TCEQ Environmental Trade Fair and Conference Austin, Texas Update on PUC Activities

1. TCEQ Environmental Trade Fair and Conference Austin, TexasUpdate on PUC Activities Brian Lloyd Executive Director Public Utility Commission of Texas May 7, 2014

2. About the PUC • Created in 1975 by Texas Legislature to provide statewide regulation of electric, telephone and water utilities. • Since 1985, have primarily regulated electric and telephone • Beginning in mid-1990s, began the transition of those industries to competitive markets.

3. Mission Statement: We protect customers, foster competition, and promote high quality infrastructure.

5. Enforcement • Responsibility to enforce the Public Utility Regulatory Act, PUC rules, and other state laws. • Start with informal investigations and data collection • Majority of cases settled and presented to the Commission for approval • Occasional cases are contested and go to the State Office of Administrative Hearings (SOAH) for hearing. • In FY 2013, 39 cases with a total of $3.01 million in penalties. All but 2 were settled or consisted of a default order for a license revocation.

6. Rates and Infrastructure • Rate Regulation Division • Analyzes rate applications, earnings monitoring reports, tariff changes, etc. • Rate of return analysis • Capital structure • Cost allocation and rate design • Infrastructure and Reliability • Participates in infrastructure (primarily electric transmission) planning • Analyzes utility plant investment and depreciation in rate proceedings • Also operates PUC’s Emergency Management Response Team

7. Water Utility Regulation Transfer • PUC was under Sunset Commission Review in 2011 and 2013. • Sunset Recommendation in 2011 was to transfer water utility regulation to PUC. • Bill did not pass for procedural reasons • Transfer provisions were then amended onto another bill, but that one failed to pass as well. • Transfer provisions were a straight transfer with no changes to program, • Interim committees continued discussion on water utility regulation more generally • PUC Sunset Bill in 2013 included transfer with significant changes to the regulatory process

8. Water Utility Transfer • Phase 1: • Current rulemakings to apply PUC procedural rules (generally); develop procedures relating to processing of pending cases, adoption of TCEQ’s substantive rules as PUC rules (minimal substantive changes), adoption of TCEQ forms as PUC forms (minimal substantive changes) • September 1, 2014 transfer for rate regulation matters and CCN issues • Existing regulatory requirements for rate applications continue to apply • Transfer of 20 Full-Time Equivalent Employees from TCEQ to PUC

9. Water Utility Transfer • Phase 2: • From September 2014-September 2015 – rulemaking proceedings to implement ratemaking reform • Creation of three classes based on utility size • A : similar to PUC regulation of electric utilities: high bar for interim rates, 185 day deadline on processing cases, earnings monitoring process, comprehensive rate filing package • B : few changes compared to today’s streamlined process ; review of rate-filiing packages, etc. • C: addition of a new streamlined “cost-of-living” rate adjustment process • Expectation of requesting 12-20 additional FTEs from next legislature • Discussions on funding of program

10. Parallel Issues • Meeting peak demand • Summer peak electricity vs. water needs at time of drought • Rate design/pricing signals • High prices at time of peak demand can send powerful signals • Impacts of conservation • Volumetric charges and fixed cost recovery • Addressing rural needs • Flat/declining population and infrastructure maintenance • Water/Energy nexus issues • Environmental regulations