(a) Application. Unless the context clearly indicates otherwise, in this section the term "utility," insofar as it relates to telecommunications utilities, shall refer to dominant certificated telecommunications utilities (DCTUs).
(b) Components of cost of service. Except as provided for in the Public Utility Regulatory Act (PURA), Chapters 58 and 59, or subsection (d)(2) of this section, relating to invested capital; rate base, rates are to be based upon a utility's cost of rendering service to the public during a historical test year, adjusted for known and measurable changes. The two components of cost of service are allowable expenses and return on invested capital.
(c) Allowable expenses. Only those expenses which are reasonable and necessary to provide service to the public shall be included in allowable expenses. In computing a utility's allowable expenses, only the utility's historical test year expenses as adjusted for known and measurable changes will be considered.
  (1) Components of allowable expenses. Allowable expenses, to the extent they are reasonable and necessary, and subject to the rules in this section, may include, but are not limited to, the following general categories:
    (A) Operations and maintenance expense incurred in furnishing normal utility service and in maintaining utility plant used by and useful to the utility in providing such service to the public. Payments to affiliated interests for costs of service, or any property, right or thing, or for interest expense shall not be allowed as an expense for cost of service except as provided in the PURA §53.058.
    (B) Depreciation expense based on original cost and computed on a straight line basis as approved by the commission.
    (C) Assessments and taxes other than income taxes.
    (D) Federal income taxes on a normalized basis. Federal income taxes shall be computed according to the provisions of PURA §53.060.
    (E) Advertising, contributions and donations. The actual expenditures for ordinary advertising, contributions, and donations may be allowed as a cost of service provided that the total sum of all such items allowed in the cost of service shall not exceed three-tenths of 1.0% (0.3%) of the gross receipts of the utility for services rendered to the public. Funds expended advertising methods by which the consumer can effect a savings in total utility bills shall be included in the calculation of the three-tenths of 1.0% (0.3%) maximum.
    (F) Accruals credited to reserve accounts for self insurance under a plan requested by a utility and approved by the commission. The commission shall consider approval of a self insurance plan in a rate case in which expenses or rate base treatment are requested for such a plan. For the purposes of this rule, a self insurance plan is a plan providing for accruals to be credited to reserve accounts. The reserve accounts are to be charged with property and liability losses which occur, and which could not have been reasonably anticipated and included in operating and maintenance expenses, and are not paid or reimbursed by commercial insurance. The commission will approve a self insurance plan to the extent it finds it to be in the public interest. In order to establish that the plan is in the public interest, the utility must present a cost benefit analysis performed by a qualified independent insurance consultant that demonstrates that, with consideration of all costs, self insurance is a lower cost alternative than commercial insurance and that the ratepayers will receive the benefits of the self insurance plan. The cost benefit analysis shall present a detailed analysis of the appropriate limits of self insurance, an analysis of the appropriate annual accruals to build a reserve account for self insurance, and the level at which further accruals should be decreased or terminated.
    (G) Postretirement benefits other than pensions (known in the utility industry as "OPEB"). For ratemaking purposes, expense associated postretirement benefits other than pensions (OPEB) shall be treated as follows:
      (i) OPEB expense shall be included in a utility's cost of service for ratemaking purposes based on actual payments made.
      (ii) A utility may request a one-time conversion to inclusion of current OPEB expense in cost of service for ratemaking purposes on an accrual basis in accordance with generally accepted accounting principles (GAAP). Rate recognition of OPEB expense on an accrual basis shall be made only in the context of a full rate case.
      (iii) A utility shall not be allowed to recover current OPEB expense on an accrual basis until GAAP requires that utility to report OPEB expense on an accrual basis.
      (iv) For ratemaking purposes, the transition obligation shall be amortized over 20 years.
      (v) OPEB amounts included in rates shall be placed in an irrevocable external trust fund dedicated to the payment of OPEB expenses. The trust shall be established no later than six months after the order establishing the OPEB expense amount included in rates. The utility shall make deposits to the fund no less frequently than annually. Deposits on the fund shall include, in addition to the amount included in rates, an amount equal to fund earnings that would have accrued if deposits had been made monthly. The funding requirement can be met with deposits made in advance of the recognition of the expense for ratemaking purposes. The utility shall, to the extent permitted by the Internal Revenue Code, establish a postretirement benefit plan that allows for current federal income tax deductions for contributions and allows earnings on the trust funds to accumulate tax free.
      (vi) When a utility terminates an OPEB trust fund established pursuant to clause (v) of this subparagraph, it shall notify the commission in writing. If excess assets remain after the OPEB trust fund is terminated and all trust related liabilities are satisfied, the utility shall file, for commission approval, a proposed plan for the distribution of the excess assets. The utility shall not distribute any excess assets until the commission approves the disbursement plan.
  (2) Expenses not allowed. The following expenses shall never be allowed as a component of cost of service:
    (A) legislative advocacy expenses, whether made directly or indirectly, including but not limited to legislative advocacy expenses included in professional or trade association dues;
    (B) funds expended in support of political candidates;
    (C) funds expended in support of any political movement;
    (D) funds expended in promotion of political or religious causes;
    (E) funds expended in support of or membership in social, recreational, fraternal, or religious clubs or organizations;
    (F) additional funds expended to mail any parcel or letter containing any of the items mentioned in subparagraphs (A)-(E) of this paragraph;
    (G) costs, including, but not limited to, interest expense, of processing a refund or credit of sums collected in excess of the rate finally ordered by the commission in a case where the utility has put bonded rates into effect, or when the utility has otherwise been ordered to make refunds;
    (H) any expenditure found by the commission to be unreasonable, unnecessary, or not in the public interest, including but not limited to executive salaries, advertising expenses, legal expenses, penalties and interest on overdue taxes, criminal penalties or fines, and civil penalties or fines.
(d) Return on invested capital. The return on invested capital is the rate of return times invested capital.
  (1) Rate of return. The commission shall allow each utility a reasonable opportunity to earn a reasonable rate of return, which is expressed as a percentage of invested capital, and shall fix the rate of return in accordance with the following principles.
    (A) The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties. A rate of return may be reasonable at one time and become too high or too low because of changes affecting opportunities for investment, the money market, and business conditions generally.
    (B) The commission shall consider the efforts and achievements of the utility in the conservation of resources, the quality of the utility's services, the efficiency of the utility's operations, and the quality of the utility's management, along with other applicable conditions and practices.
    (C) The commission may, in addition, consider inflation, deflation, the growth rate of the service area, and the need for the utility to attract new capital. The rate of return must be high enough to attract necessary capital but need not go beyond that. In each case, the commission shall consider the utility's cost of capital, which is the weighted average of the costs of the various classes of capital used by the utility.
Cont'd...