(a) Purpose. This section establishes criteria for a small incumbent local exchange company (small ILEC) to request adjustments to the monthly support the company receives in accordance with §26.404 of this title (relating to the Small and Rural Incumbent Local Exchange Company Universal Service Plan).
(b) Application. This section applies to a small ILEC that has been designated as an eligible telecommunications provider (ETP) by the commission in accordance with §26.417 of this title (relating to Designation as Eligible Telecommunications Providers to Receive Texas Universal Service Funds (TUSF)).
(c) Definitions. The following words and terms, when used in this section have the following meaning unless the context clearly indicates otherwise:
  (1) Eligible telecommunications provider (ETP)--A telecommunications provider designated by the commission in accordance with §26.417 of this title.
  (2) Federal Communications Commission (FCC) Rate of Return--The FCC's most recently prescribed rate of return as of the date of any determination, review, or adjustment under this section, to be no greater than 9.75 percent prior to July 1, 2021. If the FCC no longer prescribes such a rate of return, commission staff will initiate proceedings as necessary for the commission to determine or modify the FCC rate of return to be used for purposes of this section.
  (3) Reasonable Rate of Return--An intrastate rate of return within two percentage points above or three percentage points below the FCC rate of return.
  (4) Small incumbent local exchange company (small ILEC)--For purposes of this section, a small ILEC is a small provider as defined by PURA §56.032(a)(2).
(d) Notification to the commission that a small ILEC seeks to participate in this section. A small ILEC that is not an electing company under Chapters 58 or 59 may file a written notice to the commission to participate in this section to have the commission determine the amount of Small and Rural Incumbent Local Exchange Company Universal Service Plan support it receives, so that such support, combined with regulated revenues, provides the small ILEC an opportunity to earn a reasonable rate of return if the reported rate of return of such small ILEC is based on expenses that it believes are reasonable and necessary. When adjusting monthly support, the commission will consider, among other factors described in this section, the adequacy of basic rates to support universal service. A small ILEC that submits a written notice to participate in this section will continue to receive the same level of Small and Rural Incumbent Local Exchange Company Universal Service Plan support it was receiving on the date of the written notice until the commission makes a determination or adjustment under this section.
(e) Annual report of a requesting small ILEC.
  (1) Deadlines for annual reports. A small ILEC that submits a written notice under subsection (d) of this section must file an annual report each year with the commission, using the form prescribed by the commission that is available on the commission's website. The initial annual report for a small ILEC that files a written notice under subsection (d) of this section must be filed within two months after a small ILEC elects to participate in this section. Subsequent annual reports must be filed no later than September 15 of each year. All annual reports must be related to the most recent calendar year prior to the filing of the annual report.
  (2) Contents of annual report. The annual report filed by a small ILEC under this subsection must include information on the following:
    (A) summary of revenues and expenses;
    (B) all revenue, expense, and capital accounts;
    (C) invested capital;
    (D) intrastate federal income taxes calculated at the applicable tax rate;
    (E) network access service revenue;
    (F) weighted average cost of capital (for investor-owned utilities);
    (G) historical financial statistics;
    (H) proposed company adjustments;
    (I) the name, job title, and total annual compensation of each officer, director, and, for investor-owned companies, owners and former owners (including each general manager and any other highly compensated employee that may not be designated as an officer of the company), and the name and compensation of each family member of officers, directors, owners, and former owners employed by the small ILEC;
    (J) the amount and nature of each affiliate transaction, including transactions with family members of officers, directors, and, for an investor-owned company, owners and former owners;
    (K) all detail and supporting documentation necessary to support each of the items in subsection (e)(2); and
    (L) an authorized official's signature.
  (3) Cost allocation manual. The small ILEC must provide its full and complete cost allocation manual as part of the annual report specified by paragraph (2) of this subsection.
  (4) Operational information. By September 15, 2024, and on an annual basis thereafter, a small ILEC must file with the commission the following information regarding the provider's operations that are regulated by the commission:
    (A) total operating revenues;
    (B) total operating expenses;
    (C) total operating tax expense;
    (D) rate of return;
    (E) total invested capital; and
    (F) network access revenue.
  (5) The operational information specified by paragraph (4) of this subsection must be filed as part of a small ILEC's annual report specified by paragraph (2) of this subsection.
    (A) A copy of the operational information specified by paragraph (4) of this subsection must be filed publicly with the commission. The public filing is prohibited from being filed confidentially in accordance with PURA §56.032(k).
    (B) A small ILEC must provide reconciled information to the extent the operational information specified by paragraph (4) of this subsection is deficient or, where applicable, does not match the information provided in a small ILEC's annual report.
    (C) To the extent that commission staff determines the operational information is deficient, the small ILEC must provide the reconciled information to the commission in a public filing prior to the deadline prescribed by the presiding officer.
(f) Commission staff's review of annual reports. An annual report submitted under this section will be reviewed by commission staff to determine whether a small ILEC's support, when combined with regulated revenues, provide the small ILEC an opportunity to earn a reasonable rate of return and whether the reported rate of return of the small ILEC is based on expenses that the commission staff determines are reasonable and necessary.
  (1) Timeline for review of the annual reports.
    (A) During the review of an annual report, commission staff may submit requests for information to the small ILEC. Responses to such requests for information will be provided to the commission staff within ten days after receipt of the request by the small ILEC. If a small ILEC fails to timely provide information to commission staff, the small ILEC will be considered to be a Category 3 provider.
    (B) Within 90 days after an annual report has been filed, commission staff will complete its review of the annual report and file a memorandum for the commission's consideration regarding a final recommendation on the reported or commission staff adjusted rate of return.
  (2) Commission staff's review of an annual report.
    (A) Commission staff will review and may make adjustments to information contained in the small ILEC's annual report, such as:
      (i) expenses that are not reasonable or necessary;
      (ii) expenses listed under §26.201(c)(2) of this title (relating to Cost of Service);
      (iii) expenses that are not in compliance with FCC rules;
      (iv) inappropriate affiliate transactions;
      (v) inappropriate cost allocations;
      (vi) inappropriate allocation of federal universal service support; and
      (vii) any other adjustments that commission staff may find appropriate.
    (B) Commission staff will recalculate the small ILEC's reported rate of return and provide an adjusted rate of return if any adjustments were made in paragraph (2)(A) of this subsection.
  (3) Separation of small ILECs into rate of return categories. Upon completion of commission staff's review of a small ILEC's annual report, commission staff will determine the appropriate category for the small ILEC within the following three categories based on the small ILEC's reported or commission staff adjusted rate of return:
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