Senate File 2304 - Introduced SENATE FILE 2304 BY COMMITTEE ON COMMERCE (SUCCESSOR TO SSB 3068) (COMPANION TO HF 2032 BY VONDRAN) A BILL FOR An Act establishing procedures for system enhancement of 1 infrastructure, including for development of ratemaking 2 principles permitted for recovery costs of certain 3 investments in infrastructure by water and wastewater 4 utilities. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 5276SV (2) 91 sb/js

S.F. 2304 Section 1. NEW SECTION . 476.59 System enhancement 1 infrastructure. 2 1. It is the intent of the general assembly to authorize 3 alternative ratemaking mechanisms to develop and sustain 4 adequate water and wastewater treatment facilities within the 5 state to ensure resilient water supply and sanitation services 6 for Iowa consumers and provide economic benefits to the state. 7 The commission shall not be bound by traditional ratemaking 8 principles or traditional cost recovery mechanisms with respect 9 to system enhancement infrastructure. 10 2. For purposes of this section: 11 a. “Blanket-type work project order” means an agreement 12 between an eligible utility and a supplier to deliver goods or 13 services at a set price on a recurring basis over a specified 14 time period. 15 b. “Eligible utility” means an investor-owned public 16 utility providing water or wastewater service subject to rate 17 regulation by the commission pursuant to section 476.1. 18 c. “Plan” means a multiyear plan to implement system 19 enhancement improvements. 20 d. “Pretax return” means the revenues necessary to 21 accomplish all of the following: 22 (1) Producing net operating income equal to the utility’s 23 weighted cost of capital approved in the utility’s most recent 24 rate case and the actual embedded cost of debt at the time the 25 filing is made multiplied by investments in service enhancement 26 improvements. 27 (2) Paying state and federal income taxes applicable to 28 income under subparagraph (1). 29 e. “Requirement” means any decision or regulation imposed on 30 an eligible utility by a local government unit, a state, or the 31 federal government in connection with any of the following: 32 (1) The federal Water Pollution Control Act, 33 U.S.C. §1251 33 et seq. 34 (2) The federal Safe Drinking Water Act, 42 U.S.C. §300f et 35 -1- LSB 5276SV (2) 91 sb/js 1/ 9

S.F. 2304 seq. 1 (3) Any other law, order, or regulation administered by 2 the United States environmental protection agency, the United 3 States army corps of engineers, the United States department of 4 transportation, or the Iowa department of natural resources. 5 (4) Regulations imposed by a local government unit. 6 f. “System enhancement charge” means a charge assessed by an 7 eligible utility to recover system enhancement costs. 8 g. (1) “System enhancement costs” means the following 9 costs associated with any of the following system enhancement 10 improvements: 11 (a) Depreciation expenses, including any such expenses 12 incurred prior to the approval of a plan containing the 13 applicable system enhancement improvement. 14 (b) Operation and maintenance expenses. 15 (c) Restoration costs incurred to restore property to its 16 preconstruction condition other than those already capitalized 17 and included in depreciation expenses. 18 (d) Property taxes to be paid by the utility based upon the 19 first assessment date following placement in service. 20 (e) Pretax return. 21 (2) “System enhancement costs” does not include fines 22 or penalties assessed against or imposed on a utility for 23 violating laws, regulations, or consent decrees. 24 h. (1) “System enhancement improvement” means a water 25 or wastewater utility plant project that does any of the 26 following: 27 (a) Replaces or extends the useful life of existing 28 infrastructure that is at the end of its useful life or for 29 which replacement is necessary to further resiliency, health, 30 safety, or environmental protection for the utility’s customers 31 or employees, or the public. 32 (b) Installs new utility infrastructure necessary to 33 further resiliency, health, safety, or environmental protection 34 for the utility’s customers or employees, or the public. 35 -2- LSB 5276SV (2) 91 sb/js 2/ 9

S.F. 2304 (c) Installs new utility infrastructure necessary to comply 1 with federal or state requirements pertaining to resilience, 2 health, safety, or environmental protection. 3 (d) Relocates utility infrastructure necessary to 4 accommodate public improvement projects to the extent the 5 relocation costs are not otherwise reimbursed through the 6 public improvement project. 7 (2) “System enhancement improvement” does not include a 8 water or wastewater utility plant included in the eligible 9 utility’s rate base in its most recent general rate case. 10 3. a. Before an eligible utility may seek recovery of 11 its service enhancement costs through a system enhancement 12 charge under this section, it must first obtain approval 13 from the commission of a plan including the proposed service 14 enhancement improvement. The eligible utility must file with 15 the commission an application and supporting evidence for the 16 plan. The commission shall dismiss an application to approve 17 a plan if the commission has not issued a final order in a 18 general rate case proceeding under section 476.6 involving the 19 eligible utility for the same type of utility service within 20 the past five years. 21 b. Evidence supporting an application to approve a plan 22 shall include all of the following: 23 (1) Projected annual capital expenditures identified 24 by major categories of expenditures of service enhancement 25 improvements included in the plan if such information is 26 reasonably available at the time of filing the application. 27 (2) Estimated operation and maintenance costs resulting 28 from the service enhancement improvements. 29 (3) A description of the age, condition, or other similar 30 and reasonably available information about the existing 31 infrastructure that is being replaced or having its useful life 32 extended, if applicable. 33 (4) For service enhancement improvements included in the 34 plan that are intended to comply with requirements: 35 -3- LSB 5276SV (2) 91 sb/js 3/ 9

S.F. 2304 (a) The applicable requirements, including any consent 1 decrees related to the requirements. 2 (b) A narrative describing how the service enhancement 3 improvement enables compliance with the requirements. 4 (c) Alternative plans for compliance considered by the 5 eligible utility. 6 (5) An engineering evaluation and report identifying the 7 system enhancement improvements included in the plan, with 8 descriptions of project objectives, detailed cost estimates, 9 and the estimated in-service dates for each system enhancement 10 improvement. 11 (6) Proposed rate schedules establishing a system 12 enhancement charge. 13 (7) The estimated rate impact of the proposed system 14 enhancement charge. 15 c. An application for approval of a plan shall be a 16 contested case. The commission shall issue its final order 17 on the application not more than six months after the filing 18 of the petition. The commission shall approve the plan 19 and authorize the system enhancement charge for the system 20 enhancement costs resulting from the plan if the commission 21 finds that the system enhancement plan meets all of the 22 following criteria: 23 (1) Consists of projects that are service enhancement 24 improvements, except any removed pursuant to paragraph “d” . 25 (2) Includes cost estimates that enable a reasonable 26 assessment of the costs of the plan. 27 (3) Will result in rates that are just and reasonable. 28 d. The commission shall not disapprove the plan on the basis 29 that one or more service enhancement improvements within the 30 plan do not satisfy paragraph “e” . The commission may approve 31 the plan subject to the removal of the service enhancement 32 improvements found not to satisfy paragraph “e” . 33 e. An eligible utility that operates both a water and 34 wastewater utility may establish separate plans for water and 35 -4- LSB 5276SV (2) 91 sb/js 4/ 9

S.F. 2304 wastewater enhancement plans and such plans may be presented to 1 the commission through different petitions. 2 4. a. An eligible utility with one or more plans approved 3 under subsection 3 may file with the commission an application 4 annually setting forth rate schedules establishing a system 5 enhancement charge, which may thereafter be automatically 6 adjusted and include a reconciliation of revenues collected 7 under previous system enhancement charges. A revenue 8 reconciliation filing will be filed on an annual basis no later 9 than ninety days following the expiration of the charge. 10 b. The system enhancement charge shall do all of the 11 following: 12 (1) Be calculated as a monthly fixed charge based upon meter 13 size. 14 (2) Not include recovery of any system enhancement costs 15 recovered by the eligible utility through contributions in aid 16 of construction. 17 (3) Recover system enhancement costs incurred prior to the 18 date of the petition and not previously recovered through a 19 system enhancement charge. 20 (4) Reflect system enhancement costs for system enhancement 21 improvements placed in service prior to the date the 22 application is filed. 23 (5) Include the pretax return associated with the accrued 24 asset value reflected on the eligible utility’s books and 25 records as of the date of the petition for system enhancement 26 improvements with a projected construction period of more than 27 twelve months. 28 c. The application filed to implement the system enhancement 29 charge shall include all of the following: 30 (1) A breakdown of costs for each service enhancement 31 improvement that clearly identifies the status of completion of 32 such project. 33 (2) The actual costs incurred, the projected construction 34 timeline for projects with a construction period of more than 35 -5- LSB 5276SV (2) 91 sb/js 5/ 9

S.F. 2304 twelve months, and the in-service or estimated in-service 1 dates or aggregate information capturing service enhancement 2 improvements constructed pursuant to blanket-type work project 3 orders and the actual annual costs of the replacement programs 4 performed pursuant to blanket-type work project orders. 5 d. Actual costs that exceed more than twenty-five percent of 6 the projected costs set forth in the eligible utility’s plan 7 approved under this section require specific justification by 8 the eligible utility and specific approval by the commission 9 before being authorized in the next general rate case filed by 10 the eligible utility with the commission. 11 e. The commission shall not authorize an adjustment to the 12 system enhancement charge to incorporate system enhancement 13 costs incurred since the date of prior petition filed under 14 this subsection if the commission has not issued a final order 15 in a general rate case proceeding under section 476.6 involving 16 the eligible utility within the past five years. 17 5. System enhancement costs incurred prior to the 18 commission’s approval of a plan shall be eligible for recovery 19 through a subsequent system enhancement charge, provided the 20 associated system enhancement improvements are included in a 21 plan approved by the commission. A utility may defer such 22 system enhancement costs for recovery through the utility’s 23 next approved system enhancement charge. 24 6. A petition to implement or change a system enhancement 25 charge may include changes or updates to any information 26 provided in the system enhancement plan, provided that the 27 utility has a reasonable expectation that the changes or 28 updates will occur during the time the plan is effective. 29 Project changes may include but shall not be limited to 30 additions, replacements, or deferral projects that otherwise 31 qualify as service enhancement improvements. 32 7. Publication of notice of an eligible utility’s petitions 33 under section 476.6, subsection 2, is not required. 34 8. An eligible utility’s system enhancement charge approved 35 -6- LSB 5276SV (2) 91 sb/js 6/ 9

S.F. 2304 under this section shall reset to zero upon approval of 1 new basic rates and charges for the eligible utility by the 2 commission in a general rate case in which the eligible utility 3 adds the system enhancement improvements to its rate base. 4 EXPLANATION 5 The inclusion of this explanation does not constitute agreement with 6 the explanation’s substance by the members of the general assembly. 7 This bill establishes procedures for system enhancement 8 of infrastructure, including the development of ratemaking 9 principles permitted for the recovery costs of certain 10 investments in infrastructure by water and wastewater 11 utilities. The bill states the intent of the general 12 assembly that these mechanisms be available to support the 13 development and sustainability of adequate and resilient water 14 and wastewater treatment facilities, and provides that the 15 commission is not bound by traditional ratemaking principles 16 when evaluating system enhancement infrastructure. 17 The bill defines terms, including “system enhancement costs” 18 and “system enhancement improvement”. System enhancement 19 costs include depreciation expenses, operation and maintenance 20 expenses, restoration costs, property taxes, and pretax 21 return, but exclude fines and penalties. System enhancement 22 improvements include a water or wastewater utility plant 23 project that replaces or extends the useful life of existing 24 infrastructure; installs new infrastructure necessary 25 to support resiliency, health, safety, or environmental 26 protection; constructs infrastructure necessary to comply 27 with federal or state requirements; or relocates utility 28 infrastructure necessary to accommodate public improvement 29 projects when the relocation costs are not reimbursed. Utility 30 plants included in an eligible utility’s most recent rate base 31 are excluded from the definition. 32 The bill requires an eligible utility to obtain commission 33 approval of a plan before seeking recovery of system 34 enhancement costs through a system enhancement charge. The 35 -7- LSB 5276SV (2) 91 sb/js 7/ 9

S.F. 2304 bill requires the commission to dismiss an application for a 1 plan if the utility has not received a final order in a general 2 rate case for the same type of utility service within the 3 previous five years. 4 The bill requires an application for approval of a plan 5 to include projected annual capital expenditures, estimated 6 operation and maintenance costs, a description of the age or 7 condition of infrastructure to be replaced or have its useful 8 life extended, applicable legal or regulatory requirements 9 and any consent decrees, a description of how proposed 10 improvements enable compliance, alternative compliance options 11 considered, an engineering evaluation and report identifying 12 system enhancement improvements along with cost estimates and 13 estimated in-service dates, proposed rate schedules for the 14 system enhancement charge, and the estimated rate impact of the 15 charge. 16 The bill requires the application to be a contested case, and 17 the commission must issue a final order within six months of 18 filing. The bill requires the commission to approve the plan 19 if the commission determines that the plan consists of system 20 enhancement improvements, includes cost estimates that allow 21 reasonable assessment, and will result in rates that are just 22 and reasonable. 23 The bill restricts the commission from disapproving a 24 plan on the basis of one or more service enhancements, but 25 allows the commission to approve plans subject to removal of 26 the service enhancement improvements that do not satisfy the 27 criteria. 28 The bill allows a utility providing both water and 29 wastewater service to submit separate plans for each service. 30 Following approval of a plan, the bill permits an eligible 31 utility to file an annual application to establish or adjust a 32 system enhancement charge. The charge must be calculated as 33 a fixed monthly charge based on meter size, shall not include 34 recovery of costs recovered through contributions in aid of 35 -8- LSB 5276SV (2) 91 sb/js 8/ 9

S.F. 2304 construction, must recover system enhancement costs incurred 1 prior to filing that have not been previously recovered, must 2 reflect costs for system enhancement improvements placed 3 in service before the filing date, and must include the 4 pretax return associated with improvements with a projected 5 construction period exceeding 12 months. 6 The bill requires the annual application to include a 7 breakdown of costs for each improvement with a project’s status 8 of completion, and actual costs incurred. If actual costs 9 exceed projected costs by more than 25 percent, the eligible 10 utility must specifically justify the cost overrun and obtain 11 specific commission approval before the costs may be authorized 12 in the utility’s next general rate case. 13 The bill prohibits the commission from authorizing an 14 adjustment to a system enhancement charge if the utility has 15 not received a final order in a general rate case within the 16 previous five years. 17 The bill authorizes an eligible utility to defer system 18 enhancement costs incurred prior to commission approval of 19 a plan for recovery through a subsequent system enhancement 20 charge, provided the associated improvements are included in 21 an approved plan. The bill further authorizes an eligible 22 utility, when filing a petition to implement or change a system 23 enhancement charge, to update information from the plan and 24 to include project additions, replacements, or deferrals that 25 otherwise qualify as system enhancement improvements and that 26 the utility reasonably expects to occur while the plan is 27 effective. 28 The bill exempts petitions under the bill from the 29 publication of notice requirements. The bill requires a system 30 enhancement charge to reset to zero upon approval of new basic 31 rates and charges for the eligible utility in a general rate 32 case in which the system enhancement improvements are included 33 in the utility’s rate base. 34 -9- LSB 5276SV (2) 91 sb/js 9/ 9