HB 2224 — An Act amending Title 66 (Public Utilities) of the Pennsylvania Consolidated Statutes, in rates and distribution systems, providing for return on equity.

PRINTER'S NO.   3414

                     THE GENERAL ASSEMBLY OF PENNSYLVANIA



                         HOUSE BILL
                         No. 2224
                                                Session of
                                                  2026

     INTRODUCED BY FIEDLER, BURGOS, PROBST, WAXMAN, HOWARD, HILL-
        EVANS, D. WILLIAMS, RIVERA, GIRAL, FREEMAN, BOYD, CIRESI,
        CEPEDA-FREYTIZ, CURRY, GILLEN, STEELE, SHUSTERMAN,
        HOHENSTEIN, HANBIDGE AND HADDOCK, MAY 18, 2026

     REFERRED TO COMMITTEE ON CONSUMER PROTECTION, TECHNOLOGY AND
        UTILITIES, MAY 20, 2026


                                    AN ACT
 1   Amending Title 66 (Public Utilities) of the Pennsylvania
 2      Consolidated Statutes, in rates and distribution systems,
 3      providing for return on equity.
 4      The General Assembly of the Commonwealth of Pennsylvania
 5   hereby enacts as follows:
 6      Section 1.    Chapter 13 of Title 66 of the Pennsylvania
 7   Consolidated Statutes is amended by adding a subchapter to read:
 8                               SUBCHAPTER C
 9                             RETURN ON EQUITY
10   Sec.
11   1380.   Definitions.
12   1381.   Default authorized return on equity.
13   1382.   Competitive equity auction.
14   1383.   Annual reporting and transparency.
15   1384.   Applicability to State-jurisdictional rate base.
16   1385.   Applicability to ratemaking.
17   § 1380.   Definitions.
 1      The following words and phrases when used in this subchapter
 2   shall have the meanings given to them in this section unless the
 3   context clearly indicates otherwise:
 4      "10-year treasury."     The market yield on United States
 5   Treasury securities at 10-year constant maturity, quoted on an
 6   investment basis, as reported by the Federal Reserve System.
 7      "Auction-clearing return."     The uniform rate of return
 8   established as the clearing price in a competitive equity
 9   auction conducted under section 1382(e).
10      "Auction equity interest."     The following:
11          (1)   An economic interest issued under a competitive
12      equity auction under section 1382 (relating to competitive
13      equity auction). An auction equity interest represents
14      participation in the financial performance of a specific
15      regulated service, which carries the auction-clearing return
16      as adjusted under section 1382(c), and is distinct from the
17      covered utility's base common stock. The following shall
18      apply to an auction equity interest:
19                (i)    The authorized return and financial performance
20          of an auction equity interest shall be determined solely
21          by reference to the regulated service to which it relates
22          and shall not be affected by the financial performance
23          of, or returns applicable to, any other regulated service
24          or any activity of the covered utility not subject to the
25          jurisdiction of the commission.
26                (ii)   Except if auction equity interests are issued
27          by a regulated service corporation established under
28          section 1382(l), auction equity interests issued directly
29          by the covered utility are obligations of the covered
30          utility and may be subject to all risks applicable to the

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 1          covered utility generally, including the risk of
 2          insolvency or bankruptcy of the covered utility.
 3                 (iii)   If the covered utility has established a
 4          regulated service corporation and regulated service LLC
 5          under section 1382, auction equity interests shall be
 6          issued by the regulated service corporation rather than
 7          by the covered utility itself.
 8          (2)    As used in this definition, the term "covered
 9      utility's base common stock" shall mean the stock of the
10      regulated service corporation retained by the covered
11      utility.
12      "Authorized return on equity."         The rate of return on common
13   equity authorized by the commission for ratemaking purposes.
14      "Competitive equity auction."         A process overseen by the
15   commission in accordance with this subchapter that provides a
16   market-based determination of the cost of equity for a covered
17   utility.
18      "Cost of equity."     The minimum rate of return necessary to
19   attract equity capital to invest in a specific regulated
20   service.
21      "Covered utility."     An investor-owned electric distribution
22   company, natural gas distribution company or water or wastewater
23   public utilities regulated by the commission.
24      "Default authorized return."      The authorized return on equity
25   determined under section 1381 (relating to default authorized
26   return on equity).
27      "Rate period."     The time period in which a covered utility
28   collects rates that are authorized and approved by the
29   commission.
30      "Regulated service."     A service provided by a covered utility

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 1   for which the commission determines an authorized return on
 2   equity. If a covered utility provides more than one category of
 3   service subject to the jurisdiction of the commission, each
 4   category shall be treated as a separate regulated service for
 5   purposes of this subchapter and consistent with the property
 6   segregation requirements of section 1305 (relating to advance
 7   payment of rates; interest on deposits), unless the commission
 8   determines that consolidated treatment is appropriate.
 9      "Regulated service corporation."      A corporation organized
10   under the laws of any state, formed or designated by a covered
11   utility under section 1382(l) that:
12             (1)   Is treated as a corporation for Federal income tax
13      purposes.
14             (2)   Conducts no activities other than holding a
15      membership interest in a regulated service LLC and serving as
16      the issuer of auction equity interests for the regulated
17      service associated with that regulated service LLC.
18      "Regulated service LLC."     A limited liability company that is
19   a wholly owned subsidiary of a regulated service corporation,
20   formed or designated under section 1382(l), to hold assets,
21   rights, franchises and obligations associated with a regulated
22   service. A regulated service LLC shall be treated as a
23   disregarded entity for Federal income tax purposes.
24   § 1381.    Default authorized return on equity.
25      (a)    Default authorized return.--Unless an authorized return
26   on equity is established under section 1382 (relating to
27   competitive equity auction), the commission shall set the
28   authorized return on a covered utility's common equity equal to
29   the sum of the 10-year treasury and 2%.
30      (b)    Annual reset.--The default authorized return shall be

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 1   reset annually as of January 1 of each year to reflect the
 2   average of the 10-year treasury rate on the 60 business days
 3   immediately prior to January 1 of that year.
 4      (c)   Alternative benchmark.--If publication of the 10-year
 5   treasury is ceased or interrupted, the commission shall identify
 6   and use for the calculation the alternative benchmark the
 7   commission determines to be the best substitute for carrying out
 8   the purposes of this section.
 9      (d)   Burden of proof.--The burden of demonstrating that the
10   default authorized return on equity is insufficient to attract
11   capital shall be exclusively with the covered utility. The
12   default authorized return shall be presumed just and reasonable
13   unless rebutted through the competitive equity auction process
14   specified in section 1382.
15      (e)   Initial rate period.--For a rate period commencing
16   between the effective date of this subsection and the first
17   reset date under subsection (b), the 10-year treasury component
18   shall be determined using the averaging methodology prescribed
19   in subsection (b) and applied to the 60 business days
20   immediately preceding the effective date of this subsection.
21      (f)   Rate adjustment.--
22            (1)   If the authorized return on equity for a regulated
23      service changes under this section or section 1382, the
24      commission shall adjust the rates applicable to the regulated
25      service to reflect the new authorized return on equity.
26            (2)   The adjustment shall be implemented through the
27      mechanism the commission determines to be most expedient,
28      which may include a surcharge or credit applied to existing
29      tariffs, an automatic rate adjustment mechanism or
30      incorporation into the covered utility's next general rate

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 1      proceeding.
 2            (3)   The commission shall implement an adjustment no
 3      later than 90 days after the change in authorized return on
 4      equity takes effect.
 5      (g)   Risk insurance.--Nothing in this subchapter shall
 6   preclude a covered utility from procuring third-party insurance
 7   to hedge material idiosyncratic risks, with the cost of the
 8   insurance recoverable in rates as an operating expense subject
 9   to the commission's determination of prudence.
10      (h)   Performance-based ratemaking.--
11            (1)   Nothing in this subchapter shall preclude the
12      commission from establishing or maintaining a performance-
13      based ratemaking plan for a covered utility if a plan is
14      designed for the expected value of performance-based
15      adjustments to the authorized return on equity to be neutral.
16            (2)   The performance-based ratemaking plan may not permit
17      the aggregate effect of performance-based adjustments to
18      increase the covered utility's realized return on equity for
19      a regulated service by more than two percentage points above
20      the authorized return on equity for that regulated service as
21      determined under this subchapter.
22            (3)   For purposes of this subsection, the term
23      "performance-based ratemaking plan" means a plan, mechanism
24      or order that adjusts the authorized return on equity of a
25      covered utility based on measured utility performance against
26      specified benchmarks. The term does not include revenue
27      decoupling mechanisms, formula rate plans or other mechanisms
28      that operate on revenue, cost recovery or rate design without
29      adjusting the authorized return on equity.
30      (i)   Interaction with alternative ratemaking plans.--

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 1          (1)   An alternative ratemaking plan approved by the
 2    commission under section 1330 (relating to alternative
 3    ratemaking for utilities) which is in effect as of the
 4    effective date of this paragraph shall remain in effect in
 5    accordance with the plan's terms, unless a component of the
 6    plan that determines, adjusts or is calculated by reference
 7    to the authorized return on equity is recalculated using the
 8    authorized return on equity upon the next scheduled
 9    adjustment or reset of the component, as determined by the
10    commission under this subchapter.
11          (2)   Non-return-on-equity components of a plan, including
12    decoupling mechanisms, revenue-per-customer caps, price cap
13    mechanisms and any distribution system improvement charge
14    approved under section 1353 (relating to distribution system
15    improvement charge) without limitation, shall not be affected
16    by this subchapter.
17          (3)   An alternative ratemaking plan filed with the
18    commission under section 1330 on or after the effective date
19    of this paragraph shall incorporate the authorized return on
20    equity as determined by the commission under this subchapter.
21          (4)   The commission may not approve a plan that permits a
22    return on equity that is greater than the authorized return
23    on equity determined by the commission.
24          (5)   Nothing in this subsection shall limit the authority
25    of the commission to approve or maintain a distribution
26    system improvement charge under section 1353 if the return
27    component of the charge is calculated using the authorized
28    return on equity determined by the commission under this
29    subchapter.
30    (j)   Initial implementation.--

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 1        (1)   Notwithstanding any other provision of this
 2    subchapter, title or prior order of the commission, the
 3    default authorized return on equity established under this
 4    section shall apply to each regulated service of a covered
 5    utility immediately upon the effective date of this
 6    paragraph, regardless of whether a rate proceeding under
 7    section 1308(d) (relating to voluntary changes in rates) is
 8    pending and when a rate proceeding was last concluded.
 9        (2)   A rate component reflecting or implicitly permitting
10    an authorized return on equity greater than the default
11    authorized return established under this section may no
12    longer be considered just and reasonable as of the effective
13    date of this paragraph, except to the extent established
14    through a competitive equity auction conducted under section
15    1382. To implement this subsection, the commission shall:
16              (i)    No later than 60 days after the effective date
17        of this subparagraph, issue an order for each covered
18        utility setting the authorized return on equity for each
19        of its regulated services to the default authorized
20        return determined under subsection (a), as adjusted under
21        subsection (e) for the initial rate period.
22              (ii)    No later than 120 days after the effective date
23        of this subparagraph, implement corresponding adjustments
24        to customer rates, applying the mechanism the commission
25        determines to be most expedient under subsection (f),
26        which may include a surcharge or credit applied to
27        existing tariffs or an automatic rate adjustment
28        mechanism and which shall not require the initiation of a
29        base rate proceeding under section 1308(d).
30              (iii)   Implement a true-up adjustment for the period

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 1          commencing on the effective date of this subparagraph and
 2          ending on the date adjusted rates take effect, calculated
 3          as the difference between the revenue actually collected
 4          by the covered utility during the period and the revenue
 5          that would have been collected during the period had the
 6          default authorized return been reflected in rates
 7          throughout, with interest accruing at the default
 8          authorized return calculated from the midpoint of the
 9          period.
10          (3)   A covered utility that believes the default
11    authorized return is insufficient to attract capital may, at
12    any time following the effective date of this paragraph,
13    petition the commission for a competitive equity auction
14    under section 1382(a). The pendency of a petition shall not
15    delay or suspend the implementation required by this
16    subsection.
17          (4)   Nothing under this subsection shall be construed to
18    disturb a non-return-on-equity component of a rate currently
19    in effect, including the authorized capital structure or the
20    cost of debt, except to the extent that the components must
21    be adjusted as a mathematical consequence of the change in
22    authorized return on equity required by this subsection.
23    (k)   Rate base.--
24          (1)   For purposes of determining the authorized return on
25    equity for a regulated service of a covered utility under
26    this subchapter, whether the return is determined under this
27    section or under a competitive equity auction under section
28    1382, the commission shall determine a rate base to reflect
29    the full value of all assets prudently invested by or on
30    behalf of the covered utility for the benefit of the

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 1      regulated service, including construction work in progress
 2      and net of accumulated depreciation.
 3             (2)   Reductions to a rate base shall solely be for
 4      capital that is not supplied by investors, which shall be
 5      limited to the following:
 6                   (i)    Accumulated deferred income taxes, to the extent
 7             that deferred tax liabilities exceed deferred tax assets.
 8                   (ii)    Customer deposits.
 9                   (iii)    Customer advances for construction.
10             (3)   The commission may not exclude from the rate base of
11      a regulated service an asset on the basis that the asset has
12      not yet been placed in service if the investment has been
13      determined to be prudent and is being undertaken for the
14      benefit of the regulated service.
15             (4)   This subsection shall be implemented on the same
16      schedule as the initial implementation required by subsection
17      (j), and the commission's 60-day order and 120-day rate
18      adjustment under subsection (j) shall reflect both the change
19      in authorized return on equity and the rate base determined
20      in accordance with this subsection.
21   § 1382.    Competitive equity auction.
22      (a)    Utility-initiated auction.--
23             (1)   If a covered utility believes that its cost of
24      equity exceeds the default authorized return, the covered
25      utility may petition the commission to oversee a competitive
26      equity auction.
27             (2)   If the covered utility fails to take all necessary
28      steps to facilitate the competitive equity auction based on
29      the timeline and procedures determined by the commission, the
30      petition shall be deemed withdrawn and the covered utility is

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 1    deemed to have accepted the default authorized return.
 2          (3)   A petition under paragraph (1) shall be filed no
 3    later than 30 days after the effective date of this paragraph
 4    or the most recent reset of the default authorized return
 5    under subsection (b), whichever is later.
 6          (4)   Upon certification of the auction results by the
 7    commission, the auction-clearing return shall become the
 8    authorized return on equity for the regulated service, and
 9    the commission shall adjust customer rates in accordance with
10    section 1381(f) (relating to default authorized return on
11    equity) no later than 90 days after the certification.
12          (5)   The commission shall implement a true-up adjustment
13    under this subsection that is calculated as the difference
14    between the revenue actually collected by the covered utility
15    during the period from the filing of the petition through the
16    date on which adjusted rates take effect and the revenue that
17    would have been collected during that period had the auction-
18    clearing return been reflected in rates throughout. The
19    interest on the difference shall accrue at the auction-
20    clearing return and be calculated from the midpoint of the
21    period.
22          (6)   An adjustment to customer rates required by the
23    reset of the default authorized return under section 1381(b)
24    shall be implemented in accordance with section 1381(f)
25    independently of an auction petition, and the true-up
26    adjustment under paragraph (5) shall apply only to the period
27    commencing on the date of the petition under paragraph (1).
28    (b)   Commission-initiated auction.--
29          (1)   The commission may, on its own motion or upon
30    petition by the Office of Consumer Advocate, order that a

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 1    competitive equity auction be conducted for a covered utility
 2    if the commission finds reasonable cause to believe that the
 3    default authorized return materially exceeds the covered
 4    utility's cost of equity for a regulated service.
 5        (2)   An auction initiated by the commission under this
 6    subsection may be ordered no earlier than 30 days after the
 7    effective date of this paragraph or the most recent reset of
 8    the default authorized return under section 1381(b),
 9    whichever is later, and no later than 60 days after the
10    reset.
11        (3)   Upon certification of the auction results, the
12    auction-clearing return shall become the authorized return on
13    equity for the regulated service, and the commission shall
14    adjust customer rates in accordance with section 1381(f) no
15    later than 90 days after the certification.
16        (4)   The commission shall implement a true-up adjustment
17    under this subsection that is calculated as the difference
18    between the revenue actually collected by the covered utility
19    during the period from January 1 of the year in which the
20    auction is conducted through the date on which adjusted rates
21    take effect and the revenue that would have been collected
22    during that period had the auction-clearing return been
23    reflected in rates throughout. The interest on the difference
24    shall accrue at the auction-clearing return and be calculated
25    from the midpoint of the period.
26        (5)   If a covered utility fails to take all steps
27    required to facilitate an auction ordered under this
28    subsection on the timeline prescribed by the commission, the
29    default authorized return for that regulated service shall be
30    reduced by 0.10 percentage points beginning on the date of

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 1    the failure and continuing until the covered utility has
 2    complied with this subsection.
 3          (6)   If the covered utility fails to facilitate a
 4    subsequent commission-initiated auction for the same
 5    regulated service, the reduction shall be cumulative.
 6          (7)   Upon compliance with this subsection, a reduction
 7    under this subsection shall cease to apply prospectively and
 8    no retroactive adjustment shall be made for any period during
 9    which the reduction was in effect.
10    (c)   Duration and effect.--
11          (1)   Holders of auction equity interests issued at an
12    auction under this section shall receive the auction-clearing
13    return for the full duration of the interests. The auction-
14    clearing return shall be adjusted for differences between
15    realized and anticipated profits in a manner determined by
16    the commission's order issued under this section.
17          (2)   The rate of return under paragraph (1), whether
18    greater or less than the default authorized return, shall
19    determine the authorized return on equity for the regulated
20    service in accordance with subsection (d), until the
21    following January 1, at which time the covered utility may
22    elect that the default authorized return shall apply to the
23    covered utility's common equity in the regulated service.
24          (3)   An election made under paragraph (2) shall not
25    affect the return applicable to outstanding auction equity
26    interests, which shall continue to receive the auction-
27    clearing return for the full duration of the interests.
28    Following an election, the authorized return on equity for
29    the regulated service shall be determined in accordance with
30    subsection (d).

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 1      (d)   Multiple auctions.--
 2            (1)   Where different equity interests in a regulated
 3      service bear different authorized rates of return, either for
 4      multiple auctions being conducted at different times or the
 5      covered utility has elected that the default authorized
 6      return shall apply to the covered utility's common equity
 7      under subsection (c), the authorized return on equity for the
 8      regulated service shall be the weighted average of the return
 9      applicable to each equity interest, which shall be weighted
10      by its outstanding equity amount.
11            (2)   For the purposes under paragraph (2), the covered
12      utility's common equity shall bear the auction-clearing
13      return established in the most recent auction or the default
14      authorized return following an election under subsection (c).
15      If no auction equity interests remain outstanding, the
16      default authorized return shall apply to the full equity
17      component of the regulated service.
18      (e)   Auction mechanism.--The commission shall oversee a
19   sealed-bid competitive auction administered independently of the
20   covered utility. The following shall apply:
21            (1)   The commission shall determine for each auction
22      whether bids are to be expressed as an absolute number or as
23      a premium to the 10-year treasury or another index, with the
24      applicable interest rate to be reset periodically.
25            (2)   Qualified bidders shall bid the minimum target
26      return on equity they require.
27            (3)   All bids shall be ranked in ascending order and the
28      commission shall accept bids in that order until the total
29      amount of equity offered in the auction has been fully
30      allocated.

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 1        (4)    All successful bidders shall receive the same rate
 2    of return, equal to the highest accepted bid.
 3        (5)    If the aggregate amount bid at the clearing rate
 4    exceeds the remaining amount of equity to be allocated, the
 5    bids shall be accepted on a pro rata basis. For the avoidance
 6    of doubt, all bids submitted at returns below the clearing
 7    rate shall be accepted in full but a pro rata reduction shall
 8    only apply to bids submitted at the clearing rate itself.
 9        (6)    The amount of equity to be offered within each
10    auction shall be the greater of 2.5% of the equity component
11    of the regulated service rate base and the lesser of
12    $50,000,000 and 5% of the equity component of the regulated
13    service rate base.
14        (7)    The commission shall certify the results of an
15    auction if at least five qualified bidders submitted bids and
16    the aggregate equity amount bid by all qualified bidders was
17    at least 1.5 times the total equity amount offered in the
18    auction.
19        (8)    If either threshold under paragraph (7) is not met
20    in a utility-initiated auction under subsection (a), the
21    auction result shall be certified if the auction-clearing
22    return does not exceed the default authorized return by more
23    than two percentage points but, if not exceeded, the auction
24    result shall be void and the default authorized return shall
25    be applied.
26        (9)    If either threshold under paragraph (7) is not met
27    in a commission-initiated auction under subsection (b), the
28    auction result shall be void and the default authorized
29    return shall continue to apply.
30        (10)    In a commission-initiated auction under subsection

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 1      (b), regardless of whether the participation thresholds are
 2      met, the auction result shall be binding only if the auction-
 3      clearing return is less than the default authorized return.
 4            (11)    If the auction-clearing return equals or exceeds
 5      the default authorized return in a commission-initiated
 6      auction under subsection (b), the default authorized return
 7      shall continue to apply.
 8            (12)    If the aggregate equity amount bid in an auction
 9      under subsection (a) or (b) is less than the total equity
10      amount offered, the auction-clearing return shall apply to
11      the equity amount actually subscribed and the default
12      authorized return shall apply to the remainder, in which the
13      authorized return on equity for the regulated service shall
14      be determined in accordance with subsection (d).
15      (f)   Cost recovery.--All reasonable costs incurred by a
16   covered utility in connection with a competitive equity auction
17   under this section, including costs of any required securities
18   registration or offering preparation, reasonable registration
19   costs under subsection (g), reasonable management time allocable
20   to the auction and professional fees, shall be treated as
21   prudently incurred costs for ratemaking purposes and shall be
22   recoverable in rates.
23      (g)   Commission authority and regulations.--The commission
24   shall adopt and promulgate rules and regulations to implement
25   the competitive equity auction procedures under this section,
26   which shall include the following:
27            (1)    An application process, eligibility criteria and
28      other measures necessary to ensure that bidders are qualified
29      to participate in an auction.
30            (2)    Ongoing disclosure obligations applicable to the

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 1    covered utility and to holders of auction equity interests.
 2          (3)   Guidelines for an independent auction administrator
 3    to conduct an auction.
 4          (4)   Determination of the duties and requisite expertise
 5    of the independent auction administrator.
 6          (5)   Consumer protection standards.
 7          (6)   Auction disclosure documentation which states that
 8    the depreciation and amortization schedule is subject to
 9    prospective adjustment in subsequent rate proceedings and may
10    affect the timing of return of capital to holders of auction
11    equity interests.
12          (7)   Requirements for the independent auction
13    administrator to disclose to all qualified bidders prior to
14    each auction the conditions in which the auction result will
15    be binding, including whether the auction is utility-
16    initiated or commission-initiated and the consequences
17    thereof for bid acceptance.
18          (8)   The form and content of the disclosure required
19    under subsection (l)(2).
20    (h)   Securities law compliance.--
21          (1)   The economic interests offered under this section
22    may constitute securities within the meaning of the
23    Securities Act of 1933 (48 Stat. 74, 15 U.S.C. § 77a et
24    seq.), as amended, and the Securities Exchange Act of 1934
25    (48 Stat. 881, 15 U.S.C. § 78a et seq.), as amended, and
26    shall be subject to the registration requirements under
27    section 1901 (relating to registration of securities to be
28    issued or assumed).
29          (2)   Each auction under this section shall be structured
30    to qualify for an available exemption from registration under

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 1    Federal securities law. Permissible exemptions may include
 2    limiting the offering to accredited investors under Rule 506
 3    of Regulation D under the Securities Act of 1933 or
 4    conducting an intrastate offering exempt under section 3(a)
 5    (11) of the Securities Act of 1933 and applicable rules under
 6    the Securities Act of 1933.
 7          (3)   The commission may, in its discretion, direct that a
 8    specific auction be conducted on a registered basis if the
 9    commission determines, based on the expected size of the
10    offering and an analysis of anticipated investor demand, the
11    following:
12                (i)    The expected reduction in the auction-clearing
13          return attributable to broader investor participation
14          enabled by registration is reasonably expected to
15          outweigh the costs and delays of the registration
16          process.
17                (ii)   The auction will not be delayed by more than 30
18          days beyond the timeline that would apply to an exempt
19          offering.
20          (4)   Any direction by the commission to conduct an
21    auction on a registered basis shall be issued by the
22    commission sufficiently in advance of the covered utility's
23    auction petition to permit timely registration.
24          (5)   Nothing in this subsection shall be construed to
25    confer upon the commission any authority to regulate
26    securities except as expressly provided in this subsection.
27    (i)   Instrument design.--
28          (1)   A covered utility may not be required to offer its
29    common stock for sale in the auction, but the auction equity
30    interests offered shall, as approved by the commission,

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 1    provide prospective investors with the following:
 2             (i)    Economically equivalent position to that of the
 3        covered utility's equity interest in the regulated
 4        service which may consist of the covered utility's common
 5        stock where auction equity interests are issued directly
 6        by the covered utility or the covered utility's retained
 7        stock interest in the regulated service corporation where
 8        the interests are issued by a regulated service
 9        corporation.
10             (ii)    Adequate protections against dilution or
11        impairment of value through related-party transactions or
12        other transfers involving the corporation's parent
13        holding company.
14             (iii)    If the covered utility's realized profits of
15        the regulated service in each period equal those embedded
16        by the commission in the rates approved to achieve the
17        authorized return on equity, prospective periodic
18        distributions calibrated for holders of auction equity
19        interests to realize an internal rate of return equal to
20        the auction-clearing return which accounts for periodic
21        distributions and any return of equity capital over the
22        life of the interests.
23             (iv)    A stated initial equity amount per auction
24        equity interest equal to the purchase price paid by the
25        winning bidder in the auction, which shall be an equity
26        amount to be returned to holders over the life of the
27        interests at a rate and on a schedule consistent with the
28        commission's treatment of rate base depreciation and
29        amortization for the regulated service for ratemaking
30        purposes. If the equity component of the regulated

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 1        service rate base is reduced through depreciation and
 2        amortization, a commensurate portion of the initial
 3        equity amount shall be returned to holders.
 4              (v)   A specification of the shortfalls and excesses
 5        in realized profits, as determined by the commission
 6        under paragraph (2).
 7        (2)   The commission shall establish rules or promulgate
 8    regulations specifying the methods and calculations in which
 9    shortfalls and excesses in realized profits of the regulated
10    service relative to the earnings embedded in approved rates
11    are to be allocated between holders of auction equity
12    interests and the covered utility's common equity, including
13    the allocation methods in the event of multiple outstanding
14    series of auction equity interests.
15        (3)   The commission's regulations governing an auction
16    under this section shall specify the initial equity amount
17    per auction equity interest, the formula for calculating
18    periodic distributions by applying the auction-clearing
19    return to the outstanding equity balance for each period and
20    the schedule for return of equity capital. The commission
21    shall ensure that holders of auction equity interests will
22    realize an internal rate of return equal to the auction-
23    clearing return if the covered utility's realized profits of
24    the regulated service in each period equal those embedded in
25    the rates approved to achieve the authorized return on
26    equity.
27        (4)   Each series of auction equity interests under this
28    subsection shall be redeemed at its book value currently in
29    effect until the earlier of 40 years from the date of
30    issuance or the end of the first fiscal quarter in which the

20260HB2224PN3414                  - 20 -
 1    outstanding equity amount of such series is less than 5% of
 2    the initial equity amount at issuance.
 3        (5)   The covered utility or regulated service
 4    corporation, as applicable, shall fund a redemption under
 5    paragraph (4), whether through retained earnings, a capital
 6    contribution from the covered utility's parent company or any
 7    other source of equity capital. Upon the redemption, the
 8    equity represented by the redeemed series shall revert to the
 9    covered utility's common equity in the regulated service. The
10    commission may defer the mandatory redemption date by not
11    more than two years upon a demonstration by the covered
12    utility that immediate redemption would materially impair its
13    financial condition.
14        (6)   In the event of a merger, acquisition or change of
15    control of the covered utility or, where applicable, the
16    regulated service corporation, the successor entity shall
17    assume all obligations to holders of outstanding auction
18    equity interests on terms no less favorable than the terms in
19    effect immediately prior to the transaction.
20        (7)   A transaction under paragraph (6) shall not be
21    consummated without determination by the commission that the
22    rights of holders of auction equity interests will be
23    adequately preserved. The commission may require the terms of
24    each series of auction equity interests to include a
25    provision entitling holders to redemption at the book value
26    then currently in effect upon any change of control, at the
27    option of the holder.
28        (8)   In the event of the insolvency or dissolution of a
29    regulated service corporation or regulated service LLC or the
30    permanent discontinuation of the regulated service to which

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 1    auction equity interests relate, outstanding auction equity
 2    interests shall participate in any distribution of remaining
 3    assets on a pari passu basis with the covered utility's
 4    common equity in the regulated service, in proportion to
 5    their respective outstanding equity amounts, in accordance
 6    with the commission's specifications under paragraph (2).
 7          (9)   Nothing under paragraph (8) shall be construed to
 8    create a priority or preference in favor of, or against,
 9    holders of auction equity interests relative to the covered
10    utility's common equity.
11    (j)   Participants.--
12          (1)   An auction under this section shall be open, at
13    minimum, to all accredited investors as that term is defined
14    under applicable Federal securities law.
15          (2)   Each qualified bidder shall, as a condition of
16    participation, certify in writing to the independent auction
17    administrator the following:
18                (i)    The bidder is submitting its bid based solely on
19          the bidder's own assessment of the risk-adjusted
20          financial return of the auction equity interest and not
21          for the purpose or with the effect of artificially
22          suppressing or inflating the auction-clearing return.
23                (ii)   The bidder is not acting in concert with any
24          other bidder or with the covered utility or any of its
25          affiliates with respect to the formulation of its bid.
26          (3)   A bidder that is a covered utility subject to cost-
27    of-service regulation by a Federal or State regulatory
28    authority, or a holding company that directly or indirectly
29    controls the covered utility, shall not be eligible to
30    participate as a bidder, except that the covered utility, its

20260HB2224PN3414                     - 22 -
 1    parent company and any affiliates may participate as bidders
 2    and shall be subject to any existing code of conduct policies
 3    for affiliate transactions and any further eligibility
 4    requirements established by the commission to prohibit
 5    inappropriate preferential treatment in the bidding process.
 6          (4)   The exclusion under paragraph (3) shall not apply to
 7    a registered investment company, investment adviser or other
 8    institutional investor whose ownership of a covered utility
 9    is solely as a passive investor in diversified portfolios.
10    Holdings by the institutional investors in auction equity
11    interests issued under this subchapter shall not be counted
12    toward an investment limitation applicable to ownership of
13    the covered utility or the covered utility's common equity
14    under applicable State law.
15          (5)   The commission shall establish rules or promulgate
16    regulations to implement the exclusion and certification
17    requirements under this subsection, including procedures for
18    investigation and disqualification of bidders that submit
19    false certifications or are found to have violated the
20    prohibition on coordinated bidding.
21    (k)   Misconduct and risk attribution.--
22          (1)   If the commission or a court of competent
23    jurisdiction has made a formal finding that a covered utility
24    has engaged in unlawful or imprudent conduct which has
25    materially increased the covered utility's cost of equity for
26    a regulated service, the commission may exclude the portion
27    of an increase in the authorized return on equity for the
28    regulated service that is attributable to the conduct from
29    the return applicable to the covered utility's common equity.
30          (2)   An auction equity interest, whether issued before or

20260HB2224PN3414                  - 23 -
 1      after a finding under paragraph (1), shall not be subject to
 2      the exclusion under paragraph (1) and all auction equity
 3      interests shall continue to bear the auction-clearing return
 4      established in the auction in which the interests were issued
 5      without reduction on account of any exclusion under this
 6      subsection.
 7            (3)   Nothing in this subsection shall limit the authority
 8      of the commission to impose penalties, disallowances or other
 9      remedies available under applicable law.
10      (l)   Regulated service corporation and regulated service
11   LLC.--
12            (1)   A covered utility may, at any time before or after
13      conducting a competitive equity auction, form a regulated
14      service corporation and a regulated service LLC for a
15      regulated service. The following shall apply:
16                  (i)    The regulated service corporation formed shall
17            be a wholly owned subsidiary of the covered utility,
18            organized as a corporation under the laws of any state
19            and treated as a corporation for Federal income tax
20            purposes.
21                  (ii)    The regulated service LLC shall be a wholly
22            owned subsidiary of the regulated service corporation,
23            organized as a limited liability company and treated as a
24            disregarded entity for Federal income tax purposes.
25                  (iii)    The regulated service LLC shall hold all
26            material assets, rights, franchises and obligations
27            associated with the regulated service.
28                  (iv)    The regulated service corporation shall serve
29            as the issuer of auction equity interests for that
30            regulated service.

20260HB2224PN3414                       - 24 -
 1              (v)    The formation of a regulated service corporation
 2        and regulated service LLC shall not be a prerequisite to
 3        conduct an auction under this section.
 4              (vi)   The absence of the entities shall not impair
 5        the validity of auction equity interests issued by the
 6        covered utility.
 7        (2)   In a competitive equity auction conducted prior to a
 8    regulated service corporation and regulated service LLC being
 9    established, the commission shall require the covered utility
10    to disclose to all qualified bidders that auction equity
11    interests are being issued as direct obligations of the
12    covered utility and are subject to the risks of any
13    insolvency, bankruptcy or restructuring proceedings affecting
14    the covered utility or the covered utility's affiliates.
15        (3)   The commission shall require each covered utility to
16    ensure that all long-term indebtedness with a stated maturity
17    greater than one year issued or incurred on or after the
18    effective date of this paragraph, whether in the form of
19    bonds, notes, debentures or otherwise, includes a covenant
20    expressly permitting the covered utility to transfer the
21    assets, franchises, rights and obligations associated with
22    each regulated service to a regulated service corporation or
23    regulated service LLC without the transfer constituting a
24    default, event of default or breach under the indebtedness.
25        (4)   The commission may not approve any long-term debt
26    financing by a covered utility that does not include a
27    covenant under paragraph (3).
28        (5)   Nothing in this subsection shall be construed to
29    require a covered utility to restructure, refinance or assign
30    any indebtedness outstanding as of the effective date of this

20260HB2224PN3414                   - 25 -
 1    paragraph in advance of the formation of a regulated service
 2    LLC under paragraph (1).
 3        (6)   Each covered utility that has not yet established a
 4    regulated service corporation and regulated service LLC shall
 5    use commercially reasonable efforts to do so by no later than
 6    five years after the effective date of this paragraph or five
 7    years after the date of the covered utility's first
 8    competitive equity auction, whichever is later. The
 9    commission may extend the period under this paragraph upon a
10    showing by the covered utility of good cause, which may
11    include the inability to obtain required bondholder or
12    creditor consents despite commercially reasonable efforts.
13        (7)   Whenever a covered utility has established a
14    regulated service corporation and regulated service LLC, each
15    entity shall be structured and operated as a bankruptcy-
16    remote special-purpose entity. The commission shall adopt or
17    promulgate rules or regulations to ensure the compliance of a
18    regulated service corporation and regulated service LLC,
19    which shall include the following:
20              (i)    Maintenance of books of account, bank accounts
21        and financial records separate from those of the covered
22        utility and any affiliate.
23              (ii)    Prohibition on commingling of assets.
24              (iii)    Requirements for the organizational documents
25        of the regulated service LLC to include at least one
26        independent manager whose affirmative consent is required
27        for a voluntary bankruptcy filing by the regulated
28        service LLC or the regulated service corporation.
29              (iv)    A covenant by the covered utility not to cause
30        or encourage any involuntary bankruptcy filing against

20260HB2224PN3414                   - 26 -
 1        the regulated service corporation or the regulated
 2        service LLC.
 3               (v)   Restrictions on indebtedness of the regulated
 4        service corporation and the regulated service LLC unless
 5        approved by the commission.
 6        (8)    The regulated service corporation may not conduct
 7    activities other than holding a membership interest in the
 8    regulated service LLC and serving as the issuer of auction
 9    equity interests. The corporation may not hold any assets
10    other than the corporation's membership interest in the
11    regulated service LLC and any cash or other assets incidental
12    thereto.
13        (9)    Formation of both the regulated service corporation
14    and the regulated service LLC shall require any approvals
15    that may be required under applicable law, including any
16    certificate of public convenience required under section 1102
17    (relating to enumeration of acts requiring certificate) for
18    the transfer of utility assets or franchises, and any
19    approval required under Chapter 21 (relating to relations
20    with affiliated interests) for transactions between the
21    covered utility and the entities.
22        (10)    If any assets are associated with more than one
23    regulated service, the assets may be held by the regulated
24    service LLC as co-owner with one or more other regulated
25    service LLCs, with each LLC's interest proportionally
26    allocated in a manner approved by the commission for
27    ratemaking purposes.
28        (11)    For the capital structure and indebtedness of the
29    regulated service LLC, the following apply:
30               (i)   Each regulated service LLC shall maintain a

20260HB2224PN3414                   - 27 -
 1        capital structure for the regulated service consistent
 2        with the capital structure authorized by the commission
 3        for ratemaking purposes, including debt and equity
 4        components.
 5             (ii)    The equity component of the regulated service
 6        for the applicable authorized return on equity shall
 7        consist of the regulated service corporation's equity
 8        interest in the regulated service LLC which is funded by
 9        the proceeds of auction equity interests and the covered
10        utility's retained interest.
11             (iii)    For ratemaking purposes, the interest on
12        indebtedness of the regulated service LLC shall be
13        treated as a cost of the regulated service.
14             (iv)    Upon formation of a regulated service LLC, the
15        commission shall determine the portion of the covered
16        utility's outstanding indebtedness that shall be
17        allocated to the regulated service by applying the
18        methodology used or to be used to allocate the covered
19        utility's capital structure among regulated services for
20        ratemaking purposes.
21             (v)    The regulated service LLC shall assume allocated
22        indebtedness as primary obligor in which the covered
23        utility shall provide an unconditional and irrevocable
24        guaranty of all assumed indebtedness for the remaining
25        term of each obligation.
26             (vi)    An assumption of allocated indebtedness shall
27        not constitute a default, acceleration event, assignment
28        or breach under the indebtedness, notwithstanding any
29        provision of the applicable instrument to the contrary.
30             (vii)    Upon formation, the regulated service LLC

20260HB2224PN3414                  - 28 -
 1        shall issue its own debt to finance the debt component of
 2        the regulated service LLC's capital structure which shall
 3        be secured by the regulated service assets held by the
 4        regulated service LLC.
 5               (viii)   Unless the commission determines that a
 6        guaranty is necessary to obtain financing on terms
 7        consistent with public interest, the regulated service
 8        LLC's debt may not require a guaranty by the covered
 9        utility. If the commission determines that a guaranty is
10        necessary, it shall be limited in scope and for a minimum
11        duration to fulfill its obligations.
12               (ix)   For any period during which the covered utility
13        guarantees indebtedness of a regulated service LLC, the
14        covered utility shall be entitled to a guaranty fee in an
15        amount and under the terms determined by the commission.
16               (x)    The rate base of the regulated service LLC shall
17        be determined in accordance section 1381(k).
18        (12)    Upon establishment of a regulated service
19    corporation and regulated service LLC, the regulated service
20    corporation shall become the issuer of all subsequent auction
21    equity interests for the applicable regulated service.
22        (13)    If it is determined to be in the public interest,
23    the commission may authorize the covered utility to offer
24    holders of outstanding auction equity interests the option to
25    convert their interests to equivalent interests issued by the
26    regulated service corporation.
27        (14)    Notwithstanding any other provision under this
28    subsection, a covered utility shall not be required to form a
29    regulated service corporation or regulated service LLC if the
30    following apply:

20260HB2224PN3414                    - 29 -
 1                    (i)    The covered utility provides only one regulated
 2             service subject to the jurisdiction of the commission or
 3             if multiple categories of service have been determined by
 4             the commission to warrant consolidated treatment as a
 5             single regulated service.
 6                    (ii)   The covered utility does not engage in any
 7             material business activity other than the provision of
 8             that regulated service.
 9             (15)    A covered utility that meets the requirements under
10      paragraph (14) may issue auction equity interests directly,
11      in which case all references under this subchapter to a
12      regulated service corporation or regulated service LLC shall
13      be construed as references to the covered utility when
14      applicable.
15   § 1383.    Annual reporting and transparency.
16      (a)    Reports.--Not later than January 15 of each year, the
17   commission shall submit a report to the Governor, the
18   chairperson and minority chairperson of the Consumer Protection
19   and Professional Licensure Committee of the Senate and the
20   chairperson and minority chairperson of the Consumer Protection,
21   Technology and Utilities Committee of the House of
22   Representatives on the implementation of this subchapter. The
23   annual report shall include all of the following:
24             (1)    Each covered utility's requested return on equity,
25      rate of return and capitalization mix proposed as part of the
26      covered utility's most recent base rate filing under section
27      1308(d) (relating to voluntary changes in rates), including
28      the corresponding data for the preceding three base rate
29      filings.
30             (2)    The actual return on equity, rate of return and

20260HB2224PN3414                         - 30 -
 1      capitalization mixes authorized by the commission for each
 2      covered utility in the most recent three base rate
 3      proceedings.
 4             (3)   The results of any competitive equity auctions
 5      conducted under this subchapter for the previous five
 6      calendar years.
 7             (4)   An analysis of the impact on average customer rates
 8      resulting from implementation of this subchapter.
 9             (5)   In clear and accessible language, a description of
10      how authorized returns on equity have changed, reflect new
11      circumstances or remained the same during the previous year.
12             (6)   All data used for calculations under this subchapter
13      which is not publicly available, including an explanation on
14      the necessity for using nonpublic data.
15             (7)   A summary of enforcement actions taken under this
16      subchapter.
17      (b)    Public information.--The annual report under subsection
18   (a) shall be made publicly available on the commission's
19   publicly accessible Internet website.
20   § 1384.    Applicability to State-jurisdictional rate base.
21      This subchapter shall apply only to the portion of a covered
22   utility's rate base that is subject to the ratemaking
23   jurisdiction of the commission. Nothing in this subchapter shall
24   be construed to apply to, modify or otherwise affect the return
25   on equity applicable to any facilities, assets or services for
26   which the rate of return is determined by the Federal Energy
27   Regulatory Commission or any other Federal regulatory authority.
28   To the extent that a covered utility's rate base includes both
29   State-jurisdictional and federally jurisdictional components,
30   the commission shall establish procedures to allocate the rate

20260HB2224PN3414                     - 31 -
 1   base between those components. The authorized return on equity
 2   determined under this subchapter shall be applied solely to the
 3   components subject to the commission's jurisdiction.
 4   § 1385.   Applicability to ratemaking.
 5      (a)    Application.--This subchapter shall apply to each
 6   covered utility and each regulated service of a covered utility
 7   as of the effective date of this subsection regardless of
 8   whether a rate proceeding under section 1308(d) (relating to
 9   voluntary changes in rates) is pending and without regard to
10   when the proceeding was last concluded.
11      (b)    Implementation.--The implementation timeline established
12   under section 1381(j) (relating to default authorized return on
13   equity) shall govern the commission's adjustment of customer
14   rates to reflect the authorized return on equity required by
15   this subchapter.
16      (c)    Construction.--Nothing in this section shall be
17   construed to require the initiation of a rate proceeding under
18   section 1308(d) as a precondition to the application of this
19   subchapter to a covered utility.
20      Section 2.   This act shall take effect immediately.




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