ANNUAL REPORT: DETERMINATION OF ANNUAL COSTS.

For the purposes of determining the annual costs in each annual report, the following amounts shall be used:

(1) the lesser of:

(A) the utility's Texas jurisdictional operation and maintenance expense reflected in each utility's Federal Energy Regulatory Commission Form 1 of the report year, plus factoring expenses not included in operation and maintenance, adjusted for:

(i) costs under Sections 36.062, 36.203, and 36.205; and

(ii) revenues recorded under the interutility billing process adopted by the commission to implement Sections 35.004, 35.006, and 35.007; or

(B) the Texas jurisdictional operation and maintenance expense reflected in each utility's 1996 Federal Energy Regulatory Commission Form 1, plus factoring expenses not included in operation and maintenance, adjusted for:

(i) costs under Sections 36.062, 36.203, and 36.205, and not indexed for inflation;

(ii) any difference between the annual revenues and the expenses recorded under the interutility billing process adopted by the commission to implement Sections 35.004, 35.006, and 35.007; and

(iii) the annual percentage change in the average number of utility customers;

(2) the amount of nuclear decommissioning expense approved in the electric utility's last rate proceeding before the commission, as may be required to be adjusted to comply with applicable federal regulatory requirements;

(3) the depreciation rates approved in the electric utility's last rate proceeding before the commission;

(4) the amortization expense approved in the electric utility's last rate proceeding before the commission or in any other proceeding in which deferred costs and the amortization of those costs are established, except that if the items are fully amortized during the freeze period, the expense shall be adjusted accordingly;

(5) taxes and fees, including municipal franchise fees to the extent not included in Subdivision (1), other than federal income taxes, and assessments incurred that year;

(6) federal income tax expense, computed according to the stand-alone methodology and using the actual capital structure and actual cost of debt as of December 31 of the report year;

(7) return on invested capital, computed by multiplying invested capital as of December 31 of the report year, determined as provided by Section 39.259, by the cost of capital approved in the electric utility's most recent rate proceeding before the commission in which the cost of capital was specifically adopted, or, in the case of a range, the midpoint of the range, if the final rate order for the proceeding was issued on or after January 1, 1992, or if such an order does not exist, a cost of capital of 9.6 percent shall be used; and

(8) the amount resulting from any operation and maintenance expense savings tracker from a merger of two utilities and contained in a settlement agreement approved by the commission before January 1, 1999.