Public Utility Law Section Annual Seminar Water Utilities: The Latest on CCN Decertifications, Compensation, and Rates Public Utility Law Section Annual Seminar August 18, 2017 Austin, Texas

Introduction and Landowner Issues Leonard Dougal Jackson Walker LLP

Evolution of CCN Policy SB 1 “Promote Regional Water Systems” HB 2876 Landowner Decert “Expedited Release” 13.254 (a-1) HB 1600 CCN & Rates Transfer to PUC (Eff. 9-1-2014) SB 573 Landowner Decert “Streamlined Expedited Release” 13.254 (a-5) TCEQ Regionalization Policy ________________________________________________________________________________________________________________________________        1997 2003 2005 2011 2014

Water and Sewer CCN Viewer http://www.puc.texas.gov/industry/water/utilities/map.html

Statutory Authority for CCN Decertification TWC 13.254 (a) After Notice and Hearing (a-1) Expedited Release (50+ Acres) (a-5) Streamlined Exp. Release (25+ Acres) TWC 13.255 Area Incorporated or Annexed by City (Only: WSC, SUD, FWSD, IOU w/in City 1.7M)

33 Texas Counties Streamlined Expedited Release 13.254(a-5)

Streamlined Expedited Release Water Code 13.254(a-5) Thresholds Land Within the 33 Counties Tract of 25 (Contiguous) Acres, or more Not Receiving Water/Sewer Service Process Landowner Petition to PUC Legal Description/Ownership Shall Grant w/in 60 Days

Landowner Decertification Considerations Is There (Actual) Service on the Property? Who is the Alternative Service Provider? Are they Better Cost to Serve Ability to Serve Timing Will Compensation be Owed to the Former CCN Holder?

CCN Holder Perspective Geoff Kirshbaum Terrill & Waldrop

Rulemaking “Useless or valueless property” – Definition at 16 TAC §24.113(b)(6) Property that has been rendered useless or valueless to a former CCN holder by revocation or amendment, including by expedited release or streamlined expedited release, under this section. “The Commission agrees that the term property is broad and includes both real and personal property, and tangible and intangible property, but the adjectives useless and valueless restrict the relevant property to that rendered useless or valueless as a result of decertification.” Project No. 46151, Order Adopting Rules, at 6 (May 4, 2017). Broad Service Definition from TWC §13.002(21) and 16 TAC §24.3(62) - Not Changed: “Service” means any act performed, anything furnished or supplied, and any facilities or lines committed or used by a retail public utility in the performance of its duties under this chapter to its patrons, employees, other retail public utilities, and the public, as well as the interchange of facilities between two or more retail public utilities.

TWC 13.254(a-5)-(a-6) Expedited Releases “Tract of land . . . not receiving water or sewer service” Commission requiring facilities “committed” specifically to decertification tract (e.g., lines, meters, or connections). Facilities generally available to CCN area that may include tract are not enough. Commission may be requiring active meter for “service” (see, e.g., PUC Docket No. 46866, In re: Marilee Special Utility District, Final Order (May 19, 2017); but see PUC Docket No. 42801, In re Markout Water Supply Corporation, Motion to Overturn (August 27, 2014), Final Order (October 3, 2014) (meters on property, but shut off by property owner request (and may have been illegally restored by property tenant)). Commission points to Tex. General Land Office v. Crystal Clear Water Supply Corporation, 449 S.W.3d 130, 140-41 (Austin 2014, pet. denied) - but this case recognizes the broad TWC definition of “service.”

TWC 13.254(a-5)-(a-6) Expedited Releases Compensation 13.254(g) contains factors for valuing property rendered useless or valueless by decertification; bifurcated hearing process Aqua Texas/City of Celina (PUC Docket No. 45848) (TWC §13.254 Expedited Release Compensation) ALJs’ Proposal for Decision - attaching physical facility requirement to compensation for spent money equates to “property purgatory” Order on Rehearing - $0 result spent money is not property of the utility even though “expenditures may have been made using money that was formerly the property of the utility. . .” The utility “must show that money was expended to obtain property rather than services.” City of Lampasas/Kempner WSC (PUC Docket No. 46140)(TWC §13.254 Expedited Release Compensation) Proposal for Decision: followed Aqua/Celina - no compensation Commission voted to approve PFD (no order yet)

TWC 13.255 Single Certification in Incorporated or Annexed Areas Compensation for property rendered useless or valueless by the decertification is the main question for single certification of raw land to annexing municipality – limited application, but “receiving service” is not an issue Example Cases: Green Valley SUD - City of Cibolo (PUC Docket No. 45702); Green Valley SUD - City of Schertz (PUC Docket No. 45956) - Interim orders on compensation issues follow Celina

7 U.S.C. § 1926(b) Service Area Protection/Federal Law Green Valley Special Util. Dist. v. City of Cibolo, No. 16-51282, 2017 Tex. App. LEXIS 14205 (5th Cir. Aug. 2, 2017) CCN’s state law duty to provide continuous and adequate service is the equivalent of making service available under 7 U.S.C. § 1926(b) (previously, Fifth Circuit held in North Alamo that such protected service area is “sacrosanct” (include cite)) and may not be “curtailed or limited” § 1926(b)’s protection for rural utility borrowers is not tied to the service funded by a USDA loan

7 U.S.C. § 1926(b) Service Area Protection/Federal Law TWC § 13.254(a-6) [not TWC §13.255] “The utility commission may not deny a petition received under Subsection (a-5) based on the fact that a certificate holder is a borrower under a federal loan program.” This issue is currently being litigated. Case No. 1:17-cv-00254; Crystal Clear SUD v. Public Utility Commission et al; in the United States District Court, Western District of Texas, Austin Division.

Conclusions Commission has set very high bar for protecting service area from a CCN decertification in TWC § 13.254 expedited release cases and for receiving compensation following a CCN decertification in both TWC § 13.254 and § 13.255 cases Law in this area is evolving Service area planning is difficult for a CCN Holder in the meantime

Municipal Perspective Art Rodriguez Russell Rodriguez Hyde & Bullock LLP

Expedited Releases (Streamlined) New Process PUC Rule 24.113 Landowner Petition Rebuttable Presumption - no useless or valueless property Current CCN Holder Fails to Intervene – Conclusively demonstrated Current CCN holder bear burden of proof on useless or valueless property PUC makes final determination of useless or valueless property

Expedited Releases (Streamlined) Compensation Compensation only for Useless or Valueless Property 90 day process from Notice of Intent to Serve Valuation of Real Property Valuation of Personal Property

Valuation of Property Real Property Personal Property Property Code Chap. 21 Personal Property Debt allocable Value of service facilities located within the removed area Expenditures for planning, design, or construction of the service facilities Amount of contractual obligations

Valuation of Property (Cont.) Personal Property Any demonstrated impairment of service Increase of cost to consumers Impact on future revenues lost from existing customers Legal and Professional fees Any other relevant factors

City as CCN Holder City – No CCN necessary Development/Connection Requirements Expedited Releases Beneficial Detrimental

Policy and Legislative Erin Selvera Texas Rural Water Association

Regionalization PUC TWDB TCEQ

TCEQ Statutes Rules TWC 11.0235. Policy Regarding Waters Of The State TWC 26.003. Policy of Subchapter TWC 26.081. Regional Or Area-wide Systems; General Policy TWC 26.086. Rates For Services By Designated Systems Rules 30 TAC 290.39 30 TAC Chapter 295

PUC Statutes Rules TWC 13.183 Fixing Overall Revenues TWC 13.241 Granting Certificates Rules 16 TAC 24.102 Criteria for Granting or Amending a Certificate of Convenience and Necessity 16 TAC 24.31 Cost of Service. 16 TAC 24.34 Alternative Rate Methods

Top 10 Systems impacted by 13.254(a-5) CCN holder Number of Petitions Type Chisholm Trail SUD 14 W Aqua Texas, Inc. 12 W&S Tall Timbers Utility Co., Inc. 11 S Creedmoor-Maha WSC 8 Gulf Coast Waste Disposal Authority Mustang SUD G&W SUD 7 Marilee SUD 6 Crystal Clear WSC/SUD 5 HMW SUD

TWDB Statutes Rules TWC 15.001 Definitions TWC 15.002 Purpose TWC 15.102 Financial Assistance TWC 15.437 Prioritization of Projects by the Board TWC 36.1086.  Joint Efforts by Districts in a Management Area Rules TAC Chapter 357 28

SWIFT Project Prioritization Highest Consideration   Additional Criteria Serve a large population 30 Local contribution, including federal funding 5 Provide assistance to a diverse urban and rural population Financial capability of the applicant to repay 2 Provide regionalization Emergency Need Meet a high percentage of water supply needs of users to be served by the project Demonstration or projected effect of the project on water conservation, including preventing water loss 15 Readiness to proceed 8 Priority assigned by the regional water planning group Maximum subtotal 50 Maximum Subtotal Maximum Total Points: 100

Regionalization Policy PUC TWDB TCEQ

Regionalization Policy PUC TWDB TCEQ

PANEL MEMBERS Arturo D. Rodriguez, Jr. Leonard H. Dougal Russell Rodriguez Hyde Bullock, LLP arodriquez@txadminlaw.com Erin Selvera Texas Rural Water Association erin.selvera@trwa.org Leonard H. Dougal Jackson Walker L.L.P. ldougal@jw.com Geoffrey P. Kirshbaum Terrill & Waldrop gkirshbaum@terrillwaldrop.com