CCN Update Panel The CCN Holder’s Perspective on Compensation Leonard H. Dougal Jackson Walker L.L.P. ldougal@jw.com • (512) 236-2000 CCN Update Panel The CCN Holder’s Perspective on Compensation TRWA/TWCA Water Law Seminar January 11, 2017 Austin, Texas

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 SB 573 Landowner Decert “Streamlined Expedited Release” 13.254 (a-5) TCEQ Regionalization Policy ________________________________________________________________________________________________________________________________        1997 2003 2005 2011 2015 2

CCN Compensation After Decertification 3

Compensation Obligation TWC 13.254(d) A retail public utility may not in any way render retail water or sewer service directly or indirectly to the public in an area that has been decertified under this section without providing compensation for any property that the utility commission determines is rendered useless or valueless to the decertified retail public utility as a result of the decertification. 4

Compensation Process/Timing TWC 13.254(e) The determination of the monetary amount of compensation, if any, shall be determined at the time another retail public utility seeks to provide service in the previously decertified area and before service is actually provided. The utility commission shall ensure that the monetary amount of compensation is determined not later than the 90th calendar day after the date on which a retail public utility notifies the utility commission of its intent to provide service to the decertified area. 5

Statutory Basis for CCN Compensation After Decertification 13.254(g) Factors Apply to: (a-1) Expedited Release (50+ Acres) (a-5) Streamlined Exp. Release (25+ Acres) 13.255(g) Factors Appy to: Area Incorporated or Annexed by City No Agreement after 180 Days WSC, SUD, FWSD (IOU w/in City 1.7M) 6

TWC 13.254(g) Versus 13.255(g) 13.254 (g) 13.255 (g) . . . The factors ensuring that the compensation to a retail public utility is just and adequate, shall, at a minimum, include: impact on the amount existing indebtedness of the retail public utility's debt allocable for service to the area in question; and its ability to repay that debt, the value of the service facilities of the retail public utility located within the area in question; , the amount of any expenditures for planning, design, or construction of service facilities outside the incorporated or annexed area that are allocable to service to the area in question; , the amount of the retail public utility's contractual obligations allocable to the area in question; , any demonstrated impairment of service or increase of cost to consumers of the retail public utility remaining after the decertification; single certification, the impact on future revenues lost from existing customers; , necessary and reasonable legal expenses and professional fees; , factors relevant to maintaining the current financial integrity of the retail public utility, and other relevant factors. The utility commission shall adopt rules governing the evaluation of these factors. 7

TCEQ Compensation Creedmoor-Maha WSC (1960 Acres) Appraised Value Creedmoor-Maha $2,157,702 Jona Acquisition, Inc. $ 16,548 TCEQ Order $ 179,392 TCEQ Docket No. 2010-0100-UCR Order of 04-26-2010 8

TCEQ Compensation Monarch Utilities (445 Acres) Appraised Value Monarch Utilities I, LP $2,266,600 E.B Windy Hill(landowner) $ 25,223 TCEQ Order $ 275,512 TCEQ Docket No.2013-1871-UCR Order of 11-22-2013 9

(Old) PUC Compensation Process Mustang SUD (495 Acres) Appraised Value Mustang SUD $1,850,192 City of Celina $ 181,900 PUC Order* $ 258,081 PUC Docket No. 45151 Notice of Approval of 12-15-2015 *Appeal Pending in Travis County Dist. Ct 10

New PUC 2-Phase Compensation Process Phase 1: Refer SOAH, After Notice of Intent to Serve ALJ Hearing on “what property has been rendered useless or valueless by the decertification” Findings in PFD to PUC Commissioners PUC Commissioners Issue Property Determination Phase 2: Compensation; Three Appraisers Unless Agreed Appraiser “May” Return to SOAH, if contested or fact-intensive PUC Final Order on Compensation Appeal to District Court 11

Useless or Valueless Proposed PUC Rule 24.113(b)(6) Meaning “Useless or valueless property -- 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.” Meaning Surely not Completely Useless? If Partial, What Basis to Calculate Assumptions as to the Water Demand from the Decertified Tract 12

Phase 1 Other Issues/Challenges What is the Date of the “Taking” Tract Not Receiving Service Does a Water Facility need to be “dedicated” to serve the decertified tract? What is Property? Facilities: Wells, Pipes, Tanks, Pumps Lost Economic Opportunity? (PUC 45848) Cost of Obtaining and Maintaining a CCN? Legal & Professional Fees re: Decertification 13

“Just and Adequate” Compensation Factors 13.254(g) Statutory Factors (Allocable to the Decertified Area) Debt Allocable to the Area Value of Facilities in the Area Amount of Expenditures for Planning, Design and Construction Contractual Obligations Impairment/Increased Cost to Remaining Customers Loss of Future Revenues from Exist. Customers (None) Legal and Professional Fees Other Relevant Factors 14

Phase 2 Compensation Issues Will You Even Get to Address the 8 Comp. Factors? No, if no property is “Useless or Valueless” in Phase 1 Who is Qualified to Make an Appraisal? Engineer? Professional Appraiser? Appeal to District Court Substantial Evidence 15

Policy Concerns Discourages Planning and Investing for Growth Swiss Cheese CCNs Stranded Assets Future Growth, Does it Off-Set Decertification Increased Costs to Customers Greater Protections by Federal Debt, 7 USC 1926(b) 16

QUESTIONS? Leonard H. Dougal Jackson Walker L.L.P. 100 Congress Avenue, Suite 1100 Austin, Texas 78701 Telephone: (512) 236-2000 ldougal@jw.com 17