Buying and Selling Water and Wastewater Systems – Let’s Make a Deal, But How?
by David J. Klein
There are over 3,000 water systems and over 800 wastewater systems registered with the Public Utility Commission of Texas (“PUC”), meaning, that they possess a certificate of convenience and necessity (“CCN”) or an exempt registration from the PUC. There are even more systems out there that, right or wrong, are not registered with the PUC. Like any other asset, utility systems are bought and sold every day by two willing parties; and they are typically transferred for at least one of the following three reasons:
(1) investors are looking to enter the utility service industry in Texas, (2) existing utility service providers are looking to expand their footprint in Texas to achieve better economies of scale, and/or (3) utility system owners are looking to downsize or exit the utility service industry altogether, either voluntarily or involuntarily.
When looking to buy or sell a water or wastewater system, the process is unfortunately more complicated than just finding a willing buyer or seller and then quickly closing on a transaction. There are regulatory approvals that the parties must secure from the PUC and Texas Commission on Environmental Quality (“TCEQ”) to complete a transaction. To that end, some approvals are obtained pre-closing, and others are completed post-closing.
The extent of the regulatory hoops that a buyer and seller have to jump through depends on their corporate classification. Generally speaking, water and wastewater systems are owned by either (1) for profit corporations, known as investor-owned utilities (“IOUs”); (2) non-profit corporations, known as water supply corporations or sewer service corporations (collectively “WSCs”); (3) water districts, such as municipal utility districts, water control and improvement districts, and special utility districts; and (4) municipalities.
In Texas, if the buyer of a water or wastewater system is an IOU or a WSC, then the parties must obtain PUC approval of the transfer of the utility system and CCN. Specifically, Texas Water Code § 13.301 provides that on or before the 120th day before the effective date of a sale, acquisition, lease, or rental of a water or sewer system owned by an IOU or a WSC…shall: (1) file a written application with the [PUC] and (2) issue notice of the application, unless public notice is waived by the PUC. In other words, the parties must first negotiate and enter into a contract to transfer the utility system(s) and CCNs. But, the parties cannot close on the transfer of the system and CCN, until they prepare and file an application at the PUC and secure the agency’s approval of that application. If the buyer is a water district or a municipality, then PUC approval is still required, but it is subject to a different process.
As to the PUC application process for a buyer that is an IOU or WSC, there are many potential pitfalls that can delay or potentially bring the acquisition process to a halt. Even worse – the PUC could deny the application! In processing a utility system transfer application that is subject to Texas Water Code § 13.301, the PUC will likely require the buyer to demonstrate that it has the financial, managerial, and technical capability for providing continuous and adequate service to the service area to be transferred. In the event that the PUC believes that the buyer cannot prove up those factors, the PUC could require that the buyer provide a bond or other financial assurance in a form and amount specified by the PUC to ensure continuous and adequate utility service is provided. The buyer and seller will also need to have detailed maps of the CCN area to be transferred. Plus, in addition to the PUC’s review of the transfer application, the customers of the system are entitled to notice of the application, and they could protest the application, causing further delay and expense.
As a final note on utility system transfer applications, another important consideration is determining the rates that the acquiring entity will charge the customers, post-closing. To that end, the Texas Legislature enacted a new law in 2021, providing buyers with some additional flexibility.
As noted above, the parties will also need to seek approval from the TCEQ to transfer either the public drinking water system authorization or wastewater treatment plant permit. Plus, there could be other local permits or authorizations that would need to be transferred too, such as groundwater permits or contractual rights/obligations. The timing of these steps may be post-closing events, but it will depend on the permit.
Ultimately, the buyers and sellers must evaluate a host of factors to get from negotiating an agreement to closing, with some factors being shared and others being unique to just one party. Consequently, it is clear that preparation for the transfer process, as well as creating a well-prepared utility system and CCN transfer application, are critical steps.
David Klein is a Principal in the Firm’s Districts and Water Practice Groups. If you have any questions regarding buying or selling a water or wastewater system, please contact David at 512.322.5818 or firstname.lastname@example.org.