Who Should Pay for Costly Water and Sewer Infrastructure? The Legal Considerations

1. Who Should Pay for Costly Water and Sewer Infrastructure? The Legal Considerations TRWA / TWCA Water Law Seminar January 24 – 25, 2013Austin, Texas Leonard H. Dougal Jackson Walker L.L.P. ldougal@jw.com • (512) 236-2000

2. Introduction • Public-Private Efforts inProject Development • Revenue Sources: Rates and Impact Fees • Classes of Service

3. Public-Private Partnerships (P3) • Comprehensive P3 statute adopted in 2011 • Authorizes governmental entities to contract with private parties for qualifying public projects, including: • water supply facilities • public works • waste treatment facilities Tex. Gov’t Code Ch. 2267.

4. Public-Private Partnerships (P3) • Governmental entity must adopt a resolution indicating it elects to operate under Ch. 2267 • Before requesting or considering a P3 project, guidelines must be adopted & made available to the public • May receive solicited or unsolicited proposals Tex. Gov’t Code Ch. 2267.

5. Public-Private Partnerships (P3) • Comprehensive Agreement for P3 must include: • Delivery of letters of credit or other security • Delivery of performance & payment bonds • Review & approval of plans & specifications • Maintenance of public liability insurance policy • Reimbursement to governmental entity for services provided • Any user fee, lease payment or service payment Tex. Gov’t Code § 2267.058(a).

6. Proposed Lake Columbia

7. Public-Private Project: Example • Lake Columbia • Proposed new reservoir to supply East Texas • Partnership of Angelina and Neches River Authority & Tomlin Infrastructure Group • $330 Million Project • Grants Tomlin 47% of the lake’s water rights

8. Friday, January 11, 2013 Texas Bills Would Dedicate $2 Billion for Water

9. Ratemaking Jurisdiction • TCEQ Original Jurisdiction for IOUsserving outside city limits • TCEQ Appellate Jurisdiction for: • Districts • WSCs • IOUs serving inside city limits • City customers outside city limits • Wholesale water rates Tex. Water Code §§ 13.042, 13.043.

10. Rate Appeals – Retail • Affected customers must file a petition within 90 days of final decision • Petition must be signed by lesser of 10,000 or 10% of ratepayers whose rates have been changed and who are eligible to appeal • TCEQ reviews appeals de novo and will order the rates the governing body should have fixed Tex. Water Code § 13.043; 30 TAC § 291.41.

11. Wholesale Rate Appeals – Bifurcated Process at SOAH 1. Determination of Public Interest • protested rate impairs seller’s ability to continue to provide service; • protested rate impairs purchaser’s ability to continue to provide service to its retail customers; or • protested rate evidences seller’s abuse of monopoly power • protested rate is unreasonably preferential, prejudicial, or discriminatory, compared to the wholesale rates the seller charges other wholesale customers 2. Determination of Cost of Service • Will rely on any reasonable methodologies set by contract 30 TAC §§ 291.128-138.

12. Proposed Transfer of Rate Regulation to PUC • Legislature considering transfer of water and wastewater rate regulation from TCEQ to PUC • Recommended by Sunset Advisory Commission • Would consolidate most utility regulation within one agency • Proposal for PUC’s Office of Public Utility Counsel to represent customer interests Sunset Commission Report, Jan. 2013

13. Impact Fees “A charge or assessment imposed by a political subdivision against new development in order to generate revenue for funding or recouping the costs of capital improvements or facility expansions necessitated by and attributable to the new development.” Tex. Loc. Gov’t Code § 395.001(4).

14. Impact Fees • May be imposed only to pay costs of constructing capital improvements or facility expansions • May not be used for: • Construction, acquisition, or expansion of facilities not identified in the capital improvements plan; • Repair, operation, or maintenance; • Upgrading, expanding, or replacing existing capital improvements to serve existing development; • administrative and operating costs; • principal payments and interest or other finance charges on bonds or other indebtedness.

15. Impact Fees – Adoption • TCEQ Process • Develop Capital Improvements Plan (CIP) • Adopt resolution requesting approval of Impact Fee • Submit application to TCEQ • Public notice • TCEQ approval if impact fee is “reasonable, equitable, and necessary” • Local Gov’t Code Ch. 395 Process • Develop CIP • Public notice and hearing on CIP • Board order approving CIP • Public notice and hearing on Impact Fee • Board order adopting Impact Fee

16. Classes of Service • Districts may establish different charges among classes of customers based on any factor the district considers appropriate, including: • (1) similarity of the type of customer to other customers in the class (e.g. residential, commercial, industrial, out-of-district) • (2) type of services provided to the customer class; • (3) cost of facilities, operations, and administrative services (e.g. for security, recreational facilities, or fire protection) • (4) total revenues received relative to cost of service Tex. Water Code § 49.2122.

17. Classes of Service • District is presumed to have weighed and considered appropriate factors and to have properly established charges, fees, rentals, and deposits absent a showing the district acted arbitrarily and capriciously. • Rates may not be unreasonably preferential, prejudicial, or discriminatory in application to each class of customers. Tex. Water Code § 49.2122(c). 30 TAC § 291.41.

18. Improvement Triggers • Water – 85% rule • System demand at 85% of design capacity; submit planning reportto TCEQ • Wastewater – 75/90 rule • 75% permitted flow – initiate engineering and financial planning • 90% permitted flow – obtain authorization to commence construction 30 TAC § 291.93(3). 30 TAC § 305.126.

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