H.B. No. 3542
 
 
 
 
AN ACT
  relating to the provision of water and sewer services by certain
  retail public utilities.
         BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
         SECTION 1.  Subchapter E, Chapter 13, Water Code, is amended
  by adding Section 13.150 to read as follows:
         Sec. 13.150.  REPORTS REQUIRED FOR WATER AND SEWER
  UTILITIES.  (a)  This section applies only to a utility that
  provides retail water or sewer utility service through fewer than
  10,000 taps or connections.
         (b)  Except as provided by Subsection (c), a utility shall
  deliver to the utility commission a report of the utility's
  financial, managerial, and technical capacity to provide
  continuous and adequate service to its customers not later than the
  third anniversary of the date that the utility violates a final
  order of the commission by failing to:
               (1)  provide system capacity that is greater than the
  required raw water or groundwater production rate or the
  anticipated daily demand of the system;
               (2)  provide a minimum pressure of 35 pounds per square
  inch throughout the distribution system under normal operating
  conditions; or
               (3)  maintain accurate or properly calibrated testing
  equipment or other means of monitoring the effectiveness of a
  chemical treatment or pathogen inactivation or removal process.
         (c)  A utility that has an existing obligation to deliver a
  report under Subsection (b) is not required to deliver another
  report as a result of the occurrence of an event described by
  Subsection (b) if the event occurs before the date that the utility
  delivers the report required by Subsection (b).
         (d)  On receiving notice that a utility has violated an order
  described by Subsection (b), the commission shall provide written
  notice of the violation to the utility commission.
         (e)  The utility commission shall deliver a copy of a report
  received under Subsection (b) to:
               (1)  each state senator representing a district that
  contains a portion of the service area of the utility that submitted
  the report; and
               (2)  each state representative representing a district
  that contains a portion of the service area of the utility that
  submitted the report.
         (f)  If a utility fails to deliver a report in accordance
  with Subsection (b), the utility commission shall report the
  failure to:
               (1)  the commission;
               (2)  each state senator representing a district that
  contains a portion of the utility's service area; and
               (3)  each state representative representing a district
  that contains a portion of the utility's service area.
         SECTION 2.  Subchapter H, Chapter 13, Water Code, is amended
  by adding Section 13.305 to read as follows:
         Sec. 13.305.  VOLUNTARY VALUATION OF ACQUIRED UTILITY OR
  FACILITIES. (a) In this section:
               (1)  "Acquiring utility" means a Class A or Class B
  utility that is acquiring a selling utility, or facilities of a
  selling utility, as the result of a voluntary arm's-length
  transaction.
               (2)  "Ratemaking rate base" means the dollar value of a
  selling utility that is incorporated into the rate base of the
  acquiring utility for postacquisition ratemaking purposes.
               (3)  "Selling utility" means a retail public utility
  that is being purchased by an acquiring utility, or is selling
  facilities to an acquiring utility, as the result of a voluntary
  arm's-length transaction.
         (b)  The utility commission shall maintain a list of experts
  qualified to conduct economic valuations of utilities for the
  purposes of this section.
         (c)  An acquiring utility and a selling utility may agree to
  determine by the following process the fair market value of the
  selling utility or the facilities to be sold, as applicable:
               (1)  the acquiring utility and the selling utility
  shall notify the utility commission of their intent to determine
  the fair market value under this section;
               (2)  not later than the 30th day after the date the
  utility commission receives notice under Subdivision (1), the
  utility commission shall select three utility valuation experts
  from the list maintained under Subsection (b);
               (3)  each utility valuation expert shall perform an
  appraisal in compliance with Uniform Standards of Professional
  Appraisal Practice, employing the cost, market, and income
  approaches, to determine the fair market value; and
               (4)  the three utility valuation experts selected under
  Subdivision (2) jointly shall retain a licensed engineer to conduct
  an assessment of the tangible assets of the selling utility, or the
  facilities to be sold, as applicable, and each utility valuation
  expert shall:
                     (A)  incorporate the assessment into the
  appraisal under the cost approach required under Subdivision (3);
  and
                     (B)  provide the completed appraisal to the
  acquiring utility and the selling utility in a reasonable and
  timely manner.
         (d)  A utility valuation expert described by Subsection (b)
  may not:
               (1)  derive any material financial benefit from the
  sale other than fees for services rendered; or
               (2)  be or have been within the year preceding the date
  the service contract is executed an immediate family member of a
  director, officer, or employee of the acquiring utility or the
  selling utility.
         (e)  A fee paid to a utility valuation expert may be included
  in the transaction and closing costs associated with the
  acquisition by the acquiring utility. A fee may not exceed the
  lesser of:
               (1)  five percent of the fair market value; or
               (2)  a fee amount approved by the utility commission.
         (f)  For the purposes of the acquisition, the fair market
  value is the average of the three utility valuation expert
  appraisals conducted under Subsection (c).
         (g)  For an acquisition of a selling utility, the ratemaking
  rate base of the selling utility is the lesser of the purchase price
  negotiated by the acquiring utility and the selling utility or the
  fair market value.  The ratemaking rate base of the selling utility
  shall be incorporated into the rate base of the acquiring utility
  during the utility's next rate base case under Subchapter F.
         (h)  If the acquiring utility and the selling utility use the
  process for establishing fair market value in Subsection (c), the
  acquiring utility shall submit as attachments to an application
  required under Section 13.301:
               (1)  copies of the three appraisals performed by the
  utility valuation experts under Subsection (c);
               (2)  the purchase price agreed to by the acquiring
  utility and the selling utility;
               (3)  if applicable, the ratemaking rate base determined
  under Subsection (g);
               (4)  if applicable, the transaction and closing costs
  incurred by the acquiring utility that will be included in the
  utility's rate base; and
               (5)  if applicable, a tariff containing a rate equal to
  the existing rates of the selling utility at the time of the
  acquisition.
         (i)  If the utility commission approves the application for
  acquisition under Section 13.301, the utility commission shall
  issue an order that includes:
               (1)  the ratemaking rate base of the selling utility as
  determined under Subsection (g); and
               (2)  any additional conditions for the acquisition the
  utility commission requires.
         (j)  A tariff submitted under Subsection (h)(5) shall remain
  in effect until the utility commission approves new rates as part of
  a rate base case proceeding.
         (k)  The original sources of funding for any part of the
  water or sewer assets of the selling utility are not relevant to
  determine the value of the selling utility's assets.  The selling
  utility's cost of service shall be incorporated into the revenue
  requirement of the acquiring utility's next rate base case
  proceeding.
         (l)  In this subsection, "allowance of funds used during
  construction" means an accounting practice that recognizes the
  capital costs, including debt and equity funds, that are used to
  finance the construction costs of an improvement to a selling
  utility's assets by an acquiring utility.  An acquiring utility's
  postacquisition improvements shall accrue an allowance of funds
  used during construction after the date the cost was incurred until
  the earlier of:
               (1)  the fourth anniversary of the date the asset
  entered into service; or
               (2)  the inclusion of the asset in the acquiring
  utility's next rate base case.
         (m)  Depreciation on an acquiring utility's postacquisition
  improvements shall be deferred for book and ratemaking purposes.
         SECTION 3.  Section 13.4132(a), Water Code, is amended to
  read as follows:
         (a)  The utility commission or the commission, after
  providing to the utility notice and an opportunity to be heard by
  the commissioners at a utility commission or commission meeting,
  may authorize a willing person to temporarily manage and operate a
  utility if the utility:
               (1)  has discontinued or abandoned operations or the
  provision of services; [or]
               (2)  has been or is being referred to the attorney
  general for the appointment of a receiver under Section 13.412; or
               (3)  provides retail water or sewer utility service
  through fewer than 10,000 taps or connections and violates a final
  order of the commission by failing to:
                     (A)  provide system capacity that is greater than
  the required raw water or groundwater production rate or the
  anticipated daily demand of the system; 
                     (B)  provide a minimum pressure of 35 pounds per
  square inch throughout the distribution system under normal
  operating conditions; or 
                     (C)  maintain accurate or properly calibrated
  testing equipment or other means of monitoring the effectiveness of
  a chemical treatment or pathogen inactivation or removal process.
         SECTION 4.  (a) Except as provided by Subsection (b) of this
  section, a utility that provides retail water or sewer utility
  service through fewer than 10,000 taps or connections and that, not
  more than three years before the effective date of this Act,
  violated an order described by Section 13.150(b), Water Code, as
  added by this Act, shall submit a report described by Section
  13.150(b), Water Code, as added by this Act, not later than the
  fifth anniversary of the event.
         (b)  A utility that provides retail water or sewer utility
  service through fewer than 10,000 taps or connections and that has
  an existing obligation to deliver a report under Subsection (a) of
  this section is not required to deliver another report as a result
  of the occurrence of an event described by Section 13.150(b), Water
  Code, as added by this Act, if the event occurs before the date that
  the utility delivers the report required by Subsection (a) of this
  section.
         SECTION 5.  This Act takes effect September 1, 2019.
 
 
  ______________________________ ______________________________
     President of the Senate Speaker of the House     
 
 
         I certify that H.B. No. 3542 was passed by the House on May 2,
  2019, by the following vote:  Yeas 141, Nays 0, 2 present, not
  voting.
 
  ______________________________
  Chief Clerk of the House   
 
 
         I certify that H.B. No. 3542 was passed by the Senate on May
  22, 2019, by the following vote:  Yeas 31, Nays 0.
 
  ______________________________
  Secretary of the Senate    
  APPROVED:  _____________________
                     Date          
   
            _____________________
                   Governor