MEMORANDUM
FROM:
Sid Hemsley, Senior Law Consultant
DATE:
October 22, 2001
RE:
Acquisition of the Utility District
You have the following questions:
1. How does the City acquire the Utility District (UD)?
2. If the City can acquire the UD, what are the implications for the rate structures
where the former’s rates are lower than the latter’s rates?
Under the facts you relate, the Utility District will be debt free by the end of
October, 2001, and the UD wants no money for the system.
Answer to Question 1
Tennessee Code Annotated , ' 7-82-202(e) and (f), appear to authorize two ways
by which a municipality can acquire a utility district.
(1) Tennessee Code Annotated, ' 7-82-202(3) provides for a merger of two utility
districts, or the consolidation of one or more utility districts with a city or county. In the
latter case, the utility district transfers all its obligations and property to the city or
county. The utility district files a petition with the county executive for an order of
convenience and necessity permitting the transfer to the city of its “franchise facilities,
assets and obligations....” When the petition is filed the county executive proceeds in
exactly the same manner as he would if a petition for the creation of a utility district had
been filed. Upon the county executive’s finding that the public convenience and
necessity requires the transfer, the utility district is dissolved.
Where the order provides for the “sale or transfer” of the franchises, assets and
liabilities to a municipality, provisions in the order must provide for the rights, duties and
obligations of the parties. In addition, it must provide that the acquiring governmental
entity will assume the operation of the system, and account for the revenues from the
system in such a manner as to protect the rights of bondholders and other persons who
have contracts with the utility district.
(2) Tennessee Code Annotated, ' 7-82-202(f) authorizes a utility district to convey,
and a municipality to acquire, the property of a utility district. The utility district petitions
the county executive to permit the municipality to acquire the utility district, and the
county executive handles that petition the same way he would handle the petition for the
creation of a utility district. If the county executive determines that the acquisition serves
the public convenience and necessity, the utility district is dissolved and all its property
is conveyed to the municipality.
The former utility district must be operated by the municipality’s governing body
separately from any other municipal utility. If the area served by the former utility district
is outside the limits of the municipality, the municipal governing body must by ordinance
appoint an advisory committee consisting of either the former commissioners of the
former district, or the residents and customers of the former district.
Somewhat ambiguously, the same statute that requires the former utility district to
be operated as a separate department, also says that:
When the former utility district ceases to be a separate department and is
merged with the other utility services of the municipality into one (1) utility system, such
advisory committee may be dissolved. No portion of such utility district shall be made a
part of the municipal utility service without consideration being paid to the department
composed of such utility district.
It appears that the first method of consolidation of a utility district is the simpler
one and produces a truly consolidated or merged system. The second method appears
to require the utility district to be operated separately, for at least a period (the end of
which is not clear in the statute, perhaps ending when no longer has outstanding
bonds). In addition, it requires “consideration” to be paid by the acquiring municipality to
the former utility district being operated as a separate department. It is not clear when
such payment would be made; but presumably it would be made as a part of the
acquisition, which would give the former utility district now operating as a separate
department operating funds.
Answer to Question 2
An important question to which I do not know the answer is whether the UD has
any customers inside the City. It seems to me that if the City acquires UD by the first
method, it would have a difficult time justifying disparate water rates for customers
within the city, absent some good reason to put some city residents in a separate rate
classification. The reason is that the first method provides for an actual merger or
consolidation of the two utility units. But with respect to customers outside the city in a
system consolidated under the first method, the courts have held that municipalities
have the right to charge a higher rate for outside water customers, provided the higher
rate is reasonable.
If the city acquires the UD under the second method, the former UD is operated,
at least for a time, as a separate department. The implication of two separate
departments consisting of the city utility system and the former utility district is that
during the time those departments are separate, they function under rate schedules
appropriate to those departments. Presumably, the higher rates charged by the present
UD (assuming they are otherwise reasonable) would be the appropriate rates for that
department. If and when the two separate departments actually consolidated (As
pointed out above, how and when that is done is not clear in the statute), what rates are
appropriate would probably require a review.
In fact, it seems to me that a merger or consolidation by whatever method is
authorized is an opportune time to look at the rate structure.
If the city and UD are interested in a merger or consolidation, I will attempt to find
the documents other cities and utility districts have used to accomplish such mergers or
consolidations.