Wholesale Water Rate Case Threatens Development of Future Water Supplies
By Sarah Kirkle, TWCA
Background. The North Texas Municipal Water District (NTMWD) provides water, wastewater, and solid waste services to 13 member cities who each appoint members to NTMWD’s governing board. In December 2016, four of NTMWD’s member cities filed a petition with the Public Utility Commission of Texas (PUC), alleging that NTMWD’s 2017 wholesale water rates were unreasonably preferential, prejudicial, and discriminatory. PUC is the state agency with jurisdiction to adjudicate appeals of wholesale water and wastewater rates.
Under the District’s long-standing contract, member cities are charged costs to cover the infrastructure capacity and water to support the highest annual demand of each city. Petitioners argue that the contract forces cities to pay for water they do not take, disincentivizing conservation. These so-called “take-or-pay” contracts form the backbone for many regional water system financing arrangements. Additionally, the term “take-or-pay” is a misnomer, in that customers are actually paying for reserved storage of water, treatment, and delivery infrastructure costs that exist regardless of the amount of water or capacity used.
The District’s non-petitioning cities argue that because each city’s charges are based on their highest annual demand, cities have a very strong incentive to conserve and keep their annual demand as low as possible. All parties acknowledge that the core dispute centers around how to allocate District costs among member cities. All 13 cities must agree to any contract change, and attempts to mediate a settlement have been unsuccessful to date.
Findings. On February 27, 2020, PUC found NTMWD’s contracted wholesale water rates adverse to the public interest, but has yet to outline the basis for its decision.
Significance. This case is significant because the state has never found a wholesale water rate adverse to the public interest since a 1994 major retooling of the process in response to a court decision in Texas Water Commission v. City of Fort Worth. In Fort Worth, the court found that the Texas Constitution’s prohibition against state impairment of contracts restricts the state’s exercise of jurisdiction over wholesale rates, and that rates set by contracts can only be reviewed where the public interest requires it. In other words, the Texas Constitution sets a high bar for the state to interfere with a contract because such interference undermines agreements that two or more willing, sophisticated parties knowingly entered. As such, the PUC’s decision to interfere in NTMWD’s contract sets a new and concerning precedent. Next Steps. PUC reviews wholesale water rates in a two-step process:
Phase 1 determines whether wholesale rates are adverse to the public interest, and
Phase 2, which occurs only if a rate is determined to be adverse to the public interest, determines the cost of service to inform what the wholesale rate should be.
NTMWD’s case is now moving into phase 2, the cost-of-service hearing. PUC asked interested parties to submit a list of issues to be addressed in its order remanding the case to the State Office of Administrative Hearings(SOAH) for a cost-of-service hearing by March 13, 2020. The Commission did not place the item on its agenda for March 26 and has not yet indicated when it will hold further proceedings in the case. TWCA Concerns. TWCA represents most - if not all - wholesale water suppliers in Texas. The Association is concerned that the PUC’s recent decision in the NTMWD case threatens wholesale water providers’ ability to provide affordable water supplies to support a growing population and economy. The case also sets a standard for PUC review that will likely create increased litigation, uncertainty in water planning, higher water costs, and potential impacts to the bond market.
Impacts on Wholesale Contracts. The PUC has yet to articulate its reasoning as to how NTMWD’s rates are adverse to the public interest, leaving uncertainty as to whether other wholesale water supplier contracts that are similarly structured to NTMWD’s are also at risk.
Impacts to water supply planning and development. Increased litigation and unforeseen changes to contract provisions risks water developers being less likely to invest in long-term, regional, and non-conventional water projects. Stability is important for both buyers and sellers, as new water supplies can take decades to develop.
TWCA Action. Pursuant to Board authorization, TWCA submitted a letter brief to the PUC by its March 13th deadline to inform the list of issues as described above. TWCA’s recent brief, as well as its original amicus brief in response to SOAH’s May 2019 proposal for decision are posted on TWCA’s website.
The TWCA board also authorized TWCA President David Montagne to establish a PUC Rate Committee, chaired by TWCA Water Laws chairman Howard Slobodin. That committee will initially guide TWCA’s actions and comments related to the NTMWD case and then focus on interim legislative charges and potential legislation on these issues in preparation for next session.