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Original Author: Hemsley, Sid
Date of Material: 10/22/2001

Utilities--Utility districts

Acquiring a Utility District

Reviewed Date: 04/23/2021
MTAS was asked how a municipality can acquire a utility district.

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.