Original Author: Huffer, Dennis
Date of Material: 12/08/2003
Reviewed Date: 07/16/2021
MTAS was asked how a sewer system for a subdivision can be provided through a franchise or contract with a private operator.
FROM: Dennis Huffer
RE:Sewer System for Subdivision
You and others have asked for advice on how a sewer system for a subdivision can be provided through a franchise or contract with a private operator. It is my understanding that the Town does not have the financial resources to build the system itself and that the system will be limited in how it can dispose of the sewage. The only alternative that appears possible is a system built and operated by the developer or a private company. Because of environmental laws or regulations and perhaps other concerns, the company cannot dispose of the treated sewage into a stream. There are a few alternatives for doing this depending on arrangements the Town, the developer, and the company that will operate the system work out.
The Town is incorporated under the general law Mayor - Aldermanic Charter (T.C.A. § 6-1-101, et seq.). § 6-2-201(12) and (13) authorize the Town to grant exclusive contracts and franchises for the provision of utility services for those in the Town. These contracts or franchises may have a term of twenty-five (25) years or less. These subsections also authorize the Town to regulate rates of the contractor or franchisee, but in the case of a franchise to a private company with a certificate of public convenience and necessity from the Tennessee Regulatory Authority, T.C.A. § 65-5-201 provides that the TRA has the ultimate authority to set rates for public utilities regulated by that body. Therefore, in the franchise arrangement, as opposed to an operating agreement in which the system is owned by the Town but operated under contract, the Town would have little control over rates.
Here are the alternatives that might be considered:
1. Allow the developer to build the system and then dedicate it to the Town. Under this arrangement, the Town would own the system and would either operate the system itself or make a contract with a private company for its operation. The Town would retain control over rates but would also have the liability of maintaining the system either directly or through the contractor operating the system or other contractors. The Town would also have to provide somehow for tort and environmental liability that might result from owning the system. Some of this potential liability could be transferred by contract through hold harmless provisions, but liability under environmental laws may not be transferrable under an operating contract.
2. Allow the developer to build the system but sell it to the franchisee. The franchisee would then own and be responsible for operating the system. Under this arrangement, the Town might retain some tort and environmental liability, but most of this liability should rest with the franchisee. The owner would also be responsible for maintaining the system. The TRA, however, and not the Town, would have final say on rates.
3. Allow the franchisee to build the system at the same time the developer is building the subdivision. This would require an agreement between the developer and the franchisee. The franchisee might like this arrangement because it would be in charge of the construction of the system that it will eventually operate. The developer might like it because it relieves him of the burden of constructing it. The transition from construction to operation would probably also be smoother. Under this arrangement, the franchisee would own and operate the system. The TRA would regulate rates.
4. Allow the Town to build the system at the same time the subdivision is built. The Town would own and be responsible for operating the system or could sell it and grant a franchise to the buyer. It is my understanding, however, that the Town does not feel it has the financial ability to build the system.
Whatever arrangement the Town makes for the ownership or operation of the system, the contract or franchise should have provisions that ensure the Town will have continuing assurances that the company has the financial ability to carry out its responsibilities. There should be financial and performance standards the contractor or franchisee must meet to retain the contract or franchise.
Here are some things the Town should also consider in making its decision:
• Alternative systems like the Town is considering do not have much of a track record. Because of the way the sewage is being disposed of, there are potential problems in the future involving percolation and odor.
• It might be better for the long term benefit of the Town and its future residents to try to hook onto an existing sewer system. The system being considered could be obsolete and have to be scrapped in the future, where an existing system could be expanded to meet the future needs of a growing Town into the distant future. At the very least, the Town should consider how, and whether, the alternative system could be integrated in the future into a larger system.
• The Town should probably consult with a planner to try to project the Town’s future sewer needs and how such a system, or other alternatives, would or would not accommodate those needs.
• The Town should consult with an engineer to get an unbiased opinion on the system and the potential for other methods of dealing with sewage, including hooking onto an existing system.
Sewer System for Subdivision public.doc