Texas Administrative Code
Title 16 - ECONOMIC REGULATION
Part 2 - PUBLIC UTILITY COMMISSION OF TEXAS
Chapter 24 - SUBSTANTIVE RULES APPLICABLE TO WATER AND SEWER SERVICE PROVIDERS
Subchapter H - CERTIFICATES OF CONVENIENCE AND NECESSITY
Section 24.238 - Fair Market Valuation
Universal Citation: 16 TX Admin Code § 24.238
Current through Reg. 50, No. 13; March 28, 2025
(a) Applicability. This section applies to a voluntary arm's length transaction between an acquiring utility and a retail public utility under TWC §13.305 for which approval is required under TWC §13.301. This section does not apply to a transaction between a utility and its affiliate.
(b) Definitions. In this section, the following words and terms have the following meanings, unless the context indicates otherwise.
(1) Acquiring utility--A
Class A or Class B utility that is acquiring a selling utility, or the
facilities of a selling utility.
(2) Allowance for funds used during
construction (AFUDC)--An accounting practice that recognizes the capital costs,
including debt and equity funds, that are used to finance a transferee's
construction costs of an improvement to a purchased asset.
(3) Fair market value--The average of the
three appraisals conducted under subsection (f) of this section.
(4) Ratemaking rate base--The dollar value of
the selling utility or the sold facilities of a selling utility that is
incorporated into the rate base of the acquiring utility for post-acquisition
purposes. The ratemaking rate base is the lesser of the purchase price
negotiated by an acquiring utility and a selling utility or the fair market
value. The ratemaking rate base does not include transaction and closing
costs.
(5) Selling utility--A
retail public utility that is being purchased by an acquiring utility or is
selling facilities to an acquiring utility.
(c) List of qualified utility valuation experts. The commission will maintain a list of qualified utility valuation experts to perform appraisals to determine a fair market value of a selling utility or facilities of a selling utility.
(1) A utility valuation expert may request to
be included on the commission's list by submitting, under the control number
designated for that purpose, the required information.
(2) The request filed by the utility
valuation expert must include:
(A) The
expert's name, mailing address, telephone number, and email address;
(B) The name of the company with which the
expert is employed or associated, or the name under which the expert conducts
business;
(C) The names of the
principal officers of the company with which the expert is employed or
associated, if applicable;
(D) The
name and mailing addresses of any affiliates of the company with which the
expert is employed or associated, if applicable; and
(E) A detailed description of the utility
valuation expert's qualifications, such as professional licensing,
certifications, training or past experience conducting economic evaluations of
water and sewer utilities.
(3) The utility valuation expert must update
the information in its request on file with the commission within ten business
days of a material change to the information.
(4) A utility valuation expert who wishes to
be removed from the list maintained by the commission under this subsection
must file a letter with the commission requesting to be removed from the list.
This letter must be filed under the control number designated for that purpose.
The commission will acknowledge the removal request in writing.
(d) Notice of intent to determine fair market value.
(1) A selling utility and
an acquiring utility that agree to use the fair market valuation process
described in subsection (f) of this section must file a notice of intent to
determine fair market value in the control number designated for that
purpose.
(2) The notice of intent
must include the following:
(A) The name and
certificate of convenience and necessity (CCN) number of the acquiring utility.
If the acquiring utility holds multiple CCN numbers, the acquiring utility must
provide all the CCN numbers.
(B)
The name and contact information of the acquiring utility's
representative.
(C) The number of
connections served by the acquiring utility.
(D) The name and CCN number of the selling
utility.
(E) The name and contact
information of the selling utility's representative.
(F) The number of connections served by the
selling utility.
(G) The estimated
closing date of the planned acquisition.
(H) A list of the utility valuation experts
on the commission's list of qualified experts who, as of the date of the notice
of intent, are precluded under subsection (e)(2)(B) of this section from
performing an appraisal of the transaction.
(3) The notice of intent must not include the
purchase price agreed upon by the acquiring utility and the selling
utility.
(e) Selection of utility valuation experts.
(1) The
commission's executive director or the executive director's designee will
select three utility valuation experts from the list maintained under
subsection (c) of this section no later than 30 days after the filing of a
notice of intent to determine fair market value that meets the requirements of
subsection (d) of this section.
(2)
The utility valuation experts selected under paragraph (1) of this subsection
may not:
(A) derive material or financial
benefit from the sale other than fees for services rendered;
(B) be or have been within the year preceding
the date the service contract is executed a director, officer, or employee of
the acquiring utility or the selling utility or an immediate family member of a
director, officer, or employee of the acquiring utility or the selling utility;
or
(C) have received compensation
under a contract for consulting or other services with the acquiring or selling
utility, or executed a contract for consulting or other services with the
acquiring or selling utility, within the year preceding the date the utility
valuation expert is selected.
(3) The commission's executive director or
the executive director's designee will base the selection of utility valuation
experts on the following:
(A) Qualifications
of the utility valuation expert.
(B) Availability of the utility valuation
expert during the required time frame.
(C) Absence of conflicts of interest
described in paragraph (2) of this subsection.
(D) Other factors relevant to a utility
valuation expert's ability to perform an appraisal under this
section.
(4) The
acquiring utility must contract directly with the selected utility valuation
experts and the commission will not be a party to the contract. Subsection
(k)(2) of this section, which limits the amount of transaction and closing
costs that may be recovered in rates, does not apply to the fees for service
agreed to in the contract. If the acquiring utility and any of the utility
valuation experts selected under subsection (e)(1) of this section are unable
to reach agreement on the terms and conditions for performing the appraisal,
including the amount of the service fee, the acquiring utility or utility
valuation expert may submit a request for selection of a different utility
valuation expert under the control number designated for that purpose. If the
commission's executive director or the executive director's designee selects a
different utility valuation expert, the time period for all utility valuation
experts to submit a report under subsection (f)(5) of this section begins when
the different utility valuation expert is selected.
(f) Determination of fair market value.
(1) The three utility valuation experts
selected under subsection (e) of this section jointly must retain a licensed
engineer to conduct an assessment of the tangible assets of the selling utility
or the facilities to be sold to the acquiring utility.
(A) The engineer may not be or have been
within one year preceding the date the service contract is executed a director,
officer, or employee of the acquiring utility or the selling utility or an
immediate family member of a director, officer, or employee of the acquiring
utility or the selling utility.
(B)
The engineer must provide the following information to the valuation experts:
(i) Qualifications that demonstrate the
engineer's ability to provide the requested assessment;
(ii) The engineer's fees for other similar
assessments; and
(iii) Other
relevant information requested by the utility valuation experts.
(C) The engineer's assessment must
include a separate assessment for each type of facility based on the applicable
National Association of Regulatory Utility Commissioners (NARUC) account for
the facility.
(D) The fee charged
by the engineer must be shared and paid equally by the three utility valuation
experts and may be included as part of the utility valuation expert
compensation under subsection (k) of this section.
(2) Each utility valuation expert must
perform an independent appraisal of the selling utility, including the
valuation of intangible assets as appropriate, in compliance with Uniform
Standards of Professional Appraisal Practice, using the cost, market, and
income approaches in accordance with subsections (g) through (i) of this
section.
(3) The appraisal must not
take into account the original sources of funding, including developer
contributions or customer contributions in aid of construction, for any of the
utility plant that is assessed by the engineer or the utility valuation
experts.
(4) The appraisal must not
take into account the purchase price negotiated by the acquiring utility and
the selling utility or methodologies or process used to arrive at the purchase
price.
(5) Each utility valuation
expert must submit a completed report to the acquiring utility and the selling
utility no later than 120 days after the date the commission's executive
director or the executive director's designee selects the utility valuation
expert under subsection (e) of this section. Before the submission of the
report, the acquiring and selling utilities must review the report for
mathematical and factual errors, and notify the utility valuation expert of any
mathematical any factual errors they identify. The utility valuation expert may
promptly revise the report in response to the utilities'
notification.
(6) The ratemaking
rate base established under this section will be the rate base for the system
or facilities acquired in the transaction.
(g) Cost approach.
(1) A cost approach appraisal performed under
this section must be based on one of the following:
(A) the investment required to replace or
reproduce future service capability; or
(B) the original cost of the facilities as
adjusted for depreciation.
(2) A cost approach appraisal performed under
this section must:
(A) incorporate the results
of the assessment performed by the engineer selected under subsection (f)(1) of
this section;
(B) exclude from
consideration overhead costs, future improvements, and going concern value;
and
(C) use a consistent rate of
inflation for all classes of assets unless use of different rates is reasonably
justified.
(h) Income approach.
(1) An income approach appraisal performed
under this section must be based on one of the following:
(A) capitalization of earnings or cash flow;
or
(B) the discounted cash flow
method.
(2) An income
approach appraisal performed under this section must exclude consideration of
the following:
(A) going concern
value;
(B) future capital
improvements; and
(C) erosion of
cash flow or erosion on return.
(3) An income approach appraisal performed
under this section must be supported by the following:
(A) an explanation of how the capitalization
rate was calculated, if a capitalization rate was used;
(B) an explanation of the basis for the
discount rates used; and
(C) an
explanation of the capital structure, cost of equity and cost of debt
used.
(i) Market approach.
(1) A market approach
appraisal performed under this section must be based on the following:
(A) the current connection count of the
selling utility at the time of the appraisal;
(B) use of a proxy group that includes
companies that have made acquisitions that were not based on a fair market
valuation methodology; or
(C)
comparable sales that did not include the value of future capital improvement
projects in the selling price.
(2) A market approach appraisal performed
under this section must not consider the following:
(A) a net book financials multiplier or
speculative growth adjustments;
(B)
the value of future capital improvement projects; or
(C) a value or adjustment for the goodwill of
the selling utility.
(j) Contents of utility valuation expert report. A report submitted under paragraph (f)(5) of this section must include:
(1) a copy of the service contract executed
by the utility valuation expert and the acquiring and selling
utilities;
(2) the fee charged by
the utility valuation expert along with documentation supporting the amount of
the fee;
(3) a copy of the
engineer's report, including a detailed list of the utility plant assessed by
the engineer;
(4) an explanation of
how the cost, market, and income approaches were incorporated into the
calculation of the fair market value of the selling utility or the selling
utility's facilities; and
(5) a
notarized affidavit stating that:
(A) the
appraisals described in the report were conducted in compliance with the most
recent edition of the Uniform Standards of Professional Appraisal
Practice;
(B) the utility valuation
expert will not derive material or financial benefit from the sale other than
the fee for services rendered;
(C)
the utility valuation expert is not currently and was not within the year
preceding the date of the contract for service executed between the utility
valuation expert and the acquiring and selling utilities, a director, officer,
or employee of the acquiring utility or the selling utility or an immediate
family member of a director, officer, or employee of the acquiring utility or
the selling utility; and
(D) the
utility valuation expert did not receive compensation under a contract for
consulting or other services with the acquiring utility or selling utility, or
execute a contract for consulting or other services with the acquiring or
selling utility, within the year preceding the date the utility valuation
expert was selected to perform the appraisal that is the subject of the
report.
(k) Transaction and closing costs.
(1) A fee paid
to a utility valuation expert to perform an appraisal under subsection (f) of
this section may be included in the transaction and closing costs associated
with a transaction approved under §
24.239 of this title, relating to
Sale, Transfer, Merger, Consolidation, Acquisition, Lease or Rental.
(2) The commission will review the
transaction and closing costs, including fees paid to utility valuation
experts, in the rate case in which the acquiring utility requests rate recovery
of those costs. The fee amounts included in transaction and closing costs that
are recoverable in the acquiring utility's rates may not exceed the lesser of:
(A) five percent of the fair market value;
or
(B) the fee amounts approved by
the commission in the rate case in which the acquiring utility requests rate
recovery of the transaction and closing costs.
Disclaimer: These regulations may not be the most recent version. Texas may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.
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