SENATE, No. 3870

STATE OF NEW JERSEY

218th LEGISLATURE

 

INTRODUCED JUNE 3, 2019

 


 

Sponsored by:

Senator  PAUL A. SARLO

District 36 (Bergen and Passaic)

 

 

 

 

SYNOPSIS

     Authorizes alternative procedure for sale of municipal sewerage systems to public utilities.

 

CURRENT VERSION OF TEXT

     As introduced.

 


An Act concerning sales of municipal sewerage systems to public utilities, supplementing Title 40 of the Revised Statutes, and amending R.S.40:62-3.

 

     Be It Enacted by the Senate and General Assembly of the State of New Jersey:

 

     1.    (New section)  A municipality owning sewerage facilities may sell the sewerage facilities to a public utility in accordance with the provisions of section 2 of P.L.    , c.    (C.    ) (pending before the Legislature as this bill), if the governing body of the municipality adopts an ordinance authorizing the sale of the sewerage facilities.  The provisions of R.S.40:62-4 and R.S.40:62-5 shall not apply to a sale authorized by ordinance adopted pursuant to this section, however, the terms of the sale and the ordinance authorizing the sale shall be subject to review by, and the approval of, the Board of Public Utilities.

     As used in this section:

     "Sewerage facilities" means the plants, structures, or other real and personal property acquired, constructed, or operated, or to be financed, acquired, constructed, or operated, or any parts thereof, used for the storage, collection, reduction, reclamation, disposal, separation, or other treatment of wastewater or sewage sludge or for the final disposal of residues resulting from the treatment of wastewater, including but not limited to, pumping and ventilating stations, treatment plants and works, connections, outfall servers, interceptors, trunk lines, and other appurtenances necessary for their use or operation; and, in the case of a combined stormwater and wastewater system, any assets of the stormwater management system that are connected to or otherwise part of the sewerage facilities.

     “Stormwater management system” means any equipment, plant, structures, machinery, apparatus, management practices, design practices, planning activities, or land, or any combination thereof, acquired, used, constructed, implemented, or operated to convey stormwater, control or reduce stormwater runoff and associated pollutants or flooding, induce or control the infiltration of groundwater recharge of stormwater, or eliminate illicit or illegal nonstormwater discharges into stormwater conveyances.

 

     2.    (New section)  a.  Notwithstanding any provision of law, rule, or regulation to the contrary, the governing body of a municipality and a public utility may enter into an agreement for the sale of a sewerage system from the municipality to the public utility. A public utility may not acquire a controlling interest in a municipal sewerage system unless the Board of Public Utilities authorizes the acquisition and finds that the acquisition is consistent with the public convenience and necessity.

      b.   An agreement for the sale of a sewerage system from a municipality to a public utility may provide that the fair market value of the sewerage system shall be determined in accordance with this section.  

     (1)   The Board of Public Utilities shall establish and maintain a list of qualified utility valuation experts from which the public utility and the municipality shall each enter into a contract with a valuation expert to conduct an appraisal of the sewerage system for the purpose of determining the fair market value of the sewerage system. Each sewerage system valuation appraisal shall be completed in accordance with the Uniform Standards of Professional Appraisal Practice, employing the cost, market, and income approaches.  The original source of funding for any part of the sewerage system shall not be considered in determining the value of the sewerage system.

     (2)   The public utility and the municipality shall jointly engage the services of a licensed engineer or other appropriate qualified professional to conduct an assessment of the tangible assets of the sewerage system.  The assessment shall be incorporated into the appraisals under the cost approach required under paragraph (1) of this subsection.

     (3)   Each utility valuation expert shall:

     (a)   deliver a draft appraisal of the sewerage system to the public utility and to the municipality within 60 days of the execution of a contract to conduct an appraisal of the sewerage system; and

     (b)   deliver a completed final appraisal of the sewerage system to the public utility and to the municipality within 90 days of the execution of a contract to conduct an appraisal of the sewerage system.

      c.    A utility valuation expert shall not:

     (1)   derive any material financial benefit from the sale of the sewerage system other than fees for services rendered; or

     (2)   be an immediate family member of a director, officer or employee of either the public utility or the municipality within 12 months of the date of the execution of the contract to conduct an appraisal of the sewerage system.

      d.   (1)  Reasonable transaction and closing costs incurred by an acquiring public utility shall be included in the rate-making rate base of the public utility.

     (2)   Fees paid to utility valuation experts may be included in the transaction and closing costs associated with acquisition by the public utility, however, fees shall not exceed the greater of $50,000 or five percent of the fair market value of the sewerage system.

      e.    As of the closing date of the acquisition, the rate-making rate base of the sewerage system, including amounts included pursuant to subsection d. of this section, shall be the lesser of:

     (1)   the purchase price negotiated by the public utility and the municipality; or

     (2)   the fair market value of the sewerage system.

      f.    The rate-making rate base of the sewerage system thus acquired shall be added to the total consolidated Statewide rate base of the acquiring public utility during the public utility’s next base rate case for the purpose of setting a total consolidated revenue requirement pursuant to the provisions of R.S.48:2-21.

      g.   (1)  If a public utility and a municipality agree to use the valuation process authorized in this section, the public utility shall submit an application to the Board of Public Utilities for approval of the acquisition, together with:

     (a)   copies of the two appraisals performed by the utility valuation experts;

     (b)   the purchase price of the sewerage system as agreed to by the acquiring public utility and the municipality;

     (c)   the rate-making rate base of the sewerage system determined pursuant to subsections d. and e. of this section;

     (d)   the estimated transaction and closing costs incurred by the public utility to be included in its rate base;

     (e)   a tariff containing a schedule of rates, service charges, and any additional fees to be incurred by the customers of the sewerage system at or immediately after the closing date of the acquisition; and

     (f)   a rate stabilization plan, if applicable to the acquisition.

     (2)   The Board of Public Utilities shall issue a final order on an application submitted under this subsection within six months of the filing date of a complete application. 

     (3)   When the board issues a final order approving an application submitted under this subsection, the order shall include:

     (a)   the rate-making rate base of the sewerage system, as determined under this section; and

     (b)   any conditions of approval that the board may require.

     (4)   The tariff submitted pursuant to subparagraph (e) of paragraph (1) of this subsection shall remain in effect until such time as new rates are approved for the public utility as the result of a base rate case proceeding before the board.  The board may authorize an acquiring public utility to collect any appropriate clause or mechanism charges, including any applicable system improvement charge, at the time new rates are approved for the public utility as the result of a base rate case proceeding, without requiring a new application by the public utility making the acquisition.

     (5)   The sewerage system’s cost of service shall be determined as part of the setting of the overall consolidated revenue requirement of an acquiring public utility as part of the public utility’s next base rate case proceeding.

     h.    (1)  The cost of an improvement placed in service by a public utility after the date of an acquisition completed under this section shall accrue a construction allowance after the date the cost was incurred until the earlier of:

     (a)   four years after the improvement is placed in service; or

     (b)   the date the improvement is included in the public utility's next base rate case.

     (2)   Depreciation on improvements placed in service by a public utility after an acquisition completed under this section shall be deferred for book and rate-making purposes.

      i.    As used in this section:

     "Board" means the Board of Public Utilities.

     "Construction allowance" means an accounting practice that recognizes the capital costs, including debt and equity funds that an acquiring public utility used to finance the construction costs of an improvement to a sewerage system.

     "Fair market value" means the average of the two appraisals conducted by sewerage system valuation experts pursuant to subsection b. of this section.

     "Public utility" means a public utility regulated by the Board of Public Utilities and defined pursuant to R.S.48:2-13.

     "Rate-making rate base" means the dollar value of a sewerage system which, for post-acquisition rate-making purposes, is incorporated into the total consolidated rate base of an acquiring public utility.

     "Rate stabilization plan" means an acquiring public utility's plan to implement rate changes incrementally over a period of time, beginning after the acquiring public utility's next base rate case, to minimize sudden rate increases and predictably achieve consolidated pricing over time.

     "Sewerage system" means the plants, structures, or other real and personal property acquired, constructed, or operated, or to be financed, acquired, constructed, or operated, or any parts thereof, used for the storage, collection, reduction, reclamation, disposal, separation, or other treatment of wastewater or sewage sludge or for the final disposal of residues resulting from the treatment of wastewater, including but not limited to, pumping and ventilating stations, treatment plants and works, connections, outfall servers, interceptors, trunk lines, and other appurtenances necessary for their use or operation; and, in the case of a combined stormwater and wastewater system, any assets of the stormwater management system that are connected to or otherwise part of the sewerage facilities.

     “Stormwater management system” means any equipment, plant, structures, machinery, apparatus, management practices, design practices, planning activities, or land, or any combination thereof, acquired, used, constructed, implemented, or operated to convey stormwater, control or reduce stormwater runoff and associated pollutants or flooding, induce or control the infiltration of groundwater recharge of stormwater, or eliminate illicit or illegal nonstormwater discharges into stormwater conveyances.

     "Utility valuation expert" means a person hired by an acquiring public utility or a municipality for the purpose of conducting an economic valuation of a sewerage system to determine the fair market value of the sewerage system.

 

     3.    R.S.40:62-3 is amended to read as follows:

     40:62-3.      Any municipality owning a sewer plant, water plant, heat, light or power plant, system of transportation, or other public utility plant or system, may long-term lease or sell such plant or system.  Such a long-term lease or sale to another municipality, a sanitary sewerage authority, a sewerage authority or any other authority, commission or public body shall be authorized by ordinance and may be made upon such terms as said ordinance shall provide and the provisions of R.S.40:62-4 and R.S.40:62-5 shall not apply thereto.  Such a long-term lease or sale to any person except another municipality, a sanitary sewerage authority, a sewerage authority or any other authority, commission or public body shall, except as otherwise provided by law, be made only upon compliance with the provisions of R.S.40:62-4 and R.S.40:62-5 and after the same is authorized by the legal voters of the municipality in accordance with said sections, or upon compliance with the provisions of section 2 of P.L.1981, c.16 (C.40:62-3.1) [or], the "Water Infrastructure Protection Act," sections 1 through 9 of P.L.2015, c.18 (C.58:30-1 et seq.), or the provisions of sections 1 and 2 of P.L.    , c.    (C.    ) (pending before the Legislature as this bill).

(cf: P.L.2015, c.18, s.10)

 

     4.    This act shall take effect immediately.

 

 

STATEMENT

 

     This legislation would provide municipalities with an additional procedural option to address future liabilities associated with deficient underground sewer and wastewater infrastructure.  Rather than facing the prospect of immediately shouldering all of the costs associated with addressing decades of underfunding, or continuing to operate deteriorating wastewater systems without properly maintaining, repairing, and replacing failing infrastructure, this bill would permit a municipality to sell a sewerage system to a qualified public utility operator, which is subject to the oversight of the state Board of Public Utilities.  By allowing an alternate method to determine the fair market value of a sewerage system, the bill would enhance the ability of a municipality to sell a sewerage system, thereby allowing municipalities to turn a future liability into a current asset.  

     Current law authorizes a municipality to sell a municipal-owned sewerage facility to an investor-owned public utility if the sale is approved by voter referendum. This bill would allow a municipality to authorize the sale of a municipal-owned sewerage facility by adoption of an ordinance, subject to the review and approval of the Board of Public Utilities.  Current law authorizes municipalities to sell other types of assets, such as buildings or heavy equipment, by ordinance.  By requiring the sale to be made to a public utility, the bill provides ratepayers the additional safeguards of ongoing state oversight and rate regulation by the Board of Public Utilities.  Under the bill, the Board of Public Utilities may not authorize an acquisition unless it finds that the acquisition is consistent with the public convenience and necessity.

     The bill also authorizes a municipality and a public utility to agree to determine the value of a sewerage system under an alternate procedure. Under the bill, a municipality and a public utility agreeing to use this alternate procedure would each retain the services of a valuation expert to determine the fair market value of a sewerage system.  The sewerage system's fair market value would be the average of the two appraisals.

     As of the closing date of the acquisition, the rate-making rate base of the sewerage system would be the lesser of the purchase price negotiated by the public utility and the municipality; or the fair market value of the sewerage system.

     The rate-making rate base of the sewerage system would be incorporated into the rate base of the acquiring public utility during the public utility’s next base rate case.

     If a public utility and a municipality agree to use the bill's valuation process, the public utility would submit an application to the Board of Public Utilities for approval of the acquisition, together with:

·         copies of the two appraisals;

·         the agreed–upon purchase price of the sewerage system;

·         the rate-making rate base of the sewerage system;

·         the estimated transaction and closing costs incurred by the public utility to be included in its rate base;

·         a tariff containing a schedule of rates, service charges, and any additional fees to be incurred by the customers of the sewerage system at or immediately after the closing date of the acquisition; and 

·         a rate stabilization plan, if applicable to the acquisition.  A rate stabilization plan is a plan designed to hold rates constant or phase rates in over a period of time after the next base rate case.

     The bill affords the Board of Public Utilities six months from the filing of a complete application to issue a final order.  A final order would include:

·         the rate-making rate base of the sewerage system; and

·         any conditions of approval that the board may require.

     Under the bill, the tariff to be incurred by the customers of the sewerage system at or immediately after the closing date of acquisition would remain in effect until the Board of Public Utilities approves new rates as the result of a base rate case proceeding before the board.  The board may authorize an acquiring public utility to collect a distribution system improvement charge at the time new rates are approved for the public utility as the result of a base rate case proceeding.

     The bill provides that a sewerage system’s cost of service would be incorporated into the revenue requirement of an acquiring public utility as part of the public utility’s next base rate case proceeding.

     The bill also provides that when a public utility places an improvement in place after the date the utility acquires a municipal sewerage system, the cost of the improvement would accrue a construction allowance after the date the cost was incurred until the earlier of: four years after the improvement is placed in service; or the date the improvement is included in the public utility's next base rate case.  The bill defines the term "construction allowance" to mean an accounting practice that recognizes the capital costs, including debt and equity funds that are used to finance the construction costs of an improvement made by a public utility after acquiring a municipal sewerage system.

     Finally, the bill provides that depreciation on improvements, that a public utility places in service after acquiring a municipal sewerage system, would be deferred for book and rate-making purposes.