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Texas Commission on Environmental Quality INTEROFFICE MEMORANDUM

To: Thru: Commissioners LaDonna Castañuela, Chief Clerk Glenn Shankle, Executive Director Dan Eden, Deputy Director Office of Permitting, Review and Remediation 2007-0998-RUL Commission Approval for Proposed Rulemaking Chapter 291, Utility Regulations HB 149, HB 3475, SB 3: Temporary Rates, Border Counties Water and Sewer Systems, CCNs and Rates Rule Project No. 2007-048-291-PR Date: December 28, 2007

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Reasons for the rule package: In 2007, the 80th Legislature passed Senate Bill (SB) 3, House Bill (HB) 149, and HB 3475. HB 149, HB 3475, and §2.05, Certificate of Convenience and Necessity (CCNs); §2.06, Consolidated Billing; §2.07 Rates; §2.08, CCNs; §2.32, Powers and Duties of Utilities; §2.39, CCNs; and §7.01, Rates, of SB 3 relate to water utilities. This legislation amended Texas Water Code (TWC), §13.002, §13.046, §13.147, §13.188, §13.2451, §49.2122, and Local Government Code, §412.017 and §402.911. This proposed rulemaking will implement these changes by amending Chapter 291, Utility Regulations. · Under what authority are we proposing these changes? The amendments are proposed under TWC, §5.102, which provides the commission the general powers to carry out the powers and duties under the provisions of the TWC and other laws of this state. In addition, TWC, §13.041 states that the commission may regulate and supervise businesses of every water and sewer utility within its jurisdiction and may do all things, whether specifically designated in TWC, Chapter 13 or implied in TWC, Chapter 13, necessary and convenient to the exercise of this power and jurisdiction. Further, TWC, §13.041 also states that the commission shall adopt and enforce rules reasonably required in the exercise of its powers and jurisdiction, including rules governing practice and procedures before the commission. Additionally, TWC, §13.046 requires the commission to adopt rules that allow a retail public utility that takes over the provision of services for a nonfunctioning retail water or sewer utility service provider to charge a reasonable rate for the services provided to the customers of the nonfunctioning system. Finally, TWC, §13.188 mandates that the commission shall adopt a procedure allowing a utility to file an application with the commission to timely adjust the utility's rates to reflect an increase or decrease in documented energy costs. · Is this rulemaking required by federal rule or state statute? Which ones? The proposed rulemaking is required to implement TWC, §§13.002, 13.046, 13.147, 13.188, 13.2451, 49.2122 and Local Government Code, §412.017 and §402.911.

Commissioners Page 2 December 28, 2007 Re: Docket No. 2007-0998-RUL

Are there any legal deadlines by which these rules must be proposed, adopted, or effective? No. · What issue(s) or problem(s) are we trying to solve? This rulemaking will implement amendments to the TWC and the Local Government Code made during the 80th Legislative Session, 2007. · Why is it important that we do this rule package? To implement TWC, §§13.002, 13.046, 13.147, 13.188, 13.2451, 49.2122, and Local Government Code, §402.911 and §412.017 as amended by HB 149, HB 3475, and SB 3. · Other important background or historical information. Senator Kip Averitt sponsored SB 3. Representative Larry Phillips sponsored HB 149 and HB 3475. HB 2876, 79th Legislative Session, 2005, affected the ability of cities to obtain a CCN for the area outside the city's extraterritorial jurisdiction (ETJ) without first obtaining individual landowner consent from all landowners in the requested area. SB 3, §2.08 and §2.39, amended TWC, §13.2451 to allow a city to extend a CCN to an area outside the city's ETJ so long as the city meets the criteria outlined in TWC, §13.241, for granting or amending a CCN. Scope of the rulemaking: This rulemaking proposes to implement legislation from the 80th Legislative Session, 2007 including HB 149, HB 3475, and specific sections of SB 3 regarding certain capabilities of retail public water utilities to provide water and sewer service in the state by amending various sections of Chapter 291. · Changes required by federal rule: None. · Changes required by state statute: The Legislature amended the TWC and Local Government Code during the 80th Legislative Session, 2007. This rulemaking proposes to incorporate the changes to the TWC and the Local Government Code by amending various sections of Chapter 291. The statutory provisions proposed to be incorporated into Chapter 291 include: · · TWC, §13.002 as amended by SB 3, §2.05, which amends the definition of a landowner for the purpose of CCN regulation; TWC, §13.147 as added by SB 3, §2.06, which allows for consolidated billing and collection contracts between retail public water and sewer providers;

Commissioners Page 3 December 28, 2007 Re: Docket No. 2007-0998-RUL

· · · TWC, §13.188 as added by SB 3, §2.07, which allows for adjustments to utility rates to account for increases or decreases in documented energy costs; TWC, §13.2451 as amended by SB 3, §2.08 and §2.39, which revises the rules relating to obtaining, amending, and decertifying a municipality's CCN for water and sewer service; Local Government Code, §402.911, as added by SB 3, §2.32, which requires a water service provider that meets specific criteria to provide a municipality or district with relevant customer information, for compensation, so the municipality or district may bill the customer directly for sewer service, and verify water consumption. If payment is not remitted, and after proper notice, the municipality or district may notify the provider who must discontinue water service to that sewer customer. This section applies to a water provider in a county with a population exceeding 1.3 million; TWC, §49.2122, as added by SB 3, §7.01, which allows a district to establish different utility rates among classes of customers; TWC, §13.046, as added by HB 149, which allows a utility that takes over a nonfunctioning utility to charge reasonable temporary rates and give the utility a reasonable period of time to bring the nonfunctioning system into compliance with commission rules before the commission assesses penalties; and Local Government Code, §412.017, as added by HB 3475, which allows certain counties to operate a utility in the same manner as a municipality.

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Staff recommendations that are not expressly required by federal rule or state statute: None.

Impact on the regulated community: · Who will be affected? · HB 149: This bill affects a retail public utility taking over a nonfunctioning retail water or sewer utility to apply for a ruling by the commission on the reasonableness of newly implemented rates to recover service costs. The commission would be required to consult with the utility to establish a reasonable timeframe to bring the water or wastewater system into compliance with commission rules. The proposed rules would also prohibit the commission from imposing penalties during this period for violations existing at the time the nonfunctioning system was taken over by the functioning retail public utility. HB 3475: This bill affects counties along the border by allowing them the ability to acquire, construct, operate, or maintain a water supply or sewage system to serve unincorporated areas of the county. SB 3: This bill affects a retail public utility providing sewer service to contract with a separate retail public utility providing water service to establish a consolidated billing process to bill and collect sewer service provider fees; allows the commission to establish a

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procedure allowing a utility to apply for rate adjustments to reflect increases or decreases in its rates due to documented energy costs passed through to consumers; allows a municipality to extend a CCN to an area outside its extraterritorial jurisdiction under certain conditions; requires water service providers located in a county with a population greater than 1.3 million to provide relevant customer information to municipalities or water districts so that they may bill customers directly for sewer service and verify water consumption; and allows water districts to establish different charges, fees, rentals, or deposits among classes of customers based on factors the water district considers appropriate. · Does it create a group of affected persons who were not affected previously? How? No. · Will there be a fiscal impact? If so, estimate. · HB 149: Since the proposed rules would allow a local government to recoup reasonable costs and avoid the payment of penalties for certain violations, no significant fiscal impacts are expected to affect local governments providing retail water and sewer services to an area previously serviced by a nonfunctioning water or sewer utility. Staff expects at least one municipality will take over a nonfunctioning system. HB 3475: The proposed rules are not anticipated to have a significant fiscal impact on county governments since they would be allowed to seek financial assistance to construct such systems and to establish water and wastewater rates to recoup service and operation costs. There may be as many as two counties that might choose to provide water and sewer service to their unincorporated areas. SB 3: The proposed rules implementing these provisions of SB 3 are not anticipated to have a significant fiscal impact on local governments since the rules are optional or allow an impacted local government to recoup the cost of providing services either to direct customers or other public water utilities.

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Impact on the public: · Who will be affected? Retail water or sewer service customers. · Does it create a group of affected persons who were not affected previously? How? No. · Will there be a fiscal impact? If so, estimate. Although some individual consumers may see an increase in the costs of retail water or sewer service, the proposed rules will help ensure that such services remain safely available and interruptions in such services are minimized as much as possible. By allowing retail water and wastewater providers the ability to charge reasonable rates to cover increased costs and thus provide

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incentives to take over failed water and sewer systems, consumers should experience continued confidence or greater convenience concerning retail public utilities providing safe drinking water and adequate sewer services. The proposed rules are not anticipated to have a significant fiscal impact for the individuals or large businesses providing retail water or sewer services to the general public. The proposed rules are optional in many cases. Any rate increases are expected to cover costs, and the commission must ensure the costs are reasonable. Impact on agency programs: Water Supply Division: · HB 149: The acquiring systems may request approval of an emergency rate increase; therefore, the commission may affirm, modify or set aside an increased number of emergency orders issued by the executive director. HB 3475: The proposed rules will remove some counties from the status of "affected county." Those counties would not be required to file CCN or rate increase applications. SB 3: No impact on the routine business operations of the Utilities and Districts Section.

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Enforcement Division and Field Operations Division: · HB 149: Based on the specific language "must consult" in the bill, the proposed rules will include compliance discussions between the Regional Offices, the Enforcement Division and the acquiring utility. Since the legislation gives the TCEQ discretion on imposing penalties on the acquiring system, the discussions will most likely focus on a compliance plan under reasonable timeframes.

Stakeholder meetings: · Have any stakeholder meetings been held? Yes. · With whom? The Drinking Water Advisory Work Group (DWAWG), a group of participants that meet on a quarterly basis to discuss issues related to drinking water, with emphasis on compliance with state and federal regulations and improving customer service to the public. The DWAWG currently has representation from the American Water Works Association, Texas Rural Water Association, Texas Water Utilities Association, Independent Water & Sewer Companies of Texas, Texas Municipal League, Clean Water Action, Consumers Union, League of Women Voters, Sierra Club, Texas Water Conservation Association, Association of Water Board Directors, Community Resource Group, Dow Chemical, attorneys, engineers, and individual citizens.

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· What were the general sentiments? · · · HB 149: No comments were received from the stakeholders. HB 3475: An individual stated that the Gulf of Mexico is an international boundary. SB 3: A stakeholder suggested additional guidance on filing petitions. Staff also responded to a question regarding whether the commission has appellate jurisdiction on rates for districts.

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Were any changes made in response to stakeholder concerns? No.

Policy issues: · What policy issues are affected? No policy issues are affected. · Are any policies that are not currently based on rule being made into a rule? No. · What are the consequences if this rulemaking is not approved to go forward? Without approval, Chapter 291 will be inconsistent with the state statutes. · Are there alternatives? No. Potentially controversial matters: None. Key points in proposed rulemaking schedule: · · · · · Anticipated proposal date: January 16, 2008 Anticipated Texas Register publication date: February 1, 2008 Public hearing date: February 26, 2008 Public comment period: February 1, 2008 through March 3, 2008 Anticipated adoption date: June 18, 2008

Agency contacts: Tammy Benter, Rule Project Manager, 239-6136, Water Supply Division Ross Henderson, Staff Attorney, 239-6257 Lesley Williamson, Texas Register Coordinator, 239-2461

Commissioners Page 7 December 28, 2007 Re: Docket No. 2007-0998-RUL

Attachments cc: Chief Clerk, 5 copies Executive Director's Office David C. Schanbacher, P.E. Ashley K. Wadick Daniel Womack Zak Covar Office of General Counsel Tammy Benter Lesley Williamson

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