Visualizing 2022: Perspectives on Water/Wastewater CCNs

by David J. Klein

While the 2021 headlines focused on the Public Utility Commission’s (“PUC’s”) attention to electric issues in response to Winter Storm Uri, the reality is that PUC also dedicated significant time and efforts to addressing issues concerning water and sewer certificates of convenience and necessity (“CCN”) last year. CCNs are permits that provide a retail public utility with the exclusive right to provide retail water and/or sewer service to customers located within a defined geographic area. CCNs are regulated by the PUC, where the agency routinely processes applications for new CCNs, amendments to existing CCNs – either by adding or removing land to/from the service boundaries, and transferring CCNs from one service provider to another.

Texas experienced tremendous population growth in 2021, with several municipalities topping national lists of the fastest growing cities in the United States. With such urban expansion, water and sewer service areas have been expanding, necessitating all water and wastewater providers to re-examine their CCN boundaries and capital improvements plans.

So, as everyone stands atop the plateau in January, gazing out over the landscape to anticipate what 2022 will bring, economic indicators and growth rates suggest that this year will likely be another year of high growth and development throughout Texas. From a long-term perspective, the 2022 Texas State Water Plan, released on July 7, 2021, projects that in the next 50 years, the state’s population will grow 73% (from 29.7 to 51.5 million people), while the existing water supplies will decline by 18%. With such expected rapid and prolonged growth, the need for reliable water and sewer services will continue to be in high demand by developers, home builders, and commercial and industrial companies. This need could include the short term as well. In that case, challenges will likely arise for all entities in all phases of land development. For example, these entities would not only find difficulty in securing water supplies and wastewater capacity, but also in designing, procuring, financing, and constructing the necessary utility infrastructure to expand their utility systems. With those challenges, CCN service area boundary fights will likely be in the spotlight at the PUC in 2022.

These CCN fights will likely entail several contested issues that are consistently being litigated. For instance, as the PUC processes CCN applications that propose creating new or modify existing water and sewer service area boundaries, its Staff will likely be facing questions regarding whether the requested CCN service area change itself is needed. To that end, a narrow interpretation of need could cause the regulated community to file more CCN applications, requesting service area changes on a project-by-project basis. Consequently, more applications could create a backlog of service requests, resulting in longer application processing times. Second, with more applications to amend CCNs, which often entail applications to decertify/remove land from the existing CCN holder’s service area boundaries, the PUC will likely face questions regarding what should be proper compensation to that decertified CCN holder. While the Texas Legislature has established and subsequently tweaked a process and compensation methodology for the PUC to implement, it is rare for an application to be contested to the fullest extent possible. But in a high growth arena, with many CCN decertification applications being filed, it is entirely possible that there will be more fights on what would be proper compensation. Next, with more CCN applications being filed because of expansion into previously undeveloped or rural land, the PUC may receive more applications for dual CCNs. A dual CCN is a situation where two or more entities both possess CCNs over the same tract(s) of land. There are benefits to a dual CCN, where the parties can decide the conditions and scenarios whereby each entity would serve customers on the land. (i.e., low v. high population density on that tract of land). Last, as CCNs are conveyed from one service provider to another, questions may arise regarding the rates and fees that can be charged to the customers of those transferred utility systems. In particular, there appears to be a renewed interest at the PUC in examining the fees listed on the rate tariffs of for-profit utilities.

Ultimately, the growth in Texas will likely create an increase in the quantity of CCN-related applications filed at the PUC, but hopefully 2022 will be a productive year for all of the regulated community!

David Klein is a Principal in the Firm’s Districts and Water Practice Groups. If you have any questions regarding CCNs or other water or wastewater system issues, please contact David at 512.322.5818 or dklein@lglawfirm.com.