SRC-HRD H.B. 2851 75(R) BILL ANALYSIS Senate Research Center H.B. 2851 By: Williams (Lindsay) Natural Resources 5-6-97 Engrossed DIGEST A special utility district (SUD) is a type of conservation and reclamation district, or water district, that may be created as a political subdivision of the state pursuant to Article XVI, Section 59 of the Texas Constitution. Chapter 65 of the Water Code governs the creation and operation of SUDs and provides that the Texas Natural Resource Conservation Commission (TNRCC) may convert into SUDs certain water supply corporations that were in operation before January 1, 1985. A water supply corporation is a special type of nonprofit corporation that may be created under Article 143a, V.T.C.S., to provide water and wastewater services to its members or customers. A water supply corporation does not have outside shareholders who seek to earn a profit from providing water and sewer services. Under existing state law, a water supply corporation is exempt from sales and property taxes; however, under federal tax law, because it is not a local government entity, interest on its debt is not exempt from income tax. In 1994-1995, Coe Utilities (Coe), a private for-profit water and sewer company, undertook an effort to sell its utility assets to its approximately 3,000 customers in far northwest Harris County and Montgomery County. Coe served 35 noncontiguous separate areas covering 70 subdivisions in the general area of Tomball, Texas. The HMW Water Supply Corporation (HMW) was created by Coe's customers to acquire Coe's assets. With consent from the TNRCC, the acquisition was accomplished in fall 1996, with HMW using proceeds of an interim bank loan to fund the purchase. To provide permanent financing of the acquisition in mid-1996, HMW secured a funding commitment from the Texas Water Development Board, which agreed to make either taxable or tax-exempt funds available. Tax-exempt funds bear a significantly lower interest rate, which will save HMW's customers about $100,000 per year for 20 years. Because HMW may not borrow at tax-exempt interest rates, only at higher taxable rates, it would need to be converted to some type of water district or political subdivision, which qualifies as a local governmental entity, in order to borrow at tax-exempt interest rates. Due to the broad HMW service area, many believe that conversion into a SUD is the most expedient and cost-effective approach to becoming a political subdivision. Chapter 65 expressly provides for such conversion by water supply corporations, subject to TNRCC approval, but it only applies to older corporations that were in operation before 1985. Alternatively, HMW could undertake the more complicated process of seeking to create another type of water district to acquire and finance the HMW utility assets on a permanent basis. It is not clear that the laws applicable to other water districts would permit HMW to become another type of district. Even if existing statutes were adequate for HMW's purposes, there are concerns that since its utility assets are included within the extraterritorial jurisdictions of at least four municipalities, the requirements for consent to the creation of a new water district could be different and perhaps inconsistent in each municipality. This bill would allow the HMW Water Supply Corporation to be eligible for conversion into a SUD, subject to the approval of TNRCC. PURPOSE As proposed, H.B. 2851 authorizes the HMW Water Supply Corporation to be eligible for conversion into a special utility district, subject to the approval of the Texas Natural Resource Conservation Commission. RULEMAKING AUTHORITY This bill does not grant any additional rulemaking authority to a state officer, institution, or agency. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 65.001(10), Water Code, to redefine "water supply corporation" as any member-owned, consumer-owned water supply corporation created and operating under Article 1432a, V.T.C.S., that provides water supply services to noncontiguous subdivisions in two or more counties, at least one of which counties has a population greater than two million. Makes conforming changes. SECTION 2. Emergency clause. Effective date: upon passage.