A recent Indiana Court of Appeals decision provides valuable practice pointers for municipalities considering the sale of their utilities. Municipalities that do not comply exactly with statute when selling a utility do not necessarily doom the sale. The Court of Appeals’ ruling in NOW!, Inc. v. Indiana-American Water Company, Inc., __ N.E.3d __, 2018 WL 6837732 (Ind. Ct. App. Dec. 31, 2018)[1], affirmed the Indiana Utility Regulatory Commission’s (“IURC”) order approving the sale of the City of Charlestown’s (“City” or “Charlestown”) water utility to a private utility.

In NOW!, a non-profit group, NOW!, Inc. (“NOW”), opposed the sale and claimed it should not be allowed because the City did not follow exact procedures set forth the municipal utility disposition statute (Ind. Code 8-1.5-2 (the “Sale Statute”)). NOW cited instances where the City did not appoint the appraisers in a single document or specify the time the appraisal was due. NOW also had complained that the purchase price was not reasonable and that the City inappropriately had the appraisal “recertified” by the appraisers in contravention of the Sale Statute.

Facts

Charlestown has owned and operated its water utility in Clark County since the 1940s. Over time, the City deferred needed maintenance and repairs, resulting in frequent water main breaks and instances of “brown water” in people’s homes. The City concluded it could not make the necessary repairs without a large increase in customer rates. City officials met with Indiana-American Water Company, Inc. (“Indiana-American”), in 2016 about purchasing Charlestown’s water utility. As required by statute, the City obtained an appraisal from three appraisers in November 2016, which was later “recertified” and returned to Charlestown in April 2017.

After the appraisal was returned in April 2017, the City’s common council set a public meeting on the sale. Notice of the public meeting was published, which also indicated that the appraisal was available for review in the City’s Clerk-Treasurer’s office. The City’s common council then conducted the public meeting. At a subsequent common council meeting, the City’s common council approved a purchase agreement to sell its water utility to Indiana-American for a price of approximately $13.4 million, which was equal to the total appraised value, minus the appraised value of wells and well pumps that Charlestown would retain and lease to Indiana-American. All of the City’s actions concerning the public meeting and the vote to approve the sale conformed to the statutory timeline set forth in the Sale Statute.

As with all acquisitions of municipal utilities, the City and Indiana-American sought IURC approval. The IURC, after consolidating the sale approval case with a complaint filed by NOW, ultimately approved the sale, finding that the sale was in the best interest of the public, that the purchase price was reasonable, and that Charlestown, even though it did not exactly comply with the Sale Statute, had substantially complied with the Sale Statute.

Purchase Price Is Reasonable

NOW argued the IURC erred in determining the sale price of the utility was reasonable. The transaction was approved under Indiana Code 8-1.5-2-6.1, which governs the sale of “nonsurplus utility property,” as well as I.C. 8-1-30.3-5, which governs the treatment of cost differentials involved in the sale or disposition of “distressed” water or wastewater utilities. The IURC concluded the “actual purchase price” was reasonable under I.C. 8-1-30.3-5 because the purchase price was deemed reasonable under I.C. 8-1.5-2-6.1(d). NOW argued that the two statutes must be read separately and that different standards of reasonableness apply to the treatment of the purchase price under the statutes.

The appellate court found that I.C. 8-1-30.3-5 is necessarily dependent upon the other statute, because there would be no reason to seek permission under I.C. 8-1-30.3-5 for a cost differential to be included in a rate base unless the petitioner was engaged in the purchase of a utility under I.C. 8-1.5-2-6.1. The sale fulfilled the requirements of I.C. 8-1-30.3-5(c), and it did not need to be submitted to a public vote under I.C. 8-1.5-2-6.1(h), the court ruled.

Practice Pointer: Municipalities can sell their “distressed utilities” at a purchase price higher than the appraised value if the IURC finds the actual purchase price to be reasonable. Be prepared to provide substantial evidence in support of the reasonableness of the higher purchase price.

Substantial Compliance with Sale Statute

The Court of Appeals found that Charlestown did not comply with the Sale Statute in providing appraisal information to the public in that it did not put all the required information – appointment of three appraisers, the appraisal of the property, and the time the appraisal is due – into a single document for inspection. Rather, the City provided multiple documents containing the appraisers and appraisal, but omitted when the appraisal was due. This constituted a technical violation of I.C. 8-1.5-2-4; however, the court found the City substantially complied with the statutory requirements as the City did have the appraisal available for inspection by the public and its discovery responses noted that the appraiser documents were available upon request.

Practice Pointer: When a municipality explores selling a utility, it should engage counsel that understands the Sale Statute early in the process. A timeline of events should also be prepared early in the process. While strict compliance with the Sale Statute is preferred and minimizes arguments for remonstrators, if a municipality finds itself having failed to fully comply with the Sale Statute, so long as the municipality substantially complied with the Sale Statute, its actions should withstand appellate scrutiny.

“Recertification” of Appraisal

The City did not hold a public hearing within the required 90 days of receiving the certified appraisal in November 2016. Instead, it held a public hearing within the statutory time frame after it received the “recertified” appraisal in April 2017. The appellate court agreed with IURC that “recertification” was not expressly forbidden by the statute and the public was not harmed by the process because it had a chance to comment and be heard by the city council.

Practice Pointer: Selling a municipal utility is a big deal. Sometimes it takes time for municipal officials to weigh the costs and benefits of a sale, and the “recertification” process can buy additional time to build consensus and get comfortable with the idea of selling the utility.

Conclusion

Selling a municipal utility comes with a unique set of challenges, especially for municipalities that are unfamiliar with the IURC’s regulatory process. Municipalities that face challenges of not complying with Sale Statute should note the decision of the Court of Appeals. While the statutory requirements should always be followed as outlined, in some instances, especially when the public is not harmed, courts will determine that the municipality achieved substantial compliance with the Sale Statute and allow the sale to proceed.