Transferring a Water System

Utility owners may sell or transfer water systems to another individual or company, a society, municipality, regional district or an improvement district.

Normally the transfer of a water system is generated by the owner who no longer wants to operate it. Occasionally, due to poor service quality and/or deterioration of the water system, system users approach the utility owner either to have the assets transferred to some form of public authority or to acquire it themselves—by way of a transfer to a corporation or society that they have formed.

The parties involved negotiate the sales agreement, including the price, as private transactions; the Comptroller must approve the sale and transfers of ownership. An agreement for transfer or sale should contain a statement or paragraph to the effect that the transfer is subject to the approval of the Comptroller of Water Rights.

Considerations

A water utility is responsible for supplying adequate and safe water to customers; an important public service requiring business skills and abilities such as:

• Managing the operation and maintenance of the waterworks system
• Planning system upgrades and component replacement
• Managing the financial and administrative aspects of the utility
• Complying with the regulatory requirements of the Comptroller

Potential purchasers must show they are able to effectively operate the water utility. Before approving sale and transfer of ownership of a regulated water utility, the Comptroller will consider the following matters:

• State of the system analysis and business plan
• Purchaser’s knowledge of operating a water utility
• Acquisition adjustments
• Redundant assets
• Reserve funds
• Rights and licences
• Types of ownership
• Administrative requirements

State of the System Analysis and Business Plan

Most private utilities were established as a consequence of land development. The initial capital cost of the waterworks infrastructure was usually contributed to the utility. Most older utilities do not have adequate provision for system replacement so major capital investment may be required in the future. The timing will depend on the age and state of the system.

A “state of the system” analysis is required to show potential owners the makeup and condition of the waterworks system. This information is critical to completing a utility business plan that illustrates the activities and costs related to the following elements:

• Capital improvements required to bring the system infrastructure to an adequate state
• Managing of the ongoing operational and maintenance activities required to consistently deliver adequate and safe water
• Planning, financial and administrative activities required to operate a viable business function and meet the reporting requirements of the Comptroller

The business plan must clearly show capital and cash flow financing requirements and the cost of operating the system. This will determine any amount that must be deposited into trust funds and whether a rate increase will be required.

Ability to Operate

Purchasers must be able to demonstrate that they are capable of operating or managing a water utility business, or that they have contracted suitable utility management services.

Price Considerations

Negotiations and the final price established for the utility are the responsibility of the parties involved. An owner will want to consider the following issues when negotiating a price:

• Original cost of the waterworks system infrastructure which in most cases was contributed to the utility by the developer
• Value of additional works, equipment or land contributed by the owner
• Value of the business as an income generator to the owner/operator
• Value of business or land development potential the utility may provide

The purchase price cannot be recovered in the rates charged to customers.

Reserve Fund Allocation

Most utilities will have one or more of the following reserve funds in place as a condition of obtaining their Certificate of Public Convenience and Necessity (CPCN). Trust funds remain with the utility.

• Replacement Reserve Fund (RRFF)
• Revenue Deficit Reserve Fund (RDRF)
• Deferred Capacity Reserve Fund (DCRF)
• Find more information about reserve funds

Rights and Licences

All rights and licences that a utility holds to allow access to the assets and use of the water resource must be transferred or established if they are not already in place. These include easements and/or rights of way for the protection of and access to the utility property, water licences, highway permits and/or health certificates.

Ownership Transfer

Ownership may be transferred through a share or asset purchase. A purchase of assets requires the Comptroller to grant a CPCN to the new owner. A share purchase simply requires the approval of the Comptroller for the transfer of shares. Potential purchasers should seek professional advice as there are business and legal implications to each method.

Administrative Requirements

The Comptroller will require the following documentation to approve the transfer of a utility to a private company or a society:

• State of the system analysis and business plan
• Indication of the purchaser’s ability to operate a water utility or evidence of a contract with a suitable utility management firm (may be included in the business plan)
• A copy of the constitution and by-laws for societies and certificate of incorporation for companies
• A copy of the agreement of sale
• An application for a CPCN including a $50.00 non-refundable application fee
• Verification that all lot owners on the water system have been notified of the pending transfer
• Verification of the transfer of all easements and/or the registration of statutory rights of way with the Land Titles office is required within 30 days after the sale is completed and a CPCN is issued