§ 7-82-704 — Financially distressed utility districts - Merger or consolidation

(a) The board may order the merger or consolidation of an ailing utility system with another utility system if the merger is necessary to restore financial stability of the system, ensure continued operation, or otherwise ensure the well-being of the public being served by the utility system. A utility system is ailing if the utility system: (1) Is financially distressed, as described in § 7-82-703(b) ; (2) Is financially unable to expand the amount or type of service as set forth and described in its founding documents or petition for creation as described under § 7-82-201 , § 68-221-604 , § 68-221-1304 , or any other section or private act; or (3) Displays a pattern of severe managerial incompetence such that the utility system cannot provide the public it serves with safe, consistent access to its services. As used in this subdivision (a)(3), "severe managerial incompetence" includes: (A) Frequent interruptions in service to multiple customers, lasting multiple days; (B) Frequent infrastructure failures that result in interruptions in service or cause the quality of service to fall below safe levels; or (C) Failure to: (i) Respond to reports of damage to, or failure of, infrastructure within a reasonable timeframe; (ii) Improve or attempt to improve infrastructure, including necessary maintenance, upgrades, or construction of redundant infrastructure where necessary; or (iii) Correct a deficiency in oversight, operational management, or finance management, which leads to repeated harm to the utility system, a violation of state or federal law, or fraud, waste, or abuse of the utility system's resources. (b) (1) After reviewing the audited annual financial report and operations of the ailing utility system, the board may order the ailing utility system to obtain a study from a qualified expert on the feasibility and benefit of the ailing system merging or consolidating with another utility system. For purposes of this subdivision (b)(1), the board may determine by vote that an expert is not qualified to conduct the study, or determine that the study is not sufficient for any reason deemed appropriate in the board's discretion. (2) After the results of the study are submitted to the board or the board's staff, and if the results favor a merger or consolidation, then a representative of the board shall hold a public hearing within the service area of the ailing utility system to notify the customers of the potential merger or consolidation. (c) After the public hearing described in subdivision (b)(2) occurs, the board shall conduct an informal hearing on the questions of whether: (1) The consolidation or merger: (A) Is in the best interest of the public being served by the ailing utility system; and (B) Harms the public being served by the utility system with which the ailing utility system may consolidate or merge; and (2) The ailing utility system should be merged or consolidated with another utility system. (d) In making the determination pursuant to subsection (c), the board shall consider: (1) The results of the study described in subdivision (b)(1); (2) Comments that the board representative received at the public hearing that occurred within the service area of the system; (3) Other evidence presented by the ailing system and the system with which the ailing system may merge or consolidate; and (4) Other evidence presented to the board. (e) The board shall properly notify the ailing utility system and the system with which the ailing utility system may merge or consolidate of the date and time of the informal hearing and allow each party a reasonable opportunity to address the board. (f) If the board determines that it is in the best interest of the public being served by the ailing utility system that the ailing utility system merge or consolidate with another utility system, and that it is not harmful to the public being served by the utility system with which the ailing utility system should merge or consolidate, then the board shall order the systems to develop a merger or consolidation agreement between the systems. The agreement must include, at a minimum, the following components: (1) An assurance that the systems have sought and obtained, or will seek and obtain, all necessary approvals from the United States department of agriculture, the Tennessee local development authority, the Tennessee department of environment and conservation, or another interested party for the assumption of the ailing utility system's outstanding debt obligations; (2) A transfer of all other rights and duties of the ailing utility system to the system with which the ailing utility system is to merge or consolidate; (3) An assumption of all assets and liabilities of the ailing utility system to the system with which the ailing utility system is to merge or consolidate; (4) A transfer of all appropriate documents to vest legal title of the ailing utility system to the system with which the ailing utility system is to merge or consolidate; (5) A provision that the system with which the ailing utility system is to merge or consolidate will operate the system and account for the revenues from the system in a manner as not to impair contractual or other legal obligations of the ailing utility system; (6) A provision describing the merged or consolidated system's new territorial boundaries; (7) An initial rate structure for the newly merged or consolidated utility system; and (8) Other provisions necessary to comply with applicable state and federal laws such that the systems are solely responsible for ensuring that the terms of the merger or consolidation agreement address all necessary topics. (g) (1) After the systems have drafted a complete agreement, the board shall enter an order approving the merger or consolidation agreement and shall require the utility systems to enter into the merger or consolidation agreement. (2) (A) If the board finds that a provision of the agreement is unreasonable or deficient, then the board may order the parties to amend the agreement or resolve the deficiency in a fair and reasonable manner. (B) If, after the parties have attempted to develop an agreement in good faith, they are unable to come to an agreement, then the board may resolve topics of disagreement in a fair and reasonable manner and have the parties amend the agreement to reflect the determination of the board. (3) If the board determines that the systems have refused or failed to enter into good faith negotiations on a merger or consolidation, then the board shall petition the chancery court in a jurisdiction in which a utility system that is a party to the merger or consolidation is operating to require the party or parties to engage in good faith negotiations concerning the merger or consolidation. (h) If the governing body of the utility system does not enter into the approved merger or consolidation agreement or fails to abide by the terms and conditions of the merger or consolidation agreement, then the board shall petition the chancery court in a jurisdiction in which the utility system is operating to enforce the board's order to require the board of commissioners to enter into the approved merger or consolidation agreement and to abide by and implement all of the terms and conditions of the merger or consolidation agreement. (i) A merger or consolidation approved by the board under this section is not subject to the petition, public hearing, or mayoral order requirements of § 7-82-202 , § 7-82-601 , or § 7-82-603 . A merger or consolidation approved under this section is not subject to approval by a county legislative body under § 7-82-202(a)(3)(B) . (j) After the board has ordered the utility systems to enter into the merger or consolidation agreement negotiated under this section, and after the utility systems have entered into the agreement, the board shall issue an order like that required under § 7-82-202(e) . After the board issues the order, a party to the agreement may secure judicial review of the decision by filing a petition for judicial review in the appropriate venue as set forth in § 4-5-322(b) . (k) The board shall file the order required by subsection (j) in the same manner as described under § 7-82-202(d) . The board shall also file a copy of its order with the county or municipal mayor or mayors where the consolidated or merged systems are located. (l) (1) When utility systems merge or consolidate and the merging utility systems are utility districts, the utility systems may agree to expand the size of the board of commissioners of the surviving district as permitted by § 7-82-202(e)(2) and (3) . If the utility systems agree to expand the size of the board of commissioners of the surviving district, then the systems shall assert their intention to expand the size of the board of commissioners of the surviving district and name qualified individuals to serve on the new board in the consolidation or merger agreement. If the board approves of the agreement, then the named qualified individuals serve on the board of commissioners of the surviving merged or consolidated district until their terms expire, at which time the county mayors shall appoint commissioners in accordance with the procedures set out in this section. (2) If the utility systems do not agree to expand the size of the board of commissioners of the surviving district, then the current commissioners of the surviving district must serve the remainder of their terms. Upon the first expiration of a commissioner's term after the merger or consolidation is completed, the list of three (3) nominees submitted to the appropriate county mayor to fill the vacancy created by the expiration of the term must include at least one (1) nominee from the service area of the previously ailing utility system to fill the seat. (m) The board is authorized to develop a plan of mitigation payments to the merged or consolidated utility system in order to mitigate any negative financial impact of the merger or consolidation on the utility system agreeing to merge or consolidate with an ailing utility system. The mitigation payments must be made from funds available in the utility revitalization fund and may include: (1) Amounts to offset increased administrative costs relating to the merger or consolidation, to the extent those costs cannot reasonably be recovered from customer revenues or other assets of the ailing utility system; (2) Amounts that may be necessary to cure a default on indebtedness of the ailing utility system to the extent the defaults can, in the opinion of the board, reasonably be cured; (3) Amounts that may be necessary to renovate and repair the facilities of the ailing utility system to the level necessary to enable the merged or consolidated utility system to provide continued service to the public being served by the ailing utility system; (4) Amounts sufficient to fund capital improvements or connect one (1) utility system to another, if the merger is not achievable without the improvements; or (5) Other payments as may be necessary in the opinion of the board to accomplish the merger or consolidation and mitigate the financial impact of the merger or consolidation.

Legislative History

Amended by 2023 Tenn. Acts, ch. 463, s 23, eff. 7/1/2023. Amended by 2022 Tenn. Acts, ch. 757, s 2, eff. 3/31/2022. Acts 1987, ch. 422, § 10; 2011 , ch. 215, § 2.