Can a Texas home-rule city sign a contract promising never to try to decertify a utility district's service-area certificate?

Plain-English summary

In Texas, water and sewer providers operate under certificates of convenience and necessity, or CCNs, which the state issues under chapter 13 of the Water Code. A CCN gives its holder the exclusive right, a monopoly, to provide retail water or sewer service in a defined geographic area, so another provider generally cannot serve there without first changing the existing CCN. One way to change a CCN is to petition the Public Utility Commission to "decertify" part of the territory. Senator Brian Birdwell asked the Attorney General a single, abstract question: can a home-rule city sign a contract with a special utility district promising that it will never petition to decertify the district's CCN in the future? Because the request gave no specific facts, the AG answered in terms of general legal principles.

The AG first looked at whether chapter 13 of the Water Code speaks to the question. It does not directly. Section 13.248 makes contracts between retail public utilities "designating areas to be served" valid and enforceable once the Commission approves them, and an Austin court of appeals had addressed a similar contract in the Mountain Peak Special Utility District case, where it held that a promise not to seek future CCN changes was not itself a "designation of a service area" and so had not been folded into the CCN. Section 13.255(a) allows broad written agreements, but only in the specific context of municipal incorporation or annexation. So no Water Code provision squarely answers whether a city can waive its right to seek decertification.

The AG then turned to home-rule authority. Under the home-rule amendment (article XI, section 5 of the Texas Constitution) and Local Government Code section 51.072(a), a home-rule city has full power of local self-government and looks to the Legislature only for limits on its authority, which must appear with unmistakable clarity. Briefing to the AG argued that chapter 13 contains no clear limit, so a city should be free to make this promise. But the AG identified a different constraint. A home-rule city is still a political subdivision with no greater powers than the State, and under the common-law reserved powers doctrine a government "may not, by contract or otherwise, bind itself in such a way as to restrict its free exercise of governmental powers," nor abdicate its governmental functions even temporarily. Water and sewer service is a governmental function (article XI, section 13(a) and Civil Practice and Remedies Code section 101.0215(a)(32)), and the AG reasoned that, depending on the purpose of a future decertification and the city's posture (as a competing utility or as a landowner), the decertification process might be exactly the tool a city needs to perform its governmental function, making it something the city cannot bargain away. The AG therefore declined to say a home-rule city may always contract away its decertification rights, concluding instead that such questions must be decided case by case.

Currency note

This opinion was issued in 2020. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

What the opinion meant for those who asked

The opinion was written for a state senator asking in the abstract, so its value was a framework rather than a verdict on any deal. For home-rule cities, it meant that signing away the right to seek decertification of a neighbor's CCN was not safely within their power in every case; even without a clear statutory bar, the reserved powers doctrine could make such a promise unenforceable. For special utility districts negotiating boundary or no-contest agreements with cities, it meant a city's promise never to petition for decertification might not hold up, so the district could not assume permanent protection from such a clause. For both sides, the opinion signaled that enforceability turns on the specific circumstances, including why decertification is later sought and whether the city is acting as a utility or a landowner, so a court would have to evaluate any given contract on its own facts.

Common questions

Q: What is a CCN, and why would a city want to decertify one?
A: A certificate of convenience and necessity gives a water or sewer provider the exclusive right to serve a defined area. A city might petition to decertify part of that area, for example, to provide service itself or to allow another provider, by asking the Public Utility Commission to revoke or amend the CCN.

Q: Did the AG say a city can promise never to seek decertification?
A: Not as a blanket rule. The AG concluded it could not say a home-rule city may always make that promise, because the reserved powers doctrine may bar a city from bargaining away a governmental power.

Q: Doesn't home-rule status let a city do anything the Legislature has not clearly forbidden?
A: Home-rule cities do look to the Legislature only for clear limits on their authority. But the AG noted a separate, common-law limit: a political subdivision cannot contract away the free exercise of its governmental powers, even if no statute says so.

Q: So is such a contract valid or not?
A: It depends. The AG said the answer must be decided case by case, considering the purpose of any future decertification and whether the city is acting as a competing utility or as a landowner.

Background and statutory framework

The opinion weaves together utility-regulation statutes and a strand of constitutional and common law about what governments can promise. Chapter 13 of the Water Code (sections 13.241 through 13.258) sets up the CCN system to give utilities exclusive, monopoly service areas, as the Austin court of appeals described in City of Carrollton v. Tex. Comm'n on Envtl. Quality. Section 13.248 validates Commission-approved contracts designating service areas; sections 13.254, 13.2541, and 13.255 supply the various decertification and release mechanisms. The Mountain Peak Special Utility District decision is the closest case on point, holding that a no-future-change promise is not itself a service-area designation absorbed into the CCN. On the home-rule side, article XI, section 5 of the Texas Constitution and Local Government Code section 51.072(a) give home-rule cities broad self-government, with the "unmistakable clarity" limit on legislative restrictions recognized in BCCA Appeal Grp., Inc. v. City of Houston and City of Laredo v. Laredo Merchs. Ass'n, though the decisive limit came from the reserved powers doctrine: a political subdivision has no greater rights than the State (Faulk v. City of Tyler) and cannot bind away its governmental powers (Clear Lake City Water Auth. v. Clear Lake Util. Co.; Kirby Lake Dev., Ltd. v. Clear Lake City Water Auth.). Because water and sewer service is a governmental function under article XI, section 13(a) and Civil Practice and Remedies Code section 101.0215(a)(32), and the governmental-versus-proprietary line from Wasson Interests, Ltd. v. City of Jacksonville applies to contract claims, the AG concluded the doctrine could invalidate such a waiver in some circumstances.

Citations and references

Constitutional and statutory provisions:

• Tex. Water Code §§ 13.241–.258 (CCNs); § 13.248 (service-area contracts); § 13.254, § 13.255 (decertification and release)
• Tex. Loc. Gov't Code § 51.072 (home-rule self-government); § 51.078
• Tex. Const. art. XI, § 5 (home-rule amendment); art. XI, § 13(a)

Key cases:

• Clear Lake City Water Auth. v. Clear Lake Util. Co., 549 S.W.2d 385 (Tex. 1977) (a government cannot contract away its free exercise of governmental powers)
• Kirby Lake Dev., Ltd. v. Clear Lake City Water Auth., 320 S.W.3d 829 (Tex. 2010) (reserved powers cannot be delegated or bartered away)
• Wasson Interests, Ltd. v. City of Jacksonville, 559 S.W.3d 142 (Tex. 2018) (governmental vs. proprietary functions in contract claims)
• Mountain Peak Special Util. Dist. v. Pub. Util. Comm'n, 2017 WL 5078034 (Tex. App.—Austin 2017, pet. denied) (no-future-change promise not a service-area designation)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0340
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2020/kp-0340.pdf

Original opinion text

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

November 4, 2020

The Honorable Brian Birdwell
Chair, Senate Committee on Natural Resource and Economic Development
Texas State Senate
Post Office Box 12068
Austin, Texas 78711-2068

Opinion No. KP-0340

Re: Whether a home-rule municipality may enter into a contract with a special utility district that prohibits the city from petitioning for decertification of all or part of the special utility district's certificate of convenience and necessity in the future (RQ-0354-KP)

Dear Senator Birdwell:

You ask whether a home-rule municipality may agree by contract not to petition to decertify all or part of a special utility district's certificate of convenience and necessity in the future.¹ In particular, you ask whether certain self-rule provisions applicable to home-rule municipalities supply authority to do so. Request Letter at 1. We have no other information or context for your question. Accordingly, our response is necessarily limited to general legal principles that may be applicable.

We presume you to refer to certificates of convenience and necessity ("CCNs") for water and sewer service as governed by subchapter G in chapter 13 of the Water Code. See generally TEX. WATER CODE §§ 13.241–.258. The purpose of chapter 13 "is to establish a comprehensive regulatory system that is adequate to the task of regulating retail public utilities to assure rates, operations, and services that are just and reasonable to the consumers and to the retail public utilities." Id. § 13.001(c). A CCN under subchapter G gives a retail public utility² the exclusive right to provide retail water and sewer utility service to an identified geographic area. See id. § 13.242(a); see also id. § 13.241 (outlining the criteria for granting a certificate). Generally, once an area is covered by a CCN, another "retail public utility may not furnish, make available, render, or extend retail water or utility service" without formally modifying the already-existing CCN service area. See id. § 13.242(a). This can be done either through obtaining its own CCN over that area or through other means. Id. "The general purpose of certification is to provide for a rational distribution of public utility services within defined geographical areas so that, within a specified area, the provider of utility service is unhampered by competitive forces." City of Carrollton v. Tex. Comm'n on Envtl. Quality, 170 S.W.3d 204, 209 (Tex. App.—Austin 2005, no pet.) (quotation marks omitted) (describing the effect of certification as granting the certificate holder "a monopoly within its service area").

Subchapter G of chapter 13 includes various methods for altering an existing CCN service area, depending on the circumstances. One such method, to which you allude in your letter, is to petition the Public Utility Commission (the "Commission") for decertification. See Request Letter at 1. The process to revoke or amend a CCN through decertification requires the Commission to make certain findings regarding the provision of continuous or adequate service, the cost of such service, or the provision of service by another retail public utility. See generally TEX. WATER CODE § 13.254(a). Other methods for altering an existing CCN service area through Commission action include: (1) an expedited release petition by certain landowners who wish to receive service from another retail public utility; (2) a streamlined expedited release petition by certain landowners whose properties meet particular geographic and population requirements; (3) an application for single or dual certification by a municipality that has incorporated or annexed land already in another CCN; and (4) alteration through mutual agreement, among others. See, e.g., id. §§ 13.248, .254(a-1), .2541(b), .255(a).

You reference a contract between a home-rule municipality and a special utility district, both of which could qualify as "retail public utilities" under chapter 13. Request Letter at 1. Two provisions specifically address written agreements between retail public utilities concerning CCNs. First, section 13.248 provides generally that "[c]ontracts between retail public utilities designating areas to be served and customers to be served by those retail public utilities, when approved by the utility commission . . . are valid and enforceable and are incorporated into the appropriate areas of public convenience and necessity."³ TEX. WATER CODE § 13.248. At least one court in an unpublished opinion addressed a contract between a special utility district and a home-rule municipality in which the parties designated dually certified areas and agreed that neither one would attempt to formally change, alter, or amend the boundaries between their CCNs or the arrangement for their dually certified areas in the future. See Mountain Peak Special Util. Dist. v. Pub. Util. Comm'n, No. 03-16-00796-CV, 2017 WL 5078034, at 5–6 (Tex. App.—Austin Nov. 2, 2017, pet. denied) (mem. op.). Noting that the Commission's predecessor approved only the portions of the agreement designating the areas to be served by each entity, consistent with what section 13.248 provides, the court concluded that the provision prohibiting seeking changes to the CCN in the future did "not itself constitute a designation of a service area" and thus the contractual prohibition had not been incorporated into the CCN.⁴ Id. at 7; see also TEX. WATER CODE § 13.248.

Second, subsection 13.255(a) provides that if an area that receives water or sewer service from a retail public utility pursuant to a CCN "is incorporated or annexed by a municipality . . . the municipality and [the] retail public utility . . . may agree in writing that all or part of the area may be served by a municipally owned utility, by a franchised utility, or by the retail public utility." TEX. WATER CODE § 13.255(a). "The agreement may provide for single or dual certification of all or part of the area, for the purchase of facilities or property, and for any such other or additional terms that the parties may agree on." Id. (emphasis added). However, this provision, while broad regarding contemplated terms, applies only in the context of municipal incorporation or annexation.

You ask whether sections 51.072 and 51.078 of the Local Government Code, along with article XI, section 5 of the Texas Constitution, supply the authority for a home-rule municipality to contract away its ability to petition to decertify a special utility district's CCN in the future. See Request Letter at 1. Article XI, section 5 of the Texas Constitution, known as the "home-rule amendment," authorizes municipalities with more than 5,000 inhabitants to adopt a charter "subject to such limitations as may be prescribed by the Legislature." TEX. CONST. art. XI, § 5 (providing also that home-rule municipal ordinances must not "contain any provision inconsistent with the Constitution of the State, or of the general laws enacted by the Legislature of this State"). Section 51.072(a) provides that a home-rule municipality "has full power of local self-government," which the Texas Supreme Court has found means that home-rule municipalities "look to the Legislature not for grants of authority, but only for limitations on their authority."⁵ BCCA Appeal Grp., Inc. v. City of Houston, 496 S.W.3d 1, 7 (Tex. 2016); TEX. LOC. GOV'T CODE § 51.072(a). Any limitations the Legislature imposes on local authority "must appear with unmistakable clarity." City of Laredo v. Laredo Merchs. Ass'n, 550 S.W.3d 586, 593 (Tex. 2018) (quotation marks omitted).

Briefing received by this office argues that Water Code chapter 13 reflects no clear and unmistakable legislative intent to prohibit a home-rule municipality from entering into an agreement that would negotiate away its ability to decertify territory from a neighboring utility's CCN.⁶ No provision in chapter 13 or elsewhere in the Water Code addresses whether a municipality may waive its right to petition for decertification. But a municipality that has adopted home-rule status nonetheless remains a political subdivision of the State, having "no greater rights, immunities, or exemptions than does the State of Texas from which exclusively it derives its rights and powers." Faulk v. City of Tyler, 389 S.W.2d 706, 707 (Tex. App.—Tyler 1965, writ ref'd n.r.e.). And a political subdivision may "not, by contract or otherwise, bind itself in such a way as to restrict its free exercise of governmental powers, nor [can] it abdicate its governmental functions, even for a reasonable time." Clear Lake City Water Auth. v. Clear Lake Util. Co., 549 S.W.2d 385, 391 (Tex. 1977). Under this common-law reserved powers doctrine, "[c]ertain powers are conferred on government entities for public purposes, and can neither be delegated nor bartered away." Kirby Lake Dev., Ltd. v. Clear Lake City Water Auth., 320 S.W.3d 829, 843 (Tex. 2010) (quotation marks omitted).

In particular, the reserved powers doctrine may limit a city's authority to waive decertification petitioning rights because water and sewer service constitute a municipal governmental function. See TEX. CONST. art. XI, § 13(a) (authorizing the Legislature "by law [to] define for all purposes those functions of a municipality that are to be considered governmental and those that are proprietary"); see also TEX. CIV. PRAC. & REM. CODE § 101.0215(a)(32) (designating "water and sewer service" as a governmental function for purposes of tort liability); Wasson Interests, Ltd. v. City of Jacksonville, 559 S.W.3d 142, 147–48 (Tex. 2018) (explaining that the distinction between governmental and proprietary functions specified in the Tort Claims Act also applies in the context of a contract claim). Depending on such factors as the purpose for seeking decertification and the posture of the municipality (for example, as a competing retail public utility or as a landowner), instances may exist in which a municipality's governmental power cannot be exercised without the decertification process, making that process ineligible to be bargained away under the reserved powers doctrine. See Wasson Interests, Ltd., 559 S.W.3d at 153 (stating that "governmental functions encompass activities that are closely related to or necessary for performance of the governmental activities designated by statute"). Thus, even if chapter 13 of the Water Code does not reflect a clear and unmistakable legislative intent to prohibit a home-rule municipality from entering into the type of contractual provision you describe, the municipality's contracting authority may nonetheless be limited. Accordingly, we cannot conclude as a matter of law that in all circumstances a home-rule municipality may agree by contract not to petition to decertify a special utility district's CCN in the future. Instead, such questions must be decided on a case-by-case basis.

S U M M A R Y

Chapter 13 of the Water Code governs certificates of convenience and necessity for the provision of water and sewer service. No provision in chapter 13 addresses whether a home-rule municipality may enter into a contract with a special utility district that prohibits the city from petitioning for decertification of all or part of the special utility district's certificate of convenience and necessity in the future. However, the common-law reserved powers doctrine could limit a municipality's contracting authority in some circumstances, despite the existence of home-rule power. Accordingly, we cannot conclude as a matter of law that in all circumstances a home-rule municipality may agree by contract not to petition to decertify a special utility district's certificate of convenience and necessity in the future. Instead, such questions must be decided on a case-by-case basis.

Very truly yours,

KEN PAXTON
Attorney General of Texas

BRENT E. WEBSTER
First Assistant Attorney General

LESLEY FRENCH
General Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

BECKY P. CASARES
Assistant Attorney General, Opinion Committee