Florida has emerged as the 13th state to adopt such fair market value (FMV) legislation, further highlighting a steady trend of state policymakers targeting consolidation of water and wastewater utilities. On 6 June 2023, Florida’s governor signed the anticipated House Bill 125 (HB 125), which establishes an alternative procedure for determining the rate base value of acquired water or wastewater utility systems.
In the context of the highly fragmented and underfunded U.S. utility landscape, FMV legislation is being rolled out from coast to coast as a means of incentivizing municipalities and towns to consider divesting their utility assets and operations.
The values of acquired systems have been (and predominantly still are) determined using the system’s depreciated original cost, or net book value. FMV represents an alternative that is slowly gaining momentum in key states such as Pennsylvania, Texas, Illinois.
What makes FMV different is that its application calls for independent, third-party appraisers to set a “fair market value” purchase price, which is typically above the net book value. Critics question whether this valuation methodology provides enough value to customers, arguing that the negotiated costs of FMV acquisitions ultimately fall on customers because of artificially inflated purchase prices.
What are the key components of Florida’s HB 125? HB 125 follows a fairly standard formula for FMV policies, calling for appraisals by three licensed appraisers chosen from a list established by the commission. The law limits the rate base value to the lesser of the purchase price negotiated between the parties or the average of the three appraisals. Florida’s policy only applies to larger acquiring utilities, specifically those providing water and/or wastewater service to more than 10,000 customers (not limited to those operating in Florida), or that are permitted to produce at least 3 million gallons per day of drinking water. The Public Service Commission (PSC) must issue a final order granting or denying the petition within eight months of receiving it.
What does this mean for utility acquisitions in Florida? While 69% of community water systems in Florida are privately owned, these systems serve just 12% of the state’s population. As of 2021, the PSC had jurisdiction over approximately 124 IOUs across 38 counties. Of these regulated utilities, HB 125 applies to just three IOUs operating in Florida: Central States Water Resources, Corix, and Pluris. However, the bill opens the door for IOUs operating outside Florida which are above the established customer base threshold to tap into the Florida market. This would include regional and national players like American Water and Essential Utilities.
Over the last five years, Florida has seen the sixth highest number of (water or private water) acquisitions in the U.S., with an average of seven deals approved each year. The new bill took effect on 1 July 2023, but if other states’ policies are any indication, it could take a couple of years for the PSC and local IOUs to streamline the process before any FMV acquisitions are approved.
How has FMV legislation impacted IOU M&A more broadly? 2022 was a busy year for FMV acquisitions, with a record 26 approved deals citing the legislation. IOUs are increasingly using FMV to target larger publicly owned systems, but smaller distressed systems continue to make up the bulk of FMV deals. With 23 pending or announced applications citing FMV policies, including 17 in Texas and Pennsylvania, the legislation will continue to have a growing impact on IOU M&A.
With a roster of more than 73,000 water and wastewater systems in the U.S., Bluefield’s team of water experts continues to track the policy advancements and strategies that are altering the future landscape of the municipal water sector.
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