| (D) The fee charged by the engineer must be shared
and paid equally by the three utility valuation experts and may be
included as part of the utility valuation expert compensation under
subsection (k) of this section.
(2) Each utility valuation expert must perform an independent
appraisal of the selling utility, including the valuation of intangible
assets as appropriate, in compliance with Uniform Standards of Professional
Appraisal Practice, using the cost, market, and income approaches
in accordance with subsections (g) - (i) of this section.
(3) The appraisal must not take into account the original
sources of funding, including developer contributions or customer
contributions in aid of construction, for any of the utility plant
that is assessed by the engineer or the utility valuation experts.
(4) The appraisal must not take into account the purchase
price negotiated by the acquiring utility and the selling utility
or methodologies or process used to arrive at the purchase price.
(5) Each utility valuation expert must submit a completed
report to the acquiring utility and the selling utility no later than
120 days after the date the commission's executive director or the
executive director's designee selects the utility valuation expert
under subsection (e) of this section. Before the submission of the
report, the acquiring and selling utilities must review the report
for mathematical and factual errors, and notify the utility valuation
expert of any mathematical any factual errors they identify. The utility
valuation expert may promptly revise the report in response to the
utilities' notification.
(6) The ratemaking rate base established under this
section will be the rate base for the system or facilities acquired
in the transaction. Nothing in this section alters the requirements
for multiple system consolidation in §24.25(k) of this title,
relating to Form and Filing of Tariffs.
(g) Cost approach.
(1) A cost approach appraisal performed under this
section must be based on one of the following:
(A) the investment required to replace or reproduce
future service capability; or
(B) the original cost of the facilities as adjusted
for depreciation.
(2) A cost approach appraisal performed under this
section must:
(A) incorporate the results of the assessment performed
by the engineer selected under subsection (f)(1) of this section;
(B) exclude from consideration overhead costs, future
improvements, and going concern value; and
(C) use a consistent rate of inflation for all classes
of assets unless use of different rates is reasonably justified.
(h) Income approach.
(1) An income approach appraisal performed under this
section must be based on one of the following:
(A) capitalization of earnings or cash flow; or
(B) the discounted cash flow method.
(2) An income approach appraisal performed under this
section must exclude consideration of the following:
(A) going concern value;
(B) future capital improvements; and
(C) erosion of cash flow or erosion on return.
(3) An income approach appraisal performed under this
section must be supported by the following:
(A) an explanation of how the capitalization rate was
calculated, if a capitalization rate was used;
(B) an explanation of the basis for the discount rates
used; and
(C) an explanation of the capital structure, cost of
equity and cost of debt used.
(i) Market approach.
(1) A market approach appraisal performed under this
section must be based on the following:
(A) the current connection count of the selling utility
at the time of the appraisal;
(B) use of a proxy group that includes companies that
have made acquisitions that were not based on a fair market valuation
methodology; or
(C) comparable sales that did not include the value
of future capital improvement projects in the selling price.
(2) A market approach appraisal performed under this
section must not consider the following:
(A) a net book financials multiplier or speculative
growth adjustments;
(B) the value of future capital improvement projects;
or
(C) a value or adjustment for the goodwill of the selling
utility.
(j) Contents of utility valuation expert report. A
report submitted under paragraph (f)(5) of this section must include:
(1) a copy of the service contract executed by the
utility valuation expert and the acquiring and selling utilities;
(2) the fee charged by the utility valuation expert
along with documentation supporting the amount of the fee;
(3) a copy of the engineer's report, including a detailed
list of the utility plant assessed by the engineer;
(4) an explanation of how the cost, market, and income
approaches were incorporated into the calculation of the fair market
value of the selling utility or the selling utility's facilities;
and
(5) a notarized affidavit stating that:
(A) the appraisals described in the report were conducted
in compliance with the most recent edition of the Uniform Standards
of Professional Appraisal Practice;
(B) the utility valuation expert will not derive material
or financial benefit from the sale other than the fee for services
rendered;
(C) the utility valuation expert is not currently and
was not within the year preceding the date of the contract for service
executed between the utility valuation expert and the acquiring and
selling utilities, a director, officer, or employee of the acquiring
utility or the selling utility or an immediate family member of a
director, officer, or employee of the acquiring utility or the selling
utility; and
(D) the utility valuation expert did not receive compensation
under a contract for consulting or other services with the acquiring
utility or selling utility, or execute a contract for consulting or
other services with the acquiring or selling utility, within the year
preceding the date the utility valuation expert was selected to perform
the appraisal that is the subject of the report.
(k) Transaction and closing costs.
(1) A fee paid to a utility valuation expert to perform
an appraisal under subsection (f) of this section may be included
in the transaction and closing costs associated with a transaction
approved under §24.239 of this title, relating to Sale, Transfer,
Merger, Consolidation, Acquisition, Lease or Rental.
(2) The commission will review the transaction and
closing costs, including fees paid to utility valuation experts, in
the rate case in which the acquiring utility requests rate recovery
of those costs. The fee amounts included in transaction and closing
costs that are recoverable in the acquiring utility's rates may not
exceed the lesser of:
(A) five percent of the fair market value; or
(B) the fee amounts approved by the commission in the
rate case in which the acquiring utility requests rate recovery of
the transaction and closing costs.
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