Private Side Replacements and State Law
Replacing LSLs at no direct cost to homeowners helps expedite replacement projects and protect public health. However, water utilities may be uncertain about the legality of providing no-cost private-side replacements because of real or perceived state constitutional and statutory barriers to using water utility resources for work on private property.
As a starting point, this document provides a framework for understanding and approaching state law on the use of public and utility funds for private-side replacements. It outlines some common state constitutional and statutory law questions and concepts relevant to private-side replacements. Though it does not outline all considerations or provide a legal analysis of any particular state’s law, this document is designed to address concerns and clarify questions commonly raised about private-side replacements. For further research, check out the resources at the end which include deep dives into particular states.
Question 1: Does my state constitution restrict the ability to replace private-side LSLs at no direct cost?
Your state’s constitution is the highest state law authority, and water utilities have expressed concerns that constitutional “gift clauses” are a potential barrier to replacements of private-side LSLs at no direct cost or subsidised cost. Gift clauses restrict the use of public credit, aid and/or appropriations on private property or for private benefit.
Some utilities worry that providing the benefit of the replacement or the new private-side lateral for no direct cost amounts to using public funds to provide a constitutionally impermissible private gift. There are, however, several reasons private-side replacements at no direct cost are unlikely to violate constitutional gift clauses.
Consideration 1: Would a “gift clause” apply to the water utility?
Gift clauses only apply to state and local government and the water utilities they own or operate, not privately-owned utilities.
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Constitutional gift clauses only limit government entities and often apply to local government entities, like municipal water utilities, as well as state government entities. If the water utility is privately-owned, a gift clause restriction won’t apply. Proceed to question 2 on state statutory restrictions. If the water utility is municipally or otherwise government-owned, proceed to consideration 2.
Consideration 2: Does your state constitution have a gift clause?
A 2011 law review article found that 46 state constitutions have gift clauses. Check your state constitution; if it does not have a gift clause, proceed to Question 2. If your constitution does have a gift clause, verify that it applies to both state and municipal government entities and proceed to considerations 3 and 4.
Consideration 3: Does the gift clause prohibit the replacement of private-side LSLs?
States generally recognize exceptions to gift clause prohibitions when a publicly funded activity with private benefit serves a public purpose, like public health. Private-side LSLRs have well documented public health benefits, which suggests they would qualify for this public purpose exception. Utilities can check court opinions, state statutes, and local ordinances for determinations that private-side LSLRs serve a public purpose or protect public health.
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Gift clauses vary across states. They are worded differently, and courts in different states have interpreted them in different ways. The next two considerations provide a brief overview of common themes across states that could affect LSLR programs.
Almost all gift clauses recognize some exceptions that allow uses of public funds with private benefits if the activity also sufficiently advances a public purpose, like public health or welfare. Water utilities will want to determine if private-side LSLRs sufficiently advance a public purpose. In determining if an activity serves a public purpose, courts generally defer to legislative determinations. This means that statutes or even municipal ordinances can effectively qualify a specific use of public funds for the public purpose exception.
Court decisions can help utilities determine if the private-side LSLRs advance a public purpose. States may have court decisions that have found a public purpose for private-side replacements, like this Michigan decision at 15.
Otherwise, water utilities should look for legislative determinations that expressly state that private-side LSLRs serve a public purpose or otherwise indicate private-side LSLRs serve a public purpose. These could be statutory determinations that private-side LSLRs are required, can be funded by rates or public funds (Pennsylvania, Indiana, and New Jersey), serve a public purpose like public health (New Jersey), or recognize the public health benefits of LSLRs. Utilities should also review agency rules for similar determinations. A Michigan court decision reviewed and upheld an agency rule in part out of deference to the agency’s public purpose determination. In some states, courts extend legislative deference to local legislative determinations. Water utilities should check local ordinances for similar determinations.
Even if there is no relevant statute or legal opinion, a water utility can make a strong argument that its program advances a public purpose, see the New York State Comptroller’s opinion and the Harvard and EDF report at 11.
Consideration 4: What sources of funds are restricted by gift clauses?
Gift clause restrictions limit public financing, but often do not apply to all sources of funds. For example, states have determined that gift clauses do not restrict the use of grant funds. And, in at least one state, a court held that items paid for through utility rates do not come under the state’s gift clause. Even if the gift clause prevents utilities from replacing private-side LSLs with rates or taxes, water utilities should review if they can instead fund their program’s private-side replacements through grants or other permissible sources.
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Typically, states adopted gift clauses to protect public credit, like government loans and future tax revenues, but these clauses do not apply to all sources of funds. In some states, they do not apply to grants or rates, and other clauses only apply to government loans or debt and not current appropriations. For example, Alabama Attorney General advisory opinion No. 91-00406 found that a federal grant was not subject to the state’s gift clause. In New York, the Comptroller advisory opinion found that the use of state grant funds for LSLRs “may eliminate constitutional questions” at 7. Some state gift clauses only restrict lending of public credit that gives private interests a claim on future tax revenues and don’t restrict funding limited to annual or current appropriations. Moreover, in some states, rate-financing itself may mean the private-side LSLR is not a gift or lending of credit, as a Michigan court decided at 14, on the basis that the cost of replacing lead service lines system-wide—something which benefits the affected area by removing potential sources of lead contamination—is shared by all ratepayers, and therefore not given away for free.
If the state does not provide a public purpose exception or it is unclear if private-side LSLRs would fall within the exception, water utilities should review the scope of gift clause restrictions on funding sources. Does the restriction apply only to credit and not annual appropriations? Does it apply to the use of grants? Or rate funds? In Alabama and Michigan, the answer was no and no, respectively, and this opened the door for utility projects on private property funded through these sources. Even in the absence of a public purpose exception, water utilities may be able to design programs that provide the private-side subsidy from grants or other sources not subject to the clause.
Even if the use of funds is constitutionally permissible, state statutes may further restrict which funds may be used to fund private-side replacements. Proceed to question 2.
Question 2: Does state statute or regulation restrict water utility rates?
Beyond the constitution, state statutes often regulate utility programs and funds. This section will focus on common regulations on utility rates and the uses of utility rate revenues. Statutes often restrict rates based on reasonableness and fairness. These restrictions may pose barriers to rate funding of private-side LSLRs.
Consideration 1: Are there limitations on rates such as reasonableness and anti-discrimination standards?
Most states require that utility rates be reasonable and not discriminate between different users. State courts, statutes, or agency rules already may have determined that using utility rates for private-side replacements is reasonable and non-discriminatory. If not, utilities can likely demonstrate that subsidizing private-side LSLRs is a reasonable and non-discriminatory use of rates because LSLR program replacements have system-wide health benefits and help lower replacement costs.
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State law typically places requirements on both government- and privately- owned utility rates. This Environmental Finance Center report gives an overview of each state’s laws.
A Harvard and EDF report at 10 found statutory rate regulations typically impose two requirements: 1) reasonableness and 2) fairness—that rates not be “unduly discriminatory” in the “difference in rates” charged to different customers. Under these restrictions, water utilities can only use ratepayer funds to replace private-side LSLRs if that is considered a reasonable use. Further, the use of rate funds to replace private-side lines must not be “unduly discriminatory” to customers who do not have LSLs or receive less of a rate subsidy for replacements under the program. The report also notes that statutes may require that municipal or government-owned utilities use rates only for “public purposes,” similar to the requirements of the public purpose exception to a constitutional gift clause discussed in Question 1.
Water utilities should check to see if other utilities have been able to use rates to fund private-side LSLRs or other private infrastructure upgrades. For example, the state may have approved rate funding for private-side replacements or found it in the public interest, like in the examples discussed in Question 1. Privately-owned utilities overseen by an economic regulator such as a public utility commission should make sure their state permits inclusion of private-side costs in rates. States like Indiana, Pennsylvania, and New Jersey actually require that investor-owned utilities use rate revenues for these purposes.
Beyond LSLRs, utilities may want to look at other utility projects where fairness and antidiscrimination requirements for rates also apply. For instance, utilities commonly use rate revenues for Advanced Metering Infrastructure projects and, at least in some states, these projects include replacing privately owned property adjacent to the new meter. Even if there is no precedent, there are strong arguments that rate funded private-side LSLRs are reasonable and not discriminatory. See the Harvard and EDF survey at 11.
Even if rate funding for private-side LSLRs is determined to be unreasonable or unduly discriminatory, water utilities could design LSLR programs to use other sources of funds for private replacements. For example, a Wisconsin statute limits utility financial assistance for private-side replacements to half the cost and requires offering equal assistance to customers. This law hasn’t, however, prevented municipalities from using state and federal funds (primarily grants and SRF principal forgiveness) to completely finance the private-side portion of costs for eligible projects. Since 2024, the LSLR program of Milwaukee, WI has used principal forgiveness from IIJA LSLR funds to finance 100% of the private-side costs for their planned replacements, eliminating the cost to property owners. In New York, Troy funded its LSLR program, including private-side replacements, with American Rescue Plan Act and other grant funds.
If your state lacks law clearly stating that utility funds can be used for private-side replacements, proceed to consideration 2. If your state law clearly allows this use of rate funds, proceed to Consideration 3.
Consideration 2: Are the water utility’s rates regulated by a state public utility or service commission?
Public utility or public service commissions generally review and approve the rates of privately-owned utilities for legal compliance before the rates can take effect. Most commissions do not regulate the rates of municipal- or government-owned utilities, which means their rates go into effect without state oversight and receive a presumption of legality from courts. This reduces the chances that their rate-funded private-side replacement program would be found noncompliant with state law.
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Public utility or public service commissions generally review and approve the rates of the water utilities that they regulate. This means the commissions determine if the rates meet reasonableness and anti-discrimination standards before the rates go into effect. For water utilities not subject to this regulation, rates can go into effect without state-level review. These rates often receive a favorable presumption from courts which may also flexibly interpret the legal standard, see the Harvard and EDF survey at 5 and 43. Since unregulated rates are less likely to be reviewed and likely to receive a favorable presumption, this could help water utilities implement rate-funded LSLR programs. For the most part, public utility or service commissions regulate the rates of privately-owned water utilities, but not government-owned water utility rates. For an overview, see this Michigan State University policy brief at 6–7. According to the EFC report at 167, government-owned utilities are regulated by commissions in only 7 of 52 jurisdictions, while privately-owned utilities are regulated in 46 of the 52.
Proceed to consideration 3.
Consideration 3: Be aware of other, less common state laws, utility rate regulations, and limitations on municipal provision of services.
State law may regulate other aspects of utility rates and municipal services, and these regulations may have implications for LSLR programs. Regulations may require that water utilities a rates based on the value of the utility-owned property and not privately-owned property, though states may recognize exceptions that would allow rate calculations to include private-side LSLs. Some states also restrict the municipal provision of services or work of municipal staff on private property. These laws are often intended to protect private industry, but these laws may recognize exceptions for LSLRs as activities that protect public health or allow municipal services to compete with private services under certain conditions.
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State law may impose other requirements for utility rates and municipal services. In some states, limitations on what property water utilities can base their rates on and restrictions on municipal work on private property competing with private service providers may have real or perceived impacts for private-side LSLRs.
Some states require rates to be based on the value of utility-owned property, which may be seen as a barrier to funding private-side LSLRs, since these LSLs are privately owned. Ohio and Texas both have these types of base rate limitations. However, courts in those states have upheld utility rate calculations that include the value of private property in certain circumstances. This precedent may allow water utilities to include private LSLs in their rate calculations, see the Harvard/EDF report at 11–12.
States may limit municipal work on private property when private industry already provides similar services, which may affect LSLR programs. Pennsylvania, for example, has a statute that protects private competitors from similar municipal services. The statute generally prohibits water authorities from undertaking projects that duplicate or compete with existing enterprises, even if the municipal services are superior to the private services. However, Pennsylvania passed a law that expressly allows water utilities to employ municipal employees (and public funds) to perform private-side replacements when the replacement benefits public health or the public water system.
If state law restricts municipal work on private property, water utilities should look out for other laws that, like Pennsylvania’s, expressly allow such work for LSLR programs or for public health purposes. Water utilities should also examine the conditions under which they can provide these services. For example, can they perform the replacement if they: offer a better price? or allow customers to select their own contractor? Can utilities still fund private-side LSLRs even if they cannot complete all the work themselves?
Resources for further research
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State constitution gift clauses - Shopping for State Constitutions: Unequal Gift Clauses as Shopping for State Constitutions: Unequal Gift Clauses as Obstacles to Optimal State Encouragement of Carbon Obstacles to Optimal State Encouragement of Carbon Sequestration by Nicholas Houpt provides an overview of gift clauses: their background, which state constitutions have them, and how the clauses and their exceptions are interpreted.
The summary table of state constitutional gift clauses on page 47 is a starting point for research. Note that this article is from 2011, so it may not be up to date.
For a discussion of judicial deference to legislative determinations, see page 22.
State law on utility rates - A 2021 Environmental Finance Center (EFC) report gives an overview of statutory limitations on utility rate fees for all states in the context of water utility customer rate assistance programs. Michigan State University published Potential for Economic Regulation of Michigan’s Water Sector, a policy brief which provides a nationwide summary of public utility or service commission regulation of utility rates for both publicly- and privately-owned utilities.
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Private-side replacements, gift clauses, and state statutes - This 2019 Harvard and Environmental Defense Fund report provides both a high-level summary and deep dives into constitutional and statutory restrictions on LSLR programs across 13 states with large numbers of LSLs. It also highlights six states that have expressly approved some level of rate-based funding. See the summary table on page IV for an overview of the report’s findings for Illinois, Ohio, Michigan, New York, New Jersey, Missouri, Indiana, Texas, Minnesota, Wisconsin, Massachusetts, Florida, and Pennsylvania. A related EDF whitepaper focuses more specifically on rate-based funding.
Indiana - statute allows rates to include the cost of private-side replacements for investor-owned utilities and municipally-owned utilities.
Michigan - court decision finding that private-side LSL replacements serve a permissible public purpose under the constitutional gift clause, upholding an agency rule requiring utilities to replace private-side LSLs at the utility’s expense, and upholding the use of rate revenues to fund such replacements.
New Jersey - statute declaring that water utilities should replace all LSLs, including the portions on private property, and that replacement is in the public interest for public health reasons. New Jersey allows government-owned utilities to spread the cost of replacing LSLs across all customers and requires investor-owned utilities to spread the cost across all customers, recovering costs through rates or in another commission approved manner. The statutory definition of “service line” includes the property-owner side of the line.
New York - Comptroller advisory opinion reviewed bond-funded LSLR programs and found them likely constitutional under the state’s gift clause, but would not address the constitutionality of rate-funded programs. SUNY Rockefeller Institute of Government, Leading on Lead, 2023 provides an in-depth review of NY’s constitutional limitations, including key cases, and reviews recent NY legislation that establishes funding for LSLRs.
NY’s constitutional gift clause: for a discussion of judicial deference to state and local legislative determinations, see the New York Comptroller’s opinion at 11 and this New York case at 313. The Comptroller’s opinion also suggests that the use of grant funds means the gift clause would not apply at 7.
Troy, NY’s LSLR program provides free private-side replacements during planned improvements. The Comptroller’s opinion states this program is funded by “ARPA funds and other grants” at 3.
Pennsylvania - statutes allow both investor-owned and municipally-owned utilities to use rates for private-side replacements. The law also allows municipal employees to replace private-side LSLs. This statute expanded municipal authority after an earlier court decision held that these water utilities could not perform service line work on private property when private businesses existed for that purpose.
Wisconsin - statute allowing utilities to provide financial assistance to customers for up to 50% of private-side replacement costs. In addition to, or instead of, providing financial assistance to customers, municipalities can use grants and principal forgiveness to cover the private costs of projects, like Milwaukee’s LSLR program, which covers 100% of the private-side cost using principal forgiveness from IIJA LSLR funds.
