Update, 10:15 p.m., May 24:

The City of Falls Church has decided to suspend Friday’s planned auction of its water utility after the federal agency that supplies the city with water determined that it could not sell water to an investor-owned utility, the city manager said late Thursday.

The city had planned to open sealed bids to begin an auction for any qualified utility interested in purchasing its water utility for at least $44 million. But its plans were dashed by a ruling from the U.S. Army Corps of Engineers’ legal counsel that the Washington Aqueduct can only provide water from the Potomac River to governmental agencies.

“It’s unfortunate the Army has reversed itself,” Falls Church City Manager Wyatt Shields said late Thursday. He said the city had proceeded with the sale on the basis of a March 8 memorandum from the Corps that suggested the Washington Aqueduct could serve a governmental or an investor-owned water utility. “In light of that, the city will suspend until further notice the bid opening and auction scheduled for May 25. It’s disappointing. That’s all I can say right now.”

The decision to sell off the utility came after Fairfax County’s Board of Supervisors voted last year to assume authority for setting all water rates for county residents, including those who received their water from municipal utilities in Falls Church, the City of Fairfax or Vienna.

Update, 3:55 p.m., May 24: Less than a day before the City of Falls Church prepared to open sealed bids for the possible purchase of its water system, Fairfax County officials said Thursday that the federal agency that supplies the city’s water has issued a definitive legal opinion saying that it can sell water only to another governmental agency, not a privately owned utility.

Until Thursday,  the City of Falls Church said it was proceeding with the sale of its water system for at least $44 million to all comers, based on a memorandum from the U.S. Army Corps of Engineers that said the agency would continue supplying water from the Potomac River to any qualified purchaser, including an investor-owned utility or another governmental entity. But Fairfax County officials, armed with a contradictory opinion from Earl Stockdale, who is the corps’ chief legal counsel, warned that the city could end up selling nothing but a bunch of pipes to a private company. On Thursday,  it appeared that the Fairfax County view of federal law had prevailed, according to an e-mail they received from the Pentagon. 

“Following separate briefings yesterday from counsel for the City of Falls Church and counsel for the Fairfax County Water Authority, the Army General County Counsel has elected to let stand Mr. Stockdale’s May 17, 2012, legal opinion regarding the authority to deliver water from the Washington Aqueduct to Falls Church,” writes Craig R. M, deputy general counsel for the corps’ Installations, Environment & Civil Works.

It’s not clear what bearing the new legal ruling will have on the proposed sale.   

Original post: With the City of Falls Church just days away from opening sealed bids submitted by potential buyers of its embattled water utility, a recently issued legal opinion by the federal agency that supplies the city’s water cast doubt on its ability to conclude a deal with private entities.

The chief counsel for the U.S. Army Corps of Engineers — whose Washington Aqueduct provides Falls Church with water from the Potomac River — has rendered an opinion saying the agency can only sell its water to another governmental entity, Fairfax County officials say.

Fairfax County Chairwoman Sharon Bulova (D) (Michael S. Williamson/The Washington Post)

Earl Stockdale, the corps’ chief counsel, advised Fairfax County officials that after reviewing a 1947 federal statute, he concluded that Congress gave authority to the corps to deliver water from the Washington Aqueduct “only to governmental entities,” the e-mail states. He said his May 17 opinion is also consistent with a 1963 opinion issued by the corps.

The finding — which would appear to limit the city to selling empty pipes — took Falls Church city officials by surprise. Last month, the city opened the bidding to all comers for a system valued at $44 million or more.

“The Washington Aqueduct has publicly stated that the legal staff for the headquarters of the U.S. Army Corps of Engineers reviewed this issue and concluded recently that federal law permits the Washington Aqueduct to sell water to an investor-owned utility or to a government-owned utility under the circumstances anticipated in the city’s agreement of sale,” Falls Church City Manager Wyatt Shields said Monday afternoon in a prepared statement. “It is our understanding that the Army Corp of Engineers and possibly the Department of the Army are giving further consideration to this issue, but no new opinion has been issued.”

Stockdale’s legal opinion was communicated in an e-mail circulating among Fairfax County officials and a letter on Monday to the City of Falls Church from Fairfax County Chairman Sharon S. Bulova (D).

A call to the Corps’ headquarters seeking comment was not immediately returned.

Word of the legal opinion also comes after a City of Falls Church Vice Mayor David F. Snyder accused Fairfax Water of negotiating in bad faith for a possible merger and urged Bulova to step in.

For years, Falls Church and surrounding Fairfax County have been at odds over drinking water, largely over the city’s treatment of county customers located outside its borders who receive water from the city’s system. In years past, Falls Church billed customers above cost and transferred the surplus revenue to its general fund. From 1981 to 2008, Falls Church sent more than $58 million in surplus revenue to its coffers — a practice that city officials say is common among municipal utilities. A court put a stop to the arrangement in January 2010, however, after ruling that the city was effectively imposing an unconstitutional tax.

Last year, after Falls Church sought to boost its water rates by 30 percent over the next five years, Fairfax County’s Board of Supervisors voted to assume authority for water rates of all county residents, including those who receive their water from the City of Falls Church or other municipal systems. In amending its water ordinance, the county also claimed the right to establish exclusive service areas for Fairfax Water, the county-controlled utility that supplies most water in the county. Earlier this year, after Falls Church’s city council announced its intent to possibly sell its water system, Fairfax Water approached the city about working out a merger.

Bulova, in a letter to Snyder dated May 21, was critical of the city’s effort to sell off its utility to the highest bidder. She warned that a privately owned utility might charge higher rates to recover its purchase cost, pay taxes that governmental entities do not have to pay, and earn a profit. She also argued that selling the city’s water system to an investor-owned utility would run counter to the corps’ opinion and state law.

She also rebutted an allegation reportedly made by Shields that Fairfax Water failed to offer financial compensation to the city in a possible merger. Bulova said the city never responded to Fairfax Water’s merger proposal, “pushing ahead instead with a plan to sell the City’s water system to the highest bidder.”

This post has been updated since it wads first published.