June 14, 2017 (Philadelphia, PA) - On June 14, 2017, the Pennsylvania Public Utility Commission approved, in a four-to-one vote, Aqua Pennsylvania Wastewater, Inc.’s application to acquire the wastewater system of New Garden Township and its Sewer Authority, and to begin providing wastewater service to the residents of New Garden and Kennett Townships in Chester County. The transaction is the first to be approved using the fair market valuation approach established by the Pennsylvania State Legislature and Governor Tom Wolf with Act 12 of 2016 (Act of Apr. 14, 2016, P.L. 76, No. 12, 66 Pa. C.S. § 1329).
Act 12 is changing the landscape for municipal sales of water and wastewater systems to PUC-regulated public utility companies. The new law allows the parties to the transaction to opt in to a new method of valuation, which takes the value of the system for ratemaking purposes as either the lower of the average of two independent fair market value appraisals—one obtained by the utility buyer and one by the municipal seller—or by the negotiated purchase price. Prior to Act 12, system value for ratemaking was based on depreciated original cost, which would likely always result in a lower sale price than fair market value. In addition, the new law requires the PUC to act within six months of the acceptance of the application.
Act 12 became effective mid-June 2016, and the PUC issued its final implementation order in October 2016. The New Garden transaction was the first Act 12 application, submitted for approval in December 2016. Aqua, New Garden, and the Authority agreed to a negotiated purchase price of $29,500,000, which turned out to be less than the average of the two appraisals commissioned by Aqua and New Garden. The valuation for ratemaking purposes was therefore set at $29,500,000.
A protest to Aqua’s application for PUC approval pursuant to Act 12 in the New Garden transaction was filed by the Bureau of Investigation and Enforcement, which sought a review of both of the fair market appraisals used, additional information about the proposed rate freeze agreed to by the parties, and a determination of whether the transaction was in the public interest under Section 1102 of the Public Utility Code.
An additional protest was filed by the Office of Consumer Advocates requesting further information to determine whether supplementary conditions should be imposed on the transaction to ensure that Aqua’s existing customers are treated in a fair and just manner; how the transaction will substantially and affirmatively benefit Aqua’s existing customers; and whether the agreement sufficiently provides for safe, adequate, and reasonable service at just and reasonable rates.
An evidentiary hearing was held before an administrative law judge on February 16, 2017. After the hearing, the judge recommended the denial of Aqua’s application, concluding that Aqua had failed to demonstrate by a preponderance of the evidence that the acquisition was in the public interest because it failed to demonstrate that the transaction will result in affirmative public benefits to its existing customers. The judge also concluded that Aqua had failed to support its rate stabilization plan with evidence to show its basis and impact. The judge did conclude that Aqua had demonstrated it was technically, legally, and financially fit to provide the proposed utility service, and that its proposed rate base value of $29,500,000 was reasonable.
Exceptions to the judge’s Recommended Decision were filed by the Bureau of Investigation and Enforcement, the Office of Consumer Advocates, New Garden Township, the New Garden Township Sewer Authority that had been permitted to intervene, and Aqua.
Aqua, New Garden, and the Authority argued that the judge was not following the requirements of the Act 12 process, undermining the PUC’s long-standing stated goals—under its Final Policy Statement on Acquisitions of Water and Wastewater Systems—of encouraging investor-owned utilities to acquire utility systems and achieving the public benefits of regionalization and consolidation. In emphasizing the PUC’s policy of encouraging regionalization, Aqua also cited its capability to relieve distressed or otherwise cash-strapped municipalities from the burden of financing needed capital improvements to aging sewer and water systems. New Garden noted that the PUC would retain the ability to regulate rates to protect the interests of Aqua’s existing customers at the time of the next general rate case.
In the final four-to-one decision, the PUC departed from the judge’s Recommended Decisions and approved Aqua’s application, clearing the way for the completion of the first transfer of a wastewater system under Act 12. In his remarks while moving for the approval of the New Garden sale, PUC Commissioner Robert Powelson noted the PUC's continuing focus on the potential rate impact of fair market value transactions, while also noting that those issues will be appropriately addressed in Aqua's next general rate case.
At least two other Act 12 applications have been submitted to the PUC, and several other municipalities are considering a transaction. If a municipality is interested in considering a sale of their water and/or wastewater system, the first step is to determine the value of the system with the assistance of an experienced financial advisor, and examine the status of its contracts and assets, including all property, real estate, easements, and rights-of-way owned and/or used by the system.
While Act 12 has made the purchase of wastewater and water systems by investor-owned public utilities more attractive, municipal authorities are also quite active in the marketplace. Noting the recently signed deal for the purchase by the Borough of Conshohocken Authority of the Borough of West Conshohocken’s sewer system, and the recently closed transaction with Bucks County Water and Sewer Authority purchasing the sanitary sewer system of Township of Springfield, Montgomery County, Dilworth Paxson attorney Thomas Wyatt stated, “As the capital costs and regulatory requirements of providing safe and reliable water and wastewater service continue to increase, Act 12 provides a valuable new tool for municipalities wishing to monetize those assets and redeploy the proceeds to other long-lived assets or to bolster core government functions.” Dilworth Paxson serves as special counsel to the selling municipality in each of those transactions.