How a recent court ruling could put the brakes on water and sewer privatization in Pa.

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HARRISBURG — A Pennsylvania court recently found a state commission should not have approved the sale of a municipal sewer system to a private company because the deal would harm consumers, a ruling that has the potential to raise the bar for such acquisitions.

The decision challenges six years of precedent in favor of water consolidation that critics contend has led to customers overpaying tens of millions of dollars on their bills.

The Public Utility Commission, which approved the deal, said it was still reviewing the ruling. But privatization skeptics say that if the ruling stands it will force the panel to more closely scrutinize proposals.

“I think this case represents a significant win for consumers in Pennsylvania,” said Patrick Cicero, the state’s appointed consumer advocate who filed the challenge, “because it provides a roadmap that is unequivocally clear that the Public Utility Commission has to do a fact-based scrutiny of these cases.”

In the July 31 ruling, a three-judge Commonwealth Court panel found the Public Utility Commission erred in allowing Bryn Mawr-based Aqua Pennsylvania to buy a municipal sewer system without showing how the sale would benefit the public.

The judges found that the potential doubling of nearly 3,900 customers’ bills in a suburban Philadelphia township outweighed the possible benefits from digital billing, a 24/7 hotline, and almost $17 million in planned investment for the system.

The Public Utility Commission is a five-member board appointed by the governor and confirmed by the state Senate that regulates and approves rates for hundreds of companies that provide electricity, water, gas, and telephone services, among others, to millions of Pennsylvanians.

The commission has allowed private water companies, including Aqua, to buy 20 local water and sewer systems since 2016, according to the Pennsylvania Office of Consumer Advocate. These acquisitions have led to $68 million in additional annual charges on customers’ water bills, the office said.

The ruling is a “shot over the bow” for the commission, said Andrew Place, a former utility commissioner who served from 2015 to 2020 and frequently dissented from the commissions’ decisions to approve previous acquisitions under similar circumstances.

“This wasn’t nuanced or a close call,” he told Spotlight PA. “This was, ‘You guys didn’t get this right, period.”

‘The known harms’

In a July 2022 order, the PUC gave the go-ahead for Aqua, a private-owned wastewater company that already serves 43,000 customers in southeastern Pennsylvania, to acquire the sewer system of East Whiteland Township, a Chester County municipality of about 12,000 people, for just under $55 million.

Aqua itself is a subsidiary of Essential Utilities, which provides gas and water services to customers in eight states.

The order was made over the objections of an administrative law judge employed by the commission to draft suggested rulings. The judge noted Aqua’s estimate of a potential increase from $33 to $78 per month for East Whiteland customers after a three-year rate freeze, the township’s ability to cover future upgrades, and that the current service was “safe and reliable.”

The commission unanimously approved the sale anyway, arguing that the township “determined that it is in the best interest of its constituents to stop providing wastewater service” and that Aqua “has a history of infrastructure improvements … which represents a substantial benefit weighing in favor of the transaction.”

The commission also cited Aqua’s customer service and the company’s ownership of the township’s water system, which could create economies of scale within East Whitefield.

But Commonwealth Court judges rejected all of this, concluding in a 23-page opinion that “the aspirational statements of Aqua and its technical, financial, and operational assistance are not substantial enough to outweigh the known harms of this proposed transaction.”

It’s not clear what will happen next.

East Whiteland transferred ownership of the sewer system to Aqua in August 2022, and Aqua has since invested $1.1 million in emergency generators, safety equipment, and repairs for the system.

In a statement Thursday, an Aqua spokesperson said that the company, the township, and the commission plan “to request a rehearing of the Commonwealth Court’s decision.”

The East Whiteland Township Board of Supervisors added in its own statement that it is disappointed with the ruling.

If the decision isn’t reversed, the supervisors said multiple local initiatives, including a new police station and road improvements, would be shelved and that sewer rates would increase.

“The Commonwealth granted townships the authority to make these decisions in part based upon their understanding of local needs and priorities,” the board said. “In the event the reversal remains permanent, this Board will not be able to move forward with its plans and vision for the Township.”

The impact of Act 12

Act 12, signed by then-Gov. Tom Wolf in 2016, allows utilities to bake the costs of acquiring new systems into their rate increase requests for all customers. The law also created new rules for pricing water systems.

In approving the recent water system sales, the PUC has pointed to the law to justify its policy of supporting the consolidation of municipal authorities under investor-owned public utilities.

Such acquisitions, the commission argued in the East Whiteland order, “can facilitate necessary infrastructure improvements and ensure the continued provision of safe, reliable service to customers at reasonable rates.”

The companies and their trade organization, the Philadelphia-based National Association of Water Companies, have made similar arguments for their acquisitions, saying they can provide cheaper and more effective services with access to more professional help. They also argue they can take a costly liability off the hands of local governments for a big check.

But skeptics counter that the big sale price amounts to a get-rich-quick scheme for local governments while enriching shareholders.

The law incentivizes both the municipal seller and the utility buyer to increase the sale price, the previous consumer advocate argued in 2021 legislative testimony. The former receives a bigger payment to use on local projects while the latter can pass on the cost of the purchase to their ratepayers through higher monthly bills.

And while some troubled systems with aging, leaky pipes may need the close attention of a private company, selling an effective one like East Whiteland’s avoids a more politically unpopular option like a tax increase or increasing debt.

“It’s a shell game where these funds come from,” Place said. “Instead of taxpayers paying for the police station or a library and whatever else, [local governments are] really borrowing the money from the utility, who then is going to recoup that” through increasing rates over time.

But the return comes only after utilities spend hundreds of millions on repairs to make the new systems more effective, argued Robert Powelson, president of the National Association of Water Companies and a former PUC board chair, in a 2022 op-ed.

“In reality, years of neglect and underinvestment combined with increasing environmental and safety regulations are prompting local governments to want to exit the water and wastewater business,” Powelson wrote.

The industry group estimates that private companies spend $800 million on repairs each year to keep their systems in compliance with state and federal law.

This trade-off shows up in research. Privately owned water systems may be less vulnerable to water quality violations than publicly owned systems, according to a 2018 UC Irvine and Columbia University study. A 2022 study from Cornell University also suggested that utility rates are higher, with a disproportionate impact on poorer residents.

Cicero wants the General Assembly to repeal Act 12, or at a minimum add more guardrails, such as requiring municipal voters to approve a utility sale through a referendum.

But if the law remains, Cicero said he hopes the ruling “disciplines sellers and buyers” to provide tangible, not speculative, benefits from privatization. He also hoped it would reduce the sale prices, which drive higher water rates for customers.

“Ultimately, I do believe that there should be legislative reform … and I would hope to continue to work on that,” Cicero said. “But given the way the law stands now, this is a very helpful case.”

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