On October 11, 2018, the Commonwealth Court of Pennsylvania (“Court”) vacated the Pennsylvania Public Utility Commission (“PUC”) Order approving the acquisition of the wastewater system assets of New Garden Township and New Garden Sewer Authority (collectively “New Garden”) by Aqua Pennsylvania Wastewater, Inc. (“Aqua”).[1]  Aqua’s Application sought PUC approval of the acquisition, a Certificate of Public Convenience to furnish wastewater service to customers in and around the service territory of New Garden, and, approval of a rate base predicated on the acquisition price, rate commitments and transaction costs.[2]

The Court remanded the case to the PUC to ensure all affected ratepayers (i.e., New Garden customers, as well as all Aqua customers) receive proper notice of the proposed acquisition, and to adduce additional evidence as to the full impact on rates for all Aqua customers of the Acquisition, and the other rate restrictions set forth in the Asset Purchase Agreement (“APA”).[3]  (i.e., the APA contains a two-year “rate freeze” in which New Garden customers would experience no rate increase, as well as a limitation that New Garden customers would have a ten-year cap limiting rate increases to no more than a compounded 4% per year, in addition to an Aqua commitment to fund $2.5M of capital improvements in the New Garden service territory).[4]

By way of background, in 2016, Pennsylvania Governor Tom Wolf signed Act 12 of 2016 (Act 12) into law, establishing a methodology for valuing water and wastewater systems owned by Municipal Authorities or Municipal Corporations to be acquired by a Public Utility.  Act 12 is codified in Chapter 13 of the Public Utility Code, 66 Pa. C. S. § 1329 et al.[5]  As the Court noted in the instant case, “[i]n sum, Section 1329 allows a utility to cover the full costs of its investment in purchasing the new system from ratepayers.”[6]

This law furthers the 2006 Pennsylvania Public Utility Commission Policy Statement (set forth at 52 Pa. Code §69.721) regarding water and wastewater system acquisitions where:

“…The Commission believes that further consolidation of water and wastewater systems within this Commonwealth may, with appropriate management, result in greater environmental and economic benefits to customers. The regionalization of water and wastewater systems through mergers and acquisitions will allow the water industry to institute better management practices and achieve greater economies of scale….”[7]

Under the terms of the APA intended to satisfy the requirements of Act 12, Aqua would pay New Garden $29.5M for the assets, which is almost 3x the systems’ fully depreciated original cost of $10.9M.[8]  Yet, the average of two Fair Market Value (“FMV”) appraisals required by Section 1329 was $32.1M.[9]  As Section 1329 requires use of the lesser of the purchase price or the average of the FMV appraisals, Aqua relied on the $29.5 million valuation.[10]

In hearings before a PUC Administrative Law Judge (“ALJ”), Aqua entered substantial evidence that acquisition will have no adverse effects on service provided to existing customers.  The Court noted “Aqua, however, provided no evidence regarding the effect on rates by increases on the rate base or the rate impact of the rate freeze provision or Compound Annual Growth Rate (“CAGR”) limitation to New Garden on existing ratepayers.”[11]

In addition, the Office of the Consumer Advocate (“OCA”) and the PUC’s Bureau of Investigation and Enforcement (“I&E”) both filed protests at this Docket and vigorously challenged Aqua’s Application and claims as to the rate impact on all Aqua customers.[12]  OCA challenged the $29.5M prospective rate base impact on all Aqua customers, as well as the additional embedded impact of a two-year rate freeze and ten-year rate cap for New Garden customers.[13]  In short, OCA argued the cost of acquiring New Garden to all Aqua customers would far exceed any net benefit gleaned from addition of New Garden customers.[14]

The ALJ, while finding the $29.5M APA was reasonable, nonetheless denied the request for a Certificate of Public Convenience (“Certificate”) on the basis that Aqua failed to show “… that all affected parties, including its existing customers, will realize any affirmative public benefits…” and Aqua’s existing ratepayers will have “to bear a disproportionate share of revenue requirements in future base rate cases….”[15]

The PUC later reversed the ALJ’s Recommended Decision and approved the $29.5M ratemaking rate base and directed that a Certificate be issued to Aqua to provide service in New Garden’s former service territory.[16]  The PUC disagreed with the ALJ and found Aqua proved the acquisition would affirmatively benefit the public, and that consolidation of Pennsylvania’s water and wastewater industry would advance significant economic and environmental benefits to all citizens and end users.[17]  However, the PUC did attach conditions for approval, including the filing of a Cost of Service Study in Aqua’s next rate case that separates costs, capital and operating expenses of providing wastewater service to New Garden customers as a stand-alone rate group.[18]  The PUC perceived this cost data, provided at a future time, would adduce an overall rate impact on all Aqua customers.[19]

The Commonwealth Court, while agreeing with PUC acceptance of “aspirational” statements as evidence of acquisition public benefits, disputed the PUC plan of reliance on a prospective Cost of Service Study to assess rate impact on all customers.[20]  Specifically, Section 1102 of the Code requires a balancing test to weigh all factors, including impact on rates, to determine if a public benefits exists as a result of this transaction.[21] The Court held this PUC determination must be made in the instant Application, and not in a prospective rate case.[22]  Accordingly, the Court directed the PUC to make a full determination and disposition of all issues, most especially rate impact issues at this Docket.[23]

As such, the Court remanded this matter to the PUC for, after actual notice to all affected ratepayers, a full explication of rate impact on all Aqua customers, as well as a more detailed explanation of all corresponding affirmative net benefits.[24]

It will be interesting to observe how participation of other interested parties impacts the analysis required under the law.  In any event, the proceedings before the PUC should provide additional guidance as to what evidence will be appropriate in terms of acquisition impact on existing customers.

[1] McCloskey v. Pa. PUC, 2018 Pa. Commw. LEXIS 559 (Cmwlth, Oct. 11, 2018) (“Court Order”).

[2] Application of Aqua Pennsylvania Wastewater, Inc. pursuant to Sections 1102 and 1329 of the Public Utility Code for Approval of its Acquisition of the Wastewater System Assets of New Garden Township and the New Garden Sewer Authority, Docket No. A-2016-2580061 (Dec. 15, 2016).

[3] Court Order at *27-*33.

[4] Opinion and Order, Application of Aqua Pennsylvania Wastewater, Inc. pursuant to Sections 1102 and 1329 of the Public Utility Code for Approval of its Acquisition of the Wastewater System Assets of New Garden Township and the New Garden Sewer Authority at 16-17, 27-28, Docket No. A-2016-2580061 (June 29, 2017) (“PUC Order”).

[5] 66 Pa.C.S. § 1329.

[6] Court Order at *3.

[7] 52 Pa. Code § 69.721.

[8] Court Order at *5.

[9] Id. at n.7.

[10] 66 Pa.C.S. § 13296(c)(2).

[11] Court Order at *8.

[12] Id. at *6.

[13] Id. at *6-*10.

[14] Id. at *9-*10.

[15] Application of Aqua Pennsylvania Wastewater, Inc. pursuant to Sections 1102 and 1329 of the Public Utility Code for Approval of its Acquisition of the Wastewater System Assets of New Garden Township and the New Garden Sewer Authority, Docket No. A-2016-2580061, Recommended Decision at 43-44 (Apr. 21, 2017).

[16] PUC Order at 72-73.

[17] Id. at 67-68.

[18] Id. at 73-74.

[19] Court Order at *14-*15.

[20] Id. at *23-*27.

[21] Id. at *27.

[22] Id.

[23] Id.

[24] Id. at *25-*33.

We periodically report on matters that impact the costs large volume commercial, industrial and institutional customers pay for water/wastewater/stormwater service.  Below is information pertaining to a York Water Company matter before the Pennsylvania Public Utility Commission (“PUC” or “Commission”).

At the March 2, 2017, Public Meeting, the PUC voted to approve York Water Company’s (“York Water” or “Company”) plan for immediate replacement of both company and customer-owned lead service lines.  This permits York Water to replace customer-owned lead lines at its initial expense, and then recover the costs as a regulatory asset in the Company’s next rate case.

York Water’s most recent drinking water results exceeded the lead action level established by Pennsylvania regulations.  As a consequence, the Company became subject to a Consent Order with PaDEP that required specific action to reduce lead levels at customer taps.  Pursuant to the Consent Order, York Water proposed a two-phase plan to replace both company and customer-owned lead service lines.

The Commission granted the Company’s two-phase plan, permitting York Water to bear the costs of replacing customer-owned lead services lines, and to begin line replacement work immediately, consistent with the Consent Order.

Phase I involves replacement of customer-owned lead service lines discovered concurrently with York Water’s planned replacement of approximately 1,660 lead company-owned service lines in certain portions of the water system.  The estimated cost of replacing company-owned lead service lines is $2 million.  After replacement, the customer will continue to own the service line and be responsible for maintenance and repair.

Phase II involves annual replacement of 400 lead customer-owned service lines whenever they are discovered, over a period of nine years.  Under this phase, York Water would offer payment towards the replacement cost of the customer-owned lead service line.  As with Phase I, the customer will continue to be responsible for maintaining and repairing the service line after replacement.  In the event the number of Phase II replacements exceed those authorized, York Water must process them on a first-come, first-served basis.  However, if a water test exceeds 15 pbb of lead, then the Company may prioritize such replacement.

As to cost, York Water must make a payment towards the replacement cost of the lead customer-owned service line up to the Company’s average contracted cost.  For 2017, the average contracted cost is $1,150/service line replacement <10 feet and $1,250/service line replacement >10 feet.  Customers must pay any difference as a lump sum, or as an amount added to their bill, to be paid within one year.  The Company agrees not to charge interest on any payment period for the difference, other than late payment interest.  If the Company is unable to collect the difference from a customer, and the difference is written off as uncollectible, York Water will be permitted to include  uncollected amounts in the regulatory asset account.

The Company will offer a sliding-scale reimbursement to customers that have already replaced lead service lines within the past four years.  As such, a customer who replaced a line within one year may recoup 80% of the cost of replacement from the Company.  As the replacement grows older, reimbursement is less.

York Water must amortize amounts booked to the regulatory asset account in a base rate proceeding over a reasonable period (<6 years).  Amortization will begin on the effective date of new rates in a base rate proceeding.  York Water will reconcile amounts amortized to amounts incurred, and the difference must continue to be amortized in subsequent base rate proceedings.  The allocation among customer classes of the recovery of amortized costs will be determined in a base rate proceeding.

In closing remarks, Commissioner Powelson stated: “The importance of ensuring safe drinking water for all Pennsylvanians cannot be overstated.  However, in this post-Flint, Michigan world, it is not something we can take for granted.  I commend York Water for recognizing this, for taking the issue seriously, and for acting quickly to resolve it.  I encourage other utilities to do the same….”

However, it appears the PUC actions have not (yet) addressed the cost consequences on all ratepayers for lead-line replacement.  No legitimate reason exists for this cost to be passed on to large commercial or industrial customers; why this unvarnished fact was not now determined by this Commission is unclear, but suggests some contemplate these costs to be recovered volumetrically (as in the DSIC or CSIC) in which large commercial and industrial customers will shoulder most of the cost responsibility.

At McNees, Wallace, and Nurick, LLC, we often write of current or emerging issues that may have significant cost implications for large commercial, industrial and institutional end users in Pennsylvania.  We also closely monitor newly proposed legislation or regulation that may affect service rates, terms and use conditions.

For example, in 2016, we closely tracked HB 2114 introduced by Representative Mike Sturla (D-Lancaster).  It was captioned as follows: “Providing for registration of extraordinary nonagriculture and nonmunicipal water users; imposing a water resource fee; establishing the Water Use Fund; and providing for submission of a question to the electorate authorizing incurring of indebtedness for water-related environmental initiatives.”

This Bill defines “extraordinary water user” as “a person that withdraws more than 10,000 gallons of water a day from the waters of this Commonwealth for the purpose of for-profit business.”  In addition to a rather rigorous filing requirement, this Bill proposed a fee of $0.001 per gallon for water consumption greater than 10,000 gallons/day.”  In other words, this proposed legislation seeks to foist an additional $110,000/year on a large commercial/industrial customer using 10,000,000 gallons/month.  No mention is made in the Bill that some large volumes users (within the Susquehanna River Basin) have been paying a similar fee for some time. (See our earlier Blog articles regarding this issue.)

In 2016, this bill stalled in Committee; as such, by the end of the session, we believed the matter had been put downWe learned recently that plans exist for this same bill to be re-introduced later in 2017.  This is an important issue for large volume commercial and industrial users all of whom likely use far more than 10,000 gallons/day.

Recently, we learned that this bill is slated to be introduced in the second quarter of 2017 and may also include additional cost factors to be introduced in the upcoming Chesapeake Bay Commission meeting.  That meeting is currently slated for March 4 and 5, 2017, in Washington, DC.  Bill proponents are hoping to incorporate additional initiatives into what will be more expansive and far-reaching legislation.

This is yet one more example of the significantly increasing prices paid for provision of water and wastewater services, as they pertain to industrial, large commercial and institutional end-users.  This trend is likely, absent more vocal opposition from all affected end users, to continue in 2017 and beyond.

The Pennsylvania Statewide Water Users group is organizing an initiative to raise the awareness of lawmakers as to the potential impact of such legislation, and to coalesce if necessary, a group of impacted large volume users to provide testimony in opposition to such a significant cost increase.  If you would like more information, or if you have questions, please contact Jim Dougherty at 717.237.5249 or jdougherty@mcneeslaw.com.

A recent decision by the Pennsylvania Public Utility Commission (“PUC” or “Commission”) confirms that Pennsylvania public utilities with combined sewer systems (i.e., systems that collect both sewage and stormwater) may incorporate stormwater charges in their service charges.  While some public utilities have already been incorporating stormwater collection charges in their sewage rates, not all utilities have carried forth this practice.  As a result, this decision could increase sewage rates for some large commercial and industrial customers experiencing significant stormwater flows.

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On March 30, 2016, the Pennsylvania American Water Company (“PAWC”) and the Sewer Authority of the City of Scranton (“SSA”) filed an Application with the PUC to permit PAWC to purchase the SSA’s combined sewer system.  As indicated above, combined sewer systems collect sewage and stormwater, so the PUC’s disposition of this Application would clarify the ability of a Pennsylvania public utility to include stormwater charges in its wastewater service rates.  Although Administrative Law Judges David A. Salapa and Steven K. Haas recommended that the PUC reject the proposed Application, the PUC approved it on October 19, 2016.

As a result of the PUC’s approval, statutory enabling legislation was required.  Senate Bill No. 881 was revived and amended to make necessary changes to the Public Utility Code.  Specifically, the Bill amends the Public Utility Code to change the reference of “sewer” to “wastewater,” and expanded the definition of wastewater to include certain “stormwater.”  This bill passed both chambers [October 26 (Senate) and October 27 (House)] and was signed by Governor Wolf.

The Bill provides as follows:

Wastewater.  Any used water and water-carried solids collected or conveyed by a sewer, including:

(1)  Sewage, as defined in Section 2 of the act of January 24, 1966 (1965 P.L. 1535, No. 537), known as the Pennsylvania Sewage Facilities Act.

(2)  Industrial waste originating from an establishment.  For the purposes of this paragraph, the terms “industrial waste” and “establishment” shall be as defined in Section 1 of the Act of June 22, 1937 (P.L. 1987, No. 394), known as the Clean Streams Law.

(3)   Infiltration or inflow into sewers.

(4)   Other water containing solids or pollutants.

(5)  Storm water which is or will become mixed with waters described under paragraph (1), (2), (3) or (4) within a combined sewer system.

The term does not include storm water collected in a Municipal Separate Storm Sewer, as that term is defined by 40 CFR 122.26(b)(8) (Relating to storm water discharges (applicable to state NPDES programs, see § 123.25)), that does not flow into a combined sewer system.

This legislation, now codified as PA Act 154, allows Pennsylvania utilities providing wastewater service to include, in certain cases (i.e., combined sewer systems), stormwater charges into rates.  While some Pennsylvania municipal wastewater service providers (e.g., Philadelphia Water Department) have been including stormwater charges in wastewater rates for some time, it will be much more commonplace with PUC-regulated service providers with this new legislation.