Utility-Specific Developments

On November 8, 2017, Aqua Pennsylvania (“Aqua”) filed a Complaint in the Pennsylvania Court of Common Pleas of Bucks County against the Bucks County Water and Sewer Authority (“BCWSA” or “Authority”), docketed at Case #2017-07215.  Joining Aqua as co-Plaintiff is J. Kevan Busik, a customer and ratepayer of BCWSA.

The Aqua Complaint alleges BCWSA (and ostensibly, all PA Municipal Authorities) has a significant competitive advantage for acquisition of water/sewer systems and seeks redress.  Specifically, the Complaint cites unfair competitive advantage of BCWSA (and other PA Municipal Authorities) in light of its exemption from property taxation, ability to raise capital via the issuance of tax-free bonds, and freedom from the substantial expense associated with regulation.  In addition, it notes that because no regulatory body has oversight of BCWSA to limit its rate setting capability, BCWSA is able to amass funds to give it a competitive advantage.

On an ironic note, the Complaint indicates that neither co-Plaintiff Busik, nor any other current customer of BCWSA, would benefit from acquisition of any other water/wastewater system.

The Complaint cites four separate Counts:

  • Count I seeks Declaratory Judgment requesting a Court Order in favor of the Plaintiffs declaring that, pursuant to the Municipal Authorities Act’s (“MAA”) Noncompetition Clause, BCWSA is prohibited from competing with Aqua (or any other privately owned public utility) that serves the same substantial purpose by bidding on acquiring any water or wastewater provider.
  • Count II seeks Permanent Injunctive Relief that enjoins BCWSA from bidding upon and being competitive with Aqua in the acquisition of any water and/or wastewater provider.
  • Count III seeks Declaratory Judgment declaring BWCSA’s expenditure of revenue generated by its service area to purchase and acquire any water or wastewater provider to be prohibited under the terms of the MAA.
  • Count IV requests Declaratory Judgment declaring BCWSA’s rates unreasonable and invalid under the MAA because of BCWSA’s use of funds to acquire water and wastewater systems rather than solely for providing for payment of expenses, construction, improvement, repair, maintenance, and operation of Authority facilities and properties.

Aqua is a public utility providing water and wastewater services to various Pennsylvania residents and is regulated by the Pennsylvania Public Utility Commission (“PUC”).  BCWSA originally provided water/sewer service to residential, commercial, and industrial customers solely in portions of Bucks County, and only recently expanded its services beyond Bucks County.

Aqua notes that in purchasing and acquiring water/sewer systems from Pennsylvania municipalities, it is specifically bound by provisions of Act 12 of 2016, which sets forth procedural requirements for determining fair market valuation of acquired water and wastewater systems for ratemaking purposes.  BCWSA, in contrast, is not regulated by the PUC for provisions of service, setting of customer rates, or acquisition of new water or wastewater systems.  BCWSA also does not fall under the oversight of any other legislative or regulatory body that can limit rate setting, nor is it constrained by any Act 12 requirements.  BCWSA’s authority and powers are instead set forth, governed, and controlled by the provisions of the MAA.

Aqua’s Complaint further notes that pursuant to MAA, BCWSA is exempt from paying taxes or assessments upon property acquired or used by BCWSA for purposes of performing essential government services.  Similarly, BCWSA is authorized to issue tax-exempt bonds to finance its acquisitions and improvements of municipal water and wastewater systems, and the income from these bonds, including any profits made on the sale of these bonds, are exempt from taxation.  BCWSA’s operating income comes directly from the service revenues it receives from its water and sewer customers.

The Complaint identifies two local prospective sales of water/sewer systems in which both Aqua and BCWSA appear to be enormously interested (Cheltenham Township Sewer System and Exeter Township (Berks County) Wastewater System).  The Complaint also cites, for background purposes, BCWSA’s recent acquisition of the Springfield Sewer System.  BCWSA overcame two competitors – privately owned public utilities – and paid $16,500,100.  Aqua alleges the actual value of the Springfield System was approximately $9 million.

This Complaint will surely receive attention from all Pennsylvania public utilities and Municipal Authorities that have been looking to expand, by acquisition or combination, their water and sewer service territories.

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.