Pa. lawmakers, regulators scrutinize water privatization
Consumers sour on rate increases
The biggest for-profit water utility in Pennsylvania announced in November that it planned to collect an additional $204 million from customers — less than a year after the company’s last rate hike.
It may have been a major strategic error.
Over the next couple months, public hearings held by the state’s utility regulator were packed with frustrated ratepayers whose complaints were echoed by politicians — notwithstanding Pennsylvania American Water’s assurances that the revenue would help fund $1 billion in upgrades to water and sewer plants and other infrastructure. An investment analyst who follows utilities later wrote that he’d been attending such rate case hearings for years and had “never seen anything like those we attended in recent days.”
For-profit utilities in Pennsylvania have scooped up more than 20 water and sewer systems from municipal governments during the last eight years, spurred by a state law that changed how such assets are valued. Municipalities have used sale proceeds to pay off debt, invest in capital projects and avoid tax increases.
The acquisitions have at times prompted local political backlash as some customers have seen their monthly water bills double or even triple, in some cases exceeding their electric bills. At the same time, consumers are still grappling with elevated prices for key items such as groceries and housing.
Now, discontent over the law has reached something of a boiling point. Lawmakers from both parties in Harrisburg are weighing potential changes that range from an outright repeal of the law to limiting the share of acquisition costs that utilities can pass on to customers.
In February, the state regulator that oversees utilities for the first time denied an acquisition of a water or wastewater system under the fair market valuation process established by the law. All of that came after a state court last summer blocked the regulator’s
approval of Aqua Pennsylvania’s proposed $54.9 million purchase of the public sewer system in East Whiteland Township, Chester County. The state Supreme Court has been asked to weigh in.
The push to change Act 12 gained momentum after Democrats won control of the Pennsylvania House in the 2022 elections, said State Rep. Leanne Krueger, D-Delaware, who is co-sponsoring a package of bills related to the issue.
“Public companies have used Act 12 to mark up the valuation, mark up the price, and then pass that price along to shareholders,” Krueger said. “Act 12 is not a good deal for consumers, and it needs reform.”
An uptick in lobbying
The utilities have taken note of the changing landscape in Harrisburg. Pennsylvania American Water — a subsidiary of Camden-based American Water Works Co. — spent $438,000 on lobbying in 2023, up threefold from the previous year, records show. Bryn Mawr-based Aqua Pennsylvania and its parent company, Essential Utilities Inc., spent a combined $650,000 on lobbying last year, just a slight uptick from the prior year but up 50% from 2021.
The companies — which serve more than 1.2 million customers in Pennsylvania — have also ramped up their campaign donations. Essential Utilities’ political committee contributed $345,000 to Pennsylvania political committees from 2021 through 2022, up from $212,000 in the 2020 cycle, records show. A PAC affiliated with American Water gave Pennsylvania groups $189,000 in the 2021-22 cycle, up from $133,000 the prior cycle.
Laura Martin, American Water’s senior director for government and external affairs, said the company’s operations “are significantly impacted by public policy” and that “we absolutely participate responsibly in the political process.”
Dave Kralle, vice president of public affairs at Essential, said the company’s increased political spending came after it expanded its holdings into natural gas with the 2020 acquisition of Pittsburgh natural gas provider Peoples.
The companies say they advocate on a variety of issues in Harrisburg, including urging lawmakers to fund a water assistance program for low-income households.
The industry has defended Act 12, saying that rate increases have been driven primarily by the need to replace and repair aging plants and pipes and comply with an increasing number of environmental regulations — not acquisition prices — and that rates would have gone up regardless of ownership to fund those investments.
But Pennsylvania American and Aqua have taken different approaches. For example, Pennsylvania American’s president told lawmakers in recent testimony that proposed legislation amounted to an attempt at “price control” that would “hamstring” investment. Aqua executives, by contrast, say they support a cap on the portion of the purchase price that can be passed on to ratepayers, though they are waiting to see the final details.
In an interview, Aqua president Marc Lucca said that as municipalities consider selling their assets, “they want to get a fair market value for their systems, but they’re also trying to balance rates.”
How the debate plays out in Pennsylvania could have national implications. American Water and Essential Utilities are the two biggest publicly traded U.S. water and wastewater utilities by market capitalization, and both are headquartered near Philadelphia. The industry’s main trade group, the National Association of Water Cos., is in Center City.
“This is really the nerve center of that industry,” said Ryan M. Connors, managing director of Northcoast Research Partners, an Ohiobased investment research firm. “Historically, what happens in Pennsylvania tends to get exported.”
A need for infrastructure upgrades
Act 12 passed both houses of the then-GOP-led Legislature with overwhelming and bipartisan support. It was signed into law by Gov. Tom Wolf, a Democrat, in April 2016.
At the time, proponents said the law would help improve water and wastewater systems that were “urgently in need of repair,” as the House’s lead sponsor put it in a memo.
But Rep. Robert Godshall, a Republican who represented part of Montgomery County at the time, wrote that existing law discouraged such municipal sales because “the purchasing utility may not be able to recover its investment.” Act 12 aimed to address that by changing the valuation process.
The law allows investor-owned utilities to charge ratepayers for the appraised fair-market value of an acquired system, rather than its lower depreciated cost.
Some legislators — including Krueger, who voted in favor of Act 12 — now say that although the law was intended to help distressed systems, in practice it has instead enabled investor-owned utilities to buy up healthy assets and raise rates without providing a meaningful public benefit. Others note that nothing in the law’s text actually set a limit on which assets could be acquired.
Critics say the law provides incentives for price inflation: Municipalities want as much cash as possible in exchange for selling their property, and investor-owned utilities can recover that money from ratepayers.
The law has made a “sham” of regulation by restoring monopoly pricing that predated the early-20th-century advent of Pennsylvania’s Public Utility Commission and by eliminating the agency’s authority to ensure that utility rates are “just and reasonable,” James H. Cawley, a former commission chair under Democratic Gov. Ed Rendell, said in written testimony to lawmakers in December.
Twenty-one acquisitions have been completed since the 2016 law was enacted, and several more are pending, according to the Public Utility Commission, a state agency governed by five board members who are nominated by the governor and confirmed by the Senate.
More than half of Pennsylvania’s 1,800 community water systems are owned by private companies or nongovernment entities, while municipalities own 39%, according to a 2023 report commissioned by the National Association of Water Cos. More than 60% of wastewater facilities are owned by municipalities, the report found.
In the aftermath of those deals, the commission has approved rate hikes ranging from 45% in East Bradford Township, Chester County, to 167% in Exeter Township, Berks County.
In East Bradford, monthly bills went from $68.09 to $98.69, assuming the average residential usage of 3,500 gallons of water. In Exeter, bills increased from $43.11 to $114.93.
Patrick Cicero, the state’s consumer advocate, said the rate increases are the result of investor-owned utilities’ “growth strategy.”
His office estimates that customers pay $85 million more annually than they would have without the 2016 law — a figure that will grow if more pending deals close.
Jenn Kocher, a spokesperson for the National Association of Water Cos., said that analysis is flawed.
It assumes that government-run systems were charging rates that reflected the cost of service — the criteria by which the Public Utility Commission bases rates — at the time of sale, she said. However, experience shows that municipal utilities’ rates often do not cover the cost of service, and the systems are subsidized by local general fund budgets funded by taxpayers, Kocher said. For example, New Garden Township reported that operating expenses for its sewer system exceeded revenue by 16% over the five years leading up to Aqua’s 2020 acquisition.
Cicero said that argument lacked merit and was merely an “attempt to justify high acquisition prices.”
The industry says many of the systems acquired by investor-owned utilities suffered from chronic underinvestment by the government. In Exeter, for example, the municipal wastewater plant spilled 4 million gallons of untreated sewage into the Schuylkill, according to Pennsylvania American Water President Justin Ladner’s testimony to state lawmakers. The company has invested $19 million into that system to upgrade facilities and achieve compliance, he said.
More broadly, the industry notes that the American Society of Civil Engineers’ most recent report card gave Pennsylvania a “D” for water infrastructure and a “D-” for wastewater infrastructure. Those systems will face a funding gap totaling $18.6 billion over the next decade, the report says.
Much of the Philadelphia region’s water and wastewater infrastructure dates to the 1960s and ’70s, said Lucca, president of Aqua Pennsylvania.
“And it’s all coming due, if you will, the end of its service life, all at about the same time,” Lucca said. “So we really are at a crisis in the United States with our drinking water and wastewater infrastructure.”
Some municipalities have calculated that they’d rather sell their systems to companies that have the technical expertise and resources to fix those issues, he said.
Aqua says it has made $2.3 billion in Pennsylvania capital investments since 2017.
American Water Works Co. saw similar growth over that period of time. The company reported $965 million in operating revenue from its Pennsylvania subsidiary in 2023, up from $639 million in 2016. American Water’s Pennsylvania business accounted for 25% of the company’s operating revenue last year.
Pennsylvania American says it has made about $3.3 billion in capital investments over that period of time.
Regulatory scrutiny
Water and wastewater deals are also coming under increased regulatory scrutiny.
The Public Utility Commission voted, 5-0, in February to deny approval of Pennsylvania American Water’s acquisition of a sewer system in Brentwood, outside Pittsburgh. That same month, the PUC proposed new procedures and guidelines regarding the acquisition process.
One idea is to publish a benchmark against which regulators could compare water and wastewater valuations. The PUC says the benchmark, which the commission calls a “reasonableness review ratio,” would determine the ratio of fair market value to depreciated original cost of “a barometer group of similarly situated investor-owned water utilities.”
This could function as an unofficial cap on valuations — potentially lowering prices and dissuading municipalities from entertaining sale offers, said Connors, the investment analyst.
The Pennsylvania State Association of Boroughs, which represents 950 municipalities, wrote in a March 18 letter to the PUC that it opposes the idea because it would “reduce the benefits received by selling communities.”
Meanwhile the Public Utility Commission has until August to issue a decision on Pennsylvania American’s rate request. The Office of Consumer Advocate is opposing a hike.
Debate in Harrisburg
Critics of Act 12 welcomed the Public Utility Commission’s proposal but said the problem also requires new laws.
In addition to a proposed cap on the share of acquisition costs that utilities can pass on to customers for nontroubled systems, legislation sponsored by Krueger and other House Democrats would spread out increased costs to ratepayers over time and eliminate a six-month deadline by which regulators must evaluate deals. Krueger said a House committee will consider the bill package this week.
Martin, of Pennsylvania American, said that the company is open to changes to Act 12 but believes that any new legislation should “support regionalization and consolidation.”
State Sen. Katie Muth, a Chester County Democrat who led a recent hearing on the matter, said she wants to see a full repeal but expressed skepticism that any reform legislation would pass, pointing to the industry’s political influence. Other lawmakers said there aren’t enough votes in the General Assembly to repeal the law.
“Act 12 has allowed our basic necessities of life to be put on the market for profit,” Muth said.