WATER WARS
DELCO’S BID TO TAKE OVER DELCORA RAISES QUESTIONS
As Delaware County Council moves forward with a plan to terminate the Delaware County Regional Water Quality Control Authority, questions began to mount over what that will look like, how it will impact customers and what becomes of existing contracts.
The move is part of a three-pronged approach council is taking to thwart a pending sale to Aqua Pennsylvania Wastewater Inc. approved by the DELCORA board last year. Council has also filed a civil complaint in Delaware County Common Pleas Court to block the formation of a trust that would receive sale proceeds recently moved to intervene in an ongoing state Public Utility Commission approval process for the sale.
Aqua and DELCORA have both stated that they don’t intend to let their proposed merger go quietly into that good night and additional court challenges are all but assured as the process moves along.
But how did this sale come to pass, what are the political connotations and how might any of the outcomes impact DELCORA customers?
Tidal wave coming
DELCORA, which treats wastewater for approximately 500,000 customers in 42 municipalities in Delaware and Chester counties, is an independent municipal authority overseen by a board of directors and treats approximately 100 million gallons of wastewater every day.
The authority developed a Long-Term Control Plan in 1999, but new regulations from the U.S. Environmental
Protection Agency the following year required wastewater systems throughout the United States to address stormwater overflow issues in what DELCORA director of operations and maintenance Michael DeSantis called “new unfunded initiatives.”
“DELCORA was doing everything they were required to do with the 1999 LongTerm Control Plan, but the target got moved,” said DeSantis. “There’s been a continuous march of environmental initiatives, which is fine, but unlike the initial march of a lot of these initiatives in the ‘70s and
‘80s, when there was a tremendous amount of funding available from the federal government … we have these unfunded new initiatives and we had new targets to meet. The EPA felt we didn’t meet it and so we had to update our plan.”
The authority and federal government sparred for years over these initiatives until, as DELCORA attorney Tom Wyatt said, the EPA brought in the Department of Justice to “slam us with a consent decree” for a
$1.375 million civil penalty in 2015 that went toward the Clean Water Act fund. The EPA would not accept that penalty going toward projects, he added.
DELCORA then had to develop a new LTCP that was submitted in February
2019 and is expected to cost more than $100 million, said Wyatt. That plan has also not yet been approved by regulators.
The authority continued to lay out a capital plan that is expected to cost $332 million to maintain and improve existing aboveground infrastructure over a number of years and another $88 million to rehabilitate about 150 miles of pipelines, some of them 50 years old or more. Additional environmental initiatives to reduce the amounts of ammonia and nitrogen going into the Delaware River are estimated to cost about $100 million, based on similar efforts done by other companies.
The Philadelphia Water Department, which declined comment for this story, was meanwhile working to meet the new EPA standards. DELCORA has had a contract with the city since the 1970s to process some of Delaware County’s wastewater, but those rates were about to jump dramatically.
DELCORA signed a deal to continue sending wastewater to Philadelphia in
2013, expiring in 2028. At that time, the contribution from Delaware County residents was estimated to be
$178 million. But by the end of 2017, DELCORA received an email from PWD indicating that figure was going to jump to $605 million.
All told, DELCORA was looking at about a $1.2 billion layout over the next 20 years.
DeSantis noted that Philadelphia’s long term plan continues on until 2042. Costs would continue to dramatically escalate for each year in the latter part of the contract and could rise exponentially thereafter. If the county continues even one more year with Philadelphia beyond April 2028, according to DeSantis, it could pay an additional $26 million for that year alone and there is no telling where it goes from there.
The DELCORA board commissioned an engineering study to look at shifting its flow out of Philadelphia and determined that would cost $450 million to complete a new 72inch wide, approximately
10-mile long pipeline to the Chester Wastewater Treatment Plant, as well as improvements there to handle the new flow.
Rate stabilization
If it did nothing, DELCORA Executive Director
Aqua and DELCORA have both stated that they don’t intend to let their proposed merger go quietly into that good night and additional court challenges are all but assured as the process moves along.
Robert Willert said, ratepayers could expect double-digit increases over the next 10 years. So the authority looked at its options and decided to entertain the idea of a merger.
Because the authority has never undertaken a project on the magnitude of leaving the city of Philadelphia, DeSantis said Aqua seemed a natural fit due to its massive footprint in the state and experience in laying pipe. Willert added that Aqua already has threequarters or more of DELCORA’s customers.
Willert said DELCORA decided not to extend a sale proposal to any other company in order to stave off a bidding war that could result in a higher sale figure. While he believed DELCORA could have gotten $400 million out of Aqua, Willert argued that money would ultimately be recouped by the new owner through higher rates on customers.
Instead, the authority and Aqua agreed to a $276.5 million merger that would be used to pay off outstanding debt and fund a trust to be used as a “rate stabilization plan” that keeps increases pegged at 3 percent annually until the fund is exhausted.
As DeSantis explained, if the PUC were to authorize an 8 percent increase, the fund would cover 5 percent and the ratepayers would only be on the hook for the remaining 3 percent.
The authority brought in PFM Financial Advisors to crunch the numbers – both DELCORA’s and Aqua’s. The resulting estimates found six major municipal authorities doing business with DELCORA could save hundreds of millions of dollars and the average customer, using 70,000 gallons annually, could see savings of approximately $1,400 over 10 years.
Wyatt noted state law allows utilities to spread out operational maintenance costs across the entire customer base. If DELCORA merges with Aqua, DeSantis said that hugely expands the ability for ratepayers to cover those costs because they would be spread out over a vastly larger group.
The agreement also allowed for Willert and other employees to stay on following the merger. Aqua indicated at the time that it would honor all current employee contracts. The DELCORA board unanimously approved the merger in September 2019.
Changing of the guard
As part of the deal, county council voted to amend DELCORA’s articles of incorporation in December and grant it the ability to establish a trust “to exist for the benefit of rate payers to distribute to rate payers some or all of the proceeds received from any transfer and sale” of the authority’s assets.
At the time, council was made up of three Republicans, John McBlain, Colleen Morrone and Michael Culp, as well as two Democrats, Brian Zidek and Kevin Madden. Madden and Zidek were not present for the vote to amend.
McBlain, Morrone and Culp were replaced in January by Democrats Christine Reuther, Elaine Paul Schaefer and Dr. Monica Taylor, making the five-member council all Democratic for the first time in history.
The Democrats have long denounced the sale as a secretive and shady deal cut for the benefit Willert and Aqua, as longtime Republican supporters, without any community input and little analysis of the outcome.
“County council feels very deeply that the transaction didn’t have the best interest of the ratepayers or the taxpayers at its core,” said Delaware County Solicitor Bill Martin. “It was a backroom deal. The same people who were negotiating the deal also arranged for jobs after the deal was closed. It doesn’t appear that they were centrally focused on getting the best deal for the county taxpayers and rate payers.”
DELCORA and Aqua representatives have bristled at that suggestion.
Aqua previously denounced insinuations that the transaction was political payback last week as “reprehensible and inaccurate,” saying that it negotiated with DELCORA at arm’s length to provide a fair purchase price and stable rates for the long term.
Willert noted that county council is moving forward with its attempt to terminate the authority during a pandemic over Zoom meetings, which he said provides far less transparency and the ability for the community to ask questions than DELCORA’s meetings in the run up to the agreement.
Willert added that he believes council is moving forward with the unprecedented termination action because it wants to remove the money from the rate stabilization fund and place it in the general fund.
“It’s a shell game,” he said. “They’re just moving the cost on the rate payers from rate stabilization, instead of taxing them, or – I don’t know what they’re going to do with them. But we have the tidal wave coming no matter what. We have a tidal wave of costs coming at our residents and ratepayers, and it just seems crazy to do this at this time.”
DELCORA representatives also pointed to 13 meetings and presentations on the proposed agreement that took place between July and September. PFM Financial Senior Analyst Ben Kapenstein added that thousands of hours of work went into laying out various projections.
“For anybody to suggest that this was some willynilly, off-the-cuff thing – we put tons of time and had tons of meetings and a lot of analysis into making sure this was the best deal for the residents,” said Kapenstein. “We’ve had meetings in person with a lot of these authorities we’re talking about, if not all of them, to discuss this, come back and discuss it a second time, so it’s been a really long due diligence process to get to this point.”
Council filed a complaint earlier this month to block the creation of the trust, created between DELCORA and Univest Bank Co. as trustee on Dec. 27, 2019, according to the complaint. The stated purpose of the