GETTING SOAKED?
Water privatization is coming under renewed scrutiny
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 Pennsylvania Public Utility 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.”
Act 12 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 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
In the aftermath of those deals, the Pennsylvania Public Utility Commission has approved rate hikes ranging from 45% in East Bradford Township, Chester County, to 167% in Exeter Township, Berks County.
‘Sham’
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 the Pennsylvania 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 chairman 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 PUC, a state agency governed by five board members who are nominated by the governor and confirmed by the Senate.
Cicero’s 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 PUC 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.
Cicero said that argument lacked merit and was merely an “attempt to justify high acquisition prices.”
Pointing to Exeter
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 River, 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.
Acquisitions have helped fuel the publicly traded utilities’ revenue growth. Essential Utilities — formerly known as Aqua America Inc., and parent of Aqua Pennsylvania — reported $644 million in operating revenue from its Pennsylvania water operations last year, almost a third of the company’s total revenue. That was up from $424 million in 2016, when Act 12 passed.
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 Penn
sylvania 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.
Customer backlash
Recently, 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. 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.
Legislation to protect consumers from triple-digit rate hikes when public water and sewer companies are privatized advanced toward a vote in the Pennsylvania House on Tuesday.
The House Consumer Protection, Technology, and Utilities Committee passed a slate of bills that would require utility companies to use lower valuations for newly purchased water and sewer systems when seeking rate increases, spread the impact over a longer period and improve transparency of the process.