The largest for-profit water energy in Pennsylvania announced in November that it would acquire an additional$ 204 million from customers, less than a year after the company’s final rate increase.
It might have been a significant tactical problem.
Over the next few months, public hearings held by the country’s energy regulator were packed with disappointed ratepayers whose complaints were echoed by politicians— notwithstanding , Pennsylvania American Water’s assurances , that the income would help finance$ 1 billion in upgrades to water and sewage plants and other infrastructure. Later, an investment analyst who monitors utilities reported that he had been paying attention to rate case hearings for years and had never seen anything the same as what we saw.
In Pennsylvania, for-profit utilities have seized more than 20 water and sewer systems from municipal governments over the past eight years, helped in part by a state law that altered the valuation of these assets. 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.
The legal debate has now reached a point where it almost becomes racial. In Harrisburg, lawmakers from both parties are considering potential changes that range from a complete repeal to a cap on the share of acquisition costs that utilities can pass on to customers.
The state regulator that regulates utilities for the first time in February rejected a water or wastewater system’s acquisition under the law’s fair market valuation process. 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 cosponsoring 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 noticed the shifting 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 businesses, which have a total of more than 1.2 million customers in Pennsylvania, have also increased 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- based natural gas provider Peoples.
The businesses claim to represent Harrisburg on a variety of issues, 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 primarily resulted from the need to replace and repair aging plants and pipes and comply with increasing numbers of environmental regulations, not acquisition prices, and that rates would have increased regardless of ownership to support those investments.
However, Pennsylvania American and Aqua have adapted their strategies. 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”.
The outcome of the Pennsylvania debate might have global implications. The two biggest publicly traded U.S. water and wastewater utilities by market cap, American Water and Essential Utilities, both have offices close to 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 Ohio- based 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. The governor signed it into law. 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.
Rep. Robert Godshall, a Republican who at the time spoke in Montgomery County, claimed that current law forbade such municipal sales because” the purchasing utility may not be able to recover its investment.” By changing the valuation process, Act 12 sought to address that.
The law allows investor-owned utilities to charge ratepayers for an acquired system’s appraised fair-market value rather than its lower depreciation cost.
Some legislators, including Krueger, who voted in favor of Act 12, now claim that despite the law’s intended purpose, it has actually allowed investor-owned utilities to buy up healthy assets and raise rates without providing a significant public benefit. Other people take note of the fact that there is no actual cap on the amount of assets that can be acquired in the law’s text.
Critics claim that the law encourages price inflation, saying that investor-owned utilities can recover the money from ratepayers if they sell their properties and municipalities demand as much as possible in exchange.
By restoring monopoly pricing that predated Pennsylvania’s early 20th-century public utility commission and removing the agency’s authority to ensure that utility rates are” just and reasonable,” former commission chairman under Democratic Governor James H. Cawley said. 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, which the Public Utility Commission uses to determine the basis for rates, at the time of sale, she said. However, research shows that the rates used by municipal utilities frequently do not cover the cost of service, and that the systems are subsidized by taxpayer-funded local general fund budgets, according to Kocher. 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 claimed that the claim was unsupported and was merely an attempt to” justify high acquisition prices.”
According to the industry, many of the systems that investor-owned utilities acquired suffered from persistent underinvestment by the government. In Exeter, for example, the municipal wastewater plant spilled four million gallons of untreated sewage into the Schuylkill, according to Pennsylvania American Water president  , Justin Ladner’s testimony to state lawmakers. According to him, the company has invested$ 19 million into that system to improve its facilities and comply with regulations.
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. According to the report, those systems will be left with a total of$ 18.6 billion over the next ten years.
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 are actually at a crisis in the United States with our infrastructure for drinking water and wastewater.”
Some municipalities have calculated that they would rather sell their systems to businesses with the technical expertise and resources to resolve those issues, he said.
The acquisitions have contributed to the rise in revenue for the publicly traded utilities. 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.
Since 2017, Aqua claims to have invested$ 2.3 billion in Pennsylvania capital.
Over that time period, American Water Works Co. experienced similar growth. The Pennsylvania subsidiary of the business generated$ 965 million in operating revenue 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 claims to have invested about$ 3.3 billion in capital over that time.
Regulatory scrutiny
Deals involving water and wastewater are also undergoing 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 suggestion would be to create a benchmark that regulators could use to compare water and wastewater valuations. The PUC claims that the benchmark, which the commission refers to as a “reasonableness review ratio,” will determine the ratio of fair market value to depreciated original cost of” a barometer group of similarly situated investor-owned water utilities.”
According to Connors, the investment analyst, this could serve as an unofficial cap on valuations, which could lower prices and dissuade municipalities from accepting sale offers.
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
Act 12 critics applauded the proposal of the Public Utility Commission, but they also claimed that the issue necessitated new laws.
A proposed cap on the share of acquisition costs that utilities can pass on to customers for non-troubled systems would also be implemented by legislation sponsored by Krueger and other House Democrats, which would eliminate a six-month window for regulators to review deals. This week, according to Krueger, a House committee will consider the bill package.
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 Senator Katie Muth, a Democrat from Chester County who presided over a recent hearing on the subject, said she wants a full repeal but that she doubts any reform legislation would pass, citing the political influence of the sector. According to some lawmakers, the General Assembly does n’t have enough votes to repeal the law.
According to Muth,” Act 12 has allowed the sale of our fundamental needs.”
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