Compromise elusive on reforming 2016 law that led to higher water bills across Pa.

The Pennsylvania legislature appears unlikely to address a 2016 law that has led to higher utility bills for communities across the state despite customer frustrations and concerns from the commonwealth’s consumer advocate.

Act 12 allows investor-owned utilities to bake the costs of buying public water and wastewater systems into rate increase requests, and it became law with few objections. However, upon implementation, the law has frustrated customers who have seen their bills increase by as much as 166%.

In response to those concerns, lawmakers have proposed repealing the law and assigning a commission to study it, among other ideas. The state’s two biggest for-profit utilities — Pennsylvania American Water and Aqua Pennsylvania — have said they’re open to change, but policymakers have yet to agree on a solution.

A committee in the state House, which Democrats narrowly control, has advanced bills that would put guardrails on private acquisitions of public systems. But lawmakers have only a limited number of session days — during a hectic election season — to vote on the proposed changes before having to start over again next year. Meanwhile, the Republican lawmaker who controls the state Senate committee that would vote on the proposals wants to wait and see how guidelines recently approved by the utility commission play out.

The Public Utility Commission regulates core services like water, electric, and gas, and sets the service rates paid by customers for hundreds of providers. It has approved 22 private acquisitions of government-owned water and wastewater systems since Act 12’s passage.

One of those decisions — the sale of East Whiteland Township’s wastewater system to Aqua — was later reversed by a state court, which found that the deal would harm consumers. The case is currently on appeal to the state Supreme Court.

Some acquisitions have resulted in rate increases ranging from $30.60 to $71.82, based on an average monthly residential water use of 3,500 gallons.

In testimony before lawmakers last year, PUC Chair Stephen DeFrank said higher bills under Act 12 acquisitions are likely because government-owned utilities might have deferred maintenance and charged lower rates than the cost of service. He added that municipal-run systems also don’t have stockholders, so they don’t charge based on a return on investment.

The utility commission decides whether the perks of a sale — service improvements and environmental benefits — outweigh the impact on rates paid by customers, DeFrank said.

Before Act 12, the original cost of construction minus depreciation largely determined a system’s value. This method discouraged private acquisitions of municipal systems “because the purchasing utility may not be able to recover its investment,” the law’s prime sponsor, former state Rep. Robert Godshall (R., Montgomery), wrote in a 2015 memo.

Now, the municipal seller and the utility buyer can use state-approved experts to calculate a system’s fair market value, which determines how much a system can be sold for — and thus how much customers will pay for the service.

Critics say this approach artificially inflates the final sale price and results in a big check for the municipality and financial benefits for the investor-owned companies’ shareholders.

One such skeptic is Bill Ferguson, a resident of New Garden Township in Chester County who co-founded Keep Water Affordable. The group opposes private takeovers of “well-run” municipal systems, and formed after the local wastewater system was the first acquired under Act 12.

Customers saw a 93.8% increase, or $61.42, in their bills after Aqua bought the system for $29.5 million, which Ferguson called “a dirty deal.”

“The Act 12 deals to date benefit big water, local politicians, and rip off the ratepayers,” he told Spotlight PA.

The private water industry has defended Act 12 and the resulting acquisitions, saying rate increases have helped them fund repairs, make long-term infrastructure investments, and comply with state regulations.

Marc Lucca, Aqua’s president, highlighted the company’s acquisitions in Cheltenham Township and Shenandoah borough — a combined $62 million purchase — as positive Act 12 sales.

In an interview with Spotlight PA, he cited the company’s efforts to address sewage overflows into a creek through system repairs and technology upgrades. In the borough, Aqua identified issues with fire hydrants that were either inoperable or had insufficient flow for emergency services, Lucca said.

Lawmakers say that Act 12 was meant to encourage sales of public systems that could no longer provide safe and reliable service. But in the years since it was enacted, how Act 12 has been used “has run far afield of that original intent,” wrote a group of state House Democrats who have proposed adding limitations to the law and bolstering efforts to inform customers about a possible sale.

Pat Cicero, the state’s appointed consumer advocate, agrees with this assessment, and testified last year that none of the approved acquisitions have been “troubled or nonviable.” Citing harm to consumers, he has asked lawmakers to repeal the law — or set limits at a minimum.

“We are not anti-privatization, and we are not against well-thought-out consolidation or regionalization,” Cicero told lawmakers in December. “What we oppose is privatization for its own sake and privatization and consolidation regardless of the cost to consumers.”

Calculations from the Office of Consumer Advocate estimate that customers pay an additional $85 million annually for water and wastewater services because of Act 12.

The National Association of Water Companies disputes this analysis, arguing that government-operated systems weren’t charging customers based on the cost of service. The industry also notes that nothing in Act 12 limits these types of sales to distressed systems.

“You might be a customer of a system that is providing inadequate water,” said Rikardo Hull, chief operating officer at the association. “It doesn’t have adequate fire pressure for fire suppression, isn’t testing the way it needs to test, isn’t changing out its filtration, isn’t doing a number of things that a well-run system should, or wastewater system should be doing — but not be considered distressed.”

Plus, taxpayers likely pay for their water and wastewater services through other government funds, said Jenn Kocher, a spokesperson for the trade organization. She noted that New Garden Township reported a 16% operating loss over the five years leading up to its sale in 2020.

“They’re paying for it out of taxes,” Kocher told Spotlight PA. “So, while it’s not showing up on their water bills, it’s baked into their tax bill or someplace like that.”

State Rep. Rob Matzie (D., Beaver) has introduced four pieces of legislation aimed at addressing consumer frustrations with Act 12. During a state House hearing on the bills last year, he said that his proposals strive to be realistic about what changes could pass the divided legislature and make it to Democratic Gov. Josh Shapiro’s desk.

The proposed changes include new notification requirements to better inform customers about a potential acquisition, any impact on rates, and opportunities for public input. The package also would extend a six-month deadline for the utility commission to evaluate an accepted acquisition application to nine months. The regulatory body could also extend for an additional three months.

Matzie has also proposed spreading costs to ratepayers over time, rather than all at once.

In testimony, Justin Ladner, Pennsylvania American Water’s president, told lawmakers that the proposed limit would prevent utility buyers from recouping the commission-approved rate base, which considers operating costs and investments and puts a cap on a company’s return on equity, “for potentially years.”

A bill that would limit the sale price is where stakeholders differ the most. The proposal would cap the ratemaking rate base at the lesser of the negotiated purchase price, the fair market value, or 125% of the depreciated original cost if the acquisition does not meet specific criteria.

“Systems that are not troubled would still be able to be bought at a premium, but the amount that could be put into rate base would be capped,” Cicero said of the proposal. “This change would make a significant difference to consumers but would not otherwise disincentivize the acquisition of troubled systems.”

Aqua is open to a cap but opposes putting a specific number into law, said Dave Kralle, vice president of public affairs at Aqua’s parent company, Essential Utilities Inc. Instead, he suggested that lawmakers take a similar approach to the formula approved by the utility commission in June.

The method, called the “reasonableness review ratio,” was adopted as part of new standards, and serves as a guidepost for the commission when it evaluates private water and wastewater system acquisitions. It uses publicly available data from investor-owned utilities to compare the ratio of the depreciated original cost of the seller and the Act 12 sale price.

“We’re supportive of the concept,” Kralle told Spotlight PA. “We just want to make sure that, again, there’s something that moves with markets, so that way, it’s fair for municipalities who want to sell. It’s fair for the utilities and fair for ratepayers.”

Kofi Osei, a Towamencin Township supervisor who ran for office on an anti-privatization platform after local leaders initiated a recently terminated wastewater system sale to Pennsylvania American, said the commission’s efforts are meaningful but limited in their impact.

Advocates still want legislative change.

If lawmakers passed the proposed reforms as is, the status quo would improve, Cicero told Spotlight PA.

The state House Consumer Protection, Technology, and Utilities Committee advanced the bill package to the full chamber with some bipartisan support in April, but Democratic leaders didn’t call the legislation up for a vote before the summer recess.

Matzie did not respond to interview requests about the bills. A spokesperson for state House Democrats told Spotlight PA in an email that leadership hopes to move the legislation this fall.

In January, state Senate Democrats held a policy hearing on rising water and wastewater rates related to Act 12 acquisitions and possible solutions to customer concerns, including a repeal. However, those measures haven’t gained traction.

State Sen. Pat Stefano (R., Fayette), who chairs the chamber’s Consumer Protection and Professional Licensure Committee, told Spotlight PA in a statement that lawmakers should let the utility commission’s efforts play out.

In addition to the reasonableness review ratio, the commission’s guidelines require that utilities hold at least two public meetings before signing a purchase agreement and outline how a sale could affect rates. Under the new standards, experts must also evenly weigh each valuation result — cost, market, and income — to make the process consistent.

“While there have been ongoing discussions regarding the broader implications of Act 12, I believe the PUC’s adjustments can improve the process, and we should allow these changes to take full effect before considering further reforms,” he said.

90.5 WESA partners with Spotlight PA, a collaborative, reader-funded newsroom producing accountability journalism for all of Pennsylvania. More at spotlightpa.org.