Last week, the Pennsylvania Public Utility Commission (PUC) voted to approve Aqua Pennsylvania’s (Aqua) acquisition of the New Garden Township (Township) wastewater treatment system, making it the first transaction conducted under Pennsylvania’s recently approved Act 12. Regional consolidation of public services, which increases efficiency, is a critical and increasingly necessary tool in battling municipal distress.
Pennsylvania’s Act 12, which was signed into law in April of 2016, encourages regional consolidation of smaller utilities, and benefits municipalities who are struggling with the financial burden and maintenance of ageing water and sewer systems. Act 12 revises the Pennsylvania Public Utility Code to provide a new framework for valuing water and wastewater systems acquired by an entity that is or will be regulated by the PUC. Act 12 mitigates risk for private utility companies in the acquisition of these assets by allowing rate base adjustments in light of necessary repairs and upgrades for the systems. Act 12 no longer requires the utility rate base to be calculated using the depreciated book value of the assets, or the original cost. Instead, buyers and sellers, who must mutually agree to utilize Act 12, employ the following process:
- The buying utility (Buyer) and selling utility (Seller) each receive two separate expert appraisals of the selling utility in order to determine its fair market value. The fair market value is set as the average of the two appraisals.
- The Seller’s ratemaking rate base is incorporated into the rate base of the Buyer during the Buyer’s next rate base case or in the Buyer’s initial tariff filing. Under Act 12, the rate base of the Seller is either: (a) the negotiated purchase price of the Buyer/Seller; or (b) the fair market value of the Seller (as determined by the appraisal), whichever is less.
In this instance, Aqua’s purchase price was below the appraised value of the system, but was still $10.9 million higher than the Township’s original cost. Therefore, Aqua benefits from the Act 12 changes through its ability to use the purchase price of the system in establishing the rate base, which is higher than using the Township’s lower, original cost.
Act 12 also mitigates the possibility of sharp post-acquisition rate increases for customers of the system by freezing the rate base of the Seller until new rates are approved at the Buyer’s next rate base case. The parties can also seek PUC approval of a rate stabilization plan to hold rates constant or phase rates in over a period of time. In this instance, Aqua promised to freeze rates for two years, as well as limit annual rate increases to four percent for ten years.
By making consolidation and acquisition of aging infrastructure more attractive to privately held utility companies, Act 12 has the potential to allow local governments and municipal authorities to facilitate critical infrastructure improvements and ensure the continued provision of safe, reliable service to customers. Since the legislation’s enactment, several other municipalities have submitted Act 12 applications to the PUC, and others are considering similar transactions.
MacElree Harvey Business and Finance attorneys have experience advising clients on developing innovative ways to identify potential revenue streams and can help local governments and private business partners evaluate opportunities to seize on various infrastructure opportunities.