Commonwealth Court Thursday ruled the Public Utility Commission did not consider the impact of future rate increases on customers of the New Garden Township, Chester County wastewater system during its consideration of its acquisition by Aqua Pennsylvania Wastewater and that consideration of rate impacts cannot be pushed to future rate proceedings.

This decision, if left standing, has implications for future purchases of public water and wastewater facilities by private water and wastewater companies.

The challenge to the PUC action was brought by the PUC’s Office Of Consumer Advocate.

The ruling involved the approval process the PUC uses to approve the ratemaking rate base, acquisition price and costs for the New Garden wastewater system assets and a rate stabilization plan when a public system is sold to an investor-owned entity.

“Under the terms of the purchase agreement, Aqua would pay the Township $29.5 million for the assets. That is, $10.9 million or 59 percent more than the depreciated original cost of the system.

“Aqua also asked the Commission to establish the purchase price of $29.5 million as the rate base for the acquired assets to be included in its next rate base proceeding based on two fair market value appraisals obtained by Aqua and the Township.”

Aqua also agreed to: “Not to increase the current rates charged to the New Garden customers for 730 days after closing; That for the first 10 years of Aqua ownership, Aqua agreed to limit rate increases for the New Garden customers to no more than a compounded 4 percent per year; Aqua agreed to fund approximately $2.5 million in projects in the acquired territory.”

“Aqua did not submit a rate stabilization plan.”

During the PUC proceedings-- “Aqua, however, provided no evidence regarding the effect on rates by increases on the rate base or the rate impact of the rate freeze provision or Compound Annual Growth Rate (CAGR) limitation to New Garden on existing ratepayers.”

“The OCA [Office of Consumer Advocate] offered witnesses and evidence showing that rates would substantially increase for Aqua’s customers if the sale were approved.

“Those witnesses testified that Aqua’s existing 19,784 wastewater customers have an average rate base cost per ratepayer of $3,714. However, the $29.5 million rate base for the 2,106 New Garden ratepayers would mean that the average rate base cost per New Garden customer would be $14,007.

“Because that average rate base is nearly four times Aqua’s existing rate, the OCA contended that once the costs of New Garden’s new rate base are spread to all existing Aqua ratepayers, the rate base attributed to them would increase by 27 percent.

“Aqua also agreed to fund approximately $2.5 million in projects in the acquired territory that would also be added to Aqua’s existing rate base which would have a further effect on rates.

“The OCA contended that its undisputed evidence showed that those rate limitations meant that Aqua’s costs of acquiring the New Garden system would far exceed the revenues from the New Garden customers, necessitating that Aqua ratepayers’ rates will be further increased.

“The OCA contended that in Aqua’s next rate base case, limited to the new rate base only, if the increase in rate bases are allocated to: Aqua’s existing wastewater customers, their rates would increase by 19 percent; New Garden customers, their rates would increase by 101 percent; All wastewater customers (existing and acquired), their rates would increase by 16 percent.

“Though finding a proposed rate base value of $29.5 million for the required assets was reasonable, the ALJ [PUC Administrative Law Judge] denied the request for a Certificate because “Aqua has failed to show . . . that all affected parties, including its existing customers, will realize any affirmative public benefits as a result of approval of Aqua’s application.”

The ALJ denied Aqua’s request for approval of the acquisition, but laid out several suggested conditions, if the full PUC decide to approve the sale.

“Aqua appealed the determination to the Commission, which reversed the ALJ, approving a $29.5 million ratemaking rate base for the New Garden system and directing that a Certificate be issued to Aqua for New Garden’s previous service area.

“The Commission concluded that Aqua proved that the acquisition would affirmatively benefit the public, contrary to the ALJ’s conclusion that the public benefits were too general in nature.

“It reasoned that further consolidation of the water and wastewater industry in Pennsylvania might also result in greater economic and environmental benefits to customers.”

The PUC did attached conditions to its approval of the acquisition, principally that information on the impact of ratemaking on customers be considered in future ratemaking proceedings.

The Court found-- “Simply, by approving the sale and then putting off the consideration of the impact on rates to a later rate base proceeding, the Commission cannot do the balancing test required by Section 1102 of the Code to weigh all the factors for and against the transaction, including the impact on rates, to determine if there is a substantial public benefit.

“It is in this proceeding that the Commission is charged with deciding whether the impact on rates based on the OCA’s undisputed evidence was outweighed by the other positive factors that the acquisition served a substantial public benefit.

“Because it did not do so, this matter is remanded to the Commission to make that determination, including the propriety of the rate restriction on New Garden ratepayers set forth in the APA.

“Finally, the OCA contends that Aqua and New Garden ratepayers’ due process rights were violated because they had no opportunity to be heard prior to the Commission’s approval of the $29.5 million rate base for the New Garden system under Section 1329 because adequate notice was not provided to those ratepayers simply by notice in the Pennsylvania Bulletin as a newspaper of general circulation in the New Garden service territory.”

The Court agreed with OCA on notice requirements.

“Accordingly, because notice is required to all ratepayers, we vacate the Commission’s order, direct it to provide notice to all ratepayers in accordance with 52 Pa. Code § 53.45, and receive additional evidence from ratepayers regarding the acquisition and then enter a new order consistent with this opinion.”

Click Here for a copy of the Commonwealth Court opinion.

PUC Reviewing Issue

On September 20, the Public Utility Commission adopted a Tentative Supplemental Implementation Order that puts forth proposals to further improve procedures for how the PUC examines the acquisition and valuation of municipal and authority-owned water and wastewater systems under Section 1329 of the Public Utility Code that are the subject of this court case.

The Commission voted 5-0 to issue proposed revisions for public comment on potential changes to procedures and guidelines for applications seeking rate base valuation treatment under Section 1329 of Chapter 13 of the Pennsylvania Public Utility Code (Code).

Signed into law as Act 12 of 2016, Section 1329 addresses the sale of water and wastewater systems owned by municipal corporations or authorities by providing a process for the sale of public water and wastewater assets for at fair market rates.

With the benefit of approximately two years’ experience applying Section 1329 to applicable transfers of control under Chapters 11 and 13 of the Code and PUC regulations, the Commission now seeks to create more certainty in the process, improve the quality of valuations and further ensure that the adjudication process is both fair and efficient.

The Commission invites interested parties to provide formal comments-- and to offer recommendations for consideration-- on its proposals to improve the processes, evidence and guidelines for Section 1329 applications.

Comments are due within 30 days of publication of the Tentative Supplemental Implementation Order in the Pennsylvania Bulletin, with reply comments due 15 days thereafter.

The Tentative Order has not yet been published in the PA Bulletin.

Click Here for a copy of the Order.

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[Posted: Oct. 12, 2018]

10/15/2018