Judge recommends denial of Aqua’s $17.5 million bid to buy Chesco town’s sewer system

A Pennsylvania administrative law judge has recommended the state reject Aqua Pennsylvania’s proposed $17.5 million acquisition of a Chester County town’s sewer system, a roadblock in the race by private utilities to acquire public water and wastewater systems under a 2016 law that encourages the private ownership of municipal water utilities.

Administrative Law Judge Jeffrey A. Watson recommended the Pennsylvania Public Utility Commission deny approval of Aqua’s proposed purchase of the wastewater system in Willistown Township, which serves about 2,294 customers mostly outside Malvern borough. Watson said the harm the transaction would cause with higher rates for Willistown’s customers, as well as Aqua’s existing water and wastewater customers, outweighed any public benefits derived from the sale.

The PUC is not obligated to adopt the recommendation. But the decision could become a serious impediment to the water company’s plans to expand its network under a 2016 Pennsylvania law that encourages municipalities to sell their water and wastewater utilities at sometimes very attractive prices, which critics say is leading to an upward spiral of water and sewer rates for customers of companies like Aqua.

» READ MORE: In Philly suburbs, sewer systems are for sale, and citizens push back, fearing rate hikes

“Aqua failed to establish that the sewer system under Aqua’s ownership will affirmatively promote the service, accommodation, convenience, or safety of the public and the evidence did not establish that any benefit to be realized from the proposed transaction would outweigh the harms to current Aqua water and wastewater customers or existing Willistown sewer customers,” Watson wrote in his 220-page decision.

The PUC is expected to make a decision by June.

Aqua Pennsylvania, a subsidiary of Essential Utilities Inc. of Bryn Mawr, said Friday it was reviewing the recommended decision, which was posted on the PUC’s website on Thursday.

“While we are disappointed with the ALJ’s recommendation, we also recognize that the final decision will be made by the Public Utility Commissioners and we remain optimistic that the commissioners will see the long-term customer benefits of the transaction,” the company said in a statement.

The decision is a rare negative recommendation by a hearing examiner of a proposed sewer system sale, which have occurred with greater frequency since Pennsylvania adopted a 2016 Fair Market Value law that allows private buyers to pay higher prices for municipal water and wastewater utilities. Critics say those acquisitions are leading to an upward spiral in rates for customers while generating attractive payouts to towns selling their systems.

Just a week ago, the PUC approved Pennsylvania American’s $235 million acquisition of the York City Sewer Authority, the largest water system privatization in recent years.

Pennsylvania’s Office of Consumer Advocate argued that the Willistown sale would cause an 86% increase in the bills for Willistown sewer customers, who currently pay about $63.63 a month. Aqua proposed shifting some of the costs to its existing customers, reducing the impact on Willistown customers to a 43% increase.

Aqua argued that higher rates were outweighed by the public benefits of consolidating the town’s system with Aqua’s larger system. Aqua said that state policy encourages the consolidation of municipal water and wastewater systems under private ownership to benefit from greater economies of scale and better management.

But Watson found that Willistown’s relatively new system is well-run and adequately financed, and the affluent township has $20 million in its bank accounts and is “financially fit to complete any necessary improvements and upgrades.” As a private company, Aqua needs to generate a profit for investors and to pay higher borrowing costs than municipal owners. It also pays federal and state taxes, which the nonprofit municipal systems do not pay.

Aqua also did not establish that its 443,000 existing water and 45,000 wastewater customers in Pennsylvania would benefit from the costs of absorbing the Willistown system, Watson wrote. Most of Aqua’s Pennsylvania customers are concentrated in the Philadelphia suburbs.

The proposed sale sparked outrage among some Willistown residents, who organized as Concerned Willistown Sewer Customers after realizing that only about half the town’s residents served by the sewer system would pay much higher rates in exchange for a big payout to the township that would benefit all the town’s residents. About half the town’s residents are served by private septic systems.

“We are gratified that Judge Watson has affirmed that our positions and arguments are supported by the evidence and has recommended that the Public Utility Commissioners deny Aqua’s application,” the group said in a statement. It also expressed thanks to the Office of Consumer Advocate for guidance in navigating the PUC’s legal process.