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Letter against Aqua Pennsylvania proposal to BCWSA

Benjamin Jones, Chief Executive Officer and Commissioners
Bucks County Water and Sewer Authority
1275 Almshouse Road
Warrington, PA 18976

Dear CEO Jones, Chair Cordisco, and Members of the Board:

I am writing to the Board to express my strong opposition to the $1.1 billion Aqua Pennsylvania proposal to the Bucks County Water and Sewer Authority (BCWSA). I urge the Authority to reject this and any bid that privatizes your well-functioning and well-run public system.

As a New Jersey resident and former President of the New Jersey Board of Public Utilities (NJBPU), I generally limit my public comment on policy matters to those affecting my home state. I am making an exception in this instance for several reasons. The Commonwealth of Pennsylvania and the State of New Jersey share a border, and they share the Delaware River as a vital water source. Many BCWSA customers are employed by the State of New Jersey in Trenton or other parts of New Jersey. Most importantly, however, I am writing to you because, if carried out, this deal would set the wrong precedent for our region and the nation. It has the potential to hurt many people, especially low-income families and seniors. Like any deal carried out under fair market value laws, Aqua’s proposal is anti-ratepayer and anti-democratic. From across the river, we have been watching with alarm as rates in Pennsylvania have shot up after Act 12 was unleashed on ratepayers.

My opinions are based on my experience as a regulator, an attorney, environmentalist, and adjunct professor as well as my expertise in governmental administrative and regulatory matters in the energy and environmental arena. I attended Douglass College, Rutgers University, Rutgers Camden Law School, and the Harvard University Kennedy School of Government. Early in my career, I was a Regulatory Officer and Director of the New Jersey Division of Water & Sewer at the NJBPU. Under NJ Governor Jim Florio, I served as Deputy Commissioner and Acting Commissioner of what was then called the Department of Environmental Protection and Energy, and I served for seven years as Region 2 Administrator for the Environmental Protection Agency. I am the only former NJBPU civil service staffer to become a Commissioner. I was appointed President of the NJBPU in 2002 and served in that capacity under three Governors. After my term as President ended, I served as a Commissioner until my retirement in 2014. I currently teach at Columbia University and Rutgers Bloustein School.

Selling the BCWSA wastewater system under Act 12 may appear to be a solution, but it creates more and bigger problems than it is supposed to be solving.  It reduces the utility system to a commodity and a vehicle for monetization rather than a lifeline public service that must be managed well. The $1.1 billion bid sounds wonderful, but it isn’t. As with any offer made under Act 12’s Fair Market Value (FMV) provisions, this offer does not provide BCWSA with a windfall. It saddles you with a very expensive and unnecessary $1.1 billion loan that gets paid back later through rates.

I am not alone in my opinion that there is nothing fair about FMV. Many water and sewer sector stakeholders are increasingly aware of its anti-consumer impacts.

In May of 2021, Tanya McCloskey, Acting Consumer Advocate for the Pennsylvania Office of Consumer Advocate testified before the Pennsylvania Legislature’s Subcommittees on Public Utilities and on Government and Financial Oversight. She noted that the FMV approach was criticized by U.S. Supreme Court Justice Harlan Stone, who wrote that having courts use “fair market value” to determine the value of public utilities projected them into “the most speculative undertaking imposed upon them in the entire history of English jurisprudence.” Ms. McCloskey noted that the Commonwealth abandoned fair market value in 1984. She also testified that “net original cost,” which was replaced by FMV, had been the long-established approach to ratemaking because it served as a check on prices of systems. FMV distorts the normal incentive relationship between buyers and sellers so that, according to Ms. McCloskey, “both parties negotiating the acquisition have the same profit motive — to increase the purchase price as far as possible.” The impact of that is rising rates. Ms. McCloskey told the legislators that “Aqua’s average rate base per customer increased from $3,795 in 2016 to $7,404 in 2019, or by 95%, driven largely by the Section 1329 [Act 12] acquisitions. The higher the average rate base cost per customer, the higher that rates will need to go to support these acquisitions, and the more profits are earned by shareholders.” Ms. McCloskey is correct, and she has substantial evidence to back this up.

FMV legislation in Pennsylvania and in New Jersey has been justified as necessary to address struggling water and sewer systems. But as Aqua’s bid for BCWSA demonstrates, well-run public systems are acquisition targets too. That’s because the FMV is not really about saving struggling systems and protecting ratepayers. It is about enhancing value for shareholders. Dennis Doll, chairman, president and CEO of the Middlesex Water Company, a New Jersey-based investor-owned utility, made this point in a 2021 op-ed criticizing FMV. He noted that FMV proponents claim that Act 12 and other FMV laws further consolidations for the benefit of customers. But that’s not the case. Mr. Doll wrote, “Although on its face this sounds like a noble goal, the fact that the acquiring utility is potentially able to close more transactions with more willing sellers and obtain higher returns for its owners than might be possible absent FMV legislation, is a reality not readily disclosed to the public at large.” Ms. McCloskey made a similar point. She said that “most of the systems being acquired already have safe and adequate service with few operating problems, ” and that “there are no efficiencies or economies of scale that justify these purchases.”

Even without the inflationary aspects of FMV, privatization is a poor deal for customers. Public water and sewer rates cover operations, maintenance, capital costs, and debt service. Private water and sewer rates include O&M, the cost of capital improvements, and a return on investment for both of those costs. Corporations also pass on to customers the cost of corporate income and other taxes that public owners do not incur. The cost to borrow funds for capital improvements is higher for corporations than it is for public entities. What makes this transaction especially ill-advised is that water and sewer utilities across the nation have access to more lower cost funding than they have had in a generation, thanks to the passage of the Bi-partisan Infrastructure Law(BIL). Pennsylvania will receive $1.4 billion under the BIL. One of the permitted uses for American Rescue Plan funds is investment in water and sewer infrastructure. Pennsylvania’s ARP allocation was $6.15 billion.

BCWSA is an example of a well-run, well-regarded public wastewater system that does not need fixing. Given that, I ask the Board to consider the long-term, costly impacts of this proposal on BCWSA customers and on Aqua ratepayers across Pennsylvania. Please reject this proposal and any future proposals like it.

Sincerely,

Jeanne Fox

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