Sewer System Sale Update

New Garden Township and the New Garden Township Sewer Authority issued, in June of 2014, a request for Qualifications from several regulated and non-regulated utilities in conjunction with exploring the possibility of selling its sewer system assets.  After evaluation of the responses, the Township and the Sewer Authority issued, in November of 2014, a Request for Proposal, which was followed by several addenda, for the sale of its sewerage system to two public/regulated utilities and one municipal authority, each of which expressed interest in owning and operating the Township's sewerage system.  In December of 2014 proposals were received and initially evaluated.  The proposals were in different formats which made a side-by-side comparison of the proposals difficult.  A committee was then formed in early 2015 to evaluate the proposals and prepare a “standard” format for the bidders to follow.  Consequently, a Request for Supplemental Proposals was issued.  Supplemental Proposals were received and opened in March of 2016.  After an evaluation of the proposals, the Board of Directors of the Sewer Authority and Township Board of Supervisors determined that Aqua Pennsylvania Wastewater, Inc. ("Aqua") was the most responsible bidder and represented the best reasonable offer for the purchase of the sewerage system.  The Assets Purchase Agreement (“APA”) was then prepared and ultimately signed as noted below.  It is anticipated that the sale of the sewerage system will provide stability in sewer rates in the future, as a result of economies of scale, by having the service provided by an organization with significant resources to meet ever increasing regulatory demands and infrastructure needs as the sewerage system ages.

In August 2016, the Township, the Sewer Authority and Aqua entered into an APA to sell/purchase the sewerage system for the sum of $29,500,000.00 subject to approval from certain regulatory agencies.  In December 2016, a formal application was filed by Aqua with the Pennsylvania Public Utility Commission ("PUC'') requesting approval of the sale and the issuance of a Certificate of Public Convenience to permit Aqua to purchase the sewerage system and to begin serving customers in New Garden Township.  The PUC adopted an Order on June 14, 2017, which was entered on June 29, 2017, approving the application and sale.  A 30-day appeal period ran from June 29, 2017.  During the appeal period, the Bureau of Investigation and Enforcement (“I&E”) timely filed with the PUC a Request for Reconsideration.  The PUC agreed to consider the Request for Reconsideration and at its meeting in October 2017 the PUC adopted and issued a Revised Order affirming its June Order with modifications.  The Office of Consumer Advocate (“OCA”) then filed a timely appeal with Commonwealth Court of the October 2017 PUC Order.  The Commonwealth Court then heard oral argument on September 14, 2018 and issued its decision on October 11, 2018, which was over one year after the initial PUC approval and Order and more than 22 months after the application was filed with the PUC.  The Commonwealth Court decision sends the matter back to the PUC for further review and action.  Aqua then filed a Petition for Allowance of Appeal with the Pennsylvania Supreme Court.  On April 23, 2019 the Supreme Court issued its decision to deny hearing the appeal thus ending the appeal process.  Throughout the proceedings, the Township and Sewer Authority were kept informed and participated, in a limited capacity, while Aqua remained the principle participant.

Currently, settlement discussions are ongoing between the parties to the original proceeding.  Objection was previously expressed by the OCA, I&E and Office of Small Business Advocate (“OSBA”) in the original proceeding related to the two-year rate freeze, the cap on how much rates could increase over ten years (the CAGR), determining public benefit and not providing adequate public notice of the transaction.  The selling price of the sewerage system has not been an issue and remains at $29,500,000.00.  The expectation is that by working through the concerns of each entity involved in the approval/appeal process, agreed upon settlement terms can then be presented to the PUC for consideration and favorable action.

One of the requirements contained in the Decision and Order of the Commonwealth Court is that notice of the acquisition and potential impact on user rates be provided to all existing Aqua water and wastewater customers in addition to all existing New Garden sewer customers.  Notice will be provided as required by the Commonwealth Court’s Order.  Certain legislation provides for the distribution of costs related to acquisition of water and wastewater systems over the entire existing water and sewer customer base throughout Pennsylvania, of the purchaser, in addition to the customers of the acquired system when in the public interest.  The logic is that by spreading costs equitably, as determined by the PUC, user rates can be kept reasonable. 

As part of the potential settlement, New Garden and Aqua will amend the APA to remove the provisions regarding the compound annual growth rate and rate freeze. 

In summary, the potential settlement, if approved, would do the following:

Allow Aqua to acquire the New Garden sewer assets and begin to provide sewer service in areas supplied by New Garden.

Allow Aqua to add $29.5 million to its rate base pursuant to 66 Pa. C.S. § 1329. A utility’s rate base is the value of property used by the utility to provide service to its customers and is one of several components used to establish a utility’s customer rates.

Remove the provisions regarding the compound annual growth rate and rate freeze from the Asset Purchase Agreement.

Implement New Garden’s existing sewer rate ordinance, which provides for rate increases in 2019, 2020 and 2021, after which time rates would remain in effect until Aqua’s next base rate case is approved and implemented.

Propose a rate zone for New Garden customers, in Aqua’s first base rate case following closing, that would increase rates to an amount equal to Aqua’s Zone 1 wastewater rates, unless the increase would be more than twice the system average increase for all Aqua’s wastewater divisions. In that case, the increase would be capped at twice the system average increase.

The table below presents a non-binding, estimated incremental rate effect of the proposed rate base addition on New Garden’s wastewater customers as a result of the proposed settlement after the implementation of the rate increases as set forth in the New Garden’s ordinance:

rate chart

The amounts stated above could change and will depend on how the PUC chooses to apportion any increase among the types of service, rate zones, and classes of customers.

Aqua will adopt the current sewer ordinance of New Garden Township which includes an implementation of rate increases in 2018, 2019 and 2020.  These rates will then be held at that level until Aqua files its next base rate case which is anticipated to be filed in 2021 with rates effective in 2022.

What are the next steps?

Aqua will continue to discuss settlement terms with the OCA, I&E and the OSBA and New Garden will continue to provide its input as the process moves along. Aqua and New Garden will then be able to move forward towards getting approval from the PUC and closing the transaction.   Once terms are acceptable, the settlement agreement will be filed with the PUC.  Concurrently, the notice to customers will be disseminated.