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Act 11

Pennsylvania’s Act 11 plays a major role in determining how much regulated Big Water companies are allowed to charge us for water and sewer service.  This legislation allows the Big Water companies to move sewer revenues to water customers or to other sewer systems – “if in the public interest”.  Basically, it is used to temper “rate shock” for the customers of newly acquired municipal systems.

 

Since 2016 Big Water companies have been buying municipal sewer systems at premium prices enabled by Act 12.  Those premium prices translate to significantly higher water and sewer bills to pay for the investments.  The Big Water companies and the PUC use Act 11 to temper the exorbitant rate increases by moving part of the increase to their base of water customers. 

 

This practice really stinks – but, it is legal.  Your water or sewer bill should pay for the cost of service.  If your supplier is a for profit company, that company’s profit is a part of the bill.  But, because of Act 11 your bill can include your company’s cost and profit for totally unrelated systems in other parts of the state. 

 

The chapter on Beggar Thy Neighbor has the example where Aqua water customers 300 miles away in Warren County PA are helping subsidize our New Garden sewer bills.  There is absolutely no connection between them.  We did not ask for this and think it stinks, but it is happening. 

Background

 

Act 11 was passed in 2012.  It is a ten page bill of dense legalese dealing with recovery of costs for capital improvements.  It applies to all regulated utilities, not just water and sewer. 

The following is the single paragraph slipped into Act 11 that opens a loophole for the Big Water companies to drive a truck through: 

 

"(c) Segregation of property.--When any public utility furnishes more than one of the different types of utility service, the commission shall segregate the property used and useful in furnishing each type of such service, and shall not consider the property of such public utility as a unit in determining the value of the rate base of such public utility for the purpose of fixing base rates.  A utility that provides water and wastewater service shall be exempt from this subsection upon petition of a utility to combine water and wastewater revenue requirements.  The commission, when setting base rates, after notice and an opportunity to be heard, may allocate a portion of the wastewater revenue requirement to the combined water and wastewater customer base if in the public interest."

 

What this means is:

#1 - Big Water companies like Aqua Pennsylvania and Pennsylvania American Water can ask the PUC to allow collecting of sewer revenues from their water customers. 

 

#2 - But it is different for a company like PECO - a utility that supplies both gas and electric service.  PECO is strictly prohibited from collecting gas revenues from its electric customers or collecting electric revenues from their gas customers. 

How It Is Used

 

Rate cases for Aqua in 2021 and American in 2022 & 2023 illustrate how costs are moved from one customer segment to another.  First Aqua in their August 2021 rate case.

Aqua Pennsylvania
August 2021 Rate Filing

The top line titled “Revenue Increase” is the increase Aqua claimed was necessary to cover costs plus deliver their proposed return on investment.  As you can see, the sewer customers would be hit with the largest percentage increases – almost 7X the water increase.  This is logical since their acquisitions were all sewer utilities.

Aqua proposed to temper the “rate shock” of the sewer increases by moving almost $21 million of the sewer revenue to water customers.  The total “required revenue” increase for sewer customers was $32.4 million.  Aqua wanted to move $21 million (64% of the increase) to their water customers!  This would have had raised the rate increase for water customers from ~13% to ~17%.  Those water customers had nothing to do with the sewer acquisitions but would be required to pay for the majority of the increase.  Does that make sense to you?

 

The final decision by the PUC did two things:

 

#1 - The PUC trimmed Aqua’s allowed revenue by $26 million (a whopping 4% reduction).

#2 - It reduced the Act 11 revenue shift to ~$11 million.  That was still 38% of the sewer increase.  That increased the “rate shock” for sewer customers.  And, we can vouch first hand that there was a lot of rate shock when the first bills arrived with the increased rates. 

Pennsylvania American Water
May 2022 Rate Filing

Like Aqua, the “revenue increase" for sewer customers was about 7X the water increase on a percentage basis.  American wanted to move almost $73 million of revenue from sewer users to their water customers.  They wanted their water customers to pay 79% of the increase for sewer!  That would have doubled the increase seen by water customers from 11% to 22%. 

In its final decision the PUC did the following:

#1 - American’s revenue was trimmed by $35 million – another whopping 3.5% of total revenue.

#2 - The Act 11 adjustment was substantially scaled back to $27 million/yr.  That is still water customers paying 29% of the sewer cost increases. 

#3 - Water customers were hit with a 12% increase while sewer customers are paying 46% more. 

Pennsylvania American Water
November 2023 Rate Filing

This rate case is still being processed as of this writing.  We find two things astounding about this case:

#1 - American wants to move all but $5 million of its sewer increase to its water customers.  That is $71 million out of $76 million or 94% of the increase!  The total sewer increase would be reduced to only 3% while water customers would see a 24% increase.  Why should the water customers have to pay for American's sewer acquisitions whose costs are inflated by Act 12 (LINK)? 

#2 - American is proposing increases for systems it does not even own yet - BASA and Brentwood.  And, BASA figures prominently in the proposed Act 11 adjustment.  So, go figure on how all that gets worked out when it comes to setting rates.  When the rate increases go into effect, it would absurd to let American collect revenue from water customers for a system it does not own. 

Conclusions

Act 11 allows both Big Water and the regulators to play games with rate increases for expensive acquisitions.  All in the interest of avoiding “rate shock”.  It could also be described as covering up the true cost of these “Fair Market Value” acquisitions.  There is nothing equitable about palming off cost increases on customers totally disconnected from those increases.

It will be interesting to see what happens with the next round of rate increases in 2024.  There are several possibilities:

#1 - If the PUC really moves rates to reflect the cost of service, the current sewer systems are apt to see another large increase.  Along with this the Act 11 adjustment should go down and the water increases would be much more modest. 

#2 - In Pennsylvania over 98% of Aqua and American water customers are lumped into one rate category for each company.  This is true whether or not individual systems are connected.  This is another form of expensive systems being subsidized by lower cost ones.  The same might happen to sewer systems.  You could wind up with one sewer rate for everyone, regardless of individual cost. 

#3 - Almost certainly there will be additional “Fair Market Value” acquisitions.  It is likely that new Act 11 adjustments will be applied to those situations. 

#4 - It is almost certain there will be various forms of “Beggar Thy Neighbor” situations.

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