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ACT 12

Predatory Pricing Act And Its Impact

Background

 

Pennsylvania’s 2016 Act 12 was legislation that allows Big Water companies to buy municipal water and sewer systems at “Fair Market Value”.  It went through a fairly quick legislative process (LINK) and was signed by the governor on 14-April-2016.  It became law 60 days later. (Lawyers refer to Act 12 as “1329” – that is the relevant section of the Pennsylvania law)

 

Prior to Act 12 Big Water companies were not making many acquisitions in Pennsylvania.  The purchase price was limited to depreciated value.  As we will see, this results in lower profits.  There was also more focus on distressed systems – ones that had been mismanaged and required expensive fixes. 

 

Act 12 changed things dramatically. 

 

This legislation raises several questions:

 

  1. What does “Fair Market Value” mean? 

  2. Why would Big Water companies want to be buying municipal water and sewer systems. 

  3. Why would Pennsylvania want to move to “Fair Market Value”?

  4. Why do the Big Water companies want “Fair Market Value”? 

  5. What has been the subsequent impact of the law?

“Fair Market Value”

 

This is a fairly simple concept.  If water or sewer systems were routinely being bought and sold, “Fair Market Value” would be the price that a willing seller and a willing buyer would settle on.  But, there are a couple of problems with this concept: First, each municipal water or sewer system is totally unique – a one of a kind entity. Second, these systems are not exactly traded like a stock or bond on a daily basis.  So how can a "market value" be determined? 

The legislation specified that both the buyer and seller would hire an appraiser to value the system in question.  Each appraiser had to be approved by Pennsylvania’s utility regulator.  Based on those appraisals, a “Fair Market Value” would be determined. 

Why does Big Water want to buy municipal systems?

 

The answer is very simple:  It is all about growing profits.  The water and sewer needs of a huge percentage of the population is currently well served.  There is not much opportunity for these companies to attract willing new customers and then install the infrastructure to serve them.  Absent that type of growth, the alternative is to take over existing systems. 

 

Why did Pennsylvania pass “Fair Market Value” legislation?

 

Another simple answer:  The Big Water companies wanted it.  They worked with the legislature on the bill and lobbied hard for its passage.  They are very open about this in their investor presentations (LINK).  In fact, they position it as a major element for their profit growth strategy. 

 

Why does Big Water want “Fair Market Value”?

 

Yet, a third simple answer:  Bigger profits.  Big Water companies are regulated by the state.  They are allowed to charge ratepayers for all their costs plus a profit.  That profit is set as a percentage of investment.  Therefore, the more they invest, the greater their profits.  This is a highly unusual situation where both buyer and seller want the price as high as possible. 

 

To illustrate, consider a person shopping for a new car.  For a car with a $25,000 sticker on it, The shopper asks the dealer if he would take $45,000 for it.  Would you do that?  Of course not.  But if the shopper is Big Water that is the kind of deal they offer the municipality.  The more Big Water pays for a system, the greater its profits – and Big Water is driven by growing profits. 

The Impact Of Act 12

 

In the first seven years after Pennsylvania passed Act 12 legislation that allows Aqua Pennsylvania and Pennsylvania American Water (Big Water) free reign to acquire municipal water and sewer systems.  They have made 17 acquisitions costing over $850 million.  Eight more ($1.0 billion) are proposed or in progress. 

 

Tanya McCloskey was the acting Consumer Advocate in 2021.  On May 26, 2021 she testified about Act 12 before a legislative subcommittee.  Her testimony included the following data on the premium price paid for various Act 12 acquisitions:

Acquisition Price Premium 29-Nov-2023.png

Just for those eight acquisitions, the premium paid was $220 million.  The customers of those eight are now paying about $26 million/year just for the premium price of their systems. 

 

The early acquisitions did not draw much attention because ratepayers did not understand what was coming.  Deceptive tactics during the sale hid the size of the rate increases.  Many ratepayers have now experienced “rate shock” and realize that their elected officials “sold them out” for some very expensive “free” money.  The following table illustrates the impact.  The rate increases are based on sewer customers using a typical 4,000 gallons/month, the rates before the acquisition and rates after the first general rate increase. 

Acquired System.jpg

Ratepayers are now more aware of the acquisition downsides.  As a result, recent acquisition attempts have met with stiff ratepayer resistance.  Several proposals have been abandoned because of this resistance: 

 

  • Bucks County - $935 million

  • Norristown - $82 million

  • Conshohocken - $52 million

  • Willistown - $17 million

 

These were cases where the elected officials favored the sale, but had to bow to public pressure.  Tredyffrin also rejected a $75 million offer, but did so willingly after listening to public input and doing an objective analysis.  Kudos to Tredyffrin

Repeal Act 12 

 

Act 12 is siphoning wealth away from the citizens of Pennsylvania and into the coffers of Big Water.  The ratepayers are seeing no benefit from this.  Their toilets flush the same and the water coming out of the tap is no different.  They only thing that has changed is the cost. 

 

Act 12 should be flat out repealed.  There are bills in the legislature to do this (LINK), but their chances of passage are about the same as finding a snowman in a blast furnace.  Big Water lobbying efforts are very effective in this regard – they protect their turf.  In the areas of Pennsylvania where Big Water has been active, legislators are supportive of repeal.  But, they are still a small minority of the state. 

 

In the meantime, Big Water remains active.  They try to keep any deal out of public site until it is close to time to sign a contract.  Then the roll out comes quickly with a blizzard of public relations propaganda telling how great the deal is. (LINK)

 

More and more Pennsylvania citizens will be ripped off unless we can get the legislature to stop these sell outs. 

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