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Water - A Universal Need

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Water is a necessary and valuable natural resource.  Everyone needs access to water on a daily basis.  Most of us never give a thought to having plentiful running water.  We turn the faucet on and there it is.  And, what about the used water?  You wash your hands, flush the toilet or run the washing machine and the used water just goes down the drain and disappears.  We usually take it for granted.

It is highly beneficial to health to have good quality water.  Things would be wonderful if supply and disposal were as simple opening the faucet and letting used water run down the drain.  Providing for clean water at an affordable cost is one of our basic responsibilities.  The Pennsylvania constitution was even amended in 1971 to acknowledge this issue:

 

  “The people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment. Pennsylvania's public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.”

Supply And Disposal Options

At the most basic level there are two options:  INDIVIDUAL or COLLECTIVE systems.  Out in the country, individual wells and septic tank systems are the usual option.  In a city collective systems are mandatory. 

 

The technology for providing quality drinking water and wastewater disposal is well known.  It is literally being practiced by thousands of collective organizations and millions of individual wells and septic systems.  There is a large body of government codes and regulations intended to ensure quality water.  Especially for collective systems, there are rigorous standards that have to be met.

Collective Systems

Collective systems can range from two neighbors sharing a water or sewer system to systems serving millions of customers.  This website focuses on the following:

 

#1 - Municipal water or sewer systems run by your local government or a semi independent “Authority” set up by your local government.  Nationally, these not-for-profit public utilities dominate water and wastewater service.

 

#2 - A company seeking to make a profit by offering water or sewer service.  Such companies can be publicly or privately owned.  Nationwide, two of the largest investor owned for profit water and sewer utilities are American Water (LINK) and Essential Utilities (LINK) - (the parent of several Aqua state utilities.  Like Aqua Pennsylvania in our state).  You will find these two companies referred to frequently on this site.  We often refer to them as “Big Water”. 

 

There is also a third category of mostly smaller systems.  Typically, this would be the utility run by a neighborhood homeowners association.  It might range in size from a handful of homes to several hundred homes.  As these systems age, maintenance is often neglected and repairs can become expensive.  This website can provide useful information if your system is considering being taken over by a larger system to deal with system problems. 

Collective Systems Are Monopolies

Water and sewer utilities are  natural monopolies because of the large investments required to provide these services.  It is economically impossible to install multiple systems of pipes and treatment plants needed to offer competing services.  So, you have one and only one option for water or sewer service.  Ownership of this infrastructure naturally leads to a monopoly position. 

 

Profiteering can be a major issue for any monopoly.  They have a long history of ripping off their customers – just because they can.  For water and sewer utilities this is managed in two basic ways:

 

#1 - Municipal systems or their Authorities are non-profit.  They generally collect enough revenue from ratepayers to cover the cost of operating the system.  No profits get distributed to anyone.  Ratepayers have the ability to address issues via their elected officials.  If the issues warrant, those elected officials can be voted out of office. 

 

#2 - For-profit utilities need to provide their shareholders profits and profit growth.  This is the major difference between public and private utilities.  Recognizing the potential for monopolistic abuse, states have created Public Utility Commissions (PUC) to regulate private utilities.  In theory, a utility commission functions to protect ratepayers from monopolistic price gouging.  

Big Water’s Growth Strategy

The large for-profit companies are always looking to grow their profits.  There are two basic ways they can grow profits: 

 

#1 - They can increase their investment.  The state PUC’s regulate profits based on return on investment.  So, the more they invest, the greater their profits.  This encourages them to build and maintain first class facilities.  But, there are definite limits to earnings growth via this route. 

 

#2- Attract new customers.  This is not a business where many new customers come to you asking to tap into your system.  Some new customers may be added from residential or commercial development within their service area.  Although welcome, it is generally not a large growth opportunity. 

 

The Big Water companies have adopted a hybrid growth strategy.  They are seeking to buy existing municipal water and sewer systems.  This allows them to both make large investments and gain large numbers of new customers.  Both American and Essential have publicly stated that municipal acquisition is a major growth strategy.  Here is a more in-depth look at the growth strategy of both companies (LINK)

Fair Market Value

Fair Market Value (FMV) legislation has dramatically changed what Big Water can acquire and at what price.  Before FMV came along, if Big Water wanted to buy a municipal system it had to be “distressed” (i.e. having significant operating issues) and the price was limited to depreciated value.  With FMV legislation, Big Water can now buy healthy systems at an “appraised value”, as determined by professional appraisals.  In practice, FMV is usually 2X – 3X the depreciated value, at least in Pennsylvania. 

You may be surprised that Big Water is delighted to be paying these increased prices.  Their profit is determined by their investment.  So, the more they pay, the greater their profits.  This is a very unusual situation where both the seller and buyer want the highest price possible. 

FMV has also had a big impact on municipalities.  The increased valuations have proven to be a huge temptation for elected officials.  This is aided and abetted by Big Water touting that it is "free money".  Here is a five chart summary of our view of FMV (LINK).

FMV Impact On Ratepayers

The ratepayer is not particularly happy about FMV pricing.  The decision to sell is seldom in the best interest of the ratepayer.  That "free money" is not "free" and it is the ratepayer who bears the cost burden. 

 

Once an acquisition is complete, our experience in Pennsylvania is that water or sewer bills can double when Big Water files it next rate case with the PUC.  The same water comes out of the faucet.  The toilet flushes just the same.  But, your bill is shockingly higher.  

 

Big Water and the PUC often claim that the initial rate increases are the result of the previous owner under investing so much that it was "falling apart".  It is implied that they are "catch up" increases.  At best, we think that is totally disingenuous.  The first rate increase represents paying for Big Water's profits on the purchase price of the acquisition.  And, if the purchase price was double or triple depreciated value, the rate increase will reflect that. 

 

The first rate increase will have little to nothing to do with improvements made to the system.  If the system really does require improvements, those costs (and Big Water's profits that go along with any added investment) will be fully reflected in future rate increases.  If the system really was "falling apart", those future increases can be substantial.  And, there have been some acquisitions with tens of millions of dollars of followup improvements. 

Big Water profits play a huge role in rate setting.  Here is a profile of the Big Water companies and their profitability in Pennsylvania (LINK).  Also, here is a comparison of the cost structure of a for-profit Big Water company versus a non-profit municipal system (LINK)

Big Water’s Growth In Pennsylvania

Pennsylvania has become a prime target of investor-owned utilities due to the passage of privatization friendly legislation over the past 10 years (LINK).  The Big Water companies initially targeted small municipal utilities but have changed tactics and are now also targeting large regional public utilities.  

 

The combination of enabling legislation, regulatory green lighting, and an aggressive growth strategy by Big Water companies has led to a feeding frenzy in Pennsylvania.  In the last seven years they have spent over $1.0 billion to acquire 20 public utilities.  With another $1.1 billion worth of acquisition deals proposed or in progress. The result of these sales consistently means much higher rates.  And, when the acquired system was "healthy", there is little to no improvement in service. 

The Purpose Of This Website

Our New Garden Township sewer system was sold to Aqua Pennsylvania in 2020.  Since then our rates have more than doubled for no improvement in service.  We have dug into the activities that led to the sale and feel that some very questionable actions were used to push the sale through. 

 

Subsequently, we have seen many of the same things happen to others.  We want anyone and everyone who might be involved in such a transaction aware of the shenanigans that can go on.  These are situations where your local officials are likely to take actions that are not in your best interest.  You need to be informed and act early on your own behalf.  Hopefully, this website will provide you awareness and tools to do that. 

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