Water is a valuable public asset which should be available to all, not sold to the highest bidder to exploit for profits.
The Saga Of New Garden’s Rate Cap
(Have We Got A Deal For You)
But ...
Now You See It
AND ...
Now You Don't
Background
In August of 2016 New Garden Township signed a sales contract with Aqua Pennsylvania (Aqua) to sell its sewer system for $29.5 million. A key provision was that Aqua contractually promised a ten year cap on sewer rate increases. From the date the sale closed there would be a two year rate freeze. Then for the next eight years rate increases would not exceed 4%/year. That was positioned as a very good deal for rate payers. Here is a picture of how that would impact the ratepayer:
Rates would increase for the average customer from $56/month to $74/month over that period.
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This is a side issue, but what happens in year eleven? Check that out here: (LINK).
The Approval Process
Aqua is a regulated utility. The Pennsylvania Public Utility Commission (PUC) has to approve any deal before a sale can be executed. That is a long involved legal process run by an Administrative Law Judge (ALJ). Besides Aqua and New Garden Township, the Office of Consumer Advocate (OCA, part of the Attorney General’s office) and the Bureau of Investigation & Enforcement (I&E, a part of the PUC) were major players.
The rate cap was a major issue in the PUC approval process. Both the OCA and I&E opposed the rate cap. They claimed that the rate cap was a “Rate Stabilization Plan". That is a technical term within the PUC. It requires special documentation to approve it. Aqua said no, the rate cap was a contractual issue with New Garden ratepayers and did not provide the needed documentation.
Who Pays The Difference
The difference between what Aqua would collect from ratepayers with and without the rate cap is considerable. We are speculating here, but it is likely Aqua was not expecting to forego that difference. Aqua probably expected to be able to use Act 11 (LINK) to make up the difference from other ratepayers. Both the OCA and I&E were adamantly against that idea. In the end, the OCA got a stipulation in the PUC approval where Aqua was welcome to charge New Garden customers less than its normal rates, but at shareholders expense, not out of the pocket of other ratepayers.
The First PUC Approval
At the end of the PUC approval process, the ALJ recommended against the approval of the acquisition. That is a story by itself told here (Future Link). But, the full Commission overruled the ALJ and approved the acquisition on June 29, 2017 – a little less than a year after the deal was signed.
Essentially, the commissioners agreed the rate cap was private contractual side deal between Aqua and ratepayers. However - and, this is important - they did include the provision that the cost of the rate cap would be borne by shareholders, not other ratepayers. It is a bit of convoluted legal language, but here is the PUC's statement on the issue (pages 73 - 74 of the PUC's Opinion & Order - LINK):
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"12. That the Commission retains the authority to allocate revenues, if appropriate, to the New Garden Township customers that are in excess of the restrictions outlined in the Asset Purchase Agreement. Aqua Pennsylvania Wastewater, Inc., and its shareholders should bear all risk of a shortfall between revenues it is permitted to recover under its Asset Purchase Agreement with New Garden Township and New Garden Township Sewer Authority and the costs that Aqua Pennsylvania Wastewater, Inc., will incur with respect to the acquired system. To the extent that Aqua Pennsylvania Wastewater, Inc., is unwilling or unable to charge costs in excess of the limitations provided in the Asset Purchase Agreement, the excess costs should be borne by its shareholders and not spread to other ratepayers."
Litigation Of The PUC’s Approval
At that point the OCA sued the PUC to overturn the decision. This acquisition was the first under Pennsylvania's new "Fair Market Value" law (Act 12) - explained here (LINK). As a first "test case" it was not surprising that it would be tested in court.
That lawsuit had absolutely nothing to do with the rate cap. The issue the OCA focused on was not adequately informing ratepayers about the impact of the acquisition. On October 11, 2018 the OCA won its case. The approval was remanded to the PUC for re‑consideration. Aqua appealed the decision to the PA Supreme court but was turned down on April 23, 2019.
The basis for the court overturning the PUC’s approval was narrow and technical. Aqua had to make an estimate of the cost impact of the acquisition on all ratepayers and then notify those ratepayers. Those were relatively easy things to do. The PUC should have been able to move forward quickly with the second approval. But, that is not what happened.
Public Meeting On The Rate Cap
There was a quiet period and then on September 23, 2019 New Garden Township held a public meeting of HUGE importance to sewer ratepayers. The meeting was not well publicized. The "official" announcements about the meeting follow.
About a month before the September meeting, the Board of Supervisors meeting minutes from August 19, 2019 had the following statement:
Note that they were going to “explain” potential changes. There was no indication of what those changes might be or how significant they were. There had been two previous changes that were minor and technical in nature.
There was another Board of Supervisors meeting on September 16, 2019, just three days before the big public meeting. The meeting minutes had the following statement:
They were going to provide an “update”. No big deal, just an update.
The 9/23/2019 Public Meeting - Introduction
This meeting turned out to be a big deal. It was a full Board of Supervisors meeting. All five supervisors were present. All four sewer authority board members were present.
Five Aqua officials also participated. Not many New Garden residents attended. One who did estimated that maybe 20 others were in the audience.
New Garden’s solicitor (Mr. Vince Pompo) more or less ran the meeting. The proposal to drop the rate cap was introduced as follows (Pompo is speaking - pages 13 -14):
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"As discussed before, 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 at 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 be asked to amend the Asset Purchase Agreement to remove the provisions regarding the rate freeze and the compound annual growth rate."
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Without naming it, the first part talks about Act 11 (LINK) and how costs can be distributed across a very large user base so that “user rates can be kept reasonable”. This seems to suggest, but does not overtly state, that a rate cap is really not needed because costs will be distributed over the whole system. We think that was a deceptive introduction to dropping the rate cap. But, dropping the rate cap was the very next statement.
There were a number of questions from residents that clearly indicated they understood that New Garden costs would be shared across a wide customer base. The answers to those questions were always evasive.
The 9/23/2019 Public Meeting - Omissions
We think there were a couple of important omissions at this point:
#1 - When the PUC first approved of the sale in 2017, they ordered Aqua to set up New Garden as an independent rate zone. If you are going to lump all users into one big group, separate zones would not be needed. This should have been a red flag that New Garden being subsidized by other Aqua customers could be very limited.
#2 - The ethical thing to do would have been to estimate New Garden rate increases based on a stand alone basis. Indeed, disclosing ratepayer impact was the reason the PA Commonwealth Court overturned the original approval. One resident actually complained that no one would even make an estimate on rates. Everything was generalities. One of Aqua's participants was a financial leader qualified to answer the rate questions. He remained silent on the issue.
The 9/23/ 2019 Public Meeting - End Result
At the end of the meeting the New Garden officials voted to drop the rate cap. It is pretty clear to us that was the planned outcome from the very start.
Our rate cap was gone!
So what happened to New Garden ratepayers when Aqua filed to increase rates in August, 2021? The following chart shows the result:
Aqua’s rate increase of May, 2022 increased our rate 146% over the contract commitment. Needless to say there was a lot of “rate shock” when the bills with the rate increases arrived.
As a side note, there is a small increase in 2021. That is the story of a different rate increase that probably was not needed. That story is told here (LINK)
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The full transcript of the September 23, 2019 meeting is available here:
Why Was the Rate Cap Removed
This is a question that is not easy to get a straight answer on. The question was asked at the September 23, 2019 meeting (page 46). Here is the back on forth on the issue:
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STAN LUKOFF: "Yes, sir. Stan Lukoff, Reynolds Road. I'm a present New Garden sewer customer. So, I may have missed something, but why are we removing the provision around the compound annual growth rate and the rate freeze in the Asset Purchase Agreement Is that because the New Garden sewer rates are superceding that?"
MR. POMPO: "The basic answer to the question is because there were other parties in the matter, arms of the PUC and the Office of Consumer Advocate that objected to those provisions in the agreement. That's the simple answer."
STAN LUKOFF: "Certainly not in the customers benefit to do that."
MR. POMPO: "Well, one can argue that both sides, because we thought that that was in favor of the customer, but others, including the Consumer Advocate, for good reason I'm not going to go into, did not follow that same logic."
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Paraphrasing the reason given: others, including the Consumer Advocate made us do it. But, I am not going to tell you why.
We have been filing right to know requests and appeals to validate this claim. So far we have been stonewalled on this. New Garden either claimed the records no longer exist or are part of "settlement discussions", which are a protected category. A few documents have been produced but they bear zero relevance to the requests.
There was a second public meeting on this issue held November 21, 2022 (LINK). This was long after the sale had been executed. The purpose of the meeting to address citizen unrest about what happened to our sewer system. At that meeting Mr Pompo stated clearly multiple times that the OCA would not approve the deal unless the rate cap was removed.
It is unlikely that the OCA demanded that the rate cap be removed for the following reasons:
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#1 - The issue had been thoroughly processed in the first PUC approval of the acquisition. Although the OCA was not happy about the rate cap, they did succeed in having clear language that Aqua shareholders would bear the cost of the revenue shortfall, not other ratepayers – which was their primary concern.
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#2 - When the OCA appealed the PUC approval through the court system, the rate cap was not part of the appeal. That makes it very unlikely that it would later become a non negotiable issue.
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#3 - The OCA does not have veto authority over PUC decisions. They can vigorously state their position, but the PUC commissioners are the deciding authority.
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#4 - Since the New Garden case, Pennsylvania American Water acquisitions have included rate freeze/rate cap provisions. Whether or not the OCA approved them or not, it was not an issue that stopped the approval process.
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We had direct communication with the OCA principals in the New Garden approval case. They told us that dropping the rate cap was an issue between Aqua and New Garden.
Conclusions
So why was the rate cap dropped?
#1 - It is pretty clear that it was NOT the OCA demanding it.
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#2 - Our speculation is that Aqua was not willing to forgo over $2.5 million/yr of revenue the rate cap would take away. There would have been essentially zero profit during the first ten years of the deal.
But, did Aqua have an escape clause in the contract? We can not find it. Could New Garden have sued Aqua to enforce the contract? Possibly. Why didn’t they? We do not know. It might have been the irresistible lure of the $29.5 million of “free” money.
But, we must note that New Garden did receive compensation for the dropping of the rate cap: $10.00. That is ten whole dollars. Not ten thousand or ten million. Ten dollars. Aqua will be collecting over $20 million additional revenue over their first ten years of ownership and New Garden sold that to them for the paltry sum of ten dollars!
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One thing is clear: the rate cap disappeared.
And, WE ARE PAYING FOR IT.