Act 11 helps water utilities expand wastewater assets
It's not a perfect storm, but at least three factors have come together at the right time to drive long-term sustainability for water and wastewater firms.
The starters: Aging infrastructure that's in need of billions of dollars, if not more, for upgrades. And local governments still in the sewer business that are dealing with mandated repairs while trying to balance other budgetary pressures.
The kicker: Last year's passage of Act 11 in Pennsylvania.
The latter has made acquiring wastewater assets, even those in need of major repairs, much more attractive for state water utilities. It gives these companies, which have the capital and expertise, the ability to spread investments that might be needed at a sewer plant across their entire customer base, and vice versa with water assets.
Accomplished through a distribution system improvement charge, or DSIC, which water companies already had, the law may not only be accelerating infrastructure improvements but also providing greater rate stability for customers.
"Wastewater is an opportunity, a big opportunity," said Kathy Pape, president of Derry Township-based Pennsylvania American Water Co., one of the leading advocates for the change.
This year, the company has made six acquisitions, including three on the wastewater side. One of those was in Adams County.
Given the age of many publicly owned wastewater treatment facilities and burdensome replacement costs, now is the perfect time for the private sector to step in, Pape said.
Federal grants in the 1970s and 1980s helped drive much of the infrastructure development, which now is in need of an overhaul. State revolving loan funds have largely replaced grants.
Pennsylvania American Water is taking a "disciplined" approach as it pursues new opportunities, she said. It first wants to look at systems where it already provides water service to find greater economies of scale, Pape said.
"We will continue to acquire water, but with Act 11, there is more focus on wastewater than in the past," she added.
The law helped the York Water Co. jump into wastewater last year for the first time in its nearly 200-year history. The York-based utility is in the process of completing a second sewer acquisition.
"Right now, we look at where we already provide water," said Jeffrey Hines, president and CEO.
That footprint includes 47 municipalities in York and Adams counties. It has about 65,000 customers, serving about 189,000 people.
"It makes a lot of sense. They are interconnected. A lot of (sewer) billing is based on how much water they use," Hines said.
There is a lot of potential to acquire both municipal authorities and developer-built systems, he said. York Water would also be interested in looking at other opportunities outside its immediate footprint, he said.
On the other side of the equation, companies such as United Water Pennsylvania Inc., based in Lower Paxton Township, are pushing a public-private partnership model called "Solution."
Under this model, which is being used in Bayonne, N.J., United Water provides the technology and management expertise. It brings in long-term capital from private equity partners to fund needed investments and free the public owner of asset-related debts.
The municipality maintains ownership and control of the water or wastewater system and of rates charged to users.
"The Act 11 expansion of the water DSIC to wastewater will facilitate additional capital investment by utilities and benefit consumers by minimizing rate shocks," said Bob Manbeck, spokesman for United Water Pennsylvania.
Part of New Jersey-based United Water, the Pennsylvania subsidiary has just one wastewater system in the commonwealth. That is in Bloomsburg.
But that doesn't mean it's not looking for additional business in both water and wastewater. Its Pennsylvania systems currently serve about 56,000 customers and more than 166,000 people in 38 municipalities.
That territory includes Cumberland, Dauphin and York counties.
"It allows us to treat infrastructure without having to wait for a lengthy rate case," Manbeck said.
In its 2013 report card on the nation's infrastructure, the American Society of Civil Engineers said capital investment needs for wastewater and stormwater systems are estimated to total $298 billion over the next 20 years. Pipes represent the largest capital need, comprising three quarters of total needs.
Drinking-water infrastructure was pegged at more than $1 trillion over the coming decades, assuming every pipe would need to be replaced.
Pennsylvania American Water and York Water referenced 1 percent annual replacement rates with pipes expected to last about 100 years.
More about PAWC
• Over the last five years, Derry Township-based Pennsylvania American Water Co. has made 25 acquisitions, including five wastewater systems. It has made six acquisitions this year alone, including three wastewater systems.
• The company spent about $13.8 million on 20 water deals and
$13.2 million on the five wastewater acquisitions.
• On top of the purchases, PAWC has spent about $40 million on improvements and repairs of these assets.
• Its first wastewater acquisition was in 1995 with the Pocono Country Place Water and Sewer Co., which was the result of a bankruptcy auction.
• The company is currently upgrading its Clarion wastewater system to the tune of $24 million. Scheduled for completion in late 2014, that project received a $19 million loan in July through the Pennsylvania Infrastructure Investment Authority, or Pennvest. It acquired that system in 2008.
Revenue and other data
• Pennsylvania is second to New Jersey in revenue but first in the number of customers in a state for parent company American Water Works Co. Inc., which is based in New Jersey. PAWC had 658,153 customers in 2012, serving an estimated population of 2.2 million people, and revenue of $557.7 million. New Jersey had 639,838 customers, serving about 2.5 million people, and revenue of $639 million, according to the company's annual report.
• PAWC revenue was $515.5 million in 2011; $505.9 million in 2010; $459.8 million in 2009; and $447.9 million in 2008.
• PAWC serves about 17 percent of the commonwealth's population. It is the largest water utility in the commonwealth.
• PAWC has nine wastewater plants that serve about 17,500 customers.
What is Act 11?
Gov. Tom Corbett signed Act 11 of 2012 in February of last year.
The law gives electric, wastewater and natural-gas companies the ability to add a distribution system improvement charge, or DSIC, to customer bills to pay for infrastructure improvements.
For water companies, who have had the ability since the 1990s, the act allows them to file joint rate requests with the Pennsylvania Public Utility Commission for their water and wastewater assets.
"Before Act 11, we would have to set up a separate company to manage the wastewater side," said Jeffrey Hines, president and CEO of York Water Co. "When you needed to adjust the rates, it was a separate filing. Those can be over $100,000 just for filing a rate request."
In addition to savings on the filing, rate requests are likely going to be less, because improvement costs are going to be spread over the entire customer base. In the past, a company's wastewater customers would shoulder the burden of needed sewer upgrades.
DSICs are used as a way to accelerate infrastructure upgrades.
• In June, the Pennsylvania Public Utility Commission voted to investigate Pennsylvania American Water Co.'s April request to increase annual revenue by $58.6 million, or 10.1 percent.
The Dauphin County-based utility said it has invested about $731 million in capital improvements since its last rate increase in 2011.
Under the proposal, typical residential customers using nearly 4,000 gallons of water per month would see an increase of $6.12, taking their bill to $58.63. The average commercial customer using 22,000 gallons would see the bills go up to $254.10 from $231.57.
With the passage of Act 11 last year in Pennsylvania, which allows companies to spread capital costs to both water and wastewater customers, rates should stabilize over time, even as needed infrastructure replacement projects are taken on by utilities.
In the PAWC rate case, many wastewater customers could see their rates go down.
• In July, the PUC voted to investigate the York Water Co.'s rate request to bring in about $7.1 million in additional annual revenue.
The average monthly residential water bill would rise by about $5.69, while the average commercial bill would go up by about $20.90.
The increase is needed because of about $49 million in capital investments the York-based utility has made since its 2010 rate filing and will make through February 2015.
York Water Co. is in the process of acquiring the East Prospect Borough Authority, its second wastewater system. Last year, it acquired the developer-built Asbury Pointe Water & Sewer Co. in East Manchester Township.
• Two years ago, the PUC settled with United Water Pennsylvania to increase its annual rates by about $1.5 million. The company had requested $2.8 million.
Without a wider net
In 2010, Pennsylvania American Water Co. requested substantial rate hikes for wastewater operations in Clarion, Claysville, Coatesville and its Northeast division.
“We knew it was a significant impact,” President Kathy Pape said of 2010.
Compliance and capacity issues at its Coatesville treatment plant in the 2000s led to a $55 million replacement and expansion project. That was a driving force for the rate request.
In that case, which was well before the passage of Act 11, about 12,700 wastewater customers were asked to cover a total rate request of $11.7 million. The Pennsylvania Public Utility Commission settled on a cumulative increase of about $8.4 million, according to PUC records.
In 2008, a roughly $2.7 million request for Coatesville was settled at nearly $1.9 million by the PUC.
In its latest rate case, which combines water and wastewater revenue, the utility is looking to reduce wastewater rates.