In a record deal, Delaware County sewer system serving 42 towns is sold for $276 million

Aqua Pennsylvania on Tuesday announced it will buy the Delaware County Regional Water Quality Control Authority system for $276.5 million, Aqua’s largest acquisition ever, and the largest privatization of a public water or wastewater system in Pennsylvania.

With the acquisition of DELCORA’s 165,000 retail customers in 42 towns, Aqua Pennsylvania will dramatically expand its current base of 29,000 wastewater customers. Most of Aqua Pennsylvania’s 450,000 customers get water service.

Aqua Chief Executive Christopher Franklin said the deal is expected to be approved by the Pennsylvania Public Utility Commission in about a year. Aqua will hire all 136 current DELCORA employees and honor existing labor contracts.

DELCORA said it was prompted to sell its system to Aqua after the Philadelphia Water Department notified the authority it planned to dramatically increase the amount it charges DELCORA for treating some of its sewage at Philadelphia’s Southwest Water Pollution Control Plant. Customers in eastern Delaware County currently account for about 9 percent of the volume treated at the city’s plant on Enterprise Avenue, near the airport.

DELCORA said its customers would pay less, at least in the next decade, under Aqua’s private ownership rather than paying the higher costs of staying on Philadelphia’s system or to pay almost $1.2 billion in new and ongoing capital costs to meet new U.S. Environmental Protection Agency regulations.

After using some of the sale proceeds to retire the authority’s debt, about $210 million will got into a rate-stabilization fund to be used to curtail expected sewer-rate increases to about 3 percent per year through 2029 — rather than expected 8 percent — a DELCORA spokesman said.

“Our number one goal throughout this process was to find a partner who could help us stabilize rates for our ratepayers in the face of large, looming capital costs,” Robert Willert, DELCORA’s executive director, said in a statement. “By partnering with Aqua Pennsylvania, DELCORA was able to develop a rate stabilization plan with an experienced operator with knowledge of the local community while also preserving all DELCORA jobs.”

The acquisition is by far the largest transaction conducted Pennsylvania approved a 2016 state law that encourages the consolidation of smaller water and wastewater systems under private ownership. The new law allows investor-owned utilities to charge ratepayers for the appraised fair-market value of an acquired system, rather than its lower depreciated cost.

The new law, combined with a 2012 act that allows a utility to spread the acquisition costs to all its ratepayers across the state, creates an industry-friendly environment for private water utilities to expand their reach. Both Aqua Pennsylvania and Pennsylvania American Water have been actively courting public systems that want to sell.

Public wastewater treatment systems, which are under pressure to invest heavily in decaying infrastructure to comply with clean-water laws, seem to be the most likely to be sold. Privatization of sewer systems also is less likely to arouse customer opposition than when a public entity attempts to sell a town’s drinking water system.

Many towns use the proceeds from the utility sales to rein in property taxes or to pay for capital projects. DELCORA’s board took the unusual step of putting the proceeds from its sale into a trust that would be spent over eight years to reduce the impact of expected rate increases.

“What’s really impressive here is that the DELCORA board has voted to give all of the proceeds from the sale back to customers," said Franklin. "We haven’t seen that before.”

In addition to acquiring water and wastewater systems, Aqua’s parent company, Aqua America, is also in the process of acquiring Pittsburgh-based natural gas company Peoples for $4.3 billion. The transaction, which requires regulatory approval, is expected to close this year.

» READ MORE: Aqua America to buy Pittsburgh gas utilities for $4.3B

The DELCORA system consists of retail, commercial, and industrial customers and large wholesale agreements with municipal authorities in Delaware and Chester Counties. Its assets include 168 miles of sewer mains, 14 miles of large-diameter force mains, and a 50-million gallon-per-day wastewater treatment plant that serves the western part of its service territory.

Philadelphia stands to lose a large customer under the deal. Aqua plans to build a large sewer main to pump wastewater than now flows to Philadelphia to DELCORA’s treatment plant in Chester. The new sewer main, along with an expansion of the Chester treatment plant, will cost between $400 million and $600 million, Franklin said.

DELCORA announced in July that it had entered into a nonbinding exploratory agreement with Aqua as it confronted its own rising costs, as well as the rising costs faced by Philadelphia that were being passed along to DELCORA.