Bucks County moves ahead on $1.1 billion sewer system offer from Aqua Pa.

Bucks County is moving ahead on an ambitious plan to sell its public sewer system to Aqua Pennsylvania for $1.1 billion, a colossal transaction that would generate a windfall for the county, but would increase monthly utility bills for about 75,000 households in the Philadelphia suburbs.

The Bucks County Water and Sewer Authority (BCWSA) voted 3-1 on Wednesday to give Aqua the exclusive right to negotiate a sale for a year. If it accepts Aqua’s formal offer, it would be the largest privatization ever of a U.S. public wastewater system, and is potentially transformative for Bucks County, which would receive close to $1 billion in proceeds after the authority’s wastewater system debt is paid off. The net proceeds would amount to about five times Bucks County’s annual tax revenue.

Authority officials said they plan a series of public meetings to gauge sentiment about the sale. “There is no decision to sell until we hear from the public,” the authority said on a website, BCWSAcommitment.org, that went live Wednesday.

The board got an earful on Wednesday as about 30 spectators crowded the BCWSA’s tiny meeting room in Doylestown Township to denounce the board’s move, which was not advertised in advance and appeared on a hastily amended agenda. “It’s a disgrace what’s happening here,” said Len Hughes Jr., a union shop steward with the AFSCME local that represents the authority’s supervisors.

Under Aqua’s proposal, current sewer rates would be frozen for a year. But in the coming years, rates would eventually increase to match Aqua’s rates, which are now about $88 compared with BCWSA’s average monthly rate of $48. The precise impact is unclear because BCWSA suggests that some of the sale proceeds could be used to soften the rate impact.

BCWSA’s 114 union and nonunion employees would maintain their jobs based on current salaries and collective-bargaining agreements, the authority said. About three-quarters of the staff would become Aqua employees. All pension plans would remain intact and existing employee benefits would be maintained, BCWSA officials said during a media briefing.

Aqua Pennsylvania, a subsidiary of Essential Utilities Inc. in Bryn Mawr, initially offered about $600 million for all BCWSA operations. After the authority’s appraiser valued both the water and wastewater systems at $1.4 billion, BCWSA indicated it was interested only in taking offers for the sewer system. Aqua came back with a price closer to the appraised value of the sewer system, which comprises about three-quarters of BCWSA’s assets.

Aqua’s chief rival, Pennsylvania American Water, a subsidiary of American Water Works Co. Inc. of Camden, also submitted a bid “very close” to Aqua’s offer, said Benjamin Jones, BCWSA’s executive director. The authority’s board, after meeting in executive session on Wednesday, gave Aqua exclusive rights to finalize the deal.

Board member Dennis Cowley cast the lone dissenting vote, saying he rejected Aqua’s initial outreach in early 2020 when he was the authority’s board chairman. At the time, the board portrayed Aqua as a “bad guy,” Cowley said in an interview after the meeting, and he thought BCWSA was well-run and would not improve under private ownership. “So where are we now? We think they’re the great savior?”

The sale process was shrouded in secrecy for months and came to light only in April. Although some towns have opened the sale of their utilities to a public bidding process, municipal authorities are not required to conduct an asset sale in public. Ginny Kerslake, the eastern Pennsylvania organizer for Food and Water Watch, an advocacy group opposed to utility privatization, denounced the board’s action as the result of “backroom private meetings.”

David McMahon, a founder of the grassroots organization Neighbors Opposing Privatization Efforts, which was instrumental in forcing Aqua to abandon an effort in 2020 to buy the Norristown sewer system for $82 million, urged the BCWSA board members to drop a sale pursuit.

“Unfortunately, we see this all over Southeastern Pennsylvania. Now, despite vociferous public opposition to the sales of water and sewer systems, officials seem to be committed and highly motivated sellers of public assets,” McMahon said.

The deal is the latest privatization undertaken in Pennsylvania since the state in 2016 passed new rules encouraging private ownership of public water and sewer systems, which has generated a surge in private investment in water and wastewater systems, and a corresponding increase in utility rates. In essence, utility customers are financing an influx of cash to local governments.

The law, Act 12, allows private buyers to pay a higher “fair-market value” for a municipal utility and recover the cost in future rates, making it attractive for local officials to divest their unwanted systems to balance their budgets and stave off tax increases. The law’s rationale was to encourage consolidation of sometimes troubled water and sewer systems that are a threat to health and the environment. Local officials say that profit-making private owners are more capable of operating complicated water and wastewater systems.

But critics say private buyers systems are increasingly targeting larger water and wastewater systems that are well-managed and prosperous, such as BCWSA. And they say investor-owned utilities are inherently more costly to run because they need to earn a profit, they have higher borrowing costs than municipalities, and they have to pay taxes.

» READ MORE: Aqua Pa. details its steep rate increase and hits sewer users the hardest

Critics also say customers of private utility systems are inequitably picking up the costs for payouts to local government. BCWSA’s system covers only part of Bucks County, whose customers will pay the higher costs for a sale, while the benefits will flow to the entire county. BCWSA also serves several towns in Montgomery and Chester Counties, whose residents will receive few benefits from the sale. Likewise, Aqua’s existing ratepayers outside Bucks County will cover some of the acquisition costs.

“The rates that we’re paying now could easily double and that would be ludicrous,” Ira S. Tackel, president of the Upper Dublin Board of Commissioners in Montgomery County, said in April after learning that BCWSA was considering sale offers. Upper Dublin sold its system to BCWSA about 20 years ago, expecting it to remain in public ownership.

The Warrington Township Board of Supervisors voted in 2019 to sell its sewer system to BCWSA for $16.4 million after rejecting an offer for twice as much from Aqua, said Barry P. Luber, the township manager.

“We went in good faith negotiations with Bucks County Water and Sewer with being assured that they will not sell at all,” let alone to an investor-owned utility, Luber said. Warrington will explore whether it can buy back its system under a contract provision that gives it the right of first refusal if the system is sold, he said.

Advocates of the sales say that utility customers will benefit in the years ahead when the fragmented water and wastewater systems are consolidated and operate more efficiently, much like electric and gas utilities.

The Pennsylvania Public Utility Commission, which needs to approve any transactions involving investor-owned utilities, has generally supported the takeovers. On Friday, the PUC approved Aqua’s $17.5 million acquisition of the Willistown sewer system in Chester County, overriding an administrative law judge’s recommendation to reject the sale as harmful to new and existing Aqua customers. The PUC said that private ownership in Willistown “has substantial affirmative public benefits that outweigh the purported harms.”

» READ MORE: Aqua Pennsylvania’s rate hike: The price per flush will go up 50% as early as Thursday

BCWSA officials suggested the Bucks County Commission could allocate some of the $1 billion sale proceeds for a “rate stabilization fund” to help cushion the impact on utility customers for about 10 years. The three county commissioners who comprise the county’s governing body have not commented on the sale.

“Along with creating a fund for customers, the county can allocate the money for needs that it deems appropriate, such as eliminating its debt, freezing any tax increases over an extended period of time, and other essential needs to benefit residents,” John F. Cordisco, the sewer authority’s board chairman, said in a letter to customers.

Cordisco was unable to attend Wednesday’s meeting and did not cast a vote.

Under the negotiated sale terms, rates for BCWSA’s customers would remain frozen for a year after the sale closes, and then Aqua would likely seek regulatory approval to integrate the BCWSA customers into its existing rate structure. Aqua’s rates are regulated by the state utility commission. BCWSA sets its own rates.

Aqua Pennsylvania, the state’s second largest private water utility after Pennsylvania American, serves 440,000 water customers and 40,000 wastewater customers, heavily concentrated in the Philadelphia suburbs. The acquisition of BCWSA’s 75,000 wastewater customers would nearly triple the size of its sewer customer base.

Aqua was founded as the Springfield Water Co. in 1886 by Swarthmore College professors and residents. As it expanded, it was renamed Philadelphia Suburban Water Co. Later, as its operations extended beyond Philadelphia into other states, it was renamed Aqua.

Under the leadership of Christopher H. Franklin, who took over the company then known as Aqua America in 2015 from longtime CEO Nicholas DeBenedictis, the Bryn Mawr company has pursued an aggressive growth strategy. In 2020, the PUC approved the company’s $4.3 billion acquisition of Peoples Natural Gas in Pittsburgh, when the company was remained Essential Utilities to reflect its new mission as an “infrastructure company.”

Since the 2016 fair-market value law went into effect, Aqua has agreed to buy eight systems in the Philadelphia suburbs for a total of $295 million: New Garden Township, Limerick, East Bradford, Cheltenham, East Norriton, Lower Makefield, Willistown and East Whiteland.

Aqua also has a deal to buy the massive DELCORA wastewater system in Delaware and Chester Counties for $277 million and has offered to buy the Chester Water Authority for $410 million, but both of those deals are tied up in litigation.

Though BCWSA’s fees are now much lower than those charged by Aqua, a projection conducted for the authority projected that its rates under continued public ownership would increase at a quicker pace than Aqua’s in the next 10 years to pay for anticipated upgrades to its aging sewer mains and treatment plants to resolve sewage overflow issues, said Jones. In about a decade, the $40 difference in bills between BCWSA and Aqua would shrink to about $20, he said.

Still, by that math, about 10 years from now customers would be paying $20 more a month under Aqua compared with BCWSA.

Jones said that Aqua, as a private utility regulated by the state, has an advantage over the municipal authority in that it can ask the PUC for permission to repair aging lateral pipes on private land that connect customers to the sewer mains. Those lateral sewers, often made of brittle terra cotta, are frequently the source of infiltration of groundwater and rainwater that overwhelms the system’s treatment system, Jones said.

Municipal authorities are not allowed to spread the costs of those repairs to ratepayers at large, Jones said, forcing homeowners to pay for costly repairs that some cannot afford.

BCWSA in December agreed to pay a $450,000 penalty and make substantial upgrades to its system because of more than 250 overflows of raw sewage since 2014, according to a settlement with federal and state officials to resolve a suit filed under the Clean Water Act.

The Bucks County system was founded in 1962 initially to provide bulk water service to communities in Lower Bucks County. It later acquired more local systems and became both a wholesale provider and a retail provider of water and wastewater services.

Before Act 12 came into effect, BCWSA was also an aggressive rival to Aqua and Pennsylvania American to acquire local systems.

BCWSA in 2015 outbid private operators to acquire the sewer system in Springfield Township, Montgomery County, for $16.5 million. Aqua, a losing bidder in the Springfield sale, alleged in a lawsuit against BCWSA that the township’s system was valued at no more than $12 million, and that BCWSA illegally used its nonprofit status to expand beyond its core territory. The suit was settled out of court.