State approves $50.25 million sale of Cheltenham’s sewer system to private buyers

State regulators on Thursday approved Aqua Pennsylvania’s $50.25 million acquisition of Cheltenham Township’s aging sewer system, which will require an additional $50 million in upgrades to bring it into legal compliance. Those costs will translate into higher rates for all of Aqua’s customers.

The Pennsylvania Public Utility Commission, by a 3-1 vote, approved the sale, the eighth public system to be acquired by private buyers under a 2016 state law that encourages the consolidation of smaller water and wastewater systems under private ownership.

Aqua has budgeted $54.8 million over 10 years to upgrade Cheltenham’s leaky system, which conveys sewage from the township’s 10,200 customers to Philadelphia’s system, where it is treated and discharged into the Delaware River. State environmental regulators have pressured the township to reduce overflows, and the township has also restricted development to curtail additional wastewater volumes.

Aqua will also spend an addition $18.5 million in system upgrades that it will pass on to Abington Township and Jenkintown, neighboring Montgomery County towns whose sewage Cheltenham also conveys to Philadelphia.

Aqua, which is based in Bryn Mawr, notified its existing customers in March that the acquisition would eventually add $3.98 a month to a residential wastewater bill, or about 5.83%. That was based on the $50.3 million acquisition cost.

» READ MORE: Aqua strikes again, acquiring another Montco sewer system

The PUC accepted a recommendation from Administrative Law Judge Angela T. Jones to value the system using a different formula and allow Aqua to recover only $44.6 million from ratepayers when it eventually seeks a rate increase. The rate impact of the $44.6 million value was not immediately available.

But the reduction in value was insufficient for Commissioner Andrew G. Place, who sided with the Office of Consumer Advocate and said the system should be valued closer to its original cost of $15.4 million, especially considering the need for expensive repairs. Place said the transaction does not generate net public benefits and should not be approved.

Aqua told the PUC that the $50.25 million price it agreed to pay Cheltenham in 2018 was in line with two appraisals conducted by independent experts. The company declined to comment Thursday on the PUC’s decision.

Cheltenham argued that its customers would benefit from a sale to Aqua, which has greater experience and economies of scale. Cheltenham residents already receive water service from Aqua, and now will receive a consolidated monthly water and sewer bill from the company.

The township said that after the sale, its officials could reallocate their time and resources to other municipal functions and would no longer have to occupy themselves negotiating with environmental regulators and with the Philadelphia Water Department.

“Cheltenham Township customers will become part of a larger-scale, efficiently operated wastewater utility that over time will likely yield further operating efficiencies and improve long-term viability," the township’s law firm, Dilworth Paxson LLP, argued in filings with the PUC.

The Cheltenham deal is the largest of Aqua’s recent acquisitions inspired by the state’s fair-value law, which allows private buyers to pay market values for water and wastewater systems — and recover those costs from customers. Market values are typically much higher than book value, which represents the depreciated amount that was actually invested in the systems.

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

The Office of Consumer Advocate, an arm of the attorney general, has pushed back on the method of valuing water systems, saying that for some customers, the utility sales generate higher rates but few tangible benefits.

With the acquisition of Cheltenham’s 10,200 customers, Aqua Pennsylvania, which is primarily a water provider, will have about 39,000 wastewater customers in 15 counties.

But that number could dramatically expand next year after Aqua announced in September that it will pay $276.5 million for the Delaware County Regional Water Quality Control Authority system, which has 165,000 retail customers in 42 towns.