746 Petition of Aqua Pennsylvania, Inc. for a statement of policy on water and wastewater system acquisitions; doc. no. P-00052155

PENNSYLVANIA PUBLIC UTILITY COMMISSION

Petition of Aqua Pennsylvania, Inc. for a Statement of Policy on Water and Wastewater System Acquisitions; Doc. No. P-00052155

[35 Pa.B. 2366]

   On March 11, 2005, Aqua Pennsylvania, Inc. (Aqua) filed the following petition for a statement of policy on water and wastewater system acquisitions. By this petition, Aqua urges the Pennsylvania Public Utility Commission (Commission) to adopt a policy statement that establishes clear guidance regarding the Commission's expectations on water and wastewater system acquisitions.

   In support of its petition, Aqua first notes that the regionalization foresight of the Commission and the Department of Environmental Protection (Department) has made the Commonwealth a National leader on water and wastewater issues. To further support the Commission's and the Department's continued goal of regionalization, Aqua suggests that the adoption of a statement of policy would provide a workable system under which acquiring companies could continue acquisitions and, concomitantly, ensure fair treatment of customers.

   Persons wishing to file comments to the Aqua petition should do so by May 6, 2005. Replies to the comments must be filed by May 13, 2005. An original and three copies of the comments and replies must be filed with the Office of the Secretary, P. O. Box 3265, Harrisburg, PA 17105-3265 and one copy should be served on the following contact person at the same address.

   The contact person is Assistant Counsel Stanley E. Brown, [phone], [e-mail].

Petition for Statement of Policy on Water and Wastewater System Acquisitions

   Aqua Pennsylvania Inc. (''AQUA''), by and through its counsel, Saul Ewing LLP, hereby petitions the Pennsylvania Public Utility Commission (''Commission'') for the issuance of a ''Statement of Policy'' on water and wastewater system acquisitions. A copy of the proposed Statement of Policy is Appendix ''A.''

Background

   1.  The Commission and the Department of Environmental Protection (''DEP'') have successfully promoted the needed regionalization of water and wastewater systems in the Commonwealth through mergers and acquisitions. See 52 Pa. Code § 69.711 (regarding acquisition incentives); see also Memorandum of Understanding between the Commission and the DEP, dated December 2, 1993 (''MOU''). The foresight of the Commission and DEP on regionalization has made the Commonwealth a national leader on water and wastewater issues.

   2.  The merger and acquisition of small non-viable water and wastewater systems into larger and more-sophisticated private water and wastewater companies has improved the health and welfare of Pennsylvania's citizens, promoted needed infrastructure and water quality improvements, and spurred economic growth.

   3.  Pennsylvania Class A utilities historically have assisted the Commission's efforts to consolidate the numerous water and wastewater companies by acquiring investor-owned companies and municipal operations--including small, troubled water and wastewater systems. For example, since 1996, AQUA has acquired approximately 75 water systems and 15 wastewater systems in the Commonwealth, many of which were small and/or troubled. AQUA acquired these systems in line with the Commission policy and regulations.

   4.  The larger, more viable, water companies in Pennsylvania wish to continue to acquire water and wastewater systems in Pennsylvania; however, confusion surrounding recent Commission staff actions and informal policies has made the process increasingly cumbersome. See, e.g., Application of Pennsylvania Suburban Water Company and Eagle Rock Utility Corp., Docket No. A-210104F0023 (Motion of Chairman Holland adopted Jan. 13, 2005) (Order entered Mar. 4, 2005) (rescinding, on reconsideration, language that set dollar amounts for plant-in-service, contributions in aid of construction (''CIAC''), and depreciation).

   5.  AQUA has met with Commission staff on numerous occasions over the past two years in order to address acquisition-related issues. While total agreement on all issues was not achieved, most issues were, in fact, amicably resolved. The proposed Statement of Policy represents AQUA's best efforts to memorialize existing understandings with Commission staff and to resolve the remaining issues. The proposed Statement of Policy sets forth clear guidance regarding the Commission's expectations on water and wastewater system acquisitions. It would further the Commission's goal of regionalization by providing a workable system under which acquiring companies could continue acquisitions and by ensuring fair treatment of customers.

Summary of Proposed Policy Statement

   6.  Subparagraph (b)(1) addresses an acquiring utility's duty to prepare an original cost study within six months of acquisition closing. The acquisition would not be included in a rate filing, unless the original cost study is submitted prior to or along with the rate filing (with limited exceptions, such as acquisitions made at the request of the Commission). This timing guidance would ensure that all parties to a rate proceeding would have a meaningful opportunity to review and advocate original cost issues in a rate proceeding--which is the appropriate forum for resolution of original cost issues.

   7.  Subparagraph (b)(2) describes the acquiring utility's duty to request specific cost-related records from the seller. This provision addresses the concern that relevant records often become unavailable once a system is sold.

   8.  Subparagraph (b)(3) would permit the acquisition of a system, even if the seller is unable to provide the requested cost-related records. This provision is necessary to allow for the acquisition of the many poorly-run systems now in existence. Based on experience to date, the seller is often remiss in its maintenance of records and unable or unwilling to provide the records. Moreover, the records available at the application stage are not always complete or accurate. As such, subparagraph (b)(3) allows the acquiring utility to deviate from the records--provided that an explanation for discrepancies is included in the original cost study or rate case testimony.

   9.  Subparagraph (b)(4) would direct the acquiring utility to attempt to ascertain the actual CIAC. However, it would not impose a duty upon the acquiring utility to estimate and impute CIAC if there were no evidence that such CIAC existed. Subparagraph (b)(4) also states that the Commission will not attempt to set an original cost or impute CIAC during the application proceeding. Rate issues, including the determination of original cost, are properly considered in the context of a rate proceeding. See Pennsylvania Suburban and Eagle Rock, supra.

   10.  Subparagraph (b)(5) addresses the acquiring utility's responsibility to track plant retirements and identify plant not booked because of contributions or dedications.

   11.  Subparagraph (b)(6) sets forth the Commission's expectation that the acquiring utility reconcile its original cost study with the original cost shown in Commission records.

   12.  Paragraph (c) describes the acquiring utility's statutory right to earn on original cost if the purchase price is less than original cost.

   13.  Paragraph (d) re-affirms the Commission's long-standing policy to allow an acquisition premium if the purchase price was higher than original cost--provided that: (1) the acquisition is in the public interest and supportive of the Commission's goal of regionalization to promote environmental, operational and economic benefits; or (2) the acquired system was troubled or non-viable. This policy has proved to be an effective incentive that has accelerated the acquisition of small or non-viable systems and should continue in effect.

   14.  Paragraph (e) recognizes that calculation of an accurate original cost is not always possible. It suggests that the purchase price per customer in relation to the acquiring utility's existing rate base per customer is a relevant benchmark in assessing the reasonableness of the purchase price of a system. It provides an alternative method of valuation if records are not available or accurate and would be in the best interest of the seller's and acquiring company's customers.

Conclusion

   Wherefore, Aqua Pennsylvania Inc. petitions this Honorable Commission to issue the Statement of Policy in order to promote the regionalization of water and wastewater systems by providing clear guidance to acquiring utilities.

Respectfully submitted,
 
David P. Zambito
Attorney ID No. 80017
SAUL EWING LLP
Penn National Insurance Plaza
2 North Second Street, 7th Floor
Harrisburg, PA 17101
Phone: [phone]
Fax: [phone]
E-mail: [e-mail]

JAMES J. MCNULTY,   
Secretary

[Pa.B. Doc. No. 05-746. Filed for public inspection April 15, 2005, 9:00 a.m.]