The Governors of New Jersey and Pennsylvania are, commendably, working to lower the cost of electric service. Gov. Shapiro supports reforms to PJM, the regional grid manager; Gov. Sherrill directed the New Jersey Board of Public Utilities to cut electric bills.

 

We urge them to work equally hard for water/sewer customers. Their costs are rising, largely because of so-called “fair market value” (FMV) laws in our states.

 

Because of the 2016 FMV law, Act 12, Pennsylvania American Water (PAW) and Aqua Pennsylvania customers pay $85 million a year over and above what they would have paid — $1 billion so far and growing.

 

New Jersey’s 2015 FMV law (the Water Infrastructure Protection Act or WIPA) boosted expansion plans of investor-owned (corporate) utilities. Since 2015, they have spent about $100 million to buy municipal water/sewer systems. The robust capital programs embedded in sales deals are usually far more ambitious than needed because that’s how corporate utilities enhance profits.

 

Act 12 and WIPA represent a dramatic change to 100 years of investor-owned utility regulation. The state subsidiaries of American Water Works (AWW) and Essential Utilities/Aqua America promoted FMV as a “solution” for “distressed” systems—an entirely spurious claim. Most systems acquired have been healthy and well-managed. 

 

FMV laws made water and sewer rates less affordable. Both replaced the court-tested approach to system valuation with one that overvalues them. The result: grossly inflated purchase prices which the FMV laws allow to be fully recovered in subsequent rates.

 

Anti-customer FMV laws abolished the BPU and the PaPUC power to allow only reasonable purchase prices to be included in rates. Instead of balancing utility and customer interests, FMV enormously favors only the monopoly utility. FMV laws pervert buyer/seller relationships. Municipal leaders see the inflated price tags as windfalls without understanding (apparently) that citizens will pay higher rates and gain no appreciable service improvement. The highly inflated sales prices and the drive to acquire more systems result in ever-higher water/sewer bills. Corporations leverage cash from sales to buy more municipal systems.

 

The buyer has no incentive to negotiate a lower purchase price when full purchase price recovery is guaranteed, and it can recover the costs from customers—whose rates will rise steadily as a result (as we have seen).

 

AWW’s pending acquisition of Essential Utilities makes stopping FMV an urgent matter. AWW is already the largest privately owned water/sewer utility in the U.S. The purchase would expand its monopolistic reach to 17 states, giving AWW unprecedented market power over millions of people. 

 

NJ and Pa. “fair” market value laws are unfair and irredeemable. They should be repealed. Nevertheless, we can propose the following amendments as the bare minimum needed.

 

At the very least, the power of the BPU and PaPUC to determine the reasonableness of purchase prices of both healthy and distressed municipal systems must be restored.

 

New Jersey’s WIPA must clearly define “distressed” and its provision permitting eligibility based on a system’s location must be eliminated.

 

In Act 12, the purchasing utility’s costs for engineers, investment bankers, and attorneys should not be permitted to be charged to customers as a continuing return. The earlier approach of a “once-and-done” return should be restored.

 

Our states must improve public interest oversight in their FMV laws. Use of so-called “independent” engineers and appraisers, including some who regularly work for the utility, must end. The BPU and PaPUC must be authorized to appoint third parties for assessing and appraising the system for sale.

 

Reforms must include timely notification about negotiations, terms, and public hearings. Customers outside the boundaries of the system owner must be notified of pending sales. The Pa. consumer and small business advocates and the NJ Rate Counsel must review FMV transactions. Act 12 must be amended to include a review role for the Pa. Department of Environmental Protection.

 

The 30-day state agency review period under WIPA must be increased to 120 days, similar to non-WIPA transactions. Both laws must be amended to include comprehensive ethics requirements.

 

We urge Gov. Shapiro, Gov. Sherrill to address water/sewer affordability with the same vigor they apply to high electric rates. Repeal Act 12 and WIPA. Protect NJ and Pa. citizens.