2019 AEA Annual Conference

The following is based on written comments AEA submitted to the Senate Economic Growth committee regarding S3870.

The Association of Environmental Authorities (AEA) strongly opposes S3870 because it places corporate interests ahead of the public good, and it will hurt most the people who can least afford it. We are a trade association representing 85 public agencies, primarily authorities, which provide water, wastewater and solid waste utility service to millions of New Jerseyans. More than 40 private sector firms that provide professional services to the public sector also belong to AEA.

S3870 puts the ratepayer last because it favors a sales process focused on attaining a high price rather than securing the most efficient, cost-effective quality sewer service and getting the best deal for the people paying the sewer bills. These deals often are portrayed as great for the ratepayer, but what is left unsaid is that the corporate buyer can recover all or most of the purchase price in the rates paid by the ratepayers of the system. These deals are actually disguised loans—and expensive ones at that. The governing body gets to look great because they have secured a supposed “windfall.” What they have really done is ceded control of the town’s “circulatory” system and saddled the people who pay the sewer bills with the cost. 

AEA believes preserving public ownership and operation of public systems in New Jersey is worthwhile. Among the many things wrong with this bill is that it will help promote sales and undermine public ownership. Pennsylvania has similar legislation already in place, and the result has been what one article referred to as a “feeding frenzy”[1] of acquisitions at inflated prices.

Because S3870 permits methods of appraisal that will result in inflated prices, S3870 favors investor-owned utility shareholders over the people who have been paying the sewer bills for years. This bill will hurt ratepayers with lower incomes. It also hurts contractors and construction workers: dollars that go to shareholders can’t be spent to employ them on capital projects.

The bill allows so-called “fair market value” approaches to be used to determine the “value” of the system. These three approaches (cost, income, market) are borrowed from the real estate industry and are based on the assumption that a utility is sold on a competitive market. They do not apply well to the monopolistic nature of utilities. Fair market value approaches give the buyer AND the seller incentives to negotiate the HIGHEST, not the lowest, prices. By requiring the lower of two fair market value-based valuations, the bill appears to protect the ratepayers and get them the best price. But it doesn’t because those two prices are both likely to be inflated.

A June 7, 2019 blog — “Here’s what’s happening in State X: State law lets investor-owned acquirers and municipal system owners negotiate their own prices, subject to deferential state commission review….” The blog goes on to say, “The state regulator approves the rising acquisition prices, as long as they don’t exceed some standard borrowed from the real estate industry… that has no relevance to the acquired system’s real value.”[2]

The valuation provisions in S3870 rob current ratepayers of the benefit of billions of dollars in savings from the federal and state grants that built the systems. Soon after our organization was founded, nearly 50 years ago, the federal Clean Water Act became law. It was a golden age of sorts when it came to clean water funding. The Federal Construction Grants Program provided financial assistance to public bodies to upgrade and expand sewerage infrastructure. By 1983, the program had given $6.3 billion in grants in New Jersey. Our state created its own supplemental matching/supplemental grant program and gave regional sewerage facilities funding priority. Those grants helped introduce advanced wastewater treatment to our State — an enormous environmental achievement. S3870 says that when a sewer system is being appraised, “the original source of funding for any part of the sewerage system shall not be considered in determining the value of the sewerage system.” That means that those billions in dollars in grants are, for the purposes of the valuation, treated as if sewer system users had actually spent them. This is yet another way to inflate value.

AEA believes that every sales transaction deserves public scrutiny and should go to referendum. By eliminating public referendum as currently required, S3870 cloaks and obscures utility system transactions from public view and discourages public involvement. S3870 allows governing bodies to sidestep a full and vibrant public discourse about a vital community asset. Instead of going to the voters, under this bill, a handful people on a governing body could post a couple of routine meeting notices and agendas to initiate discussions that take place over one, two or maybe three poorly attended public meetings. Within a few months or less, this handful of people could decide to take the momentous and irretrievable step of selling the community’s wastewater system asset without making certain the people who pay the bills understand what is happening. Then, under this bill, the sale would be reviewed by a state-level board comprised of five gubernatorial appointees who deliberate in Trenton, in most cases miles away from where the ratepayers live, and they do so via a complex, quasi-judicial proceeding that is virtually opaque to the uninitiated or the lay person. In a recent report touting how great water/wastewater is for investors, Aqua America said legislation like S3870 represents a “favorable” regulatory trend. This of course begs the question: favorable for whom?

Utility finance expert Janice A. Beecher, Ph.D. of the Michigan State University Institute of Public Utilities, has referred to these investor-owned utility/municipal deals as having “potential for distorted incentives” that can leverage “public problems as private opportunity” in a way that can be seen as “unfair or even predatory.” The bill promotes shortsighted decision-making – what one expert calls “today’s proceeds rather than tomorrow’s performance.”[3]

Public servants in governing bodies need to understand that they do not need to mortgage the ratepayers’ future by selling or entering into lease/concession deals highly favorable to the concessionaire. They can decide not to raid wastewater funds, they can dedicate appropriate levels of funding to the system, they can apply for principal-forgiveness loans from the New Jersey I-Bank, and they can exercise oversight by hiring knowledgeable and dedicated managers. There are thousands of them out there.

AEA respectfully asks the Senate Economic Growth Committee to think of ratepayers, especially those with fewer resources, and to vote against releasing this bill.

[1] https://www.inquirer.com/philly/business/new-pennsylvania-law-private-water-sewer-acquisitions-aqua-pennsylvania-american-20180905.html

[2] Hempling, Scott. “Water Mergers: Are They Making Economic Sense?” June 7, 2019. www.scotthemplinglaw.com.

[3] See footnote #2