In one of the first acquisitions to be decided pursuant to a 2016 amendment to the Pennsylvania Public Utility Code (Code) that allows a public utility to rate base fair market value instead of depreciated original cost, the Pennsylvania Public Utility Commission (PUC) has approved Pennsylvania-American Water Company’s (PAWC’s) acquisition of the wastewater system owned by the Municipal Authority of the City of McKeesport (MACM). PAWC was represented by Cozen O’Connor before the PUC in the $159,000,000 transaction. Application of Pennsylvania-American Water Company-Wastewater under Section 1329 of the Pennsylvania Public Utility Code, 66 Pa. C.S. § 1329, for approval of the use for ratemaking purposes of the lesser of the fair market value or the negotiated purchase price of The Municipal Authority of the City of McKeesport’s assets related to its wastewater collection and treatment system and other related transactions, Docket No. A-2017-2606103 (Order entered October 26, 2017).1

PAWC and MACM signed an asset purchase agreement in September 2016, which was amended in May 2017. PUC approval of such acquisitions is required; so PAWC filed an application with the PUC in June 2017, which included two required fair market valuation appraisals along with responses to other PUC minimum filing requirements. The application was contested by the public advocates, but PAWC and MACM were able to reach a full settlement with the other parties. The settlement, among other things, set forth an agreed-upon fair market value of the acquired assets of $158,000,000 for rate base purposes. The two assigned PUC administrative law judges recommended that the settlement be approved without modification, and, on October 26, 2017, the commission agreed and entered its final order.

This is one of the first cases that the commission has decided pursuant to Section 1329 of the Code, which established a voluntary procedure for valuing the assets of a water or wastewater system that is owned by a municipality or municipal authority and is sold to a public utility or other entity. 66 Pa. C.S. § 1329.2 The new law requires the PUC to issue a decision within six months of the date an application is deemed filed, but a decision was issued in this case in less than five months. No appeal is expected because of the unanimous nature of the settlement.

By acquiring the McKeesport system (a combined wastewater system), PAWC will provide wastewater service directly to an additional 12,780 customers. It will also provide service indirectly to approximately 10,000 additional businesses and residences through bulk service connections with eight neighboring communities. This is a substantial addition to PAWC’s existing wastewater customer base and demonstrates that Section 1329 provides a workable mechanism for the acquisition of municipal and authority systems.

Shortly before its decision in the McKeesport acquisition, the PUC decided its first case pursuant to Section 1329. That case was a fully litigated proceeding, was reconsidered by the PUC, and may be appealed to the Commonwealth Court of Pennsylvania. Application of Aqua Pennsylvania Wastewater, Inc. Pursuant to Sections 1102 and 1329 of the Public Utility Code for Approval of its Acquisition of the Wastewater System Assets of New Garden Township and the New Garden Township Sewer Authority, Docket No. A-2016-2580061 (Order on Reconsideration entered October 5, 2017). There is one additional, fully-litigated Section 1329 proceeding currently pending before the Commission. Application of Aqua Pennsylvania Wastewater, Inc., Pursuant to Sections 1102 and 1329 of the Public Utility Code, for Approval of its Acquisition of the Wastewater System Assets of Limerick Township, Docket No. A-2017-2605434 (Recommended Decision issued September 18, 2017). Among other issues, the public advocates challenged the fair market value rate base and Aqua’s rate commitments in both cases.

As a result of financial difficulties (including pension liabilities) and the increasing costs of operating water and wastewater systems, many municipalities and authorities are considering the sale of their water or wastewater systems pursuant to Section 1329. An increasing number of applications are expected to be filed with the PUC in the future.