Sewer rates soar as private companies buy up local water systems

by Alex Brown, Iowa Capital Dispatch
November 7, 2023

For residents in some Pennsylvania communities, flushing the toilet has suddenly gotten much more expensive.

In many townships and counties, rates have spiked as private water companies have bought up wastewater systems from local governments.

The new push to privatize sewer services follows the passage of a state law in 2016 that allows the dollar value of water systems to include not just pipes and plants but market factors such as their worth to the community, allowing them to be sold at much higher prices.

Community groups and municipal leaders say that law, an example of “fair market value” legislation, has unleashed dozens of buyout attempts as private companies have offered tens of millions of dollars for local water systems. Pennsylvania’s municipalities have been at the forefront of the national movement, though an ongoing court case could slow the state’s momentum.

The deals provide a short-term cash boost for local governments, which can struggle to cover the cost of aging infrastructure. But critics say the public services and tax savings that governments might provide residents with the quick money don’t make up for the rate hikes, a phenomenon known as “taxing through the tap.”

“Big Water tells municipal officials, ‘You’re going to get free money.’ “That’s a lie. That money is going to be paid for by ratepayers,” said Bill Ferguson, a co-founder of Keep Water Affordable. The community group protested the 2020 sale of the wastewater system in New Garden Township, a community of about 11,000 residents near the Delaware border, to Aqua Pennsylvania.

Fifteen states, including Iowa, have enacted “fair market value” laws to boost the sale price of water systems, according to the National Association of Water Companies, an industry group. Most of those laws have passed within the past decade, with Florida becoming the latest earlier this year. Public water activists say the private water industry has lobbied hard in state capitols, while also pushing Congress to provide them with federal funding that has historically been reserved for local governments.

Research published last year in Water Policy, the journal of the international think tank World Water Council, surveyed the United States’ 500 largest water systems and found that private ownership was the most significant variable in driving up utility bills — even more than aging infrastructure, water supply and local regulations.

While the survey focused on drinking water systems, Marcela González Rivas, an associate professor in the Graduate School of Public and International Affairs at the University of Pittsburgh and one of the study’s authors, said privatization of any system conflicts with the human right to water.

“Providing water is really expensive as it is,” she said. “If you then add making a profit as part of the cost of the service, it just makes it really unaffordable.”

New Garden Township was the first sewer sale that state regulators approved after the passage of Pennsylvania’s valuation law. Ferguson’s group says the community has seen bill increases approaching 85% since the takeover.

Opponents of valuation laws say the measures have largely passed with little public awareness or controversy, as water companies have donated heavily to Republicans and Democrats alike. At the local level, residents are often unaware that their water system is up for sale until a deal is being finalized.

“If someone else had been No. 1, we might have had time [to stop it],” said David Unger, chair of the New Garden Township board of supervisors, who was elected after the sale was finalized. “The fact that we were first in line — we became the lesson.”

‘Fair market value’

Roughly 97% of sewer customers in the U.S. get their service from a public system, according to the U.S. Government Accountability Office. But private water companies, which control more than 10% of the drinking water market, are pushing to get into the wastewater business. In many states, “fair market value” legislation has been a key tool in that effort.

Historically, the sale price of regulated water systems has been determined by the book value of their assets, including pipes and treatment plants. But these new state laws enable outside appraisers to incorporate other factors, such as the system’s value to the community. Critics say that has allowed systems to sell for many times what they’re worth.

For local governments, the higher prices under the fair market value model make it enticing to sell off their infrastructure. And the water companies want a higher sale price as well: Higher acquisition payments allow the companies to charge higher rates to recover those costs, driving up profits, which are determined by a percentage of their investments.

“Both the seller and buyer want the highest price possible,” said Mary Grant, director of the Public Water for All campaign with Food and Water Watch, an environmental advocacy nonprofit. “Who loses? It’s the ratepayers.”

The private water industry argues that privatization is an important tool when cash-strapped municipalities can’t keep up with the maintenance needs of their aging infrastructure. Fair market value, they say, gives local governments financial relief via the hefty sale price.

“Most of the time it is willing seller, willing buyer,” said Jenn Kocher, vice president of communications and marketing with the National Association of Water Companies, a trade association. “Municipalities … see that there are better options out there through private systems and their economies of scale.”

Many public water advocates acknowledge that sell-offs can help keep water systems running when municipalities can’t afford the maintenance costs. But in Pennsylvania, they say, many of the systems being bid on are in perfectly fine shape.

“I don’t think they’re targeting distressed systems at all,” said Kofi Osei, a member of Towamencin Neighbors Opposing Privatization Efforts, a local activist group. “Our system is actually very well maintained, and we recently did some pretty substantial upgrades.”

Osei’s group is fighting the sale of the sewer system in Towamencin Township, a community of nearly 18,000 residents near Philadelphia, to American Water, the nation’s largest private water and wastewater company. Activists backed a home rule charter, passed by voters this year, to amend the county’s governing document to ban privatization of the system. Township supervisors, Osei said, are still trying to proceed with the sale, while residents are suing them to block it.

Neither American Water nor township Board of Supervisors Chair Chuck Wilson responded to an interview request.

‘Ground zero’

In Pennsylvania, Food and Water Watch said more than 30 water systems — primarily sewer — have been sold off since the passage of the 2016 law.

Another dozen or so local governments are currently considering offers, according to Jennie Shade, senior director of government relations with the Pennsylvania Municipal Authorities Association, which represents the special purpose districts that oversee public services and is seeking to protect local oversight.

Shade’s group estimates that completed acquisitions are costing ratepayers $70 million to $85 million annually in higher water bills, and pending sales could double that amount.

“We’re seeing buyer’s remorse in a lot of communities,” she said. “Pennsylvania has become ground zero for the commoditization of our precious public water supply.”

Since the beginning of this year, Food and Water Watch has tracked 31 water or wastewater systems nationwide that have been purchased by private companies or have a pending sale proposal. All but three are in states with fair market value laws on the books. Thirteen are in Pennsylvania.

Kocher, with the National Association of Water Companies, said many of the communities that sold their systems would have faced rate increases anyway to pay for overdue maintenance needs. Community activists said water companies’ rate hikes far exceed repair costs.

“We were told that without a sale, our rates would go up 78% to fund $12 million of infrastructure improvements,” said Pete Mrozinsi, a co-founder of the group in New Garden Township that opposed the sale to Aqua Pennsylvania. “After the sale, our rates went up 85% with no infrastructure improvements.”

Requests for comment from Aqua Pennsylvania and its parent company, Essential Utilities, were directed to a spokesperson with an outside communications firm, who was unable to arrange an interview by publication time.

Opposition grows

Activists in Pennsylvania say communities are starting to see the risks of privatization offers. Municipal officials in Bucks County, Newberry Township and Williston Township rejected purchase offers after significant local opposition.

State Sen. John Kane, a Democrat, made his living as a plumber but had never heard of the sewer privatization movement until he was elected in 2020. He learned that the city of Chester, which is in bankruptcy, was considering selling its water system for $410 million.

Kane said other communities in his district have seen rate hikes as high as 100% after selling off their water systems, and he’s joined local residents in opposing the Chester sale. He also has introduced legislation to repeal the state’s fair market value law.

“This is a junk accounting tool that games the system for private water companies to acquire infrastructure and profit off of basic human needs,” he said.

Kane’s bill has been stalled in the Consumer Protection & Professional Licensure Committee, which is chaired by Republican state Sen. Patrick Stefano. According to data collected by the government transparency group OpenSecrets, Stefano has received $13,500 in campaign contributions from water companies or their officials since 2014.

Stefano did not reply to a request for comment. House Speaker Joanna McClinton, a Democrat, did not respond to a request for comment, while staffers for Senate Majority Leader Joe Pittman, a Republican, said he was unavailable to connect for an interview.

OpenSecrets has tracked nearly 3,700 donations made by water companies or their associates to Pennsylvania candidates, totaling almost $2.7 million.

Activists won a legal battle earlier this year when the Pennsylvania Commonwealth Court overturned the state Public Utilities Commission’s approval of a sewer sale in East Whiteland Township. The court ruled that regulators had failed to show any public benefit of the sale.

Some activists think the court decision, if upheld by the state Supreme Court, could help dismantle the privatization push by forcing regulators to acknowledge its toll on ratepayers.

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