STATEMENTS OF POLICY
Title 52--PUBLIC UTILITIES
PENNSYLVANIA PUBLIC UTILITY COMMISSION
[52 PA. CODE CH. 69]
[M-00051926]
Acquisitions of Water and Wastewater Systems
[36 Pa.B. 5991]
[Saturday, September 30, 2006]The Pennsylvania Public Utility Commission, on August 17, 2006, adopted a final policy statement order which seeks to increase the number of mergers and acquisitions of small, nonviable water companies to foster regionalization and enhance the viability of jurisdictional water and waster systems in this Commonwealth.
Public Meeting held
August 17, 2006Commissioners Present: Wendell F. Holland, Chairperson; James H. Cawley, Vice Chairperson; Bill Shane; Terrance J. Fitzpatrick; Kim Pizzingrilli
Final Policy Statement on Acquisitions of Water and Wastewater Systems; Doc. No. M-00051926
Final Policy Statement By the Commission:
Introduction
By Order entered December 5, 2005 at the previously-captioned docket, this Commission issued an amendment to the existing policy statement regarding the acquisition of water and wastewater systems in the form of a proposed policy statement. This order addresses the comments to the Commission's proposed policy statement and sets forth a final policy statement on the acquisition of water and wastewater systems in Pennsylvania.
Background
On March 11, 2005, Aqua Pennsylvania, Inc. (Aqua) filed a petition with the Commission in which it requested the Commission to issue a proposed statement of policy regarding water and wastewater system acquisitions. Aqua's draft proposed policy statement was essentially an amendment to the Commission's existing policy statement regarding water and wastewater system acquisitions at § 69.711. Aqua's proposed Policy Statement set forth several substantive duties and procedural obligations for acquiring utilities, most notably, a requirement that the acquiring utility prepare an original cost study within six months of closing. In support of its petition, Aqua asserted that the adoption of its proposed policy statement would enhance the Commission's and the Department of Environmental Protection's (DEP) continued goals of promoting water system viability and regionalization and would provide a workable system under which acquiring companies could continue acquisitions and, concomitantly, ensure fair treatment of customers.
The Commission determined that comments on Aqua's petition would be helpful in reaching a final determination on the necessity of issuing an amended policy statement regarding acquisitions of water and wastewater systems in Pennsylvania. The notice requesting comments from interested parties regarding Aqua's petition was published at 35 Pa.B. 2366 (April 16, 2005). The Commission received comment from various parties on Aqua's petition for a proposed policy statement.1
Upon its review of those comments, the Commission issued a revised proposed policy statement regarding the acquisition of water and wastewater systems. The revised proposed policy statement was published at 36 Pa.B. 824 (February 18, 2006). The Commission received comments from Rhoads & Sinon LLP (Rhoads), Aqua Pennsylvania Inc. (Aqua), York Water Company (York Water), Pennsylvania American Water Company (PAWC), the Pennsylvania Office of Consumer Advocate (OCA), and the Pennsylvania Office of Small Business Advocate (OSBA).
Rhoads & Sinon LLP
Rhoads states that the proposed policy statement addresses only a small portion of the problem in dealing with non-viable water systems. Rhoads states that the policy statement does not address the problem of non-viable systems that do not have the rate base or resources to provide adequate service and for which there is no viable provider of last resort. Rhoads suggests that a cooperative effort between the Commission, the DEP, and local municipalities would be ideal.
Aqua Pennsylvania Inc.
Aqua states that it generally supported the revised proposed policy statement. Aqua notes that Pennsylvania Class A water utilities historically have assisted the Commission's efforts to consolidate the numerous water and wastewater systems by acquiring investor-owned companies and municipal operations. Accordingly, Aqua acknowledges that the revised proposed policy statement will give clear and fair guidance to acquiring companies, customers and Commission staff on important acquisition issues. Additionally, Aqua states that it was in favor of an allowance of additional rate of return basis points as a means to encourage the acquisition of smaller, less viable water and wastewater systems that fall outside of the parameters of 66 Pa.C.S. § 1327.
Nevertheless, Aqua also offers some limited changes. Aqua states that it was opposed to the language contained in proposed §§ 69.711(d)(2)(i)(C) and 69.721 (e)(1)(iii) regarding the mandatory treatment of tap-in fees and hook-up fees and contributions. Aqua states that the nature and use of tap-in fees and hook-up fees vary greatly between municipal entities. Aqua notes that some entities actually invested the fees in their system, while others used the fees as revenues. Aqua asserts that since the facts of every acquisition may be different with regard to tap-in fees and hook-up fees, the policy statement should not bind the acquiring utility to a particular treatment. Aqua states that all that should be required of the acquiring utility is that it obtain tap-in and hook-up fee records from the seller so that it can present the information and the treatment of those fees can be resolved in the context of a formal rate case.
Additionally, Aqua objects to the second sentences of proposed §§ 69.711(d)(2)(iii) and 69.721(e)(3). Aqua states that the terms ''direct or indirect'' contributions in aid of construction (CIAC) creates ambiguity and should be deleted from these sentences. Aqua asserts that the examination of a system's original cost will reveal either the existence or non-existence of actual CIAC. Aqua further asserts that to guess as to what should be treated as CIAC would create uncertainty for accounting purposes and subject the acquiring utility to arbitrary and capricious CIAC estimations, which will have the effect of discouraging acquisitions.
Furthermore, Aqua states that while it supported the notion of an acquiring utility submitting an original cost study or statement of reliance on Commission or seller records prior to the next rate filing, it was concerned with the 6-month timeframe set forth in § 69.711(e) of the proposed policy statement. Aqua proposes that the timeframe be shortened to four months because it allows for a more timely inclusion of acquisitions in rate base.
Lastly, Aqua states that it supports the premise of proposed § 69.711(f) that the use of the purchase price per customer is relevant in determining the reasonableness of the purchase price of a water and wastewater system. Nevertheless, to remove any inconsistency, Aqua asserts that the phrase ''in most situations'' be removed from the second sentence of this subsection.
York Water Company
York Water states that it has been a strong supporter of the Commission's policy of encouraging larger, well-run water companies to acquire smaller, troubled water systems. Additionally, York Water states that since it is a purchaser of water systems throughout the York County area, it has substantial experience in determining the original cost of acquired facilities, and in preparing documentation in support of acquisition incentives for submission in subsequent base rate proceedings.
York Water's first comment concerned proposed § 69.711(b)(2)(i), which involves acquisitions for a price below depreciated original cost (negative acquisition adjustment). York Water recommends that the final clause of the first sentence be revised to read:
. . . provided that the difference between the acquisition cost and depreciated original cost should be amortized as an addition to income over a reasonable period of time or be passed through to ratepayers by such other methodology that is determined by the Commission. (Emphasis indicates York Water's new language to be inserted in policy statement).York Water asserts that this revision tracks the provisions of section 1327 of the Public Utility Code. York Water further recommends that the final sentence of this subsection be revised to state affirmatively the statutory exception to any pass through to ratepayers. York Water suggests the following language be inserted:
No amortization or pass through will be required when the acquisition involves a matter of a substantial public interest.York Water's second comment concerns proposed § 69.711(d)(2)(v). This subsection provides that an acquiring utility should reconcile and explain any differences between the original cost valuation and the Commission's records at the time the original cost (OC) study is filed with the Commission. York Water states that many of the acquisitions that it conducts are of municipal systems that are not regulated by the Commission, or are small utilities that may never have submitted original cost valuations to the Commission. York Water asserts that this subsection of the policy statement should be revised to recognize that Commission records may not exist.
Furthermore, York Water states that it is unclear what records are to be considered in such reconciliation. Accordingly, York Water recommends that this provision be revised to state:
In the case of an acquisition of a water or wastewater system that is regulated by the Commission, the acquiring utility should reconcile and explain any discrepancies between the acquiring utility's original cost plant-in-service valuation and the Commission's record, to the extent reasonably known and available to the acquiring utility, at the same time the supporting documentation for the study is filed.
York Water also has concerns regarding the 6-month timeframe for submitting to the Commission a newly prepared original cost plant-in-service valuation of the acquired system or statement in reliance on existing records set forth in § 69.711(e). York Water proposes that this timeframe should be shortened, particularly when the acquiring utility intends to rely upon existing records of the acquired utility or of the Commission.
Additionally, York Water notes that proposed § 69.711(e) indicates that the acquisition adjustment is not to be included in the next rate filing if the acquiring utility is unable to provide the Commission with an OC valuation more than six months before its next rate filing. However, York Water asserts that in order to be consistent with proposed § 69.721(f), it should not just be the acquisition adjustment that is not presented in the next rate case, but the entire acquisition should not be included. York Water further asserts that if the acquisition adjustment is not permitted to be reflected in a rate case under this provision, the acquiring utility, at its option, should not be required to reflect revenues resulting from the acquisition in that rate case.
York Water also had concerns about the proposed Commission staff audit of the valuation. York Water suggests that the policy statement should be clarified so that it states that the results of the audit, which is not an on-the-record proceeding, are not binding on any party, but may be presented in the acquiring utility's next rate case, subject to applicable evidentiary rules.
Lastly, York Water seeks clarification regarding proposed § 69.711(e)(2)(ii). York Water is uncertain as to what represents a Commission request. York Water encourages the Commission to make it clear that a request does not have to appear in a formal order or document from the Commission. York Water notes that occasionally it will receive informal requests from Commission staff to consider an acquisition of a troubled small utility adjacent to its service territory. York Water suggests that an acquisition that occurs following such an informal request should also qualify under this exception.
Pennsylvania American Water Company
PAWC states that it is strongly supportive of the Commission's goal of promoting water system viability and regionalization, and that it generally supports the Commission-revised proposed policy statement. However, PAWC has some concerns regarding various provisions of the policy statement.
PAWC first takes exception to proposed § 69.711(d) (2)(i)(C). PAWC disagrees with the conclusion that tap-in fees and hook-up fees booked by the seller as revenue must be booked as contributions. PAWC states that if tap-in fees or hook-up fees are booked by the seller as revenue, they should not be included as contributions. PAWC notes that when tap-in fees are booked by the seller as revenue, they are part of the seller's revenue requirement needed to support that utility's expenses, not its capital base. PAWC further notes that since the buyer usually assumes the seller's tariff, requiring the buyer to restate these revenues as contributions does not provide the buyer with adequate revenue to support the business. PAWC asserts that this will become a disincentive to regionalization and consolidation. Moreover, PAWC notes that a utility may have financed the entire cost of its asset base with debt while using tap-in fees to reduce its revenue requirement. PAWC goes on to state that requiring the buyer to restate these tap-in fees as contributions means that the buyer would automatically have to assume an unfavorable adjustment in order to acquire the system.
Secondly, like Aqua, PAWC has concerns regarding proposed § 69.711(d)(2)(iii). In identifying the procedure for booking CIAC, this subsection of the Commission proposed policy statement references ''direct and indirect CIAC.'' PAWC states that the distinction between ''direct'' and ''indirect'' CIAC is undefined and therefore confusing. PAWC notes that the term ''CIAC'' is defined in the National Association of Regulatory Utility Commissioners Uniform System of Accounts without distinction with regard to its being direct or indirect.
Thirdly, like the other commentators, PAWC has concerns regarding the fact that in order to request an acquisition adjustment, the acquiring utility had a 6-month timeframe to submit an OC study to the Commission prior to its next rate case filing. PAWC asserts that this requirement in proposed § 69.711(e) is onerous and unnecessary, and counter-productive to the Commission's goals of promoting regionalization and acquisition of small non-viable water and wastewater systems. PAWC further asserts it is not reasonable to presume a seller's willingness to sell a water or wastewater system and the acquirer's completion of an original cost study will coincide so far in advance of the acquiring utility's next rate case. PAWC recommends that the 6-month requirement be changed to 30 days, which is consistent with the notice requirement for filing a rate case.
Finally, PAWC has a concern with proposed § 69.711(f). PAWC states that it agreed that purchase price per customer is a factor to be considered, but objects to giving this one metric such elevated status. PAWC suggests that this subsection be revised to identify the purchase price per customer as one of the listed considerations without singling it out for special consideration.
Office of Consumer Advocate
The OCA submits that the Commission-revised proposed policy statement is more consistent with section 1327 of the Code, 66 Pa.C.S. § 1327, than Aqua's original policy statement. However, OCA submits that some of the proposed sections are still not consistent with section 1327 and are not necessary to set forth in a policy statement because they are already set forth in the statute.
The OCA has some concerns regarding acquisition incentives. In particular, the OCA's chief concern with the rate of return premium set forth in proposed § 69.711(b)(1) is to ensure that the Commission carefully applies this acquisition premium and that it be placed in the proper context in each case. Additionally, the OCA had concerns with proposed § 69.711(b)(5). The OCA asserts that this provision is too open-ended and vague and requested that it be deleted from the policy statement.
Additionally, the OCA seeks clarification of proposed § 69.711(d). The OCA states that the language at the beginning of this subsection could be interpreted so that the following subsections are the only type of documentation needed to justify an acquisition adjustment. The OCA notes, however, that it is clear under section 1327(a) of the Code that the acquiring utility is required to meet all of the criteria listed in section 1327(a). The OCA recommends that the proposed subsection should be revised so that it is clear that it does not address the criteria required under section 1327(a), which would allow the acquiring utility to include the acquisition adjustment in its rates, but only addresses the determination of the original cost of the acquired utility. Moreover, the OCA states that there is no requirement in § 1327 that the acquiring utility perform an OC study. The OCA further states that an OC study should only be required when there is no other way of determining the net original cost or when there is a good deal of assurance that the records of the seller are inaccurate.
Furthermore, the OCA has significant concerns regarding proposed § 69.711(e). The OCA states that it was concerned about the situation where Commission staff completes the audit of the OC study of the acquired system and then releases its findings before the acquiring utility files its next rate case. The OCA cautions that the Commission, in the context of the policy statement, considers the audit to be a final determination regarding the original cost for ratemaking purposes, the policy statement goes beyond what can be done in a policy statement and presents a due process violation. Moreover, the OCA states that this subsection of the policy statement is inconsistent with section 1327 because the timing set forth in that provision is not envisioned under 66 Pa.C.S. § 1327(b).
Lastly, the OCA has concerns regarding proposed § 69.711(f). The OCA states that the purchase price per customer alone is not an appropriate way to judge the reasonableness of the purchase price for purposes of meeting section 1327(a)(6). The OCA further states that this information alone is not sufficient to judge whether the acquisition is in the best interests of the acquiring utility's existing customers because the purchase price per customer is not meaningful for ratemaking purposes.
Office of Small Business Advocate
The OSBA's sole concern is with proposed § 69.721(g). The OSBA states that awarding a rate of return premium to an acquiring utility may impose an unreasonable burden on the pre-acquisition customers of the acquiring utility. The OSBA suggests that the same standard that applies when an acquiring utility qualifies for an acquisition adjustment--the rates charged to its preacquisition customers will not increase unreasonably because of the acquisition--should apply when a larger utility is acquiring a viable utility. The OSBA also notes that larger utilities have been regularly acquiring smaller utilities that do not qualify as non-viable. The OSBA asserts that since these acquisitions have occurred without a rate of return premium, the economic gain to the acquiring utility has apparently been a sufficient incentive. Accordingly, the OSBA requests that this subsection be deleted from the Commission's proposed policy statement.
Discussion
After reviewing the comments to the proposed policy statement, we will revise portions of the policy statement so that it is more consistent with the parameters of section 1327 of the Code and tracks sound accounting practices.
First, we address Rhoads comments. Rhoads suggests that a cooperative effort between the Commission, the Department of Environmental Protection, and local municipalities would be ideal to discuss and address many of the issues faced by non-viable water system operators. We note the Commission has established a Small Water Company Task Force that includes representation by DEP, PENNVEST and the OCA. Additionally, the Commission also interacts with DEP regional offices on a regular basis about problem company situations and compliance. Furthermore, we interact with counties, municipalities and their planning offices when we process applications for certificates of public convenience. The Commission is also a member of DEP's Technical Assistance Center Advisory Board (TAC Board), which includes the Pennsylvania Municipal Authorities Association and the Association for Boroughs and Townships. The TAC meets quarterly and often discusses water utilities' problems and solutions. We believe that we currently have in place appropriate mechanisms to bring all parties of interest together and address their concerns to insure adequate service to the public. Nonetheless, expansion of our interaction with other relevant entities continues to be an important component in achieving the elimination of non-viable water and wastewater companies.
We note that York Water had a concern regarding proposed § 69.711(b)(2)(i), which involves acquisitions for a price below depreciated original cost (negative acquisition adjustment). Specifically, York Water recommends that this provision should be more consistent with 66 Pa.C.S. § 1327(e). In order to remove any substantial ambiguity regarding this subsection, we will adopt York Water's recommended language and revise this subsection of the policy statement so that it is more consistent with section 1327(e) of the Code.
The OCA believes that proposed § 69.711(b)(5) is too open-ended and vague. This subsection references additional acquisition incentives that may be considered by the Commission. We agree with OCA's assessment. We note that larger utilities have been regularly acquiring smaller non-viable utilities and that the acquisition adjustments that have been in existence since 1990 have apparently been a sufficient incentive for acquiring utilities. Therefore, we will delete this subsection from the policy statement.
York Water and the OCA both suggest that we clarify proposed § 69.711(d) of the policy statement regarding documentation for an acquisition adjustment. We note that the OCA stated that the language at the beginning of this subsection could be interpreted so that the following subsections are the only type of documentation needed to qualify for an acquisition adjustment. We acknowledge that it is clear that the acquiring utility is required to meet all of the criteria listed in 66 Pa.C.S. § 1327(a)(1)--(9) before it is eligible to claim an acquisition adjustment to its rate base. Therefore, we agree with the OCA's recommendation that this subsection should be revised so that it is clear it does not address the criteria required under section 1327(a)(1)--(9) of the Code, but only addresses the documentation that should be provided by the acquiring utility to support a requested acquisition adjustment during its next rate case. It should be understood that the acquiring utility is still required to meet all of the eligibility criteria outlined in 66 Pa.C.S. § 1327(a)(1)--(9) before it can request inclusion of the acquisition adjustment in its rate base. Therefore, we will modify proposed § 69.711(d) accordingly.
Additionally, York Water stated that it had concerns regarding proposed § 69.711(d)(v) of the policy statement. This subsection provides that an acquiring utility should reconcile and explain any differences between the original cost valuation and the Commission's records at the time the OC study is filed with the Commission. York Water asserted that this subsection of the policy statement should be revised to recognize that Commission records may not exist. Furthermore, York Water stated that it is unclear what records are to be considered in such reconciliation. Accordingly, York Water recommended that this provision be revised to state:
In the case of an acquisition of a water or wastewater system that is regulated by the Commission, the acquiring utility should reconcile and explain any discrepancies between the acquiring utility's original cost plant-in-service valuation and the Commission's record, to the extent reasonably known and available to the acquiring utility, at the same time the supporting documentation for the study is filed.We adopt York Water's proposed revision to § 69.711(d)(v).
We note that both Aqua and PAWC had concerns regarding the treatment of tap-in fees and hook-up fees set forth in §§ 69.711(d)(2)(i)(C) and 69.721(e)(1)(iii) of the proposed policy statement. Accordingly, we will revise both sections so that the acquiring utility is not required to give tap-in fees and hook-up fees mandatory treatment as contributions. Additionally, both Aqua and PAWC had concerns with the proposed policy statement's distinction between ''direct'' and ''indirect'' CIAC. We note that PAWC indicated that CIAC is defined in the National Association of Regulatory Utility Commissioners Uniform System of Accounts without distinction with regard to its being direct or indirect. Therefore, we will revise §§ 69.711(d)(2)(iii) and 69.721(e)(3) in order to eliminate any distinction.
Aqua, York Water, PAWC and the OCA all had concerns with the timeframe set forth in §§ 69.711(e) and 69.721(f) of the Commission-proposed policy statement. Aqua stated that while it supported the notion of an acquiring utility submitting an OC study or statement of reliance of Commission or seller records prior to the next rate filing, Aqua was concerned with the 6-month timeframe. Aqua proposed that the timeframe be shortened to four months because it allows for a more timely inclusion of acquisitions in rate base.
York Water also had concerns regarding the 6-month timeframe set forth in the subsections. York Water proposed that this timeframe should be shortened, particularly when the acquiring utility intends to rely upon existing records of the acquired utility or of the Commission.
Additionally, York Water suggested that if the acquisition adjustment cannot be included in the next rate filing because the acquiring utility was unable to provide the Commission with an OC valuation more than six months before its next rate filing, then the entire acquisition should not be included in the acquiring utility's next rate case. York Water further determined that if the rate base is not permitted to be reflected in a rate case under this provision, the acquiring utility, at its option, should not be required to reflect revenues resulting from the acquisition in that rate case.
PAWC asserted that the 6-month timeframe in proposed §§ 69.711(e) and 69.721(f) is onerous and unnecessary, and counter-productive to the Commission's goals of promoting regionalization and acquisition of small non-viable water and wastewater systems. PAWC recommended that the 6-month requirement be changed to 30 days, which is consistent with the notice requirement for filing a rate case.
The OCA also had concerns regarding the timeframe of submitting the supporting documentation for the acquisition adjustment. In particular, OCA states that the proposed subsection is inconsistent with section 1327 of the Code because the timing set forth in that provision is not envisioned under 66 Pa.C.S. § 1327(b).
Additionally, the OCA and York Water also had other significant concerns regarding proposed § 69.711(e). Both parties were concerned about the situation where Commission staff completes the audit of the OC study of the acquired system and releases its findings publicly before the rate case is filed.
Lastly, York Water had concerns about the exception set forth in proposed § 69.711(e)(2)(ii) of the policy statement. York Water noted that occasionally it will receive informal requests from Commission staff to consider an acquisition of a troubled small utility adjacent to its service territory. York Water suggests that an acquisition that occurs following such an informal request should also qualify under this exception.
In light of these concerns regarding this subsection, we believe that it is appropriate to make several modifications to the proposed policy statement. We note OCA's comment that proposed § 69.711(e) of the policy statement appears to be inconsistent with section 1327(b) of the Code. We agree with this assessment. We recognize that an acquiring utility that is eligible to receive a 1327(a) acquisition adjustment can request such an adjustment before the acquisition is consummated or prior to its next filed rate case. See 66 Pa.C.S. § 1327(b). Therefore, we will modify § 69.711(c) of the policy statement so that it states expressly that an acquiring utility can elect to request a 1327(a)-acquisition adjustment in accordance with section 1327(b) of the Code or during its next rate case. Nevertheless, given the interrelationship of acquisition adjustments and just and reasonable rates, the Commission prefers that an acquiring utility request a 1327(a) acquisition adjustment during its next filed rate case and not outside the context of a rate case.
Additionally, we note that section 1327 of the Code does not require that an original cost study be performed each time an acquiring utility wants to include an acquisition adjustment. However, the Commission acknowledges that one of the primary reasons for this policy statement was to provide guidance as to when and whether an acquiring utility should prepare an original cost study. In fact, Aqua previously noted in this proceeding that, in many instances, Commission staff desires the acquiring company to prepare an original cost study in order to support the acquiring utility's request for an acquisition adjustment to its rate base.
However, it is recognized that requesting the acquiring utility for such specific bookkeeping information as part of the application process for the acquisition is not appropriate. See Application of Pa. Suburban Water Co. and Eagle Rock Utility Corp, Docket Nos. A-210104F0023 and A-210075F2000 (Order entered March 5, 2005) (Eagle Rock). § 69.711(e) was an attempt to address this concern. Therefore, we believe it is appropriate to modify proposed § 69.711(e) of the policy statement so as to indicate clearly that when the acquiring utility elects to request an acquisition adjustment during its next rate case, the acquiring utility should file the supporting documentation set forth in the policy statement. Although, we suggest that the acquiring utility, if it makes a claim for an acquisition adjustment outside of the context of a rate case, should also file adequate documentation to support its request for an acquisition adjustment as well.
Additionally, we will revise the timeframe in proposed § 69.711(e) to four months. We agree with Aqua that a 4-month timeframe allows for a more timely inclusion of acquisitions in rate base. Moreover, we agree with York Water's assertion that if the acquisition adjustment is not included in the next rate case because the acquiring utility is unable to provide the Commission with an OC valuation in sufficient time, then the acquiring utility should not include any revenues or expenses related to the acquisition, including the requested acquisition adjustment, in its next filed rate case.
We note that York Water and the OCA had significant concerns about Commission staff audits of OC valuations. We believe that it is appropriate to clarify the purpose of such an audit. If staff completes an audit before the rate case is filed, the results of the audit will not be binding on any party, but rather the audit report will be made available to the public and the report can be presented in the acquiring utility's next rate case, subject to applicable evidentiary rules. This will cure any due process concerns.
Finally, we understand York Water's concern regarding staff's informal requests to acquire a troubled small utility adjacent to its service territory. However, we believe that the existing language in the proposed policy statement is sufficient and clearly encompasses informal requests from the Commission. If York Water still has concerns whether informal requests fall within this exception, York Water can always take steps on its own to memorialize any informal request from staff. We note, however, that regardless of whether it is considered an ''informal'' request from the Commission by the acquiring utility, the acquisition must still meet the requirements of section 1327 of the Code.
Aqua and PAWC both had concerns regarding the use of the purchase price per customer as outlined in proposed § 69.711(f). Aqua stated that while it believes that the purchase price per customer is relevant in determining the reasonableness of the purchase price of a water or wastewater system, in order to remove any inconsistency, the phrase ''in most situations'' should be removed from the second sentence of this subsection. PAWC suggested that this subsection be revised to identify the purchase price per customer as one of the listed considerations without singling it out for special consideration. In light of these comments, we will modify this subsection so that the purchase price per customer is listed only as one of several relevant factors to be considered in determining the reasonableness of the purchase price of the water and wastewater system.
The OSBA had a significant concern about allowing an acquisition adjustment to be requested when a large utility acquires a viable water and wastewater system. In particular, the OSBA noted that even without a rate of return premium, larger utilities have been regularly acquiring smaller utilities that do not qualify as non-viable. Consequently, the OSBA asserts that the economic gain to the acquiring utility has apparently been a sufficient incentive. Nevertheless, as we noted earlier, acquisitions of smaller systems by larger more viable systems will likely improve the overall long-term viability of the water and wastewater industry. Additionally, these types of acquisitions will also enhance the quality of ratepayers' daily lives, promote community economic development and provide environmental enhancements. We strongly believe that these types of acquisitions generally serve public policy goals and that some sort of acquisition premium for this category of acquisition is appropriate.
Based upon the comments received and our consideration of the issues raised, we adopt this final policy statement as set forth in Annex A; Therefore,
It Is Ordered:
1. That 52 Pa. Code Chapter 69 is amended by amending § 69.711 and adding § 69.721 to read as set forth in Annex A.
2. That the Secretary shall submit this order and Annex A to the Governor's Budget Office for review of fiscal impact.
3. That the Secretary shall certify this order and Annex A and deposit them with the Legislative Reference Bureau for publication in the Pennsylvania Bulletin.
4. That a copy of this order and Annex A shall be served upon the office of Consumer Advocate, the Office of Small Business Advocate, the Office of Trial Staff, all jurisdictional water and wastewater utilities, the Department of Environmental Protection, the National Association of Water Companies-Pennsylvania Chapter, the Pennsylvania Rural Water Association, the Pennsylvania Municipal Authority Association, Rhoads & Sinon LLP and Lawrence G. Spielvogel.
5. That this policy statement shall become effective upon publication in the Pennsylvania Bulletin.
JAMES J. MCNULTY,
SecretaryFiscal Note: Fiscal Note 57-246 remains valid for the final adoption of the subject regulations.
Annex A
TITLE 52. PUBLIC UTILITIES
PART I. PUBLIC UTILITY COMMISSION
Subpart C. FIXED SERVICE UTILITIES
CHAPTER 69. GENERAL ORDERS, POLICY STATEMENTS AND GUIDELINES ON FIXED UTILITIES
ACQUISITIONS OF SMALL NONVIABLE WATER AND WASTEWATER SYSTEMS--STATEMENT OF POLICY § 69.711. Acquisition incentives
(a) General. To accomplish the goal of increasing the number of mergers and acquisitions to foster regionalization, the Commission will consider the acquisition incentives in subsection (b). The following parameters shall first be met in order for Commission consideration of a utility's proposed acquisition incentive. It should be demonstrated that:
(1) The acquisition serves the general public interest.
(2) The acquiring utility meets the criteria of viability that will not be impaired by the acquisition; that it maintains the managerial, technical and financial capabilities to safely and adequately operate the acquired system, in compliance with 66 Pa.C.S. (relating to the Public Utility Code), the Pennsylvania Safe Drinking Water Act (35 P. S. §§ 721.1--721.17) and other requisite regulatory requirements on a short and long-term basis.
(3) The acquired system has less than 3,300 customer connections; the acquired system is not viable; it is in violation of statutory or regulatory standards concerning the safety, adequacy, efficiency or reasonableness of service and facilities; and that it has failed to comply, within a reasonable period of time, with any order of the Department of Environmental Protection or the Commission.
(4) The acquired system's ratepayers should be provided with improved service in the future, with the necessary plant improvements being completed within a reasonable period of time.
(5) The purchase price of the acquisition is fair and reasonable and the acquisition has been conducted through arm's length negotiations.
(6) The concept of single tariff pricing should be applied to the rates of the acquired system, to the extent that it is reasonable. Under certain circumstances of extreme differences in rates, or of affordability concerns, consideration should be given to a phase-in of the rate difference over a reasonable period of time.
(b) Acquisition incentives. In its efforts to foster acquisition of suitable water and wastewater systems by viable utilities when the acquisitions are in the public interest, the Commission seeks to assist these acquisitions by permitting the use of a number of regulatory incentives. Accordingly, the Commission will consider the following acquisitions incentives:
(1) Rate of return premiums. Under 66 Pa.C.S. § 523 (relating to performance factor considerations), additional rate of return basis points may be awarded for certain acquisitions and for certain associated improvement costs, based on sufficient supporting data submitted by the acquiring utility within its rate case filing. The rate of return premium as an acquisition incentive may be the most straightforward and its use is encouraged.
(2) Acquisition adjustment. When the acquiring utility's acquisition cost differs from the depreciated original cost of the water or wastewater facilities first devoted to public use, the difference may be treated as follows for ratemaking purposes:
(i) Credit acquisition adjustment. Under 66 Pa.C.S. § 1327(e) (relating to acquisition of water and sewer facilities), when a utility pays less than the depreciated original cost of the acquired system, the acquiring utility may book and include in rate base the depreciated original cost of the acquired system, provided that the difference between the acquisition cost and depreciated original cost should be amortized as an addition to income over a reasonable period of time or be passed through to ratepayers by another methodology that is determined by the Commission. The acquiring utility may argue that no amortization or pass through is appropriate when the acquisition involves a matter of substantial public interest.
(ii) Debit acquisition adjustment. Under 66 Pa.C.S. § 1327(a), when a utility pays more than the depreciated original cost of the acquired system, the acquiring utility may book and include in rate base the excess of acquisition cost over depreciated original cost of the acquired system, provided that the utility can meet the requirements of 66 Pa.C.S. § 1327(a). When the acquisition does not qualify under 66 Pa.C.S. § 1327(a), the debit acquisition adjustment should be treated in accordance with generally accepted accounting principles and not be amortized for ratemaking purposes.
(3) Deferral of acquisition improvement costs. In cases when the plant improvements are of too great a magnitude to be absorbed by ratepayers at one time, rate recovery of the improvement costs may be recovered in phases. There may be a one time treatment--in the initial rate case-of the improvement costs but a phasing--in of the acquisition, improvements and associated carrying-costs may be allowed over a finite period.
(4) Plant improvement surcharge. Collection of a different rate from customers of the acquired system upon completion of the acquisition could be implemented to temporarily offset extraordinary improvement costs. In cases when the improvement benefits only those customers who are newly acquired, the added costs may be allocated on a greater than average level--but less than 100%--to the new customers for a reasonable period of time, as determined by the Commission.
(c) Procedural implementation.
(1) An acquiring utility that has met the criteria set forth in 66 Pa.C.S. § 1327(a)(1)--(9) for inclusion of a debit acquisition adjustment in its rate base, may elect to have this acquisition adjustment considered on a case-by-case basis as set forth in 66 Pa.C.S. § 1327(b), or as part of its next rate case filing. The acquiring utility should file the supporting documentation outlined in subsection (d) to support the requested acquisition adjustment.
(2) The appropriate implementation procedure to qualify for the other acquisition incentives in subsection (b) would be to file the appropriate supporting documentation during the next filed rate case.
(3) In acquisition incentive filings, the burden of proof rests with the acquiring utility.
(d) Documentation to support inclusion of acquisition adjustment. When an acquiring utility elects to have the acquisition adjustment to its rate base considered as a part of its next rate case filing, the acquiring utility should file the following documentation to support the acquisition adjustment to its rate base:
(1) Statement of reliance on existing records. An acquiring utility may elect to rely in whole or in part upon the original cost records of the seller or Commission in determining the original cost of the used and useful assets of the acquired system.
(2) Preparation of data to support acquisition adjustment. An acquiring utility, upon its own election, may file an original cost plant-in-service study with the Commission to support its requested acquisition adjustment to its rate base. An original cost study is one method of determining the valuation costs of the property of a public utility. It requires the acquiring utility to develop realistic plant balances and accumulates the records and accounting details that support those balances. Disputes regarding the acquiring utility's original cost valuation of the assets of the acquired system will be resolved in the context of a rate proceeding when interested parties will have an opportunity to be heard.
(i) Contents of an original cost plant-in-service study. When an acquiring utility elects to submit its own original cost of plant-in-service valuation, the acquiring utility is obligated to exercise due diligence and make reasonable attempts to obtain, from the seller, documents related to original cost. In particular, as part of its exercise of due diligence, the acquiring utility should request from the seller, for purposes of determining the original cost plant-in-service valuation, the original cost of the assets being acquired and records relating to contributions in aid of construction (CIAC), such as the following:
(A) Accounting records and other relevant documentation and agreements of donations or contributions, services, or property from states, municipalities or other government agencies, individuals, and others for construction purposes.
(B) Records of unrefunded balances in customer advances for construction (CAC).
(C) Records of customer tap-in fees and hook-up fees.
(D) Prior original cost studies.
(E) Records of local, State and Federal grants used for construction of utility plant.
(F) Relevant PennVEST or Department of Environmental Protection records.
(G) Any Commission records.
(H) Summary of the depreciation schedules from all filed Federal tax returns.
(I) Other accounting records supporting plant-in-service.
(ii) Failure of seller to provide cost-related documents. The failure of a seller to provide cost-related documents, after reasonable attempts to obtain the data, will not be a basis for the Commission's denial of the inclusion of the value of the acquired system's assets in its proposed rate base. Because the documents obtained from the seller may be incomplete and may result in an inaccurate valuation, the acquiring utility will not be bound by the incomplete documents from the seller in the preparation of its original cost plant-in-service valuation.
(iii) Procedure for booking CIAC. The acquiring utility, at a minimum, should book as CIAC contributions that were properly recorded on the books of the system being acquired. If evidence supports other CIAC that was not booked by the seller, the acquiring utility should make a documented effort to determine the actual CIAC and record the contributions for ratemaking purposes, such as lot sale agreements or capitalization vs. expense of plant-in-service on tax returns.
(iv) Plant retired/not booked/not used and useful. The acquiring utility should identify all plant retirements and plant no longer used and useful, and complete the appropriate accounting entries.
(v) Reconciliation with commission records. In the case of an acquisition of a water or wastewater system that is regulated by the Commission, the acquiring utility should reconcile and explain any discrepancies between the acquiring utility's original cost plant-in-service valuation and the Commission's records, to the extent reasonably known and available to the acquiring utility, at the same time the supporting documentation for the study is filed.
(e) Time to submit original cost valuation. When the acquiring utility elects to request an acquisition adjustment, it should submit a copy of its newly prepared original cost plant-in-service valuation of the acquired system or a statement of reliance of the existing records of the Commission or the seller to the Commission's Secretary's Bureau, the Bureau of Audits, the Bureau of Fixed Utility Services, the Office of Trial Staff, the Office of Consumer Advocate, and the Office of Small Business Advocate at least 4 months prior to the date that the acquiring utility plans to make its next rate case filing with the Commission.
(1) The Commission staff may conduct an audit of the original cost valuation, but if no staff audit is completed and released at public meeting before the date of the rate case filing, the Commission's determination of the original cost valuation in the rate case will be deemed final action on the original cost valuation and any associated acquisition adjustment, absent subsequently discovered fraud or misrepresentation. When staff completes an audit before the rate case is filed, the results of the audit will not be binding on any party, but rather the audit report will be made available to the public and the report can be presented in the acquiring utility's next rate case, subject to applicable evidentiary rules.
(2) When the acquiring utility makes a rate case filing sooner than the 4-month window, the acquiring utility should not include any revenues or expenses related to the acquisition, including the requested acquisition adjustment in its proposed rate base unless it includes the original cost valuation with the rate filing and one of the following circumstances applies:
(i) A compelling reason exists for requesting the acquisition adjustment in the current rate filing.
(ii) The acquisition was requested or otherwise directed by the Commission.
(iii) No statutory party objects to the inclusion of the acquisition adjustment to the proposed rate base of the acquiring utility.
(f) Purchase price of the water and wastewater system. The factors relevant to the reasonableness of the purchase price of the acquired water and wastewater system include:
(1) Promotion of long-term viability.
(2) Promotion of regionalization.
(3) Usage per customer.
(4) Growth rates.
(5) Cost of improvements.
(6) Age of the infrastructure.
(7) Return on equity.
(8) Existing rates.
(9) Purchase price per customer.
ACQUISITIONS OF VIABLE WATER AND WASTEWATER SYSTEM--STATEMENT OF POLICY § 69.721. Water and wastewater system acquisitions.
(a) General. The Commission believes that further consolidation of water and wastewater systems within this Commonwealth may, with appropriate management, result in greater environmental and economic benefits to customers. The regionalization of water and wastewater systems through mergers and acquisitions will allow the water industry to institute better management practices and achieve greater economies of scale. To further this goal, the Commission sets forth the guidance in this section regarding the acquisition of water and wastewater systems. Guidance specifically applicable to the acquisition of nonviable systems is set forth in § 69.711 (relating to acquisition incentives).
(b) Inclusion of acquisition assets in rate base. After the approval of an acquisition, as evidenced by the receipt of a certificate of public convenience, an acquiring utility may request the inclusion of the value of the used and useful assets of the acquired system in its rate base. A request will be considered during the acquiring utility's next filed rate case proceeding. See 66 Pa.C.S. § 1311(a) (relating to valuation of and return on the property of a public utility).
(c) Method of valuation of acquisition assets. The assets of the acquired system should be booked at the original cost of the acquired system when first devoted to the public service less the applicable accrued depreciation and related contributions. See 66 Pa.C.S. § 1311(b).
(d) Determining original cost of acquisition assets. An acquiring utility may use various methods to support its valuation of the original cost of the used and useful assets of the acquired water or wastewater system. For example, an acquiring utility may elect to rely in whole or in part upon the original cost records of the seller or the Commission in determining the original cost of the used and useful assets of the acquired system that are to be included in its rate base.
(e) Preparation of an original cost of plant-in-service valuation. The Commission will not require an acquiring utility to submit a full original cost plant-in-service study in order to determine the value of the assets of the acquired system. An acquiring utility, upon its own election, may file an original cost study with the Commission to support its valuation of the assets of the acquired water and wastewater system proposed to be included in its rate base. A full original cost plant-in-service study is one method of determining the valuation costs of the property of a public utility. It requires the acquiring utility to develop realistic plant balances and accumulates the records and accounting details that support those balances. Disputes regarding the acquiring utility's original cost valuation of the acquired assets will be resolved in the context of a rate proceeding in which all interested parties will have an opportunity to be heard.
(1) Contents of an original cost plant-in-service study. The acquiring utility is obligated to exercise due diligence and make reasonable attempts to obtain, from the seller, documents related to original cost. In particular, as part of its due diligence, the acquiring utility should request from the seller, for purposes of determining the original cost plant-in-service valuation, the original cost of the assets being acquired and records relating to contributions in aid of construction (CIAC), such as the following:
(i) Accounting records and other related documentation and agreements of donations or contributions, services, or property from states, municipalities or other government agencies, individuals, and others for construction purposes.
(ii) Records of unrefunded balances in customer advances for construction (CAC).
(iii) Records of customer tap-in fees and hook-up fees.
(iv) Prior original cost studies.
(v) Records of local, State and Federal grants used for construction of utility plant.
(vi) Relevant PennVEST or Department of Environmental Protection records.
(vii) Any Commission records.
(viii) Summary of the depreciation schedules from all filed Federal tax returns.
(ix) Other accounting records supporting plant-in-service.
(2) Failure of seller to provide cost-related documents. The failure of a seller to provide cost-related documents, after reasonable attempts to obtain the data, will not be a basis for the Commission's denial of the inclusion of the value of the acquired system's assets in its proposed rate base. Because the documents obtained from the seller may be incomplete and may result in an inaccurate valuation, the acquiring utility will not be bound by the incomplete documents from the seller in the preparation of its original cost plant-in-service valuation.
(3) Procedure for booking CIAC. The acquiring utility, at a minimum, should book as CIAC contributions that were properly recorded on the books of the system being acquired. If evidence supports other CIAC that was not booked by the seller, the acquiring utility should make a documented effort to determine the actual CIAC and record the contributions for ratemaking purposes, such as lot sale agreements or capitalization versus expenses of plant-in-service on tax returns.
(4) Plant retired/not booked/not used and useful. The acquiring utility should identify all plant retirements and plant no longer used and useful and complete the appropriate accounting entries.
(5) Reconciliation with commission records. In the case of an acquisition of a water or wastewater system that is regulated by the Commission, the acquiring utility should reconcile and explain any discrepancies between the acquiring utility's original cost plant-in-service valuation and the Commission's records, to the extent reasonably known and available to the acquiring utility, at the same time the supporting documentation for the study is filed.
(f) Time to submit original cost valuation. When the acquiring utility elects to request inclusion of its acquisition in its rate base, it should submit a copy of its newly prepared original cost plant-in-service valuation of the acquired system or a statement of reliance of the existing records of the Commission or the seller to the Commission's Secretary's Bureau, the Bureau of Audits, the Bureau of Fixed Utility Services, the Office of Trial Staff, the Office of Consumer Advocate and the Office of Small Business Advocate at least 4 months prior to the date that the acquiring utility plans to make its next rate case filing with the Commission.
(1) The Commission staff may conduct an audit of the original cost valuation, but if no staff audit is completed and released at public meeting before the date of the rate case filing, the Commission's determination of the original cost valuation in the rate case will be deemed final action on the original cost valuation, absent subsequently discovered fraud or misrepresentation. When staff completes an audit before the rate case is filed, the results of the audit will not be binding on any party, but rather the audit report will be made available to the public and the report can be presented in the acquiring utility's next rate case, subject to applicable evidentiary rules.
(2) When the acquiring utility makes a rate case filing sooner than the 4-month window, the acquiring utility should not include any revenues or expenses related to the acquisition, including the requested acquisition adjustment in its proposed rate base unless it includes the original cost valuation with the rate filing and one of the following circumstances applies:
(i) A compelling reason exists for requesting the acquisition in the current rate filing.
(ii) The acquisition was requested or otherwise directed by the Commission.
(iii) No statutory party objects to the inclusion of the acquisition to the proposed rate base of the acquiring utility.
(g) Acquisition incentives. In its efforts to foster the acquisitions of smaller, less viable water and wastewater systems by larger more viable systems, the Commission, under 66 Pa.C.S. § 523 (relating to performance factor consideration), has broad latitude to allow the acquiring utility to request a rate of return premium in a subsequent rate case. The allowance of a rate of return premium, as an acquisition incentive for an acquisition that falls outside of the parameters of 66 Pa.C.S. § 1327 (relating to acquisition of water and sewer utilities), may be requested by those utilities that have a demonstrated track record of acquiring and improving the service provided to the customers of smaller and less viable water systems. The allowance of additional rate of return basis points may be awarded based on sufficient supporting data submitted by the utility within its rate case filing.
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1 The National Association of Water Companies - Pennsylvania Chapter (NAWC), the Pennsylvania Office of Consumer Advocate (OCA), the Pennsylvania Municipal Authority Association (PMAA), and a private individual, Lawrence G. Spielvogel, all filed comments to Aqua's petition.
[Pa.B. Doc. No. 06-1909. Filed for public inspection September 29, 2006, 9:00 a.m.]
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