DV Journal

The Commonwealth Court’s surprising rejection of a PUC-approved utility sale could be a sign the surge in sales of public utilities to corporate giant Aqua is coming to an end. The result may be a new model of fair market value (FMV) acquisitions by large corporations in Pennsylvania for city-owned water systems.

On July 31, the court reversed an order by the Pennsylvania Public Utility Commission (PUC) that approved Aqua Pennsylvania Wastewater’s takeover of East Whiteland Township’s wastewater system assets.

“We bear in mind that, on account of the Commission’s expertise in the utility arena, reviewing courts accord considerable deference to the agency concerning the certification process,” the judges wrote, quoting the Pennsylvania Supreme Court’s 2007 Popowsky v. PUC ruling. The PUC overruled an administrative law judge’s rejection of the Aqua-East Whiteland agreement last summer. The Commonwealth Court noted that the PUC typically has discretion in its rulings but with a caveat. “[S]uch discretion is not absolute, and “where the judgment is manifestly unreasonable or where the law is not applied,” that discretion is abused.” [emphasis in original].

Essential Utilities, the parent company of Aqua, is one of the largest publicly traded water, wastewater, and natural gas providers in the U.S., operating in 10 states and with an estimated 5 million customers. Since Pennsylvania passed Act 12,  the 2016 law that creates a framework for municipalities looking to sell water systems to utilities, the company has been on a Keystone State buying spree. Aqua is currently locked in litigation over its attempt to purchase both the Chester Water Authority and the DELCORA wastewater system, for example.

According to Ryan Connors, managing director and senior analyst at Northcoast Research, the new ruling could profoundly impact this trend.

“This is highly unusual, and immediate next steps remain unclear,” Ryan Connors wrote in an analysis entitled, “Surprise East Whiteland ruling ups approval risks for Butler, Towamencin.”

Connors added, “Legal sources say an appeal [to] the Pennsylvania Supreme Court is an option, although we believe Essential is unlikely to take that path, as it could lead to Act 12 itself effectively being put on trial and potentially struck down.”

Act 12 requires separate appraisals from valuation experts “for the purpose of establishing…fair market value.” There was concern at the time from Pennsylvania’s then-Action Consumer Advocate that appraisals would be overstated. Supporters claimed those higher value estimates would happen because of certain considerations not allowed in pre-Act 12 appraisals.

Act 12 supporters received a major boost from Moody’s Investors Services, which argued the law allows financially-distressed cities a way out of fiscal problems created by bloated pension balance sheets and other debts. However, another part of Act 12 required utilities to keep rates stable “or phase rates in over a period of time” following a base rate case before the PUC. In the Aqua/EWT agreement, customers would have seen rates rise by 132.92 percent.

“There is something perverse about this whole system because the people that pay for the transaction are not included as a decision-maker in the transaction,” said Francis J. Catania, Chester Water Authority attorney, who wants Act 12 repealed. “Both the buyer and seller have a motivation of getting the highest price…You have a buyer who is motivated to get a higher price because they can recover more in higher rates from future charges to ratepayers.

“And the ratepayers aren’t even asked!” he exclaimed.

Catania quoted the Commonwealth Court case, which ruled the PUC had erred and/or abused its discretion in concluding that Aqua had shown that the public benefit of the proposed sale of the wastewater system outweighed the acknowledged harms of Aqua’s proposed acquisition, a finding that the PUC Administrative Law judge had recommended but which the full Commission rejected. “Every time the PUC administrative law judges recommend not approving a transaction, The full Commission overrules them and approves them.

“Fortunately, this time, the Commonwealth Court got involved because the Consumer Advocate filed an appeal. Hopefully, this court decision will require the commission to look more closely at the permanent economic burden on ratepayers imposed by these transactions, which provide more benefits to utility shareholders than utility ratepayers.”

A bill has been introduced in the legislature repealing Act 12, but Connor doesn’t believe the effort to repeal is a serious one.

“Even some of the supporters of [the Act 12 repeal] seem to see it as largely symbolic and not having the votes to pass in the near term,” Connors said. “That doesn’t mean that three years or five years from now, that might not be different, but I think the votes aren’t necessarily there in the near term.”

Connors isn’t ready to say that future Aqua purchases are in jeopardy or that Aqua changes its strategies on future purchases.

“Essential/Aqua and peers like American Water have made municipal acquisitions a core part of their national strategy,” he told DVJournal. “They are used to fighting for their interests through legal channels (such as on rate cases), and they show no sign of being fazed by the opposition they are experiencing.”

A spokesperson for Aqua said, “We are reviewing the decision, and it would be premature to comment at this time.”

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A Pennsylvania court may strike down a labor law that is clearly unconstitutional, but elected officials shouldn’t wait on the legal system to rectify state law with Supreme Court precedent, the lead sponsor of pending legislation said in an interview.

Since the Lancaster County Court of Common Pleas is now expected to rule on the constitutionality of Pennsylvania’s “fair share fee” law, state Rep. Kate Klunk, a York County Republican, sees an opportunity for her colleagues in both parties to “end the confusion” without delay. In 2018, the U.S. Supreme Court ruled in Janus v. AFSCME that under the First Amendment government workers who are not union members cannot be forced to pay union fees.

The decision affected about 5 million workers in 22 states including Pennsylvania. But Klunk is concerned that too many public employees remain largely unaware of their rights despite the Supreme Court ruling. That’s why she’s sponsoring HB 2042, which would require public employers to notify nonunion members and new employees that they do not need to make financial contributions to a union as a condition of their employment.

“In my conversations with teachers and municipal employees, they are primarily concerned about doing their job whether it’s in the classroom or in another setting and they are not well versed with employment law,” Klunk observed. “Sometimes they don’t understand what they are signing, and they don’t have someone sitting there with them to go through the process.”

The first notification of employee rights would be sent out 30 days after Klunk’s bill becomes effective. From that point forward, notifications would be sent out annually every January. Klunk’s bill would also repeal the “fair share fee” law that is no longer enforceable after the Janus decision.

Earlier this month, the Pennsylvania Commonwealth Court directed the Lancaster Court of Common Pleas to evaluate constitutional claims made against Pennsylvania labor laws that now conflict with federal law. A Lancaster judge had previously ruled that a lawsuit against the Pennsylvania State Education Association was moot after the union agreed to stop collecting fees from nonmembers.

“The courts want this issue of fair share fees settled,” Klunk said. “But we can do this much quicker legislatively, and we can do it in a matter of two to three weeks. I’d say we have all the more reason to do it now that this case has been kicked back to the Lancaster court. These cases are going to continue to play out until there’s some kind of finality. My bill strikes fair share fees from the books so they cannot be included in future contracts. We can end the confusion.”

The PSEA, the largest public employee union in the state, and its affiliates have inserted fee provisions into at least 20 collective bargaining agreements signed since the Janus decision, according to the Fairness Center, a nonprofit public interest law firm based in Harrisburg.

“The Supreme Court made clear in 2018 that public employee unions cannot force nonmembers to pay a union,” Nathan McGrath, president of the Fairness Center, said in a press statement. “But Pennsylvania law still says unions can do just that. And almost four years after Janus, PSEA and its affiliates have continued to write illegal fair share fee provisions into teachers’ collective bargaining agreements. Our clients want to force PSEA to respect the Supreme Court ruling.”

The Fairness Center represents retired Chester County teacher Jane Ladley and Lancaster County teacher Chris Meier in litigation they filed against the PSEA more than seven years ago. Both teachers raised religious objections toward paying the union. They also both had a right to send their fees to a charity rather than a union. But the PSEA rejected their charities of choice. After the Janus ruling, the union agreed to return the money to the teachers. But Ladley and Meier continue to seek definitive court action that would strike down the fair share fee law. The Lancaster court could potentially deliver that ruling.

On Tuesday, Klunk’s bill was among four of the labor reform bills the committee approved, which means they are all eligible for a full vote in the House. One of the other bills (HB 844) would protect the privacy of public employees so their personal information like their Social Security numbers, addresses, and phone numbers cannot be shared in the collective bargaining process. Another bill (HB 845) calls for greater transparency in the collective bargaining process while another (HB 2048), known as paycheck protection, prevents public employers from deducting political action committee (PAC) contributions from public employees’ wages using public payroll systems.

Nathan Benefield, senior vice president of the Commonwealth Foundation, offered the following comments:

“Pennsylvania should not have unconstitutional laws on its books. Nor should we use taxpayer-funded payroll systems to collect campaign cash. Correcting these problems will empower public employees and help ensure fairness in government. It’s encouraging to see House lawmakers moving to protect employees’ private data and shine the light of transparency on deals that cost taxpayers millions of dollars.”

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With fewer than 60 days before the Feb. 15 deadline to enact new congressional district maps, efforts to conduct the process in a less partisan and more collegial manner hang by a thread.

Throughout the year, Republican leaders in both the state House and the Senate have promised transparency and public involvement, hoping to pass a map beyond dispute and that Democrat Gov. Tom Wolf would sign so that state courts don’t intrude on the process.

In July, Rep. Seth Grove (R-York), chairman of the House State Government Committee, announced what he called the “most transparent congressional redistricting in Pennsylvania history” through direct citizen involvement in the process. Sen. David Argall (R – Berks/ Schuylkill), chairman of the Senate State Government Committee, has similarly promised to “roll back the hyper-partisan gerrymandering sins of past decades” by “making this redistricting process much more open and transparent.”

However, Democrats have looked upon these comments with skepticism and are so far not impressed by the processes being used.

On Wednesday, an adjusted version of a map drawn by a Lehigh Valley piano teacher and redistricting advocate Amanda Holt was passed on a party-line vote by the House State Government Committee. Holt, a former Republican Lehigh County commissioner, was deeply involved in the state’s map-making a decade ago and led the charge for fairer, less gerrymandered maps.

“The only thing better than a citizen-drawn map is a citizen-drawn map that incorporates the feedback of citizens all across our commonwealth,” Grove said in a statement after the vote. “The minor adjustments made to the preliminary plan reflect changes that were important to Pennsylvanians.”

Yet, a leading Democrat on the committee threw cold water on the vote while foreshadowing arguments Democrats will likely make when a map comes to the full House floor for a final vote.

“We have an opportunity to use a citizen’s map as a vessel,” said Rep. Scott Conklin (D–Centre) in comments before the vote. “But today, what we’re about to do, is we’re going to throw the citizen’s map out and we’re going to amend it again with what the elected officials wanted.”

Grove noted during the committee meeting that the map was 95 percent similar to Holt’s and that changes were made to minimize splitting municipalities among a few other technical corrections.

In the Senate meanwhile, a draft version of a bipartisan map being drawn by Argall and Sen. Sharif Street (D–Philadelphia) has drawn heated feedback from Democrats.

The leaked draft would solidify Democratic U.S, Rep. Chrissy Houlahan’s district in the Philadelphia suburbs. However, it also appears to split Philadelphia into four districts rather than three, as it is now.

That move would take a northern portion of Democratic U.S, Rep. Brendan Boyle’s Philadelphia district and move it into Republican U.S. Rep. Brian Fitzpatrick’s district, which is comprised mostly of the Bucks County and a small slice of Montgomery County north of the city. The move would reduce the White population in Boyle’s current district, making a primary challenge from a Black politician, such as Street, more likely.

Democratic political consultant J.J. Balaban told The Philadelphia Inquirer, “Any Democratic elected official should be embarrassed to support a map as bad for Democrats as that map is.”

An anonymous national Democratic official who also spoke with The Inquirer went even further, “It’s clear the Republicans have never taken this process seriously and are just running out the clock — it’s time for the court to step in,” in a comment very similar to the claims made in a new lawsuit filed by “voters” with the help of the National Redistricting Action Fund, a group aligned with Democrats.

The unanimous Democratic opposition to the citizen’s map put forward by the house committee and the harsh Democratic criticism of the leaked Senate map show how fragile the desire for compromise is in Harrisburg.

Both chambers of the General Assembly and Wolf must come to a final agreement by Feb. 15 so that candidates hoping to be on the May 18th primary ballots can circulate nomination petitions on time.

As Holt testified, her map was “Based on census data and to not break precincts.

Although Wolf will need to approve the map the legislature puts forward or the map will end up being adjudicated by the courts, he has stated that he will not negotiate.

“No one should be surprised King Wolf doesn’t want to negotiate,” Grove said on Facebook.

State Rep. Andrew Lewis (R-Harrisburg) said, “We’ve got to move this process forward. We’re going to improve this map as we move forward.”

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