New Voluntary Process for Water and Wastewater Acquisitions in Pennsylvania

May 4, 2016

Pennsylvania’s Act 12 of 2016 (Act 12) establishes a process to remove the roadblocks typically faced by the owners of water and wastewater systems desiring to sell systems often in need of repair or that face substantial costs to meet environmental standards. Usually the potential counterparty is a larger utility regulated by the Pennsylvania Public Utility Commission (PUC).

Act 12 is voluntary. If the buyer and seller agree to use Act 12, that statutory process should help ensure that the systems receive the needed improvements while ensuring that customers of the acquired system will avoid a sharp increase in rates. Highlights of the process in Act 12 include:

• Fair Market Value: To determine the fair market value of the selling utility’s assets, two valuation experts are chosen (from a list maintained by the PUC): one by the buyer and one by the seller. Each expert will complete an appraisal of the assets. The average of the two appraisals is used as the “fair market value” of the assets.
• Rate Base: The rate base of the selling utility will be incorporated into the rate base of the acquiring utility. The selling utility’s rate base is either (a) the purchase price negotiated by the acquiring utility and selling utility or (b) the fair market value of the selling utility (as determined by the appraisal), whichever is less.
• Rate Freeze: The buying utility will adopt the selling utility’s rates. Those rates will remain in effect until completion of the buying utility’s next base rate case. In addition, the buyer and seller can agree (subject to the PUC’s approval) to a post-sale rate stabilization plan, which would help to mitigate the impact of future rate increases and avoid rate shock of consumers.

Act 12 is effective on June 13, 2016. Time will tell whether Act 12 will be achieve its dual-goals of fixing deteriorating systems, increasing environmental compliance and protecting ratepayers from rate shock.

If you have any questions, please contact Carl Shultz at (717) 255-3742 – cshultz@eckertseamans.com – or Dan Clearfield at (717) 237-7173 – dclearfield@eckertseamans.com.

This Eckert Seamans Energy and Utilities Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice.

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