Auctioning off water systems

It used to be just troubled governments that sold off water utilities to pay off debt. Now more places are doing it.

Photo by Marcin Jozwiak on Unsplash

Happy Finance Friday! I’m diving back into Chester, Pennsylvania’s bankruptcy this week to look at one of the biggest pain points in the case: the city’s water system. The Chester Water Authority has been kinda-sorta on the auction block for years but it was only recently that a state court ruled on who even had the authority to sell it. This week, I’ll explain why so many Pennsylvania cities end up selling off their water assets and the ramifications for ratepayers.

Who owns the Chester Water Authority?

You’d think ownership of a public utility would be pretty clear-cut, but thanks to an act of the Pennsylvania legislature, this became a gray area in Chester. For most of the CWA’s more than 100 years of existence, only the city had the authority to appoint members of the governing board. Over time though, the CWA became one of the region’s largest public water systems, serving more than 200,000 people across 37 municipalities in Delaware and Chester counties.

In 2012, the state passed Senate Bill 375, which required that all ratepayers have representation on the board of any water or sewer authority—even ones incorporated by a single municipality. It was basically directed at the CWA and as a result, the water authority’s five-member board expanded to nine members and split appointees equally between the city and two surrounding counties.

A few years later, the legislature struck again and passed what’s called “fair market value” legislation. Consumer protection attorneys have called these bills “one of the biggest inducements for water deals” and “a potent lure for cities that need money for their ailing budgets.” They allow a city to sell its water system for an appraised value closer to what it would cost to replace the system, rather than the commonly used and much lower “book value,” which reflects the age and original purchase price of the assets. 

That led to the private water utility Aqua America offering to buy the CWA in 2017 with an unsolicited bid. A years-long fight ensued between the CWA board and the city over who had the right to sell it. Meanwhile ratepayers and their very vocal attorneys were opposed to any sale for fear of their rates skyrocketing.

In the fall of 2022, the Pennsylvania Commonwealth Court ruled the city of Chester is the sole owner of the water authority and its assets. Chester City Council immediately and unanimously voted to approve a $410 million asset purchase agreement with Aqua. CWA has asked the state Supreme Court to hear its case and an answer is pending.

The takeaway: Easy money—too easy. Selling the water system would solve—on paper anyway—Chester’s overwhelming retiree liabilities which accounts for the bulk of its debt. That’s actually kind of a thing with Pennsylvania localities: sell off the water/sewer utility to wipe away debt and avoid expensive infrastructure improvements to the system. Scranton and York have done so in the last several years.

But, as I’ve written about before, there’s a lot more going on in Chester than just bad numbers. Offloading the water system to a private company may very well be the answer to fixing the city’s pension debt. But it won’t come close to addressing the short-sided governance and mismanagement that bankrupted the city in the first place. That’s true of any distressed city looking for an easy out to its debt.

The problem with ‘fair’ market value legislation

Pennsylvania isn’t the only place with a rash of localities selling their water utilities. A total of 12 states have now passed Fair Market Value (FMV) acquisition regulations: California, Iowa, Illinois, Indiana, Maryland, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, Texas and Virginia.