Commonwealth Court Confirms Affirmative Public Benefits Standard Still Has Teeth in Fair Market Value Acquisitions (Reversing PA PUC Approval of Aqua Acquisition of East Whiteland Township)

In Cicero v. Pennsylvania Public Utility Commission,  ___ A.3d ___, (Pa. Cmwlth., No. 910 C.D. 2022, filed July 31, 2023) (“Cicero”), the court reversed the Pennsylvania Public Utility Commission’s (PUC) approval of Aqua Pennsylvania Wastewater Inc.’s acquisition of East Whiteland Township’s wastewater system assets.  The court found Aqua had not proven that the acquisition would provide affirmative public benefits and confirmed that proving net benefits outweigh detriments of a transaction remains the standard for approving fair market value (FMV) acquisitions of municipal assets.  Cicero, slip op. at 21 (“[I]n every Section 1329 case, it must be shown that the affirmative public benefits that arise from and are specific to a transaction outweigh the harms of the transaction, such that approval of the transaction will ‘affirmatively promote the service, accommodation, convenience, or safety of the public in some substantial way.’”).

Cicero does not change the law; it finds the PUC failed to apply the law and provides clarification on fact-specific application of the affirmative public benefits test in FMV acquisition proceedings where the selling entity is already providing safe and adequate service.  The court reasoned that the PUC cannot merely rely upon benefits derived from the technical, managerial, and financial fitness of a utility like Aqua because general fitness characteristics: (1) are not specific to the system being acquired and thus do not arise from the transaction; and (2) do not outweigh the burdens to consumers of Aqua’s FMV acquisitions.  Cicero, slip op. at 19 (“Holding that a transaction will result in substantial affirmative public benefits because it will provide the same services as already being provided is not a benefit, let alone a substantial affirmative public one as required by statute and our caselaw.”).  The court further held that while “aspirational statements” are substantial evidence of an affirmative public benefit, the benefit must be considered in context and here the benefits do not outweigh the burdens to consumers of Aqua’s FMV acquisitions.  Cicero, slip op. at 20-21(“[T]hese cases[1] do not support a conclusion that the public benefits arising from aspirational statements will always constitute affirmative public benefits that will be substantial enough to outweigh known harms.”).

 The burdens on consumers derive from changes to how a utility can earn profit and recover costs from a municipal acquisition.  Act 12 of 2016 added Section 1329 to the Public Utility Code, which allows for utilities to acquire municipal or municipal authority assets at FMV and recover transaction and transition costs of the acquisition with a truncated six-month approval process.  Section 1329 incentivizes utilities to acquire municipal/authority assets through various changes. The most drastic of which is allowing the acquiring utility to include the FMV of the assets in its rate base on which it earns a profit; whereas prior to Section 1329, the value of the assets includable in rate base was original cost minus depreciation.  As opponents to various Aqua 1329 acquisitions have pointed out, Aqua’s acquisitions at FMV of systems that are already operating adequately and safely needlessly increase customer rates because unlike a municipality or authority which does not earn a profit, does not pay taxes, and has a generally lower cost of debt, Aqua is entitled to a profit on its investments, pays taxes, incurs higher debt costs, and then recovers these profits and costs from ratepayers.  Thus, a 1329 acquisition will result in higher costs to ratepayers than if the acquisition had not occurred. 

That is not to say that all FMV acquisitions are a net detriment to the public. Section 1329 acquisitions can have affirmative public benefits that outweigh the higher rates under public utility ownership. For example, where a municipal system is failing to provide safe service and the municipality is unwilling or unable to make improvements, a Section 1329 acquisition can provide much needed investment in infrastructure and customer service.  

Despite a lack of net affirmative benefits in some transactions, the PUC has approved every Aqua 1329 acquisition to date.  Thus, Cicero disrupts the PUC’s repeated refusal to appropriately apply the affirmative public benefits standard to Aqua’s 1329 acquisitions and likely results in enhanced opportunities to challenge acquisitions and prevail. 

Whitney Snyder, a partner at HMS legal, represents a variety of entities dealing with Public Utility Commission regulation and litigation, such as utilities, large customers, and municipalities, including opposing Aqua 1329 transactions.

[1] Popowsky v. Pennsylvania Public Utility Commission, 937 A.2d 1040 (Pa. 2007); City of York v. Pennsylvania Public Utility Commission, 295 A.2d 825 (Pa. 1972).