Impact of Act 12 on Water Privatization and Rate Hikes in Pennsylvania

Amid rising concerns over water infrastructure in Pennsylvania, a major merger between American Water and Essential Utilities has spotlighted the increasing privatization of municipal water systems. The $40 billion deal has stirred discussions about the future of water management and its implications for residents across the state.

Many local governments, burdened with aging infrastructure and financial strain, are now attractive targets for private companies looking to acquire municipal water systems in exchange for much-needed funds. However, the details of how this merger will impact water bills remain uncertain. According to a press release, the merger aims to maintain affordable water rates while supporting economic growth in over 2,000 communities.

Patrick Cicero, a former state consumer advocate, expressed skepticism: “We just don’t know the impact that this acquisition is going to have on utility rates yet, but I would say it doesn’t particularly bode well for consumers to have one mega-utility serving most of the Commonwealth of Pennsylvania,” he told City & State.

Private Inroads into Public Utilities

Pennsylvania's legislative landscape significantly shifted with the enactment of Act 12 in 2016, which paved the way for increased privatization of municipal water systems. The act allows higher valuations for such systems by using "fair market value" assessments, drawing interest from private investors. According to the Public Utility Commission, this change has resulted in 25 successful acquisitions since its passage.

The act requires both the seller and potential buyer to engage independent consultants to assess the water system's value. This process often results in higher acquisition prices, which can lead to increased rates for residents as municipalities seek to alleviate long-term financial burdens by selling their water assets.

Kimberly Barrow, vice chair of the Public Utility Commission, explained that the new valuation method departs from relying solely on depreciated costs, stating, “Now, instead of looking at the original cost, we’re looking at two figures. It’s going to be the negotiated purchase price or it’s going to be the fair market value – the lesser of those two things.”

The implications of Act 12 have prompted concerns over potential rate increases, especially in low-income areas where water systems are particularly fragile. Despite this, industry representatives argue that these valuations provide a more accurate reflection of a utility's worth.

Investment Needs and Rate Adjustments

In response to escalating infrastructure needs, Pennsylvania American Water has filed a request with the PUC to increase rates, aiming to fund $1.2 billion in improvements by 2027. These upgrades, critical for compliance and reliability, include the elimination of lead service lines and the replacement of old water mains.

Thom Chiomento of Pennsylvania American Water acknowledges the financial challenges: “It’s not cheap to run these systems and to invest in them and to get them to where they need to be from a compliance and an operational reliability perspective,” he said, highlighting the necessity of rate hikes to support these investments.

Legislative Considerations and Future Outlook

The ongoing privatization wave has sparked legislative interest in reforming Act 12, with proposals to place limits on acquisition costs and increase public oversight. State Rep. Robert Matzie’s previous attempts to amend the act reflect ongoing debates over ensuring the original intent aligns with consumer protection.

Chiomento suggests that any updates should balance investor incentives with public interests, emphasizing transparency and fair evaluation in acquisition processes. The conversation continues as stakeholders seek a path that ensures both infrastructure improvements and fair utility rates for Pennsylvania residents.