Gov. Wolf Should Veto Hidden Tax Increase That Could Hike Water Rates by Hundreds of Millions

Stephen Herzenberg |

As most readers of this blog know, Pennsylvania just concluded a 2015-16 budget process nine months late because the legislative majority was unwilling to raise enough revenue to begin funding schools more adequately and equitably.

While unwilling to find another roughly $200 million dollars to fund schools, however, the legislature last week passed, and sent to the Governor’s Desk, a bill (HB 1326) that could increase privatization of water utilities in Pennsylvania, raising water rates for hundreds of thousands of Pennsylvania households. The bill could end up being a backdoor tax increase that ultimately costs taxpayers several hundred million dollars per year.

Maybe the difference here is that the additional money the Governor wanted would have gone mostly to lower- and moderate-income rural and urban schools that experienced the deepest school funding cuts in 2011-12. By contrast, the hidden tax increase from higher water rates at private utilities would go mostly to fatten the bottom lines of private, for-profit water companies such as Aqua America.

Undeserving poor and middle class; deserving rich. Get it?

Most of us haven’t heard about HB 1326 because we’ve been so focused on the drawn out budget battle. In addition, advocates for public water and wastewater systems had understood that the bill would not run this session. As a result of these factors – and, we assume, effective lobbying by the private water industry – the bill passed the Senate unanimously last week after having earlier passed the House 175-22.

Because HB 1326 has not been given the public scrutiny it should have been, we urge Gov. Wolf to veto it. If the bill is sent back to the legislature, the Independent Fiscal Office should conduct an analysis of the range of plausible costs of the bill to consumers, and the Department of Environment Protection should issue an analysis of potential impacts on the environment and smart growth.

Without getting too weedy, the bill could accelerate privatization of municipally owned water and wastewater utilities because it changes the regulations governing their sale price. As it stands, when a private company buys a municipal water or sewer system, it pays the “original cost” of the acquired utility, as depreciated over the years rather than the unregulated “fair market value” (FMV). If the public entities selling the utility don’t get as much money under the current “original cost” approach, they have less incentive to sell. There is an exception to “original cost” valuation now for small (3,300 customers or less) or “nonviable” utilities. In these cases, the PUC may already authorize any reasonable purchase price so long as rates will not “increase unreasonably.” (HB 1326 also includes another sweetener for private buyers because it allows them to defer improvements for up to four years.)

HB 1326 would make FMV pricing the rule rather than the exception. The bill also eliminates important consumer protection provisions that allow the PUC to review acquisitions and determine whether the value is reasonable and whether the merger provides a public benefit. The upshot of all this is that a shift to FMV pricing may make it much more enticing for municipalities to sell their publicly run water systems because they will be paid more. The Pennsylvania bill is based on a similar bill enacted in Illinois in 2013 with the backing of an Illinois free-market think tank.

How do we know that this bill might cost Pennsylvania consumers hundreds of millions of dollars per year? Here’s how.

According to the national non-profit Food and Water Watch in a February 2016 report, private water systems in Pennsylvania charge an average of 84 percent more than public systems per year, adding $323 to a typical household’s water bill. There are 4.8 million households in Pennsylvania. If HB 1326 led to 10 percent more of Pennsylvania’s households (480,000 households) being served by private water companies and paying $323 more per year each, the total cost to consumers would be about $155 million annually.

Interestingly, of the 18 individual states for which Food and Water Watch publish separate data (see Appendix A, pp. 12-13), Pennsylvania and West Virginia private utilities win the prize for the highest average annual water rates in the county – the only ones over $700 per year. The third place state (Illinois) is more than $100 lower per year at $586. Food and Water Watch also found that half of the top 10 most expensive water systems in the country are in Pennsylvania. This likely reflects the fact that PA already has very “investor friendly” laws and regulations for water companies. In fact, Janney Montgomery Scott, a financial services firm, ranks Pennsylvania as number one for its regulatory climate for private water utilities – Pennsylvania’s regulation are the “gold standard” (literally) for companies that want to hit their Return on Equity (ROE) targets (see p. 55 in this source).

The February 2016 Food and Water Watch report also shows that facilitating privatization of water and other utilities goes against the national trend of increasing public ownership. Since 2007, the number of people served by private water companies nationally has shrunk by 18 percent (8 million people). There are sound reasons to favor public ownership of the natural monopolies we call utilities: as well as accountability and affordability, these include more equitable and environmentally responsible service, and better jobs. In many parts of Pennsylvania, plentiful, high-quality water is also an economic development and quality of life asset – one that privatization threatens to undercut.

What we know after a little digging gives us pause about HB 1326 and leaves us with the following questions.

  • Since private water and waste water service is working so well that it is shrinking nationally – despite the powerful corporate and ideological support it has – should Pennsylvania be going against the trend and encouraging more privatization?
  • Should this significant regulatory change happen while legislators and advocates are focused elsewhere – and without adequate hearings, fact-finding and analysis of potential impacts?
  • Doesn’t better regulation of water and wastewater utilities that saves consumers a few hundred million dollars a year qualify as reining in waste and abuse, which leading lawmakers now champion?
  • If consumers spend a few hundred million dollars less on water and wastewater utilities might it not be a little easier for the state to adequately fund education?

In sum: a veto of HB 1326 by Gov. Wolf would give the legislature and stakeholders a chance for a do-over on a critical issue where it looks to us like Pennsylvania needs a do-over.