Was Philly region’s largest water-utility sale a politically motivated sweetheart deal?

Delaware County voters face a watershed moment in November over whether to continue more than 150 years of unbroken Republican control. So it is fitting that the vote could hinge on a literal watershed issue — the recently announced $276.5 million privatization of the county’s public wastewater system.

The county’s Democrats are decrying the decision by the Republican-controlled Delaware County Regional Water Quality Control Authority (DELCORA) to sell its sewage system, which serves more than 40 towns in Delaware and Chester Counties. The Democrats say the hasty no-bid deal to a politically connected company, Aqua Pennsylvania, was designed to prevent an important patronage stronghold from falling into Democratic hands should political control of the county change.

“This backroom deal is what corruption looks like in Delaware County,” Elaine Paul Schaefer, a Democratic candidate for County Council, said after the Sept. 17 deal was announced. She is one of three Democrats vying to take seats on the five-member board currently held by a Republican majority.

“It’s layer upon layer of awfulness,” said Brian Zidek, one of two Democrats on the council who were first elected in 2017. “This entire matter is contrived to protect a few folks at DELCORA.”

The authority’s leadership said the sale was neither contrived nor political, but was an effort to rein in the escalating costs of complying with clean-water regulations. One of its major expenses is the fee paid to Philadelphia to treat wastewater from DELCORA’s eastern towns. DELCORA said it needs to expand its own treatment plant so it can separate itself from Philadelphia before the contract expires in 2028.

“They’re making it political,” said Robert Willert, DELCORA’s executive director, who is also president of the Ridley Township Board of Commissioners and head of the township’s Republicans. “We had to make a move because we have to be out [of Philadelphia] by 2028.”

Aqua’s political action committees gave $110,000 to Delaware County Republicans since 2015, which Democrats cite as evidence that the DELCORA deal is payback to the Bryn Mawr company. But Christopher Franklin, the chief executive of Aqua America Inc., the parent of Aqua Pennsylvania, said the company made the deal because it is good for DELCORA’s customers as well as Aqua.

“These deals aren’t done based on politics,” Franklin said. “We’re doing it because it makes economic sense.”

Aqua’s state and federal H2O PACs are funded by Aqua employees, Franklin said, and they tend to support incumbents in areas served by Aqua. In Delaware County, that’s mostly Republicans. “The contribution trends typically follow the elected officials elected by our customers,” said Franklin.

Aqua has long-standing relations with public officials in the area, where it already provides water service to 35 of the 46 towns served by DELCORA, including Radnor, Haverford, Newtown, and Ridley. When DELCORA considered privatization, Aqua seemed like a natural fit, Willert said.

“We know the Aqua people," said Willert. “They’re very near, they’re partners in a lot of things, we see them at different events, they’re respected." DELCORA announced on July 16 that it signed a letter of intent with Aqua, the first public notification that the system was on the market.

Aqua’s proposed acquisition of DELCORA, which serves 165,000 customers, would be the largest privatization of a public water or wastewater system in Pennsylvania. The Pennsylvania Public Utility Commission needs to approve the acquisition. Aqua’s expected PUC filing should disclose more details about the sales agreement.

Aqua is also engaged in a contentious battle to take over the Chester Water Authority, which provides drinking water to 42,000 customers in Delaware and Chester Counties. That $320 million proposal, now in court, pits suburban interests versus Chester City, for which the utility sale would provide a cash infusion that advocates say would resolve the city’s financial woes.

The DELCORA sale is part of a consolidation trend underway in the industry, particularly in Pennsylvania, where a 2016 state law makes it more attractive for smaller municipal water and wastewater systems to sell to private operators. The law encourages investor-owned utilities to offer heftier prices for municipal systems by allowing them to charge ratepayers for the appraised fair-market value of an acquired system, rather than its lower depreciated cost.

Aqua Pennsylvania and its chief rival, Pennsylvania American Water, a subsidiary of Camden-based American Water Works Co., have engaged in several bidding battles over municipal systems that resulted in high sales prices. Pennsylvania American has 658,000 water and wastewater customers, and Aqua Pennsylvania has about 450,000 customers.

Aqua’s negotiated price with DELCORA is about $1,600 per customer, less than half the price it is paying per customer to buy several smaller wastewater systems, including those in Cheltenham, Limerick, East Norriton, and East Bradford Townships. Critics say DELCORA might have gotten a higher price if it had sought competitive bids rather than offering to negotiate exclusively with Aqua.

American Water Works said as much in an unusual letter to the editor published Aug. 12 in the Delaware County Daily Times, asking to be considered as a potential buyer. American’s letter said its evaluation of DELCORA valued the property at “potentially more than $400 million."

American portrayed itself as bigger, more experienced, and a lower credit risk than Aqua, and took a swipe at its rival by noting Aqua’s ongoing $4.3 billion acquisition of a gas utility in western Pennsylvania, currently awaiting regulatory approval.

“We’re focused only on water and sewer; not distracted by other utility types and associated risks,” wrote Susan Story, the chief executive of American.

American has since backed down. "We are currently not active in the process,” Ruben Rodriguez, an American Water Works spokesperson, said in a statement.

Willert said he was mystified by American’s uninvited offer, because American also has engaged in exclusive negotiations to acquire several Pennsylvania municipal operations. “It’s kind of strange to me that they would throw stones when they do the same thing,” he said. Nothing in the law requires a municipal authority to take the highest offer, he said.

DELCORA was not interested in maximizing the price it got for selling the system, because that would drive up rates in the long run, Willert said. It hired Public Financial Management Inc., the Philadelphia consulting firm known as PFM, to negotiate with Aqua.

“It just didn’t make sense to put it out for bid when all we’re trying to do is keep rates stable,” said Willert. “The biggest problem we have is we don’t want the rates going crazy, and we need to make a move.”

A key aspect of the sale is its unique structure placing net proceeds of about $210 million — after DELCORA pays down debt and fully funds its employee pension plan — into a trust that will be used to reduce rate increases over eight years. In the long run, rates under Aqua ownership will be slightly less than if DELCORA borrowed money to do the upgrades itself, said Willert.

DELCORA’s unusual plan to channel the sale proceeds into a trust to benefit its customers differs from many other recent sales of public water and wastewater systems, which became windfalls for government entities that used the funds to pay for public projects. In most transactions, local governments — not water and sewer customers — benefit from the system sales.

“Overall, we see the DELCORA deal as a refreshingly ratepayer-friendly contrast to the trend in recent years of lofty valuations for acquisitions of water/wastewater systems in economically stressed areas that will inevitably create affordability issues down the road,” said Ryan Connors, research director of Boenning & Scattergood, the West Conshohocken brokerage firm.

The pros and cons of DELCORA’s approach likely will be addressed by the PUC in its review, which is expected to take upward of a year.

Democratic critics of DELCORA’s privatization say the utility should not be sold in the first place. They say it would be better off in public hands.

“DELCORA is not in financial difficulty," said Zidek, the county councilman. "They don’t need to do this at all.”

But the authority says it faces increasing costs to bring its system into compliance with federal clean-water laws, and selling the system is the best option to reduce the impact on customers.

The DELCORA system, like many wastewater systems built in older cities, has a large number of combined sewers that carry both sewage and wastewater. During storms, the sewers discharge directly into waterways, a major source of pollution.

DELCORA is under a consent order with the U.S. Environmental Protection Agency to reduce discharges of untreated wastewater from its combined sewers in Chester City. As a Philadelphia customer, DELCORA is also on the hook to pay a share of the costs that the Philadelphia Water Department has to spend to comply with its own EPA consent order, which requires Philadelphia to capture 85% of the raw stormwater discharges by 2036.

Philadelphia in 2017 notified DELCORA that based upon its 9.4% share of the city’s wastewater volume, DELCORA’s estimated costs for 25 years would total about $605 million, much more than DELCORA had previously anticipated. In April, the Water Department told DELCORA it was unable to relieve it of its obligations, but “we will work hard to find an engineering solution that is affordable and sensible.”

“At that point, we got to start thinking of something else,” Willert said.

DELCORA devised a plan to expand its Chester wastewater treatment facility and build a new pipe to pump sewage that now flows to Philadelphia to its own treatment plant. DELCORA estimates the plan would cost more than $400 million. It needs to be designed, permitted and built by 2028 if DELCORA wants to part ways with Philadelphia.

“We have to move now, because as you can imagine, to run the pipe and to expand our plant is going to take about nine to 10 years,” said Willert. “That’s why the urgency to get this done now.”

Philadelphia stands to lose its largest wholesale wastewater customer if DELCORA, under Aqua ownership, builds alternative treatment facilities. DELCORA accounted for about $7.6 million, or 1.1%, of the Water Department’s total revenue in 2016, according to a city revenue bond prospectus.

The city says it attempted to contact DELCORA in the weeks before the deal was announced Sept. 17, but Willert said the authority was already engaged in exclusive talks with Aqua and did not respond.

Since DELCORA’s sale to Aqua was announced, Mayor Jim Kenney’s office has let Delaware County officials know the city is still open to working with DELCORA to ensure the suburban system is only paying its fair share of Philadelphia’s costs.

“We are still conducting analysis, but it is likely the rates previously discussed will be lower, and that is why we had wanted to meet with the DELCORA leadership,” the mayor’s chief of staff, James R. Engler, said in a Sept. 19 email.

Willert said that DELCORA would be happy to meet with Philadelphia officials, joined by its new partners from Aqua. But DELCORA is reluctant to prolong its commitment to the city without any ability to control the costs of Philadelphia’s stormwater management program.

“It’s in the best interests of Delaware County ratepayers if we control the destiny of what our rates are and our expenses are,” he said. “I think we’re all committed to moving out at this point.”