New orders cloud possible sale of Chester Water Authority

The winds of change blow swiftly in the midst of a pandemic, and nowhere could this be more true than the dispute between the Chester Water Authority and City of Chester over a potential sale of the authority's assets.

On Wednesday, Chester City Council adopted a resolution to begin negotiations with three bidders who responded to a request for proposal put out earlier this year: The CWA, Aqua Pennsylvania and American Water Pennsylvania.
On Thursday, the state Department of Community and Economic Development issued an "Emergency Action Plan" for Chester related to Gov. Tom Wolf's April 13 declaration that the city was facing a "fiscal emergency." The plan, among other things, directed the city to continue working with its legal counsel "to formulate positions related to the authority and to city assets" with respect to CWA, but prohibited Chester from selling, leasing, or otherwise monetizing any assets valued at more than $10,000 without DCED approval.
Then on Friday, Delaware County Common Pleas Court judge Spiros Angelos issued an order indicating any sale of CWA assets must be approved not only by the city, but also by Chester and Delaware counties, where the bulk of the authority's customers live.

A long and winding road

Chester City finances have been plummeting since 2011, when it had a year-end balance of more than $8.7 million dollars. By 2014, the city had a deficit of $6.8 million, which had ballooned to more than $23 million by 2016, the last available year for audited financial statements. Actual revenues during that period were also often far lower than budgeted projections.
The DCED emergency plan would cut about $10 million from the city's $55 million budget through hiring freezes, elimination of benefits not legally obligated for terminated or temporarily laid-off employees, limiting discretionary spending and adjusting pension fund payments.
The CWA is not in financial distress, though it did furlough 24 administrative employees Thursday, according to Solicitor Frank Catania. He attributed those furloughs to employees being unable to work remotely and a 10 percent drop in water usage, probably due to shuttered businesses. Catania said those employees will be paid through next Friday and will retain benefits for now, and CWA has offered to help usher them through the unemployment compensation process.
Dating back to 1866, the CWA serves a total of about 200,000 people in the city, in 17 of Delaware County's 49 municipalities and in 16 of Chester County's 73 municipalities.
The CWA board was under the city's sole control until Act 73 of 2012 came into effect. It is now made up of three representatives each from Chester City, Chester County and Delaware County. Approximately 22 percent of CWA's customer base lies in the city, while about 78 percent is located elsewhere in Delaware and Chester counties.
The dispute over CWA and its assets goes back to 2016, when the DCED hired Econsult Solutions to draft Chester's Act 47 Recovery Plan. The plan required the city to eliminate its budget deficiencies and address its funding deficit or face entering receivership. Chester Mayor Thaddeus Kirkland sent a letter to the CWA after Econsult concluded selling the authority was the only way to reach that goal.
Bryn Mawr-based Aqua America Inc. offered to buy CWA from the city in May 2017 for $320 million, which the CWA board unanimously rejected, finding it would ultimately increase rates for its approximately 42,000 customers.
Shortly thereafter, Chester City officials asserted they had the right to reclaim and transfer the authority's assets or dissolve the authority altogether. CWA officials, wary that litigation with Chester over the ability to transfer assets would be pricey, entered into negotiations with City Council to reach an agreement in March 2018.
That resulted in a proposed settlement unanimously approved by the CWA board to provide $60.2 million to Chester in exchange for city officials agreeing not to raise any claim to terminate or acquire any CWA project for 40 years. The agreement would also protect CWA assets by placing them in trust for that same time period. The authority planned to raise the funds for this deal through a 10-percent rate hike to customers.
Aqua Pennsylvania filed suit, however, alleging the hike would result in $75,000 being directly passed on to its customers with no corresponding benefits.
City Council then approved a resolution to issue a request for proposal to value CWA assets. That prompted CWA to file a trust petition in the Common Pleas Court's Orphan Court Division, as well as a second lawsuit aimed at shutting down the RFP and placing a moratorium on selling the authority to Aqua or any other buyer.
Eight CWA customers from Delaware and Chester counties intervened, arguing Chester and Aqua had conspired to sell CWA and its assets unlawfully and that Section 5622(a) of the Municipalities Authorities Act does not authorize the seizure of the CWA by the City of Chester.

Delaware County Common Pleas Court Judge James Bradley issued an order last July enjoining the city from "alienating any assets owned by or allegedly owned by the Chester Water Authority" and prohibiting the city from taking any legal action to dissolve or attempt to dissolve the authority.
An order from Angelos later extended Bradley's order by 30 days and the city returned six RFPs it had received unopened, except to determine who to send them back to, according to letters to potential buyers posted on the CWA website.
The letters, signed by Kirkland, indicated a new RFP would be issued in the near future. A February court order allowed the bidding process to resume and the city put out another RFP the same month, leading to the three competing bids currently on the table being submitted in March.
Meanwhile, Wolf declared a fiscal emergency in the city April 13. This was later accompanied by a "concise statement of facts" issued by the DCED in support of the declaration. One line in that statement appeared to assign the CWA to Chester as an "asset," the sale of which could generate millions of dollars in support of Chester's long-term fiscal recovery.
The CWA issued a seven-page response that was highly critical of the statement and argued selling its assets would be "a counter-productive theft of hundreds of millions of dollars from ratepayers throughout Chester and Delaware counties."
The response noted the city itself has not counted CWA as an asset in audited financial statements overseen by the DCED since at least 2003.
"The city cannot claim in every single one of its audited financial statements going back decades that the authority is not a city asset, and then suddenly reverse course and now claim it owns the authority," according to CWA. "Likewise, the Act 47 Team cannot sign-off just a few months ago on the 2016 Audit explicitly stating the authority is not a city asset, and now claim that it is."
Catania said he believes DCED is actively pushing for a sale in order to lessen the burden on the state government in supporting the city, as part of a wider statewide policy.
He pointed to emails CWA uncovered through Right to Know Law requests in 2017 showing an Act 47 coordinator had been in contact with Aqua America representatives regarding a possible authority sale shortly before Aqua made its original pitch and offered to be "helpful where appropriate."

DCED spokesperson Casey Smith said neither the department nor the Act 47 coordinator has promoted a sale of the CWA, but DCED does recognize that the city may be interested in selling its asserted interest in the authority.
The CWA also reached out to state legislators to write letters to DCED Secretary Dennis Davin supporting its position. Several took up that call, including state Sen. Tom Killion, R-9 of Middletown, and state Rep. Leann Krueger, D-161 of Swarthmore.
"We have heard from hundreds of constituents expressing strong opposition to any sale of CWA," wrote Krueger in a letter with state Reps. Christina Sappey, D-158, and Carolyn Comita, D-156, both of Chester County. "The sale of municipal water authorities in our region have frequently resulted in sharp rate increases for consumers, many of whom are senior citizens. CWA is, and continues to, operate as a financially solvent, independent municipal water authority with its own governing board. Any sale of CWA is unwarranted and not in the best interests of our
constituents."
State Rep. John Lawrence, R-13 of Chester and Lancaster counties, and Republican Majority Leader Bryan Cutler, R-100 of Lancaster County, argued in their own letter that the suggestion the city owns CWA is "ludicrous" and that they were worried the DCED may attempt to force its sale under the guise of the fiscal emergency.
"This would be a gross abuse of power under any circumstance, but particularly egregious at a time when the public is rightfully distracted by with COVID-19 pandemic," Lawrence and Cutler contended.
Killion, whose district includes Chester, said he was equally concerned about a sale in his own letter, noting he had previously opposed the idea even before the emergency was announced.
"It is my understanding that discussions are ongoing about using the Emergency Declaration as a vehicle for privatizing the CWA," he said. "I want to convey in the strongest terms possible that I oppose the sale of this public asset and believe privatization is not in the best interests of CWA ratepayers in Delaware and Chester Counties."

Offers received

Representatives for American did not reveal what its bid was, offering this statement instead: "As outlined in detail in its proposal, Pennsylvania American Water is uniquely situated in its ability to meet the needs of the City of Chester and its surrounding communities through an acquisition of the water system assets of the Chester Water Authority. While it's true that we are the largest water and wastewater utility in the commonwealth and invest more in our systems than any other investor-owned water and wastewater utility, it's also true that we are a neighbor and partner with a century-long track record of supporting communities across the Commonwealth, offering first¬hand local knowledge and expertise as the water provider in nearby communities in Chester, Lancaster, Bucks and Montgomery counties."
Aqua President Marc Lucca said his company has offered up to $380 million to acquire CWA's assets and vowed that customer bills would remain at current levels for about a decade.
"There would be no change in their rates until at least 2029 and an increase in the average bill to only $45.88 in 2031," Lucca said Friday. "During that 10-year period, while rates would not be affected, we would continue to invest in their systems and their people. They would become our systems and our people if we were to be successful, so it's not like we would take a hiatus of investing in the capital that is absolutely needed. We're investing in the people. We will continue to do that; that is our commitment."
CWA rates currently range from $35.15 to $41.70, while Aqua's average rates are approximately $65.52.
Lucca said Aqua's business relies on making sure that the environment and watersheds are protected, and that it would continue to do so at the Octoraro Reservoir and more than 2,000 acres of land the authority currently holds.
"We've committed in our letter (to Chester City Council) that there would be access for continued use of Octoraro," he said. "We've committed already to maintaining a committee that the Chester Water Authority has held together for a number of years, very successfully - we would continue to have that committee so they could help advise on the use of the reservoir and the surrounding areas."
The CWA bid is identical to the original $60.2 settlement million offer, according to Catania, but he said Friday that the Public Utilities Commission, not private companies, sets the rates and typically does not abide by "rate freezes" proposed in bids.

Catania added that the two new orders from Angelos effectively render the entire RFP process moot anyway, at least with respect to these bids.
 

New orders

There are currently four cases and eight appeals pending on various aspects of the dispute, according to Angelos.
He noted in the orders issued Friday that Chester asserts that as the original incorporating municipality, it alone has authority to transfer the assets of CWA. The city also argued that Act 12 of 2016 provided a concise framework for valuation of acquired water and wastewater systems by public utility companies and that CWA assets consisting of generation, transmission and storage do not count as protected natural resources.
The judge agreed that any transfer of assets must be conducted "solely by the governing body" under the MAA, but determined that body to be the City of Chester, Delaware County and Chester County acting "in unison."
Angelos added that the identification of proposed real and/or personal property comprising the generation, transmission and storage-related assets that would be transferred to a trust, as requested by CWA, must first be identified on the record. As such, he said the court would schedule a conference on discovery deadlines related to that issue.
Chester City Solicitor Ken Schuster said earlier Friday that the city was moving forward with the bid process and would have a website available for the public to review the bids in full and comment in some fashion.
Schuster said the city had already reached out to each bidder to begin the interview process, but did not know how long that would take. He added that whatever bid was selected would be contingent on a court order either allowing the sale to proceed, probably from the Commonwealth or Supreme Court of Pennsylvania.
Schuster did not respond to calls, emails or texts following the revelation of the new orders from Angelos, however, and the website did not appear to have gone live as of Saturday afternoon.
 

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