Former Utility Commissioners Detail Benefits of State Utility Valuation Reform
Three former state utility commissioners – Norman Kennard (Pennsylvania), Richard Mroz (New Jersey), and Brien Sheahan (Illinois) – penned a new op-ed in the New Jersey Spotlight about how communities benefit when they are able to get a fair market price for the sale of their water or sewer systems. Many municipalities across the country are turning to professional water companies due to “urgent infrastructure challenges, an aging workforce, and evermore stringent water quality and environmental mandates.” The former commissioners explain that, when such a sale occurs in one of the 14 states that have adopted utility valuation reforms, the municipality gets “the most value for their water or wastewater assets by allowing multiple and independent experts to determine a market rate acquisition price using long-standing and proven methods of appraisal.”
Read the full piece below.
Op-Ed: Municipalities and taxpayers deserve a fair price for utility assets
Imagine selling a major asset — say, for instance, your family home. Naturally, you would want the market to determine its value and selling price.
Now imagine that a state law limited the price you could get for your home because an archaic accounting rule only allowed it to be sold for the original building cost, plus improvements, minus depreciation. And when you subtract depreciation, the actual value of the house (on an accounting basis) may be zero, or even less than zero.
That’s right — even though the property could command a fair market price through bids from buyers, you may only get a price that is far below its real market value or even nothing at all.
Unfortunately, this is the reality currently faced by a large portion of municipal governments and taxpayers across the country.
Driven by urgent infrastructure challenges, an aging workforce, and evermore stringent water quality and environmental mandates, a growing number of municipal governments simply want out of the drinking water and wastewater operations business.
Deciding to sell
Many local leaders around the country are determining that it is in the best interest of their ratepayers and constituents to redeploy municipal assets to more pressing needs, and allow professional water companies with scale and experience to address the challenges of rebuilding and managing aging infrastructure.
However, thanks to obsolete and unfair laws in many states, municipal governments and taxpayers are often unable to get a fair price for their water and sewer assets.
As public utility commissioners from states that have recently led the way on utility valuation reforms, and a former New Jersey Board of Public Utilities president, we’ve seen firsthand how commonsense changes to these outdated laws can help municipalities and their taxpayers receive the full market value they deserve for their assets — and in turn unlock funding to reinvest in infrastructure, retire debt, fund pensions, and address other critical local priorities. It is important to underscore that proceeds from these transactions are reinvested in the communities.
A total of 14 states — 10 in the last three years, led by both Democrats and Republicans — have adopted utility valuation reforms that modernize value-setting procedures to be used when systems are sold.
In McKeesport, Pennsylvania, the ability to sell sewer assets at market value enabled the city to retire debt, regain financial stability and avoid municipal bankruptcy. State regulators said the deal also enabled millions in much-needed infrastructure repairs and upgrades, provided enhanced customer service, and allowed for assistance programs for low-income customers.
Another wastewater system sale in Manteno, Illinois, enabled more than $7.5 million in upgrades to improve system reliability, ensure adequate capacity for municipal growth, and protect local waterways, all while also saving customers money through lower sewer rates compared to municipal operation — investment and savings that would not have been achieved otherwise.
One Illinois mayor recently said that the sale of his village’s water system offered several community benefits: “Not only do we have trust in [the water company] to ensure quality drinking water, but they are able to decrease local water bills by almost $15 a month. We are pleased about the value they bring to our community.” In 2018, the fair market law was expanded in Illinois after an initial and successful five-year period.
Opponents ignore the benefits of selling
Valuation reforms have also provided lifelines to several troubled systems facing Environmental Protection Agency enforcement orders, allowing them to regain system compliance and retire utility debt. Without the reforms, these systems would have been valued at next to nothing.
Ignoring the many benefits that asset sales bring to communities, opponents argue that valuation reforms somehow “artificially inflate” sale prices even though those prices are set by independent appraisals through a strict process defined by statute. In addition, opponents disregard how state regulators review and approve all utility transactions and can reject a purchase price that is not reasonable or a sale that does not serve the public interest.
Sales are approved both at the local level after public meetings and a transparent process, and again through a public, litigated proceeding before a public utility commission that gives all parties, including consumer advocates and residents, another opportunity to participate. Rather than diminishing oversight, the sale of municipal water and wastewater systems actually increases the regulatory scrutiny of investments in physical infrastructure, rates charged customers, and the financial health of the utility.
Despite the self-serving criticism from some opponents who would rather see ratepayer assets sold for less than their full and fair market value, the facts are clear. Fair market reforms enable communities to get the most value for their water or wastewater assets by allowing multiple and independent experts to determine a market rate acquisition price using long-standing and proven methods of appraisal.
Without these commonsense utility valuation reforms, communities would continue to have limited options to repair and rebuild water systems that are in most cases decades past their useful lives, and be unable to unlock the value of these assets for reinvestment in other municipal priorities and critical needs.