PENNSYLVANIAPUBLIC UTILITY COMMISSION

Harrisburg, PA 17105-3265

Public Meeting held June 14, 2017Commissioners Present:

Gladys M. Brown, ChairmanAndrew G. Place, Vice Chairman, Statement, dissentingJohn F. Coleman, Jr.Robert F. PowelsonDavid W. Sweet

Application of Aqua Pennsylvania Wastewater, Inc. A-2016-2580061Pursuant to Sections 1102 and 1329 of the Public Utility Code for Approval of its Acquisition of the Wastewater System Assets of New Garden Township and the New Garden Township Sewer Authority

Table of Contents

I. History of the Proceeding..........................................................................................2II. Background................................................................................................................7

A. Section 1329 and Valuation of Assets.......................................................................7B. Transaction Overview................................................................................................9

III. Discussion................................................................................................................12A. Legal Standards....................................................................................................12B. Recommended Decision..........................................................................................14

1. Applicant’s Fitness...............................................................................................152. Rate Stabilization Plan.........................................................................................163. Challenge to Appraisals.......................................................................................184. Files in Electronic Working Format.....................................................................205. Approval of Rate Base Value...............................................................................216. Public Interest / Affirmative Public Benefit.........................................................26

C. Rate Base Valuation under 66 Pa. C.S. § 1329.......................................................291. Ability to Challenge Fair Market Appraisals.......................................................292. Rate Stabilization Plan.........................................................................................353. Files in Electronic Working Format.....................................................................424. Approval of Rate Base Value...............................................................................45

D. Public Interest and Affirmative Public Benefits......................................................541. Impact of Section 1329 on Public Interest Determination...................................542. Public Interest Analysis of New Garden Acquisition..........................................60

IV. Conclusion...............................................................................................................71

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OPINION AND ORDER

BY THE COMMISSION:

Before the Pennsylvania Public Utility Commission (Commission) for

consideration and disposition are the Exceptions to the Recommended Decision (R.D.) of

Administrative Law Judge (ALJ) Steven K. Haas issued on April 21, 2017, which were

filed by the following Parties on May 1, 2017: Aqua Pennsylvania Wastewater, Inc.

(Aqua, the Company, or the Applicant); New Garden Township and New Garden

Township Sewer Authority (collectively, New Garden); the Commission’s Bureau of

Investigation and Enforcement (I&E); and the Office of Consumer Advocate (OCA). On

May 8, 2017, Aqua, I&E and the OCA filed Replies to Exceptions. For the reasons

below, we shall grant the Exceptions of Aqua and New Garden, in part, and deny them in

part, deny the Exceptions of the OCA, and I&E, and adopt the Recommended Decision,

as modified.

I. History of the Proceeding

On December 15, 2016, Aqua filed an Application seeking approval of:

(1) the acquisition, by Aqua, of the wastewater system assets of New Garden Township

(Township) and the New Garden Township Sewer Authority (Authority), (2) the right of

Aqua to begin to offer, render, furnish and supply wastewater service to the public in

portions of New Garden and Kennett Townships, Chester County, Pennsylvania, and

(3) an order approving the acquisition that includes the ratemaking rate base of the New

Garden wastewater system assets pursuant to Section 1329(c)(2) of the Pennsylvania

Public Utility Code (Code), 66 Pa. C.S. § 1329(c)(2). By Secretarial Letter dated

December 30, 2016, the Commission acknowledged receipt of the completed

Application.

The Commission published a notice of the Application in the Pennsylvania

Bulletin on January 7, 2017. 47 Pa. B. 78. On January 10, 2017, I&E filed a protest to

the Application.

On January 17, 2017, the OCA filed a protest to the Application. Also on

January 17, 2017, I&E filed a Motion to Bifurcate Proceedings (Motion to Bifurcate). In

its Motion to Bifurcate, I&E noted the six-month deadline associated with the Section

1329 part of the proceeding and requested that the Section 1102 portion be bifurcated

from the Section 1329 proceeding. I&E requested that the two be adjudicated on separate

timelines, with the Section 1102 portion not being constrained by the six-month deadline

associated with the Section 1329 portion. I&E argued that consideration of the Section

1102 proceeding requires a more extensive review of the technical, managerial and

financial fitness of Aqua, along with a review of the initial tariff to determine if the

acquisition is in the public interest. Motion to Bifurcate at 2.

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On January 18, 2017, the Township and the Authority filed petitions to

intervene. I&E filed an amended protest on January 19, 2017. On January 23, 2017,

counsel for the Office of Small Business Advocate (OSBA) filed a notice of appearance.1

Additionally, Aqua filed an Answer to the Motion to Bifurcate on January 24, 2017.

On January 27, 2017, ALJ Haas issued an Order denying the Motion to

Bifurcate. In his Order, the ALJ explained that Aqua is a certificated public utility which

enjoys a presumption of fitness. The ALJ cited to Implementation of Section 1329 of the

Public Utility Code, Final Implementation Order, Docket No. M-2016-2543193 (Order

entered October 27, 2016) (Final Implementation Order). The ALJ noted that the Final

Implementation Order does not contemplate an extended consideration period for a

Section 1102 application seeking Section 1329 treatment when the purchaser is an

existing, certificated public utility. Accordingly, the ALJ found that Aqua is entitled to

consolidate its Application and to limit consideration to the six-month time period.

On January 30, 2017, I&E filed a Petition for Expedited Interlocutory

Review, Stay of Proceedings, and Answer to Material Questions (Petition). In its

Petition, I&E requested interlocutory Commission review and answer to the following

material questions:

(1) Does Section 1329 of the Public Utility Code enable an acquiring public utility to impose a six-month time limitation upon the Commission’s consideration of an Application for a Certificate of Public Convenience under Section 1102 where no such time limitation previously existed?

(2) Does Section 1329 of the Public Utility Code bar the Bureau of Investigation and Enforcement from

1 We will collectively refer to I&E, the OCA, and the OSBA as the Statutory Advocates.

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developing a record for the Commission regarding whether the valuation proposed by an Applicant is appropriate?

I&E requested that the Commission answer the material questions in the negative.

Petition at 1.

On February 6, 2017, I&E and the OCA filed briefs in support of the

Petition. Aqua filed a brief in opposition to the Petition; and the Township and the

Authority filed briefs adopting the arguments of the Company. Also on February 6,

2017, Pennsylvania-American Water Company (PAWC) filed an amicus curiae brief,

pursuant to 52 Pa. Code § 5.502(e), in opposition to the Petition.

By Order entered February 15, 2017 (Interlocutory Review Order), we

answered the first material question, as rephrased below, in the affirmative:

(1) Does Section 1329 of the Public Utility Code impose a six-month time limitation upon the Commission’s consideration of an Application by an acquiring public utility for a Certificate of Public Convenience under Section 1102 where no such time limitation previously existed and the purchaser is an existing, certificated public utility?

In answering the first question in the affirmative, we declined to issue a stay of the

proceedings as requested by I&E in its Petition. Additionally, we declined to answer the

second material question and returned the matter to the Office of Administrative Law

Judge (OALJ) for further proceedings.

The ALJ conducted an evidentiary hearing on February 16, 2017, at which

each Party was represented by counsel. During the hearing, testimony and exhibits were

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presented and cross examination was conducted. Aqua offered eight statements and three

exhibits, which were admitted into the record. I&E presented two statements that were

admitted into the record. The OCA presented two statements and one exhibit and the

OSBA offered two statements, all of which were admitted into the record. Thereafter, the

OCA filed a Motion to supplement the record with four discovery responses received

from Aqua. By Order dated February 28, 2017, the ALJ admitted the OCA’s four

additional exhibits.

During the evidentiary hearing, Aqua objected to certain testimony

contained in statements offered into evidence by I&E and the OCA. In particular, Aqua

objected to portions of the direct and surrebuttal testimonies of I&E witness Joseph

Kubas and the OCA witness Ashley Everette, concerning the appropriateness of the fair

market value appraisals of the Utility Valuation Experts (UVEs) included as part of

Aqua’s Application. The Company argued that Section 1329 of the Code provides the

sole mechanism for determining the fair market value and rate base of the assets to be

acquired and does not allow for a challenge to these determinations by I&E or other

parties. In contrast, I&E and the OCA argued that the Commission is not precluded by

Section 1329 from analyzing and challenging the appropriateness of the fair market value

and rate base determinations offered by the Applicant.

ALJ Haas overruled Aqua’s objection to the disputed testimony of I&E and

the OCA. He explained that the Commission declined to address this issue in the

Interlocutory Review Order. The ALJ also noted his opinion that the General Assembly,

by enacting Section 1329 of the Code, did not intend to completely remove the ability of

the Commission or other parties from reviewing and challenging the fair market value

and rate base determination offered by Applicants. Accordingly, the ALJ indicated his

unwillingness to exclude such evidence at that point of the proceeding. On February 24,

2017, the ALJ also issued an Order denying the OCA’s Motion to Strike portions of

Aqua’s rebuttal testimony pertaining to fair market and rate base values. The Parties

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filed Main Briefs on March 6, 2017, and Reply Briefs on March 16, 2017. PAWC filed a

Main Amicus Curiae Brief and a Reply Amicus Curiae Brief. On March 16, 2017, the

record was closed upon receipt of the Reply Briefs.

In the Recommended Decision issued on April 21, 2017, the ALJ

recommended denying the Application because Aqua failed to prove by a preponderance

of the evidence that the proposed transaction is in the public interest or that it creates

sufficient affirmative public benefits to justify approval. As noted above, Aqua, New

Garden, I&E, and the OCA filed Exceptions on May 1, 2017. On May 8, 2017, Aqua,

I&E and the OCA filed Replies to Exceptions.

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II. Background

A. Section 1329 and Valuation of Assets

On April 14, 2016, Governor Wolf signed Act 12 of 2016 into law, which

amended Chapter 13 of the Code by adding a new Section 1329, 66 Pa. C.S. § 1329. The

new provision became effective on June 13, 2016.

Section 1329 of the Code addresses the valuation of the assets of

municipally or authority-owned water and wastewater systems that are acquired by

investor-owned water and wastewater utilities or entities. It is a voluntary process to

determine the fair market value of an acquired water or wastewater system at the time of

acquisition. For ratemaking purposes, the valuation will be the lesser of the fair market

value (i.e., the average of the buyer’s and seller’s independently conducted appraisals) or

the negotiated purchase price. Specifically, Section 1329 enables a public utility or other

acquiring entity to use fair market valuation which is not tied to the original cost of

construction of the facilities minus the accumulated depreciation. Section 1329 also

allows the acquiring entity’s post-acquisition improvement costs not recovered through a

distribution system improvement charge to be deferred for book and ratemaking

purposes. In sum, Section 1329 helps mitigate the risk that a utility will not be able to

fully recover its investment when water or wastewater assets are acquired from a

municipality or authority.

If the parties agree to the Section 1329 process, an “acquiring public

utility”2 and the seller of the municipal system each select a UVE from a list of such

2 An “acquiring public utility” is defined as a water or wastewater public utility subject to regulation under the Code “that is acquiring a selling utility as the result of a voluntary arm’s-length transaction between the buyer and seller.” 66 Pa. C.S. § 1329(g).

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experts established and maintained by the Commission. The selected UVEs perform

independent appraisals of the system to establish its fair market value. Also, the

acquiring public utility and the seller select one licensed engineer to conduct an

assessment of the tangible assets of the seller which is incorporated into the valuations of

the UVEs.

After receiving the valuations, the acquiring public utility must apply for a

Certificate of Public Convenience (Certificate) under Section 1102 of the Code and

include the following as an attachment to the Section 1102 application: copies of the

UVE appraisals; the agreed purchase price; the ratemaking rate base; the transaction and

closing costs incurred by the acquiring public utility that will be included in its rate base;

and a tariff containing a rate equal to the existing rates of the selling utility at the time of

the acquisition and a rate stabilization plan, if applicable. 66 Pa. C.S. § 1329(d)(1).

For applications involving an acquiring public entity under Section 1329(d)

(1), the Commission has a deadline for issuing a determination as follows: “The

[C]omission shall issue a final order on an application submitted under [Section 1329(d)

(1)] within six months of the filing date of an application meeting the requirements of

subsection (d)(1).” 66 Pa. C.S. § 1329(d)(2).

On July 21, 2016, the Commission issued proposed procedures and

guidelines to begin the implementation of Section 1329. Implementation of Section 1329

of the Public Utility Code, Tentative Implementation Order, Docket No. M-2016-

2543193 (Order entered July 21, 2016) (Tentative Implementation Order). Due to the

six-month timeline required in Section 1329, the Tentative Implementation Order

contained a proposed guideline and assumed that the last public meeting before the six-

month deadline would be fifteen days prior to that deadline. Id. at 14-15. As noted

above, the Commission issued the Final Implementation Order on October 27, 2016. In

the Final Implementation Order, the Commission indicated that the proposed model

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timeline was only a guideline for achieving a Commission final order within the six-

month deadline, but the parties are free to propose modifications to the presiding ALJ

within the context of the specific Section 1329 proceeding. Final Implementation Order

at 35.

B. Transaction Overview

Aqua is a subsidiary of Aqua Pennsylvania, Inc. (Aqua PA), which

provides water and wastewater utility service to approximately 450,000 customers.

Aqua’s wastewater service involves the collection, transportation, treatment and disposal

of wastewater for the public to approximately 20,000 customers in Adams, Bucks,

Carbon, Chester, Clearfield, Delaware, Lackawanna, Luzerne, Monroe, Montgomery,

Pike, Schuylkill, and Wyoming Counties. Aqua operates thirty-one wastewater treatment

plants in Pennsylvania. Both the Company and Aqua PA employ approximately 600

individuals with expertise in water and wastewater service. Aqua Stmt. No. 1 at 4-5.

New Garden’s wastewater system is comprised of three service areas: the

East End Service Area served by the East End Wastewater Treatment Plant (East End

WWTP), the South End Service Area served by the South End Wastewater Treatment

Plant (South End WWTP), and the Avondale Service Area served by the Avondale

Wastewater Treatment Plant (Avondale WWTP), which is owned by the Borough of

Avondale (the Borough). The Township has an allocated capacity of 218,250 gallons per

day (GPD) of wastewater flow to the Avondale WWTP, which has a total capacity of

500,000 GPD. The East End WWTP and South End WWTP are treatment pond systems

with liquid chlorine disinfection and spray irrigation treated effluent disposal. The East

End WWTP has a permitted capacity of 324,000 GPD. Currently, the South End WWTP

is experiencing a shortfall of 24,000 GPD in its spray irrigation effluent disposal

capacity. According to Aqua, the Township is working with the Pennsylvania

Department of Environmental Protection (DEP) to correct this shortfall with the approval

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of a proposed new stream discharge treatment process at the South End WWTP site.

Aqua Stmt. No. 2 at 3-6.

On August 19, 2016, Aqua executed an Asset Purchase Agreement (APA)

with the Township and the Authority to purchase New Garden’s wastewater utility assets

for $29.5 million. Subsequently, the Parties signed amendments to the APA on

October 17, 2016, and November 16, 2016. Pursuant to the APA, the acquired customers

will be charged the existing rates of New Garden for a period of at least two years. Also,

for a period of ten years beginning on the closing date of the APA, the Company’s future

rate increases may not exceed a compounded annual growth rate (CAGR) of four percent.

Aqua Stmt. No. 1 at 8.

Additionally, Aqua has agreed to complete two planned capital

improvement projects after closing of the APA that will cost approximately $2.5 million.

The first project involves the replacement of a six-inch diameter asbestos cement force

main along Route 41 in the Avondale service territory. According to Aqua, this project is

necessary because of the age of the current line and the occurrence of several breaks in

recent years. The second project involves the addition of a mechanical treatment system

with stream discharge in the South End service territory. The Company asserts that the

second project will make up for a shortfall in spray irrigation disposal capacity at the

South End WWTP and will bring the New Garden system into compliance with DEP

requirements. Aqua Stmt. No. 2 at 6-7.

Aqua filed its Application under Sections 1102 and 1329 of the Code, 66

Pa. C.S. §§ 1102 and 1329. It is the first filing received by the Commission under

Section 1329. Pursuant to Section 1329, the Company requests that the Commission

approve the purchase price of $29.5 million as the rate base value of the assets to be

acquired for ratemaking purposes. Aqua submits that it is permitted to use the negotiated

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purchase price because it is lower than the average of the two appraisals provided with

the Application pursuant to Section 1329(c)(2).

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III. Discussion

A. Legal Standards

As the proponent of a rule or order in this proceeding, Aqua has the burden

of proof to establish that it is entitled to the relief it is seeking. 66 Pa. C.S. § 332(a). The

Applicant must establish its case by a preponderance of the evidence. Samuel J.

Lansberry, Inc. v. Pa. PUC, 578 A.2d 600 (Pa. Cmwlth. 1990), alloc. denied, 529 Pa.

654, 602 A.2d 863 (1992). That is, the Applicant’s evidence must be more convincing,

by even the smallest amount, than that presented by any opposing party. Se-Ling

Hosiery, Inc. v. Margulies, 364 Pa. 45, 70 A.2d 854 (1950). Additionally, this

Commission’s decision must be supported by substantial evidence in the record. More is

required than a mere trace of evidence or a suspicion of the existence of a fact sought to

be established. Norfolk & Western Ry. Co. v. Pa. PUC, 489 Pa. 109, 413 A.2d 1037

(1980).

In this case, the Applicant requests approval of: (1) the acquisition, by

Aqua, of the wastewater system assets of the Township and the Authority; (2) the right of

Aqua to begin to offer, render, furnish and supply wastewater service to the public in

portions of New Garden and Kennett Townships, Chester County, Pennsylvania; and

(3) an order approving the acquisition that includes the ratemaking rate base of the New

Garden wastewater system assets pursuant to Section 1329(c)(2) of the Code, 66 Pa. C.S.

§ 1329(c)(2). Accordingly, Aqua has the burden of proving it satisfies the requirements

of the Code, particularly Sections 1102 and 1103 of the Code, 66 Pa. C.S. §§ 1102 and

1103. Section 1102(a) provides that the Commission must issue a Certificate as a legal

prerequisite to a public utility offering service or abandoning service and certain property

transfers by public utilities. The Code provides the following, in pertinent part:

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Upon the application of any public utility and the approval of such application by the commission, evidenced by its certificate of public convenience first had and obtained, and upon compliance with existing laws, it shall be lawful:

* * *

(3) For any public utility . . . to acquire from, or to transfer to, any person or corporation, including a municipal corporation, by any method or device whatsoever, including the sale or transfer of stock and including a consolidation, merger, sale or lease, the title to, or the possession or use of, any tangible or intangible property used or useful in the public service.

66 Pa. C.S. § 1102(a)(3).

The Commission will only grant a Certificate “if the Commission shall find

or determine that the granting of such certificate is necessary or proper for the service,

accommodation, convenience or safety of the public.” To ensure that a transaction is in

the public interest, the Commission may impose conditions in granting a Certificate that

it deems to be just and reasonable. 66 Pa. C.S. § 1103(a).

In order for the Commission to approve the proposed transaction under

Sections 1102 and 1103 of the Code, the Applicant must demonstrate that the proposed

acquisition will “affirmatively promote the ‘service, accommodation, convenience, or

safety of the public’ in some substantial way.” City of York v. Pa. PUC, 449 Pa. 136,

141, 295 A.2d 825, 828 (1972) (City of York). The Pennsylvania Supreme Court

explained the City of York standard as follows:

[T]he appropriate legal framework requires a reviewing court to determine whether substantial evidence supports the Commission’s finding that a merger will affirmatively promote the service, accommodation, convenience, or safety of the public in some substantial way. In conducting the

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underlying inquiry, the Commission is not required to secure legally binding commitments or to quantify benefits where this may be impractical, burdensome, or impossible; rather, the PUC properly applies a preponderance of the evidence standard to make factually-based determinations (including predictive ones informed by expert judgment) concerning certification matters.

Popowsky v. Pa. PUC, 594 Pa. 583, 611, 937 A.2d 1040, 1057 (2007)

(Popowsky).

Additionally, pursuant to Section 1103 of the Code, the Applicant must

show that it is technically, legally, and financially fit to own and operate the assets it will

acquire from New Garden. Seaboard Tank Lines v. Pa. PUC, 502 A. 2d 762, 764 (Pa.

Cmwlth. 1985); Warminster Twp. Mun. Auth. v. Pa. PUC, 138 A.2d 240, 243 (Pa. Super.

1958). As a certificated public utility, there is a rebuttable presumption that Aqua

possesses the requisite fitness. South Hills Movers, Inc. v. Pa. PUC, 601 A.2d 1308,

1310 (Pa. Cmwlth. 1992).

Before addressing the Exceptions, we note that any issue or Exception that

we do not specifically delineate shall be deemed to have been duly considered and denied

without further discussion. It is well settled that the Commission is not required to

consider expressly or at length each contention or argument raised by the parties.

Consolidated Rail Corp. v. Pa. PUC, 625 A.2d 741 (Pa. Cmwlth. 1993); also see,

generally, University of Pennsylvania   v. Pa. PUC , 485 A.2d 1217 (Pa. Cmwlth. 1984).

B. Recommended Decision

ALJ Haas made sixty-three Findings of Fact and reached thirteen

Conclusions of Law. R.D. at 7-14, 46-48. The Findings of Fact and Conclusions of Law

are incorporated herein by reference and are adopted without comment unless they are

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either expressly or by necessary implication rejected or modified by this Opinion and

Order.

1. Applicant’s Fitness

The ALJ began with an examination of whether Aqua possesses the

technical, legal and financial fitness to provide the proposed service. The ALJ explained

that as an existing, certificated public utility, the Company enjoys a presumption of

fitness in this proceeding. Here, no Party presented evidence to challenge Aqua’s fitness.

Additionally, the ALJ acknowledged that the Company offered sufficient record evidence

that it possesses the requisite technical, legal and financial fitness to provide the proposed

service. R.D. at 19.

Regarding technical fitness, the ALJ outlined Aqua’s evidence that it

currently provides wastewater service to approximately 20,000 customers in thirteen

Pennsylvania counties. The Company also operates thirty-one wastewater treatment

plants in Pennsylvania with seventeen of those systems being located in Aqua’s Southeast

Division, which are in close proximity to the Township. Further, the ALJ noted the size

of Aqua PA, the Company’s parent. Aqua PA is the second largest investor owned water

and wastewater utility operating in Pennsylvania. The ALJ highlighted the number of

water customers (455,000) and wastewater customers served by Aqua PA and the number

of employees (600) who possess expertise in providing water and wastewater service. Id.

at 20.

Next, the ALJ summarized the Company’s evidence pertaining to its legal

fitness explaining that there are no pending legal proceedings challenging Aqua’s ability

or propensity to operate safely and legally. As to financial fitness, the ALJ first noted the

assets of Aqua PA which is a Class A water utility in Pennsylvania. The ALJ indicated

that Aqua PA has total assets of $3.8 billion and had $415 million in annual revenues in

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2015. Aqua PA also had operating income of approximately $208 million and net

income of $172 million. Regarding the Company’s financial fitness, the ALJ stated that

Aqua is a Class A wastewater utility in Pennsylvania with total assets of $100 million and

annual revenue of $12 million. Its financial statements indicated a net income of $2

million for 2015. As to its acquisition of New Garden’s wastewater assets, Aqua intends

to finance the transaction using existing short-term credit lines with a likely conversion to

a mix of long-term debt and equity capital in the future. Id. at 21.

According to the ALJ, Aqua demonstrated by a preponderance of the

evidence that it is technically, legally and financially fit to own and operate New

Garden’s assets and to provide the proposed service to the public. Id.

2. Rate Stabilization Plan

The ALJ explained that Section 1329(g) of the Code defines a rate

stabilization plan as a “plan that will hold rates constant or phase rates in over a period of

time after the next base rate case.” He also noted our direction in the Final

Implementation Order that rate stabilization plans will be reviewed for reasonableness in

each rate case so as not to place long-term burdens on the acquiring utility’s existing

ratepayers. In order to facilitate such a review, an applicant must provide testimony,

schedules, and work papers to establish a basis for the plan and its impact on existing

customers who would need to cover the shifting revenue requirement. R.D. at 21-22

(citing Final Implementation Order at 27).

The ALJ stated that the APA contains the following rate related provision:

Buyer agrees that: (i) the rate schedules, shown in Schedule 7, for all customers in the Service Area shall remain the same as those Rates charged by Seller as of Closing for no less than seven hundred thirty (730) days from the Closing Date (the

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“Rate Freeze Period”) . . . and (ii) the compounded annual growth rate (CAGR) inclusive of Rates and Distribution System Improvement Charge (“DSIP”) (as DSIC is defined in Aqua’s Tariff) shall not exceed four percent (4%) for the ten year period beginning on the Closing Date. The parties acknowledge and agree that during this ten year period only pass-through costs or charges imposed by the Commonwealth of Pennsylvania, including, but not limited to State Tax Adjustment Surcharges, may be subject to increase. For purposes of this Section 7.b, “Rates” shall mean and include only customer services charges and consumption charges.

R.D. at 22-23 (citing Application at ¶ 26 and Exh. C1 at § 7(b)). The ALJ noted that

there is a dispute as to whether this provision constitutes a rate stabilization plan.

Aqua asserted that the provision does not constitute a rate stabilization plan

because it does not propose to leave rates unchanged after its next base rate case or phase

rates in after the next base rate case. Rather, Aqua argued that its tariff leaves rates

unchanged until new rates are approved in the next rate proceeding. In contrast, the

Statutory Advocates contended that the commitments constitute a rate stabilization plan

which necessitates the submission of supporting testimony, schedules and work papers to

establish a basis for the plan and the impact on existing customers. The Statutory

Advocates argued that without this supporting information they are unable to evaluate the

reasonableness of the plan. As such, the Statutory Advocates requested that the

Application be denied or that the restrictions be stricken. Alternatively, they requested

that conditions be attached by the Commission shifting the risk of any shortfall in

revenue collected from the acquired customer to Aqua and its shareholders. R.D.

at 23-25.

The ALJ explained that all Parties agreed that the rate commitment

provisions in the Application and the APA may not trump the Commission’s ultimate

authority to set and allocate rates. After analyzing the arguments of the Parties, the ALJ

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concluded that the rate commitments constitute a rate stabilization plan and the Company

should have provided supporting information to determine the impacts on existing

customers. The ALJ noted that it is impossible to fully analyze and assess the potential

rate implications of future rate increases on New Garden’s customers and Aqua’s existing

customers. Accordingly, the ALJ recommended that if the Commission approves the

Application, the following conditions, proposed by the OCA, be imposed on Aqua:

The Commission retains the authority to allocate revenues, if appropriate, to the New Garden Township customers that are in excess of the restrictions outlined in the APA. Aqua and its shareholders should bear all risk of a shortfall between revenues it is permitted to recover under its agreement with New Garden and the costs that the Company will incur with respect to this system. To the extent that Aqua is unwilling or unable to charge costs in excess of the limitations provided in the Asset Purchase Agreement, the excess costs should be borne by shareholders and not spread to other ratepayers.

R.D. at 27-28.

3. Challenge to Appraisals

Next, the ALJ addressed a dispute pertaining to the interpretation of Section

1329 related to the appraisals of the two UVEs and the rate base valuation submitted by

Aqua and New Garden. The ALJ noted the disagreement as to whether the Commission

or other Parties may challenge the appropriateness of the fair market value determinations

of the UVEs. According to Aqua, the procedures under Section 1329, including the

independent appraisals by the UVEs, provide the mechanism for determining the rate

base value of the acquired assets. The Company asserted that there is no allowance under

Section 1329 for the other Parties to challenge or question the appropriateness of the rate

base value proposed by the Applicant. R.D. at 28-29.

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On the other hand, the ALJ explained that the Statutory Advocates

disagreed with Aqua’s interpretation. The OCA argued that it would be inconsistent with

the Code to allow the Company to submit its valuation proposal, supported by two

reports, without allowing any review or challenge to those reports. Additionally, I&E

contended that Section 1329 contemplates a more thorough review of the valuation

process noting the requirement that the appraisals comply with the Uniform Standards of

Professional Appraisal Practice (USPAP) using cost, market and income approaches.

The ALJ summarized I&E’s additional argument that a perfunctory review would be

inconsistent with the timeline and procedures set forth in Section 1329 stating that there

would be no need for a six-month review period if an application would theoretically be

granted once it has been perfected. I&E also asserted that there is no language in Section

1329 requiring the Commission to abdicate its obligation to set just and reasonable rates.

Id. at 30-31.

The ALJ acknowledged that neither Section 1329 nor the Final

Implementation Order directly address this issue. However, the ALJ expressed his view

that the legislature did not intend to eliminate completely the Commission’s ability to

analyze and challenge the UVE appraisals and the rate base value proposed by the

Applicant. Adopting the arguments of I&E, the ALJ determined that the Commission

and the other Parties should have the opportunity to fully review and analyze the fair

market value appraisals to determine if they were prepared in accordance with the

USPAP requirements and whether the three required approaches – the cost, market and

income approaches – were accurately applied to the UVEs’ analyses. Furthermore, the

ALJ recognized the Commission’s statutory duty to assure the public interest and

compliance with the Code and the Commission’s Regulations. R.D. at 31-32.

Accordingly, the ALJ disagreed with Aqua’s interpretation and

recommended a finding that Section 1329 does not preclude a review and analysis of the

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UVE fair market value appraisals to insure the protection of the public interest. R.D.

at 32.

4. Files in Electronic Working Format

During the proceeding, I&E objected to the adequacy of the materials

provided by the Company as part of its Application filing. I&E argued that the

Application should be denied because Aqua failed to submit the supporting

documentation for the fair market value appraisals in working electronic format as

required by the Final Implementation Order. I&E asserted that on January 17, 2017, it

received the requested files, which were incomplete and contained inaccuracies, and on

January 25, 2017, Aqua provided updated electronic files. According to I&E, its

testimony was due six days later, on January 31, 2017, which provided insufficient time

to verify the calculations contained in the two appraisals. R.D. at 33.

In response, Aqua contends it understood the request for documentation in

working electronic format to mean an electronic copy of the filing, which it provided

with its Application filing on December 15, 2016. The Company also asserted that it

attempted to work with I&E and tried to email the requested documentation in MS Excel

files on January 9, 2017, but that I&E’s email system prevented their delivery.

Thereafter, Aqua delivered a CD copy of the files to I&E. The Company further argued

that I&E’s witness acknowledged that he performed a limited review after January 25,

2017, and that I&E overstated the alleged deficiencies with the files it received. Id.

In addressing the dispute, the ALJ acknowledged the compressed time

schedule for the litigation. However, he noted that I&E was the only Party to raise the

issue of insufficient time to analyze the two UVE appraisals. The ALJ also explained

that the OCA conducted a comprehensive review and analysis of the Application

materials and appraisals. Furthermore, the ALJ referenced the testimony of I&E’s

20

witness that he had difficulty with only one of the thirty-two books included with the

provided Excel files pertaining to one of the UVE appraisals. As to the other appraisal,

Aqua argued that the errors cited by I&E were minor and had no impact on the results of

the appraisal. Id. at 33-34.

The ALJ concluded that I&E had sufficient time, six days, to prepare its

testimony, which was due on January 31, 2017. Additionally, the ALJ determined that

I&E’s allegations of deficiencies appeared to be limited in scope and provided an

insufficient basis to deny Aqua’s Application. Id. at 34.

5. Approval of Rate Base Value

The ALJ began by explaining that under Section 1329(a) and (b) the fair

market valuation includes a calculation of the results of two separate and independent

appraisals conducted by UVEs. In this proceeding, New Garden selected AUS

Consultants, Inc. (AUS) to perform an appraisal of the New Garden wastewater system

assets. Under AUS’s appraisal – based on the cost, income, and market approaches to

value – the fair market value of New Garden’s wastewater system property, plant, and

equipment was $30,615,410 as of June 30, 2016. R.D. at 35 (citing Application, Exh. V).

Aqua selected Gannett Fleming Valuation and Rate Consultants, LLC

(Gannett) to perform an appraisal of the New Garden wastewater system assets. The ALJ

explained that Gannett used four methods under the cost, market, and income approaches

to valuation: original cost new less depreciation (OCNLD) method, market multiple

discounted cash flow method, capitalization discounted cash flow method, and the market

multiples method. Gannett obtained a fair market valuation appraisal of $33,666,340 as

of September 30, 2016. R.D. at 35 (citing Application, Exh. U). The fair market

valuation average of the two UVE appraisals, as required under 66 Pa. C.S. § 1329(c)(3),

was $32,140,875. According to the ALJ, both UVEs prepared their reports based on the

21

2016-2017 Uniform Standards of Professional Appraisal Practices. R.D. at 35 (citing

Aqua Stmt. No. 1 at 11).

The ALJ summarized that Aqua and New Garden executed their APA on

August 19, 2016, with a negotiated purchase price of $29,500,000. The ALJ noted that,

pursuant to 66 Pa. C.S. § 1329(c)(2), Aqua proposes to use the $29,500,000 purchase

price as its rate base in its next rate base case because it is lower than the fair market

value average of the two appraisals. R.D. at 35.

The OCA recommended that if the Commission approves the proposed

acquisition, the rate base value used in the Company’s next rate case should be

$28,882,607 rather than $29,500,000. According to the OCA, Gannett’s appraisal

contains several flaws and should be revised. The OCA argued that with its proposed

corrections, Gannett’s fair market value should be $27,149,804, instead of $33,666,340.

Under the OCA’s revisions, the average of the two UVE appraisals would be

$28,882,607 (($27,149,804 + $30,615, 410) / 2), which the OCA contended should be the

amount used for future ratemaking purposes. Regarding Gannett’s appraisal, the OCA

made two adjustments to Gannett’s income approach and removed the growth and risk

adjustments under the market approach. R.D. at 36.

Upon review, the ALJ agreed with removing the growth and risk

adjustments under Gannett’s market approach. Gannett gave the New Garden assets an

indicated value of $34,385,471, with a weight of forty-five percent, which resulted in a

weighted average of $15,473,462. According to the OCA, Gannett incorporated

unsupported and speculative growth and risk adjustments that should be removed. With

the removal of the growth and risk adjustments, as advocated by the OCA, the indicated

value would be $25,324,422; and with a weight of forty-five percent, the resulting

weighted value would be $11,395,989. The ALJ determined that Gannett provided an

inadequate explanation in the appraisal to substantiate growth and risk rates ranging from

22

ninety-five percent to 200 percent, which increased the value of the property. The ALJ

believed that any assumption or premise under the market approach should be more

adequately explained. R.D. at 36.

Regarding the income approach, the ALJ noted the two adjustments to

Gannett’s valuation in which the OCA: (1) removed the result produced by the 7.22

percent return on equity; and (2) disregarded the result produced by the 2.66 percent

capitalization rate. With these modifications, the OCA asserted that Gannett’s indicated

value of $36,297,487 should be lowered to $30,877,346. By applying the forty-five

percent weight, the weighted value advocated by the OCA would be $13,894,805. Id.

at 36-37.

Under the income approach, the ALJ explained the two common methods

to evaluation, which are the capitalization of earnings or cash flow method and the

discounted cash flow method (DCF). Here, Gannett analyzed both methods but only

relied on the DCF method to form the basis of its income approach conclusion. The ALJ

disagreed with the OCA’s income method adjustment because it involved the

capitalization of earnings or cash flow method. Nonetheless, the ALJ noted a math error

transcribed from the Excel spreadsheet to the narrative report affecting the results of the

DCF method. According to the ALJ, the corrected indicated value under the income

approach should be $35,800,000 in rounded figures and not $36,297,487. By applying a

forty-five percent weight, the ALJ indicated that the weighted value for Gannett’s income

approach should be $16,110,000. Id. at 37.3

3 The ALJ also noted an error made by Gannett and acknowledged by Aqua in its response to a data request. Specifically, Gannett included property in the cost of assets amounting to $20,000 in rounded figures which should not have been included in the calculations. Although determining that the assets should be reduced by $20,000, the ALJ concluded that the error would not significantly impact the figures in any way. R.D. at 37.

23

Moving to the third method under the UVEs’ analyses, the cost method, the

ALJ discussed four evaluation options – the original cost method, the trended original

cost method, the reproduction cost method, and the replacement cost method. AUS used

the trended original cost method and determined that New Garden’s investment in plant,

property and equipment of $27,146,852 had a reproduction cost new of $60,232,051.

The ALJ noted AUS’s experience with other water and wastewater depreciation studies,

its inspection of New Garden’s sewer property, and its analysis of New Garden’s sewer

system operating performance. Based on these factors, AUS made the assessment that

New Garden experiences normal depreciation without any significant functional or

economic obsolescence. By applying a normal age-life depreciation technique, AUS

determined that the value of New Garden’s system is $30,615,410. The ALJ also

explained that AUS used a weight of 100 percent and, therefore, the weighted value is

$30,615,410. The OCA did not make adjustments to AUS’s weighted value. R.D.

at 37-38.

Further, the ALJ observed that Gannett used the OCNLD method for its

cost analysis. Under this method, Gannett determined that the original cost new of the

sewer system’s utility plant in service as of June 30, 2016, was not less than $27,267,123.

Gannett also calculated an accrued depreciation reserve of $8,677,034. By factoring in

the accrued depreciation reserve, Gannett found the OCNLD value of the New Garden

system to be $18,580,089 ($27,267,123 - $8,677,034). The ALJ noted that Gannett

applied a weight of ten percent which resulted in a weighted value of $1,859,009. The

OCA did not make any adjustments to Gannett’s cost method approach and, thus, the

weighted value of $1,859,009 did not change. Id.

Regarding the weighted values, the ALJ determined that the UVEs have the

discretion to apply different weights to their indicated values. Here, the UVEs applied

extremely different weights. However, the ALJ indicated that the OCA did not make any

adjustments to the weights and he was declining to do so as well. Id.

24

The ALJ created the following tables summarizing the original UVE

appraisals (Table 1) and his adjustments to those appraisals (Table 2).

Table 1 – Gannett and AUS appraisal summary with no adjustments.

Gannett AUSIndicated Value ($)

Weight(%)

Weighted Value ($)

Indicated Value ($)

Weight(%)

Weighted Value ($)

Cost 18,590,089 10 1,859,009 Cost 30,615,410 100 30,615,410Income 36,297,487 45 16,333,869 Income 29,500,000 0 0Market 34,385,471 45 15,473,462 Market 30,090,662 0 0

Total 100 33,666,340 Total 100 30,615,410The average of the two evaluations in Table 1 is $32,140,875 (($33,666,340 + $30,615,410) / 2).

Table 2 – Gannett and AUS appraisal summary with ALJ adjustments.Gannett AUS

Indicated Value ($)

Weight(%)

Weighted Value ($)

Indicated Value ($)

Weight(%)

Weighted Value ($)

Cost 18,590,089 10 1,859,009 Cost 30,615,410 100 30,615,410Income 35,800,000 45 16,110,000 Income 29,500,000 0 0Market 25,324,422 45 11,395,989 Market 30,090,662 0 0

Total 100 29,364,998 Total 100 30,615,410The average of the two evaluations in Table 2 is $29,990,204 (($29,364,998 + $30,615,410) /2).

Upon consideration of the adjustments reflected in Table 2, the ALJ

concluded that the appraisals submitted by the UVEs were just and reasonable.

Accordingly, the ALJ recommended that if the Application were to be approved, the

appropriate amount Aqua should use as a rate base in its next rate making proceeding is

$29,500,000. R.D. at 39.

25

6. Public Interest / Affirmative Public Benefit

Next, the ALJ analyzed whether Aqua had proven by a preponderance of

the evidence that the approval of its Application is in the public interest by demonstrating

affirmative public benefits. The ALJ summarized the Company’s arguments beginning

with the contention that the transaction will promote the Commission’s goals of

consolidation and regionalization of systems thereby enabling better management

practices, economies of scale, and greater environmental and economic benefits. Next,

Aqua cited to its two proposed capital projects costing approximately $2.5 million and

that it has the financial and technical ability to complete these projects for the benefit of

the New Garden customers. R.D. at 40-41.

An additional Aqua argument included the ten-mile proximity of the

Company’s four other wastewater treatment plants to the New Garden assets which

would allow the operation of the acquired system without any additional operational or

administrative staff. The Company asserted that it would realize operational efficiencies

and mitigate future rate increases. Furthermore, Aqua contended that the increased

customer base resulting from the acquisition would allow future infrastructure costs to be

shared by the Company’s customers at a lower incremental cost and that expected

significant future customer growth would allow for additional long-term cost sharing and

further dilute the cost of service across more customers. The Company also asserted that

it did not anticipate significant investment needs in the future, excluding the $2.5 million

in capital projects, and that the system will be less costly to operate under its ownership.

Thus, Aqua argued that the acquisition will have no adverse effects on the service

provided to existing customers or on the rates of the New Garden customers or of

existing Aqua customers. Id. at 41.

Moving to the arguments in opposition, the ALJ noted the assertions of I&E

and the OCA that the purported benefits are either overly general, with insufficient

26

support in the record, or that the transaction will harm Aqua’s existing customers to such

an extent that the Application should be denied. R.D. 41-43. The ALJ agreed with I&E

and the OCA that, although the Township and New Garden’s existing customers may

realize affirmative benefits from the approval of the Application, Aqua has failed to

prove that its existing customers will realize any such benefits. Indeed, the ALJ

determined, the record evidence supports a finding that the approval of the Application

may harm Aqua’s customers to the extent that, on balance, the Application is not in the

public interest. Id. at 43.

In support, the ALJ explained the following:

As noted by both the OCA and I&E in their respective main briefs, Aqua’s December 31, 2015 wastewater Annual Report shows the company had 19,784 wastewater customers and a wastewater net utility plant value of $73,477,924. This results in an average net plant amount of $3,714.00 per customer. By contrast, the acquisition of the New Garden system will add $29,500,000 of rate base (plant) and 2,106 new customers, for an average net plant amount of $14,007 per customer. The average cost of each New Garden customer would be nearly 4 times the average cost of existing Aqua customers. (OCA Stmt. No. 1, pp. 23-24; OCA Main Brief, p. 38; I&E Main Brief, p. 15). In addition, Aqua is committed to completing the two infrastructure improvement projects following closing of the transaction at a total estimated cost of $2.5 million. These facts, coupled with the APA’s rate limitation provisions for the New Garden customers discussed above, will likely result in Aqua’s existing customers having to bear a disproportionate share of revenue requirements in future base rate cases, at least over the ten year period after closing. While this may be a benefit

27

to New Garden’s current customers, it certainly does not constitute an affirmative benefit to Aqua’s existing customers.

R.D. at 43-44.

Moreover, the ALJ stated that the record evidence shows that the Authority

itself is financially capable of completing the necessary capital upgrades. The ALJ

surmised that the public will benefit from the necessary system improvements regardless

of which entity makes them and that approval of the Application would add no

affirmative benefit. Further, the ALJ agreed with the OCA and I&E that the benefits

suggested by Aqua were overly general in nature noting the failure to demonstrate or

quantify the specific benefits in this proceeding. For example, the ALJ explained that

there is no record evidence that Aqua would be able to operate the New Garden system

more economically or efficiently than it is currently being operated. The ALJ also added

that merely stating that the transaction will promote consolidation and regionalization,

does not sufficiently explain how that would constitute an affirmative public benefit to

the existing customers of New Garden and Aqua. Id. at 44-45.

The ALJ noted that Aqua failed to provide further explanation or to

quantify how approval of the Application would provide future cost savings. Finding

Aqua’s claim of minimal future investment needs as being highly speculative, the ALJ

found that there is no way of knowing at this time what the future needs will be and what

they would cost. Id. at 45-46. Finally, the ALJ discounted Aqua’s argument that New

Garden has agreed to sell its system and that the public interest would be served by

allowing Aqua rather than New Garden to provide service and to address regulatory

requirements and necessary capital expenditures. The ALJ reiterated that there is no

evidence suggesting that New Garden is unable to provide adequate service or to

maintain capital expenditures to its system. “The mere fact New Garden has agreed to

28

sell its system, or that Aqua will be able to provide adequate service and make necessary

capital expenditures, offers no support for Aqua’s position that affirmative public benefits

will be realized by the approval of its Application.” Id. at 46.

The ALJ concluded that Aqua has failed to show how all the affected

Parties, including its existing customers, will realize any affirmative benefits by the

transaction. Accordingly, the ALJ recommended that the Application be denied on the

basis that it is not in the public interest. Id.

C. Rate Base Valuation under 66 Pa. C.S. § 1329

1. Ability to Challenge Fair Market Appraisals

a. Exceptions, Replies and Disposition

In Aqua Exception No. 3, the Company objects to the ALJ’s finding that

the Commission and other parties may review and analyze the fair market value

appraisals of the UVEs to ensure that the public interest is protected. Aqua argues that

the ALJ’s conclusion is contrary to the clear and unambiguous statutory language of

Section 1329 of the Code. According to the Company, the General Assembly established

a new procedure in a limited subtype of transactions involving public utilities and selling

municipalities. Aqua Exc. at 24-26. Aqua asserts that this procedure requires the efforts

of only two UVEs to establish fair market value. The appraisal must be conducted “in

compliance with the Uniform Standards of Professional Appraisal Practice, employing

the cost, market and income approaches.” Aqua Exc. at 25 (quoting 66 Pa. C.S.

§ 1329(a)(3)). Aqua contends that the legislative directive requires the ratemaking rate

base to be determined by the lesser of the negotiated purchase price and the fair market

value of the selling utility. Aqua Exc. at 25.

29

Aqua argues that the General Assembly intended to avoid the review,

analysis, debate and traditional litigation of the fair market appraisals and the work

product of the UVEs.4 Aqua also proffers that appraisals can vary and thus Section 1329

sets a process in which any variations and outliers would be averaged and compared with

the purchase price. According to the Company, the Statutory Construction Act of 1972

and established case law require the Commission to implement the clear, unambiguous

and express language of Section 1329 which is phrased in mandatory terms. Aqua Exc.

at 26.

In its replies, I&E argues that the ALJ correctly recognized that appraisals

submitted under Section 1329 are subject to certain statutory requirements. These

include the directive that the UVEs determine the fair market value in compliance with

USPAP standards using the cost, market, and income approaches. I&E asserts that the

ALJ correctly considered these statutory requirements and concluded that the

Commission and the Parties should have the ability to fully review and analyze the

appraisals to determine their compliance with the USPAP specifications and whether the

three methods were accurately applied to the UVEs’ analyses. According to I&E, Aqua

does not refute or address the ALJ’s conclusion on this basis. Further, I&E contends that

review of the appraisals is consistent with the plain language of Section 1329 of the Code

to determine if the appraisals are compliant. I&E also challenges Aqua’s proposed

perfunctory review as requiring the Commission to accept any submitted appraisal

without the ability to verify its basis. I&E considers such an argument as being

antithetical to Section 1329 and the Commission’s duty to protect the public interest.

I&E R. Exc. at 15-16.

4 In addition, the Company notes the arguments of PAWC in its Main Amicus Curiae Brief that for the Commission to inquire into the fair market value determination of a UVE, there must be clear evidence that fraud, illegality, or bad faith has undermined the appraisal. Aqua appears to agree with PAWC that under such a rare occurrence, the Commission would have the discretion to inquire further to assure that the fair market value is valid and reliable. Aqua Exc. at 26 n.52.

30

I&E references the statutory authority of the Commission to ensure

compliance with the Code and our Regulations and Orders. Also, I&E notes its delegated

responsibility as a prosecutory bureau for the purpose of representing the public interest

in ratemaking and service matters, and enforcing compliance with the Code. I&E argues

that Section 1329 contains no language relieving the Commission or I&E of these

obligations. Additionally, I&E cites to Section 505 of the Code, 66 Pa. C.S. § 505, as

preserving the Commission’s authority to conduct an inquiry into the value of the

property that the Company seeks to acquire.5 I&E also cites to Section 1103(b) of the

Code, 66 Pa. C.S. § 1103(b), noting that Aqua’s Application included a request for a

Certificate. Section 1103, I&E continues, affords the Commission explicit authority in

proceedings involving Certificate requests “to make such inquiries, physical

examinations, valuations, and investigations, and may require such plans, specifications,

and estimates of cost, as it may deem necessary and proper . . . .” I&E R. Exc. at 18

(quoting 66 Pa. C.S. § 1103(b) (emphasis added by I&E)). I&E concludes that these

Code provisions provide the Commission with the authority to conduct property

valuation investigations and property valuation is the core purpose of Section 1329

proceedings. I&E R. Exc. at 18.

5 Every public utility shall furnish to the commission, from time to time, and as the commission may require, all accounts, inventories, appraisals, valuations, maps, profiles, reports of engineers, books, papers, records, and other documents or memoranda, or copies of any and all of them, in aid of any inspection, examination, inquiry, investigation, or hearing, or in aid of any determination of the value of its property, or any portion thereof, and shall cooperate with the commission in the work of the valuation of its property, or any portion thereof, and shall furnish any and all other information to the commission, as the commission may require, in any inspection, examination, inquiry, investigation, hearing, or determination of such value of its property, or any portion thereof.

66 Pa. C.S. § 505.

31

Regarding Aqua’s statutory interpretation arguments, I&E proffers that the

sections of the Code should be interpreted harmoniously. Absent some exceptions not

pertinent here, a later statute – Section 1329 – shall not be construed to repeal earlier

statutes – Sections 505 and 1103 – unless the statutes are irreconcilable, states I&E. I&E

R. Exc. at 18 (citing 1 Pa. C.S. § 1971(c)). Here, I&E contends that the Section 1329 fair

market value procedure is reconcilable with the Commission’s authority under Sections

505 and 1103 of the Code. I&E R. Exc. at 18.

The OCA in its replies also objects to the Company’s argument that under

Section 1329 there can be no challenge to the UVE appraisals. Rather, the OCA asserts

that the public interest can only be protected if the Commission can consider evidence

regarding errors and unsupported judgments in the UVE appraisals. The OCA contends

that Aqua’s position is contrary to the plain language of Section 1329 and the rules of

statutory construction, which dictate that all provisions of a statute should be given effect.

Here, the OCA states that Section 1329 was established under Chapter 13 of the Code

and must be implemented consistent with the requirement that all rates be just and

reasonable. OCA R. Exc. at 14 (citing, in part, 66 Pa. C.S. § 1301). Eliminating the

Commission’s ability to investigate the reasonableness of the appraisals and make

necessary adjustments to determine the fair market value, the OCA continues, would

prevent the Commission from ensuring that rates are just and reasonable. OCA R. Exc.

at 14.

The OCA highlights the importance of the Commission’s review by noting

the potential impact of approving the $29,500,000 ratemaking rate base and the possible

resulting rate increase of sixteen percent for all Aqua wastewater customers. Further, the

OCA explains that Aqua’s testimony in support of the appraisals only came in response

to the OCA’s testimony identifying errors in the valuations. Without the OCA’s

testimony, the valuation record before the Commission would only contain the appraisals

32

themselves. In contrast, the OCA notes that if the same rate base claim were made in a

base rate case, the Company would be required to provide testimony in support of its

filing. Id. at 15 (citing 66 Pa. C.S. § 1308(d) and 52 Pa. Code § 53.53). The OCA argues

that allowing such a limited record would be inconsistent with the just and reasonable

rate requirement. OCA R. Exc. at 15.

Moreover, the OCA contends that Aqua’s position would violate the due

process protections of the Constitution. Citing to Barasch v. Pa. PUC, 546 A.2d 1306

(Pa. Cmwlth. 1988), the OCA argues that customers are entitled to notice and opportunity

to be heard before the Commission is permitted to make binding decisions likely to

increase customers’ rates in a subsequent rate proceeding. The OCA asserts that because

the determination of the ratemaking rate base will impact the calculation of the revenue

requirement – which may be greater than $1 million – that determination can only be

made by giving due notice and an opportunity to challenge the UVE appraisals. OCA R.

Exc. at 15-16.

Furthermore, the OCA contends that the opportunity to be heard must

include the ability of the Commission to make corrections and adjustments to the UVE

appraisal results in order to establish fair market value. The OCA also proffers that if

Section 1329 were read to remove all authority from the Commission to determine rate

base and to shift that authority to the UVEs, it would render the statute unconstitutional.

The OCA argues that the legislative power over prices, rates or wages, or that authority

vested with a commission, may not be delegated to a private party. Id. at 16 (citing

Carter v. Carter Coal Co., 298 U.S. 238 (1936), A.L.A. Shecter Poultry Corp. v. United

States, 295 U.S. 495 (1935), and MCI Telecommunications Corp. v. American Telephone

and Telegraph Co., 512 U.S. 218, 114 S.Ct. 2223 (1994)). The OCA concludes that the

ALJ properly rejected the Company’s restrictive interpretation of Section 1329. OCA R.

Exc. at 17.

33

Upon review, we shall deny Aqua’s Exception No. 3. Section 1329(a) of

the Code establishes the procedures for establishing the fair market value of a selling

utility for parties agreeing to proceed under Section 1329. As set forth above, one of the

required procedures of Section 1329(a)(3), provides that each UVE “shall determine the

fair market value in compliance with the [USPAP] employing the cost, market and

income approaches.” 66 Pa. C.S. § 1329(a)(3) (emphasis added). On its face, Section

1329 does not directly address the process by which compliance with the USPAP, which

utilizes the three required methods of evaluation, is determined. However, when

construing Section 1329 in conjunction with both Section 505 and Section 1103(b) of the

Code, it is clear that the Commission retains the authority to review and analyze the UVE

evaluations to determine compliance with the USPAP standards and whether the three

methods were accurately applied to the UVEs’ analyses.

There is no language in Section 1329 abrogating or repealing the

Commission’s authority under Section 505 to conduct an inquiry into the value of the

assets that Aqua seeks to acquire. Likewise, because the Application proceeding includes

the determination of whether a Certificate should be granted, the Commission retains the

authority under Section 1103(b) to “make such inquiries, physical examinations,

valuations, and investigations, and may require such plans, specifications, and estimates

of cost, as it may deem necessary or proper in enabling it to reach a finding or

determination.” 66 Pa. C.S. § 1103(b). Section 1329 does not contain language

invalidating the General Assembly’s delegation of investigatory authority to the

Commission under Section 1103.

We agree with I&E that Section 1329, despite being a later enacted statute,

is reconcilable with Sections 505 and 1103(b). Thus, consistent with 1 Pa. C.S.

§ 1971(c), we do not believe the General Assembly intended to repeal the earlier enacted

provisions under Sections 505 and 1103(b) of the Code. See also, Royal Indem. Co. v.

Adams, 455 A.2d 135, 141 (Pa. Super. 1983) (“When interpreting statutes, they should be

34

interpreted as being in harmony with each other and construed as a component of the

whole statutory structure.”).6 Accordingly, we find that Section 1329 permits the

Commission and the Parties to develop a record pertaining to the review and analysis of

the fair market value appraisals of the UVEs. We further note that there is no evidence

that either the Commission or the Parties were impeded from developing a full record in

this proceeding and commend the ALJ for his handling of this matter of first impression

before the Commission.

2. Rate Stabilization Plan

a. Aqua’s Exceptions

In its Exception No. 2, Aqua disputes the ALJ’s conclusion that the

restrictions in the APA constitute a rate stabilization plan. Aqua Exc. at 20 (citing R.D.

at 21-28, 48). Aqua maintains it did not propose a rate stabilization plan. Rather,

consistent with Section 1329(d)(1)(v), it included, as Exhibit G to its Application, a tariff

that established rates equal to the existing rates for New Garden customers at the time of

acquisition. Aqua asserts that consistent with Section 1329(d)(4), the proposed tariff will

remain in effect until new rates are approved by the Commission in a future base rate

proceeding. Aqua contends that the ALJ’s conclusion is misguided because it is based on

a contract provision in the APA rather than on Aqua’s proposed tariff. Aqua argues that

because it did not include the rate freeze or the CAGR in its tariff, the ALJ erred in

concluding that the rate restrictions constitute a rate stabilization plan. According to

Aqua, the ALJ’s conclusion inappropriately blurred the lines between contract provisions

6 Moreover, we note that Aqua appears to agree with PAWC that the Commission has authority, in rare circumstances involving clear evidence of fraud, illegality or bad faith, to inquire whether the fair market value of the appraisals are valid and reliable. PAWC’s reasoning appears based, in part, on the argument that the UVEs are presumptively valid and reasonable. However, it is unclear how such illicit actions would be uncovered without the ability of the Commission to investigate and analyze the bases of the UVE appraisals.

35

in an APA and a Section 1329 rate stabilization plan. Aqua Exc. at 20-21 (citing Aqua

Exh. 1; Exh. G – Draft of Schedule of Rates Tariff Page; Aqua St. 1R at 3-4; Aqua Stmt.

1R at 4; Aqua Stmt. 1 at 6).

Next, Aqua argues that the ALJ’s concern in the instant proceeding whether

customers may be burdened in the future by the rate restrictions in the APA contradicts

the Commission’s conclusion in the Joint Application of Pennsylvania-American Water

Company and the Sewer Authority of the City of Scranton, Docket No. A-2016-2537209

(Order entered October 19, 2016) (PAWC Scranton Order). According to Aqua, in the

PAWC Scranton Order, the Commission stated as follows:

As to the concerns raised by I&E and the OCA regarding the alleged detriments of the acquisition to PAWC’s existing customers, we note that these concerns center on the potential rate effects of the acquisition. However, we are not in a position to thoroughly adjudicate ratemaking issues relating to the acquisition in this proceeding. Nor do we find that this acquisition proceeding is the appropriate context for addressing these rate issues. The record does not contain sufficient evidence to allow us to evaluate the specific effects of the acquisition on PAWC’s revenue requirement or to decide cost allocation and rate design matters. Such issues are better reserved for a future base rate proceeding.

Aqua Exc. at 22 (quoting PAWC Scranton Order at 50). Aqua avers that the Commission

clearly expressed in the PAWC Scranton Order that it is more appropriate to address rate-

related issues in a base rate case proceeding rather than in a Section 1102 proceeding.

Aqua contends that the fact that it does not have a consolidated rate or rate zones in its

wastewater tariff makes the potential rate effects from this proceeding a non-issue.7 Aqua

Exc. at 22-23 (citing Aqua Stmt. 1R at 5). Aqua therefore argues there is no need for the

7 Aqua asserts that each of its thirty wastewater systems operate under a separate rate page. Aqua Exc. at 23 (citing Aqua Stmt. 1R at 5).

36

Company to provide additional schedules or work papers to explain its plan regarding

New Garden customers’ rates. Aqua Exc. at 21-23 (citing Aqua Stmt. 1 at 8; R.D. at 27).

Finally, Aqua points out that the Commission stated in its Final

Implementation Order that “plans” remain “subject to review in each rate case for

reasonableness.” Exc. at 23. According to Aqua, this means nothing is final or binding

about a rate stabilization plan even when it is submitted as part of a Section 1329

proceeding. Aqua asserts that because this is the first Section 1329 proceeding, the

Commission should accept Aqua’s plan to keep rates as they are at closing and then make

a determination of the appropriate rates in the Company’s next base rate case proceeding.

Aqua reiterates its argument that while the Commission will ultimately decide the

appropriate rates for the customers of the acquired utility in Aqua’s next base rate case

proceeding, Aqua and its shareholders will bear any rate differential applicable to this

transaction during the contract period stipulated in the APA. Aqua Exc. at 23-24. Based

on all of the above reasons, Aqua requests that the Commission reject the ALJ’s

conclusion and recommendation including the alternative proposed conditions for

approval. Id. at 24 (citing R.D. at 28).

b. I&E’s Replies to Aqua’s Exceptions

In its Reply to Aqua’s Exception No. 2, I&E disagrees with Aqua’s

argument that because the rates in question are not contained in Aqua’s tariff, it is not a

rate stabilization plan. I&E R. Exc. at 12. I&E avers that Aqua’s argument seems to

suggest that “no applicant could ever propose a rate stabilization plan because such a plan

could not be included in the tariff required under Section 1329.” Id. at 12-13. I&E

believes this reasoning contradicts Section 1329, which requires the filing of a tariff

containing rates equal to the existing rates of the selling utility but also contemplates the

filing of a rate stabilization plan. Id. at 13 (citing 66 Pa. C.S. § 1329(d)(1)(v)). I&E

contends that filing a tariff of proposed rates and a rate stabilization plan are not mutually

37

exclusive in a Section 1329 application. Thus, I&E concurs with the ALJ’s

determination that the rate commitments in the APA which Aqua describes as “contract

provisions,” constitute a rate stabilization plan. Id. at 13 (citing R.D. at 21-23, 26, 28).

I&E also disagrees with Aqua’s argument that the rate commitments in the

APA are not relevant in this proceeding. I&E asserts that Aqua’s conclusion regarding

rate stabilization contradicts the mandate in the Final Implementation Order which

requires supporting documents that explain how the rate stabilization plan may

potentially impact existing customers of the acquiring utility to be filed with the rate

stabilization plan in a Section 1329 proceeding. Id. at 13-14 (citing Final Implementation

Order at 27). I&E also questions Aqua’s comparison of the instant proceeding to the

PAWC/Scranton acquisition. I&E asserts that because the instant proceeding is both a

Section 1102 and a Section 1329 proceeding and requires the filing of supporting

documents to establish the basis of a rate stabilization plan, Aqua’s comparison of this

case with the PAWC/Scranton case has no bearing. I&E therefore concludes that the

Commission should deny the instant Application because Aqua failed to justify its rate

stabilization plan as required by Section 1329. I&E R. Exc. at 14-15.

c. OCA’s Replies to Aqua’s Exceptions

In its Reply to Aqua’s Exception No. 2, while the OCA did not take a

position on whether the rate restrictions in Aqua’s APA constitute a rate stabilization

plan, the OCA nonetheless echoes I&E’s argument that unlike the PAWC/Scranton

proceeding, Aqua’s Application was filed under both Sections 1102 and 1329 and

requires ratemaking rate base to be determined in this proceeding. OCA R. Exc.

at 10-11. The OCA argues that because Aqua requested in its Application that the lesser

of the purchase price or the average of the two fair market values be used as the

ratemaking rate base in the instant proceeding, Aqua’s comparison of the instant

proceeding with the PAWC/Scranton proceeding is misplaced and should be rejected. Id.

38

Furthermore, the OCA asserts that Aqua’s failure to provide supporting

documents or information regarding the rate restrictions in the APA makes it all the more

important for a complete and meaningful participation and development of the record by

I&E and the OCA in the implementation of Section 1329. The OCA argues that

although Aqua requests approval of the APA in its Application, Aqua failed to provide

sufficient information or evidence regarding the impact of the rate restrictions on its

existing customers. According to the OCA, this makes it difficult for the Commission to

adequately determine if Aqua’s ratemaking proposals in this proceeding are just and

reasonable or would result in just and reasonable rates for New Garden and Aqua’s

existing customers under Section 1329. Id. (citing Aqua Exc. at 22-23; OCA R.B. at 12;

Tr. at 28; APA ¶ 7). The OCA asserts that while the exact impact of the rate restrictions

are unknown at this time, considering the costs of the proposed improvements, which the

OCA estimates will be around $2.5 million to $7 million, it is likely that the costs of the

New Garden system will exceed the revenues from the negotiated rates in the APA.

OCA R. Exc. at 11-12 (citing OCA M.B. at 27-28; OCA R.B. at 12; OCA Stmt. 1 at 5-6;

Tr. at 36-37; Aqua Exh. 1 – Exh. U at 2 of New Garden FAQs).

The OCA argues that despite the potential difference in costs and revenues

from this transaction, Aqua has yet to fully commit to its initial position that its

shareholders would bear the cost of any rate differential. Therefore, the OCA requests

that the Commission adopt the ALJ’s recommendation that approval of this Application

be conditioned upon, inter alia, expressly requiring Aqua and its shareholders to bear the

risk of any shortfall between Commission-approved rates and what the CAGR requires.

The OCA also avers that in the alternative, Aqua and New Garden could withdraw the

rate restrictions in the APA or modify the APA to acknowledge and allow Commission

discretion in setting rates and to place the risk of any differential between the ratemaking

determinations and the restrictions on Aqua’s shareholders. OCA R. Exc. at 13 (citing

OCA R.B. at 13-14; OCA Stmt. 1S at 2-3).

39

d. I&E’s Exceptions

In its Exception No. 2, although I&E agrees with the ALJ’s determination

that Aqua’s Application contained an unsupported rate stabilization plan, I&E disagrees

with the ALJ’s decision not to strike the rate commitments from the APA or deny the

Application on the basis of this finding. I&E Exc. at 6-7 (citing R.D. at 28; Application

at ¶26; Final Implementation Order at 27). In emphasizing the gravity of Aqua’s

noncompliance with the requirements of Section 1329 regarding a rate stabilizing plan,

I&E cites to the Final Implementation Order which states as follows:

[W]e conclude that the rate stabilization plan will be subject to review in each rate case for reasonableness and should not place long term burdens on the acquiring utility’s existing ratepayers…we also conclude that if a rate stabilization plan is proposed, the applicant will be required to provide testimony, schedules, and work papers that establish the basis for the plan and its impact on existing customers who need to cover the revenue requirement that would be shifted to them under the plan.

I&E Exc. at 7 (quoting Final Implementation Order at 27).

I&E asserts that treating Aqua’s noncompliance lightly could send the

wrong message, especially, because this is the first Section 1329 proceeding. According

to I&E, “the simple fact that Aqua failed to comply with one of the requirements for an

Application under Section 1329 should be a sufficient basis upon which to deny the

Application.” I&E Exc. at 7-8. I&E also asserts that Aqua’s refusal to identify the rate

restrictions in its Application as a rate stabilization plan does not change the fact that

Aqua failed to provide supporting documents to the rate stabilization plan in its

40

Application. Thus, I&E requests that the Commission deny Aqua’s Application solely on

this basis. Id. at 8.

e. Aqua’s Replies to I&E’s Exceptions

In its Reply to I&E’s Exception No. 2, Aqua reiterates its argument that it

did not propose a rate stabilization plan; rather, it filed a tariff with the Application that

established initial rates equal to the existing rates for New Garden customers at the time

of the acquisition. Aqua R. Exc. at 5. Aqua argues there is nothing in the Final

Implementation Order that requires the denial of an application due to disagreement over

the definition of a rate stabilization plan. Therefore, Aqua requests that the Commission

reject I&E’s Exception No. 2. Id. at 5-6.

f. Disposition

Based on our review of the record, the positions of the Parties, and the

applicable law, we will grant Aqua’s Exception No. 2, in part, and deny I&E’s Exception

No. 2. The ALJ determined that the rate commitment provision contained in the APA

does not trump the Commission’s ultimate authority to set and allocate rates. We agree.

Here, the APA provides firm, unqualified guarantees to the seller as a term of the APA.8

However, it does not purport to hold rates constant or phase rates in over a period time

after the next base rate case. It offers no tariff language for us to approve. Thus, we

decline to hold that the rate commitment constitutes a rate stabilization plan pursuant to

Section 1329(g) of the Code.

8 Exh. C1 at § 7(b) (“… Buyer agrees that … the [current] rate schedules … shall remain the same as those Rates charged by Seller as of Closing …” for two years initially.).

41

Aqua acknowledges that the Commission will ultimately decide the

appropriate rates for the customers of the acquired utility in Aqua’s next base rate case

proceeding, while Aqua and its shareholders will bear any rate differential during the

contract period stipulated in the APA. The Company asks that we render no ruling on

this private contract provision and we see no reason to disagree. This provision was an

arm’s length negotiation between two independent parties and does not bind the future

rate-setting authority of the Commission. Thus, as we discuss further below, we will

adopt the ALJ’s alternative recommendations pertaining to the allocation of revenue to

the New Garden customers that might be in excess of the restrictions outlined in the

APA. Accordingly, we shall deny Aqua’s Exception No. 2, in part.

3. Files in Electronic Working Format

a. Exceptions, Replies and Disposition

In its Exception No. 1, I&E disagrees with the ALJ’s determination that

I&E had sufficient time to prepare its testimony. I&E argues that unlike the OCA which

received the electronic files on January 9, 2017, and was able to do a thorough review of

the appraisals, I&E did not receive the initial and corrected files until January 17, 2017

and January 25, 2017, respectively. According to I&E, given that its direct testimony

was due on January 31, 2017, it did not have as much time as the OCA to review the

files. I&E Exc. at 4-5. In addition, I&E avers, the ALJ recognized that the Final

Implementation Order “did require that in order for the application to be perfected that all

worksheets and schedules had to be provided in working electronic format. And to the

extent that that didn’t occur – we may have blown it.” Id. at 5 (citing Prehearing Tr.

at 10). According to I&E, the ALJ further stated that the Secretary’s Bureau “. . .

probably shouldn’t have accepted the filing as complete…” Id. I&E therefore, concludes

that Aqua’s failure to comply with the requirements of the Final Implementation Order is

a valid reason to deny the instant Application. Id. at 5-6.

42

In its Reply to I&E’s Exception No. 1, Aqua denies its Application was

deficient. Aqua reiterates its argument that it understood the request for documentation

in working electronic format in the Final Implementation Order to mean an electronic

copy of the filing, which it provided upon filing the Application on December 15, 2016,

and which the Commission accepted as complete on December 30, 2016. Aqua R. Exc.

at 3-4 (citing Aqua Stmt. 1R at 7). Aqua avers that, in its experience, any request for

work papers in a working electronic format such as Microsoft Excel, are always, and

without exception, clearly stated as “electronic Microsoft (MS) Excel files with all

formulae and links intact.” Aqua R. Exc. at 4 (citing Aqua Stmt. 1R at 7-8). Aqua

argues this clear statement was not contained in the Final Implementation Order and that

there was also no mention of “electronic” files of any kind in the Final Implementation

Order. Aqua R. Exc. at 4 (citing I&E Stmt. 1 at 4; Tr. at 105).

Aqua avers that I&E failed to receive the email containing the electronic

files on January 9, 2017, due to an internal problem with I&E’s email system. Aqua

asserts that it immediately provided a CD copy of the electronic files to I&E on

January 17, 2017, when it became aware that I&E did not receive the email. Aqua states

that it also had a telephone conversation with I&E on January 23, 2017, and provided

follow-up Excel files to I&E on January 25, 2017. Aqua R. Exc. at 3 (citing Aqua M.B.

at 36-40; Aqua Exh. 2; Aqua Stmt. 1R at 7; Aqua Stmt. 4R at 7-11). Finally, the

Company argues that it is not Aqua’s fault that I&E had difficulty with I&E’s email

system and that Aqua went above and beyond to ensure that Aqua provided all required

documents in this proceeding. Therefore, Aqua requests that the Commission deny

I&E’s Exception No. 1. Aqua R. Exc. at 4.

Based on our review of the record, the positions of the Parties, and the

applicable law, we will deny I&E’s Exception No. 1. We are not convinced by I&E’s

arguments that we are required to deny the instant Application due to Aqua’s failure to

43

provide files in working electronic format pursuant to the Final Implementation Order.

The record evidence in this proceeding indicates that Aqua filed its Application on

December 15, 2016, and the Commission accepted the Application as perfected on

December 30, 2016. Tr. at 105. The record also indicates that Aqua emailed electronic

files to both the OCA and I&E on January 9, 2017. According to Aqua, although the

OCA received the files and was able to conduct a thorough review, I&E was unable to

receive the files due to issues with its internal email system. Tr. at 46-49; Prehearing

Tr. at 8-9.

Under the circumstances of this case, we do not believe it is fair to blame

I&E’s internal email problems on Aqua. Aqua should not be held responsible for I&E’s

failure or inability to receive the electronic files especially because the OCA received the

same files as sent. Furthermore, the record indicates that upon learning that I&E did not

receive the email containing the electronic files, Aqua worked proactively and diligently

to provide the files to I&E. For instance, when Aqua became aware that I&E did not

receive the electronic files, Aqua hand-delivered copies of the electronic files to I&E on

January 17, 2017. Aqua also had a phone conversation with I&E on January 23, 2017,

and provided follow-up Excel files to I&E on January 25, 2017. Aqua R. Exc. at 3

(citing Aqua M.B. at 36-40; Aqua Exh. 2; Aqua Stmt. 1R at 7; Aqua Stmt. 4R at 7-11).

According to the ALJ, I&E had six days from that point to prepare its direct testimony,

which was due on January 31, 2017. The record also indicates that I&E had the

opportunity but failed to request additional time to complete its review after it received

the updated files on January 25, 2017, and after it filed its supplemental and direct

testimony. Tr. at 111-112.

Additionally, I&E acknowledged that it had difficulty with only one out of

the thirty-two books included with the Excel files Aqua provided. Tr. at 113. Therefore,

we agree with the ALJ that the deficiencies expressed by I&E relative to this issue appear

to be limited in scope and provide insufficient basis for the denial of this Application.

44

R.D. at 34. Also, we note that this is the first Section 1329 filing and we are not

oblivious of the fact that there is a remote possibility that these types of issues will occur.

While we do not expect similar occurrences in subsequent filings, we find no merit in

I&E’s request for denial of the instant Application on the basis of this matter. As such,

I&E’s Exception No. 1, is hereby denied.

4. Approval of Rate Base Value

a. OCA’s Exceptions

In its Exception No. 1, although the OCA welcomes the ALJ’s adoption of

its proposed removal of the unsupported growth and risk adjustments under Gannett’s

market approach, it disagrees with the ALJ’s rejection of its proposed adjustments to

Gannett’s income approach. The OCA also disagrees with the ALJ’s determination that

the $29.5 million purchase price is the appropriate value for ratemaking purposes in the

instant proceeding. OCA Exc. at 4-5 (citing R.D. at 28-32, 36). The OCA questions the

fact that the ALJ rejected its proposed adjustment “because it involves the capitalization

of earnings or cash flow method.” OCA Exc. at 5 (citing R.D. at 37). The OCA argues it

did not change the calculation or methods used by Gannett but only adjusted one input in

the investor-owned utility (IOU) scenario and one input in the municipal scenario under

the DCF method because they were not supported and were inconsistent with reasonable

ratemaking analysis. OCA Exc. at 5-6 (citing OCA M.B. at 13-20; OCA R.B. at 7-11;

OCA Stmt. 1 at 8-21; OCA Stmt. 1S at 4-12).

Regarding the IOU ownership scenario under the DCF method, the OCA

adjusted the discount rate range by removing the 5.9 percent overall cost of capital or

7.22 percent return on equity. According to the OCA, Gannett’s use of a capital range of

5.9 percent to 7.22 percent was unreasonable and inconsistent with reasonable

ratemaking analysis because the lower overall cost of capital of 5.9 percent produces a

45

higher market value while the higher overall cost of market of 7.22 percent produces a

lower market value. Thus, the OCA asserts that the market value at 7.22 percent cost of

capital is $16.5 million and at 5.9 percent is $21.9 million. OCA Exc. at 7 (citing OCA

M.B. at 14-15; OCA Stmt. 1 at 6-7, 13). According to the OCA, to reduce the effect of

this bias, it recommended that the valuation results from the 5.9 percent overall cost of

capital not be considered.9 Rather, it requests that only the 7.22 percent cost of equity

and the overall cost of capital of 9.02 percent be used. The OCA asserts that with the

9.02 percent overall cost of capital, the capitalization DCF results would be $16.5 million

while the market multiple DCF results would be $31.7 million, which would bring the

overall IOU ownership valuation to $24.1 million instead of the $28.5 million in

Gannett’s valuation. OCA Exc. at 8 (citing OCA M.B. at 17; OCA Stmt. 1. at 14). The

OCA believes using the top end of Gannett’s cost of capital range is a more consistent

and reasonable approach. OCA Exc. at 8 (citing OCA M.B. at 16-17; OCA St. 1

at 13-14).

With regard to the municipal ownership scenario under the DCF method,

the OCA asserts that Gannett’s calculation under the capitalization DCF and market

multiple DCF methods resulted in a capitalization DCF that ranges from $40.9 million to

$53.8 million and a market multiple DCF of $34.5 million, resulting in an average value

of $44.1 million.10 OCA Exc. at 9 (citing OCA M.B. at 17; OCA Stmt. 1 at 15).

According to the OCA, Gannett used a municipal bond yield of 3.66 percent to develop

the $40.9 million and $34.5 million results shown above in the capitalization DCF and

9 The OCA avers that the 5.9 percent cost of equity is lower than the rate of return authorized by the Commission and the one used for the DSIC in the Report on Quarterly Earnings. The OCA also believes this cost of equity is “significantly below” the equity rates Gannett’s witness, Mr. Walker, used in his rate of return testimony in a recent rate case by the City of DuBois, a municipal system, at Docket No. R-2016-2554150. According to the OCA, in that rate case, Mr. Walker recommended an adjusted DCF result of 9.3 percent and his final DCF recommendation, after various adjustments was 10.25 percent. OCA Exc. at 7 (citing OCA Stmt. 1 at 14).

10 ($53.8 million + $34.5 million) / 2 = $44.1 million. OCA Exc. at 9.

46

market multiples DCF, respectively. The OCA argues that Gannett based its

capitalization DCF value of $53.8 million on a municipal bond yield of 2.66 percent.

OCA Exc. at 9 (citing OCA M.B. at 17). According to the OCA, Gannett not only failed

to show the result of using a 2.66 percent bond yield for the market multiple DCF

calculation but also used only the higher result of the capitalization DCF range of $53.8

million and averaged it with the market multiple DCF of $34.5 million to arrive at the

$44.1 million valuation. OCA Exc. at 9 (citing OCA Stmt. 1 at 15). The OCA avers that

although it does not have any adjustment to the 3.66 percent bond yield, it considers the

2.66 percent bond yield developed by Gannett unreasonable. Therefore, the OCA

requests that the Commission disregard the ensuing results from the 2.66 percent bond

rate. OCA Exc. at 9 (citing OCA M.B. at 18).

According to the OCA, the 2.66 percent bond rate used by Gannett is not an

actual bond rate nor is there any evidence that it would be an actual discount rate for the

New Garden system. The OCA contends that while not based on actual historic growth,

Gannett only developed the 2.66 percent bond yield to reflect “the unique growth

assumed for the Sewer System.” OCA Exc. at 9-10 (citing OCA M.B. at 18; OCA Stmt. 1

at 15-16; Aqua Exh. 1; Aqua Exh. U. at 30). The OCA also disputes the growth

projections Gannett used as the basis for the rates in Gannett’s valuation and believes the

assumed growth projections Gannett used are unsupported and purely speculative. OCA

Exc. at 10-11.

Finally, the OCA argues that despite applying an assumed one percent

growth projection directly to the 3.66 percent bond yield by subtracting 100-basis points

from the bond yield, Gannett failed to explain or provide any support for this application.

OCA believes this application resulted in a capitalization DCF of $53.8 million which is

thirty-two percent higher than the valuation done with a legitimate bond yield. Hence,

using the 3.66 percent bond rate, the OCA recalculated the capitalization DCF at a value

of $40.9 million and the market multiple DCF at a value of $34.5 million to produce an

47

average value of $37.7 million rather than the $44.1 million in Gannett’s valuation. OCA

Exc. at 11 (citing OCA Stmt. 1 at 17).

b. Aqua’s Replies to Exceptions

In its Reply to OCA Exception No. 1, Aqua requests that the Commission

reject OCA Exception No. 1. Aqua reiterates its argument that only UVEs are legally

qualified and competent enough to address a fair market valuation in a Section 1329

proceeding and that the OCA’s witness, Ms. Everett, is not qualified to analyze or adjust

the UVE appraisals. Aqua argues that the OCA’s adjustments to Gannett’s income

approach should be disregarded because they are based on selective reliance of results

within Gannett’s appraisal. Aqua R. Exc. at 7-8 (citing Tr. at 120-122; Aqua Stmt. 3R

at 8).

In its response to the OCA’s adjustment to the IOU ownership scenario

under the DCF method, Aqua rejects the OCA’s recommendation that only Gannett’s

7.22 percent cost of equity and overall cost of capital of 9.02 percent be used. Aqua

R. Exc. at 11 (citing OCA Exc. at 8). Aqua argues that ratemaking cost of capital rates

are not appropriate to be used in fair market value appraisals. According to Aqua, “Mr.

Walker of Gannett, a registered UVE, was not aware of a single incident where a fair

market value appraisal has used ratemaking returns on equity in the DCF method for

Income Approach valuation.” Aqua R. Exc. at 11-12 (citing Aqua Stmt. 3R at 4). Aqua

further asserts that the OCA’s proposed ratemaking return on equity of 9.02 percent is

also inconsistent with the 8.25 percent return on equity the OCA recommended in the

City of DuBois’ recent rate case. Aqua R. Exc. at 12 (citing Aqua Stmt. 3R at 4; Tr.

at 57).

Next, Aqua questions the fact that the OCA recommends the removal of

Gannett’s result that is based on a 5.9 percent overall cost of capital, yet the OCA did not

48

take any issue with the 4.67 percent capitalization rate AUS used under its income

approach.11 According to Aqua, this confirms the OCA’s arbitrary and selective

adjustments aimed at reducing the appraised fair market value submitted by Mr. Walker,

a qualified UVE. Aqua R. Exc. at 12 (citing Aqua Exh. 1, Aqua Exh. V at 184

and 186-188). As a final point on this issue, Aqua requests that the Commission consider

the information it presented in a recent Aqua quarterly DSIC filing, which was admitted

into the record as OCA Cross Examination Exhibit 1. Aqua states that page 4 of that

Exhibit presents a weighted cost of capital for DSIC rate purposes of 7.42 percent, which

is comparable to the discount rates Gannett used in its valuation under the income

approach. Aqua R. Exc. at 13.

With regard to the municipal ownership scenario under the DCF method,

Aqua argues that the OCA’s proposed adjustment that the 2.66 percent discount rate be

discarded is borne out of a lack of understanding of the difference between a discount

rate and a capitalization rate.12 Id. at 13-14. Aqua avers that Gannett did not use a 2.66

percent discount rate but only used the 3.66 percent discount rate under the municipal

ownership market multiple DCF. According to Aqua, Gannett could only use the 3.66

percent discount rate because the market multiple DCF uses only discount rates and not

capitalization rates. Aqua further notes that because 2.66 percent is a capitalization rate,

Gannett could not use it. Id. at 14.

Finally, Aqua asserts that unlike the OCA’s zero growth assumption,

Gannett’s one percent growth projection was based on substantial evidence in the record.

According to Aqua, New Garden is one of the fastest growing areas in the

11 It is worthy to note that AUS applied a zero percent weight to its income and market approach valuations and applied a 100 percent weight to its cost approach valuation. Aqua Exh. V.

12 Aqua asserts that the OCA is confusing or mixing up the terms “discount rate” and “capitalization rate” because of the OCA’s limited knowledge in fair market value appraisal. Aqua R. Exc. at 14 (citing Tr. at 58).

49

Commonwealth of Pennsylvania and that Gannett reasonably concluded in its appraisal

that “[t]he combination of the Township’s higher than average projected population

growth and the domestic growth resulting from failing on-lot septic system owners

switching over to Sewer System service indicates appreciably higher future growth for

the Sewer System.” Id. at 14 (quoting Aqua Exh. U at 7-10). Aqua further states that

Gannett’s growth assessment is also based on independent population growth projections

published by the Delaware Valley Regional Planning Commission (DVRCP). According

to Aqua, the potential for septic system conversions is based on DEP’s 25-year life span

of an on-lot septic system coupled with the fact that 72 percent of the Township’s homes

were built before the year 2000. Id. at 15 (citing Aqua Stmt. 3R at 6). Aqua references

various sections of documents in its Application including New Garden’s Chapter 94

Report for 2015, New Garden’s Act 537 Plan, and several other exhibits in the

Application to support its growth projections and its decision to subtract 100-basis points

from the capitalization of earnings method based on 2.66 percent municipal bond yield.13

Aqua R. Exc. at 15-17 (citing Aqua Exh. 1; Aqua Exh. U at 10).

c. Aqua’s Exceptions

In its Exception No. 4, Aqua disagrees with the ALJ’s adoption of the

growth and risk adjustments to Gannett’s market approach as proposed by the OCA.

Aqua believes any form of adjustment to the fair market value is contrary to the clear and

unambiguous statutory language of Section 1329 and should be rejected.14 Aqua Exc.

at 27 (citing 66 Pa. C.S. § 1329(a)(2) and (a)(3); R.D. at 34-39). Aqua posits that

although the ALJ’s recommended ratemaking rate base of $29.5 million is the same as

13 According to Aqua, the capitalization rate is simply the discount rate minus the expected growth rate (3.66% - 1% = 2.66%). Aqua R. Exc. at 17 (citing Aqua Stmt. 3R at 6).

14 Aqua does not see the need to make an adjustment to the ratemaking rate base determined by two separate UVE appraisals performed in compliance with USPAP. Aqua Exc. at 27.

50

that proposed by the Company, the ALJ’s calculated average appraisal value containing

the OCA’s adjustment is contrary to the statute. Aqua asserts that the General Assembly

clearly stated that only the UVEs are legally qualified and competent enough to address

fair market valuation in a Section 1329 proceeding.15 Aqua Exc. at 28 (citing Table 2 of

R.D. at 39; Aqua M.B. at 15-16; 66 Pa. C.S. § 1329(c)).

Aqua also disputes the ALJ’s determination that “there was not an adequate

explanation presented in the [Gannett] appraisal to substantiate the growth and risk rates

ranging from ninety-five percent to 200 percent, which increased the value of the

property under the market approach.” Aqua Exc. at 29 (citing R.D. at 36). According to

Aqua, “[a] full and complete explanation of the adjustments is presented in the Gannett

Fair Market Value Appraisal.” Aqua Exc. at 29 (citing Aqua Exh. 1; Exh. U at 33-36).

Thus, Aqua requests that the Commission reject the ALJ’s recommendation on this issue.

Aqua Exc. at 29.

d. OCA’s Replies to Exceptions

In its Reply to Aqua Exception No. 4, the OCA discounts Aqua’s argument

that there is no legislative authorization to adjust a fair market value appraisal conducted

by the UVEs and that the Commission should not give any weight to the ALJ’s

recommendation adopting the OCA’s proposed adjustments. OCA R. Exc. at 17 (citing

Aqua Exc. at 27). The OCA argues that while Section 1329(a) and (b) provide the

process of engaging and selecting a UVE and the fees and other affiliation of the UVE

with the acquiring and selling utility, there is no language in Section 1329 that prohibits

any party or the Commission from reviewing those appraisals to make a determination of

their reasonableness. OCA R. Exc. at 17-18.

15 According to Aqua, “with carefully crafted and clear statutory wording phrased in mandatory terms, the General Assembly made it clear that fair market value is to be determined by the UVEs.” Aqua Exc. at 29 (citing 66 Pa. C.S. § 1329(a)(1)).

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Additionally, in its response to Aqua’s argument that the proposed

adjustments by the OCA’s witness should not be given any weight because she is not a

registered UVE and has no prior experience regarding fair market value appraisal, the

OCA argues that neither of the two UVEs in this proceeding has conducted a fair market

valuation appraisal for ratemaking purposes. OCA R. Exc. at 18 (citing Aqua Exc. at 28;

OCA R.B. at 7; OCA Exh. AEE-2, 3 and 5). Finally, with regard to Aqua’s claim that the

OCA selectively relied on parts of the appraisals in order to produce a lower ratemaking

rate base, the OCA retorts that it only adjusted portions of the appraisal that were not

supported and outside the realm of reasonable ratemaking metrics. OCA R. Exc. at 19

(citing Aqua Exc. at 28; OCA M.B. at 9-25; OCA R.B. at 7). The OCA concurs with the

ALJ’s determination that there “was not an adequate explanation presented in the

appraisal to substantiate growth and risk rates that ranged from 95% to 200%, which

increased the value of the property under the market approach.” Thus, the OCA requests

that the Commission reject Aqua’s Exception No. 4. OCA R. Exc. at 18 (quoting R.D.

at 36).

e. Disposition

After consideration of the record in this proceeding, including the positions

of the Parties and the applicable law, we shall deny both the OCA’s Exception No. 1 and

Aqua’s Exception No. 4. Preliminarily, however, we shall emphasize our agreement with

several aspects of the Recommended Decision. We agree with the finding of the ALJ

that consistent with the requirements of Section 1329, both UVEs conducted their

valuations in accordance with the USPAP using the cost, market, and income approaches

to valuation. R.D. at 14. In addition, we agree with the hearing procedure which

properly permitted the Parties to develop the record pertaining to the review and analysis

of the fair market value and appraisal of the UVEs. Moreover, we reject Aqua’s

contention that the OCA may not analyze or recommend adjustments to the appraisals of

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the UVEs. Rather, we agree with the OCA that Section 1329 contains no prohibitions on

the ability of the Parties to review the UVE appraisals and make arguments as to their

reasonableness and to recommend adjustments. Thus, we find that the ALJ was correct

in considering the analysis presented by the OCA, even though he ultimately did not

accept all of the recommended adjustments.

As to the approval of the rate base value, we find no error in the ALJ’s

consideration of the record evidence and to his adjustments to portions of the valuation,

including the determination related to the appraisal errors discussed in the Recommended

Decision at page 37. Accordingly, we shall adopt the ALJ’s disposition.

We find that the $29,500,000 acquisition price negotiated by Aqua should

be incorporated into Aqua’s rate base during its “next base rate case.” 66 Pa. C.S.

§ 1329(c)(1) and (2). Aqua’s purchase price of $29,500,000 is lower than the average

appraised value (as adjusted by the ALJ) of $29,990,204 and, therefore, is below the

statutory ceiling valuation, a point that should not go unnoticed here. As intended by the

new statute, this rate base measure is above the Commission’s traditional standard of

“original cost less accrued depreciation” under Section 1311, 66 Pa. C.S. § 1311.

Specifically, the original cost for New Garden’s wastewater assets is $18,567,728.16 So,

the negotiated purchase price results in a $10,932,272 premium above the municipality’s

original cost.

16 Although there are no adjustments for the “original source of funding” such as grant monies and taxes undertaken while the New Garden wastewater system was under municipality control pursuant to Section 1329(d) (5), the original cost was based on the Uniform System of Accounts for Wastewater Utilities as prescribed by the National Association of Regulatory Utility Commissioners (NARUC). Aqua Exh. AA at 2 (New Garden Township Sewer Authority Original Cost Study and Depreciated Original Cost at June 30, 2016).

53

D. Public Interest and Affirmative Public Benefits

1. Impact of Section 1329 on Public Interest Determination

a. Exceptions, Replies and Disposition

In Aqua Exception No. 1.A., the Company argues that the ALJ’s denial of

the Application on the basis of failing to demonstrate an affirmative public benefit

amounts to an error of law. Aqua asserts that the Commission has developed a policy of

promoting the consolidation of water and wastewater systems in Pennsylvania. Citing to

52 Pa. Code §§ 69.711 and 69.721, 17 the Company contends that the Commission’s

policies apply to viable and non-viable systems and is based on the reasonable and

justified conclusion that consolidation of water and wastewater systems benefits

customers. Aqua Exc. at 4-5.

17 Our Statement of Policy at 52 Pa. Code § 69.721, Acquisitions of Viable Water and Wastewater Systems, provides in part:

(a) General. The Commission believes that further consolidation of water and wastewater systems within this Commonwealth may, with appropriate management, result in greater environmental and economic benefits to customers. The regionalization of water and wastewater systems through mergers and acquisitions will allow the water industry to institute better management practices and achieve greater economies of scale. To further this goal, the Commission sets forth the guidance in this section regarding the acquisition of water and wastewater systems. Guidance specifically applicable to the acquisition of nonviable systems is set forth in § 69.711 (relating to acquisition incentives).

Aqua argues that our companion Statement of Policy at 52 Pa. Code § 69.711 pertaining to small nonviable water and wastewater systems, also acknowledges the goal of increasing mergers and acquisitions to foster regionalization. Aqua Exc. at 5.

54

Aqua also cites to Section 1311 of the Code, 66 Pa. C.S. § 1311, which

provides guidance on the acquisition of viable water and wastewater systems. Under

Section 1311 an acquiring utility may request inclusion of the value of the used and

useful assets of the acquired system in its rate base in its next filed rate case proceeding.

However, the acquired assets must be booked at the original cost of the acquired system

when first devoted to public service less applicable accrued depreciation and related

contributions. Aqua Exc. at 6 (citing 66 Pa. C.S. § 1311(b) and 52 Pa. Code § 69.721(c)).

The Company argues that historically Section 1311 of the Code created disincentives for

the sale of municipal systems because such systems were greatly depreciated or were

constructed using grants or contributions in aid of construction. This resulted in low

valuations of systems which the Company contends could be less advantageous or

financially harmful to the selling municipal corporation or authority. Aqua Exc. at 6.

The Company states that the enactment of Section 1329 was intended to

eliminate this disincentive for sale and consolidation of municipal systems by utilizing a

fair market valuation. According to Aqua, the General Assembly concluded that fair

market valuation would further the public interest by removing original cost as a

stumbling block to water and wastewater consolidation. Id. at 7.

Aqua argues that the Recommended Decision must be reversed because it

improperly considered the potential impact of the fair market value acquisition. Concern

for the potential impact of fair market valuation, the Company asserts, should never be a

criterion for Commission approval because it would result in the Commission never

approving a Section 1329 acquisition. In support, Aqua contends that fair market value

acquisitions will almost always result in both a purchase price higher than original cost

and a rate base per acquired customer that is higher than the rate base per existing

customer. The Company explains that such higher costs are the result of municipal water

and wastewater systems having been greatly depreciated or constructed using grants or

contributions in aid of construction. Id. at 8.

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Aqua asserts that it has not proposed any changes in rates to existing

customers. Indeed, it acknowledges that in regard to rates, the Commission will

ultimately determine the appropriate rates to charge for the New Garden system in

Aqua’s next base rate case. Further, the Company quotes from the following excerpt of

our recent decision in PAWC Scranton Order for the proposition that concerns with the

potential rate effects of the transaction must be reserved for a future rate proceeding:

As to the concerns raised by I&E and the OCA regarding the alleged detriments of the acquisition to PAWC’s existing customers, we note that these concerns center on the potential rate effects of the acquisition. However, we are not in a position to thoroughly adjudicate ratemaking issues relating to the acquisition in this proceeding. Nor do we find that this acquisition proceeding is the appropriate context for addressing these rate issues. The record does not contain sufficient evidence to allow us to evaluate the specific effects of the acquisition on PAWC’s revenue requirement or to decide cost allocation and rate design matters. Such issues are better reserved for a future base rate proceeding.

Aqua Exc. at 9 (quoting PAWC Scranton Order at 50). The Company requests reversal

of the Recommended Decision contending that the failure to do so would threaten the

successful application of the new statute and the intended consolidation of municipal

water and wastewater systems into the large utility industry. Specifically, Aqua argues

that the Commission should make clear that the fair market value acquisition of the New

Garden system is not potentially harmful to existing customers. Aqua Exc. at 9.

In its replies, I&E asserts that Aqua confuses the issue of approval of the

acquisition under Section 1102 of the Code with approval of the rate base amount under

Section 1329. According to I&E, Aqua improperly believes that Section 1329 does more

than establish the fair market value of the rate and that the acquisition can be approved

under Section 1329. I&E also disputes Aqua’s contention that the ALJ created criteria

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for approval under Section 1329 that amounts to an error of law. In contrast, I&E states,

the Recommended Decision provides that the basis of the denial of the Application was

the lack of affirmative public benefits that would flow to Aqua’s existing customers.

I&E R. Exc. at 4.

I&E argues that when an application is filed with both a Section 1102

component and a Section 1329 component, the rate base value under Section 1329 cannot

be approved if the acquisition itself is not approved under Section 1102. Further, I&E

asserts that Section 1329 did not abolish Section 1102, and in this case, the ALJ

determined that the Application did not meet the standards for approval under Section

1102. Regarding Aqua’s argument that fair market acquisition will almost always result

in a purchase price higher than original cost and a higher rate base per existing customer,

I&E responds that the ALJ’s finding pertaining to the burden of Aqua’s existing

customers was simply one part of his analysis. According to I&E, the ALJ determined

that the Company in whole failed to identify any affirmative public benefits that would

flow to its existing customers. I&E also proffers that the ALJ properly considered the

alleged detriments in which Aqua’s existing customers would shoulder a disproportionate

share of the revenue requirements in future base rate cases. As such, I&E contends that

the ALJ did not commit an error of law and that his recommendation to reject the

Application should be approved by the Commission. I&E R. Exc. at 5-6.

In its replies, the OCA addresses Aqua’s contention that the Commission

will never approve a Section 1329 acquisition under the criteria of potential impact of the

fair market value acquisition. The OCA began by arguing that the average rate base per

acquired customer is not just higher than the existing rate base of Aqua’s customers, it is

more than three times higher – $14,007 versus $3,714. However, the OCA states, the fair

market valuation of the system was not the sole criterion for the finding of harm to

existing customers but also Aqua’s plan to spend $2.5 million on the New Garden system

after closing. The OCA contends that the ALJ also considered these costs in the context

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of the rate limitation of the APA and that New Garden is financially capable of

completing the necessary upgrades to its system. Moreover, the OCA proffers, the ALJ

considered Aqua’s claims regarding consolidation, regionalization and operational

efficiencies and the future costs of operating New Garden’s system. OCA R. Exc. at 2.

The OCA also counters that Aqua’s claim of the Commission never being

able to approve a Section 1329 acquisition is an overstatement. The OCA argues that not

every acquisition will result in an average cost per acquired customer of $14,007 as

proposed in this proceeding. As examples, the OCA cites to decisions in Illinois in which

a fair market valuation of acquired utilities resulted in a much lower average rate base per

customer.18 The OCA continues that, whatever the rate impact may be, it is appropriately

included in the consideration of whether the acquisition should be approved under

Section 1103 of the Code. Furthermore, the OCA cites to Sections 529(a)(6) and 529(e)

of the Code, 66 Pa. C.S. §§ 529(a)(6) and 529(e), as a demonstration of the relevance of

the acquisition cost and the potential rate impact on existing customers. The OCA notes

that Section 529 requires the Commission to determine that the purchase price is

reasonable and “that the rates charged to its preacquisition customers will not increase

unreasonably because of the acquisition.” OCA R. Exc. at 3 (quoting 66 Pa. C.S.

§ 529(a)(6) and citing 66 Pa. C.S. § 529(e)).

The OCA also argues that acquiring a system under Section 1329 does not,

by itself, establish that the acquisition is in the public interest. According to the OCA,

the same affirmative benefit standard applies whether the system is acquired using the

original cost or fair market value analysis and not every acquisition will produce

18 The OCA notes that Illinois has a statute providing for fair market value of acquired water and sewer utilities, 220 Ill. C.S. § 5/9-210.5, and cites to Application of Illinois-American Water Co., 2017 IllPUC LEXIS 17 (average rate base per acquired customer was $1,736.33 ($260,450 / 150 customers), and Application of Illinois-American Water Co., 2016 IllPUC LEXIS 79 (average rate base per acquired customer was $1,060.91 ($195,208 / 184 customers). OCA R. Exc. at 3.

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affirmative benefits. The OCA contends that our policy statement under 69 Pa. Code

§ 69.721 recognizes the uncertainty of whether affirmative benefits will result by citing

our language that the consolidation of water and wastewater systems “may” benefit

customers. OCA R. Exc. at 3-4.

Next, the OCA addresses Aqua’s arguments that the Company did not

propose any rate changes in this proceeding and that our decision in PAWC Scranton

Order requires rate issues to be decided in a future rate proceeding. According to the

OCA, Aqua ignores the fact that in cases involving an acquisition of a municipal entity,

the Commission must approve the asset purchase agreement itself pursuant to 66 Pa. C.S.

§ 507. Here, the OCA asserts, the APA provides a purchase price which comprises part

of what the Commission must approve. The OCA argues that Aqua and New Garden are

seeking Commission approval of the APA which includes a cap on the amount of

increases that New Garden customers will be responsible for during the first ten years of

Aqua ownership and a 730 day rate freeze. The OCA reasons that the request for

approval of the cap on the CAGR and the rate freeze directly contradicts Aqua’s

argument that the potential rate effect on existing customers should be reserved for a

future meeting. OCA R. Exc. at 4-5.

Moreover, the OCA distinguishes PAWC Scranton Order as a proceeding

in which the Commission was not required to approve the ratemaking rate base of the

acquired utility. In contrast, the OCA contends, the Commission here is statutorily

required to approve the rate base under Section 1329. The OCA argues that by statute the

ratemaking issues are recognized in this proceeding and are part of the calculus of

weighing the evidence to determine the public interest. The OCA submits that the

evidence of a $29.5 million purchase price and the estimated annual expenses related to

Aqua’s operation of the New Garden system – without even accounting for the $2.5

million in proposed capital expenditures – are anticipated to be more than double the

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revenue from the New Garden customer. Thus, the OCA believes that the Application

poses a significant risk to existing customers. OCA R. Exc. at 5-6.

Upon review, we shall deny Aqua Exception No. 1.A. In our view, Aqua

appears to believe, incorrectly, that the establishment of the fair market value under

Section 1329 is the sole basis for evaluating the Application under Section 1329.

However, as set forth by both I&E and the OCA, the Company is also required to meet

the standards for approval under Section 1102. The rate base value determined under the

Section 1329 process is only one component of the factors comprising the evaluation of

the public benefit analysis required under Section 1102. We find no error in the ALJ’s

consideration of the spectrum of public benefit factors in this proceeding. R.D. at 43-45.

Although we disagree with the ALJ’s ultimate finding regarding the public

interest analysis, we find that it was appropriate for the ALJ to examine the ratemaking

issues in the evaluation of the public benefit factors.

2. Public Interest Analysis of New Garden Acquisition

a. Exceptions, Replies and Disposition

In Aqua’s Exception No. 1.B., the Company argues that the record evidence

demonstrates a substantial affirmative public benefit resulting from the New Garden

acquisition. Aqua contends that the following public benefits will occur:

consolidation/regionalization, capital improvement, long term operational efficiencies,

customer growth and long term cost sharing, decreasing cost profile, no adverse effect

and a desire of the seller to sell its system to a capable buyer. The Company also asserts

that the Commission has relied on evidence of similar benefits in many prior acquisition

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proceedings, particularly PAWC Scranton Order.19 As such, Aqua requests that we

reverse the Recommended Decision and conclude that Aqua’s acquisition of the New

Garden wastewater system is necessary or proper for the service, accommodation,

convenience, or safety of the public. Aqua Exc. at 11-15.

As for consolidation and regionalization, Aqua argues that the Commission

has long supported this objective because the utility industry has a better chance of

realizing the benefits of better management practices, economies of scale, and greater

environmental and economic benefits. The Company believes that these benefits will

ultimately help existing and acquired customers. According to Aqua, the New Garden

system is the type of system over which the Commission has historically encouraged

acquisition and that the Company has a history of assimilating such systems and

improving them over time. Id. at 11.

Aqua notes that the acquisition would represent an eleven percent increase

in customers to the Company’s wastewater operations and that it is adjacent to service

areas the Company already operates. With a larger customer base, Aqua argues that

future infrastructure capital costs will be shared at a lower incremental cost per Aqua

customer. The Company further contends that the assets do not require extensive long

term capital improvements and are in a demonstrated area of natural customer growth.

19 Citing to our decision in PAWC Scranton Order, Aqua asserts that the acquiring public utility, PAWC, had sufficient assets, and an established track record with wastewater capital improvement projects, and operated wastewater treatment plants in Pennsylvania similar to the Scranton Sewer Authority System. The Company also referenced the available resources of PAWC and that it was better able to meet the future capital needs of the Scranton system. Aqua states that PAWC’s greater customer base and substantial financial resources would permit PAWC to leverage economies of scale and mitigate the need for frequent rate increases. Moreover, Aqua noted PAWC’s expertise, its ability to maintain the system and to fulfill environmental requirements in a safe and economical manner. Finally, the Company argues that PAWC’s existing customers would benefit from the addition of Scranton’s 31,000 wastewater customers which would enhance economies of scale and produce additional revenue for PAWC. Aqua Exc. at 14-15.

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According to Aqua, significant customer growth potential in the New Garden service

area can be accommodated utilizing the current wastewater utility treatment

infrastructure without the need for additional capital. Aqua highlights its managerial,

technical and financial resources and argues that it will operate the New Garden system

in a safe, reliable and efficient manner and be able to address any system deficiencies

that may arise. Id. at 11-12.

Aqua cites to its proposed capital projects totaling $2.5 million which are

projected to benefit New Garden residents. The Company also emphasizes the

proximity of its four other wastewater treatment plants to the New Garden system. Aqua

reasserts that this will allow for operational efficiencies, without the need for additional

staff, and may ultimately mitigate future rate increases. Moreover, the Company

believes that future incremental investment needs will be minimal and less than the

incremental investment needs of Aqua’s other systems. Id.

Additionally, Aqua argues that the acquisition will have no adverse effect

on New Garden’s customers or Aqua’s existing customer base. Moreover, the Company

emphasizes that New Garden wants to sell its assets. Id. at 12-13.

Aqua asserts that this evidence was sufficiently detailed and consistent with

other acquisition proceedings approved by the Commission. The Company also argues

that benefit quantification or legal commitments are not required. Aqua Exc. at 17-18

(citing Popowsky). Aqua proffers that it has submitted substantial evidence and

testimony that allows the Commission to make numerous factually-based determinations

that public benefit will result from its fair market value acquisition of the New Garden

system. Aqua Exc. at 18-19. Finally, the Company proffers that the ALJ’s consideration

of New Garden’s financial health and ability to complete necessary upgrades was in

error. Aqua argues that the viability of the system is not a relevant consideration given

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our policy statement at 52 Pa. Code § 69.721 and that the Commission has approved

many acquisitions of viable systems. Aqua Exc. at 19-20.20

In its replies, I&E argues that the benefits alleged by Aqua are largely

unsubstantiated. Regarding Aqua’s claim pertaining to our policy statement under 52 Pa.

Code § 69.721, I&E contends that such interest in consolidation or regionalization of

water and wastewater systems does not imply that every acquisition produces affirmative

benefits. I&E also asserts that the simple fact of Aqua successfully acquiring and

improving water and wastewater systems in the past does not indicate that every

acquisition by Aqua should be viewed as benefiting the public interest. Rather, I&E

proffers, Aqua retains the burden to demonstrate such benefits by a preponderance of the

evidence which the Company has failed to do in this instance. I&E R. Exc. at 7-8.

As to the alleged long-term operational efficiencies and customer growth

and cost sharing arguments, I&E contends that the Company’s vague generalizations of

what might occur over the next 100 years do not satisfy the showing of affirmative public

benefits. I&E notes that the Commission cannot rely on speculation about potential

growth or operational efficiencies. Additionally, I&E states that the ALJ correctly

recognized that existing customers may actually be harmed if the Application were

approved. Id. at 8-9. Next, I&E addresses Aqua’s allegations regarding a decreasing cost

profile after the capital projects are completed. I&E argues that it is unclear how the

system will experience such a decrease other than normal depreciation that all plants

experience. Id. at 9 (citing OCA Stmt. No. 1-S at 13). I&E agrees with the ALJ’s

20 New Garden makes similar arguments that our policy statement under 52 Pa. Code § 69.721 encourages regionalization of water and wastewater systems. Additionally, New Garden asserts that Section 1329 provides the means for all municipal wastewater systems to be sold. According to New Garden, there is no requirement for the municipality to be financially distressed or in a worse position to render service or to provide capital improvements than an investor-owned system under Section 1329. Thus, New Garden argues that the ALJ misapplied the intent of Section 1329. New Garden Exc. at 2-4.

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conclusion that Aqua’s claims of the New Garden system needing minimal future

investment is highly speculative. According to I&E, the alleged benefit amounts to a

general assertion of something that may or may not happen in the future. I&E R. Exc.

at 9.

I&E also agrees with the ALJ’s findings that New Garden is financially

stable and that New Garden’s willingness to sell its system, as well as Aqua’s

commitment to make $2.5 million in capital improvements, cannot be viewed as an

affirmative benefit. Moreover, I&E asserts that the public interest analysis requires a

consideration of the benefits and detriments of the transaction with respect to all the

affected parties. Id. at 10-11 (citing to Middletown Twp. v. Pa. PUC, 482 A.2d 674, 682

(Pa. Cmwlth. 1984)). I&E argues that Aqua’s commitments to invest in the New Garden

system will likely have an adverse impact on existing ratepayers. In support, I&E states:

[T]he Company’s analysis shows that it will invest over $18.7 million in the [New Garden] system over the next 11 years (Aqua Application Exhibit U, Exhibit 8, pages 1-2, line 26 (2017-2027)). Some as yet unidentified party will have to pay these costs, and it is not unreasonable for I&E to anticipate that Aqua may seek recovery from its existing customers. These added costs could be more of a detriment than a benefit to existing customers.

I&E R. Exc. at 11 (quoting I&E Stmt. No. 1-SR, at 16-17). According to I&E, these

potential detriments, when combined with the fact that the only possible public benefits

are to New Garden and New Garden’s customers, show that the transaction is not in the

public interest. I&E R. Exc. at 11.

In its replies, the OCA first addresses the Company’s argument that there is

no requirement for Aqua to quantify how its claimed benefits specifically benefit the

public and that its evidence was sufficiently detailed. The OCA argues that there is

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record evidence rebutting Aqua’s claims that the Company did not meet the Popowsky

standard to establish the public benefit of the transaction by a preponderance of the

evidence. Next, the OCA cites to Aqua’s argument that regionalization and consolidation

will benefit existing wastewater customers in the long term by sharing costs among a

larger customer base. The OCA notes that the Company defines long term as 100 years

and quotes from Aqua’s witness Packer as follows:

In the long term, not 10 years in the utility space but rather 100 years, this system will allow for the spreading of future incremental costs, regionalization with existing areas of service by [Aqua], and the sharing of costs that would otherwise be borne by the existing rate payers.

OCA R. Exc. at 6 (quoting Aqua Stmt. No. 1R at 8).

The OCA argues that it is unclear how current customers will benefit from

cost sharing realized over 100 years. According to the OCA, benefits that may be 100

years in the future are too far removed from existing customers to be reasonable for

purposes of affirmative public benefits in this transaction.21 OCA R. Exc. at 6-7.

Additionally, the OCA asserts that the record evidence does not show that

future generations of customers will benefit from the transaction. The OCA indicates

that, other than normal depreciation, it is unclear what costs will decrease. Further, the

OCA contends that, although the transaction will increase Aqua’s customer base by 2,106

new customers, the costs will increase with the acquisition of these customers. In

support, the OCA references the testimony of its witness Everett as follows:

21 Moreover, the OCA contends that asking current customers to bear the costs of providing service to another generation of customers is a clear violation of the intergenerational equity principle, citing to the decision of the Minnesota Public Utilities Commission in Re Minnegasco, Inc., 143 PUR4th 416, 426 (1993). OCA R. Exc. at 7.

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As of the filing of Aqua’s December 31, 2015 wastewater Annual Report, Aqua had 19,784 wastewater customers and wastewater net utility plant of $73,477,924. This is an average net plant amount of $3,714 per customer. By contrast, the acquisition of New Garden will add $29,500,000 of rate base (plant) and 2,106 customers, or an average of $14,007 per customer. In other words, the average rate base cost of each New Garden customer is more than three times that of an existing Aqua customer. This is not economies of scale.

OCA R. Exc. at 8 (quoting OCA Stmt. 1 at 23-24). Spreading the costs of the New

Garden rate base to all wastewater customers, the OCA states, would increase the average

net plant amount per customer by $1,000 ($73,477,924 + $29,500,000 / 19,784 + 2,106 =

$4,704). The OCA argues that this higher rate base per customer is one more fact to be

considered in determining whether the transaction, on balance, will provide affirmative

benefits to all affected parties. OCA R. Exc. at 8.

The OCA also addresses Aqua’s argument that the ALJ should not have

considered whether the New Garden Authority is financially sound and whether it was

financially capable of completing necessary upgrades to the system. The OCA objects to

the Company’s assertion that the public interest standard is met because the acquisition

results in consolidation/regionalization and economies of scale making the system’s

viability irrelevant. The OCA argues that under this reasoning every application filed

under Section 1329 would be approved under Section 1102 regardless of the other

benefits and harms generated by the transaction. Id. at 8-9.

The OCA agrees with the ALJ’s conclusion that the acquisition will achieve

consolidation and regionalization. However, the OCA proffers that the evidence shows

that regionalization and consolidation alone, and in the context of the other APA terms

and the rebuttal evidence by the OCA, does not establish substantial affirmative benefits.

Id. at 9.

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Upon review, we shall grant Aqua’s Exception No. 1.B.22

We agree with Aqua that there are public benefits to this transaction under

Sections 1102 and 1103 of the Code. These sections of the Code require that the

Applicant demonstrate that the proposed acquisition will “affirmatively promote the

‘service, accommodation, convenience or safety of the public’ in some substantial way.”

City of York, 449 Pa. at 141. In this case, Aqua identified the following public benefits: 23

The acquisition will further the benefits of regionalization and economies of scale

in the Pennsylvania wastewater sector.

The New Garden system will be able to draw upon the experience of wastewater

professionals throughout the much larger Aqua organization.

The acquisition will have no negative effect on the quality or quantity of service

provided to existing Aqua customers.

These stated benefits are consistent with the Commission’s Policy Statement on

Acquisition of Viable Water and Wastewater Systems, 52 Pa. Code § 69.721, where we

22 We shall also grant the Exception of New Garden to the extent that it argues that the proposed transaction will promote the service, accommodation, convenience or safety of the public. However, we decline to address New Garden’s alternate argument that there is no requirement under Section 1329 for the municipality to be financially distressed or in a worse position to render service or to provide capital improvements than an investor-owned system.23 23 These benefits were detailed in the direct testimony of Mr. Packer and Mr. Bubel, who serve as a Regional Controller for Aqua PA and a Senior Project Engineer for Aqua PA, respectively. Both witnesses testified that Aqua has the expertise and experience to improve the operations of New Garden and to correct any deficiencies found. Aqua Stmt. No. 1 at 9 and Aqua Stmt. No. 2 at 11. It was not disputed that Aqua has the managerial, technical, and financial fitness to operate the New Garden system in a safe, reliable, and efficient manner. R.D. at 19-21.

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set forth that further consolidation of the water and wastewater industry in Pennsylvania

may also result in greater economic and environmental benefits to customers.

Additionally, we are in agreement with Aqua that both Aqua and New

Garden’s customers will benefit by sharing the costs of future infrastructure investments

at a lower incremental cost per customer since this acquisition will increase Aqua’s

wastewater geographic service territory and customer base by eleven percent and will

occur in a service territory location with projected customer growth. All of these factors

demonstrate that this acquisition likely will provide the long-term benefit of cost sharing.

Aqua Stmt. 1R at 8.

In addition to the benefits previously discussed, Aqua provided persuasive

testimony that the transaction will have no adverse result on existing operations. The

Company already has four existing wastewater treatment plants within ten miles of the

New Garden system. Accordingly, it will not be necessary for Aqua to hire additional

staff to absorb this system. Although Aqua did identify two near-term capital

investments necessary in the New Garden system, Aqua testified that over time the

acquired system will become less costly to operate. Aqua Stmt. No. 1 at 10, Aqua Stmt.

No. 2 at 6, 9, and Aqua Stmt. 1R at 10.

Finally, we are of the opinion that approval of the transaction is consistent

with the General Assembly’s clear support and encouragement of municipal wastewater

acquisitions at valuation levels higher than traditional original cost measures.

To address interim period rates for the New Garden customers, Aqua has

filed “a tariff containing a rate equal to the existing rates of the selling utility at the time

of the acquisition” as the Code requires under 66 Pa. C.S. § 1329 (d)(1)(v). These

existing rates were set by the New Garden Board of Supervisors and were not designed

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under traditional rate base/rate of return principals. Thus, we do not know how these

New Garden costs will reconcile to those of Aqua or traditional ratemaking.

We are concerned with the potential future cross-subsidization of New

Garden customers by current Aqua customers as a result of this acquisition. The record is

not at all developed on this issue, nor is it required to be as to rates. However, the record

does show that Aqua’s average net plant of $3,714 per customer is approximately four

times lower than that of New Garden at $14,007 per customer,24 indicating more

economic capital utilization by Aqua. This may suggest that the current rates in New

Garden, when reconciled to the rate base/rate of return model, potentially could be much

higher than those rates presently established for Aqua’s existing customers.

As to the issue of rate reconciliation between the two customer groups

(existing Aqua customers and New Garden customers) in the future, the record is silent

on how New Garden rates have been established, whether the current rates are

compensatory, or what those rates would be under rate base rate of return regulation.

A Commission Order approving the transaction is permitted to include

“[a]dditional conditions of approval.” 66 Pa. C.S. § 1329 (d)(3)(ii). Accordingly, as a

condition to approval of this acquisition, we direct Aqua to file a cost-of-service analysis

in its next base rate proceeding, similar to the outcome we directed in PAWC Scranton

Order. Specifically, Aqua shall develop and file a cost-of-service study in its next rate

case pursuant to our Regulations25 that separates the costs, capital, and operating expenses

of providing wastewater service to the New Garden customers as a stand-alone rate

group. Moreover, we shall also direct Aqua to address the pros and cons of designing

New Garden rates as a separate rate group. These conditions will ensure that all Parties

and the Commission will be informed of the overall rate impact that the acquisition will

24 OCA Stmt. 1 at 23-24.25 52 Pa. Code § 53.53, Exhibit D, Section VIII.

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have on Aqua customers and, alternatively, the result of establishing New Garden as a

separate rate zone. These requirements are not intended to limit what Aqua may file or

the positions that it or any party may take in that rate case.

In addition to the cost of service study requirement, we also continue to

agree with the PAWC Scranton Order decision when it comes to rate assurances.26 The

APA in this case includes provisions relating to Aqua’s assurances that it will “freeze”

the rates charged to New Garden’s customers for two years and, thereafter, limit rate

increases for New Garden’s customers to an annual four percent change for ten years. In

PAWC Scranton Order, the APA simply limited the rate assurances to what the utility

might propose, not the final outcome.

As discussed above, the APA provides firm, unqualified guarantees. See

Exh. C1 at § 7(b). Aqua acknowledges that the Commission will ultimately decide the

appropriate rates for the customers of the acquired utility in the Company’s next base rate

case proceeding, while Aqua and its shareholders will bear any rate differential during the

contract period stipulated in the APA. Aqua Exc. at 23-24. To be clear, we are adopting

the ALJ’s alternative recommendation, that if the Application is approved, the following

conditions should be imposed on Aqua:

The Commission retains the authority to allocate revenues, if appropriate, to the New Garden Township customers that are in excess of the restrictions outlined in the APA. Aqua and its shareholders should bear all risk of a shortfall between revenues it is permitted to recover under its agreement with

26 In PAWC Scranton Order, we said: “[a]s noted, the APA contains an agreement that PAWC will not ‘implement’ a rate increase for SSA customers ‘prior to January 1, 2018.’ This is a rates effective stay-out, as opposed to a rate filing stay-out. The APA also limits the magnitude of increases that PAWC may propose for SSA’s customers through a multi-year period, but does not restrict any other party’s rate case position or bind the Commission in any way.” PAWC Scranton Order at 70 (note 16) (citations omitted).

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New Garden and the costs that the Company will incur with respect to this system. To the extent that Aqua is unwilling or unable to charge costs in excess of the limitations provided in the Asset Purchase Agreement, the excess costs should be borne by shareholders and not spread to other ratepayers.

R.D. at 27-28.

Moreover, we note that if we were to approve a tariff rate at the

conclusion of Aqua’s next base rate case that is higher than that specified in the

APA rate assurances section, Aqua will be compelled to collect that tariffed rate

and may not charge a lesser amount to the customer, “directly or indirectly, by any

device whatsoever….” 66 Pa. C.S. § 1303.

In conclusion, the benefits outlined by Aqua, as well as the requirement for

the Company to include in its next base rate case a cost-of-service study relevant to the

New Garden system, and the determination that the rate assurances offered between Aqua

and New Garden are not binding on the rate-making authority of this Commission, will

all work in tandem to satisfy the requirements of Chapters 11 and 13 of the Code.

IV. Conclusion

For the reasons discussed above, we shall grant the Exceptions of Aqua and

New Garden, in part, and deny them in part, deny the Exceptions of the OCA and I&E,

and adopt the Recommended Decision, as modified, consistent with the discussion in

this Opinion and Order; THEREFORE,

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IT IS ORDERED:

1. That the Exceptions filed by Aqua Pennsylvania Wastewater, Inc.,

on May 1, 2017, are granted, in part, and denied, in part.

2. That the Exceptions filed by New Garden Township and New

Garden Township Sewer Authority on May 1, 2017, are granted, in part, and denied, in

part.

3. That the Exceptions filed by the Office of Consumer Advocate on

May 1, 2017, are denied.

4. That the Exceptions filed by the Commission’s Bureau of

Investigation and Enforcement on May 1, 2017, are denied.

5. That the Recommended Decision of Administrative Law Judge

Steven K. Haas, issued on April 21, 2017, is adopted, as modified.

6. That the Application of Aqua Pennsylvania Wastewater, Inc., filed

on December 15, 2016, seeking approval of: (1) the acquisition, by Aqua, of the

wastewater system assets of New Garden Township and the New Garden Township

Sewer Authority, (2) the right of Aqua to begin to offer, render, furnish and supply

wastewater service to the public in portions of New Garden and Kennett Townships,

Chester County, Pennsylvania, and (3) an order approving the acquisition that includes

the ratemaking rate base of the New Garden wastewater system assets pursuant to 66 Pa.

C.S. § 1329(c)(2), is granted.

7. That the resulting rate base addition of $29,500,000 is approved.

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8. That the Commission's Secretary issue a Certificate of Public

Convenience evidencing Aqua Pennsylvania Wastewater, Inc.’s right under Sections

1102(a)(1), 1102(a)(3) and 1329(c)(2) of the Pennsylvania Public Utility Code, 66 Pa.

C.S. §§ 1102(a)(1), 1102(a)(3) and 1329(c)(2), to: (a) acquire, by sale, the wastewater

system assets of New Garden Township and the New Garden Township Sewer Authority,

(b) the right of Aqua Pennsylvania Wastewater, Inc. to begin to offer, render, furnish and

supply wastewater service to the public in portions of New Garden and Kennett

Townships, Chester County, Pennsylvania, and (c) allow Aqua Pennsylvania Wastewater,

Inc. incorporate the ratemaking rate base of $29,500,000 for the New Garden wastewater

system assets in its next base rate case pursuant to 66 Pa. C.S. § 1329(c)(2).

9. That within ten (10) days after the closing of the transaction, Aqua

Pennsylvania Wastewater, Inc. shall file a compliance tariff supplement containing the

existing rates of New Garden Township and New Garden Township Sewer Authority at

the time of closing.

10. That at the time of filing its next base rate case, Aqua Pennsylvania

Wastewater, Inc., shall submit a cost- of-service study or analysis that separates the costs,

capital, and operating expenses of providing wastewater service to the customers of New

Garden Township and New Garden Township Sewer Authority as a separate rate class.

11. That at the time of filing its next base rate case, Aqua Pennsylvania

Wastewater, Inc., shall submit an analysis that addresses the effects of designing rates

for the customers of New Garden Township and New Garden Township Sewer Authority

rates as a separate, stand-alone rate zone.

12. That the Commission retains the authority to allocate revenues, if

appropriate, to the New Garden Township customers that are in excess of the restrictions

outlined in the Asset Purchase Agreement. Aqua Pennsylvania Wastewater, Inc., and its

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shareholders should bear all risk of a shortfall between revenues it is permitted to recover

under its Asset Purchase Agreement with New Garden Township and New Garden

Township Sewer Authority and the costs that Aqua Pennsylvania Wastewater, Inc., will

incur with respect to the acquired system. To the extent that Aqua Pennsylvania

Wastewater, Inc., is unwilling or unable to charge costs in excess of the limitations

provided in the Asset Purchase Agreement, the excess costs should be borne by its

shareholders and not spread to other ratepayers.

13. That any directive, requirement, disposition or the like contained in

the body of this Opinion and Order that is not the subject of an individual Ordering

Paragraph, shall have the full force and effect as if fully contained in this part.

14. That this proceeding be marked closed.

BY THE COMMISSION,

Rosemary ChiavettaSecretary

(SEAL)

ORDER ADOPTED: June 14, 2017

ORDER ENTERED: June 29, 2017

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