Municipalities in Pennsylvania and many other states today struggle with aging water and wastewater infrastructure, tighter regulations, water quality issues, debt and a labor force. aging work. To address these challenges, many municipalities in these states have sold or are considering selling their water and wastewater assets to private companies. But a better option for some of these municipalities may exist, in the form of leasing.
By leasing their water and/or wastewater assets to the private sector instead of selling them directly, municipalities can retain ownership of their valuable systems while harnessing the potential of the private sector for critical infrastructure improvements.
Six years ago, Pennsylvania enacted Bill 12, a new law that governs the fair market value of a public system sold to a private entity. The law states that the buyer in such a transaction must submit to the regulations of the Public Utility Commission. The regulatory requirement applies to transactions that are outright sales, but it does not apply to leases.
Municipalities sometimes reflexively turn to outright sales as a way to meet their challenges without a thorough examination of the potential benefits of leasing. Some of the often overlooked benefits of an asset lease agreement:
- The municipality retains ownership of the system for the duration of the lease, whereas a sale is final.
- The municipality retains governance and oversight of rate setting, and rates will not be subject to PUC regulation.
- The municipality can monetize the system in a manner similar to a sale by requiring the tenant to prepay the lease payments.
- The municipality will participate in future capital investment decisions with the tenant, including system expansions, upgrades or replacements.
- Given continued public ownership, the municipality can avail of low interest loans and grants for future capital projects.
- At the end of the lease, the municipality can take back the property and recover the value of the property upon reversion, or extend the lease.
Some argue that an outright sale frees the municipality from risk, capital obligations and regulation. This argument, however, is somewhat misleading. After an outright sale, community members remain responsible for funding the system through tariffs. Tariffs are regulated by the PUC without oversight or control by the municipality itself, and so community members retain the risk but have little or no leverage to compel the PUC to address any concerns that may arise. about prices.
In an asset lease agreement, a municipality retains some risk as the continuing owner of the system. But a significant part of the risks can be transferred to the tenant, and the retained risks can be managed by the municipality, which now bears a lower risk burden than before.
An asset sale may be the optimal solution for a municipality that is tired of battling water and wastewater issues and wants to get out of the business altogether. Other municipalities, however, might be wise to retain ownership for the long term and consider an asset lease agreement that allows them to reap the benefits of outright sales without actually selling their systems. Through leasing, these municipalities can retain control of rate structures and the ability to lease their systems again at the end of a contract. This creates the potential for repeated monetization of their systems and the possibility of funds emerging from these transactions that can be used for other utilities and improvements.
While water and wastewater asset leases may be less traditional solutions, municipalities owe it to their ratepayers to consider all viable options.
Republican Bill Shuster represented Pennsylvania’s 9th congressional district in the United States House of Representatives from 2001 to 2019, spending six years as chairman of the House Committee on Transportation and Infrastructure. His coal-mining district included all of Carbon, Columbia, Lebanon, Montour, and Schuylkill counties, as well as parts of Berks, Luzerne, and Northumberland counties. He now works as a senior policy advisor focusing on infrastructure, transportation and local government at Squire Patton Boggs.