State Regulators OK Sale of City's Sewerage Authority to PAWC

By Jason Togyer
The Tube City Almanac
November 02, 2017
Posted in: McKeesport and Region News

(Photo by Jeff Tomovcsik via Municipal Authority of the City of McKeesport website.)

Details:

• Pennsylvania-American to pay McKeesport $159 million for the assets of its sewer system
• All existing McKeesport authority employees will be offered comparable jobs at PAWC
• Rates will be frozen for one year
• PAWC will begin $62.7 million worth of improvements to the McKeesport system
• State will require PAWC to do "ongoing, targeted outreach" to low-income customers about utility bill assistance

The state Public Utility Commission has voted unanimously to approve the sale of McKeesport's sewerage system to Pennsylvania-American Water Company.

The transaction, valued at $159 million in PUC documents, will affect nearly 13,000 customers in McKeesport, Duquesne, Dravosburg, and Port Vue, as well as thousands of additional customers in Elizabeth Twp., North Versailles Twp., Liberty, Lincoln, Glassport, Versailles, White Oak and East McKeesport whose wastewater is treated by McKeesport's sewage treatment plant, located in lower 10th Ward.

About 64,000 people are affected by the switch.

At their regular meeting Wednesday, McKeesport council voted 7-0 to authorize city officals to formally dissolve the Municipal Authority of the City of McKeesport, which was created in 1949 to build and operate the sewer system.

Mayor Michael Cherepko said Wednesday the city hopes to close the sale by Nov. 30.

In a statement dated Oct. 26, PUC Chair Gladys M. Brown said the present customers of the McKeesport authority will "benefit greatly" from the sale.

"Without hesitation, I support the approval of this settlement agreement," Brown said. (PDF file)

PAWC is a subsidiary of American Water Works Co. Inc., the largest publicly traded water treatment company in the United States. Based in New Jersey, American Water's stock is a component of the Standard & Poor 500 and the Dow Jones Utility Average.

The company was founded in 1886 --- ironically enough, in McKeesport.

The deal was first announced in September 2016. 

It needed to overcome objections filed with the PUC by the state Office of Consumer Advocate as well as the PUC's own Bureau of Investigation and Enforcement, who questioned whether PAWC's purchase of the McKeesport system was in the best interest of either PAWC's existing customers or McKeesport's customers.

"We've had some bumps and obstacles along the way," Cherepko said. "There are hundreds, if not thousands, of hours that have been put into this transaction. But there is light at the end of the tunnel."

Exactly how much of a windfall the sale will be for McKeesport taxpayers is not clear. Cherepko and city Solicitor J. Jason Elash said the authority must retire existing debts and bonds, including money that was borrowed over the past decade to more than double the capacity of the McKeesport sewage treatment plant from 23 million gallons per day, to 56 million gallons per day.

Estimates of the authority's outstanding debts have ranged from $90 million to $110 million.

As for any money left over, Cherepko has pledged that the city will carefully invest it to help support the city's operating expenses as well as an ongoing recovery program.

City officials have cautioned for several years that McKeesport is running a $1 million structural deficit on its roughly $19 million operating budget, and that without selling the sewerage system, it was likely headed for Act 47 distressed status --- the equivalent of bankruptcy.

But, Cherepko said, some portion of the money will be used for much-needed infrastructure projects.

"I think it's only fair that we use some portion of the money to do some major improvements, including some paving and some demolition," he said.

Cherepko said he is heartened by PAWC's dealings with the city. The utility last year made the city an advance $5 million payment on the sale, which officials used to create an emergency reserve fund.

PAWC also has agreed to offer comparable jobs to all of the McKeesport authority's 45 employees, many of whom are represented by Utility Workers Local Union 229.

According to PUC filings, PAWC has been meeting regularly with McKeesport authority employees since February of this year.

"I feel good about American Water," Cherepko said. "I think they want to be part of the community and a good neighbor ... I truly think this is a win-win for everyone."

Cherepko said an important factor driving the decision to sell the authority was finding a buyer that had the resources and the technical know-how necessary to update the present sewerage system --- and that could spread the costs over a larger base than the McKeesport authority.

PAWC is the largest water company in Pennsylvania, serving 2.3 million people in 36 counties, including residents of several municipalities near McKeesport, such as Liberty and West Mifflin.

But according to PUC filings, the company also now provides sewerage service in 33 municipalities serving 50,400 homes, more than 4,000 business and 37 industrial plants.

In 2016, PAWC purchased for $195 million the Scranton Sewer Authority, which served 31,000 customers in that city and neighboring Dunmore Borough.

Cherepko said he expects more cities to follow Scranton and McKeesport out of the business. "I think you're going to see more and more municipalities saying it's not worth the liability" to operate their own sewerage systems, he said.

In filings with the PUC this year --- comprising literally thousands of pages of reports, charts and testimony --- the McKeesport authority detailed $62.7 million in improvements that they say will soon be necessary to comply with county, state and federal regulations.

One of the most serious problems facing the McKeesport sewerage authority --- and others throughout Western Pennsylvania --- are old sewer lines that combine rainwater with sewage, as well as connections between rain gutters and the sewage system.

During heavy storms, rainwater can surge into the system and cause raw, untreated sewage to spill into creeks and rivers.

Both McKeesport and Port Vue have some combined sewers.

But other serious deficiencies of the McKeesport system were laid out in PUC testimony by PAWC, the authority and consulting engineers who were hired to study the system.

They include sewer lines in Port Vue that in some cases date to 1919, and a neighborhood in Dravosburg where raw, untreated sewage is being dumped into abandoned coal mines instead of the sewerage system.

In addition, the Dravosburg sewage treatment plant has been judged inadequate and in need of replacement, while the Duquesne system is due for serious upgrades.

The authority and McKeesport officials told the PUC that the McKeesport authority is nearing the limit of its ability to borrow money to fund those improvements, and that continuing to increase sewerage rates was not feasible in an area where many customers are living at or below the poverty line.

PAWC has agreed to freeze current sewerage rates for a period of one year following the sale.

But before the rates can be increased, the PUC said, PAWC must submit a "cost of service study" detailing the exact cost of providing sewerage services to people in the McKeesport system, including the cost of providing stormwater treatment.

In addition, PAWC told the PUC it intends to close the outdated Dravosburg plant --- which has a maximum capacity of only 480,000 gallons per day --- and connect those customers to the McKeesport plant, which through recent upgrades now has a capacity of 56 million gallons per day.

PUC also directed PAWC to conduct "ongoing, targeted outreach" to McKeesport-area customers about how low-income customers can sign up for programs to help them pay their utility bills.

"PAWC will provide much-needed investment in the system, specifically to address environmental compliance issues," said Brown, the PUC chair, in her statement supporting the sale.

"Importantly, the authority's customers will benefit from PAWC's additional bill payment options, extended customer service and call center hours, enhanced customer information and education programs, and access to PAWC's customer assistance program," she said.

The PUC rejected attempts to block or delay the sale filed by the Pennsylvania Office of Consumer Advocate and the PUC's Bureau of Investigation and Enforcement.

The I&E bureau had claimed that the sale prices calculated by engineers working for PAWC and the McKeesport authority were based on faulty models.

In addition, the Office of Consumer Advocate argued that McKeesport-area customers will pay higher rates under private ownership than under public ownership, because the authority was eligible for low-interest loans from the Pennsylvania Infrastructure Investment Authority, or PennVEST.

Attorneys for the city and the McKeesport authority said the objections relied on testimony by people who were not experts, as well as on "shifting standards, misleading facts, innuendo of nefarious purpose and baseless attacks."

Originally published November 02, 2017.

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