Large privately held, publicly regulated utility companies with a focus on rapid growth and expansion throughout the Commonwealth have a new target – municipally owned water and wastewater systems. Pennsylvania legislation over the last few years has provided considerable financial and regulatory incentives for this unprecedented growth. These companies are no longer waiting for municipalities to announce interest in exploration of system monetization opportunities, but instead are now aggressively marketing their interest in acquiring such systems through privately negotiated sales.
Municipal representatives contacted by these companies should carefully and comprehensively do their due diligence before entering into any agreement to dispose of their system. In particular, municipalities must be wary of entering into agreements to sell system assets without the opportunity for public bidding. The municipal governance statutes in Pennsylvania require public bidding in almost all cases in which public assets are sold. Selling a water or wastewater system without the opportunity for public bidding may result in challenges to the sale by citizens of the municipality, or other utility companies that did not have the opportunity to present a bid, or believe they were promised an opportunity to compete in an open and fair bidding process.
In addition, municipalities should know that selling their system assets pursuant to a privately negotiated sale, without the benefit of public bidding, often will result in the municipality “leaving money on the table” and not achieving the best and optimal value for their systems. Selling water and wastewater assets through a public bidding process produces greater value to the municipality, as interested companies will compete to acquire the assets, thereby driving up the price. In some municipal system transactions, as many as five or six interested entities actively participate in a competitive process to acquire system assets.
Municipalities should also know that a sale is not the only option available to them. Indeed, McNees attorneys have worked on several high-profile transactions over the last three years, all of which involved long-term leases of systems. Such leases can produce equivalent or greater value to the municipality, through a three-fold compensation system; an up-front payment, annual payments, and an annual capital expenditure commitment. The municipality also retains a level of control over the operation of the system and rate levels not found in an outright sale.
If you are contacted by a private utility company with a proposal to sell your water or wastewater (or electric or natural gas) system, remember that a private sale may not be the best option for you and your constituents.