This is an exercise that asks the following: How does one go about starting a new water utility?
The players are a hypothetical natural gas utility — say, Schmeoples Natural Gas — which is considering building a new water treatment plant on the Allegheny River and possibly laying new water pipelines to supply customers currently serviced by the Schmittsburgh Water and Sewer Authority.
First of all, it wouldn’t be easy.
“Historically, we’ve been reluctant in Pennsylvania and most other states to allow fixed utility competition,” said Alan Selzer, a utility attorney with Buchanan Ingersoll & Rooney in Harrisburg.
Utilities are, by definition, regulated monopolies.
For a company to become a utility, it needs to apply for a certificate of public convenience and necessity from the state Public Utility Commission. That involves proving that its new service would not hurt existing utilities and their customers.
“They’d have to show that net-net everybody is better off,” said Dan Clearfield, a utility lawyer with Eckert Seamans.
Peoples Natural Gas has been mulling how it could get involved with PWSA for more than a year, either by acquiring the system, which doesn’t sit well with public officials who want to keep the authority public, or through some other arrangement.
Pittsburgh Water and Sewer Authority’s old pipes, its nearly $1 billion debt, and legacy customer service issues have invited overtures from a number of private companies looking at PWSA’s challenges as investment opportunities.
Mr. Clearfield represents the Pittsburgh Water and Sewer Authority in front of the Pennsylvania PUC but said he was not speaking on behalf of the water agency nor about it.
Speaking about North Shore-based Peoples Natural Gas, he said, “It’s hard to believe that they could build a whole new distribution system. More realistic would be to try to cherry-pick big customers.”
According to PWSA public filings, the water utility’s top customers in 2016 were soup maker Riverbend Foods, the Fox Chapel Water Authority, University of Pittsburgh Medical Center, the University of Pittsburgh and Carnegie Mellon University; the city of Pittsburgh and its housing authority; Allegheny County government, Riverside Community Correction Center, and PNC Park.
Together, they make up a third of the demand on PWSA’s system.
“If you had some big industrial customers that used a lot of utility service, you could potentially make a deal with those customers,” Mr. Clearfield said.
“Even that would require the PUC to approve it,” he said, recalling a famous PUC case from 1985 in which a steel company that sat on the border of two electric utilities petitioned to connect to the lower-priced one.
The PUC denied the request, reasoning that the steel company’s departure would unfairly harm those customers that remained on the pricier system as they would have to pick up the slack for the lost revenue.
What if Peoples weren’t trying to compete as a water utility, but rather serve as a water provider to a few select clients?
If it’s not holding itself out as a public utility, does the PUC even have a say?
Mr. Seltzer, the Buchanan Ingersoll attorney, wondered if the same question might apply to a hot-topic area in the electric industry — micro-grids. These are systems that are specifically designed to serve only a small portion of utility customers.
Reinventing the wheel
Experts tapped for this hypothetical exercise agreed that Peoples actually laying new pipelines to mimic and compete with PWSA’s existing system is a rather unlikely possibility.
“Avoiding infrastructure redundancy like this is the whole reason utilities are monopolies in the first place,” said Heike Doerr, principal analyst with S&P Global Market Intelligence.
“A more likely scenario, in my opinion, would be if Peoples built a plant and had a bulk water contract with the city.”
The PWSA expects to spend $117 million on its own water treatment plant in Aspinwall over the next five years.
In public filings, the PWSA wrote that it is marketing water from its treatment plant — which can produce more than current customers need — to municipalities and municipal authorities nearby.
It could make extra money selling the water outside its territory, PWSA wrote, but that might require building new water lines.
Mr. Clearfield said a public-private partnership for something like a new treatment plant is increasingly common in utilities.
Peoples, for example, could use its own capital to build a plant and then lease it to PWSA for $1. The Pittsburgh Water and Sewer Authority, in turn, would get a new plant without issuing debt and would repay that investment through customer rates. The private entity, Peoples, would get tax breaks for the depreciation of that plant.
The PUC still would need to approve such an arrangement, Mr. Clearfield said.
“So you could theoretically do that, but the real devil is in the details,” he warned.
In terms of becoming a water utility, PUC spokesperson Dave Hixson said Peoples hasn’t approached the agency.
“Until the commission receives an application and the process begins, it’s hard to speculate on any other matters related to need, feasibility, etc.,” he said.
There’s nothing in Pennsylvania law that prevents a company from owning utilities of different stripes, say a gas system and a water system. But a certified gas utility, for example, still would need to seek a new certificate of public convenience if it wants to venture into any territory or service for which it hasn’t already been approved.
The last utility created in Pennsylvania was Leatherstock Gas Co. It sprung up in Susquehanna County to take advantage of Marcellus Shale natural gas and pipe it to underserved areas.
No other utility served the area, but Leatherstock faced a challenge from an existing natural gas utility, UGI, which argued that it wanted to expand to that area. Eventually, in 2012, the PUC approved Leatherstock’s application.
Now a word of caution about hypotheticals.
Peoples spokesperson Barry Kukovich said all these possibilities are just ideas at the moment.
“This whole thing right now is a tornado of ideas,” he said. “It’s our job to sort through them.”
Then he added, “But conversations in Pittsburgh can turn on a dime.”
Anya Litvak: alitvak@post-gazette.com or 412-263-1455.
First Published: June 4, 2018, 11:00 a.m.
Updated: June 4, 2018, 12:11 p.m.