As New Jersey American Water (NJAW) has spent millions and millions to buy water and sewer systems in the Garden State, it has simultaneously been seeking permission from New Jersey courts to burden its customers with a much larger share of those costs. So far, the courts have protected customers.

For several years now, the bills paid by NJAW’s 2.8 million customers have been rising. One big reason for that has been the corporate utility’s aggressive acquisitions strategy. NJAW purchases have included municipal systems in Haddonfield, Salem, Egg Harbor City, Bound Brook, Somerville, Long Hill, Manalapan, and South Orange, as well as private systems like Shorelands Water.

Many government and corporate drinking water systems buy water supply in bulk or “wholesale” from other systems. Government utilities buy water from one another; corporate systems do, too. Some contracts involve a government utility and a corporate utility. Customers of about 50 NJ municipal systems that buy water from NJAW may not realize that indirectly they are NJAW customers.

When a system is sold, the price paid for it has two components — “book value”(original cost less depreciation) and “acquisition premium.” For decades, a New Jersey investor-owned utility that purchased a system could expect to recover the “book value” in rates charged to customers. It would be permitted to recover the acquisition premium only if the system being purchased was “distressed” or if the acquisition provided tangible benefits to existing customers. The policy was supported by a court precedent from a case involving Elizabethtown Water.

In 2015, a law known by the acronym WIPA, passed with the help of NJAW lobbying, modified the long-upheld approach. WIPA limited New Jersey Board of Public Utilities (NJBPU) discretion over acquisition premium cost recovery. Under certain conditions, WIPA permits recovery of the full purchase price, effectively weakening the NJBPU regulatory authority in this regard. NJAW’s subsequent purchases of Salem and Egg Harbor City were completed under WIPA. The corporation’s other system purchases were subject to the older pre-WIPA, NJBPU policy limiting how much of the acquisition premium could be folded into rates. That includes purchases of the Borough of Haddonfield water and sewer systems for $28.5 million and of Shorelands Water for an undisclosed amount.

NJAW requests rate increases about every two years, and it may also impose any number of surcharges in between. In 2017, NJAW requested a $129.3 million rate increase or an average of 17.54 percent above existing rates. The corporation asked the NJBPU to allow it to recover full acquisition costs for the purchases of Shorelands and Haddonfield in its rate base. NJAW had paid $26.7 million above book value for Shorelands and $1.7 million above book value for Haddonfield, so this amounted to about $28.4 million or 21 percent of the rate increase request. To justify the request, NJAW did not argue that the two systems were distressed. The utility argued that buying Haddonfield and Shorelands provided tangible benefits to their existing New Jersey customers in that it enabled NJAW to avoid certain costs that would otherwise have been incurred and passed on to customers. The NJBPU denied the full-recovery request. It allowed NJAW to fold into rates amounts equivalent to book value of the two systems but said NJAW could not recover the acquisition premiums. The NJBPU said the avoided costs were “speculative” and did not amount to specific, tangible benefits to the customers. The NJBPU permitted NJAW to implement an interim rate increase of 12.32 percent that did not include the Haddonfield/Shorelands acquisition premiums.

NJAW challenged this before the Superior Court of New Jersey, Appellate Division. The corporation argued that by denying permission to include the acquisition premiums in rates, the NJBPU had created a “guarantee” — a kind of standard. The NJBPU response was that NJAW simply failed to prove a net tangible benefit to ratepayers and that the benefits NJAW cited were “speculative.” The Appellate Division held that the NJBPU acted well within its regulatory powers.

Middlesex Water Company, which buys water wholesale from NJAW, and the NJ ratepayer consumer advocate, the Office of Rate Counsel, filed briefs supporting the NJBPU’s position.

“If [NJAW] had won the case, it would have set a precedent that would have allowed water utilities to recover overpayments from ratepayers in future acquisitions. I would say that by denying the request, the [NJBPU] acted to protect ratepayers and the Court affirmed that decision,” said Brian Lipman, who heads the Office of Rate Counsel.

Middlesex Water routinely intervenes in NJAW rate cases. Jay Kooper, Vice President, General Counsel, and Secretary of Middlesex Water, said that Middlesex had intervened in the Haddonfield/Shorelands matter “to defend the interests of all of our ratepayers — residential, commercial and industrial customers, as well as our wholesale customers.”

A NJAW win in the case would have “introduced chaos into the longstanding precedent under “Elizabethtown Water” and may have set the stage for a subsequent overturn of “Elizabethtown Water,” said Kooper. “The Appellate Division decision reaffirms the bedrock rules of the road for water utilities — if [the utility] petitions for recovery of an acquisition premium, it has the evidentiary burden of proving the acquisition generates specific and tangible benefits for ratepayers that would not have been achieved absent the acquisition.”

Want to read more about privatization? Visit inthepublicinterest.org, and while you are there, check out the report on water privatization, “Water Wars in Pennsylvania: How Corporations Play the Long Game. A Report on Water Privatization in Pennsylvania — and the Efforts to Fight Back,” published in July 2024.