APPLE VALLEY—A recently entered ruling in a Los Angeles Superior Court eminent domain case relating to the City of Claremont’s effort to seize the water utility that serves its residents from the company that owns it does not have the precedent-setting authority of a decision made by an appellate court. Nevertheless, it quite possibly presages the likely failure of a similar effort by the Town of Apple Valley in San Bernardino County.
There are unmistakable parallels between Claremont’s now apparently-failed ploy to commandeer the Claremont assets of the Golden State Water Company using eminent domain and Apple Valley’s ongoing plan to use the same condemnation and seizure power to take possession of the Apple Valley Holdings of Liberty Utilities, known locally as the Apple Valley Ranchos Water Company.
In both cases, the water purveyors enjoy a virtual monopoly on the delivery of the elixir of life to residents of their respective communities. In both cases, the customers of the companies targeted for a public takeover are paying increasingly higher and higher prices for the water they need and use. In both cases, the municipalities in question – the City of Claremont in Los Angeles County and the Town of Apple Valley in San Bernardino County – each had an opportunity earlier on to take possession and control of the water utility assets serving their respective communities but either declined or dithered because of the reluctance of previous political leaders to take on the added expense or liability of running a water utility. In both cases, those entities’ respective political leaderships, either through a change of heart or change of composition or both, at some point recognized that moving toward public ownership of the water used by residents and businesses would alleviate the community of a burdensome expense. In both cases, the belated efforts of the municipalities to obtain ownership of the water supply and means of conveying it to the public/customer base were met by either resistance to the purchase offers or countering sale offers at an expense neither governmental entity was at that point willing to bear. In both cases, the governmental entities in some fashion pushed or sought to impose upon the water asset owners terms on the sale the owners were unwilling to accept.
In the case of Apple Valley, the town is now proceeding along the lines of an eminent domain condemnation/confiscation very much similar to that which over the last two months made its way into the courtroom of Los Angeles Superior Court Judge Judge Richard Fruin. Following a trial of nearly seven weeks, Fruin entered a tentative ruling late last week that turned back Claremont’s claim that the greater public good would be served by the Golden State Water Company being compelled to sell its Claremont holdings to the city.
Fruin found the city had not established that it had a compelling need to take on ownership of the water and water delivery system, nor had it presented clear and convincing evidence that it could perform any better than can Golden State in providing safe and reliable water to Claremont’s residents. Fruin’s ruling is not yet final, and he gave both the city and Golden State 15 days – From November 11 to November 26 – to submit reasoning arguments either in favor of or against, and comment with regard to, his tentative ruling before the decision is finalized.
Decades ago, Claremont spurned an opportunity to purchase the water system delivering water to its residents and businesses, an act of omission the city would later come to regret. Beginning as early as 2010, Claremont residents were registering complaints about the increasing cost of water charged by Golden State. Claremont tendered an offer of $56 million for the water system, which Golden State rejected. In 2014, Claremont filed suit, alleging that it would partner with the City of La Verne, which has its own robust water system, and would thereby be a superior provider of water service to Claremont’s customers.
According to legal analysts, that was a risky gambit, as at that point the partnership with La Verne did not yet exist. But Claremont insisted that it had an understanding with La Verne — which operates its own water company — to expand its operation to include the system in Claremont. To buttress its argument before Judge Fruin, Claremont offered the testimony of Michael Thornton, a civil engineer with 30 years of experience in running public water systems, that Golden State was plagued by operational deficiencies in Claremont, inadequate water storage and resultant insufficient pumping and pressurizing capability throughout the city. Thornton testified that Golden State’s 7.5 million gallon storage capacity in Claremont fell roughly 9 million gallons below the industry standard. He said La Verne’s 27 million gallon storage capacity would make an excellent complement and tie-in to the facilities in Claremont if the city were to gain ownership of the Golden State operation.
Fruin, heard the case as a bench trial, meaning he rather than a jury would be the final arbiter of the matter. He heard countervailing arguments from Golden State, including testimony about shortcomings in La Verne’s water system and the La Verne staff’s complete lack of familiarity with the peculiarities of the Golden State Claremont system.
Ultimately, Fruin in his 38-page ruling, came down on the side of the water company, and it wasn’t even a close call. He said Claremont’s uncharted and previously untested theories on eminent domain as applied to water law were legally flawed. Claremont’s effort to force the acquisition of the water company would have been the first such takeover ever effectuated in California. He said the city had utterly failed to prove why it would need to acquire the billing system by eminent domain. And while Claremont was quick to point out shortcomings in Golden State’s system serving Claremont, Fruin noted Claremont was in no better of a position – and probably worse – to deal with those issues on its own and that La Verne was itself dogged with water quality and system integrity issues of its own.
Fruin said the level of service now being delivered to Claremont customers was dramatically different from – and better than – what Claremont was prepared to deliver. “Golden State is the superior operator of the Claremont water system compared to La Verne with respect to water quality, safety and reliability,” Fruin opined. “The court will dismiss the complaint because the city’s plans for operation of the Claremont water system do not provide adequate assurance that it will maintain water quality, safety and reliability in the Claremont service area at the level now provided by Golden State.”
Like Claremont, Apple Valley is being represented in its eminent domain effort by the law firm of Best Best & Krieger. And Best Best & Krieger has loaded legal eggs into its Apple Valley’s litigative basket that are similar to, though not precisely in line with, Claremont’s.
Except for some private wells, Apple Valley’s primary water system consisted of the Apple Valley Ranchos Water Company, which was created by Newt Bass and B.J. Westlund as an adjunct to their real estate company in its undertaking to develop Apple Valley in the 1940s, 1950s and 1960s. Apple Valley Ranchos was acquired by the Wheeler Family in the 1970s. Shortly after the town’s 1988 incorporation, its maiden town council spurned the Wheelers’ offer to sell the town the Apple Valley Ranchos Water Company for $2.5 million. Town officials at that time were concerned less about the initial expense of acquiring the utility than with the projected ongoing and constant costs of having to repair, upgrade and maintain the system.
In 2011, the Carlisle Group, an American multinational private equity and asset management corporation, acquired from the Wheeler Family at a cost of $102.2 million the Park Water Company, which in addition to its water holdings in Apple Valley included the water system serving Compton, Downey and Bellflower in Los Angeles County, as well as the Mountain Water Company, which serves Missoula, Montana.
The Carlisle Group packaged the water companies serving Missoula, Bellflower, Compton, Downey, Missoula and Apple Valley together as what it called Western Water Holdings and put them on the market. In addition, in the summer of 2015, the Carlisle Group had arranged for Apple Valley Ranchos to acquire, for $300,000, the water system which serves some 900 residents in the desert community of Yermo, which lies roughly 36 miles from Apple Valley.
Three years ago, the Town of Apple Valley, alarmed at the prospect that the water company serving the community’s 69,135 residents and its businesses was about to be purchased by a Canadian company, challenged the proposed sale by means of a complaint to the California Public Utilities Commission,
Town officials enunciated concern that the joint application left open questions as to how Algonquin/Liberty would balance out the proposed $327 million purchase price for Park Water without subsequently imposing substantial increases in the rates Apple Valley residents and businesses would pay for their water, particularly given that Algonquin/Liberty would need to assume at least $77 million of existing long-term debt tied into Park’s assets. Almost two years ago, the California Office of Ratepayer Advocates entered its own protest with regard to the application, citing a succession of issues which were counter to the public interest.
In 2011, the Apple Valley Town Council, backed by the recommendation of a so-called blue ribbon committee, had declined to purchase Apple Valley Ranchos. Prevailing sentiment abruptly changed less than three years later, however. Park, after beginning to implement in 2012 rate increases on Apple Valley Ranchos customers totaling 19 percent and then completing $8.1 million in capital improvements to the Apple Valley Ranchos Water Company in 2014, instituted another 30 percent rate hike on Apple Valley Ranchos customers to be implemented from 2015 until 2017. Shortly thereafter, town officials began trading notes with Missoula city officials, where Park Water’s Mountain Water Company had likewise escalated rates.
Subsequently, the city of Missoula utilized its power of eminent domain to condemn and seek to acquire Mountain Water Company from Park Water Company. Mountain Water fought the takeover, but when the matter went to trial before Montana Judge Karen Townsend in April 2015 it resulted in Townsend on June 15, 2015 entering a judgment in favor of Missoula.
Even before Missoula prevailed in that case, Apple Valley officials began angling to take Apple Valley Ranchos away from the Park Water Company, banking on a strategy that included blocking Algonquin/Liberty’s acquisition from Park by making a protest to the California Public Utility Commission, and then achieving either an amenable or forced purchase of Apple Valley Ranchos through a financing strategy involving issuing bonds to create the capital to make the purchase. The town hoped to debt service those bonds, make needed improvements to the system and pay for water division operations through charging town residents reasonable rates for water.
That scenario was highly dependent upon Park Water’s willingness to sell the Apple Valley Ranchos water system for a price of the town’s choosing, i.e., around $50 million. In support of this, the town, obtained from what it referred to as “an independent appraisal firm” the rather wishful “fair purchase price” of $45.54 million.
That strategy, however, ran aground when the California Public Utilities Commission entered a ruling in late December 2015 that the conditional sale to Liberty could proceed.
In January 2016, Liberty Utilities, an American subsidiary of Canadian-owned Algonquin Power and Utility Corporation, finalized its acquisition of Apple Valley Ranchos by consummating the purchase of Park Water Company from the Carlyle Group.
The California Public Utilities Commission’s action did not rule out the possibility that Apple Valley might acquire Apple Valley Ranchos from Liberty by means of the eminent domain process or otherwise. Yet, Liberty’s willingness to pay what the market bears for Park’s collective water assets is a strong indication that the Town of Apple Valley’s previous notion that it will be able to acquire Apple Valley Ranchos for anything near the $45.54 million the town’s “independent” appraiser previously said it is worth or the $50.3 million offer tendered by the town in informal discussions with Park last year is unrealistically low.
In Montana, local water commissioners in June 2015 set the fair market price of the Mountain Water Company, which owns and operates 37 mostly shallow and medium-depth wells, at $88.6 million, pursuant to the eminent domain confiscation process of that entity successfully achieved by the City of Missoula through Judge Townsend’s court. Missoula, with 69,821 residents, is comparable in population size to Apple Valley, which at present numbers roughly 71,000.
In Los Angeles County, Park Water operates 12 wells, supplying between five and six percent of Compton’s water and about 15 percent of the water supply to the cities of Bellflower and Downey.
By contrast, the Apple Valley Ranchos Water Company operates 24 deep wells throughout Apple Valley and three wells in Yermo.
Though there are other methods of calculating the value of a water purveying operation than the sheer number of its wells, in using that yardstick, it appears that Apple Valley Ranchos’ 24-well operation in Apple Valley entails one third of Algonquin’s Western Water Holdings’ 72-well inventory of water-producing assets. With Algonquin having just paid $327 million for Western Water Holdings, it stands to reason any judge hearing the eminent domain case will accept, unless the Town of Apple Valley can present compelling evidence to support a conclusion otherwise, that Apple Valley Ranchos is valued at somewhere in the neighborhood of $109 million. While Apple Valley officials had previously pinned some of their hopes on the City of Missoula challenging the sale to Algonquin, that action did not change the valuation of the water assets already determined by Judge Townsend.
Still, based upon Judge Fruin’s ruling in Los Angeles County last week, it is an open question whether a court would be inclined to grant Apple Valley permission to seize the water system. There are differences between the case Claremont plied and that contemplated by Apple Valley. Apple Valley is not poised to argue, for example, that there is any problem with the water system operated by Algonquin/Liberty/Apple Valley Ranchos. It is likely that Best Best & Krieger will pursue the seizure through some alternate theory, most likely that the Apple Valley’s economic vitality will be dependent upon the town owning and controlling its water assets.
Even assuming a court would go along with an eminent domain condemnation, the town may be hard pressed to come up with the capital to cover the buyout. On November 8, 67 percent of Apple Valley’s voters passed Measure V, which requires that the town’s voters approve ahead of time any issuance of bonds or assumption of debt that would be used for the purchase of the water system.
Of note is that the town has already paid Best Best & Krieger and other consultants working on the water system takeover some $1.5 million. The best estimates are that the town will have run up a legal bill with Best Best & Krieger of at least $3 million if the matter goes to trial. And if the town, like Claremont, does not prevail in that suit, it will be on the hook not only for the money to be paid to Best Best & Krieger but will need to cover Liberty’s legal costs in defending the eminent domain action.