PUC Okay Of AV Ranchos Sale Triggers Apple Valley’s Condemnation Suit

APPLE VALLEY— A decision by the California Public Utilities Commission last week conditionally approving the sale of Western Water Holdings LLC to Liberty Utilities has complicated even further the already star crossed effort by the Town of Apple Valley to acquire the Apple Valley Ranchos Water Company. Reflexively, the town this week moved to invoke its eminent domain authority to seize the water company.
The California Public Utilities Commission signed off on a proposed settlement agreement between the joint applicants of Liberty Utilities, Liberty Western Water Holdings Inc, Western Water Holdings LLC, Park Water Co. and Apple Valley Ranchos Water Co. and the Office of Ratepayer Advocates with regard to the $327 million sale. With the application conditionally approved, the prospect of the Town of Apple Valley being able to reasonably afford to purchase locally-based Apple Valley Ranchos Water. The town now faces a protracted legal battle in which the use of eminent domain is its trump card.
This renders the decision by the maiden Apple Valley Town Council made less than a year after the town’s 1988 incorporation to spurn an offer to sell the town the Apple Valley Ranchos Water Company for $2.5 million even more of a regrettable one than was previously recognized. It now appears that the town will need to pay a figure approaching $100 million to take control of the water infrastructure serving the community.
The Apple Valley Ranchos Water Company was created in 1945 by Newt Bass and B.J. Westlund as an adjunct to their real estate company, Apple Valley Ranchos, their undertaking to develop Apple Valley after they acquired 6,500 acres from the Southern Pacific Railroad for $2.50 per acre. Their intention was to install the minimum amount of infrastructure to support the construction of subdivisions and make the community grow, anticipating that as Apple Valley matured, that infrastructure would be replaced by higher quality pipes, reservoirs, pumping units and appurtenances. It would turn out, how-ever, as the town was built piecemeal, the water company merely expanded with it, a hodge podge of water mains and lines built one after the other, patched together in correspondence to the new development it was called upon to serve.
In 1987, Park Water Company, which provides water to Compton, Downey and Norwalk in Los Angeles County and was then owned by the Wheeler Family, acquired the Apple Valley Ranchos Water Company. When the town incorporated in 1988, city officials had the opportunity to purchase the company for $2.5 million, but declined, choosing not to convert the Apple Valley Ranchos Water Company to a municipal division, 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 acquired from the Wheeler Family at a cost of $102.2 million the Park Water Company, which in addition to its Los Angeles County and Apple Valley holdings, also owns the Mountain Water Company, based in Missoula, Montana, serving some 50,000 people. The acquisition of Park from the Wheeler Family was part of the Carlyle Group’s long term investment strategy of acquiring assets that can immediately return money in terms of sales of a commodity, in this case water, to a reliable customer base, while representing a future sales profit potential, whether those assets are spun off individually or collectively.
In 2011, the town impaneled a so-called blue ribbon committee to consider acquiring Apple Valley Ranchos, but advised against it. Prevailing sentiment abruptly changed in 2014, however, when 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 Judge Karen Townsend in April it resulted in Townsend on June 15 entering a judgment in favor of Missoula.
Even before Missoula prevailed in that case, town of Apple Valley officials began angling to take Apple Valley Ranchos away from Park Water Company. As articulated by the town, it believes it will be able to purchase Apple Valley Ranchos through a financing strategy involving issuing bonds and that it will be able to service the bonded indebtedness and carry out improvements to the water system by means of the payments made to the city by water users/customers, i.e., the town’s residents. The town’s officials maintain that the revenue from the water sales will be dedicated solely to this bonded debt service and water division operations and maintenance and can be effectuated without any water rate increases.
That scenario was highly dependent upon Park Water’s willingness to sell the Apple Valley Ranchos water system lock, stock and barrel 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.
The town in a public statement said that it “would like to purchase the company in a negotiated transaction.” That was met by Park’s response that Apple Valley Ranchos Water Company was not for sale. To city officials consternation, they learned that Park was in discussions with Algonquin Power & Utilities Corp., a Canadian utility company, for the sale of all of its California and Montana assets. A publicly disclosed offer was $327 million. Liberty is an American subsidiary of Algonquin and that sale, following the California Public Utility Commission ruling, is about to be recorded.
Several issues were at play before the California Public Utilities Commission, which received a challenge to the proposed sale in November 2014.
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. A year 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.
The California Public Utilities Commission’s tentative ruling last week set those concerns aside and essentially shuts the door on blocking the sale to Liberty. And while it does not rule out the possibility that Apple Valley might acquire Apple Valley Ranchos from Liberty, 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 notion that it will be able to acquire Apple Valley Ranchos for anything near the $45.54 million the town’s “independent” appraiser says it is worth or the $50.3 million offer recently tendered by the town in informal discussions with Park is a pipe dream.
Indeed, the Sentinel is informed, Park Water officials “scoffed” at the town’s $50 million offer.
Liberty Utilities California put out a public statement early this week that company officials are now looking beyond the anticipated closing of the transaction so that the company can become “an intrinsic part of the Apple Valley community.”
The California Public Utilities Commission said that Liberty’s acquisition of Park’s assets would not interrupt the “continued safe, reliable and reasonable operation of Park Water and Apple Valley Ranchos.” Its decision was less clear with regard to the takeover’s impact on rates and charges.
Liberty offered somewhat ambiguous assurances “against post-transaction rate increases” taking place.
Park Water, under the aegis of Apple Valley Ranchos, in August acquired, for $300,000, Yermo’s water system, which serves some 900 residents in that desert community, which lies roughly 36 miles from Apple Valley. That acquisition complicated the town’s effort. Park Water indicated it was purposed to undertake $1.1 million in infrastructure improvements to the system in Yermo and Liberty has indicated it is in consonance with that plan. Yermo’s system continues to be an element of Apple Valley Ranchos’ assets.
Town officials made a number of statements with regard to Apple Valley Ranchos’ acquisition of the Yermo system, seemingly overlooking the consideration that they had no authority to halt what was ultimately a private company’s investment decision. Town officials intent on obtaining Apple Valley Ranchos want that entity for local water provision purposes only and are thinking in far narrower terms than were Park Water officials or are Liberty corporate officers now. That dissonance of purpose and perspective has created a circumstance in which the town has been unable to realistically assess the scope of the action it is trying to take and has accordingly been unable to formulate an approach that would have attained Park’s cooperation. That circumstance persists with Liberty.
In November, the town council passed two resolutions of necessity to take the system by eminent do-main.
On Thursday January 7, the Town of Apple Valley filed formal condemnation action to acquire the Apple Valley Ranchos Water Company.
According to the legal pleading, filed in San Bernardino County Superior Court, acquisition of Apple Valley Ranchos will give the Apple Valley community “control over its water future instead of having in controlled by out-of-state and out-of-county corporate executives dedicated to maximizing corporate profits.”
Apple Valley Mayor Barb Stanton said, “The owners of our water system left us no choice but to pursue this action. The Apple Valley Water System does not represent free enterprise in the way one normally thinks of it. It is a monopoly, granted by the government and which, with the help of the California Public Utilities Commission, determines how much you will pay and how much profit it will make. As a customer, you aren’t given a choice – or a say.”
In a town press release hailing the legal action, it was stated that condemnation proceeding was initiated to wrest from Algonquin/Liberty the “town’s privately held water system after years of excessive rate increases, surcharges and corporate decisions that have boosted profits at the expense of ratepayers” following “longstanding public concern” about Apple Valley Ranchos Water Company’s monopoly hold on water service in the community. Since 2002, Apple Valley Ranchos’ corporate owners raised rates by more than 65 percent, and in November, instituted yet another increase that will raise water costs for the average household by 26.58 percent.”
The press release, in reference to Apple Valley Ranchos’ acquisition of the Yermo Water Company, said Apple Valley residents were being consigned into “forced subsidization of failed water systems” and at the same time decrying “Carlyle’s decision to sell its water interests to a Canadian company, Algonquin Power & Utilities Corporation. Both underscore the skewed economics that incentivize private water systems to pad profits by over-investing in imprudent projects that become part of their rate base, then turn around and sell off the company for far more than they bought it for.”

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