Apple Valley Haunted By Squandering Of H2O System Purchase Opportunity

The saga of Apple Valley’s quest for water independence grew even more absurd this week with the revelation that the town has spent over $1.5 million in the last five years in procedural, research and legal fees aimed at acquiring the town’s water system.
In 1988, shortly after the formation of the town, the water system’s then-owner offered to sell it to Town Hall for $2.5 million. The town spurned that offer, and the water system has changed hands twice. At present, the current owner, Liberty Utilities, does not appear disposed to sell it for anything less than $90 million. The town, in the meantime, appears purposed to effectuate a takeover of the water system, up to and including utilizing its power of eminent domain to force a sale.
Assistant town manager Marc Puckett, who oversees Apple Valley’s finance department, this week told the town council and the public that between January 1, 2011 and August 31, 2016, the town has expended just over $1.5 million in taxpayer funds in simply looking into the possibility of purchasing the Apple Valley Ranchos Water Company from the Wheeler Family/Park Water Company, the Carlisle Group and Liberty. According to Puckett, the town spent $1.1 million between January 1, 2011 and January 1 of this year dealing with water takeover issues, and another $400,000 in the first eight months of this year. Of the $1.5 million laid out, $974,205 has been spent on legal fees, Puckett said.
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. Bass and Westlund installed 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, however, that as the town was built piecemeal, the water company merely expanded with it, a hodgepodge of water mains and lines built one after the other, patched together in correspondence to the new development it was called upon to serve.
While Apple Valley was yet an unincorporated county area, the Wheeler Family acquired the Apple Valley Rancho Water Company.
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 same year that the Carlisle Group purchased Park Water, the town of Apple Valley impaneled a so-called blue ribbon committee to consider acquiring Apple Valley Ranchos. Again, however, the town failed to bite the bullet and buy the water system when the committee advised against the acquisition. 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 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, town of Apple Valley officials began angling to take Apple Valley Ranchos away from Park Water Company, banking on a strategy that included blocking Algonquin/Liberty’s acquisition through its 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 calculated it would 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.
That strategy, however, ran aground when the California Public Utilities Commission’s 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.
Though 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, 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 previously said it is worth or the $50.3 million offer tendered by the town in informal discussions with Park last year is entirely unrealistic.
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 numbers roughly 71,000 at present.
In Los Angeles County, Park Water supplies between five and six percent of Compton’s water by means of the four wells it operates there, while purchasing somewhere between 92 and 94 percent of the water delivered to Compton from the Central Basin Municipal Water District which wholesales potable water from the Metropolitan Water District of Southern California. In Bellflower and Downey, Park Water supplies about 15 percent of the supply to those two cities with water drawn from the groundwater basin through its eight wells there, while purchasing roughly 81 percent through the Central Basin Municipal Water District.
In addition, the Golden State Water Company also serves the communities of Compton, Downey and Bellflower.
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.
In presenting a 10-page third installment of the Rancho Acquisition Efforts Transparency Report to the Town Council on Tuesday, Puckett revealed the ongoing cost of the water system acquisition effort as slightly more than $1.5 million and vouchsafed a prediction that the town would expend as much as another $3.5 million in legal fees and technical services to move forward with the acquisition. Thus, it appears that Apple Valley is purposed to spend something on the order of $5 million on legal fees to effectuate what is almost certainly going to be a $100 million purchase of a water system it could have purchased a generation ago for $2.5 million.
Puckett reported that $381,562 of the $974,205 spent on attorney fees so far went toward advice letters and fighting Liberty rate cases. Lawyers were paid another $165,995 to respond to over 80 public record requests on water-related topics. The town marshaled over 247,000 documents in response to those requests at a cost of $277,420 for having staff search files and evaluate records and data.
According to Puckett, the town paid more than $47,000 for the services of Remcho, Johansen & Purcell LLC in regard to the preparation of Measure W, the town’s alternative to Measure V, the Liberty Utilities-backed “Right to Vote on Debt Act.” If Measure V passes at the upcoming November 8 election, the Town of Apple Valley would be prohibited from using an ordinance or resolution of the town council to issue bonds or other forms of public debt in an amount exceeding $10 million to provide funds for the acquisition, construction, improving, or financing of an enterprise without town voter approval.
Another cost related to the ongoing war with Liberty is the $63,566 the town paid in its articulation effort with the Victor Valley Wastewater Reclamation Authority to use recycled water from a currently under-construction treatment plant, the recycled water from which Liberty maintains it has a right to use in its groundwater recharging operations.
The town also spent $47,235 to compile what was termed a joint legislative audit report which contrasted the operation of Liberty, Golden State Water and the Hesperia and Victorville municipal water departments.
Puckett said the town’s efforts and the expense it is going to with regard to the water system is justified because, ““The [water] rates in Apple Valley are more than twice of what they are in Hesperia and the surrounding communities of Victorville, Adelanto and Barstow. Our water rates are excessively high.” Puckett said the town is reacting to complaints and demands that something be done to shield Apple Valley residents from the rapacious designs of Liberties Utilities California President Greg Sorensen.

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