Ruling Clears Way For AV Effort To Use Condemnation To Seize Water Company

The Town of Apple Valley, it appears, is now enabled to pursue the acquisition of the water system that served the town for 43 years prior to its 1988 incorporation and the 30 years since.
That clearance came on February 9 in a decision handed down by San Bernardino County Superior Court Judge Donald Alvarez setting aside the Apple Valley Ranchos Water Company’s challenge of the town’s effort to seize the water company and its assets by means of eminent domain.
In 1945, the Apple Valley Ranchos Water Company was created by Newt Bass and B.J. Westlund as an adjunct to their effort to develop the town on the 6,500 acres they had acquired from the Southern Pacific Railroad. Shortly after the town incorporated in 1988 the water system’s then-owner, the Wheeler Family, offered to sell it – 18 medium and deep wells, pipes, reservoirs, pumping units and appurtenances – to Town Hall for $2.5 million. The maiden town council spurned that offer.
In 2011, the Carlyle 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.
When the Carlyle Group purchased Park Water, the town of Apple Valley impaneled a so-called blue ribbon committee to consider acquiring Apple Valley Ranchos. The committee advised against the acquisition.
The Carlyle 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, at the same time embarking on upgrades to the various systems to make them more attractive to potential buyers. Those upgrades also boosted the price the Carlyle Group was asking.
The prevailing sentiment in Apple Valley with regard to the town getting control of its own water utility abruptly changed shortly after the blue ribbon committee weighed in against purchasing the water company. In 2012, Park, now under the control of the Carlyle Group, implemented 19 percent rate increases on Apple Valley Ranchos customers. In 2013, Town of Apple Valley officials, 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, Algonquin Power/Liberty Utilities, challenged the proposed sale by means of a complaint to the California Public Utilities Commission. In 2014, the Carlyle Group undertook and completed $8.1 million in capital improvements to the Apple Valley Ranchos Water Company and then instituted another 30 percent rate hike on Apple Valley Ranchos customers to be implemented from 2015 until 2017. In 2014, town officials began trading notes with Missoula city officials, where Park Water’s Mountain Water Company had likewise escalated rates. In Montana, Missoula officials had initiated what in time would prove to be a successful effort to wrest control of the water utility from its private owner by means of an eminent domain proceeding.
While the California Public Utilities Commission decision was pending in the summer of 2015, the Carlyle 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.
Apple Valley simultaneously considered making a straightforward purchase of the system from the Carlyle Group on what at least some town officials hoped might prove amicable terms using a financing strategy involving issuing bonds to create the capital to make the purchase. The ongoing effort to block the sale to Algonquin/Liberty, however had severely compromised any prospect of amicability.
Somewhat unrealistically, the town had set its sights on Park Water selling its Apple Valley assets – the Apple Valley Ranchos water system lock, stock and barrel – for 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’s strategy dead-ended, however, 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. Liberty Utilities paid $327 million for all of Western Water Holdings.
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 an eminent domain process or otherwise, Liberty’s willingness to pay what the market bears for Park’s collective water assets was a strong indication that the Town of Apple Valley’s notion that it would be able to acquire Apple Valley Ranchos for anything near the $50.3 million offer tendered by the town in informal discussions with Park in 2015 was 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 a Montana court. Missoula, with 69,821 residents, is comparable in population size to Apple Valley, which at present numbers roughly 71,000 at present.
In November 2015, the Apple Valley Town Council approved resolutions of necessity to take the water system by eminent domain. Before the town actually filed that suit, however, Park Water/Apple Valley Ranchos beat the town to the punch, in December 2015 launching legal action of its own to block the eminent domain ploy. That suit requested a writ of mandate that the town undertake a full environmental impact report, alleging that in the abbreviated environmental impact report accompanying the resolutions of necessity the town had provided “inadequate project descriptions” as pertained to both its ability to maintain and operate the water system and what changes were to be made. Thus, Park Water/Apple Valley Ranchos asserted, the environmental impact report the town had undertaken and completed as part of the procedural element of the resolutions of necessity had not complied with the California Environmental Quality Act.
In the more than two years since the filing of that suit, the town’s effort to acquire the water system has hung in limbo as it maintained that it was angling toward a mere change in ownership that would have no appreciable environmental impact. It took the court more than 25 months to resolve that issue. Over that duration, Liberty acquired ownership of Park Water and the Apple Valley water system, willingly inheriting the position of plaintiff. In the same timeframe, Apple Valley plied an argument that essentially held that the environmental impact report it had completed fully addressed all issues pertaining to the town’s takeover effort and that it was exempt from the provisions in the California Environmental Quality Act cited in the suit.
San Bernardino County Superior Court Judge Donald Alvarez previously rejected the town’s assertion that it need not undertake a full-blown environmental impact report simply because there was little more than a change in ownership at play, pointing out that the bare bones environmental impact report the town had filed acknowledged that the town would potentially be drawing more water, again potentially depleting the local aquifer, and that it might expand existing facilities. The town asserted that its reliance on existing facilities exempted it from further California Environmental Quality Act requirements.
This month, Alvarez ruled against granting Liberty’s request for a writ of mandate, finding the preponderance of evidence shows the town is exempt from the operative provisions of the California Environmental Quality Act at issue. Along the way, Alvarez noted there were inconsistencies in the town’s position on a number of points, including that when Liberty’s predecessor had sought to acquire the Yermo water system, Apple Valley’s attorney, John Brown, had asserted that Apple Valley Ranchos should have to carry out an exhaustive environmental impact report in order to do so. “On its face, it appears disingenuous for the town to prepare an environmental impact report and then in light of attacks on it assert for the first time as a part of its opposition that an environmental impact report was not even required,” Alvarez wrote. “However, the town cites to several cases in support of the court considering these issues at this time. These cases conclude that this defense can be raised in response to a petition regarding the sufficiency of an environmental impact report.”
Essentially, according to Alvarez, the town, while procedurally required to submit an environmental impact report with its resolution of necessity for the water company takeover, was not under any requirement that the report comply with the criteria outlined in the California Environmental Quality Act.
“The court denies Petitioner Apple Valley Ranchos Water Company’s petition for writ of mandate,” Alvarez wrote in his ruling. “As part of its opposition, the town raised threshold issues regarding the California Environmental Quality Act’s application to the project at issue. After considering the argument and evidence in the administrative record, substantial evidence supports the town’s conclusion the Class 1 categorical exemption applies. As a result, notwithstanding its preparation of an environmental impact report, no such environmental review was mandated by the California Environmental Quality Act, and the court will not consider petitioner’s arguments directed to whether the environmental impact report complied with the California Environmental Quality Act.”
Greg Sorensen, the president of Liberty Utilities’ West Region told the Sentinel, “Liberty Utilities respects the judge’s ruling on the California Environmental Quality Act matter, which means the legal process related to the attempted condemnation will likely continue. If the town moves forward with the condemnation case, millions of taxpayer dollars will be spent to litigate the case, and we are confident the outcome would be similar to what transpired in Claremont, where taxpayers ultimately were on the hook for more than $13 million after failing to demonstrate that municipal ownership is a ‘more necessary use.’”
Sorensen’s reference to Claremont harkens to a ruling by Los Angeles Superior Court Judge Richard Fruin in November 2016 which effectively ended the City of Claremont’s effort to commandeer through the eminent domain process the water supply and delivery system serving Claremont that is owned by Golden State Water Company. Fruin rejected Claremont’s contention that upon acquiring Golden State’s 7.5 million gallon storage capacity in Claremont it could complement and tie-in with the City of La Verne’s even more robust 27 million gallon storage capacity, and by partnering with La Verne improve service to Claremont residents. While Claremont continually belabored what it called 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, as well. Fruin said the level of service being delivered to Claremont customers was dramatically different from – and better than – what Claremont was prepared to deliver.
“We are hopeful the town will recognize that collaboration is better for the community than continued conflict, and Liberty Utilities remains willing to work with town officials to find a cooperative solution instead of a costly and contentious legal fight,” Sorensen said.
Apple Valley Councilwoman Barb Stanton told the Sentinel, “When I ran for reelection my top priority was founded on controlling our town’s water destiny. After our efforts to purchase Apple Valley Ranchos were rejected, we turned to the eminent domain process, The town has always held the position that we would prevail in the California Environmental Quality Act challenge. Judge Alvarez’s ruling allows us to move forward with the eminent domain process and continue our fight for local control of our water system.”
The success of Apple Valley’s eminent domain suit will turn on its ability to establish with a preponderance of evidence that the public interest in the town’s ownership of the water system outruns the sustaining of private ownership rights, that “driving necessity” dictates that the town can operate and manage the system not only adequately but as well or better than Liberty Utilities, and that there is a compelling reason for the town to make the acquisition. That may prove difficult, given that the town council has on numerous occasions itself rejected the necessity for doing so, including shortly after the city’s founding and again as recently as 2012 when the town’s blue ribbon committee recommended against making such an acquisition.
Whether the town succeeds in obtaining the water system through eminent domain, which is sometimes referred to as a condemnation proceeding, or, as some have suggested, through a less strident negotiating process, it will be expensive.
When condemnation is used, by law the entity forcing the purchase must pay fair market value consistent with the “highest and best use” of the assets being seized.
Considering the $327 million price tag Algonquin/Liberty paid for the entirety of Western Water Holdings, which included Mountain Water in Missoula, Montana consisting of 37 mostly shallow and medium-depth wells serving 69,821 residents, the Los Angeles County Park Water operation that entailed 12 wells serving roughly six percent of 96,455-population Compton and roughly eight percent of both 76,616-population Bellflower and 113,242-population Downey, and the Apple Valley Ranchos Water company operating 24 deep wells throughout Apple Valley and three wells in Yermo, a fair market price for Apple Valley Ranchos to be adjudicated by the courts is likely to exceed $100 million. Subtracting the $88.6 million fair market value for Mountain Water upheld by the Missouri Supreme Court from the $327 million purchase price for Western Water Holdings would indicate that the Bellflower-Compton-Downey and the Apple Valley/Yermo components of Western Water are worth $238.4 million. Assuming Apple Valley Ranchos represents roughly one half of the remaining Western Water assets now in the possession of Algonquin/Liberty, its fair market value would be approximately $119 million. Such an assumption might not be accurate as Apple Valley Ranchos owns and operates 27 wells compared to the 12 wells Park Water has in Los Angeles County while Apple Valley Ranchos serves a population of some 71,000 in comparison to the Compton-Bellflower-Downey operation, which serves a population of roughly 20,976. Based on such a calculation, Apple Valley Ranchos might be deemed to have a fair market value of $165 million.
-Mark Gutglueck

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