By Mark Gutglueck
Push has at last come to shove as the eminent domain lawsuit the Town of Apple Valley is pursuing against the owner of the community’s water system, Liberty Utilities, has now gone to trial.
Apple Valley officials consider the effort to acquire the town’s water utility to be a wholly justifiable one that will take the town a step closer to being a full service municipality and ensure the elixir of life remains affordable for all of the town’s residents, even though their predecessors spurned at least three earlier opportunities to transform the water company into a municipal branch.
In years past, town officials thought the cost of maintaining the wells, reservoirs, pipes and hookups of the entity known as the Apple Valley Ranchos Water Company to be beyond its means. After the Apple Valley Ranchos Water Company’s previous owner, Park Water, then under the control of the Carlyle Group, in 2012 instituted 19 percent rate increases on Apple Valley Ranchos customers to carry out what was said to be necessary upgrades to the aging equipment and facilities that deliver water to the 75-square mile town’s 70,000-plus residents, town officials radically changed their collective position.
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 system assets 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. Upon the Carlyle Group assuming ownership of Park Water, the town of Apple Valley impaneled a so-called blue ribbon committee to consider acquiring Apple Valley Ranchos. That committee advised against the acquisition.
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.
Some 1,128 miles away, in Missoula, Montana, city officials there, who were likewise chaffing under the higher rates that Park had imposed on the Mountain Water Company’s customers, 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. At that point, Apple Valley town officials began trading notes with Missoula city officials. The town was a bit tardy in moving toward the eminent domain solution, as the Carlyle Group in the summer of 2015 purchased 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. The Carlyle Group then packaged a sale of the entirety of the water utilities it owned in California and Montana, which it labeled Western Water Holdings, to a Canadian company, Algonquin Power/Liberty Utilities, for $327 million.
Before Algonquin/Liberty effectuated that purchase, Apple Valley officials moved to foreclose the sale of the Apple Valley Ranchos portion of transfer by means of a complaint to the California Public Utilities Commission. An element of that complaint was that the town was interested in acquiring the water company, if necessary by condemnation.
Simultaneously, the town obtained from what it referred to as “an independent appraisal firm” the rather wishful “fair purchase price” of $45.54 million for Apple Valley Rancho and thereafter indicated it would be wiling to pay Park Water the somewhat unrealistic figure of $50.3 million for the Apple Valley Ranchos water system lock, stock and barrel.
A more pragmatic assessment of the Apple Valley Rancho Water Company’s value was somewhere in the neighborhood of $119 million in 2016 dollars.
For those carrying out such an analysis, the relevant metrics were Apple Valley Ranchos represented roughly one third of the entirety of Western Water’s assets at the time of Algonquin/Liberty’s $327 million purchase, deriving a rough figure of $109 million. Another simple analysis derived the higher number of $119, based upon subtracting the $88.6 million fair market value for Mountain Water Company component upheld by the Missouri Supreme Court in June 2015 in the city of Missoula’s takeover of the Montana Park Water holdings. Subtraction of the $88.6 million from the $327 million purchase price for Western Water would indicate that the Bellflower-Compton-Downey and the Apple Valley components of Western Water were worth $238.4 million in 2016 dollars. Assuming Apple Valley Ranchos represented 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.
Another price measure started its calculation with the presumption that the Mountain Water Company in Montana which owned and operated 37 mostly shallow and medium-depth wells serving a population of 69,821 residents was comparable in terms of its customer base to Apple Valley Ranchos in 2015, which served roughly 71,000 residents. Apple Valley’s population has grown to 73,000 residents or thereabout at present. In Los Angeles County, Algonquin/Liberty supplies between five and six percent of 96,455-population 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 76,616-population Bellflower and 113,242-population Downey, Algonquin/Liberty 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 of the water it sells through the Central Basin Municipal Water District. Algonquin/Liberty is not the only purveyor of water in the communities of Compton, Downey and Bellflower, as the Golden State Water Company also serves those cities.
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 entailed one third of Algonquin’s original Western Water Holdings’ 72-well inventory of water-producing assets. Apple Valley Ranchos now accounts for 24 of Algonquin/Liberty’s current 35 wells, translating into 68.57 percent of its California wells, which are collectively valued at $238.4 million. With Algonquin having paid $327 million for Western Water Holdings, it stands to reason that the judge hearing the eminent domain case, Judge Don Alvarez, will be constrained to hear and accept, unless the Town of Apple Valley can present compelling evidence to support a conclusion otherwise, that Apple Valley Ranchos is valued at somewhere between $109 million on the low end and $163.47 million on the high end.
As the Town of Apple Valley has sought to force Liberty Utilities to disgorge the Apple Valley Ranchos Water Company at a price of the town’s choosing, Liberty Utilities has resisted mightily, and the eminent domain lawsuit, which was originally filed on January 7, 2016 has now proceeded to Judge Alvarez’s Courtroom, S-23, at the 11-story Courthouse in downtown San Bernardino.
Judge Alvarez is frequently assigned cases involving environmental law, in particular the California Environmental Quality Act. Moreover, prior to his elevation to the bench, Don Alvarez was a partner in the law firm of Brunick Alvarez & Battersby. His partner Bill Brunick, was the lead counsel for the Mojave Water Agency, which was a principal in the effort to adjudicate water rights in the Victor Valley and Barstow regions of the West Mojave Desert, including Apple Valley.
Liberty Utilities is represented by attorneys George Soneff, Edward Burg, David Moran and Lauren Fried.
Soneff said the overture to force Liberty to sell the water company to the town should be rejected because no pressing necessity to do so exists and the water system assets passing into the hands of the city will not benefit the town’s residents.
According to Soneff, who began and concluded the defense’s opening statements on Wednesday October 23, the town’s assertion that Apple Valley customers are paying inflated rates for water is spurious. In fact, Soneff said, gauged against inflation over the last ten years, Apple Valley Ranchos customers are paying 9.3 percent less than they were paying a decade ago, as individual water bills have risen just $5 since 2009. Documentation the town has submitted to the court in which unfavorable comparisons are made between what Apple Valley Ranchos customers are charged vis-à-vis customers in several other cities is highly misleading, according to Soneff. In neighboring Hesperia, where the city annexed the Hesperia Water District in 1993, the city is subsidizing water department operations, Soneff pointed out. In Victorville, Soneff said, the water department is neglecting its facilities and deferring maintenance, which is artificially reducing costs to customers, he said.
Soneff said the town’s argument that Liberty has neglected the upkeep of the water system is belied by the consideration that the 2015 environmental impact report relating to the town takeover stated no improvements or upgradings to the utility’s infrastructure were needed.
The town’s contention that its ownership of the water operations will lower residents’ rates is a canard, Soneff asserted, since the town will need to issue some $150 million in bonds to make the acquisition, which will entail debt service of more than $300 million over the next quarter century, and will further need to cover the costs of operations and maintenance. As a consequence, Apple Valley Ranchos customers will need to pay higher rates than they are now paying to Liberty, Soneff insisted.
Soneff said the town’s legal representatives are going to argue that the town’s ownership of the water utility will entail the application of a requirement under Proposition 218 that rates be considered taxes and therefore be subject to a vote. The town has a pattern and history of disregarding Proposition 218, he said, and two lawsuits against the town on that basis establish that the town will likely disregard that taxpayer/ratepayer protection in the future, he suggested.
Attorneys Kendall MacVey, Guillermo Frias and Christopher Pisano,  all of whom are with the law firm of Best Best & Krieger, represent the town.
MacVey told Judge Alvarez and all of the others present that the town’s seizure of the water assets through the eminent domain condemnation procedure is one that is justified because of the public interest, in particular protecting the residents of Apple Valley from predatory and rapacious gouging by Liberty, which has subjected its customers to exorbitant and unjustifiable rate increases. The Canadian company does not abide by the principles of transparency and open public participation in the administration of inherently public and crucial resources such as water, MacVey asserted, and placing the town’s water resources in the hands of its duly elected and functioning government will ensure that the public is not ripped off. MacVey asserted that Liberty has not proven a responsible steward of the desert town’s precious water resources, and that the foreign company has not earthquake-hardened the water system’s reservoirs and cisterns to ensure that the town’s residents will have adequate water, or any water at all, in the aftermath of a major seismic disturbance.
The condition of nine of the water company’s ten reservoirs have been compromised, with several tanks on insecure foundations that will fail under a seismic disturbance, MacVey said
What the trial will boil down to, MacVey said, is whether “we are going to have a system that is accountable to the people it serves at cost or one that’s accountable to executives and investors in Canada” who were seeking to maximize their profit at the expense and on the backs of Apple Valley’s residents.
Executives with the Canadian-based Algonquin Power & Utilities Corporation, the parent company to the U.S. subsidiary Liberty Utilities, are out to line their pockets and they don’t give a damn about their American customers, MacVey said.
An analysis of the books, MacVey said, shows that greedy managers with Liberty skimmed $4.28 million off the top of the Apple Valley Ranchos operation without any justification, explanation, or clarification of what the money was being diverted for. Those profits were boosted by a tangle of surcharges levied on customers, without any explanation for those charges added to customers’ bills. MacVey said.
Liberty’s rates qualified as, MacVey suggested, the highest charges for water service in the inland Southern California region, though one of the thirty providers of utilities in a survey of the area had a slightly higher rate. Liberty’s charges to its customers came in at a whopping 44 percent above the average cost of water among those 30 entities, with customers in Apple Valley paying $71.64 monthly for water alone as compared to the average of $49.68 paid for on average by the customers served by other water utilities, he said.
MacVey said it was appropriate for a local governmental jurisdiction to have control over a community’s water system in California, including in Apple Valley, since rate increases can be limited because they are subject to Proposition 218, as the rates are then interpreted as a tax, and Proposition 218 requires that tax increases be subject to a vote of those upon whom they are imposed. Moreover, MacVey said, having the town government in control of the water service in the town will stabilize the rates because the water will be delivered to the town’s residents at cost, without a need to pay stockholders a profit.
If Judge Alvarez rules in favor of Apple Valley, Liberty will be forced to sell Apple Valley Ranchos to the town. Alvarez will thereafter be tasked with determining the fair market value of the water company based upon information provided to him by both Apple Valley and Liberty, as well as their experts, consultants and appraisers. Apple Valley is not likely to stand by its contention that the water company is valued at $45.54 million, and might try to spring a number closer to the $88.6 million Missoula paid for Mountain Water. Meanwhile, Liberty is prepared to argue the water assets in Apple Valley are valued more accurately at $150 million.
This harks to Theodore Roosevelts statement that three-fifths of wisdom consists of being wise in time.
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 – consisting of Nick DePrisco, Heidi Larkin, Dick Pearson, Carl Coleman and Jack Collingsworth – spurned that offer.