7-Month Long Apple Valley Utility Eminent Domain Case Suspended In March To Pick Up Next Month

More than six months after the eminent domain lawsuit the Town of Apple Valley is pursuing against Liberty Utilities, the owner of that community’s water system, went to trial, the matter has yet to come to a conclusion.
It now appears that the trial will most likely resume next month, with a prospect that the hearings will conclude by early July.
Apple Valley’s attempt to use eminent domain to force the takeover of a utility is only the second such effort in California history where the matter is being decided in the forum of a trial by which a court is to be the arbiter of whether a local government can use condemnation procedure to take possession of a water utility
The circumstances that brought the matter to this juncture stretch back at least to the incorporation of the town some 32 years ago, and arguably three-quarters of a century ago, all the way to 1945, when Newt Bass and B.J. Westland founded the town on 6,500 acres they had acquired from the Southern Pacific Railroad. Simultaneously, Bass and Westlund created the Apple Valley Ranchos Water Company, which was in part constructed using salvaged oil pipelines from a nearby failed petroleum mining operation.
By 1988, when the town was incorporated, the water system had been acquired and was being operated by the Wheeler Family. Shortly after the town was established as a municipal entity, the Wheelers offered to sell the Apple Valley Ranchos Water Company – then consisting of 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. Town officials thought the cost of maintaining the wells, reservoirs, pipes and hookups to be beyond the town’s means.
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, serving 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 2012, Park Water, at the direction of the Carlyle Group, obtained from the California Public Utilities Commission permission to institute 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 delivered water to the then-74.99-square mile town’s then-70,000-plus residents.
In 2010, Park Water made $2.4 million in upgrades to Apple Valley’s water system. In 2011 the Carlyle Group undertook and completed $3.4 million in capital improvements to the Apple Valley Ranchos Water Company; another $5.7 million in work on the system in 2012; $7.5 million in upgrades in 2013; $8.1 million in improvements in 2014; and $7.8 million in maintenance and additions in 2015. The Carlyle Group obtained from the California Public Utilities Commission clearance to institute another 30 percent rate hike on Apple Valley Ranchos customers to be implemented from 2015 until 2017. The previous 19 percent hike followed by the 30 percent increase caught the attention of town officials, who radically changed their collective position with regard to the advisability of the town taking possession of the utility.
Simultaneously, the City of Claremont in Los Angeles County was attempting to utilize the eminent domain process to wrest from the Golden State Water Company the water system that supplied water to that city.
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 take possession of the water utility from its private owner by means of an eminent domain proceeding.
Apple Valley’s town attorney was and is an associate with the same law firm, Best Best & Krieger, with which the City of Claremont’s city attorney at that time is a partner. A discussion of the potential efficacy of the town using the eminent domain process to commandeer the Apple Valley Ranchos Water Company ensued at that point, together with Apple Valley town officials 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 serving 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.
While Algonquin/Liberty was before the California Public Utilities Commission in 2015 to get permission to proceed with the Apple Valley Ranchos acquisition, Apple Valley officials voiced opposition to the sale in an effort to block it. An element of that protest 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 Ranchos, 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 was that the Apple Valley Rancho Water Company, representing roughly one third of the entirety of Western Water’s assets at the time of Algonquin/Liberty’s $327 million purchase, was worth, roughly, $109 million. Another calculation, one in which the $88.6 million fair market value for Mountain Water Company component upheld by the Missouri District Court in Missoula in June 2015 was subtracted from $327 million purchase price for Western Water, indicated 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, with its 24 deep wells throughout Apple Valley and three wells in Yermo, represented roughly one half of the remaining Western Water assets now in the possession of Algonquin/Liberty, its fair market value would have been, in 2016 dollars, approximately $119 million.
Ultimately, the California Public Utilities Commission in December 2015 allowed Liberty to proceed with the acquisition of Park Water Company.
With Apple Valley unwilling to offer anything approaching $109 or $119 million for the water system, and Liberty disinclined to sell its Apple Valley holdings in any event, Apple Valley officials moved forward with the eminent domain action.
When the case went to trial in October 2019 before San Bernardino County Superior Court Judge Donald Alvarez, it was generally anticipated that the proceedings would entail 30 to 40 court days, and would thus conclude by January, and certainly no later than February. But a handful of delays, including more than two weeks between November 15 and December 1 when the courtroom was entirely shuttered and between December 18 and January 5, when there was no testimony, extended the trial into February.
In an eminent domain case, after opening statements, the defense presents its evidence and witnesses first. The defense concluded putting on its case on February 4, 2020, the 33rd day of the trial. The following day, February 5, the 34th day of the court proceedings, Judge Alvarez and the attorneys for both sides spent the entirety of the day going over exhibits to be admitted prior to commencing the plaintiff’s case. The following day, February 6, more time was devoted to going over the exhibits the town intended to utilize. That concluded, the defense rested, at which point the town began to put on its case, calling its first witness, former Town Manager Lori Lamson, on what was the 35th day of the trial.
To that point, the defense team, consisting of attorneys George Soneff, Edward Burg, David Moran and Lauren Fried, had managed to provide a relatively compelling case to Judge Alvarez, who was hearing the matter as a bench trial, meaning he would be the ultimate arbiter of both fact and the law without the involvement of a jury. Liberty’s legal team asserted, and managed to present evidence in the form of data and testimony, that the company has performed more than adequately in providing the town, its residents and businesses water.
Soneff characterized the company’s case in chief as having established that Liberty had served as the Apple Valley community’s water utility in a way that featured a “perfect water quality record with no water contamination or quality violations.” That, Soneff asserted, entailed service which is “better than that of all of the surrounding cities. We have demonstrated, I believe, that there is no public interest to be served by allowing the takeover. Doing so would create a threat to the quality of water delivered and the level of service. The city does not have the technical managerial or financial capacity nor anyone on staff with the knowledge or expertise to run a water system.”
Between February 5, the 35th day of the trial and March 16, the 55th day of the trial, there was some legal jockeying between the defense and plaintiffs with regard to exhibits, and the town brought in further witnesses in an effort to offset the defense’s showing that that the town would be incapable of handling water operations without significant augmentations to its current staff. The town’s witnesses further suggested that town residents would benefit by the town takeover of the water system because they would not be subject to being gouged by Liberty with regard to rates.
Steven Weissman, a professor of regulatory law at the University of California Berkeley School of Public Policy who worked three decades with the California Public Utilities Commission, including 15 years in the capacity of an administrative hearing officer, testified that there are inadequacies in the California Public Utilities Commission’s processes, extending to its regulation of rates. Weissman, who is also a fellow with the Center for Sustainable Energy, said the California Public Utilities Commission is plagued with understaffing and that it tended to rubberstamp rate increases requested by utility companies. Individual ratepayers, Weissman said, have insufficient political muscle, standing, gravitas or reach to have their concerns fairly heard by the commission, such that the public’s interest is better served by a primary utility such as that for water being controlled by a local public agency, which is more answerable to its constituents.
Moreover, Weissman suggested, a public agency is less driven by the profit motive than a private utility company, which would likely ensure lower rates for customers.
Furthermore, according to Weissman, water utilities routinely request that the California Public Utilities Commission grant them increases beyond what they need to cover their operating costs and achieve a reasonable profit.
Weissman did, however, acknowledge that the California Public Utility Commission generally adjusts the rate increase requests downward as a function of the review process, which entails input from the commission’s Office of Ratepayer Advocates. A local governmental entity granted ownership of a public utility, Weissman said, would be far more responsive to the constituents within that jurisdiction than a corporate entity, as publicly elected officials are answerable to those who vote them into office.
Another expert witness testifying for the town was Michael Busch of Urban Futures, whose expertise lies within the realm of municipal finance and bonding as a means of securing adequate capital to undertake public improvements. Busch testified that the town had $51 million in investments and cash liquidity which could be redirected toward defraying the cost of purchasing the water utility, and that the town’s current enterprise funds are debt free. He testified that the town, through hiring Liberty’s current employees working as Apple Valley Ranchos staff members, would be able to take on the task of operating a municipal water division.
After March 16, further testimony in the trial was delayed with the advent of the coronavirus crisis and the subsequent state mandates relating to the general suspension of all but the most essential of court proceedings.
According to Soneff, the town’s legal team is now involved in an effort to establish a justification for the takeover, including making a case that the town’s ownership of the water utility will translate into fairer and lower rates for customers.
That will be an uphill climb, Soneff said, as “looking at the water rate evidence shows Liberty’s water rates are just as reasonable as those charged by surrounding cities. The rates are set by the California Public Utilities Commission. Some have claimed the rates are too high, but we have already placed an auditor’s report into evidence explaining that in some of those communities the municipalities [which operate their own water utility divisions] either don’t invest in keeping the water systems up or they are subsidizing their water divisions with other public funds.”
Moreover, Soneff said, the prevailing evidence presented at trial thus far is that the combined cost of the town’s acquisition of the water system and its recruitment and employment of adequate personnel to carry out water operations will entail a degree of expense that will require the town to charge Apple Valley’s residents at least as much if not more than Liberty is charging them for water.
“The city is doubly challenged,” Soneff said. “We presented evidence from a leading national water economist that the requirements of bond financing and obtaining an operator competent to run a water system will require that the town raise the rates now being charged for water. The town officials won’t say they can lower rates. They can only say they can stabilize them. In all likelihood, they will have to raise rates.”
Of note is that in 2016, Soneff represented Golden State Water Company in its defense of an eminent domain takeover bid by the City of Claremont in Los Angeles County. In that matter, Claremont was represented, as is Apple Valley, by lawyers with the law firm of Best Best & Krieger. Soneff and Golden State ultimately prevailed in that litigation, with Los Angeles County Superior Court Judge Richard Fruin finding it would be contrary to the public interest – and detrimental to the City of Claremont’s residents – to allow the city to wrest ownership of Claremont’s water supply system from Golden State. He entered an order that Golden State was to remain the water provider in Claremont, opining that municipal ownership of the water system was not “a more necessary public use” on numerous grounds, a primary one of which was that Claremont had failed to establish that it could ensure Claremont residents with a safe and reliable water supply, a service Golden State had proven it could provide. In virtually every respect, the case playing out in Judge Alvarez’s courtroom mirrors that put on before Judge Fruin, the one exception being that Apple Valley intends to take on ownership and operation of the utility, and Claremont was seeking ownership of Golden State’s Claremont-based utility but intended for the neighboring City of La Verne to operate the water supply system.
Of issue and importance to Apple Valley residents is how much Apple Valley will need to pay for the water system, if indeed Judge Alvarez rules in favor of granting the town’s eminent domain petition.
At present, the town, through annexations that have occurred since 2015, has expanded to 77.13 square miles. Its population has zoomed to more than 74,000. The Apple Valley Ranchos Water Company’s assets include 34.5 acres of land, 470 miles of water mains, 20 currently active groundwater wells and four inactive ones, 11.7 million gallons of water storage capacity, 11 reservoirs, 27 trucks, three backhoes, a firetruck, tow-trailer-mounted evacuators, six large portable generators, nine stationary generators, 24,000-gallon diesel fuel storage capacity, booster pumps and mobile booster pumps, an extensive customer records computer system and a computerized data and operations system.
The town, having moved beyond the $45.54 million valuation it put forth in 2015, has suggested the lowest reasonable price of the Apple Valley Ranchos Water assets is around $100 million at present. A countervailing possible price put forth by Liberty is in the $200 million range. Assuming that Judge Alvarez would halve the difference, the town will have to come up with $150 million to make good merely on the water utility takeover. That would not include the town’s costs of hiring, either into its public works division, or into a newly created water department, administrators, managers, supervisors, at least some of whom would need extensive training and certification, as well as field employees.
Tentative indications are that San Bernardino County’s courts might reopen as early as June 8, though there has been no definitive resumption schedule posted. Under the most optimistic of circumstances, the trial could resume in front of Judge Alvarez as early as June 9.
Indications were that the town will need at least six further court days to finish with its case in chief. Judge Alvarez will have up to 90 days to contemplate the trial’s proceedings before rendering his written findings and final ruling on whether the town should be permitted to take possession of Apple Valley Ranchos. If Judge Alvarez allows the town’s acquisition of the company to take place, Liberty is entitled to a jury trial in which those jurors would be empowered to make a determination of the value of the company assets.
-Mark Gutglueck

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