Not all in Apple Valley on board for Ranchos H2O takeover (July 8, 2015)
Apple Valley looking at aggressive water company takeover. Some skeptical of Apple Valley plan to use eminent domain to seize water company.
APPLE VALLEY — As Apple Valley Town officials determinedly push forward with their effort to force their acquisition of the Apple Valley Ranchos Water Company, deepening differences between town residents over the issue are developing.
Some residents, including powerful and influential members of the community, have signaled they are on board with the agenda to wrest the privately held company from one of the largest venture capital conglomerates in the world, potentially using the power of eminent domain to do so.
Others are questioning the wisdom of the move, asserting the acquisition cannot be effected cheaply, and that the stated goal of dampening the prospect of the town’s residents having to accept ever escalating water rates will prove unachievable, given the state of disrepair of the water company’s physical assets and the sheer cost of purchasing the system.
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, however, 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.
This scenario is 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 is not for sale. To city officials consternation, they learned that Park is 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.
It thus appears that there is no prospect that Park Water Company will sell Apple Valley Ranchos for anything near the $45.54 million the town’s
independent appraiser says it is worth or the $50 million offer recently tendered by the town in informal discussions with Park.
Indeed, the Sentinel is informed, Park Water officials
scoffed at the town’s offer.
For this reason, Judge Townsend’s ruling looms large, fortifying the town with the eminent domain card to play.
One Apple Valley resident observing all of this, Richard Rorex, indicated he was highly skeptical of both the town’s actions and its claims.
They are justifying this proposed takeover by trying to sell the residents the idea that they can lower the water rates the residents will pay, Rorex said.
It is going to cost X amount to provide water, no matter who delivers it. Now they are talking about eminent domain, which is total thievery, as far as I am concerned.
I see three people driving this and he later identified them as town manager Frank Robinson, assistant town manager Dennis Cron and town attorney John Brown.
They’re looking to make their name with this, Rorex stated.
He took particular issue with Brown’s involvement, implying that lawyers should be confined merely to vetting the legality of the town’s action or contemplated action rather than advising the council on policy. Lawyers, Rorex said,
are like bookies. No matter who wins, they get paid. The town is into this for close to a million dollars with lawyer’s fees and studies. All of that is tax money I don’t think it will be a viable purchase.
Rorex said the town is so far apart from Park on the purchase price that it is beyond doubtful that a deal could be closed. Moreover, Rorex said, he questioned the wisdom of having the town getting involved in an arena in which the private sector has been functioning for so long.
I have never seen a government agency take over a private business and do a better job of it, he said, citing the example of
the City of Los Angeles Department of Water and Power, which is going broke because they have been hiding their true costs.
While acknowledging that Apple Valley Ranchos’ rates have risen, he said that there was not much chance the town could operate the water company as a division of the town and not raise rates or otherwise up the costs for consumers.
In this regard, he noted that
In all of the talk about a takeover, they never discussed connection fees. Apple Valley Ranchos does not charge a connection fee. Over in Hesperia, which owns its water agency, they charge $5,000 to $7,000 every time you want to connect to the city system. My guess is that is exactly what the town of Apple Valley will do.
The town doesn’t have the expertise to run the water system. When the town incorporated in 1988, they could have had it for nothing. They didn’t take it then. Now they are saying we can do it better and cheaper and that people will have control over our own water. But how much control do you have through a bureaucracy? We have a nice town council but they do not know how to run a water company.
He said he believed those pushing for the water system takeover are trying to stampede the town’s residents into supporting forcing the purchase and trying to make it seem as if everyone is in favor of it. In reality, Rorex said.
About two thirds of the people are paying no attention to this at all. Ten percent, which includes many of the town’s movers and shakers, are avidly in favor of it. The rest of us are against it. We just had a water rate increase of ten percent, and I know that our water rates are going to go up a little more, but that doesn’t bother me. The town makes it sound like everyone is complaining, he said.
Over the last six years our sewer rates were raised by 70 percent and our trash rates by 50 percent. Those were both done by the town council. There were minimal protests filed. Why is water any different, except the town was a driver rather than Apple Valley Ranchos? I have a water bill of about $100 per month, which is probably reasonable when you consider I am living on three quarters of an acre.
And, Rorex said, he questioned the town’s assertion that
the revenue from water operations would pay for the infrastructure repairs, maintenance and water operation and cover the cost of the bonds the town will need to float to make the purchase. I do not think those are valid numbers. I am not an accountant but I do know that two plus two equals four.
With a recent internet posting, the town provided what it said were straightforward answers to frequently asked questions about the town’s attempt to purchase the Apple Valley Ranchos Water Company. One revelation emerging from that posting was that the $45.54 million and $50 million figures may have been low-ball quotes proffered as part of the town’s
bargaining strategy with Park, although Park maintains no discussion of a sale with the town is ongoing.
According to the city’s web posting,
Based on our understanding of the announcement by Algonquin Power & Utilities Corp., the purchase price was $257 million ($327 less $70 million in assumed debt) – well more than double the $102.2 million purchase price paid by the current owners, the Carlyle Group, just three years ago. We believe this is over-inflated and will harm ratepayers as the new owners seek to recover its excessive purchase price. Furthermore, any discussion of the acquisition of Apple Valley Ranchos must begin by separating it from the other two entities in the Park Water portfolio: Park Water in Los Angeles and the Mountain Water Company in Missoula, Montana. The town is interested only in Apple Valley Ranchos – one third of Park Water. One third of the announced purchased price by Algonquin is $86 million, which is within the range of possible values anticipated.
According to the town’s web posting,
The lack of transparency from Apple Valley Ranchos’ owners has kept us from fully vetting the company’s financials.
In response to charges that the town is preparing to use eminent domain to commandeer the water company, the web posting states,
No formal discussions regarding eminent domain have taken place. We are preparing to offer Park Water Co. and the Carlyle Group – Apple Valley Ranchos’ parent – a fair purchase price for Apple Valley Ranchos. The posting then goes on to say,
Eminent domain gives municipalities the ability to acquire private property if it is determined there is a compelling public interest in doing so. If Apple Valley Ranchos refuses to sell our system to the town, this might be an option. The final purchase price under eminent domain would be set by a court based upon ‘just compensation’ – a fair purchase price.
Furthermore, according to the posting, the town’s acquisition of Apple Valley Ranchos would not be an infringement on free enterprise because
Apple Valley Ranchos is not a normal company. It has a government-granted monopoly over the provision of drinking water in its service area. As a customer, you don’t have the opportunity to buy your water from someone else, which means you are at the mercy of the company and the California Public Utilities Commission when it comes to how much you will pay and how much profit Apple Valley Ranchos makes. Choice, a fundamental component of the free market, is non-existent when it comes to Apple Valley Ranchos. With a municipally owned water system, you have a voice. The web posting maintains that
Apple Valley has a management team with extensive experience in water system management. Most cities in California have owned and operated their own water systems of years.
The web posting disputed assertions that the town has spent between $700,000 and $1 million to look into the acquisition.
The town has spent less than $250,000 studying this option, according to the posting.
And, according to the posting, the purchase can be made, Apple Valley Ranchos can be subsumed by the town, the water system can be maintained and repaired and Apple Valley residents can be protected from being gouged on the amount they will be charged for water.
With a fair purchase price, the savings from eliminating the profit margin and other costs would be sufficient to cover the debt service without raising rates to do so, the posting states.
Source: Mark Gutglueck, San Bernardino County Sentinel
Posted on July 8, 2015