Missoula plans next steps in MWC takeover (June 15, 2015)

The city of Missoula won the first round of its legal fight to take ownership of Mountain Water Co. — the preliminary order of condemnation set forth in a 68-page decision by Missoula County District Judge Karen Townsend.

So what happens now that Townsend has ruled? Expect a new round of legal proceedings, appeals, a debate over costs and planning talks to shift the private utility to public ownership.

In a news conference in City Council Chambers on Tuesday morning, Mayor John Engen and the city’s co-counsel, Natasha Prinzing Jones of Boone Karlberg, said Mountain Water and its parent company, The Carlyle Group, have roughly 30 days to place a value of fair compensation on the local utility.

The city must accept the offer within 20 days — if it believes the price is fair — or decline it, turning the matter over to a three-member water commission for further negotiation.

There is a time frame for Mountain Water and The Carlyle Group to present to the city an offer for what they believe to be just compensation, said Jones. There is a statutory time frame for the city to consider that offer and respond if appropriate.

If the effort to reach a fair price for the utility fails, the city and Carlyle will each appoint a single representative to the water commission. Together, the two appointees will select a third commissioner. If they fail to agree, the court will make the final appointment.

Once the commission is set, Jones said it will have 10 days to value the utility.

We will present evidence to those water commissioners, and we’re prepared for that process, she said. We have experts who have assisted the city on articulating a value based upon a lengthy analysis of the evidence, and we’re prepared to present that testimony.

The city has tried to negotiate a fair value for the water utility in the past. In 2013, it made an initial offer of $65 million — an offer Carlyle rejected. The city made a second offer of $50 million, but was again rejected.

A Mountain Water sister company of comparable size in California was recently valued at $45 million.

Carlyle has not said whether it would challenge the court’s ruling, which found that public ownership of Mountain Water was more reasonable and proper than private ownership. An attorney representing Mountain Water employees said Tuesday that he will file an appeal.

We can’t predict what their legal team will do, Jones said. There’s an appropriate process dictated by statute. When I go back to Judge Townsend’s order, she very thoughtfully weighed the evidence. She set forth an order we believe will be well received by the Montana Supreme Court.

Mayor John Engen said the city’s legal fees in the case now total roughly $3.1 million. The city has established a separate account to cover such costs, though the outcome of the case held sway over how those fees would be repaid.

Because the court ruled in the city’s favor, the fees will likely be included with the cost of acquisition.

We’ll be able to roll this into the larger acquisition cost of the utility, so there should be no tax implication for anyone, Engen said. Nor do we believe, based on our analysis, that there should be a rate implication for ratepayers on the system.

Engen added that the city is responsible to pay the defendants’ reasonable legal fees. As the court determines what the city owes, the city is likely to argue that some fees incurred by Carlyle during the trial were unreasonable.

Engen said the numerous motions filed by Carlyle and Mountain Water could be seen as questionable. Before the trial began, Carlyle noted that its lawyers charged by the hour, and the longer the case dragged on, the higher the overall cost would be.

You will see their success has been spotty at best, and we would argue that in some cases, those motions have been unnecessary, and in some cases redundant, and we would argue unreasonable, Engen said. We would certainly ask that the court keep that in mind as it determines what the city might owe in terms of those costs.

While the city prepares to settle the remaining legal proceedings, it’s also preparing to transition the private utility to public ownership.

Engen maintains that the city is better suited to invest in the system and bring it up to industry standards.

We have the ability, by virtue of public ownership, to pay to repair the system, Engen said. The fact of the matter is, we will continue to develop our plan for fixing the system, and we’ll execute the plan.

The system serves nearly 24,000 customers and includes 327 miles of water main. Nearly half of those mains are 45 years and older, and the system leaks at a rate that far outpaces the Infrastructure Leakage Index, established by the American Water Works Association.

During the trial, the city argued that the system would require $95 million to bring it up to industry standards. How much the city can invest — and how quickly — will depend on the final cost of acquisition.

We have to know what we’re paying for the system, Engen said. We have to understand what our debt service is in order to understand what our capital program looks like. There are variables at play there.

Engen added that the Missoula City Council will discuss the transition in the coming months. After public discussion, the council will also set the rate customers will pay under city ownership.

A transition team will also be created as the process moves forward. Engen said Mountain Water employees will have a seat at the table during the transition, as they are likely to become city employees.

We’ll have a plan to invest in this system that will be available to the public and be a function of the public planning process, Engen said. Those changes will provide significant savings and significant improvements over the long haul, and we’ll begin to see those changes immediately under public ownership.

Jones said the city plans to notify the Montana Public Service Commission of the court’s order. She said the city believes the PSC should terminate or stay Carlyle’s sale of Mountain Water to Liberty Utilities, a subsidiary of Algonquin Power and Utilities Corp. of Canada.

Justin Kraske, chief legal counsel for the PSC, said the commission has not yet received any motions from either party in the case. He said the commission was reviewing the court’s ruling and has not decided upon the pending sale to Liberty.

The commission is reviewing the decision right now, Kraske said. We’ll decide how to proceed in the upcoming weeks.

Utility will require investment

The water system pumps groundwater from the Missoula aquifer through 37 wells and 327 miles of water main. The system serves 23,500 customers, with 1,500 of them outside the city limits. The city of Missoula estimates that an investment of $66 million to $95 million is needed to bring the system to industry standards.

Nearly 50 percent of the mains are more than 45 years old. Twenty percent of the mains have exceeded their useful life.

While 81 percent of the system is metered, only 40 percent of the water is measured through meters. The average age of the meters is 20 years and will require $16 million to $20 million to achieve industry standards.

Nearly 75 percent of the service lines are galvanized steel and have exceeded their useful life. The cost to bring the lines up to industry standards is roughly $25 million.

Rattlesnake Dam and the intake dam have not been maintained and show problems with erosion, slope and stability, requiring $3 million in repairs.

The water system leaks at a rate of 50 percent. An estimated 8,000 gallons leak every minute, well above the national Infrastructure Leakage Index.

Mountain Water believes the pipes and mains need to be replaced at an accelerated rate of 2.4 to 3.2 miles per year to keep pace with the aging system.

Source: Michael Gallacher, The Missoulian