So just what is Claremont’s water system worth? If you ask Golden State Water Company, it’s $222 million.
In a second analysis of the city’s system, released by Golden State on Tuesday, water company representatives have given Claremont’s system its highest price tag yet, albeit in draft form.
“Golden State Water Company estimating Claremont’s water system value at $222 million is either fantasy, incompetence or wishful thinking,” stated Claremont resident Joe Farrell. “While Golden State Water has presented its number as a ‘replacement value,’ no one replaces a public utility’s assets. You don’t build a parallel water, gas, electric or sewer system. It is not like taking private land for a freeway, a park or a factory. A utility is designed to be a monopoly.”
According to Golden State Water spokesperson Julie Hooper, a final analysis on the water system will be prepared if and when an eminent domain lawsuit is filed by the city. According to Ms. Hooper, the lawsuit will establish the applicable date for determining the inventory of facilities to be condemned, as well as the replacement cost and level of depreciation of the facilities.
With less than five weeks remaining before Claremont’s registered voters flood the polls to cast their ballots on Measure W, the staggering price tag has led many Claremonters to question not only the methodology behind the analysis but also how the numbers will pan out in a case of eminent domain.
“It looks like it was just an analysis of what it would cost to replace the system if they were starting from scratch,” says Freeman Allen with Claremont Friends of Locally Owned Water (FLOW). “It doesn’t consider the present system isn’t new. They need to take into account its depreciation.”
Prepared by engineering firm Hatch Mott MacDonald, the draft analysis includes a review of the 150 miles of pipe, 17 wells, 11 reservoirs, 11 booster stations and 11,065 customer meters that make up the Claremont system, concluding the replacement value of the system to be $222,772,010.
By implementing the Replacement Cost New Less Depreciation (RCNLD) methodology for valuation, the engineering firm estimated the current construction re- placement cost of what it would take to replace the en- tire existing water system and then depreciated that estimation by an amount consistent with the observed depreciation of the assets. The data for the analysis was collected from the 2008 Master Plan, planning studies, site inspections and interviews with Golden State personnel with knowledge of the operations and maintenance history of the water system.
“We performed an analysis of the Claremont water production and distribution tangible assets, including distribution mains, valves, hydrants, services, meters, wells, pumps, tanks and associated structures, electri- cal, treatment equipment and other miscellaneous assets,” said Hatch Mott MacDonald engineer Michael Altland, PE. “Estimates of the engineering design, permitting and funding for construction of these assets were also prepared and included in the analysis.”
However, not included in the report was discussion of water rights, real property or other assets. According to Golden State, the value of those assets will only serve to increase what they consider fair market value of the water system. It is this figure that would be presented to a jury in the event the city moves forward with the takeover of the system.
Claremont officials are quick to point out that the city engaged a certified appraisal expert as directed by state law, who appraised the water system at $55 million. Despite that assertion, it should be noted that the replacement value analysis put forth by Golden State is another accepted methodology of appraising property taken by eminent domain. A judge or jury may take this report into account, along with other factors, in reaching its decision.
“During an eminent domain court proceeding, a Los Angeles County jury will decide the price that the city of Claremont must pay to take over Golden State Water’s water system, and they will be instructed to determine the highest price a willing buyer would pay for the assets,” eminent domain attorney George Soneff, partner at Manatt, Phelps and Phillips, said in a press release issued by Golden State Water.
The city of Claremont contends that Golden State didn’t engage in a credible, comparative process when evaluating the value of the system but instead, it calculated the costs associated with replacing every single component of the system, incorrectly inflating a potential purchase price.
“This is a skewed, draft study that is silent on the fair market value of the water system and wasn’t prepared by a certified appraisal expert,” said Joe Lyons, mayor of Claremont.
Mr. Farrell contends that not only is replacement value a flawed methodology for analysis, Golden State hasn’t taken a fair look at assets. “There are numerous cases around the country that support the idea that replacement value is the wrong measure for a public utility’s assets, since their pipes run using easements granted on public and private property for a single purpose,” Mr. Farrell said. “Their only real assets are the pumps and tanks they own, which are paid for totally by ratepayers in separate proceedings whereby the company is granted a guaranteed rate of return on the investment by PUC,” Mr. Farrell said. “So technically, the ratepayers already own those assets since they paid for them as part of mandatory rates.”
Still, it begs the question. Could the Claremont water system be valued at $222 million?
“I can’t figure out how they’re figuring it that high,” says La Verne resident Brian Bowcock of the estimation. “It has nothing to do with property. It’s all-inclusive.”
With more than 54 years of experience in the municipal utility business, Mr. Bowcock knows a thing or two about water systems. He served as the director of public works for the city of La Verne before retiring after 24 years of service.
“If the city of La Verne were to sell their water system, which has twice as much storage, we couldn’t even come close to that number, even by adding in the water rights,” he says of the $222 million analysis. “I can’t think of one water system that has sold for that much for that size.”
For Mr. Farrell, it’s simply a matter of arithmetic.
“The numbers do not lie. [At $222 million], Golden State alleges the per-connection cost for the Claremont system is $19,304. This means that for the company’s total 257,000 connections, just the water systems and supply rights are worth $4.96 billion. I’m sure the Los Angeles County Tax Assessor will be interested in hearing what Golden State believes their company assets are worth,” he said.
“Moreover,” Mr. Farrell continued, “I’m sure a Wall Street corporate raider would be interested in making an almost $4 billion profit for a $1 billion investment, buying every share at current market value. For Golden State to contend that it's worth almost five times what the stock market believes it is worth strains credulity.”