Golden State issues skewed valuation of water system

Numbers are zipping around Claremont—all kinds of numbers related to the city’s potential acquisition of the water system currently owned by Golden State Water. It’s enough tomake your head spin. As an elected member of your city council, I take my charge seriously and want to ensure the core facts are not lost in all the cacophony of voices.

As many of you know by now, the Claremont City Council began exploring alternatives to a privately-owned water system in Claremont several years ago. As part of our discussions, the city council commissioned a study to determine how much it would potentially cost to purchase Golden State Water’s water system and infrastructure.

The city hired a certified appraiser, experienced in utilities, to prepare an analysis of the value of the water system. After extensive research and study, the expert set the fair market value of the water system at just over $55 million. We also conducted a financial feasibility study that determined the city could fund an acquisition amount up to $80 million without increasing current water rates.

Based on the appraised value of the system, the city offered Golden State the fair market value to purchase the Claremont water system. However, Golden State rejected the city’s offer. After thoughtful discussion and taking into account the public’s testimony at open meetings, the city council determined it was in the best interest of Claremont residents to continue to explore ownership of the local water system and here we are today, carefully studying our options and ensuring residents have fact-based information.

This week, the numbers started flying again with Golden State circulating a skewed, “draft” study with a wildly-inflated valuation of the system. In a gross overestimation, the company announced that its water system was valued at more than $220 million. That’s six times the amount the company has invested in the Claremont water system and four times the appraised value.

Moreover, Golden State Water didn’t engage in a credible, comparative process when evaluating the value of the water system. While the city engaged a certified appraiser as directed by state law, Golden State hired an engineering firm to produce a draft engineering report, which is very different from the city’s appraisal. The report Golden State released this week didn’t determine fair market value—it calculated the costs associated with replacing every single component of the water system. Simply put, it’s an apples to oranges comparison and incorrectly inflates the potential purchase price.

Imagine this: If I decide to sell you my car tomorrow, my selling price would be based on the fair market value of my vehicle, as determined by Kelley Blue Book’s appraisal. However, if I base my selling price on the value of my car after I replace all of the parts with new components, the cost to you would be significantly inflated. But why would I replace all of my car’s parts if it’s running fine? That approach makes no sense. But that’s exactly what Golden State is trying to do to Claremont residents. They are trying to needlessly increase the cost of the local water system.

After reviewing Golden State’s draft engineering report, we continue to have concerns with the report’s methodology and purpose. The report is unsigned and in draft form, which raises questions about why it was released to the public in such haste.

Additionally, there are inaccuracies in the methodology including the report’s valuation of some existing infrastructure as brand-new, when it is simply not new. Most concerning, however, is the report’s blatant disregard for the facts. The report assumes in its valuation that all existing pipes are made of expensive ductile iron pipe, when in fact only 12 percent are made of this material. A company that is comfortable playing fast and loose with the facts at the expense of ratepayers must be questioned.

Another problem? Golden State only claims 16 percent in depreciation for purposes of the engineering report, but reports much higher depreciation in their most recent California Public Utilities Commission (CPUC) filing. Although technical, claiming high deprecation before the CPUC allows the company to pass on the expense to ratepayers in the form of rate increases. It’s an accounting move that is nothing more than a “tale of two systems” tailored to the target audience to the benefit of the current owner.

The court, guided by qualified valuation experts, will ultimately decide the fair market value of the water system. It will be their job to sort through the numbers and make a decision that is in the public’s best interest. Until then, it is our job as city-elected officials to ensure residents have the correct information, which to date places the value of the Claremont water system at $55 million based on the only appraisal available to the public.

From the beginning, the city council has worked diligently and cautiously, exploring alternatives to a privately-owned water system in Claremont and considering options that best suit residents’ needs and are clearly in the public’s interest.

The city remains confident in our approach and valuation—interested residents can find detailed financial information on the city’s appraisal and our financial feasibility report on the city’s website, www.ci.claremont.ca.us.