Legal Tide Rises Against Utility

By HOWARD FINE Staff Reporter LA Business Journal, December 1-7, 2014

Utility operator Golden State Water will soon be hip deep in litigation as it battles two Southern California communities trying to take over the company’s services – and the treacherous water could get even deeper.

Last month, voters in Claremont overwhelmingly gave the go-ahead for the city to take control of the water system run by Golden State, a private-sector utility subsidiary of American States Water Co. of nearby San Dimas. That follows on the heels of another lop- sided vote last year in Ojai to have a neighboring water district take control of Golden State’s system in the Ventura County town.

While Claremont and Ojai represent a fraction of Golden State’s customer base, the company is determined to keep running those systems, fighting the Ojai takeover bid in court and vowing to do the same in Claremont.

If Golden State comes out the loser, more communities could try to oust the utility operator, said Larry Kosmont, an L.A. economic development consultant and former board member of water wholesale giant Metropolitan Water District of Southern California.

“I expect the move by cities to acquire local private water companies will continue and will likely pick up momentum,” Kosmont said. “They will get pushed by their constituents to look at it.”

Already, two other communities have fledgling takeover efforts: Los Osos on the Central Coast near San Luis Obispo and Cowan Heights in the foothills above Tustin in Orange County. Activists in all those communities say they’re frustrated by rising Golden State water rates that are already higher than rates elsewhere.

But Golden State is hardly a willing seller in any of these cases, so communities that want to run their own utilities need court approval to invoke eminent domain and negotiate a purchase price, setting up perhaps years of legal wrangling.

Big money

Golden State accounts for roughly two-thirds of American States’ revenue, which totaled $472 million last year. The utility serves 21 cities and regions in the state, with roughly 257,000 individual water hookups. (The utility serves many more people, since an entire apartment building or shopping mall can constitute a single hookup.) Together, Claremont and Ojai have nearly 14,000 hookups, or about 5 percent of Golden State’s customer base.

Michael Gaugler, an analyst with Brean Capital in New York who follows American States, said that’s too few customers to worry about – for now.

“While the situation with the city of Claremont bears watching, we wouldn’t expect the potential loss of 11,000 customers to meaningfully financially impact the company if Claremont is ultimately successful with a condemnation,” Gaugler said in a report released after the Claremont vote.

Still, Golden State is fighting to keep those customers. If activists in Ojai or Claremont manage to pull off legal victories, then other communities might jump in with their own efforts. The real impact could be felt if municipal takeover efforts get started in the heart of Golden State’s customer base: southern Los Angeles County. Roughly half of the utility’s customers are in a swath of territory from Torrance on the west through Norwalk and into portions of northern Orange County.

In those areas, there have been scattered incidents of customer discontent over high water prices in communities such as Bell, but no additional effort at municipal takeover – yet.

Activists say this is why Golden State is fighting so aggressively to hold on to its water systems. “We strongly believe that Golden State is fighting us so vigorously because they know that if we prevail here, the floodgates will open and other communities would be lining up to take over water systems from Golden State,” said Ryan Blatz, attorney and board member of Ojai Flow, the organization that pushed the municipal takeover effort in that city.

The municipal takeover threat could also be helped from outside. Proponents have received guidance from a national environmental group, Food & Water Watch of Washington, D.C., which has a page on its website promoting municipal takeover of private water systems.

Rising rates?

At the root of the takeover attempts is a common complaint: Golden State’s rates are  too high, critic claim, and getting higher. Activists in these communities say the California Public Utilities Commission, which regulates private water utilities, has hailed to rein in costs. They also say municipal water districts, which don’t have to distribute profits to shareholder, can provide the water more cheaply.

“The thing that’s aroused all of us is that our water is already more expensive and the increases just aren’t going to stop,” said Naida Simpson, president of Los Osos Flow, the organization formed to promote a municipal takeover.

Golden State executives say the activists’ promises of lower water rates from municipal providers are fantasy.

“Ojai and Claremont voted on what communities in those areas had promised them,” said Denise Kruger, senior vice president of regulated utilities for Golden State. “But what the cities have promised is quite different from what the reality is: Rates will go up even more than before.”

Kruger said municipal operators would still have to spend increasing sums of money on maintenance and upgrades – and they will have to pay off tens of millions of dollars in bonds used to purchase the systems from Golden State.

She also said Golden State’s actual rate increases have been lower than the double- digit hikes activists have claimed.

Water rate changes are complex and vary widely by region. Activists use one set of figures to argue rates have skyrocketed, while Golden State uses other figures that suggest more moderate increases.

The company is in the process of asking the Public Utilities Commission for rate changes that would start in 2016, ranging from a 3 percent price cut in Rancho Cordova in Northern California to an increase of 4.7 percent in Ojai. A decision from the PUC is not expected until late next year.

 

Court battle

In Ojai, Golden State challenged the financing behind the Casitas Municipal Water District’s $60 million takeover bid for its water system there. A lower court sided with the water district, but Golden State has appealed.

Meanwhile, in Claremont, where 71 percent of voters last month approved a measure to have Claremont issue $135 million in bonds to finance a takeover of Golden State’s water system, a legal battle is also in the wings.

Speaking to Wall Street analysts on an earnings conference call – coincidentally scheduled for the day after the Nov. 4 vote – American States Chief Executive Robert Sprowls said, “We will continue to defend our Claremont system from condemnation.”

One of the leaders of the Claremont Flow movement, Randy Scott, said Claremont officials had looked into a takeover of Golden State’s system several times in the last decade, but opted not to pursue it, “with the hope that things would change.” But water rates continued to go up, with Scott saying that the increases are going toward Golden State’s focus on maximizing profit and executive compensation.

Golden State’s Kruger said that one reason rates have continued to increase is the need for maintenance to prevent the frequency of water main breaks that have plagued Los Angeles. “Politicians there have been unwilling to raise rates to pay for the maintenance,” she said. “We don’t have those problems because we are spending the money to keep our system in shape.” She said that while Golden State will continue to fight municipal takeovers, communities such as Los Osos and Cowan Heights might back off if Ojai and Claremont end up facing huge

legal and operational costs. And even if takeovers succeed, Kruger noted that Golden State and its parent, American States, must still be fairly compensated through the eminent domain process.

“While we don’t want our business to get smaller and will fight that, if a takeover effort does succeed, shareholders will get their money,” she said.

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