MAYOR SAM PEDROZA’S STATEMENT ON COURT DECISION ON THE CITY’S ACQUISITION OF THE CLAREMONT WATER SYSTEM

December 13, 2016

On Friday, December 9, Judge Fruin issued his final statement of decision against the City and dismissed the City’s eminent domain case. Many of you have asked questions about the Court’s decision against the City’s right to acquire the Claremont Water System by eminent domain.  I have tried to answer many of those questions in this detailed statement.

The History

The questions posed are best answered by reviewing the context of how we got where we are today.

This has been a long journey.  Over the last three decades, the community has repeatedly raised questions and concerns about how Golden State Water Company runs the Claremont Water System and why they are not accountable to the community.  In an attempt to address these concerns and after considerable public deliberation, the City decided to intervene and participate at its own expense in PUC proceedings, and has continued to do so over the last 20 years.  After the PUC authorized Golden State to impose uniform rates over an entire region of several thousand square miles that included Claremont, the City protested that regional rates are inequitable and ignore community concerns and needs.

Over the last ten years, hundreds of Claremont residents have spoken before the PUC in so-called “public participation hearings” to express frustration with water bills, how the water system works, how Golden State does business, and how their voices are not listened to by either Golden State or the PUC.  More recently, the City and many of its residents protested against Golden State’s imposition of WRAM surcharges, whereby ratepayers are forced to pay more for using less water.

In 2006, after a multi-year process of workshops and public meetings, the City adopted a new General Plan.  This General Plan is cutting edge.  It commits the City to specific environmental sustainability goals on water.  These include: setting objectives for use of gray water and recycled water: maximizing ground water use; implementing conservation; and having for the first time, open and transparent water master planning for the Claremont Water System.  The General Plan also speaks to water safety concerns; including making sure there is enough water for so homes won’t burn down again like they did in the Claraboya neighborhood, when fire hydrants supplied by Golden State ran dry. 

The General Plan also expresses concerns about Golden State’s ever rising water rates that are always the highest when compared to our neighbors, and about how regional rates mean Claremonters are subsidizing Golden State customers hundreds of miles away.  But most important, the General Plan, along with the subsequently enacted environmental sustainability plans, demonstrates the Claremont community’s commitment to have a say over its water future.

The Problems Persist

            Despite all of the City and community efforts over the past several decades, the fundamentals have not changed, at least not for the better.  Nothing changed the fact that the City and its citizens are captive customers to a for-profit monopoly, which is more accountable to its shareholders than to its customers.  Nothing changed the fact that Golden State’s water rates are going up and are always the highest compared to Claremont’s neighbors.  Nothing changed the fact that the first time the Claremont community learns about Golden State’s plans on water rates and water projects in Claremont, is after Golden State files its PUC rate applications in San Francisco.  Nothing changes the fact of Golden State’s indifference to the community’s environmental sustainability goals, including the promotion of recycled water projects.

The Community Input Process

            We have tried to fix these problems again and again over the years.  In the last decade, at the urging of the community, different City Councils and City Managers explored and even tried to negotiate with Golden State to acquire of the Claremont Water System.  Ultimately, those efforts proved fruitless, culminating in Golden State press releases declaring that the Claremont Water System is “not for sale.”

            Urged by community members and the organized efforts of Claremont Outrage, the City Council pressed forward.  At the direction of the City Council, City staff and expert consultants undertook an exhaustive evaluation process of the potential acquisition of the Claremont Water System.  This process included: reviewing Golden State’s official filings, reports and documents; reviewing reports and resolutions from civic organizations, such as the League of Women Voters urging action to acquire the System; conducting public and town hall meetings seeking community input; retaining financial and utility experts to prepare studies of the Claremont Water System; preparing fair market appraisals and offers to purchase; undertaking a detailed Environmental Impact Report on the possible acquisition of the Claremont Water System; and retaining experts on utility rate making and public finance to prepare and present an in-depth financial study and analysis on the financial consequences of municipal ownership of the System.  Additionally, Measure W, a $135 million revenue bond measure to acquire the Claremont Water System, was approved by 71.99% of the voters, despite an aggressive opposition campaign by Golden State.

 

The Known Challenges

            Through all of this, we never said it would be easy.  We knew there are risks.  We did say we were pioneers.  We did say that Golden State would fight hard and the process of moving forward could cost millions.  Golden State did what we said it might do—it initiated costly court battles.  It brought a CEQA lawsuit.  It brought a Public Records Act lawsuit.  It sponsored a lawsuit challenging Measure W.  It also spent hundreds of thousands of dollars to try to defeat Measure W--ten times more than the measure’s supporters spent.

            We worked through this process and resolved these court challenges with our legal team at Best, Best & Krieger, which includes lawyers highly regarded in their profession, with years of experience in municipal, water, condemnation, CEQA, public financing, and PUC law, and complex litigation -- as well as years of experience in representing the City and the Claremont community.

            After the electorate spoke on Measure W, we held hearings on “Resolutions of Necessity” authorizing the City to file the lawsuit to acquire the Claremont Water System by eminent domain.  At the hearings the public spoke.  Golden State spoke too, renewing its threat to raise every obstacle to block the City’s efforts.  The City Council weighed and considered the pros and cons.  Ultimately, the resolutions were passed unanimously. 

            So we pressed forward to court, knowing the risks, the challenges, and the electorate’s mandate that public acquisition of the Claremont Water System is in the public interest and that this is the Claremont community’s best and only opportunity to take control of its water future.

The Trial

            The trial on the City’s right to acquire the System by eminent domain was a judge trial spread over six weeks.  There were numerous witnesses on both sides, including representatives from the City of Claremont, Golden State, and the City of La Verne.  The City of Claremont put on testimony of the fire commander who was at the scene of the Claraboya fire, who testified that fire hydrants supplied by Golden State ran dry while 16 homes burned down and others were damaged.  He testified that if the hydrants had not run dry, homes could have been saved.  The City also put on the testimony of community activist Marilee Scaff, who spoke of the community’s rocky history with Golden State, and about the League of Women Voters extensive research on water issues and its endorsement of City’s acquisition of the Claremont Water System.

At the trial, a large number of exhibits were introduced into evidence by both sides.  They included an internal engineering consultant report commissioned by Golden State, which contained a thorough engineering assessment of the Claremont Water System.  The City had to serve a subpoena on the consultant to obtain the report, because Golden State never disclosed it to the City or the community.  The report concluded that the Claremont Water System suffers from numerous operational deficiencies, which have gone uncorrected over the years.  These deficiencies include continuing non-compliance with fire standards in certain pressure zones, such as the Claraboya zone where homes burned down years before, and inadequate water storage for operations, emergencies, fire flow, and reliable water service. 

Golden State’s own witnesses acknowledged at trial that the Claremont Water System is sub-optimal, suffering from operational inefficiencies, a high number of main breaks, and poorly aligned pressure zones that need to be consolidated and/or re-aligned.  One of Golden State’s experts described the water system as a “kluge” (a computer term for a “hodgepodge”).  Counsel for Golden State even called the System “quirky.”  This is the condition of the Claremont Water System after more than 80 years of Golden State’s stewardship.

To make it worse, the superintendent of the Claremont Water System testified under cross-examination that he had never seen a written operations plan for the System and that he was unaware of any effort by Golden State to solicit input from the City or the community on needed System improvements.   The Golden State executive in charge of preparing water master plans testified under cross-examination that Golden State prepares written water master plans for the Claremont Water System but does not share these plans with the City or the community.  He also testified under cross examination that Golden State made no effort to solicit input from Claremont before, during, or after preparation of these master plans and that Golden State did not “reach out to the community,” even when the master plans showed the System does not comply with fire standards.

The City also presented testimony from seven independent experts on the condition of the Claremont Water System.  This included testimony from a water engineer who analyzed the Claremont and La Verne water systems; a utility financial analyst and appraiser with an MBA from University of Chicago and over 30 years of experience in the field; a public finance consultant who previously did a financing for the public acquisition of a private water system; an adjunct professor at UC Berkeley who was a formerly PUC administrative law judge and Commissioner advisor who specializes in academic research on PUC practices; a CPA who specializes in utility rate making; a municipal planning consultant who is also an adjunct professor of urban planning at USC; and an environmental resources economist at UCLA, who has a Ph.D. from Harvard and is a Rhodes Scholar.

Prior to his involvement in the case, the UCLA economist published a “water atlas” of all water providers in Los Angeles County, which includes detailed data on each water provider (including the Claremont Water System).  For trial, he did a comparative analysis of Golden State’s performance as a water operator with other water providers.  This included a comparative survey of Golden State’s water rates, which shows that Golden State’s rates are the highest by a large percent when compared to water providers in the communities in the vicinity of Claremont.  He also surveyed 19 cities where Golden State is a water provider and there is another water provider in the same city, which he found to be a good way to measure Golden State’s performance.  In all 19 cities, Golden State’s rates were the highest, mostly by a high margin, even when compared to other investor-owned utilities.

The City also introduced into evidence portions of the deposition testimony of one of Golden State’s experts, who was the former PUC “water” commissioner. He testified that in his opinion, regional rates represent bad policy, and that he opposed them as a commissioner.

The City also offered testimony from its CPA utility rate expert who analyzed Golden State’s rate of return (or profit).  The PUC authorizes Golden State’s rate of return, which is an annual percent on Golden State’s investment.  Based on Golden State’s filings with the PUC, she analyzed Golden State’s actual achieved rate of profit for the region where the Claremont Water System is located.  (This region consists of several thousand square miles, comprised of nine Golden State water systems, including Claremont.  Golden State’s rate structure is the same for every water system in the region.)  In every year for the prior 10 years, Golden State’s actual rate of return/profit for the region exceeded the PUC-authorized rate of return or profit -- often by a large amount.  (The authorized rate of for this 10 year period ranged between 8% and 9%.)  In other words, Golden State’s rate of return/profit for the region consistently exceeded what the PUC authorized. 

In turn, the Claremont Water System profit rate exceeded the region’s rate of profit in seven out of 10 years.  She testified that the PUC never requires that these excess profits be refunded to ratepayers.  She also testified that her analysis of the profit rate demonstrates that Claremont ratepayers subsidize ratepayers in other Golden State systems in the region.  Her testimony on these issues was not challenged by Golden State, either by testimony or evidence to the contrary.

The City also offered into evidence the “administrative record,” that supports the findings in the resolutions of necessity authorizing the City’s acquisition of the Claremont Water System and the filing of the condemnation action.  The administrative record includes meeting agendas, minutes, staff reports and hearing transcripts that detailed many of the factors that support the City Council’s decision to acquire the System.  Although administrative records are typically admitted into evidence in eminent domain “right to take” trials, the trial court declined to admit the administrative record into evidence, despite the City’s repeated requests. 

While there is much more to what was presented over the weeks of trial, this gives an overview of much of what the City presented at trial.

The Court’s Decision

            The Court’s decision finds against the City.  The City is, of course, disappointed with the Court’s decision, but is also surprised because, after the close of the evidence, the Court made a number of statements in support of the City’s right to acquire the Claremont Water System, which are contradicted in the decision. 

Specifically, the Court concluded on the record that the City’s acquisition of the Claremont Water System is in the City’s best interest, stating:  “I think the adoption of the resolutions of necessity, which adoption I understand was unanimous, is sufficient to establish the City’s decision that the condemnation is in its best interests.”

            On the issue of the City’s financial ability to acquire the System and run it, which was hotly contested by Golden State at trial, the Court stead:  “So my conclusion is that, you know, Claremont does have the ability to finance this system.”

The Court also stated that he did not find the impact of the acquisition cost on the rates as a significant issue and recognized the value to the community of ownership of the System, stating:  “I don’t think it’s a significant issue in this case because the higher rates that Golden States—excuse me, the higher rates that Claremont residents would be paying would be not only for the water service, it would be for acquisition of an asset.  They’re buying something other than water.  They’re buying a facility.  Furthermore, I think when you actually work out the sources of payment to be utilized by the City, that if the citizens or the residents are paying more, it may not be much more.”

            On the issue of whether the Claremont Water System could be properly operated by La Verne, another issue hotly contested by Golden State based on a limited number of drinking water quality incidents affecting the La Verne system several years ago, the Court stated on the record: “I think the question is whether La Verne or Claremont itself have the capability of operating the system safely and reliably.  The safety is assured by the tests that are required by the Department of Public Health may be other agencies.” 

            The decision contradicts these conclusions made by the Court after all the evidence was in.

The decision, with some modifications, follows the Court’s prior written tentative decision.  The City filed written objections to the tentative decision, pointing out errors and omissions of fact and law, including the Court’s failure to consider un-disputed evidence supporting a wide range of public benefits, such as greater transparency in decision making and local accountability, which will only become reality through public ownership.

The City requested a hearing before the decision was finalized but the Court did not hold such a hearing.  The City’s filed objections remain applicable to the final decision.

Some Questions

La Verne as Operator of the Claremont Water System

Some of you have asked about the judge’s comments on La Verne as an operator of the Claremont Water System.  One of the major thrusts of Golden State’s case was that La Verne could not safely operate the Claremont Water System because La Verne was cited for a lead exceedance violation some years before.

Here are the facts.  La Verne was cited only once by the State Department of Public Health for a lead exceedance in La Verne’s s entire 100 plus year history as a water operator, and the exceedance was only slightly above the state minimum threshold.  This incident occurred in 2012, and it was promptly remedied by La Verne.  In fact, La Verne identified the problem first and reported it to the State.  The exceedance did not involve lead emanating from La Verne water system, but concerned lead from individual household’s plumbing.  Importantly, it was never claimed that anyone was in fact harmed by the exceedance.  La Verne has not had a single violation issued against it since 2012.  In fact, in 2016 the State sent a letter to La Verne confirming that the La Verne system is in full compliance.

Golden State, as shown at trial, has had its own drinking water quality violations.  Golden State has been cited for dozens of violations over the years, including as recently as 2015.  In one of these violations, the State Department of Public Health charged Golden State with downplaying its violation to the public on its website.  Golden State in 2015 also had a widely publicized series of incidents of black water coming out of household taps in its water system in Gardena.  The Court, however, refused to hear this evidence at trial.

It is also important to note that the operations agreement that La Verne signed with Claremont, fully protects Claremont residents, requiring that La Verne comply with all drinking water and other safety requirements.  This agreement also holds La Verne liable for damages if it fails to comply.

It is also worth noting that the City of Claremont’s 2015 Environmental Impact Report on the acquisition of the Claremont Water System identified La Verne as the likely operator.  Golden State submitted pages of written objections and comments and filed a CEQA lawsuit challenging the EIR.  Not once did it raise this issue about La Verne.  At the City Council hearings on the resolutions of necessity, Golden State did not raise the issue.  In its written response to the eminent domain lawsuit, Golden State did not raise the issue. The first time it raised this issue was about two months before trial when it listed its experts and their opinions for trial.

It is also worth talking about what the tentative decision doesn’t say.  It doesn’t talk about all the evidence demonstrating many ways in which La Verne is a superior operator to Golden State.  For example, the La Verne system has far fewer main breaks than the Claremont Water system.  While the Claremont Water System has a serious deficiency in water storage capacity, the La Verne system does not, and has almost four times the storage capacity of Claremont.  Golden Staten wastes up to 4000 acre feet of inexpensive groundwater per year while La Verne keeps increasing its use of such water.  The La Verne system is better designed with well aligned pressure zones.  The Claremont Water System has three times more pressure zones than La Verne and Golden State’s internal master plan acknowledges the Claremont System’s zones still need to be consolidated and re-aligned.  La Verne has no history of fire hydrants running dry while houses burn down.  Unlike Golden State, La Verne has transparent and public water master plans.  No one, not even Golden State, has claimed that the La Verne system is “quirky,” a “kluge,” or “cobbled together,” terms which Golden State’s own counsel and witnesses have used to describe the Claremont Water System.

Economic Feasibility Issues

            Some of you have also asked questions about the City’s feasibility study regarding City acquisition of the Claremont Water System.  Some of you may recall that the City presented a study in a town hall meeting that projected “break even points” under various acquisition prices for the water system ranging from $55,000,000 to $120,000,000.  The break-even point was defined to mean when rates under municipal ownership equal rates under investor ownership and thereafter could decline from what they would otherwise be under investor ownership. 

The municipal and investor ownership scenarios in the feasibility study assumed exactly the same operational expenses and capital expenditures.  Yet despite these identical costs rates, municipal ownership eventually reaches a breakeven point with investor ownership, despite the cost of debt financing of the acquisition of the System under municipal ownership.  Under municipal ownership there would be no profits, no taxes, no shareholder dividends, no high executive salaries, and no depreciation expenses passed on in rates.  Because of these differences, at some point a break-even point would be reached in rates whereupon municipal rates would be lower than investor utility rates. The question was not if but when.  The higher the acquisition price, the longer it takes to reach the break- even point under municipal ownership.  This was what was shown in the presentation using four alternative acquisition prices, ranging from $55,000,000 (the original City appraised value) to $120,000,000 (double the appraised value).

            This study was prepared by an expert in utility finances and valuation with over 30 years of experience.  She received input from another expert on municipal financing of property acquisitions to account for debt service assumptions in the study.  The expert on utility finance and valuation used Golden State’s filings on the Claremont Water System to develop a history of operational expenses and capital expenditures for the Claremont Water System to arrive at common operational expense and capital expenditure assumptions for the municipal and investor ownership scenarios.  This expert, based on Golden State’s own bill impact analysis, also found that there was a rate premium under investor ownership because of PUC regional rates.

            Around the same time, Golden State also produced its own feasibility study by an economist in Claremont.  At trial, the City had its original consultants who did the feasibility study testify.  Without explanation, Golden State dropped its economist from Claremont, instead relying on another economist who then came up with an entirely different study.  The new Golden State economist in deposition said he had spent only an hour looking at the study by the Claremont economist and had no opinion on it.

            This new Golden State economist prepared a distorted feasibility study based on estimates instead of actual numbers that were available in Golden State’s filings with the PUC.  He arrived at revenue estimates that were several million dollars lower than the most recent actual revenues reported by Golden State for the Claremont Water System.  He then estimated the revenues for the Claremont Water System would remain below actual 2014 revenues for the Claremont system for at least ten years.  He then concluded, using similar acquisition price scenarios in the City feasibility study that rates would go up significantly under municipal ownership to cover operational expenses and capital expenditures.  In other words, by projecting revenues low and projecting operational expenses and capital expenditures high, he testified that rates would have to go up.  He conceded, however, that after the debt financing was paid off, water rates would drop significantly under municipal ownership and would be lower than under investor ownership.  This economist never did the rate of profit analysis that the City’s expert did.  He easily could have, yet he didn’t.

Remarkably, this expert conceded under cross-examination that the Claremont Water System was poorly put together, suffered operational deficiencies, and had very high overhead and even called the system a “kluge,” a computer term for a hodgepodge.  The expert also admitted under cross-examination that his study was “speculation.”  (The Court, however, denied the City’s motion to strike the expert’s testimony as speculative.)

            Golden State also contended there was no premium earned by Golden State due to regional rates.  However, the City’s expert testified her acquisition price was higher because she found there was a premium.  If Golden State was correct that there is no premium, The City’s appraiser would have to lower her $55,000,000 System valuation by as much as $20,000,000.  This in turn means that at this reduced acquisition price, the break-even point of municipal ownership would be reached immediately at the time of acquisition.  (Golden State’s economist, who denied there was a premium, did not make this adjustment in the acquisition price.)

            In any case, the City’s expert stood by her finding of a rate premium even though it increased her valuation The City’s offer of $55,000,000 to Golden State reflected this rate premium.  This expert stood by her feasibility study under oath.  At trial, Court recognized her professionalism.

As discussed before, the City also put on expert testimony from a CPA and utility rate expert, who found that Golden State’s rates are propped up by earnings above the PUC-authorized rate of return or profit.  This testimony was not disputed and provided independent support that Golden State enjoys a rate premium due to regional rates.

            The City also showed, without rebuttal by Golden State, that the rate increases Golden State’s expert claimed would occur with acquisition were actually within the range of potential rate increase discussed in the ballot analysis for Measure W, which was approved by almost 72% of the voters. 

            The City presented testimony from the environmental resources economist from UCLA that because of the City’s official commitments to water sustainability, it was in a superior position to contain rising water costs in the future.  Golden State offered no rebuttal to this testimony.

            The City also pointed out that under City acquisition of the System for the public, water rates would not just be for water, but also to acquire an asset, namely the Claremont Water System.  This is akin to the distinction between being a renter who will always pay rent and being a homeowner, who someday pays off a mortgage who will have full title to the property.  

As discussed, the Court stated on the record after the close of all of the evidence at trial, that he was satisfied that the City could finance and acquire the Claremont Water System, and that he did not think the impact on rates would be that significant.  The Court reversed its position in its written final decision. The City believes the Court got it right in the first place and that the Court’s turnabout in the final decision is contradicted by the trial record and constitutes legal error.

What’s Next?

            We have gone to great length to explain how we got where we are today.   We are evaluating all of our options to decide what next steps we will take in this decades’ long journey. The City has 60 days to file a Notice of Appeal. After the first of the year, the Council will meet to discuss our options.

It is also anticipated that Golden State will be making a motion for several millions in litigation expenses, which will be evaluated as part of this process. If necessary, the Council will consider financing options that will not impact resident’s taxes or minimize City services. All these decisions will be made in public meetings with notification to the community, as has been our practice throughout this process.

We are disappointed in the decision after a hard fought battle.  We believe that the bottom line remains that the City presented a powerful case, much of it not even contested at trial, demonstrating that City ownership and operation of the Claremont Water System, for the benefit of the Claremont community, is in the public’s best interest.

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