On December 9, 2016, the Honorable Richard L. Fruin, Jr. of the Superior Court of Los Angeles County dismissed the City of Claremont’s complaint to take Golden State Water Company’s (“Golden State”) Claremont Water System by eminent domain. In dismissing the complaint, Judge Fruin held that Golden State had successfully rebutted the presumptions in favor of condemnation under California’s eminent domain law.
Background
Citizen concerns about the level of Golden State’s water rates has been a Claremont cottage industry for many years. The local chapter of the League of Women Voters has advocated that the City of Claremont acquire Golden State’s Claremont Water System. The impetus for the acquisition is the belief that, under city ownership, water rates would be lower. This expectation is based on Golden State’s water rates being higher than water rates in surrounding communities, most prominently the City of La Verne.
The City of Claremont offered Golden State $56,335,000 to acquire the Claremont System, about $4,000 per customer. Golden State rejected the offer. Claremont then initiated proceedings to acquire Golden State’s water system by eminent domain. Claremont intended to use the system’s assets (adjudicated groundwater rights, infrastructure and billing software) to operate a municipally-owned water system using the same water sources to serve the same customers. Since Claremont had no experience in operating a water system, the city entered into a contract with the City of La Verne to operate Claremont’s water system for five years.
With its plans in place, Claremont initiated legal action. Golden State challenged Claremont’s right to take the water system. Therefore, Judge Fruin divided the proceeding into two phases. Phase One addressed whether Claremont had a right to take the water system. Phase Two would address valuation of acquired assets, assuming that Claremont prevailed in Phase One.
Issues
The issues involve whether all of the following statutory requirements for the use of eminent domain are satisfied:
- The public interest and necessity require the project;
- The project will be most compatible with the greatest public good and the least private injury;
- The property acquired is necessary for the project; and
- The property taken is a “more necessary public use.”
The last requirement is specific to condemnation of public utilities. Claremont and Golden State agreed that Claremont intends to use the acquired assets for the same use (provide water service to customers). Judge Fruin interpreted the phrase “more necessary public use” to require a comparison between Golden State’s actual operation versus the City’s proposed operation of the same water system. Golden State had to rebut the statutory presumption that the benefits of municipal operation of the water system outweigh the benefits of Golden State’s operation of the water system.
Decision
Judge Fruin’s decision started with observing that Claremont did not initially provide any factual findings for its proposed taking of a privately-owned and operated public utility. Claremont’s Resolutions of Necessity and original Complaint offered no factual findings. Instead, Claremont unveiled a growing list of justifications throughout the trial including post-trial briefing.
Project Does Not Include Water System Improvements
Judge Fruin concluded that the ability of Claremont to make system improvements post-condemnation does not favor the condemnation. The Resolution of Necessity defined the project as acquisition of the water system “as is.” The final Environmental Impact Statement stated that no new facilities or expansion of operations were proposed. The City Manager testified that Claremont had no plans to build new facilities or change operations.
Golden State Established that City Ownership Does Not Assure Delivery of Safe and Reliable Water Service
Golden State proved that its operation of the Claremont Water System is superior to the city’s planned operation by comparing Golden State’s operations with the City of La Verne’s water department. Judge Fruin compared Golden State’s actual operation record with La Verne’s actual operation record. The former was exemplary and the latter troubling.
Golden State specializes in the delivery of safe and reliable water service. It has personnel who provide specialized services and training to the employees working in each of its water systems. It maintains a centralized call center that provides around-the-clock response to water emergencies. There was no evidence that Golden State’s performance was deficient in any way.
The City of La Verne’s track record was not exemplary. It had difficulty in meeting state water quality standards for lead. It engaged in selective test reporting to show compliance with water quality standards. It received notice of violations from California Department of Public Health. Judge Fruin agreed with Golden State’s proposed finding that La Verne water customers residing in houses built before 1986 were exposed to unsafe drinking water for nearly seven years. La Verne’s performance problems also included misreporting of water quality tests in annual consumer confidence reports and violation of state E. coli standards.
Judge Fruin concluded that La Verne is not as qualified as Golden State to provide safe and reliable water service to customers of the Claremont Water System. He expressed concern that La Verne’s failure to accurately report bad water quality test results suggests concealment and inattention by supervisory personnel. Golden State is the superior operator because it has greater expertise in water management, familiarity with the Claremont Water System and, unlike La Verne, continuing training of personnel in water quality issues.
Judge Fruin stated he would dismiss Claremont’s Complaint because Golden State proved Claremont’s plans for operation of the water system do not provide adequate assurance that it would maintain the quality, safety and reliability of water service at the level provided by Golden State.
Public Ownership Will Not Lower Water Rates
At trial, Claremont’s City Manager testified that any expected decrease in water rates would not make the acquisition of the Claremont Water System “a more necessary public use.” Further, he testified that water rates would not likely be lowered by the condemnation and that he never represented to the City Council or the public that would be the result from the acquisition. Therefore, Golden State rebutted any statutory presumptions in favor of the condemnation.
Judge Fruin then addressed concerns that Golden State’s water rates were higher than water rates in neighboring communities, such as La Verne. He observed that any price differential may reflect factors other than ownership.
Water consumption per customer is higher in Claremont than in neighboring communities. “If Claremont customers receive more water on average, their water costs on average will be higher.”
The price comparison ignores that water systems have different cost structures. Golden State replaces underground pipe under a schedule approved by the California Public Utility Commission, spending about $1.3 million annually over the past ten years. In contrast, La Verne does not replace underground pipe until they wear out. Judge Fruin found Claremont’s price comparisons unreliable and irrelevant for an eminent domain trial. Claremont “does not identify and quantify the factors that affect the differential in water costs to make an apples-to-apples comparison.”
Bond Financing to Acquire the Water System Will Increase Water Rates
Claremont and Golden State argued that the impacts of the acquisition on water rates determines whether the acquisition serves the “public interest and necessity” and is a “more necessary public use.” Based on the extensive evidence presented at trial, Judge Fruin concluded that the bond financing would increase water rates in Claremont even under the acquisition price offered by Claremont (that was rejected by Golden State). This conclusion depends on the assumption that city ownership of the water system will continue Golden State’s level of investment in the water system including replacing depreciated facilities and making new investments as needed.
“Spectrum of Benefits” Do Not Support Acquisition of An Investor-Owned Public Utility
Claremont argued that acquisition of the Claremont Water System generates a variety of benefits related to “local control.” The problems local control allegedly solves involve escalating water rates, no local control over water rates, service, expenditures and policy, lack of accountability to the local community, and lack of transparency. Judge Fruin observed that many of the problems stem from the state regulation of Golden State’s operations.
The Legislature put in place the Public Utility Commission procedures specified in Article XII of the California Constitution. State procedures are intended to regulate the monopolistic structure of utility service. “The overriding concern for the Legislature was the effectiveness of the regulation rather than local participation in decision-making.” The court does not find escaping state regulation of investor-owned utilities supports the exercise of eminent domain.
Implications
Acquisition of a water utility by eminent domain is not the same exercise of acquisition of a ranch, for example, to construct a water reservoir. The Claremont saga demonstrates that the right to take is not a foregone conclusion. While there are statutory presumptions in favor of condemnation, there are legal standards that the utility can rebut with evidence. In the instance of the Claremont Water System, the city assumed a right to take. The political arena of the decision to condemn the Golden State system did not require a factual foundation. The legal arena did.
The poster child of the acquisition movement (the difference in water rates between the Claremont Water System versus La Verne’s water department) turned out did not demonstrate that private ownership is more expensive than public ownership. Instead, the record shows that Golden State invested in the Claremont Water System and marshalled the expertise and resources to assure reliable and safe water service. The City of La Verne did not.
Next Steps
The City of Claremont has not made a decision about whether to appeal Judge Fruin’s decision. There will be a Special City Council Meeting on January 31st to discuss the City’s options and receive public input. A Mayor’s letter sent to city residents stated that Claremont has incurred costs of $6.1 million to date pursuing the condemnation. Golden State has filed with the court an estimated $7.54 million of litigation costs. An unsuccessful condemnation requires Claremont to reimburse Golden State for its litigation costs. Therefore, the price tag for Claremont’s venture stands at $13.64 million.
Written by Rodney T. Smith, Ph.D.
Editor’s Note: Golden State Water Company is a client of Stratecon Inc., the publisher of the Journal of Water. Stratecon prepared an economic study of the impact of Claremont’s proposed acquisition on Claremont water rates in 2012 sponsored by the Golden State Water Company. Dr. Smith was not an expert in Phase One of the trial.