Report takes issue with municipal takeovers of investor-owned water utilities (March 13, 2017)
A recent report has found that contested government takeovers of investor-owned water utilities are
typically very costly and systems
do not necessarily perform better once ownership switches hands.
Led by Dr. David Sosa of Analysis Group, a team of economic consultants examined four cases — including a successful takeover in Missoula, Montana that Apple Valley officials say is similar to their eminent domain action against Liberty Utilities, Apple Valley — in which government entities pursued acquisition via condemnation.
In a statement, Sosa said arguments in favor of acquisition
frequently cite lower costs among the purported benefits.
We examined case studies of four systems where eminent domain proceedings were initiated to examine these arguments and the effects of contested acquisitions, Sosa said,
and we found these claims to be unsubstantiated.
The report was funded by the California Water Association — a consortium of investor-owned water utilities — which left local officials skeptical, as did Analysis Group’s involvement in the research.
Town spokeswoman Kathie Martin said staff would need time to review the report in detail, adding that, at first glance, it appeared to be a situation wherein a small number of cases were
hand-picked by a private firm that provides expert services for litigation as opposed to an independent research firm.
In fact, Martin said,
it is clear that this consultant performed work for Manatt (Phelps & Phillips LLP) in the City of Claremont case — the same law firm representing Liberty.
On Monday, Sosa described the town’s response as a
We looked for every contested takeover of a water utility in the U.S. since 2000, Sosa told the Daily Press.
The four case studies discussed in our report were the only contested takeovers that we could identify. Our research methodology, analysis and conclusions are clearly described in our report. I would be delighted to address any substantive questions or concerns that the (town) may have when it has completed its review of our report.
Meanwhile, the report found that changes to government ownership placed
immediate and substantial financial burdens on customers and taxpayers. In addition, the elimination of profits and taxes was typically identified as one of the financial benefits of acquisitions.
Assistant Town Manager Marc Puckett has on several occasions discussed profits and taxes, and how the elimination of both could impacts water rates in Apple Valley.
Most recently, during a special meeting last week, Puckett said eliminating profits, taxes, inter-company service agreements, a corporate office in Los Angeles and executives would make approximately $10.7 million available for debt service toward the town’s purchase of Liberty’s system.
Those additional resources, over and above those that are required for debt service, could in fact be used to do additional capital improvement projects — it was determined those were needed — or lower rates. Immediately, Puckett said.
Not in 30 years. Not in year two, three or five. But immediately upon completion of the acquisition process.
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According to the report, though, there is
no sound basis in accounting or economics to support the expectation of real benefits to ratepayers, in the form of lower bills, from the elimination of these sources.
Specifically, the report examined an acquisition in Montara, a community located south of San Francisco. In the early 2000s, the Montara Water and Sanitary District, with voter approval, issued $17.5 million in 25-year general obligation bonds to acquire — and finance improvements to — its system.
Repayment is funded by property taxes levied on residents, the report said.
In the lead-up to acquisition, according to the report, several MWSD Board members
claimed that by not paying said profits or taxes, the utility would be able to ‘reduce water rates or use excess revenues to pay down the bond debt,’ or ‘use the same money to improve the system.’
But research found that the cost of the takeover was
higher than expected, municipal ownership
did not result in lower rates or produce excess revenues and
water bills today are higher than MWSD projected.
Still, during the special meeting, Puckett called the $10.7 million a conservative estimate and said it would pay for approximately $9.7 million per year in debt service only if Liberty’s system is purchased for $150 million, an amount the town does not plan to pay.
We expect that, ultimately, the value would be much closer to the value assigned to the system in Missoula, Montana, Puckett said,
and the value of the Mountain Water System (there) was $88.7 million.
Therefore, the debt service, according to Puckett would be lower than $9.7 million per year.
The Daily Press is awaiting the town’s response to additional questions and plans to discuss the report’s analysis of Missoula’s successful acquisition in a subsequent article.
Source: Matthew Cabe, Daily Press