The economic consequences of the Town of Apple Valley’s attempt to condemn Liberty Utilities Apple Valley (April 27, 2017)

By Dr. Rodney T. Smith, Ph.D.

[I]f the Town condemns Liberty Utilities Apple Valley by eminent domain, higher water rates for Town residents are a virtual certainty for decades to come. If the goal of acquiring Liberty Utilities Apple Valley is to charge lower water rates, then the effort should be abandoned because that goal is not a feasible outcome.

Given these facts, the Town of Apple Valley condemnation of Liberty Utilities Apple Valley faces significant economic risks.

For the period 2005 through 2015, company funded capital expenditures in Liberty Utilities Apple Valley exceeded Liberty Utilities Apple Valley net income in all but two years. Company funded capital expenditures exceeded Liberty Utilities Apple Valley cumulative net income from 2005-2015 by $14.4 million. In other words, Liberty Utilities Apple Valley reinvested all of its net income plus an additional $14.4 million to fund CPUC-approved capital expenditures.

In the end, Town ownership is more expensive than Liberty Utilities Apple Valley ownership under all scenarios.

The experiences of government-owned systems, such as Los Angeles and San Diego, suggest that government ownership is a recipe for deferred maintenance that ultimately translates into deteriorating service and substantially higher costs to address problems that had been kicked down the road due to poor asset management and planning.

Liberty Utilities Apple Valley, Park Water and Liberty Utilities have senior management and staff who are focused full-time on running municipal water systems. Therefore, the individuals responsible for Liberty Utilities Apple Valley have internal resources at their command. Senior management is accountable to the company’s Board of Directors and shareholders. The Board is selected by shareholders for the purpose of monitoring the management of municipal water systems. Moreover, the CPUC approves all the company’s activities, including rate-setting and capital improvement.

Town ownership places the water system under control of the Town Council. Council members have a broader plate of issues than simply water systems. Inevitably, individuals chosen on a broad range of issues will lack the same depth of intellectual capital in water than those chosen solely for water issues.

From a financial perspective, the Town of Apply Valley pursuit of the Apple Valley Ranchos Water Company is difficult to justify.

From an operational standpoint, there appears to be no justification for the takeover.

[T]he experience of successful contested municipal takeovers of water systems is informative. Actual water rates after takeovers are substantially higher than projected by takeover proponents.

From a consumer’s perspective, the Town’s takeover will have one primary impact: Higher monthly water bills.

For a community hard hit by the 2008 economic downturn, saddling residents with higher and more variable water rates and higher development costs is not the recipe for a community’s economic sustainability.

Dr. Rodney T. Smith specializes in the economics, finance, and public policy of water resources. He was a Professor of Economics at Claremont McKenna College for 15 years, Director of the Lowe Institute of Political Economy, and a member of the editorial board of Economic Inquiry, the professional economics research journal of the Western Economics Association. Dr. Smith has authored two books, Troubled Waters: Financing Water in the West, and Trading Water: A Legal Framework for Water Marketing, sponsored by the Ford Foundation through grants to the Council of Governors' Policy Advisors. He was also the John M. Olin Visiting Professor of Law and Economics at Columbia Law School, and a visiting assistant Professor of Economics at the Graduate School of Business, University of Chicago, where he served as the Associate Director of the Center for the Study of the Economy and the State. Dr. Smith received his Ph.D. in Economics from the University of Chicago and a B.A. in Economics from the University of California at Los Angeles. He is currently President of Stratecon Inc, an economics and consulting firm specializing in water resources (