Tentative Decision May 7, 2021

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SUPERIOR COURT OF CALIFORNIA
COUNTY OF SAN BERNARDINO, San Bernardino DISTRICT

TOWN OF APPLE VALLEY, a municipal corporation,

Plaintiff,

vs.

APPLE VALLEY RANCHOS WATER COMPANY, a California corporation; DOES 1-100; AND ALL PERSONS UNKNOWN CLAIMING AN INTEREST IN THE PROPERTY,

Defendants.

 

Case No.: CIVDS1600180

TENTATIVE STATEMENT OF DECISION

This matter came before the court for a lengthy 67-day bench trial. Upon the conclusion of the trial, the parties engaged in an extensive post-trial briefing schedule and ultimately closing oral arguments. The matter was taken under submission. The court now renders its Tentative Statement of Decision which will be deemed to be the Final Statement of Decision unless a specific and timely request for a formal and Final Statement of Decision is requested by the parties pursuant to the Code of Civil Procedure.

THE DISPUTE

This is a right to take proceeding under California’s Eminent Domain Law. In this case, the Town of Apple Valley seeks to acquire the Apple Valley Water System, owned and operated by Liberty Utilities (Apple Valley Ranchos Water) Corp., an investor-owned water utility, and includes the assets used by Liberty to deliver water to subscribers in the Apple Valley service area and to use those assets to operate a water system owned by the Town in the same service area. Liberty objects to the Town’s right to take its water system by eminent domain.

In this condemnation endeavor, while the court does understand and appreciate

the motivation and aspirational goals of the Town generally, for more local control of its water delivery system and corresponding rate structure, the court also recognizes that its ultimate decision must be tethered to the applicable statutory scheme relevant to this condemnation proceeding — to this end the court’s analysis follows.

General Overview of Town’s Action

Defendant Liberty is an investor-owned, PUC-regulated water utility that is the sole provider of water to subscribers (or service connections) within the Town as well as subscribers outside the Town itself. The subscribers or customers include, but are not limited to, residences, businesses, institutions, churches, other organizations, and governmental agencies.

The Town has initiated this legal action to take by eminent domain the assets owned by Liberty that are used to provide water to the Town and some areas outside its borders. The assets the Town seeks to acquire from Liberty include such things as water wells, water rights, reservoirs, tanks, pumps, underground pipelines, other infrastructure, real property, and systems used to deliver water.

If the Town is successful in acquiring the Liberty water assets it intends to use the assets to operate a municipally-owned water system to sell water from the same sources and infrastructure to subscribers in the same service area. The Town itself does not have any experience in operating a water system and would initially seek to hire the same Liberty employees to continue to operate the system assuming such employees would be willing to stay on with a new owner which at best is uncertain and speculative at this time.

THE PROJECT
General Overview of Legal Arguments

The Town filed this eminent domain action against Liberty on January 7, 2016, to obtain the company’s water supply and distribution system (“Assets”) within the boundaries of the Town and County of San Bernardino.

In Liberty’s post-trial brief, it asserts it has met its burden of rebutting the applicable presumptions to three of the four required findings, the three being:

  1. The public interest and necessity do not require the Town’s project (Code of Civil Procedure, section 1240.030, subd. (a)).
  2. The Town’s project is not planned in the manner most consistent with the greatest public good and least private inquiry (Code of Civil Procedure, section 1240.030, subd. (G)); and
  3. The Town’s proposed use is not a more necessary use than continued use of the system by Liberty (Code of Civil Procedure, section 1240.650, subds. (a) and (c). In order to frame these issues, Liberty asserts that the “project” to be evaluated is that as set forth in the Resolutions of Necessity. Contrary to Town’s argument, it does not appear Liberty is asserting there is no right to take because the Town has not defined the “project.” Instead, Liberty is arguing that under City of Stockton v. Marina Towers LLC (2009) 171 Cal. App. 4th 93 (Marina Towers), the “project” is defined as that set forth in the Resolutions of Necessity. Liberty argues that with this limitation, the Town cannot rely on post-resolution asserted needs to upgrade or construct improvements as reasons for its taking. Liberty appears to be correct that the court is to consider the project as contained in the project description at the time the Resolutions of Necessity were approved.

In Resolutions of Necessity no. 2015-43 and no. 2015-44 the Town stated the proposed public project is “for the public ownership, operation, and maintenance of the Apple Valley Water System to provide water service to the public.”

In its complaint, the Town alleges that it seeks to acquire Liberty’s water supply and distribution system (water system”). (compl. Section 6) “The Town’s proposed public project is the public ownership, operation, and maintenance of the water system to provide water service to the public. (“the project”). (Ibid.)

The Town alleges it began exploring acquisition in response to a number of factors including but not limited to such things as public concern about escalating water rates and the lack of local control and decision making over water rates, service and expenditures although curiously, at trial, the Town’s own evidence acknowledged it was unlikely water rates would be reduced even if the taking was successful.

In any case, it appears the relevancy of Marina Towers to this case is that the proposed project is considered in terms of that set forth in the Resolutions of Necessity because it is in that context findings of necessity are made and objections to the right to take are evaluated (Marina Towers, supra, 171 Cal. App. 4th pp 108-109, k113). Post-resolution events cannot be used to support the required findings of necessity. (Id. at pp 113-114).

Again, as noted, the Resolutions of Necessity here set forth that the project is “the public ownership, operation, and maintenance of the Apple Valley Water System to provide water service to the public.” Additional evidence that the project only proposed to take over the existing water system without changes in or expansion of existing use is found in this court’s acceptance of the Town’s argument under CEQA, the Class 1 Existing Facilities exemption applied. Even though the Town had completed an Environmental Impact Report (“EIR”) for its taking, in the face of Liberty’s challenge to the EIR, the Town argued that the Class 1 exemption applied. This court accepted the Town’s argument that it only proposes taking over the existing operations and is not proposing any expansions of use or facilities. (Apple Valley Rancho’s Water Co. v. Town of Apple Valley, Case No. CIVDS1517935, Ruling on Writ Petition, filed Feb. 9, 2018, pp. 16:4-17; 4, 21:6-25:15 (hereinafter Ruling).) [1] In the ruling, this court discussed that the Amended Initial Study and the final EIR described the project as “only to acquire and operate the existing system,” and not “proposing changes or expansion to the physical AVR system or to the associated water rights,” nor was Town “proposing any changes to the manner of operation of the AVR System or the exercise of the associated water rights.” [2] (Id. at p. 21: 18-12)

While Liberty discusses the doctrine of judicial estoppel in its post-trial brief, it really may be unnecessary for the court to make a formal finding that judicial estoppel applies. Instead, in considering the scope of the project and Liberty’s objections to the right to take, the project is treated as that described in the Resolutions of Necessity and CEQA documents which is the acquisition and operation of an existing water system without any proposed changes or expansions to the physical water system or manner of operation. Liberty makes this point by its citation to Marina Towers to preclude consideration of post-resolution improvements or deficiencies in the system to the extent the Town asserts such exist and is the reason the required findings are supported. According to Liberty it is in this framework that the evidence directed to the three findings at issue must be viewed; (the three being: 1) the public interest and necessity do not require the project; 2) the project is not planned in a manner most consistent with the greatest public good and least private inquiry; and 3) the Town’s proposed use is not a more necessary use than the use to which the property already has been appropriated.) [3]

The Town cites the City of Oakland v. Oakland Raiders (1982) 32 Cal. 3d 60, 69, in support of its contention that “public use “is” a use which concerns the whole community or promotes the general interest in its relation to any legitimate object of government.” [Citation]” But there is no dispute that the operation of the project as a water utility is a public use, the issue is Liberty’s objections to the Town’s findings.

The Town argues that “operation and maintenance” is part of the project and the FEIR contemplated future improvements and upgrades (Town’s Post Trial Brief p. 25:17-25 and fn.8). But the Town acknowledges the FEIR stated no improvements are proposed as part of this project. (Id. At p. 25, fn.8) In partially quoting the FEIR the Town leaves out that it also acknowledged that any improvements would exist regardless of who owns the system. The FEIR stated:

Although none are proposed as part of this Project nor are any specific improvements reasonably foreseeable at this time, the AVR System and O&M facility may require construction improvements and upgrades at an unknown future date. Such upgrades may include pipeline replacements, building improvements, or other activities. The need for these types of future projects would remain the same as those currently required for the AVR system, regardless of who owns the system. Therefore, there would be little to no change to the physical environmental setting in terms of the needs of the system and supporting facilities. Moreover, any future upgrades of the system or facilities are not conditions caused by the Project but would exist, regardless of the ownership. Finally, any such improvements would be subject to CEQA and would comply with any associated environmental review and documentation requirements. Therefore, these types of future improvements are not considered in this analysis.

In light of the above, no improvements were contemplated as part of the project. Therefore testimony regarding such improvements should not be considered as part of the project or to the extent such evidence is offered by the Town in support of the required findings. In its post-trial brief, the Town argues that expert testimony of system problems and deficiencies are offered in response to Liberty’s case in chief. The Town argues the testimony demonstrated serious major problems not being addressed or disclosed to the Town or public. (Town’s Post-Trial Brief, p. 26:4-23.) But the Town’s argument concedes improvements were not considered as part of the taking and were not taken into account in approving the Resolutions of Necessity. To the extent any such evidence by the Town is considered, it would seem it could only come in for the limited purpose of responding to Liberty’s evidence directed to rebutting the presumptions. Also, the evidence would seem to be irrelevant to the Town’s right to take because the newly asserted required post-resolution improvements to the system were not part of the project.

Against this background and overview of the “Project,” the court in this statement, will more specifically address the issues to be decided and to apply the statutory requirements for eminent domain to the circumstances of this case as follows:

I. OVERVIEW OF THE ISSUES TO BE DECIDED AND THE APPLICABLE STANDARD OF PROOF.

Under the applicable eminent domain statutes, the Court must decide four issues to determine whether the Town is permitted to take the water system:

First. Do the public interest and necessity require the Town’s Project? (Code Civ. Proc. §1240.030(a).)

Second. Is the Town’s Project planned in the manner that will be most compatible with the greatest public good and the least private injury? (Code Civ. Proc. §1240.030(b).)

Third. Is the property sought to be acquired by the Town necessary for the Town’s Project? (Code Civ. Proc. §1240.030(c).)

Fourth. Is the use for which the Town seeks to take Liberty’s property a more necessary public use than the use to which Liberty’s property is presently devoted? (Code Civ. Proc. §1240.610.)

In its Opening Post-Trial Brief, Liberty stated that it does not contest the third item; only the first, second, and fourth issues are contested. Liberty challenges the first and second issues by objections under Code Civ. Proc. §§1250.370(b) and (c), and it challenges the fourth issue by objection under Code Civ. Proc. §1250.360(f).

The Court previously considered the parties’ arguments and laid out the legal framework applicable to this right-to-take trial in the Court’s “Ruling on Motion Re: Standard of Review” filed on October 31, 2018 (“October 31, 2018 Ruling”). On the three public necessity elements that must be established under Section 1240.030, the presumption in Code Civ. Proc. §1245.250(a) usually applies:

Except as otherwise provided by statute, a resolution of necessity adopted by the governing body of the public entity pursuant to this article conclusively establishes the matters referred to in Section 1240.030.

On the “more necessary public use” question, the presumption in Code Civ. Proc. §1240.650(a) usually applies:

Where property has been appropriated to public use by any person other than a public entity, the use thereof by a public entity for the same use or any other public use is a more necessary use than the use to which such property has already been appropriated.

However, these ordinary presumptions do not apply in this case. Senate Bill 1757, which was signed into law by Governor Pete Wilson on September 21, 1992, amended the prior versions of both Section 1245.250 and Section 1240.650. SB 1757 changed the law by granting the owner of “electric, gas or water public utility property” (Code Civ. Proc. §1235.193) the right to rebut the presumptions that formerly were “conclusively established” in favor of the public entity. Here, Liberty’s property is “water public utility property” because it is appropriated to a public use by a water corporation as defined in Pub. Util. Code §241. [4]

As amended by the 1992 legislation, Code Civ. Proc. §1245.250(b) now provides:

(b) If the taking is by a local public entity … and the property is electric, gas, or water public utility property, the resolution of necessity creates a rebuttable presumption that the matters referred to in Section 1240.030 are true. This presumption is a presumption affecting the burden of proof. (Emphasis added.)

And, as amended by the 1992 legislation, Code Civ. Proc. §1240.650(c) now provides:

(c) Where property which has been appropriated to a public use is electric, gas, or water public utility property which the public entity intends to put to the same use, the presumption of a more necessary use established by subdivision (a) is a rebuttable presumption affecting the burden of proof unless the acquiring public entity is a sanitary district exercising the powers of a county water district pursuant to Section 6512.7 of the Health and Safety Code. (Emphasis added.)

As the Court previously explained in its October 31, 2018 Ruling:

As a result of the 1992 amendments to sections 1240.650 and 1245.250, in an eminent domain proceeding initiated by a public entity to obtain a public utility from a non-public utility, such as here, the conclusion that the use by a public entity is a more necessary use is rebuttable. Similarly, the resolution of necessity creates a rebuttable presumption that the three necessity elements of section 1240.030 are true. (See October 31, 2018 Ruling, at p. 7:18-22.)

The Enrolled Bill Report from the Governor’s Office of Planning and Research for SB 1757, issued on September 1, 1992, explains the context in which the bill was being considered:

The purpose of eminent domain takings is to allow government to seize private property for a future use that is in the best interest of the community as a whole. For example, a typical eminent domain procedure would involve the taking of private homes to allow development of a new freeway. However, under current law, local governments may seize private utility properties by eminent domain authority and use those properties for the same use as their current use. This office believes there is a clear difference between taking property because the community needs it for a more important use, and taking property because the local government wants it under its own management.


Generally, this office does not support legislation that could add more litigation to an already ridiculously litigious society. However, we believe this bill’s protection of private property rights would outweigh the potential adverse impact of any increase in court actions.

The reality of this bill is that it would strengthen private utilities’ hand in negotiating, and probably dissuade some public acquisitions. This office believes that would be a good thing. The private sector can provide utility services more efficiently than the public sector. The whole world round, utilities are being privatized. California should not be marching in the opposite direction. (Enrolled Bill Report, SB 1757, pp. 4-5 [Liberty’s July 13, 2018 Request for Judicial Notice, Exhibit 2].) [5]

Enrolled Bill Reports, which are prepared by a responsible agency contemporaneous with passage and before signing of a bill, are instructive on matters of legislative intent. Eisner v. Uveges, 34 Cal. 4th 915, 934 n. 19 (2004) The Enrolled Bill Report for SB 1757 notes the position of the California Water Association, the bill’s sponsor:

[W]hile some condemnations involve utilities which have fallen into disrepair or which fail to meet health and safety standards, other condemnations involve healthy, responsive utilities which provide excellent service to their ratepayer at the lowest possible rate. In such cases, CWA contends that a public entity might just desire to take a utility because of the potential income it may generate … [¶] [M]aking the presumption of a public necessity and a more necessary use rebuttable would allow reasonable challenges to condemnation that may be in the best interest of the ratepayer. (Enrolled Bill Report, SB 1757, p. 3, internal quotation marks omitted [Liberty’s July 13, 2018, Request for Judicial Notice, Exhibit 2].)

This legislative history indicates that the quality of service and the health and safety record of the targeted utility are factors that should be taken into account in assessing whether the proposed condemnation is in the public interest.

The 1992 legislation made the issues of necessity Judicial issues to be decided by the Court after trial — not issues decided legislatively by the Town when it adopted the Resolutions of Necessity. See October 31, 2018 Ruling, at pp. 15:25-16:4. As the Court explained in its October 31, 2018 Ruling:

The issue regarding litigation of Liberty’s objections under sections 1250.370 and 1250.360, subdivision (f), as they relate to the rebuttable presumptions applicable to public utilities, is not a question of the standard of review as the Town asserts. Instead, it is an issue of the burden of proof. With respect to such objections, Liberty bears the burden of demonstrating the nonexistence of such presumed facts by a preponderance of the evidence. If Liberty cannot make such a showing by a preponderance of the evidence, the presumed facts continue to exist. (See October 31, 2018 Ruling, at p. 15:18-24.)

The rebuttable presumptions in Sections 1245.250(b) and 1240.650(c) are presumptions affecting the burden of proof. Thus, under Evid. Code §606, at trial, Liberty had the burden to show, by a preponderance of the evidence, the nonexistence of: (1) one or more of the public necessity elements in Section 1240.030; or (2) the more necessary public use element under Section 1240.650(c). If the preponderance of the evidence at trial disproved any of these prerequisites to condemnation — whether it be either of the two public necessity elements contested here, or the more necessary public use element — the Town’s eminent domain action must be dismissed. See Code Civ. Proc. §1260.120(c).

By adopting SB 1757 in 1992, the Legislature made the policy decision that objections to attempted condemnations of utility property are to be treated differently than those same objections would be treated where non-utility property is involved.

More specifically, the owners of utility property have been given greater rights than the owners of non-utility property to challenge eminent domain actions. “SB 1757 would allow private utilities to argue the necessity of certain eminent domain takings in court.” (Enrolled Bill Report, SB 1757, p. 3 [Liberty’s July 13, 2018 Request for Judicial Notice, Exhibit 2].) Having granted these greater rights to owners of public utility property, it is evident the Legislature intended that at least some legal challenges to utility takings made possible by SB 1757 will deserve to be sustained; otherwise, the legislation would be without purpose. As addressed further below, if generic concepts such as “local control” or a municipality’s interest in “controlling its water future” or satisfying its “vision statement” were enough to defeat the objections, the 1992 legislation would be rendered meaningless — because such generic arguments could always be asserted by every public entity that sought to acquire utility property by eminent domain. It follows that the issue of whether the statutory presumptions have been rebutted is more properly focused on specific attributes of the particular targeted utility. In this manner, courts can carry out the legislative policy behind SB 1757 by separating out those utilities whose condemnations would be in the public interest from those whose condemnations would not be. [6]

By a preponderance of the evidence introduced at trial and reviewed below, Liberty disproved that (1) the public interest and necessity require the Town’s Project (Code Civ. Proc. §1240.030(a)); (2) the Town’s Project is planned in the manner that will be most compatible with the greatest public good and the least private injury (Code Civ. Proc. §1240.030(b)); and (3) the use for which the Town seeks to take Liberty’s property is a more necessary public use than the use to which Liberty’s property is presently devoted (Code Civ. Proc. §1240.610).

II. THE TOWN’S “PROJECT” IS ESSENTIAL TO THE ISSUES THE COURT MUST DECIDE.

A. In Order to Determine The Public Necessity Elements, A Clear Statement of What Constitutes “the Project” is Essential.

The three requirements imposed by Code Civ. Proc. §1240.030 are commonly referred to as “the public necessity elements.” SFPP, LP. v. The Burlington Northern & Santa Fe Railway Co., 121 Cal. App. 4th 452, 468 (2004). Each of the public necessity elements specifically uses the term “the Project.” Consequently, in order for the Court to determine whether these elements have been rebutted by the evidence, the Town must clearly and unequivocally state and define its “Project.”

The Court in City of Stockton v. Marina Towers LLC, 171 Cal. App. 4th 93 (2009) explained why a proper description of “the Project” is so critical in an eminent domain case:

There are many reasons why a failure to identify sufficiently the proposed project in a resolution of necessity must have fatal consequences to a public entity’s right to take. First … [i]t is both a physical and legal impossibility for legislators to make a determination that public interest and necessity require “the project,” that “the project” is located or planned in a manner consistent with the greatest public good and least private injury, and that the property sought to be acquired is necessary for “the project” (§1240.030, subds. (a)-(c)) if the resolution contains no intelligible description of what the project is.

Second, our case law recognizes that compliance with CEQA is mandatory before a public entity may condemn property for a proposed project. Thus, if the public entity fails to prepare a valid EIR or negative declaration for the proposed project prior to condemning the property, the trial court is authorized to dismiss the action …

Third, identification of the project is an integral component of the property owner’s right to procedural due process. A governing body of a public entity may not adopt a resolution of necessity until it has given the owner proper notice and an opportunity to be heard on all matters that are the subject of the resolution of necessity … If the governing body does not have before it a definable project for which the property is sought to be taken, any discussion of the pros and cons of the condemnation would be an empty gesture and the necessity findings rendered at the conclusion of the hearing would be devoid of real meaning.

Fourth, and finally, an adequate project description is essential to enable judicial resolution of several right-to-take defenses authorized by eminent domain law.

Marina Towers, 171 Cal. App. 4th at 108-109, citations omitted.

The Town argues that Marina Towers has no bearing here, but it misconstrues the applicability of the decision. Liberty has not argued that the Town’s acquisition “is not a project” or that “the Town has no project,” as the Town asserts in its post-trial brief. (Town’s Brief, pp. 20, 24.) Liberty relies on Marina Towers for a simpler point — that “the Project” proposed by the Town is established by its Resolutions of Necessity. This does not mean that all post-resolution of necessity conduct is “irrelevant,” as the Town suggests. (Town’s Brief, p. 95.) What it means is that “the Project” cannot be a moving target; Liberty’s due process rights would be violated if it were. The Court agrees that Marina Towers establishes these important points and the rationale for why “the Project” is critical to evaluating Liberty’s objections.

B. The Town’s “Project” Here Is To Acquire The Water System and Make No Changes To It Or To Its Manner of Operation.

Here, the Town adopted two Resolutions of Necessity on November 17, 2015. Resolution No. 2015-43 addressed those portions of the water system located within the Town’s boundaries (Exhibit 3651-1), and Resolution No. 2015-44 addressed those portions of the water system that were located outside of the Town’s boundaries (Exhibit 3652-1). The Town’s adopted Resolutions of Necessity define “the Project” as “the public ownership, operation, and maintenance of the Apple Valley Water System to provide water service to the public.” (Exhibit 3651-1; Exhibit 3652-1, emphasis added.)

When the Town adopted its Resolutions of Necessity on November 17, 2015, it also (1) referenced its certified Environmental Impact Report; and (2) incorporated its Staff Report regarding the Resolutions. (Exhibit 3651-1, §§1, 2; Exhibit 3652-1, §§1, 2.)

The Town’s certified EIR recognized repeatedly that “[t]he Town is proposing only to acquire and operate the existing system, and is not proposing changes or expansion to the physical [Water] System or to the associated water rights, nor is the Town proposing any changes to the manner of operation of the [Water] System or the exercise of the associated water rights. (Exhibit 165-42. emphasis added; see also Exhibit 165-8 to 165-9, 165-14, 165-261, 165-301, 165-307.)

The Town’s Staff Report (incorporated into its Resolutions of Necessity) also defined “the Project” as “public ownership, operation, and maintenance of the Apple Valley Water System to provide water service to the public.” (Exhibit 891-2, emphasis added.) The incorporated Staff Report further provides: “The Project as described in the Resolutions of Necessity is consistent with the Project as described in the Final “Environmental Impact Report.” (Exhibit 891-6.)

And finally, the Town’s Complaint in this action filed on January 7, 2016, likewise describes “the Project” as:

The Town’s proposed public project is the public ownership, operation, and maintenance of the Water System to provide water service to the public (“the Project”). (Complaint In Eminent Domain, ¶ 6; emphasis added).

The testimony from Town employees at trial was consistent with these documents. Town Manager Doug Robertson testified that the Town has no current plan to make any changes to the water system. (11/4/19 Robertson 109:19-22.) As Mr. Robertson told the Town Council on July 23, 2019: “We don’t have any beef with any of the employees of Liberty Utilities, and we hope to simply bring them on, change the logo on the door of their truck, change the logo on their polo shirt and have ‘em keep right on working.” (Exhibit 159-1.) Assistant Town Manager Lori Lamson testified that there are no proposals to expand or modify operations in any substantial way. (2/13/20 Lamson 27:2-16.) And the Town’s Interim Public Works Manager Michael Molinari agreed that “the plan is to have the same employees pumping the same water from the same sources and delivering that same water through the same distribution pipes to the same customers.” (10/24/19 Molinari 101:15-25.)

C. The Town’s Right to Take Must Be Decided Based on the Town’s Project, Not Subsequent Attempts to Modify the Project.

At trial, the Town introduced extensive expert testimony by Craig Close about the condition of the water system. Mr. Close inspected the system over Labor Day weekend 2019 (Exhibit 4334-8) — less than two months before the start of trial — and presented a series of “inspection reports” and testimony highly critical of the water system. By way of example, according to Mr. Close, the Bell Mountain Tank is “in poor/severe condition” and needs to be rehabilitated or replaced (Exhibit 3871-2); Wells 17R, 34, and 25 are all in “poor condition” and should be replaced (Exhibit 3899-3; Exhibit 3916-3; Exhibit 3908-3); and the Jess Ranch Booster Station is also in “extremely poor condition and needs to be replaced” (Exhibit 3880-4). Mr. Close also showed a multitude of photographs of peeling paint and criticized the appearance of several components of the water system.

Mr. Close’s opinions regarding supposed defects or shortcomings in the system are diametrically opposed to the Town’s Project as reviewed above — to acquire the water system and make no changes to it. Not only was Mr. Close’s testimony inconsistent with the Town’s Project, he also made no effort to determine how much it would cost the Town to make any of the changes he opined were needed. (6/22/20 Close 86:19-22.) Likewise, the Town’s financial expert, Shawn Koorn, did not include any earmarked costs to repair any of the system changes Mr. Close recommended. (6/30/20 Koorn 89:4-7, 90:14-18.)

The Town argues that Mr. Close’s testimony may be considered to rebut Liberty’s evidence that the system is well-run operationally. (Town’s Brief, at p. 26.) The Court agrees and has considered Mr. Close’s testimony for this purpose. However, Mr. Close’s myriad criticisms of the water system cannot be used to affirmatively support the Town’s right to take the system because the Town’s Project does not include any changes to the system or its operation, and the Town cannot modify its Project based on Mr. Close’s eve-of-trial system inspection. The Town could have undertaken a thorough inspection of the Apple Valley Water System and compiled a list of any system changes it believed were needed before it filed this action. The Eminent Domain Law includes extensive procedures for a condemnor like the Town to “enter upon property to make photographs, studies, surveys, examinations, tests, soundings, borings, samplings, or appraisals or to engage in similar activities” before filing an eminent domain lawsuit. See Code Civ. Proc. §§1245.010 et seq. [7] The Town did retain an engineering consulting firm before it adopted its Resolutions of Necessity in November 2015. (Exhibit 891-5.) Everything Mr. Close did over Labor Day weekend 2019 could have been done by the Town before it filed its Complaint more than three years earlier. Then, if it chose to, the Town could have included the repair of any alleged system deficiencies in its “Project” and analyzed them in its EIR. Having eschewed that opportunity, the Town cannot engage in a post-hoc attempt to change its Project.

The Town also cannot justify its right to take the system based on the possibility of a future plan to modify the system or its operations. That stratagem was attempted and rejected in Marina Towers. There, the Court held it was incumbent upon the City to define its project, and “[t]o define is to limit, and that which is left unlimited, and is to be determined only by such future action as the [c]ity may hereafter decide upon, is not defined.” Marina Towers, 171 Cal.App.4th at 112 (emphasis added; quoting Cincinnati v. Vester, 281 U.S. 439 (1930)). What is at issue in this case is the Project now proposed by the Town, not some other unknown Project that the Town may or may not seek to pursue at some point in the future.

III. LIBERTY HAS REBUTTED THE PRESUMPTIONS THAT THE PUBLIC INTEREST AND NECESSITY REQUIRE THE PROJECT AND THAT THE PROJECT IS A MORE NECESSARY PUBLIC USE OF LIBERTY’S PROPERTY.

Most of the evidence introduced at trial applies to multiple prongs of the three legal issues to be decided by the Court. The Court begins by considering together the rebuttable presumptions under Code Civ. Proc. §§1240.030(a) and 1240.650(c).

Code Civ. Proc. §1240.030(a) states that the power of eminent domain may be exercised only if it is established that “[t]he public interest and necessity require the project.” As noted in the Legislative Committee Comment to Section 1240.030, “public interest and necessity” is an exceedingly broad concept: “‘Public interest and necessity include all aspects of the public good including but not limited to social, economic, environmental, and esthetic considerations.” Notably, the statutory language doesn’t say that the public interest and necessity may support the Project, or allow for the Project, or even favor the Project — the public interest and necessity must require the Project.

Code Civ. Proc. §1240.650(c) creates a rebuttable presumption that water public utility property that a public entity intends to put to the same use as a private owner is a “more necessary” public use than the private owner’s use of the property. The determination of “more necessary public use” presumes that the future operation of the system by both the Town and Liberty can be deemed “necessary” — and then requires the Court to balance the necessity of each to determine which one is more necessary. [8] This legal standard is a lesser one than that which applies under Section 1240.030(a); while Section 1240.030(a) requires the Project to be necessary, Section 1240.650(c) presumes the Town’s Project is necessary, and balances that necessity against the necessity of continued operation by Liberty to determine which scenario is more necessary. If the two are found to be equally necessary, the requirement of Section 1240.650 is not satisfied and the power of eminent domain may not be exercised by the Town. Code Civ. Proc. §1240.610.

Liberty objects to the Town’s right to take Liberty’s property under Code Civ. Proc. §1250.370(b) — asserting that “[t]he public interest and necessity do not require the proposed project.” (Emphasis added.) Liberty further objects to the Town’s right to take under Code Civ. Proc. §1250.360(f) — asserting that the Town’s Project “does not satisfy the requirements” for “condemnation for more necessary public use.”

The Court sustains Liberty’s objections. The preponderant evidence at trial shows that the public interest and necessity do not “require” the Town’s Project — i.e., the acquisition and operation of the Apple Valley Water System, with no changes to it. The nonexistence of the first public necessity element is demonstrated by evidence in three broad areas: (1) Liberty has operated a safe and reliable water system, while the Town has no experience, but only a hope, of doing so; (2) the regulatory oversight provided by the California Public Utilities Commission is more stringent than the oversight that would apply to Town ownership of the system; and (3) there is a substantial risk that the water system will be imperiled and the ratepayers will be harmed if the Town were permitted to take over the system and supplant regulation by the Public Utilities Commission.

The same evidence also demonstrates the nonexistence of the requirement of “more necessary public use.” Because the Town’s Project is not necessary under Section 1240.030(a), it is not “more necessary” under Section 1240.650(c).

Even separately analyzing the evidence as to the “more necessary” use element, Liberty has met its burden of proof by proving that the Town’s operation of the water system is not “more necessary” than continued operation of the system by Liberty. The Town’s plan is “to have the same employees pumping the same water from the same sources and delivering that same water through the same distribution pipes to the same customers.” (10/24/19 Molinari 101:15-25.) Town Manager Robertson testified that he “can’t imagine” that anyone could run the system better than the Liberty employees are currently operating it. (11/4/19 Robertson 110:20-25.) It is not “more necessary” for the Town to try to hire Liberty’s employees and “change the logo on their polo shirts” (Exhibit 159-1) to operate the water system with no contemplated changes.

As addressed further below, much of the evidence offered by the Town on the issues of whether the Project is required by the public interest and necessity, and whether it is a more necessary use of Liberty’s property, seems to be rooted in disagreements with existing law. For example, the Town has advanced a litany of arguments as to why it believes that regulation of Liberty by the Public Utilities Commission is ineffective and lacking; or why CEQA does not (in the Town’s view) adequately apply to actions of an investor-owned utility like Liberty; or why the service duplication law (Pub. Util. Code §1501) that provides certain protections to investor-owned utilities is unfair or improper; or whether the fire flow standards established by Apple Valley Fire Protection District Ordinance 42 are appropriate for the Town. Such legal criticisms of existing law are not a proper basis for justifying the use of eminent domain, which has been described as government’s “most awesome grant of power.” City of Oakland v. Oakland Raiders, 174 Cal. App. 3d 414, 419 (1985). To exercise this awesome power against a private utility which is following the law as written would be unfair, and would certainly not rise to the level of being “required” by the public interest. Properly adopted statutes or regulations represent policy choices by the Legislature or entities created by it. The Town is certainly entitled to have its opinion on the wisdom of the law and advocate for changes to it. But it is a very different matter for the Town to seek to use its disagreement with existing law as a basis for using its power of eminent domain, as it has tried to do here.

A. Liberty Has Operated a Safe and Reliable Water System; Allowing the Town to Acquire It Would Create Substantial Risks to Continued Effective Operations.

1. Liberty Has a Highly Skilled Work Force That Has Operated The System With a Perfect Water Quality Record

Over the past 30 years, the Apple Valley Water System has had zero water quality violations. (11/6/19 Thomas-Keefer 36:16-37:17.) This achievement differs markedly from many of the water systems that serve adjacent communities. (Exhibit 920-8 57; Exhibit 994-1.) The superior record on water quality violations has been accomplished by what appears to be a highly skilled contingent of employees, many of whom have worked on the system for decades. The evidence showed:

  • The system is rated D5, the category that applies only to the largest and most complex water systems in the state, whether publicly or privately owned (11/6/19 Thomas-Keefer 14:23-15:11);
  • 55% of the staff have 10 or more years of experience (Exhibit 993-4); and
  • Four employees hold a D5 certification — the highest distribution certification issued by the State — and 15 employees hold a T2 certification in treatment, the level needed for the system. (Exhibit 203; 11/6/19 Thomas-Keefer 18:1-13; 12/4/19 Lent 101:16-19.)

Town Manager Robertson conceded that he “can’t imagine” that anyone could run the system better than the Liberty employees are currently operating it. (11/4/19 Robertson 110:20-25.) Mr. Robertson was designated in the litigation as the person at the Town “most knowledgeable” about operating the water system. (11/4/19 Robertson 6:4-11.)

Faced with the system’s perfect record on water quality, the Town’s response was to try to suggest that water quality violations are “self-reported,” implying that the record was somehow manipulated or unreliable. (12/4/19 Dalton 73:7-17.) But Jeanne-Marie Bruno explained that water quality samples are given to an independent lab that reports the test results directly to the State’s database, in addition to providing copies to Liberty. The State then advises the water system of violations, not the other way around; and Liberty has no ability to hide or withhold water quality information from the State. (1/15/20 Bruno 73:18-75:3; 1/27/20 Bruno 113:3-8.) An example of an independent laboratory report on the result of water quality tests is Exhibit 548, which includes careful documentation of the chain of custody of the water samples. (1/15/20 Bruno 73:18-74:5, 77:18-78:17; Exhibit 548-9.) The Court rejects the Town’s effort to call into question the water system’s perfect water quality record.

Supplying water to the community is an important matter of public health and safety. Health & Safety Code §116270(d) (when present in drinking water, toxic chemicals “may cause cancer, birth defects, and other chronic diseases”); Federal Safe Drinking Water Act (Pub. Law 104-182, Sec. 3: congressional finding that “safe drinking water is essential to the protection of public health”). In this regard, water is different from other utilities. As the PUC’s statewide Water Action Plan provides: “Water is the only utility that is ingested by consumers; therefore, water quality is vital to the health of consumers.” (Exhibit 270-5.) By proving its perfect record on water quality, Liberty has proven that the Town could not possibly operate the system with a better record on water quality. On the critical issue of water quality, Liberty has proven that the public interest and necessity do not require the Town’s acquisition of the water system, and the acquisition would not be a “more necessary” public use of Liberty’s property.

a. The Town’s Plan for Operating the Water System Presents Potential Risks To Public Health And Safety

The Town tacitly concedes the high quality of the system’s current operations by its “plan” to hire all of Liberty’s current staff to run the system. (1/14/19 Robertson 110:5-9.) But there is a substantial risk that the Town’s plan will not be successful, which creates a consequent risk to public health and safety and the ongoing reliable delivery of water to the system’s customers.

Mr. Molinari, a 14½ year employee in the Town’s Public Works department, acknowledged there is no one at the Town competent to operate a water system, and Mr. Robertson admitted that it is “undetermined” who would run the system if the Town were to acquire it. (10/24/19 Molinari 77:11-15, 88:4-9; 11/5/19 Robertson 9:15-21.) Mr. Close, the Town’s expert, prepared a document that actually listed Liberty’s Greg Miles as “Town Engineer,” but Mr. Miles testified he “would not work for the Town.” (6/23/20 Close 11:5-20; Exhibit 1163-2; 3/3/20 Miles 103:4-14.) And several other key Liberty employees similarly testified they were not interested in working for the Town. (12/5/19 Lent 45:13-47:6; 12/5/19 Garcia 117:10-22; 1/14/20 Phillips 91:10-19; 2/3/20 Vogel 22:9-23.) On the other hand, the Town failed to present evidence of even a single Liberty employee who has expressed a willingness to become an employee of the Town.

The Town suggests that Liberty employees may have stated their intention to not work for the Town only because they feared reprisal from Liberty management if they said otherwise. But the evidence revealed several reasons why they could be reluctant to become Town employees. For example, Liberty employees who elect to join the Town would be required to restart the clock on their retirement benefits. (3/11/20 Busch 78:26-79:3.) Any current Liberty employee who would go to work for the Town would face a new five-year waiting period before they would be eligible for any retirement benefits under PEPRA, the Public Employees Pension Reform Act. (3/11/20 Busch 78:2-79:15.) Older more experienced workers who are closer to retirement would be less likely to accept such a five-year suspension on earning retirement benefits. More broadly, the Town has not investigated how the salaries of Liberty employees compare to the salaries of Town employees. (11/5/19 Robertson 9:12-14.) And the Town presented a proposed “zero-based budget” from its expert Craig Close that indicates that the Town would cut the salary of the average AVR employee by about $25,000. (6/25/20 Close 55:9-13.)

The evidence also established that the Town fails to account for the overall labor force that currently runs the system. Liberty’s Apple Valley organizational chart includes 42 employees who are physically located in Apple Valley. (12/10/19 Sorensen 59:21-26; Exhibit 202.) But there are many other employees located elsewhere (including in Downey and Oakville) who help to run the water system. (12/10/19 Sorensen 60:1-6, 99:3-101:2.) For example, Rick Dalton, the Director of Engineering who has worked on the system for 31 years, is employed by Liberty Park Water and officed in Downey. (11/14/19 Dalton 83:15-84:8.) Mr. Dalton also testified that he would “definitely not” go to work for the Town if it were to take over the water system. (12/4/19 Dalton 12:6-10,) Greg Sorensen, Liberty Apple Valley1s corporate president, explained that Liberty uses a “shared services” model to operate the system, with numerous tasks such as IT, payroll, and human resources performed on a company-wide basis. Other specialized tasks are performed by Liberty Park Water corporate employees like Mr. Dalton who are officed in Downey. (12/10/19 Sorensen 60:25-62:5; Exhibit 484.)

But the Town’s plan for the system only contemplates hiring the employees who are located in Apple Valley. Mr. Robertson testified that the Town will add 40 to 45 employees if it succeeds in acquiring the system (11/5/19 Robertson 40:14-16; 52:14-15.) This is equivalent to just the 42 Apple Valley-based employees and does not include any employees in Downey or Oakville. The Town’s notion that it can simply squeeze the direct work done by non-Apple-Valley-based employees onto the plates of existing Town employees is infeasible.

In July 2019, a few months before the start of trial, the Town unveiled a new Transition Plan suggesting that it might hire an unnamed consulting firm to operate part or all of the system on a contract basis. (Exhibit 156-8.) Even if this 2019 plan could be considered part of the Town’s “Project” that was defined back in 2015 before this action was filed, the 2019 plan would create a substantial risk to ongoing operation of the system. S&P, one of the rating agencies, considers reliance on external consultants to be a “vulnerable” management practice. (Exhibit 735-18.) Moreover, the Apple Valley water system is one of nine Class A regulated water utilities in the State — the Class consisting of the largest and most complex water systems regulated by the PUC. (12/17/19 Jackson 41:2-42:2; Exhibit 284.) No evidence was presented at trial of an outside consulting firm operating such a large water system in California. Outside consulting firms would need to balance services they might provide to the Town with services they would provide to other firm clients. And there is no evidence that outside consultants would be likely to achieve the longevity, water quality, success, and pride of ownership that Liberty’s current workforce has achieved.

In sum, the Court finds that a skilled and experienced workforce has operated the water system in a manner that has protected public health and safety for many decades. Liberty proved that the Town has no in-house capability to run a complex water system, and is banking on the unlikely scenario that it will be able to hire nearly all of Liberty’s Apple Valley employees to continue to run the system successfully. Given the Town’s desire to have the same workforce operate the system and its concession that no one could do a better job running the system, there appears to exist a substantial risk to public health, safety, and the continued reliable delivery of water under the Town’s plan of operation. It does not appear in the public interest to allow the Town to acquire a well-run water system.

b. Liberty Has Operated and Maintained the System Effectively and Efficiently.

Liberty proved that the Apple Valley water system has been operated and maintained both effectively and efficiently. The Town’s proposed acquisition is not “required” by public interest and necessity and would not be a “more necessary” public use than the use to which Liberty’s property is appropriated. The evidence has revealed no substantial problems with the operation or maintenance of the Apple Valley water system.

Water Conservation. The effective operation of the system is demonstrated in part by its ability to meet or exceed critical conservation goals established by the State. Water is a scarce and precious resource which must be conserved. (Exhibit 270-5.) To promote water conservation, beginning in 2009 the PUC adopted tiered conservation rates for the investor-owned utilities it regulates; tiered rates encourage conservation by charging water users more on a per-CCF basis as consumption increases. (1/6/20 Jackson 55:19-56:1; Exhibit 309-27.)

While tiered rates were in place, on January 17, 2014, Governor Brown declared a State of Emergency to exist in California due to severe drought conditions. (Exhibit 913-1). And on April 1, 2015, Governor Brown issued an Executive Order mandating a 25% reduction in water consumption throughout the state. (Exhibit 912.)

In response to the Governor’s mandates, and in conjunction with the PUC, an array of conservation programs designed to reduce water consumption were implemented. (2/3/20 Penna 80:5-84:3, 84:26-86:26; Exhibit 347; Exhibit 349, Exhibit 350). The conservation efforts, in conjunction with tiered rates, were effective; average monthly residential consumption in Apple Valley has decreased significantly since 2009.

The vast majority of Apple Valley’s approximately 20,000 connections are, and always have been, residential customers. (Exhibit 974-1.) Edward Jackson, Liberty’s Director of Rates and Regulatory Affairs, testified that in 2009 the average residential consumption in Apple Valley was 20.0 CCF per month; ten years later, in 2019, it was 11.7 CCF per month — a 41.5% decrease. (1/6/20 Jackson 85:16-88:24; Exhibit 975.)

During Governor Brown’s conservation mandate, from June 2015 through December 2017, Apple Valley conserved more water than did any of the surrounding publicly-owned systems in Victorville, Hesperia, or Adelanto. (2/3/20 Penna 99:16-21 100:6; Exhibit 946-7.)

Water System Revenues. Although residential consumption dropped 41.5% from 2009 to 2019, most of the water system’s costs are fixed, not variable. In other words, a water system operator cannot remove 41.5% of its pipes, or only repair 41.5% of its leaks, or only answer 41.5% of its customer calls, or only do water quality testing on 41.5% of its wells when consumption drops by 41.5%. Variable costs — such as the cost of chemicals to treat water — will drop as consumption drops; but the system’s fixed costs do not diminish when consumption reduces. Critically, the Apple Valley system’s costs are 95% fixed and only 5% variable. (1/9/20 Hanemann 25:2-26:9.)

This combination of factors — substantial conservation and a high percentage of fixed costs — requires that rates on a per-CCF basis must be increased as consumption decreases in order to meet the fixed costs needed to operate the system. [9] Indeed, the Town presented data showing that the system’s revenue per unit of water sold has increased substantially from 2000 to 2018 (although minimally during Liberty’s ownership since 2016). (3/9/20 DeShazo 74:18-75: 11; Exhibit 4284.) But efficient operation of the water system is shown by the fact that the total revenues collected from Apple Valley customers for water service have remained relatively flat over many years — and actually diminished slightly based on inflation-adjusted dollars. (12/11/19 Sorensen 45:17-24; Exhibit 969-1.)

The generally flat revenues from 2012 through 2018 indicate that the water system is being operated efficiently. By contrast, the revenue needed to operate the Town has increased substantially. From 2011 through 2020, the Town’s budgeted general fund revenues increased by 105.5% (Exhibit 867-1.) Focusing on just the period from 2012 to 2018, the Town’s budgeted general fund revenues increased by 34.6% in nominal dollars (from $23.4 million to $31.5 million), while total revenues collected for water service in Apple Valley increased by just 7.3% in nominal dollars. (Exhibit 969-1.)

Water System Expenses. Operating efficiency is also shown by the overall trend in operating expenses for the water system. In nominal dollars, the total operating expenses for the Apple Valley water system decreased from $11,418,458 in 2012 to $11,024,080 in 2018. (Exhibit 969-3.) When the dollars are adjusted for inflation, the decrease is even greater: in 2018 dollars, operating expenses decreased from $12,478,179 in 2012 to $11,024,080 in 2018. (Exhibit 969-3.) Notably, while total operating expenses over that period have decreased, the number of customers (water connections) served has increased. On a per-connection basis, operating expenses have decreased by 12.81% since Liberty acquired the system in January 2016. (Exhibit 970.)

At trial, the Town repeatedly attacked the amount of corporate charges to ratepayers since Liberty acquired the system. (Town’s Brief, at p. 36.) But the overall reduction in per-account operating expenses since Liberty assumed ownership includes all indirect charges (i.e., overhead) and all direct charges allocated to the Apple Valley water system from all other Liberty corporate entities. (12/11/19 Sorensen 55:16-9; 57:12.) In other words, while the source of the expenses may have changed since Liberty acquired the system — based on its shared services model — the total expenses on a per-connection basis have decreased. That shows the economies of scale and efficiencies from Liberty’s shared services model.

Operational Standards. In addition to operating the system efficiently from a financial perspective, Liberty has also operated and maintained the system professionally and appropriately. Liberty complies with the PUC’s General Order 103-A, which sets rules governing the operation, maintenance, design, and construction of water systems. (11/6/19 Thomas-Keefer 55:11-56:3; 1/21/20 Sandoval 63:20-66:5; Exhibit 204.) Liberty proved that:

  • It meets recommended operational standards for evaluating water systems’ operations and management, including system pressure, backflow prevention, water losses, valve exercising and replacement, fire hydrant maintenance and testing, meter maintenance, and energy management. (Exhibit 993-7 to 993-11.)
  • All reported leaks are investigated immediately, on a 24/7 basis. (12/5/19 Lent 38:4-39:8.) Liberty repairs main leaks, which are typically significantly larger than service line leaks, in less than 12 hours on average. (12/5/19 Lent 23:5-24.)
  • The latest technology is used to improve the system’s reliability, efficiency and security. Its top-of-the-line SCADA (Supervisory Control and Data Acquisition) system enables Liberty to monitor the water system remotely, and respond to problems quickly and effectively. (12/3/19 Dalton 34:11-35:22; 1/16/19 Thomas-Keefer 91:16-23; Exhibit 920-96 to 920-99.)
  • The GIS (Geographic Information System) enables the company to map and track all of the water system’s facilities and to catalogue every capital improvement, repair, or maintenance project in a single repository, accessible at any hour to any employee who needs it. (12/5/19 Garcia 83:14-85:21; Exhibit 707-3 to 707-4.) [10]

Water System Safety. The Town contends that Liberty’s water system is “a deficient and unsafe water system,” but the evidence does not support this serious charge. The Town asserts that the system fails to comply with various standards adopted by the American Water Works Association (“AWWA”), yet the evidence clearly established that the AWWA standards are entirely voluntary. (1/17/19 Thomas-Keefer 92:26-93:2; Exhibit 1178-2, Exhibit 4119-2.)

Launching from the AWWA recommendations, the Town argues that “[o]ne of the most concerning safety issues is that the majority of the tanks do not meet AWWA seismic standards.” (Town’s Brief, p. 53.) But Mr. Close performed only a visual inspection of the tanks, and no evidence was presented of any physical, metallurgical, or other professional testing performed to support a showing of safety threats. Mr. Close acknowledged that compliance with the AWWA D100 standard regarding water tanks is entirely voluntary, and that he is not aware of any tanks that fail to comply with any applicable law or regulation. (6/23/20 Close 29:21-30:12, 41:1-11.) While Mr. Close opined that Liberty should retrofit its tanks, he acknowledged that there is no requirement for retrofitting, and he conceded that Liberty has not acted imprudently with respect to its tanks. (6/23/20 Close 30:4-12, 32:2-23.) If Liberty were to retrofit its tanks, it would require a substantial capital investment, which would in turn lead to higher rates than those the Town objects to now. Mr. Dalton testified that all of Liberty’s tanks are already equipped with some sort of earthquake protection (12/2/19 Dalton 22:14-23:8); on balance, the evidence does not support the Town’s charge that Liberty’s water tanks “are potential time bombs waiting to explode.” (Town’s Brief, at p. 53.) [11]

Water System Capacity to Meet Demand. Mr. Close further opined that the Apple Valley system has operated “on [the] edge for a long time” with respect to its ability to meet maximum day demand. (6/25/20 Close 45:24-46:8.) At the same time, Mr. Close conceded that he is not aware of any evidence that the system has ever run dry of water. (6/23/20 Close 79:23-80:22.) Mr. Close testified that he had not seen evidence to substantiate a significant drop in consumption since 2009 (6/23/20 Close 66:20-67:2), but such evidence was in fact abundant. Using Exhibit 513 as an exemplar, Mr. Jackson testified in detail exactly how the annual PUC reports contained all of the data necessary to calculate average monthly consumption for residential customers since 2009 — total annual consumption for both low-income and non-low income residential customers, divided by the total number of residential connections for each year, divided by 12 for the per-month calculation. (1/6/20 Jackson 85:16-88:24; Exhibit 975) Each of the annual reports were received into evidence and were available to Mr. Close to confirm the significant drop in consumption. (Exhibit 3521-57, 3521-95 to 3521- 96 [data for 2009 and 2010]; Exhibit 502-55, 502-96 to 502-97 [data for 2011 and 2012]; Exhibit 504-57, 504-99 to 504-100 [data for 2013 and 2014]; Exhibit 506-55, 506-97 to 506- 97 [data for 2015 and 2016]; Exhibit 513-68, 513-113 to 513-114 [data for 2017 and 2018].)

Mr. Dalton testified that actual maximum day demand for the system in calendar year 2018 was 14.4 million gallons per day (MGD). (12/2/19 Dalton 79:22-25.) The Large Water System 2018 Annual Report for the system filed with the Division of Drinking Water shows the maximum day demand in 2018 was 18,782 CCF on July 27, 2018, which, as Mr. Close conceded, equates to 14.04 MGD. (6/23/20 Close 73:19-75: 15; Exhibit 1186-7.)

Excluding the system’s largest source (as required by 22 CCR §64554(c) [Exhibit 885]), the system’s capacity is 35.4 MGD. (12/2/19 Dalton 60:20-61:6; Exhibit 875-2.) So the capacity, excluding the system1s largest source (35.4 MGD), is slightly more than 2½ times the 2018 maximum day demand of 14.04 MGD.

The applicable regulations require comparing system capacity (again, excluding the largest source) with the highest system demand over the previous 10 years, thereby avoiding short-term aberrations in demand and creating a conservative margin of safety. 22 CCR §64554(b)(l) [Exhibit 885]. Because overall consumption has dropped substantially over the last ten years, the highest annual maximum day demand figure from 2009 through 2018 was ten years ago, in 2009 — 29.5 MGD. (12/2/19 Dalton 56:21-57:5; Exhibit 180-15.) The system’s source capacity excluding its largest source — 35.4 MGD — more than exceeds this. (12/2/19 Dalton 60:20-61:6; Exhibit 875-2.) The system also meets maximum day demand for each pressure zone. (12/2/19 Dalton 57:19-58:5; Exhibit 875-1.) And the system meets Peak Hour Demand over four hours for every pressure zone in the system. (12/2/19 Dalton 61:13-26; Exhibit 875-3.) [12]

It appears Mr. Close’s analysis of system capacity and demand was flawed. He did not know that the 29.5 MGD maximum day demand figure was based on 10-year old data from 2009. (6/23/20 Close 65:14-21, 73:17-18.) He claimed not to have the last 10 years’ data available, although the data for each calendar year could have been obtained from the system’s Division of Drinking Water annual reports, which are public records. (6/23/20 Close 77:13-23; Exhibit 4668-2.) Mr. Close’s supply analysis took two wells out of service, although the applicable regulations call for exclusion of just the largest one. (Exhibit 4295-4 n. 1; Exhibit 885 [22 CCR §64554(c)].) And Mr. Close also incorrectly assumed that water could not be supplied to the Jess Ranch pressure zone from the Main Zone; in fact, Mr. Dalton explained that it can be so transmitted through two separate paths. (Exhibit 4295-4 n. 2; 7/14/20 Dalton 33:7-34:8.) The preponderance of the evidence proved that the water system satisfies the regulatory requirements of meeting Maximum Day Demand and Peak Hour Demand.

Customer Service. The evidence further established that Liberty’s customer service is responsive and effective. The company maintains a 24-hour call center that meets the PUC’s requirement of answering at least 80% of customer calls within 30 seconds. (2/3/20 Vogel 2:18-4:1; Exhibit 204-54; Exhibit 822; Exhibit 823.) Liberty has met or exceeded PUC-set performance requirements for billing accuracy, billing timeliness, scheduling appointments, misapplied payments, and service orders. (2/3/20 Vogel 7:18-13:12; Exhibit 1012.) Customer complaints to the PUC are well below the PUC’s limit of 1/10th of 1% of the number of customers. (12/17/19 Jackson 43:26-46:10; Exhibit 923-219.) Mr. Robertson testified he was not aware of Liberty failing to respond to leaks or other water problems when contacted by Town residents. (1/15/19 Robertson 26:10-13.) Mr. Robertson further conceded he is satisfied with Liberty’s customer service, and that residents should not expect faster responses to phone calls if the Town acquires the system. (1/15/19 Robertson 26:14-21, 106:23-107:4.) The Town introduced testimony by one customer, Joseph Szobonya, who complained that his calls following a water leak were not promptly answered on one day in December 2018. (3/12/20 Szobonya 50:17-51:15.) But Mr. Szobonya also testified this was a one-time occurrence. (3/12/20 Szobonya 87:20-88:12.) Liberty offered evidence proving that it had responded in a timely manner to occurrences at Mr. Szobonya’s residence, had repaired all property damage, and replaced the water main that was the source of the problem. (7/13/20 Lent 36:3-6, 38:22-39:19, 40:7-24.) The testimony of a single witness regarding a single episode does not in the court’s view, call into question the overall customer service Liberty provides to its more than 20,000 customers. The Town’s evidence does not seriously contest that introduced by Liberty, and the preponderance of the evidence establishes that Liberty provides prompt and responsive customer service.

In sum, it appears to the court that Liberty has proven that the Town’s Project is not required in order to remedy ineffective operations or maintenance of the system. The evidence at trial supports Town Manager Robertson’s testimony that he “can’t imagine” that anyone could run the system better than the Liberty employees are currently operating it. (11/4/19 Robertson 110:20-25.) If no one could run the system better, acquisition by the Town would constitute an experiment posing a risk to public health, safety, and the continued effective system operation by a long-term work force. The public interest and necessity do not appear to require taking the water system that Liberty has expertly operated and maintained to see whether the Town can do the same. Nor would it be a “more necessary” public use of Liberty’s property to transfer it to the Town in the hopes the Town will be able to operate the system as effectively as has Liberty.

c. There is a Substantial Risk That the Town Would Fail to Commit the Needed Level of Capital Improvements and Maintenance to the System.

The evidence showed that water systems are extremely capital intensive. The majority of the capital assets in a water system consists of buried pipe, out of sight to customers but constantly degrading. (1/8/20 Hanemann 17:13-20:3; Exhibit 1001-8.) The failure of many water systems to adequately invest in and replace their capital assets is a recognized national infrastructure crisis. (1/16/20 Bruno 2:23-3:13; Exhibit 998-3, 998-10; Exhibit 1001-8 to 1001-10, 1001-17.)

The Apple Valley water system has 470 miles of underground distribution and transmission mains, which are in constant need of maintenance and replacement. (11/6/19 Thomas-Keefer 13:19-21; Exhibit 920-11.) When Park Water acquired the system from Texaco in 1987, 80% of the system’s mains were comprised of old, poor-quality salvaged steel oil surplus pipes. (11/14/19 Dalton 102:25-104:14.) Since 1987, the company has replaced or installed 282.6 miles of water pipes in Apple Valley. (Exhibit 1184-24.)

Taking into account all capital improvements to the system, the company-funded annual expenditures from 2010 through 2018 ranged from $2.5 million to $10 million per year, averaging $6.4 million in inflation-adjusted 2019 dollars. (12/4/19 Dalton 10:11-18; Exhibit 888; Exhibit 423-7.) A significant part of the total capital investment is for pipeline replacement, which has steadily reduced the system’s leak rate by 90%, from nearly 3,200 leaks per year in 1995 to 319 leaks in 2018. (11/14/19 Dalton 110:24-111:6; Exhibit 179.)

The evidence established that the Town has no plans to change Liberty’s history of pipeline replacement or the level of capital improvements to the system. (11/4/19 Robertson 104:22-106:16; Exhibit 165-183.) Thus, it appears the acquisition is not “required” by public interest or necessity in order for the Town to upgrade the system or make needed capital improvements that would not otherwise be made under continued Liberty ownership. Nor is the acquisition a “more necessary” public use on this basis either.

While the Town does not plan to change the level of investment, there is a substantial risk that it will not be able to match the capital expenditure level made under private ownership. The system continues to have a number of pressing engineering needs that require capital investment; and Mr. Dalton expressed concern that the Town, if it were to acquire the system, would not continue to make the appropriate level of investment. (12/4/19 Dalton 10:19-12:5.) Because the Town has not operated a water system, there is no track record of Town capital expenditures on such a system. However, based on the evidence at trial, the Court finds that Liberty proved that Mr. Dalton’s concern is justified.

The evidence demonstrated that owners of nearby municipally-owned water systems have invested far less than Liberty in their systems. From 2012 through 2018, Victorville averaged only $3.1 million per year in capital improvements, while Hesperia averaged a mere $600,000 per year. (Exhibit 427-10.) While this straight dollar comparison may not account for differences between the systems, there is more. Victorville’s Water Master Plan called for $7.5 million in annual capital expenditures between 2010 and 2020, but in fact Victorville spent less than half of that. (1/15/20 Hanemann 14:15-15:20; Exhibit 4176-189.) And between 2008 and 2018, Victorville budgeted a total of $19,228,550 for capital improvements to its water system but actually spent only $4,575,581. (Exhibit 901-2; Exhibit 922-2.) Thus, according to Victorville’s own Water Master Plan and budget documents, the Victorville water system required significantly more capital improvement work than it received.

When the “Great Recession” hit in 2008, Victorville essentially halted all capital improvements to its system between 2008 and 2013. (Exhibit 861.) The pipes in the ground continue to deteriorate when the economy is bad; suspension of capital improvements in hard times just exacerbates the serious national problem of deferred investment in buried water infrastructure.

During the 2008-2018 period, Victorville replaced 42,204 linear feet of water mains, or a total of 7.99 miles (out of 694 miles of water mains in the system), while 44.52 miles of water main (out of 470 miles in the system) were replaced in the Apple Valley system — 2 times more. (Exhibit 862; Exhibit 928.) This equates to a 955-year replacement rate for Victorville and a 116-year replacement rate for Apple Valley over that time period. (Exhibit 862; Exhibit 928; Exhibit 920-11.)

As Dr. Michael Hanemann testified, a water system must spend more on capital improvements than the system is depreciating in order to keep the system functioning properly. Depreciation is based on the original cost of an improvement, but the improvement has to be replaced based on current replacement cost, factoring in inflation. So a system that is investing only at the rate of depreciation (or less) is an aging system that is not being kept up-to-date. (1/8/20 Hanemann 38:12-39:18.) Fitch, one of the independent ratings agencies, “compares a utility’s annual capital expenditures in relation to depreciation” to gauge ongoing capital investment. And Fitch recognizes that when annual spending “regularly falls below the amount of annual depreciated assets,” the system may require “substantial upgrades over time to maintain regulatory compliance.” (Exhibit 743-5.)

From 2012 to 2018, capital investment in the Apple Valley system was twice (202%) the system’s deprecation. In contrast, the nearby municipally-owned systems (Victorville, Hesperia, Adelanto, and Helendale Community Service District) made capital investments of just 20% to 48% of the systems’ depreciation. (Exhibit 427-10.) That is the hallmark of an aging system-one that will eventually require significant and mounting future improvements to catch up (1/8/20 Hanemann 26:14-25) — and is characteristic of the publicly owned water systems surrounding Apple Valley.

Again, the Town itself has no track record of capital expenditure levels on a water system. But the Town’s record with its own sewer system shows the same pattern of investment below the rate at which the assets are depreciating, like the water systems in neighboring communities. From 2011 through 2018, the value of the Town’s sewer capital assets, net of depreciation, dropped from $32.6 million to $22.5 million. (Exhibit 868-1.) Thus, there is a marked difference in the level of investment committed by Liberty to its water system as compared to that committed by the Town to its sewer system. While the value of the water system’s capital assets, net of depreciation, was increasing by 24.7%, the value of the Town’s sewer system capital assets was decreasing by 28.2%. (1/9/20 Hanemann 62:20-63:22; Exhibit 427-22.)

In sum, the evidence shows that Mr. Dalton’s concern of insufficient investment under Town ownership is well-founded. If the Town were to acquire the water system, there is a risk that its capital investments will not keep up with the system’s depreciation, similar to the performance of the other nearby municipally-owned systems and the Town’s own performance with its sewer system. Such under-investment would cause the system to degrade, to the detriment of the system and, ultimately, the detriment of its customers.

2. Replacing Systematic and Skilled Regulatory Oversight By the Public Utilities Commission With Politically Motivated Control by the Town Council Is Not In the Public Interest.

As an investor-owned utility, Liberty Apple Valley is subject to thorough regulation by the California Public Utilities Commission. If the Town’s proposed Project were to proceed, the water system would be overseen by the Town Council rather than the PUC. The parties both presented evidence regarding the comparative merits of PUC regulation and Town Council oversight. The Court finds that Liberty met its burden of proving that the Town’s plan to jettison PUC oversight and replace it with Town Council oversight is not “required” by the public interest and necessity and would not be a “more necessary” public use.

On the issue of oversight, the Town is really objecting to existing California law and the regulatory scheme created by it. Liberty did not write the current regulatory scheme; it is following the California constitution and laws enacted by the Legislature and carried out by the PUC. The Court finds that Liberty’s mandatory compliance with State law is not an appropriate basis to permit the Town to use its power of eminent domain, regardless of whether the Town disagrees with the wisdom or implementation of the law. If the Town wants to change the law, its course is to go to Sacramento and convince the Legislature to do so. The public interest and necessity do not require a Project grounded in a fundamental distaste for existing law; nor does such distaste provide a basis for a “more necessary public use.”

a. As a “Class A” Investor-Owned Utility. Liberty is Subject to Thorough and Extensive Regulatory Oversight by the PUC

Liberty Apple Valley (and its parent, Liberty Utilities Park Water) are Class A investor-owned utilities regulated by the PUC. (12/17/19 Jackson 38:2-17, 39:22-42:2.) There are nine Class A water utilities in California, each with over 10,000 connections. The PUC also regulates smaller privately-owned systems (Classes B through D), adding up to 98 total systems. (Exhibit 284.)

The PUC exerts complete oversight over Liberty: “[A]ny activity that the company wishes to engage in requires the approval and permission of the California Public Utilities Commission.” (12/17/19 Jackson 42:25-43:6.) The PUC keeps a close watch on the operations, finances, and capital investment in the AVR system.

Ultimately, through an adversary process, the PUC weighs competing factors and sets water rates that are required by statute to be “just and reasonable.” Pub. Util. Code §451 (Exhibit 982-10). Accordingly, because it is acknowledged that Liberty has collected money based only upon water rates set by the PUC, the amount charged to Apple Valley customers are deemed just and reasonable as a matter of law.

The Public Utilities Commission is a constitutional body under Article XII of California’s constitution, with powers granted by the Legislature. The PUC may establish its own procedures, and “may fix rates, establish rules, examine records, issue subpoenas, administer oaths, take testimony, punish for contempt, and prescribe a uniform system of accounts for all public utilities subject to its jurisdiction.” See Cal. Const., Art. XII, Sections 2, 6. A city “may not regulate matters over which the Legislature grants regulatory power to the Commission.” See Cal. Const., Art. XII, Sec. 8.

Pursuant to these constitutional provisions, the Legislature enacted the Public Utilities Act, as codified in California’s Public Utilities Code. The PUC has plenary power to supervise and regulate utilities and “do all things … which are necessary and convenient in the exercise of such power and jurisdiction.” Pub. Util. Code §701 (Exhibit 982-18). Regulated public utilities like Liberty must “obey and comply with every order, decision, direction, or rule made or prescribed by the commission.” Pub. Util. Code §702. Liberty must furnish to the PUC whatever reports the PUC requests, and must answer all questions propounded by the PUC. Pub. Util. Code §584 (Exhibit 982-16). In addition, the PUC has a plenary right to inspect Liberty’s books, records, and facilities, including those of any parent or affiliate of Liberty. Pub. Util. Code §314 (Exhibit 982-8; 1/21/20 Sandoval 24:17-26:26). [13]

The Legislature has established detailed policies underlying the PUC’s setting of water rates. Pub. Util. Code §701.10 (Exhibit 982-19). As former PUC Commissioner Catherine Sandoval explained, the PUC is required to oversee the provision of facilities and service “necessary to promote the safety, health, comfort, and convenience” of the utility’s patrons and the public. (1/21/20 Sandoval 14:23-16:9.) Liberty bears the burden of justifying its expenses to the PUC before any such expenses may be included in rates. (3/10/20 DeShazo 36:17-37:4.)

Toward meeting its constitutional and statutory duties, the PUC issues extensive regulations and policies. See, e.g., General Order 103A (Exhibit 204); 2010 Water Action Plan (Exhibit 270). The PUC prioritizes water quality and utilizes water quality experts to assist the Commission in making specific findings and recommendations concerning water quality compliance. (1/21/20 Sandoval 52:19-54:8; Exhibit 267-25 to 267-27.) The PUC’s strict oversight on water quality issues helps explain the Apple Valley water system’s superior water quality record versus municipally-owned systems, as reviewed above.

b. The PUC’s Rate-Setting Process is Handled Like Complex Adversarial Litigation in Which the Interests of the Ratepayers Are Vigorously Represented By The Public Advocates Office.

Setting water rates that are “just and reasonable” and promote the health and safety of the public is one of the PUC’s primary tasks. Rates are set prospectively for a three-year period in a general rate case. General rate cases are complex and lengthy adversarial proceedings, with a multitude of filings akin to complex litigation in courts. (12/17/19 Jackson 55:24-56:7, 57:17-58:14; Exhibit 270-22.)

As part of the general rate case, Liberty’s rates and operations are scrutinized by the Public Advocates Office (PAO), which represents the interests of Liberty’s Apple Valley customers. The PAO — formerly called the Office of Ratepayer Advocates (ORA) — employs a battery of highly-skilled professionals who balance the system’s proposed revenue requirements and the interests of ratepayers. The PAO is an independent office within the PUC created by statute. Pub. Util. Code §309.5(a) (Exhibit 982-5). Its mission is to “obtain the lowest possible rate for service consistent with safety, reliability and the state’s environmental goals.” (Exhibit 302-3.) Former Commissioner Sandoval found the PAO to be extremely rigorous and very effective advocates for the ratepayers. (1/21/20 Sandoval 37:5-16.)

In Liberty’s current rate case, the PAO assembled an experienced team of eight professionals that included engineers, regulatory analysts, an MBA, an accountant, and a tax specialist to review and analyze Liberty’s application to raise rates. (Exhibit 923-243 to 923-250; Exhibit 923-253.) Following a thorough review of each of the components of Liberty’s application, PAO issued a 253-page report responding to specific requests in the application. (1/7/20 Jackson 120:2-13; Exhibit 923-1 to 923-2; Exhibit 923(a)-3 to 923(a)-13.) PAO’s vigorous representation of Apple Valley’s ratepayers is shown by, for example:

  • Liberty’s application sought a total revenue increase of 3.96% for 2019 — but PAO recommended an overall revenue decrease of 14.5% (Exhibit 923(a)-15);
  • Liberty’s application included a proposal to build a new 1.5-million gallon tank at Bell Mountain — but PAO opposed the request (12/17/19 Jackson 87:25-88: 16);
  • Liberty’s application included a proposal to transition to AMI meters that automatically transmit data to the home office — but PAO opposed the request (12/17/19 Jackson 89:4-15); and
  • Liberty’s application included General Office Allocations of $3.3 million as part of total revenue — but PAO recommended $2.0 million (Exhibit 305-19).

While the ultimate decision is up to the PUC, PAO has vigorously represented the Apple Valley customers to keep rates as low as possible. The technical expertise and ratepayer advocacy of PAO would be lost if the Town were permitted to acquire the system. Under Town ownership, the PUC would have no regulatory role in the oversight of the system. (1/22/20 Sandoval 1:18-2:2.) There would be no skilled independent body like the PAO to advocate for ratepayers — just as there is no similar independent body to advocate for ratepayers when the Town considers rate increases for its sewer system. (1/6/20 Jackson 28:13-21; 1/17/19 Bishop 121:17-24.)

The PUC has adopted procedures for General Rate Cases that mirror procedures in adversarial litigation in courts. (Exhibit 267-36.) Liberty’s current rate case was commenced by the filling of an application (like a complaint in litigation). (Exhibit 277.) The application was accompanied by thousands of pages of back-up reports and work papers. (See, e.g., Exhibit 279-1 through 279-3; Exhibit 294-1; Exhibit 295-1; Exhibit 296-1; Exhibit 299-1; Exhibit 300-1.) After the application was filed, PAO (formerly ORA) filed its responsive report to the application, like a detailed answer with pinpoint objections. (Exhibit 923-1 to 923-2; Exhibit 923(a)-3 to 923(a)-13.) PAO submitted 56 separate data requests, like discovery, to which Liberty responded. (Exhibit 293.) Two sessions of noticed Public Participation Hearings (one during the day and the other in the evening) were held in Apple Valley on October 25, 2018, where ratepayers could learn details about and present testimony regarding their views on the proposed rate increase. (1/6/20 Jackson 14:18-16:5; Exhibit 288.) Evidentiary hearings before the assigned Administrative Law Judge, similar to trial testimony, were held in October/November 2018 in Los Angeles. (1/6/20 Jackson 18:5-24, 103:11-22.) Exhibit lists were prepared, and exhibits were marked and introduced into evidence, just as they were in this case. (1/6/20 Jackson 18:25-19:9; Exhibit 289.) Lengthy opening and reply briefs were filed by both Liberty and PAO. (Exhibit 290-1; Exhibit 291-1; Exhibit 303-1; Exhibit 304-1.) The parties prepared a Joint Comparison Exhibit showing the issues that were resolved and those that remained in dispute. (Exhibit 305-1.)

The adversary process used to protect ratepayers and set water rates is a strength of the PUC rate-setting system, not a justification to take Liberty’s system, as the Town has urged in this case. The loss of such an extensive and skilled system of oversight would not appear to be in the public interest.

The PUC’s rate-setting process is transparent and provides ample opportunities for participation and involvement. In addition to the Public Participation Hearings held in Apple Valley, anyone can become a party to a General Rate Case proceeding and all parties may file testimony, write briefs, and submit evidence. {l/6/20 Jackson 5:21-6:5.) The Town intervened and participated as a party in AVR’s previous 2015 rate case, but chose not to participate in Liberty’s current rate case. (1/6/20 Jackson 6:6-7:16; Exhibit 44.) The PUC is subject to the Public Records Act and routinely receives and responds to such requests. (1/21/20 Sandoval 39:23-40:2.)

Control by the Town Council leaves the water system vulnerable to political pressure to keep rates low, regardless of whether it is prudent in the short run or the long run. (1/9/20 Hanemann 59:2-61:17.) Town oversight is inclined toward short-term decision making because Town council members must run for re-election every few years. Naturally, voters want to pay less for water service, not more; and Town Council regulation is focused more on the short-term interest of voters than the long-term interest of water infrastructure. (1/15/20 Hanemann 37:25-38: 19.) The pressure to keep rates low increases the likelihood that the water system’s buried capital assets will be run to failure, thereby creating risks to water reliability, water quality, and public safety. (1/22/20 Sandoval 9:24-12:17.) PUC regulation takes the politics out of rate setting, focusing instead on prudent investments in the system. (1/16/20 Bruno 45:16-46:4.)

The Town offered testimony by Steven Weissman, a former PUC administrative law judge, who was critical of the PUC. However, Mr. Weissman did not offer an opinion that the Town’s residents would be better off if the system were taken by eminent domain. (3/2/20 Weissman 88:5-10.) The public interest and necessity do not require exchanging a regulatory scheme that is technically sophisticated and properly focused on the long-term viability of the water system with one that is more focused on short-term political expediency.

c. The Economic Incentive to Invest in the Capital Assets of the Water System Could Be Lost If PUC Regulation Were to be Replaced by Town Regulation.

PUC regulation encourages the needed level of capital investment in water systems which, as noted above, are highly capital intensive. Capital investment is incentivized by allowing Liberty the opportunity to earn a return on its invested capital by way of a return on rate base. (12/17/19 Jackson 55:3-7.) The revenue requirement formula that the PUC uses to set rates is:

Revenue = (Rate of Return × Rate Base) + Expenses+ Depreciation + Taxes

(1/8/20 Hanemann 33:21-34:21; Exhibit 276-7.)

Following careful scrutiny and objections by the PAO and the PUC, Liberty’s approved Expenses and Taxes are mere pass-throughs to its customers. The other two components — Rate of Return × Rate Base and Depreciation — are both based on the capital investment and capital assets of the water system. In economic terms, Rate of Return × Rate Base represents a return on investment and depreciation represents a return of investment. What both have in common is what PUC regulation clearly incentivizes — investment in the system. By statute, the PUC is to afford utilities “an opportunity to earn a reasonable return on its used and useful investment, to attract capital for investment on reasonable terms and to ensure the financial integrity of the utility.” Pub. Util. Code §701.l0(a) (Exhibit 982-19).

Rate Base is essentially the company’s depreciated book value of its own money invested in the system — original investment minus depreciation. (12/11/19 Sorensen 47:24-49:24; 7/1/20 Koorn 48:9-49:8; Exhibit 971.) Liberty does not earn a return on assets that are paid for by someone else, as those assets are deducted in the calculation of Rate Base. (12/17/19 Jackson 62:11-63:9.) Rate Base constantly changes over time: it increases as new company investments are made in the system, but it also concurrently decreases as the investments in the system depreciate. (1/8/20 Hanemann 33:4-13; 1/15/20 Hanemann 26:19-28:1; 12/11/19 Sorensen 50:7-16.)

Return on Rate Base is an authorized return determined by the PUC in “cost of capital” proceedings. The cost of capital is determined by weighing two components — the cost of debt and the cost of equity. In its most recent cost of capital decision for Liberty (issued December 20, 2018), the PUC set Apple Valley’s cost of debt at 4.71% and its cost of equity at 9.35%. Weighing those rates using a capital structure of 43% debt and 57% equity produced a total authorized Rate of Return of 7.35%. (1/6/20 Jackson 38:17-39:22; Exhibit 292-1, 292-24.) Because of Liberty’s superior access to the capital markets, the authorized rate of return set by the PUC for Liberty was the lowest of all of California’s Class A water utilities. It is noteworthy that the authorized rate of return for the Apple valley water system before Liberty acquired it had been the highest (or, in some years, second highest) of all of the Class A water utilities. (Exhibit 972.) In other words, Apple Valley customers benefited from Liberty’s acquisition of the system, as the authorized Return on Rate Base that was included in rates was reduced substantially.

Depreciation is the value by which the Company’s capital assets wear out over the course of a year. (1/8/20 Hanemann 32:17-23.) For example, if an asset was originally installed at a cost of $1 million and is depreciated on a straight-line basis over 40 years, the annual depreciation over the asset’s 40-year life would be $25,000 per year.

Because a utility’s Revenue Requirement includes Rate of Return x Rate Base and Depreciation, the utility is incentivized to invest in the system, as greater investments will increase Rate Base and increase Depreciation. However, not all company-funded investments are included in Rate Base or Depreciation — only those that are “used and useful” and approved by the PUC are included, by statute (Pub. Util. Code §701.l0(a)) as quoted above. (12/11/19 Sorensen 51:17-23; 1/21/20 Sandoval 16:24-18:26.) Here, the PAO and the PUC play a critical role in determining which investments are “used and useful” in the system. All of Liberty’s proposed capital investments are submitted as part of its general rate case, and the proposed investments are heavily scrutinized by the PAO and ultimately the PUC. (12/17/19 Jackson 88: 17-89:3, 89: 16-18; 3/10/20 DeShazo 82: 13-19.)

The Town argued at trial that the “Averch-Johnson effect” encourages utilities to over-invest in the system by “gold-plating” them in order to increase the utility’s return. (3/9/20 DeShazo 25:17-26:2.) But the professional staff of the PAO and the PUC provide the regulatory check to prevent such theoretical over-investment. (1/8/20 Hanemann 20:26-21:11.) The PAO’s 256-page Report (Exhibit 923-1) shows that it is clearly up to the task of scrutinizing Liberty’s application in order to protect the interests of Apple Valley ratepayers.

If the Town were permitted to acquire the system, the regulatory incentive to make reasonable investments in the system would be lost. The Town has no comparable financial incentive to invest in the system; in fact, its incentive is just the opposite, because ratepayers are always clamoring for lower rates. (1/8/20 Hanemann 21:12-21.) Even worse, that lack of financial incentive is compounded because Town ownership, as opposed to Liberty ownership, does not involve any independent expert oversight of capital decisions, budget decisions, or other operational decisions by the Town. (1/6/20 Jackson 28:13-21.) Rather, the Town proposes that the Town will oversee itself in the operation of the Apple Valley Water System, subject to citizen oversight through the political process. In terms of substantive oversight, that is a far cry from independent oversight by subject matter experts from the PUC and the PAO.

Apart from the issue of financial incentives or disincentives to invest in the water system, the evidence at trial established that the Town has experienced and is experiencing financial difficulties that would create pressures to maximize transfers of administrative overhead away from the water system and into the Town’s General Fund. The General Fund is the chief operating fund of the Town. (Exhibit 238-30.) It receives all the Town’s revenue from taxes and other sources of general income like fees for licenses and permits. (11/12/19 Harris 41:10-16.) The Town’s financial policy is to maintain a balanced budget, meaning any increase in General Fund expenditures must be matched with an increase in General Fund revenues. (11/12/19 Harris 41:23-42:11; Exhibit 925-244.)

The Town’s fiscal year runs from July 1 through June 30. The fiscal year from July 1, 2019 through June 30, 2020 was referred to as fiscal year 2020. (11/12/19 Harris 36:25-37:7.) The Town’s current fiscal year, fiscal year 2021, began on July 1, 2020. (7/1/20 Robertson 69:13-15.) From FY 2011 to FY 2020 the Town’s budgeted General Fund expenditures increased by 102%; consequently, its budgeted General Fund revenues increased by 105% over that same time period. (Exhibit 867-1.) The massive increase in General Fund expenditures to run the Town required a similar increase in revenues to feed the General Fund and meet the Town’s balanced budget policy. But current revenues for each year were not sufficient to meet current expenditures for each year, forcing the Town to find alternative revenue sources to keep the General Fund afloat and the Town functional. These alternative sources included: (1) drawing down General Fund operating reserves; (2) extracting “administrative overhead” from its enterprise funds; and, finally (3) simply borrowing money on a $10 million line of credit from J.P. Morgan.

The Town’s General Fund “operating reserves” consists of the “committed” and “unassigned” portions of its General Fund balance. (11/13/19 Hildreth 104:16-26; Exhibit 925-19,) The Town’s General Fund operating reserves have been depleted over many years. From FY 2012 through FY 2018, the Town’s current expenditures exceeded its current revenues by more than $5 million per year on average. (11/13/19 Hildreth 108:1-19; Exhibit 470-3.) During that time, the Town’s General Fund operating reserves decreased by 80%, while the Town’s General Fund expenditures increased by 36.5%. (11/13/19 Hildreth 106:15-107:23; Exhibit 470-2, 470-14.) By the time Mr. Robertson assumed the Town Manager position in January 2018, he knew that the Town was having financial problems due to budget deficits that had been depleting the General Fund and its reserves. (11/4/19 Robertson 73:12-74:6.)

The Town’s 2019 CAFR was released during the suspension of the trial due to COVID-19, in March or April 2020. (7/1/20 Robertson 82:3-20.) Although the Town’s 2019 CAFR showed a $3.7 million improvement in the Town’s General Fund balance, that improvement came mostly from borrowed money. Specifically, $3 million of the $3.7 million were funds that the Town drew on its $10 million line of credit in FY 2019 and included as a credit to the General Fund. [14] (Exhibit 4315-44.) Through FY 2020, the Town had borrowed $6 million on its line of credit, and the Town has budgeted to borrow another $2 million in FY 2021. (7/2/20 Robertson 84:19-85:9; Exhibit 4337-34.) Thus, it appears to the court that the Town has attempted to prop up its General Fund by putting millions on its municipal credit card with J.P. Morgan — with its residents required to pay interest on the borrowed funds and ultimately pay off the debt. The Town’s use of borrowed money to shore up its General Fund raises alarm bells because it shows the Town cannot pay its current bills out of current revenue. (11/14/19 Hildreth 7:1-16.)

The last source of funds that the Town has used to attempt to rescue its General Fund is perhaps most relevant to the Town’s proposed Project at issue here. If the Town were to prevail in this action, it would operate the water system as an Enterprise Fund, like the Town’s sewer fund, solid waste fund, and Choice Energy fund. (11/12/19 Harris 49: 19-23.) For many years, the Town has siphoned off millions of dollars from its Enterprise Funds in the form of “administrative overhead” and “franchise fees” and transferred those millions to the General Fund as General Fund revenue. From FY 2011 through FY 2018 the total amounts transferred were:

Administrative Overhead Transfers to General Fund:
  From Sewer Enterprise Fund 5010 $11,897,755
  From Solid Waste Fund 5510 $12,417,543
Franchise Fee Transfers to General Fund:
  From Solid Waste Fund 5510 $10,012,233
  Total Transfers $34,327,531 [15]

While these annual transfers of administrative overhead and franchise fees from the Town’s Enterprise Funds to the Town’s General Fund have been massive, they are actually less today than they were prior to 2016. (Exhibit 864.) After the Town was sued for violating Proposition 218, it reduced the annual transfers in settlement of those lawsuits. (11/13/19 Hildreth 121:24-122:6.) As the Town’s budget documents show, the administrative overhead and franchise fee transfers were 21.8% of total budgeted General Fund revenues in FY 2011, but only 10.0% of total budgeted General Fund revenues in FY 2018. (Exhibit 867-1.) In other words, while the Town’s General Fund has needed more and more money to match budgeted expenditures, it has been getting less and less money from its Enterprise Funds — exacerbating the Town’s financial stress and increasing the need to raise more revenue from other sources.

As is to be expected, the COVID-19 pandemic has made the Town’s financial condition even worse. Mr. Robertson testified that the Town is currently “struggling” financially, and it would be seeking voter approval of a proposed sales tax increase to try to make ends meet. (7/1/20 Robertson 71:3-13, 73:16-74:19.) Apart from the reduction in tax revenues resulting from the pandemic, the Town’s contract for police service with the County sheriff has created “tremendous budgetary constraints” for the Town. (7/1/20 Robertson 72:5-11.) Between the police contract and COVID-19, Mr. Robertson estimated a General Fund impact of $3 million for this calendar year. (7/1/20 Robertson 73:3-15.) The Town’s FY 2021 budget calls for total General Fund revenue of $32.9 million, which includes transfers and borrowings of $5.6 million, as follows: (1) budgeted administrative overhead transfers of $2,617,922; (2) budgeted franchise fee transfers of $1,050,950; and (3) budgeted borrowing on the line of credit of $2 million. (Exhibit 4337-34 to 35, 4337-144.)

The evidence establishes that the Town has an increased need for General Fund revenues to meet its increased level of General Fund expenditures. If the Town’s Project were to proceed, it would acquire a water system that has produced constant revenues in the range of $23 million to $25 million per year (adjusted for inflation) since 2012. (Exhibit 969-1.) This revenue would become another source of funds that would be available to the Town to use to bolster its General Fund.

Like the other Town Enterprise Funds, the Town expects to transfer “administrative overhead” from the Water Enterprise Fund to the General Fund. (11/12/19 Harris 88:3-22.) With the stressed condition of the General Fund, the Town’ financial incentive will be to maximize administrative overhead transfers from the Water Enterprise Fund to the General Fund to help keep the General Fund afloat. (11/14/19 Hildreth 9:13-21; 76:3-15.) The General Fund thus would compete with the Water Fund for revenues.

If the Town is faced with a choice of reducing the level of police services from the County Sheriff or replacing a stretch of water main, there is a substantial risk that the water system improvement will be deferred. Positioning the Water Fund to compete with the General Fund over revenues — deciding whether to retain money in the Water Fund to be spent on the water system, or transfer more money to the General Fund as administrative overhead — would create financial tension that is contrary to the public interest, not a necessity, and not a “more necessary” public use of Liberty’s property.

d. The PUC’s Regulatory Emphasis on Conservation Serves the Public Interest and Would Be Lost If PUC Oversight Were to be Replaced by Town Oversight.

The PUC’s Water Action Plan emphasizes strengthening water conservation programs as a critical policy goal. (Exhibit 270-5.) The Water Action Plan “Changed [the] Utility Business Model from selling water to conserving water.” (Exhibit 282-14, emphasis added.) To implement this fundamental policy shift, the PUC decoupled sales from revenues in order to encourage conservation. “Decoupling” means that a water company like Liberty doesn’t make more money when it sells more water, and doesn’t make less when it sells less water — so it is not disincentivized from encouraging conservation. (12/17/19 Jackson 67:14-70:8; Exhibit 987-5.) Liberty doesn’t make money by producing water at a cost and then marking up the water and selling it at a profit to the public; the PUC-approved expenses incurred in producing water are merely passed through to customers. (12/10/19 Sorensen 89:5-90:6.)

The policy of decoupling sales from revenue is nowhere mentioned in the Town’s eve-of-trial transition plan (Exhibit 156), and there is no indication that the Town can or will adopt such a policy. The transition plan says only that the Town Council will consider hiring an as-yet unidentified firm to create a Water Master Plan that will “assess” and “make recommendations” on matters such as conservation. (Exhibit 156-15, 156-16.)

The Town has conceded that its effort to acquire the water system is based in part on “longstanding public concern about AVR’s escalating water rates.” (Exhibit 891-4. But if water rates are reduced, the incentives for consumers to conserve water will diminish accordingly. In short, trading the existing statewide public policy so geared toward conservation for a Town policy that is unknown is a regulatory gamble — one that would not be in the public interest.

e. Proposition 218 Does Not Cure the Regulatory Deficiencies That Would Exist Under Town Ownership of the System.

The Town has argued that the virtues of Proposition 218 would put in place a system of regulation that would be superior to PUC regulation. The Court does not agree.

Proposition 218 requires that notice be given to ratepayers before a public hearing is held to raise water rates. (6/29/20 Koorn 99:24-100:4.) Under PUC regulation, notice of an application to raise water rates is also required to be provided to ratepayers, and the notice must be approved in advance by the PUC. (Exhibit 984-32; Exhibit 267-58.) So there is no effective difference regarding notices of proposed rate increases.

Proposition 218 also requires that a public hearing be held before a rate increase is instituted, where the Town Council would accept comments from customers. (6/29/20 Koorn 100:5-11.) Under PUC regulation, Public Participation Hearings in Apple Valley are also part of the rate setting proceedings, where customers may provide comments to the Administrative Law Judge. (1/6/20 Jackson 14:18-16:5; Exhibit 288.)

One area where the Proposition 218 process does differ from the PUC process is in the mechanism provided to prevent a rate increase. As discussed above, the PUC model enlists the Public Advocates Office to rigorously scrutinize every element of Liberty’s rate application to ensure that a rate increase is justified. In lieu of the PAO, Proposition 218 provides a right to object to a rate increase if 50% plus one of the ratepayers file a written protest with the Town. (6/29/20 Koorn 100:5-21.) That is very different from the standard that applies to elections, where 50% plus one of the voters who show up to the polls must approve or disapprove of a ballot measure. Proposition 218 requires 50% plus one of all of the ratepayers to file written protests in order to halt a rate increase. This is such a high standard that the Town’s own expert Shawn Koorn has never seen it accomplished in any of the 150 utility rate increases in which he has been involved in California. (7/1/20 Koorn 7:26-9:1.) During the Town’s most recent invocation of the Proposition 218 process — when it sought to raise sewer rates — the Town sent out 8,651 written notices to its sewer customers and received 16 written protests, a protest rate of .18%, or far less than 1%. (Exhibit 126-2.) The evidence shows that Proposition 218’s “right to object” to proposed rate increases is more of a theoretical paper right, rather an actual one in practice.

In addition, the Town’s track record with regard to Proposition 218 creates questions as to the Town’s true level of commitment under it. The Town was sued for violating Proposition 218 regarding transfers of administrative overhead from both its Sewer Enterprise Fund and its Solid Waste Enterprise Fund, and settled both lawsuits. (11/5/19 Robertson 58:1-12; 11/13/19 Hildreth 121:24-122:6.) However, the evidence showed that, notwithstanding those settlements, the Town still came out far ahead financially. After the settlements, the Town recalculated the “proper” administrative overhead charges to be assessed to the Town’s sewer and solid waste funds. Using the corrected figures, the Town’s previous overcharges to those funds amounted to $13 million from 2012 through 2018. (11/13/19 Hildreth 125:13-126:6.) But the total payback from the Prop 218 lawsuit settlements was just $3,948,000. (11/13/19 Hildreth 128:7-22 [$798,000 payback for sewer fund]; 129:20-25 [$3,150,000 payback for solid waste fund].)

Worse still, although the Town was alleged to have overcharged its Solid Waste Enterprise Fund by transferring excess cash from that fund to the General Fund — excess cash that was paid by the Town’s residents in solid waste fees — the Town did not use its General Fund to refund the excess back to the Solid Waste Fund. Instead, the Town charged the Solid Waste Fund $3.15 million to settle the allegations of overcharging that same fund. (11/13/19 Hildreth 129:20-130:24; Exhibit 925-14.) In other words, the Town’s ratepayers who were alleged to have paid excessive Solid Waste charges were charged a second time to settle claims that they had been previously overcharged. The Town never explained this unusual arrangement, which creates doubt as to the Town’s faithful implementation of Proposition 218.

Even were it to be faithfully implemented, Proposition 218 does nothing to address any of the numerous major differences between PUC regulation and municipal regulation:

  • Proposition 218 does not provide for a contested hearing process for proposed rate increases, nor for a technically skilled independent body like the PAO to review rate increase applications;
  • Proposition 218 does not provide for rate decisions to be made by a body with broad experience in utility issues instead of by elected officials with individual interests and motivations;
  • Proposition 218 does not encourage or incentivize capital investment in the Apple Valley Water System;
  • Proposition 218 does not provide for an independent review of proposed capital projects in order to determine whether they would be used and useful for the water system;
  • Proposition 218 does not require that rates be set to achieve conservation of scarce water resources; and
  • Proposition 218 does not prevent “administrative overhead” from being charged to ratepayers and then transferred to the General Fund to alleviate financial distress being experienced by the General Fund.

In short, in the court’s view, municipal control over the water utility, even with Proposition 218, is inferior to the regulatory scheme under PUC oversight. The PUC’s systematic and thorough regulatory oversight of the Apple Valley water system would be lost if the Town were to acquire the system. (12/17/19 Jackson 42:18-20.) The skilled and detailed oversight of the water system provided by the PUC promotes responsible utility operation and is itself in the public interest. Removing that oversight and replacing it with less skilled oversight by the Town Council is not required by the public interest and necessity, and is not a “more necessary” public use.

3. Acquisition of the System Would Not Be in The Best Interests of Ratepayers.

The Town’s Project definition includes nothing about lowering water rates. (Complaint In Eminent Domain, ¶ 6.) Quite to the contrary, the Town’s certified EIR stated that the reduction of water rates would be an “unlikely event” (Exhibit 165-124, emphasis added.) And the Staff Report that the Town incorporated into its Resolutions of Necessity stated that “the Town does not expect to be able to decrease rates.” (Exhibit 891-14; Exhibit 3651-1, §1; Exhibit 3652-1, §1, emphasis added.) Thus, the Town’s acquisition of the water system is not required by the public interest and necessity, nor is it a more necessary public use, in order to lower water rates — because that is not a component of the Town’s Project.

A related question is whether future water bills for customers of the Apple Valley water system are likely to be higher or lower under Town ownership than they would be under continued Liberty ownership. Both sides presented competing models regarding revenue requirements associated with future costs of operation of the system (which would translate into future water bills to customers) under the different ownership scenarios.

Liberty’s expert, Dr. Michael Hanemann, opined that the water system’s total annual costs will be higher under Town ownership (Exhibit 978-2; Exhibit 978-4; Exhibit 978-6), and thus Apple Valley ratepayers will be forced to pay higher water rates in order to produce the additional revenue that will be needed for the Town to operate the system. (1/8/20 Hanemann 101:14-18; 1/9/20 Hanemann 5:14-24; 7:6-14.) Dr. Hanemann is an economist on the faculty of Arizona State University and an Emeritus Professor at UC Berkeley. (1/8/20 Hanemann 2:17-25.) He has taught courses on the economics of water at both universities, and has been a prolific author in his area of expertise. (1/8/20 Hanemann 5:5-26, 12:15-13:4; Exhibit 397.) He was elected to the National Academy of Sciences in 2011. (1/8/20 Hanemann 4:3-18.) Dr.Hanemann designed water rates for the City of Los Angeles; he served as economic staff to the State Water Resources Control Board; and he gave an invited presentation to the Water Division of the PUC regarding economic aspects of investor-owned utilities and municipal-owned utilities. (1/8/20 Hanemann 7:3-19, 8:12-26, 11:24-12:14.)

The Town’s expert, Mr. Shawn Koorn, opined the opposite — that the total costs would be lower under Town ownership, resulting in lower water rates. (6/29/20 Koorn 31:14-33:7; Exh 4333-19 to 24.) Mr. Koorn is an Associate Vice-President at HDR Engineering, where he heads the firm’s utility rates and finance group. (6/29/20 Koorn 4:9-12.) He holds bachelor’s degrees in business administration and managerial economics from Central Washington University. (6/29/20 Koorn 3:26-4:8.) He has completed over 150 rate studies in California under Proposition 218, which applies only to municipally-owned utilities; no testimony was presented of any rate studies he has prepared for California investor-owned utilities regulated by the PUC. (6/29/20 Koorn 8:26-9:20.) [16]

The Court finds that Dr. Hanemann provided a more thorough and accurate economic analysis. The Town’s acquisition is not required by the public interest and necessity, nor is it a more necessary public use, when future economic impacts to the system’s customers are considered.

a. The Experts Agree That The Respective Revenue Requirements Under Continued Liberty Ownership and Town Ownership Each Have Different Components.

Both Liberty and the Town will need a certain amount of revenue each year to operate the Apple Valley Water System, known as the “Revenue Requirement.” The experts agreed that two different accounting methods must be used to compare the Revenue Requirements under continued Liberty operations with Town operations. The utility basis of accounting applies to Liberty ownership, while the cash needs basis of accounting would apply to Town ownership. (1/8/20 Hanemann 30:10-14, 35:9-15; 6/29/20 Koorn 144:18-147:3.) The comparison of the two systems is shown in Exhibit 977:

Utility Basis Accounting (Liberty Ownership) Cash Needs Accounting (Town Ownership)
Water Supply Expenses Water Supply Expenses
O&M + A&G Expenses O&M + A&G Expenses
Taxes Taxes and Transfers
Depreciation Rate-Funded Capital Expenditures
Authorized Return on Rate Base Debt Service

Under both Liberty ownership and Town ownership, Water Supply Expenses and O&M (Operations & Maintenance) and A&G (Administrative & General) expenses will be incurred to operate the system. Liberty will incur Taxes, and the Town will incur certain Taxes and Transfers.

The major differences between the two accounting methods are the last two items. Liberty’s revenue requirement will include Depreciation and Authorized Return on Rate Base, while the Town’s revenue requirement will not include these components. On the other hand, the Town’s revenue requirement will include Rate-Funded Capital Expenditures and Debt Service on the acquisition debt to acquire the system, while Liberty’s revenue requirement will not include these components.

The Town has argued that the Town’s revenue requirement is “Cost,” while Liberty’s revenue requirement is “Cost Plus.” It is more accurate to say that both Liberty and the Town will require revenues consisting of “Cost Plus,” but the “Plusses” are different — Depreciation and Authorized Return on Rate Base for Liberty, and Rate-Funded Capital Expenditures and Debt Service for the Town. While the Town seeks to portray all of Liberty’s “Plusses” as going to line the pockets of APUC and corporate executives, this is not correct. Liberty does not directly charge its Apple Valley customers for the cost of capital expenditures, which is money reinvested into the system from revenues received as Depreciation and Authorized Return. These two components of revenue — Depreciation and Authorized Return — are the sources from which Liberty must fund: (1) company-funded approved capital expenditures on the system (Exhibit 423-7); (2) debt service payments on capital provided by borrowed funds (Exhibit 3589-7); (3) dividends to shareholders to attract equity capital [17]; (4) refunds to developers for advances that funded new infrastructure for new development (Exhibit 513-47); and (5) retained earnings, if any.

Both Liberty and the Town will incur significant “Plusses” that will be included in their respective revenue requirements. In fact, the cost model prepared by the Town’s own expert, Mr. Koorn, shows that the “Plusses” attributable to Town ownership will actually exceed the “Plusses” attributable to Liberty ownership. The annual and total figures for 2020 (when Town debt service payments begin in Mr. Koorn’s model) through 2027 (when Mr. Koorn’s model ends), using his middle purchase price of $110 million, are:

  PLUSSES UNDER TOWN OWNERSHIP (Exhibit 3999-32) PLUSSES UNDER LIBERTY OWNERSHIP (Exhibit 3999-13)
  Debt service Rate-Funded Cap Ex Depreciation Return on Rate Base
2020 6,533,320 6,162,000 4,337,960 5,438,902
2021 6,533,320 6,328,374 4,958,547 6,037,827
2022 6,533,320 6,499,240 5,117,734 6,231,662
2023 6,533,320 6,674,720 5,279,691 6,428,871
2024 6,533,320 6,854,937 5,444,584 6,629,655
2025 6,533,320 7,040,020 5,612,580 6,834,217
2026 6,533,320 7,230,101 5,783,844 7,042,758
2027 6,533,320 7,425,314 5,958,541 7,255,479
Subtotals 52,266,560 54,214,706 42,493,481 51,899,371
Total $106,481,266 $94,392,852

Thus, simply labelling Town ownership as “Cost” and Liberty ownership as “Cost Plus” does not capture all of the revenue requirement components that will be needed by each ownership. Both the Town and Liberty have significant “Plusses” in their revenue requirements, though the components of the “Plusses” differ.

b. The Purchase Price Will Largely Determine the Town’s Annual Debt Service, But the Town Used One Low Purchase Price In It Analysis.

Under Town ownership, a sizable cash expenditure would be the debt service payments the Town would pay for the money it would need to borrow to buy the system. To precisely determine the Town’s annual debt service payments, the purchase price for the system must be known; the higher the purchase price, the highe the annual debt service. (12/16/19 Peters 82:26-83:6.) Because the purchase price is as-yet unknown (it would have to be determined in a subsequent jury trial), both sides’ experts used three different potential purchase prices to analyze annual debt service.

Dr. Hanemann used purchase prices of $100 million, $122.3 million, and $243.8 million. (1/8/20 Hanemann 40:25-41:26.) The lowest purchase price was taken from the figure that Assistant Town Manager Mark Puckett reported to the Town Council on April 25, 2017: “[W]e expect that the system will be acquired somewhere around a hundred million dollars.” (1/8/20 Hanemann 42:7-43:12; Exhibit 108.) The $122.3 million figure was provided to Dr. Hanemann by Stephen Peters, Liberty’s bonding expert, based on a bond issuance of $150 million, the maximum bond approved by the voters under Measure F. (1/8/20 Hanemann 43:13-44:6; 12/16/19 Peters 83:24-84:17; Exhibit 747-2.) The $243.8 million purchase price was based on two recent sales of water systems in California at an average figure of $11,868 per connection and applying the per-connection price to the Apple Valley system with 20,542 connections. (1/8/20 Hanemann 44:7-45:9; Exhibit 423-1.)

For the Town, Mr. Koorn used purchase prices of $70 million, $110 million, and $150 million. When Mr. Koorn used $70 million as his lowest purchase price, he was not aware that Assistant Town Manager Puckett had publicly reported to the Town Council in 2017 that the Town itself expected to pay “around $100 million” for the system. (6/30/20 Koorn 11:2-16.) While the exact purchase price that would have to be paid by the Town is unknown, it is unlikely that Assistant Town Manager Puckett would have reported $100 million as the estimated purchase price to the Town Council if the likely purchase price were in fact $30 million less. [18] Moreover, Mr. Koorn testified that the $70 million figure “was reflective of the current value of the rate base.” (7/1/20 Koorn 33:5-7.) But Rate Base is book value of some of Liberty’s assets — original cost minus depreciation. (7/1/20 Koorn 48:9-22.) Under the Eminent Domain Law, the Town would be required to compensate Liberty for the fair market value of all of its property, not its book value. See Code Civ. Proc. §1263.310. [19] Therefore, the Court gives little weight to Mr. Koorn’s $70 million purchase price scenario.

c. Economies of Scale That Apply to Liberty’s Operations Would be Lost Under Town Ownership.

For Liberty, Dr. Hanemann opined that economies of scale apply to Liberty’s continued operations, but would be lost if the Town were to take over the system and operate it as a standalone 20,000-connection system. (1/8/20 Hanemann 89:2-6.) For the Town, Mr. Koorn, acknowledged and understood the concept of economies of scale, but chose not to apply it in his cost model. (6/30/20 Koorn 21:24-23:13.) The Court finds the testimony of Dr. Hanemann on this point to be more persuasive.

Economies of scale means that the costs of operating a company rise less than proportionately as the scale of the operation expands. If production increases ten-fold, costs of operations will go up — but less than ten-fold. As costs are spread across a higher number of customers, costs are reduced on a per-unit (i.e., per-customer) basis. In addition, larger operations have economic leverage to negotiate volume discounts, which also reduce per-unit costs. (1/8/20 Hanemann 78:11-80:22.)

Significantly, the Legislature itself has found and declared that “[s]cale economies are achievable in the operation of public water systems.” Pub. Util. Code §2719(c), emphasis added. [20] The Apple Valley water system has about 20,000 connections. When considered together with its parent, Park Water, the two systems have 47,000 connections, a scale increase of 2.3. Nationally, Liberty has about 164,000 water and wastewater connections, a scale increase of about 8.0 over Apple Valley’s 20,000 connections. And Liberty has about 768,000 total connections nationally, a scale increase of approximately 37.4 over Apple Valley’s 20,000 connections. (1/8/20 Hanemann 82:14-83:23; Exhibit 423-5.) Thus, Liberty can spread certain of its costs of operation across many more customers than the Town could, resulting in lower per-customer expenses.

The benefits of cost-spreading and economies of scale applicable to Liberty’s operation of the system are clearly demonstrated by the evidence. Mr. Sorensen testified that Liberty is able to negotiate volume discounts from vendors, who want to attract Liberty as a high-volume purchaser. (12/11/19 Sorensen 25:20-26.) Examples include a 10-15% discount from material suppliers like Grainger, a 10-15% discount on AMI meters, a 10-15% discount on Ford vehicles, and other discounts that drive efficiencies. (12/11/19 Sorensen 26:1-22, 30:19-31:25, 32:3-20; Exhibit 963-6; Exhibit 964-11.) The economies of scale and concomitant efficiencies in operations that apply to Liberty ownership are reflected in the total operating expenses incurred on a per-customer basis. Since Liberty acquired the Apple Valley water system at the beginning of 2016, annual operating expenses on a per-connection basis have been reduced by 12.81%. (Exhibit 970.)

These economies of scale would be lost were the Town to operate the water system on a standalone basis. (1/8/20 Hanemann 89:2-6.) Based on five published studies as well as interviews with Liberty employees who provide key services across-the-board to all Liberty-owned utilities, Dr. Hanemann applied appropriate economies of scale factors in his economic model. (1/8/20 Hanemann 80:25-82:1, 84:6-25, 86:19-89:1; Exh 423-4.)

The five studies Dr. Hanemann relied on are listed and summarized on Exhibit 423-4. Each study found elasticity of cost values of less than 1, which indicates the existence of economies of scale. (1/15/20 Hanemann 3:4-4:15.) Dr. Hanemann explained precisely how he took the data from each study and incorporated it into his chart (Exhibit 423-4) to show elasticity of cost values applicable to increases in the number of customers served. (1/13/20 Hanemann 122:25-125:6 [use of data in Aubert study, Exhibit 4505], 125:7-126:3 [use of data in Torres study, Exhibit 4511], 128:1-129: [use of data in Garcia study, Exhibit 4509], 129:10-131:8 [use of data in Destandeau study, Exhibit 4507].)

The Town did not, as the court recalls, dispute any of the data relied on by Dr. Hanemann in determining economies of scale or his use of that data. Instead, the Town focused on sentences extracted from the articles which did not disprove the data or Dr. Hanernann’s reliance on it. For example, the Town cited two sentences from the Garcia study which addressed economies of vertical integration, but Dr. Hanemann explained that there is no issue of changes to vertical integration in this case because the Town would both supply and distribute water to Apple Valley customers, just like Liberty does. (1/13/20 Hanemann 20:6-21:6, 126:4-127:26.) The Town also cited a single sentence from the Shih study that public systems have lower costs than private ones. (1/13/20 Hanemann 26:24-26; Exhibit 4506-8.) But Dr. Hanemann explained that public systems are generally far larger than private systems, so the Town’s wrenched sentence actually proves the existence of economies of scale rather than disproving them. (1/15/20 Hanemann 16:10-17:19, 18:17-19:21.) And the Shih study itself concluded: “By quantifying the economies of scale, it appears that doubling a system’s production would lower unit costs between 10 and 30%, depending on the model and the cost component.” (Exhibit 4506-8.) The evidence Dr. Hanemann relied on seems to support the existence of economies of scale, just as the California Legislature has declared in Pub. Util. Code §2719(c). The economies of scale applicable to operation by Liberty would be lost were the Town seek to operate the Apple Valley system on a standalone basis.

By contrast, Mr. Koorn reviewed no studies regarding economies of scale in the utility industry because he didn’t believe it “pertained to my analysis.” (6/30/20 Koorn 26:11-23.) He did no research to determine what cost elasticities applied to the operation of water systems. (6/30/20 Koorn 27:12-14.) He did not know whether Liberty is able to negotiate volume discount contracts with its suppliers due to its size. (6/30/20 Koorn 27:15-17.) He did not know how many connections Liberty served nationally. (6/30/20 Koorn 24:6-22.) He did not know how many connections Park Water served in total, and did not know that Park Water had employees in Downey who provided services to the Apple Valley system. In fact, Mr. Koorn had never even heard of Park Water when he did his study. (6/29/20 Koorn 112:16-113:6; 6/30/20 Koorn 25:22-25.) Mr. Koorn understated the costs of operation under Town ownership by failing to take into account the economies of scale that exist under Liberty ownership but would be lost under Town ownership. [21]

d. The Town Expert’s Calculation of an Administrative Overhead Savings in the Financial Analysis of Operating Expenses Under Town Ownership Does No Appear to be Supported by the Weight of the Evidence

As noted, Mr. Koorn concluded that the Town’s revenue requirement to operate the water system would be less than Liberty’s. In reaching that conclusion, Mr. Koorn deleted the “Allocations” charges he used for Liberty’s continued operation — approximately $3,350,000 — and replaced it with a far smaller amount of $1,064,807 for “Administrative Overhead” under Town ownership. (6/30/20 Koorn 30:13-33:8; Exhibit 3999-12; 3999-31.) This paper “savings” of $2.2 million was equal to the entire difference between Mr. Koorn’s assessment of Liberty’s operating expenses and his assessment of the Town’s operating expenses for 2019. (6/30/20 Koorn 33:13-19; Exhibit 1047.)

But Mr. Koorn’s methodology, it appears, used an unjustified assumption. He assumed that the Town’s administrative overhead charges would be 12% of the water system’s total O&M and A&G expenses, amounting to an annual overhead charge to the Water Enterprise Fund of $1,064,000. (6/30/20 Koorn 37:7-39:9.) Mr. Koorn’s basis for his 12% overhead figure was a single page of numbers (with no back-up) from seven different systems, including two in Washington. (6/30/20 Koorn 41:20-42:10; Exhibit 3996-8.) His single page of numbers included 10 years’ of data from four cities and six years’ of data from three other cities. (6/30/20 Koorn 40:22-41:1; Exhibit 3996-8.) He calculated averages for each of the seven cities and then averaged the averages to reach a “result” of 12.2% as the administrative overhead percentage to apply to total O&M and A&G under Town ownership. (6/30/20 Koorn 42:11-14; Exhibit 3996-8.)

What Mr. Koorn failed to consider, however, was data about the administrative overhead that the Town of Apple Valley has actually charged to and extracted from its other existing Enterprise Funds. The historical data for the Town’s Sewer and Solid Waste Enterprise Funds show the Town has charged an average administrative overhead percentage of 37.9%. (Exhibit 1049-5.) And omitting the large payments to third-party contractors who treat the Town’s sewage and collect its garbage — as Mr. Koorn did in arriving at the overhead charge for the City of Santa Maria (Exh, 3996-8) — increases the Town’s average administrative overhead percentage to 109.9%. (Exhibit 1051-1.) [22]

The number of employees who work for the Town’s existing Enterprise Funds also demonstrates that Mr. Koorn’s determination that the Town would extract only $1,064,807 in administrative overhead from its Water Enterprise Fund is unreasonably low. The Town’s budget for FY 2020 shows the number of full time equivalent employees, and associated charges for administrative overhead, for each of its existing Enterprise Funds:

Enterprise Fund # of FTEs Admin. Overhead Source
Sewer 5010 6.35 $748,400 Exhibit 925-193
Solid Waste 5510 4.67 $789,400 Exhibit 925-195
Choice Energy 5810 [23] 1.00 $946,500 Exhibit 925-201
TOTAL 12.02 $2,484,300

The Town’s witnesses did not agree on how many employees its Water Enterprise Fund would require. Mr. Robertson testified the Town would add 40 to 45 employees if it takes the Water System. (1/15/19 Robertson 40:13-16.) Mr. Close testified the Town would need 51.2 full-time employees working 2,080 hours a year or 62.6 full-time employees working 1,700 hours a year to run the water system. (6/23/20 Close 17:11-15.) Mr. Koorn did not know how many employees it would take for the Town to operate the water system. (6/29/20 Koorn 109:22-110:5.)

But using the lowest number (which would be most favorable to the City for this analysis) — Mr. Robertson’s 40-employee estimate — the Town’s Water Enterprise Fund would be more than three times larger than its three other Enterprise Funds combined, in terms of number of employees. To suggest that the Town would charge the Water Fund only $1,064,807 in administrative overhead when the Town charges its other three Enterprise Funds nearly $2.5 million in administrative overhead — with only 12 total employees — is not reasonable. The Town is charging its other three Enterprise Funds over $200,000 per employee in administrative overhead (as shown in the table above: $2,484,300 in total overhead divided by 12.02 total employees) but, according to Mr. Koorn, the Town would only charge its Water Enterprise Fund about $26,500 per employee ($1,064,807 divided by 40 employees). Especially in light of the poor financial condition of the Town’s General Fund discussed above, the Town’s financial incentive would be to extract more in administrative overhead from the water fund, not less.

Mr. Koorn’s opinion that the Town would extract only $1,064,807 in administrative overhead from the Water Enterprise Fund appears to be an understatement of the revenue requirement under Town ownership. Mr. Koorn’s model used a low level of revenue under Town ownership, which affects all of his comparisons of Town ownership versus continued Liberty ownership.

e. Mr. Koorn’s Projection of Future Water Bills Does Not Appear to be Accurate Because It Is Based On An Erroneous Assumption.

As noted, Dr. Hanemann’s model shows that the system’s revenue requirements will be higher under Town ownership, for each of the purchase prices analyzed. (Exhibit 978-2; Exhibit 978-4; Exhibit 978-6.) This revenue need will translate into higher water rates: under Town ownership, the Town’s ratepayers will have to pay higher water rates in order to produce the additional revenue that will be needed for the Town to operate the system rather than Liberty. (1/8/20 Hanemann 101:14-18; 1/9/20 Hanemann 5:14-24, 7:6-14.)

Mr. Koorn performed an erroneous analysis in an attempt to show otherwise. His first step was trying to determine how the “average monthly customer bill” would increase in the future under continued Liberty ownership. (Exhibit 4333-48.) He purported to calculate Liberty’s “historical average monthly customer bill” from January 1, 2011, through July 1, 2019, and concluded that the annual increase over that period was 4.82% per year. (Exhibit 4333-46, 4333-47, 4333-48.) But Mr. Koorn’s calculation of “historical average monthly customer bills” was erroneous because he assumed that the average customer consumed 11.6 CCF of water every month from January 1, 2011, through July 1, 2019 — what he referred to as the “constant consumption assumption.” (6/30/20 Koorn 107:14-108:3, 113:3-5.)

Mr. Koorn’s “constant consumption assumption” appears to be erroneous; and from that it follows that his projection of future Liberty rate increases was likewise flawed. In fact, the evidence showed that the average residential customer in Apple Valley consumed 17.0 CCF of water per month in 2011, not 11.6 CCF. (Exhibit 975; 1/6/20 Jackson 85:16-88:4.) And the evidence also showed that the average residential customer in Apple Valley consumed 17.3 CCF of water per month in 2012, not 11.6 CCF. (Exhibit 975.) Exhibit 975 also shows all of the other average monthly consumption amounts by residential customers since January 1, 2011. There was no contrary evidence.

Because water bills include quantity rates based on consumption, Mr. Koorn’s graphs (Exhibit 4333-46, 4333-47) do not show anything about “Historical Average Monthly Customer Bills,” — all they show is what a hypothetical customer who happened to use 11.6 CCF of water constantly over the years would have paid for water. (6/30/20 Koorn 109:25-110:23.)

The Town tries to defend Mr. Koorn’s approach by arguing, “The point is to measure the difference in rates, not consumption.” (Town’s Brief, at p. 44.) But Mr. Koorn was not purporting to measure differences in rates — his graphs clearly state in their headings that he was trying to determine “Historical Average Monthly Customer Bills,” not differences in rates. (Exhibit 4333-46, 4333-47, emphasis added.) And he then used his data to make projections about the “Average Monthly Customer Bill” (Exhibit 4333-48, 4333-51, 4333-52, emphasis added) — Mr. Koorn’s own words — not projections about future differences in rates, as the Town argues. Using Mr. Koorn’s own methodology but correcting for his erroneous assumption that the average monthly residential customer used 11.6 CCF of water in 2011 instead of 17.0 CCF of water in 2011 produces a very different result — an average annual increase of 1.49%, not 4.82%. (Exhibit 1180-5.)

In short, Mr. Koorn’s attempts to compare “projected monthly customer bills” under Liberty ownership versus Town ownership used an erroneous analysis. (Exhibit 4333-52.) His red line for “Liberty Utilities” shows bills increasing at the erroneous rate of 4.82% per year instead of 1.49% per year. And his other lines for Town ownership are all based on understated annual revenue requirements — generated by ignoring lost economies of scale, and by including the too-low 12% administrative overhead factor, as the Court has already addressed. The evidence shows that, adjusting for inflation and considering the actual average monthly consumption, residential water bills in Apple Valley — including surcharges and other monthly charges — have decreased by 6.8% from 2009 through 2019. (Exhibit 976.)

Dr. Hanemann’s conclusion that Apple Valley customers will face higher water bills under Town ownership was more compelling and the Court accepts it. Accordingly, insofar as future water bills are concerned, the Town’s Project is not required by public interest and necessity and is not a “more necessary” public use than continued ownership and operation of the system by Liberty.

f. The Town’s Avoidance of Property Taxes and Income Taxes is Not a True Cost Savings.

If the Town were to acquire the water system, it would not pay income taxes or property taxes, as Liberty does. This tax avoidance is not properly considered a “savings” of Town ownership. As Dr. Hanemann testified, the Town’s tax avoidance just creates holes in the budgets of other public entities, which must be replaced by other taxpayers. The tax revenues needed to operate those other public entities would not be reduced by the Town’s acquisition of the Apple Valley water system. Thus, “tax avoidance” is not a savings at all, but a shifting of the tax burden from Liberty to other taxpayers. (1/8/20 Hanemann 36:9-37:6, 98:9-99:3.)

Mr. Koorn, however, listed the Town’s tax avoidance of $764,345 in property taxes and $2,256,636 in income taxes as a “Year 1 Reduction under Town Ownership.” (Exhibit 4333-32.) Saying that reducing other public entities’ tax revenues by $3 million is a “savings” or a “benefit” of Town ownership is an economic falsehood. It is actually a cost of Town ownership, and Dr. Hanemann was correct to treat it as such. (1/8/20 Hanemann 98:9-99:3; Exhibit 425-24 Row 66.)

g. Dr. Hanemann’s Economic Model Appears to be More Thorough and Accurate Than Mr. Koorn’s Model.

Both Dr. Hanemann and Mr. Koorn created models of financial proformas in order to compare the performance of the system under continued Liberty ownership versus under Town ownership.

Dr. Hanemann’s model covers 31 years, in order to include the entire life of the acquisition debt (30 years), plus one year after the debt is paid off. (1/8/20 Hanemann 40:13-24; Exhibit 425.) He began with an analysis of how much water would be consumed by all classes of the system’s customers, adding a water loss factor in order to determine how much total water the system would need to produce to serve its customers. Dr. Hanemann relied on agreed-upon data from the Joint Comparison Exhibit in the pending rate case for this analysis. (1/8/20 Hanemann 50:22-51:25; Exhibit 425-120.) He used agreed-upon water production data to determine water supply costs for the system. (Exhibit 425-114.) Dr. Hanemann testified in detail about all of his input data for O&M, A&G, taxes, return on rate base, capital expenditures, and acquisition debt payments. (Exhibit 425-6 to 425-7.) Only after doing so did he present the output from his model: comparative graphs of total revenue requirement under continued Liberty ownership vs. under Town ownership at the three different purchase prices. (Row 76 at Exhibit 425-7, 425-9, 425-11, 425-13, 425-15, 425-17, 425-19, and 425-21 [Liberty ownership]; Row 83 at Exhibit 425-24 et seq.[$100 million purchase price], Row 83 at Exhibit 425-47 et seq. [$122.3 million purchase price], Row 83 at Exhibit 425-70 et seq. [$243.8 million purchase price]; Exhibit 978-1 to 978-6.) Under each purchase price, the revenue requirement under Town ownership would be more than the revenue requirement under continued Liberty ownership. (1/8/20 Hanemann 101:14-18; 1/9/20 Hanemann 5:14-24, 7:6-14; Exhibit 978-2, 978-4, 978-6.)

Dr. Hanemann recognized that, in 2049, the Town’s acquisition debt would be paid off and the Town would own the system free and clear. He analyzed the discounted present value under the two ownerships in 2049 and beyond, which demonstrated that, even after the debt is paid off, the ratepayers would still come out worse financially by needing to wait 31 years to own the system debt-free. The discounted present value for each year is included in the model. (Exhibit 425-7 et seq. Row 83 [Liberty ownership]; Exhibit 425-24 et seq. Row 90 [$100 million purchase price]; Exhibit 425-47 et seq. Row 90 [$122.3 million purchase price]; Exhibit 425-47 et seq. Row 90 [$243.8 million purchase price].) The results of Dr. Hanemann’s discounted present value analysis is shown at Exhibit 425-93. Even though the Town will someday pay off the debt, the community is better off financially under continued Liberty ownership rather than Town ownership, at any purchase price. (1/9/20 Hanemann 12:25-15:4.) [24]

Mr. Koorn’s model did not reflect the level of careful analysis that Dr. Hanemann’s did:

  • Mr. Koorn’s model covered nine years, from 2019 through 2027, even though the Town would not be operating the system in 2019 and Mr. Koorn assumed the Town would acquire the system “in 2020 at some point.” (6/30/20 Koorn 14:25-15:26.)
  • Mr. Koorn did no analysis of the system’s water consumption or production. As noted above, he rooted his model in superseded data from Liberty’s 2018 Revenue Requirement Report, rather than the 2019 Joint Comparison Exhibit. (6/29/20 Koorn 127:1-6.)
  • Mr. Koorn failed to analyze or apply the economies of scale that Liberty enjoys and the Town would lose by operating the system on a standalone basis. (6/30/20 Koorn 21:26-23:13.)
  • Mr. Koorn used an inappropriate administrative overhead factor of 12% that produced an unrealistically low revenue requirement under Town ownership, as discussed above.
  • Mr. Koorn used an inappropriate “constant consumption assumption” to compare future water bills under Town ownership versus Liberty ownership. And,
  • Mr. Koorn did not compare the present value of revenue requirements over time, including after the Town’s acquisition debt is paid off.

Overall, Dr. Hanemann did a more thorough and accurate assessment of the economic consequences to Apple Valley customers from a Town acquisition of the water system. The preponderance of the evidence on this issue proves that the Town’s Project is not required by the public interest and necessity, and is not a “more necessary” public use of Liberty’s property that the Town seeks to acquire.

4. When Properly Analyzed, Liberty’s Water Rates Compare Favorably to Water Rates Charged by Nearby Municipally Owned Water Systems.

Both sides presented evidence comparing the nominal rates for water usage charged by Liberty versus other water systems. For Liberty, Dr. Hanemann adjusted the data based on different attributes of the water systems — for example, consumption, alternate revenue sources, and capital expenditures. For the Town, Dr. DeShazo did not control for such differences between water systems. Making such adjustments is an appropriate step in seeking to compare apples-to-apples data. In a similar vein, when real estate appraisers value property using the comparable sales approach, they typically adjust the raw sales price to account for differences between the properties. Emeryville Redevelopment v. Harcros Pigments, Inc., 101 Cal. App. 4th 1083, 1094 (2002) (appraisers “typically adjust the price to reflect such matters as material differences between the properties and differences in market forces between the time and location of the comparable sale and that of the property being valued.”).

Some key differences in the water rates charged by Liberty versus those charged by other nearby water system were addressed by the California State Auditor in its April 2015 report entitled “Apple Valley Area Water Rates.” (Exhibit 68.) The State Auditor — an arm of the State, independent of any of the parties to this lawsuit — found that operational and accounting differences between investor-owned utilities like Liberty and municipally-owned utilities explain some of the differences between the nominal rates they charge. For example, publicly owned utilities receive revenues from other sources like property taxes and connection fees that do not appear on customer’s bills, whereas investor-owned utilities derive all of their revenue from rates. (Exhibit 68-7.) [25] In addition, the State Auditor found that Hesperia provided financial assistance to its water system to help it keep its rates lower and subsidized rates by declining to collect the full amount of services provided by the City to its water utility. (Exhibit 68-36; Exhibit 1130-2.) Victorville kept its rates low by deferring routine maintenance and scheduled asset replacements. (Exhibit 68-37.)

Given those differences, Dr. Hanemann explained that looking solely at nominal rates charged to customers does not fully capture the true charges of the systems. (1/9/20 Hanemann 33:9-34:21.) He performed a comparative analysis of the rates charged by Liberty and four nearby government-owned systems that the Town itself had selected as comparators, including Victorville, Hesperia, Helendale Community Service District, and County Area 64. (Exhibit 386.) In a manner similar to the adjustment process an appraiser would use to account for differences between properties, Dr. Hanemann controlled and adjusted for important differences between the systems, including:

  1. Consumption levels. Dr. Hanemann analyzed the actual average consumption of the systems’ customers rather than pretending that each system’s water users consumed identical quantities of water (Exhibit 429-1);
  2. Capital spending. Dr. Hanemann recognized that a water system can keep rates artificially low by deferring capital spending and letting the system deteriorate. For a fair comparison, he adjusted for different rates of capital expenditures between different systems (Exhibit 427-10); and
  3. Revenues derived from sources other than water rates, such as property tax revenues, connection fees, subsidies from the general fund, and investment income “received by the municipal systems but not by Liberty (Exhibit 429-6, 429-7, 429-8).

After controlling for these factors (Exhibit 429-3 to 429-5), Dr. Hanemann’s analysis showed what average monthly rates would be for each of the systems if they operated on equal footing — and Liberty’s average residential monthly charges compare favorably to — in fact, are less than — the average residential monthly charges for each of the other systems. (1/9/20 Hanemann 53:15-54:19; Exhibit 426.)

The Town’s water rate analysis by Dr. DeShazo did not control for any of the relevant differences between the systems. He analyzed water rates based on a standardized consumption of 11.555 CCF for all the systems, regardless of the actual level of consumption in each community, and notwithstanding that both the Raftelis rate study and the Environmental Protection Agency’s guidance documents that he referenced looked to actual levels of consumption. (3/10/20 DeShazo 115:7-15, 116:21-117:15, 118:4-16, 123:5-21.) Dr. DeShazo’s water rate analysis also did not consider the variable impacts of alternative sources of revenue like connection fees, property taxes, and subsidies, or the massively different rates of capital expenditures between systems. (3/16/20 DeShazo 23:23-25:6, 34:8-12, 47:16-49:7.) His approach mirrored that taken by the Town itself when it adopted its Resolutions of Necessity in November 2015. (Exhibit 891-13.)

It is overly simplistic to say that Victorville or Hesperia charge X dollars per CCF while Liberty charges Y dollars per CCF; a fulsome comparative analysis requires more than that. The Court finds that the nominal water rates charged by Liberty and other systems do not support the conclusion that the Town’s proposed acquisition is required by the public interest or is a “more necessary” public use of the water system.

IV. LIBERTY HAS REBUTTED THE PRESUMPTION THAT THE TOWN’S PROJECT IS PLANNED IN THE MANNER MOST CONSISTENT WITH THE GREATEST PUBLIC GOOD AND THE LEAST PRIVATE INJURY.

Code Civ. Proc. §1240.030(b) states that the power of eminent domain may be exercised only if it is established that “[t]he project is planned or located in the manner that will be most compatible with the greatest public good and the least private injury.” (Emphasis added.) The Town’s Project is proper unless another plan or location “would involve an equal or greater public good and a lesser private injury.” Law Revision Commission Comment to Section 1240.030.

Liberty objects to the Town’s right to take Liberty’s property under Code Civ. Proc. §1250.370(c) — that “[t]he proposed project is not planned or located in the manner that will be most compatible with the greatest public good and the least private injury.” (Emphasis added.) The Court sustains Liberty’s objection. The preponderance of the evidence at trial shows that the Town’s Project does not meet the greatest public good/least private injury standard.

The leading case on this factor is SFPP, LP. v. The Burlington Northern & Santa Fe Railway Co., 121 Cal. App. 4th 452 (2004). Plaintiff SFPP was a pipeline company, and defendant BNSF was a railroad company- so neither party was a public entity. While both entities had statutory powers of condemnation, neither was required (or entitled) to adopt a resolution of necessity (SFPP, 121 Cal. App. 4th at 472 n. 12), so the elements of necessity under Section 1240.030 were subject to proof at trial, just as in this case.

By agreement, the pipeline company had placed a gasoline pipeline within the railroad’s right of way. The railroad desired to add a second track within its right of way and requested the pipeline company to relocate its pipeline to another location within the right of way, pursuant to the parties’ agreement. The pipeline company refused to relocate its pipeline and, instead, filed an eminent domain action to condemn a 5-foot easement that encompassed the location of its existing pipeline. The pipeline company’s “project” was thus keeping its pipeline in exactly its existing location within the right of way, rather than moving it. The railroad objected to the pipeline company’s right to take the easement. (SFPP, 121 Cal. App. 4th 452, 456-8.)

The parties submitted the matter to a private referee who found the pipeline company did not have the right to take the easement it sought by eminent domain. In particular, the referee concluded that the pipeline company failed to prove the required element of Code Civ. Proc. §1240.030(b) — that its project was planned or located in the manner “most consistent with the greatest public good and the least private injury.” The trial court entered judgment consistent with the referee’s ruling and the Court of Appeal affirmed.

The Court stressed the comparative nature of the analysis under Section 1240.030(b):

The words “most,” “greatest” and “least” are comparative terms that relate to both the plans and the location of the project. Such comparative terms cannot be applied in the abstract; instead, they unambiguously show the Legislature’s intent that the condemnor’s proposed location be compared with other potential locations to see how those other locations compare in effect on the public good and private injury resulting from the project. (SFPP, 121 Cal. App. 4th at 469-470.)

While SFPP involved the comparison of greatest public good and least private injury of the location of the project, here the issue is not location but the plan for the Town’s Project. But these concepts have equal dignity under the statute — the issue to be determined is whether the project is “planned or located’ in the manner most consistent with the greatest public good and least private injury. The same comparative analysis undertaken by the SFPP Court regarding the location of the proposed project in that case must be undertaken in this case regarding the Project’s plan. The comparative terms “most,” “greatest,” and “least” thus require the Court to compare and contrast the Town’s planned Project with alternative plans, including the status quo.

The balance under Section 1240.030(b) requires an analysis of “public good” and “private injury.” The presumption may be overcome if another plan “would involve an equal or greater public good and a lesser private injury.” SFPP, 121 Cal. App. 4th at 470. The Court held that “all the facts and circumstances” are to be considered in making the greatest public good/least private injury determination:

We, therefore, hold that a finder of fact inquiring into greatest public good and least private injury should consider all the facts and circumstances, and the preexisting location of an improvement is only one of the factors relevant to that inquiry. (SFPP, 121 Cal. App. 4th at 473.)

Applied here, the Court is to consider “all the facts and circumstances,” including the status quo — continued operation by Liberty — which is the preexisting plan for continued operation of the water system.

Risk and efficiency of a planned Project are elements to be analyzed in making the greatest public good/least private injury determination. The Court in SFPP noted that “the public good” in that case “takes the form of less risk and more efficient performance of the rail system.” SFPP, 121 Cal. App. 4th at 474 n. 14. Similarly here, “the public good” includes an analysis of less risk and more efficient performance of the water system if left in Liberty’s hands, rather than taking a gamble on the Town’s ability to operate the system. The issues of risk and efficiency are already discussed above. The continued status quo — i.e., the continued operation of the water system by Liberty — is an alternate project plan which involves less risk and greater efficiency in the operation of the system than would be the case under the Town’s Project, under which the system would be transferred to the Town. Thus, the continued status quo involves greater public good and lesser private injury than the Town’s proposed Project.

In addition, there are other factors that show the Town’s Project is not planned in the manner most compatible with the greatest public good and the least private injury. And these factors are, simultaneously, additional evidence disproving that the Town’s Project is required by the public interest and necessity, or that the Town’s Project constitutes a “more necessary public use” of Liberty’s water system.

A. Low-Income Customers Will Suffer Significant Private Injury Because The Town’s Project Does Not Include Providing Discounted Rates To Them.

Approximately 18% of Liberty’s customers are low-income and qualify for discounted water rates through the CARW (California Alternative Rates for Water) program. (12/17/19 Jackson 55:12-18; 1/6/20 Jackson 72:8-10.) As stated in its Water Action Plan, one of the PUC’s primary objectives for the investor-owned utilities it regulates is to provide assistance for low-income ratepayers. (Exhibit 270-5.) Liberty assists low-income customers through a special PUC-approved tariff that provides a bi-monthly discount of $16.76 (2 × $8.38) from their water bills. (1/6/20 Jackson 70:4- 71:16; Exhibit 309-47.) The low-income discounts are funded through a 69¢ per month surcharge charged to the remaining customers. (1/6/20 Jackson 72:11-73:9; Exhibit 309- 49.)

If the Town were to acquire the water system, it would not be able to provide a low-income discount that is funded by a surcharge on the rest of the customers. (1/9/20 Hanemann 15:19-25.) As the State Auditor noted: “Under Proposition 218, however, a publicly run water district may not use revenue derived from water fees to offer reduced rates to low-income ratepayers. Public utilities can offer such programs but must fund them through other revenue sources, such as the city’s general fund.” (Exhibit 68-15.)

There is nothing in the Town’s Project that indicates any intent to provide discounts to low-income customers. Its Resolutions of Necessity say nothing about such discounts. (Exhibit 3651; Exhibit 3652.) Likewise, the Town’s November 17, 2015, staff report incorporated into its Resolutions of Necessity says nothing about providing such discounts. (Exhibit 891; Exhibit 3651-1 §1; Exhibit 3652-1 §1.) Nor is there anything in the Town’s July 2019 Water Enterprise Transition Plan that indicates that the Town intends to provide a low-income discount if it succeeds in acquiring the water system. (1/15/20 Hanemann 8:23-10:17; Exhibit 156-5.)

The issue was expressly brought to the Town’s attention in a comment to its draft Environmental Impact Report:

The DEIR fails to address whether the Town would continue AVRWC’s low-income discount program to needy individuals and seniors. Under Proposition 218, the Town is prohibited from instituting such a program. The lack of a low-income discount program will have a significant impact on citizens in need, leading to potential population shifts and impacts on social services. (Exhibit 165-226.)

In response, the Town dismissed the comment as raising only “economic and social impacts” which required no response. (Exhibit 165-244.) The Town noted it had “other options” for subsidizing water rates through “unrestricted revenue sources,” but stood conspicuously silent on the Town’s intent to implement such subsidies. (Exhibit 165-244.) While the Town could, if it chose to, fund a low-income discount by way of a direct subsidy from its General Fund, the financial condition of the General Fund (addressed above) calls into question the Town’s ability and likelihood of doing so.

In sum, the evidence established no intent by the Town to continue low-income discounts as part of its Project if it were to acquire the water system. If the low-income residential customers were to lose their discount, they would pay substantially more for water service. The current $8.38 per month discount represents a 14% reduction in the water bills of low-income customers. (1/9/20 Hanemann 16:21-17:11; Exhibit 978-7 note 1.) In other words, low-income customers will be hit with an immediate 14% increase in their water bills if they lose their discounts. Over the period of Dr. Hanemann’s model, low-income customers would pay an additional $20.6 million in water bills under Town ownership than they would under continued Liberty ownership, with their low-income discounts intact. (1/9/20 Hanemann 17:12-18:13; Exhibit 978-8.)

Low-income customers are likely to suffer substantial private injury if the Town acquires the water system. Nothing in the Town’s Project requires it to continue providing the current low-income discount, and it cannot do so by the approved funding mechanism currently employed by Liberty. The Town could have crafted a Project that included continued assistance to low-income customers — with the funding source for the assistance clearly spelled out — but it did not do so. Thus, the Town’s current Project is not planned in the manner most consistent with the greatest public good and the least private injury.

B. The Town’s Project Would Cause Additional Private Injury To Those Who Currently Rely on Tax Revenues That Would Be Lost If the Town Were To Acquire the System.

Liberty Apple Valley is the third largest payer of property taxes in the Town of Apple Valley. (11/12/19 Harris 119:5-16; Exhibit 238-139.) Some of the property tax payments that are paid to the Town are distributed to other entities, like the Apple Valley Unified School District and the County of San Bernardino. (11/12/19 Harris 120:19-121:15.) If the Town acquires the water system, it will not pay those property taxes, and the revenue that is distributed to other entities will be lost. (1/8/20 Hanemann 36:9-16; 6/15/20 DeShazo 9:18-26.) See California Constitution Art. XIII, Sec. 3(b). Mr. Koorn testified that the total lost property tax revenue would be $764,345 in the first year of Town ownership alone. (6/30/20 Koorn 4:3-11; Exhibit 4333 32.)

The entities that will lose property tax revenue if the Town acquires the water system, as well as those that derive services from those tax revenues, will suffer substantial private injury. The Town could have chosen to offset those private losses, again, by using General Fund revenues to make up for the shortfall, but its Project includes no plan to do so. There is nothing in the Town’s Resolutions of Necessity, its staff report, or its more recent transition plan that addresses any plan to make up these lost revenues to other entities and members of the public that use their services. (Exhibit 3651; Exhibit 3652; Exhibit 891; Exhibit 156.) To the contrary, the Town’s staff report that was incorporated into its Resolutions of Necessity says only that “acquisition by the Town would also save this expense.” (Exhibit 891-10.)

The Town could have structured a Project which backfilled these lost property tax collections, but its proposed Project does not do so. Accordingly, the Town’s Project is not planned in the manner most consistent with the greatest public good and the least private injury.

C. Water Customers in Smaller (and Frequently Poorly-Run) Nearby Systems Will Suffer Private Injury Because Liberty Will Not Be Available to Rescue Them.

The PUC recognizes that many smaller water systems lack the resources and skill to continue to provide healthy water to their customers, and encourages Class A water companies like Liberty to take them over. As stated in the PUC’s Water Action Plan:

Smaller water companies often do not have the resources or expertise to operate in full compliance with increasingly stringent and complex water quality regulations. Many water companies are too small to be viable in the long-term, raising questions as to whether they will be able to continue to provide clean and reliable water in the future. [Department of Public Health] requests Class A utilities (over 10,000 connections) to report on an annual basis which smaller utilities they might consider purchasing. (Exhibit 270-11.)

The PUC’s concern is supported by the number of smaller systems that surround Liberty’s AVR system. (Exhibit 920-57.) There are five smaller systems, each serving less than 1,500 connections, that are adjacent to Liberty Apple Valley, and each of the smaller systems have had multiple water quality violations (unlike Liberty1s far larger system with 20,000 connections, which has had zero). (Exhibit 920-57.)

The Legislature has clearly recognized the greater public good that accrues when larger water systems acquire and operate smaller ones. It adopted the Public Water System Investment and Consolidation Act of 1997 to encourage such acquisitions. The Legislature found and declared that economies of scale are achievable and “will provide benefits to ratepayers” when larger systems acquire and operate smaller ones. See Pub. Util. Code §2719(c) and (d). The Act encourages such acquisitions by giving favorable rate base treatment to regulated utilities when they acquire small systems. (1/16/20 Bruno 51:2-13.)

Liberty has in fact complied with the policies of the PUC and the Legislature, as demonstrated by the acquisition and operation of the Yermo water system. Yermo is a small disadvantaged community in unincorporated San Bernardino County. Its water system had fallen into utter disrepair and was put into receivership by Court order. (11/6/19 Thomas-Keefer 42:8-23.) The Yermo system had 46 water quality violations from 1993 through 2014. (11/6/19 Thomas-Keefer 42:24-43:9.) As found by the PUC: “Yermo has had a long, troubled, and well-documented history of absentee ownership, mismanagement, negligent operations, unsafe, inadequate and substandard water service, including unsafe water supplies, service interruptions, contamination and other operation problems that imperiled the public health and safety of Yermo customers.” (Exhibit 918-2.)

Shortly before Liberty acquired the Apple Valley water system in January 2016, Liberty’s predecessor acquired the Yermo system. Liberty immediately began to make the improvements necessary to cure the system’s public health and safety problems. For example, Liberty connected Yermo’s two separate systems (operated by two separate wells) in order to provide needed redundancy; it added chlorination disinfection to the well sites that had not previously existed; it capped old abandoned wells; it brought water quality monitoring into compliance; and it added a back-up generator so the wells would work even if power was lost. (1/16/19 Thomas-Keefer 45:19-47:22; 7/15/20 Thomas-Keefer 19:3-10.) Yermo is operated as a separate division of the Apple Valley system, and the PUC sets rates separately for Yermo. (12/17/19 Jackson 56:11-22.) The public has benefited from Liberty’s operation of a safer and more reliable water system in Yermo.

If the Town were permitted to acquire the Apple Valley water system, the policies of the PUC and the Legislature (as expressed in Pub. Util. Code §2719) to encourage the consolidation of smaller systems with larger systems would be turned on their head. Currently, Liberty is a good candidate to acquire some or all of the smaller systems that are adjacent to the AVR system but outside the Town’s boundaries — like Apple Valley View MWC (275 connections), Thunderbird CWD (840 connections), Apple Valley Foothill CWD (712 connections), Mariana Ranchos CWD (1,386 connections), and Juniper-Riviera CWD (415 connections). (1/16/20 Bruno 54:19-55:4; Exhibit 920-57.) For example, consolidation studies for Liberty to operate the Apple Valley Foothill system, which has experienced water quality problems, have already been submitted for review by the State Water Resources Control Board and are presently pending. (2/3/20 Penna 54:15-55:1, 61:15-20; Exhibit 1016.) The Apple Valley View system also approached Liberty seeking assistance due to water quality problems, and is awaiting the outcome of this case before proceeding. (2/3/20 Penna 60:7-61:9.)

The public good inherent in the opportunity for consolidation of such nearby smaller systems with an experienced operator like Liberty would be lost if the Town’s Project were to proceed. The Town has shown its lack of interest in acquiring smaller systems by its decision not to include acquisition of the Yermo system in its Project because the Yermo facilities “do not provide any other benefit to the Town’s residents.” (Exhibits 165-8; Exhibit 891-3.) Moreover, it will be difficult for Liberty Park Water to economically and efficiently serve the Yermo water system from 130 miles away, in Downey, if the Town’s Project is permitted to proceed. (1/16/20 Bruno 54:13-18.)

The Town’s Project and its parochial interests will cause private injury to the customers of nearby smaller systems because Liberty will no longer be a viable candidate to acquire them, consistent with the policies of the PUC and the Legislature. Residents of Yermo will also suffer private injury because Liberty’s ability to operate the system efficiently will suffer if Liberty no longer owns the Apple Valley system. In short, the Town’s acquisition creates a significant threat and damage to small-system customers — precisely the customers that need the skill and resources of a Class A water utility to serve the interests of public health and safety. Because the Town’s Project provides no public benefits to these customers — only private injury — its Project is not planned in the manner most consistent with the greatest public good and the least private injury.

DISPOSITION

The court finds that Liberty, through evidence introduced during the court’s bench trial, has rebutted the presumptions established by Eminent Domain Law for the taking of its property for use as a municipal water utility. In particular, Liberty has disproved that 1) the public interest and necessity require the Town’s Project (Code of Civil Procedure section 1240.030(a)); 2) the Town’s Project is planned in the manner that will be most compatible with the greatest public good and the least private inquiry (Code of Civil Procedure section 1240.030(G)); and 3) the use for which the Town seeks to take Liberty’s property is a more necessary public use than the use to which Liberty’s property is presently devoted (Code of Civil Procedure section 1250.370(G) and (c) and section 1250.360(f). Therefore, Liberty’s objections to the Town’s right to take the Apple Valley Water System are sustained.

Finally, the court shall find for Liberty and shall dismiss this action under Code of Civil Procedure section 1260.120(c)(1).

Dated this 7 day of May, 2021

DONALD ALVAREZ Judge of the Superior Court

Footnotes
[1] In its post-trial brief, Liberty requests the court take judicial notice of the file from the CEQA lawsuit. The court can take judicial notice of its ruling on the writ petition.
[2] The Amended Initial Study stated:
“The Town is proposing only to acquire and operate the existing system, and is not proposing changes or expansion to the physical AVR System or to the associated water rights, nor is the Town proposing any changes to the manner of operation of the AVR System or the exercise of the associated water rights. “The Town would operate and maintain the system out of AVR’s existing operations and maintenance facility. which is located at 21760 Ottawa Road. approximately half a mile south of Highway 18 and 300 feet east of the intersection of Navajo Road and Ottawa Road.” “The AVR System is a stand-alone system …” “The Town’s acquisition of AVR’s water rights would entitle Town to the currently established allocations assigned to AVR and would require the Town to meet the same standards in terms of replenishment if it were to exceed established limits on withdrawals.’ “The underlying purpose of the proposed project is for the Town of Apple Valley to acquire, operate and maintain the existing AVR System.” (Ruling p. 16:14-27, emphasis on original). The Final EIR included the same basic description (ID at pp 16:28 17:4.)
[3] As for more necessary use, under CCP 1240.650(a), given the property already has been appropriated to public use by Liberty “the use thereof” by the Town “for the same use … is a more necessary use than the use to which such property has already been appropriated” under section 1240.650 the presumption of a more necessary use established under subdivision (a) is rebuttable presumption.
[4] Liberty’s property is “appropriated to public use” under Code Civ. Proc. §1235.180 because Liberty is a regulated public utility. Slemons v. Southern California Edison, 252 Cal. App. 2d 1022, 1026 (1967). See also, South Bay Irr. Dist. v. Cal. American Water Co., 61 Cal.App.3d 944, 957 (1976) (“Property owned by a public utili water company is impressed with a public use.”); Patel v. Southern Cal Water Co., 97 Cal.App.4th 841, 845 (2002 (“Providing water is a public use.”). The Town cites authority on what constitutes a public use (Town’s Brief, at p. 19 which would be relevant if public use were contested. Here, however, there is no dispute that providing water to Apple Valley’s customers is a public use, regardless of whether the water were to be provided by Liberty or by the Town. The question is not the existence of a public use, but whether provision by the Town is a “more necessary public use” than continued provision by Liberty.
[5] The legislative history of SB 1757 was provided to the Court by Liberty’s Request for Judicial Notice Re: Legislative History of Senate Bill 1757, filed on July 13, 2018. As requested by Liberty, the Court again takes judicial notice of the same materials.
[6] This is not to say that arguments about the attributes of local control or the Town’s broader goal and policies are irrelevant. They are not. As explained below, much evidence on these topics was introduced at trial and has been considered by the Court.
[7] The Town argues that the inspection statute was unavailable to it because the constitutionality of the statute was under review by the Supreme Court in Property Reserve, Inc. v. Superior Court, 1 Cal. 5th 151 (2016). The argument is unavailing, as the only questions before the Supreme Court involved whether certain invasive or destructive testing required the government to pay compensation, and if so, whether the statute has adequate, processes for determining the amount of compensation. (1 Cal 5th at 167.) The pendency of that litigation would not have prevented the Town from inspecting the water system at any time, including in 2015, before it adopted its November 17, 2015, Resolutions of Necessity. (Exhibit 3651; Exhibit 3652.) From the record, it appears that the Town never demanded inspection of the system at any time before adopting its Resolutions and filing this action.
[8] Just as the Court in SFPP stressed that the words “most,” “greatest” and “least” in Section 1240.030(b) are “comparative terms” that require a consideration of different options, so too is use of the word “more” in Section 1240.650 in the phrase “more necessary public use” a comparative term that requires a comparison of the necessity of continued operation of the water system by Liberty with operation of the system by the Town. (SFPP, 12 cal. App. 4th at 469-470.)
[9] The PUC recognized this economic fact in the face of consumer frustration: “This leads many customers to puzzled exasperation ‘We did what you asked, we conserved, yet we have to pay more.” It is a unfortunate fact that even without overhanging WRAM balances, lower consumption combined with unchanging or even escalating fixed and variable costs necessarily means that future rates may need to be higher.” (Exhibit 987-11.)
[10] The Town repeatedly objected at trial to testimony regarding the GIS and SCADA systems, asserting that it was not permitted to inspect the systems during discovery. (11/6/19 Thomas-Keefer 14:3-9, 28:20-25; 6/16/2 Close 67:1-20.) But later it appeared that the Town never pursued inspection concerning the details to which it objected at trial. Neither the Town’s discovery request (Exhibit 1172) nor its counsel’s letter listing the facilities to be inspected (Exhibit 1173) mentioned the GIS or SCADA systems, and Mr. Close was not aware of any written request fo the data. (6/24/20 Close 42:3-45:13.) The Town did conduct depositions of witnesses to testify about how the GIS and SCADA systems were used by Liberty, and never filed any subsequent motion seeking to compel additional information on those topics. (6/25/20 Close 62:5-14, 65:12-67:16.)
[11] The Town argues that the two Desert Knolls tanks overlook numerous homes and “the results would be catastrophic” if the tanks were to rupture. (Town’s Brief, at p. 53.) But the evidence showed that the tanks were there first: the Desert Knolls tanks were constructed in 1949 and 1988, and most of the homes below the tanks were built after 1994. (6/23/20 Close 44:24-45:7; Exhibit 1179.) The Town was incorporated in 1988 (2/10/20 Lamson 28:18 19), meaning it was the Town that approved the construction of most of the homes built below the tanks after 1994. Having approved the homes below the tanks, the Town’s speculative argument of a “catastrophe” if the tanks were to fail is entitled to little weight.
[12] Even Mr. Close conceded that the system and its pressure zones satisfied Peak Hour Demand. (Exhibit 4295-6.) Notably, Mr. Close’s testimony was based on an inflated maximum day demand figure of 30.9 MGD rathe than 29.5 MGD. (6/23/20 Close 78:8-79:16.)
[13] A regulated utility cannot be sold without the approval of the PUC. (2/20/20 Schilling 33:14-16. After lengthy proceedings, the PUC approved the sale of the Apple Valley system to Carlyle in 2011 (2/20/20 Schilling 44:8-18; Exhibit 3566-1) and the subsequent sale of the system to Liberty in 2015 (Exhibit 3573-23).
[14] The Town argues that “only $1.8 million” of the $3 million should count because “[t]he remainder had been spent.” (Town’s Brief, at p. 89.) This is illogical. The entirety of the borrowed $3 million is shown as credit on the Town’s 2019 CAFR in calculating the $3.7 million bottom line “Net Change in Fund Balance” for the Genera Fund. (Exhibit 4315-44.) Other revenue that was “spent” is still fully counted as revenue — that’s exactly how “Ne Change in Fund Balance” is calculated. The Town’s argument is akin to a taxpayer urging the IRS it should not hav to pay income tax because all of its income has been spent.
[15] These numbers are the totals of the annual figures that are shown on Exhibit 864-1. After that exhibit was prepared, the Town transferred additional funds to the General Fund in FY 2019 as follows: Administrative Overhead from Sewer Fund 5010, $748,400; Administrative Overhead from Solid Waste Fund 5510, $789,400; and Franchise Fee from Solid Waste Fund 5510, $1,044,900. (Exhibit 4337-142, 4337-144.) In addition, Administrative Overhead transfers were made from the Apple Valley Choice Energy Enterprise Fund 5810 to the General Fund in the following amounts: FY 2017, $275,625; FY 2018, $946,300; and FY 2019, $900,000. (Exhibit 925-81, Exhibit 4337-35.) These updates bring the total above — from FY 2011 through FY 2019 — to $39,032,156. This is $39 million that was charged to and collected from the Town’s ratepayers and then transferred to the Town’s General Fund.
[16] To undertake a comparison of future water rates that would be charged by the Town and by Liberty requires an understanding of how rates would be set under both scenarios. Mr. Koorn was unfamiliar with numerous aspects of the PUC rate-setting process that is applicable to Liberty, including its currently pending rate case. For example, even though a Joint Comparison Exhibit is required in every PUC rate case, Mr. Koorn had never heard of one and did not use it in preparing his economic model. (6/29/20 Koorn 124:20-125:1, 126:21-24; Exhibit 267-48.) Notwithstanding the mountains of financial data and information submitted by Liberty to the PUC, Mr. Koorn reviewed and relied on only one single document from the current rate case in reaching his opinions — a superseded 2018 Revenue Requirement Report. (6/29/20 Koorn 121:4-122:1.) He did not review any of Liberty’s detailed work papers and was not aware they existed. (6/29/20 Koorn 128:14-20.) He was not aware that the PAO (formerly ORA) undertook a detailed review of Liberty’s application on behalf of ratepayers, and he reviewed no reports by PAO or ORA. (6/29/20 Koorn 128:21-129:9.) Likewise, before reaching his opinions Mr. Koorn did not review the Public Participation Hearing transcript, any data requests, or any briefs filed by Liberty or PAO/ORA in the pending rate case. (6/29/20 Koorn 129:10-130:1.)
[17] Since Liberty acquired Park Water in 2016, neither Liberty Park Water nor Liberty Apple Valley has paid any dividends to their shareholders. (1/6/20 Jackson 53:15-54:18; Exhibit 3589-15.)
[18] The evidence at trial was that Carlyle purchased three water systems (including the Apple Valley system) for $102 million in December 2011. (2/20/20 Schilling 124:23-25; Exhibit 3566-1.) Four years later, the value of the three systems (including Apple Valley) had more than tripled when they were sold to Liberty for $327 million in January 2016. (12/10/19 Sorensen 50:10-12; Exhibit 3571-12.) Nearly five years have passed since January 2016, and if the Apple Valley system were to be valued in a compensation phase in this case, it would be valued as of the future date of the compensation trial. See Code Civ. Proc. §1263.130.
[19] The United States Supreme Court has long recognized that original cost is not the proper standard for compensation in eminent domain. Almost 100 years ago, the Supreme Court wrote: “It is property and not the cost of it that is protected by the Fifth Amendment.” Brooks-Scanlon Corp. v. United States, 265 U.S. 106, 123 (1924). Later the Supreme Court hurled blunt criticism at the original cost approach: “Original cost is well termed the ‘false standard of the past’ where, as here, present market value in no way reflects that cost.” United States v. Toronto, Hamilton & Buffalo Navigation Co., 338 U.S. 396, 403 (1949).
[20] Additionally, the Enrolled Bill Report for SB 1757 similarly states: “The private sector can provide utility services more efficiently than the public sector.” (Enrolled Bill Report, SB 1757, p. 5 [Liberty’s July 13, 2018, Request for Judicial Notice, Exhibit 2].)
[21] At the same time, Mr. Koorn overstated revenues because he based his analysis on Liberty’s Revenue Requirements Report (Exhibit 279), which was filed with its Application on January 2, 2018. (1/6/20 Jackson 23:25-4:12, 25:10-16; 6/29/20 Koorn 122:2-6.) The Town concedes that, in Mr. Koorn’s model, Liberty’s “revenue requirements for 2019 and 2020 are taken directly from its revenue requirements report and then escalated after 2020.” (Town’s Brief, at p. 72.) But the January 2018 Revenue Requirements Report was superseded by the Joint Comparison Exhibit filed a year later, on January 25, 2019. (1/6/20 Jackson 33:24-34:7; Exhibit 305.) The 2019 Join Comparison Exhibit sought less revenue than the 2018 Report; the 2018 Report had sought a 3.19% increase in residential rates, while the 2019 Joint Comparison sought a rate increase of just .17%, less than 1 percent. (1/6/20 Jackson 27:7-19; Exhibit 305-19.) By using the (superseded) higher revenue figure as the starting point in his revenue analysis, and then escalating revenues from there, Mr. Koorn’s opinions regarding the Town’s ability to lower water rates was likewise faulty. Dr. Hanemann properly used the most recent data from the Joint Comparison Exhibit in preparing his economic model. (1/8/20 Hanemann 47:2-4, 48:5-10, 53:7-15, 63:6-16.)
[22] The higher percentage is the most appropriate. As the Town’s Finance Director Harris admitted in her testimony, the Town incurs no overhead on its large garbage contract payment to Burrtec, the firm that actually collects the Town’s garbage. (11/12/19 Harris 54:2-5; 87:12-23.)
[23] When the Town started its newest Enterprise Fund, Apple Valley Choice Energy, it decided to extract $946,500 in administrative overhead in 2018 from a department that had one employee based on nothing but an “estimate” by Kofi Antobam, the Town’s previous Finance Director. Mr. Robertson testified that he saw no documentation to support the $946,500 transfer but accepted it because he had “great trust in Mr. Antobam.” (7/2/20 Robertson 70:23-71:13, 71:25-73:16.) This evidence shows the Town’s financial incentive to extract substantial “administrative overhead” transfers from new enterprise funds; and the Town’s Project seeks to make the water system1 its newest enterprise fund.
[24] Dr. Hanemann used a discount rate of 7% in his present value analysis. The Town contends that Dr. Hanemann “offered no testimony to justify his 7% discount rate” (Town’s Brief, at p. 81), but in fact Dr. Hanemann offered precisely that testimony. (1/15/20 Hanemann 24:19-26:18.) He explained that his 7% discount rate was conservative, as he was trying to assess whether ratepayers would come out ahead or behind by paying off the acquisition debt after 30 years. The issue is therefore what rate the ratepayers would pay, on average, if they were required to squeeze more out of their personal monthly budgets to pay more to operate the water system for 30 years. Some ratepayers might come up with the additional cash needed by withdrawing from bank accounts paying 1%, others would potentially lose higher stock market returns, and others would incur 18% in credit card interest to fund their increased personal expenses. (1/15/20 Hanemann 25:4-26:18.) This is very different from the interest rate the Town would pay on municipal debt to finance the acquisition. The Town offered no contrary evidence as to the appropriate discount rate. Further, of note, the Town itself uses a discount rate of 7.15% to measure its total pension liability. (Exhibit 238-79.)
[25] The Town argues that Exhibit 68-7 “refutes [Dr. Hanemann’s] thesis that connection fees are a revenue source.” (Town’s Brief, at p. 43.) In fact, the State Auditor’s Report, Exhibit 68-7, clearly says that “public utilities may receive revenues such as property taxes and connection fees …”

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