Town of Apple Valley Water System Acquisition FAQs (March 23, 2016)

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Local Control

Why is the Town considering acquisition?

Acquiring Apple Valley Ranchos would give the Town and its residents control of its water future and stabilize rates. Apple Valley Ranchos, by definition, is a government-granted monopoly. As a customer, you have no choice but to buy your water from them at whatever price they and the California Public Utilities Commission decide to set. During the past 10 years, those rates have increased significantly, and the company has asked for another 31.55 percent increase over the next three years.

How would the Town be any different when it comes to setting rates?

As a public entity, we are required by law to bring rate proposals to you through a Proposition 218 process. As a private company, Apple Valley Ranchos needs approval only from the CPUC, which has a long history of leniency when it comes to rate requests and, in fact, is required to factor in a rate of return for the company’s investment.

How is the Town going about acquiring Apple Valley Ranchos?

The Town would like to purchase the company in a negotiated transaction, but have been told it is not for sale. Nonetheless, the company is now being sold as part of a package deal to a huge Canadian power company without any water utilities in California.

The Town’s blue ribbon committee advised against acquisition. Why are you doing it anyway?

The Blue Ribbon Committee made its recommendation in 2011, based on information available at that time. The situation has changed significantly since then. In 2012, Apple Valley Ranchos began implementing rate increases totaling 19 percent. In 2014, it requested another 31.55 percent rate hike. In reviewing the most recent request, the Office of Ratepayer Advocates found overestimates in operational and administrative costs, infrastructure, and forecasts of water sales. All of this, along with the proposed sale of Apple Valley Ranchos’ parent company to a Canadian firm, has convinced us that Town acquisition is the right move at this time.


How much will acquiring Apple Valley Ranchos cost?

We are working with an independent appraisal firm to determine a fair purchase price. That firm has come up with a preliminary business valuation of $50.3 million.

How would we pay for this purchase?

With a fair purchase price, the savings from eliminating the profit margin and other costs would be sufficient to cover the debt service without raising rates to do so. We will examine all possible approaches.

Another company has offered $327 million for Park Water Co. Why shouldn’t they take the best offer?

Based on our understanding of the announcement by Algonquin Power & Utilities Corp., the purchase price was $257 million ($327 less $70 million in assumed debt) — well more than double the $102.2 million purchase price paid by the current owners, the Carlyle Group, just three years ago. We believe this is over-inflated and will harm ratepayers as the new owners seek to recover its excessive purchase price. Furthermore, any discussion of the acquisition of AVR must begin by separating it from the other two entities in the Park Water portfolio: Park Water in Los Angeles and the Mountain Water Company in Missoula, Montana. The Town is interested only in AVR — one third of Park Water. One third of the announced purchased price by Algonquin is $86 million, which is within the range of possible values anticipated within the feasibility study. Also, the announced sale has a very long way to go to get approved, requiring acceptance by public utilities commissions in both California and Montana. We’ll continue to pursue our quest to buy Apple Valley Ranchos in the meantime.

Why has it been so hard to get to a bottom-line number?

The lack of transparency from Apple Valley Ranchos’ owners has kept us from fully vetting the company’s financials. Basic information unavailable so far includes auditor’s reports, executive salaries, notes to financial statements, cash flow reports and stockholder equity statements.

Apple Valley Ranchos says the Town is trying to take it over via eminent domain. Is that correct?

No formal discussions regarding eminent domain have taken place. We are preparing to offer Park Water Co. and the Carlyle Group — AVR’s parent — a fair purchase price for Apple Valley Ranchos.

How does eminent domain work?

Eminent domain gives municipalities the ability to acquire private property if it is determined there is a compelling public interest in doing so. If Apple Valley Ranchos refuses to sell our system to the Town, this might be an option. The final purchase price under eminent domain would be set by a court based upon just compensation — a fair purchase price.

Wouldn’t the Town’s acquisition of Apple Valley Ranchos be an infringement on Free Enterprise?

Again, Apple Valley Ranchos is not a normal company — it has a government-granted monopoly over the provision of drinking water in its service area. As a customer, you don’t have the opportunity to buy your water from someone else, which means you are at the mercy of the company and the CPUC when it comes to how much you will pay and how much profit AVR makes. Choice, a fundamental component of the free market, is non-existent when it comes to AVR. With a municipally owned water system, you have a voice.

Is the Town equipped to run a water system?

Apple Valley has a management team with extensive experience in water system management. Most cities in California have owned and operated their own water systems of years. In addition, the Town is not going to simply start fresh with new employees. We understand we will benefit from the years of experience of AVR’s current employees.

Rate Stability

Are you going to lower rates?

We cannot promise to reduce rates after acquisition, but we will do our utmost to stabilize them.

What is the underground infrastructure like? Can we afford to keep it in good condition?

Our neighboring cities also have to maintain their own underground infrastructure, yet their cost to consumers is still much lower than here in Apple Valley. Apple Valley Ranchos has not been forthcoming with information about the condition of its facilities, but it recently spent some funds on repairs and capital improvements. We already pay Apple Valley Ranchos for repairs and maintenance through our water rates. If we own the system, there would be no change. In addition, government programs that would help pay for maintenance are available to cities.

Won’t taxes go up as a result of this acquisition?

The acquisition will be paid for by Apple Valley Ranchos ratepayers, not by taxes on the entire Town’s residents. Though debt service would increase initially, it will be offset by cost reductions resulting from the elimination of AVR’s 9 percent rate of return and the latest round of rate increases, but more importantly, all of those aggravating surcharges to your water bill will disappear.

If the Town assumes this water company, where would you put the staff, more new buildings?

Purchase of the water company would include all assets, including buildings and property. We don’t foresee needing any additional facilities in the immediate future.

I get water service from Golden State, how will this effort help me with my water bills, which are even higher than Ranchos?

Golden State is the other private water purveyor in this area and, unfortunately, we cannot control their rates. But as a ratepayer to that agency, you will still share the benefits of this acquisition because it will strengthen our local economy and therefore add important revenue to the Town’s coffers. By stabilizing rates we pay as a customer of Apple Valley Ranchos Water Company, we reduce how much taxpayer money we spend on things like irrigation.

Town of Apple Valley. 14955 Dale Evans Parkway, Apple Valley, California 92307 | 760-240-7000