Earlier this year, the city of Apple Valley, California, proposed using recycled water on its parks to conserve the scarce resource in a state that's in the midst of a drought.

"Carlyle (The Carlyle Group) responded with a cease and desist letter, stating if the town proceeded to reduce its water usage by using reclaimed water 'both Apple Valley Ranchos and its customers will be harmed,' " reads a recent court filing. "In effect, Carlyle stopped efforts by Apple Valley to use recycled water and blocked an effort to conserve water."

The anecdote comes from the city of Missoula's expert disclosures in its pending eminent domain case against Mountain Water Co. and its owner, The Carlyle Group.

In September, in the midst of the city's takeover effort, Carlyle proposed to sell Mountain Water to Liberty Utilities. Liberty's petition to intervene in the case included the city's possible testimony from experts.

"Water utilities ... lose revenues if there is a reduction in consumption without an accompanying increase in rates. ... There is no motivation to conserve resources and reduce consumption if there is no possibility of an accompanying rate increase," reads possible testimony from city chief administrative officer Bruce Bender.

The condemnation case is headed to trial in March 2015 in Missoula County District Court.

In response to the situation in Apple Valley, Carlyle provided a statement from Park Water CEO Christopher Schilling. Park Water is the parent company to both Apple Valley Ranchos and Mountain Water Co.

"We are fully supportive of promoting water conservation in the communities we serve, with reclaimed water increasingly becoming a more important component of such efforts," Schilling said in the statement through Carlyle. "Park Water, Ranchos' parent, has been supplying customers with reclaimed water for over two decades."

***

In its petition to intervene in Missoula's takeover bid, Liberty describes itself as the "de facto owner of Mountain Water," and argues it "has a substantial financial interest in defending against the effort by the city of Missoula."

"To say that Liberty has a substantial interest in this proceeding is an understatement," the petition reads.

Attached to the petition are affidavits from its witnesses as well as expert disclosures from the city of Missoula. The filing is lengthy, but some notable items in the packet include the following:

  • In an affidavit, Liberty president David Pasieka discusses the winning bid his company made in competing to buy the three water utilities: "There is no question that the price Liberty committed to pay represents fair market value for the interests it acquired." The price was earlier noted at $327 million. "Liberty has never sold any of its regulated utilities." 
  • On behalf of the city, an analysis by Thomas Power of Power Consulting describes companies' behavior in buying and selling water utilities in the U.S. as a "feeding frenzy." Power notes Liberty's parent company, Algonquin Power and Utilities Corporation, did not own any water utilities until 2001. He shows Algonquin has a pattern of buying and selling other assets, and he concludes "ownership (of Mountain Water) could continue to change in the future."
  • In response, Liberty president Pasieka said the following in a statement provided by Algonquin: "The assets that were sold were not part of Liberty's utility business. ... In fact, we have never sold a utility asset, and plan on serving many future generations of Missoulians. For Liberty Utilities, regulated water utilities are at the core of our long-term focus and strategy."
  • An expert on valuation for the city, David Hayward of Hayward Consulting Group in Oceanside, California, puts the value of Mountain Water's operating assets at $45 million to $50 million.
  • The city has access to low-interest bonds at an estimated 2 percent to 3.5 percent, according to expert disclosure. On the other hand, the interest rate on Mountain Water's long-term debt has been as high as 10.12 percent, it says.
  • The city of Missoula has "almost no knowledge of Mountain Water's future growth plans." However, when cities undertake planning efforts, it's wise to plan for water expansion, according to the expert disclosure. "Generally, sewer and water are planned together when expanding to or upgrading a location, as both sets of pipes usually occupy the same trench and both are fundamental to development."

The eminent domain case is pending in court, and the proposed sale to Liberty is contingent on regulatory approvals.

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