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Mountain Water sale: California city's water also part of sale to Carlyle Group

Mountain Water sale: California city's water also part of sale to Carlyle Group

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When it comes to water, the cities of Apple Valley, Calif., and Missoula have a lot in common.

A municipality of 70,000 located in the high desert 95 miles north and east of Los Angeles, Apple Valley's water source is an underground aquifer along the Mojave River.

Like Missoula, Apple Valley has never owned its water utility. The company that provides drinking water to residents there is Apple Valley Ranchos Water Co., which is owned by Park Water Co., the same company that owns Missoula's Mountain Water Co.

Like Missoula, Apple Valley was introduced to The Carlyle Group last December, when the multinational private equity firm announced it was buying Park Water.

Like Missoula, residents were surprised - and in Carl Coleman's case - disappointed by the news.

"I think everyone originally thought that Park Water should sell Apple Valley Ranchos to the town of Apple Valley at a reasonable cost," Coleman wrote in an email.

Coleman is an Apple Valley resident who is now chairman of a city-appointed committee formed to investigate what the sale of Apple Valley Ranchos to Carlyle might mean for the city.

Like Missoula, the city of Apple Valley is hoping that it can someday own its water utility.

"All residents in Apple Valley are very concerned about the fast-rising cost for water service, which is substantially outpacing inflation during the past five years and is projected to continue by Apple Valley Ranchos information," Coleman said. "I think the town of Apple Valley would like to purchase the AVR water system for a reasonable price so the town could have control of the water system, which is particularly needed for future job growth."

The recession has hit Apple Valley hard, and city ownership of the water company could offer multiple benefits to residents - the possibility of lower rates and the chance to create new jobs.

The Apple Valley Town Council created a 15-member Blue Ribbon Water Committee early in 2011 to study the possibility of buying the system owned by Park, as well as a smaller company that also provides water in town.

***

Historically, the relationship between Park Water's owners and Apple Valley has been cordial, said Randy Coleman, Carl's son, a civil engineer and a San Bernadino County planning commissioner.

Apple Valley Ranchos Water Co. has served the town of Apple Valley since 1947. The Wheeler family, which owns Park Water Co., bought Apple Valley Ranchos in 1986.

The company pumps drinking water to about 80 percent of the town's residents and has a well capacity of 41.9 million gallons per day. The other main water provider there, Golden State, is owned by American State Water.

Apple Valley Ranchos has targeted $3.4 million for capital improvements to its infrastructure in 2012. The company's projected annual revenue for 2012 is $19.5 million.

"They've reinvested monies into the system to make improvements," Randy Coleman said. That's better than Golden State, the other major private water utility in Apple Valley: "They strip out all the profits to pay dividends to stockholders."

In Randy Coleman's estimation, about half of the water system's original older steel water pipes - pipes that caused leakage and water main breaks - have been replaced.

But the goodwill Coleman felt toward Park Water was lost when the Carlyle deal was announced.

"The way (Park Water) did it was not very nice. That's why many of us were personally ticked off. We were not given the opportunity of time," he said.

At recent Blue Ribbon and Apple Valley Town Council meetings, Randy Coleman said Park Water representatives were condescending.

"The attitude is, ‘If you try to stop this deal, you're going to get sued and you have no idea what it will cost you,' " he said of Park Water's representatives. "It's the California mentality, ‘I will do what I want or you're going to get sued.' "

The California Public Utilities Commission regulates private municipal utilities, and is in the process of vetting the sale of Park Water to Carlyle. Apple Valley residents and officials have been vocal about their concern for aspects of the sale at CPUC meetings. The primary concern for residents appears to be the possibility of even higher rates.

When Apple Valley Ranchos requested a 20 percent rate hike earlier this year, residents complained loudly.

"If these rates go up, I won't be able to afford living here," said Walter Smith, 79, during a hearing reported on by the local newspaper. "Looks like Apple Valley is going to dry up."

With the Carlyle sale and its accompanying host of unknowns pending, those concerns are more acute, pushing on discussions of possible public ownership.

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It is possible for municipalities to pry water systems from the hands of private owners. But it's neither easy nor inexpensive, and the transition doesn't happen overnight.

It took the town of Felton, Calif., population 6,000, five years to gain public ownership of its water. Felton's water had always been privately owned, bouncing from company to company. The final straw came when owner American Water requested a huge rate increase.

"It started with the 78 percent rate hike that American Water requested shortly after acquiring Citizens Utilities, which had owned Felton's water system since the 1960s. Residents couldn't see a justification for it," said Jim Graham, who helped Felton Friends of Locally Owned Water, or FLOW, during that city's fight to buy its water utility.

"Eventually, FLOW organized around a steering committee of 15 people and more than 60 volunteers who walked neighborhoods, stuffed envelopes and made phone calls," Graham said.

FLOW showed residents they'd save money by buying the system, with lower rates balancing out the tax increase necessary to make the purchase.

Felton had some help along the way from Food and Water Watch, a national consumer advocacy organization that has also talked with Missoula groups concerned about the sale of Mountain Water to Carlyle.

Food and Water Watch views privatization as a growing problem across the world, and worries about Carlyle's lack of experience in running a water company and the possibility of higher rates.

"Missoula has the dubious distinction of being a guinea pig, or test case, for Carlyle," said Sam Schabacker, a University of Montana graduate who is now Food and Water Watch's Rocky Mountain regional director. "That's one of the things that concerns us the most about the sale. There's a reason that water should be owned, operated and managed by the public, because it's necessary for everyone. There's no room for profit motive."

Schabacker's advice for citizen groups - advice Felton followed closely - aiming to fight privatization is to start early and meet often, whether it's for a protest or a public hearing. Developing a constituency to pressure decision makers is crucial, he said.

"I think very often elected officials want to do the right thing, but they need to have a little backup from their constituents," he said. "Getting out and talking to people is really one of the most important things people can do."

***

In Felton, the local connection was key, because resistance from private owners was strong.

"Locally, American Water spent $300,000 to defeat a local measure to spend up to $500,000 on a study of what it would take to acquire the water system. That study was later done privately for about $15,000," Graham said. "They distributed misinformation, they tried to run up the cost of the system by buying new, unnecessary equipment, they paid money to a fringe community group that likened us to socialists and Nazis."

Felton voters approved the purchase in 2008.

"The day we took control of the water system, our rates were cut in half. Granted, we still had to pay increased property taxes, but even with that, we were still spending less each year than we would have been if we'd stuck with American Water," Graham said.

Food and Water Watch's data shows the average household water bill in Felton dropped from $225 to $80 a month.

Felton has owned its water system for just over three years and "it's been great," Graham said. "Private water companies argue they achieve economies of scale, but the numbers just don't show it. We now work with other community groups exploring acquisition and what I tell them is ‘If Felton can do it, anyone can.' "

Felton's story certainly holds attraction for places like Apple Valley and Missoula, but the situations are different because of the pending sale to Carlyle.

Missoula hosts a meeting of the Montana Public Service Commission on Monday, and a public meeting has already been held in Apple Valley. Missoula Mayor John Engen announced late last week that a deal had been reached giving the city first bidding rights, should Carlyle sell Mountain Water in the future.

In California, it seems likely the Public Utilities Commission will rule on the deal sometime this fall, Randy Coleman said.

The Colemans have been told by CPUC attorneys that the commission doesn't have the legal authority to demand a right of first refusal stipulation, guaranteeing Apple Valley could someday purchase its water system from Carlyle. Missoulians are interested in a similar stipulation, but Carlyle can't be forced into such an agreement in either state.

"If Carlyle would accept (a right of first refusal) as a condition of purchase and the town then agreed to drop its opposition to the merger, then it is possible for a mutually positive contractual relationship with Carlyle to be created," Carl Coleman wrote.

Even with such a stipulation, buying a water company might not make financial sense for either Missoula or Apple Valley. Still, the cities want to keep their options open.

Reporter Jenna Cederberg can be reached at 523-5241 or at jenna.cederberg@missoulian.com.

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