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Expert says Missoula can win Mountain Water condemnation this time

Expert says Missoula can win Mountain Water condemnation this time

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The city of Missoula tried to condemn Mountain Water Co. in 1984.

After five years of litigation and appeals, the Montana Supreme Court ruled against Missoula in the eminent domain case. State law says public bodies must show that the taking is “necessary” to the public interest, and the high court ruled it wasn’t.

“Since this property is already a public utility, and hence to some degree dedicated already to a public use, it is not more necessary the city take over its operation,” reads the 1989 decision. “The public interest will be best served by the city not being permitted to condemn Mountain Water.”

Now, 30 years later, the city of Missoula is headed toward condemnation again. So what’s changed?

Quite a lot, according to Mayor John Engen. Engen said he and the lawyers on his advisory team believe the city is prepared to make a winning case for public ownership, and on Wednesday they plan to share with the City Council and public as much as they can without tipping off the opposition.

“We are convinced that our circumstances are markedly different, that the judiciary is markedly different, (and) that our legal team is much more experienced in this area of law,” Engen said.

The stakes are high. A lawsuit may motivate the Carlyle Group – which owns Mountain Water Co. – to negotiate a sale with the city, but it could also lead to a long and costly battle in court, with taxpayers picking up the tab.

***

In 1979, Mountain Water bought the Missoula utility from Montana Power Co., according to a brief history of ownership in the first decision from the Supreme Court. In that ruling, the Supreme Court sent the case back to District Court.

At the time, the city couldn’t move fast enough to buy the water system, the decision states: “Because of ... delays associated with municipal financing, the city was unable to fund the purchase before the sale was made to Mountain Water.”

The same year, the City Council adopted an ordinance that gave the administration the power to “acquire the water system by purchase or condemnation.” It approved a similar resolution in 1984, and late the same year, the city went to court to try to condemn Mountain Water.

The city lost and appealed, and the Supreme Court sent the case back to the lower court for more work.

“Unfortunately, there are no statutory guidelines to assist the District Court in weighing the various factors which it must consider,” reads the 1987 order from the high court. “We do point out that the city has the burden to prove by a preponderance of the evidence that the condemnation is necessary under 70-30-111 MCA.”

The city lost, appealed and lost again. After weighing a variety of factors, including public savings, rates and charges, the will of the people, location of the home office, and cooperation between Mountain Water and the city, the Supreme Court again ruled against condemnation.

In its final order, the justices said the city “failed to carry its burden of proof” that taking the water system was necessary.

***

In Montana, a public entity can take property only after showing “by a preponderance of the evidence that the public interest requires the taking,” and it must show four findings:

• The property use will be a public use.

• “The taking is necessary to the public use.”

• If already used for a public purpose, the public use proposed is more necessary.

• A written offer for the property was submitted and rejected.

Thirty years after condemnation failed, Montana’s eminent domain statute remains largely unchanged, said Roy Koegen, the city of Missoula’s lead bond counsel on the acquisition. However, he said factors on the ground are much different as the court determines if the public need is greater than the private one.

“In the last three decades, the totality of the facts and circumstances have changed in a major way,” said Koegen, of Spokane.

***

The big one? In 2011, the Carlyle Group bought Mountain Water and its parent company Park Water, and ownership went from a private family with Sam Wheeler at the helm to a global investment firm with $185 billion in assets.

“Of course, (Wheeler) had a profit motive, but he was very paternal,” Koegen said. “As a hedge fund, (Carlyle’s) only goal is to make money for their investors.”

The community of Missoula, though, has other goals and obligations. For one thing, Koegen said, the population of Missoula grew 14 percent from 2001 to 2011, “which puts a greater burden on water resources.” And now, unlike in the 1980s, conservation is a priority for the public.

“The city is looking at long-term access to clean water. (Carlyle is) looking at profit,” Koegen said.

Nothing wrong with profit, he said, but under city ownership, the money could go toward the public asset. Currently, revenue from the water company covers operating costs and debt, and then, the balance goes to Carlyle’s investors, Koegen said. Under city ownership, the balance earlier estimated at some $2 million could go to things like capital improvements or a rate stabilization fund.

“We think the public use is more necessary than the private use because it’s not necessary to generate a profit for investors,” Koegen said.

***

According to the Supreme Court, profit and out-of-state ownership are relevant issues, not “prejudicial” ones as the District Court found. In fact, it ruled the issues are “pertinent” to “whether the public interest requires the taking under 70-30-111 MCA, as it has been broadly drafted and defined.”

At the time, the city argued it would save substantial money in a takeover, but it made a different argument than it is making now. Then, its plan was to save money with cuts to jobs and wages at Mountain Water; the court, though, found the city’s estimates were “unrealistic,” and its plan would hurt “loyal” employees “for no real gains.”

The court also found the investment Mountain Water was making on capital improvements was more than the city had proposed, and the city’s plan would lead to “a steadily declining water system with problems occurring more and more frequently.”

Today, Mountain Water’s pipes are still leaky, but Carlyle has reported putting $4 million into the infrastructure in 2013, a 40 percent increase from the previous year; it plans to put another $4 million into fixes this year.

As for profits, the court noted those are regulated by the Montana Public Service Commission, and that body ensures profits aren’t excessive at the expense of customers: “The profit incentive is one of the reasons for the continuing efficiency of the system of Mountain Water, its annual improvements, and the overall exemplary services provided to the consumers.”

Another financial matter? The courts said a takeover by the city would result in “a loss of substantial tax revenue to the county and the school districts as a result of the condemnation.” Currently, Mountain Water pays some $1.1 million in local property taxes.

***

In their decisions, the justices also concluded condemnation isn’t “solely a matter of economics.” The courts must also weigh the will of the voters, then expressed in an ordinance, resolution, and vote of the people and the council.

“The votes of the people and the city council cannot be considered as finally dispositive of the issue of necessity,” reads the decision. “However, we hold that upon remand, the public interest as expressed in these votes must be considered ... ”

In reconsideration, the District Court weighed the will of the people. It found a problem with a ballot initiative in which voters approved of the city’s effort (“it stated the wrong owner of the water system”), and it noted only 42 percent of registered voters cast ballots.

The turnout demonstrated to the lower court that “ownership by the public was not an important issue in the minds of most city residents,” according to the Supreme Court.

Today, public ownership is a pressing matter, Koegen said. The mayor has talked about buying Mountain Water for three years, council candidates have run on platforms of acquiring the system, and the council voted in October to give the mayor the authority to pursue condemnation.

“So the citizens now understand … that it’s important to control their water destiny,” Koegen said.

***

In its remand, the Supreme Court asked the District Court to consider water rights, too, and it noted the state’s eminent domain statute does not address every critical issue, such as water rights.

“A significant argument may be made as to the importance of the city obtaining ownership of the water rights themselves, in order that the city may assure its inhabitants of long range access to water,” reads the ruling. “It presently appears that the access to such a water source is at least to some extent dependent upon Mountain Water.”

Upon review, the District Court found Mountain Water had improved the system as well as the Missoula economy since it bought the company. It also found the people’s long-term access to water would be assured, not endangered, by Mountain Water’s continued ownership.

This factor, too, is different under Carlyle, Koegen said: “They buy things to flip.” With the PSC’s approval, he said, the hedge fund could sell to companies based overseas, far from the taps in Missoula.

***

On Wednesday, Mayor Engen, Koegen and other members of the advisory team plan to make their case for condemnation and take questions at the Committee of the Whole meeting of the Missoula City Council. The meeting is tentatively scheduled to begin at 1:05 p.m. and be held in City Council Chambers, 140 W. Pine St.

To pursue condemnation, the city would file a lawsuit in Missoula County District Court, and Engen has said he will seek the council’s approval before doing so.

Last month, Carlyle rejected the city of Missoula’s $50 million offer for Mountain Water, one submitted in writing after an earlier $65 million offer fizzled out. In a letter, Carlyle managing director Robert Dove said Engen made it clear the city plans to begin condemnation, and Carlyle and Mountain Water “will vigorously defend our legal rights.”

Reach Keila Szpaller at @keilaszpaller, at keila.szpaller@missoulian.com or at (406) 523-5262.

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Missoula Mayor John Engen anticipates moving to condemn Mountain Water Co. as one step toward public ownership. On Monday in a unanimous vote, the Missoula City Council authorized Engen to make a $50 million offer to purchase Mountain Water from the Carlyle Group, a global hedge fund.

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