The city of Missoula filed for condemnation of Mountain Water Co. on Wednesday in District Court, seeking to take ownership of its public water system from The Carlyle Group.
“This is something that we have not engaged in lightly,” Mayor John Engen said at an afternoon news briefing in his office. “I’ve never imagined exercising the city’s right of eminent domain in any circumstance, but I believe this is so important to the future of our community and the risks of not pursuing this avenue are too great.”
If the city succeeds in court, it will realize the longtime goal of many current and past elected leaders to bring Missoula’s water supply and distribution system into public ownership.
In 2011, the global investment firm The Carlyle Group acquired Mountain Water Co. and its parent company, Park Water in California. Missoula remains the only major city in the state of Montana that does not own its water utility.
As part of its complaint, the city argues that Mountain Water ratepayers under private ownership are lining the pocketbooks of faraway investors. In the 2013 fiscal year, the Carlyle Group’s three founders earned $750 million, or roughly more than $133,000 each per hour, and they had use of a private airplane valued at $1.1 million.
“As a result of its focus on creating value for its investors rather than creating value for its customers and ratepayers, Carlyle Infrastructure is incentivized to operate the Water System in a manner that will achieve the maximum short-term economic return rather than to operate it for the long-term stability and security of the people of Missoula,” reads the eminent domain complaint.
Win or lose, the city will pick up legal fees, estimated to run anywhere from $800,000 to more than $1 million for Carlyle alone. Carlyle earlier warned the city against taking action in court, and spokesman Christopher Ullman said Wednesday the firm intends to maintain ownership of Mountain Water.
“We are disappointed the city has chosen this unnecessary, unjustified and expensive route,” Ullman said in a statement. “We will vigorously defend our property rights against any unnecessary taking.”
As plaintiff, the complaint names the city of Missoula, a Montana municipal corporation; as defendants, it names Mountain Water Co., a Montana corporation, and Carlyle Infrastructure Partners, a Delaware limited partnership. The firms representing the city are Boone Karlberg of Missoula; Datsopoulos, MacDonald and Lind of Missoula; and Perkins Coie, of Seattle.
On Wednesday, Engen said he remains willing to negotiate should Carlyle change course and seek a transfer. However, he said the court filing was not a negotiation strategy, and the lawyers on the case fully intend to serve the defendants with the formal complaint.
“We wouldn’t engage in this if we didn’t think we would prevail,” Engen said at the briefing.
To win in court, the city must demonstrate the proposed use of Mountain Water “is more necessary” than the current use, among other findings. The court filing requests a judge set a hearing or trial within six months “to determine that the public necessity and the public interest requires that the city take ownership of Missoula’s Water System in this eminent domain proceeding.”
In 1984, the city tried and failed to condemn Mountain Water under the same law, but Engen said much is different three decades later, beginning with the scarcity of water. Then, he said, concerns about water were considered Third World issues.
“By most standards today, the state of California would be a Third World country based on its water issues,” said Engen. California Gov. Jerry Brown declared a drought emergency in the state earlier this year. “And we see those water issues cropping up around the country.”
Last year, the city offered $65 million to purchase Mountain Water, but Carlyle rejected the deal. In a signed letter, the firm had agreed to consider “in good faith” any offer from the city of Missoula, and the city argues in its complaint that Carlyle failed to do so.
“The Carlyle Group … has indicated to the city that it will not sell Missoula’s water system for less than $120 million,” reads the court document. “Carlyle’s valuation and refusal to negotiate in good faith are contrary to its promise made to the city in 2011.”
In October, the Missoula City Council approved a formal $50 million offer to purchase Mountain Water, but Carlyle rejected that proposal in a pointed letter. Carlyle spokesman Ullman earlier declined to disclose how the firm considered the city’s offers or whether any were presented to a board of directors or other governing body before being dismissed.
On Wednesday, Ullman declined to discuss whether the court filing will influence the way the firm makes decisions about its ownership of Mountain Water. He again opted against sharing the way Carlyle vetted the offers from the city of Missoula, although he said Mountain Water will continue to provide the people of Missoula with the best quality water and service possible.
“We’re not going to comment further on this issue of good faith,” Ullman said.
In the complaint, the city presents public, local ownership as a secure and reliable path to providing water to the Missoula community for the long term. The city also argues the private ownership model necessarily sends money away from the needs of the ratepayers and ailing infrastructure at home to investors with no interest in Missoula.
“Missoula desires to acquire the Water System in order to ensure that it will be used in the future for a public purpose and for the benefit of the citizens and inhabitants of Missoula,” reads the complaint.
The city has proposed to buy the company using revenue bonds backed by money customers already pay in water rates. Engen has said the city will not raise rates to be able to afford the purchase, but he has also said rates eventually will go up, albeit under local control.
The following are among the arguments the city makes in the complaint, attached to this story:
• “The taking of the Water System will advance the public purpose of managing for the public benefit a scarce and vulnerable natural resource available for public use.”
• “Defendants’ unwillingness to make improvements to the City’s Water System is evidenced by the decaying and leaking condition of the System’s Infrastructure and Defendants’ notable decrease in spending on necessary maintenance and repairs.”
• “The City has grown tremendously over the past three decades, including a 17 percent population increase from 2000 to 2010. Population growth has placed a greater burden on the City’s water resources and heightened the need for the Water System to be run by a municipality that will look after Missoula’s long-term interests in having a stable, safe, plentiful, and predictable supply of clean water now and in the future.”
• “The City understands that Missoula’s Water System operated by Defendants incurs and pays approximately $2 million per year to Mountain Water’s parent company … for ‘administrative support.’ Upon acquiring the Water System, the City will be able to operate it at cost.”
• “As part of an investment fund, Carlyle Infrastructure has a business model that requires it to exact as much leverage as possible out of the assets it owns for the benefit of investors, thus requiring it to focus on the short-term rather than the long-term. Ownership of Missoula’s Water System by Defendants therefore creates instability with regard to future ownership.”
• “Since the 1980s, the prospect and probability of droughts affecting Montana have become a reality.”
• “Public opinion favors municipal ownership of Missoula’s Water System. The governing body of the City, the City Council, has expressed overwhelming support for public ownership of Missoula’s Water System.”
The court document notes it isn’t practical or feasible for the city of Missoula to build another distribution system, despite the need for public water. So the city asks the court to rule the plaintiff is entitled to have the fair market value of the system determined by a panel of three “qualified and disinterested” commissioners to be appointed by the court.
At the briefing, Engen said the city will cross the bridge with the Montana Public Service Commission when the time comes. The commission regulates private utilities in the state, and it rules on sales; the city and others question the body’s jurisdiction over transfers to public entities such as municipalities.
In some ways, the city’s bid for public ownership has been decades in the making, and many members of the public are cheering on the endeavor. Some also have described it as an enormous gamble given the potential legal costs and the deep pockets of Carlyle, one of the largest investment firms in the world.
Engen, though, said he believes the city will prevail. He isn’t pursuing an eminent domain takeover out of any desire to create a mayoral legacy, he said, but he is doing so because he believes the move is right for the community.
“If there’s a legacy here, it’s a legacy for the city of Missoula, and it’s a legacy and testament to the people who support the effort,” Engen said.