FLOW prepares for the final battle against RWE for control of Felton’s water utility
How much is water worth? A California American Water (CalAm) internal memo—prepared by a PR firm in 2003 and leaked to activists and the press anonymously—states the following about the prospects of quashing eminent domain mutiny in Felton: “The results of [focus groups] show a grim environment in which the only viable argument appears to be increased taxpayer cost without improvements to service or water quality.”The resulting two years saw the 2003 memo serve as a playbook for the company in its efforts to prevent Felton Friends of Locally Owned Water (FLOW) from placing Measure W on the ballot and getting the necessary votes for the $11 million bond issue to pass. Those efforts fell short; the bond passed, and FLOW has successfully opened an eminent domain case in Santa Cruz County against CalAm, which is a division of American Water, itself a branch of the German company RWE. CalAm contested the FLOW lawsuit, forcing a court case to determine the amount of compelling public interest necessary for a legally mandated takeover. Jim Mosher, a lawyer with the Pacific Research Institute who has represented FLOW pro bono throughout the five-year ordeal, says the case was not looking good for CalAm. “It was odd that as we neared the trial, they didn’t seem to be preparing,” he says. “They even announced another 67 percent rate increase, which would further skew the difference between what we paid under them versus public ownership, a substantial part of our case. We had a mountain of evidence of their mishandling the watershed, lack of attention to conservation and environmental protection, and poor service.” All this is in the past tense because, on March 10, one week before the hearings were scheduled to begin, CalAm withdrew its opposition and asked Judge Paul Burdick to move the case directly to the jury phase, in which a panel of Santa Cruz citizens will determine the price of the system. That case will begin in June. “They never intended to go to trial in the first place,” asserts Jim Graham, FLOW’s spokesperson. “It was just a tactic to make us do tons of research and spend tens of thousands of dollars. They have proven they’ll do anything to drive up the price of our acquisition.” CalAm’s statement in the wake of its change of heart is, basically, that it thinks the district is worth $25 million, the citizens don’t have that much money, and so the eminent domain case will be dismissed for lack of a buyer. “Without question, there are serious issues with the District meeting the ‘more necessary public use’ standard under the law,” says Joe Conner, CalAm’s trial lawyer. “However, after reviewing the District’s appraisals and taking depositions of the District’s witnesses, we don’t believe the District will be willing to pay for the system. That will show that eminent domain is not in the best interest of the public.” Mosher says this is a fool’s bet. “I believe their legal tactic is to get the jury confused with all the technical evaluations of the system from both sides, and hope they’ll come up with a number halfway between their $25 million and our $7 million.” The assessment FLOW is working with stems from work the county did in advance of Measure W, to assure that the $11 million being raised would be sufficient for purchasing the system. “But I don’t think a Santa Cruz jury will go for that,” Mosher continues. “I think they’ll see through what CalAm is trying to do.” The valuation of a water system is tricky, and can be calculated by many different methods. FLOW currently maintains that American Water’s private purchase of the utility cost about $3 million, though it’s hard to pinpoint since Felton’s system was just part of a much larger purchase that wasn’t broken down piece by piece. Because the system has always been privately owned, there are no publicly available figures for its value through the years. Barbara Sprenger, FLOW coordinator and candidate for State Assembly, says the group’s numbers reflect market rates. “Most systems sell for around $2,500 per hookup,” she says. “We looked at another system that sold for $6,700 per hookup, because it was a tremendous outlier due to a lot of property that could be sold off. Then we went above that to $8,200 per hookup for ours, just to be extra safe.” There are approximately 1,300 hookups in the Felton water system. CalAm’s estimate of $25 million would equate to $19,230 per hookup. “When you’re valuing something that’s a business,” says Sprenger, “it’s basically worth what you can make out of it.” She estimates that CalAm takes in $1 million a year, and with an 11 percent profit guaranteed by the California Public Utilities Commission (PUC), that equals $110,000 annually. Conner says the company retained a team of experts, including local real estate and timber appraisers who know the area well, in order to arrive at its valuation. “What we’ve done is apply standard accepted uniform appraisal practices,” Conner says. “This is a system that is well run and well operated with dedicated employees. It has 250 acres of watershed property and timber. We believe it’s worth $25 million.” Part of that valuation is the treatment plant CalAm installed after taking over, which makes up a large part of the water system’s replacement value. FLOW argues that residents already paid for that system in rate hikes, and shouldn’t have to buy it again. “We’re saying you can’t charge us again for that,” says Graham, “and they say they can.” The irony of the entire case is that RWE, the German parent company, wants to sell its CalAm holding (indeed its entire water interest in America), and even sought to issue an IPO in 2006 when no private buyers were found. As a utility, the IPO had to be cleared through the PUC, which entailed filing a statement with the Division of Ratepayer Advocates (DRA). RWE stated that it was merely divesting its American holdings in order to concentrate on the dynamic European energy market. The DRA had a scathing reply, poking holes in RWE’s rationale. The findings were so incisive, in fact, that a judge allowed the public report of the findings to be partially redacted by RWE to protect its interests. However, the technology used to black out the redacted passages was flimsy, and a clean version of the PDF accidentally appeared for a time. It is in this clean version that the true motivation for RWE’s need to sell emerges. According to the DRA, minutes from an RWE board meeting show that the German company was taken aback at the difficulties of turning a profit in the American water market, and that its initial estimates of efficiencies and rate increases were overly optimistic. The American Water system turned out to be full of leaks, and would need a new management team to perform up to code, much less with improved efficiency. “In an effort to avoid its commitment to invest in the system and risk a lower investment in the energy business,” the report states, “RWE determined it should cut its losses and divest itself of American Water.” Conner says the decision of RWE to divest has no bearing on American Water’s willingness to sell off its constituent parts. “We are owners and operators, not sellers,” he says. “We take great pride in the way it operates, and the fact is that we’re not in the business to improve a system or develop a system simply to sell it. I’ve worked with American Water for almost 10 years, and the way they operate today is very similar to when I came in before RWE’s ownership.” The DRA report indicates that RWE is aware of the entire system being somewhat less valuable than it anticipated. “Based on the minutes,” the report states, “water lost through leakage increased from 15 percent to 18 percent in New Jersey, and was as high as 30 percent in Pennsylvania. Replacing American Water’s pipe system based on the current renewal rates would take 200 years. In addition, American Water has not met regulatory stipulations in various U.S. states for a period of several years due in part to American Water’s insufficient investment in the 10 years prior to RWE’s acquisition.” So, for Felton’s very small system to have increased in value from $3 million to $25 million in five years, one would expect it to be an exception to this rule, with fantastic profit margins and a gleaming, well-maintained system. It’s entirely possible to take a wrong turn while hiking near Henry Cowell Redwoods State Park and accidentally get lost on the unfenced property between CalAm’s Bull Creek dam and its water tank on Orchard Road. Along that stretch of creek, as one desperately searches for a way back to the road, the pipeline floats through the culvert, tied to various rotting rail ties and, at one point, an ancient tree trunk, with lengths of chain. Metal alternates with blue plastic piping in areas where repairs have been made. A valve near the dam gushes water. To the untrained eye, the Rube Goldberg entwinement of pipes and moss and rot seems less than ideal, but perhaps this is just the nature of running a water system through geography as untamed as the western slope of the Santa Cruz Mountains. Speaking about the state of maintenance in Felton, Conner says, “I think the best thing I could tell you is out of the district’s own words: they have not alleged any problem with the maintenance or service components of the Felton system in the lawsuit. I specifically asked them that question. They know of no problems with the work being done on the ground by the employees. Their issue is simply wanting to take over the system.” Mosher thinks the trial won’t drag on now that it’s in its final phase. He’s also confident that the system will be affordable. “My understanding is that the water district will be able to get occupancy of the sale within weeks of the verdict,” he says, “and any appeal would be on a very narrow basis, on a matter of law, not fact. We will get a dollar amount. The point we put it down, it’s over.” |
