City of Claremont’s Water System Acquisition Attempt Rejected

December 7, 2016

Developments this month set the stage for a litigation battle over the future of private water systems in California. Private water companies, equity funds, and public agencies could all be affected by this potentially precedent-setting eminent domain fight.

Los Angeles Superior Court judge Richard Fruin on November 10 issued a tentative decision blocking the City of Claremont’s plan to exercise eminent domain over the private water system serving its residents. Claremont has filed objections, and the court could hand down a final decision any day.

If the tentative decision stands, the system’s current owner, Golden State Water, will retain control, and the City’s years-long takeover effort will have suffered a significant blow. The decision may also affect similar pending suits filed by Casitas Municipal Water District against Golden State in Ventura Superior Court in May of this year and by the town of Apple Valley against Liberty Utilities in San Bernardino Superior Court in January. Claremont filed suit against Golden State in December 2014 after Golden State rejected Claremont’s $56 million offer to purchase the water system.

To forcibly acquire a currently operating private utility like Golden State, which has offered water to the public in Claremont since 1929, California Civil Procedure Code section 1240.610 requires a public entity to demonstrate that its desired use is “more necessary” than the property’s current use. In the case of a water, gas, or electric utility, section 1240.650 provides a rebuttable presumption that the use of property by a public entity qualifies as a “more necessary use” than private ownership. Judge Fruin interpreted the phrase “more necessary use” to require “[t]hat the benefits from municipal operation must be significant over the present operation of the water system.” This interpretation will be a central focus of any appeal by the City.

Following a 21-day bench trial, the court determined that Claremont’s proposed use failed to satisfy the “more necessary” statutory requirement. Specifically, Judge Fruin wrote that the City had not fully explained to the court why it wanted to exercise eminent domain over the water system. The court also faulted the City for failing to submit appropriate factual findings supporting the proposed takeover, a requirement the court found to be “implied by” the private utility’s “statutory right to rebut the presumptions favoring public ownership.” The court agreed with Golden State’s criticisms of Claremont’s proffered plan tasking the nearby City of La Verne with day-to-day operations of the facility, concluding that La Verne had a poor record of water quality, maintenance, and reporting of testing results. The court further dismissed arguments that Golden State had overcharged Claremont ratepayers, rejecting the City’s argument that a fee known as a “water rate adjustment mechanism,” which allows Golden State to impose a surcharge on ratepayers when water usage falls below a standard set by the Public Utilities Commission, should be viewed as a “penalty” imposed on ratepayers for conserving water.

On November 23, the City filed objections to the court’s decision, arguing, among other things, that the court had misapplied the statutory presumption and “instead imposed on the City a burden akin to absolute necessity.”

Once the court finalizes its decision, the City Council will determine whether to appeal, triggering a statutory interpretation dispute with significant implications for the pending eminent domain cases in Ojai and Apple Valley, as well as with private water systems and investors across California.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Matt Kline, an O’Melveny partner licensed to practice law in California, Barton H. “Buzz” Thompson, Jr., an O’Melveny of counsel licensed to practice law in California, and Heather Welles, an O'Melveny associate licensed to practice law in California contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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