CLAREMONT - Golden State Water Co. presented a feasibility study by a water expert it paid for that said the water company's Claremont assets could cost as much as $204 million.
That figure was offered by Rodney T. Smith, a former professor of economics at Claremont McKenna College and now president of Stratecon Inc., an economics and consulting firm specializing in water resources.
"I'm not saying it can't be above $200 million but that's a reasonable rate," Smith said Tuesday afternoon in a presentation given to media with Denise L. Kruger, senior vice president of regulated utilities for Golden State.
The San Dimas-based utility has already turned down Claremont's initial offer to purchase the local assets for more than $54 million in November.
Smith cited an experience he had as an expert in water rights trial involving Yolo County's attempt to take over a local water company. From that trial, he believes value of the Claremont assets of Golden State could reach more than $200 million.
"The county got an appraisal of $35 million," Smith said of Yolo County's case. "When you added up everything, (the value) was $500 million. The long story short is (the county) walked away" from taking over the water company.
Smith said even if Claremont is able to purchase the company at $54 million, the annual revenue requirement rates for the city will go up about 30 percent for decades, Smith said.
The revenue requirement is a "core concept" in rate making that includes total water supply costs and operational and maintenance costs, Smith said.
If Golden State refuses to sell to Claremont, the city's only alternative is to use an eminent domain procedure and take it through court action.
"And if they lose ... I call it the litigation lottery. It will be 70 percent ($104 million) or double or more. If you lose the litigation lottery, your rates are going to go over the roof."
He said the city has not yet hired expert personnel to run a water company, something that will further add to the cost of operation.
City officials have long been at odds with the water company after it asked the Public Utilities Commission to approve a rate increase of more than 24 percent in 2013 and additional increases in 2014 and 2015.
A negotiated settlement resulted in Claremont's 11,000 customers and ratepayers receiving a 15.1 percent rate increase in 2013, 2 percent more in 2014 and 1.8 percent in 2015.
City Manager Tony Ramos said Tuesday he had not heard of Golden State's presentation and "if and when we see it then we will comment. It's unfortunate they have gone to the press first without showing any of this information to the city."
Ramos said the water company and city are scheduled to have a meeting after the first of the year.
Hal Hargrave, of the group Claremonters Against Outrageous Water Rates, has been pushing back against the rising water rates.
"As a group, they're going to stop at nothing because they have so much to lose," said Hargrave about Golden State. "They will continue to print lies, they will continue to sensationalize and they will continue to ... try and sway our residents and confuse our residents."
The back and forth between Golden State Water and the city of Claremont continues today with the release of a study outlining 3 possible scenarios for the water company takeover.
According to local water consultant Rodney Smith on behalf of Golden State Water Company, a $54 million water system purchase means a water bill increase of $469 annually for Claremont residents. Mr. Smith makes this assertion and many others regarding the city’s potential water purchase in his feasibility study released Wednesday, December 19.
While making note of several reasons why he advises the city against its water system purchase, much of it comes down to one issue for Mr. Smith: operations and management.
“Running a [water] system is not playing Nintendo. You don’t get amateurs involved to do this,” he said.
Mr. Smith noted his belief that, if the water system is purchased for $54 million, rates would go up about 30 percent for decades. That percentage increases as the total purchase price goes up.
“If you lose the litigation lottery, your rates are going to go over the roof and you are hoping that the city—is going to have to expand and transform themselves into major asset managers, infrastructure planners, risk managers and all that—doesn’t screw it up.”
A copy of Mr. Smith’s report, titled “The Economics of Claremont’s Attempt to Buy the Water System,” was delivered to Claremont councilmembers and other city officials early Wednesday morning outlining what Mr. Smith believes will be costs incurred by residents should a $54 million, $104 million or $204 million deal be made resulting in the city’s ownership of its water system. The $54 million figure is based on the city’s formal offer to the water company, $104 million based on the League of Women Voters estimate in a 2006 study and $204 million as an arbitrary number selected by Mr. Smith.
Mr. Smith’s study does not recommend a price for the city’s water system, but he indicates the water company is worth at least $204 million and could very well go beyond that price. He goes on to question whether Claremont city employees are well enough prepared for such a massive undertaking.
“The auto mart used to be full. It’s fricken’ empty now. And the warehouse [sic] district took a long time,” Mr. Smith said in reference to both Auto Center Drive and the Packinghouse Village expansion project. “There’s a lot of empty spaces there. There’s going to be an issue with that track record.”
Golden State Water has not yet released what it believes to be the cost of its system after rejecting the city’s $54 million offer last month. A study to determine that price is currently underway, according to Denise Kruger, Golden State Water’s senior vice president of regulated utilities.
Mr. Smith also raises concern at whether or not the city would be able to build a successful enough bond management team to get the funds needed to purchase the water system.
“Who are they?” he said in reference to city staff. “And what about the city manager? What’s his record?”
As water company and city representatives await negotiations, which have yet to be scheduled, according to Ms. Kruger, Golden State approached Mr. Smith to conduct the report brought before the city. The presented document represents an estimated month of work, according to Mr. Smith.
A Claremont resident since 1982, Mr. Smith is the senior vice president of Claremont-based Stratecon, Inc., a consulting firm that specializes in the economics, finance, law and politics of water. He earned his bachelor’s degree in economics at the University of California, Los Angeles before receiving his PhD in Economics from the University of Chicago and moving on to teach the subject at Claremont McKenna College for 15 years.
He now works full-time for the private sector as an “advisor in the acquisition of water rights throughout the western United States and in the sale and leasing of water rights and water supplies to public and private sector water users.”
A self-proclaimed “water geek,” Mr. Smith has been providing consulting services to Golden State Water Company for the last 12 years, a fact both parties disclosed up front. Mr. Smith was hired and paid by Golden State to conduct this latest water study, though how much was spent on the study was not disclosed.
Mr. Smith’s latest study is based on Golden State Water’s cost numbers and takes into consideration 4 main revenue requirements of the city’s water system: capital charges, or the cost of maintaining the company’s assets, income tax, operating expenses and the water itself. Should the city take over the water system, Mr. Smith reports that while the city would not have to worry about income tax, reported as costing Golden State Water an estimated $1.3 million, capital charges would increase significantly. Golden State Water currently pays about $2.97 million in capital charges. With the city’s $54 million offer, Mr. Smith estimates the city would pay $8.87 million in annual capital charges, at $104 million an estimated $15.79 million, and at $204 million about $29.51 million.
According to Mr. Smith, the dramatic increase in capital charges is partially due to the city’s lack of “pay as you go” funds for operations and capital improvements, allowing the city to pay for needed improvements with current funds rather than borrowed money. The city would need to build up such a fund should it take ownership of its water system, says Mr. Smith.
“While a government-owned water system does not have shareholders, it does not follow that the acquisition and operation of the system can be financed by simply borrowing the amount needed to purchase and operate the system,” he writes. “Rather, extra borrowing is needed to create an equity cushion.”
Mr. Smith believes Claremont would need to consider a financial plan not unlike other local providers like the Metropolitan Water District of Southern California. MWD’s financial plan includes reserve funding that would equate to 173 days of operation and “pay as you go” financing, paying for 25 percent of its capital investments with reserves gathered from customer’s rates in previous years.
“The city of Claremont, of course, starts with a blank slate,” Mr. Smith states. “From a consumer’s perspective, the vision of lower water rates is a mirage.”
Two subjects that did not factor into Mr. Smith’s assessment are current Claremont water rates and conservation efforts. Water usage by Claremont homeowners and businesses has gone from about 14,000 acre-feet in 2007 falling to below 11,000 acre-feet since 2010. The reduction in water use has had little to no impact on residents’ water bills, in fact, the opposite speculated outcome has occurred and residents are paying as much as twice for water as they did in 2007.
Golden State and its representatives invited COURIER representatives and Wes Woods from the Inland Valley Daily Bulletin to attend the meeting in what they say is an effort to be open and honest about the costs associated with the city’s takeover of the water company.
At the 90-minute meeting held at Stratecon in Claremont on Tuesday, Mr. Smith, Ms. Kruger from Golden State and Peter DeMarco, director of Randle Communications for Golden State, dodged the question of why Claremont residents pay such high rates and why the water company has systematically requested increases. Ms. Kruger cited infrastructure upgrades and Mr. DeMarco claims the questions have already been answered.
Claremont residents have said in the past they are willing to pay the high prices now in order to ensure that Golden State’s record of yearly rate increases does not push future generations out of Claremont.
“We’re here to support the future,” said Claremont resident Ellen Taylor to the CPUC’s administrative law judge last December. “We probably won’t see much of the benefit, but I want the benefit for my children and for my grandchildren, and I want people to think forward rather than backwards.”
On Wednesday morning, Mr. Ramos told the COURIER that he had not had an opportunity to give ample review of Mr. Smith’s study, which Mr. Ramos had received about an hour before request for comment.
“Once we review the information, myself and our legal team—if and when appropriate—we will have a comment,” said Mr. Ramos, adding that he feels “it is very unfortunate they chose to hold this press conference without any input or showing the city first.”
Of what he has seen, Mr. Ramos says he believes there are “numerous, gaping holes” in the information they have provided, which is consistent with the message they are giving this community to try to mislead them on this whole water acquisition issue.
“What they haven’t touched in what I saw in the newspaper were any comments about profits or anything else like that,” Mr. Ramos said. “I think they have sent a paid message, they hired a paid professional, to send the message they want to send. Without seeing all the information, I am not sure what’s factual or not factual because we haven’t had the chance to review it yet.”
The city’s battle toward acquisition approaches the 12-month mark, beginning with the city’s appropriation of up to $300,000 of general reserve funds in explore the possibility of purchasing the city’s water system in January. The feud began in response to Golden State Water’s request for a 24 percent rate increase in 2013 as well as additional, smaller increases in 2014 and 2015. While the new rates were expected to begin this January, that increase has been delayed as the California Public Utilities Commission continues to deliberate.
[Editor’s note: In our continuing effort to support open dialogue, Mr. Smith’s entire 18-page report is available on the COURIER website at www.claremont-courier.com. We have loaded it as an edition, with a link on the left side of our homepage, and can be found in the “Print Archive” tab on our home page. —KD] See this article!