In the Old West, they used to say that “Whiskey is for drinking; water is for fighting over.” It’s a notion that applies to American States Water Co. in San Dimas today.
American State’s water utility, Golden State Water Co., is facing a battle over control of the water system in the Ventura County community of Ojai. Also, the company has been hit with millions of dollars of fines and reimbursements over a construction contract. Finally, state regulators could order the company to lower its profits and slow down rate hikes.
In Ojai, some residents are fed up with rate increases and want to have a local municipal water district take over the system. With Golden State so far refusing to consider a sale, the residents want the city to force one through eminent domain.
Company executives said that any other operator would probably not be able to lower rates, and an eminent domain battle would likely turn into a long and expensive process.
“We believe that we are operating the system as cheaply as anyone can handle it,” said Robert Sprowls, Golden State’s chief executive.
In a separate issue, the state Public Utilities Commission last month fined Golden State $1 million and ordered the company to refund $9.5 million to customers in several water districts. The fine and refund are part of Golden State’s settlement of allegations that a construction contract of about 10 years ago was improperly handled. The company took charges against earnings in the second half of 2010 after the settlement was reached.
The company had failed to exercise reasonable management oversight and apply adequate internal controls over the contracting process, according to the PUC. The settlement requires three independent audits of Golden State over the next 10 years. Sprowls acknowledged the audits could have an impact on the company in the future.
So far, though, these developments have had little effect on American States’ stock price, which has traded in the $33-$36 range for much of the past year and was right in the middle of that range in late December.
But investor confidence in American States could drop if California regulators decide to lower the amount of allowable profit for its Golden State subsidiary and for a handful of other investor-owned water utilities.
American States has two divisions. One is Golden State, a regulated water utility that serves more than 250,000 customers in 75 communities in California. The utility generates about 80 percent of the company’s revenue. The other is American States Utility Services, an unregulated water and wastewater services division. American States Water Co. also provides electricity to about 23,000 customers in Big Bear.
The question of whether to lower Golden State’s allowable profit follows an agreement several months ago with the rate watchdog arm of the Public Utilities Commission to a return on equity of just under 10 percent. But in late November, a regulatory judge announced that he was skeptical a 10 percent ROE was justified due to today’s low interest rates and consumer hardship. He ordered additional hearings on the question for early this year. The decision is up to the PUC.
If the commission does order a lower rate of return, that could sour investors on American States.
“This is something that investors are monitoring pretty closely,” said Heike Doerr, senior research associates for utilities with Robert W. Baird & Co. in Philadelphia, which follows American States and other water companies.
Doerr said that the conflict in Ojai isn’t on investors’ radar.
The focus of Ojai residents is on trying to convince the nearby Casitas Municipal Water District to launch a takeover of Golden State’s Ojai water system.
“The main reason we want Golden State out is their rates,” said Ryan Blatz, an Ojai attorney who is one of the founders of Ojai Flow, an organization formed a few years ago to try to evict Golden State. “The rates are two to three times what people in the Casitas Municipal Water District pay.”
He said some Ojai residents pay nearly $300 a month for water supplied by Golden State and that Golden State has proposed hiking rates 25 percent over the next four years.
At a public hearing in the summer, Golden State representatives said the system was not for sale. Ojai Flow members asked the City Council about invoking eminent domain to force a sale. But eminent domain can only be used if a municipal water authority wants to buy the system, and, so far, the Casitas Municipal Water District, which serves the rest of the Ojai Valley, has said it is only considering the proposal.
American States’ Sprowls said that Golden State’s rates have been rising due to the amount of maintenance and upgrades required for the aging system. He noted that any other company or agency would have to spend similar amounts to make the upgrades and would have to spend ratepayer money to buy out Golden State and pay legal costs for eminent domain proceedings. He said that water customers ultimately would have to shoulder those costs.
“We believe that the costs will be greater than customers have been led to believe by Ojai Flow,” he said.
Estimates on the value of the Ojai system range from $15 million to $30 million.
Sprowls said that even if Golden Water had to sell its water system, it would have little impact on the company as a whole because the 2,900 residential and business customers in Ojai represent only about 1 percent of the utility’s 256,000 customers statewide.
“That being said, we don’t want to lose any of our customers,” he said. “We’ve made a significant effort to educate our Ojai customers on the system and how the rates work.”
Outside of Ojai, Sprowls said Golden State is looking to grow by acquiring small existing water systems and applying to serve new developments. The utility hopes to gain final approval soon to serve up to 17,500 planned homes in a proposed development in Sutter County adjacent to existing Golden State service territory.
American States Utility Services, meanwhile, contracts with cities, agencies and utilities for water and wastewater services. Its biggest client is the U.S. military, which has launched an initiative to privatize its water services. American States has 50-year contracts with nine military bases in six states and is looking for more.
“With more bases scheduled for privatization, we see this as a major growth area,” Sprowls said.