Water Company Faces Double Trouble in Court

Water Company Faces Double Trouble in Court
Diving In: Supporters of Claremont’s water system takeover in a 2014 photo.

American States Water Co. faces two key legal decisions in coming weeks that could shape the San Dimas company for years to come.

First up, likely later this month, is a judge’s decision in an eminent domain lawsuit that the city of Claremont filed against Golden State Water, American States’ utility subsidiary. Claremont wants to take over Golden State’s system in the city and have neighboring La Verne operate it. Claremont voters, upset over rising water rates, authorized the city in 2014 to sell up to $135 million in bonds to fund a takeover. Golden State doesn’t want to sell its system and contends that if another operator takes over, water rates would still rise. The trial began June 14 and was scheduled to last several weeks, with both sides spending millions on pretrial and other legal proceedings.

The case has ramifications for Golden State beyond Claremont. The company has already been battling Ojai for four years for control of the system in that Ventura County city; in April, the Casitas Municipal Water District took the first steps toward invoking eminent domain, making a similar lawsuit there almost inevitable.

If Claremont wins, it could start other dominoes falling.

“We’re in an environment now where cities want more control over their infrastructure,” said Larry Kosmont, president of Kosmont Cos. of Los Angeles, which provides consulting services in economic development and public finance. “If Claremont is successful, it could start efforts for other cities to take back control over water systems, and that means Golden State Water could be at risk with its other water systems.”

Meanwhile, in San Francisco, an administrative law judge for the California Public Utilities Commission is expected to issue a final decision in Golden State’s rate case that will determine the revenues the utility will be allowed to collect through 2018. The company has requested a revenue growth rate of nearly 4 percent, while the PUC’s Office of Ratepayer Advocates has recommended a growth rate closer to 2 percent.

The judge’s decision, initially due during the second quarter, has been pushed back because of a backlog of cases. Since water utility revenue accounts for about 75 percent of American States’ total business, this is a huge decision. The company has already indicated that allowed revenue for this year will likely be lower than 2015 levels; the question is how much lower and whether the utility will receive its full rate request for next year and 2018.

Neil Kalton, senior analyst with Wells Fargo Securities in New York, said he believes the final revenue decision will be closer to what Golden State is seeking. In a July 1 research note, Kalton said the state is focused on upgrading utility infrastructure and thus wants to see slightly higher capital expenditures by utilities.

Another issue Golden State has pending before the PUC is recovery of additional expenditures related to the drought.

In his comments to analysts after American States’ first-quarter earnings release, Chief Executive Robert Sprowls said the company has incurred roughly $1.3 million in drought-related costs, mostly last year. Some of those costs were related to maintenance and supply contracts for what turned out to be more water than needed, thanks to customer conservation measures.

One cost Golden State Water is not likely to face, however, are penalties for its customers failing to meet state-mandated water cutback targets.

“Based on our drought response actions and customers’ conservation efforts to date, we do not believe we will be subject to the state (Water Resources Control) Board’s penalties for failure to implement a water shortage contingency plan,” Sprowls said.

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