A Small City Wants To Unload A Leaky Water System, But Regulators Say Not So Fast

Water faucet (Justin Sullivan/Getty Images)

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The city of Bellflower wants to sell its aging water system to a big for-profit water company that is better able to manage it. But the deal could fall through. That's because state regulators say the price is so high, it could hurt water customers across Southern California.

The Bellflower dilemma illustrates the difficulty that hundreds of small, aging water systems face throughout California. State water policy calls for tiny struggling water systems to be acquired by larger, more stable water systems that have the capacity to fund needed upgrades.

But the law also calls for fair prices to be paid for such systems. So the argument is over what the fair price for the Bellflower system should be, and whether a fair-market price that buyer and seller agree upon would burden water consumers elsewhere.

SALE HITS A ROADBLOCK

California American Water Company — the fourth-largest in the state serving more than half million people — wants to buy Bellflower's tiny water system for $17 million. Bellflower voters okayed the sale in 2016. The City Council approved it the following year. So the local stakeholders are fine with the deal.

But then it hit a roadblock at the state Public Advocates Office. It's an independent arm of the state regulator known as the Public Utilities Commission, and it's there to look out for the rights of utility ratepayers and to keep rates reasonable and low.

"The proposed acquisition price is grossly inflated and would ultimately result in rate increases for a significant number of customers, not just in Bellflower, but throughout the state and in particular in the Los Angeles district," said Richard Rauschmeir of the Public Advocates Office.

The office said in public filings that the price of the Bellflower system was so high, it could raise water rates for Cal-Am customers by .5% to 3% across the state. Instead, it recommended a lower price of about $9 million, which is equal to the water rights that would come along with the water system.

An administrative law judge agreed that the price was too high, and went even further. In a proposed decision issued in March, the judge said the Bellflower system was in such poor repair that Bellflower should pay someone else $5 million to $9 million to take it off the city's hands.

The judge initially recommended the state Public Utilities Commission reject the deal when it was to come up for a vote on Thursday, Aug. 6.

"Hogwash," said Bellflower City Manager Jeff Stewart. "That's my one-word response to that. The market determines the value of the systems."

(UPDATE: On Wednesday, Aug., 5, the judge granted Cal-Am's request allowing the utility to do a new study of the current condition of the water system and estimate its value. The judge gave Cal-Am, Bellflower and the Public Advocates Office until late September to settle on a price tag for the water system.)

Stewart says state law requires the city to get fair market value. He pointed to the lengthy public review process that the sale underwent. Also, he said breaking up the system and selling the water rights and high-capacity well separately would add up to the disputed sale price.

Cal-Am spokesman Kevin Tilden said the judge and the advocate office wrongly totaled up the valuation of the water system as if the millions of dollars in needed repairs were going to be done in the first years of Cal-Am's ownership. It would take longer to do all the repairs, so the costs would be spread over its customer base more gradually, not all at once, Tilden said.

The price increase to its customers in Los Angeles, Ventura and San Diego counties would be only about 50 cents per household over the first few years after the sale, Tilden said.

The company has letters of support for its purchase from various elected officials including in the city of Montebello, which wants to sell its water system to a larger operator. Assemblywoman Christina Garcia, a Democrat who represents Bellflower, says she supports the sale.

The California Water Association, an industry group for investor-owned water utilities, says the judge's rejection of the sale wrongly overturns the desire of city residents who voted in favor of it, and it would put a chilling effect on other cities' effort to sell their water systems.

BIGGER ISSUE: AFFORDABLE WATER AS A HUMAN RIGHT

Why should we care when a water giant wants to buy a tiny water system for a whole lot of money? The issues resonate beyond Bellflower, its population of 75,000, and its 1,800 municipal water connection customers and a big investor-owned utility company dickering over a sale price. The issues story go to the heart of whether California can achieve its goal of providing safe water for all.

California was the first state in the nation to declare that safe, clean, affordable and accessible water is a human right. That principal was added to the state Constitution in 2012, partly because California is full of small water systems that have not been maintained well enough to provide clean, affordable and accessible water.

One of the aims of California water policy, since 1997, is to encourage small, struggling water systems to be acquired by bigger, more capable systems. But that law also requires the utilities to pay fair market prices.

Cal-Am says that creating a market where cities are willing to sell water systems they no longer want is encouraged by prices tags like the $17 million for Bellflower's system.

The Public Advocate Office argues the opposite, that setting a unreasonably high price on the system benefits only Bellflower and Cal-Am, but harms the consumers who ultimately have to pay the costs to buy and fix the water systems, along with a set profit as high as 9.25% to Cal-Am on all those expenses.

HOW THE PRICE WAS SET

The dispute in Bellflower is over how the price was set.

There were some problems in the valuation Cal-Am initially put on the water system, which the Public Advocate Office called overstated and unreasonable. For starters, the valuation failed to account for some $25 million in needed upgrades, the advocate office said.

Most of Bellflower's underground pipes are made of a now-discontinued type of asbestos and concrete pipe, and Bellflower's pipes break twice as frequently as similar pipes in other water systems. That means the system should have been assigned a lower value because the pipes have depreciated so much from when they were installed.

But Cal-Am used a 2014 city-commissioned report that valued Bellflower's system as if it were constructed recently with new PVC pipe, which is less prone to breakage and cheaper to replace, so the valuation of the system was far higher than it should have been, the Public Advocate Office said.

Bellflower City Manager Jeff Stewart and Cal-Am Vice President Kevin Tilden want the Public Utilities Commission to hold off on a vote over the sale on Thursday, and re-evaluate the sale price using an analysis that focuses on the effect of the sale on the next three years of water rates.

This story has been updated.