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California

Steven Greenhut
Tapping Eminent Domain
A Southern California city’s scheme to seize a water company is all wet.
7 February 2013

Officials in the city of Claremont believe they have a foolproof solution to stem rising water rates: eminent domain. City leaders are considering plans to seize water facilities from the Golden State Water Company, a private firm that since 1929 has provided water to the college town on the eastern edge of Los Angeles County. Spurred by an activist group upset at residents’ relatively high water rates, and with more rate increases in the offing, the Claremont City Council has made taking over the company a top priority.

“It’s troubling that Golden State is continuing to hire consultants to make misleading claims, release baseless information, and establish so-called community groups and websites, in an effort to avoid the facts related to the city’s offer to purchase the water system in Claremont,” said city manager Tony Ramos in an official statement that sounded almost as overheated as the communiqués issued by the anti–Golden State activists. Typical for Claremont, Ramos’s words had a distinctly left-wing edge: “But given the excessive profits, executive salaries, and Board Member compensation that Golden State is attempting to protect, one might understand why the company would go to such lengths.”

It isn’t hard to imagine how a city could justify such a brazen abuse of power. Until recently, California municipalities routinely misused eminent domain, pushing aside independently owned properties and transferring them to private developers, who built the tax-generating projects—shopping malls, movie theaters, auto dealerships—that cities so love. The U.S. Supreme Court’s 2005 decision in Kelo v. New London upheld the use of this power for private economic-development projects, but the ruling caused such a backlash that most states reined in municipalities’ latitude in using it.

Even in California, bad publicity and the improbable elimination of the state’s redevelopment agencies have virtually ended the use of eminent domain for so-called economic development. But eminent domain remains a tempting tool for activist-minded city officials, some of whom threaten its use in novel and disturbing ways. Officials in Ojai, for instance, are considering a plan similar to Claremont’s, and Stanton officials had previously mulled the same idea. For its part, Claremont officials offered to purchase Golden State’s water system for $54 million, far below what the company says it is worth. When eminent domain is in play, valuation becomes a battle of appraisals, but Claremont officials haven’t provided any documentation for how they arrived at their offering price or explained how the small city could afford to pay it.

A recent USA Today study of water systems nationwide found that consumer water costs are increasing dramatically, even as conservation efforts reduce per-capita water usage. According to the newspaper, factors driving costs include expensive upgrades of long-neglected infrastructure, government-mandated environmental efforts, and the skyrocketing costs of employee pensions. Water rates are soaring throughout California—and public agencies, not private companies, are leading the way. The Metropolitan Water District of Southern California has raised rates ten times in the past decade and increased rates 100 percent since 2006. The Golden State Water Company, by contrast, is a regulated, privately held utility whose rates must be approved in an arcane Public Utilities Commission process. No one has offered convincing evidence that private companies are gouging consumers any more than public agencies are.

Sometimes, consumers do enjoy lower bills with public utilities—not because the utilities are more efficient service providers, but because they can hide their costs elsewhere. Golden State has relatively high rates, in part, because a private company cannot force taxpayers to assume costs for which it does not want to account—specifically, its future unfunded pension promises. Thus last year, the company switched from a defined-benefit pension plan—similar to retirement plans in the public sector—to a defined-contribution plan, common in the private sector. As a Golden State official told the Orange County Register, “Golden State rates reflect the full cost to provide the service, maintain the infrastructure and make needed investments to improve the system.” Private-monopoly water systems, which set rates based on regulatory filings and edicts, hardly epitomize the free market. But private entities are far better at maintaining their infrastructure than public utilities, and they can’t run up unfunded pension liabilities indefinitely.

While public utilities excel at hiding such costs, it’s unlikely that Claremont officials would be able to paper over the enormous debt the city would incur to buy the Golden State system. Courts rarely prevent the use of eminent domain—especially in cases like this, involving a clear “public use”—but they just as rarely allow agencies to get away with low-ball purchase offers. One economist who analyzed the city’s “fair market” bid for Golden State concluded that, officials’ assurances to the contrary, customers’ water bills would likely increase 30.5 percent if Claremont has its way. If the city paid what the utility’s assets are really worth, he wrote, even larger rate hikes would be necessary. In short, Claremont residents wouldn’t be getting a fairer deal at all.

The eventual valuation could put a small city in a precarious financial spot. Perhaps instead of forcing themselves on private companies, cities genuinely interested in maintaining low rates and good service should look for ways to impose more competitive pressures on these monopoly systems. Unfortunately, the power of eminent domain makes it easy for cities to do the wrong thing.

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