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The city of Bellflower wants to sell its aging water system to a large, profit-making water company that can manage it better. But the deal could fail. That's because government regulators say the price is so high that it could harm water customers across Southern California.
The Bellflower dilemma shows the difficulty hundreds of small, aging water systems across California are facing. State water policy requires that smaller, more stable water systems be purchased from larger, more stable water systems that can fund the necessary upgrades.
However, the law also requires payment of fair prices for such systems. So it is about how high the fair price for the Bellflower system should be and whether a fair market price that buyers and sellers agree on would pollute water consumers elsewhere.
The sale hits a street block
The California American Water Company – the fourth largest in the state to serve more than half a million people – wants to buy Bellflower's tiny water system for $ 17 million. Bellflower voters approved the sale in 2016. The city council approved him the following year. The local stakeholders therefore agree to the deal.
But then there was a roadblock at the state law firm. It is an independent branch of the state regulator, known as the Public Utilities Commission, and is there to look for tariff payers' rights and keep tariffs reasonable and low.
""The proposed purchase price is greatly inflated and would ultimately result in rate increases for a significant number of customers, not just in Bellflower, but across the state, particularly in the Los Angeles district, "he said Richard Rauschmeir the prosecutor's office.
The office said in public documents that the price of the Bellflower system was so high that water rates for Cal-Am customers could increase by 0.5% to 3% across the state. Instead, a lower price of around $ 9 million was recommended, which corresponds to the water rights that would come with the water system.
An administrative judge agreed that the price was too high and went further. In a decision proposed in March, the judge said the Bellflower system was in such bad shape that Bellflower should pay someone else $ 5 to $ 9 million to take it from the city.
The judge recommends the state public utility commission to reject the deal if it is up for vote on Thursday.
""Hogwash, "said Jeff Stewart, manager of Bellflower City." That is my answer in one word. The market determines the value of the systems. "
According to Stewart, state law requires the city to have a fair market value. He pointed out the lengthy public review process the sale was going through. He also said that breaking the system and selling the water rights and high-performance well separately would result in the controversial selling price.
Cal-Am spokesman Kevin Tilden said the judge and law firm had incorrectly summed up the water system assessment as if the millions of dollars in necessary repairs were being made in the early years of Cal-Am's ownership. It would take longer to do all the repairs, so the costs would gradually spread across the customer base, not all at once, said Tilden.
The price increase for his customers in the Los Angeles, Ventura and San Diego counties would only be about 50 cents per household in the first years after the sale, Tilden said.
The company has letters of support for the purchase of various elected representatives, including in the city of Montebello, who want to sell their water system to a larger operator. MEP Christina Garcia, a Democrat who represents Bellflower, says she supports the sale.
The California Water Association, an investor-owned water supply industry group, says the refusal of the judge's sale would wrongly upset the city dwellers who voted for it, and would terrify other cities' sales efforts and affect their water systems.
BIGGER PROBLEM: CHEAP WATER THAN HUMAN RIGHTS
Why should we mind if a water giant wants to buy a tiny water system for a lot of money? The problems go beyond Bellflower, which has 75,000 residents and 1,800 municipal water supply customers, as well as a large investor-owned power company that fluctuates over a retail price. The story is about whether California can achieve its goal of providing clean water for everyone.
California was the first state in the nation to declare that safe, clean, affordable, and accessible water is a human right. This principle was incorporated into the state constitution in 2012, also 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 goals of California's water policy since 1997 has been to encourage small, difficult water systems to be acquired by larger, more powerful systems. However, this law also requires utilities to pay fair market prices.
According to Cal-Am, the creation of a market where cities are ready to sell water systems they no longer want is supported by price tags such as the $ 17 million Bellflower system.
On the contrary, the prosecutor argues that setting an inappropriately high price for the system benefits only Bellflower and Cal-Am, but harms consumers, who ultimately have to pay the cost of buying and repairing the water systems and a set profit as high to 9.25% in Cal-Am on all of these expenses.
HOW THE PRICE HAS BEEN SET
The dispute in Bellflower is about how the price was set.
There were some issues with the assessment that Cal-Am originally made for the water system, which the prosecutor described as excessive and unreasonable. For starters, the valuation failed to account for the $ 25 million upgrades required, the firm said.
Most Bellflower underground pipes consist of a now discontinued asbestos and concrete pipe, and Bellflower pipes break twice as often as similar pipes in other water systems. This means that the system should be assigned a lower value because the pipes have been devalued so much since they were installed.
However, Cal-Am used a 2014 city-commissioned report evaluating the Bellflower system as if it had recently been built with a new PVC pipe that is less prone to breakage and cheaper to replace . As a result, the rating of the system was much higher than expected, the prosecutor said.
Jeff Stewart, manager of Bellflower City, and Kevin Tilden, vice president of Cal-Am, would like the public utility commission to vote on the sale Thursday and reevaluate the sale price based on an analysis that looks at the impact of the sale on the The company will concentrate water rates over the next three years.