Municipal Condemnation of Privately Held Utilities Continues to be a Hot Issue, but at what Cost?
Posted in Valuation

In January, I spoke at a conference in Austin about efforts by municipalities to condemn privately-held utility companies.  At the time, I figured it would be a one-off presentation on a pretty niche issue, even for eminent domain attorneys.  But next month, I'll be speaking on a variation of that topic at CLE International's 2016 Eminent Domain Conference in Las Vegas, a presentation that will be the third time this year I've spoken on the topic.

In fact, we've been following this issue since at least 2014, when my partner Brad Kuhn wrote about a takeover effort involving PG&E.  Those efforts remain ongoing, and in June, the South San Joaquin Irrigation District ("SSJID") adopted a Resolution of Necessity to condemn PG&E's facilities in Ripon, Escalon, and Manteca.  SSJID filed an eminent domain action on July 7.

Without passing any judgment on PG&E or SSJID in the above case (I have no personal knowledge about the case and am not involved in it in any way), it does provide a framework for what I think may be the most important aspect of these types of cases: valuation.

SSJID's premise in condemning PG&E's facilities is that it will be able to save its constituents 15 percent on their utility bills.  I have no idea whether that is or is not the case, but I do know that the actual savings in these situations can be complicated and very difficult to predict.  Hopefully, before a municipality proceeds down this path, it will have performed a realistic financial assessment that takes into account both (1) what the municipality thinks it will cost to provide utility service and (2) what it will cost to acquire the private utility company's assets.  This second piece is crucially important, because the residents are not likely to be very impressed with a reduction in their utility bills if they have bonds to pay off from the acquisition that dwarf the utility service "savings."

This is where I think many takeover efforts will collapse, as municipalities run their calculations, demonstrate a net "savings," and then find out during the acquisition process that the cost is far higher than they had projected.  As just one recent example, the City of Missoula, Montana condemned the utility company in its jurisdiction based on a projected acquisition cost of $50 million and anticipated legal fees of $400,000.  Ultimately, the condemnation award was $38 million higher than projected -- and the legal fees may turn out to be as much as $14,000,000.

Like the SSJID case, I have no personal involvement or knowledge about the situation in Missoula.  But I do know that a takeover effort projected to cost $50,400,000 may not "pencil out" quite the same if the actual cost turns out to be more than twice that much.  At least one person following the situation there appears quite concerned about how everything is turning out.  Dan Brooks, in his August 4 blog post Two years and $14 million later, Missoula wins right to buy Mountain Water, expressed his frustration at the city's process and (apparent) lack of financial planning:

The city had not run the numbers to determine at what point Mountain Water stopped being a good deal. Fifty million was a good price, apparently, and $50 billion would be too much. But within that range, no one could say exactly where a smart investment would turn dumb.

So what's my point in all of this?  Only this:  whether you are a city representative considering whether a takeover bid makes sense or a resident encouraging your local government to take steps down this path, you need to think carefully about the costs of proceeding.  As well intentioned and as meticulous as your financial planning may be, it is a good bet that the takeover target is going to view the costs very differently, and that the actual acquisition costs may be higher . . . potentially far higher . . . than anything that makes sense in terms of saving anyone any actual money.

  • Rick E. Rayl

    Rick Rayl is an experienced litigator on a broad range of complex civil litigation issues.  His practice is concentrated primarily on eminent domain, inverse condemnation, and other real-estate-valuation disputes.  His public ...

California Eminent Domain Report is a one-stop resource for everything new and noteworthy in eminent domain. We cover all aspects of eminent domain, including condemnation, inverse condemnation and regulatory takings. We also keep track of current cases, project announcements, budget issues, legislative reform efforts and report on all major eminent domain conferences and seminars in the Western United States.

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