For nearly a decade, a California city fought to take over its privately owned water company; now the state Supreme Court has ruled 7-0 against his takeover argument

California’s highest court rejected a key legal argument in a decade-long effort by a Southern California city to take control of its local water system. The California Supreme Court ruled 7-0 on August 24 against the city of Apple Valley, determining that judges do not automatically have to defer to local governments seeking to subjugate private utilities through eminent domain. Writing for the unanimous court, Associate Justice Leondra Kruger rejected Apple Valley’s argument that its statement of public necessity should receive only limited judicial review. “The city of Apple Valley, seeking to take over a privately owned water company, argues that its decision to take over the company is subject to the usual standard governing judicial review of a determination of necessity, meaning, in effect, that the court can deny the takeover only if it concludes that the city has committed a serious abuse of discretion,” Kruger wrote in the court’s opinion. “The Court of Appeal accepted this argument. We did not.”A Courthouse News Service report, republished by Maven’s Notebook, said the ruling changes how courts review municipal attempts to take over private utilities in California. The decision could make it easier for private water, gas and electricity companies to challenge government seizures.

Roots of a decade-long legal battle

The dispute in San Bernardino County began in 2010, when private equity firm Carlyle Infrastructure Partners bought Apple Valley Ranchos Water Company, which served about 65,000 people. Large rate increases after the sale sparked public anger and pushed city officials to consider taking over the system. In 2015, the Apple Valley City Council passed formal resolutions of necessity to condemn the water system and take control of its infrastructure. During the early stages of the case, the utility was sold back to Liberty Utilities, a subsidiary of Canada-based Algonquin Power & Utilities Corp. Liberty Utilities strongly opposed the compulsory acquisition in San Bernardino County Superior Court. The company argued that public ownership was neither necessary nor better public use. After a 67-day trial, a Superior Court judge ruled in favor of Liberty Utilities. The judge concluded that the company had successfully challenged the city’s claims that the acquisition was necessary. The trial court also ordered the city to pay Liberty Utilities $13.2 million in legal fees. That ruling was later overturned by a state appeals court. The appeals court said judges must use a highly deferential standard of “gross abuse of discretion” when reviewing local government determinations of necessity.

Establishing limits on municipal power

The Supreme Court’s decision addresses the conflict between local governments’ broad eminent domain powers and a 1992 California law that grants additional protections to private utility companies. The court said the 1992 law was designed to provide stronger protections for privately owned utilities. Under the law, trial judges must independently examine the facts rather than simply accept a local government’s declaration. Kruger wrote that a municipal resolution cannot automatically approve a property seizure. “The resolution is neither the beginning nor the end of an expropriation proceeding,” Kruger wrote. “As a general rule, public need is a question to be decided by the public entity, subject to limited judicial review.” However, the court said that when it comes to privately owned utility properties, judges must independently examine the evidence to determine whether the legal requirements for taking have actually been met. “In evaluating a challenge to the taking of privately owned utility property, the trial court, acting as a trier of fact, must exercise its independent judgment to determine whether the utility owner challenging the taking has rebutted the relevant presumptions and, therefore, has established by a preponderance of the evidence that the taking does not satisfy the legal requirements,” the ruling stated.

Case returned for review

The Supreme Court rejected Apple Valley’s main legal argument, but did not decide whether the city can ultimately take control of the water system. Instead, the unanimous ruling returns the case to the California Court of Appeals to continue proceedings under the new legal standard. The appeals court must reconsider the trial court’s original findings. It will also examine separate procedural issues, including whether evidence collected after the passage of the 2015 resolutions should have been allowed during the original trial. The ruling could affect other California communities seeking similar utility acquisitions. In San Francisco, city officials have spent years exploring the use of eminent domain to acquire the local power grid from Pacific Gas & Electric and create a publicly owned electric utility. By requiring trial judges to independently examine evidence rather than leave it to local officials, the California Supreme Court has raised the legal hurdle for municipalities seeking to adopt privately owned utility systems.