California Appellate Court Affirms Public Water District's Action to Buy Private Water Company

The Mello-Roos Act can be used to finance acquisitions by eminent domain, the Second District Court of Appeal affirmed in a published decision. In Golden State Water Company v. Casitas Municipal Water District, handed down Tuesday, the court rejected Golden State Water Company’s contentions and affirmed that the Act should be “liberally construed” to allow for the financing of the acquisition of facilities.

Golden State Water Company, a for-profit regulated utility, has a monopoly in providing water service in Ojai. Concerned about what the opinion described as “sky high water bills,” Casitas Municipal Water District “concluded that the Ojai community would benefit from having its water utility run by a locally controlled entity rather than an out-of-area-corporation seeking to maximize profits for its owners.”  

In a Mello-Roos election held in Ojai, 87 percent of the voters approved using Mello-Roos property taxes to finance Casitas’ acquisition by eminent domain of Golden State’s Ojai water system. Golden State, declaring its system was “not for sale,” brought a legal challenge to set aside the voter approved Mello-Roos measure.

Golden State argued on appeal that only “purchases” of “tangible” property could be financed under Mello-Roos and that “purchase” did not include eminent domain, and that Golden State’s water system consisted in part of intangible property.

The appellate court rejected these contentions. It observed that the Act itself requires that it be “liberally construed.” It noted that the Act provides for the acquisition of “rights of way,” which are intangible and that “purchase” has been interpreted in prior case law to include eminent domain. It concluded that “if the public agency otherwise has the power to acquire the facilities, the Mello-Roos Act should not be interpreted to preclude financing them.” It further concluded that litigation expenses for eminent domain could be considered “incidental expenses” that could be financed under Mello-Roos.

The decision observed that “[m]onopolists have long been unpopular in this country” and that “[n]othing is more necessary to life than water.” The decision ended on this note:

“[Golden State] advocates for a rule that would shift the bargaining power decisively in its favor, allowing it to hold out for a sale price far above the market rate while it continues to extract monopoly rents from the people of Ojai. This is neither sound policy nor supportable by the statutory text.  Like the trial court, we will not set the will of the voters aside.”

Best Best & Krieger LLP filed a brief on behalf of Casitas as amicus curiae counsel for the Association of California Water Agencies, League of California Cities, California State Association of Counties and California Special Districts, which collectively represent more than 2,000 public entities.