California Supreme Court: Apple Valley Water Eminent Domain Review Strengthened

• The California Supreme Court ruled that courts must use independent judgment, not just review for gross abuse of discretion, when assessing a municipality's eminent domain action against a private public utility.
• This unanimous decision sided with Liberty Utilities, sending the decade-long Apple Valley water eminent domain dispute back to an appeals court.
• The ruling clarifies that a 1992 California law allows private utilities to challenge the necessity of a takeover, requiring trial courts to act as triers of fact.
• The case originated from Apple Valley's attempt to acquire its water system after significant rate increases by a previous owner, Carlyle Infrastructure Partners.
• The decision has broader implications for similar eminent domain cases involving public utilities across California, including efforts in San Francisco to take over parts of the PG&E grid.

To evaluate a challenge to the taking of privately owned public utility property, the trial court, sitting as trier of fact, must exercise its independent judgment to determine whether the utility owner challenging the taking has rebutted the relevant presumptions and has thus established by a preponderance of the evidence that the taking is not authorized by the eminent domain law.

The California Supreme Court has significantly altered the landscape for municipal eminent domain actions targeting private public utilities, ruling that courts must apply independent judgment rather than merely reviewing for a gross abuse of discretion. This unanimous decision, handed down on Monday from the Earl Warren Building in San Francisco, sends a decade-long dispute between the town of Apple Valley and its water provider, Apple Valley Ranchos Water Company, back to a state appeals court.

The ruling specifically sided with the utility, now known as Liberty Utilities, effectively halting Apple Valley's immediate plans to acquire the water systems serving approximately 65,000 residents. Justice Leondra Kruger, writing for the 7-0 majority, clarified that while public necessity is generally a matter for the public entity, subject to limited judicial review, this standard changes when a privately owned public utility is involved. The court explicitly rejected the argument, previously accepted by an appeals court, that a municipality's resolution of necessity should only be overturned if there's a finding of gross abuse of discretion.

The conflict originated around 2010 when investment firm Carlyle Infrastructure Partners acquired Apple Valley Ranchos Water Company, subsequently implementing significant rate increases. This prompted the town of Apple Valley, located in San Bernardino County, California, to begin exploring a public takeover of the utility. In 2015, the town approved two resolutions to acquire the water systems and subsequently initiated an eminent domain complaint against the company.

Following these initial steps, the utility was sold again, this time from Carlyle to Liberty Utilities, a subsidiary of Algonquin Power & Utilities Corp, which operates other private utilities across the United States. Liberty Utilities then challenged Apple Valley's eminent domain action in San Bernardino Superior Court, arguing that the town had not adequately demonstrated the public necessity for the takeover and had failed to meet the criteria for a "more necessary public use." After a 67-day bench trial, the trial judge ruled in favor of Liberty, concluding that the utility had successfully disproved the town's claims of public necessity and awarded Liberty $13.2 million in attorney's fees. However, this decision was later reversed by an appeals court, which found that the lower court had not given due deference to the town's initial findings and decisions.

The core of the California Supreme Court's decision hinges on the interpretation of judicial review standards for a municipality's resolution of necessity, particularly in the context of public utility eminent domain. The town of Apple Valley had contended that its decision to take over the utility should be subject to the standard requiring a finding of 'gross abuse of discretion' for judicial intervention. This standard typically allows an eminent domain takeover to proceed unless a judge determines it was made in bad faith.

However, Justice Kruger's opinion highlighted a crucial distinction introduced by a 1992 California law, which specifically grants public utilities the right to dispute the necessity of such takeovers. The Supreme Court affirmed that this law mandates a more rigorous standard of judicial review. As Justice Kruger articulated, "To evaluate a challenge to the taking of privately owned public utility property, the trial court, sitting as trier of fact, must exercise its independent judgment to determine whether the utility owner challenging the taking has rebutted the relevant presumptions and has thus established by a preponderance of the evidence that the taking is not authorized by the eminent domain law." This means trial courts must actively assess the evidence presented by the utility, rather than simply deferring to the public entity's initial determination.

This landmark ruling by the California Supreme Court significantly strengthens the position of private public utilities facing eminent domain challenges from municipalities. By requiring trial courts to apply independent judgment rather than the more deferential gross abuse of discretion standard, the decision ensures a more thorough judicial review of the necessity behind such takeovers. This shift means that municipalities, when contemplating eminent domain actions for utilities, will need to build a more robust and independently verifiable case for public necessity.

The implications extend beyond Apple Valley, as similar disputes are unfolding across California. For instance, lawmakers in San Francisco are also exploring the use of eminent domain to acquire parts of the Pacific Gas & Electric grid, with the aim of reducing costs. The Supreme Court's clarification on California eminent domain law will undoubtedly influence these ongoing and future cases, providing a clearer framework for judicial review of public utility eminent domain proceedings. Neither Apple Valley's attorneys nor Liberty Utilities' attorneys responded to requests for comment following the ruling.

This ruling clarifies that courts will apply independent judgment, not just a gross abuse of discretion standard, when reviewing a municipality's resolution of necessity to take over a private public utility. Lawyers advising municipalities on eminent domain actions for utilities must prepare for more rigorous judicial scrutiny, while those representing private utilities have a stronger basis to challenge such takeovers.

Source: Original reporting via Courthouse News Service