An 11th-hour letter submitted by The Newhall Land and Farming Co. questioning the developer’s responsibility for $25 million in connection fees for more than 20,000 future hookups in burgeoning FivePoint Valencia — formerly known as Newhall Ranch — prompted the Santa Clarita Valley Water Agency’s board to take a beat Tuesday and check with its lawyers.
The decision followed a nearly 80-minute discussion that shared some board members’ surprise the fees weren’t already being collected, as well as a look at what’s considered “contributed capital” — a key part of the discussion — and whether the developer should have to pay hookup fees that reflect the cost of infrastructure the developer previously sold to SCV Water.
Ultimately, the SCV Water Agency board will be making a decision on the fees for the Valencia Service Area at a future date, after moving to delay the discussion.
Board member Maria Gutzeit, who initially moved to continue the discussion in light of the late notice of the letter, said during the meeting the item should be taken back for a committee-level discussion at least one more time before it’s brought back to the board.
A water official emailed late Friday to say staff plans for the fee to be considered for adoption by the board in July.
The contention of SCV Water’s staff and its analyst is yes, the fee is fair because its predecessor, the Castaic Lake Water Agency, paid Newhall Land $73.8 million for the land and the facility in 2012.
“Since all those developments have been completed and … the land has been sold, we believe the value of those facilities goes with the land and so it is fair to include those in the fee,” said Doug Dove, president of Bartle Wells Associates, which was contracted by SCV Water to conduct the fee study.
The Newhall Land and Farming Co., a subsidiary of Five Point Holdings, which spoke on behalf of the Valencia Service Area that would be affected by the fee at Tuesday’s water board meeting, detailed why the charges were unfair in a five-page letter left with the agency around 4:30 p.m. Tuesday.
“Respectfully, we do not believe this board has all the information necessary in order to make an informed and prudent decision,” Sandy Sanchez, vice president of policy for Five Point, said to the water board Tuesday during the board’s discussion.
Five Point believes “the proposed capacity fee was calculated using a flawed and legally questionable methodology that did not account for the tens of millions of dollars’ worth of facilities that Newhall contributed to this agency’s predecessor,” she told the board Tuesday.
The letter sent Tuesday states:
“Now, the agency is proposing to charge (Newhall Land) roughly $25 million in RCFs (retail capacity fees) to ‘buy in’ to the construction of that very same water system, minus the purchase price (which is being recovered through water rates), under the guise that the system now enjoys a higher valuation,” the letter states, contending the facilities were donated as contributed capital.
“(Newhall Land) has no objection to paying the capital costs for the water system infrastructure necessary to service the Valencia Service Area, but it does object to paying for it twice (and/or paying the agency back for capital costs it never occurred in the first place),” the letter continues.
A spokesperson for Five Point Holdings did not immediately respond to a request for comment Friday.
SCV Water requested the fee study for Valencia in July 2022, and the money is intended to help pay for future hookups from the existing infrastructure, as well as the cost of the current infrastructure that will have “beneficial use” for future growth, which SCV Water staff, a contracted analyst and the agency’s ratepayer advocate have determined is fair and in compliance with the law.
However, the ambiguity of the undefined term “beneficial use” also was mentioned.
Newhall Land’s letter stated SCV Water’s proposed fee structure — a little over $1,100 for the most common connection size — amounts to charging the developer for more than the cost of service to the agency, which would be illegal, if true.
“This proposed fee covers a system buy-in component for new development. It is a buy-in to the existing system, and not to fund new construction,” wrote Kathie Martin, communications manager for SCV Water, in an email Friday. “Many communities and water agencies throughout California and the country set these capacity fees to apportion system costs more equitably between all customers — both existing and future. The specific methods used vary.”
Newhall Land also said that, from a best practices standpoint, the American Water Works Association manual, which was the reference guide Bartle Wells used for its study, recommends not including “contributed capital” in determining capacity fees; however, what sprung from that argument was an observation of that term’s potential ambiguity.
Water officials also said the manual was only a guideline, and not the end-all, be-all, and the uniqueness of the Newhall Land-Valencia situation made Bartle Wells analyst’s decision appropriate, with which SCV Water General Manager Matt Stone concurred.
As to why the fees are only being looked at now, Martin wrote: “Both the Santa Clarita division, and the Newhall division already had retail capacity fees in place. As a private utility, Valencia Water Co. did not. A public agency has different fee structures and revenue models that a private company like Valencia Water Co. did not have to include.”
When the Newhall County Water District and Castaic Lake Water Agency merged in 2018 to create the SCV Water Agency through eponymous legislation, the law also called for the new agency to contract with an independent ratepayer advocate to review such fees and schedules and make sure they are not only fair to ratepayers, but also to developers, so as not to stymie development, according to local water officials.
The agency set about assessing its regional facility capacity fee for new growth, then tackled the retail water rates for all three retail divisions, with each process taking about a year.
A water official on background also said the need to address treatment plants and COVID-19 also created priorities for the water district to address before the retail rate study was undertaken.
The ratepayer advocate for SCV Water, Anthony Elowski of Robert D. Niehaus Inc., said he determined the fee to be in compliance with the law because the schedule considered a depreciation of the disputed assets built by Valencia Water, which already serve approximately 31,189 customers.
Elowski said the fee study was conducted in a standard manner, in accordance with the law, in determining a current total asset value of about $56 million for the Valencia Service Area, according to a letter he submitted to the board. That total was reduced from around $141.4 million, because it includes a depreciation in value of the assets as well as the $58.5 million in loans SCV Water has to pay off for its purchase of the water system.
Newhall Land officials also said they tried to approach SCV Water agency staff for a discussion of some sort of compromise, but Stone told the board the developer’s proposal ultimately amounted to a side deal, which he didn’t think was appropriate, adding such a fee should be set uniformly.
Near the end of the meeting, the board allowed for a 5-minute recess that gave the agency’s counsel a chance for Stone to review Newhall Land’s letter with counsel for Bartle Wells.
“We had a chance to read through the letter quickly and discuss some of the cites in the letter,” Stone said after the recess.
“While I think we’re fairly confident, what I would be wanting to be sure of is that the board is confident as well,” Stone added, while reminding the board it could delay the decision for more study but saying he was comfortable either way.
After initially declining to delay the vote prior to the discussion, the board voted to delay the discussion with a vote of 6-2, with Beth Braunstein and Kathye Armitage dissenting.