Developers Wary of Plan to Buy Water District : Utility: A decision on firm’s unusual offer for Santa Margarita system is expected early next year.

Three powerful South County developers are lobbying against an unusual bid by a private firm to buy the Santa Margarita Water District.

In recent letters to state and county officials, Coto de Caza Ltd., the Santa Margarita Co. and the Mission Viejo Co. said residents would be better served and would enjoy cheaper water rates in the long run if the district remained publicly run.

“Based on our analysis, we see no reason to support or go forward with this venture,” said Brian H. Gentner, senior counsel for Coto de Caza Ltd.

Last May, California-American Water Co. of Chula Vista, a subsidiary of American Water Works Co., the largest privately owned water company in the country, surprised the district board and the California water industry with its offer to buy the district by taking over its $300-million debt.

But by using a state law, California-American was able to circumvent any consideration of its proposal by the district’s board, which opposes it. Instead, the company successfully circulated a petition among residents, forcing the county’s Local Agency Formation Commission to consider its proposal.

A decision is expected in early 1995.

Private water and sewer systems exist around the state, including many owned by California-American, but this would be the first purchase by a private company of a public district.

The 100-square-mile district serves 80,000 residents in Mission Viejo and Rancho Santa Margarita, parts of San Juan Capistrano and San Clemente, and the 40,000-acre Rancho Mission Viejo.

Mission Viejo Co. spokeswoman Wendy Wetzel Harder said her company needs a lot more information before it can back California-American’s proposal. The Mission Viejo Co., which has been building up its community since 1963, believes the district is worth much more than the $300 million of debt, she said.

“This is like making payments on your house for 25 years and then someone coming along and offering to pay if off in bonds. But then you don’t own it anymore,” Wetzel Harder said. “We can’t support this at this point.”

John Schatz, general manager of the district, admits he was surprised to find allies in the developers.

Because the district has financed itself to the hilt to construct the water and sewer infrastructure to serve its future growth of 180,000 residents, the developers in the area now must pay about $5 million annually to keep the water and sewer rates low enough to sell homes, Schatz said.

“When this first happened, we thought the landowners were behind it,” Schatz said. “In this district, developers have historically subsidized the water and sewer rates to make the homes more attractive to sales.”

Ted Jones Jr., president of California-American, said although the company would have welcomed the developers’ support, it makes little difference. The company can simply do a better job because of economies of scale and the success its parent has had nationally, Jones said.

“We are confident that the people would be better served under a regulated private utility,” Jones said, adding that the company has a successful record all over California, including communities in San Diego and Los Angeles counties and the Monterey Peninsula.

Schatz, however, said that a public agency has tax and financing advantages, which a private company that must earn a profit cannot match. None of California-American’s other service areas are anywhere near as large as the Santa Margarita district.

Susan Trager, an Irvine attorney who specializes in water issues, called the company’s bid “an opportunist action” meant to take advantage of the scandal-plagued district’s problems. Three of the district’s top managers were fined during the past year after pleading guilty to criminal conflict-of-interest charges.

“There is something very skewed about this concept. A private company should not be allowed to buy government,” Trager said. “That’s like Philip Morris walking into the North Carolina Legislature and saying, ‘Give me the keys to the Statehouse.’ That’s not how we do things in this country.”

But Don Owen, a longtime director of the Orange County Water District, said the success or failure of such a purchase depends only on how efficiently the district is run.

“I think it’s workable,” said Owen, who has a unique perspective because he is a director of the privately owned Dominguez Water Corp. in Los Angeles County. “I think there are enough checks and balances to make it work either way. It really comes down to who can be the most efficient and most imaginative in making the systems work.”