Water Rates Hiked While Debt Forgiven, Analysis Shows : Utilities: Santa Margarita Water District gave the Santa Margarita Co. a $11.4-million ‘credit’ while customers saw their bills rise, study finds. Both entities find fault with report.

The once-troubled Santa Margarita Water District wiped away an $11.4-million debt owed last summer by the Santa Margarita Co. while it was raising rates by as much as 25% for homeowners and others, according to a financial analysis obtained by The Times Orange County.

In addition to the $11.4-million “credit,” the development company also received a large break on the normal interest charges it had to pay on the remaining $5 million it owed, according to an analysis by the J.P. Morgan Securities Inc. investment banking firm.

And the developer’s new water rate is substantially below what most others pay. While more heavily populated areas like Mission Viejo were hit with a 25% rate increase, two less-populated areas where Santa Margarita Co. has extensive holdings saw rate increases of only 4% and 12.4%.

The water district has engaged in “a masterpiece of obfuscation” to conceal its close relationship with the Santa Margarita Co., Michael George, managing director of Morgan’s municipal bond division, said Monday in an interview.

But water district officials cried foul, alleging that the analysis was a “smear” campaign by California American Water Co. The Chula Vista company, which hired Morgan’s San Francisco office to conduct the analysis, is mounting a campaign to win county approval to buy the water district by taking over its $300-million debt.

The results of the analysis call into question whether the water district, which serves 80,000 South County residents, has followed through on promises to clean up its operations in the wake of a 1993 scandal that led to the ouster of its leadership.

The water district’s two top officials resigned and later pleaded guilty to criminal charges for receiving $60,000 in gifts from bankers, developers and engineering firms that had been recommended for business with the water district. The board of directors also had granted $16.7 million in credits to Santa Margarita Co.

Voters swept out the old board and elected candidates promising reform. But the Morgan analysis casts doubt on how successful reform has been.

“Under the current board and management, the extraordinarily close working relationship between the major landowner and the district has continued,” George said.

Santa Margarita Co. officials blasted the analysis as “full of inaccurate information, incorrect terms and lies.” Company spokeswoman Diane Gaynor said Monday that California American “threatened to use this information in a smear campaign” if the developer did not offer its support to California American’s effort. She said the analysis amounts to “blackmail.”

Water district spokesman Laer Pearce said California American “has been unable to get community support so they are trying to get the largest landowner to their side by threatening to embarrass them” through the analysis.

Water district officials acknowledge giving the $11.4-million credit to Santa Margarita Co., but say that the Morgan analysis distorts the background surrounding the dealings. For instance, they said, last July’s rate increases of up to 25% for homeowners made up for past subsidies and inequities among the more-populated and the less-populated areas.

In addition, had Santa Margarita Co. not been granted a credit, it might have been unable to pay its back debt and all rate payers would have had to pay substantially more, said John Schatz, the district’s general manager.

Santa Margarita Co. was heading toward “a default situation,” Schatz said. “They said, ‘You can send us a bill and we will continue to work with you.’ ”

Instead of working out more lenient repayment terms, Schatz said, the district forgave Santa Margarita’s $11.4-million debt because the company had sunk $50 million more than required into building waterworks a decade ago in new South County communities.

The developer’s decision to build the extra infrastructure has helped keep rates lower throughout the entire community, he said.

In a prepared statement, Gaynor did not address whether the developer would have been unable to pay its water district bills. Instead, she said, the company paid the bill that was presented by the district last year. It amounted to about $5 million.

She said it is being paid in monthly installments at an interest rate of 1 percentage point over the district’s real estate investment rate--which, the Morgan analysis says, works out to about 7% a year. For such late payments, the analysis states that the district’s normal charge is a 10% late penalty on top of an annual 18% interest rate.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Water Rate Increase

Santa Margarita Water District rates increased 52% from 1991-1995. An additional 53% increase is projected from 1995-2000. Rates charged per hundred cubic feet:

2000*: $2.85

* Projected

Source: JP Morgan; Researched by JANICE L. JONES / Los Angeles Times