Bid to Buy Water District Raises Ire : Utilities: Opponents call possible sale of Santa Margarita agency a grab for profits. Company says takeover would save residents money.

About 500 people packed a raucous meeting Monday night and passionately debated an unusual bid from a private firm to buy the Santa Margarita Water District.

The meeting of the Local Agency Formation Commission, which oversees takeovers and consolidations of special districts, continued late into the night, as supporters and opponents haggled over the ultimate costs of a $300-million purchase bid from the California-American Water Co.

Nearly 60 residents asked to speak at the public meeting, many wearing stickers with the company’s name inside the international “no” sign--a red circle with a slash through it. Despite the complexity of the topic, it was the sort of meeting in which a speaker’s offhand remark about the cost of fire hydrants invoked whistles and lusty cheers.

“This proposal is not privatization, but it is profitization, and therefore not in the best interests of the ratepayers of the Santa Margarita Water District,” said Jim Holmes, chairman of the water district’s board of directors.

Calling the company’s proposal “wholesale theft of our district,” Holmes elicited one of the biggest ovations of the night from the standing room-only crowd in the gymnasium of St. John’s Episcopal School.

But David Paine, a spokesman for California-American, said many of the people in the crowd failed to understand that the company’s bid would save them money.

“I think people are just afraid of the word ‘profit,’ ” he said. “You can hear that tonight.”

Suspense was provided by uncertainty over whether LAFCO members would make a decision by the meeting’s end.

Company officials seemed uncomfortable as speaker after speaker took to the podium and blasted the proposed sale.

“We don’t believe their promise of better, cheaper and safer,” Fred Flo said.

“Call your courage. Bite the bullet. Vote 7-0 to keep our water district public,” Virginia S. Cankar said.

Monday’s meeting on the unusual bid from California-American Water Co., a Chula Vista subsidiary of New Jersey-based American Water Works Co., also came in the wake of Orange County’s bankruptcy, which reignited the privatization issue.

Before the meeting, LAFCO commissioners had received a staff report that warned of higher user fees and reduced services if the bid was accepted.

But the study’s conclusions were dismissed by California-American as the predictable findings of one government agency protecting another, and the hearing brought out people on both sides of the issue.

The water district, the largest in South County, serves 60,000 residents in Mission Viejo, Coto de Caza, Rancho Mission Viejo and Rancho Santa Margarita.

The company’s proposal to buy the district and assume its $370 million in debt marked the first attempt in state history to privatize a public agency.

It also added another chapter to the long history of a water district that, partly due to its scandalous past, has been a catalyst for grass-roots government reform movements.

In 1993, The Times disclosed that the district’s top managers--Walter W. (Bill) Knitz and his assistant, Michael P. Lord--had received more than $60,000 in gifts from companies that had been awarded district contracts worth millions of dollars.

At the public’s expense, district officials rode in limousines, stayed in luxury hotels and drove $35,000 cars.

Both managers were eventually convicted on criminal conflict-of-interest charges.

The disclosures, which incited public outrage and helped fuel anti-government sentiment, raised larger questions about spending practices among special districts and resonated throughout the county network of 19 independent water districts.

The scandal even reached Sacramento, sparking talk of reform. State laws were proposed to increase financial disclosures by district officials and measures were suggested to reform outmoded election procedures for district board members.

But nowhere were events more relevant than in South County, where the maze of water and sewer districts is the oldest known form of government, predating even some local cities by 50 years. Cities such as Dana Point, for instance, are patchworks of water districts and sanitary districts.