Water district linked to developer will consider reforms after eminent domain action revealed web of conflicts
After blurring the line between a private and public utility for nearly two decades, the water district that serves the world’s largest industrial park is looking to part ways with a developer.
That action comes after The Nevada Independent reported this month that the public water district, with the governmental power to seize private property, is operated by a private entity and governed by three board members who report income from companies connected to Lance Gilman, the face of the industrial park. The board members also reside at Gilman’s brothel, the Mustang Ranch.
The board’s structure and a recent vote to use eminent domain has raised concerns about the concentration of power at a public water district that has been operated by a private developer.
At a meeting Thursday, the board plans to consider basic administrative rules for the water district, procurement protocols that comply with state law and conflict of interest disclosures.
The public water district, a quasi-municipal entity, was formed to provide utilities to the Tahoe Reno Industrial Center. High-profile companies — Tesla, Amazon and Walmart — have set up footholds in what is advertised as the world’s largest industrial park, about 30 miles from Reno.
Starting in 2001, Storey County allowed a developer’s private water company to operate the public water district, exempt from utility regulation and with many powers of a local government. A new document reviewed by The Nevada Independent shows the district’s elected governing board delegated many of its non-statutory responsibilities to the developer-controlled company.
“Most people were unaware of some of the details of potential conflicts of interest,” said Mike Kazmierski, the president and CEO of the Economic Development Agency of Western Nevada.
Through a spokesman, the Public Utilities Commission, which regulates private water utilities, declined to comment. Although Storey County formed the water district, it is a political subdivision of the state. A spokesman for Gov. Steve Sisolak said that his “office defers to the appropriate jurisdictional agencies for any review of these entities and their interrelationships.”
The sooner, the better
For years, the board operated under the radar. Now the conflicted water district has been thrust into the spotlight as it leads a regional project to construct a multimillion-dollar effluent pipeline. When completed, the 16-mile pipeline will connect the region’s wastewater facility with the park. The project could be a win-win for regional development, bringing recycled water to the thirsty industrial park while helping the cities of Reno and Sparks defer millions of dollars in upgrades for the sewer facility.
To construct it, the water district wants to use eminent domain, a power that lets public entities seize private property for projects that benefit the public. Given the water district’s connection to the private developer, a property owner challenged the board’s use of the special public power.
The water district failed to properly notice the affected property owner and asked a judge to dismiss the case. It could potentially reconsider its eminent domain request at a future meeting.
A new general manager for the water district is working to create more independence between the public entity and the industrial park’s private developer.
But present and past conflicts, some of which the board president denied last week, could continue to haunt the water district. It also calls into question whether it has negotiated in good faith and complied with state ethics rules.
While pursuing the pipeline over the past several years, the water district has negotiated with state officials, city officials, regional water planners and companies at the park. Tesla and Switch, a data storage company pushing the pipeline, did not reply to requests for comment.
A spokeswoman for Blockchains, the cryptocurrency company that now owns most of the land at the park, said company officials were “currently trying to familiarize ourselves with the facts.”
Kazmierski said he understood why the board was structured the way it was. Under state law, water districts — formed as General Improvement Districts (GIDs) — must have a governing board comprising elected local residents or the County Commission. The residents eligible to serve the industrial park’s water district almost exclusively live at Gilman’s brothel. In recent months, the Storey County Commission has considered assuming oversight of the board.
“The sooner they get through the transition the better,” Kazmierski said.
The current structure, he said, “just doesn't smell right as they get into their larger role.”
Private and public
The water district is operated by the developer’s private water company, TRI Water and Sewer Company. That company began servicing the industrial park as a private utility. In 2001, Storey County allowed the company to keep servicing the park by taking over an existing water district.
Even after the private company went public, the developer remained in the driver’s seat.
Documents and interviews reveal that the 2001 deal allowed the developer to avoid regulation from the state’s utilities commission, while retaining most of its authority as a private company.
For instance, one clause in a 2001 Operating Agreement appears to hand over certain rights of the governing board, intended to comprise elected residents, to the private water company.
According to the agreement, “any right or obligation not required by law to be performed by the [board] as a nondelegatable function is hereby delegated to the [private water company].”
Examples of authorities that the board has delegated to the company include the supervision of contractors and the handling of many of its finances, including expenditures and revenues.
“There are a lot of portions to that document that are not legal,” argued Paul McKenzie, a former Reno councilman who works for a builders union. “They can’t sign public responsibilities away.”
Despite the inclusion of that provision, Bob Sader, an attorney for the developer and a former assemblyman, explained that the private water company was not involved in constructing the infrastructure. The master developer paid millions to construct the water infrastructure and dedicated it to the water district at no cost. Such projects are often exempt from public works requirements and that type of dedication practice is common in development projects.
As part of the agreement, the developer helped subsidize the water district. In an email last week, Gilman noted that the developer operated the district “at a loss for over a decade.”
But McKenzie remains concerned about whether the board provided adequate oversight.
“[The board members] have a fiduciary responsibility to those people,” McKenzie said, referring to customers. “That’s why they have to approve the budget and not the operating company.”
Kris Thompson, the board president, pushed back in a recent interview. Thompson said that the board was independent and has always acted in the best interest of the industrial park.
He said forming the water district was one of the reasons the park was successful, noting that Storey County did not have the financial wherewithal to build an extensive water system in the late-’90s. When asked why the developer did not operate a private company, he said that would have subjected it to state utility commission regulation and delayed the industrial park’s growth.
“If it’s a private company, it’s governed by the [Public Utilities Commission of Nevada], which is so expensive and so onerous in terms of legal requirements and regulatory requirements that no one could have set that up in a financially doable manner,” Thompson said on Wednesday.
The district, Thompson noted, is regulated by the Department of Taxation and the Nevada Division of Environmental Protection. The firms it contracts with are some of the best, he said.
There are numerous cases in which public boards, such as medical licensing agencies, present inherent conflicts for those that serve on them. But Yvonne Nevarez-Goodson, the executive director of the state’s Commission on Ethics, said that does not absolve board members from disclosing conflicts or abstaining from votes when they affect the direct interests of their employer.
It is not necessarily a conflict for a dentist to serve on a dental board. But if dentists are voting on issues that involve their business or the business of someone with whom they have a significant relationship — a household member or an employer — it could merit a disclosure or abstention.
“Just because it's a developer-governed board doesn't mean there isn't the potential to have this crossover of interests that could trigger conflicts,” Nevarez-Goodson said in a phone interview.
Meeting minutes reviewed by The Nevada Independent last month did not show instances in which board members abstained from votes or disclosed their relationships with the developer.
That is starting to change.
Last week, two board members read disclosure statements before voting on a utility rate study.
A third board member and a contractor at Gilman’s brothel, verbally agreed with the disclosure because her statement was stored on her phone, which she was using to call into the meeting.
Despite the planned reforms for the district, Thompson, the board president, offered a pointed defense of the water district board before he read his prepared disclosure statement last week.
He said that there have been “gratuitous comments flying around” about the board’s apparent conflicts of interests. Thompson lives at Gilman’s brothel, works as an independent contractor for the industrial park, as an independent contractor for Lance Gilman Commercial Real Estate Services — the park’s exclusive broker — and as the risk manager for Gilman’s family trust.
“I met personally with one of the top ethics attorneys in Nevada,” Thompson said at the board’s Nov. 4 public meeting. “And we went through the statutes word-by-word, line-by-line. I am absolutely 100 percent convinced that there is no violation of any conflict-of-interest statute by any of the board members to vote on the matter at the last meeting or to vote on these matters. And so anybody that says or insinuates that there is a conflict of interest obviously has not read those statutes.”
At the last meeting Thompson references, the board approved an eminent domain action for the pipeline. His employer, the industrial park developer, has signed numerous contracts discussing the project. Thompson has signed several contracts involving the pipeline on behalf of the district.
Nevada’s ethics law requires public officers to avoid conflicts when a public duty is affected by a personal interest. A conflict could consist of a financial interest or a close personal relationship. Public officials are required to inform the public of the nature and extent of those conflicts.
A second test is used to decide whether a reasonable person would view the conflict as material so as to disqualify a public official from voting on a matter. The Ethics Commission responds to complaints filed by the public or initiates its own investigations, pending sufficient evidence.
Gilman is closely connected to the industrial park’s development. In a separate lawsuit, his attorneys have stated that he is a principal in and Director of Marketing for the Tahoe Reno Industrial Center. His lawyers have stated that his company, Lance Gilman Commercial Real Estate Services, where two water district board members report working, is the park’s broker.
Gilman said the district’s structure and the board’s composition was the only option, given the circumstances when the park was first being developed, and statutory requirements for the board.
"We followed the state rules and regulations to the letter,” he said in an interview Wednesday. “We didn't cut corners. We did exactly what we had to do. We maintained compliance. It might not have been the ultimate best circumstances. But it was the only circumstances [that were] available to pull off what is one of the best industrial parks in the United States."
On Nov. 4, all three board members voted to approve a utility rate study for the park. They said that the items on the agenda did not directly affect the pecuniary interest of their employers.
At the meeting, Thompson said “there’s been a lot of sensationalism” about “brothel people” serving on the water district board. But he said it was a reality of the statute that board members had to live within the district. Without them, he said the water district “would’ve gone into chaos.”
“For them to join the board as they did to keep us legal, to keep this governing board sufficient and to help the park grow” was a “brave act on their part,” Thompson stated during the meeting, “because they probably knew that they were going to get some insinuations at some point.”
Thompson did not elaborate on how they came to join the board. “Had Lucy and Jennifer not stepped up to the plate and joined our board, this [district] would've gone into chaos,” he said.
The rate study is one step in helping the water district cut ties with the developer. With higher rates, it expects to hire an independent administrative assistant and an operations manager.
It could also get a new board.
At the request of the water district, Storey County is considering a takeover of the board. The county is conducting due diligence, and the commission has yet to vote on the issue. Gilman is one of three members on the Storey County Commission, presenting another potential conflict.
Until recently, the water district had no staff. It was operated by the developer and contracted out its services. After nearly two decades, the district hired its first general manager, Shari Whalen, in July.
Whalen, a former Fernley City councilwoman and a professional engineer, is now responsible for the difficult task of negotiating with the developer over its exit and building up the district.
At Thursday's meeting, she is asking the board to establish administrative policies and procurement procedures. An agenda says the board members will also consider “conflict of interest scripts.”
The procurement policy will ensure that the water district follows laws governing public works projects and purchasing. Whalen said she wants to ensure it is operating in a transparent way. She could not speak to how the water district had bid contracts or procured services in the past.
Finally, the board will consider the approval of a contract with the UNR Center for Economic Development “for assessment and technical assistance” with the water district’s transition.
The district has hired its own attorney with experience in Nevada water law. The water district is the owner of most of the industrial park’s water rights, but the developer, which dedicated many of those water rights, has largely controlled how the interest in those water rights are allocated.
“What I'm trying to do is create some level of confidence in sustainability and the operations of the [water district,]” Whalen said. “There is a transition plan that is being implemented.”