considering he has a separate sig- terminal and 0v terminal on the valve, I assumed that the signal was isolated from the power. I asked and he said he checked that they were not connected internally.So, you are running both the servo and this 12v regulator from the same supply, right?
Then they have a common ground, via the single power supply. Just because you stuck a linear regulator between your single power supply and the servo does not mean that it is isolated. Now, if you had used a 1:1 transformer from the AC to isolate the power, you would have a different situation, and it would be working.