BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 240 HEARING: 6/12/13
AUTHOR: Rendon FISCAL: No
VERSION: 6/5/13 TAX LEVY: No
CONSULTANT: Weinberger
MUTUAL WATER COMPANIES
Requires mutual water companies to comply with open
meeting, public record, audit, and budget requirements and
allows them to impose liens to collect unpaid charges.
Background and Existing Law
Public water systems that deliver domestic water generally
fall into three categories:
Local agencies (cities and special districts).
Local agency formation commissions (LAFCOs) control
the cities and special districts' boundaries and local
officials are responsible to their voters for their
water rates.
Investor owned public utilities. The California
Public Utilities Commission (PUC) controls the
companies' service areas and their water rates.
Mutual water companies. These private entities,
formed under statutes governing corporations, respond
to their shareholders, usually the landowners who
receive water service. Neither LAFCOs nor the PUC
regulate mutual water companies.
The State Department of Public Health and some county
health departments monitor the quality of drinking water
delivered to most households, regardless of what type of
public water system delivers the water.
Most mutual water companies are organized pursuant to the
General Corporation Law or the Nonprofit Mutual Benefit
Corporation Law. Shareholders in a mutual water company
hold a right to purchase water from the company. Stock in
a company is usually linked to the ownership of a parcel
served by the company and transfers with the land when the
parcel is sold to successive owners. This type of
corporate structure allows landowners to establish,
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essentially, a customer-owned water provider to serve their
properties. State law exempts a mutual water company from
state regulation if it is organized to deliver water to its
stockholders and members, with specified exceptions.
Governance of a mutual water company is generally limited
to shareholders, or members, of the company. While the
details of any particular company's governing structure are
determined by its articles and bylaws, most mutual water
companies allow only shareholders and members to vote on
organizational matters and serve on the company's governing
board.
The Ralph M. Brown Act, first enacted by the Legislature in
1953, is the set of state laws which guarantees the
public's right to attend and participate in local
legislative bodies' meetings. As private corporations,
mutual water companies are not subject to the Brown Act.
Instead, state law gives mutual water companies broad
authority to specify in their articles and bylaws how their
meetings are conducted, and who may attend.
In 1968, the Legislature enacted the Public Records Act,
which generally requires that government records must be
provided to the public, upon request, unless there is a
specific reason, specified in state law, to withhold a
record. Private corporations, including mutual water
companies, are not subject to the Public Records Act.
State law requires that mutual water companies must allow
members to inspect specified records including accounting
books, meeting minutes, articles and bylaws, and election
results. A mutual water company's articles and bylaws
determine whether non-members are permitted access to the
company's records.
State law requires most local governments to prepare annual
budgets and requires periodic audits of most local
governments' accounts and records. State law requires
private corporations to prepare and distribute annual
reports and other specified financial statements.
In response to concerns that that some mutual water
companies lacked capital to pay for needed water quality
improvements and the managerial capacity to operate
successful public water systems, the Legislature passed AB
54 (Solorio, 2011). That bill established training
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requirements for mutual water districts' board members,
made mutual water companies liable for specified fines and
penalties for violating the California Safe Drinking Water
Act, and expanded LAFCOs' authority to review matters
related to mutual water companies.
Despite these recent changes to state law, some public
officials and environmental justice advocates express
frustration that some mutual water companies remain
unaccountable to water users who are not shareholders or
members.
Proposed Law
Assembly Bill 240 requires a mutual water company that
operates a public water system to comply with the Ralph M.
Brown Act and the Public Records Act.
Assembly Bill 240 requires the board of a mutual water
corporation that operates a public water system to contract
with a certified public accountant or public accountant to
make an annual audit of the accounts and records of the
mutual water company. The audit must conform to generally
accepted auditing standards. A report of the audit must be
filed as a public record with the mutual water company and
must be sent to the State Controller and any person served
by the mutual water company that submits a written request
to the board. The report must be filed within 12 months of
the end of the mutual water company's fiscal year under
examination.
Assembly Bill 240 requires the board of a mutual company
that operates a public water system to adopt in an open
meeting, an annual budget on or before the start of each
fiscal year of the mutual water company.
Assembly Bill 240 allows a mutual water company's board of
directors, after providing at least 20 days' written notice
and if authorized by its articles or bylaws, to authorize
the recording of a lien against a shareholder's property to
secure the collection of rates, charges, and assessments
owed to the mutual water company by the shareholder.
AB 240 requires mutual water company board members to
repeat, every six years, training related to the duties of
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mutual water companies' board members.
AB 240 expresses the Legislature's intention to encourage
collaboration among mutual water companies that operate
public water systems in the City of Maywood to create a
public agency that can consolidate drinking water services
for the people and businesses of that city.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Three mutual water companies
deliver water to residents of the City of Maywood in Los
Angeles County. Maywood residents have, for years,
expressed concerns about the quality of water they receive,
citing problems with discoloration, odors, and taste.
Deteriorated water supply infrastructure may be a primary
cause of these problems. A substantial portion of
Maywood's residents are renters. Because they don't own
real property in Maywood, they are not stockholders or
members of the mutual water companies that serve Maywood
and cannot participate in those companies' corporate
governance. Residents express frustration that the three
mutual water companies are not responsive to the needs of
thousands of residents who use the water that the companies
deliver. As the Legislature declared in the 2011 Solorio
bill, "Regardless of the form of the organization that
operates a public water system, these organizations provide
a public service that remains one of the core duties of the
people's government." By making mutual water companies
comply with long-established state laws relating to open
meetings, public document disclosure, audits, and budgets,
AB 240 seeks to empower water users throughout California
who are served by mutual water companies. The bill also
benefits mutual water companies by granting them more
flexibility to collect unpaid water charges from
shareholders by recording liens as an alternative to
shutting off water service to a property.
2. Private business, public disclosure . Despite some
state laws that treat mutual water companies like
quasi-governmental entities, they are private corporations.
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The Brown Act and Public Records Act statutes are written
specifically to ensure that governments uphold their
responsibilities to provide public access to information
about public affairs. Unlike a government, a private
corporation that provides domestic water service
exclusively to its stock holders does not have a
responsibility to disclose to the general public how it
conducts its business. Forcing private entities to comply
with public sector transparency requirements is an
unnecessarily broad response to the challenges of making
mutual water companies more accountable to water users. As
an example of an alternative approach, the "Common Interest
Development Open Meeting Act" requires homeowners
associations' boards to conduct meetings that are noticed
in advance, open to all association members, and provide
opportunity for association members to participate (AB 46,
Hauser, 1995). State law also identifies numerous specific
documents that homeowners associations must provide to
their members. Like mutual water companies, homeowners
associations are typically private mutual benefit
corporations that wield significant powers over property
owners. The Committee may wish to consider amending AB 240
to repeal the cross-references to the Brown Act and Public
Records Act and, instead, require mutual water companies to
follow requirements that replicate homeowners associations'
open meeting and document disclosure statutes.
3. A narrower approach . State law exempts mutual water
companies from being regulated by the Public Utilities
Commission if they provide water, with limited exceptions,
exclusively to shareholders or members. The governance and
accountability problems in Maywood and other similar
communities served by mutual water districts arise, in
part, because a large portion of water users are renters
who are not company shareholders or members. AB 240
responds by requiring all mutual water companies to comply
with additional state requirements that currently apply to
local governments that supply domestic water. An
alternative policy response could define some
characteristics that make a mutual water company too
"public" to remain exempt from state regulation. One
measure, for example, could be the proportion of water
users served by the mutual water company who are not
eligible to participate in the company's corporate
governance. Rather than applying public sector standards
to all private mutual water corporations, the Committee may
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wish to consider amending AB 240 to define additional
conditions that would make a mutual water company subject
to state regulation.
Assembly Actions
Assembly Local Government Committee: 9-0
Assembly Floor: 76-0
Support and Opposition (6/6/13)
Support : Central Basin Municipal Water District, Sierra
Club, Union de Vecinos.
Opposition : Unknown.