BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 2443
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          ASSEMBLY THIRD READING
          AB 2443 (Rendon)
          As Introduced  February 21, 2014
          Majority vote 

           LOCAL GOVERNMENT    6-2                                         
           
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          |Ayes:|Levine, Alejo, Bradford,  |     |                          |
          |     |Gordon, Mullin, Rendon    |     |                          |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|Melendez, Waldron         |     |                          |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 

           SUMMARY  :  Allows specified agencies to provide recycled water  
          service in the territory of mutual water companies, without  
          providing compensation.  Specifically,  this bill  exempts a  
          political subdivision, such as a water district, that constructs  
          facilities to provide or extend recycled water services to the  
          territory of the mutual water company from the service  
          duplication law which requires payment of compensation to  
          privately owned water utilities by a political subdivision that  
          provides duplicate water service in the same service area.

           EXISTING LAW  :

          1)Finds and declares that it is necessary for the public health,  
            safety, and welfare that privately owned public utilities  
            regulated by the state be compensated for damages that they  
            may suffer by reason of political subdivisions extending their  
            facilities into the service areas of such privately owned  
            public utilities.  

          2)Requires the payment of compensation to privately owned public  
            water utilities by a political subdivision that provides  
            duplicate water service in the same service area as the  
            private water utility.  

          3)Defines "service area" to mean "an area served by a privately  
            owned public utility in which the facilities have been  
            dedicated to public use and in which territory the utility is  
            required to render service to the public."  








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          4)Defines a "political subdivision" to mean "a county, city and  
            county, city, municipal water district, county water district,  
            irrigation district, public utility district, California water  
            district, or any other public corporation."  

          5)Defines "public utility" to mean "a privately owned public  
            utility providing water service, and includes a mutual water  
            company."  

          6)Specifies that any corporation organized for or engaged in the  
            business of selling, distributing, supplying, or delivering  
            water for irrigation purposes or for domestic use must be  
            known as a mutual water company.  

          7)Defines "recycled water" to mean "water, which, as a result of  
            treatment of waste, is suitable for a direct beneficial use or  
            a controlled use that would not otherwise occur and is  
            therefore considered a valuable resource."  Defines recycled  
            water to also mean reclaimed water.  

          8)Exempts from the Service Duplication Law the use of reclaimed  
            water at a landfill in Los Angeles County.  

           FISCAL EFFECT  :   None
           
          COMMENTS  :   

          1)Purpose of this bill and background.  The Service Duplication  
            Law enacted in 1965 requires the payment of compensation to  
            privately owned public water utilities by a political  
            subdivision, such as a county water district, that provides  
            duplicate water service in the same service area as the  
            private water utility.  Mutual water companies are included in  
            the definition of a "private utility" meaning that the same  
            requirement of compensation is required if a political  
            subdivision provides duplicate water service in a mutual water  
            company's service area.  

            This bill exempts a political subdivision that constructs  
            facilities to provide or extend recycled water service to the  
            territory of a mutual water company from the service  
            duplication law which prohibits public agencies from providing  
            water service to a customer of another water utility unless  








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            damages are paid.  In other words, this bill allows specified  
            agencies (including a county, city, municipal water district,  
            county water district, California water district, or any other  
            public corporation) to provide recycled water service in the  
            territory of mutual water companies, without providing  
            compensation.  This bill is author-sponsored.  

          2)Author's statement.  According to the author, "State law  
            protects a monopoly on water service in neighborhoods served  
            by a mutual water company, but does not impose any  
            requirements as to investments in that infrastructure that the  
            law claims to protect.  Public agencies cannot provide any  
            kind of water to a customer of a mutual water company without  
            the public agency paying the company for the privilege of  
            serving that customer.  This bill promotes public agency  
            investments in recycled water by limiting mutual water company  
            monopolies.  Specifically, it allows public agencies to sell  
            recycled water to customers of mutual water companies [and]  
            eliminates the state-law protection of the company's monopoly  
            of water service in its service area, but only for sale of  
            recycled water.  The bill favors protecting the public's  
            investments in recycled water over the unknown investment by  
            mutual water companies in serving drinking water.  

            "Recycled water is a growing part of the water supply  
            portfolio of Southeast Los Angeles County.  Regional agencies,  
            including the County of Los Angeles and the Water  
            Replenishment District of Southern California, have invested  
            in recycled water facilities.  If those agencies choose to  
            invest in 'purple pipe' to bring recycled water directly to  
            customers, then mutual water companies should not be allowed  
            to stop those public agencies from serving that recycled water  
            and repaying the public investment in recycling."  

          3)Mutual water companies.  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,  
            essentially, a customer-owned water provider to serve their  
            properties.  State law exempts a mutual water company from  








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            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.  

          4)Regulation of public utilities vs. mutual water companies.   
            Public water systems that deliver domestic water generally  
            fall into three categories:  a) Local agencies (cities and  
            special districts), in which local agency formation  
            commissions (LAFCO) control boundaries and local officials are  
            accountable to voters for issues like water rates;  b)  
            Investor owned public utilities, in which the California  
            Public Utilities Commission (PUC) controls the companies'  
            service areas and water rates; and, c) Mutual water companies  
            which are private entities that respond to their shareholders,  
            usually landowners, are not regulated by LAFCOs or the PUC.   
            The State Department of Public Health and some county health  
            departments monitor the quality of drinking water delivered to  
            most households by any water systems.  

            The author states that current law prohibits the duplication  
            of service when a public agency tries to encroach on the  
            service area of a regulated public utility or an unregulated  
            mutual water company.  Current law also recognizes the  
            substantial obligation of investment that public utilities  
            undertake to obtain their certificate of public convenience  
            from the PUC to serve their customers.  However, the same law  
            also protects the monopoly control by mutual water companies,  
            private companies that are not regulated by the PUC.  

            Opposition argues that mutual water companies are subject to  
            the Department of Public Health, are subject to regulation by  
            the regional water quality control boards for their  
            discharges, are subject to numerous provisions of the  
            Corporations Code, and are now required to have open board  
            meetings, among other requirements recently passed into law.  

          5)Previous legislation.  In response to concerns that some  
            mutual water companies lacked capital to pay for needed water  
            quality improvements and the managerial capacity to operate  








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            successful public water systems, the Legislature passed AB 54  
            (Solorio), Chapter 512, Statutes of 2011.  That bill  
            established training 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  
            that change to state law, some public officials and  
            environmental justice advocates expressed frustration that  
            some mutual water companies remained unaccountable to water  
            users who are not shareholders or members.  AB 240 (Rendon),  
            Chapter 633, Statutes of 2013, enacted several changes for  
            mutual water companies that operate a "public water system"  
            with the goal of bringing those companies more in line with  
            how other types of public agencies that provide drinking water  
            are treated in statute.  AB 240 established the Mutual Water  
            Company Open Meeting Act and imposed several other  
            transparency requirements.  

            SB 778 (Dills), Chapter 859, Statutes of 1994, exempted, from  
            the Service Duplication Act which prohibits public agencies  
            from providing water service to a customer of another water  
            utility unless damages are paid, the use of reclaimed water at  
            a landfill in Los Angeles County.  

          6)Arguments in support.  Supporters argue that this bill would  
            promote public agency investment in recycled water by limiting  
            mutual water company monopolies.  Additionally, supporters  
            argue that mutual water companies should not be allowed to  
            stop public agencies that have chosen to invest in recycled  
            water as means of increasing regional self-reliance from  
            providing recycled water and repaying a public investment in  
            recycling.  

          7)Arguments in opposition.  Opposition argues that this bill  
            would allow a public agency to poach larger revenue-producing  
            customers and would place a financial burden on all the  
            remaining drinking water customers if the mutual water company  
            is not provided with compensation for investments in the  
            drinking water system.  Unlike for-profit companies and public  
            agencies who rely on tax revenue and fees, mutual water  
            companies are non-profit corporations that can only charge for  
            the cost of providing water and maintaining the water delivery  
            system to serve shareholders.  Additionally, opposition argues  








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            that they believe this bill is unconstitutional because the  
            California and United States Constitution states that it is  
            impermissible for the government to "take" private property  
            without the payment of fair compensation.  

           
          Analysis Prepared by  :    Misa Yokoi-Shelton / L. GOV. / (916)  
          319-3958 


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