BILL ANALYSIS Ó AB 2443 Page 1 ASSEMBLY THIRD READING AB 2443 (Rendon) As Introduced February 21, 2014 Majority vote LOCAL GOVERNMENT 6-2 ----------------------------------------------------------------- |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." AB 2443 Page 2 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 AB 2443 Page 3 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 AB 2443 Page 4 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 AB 2443 Page 5 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 AB 2443 Page 6 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 FN: 0003164