BILL ANALYSIS                                                                                                                                                                                                    Ó






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                                   THIRD READING 


          Bill No:  SB 1112
          Author:   Cannella (R) 
          Amended:  4/27/16  
          Vote:     21 

           SENATE ENERGY, U. & C. COMMITTEE:  11-0, 4/19/16
           AYES:  Hueso, Morrell, Cannella, Gaines, Hertzberg, Hill, Lara,  
            Leyva, McGuire, Pavley, Wolk

           SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
           
           SUBJECT:   Utilities:  water and sewer systems corporations:   
                     transactions


          SOURCE:    California Public Utilities Commission

          DIGEST:   This bill allows the California Public Utilities  
          Commission (CPUC) discretion to retroactively approve, or  
          conditionally approve, specified transactions, valued at $5  
          million or less, by small water or sewer corporations, as  
          specified, when the utility fails to obtain prior approval.
          
          ANALYSIS:  

          Existing law:
          
          1)Establishes that private corporations and persons that own,  
            operate, control or manage furnishing of water to or for the  
            public are public utilities subject to control by the  
            Legislature.  Authorizes the CPUC to fix rates, establish  
            rules, examine records, and establish a uniform system of  
            accounts for all public utilities subject to its jurisdiction.  








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             (California Constitution Article XII)

          2)Establishes that "public utility" includes every water  
            corporation and sewer system corporation where the service is  
            performed for, or the commodity delivered to, the public or  
            any portion thereof.

          3)Prohibits a public utility (except for certain railroads) from  
            selling, leasing, assigning, mortgaging, or otherwise  
            disposing of, or encumbering the whole or any part of its  
            plant, system, or other property necessary or useful in the  
            performance of its duties to the public, or any franchise or  
            permit or any right thereunder, or by any means whatsoever,  
            directly or indirectly, merge or consolidate its plant,  
            system, or other property, or franchises or permits or any  
            part thereof, with any other public utility, without first  
            having either secured an order from the CPUC authorizing it to  
            do so for qualified transactions valued above $5 million, or  
            for qualified transactions valued at $5 million or less, filed  
            an advice letter and obtained approval from the CPUC  
            authorizing it to do so.  (Public Utilities Code §851)

          4)Requires the CPUC to determine the types of transactions  
            valued at $5 million or less that qualify for advice letter  
            handling.  (Public Utilities Code §851)

          5)Authorizes the sale, lease, encumbrance, or other disposition  
            by any public utility of property that is not necessary or  
            useful in the performance of its duties to the public.   
            (Public Utilities Code §851)

          6)Provides that water utilities, with service connections of  
            10,000 or less, are not prohibited from any assignment,  
            acquisition, or change of control without advance  
            authorization from the CPUC under circumstances when a  
            decedent to a member of the decedent's family in the manner  
            provided in Section 240 of the Probate Code or by a will,  
            trust, or other instrument.  (Public Utilities Code §853(c))

          7)Prohibits a person or corporation from merging, acquiring, or  
            controlling either directly or indirectly any public utility  
            organized and doing business in this state without first  
            securing authorization to do so from the CPUC.  Requires that  
            any merger, acquisition, or control without that prior  







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            authorization is void and of no effect.  (Public Utilities  
            Code §854)

          8)Establishes that any corporation or association that is  
            organized for the purposes of delivering water to its  
            stockholders and members at cost, including use of works for  
            conserving, treating, and reclaiming water, and that delivers  
            water to no one except its stockholders or members, or to the  
            state or any agency or department thereof, to any city,  
            county, school district, or other public district, or any  
            federal agency that provides fire protection or operates park  
            facilities, or to any other mutual water company, at cost, is  
            not a public utility.  Provides that a mutual water company  
            may perform specified activities without becoming a public  
            utility and becoming subject to the jurisdiction, control or  
            regulation of the CPUC.  (Public Utilities Code §2705)

          This bill:

          1)Requires water or sewer system corporations with less than  
            2,000 service connections to obtain prior approval from the  
            CPUC before entering into a transaction related to property  
            subject to Public Utilities Codes §§851 and 854 and valued at  
            $5 million or less.

          2)Provides that if a water or sewer system corporation fails to  
            obtain prior approval, the transaction is voidable by the CPUC  
            unless the CPUC takes the following action:

             a)   Retroactively approves the transaction upon a  
               determination that the transaction is in the best interests  
               of both the corporation and its ratepayers.

             b)   Conditionally approves the transaction, subject to  
               specified conditions that would ensure the transaction is  
               in the best interest of the corporation and its ratepayers.

          3)Authorizes the CPUC to delegate the authority to make the  
            determinations in this bill to the director of the division  
            that investigates water and sewer system service quality  
            issues and analyzes and processes utility rate change  
            requests. 

          Background







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          CPUC-regulated water and sewer utilities.  After decades of  
          consolidations, mergers, and acquisitions by municipalities,  
          special districts, and mutual water companies, the CPUC now has  
          jurisdiction over 12 sewer and 108 water companies that provide  
          water service to about 16 percent of California's residents with  
          annual water and wastewater revenues totaling $1.4 billion.   
          Approximately 95 percent of those residents are served by nine  
          large water utilities each serving more than 10,000 connections.  
           However, the majority of the CPUC-regulated water utilities  
          (94) have service connections of 2,000 or less, and with 70 of  
          those having service connections of 500 or less.
           




































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              Total Water Companies:                108
                Class A Companies:                      9
                        (Ã 10,000 Service Connections)

                Class B Companies:                      5
                        (Ã 2,000 Service Connections)

                Class C Companies:                    24
                        (Ã 500 Service Connections)
                 
                Class D Companies:                    70
                        (Â 500 Service Connections)
               
              Total Sewer Companies:                  12
           
          Why is this bill needed?  According to the CPUC, there have been  
          instances when small water corporations sell their utilities  
          unaware that they must first get approval from the CPUC for any  
          transactions involving the "property necessary and useful in the  
          performance of its duties to the public," as required by Public  
          Utilities Code §851 and also restated in CPUC Rule 3.6 and  
          further defined in General Order 173.  In those instances, the  
          CPUC has only one option - to void the sale - as required by  
          Section 854 and re-affirmed in Henderson v. Oroville-Wyandotte  
          Irrigation District (1913) 213 Cal 514, 529-530. 
           
          The CPUC provides some examples of small water corporations who  
          sold their company without the necessary prior approval from the  
          CPUC, including: January Water Company in Tulare County, Black  
          Butte in Glenn County, and Sonoma Springs Water Company and  
          Wendell Water Company both in Sonoma County.  In these  
          situations, the CPUC must track down the original owner and  
          explain that the sale is now void.  However, locating the  
          original owner may be very difficult as the owner may have died,  
          may be out of state, or not able to cooperate. Although there  
          are fewer water corporations than in the recent past, many of  
          the owners of these corporations are aging and due to death or  
          illness the sale of these utilities are likely to grow  
          exponentially.  The CPUC expects the challenges will be  
          particularly acute in the Central Valley where the majority of  
          the Class C and Class D CPUC-regulated water utilities are  
          located. Although the CPUC attempts to educate owners of these  







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          utilities of their many responsibilities, including those  
          related to the sale of property, through the certificate of  
          public necessity and convenience (CPCN) and subsequent rate case  
          application processes, many sales may still occur without CPUC  
          prior approval, particularly when the operator dies and a family  
          member inherits the utility and is not aware of the  
          responsibilities and requirements. 
           
          This bill provides the CPUC some discretion to make a post-sale  
          approval, or conditional approval, determination for  
          transactions involving small water and sewer utilities, those  
          with 2,000 service connections or less, for specified  
          transactions valued at $5 million or less.  This seems  
          reasonable considering ownership of these utilities is more  
          likely to change hands with owners not knowing they need the  
          prior approval.  This bill provides the CPUC some flexibility to  
          not have to void those transactions that are determined to be in  
          the best interests of the ratepayers and the corporation.   
          Additionally, this bill provides that the CPUC Director of the  
          Division of Water and Audits can make this determination without  
          necessary approval from the Executive Director.

          Emergency transactions.  There may be instances that necessitate  
          an emergency transaction, such as a large water transfer to  
          another utility lacking water.  Under emergency situations, the  
          CPUC has authority, provided by Government Code §11125.5 and  
          reflected in Rule 14.6 of the CPUC's Rules of Practice and  
          Procedures, to reduce or waive the period for public review and  
          comment on a proposed decision, draft resolution, and their  
          alternates.  Examples of the CPUC exercising this authority  
          include: a recently approved request of the California Water  
          Service (Cal Water) request to supply trucked water to  
          homeowners with private wells that have gone dry in the East  
          Porterville area of Tulare County; and the provision of  
          emergency water to residents near Cal Water's Chico District.   
          This bill will not affect the ability to handle emergency  
          transactions.


          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No


          SUPPORT:   (Verified5/17/16)







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          California Public Utilities Commission (source)
          California Water Association


          OPPOSITION:           (Verified5/17/16)


          None received


          ARGUMENTS IN SUPPORT:     According to the CPUC, currently,  
          there are a number of small water and sewer companies who lack  
          the regulatory expertise to comply with Section 851, or even to  
          know that it exists.  This bill gives the CPUC the flexibility  
          and discretion to void such transactions or to approve them  
          retroactively, imposing such conditions as the CPUC deems  
          appropriate to protect ratepayers.  This bill also allows the  
          CPUC to delegate the authority to make that determination to the  
          director of the Division of Water Agencies.





          Prepared by:Nidia Bautista / E., U., & C. / (916) 651-4107
          5/18/16 16:27:57


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