BILL ANALYSIS Ó
SB 1112
Page 1
Date of Hearing: June 29, 2016
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Mike Gatto, Chair
SB
1112 (Cannella) - As Amended April 27, 2016
SENATE VOTE: 39-0
SUBJECT: Utilities: water and sewer systems corporations:
transactions
SUMMARY: 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. Specifically, 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 specified
property subject to 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:
SB 1112
Page 2
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.
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.
(California Constitution Article XII)
2)Establishes "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. (Public Utilities Code Section 216)
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
SB 1112
Page 3
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 Section 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 Section 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 Section 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 Section
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
authorization is void and of no effect. (Public Utilities
SB 1112
Page 4
Code Section 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 Section 2705)
FISCAL EFFECT: Unknown.
COMMENTS:
1)Author's Statement: "SB 1112 resolves an issue at the [CPUC]
that has occurred when small water companies are transferred
or sold. In many cases, these are Mom & Pop operations, and
the owners did not realize they needed prior CPUC approval to
make the sale. Some occurring decades ago, under current law
these transactions are legally void. This bill avoids the
legal nightmare of having to track down and reinstate the
original owners, some of whom are deceased, by retroactively
making these small asset sales voidable instead of outright
void."
2)CPUC-Regulated Water and Sewer Utilities: After decades of
consolidations, mergers, and acquisitions by municipalities,
special districts, and mutual water companies, the CPUC now
SB 1112
Page 5
has jurisdiction over 12 sewer and 108 water companies that
provide water service to about 16% of California's residents
with annual water and wastewater revenues totaling $1.4
billion. Approximately 95% 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.
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
3)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 Section 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
SB 1112
Page 6
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 is likely to
grow exponentially. The CPUC expects the challenges will be
particularly acute in the Central Valley were the majority of
the Class C and Class D CPUC-regulated water utilities are
located. Although the CPUC attempts to educate owners of
these 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 would provide 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 would provide the CPUC some
flexibility to not have to void those transactions that are
determined to be in the best interests of the ratepayers and
SB 1112
Page 7
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.
4)Emergency Transactions: There may be instances that
necessitate an emergency transaction, such as a large water
transfer from one utility to another utility lacking water.
Under emergency situations, the CPUC has authority, provided
by Government Code Section 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 request from
California Water Service (Cal Water) to supply trucked water
to homeowners with private wells that went dry in Tulare
County and the provision of emergency water to residents near
the Cal Water Chico District. This bill will not impact
processes from emergency transactions.
5)Suggested Amendment:
The author may wish to consider an amendment to ensure all
entities attempting to acquire a small water or sewer
corporation as specified are required to seek CPUC approval in
advance of the transaction.
853.2. (a) (1) A water or sewer system corporation or an
entity merging with or acquiring control of a water or sewer
system corporation shall receive the commission's approval
before entering into a transaction that would otherwise be
subject to Section 851 or 854.
SB 1112
Page 8
(2) If a water or sewer system corporation or an entity
merging with or acquiring control of a water or sewer system
corporation fails to receive the commission's approval
pursuant to paragraph (1), the transaction is voidable by the
commission until the commission does either of the following:
6)Arguments in Support: According to the CPUC, the sponsor of
this bill, "The CPUC currently lacks discretion to
retroactively approve accidental sales. If the [CPUC] finds
that an asset was transferred to new ownership without prior
approval, it is obligated to nullify that transaction under
current law. Sometimes assets have been transferred multiple
times before the CPUC is informed, causing considerable legal
trouble and the prospect of CPUC docket congestion. SB 1112
would give the [CPUC]more flexibility when it comes to
addressing accidental sales. Under the bill, the CPUC would
have the discretion to retroactively approve harmless sales or
nullify harmful sales. This statutory change will allow the
[CPUC]to better protect small water utility ratepayers, most
of whom are rural residents of the Central Valley."
REGISTERED SUPPORT / OPPOSITION:
Support
California Public Utilities Commission (Sponsor)
SB 1112
Page 9
California Water Association
Opposition
None on file.
Analysis Prepared by:Darion Johnston / U. & C. / (916)
319-2083