BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    SB 1112


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          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:










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             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  








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            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  








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            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  








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            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  








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            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  








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            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. 











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            (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) 










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          California Water Association  




          




          Opposition




          None on file. 




          Analysis Prepared by:Darion Johnston / U. & C. / (916)  
          319-2083