BILL ANALYSIS                                                                                                                                                                                                    Ó




           ----------------------------------------------------------------- 
          |SENATE RULES COMMITTEE            |                       SB 1112|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
          |327-4478                          |                              |
           ----------------------------------------------------------------- 


                                UNFINISHED BUSINESS 


          Bill No:  SB 1112
          Author:   Cannella (R) 
          Amended:  8/11/16  
          Vote:     27 - Urgency

           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

           SENATE FLOOR:  39-0, 5/26/16
           AYES:  Allen, Anderson, Bates, Beall, Berryhill, Block,  
            Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall,  
            Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson,  
            Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning,  
            Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Stone,  
            Vidak, Wieckowski, Wolk
           NO VOTE RECORDED:  Runner

           ASSEMBLY FLOOR:  78-0, 8/18/16 (Consent) - See last page for  
            vote

           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 related to  
          property valued at $5 million or less of small water or sewer  
          corporations, as specified, when the utility fails to obtain  








                                                                    SB 1112  
                                                                    Page  2



          prior approval.


          Assembly Amendments extend this bill's provisions applied to  
          small water corporations to include entities merging with or  
          acquiring control of a water or sewer system corporation; and  
          add an urgency clause to this bill.


          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.  
             (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. (Public Utilities Code § 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  
            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  








                                                                    SB 1112 
                                                                    Page  3



            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  
            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 or entities merging with or  








                                                                    SB 1112  
                                                                    Page  4



            acquiring control of the water or sewer corporations 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 or entity  
            merging with or acquiring control of the water or sewer  
            corporations 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

          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, with 70 of those  
          having service connections of 500 or less.
           
             Total Water Companies:                108
             Class A Companies:                       9
                   (Ă 10,000 Service Connections)








                                                                    SB 1112  
                                                                    Page  5




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

            Class C Companies:                      24
                   (Ă 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. 
           
          Some case studies.  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  
          utilities of their many responsibilities, including those  
          related to the sale of property, through the application process  
          for a certificate of public necessity and convenience (CPCN) and  








                                                                    SB 1112  
                                                                    Page  6



          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. 
           
          What this bill does. 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 delegates authority to the CPUC Director  
          of the Division of Water and Audits to make these determinations  
          without 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 California Water  
          Service's (Cal Water) request to supply trucked water to  
          homeowners with private wells that have gone dry in the East  
          Porterville area of Tulare County. Another example is 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

          According to the Assembly Appropriations Committee, the CPUC  
          indicates minor cost savings associated with not having to void  
          future accidental asset sales. This will reduce CPUC attorney  
          workload associated with locating the last legal owner of record  








                                                                    SB 1112  
                                                                    Page  7



          and sorting out property rights.

          SUPPORT:   (Verified8/18/16)


          California Public Utilities Commission (source)
          California Water Association


          OPPOSITION:   (Verified8/18/16)


          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.

          ASSEMBLY FLOOR:  78-0, 8/18/16
          AYES:  Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker,  
            Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke,  
            Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley,  
            Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth  
            Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto,  
            Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper,  
            Holden, Irwin, Jones, Jones-Sawyer, Lackey, Levine, Linder,  
            Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina,  
            Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen,  
            Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago,  
            Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber,  
            Wilk, Williams, Wood, Rendon
          NO VOTE RECORDED:  Roger Hernández, Kim


          Prepared by:Nidia Bautista / E., U., & C. / (916) 651-4107








                                                                    SB 1112  
                                                                    Page  8



          8/19/16 19:37:28


                                   ****  END  ****