BILL ANALYSIS �
AB 2443
Page 1
Date of Hearing: April 9, 2014
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
K.H. "Katcho" Achadjian, Chair
AB 2443 (Rendon) - As Introduced: February 21, 2014
SUBJECT : Duplication of service: mutual water companies.
SUMMARY : Allows specified agencies to provide recycled water
service in the territory of mutual water companies, without
providing compensation. Specifically, this bill :
1)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."
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
AB 2443
Page 2
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
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
AB 2443
Page 3
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
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 .
AB 2443
Page 4
Public water systems that deliver domestic water generally
fall into three categories: (1) 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; (2)
Investor owned public utilities, in which the California
Public Utilities Commission (PUC) controls the companies'
service areas and water rates; (3) 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 CPUC.
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
successful public water systems, the Legislature passed AB 54
(Solorio), Chapter 512, Statutes 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,
AB 2443
Page 5
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
that they believe this bill is unconstitutional because the
Constitution states that it is impermissible for the
government to "take" private property without the payment of
fair compensation.
REGISTERED SUPPORT / OPPOSITION :
Support
Sierra Club of California
Supervisor James Ramos, Third District, San Bernardino County
AB 2443
Page 6
Opposition
Amarillo Mutual Water Company
Atascadero Mutual Water Company
Bellflower-Somerset Mutual Water Company
California Association of Mutual Water Companies
California Domestic Water Company
Cartago Mutual Water Company
La Cumbre Mutual Water Company
Lincoln Avenue Water Company
Maywood Mutual Water Company #1 and # 3
Montebello Land and Water Company
Oildale Mutual Water Company
Ponderosa Basin Mutual Water Company
South Mesa Water Company
Sundale Mutual Water Company
Valencia Height Water Company
Valley Water Company
Analysis Prepared by : Misa Yokoi-Shelton / L. GOV. / (916)
319-3958