The Public Utilities Act prohibits, with certain exemptions, any public utility other than a common carrier by railroad from selling, leasing, assigning, mortgaging, or otherwise disposing of or encumbering the whole or any part of specified property necessary or useful in the performance of the public utilitys duties to the public, among other things, without first either having secured an order from the Public Utilities Commission authorizing it to do so for qualified transactions valued above $5,000,000, or for qualified transactions valued at $5,000,000 or less, having filed an advice letter and obtained approval from the commission authorizing it to do so. Under existing law, every sale, lease, assignment, mortgage, disposition, encumbrance, merger, or consolidation made other than in accordance with the advice letter and approval from the commission authorizing it is void.

Existing law requires the commission, before authorizing the merger, acquisition, or change in control of an electric, gas, or telephone utility when one of the parties has revenues in excess of a specified amount, to consider, among other things, whether the proposal provides short-term and long-term economic benefits to ratepayers and equitably allocates the short-term and long-term forecasted economic benefits of the proposed merger, acquisition, or change in control, as determined by the commission, between shareholders and ratepayers, if the commission has ratemaking authority. Under existing law, any merger, acquisition, or change in control without that prior authorization is void.

This bill would provide that if a water or sewer system corporation or an entity merging with or acquiring control of a water or sewer system corporation with less than 2,000 service connections fails to receive the commissions approval before entering into any of the specified transactions valued at $5,000,000 or less, the transaction is voidable by the commission until the commission either retroactively approves or conditionally approves the transaction. The bill would authorize the commission to delegate this approval authority to a specified division director.

This bill would declare that it is to take effect immediately as an urgency statute.

The Public Utilities Act prohibits, with certain exemptions, any public utility other than a common carrier by railroad from selling, leasing, assigning, mortgaging, or otherwise disposing of or encumbering the whole or any part of specified property necessary or useful in the performance of the public utilitys duties to the public, among other things, without first either having secured an order from the Public Utilities Commission authorizing it to do so for qualified transactions valued above $5,000,000, or for qualified transactions valued at $5,000,000 or less, having filed an advice letter and obtained approval from the commission authorizing it to do so. Under existing law, every sale, lease, assignment, mortgage, disposition, encumbrance, merger, or consolidation made other than in accordance with the advice letter and approval from the commission authorizing it is void.

Existing law requires the commission, before authorizing the merger, acquisition, or change in control of an electric, gas, or telephone utility when one of the parties has revenues in excess of a specified amount, to consider, among other things, whether the proposal provides short-term and long-term economic benefits to ratepayers and equitably allocates the short-term and long-term forecasted economic benefits of the proposed merger, acquisition, or change in control, as determined by the commission, between shareholders and ratepayers, if the commission has ratemaking authority. Under existing law, any merger, acquisition, or change in control without that prior authorization is void.

This bill would provide that if a water or sewer system corporation or an entity merging with or acquiring control of a water or sewer system corporation with less than 2,000 service connections fails to receive the commissions approval before entering into any of the specified transactions valued at $5,000,000 or less, the transaction is voidable by the commission until the commission either retroactively approves or conditionally approves the transaction. The bill would authorize the commission to delegate this approval authority to a specified division director.

This bill would declare that it is to take effect immediately as an urgency statute.

The Public Utilities Act prohibits, with certain exemptions, any public utility other than a common carrier by railroad, from selling, leasing, assigning, mortgaging, or otherwise disposing of or encumbering the whole or any part of specified property necessary or useful in the performance of the public utilitys duties to the public, among other things, without first having either secured an order from the Public Utilities Commission authorizing it to do so for qualified transactions valued above $5,000,000, or for qualified transactions valued at $5,000,000 or less, having filed an advice letter and obtained approval from the commission authorizing it to do so. Under existing law, every sale, lease, assignment, mortgage, disposition, encumbrance, merger, or consolidation made other than in accordance with the advice letter and approval from the commission authorizing it is void.

Existing law requires the commission, before authorizing the merger, acquisition, or change in control of an electric, gas, or telephone utility when one of the parties has revenues in excess of a specified amount, to consider, among other things, whether the proposal provides short-term and long-term economic benefits to ratepayers and equitably allocates the short-term and long-term forecasted economic benefits of the proposed merger, acquisition, or change in control, as determined by the commission, between shareholders and ratepayers, if the commission has ratemaking authority. Under existing law, any merger, acquisition, or change in control without that prior authorization is void.

This bill would provide that if a water or sewer system corporation or an entity merging with or acquiring control of a water or sewer system corporation with less than 2,000 service connections fails to receive the commissions approval before entering into any of the specified transactions valued at $5,000,000 or less, the transaction is voidable by the commission until the commission either retroactively approves or conditionally approves the transaction. The bill would authorize the commission to delegate this approval authority to a specified division director.

The Public Utilities Act prohibits, with certain exemptions, any public utility other than a common carrier by railroad, from selling, leasing, assigning, mortgaging, or otherwise disposing of or encumbering the whole or any part of specified property necessary or useful in the performance of the public utilitys duties to the public, among other things, without first having either secured an order from the Public Utilities Commission authorizing it to do so for qualified transactions valued above $5,000,000, or for qualified transactions valued at $5,000,000 or less, having filed an advice letter and obtained approval from the commission authorizing it to do so. Under existing law, every sale, lease, assignment, mortgage, disposition, encumbrance, merger, or consolidation made other than in accordance with the advice letter and approval from the commission authorizing it is void.

Existing law requires the commission, before authorizing the merger, acquisition, or change in control of an electric, gas, or telephone utility when one of the parties has revenues in excess of a specified amount, to consider, among other things, whether the proposal provides short-term and long-term economic benefits to ratepayers, ratepayers and equitably allocates the short-term and long-term forecasted economic benefits of the proposed merger, acquisition, or change in control, as determined by the commission, between shareholders and ratepayers, where if the commission has ratemaking authority. Under existing law, any merger, acquisition, or change in control without that prior authorization is void.

This bill would provide that if a water or sewer system corporation or an entity merging with or acquiring control of a water or sewer system corporation with less than 2,000 service connections fails to receive the commissions approval before entering into any of the specified transactions valued at $5,000,000 or less, the transaction is voidable by the commission until the commission either retroactively approves or conditionally approves the transaction. The bill would authorize the commission to delegate this approval authority to a specified division director.

The Public Utilities Act prohibits, with certain exemptions, any public utility other than a common carrier by railroad, from selling, leasing, assigning, mortgaging, or otherwise disposing of or encumbering the whole or any part of specified property necessary or useful in the performance of the public utilitys duties to the public, among other things, without first having either secured an order from the Public Utilities Commission authorizing it to do so for qualified transactions valued above $5,000,000, or for qualified transactions valued at $5,000,000 or less, having filed an advice letter and obtained approval from the commission authorizing it to do so. Under existing law, every sale, lease, assignment, mortgage, disposition, encumbrance, merger, or consolidation made other than in accordance with the advice letter and approval from the commission authorizing it is void.

Existing law requires the commission, before authorizing the merger, acquisition, or change in control of an electric, gas, or telephone utility when one of the parties has revenues in excess of a specified amount, to consider, among other things, whether the proposal provides short-term and long-term economic benefits to ratepayers, and equitably allocates the short-term and long-term forecasted economic benefits of the proposed merger, acquisition, or control, as determined by the commission, between shareholders and ratepayers, where the commission has ratemaking authority. Under existing law, any merger, acquisition, or change in control without that prior authorization is void.

This bill would provide that if a water or sewer system corporation with less than 2,000 service connections fails to receive the commissions approval, approval before entering into any of the specified transactions valued at $5,000,000 or less, the transaction is voidable by the commission until the commission either retroactively approves or conditionally approves the transaction. The bill would authorize the commission to delegate this approval authority to a specified division director.

The Public Utilities Act prohibits, with certain exemptions, any public utility other than a common carrier by railroad, from selling, leasing, assigning, mortgaging, or otherwise disposing of or encumbering the whole or any part of specified property necessary or useful in the performance of the public utilitys duties to the public, among other things, without first having either secured an order from the Public Utilities Commission authorizing it to do so for qualified transactions valued above $5,000,000, or for qualified transactions valued at $5,000,000 or less, having filed an advice letter and obtained approval from the commission authorizing it to do so. Under existing law, every sale, lease, assignment, mortgage, disposition, encumbrance, merger, or consolidation made other than in accordance with the advice letter and approval from the commission authorizing it is void.

Existing law requires the commission, before authorizing the merger, acquisition, or change in control of an electric, gas, or telephone utility when one of the parties has revenues in excess of a specified amount, to consider, among other things, whether the proposal provides short-term and long-term economic benefits to ratepayers, and equitably allocates the short-term and long-term forecasted economic benefits of the proposed merger, acquisition, or control, as determined by the commission, between shareholders and ratepayers, where the commission has ratemaking authority. Under existing law, any merger, acquisition, or change in control without that prior authorization is void.

This bill would require a water or sewer system corporation with less than 2,000 service connections to receive the commissions approval before entering into specified transactions valued at $5,000,000. The bill would provide that if a water or sewer system corporation fails to receive the commissions approval, the transaction is voidable by the commission until the commission either retroactively approves or conditionally approves the transaction. The bill would authorize the commission to delegate this approval authority to a specified division director.

 UNFINISHED BUSINESS  

Bill No: SB 1112

Author:

:

Vote:

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:

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 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 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 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:
   1. Retroactively approves the transaction upon a determination that the transaction is in the best interests of both the corporation and its ratepayers.
   2. 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

(˃ 10,000 Service Connections)

Class B Companies: 5

(˃ 2,000 Service Connections)

Class C Companies: 24

(˃ 500 Service Connections)

Class D Companies: 70

(˂ 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 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: Fiscal Com.: Local:

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 and sorting out property rights.

SUPPORT: (Verified 8/18/16)

California Public Utilities Commission (source)

California Water Association

OPPOSITION: (Verified 8/18/16)

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:

8/19/16 19:37:28

**** END ****

Date of Hearing: August 10, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

SBPCA Bill Id:SB 1112

Author:(Cannella) – As Amended Ver:August 1, 2016

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill authorizes the California Public Utilities Commission (PUC) to retroactively approve, or conditionally approve, transactions by small water or sewer corporations valued at $5 million or less, when the utility fails to obtain prior approval. Specifically, this bill:

1. Requires water or sewer system corporations, or an entity merging with or acquiring control of a water or sewer system corporation, with less than 2,000 service connections, to obtain prior approval from the PUC before entering into a transaction related to property subject to and valued at $5 million or less.
2. Provides that if a water or sewer system corporation, or an entity merging with or acquiring control of a water or sewer system corporation, fails to obtain prior approval, the transaction is voidable by the PUC unless the PUC takes the following action:
   1. Retroactively approves the transaction upon a determination that the transaction is in the best interests of both the corporation and its ratepayers.
   2. 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 PUC 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.

FISCAL EFFECT:

The PUC indicates minor cost savings associated with not having to void future accidental asset sales. This will reduce PUC attorney workload associated with locating the last legal owner of record and sorting out property rights.

COMMENTS:

1. Background. The PUC has jurisdiction over 12 sewer and 108 water companies that provide water service to about 16% of California's residents. Ninety-four of these water utilities have service connections of 2,000 or less.
2. Purpose. This bill is sponsored by the PUC. According to the PUC, there have been instances when small water corporations sell their utilities and are unaware that they must first get approval from the PUC 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. In those instances, the PUC's only option is to void the sale. When this occurs, PUC staff must track down the original owner and explain that the sale is now void. Locating the original owner may be difficult, as the owner may have died, may be out of state, or not able to cooperate. Although the PUC attempts to educate owners of these utilities of their many responsibilities, sales may still occur without PUC prior approval, particularly when the operator dies and a family member inherits the utility and is not aware of the responsibilities and requirements. The PUC has provided recent examples that have surfaced with January Water Company, Wendell Water Company, Sonoma Springs Water Company, Black Butte Water Company and Live Oak Springs Water Company.

This bill would provide the PUC 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.

1. Urgency amendments. The author proposes to add an urgency clause to this bill to allow the PUC to immediately resolve transactions that have been voided under existing law.

Analysis Prepared by: Misty Feusahrens / APPR. / (916) 319-2081

Date of Hearing: June 29, 2016

ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE

Mike Gatto, Chair

SBPCA Bill Id:SB 1112

Author:(Cannella) – As Amended Ver: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:
   1. Retroactively approves the transaction upon a determination that the transaction is in the best interests of both the corporation and its ratepayers.
   2. 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 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 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 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

(˃ 10,000 Service Connections)

Class B Companies:                                         5

(˃ 2,000 Service Connections)

Class C Companies:                                         24

(˃ 500 Service Connections)       

Class D Companies:                                         70

(˂ 500 Service Connections)

Total Sewer Companies:                                 _       12

1. 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 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 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.

1. 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.
2. 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.

(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:

1. 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)

California Water Association

Opposition

None on file.

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

 THIRD READING  

Bill No: SB 1112

Author:

:

Vote:

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:

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. (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 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:
   1. Retroactively approves the transaction upon a determination that the transaction is in the best interests of both the corporation and its ratepayers.
   2. 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, and with 70 of those having service connections of 500 or less.

Total Water Companies: 108

Class A Companies: 9

(˃ 10,000 Service Connections)

Class B Companies: 5

(˃ 2,000 Service Connections)

Class C Companies: 24

(˃ 500 Service Connections)

Class D Companies: 70

(˂ 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 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: Fiscal Com.: Local:

SUPPORT: (Verified 5/17/16)

California Public Utilities Commission (source)

California Water Association

OPPOSITION: (Verified 5/17/16)

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:

5/18/16 16:27:57

**** END ****

SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS

Senator Ben Hueso, Chair

2015 - 2016 Regular

Bill No: SB 1112 Hearing Date: 4/19/2016

SUBJECT: Utilities: water and sewer systems corporations: transactions

DIGEST: This bill would allow the California Public Utilities Commission (CPUC) discretion to retroactively approve, or conditionally approve, specified transactions, valued at five million dollars ($5,000,000) 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. (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.
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 $5,000,000, or for qualified transactions valued at $5,000,000 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 $5,000,000 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 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 $5,000,000 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:
   1. Retroactively approves the transaction upon a determination that the transaction is in the best interests of both the corporation and its ratepayers.
   2. 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, and with 70 of those having service connections of 500 or less.

Total Water Companies:                                              108

Class A Companies:                                         9

(˃ 10,000 Service Connections)

Class B Companies:                                         5

(˃ 2,000 Service Connections)

Class C Companies:                                         24

(˃ 500 Service Connections)       

Class D Companies:                                         70

(˂ 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 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 $5,000,000 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 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 Cal Water’s 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.

Technical amendment. In order to provide clarity regarding maintaining the existing requirements for CPUC prior approval of all utility transactions regardless of the value of the transaction, the author and committee may wish to amend this bill to move the language regarding the value of the transaction from (a)(1) to the overarching statement of the statute:

Notwithstanding Sections 851 and 854, for For a water or sewer system corporation with less than 2,000 service connections, the following shall apply to transactions valued at five million dollars ($5,000,000) or less, notwithstanding Sections 851 and 854:

(a) (1) 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 and that is valued at five million dollars ($5,000,000) or less.

(2) If 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:

(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 the fulfillment of specified conditions that would ensure that the transaction is in the best interests of both the corporation and its ratepayers.

(b) The commission may delegate the authority to make the determinations described in subdivision (a) to the director of the division that investigates water and sewer system service quality issues and analyzes and processes utility rate change requests.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT:

California Public Utilities Commission (Sponsor)

California Water Association

OPPOSITION:

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 would give 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 would also allow the CPUC to delegate the authority to make that determination to the director of the Division of Water Agencies.

-- END --