SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 1751 (Chiu) - Water and sewer system corporations: consolidation of service

Bill Summary:

This bill would establish timeframes by which the Public Utilities Commission (PUC) is required to take action on a request for water system consolidation.

Fiscal Impact:

• Approximately $1 million annually ongoing (PUC Utilities Reimbursement Account) for CPUC staff and Administrative Law Judges to review, analyze, and decide on applications and advice letters regarding water utility consolidations in an expedited and statutorily mandated timeframe

Background:

Drinking water regulation. The SWRCB regulates public water systems that provide water for human consumption and have 15 or more service connections, or regularly serve at least 25 individuals daily at least 60 days out of the year. A "service connection" is usually the point of access between a water system’s service pipe and a user’s piping. The state does not regulate water systems with less than 15 connections; county health officers oversee them. At the local level, 30 of the 58 county environmental health departments have been delegated primacy—known as Local Primacy Agencies (LPAs)—by the SWRCB to also regulate systems with between 15 and 200 connections within their jurisdiction. For investor-owned water utilities under the jurisdiction of the PUC, which is about 15% of the water systems statewide, the SWRCB or LPAs share water quality regulatory authority with PUC.

The SWRCB regulates approximately 7,500 water systems. About one-third of these systems have between 15 and 200 service connections. The number of systems with 14 or fewer connections is unknown, but estimated to be in the thousands.

The Legislative Analyst’s Office provides a succinct background on the general topic of Safe and Affordable Drinking Water in their Analysis of the 2018-19 Governor’s Budget, as follows:

“Multiple Causes of Unsafe Drinking Water. The causes of unsafe drinking water can generally be separated into two categories (1) contamination caused by human action and (2) naturally occurring contaminants. In some areas, there are both human caused and natural contaminants in the drinking water.

“Three of the most commonly detected pollutants in contaminated water are arsenic, perchlorate, and nitrates. While arsenic is naturally occurring, perchlorate contamination is generally a result of military and industrial uses. High concentrations of nitrate in groundwater are primarily caused by human activities, including fertilizer application (synthetic and manure), animal operations, industrial sources (wastewater treatment and food processing facilities), and septic systems. Agricultural fertilizers and animal wastes applied to cropland are by far the largest regional sources of nitrate in groundwater, although other sources can be important in certain areas.

Unsafe Drinking Water a Statewide Problem. The SWRCB has identified a total of 331 water systems that it or LPAs regulate that are in violation of water quality standards. These water systems serve an estimated 500,000 people throughout the state. The number of water systems with 14 or fewer connections that are currently in violation of water quality standards is unknown, but estimated to be in the thousands by the SWRCB. Of the 331 systems identified by the SWRCB, 68 have violations associated with nitrates (and in some cases, additional contaminants). In some of these water systems, unsafe contamination levels persist over time because the local agency cannot generate sufficient revenue from its customer base to implement, operate, or maintain the improvements necessary to address the problem. The challenge in these systems is often a product of a combination of factors, including the high costs of the investments required, low income of the customers, and the small number of customers across whom the costs would need to be spread.”

Consolidation of Public Water Systems. SB 88 (Budget Committee, Chapter 27 Statutes of 2015) authorizes SWRCB to require water systems that are serving disadvantaged communities with unreliable and unsafe drinking water to consolidate with or receive service from public water systems with safe, reliable, and adequate drinking water. SB 552 (Wolk, Chapter 773, Statutes of 2016) authorizes the SWRCB to identify public water systems that are consistently unable to provide an adequate and affordable supply of safe drinking water and, once funding is available, to then contract with a competent administrator to provide managerial and technical expertise to that system.

Consolidating public water systems and extending service from existing public water systems to communities and areas, which currently rely on under-performing or failing small water systems, as well as private wells, reduces costs and improves reliability. Consolidating or extending service from a public water system to a community otherwise served by unreliable systems or unregulated private wells advances the goal of a reliable, accessible supply of safe drinking water for all California residents.

The SWRCB currently posts information on its website about ordered consolidations. It also tracks and has information on voluntary consolidations. Currently, 60 consolidations are being funded by SWRCB. Fifteen mandatory consolidations are currently proceeding, although 5 of those have decided to pursue voluntary consolidation.  Only one mandatory consolidation has been completed so far. In 2017-18, there were 90 voluntary physical consolidations and 6 voluntary managerial consolidations. Physical consolidations are for systems that are close enough to be connected by new pipelines. In managerial or operational consolidation, the systems remain physically separate, but are managed by the same entity.

Public Water System and Consolidation Act of 1997. As it relates to public water utilities, state law requires these systems to obtain PUC approval to merge with or buy another public utility or to sell useful utility property. Water system consolidations under the jurisdiction of the PUC are semantically considered acquisitions and mergers, and the approval of those transactions differ from those at the SWRCB.

The Legislature enacted the Public Water System Investment and Consolidation Act of 1997 (Act) to provide water corporations with an incentive to acquire public water systems needing improved infrastructure to meet increasingly stringent safe drinking water laws and regulations. The Act does this by requiring the PUC to use the standard of fair market value when establishing the rate base value for the distribution system of a public water system acquired by a water corporation, and to use this value for rate setting.

The PUC conducts proceedings to consider applications for authority to merge with or acquire another public utility or to sell a public utility water system, to operate an acquired water system, to include acquired water systems in rate base, to establish tariffs for an acquired water system, and to make other related requests.

The PUC uses two methods for approving PUC-regulated water system consolidations:

• 1. Applications – where the consolidation involves the acquisition of a PUC-regulated public water system by another PUC-regulated public water system; and,
  2. Advice Letters – where the consolidation involves the acquisition of a public water system not regulated by the PUC and where certain conditions are met.
     

From 1998 (when the Act became effective) through 2016, covered water corporations sought approval to acquire 19 water systems. Thirteen of these requests were made by application, while six were made via Advice Letter.

Currently, applications undergo a formal legal process with an ALJ and start with an 18-month time line (although the ALJ or the Assigned Commissioner can extend this deadline indefinitely). Applicable Advice Letters can be processed and approved by the PUC in much less time – sometimes less than four months. The PUC can and has granted requests to require that water utilities file applications for acquisitions of municipal water systems instead of Advice Letters, particularly if there may be rate impacts for either the existing system’s customers or the acquired system’s customers.

Consolidation of small water systems with health and safety violations. Current statute provides a process to help expedite the consolidation of small water utilities that have failing water systems, referred to as “Inadequately Maintained and Operated Small Water Systems (IMOSWS).” Per a PUC decision to implement the Public Water System Investment and Consolidation Act of 1997, an advice letter process can be used to transfer assets of IMOSWS. The IMOSWS is defined as any water system serving fewer than 2,000 customers that is subject to compliance order or citation related to drinking water standards. According to the PUC, this process has been utilized as recently as this year with the consolidation of the Rolling Hills Water System with the Bakman Water Company in Madera.

Office of Public Advocates. The Public Advocates Office (Office) is an independent organization within the PUC that advocates solely on behalf of utility ratepayers. The Office represents the public interest and benefits of utility customers in water utility acquisition and other PUC proceedings. The Office is often the only party in these proceedings other than the buyer and seller.

The Office has a very important role in overseeing these consolidations. However, the Office is currently understaffed with only one staff person primarily dedicated to supporting its participation in water utility acquisition proceedings. All other Office staff in the Water Branch are fully dedicated to supporting advocacy in water general rate case proceedings. According to the Office, staff spends an average of 985 hours per year advocating in each water utility acquisition proceeding. With current resources, the Office can only effectively participate in two water system acquisition proceedings at any given time. This contributes to delays in approving water utility consolidations.

Proposed Law:

This bill:

1. Establishes the Consolidation for Safe Drinking Water Act of 2019.
2. Makes findings and declarations regarding the needs for facilitating consolidation of public water systems and state small water systems that consistently fail to provide an adequate supply of safe drinking water.
3. States the intent of the Legislature is to promote timely consolidation of water systems to provide an adequate supply of safe drinking water for all residents of California.
4. Defines “consolidate” as joining two or more public water systems, state small water systems, or affected residences not served by a public water system into a single public water system.
5. Defines “subsumed water system” as the public water system or state small water system consolidated into the water or sewer system corporation.
6. Authorizes a water or sewer system corporation to file an application and obtain approval from the PUC through an order authorizing that corporation to consolidate with a public water system or state small water system with fewer than 3,300 service connections and serving a disadvantaged community, or to implement rates for the subsumed water system. Requires the PUC to prioritize cases where a water or sewer system corporation consolidates with a public water system or a state small water system that is: subject to a compliance order for failure to meet primary or secondary drinking water standards or the sale or transfer has been previously approved by voters, as specified.
7. Requires the PUC to approve or deny an application within eight months of its filing, unless the administrative law judge (ALJ) makes a written determination that the deadline cannot be met, including findings as to the reason, and issues an order extending the deadline by up to an additional eight months. Authorizes the ALJ to grant additional extensions of eight months or less consistent with this paragraph.
8. Requires the water and sewer system corporation seeking to purchase the subsumed system to give adequate public notice and provide adequate opportunities for public participation, as determined by the PUC.
9. Authorizes a water or sewer system corporation to file an advice letter and obtain approval from the PUC through a resolution authorizing that water or sewer system corporation to consolidate with a public water system or state small water system, or to implement rates for the subsumed water system, with fewer than 3,300 service connections and serving a disadvantaged community. Requires the PUC to prioritize cases where a water or sewer system corporation consolidates with a public water system or a state small water system that is: subject to a compliance order for failure to meet primary or secondary drinking water standards or the sale or transfer has been previously approved by voters, as specified.
10. Authorizes approval by the executive director of the PUC or the director of the division of the Commission having regulatory jurisdiction over the water or sewer system corporation if a filed advice letter is uncontested.

1. Requires the PUC, absent incomplete documentation, to approve or deny the advice letter within 120 months of its filing by the applicant water or sewer system corporation unless the executive director of the PUC makes a written determination that the deadline cannot be met, including findings as to the reason, and issues a response extending the deadline by up to an additional four months. Authorizes the executive director of the PUC to grant an additional extension of four months or less consistent with the provisions of this paragraph.

1. Authorizes the PUC, for any consolidation that meets the criteria described above, to designate a different procedure if it determines that the consolidation warrants a more comprehensive review than the advice letter procedure provides.

1. Provides that nothing in this bill shall be construed to require a public water system or state small water system that is not subject to the jurisdiction, control, and regulation of the PUC to obtain authorization from the PUC before consolidating with a public water system or state small water system.

Related Legislation:

AB 508 (Chu). This bill would further implement the provisions from AB 2501 regarding domestic wells and fees imposed on new and existing customers for increase groundwater use following a consolidation or extension of service.

AB 2339 (Gipson, Chapter 866, Statues of 2018). This bill authorizes the City of El Monte, the City of Montebello, and the City of Willows to sell its public water utility through an alternative simplified procedure for the purpose of consolidating with another public water system.

AB 2501 (Chu, Chapter 871, Statutes of 2018). This bill provides additional authority to the SWRCB to order consolidations.

SB 552 (Wolk, Chapter 773, Statutes of 2016). This bill expands the SWRCB’s authority by enabling it to, in order to provide affordable, safe drinking water to disadvantaged communities and to prevent fraud, waste, and abuse, contract with a competent administrator to provide managerial and technical expertise to that system, if sufficient funding is available. SB 552 also authorizes the SWRCB to order the designated public water system to accept administrative and managerial services, including full management and control, from an administrator selected by the SWRCB.

SB 88 (Senate Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2015). This bill authorizes the SWRCB, when a public water system or state small water system serving a disadvantaged community consistently fails to provide an adequate supply of safe drinking water, to order that system (referred to as a subsumed water system) to consolidate with, or receive an extension of service from, a compliant public water system (referred to as the receiving system).

Staff Comments:

According to CPUC, given the new expedited timeline, its Water Division, Legal Division, and the Administrative Law Judges would not be able to prioritize existing workload in a timely manner while also meeting an expedited timeframe for water consolidation work. As such, additional staff would be needed to meet the new statutory timelines. It is also likely this bill would result in an increased volume of advice letters and applications overall due to water or sewer corporations seeking to take advantage of a quicker and potentially less robust review, which would further elevate the need for additional staff to meet the time mandates of the bill while balancing the CPUC standing mandate to ensure consumers would receive safe and reliable water service at a reasonable rate as a result of a consolidation of providers.

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SENATE COMMITTEE ON ENVIRONMENTAL QUALITY

Senator Allen, Chair

2019 - 2020 Regular

Bill No: AB 1751

SUBJECT: Water and sewer system corporations: consolidation of service

DIGEST: This bill establishes timeframes by which the Public Utilities Commission (PUC) is required to take action on a request for water system consolidation.

ANALYSIS:

Existing law:

1. Requires the SWRCB, in administering Safe Drinking Water Act (SDWA) programs, to fund improvements and expansions of small community water systems, to encourage the consolidation of small community water systems that serve disadvantaged communities, and prioritize funding for construction projects that involve the physical restructuring of two or more community water systems, at least one of which is a small community water system that serves a disadvantaged community, into a single, consolidated system. (Health & Safety Code (HSC) § 116326)
2. Authorizes the SWRCB, where a public water system or a state small water system within a disadvantaged community, consistently fails to provide an adequate supply of safe drinking water, to order consolidation with a receiving water system. Provides that the consolidation may be physical or operational. (HSC § 116682 (a))
3. Makes legislative findings that regional solutions to water contamination problems are often more effective, efficient, and economical than solutions designed to address solely the problems of a single small public water system, and that it is in the interest of the people of the State of California to encourage the consolidation of the management and the facilities of small water systems to enable those systems to better address their water contamination problems. (HSC § 116760.10 (h))
4. States that no person or corporation shall merge, acquire, or control either directly or indirectly any public utility organized and doing business in this state without first securing authorization to do so from the PUC. Provides that any merger, acquisition, or control without that prior authorization from the PUC shall be void and of no effect. (Public Utilities Code (PUC) § 854)
5. States the intent of the Legislature is that transactions with monetary values that materially impact a public utility’s rate base should not qualify for expedited advice letter treatment. (PUC § 853 (d))
6. Defines "public water system" as a system for the provision of water for human consumption through pipes or other constructed conveyances that has 15 or more service connections or regularly serves at least 25 individuals daily at least 60 days out of the year. (HSC § 116275 (h))
7. Defines "state small water system" as a system for the provision of piped water to the public for human consumption that serves at least five, but not more than 14, service connections and does not regularly serve drinking water to more than an average of 25 individuals daily for more than 60 days out of the year. (HSC 116275 § (n))
8. Defines "disadvantaged community" as a community with an annual median household income that is less than 80 percent of the statewide annual median household income. (Water Code (WC) § 79505.5(a))
9. Declares that it is the established policy of the state that every human being has the right to safe, clean, affordable, and accessible water adequate for human consumption, cooking, and sanitary purposes. (WC § 106.3)

This bill:

1. Establishes the Consolidation for Safe Drinking Water Act of 2019.
2. Makes findings and declarations regarding the needs for facilitating consolidation of public water systems and state small water systems that consistently fail to provide an adequate supply of safe drinking water.
3. States the intent of the Legislature is to promote timely consolidation of water systems to provide an adequate supply of safe drinking water for all residents of California.
4. Defines “consolidate” as joining two or more public water systems, state small water systems, or affected residences not served by a public water system into a single public water system.
5. Defines “subsumed water system” as the public water system or state small water system consolidated into the water or sewer system corporation.
6. Authorizes a water or sewer system corporation to file an application and obtain approval from the PUC through an order authorizing that corporation to consolidate with a public water system or state small water system with fewer than 3,300 service connections and serving a disadvantaged community, or to implement rates for the subsumed water system. Requires the PUC to prioritize cases where a water or sewer system corporation consolidates with a public water system or a state small water system that is: subject to a compliance order for failure to meet primary or secondary drinking water standards or the sale or transfer has been previously approved by voters, as specified.
7. Requires the PUC to approve or deny an application within eight months of its filing, unless the administrative law judge (ALJ) makes a written determination that the deadline cannot be met, including findings as to the reason, and issues an order extending the deadline by up to an additional eight months. Authorizes the ALJ to grant additional extensions of eight months or less consistent with this paragraph.
8. Requires the water and sewer system corporation seeking to purchase the subsumed system to give adequate public notice and provide adequate opportunities for public participation, as determined by the PUC.
9. Authorizes a water or sewer system corporation to file an advice letter and obtain approval from the PUC through a resolution authorizing that water or sewer system corporation to consolidate with a public water system or state small water system, or to implement rates for the subsumed water system, with fewer than 3,300 service connections and serving a disadvantaged community. Requires the PUC to prioritize cases where a water or sewer system corporation consolidates with a public water system or a state small water system that is: subject to a compliance order for failure to meet primary or secondary drinking water standards or the sale or transfer has been previously approved by voters, as specified.
10. Authorizes approval by the executive director of the PUC or the director of the division of the Commission having regulatory jurisdiction over the water or sewer system corporation if a filed advice letter is uncontested.

1. Requires the PUC, absent incomplete documentation, to approve or deny the advice letter within 120 months of its filing by the applicant water or sewer system corporation unless the executive director of the PUC makes a written determination that the deadline cannot be met, including findings as to the reason, and issues a response extending the deadline by up to an additional four months. Authorizes the executive director of the PUC to grant an additional extension of four months or less consistent with the provisions of this paragraph.

1. Authorizes the PUC, for any consolidation that meets the criteria described above, to designate a different procedure if it determines that the consolidation warrants a more comprehensive review than the advice letter procedure provides.

1. Provides that nothing in this bill shall be construed to require a public water system or state small water system that is not subject to the jurisdiction, control, and regulation of the PUC to obtain authorization from the PUC before consolidating with a public water system or state small water system.

Background

1. Drinking water regulation. The SWRCB regulates public water systems that provide water for human consumption and have 15 or more service connections, or regularly serve at least 25 individuals daily at least 60 days out of the year. A "service connection" is usually the point of access between a water system’s service pipe and a user’s piping. The state does not regulate water systems with less than 15 connections; county health officers oversee them. At the local level, 30 of the 58 county environmental health departments have been delegated primacy—known as Local Primacy Agencies (LPAs)—by the SWRCB to also regulate systems with between 15 and 200 connections within their jurisdiction. For investor-owned water utilities under the jurisdiction of the PUC, which is about 15% of the water systems statewide, the SWRCB or LPAs share water quality regulatory authority with PUC.
   

The SWRCB regulates approximately 7,500 water systems. About one-third of these systems have between 15 and 200 service connections. The number of systems with 14 or fewer connections is unknown, but estimated to be in the thousands.

1. The Legislative Analyst’s Office provides a succinct background on the general topic of Safe and Affordable Drinking Water in their Analysis of the 2018-19 Governor’s Budget, as follows:
   
   “Multiple Causes of Unsafe Drinking Water. The causes of unsafe drinking water can generally be separated into two categories (1) contamination caused by human action and (2) naturally occurring contaminants. In some areas, there are both human caused and natural contaminants in the drinking water.
   
   “Three of the most commonly detected pollutants in contaminated water are arsenic, perchlorate, and nitrates. While arsenic is naturally occurring, perchlorate contamination is generally a result of military and industrial uses. High concentrations of nitrate in groundwater are primarily caused by human activities, including fertilizer application (synthetic and manure), animal operations, industrial sources (wastewater treatment and food processing facilities), and septic systems. Agricultural fertilizers and animal wastes applied to cropland are by far the largest regional sources of nitrate in groundwater, although other sources can be important in certain areas.
   
   “Unsafe Drinking Water a Statewide Problem. The SWRCB has identified a total of 331 water systems that it or LPAs regulate that are in violation of water quality standards. These water systems serve an estimated 500,000 people throughout the state. The number of water systems with 14 or fewer connections that are currently in violation of water quality standards is unknown, but estimated to be in the thousands by the SWRCB. Of the 331 systems identified by the SWRCB, 68 have violations associated with nitrates (and in some cases, additional contaminants). In some of these water systems, unsafe contamination levels persist over time because the local agency cannot generate sufficient revenue from its customer base to implement, operate, or maintain the improvements necessary to address the problem. The challenge in these systems is often a product of a combination of factors, including the high costs of the investments required, low income of the customers, and the small number of customers across whom the costs would need to be spread.”
   
2. Consolidation of Public Water Systems. SB 88 (Budget Committee, Chapter 27 Statutes of 2015) authorizes SWRCB to require water systems that are serving disadvantaged communities with unreliable and unsafe drinking water to consolidate with or receive service from public water systems with safe, reliable, and adequate drinking water. SB 552 (Wolk, Chapter 773, Statutes of 2016) authorizes the SWRCB to identify public water systems that are consistently unable to provide an adequate and affordable supply of safe drinking water and, once funding is available, to then contract with a competent administrator to provide managerial and technical expertise to that system.
   
   Consolidating public water systems and extending service from existing public water systems to communities and areas, which currently rely on under-performing or failing small water systems, as well as private wells, reduces costs and improves reliability. Consolidating or extending service from a public water system to a community otherwise served by unreliable systems or unregulated private wells advances the goal of a reliable, accessible supply of safe drinking water for all California residents.
   
   The SWRCB currently posts information on its website about ordered consolidations. It also tracks and has information on voluntary consolidations. Currently, 60 consolidations are being funded by SWRCB. Fifteen mandatory consolidations are currently proceeding, although 5 of those have decided to pursue voluntary consolidation.  Only one mandatory consolidation has been completed so far. In 2017-18, there were 90 voluntary physical consolidations and 6 voluntary managerial consolidations. Physical consolidations are for systems that are close enough to be connected by new pipelines. In managerial or operational consolidation, the systems remain physically separate, but are managed by the same entity.
   
3. Public Water System and Consolidation Act of 1997. As it relates to public water utilities, state law requires these systems to obtain PUC approval to merge with or buy another public utility or to sell useful utility property. Water system consolidations under the jurisdiction of the PUC are semantically considered acquisitions and mergers, and the approval of those transactions differ from those at the SWRCB.

The Legislature enacted the Public Water System Investment and Consolidation Act of 1997 (Act) to provide water corporations with an incentive to acquire public water systems needing improved infrastructure to meet increasingly stringent safe drinking water laws and regulations. The Act does this by requiring the PUC to use the standard of fair market value when establishing the rate base value for the distribution system of a public water system acquired by a water corporation, and to use this value for rate setting.

The PUC conducts proceedings to consider applications for authority to merge with or acquire another public utility or to sell a public utility water system, to operate an acquired water system, to include acquired water systems in rate base, to establish tariffs for an acquired water system, and to make other related requests.

The PUC uses two methods for approving PUC-regulated water system consolidations:

• 1. Applications – where the consolidation involves the acquisition of a PUC-regulated public water system by another PUC-regulated public water system; and,
  2. Advice Letters – where the consolidation involves the acquisition of a public water system not regulated by the PUC and where certain conditions are met.
     

From 1998 (when the Act became effective) through 2016, covered water corporations sought approval to acquire 19 water systems. Thirteen of these requests were made by application, while six were made via Advice Letter.

Currently, applications undergo a formal legal process with an ALJ and start with an 18-month time line (although the ALJ or the Assigned Commissioner can extend this deadline indefinitely). Applicable Advice Letters can be processed and approved by the PUC in much less time – sometimes less than four months. The PUC can and has granted requests to require that water utilities file applications for acquisitions of municipal water systems instead of Advice Letters, particularly if there may be rate impacts for either the existing system’s customers or the acquired system’s customers.

1. Consolidation of small water systems with health and safety violations. Current statute provides a process to help expedite the consolidation of small water utilities that have failing water systems, referred to as “Inadequately Maintained and Operated Small Water Systems (IMOSWS).” Per a PUC decision to implement the Public Water System Investment and Consolidation Act of 1997, an advice letter process can be used to transfer assets of IMOSWS. The IMOSWS is defined as any water system serving fewer than 2,000 customers that is subject to compliance order or citation related to drinking water standards. According to the PUC, this process has been utilized as recently as this year with the consolidation of the Rolling Hills Water System with the Bakman Water Company in Madera.
   
2. Office of Public Advocates. The Public Advocates Office (Office) is an independent organization within the PUC that advocates solely on behalf of utility ratepayers. The Office represents the public interest and benefits of utility customers in water utility acquisition and other PUC proceedings. The Office is often the only party in these proceedings other than the buyer and seller.

The Office has a very important role in overseeing these consolidations. However, the Office is currently understaffed with only one staff person primarily dedicated to supporting its participation in water utility acquisition proceedings. All other Office staff in the Water Branch are fully dedicated to supporting advocacy in water general rate case proceedings. According to the Office, staff spends an average of 985 hours per year advocating in each water utility acquisition proceeding. With current resources, the Office can only effectively participate in two water system acquisition proceedings at any given time. This contributes to delays in approving water utility consolidations.

Comments

1. Purpose of Bill. According to the author, "There are communities in California that lack access to clean drinking water. This is unacceptable. In many areas in the state, there are water systems that cannot afford – and are either unwilling or unable to raise rates sufficiently to make – the improvements necessary to provide drinking water to residents … The [PUC] must approve all water system consolidations that involve PUC-regulated utilities .. but the process is inconsistent and sometimes time-consuming … Accordingly, this bill will create a waiver for the current 18-month established time frame for applications and set deadlines for the completion of small water system voluntary consolidations that require PUC approval."
2. PUC approval delays. The PUC's process for reviewing voluntary system consolidations is often time consuming. It is not unusual for the approval process to take as long as 24-months. Many factors are impeding faster approval times. The volume of work on the PUC, limited staff resources dedicated to water utility issues, the workload of the ALJs, as well as the nuances of individual consolidation cases, can impact approval time.
   

Since 2013, thirteen PUC-regulated water systems have requested consolidation from the PUC. The average amount of time to approve a request is 314 days – nearly a year from when the application or Advice Letter was submitted. Six of those thirteen are still pending.

AB 1715 would require the PUC to approve or deny a PUC-regulated water system consolidation application within eight months of its filing, and would also require the PUC, absent incomplete documentation, to approve or deny an advice letter within four months of its filing by the applicant water or sewer system corporation.

If those timeframes do not suffice for the work of the Office, or for any other reason, the bill allows for an additional eight and four month time extension, respectively, pursuant to the overseeing judge's discretion. It seems reasonable for the state to ensure residents in disadvantaged communities who are served by failing water systems receive resolution to a consolidation request within a reasonable timeframe.

1. Voter Approval. The bill uses voter approval as a qualifying criterion for application to be reviewed as an advice letter. The concern with this criterion does not stem from disagreement with the will of voters selling their municipal utility, but rather out of concern for the ratepayers of the water utility that is seeking to purchase a municipal system.

The policy critique boils down to this – although the citizens of a city may approve by public vote the sale of their system for whatever price they see fit, the ratepayers of the water utility that is purchasing the system (existing ratepayers) will never have an opportunity to vote on the sale or the sale price. Existing ratepayers rely on the Commission, especially the Public Advocates Office (PAO), to do a thorough vetting of the sale including the purchase price and other terms of the agreement. If these sales are permitted to be approved through an advice letter there is significantly less time and opportunity for Water Division staff and PAO to do a full review of the sale.

An expedited advice letter review might be favorable when there are water quality issues present because of the public health concerns, but if there are no public health concern such a change may only serve the utility’s bottom line potentially at the expense of ratepayers.

The Committee may wish to consider deleting the use of voter approval as a qualifying criterion for application to be reviewed as an advice letter.

1. Technical issue. The SWRCB has two remedies for public water systems that violate drinking water standards – it can issue a citation or a compliance order. AB 1751 directs the PUC to prioritize the consolidation of drinking water systems subject to a compliance order.

The Committee may also wish to consider adding systems subject to drinking water citations as a criteria for PUC consolidation prioritization.

Related/Prior Legislation

AB 508 (Chu). This bill would further implement the provisions from AB 2501 regarding domestic wells and fees imposed on new and existing customers for increase groundwater use following a consolidation or extension of service. It will be heard in the Senate Environmental Quality Committee on July 3, 2019.

AB 2339 (Gipson, Chapter 866, Statues of 2018). This bill authorizes the City of El Monte, the City of Montebello, and the City of Willows to sell its public water utility through an alternative simplified procedure for the purpose of consolidating with another public water system.

AB 2501 (Chu, Chapter 871, Statutes of 2018). This bill provides additional authority to the SWRCB to order consolidations.

SB 552 (Wolk, Chapter 773, Statutes of 2016). This bill expands the SWRCB’s authority by enabling it to, in order to provide affordable, safe drinking water to disadvantaged communities and to prevent fraud, waste, and abuse, contract with a competent administrator to provide managerial and technical expertise to that system, if sufficient funding is available. SB 552 also authorizes the SWRCB to order the designated public water system to accept administrative and managerial services, including full management and control, from an administrator selected by the SWRCB.

SB 88 (Senate Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2015). This bill authorizes the SWRCB, when a public water system or state small water system serving a disadvantaged community consistently fails to provide an adequate supply of safe drinking water, to order that system (referred to as a subsumed water system) to consolidate with, or receive an extension of service from, a compliant public water system (referred to as the receiving system).

DOUBLE REFERRAL:

This measure was heard in Senate Energy, Utilities & Communication Committee on June 18, 2019, and passed out of committee with a vote of 13-0.

SOURCE:

Author

SUPPORT:

California American Water Company

California Water Association

City of Bellflower

City of Perris

Liberty Utilities

Sierra Club

OPPOSITION:

Public Advocates Office

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SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS

Senator Ben Hueso, Chair

2019 - 2020 Regular

Bill No: Hearing Date: 6/18/2019

SUBJECT:

DIGEST: This bill would establish timeframes by which the California Public Utilities Commission (CPUC) is required to take action on a request for water system consolidation.

ANALYSIS:

Existing law:

1. Prohibits a public utility from changing any rate or rule as to result in any new rate, except upon a showing before the CPUC and a finding by the CPUC that the new rate is justified. Provides that the procedures for advice letters may include provision for notice to customers or subscribers on a case-by-case basis, as determined by the CPUC. Provides that the CPUC may adopt rules it considers reasonable and proper for each class of public utility providing for the nature of the showing required to be made in support of proposed rate changes. (Public Utilities Code §454)
2. Establishes The Public Utilities Act prohibits, with certain exemptions, any public utility from selling, leasing, assigning, mortgaging, or otherwise disposing of or encumbering specified property necessary or useful in the performance of the public utility’s duties to the public without first, for qualified transactions valued above $5,000,000, securing an order from the CPUC authorizing it to do so or, for qualified transactions valued at $5,000,000 or less, filing an advice letter and obtaining approval from the CPUC. (Public Utilities Code §851)
3. States that no public utility, subsidiary, affiliate or corporation holding a controlling interest in, a public utility, shall purchase or acquire, take or hold any part of the capital stock of any other public utility without having been first authorized to do so by the Public Utilities Code. (Public Utilities Code §852)
4. States that no person or corporation shall merge, acquire, or control either directly or indirectly any public utility organized and doing business in this state without first securing authorization to do so from the CPUC. Provides that any merger, acquisition, or control without that prior authorization from the CPUC shall be void and of no effect. (Public Utilities Code §854)
5. States the intent of the Legislature is that transactions with monetary values that materially impact a public utility’s rate base should not qualify for expedited advice letter treatment. (Public Utilities Code §853 (d))
6. The Public Water System Investment and Consolidation Act of 1997, mandates the CPUC to use the standard of fair market value when establishing the rate base value for the distribution of a public water system acquired by a water corporation. (Public Utilities Code §2719 et seq.)
7. Requires the State Water Board (SWB), in administering Safe Drinking Water Act (SDWA) programs, to fund improvements and expansions of small community water systems, to encourage the consolidation of small community water systems that serve disadvantaged communities, and prioritize funding for construction projects that involve the physical restructuring of two or more community water systems, at least one of which is a small community water system that serves a disadvantaged community, into a single, consolidated system. (Health & Safety Code §116326)
8. Authorizes the SWB, where a public water system or a state small water system within a disadvantaged community, consistently fails to provide an adequate supply of safe drinking water, to order consolidation with a receiving water system. Provides that the consolidation may be physical or operational. (Health & Safety Code §116682 (a))
9. Makes legislative findings that regional solutions to water contamination problems are often more effective, efficient, and economical than solutions designed to address solely the problems of a single small public water system, and that it is in the interest of the people of the State of California to encourage the consolidation of the management and the facilities of small water systems to enable those systems to better address their water contamination problems. (Health & Safety Code §116760.10 (h))

This bill:

1. Establishes the Consolidation for Safe Drinking Water Act of 2019 and makes several findings and declarations concerning the right to safe, clean, affordable water, and the benefits of consolidation of water systems to achieve an adequate supply of clean water, particularly for small water systems that have failing infrastructure and are unable to bear the cost of replacing and upgrading their systems.
2. Authorizes a water or sewer system corporation to file an application and obtain approval from the CPUC through an order authorizing consolidation with a public water system or state small water system, or to implement rates for the subsumed water system.
3. Requires the CPUC to approve or deny the application within eight months, unless the executive director of the CPUC makes a written determination that the deadline cannot be met and issues a letter extending the deadline by up to eight months. Authorizes the executive director to grant additional extensions of eight months or less.
4. Authorizes, for consolidations meeting certain criteria, a water or sewer system corporation to instead file an advice letter and obtain approval from the CPUC through a resolution authorizing consolidation with a public water system or state small water system, or to implement rates for the subsumed water system, under specified circumstances, including: a consolidation involving a state water system with fewer than 3,300 service connections, a consolidation of a water system serving disadvantaged community, a consolidation of a water system that is subject to a compliance order for failure to meet primary or secondary drinking water standards.
5. Authorizes the executive director of the CPUC or the director of the division of the CPUC having regulatory jurisdiction over the water or sewer system corporation to approve an uncontested advice letter and would require the CPUC to approve or deny the advice letter within four months, except as provided.
6. Authorizes the CPUC to designate a different procedure if it determines that the consolidation warrants a more comprehensive review than the advice letter procedure provides.

Background

CPUC regulated water utilities. The CPUC is responsible for ensuring that California’s investor-owned water utilities deliver clean, safe, and reliable water to their customers at reasonable rates. While the CPUC Water Division regulates over a 100 investor-owned water and sewer utilities under the CPUC’s jurisdiction providing water service to about 16 percent of California’s residents. Approximately 95 percent of that total is served by nine large water utilities each serving more than 10,000 connections. Annual water and wastewater revenues under the CPUC’s regulation total $1.4 billion.

Publicly owned water utilities. The majority of California’s water customers are served by cities, water districts, and mutual water companies, which are governed by local boards. These utilities are not regulated by the CPUC. These entities provide service to about 85 percent of California’s residents.

State Water Resources Control Board (SWRCB). SWRCB has general authority with regard to water quality and drinking water functions of the state government. Under the California Safe Drinking Water Act (Chapter 4 (commencing with Section 116270) of Part 12 of Division 104 of the Health and Safety Code), SWRCB administers provisions relating to public water systems and regulates drinking water to protect public health, including, among other things, adopting primary drinking water standards and maximum contaminant levels for contaminants in drinking water and permitting public water systems.

CPUC v. SWRCB. Under existing law, the CPUC generally has authority over the regulation of services and utilities and assures that California residents have access to safe and reliable utility infrastructure and services. In comparison, the SWRCB has regulatory authority over the quality of the state’s water resources and drinking water. The SWRCB is involved with the quality of the water, especially drinking water, whereas the CPUC is involved with the supply and access to that water. As discussed above, there are investor owned water utilities that are regulated by the CPUC and publicly owned utilities that are not regulated by the CPUC but by their own boards.

Consolidations. Per statute, the CPUC must approve all water system consolidations that involve investor-owned utility (IOU) water utilities. This review is consistent with the CPUC’s role as a rate regulator of IOU utilities and ensures rates and costs are just and reasonable. The CPUC utilizes two approaches to review water consolidations involving IOU water utilities: applications and advice letters. Applications are submitted by the CPUC-regulated utility. These applications undergo a formal CPUC proceeding involving an administrative law judge (ALJ), other parties, and can take about 18 months. Advice letters, on the other hand, are documents prepared by a utility to request action by the CPUC, including: approval, authorization, or other relief. Statute has largely deferred to the CPUC to adopt rules and procedures for addressing advice letters. Advice letters are intended to address issues that are not expected to be controversial or raise important policy questions. As such, advice letters are procedurally less formal than other proceedings at the CPUC that require more judicial-type elements of an evidentiary hearing. Advice letters are classified into three tiers, ranging from Tier 1 to Tier 3. Tier 1 advice letters generally become effective upon filing of the letter. However, Tier 3 advice letters require commissioners to hear the item and take a vote of a resolution of the item at a publicly noticed meeting. In the case of water consolidations, these are often Tier 3 advice letters that can be processed and approved by the CPUC in less time than a formal proceeding of an application – sometimes in fewer than four months.

Need for consolidation. According to the CPUC, the majority of troubled water systems have fewer than 500 service connections. These water systems are generally, but not always, publicly owned systems or mutual water companies, which often lack the rate base to fund the necessary infrastructure improvements to provide clean drinking water. In recent years, there has been a push at the state level to encourage consolidation of these smaller water systems as an approach to provide a larger rate base to fund the necessary improvements. The need to consolidate can provide benefits to the residents served by the failing water system, but also likely comes at increased costs to the systems (and corresponding ratepayers) subsuming the failing system. As such, it seems appropriate to ensure there is adequate review of implications of the costs associated with the consolidation. In the case of IOU water utilities, the costs associated with consolidation are largely borne by the ratepayers of the utility, not the shareholders/owners. For this reason, the CPUC review can be beneficial to ensure all ratepayers are well-protected.

Consolidation of small water systems with health and safety violations. Current statute provides a process to help expedite the consolidation of small water utilities that have failing water systems, referred to as “Inadequately Maintained and Operated Small Water Systems (IMOSWS).” Per CPUC decision to implement the Public Water System Investment and Consolidation Act of 1997, an advice letter process can be used to transfer assets of IMOSWS. The IMOSWS is defined as any water system serving fewer than 2,000 customers that is subject to compliance order or citation related to drinking water standards. Per the CPUC, this process has been utilized as recently as this year with the consolidation of the Rolling Hills Water System with the Bakman Water Company in Madera.

Comments

AB 1751. This bill would establish timelines for the CPUC to act and authorize the broader use of the advice letter process in relation to water system consolidations.

AB 1751 seeks to address delays in the processing of consolidations of water systems involving CPUC-regulated water utilities. The author and sponsors note the desire to speed up the process in order to provide residents with the clean and safe drinking water they deserve. In this regard, it seems reasonable for the state to ensure that residents in disadvantaged communities who are served by failing water systems receive resolution to a consolidation request within a reasonable timeframe. However, as noted above, these cases can at times involve increased costs to ratepayers which warrant a thorough review. Additionally, as noted by the Public Advocates Office (formerly Office of Ratepayer Advocates), consolidations can be complex matters involving legal question and require more time. In order to balance the need to help expedite review of consolidations for water systems that are failing, the author and committee may wish to amend this bill to narrow its application to those cases involving these systems located in disadvantaged communities, replace the executive director with the ALJ in deciding to extend the proceeding for an application, include additional technical amendments to clarify the timeline and shift the section to an existing section of the code addressing consolidation of water systems.

Dual referral. Should this committee approve this bill, it will be re-referred to the Senate Committee on Environmental Quality for their consideration.

Prior/Related Legislation

SB 88 (Senate Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2015) authorized the SWRCB, when a public water system or state small water system serving a disadvantaged community consistently fails to provide an adequate supply of safe drinking water, to order that system (referred to as a subsumed water system) to consolidate with, or receive an extension of service from, a compliant public water system (referred to as the receiving system). While for many years the state's drinking water program had encouraged voluntary consolidation of public water systems, the authority granted by SB 88 allows the state to mandate the consolidation of water systems where appropriate.

SB 552 (Wolk, Chapter 773, Statutes of 2016) expanded the SWB’s authority by enabling it to, in order to provide affordable, safe drinking water to disadvantaged communities and to prevent fraud, waste, and abuse, contract with a competent administrator to provide managerial and technical expertise to that system, if sufficient funding is available. The bill also authorized the SWB to order the designated public water system to accept administrative and managerial services, including full management and control, from an administrator selected by the SWB.

AB 2339 (Gipson, Chapter 866, Statues of 2018) authorized the City of El Monte, the City of Montebello, and the City of Willows to sell its public water utility through an alternative simplified procedure for the purpose of consolidating with another public water system.

AB 2501 (Chu, Chapter 871, Statutes of 2018) provided additional authority to the SWB to both order consolidations and appoint administrators and include domestic wells. Specific to the CPUC, the bill requires the CPUC upon issuance of a consolidation order, to open a proceeding to determine cost allocation, ratemaking, and CPUC public participation requirements for the consolidation process.

AB 508 (Chu, 2019) further implement the provisions from AB 2501 regarding domestic wells and fees imposed on new and existing customers for increase groundwater use following a consolidation or extension of service. The bill is pending consideration in the Senate Committee on Environmental Quality.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT:

California Water Association (Sponsor)

California American Water Company

City of Bellflower

City of Perris

Liberty Utilities

Sierra Club California

OPPOSITION:

Public Advocates Office (formerly Office of Ratepayer Advocates)

ARGUMENTS IN SUPPORT: According to the author:

In many areas in the state, small water systems have a serious deficiency in technical, managerial or financial capacity, deferred maintenance and repair problems, failing operations, or contaminated drinking water and other serious health and safety issues. Fortunately, these systems are often contiguous with or near larger water systems that can extend their services or accommodate the addition of a new water district in their system operations, either physically or managerially. Consolidation of water systems is normally the solution to making sure Californians in geographically adjoining areas all receive clean drinking water. For those water systems regulated by the CPUC, the approval process can be unduly time-consuming. This bill imposes flexible deadlines on the CPUC for approval and thereby ensures the CPUC is able to help implement the State’s policy to provide clean drinking water to all Californians.

ARGUMENTS IN OPPOSITION: The Public Advocates Office (formerly Office of Ratepayer Advocates (ORA)), also known as Cal Advocates in CPUC proceedings) opposes this bill stating:

We strongly support the state’s goals to ensure that all Californians have access to safe, clean and affordable water. Unfortunately, this bill may not advance these goals because the proposed expedited approval process does not provide ample time to carefully examine these acquisitions which are often controversial, raise legal and policy issues, and can substantially increase customer’s monthly water bills. Importantly, this bill may not be necessary to address water quality issues because there is already an expedited process in place that the CPUC uses to approve acquisitions ordered by the State Water Resource Control Board, in instances where water system improvements (e.g., water quality compliance) are necessary. This expedited approval process can take less than 120 days.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 1751

Author:(Chiu)

As Amended Ver:May 1, 2019

Majority vote

SUMMARY:

Establishes timeframes by which the California Public Utilities Commission (PUC) is required to take action on a request for water system consolidation.

Major Provisions

1. Authorizes a water or sewer system corporation to file an application and obtain approval from the PUC through an order authorizing that water or sewer system corporation to consolidate with a public water system or state small water system, or to implement rates for the subsumed water system.
2. Requires the PUC to approve or deny an application for consolidation within eight months of its filing. Authorizes the PUC to extend the deadline by up to an additional eight months.
3. Requires the PUC to approve or deny an advice letter requesting consolidation within four months of its filing by the applicant. Authorizes the PUC to extend the deadline by up to an additional four months.

COMMENTS:

Consolidation of water systems: According to the United States Environmental Protection Agency, restructuring, or consolidating, can be an effective means to help small water systems achieve and maintain technical, managerial, and financial capacity. The State Water Resources Control Board maintains that consolidating public water systems and extending service from existing public water systems to communities and areas that currently rely on under-performing or failing small water systems, or private wells, reduces costs and improves reliability.

The Public Water System Investment and Consolidation Act of 1997 (Act) was enacted to provide water corporations with an incentive to acquire public water systems needing improved infrastructure to meet increasingly stringent safe drinking water laws and regulations. The PUC conducts proceedings to consider applications for authority to merge with or acquire another public utility or to sell a public utility water system, to operate an acquired water system, to include acquired water systems in that rate base, to establish tariffs for an acquired water system, and to make other related requests. The PUC uses two methods for approving water system consolidations: applications, where the consolidation involves the acquisition of a PUC-regulated public water system by another PUC-regulated public water system; and, advice letters, where the consolidation involves the acquisition of a public water system not regulated by the PUC and where certain conditions are met.

PUC approval delays: The PUC's process for reviewing voluntary system consolidations is inconsistent and often time consuming. It is not unusual for the approval process to take as long as 24 months. Many factors are impeding faster approval times, including the volume of work on the PUC, the workload of the administrative law judges, and the nuances of individual consolidation cases.

This bill: AB 1715 would require the PUC to approve or deny an application within eight months of its filing, and would also require the PUC, absent incomplete documentation, to approve or deny an advice letter within four months of its filing by the applicant water or sewer system corporation.

According to the Author:

"There are communities in California that lack access to clean drinking water. This is unacceptable. In many areas in the state, there are water systems that cannot afford – and are either unwilling or unable to raise rates sufficiently to make – the improvements necessary to provide drinking water to residents … The [PUC] must approve all water system consolidations that involve PUC-regulated utilities .. but the process is inconsistent and sometimes time-consuming … Accordingly, this bill will create a waiver for the current 18-month established time frame for applications and set deadlines for the completion of small water system voluntary consolidations that require PUC approval."

Arguments in Support:

The California Water Association, a statewide trade group representing 98 public water suppliers regulated by the PUC, argues that through the end of 2018, the average approval for consolidation was taking 311 days, an untenable length of time for which long-suffering residents must wait for safe, reliable drinking water. This bill will ensure the PUC is able to help implement the State’s policy to consolidate small water systems, provide safe, reliable drinking water to customers sooner than is currently the case, and contribute to the success of the Human Right to Water law.

Arguments in Opposition:

The Public Advocates Office, which is the independent consumer advocate at the PUC, argues that this bill may not advance these goals because the proposed expedited approval process does not provide ample time to carefully examine these acquisitions which are often controversial, raise legal and policy issues, and can substantially increase customers' monthly water bills.

FISCAL COMMENTS:

According to the Assembly Appropriations Committee, enactment of this bill could result in annual ongoing PUC costs of approximately $575,000 for additional engineers and an attorney to evaluate and consider advice letters and applications for consolidation within the expedited time frame (Utilities Reimbursement Account).

VOTES:

ASM ENVIRONMENTAL SAFETY AND TOXIC MATERIALS: 9-0-0

YES: Quirk, Melendez, Kalra, Bauer-Kahan, Dahle, Cristina Garcia, Holden, Mathis, Muratsuchi

ASM UTILITIES AND ENERGY: 14-0-1

YES: Holden, Patterson, Burke, Carrillo, Chen, Cunningham, Cristina Garcia, Rodriguez, Mayes, Muratsuchi, Quirk, Reyes, Santiago, Ting

ABS, ABST OR NV: Eggman

ASM APPROPRIATIONS: 18-0-0

YES: Gonzalez, Bigelow, Bloom, Bonta, Brough, Calderon, Carrillo, Chau, Diep, Eggman, Fong, Gabriel, Eduardo Garcia, Maienschein, Obernolte, Petrie-Norris, Quirk, Robert Rivas

UPDATED:

VERSION: May 1, 2019

CONSULTANT: Paige Brokaw / E.S. & T.M. / (916) 319-3965 FN: 0000550

Date of Hearing: May 16, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 1751

Author:(Chiu) – As Amended Ver:May 1, 2019

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

SUMMARY:

This bill establishes the Consolidation for the Safe Drinking Water Act of 2019 and sets timeframes by which the California Public Utilities Commission (CPUC) must take action on a request for water system consolidation. Specifically, this bill:

1. Authorizes a water or sewer system corporation to file an application and obtain approval by the CPUC through an order authorizing that water or sewer system corporation to consolidate with a public water system or state small water system, or to implement rates for the subsumed water system.
2. Requires the CPUC to approve or deny an application within eight months, except as provided.
3. Authorizes a water or sewer system corporation to file an advice letter and obtain approval from the CPUC through a resolution authorizing consolidation with a public water system or state small water system, or to implement rates for the subsumed water system, under specified, limited conditions.
4. Authorizes the executive director of the CPUC or the director of the division with regulatory jurisdiction over the water or sewer system corporation to approve an uncontested advice letter if a filed advice letter is uncontested.
5. Requires the CPUC absent incomplete documentation, to approve or deny the advice letter within four months, except as provided.
6. Authorizes the CPUC, to designate a different procedure if it determines the consolidation warrants a more comprehensive review than the advice letter procedure provides.

FISCAL EFFECT:

Annual ongoing CPUC costs of approximately $575,000 for additional engineers and an attorney to evaluate and consider advice letters and applications for consolidation within the expedited time frame (Utilities Reimbursement Account).

COMMENTS:

1. Background and Purpose. It is the policy of the state to encourage the consolidation of small water systems. In 2015, the State Water Board was given the authority to order consolidation of a public water system within a disadvantaged community under specified conditions. In 2016, the State Water Board was given the authority to evaluate the ability of a proposed new public water system to meet drinking water standards for the foreseeable future and to deny a permit if the board determined the new public water system will not be sustainable into the future. In 1997, the CPUC was required to use fair market value when setting rates, creating a greater incentive for CPUC-regulated water providers to consolidate.

The report found drinking water contamination in California disproportionally affects small, rural and low-income communities that depend mostly on groundwater. Similarly, a 2013 State Water Board report found 682 community public water systems in California, which serve nearly 21 million people, rely on contaminated groundwater as a primary source of drinking water. It also found that 265 community public water systems, which serve a little more than two million people, had received at least one drinking water quality violation within the last compliance cycle. The State Water Board’s report points out that an additional two million Californians rely on groundwater from private domestic wells or smaller groundwater-reliant systems that are not regulated by the state. While these statistics may have changed over the past several years, the State Water Board notes approximately 282 drinking water systems are currently not in compliance with drinking water standards.

The 2018 UC Davis report also found a significant number of residents live close to an existing and water-quality compliant community water system that could provide clean drinking water.

The 2018 UC Davis report included policy recommendations to better enable communities to secure access to safe and affordable drinking water. These recommendations included: a) clarifying state law to allow the State Water Board to use its authority to extend services to residents who receive water from [state small water systems] and private wells, and b) allowing communities without safe drinking water to petition the state to consider ordering consolidations.

AB 2501 (Chu), Chapter 871, Statutes of 2018, provided additional authority to the State Water Board to order consolidations.

According to the author:

There are communities in California that lack access to clean drinking water. This is unacceptable. In many areas in the state, there are water systems that cannot afford – and are either unwilling or unable to raise rates sufficiently to make – the improvements necessary to provide drinking water to residents … The PUC must approve all water system consolidations that involve PUC-regulated utilities .. but the process is inconsistent and sometimes time-consuming … Accordingly, this bill will create a waiver for the current 18-month established time frame for applications and set deadlines for the completion of small water system voluntary consolidations that require PUC approval.

This bill requires the CPUC to approve or deny an application within eight months of its filing and requires the CPUC to approve or deny an advice letter within four months of its filing by the applicant water or sewer system corporation.

If those timeframes do not suffice, or for any other reason, this bill allows for time extensions pursuant to the overseeing administrative law judge's (ALJ) discretion. Therefore, should an application, or the CPUC, need more time to process a request for consolidation, the ALJ could grant additional time.

1. Community Water Systems and Drinking Water Quality. There are approximately 7,500 public water systems in the state, of which 3,300 are community water systems. A community water system is a public water system that serves at least 15 service connections used by yearlong residents, or regularly serves at least 25 yearlong residents. These water systems primarily serve cities, neighborhoods, schools and businesses. The State Water Board data primarily captures community water systems. Of systems in the State Water Board data, 61% are very small systems serving populations of 25 to 500 people. These very small systems represent 80% of all drinking water standard violations. The disproportionate number of violations occurring in small systems is due to small systems having a small rate base. The small rate base is more likely to struggle to pay for asset management necessary to maintain the system.

Analysis Prepared by: Jennifer Galehouse / APPR. / (916) 319-2081

Date of Hearing: April 24, 2019

ASSEMBLY COMMITTEE ON UTILITIES AND ENERGY

Chris Holden, Chair

ABPCA Bill Id:AB 1751 (

Author:Chiu) – As Amended Ver:March 21, 2019

SUBJECT: Water and sewer system corporations: consolidation of service.

SUMMARY: Establishes timeframes by which the California Public Utilities Commission (CPUC) is required to take action on a request for water system consolidation.

Specifically, this bill:

1. Establishes the Consolidation for the Safe Drinking Water Act of 2019.
2. Makes findings and declarations regarding the needs for facilitating consolidation of public water systems and state small water systems that consistently fail to provide an adequate supply of safe drinking water.
3. States the intent of the Legislature is to promote timely consolidation of water systems to provide an adequate supply of safe drinking water for all residents of California.
4. Defines the term “consolidation” as joining two or more public water systems, state small water systems, or affected residences not served by a public water system into a single public water system.
5. Defines subsumed water system as the public water system or state small water system consolidated into the water or sewer system corporation.
6. Authorizes a water or sewer system corporation to file an application and obtain approval from the CPUC through an order authorizing that water or sewer system corporation to consolidate with a public water system or state small water system, or to implement rates for the subsumed water system.
7. Requires the CPUC to approve or deny an application within eight months of its filing, unless the CPUC makes a written determination that the deadline cannot be met, including findings as to the reason, and issues an order extending the deadline by up to an additional eight months.
8. Authorizes a water or sewer system corporation to file an advice letter and obtain approval from the CPUC through a resolution authorizing that water or sewer system corporation to consolidate with a public water system or state small water system, or to implement rates for the subsumed water system, when any of the following occur:
   1. A water or sewer system corporation consolidates with a public water system or state small water system with fewer than 3,300 service connections;
   2. A water or sewer system corporation consolidates with a public water system or state small water system serving a disadvantaged community;
   3. A water or sewer system corporation consolidates with a public water system or state small water system that is subject to a compliance order for failure to meet primary or secondary drinking water standards, as defined under current law; or,
   4. A water or sewer system corporation consolidates with a public water system or state small water system, the sale or transfer of which has been previously approved under current law.
9. Authorizes approval to be given by the executive director of the CPUC or the director of the division having regulatory jurisdiction over the water or sewer system corporation if a filed advice letter is uncontested.
10. Requires the CPUC, absent incomplete documentation, to approve or deny the advice letter within four months of its filing by the applicant water or sewer system corporation unless the executive director of the PUC makes a written determination that the deadline cannot be met, including findings as to the reason, and issues a response extending the deadline by up to an additional four months.
11. Authorizes the CPUC, for any consolidation that meets the criteria described above, to designate a different procedure if it determines that the consolidation warrants a more comprehensive review than the advice letter procedure provides.
12. Provides that nothing in this bill shall be construed to require a public water system or state small water system that is not subject to the jurisdiction, control, and regulation of the CPUC to obtain authorization from the CPUC before consolidating with a public water system or state small water system.

EXISTING LAW

1. States that no public utility, subsidiary, affiliate or corporation holding a controlling interest in, a public utility, shall purchase or acquire, take or hold any part of the capital stock of any other public utility without having been first authorized to do so by the Public Utilities Code. (PUC § 852);
2. States that no person or corporation shall merge, acquire, or control either directly or indirectly any public utility organized and doing business in this state without first securing authorization to do so from the PUC. Provides that any merger, acquisition, or control without that prior authorization from the PUC shall be void and of no effect. (Public Utilities Code. (PUC § 854);
3. States the intent of the Legislature is that transactions with monetary values that materially impact a public utility’s rate base should not qualify for expedited advice letter treatment. (PUC § 853 (d));
4. The Public Water System Investment and Consolidation Act of 1997, mandates the commission to use the standard of fair market value when establishing the rate base value for the distribution of a public water system acquired by a water corporation. (PUC § 2719);
5. Requires the State Water Board, in administering Safe Drinking Water Act (SDWA) programs, to fund improvements and expansions of small community water systems, to encourage the consolidation of small community water systems that serve disadvantaged communities, and prioritize funding for construction projects that involve the physical restructuring of two or more community water systems, at least one of which is a small community water system that serves a disadvantaged community, into a single, consolidated system. (Health & Safety Code (HSC) § 116326);
6. Authorizes the State Water Board, where a public water system or a state small water system within a disadvantaged community, consistently fails to provide an adequate supply of safe drinking water, to order consolidation with a receiving water system. Provides that the consolidation may be physical or operational. (HSC § 116682 (a));
7. Makes legislative findings that regional solutions to water contamination problems are often more effective, efficient, and economical than solutions designed to address solely the problems of a single small public water system, and that it is in the interest of the people of the State of California to encourage the consolidation of the management and the facilities of small water systems to enable those systems to better address their water contamination problems. (HSC § 116760.10 (h)).

BACKGROUND:

The PUC must approve all water system consolidations that involve PUC-regulated water utilities. It uses two methods for these approvals: (1) Applications – where the consolidation involves the acquisition of a PUC-regulated public water system by another PUC-regulated public water system; and (2) Advice Letters – where the consolidation involves the acquisition of a public water system not regulated by the CPUC by a CPUC-regulated public water system and where certain conditions are met.

Currently, applications undergo a formal legal process with an administrative law judge (ALJ) and starts with an 18-month time line (although the ALJ or the Assigned Commissioner can extend this deadline, with Commission approval, at their discretion). Applicable Tier 3 Advice Letters can be processed and approved by the PUC in much less time – sometimes less than four months. However, in recent years, the PUC has granted requests to require that water utilities file applications for acquisitions of municipal water systems instead of advice letters, particularly if there may be rate impacts for either the existing system’s customers or the acquired system’s customers.

The PUC has a process for reviewing small water system’s consolidations, but the process is inconsistent and time consuming. It is not unusual for the approval process to take as long as 16 months, even when, in the case of a municipal water system, the residents of a city or town have voted to have the system consolidated by another CPUC-regulated utility.

While many applications on other matters (e.g., general rate cases) properly utilize the 18-month time frame, the issues involved in a small system consolidation should not warrant a drawn out proceeding, especially when water quality compliance or technical, managerial and financial challenges increase the risks for water utility customers. Accordingly, this bill will change the current 18-month established time frame for applications and set deadlines for the completion of small water system voluntary consolidations that require PUC approval. Commission disposition of Tier 3 Advice Letters currently can extend for 11 months (or longer for those submitted for consolidations under PU Code Section 851).

Current CPUC Small Water System Acquisition Approval Chart

According to a recent report by the US Water Alliance and the UNC Environmental Finance Center, “Water is a capital-intensive enterprise. There are high costs associated with investing in water utilities and in maintaining the vast infrastructure that they are require. Costs are climbing with the need to upgrade, retrofit, and make systems more resilient. Several case studies in this report show that consolidated utilities can access capital from investors at lower cost. When utilities consolidate, they pool resources to serve larger customer bases. As a result, consolidated systems may receive better terms and interest rates on bonds and commercial loans from private capital markets to fund capital improvements.”

FISCAL EFFECT: Unknown.

COMMENTS:

Author’s Statement: It’s unacceptable that in 2019 there are still communities in California that lack access to clean drinking water. In many areas in the state, small water systems have a serious deficiency in technical, managerial or financial capacity, deferred maintenance and repair problems, failing operations, or contaminated drinking water and other serious health and safety issues. Many of these are water systems cannot afford – and are unable to raise rates sufficiently – to make the improvements necessary to provide drinking water to residents.

Fortunately, these systems are often contiguous with or near larger water systems that can extend their services or accommodate the addition of a new water district in their system operations, either physically or managerially. Consolidation of water systems is normally the solution to making sure Californians in geographically adjoining areas all receive clean drinking water.

For those water systems regulated by the California Public Utilities Commission (CPUC), the approval process can be unduly time-consuming. In some cases, approval takes as long as 24 months after a CPUC-regulated utility decides (or is directed) to sell his or her system, or after the customer owners of a mutual water company vote to sell their system, or after residents in a municipality vote to have their system consolidated into another water utility. It is the CPUC’s obligation to review proposed consolidations in order to protect both existing and future customers. However, the longer a review takes, the longer Californians are left with undrinkable water or systems in chronic disrepair. A balance between goals must be reached.

This bill imposes flexible deadlines on the CPUC for approval and thereby ensures the CPUC is able to help implement the State’s policy to provide clean drinking water to all Californians.

AB 1751 establishes timelines for the CPUC to act, where CPUC approval is needed, on voluntary consolidations of small water systems. In this context, the CPUC defines small as public water systems with less than 10,000 service connections.

Optimizing Water Systems: There are water systems in California that cannot afford – and are either unwilling or unable to raise rates sufficiently to make – the improvements necessary to provide drinking water to residents. Often, these systems are contiguous with or near larger water systems that can extend their services or accommodate the addition of a new water district in their system operations, either physically or managerially.

Implementation Timeline: The California Public Utilities Commission (CPUC) must approve all water system consolidations that involve CPUC-regulated water utilities. The average time for approval is more than 300 days, which is too long to make a community wait for clean drinking water or to wait for needed infrastructure improvements. The delays in processing consolidations simply exacerbate the customers’ frustration in resolving water quality and deferred maintenance issues. By mandating that the CPUC take action within specific timelines, this measures provides the water district and their customers with greater certainty that the CPUC will act upon their request in a timely manner.

This measure establishes the following deadlines: 1) Eight months for processing applications for consolidations and the PUC can extend the deadline by an additional eight months with Commission approval and 2) Four months for processing an uncontested advice letters and the Executive Director may extend the deadline by an additional four months.

The measure is silent about what occurs after the extension lapses. Enabling the commission to grant additional extensions for the request for consolidation and the executive director for an advice letter resolves this problem.

To address the issue of extensions, the Committee may wish to consider the following amendments:

Page 3, (b) (2) The commission shall approve or deny an application filed pursuant to paragraph (1) within eight months of its filing, unless the commission makes a written determination that the deadline cannot be met, including findings as to the reason, and issues an order extending the deadline by up to an additional eight months. The commission is authorized to grant an additional eight month or less extensions consistent with the provisions of this section.

Page 4, (c) (C) Absent incomplete documentation, the commission shall approve or deny the advice letter within four months of its filing by the applicant water or sewer system corporation unless the executive director makes a written determination that the deadline cannot be met, including findings as to the reason, and issues a response extending deadline by four months. The executive director is authorized to grant additional four months extensions consistent with the provisions of this section.

Related/Prior Legislation:

1. AB 508 (Chu). This bill would further implement the provisions from AB 2501 regarding domestic wells and fees imposed on new and existing customers for increase groundwater use following a consolidation or extension of service.
2. AB 2339 (Gipson, Chapter 866, Statues of 2018). This bill authorizes the City of El Monte, the City of Montebello, and the City of Willows to sell its public water utility through an alternative simplified procedure for the purpose of consolidating with another public water system.
3. AB 2501 (Chu, Chapter 871, Statutes of 2018). This bill provides additional authority to the State Water Board to order consolidations.
4. SB 552 (Wolk, Chapter 773, Statutes of 2016). This bill expands the State Water Board’s authority by enabling it to, in order to provide affordable, safe drinking water to disadvantaged communities and to prevent fraud, waste, and abuse, contract with a competent administrator to provide managerial and technical expertise to that system, if sufficient funding is available. SB 552 also authorizes the State Water Board to order the designated public water system to accept administrative and managerial services, including full management and control, from an administrator selected by the State Water Board.
5. SB 88 (Senate Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2015). This bill authorizes the State Water Board, when a public water system or state small water system serving a disadvantaged community consistently fails to provide an adequate supply of safe drinking water, to order that system (referred to as a subsumed water system) to consolidate with, or receive an extension of service from, a compliant public water system (referred to as the receiving system).

REGISTERED SUPPORT / OPPOSITION:

Support

Bellflower; City of
California American Water
California Water Association
Liberty Utilities
Perris; City of
Sierra Club

Opposition

Public Advocates Office

Analysis Prepared by: Mary McDonald / U. & E. /

Date of Hearing: April 9, 2019

ASSEMBLY COMMITTEE ON ENVIRONMENTAL SAFETY AND TOXIC MATERIALS

Bill Quirk, Chair

ABPCA Bill Id:AB 1751 (

Author:Chiu) – As Amended Ver:March 21, 2019

SUBJECT: Water and sewer system corporations: consolidation of service

SUMMARY: Establishes timeframes by which the Public Utilities Commission (PUC) is required to take action on a request for water system consolidation. Specifically, this bill:

1. Establishes the Consolidation for Safe Drinking Water Act of 2019.
2. Makes findings and declarations regarding the needs for facilitating consolidation of public water systems and state small water systems that consistently fail to provide an adequate supply of safe drinking water.
3. States the intent of the Legislature is to promote timely consolidation of water systems to provide an adequate supply of safe drinking water for all residents of California.
4. Defines consolidate as joining two or more public water systems, state small water systems, or affected residences not served by a public water system into a single public water system.
5. Defines subsumed water system as the public water system or state small water system consolidated into the water or sewer system corporation.
6. Authorizes a water or sewer system corporation to file an application and obtain approval from the PUC through an order authorizing that water or sewer system corporation to consolidate with a public water system or state small water system, or to implement rates for the subsumed water system.
7. Requires the PUC to approve or deny an application within eight months of its filing, unless the PUC makes a written determination that the deadline cannot be met, including findings as to the reason, and issues an order extending the deadline by up to an additional eight months.
8. Authorizes a water or sewer system corporation to file an advice letter and obtain approval from the PUC through a resolution authorizing that water or sewer system corporation to consolidate with a public water system or state small water system, or to implement rates for the subsumed water system, when any of the following occur:
   1. A water or sewer system corporation consolidates with a public water system or state small water system with fewer than 3,300 service connections;
   2. A water or sewer system corporation consolidates with a public water system or state small water system serving a disadvantaged community;
   3. A water or sewer system corporation consolidates with a public water system or state small water system that is subject to a compliance order for failure to meet primary or secondary drinking water standards, as defined under current law; or,
   4. A water or sewer system corporation consolidates with a public water system or state small water system, the sale or transfer of which has been previously approved under current law.
9. Authorizes approval to be given by the executive director of the PUC or the director of the division having regulatory jurisdiction over the water or sewer system corporation if a filed advice letter is uncontested.
10. Requires the PUC, absent incomplete documentation, to approve or deny the advice letter within four months of its filing by the applicant water or sewer system corporation unless the executive director of the PUC makes a written determination that the deadline cannot be met, including findings as to the reason, and issues a response extending the deadline by up to an additional four months.
11. Authorizes the PUC, for any consolidation that meets the criteria described above, to designate a different procedure if it determines that the consolidation warrants a more comprehensive review than the advice letter procedure provides.
12. Provides that nothing in this bill shall be construed to require a public water system or state small water system that is not subject to the jurisdiction, control, and regulation of the PUC to obtain authorization from the PUC before consolidating with a public water system or state small water system.

EXISTING LAW:

1. Requires the State Water Board, in administering Safe Drinking Water Act (SDWA) programs, to fund improvements and expansions of small community water systems, to encourage the consolidation of small community water systems that serve disadvantaged communities, and prioritize funding for construction projects that involve the physical restructuring of two or more community water systems, at least one of which is a small community water system that serves a disadvantaged community, into a single, consolidated system. (Health & Safety Code (HSC) § 116326)
2. Authorizes the State Water Board, where a public water system or a state small water system within a disadvantaged community, consistently fails to provide an adequate supply of safe drinking water, to order consolidation with a receiving water system. Provides that the consolidation may be physical or operational. (HSC § 116682 (a))
3. Makes legislative findings that regional solutions to water contamination problems are often more effective, efficient, and economical than solutions designed to address solely the problems of a single small public water system, and that it is in the interest of the people of the State of California to encourage the consolidation of the management and the facilities of small water systems to enable those systems to better address their water contamination problems. (HSC § 116760.10 (h))
4. States that no person or corporation shall merge, acquire, or control either directly or indirectly any public utility organized and doing business in this state without first securing authorization to do so from the PUC. Provides that any merger, acquisition, or control without that prior authorization from the PUC shall be void and of no effect. (Public Utilities Code (PUC) § 854)
5. States the intent of the Legislature is that transactions with monetary values that materially impact a public utility’s rate base should not qualify for expedited advice letter treatment. (PUC § 853 (d))
6. Defines "public water system" as a system for the provision of water for human consumption through pipes or other constructed conveyances that has 15 or more service connections or regularly serves at least 25 individuals daily at least 60 days out of the year. (HSC § 116275 (h))
7. Defines "state small water system" as a system for the provision of piped water to the public for human consumption that serves at least five, but not more than 14, service connections and does not regularly serve drinking water to more than an average of 25 individuals daily for more than 60 days out of the year. (HSC 116275 § (n))
8. Defines "disadvantaged community" as a community with an annual median household income that is less than 80 percent of the statewide annual median household income. (Water Code (WC) § 79505.5(a))
9. Declares that it is the established policy of the state that every human being has the right to safe, clean, affordable, and accessible water adequate for human consumption, cooking, and sanitary purposes. (WC § 106.3)

FISCAL EFFECT: Unknown.

COMMENTS:

Need for the bill: According to the author, "There are communities in California that lack access to clean drinking water. This is unacceptable. In many areas in the state, there are water systems that cannot afford – and are either unwilling or unable to raise rates sufficiently to make – the improvements necessary to provide drinking water to residents … The [PUC] must approve all water system consolidations that involve PUC-regulated utilities .. but the process is inconsistent and sometimes time-consuming … Accordingly, this bill will create a waiver for the current 18-month established time frame for applications and set deadlines for the completion of small water system voluntary consolidations that require PUC approval."

Drinking water regulation: The State Water Board regulates public water systems that provide water for human consumption and have 15 or more service connections, or regularly serve at least 25 individuals daily at least 60 days out of the year. A "service connection" is usually the point of access between a water system’s service pipe and a user’s piping. The state does not regulate water systems with less than 15 connections; county health officers oversee them. At the local level, 30 of the 58 county environmental health departments have been delegated primacy—known as Local Primacy Agencies (LPAs)—by the State Water Board to also regulate systems with between 15 and 200 connections within their jurisdiction. For investor-owned water utilities under the jurisdiction of the PUC, which is about 15% of the water systems statewide, the State Water Board or LPAs share water quality regulatory authority with PUC.

The State Water Board regulates approximately 7,500 water systems. About one-third of these systems have between 15 and 200 service connections. The number of systems with 14 or fewer connections is unknown, but estimated to be in the thousands.

Multiple causes of unsafe drinking water: The causes of unsafe drinking water can generally be separated into two categories: (1) contamination caused by human action, and (2) naturally occurring contaminants. In some areas, there are both human caused and natural contaminants in the drinking water.

Three of the most commonly detected pollutants in contaminated water in California are arsenic, perchlorate, and nitrates. While arsenic is naturally occurring, perchlorate contamination is generally a result of military and industrial uses. High concentrations of nitrate in groundwater are primarily caused by human activities, including fertilizer application (synthetic and manure), animal operations, industrial sources (wastewater treatment and food processing facilities), and septic systems. Agricultural fertilizers and animal wastes applied to cropland are by far the largest regional sources of nitrate in groundwater, although other sources can be important in certain areas.

Drinking water contamination in disadvantaged communities: The February 2018, University of California (UC) Davis report, "The Struggle for Water Justice in California’s San Joaquin Valley: A Focus on Disadvantaged Unincorporated Communities," summarizes drinking water issues facing disadvantaged communities in California as follows.

"In California, lack of access to clean, safe, and affordable water is a threat to public health and well-being, and violates the state’s newly codified Human Right to Water. In low-income communities located outside city boundaries (known as disadvantaged unincorporated communities or DUCs), drinking water is often unsafe to drink. In many such localities, drinking water is contaminated by industrial by-products (usually associated with agriculture, oil and gas production, transportation, and manufacturing) and compromised by inadequate wastewater treatment and disposal systems, as well as naturally occurring toxic substances like arsenic and uranium. Many DUC residents in the San Joaquin Valley pay a triple penalty to obtain safe water: they bear the health costs of unsafe drinking water; they purchase that unsafe water at high costs; and they must also purchase 'substitute' water—typically expensive bottled water—for drinking and cooking.

Lack of access to clean, safe and affordable drinking water has a racial and ethnic component: the vast majority of DUC residents are people of color who also face cumulative impacts from environmental contamination brought on by proximity to air pollution, pesticides, toxic facilities and waste disposal. Without city governments to directly represent their interests and provide essential services, residents of DUCs have been systematically deprived of access to important means of democratic governance."

While the 2018 UC Davis report focuses on DUCs in the San Joaquin Valley, the findings are consistent with a more expansive 2013 State Water Board report and 2012 UC Davis report that found that drinking water contamination in California disproportionally affects small, rural, and low-income communities that depend mostly on groundwater as their drinking water source. The 2013 State Water Board report found that 682 community public water systems in California, which serve nearly 21 million people, rely on contaminated groundwater as a primary source of drinking water. It also found that 265 community public water systems, which serve a little more than two million people, had received at least one drinking water quality violation within the last compliance cycle. The report points out that an additional two million Californians rely on groundwater from a private domestic well or a smaller groundwater-reliant system that is not regulated by the state. The State Water Board reports that currently approximately 330 drinking water systems are not in compliance with drinking water standards.

The 2018 UC Davis report also found that a significant number of DUC residents live close to an existing, and water quality compliant, community water system that could provide them with clean drinking water.

Urban disadvantaged water systems: A March 15, 2019 briefing paper (Paper) from the UCLA Water Resources Group noted that the Legislature and Governor have made a strong commitment to rural water systems, but have not provided as much information about urban disadvantaged water systems. The Paper noted that Los Angeles County (LA County) has 210 community water systems, with 64 water systems serving either disadvantaged or severely disadvantaged communities. It estimates that these 64 disadvantaged urban water systems could be serving close to 1,000,000 people. One of the key points of the Paper is that there is very little information about these urban water systems, and whether or not they have the technical and managerial expertise to provide clean safe drinking water to their customers. In one recent example in Compton, that State Water Board appointed LA County to take over the administration of the Sativa Water District (District), and LA County discovered that the water system operated by the District was failing and that the District had a compliance order that would take 12 years of its revenues for compliance costs to enact.

Consolidation of water systems: According to the US EPA, restructuring can be an effective means to help small water systems achieve and maintain technical, managerial, and financial capacity, and to reduce the oversight and resources that states need to devote to these systems. The State Water Board maintains that consolidating public water system and extending service from existing public water systems to communities and areas that currently rely on under-performing or failing small water systems, as well as private wells, reduces costs and improves reliability. Consolidation does this by extending costs to a larger pool of ratepayers.

Authority to require consolidation of public water systems: Effective June 24, 2015, SB 88 (Senate Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2015) authorized the State Water Board, when a public water system or state small water system serving a disadvantaged community consistently fails to provide an adequate supply of safe drinking water, to order that system (referred to as a subsumed water system) to consolidate with, or receive an extension of service from, a compliant public water system (referred to as the receiving system). While for many years the state's drinking water program had encouraged voluntary consolidation of public water systems, the authority granted by SB 88 allows the state to mandate the consolidation of water systems where appropriate.

The following year, SB 552 (Wolk, Chapter 773, Statutes of 2016) expanded the State Water Board’s authority by enabling it to, in order to provide affordable, safe drinking water to disadvantaged communities and to prevent fraud, waste, and abuse, contract with a competent administrator to provide managerial and technical expertise to that system, if sufficient funding is available. SB 552 also authorizes the State Water Board to order the designated public water system to accept administrative and managerial services, including full management and control, from an administrator selected by the State Water Board.

Since 2016, the State Water Board has ordered the consolidation of three public water systems with an additional five water systems consolidating voluntarily.

Public Water System and Consolidation Act of 1997: As it relates to public water utilities, state law requires these systems to obtain PUC approval to merge with or buy another public utility or to sell useful utility property (PUC §854(a)). Water system consolidations under the jurisdiction of the PUC are semantically considered acquisitions and mergers, and the approval of those transactions differ from those at the State Water Board.

The Legislature enacted the Public Water System Investment and Consolidation Act of 1997 (Act) to provide water corporations with an incentive to acquire public water systems needing improved infrastructure to meet increasingly stringent safe drinking water laws and regulations. The Act does this by requiring the PUC to use the standard of fair market value when establishing the rate base value for the distribution system of a public water system acquired by a water corporation, and to use this value for rate setting.

The PUC conducts proceedings to consider applications for authority to merge with or acquire another public utility or to sell a public utility water system, to operate an acquired water system, to include acquired water systems in rate base, to establish tariffs for an acquired water system, and to make other related requests.

The PUC uses two methods for approving PUC-regulated water system consolidations:

1. Applications – where the consolidation involves the acquisition of a PUC-regulated public water system by another PUC-regulated public water system; and,
2. Advice Letters – where the consolidation involves the acquisition of a public water system not regulated by the PUC and where certain conditions are met.

From 1998 (when the Act became effective) through 2016, covered water corporations sought approval to acquire 19 water systems. Thirteen of these requests were made by application, while six were made via Advice Letter.

Currently, applications undergo a formal legal process with an administrative law judge (ALJ) and start with an 18-month time line (although the ALJ or the Assigned Commissioner can extend this deadline indefinitely). Applicable Advice Letters can be processed and approved by the PUC in much less time – sometimes less than four months. The PUC can and has granted requests to require that water utilities file applications for acquisitions of municipal water systems instead of Advice Letters, particularly if there may be rate impacts for either the existing system’s customers or the acquired system’s customers.

Office of Public Advocates: The Public Advocates Office (Office) is an independent organization within the PUC that advocates solely on behalf of utility ratepayers. The Office represents the public interest and benefits of utility customers in water utility acquisition and other PUC proceedings. The Office is often the only party in these proceedings other than the buyer and seller.

The Office has a very important role in overseeing these consolidations. However, the Office is currently understaffed with only one staff person primarily dedicated to supporting its participation in water utility acquisition proceedings. All other Office staff in the Water Branch are fully dedicated to supporting advocacy in water general rate case proceedings. According to the Office, staff spends an average of 985 hours per year advocating in each water utility acquisition proceeding. With current resources, the Office can only effectively participate in two water system acquisition proceedings at any given time. This contributes to delays in approving water utility consolidations.

Other delays: The PUC's process for reviewing voluntary system consolidations is inconsistent and often time consuming. It is not unusual for the approval process to take as long as 24-months, even when, in the case of a challenged system, the residents of a town or city have voted to have the system consolidated by the PUC-regulated water utility.

Many factors are impeding faster approval times. The volume of work on the PUC, limited staff resources dedicated to water utility issues, the workload of the ALJs, as well as the nuances of individual consolidation cases, can impact approval time.

Timing: Since 2013, thirteen PUC-regulated water systems have requested consolidation from the PUC. The average amount of time to approve a request is 314 days – nearly a year from when the application or Advice Letter was submitted. Six of those thirteen are still pending.

While consolidations under current law are not as frequent as they are under State Water Board law, the number of applications to the PUC will likely continue to grow on an annual basis because acquisition of small, distressed water systems by larger, better-managed systems is necessary to ensure delivery of safe and reliable drinking water across the state. Therefore, a delay in consolidation can lead to a delay in access to clean drinking water from some Californians.

While many applications on other matters before the PUC (e.g. general rate cases) use the 18-month time frame, the author believes the issues involved in a small system consolidation should not warrant a drawn out proceeding, especially when water quality compliance or technical, managerial and financial challenges increase the risks for water utility customers.

AB 1715 would require the PUC to approve or deny an application within eight months of its filing, and would also require the PUC, absent incomplete documentation, to approve or deny an advice letter within four months of its filing by the applicant water or sewer system corporation.

If those timeframes do not suffice for the work of the Office, or for any other reason, the PUC's judicial process allows for time extensions pursuant to the overseeing judge's discretion. Therefore, should an application, or the PUC, need more time to process a request for consolidation, additional time could likely be granted.

Related legislation:

1. AB 508 (Chu). This bill would further implement the provisions from AB 2501 regarding domestic wells and fees imposed on new and existing customers for increase groundwater use following a consolidation or extension of service. It will be heard in the Assembly Environmental Safety & Toxic Materials Committee on April 9, 2019.
2. AB 2339 (Gipson, Chapter 866, Statues of 2018). This bill authorizes the City of El Monte, the City of Montebello, and the City of Willows to sell its public water utility through an alternative simplified procedure for the purpose of consolidating with another public water system.
3. AB 2501 (Chu, Chapter 871, Statutes of 2018). This bill provides additional authority to the State Water Board to order consolidations.
4. SB 552 (Wolk, Chapter 773, Statutes of 2016). This bill expands the State Water Board’s authority by enabling it to, in order to provide affordable, safe drinking water to disadvantaged communities and to prevent fraud, waste, and abuse, contract with a competent administrator to provide managerial and technical expertise to that system, if sufficient funding is available. SB 552 also authorizes the State Water Board to order the designated public water system to accept administrative and managerial services, including full management and control, from an administrator selected by the State Water Board.
5. SB 88 (Senate Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2015). This bill authorizes the State Water Board, when a public water system or state small water system serving a disadvantaged community consistently fails to provide an adequate supply of safe drinking water, to order that system (referred to as a subsumed water system) to consolidate with, or receive an extension of service from, a compliant public water system (referred to as the receiving system).

REGISTERED SUPPORT / OPPOSITION:

Support

California American Water, a wholly owned subsidiary of American Water Works

City of Bellflower

City of Perris
Liberty Utilities
Sierra Club

Opposition

None on file.

Analysis Prepared by: Paige Brokaw / E.S. & T.M. /