I have noticed that a number of readers find their way to my blog seeking information related to California mutual water companies. In an effort to respond to that apparent demand, this post is devoted to some of the basics of those organizations. There are many nuances and other laws I will not mention in this post; for those you’ll have to contact me, since there are many considerations relevant to mutual water company operations and disputes.
In California, there is no specific statute under which mutual water companies are formed or governed; mutuals are created pursuant to the various general corporation statutes. Mutuals are most commonly formed as general corporations (Corp. Code §§ 100 et seq.) or as nonprofit mutual benefit corporations (Corp. Code §§ 7110 et seq.), although other structures are sometimes used for tax or other reasons. There are some special corporate laws found in Corp. Code §§ 14300 and 14310, but those supplement rather than supplant the general corporate laws. Because the method of forming mutual water companies is ordinary, so are most of the rules regarding their internal governance. The typical corporate governance rules apply to board elections and actions, ownership of property, assessments and other corporate activities.
One key question is whether a mutual water company is subject to the jurisdiction of the California Public Utilities Commission (CPUC). That is important because the CPUC comprehensively regulates those companies within its jurisdiction, controlling their provision of water service, acquisition and disposition of property, water rates and capital structure. A regulated water company is commonly referred to as an investor-owned utility. Use of the term “mutual water company” does not mean that a company is truly operating outside the scope of CPUC jurisdiction. It is not uncommon for companies that refer to themselves as mutuals to be acting as regulated companies, sometimes without CPUC authorization, i.e., illegally.
In order for a mutual water company to legally avoid CPUC jurisdiction, it must meet one of two tests. First, there is a statutory safe harbor in Public Utilities Code § 2705, which provides that a company is exempt from CPUC regulation if it delivers water exclusively to its shareholders at cost. A mutual may deliver water to certain non-shareholders, such as lessees of lands from shareholders, schools, public agencies or other mutuals in emergencies, as part of water acquisition transactions, or as part of water transfers. Those exceptions must be applied carefully so that a mutual does not inadvertently subject itself to CPUC jurisdiction. I recommend a hard look at any transaction involving non-shareholders.
The second test grows out of the original legal basis for CPUC jurisdiction over utilities, i.e., that a utility is subject to public regulation because it holds itself out as serving the public at large, or dedicated its assets to public use. The common law test of whether a water company has dedicated its water supplies to public use is:
whether or not those offering the service have expressly or impliedly held themselves out as engaging in the business of supplying water to the public as a class, not necessarily to all of the public, but to any limited portion of it, such portion, for example, as could be served from its system.
Samuel Edwards Associates v. Railroad Comm., 196 Cal. 62, 70 (1925). See Richfield Oil Corp. v. Pub. Util. Comm., 54 Cal.2d 419, 425 (1960), cert. denied sub nom. Southern Counties Gas Co. of California v. Pub. Util. Comm., 364 U.S. 900. This exemption from CPUC jurisdiction is less certain in its application than the statutory exemption, but there have been a number of court decisions establishing bright line rules. It is necessary to consult legal counsel for questions related to whether any particular water company is subject to CPUC jurisdiction.
Mutual water companies may deliver water to their shareholders for agricultural irrigation or domestic uses, but rarely does a company provide both kinds of service. Agricultural mutuals are common in the Central Valley and other rural areas of California, and domestic mutuals have often been formed in conjunction with land development outside the urban core of cities. Mutuals have been used throughout the history of California, and well over 500 exist in the state today.
One question related to agricultural mutuals that is frequently asked is whether water rights are owned by the mutual or by its shareholders. Either arrangement is possible, depending on the manner in which the mutual was formed and the way in which the water rights were acquired. It is much more common that the water rights are owned by the mutual, but there are a few examples where the shareholders own water rights directly. Even when a mutual holds the legal title to water rights, however, it does so on behalf of the shareholders, and there are a number of rules regarding that fiduciary duty. The key conclusion in such a case is that a shareholder may not transfer water pursuant to its shares without the approval of the mutual, since each shareholder’s right to water is subject to the rights of the other shareholders in the mutual structure.
As one can see from the discussion above, there are many permutations related to the formation, governance and operation of mutual water companies in California. In general, mutuals in the state function well, although they can be subject to the same dysfunctionalities as any small, self-governed organization.
The discussion above focuses on mutual water companies in California. The laws in other western US states are similar, although there are some distinctions, especially regarding the scope of public regulation. Mutual companies exist in Arizona, Colorado, Nevada, New Mexico, Texas, Utah and elsewhere. Similar structures exist in rural communities in other nations also, with mutual irrigation organizations often being some of the oldest elements of civil society. Well-governed mutuals can represent the best of local sharing of water resources and provide good examples for broader water resource management methods.