I have received many comments and questions on my earlier post about California Mutual Water Company Basics. In order to protect the privacy of questioners, I have responded to most individually rather than on this blog. In the belief that there may be value in providing answers to some of the most frequently asked questions here, this post elaborates on a few issues regarding mutual water companies.

On what matters of corporate management do mutual water company shareholders get to vote? Mutual water companies are governed like other corporations. In fact, mutuals are not formed according to special provisions of the California Corporations Code, but are normally formed as either general corporations or nonprofit mutual benefit corporations as may be appropriate under the circumstances. Corporate governance rules dictate that the shareholders or members of a corporation normally only vote in the election of directors, and the board of directors has the authority and obligation for all day-to-day management of the company. Day-to-day management includes water resources management, personnel decisions, capital improvements, financing and water rates. There are limited exceptions, such as the sale of substantially all assets and dissolution of the corporation, but these occur rarely in the life of a company. Instead of voting, a shareholder who wishes to change company management must seek to participate in the governance process, most notably through influencing the board of directors. In a well-run mutual, directors should always be available to discuss operations of the company with shareholders. If the directors are not responsive to the needs of shareholders, there is a process for removal of one or more directors. Note that the first place to look for internal governance rules is the articles and bylaws of each mutual.

Can a mutual lease shares to non-shareholders? Absent a contrary rule in its articles or bylaws, a mutual may deliver water to lessees of either shares or property to which shares are appurtenant. A mutual must be very careful about such deliveries, though, so that it is clear the mutual is not delivering or offering to deliver water to the public, with shares as a façade. A mutual is required to collect and maintain copies of all leases of shares or property in case a court or the California Public Utilities Commission (CPUC) asks to inspect the mutual’s records. If a mutual is going to deliver water to lessees, I recommend having the board of directors draft and diligently apply an official policy, with review by a knowledgeable attorney.

How does a developer turn over control for a mutual formed as part of a land subdivision? When a developer forms a mutual water company as part of a land subdivision, the developer may continue to control the mutual as long as lots remain unsold. This rule was established so that a developer does not become hostage to a poorly run mutual in the sale of final lots. However, if the sale of lots is taking an unreasonable amount of time, the developer should turn over control to the mutual shareholders on such reasonable terms and conditions as needed to protect the developer’s economic interests. This can be a difficult process, and the best solution will vary widely based on the number of lots, the relative experience and expertise of the developer and shareholders, and many other factors. In a well-planned mutual, there will be a control agreement between the developer and the mutual with terms related to the transition of control, including a time limit on developer control. While there is no hard and fast rule, generally speaking a developer should be able to cede control within five years, and in many cases much earlier.

What does “at cost” mean for operation of a mutual water company? The concept of operation “at cost” is part of the test for exemption of a mutual water company from CPUC jurisdiction. Nonprofit operation is part of the basic notion of a mutual being truly “mutual” in character, as opposed to a profit-seeking business. In practice, however, mutuals have great leeway regarding what constitutes “at cost” operation. For example, a mutual may determine its own revenue requirements and design its own rate structure, including stand-by, fixed service and commodity charges. A mutual may collect and build reserves, at levels determined in the discretion of the board of directors. A mutual may take actions to encourage water conservation, including the development of conservation pricing, with increasing block rates. A mutual may enter into an agreement to transfer water to non-shareholders at different rates than are charged to shareholders, although such transactions must be carefully structured. In order to determine whether a mutual is being operated at cost, all these revenues must be compared to company expenses (including taxes and depreciation, if any). As long as a mutual is actually delivering water to its shareholders on a regular basis and does not pay any dividends, it probably will not fun afoul of the requirement to operate at cost. As always, though, the outcome in any particular case will depend on the totality of the circumstances, which I cannot address here.

I hope the FAQs above are useful to some of my readers. If you have questions that are not answered here, or are specific to your mutual water company, please contact me.

16 comments

  1. If yhour By laws say you can not sale water to anyone but shareholders but you are a mutual also they say they can where do you go to get answers? Do they have to follow any of the By laws they pick and choose which ones to go by

    1. Together with the articles of incorporation, the bylaws establish and limit the powers of the corporation, with some exceptions. This is true for mutual water companies, as well as other types of business corporations. The exception is that a corporation may also be granted certain powers by statute, regardless of whether those powers are listed in the articles or bylaws, and the corporation may take any actions that are necessary to accomplish expressed powers. A mutual water company must operate in accordance with its bylaws, and cannot “pick and choose,” but the bylaws may not be interpreted narrowly.

      The specific provision you reference, related to sale of water only to shareholders, is required for the articles and bylaws of a mutual water company that delivers water for domestic uses, pursuant to Cal. Corp. Code § 14300(a). That code section also, provides, however, that notwithstanding such a restriction, a mutual may deliver water to the state, a school district, any public agency, another mutual water company, or during an emergency any other person. In addition, a mutual may be able to deliver water to others based on common law rules, or arrangements that pre-dated the relevant language in § 14300(a). As you can see, there are many specific factors that would be needed to determine whether any particular mutual water company is able to deliver water to a particular non-shareholder.

  2. I am in California I am in the same place it clearly states in the By Laws If you are not a certificate holer/ Member they can only sale water to the member owner certificate holder. They want to place a 100.00 deposit to anyone who rents the property and put the bill in there name they dont pay the property owner gets the bill. and all back assessment fees
    Is there any help In california they dont even get leasess or rental agreements

    1. While a mutual water company is organized for the purpose of delivering water to its members, it may deliver water to certain other people, such as those who lease property from a member. A mutual water company has the authority to make such a delivery, and it will not affect the company’s exemption from CPUC jurisdiction. In order to maintain the CPUC exemption, the company is supposed to obtain and maintain copies of the lease, etc., but in practice that is rarely done. In addition, the maintenance of such records does not affect the ultimate reason for the CPUC exemption, which is that the company has not dedicated its water or assets to public use. While it would be good for a mutual water company to maintain such records, in reality it probably does not make a substantial difference in the residential context. (It would make a difference for irrigation mutuals that do not have appurtenant memberships.)

      That said, the better practice probably is for the mutual company to keep all water bills in the member’s name, and let the member collect from the lessee. Otherwise, the member can get stuck with the lessee’s delinquent bill when the lease ends, and other similar problems. It’s not a hard and fast rule, but it does seem to be practically easier for a mutual water company.

    2. thank you I did get stuck with a 500.00 water bill I still think if they put the bill in that persons name then that person is responsible for that bill not the home owner thank you for your time this clears it all up

    3. You are correct that the person who should be responsible for the bill is the renter, but unfortunately the water company has no ability to collect once they have moved. Since mutuals are typically fairly small in size, they have a harder time just writing off unpaid charges than large water utility districts or companies, so they don’t have any recourse besides collecting from the landlord, who is the official member of the mutual water company.

  3. Thank you for your invaluable insight on mutual water company issues.

    We have a neighborhood (i.e. volunteer officers) private mutual water company (A CA corp) serving 60 households that recently made a $6,000 assessment on member households for a replacement well. Some households have not paid. We do not have a formal delinquency policy established and do not want to shut off domestic water. We want to file a lien to protect our interests. It is difficult to determine what CA code sections or rules apply to our situation and what procedures are appropriate to file a lien. Any suggestions/direction would be appreciated.

    1. A lien for delinquent assessments would be made against the shares of the company. If your shares are appurtenant to land (which they should be in the residential context), a lien is automatically in place under Cal. Corp. Code § 14303, and should also be according to your articles of incorporation or bylaws. It is important to have policies in place regarding how collections of delinquent assessments and water bills will be made, and to follow the process as closely as possible even though variations generally will not invalidate the assessment. There are many differences in the way mutual water company articles, bylaws, rules and regulations are drafted, so the process depends somewhat on your specific documents. Feel free to contact me directly with specific questions.

      Wes

  4. This blog provides great insight into mutual water companies.
    A shareholder with a local mutual water company purchased a vacant property in 1980 and never paid the monthly assessments.The mutual water company never filed a lien on the property. The original owner sold the property and the back assessment was never reported on any title report, etc. The back unpaid assessments were for 26 years. The new property owner purchased the property in 2006, and did not learn about the back assessment until he put the property up for sale in 2011. The mutual still has not filed a lien. Is the new property owner responsible for the back assessments for the previous 26 years before purchasing the property?

    1. Thanks, I hope that it proves useful to companies and their members.

      In the situation you describe, obviously there are some equities that suggest the new property owner should not have to pay for 31 years of back assessments. On the other hand, if the property owner is getting the benefit of partial ownership of a water system, they should pay their fair share. Without thinking about it very much, the statute of limitations likely bars suit back beyond three or four years. Given that the company did not diligently seek payment, a middle ground would seem to be a fair outcome. Exactly how you determine where the liability starts and stops depends on the specific facts in the situation. Good luck.

      Wes

  5. I am wondering about online payments from customers to these mutual water companies. I recently received a late payment statement so I got online and did online banking. This banking process will deliver the day after the water is supposed to be shut off. However it is in route to them, I cannot help the bank go faster. I also have never missed a payment and when I called to negotiate and explain the payment is on its way, the manager told me I need to learn to pay my bills and hung up on me. I cannot have the water turned off.. I printed up the bank statement that shows the payment has been sent… Is this going to be good enough ? I always pay double the amount in order to stay ahead, but one time I slip and I get hung up on and it is not like I am not going to not pay them, the payment has left my bank, but cannot be delivered til the day after shut off and they are closed on Fridays so I wont have water all weekend . I feel this is not right..

    1. There is no standard legal rule regarding the timing or handling of late payments. A mutual water company may establish rules and regulations for matters like this at the discretion of the board of directors. You would need to review the rules for your mutual company. That said, many small mutuals are run more like neighborhood groups, and they can be more flexible than larger utility companies or agencies that must apply the rules uniformly and strictly. I recommend being as polite as possible when asking for accommodation.

  6. Interpretation of Bylaws and possible erroneous reference to California Codes: We are a shareholder in a small rural MWC (50 connections) where the past practice has been to have all 50 shareholders pay an EQUAL amount toward our system improvement and replacement (reserves) fund based on the following Bylaw wording:

    The Board of Directors shall establish a rate structure
    which will result in the accumulation and maintenance of a fund
    for the improvement and replacement of the Company’s water system
    (“Reserves Fund”). The bi-monthly rate charged shall bear a
    reasonable relationship to the cost of replacing water system
    assets in accordance with a long-term plan approved by the Board
    of Directors. Unimproved lots within the Company’s service area shall
    bear the same proportionate share of the bi-monthly
    Reserves Fund assessment as that borne by improved lots within
    the Company’s service area.

    Thus we have a very large bi-monthly “Reserves” flat fee that everyone pays and a very inexpensive rate structure for the amount of water used. We see that other MWC’s choose to interpret “bear the same proportionate share” as being based on the proportionate amount of water used rather than an EQUAL same-cost share. Thus, those shareholders that use the most water will pay the most into the Reserves fund. In our case, everyone pays an equal amount into the Reserves fund independent of how much or how little water we use.

    Our board has always taken the position that this EQUAL payment into reserves is a “requirement of CA state codes.” We can find no such code requirement.

    Has our MWC been misinterpreting the meaning of “proportionate” share all this time, or are other MWCs violating some state code requiring equal payment by all shareholders into the Reserves Fund?

    1. The provision in your bylaws is similar to, but not exactly the same as, the language in California Corporations Code section 14312(a)(13)(B), which requires the inclusion of certain language in the articles or bylaws of a mutual formed in connection with the subdivision of land after January 1, 1998. That section may or may not apply to your mutual.

      Not knowing all the circumstances of your company, I cannot say whether the provision in your bylaws is the best practice, or whether the board’s interpretation is correct. If you would like further guidance, please contact me directly by phone or email.

  7. Can a mutual water company enter into a joint powers authority (JPA) agreement with one or more public agencies in California?

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