Effective January 1, 2012, California law imposes new requirements on mutual water companies that own and operate a public water system. Adopted as Assembly Bill 54 (Solorio), and codified at several places in the California Corporations, Government, and Health and Safety Codes, the new requirements are intended to improve the quality of water served by domestic mutual water companies throughout the state. Assemblyman Solorio introduced the bill in response to failure of technical, managerial and financial capacity at the Diamond Park Mutual Water Company in Santa Ana, although that company is in the process of being dissolved after connection to the City of Santa Ana water system.
The new statute departs from existing law in several ways. First, it includes a legislative declaration that “[r]egardless of the form of the organization that operates a public water system, these organizations provide a public service that remains one of the core duties of the people’s government.” Defining the business of a mutual water company as a “public service” is directly counter to a long history of court decisions that recognize the private nature of mutual water companies. It is that purely private nature that allows mutual water companies to remain exempt from regulation by the California Public Utilities Commission (CPUC). The legislative declaration that mutual water companies may be providing a public service is legally questionable, as well as unnecessary for improved oversight of public water systems that happen to be mutual water companies. While Assemblyman Solorio and the Legislature may not have intended to interfere with historical legal doctrines regarding mutual water companies, it is not hard to see some mischief growing out of that declaration in future.
Second, by declaring the distribution of water to be “a public service that remains one of the core duties of the people’s government,” the Legislature has made a bold statement on a question that is widely debated among legal and policy experts. While the 20th Century saw substantial growth in the provision of water services by local governments in California, the same is not true globally or historically, where water service is frequently (and successfully) provided by the private sector subject to public regulation. While there are some civil society activists who argue that water service should be provided exclusively by the government, by no means is that a universal opinion, and the California Legislature’s declaration that water service is a core duty of government appears either ill informed or out of place in a statute that addresses only the relatively tangential matter of mutual water company operations.
Third, AB 54 subjects mutual water companies to a broad range of regulation by the Local Agency Formation Commission (LAFCO) in each county. Traditionally, LAFCOs have provided limited oversight of local government entities that provide water service, while the CPUC has comprehensively regulated the operations of investor-owned utilities. Mutual water companies have not been regulated by either of those agencies, although they have been subject to regulation by the California Department of Public Health if they operate a public water system, the California Department of Real Estate if they are formed to serve a residential subdivision, and the California State Water Resources Control Board related to water rights.
New Corporations Code § 14301.1 requires that each mutual water company submit to the LAFCO for its county a map showing its service area by December 31, 2012. In addition, a mutual must respond to a request for non-confidential information from a LAFCO in conjunction with that agency’s preparation of a municipal service review or sphere of influence. The statute does not require the mutual to undertake a new study or investigation, but merely turn over information already generated. It also does not require a mutual to disclose information about shareholders, such as their names, addresses or water usage.
New Government Code § 56375(r) grants authority to a LAFCO to approve the annexation of a mutual water company’s service area to a city or special district. This provision does not insulate a city or district from having to pay just compensation for any mutual water company property taken by eminent domain, including, apparently, any compensation due under the Service Duplication Law (Cal. Pub. Util. Code §§ 1501 et seq.).
New Government Code § 56430(c) and (d) allows a LAFCO conducting a municipal service review to investigate whether a mutual water company that operates a public water system is in compliance with the federal and state Safe Drinking Water Acts. This new power overlaps with the existing jurisdiction of the Department of Public Health over public water systems.
Under the new law, Corporations Code § 14300(b) defines a mutual water company as the type of corporation described in § 14300(a), i.e., a “corporation organized for or engaged in the business of selling, distributing, supplying, or delivering water … only to owners of its shares.” Previously, the California statutes did not include a definition of the term “mutual water company,” although there was a common understanding of what constituted such a company. This is a minor, and possibly helpful, clarification.
New Corporations Code § 14301.3(a) requires that all improvements to a public water system owned by a mutual water company be designed and constructed in accordance with the California Waterworks standards found in Chapter 16 of Title 22, California Code of Regulations. New Corporations Code § 14301.3(b) requires that a mutual water company maintain financial reserves at a level sufficient to repair and replace its facilities in compliance with the federal and state Safe Drinking Water Acts (42 U.S.C. §§ 300f et seq.; Cal. Health & Safety Code §§ 116270 et seq.). These are helpful changes in the law and directly support the provision of high quality water supplies without challenging the nature of mutual water companies.
Lastly, new Health and Safety Code § 116755 requires that each board member of a mutual water company complete a two-hour training course within six months of joining the board, or by December 31, 2012 if already serving on the board as of the effective date of AB 54. The course must cover the duties of board members, including: the fiduciary duty of a corporate director; avoiding conflicts of interest; the duty of a public water system to provide clean drinking water; and long-term management of a public water system. A qualified trainer may include a California attorney, a person accredited under ANSI/IACET 1-2007, or a program sponsored by the Rural Community Assistance Corporation or California Rural Water Association.
During 2012, I will be offering the required training to mutual water company board members in several cities. Please contact me at email@example.com if you are interested in participating in one of those sessions, or to schedule a training course for your board as a group. That training will include all required topics, as well as an overview of the laws related to mutual water companies, water rights and water quality. I look forward to seeing many of you during this year.