The Trinity River near Salyer, CA

The California Public Utilities Commission (CPUC) has approved acquisition of the water system assets of Riverview Acres Water Company (RAWC) in Trinity County by Salyer Mutual Water Company (SMWC). The CPUC decision in Resolution No. W-4923 sets forth the criteria for transferring a water system from an investor-owned water utility to a mutual water company and illustrates the relatively favorable view of such transfers by the CPUC.

The acquisition is intended to allow the owner of RAWC to retire due to health and financial problems that prevented his adequate maintenance of the system; he had owned and operated the water company since 1978. This is not an uncommon occurrence for small Class C and D investor-owned water and sewer companies in California, since many are family businesses without any significant investment value. The lack of value in small water and sewer systems makes their management and operation difficult, because it means they have relatively low access to capital for infrastructure maintenance and improvements. Sometimes the family owners of such systems must pledge their personal assets in order to obtain bank financing, which obviously discourages investment. Once a water system becomes unable to obtain capital, it begins a vicious cycle of undercapitalization and lack of maintenance. In addition, small systems do not enjoy any economies of scale in the purchase of labor or materials, such as water treatment chemicals.

In response, the CPUC tends to look favorably on acquisitions of small water and sewer systems by entities that have a better chance of successfully managing the water systems, such as larger Class A or B investor-owned utilities, public agencies or mutual water companies. The CPUC requires that the sale of a public utility must be indifferent to ratepayers, and also requires the buyer to demonstrate that the acquisition yields a tangible benefit to ratepayers. In the case of sale and acquisition of small, inadequately maintained water systems like RAWC, those standards are easily met as long as the buyer has the technical, managerial and financial capacity to own and operate the system effectively and has obtained all required permits, primarily from the California Department of Public Health. In Resolution No. W-4923, the CPUC had no difficulty finding its standards to be met for sale of the RAWC water system to SMWC.

Helpfully, the CPUC has found that the transfer of ownership from one entity to another does not constitute a “project” under the California Environmental Quality Act (CEQA), thus avoiding costly and time-consuming environmental review. This is true as long as the transaction does not involve any new construction, changes in the source of water supply or other physical action that may have an impact on the environment. The exemption is based on CEQA Guidelines Section 15061(b)(3), which declares that “[a] project is exempt from CEQA if … it can be seen with certainty that there is no possibility that the activity in question may have a significant effect on the environment.”