5. Overview - The Major Issues in Context

The facts presented to the Commission in the course of this proceeding, and arguments about the law applicable to those facts, focus on three basic situations: charges for water service at submetered MHPs; charges for water service - and particularly, the method for allocating charges -- at multi-unit apartments which aren't submetered; and charges for sewer service. In each of these scenarios, the owner/operator of the MHP or multi-unit apartment is the customer of record of the water or sewer provider and the tenant (the end use residential consumer) is not.

The California Department of Housing and Community Development web site indicates that there are 5, 640 MHPs in California ( www.hcd.ca.gov). CMRAA provided a somewhat lower estimate in this proceeding (5,000 MHPs) and indicated that this lower figure represents close to 400,000 spaces. We have no useful approximation of the percentage of MHPs (or total spaces) located within the service territories of CPUC-regulated water and sewer utilities. Data on multi-unit apartments tend to be the product of estimates but at least one estimate suggests as many as 15 million Californians reside in them.³ We have been unable to independently verify estimates of the number of such apartments or the number of tenants they house.

Under existing law, the Commission directly regulates - as public utilities under § 216 and other provisions of the Public Utilities Code -- about 150 water corporations and about nine sewer system corporations. Information provided by CPUC-jurisdictional water corporations to the Water Division indicates that these water corporations provide only 20% of the potable water supply delivered to end use customers in California. ⁴ The remaining 80% comes from other water providers, such as municipal public utilities, municipal utility districts, public utility districts, and a limited number of private water sources, none of which this Commission regulates. Commission-regulated sewer corporations provide approximately 2,000 service connections, an extremely minor percentage of the total in California.

The recent interest in these water and sewer issues has been stimulated by changes in billing practices at some MHPs and multi-unit apartments and complaints about these changes. Landlord and tenant perspectives vary regarding the reasons (and motives) for these changes. The water issues are the most complex and have generated a large number of inquires, both prior to the issuance of this OII and subsequently. Questions from tenants at MHPs and multi-unit apartments predominate among the many letters, e-mail inquiries, and telephone calls the Commission has received. Some consumers merely seek basic information, which they allege the owner/operator has not divulged, such as the reason for assessing certain water charges and the basis for calculating them. Other consumers assert that they are being assessed improper, or illegal, charges for water service.

5.1 MHP Issues

The history at De Anza Santa Cruz Mobile Home Park (De Anza), a 200 site MHP subject to local rent control, illustrates the major controversy surrounding MHPs. (See, Application of MHC for a Certificate of Public Convenience and Necessity [Application of MHC], Decision (D.) 98-12-077 (1998) xx Cal. PUC xx.) De Anza, owned by MHC since 1994, receives water and sewer services from municipal systems owned and operated by the City of Santa Cruz. Prior to 1993, water and sewer costs at De Anza were rolled into the monthly rent charge. Application of MHC relates that in 1993, new owners (not MHC) installed submeters for each site and in conformance with Civ. Code § 798.41, which is part of the Mobilehome Residency Law, removed utility charges from rent and began billing separately for utility services, including water and sewer.⁵

The owners allocated sewer charges among spaces on a "pass through" basis (i.e. a pro rata allocation of the actual charges billed by the City). The resulting water bill per space included volumetric charges at the municipal water system's baseline rate of $0.65 per hundred cubic feet (Ccf), a $7.80 "readiness to serve" charge, and a 7% tax. These were the same charges at the same rates the municipal water system imposed on any residential customer located outside the MHP who received water directly from the municipal water system. De Anza paid a higher total volumetric charge than the tenants were billed (since $1.55 per Ccf, rather than the baseline rate, applied above 400 Ccf), but De Anza's paid a single "readiness to serve" charge of $217.50. Thus, the total submeter receipts exceeded, by about $1,500 per month, the amount the municipal water system billed De Anza.

The rent control board hearing officer agreed with the tenants that Civ. Code § 798.41 does not permit the levy, on a per space basis, of a "readiness to serve" charge and "tax" and that these amounts constituted a windfall de facto rent increase. The only allowable water charges, the hearing officer concluded, were actual submetered usage, plus a pro rata share of the "readiness to serve" charge, and tax, that De Anza actually paid. Ultimately, the Sixth District Court of Appeal, in an unpublished opinion, revised the refund calculation to ensure recovery of all of De Anza's volumetric charges but otherwise agreed with the hearing officer.⁶

Meanwhile, MHC filed an application at the CPUC in which it expressly stated its intention to dedicate both its submeter water system and its sewer system to public service, acquire public utility status and then levy the water rates authorized by the CPUC. After evidentiary hearings, the Commission granted a Certificate of Public Convenience and Necessity (CPCN) to MHC, albeit with some stated reluctance. The Commission concluded that the financial and management resources available to MHC placed it in a different league than other, troubled Class D water utilities. Nonetheless, Commission and legislative policy of recent years has encouraged consolidation of very small water and sewer utilities with larger, more stable entities -- not the creation of additional small utilities - and the Commission expressed concern that other MHP owners might follow MHC's example. (Application of MHC, supra, D.98-12-077 at p. 31.)

Though the Commission's CPCN proceeding is closed, De Anza's history is still being written. GSMOL reports that the City of Santa Cruz has refused to grant De Anza permission to resell municipal water and sewer services under the tariffed rates approved by the Commission in Application of MHC and that the dispute between the two is pending in the federal courts.

5.2 Issues at Multi-Unit Apartments

From the standpoint of the apartment lobby, increases in water costs, coupled with the absence of any conservation incentive when consumption isn't metered, necessitate removing water costs from rent and separately allocating water costs among rental units. By comparison to MHPs, few multi-unit apartments are submetered and water charges (like sewer charges) typically have been subsumed in rent. The apartment lobby argues that it would be a costly proposition to install separate, direct meters or submeters at existing multi-unit apartments using the metering technologies currently required by law. The apartment lobby also argues that unmetered water usage promotes waste and that a proxy for metered consumption is necessary to promote conservation and cover increased water costs. Typically, landlords use apartment square footage or number of tenants per unit as proxies for usage and impose a separate water charge on that basis. These proxies are generally known as "RUBS", or Ratio Utility Billing Systems. Apartment tenants complain the proxies are flawed and assert that owners are looking for additional profit centers and in some cases, for a way to circumvent the rent increase limitations imposed by local rent control ordinances.

5.3 Basis of CPUC Jurisdiction

The CPUC's power to regulate water and sewer corporations as public utilities relies on legislative grants, pursuant to sections 3 and 5 of Article XII of the California Constitution, which expand upon direct constitutional grants conferred by other provisions of Article XII.⁷

As Witkin succinctly states, "[t]he Commission's jurisdiction extends only to regulation of privately owned utilities; in the absence of express statutory provision, it has no jurisdiction over municipally owned utilities." (Witkin, 8 Summary of California Law, 9^th Edition, Constitutional Law § 892, p. 436, emphasis in original.) Moreover, in County of Inyo v. Pub. Util Comm., the California Supreme Court held that absent an authorizing statute, the CPUC lacked jurisdiction to regulate the rates the Los Angeles Department of Water and Power (LADWP), a municipally owned public utility, charged for water service to nonresidents in Inyo County (Inyo). Inyo had argued that, in making sales outside its municipal border, LADWP was acting as a private corporation. The Supreme Court noted that not only does § 10005 expressly permit a municipal corporation to sell outside the corporate limits, but no statute grants

the CPUC authority to regulate the rates for such sales. (County of Inyo v. Pub. Util Comm., (1980) 26 Cal.3d 154, 166.) The Supreme Court opined, however:

"Possible legislation conferring PUC jurisdiction over municipally owned water corporations, selling beyond municipal borders or even within such borders, would fall clearly within the scope of present article XII, section 5." (Id. at 164, emphasis added.)

The Legislature has not conferred upon the Commission authority over municipal utility water or sewer sales to date; neither has is it conferred such authority over sales by municipal utility districts or public utility districts. ⁸

Where a MHP or a multi-unit apartment obtains water or sewer service from a Commission-regulated public utility, and then separately bills for that service, many consumers and some of the parties to this proceeding presume the Commission has jurisdictional oversight of that activity, without limitation. Many consumers, as well as some parties, also assume CPUC jurisdiction where the water provider to the MHP or multi-unit apartment is part of that non-jurisdictional group that supplies 80% of California's potable water. They reason, under both scenarios, that in reselling the utility service to an end use consumer, the MHP or multi-unit apartment owner/operator is performing a public utility function as a de facto public utility.

In Sections 6, 7 and 8 of this decision, respectively, we examine the relevant statutory provisions of the Public Utilities Code as they apply to submetered water service at MHPs, water allocation methodologies at non-submetered multi-unit apartments, and to sewer service charges at both. First, however, we review the import for this proceeding of the common law doctrine which requires that an entity dedicate its property to public use before it can be deemed a public utility subject to the jurisdiction of the CPUC.

5.4 Dedication of Property to Public Use

Reviewing the historical evolution of the dedication doctrine in a 1994 decision, the Commission stated:

Beginning in 1912, California courts ruled that in order to be subject to regulation as a public utility, an entity must not only satisfy the express definition of the Constitution and the PU Code, it must also meet an implicit prerequisite that it had dedicated its property to the public use. (See Thayer v California Development Co. (1912) 164 Cal. 117.) Dedication occurs if an entity "held himself out, expressly or impliedly, as engaged in the business of supplying [a service or commodity] 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 by his own system, as counterdistinguished from his holding himself out as serving or ready to serve only particular individuals, either as a matter of accommodation or for other reasons peculiar and particular to them." (Van Hoosear v Railroad Commission (1920) 184 Cal. 553, 554.).

However, as time passes the needs of society often change. By 1960, in Richfield Oil Corp. v Public Utilities Commission (1960) 54 Cal. 2d 419, the California Supreme Court commented that "[i]f we were called upon to decide the question for the first time in the light of modern principles of constitutional law, we would have serious doubts that the broad language of the . . . Public Utilities Act should be interpreted as including the limitation of dedication that the Court found in the constitutional provision it construed in the Thayer case." (54 Cal. 2d at 428.) The Court concluded that "the Legislature by its repeated reenactment of the definitions of the public utilities without change has accepted and adopted dedication as an implicit limitation on their terms." (54 Cal. 2d at 430.) The Court made clear, however, that the implicit requirement of dedication is not to be used to render the broad language of the definitions of "public utility" and "public or any portion thereof" in the PU Code superfluous. (Id. at 431.)

The California Supreme Court revisited the dedication requirement in Greyhound Lines, Inc. v Public Utilities Commission (1968) 68 Cal. 2d 406, 413, and again emphasized its limitations:

"The requirement of dedication as a condition precedent to regulation is not found in the statutes. This judicial doctrine, in its pristine form, was buttressed by constitutional principles which have now passed into history. Dedication continues to perform important functions in the interstices of the Public Utilities Code. But its raison d'etre is attenuated, and it would be inappropriate to extend its restraining power further than logic and precedent require."

Thus, the dedication requirement has survived, but only narrowly. (Pacific Gas & Electric Co. v. Dow Chem. Co., D.94-07-063, (1994) 55 CPUC 2d 430, 439.)

In that proceeding the Commission concluded that both Dow and Great Western, another entity with natural gas transmission and storage facilities, had implicitly dedicated their property to public service by their actions to serve various industrial gas transmission customers over the years with surplus gas. The Commission ordered the entities to cease and desist or file an application for a CPCN.

Whether or not dedication has occurred is a factual question. (Haynes v. MacFarlane (1929) 207 Cal. 529, 532.) Where dedication has occurred, it may be either express or implied and in the latter case, "it may be inferred from the acts of the owner and his dealings and relations to the property." (Cal. Water & Tel. Co. v. Public Util. Com. (1959) 51 Cal.2d 476, 494; see also Yucaipa Water Co. No. 1 v. Public Utilities Com. (1960) 54 Cal.2d 823.)

Over the years the Commission has examined the issue of dedication as it relates to services provided by a landlord to a tenant. The California Supreme Court's decision in Story v. Richardson remains the preeminent authority in such factual scenarios. (Story v. Richardson (1921) 186 Cal. 162.) In that case, the Supreme Court held that an office building owner was not acting as a public utility though he maintained boilers, pumping engines, hot water heaters, and other equipment in the office building basement for the purpose of supplying tenants with light, heat, and hot water service. (Id. at 166.) The owner was "not engaged in the sale and distribution of electricity to the public at large or any portions thereof" the Supreme Court said, emphasizing that the equipment within the building was designed "primarily and pre-eminently for supplying service to the tenants of the building" and that the owner used his property "solely in a private enterprise." (Id. at 166, 167, 168.)

In Barnes v. Skinner, the Commission held that owners of a tract of land containing rental homes had not dedicated their facilities to public use by providing water and sewage services, for a fee, only to their tenants. (D 85492 slip op. at 8-9; (1976) 79 CPUC 503) Shortly thereafter, in a commercial context, the Commission held that owners of a regional shopping center who resold electricity to their tenants had not dedicated their property to public use. (Bressler v. Bayshore Properties, Inc. (1977) 81 CPUC 746, 748.) Subsequently (and prior to the enactment of § 2705.6 which creates a statutory exemption), the Commission held that owners of a MHP who used a well that they owned to provide water to park tenants had not dedicated their facilities to public use. (Fowler v. Guenther (1988) 27 CPUC 2d 591, 594.) The Commission declined to address "whether the existence of a landlord-tenant relationship will be sufficient in all situations to prevent the Commission from asserting jurisdiction" and stated future questions "shall be handled on a case-by-case basis." (Id. at 595.)

Citing Richfield Oil and other leading cases, we recently applied this principle of case-by-case determination, concluding that the Commission had not erred in failing to assert jurisdiction over commercial building owners who had installed certain telecommunications facilities for use by their tenants. (OIR into Competition for Local Exchange, D.00-03-055, slip op. at 11 [modifying D.98-10-058 and denying rehearing].)

In this proceeding, with the single exception of MHC, no MHP or multi-unit apartment owner (or owner's representative) has expressly dedicated water or sewer facilities to public service. Moreover, the apartment lobby and others vigorously contest that providing water and sewer service to tenants only, and billing for it, meet the requirements of an implied dedication.

While it is not the task of this proceeding to definitely determine, based on the unique facts of water or sewer service at any given MHP or multi-unit apartment, whether that service is legal, one guideline is clear: existing statutes which define public water and sewer utilities must be interpreted in light of the common law doctrine of dedication.

... at the time of the initial separate billing of any utility fees and charges the rent chargeable under the rental agreement or the base rent chargeable under the terms of a local rent control provision is simultaneously reduced by an amount equal to the fees and charges separately billed. The amount of this reduction shall be equal to the average amount charged to the park management for that utility service for that space during the 12 months immediately preceding notice of the commencement of the separate billing for that utility service. (Civ. Code § 798.41(a), emphasis added.)

"Private corporations and persons that own operate, control or manage a ... system for ... furnishing water ... to or for the public ... are public utilities subject to the control by the Legislature. The Legislature may prescribe that additional classes of private corporations or other person are public utilities." (Cal. Const., art. XII, § 3, emphasis added.)

Section 5 provides, in relevant part:

"The Legislature has plenary power, unlimited by the other provisions of this constitution but consistent with this article, to confer additional authority and jurisdiction upon the commission ..." (Cal. Const., art. XII, § 5.)