Procedural Background

The City offered three counts that it contended justified the Commission revoking the CPCN issued to MHC Acquisition One (MHC) in Decision (D.) 98-12-077:

Count One: Interference with or Obstruction of Conduct of Municipal Affairs

The City stated that it has complete authority to set the rates, terms, and conditions under which its residents receive water service, and that this authority extends to all its residents whether served directly by the City or through submetered systems. Consequently, the City argued that the contract between MHC and the City, as well as the City's municipal code, require MHC to resell the City's water at a rate no higher than that charged by the City. The City also stated that MHC had applied for authority from the City to resell City water, and that such application had been denied by the City. The City, thus, concluded that for MHC to sell water at Commission-approved rates, which are higher than the City's rates, would obstruct the City's right to operate its municipal water system in the public interest.

Count Two: Interference with or Obstruction of Enforcement of Municipal Police Powers

The City stated that it is a municipal corporation and, as such, is privileged to make and enforce within its limits all ordinances and regulations not in conflict with general laws. Among the ordinances the City has adopted is a rent control ordinance that applies to all mobilehome parks, including MHC. Pursuant to the rent control ordinance, any charges for in-park utility services that exceed a pass-through of actual costs paid by the parkowner are cognizable as rent and subject to local rent controls. The City concluded that efforts by MHC to impose the Commission-approved water rates is a violation of the rent control ordinance such that the rates interfere with the City's enforcement of its police powers.

Count Three: Misconduct Justifying Revocation of CPCN

The City stated that the following MHC acts warranted revocation of the CPCN:

1. MHC misrepresented its inability to recover its in-park water system costs in the CPUC proceeding which resulted in D.98-12-077;

2. MHC failed to show that it had acquired the consent of the City as required by Public Utilities Code § 1004² prior to issuance of the CPCN;

3. MHC attempted to collect its Commission-approved rates prior to applying to the City for resale approval as required by D.98-12-077;

4. MHC attempted to collect Commission-approved water and sewer rates without the use of separate billings in the name and style of the water and sewer corporation;

5. MHC misapplied a 7% City user tax, and retained most of the proceeds rather than paying the funds over to the City; and

6. MHC sought review of the City's decision denying MHC water resale authority in federal court, which unreasonably burdens the City, rather than a readily available state court forum.

On December 15, 2000, MHC denied the substantive allegations of the complaint, and offered six separate affirmative defenses:

1. the complaint fails to set forth any act or thing done or omitted to be done by a public utility in violation of any provision of law or any order or rule of the Commission;

2. the complaint is an impermissible collateral attack upon D.98-12-077;

3. the complaint is an impermissible challenge to the Commission's exclusive authority to establish rates for MHC;

4. the claims described in the complaint are or may be barred in whole or in part by the doctrine of unclean hands;

5. the claims described in the complaint are or may be barred in whole or in part by the doctrine of laches; and

6. the claims described in the complaint are or may be barred in whole or in part by the doctrine of estoppel.

In addition to asking that the complaint be denied, MHC sought a declaratory ruling. MHC asked the Commission to find that the City's policy and practice of denying resale authority to MHC because of the City's belief that the Commission-approved rates are excessive and unreasonable directly interferes with the Commission's rate approval authority as exercised in D.98-12-077.

After filing the answer, MHC also filed a Motion to Dismiss and Request for Declaratory Determination (Motion) on December 18, 2000. According to MHC, all counts of the City's complaint were legally or factually flawed and should be dismissed. MHC stated that Counts 1 and 2 were legally defective because both seek to contest the validity of MHC's rates that have been previously found reasonable by the Commission in D.98-12-077. Since that decision had long ago become final and is not subject to appeal, the City's complaint was an impermissible collateral attack.

On Count 3, MHC argued that the City has failed to allege that MHC has done or omitted to do anything in violation of any law or Commission rule or order. MHC also noted that this count, like Counts 1 and 2, failed to allege any facts developed since the decision granting MHC's CPCN which would justify revocation of the CPCN.

MHC also sought a declaratory determination that the Commission's ratemaking authority preempts any attempt by the City to exercise its municipal authority in conflict with the Commission. MHC argued that the Commission must address the City's direct challenge to its authority by making clear that the City cannot condition the grant of resale authority upon changes to Commission-approved rates.

On December 13, 2000, the De Anza Santa Cruz Homeowners Association (Homeowners Association) filed a Petition to Intervene. The Homeowners Association stated that it represents the interests of approximately 245 residents of the mobile home park that constitutes MHC's service territory. These homeowners are MHC's customers. The petition stated that the Homeowners Association fully supported the relief requested by the City. On December 27, 2000, the assigned Administrative Law Judge granted the Homeowners Association's petition solely for the limited purpose of responding to the motion to dismiss.

On January 19, 2001, the City opposed the Motion. The City argued that, under criteria commonly applied by the Commission and the courts, a motion to dismiss is disfavored and can only be allowed if there is no cognizable legal theory or if there are insufficient facts under a cognizable legal theory to support granting the relief requested. The City stated that the complaint reveals allegations of multiple violations of the State Constitution and Public Utilities Code due to actions taken by MHC after receiving the CPCN. These actions, the City alleged, constitute an interference, hindrance and/or obstruction of the City's rights and obligations to provide water and sewer service and to enforce rent control under its police power. The City also opposed MHC's request for a declaratory determination on the grounds that the Commission has usually refused to grant such relief, and that the requested ruling would compel the City to allow resale of its water and sewer services.

Also on January 19, 2000, the Homeowners Association opposed the motion. The Homeowners Association stated that the City, like any property owner, has the right to determine whether and, if so, under what terms and conditions, it would allow MHC to purchase water and sewer services for resale. The Homeowners Association contended the Commission lacks the authority to order the City to sell water and sewer services for resale to MHC. The Homeowners Association also stated that this very issue has been raised by MHC in its appeal of the City's decision denying resale authority, and is currently pending in U.S. District Court.

On January 30, 2001, MHC responded to the City's opposition to the Motion. MHC stated that the City has no authority either under its own charter or related ordinances to refuse to provide water service for resale. MHC argued that longstanding practice, the City's charter and ordinances, and applicable state law all required the City to continue to provide water and sewer services to the MHC, without regard to the Commission-approved rate MHC charges park residents.