4. Validity of Line Extension Agreements

Del Oro's Rule 15 deals with water main extensions to serve new customer connections in locations where the current water distribution system does not exist or is inadequate. In general, extensions of water mains to serve new customers are paid in advance by the customers and contributed to the utility. In some cases, the payment may be refunded in part if the new main extension is later used by other customers.

The Water Division, in its analysis, looked to two provisions of Rule 15:

Rule 15.C.1.b.

If special facilities consisting of items not covered by Section C.1.a. are required for the service requested and, when such facilities to be installed will supply both the main extension and other parts of the utility's system, at least 50 percent of the design capacity (in gallons, gpm, or other appropriate units) is required to supply the main extension, the cost of such special facilities may be included in the advance, subject to refund, as hereinafter provided, along with refunds of the advance of the cost of the extension facilities described in Section C.1.a. above.

Rule 15.C.1.d.

If, in the opinion of the utility it appears that a proposed main extension will not, within a reasonable period, develop sufficient revenue to make the extension self-supporting, or if for some other reason it appears to the utility that a main extension contract would place an excessive burden on customers, the utility may require nonrefundable contributions of plant facilities from developers in lieu of a main extension contract.

ORA witness Arthur B. Jarrett, program and project supervisor in the Water Division, concluded in his analysis that Del Oro's main extension agreement complied with Rule 15. He testified that a small water district like Lime Saddle was authorized under Rule 15.C.1.b. to prepare a standard main extension agreement covering "special facilities" like the Lake Oroville water intertie. Under 15.C.1.d., the utility also was authorized for good cause to require nonrefundable contributions as part of the standard main extension contract. Jarrett stated:

"The [main extension] contracts are essentially identical, differing only in the information concerning property being served and the number of connections involved. The contracts contain the standard paragraphs with all the pertinent information required by the main extension rule, clearly stating the purpose for which the funds were to be used. The contracts also clearly state that the funds collected by Del Oro are to be contributed and not subject to refund. The contracts contain funding to cover the shared portion of the Lime Saddle Marina/Penz Intertie project without unfairly discriminating against any of the parties and without unfairly burdening existing customers with any costs." (Exhibit 15, at 3.)

Focusing on Rule 15.C.1.d., Breuer argues that the Lake Oroville intertie is not a "proposed main extension," that there is no showing that the proposed intertie will not be self-supporting, and that "contributions of plant facilities" cannot be interpreted to mean $5,000 cash contributions. It also faults the utility for adding non-tariff language to its main extension contract promising refunds, with interest, if the intertie project should subsequently be funded by a special assessment district. Testimony at hearing showed that Del Oro in 1995 sought formation of a special assessment district, but a majority of property owners opposed it.

Breuer argues that the $5,000 charge imposed by Del Oro in January 1991 was a "facilities fee," which this Commission did not authorize until April 1991 in Decision (D.) 91-04-068, a rulemaking proceeding. Breuer also contends that Del Oro breached its contract by starting work on the intertie project before adequate funds had been collected to (in the words of the main extension agreement) "commence and prosecute to completion" all of the work on the project. Since Del Oro served only 259 customers in 1991 and was authorized by the State to serve up to 181 additional connections, Breuer contends that it and other new customers could and should have been served without paying $5,000 per connection.

Del Oro responds that the $5,000 fee gave new customers the promise of an uninterruptible supply of water from Lake Oroville, as opposed to the current reliance on purchased water from entities free to cut off supply if those entities experience shortages. The utility notes that under the Commission's General Order 103, a water company is required to supply water "from a source reasonably adequate to provide a continuous supply of water." (General Order 103.II.1.b.1.b.)

Del Oro also argues that nothing in Rule 15 precludes a contribution of cash to be used to replace an unreliable source of water and that, in fact, Rule 15's provisions for refunds of advances contemplate cash transactions where a developer cannot itself install the required special facilities. As to the non-tariff language added to the contracts, Del Oro argues that promising refunds if alternative financing is arranged provides a benefit to protestants. Del Oro noted that the Water Division concluded that a provision like this that benefits customers did not conflict with the Commission's intent in enacting Rule 15.

4.1 Discussion

It is undisputed that replacing the current interruptible supply of water with a reliable system for extracting Lake Oroville water is desirable for the customers of the Lime Saddle District. Where parties disagree is on the method of financing that replacement. Breuer maintains that it was unlawful for the utility to use Rule 15 line extension contracts to assess a fee of $5,000 on each new connection. Breuer correctly asserts that utility tariffs must be strictly construed. (Transmix Corp. v. Southern Pacific Co. (1960) 187 Cal.App.2d 257.) By parsing Rule 15.C.1.d. word by word, Breuer maintains that it has shown that the main extension contract violates the utility's tariffs.

Breuer, however, focuses exclusively on a single provision of Rule 15. It is axiomatic that a contract must be read as a whole. (Civ. Code § 1641.) So too must tariffs, which constitute a utility's contract with its customers. In enacting Rule 15.C.1.d., the Commission contemplated that non-refundable contributions would apply to "advance contracts" developed under Rule 15.C. and would apply to special facilities that would qualify as utility plant. The Commission stated:

"Small utilities which would find it difficult to repay advance contracts out of net revenues should therefore require that the plant for these extensions be financed through non-refundable contributions from the developer." (D.82-01-062, 7 CPUC2d at 793.)

As the Water Division analysis asserts, Rule 15 contemplates water main extension agreements that include "special facilities" as well as mains. Obviously, connecting a new customer to a water system, particularly when the new customer intends to develop multiple housing units, will involve installation of pumps, additional storage capacity, fire hydrants, and other material besides the pipelines through which the water will flow. Because such facilities vary widely from project to project, the Commission has declined to adopt a narrow definition of what constitutes a special facility. (See D.75205, adding the 50% language to Rule 15.C.1.b.; see also D.82-01-062, declining to exclude source and storage facilities as special facilities.)

Moreover, Rule 15 contemplates proportionate financing of special facilities similar to the proportionate financing in the Del Oro agreement. In D.82-01-062, Rule 15.C.2.c. was added to provide that "[w]henever costs of special facilities have been advanced..., the amount so advanced shall be divided by the number of lots (or living units, whichever is greater) which the special facilities are designed to serve, to obtain an average advance per lot (or living unit) for special facilities." (D.82-01-062, 7 CPUC2d 778, 806.)

Under the pre-1982 version of Rule 15, developers who paid for special facilities could look forward to progressive refunds of such expenditures. The 1982 rule gave small utilities like Del Oro's Lime Saddle District the ability to require applicants for new extensions to contribute funds for the work. (Rule 15.C.1.d.)

The main extension contract at issue here contains these elements. It covers special facilities (installation of a replacement source of water), proportionate financing (total cost divided by the number of new connections), and contribution of financing. As required by Rule 15, the contract sets forth the special facilities to be constructed. We agree with the Water Division that when Rule 15 and particularly Rule 15.C. are read as a whole, the main extension contract here is in compliance with the tariff. Rule 15.C.1.d. was not intended to be read alone, without regard to other provisions of Rule 15.C. Rather, Rule 15.C.1.d. was intended to be an alternative method of financing the main extensions and special facilities described in the tariff. We also agree with the Water Division that inclusion of a refund provision for developers if alternative financing is arranged does not veer so far from the refund provisions of Rule 15 as to invalidate the contract.

We note that in April 1991, the Commission in D.91-04-068 authorized water utilities serving fewer than 2,000 connections to accept from individual customers amounts in contribution as "connection fees" covering actual costs of installing new connections and facilities. While that authority was not exercised here, its availability reflects the Commission's policy at the time of granting financial flexibility to small water companies seeking to upgrade their facilities.

Based on the record as a whole, we concur with the Water Division analysis and conclude that the main connection agreement at issue is in compliance with the utility's Rule 15 and the Commission's rules and regulations. Because our task here is merely to determine the validity of the contract at issue, we do not reach the question of whether the statute of limitations or the doctrine of laches serve as a bar to protestants' complaints.