6. Submetering Water

We begin by reviewing the statutory provisions which define a CPUC-regulated water utility and those that expressly exempt some MHPs with submeter systems from that regulatory scheme. Chapter 1 of Part 1 of Division 1 of the Public Utilities Code defines a number of terms critical to analysis of CPUC-regulation of water utilities including: "corporation" (§ 204); "public utility" (§ 216); "water system" (§ 240); and "water corporation" (§ 241).

Chapter 2 of Part 2 of the Code is entitled Water Companies. It includes various statutes which, among other things, describe actions which confer public utility status (e.g. § 2701) as well as certain actions which do not (e.g. § 2705.5).

6.1. Existing Law: CPUC-Regulated Water Utilities

Section 216 is the general definitional statute which describes categories of pubic utilities. With respect to water, it provides, in relevant part:

(a) "Public utility" includes every ...water corporation ... where the service is performed for, or the commodity is delivered to, the public or any portion thereof.

(b) Whenever any ... water corporation ... performs a service for, or delivers a commodity to, the public or any portion thereof for which any compensation or payment whatsoever is received, that ... water corporation ... is a public utility subject to the jurisdiction, control, and regulation of the commission and the provisions of this part. (§ 216, emphasis added.)

Pursuant to § 241, water corporation means "every corporation or person owning, controlling, operating, or managing any water system for compensation" within California. Section 204 defines corporation as "a corporation, a company, an association, and a joint stock association" but, notably, does not include a municipal corporation.

Section § 2701 (in Part 2 of the Code) contains an additional definition of a CPUC-regulated water utility:

Any person, firm, or corporation ... owning, controlling, operating, or managing any water system within this State, who sells, leases, rents, or delivers water to any person, firm, corporation, municipality, or any other political subdivision of the State, whether under contract or otherwise, is a public utility, and is subject to the provisions of Part 1 of Division 1 and to the jurisdiction, control, and regulation of the commission, except as otherwise provided in this chapter. (§ 2701, emphasis added.)

Were we to construe § 216, § 241, and § 2701 in isolation, and ignore the dedication doctrine, the narrow language of these statutes would appear to confer broad Commission jurisdiction over the delivery of water by landlords to tenants for compensation. As we have already seen, however, the California Supreme Court's Richfield Oil decision states, "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." (Richfield Oil, supra, 54 Cal. 2d at 430.)

6.2. MHP Exceptions to CPUC Regulation

A major focus of this proceeding is § 2705.5, which provides in relevant part:

Any person or corporation ... that maintains a mobilehome park or a multiple unit residential complex and provides ... water service to users through a submeter service system is not a public utility and is not subject to the jurisdiction, control, or regulation of the commission if each user of the submeter service system is charged at the rate which would be applicable if the user were receiving the water directly from the water corporation. (§ 2705.5, emphasis added.)

As such, § 2705.5 provides a "safe harbor" from public utility status and attendant regulation by CPUC, to qualifying MHPs.⁹ The information available to us in this proceeding indicates very few apartments in California have submetered water service and the record registers no concerns from either landlords or tenants (with the exception of submetered hot water). However, the issue is a contentious one at MHPs. The two primary disagreements between the parties concern what "rate" may be charged under the statute and whether the statutory reference to "water corporation" means § 241 water corporations, only, or whether it means any water supplier, including those not subject to CPUC-regulation. The Commission has not been asked to address these questions before, but the recent developments at De Anza and the concerns of other MHP owners and tenants urged the opening of this proceeding.

Superficially, § 2705.5 parallels § 739.5, the 1976 statute which governs the submetering of gas and electricity at MHPs and multi-unit apartments. Under § 739.5(a), the same general exemption from regulation as a public utility applies where the MHP owner/operator who is the "master meter customer" charges "each user of the service at the same rate which would be applicable if the user were receiving gas or electricity, or both, directly from the gas or electrical corporation." However, § 739.5(a) establishes a submeter discount for MHP owners/operators, designed to cover, at least partially, the costs of the operation and maintenance of the electric and gas submeter system, as follows:

The commission shall require the corporation furnishing service to the master-meter customer to establish uniform rates for master-meter service at a level which will provide a sufficient differential to cover the reasonable average costs to master-meter customers of providing submeter service, except that these costs shall not exceed the average cost that the corporation would have incurred in providing comparable services directly to the users of the service. (§ 739.5(a), emphasis added.)

The Commission interpreted this portion of the statute in its 1995 decision, Re Rates, Charges, and Practices of Electric and Gas Utilities Providing Services to Master-metered Mobile Home Parks (Rates, Charges and Practices at MHPs), holding that a MHP was prohibited from surcharging its tenants to recover any costs greater than the utility's average costs, even if those costs were reasonably incurred. (Rates, Charges and Practices at MHPs, (1995) 58 CPUC 2d 709, 718.) The Commission noted that the electric and gas MHP discount:

... includes a factor for investment-related expenses for all initial and ongoing capital upgrade costs. Also included in the discount are depreciation of the average installed cost of the equivalent distribution system which the utility has installed in its directly metered parks, return on investment, income taxes on the return, and property (ad valorem) taxes. (Id. at 717, emphasis in original.)

Not only does § 2705.5 not provide for a MHP water discount, but it does not provide any other explicit means or method for the MHP owner/operator to recover the costs of installation of the submeter water system, its operation, or maintenance. Legislative history, cited by GSMOL, shows that § 2705.5 was enacted in 1983 in response to questions at the time about whether MHPs that were submetering water to their tenants could do so without obtaining a CPCN and submitting to regulation by the CPUC as public utilities. (See GSMOL initial brief, Ex. B-D.) As enacted, the statute codified an exemption or safe harbor - in other words, nonpublic utility status -- for MHPs that charged the same rate as the user would receive from the "serving public utility water company." (Stats. 1983, ch. 339.) On the advice of Legislative Counsel in the 24^th Report on Legislation Necessary to Maintain the Codes (March 1, 1984), this terminology was deleted and replaced by the term "water corporation," which appears in the current statute. (Stats. 1984, ch 144, sec. 169.) The Legislative Counsel's report states that all recommendations are nonsubstantive changes, and with respect to § 2705.5, points out that "water corporation" is the term used in § 241. (March 1, 1984 Leg. Counsel Report, pp. 2, 56-57 [see selected pages included with GSMOL initial brief, Ex. I]).

6.2.1. "Water Corporation"

The parties disagree whether "water corporation," as used in § 2705.5, means only § 241 water corporations (i.e. those water corporations which § 216 defines to be public utilities regulated by the CPUC) or whether it means any water supplier, such as municipal corporations, municipal utility districts, and public utility districts.¹⁰

The narrower interpretation limits the application of § 2705.5 to MHPs located within the service territories of Commission-regulated water utilities. It therefore limits the Commission's oversight of water rates to those MHPs which are themselves customers of CPUC-jurisdictional water utilities (and which must charge the same rate such utilities would charge each end use customer directly). We conclude the Legislature intended the narrower interpretation, for the following reasons.

As discussed above, the 1984 amendment to § 2705.5 was made to conform its language to that used in § 241. In addition, review of Chapter 2 of Part 2 as a whole shows a strong legislative intention to impose consistent terminology on descriptions of whom or what, by reason of doing certain acts, becomes a Commission-regulated water utility, and whom or what is exempted. All sections in Chapter 2 that describe actions that confer public utility status on water companies (e.g. § 2701, 2702, 2703 and others) expressly incorporate Part 1, including its definitions provisions. (See for example, § 2701, quoted in full in section 6.1 of this decision.) The provisions which create exemptions from public utility status, such as § 2705.5, must be read in conjunction with the rest of Chapter 2 for their operative terms to have any meaning.

We cannot agree with CMRAA's proposal that the existing statutory framework leaves the Commission with discretion to routinely oversee the rates charged over all MHPs served by non-jurisdictional water providers. Where a MHP receives water service from a provider the CPUC does not regulate, in our view disputes about submetering rates are within the purview of the municipal or district board which governs that provider, local rent control authorities, or the civil courts. The sole exception which would engender CPUC jurisdiction under existing law, is the hypothetical situation where the MHP expressly or impliedly had dedicated its property to public service. Of course, where dedication had occurred, the MHP then would be required to obtain a CPCN from this Commission for authority to operate as a public utility, or cease and desist.

6.2.2. "Rate"

Having concluded that § 2705.5 applies only to MHPs which obtain water from a water corporation regulated as a public utility by the CPUC, we address the parties' second dispute. To be eligible for the exemption from regulation as a public utility, a MHP must charge the rate "which would be applicable if the user were receiving the water directly from the water corporation."¹¹ As discussed above in section 5.1.1 of this decision, the question tends to be of greatest concern in MHPs subject to rent control ordinances.

No parties, including the Class A and B water utilities we made respondents to this proceeding, argue for a submeter discount. Several factors make calculation and imposition of a water submeter discount impractical, if not infeasible. One is the larger number of Commission-regulated water corporations (ranging from Class A companies with more than 10,000 service connections to Class D companies with fewer than 500), compared to the relatively few and typically very large gas and electric corporations. The attendant difficulty of calculating an "average" utility cost to serve as a differential benchmark is readily apparent. A related problem is the how to fairly resolve the revenue allocation issues which a submeter discount would pose. The non-MHP customer base for most water corporations, if not all, is considerably smaller than for gas and electric corporations. Creation of a discount would require a reallocation of revenue requirement among the other customers.

CMRAA, WMA and MHC all agree that at MHPs with submetered water systems, the owner/operator should be free to bill tenants at the "prevailing rate," which they define to mean the sum of all rate elements the water corporation would charge the tenant as a directly-served end user: applicable volumetric rate, customer charge (sometimes referred to as "readiness to serve charge"), and any taxes. GSMOL strongly opposes interpretation of § 2705.5 to authorize MHPs to bill for anything other than the submetered volumetric rate to each tenant plus a pass through, on a pro rata basis, of other charges the water corporation directly bills the MHP.

GSMOL argues that tenants already pay the costs of installation, operation and maintenance of submeter water systems in rent. These costs are imbedded in rent, GSMOL contends, because the Civ. Code § 798.4 formula (in the Mobilehome Residency Law) requires an MHP, before separately billing for utilities, to deduct from rent only the "average amount charged to the park management for that utility service for that space during the 12 months immediately preceding." (See footnote 4, above, which more fully quotes Civ. Code § 798.41.) While CMRAA, WMA and MHC acknowledge that their proposal exceeds a straight pass through to tenants of a pro rata share of the master meter bill, they argue it serves as a reasonable proxy for the total costs of submeter operation and maintenance, thereby enabling the owner/operator to recover the capital and operational costs of the water system, including meter reading and billing. They argue that GSMOL's proposal forces MHPs to submeter water at a loss, particularly if a rent control ordinance applies.

Moreover, according to MHC, GSMOL's proposal results in a subsidy to MHP tenants, because their total water bills are less than those paid by other residential customers (whether resident of MHPs or not) who receive water directly from a water corporation. CMRAA points out that the Commission used a similar prevailing rate proxy in the 1970s before it adopted specific submetering discounts for individual electric and gas corporations. CMRAA asks us to note that Civ. Code § 798.38 requires management of MHPs with submeter systems to "post in a conspicuous place, the prevailing residential utilities rate schedule as published by the serving utility." And WMA adds that Civ. Code § 798.41 presents no bar since the Legislature did not intend Civ. Code § 798.41 to be a rate setting statute.

The positions of CMRAA, WMA, and MHC are not entirely aligned, however. CMRAA argues the Commission should require MHPs to establish individual escrow accounts and deposit in them the "differential" over master meter costs which prevailing rates would yield. MHC argues the Commission should hold that MHPs which charge prevailing rates are not exempt from CPUC-regulations but are, in fact, public utility water corporations. The CPUC should call these entities "Class M" public utilities and then establish a "light-handed" regulatory regime, with advice letter procedures.

It is well established the Commission has exclusive ratemaking authority over public utility matters delegated to the Commission by the Legislature. The rules of statutory construction require us to harmonize § 2705.5 with Civ. Code § 798.41 if possible, and to seek to avoid interpretations which would require us to ignore one statute or the other. (See Fuentes v Worker's Comp. Appeals Bd. (1976) 16 C 3d 1, 7, citing other cases.)

In Application of MHC, supra, the Commission recognized that since its enactment in 1978, the landlord-tenant relationship between MHP owners/operators and their tenants has been extensively regulated by the Mobilehome Residency Law, Civ. Code § 798 et seq. The Commission explained that the statutory framework "recognizes that unlike other renters, mobile home owners cannot easily relocate should their tenancy be terminated. Accordingly, their tenancy is considered "different" and the relationship is to be treated differently." (Application of MHC, supra, D.98-12-077 at p. 3.) The Commission pointed out that Civ. Code § 798.31 (part of the 1978 enactment) expressly provides that mobilehome owners shall be charged no fees other than for rent, utilities, and incidental reasonable charges for services actually rendered to them. Civ. Code § 798.41, enacted in 1990 and amended in 1992 to authorize MHPs to remove "utility fees and charges" from rent and bill for them separately, severs those costs from rent control restrictions.

We have no reason to conclude that the Legislature intended Civ. Code § 798.41 or other provisions of the Mobilehome Residency Law to provide MHP tenants with water at a subsidy below the costs to other residential water users or to require MHPs to submeter water at a loss. The record here, however, does not establish that the prevailing rate is a fair proxy for the average costs of in-park submeter water systems. Far too little is known about the actual basis for the rent levels charged at individual MHPs, whether subject to rent control or not. In the latter case, as GSMOL points out, the rent formula typically is structured to allow some increase in MHP net operating income based on increases in the CPI. Generally the base year rent is the last year of rent prior to rent control, and rebuttably presumed to meet capital and operational costs.

We think there is a legislative solution that is fairer, more direct and less complex than any of the parties' proposals. We suggest that the Legislature amend both Civ. Code § 798.41 and § 2705.5 of the Public Utilities Code to provide the MHP owner/operator with an alternative. If the MHP removes from base rents all imbedded capital and operational costs associated with the submeter water system, the MHP may bill each tenant at the prevailing rate of the water corporation (or other water provider) which serves the master meter. The Legislature should provide that if the MHP chooses not to remove those costs from rent, the MHP may only recover volumetric submeter charges plus a pro rata allocation of any other charges billed to the master meter.

Considerations of reasonableness, administrative feasibility, and water conservation recommend this approach. It protects MHP tenants from paying any more than other residential consumers. It also provides the MHP owner/operator with a reasonable opportunity to recover the costs of submetering water, capped at the rate level charged by the water corporation (or other water provider). The result approximates treatment of gas and electricity submetering charges, which § 739.5 caps at the electric or gas corporation's average costs.

Basing submeter water charges on the charges levied by the underlying water corporation is practical as well as reasonable. Failure to clarify existing law may well cause other MHPs, following MHC's steps at De Anza, to apply for CPCNs to operate as public utility water corporations. Such applications are complicated regulatory proceedings and often time consuming; for example, if the Commission determines a CPCN should be granted, it must then devise and adopt rates for the new utility. A regulatory review of this type - like any regulatory solution that requires the Commission to review the submeter water costs of individual MHPs - would impose significant administrative costs. Furthermore, the potential for a proliferation of new, very small water utilities runs counter to both state and federal water policy, which seeks to consolidate water systems into units sufficiently large to meet the challenges of the Safe Drinking Water Act and other water laws.

Finally, to the extent this approach promotes water submetering in existing MHPs that are not already submetered, it encourages the judicious use of water and avoids injection at MHPs of one of the most troublesome issues raised repeatedly in this proceeding in the multi-unit apartment context - water allocation charges unrelated to measured, individual consumption.

Our recommendation addresses the issues which have arisen at existing MHPs. The Legislature has already prohibited submetering gas and electric services at MHPs (and multi-unit apartments) constructed after 1997 in the service territories of CPUC-regulated gas and electric corporations. Section 2791(c) provides that new construction must have individual gas and electric meters for all spaces (and units) and be served directly by the public utilities. We urge the Legislature to extend this mandate to the provision of water service at any new MHPs within the service territories of CPUC-regulated water corporations (and possibly, to all other MHPs).