Discussion

Based upon the issues framed by the parties in their Joint Case Management Statement, the assigned commissioner's Scoping Memo and Ruling articulated the principal issue in the proceeding as "whether the nonutility defendant's mutual water company has, through its actions, become a public utility subject to regulation by the Commission." Graham claims that AMWC has transmuted itself into a public utility by failing to sell water to its members at cost, i.e., by earning a profit on water sales. AMWC denies that it has sold water at a profit.

In support of his contention Graham cites various actions by AMWC that either resulted in the accrual of a relatively substantial capital and operating reserve, or the expenditure of funds for plant that benefited certain developers or stockholders in lieu of lowering rates for all members. Graham claims that the retention or expenditure of these funds is tantamount to making a profit, and that AMWC should therefore lose its unregulated mutual water company status.

Although we have addressed a number of cases in which mutual water companies were alleged to have lost their unregulated status because they allegedly sold water to nonmembers, this appears to be the first instance where a mutual is accused of losing that status for selling water at a profit. The relevant principles are set forth in provisions in the Public Utilities Code which govern the status of mutual water companies.

Pub. Util. Code § 2705 provides in pertinent part,

"Any corporation or association that is organized for the purposes of delivering water to its stockholders and members at cost, including use of works for conserving, treating, and reclaiming water, and that delivers water to no one except its stockholders or members, or to the state or any agency or department thereof, to any city, county, school district, or other public district, or any federal agency that provides fire protection or operates park facilities, or to any other mutual water company, at cost, is not a public utility, and is not subject to the jurisdiction, control or regulation of the commission."

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"The term `cost' as used in this section shall be construed to mean without profit."

Under this provision we must look to two factors to determine whether a company is legitimately organized as a mutual water company: first, whether it is organized for the purpose of delivering water at cost; and second, whether it delivers water only to its own members, stockholders, or others specifically provided for by statute.

Graham does not allege that AMWC delivers water unlawfully to anyone other than its own members or stockholders. The gravamen of his complaint is that the company does not in fact deliver water "at cost."² He claims that the company in effect earns a profit in various ways, such as (1) waiving main line extension fees that would otherwise be used to reduce water rates or increase stockholders' equity; (2) postponing the collection of certain fees relating to commercial properties, with the same result; and (3) requiring certain customers to pay booster pump fees when they actually receive their water by gravity feed, resulting in the collection of excess revenue from those customers. He also contends that recent energy cost reductions have not been passed on to members through lower rates. As evidence that these actions have resulted in a profit to the company, he cites the lower rates paid by customers of neighboring water districts.

AMWC denies that any of its actions have resulted in a profit within the usual meaning of that term. Rather, AMWC characterizes any of its uses and allocation of revenues, and its decisions to forego certain fees, as internal management decisions over which we have no authority. In support of its position AMWC presented testimony that it has never paid any dividends or otherwise distributed money to its stockholders.

The evidence presented by AMWC demonstrates that any excess of revenues over expenses was used to establish reserve accounts for AMWC's capital and operating needs. The company's accountant testified that the level of these reserves is appropriate; that it is prudent to have operating reserves for unpredictable revenue variations from drought and similar causes; and that other reserves are required for plant replacement and expansion. He also testified that the reduced cost of power was consistent with revenues AMWC received during the relevant periods, so the rates were not lowered.

Graham's contention that some members were paying booster pump charges despite being on gravity feed was rebutted by testimony from the company's general manager. We find AMWC's testimony credible, and Graham has not satisfied his burden of proof on this issue.

All of this may well be beside the point, because a substantial body of precedent supports AMWC's argument that, as long as we find upon investigation that the company satisfies the two basic requirement of Section 2205, the company retains its exempt status, and we are without the additional jurisdiction to regulate its internal financial decisionmaking. See, for example, Richard D. and Priscilla Benson v. Lincoln Avenue Water Company, 50 CPUC2d 639 (1993). Such decisions are governed by AMWC's own by-laws and rules, and may only be challenged in court under traditional legal principles. In giving mutual water companies special status as unregulated entities, the legislature clearly intended to carve out an exception to our usual regulatory jurisdiction.³

Graham has not demonstrated that AMWC has failed to sell water "at cost," as that term is used in relevant provisions of the Public Utilities Code. His request that we order AMWC to be reorganized as a regulated water company is therefore denied.

Findings of Fact

1. AMWC is a corporation that is organized for purposes of delivering water to its stockholders and members at cost.

2. AMWC delivers water to no one except its stockholders or members.

3. There is no evidence that AMWC at any time relevant to the complaint, paid any dividend or made any cash distribution to its members or shareholders.

4. AMWC has abandoned its Rule 45 Motion to Dismiss for Lack of Jurisdiction in this proceeding.

Conclusions of Law

1. AMWC is a "mutual water company" within the meaning of the Public Utilities Code.

2. AMWC at all times relevant to the complaint has delivered water to its stockholders and members "at cost" within the meaning of the Public Utilities Code.

3. AMWC should not be declared to be subject to our jurisdiction.

4. Graham's amended complaint should be denied, effective immediately.

ORDER

IT IS ORDERED that:

1. The amended complaint of complainant Terril L. Graham is denied.

2. Case 99-03-070 is closed.

This order is effective today.

Dated , at San Francisco, California.

"concern matters of internal management which are not within the province of this Commission to control, and do not alter our conclusion in respect to the main issue presented. Its charges or assessments for water service rendered may or may not be entirely equitable, or in excess of the actual current cost of operation. It is obvious the recipients of water service, the stockholders themselves, are the beneficiaries of any profits which have accumulated and they in effect are having their waters distributed among them at actual cost. They have it within their power to administer the affairs of their corporation in any legal manner which will best promote their own interests."