6. Application of the Submeter Exemption

When the Legislature passed § 2705.5 in 1983, it exempted from the Commission's control MHPs and multi-unit apartments with a submetered water service system if the submetered customers are charged the same rate that they would have been charged if served directly by the water corporation.¹⁶ Six years earlier, in 1976, the Legislature passed a similar, but more detailed, exemption statute governing submetering of gas and electricity at MHPs and multi-unit apartments.

While these exemption statutes may benefit tenants by imposing a cap on their rates, it appears that the Legislature only intended that tenant end-users be indifferent to whether the water corporation or the MHP billed them for their water service. As shown by the legislative history of § 2705.5 (see section 5.1) the statutes were designed to provide qualifying MHPs and multi-unit apartments a "safe harbor" from public utility status and attendant CPUC regulation.

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-See Complaint 98-03-023, DiResta v Esprit de Sol Apartments). However, the issue is a contentious one at MHPs. The two primary disagreements between the parties concern: (1) whether the statutory reference in § 2705.5 to "water corporation" is confined to the definition contained in § 216 or whether it means any water supplier, including those not subject to CPUC-regulation; and (2) what is the "rate" charged to submetered customers that qualifies for the § 2705.5 exemption from CPUC jurisdiction. After discussing these disputes between the parties, we note the differences in Commission control provided by the comparable water and energy exemption statutes.

6.1. "Water Corporation"

The meaning of the term "water corporation," is significant because it determines which entities are eligible for the § 2705.5 exemption. For example, if "water corporation" means any water supplier, then every MHP and multi-unit apartments that has submetered water service could consider seeking the § 2705.5 exemption. If, on the other hand "water corporation" is limited to the definition expressed in § 216, then the "water corporation" which serves the MHPs must be a CPUC-regulated utility and only MHPs served by a CPUC-regulated water utility qualify for the § 2705.5 exemption. For the reasons explained below, we conclude the Legislature intended the narrower interpretation - that § 2705.5 applies only to those MHPs that obtain water from CPUC-regulated water utilities.

First, as known by the legislative history, the 1984 amendment to § 2705.5 expressly changed the language describing the water service provider from "public utility water company" to "water corporation," thereby limiting the application of the exemption. The term "water corporation is defined in Part 1, § 216 and §241 of the Public Utilities Code as a public utility subject to CPUC jurisdiction. It is that meaning that must be used to construe the § 2705.5 statutory exemption.

Second, we cannot ignore the message of Inyo County. (See Section 5.2.2 of this decision.) There the Supreme Court was clear that no matter how much the behavior of a municipal utility looks like that of a public utility, this Commission has no jurisdiction over the actions of the municipal entity unless and until such time as the Legislature says so. The Supreme Court noted that there is no constitutional restriction that precludes the Legislature from conferring Commission jurisdiction over municipally owned water corporations. The fact that the Legislature has not expressly conferred such jurisdiction on the Commission is a strong indication that it does not intend that we have that authority.

We cannot agree with CMRAA's proposal that the existing statutory framework leaves the Commission with discretion to routinely oversee the rates charged by all MHPs served by non-jurisdictional water providers. We believe that the proposal violates Inyo County.¹⁷ Where a MHP receives water service from a provider the CPUC does not regulate, disputes about submetering rates may be within the purview of the governing board of the water provider, the local rent control authorities, or the civil courts. However, we conclude that such disputes are not presently subject to the authority of this Commission.

The sole exception that would engender CPUC jurisdiction under existing law is the hypothetical situation where the MHP has dedicated its property to public service. Where dedication has occurred, the MHP then would be required to qualify in all other respects for authority to operate as a public utility by satisfying this Commission that it should be granted a CPCN. Otherwise, the MHP would have to cease and desist its activity.

6.2. "Rate"

To be eligible for the § 2705.5 exemption from CPUC regulation, a MHP must charge the rate "which would be applicable if the user were receiving the water directly from the water corporation."¹⁸ Parties disagree about what the exempting "rate" should include. The parties most concerned about this question tend to represent MHPs subject to rent control ordinances or the tenants of these MHPs.

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 as the sum of all rate elements the water corporation would charge the tenant as a directly-served end user: applicable volumetric rate, customer service charge (sometimes referred to as "readiness to serve charge"), and any taxes. GSMOL strongly opposes this interpretation. Instead, it contends that the § 2705.5 rate should be confined to each tenant's submetered volumetric rate plus a pass through, on a pro rata basis, of other charges the water corporation directly bills to the MHP.

GSMOL argues that tenants already pay the costs of installation, operation and maintenance of submeter water systems because these costs are imbedded in rent. This is so, claims GSMOL, 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 5 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. Drawing from Nevada's MHP laws, 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.¹⁹ 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 for ratesetting and other purposes limited to 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. Some rent formulas provide that the base year rent is the last year of rent prior to rent control, and rebuttably presumed to meet capital and operational costs.

The question of whether a MHP is charging its tenants the "rate" that qualifies for the § 2705.5 exemption can only be determined on a case by case basis. Because the "rates" of water corporations vary in numerous ways, there is no formula that we can provide beyond the clear language of the statute - "the rate which would be applicable if the user were receiving the water directly from the water corporation." ²⁰

As a general rule, the "applicable rate" is the specific rate or the total of several rate components that can be found in the Commission-authorized tariffs of the water corporation that provides water service to the MHP. Pursuant to Rule 19, upon written request, a water corporation must provide the MHP owner/operator with a copy of the rates it would charge if the water corporation served each MHP tenant directly. However, we caution that the water corporation's statement of "prevailing rates" is not a conclusive determination of the "applicable rate."

It is this Commission's obligation to determine the "applicable rate." That rate may not include each rate component that the water corporation charges its residential customers directly. Special rates such as surcharges or taxes collected by the water corporation for a specific purpose may fall into this category. For example, it is reasonable to conclude that a local tax which the water corporation is obliged to charge its direct customers but which the MHP is not required to collect from submeter customers is not a component of the "applicable rate" that can be charged to each submeter customer. Instead, it is reasonable to charge submetered customers only a pro-rata share of the tax actually charged to the MHP by the water corporation. Using this method, the tax is paid, as intended, to the local government; the MHP does not reap a financial benefit from the tax collection, nor, does the MHP suffer a tax-induced financial loss.

Because the "applicable rate" is based on the capital and operation costs of the serving water corporation, that rate may not be sufficient each and every month or year to compensate the MHP for the ongoing capital and operation costs incurred in construction, repair and service of the submeter system. On the other hand, when the "applicable rate" more than compensates the MHP for the full cost of submetered water service, the MHP reaps a financial benefit, some of which may be needed in the future to repair an aging submeter system. The § 2705.5 exemption guarantees the MHP a safe harbor from regulation. It does not guarantee consistent cost protection.

The decision to seek the § 2705.5 exemption is that of the MHP. Submetered customers have no such discretion. Therefore, it is incumbent on this Commission to insure that the "applicable rate" does not cost the submetered customer more than he/she would pay if served directly by the water corporation. In examining the water charges at a given MHP, we must consider whether the MHP's rent structure includes recovery of water expenses -specifically capital and operation costs associated with the submeter system.²¹ Consistent with our discussion above, we conclude that the MHP owner/operator may not have it both ways. Either these charges must be removed from rent altogether, and then the submeter customer may be charged the same rate applicable to any other residential customer (i.e., the "prevailing rate"), or the submeter customer may be charged only for volumetric submeter usage plus a pro rata allocation of any other charges billed to the master meter.

6.3. Comparing the Water and Energy Submeter Exemption

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, 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.)

When comparing the gas/electric submeter exemption provisions with those of the water exemption, it appears that the energy version affords landlords more protection and the Commission more control. 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. The gas/electric exemption statute provides the Commission with an intermediary regulatory oversight position distinguishable from the water submeter exemption where the Commission only has the authority to decide whether an entity is a public utility or is exempt from our control.

Recently, the Legislature has enacted another difference in the treatment of energy submetering law by prohibiting the submetering of 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. There is no comparable legislative restriction applicable to water service.

No parties, including the Class A and B water utilities identified as respondents in this proceeding, argue for a submeter discount. We may wish to explore this issue at some later date. Several factors make calculation and imposition of a water submeter discount difficult, however. 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 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 could require a reallocation of revenue requirement among the other customers.