Court Opinion

ID: 9570456
Source: CourtListenerOpinion
Date Created: 2023-08-21 20:23:23.457769+00
Date Added: 2024-06-11T12:08:52.161849
License: Public Domain

BROUSSARD, J., Concurring and Dissenting.
I agree with the majority, insofar as they conclude that the City of San Buenaventura is entitled to be compensated for services, facilities or capital which it contributes to the municipal utility and the ratepayers and that in lieu of such compensation the city ratepayers may be charged a lower rate than the noncity ratepayers. However, I cannot agree that the city is entitled to be compensated through discriminatory rates for claimed capital improvements and additions which were in fact financed by the ratepayers both within and without the city or obtained by donations to the water system.
In 1923 the city purchased a water system from Southern California Edison and commenced to provide water to the city and out-of-city consumers. The purchase was financed by general obligation bonds. Although the bondholders had the right to require the city to levy taxes to pay for the bonds, it was contemplated that the bonds and the interest on them would be paid by water revenues. Over the years the city has issued similar bonds to purchase additional water systems and to obtain additional facilities. All payments of principal and interest on the bonds have been made from water revenues. An advance made by the city to the water company was repaid with interest, and so far as appears, city capital contributions have been negligible.
In 1935, the city established a surcharge on out-of-city customers requiring them to pay higher rates than the in-city customers. From 1935 to 1952, the surcharge averaged 48 percent; between 1953 and 1972 the surcharge was 32 percent. In 1972, the city imposed a 70 percent surcharge. The instant case involves the validity of the latter surcharge.
Over the years the water system has been greatly expanded and improved, and the value of the property devoted to the system including water rights and facilities has increased greatly. The main issue presented is whether the surcharge, or most of it, may be justified on the theory that the city is entitled to a rate of return based on the value of the property in the system.
In County of Inyo v. Public Utilities Com. (1980) 26 Cal.3d 154 [161 Cal.Rptr. 172, 604 P.2d 566], we considered the relationship between a city water department and out-of-city users. The Los Angeles Department *1192of Water and Power served consumers in the County of Inyo, and the county argued that the Public Utilities Commission should regulate the rates because it was established to protect people from the consequences of monopoly in the public services industry and that, while city residents may exert political power over the rates, outside residents have no voice as voters or taxpayers, leaving them at the mercy of the city. (26 Cal.3d at pp. 158-159.) The court held that, although the Legislature could authorize the Public Utilities Commission to regulate water rates charged by a city to noncity consumers, it had not done so.
In response to the county’s argument that the consumers had no control over the rates charged, the court stated: “[A] city which acquires the water system of another community incurs an obligation to deal fairly with its customers in that community and to provide them with reasonable service at reasonable rates. (See South Pasadena v. Pasadena Land, etc. Co. (1908) 152 Cal. 579, 587-588, 594 [93 P. 490].) Such an acquiring city, as to the water dedicated to the use of the outside community, holds ‘title as a mere trustee, bound to apply it to the use of those beneficially interested.’ (Id., at p. 594; see Durant v. City of Beverly Hills, supra, 39 Cal.App.2d 133, 138.) Consequently, the county can sue to enjoin rates which are themselves ‘unreasonable, unfair, or fraudulently or arbitrarily established’ (Durant v. City of Beverly Hills, supra, 39 Cal.App.2d 133, 139), or which discriminate without a reasonable and proper basis (Elliott v. City of Pacific Grove, supra, 54 Cal.App.3d 53, 59).4” Footnote 4 states: “A showing that rates are discriminatory is in itself insufficient to fulfill the complainant’s burden of proof (see Durant v. City of Beverly Hills, supra, 39 Cal.App.2d 133, 138); a showing, however, that such discrimination rests solely on the nonresident status of the customer, and not on the cost of service or some other reasonable basis, will prove the rate invalid (see Elliott v. City of Pacific Grove, supra, 54 Cal.App.3d 53, 59).” (26 Cal.3d at p. 159.)
When new users come into a municipal utility system, the city may properly charge connection fees or other charges to defray the cost of the facilities needed to serve the new users. (E.g., Associated Homebuilders v. City of Livermore (1961) 56 Cal.2d 847, 851 et seq. [17 Cal.Rptr. 5, 366 P.2d 448]; Beaumont Investors v. Beaumont-Cherry Valley Water Dist. (1985) 165 Cal.App.3d 227, 233 [211 Cal.Rptr. 567].) However, County of Inyo, supra, 26 Cal. 3d 154 makes clear that once a municipality chooses to dedicate its water service to consumers outside the city, it becomes a trustee bound to use the system for all of those beneficially interested, and any discrimination between consumers must be based on the cost of service or other reasonable basis. The lack of political power of out-of-city residents may not furnish a basis for discrimination but requires the city to act *1193reasonably in setting their rates. They are not second-class consumers but entitled to the same rights as other ratepayers.
Accordingly, we must determine whether the record shows that the discriminatory rates are based solely on the nonresident status of the consumers and not on the cost of service or some other reasonable basis. It is not claimed that the surcharge can be justified on the ground that it is more expensive to deliver water to the out-of-city consumers than the in-city consumers. Most of the out-of-city users live in islands of unincorporated territory surrounded by the city or areas adjacent to the city and the facilities used to deliver the water are the same for both types of users. Rather, most of the surcharge is sought to be justified on the basis of extra charges for the acquisition of water or for facilities serving the system.
As the majority recognize (ante, p. 1181) and as the evidence established, there are two alternative methods for determining the revenue requirements of a utility, the cash basis and the utility basis. Under both methods the water company is entitled to recover all of its operating and maintenance expense, including any taxes. Under the cash basis, the utility may add charges for system replacement, debt service expenses (principal and interest) and other capital costs, including additions to the facilities or reserves for additions. The total of the charges become the revenue requirement. Under the utility basis, charges for capital replacement, additions, reserves for additions and debt repayment are not included; rather, the utility recovers for depreciation of its plant and a rate of return on its rate base or investment. (See City of Los Angeles v. Public Utilities Commission (1972) 7 Cal.3d 331, 336, 346-347 [102 Cal.Rptr. 313, 497 P.2d 785].)
Under the utility basis, it should be improper to include in the rate base capital assets donated or paid for by the ratepayers because such assets may not be viewed as investment. The point is illustrated by Pacific Tel. & Tel. Co. v. Public Util. Com. (1965) 62 Cal.2d 634, 663-664 [44 Cal.Rptr. 1, 401 P.2d 353]. There the Public Utilities Commission concluded that Pacific Telephone and Telegraph Company (Pacific) could properly include in Its rate base its gross working cash requirement but the commission disallowed various additional cash sums held by Pacific which had been collected from customers in advance, from funds collected to pay debenture interest, and from taxes withheld from employees. The disallowed sums exceeded the working cash requirement. The court approved as sound and fair the commission’s view that when the funds supplied by “‘others than investors are greater than the amount required ... for working cash, and the excess amount is not deducted from rate base, customers would be unreasonably required to pay a return on funds supplied by them to defray reasonable expenses and taxes [and debenture interest] and to provide a reasonable return on invested funds.’”
*1194The principle is clear. The utility may not be permitted to include in its rate base donations or assets supplied by the ratepayers because to allow inclusion in rate base would permit “a double return.” (Id., at p. 664.)1 It *1195is only the investment made by the utility which may be included in the rate base.
So far as appears in the instant case there has been no substantial investment of capital in the water system by the city. Although the city initially advanced funds to the water system, the advances were treated as a loan by the city rather than a capital investment and were repaid with interest.
The majority suggest other bases for concluding that the water facilities may be viewed as investment by the city warranting establishment of a rate base and justifying the city receiving a rate of return which can be used to reduce rates paid by city customers.
First, it is urged that the city is entitled to claim the assets of the system as investment because payment of the bonds used to acquire many of the assets and the State Water Project obligations was guaranteed by the residents of the city whose property was subject to taxes if the water company could not pay the bonds or obligations. However, it is clear that it was always contemplated that the principal and interest on the bonds and the project obligations would be paid from revenues of the water system and in fact that is what has occurred. In the absence of any significant capital contribution by the city, it is unreasonable to permit the city to establish the assets acquired by the bond funds or the project obligation to be viewed as investment by the city rather than the ratepayers.
Second, the city points out that it has provided services and facilities to the water system. As pointed out at the outset of this opinion, I agree that the city is entitled to be compensated for any services or facilities made available to the water system and rather than accept compensation the city may properly discount the rates charged in-city consumers. However, the discount should be reasonably related to the value of services and facilities. It is not. The discount was more than 10 times the amount which the city claimed as the value of its services and facilities made available to the water company.2 Because the discount, so far as appears, greatly exceeded the value of the services and facilities contributed by the city, there is no reasonable basis to conclude that the city’s contributions of services and facilities furnished substantial investment capital warranting a rate of return. *1196The trial court found that over the years the water system has “generally proven to be self-sustaining.” To allow a rate of return based on the city services and facilities would permit the city a double recovery.
It is also argued that the water system was built on the basis of revenues obtained from ratepayers and that when the city added new ratepayers the old ones who helped build the system were entitled to a rate differential based on the value of the existing system. However, this is not the basis of the discriminatory rates. Thus, when in 1969 the city acquired the Saticoy Water Company, 60 percent of the Saticoy consumers were city residents and 40 percent nonresidents. Only the nonresidents paid the surcharge; the 60 percent of the new users who were city residents paid the discounted rate. The converse is also true; “old” users outside the city are required to pay the surcharge. Prior to the Saticoy acquisition, about 1,000 of the service connections were outside city limits with 12,600 within the city.3 The 1,000 noncity consumers, the “old” users who helped to pay for the system, are required to pay the surcharge unless their property was annexed to the city.
It is also implied that the discrimination may be justified because after the purchase of the out-of-city companies the consumers of those companies received improved service and water quality. Fixing utility rates on the basis of the value of the service provided would be a repudiation of our long history of determining utility rates on the basis of cost.
The record here is clear that the system has been paid for and is being paid for by the ratepayers, both within and without the city, and the city has not made a significant capital contribution warranting the establishment of a rate base composed of the assets of the system and an allowance of a rate of return on that rate base. When the ratepayers have paid for the system, requiring them to also pay a rate of return to the city on the assets of the system in the absence of a significant capital investment is to charge them twice for the investment. Although the rate of return may be used for replacement, improvement and additions to the system, it is improper to discriminate against the out-of-city consumers by requiring them to furnish excessive amounts for those purposes. Rather, when the city chose to dedicate its system to serve out-of-city consumers, they became entitled to the same rights as to reasonable rates as the city users. Discrimination in rates can be justified on the basis of differentials in cost in delivering water or *1197on the basis of city contributions but not on the basis of fictitious capital contributions.
Bird, C. J., concurred.
Appellants’ petition for a rehearing was denied February 5, 1987.

The Court of Appeal in the instant case in an opinion by McMahon, J., assigned, reached the same conclusion on the basis of other authorities. The court stated: “The Donated Property Should Have Been Excluded From the Rate Base, [f] Customer donations of plant are normally excluded from the rate base on the theory that it would be inequitable to permit the utility to earn on property provided by the customers themselves. (Conejo Valley Water Co. (1965) 64 P.U.C. 212, 225; La Puente Cooperative Water Co. (1966) 66 Cal.P.U.C. 614, 626; Sutter Butte Canal Co. v. Railroad Com. (1927) 202 Cal. 179, 190-191 [259 P. 937] (affd. 279 U.S. 125 [73 L.Ed. 637, 49 S.Ct. 325]); Public Utilities Commission v. Northwest Water Corp. (1969) 168 Colo. 154 [451 P.2d 266, 276-277]; Application of Kaanapali Water Corp. (Hawaii App. 1984) 678 P.2d 584, 590-592; United Gas Corp. v. Mississippi Public Service Com’n. (1961) 240 Miss. 405 [127 So.2d 404, 412]; Cogent Public Service v. Ariz. Corp. Com’n. (1984) 142 Ariz. 52 [688 P.2d 698, 701-703].)
“An Illinois court reasons that it is proper to exclude contributions in aid of construction made by customers; the propriety of a reasonable depreciation deduction is not dependent upon the source of funds for the original construction of the facility, as the utility will have to replace obsolete properties. (Du Page Utility Co. v. Illinois Commerce Comm. (1971) 47 Ill.2d 550 [267 N.E.2d 662, 668-669], cert. den. 404 U.S. 852 [30 L.Ed.2d 62, 92 S.Ct. 74].) However, most courts reason that the purpose of depreciation is not to replace property but to recover the original investment over the life of the property. ‘Since the company has invested no funds in contributed property, it is not entitled to recover the original investment through depreciation. . . . We believe it inequitable to allow a company to recover depreciation accruals on plants in which it has made no investment. ’ (Mechanic Falls Water Co. v. Public Utilities (Me. 1977) 381 A.2d 1080, 1104; accord State ex rel. Martigney Creek Sewer Co. v. Public Service Commission (Mo. 1976) 537 S.W.2d 388, 399; State ex rel. Utility Commission v. Heater Utilities (1975) 288 N.C. 457 [219 S.E.2d 56, 62]; Sunbelt Utilities v. Public Utility Commission (Tex. 1979) 589 S.W.2d 392, 395; Princess Anne Utilities Corporation v. Commonwealth ex rel. State Corporation Commission (1971) 211 Va. 620 [179 S.E.2d 714].)
“What about federal grants and funds derived from federal revenue sharing? One court has reasoned that ‘the city has unqualified ownership of the portion of the plant built with the money and the fact that some infinitesimal portion of the money might be considered to have come from taxes paid by the out-of-city consumers does not create equities in their favor. ’ (City of Covington v. Public Service Commission (Ky. 1958) 313 S.W.2d 391, 393.) On the other hand, a Wisconsin court, in a valuation proceeding, excluded federal contributions on the theory that the federal grant was made for the benefit of both the town and the city and ‘. . . the city should not now be heard to claim that they should receive compensation for a portion of the water utility which was never paid for by them either directly or indirectly. ’ (City of St. Francis v. Public Service Commission (1955) 270 Wis. 91 [70 N.W.2d 221, 225-226].)
“Most courts which have considered the problem have excluded federal grants from the rate base. (See, e.g., Pichotta v. City of Skagway (D.C. Alaska 1948) 78 F.Supp. 999, 1006 [$39,973 expended by army in rehabilitating the system during World War II was excluded from the rate base, as the rule allowing additions was never intended to embrace a gratuitous contribution to capital made at the taxpayers expense]; In re Southern California Edison Co. (1954) 53 Cal.P.U.C. 385, 410; 6 P.U.C.3d 161, 185-186 [donations from governmental entities were not ‘investment’]; City of Detroit v. City of Highland Park (1949) 326 Mich. 78 [39 N.W.2d 325, 333] [federal funded contributions were excluded from rate base of municipally owned utility]; City of Hagerstown v. Public Service Commission (1958) 217 Md. 101 [141 A.2d 699] [in setting rates to utility serving outside customers, both customer contributions and federal grants were excluded from the rate base].)
“We agree that both acreage fees, connection fees, and other donations should be excluded from the rate base, in calculating any surcharge to nonresidents. As to federal contributions *1195and grants, the same result should obtain; it is unfair to require those who have paid federal income taxes to pay for the proverbial ‘pork barrel’ a second time.” (Fn. omitted.)

The additional revenue due to the 70 percent surcharge during the fiscal years 1972-1973 through 1976-1977 totalled approximately $1.4 million. During the period the ratio of city consumers to out-of-city consumers ranged from approximately five to one to six to one. Assuming, as the majority conclude, that the out-of-city consumers paid a reasonable rate, the discount allowed city consumers from the reasonable rate would be at least $7 million (5 X $1.4 million). During the period the city claimed unreimbursed expenses of $629,000.

After the acquisition, there were apparently 18,000 city customers and 2,800 customers outside the city.