Human Right to Water

Since 2012, California law has declared that every person in the state has a right to clean, safe, and affordable drinking water. However, hundreds of water systems serving millions of Californians lack the technical, managerial, or financial resources necessary to provide safe and reliable water service at affordable rates.  Although a portfolio of solutions will be needed to address this situation, the Public Advocates Office recognizes that acquisition of inadequately operated and maintained water systems by California’s largest investor-owned water utilities (IOUs) can help achieve the State’s Human Right to Water.

 

In April 2022, the Commission began a rulemaking proceeding to establish a framework for acquisition of water systems by IOUs. As a party in the proceeding, the Public Advocates Office supports prioritizing the acquisition of small failing systems near existing IOU service territories. We also understand that IOU ratepayers have limited capacity to fund the acquisition and improvement of failing systems. Therefore, we have recommended a four-pillar framework to prevent over-priced and unnecessary monopolistic acquisitions to help ensure adequate resources are available and focused on where the public interest is best served.

 

 

 

Policy Principles

Historically, IOUs have requested the Commission approve whatever acquisition price has been agreed-to by the buying and selling utilities. However, because IOU profit is a direct function of the price paid, there is a reduced incentive for a buying utility to offer the lowest price reasonable (as would be expected in a competitive market).  When considering whether a proposed acquisition price is reasonable, the Commission should consider different valuation methodologies produced by independent professional appraisers to ensure that the rates customers will pay to fund acquisitions are reasonable.

In 2006, the Commission established rules to share between ratepayers and shareholders the gain (i.e. profit) that may result when a utility asset is sold.  Although the Commission has not applied these rules to the sale of an entire water system, conceptually there is little difference between the sale of all an IOUs assets (as in an acquisition proceeding) and the sale of any other number of assets. In both cases, an IOU can receive unreasonable profits on assets funded by ratepayers unless the rules are applied. 

When a larger IOU purchases a smaller water system, there is the potential for economies of scale, as cost savings are realized on bulk purchases of materials and through the elimination of administrative redundancies. However, when the cost to ratepayers of the combined system increases solely because of the acquisition (without any beneficial improvements being made), ratepayers are funding diseconomies of scale.  By preventing existing ratepayers from funding these diseconomies of scale, IOUs will have a greater incentive to ensure that any premium being paid on the acquired system is just and reasonable. Furthermore, ratepayers will have greater capacity to fund the actual system improvements that are necessary to ensure California’s Human Right to Water.

Typically, an IOU presents “illustrative” rates when it seeks approval of an acquisition.  Rather than seeking approval of an actual budget up front, IOUs request surcharge accounts to record all costs associated with the acquisition and necessary system improvements, and then surcharge customers at a later date for these costs. This process lacks transparency, reduces the IOUs incentive to control costs, and shifts the risk of operations to ratepayers.  If an IOU has performed its due diligence evaluating the system to be acquired, it should have a reasonable basis to develop a budget and forecast the necessary rates to meet that budget.  This is the traditional ratemaking process and should be the same process for acquisitions.

HISTORIC LEGISLATION

Bill Number: AB 685 (2012)

Bill Description: Established the policy of California that every human being has the right to safe, clean, affordable, and accessible water adequate for human consumption.

Link: Bill Text - AB-685 State water policy. (ca.gov)

PROCEEDINGS

Rulemaking to Establish Framework for Water System Acquisitions (R.22-04-003)

 

Download the Comments of the Public Advocates Office:

Comments on Rulemaking

Comments on Failing Systems

Comments on Valuation TBD

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