Hansen v. City of San Buenaventura

• Citation: 167 Cal.App.3d 900,213 Cal.Rptr. 859
• Court: California Court of Appeals
• Decision Date: 08 April 1985
• Parties: Previously published at 167 Cal.App.3d 900, 184 Cal.App.3d 679 167 Cal.App.3d 900, 184 Cal.App.3d 679 Magdaline M. HANSEN, et al., Plaintiffs and Appellants, v. CITY OF SAN BUENAVENTURA, Defendant and Respondent. Civ. 67886.

Page 859

213 Cal.Rptr. 859

Previously published at 167 Cal.App.3d 900, 184 Cal.App.3d 679

167 Cal.App.3d 900, 184 Cal.App.3d 679

Magdaline M. HANSEN, et al., Plaintiffs and Appellants, v. CITY OF SAN BUENAVENTURA, Defendant and Respondent.

Civ. 67886.

Court of Appeal, Second District, Division 6, California.

April 8, 1985.

As Modified on Denial of Rehearing

May 7, 1985.

Review Granted July 25, 1985.

Stone & Stone, a Professional Corp., and Richard C. Gilman, Oxnard, for plaintiffs and appellants.

Donald S. Greenberg, City Atty., Michael R. Dougherty, Asst. City Atty., Ventura, Arthur L. Littleworth, Best, Best & Krieger and Ariel P. Calonne, Riverside, Sp. Counsel, for defendant and respondent.

McMAHON, Associate Justice. ^**

May a municipally owned water system impose a 70 percent surcharge upon the water bills of customers living outside of the city limits when the cost of providing water service has been funded by water revenues, and not taxes?

We conclude that the answer to this inquiry is found in venerable common law rules and, accordingly, decline to consider the constitutional arguments advanced by the parties.

At common law, a privately owned utility which had a monopoly in serving a given area was required to serve all consumers without unreasonable discrimination in rates or manner of service. Although such private utilities are subject to regulation by the Public Utilities Commission, customers of municipally owned utilities are just as It is apparent that the trial judge gave little weight to these settled principles of California law, and relied instead upon other rules of law applicable in other states, but not California. For the reasons stated, we will remand the matter for a new trial consistent with the principles enunciated herein.

protected from exorbitant rates and unjust discrimination as the consumers are under the Public Utility Act. Indeed, when a municipality proposes to acquire a water company subject to the jurisdiction of the Public Utilities Commission, the commission will impose, as a condition of its approval of the sale, a provision that the city shall not unfairly discriminate against customers who live outside the city and who have no voice in city government.

THE CASE

In 1972 the City of San Buenaventura (hereinafter referred to as "Ventura" or "the city") enacted an ordinance imposing a 70 percent surcharge upon water supplied to existing customers living outside city limits. This prompted a rebellion, and in 1973 a class action was filed seeking declaratory relief and damages on the ground that the rates imposed upon customers outside the city limits, after July 1, 1972, were exorbitant, unreasonable, arbitrary and discriminatory, and did not bear any relationship to the actual cost of furnishing water.

As is customary in water cases, the matter languished for several years. (See e.g., City of Los Angeles v. City of San Fernando (1975) 14 Cal.3d 199, 207-208, 123 Cal.Rptr. 1, 537 P.2d 1250.) After a nine day trial in 1978 the trial judge then considered post-trial briefs before filing his intended decision in 1980. Prolix findings of fact together with a judgment were filed in 1981. This appeal followed.

The trial court concluded that the rate structure was reasonable. While we are, of course, obliged to uphold this conclusion if it is supported by substantial evidence, we are also guided by what Justice Holmes said in Kidd v. Alabama (1903) 188 U.S. 730, 733, 23 S.Ct. 401, 402, 47 L.Ed. 669: "What is reasonable is a question of practical details into which fiction cannot enter."

THE HISTORY OF THE SYSTEM

Prior to 1923 the City of Ventura and adjacent territory was provided water by the Southern California Edison Company, a private company. That year the city authorized the issuance of general obligation bonds in the amount of $250,000 to purchase the system.

In 1925, 1927, 1948 and 1960 additional general obligation bonds totalling over 3.5 million dollars were issued and the proceeds were used to improve and modernize the system. Although all property within the city was subject to a lien, and the city would have had to raise taxes if the funds generated from water revenues had proved insufficient to pay the bonds, in actuality, both operating costs and payments of bond principal and interest were always paid from available water revenue, and not from ad valorem taxes.

Indeed, annual financial reports issued by the city repeatedly stressed that its water department was operated on an "enterprise basis," and that the department generated sufficient funds through user fees to finance the acquisition, operation and maintenance of its facilities.

In 1966 the city purchased the Mound Mutual Water Company for $62,500 from water revenues. The water was of poor quality, exceeding a thousand parts per million of total dissolved solids. Under water quality standards promulgated in California, the acceptable limits are 1000 parts per million, and the health department will only issue a temporary certificate if the water contains 1000 parts per million. After Mound was acquired, the city abandoned wells which had served the customers of the private water company and began supplying them with water of better quality. ¹ In 1968, the city acquired the Saticoy Water Company ("Saticoy"), a private water company regulated by the Public Utilities Commission. Before Saticoy was acquired, only 1,025 of the 13,681 service connections of the municipal waterworks were outside city limits. With the addition of Saticoy's customers, although the number of customers within city limits increased slightly to 15,215, the number of customers living outside city limits almost trebled, increasing to 2,711. ²

A perusal of the map indicates that the present boundaries of the city resemble a partially completed jigsaw puzzle; many of the county residents provided with city water live in various enclaves, surrounded by areas previously annexed to the city.

The acquisition of Saticoy was financed by 2.5 million dollars in revenue bonds which constitute a first lien on the revenues of the water department. The bond holders could not make recourse either to the taxing power of the city or to money derived from the levy and collection of taxes. Subsequently, an additional 4 million dollars in revenue bonds were issued to provide for the replacement of deteriorated transmission and distribution lines and to prepare the system for waters expected to come from the State Water Project.

Saticoy customers benefited from the sale. Instead of relying on four small storage tanks, they now could take advantage of a city system which provided over 50 million gallons of storage capacity from tanks and a reservoir tied into the Ventura water system. Water obtained from Saticoy's wells also was of poor quality. One well was abandoned and one well was put on a standby basis. Citizens now complain when water is pumped from this well during the summer.

The 1968 contract of sale between Saticoy and the city, which was approved by the California Public Utilities Commission, allowed the city to alter the preexisting rates at any time after 60 days. The contract further provided: "City agrees that from and after the closing date it will serve water without unfair or unreasonable discrimination to all customers in the area wherein seller is certificated to provide water service by the California Public Utilities Commission whether such customers are located within or without the territorial boundaries of the city and will continue to serve all of such customers."

Indeed, under the Revenue Bond Law of 1941, the city shall prescribe, revise, and collect such charges that the services, facilities, or water are furnished at the lowest cost consistent with sound economy, and prudent management, and the security and payment of the principal and interest of the bonds. (Gov.Code, § 54514.)

The city has taken the position that the creation of separate pressure zones for rate making purposes would be costly to establish and politically divisive. Nevertheless, since 1935, the city has imposed a surcharge on nonresident water users. Until December of 1952, the surcharge was 48 percent. ³ Thereafter, until July 1, 1972, the surcharge varied between 31.4 percent and 32.7 percent. Since July 1, 1972, the surcharge has been 70 percent. In fiscal year 1976-1977, this resulted in outsiders paying an average of $97.13 more than their neighbors living within city limits. If they annexed, the surcharge would be eliminated Before considering the rate increase of 1972, it is appropriate to consider the sources of money used to improve the system apart from the bonds. First, there was an intra-city loan of $245,000 in 1958 to the water department which was repaid, without interest in 1967 and 1971 (conversely, in 1946, $118,000 was transferred from the water fund to the sanitation fund. It was never repaid). Second, there was a $322,000 loan derived from revenue sharing funds in 1974 for improvements. It is to be repaid with interest, over five years, generating a return of $382,210. Third, between 1972 and 1976 the city received housing and urban development water facility grants totalling $1,774,889 for a transmission pipeline, the Avenue treatment plant, and other facilities. Fourth, the general fund was to loan the water department $1,380,245, for the financing of the Bailey Reservoir in 1978-1979, which was to be repaid with interest in five years in the amount of $1,560,081.87.

but acreage and connection fees would be paid by the developer.

Since 1972 or 1973, no nonresident may connect to the system unless the property is annexed to the city and a correction fee is paid. By the time of trial, these contributions following annexation amounted to $778,000. This sum was included in the rate base, having been contributed by those now within the city.

Turning now to the 1972 rate increase, we first note that the...