Hansen v. City of San Buenaventura

• Decision Date: 31 December 1986
• Citation: 729 P.2d 186,233 Cal.Rptr. 22,42 Cal.3d 1172
• Parties: , 729 P.2d 186 Magdaline M. HANSEN et al., Plaintiffs and Appellants, v. CITY OF SAN BUENAVENTURA, Defendant and Respondent. L.A. 32091.
• Court: California Supreme Court

Page 22

233 Cal.Rptr. 22

42 Cal.3d 1172, 729 P.2d 186

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

L.A. 32091.

Supreme Court of California.

Dec. 31, 1986.

Rehearing Denied Feb. 5, 1987.

[42 Cal.3d 1175] [729 P.2d 187]

Stone & Stone, Helene Stone and Richard C. Gilman, Oxnard, for plaintiffs and appellants.

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

Jerome B. Falk, Jr., Steven L. Mayer and Howard, Rice, Nemerovski, Canady, Robertson & Falk, San Francisco, as amici curiae on behalf of defendant and respondent.

GRODIN, Justice.

Defendant City of San Buenaventura (hereafter referred to as Ventura) owns and operates a water company which serves customers who reside both in and outside the city boundaries. In 1972, Ventura enacted an ordinance imposing a 70 percent surcharge on water supplied to customers living outside the city limits. Those nonresident customers brought this class action to challenge the surcharge, seeking declaratory relief and damages on the ground that the rates imposed were unreasonable, arbitrary, and discriminatory and that the rate structure denied them equal protection. Following a nine-day trial, the superior court held the 70 percent surcharge was reasonable and entered judgment for Ventura. The Court of Appeal reversed and remanded for a new trial; Ventura sought review in this court.

We granted review to resolve the important question of whether a municipal utility may recover a reasonable rate of return on its investments and to clarify what circumstances may be considered by a court in determining whether a rate is reasonable. We conclude that a municipal utility is entitled to a reasonable rate of return and, for reasons we shall explain, we agree with the trial court that the 70 percent surcharge on water supplied nonresidents in this case was justified. Accordingly, we reverse the judgment of the Court of Appeal.

I

The City of Ventura has owned and operated its own municipal water system since 1923 when it bought the facilities of the public utility corporation that had previously supplied water to the city and surrounding areas. Ventura financed the sale through a $250,000 general obligation bond issue. Between 1925 and 1960, the citizens of Ventura authorized four additional general bond issues to improve and modernize the system. Totalling over $3.6 million, these bond issues subjected all private property in the city to a lien: if funds were unavailable to pay the bonds, the bondholders had the right to require Ventura to levy taxes on all private property to meet the bond indebtedness.

Throughout the years, the citizens of Ventura demonstrated their commitment to the system by allowing the city to use its general fund monies to help maintain and improve the system. Ventura used its general fund monies 1) to provide office space for water system employees as well as for city employees who rendered services for the water system and 2) to pay a portion of the salaries of city employees who performed accounting, billing, administrative, and legal services for the water system. Additionally, Ventura made a number of transfers from its general fund to the water system at little or no interest.

Ventura also used power taxes in the amount of nearly $300,000 to support the water system in the 1971-1972 and 1976-1977 fiscal years. These funds represented transfers to the system from tax payments made by residents only. Additionally, Ventura required new in-city customers to pay upfront connection and acreage fees to obtain water service. These contributions, which were used to benefit the entire water system, totalled over $600,000 from 1964 until trial, in 1978. No water system revenues have ever gone to Ventura's general fund; all water revenues, acreage and connection fees, power tax revenues, and contributions from the city's general fund have been used to operate and maintain Ventura's water system.

In 1966, Ventura purchased the Mound Water Company (Mound), a small mutual water company ¹ serving customers outside the city. At the time of the sale, Mound represented to Ventura that the Mound shareholders, that is the Mound customers, had approved the transaction. Thus, the sale was truly consensual in that the very customers who were to receive water from Ventura ratified the purchase.

Pursuant to the terms of the purchase agreement, Ventura agreed to furnish water "to those customers heretofore served by Mound who may desire such service at the regularly established rates for water service from the Ventura Water System." However, nothing in the sale agreement precluded Ventura from continuing to apply reasonable rate differentials between residents and nonresidents as it had done for years. ² The purchase agreement only assured that Ventura would continue to provide service at regularly established rates to customers served by Mound at the time of the sale.

The water that Mound had supplied its users prior to the sale came from wells of poor quality which were below public health standards. On acquisition, Ventura abandoned the polluted wells and commenced supplying the former Mound customers with water of substantially better quality. It is undisputed that the sale of Mound to Ventura immediately and significantly improved the quality, availability, and overall source of supply and service to the customers previously served by Mound, customers who all live outside the city boundaries and are presently subject to the disputed surcharge.

In 1969, Ventura acquired a second water company, the Saticoy Water Company (Saticoy). Saticoy was an investor-owned public utility, 60 percent of whose customers were residents of Ventura, 40 percent nonresidents. Because of the nature of the ownership of the utility, the Saticoy customers were not given an opportunity to approve the sale. However, they were given the chance to participate in an election to approve or disapprove the purchase of Saticoy by Ventura. Close to 90 percent of those customers who voted registered approval. In addition, customers also had the opportunity to appear before the Public Utilities Commission (hereafter referred to as P.U.C.), but it appears no protests were in fact received.

Under the terms of the agreement, Ventura was bound for 60 days to maintain the rates charged by Saticoy prior to the sale; however, following the 60-day period, Ventura had the right to alter the preexisting rates. The sale contract further provided: "[Ventura] agrees that from and after the closing date it will serve water without unfair or unreasonable discrimination to all customers in the area wherein [it] is certified to provide 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." Nothing in the sale agreement, however, specifically precluded Ventura from applying reasonable rate differentials between residents and nonresidents.

Saticoy customers benefited immediately and substantially from the sale. Instead of continuing to rely on four small storage tanks, they suddenly had available over fifty million gallons of storage capacity from a vast network of tanks and reservoirs tied into Ventura's system. Further, the two wells formerly owned by Saticoy fell short of state health standards with respect to water quality. Ventura abandoned one well immediately and placed the other on standby status, to be used only in event of emergency.

The improvements to both the former Mound and Saticoy customers were not without cost. By 1969, Ventura was serving approximately 2,800 out- water users, the vast majority of whom were added in conjunction with the Mound and Saticoy acquisitions. Because Ventura did not have sufficient surplus water of its own and because it did not acquire any surplus water as a result of these acquisitions, Ventura was obliged to purchase additional water. The cost of the additional water purchased from the Casitas Municipal Water District (Casitas) and others was substantially greater than the cost of Ventura-owned water sources. ³ In addition to purchasing additional water to accomodate the needs of its additional customers, Ventura was forced to expand and improve its facilities. Partly because the facilities purchased from Mound and Saticoy were inadequate to meet the needs of customers previously served by these two water companies, Ventura undertook major improvements to improve and expand its own facilities. ⁴

In 1970, Ventura acquired by assignment a contract for 10,000 acre feet of water annually from the State Water Project. Under the contract, Ventura obliged itself to make payments for the next 65 years estimated at $58 million. Although Ventura had yet to receive any state water at the time of trial, it had made the required annual payments for capital and fixed operating and maintenance costs. Not only must Ventura make payments irrespective of whether it receives water, but the contract provides that it must levy taxes if revenues should be insufficient to meet these payments. This tax lien obviously falls only on property owners in Ventura; as a class, nonresident water users do not share the risk of this obligation. Another burden not shared by out-of-city users was Ventura's obligation to construct the necessary transmission facilities to bring water from the state system, an estimated cost at time of trial exceeding $50 million.

Because of the impact caused by the acquisition of the two water companies, in 1970 Ventura retained the consulting firm of Wilsey & Ham to analyze the water rates. The firm initially recommended and Ventura adopted a 20 percent overall rate increase. At some later point, after obtaining updated figures...