WATER ‑- PUBLIC SERVICE COMPANY SELLING ASSETS TO A MUTUAL WATER COMPANY ‑- JURISDICTION OF PUBLIC SERVICE COMMISSION

WATER ‑- PUBLIC SERVICE COMPANY SELLING ASSETS TO A MUTUAL WATER COMPANY ‑- JURISDICTION OF PUBLIC SERVICE COMMISSION

Public Service Commission has jurisdiction over a mutual water company and could require it to continue service to non-members who refused to join it but who had been receiving water service.

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                                                                  March 28, 1950

Washington Public Service Commission
Insurance Building
Olympia, Washington                                                                                                              Cite as:  AGO 49-51 No. 243

Attention:  !ttHonorable Raymond W. Clifford
            Commissioner

Gentlemen:

            We have your letter of January 12, 1950, asking in substance the following question:

            When pursuant to 10440b Rem. Supp. 1945 a public service company engaged in the business of supplying water has applied to the Public Service Commission for an order authorizing it to sell its assets to a mutual water company organized under the non-profit section of the corporation law of the State of Washington, and certain subscribers of the seller have refused to join the mutual;

            (a) should the facts warrant approval of the application, can the commission require the purchaser to continue service to those non-members of the mutual who refuse to join and who are now receiving water service?

            (b) assuming approval of the application, and continued service to non-members of the mutual, will the purchaser be a water company and public service company subject to the jurisdiction of this commission?

            The conclusions reached may be summarized as follows:

             [[Orig. Op. Page 2]]

            Assuming approval of the application, the purchaser would be a water company and public service company subject to the jurisdiction of the Public Service Commission, and thus the commission could require the purchaser to continue service to those non-members of the mutual who refuse to join and who are now receiving water service.

                                                                     ANALYSIS

            You advise that,

            "Under the provisions of 10440b Rem. Supp. 1945, the Waller Road Water Company, a public service company of the State of Washington, has applied to this commission for an order authorizing it to sell its assets to a mutual water company organized under the non-profit section of the Corporation Law of the State of Washington.  Approximately 60% of the 500 subscribers of the seller are members of the mutual.  Approximately 40% refuse to join the mutual."

            Restated, your problem is as follows: What should be the result where the assets of a public service company are sought to be transferred to a cooperative company in the event that a substantial number of the public service company's subscribers refuses to participate in the transferee company?  The question is apparently one of first impression in this jurisdiction.

            It appears to be a general rule that where a public service company has dedicated its facilities to the public, the public has acquired a right to have that service continued, even though the facilities be transferred to another company or to a municipality.

            This principle is well stated in North Little Rock Water Company v. Waterworks Commission of Little Rock, 199 Ark. 773, 136 S.W. 2d 194, wherein the court said:

            "We think, however, that the principle does apply, for the reason that Little Rock acquired an essential part of the system devoted to furnishing water to North Little Rock, and without which the latter City would be without water supply until another system or source of supply could be procured.  The  [[Orig. Op. Page 3]] theory of the law is that a city may not be deprived of an essential utility, such as water, through the action of the utility furnishing that service by selling its plant, or an essential portion thereof, without which the service cannot be furnished; and if it does so, the purchaser or succeeding utility company succeeds to and has imposed upon it the obligation of continuing the service.

            "* * *

            "The entire original plant was devoted to the public service of furnishing both cities with water, and North Little Rock may not be deprived of that service through the action of the Water Company in selling a portion of its plant without which portion the service to North Little Rock could not be continued. * * *"

            "In 67 C.J., title Waters, Sec. 633, p. 1158, it is said.  'So, in general, a municipal corporation which purchases the assets and franchise of a water company acquires the rights and privileges of, and has no greater rights and powers than, such company; it assumes the responsibilities of, and is subject to the same obligations as, such company.'"

            See alsoWestern Canal Co. v. R. R. Comm. of State of Calif., 216 Cal. 639, 15 P. (2d) 853;City of So. Pasadena v. Pasadena Land and Water Co., 152 Cal. 579, 93 Pac. 490.

            It has been decided in Washington that a utility corporation operating strictly within the provisions of chapter 134, Laws of 1907 (Rem. Rev. Stat. 3888-3900, the Non-Profit Corporations Act, is not a public service company subject to regulation by the Public Service Commission.  Under the authority ofInland Empire Rural Electrification, Inc. v. Dept. of Public Service, 199 Wash. 527, 92 P. (2d) 258, such corporations may operate without regard to public service commission law.

            This rule would undoubtedly apply in the present instance if all the present subscribers agreed to join the new company.  However, as will be pointed out, where a portion of the subscribers refuse to affiliate with the cooperative, the  [[Orig. Op. Page 4]] reason for exempting cooperatives from the jurisdiction of the Public Service Commission does not exist. The action in theInland case, supra, was one for declaratory relief to ascertain the status of the plaintiff company, and to determine whether or not it was a public service company subject to regulation by the state commission.  The court held first that the declaratory judgment action would lie and secondly that since the company was organized and was in fact operating under the non-profit corporation law, chapter 134, Laws of 1907, p. 255 (Rem. Rev. Stat. 3888-3900), it was not subject to such regulation.  It was pointed out, however, that despite the literal definition of the public service commission law, chapter 117, Laws of 1911, as amended (Rem. Rev. Stat. Supp. 10339-10459), the question was whether "respondent is, in fact and law, a public service corporation within the purview of the public service commission law."  The court then noted the provisions of the non-profit corporation act and found that the company was pursuing its activities strictly in accordance with the provisions and privileges of the 1907 act and further stated,

            "* * * However, the question in this respect is whether respondent, although created and purporting to operate under that act, is, nevertheless, in fact and law, a public service corporation."

            The court then reiterated the well established principles that regulation by the department is predicated upon the proposition that the service rendered is public service, and that thus the corporation rendering it is a public service corporation and that unless this were so, regulation by the commission would be unconstitutional.

            The opinion continues as follows:

            "A corporation becomes a public service corporation, subject to regulation by the department of public service, only when, and to the extent that, its business is dedicated or devoted to a public use.  The test to be applied is whether or not the corporation holds itself out, expressly or impliedly, to supply its service or product for use either by the public as a class or by that portion of it that can be served by the utility; or whether, on the contrary, it merely offers to serve only particular individuals of its own selection.  (Citing cases)

             [[Orig. Op. Page 5]]

            "The question of the character of a corporation is one of fact to be determined by the evidence disclosed by the record.  A corporation which is actually engaged as a public utility cannot escape regulation by the state merely because its charter or its contract characterizes it as a private corporation.  On the other hand, a private corporation cannot be converted into a public service corporation by mere legislative fiat.  What it does is the important thing, not what it, or the state, says that it is.  (citing cases)

            "Applying these rules and principles, we are of the opinion that respondent is not a public service corporation and is, therefore, not subject to regulation by the public service commission.  Respondent was organized under the 1907 act and, so far as the complaint shows, it conducts its business strictly in accordance with the privileges conferred and the limitations prescribed by that act.  But more important than that is the controlling factor that it has not dedicated or devoted its facilities to public use, nor has it held itself out as serving or ready to serve, the general public or any part of it.  It does not conduct its operations for gain to itself, or for the profit of investing stockholders, in the sense in which those terms are commonly understood.  It does not have the character of an independent corporation engaged in business for profit to itselfat the expense of a consuming public which has no voice in the management of its affairs and no interest in the financial returns.  Its members do not stand in the relation of members of the public needing the protection of the public service commission in the matter of rates and service supplied by an independent corporation.

            "On the contrary, it functions entirely on a cooperative basis, typifying an arrangementunder and through which the users of a particular service and the consumers of a particular product operate the facilities which they themselves own.   [[Orig. Op. Page 6]] The service, which is supplied only to members, is at cost, since surplus receipts are returned ratably according to the amount of each member's consumption.  There is complete identity of interest between the corporate agency supplying the service and the persons who are being served.  It is a league of individuals associated together in corporate form for the sole purpose of producing and procuring for themselves a needed service at cost.  In short, so far as the record before us indicates, it is not a public service corporation."  (Emphasis supplied)

            The factual situation here before us differs materially from that of theInland Empire case,supra, in that instead of the cooperative being formed initially and then acquiring a new distribution system which had never been dedicated to the public as in InlandEmpire, supra, we are confronted with a situation where the property to be acquired had already been dedicated to the use of the public.  Thus the present subscribers of the Waller Road Company are entitled to a continuation of service whether or not they join the new company.  The net result of the transfer then, will be quite unlike the situation in theInland Empire case in that the contemplated transfer will not result in a corporation which (in the language of that decision) "functions entirely on a cooperative basis, typifying an arrangement under and through which the users of a particular service and the consumers of a particular product operate the facilities which they themselves own," and in which "There is complete identity of interest between the corporate agency supplying the service and the persons who are being served."

            Having determined that the non-members are entitled to a continuation of service, they will, if the contemplated transfer is effected, stand in the same relation to the newly formed mutual company as they did to the Waller Road Company.  They will be "members of the public needing the protection of the public service commission in the matter of rates and service supplied by an independent corporation."

            Our conclusion is that the proposed company cannot, under the facts herein presented, become a true mutual water company within the purview of theInland case so as to be without the jurisdiction of the public service commission law.

             [[Orig. Op. Page 7]]

            Doubtless if the time should arrive when all of Waller Road's subscribers would join the new company it would then fall squarely within the holding ofInland Empire Rural Electrification, Inc. v. Dept. of Public Service, supra.

Very truly yours,

SMITH TROY
Attorney General

RICHARD OTIS WHITE
Assistant Attorney General