Hansen v. City of San Buenaventura

Full title: Magdaline M. HANSEN, et al., Plaintiffs and Appellants, v. CITY OF SAN…

Court: California Court of Appeals, Second District, Sixth Division

Date published: Apr 8, 1985

213 Cal. Rptr. 859 (Cal. Ct. App. 1985)

Opinion

As Modified on Denial of Rehearing May 7, 1985.

Review Granted July 25, 1985.

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

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. ^**

** Assigned by the Chairperson of the Judicial Council.

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.

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 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 2}

1 Interestingly, in calculating the value of the system, Mr. Stetson, one of the city's experts, opined that the city had an entitlement to the "Mound Basin," or 40 percent of the indigenous water rights. Because the "Mound Basin" and the "Ventura river" provided a cheaper source of water, as compared with the supply obtained from Lake Casitas, if these water rights were given a capitalized value, they would be worth $2,000,000, or 40 percent of the total water rights. However, we are not told whether the Mound Basin is coterminous with the previous boundaries of the Mound Mutual Water Company.

1 In California a water district, empowered to declare a water shortage emergency condition, may deny new connections to preserve the supply when there would be insufficient water for human consumption, sanitation, and fire protection. (Wat.Code, §§ 350, 353, 354, 356; Butte Co. W.U. Assn. v. Railroad Com. (1921) 185 Cal. 218, 230, 196 P. 265; Swanson v. Marin County Mut. Water Dist. (1976) 56 Cal.App.3d 512, 522-523, 128 Cal.Rptr. 485.) Similarly, a sanitary district may not grant a preference in limited disposal capacity to those outside the district over its inhabitants who had a current need for such service. (Trimont Land Co. v. Truckee Sanitary Dist. (1983) 145 Cal.App.3d 330, 351-354, 193 Cal.Rptr. 568.)

2 By 1976-1977, following residential growth and annexations, there apparently were 18,513 city customers and 2911 customers living outside city limits.

2 Los Angeles was held bound by a contract with the Veterans Administration providing for water at the resident rate to facilities located outside city limits. (Department of Water & Power v. United States (1945) 105 Ct.Cl. 72, 62 F.Supp. 938.)

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 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.

3 In 1943 the California Railroad Commission, at the city's request, issued an advisory opinion wherein it concluded that the rate differential produced a reasonable rate of return on rate base, which apparently included monies from donations and federal funds.

3 But see Ross v. City of Geneva (1978) 71 Ill.2d 27, 15 Ill.Dec. 658, 661, 373 N.E.2d 1342, 1345 , where the statute did not empower the city to levy a 10 percent surcharge on commercial electric users and then use funds for the construction of parking lots.

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 addition of the Saticoy customers (together with the 31.4 percent surcharge then imposed on nonresidents), produced rather dramatic results. Gross revenues for the fiscal year ending in 1970 increased 30.89 percent, while expenses only increased 16.63 percent. Net income jumped from $110,889.59 to $303,787.75, an increase of 173.96 percent. Yet, further funds were sought.

In the spring of 1970, the consulting firm of Wilsey & Ham was retained by the city to analyze the water rates. Mr. Heidrick, who was in charge of the study, recommended an overall rate increase of 20 percent, which has never been challenged. When it came to recommending a surcharge, Mr. Heidrick initially concluded that those outside contributed $340,000 in revenue, and, after deducting a proportionate share of operating expenses, interest and depreciation, this would yield $61,000 (a 17.9 percent yield). By contrast, the city system would produce $132,000 on revenues of $1,634,000 (a 8.1 percent yield). However, this disparity was soon eliminated because Mr. Heidrick thought that county residents were being subsidized. For instance, on the basis that persons who made reservations for the city parks were persons who lived somewhere in the county, he believed that the relatively few county residents supplied with water by the city should be charged $31,000 for the use of the city parks and the swimming pool, and $1,000 for the fiesta de la Marina and Poinsetta Festival. He also charged nonresidents with $4,000 in indirect administrative costs, and $135,000 for foregone interest on investment in plant serving the county.

Apparently, the city assumed that the study would provide justification for even a higher surcharge. However, Mr. Heidrick initially concluded that while the existing 32 percent surcharge on outside customers could be justified, any additional significant surcharge would be hard to justify on the basis of available data. He could only recommend another 6.8 percent increase in the surcharge, so that the total surcharge would be 38.8 percent.

The director of public works then came up with a novel approach; why not exclude both the revenue and expenses associated with the sale of untreated water to the oil companies? The sale of untreated water had generated substantial revenue. Shell Oil paid between $195,241 and $266.109 for untreated water each year between 1972 and 1976. Yet, because the expenses associated with the sale of untreated water was less, this constituted a profit center. By eliminating his source of profit, the "loss" became $111,000 rather than $23,000. ^{4 4} Mr. Heidrick concurred, and in light of the recalculated figures, recommended that the surcharge be increased to 70 percent. A grateful city council then enacted an ordinance imposing the recommended surcharge effective July 1, 1972.

4 Appellants' expert, Mr. Knaggs, believed that if the income and expenses associated with the sale of untreated water were added back in, only a 7.6 percent surcharge would be in order. The difference between this figure and the 6.8 percent figures chosen by Mr. Heidrick, is not particularly significant.

4 Where water is furnished by a private company from the same sources, and is supplied to separate counties and communities, and there are no elements creating a material difference in cost, a uniform rate is indicated. (New Haven v. New Haven Water Co. (1934) 118 Conn. 412, 172 A. 767, 776-777.) Also, generally speaking, the courts will not permit discrimination by a private water company in favor of certain customers, or allow it to set exorbitantly high rates for others. (Griffin v. Goldsboro Water Co. (1898) 122 N.C. 206, 30 S.E. 319, 320.)

After the 70 percent surcharge was imposed, a funny thing happened. In fiscal year 1971-1972, a new "administrative charge" of $71,744 was imposed on the waterworks and those revenues were transferred to the general fund. This sum increased each year and by fiscal year 1974-1975, $150,000 was so transferred. The same amount was transferred in the next two successive years, plus $76,442 to repay a loan from the general fund. This, of course, was in addition to free water furnished to city departments, which, if revenue had been collected, would have resulted in $31,199.79 in additional revenue in fiscal year 1971-1972 and $56,353.22 in fiscal year 1975-1976.

In the annual budget proposed by the city manager in 1978-1979, water revenues of $4,491,450 were anticipated, including $300,000 for water connections. Projected departmental administration costs were $119,498. Nondepartmental administrative charges were $200,302, professional services were $41,700 and taxes were $32,755. The total expenses, including payments to water purveyors, the state water contract, and payments of bond, principal and interest, amounted to $3,314,681. After setting aside $140,510 required by a bond covenant, this would lead to a projected profit of $1,036,259 which was to be used to provide financing for a Reservoir.

THE CLAIMED JUSTIFICATION FOR THE DISCRIMINATION

A consistent theme emerged from the testimony of experts engaged by the city, namely that the city owned the system and was entitled to a reasonable rate of return as if the city residents were stockholders in a private utility. They pointed out that other cities imposed surcharges and that the City of Pasadena took 16 percent of gross revenues from water and electric sales and put it in the general fund.

For instance, Mr. Heidrick believed that the city was entitled to a reasonable rate of return on its investment in plant serving customers residing outside city limits. Thus, he explained that the $135,000 which represented the surplus revenues generated by the surcharge upon water sales to nonresidents could be classified as foregone interest on investment. The foregone interest theory was based on the assumption that although the assets of the enterprise were created from water revenues contributed by both nonresidents and residents, the municipality which owned the plant should be entitled to a return on the investment devoted to persons outside city limits, namely those who did not own the system. In fact, the $135,000 represented a 5 percent return on that part of the waterworks whose value was allocated to nonresident customers. He did not find fault with the rate of return, as a good part of the waterworks was based on historic cost, namely the cost of acquisition years before, and not the replacement cost.

Mr. Heidrick also felt that the $135,000 profit could be classified as an in lieu tax, based upon the theory that the city managed the enterprise, that city property was theoretically at risk if revenues proved insufficient to pay any outstanding general obligation bonds, and that only the city would be in a position to obtain short term financing if an emergency arose.

When Mr. Heidrick recommended a 70 percent surcharge when he studied the system between 1970 and 1972, he admitted that he thought that a court reviewing another rate surcharge imposed by another city had actually upheld the validity of such a surcharge. By the time of trial, he became aware that the other 70 percent surcharge had resulted from a negotiated settlement of that lawsuit. Although Mr. Mr. Ferry testified that the city's water rate base was $21,006,505, and included $10,706,000 in long term debt (50.97%). The Public Utility Commission in 1976 had allowed a median return of 12.30 percent on the equity of privately owned water companies. The embedded annual cost of debt averaged 5.18 percent in fiscal year 1976-1976. If a rate of 12.30 percent was applied against the 49.03 percent of the rate base representing the city's equity, and if the 5.18 percent embedded annual cost of debt was applied against the 50.97 percent of the rate base financed by long term debt, the equitable composite rate of return for the city's total rate base would be 8.67 percent.

Nonresident users accounted for 14.41 percent of the total potable water usage in fiscal year 1975-1976. Although only 10.43 percent of the hydrants were in the county, 83 percent of the property subject to county taxes were in areas where nonresident users were found, and Mr. Ferry allocated $21,164 to nonresidents for county taxes. The total revenues from nonresident potable water in fiscal year 1975-1976 was $615,778. The recorded expenses associated with service to nonresidents was $328,762, yielding a significant profit.

On the other hand by applying an 8.67 percent rate of return to the nonresident portion of the rate base, which amounted to $3,067.170 of the total of $21,006,505, an additional $265,924 would be added to the "revenue requirements," which would then total $594,686. The disparity then only amounted to $20,000, which Mr. Ferry believed was within the "zone of reasonableness."

Under Mr. Ferry's computation, grant monies were included in the total rate base. ^{5 5} He also included $4,639,656 in the rate base, representing the capitalized value to the future payments that the city is obligated to pay under its contract with the State Water Project, even though the system is not connected to the nearest state water conduit. Note also that nonpotable water supplied to industrial users, such as Shell Oil Company and Getty Oil Company, who use 95 percent of the untreated water, was excluded from this computation. If the revenues ($374,301) and expenses ($271,972) were allocated to outside users, then revenue would amount to $1,001,075, expenses would be $866,658, and there would be a surplus of $134,417. Under that analysis, only a 33.9 percent surcharge could be justified by Mr. Ferry. He also treated the $56,353 in free water as revenue foregone, and that the outside users should be charged $8,064 to make up for this lost revenue.

5 Mr. Ferry acknowledged that the California Public Utilities Commission does not allow donations to be included in the rate base of an investor-owned utility.

5 Conversely, although a Vermont court acknowledged that the resident taxpayers were entitled to some consideration for the risks assumed in undertaking the enterprise to which their credit was pledged, and that it would be unfair to require taxpayers who contributed the capital investment to pay a rate of return on the investment they alone contributed, a municipally owned utility should not impose unreasonably high rates to gain revenue for governmental operations. Hence, where the electrical department contributed 60 percent of the village's budget, the utilities commission could reduce the rate disparity. (Hastings v. Village of Stowe Electric Department (1965) 125 Vt. 227, 214 A.2d 56, 62.) Also, a municipal utility, having no stockholders, does not have to compete in the market for equity capital. Hence, where it had retained earnings of $812,000, it did not need even a 10 percent return, and was allowed a rate of return equal to twice its interest expense. (Village of Hardwick Electric Department (1983) 143 Vt. 437, 466 A.2d 1180.)

Mr. Jones, who served as the city's public works director, explained that the Casitas Mutual Water District provides half the water used by the system at a cost of $61.00 per acre foot. The water from Casitas lake can only be used within the boundaries of the district, which only includes the westerly portion of the city's water system. Because the city's water system is integrated, the city uses no more water from Casitas than is pumped from other sources, such as from the submerged dam and wells on the Ventura river, which supply 25 percent of the water, certain golf course wells, which provide 20 percent of the supply, and cost $20 to $25 per acre feet. Certain other wells are used and water is also purchased from Alta Mutual Water Company, at $56 per acre feet.

Mr. Stetson, another engineer calculated that the value of the city's water rights on the basis that 6,000 acre feet would be extracted annually from the Ventura river Overlooking the fact that a large proportion, if not a majority of those living outside city limits also are not within the boundaries of the Casitas Mutual Water District, and technically therefore could not use unblended Casitas water, Mr. Stetson assumed that when the Saticoy wells were abandoned, or put on a standby basis, the city had to purchase additional more costly water to serve these customers from the Casitas Mutual Water District. Based upon the costs associated with purchased water, in 1976-1977, the annual cost to nonresidents was $127.17 while the annual cost to residents was $71.89, thereby justifying a 76.9 percent differential in rates.

We turn now to the State Water Project. After the voters of California approved the project, the Ventura Flood Control District reserved 20,000 acre feet of water. Because the city did not acquire its right to 10,000 feet of the 20,000 acre feet until 1970 or 1971, it must pay back the charges that accrued since 1960, and make ongoing annual payments as well. $1,785.681 has been contributed as of June 30, 1977 and, of course, each nonresident consumer contributed $1.70 for every $1.00 contributed by a city resident. Future contributions on the arrearages include $313,199 in principal and $94,550 in projected interest. Between 1977 and December 31, 2035, $3,704,757 in principal and $5,699,761 in interest will be paid in annual installments to the state. In addition, there will be operating and maintenance charges of $34,091,193 and Delta water charges of $14,346,755. Yet even then, not a drop of state water will be delivered to the city or the customers until a 40 to 50 mile conduit is built between Castaic and existing Ventura mains, at a cost of countless millions.

Although all monies necessary to reserve the right to ultimately acquire state water were contributed by all rate payers, Mr. Ferry included a figure of $4,517,361, as the capitalized value of future payments, and then has 14.41 percent of that figure included in the rate base allocated to nonresidents, so that they must pay a return on monies previously paid. Mr. McMillan, the city's Director of Management Services, treated the fixed obligation of $4,017,955 as a liability. Yet that figure is also somehow treated as a future asset, and it, together with previous payments of $1,785,681, amounts to an asset of $5,803,636.

DISCUSSION

I. INTRODUCTION

To persuade the trial court that it could exact a profit from nonresident customers, the city submitted briefs containing numerous out-of-state authorities. We find significant differences between the rules governing water rates in other states and the rules operative in California.

For the reader's convenience, we have canvassed and criticized these authorities in Appendix A to this opinion. Briefly stated, we find several recurrent themes. First, some municipalities charge "what the traffic will bear," unless of course the nonresident consumer is protected by a contract. Second, municipalities can exact profits from service to nonresidents, and place the profits in the general fund.

While it is understandable that Ventura might prefer the rate making freedom enjoyed by municipalities in other jurisdictions we see no reason to adopt the reasoning of those out-of-state cases which sanction egregious forms of discrimination in municipal rate making. Certainly a politically powerless class of consumers are not going to tamely surrender their right under California law to obtain essential services at a fair price. In considering these expectations, it would seem that California public II. UNDER CALIFORNIA PUBLIC UTILITY LAW, POLITICAL BOUNDARIES ARE NOT RELEVANT CONSIDERATIONS IN RATE SETTING.

We acknowledge that although the Legislature could confer upon the State Public Utilities Commission the power to regulate municipally owned utility rates, including the rates charged nonresidents, it has not chosen to do so. (County of Inyo v. Public Utilities Com. (1980) 26 Cal.3d 154, 166-167, 161 Cal.Rptr. 172, 604 P.2d 566.) Nevertheless, a brief survey of our public utility law will prove to be useful.

First, a regulated public utility shall not raise any rate or alter any classification as to result in any increase in that rate except upon a showing that such a rate increase is justified. (Cal.P.U.C., § 454(a); e.g., Dyke Water Co. (1964) 63 Cal.P.U.C. 507, 509-510 (where exhibits essential for calculation of a rate base or operating results were uncertain, unsubstantiated or improperly accounted for, the application would be dismissed).)

A public service water company appropriating water for purposes of rental, distribution or sale cannot confer upon a customer any preferential right to the use of any part of its water. (Leavitt v. Lassen Irrigation Co. (1909) 157 Cal. 82, 89, 106 P. 404, Cal.P.U.C. § 453(a).) Thus, stockholders obviously are not entitled to free service or preferential rates. (Application of Foothill Ditch Company (1929) 33 C.R.C. 237, 240; Narbonne Ranch Water Company No. 2 (1928) 31 C.R.C. 548, 550 (company must discontinue the practice of charging stockholders $1.25 and nonstockholders $1.50 for the same amount of water); Franscioni v. Soledad Land & Water Company (1914) 4 C.R.C. 184, 187.)

No public utility shall establish or maintain any unreasonable differences as to rates, charges, services, facilities, or in any other respect, either as between localities or as between classes of service. (P.U.C. § 453(c).) Thus, each district should provide a reasonable return on the investment in that district. It would not be fair to require customers in other districts to provide more than their fair share of total earnings requirement, so that a particular district could have lower rates. (Cal. Water service Co. (1969) 69 Cal.P.U.C. 423, 429.)

At one time, the commission would suggest that political boundaries were proper criteria for different rate zones. In Residents of Kentwood v. Pacific Gas & Electric Co. (1936) 39 C.R.C. 577 (13 P.U.R. (N.S.) 400), residents of Kentwood believed they should be entitled to rates operative in incorporated towns of Ross, Larkspur and San Anselmo in Marin County. However, the evidence established that there were only 38.5 electric customers per mile in Kentfield, as compared with 68.1 per mile in the incorporated municipalities, and revenue per mile was $2,209 in Kentfield while the revenue per mile was $4,430 in the cities. A similar, but less striking, disparity existed with respect to gas service. The commission said: "... Taken as a whole, the density of customers and revenue per mile of line is greater, and the cost of installation and operation per customer is less in incorporated cities and towns than in unincorporated areas, for both gas and electricity. It is equally true that the incorporated limits of cities and towns form a rather definite dividing line between areas of low cost and high cost service, which justified a differential in rates...." (39 C.R.C. 577, 582.)

The commission suggested that Kentfield could procure more favorable rates through the simple process of incorporation. Until it did so, it would share the advantages and handicaps characteristic of rural districts. (39 C.R.C. 577, 582.)

On the other hand, where the proposed rates would favor customers inside city limits, and there was no difference in the method of providing water service to customers, or the expense involved simply by reason of the limits of the City of Vallejo, Some 30 years ago, the Public Utilities Commission announced that it was doing away with incorporation of a city as a reason for being placed in a lower electric or gas rate zone. In the future, for a city to improve its position as to rates, certain density and other pertinent factors were to be considered. (Pacific Gas & Electric Company (1952) 52 Cal.P.U.C. 111, 142; Pacific Gas & Electric Co. (1954) 53 Cal.P.U.C. 616, 622.) Also, territory contiguous to cities must now be reviewed periodically to determine if any newly developed territory has urban characteristics warranting consideration for either more favorable rate treatment, or for rates comparable to the adjoining cities. (Southern California Edison (1957) 55 Cal.P.U.C. 743, 761.)

In California Water Service Co. (1955) 54 Cal.P.U.C. 266 (9 P.U.R.3d 128) the City of Chico urged that its city limits should be adopted as a zone boundary. The commission disagreed, saying: "This commission has long adhered to the premise that no distinction, without other controlling reasons, should be recognized either in rates charges customers or in rules governing service to them by reason of the fact that a political boundary, such as that determined by the limits of a city, separated one customer from another. If such a distinction were to be made, political rates, rather than service rates, might soon follow--a condition abhorrent to the general public interest and to the clear mandate of the law that no unreasonable distinction shall exist." (54 Cal.P.U.C. 266, 269.)

Noting that there had been 26 boundary changes in Chico in 3 years, the commission found no just cause for establishing a rate differential based upon whether the water service was rendered within or without the political boundaries of the city. (54 Cal.P.U.C. 266, 270.)

Similarly in San Diego Gas & Electric Co. (1972) 74 Cal.P.U.C. 93, the commission noted that counsel's arguments that preferential treatment should be accorded San Diego over the contiguous cities such as El Cajon, National City, La Mesa and others, were not convincing. "The use of city boundaries is frequently advocated by cities and has just as frequently been cast aside by the commission as inappropriate...." (74 Cal.P.U.C. 93, 124.) The commission reminded the city that the purpose in establishing differential rate zones on a geographic basis is to reflect differences in costs of service in the most equitable manner as practical. (74 Cal.P.U.C. 93, 124.)

The commission does not assert jurisdiction over rates charged by a city for service inside and outside its boundaries. However, it is most significant that the commission, when it approves the acquisition of a privately owned, regulated public utility by a municipality, does afford protection to nonresident consumers. (Dyke Water Co. (1963) 61 Cal.P.U.C. 313, 321.) In that case the commission observed "... the transfer would not be in the public interest if discriminatory treatment by the city were to result. It is for that reason that the commission has at all times imposed, as a condition of its approval, a provision that a city purchasing a utility system shall not unfairly discriminate against customers who live outside the city and have no voice in city government." (61 Cal.P.U.C. 315, 321.) ^{6 6}

6 In Dyke, the evidence indicated that the City of Anaheim had used other city funds to support the system. Hence the customers living outside the city could fairly be expected to pay for the water at higher rates. (61 Cal.P.U.C. 313, 321.)

6 Subsequently it was held that a class action could be maintained. (Mohme v. City of Cocoa (Fla.App.1977) 356 So.2d 2.)

Thus, the Public Utilities Commission, foreseeing the risk of discrimination against nonresidents, has guaranteed that they may not be treated like the "Outcasts of Poker Flat." ^{7 7} III. IN CALIFORNIA A MUNICIPALITY MAY NOT ESTABLISH RATES WHICH UNFAIRLY DISCRIMINATE AGAINST NONRESIDENT WATER CONSUMERS, ESPECIALLY WHEN THE NONRESIDENTS ARE PROTECTED BY THE TERMS OF A CONTRACT BETWEEN THE CITY AND THE PRIVATE WATER COMPANY WHICH PREVIOUSLY SERVED THEM.

7 See, I, The Writings of Bret Harte, Houghlin & Mifflin, 1896, p. 14 et seq.

7 It has been suggested that while the burden should remain on the party challenging the rate, the city should have a duty of compiling and producing cost data for each item used in calculating rates. If the city has acted properly, it should already have this information at hand. (4 Clark, Waters & Water Rights, (1970) § 349, p. 460.) Thus, a board has been enjoined from raising water rates where it refused to allow responsible persons to see its books and records. (Waterworks Board of Town of Parrish v. White (1967) 281 Ala. 357, 202 So.2d 721, 724.)

If we were confronted with discriminatory water rates established by a municipal water district governed by the Municipal Water District Law of 1911, this opinion would have been mercifully brief. Although a district may establish different rates for different classes or conditions of service, "rates shall be uniform throughout the district for like classes and conditions of service." (Wat.Code, § 71614.) Although a city may be included within the boundaries of such a district (Wat.Code, § 71611), once the city is made part of this district, the district may sell such water "without preference" to a city. (Wat.Code, § 71611.) ^{8 8} Nevertheless, it appears that no specific statute regulates the rates set by municipalities operating their own waterworks. We turn then to common law rules upon that subject as they have evolved in California.

8 The similarity between this language in these sections and those found in section 453(a) and (b) of the Public Utilities Code is not surprising, as both measures were first enacted two years apart during the trust busting era of the first part of this century. Nevertheless, under the Municipal Water District Law of 1911, special rates have been set for property annexed to the district (Wat.Code, § 71615), and it has also been held that section 71614 of the Water Code is discretionary, and that the district had the statutory authority to enter into long term contracts governing rates so as to induce pulp mills to locate within the district. (Louisiana-Pacific Corp. v. Humboldt Bay Mun. Water Dist. (1982) 137 Cal.App.3d 152, 186 Cal.Rptr. 833.) In Louisiana-Pacific it appears that the pulp companies did bear all of the cost of the initial costs for the additional facilities, paid $105,000 toward the district's fixed expenses for existing facilities, and agreed to pay a percentage of the operating expenses, which was subject to changes in a building cost index. (Id., at pp. 154-155, 186 Cal.Rptr. 833.) Nevertheless, Justice Grodin, concurring, suggested that in setting rates by contract, the district must still guarantee that the district substantially complies with Water Code section 71616, which requires revenues sufficient to pay operating expenses, depreciation, etc. (Id., at p. 163, 186 Cal.Rptr. 833.)

8 However, in Waterworks Bd. of Birmingham v. Barnes (Ala.1983) 448 So.2d 296, the court clarified its position and held that political boundaries could be used for rate zones where the zones themselves were based on a study which indicated that there were differences in the distance from the filter plant, differences in population density and land use, differences in the amount of water needed for fire fighting, and etc. The court emphasized that supplying water was not a tax. Even if two groups were supplied from the same main, the physical differences between two sides of a political boundary may constitute a basis for classification based upon differing costs of service. (Id., pp. 299-300.)

The rates charged by a municipally owned utility must be fair, reasonable, just and nondiscriminatory. (American Microsystems, Inc. v. City of Santa Clara (1982) 137 Cal.App.3d 1037, 1041, 187 Cal.Rptr. 550; Boynton v. City of Lakeport Mun. Sewer Dist. (1972) 28 Cal.App.3d 91, 94, 104 Cal.Rptr. 409.)

However, the lack of uniformity in rates charged to users of public utility service who reside outside city limits and those charged users within city limits is not necessarily evidence of unlawful discrimination and is not prima facie unreasonable. (Elliott v. City of Pacific Grove (1975) 54 Cal.App.3d 53, 57, 126 Cal.Rptr. 371; Durant v. City of Beverly Hills (1940) 39 Cal.App.2d 133, 138-139, 102 P.2d 759; County of Inyo v. Public Utilities Com., supra, 26 Cal.3d 154, 159, fn. 4, 161 Cal.Rptr. 172, 604 P.2d 566.)

It is presumed that the rates fixed are reasonable, fair and lawful. Thus the challengers must establish that the rates fixed are unreasonable, unfair or unlawful. (Elliott v. City of Pacific Grove, supra, 54 Cal.App.3d 53, 60, 126 Cal.Rptr. 371; Durant v. City of Beverly Hills, supra, 39 Cal.App.2d 133, 139, 102 P.2d 759.) If, however, it is shown that a city set sewer charges four times the rate set for users inside city limits, based upon the nonresident status of the consumer, not on cost of service, and it appears that the system is financed by revenue, and no part will be financed through taxation, the rate will be deemed invalid. (Elliott v. City of Pacific Grove, supra, 54 Cal.App.3d at pp. 57, 59, 126 Cal.Rptr. 371; County of Inyo v. Public Utilities Com., supra, 26 Cal.3d at p. 159, fn. 4, 161 Cal.Rptr. 172, 604 P.2d 566.) In the area of economic regulation, such as rate regulation, it need only be shown that the distinction between customers bears a rational relationship to other reasonable considerations. (Toward Utility Rate Normalization v. Public Utilities Com. (1978) 22 Cal.3d 529, 544, 149 Cal.Rptr. 692, 585 P.2d 491; Wood v. Public Utilities Commission (1971) 4 Cal.3d 288, 294, 93 Cal.Rptr. 455, 481 P.2d 823; Swanson v. Marin Mutual Water District (1976) 56 Cal.App.3d 512 at pp. 523-524, 128 Cal.Rptr. 485.)

Nevertheless, "... 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 [93 P. 49]; see Durant v. City of Beverly Hills, supra, 39 Cal.App.2d 133, 138 [102 P.2d 759].) ..." (County of Inyo v. Public Utilities Com., supra, 26 Cal.3d 154, 159, 161 Cal.Rptr. 172, 604 P.2d 566. Emphasis added.) ^{9 9} See also People ex rel. City of Downey v. Downey County Water Dist. (1962) 202 Cal.App.2d 786, 797, 21 Cal.Rptr. 370.)

9 Conversely, the relationship between a private utility company and its customers is not that of trustee and beneficiary. (Board of Commrs. v. New York Telephone Co. (1926) 271 U.S. 23, 31, 46 S.Ct. 363, 366, 60 L.Ed. 808.

9 See also Town of Taylorsville v. Modern Cleaners (1977) 34 N.C.App. 146, 237 S.E.2d 484. Likewise, it was unreasonable to change mobile home parks at the rate of $8.50 per month for unsewered facilities, which was twice the rate for sewered facilities, on the basis that the district had to install a collection system, when in fact the owner installed a sewer system and connected it to the district interceptor. (Dalton v. South Fork of the Coeur D'Alene River Sewer District, (1980) 101 Idaho 833, 623 P.2d 141.)

These common law rules are illustrated in Austin View Civic Association v. City of Palos Heights (1980) 85 Ill.App.3d 89, 40 Ill.Dec. 164, 405 N.E.2d 1256. In that case, defendant purchased two private water companies that were supplying water to residents in the unincorporated area. It also entered into a contract with the City of Alsip to obtain water which originated in the City of Chicago. Under this contract, defendant was required to pay to the City of Alsip, who in turn must pay to the City of Chicago, a 50 percent surcharge over the normal price for water delivered to nonresidents. Defendant then elected to require nonresidents to pay 25 percent more for all water from whatever source, delivered to nonresidents. In reversing the order dismissing the class action, the Illinois court said:

"... The business of supplying water belong to that class of enterprises upon which the public interest is impressed. [Citations.] At common law, such an enterprise, because it had a monopoly on the service provided in the area, was prohibited from charging exorbitant rates and was required to serve all of its consumers without reasonable discrimination in rates or manner of service. [Citations.] Today, private utility companies are prevented from charging exorbitant rates or from engaging in unreasonable discrimination in rates or manner of service by statute, and are no longer subject to the common law [citation]. Though there is no statute that prevents municipal corporations that operate public utilities from acting in an unreasonably discriminatory manner, there is still the common law duty that prevents them from doing so." (40 Ill.Dec. 164, 170, 405 N.E.2d 1256, 1262.)

The court noted that consumers of municipally owned utilities are just as completely protected from exorbitant rates and unjust discrimination as the consumers are under the Public Utilities Act. Hence, the test to be applied in determining whether there has been a violation of the common law right is the same test used to determine whether a privately owned utility company is acting in an unreasonably discriminatory manner. The court said:

"When a privately owned utility is charged with unreasonable discrimination in rates, the test used for deciding the validity of the difference in rates is to determine whether the difference is reasonable, and not arbitrary, based on a consideration of such factors as differences in the amount of the product used, the time when used, the purpose for which used, or any Because the complaint alleged that the rate structure was arbitrary and discriminatory, because it bore no reasoanble relationship to a difference in the costs of providing water to nonresidents, then evidence had to be presented to refute that contention. While defendant may have had the power to enter into a contract with another municipal corporation for the purpose of procuring a supply of water, it did not have the power to enter into a contract which would discriminate against nonresidents. (40 Ill.Dec. 164, 174-175, 405 N.E.2d 1256, 1266-1267.)

Finally, it should be remembered that nonresidents are protected by the earlier contract between the city and the private water companies. While the city is not under the jurisdiction of the Public Utilities Commission, if, after the commission has fixed the conditions of sale, the city purchases the private water companies, the city may not disregard those conditions. Thus in Henderson v. Oroville-Wyandotte Irr. Dist. (1931) 213 Cal. 514, 526-534, 2 P.2d 803, where the contract guaranteed that the consumers outside the district pay the same total costs for water, the district could not impose a 50 percent surcharge for nonresident use, to substantially extend service within the district.

In Rutherford v. Oroville-Wyandotte Irr. Dist. (1932) 215 Cal. 124, 8 P.2d 836, cert. den. 287 U.S. 609, 53 S.Ct. 12, 77 L.Ed. 529, the Supreme Court issued a writ of mandate requiring the district to grant water service to a nonresident at the same rate charged to residents.

The district persisted in attempting to obtain additional funds from nonresidents and chose to impose a standby charge of $2.00 in addition to a standard $6.00 rate. The standby charge was imposed whether water was used or not. Coincidentally, the district reduced the tax on lands belonging to residents from $3.00 per acre to $.10 per acre.

The Supreme Court recognized that the standby charge imposed upon nonresidents was designed to defray additional expenses to secure additional rights for the exclusive benefit of those within the district. The court ruled that the amount chargeable against inside users in extending the works of the district could not be included in the charge made against outside users. It held that inside and outside users must be charged the same rate. (Rutherford v. Oroville-Wyandotte I. Dist. (1933) 218 Cal. 242, 250, 22 P.2d 505.)

With these principles in mind, we now examine the proffered justification for the surcharge.

IV. ALTHOUGH A MUNICIPALITY MAY PROVIDE ITSELF WITH FREE SERVICE AND MAY ESTABLISH RESERVES, IT MAY NOT EXCLUDE OTHER WATER REVENUES OR IMPOSE AN IN LIEU TAX OR MAKE ANY OTHER UNREASONABLE DISCRIMINATION, IN SETTING WATER RATES TO NONRESIDENTS PREVIOUSLY SERVED BY A PRIVATE WATER COMPANY.

A. Free Service

There is no legal reason why a city which owns and operates its water or sewer system should take money from its own taxpayers to pay itself for the use of its own waterworks or sewers. This is simply not equivalent to the public utilities doctrine which prohibits the rendition of free public service to preferred customers. (See Gericke v. City of Philadelphia (1945) 353 Pa. 60, 44 A.2d 233, 237; Camden County v. Pennsauken Sewage Authority (1953) 28 N.J.Super. 586, 101 A.2d 361, 362; Twitchell v. City of Spokane (1909) 55 Wash. 86, 104 P. 150, 151.)

For the guidance of the trial court, the revenue associated with what appears B. Reserves

Municipally owned utilities may charge rates to finance needed replacement, or expansion of the facilities. (Pub.Util.Code, § 10003 (to complete, reconstruct, extend, enlarge and repair water facilities).) American Microsystems, Inc. v. City of Santa Clara, supra, 137 Cal.App.3d 1037, 1040, 187 Cal.Rptr. 550 (to create funds for new construction) Cramer v. City of San Diego (1958) 164 Cal.App.2d 168, 169, 173, 330 P.2d 235 (funds used to pay for extending or improving the sewer system) Western Heights Land Corp. v. City of Ft. Collins (1961) 146 Colo. 464, 362 P.2d 155, 158 (rates can be established to extend the service and replace facilities outmoded by depreciation and obsolescence) City of Mt. Vernon v. Banks (Ky.1964) 380 S.W.2d 268, 271 (65 percent increase in water rates was justified to finance a sewer system. Prudent management contemplates contingencies and conserves assets needed for normal growth, maintenance and improvements) Rankin v. Chester Municipal Authority (1949) 165 Pa.Super. 438, 68 A.2d 458, 462, 464 (the authority was committed to provide a new source of water, including a dam 40 miles away, and a pumping station. An increase in rates to provide a new source of water is not a tax) Pabst Corp. v. Railroad Commission (1929) 199 Wis. 536, 227 N.W. 18, 20 (funds should be available to facilitate continued development, so that the quality and abundance of the supply will be well in advance of actual needs of the community) Laramie Citizens for Good Government v. City of Laramie (Wyo.1980) 617 P.2d 474, 484 (rates should take into account the cost of construction and operation, necessary expansion, reserve for depreciation and debt retirement).

Unlike the situation in Rutherford v. Oroville-Wyandotte Irrigation Dist., supra, 218 Cal. 242, 250, 22 P.2d 505, the connection to the state water project will not be merely for the benefit of city residents. If and when the actual connection is made, all consumers will equally derive whatever benefit is obtained from the additional water supply. While a private utility could not include such a contingent water supply in its rate base, there was no evidence before the trial court that the decision to reserve rights to state water was an imprudent investment, or that other less costly alternatives existed for future expansion. (See generally, Pub.Util.Code, § 10153.)

We part company with the city on the subject as to whether such a projected enormous expense should, by some process of alchemy, be treated as an asset for rate making purposes sufficient to justify a discrimination against nonresidents. The city had not even begun the task of physically connecting its system to the state water project, so it cannot be categorized as work in progress. Remember too, that the Mound and Saticoy customers became city customers before the city ever began paying on its state water obligation. The nonresidents are not specially benefited by this expenditure. Yet, under the city's reasoning, they should continue to pay $1.70 for each $1.00 contributed by their neighbors who possibly live across the street, but within city limits. We do not agree.

The obvious solution, of course, is to treat this as a liability to be paid by nonresidents and residents alike. It should not be employed to discriminate among similarly situated customers.

C. Wages of Borrowed Services and Rent

When the city lends its employees to the utility, and acts as landlord, the city is entitled to compensation. Unless the utility pays the city that which it would have to pay to private individuals for rent, management, fiscal and legal services, the utility rate payers are getting a "free ride" The city did not attempt to prepare documents reallocating the proportions of city salaries attributable to water service until shortly before trial began. Its new allocation is somewhat inconsistent with its earlier statement to the effect that the water department was entirely self-supporting. While we might question the admissibility of these documents prepared long after the services were rendered (Evid.Code, § 1280(b) and (c)); see Elsworth v. Beech Aircraft Corp. (1984) 37 Cal.3d 540, 554, 208 Cal.Rptr. 874, 691 P.2d 630) this evidence ultimately was received without objection.

D. Exclusion of Income and Expenses From Nonpotable Water

While under public utility law different types of service may be separately classified, we know of no decision which allows a utility to exclude income and expenses from one particular class of customers, so as to create a feigned distinction for rate-making purposes between customers receiving the same service and who are similarly situated. Several cases demonstrate that this practice is unfair, if not pernicious.

In Marshall Durbin & Co. v. Jasper Utilities Bd. (Alabama 1983) 437 So.2d 1014, the court acknowledged that it was not per se improper to combine a water, sewer and gas system for the purpose of rate making. However, it appeared that the gas rates were excessive and arbitrary. While the system as a whole earned 2.18 percent to 6.51 percent during the period in question, and a proper rate of return for gas services ranged from 7.79 percent to a maximum of 10.38 percent, the actual rate of return on gas service was 42.12 percent one year, 60.86 percent a second year, and 73.20 percent a third year. The court said: "A consolidated utility may establish rates which in effect, allow one component of the system to subsidize another component, where the overall rate structure is reasonable. Nevertheless, the profit on any one system may not unduly burden the customers with rates which are unreasonable in order to lower rates for other services." (437 So.2d 1014, 1020.)

The Alabama court ruled that the gas rate was unlawful and that a customer might recover damages at common law resulting from discrimination by a utility as to rates or services. The customer was entitled to a refund. To hold otherwise would create a situation where a utility could set a clearly unreasonable, even exorbitant rate, collect it during prolonged litigation, and then be relieved of the duty to make a refund. (437 So.2d 1014, 1020.)

In Pennsylvania Public Utility Commission v. Johnstown Water Co. (1957) 19 P.U.C.3d 433, 450, the proposed rates for a company operating a gravity system for customers in areas of lower elevation and a pumping system in areas of higher elevation were discriminatory in that the proposed rates would impose a large segment of the pumping system expense upon the customers served by the gravity system.

In Jager v. State (Alaska 1975) 537 P.2d 1100, the rate of $1.49 per MCF for residential service produced 53 percent of the The exclusion of the nonpotable revenues and expenses appears to have resulted in a surcharge approaching 30 percent upon nonresident potable water users. This alone justifies the reversal of the judgment. "Profits of the past cannot be used to sustain confiscatory rates for the future." (Board of Commissioners v. New York Telephone Co., supra, 271 U.S. 23, 32, 46 S.Ct. 363, 366, 70 L.Ed. 808.)

E. The Discrimination Cannot Be Justified Because Casitas Water is More Costly.

Although one of the city's experts believed that a 76.9 percent surcharge could be justified on the theory that the nonresidents created the need to purchase additional and more costly water from Casitas, we already know that the assumption is erroneous because a large proportion of nonresidents are not technically eligible for unblended Casitas water because they live to the east of the area where the Casitas boundaries bisect the city. Yet, the theory itself is alien to public utility law.

In Butte County Water Users Assn. v. Railroad Commission (1921) 185 Cal. 218, 196 P. 265, it was claimed that a consumer of public water company had a vested right to service in preference to later customers, so that their rights were ranked, in the order of the time that each became a customer. The court said: "This is a rather novel doctrine and one whose statement alone is well-nigh sufficient for its rejection.... [A] public utility must hold itself out as ready to serve and must serve the public or its portion of the public without discrimination or preference other than such as corresponds to difference in the value or cost of the service rendered.... [I]t would be most unjust and very injurious to the state to hold that in times of shortage the older consumers could have a full supply and the later none." (185 Cal. 218, 224-225, 196 P. 265.)

In In re Trunkline Gas Co., 29 P.U.C.3d 1 (F.Power Comm. 1959) the utility proposed to impose an incremental charge. The commission ruled: "The commission has consistently rejected allocation methods which would, in effect, assign costs of particular main line facilities to a specific customer. Likewise, the commission has rejected methods which treat, for rate purposes, particular gas purchase contracts as being dedicated to a specific customer. Trunkline's proposed rates, based as they are upon all of the incremental costs of Trunkline's expansion project, are inherently inequitable and would tax the customers of consumers for benefits to be enjoyed by all of the customers of the integrated Pan Handle-Trunkline system." (29 P.U.R.3d 1, 11.)

McGinley v. Wheat Belt Power Dist. (1983) 214 Neb. 178, 332 N.W.2d 915, involved a situation where the district, because of increased seasonal irrigation and increased peak loads, built a new facility and created two consumer classes based on the date the customer requested the service on the theory that new customers were creating the sudden demand. In 1976 old customers paid 39 cents per unit while the new customers paid $5.02 per unit. Although the older customers used 75 percent of the power, by 1981 they paid only $5.75 while the newer customers paid $17.17. The court found no justification for the practice. While discrimination can be based on classes, the class may not be subdivided solely upon the date the service was provided. Otherwise, a utility could impose on a new building, the entire cost of obtaining a new source of energy required by reason of the addition of the building to the service, even though the nature of the service is in all respects identical to all The court said: "This is a question of Wheat Belt determining that the least expensive block of power it purchases belongs to the first customers and the most expensive block belongs to the later customers, though Wheat Belt cannot show where any particular block of power is transmitted." (332 N.W.2d 915, 920.)

The court found the rate to be invalid and directed Wheat Belt to refund or credit the 1976 class the proper amount, and absorb the loss in future rates. ^{10 10}

10 A related problem may exist in the context of a development. For instance, when developers contribute water facilities with excess storage capacity, and in fact use one-half of the capacity, a rate which would require them to be repaid in full by subsequent developers, would mean subsequent developers would have to bear all of the costs. (See Huntingdon Inc. v. Penn. Public Utility Commission (1983) 76 Pa.Cmwlth. 387, 464 A.2d 601, 605.)

10 Apparently, the rule in the Wiggins case only applies if the rate differential is promptly challenged. Thus, when, for 31 years, the surcharge has never been less than 10 percent and at one time amounted to 100 percent, a challenge to a new 30 percent surcharge will be barred. (Town of Terrell Hills v. City of San Antonio (Tex.Civ.App.1958) 318 S.W.2d 85, 87.) The rationale of the Texas court is far from clear.

Likewise, a Washington court concluded that it would be inequitable to assess all costs to the new consumer block when benefits were received system-wide, even when the water consumption within the district did not increase. However, when it appeared that 40 percent of the water distributed through the new facilities went to the city, and 60 percent went to purveyors, it was reasonable to allocate costs on that basis. (King County Water District No. 75 v. City of Seattle (1978) 89 Wash.2d 890, 577 P.2d 567, 574.)

This is not a situation described by the Washington court, especially because the number of consumers both in and outside of the city have increased, and, if Casitas is now providing 50 percent of the water, all customers are being benefited by this particular supply. Hence, to charge existing nonresident consumers on the basis of incremental costs is patently ridiculous.

F. The Donated Property Should Have Been Excluded From The Rate Base.

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 aff'd. 279 U.S. 125, 49 S.Ct. 325, 73 L.Ed. 637; 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 Commission (1961) 240 Miss. 405, 127 So.2d 404, 412; Cogent Public Service v. Ariz. Corp. Com'n. (Ariz.App.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. (Dupage Utility Co. v. Illinois Commerce Comm. (1971) 47 Ill.2d 550, 267 N.E.2d 662, 668-669, cert. den. 404 U.S. 832, 92 S.Ct. 74, 30 L.Ed.2d 62.) 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 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 Commission (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

^{11 11}

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 (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.R.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 and 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.

Although donations per se should not be depreciated, and we recognize that there is only a gossamer thin line separating federal donations from other types of private donations, cities might be deterred from applying for federal grants for improved water works or from applying revenue sharing funds to aid one of its utilities serving nonresidents if the city elders discovered that none of the investment could ever be recouped, as depreciation, and made available for reinvestment in utility projects in subsequent years. After all, facilities built with federal funds do become G. Increased Value of Water Rights

One expert added $5,000,000 to the rate base on the theory that water rights within the area served by the system could generate water at a lower cost than the amount which was obtained from Lake Casitas.

Although we acknowledge that the value of water rights owned by a privately owned and regulated utility must be taken into account in setting rates (San Joaquin Co. v. Stanislaus County (1914) 233 U.S. 454, 34 S.Ct. 652, 58 L.Ed. 1041; San Joaquin Land & Power Co. v. Railroad Commission (1917) 175 Cal. 74, 77, 165 P. 16), we are puzzled by the suggestion that this increased value suddenly springs into being when nonresidents challenge a discriminatory rate. ¹² This is not a valuation case, or a situation where the water rights in question were paid for with tax revenues. Therefore, the inclusion of this sum would be wholly inconsistent with the rights to nondiscriminatory service found in the Mound and Saticoy contracts.

12 See footnote 1, supra.

H. In Lieu Taxes

In lieu taxes have not fared too well in the history of this country.

At one time, the colonists evaded the tea duty by smuggling Dutch tea, reducing the sale of the tea of the East India company by almost two-thirds. To rescue the company, Lord North devised a majestic scheme by which the surplus tea piling up in company warehouses could be sold directly to America, skipping England and the English customs duty. If the duty was reduced to 3d a pound, the tea could be sold at 10s, instead of 20s a pound. Considering the Americans' known fondness for tea, the lowered price was expected to overcome their patriotic resistance to paying duty, and the duty would then generate funds to pay for the defense of the colonies.

This resulted in the Boston Tea Party. Disgruntled patriots boarded ships, slashed open the tea chests, and dumped the contents into the waters of Boston Harbor, voicing seditious thoughts, such as "no taxation without representation." And you know how the story ended. ¹³

13 For a modern account, see B. Tuchman, The March of Folly: From Troy to Vietnam, pp. 193-196, (A. Knopf 1984).

When private utilities are regulated by a public utility commission, the commission will not allow the utility to charge customers living outside municipal boundaries with business and occupation, or gross receipts taxes, and will instead require such taxes to be paid exclusively by the inhabitants of the city which imposes the tax. (State ex rel. West Plains v. Public Service Comm. (Mo.1958) 310 S.W.2d 925; City of Spartanburg v. Public Service Comm. (1984) 281 S.C. 223, 314 S.E.2d 599; City of Houston v. Public Utilities Commission of Texas (Tex.App.1983) 656 S.W.2d 107; Ogden City v. Public Service Commission (1953) 123 Utah 437, 260 P.2d 751; King County Water District No. 75 v. City of Seattle (1978) 89 Wash.2d 890, 577 P.2d 567, 571-573.)

In most jurisdictions, the burden of paying franchise payments is imposed upon the inhabitants of the communities which exact the franchise payment, and not upon those consumers residing elsewhere. (City of Petersburg v. Hawkins (Fla.1978) 366 So.2d 429; Village of Maywood v. Illinois Commerce Commission (1961) 23 Ill.2d 447, 178 N.E.2d 345, cert. den. 369 U.S. 851, 82 S.Ct. 935, 8 L.Ed.2d 10; City of Des Moines v. Iowa State Commerce Commission (Iowa 1979) 285 N.W.2d 12; City of Norfolk v. Chesapeake and Potomac Telephone In California, private utilities do pay franchise fees regulated by the Legislature. (P.U.C., § 6231(c).) When San Diego, a charter city, imposed a 3 percent franchise fee, which was higher than the rate which could be charged by other municipalities, the Public Utilities Commission required the customers within the City of San Diego to bear the increased cost in their utility bills, and would not permit the increased fee to become a general operating expense which could be levied upon customers living outside the charter city. (San Diego Gas and Electric Company (1972) 73 Cal.P.U.C. 623, 627-628.)

Thus, California utility law appears to be consistent with the rules operative in other states.

Before examining cases from other jurisdictions, allowing the imposition of so-called "in lieu" taxes, we should note that "in lieu" taxes are usually found in statutes allowing one governmental entity to collect funds from another public entity. Thus, the Federal Payment in Lieu of Taxes Act (31 U.S.C., § 6901, et seq.) is designed to compensate local governments from the loss of revenue from tax immune federal lands. See generally, Lawrence County v. Lead Deadwood School Dist. (1985) 469 U.S. 256, 105 S.Ct. 695, 83 L.Ed.2d 635. In lieu taxes are also collected by the Metropolitan Water District from public entities within its own boundaries. (See Wat.Code Appen., §§ 109-306 and 109-331 et seq.; see generally City of Burbank v. Metropolitan Water District (1960) 180 Cal.App.2d 451, 4 Cal.Rptr. 757. Yet courts tend to mistakenly view extraterritorial taxes of the type proposed by Lord North, as being simply in lieu taxes.

In some states, tax equivalent charges are permitted by statute, see e.g., Village of Fox Point v. Public Service Commission (1943) 242 Wis. 97, 7 N.W.2d 571, 574 ( § 66.069(c) of the Wisconsin statutes permitted a $550,000 tax equivalent charge).

In H.P. Biggs Inc. v. Borough of Madison (1983) 188 N.J.Super. 212, 457 A.2d 43, the utility only provided service within its municipal boundaries. Although it acquired its electricity from a private company at wholesale rates, it charged the same rates as the private company, instead of recalculating the cost of service. It had thereby created a surplus of $536,232 and paid in lieu taxes of $425,000 to the municipality.

The New Jersey court held that the rate was proper. A municipality could set rates within its own boundaries, and if the resident consumer voter did not like the rates, he could vote the governing body out of office. (457 A.2d 43, 48.) The court acknowledged that because the statute allowed the utility to create a surplus, there was no reason to invalidate the tax. In reaching its conclusion, the court opined that electric utility charges should not be a substitute for general taxation. However, charges, otherwise reasonable would not be invalidated merely because they resulted in the creation of surpluses to be transferred to the budget. (457 A.2d 43, 51.)

In Rosalind Holding Co. v. Orlando Utilities Commission (Fla.App.1981) 402 So.2d 1209, the court noted that the municipal owned utility imposed a charge of 1 percent of retail sales of electricity to customers outside the city of Orlando but within Orange County. Over several years, $1,114,000 was given to Orange County. Although no statute authorized the practice, the court noted that this was less than ad valorem taxes paid by a public utility and that the experts had said that it was not an uncommon practice for tax exempt utilities to make tax equivalent payments.

The utility also charged a franchise equivalent fee based on six percent of the revenues earned. This yielded a payment of $1,442,561 in addition to profits of $5,542,000. Although the Florida Public Service Commission would have limited the charge to customers in cities charging the In Hastings v. Village of Stowe, Electric Department (1965) 125 Vt. 227, 214 A.2d 56, the court allowed a small sum as a tax equivalent. However, it disallowed a claim of $15,106 for federal income and state franchise taxes which, of course, were never paid, saying: "To proliferate a utilities true operating expense by the introduction of illusory charges never actually experienced would impair the regulatory process." (214 A.2d 56, 59.) ¹⁴

14 Although in lieu taxes were approved, because the total contribution from other earnings constituted 60 percent of the village budget, the Public Utility Commission could lower the rates. (214 A.2d 56, 62.)

In Petition of Burlington Electric Light Department (1977) 135 Vt. 114, 373 A.2d 514; a challenge was made to a $452,783 contribution in lieu of taxes, on the ground that it was a guise to redistribute taxes upon tax exempt private organizations, and various governmental agencies, including the University of Vermont, by requiring them to pay a contribution through increased utility bills. The court rejected the challenge, reasoning that a Vermont statute allowed municipalities a return commensurate with that allowed private utilities. Property taxes were a recognized operating expense for private utilities. Therefore, as a contribution in lieu of taxes is analogous to a proper operating expense of a private utility, it could be expected to make up for taxes lost where the municipality, instead of a private company, owned the facility. (373 A.2d 514, 516.)

Nevertheless, it should be recognized that an in lieu tax is a fiction. We are aware of no California statute which authorized a municipality to impose an in lieu tax upon nonresidents. There is nothing in the record indicating that the city ever attempted to officially impose such a tax. To the extent to which the judgment is based upon the assumption that an in lieu tax could be imposed on nonresidents protected by their contract between the city and Saticoy, it is clearly erroneous. (Rutherford v. Oroville-Wyandotte Irrigation District, supra, 218 Cal. 242, 247, 22 P.2d 505.) ¹⁵

15 See also Guy S. Atkinson Co. v. Highland Util. Dist. (1958) 158 Cal.App.3d 718, 723, 323 P.2d 173, where the court found it was unfair to increase the connection fee from $5.00 to $175. where the district had earlier agreed to give a refund to the developer at the rate of $184.42 per house.

Conversely, to the extent to which the county taxes service extensions used to furnish service exclusively to nonresidents, that burden would be borne by the outsiders. If the tax was imposed on land and facilities serving all customers, then there is no reason for any discrimination.

I. Profits

Of course, a charge for water services is not a tax (Arcade County Water Dist. v. Arcade Fire Dist. (1970) 6 Cal.App.3d 232, 240, 85 Cal.Rptr. 737 (charge for hydrants); Trumbo v. Crestline Lake Arrowhead Water Agency (1967) 250 Cal.App.2d 320, 322, 58 Cal.Rptr. 538 (charge for standby water service). However, where a given rate is imposed in order to provide a fund for the general benefit of the city, and thereby enable the city to fix a lower rate for general purposes, this could constitute an unjust discrimination, rendering the charges excessive and unreasonable. (City of Madera v. Black (1919) 181 Cal. 306, 314, 184 P. 397.)

This principle is now incorporated in the California Constitution. "Under article X111 B, with the exception of state subventions, the items that make up the scope of 'proceeds of taxes' concern charges levied to raise general revenues for the local entity." "Proceeds of taxes" in addition to "all tax revenues" includes "proceeds ... from ... regulatory licenses, user charges, and user fees [only] to the extent that such proceeds exceed the costs reasonably

¹⁶

Remember too, that having acquired a water works, as to the water dedicated to the use of the outside community, the city holds title as "a mere trustee, bound to apply it to the use of those beneficially interested. County of Inyo v. Public Services Commission, supra, 26 Cal.3d 154, 159, 161 Cal.Rptr. 172, 604 P.2d 566. Obviously, a trustee may not use or deal with trust property for his own profit. (Civ.Code, § 2229.)

Thus, unlike the many states which have sanctioned the practice of allowing a municipality to make a profit on service to customers outside city limits previously served by a private water company, California law would prohibit such a practice. Furthermore, as a general proposition, a rate which produces an excessive return is a tax, and there is no California statute allowing a municipality to tax nonresidents by way of an in lieu tax, or otherwise.

Note too that under the Revenue Bond Law, the services, facilities, or waters of the enterprise must be furnished at the lowest possible cost consistent with sound economy, and prudent management, and the security and payment of principal and interest on the bonds. (Gov.Code, § 54514.) A rate which creates an artificial discrimination against nonresident customers would be inconsistent with this requirement. ¹⁷

17 In Michigan, by way of contrast, the revenue bond statute contains no limitations as to what methods of developing rates may be used, and under other provisions of Michigan law, a municipality may include a fair rate of return. (County of Oakland v. City of Detroit (1978) 81 Mich.App. 308, 265 N.W.2d 130, 133.)

In short, where the city has agreed to serve all customers of a private water company, including those customers located outside city boundaries, without unfair or unreasonable discrimination, it cannot establish a discriminatory rate for outsiders which is not based on true differential in cost of service. Therefore, it was not proper to allow a rate of return on outside service to justify a discriminatory rate which favored city residents. (Henderson v. Oroville-Wyandotte Irr. Dist., supra, 213 Cal. 514, 529, 2 P.2d 803; Rutherford v. Oroville-Wyandotte Irrigation Dist., supra, 218 Cal. 242, 247, 22 P.2d 505, Dyke Water Co., supra, 61 Cal.P.U.C. 315, 321.) The foregone investment theory is flawed for the same reason. Thus, where, as here, the nonresidents were existing customers of a private water company acquired by the city, and the cost of service was defrayed through revenue, rather than taxes, a surcharge would only be justified if the costs of serving them were higher. ¹⁸

18 In light of this conclusion, we will not consider the interesting question as to whether a public entity holding water subject to a "public trust" (National Audubon Society v. Superior Court (1983) 33 Cal.3d 419, 433-434, 189 Cal.Rptr. 346, 658 P.2d 709; People v. Weaver (1983) 147 Cal.App.3d Supp. 23, 28-29, 197 Cal.Rptr. 521) might be precluded from discriminating between residents and nonresidents as to user fees. (See Neptune City v. Avon By The Sea (1972) 61 N.J. 296, 294 A.2d 47, 55; 57 A.L.R.3d 983.) (Higher fees charged to nonresidents using a beach within a municipality were invalid.)

J. Fire Protection

Because water is furnished both for general use and fire protection, the task of dividing the cost of service between the two services has always been a perplexing one. (City of Bangor v. Public Utilities Commission (1960) 156 Me. 455, 167 A.3d The problem is magnified when fire protection services are rendered to nonresidents. If the residents live in another municipality, district or simply within a county, part of their tax bill may include a provision for fire protection. Insofar as appellants are concerned, after 1978, the other governmental entity is not obliged to pay for the service, unless it consents to do so. (Gov.Code § 53069.9; Public Water Agencies Group v. Consolidated Fire Protection Dist. (1983) 145 Cal.App.3d 695, 193 Cal.Rptr. 644.)

Because appellant did not specifically advert to this issue in the briefs filed with this court, we will not address the point (In re Marriage of Sheldon (1981) 124 Cal.App.3d 371, 381, 177 Cal.Rptr. 380), except to alert the trial judge who hears the retrial of this matter that it will prove to be a difficult one to resolve.

SUMMARY

Although we acknowledge our obligation to uphold rates which are within the proverbial "zone of reasonableness" (Permian Basin Area Rate Cases (1968) 390 U.S. 747, 767, 88 S.Ct. 1344, 1360, 20 L.Ed.2d 312, citing FPC v. Natural Gas Pipeline Co. (1942) 315 U.S. 575, 585, 62 S.Ct. 736, 742, 86 L.Ed. 1037, we have concluded that in the case before us, reason was replaced by several fictions. Although the experts chosen by the city may have been among the "best and brightest", ¹⁹ they were beguiled by legal principles applicable in other jurisdictions, but not in California. The expert who espoused the view that the existing nonresident customers should pay the incremental costs of Casitas water not only was unaware of the facts, but he also relied upon a discredited theory. Apparently no one considered the Rutherford and Henderson cases decided by the Supreme Court more than 40 years earlier.

19 See generally, D. Halberstam, The Best & Brightest, Random House (1972).

It appears to us that the collection of errors made by the city's experts led in turn to a flawed analysis by the trial court. For instance, even if nonresidents should contribute to defray the expenses incurred by employees whose salaries are paid by taxes, the 70 percent surcharge was also predicated upon a host of other errors, such as the exclusion of the operating results arising from the sale of nonpotable water, or the theory that the city was entitled to a return on investment, etc. We think that a miscarriage of justice occurred requiring us to reverse the judgment and remand the case for a new trial (Cal.Cont., art. VI, § 13; Kuffel v. Seaside Oil Co. (1977) 69 Cal.App.3d 555, 567, 138 Cal.Rptr. 575) and a result consistent with the principles enunciated herein (Puritan Leasing Co. v. Superior Court (1977) 76 Cal.App.3d 140, 142 Cal.Rptr. 676).

DISPOSITION

The judgment is reversed, and the cause is remanded for a new trial.

GILBERT, Acting P.J., and ABBE, J., concur.

APPENDIX A ^*

* Footnotes of this part of the opinion are numbered independently.

1. IN MOST JURISDICTIONS, MUNICIPALITIES ARE ALLOWED TO GENERATE A PROFIT FROM THEIR UTILITY OPERATIONS AND MAY IMPOSE A SURCHARGE UPON THE RATES PAID BY NONRESIDENTS.

Invariably, it is the rule that it is presumed that the municipal rates are reasonable, and the party assailing the rates has the burden of persuasion. (See e.g., City of Pompano Beach v. Oltman (Fla.App.1980) 389 So.2d 283, 286; County of Oakland v. City of Detroit, supra, 81 Mich.App. Several states take the sensible position that a municipal water system should be operated to serve its residents and that nonresidents may be served if that commitment does not endanger local service. However, such incidental service to nonresidents may not fairly be converted to an obligation to render additional nonresident service tending to jeopardize service within the municipality. (Mongiello v. Borough of Hightstown (1955) 17 N.J. 611, 112 A.2d 241, 245; 48 A.L.R.2d 1216; see e.g., Richards v. City of Portland (1927) 121 Or. 340, 255 P. 326, 329) (service could be discontinued to customers of private water company which refused to provide storage facilities, despite a water shortage, where the water contract was for a fixed period of time and contained the reservation that the water was supplied subject to the superior rights of the city when no surplus existed.) ¹

Other states have gone a step further, reasoning that since a governmental unit has the power to withhold service to nonresidents, it has no duty at all to them, and can establish whatever rates the traffic will bear. The following passage from a South Carolina case evidences uncommon solicitude for a local city--state and brings to mind medieval walled cities, where the only entrance was a fortified gate protected by guard towers, a moat, and portcullis.

Assuming the city had an obligation to sell surplus water, "... it did not import an obligation to make a contract with any particular person at a reasonable price; but on the contrary, it did import an obligation to sell its surplus water for the sole benefit of the city at the highest price obtainable. It was a duty not owed to outsiders, but exclusively to inhabitants and taxpayers of the city. It follows that the plaintiff, as a mere nonresident, had no rights whatever against the city, except such as he may have acquired by contract. In other words, the city was under no public duty to furnish water to the appellant at reasonable rates, or to furnish it at all...." (Childs v. City of Columbia (1911) 87 S.C. 566, 70 S.E. 296, 298.)

This doctrine finds acceptance in many jurisdictions. (See e.g., City of Phoenix v. Kasun (1939) 54 Ariz. 470, 97 P.2d 210.) (The relationship is purely contractual and courts do not have the power to determine the reasonableness of rates charged nonresidents); (City of Englewood v. City and County of Denver (1951) 123 Colo. 290, 229 P.2d 667, 672.) (Defendant was under no obligation to serve another city at any particular rate, or at all); (Lee v. City of Colorado Springs (1957) 136 Colo. 248, 315 P.2d 822, cert. den. 355 U.S. 955, 78 S.Ct. 541, 2 L.Ed.2d 531; Barr v. City Council of Augusta (1950) 206 Ga. 753, 58 S.E.2d 823; Davisworth v. City of Lexington (1949) 311 Ky. 606, 224 S.W.2d 649, 651.) (Nonresidents have no lawful claim upon any city service and any use of city facilities is wholly permissive, and the outside customers are mere licensees); (Forest City v. City of Oregon (Mo.App.1978) 569 S.W.2d 330, 334.) (Missouri statutes which allow water to be provided to nonresidents or to other cities on such terms as may be agreed upon by the contracting parties, have left the sale of water free of regulation). In those types of jurisdictions the nonresident may secure protection by contracting with the municipality. ² (See e.g., City of Daytona Beach v. Stansfield (Fla.1972) 258 So.2d 809, 810 (under a 1954 agreement, when the city bought a water company, the parties agreed that the rate to nonresidents would not exceed 133 percent of resident rates. In upholding an order enjoining a 200 percent increase, the court reasoned that the charge to outsiders could never be less than cost unless the city elected to charge rates to its own residents which were less than cost); Copper County Mobile Home Park v. City of Globe (Ariz.App.1981) 131 Ariz. 329, 641 P.2d 243 (when city contracted to provide sewer service at a rate equal that charged within city limits, it could not charge nonresidents a monthly service fee of $10.00 when $1.00 per month was charged residents).)

However, a fixed contractual rate such as $10.00 per annum set in 1946, may become unreasonable in the face of unforeseen inflation, and when such a low rate compromises health services, it can be replaced with just and equitable sewer charges. (Landau v. City of Leawood (1974) 214 Kan. 104, 519 P.2d 676.) Conversely, when a developer entered into a contract calling for a rate of not less than 70 cents per 1,000 gallons at a time when utility rates were unregulated, and subsequently legislation required that the rates shall be the same as those within the municipality, the contract was nullified and the persons outside could only be required to pay the same rate paid by city residents. (Weidling v. Borough of Manville (1979) 172 N.J.Super. 371, 412 A.2d 133.)

Most significantly, in most jurisdictions, it has been held that city authorities may fix a utility rate which generates a profit which can be transferred to the general fund. (See e.g., Mitchell v. City of Mobile (1943) 244 Ala. 442, 13 So.2d 664, 667; City of Pompano Beach v. Oltman, supra, 389 So.2d 283, 286; Messenheimer v. Windt (1955) 211 Ga. 575, 87 S.E.2d 402, 404-405.) (Since nonresidents are not taxpayers, they have no interest in the municipal revenues and no right to challenge a diversion of fund to retire hospital obligations. The city of Macon may operate its waterworks at a profit, and those who do not wish to use the water can cease buying it from the city.) (Wagner v. City of Rock Island (1893) 146 Ill. 139, 34 N.E. 545 ³ ; Shawnee Hills Mobile Homes Inc. v. Rural Water Dist. No. 6, supra, 217 Kan. 421, 537 P.2d 210, 218.) (In the absence of statutory restrictions, a municipality operating a water system has the authority to charge such rates as will yield a fair profit, so long as the rate is not disproportionate to the service rendered); (Township of Meridian v. City of East Lansing (1955) 342 Mich. 734, 71 N.W.2d 234, 236, 238.) (Although the contract provided for reasonable rates, and statute provided that nonresidents should not pay more than double the rate paid by residents, an 87 1/2 percent surcharge was proper because the city was entitled to a fair return. The court reasoned that a city's purchase of a utility plant is made on behalf of its citizens, who then become both consumers and owners. A requirement that nonresidents be charged at the same rates defeats the purpose of the purchase); (Apodaca v. Wilson (1974) 86 N.M. 516, 525 P.2d 876.) (The city rates compared favorably with amounts received by private utilities. The city was not obliged to provide service at cost and could make a profit. Hence, of the $1,505,233 derived from increased sewer and water revenues, $1,129,903 could be transferred to the general fund); (Village of Boonville v. Maltbie (1936) 272 N.Y. 40, 4 N.E.2d 209, 212.) (Although a surplus of $249,000 existed, the court reasoned that privately owned utilities must be allowed a If the city is entitled to divert water revenues, will not the city soon become as rich as Croesus, by exacting a profit from sales made to nonresidents? In Rosalind Holding Co. v. Orlando Utilities Commission, supra, 402 So.2d 1209, 1212, fn. 19, the court said, in passing: "The city of Jacksonville receives 30% of its utility's gross income. In an extreme case, there may arise the specter of a tax-free town made wealthy by its utilities operations inside and outside its political limits."

Yet, the prevailing view in most jurisdictions is that the charges of a municipal waterworks are for a commodity sold and are not taxes. (Chicopee Mfg. Corp. v. Manchester Bd. of Water Commissions (1951) 97 N.H. 109, 81 A.2d 837, 839; Daniel v. Borough of Oakland (1973) 124 N.J.Super. 69, 304 A.2d 757, 759; Apodaca v. Wilson, supra, 86 N.M. 516, 525 P.2d 876, 885; Simons v. City Council of Charleston, supra, 181 S.C. 353, 187 S.E. 545, 547; Twitchell v. City of Spokane, supra, 55 Wash. 86, 104 P. 150, 151; see also Louisville and Jefferson County Metropolitan Sewer District v. Joseph E. Seagram & Sons (1948) 307 Ky. 413, 211 S.W.2d 122, 125; 4 A.L.R.2d 588 (sewer rate isn't a tax).) In City of Niles v. Union Ice Corp. (1938) 133 Ohio St. 169, 12 N.E.2d 483, 489, the court reasoned as follows:

"The rate charged in excess of cost is not a tax or in the nature of a tax, regardless of how the fund derived therefrom is ultimately used. A municipality, acting in a proprietary capacity, cannot impose taxes. While thus engaged, it is engaged in business but not in the business of government.... Since the rate charged is not a tax in its inception, ultimate use of surplus funds derived therefrom for the support of municipal government will not convert it into taxes or cause it to assume the nature of taxes."

Of course, when the service is confined within the borders of the municipality, if the resident does not like the management or rates, he can vote the governing body out of office and thus achieve reform. On the other hand, if the rates are high and the operation is profitable, the excess revenue would pass to the municipal treasury and benefit the taxpayer. In this situation, he would not be likely to complain or vote the governing body out of office just to aid the foreign consumer in an adjoining municipality. Thus, from a practical standpoint, if the Public Utilities Commission has no jurisdiction, the foreign customer must undertake a difficult burden of challenging Occasionally, a public utility commission will approve uniform water rates both within and outside corporate limits. (E.g., Manufacturers Ass'n of Erie v. Pa. Public Utility Commission (1979) 47 Pa.Cmwlth. 31, 407 A.2d 114.) ⁴ However, the fact that a public utilities commission is regulating rates, does not necessarily eliminate all discrimination. To illustrate, in Borough of Ambridge v. Pennsylvania Public Service Utility Commission, supra, 137 Pa.Super. 50, 8 A.2d 429, the court acknowledged that the municipality could make a profit from service to outsiders and that the citizens and taxpayers should not be asked to bear any part of the additional expense in supplying water to customers outside the city. The court said: "... A municipality may discriminate between its customers within its limits and those without; that while it is entitled to change rates that will return a fair profit based on the present value of all its property used and useful in the public service, it may forego such profit as respects its customers within its limits and demand it of its customers outside its limits; that in arriving at the fair value of its property for the purpose of fixing just and reasonable rates to its customers within the city, the value of the property outside the city of borough must be segregated and deducted from the value of the entire plant, and the value of the property within the city thus be ascertained in fixing the fair and reasonable rates to be charged for water within city limits; and that the rates to be charged customers outside the city must cover a fair return on the property thus devoted to the public service outside city limits plus a fair proportion of the value, cost and expense of the plant within the city; and that no part of the burden of furnishing water to customers outside the city can properly be placed on its citizens and customers within city limits." (8 A.2d 429, 433.)

A Wisconsin court has suggested that the margin of profit should not be merely sufficient to provide as fair and reasonable return as is considered proper for other public utilities, but should at all times be ample to inspire and facilitate the continued development and improvement of the plant, and the efficiency of the service, so that the quality and abundance of the supply will always be well in advance of the actual needs of the community. (Pabst Corp. v. Railroad Commission (1929) 199 Wis. 536, 227 N.W. 18, 20.) ⁵

In Village of Fox Point v. Public Service Commission, (1943) 242 Wis. 97, 7 N.W.2d 571 the court considered a challenge to a rate charged by the City of Milwaukee which yielded a 4 percent rate of return. Pursuant to section 66.069 of Wisconsin statutes annotated, the city is entitled to the same rate of return as permitted by privately owned utilities. The city could either use revenues for construction Under New Jersey law, water rates charged other municipalities are subject to the regulatory power of the Board of Public Utility Commissioners. (City of North Wildwood v. Board of Commissioners of Wildwood (1976) 71 N.J. 354, 365 A.2d 465.) The Public Utility Board also assumes jurisdiction if it serves more than 1,000 nonresident customers, or the municipal water revenues from nonresidents exceed 25 percent of the total water revenue (N.J.S.A. 40:66-85.2). Under this statute, it may recoup its costs of operation, including taxes and budget deficits for the previous year. However, if it is not subject to jurisdiction by the board, it must charge nonresidents the same rates.

Because the statute requires uniformity, actual costs need not be calculated. (Reahl v. Randolph TP. Mun. Utilities Authority (1978) 163 N.J.Super. 501, 395 A.2d 241, 249 (sewer service); see also Weidling v. Borough of Manville, supra, 172 N.J.Super. 371, 412 A.2d 133 (water rates).)

Florida allows a municipality to impose a 25 percent surcharge to water customers outside city limits. (Fla.Stats. § 180.191.) The Florida Supreme Court has upheld this surcharge on the ground that as density increases and additional demand is created, additional costs are borne in terms of capital expenses and other costs which could not be pinpointed even under sophisticated cost accounting techniques. (Mohme v. City of Cocoa (Fla.1976) 328 So.2d 422, 425.) Although the statute allows up to an additional 25 percent surcharge, not to exceed a total surcharge of 50 percent, using the same factors used in fixing rates closed to other city residents, a triable issue of fact exists when it is alleged that the charges exceeding 25 percent are unjust and inequitable, (Mohme v. City of Cocoa, supra, 328 So.2d 422, 426; ⁶ compare Hunger v. City of Zephyrhills (Fla.App.1975) 307 So.2d 487), where additional cost factors involved in serving nonresidents and capital outlay costs supported the 50 percent surcharge.

In Illinois, a statute (Smith Hurd Annot.Ill.Stats. c. 42, § 348) requires that water must be provided certain cities at no greater price than the sum the city of Chicago collected from customers within its own limits. Seventy-four suburban communities claimed that the uniform rate was discriminatory, and that the statute merely set a ceiling on the rates. They alleged that the consumption of water within the city was higher, yet 27 percent of the population in the suburbs using 18 percent of the water was charged 27 percent of the total costs. Also, it cost the city $7,000,000 to meter, deliver water to, and collect revenue from its customers but this charge was allocated to the suburbs as well. Even though the suburbs maintained their own fire departments, the suburbs were paying for 46,000 hydrants in Chicago and the excess pumping capabilities needed by Chicago for its own fire protection. The Illinois court acknowledged that although the city could make a profit and create a surplus, the statute simply imposed a ceiling and a uniform rate does not establish that the rates were in fact nondiscriminatory. The judgment of dismissal was reversed. (Village of Niles v. City of Chicago (1980) 82 Ill.App.3d 60, 37 Ill.Dec. 142, 146-147, 401 N.E.2d 1235, 1239-1240.)

In City of Plymouth v. City of Detroit (1983) 130 Mich.App. 155, 344 N.W.2d 291, 295 the court concluded that although by statute, the rate charged nonresidents could not exceed twice the local rate, Detroit had agreed by contract to charge rates reasonable in relation to cost. See also Fairway Manor Inc. v. City of Akron When no specific statute or contract applies, nonresidents have had a very difficult time challenging surcharges or differential rates. For instance, a city has successfully defended a lawsuit by establishing that the system was financed by taxes. See e.g., Barr v. First Taxing District of the City of Norwalk (1963) 151 Conn. 53, 192 A.2d 872 (the income from revenue was insufficient to pay carrying charges on bonds, requiring taxes. Outside growth required expansions of the system including a dam); (Louisville & Jefferson Co. Metropolitan Sewer District v. Joseph E. Seagram & Sons, supra, 307 Ky. 413, 211 S.W.2d 122, 126; 4 A.L.R.2d 588; Wells v. City of Jackson (1955) 223 Miss. 228, 77 So.2d 925, 926-927; Ashley v. City of Gilmer (Tex.Civ.App.1954) 271 S.W.2d 100.) (The revenue was insufficient to make all payments on revenue bonds and taxes had to be levied. Additional pumping and fuel cost, and meter reading expense, increased as the distance increased).

Even when the system was acquired with revenue bonds, and no tax revenue was employed, a rate differential has been upheld. See e.g., Town of Terrell Hills v. City of San Antonio (Tex.Civ.App.1958) 318 S.W.2d 85, 88. (A 29 percent surcharge was justified because the cost of reading nonresident meters was substantially higher, their need for fire protection and standby water demand was higher, and the municipality, which bore the burdens and responsibilities of management, was entitled to a 7 percent return.); County of Oakland v. City of Detroit (1978) 81 Mich.App. 308, 265 N.W.2d 130, 132.) (A sewer rate 14 cents higher than the 75 cent charge within the city constituted a reasonable return on investment. While the financing costs were the same, the city provided police and fire protection, faces the risk of tort liability, and loses money from its tax base by providing facilities.)

A variety of reasons have been offered to justify a surcharge. (See e.g., Delony v. Rucker (1957) 227 Ark. 869, 302 S.W.2d 287, 289.) (City residents have a preferred claim to the benefits of owning a waterworks and, absent a statute to the contrary, may discriminate in rates based upon a political boundary. Further, all evidence showed that it was in fact more expensive to serve the less densely populated suburbs.) (Clay Utility Co. v. City of Jacksonville (Fla.App.1969) 227 So.2d 516, 518.) (It costs more to extend the high voltage lines over long distances to widely scattered customers.) (Usher v. City of Pittsburg (1966) 196 Kan. 86, 410 P.2d 419.) (A 100 percent increase was warranted in light of investment outside the city and an allocation of operating, maintenance and depreciation charges.) (City of Detroit v. City of Highland Park (1949) 326 Mich. 78, 39 N.W.2d 325, 334.) (Utility property is not taxed and other services are provided by the city, such as police and fire protection. A 5.97 percent return was reasonable.) (Botkin v. City of Abilene (Tex.Civ.App.1953) 262 S.W.2d 732.) (Outside users resided as much as 18 miles away requiring meter readers to take twice as much time. Also the private system was purchased with general obligation bonds.); (Faxe v. City of Grandview (1956) 48 Wash.2d 342, 294 P.2d 402, 405-409.) (A 50 percent surcharge was justified because it cost more to read nonresident meters. Salaries, insurance premiums, and legal expenses, and other overhead expenses were paid out of general funds. Thus, proof that a differential exists does not amount to a prima facie showing that the nonresident rates are unreasonable. A city boundary line divides those who made a capital contribution and those who have not done so.) (Geneva Water Corp. v. City of Bellingham (1975) 12 Wash.App. 856, 532 P.2d 1156, 1161-1162.) (Even though it was impossible to isolate costs and benefits with precision, bulk water purchasers failed to meet its

⁷

However, there have been several examples where discrimination against nonresident water users has not been countenanced. In City of Montgomery v. Greene (1913) 180 Ala. 322, 329-330, 60 So. 900, 902 the court ruled that once a municipality attempts to supply water beyond its corporate limits, it must be with uniformity and without discrimination. A different rate fixed wholly upon corporate lines as the line of demarcation, in the absence of physical differences, was an unreasonable classification. ⁸

Likewise, in Hicks v. City of Monroe Utilities Commission (1959) 237 La. 848, 112 So.2d 635 the court ruled that when the city acquired a private water system, it was bound to continue to serve the customers of the system, at nondiscriminatory rates. It was therefore improper for a city to charge a nonresident who received electricity from a public utility at the rate of $10.50 for water alone when it charges its residents a $2.50 rate for water if the customer obtained both water and electricity from the city. ⁹ In Malvern v. Young (1943) 205 Ark. 886, 171 S.W.2d 470, 474 it appeared that when the city obtained a waterworks from district 12, district 12 had allowed residents of districts 14 and 16 to receive water at the same rates charged residents in district 12. Without any change in conditions or additional expenditures, the city now proposed to impose a surcharge upon residents in districts 14 and 16. The court concluded that this was an unreasonable discrimination. It suggested, by way of dictum, that the city could classify customers on the basis of distance or expense of delivery, noting that conditions may be different if the consumers lived in a sparsely settled area.

In City of Texarkana v. Wiggins (1952) 151 Tex. 100, 246 S.W.2d 622, the city bought a private water system and financed the acquisition with revenue bonds. It then exacted a 50 percent surcharge upon nonresident water consumers. The court ruled that when the City of Texarkana purchased a privately owned utility, it was subject to the same rule prohibiting unreasonable or unjustified discrimination in rates and charges imposed upon privately owned utilities. The court said: "The change from private to public ownership may, in theory at least, eliminate or lessen the profit motive, but the customer of utility services still cannot pick and choose his supplier of water as he does his grocer. The utility customer is thus at the mercy of the monopoly and, for this reason utilities, regardless of the character of their ownership should be, and have been, subject to control under the common law rule forbidding unreasonable discrimination." (246 S.W.2d 622, 625.) The court held that a governmental unit having the power to withhold a privilege did not perforce have the lesser power of offering it on whatever terms it can impose. Once it elected to serve, it must do so on a nondiscriminatory basis. Here, the only difference was whether the customer resided north or south of 29th Street. The court held: "The limits of a municipal corporation, of themselves, do not furnish a reasonable basis for rate differentiation." (246 S.W.2d 622, 626.) ¹⁰

In Inland Real Estate v. Village of Palatine (1982) 107 Ill.App.3d 279, 63 Ill.Dec. 234, 437 N.E.2d 883, the defendant had acquired a private water company in an unincorporated area, and then not only raised the rates above those previously approved for the private water company by the public utilities commission, it charged a rate to nonresidents which was higher than that charged to village residents. Although the court acknowledged that the municipal rates were exempted under the Public Utilities Act, the aggrieved parties had a remedy: "... [I]nability of the consumer to vote municipal officials in or out of office does not leave the customer without a remedy, because the reasonableness of rates is subject to judicial review...." Municipal officers under the Municipal Ownership Act cannot discriminate in rates or make exorbitant and unjust rates to consumers if they discharge their duties faithfully, honestly, and efficiently under the Act...." (63 Ill.Dec. 234, 237, 437 N.E.2d 883, 886.)

Austin View Civic Association v. City of Palos Heights, supra, 85 Ill.App.3d 89, 40 Ill.Dec. 164, 405 N.E.2d 1256, which is discussed in the text of the opinion, involves virtually the same scenario.

Finally, mention should be made of City of Palo Alto v. City and County of San Francisco (9th Cir.1977) 548 F.2d 1374. In that case, after the San Francisco fire, the City and County of San Francisco were granted the right to build a dam and reservoir to the Hetch Hetchy Valley in Yosemite National Park. However, as water would be supplied to other communities, the enabling legislation enacted by Congress, the Raker Act of December 19, 1913, (38 Stat. 242), prohibited San Francisco from discriminating other than on the basis of cost. San Francisco decided to raise the water rates to other cities by 20.5 percent while raising the rates to its own inhabitants by 14.5 percent. The Ninth Circuit held that the statute conferred standing upon the adjacent cities and upheld a preliminary injunction enjoining the rate increase.

2. A CRITIQUE

To summarize, although discrimination has been banned by a few statutes, in most jurisdictions, courts have left nonresidents at the mercy of the municipal water monopoly. As we have seen, on the theory that a municipality is entitled to a profit, courts have upheld rates which allow a city to siphon over a million dollars from increased water and sewer revenues into its general fund (Apodaca v. Wilson (1974) 86 N.M. 516, 525 P.2d 876), and allowed it to obtain 23 percent and 30 percent of its budget requirements from its utility systems. (San Antonio Independent School Dist. v. City of San Antonio (Tex.1976) 550 S.W.2d 262, 264-265; cf., Rosalind Holding Co. v. Orlando Utilities Commission (Fla.App.1981) 402 So.2d 1209, 1213, fn. 19.) Of course, once you accept the premise that a city is entitled to forgo any rate of return upon service to enfranchised voters within city limits, and to collect the profits exclusively from those denied the right to participate in the political process, then discrimination becomes a foregone conclusion. ¹¹

Note also that private utilities, entitled to a profit, are not allowed to discriminate, Sadly, when confronted with discrimination, some courts simply refuse to require the municipality to justify why a surcharge is always necessary. (Mohme v. City of Cocoa, supra, 328 So.2d 422, 425; see also Geneva Water Corp. v. City of Bellingham, supra, 12 Wash.App. 856, 532 P.2d 1156, 1161-1162.) Other courts fail to appreciate the fact that although new service to distant customers may be more costly, (Clay Utility Co. v. City of Jacksonville, supra, 227 So.2d 516, 518; Botkin v. City of Abilene, supra, 262 S.W.2d 732), that fact would hardly justify imposing the same rate surcharge upon other consumers in densely populated suburban areas near the city itself, especially those who obtained service years before. While it is obvious that if the utility is not self-supporting, and must make recourse to taxes, the outsiders should not enjoy a free ride, some attention should be given to the taxes actually levied. Otherwise, the reader could easily visualize a situation where a city could impose a modest tax levy upon its residents and then use this as a pretext for rate discrimination against nonresidents in perpetuity.

OPINION ON DENIAL OF REHEARINGS AND MODIFICATION OF OPINION

THE COURT:

Only a few of the points raised in the petitions for rehearing deserve answers.

1. Appellants urge that rate base valuation is no longer relevant because this court disallowed the practice of charging nonresidents with a rate of return. However, it is elementary that assets must be subject to depreciation. (Knoxville v. Knoxville Water Co. (1908) 212 U.S. 1, 13-14, 29 S.Ct. 148, 152, 53 L.Ed. 371; Contra Costa Water Co. v. Oakland, Etc. (1911) 159 Cal. 323, 335, 113 P. 668; Miller v. Railroad Commission (1937) 9 Cal.2d 190, 201, 70 P.2d 164.) Therefore, it was necessary to consider whether particular assets could be depreciated.

2. Appellants, still captivated by their equal protection theory, suggest that we overlooked the central issue in this lawsuit, namely, the discriminatory animus of the city. Once a discriminatory design exists, appellants evidently believe that no surcharge is permissible. To the contrary, our task is to simply review the result of the city's action. "The function of the courts is merely to ascertain whether the power has been carried out beyond the constitutional limits so fixed; and, if such be found to be the case, to declare the acts of the council void. They do not sit as appellate tribunals to review the correctness of the council's determination, nor need they know anything about the evidence on which that body has acted. All that they have to consider is, whether, in a given case, the result of the council's action will be to take the property of the complaining party without just compensation...." (San Diego Water Co. v. San Diego (1897) 118 Cal. 556, 564-565, 50 P. 633; see also Durant v. City of Beverly Hills (1940) 39 Cal.App.2d 133, 139, 102 P.2d 759.)

3. Appellants suggest that nonresidents should not pay any part of the cost of borrowed servants. We disagree. The opinion clearly holds that to the extent to which city devotes any tax revenue to pay the salaries of employees of the waterworks, 4. The city tells us that we should be bound by the experts who believed that Ventura was entitled to a reasonable rate of return. However, experts may not testify on questions of the law of this state. Such testimony, and the trial court's findings based on that testimony, are not binding on this court. (Communications Satellite Corp. v. Franchise Tax Board (1984) 156 Cal.App.3d 726, 747, 203 Cal.Rptr. 779; Standard Register Co. v. Franchise Tax Board (1968) 259 Cal.App.2d 125, 129-130, 66 Cal.Rptr. 803.) In our opinion, we carefully examined the validity of each theory advanced by the experts. We accepted some of those theories, and rejected others, as being contrary to California law. Therefore, when the case is retried, or a similar dispute comes before a court, the trial judge will not be confused by experts who attempt to interpret what the law should be as they recite the custom and practice in the industry. (See Elder v. Pacific Tel. & Tel. Co. (1977) 66 Cal.App.3d 650, 664, 136 Cal.Rptr. 203.)

5. We are told that we assumed, without any support in the record, that a large portion, if not a majority, of those living outside city limits are not within the boundaries of the Casitas Municipal Water District. However, the boundaries of the city and the district are depicted on a map included in the record on appeal, even if it does not shed light on the population distribution.

6. The city also claims that it had the right to treat oil companies as a separate class of customers. We do not quarrel with that decision. What we do find to be unfair is to totally eliminate a profit center. You do not have to have a PHD in economics from Harvard to understand what happens when you eliminate a source of profit from your books of account.

7. We are not impressed by counsels attempt to distinguish between a rate of return and a profit. The terms are synonymous. (Sun City Water Co. v. Arizona Corporation Com'n. (1976) 26 Ariz.App. 304, 547 P.2d 1104, 1109, vacated on other grounds in Sun City Water Co. v. Arizona Corporation Com'n. (1976) 113 Ariz. 464, 556 P.2d 1126; see also Gen. Tel. Co. of Calif. (1980) 4 Cal.P.U.C.2d 428, 438, 37 PUR (4th ed.) 127, 135-136.) As the late Senator Sam Ervin once said: "Ostriches stick their heads in the sand to conceal reality from themselves. Politicians employ euphemistic words to hide reality from the people."

However, these payments are made by developers and other individual applicants for new service connections in order to defray the costs of obtaining service. By no stretch of the imagination could such payments be labeled prepaid expenses by every city resident. Therefore, it is not logical to employ such payments as a method of perpetuating rate discrimination against existing nonresident customers, especially if the latter paid connection charges when they first obtained service from the private water company or the public entity itself.