107 Wn.2d 359, WEST VLY. LAND v. NOB HILL WATER

CITE:          107 Wn.2d 359, 729 P.2d 42

               WEST VLY. LAND v. NOB HILL WATER

CAUSE NUMBER: 52334-7

FILE DATE:     December 4, 1986

CASE TITLE: West Valley Land Company, Inc., Appellant, v.
               Nob Hill Water Association, Respondent.

[1] Utility Services - State Regulation - Public Service - Necessity - Determination. State regulation of the rendition of utility services is limited to companies providing service to the public, I.E., public service companies. What a company actually does, and not legislative definitions, is determinative of whether a company is a public service company.

[2] Utility Services - State Regulation - Public Service - Test. A public service company is one which has dedicated its business to a public use by holding itself out as serving the general public for a profit, as opposed to serving only its owners or voting members at cost. An excess of revenue over expenses that is retained for working capital is not inconsistent with a nonprofit company.

[3] Statutes - Construction - Provisos - Operative Effect. The insertion of a limiting proviso into a statute does not exclude other limitations on the statute's application.

NATURE OF ACTION: A landowner sought the return of charges it paid for water service. It also sought a determination that the water service company was subject to regulation by the Utilities and Transportation Commission.

Superior Court: The Superior Court for Yakima County, No. 84 2-00484-2, Cameron K. Hopkins, J., entered a summary judgment in favor of the defendant on March 8, 1985.

Supreme Court: Holding that the water company was not a public service company, the court AFFIRMS the judgment.

COUNSEL:      F. JOE FALK, JR. (of WALTERS, WHITAKER, FINNEY & FALK), for appellant.

THOMAS A. GISH and TERRY BROOKS (of BROOKS & LARSON, P.S.), for respondent.

AUTHOR OF MAJORITY OPINION: Callow, J. -

MAJORITY OPINION: West Valley Land Company, Inc., is a real estate developer. It seeks recovery of all charges for water service for the past 2 years on the theory that Nob Hill Water Association, f/k/a Nob Hill Water Company, is a public water service company. West Valley also seeks a judgment declaring that Nob Hill is a water company subject to public regulation by the State Utilities and Transportation Commission (UTC) and attorney's fees together with treble damages under the Consumer Protection Act, RCW 19.86. The purpose of Nob Hill is to construct and operate a water supply system to provide water to its members for residential and domestic use and irrigation. West Valley appeals the denial of its motion for partial summary judgment and the grant of Nob Hill's motion for a summary judgment dismissing the complaints of West Valley with prejudice.

West Valley asserts that Nob Hill is a public service company subject to regulation by the UTC. This presents two issues: (1) whether Nob Hill is a public service company as defined by RCW 80.04.010; and (2) whether Nob Hill is a public service company as defined in INLAND EMPIRE RURAL ELECTRIFICATION, INC. v. DEPARTMENT OF PUB. SERV., 199 Wash. 527, 92 P.2d 258 (1939). Other issues of secondary importance also have been raised. We affirm the trial court which held that Nob Hill is a nonprofit cooperative, not a public service corporation, and is not subject to regulation by the UTC.

Nob Hill was originally incorporated in 1908 under the name of Nob Hill Water Company. At that time Nob Hill had 50 members. It now has over 3,700 shareholder members. In the original articles of incorporation of Nob Hill (1908), article 4, section 2 stated indirectly that Nob Hill would operate as a nonprofit corporation and will

"[charge] . . . as may be necessary TO COVER THE COST
      AND EXPENSE of procuring such supply of water and of carrying
      and delivering the same to the stockholders.

(Italics ours.) Article 4, section 5 of the articles of incorporation read in part

"but no such funds raised from such charges and rentals
      shall ever be applied to the payment of dividends . . .
      it being intended to furnish, carry and deliver said
      water . . . AT ACTUAL COST.

(Italics ours.)
     Article 4, section 6 reads:

"     The business of this corporation shall be conducted
      strictly upon the cooperative basis and no service shall
      be rendered to or for any person, firm or corporation
      other than stockholders of this corporation and there
      shall be no profit earned by the corporation nor any dividends
      declared from any accumulations in its treasury nor any
      division of the assets of the corporation among the stockholders
      thereof at any time unless upon the dissolution and liquidation
      of the corporation in which event each stockholder shall
      be entitled to take pro rata with every other stockholder
      of the corporation in any such liquidation.

The articles were amended numerous times, but the language in the relevant articles remained identical or retained the same meaning. In June of 1983 two articles of amendment were concurrently executed and filed. They first changed the name of the corporation to Nob Hill Water Association and declared that the corporation had no capital stock, either past or present. The second explicitly describes the corporation as a "non-profit association" for the first time.

West Valley decided to develop 14 acres of land which it owned within the Nob Hill service area. On August 15, 1983, the Yakima County Board of Commissioners approved a preliminary plat for West Valley's subdivision. On August 16, the Nob Hill Board of Directors adopted a resolution that the company charge a "membership fee" of $450 for all new service connections. In addition, Nob Hill was charging a service connection fee of $300 for a 1-inch meter and up to $1,900 for a 2-inch meter. Nob Hill did not seek approval from the UTC for these charges and policies. Nob Hill felt such approval was unnecessary partly because of past communications with the UTC in which the UTC informed Nob Hill that Nob Hill was not subject to UTC jurisdiction.

The UTC historically has not regulated nor asserted jurisdiction over and presently does not regulate nor assert jurisdiction over cooperatives or nonprofit water providers. Nob Hill has certain criteria to be met in order to qualify for service. Specific instances exist where Nob Hill has denied service to potential customers. Excess revenues, if any, are retained by Nob Hill to sustain company operations. West Valley now seeks a judgment that all charges paid by West Valley to Nob Hill during the 2 years prior to commencement of this action were overcharges.

We turn to the issue of whether Nob Hill is a public service company subject to regulation by the UTC. RCW 80.01 ET SEQ. West Valley contends that Nob Hill is a water company under RCW 80.04.010 and therefore is a public service company subject to UTC regulation. Nob Hill answers that it operates strictly as a nonprofit cooperative and is not a public service company.

The public service commission law, adopted in 1911, came into existence through an act entitled "An Act relating to public service properties and utilities, providing for the regulation of the same, fixing penalties for the violation thereof, making an appropriation and repealing certain acts." Laws of 1911, ch. 117, p. 538. The law has been amended numerous times.

The current section of the act, codified as RCW 80.04.010, was amended three times during the 1985 regular session of the Legislature, each without reference to the others. Pursuant to the directive of RCW 1.12.025, we give effect to each act to the extent that the amendments do not conflict in purpose. We set forth the definitions reflected in the last act filed in the office of the Secretary of State as controlling (Laws of 1985, ch. 450). RCW 1.12.025. The definitions are set forth for purpose of discussion and such differences in definitions as exist in chapters 161, 167 and 450 of the Laws of 1985 are not material to our discussion of the issue presented in this case. RCW 80.04.010 (Laws of 1985, ch. 450, 2) contains the following definitions:

"     "Water system" includes all real estate, easements,
      fixtures, personal property, dams, dikes, head gates,
      weirs, canals, reservoirs, flumes or other structures
      or appliances operated, owned, used or to be used for
      or in connection with or to facilitate the supply, storage,
      distribution, sale, furnishing, diversion, carriage, apportionment
      or measurement of water for power, irrigation, reclamation,
      manufacturing, municipal, domestic or other beneficial
      uses for hire.

"Water company" includes every corporation, company,
      association, joint stock association, partnership and
      person, their lessees, trustees or receivers appointed
      by any court whatsoever, and every city or town owning,
      controlling, operating, or managing any water system for
      hire within this state: PROVIDED, That it shall not include
      any water system serving less than sixty customers where
      the average annual gross revenue per customer does not
      exceed one hundred twenty dollars per year.

. . .

"Public service company" includes every gas company,
      electrical company, telecommunications company, and water
      company. Ownership or operation of a cogeneration facility
      does not, by itself, make a company or person a public
      service company.

The term "service" is used in this title in its broadest
      and most inclusive sense.

[1, 2] Under a literal application of the definitions set forth in RCW 80.04.010, Nob Hill would come within the scope of the regulatory provisions in RCW 80.04, because Nob Hill is a "water company" operating a "water system" in this state as an association that owns, controls, operates and manages a water system for power, irrigation, domestic and other beneficial uses. West Valley seeks to have Nob Hill subject to regulation pursuant to RCW 80.04 and RCW 80.28. Nob Hill contends that it is a nonprofit cooperative under the public service act.

"[Such cases] must be determined by the character of the
      business actually carried on by the carrier and not by
      any secret intention or mental reservation it may entertain
      or assert when charged with the duties and obligations
      which the law imposes.

CUSHING v. WHITE, 101 Wash. 172, 181-82, 172 P. 229 (1918), QUOTED IN STATE EX REL. ADDY v. DEPARTMENT OF PUB. WORKS, 158 Wash. 462, 465, 291 P. 346 (1930). "It does business . . . and the important thing is what it does, not what its charter says." TERMINAL TAXICAB CO. v. KUTZ, 241 U.S. 252, 253- 54, 60 L. Ed. 984, 36 S. Ct. 583 (1916).

The fact that the articles of incorporation state that Nob Hill is a nonprofit cooperative does not end the inquiry. It must be ascertained what Nob Hill does.

"     Regulation by the department [UTC] is predicated
      upon the proposition that the service rendered is public
      service and, further, if the person sought to be regulated
      is a corporation, that it be a public service corporation

. . .

INLAND EMPIRE RURAL ELECTRIFICATION, INC. v. DEPARTMENT OF PUB. SERV., 199 Wash. 527, 536, 92 P.2d 258 (1939); SEE ALSO STATE EX REL. WEBSTER v. SUPERIOR COURT, 67 Wash. 37, 120 P. 861 (1912); STATE EX REL. PUBLIC SERV. COMM'N v. SPOKANE & I.E. R.R., 89 Wash. 599, 154 P. 1110 (1916); SUNSET SHINGLE CO. v. NORTHWEST ELEC. & WATER WORKS, 118 Wash. 416, 203 P. 978 (1922); CLARK v. OLSON, 177 Wash. 237, 31 P.2d 534, 93 A.L.R. 240 (1934); STATE EX REL. SPOKANE UNITED RYS. v. DEPARTMENT OF PUB. SERV., 191 Wash. 595, 71 P.2d 661 (1937); PORT OF SEATTLE v. UTILITIES & TRANSP. COMM'N, 92 Wn.2d 789, 800, 597 P.2d 383 (1979); PUGET SOUND INT'L RY. & POWER CO. v. KUYKENDALL, 293 F. 791 (W.D. Wash. 1923); 51 C.J. PUBLIC UTILITIES 79, at 38 (1930).

The test used to determine if a corporation is to be regulated by the UTC was stated in INLAND EMPIRE, at 537, as follows:

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

SEE ALSO STATE EX REL. YORK v. BOARD OF CY. COMM'RS, 28 Wn.2d 891, 184 P.2d 577, 172 A.L.R. 1001 (1947); MILES v. ENUMCLAW COOP. CREAMERY CORP., 12 Wn.2d 377, 121 P.2d 945 (1942); MOTOROLA COMMUNICATIONS & ELECS., INC. v. STATE PUB. SERV. COMM'N, 515 F. Supp. 793, 797 (S.D. Miss. 1979), AFF'D, 648 F.2d 1350 (5th Cir. 1981). The actions and activities of the association indicate whether it must be regulated or allowed to conduct its business free of governmental control. INLAND EMPIRE, at 538, states:

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

SEE ALSO MCDONALD v. IRBY, 74 Wn.2d 431, 435, 445 P.2d 192 (1968); TRUDEAU v. PACIFIC STATES BOX & BASKET CO., 20 Wn.2d 561, 571, 148 P.2d 453 (1944); LARSON v. AETNA LIFE INS. CO., 19 Wn.2d 601, 143 P.2d 850, 149 A.L.R. 1289 (1943); MILES v. ENUMCLAW COOP. CREAMERY CORP., SUPRA; WASHINGTON EX REL. STIMSON LUMBER CO. v. KUYKENDALL, 275 U.S. 207, 72 L. Ed. 241, 48 S. Ct. 41 (1927).

We find from our application of the principles set forth to the actions of Nob Hill that it is not a public service corporation and, therefore, not subject to regulation by the UTC. Nob Hill conducts its business in accordance with the privileges granted and the limitations prescribed by law. But of greater consequence is that Nob Hill has not dedicated or devoted its facilities to public use, nor has it held itself out as serving, or ready to serve, the general public. As observed in INLAND EMPIRE, at 539-40:

"But more important than that is the controlling factor
      that it has not dedicated or devoted its facilities to
      public use, nor has it held itself out as serving, or
      ready to serve, the general public or any part of it.
      It does not conduct its operations for gain to itself,
      or for the profit of investing stockholders, in the sense
      in which those terms are commonly understood. It does
      not have the character of an independent corporation engaged
      in business for profit to itself at the expense of a consuming
      public which has no voice in the management of its affairs
      and no interest in the financial returns. Its members
      do not stand in the relation of members of the public
      needing the protection of the public service commission
      in the matter of rates and service supplied by an independent
      corporation.

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

The Utah Supreme Court when faced with a similar problem adopted the reasoning of INLAND EMPIRE stating:

"INLAND EMPIRE RURAL ELECTRIFICATION, INC. v. DEPT. OF
      PUBLIC SERVICE OF WASHINGTON, 199 Wash. 527, 92 P. 2d
      258, . . . held that a rural electric service cooperative
      was not a public utility under Washington's laws. We
      believe the reasoning in the Inland Empire case to be
      convincing and sound.
           We hold, therefore, that a non-profit electric cooperative
      which serves only its members, and is completely consumer
      owned with each consumer limited to one membership, is
      not a public utility within the purview of our statute.

GARKANE POWER CO. v. PUBLIC SERV. COMM'N, 98 Utah 466, 473, 100 P.2d 571 (1940).

Nob Hill will provide water service to any property within its service area upon request and without discrimination unless there is a technical reason that adequate service cannot be provided or the property owner fails to pay the necessary connection and membership fee. Although many in the Nob Hill area are serviced, the criteria for service is set forth by Nob Hill and there are instances where service has been denied. Nob Hill has chosen to serve particular individuals of its own selection, and does not serve the public as a class or that portion of it that could be served by Nob Hill.

Additionally, Nob Hill does not conduct its operations for gain to itself, or for the profit of investing stockholders, but functions entirely on a cooperative basis. Nob Hill has had greater annual revenues than expenses and West Valley asserts that since none of these excess revenues were rebated to shareholder-members, but were retained to sustain company operations that this indicates that Nob Hill should be subject to regulation. However, the fact that excess revenues are not rebated to the shareholder-members is not controlling. A reasonable retention of profits for future liquidity and working capital is permissible. It is material, however, that Nob Hill does not have the character of an independent corporation engaged in business for profit to itself at the expense of a consuming public which has no voice in the management of its affairs and no interest in its financial returns. The members of Nob Hill do not stand in the same position as members of the general public needing the protection of the UTC in the matter of rates and service supplied by an independent corporation.

A comparison of STATE EX REL. ADDY v. DEPARTMENT OF PUB. WORKS, 158 Wash. 462, 465, 291 P. 346 (1930) with INLAND EMPIRE RURAL ELECTRIFICATION, INC. v. DEPARTMENT OF PUB. SERV., 199 Wash. 527, 92 P.2d 258 (1939) makes the distinction between those subject to regulation and those not subject to regulation apparent. In ADDY the Fruitdale-on-the-Sound Water Company maintained and operated its system on charges collected from outside customers while supplying free water to those owning property inside the original 46-acre tract and, in addition, the stockholders declared and received a dividend on their stock out of funds derived from water charges against outside patrons. In INLAND EMPIRE the company did not hold itself out as serving the general public, nor did it conduct its business for gain or the profit of stockholders, and its members were held not to be in need of Public Service Commission regulation. Nob Hill conducts its business as did Inland Empire, not as did the Fruitdale-on-the-Sound Water Company.

In a cooperative, the consumers have a "voice" in the management of its affairs. West Valley contends that not all users are allowed to vote at the shareholder-member meeting. On the other hand, although some persons using Nob Hill water cannot vote directly, they can vote derivatively through their landlord or their condominium association. Tenants receive the same benefit as other members and are not charged an additional amount for their water nor are they treated differently as a class. Since the landlord or the condominium association has membership and a vote in the water association, the tenant or condominium association member cannot be exploited since the interest of the landlord and the condominium association is the same as the interest of those represented. Equality of representation is not required by INLAND EMPIRE; all that is requisite is a voice in the cooperative. Since all members are directly or derivatively represented, the requirement is met.

[3] In 1963 a proviso was added to the current definition of "water company" as contained in RCW 80.04.010. This proviso has been since amended. The proviso currently states

"PROVIDED, That it shall not include any water system
      serving less than sixty customers where the average annual
      gross revenue per customer does not exceed one hundred
      twenty dollars per year.

This proviso exempts small companies from UTC jurisdiction. However, the provision does not allow only small companies with less than 60 customers and annual gross revenue per customer of $120 or less to be excluded from UTC jurisdiction.

"[A] proviso . . . must be construed in the light of the
      body of the statute, and in such a manner as to carry
      out the legislature's intent as manifested by the entire
      act and laws in pari materia therewith. Provisos operate
      as limitations upon or exceptions to the general terms
      of the statute to which they are appended and as such,
      generally, should be strictly construed with any doubt
      to be resolved in favor of the general provisions, rather
      than the exceptions.

GARVEY v. ST. ELIZABETH HOSP., 103 Wn.2d 756, 759, 697 P.2d 248 (1985) (quoting STATE v. WRIGHT, 84 Wn.2d 645, 652, 529 P.2d 453 (1974)).

Regulation by the commission is predicated upon the proposition that the service rendered is a public service and that the entity sought to be regulated is a public service corporation. Nob Hill is not a public service corporation but rather a nonprofit cooperative and its failure, by virtue of its size, to fall within the exemption from regulation proviso does not make it subject to regulation.

Nob Hill is a nonprofit cooperative. It is not within the ambit of regulation of the UTC as a public service corporation. In light of our disposition of the primary issues present on appeal, we need not address the ancillary questions raised.

The trial court is affirmed.

CONCURRING JUDGES: Dolliver, C.J., and Utter, Brachtenbach, Dore, Pearson, Andersen, Goodloe, and Durham, JJ., concur.

POST-OPINION INFORMATION: