UTAH SUPREME COURT DEFINES WHEN A MUTUAL WATER COMPANY MAY BE REGULATED BY THE PUBLIC SERVICE COMMISSION

In Bear Hollow Restoration, LLC v. Public Service Commission of Utah, 2012 UT 18, the Utah Supreme

Court addressed whether a mutual water company is a public utility subject to regulation by the Public

Service Commission of Utah (Commission).

Bear Hollow involved Summit Water Distribution Company (Summit) and Bear Hollow, LLC (Bear

Hollow), a Summit shareholder. Bear Hollow owned Class A shares in Summit. Class A shares did not

allow water consumption. A Class A share was for a developer to hold until the land was developed at

which time the share would be conveyed to the homeowner and converted to a Class B share, allowing

water consumption. Class B shares were appurtenant to the land of the homeowner.

Bear Hollow’s predecessor-in- interest obtained its Class A shares through a development agreement

that made them appurtenant to certain land. Bear Hollow discovered it had more shares than it needed

to complete the development and attempted to sell its surplus Class A shares. Bear Hollow could not

transfer the shares separate from the land without Summit’s approval. Summit denied Bear Hollow’s

requests to transfer its Class A shares separately from the land. Bear Hollow then petitioned the

Commission to reevaluate Summit’s exempt status and requested that the Commission regulate

Summit. The Commission denied Bear Hollow’s petition. The Commission also denied Bear Hollow’s

request for rehearing and refused to consider Bear Hollow’s amended complaint. Bear Hollow appealed

the Commission’s rulings.

The Court addressed four issues on appeal. This blog addresses only the issue of whether the

Commission properly ruled that Summit was not a public utility subject to regulation by the Commission.

The Court affirmed the Commission’s ruling that Summit was not a public utility subject to regulation by

the Commission.

A “public utility” includes water corporations “where the service is performed for, or the commodity

delivered to, the public generally.” 1 The issue for the Court was whether Summit provides “service to or

delivers its water to the public generally.” 2 The Court relied on the test in Garkane Power Co. v. Public

Service Commission 3 whether an entity provides service to the general public. The Court also pointed

out the policy justification for regulation by the Commission where regulation is necessary to prevent

“monopolistic coercion,” which potentially exists where a profit driven corporation controls essential

public services.

Addressing these concerns the Court reaffirmed the Garkan standard that a cooperative does not serve

the public generally and will be exempt from regulation by the Commission where “(1) there is

‘mutuality of ownership among all users [that] is substituted for the conflicting interests that dominate

the owner vendor-non owner vendee relationship,’ (2) the ‘cooperative serves only its owner-members,’

and (3) the cooperative ‘has the right to select those who become members.’” 4

Mutuality of Ownership Among Owner-Members

1 Bear Hollow Restoration, LLC v. Public Service Commission of Utah [get final citation], p. 7 (emphasis in original).

2 Id.

3 100 P.2d 571 (Utah 1940).

4 Bear Hollow, at 8.

Bear Hollow argued that mutuality did not exist in Summit because a shareholder, SK Resources,

controlled 80 percent of all Summit Class A shares and 51.9 percent of all outstanding Summit shares.

The Court held that mutuality existed because each shareholder had a proportionate interest in Summit

and that they had a common interest, even though not all shareholders had the same amount of voting

power. Because SK resources invested much more money into purchasing Summit shares, it had greater

entitlement to water and voting power than other shareholders. The Court held that there was mutual

ownership among Summit’s shareholders and that it did not serve the public generally.

Service Only to Owners-Members

The Court made clear that a “true cooperative only extends its benefit to a limited class of owner-

members.” 5 The Court upheld the Commission’s determination that Summit only provides service to its

members because the only entities who pay for and are entitled to receive water from Summit are

shareholders, regardless of whether the shareholders own public or rental facilities. Therefore, the

Court concluded that Summit served only its members and did not serve the public generally.

Right to Select Who Becomes Members

The Court held that Summit retained the right to select its members. Bear Hollow argued that Summit

had lost control of who became a member because it could not control to whom an existing shareholder

may sell its land and appurtenant shares. The Court stated that a cooperative is not required to exercise

its right to select its members on a case-by- case basis and that a cooperative’s right to select its

members is not lost just because membership is easy to obtain. “In short, it is irrelevant to the public

utility analysis how a member acquires his status (here by acquiring shares) so long as a member is

bound by rights and duties that are different from those of nonmembers.” 6 The Court determined that

Summit retained the right to select its members because membership was conditioned upon owning

Summit shares and complying with the articles of incorporation and bylaws.

Conclusion

The Court held that because Summit shareholders mutually own Summit, because Summit served only

its members, and because Summit had the right to select its members, Summit did not serve the public

generally and was not subject to regulation by the Commission. The Court affirmed the Commission’s

ruling. This case is significant for Utah water law because it defines when the Commission may regulate

non-profit mutual water companies, which control a significant portion of Utah’s water supply.

Posted in Water Rights

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