By Jones Osborn II

In Arizona, an arid state, water is obviously critical to the development of real property. Normally, potable water is obtained in one of three ways—from the city, from a private water company, or from a well.

City Service. For property located within the city limits, the usual choice is city water. This raises the question of whether the city is obligated to provide water to all land within its borders, and if so, at what price and on what terms.

As a general rule, a city is not required to extend water service to new unserved areas, even if those areas are within the city limits. The decision to extend or not extend its service area is a decision that a city may make in its discretion based on the cost of extending its lines, the availability of water supplies, the existence of adequate treatment facilities, and other relevant factors. In addition, the city may impose reasonable line extension charges and other fees as a condition of extending service to a new area.

However, where a property is located in a zone that is already served by city water lines, the city cannot arbitrarily refuse to provide service to a particular property.

Municipalities are not subject to regulation by the Arizona Corporation Commission, as are private water companies. The Corporation Commission has the power to grant franchises to private water companies, to require them to serve properties within their franchised areas, and to regulate the rates that can be charged. Because water service is a natural monopoly which is critical to the owners of property, and because of the lack of regulation of city-owned water companies, the courts have stepped in to impose certain duties on cities and towns when they undertake to provide water service. Although municipalities still have considerable freedom in the operation of their water systems, they cannot arbitrarily cease providing water service to those who are receiving it and must act in a reasonable and non-discriminatory manner in setting rates and charges for service.

Municipalities are not required to serve property located outside the city limits, but may do so if they choose. However, once a municipality begins to serve property outside city limits, it cannot cease such service.

If the municipality agrees to supply water to County residents pursuant to a negotiated contract, it can charge whatever is provided for in the contract. However, if there is no contract (as, for example, when a city takes over a private water company which services County residents), the charges for water must be reasonable. They may be higher than the municipality charges its residents, but still, they must be reasonable. For example, the courts have said that a city may provide water to its residents at cost, but may make a reasonable profit on service outside its boundaries.

If the city undertakes to serve property outside its boundaries which is located in another municipality, there is a statute which limits what the city can charge the owners of that property for water service. According to the statute, the rate must be either the same rate charged to its own residents, the rate charged by the other city to its residents, the rate charged by a private water company in the other city, or the rate agreed to by both cities based on a cost study. The statute contains an exemption for surcharges adopted before July 1, 1986, so long as the surcharge does not exceed thirty percent of the rate charged by the city to its own residents.

Private Water Companies. In areas served by a private water company, service is governed by rules, regulations, and decisions of the Arizona Corporation Commission. Normally, a private water company must provide service to all property located within its franchise area. However, private water companies are allowed to require those seeking service in new areas to advance the funds needed for line extensions or other facilities necessary to provide the water. These deposits are usually refundable in whole or in part over the following ten years based on the amount of water that is purchased by the customer at the rate of 10% of the annual billings from that customer.

Wells. In some cases, property may be served by a private well. However, sufficient water is often not available or is located too far below ground to be economically feasible to pump. Sinking a well may also be too expensive to justify service to a single property. Wells serving multiple properties can present operational and maintenance problems, and at some point may come under regulation by the Corporation Commission as a de facto public utility. In addition, there are limits on the amount of water that can be legally pumped from a well in many areas. It is rarely feasible for a subdivision or other large development to rely on private wells.

Conclusion. Water service is critical to property purchased for development. Always thoroughly investigate the availability and cost of water service when purchasing property. Do not assume that because the property is in a city that water will automatically be available.

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See Jung v. City of Phoenix, 160 Ariz. 38, 770 P.2d 342 (1989); Town of Wickenburg v. Sabin, 68 Ariz. 75, 200 P.2d 342 (1948); A.R.S. Sec. 9-511, -511.01, and -516.