The Washington Utilities and Transportation Commission is being asked to decide whether the Sandy Point Improvement Co. water system should be subject to state regulation when it sets rates for water customers.

According to documents on the commission's website, the commission staff began an investigation after some Sandy Point water customers contacted the commission.

"These customers believe excessive rates are being charged by Sandy Point for water usage," a staff report says. "They also want to ensure funds paid by water customers are not being used for non-water related expenses."

In past years, the Sandy Point association has placed surcharges on water bills to raise money for legal fights with Lummi Nation over a wide range of jurisdictional issues. Sandy Point is within Lummi Reservation boundaries.

The staff report argues that at least some of the association's water system is subject to state regulation. That is the portion that provides water to 119 so-called "Class C" improvement company shareholders who get no services besides water, as well as 46 other water customers who are not association shareholders.

Another 779 Sandy Point water customers are "Class A" shareholders who also get use of a clubhouse, marina, golf course and pool, according to the staff report. That portion of the association's activity may not be subject to state utility regulations, according to legal documents filed by the staff.

State law says a water utility with more than 100 customers is subject to the commission's regulatory system.

The staff report recommends that the commission begin a formal proceeding to determine whether any portion of Sandy Point's utility activities are subject to state regulation, which would likely mean that its water rates would need commission approval.

The staff also recommends that a penalty of $16,500 be assessed against Sandy Point if it is determined that the water utility has been out of compliance with state law, although documents also indicate that financial penalties, if any, will be determined later.

Olympia attorney Joseph Rehberger is representing the Sandy Point Improvement Co. He has filed legal documents denying that Sandy Point is operating outside the law, and should be exempt from state regulation because it is a homeowner association.

"Sandy Point has at all times acted in good faith in the operation of its water system and with regard to its belief that it was not subject to obligations under the rules and regulations of the commission," Rehberger wrote, adding that violations, if any, were minor.

"The alleged offending conduct was unknowing and unintentional; the alleged offending conduct was not gross or malicious; the violation is isolated and not repetitive," Rehberger wrote in a document filed with the commission.

The commission has yet to schedule a formal hearing on the matter. A scheduling conference is set for Monday, Jan. 14.

Reach John Stark at 360-715-2274 or john.stark@bellinghamherald.com. Read his Politics blog at blogs.bellinghamherald.com/politics or get updates on Twitter at @bhampolitics.

Reach John Stark at 360-715-2274 or john.stark@bellinghamherald.com. Read his politics blog at blogs.bellinghamherald.com/politics or follow him on Twitter at @bhamheraldpolitics.