II. BACKGROUND

In April 2009, Great Oaks stopped paying pump taxes that SCVWD had levied against it. On September 3, 2009, Great Oaks filed its General Rate Case ("GRC") Application requesting the Commission authorize rate increases for the 2010-2012 rate cycle. Great Oaks' application included what it perceived to be the required data pursuant to D.07-05-062, Appendix A, Rate Case Plan and Minimum Data Requirements for Class A Water Utilities General Rate Applications. In its GRC Application, Great Oaks recorded actual groundwater production charges (or pump tax) as operating expenses as of August 2009 and forecasted the amounts it would be required to pay in pump taxes for the remainder of 2009 and for 2010 through 2012.

Pump tax is treated as a pass-through operating expense for ratemaking purposes and Great Oaks collects the revenues from its customers to cover its pump tax payments. Great Oaks included its pump tax expenses in its application to calculate its revenue requirement. However, it did not disclose in its application that it had stopped paying the pump taxes to SCVWD and instead was holding the funds in a money market account.

On October 19, 2009, Great Oaks updated its GRC Application and corrected its workpapers. During the evidentiary hearings on January 21-22, 2010, Timothy Guster, General Counsel for Great Oaks, provided testimony on Great Oaks' various legal claims against SCVWD. According to Mr. Guster's testimony, SCVWD was illegally collecting this pump tax. On January 23, 2010, Great Oaks again updated its workpapers. These updates afforded Great Oaks at least two opportunities to disclose that it had stopped paying the pump taxes and was holding the funds in a money market account.

In March 2010, SCVWD informed DRA that Great Oaks had been refusing to pay the pump tax since April 2009.³ Great Oaks' unpaid taxes as of March 2010 totaled $4,856,030.⁴ These pump tax payments are due monthly and based on SCVWD's terms, include a 1% monthly interest charge on the delinquent amount.⁵ Great Oaks claims that it was withholding payments because of a series of lawsuits it filed in Santa Clara County Superior Court regarding the pump tax charges SCVWD levied.⁶ The court ruled against SCVWD on the pump tax charges levied on Great Oaks in the 2005-2006 fiscal year. However, this matter is unresolved because SCVWD appealed the court's decision.⁷ As of April 10, 2012, the court had not yet ruled on SCVWD's appeal

On March 19, 2010, DRA filed a motion to reopen the evidentiary record in
A.09-09-001 to admit information demonstrating that Great Oaks had not disclosed to the Commission that it was withholding payment of pump tax charges and to request that the Commission issue an order to show cause for an alleged violation of Rule 1.1 and possible violation of Section 2114 of the Public Utilities Code.

On March 31, 2010, Great Oaks filed its Annual Report for calendar year 2009. Included were balance sheets showing an unusually large ending balance for accrued liabilities (Account 230) when compared to the beginning balance because of the large sum of recorded pump taxes payable during the year. Account 230 also had a line item for pump taxes interest due. This balance sheet is not normally included in the required GRC application filing.⁸

On June 21, 2010, the Assigned Commissioner and Administrative Law Judge issued a joint ruling reopening the evidentiary record in Great Oaks' GRC Application, A.09-09-001.⁹ The Ruling directed the DWA to determine, among other things, whether Great Oaks' failure to inform DRA and the Commission of its actions in withholding funds from the SCVWD violated any Commission accounting or reporting requirement.¹⁰

On August 20, 2010, DWA submitted its Financial and Compliance Verification of Great Oaks ("Verification Report") for the period from March 1, 2009 to June 30, 2010. DWA's report found that Great Oaks was not in compliance with the USOA for Class A Water Utilities, D.04-06-018,¹¹ and Public Utilities Code Sections 451 and 794.¹² As of August 13, 2010, Great Oaks owed the SCVWD $6,481,420 for groundwater charges, which included interest and penalties.¹³

On September 23, 2010, after DWA submitted its Verification Report, Great Oaks remitted, under protest, $5,880,991 to SCVWD, the amount collected from its ratepayers plus the accrued interest in the money market account with Waddell & Reed Services and agreed to continue to make payments to the SCVWD when due.¹⁴ Great Oaks asserts that the aforementioned payment represents payment of pump taxes for the period of time from March 2009 through June 2010 and that these amounts are not to be applied to interest.¹⁵ SCVWD asserts that the balance still owed to SCVWD for the period March 2009 through June 2010, and calculated through April 30, 2012 is $781,213.79.¹⁶

³ CPSD Report. This was a phone call from SCVWD to DRA.

⁴ CPSD Report. Motion of the DRA to reopen the record to admit Great Oaks' nondisclosure of lack of payment of groundwater charges and request that the Commission issue an order to show cause for violation of Rule 1.1 and possible violation of Section 2114, filed March 19, 2010, p 2.

⁵ CPSD Report. Letter from SCVWD to Great Oaks dated August 13, 2010. Attachment A.

⁶ CPSD Report. Letter from Great Oaks to SCVWD dated August 19, 2010. Attachment B.

⁷ CPSD Report. Letter from Great Oaks to SCVWD dated September 23, 2010. Attachment C.

⁸ D.07-05-062, Appendix A.

⁹ See Assigned Commissioner and Administrative Law Judge's Ruling and Scoping Memo, at 9, available at http://docs.cpuc.ca.gov/efile/RULINGS/119462.pdf.

¹⁰ Id. at 12.

¹¹ D.04-06-018 was superseded by D.07-05-062.

¹² D.10-11-034, Appendix D, pp. 9-11.

¹³ CPSD Report. Letter from SCVWD to Great Oaks dated August 13, 2010. Attachment A.

¹⁴ CPSD Report. Copy of check dated September 15, 2010, Attachment D.

¹⁵ CPSD Report. Letter to SCVWD dated September 23, 2010, Attachment C.

¹⁶ CPSD Report. SCVWD's reconciliation of the balance due for Great Oaks, Attachment E.