III. DISCUSSION- GREAT OAKS' VIOLATIONS AND THE POSSIBILITY/OPPORTUNITY FOR FINES
A. Public Utilities Code Section 794 & USOA
The Commission prescribed the accounting requirements for Class A Water Companies in the Uniform System of Accounts ("USOA") for Class A Water Companies adopted by the Commission effective January 1, 1955.17 Great Oaks is required to maintain its accounting records in conformance with the adopted USOA for Class A Water Utilities.
The USOA Section 2.A states:
Each utility shall so keep its books of account, and such other books, records, and memoranda which support, or are necessary to an understanding of, the entries in such books of account, as to be able to furnish readily full information as to any item included in any account. Each entry shall be supported by such detailed information as will permit a ready identification, analysis, and verification of all of the facts relevant thereto.
The USOA Section 2.B states:
The books and records referred to herein include not only accounting records in a limited technical sense but all other records such as minute books, stock books, reports, correspondence, memoranda, and the like, which may be useful in developing the history of or facts regarding any transaction.
Great Oaks recorded the pump tax charges collected from its ratepayers in Groundwater Charges, Account 700. This Account used by Great Oaks is in Operating Expenses under the sub-category of Operating Expenses other than Payroll. The USOA provides a list of valid accounts for operating expenses.18 Account 700 is not an account USOA prescribed for Class A Water Utilities. Great Oaks should have used an account prescribed by the USOA in the 700 series or created a sub-account within one of the 700 series accounts.
Although Great Oaks collected pump taxes and recorded them as operating expenses,19 it did not pay these taxes to SCVWD and instead deposited the amounts collected from its ratepayers for the period March 2009 to June 2010 in a money market account.20 Great Oaks has filed a series of lawsuits in Santa Clara County Superior Court regarding the pump tax charges SCVWD levied. The court ruled against SCVWD on these pump tax charges. However, SCVWD has appealed the court's decision. The Court of Appeals has not yet ruled on SCVWD's appeal as of April 10, 2012.
Despite Great Oaks' on-going litigation, it should have, as required by the USOA, disclosed that it was withholding payments, the reasoning behind its non-payment, the accounting treatment it was giving these pump tax charges, and it should have discussed the ruling on the court decision and the pending appeal in its Application. This information should have been disclosed in Great Oaks' GRC Application and/or its updates to the Application so that the Commission and its staff could consider whether the recorded pump tax expenses are reasonable. Great Oaks' failure to disclose this information may have violated USOA Sections 2.A and 2.B.21 By failing to adhere to the dictates of the USOA, Great Oaks may have violated PU Code Section 794.
PU Code Section 794 states:
The commission may, after notice, and hearing if requested within 15 days after receipt of notice, prescribe by order the accounts in which particular outlays and receipts shall be entered, charged, or credited. Where the commission has prescribed the forms of accounts, records, or memoranda to be kept by any public utility for any of its business, it is unlawful for such public utility to keep any accounts, records, or memoranda for such business other than those so prescribed, or those prescribed by or under the authority of any other state or of the United States, except such accounts, records, or memoranda as are explanatory of and supplemental to those prescribed by the commission.
When the Commission has determined the appropriate accounting to utilize, it is "unlawful" to utilize any other accounting formats. Great Oaks appears to have violated PU Code Section 794 by not following the USOA. Great Oaks should have used an account prescribed by the USOA in the 700 series or created a sub-account within one of the 700 series accounts.
B. Rate Case Plan
The Commission's Rate Case Plan for Class A Water Companies, D.07-05-062, requires a utility to list the major controversial issues included in its GRC filing.22 The Rate Case Plan also requires the utility include the dollar impact of such controversial issues and a brief summary of the utility's rationale on this subject.23
The Santa Clara County Superior Court has ruled that the pump taxes levied during the 2005-2006 fiscal year violated Proposition 218 by not securing proper voter approval. The court also ruled SCVWD violated the District Act by improperly calculating groundwater charges (pump taxes) and spending inappropriately. This litigation is a material fact involving a large sum of revenue collected from Great Oaks' customers. To illustrate, the subject pump tax charge in 2009 is $4,609,320 and the total revenue is $12,356,560. This accounts for approximately 37.3% ($4,609,320/$12,356,560) of the total revenue.
Total revenue is a component in the calculation of the Operational Cash Requirement in Rate Base. If Great Oaks prevails in its litigation against SCVWD, its customers stand to receive substantial refunds from Great Oaks. CPSD asserts that Great Oaks should have reported this matter as a important issue in its GRC filing pursuant to the Commission's Rate Case Plan.
By withholding pump tax payments from SCVWD, Great Oaks accrued interest at one percent (1%) per month and continued to accrue interest at a rate of one percent (1%) on the delinquent amount due each month.24 The accumulation of interest on the unpaid balance due SCVWD could have resulted in increased costs to Great Oaks' ratepayers. Prior to DRA's motion to reopen the GRC evidentiary record and before D.10-11-034 was issued, the record did not have information to ensure that Great Oaks' ratepayers would not be charged for these interest and/or penalty charges. The lack of information about these expenses in Great Oaks' GRC application could have prevented the Commission from properly accounting for these costs and/or preventing them from becoming a ratepayer liability in this and future GRCs. D.10-11-034 requires that Great Oaks' shareholders be solely responsible for all interest, penalties, and legal expenses associated with the nonpayment of groundwater production charges.25
Great Oaks appears to have violated the Rate Case Plan by failing to disclose its non-payment of pump taxes to SCVWD.
C. Public Utilities Code Section 451
All charges a utility levies against its ratepayers must be just and reasonable. Public Utilities Code Section 451 states that:
All charges demanded or received by any public utility, or by any two or more public utilities, for any product or commodity furnished or to be furnished or any service rendered or to be rendered shall be just and reasonable. Every unjust or unreasonable charge demanded or received for such product or commodity or service is unlawful.
All rules made by public utility affecting or pertaining to its charges or service to the public shall be just and reasonable.
Great Oaks collected substantial amounts of pump taxes from its ratepayers and chose not to make the pass-through payments to SCVWD. The Commission has a mandate to ensure that charges any public utility imposes are just and reasonable based substantially on complete and truthful information from the public utility it regulates. It is unjust and unreasonable for Great Oaks to withhold such material and controversial information from the Commission when it requests rate increases in future years.
Great Oaks should have disclosed in its GRC Application that it was withholding these payments and listed the litigation as a controversial issue, as required in D.07-05-062. Great Oaks' withheld pump taxes incurred interest and penalty charges. Great Oaks' failure to report its withholding of pump tax payments in its GRC Application potentially undermined the Commission's ability to consider all facts in determining the reasonable test year and escalation years' expense for its pump taxes.26 Therefore, Great Oaks appears to have violated PU Code Section 451.
D. Rule 1.1
Great Oaks apparently did not violate Rule 1.1 of the Commission's Rules of Practice and Procedure. Rule 1.1 states:
Any person who signs a pleading or brief, enters an appearance, offers testimony at a hearing, or transacts business with the Commission, by such act represents that he or she is authorized to do so and agrees to comply with the laws of this State; to maintain the respect due to the Commission, members of the Commission and its Administrative Law Judges; and never to mislead the Commission or its staff by an artifice or false statement of fact or law.
As described earlier, Great Oaks' accounting for its ratepayer provided pump tax funds and its withholding of the pump tax payments to SCVWD may have violated the USOA for Class A Water Companies, the Rate Case Plan, and PU Code Sections 451 and 794.
Pursuant to D.07-05-062, Great Oaks submitted the required minimum data for Class A Water Utilities General Rate Applications. The balance sheet and/or income statement do not have to be submitted as part of the GRC application. A partial balance sheet for 2009 would have revealed Great Oaks had withheld pump tax payments to SCVWD. CPSD found no evidence that DRA requested this additional information in its initial review of the GRC. While Great Oaks' decision not to disclose the information relating to its withholding of the pump tax revenues is unreasonable and its use of Account 700 is incorrect, CPSD does not assert they rise to the level of a Rule 1.1 violation.
E. The Commission has the authority to consider fines
Any public utility which violates or fails to comply with any provision of the Constitution of this state or of this part, or which fails or neglects to comply with any part or provision of any order, decision, decree, rule, direction, demand, or requirement of the commission, in a case in which a penalty has not otherwise been provided, is subject to a penalty of not less than five hundred dollars ($500), nor more than twenty thousand dollars ($20,000) for each offense.27
PU Code Section 2108 states:
Every violation of the provisions of this part or any part of any order, decision, decree, rule, direction, demand, or requirement of the commission, by any corporation or person is a separate and distinct offense, and in the case of a continued violation, each day's continuance thereof shall be a separate and distinct offense.
Great Oaks' improper accounting for its ratepayer-provided pump tax funds and its withholding of those tax payments to SCVWD appears to have violated the USOA for Class A Water Companies, the Rate Case Plan (D.07-05-062), and PU Code Sections 794 and 451. Pursuant to D.10-11-034, Ordering Paragraph 12, CPSD recommends the Commission open an OII based on CPSD's findings and order Great Oaks to show cause why penalties should not be imposed for the alleged violations.
17 Decision No. 50185 on June 29, 1954 and modified by Decision No. 57578 on November 10, 1958.
18 USOA, pp. 90-91.
19 A.09-09-001, pp. 3-7.
20 CPSD Report. SCVWD letter to Great Oaks dated August 13, 2010, Attachment A.
21 D.10-11-034, Appendix D, p 10.
22 D.07-05-062, Appendix A, p A-22.
23 D.07-05-062, Appendix A, p A-22.
24 CPSD Report. Letter to Great Oaks from SCVWD dated August 13, 2010, Attachment A.
25 Decision 10-11-034, p. 81.
26 D.10-11-034, Appendix D, p. 11.
27 The maximum statutory penalty for violations of section 2107 has been changed to $50,000.00 however, the offences that were the subject of this OII happened when the statutory maximum was $20,000.00.
