V. Past Operations
Before Casmite submitted its CPCN application, the Casmalia Community Services District had complained to the Commission and asked that the company be declared a public utility based on its prior water delivery activities. The district's complaint raises the issue of whether Casmite impermissibly operated as a public utility without authority from the Commission.
Casmite's own application sets forth the undisputed facts. In 1945, Casmite acquired the groundwater well to provide water for oil-producing activities in the Casmalia oil field. Casmite also provided surplus water to some neighbors including William Tognetti who, in turn, supplied water to the community of Casmalia. In 1953, Unocal purchased all of Casmite's stock. Pursuant to inter-company agreements, Unocal continued to operate the system to supply water for both the oil field and neighbors. In 1994, Unocal sold the oil field to Capco Resources, Inc., and through Casmite, has continued to provide water to the oil field and Casmalia neighbors. Application at 4 (Dec. 22, 2003).
Historically, each of Casmite's six metered customers has signed a revocable license agreement with Casmite indicating that they are receiving surplus water and the water is not dedicated to public use. Id. Since before1986, Casmite has charged most of its customers for the water. Id. at 7.
These facts are similar to other cases to come before the Commission where a dominant economic enterprise, such as a railroad, begins to provide water for local residents (many of whom are directly or indirectly employed in the enterprise). Years later, the basic economic activity may have ceased or moved, but the firm remains the water provider for residents (many of whom are no longer associated with the original business). While the company may now want to terminate water service, local residents rely on the water and argue that the company has a continuing obligation to serve. See, e.g., In re Keene Water System, Decision (D.) 02-04-017, 2000 Cal. PUC LEXIS 1108 (April 4, 2002).
Prior to 1994, Casmite was not a public utility since it qualified for the exemption set forth in Section 2704. This section indicates that an "owner of a water supply not otherwise dedicated to public use and primarily used for . . . industrial purposes by him" is not regulated as a public utility if it "sells or delivers a portion of such water supply as a matter of accommodation to neighbors to whom no other supply of water . . . is equally available . . . ." During those years, Casmite was primarily involved in oil field operations; it was using water in those operations, and, secondarily, providing surplus water to Casmalia and other users.
When Unocal/Casmite sold the oil field operations in 1994, however, it ceased to quality for the Section 2704 exemption since the primary use of the water was no longer for industrial purposes. In determining whether the company should be considered a public utility under these circumstances, the Commission looks to see if the company has expressly or impliedly dedicated its property to public use. Like Union Pacific Railway in Keene, Casmite has not, until its December 2003 application, expressly represented itself as a public utility. This case is similar to Keene in other respects. Since the 1994 oil field sale to Capco, Casmite has sold the water primarily for the use of the seven customers including the Casmalia residents-and not for use in Casmite's or Unocal's oil field operations. In recent years, Casmite (to its credit) has contracted for water quality testing, tank replacement and, more recently, pipe replacement. These activities constitute, as in Keene, "a long course of conduct . . . from which implied dedication arises." D.02-04-017 at 10. Consequently, since 1994, Casmite has operated as a water utility without Commission authority. In doing so, Casmite has violated Public Utilities Code Section 1001 ("No . . . water corporation . . . shall begin the construction . . . of a line, plant, or system, or of any extension thereof, without having first obtained from the commission a certificate that the present or future public convenience and necessity require or will require such construction").
Section 2111 authorizes the Commission to impose a penalty of not less than $500 nor more than $20,000 on any corporation or person, other than a public utility, which knowingly violates or fails to comply with provisions of the Public Utilities Code which, in this circumstance, include the requirement of holding a CPCN when providing public utilities services. Since 1994, Casmite itself has failed to comply with Section 1001. Section 2111 also indicates that any corporation or person which "aids or abets" a violation of the Public Utilities Code also violates that section. Casmite is a wholly owned subsidiary of Unocal, and Unocal has been deeply intertwined in the operations of the water system. Unocal provides much of the management, labor, and equipment for system operations. On its own books, Unocal has allocated various operational costs to Casmite and advanced Casmite money. Many of the Casmite officers are also employees or officers of Unocal. Unquestionably, Unocal has aided and abetted Casmite in failing to comply with Public Utilities Code Section 1001, and Unocal's conduct may also be sanctioned under Section 2111.
The Commission discussed the overall guidelines for determining fines in D.98-12-075, In re Standards of Conduct Governing Relationships Between Energy Utilities and Their Affiliates, 84 CPUC 2d 155 (Dec. 17, 1998), and reiterated them in D.99-11-044, Strawberry Property Owners Ass'n v. Conlin-Strawberry Water Co., 1999 Cal. PUC LEXIS 875 (Nov. 18, 1999). The purpose of a fine is to deter future violations by the perpetrator or others. The severity of the offense and the perpetrator's conduct guide the Commission in setting a fine that is proportionate to the offense. Also, the Commission must consider the financial resources of the perpetrator in balancing the need for deterrence with the constitutional prohibition on excessive penalties.
Operating as a public utility without holding a CPCN is usually a serious violation of law and Commission orders because such conduct deprives the ratepayers of the Commission's scrutiny of rates and service in monopolistic circumstances. With no competitors and no other firm offering to provide services, Casmite holds monopoly power over its customers. Fortunately, the record contains no evidence that Casmite has sought to abuse its monopolistic position. Over the years, rates have been modest and service has been adequate. Indeed, the company has operated at a loss with its deficits covered by its parent company Unocal.
Casmite's operations without a CPCN, however, have deprived ratepayers of an important Commission regulatory function: periodic "cost-of-service" ratesetting. Had Casmite obtained a CPCN in 1994, rates would likely have increased over the years, but ratepayers would have had a decade to adjust accordingly. By failing to obtain a CPCN in 1994, Casmite has now caused a situation where a dramatic increase in rates is necessary-producing considerable rate-shock to the few customers of the system and indirect adverse consequences to the entire Casmalia community, as described by Supervisor Gray and community resident Ostini during public comment. The evidence indicates that Casmalia is economically ill-equipped to suffer such shock. To deter such regulatory-avoidance behavior that can cause ultimately severe economic disruption to small communities, the nature of Casmite's and Unocal's offenses must be considered moderately severe and should be sanctioned accordingly. This factor weighs heavily against Casmite and Unocal.
As indicated above, the perpetrator's conduct is also considered in determining appropriate sanctions. Casmite has operated, and Unocal has abetted, an uncertified public utility for ten years. However, they have operated the system reasonably well. The evidence indicates that, during this period, they sought to sell or transfer the water system to a utility holding a CPCN or a governmental entity. Once Casmalia's complaint was filed, Casmite took immediate steps to bring itself into compliance and apply for a CPCN and ratesetting. Casmite also engaged in negotiations to convey the system to Casmalia with some initial financial assistance. In all, Casmite's and Unocal's conduct, especially during the course of this proceeding, has been constructive; and this factor weighs in their favor.
Finally, we consider the financial resources of the perpetrators. Casmite's financial resources, even after the rates authorized in this proceeding, are slender while Unocal's are considerable. As of December 31, 2002 (the most recent financial statement in evidence), Casmite had plant and equipment of only $106,543 and accounts payable to Unocal of $520,460. The imposition of a monetary sanction against Casmite would only further jeopardize the financial condition of the water system.
The Commission proposes to take official notice of Unocal's current financial condition.2 By comparison to Casmite's slender resources, Unocal had gross revenues of more than $5.8 billion, and net earnings of $940 million, during the first nine months of 2004. On September 30, 2004, Unocal had total assets of $12.5 billion and $4.8 billion in stockholders' equity.
Under Section 2108, continuing violations of the Public Utilities Code are normally calculated on a daily basis. Based on the foregoing analysis, a penalty of between $1.8 million ($500 per day) and $73 million ($20,000 per day) could be appropriately levied against both Casmite and Unocal for ten years of violations of the Public Utilities Code.
As an alternative to such a direct monetary sanction, Casmite's rate of return should be adjusted to (a) mitigate ratepayer rate-shock during a transitional period, and (b) after the transitional period, provide only the lower threshold of what constitutes a reasonable rate of return. Additionally, Casmite should be denied the full addition of the water main replacement project (installed in 2004 at the cost of $70,000) to the utility's rate base. Only one-half of that cost ($35,000) should be authorized for inclusion in the rate base. The Commission has undertaken a similar approach when sanctioning impermissible activities between a utility and an affiliate. See D.98-12-075, 84 CPUC 2d at 187 ("[T]he Commission may do any or all of the following: . . . (b) Prospectively limit or restrict the amount, percentage, or value of transactions entered into between the utility and its affiliate(s);").
Because of its more substantial financial resources, a monetary sanction is even more properly levied against Unocal. The penalty should be in the amount of $500 per day for the ten years of violations of the Public Utilities Code, or a total of $1.8 million. However, since Unocal did not abuse its monopoly position and has now taken actions to rectify the violation, we will suspend the imposition of this specific monetary sanction on the condition that Unocal unconditionally foregoes claims, preceding the effective date of this decision, for the reimbursement of any and all loans or advances to Casmite.
We reiterate our statement in D.99-11-044 that sanctions are fashioned to the unique facts of each case. Consequently, we have calculated the violations and tailored the sanctions imposed against Casmite and Unocal to address the circumstances presented herein.
2 The Commission proposes to take official notice Unocal's filing of its Quarterly Report for Quarter Ending Sept. 30, 2004, Form 10-Q, with the U.S. Securities and Exchange Commission, Common File No. 1-8483 (filed Nov. 5, 2004). The financial information in this filing, provided by Unocal itself and readily available on the SEC's web site, are "[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy." Cal. Code of Evid. § 452(h) (2004). In comments on this proposed decision, Casmite or Unocal may "meet such information" before official notice is finally taken. Id. § 455(b).
