4. Evidentiary Hearing

An evidentiary hearing was set for November 4, 2008 in San Francisco. That evidentiary hearing was rescheduled at the request of the Division of Water and Audits to December 4, 2008 and again at the request of Respondents to January 13, 2009. Respondents did not provide any direct testimony. Cross examination of Respondents was undertaken by the Division of Water and Audits. The Division of Water and Audits also provided direct testimony.

Actions that could support a finding that Respondents have actually or effectively abandoned the water system were identified in the investigation, including that Respondents have, among other matters, not complied with Resolution W-3812, moved the water operations out-of-state, not employed a State certificated water operator for several years, and attempted to sell the water system without Commission authority.

Yermo was authorized a general rate increase in 1993, pursuant to Resolution W-3812, dated November 23, 1993. The Commission found in that proceeding that the water system was antiquated and in constant need of repair. Therefore, Yermo was required as part of that general rate increase to file a plan of action with the Water Utilities Branch within 90 days after the effective date of that resolution. The plan of action was to detail the repair work, system upgrading, new personnel hired and/or equipment purchases to be made as a result of the general rate increase. Then commencing July 1, 1994 and every six months thereafter, until relieved by the Water Utilities Branch, Yermo was required to file a report with the Water Utilities Branch showing the progress completed on the plan of action and the remainder work to be completed.

Respondent Walker testified that he was not sure if he had filed the required plan of action.11 At that time, he was selling cars in Barstow and running a lake by the name of Lake Tami. His manager running the water company at that time was to submit the updated reports. Walker subsequently recalled signing a plan of action and believed that it was submitted to the San Bernardino office of the Public Utilities Commission.12 Walker then acknowledged that the required follow-up reports were not prepared or sent, explaining "we were very busy" and "I don't know."13

To the extent that Respondents may have prepared a plan of action there is no evidence that such a plan was implemented for water utility improvements because Yermo's utility plant investment has substantially decreased in the past 14 years, since 1993. Yermo's 1993 average utility plant investment of $367,810 reported in Resolution W-3812 has decreased by $266,600 to a level of $101,210 in 2007. The only capital improvement reported in Yermo's 2003 through 2007 Annual Reports was $2,000 of equipment and tools in 2007. The Commission has yet to receive a copy of Respondents' plan of action and periodic updates.

Respondent Walker moved out-of-state to Florida in 2002 and continued to manage the water company from Florida. In 2006 he closed the Yermo business office and relocated all financial matters including bookkeeping and billing of the water company to Florida. He recently reopened a business office in Yermo and moved some cash, receivable and payable aspects of the water company back to Yermo. The billing functions continue to be handled out of Florida.14

Pub. Util. Code § 791 requires Yermo to have an office in a county of this State in which its property or some portion thereof is located and to keep in that office all the books, accounts, papers, and records required by the Commission to be kept within this State. Section 791 requires that no such books, accounts, papers, or records be removed from the State at any time except upon such conditions as the Commission prescribes. Respondents have not obtained Commission authority to close the California office or to take and maintain books, accounts, papers and records office out of California.

Respondent Walker acknowledged at the PHC that Yermo does not have a State certified water operator to run the water system.15 Subsequently, Respondent Walker stated in an August 27, 2008 filed response to an ALJ inquiry explaining why he does not have a certificated operator that Water Well Service is state certified and has been serving as a consultant to Yermo since Respondent purchased the water system in 1983.

Respondent Walker subsequently testified on January 13, 2009 that at the end of July 2008, he still did not have a State certified operator.16 However, approximately two months prior to the January evidentiary hearing he hired a State certified operator to supervise the water operations on a part-time basis. This part-time person is paid $100 a month to oversee periodic water sampling.17 Respondents do not have a full time State certified water operator.

Respondent Walker's attempt to sell the water system in 2004 was another issue identified in the investigation as to Respondents' unresponsiveness to Commission rules and orders, specifically Pub. Util. Code § 851. That code section precludes the sale of a water system without prior Commission authority.

Respondent Walker has tried to sell the water system for the past ten years, and would definitely like to sell it but has not been able to do so because the water system does not make enough money to keep it going.18 Although Respondent Walker let potential buyers manage the water system under his control in both 2002 and 2004, those potential buyers did not purchase the water system.19 In both instances Respondent Walker was aware that Commission and CDPH approval was necessary if the water system was to be sold.20 There is no evidence that a sale of the water system took place in either of these incidents.

However, Yermo's late-filed annual reports identified recent changes in Walker's legal ownership of Yermo that took place without Commission authorization. Walker reported in Respondents' 2003 Annual Report that he was the president of Yermo, a California corporation incorporated on January 1, 1992. Walker then reported in Yermo's 2005 Annual Report that he was the owner of Yermo as an unincorporated entity. Finally, Walker reported in Yermo's 2006 Annual Report that he was the president of Yermo, a Florida Corporation incorporated on January 1, 2006. 21 These changes in the ownership of Yermo raise a cloud over the true legal entity of Yermo and who owns Yermo.

Although Florida authorized that entity to issue up to 100 shares of stock, it is not known who owns the issued and outstanding shares of stock. This recent Florida incorporation of Yermo is impacted by Pub. Util. Code §§ 818, 825, and 851. Pub. Util. Code § 818 prohibits a public utility from issuing stock without first having secured from this Commission an order authorizing the issuance of stock. Pub. Util. Code § 825 provides for any issuance of stock without an order of authorization from the Commission to be void. Respondents have not requested and this Commission has not approved this change in ownership of Yermo. Therefore, the 2006 incorporation of Yermo as a Florida corporation is voided.

This leaves an issue of whether Yermo is an incorporated or unincorporated California company as authorized by the Commission. By Resolution W-3149, dated November 22, 1983, the owners prior to Walker and Ruff were authorized to combine the accounting records of California corporations Marine and Hel-Bro to operate those water systems under the name of Yermo Water Company, Inc., a California corporation. Hence, Yermo, a California corporation, was owned by California corporations Marine and Hel-Bro. Yermo was subsequently acquired by Walker and partner Ruff in 1985, pursuant to D.85-08-082. That acquisition involved Walker and Ruff acquiring all of the outstanding capital stock of two California corporations, Marine and Hel-Bro, operating as Yermo, a California corporation. Therefore, Yermo consisted of three (Yermo, Hel-Bro, and Marine) California corporations in 1985. Subsequently, by D.86-05-026, dated May 7, 1986, Marine and Hel-Bro were merged with Hel-Bro becoming the surviving corporation leaving two active corporations, Hel-Bro and Yermo owned by Walker and Ruff. By Resolution W-3812, dated November 23, 1993, Walker became the sole shareholder of the surviving California corporations Yermo and Hel-Bro. Therefore, Yermo should consist of two California corporations, Yermo and its parent company, Hel-Bro.

However, the California Secretary of State's corporation web site www.sos.ca.gov/business, reports that both Marine and Hel-Bro are suspended corporations and have lost all rights and power of a California corporation for failure to meet statutory filing requirements of either the Secretary of State's office or the Franchise Tax Board. Yermo, as a California corporation, is not currently listed on the California Secretary of State's corporation web site.

Respondents' recent changes in the legal ownership of Yermo are in violation of Pub. Util. Code §§ 818, 825, and 851. Clear title of Yermo and its public utility water properties, including well sites, needs to be established because of Respondents' recent unauthorized changes in the legal ownership of Yermo.

Actions supporting a finding that Respondents have been unresponsive to rules and orders were identified in the investigation because Respondents have consistently violated CDPH rules and G.O. 103, and failed to comply with and update tariffs and various other Commission orders, some of which are addressed above regarding actual or effective abandonment of the water system and below regarding Respondents' inability to adequately serve customers.

Respondents have a history of CDPH violations. Approximately a half dozen of those citations covering a ten-year period from 1997 to 2007 were identified in the investigation. These citations were for, among other matters, failure to notify customers that Yermo had violated bacteriological quality standards; failure to comply with prior citations, primary drinking water standards for total coliform and requirements for monitoring lead and copper tap water, having qualified personnel to run the water system, having a certified distribution operator, maintaining records of source production records and well pump tests, and preparing a Technical Managerial and Financial Capacity assessment including a five-year budget projection and capital improvement plan; and overdue or omitted sampling results for all wells. CDPH also required Respondents twice to impose a "Boil Water Advisory" notice, the first from July 3, 2006 to August 10, 2006 and the second from July 19, 2007 to August 14, 2007.22

Respondent Walker asserted at the PHC and testified at the evidentiary hearing that all CDPH violations were resolved.23 Contrary to that assertion and testimony, a January 8, 2009 citation issued to Respondents subsequent to the PHC and prior to the evidentiary hearing substantiates otherwise. This citation was for failure to comply with CDPH Directives 3 and 8 of an October 2, 2006 citation and Directive 1 of an April 27, 2007 violation. Specifically, Respondents have not complied with the required utilization of distribution operators that have been certified by the CDPH, not completed lead and cooper monitoring, are in violation of CDPH's waterworks standard, and have not paid a $2,500 civil penalty assessed on April 20, 2007. 24 This new citation increased the unpaid civil penalty to $43,800 for Respondents' failure to satisfy the original civil penalty. Additional penalties may be imposed if Respondents fail to comply within 30 days of receipt of the citation.

A CDPH cover letter to the January 8, 2009 citation identified CDPH's primary concerns of Yermo to be the lack of direct and continuous management over the water system and the lack of a certified distribution operator. Absent immediate attention and response to this latest citation, the CDPH intends to request that a court appointed receiver be directed to oversee the water system's operations in order to achieve compliance.25 Contrary to Respondents' assertion, CDPH violations are still outstanding.

G.O. 103 sets forth the minimum standards and rules for water service. It requires that any utility supplying water for human consumption shall hold or make application for a permit as provided by the Health and Safety Code of the State of California, and shall comply with the laws and regulations of the state or local Department of Public Health. Therefore, Respondents remain in violation of G.O. 103 until such time that all CDPH and Commission violations have been resolved.

Respondents' unresponsiveness to Commission rules and orders included their inability to understand and implement tariffs, which set forth authorized procedures and charges for providing public utility service.

One such failure to comply with tariff provisions was a failure to pay annual Public Utilities Reimbursement Fee (user fee) since 2003. Respondent Walker asserted at the PHC that he was not delinquent in submitting his user fees to the Commission.26 In response to that assertion, the assigned ALJ ordered Respondent Walker to file with the Commission's Docket Office by July 28, 2008 an explanation of Yermo's user fees, paid and unpaid to date. Although Respondent Walker provided his response by letter to the ALJ on July 23, 2008 he did not file that response with the Docket Office as instructed. Hence, the ALJ issued a July 30, 2008 ruling instructing that response to be filed with the Docket Office by August 18, 2008.

The Docket Office rejected Respondent Walker's subsequent August 18, 2008 filing because that filing, among other things, did not include an original certificate of service as required by the Commission's Rules of Practice and Procedure. It was finally accepted for filing on August 27, 2008, a month late. Respondent Walker again stated that he was current with user fee payments and included an August 4, 2008 copy of a $521 past due CDPH small water system annual fee payment to substantiate that he was current.27

The ALJ issued a September 10, 2008 ruling for additional user fee information to be filed with the Docket Office by October 2, 2008 because the response did not address the Commission's user fees. This time, Respondents were instructed to review their Tariff Schedule No. UF of Tariff Sheet 104-W, dated April 29, 1998 before responding to specific user fee questions set forth in that ALJ Ruling.

Respondents filed an October 14, 2008 late-filed response stating that: "We have tried to find a copy of the Schedule UF, reimbursement fee surcharge. We have visited your web-site and asked for help, as we have no copy or information concerning that particular Schedule and do not know how to figure the fees due until we have a copy of the Schedule." Respondents further explained that: "[Yermo] has not billed, collected, or applied these fees as we were not aware they were to be billed to the customers and our software system is being upgraded to provide for this charge which will be added to the October, 2008 billings and continue thereafter." Respondents, not aware that the required surcharge rate for the user fee increased to 1.5% from 1.4% effective July 1, 2007 stated that Yermo "will immediately file an updated Schedule UF as soon as we get a copy of the form needed to do so."28

As detailed in Yermo's Tariff Schedule No. 1 for metered service signed by Respondent Walker, effective December 6, 1993, all customer bills are subject to the user fee set forth in Schedule UF.29 Attached to Schedule No. 1 is Schedule UF, dated April 29, 1998, which provides for a 1.4% surcharge to be added to all customers bills to be paid to the Commission pursuant to Pub. Util. Code §§ 401-442.

Respondent Walker also testified that Yermo's customers have not been billed user fees.30 The Commission subsequently received 2003 through 2007 past due user fee payments on October 24, 2008. However, there appears to be a discrepancy in how the payments were calculated. User fee payments for the 2003, 2004, and 2006 years were based on the gross revenue amount reported in the respective annual reports, consisting of cash actually received and billed but not yet received from customers. For 2005, the user fee rate was applied on $57,838 of gross revenues instead of the $86,422 amount reported in Yermo's Annual Report. This difference in the 2005 payment from other years may have resulted from excluding customers' receivables in the 2005 calculation while including customers' receivables in the calculation for the other years.31 Respondent Walker acknowledged that Yermo's 2005 Annual Report does not report any customer receivables for that year, an indication that either all customers have paid their water bills or that revenue are not properly reported in the Annual Report.32 Although Respondents are now current with user fee payments, those payments may not have been properly calculated. The Commission's Division of Water and Audits should audit Yermo's 2003 through 2008 user fee calculation and payments. Respondents should also update Yermo's user fee tariff to reflect the current 1.5% user fee rate.

A tariff provision not specifically identified in the investigation was a purchased power balancing account. Special Condition 1 of Yermo's Tariff Schedule No. 1 for metered services provides for a balancing account and requires a $0.38 per hundred cubic feet (Ccf) purchased power surcharge to be added to the quantity rate of each customer's water usage.33 Irrespective of this tariff provision, Yermo does not maintain a purchased power balancing account.34 The Division of Water and Audits should audit Respondents' billing procedures to determine whether the purchased power surcharge has been billed and, if so, offset that revenue against Yermo's purchased power costs and require Yermo to record on its accounting records any balance in a purchased power balancing account.

Another shortcoming supporting a finding that Respondents are unable to adequately serve customers was identified in the investigation in that Respondents have failed to maintain complaint logs as required by G.O. 103 and failed to address customer complaints.

At a July 27, 2006 local public meeting organized by the Yermo Community Services District (YCSD) attended by approximately 90 of Yermo's customers, complaints were voiced on the quality of Yermo's water, water outages, malodorous and bad tasting water, broken water meters, inadequate water pressure, distribution system leaks, poor service, lack of response to customer complaints, and operation of the water system by an out-of-state owner.35

Complaints similar to those expressed at the YCSD meeting were expressed at a prior June 29, 1993 general rate case public meeting attended by 120 to 150 customers, almost half of the utility's customers. 36 Those complaints and the existence of an antiquated water system contributed to the Commission requiring Yermo to maintain a customer complaint log and to file a plan of action with periodic updates detailing necessary repair work and system upgrades.37

Although Ordering Paragraph 6 of the order instituting this investigation required Respondents to submit to the Director of the Water Division a copy of Yermo's 2002 through 2007 customer complaint logs no later than May 23, 2008, those logs were not submitted until three months later, in August of 2008.

If a customer wants to contact the water company to lodge a complaint that customer can either call the Commission or Yermo. If a customer calls Yermo, depending on which number is called, that customer reaches either a local office, the cell phone of a local full-time employee or Respondent Walker located in Florida.38 There is no assurance that the complaints will be logged. The local full-time employee tries to keep a log of customer complaints but does not keep a pen and a log list with him.39 Respondents do not maintain an accurate customer complaint log.

11 Reporter's Transcript, Volume 1, mimeo. at 17.

12 The Commission's Water Utilities Branch has never been located in San Bernardino.

13 Reporter's Transcript, Volume 1, mimeo. at 20.

14 Id. at 9 and 41.

15 Id. at 6.

16 Id. at 13.

17 Id. at 37, 60, and 61.

18 Id. at 26 and 36.

19 Id. at 24 and 27.

20 Id. at 25 and 27.

21 The Florida Department of State Divisions of Corporations web site www.sunbiz.org/search.html shows that Walker incorporated Yermo in Florida effective January 1, 2006. See Appendix C.

22 A Boil Water Advisory recommends that water users boil tap water or use bottled water for drinking and cooking purposes as a safety precaution.

23 Reporter's Transcript, Prehearing Conference, mimeo. at 6 and Reporter's Transcript, Volume 1, mimeo. at 13, respectively.

24 Exhibit 3.

25 Id.

26 Id. at 5.

27 See Appendix B.

28 An updated user fee tariff to reflect the 1.5% surcharge was subsequently filed on February 24, 2009 with a July 1, 2007 effective date.

29 See Appendix A.

30 Reporter's Transcript, Volume 1, mimeo. at 41.

31 Id. at 44.

32 Id.

33 See Appendix A.

34 Reporter's Transcript, Volume 1, mimeo. at 40.

35 Investigation 08-04-032, mimeo. at 7.

36 Resolution No. W-3812, mimeo. at Appendix E.

37 The plan of action and periodic updates have yet to be received by the Commission as addressed in our prior Resolution W-3812 discussion.

38 Reporter's Transcript, Volume 1, mimeo. at 64.

39 Id. at 63.

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