Comments on Draft Decision

On May 9, 2000, the ALJ's draft decision was served on the parties to afford opportunity for comment. On May 30, 2000, the Water Division filed a comment. It supported adoption of the draft decision while recommending certain changes to adopt another method of financing replacement of one of the three Greenbelt water storage tanks. We have incorporated Division's recommendation to pursue a commercial loan as well as its DWR application, but we also retain reliance upon the surcharge to be implemented as expeditiously as possible, since in any event surcharge revenues will be necessary, whether to fund a replacement or to provide security for and to repay any loan. Division also identified certain incorrect dollar statements and these corrections have been incorporated into our decision.

Findings of Fact

1. Beginning approximately 1960, the Cavanaughs developed and sold building sites along Redwood Drive in Santa Cruz County, initially obtaining water service to those sites from a local water utility.

2. After losing this local water supplier, the Cavanaughs were forced to develop their own water system to serve their subdivision.

3. As the result of customer complaints, in 1970 the Commission declared the Cavanaugh water system to be a public utility subject to Commission regulation.

4. The Cavanaughs have had a troubled relationship with both the Commission and their customers, primarily because they operated with little regard for regulatory requirements or customer concerns.

5. The Cavanaughs incorporated the water system as Greenbelt in 1980.

6. In order to rehabilitate Greenbelt, the utility was authorized and obtained a 30-year SDWBA loan of $128,440 in 1987, but because of soaring inflation at the time and a three-year DWR delay in funding the loan, the proceeds were insufficient to complete all the rehabilitation scheduled.

7. A monthly customer surcharge was authorized by the Commission and implemented to accumulate the scheduled bi--annual loan repayments to DWR for the SDWBA loan.

8. Cavanaugh supervised the rehabilitation work, but his failure to adhere to bidding and accounting practices led to DWR and State Controller audits which later concluded that the work actually performed was commensurate with the expenditures; a conclusion never accepted by some of Greenbelt's customers.

9. Customer complaints pertaining to use of a repair and replacement fund earlier ordered by the Commission led to Commission audits in 1994 which concluded that while procedures had not been followed, Cavanaugh had used the challenged funds for appropriate repairs and replacements, and the Commission abolished the Fund.

10. In mid-1994, DWR notified the Commission that Greenbelt had missed remitting three semi-annual SDWBA loan repayments.

11. Later Staff investigation ascertained (a) the Cavanaughs were both incapacitated; (b) substantial surcharge payment funds has disappeared; and (c) few Greenbelt records were available for tracing the missing funds.

12. To assure continued interim operation of the water system, Staff arranged for the Cavanaughs to turn over the day-to-day operations to a resident operating couple with plumbing and bookkeeping experience.

13. In September of 1996, the Commission ordered the present investigation, I.96-09-002.

14. Complicated by the incapacities of the Cavanaughs, and the intervening death of Cavanaugh, PHCs were held in November of 1996 and March of 1997.

15. Information obtained during the PHCs from both Cavanaughs, Mills and McAllister, Commission staff personnel, several customers, the Santa Cruz County District Attorney's office, and DWR officials, indicated there had been defalcations (including probable embezzlements) of Greenbelt funds, failure by Greenbelt to keep records as required, and failure to make requisite payments semi-annually to DWR on the SDWBA loan. It further became apparent that the only possibility of some recovery on the missing funds would Cavanaugh restitution from sales of Cavanaugh properties.

16. Retention of the Mills-McAllister team to operate the system until new ownership can be obtained would be less costly to the ratepayers than the services of a Court appointed Receiver.

17. In January of 1997, the Cavanaughs stipulated to the Mills-McAllister team operation of the water system pending a final decision in I.96-09-002, with the Mills-McAllister team to remit surcharge payments to a Fiscal Agent for the SDWBA loan.

18. By the same January 1997 stipulation, staff agreed to begin the process of consideration of a needed rate increase for Greenbelt, resulting in D.97-10-021 issued October 9, 1997.

19. In 1998, the Santa Cruz County District Attorney's office instituted an Unlawful Business Practices suit against Greenbelt, Mrs. Cavanaugh and Does 1-20 seeking restitution of unlawfully converted Greenbelt SDWBA surcharge funds.

20. In April of 1999, after consultations with Commission staff, DWR agreed to "forgive" $39,848.13 representing unpaid principal and interest on the Greenbelt SDWBA loan, and to restructure the resulting $89,222.37 principal balance over a 10.206 year period, with semi-annual payments of $6,304.24 to commence July 1, 1999. These semi-annual payments are being made.

21. Staff determined that there was a further approximate $32,399.23 missing from the Greenbelt SDWBA loan fund, represented by the excess of monthly surcharge payments above the scheduled accumulations toward semi-annual payments to DWR.

22. The Unlawful Business Practices suit in Superior Court resulted in a stipulated judgment.

23. The Commission is informed that some recovery and restitution to the Greenbelt SDWBA loan fund may be anticipated from sale under the stipulated judgment of Cavanaugh land parcels.

24. Mills and McAllister would make an excellent team to acquire Greenbelt.

25. A necessary component to the Greenbelt distribution system, a 40,000 gallon steel riveted storage tank, is in urgent need of replacement.

Conclusions of Law

1. SDBWA loan E51038 is an agreement between DWR and Greenbelt, and is secured by Greenbelt's plant and land assets. The repayment responsibility is Greenbelt's.

2. Funds collected under the Commission authorized surcharge provisions of Greenbelt's filed tariff for aggregation and periodic payment to DWR under the provisions of Greenbelt's SDWBA loan E51038 are trust funds that belong to Greenbelt, not to the ratepayers who paid the surcharge as part of their rates for water service.

3. Funds obtained from sale of assets of Mrs. Cavanaugh under the stipulated judgment in Superior Court, thus recovering defalcations of Greenbelt's SDWBA loan trust aggregations, should be restored to Greenbelt's trust account to cover future loan repayment of SDWBA loan E51038, with any surplus to be paid by DWR to reimburse for the "forgiven" principal and interest.

4. Mills and McAllister should be permitted a reasonable time in which to obtain corporate status, and thereafter to apply for formal Commission authorization to acquire Greenbelt from Mrs. Cavanaugh and/or the Cavanaugh Estate.

5. Should Mills and McAllister fail to avail themselves of the opportunity to acquire Greenbelt, the Commission should seek Superior Court appointment of a Receiver.

6. With insufficient accumulated funds in its System Improvement Account, and in a difficult borrowing position to obtain funds to replace the failing 40,000 gallon water tank, while conserving the funds presently accumulated, Greenbelt should, assisted by the Chief of the Water Advisory Branch, make every effort to obtain a commercial loan, continue processing its DWR application for funds, and immediately file an advice letter to institute a monthly per customer surcharge to accumulate funds necessary for a replacement tank or to pay off any loan it may obtain.

7. Because of the urgency of certain actions that must be undertaken, both for restructuration of the SDWBA loan and resolution of the future ownership of Greenbelt, the order that follows should be made effective as of the date hereof.

8. No further hearings are necessary for this investigation.

9. The investigation should be closed.

ORDER

IT IS ORDERED that:

1. If within six months of the effective date of this order, Michael Mills (Mills) and Opal McAllister (McAllister) form a legal entity for the purpose of acquisition of Greenbelt Water Company, Inc. (Greenbelt), the Chief of the Commission's Water Advisory Branch shall provide advice and technical assistance in preparation and filing of the requisite application to the Commission to initiate such a transfer of ownership.

2. Funds allocated and accumulating each month in the System Improvement Account of Greenbelt shall as far as possible, baring more urgent need elsewhere in the operation, be preserved and retained toward accumulation of funds to replace the 40,000 gallon steel riveted storage tank.

3. The Director of the Water Advisory Branch shall provide assistance to Mills and McAllister in preparation and filing of a temporary monthly per customer surcharge tariff provision to accumulate funds toward replacement of the 40,000 gallon steel tank.

4. With the assistance of the Chief of the Water Advisory Branch, Greenbelt shall also seek a commercial loan and continue processing its Department of Water Resources (DWR) application, for funds to replace the tank.

5. The Commission accepts and approves the restructuring of the Safe Drinking Water Bond Act (SDWBA) loan as instituted by the DWR, and authorizes the repayment schedule set forth in Appendix A to this order.

6. Greenbelt is directed to adhere to the repayment schedule set forth in Appendix A to this order.

7. Any funds recovered under provisions of the Superior Court's order in Case No. 134142, as restitution for the approximate $32,399.23 misappropriated from the Greenbelt SDWBA loan repayment fund, shall be deposited with the Fiscal Agent, the Federal Credit Union in Capitola, California, for ultimate early payoff of the SDWBA loan, E51038.

8. Should Mills and McAllister fail to apply to the Commission by January 1, 2001 for authorization to acquire Greenbelt, the Director of the Water Advisory Branch shall institute the necessary preparation for a Commission request to Superior Court for the appointment by the Court of a Receiver for Greenbelt.

9. Imposition of a fine for failure of the Cavanaughs to comply with Commission rules, orders, and decisions under the circumstances would be meaningless.

10. Investigation 96-09-002 is closed.

This order is effective today.

Dated June 8, 2000 , at San Francisco, California.

APPENDIX A

GREENBELT WATER COMPANY

       

E51038

Loan Amount:

  

$89,222.37

   

3% Administrative Fee:

$0.00

(Included in the Loan Amount)

Principal:

    

$89,222.37

 

Interest:

    

7.4000%

  

Remaining Term:

  

10.206

Years

         
 

Semi-annual Payments

  

Payment
No. & Date

Semi-annual Payment

Interest

Principal

Principal
Balance

       

$89,222.37

07/01/99

$6,304.24

$3,301.23

$3,003.01

$86,219.36

01/01/00

$6,304.24

$3,190.12

$3,114.12

$83,105.24

07/01/00

$6,304.24

$3,074.89

$3,229.35

$79,875.89

01/01/01

$6,304.24

$2,955.41

$3,348.83

$76,527.06

07/01/01

$6,304.24

$2,831.50

$3,472.74

$73,054.32

01/01/02

$6,304.24

$2,703.01

$3,601.23

$69,453.09

07/01/02

$6,304.24

$2,569.76

$3,734.48

$65,718.61

01/01/03

$6,304.24

$2,431.59

$3,872.65

$61,845.96

07/01/03

$6,304.24

$2,288.30

$4,015.94

$57,830.02

01/01/04

$6,304.24

$2,139.71

$4,164.53

$53,665.49

07/01/04

$6,304.24

$1,985.62

$4,318.62

$49,346.87

01/01/05

$6,304.24

$1,825.83

$4,478.41

$44,868.46

07/01/05

$6,304.24

$1,660.13

$4,644.11

$40,224.35

01/01/06

$6,304.24

$1,488.30

$4,815.94

$35,408.41

07/01/06

$6,304.24

$1,310.11

$4,994.13

$30,414.28

01/01/07

$6,304.24

$1,125.33

$5,178.91

$25,235.37

07/01/07

$6,304.24

$933.71

$5,370.53

$19,864.84

01/01/08

$6,304.24

$735.00

$5,569.24

$14,295.60

07/01/08

$6,304.24

$528.94

$5,775.30

$8,520.30

01/01/09

$6,304.24

$315.25

$5,988.99

$2,531.31

07/01/09

$2,624.97

$93.66

$2,531.31

($0.00)

         
 

$128,709.77

$39,487.40

$89,222.37

 

(END OF APPENDIX A)

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