Background

Arrowhead is Class C water utility providing service to approximately 560 customers in the unincorporated community of Cedar Glen and vicinity, one mile southeast of Lake Arrowhead, San Bernardino County. This is the second decision in a consolidated proceeding addressing an Arrowhead GRC (general rate case) application and a Commission investigation into Arrowhead's operations.

In mid-1997 Water Division dispatched an accountant to conduct an audit of Arrowhead's SDWBA loan and possibly to lay the foundation for an Arrowhead general rate increase request. In about March 1998 Water Division assigned an engineer and an analyst from its Los Angeles office to begin the informal rate increase process. Those efforts were suspended in mid-1998. Water Division revisited the company in April 1999, and in June resumed with a full financial audit focused on Arrowhead's 1998 income statement and its SDWBA loan. With Water Division's assistance, Arrowhead in September 1999 submitted two draft advice letters seeking a total increase of $203,266 (131.2%). One advice letter sought the entire GRC increase, and the second only the purchased water component of the overall increase. In October 1999, the Commission issued Resolution W-4167 granting Arrowhead a $91,342 (57.5%) interim rate increase for purchased water, and Water Division shortly thereafter had Arrowhead's draft advice letter GRC request converted into Application (A.) 99-10-027.

By Interim Decision (D.) 00-07-036, the Commission approved an uncontested settlement agreement proffered by four of the five parties in the proceeding: Arrowhead, the Commission's Water Division, William J. Peters, and Richard Thomas Pretzinger, Jr. Arrowhead was authorized an interim 87.6% general rate increase, which included the 57.5% interim increase authorized earlier for purchased water costs. D.00-07-036 required Arrowhead to establish memorandum accounts for purchased water and for contract repair work and to charge or credit customers at six-month intervals for variations between actual expenditures and amounts allowed in rates. D.00-07-036 resolved all issues related to Arrowhead's GRC except the appropriate net revenue allowance, which the settling parties agreed should be deferred pending resolution of the issues in Order Instituting Investigation (OII, or I.) 00-03-016 in the investigatory phase of the proceeding. By today's decision, the Commission grants Arrowhead an additional $47,815 (16.8%) general rate increase, completing its consideration of the GRC issues.

Table 1

Revenue Requirement Increases

* 31.6% of pre-A.99-10-027 rates, equivalent to 16.8% increase in current rates.

On March 16, 2000, the Commission issued I.00-03-016 to examine allegations of SDWBA improprieties, noncompliance with Commission and California Department of Health Services (DHS) requirements, and failure to resolve customer complaints and inquiries. I.00-03-016 and A.99-10-027 were consolidated and evidentiary hearings set for July in the investigatory phase.

The Assigned Commissioner's April 6, 2000 scoping ruling in the consolidated proceeding's investigatory phase confirmed the Commission's preliminary ratesetting designation and stated the issues to be addressed:

Does Arrowhead have an effective system for receiving and resolving customer complaints and inquiries?

Has Arrowhead complied with applicable laws, and regulations and orders of the Commission and of the Department of Health Services in the provision of a reliable, adequate and healthful water supply to its customers?

Has Arrowhead complied with Commission requirements in collecting, accounting for, preserving, and applying for the benefit of its customers Safe Drinking Water Bond Act loan surcharges included in its rates?

If the Commission determines that Arrowhead has failed to meet its obligations in any or all of these three areas, what action(s) should the Commission take?

Assigned Administrative Law Judge (ALJ) McVicar held a prehearing conference for the investigatory phase on March 27, 2000 and three days of evidentiary hearing July 24 through July 26, 2000, both in Crestline. At the conclusion of those hearings, the ALJ determined that no party had provided reliable figures for several items critical to the investigation, so he directed Arrowhead and Water Division, and invited the other parties, to meet and attempt to reach agreement. Arrowhead and Water Division did reach agreement and filed a joint stipulation with the figures on November 6, 2000 (Attachment A to this decision). The proceeding remained on hold for much of 2001 on a series of optimistic projections that Arrowhead's owner was very near agreement to sell the water system. Four potential buyers were mentioned during that period, but no sale agreement was ever reached.

A second prehearing conference in the investigatory phase was held on October 31, 2001 and one day of evidentiary hearing on January 24, 2002 to update the record. The proceeding was submitted on receipt of concurrent briefs due February 28, 2002.

On May 3, 2002, the Commission staff relayed information that Lance L. Johnson, Arrowhead's only stockholder, the only corporate officer listed in its annual reports to the Commission and manager of the water utility, had passed away on April 30, 2002. We take official notice of Lance Johnson's death notice provided by DHS the following week.

In I.00-03-016, Ordering Paragraph 1, the Commission named as respondents in this investigation both "Arrowhead Manor Water Company, a water corporation, and Lance L. Johnson, an individual having control and management decision making authority in connection with Arrowhead Manor Water Company." The parties in the proceeding typically did not focus their allegations on Lance Johnson as an individual separate from Arrowhead, and no party has advocated sanctions specific to him. Thus, this decision will focus on Arrowhead, the water corporation, and how it managed and operated its public utility water system.