IV. STAFF INVESTIGATION
Herbert L. Chow, Public Utilities Financial Examiner, conducted an examination of Arrowhead's SDWBA loan practices. Eric Y. Matsuoka, Public Utilities Regulatory Analyst, reviewed the utility's customer complaint history and Arrowhead's record of compliance with Department of Health Services' (DHS) regulations. Following is a summary of findings memorialized in the declarations of staff members Chow and Matsuoka, sworn to under penalty of perjury:
1. Safe Drinking Water Bond Act Loan
Staff performed a financial examination in the early 1990's of Arrowhead's SDWBA surcharge and trustee fees from the beginning of the loan through August of 1991. A second staff examination in 1998 covered the period from September 1991 through December of 1997. The current examination was pursued in connection with Arrowhead's general rate case application (A.) 99-10-027. It covers the period since January 1994 through December 1998.
The staff's current audit report attached to the declaration of Herbert L. Chow provides probable cause for the issuance of this Order Instituting Investigation and further, it establishes a basis for specific orders contained herein that mandate interim accounting and fiscal controls for Arrowhead's SDWBA loan.
The staff identified several problems with Arrowhead's administration and maintenance of its SDWBA surcharge collections and repayment of the loan. The audit report notes the following facts and accounting discrepancies:
(1) Arrowhead opened a trust account at the beginning of the loan, subsequently abandoned its use and finally, in 1995, closed out the trust account.
(2) Arrowhead failed to deposit fully its SDWBA surcharge collections into the trust account or to make the necessary semi-annual loan payments to DWR.
(3) Arrowhead failed to account properly the reduction of its tax liability by normalizing the investment tax credit earned on the plant financed by the SDWBA loan.
(4) Arrowhead failed to maintain accurate accounting records in tracking its SDWBA loan activities.
(5) Arrowhead applied the surcharge collections from customers to uses other than the intended repayment of loan principal and interest.
Staff has concluded that Arrowhead's SDWBA surcharge collection balance is under-funded by $273,322.31 in surcharge revenues plus $52,930.21 in applicable interest as of December 31, 1998. Staff recommends that the Commission immediately order Arrowhead to:
(1) Open a new Trust Account and deposit into this account all surcharge funds in its possession; withdrawals may be used only for repayment of the SDWBA loan.
(2) Deposit all future and outstanding surcharges into the Trust Account within three business days following their collection.
(3) Discontinue billing customers SDWBA surcharges to offset past overcollections.
(4) File a report with the Commission within 60 days of issuance of this OII, detailing how it plans to deposit into the Trust Account $326,252.52 (missing funds as of December 31, 1998) plus the surcharge revenues collected during the year 1999 and the applicable interest.
(5) Submit monthly status reports to the Commission updating its progress with repayment of the missing surcharge collections.
(6) Update its Deferred Investment Tax Credit Account.
2. Customer Complaints
The Commission has received numerous complaints from Arrowhead's customers over the years regarding water quality, services, and billing problems. Most customers have attempted to contact the company to resolve their problems directly, but have failed to resolve them because of various reasons, including difficulty in reaching company personnel, no response from the company after leaving messages, delay or no action by the company after contacts were made to fix the problems. Thirty-six informal inquiries or complaints were received by the Commission's Consumer Affairs Branch during the period between June 6, 1998 and March 9, 2000. Apparently, the company has failed to develop effective methods for handling and resolving customers' concerns.
3. Department of Health Services Citations
G.O. 103 requires Commission regulated water utilities to comply with the regulations and orders of DHS. Arrowhead has regularly violated DHS health and safety regulations and standards and DHS has cited the company for non-compliance over the years. Presently, DHS has two outstanding citations issued to Arrowhead denoting 35 separate, uncorrected health and safety deficiencies.
