VI. PRELIMINARY SCOPING MEMO

This investigation will be conducted in accordance with Article 2.5 of the Commission's Rules of Practice and Procedure. As required by Rule 6(c)(1), this order includes a preliminary scoping memo as set forth below.

The primary issues to be considered in this proceeding are:

1. Arrowhead's administration and management of the SDWBA loan and the propriety of the utility's use of SDWBA surcharge revenues ;

2. Arrowhead's compliance with Commission rules and orders, particularly with respect to its delivery of healthy and safe water;

3. The adequacy of Arrowhead's complaint handling procedures.

The assigned Commissioner in his scoping ruling may refine and /or restate these issues as necessary to ensure the orderly and efficient conduct of the proceeding.

Pursuant to Rule 6(c)(1), we preliminarily determine the category of this investigation to be ratesetting as the term is defined in Rule 5(c). Consistent with this categorization, we intend to determine whether customer surcharges for SDWBA loans require prospective adjustment and whether Arrowhead violated any provision of statutory law or order or rule of the Commission. At this time, we anticipate holding hearings to gather additional evidence.

In accordance with Rule 6.2, a prehearing conference will be set as soon as practicable. The schedule will be issued after the prehearing conference. Any person filing a response to this Order Instituting Investigation may address the following: (1) Objections to the order; (2) Need for hearings; (3) Categorization of this proceeding.

Commissioner Josiah L. Neeper and Administrative Law Judge James C. McVicar shall be assigned to this proceeding.

VII. CONCLUSION

Based on the declarations of Commission staff members discussed above, we find good cause to institute this investigation and to impose immediate requirements on Arrowhead and Lance L. Johnson (Respondents) to provide for the establishment of an active trust account and to ensure the safekeeping of SDWBA funds during the pendancy of this proceeding.

IT IS ORDERED THAT:

1. An investigation on the Commission's own motion is instituted into the operations and practices of Respondent, the Arrowhead Manor Water Company, a water corporation and Respondent, Lance L. Johnson, an individual having control and management decision making authority in connection with the Arrowhead Manor Water Company to determine whether these Respondents have: (1) complied with Commission orders to collect, account for, preserve and apply for the benefit of its customers SDWBA loan surcharge revenues included in the rates of Arrowhead Manor Water Company; (2) complied with applicable laws, regulations and orders of this Commission and of Department of Health Services in the provision of a reliable, adequate and potable supply of water to customers; and (3) pursued effective resolution of customer inquiries and complaints.

2. Within ten business days of service of this order at least one of the respondents shall provide to the Director of the Commission's Water Division, for his review and approval, a copy of the Trust or Fiscal Services Agreement that it proposes to be used as the Safe Drinking Water Bond Act Trust Account.

3. Within twenty days after the approval of the proposed Trust or Fiscal Services Agreement (identified in paragraph 2 above) by the Director of the Commission's Water Division, Respondents shall open the interest bearing Trust Account and deposit into this account all Safe Drinking Water Bond Act surcharge funds in their possession. Thereafter, any additional surcharge remittances shall be deposited in that Trust Fund Account. Respondents shall instruct the fiscal agent to use funds from this account only for the purpose of repaying the Safe Drinking Water Bond Act loan. The Trust or fiscal agent services agreement shall not be terminated until further order of the Commission.

4. Arrowhead Manor Water Company shall submit a monthly status report to the Director of the Commission's Water Division on the Trust Account deposits, identifying whether the deposits are surcharge revenue collections or repayment of alleged missing surcharge funds.

5. Arrowhead Manor Water Company shall update its Deferred Investment Tax Credit Account and, within thirty days of the service of this order, provide such update to the Director of the Commission's Water Division.

6. Within thirty business days of service of this order, respondents shall provide to the Director of the Commission's Water Division accounting documents showing, by month, all Safe Drinking Water Bond Act surcharge revenues billed, collected and disbursed during 1999.

7. Within twenty days of service of this order, Arrowhead Manor Water Company shall file the appropriate tariffs to discontinue billing customers for the Safe Drinking Water Bond Act surcharge until further order by the Commission. However, whenever previously billed surcharges are collected, they shall be deposited in the Trust Account as provided in paragraph 3 above.

8. This proceeding will allow Respondent, Lance L. Johnson, the opportunity to show to the satisfaction of this Commission: (1) that as manager of the utility, he has fulfilled his fiduciary duties with respect to the Safe Drinking Water Bond Act loan and has complied with Commission orders to collect, account for, preserve and apply for the benefit of its customers loan surcharge revenues included in the rates charged by Arrowhead Manor Water Company; (2) that as manager of the utility, he has caused Arrowhead Manor Water Company to comply with the regulations and orders of the Department of Health Services or has a feasible plan for promptly doing so; and (3) that as manager of the utility, he has caused Arrowhead Manor Water Company to establish an effective vehicle for hearing and resolving customer complaints or has a feasible plan for promptly doing so.

9. All Respondents are put on notice that this investigation shall explore any improprieties in the collection or use of the Safe Drinking Water Bond Act loan surcharge revenues. If any such improprieties are determined to have occurred, the Commission shall hold accountable either Respondent Arrowhead Manor Water Company and/or Respondent Lance L. Johnson.

10. Respondents shall first obtain the Commission's approval before executing any agreement of sale or transfer of ownership or management of Arrowhead Manor Water Company.

11. This proceeding shall be consolidated with Application 99-10-027.

12. A pre-hearing conference shall be held as soon as practicable.

The Executive Director shall cause a certified copy of this order and the declarations of Commission staff members, Herbert L. Chow and Eric Y. Matsuoka, to be served upon Respondents: Arrowhead Manor Water Company and Lance L. Johnson, 29135 Hook Creek Road, Cedar Glen, CA 92321.

This order is effective today.

Dated March 16, 2000, at San Francisco, California.

RICHARD A. BILAS

President

HENRY M. DUQUE

JOSIAH L. NEEPER

CARL W. WOOD

LORETTA M. LYNCH

Commissioners