Discussion

With this factual background we turn to a discussion of the specific issues raised in the OII, in the sequence established by the ALJ's Ruling of September 10, 2002.

The extension of distribution mains from Hillview's basic production and transmission system to serve new customers described in this investigation is governed by the terms of the company's Tariff Rule 15, a standardized water utility tariff approved by the Commission. The material provisions of Tariff Rule 15 in this dispute were in effect from 1982 throughout the period subject to investigation. The parties agree on the substance of Tariff Rule 15, but differ as to their interpretation.

Tariff Rule 15 requires a main extension contract to be executed by the utility and the applicant(s) in advance of the construction work. The Commission has different versions of this main extension contract to be used for individual customers and for real estate developers and builders. Here, we are concerned with the version of the main extension contract that applies to real estate developers and/or builders since the transactions at issue involve Hillview's dealings with the developer of a real estate development known as "Indian Springs." (Tariff Rule 15 defines the latter to include individuals and others who divide a parcel of land into two or more portions, or who engage in the construction and resale of individual structures on a continuing basis. (Paragraph A.3.b.)) Before we examine the terms of Hillview's Tariff Rule 15, we restate here the relevant parts of this tariff rule:

C. Extensions to Serve Subdivisions, Tracts, Housing Projects, Industrial Developments, Commercial Buildings, or Shopping Centers.

According to this tariff rule, the sum paid by an applicant for a main extension is an advance, and is recoverable through refunds paid under a schedule specified in Section C.2.c. of the tariff. An exception is made if, in the opinion of the utility, it appears that a proposed main extension will not, within a reasonable period, develop sufficient revenue to make the extension self-supporting, or if for some other reason it appears to the utility that a main extension contract would place an excessive burden on customers. In this event the utility may require non-refundable contributions of plant facilities from the developer in lieu of a main extension contract. (Paragraph. C.1.d.)

Staff contends that because of the cited language in Paragraph C.1.d above, these tariff requirements must be read in the alternative: Either a special facilities (or supply and storage) fee is refundable under the terms of a main extension contract, or it is a discretionary non-refundable contribution from the developer.

The respondents, on the other hand, argue that refundable advances under main extension contracts and nonrefundable contributions under Paragraph C.1.d are not mutually exclusive. They cite D.02-01-014 (January 9, 2002) in Application of Del Oro Water Co., Inc., etc., in support of their contention that Hillview had the prerogative to receive the sums involved either as refundable advances or as nonrefundable contributions. The respondents also argue that, as to any payment regarded as advances, Paragraph C.1.d. does not specify the time or manner of payment, and that per-lot installment payments of special facilities fees was not prohibited by the tariff. They also contend that Tariff Rule 15 did not prohibit the third-party beneficiary arrangement.

We disagree with the respondents' interpretation of Tariff Rule 15. This rule expressly specifies how main extension contracts are to be administered by the company. Paragraph C.1.b. states that special facilities fees (or supply and storage fees) collected from the applicant as advances must be refunded by the company to the customers.12 Paragraph C.1.d. states that non-refundable contributions are allowed, only if Hillview determines that its main extension, will not within a reasonable period, develop sufficient revenue to make the extension self-supporting. If Hillview was confused or unsure about the terms of this tariff rule, it could have sought clarification from the Commission. However, it did not do so. Whether it is a non-refundable advance or a non-refundable contribution, Hillview must make its election clearly known to the applicant and execute its election of fees in a proper manner.

In this proceeding, Forrester testified that Hillview collected the supply and storage fees pursuant to Paragraph C.1.b. Hillview admits violating the tariff and concedes that it was not proper to alter the approved form of its main extension contract to collect an unauthorized "supply and storage" fee. The record also shows that no refunds of the advances collected by the company have been provided to customers as required under the tariff. To complicate matters, Hillview admits that it mistakenly used the wrong form of agreement on a number of occasions, confusing the contract form used for developers with that used for individuals. Furthermore, the inability to reconstruct the record of fee payments to determine reliably all of the persons who might have been entitled to a refund is compelling enough evidence that the third-party arrangement did not carry out the purposes of Tariff Rule 15. Consequently, we agree with Staff that there is substantial evidence of Hillview's violation of Commission-approved tariff procedure in collecting "supply and storage fees" from individuals.

All of these violations by Hillview have substantially harmed its customers. We recognize that the fees collected for main extensions and special facilities were recorded in its CIAC account, as our auditors found in 1993 and that the funds in that account were used for the construction of facilities in districts with which they were associated, and not included in its rates. However, the fact remains that Hillview collected supply and storage fees in contravention of its tariff rule and failed to properly refund those fees back to the customers as required by the tariff and as a consequence, caused substantial financial harm on those customers that were forced to pay the fees. Those customers must be made whole and tariff requires us to do so by ordering the company to refund those fees back to the customers.

Refunds:

By Forrester's own admission, Hillview collected the supply and storage fees as advances under Paragraph C.1.b, and not as non-refundable contributions under Paragraph C.1.d between 1985 to June, 1994. Although Hillview stopped including the supply and storage fees in the company's Main Extension Contracts or accept such fees from individual lot purchasers in June, 1994, the company has yet to refund any of those fees back to the customers as required by the tariff and thus, is still in violation of Rule 15. To date, no refunds have been issued. Consequently, we will now order the company to refund the supply and storage fees it unlawfully collected from the individual lot owners in accordance with the terms of Tariff Rule 15.

Paragraph C.2. of this rule states that refunds should be issued as follows:

C.2. Refunds

a. The amount advanced under Sections C.1.a., C.1.b., and C.1.c. shall be subject to refund by the utility, in cash, without interest, to the party or parties entitled thereto as set forth in the following two paragraphs. The total amount so refunded shall not exceed the total of the amount advanced and for a period not to exceed 40 years after the date of the contract.

b. Payment of refunds shall be made not later than June 30 of each year, beginning the year following execution of contract, or not later than 6 months after the contract anniversary date if on an anniversary date basis.

c. Whenever costs of main extensions and/or special facilities have been advanced pursuant to Section C.1.a., C.1.b., or C.1.c., the utility shall annually refund to the contract holders an amount equal to 2-1/2 percent of the advances until the principal amounts of the contracts have been fully repaid. . .

In no case shall the refund on any contract exceed the amount advanced.

Consistent with the terms of this tariff provision, the respondents shall provide to each customer 2 ½ percent of the total amount of the supply and storage fees they collected annually until the total amount is paid off. Certainly, since Forrester admits that Hillview collected the supply and storage fees pursuant to Paragraph C.1.b., he had no expectation of any limitation on refund of those supply and storage fees he collected as advances.

In order for us to determine who should receive refunds in accordance with Tariff Rule 15, we must first identify which Hillview customers paid the supply and storage fees during the subject years. Staff and respondents each submitted a list of customers who paid the supply and storage fees in this proceeding.13 Unfortunately, however, neither party was able to support or validate its customer list during the evidentiary hearings. The parties also jointly submitted a customer list, which was prepared for the settlement (also known as the "Joint Report" list). The Joint Report list was based on documentation provided by Hillview, including main extension contracts, receipts and Hillview's supply and storage fee passbook. It appears that the Joint Report is more comprehensive than either of the customer lists provided by the Water Division and the respondents. The Joint Report list, according to Hillview, however, includes a large number of persons for whom the parties agree that there was no "proof" that Hillview received payment on such person's lot.

Given that none of the lists available to us provides a complete and accurate list of all of the customers that paid the fees, we will allow the individual customers to make a refund claim directly with the company, instead of requiring the company to refund the fees to those customers in the Joint Report. This will ensure that all Hillview customers who paid the supply and storage fees are provided with an equal opportunity to get their money back from the company. We do not want to omit or preclude any customer who paid the fees from obtaining the refund.

In order to ensure that all Hillview customers are notified of the their right to seek a refund, we will require the company to publish a refund notice in the most widely circulated local newspaper in its service territory. We will require the company to publish the notice twice for duration of one-week per notice. The first notice shall be published within 30 days from the effective date of this decision and the second notice shall be published three months after the publication of the first notice. Hillview shall submit a draft of the notice and obtain an approval from the Water Division prior to the publication of the refund notice.

In order to ensure that the refunds are properly administered, we will implement the following procedure for the refund claim process:

Statute of Limitations:

Respondents assert that the applicable statute of limitations bars recovery of refunds. They assert that, under Section 736, a claim for damages, namely, the collection of unauthorized supply and storage fees, is three years. Since the OII in this proceeding was issued on July 17, 1997, respondents assert that there can be no recovery for the collection of the supply and storage fees by Hillview prior to July 16, 1994. Respondents also point out that Commission staff, in a prehearing conference, conceded that the statute of limitations "does bar refunds to utility customers after - previous to the three years before the OII was filed."

The Water Division, on the other hand, states that refunds are a legal requirement of Hillview's tariffs. The Water Division states that Hillview used the terms "supply and storage fees" and "special facilities" fees interchangeably and that, under Tariff Rule 15, special facilities must be fully refunded, except when charged under Section C.1.d. The Water Division further states that the three-year statute of limitations found under Section 736 applies only to actions filed by customers. The Water Division states that this matter is not "a claim for damages" as the respondents assert, but rather a matter that is an integral part of an investigation by the Commission.

Section 736 states that "All complaints for damages resulting from the violation of any of the provisions of Section 494 or 532 shall either be filed with the [C]ommission, or, where concurrent jurisdiction of the cause of action is vested in the courts of this state, in any court of competition jurisdiction within three years from the time the cause of action accrues, and not after. . ." We recognize that, under Section 736, a claim for damages resulting from the violation of any of the provisions of Section 494 or 532 must be filed with the Commission, or any other court of competent jurisdiction, within three years. However, Section 736 and the three-year statute of limitations found therein, does not apply here. This proceeding is about a tariff violation committed by Hillview, not a claim for damages. By ordering Hillview to refund the advances it collected from its customers, we are merely enforcing the terms of its Tariff Rule 15. This tariff provision expressly requires the company to refund all advances it received under the main extension contracts, pursuant to Section C.1.b, within 40 years from the date of the contract. Even if Section 736 did apply to this case, which we conclude it does not, we are not barred by the statute of limitations because the company has violated and is still violating Tariff Rule 15 because it has not provided any refunds to the customers. Section C.2.c. of Rule 15 expressly requires Hillview to annually refund to the customers an amount equal to 2-1/2 percent of the advances until the principal amounts of the contracts have been fully repaid. No such refund, however, has ever been provided by the company to the customers.

Moreover, we agree with WD and conclude that Section 736 does not apply to this proceeding because this proceeding is not a complaint case filed by an aggrieved customer seeking damages from the company, but is an investigatory proceeding instituted by the Commission to determine whether or not the company has violated our rules and/or statutes. The Commission has separate rules and procedures for handling and processing complaint cases and for OIIs. If this proceeding were a complaint filed by a Hillview customer seeking damages resulting from the improper charges by the company, Section 736 would apply and the customer would be limited to recovering any overcharges that occurred during the three years immediately prior to the date the customer filed the complaint. However, because this is an investigatory

proceeding instituted by the Commission to determine whether Hillview has violated its tariffs, Section 736 does not apply.

The allegation that the respondents furnished falsified documents to the Commission in response to a request relates to an incident that occurred in the course of our auditor's 1996 investigation. In a data request the auditor asked for lists of Hillview's new customers from 1993 and 1995. The response for this request was due in seven days.

Instead of responding with a list of these customers, Hillview responded by submitting photocopies of these customers' application forms. The lower portions of the forms were covered with a form of different appearance that had blanks for recording fee payments. Although these documents collectively comprised the customer lists requested by the auditor, Staff alleges that Hillview covered the lower portion of the forms when copying them in an effort to hide information and mislead the Commission.

Jacqueline Forrester, who by the time of these events was Hillview's office manager, credibly explained this incident in her testimony at the evidentiary hearings of May 20, 2000, in this proceeding.16 Essentially, she explained that the forms were copied and produced in lieu of creating a computer-generated list, because Hillview's computer system at the time did not have the capability to do so, and because of the short deadline given by the auditor. The bottoms of the forms were covered to prevent confusion, as the company had adopted a second, different form, and the information recorded thereon was not required in order to respond to the data request. Staff accepted Jacqueline Forrester's explanation at the earlier evidentiary hearings, and it is credible. There is no new information in the record that would cause us to doubt Staff's earlier determination. We find that, although the lower portions of application forms were admittedly covered for photocopying, this fact did not represent a deliberate effort to mislead the Commission, nor did it hinder Staff's investigation.

Staff alleges that in 1991 the respondents entered into an arrangement whereby Hillview would assist 41/49, the developer of the Old Mill Village commercial development, by getting Hillview customers to reimburse 41/49 for its special facilities fees. The customers to which this allegation relates were Long's Drugs and Von's Market, each of which built retail facilities on lots in the development. As set out in Staff's audit report, which constitutes its only evidence in support of this contention,

When 41/49 completed construction of a building in a shopping center and the building was ready for occupancy, 41/49 advised the store, market, or other retailer that was going to occupy the building that supply and storage fees would have to be paid to [Hillview] in order for it to have water service. When the store, market, or other occupant paid the money [Hillview] immediately turned the money over to 41/49. (Exh. 68, p. 27.)

There is no controversy that in concept this is a correct rendition of the procedure that was followed. Staff admits that this produced no direct benefit to Hillview, but claims that it benefited 41/49 by making its properties appear less expensive and thus more attractive, and also benefited Forrester and his now ex-wife Judith, by constituting part of the consideration for the $350,000 loan they received from 41/49.

The respondents explain that 41/49 had already paid plant and special facilities fees up front for Old Mill Village, and that the amounts returned to 41/49 were simply refunds of advances under the main extension agreement. The respondents also admit that they should have entered into main extension contracts with Long's and Von's under Paragraph C.2.d, and that this was not properly accomplished.

The $350,000 loan transaction between 41/49 and the Forresters is explained in detail above. There is no evidence in the record that this was a quid pro quo arrangement, and Forrester denies that it was, because 41/49 had already fulfilled its obligation to pay these fees. Although we are concerned about the closeness of the relationship and informality of the business dealings between 41/49 and the respondents, which aroused suspicion when they came to light during Staff's investigation, Staff concedes that Hillview's customers suffered no harm as the result of Hillview making these refunds.

Hillview admits that it did not carry out the refund transaction in accordance with Tariff Rule 15, but our inquiry must end there. Any contention by Staff that the payments were "illegal" or part of an "unlawful scheme" are either unsupported by the record or beyond the enforcement jurisdiction of the Commission.17 We will not impose any penalty in relation to this allegation.

Staff notes that Res. No. F-632 authorized the respondents to enter into the CoBank loan contracts for $540,000 and $960,000 for the specific purpose of refinancing existing unauthorized commercial debts, namely the SDWBA loan and $266,650 in improvements. Staff alleges that some loan proceeds instead were used to pay Forrester's past due property taxes and electric bills, and for some construction activities that had already been reimbursed through surcharges collected from customers.

The underlying facts are explained earlier in this decision. Regarding Hillview's construction activities, Res. No. F-638 (April 26, 1995) authorized Hillview to increase its loan agreement by $100,000 over the amount approved in Res. No. F-632, to reimburse Hillview for funds already spent for facility construction and improvements, and those improvements were made. As to the allegations regarding improper payment of taxes and electric bills, the respondents point out that Forrester personally owns the building in question and leases it to Hillview under the terms of a triple net lease that obligates Hillview, not Forrester, to pay these expenses. (Exh. 74; Tr.881: 9-23.) Hillview's payment of these expenses was therefore entirely proper.

All of the evidence indicates that we examined and approved these transactions before we issued the OII. The respondents have effectively rebutted any showing made by Staff to support its theory, and that showing is weak.18

As explained above, Hillview filed AL 53, asking the Commission to modify Res. No. F-632 by permitting diversion of $112,463.42 of surplus funds from paying down the CoBank loan to paying for new facilities. We granted this request, with the net effect that Hillview's indebtedness increased by that amount.

Staff contends that the net surplus in the loan account was $281,734 on October 23, 1995, when the respondents filed AL 53, and that the special fund was accordingly understated by $169,271. Staff argues that the present value of this figure at the time of the hearing was $200,467. (Exh. 22A.) The derivation of the claimed understatement remains a mystery. The utilities engineer who prepared Exh. 22A did so on the basis of figures in the auditor's workpapers, and calculated account balances by plugging those figures into a formula that in turn relied upon an unsupported assumption. The workpapers were marked for identification at the hearing, but Staff declined to offer them in evidence. Staff has not carried its burden of proof on this issue, however, we will require appropriate relief if an inconsistency in this account is revealed in the reconciliation to be prepared pursuant to our Order.

Hillview's history of long-term debt and plant account is largely recounted above. Staff relies solely upon Chapters 7 through 12 of its audit report (Exh. 68) in support of the allegations that there is no documentation for expenditures ostensibly used for utility plant, that the respondents misused corporate assets, and that these circumstances explain why the respondents did not seek Commission approval for the "initial" [SDWBA?] loan.19

The Staff auditor prepared Chapters 7 through 12 of the audit report (Exh. 68). He adopted all of this material as his testimony at the evidentiary hearings in lieu of providing prepared testimony (Tr. 447 - 478). He was extensively questioned about this report by respondents' counsel on cross-examination (Tr. 478 - 686; 689 - 790) and recross (Tr. 878 - 890), and much of the report was seriously discredited. Little of his testimony was effectively rehabilitated on redirect. His answers to many questions were incomplete, unresponsive or evasive. These factors call into question the reliability of the portions of Exh. 68 that he sponsored, and we accord them little weight.

The portions of Exh. 68 sponsored by this witness are the heart of the investigative report the OII directed Staff to prepare. Staff issued the original report on November 20, 1997, and Exh. 68, an amplification of that report, in August 2002, offering it in substitution of the original as Staff's principal testimony. Yet despite the passage of more than five years since we had issued the OII and Staff had issued the audit report, Chapters 7 through 12 remained untouched in the revised version. By contrast, the respondents made a credible showing on the propriety of its loans and expenditures.

Notwithstanding the absence of substantial evidence to support Staff's broad accusations, several discrete issues relating to this aspect of the OII were raised by the parties and should be addressed. Fortunately, there is sufficient reliable evidence to make findings on these issues. We do so to enable the parties to prepare a final reconciliation of Hillview's accounts, so that its financial condition may be accurately established.

First, with regard to the transaction in which Hillview made a $350,000 loan to Forrester and Judith in 1992, a question arose as to whether the Forresters' assumption of a $47,900 loan to the company from Linton was valid consideration. The original debt derives from Linton's payment of Hillview's utility bills, satisfaction of a judgment against the company, and the deposit of $16,000 in cash to the company's general account. Altogether, Linton advanced a total of $50,000 on the company's behalf, but by December 1982 Hillview had repaid only a small portion of this obligation, and the remaining $47,900 was on Hillview's books until the 1992 transaction. We had occasion to review this obligation as early as January 21, 1982. (D.82-01-105 in Application (A.) 61148; see also D.82-12-062 in A.82-06-073 (December 15, 1982).) Forrester provided a credible explanation of its origin, and Staff has not persuaded us that any part of the obligation was invalid.

Second, with respect to the 1992 loan from the Forresters to Hillview, the respondents admit that Forrester should have immediately loaned $141,546.97 in cash to Hillview instead of executing a note. Forrester attributes his failure to do so to unspecified "personal problems." (Respondents' Brief, p. 28.)20

Third, Forrester admits that a book entry made in December 1992 that included the $350,000 obligation of the Forresters was improperly recorded, resulting in confusion of the company's accounting. He attributes this to the lack of sophistication of Hillview's bookkeeping staff (including Forrester himself) at the time the transaction was recorded. Peasley discovered the error after he was retained and learned that the accounts related to surcharge-funded utility plant, CoBank loans, income taxes, deferred taxes, and CIAC all needed adjustment before the 1995 financial statements could be prepared.

Peasley testified that Hillview had made an error in recording contributed property conveyed by 41/49, as well as the loan payable by Forrester. The company did not correctly record amounts to CIAC equal to the conveyed property, and actually recorded a slight decrease in CIAC. Hillview's records needed an adjustment of $141,546.97 to increase (credit) CIAC. In the loan transaction, Hillview failed to record a loan due from Forrester of $141,546.97(debit). (Exh. 81.) In sum, the entry related to the $350,000 obligation should have reflected:

· Cancellation of the prior loans of $160,553.03 from the Forresters;

· Assumption of Hillview's debt of $47,900 to Linton;

· A receivable from the Forresters of $141,546.97; and

· A debt payable to Forrester of $350,000.

A separate entry should have been made for plant, reflecting:

· $131,158.36 of utility plant, and

· $131,158.36 CIAC.

(Exh. 81, pp. 2-3, 123, and 124; Respondents' Brief, pp. 22-23.)

The consequence of this mistake was that for the 1994 test year, on the basis of which Hillview's rates prior to 2001 were adopted, CIAC was understated by $141,546.97, and rate base was overstated by the same amount. This circumstance in itself would have resulted in rates that were too high.21

All of the foregoing evidence indicates a need for further reconciliation of Hillview's accounts. Therefore, we will order the respondents Hillview Water Company, Inc. (Hillview) and Roger L. Forrester (Forrester), the principal shareholder and president, to file a general rate case application within nine months from the effective date of this decision, which includes a final reconciliation of Hillview's accounts for the period from January 1, 1991, to and including June 30, 2003. In the application, Hillview shall fully explain all of the discrepancies and irregularities identified in the Findings of Fact. This reconciliation shall include, but not be limited to, the following:

Given that the reconciliation is necessitated by Hillview's own failure to maintain an accurate and reliable record of its accounts, we do not believe ratepayers should bear the financial burden for all of the expenses associated with the reconciliation process, but rather, those expenses should be borne by Hillview's shareholders. Accordingly, we order that all expenses resulting from the account reconciliation are the responsibility of Hillview's shareholders and the company shall not be able to recover those expenses from its ratepayers.

The loan transactions at issue are explained earlier in this decision. Staff's argument is based upon Chapter 8 of its audit report (Exh. 68), which characterizes this succession of loans as a "scheme of layers upon layers of loans...apparently designed to hide the true origin of the [CoBank] loan" for which Hillview sought our approval. (Id., p. 40.) In light of the facts of record set forth above, we find that Staff has misinterpreted the evidence. Staff's rendition of the loan history is as follows:

1. In 1991 Forrester obtained a personal loan of $350,000 from 41/49 in exchange for a letter declaring that 41/49 had provided all the required utility plant.

2. In 1992 Hillview "falsely" recorded the $350,000 as a company loan on its books.

3. In 1993 Hillview obtained the $424,000 SBA loan to pay off the $350,000 personal loan, which was now inaccurately recorded on its books, "apparently in order to mislead the Golden Oak Bank and the Commission."

4. In 1994 Hillview came to the Commission for approval of the loan for $540,000 to use to pay off the SBA loan.

Staff characterizes this "compounding" of loans as an attempt to disguise the origin of the loan. (Id., p. 41.)

Staff's rendition is based upon speculation, and the weight of the evidence indicates that its logic is flawed. First, irrespective of the reason why 41/49 requested, and the respondents furnished, the letter to Madera County as part of the personal loan transaction (which is nowhere explained in the record), the statement in the letter was correct: 41/49 had satisfied its obligation to contribute all of the utility plant under its main extension agreement with Hillview. Second, the personal loan was not recorded as a company loan at all; see the explanation in the preceding section. Third, Staff has offered no evidence to support its allegation that there was an effort to mislead us or the Golden Oak Bank, and our 1993 general rate case indicates just the opposite.

There is no substantial evidence in the record to convince us that the respondents "schemed" to conceal the personal loan to the Forresters, the proceeds of which were used principally to pay off Hillview's indebtedness. That debt reflected loans extended to the company by the Forresters, and by Linton apparently before he conveyed ownership to Forrester and Forrester's sister. Only the disposition of the remaining $141,546.97 is of any concern to us, and both Forrester and Peasley testified that Forrester reimbursed that sum to Hillview in 1998 in satisfaction of the loan he and Judith had received from Hillview. We infer from this succession of events and the absence of a cash transaction of this amount that Forrester and his ex-wife Judith simply retained the $141,546.97 loaned to them by 41/49, and gave the company a note in that amount to document that portion of the loan to the company; the company recorded the entire transaction as a $350,000 loan from the Forresters, and canceled the outstanding indebtedness to them in partial satisfaction thereof.

This leaves unaccounted for only the four withdrawals from the SDWBA surcharge account made by Judith Forrester, totaling $15,541.16. Forrester became defensive when questioned at the evidentiary hearings about these withdrawals, and we infer that his marital difficulties with Judith were very likely involved. These funds (which are not included in the succession of loans recounted above), were withdrawn as payments to the Forresters in satisfaction of their loan to Hillview. It appears that this was improper, and there is no record that they were ever repaid to the SDWBA account.22 If this is true, these funds must be reimbursed to the account with interest at the rate applicable to the SDWBA account at the time the withdrawals were made.

Fines/Penalties:

The Water Division recommends that we impose fines or penalties on Hillview for its egregious conduct. The Water Division states that the statute of limitations does not bar the Commission from imposing fines or penalties for violations of Commission orders.

The respondents assert that, under the California Code of Civil Procedure Section 340, claims for violations of a statute for a forfeiture or penalty to the people of California must be brought within one year. They assert that no fines or penalties can be imposed for the collection of any unauthorized fees or use of unauthorized main extension contracts prior to July 16, 1996. Because none of the violations underlying the OII are alleged to have occurred within the period one year prior to the OII, respondents assert that all claims for fines and penalties for such actions are barred by the statute of limitations.

We disagree with the respondents and conclude that this proceeding is not subject to CCP Section 340. The Commission has previously held that, while the one-year statute of limitations in CCP Section 340 applies to civil actions, it does not apply to administrative actions such as Commission proceedings. (See Investigation into NOS COMMUNICATIONS, INC. (U-5251-C), dba International Plus, 011 Communications, Internet Business Association (INETBA), I-Vantage Network Solutions; AFFINITY NETWORK, INC. (U-5299-C), dba QuantumLink Communications and Horizon One Communications; and the corporate officers of NOS and ANI, D.03-04-053, 2003 Cal. PUC LEXIS 272, p. 12.) California courts have also held that the statue of limitations codified in CCP 340 does not apply to administrative actions. (See Investigation into the Commission's Own Motion into Whether The Bidwell Water Company misused its Safe Drinking Water Bond Act Surcharge Revenues and Has violated rules, orders, and decisions of the Commission, D.99-04-028, (1999), 85 CPUC 2d. 667 citing Robert F. Kennedy Medical Center v. Department of Health Services (1998) 61 Cal. App. 4th 1357, 1361-1362; Little Company of Mary Hospital v. Belshe (1997) 53 Cal. App. 4th 325, 329.

Rather, this Commission is an administrative agency which has been granted broad powers by both the California Constitution and the Public Utilities Code. Included in those powers is our ability to take action, whether it be to levy sanctions or impose fines, against a utility which has violated our orders to ensure that such violations end and to deter those violations from occurring in the future. If we are unable to penalize utilities for violating our rules and orders, utilities will have little or no incentive to comply with them.

The Commission's authority to impose fines and penalties is found, in particular, in Sections 701, 2107 and 2108, as well as in other statutes. (See Public Utilities Code §§ 2110 and 2113.) Under Section 701, the Commission has broad authority to levy appropriate fines in the course of its business. Section 701 provides that " The [C]ommission may supervise and regulate every public utility in the State and may do all things, whether specifically designated in this part or in addition thereto, which are necessary and convenient in the exercise of such power and jurisdiction." Sections 2107 and 2108 provide the Commission with additional authority, with specific dollar amounts, for imposing fines. Section 2107 states that "any public utility which . . fails to comply with any part of the provisions of any order, decision, decree, rule, direction, demand, or requirement of the [C]ommission, in a case in which a penalty has not been otherwise provided, is subject to a penalty of not less than five hundred dollars, nor more than twenty thousand dollars for each offense. Section 2108 further provides that, where the violations are ongoing, each day they continue is a separate and distinct offense.

The specific guidelines for setting fines are found in the Commission's Merger Rulemaking decision, I.98-04-009, D.98-12-075. In establishing the appropriate fine, the Commission has taken the following factors into consideration:(1) the severity of the offense; (2) the conduct of the utility; (3) the financial resources of the utility; and (4) the totality of circumstances related to the violation. In this decision, the Commission noted that the purpose of a fine is to effectively deter further violations by the perpetrator or others. For this reason, fines are paid to the State of California, rather than to victims.

In this case, we conclude that the respondents' failure to comply with various Commission rules and statutes has substantially harmed its customers and, as a consequence, we believe a fine is warranted. Section 2107 allows us to impose anywhere from $500 to $20,000 against the company for each violation committed. Under section 2108, such fine can be imposed for each day of continuing violations. According to the evidentiary record in this proceeding, Hillview unlawfully collected the supply and storage fees from many (over 100) customers.23 Furthermore, none of those customers have been provided with a refund to date. If we apply Sections 2107 and 2108 and calculate the fine based on each violation committed, the fine would result in million of dollars against the company. Because an imposition of such a heavy fine would jeopardize and destroy the financial health of the company, we will not calculate the fine based on each violation committed. Instead, we impose a fine of $1000 on the company and require the company to submit the payment to the Commission within 60 days from the effective date of this decision based on the facts of this case. Although Hillview does not have good reasons to justify its failure to comply with the terms of its tariffs, we recognize that it is a relatively small water company with only approximately 1,370 customers. We also recognize that the supply and storage fees it unlawfully collected for main extensions and special facilities were recorded in its CIAC account and that the funds in that account were used for the construction of facilities in districts with which they were associated. We also note that the supply the storage fees Hillview collected were not included in its rate base and the company has not earned a return on these funds. In this OII, our core objectives are to deter the company from committing these violations again in the future and to ensure that the customers of the company are receiving safe and reliable water service that meets the Commission's requirements. Rather than a fine based on each violation committed, we believe a fine in the amount of $1000 is sufficient to achieve these objectives.

12 Under Hillview's Tariff Rule 16, the company was generally forbidden from charging individual customers a fee for making new service connections until June 9, 1992, but following that date, as a Class C utility, Hillview could lawfully accept from such customers amounts in contribution as connection fees, and amounts in contribution as facilities fees, calculated in accordance with Commission-approved schedules. 13 We note that, although the Water Division prepared a customer list and marked the list for identification as exhibits, it was not offered into evidence. 14 Past due amounts represent money due to affected customers since the first payment would have been due under Tariff Rule 15. 15 The parties shall attempt to use the informal process available at the Commission, by contacting the Consumers Affairs Branch, to resolve any refund disputes before filing a formal complaint. 16 Jacqueline Forrester died after giving this testimony, and the transcript of her explanation was received as Exh. 83 in addition to being part of the official transcript herein. 17 As explained in our Introduction above, all of these contentions were investigated by the California Attorney General with Staff's cooperation. That investigation was terminated, and no indictment was sought in Madera County Superior Court. We understand that the investigative documents were then turned over to the United States Internal Revenue Service. 18 We note that Staff has devoted only eight lines of argument to this theory in its Opening Brief. This fact suggests to us that the issue is not as significant as it may have appeared to Staff at the time the audit report was written. 19 Staff's Opening Brief devotes a short paragraph of argument to these charges, accusing Hillview's management of a "wholesale breach of trust," and representing a "flagrant flouting of state law and Commission authority," but contains no discussion of any evidence demonstrating that such serious allegations are justified. 20 We infer from Forrester's other testimony that this is a reference to the breakdown of his marriage to Judith, and that community property problems may have flowed from this event, impairing Forrester's ability to raise cash at the time. The occurrence of such personal problems does not excuse any failure of regulatory compliance, and we do not condone Forrester's actions in so finding. 21 Forrester testified that rate base was actually understated, because the recorded average plant in 1994 was $212,581 higher than the test year average plant. (Exh. 82A, p. 26.) This is corroborated by Jacqueline Forrester's testimony at the May 20, 2000, EH. (Exh. 83.) In the general rate case, we adopted a reduced rate of return for Hillview because of its unauthorized borrowing activities. As a consequence of the current investigation, which was largely the result of the confusion in Hillview's accounting records, Hillview did not have a general rate case between 1993 and 2000. Hillview's average plant increased significantly over that period, and contributions generally decreased. (Exh. 126.) Hillview argues that it has lost part of the return on its actual rate base because of this, and that its loss has more than offset the consequences of its accounting error, producing unrealistically low rates. By these arguments, Hillview is now merely trying to retroactively justify its failure to correct its own errors. Hillview was never prohibited from coming for a general rate case between years 1993 and 2000. It, on its own, decided not to do so. 22 If the Forresters (or either of them) retained the initial $141,546.97 and the $15,541.16 as well, it appears that the latter sum should have been recorded as a loan to Forrester and Judith, and repaid with interest to the SDWBA surcharge account. If this reimbursement has not been made, the company's customers will apparently have funded these cash payments to the Forresters through withdrawals from the company's SDWBA surcharge account. 23 The record shows that Hillview included the supply and storage fees in its main extension contracts. Such contracts were executed with over 100 customers.

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