IV. DISCUSSION

A. Respondents' failure to timely comply with all commission orders warrants a receivership

This proceeding implements Ordering Paragraph 3 of Res. W-4207 (as modified) which states:

Should the Water Division report that Conlin-Strawberry has failed to timely comply with all requirements of this Resolution, an Order to Show Cause why the Commission should not proceed to receivership pursuant to Public Utilities Code, section 855 shall issue.

As noted above, the Water Division reports that as of September 2003, the Respondents have not complied with two Commission orders as prescribed by Res. W-4207: (i) hiring a new system operator and/or manager, and (2) developing and filing with the Commission, an engineering study of system improvements. In this proceeding, the Water Division has requested that because of the Respondents' "intractable resistance" to these and other Commission orders, the Commission should after notice and hearing direct the Respondents to show cause why the Commission should not apply to the Superior Court for Tuolumne County for the appointment of a receiver to assume possession of the utility and its water system.

Since 1995, the Respondents have been on notice that receivership is a possible remedy to gain compliance with Commission order. The utility's ratepayers asked for a receiver in their 1995 complaint proceeding, C. 95-01-038, because of the Respondents' unresponsiveness to customers, inadequate management, and disregard of prior Commission orders.³⁰

In D. 99-11-044, the Commission directed the General Counsel to proceed for a receivership if the Respondents failed to complete the ordered improvements by April 30, 2000. The Commission stated, "[s]hould Conlin-Strawberry continue its intractable resistance to Commission and/or DHS orders, we are prepared to reconsider the receivership solution."³¹

B. Additional and corroborative evidence of the need for a receiver

The Water Division also has presented allegations of more recent violations. For example, the Respondents were unresponsive to the needs of ratepayers during the December 2002 electrical energy outage. The 2003 Water Division Audit Report raises serious issues regarding misappropriation of SDWBL loan funds and collected surcharges, as well noncompliance with Commission rules and regulations.

If the allegations of continuing and new violations presented in this proceeding are proven, these charges would show a pattern and practice that is so serious as to warrant placing the company in receivership and possibly imposing additional fines or penalties. Good cause exists to indicate that the Respondents have obdurately disregarded Commission orders, resolutions, and other rules and regulations, threaten the public health, and failing to adequately respond to ratepayers.

IT IS ORDERED THAT:

1. An investigation on the Commission's own motion is instituted into the operations and practices of the Respondents: the Conlin-Strawberry Water Co. Inc., a water corporation, and Danny T. Conlin, the sole individual controlling and managing the company, CSWC, and its water system.

2. The Respondents are directed to show cause why the Commission should not petition the Tuolumne County Superior Court for the appointment of a receiver to assume possession and operation of CSWC and its water system pursuant to the California Public Utilities Code section 855.

3. The Respondents are further directed to show cause why an order imposing fines, penalties, or other remedies should not be issued for their continuous and/or new violations of Commission rules, regulations, resolutions, citations, or orders.

4. A hearing will be held as soon as practical after the assigned Administrative Law Judge (ALJ) convenes a Prehearing Conference pursuant to Rule 49 and calendars a date, time, and location for a hearing in a subsequent ruling or order. The ALJ will determine the findings of fact and conclusions of law regarding the following issues:

4.1. Are the Respondents unresponsive to the rules or orders of the Commission when they failed to timely comply by September 30, 2000, or at any time thereafter with all Commission orders as directed by Res. W-4207?

4.2. Are the Respondents unable or unwilling to adequately serve its ratepayers, when for example, for years they have disregarded a Commission order to install an answering machine or provide an answering service for ratepayer's use?

4.3. Has the operator/owner, Danny T. Conlin, actually or effectively abandoned the utility, when for example, he misappropriates SDWBL loan monies for personal or other unallowed purposes other than system improvements, or fails to deposit surcharges into the SDWBL Trust Account for repayment of the SDWBL loans?

4.4. If proven do the allegations presented in this OII above at Section III, subsection D entitled "Audit issues," paragraph nos. (1) through (9) -- such as using SDWBL loan funds for illegal purposes; misappropriating SDWBL surcharges collected from ratepayers; false accounting of physical assets and revenues, etc. - constitute additional violations of pertinent State statutes and Commission orders, resolutions, or other rules and regulations?

4.5. Have the Respondents -- after notice and hearing -- shown cause why the Commission should not petition the Tuolumne County Superior Court for appointment of a receiver to assume possession and operation of the Conlin-Strawberry Water Co. Inc. and its water system?

4.6. If sustained at hearing, do any of the violations alleged in this OII and/or Exhibits 1 or 2 hereof warrant fines, penalties, or other appropriate remedies?

5. This Order constitutes the Notice of Opportunity for Hearing pursuant to Section 855. Respondents shall appear at any scheduled hearing. On a date to be established at the PHC, Respondents shall serve prepared testimony responding to the issues stated above and any other allegations presented in this OII and attached Exhibits 1 and 2. Should Respondents fail to appear, the allegations in this OII and Exhibits 1 and 2 will be deemed admitted, although the assigned ALJ may require additional evidence or information.

6. Within 30 days after the date of this Order, the Respondents shall submit a written report to the assigned ALJ, with a copy to the Director of the Water Division that contains the following information:

6.1. The date and amount of all SDWBL surcharges billed, collected, and deposited into the SDWBL Trust Account;

6.2. For each deposit into the SDWBL Trust Account state the following:

6.2.1. The amount of the deposit that is comprised of surcharges collected from the ratepayers and the date of such collection; and

6.2.2. The amount of the deposit that is the Respondents' repayment of surcharges that the Respondents failed to deposit.

6.3. The total amount of surcharges that was not deposited by the Respondents into the SDWBL Trust Fund and remains outstanding as of the date of this Order.

7. Respondents shall cease and desist from any and all violations of, and shall comply with, all Commission orders, rules or regulations (including General Orders) and any pertinent Public Utilities Code statutes, including the requirement that Respondents obtain the Commission's prior written approval before executing any agreement for the sale, transfer, or encumbrance of any ownership interests of the utility or in its water system.

8. All applications submitted by Respondents after today and while this proceeding is open will be consolidated with this proceeding for consideration.

9. The Respondents and any agent, representative, employee, consultant, or other individual or person acting on behalf of the Respondents, shall cooperate with the Water Division Staff in accordance with Section 314 in providing access to the public utility's accounts, books, papers, and documents (whether in electronic or paper form), which the Respondents must preserve until further orders by the Commission.

10. This ordering paragraph suffices for the "preliminary scoping memo" required by Commission Rule 6(c) of the Commission's Rules of Practice and Procedure (Rule). This proceeding is categorized as an adjudicatory proceeding and will be set for evidentiary hearing. The issues of this proceeding are framed in the above order. A prehearing conference shall be scheduled for the purpose of setting a schedule for this proceeding, including dates for the exchange of additional written testimony, determining which of the Staff's witnesses will need to testify, and addressing discovery issues. As to categorization of this proceeding, this order is appealable pursuant to Rule 6.4. Any person filing a response to this Order Instituting Investigation, Notice with Opportunity to be Heard, and Order to Show Cause must state in any response any objections to such orders and notice regarding the need for hearings, issues to be considered, or proposed schedule. However, objections may not address factual allegations that an evidentiary hearing will decide.

11. The Executive Director will send by certified mail return receipt requested, a copy of this ORDER INSTITUTING INVESTIGATION, NOTICE OF OPPORTUNITY FOR HEARING, AND ORDER TO SHOW CAUSE to the Respondents at the following address:

Danny T. Conlin

and the Conlin Strawberry Water Co. Inc.

P O Box 116

Strawberry CA 95375

and send by first class mail a courtesy copy of the same to

Bill Rugg,

President of the Strawberry Property Owners Association,

1753 Starview Dr

San Leandro CA 94577

This order is effective as of the date shown below.

Dated October 16, 2003, at San Francisco, California.

MICHAEL R. PEEVEY

President

CARL W. WOOD

LORETTA M. LYNCH

GEOFFREY F. BROWN

SUSAN P. KENNEDY

Commissioners

Exhibit No.:	One___________
Commissioner:	_______________
Administrative Law Judge:	_______________
Witness:	Herb Chow______

STATUS OF REQUIRED SYSTEM IMPROVEMENTS

FOR THE

CONLIN STRAWBERRY WATER COMPANY

VERIFICATION REPORT ORDERED BY

RESOLUTION W-4207

STATE OF CALIFORNIA GRAY DAVIS, Governor



PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

Status of Required System Improvements for the

Conlin Strawberry Water Company

Verification Report Ordered By

Resolution W-4207

SUMMARY

In Res. W-4207, signed July 20, 2000 the Commission ordered the Conlin Strawberry Water Company (CSWC) to make eight system improvements, two from the Commission and six from the Department of Health Services (DHS), by September 30, 2000. In addition, Res. W-4207 required the Director of the Water Division to file a "status of verification report" (Report) with the Commission within one month of the September 30 deadline. Finally, the Resolution provided if the required improvements were not made, the Commission's General Counsel would prepare for the Commission's review a petition pursuant to § 855 of the Public Utilities Code (P.U. Code) to be filed in the Superior Court of Tuolumne County seeking the appointment of a receiver to assume possession of the company.

This document is the required Report. The Report finds the required DHS items listed in the findings and recommendation of section of Res. W-4207 are complete but the CPUC items are not. In addition to the original two Commission compliance items not completed, the Report³², finds many Commission orders critical for system operation and at one time completed by CSWC, have fallen back into non-compliance. The company has placed itself in the limelight once more because the system was with little or no water for an entire week in December of 2002. Commission staff, customers, and the DHS could not reach the company during this time. The Commission requirement for a dedicated standby energy supply was once again out of compliance, causing the water outage.

The recommendation of the Report is to issue the Order to Show Cause (OSC) per OP No. 3 of Res. W-4207, as modified by Decision (D.) 00-11-043, which states the following:

"Should the Water Division report that Conlin-Strawberry has failed to timely comply with all requirements of this Resolution, an Order to Show Cause why the Commission should not proceed to receivership pursuant to Public Utilities Code, section 855 shall issue."

CSWC's failure to comply with the Commission items listed in Res. W-4207: replace the current system manager and complete an engineering study; and revisionist behavior on other items critical for system operations requires the OSC and related Order Instituting Investigation (OII).

PRELIMINARY RESULTS OF 9-22-03 FILED INVESTIGATION

A field investigation of 9-22-03 revealed the lower Dymond storage tank three-quarters empty due to a leak apparently present for weeks if not months. The upper Dymond tank that directly supplies water to connections had severe leaks present for weeks if not months. Access to the upper Dymond storage tank required a half-mile walk on foot due to the service road obstructed by a fallen tree. A DHS staff member, Arnold Hatai, accompanied WD staff on this field investigation of 9-22-03. Mr. Hatai discovered in testing the turbidity instrument irregularities that indicated the machine was not working properly. The DHS staff member expressed concerns regarding management of the system which requires a Class II operator's license. The DHS currently lists Mr. Conlin, who holds such a license as the operator/manager of the system. However, the field investigation revealed that Mr. Conlin has been working full time in San Bernardino logging trees for the past 18 months and visits the Strawberry region only on weekends.

BACKGROUND

The Commission issued Res. W-4207 as the seventh document concerning complaint case No. C.95-01-038. Submitted by the CSWC ratepayers' representative group, the Strawberry Property Owners Association (SPOA), C.95-01-038 requested the system manager and owner, Mr. Danny Conlin, be replaced due to egregious management behavior that, as discovered in a Commission mandated audit of the company's books, included tens of thousands of missing dollars from the State Drinking Water Bond Act (SDWBA) loan granted CSWC back in 1982.

The first decision on C.95-01-038 was an interim opinion, D.96-06-043. The decision required the case stay open until all items were completed.

In order to gain an understanding of the complaint case's history, listed below are the eight Decisions and Resolutions that have been a result of C.95-01-038, including the case CSWC filed in the Court of Appeal of the State of California (Fifth Appellate District):

· D.96-09-043

Interim opinion finding major problems with every major aspect of CSWC due to management. The company's failure to run a safe public utility was properly framed in D. 96-09-043:

Within 30 days after the effective date of this order, Conlin-Strawberry shall file a written response indicating why it should not be found to have failed to comply with past Commission decisions and fined pursuant to the Public Utilities (PU) Code:

1. Failure to comply with orders in Decision (D.) 83-05-052;

2. Failure to comply with Resolution W-3445;

3. Failure to comply with DHS orders in Citation No. 03-095;

4. Failure to comply with DHS orders in Citation No. 03-11-94C-135;

5. Failure to comply with DHS orders in Citation No. 03-11-940-010; and

6. Failure to comply with DHS orders in Citation No. 03-11-94C-205.

It also required the Commission staff to conduct an audit to include but not limited to:

7. Use of a 2.20% composite depreciation rate;

8. Establishment and maintaining a separate balancing account to record all billed surcharge revenue interest earned on deposits made to the fiscal agent;

9. Depositing within 30 days after collected all rate surcharge and up-front cash payment revenue collected with the fiscal agent approved by the DWR;

10. Establishment and maintaining a separate bank account for deposits and disbursements of Safe Drinking Water Bond Act loan construction funds advanced by DWR to CSWC;

11. Clear identification and support by written documentation for all transactions between CSWC and Conlin Logging Company;

12. The propriety of covering water company employees on the Workers' Compensation insurance policy of Conlin Logging Company;

13. Existence of contracts for employees hired from Conlin Logging Company; and

14. Verification of hours worked by all employees.

· D.97-10-032

Addressed both the petition for modification by SPOA and application for rehearing by CSWC of D.96-09-043. The Commission denied the petition for modification. The Commission also denied rehearing. However, it corrected the statutes under which penalties may be imposed for defendant's noncompliance with Commission orders and the statute of limitations for such noncompliance.

· D.99-11-044

Ordered $10,000 in fines for noncompliance violations, required compliance verification report and associated resolution for Commission review with timetable for completion of previously ordered system improvements, and to address whether as required by 96-09-043 the company had hired a qualified system operator and/or manager. These fines have been paid in full and on time.

· D.00-03-023

Denied rehearing of D.99-11-044 due to insufficient grounds.

· Res. W-4187

Dated January 20, 2000, this is the compliance verification resolution as ordered per D. 99-11-044. Verifies two CPUC and four DHS items still not completed and included a timetable for completion of these remaining six non-compliance issues with a deadline of April 30, 2000. One of the two CPUC items: lack of an engineering study. While Ordering Paragraph (OP) 7 of D.99-11-044 required this resolution to address the issue of the company's lack of a qualified system manager, and was so mentioned in the background section of the resolution, it was not mentioned in the Ordering Paragraphs, thus still remained undetermined and an item still to be resolved.

· Res. W-4207

Dated July 20, 2000, the compliance verification resolution ordered in Res. W-4187. Water Division wrote the verification report finding two CPUC items still not completed: the engineering study and lack of a new system manager. All past DHS items were corrected, but six new DHS items had been sent to CSWC for compliance. A September 30, 2000 compliance deadline was set.

· A.00-08-026 and A.00-08-028

Danny Conlin filed a Petition for Rehearing and a Petition for Modification of W-4207, raising essentially the same arguments in the Application for Modification as he does in the Application for Rehearing. This action delayed the current verification report.

· D.00-11-043

This order found no reason for a rehearing or to modify W-4207 as requested because applicant (Danny Conlin of CSWC) raised no specific factual errors, but simply made general, conclusionary allegations unsupported by the facts. However, OP 3 was replaced with the following language:

"3. Should the Water Division report that Conlin-Strawberry has failed to timely comply with all requirements of this Resolution, an Order to Show Cause why the Commission should not proceed to receivership pursuant to Public Utilities Code, section 855 shall issue."

· F.035333

On April 6, 2000 CSWC filed an appeal of D.99-11-044 and D.00-03-023 at the Fifth Appellate District Court of Appeal in Fresno, California naming the CPUC as respondent and SPOA as real party of interest. Petitioner, CSWC, claims the Commission itself cannot impose penalties directly without bringing action in Superior Court and requests that D.99-11-044 and D.00-03-023 be annulled. As of the Report's first writing in 2001 the case was still pending, causing delay of this Report. The Report update indicates the case was dismissed and not appealed by CSWC.³³

The lack of timeliness of this Report is due in part to the company's appeal to the Appellate Court of the original decision requiring these verification reports. The appeal was denied, and the appeal period of the denial passed, marking the advent of this Report in February 2001. While management of WD changed later on in 2001, this Report apparently was never presented to the Commission. This updated version of the Report included the original information and describes the activities that have occurred since the Report's first rendition.