VI. Violations of Commission's Discovery Orders

During the proceedings, the Water Division filed two motions for sanctions against Conlin-Strawberry and Conlin, as its owner and operator. By a ruling after the evidentiary hearing, I decided both motions and found that respondents had violated certain Commission orders by failing to respond to discovery rulings in the proceeding.³¹ I imposed certain issue and evidentiary sanctions as provided by California Code of Civil Procedure Section 2023(b)(2) & (3) and often used by the Commission.³²

Respondents moved for reconsideration of my ruling,³³ and I reserved my decision on the motion for reconsideration, as well as any additional monetary sanctions, until this Presiding Officer's decision.

A. First Water Division Motion

The first motion (May 18, 2004) sought sanctions for respondents' alleged failure to comply with the assigned ALJ's ruling of May 7, 2004, requiring the disclosure of certain employee information, tax returns, and Conlin's whereabouts during 2001-03. This motion was heard on September 2, 2004.

Information about Conlin's whereabouts could reasonably have led to admissible evidence as to whether Conlin was impermissibly involved in utility operations (in contravention of prior Commission orders) or had effectively abandoned the utility. Conlin failed to provide even a basic chronology of his general whereabouts during the years in question. I adopted an evidentiary and issue sanction specifying as follows: "In violation of Public Utilities Code § 855, owner Respondent Danny Conlin has actually or effectively abandoned the Conlin-Strawberry Water Co. Respondent Danny Conlin is hereby precluded from offering any evidence, relying on any evidence already admitted into evidence, or advancing any argument contrary to this determination."³⁴

The Water Division also sought sanctions for respondents' failure to provide copies of corporate state and federal tax returns for the years 1984-2003. For this period, federal tax returns were provided only for five years (1997, 1998, 1999, 2001, and 2002) and a state tax return was provided for only one year (1997). Respondents maintained that tax returns only have to be retained for seven years.

I determined that the company's document retention responsibilities included these tax returns. While tax returns are not specifically mentioned in GO 28, "[a]ll records pertaining to original cost of property and . . . depreciation and replacement of equipment and plant" must be retained; and a utility could not comply with this requirement without retaining tax returns showing this information. Additionally, utility tax returns are a foundational business financial record and fall well within the types of documents that GO 28 requires to be retained. Resolution A-4691 requires that these tax records be retained for seven years "after settlement," and I concluded that seven years from filing of a return is the appropriate retention period for respondents' corporate income tax returns due to the basic importance of these documents.

I found that respondents had violated Section 791 and GO 28 by failing to maintain and make readily available to the Commission the federal corporate income tax return for 2000 and the state corporate income tax returns for 1998-2002. The Water Division asked for a variety of evidence, issue, and monetary sanctions. I sanctioned respondents by imposing the following evidentiary and issue sanction: "Audit Issue D(3) [denying staff access to utility books and records], as set forth in the Order Instituting Investigation at page 9, is conclusively determined to have been established. Respondents have violated state law (Public Utilities Code Section 791) and prior orders of the Commission (GO 28). Any evidence or argument of Respondents to the contrary will be disregarded."³⁵

B. Second Water Division Motion

The second motion sought sanctions for respondents' alleged failure to provide certain data from bookkeeping accounts and customer information. This second motion was orally made and heard also during the September 2, 2004, hearing and later presented in a written motion filed on September 16, 2004. The Water Division sought monetary and issue sanctions to preclude respondents from contesting certain issues framed in this proceeding. Respondents responded to both motions.

First, the Water Division alleges that respondents failed to produce supporting papers for certain bookkeeping accounts for the period of January 1, 1999, through December 31, 2003. The accounts track employee labor, transportation expenses, office services and rental, and general expenses. Respondents conceded that no work papers had been provided because no such work papers exist.

Sections 791 and 792 authorize the Commission to establish and require a system of accounts for utilities. GO 28 requires utilities to keep information concerning the corporate accounts. Resolution A-4691 establishes retention periods for various general accounting records that range from 3 to 50 years. Trial balances are to be retained for three years. Purchase and supply records are to be kept for six years and revenue records generally for ten years. The type of supporting documents that the Water Division sought certainly should be retained for at least three years, which for this proceeding means from October 2000 (three years before the issuance of the OII). That respondents were unwilling or unable to provide work papers or other documents supporting these account entries indicated a substantial noncompliance with Section 791 and GO 28.

I sanctioned respondents by imposing the following issue sanction: "Audit Issues D(3) & (4) [denying staff access to utility books and records; improper accounting methods], as set forth in the Order Instituting Investigation at page 9, are conclusively determined to have been established. Respondents have violated state law (Public Utilities Code Section 791) and prior orders of the Commission (GO 28)."³⁶

After imposing these evidentiary and issue sanctions, I reserved for the present decision the question of whether monetary sanctions should also be imposed for these discovery violations. I discuss the propriety of monetary sanctions along with the discussion of remedies later in this decision.

C. Respondents' Motion for Reconsideration

In their motion for reconsideration, respondents indicate that I erred in the imposition of sanctions by ruling both that certain facts are deemed established and that the so-established facts also constitute violations of law (e.g., abandonment within the meaning of Section 855).³⁷

I disagree with respondents' narrow reading of Code of Civil Procedure Section 2023(b)(2). The authority of that provision, to prohibit a party from opposing a "designated claim," leads to a virtual concession of that claim. In any event, my evidentiary and issue preclusions are collaborated by other evidence indicating Conlin's absence from the company, respondents' failure to use proper accounting methods, and respondents' failure to provide staff with access to utility books and records. Respondents' motion for reconsideration is denied.

D. Request for Additional Issue Sanctions

The Water Division now asks for additional issue sanctions for respondents' alleged failure to respond to a May 7, 2004, ruling. The ruling required respondents to provide certain information concerning past and current employees. In response, respondents provided spotty information, but not enough information to satisfy the Water Division. Subsequently, the Water Division sought sanctions for the company's alleged failure to comply with the May ruling. On October 26, 2004, I denied the Water Division's request for sanctions because I believed the respondents (though certainly not adept in record-keeping) had not intentionally withheld the requested information. In its request contained in its brief, the Water Division has offered nothing new to convince me otherwise. The Water Division's request for additional issue sanctions is denied.