XII. Appeal of Presiding Officer's Decision
The presiding officer's decision was filed and served on the parties to this proceeding on April 4, 2005. Pursuant to Section 1701.2, respondents filed a timely appeal on May 4, 2004. The Water Division filed a timely response on May 19, 2005. In response to this appeal, the presiding officer's decision was modified; but the Commission held the modified decision on June 30, 2005. On that date, respondents filed a motion to file a supplement to their appeal to correct an alleged factual error in the modified decision. Pursuant to the presiding officer's consent, the Water Division filed a response to the motion on July 8, 2005, and respondents filed a reply on July 12, 2005. Respondents' motion to file the supplemental appeal is granted. This modified decision corrects the earlier factual error concerning respondents' pleading of statute of limitations issues but otherwise affirms the presiding officer's decision.
Respondents' first ground for appeal, raised in their May 4th pleading, is their contention that the facts recited in the presiding officer's decision do not warrant the conclusion that the Commission should petition Superior Court for the appointment of a receiver for the water company. In particular, respondents argue that the presiding officer over-emphasized the importance of Exhibit 123, a letter from the Department of Health Services to the company, of which official notice was taken after the evidentiary hearing. Coincident with their brief, respondents moved the presiding officer to reopen the record to admit the declaration of James Pingree so as to provide additional information concerning the conditions described in the DHS letter. Over the objection of the Water Division, the presiding officer granted the motion and, except for hearsay portions, admitted the declaration as Exhibit No. 511.
Even with this additional exhibit in evidence, we conclude that the presiding officer's findings of fact and conclusions of law are amply supported by the record and support the determinations that respondents have failed to comply with discovery requirements in this proceeding, disregarded our previous decisions, failed to satisfy our General Orders, and violated provisions of the Public Utilities Code. While respondents seek to distinguish their conduct from behavior we have sanctioned in other proceedings, we also conclude that the totality and duration of violations determined in this proceeding are substantially similar to conduct we have penalized previously in other cases and fully warrant the sanctions imposed herein.
The second major argument advanced by respondents in their appeal is that the statute of limitations periods set forth in Public Utilities Code Sections 735 and 736 substantially limit the amount of reparations that can be assessed against respondents. The presiding officer rejected respondents' earlier argument based on Section 735, holding that the provision "does not prevent the Commission from ordering reparations of any illegally collected amount, regardless of the period of impermissible collection. The section only requires that the Commission file its action to enforce its order, if necessary, within one year of the order." Supra at IX(B). Respondents now argue that the presiding officer failed to recognize that claims for reparations must be initially filed with the Commission within two years (if proceeding under Section 735) or three years (if proceeding under Section 736).
Arguably, respondents waived any defenses based on an applicable statute of limitations by not pleading or asserting them soon after our Order Instituting Investigation was issued on October 21, 2003. Respondents filed no substantive pleading in response to the OII; thus, no statute of limitations defense was asserted at that time. Respondents submitted a prehearing conference statement (Dec. 15, 2003) and listed the issues to be litigated; but they did not include a statute of limitations argument. Such a defense was not among the issues identified in the Scoping Memo (Jan. 9, 2004). Respondents did file a Motion for Full or Partial Dismissal or Suspension of Procedural Calendar Pending Mediation (Feb. 26, 2004), which was denied by the presiding officer. In their motion, respondents discussed the SDWBA loan surcharges at length and they suggested that Section 735 (imposing a two-year statute of limitations period) might apply;82 but they made no argument that the Water Division's effort to recover these funds was barred by the three-year statute of limitations set forth in Section 736 (which we conclude is the applicable statute of limitations).
A basic rule of civil procedure is that a statute of limitations defense must be specifically pleaded. If it is not so pleaded, it is waived. See, e.g., Cal. Civ. Proc. Code § 458 ("it is not necessary to state the facts showing the defense, but it may be stated generally that the cause of action is barred by [a specific statutory provision]; and if such allegation be controverted, the party pleading must establish, on the trial, the facts showing that the cause of action is so barred."); Hall v. Chamberlain, 31 Cal. 2d 673 (1948) (statute of limitations is waived if it is not pleaded); Sheeter v. Lifur, 113 Cal. App. 2d 729 (2d Dist. 1952) (failure to plead a statute of limitation, whether general or relating to a proceeding, constitutes waiver); Coruccini v. Lambert, 113 Cal. App. 2d 486 (3d Dist. 1952) (defendant is precluded from raising a statute of limitations argument for the first time on appeal).
We proceed, however, to address the substance of respondents' statute of limitations argument. Respondents cite numerous Commission decisions they say impose a two- or three-year statute of limitations on reparation claims. See Appeal of Presiding Officer's Decision at 10 (May 4, 2005). Almost all of these decisions involve complaints against a utility brought by a ratepayer or another utility. An important distinction should be drawn between these decisions (involving non-Commission parties) and an enforcement action brought by the Commission itself to enforce compliance with its own previous order or decision which, arguably, should not be restricted by such short limitation periods.
One decision cited by respondents does discuss the applicable statute of limitations to Commission-initiated proceedings that result in reparation orders. In Ridgecrest Heights Water Co., 84 CPUC 612 (1978), the Commission equated Commission-initiated proceedings with ratepayer complaints and held that in both cases, Section 736's three-year statute of limitations period applies to reparation orders issued, as here, for violations of Section 532. The Commission justified this determination by saying, "[T]he Commission is empowered under the law to order a utility to refund to a customer only those charges for which the utility is legally liable to the customer." Id. at 617.
While we conclude (based on Ridgecrest) that Section 736 provides the applicable statute of limitations, the section does indicate that complaints must be filed "within three years from the time the cause of action accrues, and not after." Other Commission precedent discusses when a cause of action accrues. In Toward Utility Rate Normalization v. Pacific Bell, 54 CPUC 2d 122 (1994), we addressed the accrual of a cause of action for the refund of improperly collected late payment charges. While we recognized that normally the cause of action accrues when customers are improperly billed, we held that "the cause of action was delayed (or tolled) until ratepayers became aware of their injury and its negligent cause." Id. at 126. Because Pacific Bell's own management was unaware or unwilling to admit the wrongdoing, we concluded that the circumstances justified the tolling of the limitation period until that information became available.
This proceeding is comparable to Pacific Bell. Both ratepayers and the Commission were suspicious of financial irregularities in company finances in 1995 when the Association filed its complaint but neither had reasonable sources of information to ascertain the truth. The Water Division, therefore, was ordered to prepare a financial audit of company finances. As indicated by our earlier findings concerning discovery orders, respondents continually have been unresponsive in providing financial information to the Water Division. Consequently, only when the OII was filed on October 16, 2003, did the financial audit become substantially complete and its findings publicly know. We conclude that the cause of action for reparations for illegally collected surcharges from 1983 forward did not accrue until October 16, 2003.
We have made additional Findings of Fact (41 and 42) and Conclusions of Law (24, 25, and 26) to so indicate. Other than these additions, we affirm the presiding officer's determinations and orders.
A. Customer Responsiveness
1. During a power outage in December 2002, customers were unable to reach a company representative for several days.
2. On other occasions, when other customers have left messages on the company's answering machine, their calls have not been returned.
B. Tank Leakages
3. In the Commission's interim decision in September 1996 (D.96-09-043), the Commission ordered Conlin-Strawberry to repair leaks in the Lower Dymond storage tank.
4. As of July 20, 2000, the leaks to the Lower Dymond storage tank had been repaired, as indicated by the Commission in Resolution W-4207.
5. In May 2004, the Lower Dymond tank, storing treated water, contained numerous holes and leaks, many of which were imperfectly plugged with broken tree branches and twigs. The holes and leaks in the tank constitute an ongoing condition of the tank.
C. Low Water Pressure
6. Some of the witnesses at the hearing testified as to low water pressure, but this problem seemed to be related to the combination of high-elevation water users and low river water conditions, conditions that are difficult for the company to prevent in a reasonable fashion.
D. Turbidity Monitor
7. The Commission has previously determined that no sanction can be imposed on Conlin-Strawberry for failing to promptly purchase the turbidity monitor as originally ordered in 1983.
8. No evidence indicates that the turbidity monitor is missing or inoperative.
E. Actual or Effective Abandonment
9. As the result of an evidentiary and issue sanction, Conlin is conclusively determined to have physically abandoned the water system.
10. Conlin's receipt of excessive management salaries depletes the utility of needed financial resources.
11. Conlin-Strawberry's loan repayment surcharges were payments ratepayers did not need to make in order for the company to meet its loan obligations. The excessive surcharges, however, did not cause direct harm to the utility.
F. Preparation of Engineering Plan
12. In 1983, the Commission ordered Conlin-Strawberry to contract with a licensed civil engineer, within 30 days of the order, "to formulate a plan for plant improvement and proper progressive maintenance" of the water system.
13. In April 2000, 17 years later, Conlin-Strawberry submitted to the Water Division a three-page letter, authored by R.F. Walter, consulting civil engineer, discussing maintenance, operations, and capital improvement needs of the water system.
14. In July 2000, the Commission determined by Resolution W-4207 that the Walter letter did not satisfy the engineering report requirement and that the company remained in noncompliance with the 1983 order. The Commission ordered full compliance by September 30, 2000.
15. No other evidence has been admitted indicating that Conlin-Strawberry has prepared and submitted the required engineering report.
G. Failure to Replace System Manager
16. In 1996, the Commission ordered Conlin-Strawberry to replace Danny Conlin, its current system manager, with another qualified individual who was willing to comply with past Commission and DHS orders.
17. In 1997, Conlin-Strawberry hired Jim Pingree who was properly qualified and certified to manage the system. Pingree worked responsibly to address system shortcomings.
18. In May 2004, Pingree took another full-time job at a location some distance from the Conlin-Strawberry system. While he continues to work on the system approximately three times per week, his ongoing status with Conlin-Strawberry has not been clarified.
19. In Pingree's absence, other individuals are available on a part-time basis to take water measurements, but they are not DHS certified to make water treatment adjustments.
20. While Conlin has advertised for another system operator, the daily management of the water distribution and treatment components of the system is haphazard and unreliable.
21. From May to at least September 2004, Conlin-Strawberry did not have in place a reliable, routine method of water quality and supply management by qualified and properly certified individuals.
22. In a letter to Conlin dated January 28, 2005, DHS notified respondents that, based on 2004 monitoring, the water system did not meet the following federal maximum contaminant level (MCL) treatment techniques and monitoring requirements, specifically: (a) exceeded the MCL for haloacetic acids; (b) violated the total organic carbon (TOC) percent removal requirements; and (c) failed to take the required monthly water samples for January, February, and April 2004.
H. Management Salaries
23. The Water Division's expert witness, Herbert Chow, estimated that the company paid out between $145,837 (based on cash disbursements) and $162,015 (based on annual report information) in unauthorized management salaries for the 1983-2002 period. If cash disbursement figures are used, the company shows a cumulative net loss of $154,841 for the period. If the excessive salaries had been left in the company, Conlin-Strawberry would have shown a modest cumulative net loss of $9,004 for the 19-year period (with individual years varying from almost $18,000 net loss (1987) to almost $16,000 net gain (1984)).
24. Since 1983, the Commission's rate-of-return decisions and resolutions through 2003 have authorized the recovery of approximately $283,000. This is close to the $293,875 that Chow estimates was paid to Conlin in management salaries during those years.
25. The Water Division has failed establish that Conlin engaged in wholesale looting of the company through excessive management salaries.
26. Effective January 1, 1985, the Commission adopted a Uniform System of Account for Class B, C, and D water utilities including Conlin-Strawberry (a Class D company). The Uniform System of Accounts requires that management salaries, which are "chargeable to utility operations," be posted to Account No. 671. Dividends, however, are to be charged to Account 215, "Retained Earnings."
27. Since 1983, Conlin-Strawberry was consistently showing negative retained earnings that ultimately totaled $80,000 in 2002. The company had no retained earnings from which to draw dividend payments to its sole shareholder, Danny Conlin. By admittedly taking larger salaries than set forth in test years reviewed by the Commission, however, Conlin was in many years receiving a preference over competing operating expenses.
28. Under this arrangement, Conlin's excess salary payments directly competed with other necessary operating expenses and have contributed to the decline of the water system.
I. Surcharges
29. Since 1983, Conlin-Strawberry has collected and received different compensation than specified in its schedules on file and in effect at the time. All the company's tariffs since the Commission approved the surcharge in 1983 carried the provision, "The surcharge is in addition to the regular metered water bill. The surcharge must be identified on each bill. The surcharge is specifically for the repayment of the California Safe Drinking Water Bond Act loan authorized by Decision 83-05-052." The company, however, was collecting and using portions of the surcharge for purposes other than repayment of the loan.
30. The amount of money collected from ratepayers as surcharges but not used for repayment of the SDWBA loan as required by D.83-05-052 totals $64,842 for the period April 1984 through December 2003. The interest on this amount is an additional $41,716, for a total of $106,558.
J. Misappropriation of Loan Proceeds
31. The Commission authorized respondents to borrow a total of $411,200 from the DWR in 1983 to satisfy DHS' requirements. In 1986, the Commission approved an additional loan of $51,500 because pipeline installation in rocky ground exceeded original estimates.
32. In auditing loan proceeds, Chow concludes that $59,177 paid to Conlin is unsubstantiated because Conlin has "failed to specify and document the SDWBA costs or work claimed for this amount." Of the $269,608 loan proceeds paid to the Conlin-Strawberry, Chow concludes that $224,612 is "unsubstantiated."
33. Chow has recognized as "substantiated" only payments from the loan disbursement account to outside contractors or payments from the company to outside contractors and suppliers. Chow effectively considers any labor provided by Conlin, his employees, or employees of the company to be "unsubstantiated" expenditures.
34. Chow's position is ultimately untenable because no one contests that the improvements to the water system were made substantially as proposed, DWR has not registered concerned about the loan proceeds, and other evidence indicates that respondents did incur legitimate labor costs on the improvements.
K. Other Issues
35. As the result of an evidentiary and issue sanction, Conlin is conclusively determined to have denied Commission staff access to utility books and records.
36. At all times relevant to these factual determinations, Conlin was an officer and performed the duties of an agent of Conlin-Strawberry.
L. CEQA
37. The Commission's efforts to secure the appointment of a receiver, under Section 855, for Conlin-Strawberry will not result in a direct or reasonably foreseeable indirect physical change in the environment.
M. Remedies
38. While respondents' proven conduct provides sufficient grounds for the imposition of financial penalties, the authorization to seek a receiver and the reparations order, without additional financial penalties, are sufficient punishment and will work as forceful deterrents of future offenses by Conlin-Strawberry, Conlin, or others. The imposition of penalties will only compound the precarious financial condition of the utility.
39. Ratepayers paid unnecessary loan surcharge payments that should be returned to them through reparations.
40. A receiver is necessary because Conlin-Strawberry's multiple demonstrations of inattention, unreliability, lack of routine, haphazard management, and violation of law and Commission's orders creates a situation where it is reasonable to expect that serious adverse consequences to the customers of the system may follow.
41. Respondents did not assert any statute of limitation argument, based on Section 736 (three-year limitation) in a response to the OII, in their pleadings in advance of the prehearing conference, or in their motion to dismiss the OII. A statute of limitations argument was not identified in the Scoping Memo as an issue to be resolved in this proceeding.
42. The Water Division's financial audit was not substantially completed until October 16, 2003. Only then did the Water Division and ratepayers have reasonably complete information about the company's collection and use, since 1983, of loan repayment surcharges.
A. Customer Responsiveness
43. Due to deficiencies after September 1996, Conlin-Strawberry has violated D.83-05-052 by failing to maintain a workable, reliable telephone answering system or service.
44. Conlin-Strawberry has violated GO 103 by failing to provide a reliable telephone answering system and, further, by failing to respond to customer complains and inquiries in a prompt manner.
N. Tank Leakages
45. D.96-09-043 imposed a continuing reasonable obligation on Conlin-Strawberry to seal in a professional manner new leaks and holes in the system's storage tanks, including the Lower Dymond tank.
46. By failing to reasonably seal leaks and holes in the system's storage tanks, Conlin-Strawberry has violated the Commission's order as set forth in D.96-09-043.
O. Low Water Pressure
47. No present violation of the Commission's rules and orders concerning low water pressure exists.
P. Turbidity Monitor
48. The evidence does not establish the violation of any legal requirement concerning the turbidity monitor.
Q. Actual or Effective Abandonment
49. As the result of an evidentiary and issue sanction, it is conclusively determined that Conlin, in violation of Section 855, actually or effectively abandoned the Conlin-Strawberry water utility.
50. Conlin's receipt of excessive management salaries also is an effective abandonment of the Conlin-Strawberry water utility, in violation of Section 855, since it depleted the utility of financial resources.
R. Preparation of Engineering Plan
51. In adopting Resolution W-4207, the Commission conclusively determined that, as July 20, 2000, Conlin-Strawberry had failed to satisfy the Commission's 1983 order to prepare and submit an acceptable engineering report.
52. Since no engineering report has been prepared and submitted since July 20, 2000, Conlin-Strawberry remains in violation of the Commission's 1983 order.
S. Failure to Replace System Manager
53. By failing to have in place, on more than a temporary basis during most of 2004, a qualified and properly certified operator or manager willing to comply with past Commission and DHS orders, respondents are in substantial and continuing violation of D.96-09-043.
T. Management Salaries
54. Conlin-Strawberry has failed to maintain its records according to the Uniform System of Account for Class B, C, and D water utilities, as ordered by the Commission.
U. Surcharges
55. By collecting and receiving different compensation than specified in its schedules on file and in effect at the time, Conlin-Strawberry has violated Section 532.
56. By collecting and receiving different compensation than specified in its schedules on file and in effect at the time, in violation of Section 532, Conlin-Strawberry was also charging unreasonable and excessive rates in violation of Section 734.
57. As provided by Section 735, the Commission should order reparations to ratepayers.
V. Misappropriation of Loan Proceeds
58. The Water Division has not carried its burden of proof on the alleged misappropriation of SDWBA loan proceeds.
W. Other Issues
59. Respondents denied Commission staff access to utility books and records in violation of Section 791 and GO 28.
X. CEQA
60. The Commission's efforts to secure the appointment of a receiver, under Section 855, for Conlin-Strawberry is not a project under CEQA.
61. Even if the Commission's efforts to secure the appointment of a receiver were determined to be a project, the Commission's actions would be categorically exempt as a Class 21 exemption under CEQA Guidelines, 14 Cal. Code Reg. § 15321.
Y. Remedies
62. While respondents' conduct provides sufficient grounds for the imposition of financial penalties, such penalties should not now be imposed.
63. The conditions of Section 735 are satisfied; the Commission should order reparations of loan surcharge payments to ratepayers.
64. The conditions of Section 855 are satisfied; the Commission should petition superior court for the appointment of a receiver for Conlin-Strawberry.
65. In all violations determined herein, Conlin was the officer and agent of Conlin-Strawberry and, additionally, was in violation of Section 2109.
66. Respondents failed to assert, in a timely fashion, a defense to reparations, fines, penalties, or damages based on Section 736. Respondents have waived such a defense.
67. The three-year statute of limitations set forth in Section 736 applies to reparation claims in this proceeding.
68. The cause of action for reparations in this proceeding did not accrue until October 16, 2003. Consequently, the Commission may order reparations from 1983 to the present.
69. The General Counsel shall proceed immediately to petition the Superior Court, Tuolumne County, for the appointment of a receiver to assume possession of Conlin-Strawberry Water Company Inc. (Conlin-Strawberry or company) and all its assets and to operate the water system upon such terms and conditions as the court shall prescribe.
70. Conlin-Strawberry is ordered to pay reparations and interest to ratepayers of all illegally collected surcharges from 1983 to the present. Each ratepayer will be entitled to reparations equivalent to the amount illegally collected from that ratepayer plus interest on each illegal collection. Interest will be calculated for each month during this period by use of the average balance method and the then-applicable bank interest rate of the fiscal agent appointed pursuant to Decision 83-05-052.
71. Conlin-Strawberry shall undertake reasonable efforts to locate and pay reparations to persons who are no longer ratepayers but from whom illegal surcharges were collected in the past.
72. In the event that persons entitled to reparations cannot be located, those unpaid reparations will be applied to the unpaid principal of Conlin-Strawberry's California Safe Drinking Water Bond Act loan. Any excess shall be disposed of pursuant to the escheat laws of the state.
73. Before making any reparation payments, Conlin-Strawberry shall submit its reparation plan (including identified recipients, payment amounts, and interest calculations) to the Water Division for review and receive the Water Division's written permission to proceed with reparation payments.
74. The receiver appointed by the superior court may apply, by advice letter, for general ratemaking in the manner provided for Class D water utilities. The receiver may apply, by way of advice letter or application, for other relief that the Commission may appropriately provide.
75. The receiver also may apply, by advice letter, for suspension of the reparation payments (or any nondiscriminatory portion of them) if necessary to improve the company's financial viability and quality of service. The Water Division will prepare a resolution for the Commission concerning any suspension in reparation payments.
76. Pending the appointment of a receiver, orders of a court of competent jurisdiction, or further Commission orders, Conlin-Strawberry and Danny T. Conlin, its owner (sole shareholder) and operator, shall not remove (other than in the normal course of business), misdirect, or intentionally damage any asset of the water system.
77. The Water Division's motion for additional evidentiary or issue sanctions for respondents' alleged failure to provide employee records is denied.
78. Respondents' motion for leave to file a second supplement to their appeal, filed June 30, 2005, is granted.
79. Respondents' appeal of May 4, 2005, is dismissed. Except for the factual correction made herein, respondents' second supplement to their appeal, filed June 30, 2005, is also dismissed.
80. This proceeding is closed.
This order is effective today.
Dated July 21, 2005, at San Francisco, California.
MICHAEL R. PEEVEY
President
GEOFFREY F. BROWN
SUSAN P. KENNEDY
DIAN M. GRUENEICH
JOHN A. BOHN
Commissioners
