VII. Discussion

We reject the proposed settlement, because it fails to satisfy any of our criteria for adopting a settlement. Our analysis follows.

A. Commission Criteria and Procedures for Adopting a Settlement

Rule 51(c) provides in part that parties may, by written motion, propose a settlement for adoption by the Commission in accordance with criteria and procedures set forth in Article 13.5 of our Rules (Rules 51 through 51.10). By definition a settlement is "an agreement between some or all of the parties to [the] proceeding on a mutually acceptable outcome to the proceedings [sic]." (Rule 51(c).) The motion proposing settlement must contain "a statement of the factual and legal considerations adequate to advise the Commission and parties not joining the agreement of . . . the grounds on which adoption is urged." Id. Once adopted, a settlement is enforceable as part of the Commission's order.

Not every settlement is adopted by the Commission, even though the supporting motion may contain the requisite statement of factual and legal considerations. Rule 51.1(e) precludes approval of any settlement, whether or not contested by other parties to the proceeding, "unless the . . . settlement is reasonable in light of the whole record, consistent with law, and in the public interest."

A settlement that has the unanimous support of all active parties in a proceeding may be adopted as a means of carrying out Commission policy, but it must satisfy certain sponsorship and content criteria as a precondition to approval. Specifically, all active parties must sponsor the settlement; the sponsoring parties must fairly reflect the affected interests; no term of the settlement may contravene statutory provisions or prior Commission decisions; and the settlement must convey sufficient information to permit us to discharge our future regulatory obligations with respect to the parties and interests. The crucial requirement, however, is that the settlement is offered by all active parties.11

B. The Settlement is rejected, because the Settling Parties have not satisfied their burden, procedurally or substantively

The settling parties have not satisfied their burden under the foregoing principles. The settling parties did not comply with clearly stated procedural requirements, thereby placing opponents of the Motion at a disadvantage, and they failed to satisfy the substantive requirements for adoption of the Settlement.

We also note that Hillview and RRB convened the Rule 51.1(b) settlement conference required before signing the Settlement in Los Angeles, which is 265 miles from Oakhurst. Although this conference satisfied the literal requirements of that Rule, it certainly did not comply with its spirit. Under Rule 51.1(b) the conference should give all parties notice and an opportunity to be heard, the basic tenets of due process. A settlement conference held 265 miles from this company's customers denied them that opportunity, as a practical matter.

Rule 51.6(a) specifies that, for a hearing on the contested issues of a contested settlement, the parties to the settlement must provide one or more witnesses to testify concerning those issues, and to undergo cross-examination by the contesting parties. To simplify the presentation of evidence on these issues, the ALJ's April 25 Ruling required the settling parties and contesting parties who intended to participate in the hearing to deliver and serve prepared testimony in accordance with Rule 68. The contesting parties complied with this requirement; the settling parties did not.

As explained earlier, the settling parties chose to rely upon the Joint Report, Motion, and Settlement to satisfy this requirement without asking leave of the ALJ to make the substitution. This reliance was misplaced. The ALJ had established the prehearing procedure to give each side fair notice of the evidentiary support to be offered by the other, and provide a meaningful opportunity to prepare cross-examination. Given the skimpiness of the Joint Report, the settling parties' failure to comply with this procedure effectively denied that opportunity to the contesting parties.

The settling parties also announced for the first time at the hearing that they would make the staff witness available for cross-examination. They did not even intend to offer his direct testimony until they arranged to do so after the hearing began. Not only did the settling parties' failure to provide this witness' prepared testimony in advance result in surprise to the contesting parties, but his testimony also indicates that his role in preparing the 1997 Report may have been quite attenuated.

This witness testified that he was "involved" in the investigation, preparation of the Settlement, and preparation of the Joint Report, but the only explanation of his involvement was that he guided the auditors and engineers assigned to the investigation. (Tr., May 16, 2000, pp. 59-69.) Ebershoff told the ALJ that the RRB witness was not the staff member who actually determined whether or not customers were entitled to refunds.12 (Id., p. 36.) In short, this witness' competence to testify about the matters under investigation is at best unclear.

The contesting parties raised timely objection before evidence was taken, and although the ALJ permitted the hearing to proceed, as it turned out their objection had merit. The settling parties did not provide either prepared testimony or a witness clearly qualified to support the Settlement in light of the allegations in the OII and the 1997 Report. We therefore cannot grant the motion on the basis of the record at hand.

Rule 51.1(c) requires parties who propose a settlement for adoption to include in the written motion "a statement of the factual and legal considerations adequate to advise the Commission and parties not expressly joining the agreement of . . . the grounds on which adoption is urged." The Motion falls far short of this standard of adequacy, because it simply paraphrases the criteria stated in Rule 51.1(e). We cannot grant the settling parties' request on the basis of these conclusory assertions. They must provide factual and legal support for these assertions.

The Settlement is far from self-explanatory, and even with the supplemental information from the Joint Report, which deals only with the supply and storage fee refund issue, grounds for adopting the Settlement as a complete resolution of all issues are absent. In the OII we characterize these issues as "serious," and we cannot disregard the fact that the Settlement would leave unresolved significant allegations of wrongful behavior.

In the context of this investigation, any settlement must remedy past misconduct, ensure that such misconduct does not recur, and provide adequate assurance that customers will receive proper service. This also implies that, if the company is to continue under the same management and pay refunds, there must be an explanation of the source of funds to remain in operation and maintain service and water quality. The Joint Report fails to do any of these things.

We will not adopt a settlement as a Commission order simply because Commission staff asks us to do so. We must insist that flesh be added to the bare assertion that the proposed settlement meets Rule 51.1(e)'s criteria. There are too many damaging facts in the present record, and too many unfavorable allegations in the OII, to approve the Motion without a more concrete basis. For this reason the motion is denied.

Beyond the problems with the manner in which the Settlement is presented, the Motion fails because the Settlement does not pass the fundamental substantive tests of Rule 51.1(e). Not only does the Rule place parties on notice of these tests, but in his April 25 Ruling the ALJ specifically advised the parties that pursuant to this Rule the Commission would "deny the motion to adopt the settlement, unless the moving parties prove by substantial evidence on the record that the settlement proposal is reasonable in light of the whole record, consistent with law, and in the public interest." It is perplexing that the settling parties did so little in response to this admonition.

The record raises serious concerns about conduct by Hillview and its president that is neither explained nor remedied by the Settlement. These omissions from the Settlement are unreasonable, producing an outcome that would respond only partially to our concerns about the respondents' reportedly egregious behavior. This incomplete response is manifested in several ways.

First, Forrester, a respondent expressly identified in the OII, is neither a party to the Settlement nor a sponsor of the Motion,13 so the settlement does not address the allegations regarding his conduct. The 1997 Report indicates that he may have effectively used Hillview as a personal lending institution; if correct, this would be a particularly egregious abuse of his position. Nothing is mentioned in the Motion, Settlement, or Joint Report about this issue, and by settling all issues the Settlement would summarily absolve him of any consequences from his alleged misconduct.

The Settlement also fails to address many of the key concerns about the respondents' behavior that we identified in the OII and that LWB later corroborated and described in the 1997 Report. 14 If we adopt the Settlment in its present form, we will foreclose further inquiry into the merits of many of the findings of the 1997 Report without ever addressing their validity. The result would be significant unresolved factual issues and possible violations of law that the Settlement would excuse by its silence.

These omissions are significant in relation to what we know from the record. For example, although Hillview would be required to deposit $36,314 of the proceeds of the SDW loan in its Surcharge Savings Account, no explanation is offered nor any sanction imposed by the Settlement regarding the improper use of these loan proceeds. Similarly, the Settlement does nothing to address uncontradicted facts in the record indicating that Hillview misrepresented the need and intended use for loan proceeds obtained under Commission authority, or that Forrester and Hillview improperly engaged in self-dealing and arranged financing from developers and other third parties without the Commission's knowledge or authority.

At the hearing the settling parties characterized the Settlement merely as a device for "turning back the clock," transforming contributed plant that has been financed by the customers into rate base financed by the company. (Tr., May 16, 2000, pp. 25-26.) No penalty would be imposed for the respondents' misbehavior (if any), and there is no feature included to prevent the recurrence of the type of conduct that prompted the investigation. In short, the Settlement is merely a proverbial "slap on the wrist." This is an unreasonable result in light of these damaging facts in the record which have not been contradicted in any way by the settling parties.

Finally, the Settlement is not reasonable in light of this record because, for the key issues the Settlement does address directly, the resolution is unreasonable. The provision for refunding wrongfully collected fees, the central feature of the Settlement, lacks any terms or conditions which would afford comfort to customers. Most significantly, the obligation to make the refund is contingent upon Hillview's obtaining a new loan. Although Hillview has expressed confidence in the prospect of obtaining the loan once the Settlement is approved, the process could be delayed indefinitely while a lender is being sought and acceptable terms are negotiated. Moreover, at the hearing Hillview revealed for the first time that the funding of the refunds may not be from loan proceeds, but from the issuance of bonds -- a prospect that is not even mentioned in the Settlement. (Tr., May 16, 2000, p. 55.)

The Settlement also contains a de facto cap on the dollar amount of refunds Hillview would be obligated to make, based upon RRB's current compilation of the refunds which are due. This is unreasonable in light of testimony which clearly indicates that the list of claimants (and therefore the total dollar amount of refunds) is incomplete, and that a more comprehensive claims procedure is needed. Hillview must refund improperly collected fees, regardless of the fact that the parties have agreed upon a figure to set aside for that purpose. Placing any limit on the amount of refunds is unreasonable in light of the parties' admission at the hearing that some claims may have been overlooked, and that some customers may not receive refunds. (Tr., May 16, 2000, p. 120.)

The reason for this oversight is that the claims procedure developed by the moving parties is flawed. The RRB witness testified that the list of refundable fees attached to the Joint Report was developed by first sending a letter to each Hillview customer of record as of April 30, 1997, and then comparing the responses to entries in Hillview's ledgers showing each supply and storage fee collected by the company. This procedure overlooked some customers who were renters, or had moved, died, or inadvertently been omitted when the letter was sent. Cavin testified that there were serious inconsistencies in Hillview's records of the supply and storage fees she and her husband paid for several properties. Some of the letters to customers were returned unopened, and no effort was made to locate the customers to whom they been sent. RRB did not consider that some of the persons impacted by the refund program were not customers of record. (Tr., May 16, 2000, p. 101.) The RRB witness was not certain that the efforts of his staff had identified every customer who paid a fee that is subject to refund. (Id., p. 120.) All of this testimony points to a flawed procedure for notifying customers about the refunds.

The Settlement also has no provision for resolving disputes about refunds that would be denied by RRB. At the hearing the Commission staff members conceded that any customer who did not receive a refund as determined by RRB's list would have to resort to filing a formal complaint with the Commission to seek relief, because the Settlement includes no procedure to handle this problem. Staff counsel's only response to questions about these shortcomings was that the settling parties would consider any suggestions about improving the refund procedure if someone had a better idea. (Tr., p. 43.) Having to open new formal proceedings to close out some of these claims is unreasonable, particularly because the record demonstrates that Hillview may have wrongfully collected supply and service fees as early as 1984. We instituted this investigation to afford a final remedy to Hillview's customers for that conduct, and we will not permit it to spawn a new generation of formal complaints. The Settlement must provide a means for fully and finally resolving all claims in order to be reasonable.

In addition to the contingency that Hillview must obtain a loan before making the refunds, the Settlement lacks other assurances that refunds to customers will be made on a reasonable basis. Hillview is subject to no time constraint that would require or encourage it to make timely refunds, nor any sanction for failing to do so. A requirement that the current owners sell the company at a price reflecting its correctly stated rate base and refund obligations if it failed to meet a deadline, for example, would provide an appropriate incentive for Hillview to process refunds promptly. We adverted to the possible imposition of this sanction in our OII.

Various features of the Settlement are inconsistent with basic rights of Hillview's customers. Hillview concedes that customers who paid supply and storage charges which are unlawful under Hillview's Tariff Rule 15 are entitled to refunds. However, the specific dollar limitation in the Settlement on the amount of refunds to be made, coupled with the moving parties' admission that the total figure may not include all potentially legitimate claims, could operate to foreclose refunds that are lawfully due. We are unaware of a provision of law that would excuse Hillview from the obligation to pay each and every legitimate refund claim, and the moving parties have not shown that any such exception exists.

For the same reason, the fact that the Settlement effectively makes payment of the refunds contingent upon Hillview's obtaining a loan is not consistent with the law. At the hearing the RRB witness testified that Hillview could reasonably be expected to obtain the loan, and would be in violation of the Commission's order if it did not. Although it appears very likely that Hillview will seek a loan to make the refunds, the Settlement provides no guarantee that this will occur, and the refund provision is not consistent with the company's strict legal obligation to ensure that the refunds are made. At the hearing Hillview indicated for the first time that it may seek funds through the issuance of bonds, which would further confuse this obligation by departing from the literal requirements of the Settlement. Moreover, contrary to RRB's assertion, Hillview would not necessarily violate the literal terms of the Settlement by withholding refunds if those refunds are linked to obtaining the loan. In short, this provision of the Settlement is not rigorously consistent with Hillview's legal obligations.

The Settlement is also legally flawed with regard to the treatment of Hillview's overstated rate base. The Settlement would excuse Hillview from making a refund by reason of the overstatement of its rate base in Res. W-3833, on the rationale that subsequent additions to Hillview's rate base have "offset" the effect of this overstatement. Mrs. Forrester, the company's office manager, could not provide an accurate figure in her testimony for the post-1994 plant the company has put in service, and could not even testify how many years the company has operated "in the red." No other testimony was offered on this subject. In light of the questionable reliability of the available testimony, we cannot assume that the amount of offsetting additions equals the amount of overstated rate base. Moreover, the RRB witness testified that no field audit was conducted to determine if the plant additions were actually made as claimed, and thus we have no basis to conclude that the Settlement would produce just and reasonable rates in this regard. We cannot approve an agreement that amounts to mere "horse trading." The settling parties have failed to carry their burden of demonstrating the legality of their agreement.

The public interest requires a settlement in an investigative proceeding of this character to address the concerns we express in the OII, with the object of correcting past violations and preventing a recurrence of offensive conduct. The Settlement here does neither. The moving parties stated only that its purpose is to "turn back the clock."

We have already discussed the flaws in the refund claims procedure, which could result in the loss of refunds by several classes of customers. The public interest will not be served unless complete relief is reasonably available to all customers who were harmed by Hillview's behavior.

As to deterrence of future misconduct, we are struck by the absence of any penalty in the Settlement in light of the conclusions and recommendations of the 1997 Report. The basic premise of the Settlement completely disregards significant allegations of wrongdoing that have not been admitted, denied, or explained in any way by the respondents. The RRB witness admitted that it is "a possibility" that the fees collected may have been used for purposes other than utility plant. (Tr., May 16, 2000, p. 130.) Simply requiring refunds does not go far enough to redress these problems or deter Hillview from future violations. Moreover, deterring Hillview from future misconduct would discourage the owners of California's many other small water companies from engaging in such behavior.

Much of the contesting parties' testimony was directed to the Settlement provisions requiring Hillview to pay five per cent interest on improperly collected fees and other funds, rather than paying either a higher commercial rate, or the seven per cent rate suggested by the 1997 Report, or the legal rate under the California Civil Code. The only relevant testimony offered by the settling parties was that Hillview inappropriately collected the supply and storage fees because it misunderstood the requirements of Tariff Rule 15, and that the fees were invested in short-term instruments with a return of approximately five percent. Whatever Hillview's reasons were, the record is silent as to whether the interest payable according to our usual practice in a reparations case is five per cent, seven per cent, or some other rate. While this question is not now before us because we are rejecting the Settlement, there is no basis in the record for varying from that practice when the refunds are made.

The Settlement has been strenuously criticized by a substantial number of Hillview's customers, who either signed a petition form containing comments, or sent letters or e-mail correspondence to the ALJ. Ensuring that the Settlement is in the public interest is our paramount consideration in determining whether or not to approve it, and we take these criticisms seriously. The comments we have received and the hearing testimony strongly indicate that the Settlement would not serve the public interest, and the settling parties have not shown otherwise.

C. The Settlement Does Not Satisfy the Requirements for Adoption of An All-Party Settlement

Although the moving parties have presented the Settlement for approval as though it were an all-party settlement, it does not satisfy our requirements for adoption as such.

As we have noted, the Settlement is not sponsored by Forrester, a respondent under the terms of the OII and an active participant in this proceeding. Forrester did not join in the Motion, and although he signed the Settlement document, he did so only on behalf of Hillview. His absence alone negates the moving parties' contention that all active parties sponsor the Settlement.

More significantly, the Settlement is also actively opposed by Cavin and Devor, two interested parties who have played a significant role in this proceeding from the outset. Both of these parties filed timely comments in opposition to adoption of the Settlement, and both participated in the evidentiary hearing. How the moving parties can assert that all active parties sponsor the Settlement despite the obvious absence of unanimous support is mystifying, to say the least.

We also cannot adopt the Settlement because the sponsoring parties fail to reflect all affected interests. RRB concedes that customers who have moved or died may have been overlooked in the refund claims process, yet RRB sponsors the Settlement despite its awareness of this problem. Moreover, RRB suggested that the Commission develop a procedure for appealing its denial of claims. Under the circumstances, it appears that the public interest requires an independent claims administrator. There appears to be a conflict of interest between RRB and aggrieved claimants. In any event, in light of RRB's suggestion we conclude that RRB cannot represent the interests of all claimants fairly with respect to adopting this Settlement.

Finally, the public interest is not fairly represented because the Settlement omits any relief which would vindicate the harm to public generally. That the public interest is at stake is shown by the uncontradicted evidence of unlawful conduct in the Report, yet the Settlement entirely disregards alleged incidents of misconduct, one respondent is never mentioned, and no penalty is imposed upon Hillview. As we have already observed, the omission of adequate measures to deter future misconduct does not serve the public interest.

Throughout this decision we have alluded to the existence of gaps in the Settlement that would frustrate our ability to carry out future regulatory obligations to the parties and their interests. Specifically, the goal of "turning back the clock" is altogether too vague in light of (1) the contingent nature of Hillview's obligation to make refunds under the Settlement, (2) flaws in the claims procedure which could foreclose the payment of legitimate claims, and (3) the absence of a factual basis for excusing Hillview's obligation to make refunds relating to the overstatement of its rate base in Res. W-3833. As a consequence of these shortcomings in the Settlement, we would be unable to ensure that customers are repaid the fees and service charges they should not have had to pay.

The OII provides that, "a separate phase of this proceeding may be used, if violations are found, for the purpose of determining what the utility's revenue requirement should be, and to ensure that any wrongful charges assessed to consumers are refunded." However, the moving parties offer the Settlement as a "complete resolution" of all issues in this proceeding, despite Hillview's admission that its supply and service charges were assessed in violation of its tariff. Other possible violations of statutes and rules would also be overlooked if we accept the Settlement as a complete resolution of the proceeding, and we would negate our ability to schedule a new phase of the proceeding to address unresolved compliance issues.

We cannot permit the Settlement to disable us from carrying out our future regulatory responsibilities to Hillview's customers. This proceeding requires full consideration of the issues we raised in our OII, the factual conclusions reached by LWB in the 1997 Report, and the reasonable consequences which should attend Hillview's misconduct. The Settlement does not accomplish this. At best, it is a sop to aggrieved customers, and only a partial discharge of our regulatory obligations to them. It does not go far enough, and we cannot approve it.

D. Hillview's Petition to Modify the OII is Denied

Hillview's petition to modify I.97-07-018 asks us to delete the requirement that all proposals to increase rates and other new charges be consolidated with this enforcement proceeding for consideration. Hillview argues that the company desperately needs a rate increase and authorization to recover costs and charges set forth in various pending advice letters filed since 1997, and that new rates will permit a lender to ascertain the company's future cash flow and ability to service new debt. Hillview believes that the current requirement to consolidate requests for these increases could delay any relief until we close the OII.

RRB opposes the petition on the grounds that Hillview is presently earning "far in excess" of its authorized rate of return in RRB's opinion, and that its revenues should actually be decreased. RRB also argues that O.P. 6 of the OII, which makes Hillview's rates subject to refund and specifies that the proceeding will assess whether the utility's revenue requirement and rates or charges should be reduced, is inconsistent with Hillview's request. RRB contends that Hillview should rely upon the proceeds of a new loan to meet its obligations.

We initiated this investigation with the clear intention of ensuring that no rate increases or other adjustments would be made beyond the confines of this proceeding. This was because the rate base cannot be established properly until the facts to be developed in this investigation give us a full picture of Hillview's financial situation, and because we need to ensure the availability of funds to maintain operations. Allowing a request for a rate increase to proceed on a separate track will only create needless coordination problems. If the record in this proceeding demonstrates that an immediate rate increase is necessary, we may issue an interim decision granting that increase.

The petition is denied.

11 As a practical matter, satisfaction of these criteria usually appears to serve as a substitute for the critical scrutiny to which we would otherwise subject a contested settlement under the adversary process. If all of the criteria are met, a sort of presumption arises that the settlement's resolution of issues will serve the respective interests of all active parties to the dispute and, by adherence to statutes and Commission precedent, carry out the public interest generally. 12 The staff member who performed this function was never identified by name. However, Ebershoff stated that the directly responsible staff member was supervised by the staff witness. 13 We are consciously overlooking the fact that CSD also is not a party to the Motion or the Settlement despite the language of the OII, on the assumption that RRB has assumed CSD's role. 14 The principal findings of the 1997 Report are set forth in Section III of this decision.

Previous PageTop Of PageGo To First PageNext Page