IV. Discussion

In this decision, we grant Cal Water's application for a rate increase in the Salinas District, but we adopt a lower ROE due to Cal Water's poor performance in the Salinas District, and we order Cal Water to pay a fine for its actions in the Salinas and Bakersfield districts.

There are no disputed issues of material fact regarding the acquisitions. Cal Water acquired the Country Meadows, Indian Springs, and Olcese systems without authorization, and charged unapproved rates to the Country Meadows and Indian Springs customers. The rates to be applied prospectively in the former Indian Springs and Country Meadows areas were resolved by Res. W-4462.² The Olcese rates were set as part of the Bakersfield District in D.01-08-039. At issue in today's decision is ORA's request for reparations and fines for Cal Water's actions.

E. Reparations and Fines

Remedies for violations of the Public Utilities Code include reparations and fines. Below, we analyze our precedents and determine that reparations are not appropriate, but that a fine is necessary to achieve our goal of deterring future violations of the Public Utilities Code.

1. ORA's Position

In D.03-01-081, the Commission found that Cal Water had acquired and provided public utility water service to customers formerly served by the Indian Springs and the Country Meadows mutual water companies, in violation of the Public Utilities Code and of California Water Service Company, 71 CPUC 2d 276 (D. 97-03-028). The Commission ordered the parties to brief the appropriate sanctions to impose for these violations.

ORA has tabulated the statutory and decisional violations and recommends a fine of $9,578,000. ORA notes that in 1997 Cal Water had similarly been providing service without authorization. To resolve the 1997 violations, ORA reached a memorandum of understanding (MOU) with Cal Water setting out the specific steps Cal Water was to follow after any future acquisitions. The Commission approved the MOU in D.97-03-028. The MOU requirements are reproduced in Appendix A to today's decision.

ORA argues that the Indian Springs and Country Meadows³ acquisitions failed to adhere to the requirements in D.97-03-028, thus violating that decision
as well as § 702.⁴ ORA also contends that by charging rates not approved by the Commission, Cal Water has violated § 451, requiring just and reasonable rates, § 453, prohibiting discriminatory rates, § 454, mandating Commission approval of rate increases, § 489, requiring that all tariffs be on file with the Commission, and § 532, prohibiting charges other than as set out in published tariffs.

Based on these violations, ORA also recommends that the Commission order Cal Water to refund all amounts collected in violation of the Public Utilities Code, that is, all charges collected from the Country Meadows and Indian Springs customers.

Regarding its recommended fine, ORA tallies each violation of a Commission decision or statute, treats each day as a continuing violation (as authorized by § 2108), and determines that Cal Water has committed 72,388 violations (52,840 with the Indian Springs acquisition and subsequent billings, and 19,544 with the Country Meadows acquisition). Based on the ranges set out in § 2107, ORA calculates a fine between $35 million and several hundred million dollars. Applying our guidelines for setting fines (discussed below), however, ORA recommends a fine of $9,578,000 million.

2. Cal Water's Position

Cal Water urges the Commission to impose no sanctions other than a small fine. Although admitting that it failed to comply with Commission requirements when it acquired Indian Springs and Country Meadows, Cal Water argues that these customers are not "victims," but rather have benefited by being part of the Cal Water system. Cal Water states that these customers enjoyed substantial capital investment from Cal Water, and access to Cal Water's lower borrowing rate, experienced staff, enhanced response capabilities, and state-certified water quality laboratory. Cal Water concludes that these customers have received the benefit of their bargain in agreeing to the acquisition of their water systems by Cal Water, and that reparations are not justified.

Cal Water contends that ORA's calculation attempts to inflate Cal Water's two "honest mistakes" into a host of violations. Cal Water argues that all violations of the Public Utilities Code arise from two violations and should be counted as such. Cal Water further contends that while its two violations are "serious," a fine at the lower end of the range in § 2107 is warranted under the circumstances.

3. Discussion: Reparations

We have concluded that reparations are not appropriate because reparations would go to the Indian Springs and Country Meadows customers, who have not been harmed.

Reparations and fines serve distinct purposes. Reparations are refunds of unlawfully collected amounts. See, e.g., § 734; Cal-Dak Co., v. Delta Lines, Inc., (1962) 59 CPUC 378 (finding certain rate increases were "unlawful, illegally filed and without force.") In D.98-12-075, 84 CPUC2d 155, the Commission set forth guidelines for the imposition of monetary sanctions. The Commission stated that the purpose of reparations is to return funds from the public utility to the victim of the unlawful collection. Unclaimed reparations escheat to the state. See generally D.98-12-075 at 188. The purpose of fines, in contrast, is to effectively deter further violations by the current perpetrator and others. Fines are paid to the State of California, rather than victims. Id.

Following the guidelines in D.98-12-075, we begin our analysis with reparations. In the typical reparations fact pattern, the customers that paid the illegal amounts are victimized by the utility. The Indian Springs customers, however, have enjoyed unmetered water service at a flat rate. Country Meadows customers also received unmetered service at a flat rate and $125,000 in capital expenditures that were intended for customers in the Salinas District as it existed before these acquisitions. Moreover, as noted by Cal Water, both groups of the customers received the benefit of the agreement into which they voluntarily entered with Cal Water. Consequently, the unique facts of this proceeding do not support the finding that the customers that paid the unauthorized charges were harmed or as a result were otherwise "victims."

The facts show, however, that existing Salinas District customers were disadvantaged by the addition of the Indian Springs and Country Meadows customers. The Salinas District rates were set to bear the full cost of the Salinas District, based on the expectation that the district would serve only these customers. To serve the Indian Springs and Country Meadows customers, however, Cal Water diverted resources intended to serve the Salinas District.

Cal Water makes much of the capital investment, experienced staff, enhanced response time, and state-certified laboratory provided to the Indian Springs and Country Meadows customers. The cost for these services, however, was included in the revenue requirement upon which the Salinas District customers' rates were set.⁵ Cal Water acknowledges this diversion of resources, but argues that it would have a "very small at best" impact on the other customers in the district.⁶ Cal Water also opposes the ORA recommendation that the Commission expand its inquiry to include analysis of whether credits or refunds are owed to existing Salinas District customers.

The existing Salinas District customers also did not benefit from additional revenue from the Country Meadows and Indian Springs customers. The amounts paid by the Country Meadows and Indian Springs customers were not included in revenue requirement as an offset to other Salinas District costs. Revenue not accounted for in revenue requirement is available for shareholders.⁷

In sum, the Indian Springs and Country Meadows customers paid unauthorized charges and thus could be eligible for reparations. These customers, however, suffered no disadvantage, while shareholders had additional, unanticipated revenue available. In contrast, the remaining Salinas District customers suffered a diversion of resources intended to serve their needs, without deriving any benefit from the incremental revenue. Thus, as among the groups affected by these acquisitions, the Indian Springs and Country Meadows customers, as well as shareholders, gained at the expense of the existing Salinas District customers.

Reparations, however, are limited to refunding illegal rates or charges. See § 734. The Salinas District rates were not unlawful and thus cannot be refunded. While § 734 provides us with broad discretion, see Ortega v. AT&T, 82 CPUC2d 310, 312-15 (D.98-10-023), we conclude that the reparations statute does not provide us the best means to redress the inequities that flow from these unauthorized acquisitions. Our statutory authority to set "just and reasonable" rates, § 451, is better suited for the unique facts of this case. Cal Water's unfair administration of its Salinas District, and its repeated disregard of Commission directives, are factors that can and should affect our ratemaking for the Salinas District, even though, on these facts, they are not appropriately addressed through reparations. Rather, we will apply these factors in our resolution, later in today's decision, of Cal Water's Salinas District GRC.

4. Discussion: Fines

We conclude that a fine of $75,000 is appropriate because Cal Water has committed five distinct and serious violations of a Commission directive.

The Commission has adopted guidelines for setting fines. These guidelines reflect two primary factors - the severity of the offense and the conduct of the utility. The impacts may be measurable in economic or physical terms, and they may also be more abstract, as in obstructing the Commission in the performance of its regulatory oversight of utility operations.

The severity factor relates to the harm caused and the nature of its impacts. Disregarding a statutory or Commission directive, regardless of any other impacts, is considered a severe violation. Economic harm is measured as the higher of the expense imposed on the victims and the unlawful benefits gained by the public utility. The number of violations is also a component of the severity analysis. A series of distinct but similar violations suggests an on-going compliance deficiency that the utility should have addressed after the first violation. See D.98-12-075, 84 CPUC 2d at 188.

The conduct factor relates to the actions taken by the utility to prevent, detect, and rectify a violation. The utility may aggravate or mitigate a violation by its related conduct.

Financial resources of the utility also must be considered in setting a fine that is an effective deterrent, but not excessive. Finally, the Commission considers the totality of the circumstances in furtherance of the public interest to specifically tailor the package of remedies to the unique facts of each case.

Cal Water acknowledges the severity of its offenses. Cal Water's repeated disregard of specific Commission directives harms the regulatory process. In D.99-10-064, the Commission rejected the utilities' proposal to allow utilities toretain existing rates in acquired systems. The Commission directed that acquiring utilities obtain Commission authorization for rates charged in acquired areas. Cal Water disregarded this directive in the County Meadows and Indian Springs acquisitions. Similarly, as discussed above, Cal Water disregarded its MOU with ORA and the Commission's decision by not filing the acquisition agreements.

The timeline of violations in Appendix B shows an on-going compliance deficiency that should have been addressed after the first violation. The timeline also shows Cal Water's failure to prevent and detect these violations. In partial mitigation, Cal Water did cooperate in correcting the violations.

ORA states that Cal Water has substantial financial resources, with annual revenues of over $250 million per year. ORA recommends a multi-million dollar fine to attain our goal of deterring further violations. We reject the recommendation. Under the facts of this case, treating each day of delay in filing the required requests for authorization would result in a fine that is disproportionate to the Cal Water's financial resources and to the amount needed to deter future violations. We will therefore exercise our discretion and will treat each failure to timely file as a single violation.

Pursuant to § 2107, each violation is subject to a fine of between $500 and $20,000. As noted above, Cal Water's offenses are serious and have been repeated. We will therefore impose a fine of $15,000 for each of the three agreements Cal Water failed to file timely: Country Meadows, Indian Springs, and Olcese. We also impose a fine of $15,000 each for the unauthorized rates in County Meadows and Indian Springs. Cal Water must pay $75,000 to the General Fund of the State of California no later than 60 days after the effective date of this order.