PHOENIX — Brad Cole, chief operating officer of Hunt Management, failed to explain Monday what happens to approximately $9 million in revenue — paid by Johnson Utiliies customers — that is funneled to subsidiary company Ultra Management despite the fact that Chris Johnson, the owner of the subsidiary, testified that Cole could explain what happens to the money.
The destination of $15.5 million, about half of Johnson Utilities’ annual revenue, that is transferred from Johnson Utilities to Ultra Management has been an ongoing mystery in the evidentiary hearings at the Arizona Corporation Commission, which is forcing the utility to demonstrate why it should not have an interim manager appointed by the commission.
Hunt Management leases all employees to Johnson Utilities, which only has one employee itself.
After the town of Queen Creek put its finance director Scott McCarty on the stand to describe a “highly unusual” contract with a subsidiary entity called Ultra Management, witness after witness has failed to explain what happens to the money, why Ultra Management exists or who created it.
In his testimony, McCarty directly connected the diverted funds to a lack of investment in infrastructure, which another Queen Creek witness, Paul Gardner, characterized as below municipal standards and in need of $160 million in improvements. Their knowledge of Johnson Utilities operations comes from reports commissioned by the town when Queen Creek considered acquiring the utility.
Johnson Utilities attorneys have aggressively litigated to keep those reports, along with communications between the utility and the town of Queen Creek, secret by filing for a temporary restraining order, despite the fact that the town of Queen Creek maintains that they are public record.
Hunt Management employees filed a public records request for the reports. Nobody outside the town of Queen Creek and those who produced the reports have seen them.
“I took offense to them saying there were issues, but they won’t tell us what they are,” Cole said, when asked why the request was filed.
Administrative law judge Sarah Harping, who has been presiding over the hearings that are now in their fourth week, said she would also like to know what those reasons are.
Commissioner Andy Tobin wrote a letter entered into the docket detailing his frustrating legal battle to get access to the documents.
“It is perplexing to me that Johnson Utilities thinks financial information about its regulated water and wastewater operations should be kept hidden from the commission,” Tobin wrote. “There is no end in sight as to when I will finally obtain access to these public records which the town of Queen Creek does not object to producing.”
Most notably, George and son Chris Johnson, who is one of two owners of the company along with Barbara Johnson, provided few answers while on the witness stand.
Chris Johnson said he could not remember how much money he makes as the owner of Ultra Management, could not recall if it was five or six figures, and could not say how much money he makes from all Johnson Utilities subsidiaries, of which he is the owner.
He said he did not know how much of the $15 million paid to the company flows out of Ultra Management, was not aware of how much was paid to Hunt Management, did not know why Ultra Management was created and could not remember which attorneys created it.
He did testify that Cole would be able to explain what the funds were used for. Cole said that about $6 million is paid to Hunt Management by Ultra Management, which they bill for expenses plus 20 percent. That leaves $9 million with Ultra Management that is unaccounted for. Cole said he could not provide more information.
“I don’t see what this has to do with customer billing and water quality complaints,” Cole said.
Harping did see the connection and allowed the line of questioning to continue.
The unaccounted funds are significant because the utility also has a request before the commission to raise rates on customers to generate more revenue.
Cole also testified that in June, the utility had fully intended to build a $2.5 million Biolac plant to replace the lagoon-style Section 11 plant off of Hunt Highway that has been the site of a long string of hydrogen sulfide gas violations, recognized as toxic to humans by the EPA and OSHA, and which have been of great concern to residents living nearby.
The utility instead opted to treat the lagoons with chemicals for a couple hundred thousand dollars. Cole testified that the chemicals were working, and emphasized that compliance was what mattered, asking why the company should spend more when that was working.
The utility has however had four hydrogen sulfide violations in 2018, one as recent as April 25, which Cole disputed because the county had placed a monitor behind a resident’s house, where the company could not monitor it and assure it was tamper-proof.
Cole also argued that no one could prove the emissions came from the plant and said it could have come from nearby agriculture operations, though that was declared as highly unlikely by other witnesses at the hearing.
“I do not work at Ultra Management,” Cole said, continuing that Johnson Utilities CEO Gary Drummond, the only remaining witness, could presumably provide more information. “I hate to kick the can down the road again.”
Drummond sat silently with other Johnson Utilities representatives as Cole spoke.
“I don’t know. I don’t look at the books of Ultra Management. ... Nobody works directly with Ultra Management,” Cole said. “Nobody works at Ultra Management.”