FLORENCE — EPCOR Utilities Inc. has been a “poor and negligent” manager of Johnson Utilities with obvious conflicts of interest, including pressuring JU to sell the company, JU alleges in a motion before the Arizona Corporation Commission.
The ACC appointed EPCOR as interim operator of JU in 2018 in response to customer complaints. JU has more than 67,000 water and/or wastewater customers in San Tan Valley, Queen Creek and Anthem at Merrill Ranch in Florence.
An EPCOR spokesperson told PinalCentral Wednesday, “Our focus remains on restoring this utility to proper and safe operating conditions for its customers — any suggestion otherwise is wholly inappropriate and yet another ownership tactic to interfere with our ability to get that job done.”
JU General Manager Gary Drummond told PinalCentral that EPCOR offered to buy the company a year ago for “a small fraction” of its value. He said he couldn’t disclose the exact offer because it was contained in a private letter of intent.
“EPCOR has not been bashful about the fact it would like to purchase the assets of Johnson Utilities, and we’ve alerted the commission to the fact that they’ve appointed as interim manager someone who’s actually interested in purchasing the assets of the utility company,” Drummond said.
In phone conversations with top EPCOR officials, EPCOR suggested to JU owner George Johnson if he were to accept the offer all of the ACC regulatory actions against JU, and a $100 million lawsuit filed by the Arizona Department of Environmental Quality against JU, “would go away.” Drummond couldn’t say for certain if EPCOR actually has the authority to make those issues “go away.”
But he continued that EPCOR’s interest in acquiring JU is an obvious conflict of interest that should have excluded EPCOR as interim operator. “We even raised that argument to the Arizona Supreme Court” in November 2019. It’s a competitor appointed to manage company assets, Drummond said.
Jeffrey Crockett, legal counsel for JU, said as interim manager, EPCOR has a fiduciary responsibility for sound financial decisions that maintain and enhance JU’s value, “so when management is returned to the owner there’s been no harm done.”
But as someone interested in buying the company, for as a low a price as possible, there’s less incentive to do that, Crockett said. EPCOR is further conflicted because it depends on favorable decisions from the ACC for its other utilities, which means it “has not and will not take positions in the best interests of Johnson Utilities that are adversarial to ACC staff,” according to the motion. Specifically, the motion asks the ACC to terminate EPCOR as interim manager.
EPCOR replied to PinalCentral by email:
“The operations and service provided by Johnson Utilities deteriorated over a decade to the point at which the ACC had to step in and appoint an interim manager — this is a step that the ACC takes to protect customers when the ability to provide safe and reliable service has reached a critical point.
“It’s our responsibility as interim manager to make the operational decisions that, based on our experience as a top-tier utility owner and operator, are the right thing for Johnson Utilities customers. Our decisions are made solely in the interest of returning Johnson Utilities to a point at which customers can be assured of safe and reliable service.”
EPCOR denied any conflict of interest exists.
“We work for and under the ACC’s direction with one singular task — to operate Johnson Utilities with the highest degree of professionalism and excellence. In fact, this is reflected in the ACC contract EPCOR signed and entered into. There is maximum transparency on the work we are doing for Johnson Utilities and we report to and appear before the ACC every month to answer questions.
“If George Johnson were to decide to sell Johnson Utilities, that would be his decision and his alone. EPCOR has been contracted to do what is best for the customers of Johnson Utilities — it is the owner’s responsibility to advocate to the ACC on behalf of utility ownership.”
In prior years, JU has had negotiations with Florence, Queen Creek and EPCOR about buying the company. The ACC considered all three as interim manager. “We think that should have been disqualifying for them to be appointed in the first place,” Crockett said.
The ACC’s reaction to these allegations could be moot following an Arizona Supreme Court decision expected any day, Crockett said. JU is awaiting a ruling on whether ACC had the authority to impose an interim manager in the way it was done. If the Supreme Court sides with the commission, JU will soldier on with the motion to terminate, Crockett said.
A hearing is scheduled before an administrative law judge for Aug. 19. Both sides will submit testimony and arguments before and after this hearing. The judge will write a recommended opinion and order, to be debated by the commissioners. Crockett said the ACC might issue a decision toward the end of the year.
JU’s motion says EPCOR “has shown itself to be a poor and negligent” manager. An ACC attorney has told the ASC that JU’s owner is able to meet with EPCOR to discuss operational issues, concerns and questions, but in fact EPCOR has “actively excluded” JU ownership from meetings.
Since being rebuffed in its purchase attempt, EPCOR has “initiated a campaign to plunder Johnson Utilities’ cash assets through fraudulently engaging licensed Arizona contractors to perform unnecessary and duplicative projects,” the motion alleges. Of more than $5 million paid to one of these contractors, “approximately $700,00 seems appropriate,” the motion says.
In the 1½ years since the takeover, the benefits to customers or employees of EPCOR running the company are hard to see, Drummond said.
The ACC has instructed JU not to interfere, and “we don’t know on a daily basis what they’re doing,” he said.
But, he added, it is apparent what EPCOR hasn’t accomplished: The Section 11 wastewater plant at Magic Ranch is still not in compliance with ADEQ, problems remain at the Pecan wastewater plant and other issues, despite EPCOR spending tens of millions of dollars.
“It’s easy to forget what came to light when the ACC started investigating Johnson Utilities in 2017. It took a decade of mismanagement for Johnson Utilities to fall to the profound level of non-compliance it had reached, and we’ve been crystal clear from the beginning that it will take time and money to bring it back to compliance.
“When we first walked through the door of Johnson Utilities, sewer overflows were running down neighborhood streets, water pressure was so low that some people couldn’t take showers or flush their toilets, people were concerned about whether or not there would be enough water to get through the summer, billing and service issues were a regular occurrence, and customers complained about the smell almost daily.
“Given the dire situation Johnson Utilities was in 21 months ago the level of improvement has been, in our opinion, outstanding. We’ve brought customer satisfaction from a barely passing grade of 50% to 81% and the sewer overflows, billing issues and odor complaints are almost non-existent. We’ve managed to take a foundering utility from the edge of collapse to reliability in 21 months — something that wouldn’t have been necessary if Johnson Utilities had been run properly.
“Again, we’ve made great strides, but to be clear, Johnson Utilities deteriorated over the course of years. Bringing it all the way back to compliance will not happen overnight and it will not happen without capital funds from the owner.”
“I don’t think any utility is 100% loved by its customers. And I think that would be true of not only JU but EPCOR,” Drummond said.
He noted Bullhead City is currently trying to get EPCOR out of town. According to local news reports, voters approved a proposition last fall that authorized city government to acquire EPCOR’s local assets so it could run the water system, and Bullhead City has an eminent domain case against EPCOR.