PHOENIX — Almost all parties in the Johnson Utilities evidentiary hearing have recommended the appointment of an interim manager, including Queen Creek, Florence, Arizona Corporation Commission staff, community activist John Dantico and the state Residential Utility Consumer Office.
Only Pinal County and Johnson Utilities itself did not argue that an interim manager was necessary.
The legal briefs filed by all parties sum up facts established in the case and wield them to argue for or against the appointment of an interim manager.
The arguments and facts summarized in the briefs present a damning picture of the utility’s performance over the years and strongly argue for the appointment of an interim manager.
“Johnson Utilities continuously abuses the privileges afforded it as a regulated monopoly,” reads the brief filed by attorneys from the town of Queen Creek and Florence, summarizing the prevailing sentiment in the briefs. “Current management and ownership have never managed the company in its own interests nor acted in good faith to the company’s ratepayers.”
The management structure and in-dealing that came to light during the hearings was a main point in all of the briefs.
According to the towns’ brief, the utility had $14,221,328.86 in total debts to developers for line extension agreements and was given the opportunity to buy down its debts for much less, $1,206,504.62. The utility had rights of first refusal on these deals and could have paid them off.
Instead, the debt was bought by Annuity Holdings throughout 2007 and 2008, which gave it the right to receive $14,221,328.86 from the utility. Annuity Holdings is owned by George Johnson’s children, Chris and Barbara Johnson. The utility was unable to explain this in the hearings.
“The company’s management and ownership utilizes a series of Johnson family owned businesses in an elaborate enterprise that seemingly has one purpose: to enrich the Johnson family by extracting as much money as possible from Johnson Utilities ratepayers and the company itself, to the detriment of its rate-paying customers.”
The towns of Queen Creek and Florence had been lobbying to be named the interim managers of the utility while the ACC assesses what to do on a permanent basis.
“The guiding principles of Johnson Utilities’ ownership and management are, and have always been: spend as little as possible on capital expenditures and maintenance, provide the worst possible service to its customers that it thinks it can get away with, and give away the bulk of the Company’s revenues to the Johnson family,” the brief continued.
However, this diversion of ratepayer funds to the family at the expense of the utility was not the only one uncovered.
The utility has been diverting approximately $10 million annually since at least 2014 to a shell company called Ultra Management with bank accounts also controlled by Chris and Barbara Johnson. They do not provide any services to the company, and no one associated with it, including Chris Johnson himself, could say what it did or what value it added.
Given the ultimate opportunity to file an explanation into the record for the case at the request of the judge, the company simply resubmitted part of the agreement that was already in the record, which many briefs took as a final confirmation of what already seemed clear: The family was simply enriching itself with the money.
The current manager of Johnson Utilities, Gary Drummond, could not justify the agreements beyond claiming that they protected assets and was not considering changing them or looking into them.
“Mr. Drummond may not be qualified to run a utility, but it does take audacity to claim that an agreement that squanders at least 9-10 million dollars of ratepayer revenue, annually, is actually an asset protection measure, it is protecting the assets of the Johnson family, not Johnson Utilities (or the interests of the ratepayers),” reads the brief filed by attorneys from the town of Queen Creek and Florence. “If the company had not been squandering tens of millions of ratepayer money under his and his predecessor’s direction, it could have built and maintained infrastructure that would meet First World expectations in the 21st century.”
Despite this, the company is still currently petitioning the commission for a rate increase. Queen Creek Utilities Director Paul Gardener testified, based on an extensive review of the utility made when the town was considering acquiring it, that the necessary improvements would cost $200 million, $114 million of which is needed just to get to industry standards and $48 million in wastewater just to address growth.
Due to lack of investment, the company has been plagued with violations that constitute a risk to public health including hydrogen sulfide (a toxic gas regulated by the federal government) emissions and more raw sewage spills than any state utility other than Phoenix, 42 between 2015 and May 2018, with total unlawful discharges of at least 377,000 gallons of sewage and other wastewaters. Raw sewage made it into waterways at least five times, with the last one of 65,000 gallons occurring on the eve of the hearings in March.
Gardener also testified that the system was unprepared to handle peak loads in the coming summer months.
Pinal County declined to advocate for the appointment of an interim manager and had all discussions with the Board of Supervisors on the topic behind closed doors in two executive sessions. The county did take the stance that the status quo is unacceptable and advocated for some type of independent oversight, based on points voiced by other parties, including the questionable financial management and track record of consistent environmental violations.
“While the sheer volume of compliance issues alone is troubling, testimony also revealed that many of the violations were of a similar nature or repeated violations in spite of extraordinary efforts by ADEQ to keep the company in compliance,” reads the county brief.
“Pinal County believes that the commission should impose some form of independent oversight on the company, whether it takes the form of an interim operator or a consultant which answers to the commission.”
Response briefs will be filed June 1, which will be followed by a recommendation by the administrative law judge, Sarah Harping. A public meeting will then be announced by the Arizona Corporation Commission where a final decision will be made by the ACC.