Johnson Utilities defies regulators, court order to prevent takeover

Ryan Randazzo | The Republic | azcentral.com

A court showdown is coming next week for Johnson Utilities, which is operating its troubled water company in defiance of orders from a judge and state utility regulators.

Johnson Utilities was ordered to allow EPCOR USA to run the operation and take over the finances, but the company is balking, particularly over giving another business control of its bank accounts.

A refusal to comply with an Arizona Corporation Commission order is virtually unprecedented.

A Pinal County Superior Court judge is scheduled to hear from both sides Aug. 23.

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Johnson Utilities has been plagued with issues that include overflowing sewers, low or no water pressure, toxic gases and water quality that's just barely acceptable by federal standards. The company has more than 30,000 customers in parts of Florence, Queen Creek and San Tan Valley.

The Corporation Commission voted last month for EPCOR to take over as interim manager. The commission intended for Johnson Utilities to cooperate with EPCOR, which runs water and wastewater utilities in Arizona, New Mexico and Texas and is owned by a parent company in Canada.

Johnson Utilities so far has not done so, arguing both that the commission doesn't have that authority and that the company does not like the terms of the order.

Johnson Utilities customers in Florence see sewer backups, noxious fumes Matt O’Connell lives in Florence. He and his neighbors have had problems with low water pressure, backed-up sewage and noxious fumes.

Johnson wants to keep control

Johnson Utilities argued in a court filing that the company does not need to give EPCOR full control of its bank accounts.

"(The Corporation Commission) continues efforts to bully Johnson into agreeing to do something beyond the terms of its politically motivated order that it does not have the constitutional or statutory authority to enter," the company said.

Now, the commissioners hope Pinal County Superior Court Judge Stephen McCarville will take action to force Johnson Utilities to comply. The judge already issued a restraining order aimed at forcing compliance, and regulators say Johnson is in contempt of that order.

So far, the court has not responded to the commission's request for an expedited hearing and a motion to find the utility in contempt.

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Lawyers for Johnson Utilities told commissioners the company is both concerned that it will not have decision-making authority under the interim manager and also won't control any profits earned while EPCOR has control of company finances.

Johnson Utilities' lawyer Jeffrey Crockett told regulators the company would prefer to set up an account that EPCOR could draw from to pay for things the company needs, rather than relinquish control of the company.

"That's not what the commission ordered," said Andy Kvesic, the chief counsel for the Corporation Commission.

Crockett's comments also didn't sit well with commissioners.

"You are blatantly disregarding the direction from this commission," Chairman Tom Forese said.

What's next?

It's unclear how a transition to EPCOR might occur should Johnson continue to defy the commission and court.

Kvesic said a judge can use a variety of strategies to force a defendant to comply with a court order.

"It could be getting the sheriff to go down with the interim manager," Kvesic said. "I've seen cases where someone has to sit in a jail cell until they turn over the keys. Or they could fine them an amount per day until they comply."

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Shawn Bradford, EPCOR's vice president of corporate services, said EPCOR can't manage Johnson Utilities as intended without control of the finances because there would be no way to pay vendors and employees and to make needed repairs.

"You cannot run a utility without having the quote, checkbook,” Bradford said.

But Johnson Utilities is arguing in court filings that it should not be forced to turn over its bank accounts to EPCOR.

"The word 'cooperation' cannot reasonably be read to include a requirement that Johnson give all of its money to a third party," Johnson lawyer Christian Beams said in a letter to the commission this week.

What you should know about Arizona's Corporation Commission The Arizona Republic's Ryan Randazzo explains what the Arizona Corporation Commission does and how these five elected officials can have a big impact on your electric bill.

Upgrades urgently needed

Officials at the commission and EPCOR hope the court acts swiftly because Johnson Utilities' water and wastewater facilities are in dire need of repairs and investment, they said.

Bradford this week showed commissioners photos of roofs that could collapse in water-treatment plants because they have been corroded by hydrogen sulfide gases that are not properly filtered out of the air.

He also showed where concrete infrastructure was disintegrating because of the gases, which can be harmful for workers and neighbors near the plants to breathe. They also present an explosion hazard.

“We have significant safety concerns not only for the customers as it relates to hydrogen sulfide but also to the employees," Bradford said of problems at the Pecan Wastewater Treatment Plant. "We certainly believe that facility is running incorrectly."

He also showed a hose connected to the potable-water system dropped into a sewer facility without any device to prevent backflow, which Bradford said is called a "cross connection."

"That's not a good thing," he said.

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Bradford also said the concentrations of nitrate in drinking water provided by the company was right on the edge of acceptable federal standards.

Federal standards limit nitrate at 10 milligrams per liter. EPCOR said readings were at 9.9 mg/L.

"They are on the razor’s edge," Bradford said. "That's our concern. It typically goes up over time."

Nitrates are a common water contaminant caused by agricultural runoff and leaking sewage. Health effects are primarily a concern for very young children, but the contaminant often is an indicator of other problems.

If the water violates the standard, a "do not drink" order must be issued or the source must be disconnected from the system.

After Bradford's remarks, Johnson Utilities issued a news release stating its water is safe to drink.

The Arizona Department of Environmental Quality last tested Johnson water July 27 and found nitrate levels of 9.53 milligrams per liter, below the federal threshold of 10 mg/L, ADEQ spokeswoman Erin Jordan said.

Johnson has seven open notices of violation from ADEQ for other matters besides water quality, Jordan told The Arizona Republic.

Rates under review

The Corporation Commission also is reviewing the rates at Johnson Utilities. That proceeding has been stalled as the interim manager is sorted out. Meanwhile, customers are paying rates that the commission staff and the Residential Utility Consumer Office are concerned might be too high.

Of particular concern is the money the company pays to Chris and Barbara Johnson, the adult children of company founder George Johnson.

The company pays about $15.5 million a year to a company called Ultra Management, run by Chris and Barbara Johnson and with no other employees.

Ultra, in turn, pays yet another company, Hunt Management, also run by Chris and Barbara Johnson, to provide about 100 employees who run the utility.

RELATED: Water taps dry, sewers overflow

Those contracts were brought to light by the town of Queen Creek, which studied the company financials when it was considering purchasing Johnson Utilities.

The town finance director told the Corporation Commission it decided not to purchase the company because those management obligations prevent Johnson from having enough cash to maintain pipes, lift stations, sewer plants and other infrastructure.

The parties in that case on Thursday discussed whether the commission could reduce Johnson rates under an emergency basis or revert the rates to where they were before the last rate case in 2010.

Crockett, Johnson's lawyer, opposed those suggestions.

"There is not evidence Johnson Utilities is looting the company," Crockett said, which prompted chuckles from some of the opposing attorneys. "Counsel at the table is laughing. These rates (being charged today) were lawfully enacted by the commission. Where the money goes is the business of the owners."

Johnson fights in courts

Johnson Utilities has put up a stiff fight in the courts to protect its operations, filing four separate cases in hopes a judge would find the commission does not have the authority to force an interim manager upon the utility.

Two of those cases have been denied, and commission lawyers expect the other two to be dismissed.

Johnson Utilities filed a case in Arizona Supreme Court arguing the commission did not have the authority to install an interim manager at the company. The court denied the petition.

A trust associated with the utility filed a similar action that was denied in federal court.

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The Hunt and Ultra management companies involved with Johnson Utilities filed an action in Maricopa County Superior Court, and the commission has requested it be dismissed. Johnson Utilities filed a similar action in the same court, and a hearing is scheduled for Sept. 7.

The company has yet another action in the Arizona Court of Appeals, where it is contending the town of Queen Creek should not have released financial information about the utility under the state public-records law because the information was shared with the town under a nondisclosure agreement.

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