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Wrung Dry

How can a private water utility charge four times the going rate and get away with it? (Hint: PG&E's regulators are involved)



During her one weekly shower, Dillon Beach resident Theresa Byrne crams her bathtub with empty peanut butter jars. When they're full of runoff water, she carries them into her kitchen and places them on the windowsill above her sink. Throughout the coming week, she uses that recycled supply to wash her dishes—until the next time she can afford to bathe.

Byrne, 63, isn't the only person in her remote, coastal village counting every drop that leaves the tap. With bimonthly water bills climbing as high as $600—nearly six times the average paid by households in West Marin's other hamlets—stories of desperate water conservation abound in Dillon Beach. Lea Christensen-Morris, 64, washes her dishes with reused cooking water, saves drainage from her potted plants and wears only dark clothing, reasoning that she can launder her garments less frequently if dirt and stains blend in. Stephen and Jackie Cato, 63 and 64, don't even have a washing machine. They skimp on bathing too, so they can afford to let their teenaged granddaughter, who lives with them, shower every day.

How did this happen? While the public North Marin Water District (NMWD) serves Point Reyes and Olema, a private utility called Cal Water bills homes in Dillon Beach. The rate difference is shocking.

In early May, 15 Dillon Beach residents filled out surveys distributed by Byrne, reporting bimonthly highs between $250 and $600. Meanwhile, the NMWD reports that the average customer in its small coastal towns pays just $107 every two months—and for more centralized Novato customers, it's even lower. According to the public utility's website, its average ratepayer uses 60,200 gallons—71 CCFs—a year.

A rate calculator on Cal Water's website shows that if each household in Dillon Beach used the exact same amount of water as the average NMWD customer, bimonthly bills would likely be around $473—over four times higher than neighboring towns. And it's about to get worse. In an upcoming rate cycle set to begin in 2014, the company has proposed hikes that would send those bloated $600 bills up to around $730.

Though a private, investor-owned utility, Cal Water is regulated by the California Public Utilities Commission (PUC), the same agency responsible for overseeing PG&E during its San Bruno pipeline rupture that killed eight people. It's also a governing body notorious for cozy liaisons with the utilities it's supposed to keep in check. In a recent egregious example, PUC president Michael Peevey skipped a Senate hearing in Sacramento where he was to be grilled on this very culture of elbow-rubbing, opting instead to attend an exclusive Napa reception with utility heads. The event was sponsored by a dark-money nonprofit bankrolled by many of the utilities he's supposed to regulate.

TRACKING THE TAP Longtime Dillon Beach resident Thomas McHale, 66, shows roughly $600 budgeted for every water bill. - RACHEL DOVEY
  • Rachel Dovey
  • TRACKING THE TAP Longtime Dillon Beach resident Thomas McHale, 66, shows roughly $600 budgeted for every water bill.

While ratepayers on the bottom are squeezed, executives in Cal Water's corporate office enjoy seven-figure compensation packages, multiple retirement plans, meetings that pay board members $2,300 a pop and at least one $84,000 company car. In the face of another rate hike, it's worth asking if this public-private partnership is living up to the PUC's supposed credo of providing "safe, reliable service at reasonable rates."

But poring over the numbers from Cal Water's last three rate hikes doesn't just show requests for rate increases to fund executive office remodels and automatic gates. There's also evidence that the company collected large sums of money for new employees who then weren't hired, and talk of a $3.05 million refund to ratepayers that disappeared in a private negotiating session between Cal Water and the embattled PUC.


Dillon Beach isn't Cal Water's only town struggling to pay its bills. The company serves multiple small, rural towns across California with low median incomes and high poverty rates. Locally, it provides water to parts of Guerneville and Lucerne in Lake County. In the Central Valley's Kern County, Split Mountain and Wofford Heights are two remote communities with median incomes under $30,000 and poverty rates nearly twice the national average. Twenty percent of the population in Glenn County's Willows and Yuba County's Marysville live below the poverty line.

Kurt McKelvey, a member of water-advocacy group Lucerne FLOW (Friends for Locally Owned Water) in the small Lake County town, says his household's average bimonthly bill is $250, though that isn't the highest he's seen.

"Once we tried to start a vegetable garden and got a bill that was over $600," he writes in an email. "That garden didn't last long."

McKelvey estimates that his average bill would climb to $375 under the proposed rate increase, which was the subject of a heated public meeting in Lucerne on April 12. Footage of the meeting, viewable on YouTube, shows townspeople lambasting Cal Water reps, accusing them of "raping" Lucerne. The owner of a local Foster's Freeze cites $1,600 bills, claiming her rates are going to force her to shutter her restaurant. Other residents talk about vacant storefronts and empty rental units, claiming the water bills were turning their home into a "ghost town." At one point, a local sheriff has to come to the podium to calm the room.

Gay Guidotti is the manger of Cal Water's Redwood Valley district, overseeing both Dillon Beach and Lucerne. She explains that costs spike for these small districts because the PUC regulates water utilities differently than power providers like PG&E.

"Their outlook is that each individual system should pay for the cost of service to that system," she says, adding that every community has unique sources of water—wells, lakes, etc.—and infrastructure for treatment and delivery. So while power companies can spread the cost of electricity and heat across a vast, sometimes-statewide customer base, utilities like Cal Water have to bill each community separately.

For Dillon Beach, that means spreading the cost of a treatment system and tank, pumps and maintenance across just 253 hookups, while public utilities like the NMWD have thousands. Guidotti says that Lucerne, though not as small, still only has 1,250 hookups to foot the cost of a $7 million plant to treat water from Clear Lake.

Unfortunately, this piecemeal approach means that the company's small, rural towns—many of which, again, have high poverty rates—get stuck with the steepest bills. The PUC's Division of Ratepayer Advocates (DRA), an organization within the regulation that is supposed to represent consumers, argues this in a document assessing Cal Water's latest rate hike proposal. It concedes that district size isn't the only factor driving customer bills above the company-wide average, but concludes that "there does appear to be a loose correlation between the size of the district and the average customer bill."

The utility provides low-income rate assistance to customers who qualify. However, the program's monthly discount peaked company-wide at $12 in 2012, an amount that makes only a small dent in places like Dillon Beach. At a meeting in Tomales on April 11, Christensen-Morris mocked the program, calling it a "pittance."

Cal Water also credits its higher paying districts with a small tax obtained from each customer, as part of its rate support fund. According to the rate calculator on Cal Water's website, this program does credit a Dillon Beach customer using NMWD's average CCF about $50 a month, or $100 a bill, meaning the bimonthly cost would likely be around $573 without it. Jeff Young is a Dillon Beach resident acting as an "intervener" in the current rate case, and he sees hope in this fund if the credit can be tweaked.

"The formula they're using is inequitable to Coast Springs [Dillon Beach's micro district]," he says, adding that telecommunications utilities never charge outlying ratepayers more than 150 percent of the average overall rate.

Young adds that many of the costs hitting ratepayers are fixed—infrastructure, salaries and administrative fees that are also thinly spread over the small ratepayer base, meaning that even conservation of water has its limits.

And then there are the other costs coming from Cal Water's central office.


In her Dillon Beach home on May 6, Christen-Morris handed off a three-page, typed letter to be used for this article in which she calculates the exact cost of washing a head of broccoli, and states bluntly, "I have grown afraid to use water."

Later in the letter, she writes, "I resent that each of [the] board of directors gets $2,300 to just show up at a meeting."

It sounds alarming: $2,300 just to show up at a meeting? But her figure checks out. In fact, a perusal of Cal Water's 2012 proxy statement "How Do We Measure Success?" reveals multiple expenses that, were this "publicly regulated" private company truly public, would surely raise taxpayer pitchforks. There are CEO Peter C. Nelson's total annual earnings—salary, stock awards and "other compensation"—of $2.09 million. There are the other four men on top, raking in annual packages between $730,000 and $1.2 million. And there are Nelson's pension and "supplemental executive retirement plan" with a total accumulated value of $11.6 million. (In fact, according to the DRA, this latter benefit exceeds "the amount allowed for in the qualified pension plan by the IRS.")

To be fair, these top-heavy "incentives" are comparable to other big-name utilities the PUC regulates. Kevin Burke, CEO of ConEdison, rakes in a far steeper yearly package of $14.8 million.

As a safeguard, these top-level packages at Cal Water are overseen by its Organization and Compensation Committee, which, the report states, cannot be made up of current employees or anyone with "any material interest" in the company. However, these five so-called non-employee directors receive a $32,500 annual retainer, a benefits plan that will pay $22,000 a year after retirement, stock awards and tidy sums of $1,800 for each meeting attended and $3,600 for each meeting chaired. Board members—many of the same people as the committee members—receive $2,300 for each board meeting they attend. In addition, three of these committee members have a retirement plan that will pay $22,000 annually for the number of years they served on the board.

LIQUID GOLD Theresa Byrne saves shower water in jars to use for washing dishes. - RACHEL DOVEY
  • Rachel Dovey
  • LIQUID GOLD Theresa Byrne saves shower water in jars to use for washing dishes.

It's partially for reasons like this that a hefty portion of each rate increase goes not to maintenance in the local districts but to the central office in San Jose. Of the roughly $126.9 million in rate hikes requested by Cal Water in its current case before the PUC, $71 million—more than half—would go to its general office. A large chunk of that—$42.6 million—is requested to pay for salary and benefit increases for recent and projected hires, while other costs are tied up in rent and taxes.

But a pool of other customer-funded expenses may not seem quite so essential. There are dues associated with an organization called the Alliance of Chief Executives, which, according to its website, "creates very private, high-level, confidential environments for members to have strategic business conversations." There are fees associated with new company cars for top-level executives and other general office staff in the $30,000–$40,000 range—even though some of them received money for new cars in the last general rate case, just three years ago.

The PUC may not allow all of these expenses to be folded into Cal Water's current rate hike. In its back-and-forth with each utility, the DRA can recommend removal of fees that seem extravagant. In its last rate hike, Cal Water was unsuccessful in its original request to include the total cost of CEO Nelson's car—$84,500—which the utility later said was mistakenly included.


In the last few rate cases, the DRA has also taken issue with Cal Water's hiring pattern—or lack thereof. In a January 2008 report, it questioned the company's request to hire 148 new employees in its central office—a sizable 62 percent increase over the existing staff. Meanwhile, it states that between 2005 and 2006, the company's actual payroll expenses were $2.57 million lower than the amount allotted them in ratepayer money.

"The amount authorized in rates was much higher than the actual payroll expense, resulting in a significant windfall to its shareholders," the report reads.

A similar issue resurfaced in 2010, when the DRA stated that 13 of the 38 positions that had been authorized with ratepayer money for 2009 were unfilled, and that Cal Water had used the number of employees authorized rather than the number of employees actually hired as a base number for expenses and future payroll needs. It even went so far as to recommend that Cal Water set up an account and refund ratepayers $3.05 million, writing: "CWS unfairly and inappropriately requested and received recovery for new position costs prior to CWS actually hiring those employees."

Darin Duncan and Paul Townsley, Cal Water's manager of rates and VP of regulatory matters, deny that Cal Water received any kind of windfall profits from the payroll gap.

"That was a period when we were really slow in hiring new people," he acknowledges, citing a staffing shortage in HR and a dotcom bust in San Jose. In lieu of hiring full-time, benefited employees, he says, the company hired temp and part-time staff.

Cal Water offered rebuttal testimony to its regulator's claims, taking issue with its "inflammatory and accusatory" language which could "unnecessarily agitate customers." The company claims it was burdened by excess costs in the area of healthcare, legal fees and environmental compliance, and that the DRA overstated some of the costs of its unhired employees.

"Due to these higher offsetting expenses, by not increasing its workforce to the authorized level, Cal Water still did not earn its authorized rate of return and there were no windfall profits," the document states, displaying annual returns between 5.59 and 8.07 percent.

Lisa Bilir, a supervisor with the DRA, confirmed in an email that the issue of the $3.05 million was dropped after Cal Water's testimony, and the company was not required to create an account for refunds. She further explained that each settlement reached between a utility and the DRA is "pro-rated," meaning that it would more likely lower the number of new hires Cal Water could request in its upcoming rate case rather than give a refund outright. This adjustment went into effect for Cal Water; the settlement also required a higher level of documentation for several of Cal Water's future hires.

But Bilir can't explain why the DRA's language was both adamant and specific about a refund prior to the settlement, if refunds are not in fact the PUC's practice. When asked if the term was inappropriately used, she replied that it was not. She explained, however, that after all of the back-and-forth, a settlement is often reached between the DRA and a utility in which each side concedes some of its requests to reach a compromise. Surprisingly, though the final terms of such an agreement are published, Bilir says the negotiation itself was "closed," and she can't discuss its exact details.

"It was a very large case, and we had to look at it in context," she says, speaking of the $3.05 million. However, she also admits: "It was a very large sum of money."


In the local districts, ratepayers have expressed outright contempt for the PUC's style of regulation, which has allowed hike after hike—hitting Dillon Beach with rate increases as high as 150 percent in the 2006–'07 cycle, according to an April 2013 article in the Point Reyes Light. At the Tomales public meeting, residents of the tiny district lambasted the regulatory agency, scoffing at the fact that Cal Water's vice president and CFO Thomas Smegal, who drew a compensation package of $979,000 in 2012, used to work for the PUC.

In fact, according to Reuters, three of Cal Water's top employees have worked in the past for the very regulatory agency that oversees their current company—Smegal, vice president of corporate development Francis Ferraro and corporate secretary Lynne McGee.

"Generally speaking, there's a revolving door between the utilities and the commission that regulates them," says Mindy Spatt with The Utility Reform Network, a watchdog organization that has called for increased fines for PG&E in the wake of San Bruno—and for PUC head commissioner Michael Peevey's resignation. Spatt adds that there would be more concern if the door "went the other way," and employees of the utility went to work for their regulator. Case in point: Peevey himself was previously a top officer at Southern California Edison, and in 2008 allowed his former company $843 million more in rate hikes than the PUC's own staffers recommended, according to Reform Network.

RED HANDED PUC director Mike Peevey was caught recently skipping a Senate meeting to attend a utility confab at Silverado Resort & Spa in Napa.
  • RED HANDED PUC director Mike Peevey was caught recently skipping a Senate meeting to attend a utility confab at Silverado Resort & Spa in Napa.

But other less-than-apparent links between the utility and its regulator exist. Peevey's wife is Sen. Carol Liu, D-La Canada Flintridge, who has received campaign contributions from Cal Water—$500 each in 2008 and 2012. Liu has also received contributions from a group called the California Water Association, which represents PUC-regulated water companies. That group gave Liu $5,200 in 2010 and $1,000 in 2011, according to MapLight. In 2004, Sempra energy—also regulated by the PUC—was involved in a scandal in which its VP of regulatory affairs was caught on camera saying it would look "real bad" if someone from Sempra had not attended a fundraiser for Liu.

"To the ordinary consumer, that really looks like a conflict of interest," says Spatt.

Duncan and Townsley declined to comment on the campaign contributions, but they denied any insider dealings with their regulator during ratemaking cases.

"There is no cozy relationship, I can assure you," Duncan says. "It is a very arms-length process based on sworn testimony. It's designed to be adversarial and get at the truth."

Coziness is subjective, apparently. One final connection involves the controversial California Foundation on the Environment and Economy (CFEE)—a 501c4, or "dark money nonprofit," which is not required to disclose its donors publicly. Such organizations have increasingly been the subject of public scrutiny due to their widespread use for lobbying purposes, though, like Super PACs, they can't contribute directly to a single candidate or campaign.

In 2011, the San Francisco Bay Guardian reported that the CFEE footed the bill for a lush, 12-day "travel-study excursion" to Madrid, with stops in Sevilla and Barcelona. Peevey was on that trip, as was his wife and the head of PG&E. He also flew to Poland earlier this year at the CFEE's expense. His recent jaunt to Napa—skipping a senate meeting—was for a CFEE event.

"It's not a transparent organization," Spatt says, adding, "There are all these opportunities for utilities and PUC appointees to hobnob at the CFEE in Napa Valley, but that's by invitation only. The customers who will be paying Cal Water's rate hikes are not invited."

Like so many other utility heads, Nelson, Cal Water's CEO with a professional history at PG&E, is on the CFEE's board.


Meanwhile, some ratepayers in Cal Water's small districts watching their fees climb ever skyward don't feel even remotely protected by the PUC. "This company is using us like a piggy bank," said Dennis Sarantapoulas at the Tomales meeting in May.

And so they conserve. But with a median age of 57, Dillon Beach has the highest concentration of senior citizens in an already graying Marin, many of whom live on fixed incomes and struggle with age-based disabilities. For some, scrimping on water doesn't just mean re-wearing dirty clothes—it means directly ignoring medical advice. At 64, Lea Christensen-Morris claims she doesn't clean her medical equipment daily like she's supposed to, and uses a syringe instead of her shower faucet to rinse a chronic wound. Theresa Byrne, who lives on an SSI check of under $1,200 a month, says she's skipped medication and dental care to pay her bills, and when two of her molars rotted, she simply had them pulled.

Another woman at the April Lucerne meeting who spoke about receiving multiple $1,000 bills addressed the room full of angry people and representatives from the regulatory agency bluntly. "I don't know why the [PUC] is here," she said, "expect to let we the people know that we don't matter at all."

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