980311.docx

MEMORANDUM
Date:March 11, 1998
To:Scott Woodbury
Terri Carlock
Stephanie Miller
Dave Schunke
Kent Schneider
Working Files
From:Bob Smith
Subject: Hayden Pines Cases HPN-W-97-1 and HPN-W-97-2
Case No. HPN-W-97-2 was opened on April 11, 1997 upon Staff’s recommendation and decision memorandum dated March 21, 1997.  Staff’s decision memorandum was accompanied by a preliminary report identifying certain irregularities in the activities of the Company that Staff believed should be investigated in a formal proceeding. Staff submitted a production request seeking information from the Company on April 11, 1997 coincident with the Commissions Order No. 26886 opening the case.  The Company responded to this production request on May 7 and May 13, 1997.
On June 13, 1997, the Company filed an application (HPN-W-97-2) to surrender its Certificate of Public Convenience and Necessity. Attached to the application were: a Certificate of Incorporation of Allied Water, Inc. dated May 9, 1997; Articles of Incorporation of Allied Water Inc. dated May 7, 1997, and; a Quit Claim Deed and Deed of Trust both dated May 19, 1997 evidencing sale and transfer of Hayden Pines Water Company’s water mains, service lines and meters to Allied Water for the sum of $2,216,703.54.
Staff Auditor Kent Schneider and I visited the now Allied Water offices the week of July 7, 1997 to pursue the investigation that initiated the 97-1 case and to begin Staff’s investigation into the sale case 97-2. Much of the information necessary to pursue the 97-1 case had been removed from the office and moved to a storage location. Retrieval of the information from storage was extremely slow. Mr. Bud Ford was the only individual with access to the stored information. He blamed the slow response on having to dig through numerous boxes looking for the information we needed. Likewise, information needed to review the sale Case No. 97-2 was in the remote location.
On July 29, 1997 the Staff issued a production request in the sale Case No. 97-2 for information that was not provided during the field trip the week of July 7, 1997. The responses were unresponsive and inadequate. Staff repeated its request in a production request dated November 21, 1997 seeking specific information. The responses provided were again unresponsive and inadequate.
Chief among the Staff’s request was detail regarding the calculation made to establish the sale price of $2,216,703.54. Initially Staff was told personally in July that the calculation had been made by Hayden Pines tax accountant based upon income tax valuation and that the calculation would be provided. It was not. In response to the original production request, the Company responded that “The material supporting this price has been mislaid and the Company is searching for it. A supplemental response by the Company provided a copy of a simple accounting entry to establish a single plant account on the books of Allied Water in the amount of $2,141,067.51 and two accounts receivable aggregating the remainder. And yet a later response indicated that the question could not be answered until Mr. Ford returned from Florida.  In February, 1998 Mr. Ford provided additional responses but was silent on this question.
The answers to our production requests have been unresponsive, inadequate and evasive. Staff cannot pursue its initial investigation in the 97-1 case without somehow finding a link from Hayden Pines Water Company books to the books of Allied Water.
The contract between the two companies provides for the sale of only the pipe in the ground at an exorbitant price in comparison to the valuation of Hayden Pines books at the time of sale. No wells, reservoirs, real estate, vehicles or equipment are transferred in the sales contract although the buyer assumes all loss risk for each and all of them. Leases in existence at the time of sale are assumed by the buyer. These leases are one of several issues that initiated the 97-1 case.
In summary, Staff cannot pursue its investigation in either of these cases without cooperation from the companies. I believe the formation of Allied Water and the Sale of assets are a sham. It is obvious the transaction is a direct result of the Order initiating an official investigation and an attempt to evade the Commissions regulatory authority. The exorbitant sale price together with the affiliated Company leases and other terms of the sale contract are a transparent attempt to extract unreasonable cash flow from the continuing operation by Mr. Ford while avoiding oversight by the Commission.
The Commission must take some official action to force these cases to resolution by motion to show cause, subpoena, depositions, hearing or some other action. Punitive action if necessary.
Any advice? What shall we do?