Customers who lived under troubled Johnson Utilities may get millions in repayments

Tens of thousands of customers of the former Johnson Utilities in the East Valley could get repaid about $10 million following years of service problems with the utility.

The embattled water and sewer company, which was sold earlier this year, agreed to the repayment in a court settlement. Customers are expected to get their payments through credits on their utility bills if a judge approves the settlement.

The suit alleged water and wastewater customers overpaid on utility bills, reviving a number of complaints that federal prosecutors made of Johnson in a bribery trial that ended with a deadlocked jury in July 2018.

In that case, prosecutors tried to convince a jury that company owner George Johnson bribed utility regulator Gary Pierce into granting rate hikes for the utility.

After the jury deadlocked in the criminal trial, the customers filed a new class-action complaint against the Johnson family companies, asserting they fraudulently transferred money out of the water and sewer utility.

Anyone who paid water and sewer bills to Johnson Utilities since Oct. 1, 2011, is a part of the settlement class.

Customers with the utility since that date are expected to get about $172, while those who were customers for less time are expected to get about $1.50 for every month they paid bills, based on plaintiffs' calculations of the proceeds, eligible customers and costs.

Johnson Utilities no longer runs the utility in the San Tan Valley area between Queen Creek and Florence. In January, EPCOR USA finalized the purchase of the utility from the owners who frustrated customers and state agencies with sewage spills, poor water quality, noxious odors, lawsuits and other problems for decades.

Johnson, a developer, founded the utility in 1997 to serve housing projects in the area.

EPCOR, a subsidiary of a Canadian company, first took over management of the company in 2018 when regulators at the Arizona Corporation Commission finally had enough of the service and its operational issues and forced Johnson to hand over management, but not ownership.

EPCOR has agreed to facilitate bill notifications and payments for customers, according to the court filing.

The company has about 30,000 water and 40,000 wastewater customers in the former Johnson service area, with some customers getting one and some getting both services from the company.

Johnson sold the company to EPCOR for about $110 million, with several caveats — like donating land for new utility facilities — that regulators wanted in the deal.

But Johnson also didn't immediately get the cash when the deal closed because the U.S. District Court in Arizona froze about $95 million of the sale proceeds to preserve the money for a potential payout in the pending class-action lawsuit from customers.

Through the settlement, Johnson and his family's various companies are expected to contribute $10 million to a customer fund, while lobbyist Jim Norton, who was accused in the criminal trial of facilitating bribery between Johnson and Pierce, the regulator, is expected to contribute $350,000 to the fund through his insurance company, according to the agreement filed Nov. 19 in U.S. District Court.

The settlement states that the deal is not an admission of wrongdoing or liability by any party in the case.

Pierce and his wife, who worked for Johnson while Pierce made decisions about the company's rates, are not involved in the settlement. They were left out because Pierce could claim legislative immunity as he was acting in his capacity as a utility regulator when he approved the rate increases, according to Jeffrey Goulder, the plaintiff's attorney at Stinson LLP.

Settlement won't cover all damages

The settlement is estimated to cover about half of the actual financial damages customers have endured, but the plaintiffs describe it as a fair deal considering the risk of losing such a case.

"There is substantial risk that despite the plaintiffs’ victories to date, plaintiffs would ultimately lose. In context, a 50% gross recovery is a good settlement, worthy of approval," the plaintiffs wrote in their request for the court to approve the deal.

The terms were reached after a mediation session in August.

"The parties engaged in an exchange of information regarding the facts underlying the claims and defenses, as well as voluminous exhibits and transcripts from the Pierce litigation," the plaintiffs said in the court filing. "Informed by the exchange of information, as well as by the testimony and evidence from the Pierce trial, and recognizing the complexity, delay, risk and expense of continuing with the litigation, Plaintiffs and the Defendants decided to pursue settlement negotiations before incurring the expense of completing additional fact and expert discovery."

Even though customers will get some money credited on their bills through the settlement, they are expected to pay for years for the mismanagement of the company because the owners directed most of the proceeds to themselves and their other companies rather than reinvesting in infrastructure. The utility needs millions in upgrades and expansions.

EPCOR now has a rate hike pending at the Arizona Corporation Commission that was originally filed by Johnson Utilities, and the parties in the case have some disputed issues.

"While EPCOR's acquisition of Johnson was arm's length and beneficial to the ratepayers, it came at a significant cost to ratepayers," the state's consumer advocate, known as the Residential Utility Consumer Office, wrote in a Monday filing in that case.

RUCO is challenging expenses EPCOR is claiming in that case, including fees paid to another Johnson family company, Roadrunner Transit, to haul sewer sludge away from treatment plants. The outcome of that case and what it will cost customers is unclear.

The parties in the case will file final arguments in December and a decision could come in early 2022.

Reach reporter Ryan Randazzo at ryan.randazzo@arizonarepublic.com or 602-444-4331. Follow him on Twitter @UtilityReporter.

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This article originally appeared on Arizona Republic: Johnson Utilities agrees to repay former customers $10 million