Pinal County and a prominent developer, in their zeal to convert rural areas into money-making subdivisions, are scheming to squeeze a small Queen Creek-area water utility dry, a lawsuit claims.
Diversified Water Utilities Inc. accuses the Pinal County government of condemning Diversified's service area and holding a crucial well hostage for the sole purpose of benefiting Johnson Utilities LLC. Johnson Utilities is held by George Johnson, who owns Scottsdale-based Johnson International and was creator of the 2,000-acre Johnson Ranch housing community south of Queen Creek.
Three separate lawsuits claim Johnson and Pinal County officials have used Machiavellian tactics such as circumventing the law, undermining a loan effort, trading favors, and making contradictory accusations and character attacks to wage an all-out water war.
Johnson did not return repeated telephone calls and a fax seeking comment for this story.
But Pinal County Manager Stanley Griffis said the county is simply working toward its goal of fostering large, regional water systems that will attract quality homebuilders.
"The quality of the water, the sewer and the schools and the roads is very important to them, and if it's not there, they go someplace else," Griffis states in an Arizona Corporation Commission deposition.
However, some utility executives and ACC officials have accused the county of playing favorites.
ACC Chairman Marc Spitzer said during an April hearing that Johnson seemed to prefer using his "friends at the Board of Supervisors of Pinal County" or filing lawsuits rather than complying with the rules.
All parties agree that whoever controls the water stands to make millions, since the area has been experiencing explosive growth.
"Those wells are going to become very important to whoever owns them," Griffis told the Tribune last week.
The Pinal County Board of Supervisors and Griffis have supported Johnson Utilities in its efforts to expand into new areas, despite the company's history of Arizona Department of Environmental Quality violations. It received the single highest DEQ fine of $80,000 earlier this year. Meanwhile, Griffis has openly criticized Diversified, which has had no DEQ fines, and has made scathing remarks about its owner, Scott Gray.
The county board in 2001 approved the formation of a water improvement district that overlaps about two-thirds of Diversified's state-approved service area. The Skyline Domestic Water Improvement District, located southeast of Chandler Heights and Kenworthy roads, allows the county to control water rights in three disconnected islands in and around Diversified's area, which Gray said makes no sense unless it was done to put his company out of business.
"This district is targeted at our company," Gray told the Queen Creek Town Council during its June 18 meeting. "The purpose of this district is to hurt our community."
After the district was formed, the board awarded Johnson Utilities a 30-year contract to be its exclusive water provider. Griffis said Johnson was the only company that bid on the deal.
However, Diversified's suit claims the Skyline district was created illegally because the county did not gain approval from nearby Queen Creek and Mesa before its formation. State law specifies, "If the proposed boundaries of a noncontiguous district are located within six miles of an incorporated city or town, the district shall obtain consent of the governing body of the city or town prior to the formation or expansion of the district."
Pinal County chief civil deputy attorney Bill McLean said he isn't sure whether the county needed prior approval from Queen Creek, and he doubted that Mesa's OK was required. Still, the county has now asked the Queen Creek Town Council to approve the district's formation two years after the fact. The council will vote on the matter Wednesday, just 10 days before a scheduled ruling on Diversified's request for a summary judgment.
The Skyline story dates back to October 1999, when Johnson Utilities applied with the ACC to extend its service area to include thousands of additional, undeveloped acres southeast of Queen Creek. Johnson already had formed the utility company and was serving residents of his development, Johnson Ranch. Commission records show that other area utilities — including Diversified, H2O Inc. and Queen Creek Water Co. — subsequently applied for their own piece of the same area.
Among the four competitors, neighboring Johnson Utilities and Diversified were better positioned to acquire the service area because both bordered primarily on undeveloped land to the south and west. Negotiations took place between the four utilities to divvy up the land but were unsuccessful. However, Pinal County held one more meeting in January 2001 in hopes of reaching a settlement agreement. Diversified was not invited to the meeting.
In the settlement agreement filed with the ACC and dated Jan. 24, 2001, the other three companies divided the land and agreed to file a petition to form an improvement district that would "condemn, purchase or otherwise acquire the water utility facilities of Diversified Water Utilities Inc."
Griffis defended the county's decision to cut Diversified out of negotiations and form the Skyline district during an April 2001 ACC deposition, saying he had "received numerous complaints about this company for many, many years."
However, just five months earlier, Griffis had said in an ACC deposition that he "didn't even know (Diversified) existed," and that he wasn't aware of any complaints against the company. Griffis said last week the Skyline district was formed at the behest of homebuilders who did not want to work with Gray and his company. A petition was circulated in 2001, and 100 percent of the landowners and developers in the district's area signed it, he said.
"A lot of them don't think he's terribly honest," Griffis said. "Some don't think he provides quality water."
Pinal deputy attorney McLean called Gray an "obstructionist" who has held up the progress of development by denying service to developers.
However, Gray said the reason he has a bad reputation with developers is because he forces them to comply with all environmental laws regarding water delivery systems, to ensure residents will have safe water.
Gray was a witness in a 2002 Arizona Department of Real Estate investigation into illegal land-splitting in Pinal County, in which he claimed landowner Roger Barrientos and real estate agents Russell Brandt and James Bret Marchant had asked him to supply water to an area he believed was intended for illegal "wildcat" land splits. The investigation resulted in more than $30,000 in penalties for Barrientos.
Gray doesn't think it is a coincidence that the lead petition gatherer for the Skyline district was Barrientos, and that the district's original, proposed five-member board was to include both Brandt and Marchant. The Skyline proposal later was changed to place it under the Board of Supervisors' control.
Diversified also has filed a lawsuit against Brandt, the former owner of a well within Diversified's territory that Gray said was crucial to serving the growing needs of his customers. Diversified had offered Brandt $36,000 for the well, but Gray claims the sale was interrupted in late 2000 when Johnson offered to buy the well himself. Johnson also warned the Water Infrastructure Finance Authority of Arizona, which grants loans to water utilities, not to loan Diversified the money because of the pending formation of the Skyline district, Gray said. The warning came before the settlement agreement to form the district.
In December 2000, administrative law judge Marc Stern issued a temporary restraining order against Johnson, saying, "I think all parties should tend to their own business, not interfere in the business of others."
Diversified lawyer William Sullivan also sent a letter to Brandt stating that selling the well to Johnson would be illegal because Diversified is a licensed monopoly and the well is in Diversified's service area.
Gray said over the next two years, he continued attempts to buy the well and finally began condemnation proceedings. As licensed monopolies, water utilities have the right to declare eminent domain just as a government entity does.
However, in January, Brandt sold the well to the Skyline district for a mere $100, derailing Diversified's condemnation efforts because the well became government property.
Gray and his customers sent letters to county supervisors, pleading with them to sell Diversified the well because it was needed to provide water and fire protection to the community. The letters never were answered.
The former Brandt well — which is outside the Skyline district — is not being used, and there are at least two dozen unused wells within the district's borders.
However, McLean defended the purchase by saying the Brandt well was available and the price was right.
"That well was for sale," he said. "I'm not aware that any other well in the area was for sale."
McLean added that Gray should ask the Board of Supervisors if they would sell Diversified some of the well's water.
PINAL AND JOHNSON
George Johnson has a long relationship with Pinal County and has brought a great deal of revenue to the county through developments such as the sprawling Johnson Ranch community. Recently, Johnson spearheaded a fund-raising campaign to raise $200,000 for San Tan Mountain Regional Park located in the county.
Stan Griffis' son, Jeff Griffis, is a cable technician for Johnson Utilities and has worked there for about a year, Stan Griffis said. Still, he maintained that his actions have resulted from county policies and not personal opinions.
Johnson Utilities has had 25 DEQ violations and holds the record for the highest fine in Arizona history. It was hit with an $80,000 fine in April for building and operating a water system in the Queen Creek-area Sun Valley Farms neighborhood without proper approval.
Despite Johnson's history of DEQ compliance problems, Griffis defended the company and attacked Gray in an interview last week with the Tribune.
Of Gray, he said, "I think he's crooked. I think he's a liar."
Gray declined to respond to Griffis' criticism and said he hopes the evidence in his case speaks for itself.
In April, Spitzer, the ACC chairman, criticized Johnson for using his relationship with Pinal County to defy DEQ requirements.
"With respect to compliance with DEQ, the first reaction we get is, 'Well, maybe we can just have a Pinal County Board of Supervisors create a district and oust the commission's jurisdiction and resolve the issue that way,'" Spitzer said.
During the same meeting, Commissioner Bill Mundell also criticized Johnson for getting developers in his service area to pay the entire $80,000 DEQ fine for him.
"They didn't comply to begin with, and they don't have to pay the fine themselves, and they keep their CC&N (certificate of convenience and necessity — the legal right to serve an area)," Mundell said. "What is the downside for Johnson Utilities for noncompliance?"
However, Griffis said Johnson Utilities' fines were simply paperwork errors and did not affect the company's service.
"Every time I've talked to someone from Sun Valley Farms, they sing his praises high and wide," Griffis said.
SUN VALLEY FARMS
But some residents of Sun Valley Farms Unit V aren't singing — they're suing.
Property owners in the Queen Creek farm community currently have no access to affordable irrigation water for their fields, and some blame the problem on the sale of the neighborhood's water system and wells to Johnson Utilities.
Property owner Melanie Rettler and several neighbors have a pending lawsuit against their property owners association alleging that their wells were sold to Johnson illegally. A signed contract filed with the Pinal County recorder's office shows Johnson purchased five wells belonging to the Sun Valley Farms property owners association for $30,000 in 1998. Former association president Larry Quick signed the contract on May 18 of that year, and it was ratified by the board in December 1998.
On May 14, 1998 — four days before the contract was signed — Johnson-owned Atlas Southwest Recreation Co. issued a loan to Quick and his wife, Nedra Quick, for $125,000. However, both Quick and Johnson have stated in depositions that there was no relationship between the sale and the loan. Quick resigned as board president on May 17, 1998, which the lawsuit claims also should invalidate the contract, which Quick signed a day later.
Although the entire property owners association board eventually ratified the well contract in December 1998, in June of that year association board member Michael Crymble sent the ACC a letter asking it to intervene because "the board did not meet to review the contract before signing and the board was not shown other bids that were received."
Another matter of concern to Rettler, the Sun Valley Farms property owner who originally filed the suit, is that the value of the water system was not appraised before its sale. A subsequent appraisal of the water system in August 2001 valued it at $500,000.
However, Johnson stated in a December 2002 deposition that his company has invested up to $400,000 worth of improvements into the water system, and that it was in far worse shape than he had suspected.
"It was full of coliform," Johnson said in his deposition. "I shouldn't say everyone, but everyone that I had talked to used bottled water to drink out of, and it was a pretty bad system."
But the most immediate problem for Rettler and her neighbors is that the contract states Johnson Utilities would lease the wells to Sun Valley Farms if residents were ever unable to purchase Central Arizona Project irrigation water from New Magma Irrigation and Drainage District.
A recent water shortage has made CAP water unavailable to the community, and Rettler said property owners have been asking Johnson for months to lease the wells to them, but nothing has been done.
According to ACC spokeswoman Heather Murphy, leasing the wells would likely require permission from the commission, and Johnson hasn't requested such permission.
Still, after five years of fighting, property owners have not been able to get the wells back.
"It's so much harder to undo it than if you stop him from doing it in the first place," Rettler said of Johnson.