Freeport Minerals Corp. v. Ariz. Corp. Comm'n, 2 CA-CC 2017-0001

• Decision Date: 05 April 2018
• Docket Number: No. 2 CA-CC 2017-0001,2 CA-CC 2017-0001
• Citation: 419 P.3d 942
• Parties: FREEPORT MINERALS CORPORATION, Appellant, v. ARIZONA CORPORATION COMMISSION, Appellee, Tucson Electric Power Company, Intervenor.
• Court: Arizona Court of Appeals

419 P.3d 942

FREEPORT MINERALS CORPORATION, Appellant,

v. ARIZONA CORPORATION COMMISSION, Appellee,Tucson Electric Power Company, Intervenor.

No. 2 CA-CC 2017-0001

Court of Appeals of Arizona, Division 2.

Filed April 5, 2018

Fennemore Craig, P.C., Phoenix, By Timothy Berg and Patrick J. Black, Counsel for Appellant

Arizona Corporation Commission, Phoenix, By Andy M. Kvesic, Robin R. Mitchell, Wesley C. Van Cleve, and Maureen A. Scott, Counsel for Appellee

Snell & Wilmer L.L.P., Phoenix, By Michael W. Patten and Timothy J. Sabo and Tucson Electric Power Company, Tucson, By Bradley S. Carroll and Megan J. DeCorse, Counsel for Intervenor

Judge Eppich authored the opinion of the Court, in which Presiding Judge Vásquez and Judge Brearcliffe concurred.

EPPICH, Judge:

¶ 1 This is an appeal from the Arizona Corporation Commission's (the Commission) Decision No. 75975 (Feb. 24, 2017) (the Decision), which established electricity rates for the customers of Tucson Electric Power (TEP). Appellant Freeport Minerals Corporation challenges the Decision's allocation of revenue between rate classes, arguing that it violates constitutional and statutory mandates for just, reasonable, and nondiscriminatory rates, and was not supported by substantial evidence. For the following reasons, we affirm.

Factual and Procedural Background

¶ 2 TEP, a wholly owned subsidiary of UNS Energy Corporation, is an Arizona public service corporation¹ authorized to provide electricity services. On September 4, 2015, TEP filed with the Commission a notice of intent to file a rate case application, seeking, among other things, a new rate schedule to allow it to "recover its full cost of service, including a reasonable opportunity to earn appropriate return on invested capital." Numerous entities, including government bodies, advocacy groups, and corporations, including Freeport, sought and were granted permission to intervene.

¶ 3 TEP initially requested an increase in rates that would result in a non-fuel revenue increase of approximately $109.5 million over adjusted test year² revenues. However, following settlement discussions, many of the parties to the proceeding, including TEP and Freeport, entered into an agreement dated August 15, 2016 ("Settlement Agreement") which provided for a non-fuel revenue increase of $81.5 million, resulting in a total rate of return for TEP of 7.19 percent. The Settlement Agreement, which ultimately was approved by the Commission, did not address all issues, leaving open the revenue allocation among the rate classes.

¶ 4 On January 24, 2017, after taking several days of testimony and receiving a number of briefs on the issue of revenue allocation, the Commission issued a proposed order, to which Freeport and a number of other parties filed exceptions. On February 8, 2017, the Commission held an open meeting to discuss the proposed order and the exceptions filed to it, and on February 24, 2017, the Commission issued the Decision, which adopted a nearly identical revenue allocation scheme as the one set forth in the proposed order. Freeport timely sought review, challenging only the revenue allocation portion of the Decision. We have jurisdiction pursuant to A.R.S. § 40-254.01.

Discussion

¶ 5 "The Arizona Corporation Commission, unlike such bodies in most states, is not a creature of the legislature, but is a constitutional body which owes its existence to provisions in the organic law of this state." Residential Util. Consumer Office v. Ariz. Corp. Comm'n , 240 Ariz. 108, ¶ 11, 377 P.3d 305 (2016), quoting Ethington v. Wright , 66 Ariz. 382, 389, 189 P.2d 209 (1948) ; see Ariz. Const. art. XV, §§ 1 - 19. The Arizona Constitution grants the Commission "full power to ... prescribe just and reasonable classifications to be used and just and reasonable rates and charges to be made and collected, by public service corporations within the state for service rendered therein." Ariz. Const. art. XV, § 3. As such:

[I]n the matter of prescribing classifications, rates, and charges of public service corporations and in making rules, regulations, and orders concerning such classifications, rates, and charges by which public service corporations are to be governed, the Corporation Commission ... is supreme and such exclusive field may not be invaded by the courts, the legislature, or the executive.

Residential Util. Consumer Office , 240 Ariz. 108, ¶ 12, 377 P.3d 305, quoting Ethington , 66 Ariz. at 392, 189 P.2d 209 (first alteration in original).

¶ 6 Notwithstanding what has been described as the Commission's "plenary" authority to prescribe rates, the Arizona Constitution's requirement of "just and reasonable" rates imposes an outer limit for the Commission's discretion. Residential Util. Consumer Office v. Ariz. Corp. Comm'n , 199 Ariz. 588, ¶ 11, 20 P.3d 1169 (App. 2001). Because ratemaking is a function specifically entrusted to the Commission by the Arizona Constitution, a stringent standard of review applies: "We generally presume the Commission's actions are constitutional, and we uphold them unless they are arbitrary or an abuse of discretion." Residential Util. Consumer Office , 240 Ariz. 108, ¶ 10, 377 P.3d 305. Freeport must therefore "demonstrate, clearly and convincingly, that the Commission's decision is arbitrary, unlawful or unsupported by substantial evidence." Litchfield Park Serv. Co. v. Ariz. Corp. Comm'n , 178 Ariz. 431, 434, 874 P.2d 988, 991 (App. 1994) ; accord A.R.S. § 40-254.01(A), (E).

Utilities Regulation

¶ 7 "The general theory of utility regulation is that the total revenue, including income from rates and charges, should be sufficient to meet a utility's operating costs and to give the utility and its stockholders a reasonable rate of return on the utility's investment." Scates v. Ariz. Corp. Comm'n , 118 Ariz. 531, 533-34, 578 P.2d 612, 614-15 (App. 1978). The Commission determines rates using a proceeding called a "rate case." See Ariz. Admin. Code R14-2-103. "Rule 103 or ‘full’ rate case proceedings are complex. They typically attract many intervenors, require voluminous and detailed filings, and involve multiple, lengthy hearings." Residential Util. Consumer Office , 240 Ariz. 108, ¶ 6, 377 P.3d 305. In a rate case, "[t]he Commission sets rates by finding the ‘fair value’ of a utility's in-state property, Ariz. Const. art. 15, § 14, and then using that value as the ‘rate base’ in the following rate-of-return formula: (Rate Base x Rate of Return) + Expenses = Revenue Requirement." Residential Util. Consumer Office , 240 Ariz. 108, ¶ 6, 377 P.3d 305. In determining a utility's rate base, operating income, and rate of return, the Commission uses data from the test year. Ariz. Admin. Code R14-2-103. No party has challenged the Commission's determination of the revenue requirement.

¶ 8 Having determined TEP's revenue requirement, the Commission next allocated said revenue to the various customer classes.

As a starting point for allocating the revenue requirement to each class, the utility's costs were first allocated to each class through a "Class Cost of Service Study" (CCOSS).³ See id. As the Commission's Utilities Division Staff's (Staff) rate design witness testified, the CCOSS is "intended to assist the Commission to allocate revenue requirements among customer classes."

¶ 9 Preparing a CCOSS is far from a straightforward endeavor. As Staff explained, preparing a CCOSS "involves judgment and decisions on the part of the practitioner in assigning costs to the various customer classes." TEP's CCOSS witness made the same point:

Fundamentally, performing cost of service studies is comprised of applying experience and science.... The art of applying experience involves the subjective application of certain methods, in conjunction with consideration of policy objectives, regulatory case law, emerging issues, and other factors, within the framework of the regulatory process.... The art of the cost study is having an understanding of how the unique characteristics of the utility should be combined with the various scientific methodologies.

Freeport has not challenged the CCOSS in this case.

¶ 10 Once the CCOSS is complete, it may be used to measure the degree to which each class rate schedule produces more or less revenue than would be produced if revenue were allocated solely using the CCOSS, that is, the degree of "subsidy" paid by (or received by) each customer class. There are various ways this can be measured, such as computing the relative rate of return (RoR) produced by each class. However, as Staff explained, "regulators have historically used" the CCOSS "as a guideline to allocate revenue among classes" but "[r]egulators typically also consider economic, social, historical and other factors that may affect customers when determining revenue allocation" and that such factors "often result in rates that deviate from strict cost of service."

The 2015 Rate Case

¶ 11 Here, the CCOSS showed that while TEP's total RoR for the test year was 6.57 percent, the RoR on the rate bases for individual classes differed significantly, with the Residential Class at 0.94 percent, the General Service Class at 21.33 percent, the Large General Service Class at 3.59 percent, the Lighting Class at 2.96 percent, and the Large Power Service Class at 10.94 percent. This difference in RoR produced the "significant [pre-Decision] inter-class subsidies," acknowledged by the Commission, with classes above the total rate of return of 6.57 percent subsidizing classes with a rate of return below 6.57 percent.

¶ 12 Staff, TEP, Freeport, and the Commission all agreed that rates should generally be based on costs derived from the CCOSS. Further, all agreed with the goal of reducing the pre-existing interclass subsidies in the instant rate case. To that end, Staff, TEP, and Freeport each submitted allocation proposals for the Commission's consideration. While all three proposals reduced the size of the interclass subsidies, albeit by varying...