Johnson Utilities L. L.C. v. Ariz. Corp.

• Decision Date: 07 March 2019
• Docket Number: No. 1 CA-SA 18-0197,1 CA-SA 18-0197
• Citation: 438 P.3d 656,246 Ariz. 287
• Parties: JOHNSON UTILITIES L.L.C., an Arizona limited liability company, Petitioner, v. ARIZONA CORPORATION COMMISSION; Tom Forese, Bob Burns, Andy Tobin, Boyd W. Dunn, and Justin Olson, in their official capacities as members of the Arizona Corporation Commission, Respondents.
• Court: Arizona Court of Appeals

246 Ariz. 287

438 P.3d 656

JOHNSON UTILITIES L.L.C., an Arizona limited liability company, Petitioner,

v.ARIZONA CORPORATION COMMISSION; Tom Forese, Bob Burns, Andy Tobin, Boyd W. Dunn, and Justin Olson, in their official capacities as members of the Arizona Corporation Commission, Respondents.

No. 1 CA-SA 18-0197

Court of Appeals of Arizona, Division 1.

FILED March 7, 2019

Fredenberg Beams, LLC, Phoenix, By Daniel E. Fredenberg, Christian CM Beams, Crockett Law Group, PLLC, Phoenix, By Jeffrey W. Crocket, Co-Counsel for Petitioner

Arizona Corporation Commission, Phoenix, By Andrew M. Kvesic, Maureen A. Scott, P. Robyn Poole, Counsel for Respondents

Judge Peter B. Swann delivered the opinion of the court, in which Presiding Judge Kenton D. Jones and Judge David D. Weinzweig joined.

SWANN, Judge:

¶1 Johnson Utilities L.L.C. seeks special action relief from the Arizona Corporation Commission’s order appointing a third-party interim manager to conduct Johnson Utilities' operations. It argues that the Commission lacks authority to interfere with the internal management of a public service corporation, and therefore that the Commission lacked jurisdiction to issue the interim management order.

¶2 We accept jurisdiction but deny relief. Both the Commission’s broad ratemaking power under Ariz. Const. art. 15, § 3, and its statutorily delegated power to determine a "just" remedy for "inadequate" public-utility equipment, facilities, or services under A.R.S. § 40-321(A), provide the Commission with sufficient authority to impose an interim manager under appropriate circumstances. It is for the superior court, however, to decide whether the circumstances in this case supported the Commission’s authority to issue the interim management order.

FACTS AND PROCEDURAL HISTORY

¶3 Johnson Utilities is a public service corporation that provides water and wastewater services in Pinal and Maricopa Counties. In March 2018, the Commission held a 14-day hearing regarding the adequacy of Johnson Utilities' operations and issued a decision finding several significant concerns with its billing practices and financial management, as well as with the condition of its equipment and facilities. Finding it "just and reasonable and in the public interest," the Commission appointed EPCOR Water Arizona (another water utility provider in the area) to "conduct the business and affairs" of Johnson Utilities as an interim manager. The Commission further ordered that Johnson Utilities may apply for termination of the interim management appointment with EPCOR "upon a showing that [Johnson Utilities'] services ... are in all respects just, reasonable, safe, proper, adequate, and sufficient and that terminating the [appointment] would not present an unreasonable risk of service."

¶4 Johnson Utilities filed several actions protesting the Commission’s order, including three unsuccessful requests to enjoin its enforcement. Johnson Utilities also filed a "Statutory Special Action" with the Arizona Supreme Court, and that court issued an order declining jurisdiction "without prejudice to refile in the court of appeals." Johnson Utilities now petitions this court for special action review.

¶5 We issued a brief order accepting jurisdiction and denying relief on September 21, 2018, noting that an opinion would follow. This is that opinion.

JURISDICTION

¶6 We accepted special action jurisdiction because Johnson Utilities' petition presents a purely legal issue of immediate statewide importance. See Ariz. Corp. Comm'n v. State ex rel. Woods , 171 Ariz. 286, 287–88, 830 P.2d 807, 808–09 (1992).¹

DISCUSSION

¶7 Johnson Utilities contends that only the superior court, and not the Commission, has authority to order that a third-party interim manager operate a public service corporation. The ultimate question of whether the Commission’s order was justified on the merits must be decided on a case-by-case basis. We will not engage in such a fact-intensive inquiry here. Instead, we address only the narrow legal issue presented by this special action—whether an order for an interim manager falls within the jurisdiction of the Commission.

¶8 "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." Miller v. Ariz. Corp. Comm'n , 227 Ariz. 21, 24, ¶ 12, 251 P.3d 400, 403 (App. 2011) (citation omitted); see also State v. Tucson Gas, Elec. Light & Power Co. , 15 Ariz. 294, 302, 306, 138 P. 781 (1914) (referring to the Commission as a fourth branch of state government). The Commission derives its power to govern public service corporations from two sources: Article 15 of the Arizona Constitution and Title 40 of the Arizona Revised Statutes. See Phelps Dodge Corp. v. Ariz. Elec. Power Coop. , 207 Ariz. 95, 111, ¶ 54, 83 P.3d 573, 579 (App. 2004). The Arizona Constitution grants the Commission authority to set "just and reasonable" rates subject to the requirements of Ariz. Const. art. 15, § 12, and to enact any rules, regulations, or orders that are "reasonably necessary steps in ratemaking." Ariz. Const. art. 15, § 3 ; Woods , 171 Ariz. at 294, 830 P.2d at 815. All other powers are left to the Legislature, which may delegate its own power to the Commission by statute, thus enlarging the Commission’s powers and duties. Ariz. Const. art. 15, § 6 ; Phelps Dodge , 207 Ariz. at 111, ¶ 54, 83 P.3d at 579. The Commission is required to exercise its power, constitutional or statutory, in the public’s interest. Woods , 171 Ariz. at 291–92, 830 P.2d at 812–13.

I. THE ARIZONA CONSTITUTION PROVIDES THE COMMISSION AUTHORITY TO IMPOSE AN INTERIM MANAGER.

¶9 Article 15, Section 3 of the Arizona Constitution includes, in pertinent part, the following four clauses:

The corporation commission shall have full power to, and shall , 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, and

make reasonable rules, regulations, and orders, by which such corporations shall be governed in the transaction of business within the state, and

may prescribe the forms of contracts and the systems of keeping accounts to be used by such corporations in transacting such business, and

make and enforce reasonable rules, regulations, and orders for the convenience, comfort, and safety, and the preservation of the health, of the employees and patrons of such corporations....

(Line-breaks and emphasis added.)

¶10 The supreme court originally interpreted Section 3 to establish a broad grant of power to the Commission. See Tucson Gas , 15 Ariz. at 302, 138 P. 781 ("It was clearly the policy of the framers of the Constitution, and the people in adopting it, to take the powers of supervision, regulation, and control of public utilities from the legislative branch and vest them in the Corporation Commission ...."). The court then changed course and interpreted the provision narrowly—concluding that only the first clause contained an express grant of power—and held the Commission’s constitutional power was therefore limited to setting reasonable classifications, rates, and charges. See Corp. Comm'n v. Pac. Greyhound Lines , 54 Ariz. 159, 172–73, 94 P.2d 443 (1939) (noting that reading Section 3 too expansively would result in other constitutional provisions becoming "so much Dead Sea fruit turning to ashes upon the lips" (quoting Ariz. E. R.R. v. State , 19 Ariz. 409, 411–12, 171 P. 906 (1918) )). Years later, the court interpreted Article 15 and Pacific Greyhound to give the Commission the constitutional authority to enact "rules, regulations, and orders concerning such classifications, rates, and charges." Ethington v. Wright , 66 Ariz. 382, 391–92, 189 P.2d 209 (1948).

¶11 More recent decisions afford deference to the Commission’s determination of whether a rule, regulation, or order is "reasonably necessary for effective ratemaking," interpreting "necessity in light of the framers' intent of the Commission’s function ... to protect consumers from abuse and overreaching by public service corporations." Woods , 171 Ariz. at 294–95, 830 P.2d at 815 ; see Miller , 227 Ariz. at 28–29, ¶¶ 27, 31, 251 P.3d at 407–08 (deferring to the Commission’s determination of whether a "sufficient nexus" exists between a rule and the Commission’s ratemaking authority). On the other hand, to "protect regulated corporations from over-reaching and micro-management of their internal affairs by the Commission," Miller , 227 Ariz. at 27, ¶ 23, 251 P.3d at 406, courts also must consider whether a proposed rule, regulation, or order "so interfere[s] with management functions that [it] constitute[s] an attempt to control the corporation rather than an attempt to control rates," Woods , 171 Ariz. at 297, 830 P.2d at 818.²

¶12 Although no Arizona court has explicitly reviewed the legality of imposing a third-party interim manager to run a public service corporation, courts have reviewed other measures that interfered with management.³

We look to these decisions—including particularly Woods , Phelps Dodge , and Miller —and to the text of the constitution for guidance.

¶13 In Woods , the supreme court held that it was within the Commission’s ratemaking power to require Commission approval for "all transactions between a public service corporation and its affiliates that may significantly affect economic stability and thus impact the rates charged by a public service corporation." 171 Ariz. at 295, 830 P.2d at 816. The court addressed arguments that the proposed rules would impermissibly interfere with a corporation’s management, but held that monitoring transactions between public service corporations and their affiliates had become necessary to ensure the economic viability of the utility companies. Id. at 295–97, 830 P.2d at 816–18. The court reasoned that a...