Residential Util. Consumer Office v. Ariz. Corp. Comm'n

• Decision Date: 08 August 2016
• Docket Number: No. CV 15–0281–PR,CV 15–0281–PR
• Citation: 240 Ariz. 108,377 P.3d 305
• Parties: Residential Utility Consumer Office, an Agency of the State of Arizona, Appellant. v. The Arizona Corporation Commission, Appellee, Arizona Water Company, Intervenor.
• Court: Arizona Supreme Court

240 Ariz. 108

377 P.3d 305

Residential Utility Consumer Office, an Agency of the State of Arizona, Appellant.

v.The Arizona Corporation Commission, Appellee

Arizona Water Company, Intervenor.

No. CV 15–0281–PR

Supreme Court of Arizona.

Filed August 8, 2016

Steven A. Hirsch (argued), Rodney W. Ott, Quarles & Brady, LLP, Phoenix, Attorneys for Intervenor Arizona Water Company.

Wesley C. Van Cleve (argued), Janet Wagner, Maureen A. Scott, Arizona Corporation Commission, Phoenix, Attorneys for Arizona Corporation Commission.

Scott S. Wakefield, Hienton & Curry, P.L.L.C., Phoenix; and Daniel Pozefsky (argued), Residential Utility Consumer Office, Phoenix, Attorneys for Residential Utility Consumer Office.

Christina Estes–Werther, General Counsel, League of Arizona Cities and Towns, Phoenix, Attorney for Amicus Curiae the League of Arizona Cities and Towns.

John J. Egbert, Kenneth C. Sundlof, Jr., Jennings, Strouss & Salmon, P.L.C., Attorneys for Amicus Curiae Southwest Gas Corporation.

Thomas A. Loquvam, Arizona Public Service Company, Phoenix; and Matthew E. Price, William K. Dreher, Jenner & Block LLP, Washington, D.C., Attorneys for Amicus Curiae Arizona Public Service Company.

Thomas H. Campbell, Michael T. Hallam, Lewis Roca Rothgerber Christie LLP, Phoenix, Attorneys for Amicus Curiae EPCOR Arizona, et al.

Timothy M. Hogan, Joy Herr–Cardillo, Arizona Center for Law in the Public Interest, Phoenix, Attorneys for Amicus Curiae Arizona Center for Law in the Public Interest.

Michael W. Patten, Timothy J. Sabo, Snell & Wilmer L.L.P., Phoenix; and Bradley S. Carroll, Tucson Electric Power Company, Tucson, Attorneys for Amicus Curiae Tucson Electric Power Company, et al.

Court S. Rich, Loren R. Ungar, Evan Bolick, Rose Law Group, PC, Scottsdale, Attorneys for Amicus Curiae Energy Freedom Coalition of America.

Timothy Berg, Theresa Dwyer–Federhar, Fennemore Craig, P.C., Phoenix, Attorneys for Amicus Curiae Water Utilities Association of Arizona

Meghan H. Grabel, Osborn Maledon, Phoenix, Attorneys for Amicus Curiae Arizona Investment Council.

Jennifer A. Cranston, Gallagher & Kennedy, P.A., Phoenix, Attorneys for Amicus Curiae Grand Canyon State Electric Cooperative Association Inc.

Timothy J. Sabo, Snell & Wilmer L.L.P., Phoenix, Attorney for Amicus Curiae Global Water Resources, Inc.

Julie Nepveu, AARP Foundation Litigation, Washington, DC; and Veronika Fabian, Choi & Fabian, PLC, Chandler, Attorneys for Amicus Curiae AARP.

JUSTICE BRUTINEL authored the opinion of the Court, in which CHIEF JUSTICE BALES, VICE CHIEF JUSTICE PELANDER, JUSTICE TIMMER, and JUDGE STARING^* joined.

JUSTICE BRUTINEL, opinion of the Court:

¶ 1 The Arizona Corporation Commission (“Commission”) determines the rates that a public service corporation (a “utility”) may charge. The Arizona Constitution requires the Commission to determine the fair value of a utility's in-state property when setting rates, which historically has occurred in a full rate case. During a full rate case, the Commission scrutinizes a utility's financial picture and holds many hearings—often extending more than a year. Here the Commission approved a rate increase mechanism known as the system improvements benefit (“SIB”), allowing it to adjust rates between full rate cases to help a utility recoup the cost of newly-completed infrastructure projects. We hold that the SIB mechanism complies with the Arizona Constitution's mandate that the Commission determine the fair value of a utility's property when setting rates.

I. BACKGROUND

A. Procedural history

¶ 2 Arizona Water Company (“AWC”) is a private, for-profit monopoly utility company that provides water service to several towns and rural communities. AWC is currently undertaking extensive capital improvements to its aging pipeline infrastructure. In 2011, AWC filed a rate case with the Commission for its eastern group water systems (“Eastern Group Case”). The next year AWC filed a similar rate case for its northern group water systems (“Northern Group Case”). In both cases AWC sought a rate increase and proposed a step-increase mechanism that would allow the Commission to adjust rates between full rate cases. AWC argued that recouping the costs of its infrastructure improvements through the traditional mechanism would require a near-continuous series of lengthy rate cases, raising costs and exposing consumers to “rate shock” from sudden, dramatic rate increases.

¶ 3 Attempting to settle the rate cases, AWC proposed the SIB mechanism, which allows AWC to petition for a rate increase between rate cases as new AWC infrastructure projects become active. See infra ¶¶ 7–9. Despite opposition from the Residential Utility Consumer Organization (“RUCO”), the Commission approved, with some modifications, the SIB mechanism.

¶ 4 RUCO appealed. The court of appeals consolidated the Eastern Group and Northern Group cases and vacated the Commission's approval of the SIB mechanism. Residential Util. Consumer Office v. Ariz. Corp. Comm'n , 238 Ariz. 8, 9–10 ¶ 1, 355 P.3d 610, 611–12 (App. 2015)

. Concerned the Commission would not consider all elements of a general rate case proceeding when analyzing an SIB surcharge petition, the court concluded that the SIB (1) did not fall within previously recognized exceptions to the fair value requirement, and (2) did not “provide[ ] the functional equivalent of a fair value determination.” Id. at 17–18 ¶¶ 47, 50, 355 P.3d at 619–20. As a result, the court held that “the SIB mechanism does not comply with the Arizona Constitution's mandate that the Commission determine a public service corporation's fair value when setting rates[.]” Id. at 10 ¶ 1, 355 P.3d at 612.

¶ 5 We granted review because the scope of the Corporation Commission's constitutional authority to adopt new ratemaking mechanisms is an issue of statewide importance. We have jurisdiction under article 6, section 5(3), of the Arizona Constitution

and A.R.S. § 12–120.24.

B. Ratemaking: full rate cases and the SIB mechanism

¶ 6 The Commission is constitutionally charged with setting “just and reasonable rates.” Ariz. Const. art. 15, § 3

. The 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. US West Commc'ns, Inc. v.

Ariz. Corp. Comm'n , 201 Ariz. 242, 245 ¶ 13, 34 P.3d 351, 354 (2001). The Commission determines rates using a proceeding called a “rate case,” now codified as Arizona Administrative Code (A.A.C.) R14–2–103 (“Rule 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. A Rule 103 rate case for a utility like AWC often takes more than a year to process.

¶ 7 The SIB mechanism allows the Commission to adjust rates in between rate cases, subject to various requirements and conditions. Under the SIB framework, AWC must file a full rate case at least once every five years. Within the rate case, the Commission must evaluate and pre-approve all SIB-eligible infrastructure replacement projects. During the interim years, AWC may file for only one SIB surcharge per year. Before a project may be incorporated in the SIB surcharge calculation, it must be completed and actively serving customers.

¶ 8 When AWC requests an SIB surcharge, it must submit current financial documents, including a balance sheet reflecting the value of its property—both older infrastructure and newly-constructed SIB projects that are in use. The tax multiplier, depreciation rate, and authorized rate of return used in calculating the SIB must be the same as those approved by the Commission in the most recent rate case. Before a surcharge may take effect, the Commission must provide 30–days public notice and receive and consider objections.

¶ 9 Every year the Commission must conduct a “true-up” calculation to reconcile revenue collected through the SIB surcharge with revenue authorized for the previous period. Any over-collection is refunded to customers. To compensate for efficiency-based savings resulting from the improved infrastructure, AWC must issue a credit to customers in the form of a refund equal to five percent of the SIB surcharge. Both the SIB surcharge and efficiency credit must be clearly displayed on customers' bills.

II. DISCUSSION

A. Standard of review

¶ 10 Whether the SIB mechanism complies with the Arizona Constitution is a question of law we review de novo. See US West , 201 Ariz. at 244 ¶ 7, 34 P.3d at 353

. We generally presume the Commission's actions are constitutional, and we uphold them unless they are arbitrary or an abuse of discretion. Ariz. Corp. Comm'n v. Ariz. Pub. Serv. Co. , 113 Ariz. 368, 371, 555 P.2d 326, 329 (1976) ; Simms v. Round Valley Light & Power Co. , 80 Ariz. 145, 154, 294 P.2d 378, 384 (1956).

B. The Arizona Constitution grants the Commission broad discretion within its unique decision-making sphere

¶ 11 “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.” Ethington v. Wright , 66 Ariz. 382, 389, 189 P.2d 209, 214 (1948)

; see Ariz. Const. art. 15 (“The Corporation Commission”), §§ 1–19. As relevant here, the powers and duties of the Commission are described in article 15, § 3 :

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[.]

Regarding the Commission performing these duties, article 15, § 14

, provides:

The

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