Scates v. Arizona Corp. Commission, 1

CourtCourt of Appeals of Arizona
Citation578 P.2d 612,118 Ariz. 531
Docket NumberNo. 1,CA-CIV,1
PartiesEdward G. SCATES and Rozella Castillo, Appellants, v. ARIZONA CORPORATION COMMISSION, Al Faron, Bud Tims, and Ernest Garfield, Members of the Arizona Corporation Commission, and Mountain States Telephone and Telegraph Company, Appellees. 3669.
Decision Date03 February 1978
Arizona Center for Law in the Public Interest by Kenneth Sundlof, Bruce Meyerson, Phoenix, for appellants

Bruce E. Babbitt, Atty. Gen., by Charles S. Pierson, Michael M. Grant, Asst. Attys. Gen., Phoenix, for appellees, Arizona Corp. Commission.

Fennemore, Craig, von Ammon & Udall, P. C., by C. Webb Crockett, George T. Cole, Phoenix, for appellees, Mountain States Tel. & Tel. Co.



This appeal concerns the validity of the Arizona Corporation Commission's approval of an application by Mountain States Telephone and Telegraph Company for an increase in rates. The increase affected charges for all installation, moving and changing of telephones within the State of Arizona. It amounted to an annual rise in revenue to Mountain States of approximately 4.9 million dollars, representing about two percent of its entire annual revenue in the state. The Commission approved the increase without any examination of the costs of the utility apart from the affected services, without any determination of the utility's investment, and without any inquiry into the effect of this substantial increase upon Mountain States' rate of return on that investment. We hold that the Commission's action was in violation of Arizona's constitutional provisions regarding rate making as consistently interpreted by the courts of this state, and we reverse the judgment of the trial court upholding the increase.

The application in question was filed by Mountain States on November 4, 1975, and public hearings were held on December 2 and 3, 1975. This application was filed approximately ten months after the Commission had conducted a full scale hearing to establish rates for all Mountain States' services. The hearing on this application was also held approximately two months prior to the scheduled date for another general rate hearing, set for February, 1976.

At the hearing on this application, several parties were permitted to intervene. They included businesses and the appellants herein, Edward Scates and Rozella Castillo who, as individual customers of Mountain States, would be affected by the requested increase. Throughout the hearing the Commission took the view that this increase should be considered solely on the basis of evidence reflecting the costs of these particular services. Thus, Mountain States put on evidence that the charges for these particular services, approved at the last rate hearing, covered only approximately 41 percent of the company's costs for those services, and that the increases sought would cover approximately 64 percent of costs. However, Mountain States' own attempt to submit summary data, based upon the prior submissions to the Commission showing the effect of the proposed increase on its rate of return was rejected by the Commission, and all references to the effect of this increase on the company's overall financial condition were stricken.

On December 12, 1975, the Commission approved the increase as requested by Mountain States, summarily concluding that it was just and reasonable, and ordered its immediate implementation. A motion for rehearing was filed by the appellants, and after its denial, the appellants filed this action in the Superior Court. The Superior Court, on summary judgment, upheld the Commission's order, and this appeal followed.

In Arizona, the Corporation Commission is the body charged with the responsibility for establishing utility rates which are "just and reasonable." Ariz.Const. art. 15, § 3; A.R.S. § 40-250. 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. See Simms v. Round Valley Light & Power Co., 80 Ariz. 145, 153, 294 P.2d 378, 383 (1956); see generally Phillips, The Economics of Regulation 178-302 (Rev. ed. 1969). To achieve this, the Commission must first determine the "fair value" of a utility's property and use this value as the utility's rate base. Arizona Corp. Comm'n v. Arizona Pub. Serv. Co., 113 Ariz. 368, 370, 555 P.2d 326, 328 (1976). The Commission then must determine what the rate of return should be, and then apply that figure to the rate base in order to establish just and reasonable tariffs. Id.

While the Corporation Commission has broad discretion in establishing rates, id., it is required by our Constitution to ascertain the value of a utility's property within the State in setting just and reasonable rates. Ariz.Const. art. 15, § 14.

An early case so interpreting our Constitution is State v. Tucson Gas, Electric Light & Power Co., 15 Ariz., 294, 138 P. 781 (1914), in which the Court stated that § 14 was written into our Constitution in order for the Corporation Commission to "act intelligently, justly and fairly between the public service corporations doing business in the state and the general public . . . ." Id. at 303, 138 P. at 784. The court went on to state the

" 'fair value of the property' of public service corporations is the recognized basis upon which rates and charges for services rendered should be made, and it is made the duty of the Commission to ascertain such value, not for legislative use, but for its own use, in arriving at just and reasonable rates and charges . . . ." Id. at 303, 138 P. at 785.

In a later case, while considering whether the Commission could reduce the rates without determining the fair value, our Supreme Court affirmed the principle that the value of a utility's property must be considered in setting just and reasonable rates:

"It is clear . . . that under our constitution as interpreted by this court, the commission is required to find the fair value of (the utility's) property and use such finding as a rate base for the purpose of calculating what are just and reasonable rates. . . . While our constitution does not establish a formula for arriving at fair value, it does require such value to be found and used as the base in fixing rates. The reasonableness and justness of the rates must be related to this finding of fair value." Simms v. Round Valley Light & Power Co., 80 Ariz. 145, 151, 294 P.2d 378, 382 (1956).

Thus, the rates established by the Commission should meet the overall operating costs of the utility and produce a reasonable rate of return. It is equally clear that the rates cannot be considered just and reasonable if they fail to produce a reasonable rate of return or if they produce revenue which exceeds a reasonable rate of return.

In this case, the Corporation Commission approved an increase of almost five million dollars on the rates charged for certain services with no concomitant reduction in the charges for other services. The resulting net increase in revenue to the utility was accomplished without any inquiry whatsoever into whether the increased revenues resulted in a rate of return greater or lesser than that established in the rate hearing some ten months before. All evidence bearing on the subject was expressly rejected. Although all parties before the Commission generally agreed that it would be improper to implement an increase of all rates without such inquiry, we see no justification for permitting the same increase in revenues to be accomplished by raising only some of the tariffs. As special counsel for the Commission's staff pointed out during the course of this hearing, such a piecemeal approach is fraught with potential abuse. Such a practice must inevitably serve both as an incentive for utilities to seek rate increases each time costs in a particular area rise, and as a disincentive for achieving countervailing economies in the same or other areas of their operations.

In support of its position, Mountain States points to two situations in which some courts have permitted rate increases to be effected without a simultaneous determination of their effect on the company's rate of return. These are interim rate increases and increases caused by the use of automatic adjustment clauses. On close analysis, these devices do not provide any support for the Commission's action in this case.

An interim rate is a rate permitted to be charged by the utility for products or services pending the establishment of a permanent rate.

"Interim rates are employed to fill a hiatus which occurs between the time that existing rates being charged by a public service corporation have been invalidated by a court or have been determined by the appropriate regulatory body to be confiscatory of the corporation's property, and the time that permanent rates which produce a fair return are established." 71-17 Op. Att'y Gen. (1971).

In Arizona, our Supreme Court has allowed the Superior Court to authorize such a temporary increase pending a final determination by the Commission of permanent rates. Arizona Corp. Comm'n v. Mountain States Telephone & Telegraph Co., 71 Ariz. 404, 228 P.2d 749 (1951). The Attorney General has concluded, based upon this authority, that the Commission itself may establish such interim rates, but only with appropriate safeguards to insure that rates will not become permanent until there is adequate inquiry into whether they are just and reasonable. The opinion goes on to point out that such a device should be used only in limited situations where an emergency exists, where a bond is posted guaranteeing a refund to the utility's subscribers if any payments are made in excess of the rates eventually...

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