Sun City Home Owners Ass'n v. Ariz. Corp. Comm'n

Citation460 P.3d 283,248 Ariz. 291
Decision Date23 January 2020
Docket NumberNo. 1 CA-CC 17-0002,1 CA-CC 17-0002
Parties SUN CITY HOME OWNERS ASSOCIATION, Appellant, v. ARIZONA CORPORATION COMMISSION, Appellee, EPCOR Water Arizona, Inc. and Verrado Community Association Inc., Intervenors.
CourtCourt of Appeals of Arizona

JONES, Judge:

¶1 The Sun City Home Owners Association (SCHOA) appeals Decision 76162 (the Decision) of the Arizona Corporation Commission (the Commission), which consolidated five separate wastewater districts operated by EPCOR Water Arizona, Inc. (EPCOR) and imposed an identical wastewater rate throughout the newly consolidated district. SCHOA, an intervenor in the rate case, argues the consolidated rate is unjust and discriminatory, and therefore violates the Arizona Constitution, and is unsupported by the evidence. For the following reasons, we affirm.

FACTS AND PROCEDURAL HISTORY

¶2 EPCOR provides wastewater service to the Agua Fria, Anthem, Mohave, Sun City, and Sun City West wastewater districts. All except Mohave are located within the Phoenix metropolitan area; most are geographically distinct and served by separate wastewater treatment facilities. EPCOR’s corporate service functions, including accounting and customer service, are centralized.

¶3 Historically, the Commission set individual rates for each district, and monthly wastewater rates have varied substantially, ranging from $22.11 per month in Sun City, to $71.16 per month in Agua Fria. The rates varied even between districts that use the same wastewater treatment facility; before consolidation, Sun City West customers paid $32.46 per month, while Agua Fria customers, some of whom were serviced from the same facilities, paid $71.16 per month. Ultimately, the customers paying higher rates in the Agua Fria, Anthem, and Mohave districts urged the Commission to impose a consolidated rate. See U.S. Envtl. Protection Agency & Nat’l Ass’n of Regulatory Utils. Comm’rs, EPA 816-R-99-009, Consolidated Water Rates: Issues and Practices in Single-Tariff Pricing vii (Sep. 1999), https://nepis.epa.gov/Exe/ZyPDF.cgi/200027XN.PDF?Dockey=200027XN.PDF (defining a consolidated rate as "the use of a unified rate structure for multiple [waste]water ... utility systems that are owned and operated by a single utility, but that may or may not be contiguous or physically interconnected").

¶4 In 2014, after several attempts to address the consolidation request, the Commission ordered EPCOR to file a rate application that included revenue requirements and cost-of-service studies for three different scenarios: (1) full consolidation of the five districts into a single "Arizona Wastewater" district; (2) the "stand-alone scenario," whereby the five districts would remain distinct; and (3) full deconsolidation, which would require separation into seven districts based upon the facility serving each area.

¶5 EPCOR filed the rate applications in April 2016. In February 2017, the Commission held a six-day evidentiary hearing on the issue of consolidation.

¶6 EPCOR, the Commission Staff, and the Agua Fria, Anthem, and Mohave districts supported full consolidation. The proponents argued consolidation would provide "predictable uniform rate structures, reduc[e] regulatory expenses, and increas[e] efficiencies." They presented evidence that many of EPCOR’s operational and administrative activities are centralized, and that EPCOR obtains capital and debt financing centrally. EPCOR estimated consolidation would save the utility almost $1 million over a five-year period, with most of the savings coming from the reduced number of rate cases filed with the Commission. EPCOR also specifically noted that most of its wastewater pipes in the Sun City district were nearing the end of their useful life and would require approximately $57.4 million in improvements over the next ten years.

¶7 SCHOA and the Residential Utility Consumer Office (RUCO)2 intervened and opposed full consolidation in favor of the stand-alone scenario, arguing the consolidated rate would not reflect the actual cost to provide services to Sun City residents. The opponents argued EPCOR relied too heavily upon speculative projections of Sun City’s infrastructure costs and noted EPCOR had also projected spending more than $100 million in the other four wastewater districts over the same time period. None of the parties supported full deconsolidation.

¶8 In a 4-1 decision, the Commission approved full consolidation with a five-year phase-in that would affect consumer rates as follows:

                         Full Consolidation (5-Year Phase-In)
                  District          Current          Year 1     Year 2     Year 3     Year 4     Year 5
                                    Monthly Bill
                  Agua Fria         $71.16           $62.44     $56.50     $50.53     $44.55     $38.59
                  Anthem            $60.33           $59.15     $55.39     $51.63     $47.89     $38.59
                  Mohave            $71.07           $57.28     $52.36     $47.44     $42.52     $38.59
                  Sun City          $22.11           $27.13     $29.74     $32.36     $34.98     $38.59
                  Sun City West     $32.46           $37.59     $37.59     $37.59     $37.59     $38.59
                

SCHOA unsuccessfully applied for a rehearing, see A.R.S. § 40–253(A)3 ("If the commission does not grant the application [for rehearing] within twenty days, it is deemed denied."), and SCHOA timely appealed. We have jurisdiction pursuant to A.R.S. § 40-254.01(A). On appeal, Verrado Community Association, Inc. and EPCOR were both permitted to intervene in support of the Commission’s decision.

DISCUSSION
I. Constitutionality of the Consolidated Rate

¶9 Arizona’s longstanding public policy regarding monopolistic public service corporations, including wastewater companies, "is one of regulated monopoly over free-wheeling competition." James P. Paul Water Co. v. Ariz. Corp. Comm’n , 137 Ariz. 426, 429, 671 P.2d 404, 407 (1983) (citing Ariz. Corp. Comm’n v. People’s Freight Line, Inc. , 41 Ariz. 158, 165, 16 P.2d 420 (1932), and Ariz. Corp. Comm’n v. Tucson Ins. & Bonding Agency , 3 Ariz. App. 458, 463, 415 P.2d 472 (1966) ). 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. 15, § 3. " [J]ust and reasonable rates’ are those that are fair to both consumers and public service corporations." Phelps Dodge Corp. v. Ariz. Elec. Power Coop., Inc. , 207 Ariz. 95, 106, ¶ 30, 83 P.3d 573, 584 (App. 2004) (citing Ariz. Cmty. Action Ass’n v. Ariz. Corp. Comm’n , 123 Ariz. 228, 231, 599 P.2d 184, 186 (1979) ).

¶10 "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) (citing Simms v. Round Valley Light & Power Co. , 80 Ariz. 145, 153, 294 P.2d 378 (1956) ). When setting rates, the Commission first determines the revenue requirement by "finding the ‘fair value’ of a utility’s in-state property, 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." RUCO v. Ariz. Corp. Comm’n , 240 Ariz. 108, 110, ¶ 6, 377 P.3d 305, 307 (2016) (citing Ariz. Const. art. 15, § 14, and US West Commc’ns, Inc. v. Ariz. Corp. Comm’n , 201 Ariz. 242, 245, ¶ 13, 34 P.3d 351, 354 (2001) ).

¶11 Once the Commission has determined the revenue requirement, it must then apportion the revenue requirement among the various consumer classes. See Freeport Minerals Corp. v. Ariz. Corp. Comm’n , 244 Ariz. 409, 411, ¶ 8, 419 P.3d 942, 944 (App. 2018). Few Arizona cases discuss what factors the Commission should consider when apportioning the revenue requirement, but the Commission readily acknowledges that "cost causation principles are fundamental to rate design." Other states’ courts agree "that a cost-of-service study is of paramount importance and may indeed be a precondition to consideration of a proposed rate design." United States v. Pub. Utils. Comm’n (Newport Elec. ), 120 R.I. 959, 393 A.2d 1092, 1096 (1978) (collecting cases); cf. James C. Bonbright, Principles of Public Utility Rates 67 (1961), https://www.raponline.org/knowledgecenter/principles-of-public-utility-rates/ ("Rates found to be far in excess of cost are at least highly vulnerable to a charge of ‘unreasonableness.’ "). Accordingly, the Commission requires cost-of-service studies as part of any rate application.

¶12 The cost of service, however, is but one aspect of setting rates. See Freeport , 244 Ariz. at 414-15, ¶ 20, 419 P.3d at 947-48 (concluding that a rate design may be constitutional even if it "deviate[s] from strict cost of service"); see also In re Permian Basin Area Rate Cases , 390 U.S. 747, 776-77, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968) ("[R]ate-making agencies are not bound to the service of any single regulatory formula; they are permitted, unless their statutory authority otherwise plainly indicates, to make the pragmatic adjustments which may be called for by particular circumstances.") (quotation omitted). The Commission retains broad discretion in determining the weight to assign the cost-of-service studies and may also consider "economic, social, historical and other factors that may affect customers," which "often result[s] in rates that deviate from strict cost of service." Freeport , 244 Ariz. at 412, ¶ 10, 419 P.3d at 945 ; see also Miller v. Ariz. Corp. Comm’n , 227 Ariz. 21, 28, ¶ 30, 251 P.3d 400, 407 (App. 2011) (noting the Commission may look at "more than ‘setting a fair return on a predetermined value’ ") (quoting Ariz. Corp. Comm’n v. State ex rel. Woods , 171 Ariz. 286, 296, 830 P.2d 807,...

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