Sun City Water Co. v. Arizona Corp. Commission

• Decision Date: 06 April 1976
• Docket Number: CA-CIV,No. 1,1
• Citation: 26 Ariz.App. 304,547 P.2d 1104
• Parties: SUN CITY WATER COMPANY, an Arizona Corporation, Appellant, v. The ARIZONA CORPORATION COMMISSION, Appellee. 2934.
• Court: Arizona Court of Appeals

Page 1104

547 P.2d 1104

26 Ariz.App. 304

SUN CITY WATER COMPANY, an Arizona Corporation, Appellant, v. The ARIZONA CORPORATION COMMISSION, Appellee.

No. 1 CA-CIV 2934.

Court of Appeals of Arizona, Division 1, Department B.

April 6, 1976.

Rehearing Denied May 19, 1976.

Review Granted June 8, 1976.

Evans, Kitchel & Jenckes, P.C. by Earl H. Carroll, Phoenix, for appellant

Robertson, Molloy, Fickett & Jones, P.C. by Charles D. Wahl, Michael J. Meehan, Tucson, for appellee.

OPINION

JACOBSON, Presiding Judge.

This appeal calls into question the manner in which the Arizona Corporation Commission may set a 'fair rate of return' on the fair base value of a public service corporation's assets.

The appellant, Sun City Water Co. (Company) appeals from a judgment of the Superior Court of Maricopa County affirming a decision of appellee, Arizona Corporation Commission (Commission) setting the fair rate of return on Sun City's fair base value at 6.72%. The trial court, however, remanded the matter back to the Commission for further hearings on the issue of whether the rate schedule adopted by the Commission would yield a full 6.72% Return. Only Sun City has appealed.

The Company is a wholly-owned subsidiary of Citizen's Utilities Company, supplying water to residents of the Sun City area of Maricopa County. On October 13, 1972, the Company filed an application with the Commission, requesting that it determine the fair value of the Company's utility properties, that it fix a just and reasonable rate of return thereon and that it approve rate schedules which would provide the rate of return that was determined. At this time the Company did not propose rate schedules (actual charges for water supplied to customers) as it was unaware of what revenue requirements the Commission would determine were necessary.

The hearings on this application were concluded on May 10, 1973, but the Commission did not issue its rate order until October 23, 1973, approximately a year after the initial application was made. The decision of the Commission established a fair value rate base, determined that 6.72% Was a fair return on that base and authorized the Company to charge certain specified water rates, which in the Commission's opinion would yield a 6.72% Rate of return. The actual rate schedule adopted was apparently prepared and furnished by the Commission's own staff, without consultation with the Company.

The Company filed an application for rehearing, contending that the 6.72% Rate of return was unreasonable, ¹ and that in any event the rate schedules adopted by the Commission would not yield this 6.72% Return. Further, the Company requested that it be permitted to establish rates pending court review, subject to refund, which would enable it to earn the minimum rate of return testified to by an expert of 7.7%. The Company's application for rehearing was denied and suit followed in superior court.

The hearing before the Commission established that as of July 31, 1972, (the end of the test year for the rate proceeding) substantially all of the Company's 10,150 customers were located in Sun City, a retirement community developed by Del E. Webb Corporation. The water distribution system (mains and services) are installed by Del E. Webb Corporation as contractor. The initial cost of this system is paid for by Del E. Webb Corporation, but the Company repays Del E. Webb Corporation in full for these facilities as customers are attached. This arrangement had the prior approval of the Commission. The Company itself pays for all wells, pumping plants, sewage facilities, buildings, equipment and related facilities. The Company's facilities as such are relatively new.

The evidence before the Commission and subsequently before the trial court on the issue of fair rate of return can be summarized as follows: (1) Dr. Walter A. Morton, an economist and rate of return expert called by the Company, testified that in his opinion a fair rate of return would be 9.46%; (2) Jack O. Sanders, the Company's rate manager, testified that in his opinion a fair rate of return would be 9.75%; and (3) Dr. John K. Langum, also a rate of return expert who testified for the Commission, was of the opinion that a 'minimum' rate of return for the Company was 'no less than 7.7%.'

In essence, the Commission adopted the opinion of its own witness, Dr. Langum, but concluded: (1) Dr. Langum 'did not give enough recognition to the results of earnings of the eleven water utilities reported by' him; ² (2) that the Company's properties were new and thus would have relatively low management and maintenance expense: (3) that because Sun City was one of the fastest growing areas in Arizona there are relatively few unused service connections, and (4) that the Company does not have to pay for its system until it becomes revenue producing and thus the risk is minimal to the owner compared to other utilities. Based upon these factors, the Commission set the rate of return at 6.72%.

At the time of trial before the superior court, Dr. Langum, while still maintaining his original opinion as to a rate of return of 7.7%, ³ was allowed to testify, over objection, that the methods used by the Commission in arriving at its conclusion were reasonable. At this time, the Company also produced evidence that the schedule of rates established by the Commission would in actuality yield a rate of return of only 6.07% Instead of the 6.72% Set by the Commission.

The issues presented on appeal are:

(1) What is the standard to be applied in judicial review of the Commission's decision?

(2) If the standard of review is the 'substantial evidence test', is there substantial evidence which would justify the Commission's conclusion that 6.72% Is a fair rate of return?

(3) Did the trial court err in finding that the schedule of rates established by the Commission would yield a 6.72% Return?

(4) Was the trial court in error in the manner in which it remanded the matter back to the Commission?

We are first faced with the issue of the scope of judicial review of the decision of the Commission setting a fair rate of return. While both parties agree that the trial before the superior court is De novo, the Company has the burden of showing, pursuant to A.R.S. § 40--254(E), by 'clear and satisfactory evidence', that the Commission's decision was unreasonable or unlawful, they differ as to the standard to be applied by the court in making this determination. The Commission, on the one hand, contends that it does not have to demonstrate either the evidence or the method it utilized in reaching its decision, with the limitation that the rate of return may not be confiscatory, but rather if a judicial review shows that the total effect of the rate of return is neither unjust nor unreasonable, judicial inquiry is at an end and the Commission must be affirmed. In support of this proposition, the Commission cites Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944).

The Company, on the other hand, points out that the Arizona Supreme Court has rejected the reasoning of the Hope case in rate base cases in Simms v. Round Valley Light & Power Co., 80 Ariz. 145, 294 P.2d 378 (1956). Because of this rejection of the 'end result' reasoning of Hope in rate base cases, the Company urges that it should likewise be rejected in rate of return cases. The Company instead urges that the test for review of a rate of return decision of the Commission is that the decision must be supported by substantial evidence which is capable of being articulated to the reviewing court. Stated conversely, if there is no substantial evidence to support the Commission's decision, the Commission's action must be set aside and the matter remanded for further proceedings. ⁴ It is clear that the Simms case rejected the reasoning of Hope based on Article 15, § 14 of the Arizona Constitution, ⁵ requiring that the Commission, in rate base cases, determine the fair value of the utility's property, stating:

'It is clear, therefore, that under our constitution as interpreted by this court, the commission is required to find the fair value of the company's property and use such finding as a rate base for the purpose of calculating what are just and reasonable rates. The Hope case cannot be used by the commission. To do so would violate our constitution. The statute under consideration in that case prescribed no formula for establishing a rate base. 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 rate must be related to this finding of fair value. (emphasis added) 80 Ariz. at 151, 294 P.2d at 382.

The Commission argues that since the rejection of the rationale of the Hope decision was based upon constitutional considerations, and since there are no constitutional provisions dealing with rate of return as compared to rate base, Simms is not authority for rejecting Hope in rate of return determinations. We agree that the rate of return allowable to a public service corporation is not specifically mentioned in the constitution, but it is apparent that the sole constitutionally mandated purpose in determining the fair value of a utility's property is to enable the Commission to set a fair rate of return--the finding of fair base value having no purpose in and of itself. It is thus somewhat incongruous to say that the Commission cannot use an 'end justifies the means' approach to determine the basis of the final determination, but can use that same approach in reaching the final determination itself.

As was stated in Simms, although admittedly dicta;

'The legislative duty and power to fix just and reasonable rates having been by the constitution delegated exclusively to the corporation commission, the courts cannot disturb the commission's ultimate conclusion or...