Swtc v. Arizona Corp. Com'n

• Decision Date: 12 September 2006
• Docket Number: No. 1 CA-CV 05-0369.,1 CA-CV 05-0369.
• Citation: 142 P.3d 1240,213 Ariz. 427
• Parties: SOUTHWEST TRANSMISSION COOPERATIVE, INC., a non-profit Arizona electric transmission cooperative, Plaintiff-Appellant, v. The ARIZONA CORPORATION COMMISSION, an agency of the State of Arizona, Defendant-Appellee.
• Court: Arizona Court of Appeals

Page 1240

142 P.3d 1240

213 Ariz. 427

SOUTHWEST TRANSMISSION COOPERATIVE, INC., a non-profit Arizona electric transmission cooperative, Plaintiff-Appellant, v. The ARIZONA CORPORATION COMMISSION, an agency of the State of Arizona, Defendant-Appellee.

No. 1 CA-CV 05-0369.

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

September 12, 2006.

Gallagher & Kennedy, PA By Michael M. Grant, Todd C. Wiley, Phoenix, Attorneys for Plaintiff-Appellant.

Arizona Corporation Commission By Timothy J. Sabo, Janet F. Wagner, Linda Fisher, Phoenix, Attorneys for Defendant-Appellee.

OPINION

OROZCO, Judge.

¶ 1 The issue on appeal is whether the superior court correctly affirmed the Arizona Corporation Commission's (Commission) decision concluding that Southwest Transmission Cooperative, Inc. (SWTC), is a public service corporation pursuant to Article 15, Section 2, of the Arizona Constitution and is therefore subject to the Commission's regulation pursuant to Article 15, Section 3. We affirm the superior court's decision because SWTC satisfies the definition of a public service corporation by furnishing electricity for light, fuel or power and is an entity "clothed with a public interest" under the eight factors first articulated in Natural Gas Serv. Co. v. Serv-Yu Coop., 70 Ariz. 235, 219 P.2d 324 (1950). Because we conclude SWTC is a public service corporation, we do not consider the issue of whether it is a common carrier pursuant to Article 15, Section 10.

FACTS AND PROCEDURAL HISTORY

¶ 2 In the superior court proceedings, the parties stipulated to the facts; on appeal, the parties agree that the facts are undisputed. In 1999, SWTC, a non-profit Arizona rural electric transmission cooperative, was organized under Arizona Revised Statutes (A.R.S.) sections 10-2121 to -2149 (2004), in anticipation of the restructuring of the Arizona Electric Power Cooperative (AEPCO), an Arizona non-profit rural electric generation and transmission cooperative. The Commission previously determined that AEPCO was a public service corporation under Article 15, Section 2, of the Arizona Constitution, subjecting it to the Commission's jurisdiction. After restructuring in 2001, AEPCO separated into three cooperative corporations.¹ AEPCO retained the generation function, and SWTC purchased AEPCO's transmission business, including the transmission facilities and assets and rights to transmit electricity under various agreements. A third entity, Sierra Southwest Cooperative Services, Inc., was created to operate as an electric service provider.

¶ 3 As a rural electric transmission cooperative, SWTC provides or contracts to provide only wholesale transmission service between the electric generator and electric distribution cooperatives; it does not provide retail service or transmit electricity for direct consumption by end users.

¶ 4 SWTC provides transmission service to its membership (those owning facilities at a substation interconnected with SWTC's transmission system) and to non-members (those entities or natural persons entitled to use its transmission services pursuant to Section 211 of the Federal Power Act, 16 U.S.C § 824(j) (2000)). In either case, the parties enter into contracts or agreements for transmission service with SWTC.

¶ 5 Qualified applicants must comply with membership requirements and be approved by SWTC's Board of Directors. SWTC may decline service to a member if the entity does not meet membership qualifications in SWTC's bylaws, if the parties cannot agree on a transmission service contract, if SWTC cannot provide the requested service, has insufficient capacity or if the entity will not follow SWTC's operating and other rules. SWTC may also deny service to non-members if it expects revenues from all non-members to total more than fifteen percent of its annual revenues, which would cause SWTC to lose its tax-exempt status.

¶ 6 As a "transmitting utility" under the Federal Power Act providing only transmission service in interstate commerce, SWTC is financed and regulated by the Rural Utilities Service (RUS), a division of the United States Department of Agriculture. RUS must approve SWTC's terms of service, contracts, management and other matters. When rates are not subject to state regulation, SWTC must obtain RUS rate approval. RUS must approve all transmission service contracts. RUS also requires that revenue from contracts for service to distribution cooperatives and other sources be sufficient to meet SWTC's operating and maintenance expenses, the cost of transmission service, and principal and interest payments on its debt. RUS's primary concerns are the financial viability of the cooperative and the provision of reliable power to rural areas at a reasonable price. RUS may, but does not normally, review retail rates of electric distribution cooperatives.

¶ 7 As a transmitting utility, SWTC is also subject to limited jurisdiction of the Federal Energy Regulatory Commission (FERC) under Section 211 of the Federal Power Act. SWTC maintains an Open Access Transmission Tariff to meet the requirements for reciprocity under FERC Order No. 888.²

¶ 8 On April 30, 2002, SWTC filed an application with the Commission seeking a declaration that it was not a public service corporation pursuant to Article 15, Section 2, of the Arizona Constitution and was therefore not subject to regulation by the Commission pursuant to Article 15, Section 3.

¶ 9 SWTC argued that it was not a public service corporation because it does not furnish electricity for light, fuel or power. Rather, SWTC contended that it transmits electricity at wholesale to other utilities for resale. SWTC also asserted that based on prior case law, the nature of its business operations and its corporate structure compelled the conclusion that it was not a public service corporation. SWTC further argued that regulatory policy supported the view that SWTC need not be regulated as a public service corporation partly because, as a non-profit cooperative, it set rates only to cover costs of operation, necessary financial reserves and mortgage requirements. Additionally, SWTC asserted that because it was subject to oversight by FERC and RUS, the need for additional regulation by the Commission was diminished. Finally, SWTC argued that the Commission continued to retain control over the final retail rate distributors charged because the Commission has full jurisdiction to address concerns regarding the appropriateness of the wholesale transmission cost component in the context of its authority over retail rates.

¶ 10 The Commission staff disputed SWTC's assertion that it did not furnish electricity for power and argued that the constitutional definition of a public service corporation did not exclude a wholesale provider. The Commission staff further argued that the Serv-Yu factors and case law supported a finding that SWTC was a public service corporation subject to the Commission's jurisdiction. The staff also contended that SWTC is currently regulated by FERC, RUS and to a limited extent the Commission.

¶ 11 On March 12, 2004, the Commission issued Decision No. 66835 finding that SWTC was a public service corporation. The Commission concluded that, under the language of Article 15, Section 2, SWTC "furnished" electricity to the distribution cooperatives that in turn furnished it to end users. The Commission found no evidence that Article 15, Section 2 was intended to foreclose jurisdiction over wholesale providers of electricity such as SWTC and that the nature of SWTC's business, case law and prior Commission decisions supported finding that SWTC was a public service corporation.

¶ 12 SWTC sought judicial review of the Commission's decision pursuant to A.R.S. § 40-254 (2001). The superior court affirmed the Commission's ruling, finding that SWTC was a public service corporation because it furnished electricity for light, fuel or power and because it was a common carrier. The court found that it could not separate the transmission of electric power to the distributor from the furnishing of that power to the consumer. The court also applied the eight-factor test found in Serv-Yu, 70 Ariz. at 237-38, 219 P.2d at 325-26, and concluded that, although four factors might favor SWTC's position that it was not a public service corporation, the balance of factors weighed in favor of finding that SWTC was a public service corporation. The court entered judgment affirming the Commission's Decision No. 66835 in its entirety. SWTC timely appealed. We have jurisdiction pursuant to A.R.S. §§ 12-2101.B (2003) and 40-254.D (2001).

STANDARD OF REVIEW

¶ 13 Whether an entity is a public service corporation and therefore subject to the Commission's jurisdiction is a question of law when the parties do not dispute the facts. Sw. Gas Corp. v. Ariz. Corp. Comm'n, 169 Ariz. 279, 285, 818 P.2d 714, 720 (App.1991). We review questions of law de novo. Phelps Dodge Corp., 207 Ariz. at 103, ¶ 16, 83 P.3d at 581.

¶ 14 Although the Commission agrees that de novo review is appropriate for legal questions, it asserts that this court must give great deference to the agency's interpretation and application of a statute or constitutional provisions administered by the agency and must uphold the Commission's ruling if it is a "reasonable interpretation."

¶ 15 In Southwest Gas, this court addressed the standard to be applied when considering whether an entity is a public service corporation. While acknowledging that the initial interpretation of the constitution by the Commission is entitled to respect, this court determined that "[i]n the absence of an express and specific grant of power to the Commission to determine as a matter of law who is a public service corporation under the constitution, that final responsibility is vested in the courts." Sw. Gas, 169 Ariz. at 283, 818 P.2d at 718. Similarly, the court noted that, in general, an appellate court upholds a superior court rul...