Arizona Supreme Court Affirms Corporation Commission’s Constitutional Authority

The Arizona Supreme Court has affirmed the broad constitutional powers of the Arizona Corporation Commission, in an opinion issued on August 8, 2016. The decision comes in Residential Utility Consumer Office v. Arizona Corporation Commission, a widely-watched case about the scope of the Commission’s power.

The case involved a challenge by the Residential Utility Consumer Office (RUCO) to the “System Improvement Benefits” or “SIB” mechanism. The Commission approved the SIB mechanism to help water utilities address aging infrastructure.  Under the SIB mechanism, water utilities could raise rates between rate cases after they completed specific infrastructure improvements preapproved by the ACC.  RUCO challenged the SIB mechanism as violating the Arizona Constitution’s “fair value” requirement (Article 15, Section 14), and the Arizona Court of Appeals agreed.  Our earlier coverage of this case, by Jason Gellman, is available here.

The Arizona Supreme Court reversed the Court of Appeals and affirmed the Commission’s decision. The Court began by noting the Commission’s constitutional status, explaining that 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 the Arizona Constitution.  (RUCO v. ACC, ¶ 11, quoting Ethington v. Wright, 66 Ariz. 382, 389 (1948)).  The Court emphasized that the Commission has “full and exclusive power” over rates, and in that field “the Commission is supreme and such exclusive field may not be invaded by the courts, the legislature, or the executive.”  (Id., ¶ 12, also quoting Ethington).

The Court held that the traditional “full rate case”—an extensive proceeding often lasting more than a year, with extensive hearings—“is not constitutionally mandated”, and the Commission has discretion in how to find fair value. (Id., ¶ 15).

The annual rate changes allowed by the SIB mechanism were permissible because the Commission would make an updated fair value finding when approving each annual surcharge. (Id., ¶ 16).  The SIB mechanism involved filing “updated” fair value information, and the Court found that this was sufficient, “[a]lthough the Commission will not re-calculate anew every input into the fair value determination, this updated measurement satisfies the constitutional requirement that the Commission” find fair value.  (Id.).

The Court rejected the “restrictive view” of the Court of Appeals that an adequate fair value finding could only be made in a full rate case. (Id., ¶ 17).  And while the Court of Appeals had previously allowed the Commission to set rates outside of a rate case if the rate was an “interim rate” or an “adjustor mechanism”, the Arizona Supreme Court held that these narrow categories were not the only possibilities.  The Court explained that by “supplementing and updating the fair value determination from a previous rate case, the SIB satisfies the constitutional mandate that the Commission determine fair value to aid it in setting rates.”  (Id., ¶ 18).

The full Arizona Supreme Court opinion can be found at: http://www.azcourts.gov/Portals/0/OpinionFiles/Supreme/2016/CV-15-0281-PR.pdf