355 P.3d 610
Ariz. Ct. App.2015Background
- Arizona Water Company (AWC), a monopoly water utility, sought rate increases and a DSIC/SIB to recover certain capital costs between rate cases for nineteen systems; RUCO intervened opposing the surcharge mechanism.
- The Commission initially set AWC’s ROE at 10.55% in the Eastern Group case, remanded the DSIC issue, and later approved a settlement that implemented a modified DSIC called a SIB; RUCO objected and appealed.
- The SIB allows AWC to apply for annual surcharges (capped at 5% of prior authorized revenue requirement) for completed infrastructure projects (mains, services, meters, hydrants, valves) for up to five years, with a 5% efficiency credit and annual true-ups.
- Staff and RUCO argued the SIB circumvents full rate-case scrutiny, changes regulatory lag, and permits recovery of capital without a comprehensive fair value review; the Commission treated the SIB as an adjustor and approved it despite two dissenting commissioners.
- The Court consolidated appeals from the Eastern and Northern Group cases and reviewed whether the SIB complies with the Arizona Constitution’s mandate that the Commission determine and use the fair value of utility property when setting rates.
Issues
| Issue | Plaintiff's Argument (RUCO) | Defendant's Argument (AWC/Commission) | Held |
|---|---|---|---|
| Whether SIB surcharges may be imposed without a new fair value determination | SIB circumvents constitutional mandate to ascertain fair value before imposing surcharges between rate cases | SIB is an adjustor/interim device needed to address infrastructure needs and regulatory lag; akin to step increases or permitted adjustors | Held: SIB invalid — does not satisfy constitutional fair value requirement; vacated SIB approval |
| Whether SIB qualifies as an automatic adjustor clause | SIB is not a narrow, two-way adjustor for volatile operating costs and therefore not an adjustor | Commission labeled SIB an adjustor to justify bypassing full fair value review | Held: SIB is not an automatic adjustor clause; lacks essential attributes (two-way adjustments, narrow operating-cost focus) |
| Whether SIB can be treated as interim rates (emergency exception) without bonds/refund protection | No emergency exists; AWC had long-known replacement needs; interim-rate exception inapplicable | AWC described needs as extraordinary/exceptional and argued need for prompt recovery and financing | Held: Interim-rate exception does not apply — no emergency, no bond/refund showing, and no substitute fair value determination planned |
| Whether the Commission’s ROE ruling (10.55%) is arbitrary given SIB approval | RUCO argued elevated ROE was arbitrary and duplicative when combined with SIB | Commission considered evidence and exercised rate-setting discretion; ROE supported by record | Held: ROE of 10.55% affirmed; substantial evidence supported the Commission’s choice |
Key Cases Cited
- Ethington v. Wright, 66 Ariz. 382 (explanation of constitutional role of Commission and fair value mandate)
- State v. Tucson Gas, Elec., Light & Power Co., 15 Ariz. 294 (fair value as basis for rates; duty of Commission)
- Simms v. Round Valley Light & Power Co., 80 Ariz. 145 (fair value means value at time of inquiry)
- Arizona Community Action Ass'n v. Arizona Corp. Comm'n, 123 Ariz. 228 (discussion of CWIP and limited step rate increases)
- Residential Util. Consumer Office v. Ariz. Corp. Comm'n, 199 Ariz. 588 (narrow exceptions to fair value requirement: adjustors and interim rates)
- Scates v. Ariz. Corp. Comm'n, 118 Ariz. 531 (definition and limits of automatic adjustor clauses)
- US West Commc'ns, Inc. v. Ariz. Corp. Comm'n, 201 Ariz. 242 (fair value requirement and Commission discretion in competitive contexts)
- Bluefield Waterworks & Improvement Co. v. Public Serv. Comm'n of W.Va., 262 U.S. 679 (rate of return standard: sufficient to assure financial soundness)