Arizona School Boards Assoc. et al. v. Arizona Corp. Comm.

This case challenges the Corporation Commission’s approval of a 2% rate increase for Arizona Public Service Company.  The Center brought the action on behalf of the Arizona School Boards Association and the Arizona Association of School Business Officials (“School Associations”).  Because it is a rate decision, the appeal of the decision was filed directly in the Arizona Court of Appeals pursuant to A.R.S. § 40-254.01. 

                Although the appeal was filed in 2015, the case has a long history and actually began in 2011 when APS filed an application for a rate increase with the Commission.  The Center represented several intervenors in that rate case including the School Associations.  The 2011 rate case was ultimately settled and approved by the Commission in May 2012; however, none of our clients signed onto the settlement agreement. 

                There was a provision in the settlement agreement and the Commission’s order which allowed APS to seek later rate treatment for its acquisition of Southern California Edison’s interest in the Four Corners Power Plant.  Southern California Edison (like all California utilities) was required to divest itself of all coal generation facilities which included Edison’s ownership of Units 4 and 5 at Four Corners.  APS decided to acquire Edison’s interest and retire Units 1, 2 and 3, which were older and dirtier units.  However, the acquisition of Units 4 and 5 by APS would result in a net increase in APS’ plant in service and, therefore, support a rate increase to recognize that plant once the transaction with Edison was completed.  The Commission’s decision gave APS until December 31, 2013 to complete the transaction.

                On December 30, 2013, APS notified the Commission that it had completed the transaction with Edison and sought a rate increase to reflect the increased plant in service.  A hearing was held from July 30 through August 6, 2014 culminating in a decision that approved a 2% rate increase for APS, which was approved by the Commission on December 23, 2014.  The School Associations are appealing the December 2014 decision because, we contend, it fails to comply with the Arizona constitutional requirements for rate-setting.

                The Arizona Constitution requires the Commission to find the fair value of a utility property dedicated to public service whenever it sets rates for the utility.  Not only must the Commission find fair value, it must find fair value as of the time of the inquiry. In this case, the Commission found the fair value of APS’ property in the original rate decision issued in 2012 but then left the case open in order to accommodate APS’ later application to increase rates once the Four Corners transaction closed.  The original finding of fair value in 2012 was based on a test year for the 12 months ending December 31, 2010.  Thus, the principal basis for the School Associations’ appeal is that the Commission’s decision is unlawful because it fails to find the fair value of all of APS’ property dedicated to public service at the time of the inquiry.  In the intervening two and a half to four years, there undoubtedly have been many changes to the fair value of APS’ property including retirements, additions and depreciation.  Yet, none of those were taken into account in the Commission’s decision approving the rate increase.

                Moreover, not only was there no new finding of fair value, the recent decision approving the 2% rate increase only considered the value of property associated with Four Corners.  Arizona law prohibits the Commission from singling out one item of expense for rate treatment and ignoring all other elements of the company’s revenue and expenses.  That is called single issue rate-making and is generally prohibited under the theory that it violates the Commission’s constitutional obligation to establish rates that are “just and reasonable.”  In this case, the Commission has singled out the Four Corners acquisition for rate treatment without examining whether other changes have occurred to the company’s revenues or expenses that would offset the amount of the rate increase, so that is another basis for challenging the decision. 

                The important principle that the Center seeks to vindicate in this case is that the Commission should not be allowed to simply keep a rate case open to allow for subsequent rate adjustments that are far removed from the test year and the original rate decision.  We have not claimed that there needs to be a full rate case each time a utility wants to make a rate adjustment. Rather, we argue that there does need to be a finding of fair value based on all the company’s property at the time of the inquiry and that the Commission needs to evaluate in some fashion the company’s other revenues and expenses to insure that the rates being approved are just and reasonable.  That is what our Constitution requires and what the Commission failed to do here.