Sierra Club—Grand Canyon Chapter v. Arizona Corp. Commission , 237 Ariz. 568 ( 2015 )

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
SIERRA CLUB – GRAND CANYON CHAPTER,
Plaintiff/Appellee,
v.
ARIZONA CORPORATION COMMISSION,
Defendant/Appellant.
No. 1 CA-CV 14-0003
FILED 7-23-2015
Appeal from the Superior Court in Maricopa County
No. LC2012-000470-001
The Honorable Crane McClennen, Judge
REVERSED
COUNSEL
Arizona Center for Law in the Public Interest, Phoenix
By Timothy M. Hogan, Joy Herr-Cardillo
Counsel for Plaintiff/Appellee
Arizona Corporation Commission, Legal Division, Phoenix
By Wesley C. Van Cleve, Charles H. Hains, Janet F. Wagner
Counsel for Defendant/Appellant
Curtis Goodwin Sullivan Udall & Schwab, PLC, Phoenix
By William P. Sullivan, Trish Stuhan
Counsel for Amicus Curiae Reclamation Power Group, LLC
SIERRA CLUB v. AZCC
Opinion of the Court
OPINION
Judge Patricia A. Orozco delivered the opinion of the Court, in which
Presiding Judge Samuel A. Thumma and Judge Michael J. Brown joined.
O R O Z C O, Judge:
¶1 This appeal concerns the development of a proposed “waste-
to-energy” (WTE) facility, which would generate electricity by burning
landfill waste, and the classification of electrical power that would be
produced by the proposed facility. The Arizona Constitution grants the
Arizona Corporation Commission (the Commission) broad power to
“prescribe just and reasonable” classifications and rates for services
rendered by public service corporations. Ariz. Const. art. 15, § 3. We
review the scope of that authority and the deference due a Commission
decision, later vacated by the superior court, granting approval for the
proposed WTE facility. For the reasons that follow, we reverse the superior
court’s decision and reinstate the Commission’s decision to the extent it
grants an application by Mohave Electric Cooperative, Inc. (Mohave) for a
waiver to the Renewable Energy Standard and Tariff (REST) rules.
FACTS AND PROCEDURAL BACKGROUND
¶2 Arizona public utility corporations providing electricity are
subject to the REST rules promulgated in Arizona Administrative Code
(A.A.C.) sections R14-2-1801, et seq. These rules require affected
corporations “to satisfy an Annual Renewable Energy Requirement by
obtaining Renewable Energy Credits [(Credits)] from Eligible Renewable
Energy Resources.” A.A.C. R-14-2-1804.A. A Credit is obtained for each
kilowatt-hour “derived from an Eligible Renewable Energy Resource.”
A.A.C. R14-2-1803.A. Although specific Eligible Renewable Energy
Resources are listed in the rules, the Commission “may adopt pilot
programs in which additional technologies are established as Eligible
Renewable Energy Resources.” A.A.C. R14-2-1802.D. The Commission
also “may waive compliance with any provision of [the REST rules] for
good cause.” A.A.C. R14-2-1816.A.
¶3 Mohave filed an application asking the Commission to either
(1) recognize a proposed WTE facility as a “pilot program,” or (2) waive the
REST rules for the proposed facility “to the limited extent necessary to
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Opinion of the Court
recognize energy produced [by the] facility as an ‘Eligible Renewable
Energy Resource.’” Mohave’s application stated that Reclamation Power
Group, LLC (RPG), which intended to develop, own, and operate the
proposed WTE facility in Maricopa County, could not provide
“economically viable” power unless the Commission classified the
municipal solid waste that would be used as fuel by the facility as a Credit-
eligible “Renewable Energy Resource.” Appellee, Sierra Club – Grand
Canyon Chapter (Sierra Club) successfully intervened to oppose Mohave’s
application.
¶4 The Commission’s Utilities Division (Staff) produced a report
on Mohave’s application and drafted a recommended decision. The report
stated that Mohave had provided Staff with a “breakdown, by category” of
a waste sample from a landfill that Mohave claimed was representative of
the waste composition the WTE facility would burn as fuel if the facility
became operational. The report discussed how the Mohave “breakdown”
showed ninety-five percent of the waste consisted of “biogenic material.”1
The Staff report concluded that burning waste of this composition would
mean “the biogenic material contributes about [ninety-one] percent of the
energy to the process while non-biogenic materials contribute about [nine]
percent[.]” The report suggested that the ninety-one percent figure was
high in relation to the results of other studies. As a result, Staff
recommended that the Commission not grant “pilot program” status and
instead grant a good-cause waiver of the REST rules to allow seventy-five
percent of the kilowatts produced by the facility to be Credit-eligible “as
being produced by an Eligible Renewable Energy Resource.”
¶5 Both Mohave and Sierra Club filed exceptions to the Staff
recommendation. Following an open meeting, the Commission held a
three-day evidentiary hearing before an administrative law judge (ALJ).
Seven witnesses testified, including representatives from Staff and acting
President of RPG Ronald Blendu. Following the evidentiary hearing, the
Commission adopted most of the Staff findings and recommended
decision, with two important changes: the Commission (1) granted the WTE
facility “pilot program” status under the REST rules, noting that
“[a]lthough we disagree with Staff that a waiver of the REST Rules is
1 The REST rules do not define “biogenic,” but they define somewhat
related words such as “biomass,” which is “any raw or processed plant-
derived organic matter available on a renewable basis[.]” A.A.C. R14-2-
1802.A.2.; cf. The American Heritage Dictionary of the English Language
183 (5th ed. 2011) (defining “biogenic” as “[p]roduced by living organisms
or biological processes.”).
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necessary to approve [Mohave’s] application . . . we recognize and
acknowledge that Staff’s analysis . . . provides an independent and
alternative basis upon which to approve this application[,]”and (2) granted
Credits for ninety percent of the kilowatt hours that would be produced by
the facility.
¶6 Sierra Club petitioned for a rehearing, which the Commission
granted. Another evidentiary hearing was held, with extensive testimony
from several witness, once again including representatives from Staff and
Ronald Blendu. Following the rehearing, the Commission affirmed its
initial decision “in its entirety.” The Commission denied Sierra Club’s
petition for rehearing on that decision.
¶7 Sierra Club then sought review of the Commission’s decision
in superior court pursuant to Arizona Revised Statutes (A.R.S.) section 40-
254 (West 2015).2 Sierra Club and the Commission requested judgment on
the record created before the Commission. Following briefing and oral
argument, the superior court vacated the Commission’s decision, stating
that “the authorities and arguments provided by [Sierra Club] are well-
taken, and this Court adopts those authorities and arguments in support of
its decision.” The superior court further awarded Sierra Club its attorney
fees and costs. After entry of judgment by the superior court, this timely
appeal followed. We have jurisdiction pursuant to A.R.S. § 12-2101.B. (West
2015).
DISCUSSION
I. Appropriate Standards of Proof and Review
¶8 The Commission first contends that its constitutional
ratemaking authority entitled its decision to a more deferential standard of
review than it received from the superior court. Additionally, the
Commission argues that the superior court erred by applying ambiguous
standards of proof and review. The proper standards of proof and review
for challenges to Commission decisions are legal questions we review de
novo. See Tucson Elec. Power Co. v. Ariz. Corp. Comm’n., 132 Ariz. 240, 242-
44 (1982).
¶9 The Commission occupies a unique place in Arizona’s
government, with our state constitution expressly stating the Commission’s
purpose and powers. See generally Ariz. Const. art. 15. Our supreme court
2 We cite the current version of applicable statutes when no revisions
material to this decision have since occurred.
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has described the Commission as “another department of government,
with powers and duties as well defined as any branch[.]” State v. Tucson
Gas, Elec. Light & Power Co., 15 Ariz. 294, 306 (1914); see also Ariz. Corp.
Comm’n v. State ex rel. Woods, 171 Ariz. 286, 290 (1992) (recognizing that
“[t]he [Arizona Constitution’s] framers established the Commission as a
separate, popularly-elected branch of state government”). This special
status makes the judicial review process for the Commission’s decisions
distinct from the process for reviewing other administrative decisions,
although they share many similarities. See Tucson Elec. Power Co., 132 Ariz.
at 243; compare A.R.S. § 12-905.A. (West 2015) with A.R.S. § 40-254.A (West
2015).
¶10 A further distinction exists concerning the scope of judicial
review for Commission decisions. As set forth in Tucson Electric Power
Company, a court’s de novo review is “limited” when the reviewing court is
examining a ratemaking decision. 132 Ariz. at 243-44. Here, Sierra Club
asserts that the Commission’s ratemaking authority is limited to particular
elements, none of which apply to decisions about “pilot programs” or
waivers under the REST rules. But Arizona case law has not restricted
“ratemaking” as such. See Woods, 171 Ariz. at 294 (concluding that “even
assuming we restrict the Commission’s regulatory power to its ratemaking
function, we must give deference to the Commission’s determination of
what regulation is reasonably necessary for effective ratemaking”). Indeed,
this court recently concluded that the Commission promulgated the REST
rules pursuant to its ratemaking power. See Miller v. Ariz. Corp. Comm’n.,
227 Ariz. 21, 29, ¶ 33 (App. 2011). Sierra Club contends that the court’s
holdings in Miller are inapposite because that case concerned a collateral
attack on the Commission’s power to enact the regulations. It follows,
however, that rules enacted under the Commission’s ratemaking power are
also reviewable under the standards for reviewing ratemaking decisions.
As a result, we conclude the Commission decision here was made under
the Commission’s ratemaking power. We now turn to the appropriate
standards of proof and review for ratemaking cases.3
3 We find unavailing Sierra Club’s argument that it is “abundantly
clear” that challenging a Commission ratemaking decision must be done as
a direct appeal to the Court of Appeals pursuant to A.R.S. § 40-254.01.
Although this court has interpreted A.R.S. § 40-254.01 as limiting direct
appeals to this court to ratemaking decisions by the Commission, that
opinion does not conclude that all challenges to Commission ratemaking
decisions must be brought pursuant to § 40-254.01. See Arizona-American
Water Co. v. Ariz. Corp. Comm’n, 209 Ariz. 189, 191, ¶ 10 (App. 2004).
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¶11 The applicable standard in reviewing a Commission decision
is found in A.R.S. § 40-254.E., which provides that “[i]n all trials, actions
and proceedings the burden of proof shall be upon the party adverse to the
[C]ommission or seeking to vacate or set aside any determination or order
of the [C]ommission to show by clear and satisfactory evidence that it is
unreasonable or unlawful.” The Arizona Supreme Court has provided
guidance on how the superior court should review a ratemaking decision
under § 40-254. First, the superior court must conduct a “limited” de novo
review via a new trial to give the parties an opportunity to present new
evidence. See Tucson Elec. Power Co., 132 Ariz. at 243. In considering the
evidence presented to the Commission, however, “[t]he [s]uperior [c]ourt
may not reweigh the evidence and substitute its judgment for that of the
Commission, but may disturb the Commission’s rate decision only if it is not
reasonably supported by the evidence, is arbitrary, or is otherwise
unlawful.” Id. (emphasis added; internal citation omitted). After the
superior court reviews a Commission decision, “an appellate court reviews
the [s]uperior [c]ourt’s decision and not the Commission’s[.]” Id. at 244. If
the superior court’s decision “disturbed” the Commission’s, the appellate
court examines the superior court’s “contrary conclusions to see if they are
supported by clear and satisfactory evidence.” Id. “Clear and satisfactory
evidence” is the same as “clear and convincing evidence” and is a higher
burden than preponderance of evidence. Id. at 243.
¶12 Even under a “limited” de novo review, the court is not
bound by the Commission’s legal conclusions, and a reviewing court must
“determine independently whether the Commission erred in its
interpretation of the law.” Babe Invs. v. Ariz. Corp. Comm’n, 189 Ariz. 147,
150 (App. 1997). The Commission’s factual determinations, however, are
entitled to deference and the superior court “is not free to overturn [them]
unless the plaintiff demonstrates by ‘clear and convincing evidence’ that
the Commission’s determination is unreasonable.” Grand Canyon Trust v.
Ariz. Corp. Comm’n, 210 Ariz. 30, 34, ¶ 11 (App. 2005) (citing Tucson Elec.
Power Co., 132 Ariz. at 243-44).
II. The Superior Court’s Judgment
¶13 In entering judgment in favor of Sierra Club, the superior
court made the following determinations:
1. The Corporation Commission's [REST] rules do not allow
[m]unicipal [s]olid [w]aste . . . as an eligible renewable energy
resource and, therefore, waste-to-energy facilities using
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[municipal solid waste] are not eligible as a pilot program
under the rules;
2. The proposed [WTE] facility does not qualify for a waiver
from the requirements of the REST rules because good cause
was not established for a waiver and a waiver would be
inconsistent with the exclusion of [municipal solid waste] as
an eligible renewable resource under the rules; and
3. There was no credible evidence to support the
Commission's determination that 90% of the electricity from
the proposed [WTE] facility would come from biogenic
sources.
We analyze these conclusions in turn.
A. The Superior Court’s Interpretation of the REST Rules
¶14 The superior court’s first two conclusions construe and
interpret the REST rules. We therefore review them de novo to the extent
necessary to resolve this appeal. See BNSF Ry. Co. v. Ariz. Corp. Comm’n,
228 Ariz. 481, 485, ¶ 12 (App. 2012) (observing Court of Appeals “can draw
our own legal conclusions” in reviewing the superior court’s review of a
Commission decision); Libra Grp., Inc. v. State, 167 Ariz. 176, 179 (App. 1991)
(noting “applicable statutes and regulations” are reviewed de novo).
However, because we conclude good cause was established for a waiver of
the REST rules, we need not determine as a matter of law whether the REST
rules preclude pilot program status for WTE facilities that use municipal
solid waste. See KZPZ Broad., Inc. v. Black Canyon City Concerned Citizens,
199 Ariz. 30, 38, ¶¶ 28-29 (App. 2000) (noting that a dispositive holding on
one issue may preclude appellate review of other presented issues).
¶15 As previously noted, the REST rules require affected utility
corporations “to satisfy an Annual Renewable Energy Requirement by
obtaining [Credits] from Eligible Renewable Energy Resources.” A.A.C.
R14-2-1804.A. The rules generally define “Eligible Renewable Energy
Resources” as “applications of . . . technologies that displace Conventional
Energy Resources that would otherwise be used to provide electricity to an
Affected Utility’s Arizona customers[.]” A.A.C. R14-2-1802.A. A
“Conventional Energy Resource” is defined as “an energy resource that is
non-renewable in nature, such as natural gas, coal, oil, and uranium, or
electricity that is produced with energy resources that are not Renewable
Energy Resources.” A.A.C. R14-2-1801.C. By express provision in the REST
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rules, “[t]he Commission may waive compliance with any provision of [the
REST rules] for good cause.” A.A.C. R14-2-1816.A.
¶16 Sierra Club asserts the superior court correctly found that
good cause for a waiver was not established. More specifically, Sierra Club
argues that Mohave never claimed it needed a waiver because it cannot
comply with the REST rules and the good cause exception should be
construed narrowly to prevent the exception from “swallow[ing] the rule.”
¶17 Whether good cause exists for a waiver is a case-by-case
determination that “depends on the particular circumstances . . . and
considerations of practical convenience.” See City of Phoenix v. Peterson, 11
Ariz. App. 136, 141 (App. 1969). Generally, a finding of good cause, or lack
thereof, is reviewed for an abuse of discretion. See Bd. of Educ. of Tempe
Union High Sch. Dist. of Maricopa Cnty. v. Lammle, 122 Ariz. 522, 527 (App.
1979) (determining whether a trial court’s review of a school board’s
dismissal of an employee “for good cause” was “arbitrary, capricious or an
abuse of discretion”); Maher v. Urman, 211 Ariz. 543, 548-49, ¶ 15 (App.
2005). When, as here, the superior court has “disturbed” the Commission’s
finding, we must determine whether the “contrary conclusions . . . are
supported by clear and satisfactory evidence.” Tucson Elec. Power Co., 132
Ariz. at 243. Thus, in this case, we must determine if “clear and satisfactory
evidence” supports the superior court’s conclusion that the Commission
abused its discretion in finding good cause existed to waive the REST rules.
See id. at 244.
¶18 Although the Commission granted Mohave’s application for
pilot program status, the Commission also acknowledged that an
“independent and alternative basis” existed to grant Mohave a waiver of
the REST rules. This conclusion was consistent with the Staff
recommendation that the Commission grant Mohave a waiver. In its
recommendation, Staff emphasized the experimental nature of WTE
facilities and concluded that “the potential benefits [of a WTE facility]
outweigh the potential consequences, especially when compared to the
alternative of landfilling [municipal solid waste].” Staff maintained this
position throughout the Commission’s proceedings.
¶19 On this record, we cannot conclude that Sierra Club showed
by clear and satisfactory evidence that good cause for a waiver was not
established. Much of the evidence presented to the Commission may be
characterized as a debate over the degree to which municipal solid waste
used as fuel for WTE facilities may be considered “renewable.” Given the
Commission’s constitutional authority over these matters, the Commission
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is ultimately charged with evaluating such issues and, as such, is the best-
equipped branch of government to do so. Although meaningful judicial
review requires that courts make their own legal determinations, courts
properly must exercise a more deferential review towards discretionary
matters “constitutionally entrusted to the Commission.” See US W.
Commc’n, Inc. v. Ariz. Corp. Comm’n, 185 Ariz. 277, 280 (App. 1996).
¶20 Irrespective of whether the use of municipal solid waste as
fuel makes a WTE facility eligible for pilot program status, the REST rules
do not explicitly exclude energy produced from municipal solid waste, or
at least those portions that may be considered “renewable,” from being
considered Credit-eligible if the Commission waives the REST rules for
good cause. To the extent this involves construing the REST rules, we
conclude only that the Commission retained the discretion to issue a good
cause waiver of the rules. The Staff report and testimony stating that a WTE
facility could provide substantial benefit to Arizona’s utility infrastructure
provided sufficient good cause to issue such a waiver. The superior court’s
conclusion that the Commission could not waive the REST rules because it
“would be inconsistent with the exclusion of [municipal solid waste] as an
eligible renewable resource under the rules” is neither supported by the
plain language of the REST rules nor by clear and satisfactory evidence in
this record.
B. The Superior Court’s “No Credible Evidence” Conclusion
¶21 We next turn to the superior court’s conclusion that no
credible evidence supported the Commission’s determination allowing
ninety percent of the municipal solid waste that will be used as fuel by the
WTE facility to be considered a “renewable energy source.” Because this
conclusion “disturbed” the Commission’s decision, we must determine
whether the superior court’s conclusion is supported by “clear and
satisfactory evidence.” See Tucson Elec. Power Co., 132 Ariz. at 243.
¶22 Similar to an appellate court’s general deference to trial courts
on credibility determinations and the weighing of evidence, the
Commission is also entitled to deference when “the [C]ommission’s
ultimate conclusion or findings of facts [are] supported by substantial
evidence, is not arbitrary or is not otherwise unlawful.” Simms v. Round
Valley Light & Power Co., 80 Ariz. 145, 154 (1956). Put differently, the
superior court “is not free to overturn” the Commission’s factual
determinations unless the party challenging those findings “demonstrates
by ‘clear and convincing evidence’ that the Commission’s determination is
unreasonable.” Grand Canyon Trust, 210 Ariz. at 34, ¶ 11 (citing Tucson Elec.
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Power Co., 132 Ariz. at 243-44). Substantial evidence is evidence which
would permit a reasonable person to reach the Commission’s result. See In
re Estate of Pouser, 193 Ariz. 574, 579, ¶ 13 (1999).
¶23 The two evidentiary hearings before the Commission
involved significant amounts of live testimony as well as written exhibits.
Seven witnesses testified at the first hearing and nine at the second. In its
initial recommendation, Staff stated that data received from Mohave, which
was considered in formulating the Staff recommendation, showed the
municipal solid waste that would be used by the proposed WTE facility
would be composed of an estimated ninety-five percent biogenic
(renewable) material. Staff deduced that burning municipal solid waste of
such composition would mean ninety-one percent of the energy produced
by the facility would be produced by renewable sources. However, Staff
also noted that the ninety-five percent figure submitted by Mohave was
high in relation to data about waste composition collected from other WTE
facilities throughout the United States. Staff thus recommended seventy-
five percent of any energy produced by the WTE facility be deemed Credit-
eligible.
¶24 After Mohave filed exceptions to the Staff recommendation,
one Commissioner proposed an amendment that generated the ninety
percent figure, with an additional provision that could reduce the
percentage based on what Staff might discover from Mohave’s mandatory
semi-annual reports. At the first evidentiary hearing, a Staff representative
testified that Staff had recommended the seventy-five percent figure
because “we feel, since [the WTE facility] is an experiment or pilot . . . you
might want to choose the more conservative estimate of the [seventy-five]
percent. But that’s, obviously . . . a call for the Commission.” At the second
evidentiary hearing, a different Staff representative testified that the ninety
percent figure was “within the range . . . calculated based on the samples
provided by Mohave” and that “it would be a reasonable starting figure,”
as would Staff’s recommendation of seventy-five percent.
¶25 At the second evidentiary hearing, Ronald Blendu testified
about the data Mohave submitted to Staff. Blendu stated that the data was
generated from 15,300 pounds of trash collected from a municipal area in
western Maricopa County. The trash was sorted “into various categories”
to give RPG an idea of “what the fuel supply would [be to] go into the [WTE
facility].” Blendu testified in detail about the process used to determine the
recycling rates, which would presumably indicate RPG’s ability to remove
non-renewable material out of the waste before it is consumed in the
facility.
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¶26 Given this evidence in the Commission record, the superior
court improperly reweighed the evidence in concluding no credible
evidence existed to support the ninety percent figure adopted by the
Commission. See Tucson Elec. Power Co., 132 Ariz. at 243. Sierra Club
contends that the Commission’s decision was based on speculative
evidence that “defied credibility.” But in doing so, Sierra Club merely
claims the data produced by Mohave and relied upon by Staff is an
apparent outlier among similar data collections around the United States.
Although Sierra Club asserts that this other data required the Commission
to discard Mohave’s data, it is the Commission’s constitutional
responsibility, when engaged in its ratemaking power, to view conflicting
evidence and make determinations accordingly.
¶27 The nature of Mohave’s data was not lost on the Commission.
By establishing procedures to report on the actual composition of municipal
solid waste used as fuel once the WTE facility became operational, the
Commission implicitly acknowledged that future Credit eligibility may
require adjustment depending on the data collected. Because the facility is
not operational, no data on its fuel consumption currently exists, and the
Commission was faced with deciding Mohave’s application using
projections and historical data from other facilities across the country. As
a result, Mohave’s data, the testimony of Blendu, the Staff recommendation,
and other testimony and evidence amounted to substantial evidence
supporting the Commission’s decision. The superior court’s conclusion
that “no credible evidence” supported the Commission’s decision was
therefore not supported by clear and satisfactory evidence. See Tucson Elec.
Power Co., 132 Ariz. at 243. Thus, without new evidence showing Mohave
was deceptive in producing its data or it was impossible, not just
improbable, that the proposed WTE facility would produce ninety percent
of its power from a renewable energy source, the superior court was bound
by the Commission’s factual findings.
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CONCLUSION
¶28 We conclude the Commission was acting within the REST
rules’ purview by granting a waiver to Mohave for the WTE facility. We
also conclude substantial evidence supported the Commission’s
determination that ninety percent of energy produced by the WTE facility
would be eligible for Credits, contingent upon the reporting requirements
and adjustments required by the Commission’s decision. Accordingly, we
reverse the judgment of the superior court and reinstate the Commission’s
decision as necessary to be consistent with this decision. Because we
reverse the superior court’s judgment, we set aside the award of attorney
fees to Sierra Club.
:ama
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