Sun City v. Acc

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
SUN CITY HOME OWNERS ASSOCIATION, Appellant,
v.
ARIZONA CORPORATION COMMISSION, Appellee,
EPCOR WATER ARIZONA, INC. and VERRADO COMMUNITY
ASSOCIATION INC., Intervenors.
No. 1 CA-CC 17-0002
FILED 1-23-2020
Appeal from the Arizona Corporation Commission
No. WS-01303A-16-0145
AFFIRMED
COUNSEL
Ellman Law Group, L.L.C., Phoenix
By Robert L. Ellman
Counsel for Appellant
Arizona Corporation Commission, Legal Division, Phoenix
By Andrew M. Kvesic, Mareen A. Scott, Naomi E. Davis,
Stephen Joseph Emedi
Counsel for Appellee
Lewis Roca Rothgerber Christie, L.L.P., Phoenix
By Thomas H. Campbell, Michael T. Hallam
Counsel for Intervenor Epcor Water Arizona Inc.
SUN CITY v. ACC
Opinion of the Court
Law Office of Michele Van Quathem, P.L.L.C., Phoenix
By Michele Van Quathem
Counsel for Intervenor Verrado Community Association Inc.
OPINION
Presiding Judge Kenton D. Jones delivered the Opinion of the Court, in
which Judge James B. Morse Jr.1 joined. Judge Michael J. Brown dissented.
J O N E S, Judge:
¶1 The Sun City Home Owners Association (SCHOA) appeals
Decision 76162 (the Decision) of the Arizona Corporation Commission (the
Commission), which consolidated five separate wastewater districts
operated by EPCOR Water Arizona, Inc. (EPCOR) and imposed an identical
wastewater rate throughout the newly consolidated district. SCHOA, an
intervenor in the rate case, argues the consolidated rate is unjust and
discriminatory, and therefore violates the Arizona Constitution, and is
unsupported by the evidence. For the following reasons, we affirm.
FACTS AND PROCEDURAL HISTORY
¶2 EPCOR provides wastewater service to the Agua Fria,
Anthem, Mohave, Sun City, and Sun City West wastewater districts. All
except Mohave are located within the Phoenix metropolitan area; most are
geographically distinct and served by separate wastewater treatment
facilities. EPCOR’s corporate service functions, including accounting and
customer service, are centralized.
¶3 Historically, the Commission set individual rates for each
district, and monthly wastewater rates have varied substantially, ranging
from $22.11 per month in Sun City, to $71.16 per month in Agua Fria. The
rates varied even between districts that use the same wastewater treatment
facility; before consolidation, Sun City West customers paid $32.46 per
month, while Agua Fria customers, some of whom were serviced from the
same facilities, paid $71.16 per month. Ultimately, the customers paying
1 Judge Morse replaces the Honorable Jon W. Thompson, who passed
away while this case was pending. Judge Morse has read the briefs,
reviewed the record, and watched the recording of the June 7, 2018 oral
argument.
2
SUN CITY v. ACC
Opinion of the Court
higher rates in the Agua Fria, Anthem, and Mohave districts urged the
Commission to impose a consolidated rate. See U.S. Envtl. Protection
Agency & Nat’l Ass’n of Regulatory Utils. Comm’rs, EPA 816-R-99-009,
Consolidated Water Rates: Issues and Practices in Single-Tariff Pricing vii (Sep.
1999), https://nepis.epa.gov/Exe/ZyPDF.cgi/200027XN.PDF?Dockey=
200027XN.PDF (defining a consolidated rate as “the use of a unified rate
structure for multiple [waste]water . . . utility systems that are owned and
operated by a single utility, but that may or may not be contiguous or
physically interconnected”).
¶4 In 2014, after several attempts to address the consolidation
request, the Commission ordered EPCOR to file a rate application that
included revenue requirements and cost-of-service studies for three
different scenarios: (1) full consolidation of the five districts into a single
“Arizona Wastewater” district; (2) the “stand-alone scenario,” whereby the
five districts would remain distinct; and (3) full deconsolidation, which
would require separation into seven districts based upon the facility
serving each area.
¶5 EPCOR filed the rate applications in April 2016. In February
2017, the Commission held a six-day evidentiary hearing on the issue of
consolidation.
¶6 EPCOR, the Commission Staff, and the Agua Fria, Anthem,
and Mohave districts supported full consolidation. The proponents argued
consolidation would provide “predictable uniform rate structures, reduc[e]
regulatory expenses, and increas[e] efficiencies.” They presented evidence
that many of EPCOR’s operational and administrative activities are
centralized, and that EPCOR obtains capital and debt financing centrally.
EPCOR estimated consolidation would save the utility almost $1 million
over a five-year period, with most of the savings coming from the reduced
number of rate cases filed with the Commission. EPCOR also specifically
noted that most of its wastewater pipes in the Sun City district were nearing
the end of their useful life and would require approximately $57.4 million
in improvements over the next ten years.
¶7 SCHOA and the Residential Utility Consumer Office
(RUCO) intervened and opposed full consolidation in favor of the stand-
2
2 RUCO is the state agency “established to represent the interests of
residential utility consumers in regulatory proceedings involving public
3
SUN CITY v. ACC
Opinion of the Court
alone scenario, arguing the consolidated rate would not reflect the actual
cost to provide services to Sun City residents. The opponents argued
EPCOR relied too heavily upon speculative projections of Sun City’s
infrastructure costs and noted EPCOR had also projected spending more
than $100 million in the other four wastewater districts over the same time
period. None of the parties supported full deconsolidation.
¶8 In a 4-1 decision, the Commission approved full consolidation
with a five-year phase-in that would affect consumer rates as follows:
Full Consolidation (5-Year Phase-In)
District Current Year 1 Year 2 Year 3 Year 4 Year 5
Monthly Bill
Agua Fria $ 71.16 $62.44 $56.50 $50.53 $44.55 $ 38.59
Anthem $ 60.33 $59.15 $55.39 $51.63 $47.89 $ 38.59
Mohave $ 71.07 $57.28 $52.36 $47.44 $42.52 $ 38.59
Sun City $ 22.11 $27.13 $29.74 $32.36 $34.98 $ 38.59
Sun City West $ 32.46 $37.59 $37.59 $37.59 $37.59 $ 38.59
SCHOA unsuccessfully applied for a rehearing, see A.R.S. § 40–253(A)3 (“If
the commission does not grant the application [for rehearing] within
twenty days, it is deemed denied.”), and SCHOA timely appealed. We
have jurisdiction pursuant to A.R.S. § 40-254.01(A). On appeal, Verrado
Community Association, Inc. and EPCOR were both permitted to intervene
in support of the Commission’s decision.
DISCUSSION
I. Constitutionality of the Consolidated Rate
¶9 Arizona’s longstanding public policy regarding monopolistic
public service corporations, including wastewater companies, “is one of
regulated monopoly over free-wheeling competition.” James P. Paul Water
Co. v. Ariz. Corp. Comm’n, 137 Ariz. 426, 429 (1983) (citing Ariz. Corp. Comm’n
v. People’s Freight Line, Inc., 41 Ariz. 158, 165 (1932), and Ariz. Corp. Comm’n
v. Tucson Ins. & Bonding Agency, 3 Ariz. App. 458, 463 (1966)). The Arizona
Constitution grants the Commission “full power to . . . prescribe just and
service corporations before the corporation commission.” Ariz. Rev. Stat.
(A.R.S.) § 40-462(A).
3 Absent material changes from the relevant date, we cite the current
version of rules and statutes.
4
SUN CITY v. ACC
Opinion of the Court
reasonable classifications to be used and just and reasonable rates and
charges to be made and collected, by public service corporations within the
state for service rendered therein . . . .” Ariz. Const. art. 15, § 3. “‘[J]ust and
reasonable rates’ are those that are fair to both consumers and public service
corporations.” Phelps Dodge Corp. v. Ariz. Elec. Power Coop., Inc., 207 Ariz.
95, 106, ¶ 30 (App. 2004) (citing Ariz. Cmty. Action Ass’n v. Ariz. Corp.
Comm’n, 123 Ariz. 228, 231 (1979)).
¶10 “The general theory of utility regulation is that the total
revenue, including income from rates and charges, should be sufficient to
meet a utility’s operating costs and to give the utility and its stockholders a
reasonable rate of return on the utility’s investment.” Scates v. Ariz. Corp.
Comm’n, 118 Ariz. 531, 533-34 (App. 1978) (citing Simms v. Round Valley
Light & Power Co., 80 Ariz. 145, 153 (1956)). When setting rates, the
Commission first determines the revenue requirement by “finding the ‘fair
value’ of a utility’s in-state property, and then using that value as the ‘rate
base’ in the following rate-of-return formula: (Rate Base x Rate of Return) +
Expenses = Revenue Requirement.” RUCO v. Ariz. Corp. Comm’n, 240 Ariz.
108, 110, ¶ 6 (2016) (citing Ariz. Const. art. 15, § 14, and US West Commc’ns,
Inc. v. Ariz. Corp. Comm’n, 201 Ariz. 242, 245, ¶ 13 (2001)).
¶11 Once the Commission has determined the revenue
requirement, it must then apportion the revenue requirement among the
various consumer classes. See Freeport Minerals Corp. v. Ariz. Corp. Comm’n,
244 Ariz. 409, 411, ¶ 8 (App. 2018). Few Arizona cases discuss what factors
the Commission should consider when apportioning the revenue
requirement, but the Commission readily acknowledges that “cost
causation principles are fundamental to rate design.” Other states’ courts
agree “that a cost-of-service study is of paramount importance and may
indeed be a precondition to consideration of a proposed rate design.”
United States v. Pub. Utils. Comm’n (Newport Elec.), 393 A.2d 1092, 1096 (R.I.
1978) (collecting cases); cf. James C. Bonbright, Principles of Public Utility
Rates 67 (1961), https://www.raponline.org/knowledgecenter/principles-
of-public-utility-rates/ (“Rates found to be far in excess of cost are at least
highly vulnerable to a charge of ‘unreasonableness.’”). Accordingly, the
Commission requires cost-of-service studies as part of any rate application.
¶12 The cost of service, however, is but one aspect of setting rates.
See Freeport, 244 Ariz. at 414-15, ¶ 20 (concluding that a rate design may be
constitutional even if it “deviate[s] from strict cost of service”); see also In re
Permian Basin Area Rate Cases, 390 U.S. 747, 776-77 (1968) (“[R]ate-making
agencies are not bound to the service of any single regulatory formula; they
are permitted, unless their statutory authority otherwise plainly indicates,
5
SUN CITY v. ACC
Opinion of the Court
to make the pragmatic adjustments which may be called for by particular
circumstances.”) (quotation omitted). The Commission retains broad
discretion in determining the weight to assign the cost-of-service studies
and may also consider “economic, social, historical and other factors that
may affect customers,” which “often result[s] in rates that deviate from
strict cost of service.” Freeport, 244 Ariz. at 412, ¶ 10; see also Miller v. Ariz.
Corp. Comm’n, 227 Ariz. 21, 28, ¶ 30 (App. 2011) (noting the Commission
may look at “more than ‘setting a fair return on a predetermined value’”)
(quoting Ariz. Corp. Comm’n v. State ex rel. Woods, 171 Ariz. 286, 296 (1992)).
¶13 SCHOA argues the consolidated rate adopted within the
Decision violates the Commission’s constitutional obligation to set “just
and reasonable rates,” because it is not based upon “the bedrock rate-
making principle of cost-causation” and unfairly prejudices Sun City
customers. We review de novo whether a Commission decision runs afoul
of the Arizona Constitution. RUCO, 240 Ariz. at 111, ¶ 10 (citing US West,
201 Ariz. at 244, ¶ 7).4 But “[b]ecause ratemaking is a function specifically
entrusted to the Commission by the Arizona Constitution, a stringent
standard of review applies: ‘We generally presume the Commission’s
actions are constitutional, and we uphold them unless they are arbitrary or
an abuse of discretion.’” Freeport, 244 Ariz. at 411, ¶ 6 (quoting RUCO, 240
Ariz. at 111, ¶ 10). Although we are sympathetic to the dissent’s
reservations regarding the origins of this extreme deference, we are “bound
by the decisions of our supreme court and must apply the law it has
declared.” Austin v. Austin, 237 Ariz. 201, 208, ¶ 21 (App. 2015) (citing
Bazzanella v. Tucson City Court, 195 Ariz. 372, 376, ¶ 8 (App. 1999)). Thus,
we remain mindful of the extreme deference our supreme court has
traditionally granted to the Commission’s ratemaking authority. See State
v. Tucson Gas, Elec. Light & Power Co., 15 Ariz. 294, 306 (1914) (“While it is
not so named, [the Commission] is, in fact, another department of
government, with powers and duties as well defined as any branch of the
4 We reject SCHOA’s suggestion that our analysis begins with strict
scrutiny review. This Court will apply strict scrutiny to determine whether
a law which “‘substantially burdens fundamental rights’ or makes
distinctions based on certain suspect classes” passes constitutional muster.
See, e.g., Ariz. Minority Coal. for Fair Redistricting v. Ariz. Indep. Redistricting
Comm’n, 211 Ariz. 337, 345, ¶ 18 (App. 2005) (quoting Green v. City of Tucson,
340 F.3d 891, 896 (9th Cir. 2003)). This analysis is premised upon the
existence of a substantial burden, id. (explaining when different standards
of review are applied — after differential treatment is identified), which, as
detailed in ¶¶ 22-23, infra, is not the case here.
6
SUN CITY v. ACC
Opinion of the Court
government, and where it is given exclusive power it is supreme. Its
exclusive field may not be invaded by either the courts, the legislative, or
executive.”); see also Ethington v. Wright, 66 Ariz. 382, 392 (1948) (“[I]n the
matter of prescribing classifications, rates, and charges of public service
corporations . . . the Corporation Commission has full and exclusive
power.”); US West, 201 Ariz. at 246, ¶ 21 (“The commission has broad
discretion . . . to determine the weight to be given [the fair value of services]
in any particular case.”).
¶14 In our review, we will accept the Commission’s factual
findings so long as they are supported by substantial evidence. Simms, 80
Ariz. at 154 (citations omitted). If we determine the Decision is
constitutional, we will uphold it unless the opponent demonstrates,
“clearly and convincingly, that the Commission’s decision is arbitrary,
unlawful or unsupported by substantial evidence.” Freeport, 244 Ariz. at
411, ¶ 6 (quoting Litchfield Park Serv. Co. v. Ariz. Corp. Comm’n, 178 Ariz. 431,
434 (App. 1994)); see also A.R.S. § 40-254.01(E) (“In all appeals that are taken
pursuant to this section, the party adverse to the commission or seeking to
vacate or set aside an order of the commission must make a clear and
satisfactory showing that the order is unlawful or unreasonable.”).
A. The Commission Considered Cost-Causation Evidence.
¶15 SCHOA acknowledges the Commission is not strictly bound
by the cost of service, but argues the Commission failed to even consider
the cost of service before consolidating the districts here. The record does
not support this claim.
¶16 The record reflects that EPCOR provided cost-of-service
studies for the full consolidation, stand-alone, and full deconsolidation
scenarios, as required by the Commission’s order and administrative rules.
See Ariz. Admin. Code (A.A.C.) R14-2-103(B)(1)(G). The studies were not
opposed, challenged, or otherwise refuted by any participant and the
Commission Staff found the studies were “performed consistently with the
methodology generally accepted in the industry and that the allocation
factors used had been developed appropriately.”
¶17 Additionally, the Decision reflects the Commission carefully
considered the cost-of-service studies for each proposed scenario. The
Commission cites information from the cost-of-service studies regarding
the projected savings to all consumers from a decrease in the number of rate
7
SUN CITY v. ACC
Opinion of the Court
applications5 under the full consolidation scenario. The Commission also
found that full consolidation would specifically benefit Sun City customers,
noting that “[e]ach $1 million capital investment made in Sun City would
raise a Sun City customer’s monthly bill approximately $0.60 under the
stand-alone scenario or approximately $0.25 under full consolidation.”
¶18 SCHOA relies on one paragraph of the Commission’s two-
hundred-page Decision to suggest the Commission “redefined cost
causation in a way that effectively removed it from consideration” and
“free[d] itself from the shackles of geography and ‘traditional’ cost
causation.” In that paragraph, the Commission stated:
It is true that under traditional cost-causation ratemaking, as
applied to date for EPCOR’s wastewater operations, the costs
attributable to any particular customer class have been
considered only within the confines of a specific
geographically defined wastewater district. . . . [H]owever,
. . . cost-causation does not need to be viewed in such a
narrow manner based on geography but can instead be
considered for customer classes that span across all
geographic areas in which EPCOR has wastewater
operations. Thus, full consolidation, . . . would not necessitate
repudiation of cost-causation principles if all of EPCOR’s
wastewater systems are viewed as one unit with one set of
customers who get broken up into classes not constrained by
geography.
However, SCHOA cites no authority requiring the Commission to limit its
evaluation of the cost of service by geography. Nor is any such restriction
found within Arizona’s Constitution. Accordingly, SCHOA fails to prove
the Commission violated the Arizona Constitution based upon the weight
assigned to the cost-of-service evidence.
B. The Consolidated Rate is Not Discriminatory.
¶19 SCHOA argues the consolidated rate discriminates against
Sun City customers in violation of the Arizona Constitution and A.R.S. § 40-
5 The Commission determines rate changes through a proceeding
called a “rate case.” See generally A.A.C. R14-2-103. Rate cases are long,
expensive, and complicated, often involving multiple intervening parties,
thousands of public comments, detailed reports from experts, and multiple
hearings. See RUCO, 240 Ariz. at 110, ¶ 6.
8
SUN CITY v. ACC
Opinion of the Court
334. The Arizona Constitution indeed prohibits the Commission from
“discrimination in charges, service, or facilities . . . between persons or
places for rendering a like and contemporaneous service.” Ariz. Const. art.
15, § 12. Thus, in cases involving “like and contemporaneous service,” rate
parity is not only encouraged, but constitutionally required.6 By statute,
Arizona likewise prohibits public service corporations from discriminating
in “rates, charges, service, facilities or in any other respect, mak[ing] or
grant[ing] any preference or advantage to any person or subject[ing] any
person to any prejudice or disadvantage,” or “establish[ing] or
maintain[ing] any unreasonable difference as to rates, charges, service,
facilities or in any other respect, either between localities or between classes
of service.” A.R.S. § 40-334(A)-(B).
¶20 Unlike the traditional rate discrimination case, where it is
alleged a utility treats similarly situated customers differently, SCHOA’s
argument is premised upon its assertion that Sun City customers would be
charged the same rate as other consumers but receive lower-cost services,
effectively subsidizing wastewater services in other, geographically distinct
areas. Taken to its logical conclusion, SCHOA’s argument would require
different rates for each customer if there is any discrepancy in the cost of
providing service. We do not interpret the constitutional prohibition on
“discrimination in charges, services, or facilities . . . between persons or
places” as mandating different charges based on location. But even
assuming this novel reverse-rate-discrimination theory could provide a
basis for relief, SCHOA can only prevail if it establishes as error in the
Commission’s finding that customers across the newly consolidated district
receive “like and contemporaneous services.” Although we review
constitutional claims de novo, we are bound by the Commission’s
underlying factual findings if supported by substantial evidence. See supra
¶¶ 13-14.
¶21 SCHOA’s argument focuses on evidence of dissimilarities
between Sun City and the other districts that suggest consolidation is
inappropriate. But we do not reweigh evidence; if a conflict exists, “it is the
Commission’s constitutional responsibility, when engaged in its
ratemaking power, to view conflicting evidence and make determinations
accordingly.” Sierra Club — Grand Canyon Chapter v. Ariz. Corp. Comm’n,
237 Ariz. 568, 576, ¶ 26 (App. 2015); see also DeGroot v. Ariz. Racing Comm’n,
141 Ariz. 331, 336 (App. 1984) (“If two inconsistent factual conclusions
6 An exception, not applicable here, exists for “the granting of free or
reduced rate transportation” to qualifying classes of consumers. Ariz.
Const. art. 15, § 12.
9
SUN CITY v. ACC
Opinion of the Court
could be supported by the record, then there is substantial evidence to
support an administrative decision that elects either conclusion.”) (quoting
Webster v. State Bd. of Regents, 123 Ariz. 363, 365-66 (App. 1979)) (citation
omitted); Moore v. Title Ins. Co. of Minn., 148 Ariz. 408, 413 (App. 1985)
(concluding substantial evidence may support a factual finding “even
though there might be substantial conflicting evidence”) (citing Lewis v.
Midway Lumber, Inc., 114 Ariz. 426, 429 (App. 1977)).
¶22 The Commission resolved conflicting evidence in favor of
finding that the customers within the consolidated district receive like and
contemporaneous wastewater services. This determination is supported by
the record, which contains evidence that all EPCOR customers receive the
“same exact service . . . the same customer service, . . . the same billing
systems, . . . [and] the same operations teams” and that the costs for
operation, maintenance, and administrative tasks are “relatively the same”
across the districts. Additionally, many of EPCOR’s operational and
administrative activities are centralized, and EPCOR obtains capital and
debt financing centrally. The districts also share maintenance personnel,
who are deployed as needed. Although there was evidence that the
treatment costs were “a bit higher” in Anthem because its treatment facility
uses a different technology, its maintenance costs are lower. Additionally,
although the cost-of-service studies reflected variation between the districts
under the stand-alone scenario, these differences largely resulted from the
timing of capital investments, rather than the day-to-day costs of
administration, treatment, and maintenance.
¶23 Because SCHOA has shown no error in the Commission’s
finding that all customers are charged the same rate for the same services,
SCHOA fails to prove the Commission set a discriminatory rate in violation
of the Arizona Constitution or A.R.S. § 40-334.
Other Challenges to the Consolidated Rate
¶24 SCHOA argues the Commission acted arbitrarily and
capriciously in adopting the consolidated rate. “An agency acts arbitrarily
and capriciously when it does not examine ‘the relevant data and articulate
a satisfactory explanation for its action including a rational connection
between the facts found and the choice made.’” Compassionate Care
Dispensary, Inc. v. Ariz. Dep’t of Health Servs., 244 Ariz. 205, 213, ¶ 25 (App.
2018) (quoting Motor Vehicle Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins.,
463 U.S. 29, 43 (1983)). An action is not arbitrary and capricious if there is
“room for two opinions,” so long as it is “exercised honestly and upon due
consideration.” Id. at 214, ¶ 29 (quoting Petras v. Ariz. State Liquor Bd., 129
10
SUN CITY v. ACC
Opinion of the Court
Ariz. 449, 452 (App. 1981)). And again, “[b]ecause ratemaking is such a
complex and specialized endeavor,” we accord substantial deference to the
Commission’s analysis. Miller, 227 Ariz. at 28, ¶ 27 (citing Woods, 171 Ariz.
at 294).
A. The Decision to Adopt a Consolidated Rate is Supported by
Substantial Evidence and Rational Explanation.
¶25 SCHOA first complains the Commission acted arbitrarily and
capriciously by: (1) failing to adequately explain why it looked beyond cost-
causation evidence, and (2) rejecting or failing to consider the merits of
SCHOA’s discrimination claim. We disagree.
¶26 As detailed above, substantial evidence supports the
Commission’s determination that all consumers within the consolidated
district receive similar services from EPCOR. See supra ¶¶ 22-23. Moreover,
the Decision contains a detailed explanation of how the Commission
considered cost-causation principles under the different scenarios, why
avoiding rate shock was a higher priority than staying with a strict cost-
causation rate design, and why the Commission decided not to base rates
upon geographic or demographic features of the districts. The Commission
also explained that it was not, and had never been, bound by the districts’
geographical properties; indeed, two of the then-existing districts at issue
here — Agua Fria and Mohave — were comprised of two distinct land areas
served by separate facilities. Thus, although the scale of this consolidation
was much larger than previous proposals, the Commission’s decision to
consolidate was not without precedent or the result of an abrupt policy
change.
¶27 SCHOA fails to prove the consolidated rate resulted from the
Commission’s failure to adequately consider arguments or explain its
decision. Rather, the Commission’s observations and explanations within
the Decision reflect careful consideration and conscientious rejection of
SCHOA’s arguments.
B. The Commission Gave the Evidence Due Consideration.
¶28 SCHOA argues the Commission acted arbitrarily and
capriciously when it “failed or refused to meaningfully consider” public
comments in opposition to consolidation and an Arizona State University
(ASU) report that found Sun City residents have fewer resources and lower
income than residents of other districts. In a separate but related argument,
SCHOA contends that “the fact that the Commission thoroughly recited the
11
SUN CITY v. ACC
Opinion of the Court
parties’ and witnesses’ respective positions does not mean the Commission
treated them as relevant or valid or weighed them.” We again disagree.
¶29 The record does not support SCHOA’s claim that the
Commission ignored consumer interests. See Phelps Dodge, 207 Ariz. at 107,
¶¶ 30-31 (“[b]earing in mind the Commission’s duty to consider the
interests of ‘all whose interests are involved’ in setting just and reasonable
rates,” including consumer interests). Consumers were well-represented
through the intervening parties. These parties, including SCHOA and
RUCO, were given ample opportunity to, and did, advance the interests of
various consumer groups during the course of the proceedings. And
although the record reflects that the Commission treated public comment
differently than sworn evidence, it acted within its discretion to do so. Cf.
Leslie C. v. Maricopa Cty. Juv. Court, 193 Ariz. 134, 136 (App. 1997)
(concluding the factfinder “must weigh evidence independently from the
conclusions of witnesses” and acted within its discretion in assigning a
greater weight to certain evidence “than did the witnesses”) (citing
Callender v. Transpacific Hotel Corp., 179 Ariz. 557, 562 (App. 1993), and State
Farm Fire & Cas. Co. v. Brown, 183 Ariz. 518, 525-26 (App. 1995)).
¶30 Finally, the record reflects the Commission considered and
rejected the ASU report, ultimately finding “the demographic and
economic information provided [to be] of limited utility in deciding the
consolidation issue” because “relative community affluence does not
present a valid basis for establishing the justness and reasonableness of
rates.” SCHOA argues the “rationale for discounting this evidence is not
persuasive,” but we, again, defer to the weight the Commission assigned
the evidence. See Sierra Club, 237 Ariz. at 576, ¶ 26 (deferring to the
Commission’s reliance on evidence even after the opponent of the rate
claimed the decision “was based on speculative evidence that ‘defied
credibility’”); Simms, 80 Ariz. at 146 (“The commission is entitled to
reasonably determine the probative force of [relevant evidence].”) (citing
R.R. Comm’n of Cal. v. Pac. Gas & Elec. Co., 302 U.S. 388, 397-98 (1938)).
¶31 The record clearly demonstrates the Commission considered
all the evidence, identified what it deemed relevant, and weighed the
competing rate designs. The fact that the Commission assigned less weight
to or rejected certain evidence does not render the Decision arbitrary. To
the contrary, the resolution of conflicts in the evidence is an essential part
of the Commission’s ratemaking function. See Sierra Club, 237 Ariz. at 576,
¶ 26. SCHOA simply invites this Court to reweigh the evidence — a task
in which we will not engage. See Freeport, 244 Ariz. at 417, ¶ 34 (“We are
12
SUN CITY v. ACC
Opinion of the Court
not empowered to substitute our judgment of what we may find to be an
optimal rate structure for the Commission’s.”).
C. The Commission Properly Considered Projected Future
Expenses.
¶32 SCHOA argues the Commission acted arbitrarily and
capriciously when it considered the Sun City district’s projected future
expenses as part of its consolidation analysis. Without citation to authority,
SCHOA argues “[a]nticipating costs five to ten years into the future is
illegitimate in a rate making process that creates a revenue requirement
based on historic costs in an expired test year, augmentable only under strict
criteria that do not include distant eventualities.”
¶33 In the limited context of a fair-value determination, our
supreme court has held that “the Commission in its discretion can consider
matters subsequent to the historic year, bearing in mind that all parties are
entitled to a reasonable opportunity to rebut evidence presented.” Ariz.
Corp. Comm’n v. Ariz. Pub. Serv. Co., 113 Ariz. 368, 371 (1976). Although
Arizona Public Service only addressed the inclusion of “projects contracted
for and commenced during the historical year” in the fair-value
determination, see id., the principle can apply more broadly to the
Commission’s policy decision to assign greater weight to principles such as
gradualism or avoiding rate shock. See Freeport, 244 Ariz. at 414-15, ¶ 20
(concluding that “rate shock is a well-founded concern . . . when
establishing a revenue allocation scheme that is just and reasonable”). The
projected future expenses were relevant to the Commission’s stated policy
decision to gradually increase rates and avoid rate shock through
consolidation here, and the Commission did not err in considering the
future cost of service for this purpose. Moreover, all parties had ample
opportunity to rebut the evidence at the evidentiary hearing, and several
attempted to do so. On this record, SCHOA has shown no error.
CONCLUSION
¶34 The Decision is affirmed.
13
SUN CITY v. ACC
Brown, J., Dissenting
B R O W N, Judge, dissenting:
¶35 The majority errs by giving virtually absolute deference to the
Commission’s groundbreaking decision to approve EPCOR’s application to
consolidate five dissimilar sewer districts and adopt the same rate for each
district. Even though our Constitution and statutes prohibit the imposition
of discriminatory charges or rates, the Commission never determined
whether this new consolidated rate design discriminates among groups of
customers who are quite dissimilar, other than they now share a common
owner. Not only did the Commission fail to resolve the discrimination
issue, plainly raised by SCHOA, it washed its hands of any responsibility
to address it.
¶36 Despite this gaping hole in the Commission’s ruling, the
majority pushes the highly deferential treatment afforded the Commission
for more than a century even further by concluding that EPCOR’s new rates
run afoul of neither Article 15, § 12 of the Constitution (“anti-discrimination
clause”) or § 40-334(A). The majority summarily holds that rates are not
discriminatory under our statutes and Constitution whenever the
Commission resolves conflicting evidence to conclude that customers
receive “like and contemporaneous service.” Yet the Commission itself
offered no explanation why a uniform rate does not impose a
discriminatory charge on residents when the cost to serve those residents
differs drastically. Nor did the Commission even attempt to explain how
the uniform rate does not subject Sun City customers to prejudice or
disadvantage under § 40-334(A). The majority concludes nonetheless that
the decision to force SCHOA to subsidize four other sewer districts through
consolidation was not arbitrary and is supported by substantial evidence.
¶37 I cannot agree with these broad conclusions, particularly
considering the Commission’s complete failure to address whether
consolidation violates the anti-discrimination clause or § 40-334(A). Given
the importance of the Commission’s role in our state government,
Arizonans deserve a thorough constitutional and statutory analysis of this
newly minted policy. I would therefore remand the matter to the
Commission with an instruction to squarely address the discrimination
issues raised by SCHOA. See A.R.S. § 40–254.01(A) (granting this court the
power to remand an order of the Commission “upon a clear and satisfactory
showing that the order is unlawful or unreasonable”).
A. Standard of Review: What is the Court’s Role?
¶38 I must first address the fundamental problem underlying
much of the majority’s analysis—excessive deference. For decades, both
14
SUN CITY v. ACC
Brown, J., Dissenting
this court and our supreme court have repeated broad pronouncements
suggesting that Commission decisions, especially in rate cases, are
essentially untouchable. Those statements stem from the perception that
the judiciary has an extremely narrow role in these types of cases. That
perception is not necessarily wrong, especially when the Commission
resolves highly technical matters within its expertise. I believe our supreme
court should clarify, however, our proper function in reviewing complex
legal issues like discrimination so that the judicial branch may continue to
ensure that the Commission follows its constitutional and statutory
obligations. Otherwise, one may fairly question why we are even asked to
review these types of cases, with all their complexities, when the outcome
is essentially predetermined.
¶39 The majority correctly notes that we are not free to disregard
controlling authority of our supreme court. As explained below, however,
some of the authority commonly cited for the extraordinary deference given
to the Commission has its origins in dicta, and flawed dicta at that. See
Town of Chino Valley v. City of Prescott, 131 Ariz. 78, 81 (1981) (“Dictum thrice
repeated is still dictum. It is a court’s statement on a question not
necessarily involved in the case and, hence, is without force of
adjudication. . . . It is not controlling as precedent.”).
¶40 The majority’s extreme deference to the Commission, notably
urged by EPCOR and the intervening districts, is but the latest in a
problematic trend originating with oft-repeated dicta in Tucson Gas: “While
it is not so named,” the Commission is “in fact, another department of
government,” and “[i]ts exclusive field may not be invaded by either the
courts, the legislative, or executive.” 15 Ariz. at 306. In that case, the
legislature had passed a law prohibiting utilities from charging for more
than the actual amount of resources furnished to the consumer. Id. at 296.
Notwithstanding this law, a utility attempted to collect a minimum rate
from its customers. Id. The question before the court was whether the
legislative act was unconstitutional. Id. The two-justice majority held that
the legislature had attempted to “fix rates,” a power that lay solely with the
Commission, and thus the statute could not stand. Id. at 301, 307–08.
¶41 Tucson Gas takes a dim view of the judiciary’s role in
reviewing Commission decisions. To reach its holding, the supreme court
noted “[t]he unwisdom and impracticability of imposing upon the courts,
in the first instance, this kind of litigation.” Id. at 305. This led the court to
conclude that Arizona’s founders “knew the evil, and sought to correct it in
the fundamental law of the state by constituting the Corporation
Commission a body empowered . . . to exercise not only legislative but the
15
SUN CITY v. ACC
Brown, J., Dissenting
judicial, administrative, and executive functions of the government. . . . Its
exclusive field may not be invaded by either the courts, the legislative, or the
executive.” Id. at 306 (emphasis added). This or similar language has been
recycled often in framing the standard for reviewing the Commission’s
decisions. See, e.g., RUCO, 240 Ariz. at 111, ¶ 12; Ariz. Corp. Comm’n v. State
ex rel. Woods, 171 Ariz. 286, 292 (1992); Consol. Water Utils., Ltd. v. Ariz. Corp.
Comm’n, 178 Ariz. 478, 483 (App. 1993); Sw. Gas Corp. v. Ariz. Corp. Comm’n,
169 Ariz. 279, 283 (App. 1991); supra ¶ 13. Applied literally, it leaves no role
for the courts to fill.
¶42 I cannot say whether the two justices in the Tucson Gas
majority (only one of whom was a delegate to our state’s constitutional
convention) had the better claim to original intent than did the dissenting
justice (also a delegate), but I would not quarrel with the notion of absolute
deference to the Commission that Tucson Gas embraces if it were actually
mandated by the text of our Constitution. But that is not the case.
¶43 Contrary to popular belief, the Commission is not, “in fact,
another department of government.” See Tucson Gas, 15 Ariz. at 306. As
Article 3 of the Constitution plainly states, “[t]he powers of the government
. . . shall be divided into three separate departments.” Ariz. Const. art. 3
(emphasis added). Article 3 further states that unless the Constitution itself
provides otherwise, no department may “exercise the powers properly
belonging to either of the others.” Id. So while the Constitution expressly
gives the Commission the authority and responsibility to exercise various
aspects of each of the three governmental powers, the Commission is still
not an independent and coequal branch of government on equal footing
with the legislative, executive, or judicial branches.
¶44 The Constitution’s silence on this issue is a sufficient basis to
conclude that the Commission is neither a fourth branch of government nor
exempt from judicial review. But that silence is even more prominent given
the conditions in which Arizona’s government was founded. The framers
of our Constitution, distrustful of concentrations of governmental power,
explicitly dispersed that power among different institutions in our state’s
new government. John D. Leshy, The Making of the Arizona Constitution, 20
Ariz. St. L.J. 1, 70 (1988). They believed “that process and structure are key
controls on the tendency to abuse power.” Id. And despite their cardinal
“concern with direct democracy,” the framers “had no real reason to regard
judicial review as antidemocratic” because of independent democratic
safeguards on the judiciary. Id. at 75 (discussing, for example, the ease of
amending the Constitution). Neither the legislature nor the executive
branch is immune from judicial review, even though each is a coequal
16
SUN CITY v. ACC
Brown, J., Dissenting
branch with the judiciary. It is, after all, the function of the judiciary is to
review the constitutionality of “the acts of other departments”—a
proposition widely accepted at the time of statehood. Id. at 74. That being
the case, why the courts have come to concede virtual autonomy to the
Commission is a mystery.
¶45 Given the language of Article 3, had the framers wanted the
Commission to be treated as a fourth branch of government virtually
immune from judicial review (unlike the other branches), they would
certainly have expressed such an extraordinary proposition in the text. But
for some reason our courts have failed to consistently recognize that
principle. Over 35 years ago, responding to the Commission’s argument
suggesting its decision was not subject to judicial review, this court
explained that the Commission is not exempt from the “general principle
that agency proceedings leading to rate decisions are . . . subject to judicial
scrutiny and review relating to compliance with statutory requirements
and constitutional due process standards.” State ex rel. Corbin v. Ariz. Corp.
Comm’n, 143 Ariz. 219, 224 (App. 1984). Though we acknowledged the
Commission’s “constitutional genesis,” we found “no validity” in its
assertion that the judiciary had no role to play. See id. at 224–25. Despite
that finding, Arizona’s appellate decisions continue to cite Tucson Gas’s
broad dicta implying that judicial review of Commission decisions means
we will affirm if there is any basis whatsoever for doing so.
¶46 As relevant here, the Commission’s power is “to prescribe
classifications, rates, charges, rules, regulations, or orders.” Tucson Gas, 15
Ariz. at 307. Thus, in the realm of ratemaking, what Tucson Gas stands for
is that neither the legislature nor the courts can set rates or charges. But it
must still be the province and the duty of the courts to determine (once a
rate is prescribed) whether it is just, reasonable, and not discriminatory.
¶47 Ultimately, there is ample room in the scheme of separation
of powers for both the Commission and the courts to carry out our
respective roles. It is the Commission, not the courts, that has the expertise
required to develop the complex set of facts necessary to perform its
constitutional function and, ultimately, to articulate how those facts
support its ultimate decision. See Marco Crane & Rigging v. Ariz. Corp.
Comm’n, 155 Ariz. 292, 294 (App. 1987); Campbell v. Mountain States Tel. &
Tel. Co., 120 Ariz. 426, 431–32 (App. 1978). Indeed, it would be the height
of judicial pride to conclude otherwise because, unlike the Commission, we
have neither political constituencies nor any special expertise in, what our
framers themselves called, “the most complicated subject in the economic
world.” The Records of the Arizona Constitutional Convention of 1910, 979 (John
17
SUN CITY v. ACC
Brown, J., Dissenting
S. Goff ed., 1991); see also Marsh v. Or. Nat. Res. Council, 490 U.S. 360, 377
(1989) (noting deference should be at its height when a high level of
technical experience is required to resolve the issue); Chevron, U.S.A., Inc. v.
Nat. Res. Def. Council, Inc., 467 U.S. 837, 865 (1984) (“Judges are not experts
in the field, and are not part of the political branches of Government.”).
¶48 But judicial review is meaningless if reviewing courts merely
“rubberstamp” Commission decisions without ensuring the Commission
complied with, or at least demonstrated its awareness of, its constitutional
and statutory obligations. See NLRB v. Brown, 380 U.S. 278, 291–92 (1965);
see also Pub. Citizen Health Research Grp. v. Tyson, 796 F.2d 1479, 1505 (D.C.
Cir. 1986) (explaining that a reviewing court owes no deference “when the
agency simply has not exercised its expertise”); cf. Gaveck v. Ariz. State Bd.
of Podiatry Exam’rs, 222 Ariz. 433, 438, ¶ 18 (App. 2009) (“Without clearly
articulated standards as a backdrop against which the court can review
discipline, the judicial function is reduced to serving as a rubber-stamp for
the Board’s action.” (citation omitted)). Although we do not “decide
matters entrusted to other branches,” we remain obliged to “determine
respective constitutional boundaries.” State v. Maestas, 244 Ariz. 9, 15, ¶ 28
(2018) (Bolick, J., concurring); see Forty-Seventh Legislature of State v.
Napolitano, 213 Ariz. 482, 485, ¶ 8 (2006) (“[D]etermin[ing] whether a branch
of state government has exceeded the powers granted by the Arizona
Constitution . . . traditionally falls to the courts to resolve.”). That the
Commission is a powerful and centralized government agency with
authority over necessities of life like water, wastewater, and electricity only
makes it more imperative that we carry out this duty when reviewing
Commission decisions. See Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1155
(10th Cir. 2016) (Gorsuch, J., concurring).
¶49 The proper exercise of our judicial function respects the
Commission’s expertise by ensuring the Commission has, in fact, exercised
that expertise. Our review must remain probing enough to require that the
Commission clearly articulates logical reasons for its decisions. See Motor
Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 42–43 (1983);
In re Permian Basin Area Rate Cases, 390 U.S. 747, 792 (1968) (explaining that
the court’s responsibility was to assure itself that the Federal Power
Commission gave “reasoned consideration to each of the pertinent factors.
Judicial review of the Commission’s orders will therefore function . . . only
if the Commission indicates fully and carefully the methods by which, and
the purposes for which, it has chosen to act . . . .”). When we do so it ensures
that the Commission remains accountable to the voting public whose votes,
in Arizona at least, ultimately decide the course the Commission will take.
See Ariz. Const. art. 15, § 1; see also Eduardo Jordão & Susan Rose-
18
SUN CITY v. ACC
Brown, J., Dissenting
Ackerman, Judicial Review of Executive Policymaking in Advanced Democracies:
Beyond Rights Review, 66 Admin. L. Rev. 1, 46 (2014). It is critical, therefore,
that the Commission explain the reasons for its decisions so that the
voters—who share the benefits or burdens of those decisions—can make
informed decisions at the ballot box. If our review fails to ensure that the
Commission provide an adequate answer to fairly presented arguments of
constitutional magnitude, then we undermine the people’s ability to carry
out their critical function within our constitutional framework. See Ariz.
Corp. Comm’n v. State ex rel. Woods, 171 Ariz. 286, 297 n.9 (1992) (“Under
Arizona’s system . . . the remedy for regulatory abuse is election.”).
¶50 Resolving claims of discriminatory ratemaking under the
anti-discrimination clause and § 40-334 is, in no small way, the proper way
for the courts and the Commission to carry out our respective roles.
Whether discrimination has occurred is ultimately a legal question, but
answering that question undoubtedly depends heavily on the complex set
of facts underlying ratemaking. In this context, it is the Commission, not
this court, that is expert at developing those facts, articulating a rational
connection between those facts and its chosen policy, and ultimately, as
relevant here, offering a reasoned justification as to why its decision does
not violate the prohibitions of our Constitution and statutes. Only when
the Commission has brought its expertise to bear on the issue can we
properly carry out our duty to review whether consolidation violates the
anti-discrimination clause or § 403-34. That is the only way we can ascertain
whether the Commission has exceeded constitutional and statutory
boundaries by imposing a discriminatory charge. And it is no answer to
say that the Commission’s lack of analysis is irrelevant because our review
is de novo anyway. We are not empowered to make decisions in the first
instance. De novo review is just that, review.
¶51 This case presents an ideal opportunity, then, for our supreme
court to clarify that Commission decisions are not untouchable by the
judiciary. They are subject to judicial review as contemplated by the
Constitution and statutes that outline the process aggrieved parties may
follow in challenging a Commission order. And if the standards for
evaluating a discrimination claim under Article 15, § 12, or § 40-334 are
different than they are in other areas of the law, I urge the supreme court to
announce and explain such standards.
¶52 In sum, we should not be so willing to defer to the
Commission that we create answers to arguments it never addressed in the
first instance, simply because it wears different constitutional hats. The
word “discrimination” or “discriminatory” does not even appear in the
19
SUN CITY v. ACC
Brown, J., Dissenting
Commission’s findings of fact and conclusions of law; nor is there any
reference to the relevant statute or constitutional provision. Not only do
we have the authority to remand under these circumstances, it is our
obligation to do so. When the Commission fails to meaningfully address a
constitutional challenge to its proposed plan of action, and thereby ignores
its duty to exercise its limited judicial power, traditional separation of
powers principles require remanding so the Commission may address the
constitutional challenge.
B. Rate Discrimination
¶53 Putting aside my disagreement with the deferential posture
applied by the majority, under even that extremely generous standard of
review, I would remand this case based on the Commission’s failure to
address SCHOA’s claim that the consolidated rate structure violates the
constitutional and statutory prohibitions against discrimination.
¶54 The Commission’s failure to consider the prospect of
discrimination may be due to the originality of SCHOA’s claim. The
Commission and the majority seem to understand SCHOA to argue that a
consolidated rate discriminates against them because they receive different
“services” within the meaning of the anti-discrimination clause and
§ 40-334. Supra ¶¶ 19–23. I read it differently. It seems clear to me that
SCHOA has been saying all along that a uniform charge for wastewater is
unconstitutionally discriminatory because it costs so much less for EPCOR
to provide SCHOA’s residents with the “like and contemporaneous
service” it provides the other districts—wastewater treatment.7
¶55 SCHOA therefore argues that not only did the Commission
fail to adequately explain why it rejected SCHOA’s evidence and
arguments about discrimination, but it appears the Commission failed to
even consider the possibility that a uniform rate was discriminatory. And,
as SCHOA emphasizes, the Commission’s decision represents an abrupt
and substantial departure from its own precedent. Unlike the majority, I
believe SCHOA has clearly and convincingly demonstrated that the
Commission’s decision is “arbitrary, unlawful or unsupported by
7 For example, the opening brief states that “[r]ate discrimination thus
arises when (1) a utility imposes a single, uniform rate on consumers in
separate communities notwithstanding vast differences in the utility’s cost
to serve those communities,” and (2) “[w]hen a firm sells the same service
at rates which are not proportional to costs, discrimination results.”
20
SUN CITY v. ACC
Brown, J., Dissenting
substantial evidence.” Litchfield Park Serv. Co. v. Ariz. Corp. Comm’n, 178
Ariz. 431, 434 (App. 1994).
¶56 A Commission decision is supported by substantial evidence
when it contains “evidence which would permit a reasonable person to
reach the Commission’s result.” Sierra Club, 237 Ariz. 568, 575, ¶ 22; see also
Universal Camera Corp. v. NLRB, 340 U.S. 474, 481 (1951) (noting a reviewing
court cannot just “read only one side of the case and, if they find any
evidence there, [conclude] the administrative action is to be sustained and
the record to the contrary is to be ignored”). Even if substantial evidence
supports the Commission’s choice, it “may in another regard be ‘arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance with
law’—for example, because it is an abrupt and unexplained departure from
agency precedent.” Ass’n of Data Processing Serv. Orgs., Inc. v. Bd. of
Governors of Fed. Reserve Sys., 745 F.2d 677, 683 (D.C. Cir. 1984). Decisions
should also be set aside as arbitrary when they “fail[] to consider an
important aspect of the problem” or to “articulate a satisfactory explanation
for its action including a ‘rational connection between the facts found and
the choices made.’” State Farm, 463 U.S. at 43 (citation omitted).
¶57 This standard, undoubtedly, does not demand “further
justification . . . by the mere fact of policy change” from the Commission,
but it does demand “a reasoned explanation . . . for disregarding facts and
circumstances that underlay or were engendered by the prior policy.” FCC
v. Fox Television Studios, 556 U.S. 502, 515–16 (2009) (emphasis added).
Importantly, we may not supply that explanation when the Commission
has not. See Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2127 (2016).
Among other things, our attempt to do so would itself violate the separation
of powers. See Ariz. Const. art. 3; Chenery Corp., 332 U.S. at 196. As the
United States Supreme Court explained long ago:
If the administrative action is to be tested by the basis upon
which it purports to rest, that basis must be set forth with such
clarity as to be understandable. It will not do for a court to be
compelled to guess at the theory underlying the agency’s
action; nor can a court be expected to chisel that which must
be precise from what the agency has left vague and indecisive.
In other words, “We must know what a decision means before
the duty becomes ours to say whether it is right or wrong.”
Chenery Corp., 332 U.S. at 196–97 (citation omitted). As noted, the
Commission has an essential constitutional role to play. And when we
resolve issues the Commission should have addressed in the first instance,
21
SUN CITY v. ACC
Brown, J., Dissenting
we intrude on its constitutionally assigned ratemaking role. Ariz. Const.
art. 15, § 3.
¶58 I emphasize these points not because the majority disagrees
with them, but because reasonable application of these principles compels
the conclusion that when the Commission decided to abandon long-
favored cost-causation principles in favor of consolidation—and became
aware that such consolidation could trigger discrimination in violation of
both our statutes and Constitution—it was required to provide reasons for
the change that are legally defensible and supported by evidence. See
Freeport Minerals Corp. v. Ariz. Corp. Comm’n, 244 Ariz. 409, 414–17,
¶¶ 20–33 (App. 2018) (recognizing that (1) avoiding “rate shock” may
permit the Commission to “deviate from strict cost of service” but that
“does not mean that the instant rate allocation necessarily passes
constitutional muster;” and (2) evaluating the record to determine if this
was “sufficient justification”).
¶59 Despite various warning signs that a consolidated rate might
be discriminatory, the Commission never made any finding or offered any
explanation that consolidating the five districts in a way that will compel
SCHOA to subsidize the other four districts is not unconstitutional
discrimination or does not violate A.R.S. § 40-334(A). The Commission
glossed over facts that seem to fall within the prohibitions of both our
Constitution and statutes, for example, citing “the fact that only Sun City
customers would provide any subsidies” to other EPCOR districts as a great
boon in favor of consolidation, seemingly suggesting that SCHOA’s
customers should feel elated that they are the only ones who will have to
pay a portion of the sewer bills for customers in the other districts.8
¶60 Perhaps the most troubling aspect of this case, though, is that
the Commission seemed to go out of its way to make clear it did not intend
to provide an explanation as to why a consolidated rate was not
discriminatory. In addressing the arguments concerning cost-causation,
the Commission relied heavily on the EPA/NARUC study. That study
employed the Bonbright Eight-Criteria standard, which includes
8 Notably, the Sun City district has substantially more customers than
any of the other four districts: Agua Fria serves 6,829 customers; Anthem
serves 9,025 customers; Mohave serves 1,511 customers; Sun City West
serves 17,450 customers; and Sun City serves 31,570 customers. And
unique among the five districts is that Sun City’s wastewater is treated at
the City of Tolleson Wastewater Treatment Plant, which EPCOR neither
owns, operates, nor controls.
22
SUN CITY v. ACC
Brown, J., Dissenting
“[a]voidance of ‘undue discrimination’ in rate relationships.” Although
this study concluded that a single-tariff approach was “generally
consistent” with some of the Bonbright factors, the Commission expressly
declined to reach any conclusion about whether a single-tariff approach
was discriminatory and simply stated that “regulators have more room for
discretion as to fairness, discrimination, and efficiency.”
¶61 In Arizona, however, our Constitution states there shall be
“no discrimination”; it does not give regulators permission to discriminate
so long as they do not abuse their discretion. Ariz. Const. art. 15, § 12. As
a constitutional and statutory directive, the question of discrimination was
surely “an important aspect of the problem” the Commission was required
to resolve. See State Farm, 463 U.S. at 4; see Earth Island Inst. v. Hogarth, 494
F.3d 757, 760–61 (9th Cir. 2007) (recognizing that an agency action that fails
to comply with “Congressional mandates” is arbitrary). Given the
Commission’s finding that Sun City alone would subsidize the other
EPCOR districts, which on its face implicates some type of discrimination,
the need to resolve whether that discrimination violates Arizona law seems
especially pressing. Although the onus was on the Commission to explain
why such subsidization was not unlawful, it plainly chose to ignore the
issue. That alone renders the Decision arbitrary.
¶62 Charitably construed, the Decision could be read to say that
the consolidated rate is discrimination but that it is justified on the grounds
that “simply comparing utility rates in neighboring areas . . . is not by itself
typically a valid basis for assessing whether rates for a company are just
and reasonable because a host of factors can influence rate disparity
between and among individual companies and municipal utilities.” If that
were true, then no one could doubt that, given the mandates of our
Constitution and statutes, we would be required to apply some tier of
scrutiny to the Decision. The point, however, is that we should not have to
guess. The Commission should have at least explained what those “factors”
were, why they applied in this case to make the newly consolidated rate
structure legally permissible, and what legal standard it used to reach its
conclusion.9 Only then can we fulfill our proper role to ensure that the
Commission has not contravened constitutional or statutory boundaries.
9 SCHOA argues that as a right guaranteed by the Arizona
Constitution, rate discrimination should receive strict scrutiny review. Yet
the Decision does not address this contention, nor the applicable standard
of review. The Commission should have, at the least, stated how it
23
SUN CITY v. ACC
Brown, J., Dissenting
¶63 Although the Commission may have indicated that it
considered cost evidence, it never explained how abandoning costs did not
create discrimination. The five reasons the Commission offered on pages
201–206 of the Decision do nothing to change this conclusion. Of these, only
the first and last reasons cited by the majority, supra ¶ 26, implicate in any
way the discrimination question, but they still offer no rational connection
between the facts found and the choices made. For example, the
Commission explained it was abandoning “traditional cost-causation
ratemaking, as applied to date” but that did not matter because it will
follow cost-causation principles after consolidation, viewing the districts as
one whole. This “model of circular reasoning, in which the premises of the
argument feed on the conclusion,” does nothing to explain why the
consolidation itself—which compels Sun City residents to subsidize other
EPCOR customers—does not create illegal discrimination, and as such
cannot pass muster. See Wesberry v. Sanders, 376 U.S. 1, 25 (1964) (Harlan,
J., dissenting); Elec. Consumers Res. Council v. FERC, 747 F.2d 1511, 1515–16
(D.C. Cir. 1984) (reasoning that a FERC decision was deficient for an
“absence of evidence and explanation” when the “proposed rate design
result[ed] in a cross-subsidization” and FERC offered only circular
reasoning to deny the existence of rate discrimination); see also Maher
Terminals, LLC v. Fed. Mar. Comm’n, 816 F.3d 888, 890–91 (D.C. Cir. 2016)
(reasoning that the commission’s order approving a disparity in rental rates
offered an inadequate explanation because, among other things, it relied on
circular reasoning).
¶64 A concerning theme of the Decision is the Commission’s
apparent acceptance of Verrado’s claim that stand-alone rates would be
unconstitutional because “price discrimination” would continue to exist
addressed SCHOA’s constitutional arguments—what is being compared
and analyzed. The majority seems to conclude that no constitutional injury
sufficient to trigger any form of scrutiny occurred merely because the
Commission said so. I know of no area of constitutional law where we
determine whether an injury has occurred by simply deferring to the
decision of the body we are reviewing, especially when that decision is
silent on the matter. At any rate, the majority’s premise is inaccurate—even
if we find no “substantial burden” of a fundamental right, then the law or
decision at issue remains subject to review, albeit under a lower level of
scrutiny.
24
SUN CITY v. ACC
Brown, J., Dissenting
amongst the five districts.10 To the extent discrimination was occurring
before consolidation, it was not created by SCHOA. Before EPCOR
acquired SCHOA, it could not be said that SCHOA’s lower costs created
any discrimination between it and the other districts involved in this case.
According to the Commission’s logic, however, the day after EPCOR
acquired SCHOA an immediate discrimination problem arose because the
other districts’ less efficient systems caused their customers to have to pay
higher rates.11 The majority also appears to embrace this logic, which
essentially means that going forward a single tariff must be used for all
multi-district public service corporations because to find otherwise would
be discriminatory. This approach ignores the obvious fact that until EPCOR
decided it would be profitable to acquire the wastewater rights of these
districts, nothing about their differing rate structures was discriminatory.
The only thing that changed was ownership of the districts. I cannot believe
the framers of our Constitution contemplated that the anti-discrimination
clause could be used as a sword here to compel consolidation under the
guise of eliminating discrimination. Similarly, I see nothing in § 40-334
suggesting that the legislature intended to require that outcome.
¶65 Consolidation is not like typical ratemaking. The obvious
potential for discrimination exists when dissimilar districts are
consolidated. It is therefore plain that the Commission must consider any
discriminatory impact before consolidation. Such caution is warranted here,
because this decision will undoubtedly set precedent for future
consolidation cases. And if today’s holding is any barometer, such
consolidation will occur without regard to where the districts are located,
what their customers have paid in the past, what sacrifices they may have
made to build and maintain a different (and arguably more efficient)
system, or whether better management has allowed them to keep their
unique, and perhaps less costly, systems. Moreover, forced consolidation
10 The Commission, apparently making this implicit finding without
any constitutional or statutory analysis, somehow believed it was
appropriate to reach that determination and yet failed to address the
alleged discrimination asserted by SCHOA.
11 Other entities that own multiple water or wastewater treatment
systems in Arizona with different customer rates for each system will likely
be surprised to discover that, according to the Commission’s implicit
reasoning in this case, they are now violating the anti-discrimination
provisions at issue here. Of course, if the entities are in favor of
consolidation, then this case will presumably make it easier for them to win
Commission approval to do so.
25
SUN CITY v. ACC
Brown, J., Dissenting
may occur even though the majority of customers in a particular district
might like to avoid dealing with a larger administrative bureaucracy.
¶66 The Commission states—and the majority appears to
accept—that it “generally believes that consolidating smaller utilities into
larger utilities is beneficial to the smaller utilities and their customers, and
that principle should apply equally in the context of consolidating distinct
geographically defined utility districts into a unified district.” If
consolidation is discriminatory, however, that would present an obstacle to
the Commission’s new policy. The Commission’s vague “belief” of what is
good for consumers generally, as a matter of policy, is no answer to the
question of whether rates discriminate against a group of ratepayers
specifically.
¶67 Likewise, the evidence relied on in ¶ 22 of the majority
opinion does not address SCHOA’s claim that, again, is grounded in the
assumption that the districts receive like and contemporaneous services.
The Commission’s finding that “[t]here is not an appreciable difference in
the wastewater service received by customers located in different EPCOR
wastewater districts” completely misses the mark. (Emphasis added.) It
has no bearing on SCHOA’s claim of discriminatory charges. The only cited
evidence that addresses whether consolidation would impose a
discriminatory charge on Sun City customers is the testimony of Shawn
Bradford, EPCOR’s vice president of corporate services, who generally
opined that costs would be fairly consistent throughout the five districts.
But Bradford could not say whether this was true of Sun City because
EPCOR has no control over costs at the Tolleson plant, where Sun City’s
wastewater is treated. Thus, his statement that he “would think that the
operating costs to treat the effluent . . . is roughly the same” rested, by his
own admission, on sheer speculation. I do not agree that purely speculative
testimony of one witness is “evidence which would permit a reasonable
person to reach the Commission’s result.” See Sierra Club—Grand Canyon
Chapter, 237 Ariz. at 575, ¶ 22; City of Tucson v. Citizens Utils. Water Co., 17
Ariz. App. 477, 481 (1972) (“Mere speculation and arbitrary conclusions are
not substantial evidence and cannot be determinative.”).
¶68 The failure of the Commission to provide a reasoned
resolution of SCHOA’s discrimination claim, and the majority’s labored
effort to uphold its decision despite that absence, is perhaps the best
evidence of why we should not opine on such issues without the benefit of
a reasoned explanation by the Commission—here, the majority’s holding
saps the anti-discrimination clause, as well as § 40-334, of virtually all
meaning. In short, we should not have to guess as to such explanation.
26
SUN CITY v. ACC
Brown, J., Dissenting
¶69 Existing caselaw in this area is quite sparse, with almost no
cases construing the two anti-discrimination provisions. In Town of
Wickenburg v. Sabin, 68 Ariz. 75, 77 (1948), however, our supreme court
stated that “the law on discrimination as applied to public service
corporations generally is well settled.” The court explained how a public
service corporation can avoid acting in a discriminatory manner:
The charges must be equal to all for the same service under
like circumstances. A public service corporation is impressed
with the obligation of furnishing its service to each patron at
the same price it makes to every other patron for the same or
substantially the same or similar service. . . . The common law
upon the subject is founded on public policy which requires
one engaged in a public calling to charge a reasonable and
uniform price to all persons for the same service rendered
under the same circumstances.
Id. at 77–78 (quoting 4 Eugene McQuillin, Municipal Corporations § 1829
(2d ed. 1943)). Relying on Wickenburg, this court has further described the
non-discrimination doctrine as the “obligation of a public service
corporation to provide impartial services and rates to all its customers
similarly situated.” Miller v. Salt River Valley Water Users’ Ass’n, 11 Ariz.
App. 256, 260 (1970). Neither Wickenburg nor Miller, however, relied on the
Arizona Constitution or § 40-334 because neither involved a public service
corporation and thus provide little guidance on construing these anti-
discrimination provisions. See Miller, 11 Ariz. App. at 260 (noting the
provision while passing over the defendant’s argument).
¶70 As stated above, supra ¶ 54, SCHOA raises an atypical
discrimination claim. It argues the charge imposed creates disparate rates
of return among the five districts and that, of these, Sun City alone is
prejudiced. Despite the majority’s skepticism of such a claim, other courts
in similar contexts agree that such a rate structure is discriminatory. E.g.,
Cities of Riverside & Colton v. FERC, 765 F.2d 1434, 1439 (9th Cir. 1985); Ala.
Elec. Co-op., Inc. v. FERC, 684 F.2d 20, 28 (D.C. Cir. 1982); Glacier State Tele.
Co. v. Alaska Pub. Utils. Comm’n, 724 P.2d 1187, 1191 (Alaska 1986). And
SCHOA’s claim tracks the plain language of both anti-discrimination
provisions. See Ariz. Const. art. 15, § 12 (forbidding public service
corporations from imposing discriminatory charges as between “persons or
places” to which it provides “a like and contemporaneous service”);
§ 40-334 (providing that a public service corporation may not “make or
grant any preference or advantage to any person or subject any person to
27
SUN CITY v. ACC
Brown, J., Dissenting
any prejudice or disadvantage” relating to the corporation’s “rates, charges,
services, facilities or in any other respect”).
¶71 Today, however, absent intervention by our supreme court,
the majority permanently shuts the door on any similar constitutional
argument whenever the Commission concludes that a utility’s customers
receive “like and contemporaneous service,” even though there is
substantial evidence to the contrary. This is so because, according to the
majority, “where customers receive ‘like and contemporaneous service,’
rate parity is not only encouraged, but constitutionally required.” Supra
¶ 19. Again, SCHOA is not contending that the difference in the costs to
treat its wastewater means it receives a different “service” within the
meaning of the anti-discrimination clause; rather, it asserts that EPCOR
imposes a discriminatory charge for rendering that service. Moreover, the
majority’s apparent conclusions—that this court can find a violation of the
anti-discrimination clause only when customers do not receive similar
service and that we must defer to the Commission’s evaluation of such
service—are at odds with the text and purpose of our Constitution.
¶72 The anti-discrimination clause prevents utilities from
“discriminat[ing] in charges . . . between persons or places for rendering a
like and contemporaneous service.” Ariz. Const. art. 15, § 12. Our
obligation is to consider “the plain meaning of the words as enacted.” Ariz.
Dep’t of Revenue v. Dougherty, 200 Ariz. 515, 518, ¶ 9 (2001). As relevant here,
the clause plainly covers a scenario where a utility makes a demand, Charge
Black’s Law Dictionary (4th ed. 1954), on one group of customers, in
connection with treating their wastewater, see Service Black’s Law
Dictionary (4th ed. 1954) (“[t]he furnishing of water, heat, light and power,
etc.”), that is unfair when compared to the demands it places on other
customers, Discrimination Black’s Law Dictionary (4th ed. 1954). It is
difficult to imagine what could make a charge discriminatory in violation
of this section, if EPCOR’s plan to force its Sun City customers to subsidize
the other districts does not meet that description. Indeed, taken to its
endpoint, the majority’s reading of the anti-discrimination clause declares
that courts, experts, and the Commission itself have been wrong all along
about ratemaking in Arizona: Consideration of costs is irrelevant because,
regardless of costs, the anti-discrimination clause evidently mandates that
all consumers pay the same amount to the penny.
¶73 Concluding that the Commission can side-step a more
searching judicial review by making a factual finding to which we must
defer, moreover, conflicts with the purpose of the anti-discrimination
clause. I readily acknowledge that our Constitution gives the Commission
28
SUN CITY v. ACC
Brown, J., Dissenting
vast powers to decide issues relevant to its core function. But why is the
anti-discrimination clause in our Constitution, if not to provide a judicial
backstop for when that core function breaks down? The provision is
designed to prevent discrimination and cannot be brushed aside merely
because the Commission found there were facts supporting consolidation.
¶74 Although I conclude the majority’s constitutional analysis is
wrong, I will refrain from commenting more about the meaning of the
Constitution in the absence of a reasoned decision from the Commission.
Instead, I would follow the lead of Alabama Electric, where the court
remanded for a determination of whether a single rate design created
undue (and therefore unlawful) discrimination. Ala. Elec. Co-op., Inc., 684
F.2d at 29. The court explained that discriminatory treatment may be found
even if “the affected customer groups may be in most respects similarly
situated,” i.e., they receive similar services, because so long as the “costs of
providing [the similar] service to one group are different from the costs of
serving the other, the two groups are in one important respect quite
dissimilar.” Id. at 27.
¶75 We should follow a similar approach here. We are faced with
a groundbreaking policy change—adoption of the single-tariff rate design,
the effects of which may be discriminatory if the districts are not similarly
situated. It is the Commission’s role to make the first run at explaining why
its rate structure does not violate the anti-discrimination clause and
§ 40-334. Thus, this matter should be remanded to the Commission for a
determination whether its consolidation resolution violates the Arizona
Constitution’s ban on discriminatory charges or § 40-334’s mandate that no
public service corporation may “subject any person to any prejudice or
disadvantage,” relating to its “rates, charges, services, facilities or in any
other respect.”
¶76 For these reasons, I respectfully dissent.
AMY M. WOOD • Clerk of the Court
FILED: AA
29