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Arizona Corp. Commission v. Arizona Water Co.

Supreme Court of Arizona

February 11, 1959

ARIZONA CORPORATION COMMISSION; William T. Brooks, John H. Barry and Mit Sims, as members of said Commission, Appellants,
v.
ARIZONA WATER COMPANY, a corporation, Appellee.

Page 413

[85 Ariz. 200] Robert Morrison, Atty. Gen., W. T. Willey, Sp. Asst. Atty. Gen., Walter Roche, Phoenix, Tom Fulbright, Florence, Charles W. Stokes, Coolidge, Eugene K. Mangum, Casa Grande, of counsel, for appellants.

Fennemore, Craig, Allen & McClennen, Phoenix, for appellee.

JOHNSON, Justice.

This is an appeal from a judgment of the Maricopa County Superior Court vacating and remanding, under A.R.S. § 40-254, four separate orders of the appellant Arizona Corporation Commission fixing the rate bases and rates of return of the appellee Arizona Water Company for its water utility properties located in and serving the towns of Florence, Coolidge, Casa Grande and Ajo Heights, respectively. Four separate actions were filed and were consolidated for trial, as the issues involved were identical. The trial court found that the Commission failed to determine the fair value of the Company's properties devoted to the public use at the time of the inquiry and that it failed to give the Company a fair return on such properties, thus in effect taking its property without due process of law.

The Arizona Water Company, on April 1, 1955, purchased water utilities properties located in ten Arizona towns for a lump sum price on the entire system. Shortly thereafter the Company petitioned the Commissiom for a determination, for rate-making purposes, of the fair value of the Company's properties serving the four communities above mentioned as well as for a determination of the needed earnings requirements of the Company based upon such fair values. Hearings were then held before the Commission in each of the four localities.

A test period of the most conveniently recent one-year period was agreed upon, as is the custom in the utilities field. At each hearing the Commission's own staff and [85 Ariz. 201] the Company each presented testimony as to the percentage of the entire system which it felt should be allocated to each of the four towns. The Company presented evidence pertaining to the cost of reproduction new, less observed depreciation, for that portion of the utility properties serving each town, as well as evidence of year-end original cost less depreciation, which was the original cost as it stood on the books at the end of the test period, including all additions.

The staff presented evidence of the average original cost less depreciation of the Company's properties, taking the average between the original costs less depreciation at the beginning and at the end of the test period, there having been additions in the meantime. The Commission had in its files its records of its authorization of the Company's purchase of the entire system for $3,600,000 in April, 1955. The price was mentioned during the hearings but no testimony was taken concerning the entire transaction or the seller's reasons for accepting that amount, which was about 55% of the net book value. Mention was made of a prior determination by the Commission in 1951 of the fair value of the then much smaller system; this fair value

Page 414

amount was a good deal in excess of the purchase price later paid by the Company.

The Commission's orders, all dated October 25, 1956, in each instance stated the purchase price of the entire system, the percentage of the system allocated to that particular town and the resulting amount, and found that there had been supplies purchased and improvements made since that time and that a pro rata portion of operating expenses and other factors should be allowed. In each of its four orders the Commission found this total of purchase price plus additions and expenses to be the rate base, and allowed the sum of 5% of the rate base to be earned by the Company. The Company's applications for rehearings were denied.

The appellant Commission assigns as error a conclusion of law of the trial court that

'In the determination of the fair value of the Company's properties devoted to the public use at the time of the inquity, the Commission must, in each instance, consider the original cost less depreciation of the Company's property devoted to the public use at the end of the test period, together with reproduction cost new less depreciation of the Company's properties at the end of the test period, where such evidence is submitted.'

We have stated that a reasonable judgment concerning all relevant factors is required in determining the fair value of the properties at the time of the inquiry. Simms v. Round Valley Light & Power Company, 80 Ariz. 145, 294 P.2d 378. If [85 Ariz. 202] the Commission abuses its discretion in considering these factors or if it refuses to consider all the relevant factors, the fair value of the properties cannot have been determined under our Constitution. The weight given to each particular factor is entirely within the discretion of the Commission, so long as that discretion is not abused. The Constitution of Arizona, Article 15, Section 14, A.R.S., states that the Commission 'shall, to aid it in the proper discharge of its duties, ascertain the fair value of the property within the State of every public service corporation doing business therein; * * *.' No formula is given for determining fair value, and we do not attempt to prescribe one, but the Commission must establish the rate base on the basis of fair value and that alone. Round Valley case, supra.

We do not believe that the trial court was in error in requiring the Commission to consider in this case both the original cost less depreciation and the reproduction cost new less depreciation where evidence on these factors is submitted. These factors are both relevant, particularly where there has been considerable time since the original construction of the utility.

Since fair value is to be determined as of the time of the inquiry, Round Valley case, supra, the trial court was correct in requiring that the original and reproduction costs at the end of the test period, rather than those of some earlier date, or of some average date, be used. There may have been additions to or deletions from the properties of the utility after the beginning of the test period. Average costs, average earnings, average customers, et cetera, over the test period may be necessary in order for the Commission to get a fair earnings picture, as such a test period method avoids seasonal peaks and valleys in a utility's operations. But in finding the fair value rate base the only relevant original cost figure is that computed at the time of the inquiry, or as near as possible thereto. An 'average original cost' figure found by averaging the original costs less depreciation as computed at the beginning and at the end of the test period, thus roughly halving any additions or ...


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