from the Arizona Corporation Commission ACC Docket Nos.
E-01933A-15-0239 and E-01933A-15-0322 Decision No. 75975
Fennemore Craig, P.C., Phoenix By Timothy Berg and Patrick J.
Black Counsel for Appellant
Arizona Corporation Commission, Phoenix By Andy M. Kvesic,
Robin R. Mitchell, Wesley C. Van Cleve, and Maureen A. Scott
Counsel for Appellee
& Wilmer L.L.P., Phoenix By Michael W. Patten and Timothy
J. Sabo and Tucson Electric Power Company, Tucson By Bradley
S. Carroll and Megan J. DeCorse Counsel for Intervenor
Eppich authored the opinion of the Court, in which Presiding
Judge Vásquez and Judge Brearcliffe concurred.
This is an appeal from the Arizona Corporation
Commission's (the Commission) Decision No. 75975 (Feb.
24, 2017) (the Decision), which established electricity rates
for the customers of Tucson Electric Power (TEP). Appellant
Freeport Minerals Corporation challenges the Decision's
allocation of revenue between rate classes, arguing that it
violates constitutional and statutory mandates for just,
reasonable, and nondiscriminatory rates, and was not
supported by substantial evidence. For the following reasons,
and Procedural Background
TEP, a wholly owned subsidiary of UNS Energy Corporation, is
an Arizona public service corporation authorized to provide
electricity services. On September 4, 2015, TEP filed with
the Commission a notice of intent to file a rate case
application, seeking, among other things, a new rate schedule
to allow it to "recover its full cost of service,
including a reasonable opportunity to earn appropriate return
on invested capital." Numerous entities, including
government bodies, advocacy groups, and corporations,
including Freeport, sought and were granted permission to
TEP initially requested an increase in rates that would
result in a non-fuel revenue increase of approximately $109.5
million over adjusted test year revenues. However, following
settlement discussions, many of the parties to the
proceeding, including TEP and Freeport, entered into an
agreement dated August 15, 2016 ("Settlement
Agreement") which provided for a non-fuel revenue
increase of $81.5 million, resulting in a total rate of
return for TEP of 7.19 percent. The Settlement Agreement,
which ultimately was approved by the Commission, did not
address all issues, leaving open the revenue allocation among
the rate classes.
On January 24, 2017, after taking several days of testimony
and receiving a number of briefs on the issue of revenue
allocation, the Commission issued a proposed order, to which
Freeport and a number of other parties filed exceptions. On
February 8, 2017, the Commission held an open meeting to
discuss the proposed order and the exceptions filed to it,
and on February 24, 2017, the Commission issued the Decision,
which adopted a nearly identical revenue allocation scheme as
the one set forth in the proposed order. Freeport timely
sought review, challenging only the revenue allocation
portion of the Decision. We have jurisdiction pursuant to
A.R.S. § 40-254.01.
"The Arizona Corporation Commission, unlike such bodies
in most states, is not a creature of the legislature, but is
a constitutional body which owes its existence to provisions
in the organic law of this state." Residential Util.
Consumer Office v. Ariz. Corp. Comm'n, 240 Ariz.
108, ¶ 11 (2016), quoting Ethington v. Wright,
66 Ariz. 382, 389 (1948); see Ariz. Const. art. XV,
§§ 1-19. The Arizona Constitution grants the
Commission "full power to . . . prescribe just and
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. XV, § 3. As such:
[I]n the matter of prescribing classifications, rates, and
charges of public service corporations and in making rules,
regulations, and orders concerning such classifications,
rates, and charges by which public service corporations are
to be governed, the Corporation Commission . . . is supreme
and such exclusive field may not be invaded by the courts,
the legislature, or the executive.
Residential Util. Consumer Office, 240 Ariz. 108,
¶ 12, quoting Ethington, 66 Ariz. at 392 (first
alteration in original).
Notwithstanding what has been described as the
Commission's "plenary" authority to prescribe
rates, the Arizona Constitution's requirement of
"just and reasonable" rates imposes an outer limit
for the Commission's discretion. Residential Util.
Consumer Office v. Ariz. Corp. Comm'n, 199 Ariz.
588, ¶ 11 (App. 2001). Because 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." Residential Util.
Consumer Office, 240 Ariz. 108, ¶ 10. Freeport must
therefore "demonstrate, clearly and convincingly, that
the Commission's decision is arbitrary, unlawful or
unsupported by substantial evidence." Litchfield
Park Serv. Co. v. Ariz. Corp. Comm'n, 178 Ariz. 431,
434 (App. 1994); accord A.R.S. § 40-254.01(A),
"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). The Commission determines rates using a
proceeding called a "rate case." See Ariz.
Admin. Code R14-2-103. "Rule 103 or 'full' rate
case proceedings are complex. They typically attract many
intervenors, require voluminous and detailed filings, and
involve multiple, lengthy hearings." Residential
Util. Consumer Office, 240 Ariz. 108, ¶ 6. In a
rate case, "[t]he Commission sets rates by finding the
'fair value' of a utility's in-state property,
Ariz. Const. art. 15, § 14, 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." Residential Util. Consumer
Office, 240 Ariz. 108, ¶ 6. In determining a
utility's rate base, operating income, and rate of
return, the Commission uses data from the test year. Ariz.
Admin. Code R14-2-103. No party has challenged the
Commission's determination of the revenue requirement.
Having determined TEP's revenue requirement, the
Commission next allocated said revenue to the various
customer classes. As a starting point for allocating the
revenue requirement to each class, the utility's costs
were first allocated to each class through a "Class Cost
of Service Study" (CCOSS). See id. As the
Commission's Utilities Division Staff's (Staff) rate
design witness testified, the CCOSS is "intended to
assist the Commission to allocate revenue requirements among
Preparing a CCOSS is far from a straightforward endeavor. As
Staff explained, preparing a CCOSS "involves judgment
and decisions on the part of the practitioner in assigning
costs to the various customer classes." TEP's CCOSS
witness made the same point:
Fundamentally, performing cost of service studies is
comprised of applying experience and science. . . . The art
of applying experience involves the subjective application of
certain methods, in conjunction with consideration of policy
objectives, regulatory case law, emerging issues, and other
factors, within the framework of the regulatory process. . .
. The art of the cost study is having an understanding of how