Arizona Supreme Court Permits Innovation in Ratemaking

On August 8, 2016, the Arizona Supreme Court upheld a decision by the Arizona Corporation Commission (Commission) allowing a private water utility to impose a monthly surcharge on customers to help pay for deteriorating infrastructure.  That monthly surcharge is known as the System Improvements Benefit, or SIB, and is loosely based on the  system improvement charges that have been allowed by other public utility commissions throughout the United States.  If a utility is authorized to implement a SIB by the Commission during a full rate case, the utility can start to collect a portion of the funds that it expends on replacing deteriorating infrastructure prior to its next rate case through the surcharge.  The SIB thus addresses the rate lag inherent in the current rate making system utilized by the Commission.  The SIB surcharge can be adjusted annually subject to a cap set by the Commission.  The Commission trues up the amount of the surcharge in the utility’s next mandated rate case.  The opinion, titled Residential Utility Consumer Office v. Arizona Corporation Commission, Case No. CV 15-0281-PR, can be accessed at the Arizona Supreme Court’s website here.

In upholding the Commission’s decision, the Arizona Supreme Court emphasized the broad discretion given to the Commission by the Arizona Constitution.  Under the Arizona Constitution, the Commission must determine the fair value of a utility’s rate base and use that value in setting rates.  The Court of Appeals had held that the SIB was impermissible, in part, because the Commission would not ascertain the fair value of the utility’s rate base in the same manner as a traditional rate case – prior to establishing the annual SIB surcharge.  The Arizona Supreme Court rejected that determination as imposing a requirement on the Commission that did not exist in the Constitution.  In so doing, the Court stated that a “full rate case is one permissible method for determining fair value.  Such a proceeding … is not constitutionally mandated.”  Based on this and other language in the decision, the Commission appears to have greater discretion in implementing and trying innovative rate making tools than previously thought.

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