Court of Appeals Confirms that Arizona Constitution Authorizes Arizona Corporation Commission to Determine Energy Rates

The Arizona Constitution requires that the Arizona Corporation Commission (“Commission”) approve just and reasonable rates, the determination of which is to be evaluated by the Commission.

In Freeport Minerals Corporation v. Arizona Corporation Commission, the Court of Appeals upheld rates for Tucson Electric Power Co. (“TEP”) and ruled that the Commission’s actions are presumed to be constitutional and will be upheld unless arbitrary or an abuse of discretion.  Freeport Minerals Corp. v. Ariz. Corp. Commission, (Arizona Court of Appeals Docket No. 2 CA-CC 2017-0001, decided April 5, 2018).  In response to a challenge to TEP’s Commission approved rates, the Court noted that any party seeking to challenge a rate ruling decision issued by the Commission will need to demonstrate and provide clear and convincing evidence hat the Commission’s decision to grant and approve rates was arbitrary, unlawful, or unsupported by substantial evidence.

In Freeport, the Court evaluated the core issue raised in the challenge, which concerned the existence and extent of subsidies arising from differences between the rates charged for different classes of service.  The challenge focused largely on the fact that variations existed in the rates between classes of service, with higher rates paid by commercial customers creating a subsidy to support lower rates for residential customers.  In response to the challenge, the Court stated that neither the Constitution nor Arizona law prohibits interclass subsidies, and that the existence of differences of rates between classes of service does not invalidate the Commission’s action.  Instead, the Court noted that the limitations established under Arizona law provide the opportunity to determine whether interclass subsidies are unreasonable.  The Court concluded that the Commission’s approval of TEP’s rates, which continued a historic pattern of different rates between classes of service, was “reasonable” in part because the rates at issue were less divergent than had been the case for TEP’s prior rate application.  Further, the Commission determined that in light of the unchallenged cost of service study and developments within the revenue and expense side of the company’s petition, including TEP’s recent construction of a power plant, that no justification existed to reduce rates for any individual class.

The change in the TEP’s rates signals the Court’s continued deference to the Commission to make determinations about the appropriate allocation of rates and the acceptable determination of whether rates are just and reasonable.  Indeed, the Court addressed the challenger’s claim that the Commission had erred by failing to accept the challenger’s competing rate proposal, and stated that it lacked authority to substitute its judgment for the Commission’s determination of the optimal rate structure.  The Court specifically noted that even if the rejected alternative rate proposal was just and reasonable, that determination did not mean that the scheme adopted by the Commission failed that test. Notably, this approach is consistent with legislation recently approved by Governor Ducey that eliminates judicial deference for most agency decisions, but maintains judicial deference with respect to Commission decisions, including the approval of rates.  See Laws 2018 (2nd Reg. Sess.) Ch. 180, Sec. 1 (adding a new subsection to A.R.S. §12-910, which reads: “This section does not apply to any agency action by an agency that is created pursuant to article XV, Constitution of Arizona.”)

Lewis Roca Rothgerber Christie maintains an active regulatory and energy practice. For more more information, please visit www.lrrc.com