ARIZONA COURT OF APPEALS DIVISION ONE SUN CITY HOME OWNERS ASSOCIATION, Appellant, v. THE ARIZONA CORPORATION COMMISSION, Appellee. EPCOR WATER ARIZONA, INC. and VERRADO COMMUNITY ASSOCIATION, INC., Intervenors. No. 1 CA-CC 17-0002 Arizona Corporation Commission Docket No. WS-01303A-16-0145 Decision No. 76162 APPELLANT’S CONSOLIDATED REPLY TO APPELLEE’S ANSWERING BRIEF AND INTERVENORS’ RESPONSE BRIEFS Robert L. Ellman (014410) [email protected]Ellman Law Group LLC 330 East Thomas Road Phoenix, AZ 85012 Telephone: (480) 630-6490 Attorney for Appellant
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ARIZONA COURT OF APPEALS DIVISION ONE - … · DIVISION ONE SUN CITY HOME OWNERS ASSOCIATION, Appellant, v. THE ARIZONA CORPORATION COMMISSION, Appellee. EPCOR WATER ARIZONA, INC.
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Commission weighed both the facts in support of and in opposition to rate
consolidation and approved single-tariff pricing based on those facts”).
Verrado followed the same crooked path even after quoting the OB’s
statements that the Commission had “abandoned cost causation” and
“tossed” away cost causation principles. VRB at 21.
The AB suggests that the Commission’s decision is well supported
because the record is “vast,” AB at 3, “fully developed,” id. at 34, and
“extensive,” id. at 38.7 The record was certainly adequate to support a well-
reasoned decision, but amassing a record is not the same as considering or
correctly analyzing a record. Merely saying that the Commission gave due
consideration to relevant information does not demonstrate due
consideration.8 And the fact that the Commission thoroughly recited the
parties’ and witnesses’ respective positions does not mean the Commission
treated them as relevant or valid or weighed them.
statement that there is “no dispute” that the Commission “specifically considered”
cost of service (other than to redefine it out of existence) is unsupportable. 7 See, e.g., AB at 34 (“the Commission had the benefit of a fully developed
record”), 35 (“SCHOA claims the Commission failed to consider the financial
resources of consumers in each district and their ability to pay. Again, this claim is
incorrect. The Commission had considerable evidence before it with respect to the
economic and demographic characteristics of EPCOR’s wastewater districts.”), 45
(“The record and Commission’s decision shows that its decision was made with
full consideration of the relevant facts…”). 8 To be clear, the Commission purported to consider the entire record. Dec. at 207.
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The AB repeatedly asserts that the Commission considered cost of
service or the full record without citing any page in the 233-page Decision:
AB Page Citation Reference to Commission’s Action
3 None “considered costs”
3-4 None “carefully considered … the record evidence”
5 None “consider[ed] all of the evidence in the record”
12 None “After consideration of all the evidence”
27 None “After careful consideration of all the record
evidence”
45 None “record and Commission’s decision shows (sic)
that its decision was made with full consideration
of the relevant facts”
There is scant analysis to cite. The Decision devotes 150 pages to
procedural history, background on EPCOR and the intervenors, and how the
revenue requirement was calculated, none of which is at issue here. Dec. at
7-156. It then devotes 3 pages to tables showing how rates would differ
under the parties’ respective proposals and some 40 more pages to
summarizing the parties’ respective arguments. Id. at 157-201. The last six
pages before the formal findings contain the Commission’s actual analysis,
much of which reiterates record facts. Id. at 201-207.
The six-page analysis collapses on the second page, where the
Decision erases cost of service from consideration by treating different costs
in different districts as the same, ignoring geographic and all other
constraints and treating the districts as if they were one. Dec. at 202. The
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Decision then memorializes other errors, such as the Commission’s
inappropriate reliance on distant future costs—which are not part of the
revenue requirement—to justify the single tariff rate on the theory that it will
eventually become fair (id. at 202-03); its ill-conceived view that
considering public comments reduces the process to a popularity contest (id.
at 203); and its conclusion that demographic and economic evidence are “of
little utility” in setting just and reasonable rates (id. at 203-04). Having
freed itself from the constraints that bound prior Commission decisions, the
analysis turns to the Commission’s justifications for equalizing the rate,
including administrative savings to EPCOR and the Commission itself (id. at
204-06) and the “mitigated impact” that a 5-year phase in will accomplish
(id. at 206).
Verrado calls this analysis “well-reasoned,” (ERB at 24), but its
discussion of the Commission’s “reasoning” is largely a reiteration of the
testimony the Commission summarized rather than its actual analysis. VRB
at 24-30. The VRB scarcely mentions SCHOA’s arguments in that
discussion, and fails to refute them beyond flat contradiction. Similarly,
EPCOR says the Commission “carefully considered these alternatives,”
meaning consolidation or stand-alone districts, and created a revenue
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allocation “that was in the public interest and established just and reasonable
rates.” ERB at 26.
The Commission’s sparse, unsound analysis disprove the AB’s claim
that the Commission “carefully considered,” AB at 27, or “carefully
weighed,” id. at 25, the cost of service.
C. Discretion abandoned is discretion abused.
The AB emphatically admonishes the Court that ratemaking is a “complex
and specialized”9 treatment of “the most complicated subject in the economic
world.”10 Consequently, “the complexity of rate regulation requires the exercise of
expertise-based discretion by the Commission,” AB at 17, and calls for “great
judicial deference” to the Commission’s ratemaking decisions, id. at 16. SCHOA
acknowledges the Commission’s expertise and the complexity of sound rate
making. But the Commission reduced the “complex and specialized” treatment to
a simple mathematical calculation by removing cost causation—“the most widely
accepted measure of reasonable public utility rates and rate relationships”—from
the rate making process. No amount of discretion can insulate an abject failure to
apply the expertise that creates judicial deference in the first place.
9 AB at 16 n. 54, 23 n. 83. 10 AB at 16.
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The proceedings below had only the badge of complexity. The
Commission’s Administrative Law Judge held six days of hearings to gather “all
available information,” mindful “[t]here are all sorts of things to be taken into
consideration in fixing rates.” AB at 16-17 (citing Ariz. Corp. Comm’n v. State ex
rel. Woods, 171 Ariz. 286, 294 (1992)). Those things included, among many
others, disparities in cost of service; geographic, economic and demographic
differences among districts; and even whether the wastewater services were
provided to all five districts by the same personnel (Sun City’s were not). The
“vast record” contained a great deal of information on all those things.
But assembling that vast record was for naught. The Commission
needed none of it to do what it did: reduce the complex and specialized
process to a simple fraction. All it needs to know to determine a tariff in
future consolidation attempts is the amount of the revenue requirement and
the number of customers in the districts to be consolidated (and they will
always be consolidated when the Commission treats them as “one unit” for
purposes of assessing cost of service).
As the AB aptly noted, “reviewing courts [have previously] criticized
the Commission for mechanical formula-based rate setting that failed to
consider all available information.” AB at 23. The Commission did that
here, to the great prejudice of Sun City ratepayers. After supposedly
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engaging in the complex and specialized analysis of this complicated
subject, the Commission arrived at this: divide the revenue requirement by
the number of consumers. That is truly all there was to it.
The Commission did just that much math and the result was the single
rate tariff. The Commission fixed a one-size-fits all rate despite (i) two- and
three-fold cost of service disparities between Sun City (which creates a
sizeable profit for EPCOR), Anthem, and Agua Fria (which both create a
sizeable loss for EPCOR), (ii) geographic, demographic, and economic
differences that place Sun City at one end of a wide spectrum, and (iii) Sun
City’s unique status as an EPCOR district whose wastewater is treated by a
municipality rather than by EPCOR. Those facts, primarily the cost of
service disparity and the lopsided subsidy it creates under single tariff
pricing, defy the Commission’s insistence that “single-tariff pricing does not
bestow preferential treatment on one district or another.” AB at 49.
If the cost of service and other stark disparities on this record produced a
single tariff, it is difficult to imagine any case where the Commission would ever
find consolidation unjust, unreasonable, or discriminatory. That renders the
constitutional “just and reasonable” requirement superfluous, because
consolidating districts (regardless of proximity or likeness) and imposing a single
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utility rate (regardless of differing costs of service) will always necessarily be just
and reasonable.11
The Commission needs no expertise, much less “complex and specialized
expertise,” to divide the revenue requirement by the number of customers. That is
not the probing endeavor the process demands, and it bears no semblance to
working through “the most complicated subject in the economic world.”12 The
result was plainly unjust and discriminatory: Sun City residents cause 29 percent of
EPCOR’s costs and pay 48 percent of EPCOR’s bill. If the disparities producing
that outcome do not affect the tariff here—and they do not at all—then no
distinctions ever would. Cost causation and all other distinguishing factors
become nugatory, and rate making is reduced to a simple mathematical formula.
On this record, the Commission either failed to consider the vast,
uncontested disparity in cost-of-service and other factors that weighed against
consolidation, as SCHOA argues, or it did consider them and imposed a manifestly
unjust rate anyway. Either eventuality failed the constitutional imperative to
11 The straw argument that the AB attributes to SCHOA—that the Commission
must strictly apply cost-of-service as the sole rate making criterion—would
likewise moot Article XV’s “just and reasonable” guarantee because all rates
would become simple cost-of-service derivatives. 12 Determining a utility rate involves two distinct stages: calculating the revenue
requirement based on historical costs, and then determining the rate for service
needed to meet the revenue requirement. The Commission’s determination of the
revenue requirement was complex and specialized, and Sun City does not
challenge it.
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determine a just and reasonable result. The Commission’s shoulder-shrugging
consolidation decision could only be upheld if its discretion was unlimited, or if
Article XV, Section 3 of the Arizona Constitution was rewritten to require a
uniform rate rather than a just and reasonable rate.
D. The Commission and the D.C. Circuit can’t both be right.
The AB, ERB and VRB all attempt to minimize the impact of the D.C.
Circuit’s Alabama Elec. Coop., Inc. decision as persuasive authority by offering
inapt distinctions or mischaracterizing SCHOA’s arguments. Alabama Electric
squarely holds that a single rate tariff is unduly discriminatory when it requires one
group of customers to pay significantly more than its cost of service while
requiring another group to pay less than its cost of service. The AB and ERB call
this point “novel” (AB at 46, 49, 52; ERB at 16) even while discussing Alabama
Electric.
The AB dismisses Alabama Electric because “[t]he FERC cases are not
binding,” and because “even FERC” is not required to “strictly follow cost-of-
service when allocating a utility’s revenue requirement.” AB at 50. The first point
is both obvious and innocuous. SCHOA offered Alabama Electric as persuasive
authority because it holds that identical rates can be discriminatory even when the
same rate charged to two groups yields only a 0.45 percent difference in cost-
justified rates of return. Alabama Electric, 684 F.2d at 28. Here, the rate of return
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difference is over 100.00 percent between Sun City and three of the four other
districts. See Exhibit 1. SCHOA agrees that Alabama Electric does not hold that
“applying the same rate to two classes of customers with different costs of service”
is per se discriminatory. AB at 50. The opinion qualifies that proposition because
the applicable federal statute, like its Article XV counterpart, proscribes any
unreasonable rate disparity and any undue preference or advantage, because
absolute equivalence of overall rates of return is “little more than an ideal.”
Alabama Electric, at 28 (emphasis in original). But Alabama Electric fully
supports SCHOA’s claim here:
While the typical complaint of unlawful rate discrimination is
leveled at a rate design which assigns different rates to customer
classes which are similarly situated, a single rate design may also be
unlawfully discriminatory. Such would be the case where, as is
alleged here, a uniform rate yielding disparate overall rates of return
on sales to different groups of customers. It matters little that the
affected customer groups may be in most respects similarly situated --
that is, that they may require similar types of service at similar (even
if varying) voltage levels. If the costs of providing service to one
group are different from the costs of serving the other, the two groups
are in one important respect quite dissimilar. And, as several
commentators have noted, “charging the same price to two purchasers
where the seller’s costs with respect to each differ must . . . be
considered discrimination,” just as charging different prices where the
seller’s costs are the same.
Id. at 27-28. The D.C. Circuit remanded the case to FERC, which the AB
and ERB find significant (AB at 50; ERB at 17), because FERC has “the
first-round responsibility to determine whether an identified discrimination
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in a rate design is ‘undue’ and therefore unlawful.” Alabama Electric, 684
F.2d at 28.
The AB’s second point is a meaningless attack on the straw argument
SCHOA did not make, i.e. that the Commission must strictly follow cost-of-service
as the only relevant consideration in rate making. EPCOR follows that lead,
quoting a sentence in a post-Alabama Electric case to the effect that nothing in the
opinion means “that charging the same rates to differently situated customers
always constitutes undue discrimination.” ERB at 18 (citing Advanced Energy
Mgmt. All. v. Fed. Energy Regulatory Comm’n, 860 F.3d 656, 670 (D.C. Cir. 2017)
(emphases supplied)). “Always” and “undue” are not nuances. They distinguish
the position SCHOA took from the position ascribed to SCHOA by the
Commission and EPCOR. Alabama Electric obviously does not create a per se
rule applicable to any cost-of-service difference in every case. If it did, that would
be novel.
EPCOR, too, reframes SCHOA’s position and then addresses that position
instead of SCHOA’s argument. ERB at 19 (“There is no requirement in the
Arizona Constitution that rate design within or without customer classes be
controlled as a matter of law by a single factor – class cost of service or any other
factor;” “the D.C. Circuit in Alabama Electric correctly warned against total
reliance on the numbers in class cost of service studies”) (emphases supplied).
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The ERB also accuses SCHOA of turning rate making “on its head” by “argu[ing]
that consolidation is discriminatory because it treats different ‘groups’ of
customers the same.” ERB at 16. First, requiring one customer to subsidize
another is not treating “different groups the same.” It is flagrantly discriminatory
to require one group to pay almost half of EPCOR’s bill while causing less than 30
percent of EPCOR’s costs.
Then EPCOR claims victory because the D.C. Circuit did not pronounce a
0.45 percent disparity between groups to be per se discriminatory. ERB at 17.
The distinctions yell for themselves. And the opinion stated elsewhere that “the
single rate schedule proposed by Alabama Power raised cognizable issues
concerning the rate’s discriminatory effects” and that “[t]here is no question
against this principle [one price to two groups generating different costs] that a rate
design yielding a 0.45 percent difference in cost-justified rates of return is
discriminatory.” Alabama Electric at 28-29. Those statements indicate that cost
differentials of 100 percent and more would be unduly discriminatory in the
extreme. And that is under an abuse-of-discretion standard rather than the strict
scrutiny standard applicable here. See Section III, infra.
II. THE COMMISSION’S “EVENTUALLY-THIS-WILL-BECOME-
FAIR” RATIONALE IS INCOMPATIBLE WITH ARIZONA’S
HISTORIC TEST YEAR COST BASE STRUCTURE
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The Commission, EPCOR and Verrado offer a justification for the uniform
tariff that betrays the Decision as an abandonment of cost causation and the rate
making regulatory structure. There is no dispute that the revenue requirement—
the amount that rates are designed to meet—is derived from costs in an historical
test year, in this instance calendar year 2015. Dec. 34 at n. 55, 63, 78, 198 n. 276.
Additional post-test year costs (PTY) are limited in this case to ongoing or
committed expenses that look no further than 12 months ahead. Id. at 143, 156,
Exh. D p. 6. Yet the responsive briefs and the Decision cite anticipated costly
repairs to Sun City infrastructure that EPCOR says will occur five to ten years
from now as justification for the single rate tariff. Id. at 202; AB at 27, 33; ERB at
24; VRB at 30.
The responsive briefs simply presume that the Commission’s eventual-
fairness rationale is valid without any reference or response to the contrary
argument and authority cited in SCHOA’s opening brief. See OB at 51. The
Commission has therefore conceded it cannot justify the rate it set based on distant