Lawyers for the Residential Utility Consumer Office and the Arizona Corporation Commission faced off in the Arizona Court of Appeals on June 23 to debate the constitutionality of a mechanism that allows water companies to recoup costs for infrastructure investments outside of a rate case.
The mechanism, called the system improvements benefit, or SIB, allows water companies to increase rates by up to 5 percent annually for five years in order to replace aging infrastructure. Normally, costs for adding or improving infrastructure would be recouped after the fact in a rate case.
RUCO contends the mechanism falls outside the Arizona Constitution, which charges the Corporation Commission with ascertaining the “fair value” of the property any public service corporation has.
The SIB lawsuits were a source of contention between the Corporation Commission, particularly Chairman Susan Bitter Smith, and former RUCO director Pat Quinn. Bitter Smith has been a major proponent for the mechanism.
“There are over 300 water companies in Arizona, and many of them are small rural companies with aging infrastructure which has not been repaired for years,” Bitter Smith wrote in June 2013, after the SIB was approved by the commission. “Our decision will insure that Arizonans will have a secure water delivery future.”
David Tenney, the current RUCO director, wanted to find a settlement for the issue, but RUCO’s offer fell on deaf ears at the commission, Tenney told the Arizona Capitol Times.
RUCO worked on a settlement that would allow for an increase of up to 3 percent annually in rates over five years, capped at 12 percent, Tenney said. The settlement also included some reporting requirements for the water companies, like how old their infrastructure is and what sort of water loss they’re seeing from faulty equipment.
“We’re saying, we can see some good that can come from the SIB if you put the right sideboards around it. … We can see how it can be a useful thing,” Tenney said.
Still, RUCO believes it’s in a win-win situation: If it wins the lawsuit, the SIB goes away. If RUCO loses the lawsuit, “it’s only a matter of time before (the SIB) collapses under its own weight. It will not sustain itself, we’re convinced of that,” Tenney said.
The Constitution is deliberately vague about how exactly the Corporation Commission can decide fair value to make rates for utilities, commission attorney Wes Van Cleve told the three-judge panel.
“There is really no instruction manual on how the commission is supposed to use this (ratemaking) authority,” Van Cleve argued. Instead, the commission relies on previous case law, he said.
RUCO attorney Dan Pozefsky said allowing water companies to increase rates by 5 percent for adding infrastructure without considering any other aspects of the company that would come up in a rate case isn’t fair value ratemaking, and is therefore unconstitutional.
To make rates outside of a case, the Corporation Commission has previously used interim rates in emergency circumstances or allowed for automatic adjustments for things like fuel cost, Pozefsky told the judges.
But, with the water companies that were approved for SIBs, “there is no emergency. No one has alleged that there’s an emergency in this case,” Pozefsky said.
Moreover, Pozefsky argued, increasing 5 percent each year for five years amounts to a bigger rate increase than customers would normally see in most rate cases.
“(The Corporation Commission) has essentially gutted fair value,” he said.
Van Cleve said RUCO hasn’t done enough to prove to the judges that the SIB falls outside the fair value mandate. The mechanism allows water companies to replace aging, failing water infrastructure, which is a problem around the country, he said. Requiring rate hearings for this issue would be cumbersome, time-consuming and expensive for ratepayers, he told the judges.
The Corporation Commission maintains that the SIB fully complies with fair value ratemaking, and the commission doesn’t have to label it as an interim rate or an adjustment in order for that to be true, he said.
“There is no reference (in the Arizona Constitution) to the requirement of a rate case,” Van Cleve said.
Steven Hirsch, an attorney representing Arizona Water, an intervenor in the lawsuit, said he acknowledges that crumbling water infrastructure isn’t a “traditional emergency,” but there are photos of broken pipes and “geysers” from pipes leaking that make the case for a quick resolution rather than a rate case.
The judges seemed skeptical of the Corporation Commission’s position.
Judge Margaret Downie said all sides agree that there’s much less information in a SIB than a rate case, but questioned “under what authority can we say that’s OK, that’s sufficient?”
Downie said she understood the policy of wanting to improve water companies, but the “commission can’t rely on policy to change the Constitution.”
The panel took the matter under advisement and will be issuing a decision within 60 days.