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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)
Ellman Law Group LLC
330 East Thomas Road
Phoenix, AZ 85012
Telephone: (480) 630-6490
Attorney for Appellant
ii
TABLE OF CONTENTS
Page
TABLE OF CITATIONS ................................................................................................ iiiii
INTRODUCTION ............................................................................................................... 1
ARGUMENT ....................................................................................................................... 3
I. THE COMMISSION’S FAILURE TO CONSIDER COST OF SERVICE
RESULTED IN A DISCRIMINATORY, UNJUST TARIFF ........................................ 3
A. You can always stay within the lines if you have an eraser ................................. 6
B. The AB [Corporation Commission’s Answering Brief] erases the eraser ........... 8
C. Disretion abandoned is discretion abused........................................................... 15
D. The Commission and the D.C. Circuit can’t both be right ................................. 19
II. THE COMMISSION’S “EVENTUALLY THIS-WILL-BECOME-FAIR”
RATIONALE IS INCOMPATIBLE WITH ARIZONA’S HISTORIC TEST YEAR
COST-BASE STRUCTURE ........................................................................................ 23
III. BECAUSE THE ARIZONA CONSTITUTION GUARANTEES THE RIGHT TO
JUST, REASONABLE, AND NON-DISCRIMINATORY RATES, THOSE RIGHTS
ARE FUNDAMENTAL, AND THE STRICT SCRUTINY STANDARD APPLIES . 25
CONCLUSION ................................................................................................................. 30
EXHIBIT 1 ........................................................................................................................ 32
iii
TABLE OF CITATIONS
Cases
Alabama Elec. Coop., Inc. v. FERC, 684 F.2d 20 (D.C. Cir. 1982) ........................ 5, 19-23
Advanced Energy Mgmt. All. v. Fed. Energy Regulatory Comm’n, 860 F.3d 656
(D.C. Cir. 2017) .......................................................................................................... 21
Ariz. Corp. Comm'n v. State ex rel. Woods, 171 Ariz. 286 (1992) ........................... 16
Chalpin v. Snyder, 220 Ariz. 413 (App. 2008) ........................................................... 23
Diana H. v. Rubin, 217 Ariz. 131 (App. 2007) .......................................................... 26
Gallardo v. State, 236 Ariz. 84 (2014) ........................................................................ 28
In re Trico Electric Coop., 92 Ariz. 373 (1962) ......................................................... 28
Kenyon v. Hammer, 142 Ariz. 69 (1984) ............................................................... 26-29
Planned Parenthood Ariz., Inc. v. Am. Ass'n of Pro-Life Obstetricians &
Gynecologists, 227 Ariz. 262, 270 (Ct. App. 2011) ............................................... 27
Roosevelt Elementary Sch. Dist. No. 66 v. Bishop, 179 Ariz. 233, 244 (1994) ...... 27
Simpson v. Miller, 241 Ariz. 341 (2017) ..................................................................... 26
Other Authorities
J. Bonbright, Principles of Public Utility Rates (1961) .................................................. 4, 6
Consolidated Water Rates: Issues and Practices in Single-Tariff Pricing, EPA-
816-R-99-009 (Sept. 1999) ........................................................................................... 5
Constitutional Provisions
Ariz. Const. art. XV ...................................................................... 1, 3, 19-20, 25, 27-28, 30
Statutes and Rules
A.R.S. § 40-334 .......................................................................................................... 1-2, 30
1
INTRODUCTION
The Appellee and Intervenors, particularly the Arizona Corporation
Commission (Commission), repeatedly attack positions Appellant does not take.
The Sun City Home Owners Association (SCHOA) argued in its opening brief
(OB) that the Commission’s failure to consider cost of service (a/k/a cost
causation) in its rate setting resulted in a discriminatory, unjust tariff. Instead of
rebutting that argument, the Commission’s answering brief (AB) reframed the
issue as whether Arizona law compels the Commission to strictly follow cost of
service studies and to set rates based solely on cost of service in individual
districts. SCHOA did not make that argument. It is a straw man fallacy.
SCHOA explained in the opening brief how the Commission redefined cost
causation in a way that effectively removed it from consideration in the rate
making process. The Commission’s reinvention of cost causation displaced the
duty to create just and reasonable rates with “mechanical formula-based rate
setting”1 that would always result in consolidation, and which could only be lawful
if Arizonans amended Article XV of their Constitution and A.R.S. § 40-334(A).
While Decision No. 76162 (the Decision) rationalizes the Commission’s
putative consideration of “cost-causation principles” under a construct that erases
1 The AB acknowledges that Arizona courts have previously faulted the
Commission for doing this. AB at 23.
2
cost causation from rate making altogether, the AB defends the error by distorting
the Commission’s statements and then misapplying them to SCHOA’s arguments.
In that manner the AB defends an unjust and discriminatory rate without
acknowledging, much less addressing, the manifest unfairness of a scheme that
permits EPCOR to collect 48 percent of its revenues from the low-income
community that causes only 29 percent of its costs (while EPCOR’s four wealthier
districts cover only 52 percent of its total costs). Rather than address the analytical
infirmity that created this jarring result, the AB invokes the Commission’s “broad
constitutional authority” and “expertise-based discretion” as if SCHOA were
asking this Court to narrow the scope of the Commission’s authority or to
substitute its own judgment.
The AB similarly defends the single rate tariff on the premise that it will
eventually become fair, because it contemplates “substantial projected capital
expenditures” to Sun City infrastructure and avoids rate shock. AB at 27. The first
consideration is inappropriate and the second is false. Anticipating costs five to
ten years into the future is illegitimate in a rate making process that creates a
revenue requirement based on historic costs in an expired test year, augmentable
only under strict criteria that do not include distant eventualities. Spreading a 74.5
percent rate hike over five years gradualizes shock but does not reduce it any more
3
than Congress would reduce tax shock with a five-year phased in 74.5 percent
income tax hike.
Finally, although the Commission abused its discretion, the strict scrutiny
standard of review applies. The Commission, EPCOR and Verrado Community
Association (Verrado) ignore or misapply Arizona case law holding that rights
explicitly granted in the Arizona Constitution are fundamental. Article XV
recognizes the right to a just and reasonable rate and the right to a non-
discriminatory rate. The AB erroneously argues that strict scrutiny only applies to
rights that are fundamental and violate the Equal Protection Clause. The EPCOR
response brief (ERB) and Verrado response brief (VRB) do not follow that lead,
but they provide no authority for treating the rights guaranteed under Article XV
differently from all other rights explicitly guaranteed by the Arizona Constitution.
I. THE COMMISSION’S FAILURE TO CONSIDER COST OF
SERVICE RESULTED IN A DISCRIMINATORY, UNJUST
TARIFF.
The Commission’s decision to fully consolidate these five districts and
impose a single rate tariff violated its constitutional and statutory duty to set just
and reasonable non-discriminatory rates. While the responsive briefs insist that the
Commission considered cost causation, the Decision’s explanation of how it did so
reveals a fundamentally flawed rationale that erased cost causation from
consideration.
4
The AB and other responsive briefs stand on the Commission’s defective
logic but recast the Decision’s language to change its meaning and imply a
reasoned consideration that cannot possibly have occurred in setting a single tariff
under the circumstances of this case. Where different groups of customers have
widely disparate costs of service, a uniform rate is wholly inappropriate. It is
irreconcilable with the theory that the Commission gave any consideration to cost
causation, and possible only after the Commission did away with the “traditional”
cost causation principle.
The manifestly unjust result, which the AB, ERB and VRB deny altogether,
was predictable. Consolidation and single tariff pricing are most appropriate
where costs of service are comparable, and least appropriate where those costs vary
greatly.2 The Commission’s single rate tariff under the circumstances of this case
would violate law, public policy or both under the laws of some other states,
regardless of the rate setter’s rationale.3 The Federal Energy Regulatory
2 J. Bonbright, Principles of Public Utility Rates 67 (1961) (“Rates found to be far
in excess of cost are at least highly vulnerable to a charge of ‘unreasonableness.’
Rates found well below cost are likely to be tolerated, if at all, only as a necessary
and temporary evil.”). 3 The source for the following information is Consolidated Water Rates: Issues and
Practices in Single-Tariff Pricing, EPA-816-R-99-009 (Sept. 1999) (Joint
publication of EPA and Nat’l. Assoc. of Regulatory Utilities Commissioners).
• Texas statutes ban consolidation absent a majority of customer support and a
substantially similar cost of service between systems. The OB observed that
the Decision violated the spirit of democracy (OB at 45), and the AB
responded that “rates are not set based on popular opinion” (AB at 34).
5
Commission has long recognized that “[p]roperly designed rates should produce
revenues from each class of customers which match, as closely as practicable, the
costs to serve each class or individual customer.” Alabama Elec. Coop., Inc. v.
FERC, 684 F.2d 20, 29 (D.C. Cir. 1982). This case starkly illustrates why failure to
incorporate any matching of costs and rates can result in an unfair, discriminatory
tariff.
Sun City residents generate 29 percent of EPCOR’s costs, but under the
Decision they will pay 48 percent of EPCOR’s bill. See Exhibit 1. Sun City
residents are the only EPCOR customers whose rates go up under consolidation,
and they go up by 74.5 percent. These unjust results demonstrate that applying one
tariff to customers in disparate districts is no less discriminatory than applying
different tariffs to customers in comparable districts.
These discriminatory consequences arose from the Commission’s failure to
include any cost of service component into the rate structure, if a single tariff can
be called a “structure” at all. See Dec. at 162, 166 (summarizing EPCOR witness’s
statements about the “benefit” that consolidation and “uniform rate structures”
• The general goal of Virginia’s Utilities Commission is to have uniform rates
unless the districts are very different and noncontiguous.
• Mississippi public service corporations may permit single tariff pricing, but
not when there is a large capital improvement to one system.
• Maine requires utilities to establish uniform rates within the territory
supplied “when the cost of service is substantially uniform.” (emphasis
added).
6
provide to customers). A single rate tariff always necessarily subsumes cost of
service considerations. So, while cost of service is not the only relevant
consideration in rate setting, it must be considered if erasing it from the rate
making process results in rate discrimination. Where the rate far exceeds the costs
generated by a readily defined, geographically distinct group of customers, the rate
is “at least highly vulnerable to a charge of ‘unreasonableness.’” Bonbright, 67.
A. You can always stay between the lines when you have an eraser.
As the opening brief demonstrated, the Commission disregarded cost
causation by redefining it out of existence. OB at 28-29. Instead of assessing the
cost of service in each geographically defined district as it had “traditionally done,”
the Commission decided to “diverge” from “traditional cost-causation ratemaking”
while claiming not to “repudiate” it. Dec. at 202. Under the Commission’s new
construct, cost of service disparities among wastewater districts vanish “if all of
EPCOR’s wastewater systems are viewed as one unit with one set of customers
who get broken up into classes not constrained by geography.” Id. (emphasis
added). Thus, the Decision rests on the indefensible premise that combining
districts eliminates all cost of service disparity because a district cannot be
different from itself.
Like the Commission’s order, the AB and ERB ignore the fallacy, adopting
the Commission’s notion that cost causation need not be considered “in such a
7
narrow manner as in the past based upon geography and individual districts,” and
“can instead be considered for customer classes that span across all geographic
areas where EPCOR serves wastewater customers.” AB at 35; ERB at 14.
The illogic is obvious. California and Colorado are no longer “different” if
you ignore “geographical constraints,” treat them as “one unit,” and create
Calirado. Freeing itself from the shackles of geography and “traditional” cost
causation (and the bonds of demographics and economics) the Commission
rendered Sun City and the other four districts indistinguishable by treating them as
if they were already consolidated into one jumbo district. Eliminating any doubt
that it meant what it said, the Commission summarized its view as this:
[F]ull consolidation can be approved without any violation of cost-
causation principles, provided that customer classes are viewed for
EPCOR’s wastewater operations as a whole rather than based on the
current geographically defined stand-alone districts or the potential
geographically and system-defined fully reconsolidated districts.
Decision at 202.
By redefining cost causation in this way, the Commission claims to have
acted consistently with cost-causation principles. It did not. Its reinvention of cost
causation removed it from consideration altogether.
B. The AB Erases the Eraser.
Just as it reframed SCHOA’s argument to suit its purposes, the AB
reframed the Commission’s unmistakably erroneous treatment of cost-
8
causation to render it innocuous. Citing page 202 of the decision, where the
Commission committed this error, the AB recasts this part of the Decision as
a statement that “single-tariff pricing is not theoretically incompatible with
the principle of cost causation.” AB at 44 (Emphasis supplied) (citing
Decision at 202). As the above-quoted passage make clear, that is not what
the Commission stated. The Commission stated that combining districts
with disparate costs of service eliminates the disparity and is therefore
consistent with cost causation.
Regardless, SCHOA did not argue that single-tariff pricing is
“theoretically incompatible with the principle of cost causation.” Single-
tariff pricing is compatible with cost causation principles when applied to
different districts with comparable costs of service. Rather than addressing
what the Commission actually said or what SCHOA actually argued, the AB
pretends that SCHOA argues for “strict” adherence to cost of service and
rate setting based “solely” on cost of service, and attacks that. See, e.g., AB
at 42. The VRB and ERB make similar mischaracterizations. See VRB at
16 (“SCHOA wrongly invites the Court to create a judicial line that stops the
Commission’s discretion at an indeterminate difference between the costs of
service attributed to any subgroup of customers within a single service
class”), 19 (“There is no requirement in the Arizona Constitution that rate
9
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”); ERB at 14 (“Sun
City argues that charging the same rates in different localities constitutes
discrimination”), 20 (“Although strict adherence to cost causation is not
mandated by the law, Sun City’s argument ignores that the Commission did
set rates based on cost causation”).
The AB re-uses this tactic at pages 30-31. First it quotes a finding of
fact made by the Commission, i.e., that strict application of cost causation
would categorically require that every district consist solely of one
wastewater treatment system’s users.4 Dec. at 225, ¶ 91. Then the AB
states, “[t]o adopt SCHOA’s position would result in a continued state of
disparate treatment among EPCOR’s water districts.” AB at 31. The
Decision did not characterize that finding as “SCHOA’s position,” and it
isn’t. In fact, SCHOA advocated partial consolidation. Dec. at 192-93.
The AB, ERB, and VRB also attempt to circumvent the Commission’s
error by mischaracterizing it as a discretionary weight assignment with
which SCHOA disagrees. AB at 25, 32-33; ERB at 26-27; VRB at 1, 24.
The AB falsely portrays SCHOA’s position as “[m]ere disagreement” with
the Commission’s weighing of facts, AB at 45, and “overreliance on the
4 The five districts included seven separate wastewater systems. Dec. at 8.
10
weight of [cost of service study],” id. at 52. SCHOA argued that the
Commission ignored cost of service (and other facts that distinguish Sun
City), failing to consider it, not that the Commission should have assigned it
greater weight.5 SCHOA does not ask this Court to reweigh the record facts.
It assigns error to the Commission’s failure to consider the gross disparity in
cost of service by reinventing it in a way that eliminated cost of service from
consideration altogether.
The redirection is vexing given the prominence of the point that the
Commission, EPCOR and Verrado all distort, a central premise of the
opening brief. See OB at 1 (“[T]he Commission abandons the bedrock rate-
making principle of cost causation” and replaces it with “an identical rate for
all consumers untethered to the unique costs and circumstances of
historically-independent wastewater districts and individual communities”),
2 (“The Commission’s decision to remold and jettison cost causation was
arbitrary and unreasonable”), 13 (heading assigns reversible error to
Commission’s approval of “a rate design that violates Arizona law and
5 SCHOA has consistently held this position. See Dec. at 192 (“SCHOA argues
that a Commission decision to establish fully consolidated rates would ‘ignore cost
causation, geographical separation, lack of interconnection, economic efficiency,
clear price signals, and other traditional cost-of-service principles’ and would be
arbitrary unless there is substantial compelling evidence to support it, which there
would not be.”) (citing SCHOA Br. at 14).
11
abandon[s] cost causation”), 24 (the Commission “toss[ed] cost-causation
principles to the wind” and “broke the connection between costs and rates”),
26 (“the Commission ignored EPCOR’s unique cost to serve Sun City
residents, instead lumping all five districts together and spreading the
responsibility for EPCOR’s revenue requirement equally among them”), 42
(“The question is whether Arizona’s constitution requires the Commission to
meaningfully consider the circumstances of Sun City consumers before it
consolidates five districts and thrusts a 74.5 percent rate hike on those
consumers least able to bear it”), 47 (“Nor did the Commission consider
whether the Sun City district requires fewer wastewater services than the
other districts…”) (emphases supplied).
Notwithstanding its imposition of a single rate tariff that does not
adjust for cost of service at all, and an analytical defect that necessarily
strips cost of service of any weight, the AB states that “the Commission
carefully weighed the consumer impact for both rate consolidation versus
(sic) stand-alone rate design.”6 AB at 25; see also id. at 45 (“The
6 Verrado also conflates compiling and summarizing with considering, never
addressing the Decision’s grave conceptual defect in treating five districts as one
before consolidation. See VRB at 20 (“There is no dispute that the Commission
reviewed class cost of service information in this case as it does in many, but not
all, rate cases, and that the Commission specifically considered and discussed in
length both the cost of service evidence and other evidence in making its final
decision, ultimately rejecting SCHOA’s discrimination argument.”). Verrado’s
12
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.
13
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
14
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
15
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.
16
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
17
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
18
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.
19
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
20
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
21
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).
22
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
23
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
future (and speculative) infrastructure repairs. Chalpin v. Snyder, 220 Ariz. 413,
423 n.7 (App. 2008) (“Failure to respond in an answering brief to a debatable issue
constitutes confession of error”).
Regardless, the “future fairness” argument is shamelessly deceptive. The
AB states that “63.66 percent of EPCOR’s overall projected wastewater capital
24
expenditures” over the next ten years are for Sun City and Sun City West. AB at
27. Why is the Commission coupling Sun City with another district to make this
point? Because it puts a gloss of reasonableness on an arbitrary decision.
The cited figures attribute $57.2 million of that projected capital amount to
Sun City and $46.7 million to Sun City West. AB at 27. Sun City thus stands to
benefit from 55 percent of the “63.66 percent of EPCOR’s overall projected
wastewater capital expenditures.” That means EPCOR plans to spend 35 percent
of its total projected capital improvements on Sun City—where 48 percent of the
consolidated district’s customers reside. EPCOR plans to spend a
disproportionately low amount of capital improvement on Sun City.
So even the Commission’s illegitimate rationale for consolidation is false.
In truth, under consolidation, Sun City pays far more than its share of EPCOR’s
costs now so it can subsidize the other four districts even more over the next ten
years. All three responsive briefs portray exactly the opposite, pretending Sun City
is the major beneficiary of EPCOR’s future capital improvement expenditures. AB
at 28 (consolidation and the much higher uniform rate keeps Sun City from
“hav[ing] to bear a massive increase” down the road); ERB at 24 (EPCOR has
“substantial capital expenditures planned for the Sun City and Sun City West
districts”); VRB at 30 (consolidation will mitigate the rate increase because it will
25
spread the cost of Sun City’s $57.2 million infrastructure improvements among
five districts). The Decision embraced this specious point:
Both Sun City and Sun City West face substantial projected
capital expenditures for infrastructure improvements over the next
five to ten years ($3l .8 million and $57.2 million over five and ten
years for Sun City, and $23.3 million and $46.7 million over five and
ten years for Sun City West), in the aggregate amounting to 63.66
percent of EPCOR's overall projected wastewater capital expenditures
during this ten-year period. Full consolidation would lessen the
burden that these expenditures would present to ratepayers within Sun
City and Sun City West.
Decision at 202. This clearly erroneous conclusion requires correction.
III. BECAUSE THE ARIZONA CONSTITUTION GUARANTEES
THE RIGHT TO JUST, REASONABLE, AND NON-
DISCRIMINATORY RATES, THOSE RIGHTS ARE
FUNDAMENTAL, AND THE STRICT SCRUTINY STANDARD
APPLIES.
The Arizona Constitution explicitly guarantees Arizonans the right to just
and reasonable rates and charges, Art. XV § 3, and non-discriminatory charges,
services, and facilities, Art. XV § 12. That means, under binding precedent, the
exacting strict scrutiny standard applies and the rate decision must be narrowly
tailored to further a compelling state interest.13 See OB at 12-13.
The Commission, EPCOR and Verrado deny that the strict scrutiny standard
applies. AB at 2, 19-20; ERB at 9-10; VRB at 3-5.
13 RUCO took the position below that cost-of-service ratemaking principles should
be followed unless compelling public policy supports a different outcome. (RUCO
Br. at 23.)
26
The Commission erroneously argues that strict scrutiny review applies only
to rights that are fundamental and protected under the federal Equal Protection
Clause. AB at 19. That contention is plainly wrong. Innumerable cases apply
strict scrutiny to fundamental rights in the absence of equal protection claims. See,
e.g., Diana H. v. Rubin, 217 Ariz. 131 (App. 2007) (applying strict scrutiny
standard to claims arising under Free Exercise Clause and federal constitutional
liberty interest in the absence of any equal protection claim). When a right is
fundamental by virtue of an Arizona constitutional guarantee, there are no
additional criteria to consider. See, e.g., Kenyon v. Hammer, 142 Ariz. 69, 83
(1984) (because the Arizona Constitution guarantees the right to pursue a tort
claim, it is therefore a fundamental right subject to strict scrutiny).
Although cases addressing fundamental rights under the federal constitution
do not always apply the strict scrutiny standard, that has nothing to do with the
Equal Protection Clause of the Fourth Amendment, and it is not Arizona doctrine.
See, e.g., Simpson v. Miller, 241 Ariz. 341, 347 ¶ 22 (2017) (“Ordinarily,
infringement of fundamental rights triggers strict scrutiny, which requires that the
government demonstrate a compelling interest to which the restriction is narrowly
tailored. A challenged law rarely survives such scrutiny. But the [United States
Supreme] Court has not consistently applied strict scrutiny to infringement of
fundamental rights.”) (internal citations and quotation marks omitted). The
27
Kenyon court also noted at the outset that “the opinion which follows [is] based
entirely on state constitutional grounds; federal authority is cited only for the
purpose of guidance and not because it compels the result which we reach”). Id. at
71.
Neither EPCOR nor Verrado make the Commission’s equal protection
mistake. But both err in denying that rights guaranteed by Article XV of the
Arizona Constitution are fundamental. Verrado and EPCOR stake their argument
on the fact that no published decisions have declared that the rights guaranteed in
Article XV are fundamental. VRB at 4; ERB at 9. Such precedent is unnecessary.
Arizona cases categorically treat rights explicitly guaranteed by the Arizona
constitution as fundamental. See Planned Parenthood Ariz., Inc. v. Am. Ass’n of
Pro-Life Obstetricians & Gynecologists, 227 Ariz. 262, 270 (App. 2011) (“[T]o
establish that a fundamental right to abortion exists in Arizona that is superior to
the federal right, PPAZ must show that right is explicitly or implicitly protected by
the Arizona Constitution”); accord Roosevelt Elem. Sch. Dist. No. 66 v. Bishop,
179 Ariz. 233, 244 (1994) (right to education); Kenyon, 142 Ariz. at 83 (right to
bring a tort claim). There is no authority for relegating Article XV guarantees to
some lesser status.
EPCOR’s notion that a discriminatory, unjust rate touches Sun City
residents “only peripherally” ignores the obvious distinctions between this case
28
and the cases it cites. ERB at 9-10. Gallardo v. State, 236 Ariz. 84 (2014), for
example, examined a statute that added two at-large seats to community college
governing boards in counties with over a million people. That amendment can
barely be said to affect the fundamental right to vote at all. The discriminatory rate
affects Sun City residents directly: they are the people who pay it. Gallardo would
help EPCOR if the amendment had imposed a poll tax, but then strict scrutiny
would have applied.
Article XV does not guarantee utility service. It guarantees just, reasonable
and non-discriminatory utility rates. Verrado wrongly contends that Article XV
guarantees do not apply because there is no fundamental right to utilities access,
VRB at 4. See In re Trico Elec. Coop., 92 Ariz. 373, 385 (1962) (“Having applied
for and received from the State a certificate of public convenience and necessity,
and having undertaken to serve thereunder, Trico may not arbitrarily refuse
membership to an applicant who qualifies, nor may it discriminate between
members as to service …”).
That point also undermines Verrado’s attempt, which EPCOR also makes,
to minimize the effect of the Commission’s ruling, characterizing it as “economic
regulation affecting a non-fundamental right—utility service.” VRB at 5; see also
ERB at 10. This case involves the right to just, non-discriminatory rate making,
not access to utility service. Arizona courts do not “usually” apply strict scrutiny
29
to “social or economic regulation.” Kenyon, 142 Ariz. at 78. That is because
regulation usually does not implicate a guaranteed constitutional right.
Verrado states that the “list of recognized fundamental rights worthy of strict
judicial scrutiny under those provisions is not a long one.” VRB at 4. “Those
provisions” Verrado refers to are rights guaranteed under the Arizona constitution,
but the authority Verrado cites is a federal case construing federally recognized
fundamental rights. Id. The “list” of rights guaranteed by Arizona’s constitution,
treated as fundamental and subject to strict scrutiny, is comprehensive.
EPCOR says discrimination cannot have occurred because the single rate
tariff “treats all customers within each class the same.” ERB at 10. This statement
is unclear but seems to mean discrimination never arises from imposing the same
rate on customers. That assertion contradicts all the authority cited in SCHOA’s
opening brief at pages 14-15, none of which EPCOR addresses in making its
erroneous contention. The proposition EPCOR does establish—that public service
corporations cannot “treat[] customers differently based on their ability to pay”—is
unrelated to the standard of review. Id.
Finally, SCHOA has not implicitly conceded application of the abuse of
discretion standard by not continually framing its assignments of error as strict
scrutiny violations. ERB at 11. An error that violates SCHOA’s rights under the
lower abuse of discretion standard necessarily violates SCHOA’s right under the
30
higher strict scrutiny standard. It was unnecessary to tie every argument to both
standards.
CONCLUSION
Neither the Commission, EPCOR nor Verrado have explained how the
Commission could have redefined cost causation out of existence while
simultaneously “carefully considering” it. They do not explain how a subsidizing
rate design that saddles one group of customers with a huge portion of the costs
caused by another group can be just, reasonable or non-discriminatory. They do
not explain how distant (and speculative) capital investment can justify a rate
structure designed to meet costs that occurred in 2015. They focus on the
Commission’s discretion and deemphasize its duty, unconcerned that Sun City
ratepayers pick up the tab for four other, wealthier districts.
The Commission’s decision to consolidate five dissimilar, historically-
independent districts violated the just and reasonable provision in Article XV,
Section 3 of the Arizona Constitution, the Anti-Discrimination Clause in Article
XV, Section 12 of the Arizona Constitution, and A.R.S. § 40-334(A) and (B).
Accordingly, Appellant stands on the request for relief set forth at page 55 of its
opening brief.
* * *
* * *
31
Respectfully submitted this 26th day of February, 2018.
/s/ Robert L. Ellman
Robert L. Ellman
Attorney for Appellant Sun City
Home Owners Association
1
EXHIBIT 1
THE UNJUST AND DISCRIMINATORY EFFECTS OF CONSOLIDATION
Cost of Service Cost of Service Percentage of Percentage of
District # Customers Pop % Per Customer* Per District* EPCOR’s Costs EPCOR’s Bill
Agua Fria 6,829 9.7 $71.87 $490,800 19 9.7
Anthem 9,025 13.6 $57.75 $521,193 20 13.6
Mohave 1,511 .02 $85.25 $128,813 4.9 0.02
Sun City West 17,450 26 $40.30 $703,235 27 26
Sun City 31,570 48 $23.70 $748,209 29 48
________
$2,592,250
• Sun City is the only (former) district that pays more than its share of the cost of service.
• The total annual increase in Sun City wastewater bills after the rate hike is fully phased in is $5.6 million.
That’s enough to pay for all other (former) districts’ wastewater bills combined** for three months.
______________________
* Monthly
** $1,844,041/month