By Howard Fischer
Capitol Media Services
PHOENIX -- The state Court of Appeals has thrown a hurdle into efforts by the Arizona Corporation Commission to expedite rate hike requests by utilities.
In a unanimous decision, the judges said the Residential Utility Consumer Office should be given the chance to prove that the process to review rate increases that the all-Republican commission adopted last year is a formal rule.
What makes that important is the three-judge panel refused to simply accept arguments from the commissioners that what they had done was simply a change in policy -- something they were free to do without the same extensive hearings and public input required for a new rule.
More to the point, the ruling means that pending rate hikes cannot use the commission-adopted truncated process until there is a final decision on whether it acted illegally.
All that is a win for the Residential Utility Consumer Office.
Cynthia Zwick, the agency's director, said the evidence shows that the process adopted by the commission -- and pushed by utilities -- could result in higher rates for customers, all without the opportunities they now have to object. The new ruling gives her attorneys a chance to keep that new process from being implemented.
But this may not be the last word.
"The ruling of the court is being studied,'' said Thomas Van Flein, the commission's general counsel. He said that it could "allow challenges to rate decisions and commission orders outside of the legislatively established strict appellate timelines.''
"Accordingly, review from the Arizona Supreme Court may be sought,'' Van Flein said.
Central to all this is that investor-owned utilities have a monopoly. They get to provide their services -- mainly electricity and gas and, in some cases, water and sewer -- without competition.
The trade-off is they have to get commission approval for their rates.
That has traditionally been done by utilities submitting data of costs and investments from a prior "test year.'' The commission reviews those expenses to ensure their accuracy and ultimately allows new rates based on a reasonable return on their investment.
More to the point, each rate hike has to go through the same, often lengthy process -- one that is designed to allow those who object to be heard, review corporate books and even cross-examine the company's witnesses.
Last year, however, the commission adopted "formula rate plans,'' allowing for annual adjustments based on a pre-established formula. Commissioners argued that this new system allows utilities to recover their costs more promptly while passing along any savings or benefits directly to consumers.
Nick Myers, vice chair of the five-member panel, said all this can benefit consumers.
"We listened to our constituents when they said they did not like the large bill increases every four to five years,'' he said, saying they were more interested in something that tracks with inflation.
Myers also pointed out that regulators look at rates only when utilities want more money. He said this system of annual adjustments, at least on paper, "affords the opportunity, but certainly not the guarantee, that on some years the rate could actually go down.''
And he said there are benefits for ratepayers because utilities can recover their costs quickly, with the protection of "annual true-ups'' to reflect actual costs. Reducing the lag between rate requests, the regulators argue, can lower financing costs which should be passed on to consumers.
Zwick said her office isn't buying it.
"Based on the information that we have, over time the customer will ultimately pay more than if we were operating under the traditional method,'' she told Capitol Media Services.
"The whole 'gradualism' argument really doesn't hold a lot of water with us,'' Zwick said. "And it's not holding a lot of water with residents either.''
The more immediate question -- and the one before the courts -- is whether the commission should be able to unilaterally change the process of how rates are set without going through the formal rule-making process.
"The implementation of formula rates and the ability of the utilities to request this kind of mechanism, it is a sea-change in terms of how regulation has been done by the Corporation Commission for about 100 or so years,'' said Sarah Cool, an attorney for RUCO.
And that process, she said, should not be easily scrapped.
Until now, when a utility wanted to increase its rates it would file an application with the commission. That, said Cool, led to a process where interested parties -- including customers and RUCO -- could intervene. That meant not just an opportunity to be heard and even question witnesses and the company itself about its claim for needed rate relief.
By contrast, she said, "formula'' rates do require the utilities to meet certain conditions.
"But that rate increase could occur without a full rate case,'' she said, on a shortened timetable, based on limited information.
"They change just not how quickly the commission is reaching a decision but how it's reaching a decision,'' Cool said. "We find those to be very meaningful.''
She also said it throws hurdles in the path of consumers -- and even RUCO -- who would have to keep an eye on these annual adjustments -- adjustments she said would be based on data supplied by the utility "but not necessarily supported by written testimony.''
Cool said that, given the shortened timeframes and limited information, it will be more difficult to research a company's claim, get access to corporate records, and make an argument that a utility's annual adjustment is not justified.
And there's something else: Having to review every utility's proposed adjustment every year could overwhelm the ability of even her office to do its job and ensure that residential customers are being protected.
None of this process the commission wants to impose, Zwick said, is good for ratepayers.
"We're pretty sure that, every year, customers are going to see a rate increase,'' she said. And not just for electric and gas but also for water and wastewater for those individuals who are served by privately owned utilities.
Nothing in the new ruling necessarily means the commission won't eventually be able to implement its "formula rate plan'' process, the one that RUCO finds objectionable and contrary to consumer interests.
But it does give RUCO the chance to argue the regulators should not be allowed to do that without going through the formal rule-making process. And that process, said commission attorney Dan Pozefsky, is important to ensure that anything the commission does adopt has details of how the process would work, filing requirements -- and that there is more chance for public input into all of that.
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