Arizona Court of Appeals, Division One, holds that the Arizona Corporation Commission may not consider customer service in exercising its ratemaking authority to determine the return on equity.

The Arizona Corporation Commission is a constitutional entity, empowered to set rates for public service corporations. In 2019, the Arizona Public Service Corporation (APS) initiated a rate case with the Commission to cover APS’s acquisition and installation costs related to a coal-fired power plant.

In issuing its ratemaking decision, the Commission determined APS’s return on equity, fair value increment, and fair value base rate. As it pertains to the return on equity, the Commission ultimately concluded that 8.9% was an appropriate rate, but it reduced that rate by 0.2% based on the Commission’s concerns about deficiencies in APS’s customer service performance, including errors with APS’s Rate Comparison Tool, which resulted in a consent decree with the Arizona Attorney General. APS appealed.

The Arizona Court of Appeals affirmed in part and reversed in part in an opinion covering several different issues. As to the reduction, the Court of Appeals reasoned that although the Commission has the power to regulate public service corporations to protect the health, safety, comfort, and convenience of their customers, employees, and the public, this authority is distinct from, and unrelated to, its ratemaking powers. Accordingly, the court held that the Commission exceeded its ratemaking authority by reducing APS’s return on equity based on customer service complaints. It further held that the Commission’s ratemaking authority is limited to ascertaining a public service corporation’s fair value and using that to prescribe classifications, rates, and charges. The court therefore vacated the 0.2% reduction in the Commission’s ratemaking decision. The court also affirmed or reversed other aspects of the decision.

Judge Morse authored the opinion, in which Judges Perkins and Brown joined.

Disclosure: Osborn Maledon attorneys were involved in this case.

Posted by: Brandon T. Delgado