Arizona Supreme Court holds that the Arizona Corporation Commission’s approval of a mechanism to increase the rates of monopoly for-profit public utility in between full rate cases complies with its constitutional mandate to determine the fair value of the utility’s property when setting rates.

The Arizona Corporation Commission determines the rates charged by public utilities.  The Arizona Constitution mandates that it ascertain the fair value of property owned by a public utility in the state when setting rates.  Although not constitutionally mandated, the Arizona Supreme Court has generally required that this determination be used as a basis in determining a reasonable rate of return on a monopoly for-profit utility’s investment.  Typically, according to Commission rules, the fair value determination occurs in a full rate case, which typically involves many thousands of pages of discovery, several long hearings, attracts several intervenors, and often lasts for longer than a year.

Here, the Commission approved a step-increase mechanism that would allow it to adjust its fair value determination and increase rates in between full rate cases.  The Court of Appeals concluded that the step-increase mechanism did not comply with the Constitution’s mandate to consider fair value when setting rates.

The Supreme Court reversed the decision of the Court of Appeals and reinstated the Commission’s approval.  The Court reasoned that, although the step-increase mechanism did not fall within previously approved exceptions to the fair-value requirement, the Commission has broad discretion to determine how it will make the fair-value determination.  Because the step-increase mechanism provides for a consideration of infrastructure improvements undertaken since the last full rate case, and because the rate case mechanism was merely a creation of the Commission’s own rules, the Court held that the Commission had discretion to approve a mechanism for rate increases outside a full rate case.

Justice Brutinel delivered the unanimous opinion.  Justice Bolick recused himself; Judge Staring from the Court of Appeals, Division Two, sat by designation.