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City of Surprise v. Ariz. Corp. Comm’n - 3/28/2019

Arizona Supreme Court holds that the Arizona Corporation Commission lacks authority to regulate municipal condemnations, even when a municipality acquires the assets of a regulated public service corporation through a negotiated or “friendly” condemnation.


A city began the process of acquiring through eminent domain substantially all of the assets of a water company, including valuable contractual rights to Central Arizona Project (“CAP”) water deliveries.  The two sides agreed to attempt to negotiate the terms of the deal.  A developer claiming a right to the CAP water objected and asked the Arizona Corporation Commission to intervene.  The Commission directed the water company to file an application under A.R.S. § 40-285(A) seeking Commission approval to transfer its assets to the city.

The water company objected, arguing that although § 40-285(A) requires Commission approval of an ordinary voluntary asset transfer, it does not apply when a municipality condemns the assets of a regulated public service corporation.  The Commission rejected this argument and directed the water company to file an application under § 40-285(A).  The water company filed an application under protest.  After the Commission directed the water company to confirm in writing that the water company had pledged its CAP water to the developer, the city filed a petition for special action with the Arizona Supreme Court.

The Court accepted jurisdiction over the special action.  Under § 40-285(A), “[a] public service corporation shall not sell, lease, assign, mortgage or otherwise dispose of” its assets without Commission approval.  The key issue in this case was whether the water company would “otherwise dispose of” its assets when the city condemned them.  The other transactions listed in § 40-285(A) all involve voluntary transactions.  Using these as a guide, the Court held that the phrase “otherwise disposed of” did not encompass the transfer of assets through eminent domain, which is a fundamentally coercive transaction.  In addition, the Commission lacks authority under the Arizona Constitution to regulate municipal utilities, and the Commission conceded that it lacked authority to participate in municipal condemnation proceedings.  Thus, the Court held that the Commission lacked authority to require the water company to file an application under § 40-285(A) for Commission approval of the transfer of its assets to the city via condemnation.

The Court therefore vacated the Commission’s order directing the water company to file an application under A.R.S. § 40-285(A) for Commission approval of the transfer of the water company’s assets to the city.

Justice Bolick wrote separately.  Although he agreed that the Commission lacks authority to regulate municipal utilities, he parted ways with the majority on the proper role of the Commission when a regulated entity seeks to transfer assets through a “friendly” condemnation.  Justice Bolick would find such a transaction to be a voluntary one, in which case the Commission could exercise its regulatory authority under § 40-285(A) until the transaction is consummated.

Vice Chief Justice Brutinel authored the opinion of the Court.  Justice Bolick concurred in part and dissented in part.

Posted by: Phillip W. Londen

Disclosure: Osborn Maledon attorneys were involved with this case.

Posted On: 4/4/2019