Arizona Court of Appeals Division One upholds constitutionality of Arizona Corporation Commission’s consolidation of rates for five EPCOR Water Arizona, Inc. wastewater districts.

The Arizona Corporation Commission sets rates for various utilities, including wastewater districts.  A homeowners association appealed a Commission decision, allowing a wastewater company that operated multiple wastewater districts to consolidate rates for five wastewater districts, including a district located in Sun City.  Historically, the Commission set individual rates for each of the five districts, with variation in rates ranging from around $22 in certain districts to around $71 in others.  Residents in the higher-paying districts requested consolidation, citing the company’s centralized administrative and financing activities.  After a hearing, the Commission decided to consolidate the rates for each of the five districts, with a five-year phase-in period.  The HOA and others opposed, citing evidence of lower cost of service in Sun City, which they argued made consolidation a subsidy by Sun City in favor of the other districts.  The Commission rejected this contention, relying on other evidence that substantial capital investments for new infrastructure would be needed in Sun City in the future, evening out costs among the districts over time. 

The HOA appealed, asserting (1) the consolidated rates are not “just and reasonable” under Ariz. Const. art. 15, § 3, including because the Commission failed to consider cost causation; (2) the consolidates rates are discriminate against the HOA members in violation of Ariz. Const. art. 15, § 12 and A.R.S. §§ 40-334(A)-(B); and (3) the Commission acted arbitrarily and capriciously by failing to give a rational explanation of the consolidation, failing to properly consider a report showing that Sun City residents have lower income than residents of the other districts, and improperly relying on projections of future expenses to support the decision to consolidate.

The Arizona Court of Appeals upheld the constitutionality and legality of the Commission’s decision, relying first on established Arizona Supreme Court and Court of Appeals case law giving significant deference to the Commission on ratemaking matters.  The Arizona Court of Appeals held (1) the Commission did consider cost causation evidence, though on a broader scale than what the HOA asserted it should have considered; (2) the consolidated rate was not discriminatory, even if costs for the Sun City district may be lower, because the Commission concluded that the company provided “like and contemporaneous” service throughout the five districts; and (3) the Commission’s decision was not arbitrary or capricious and was supported by substantial evidence. 

Judge Jones authored the majority opinion, in which Judge Morse joined. 

Judge Brown dissented, calling for the Arizona Supreme Court to clarify the standard of review and deference required for appeals from the Commission and asserting that the Commission failed to properly explain whether the consolidated rate was discriminatory.