PHOENIXΒ β The state Court of Appeals has thrown a hurdle into Arizona Corporation Commission efforts to expedite utilities' rate hike requests.
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, which the all-Republican commission adopted last year, is a formal rule requiring extensive hearings.
The three-judge panel declined to simply accept commissioners' arguments that it was a policy change they were free to make without the public input required for a new rule.
The ruling means that on pending rate increases, the Corporation Commission cannot use the truncated approval process it adopted, until there is a final decision on whether the commission acted illegally.
All that is a win for the Residential Utility Consumer Office, known as RUCO.
Cynthia Zwick, RUCO's director, said the evidence shows the process adopted by the commissionΒ β and pushed by utilitiesΒ β could result in higher rates for customers, without the previous opportunities to object. The new ruling gives her attorneys a chance to keep that new process from being implemented.
The commission may appeal, however.Β
"The ruling of the court is being studied,'' said Thomas Van Flein, the commission's general counsel. He said 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 the issue is that investor-owned utilities have a monopoly. They get to provide their servicesΒ β mainly electricity and gas and, in some cases, water and sewerΒ β 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 investment.
Each rate hike has to go through the same, often lengthy processΒ β one that is designed to allow those who object to be heard, review corporate books and 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.''
But Nick Myers, vice chair of the five-member Corporation Commission, said it 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. They were more interested in something that tracks with inflation, he said.
Myers also pointed out that regulators look at rates only when utilities want more money. He said a 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.
The more immediate questionΒ β and the one before the courtsΒ β 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.
She said that process should not be easily scrapped.
Until now, when a utility wanted to increase its rates it would file an application with the commission. That led to a process where interested partiesΒ β including customers and RUCOΒ β could intervene. That meant not just an opportunity to be heard, but to intervene and question witnesses and the company itself about its claim it needs rate relief.
By contrast, Cool said, "formula'' rates do require the utilities to meet certain conditions.
"But that rate increase could occur without a full rate case,'' on a shortened timetable, based on limited information.
She also said the proposed change throws hurdles in the paths of consumers, and RUCO, who would have to keep an eye on these annual adjustmentsΒ β 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.
Also, 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, she said.
The process the commission wants to impose isn't good for ratepayers, Zwick said.
"We're pretty sure that, every year, customers are going to see a rate increase,'' and not just for electric and gas, she said, but also for water and wastewater for those individuals served by privately owned utilities.
The new ruling doesn't necessarily mean the commission won't eventually be able to implement its "formula rate plan'' process. 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.Β Β
