By Gabriela Berigan.
In 2019, Arizona Public Service (APS) filed a Rate Application with the Arizona Corporation Commission (ACC), in which APS requested an increase to the rate it can charge customers for usage. It requested an increase of around 5%, to recover $215.5 million spent on pollution control upgrades. During a three-day hearing in October 2021, the five-member ACC heard APS’s arguments for the proposed rate increase. In a 3-2 decision, however, the ACC cut the company’s equity from approximately 10% to 8.7%, or about a decrease of $119 million in annual revenue. The decision was unexpected as APS has not seen a rate decrease for 25 years.
All public utilities are required to undergo utility ratemaking. Utility ratemaking is the process in which a public service commission sets the price that a public utility service can charge for its services. The intention is to ensure that the public utility service, which essentially acts as a monopoly, does not over charge its customers. Federal law, specifically 16 U.S.C. § 824(d), requires that the rates set by the public service commission be “just and reasonable.”
While all public utilities must have set rates, they are entitled to the Ben Avon Doctrine, which allows them to seek judicial review with respect to the rate. This doctrine arises from Ohio Valley Water Co. v. Ben Avon Borough, where the Court held that when a group is claiming property confiscation from a public service commission setting rates too low, the state judiciary needs to independently review the rate. Without independent judicial review, this would be in violation of the due process clause, which requires procedural protections before the government can confiscate property.
A public utility would likely seek judicial review when they are either not earning a return on the value of their property or service, or when the set rates are unreasonable. In Bluefield Water Works & Improvement Co. v. Pub. Serv. Comm’n, the Court found that public utilities are permitted to receive an earning on their service provided the earning is reasonable when considering the location and type of business. Thus, when the rate is confiscatory, meaning it does not yield a reasonable return, the public utility can bring suit to recover an earning.
APS and the ACC
APS was required to open a rate case in 2019 because they had redesigned and increased the company’s rates, which led to higher-than-expected bills. Particularly, customers complained about unexpected cost increases stemming from the redesign.
The case included several points to be heard by the ACC, such as (1) a 5% increase in monthly bills, (2) investment recovery on the Four Corners Coal Power Plants, and (3) compensation to coal-impacted Indigenous tribes.
During the hearings, the ACC held that APS would not be able to recover the full amount spent on the pollution upgrades, which was $454 million. The ACC also considered decreasing the rate from $0.1172/kWh to $0.09/kWh; however, it withdrew this proposal before releasing its final decision. The ACC decided on its final rate package, which would likely decrease APS’s revenue by $119 million whereas APS was intending for a $169 million revenue increase.
APS Bringing Suit
Before the hearing was over, APS was already threatening legal action . After the ACC ruled, APS said, “Today’s short-sighted decision by the Arizona Corporation Commission ignores the crucial responsibility [to our customers].” APS’s statement claims that even though customers might see some benefits, like a decrease in their monthly bill starting in December 2021, this will actually cause an increase in customers’ bills because APS must make up for the revenue loss. Because of the potential for an increase in monthly bills, APS claims they have “no choice” but to bring suit.
If APS does bring suit, they will have to show that the rates set by the ACC were not “just and reasonable” and that they are not earning a return on the value of their electricity. For the suit, APS will need to estimate the fair market value of its property by showing (1) original construction cost, (2) present construction cost, and (3) other improvements and expenses. Then the ACC will need to calculate “reasonable return” on the fair market value. The court determines reasonable return as a return on investments equal to “investments in other businesses where there are corresponding risks.” If the court finds that APS is not receiving a reasonable return on the fair market value, then they could be successful; however, this could be challenging to show.
Because of the ACC’s decision, APS predicts that customers will see a decrease in their monthly bills in the upcoming months. Additionally, APS will be switching the on-peak hours from 3 p.m. – 8 p.m. to 4 p.m. – 7 p.m.. Reducing the total amount of time that APS charges its customers for on-peak hours will allow customers more flexibility in their electricity use. Whether this immediate decrease in rates causes a long-term increase in monthly bills, like APS claims, is yet to be determined. Nonetheless, if APS does bring suit, they will need to show that the estimated $119 million revenue decrease has caused an unreasonable return in their fair market value.