The Court of Appeals issued a memorandum decision* in February 2007 (CA-CC 05-0002) involving the Chaparral City Water Company’s (serving Fountain Hills, Arizona) challenge of a Arizona Corporation Commission (ACC) Decision granting it a 17.86 percent revenue increase, instead of the 29 percent increase requested by the Company. Since the Commission has exclusive and plenary authority to prescribe just and reasonable rates to be charged by public service corporations, an ACC order in a rate case will be affirmed unless the party seeking review makes a clear and convincing showing that the order is unlawful or unreasonable. The courts do not reweigh the evidence or substitute their judgment for that of the ACC, but look at the evidence only to determine if the decision is unreasonable in that it lacks substantial support in the record, is arbitrary, or is otherwise unlawful. However, courts review matters of law de novo.

In affirming in part, vacating and remanding the matter back to the ACC, the Arizona Court of Appeals found the Commission’s practice of backing into the fair value rate of return to be unconstitutional. Relying on Article 15, Section 14 of the Arizona Constitution and two prior cases (Sims v Round Valley Light & Power Co (1956) and Ariz Corp Comm’n v. Citizen Utilities Co (App 1978)), the Court agreed with the Company that the Commission’s practice of multiplying the Original Cost Rate Base (OCRB) by the weighted cost of capital and then dividing the product by the Fair Value Rate Base (FVRB) to establish the fair value rate of return was improper. The Court held that the Commission was “advocating the setting of rates based on the investment made in plant” instead of the fair value of the utility’s property at the time of inquiry. The Court concluded the Commission’s approach violated the Arizona Constitution, as interpreted by prior case law.

The Court, however, rejected the Company challenge of the Commission’s adoption of Staff’s recommendation for cost of capital. After a lengthy examination the various methodologies used in the Staff’s analysis, the Company’s objections and the Commission’s findings related thereto, the Court found the Company failed to make a clear and convincing showing that the Commission’s decision to adopt Staff’s recommendation (and acceptance of the methodologies used by Staff in determining the cost of equity) was unlawful or unreasonable.

*A memorandum decision is unpublished and uncitable, but is just as binding on the parties as a published opinion.