Court Finds ACC Restructuring Rules Unconstitutional

Feb. 2 (California Energy Markets)

The Arizona Court of Appeals has ruled that the state's electric energy restructuring rules are unconstitutional, upholding a lower-court decision.

The Arizona Corporation Commission started restructuring the electric-power industry with a series of decisions dating back to 1994, and key orders were issued before some current commissioners were elected. But commission spokesperson Heather Murphy said commissioners "will regard this as a disappointment."

Tim Hogan, an attorney with the Arizona Center for Law in the Public Interest, said the January 27 appeals court decision represented a victory for his client, the Arizona Consumers Council. He noted that electric co-ops supported the council in arguing to overturn the restructuring rules.

The ACC began restructuring the power industry in 1994 "by shifting from a system of regulated monopolies to a competitive market for the provision of electric generation and other services," according to the ruling.

The commission created retail electric competition rules in December 1996 [Arizona Administrative Code R14-2-1601 to R14-2-1616]. The ACC made multiple revisions and issued a decision in 1999.These were the rules that the consumer group and others challenged in court [61969].

The rules required a competitive electric-service provider to obtain a certificate of convenience and necessity. Affected utilities generally could not provide competitive services, except as part of their "standard offer" service, which is a regulated bundled package. As a result, utilities had to sell competitive generation assets to a corporate affiliate or another buyer that would obtain a certificate. An energy-service provider could price its services at or below maximum rates as long as they were not below the marginal cost of providing services.

The Arizona Consumers Council filed a lawsuit in Maricopa Superior Court, challenging the ACC restructuring rules.

"We opposed the rules at the time, because it didn't give enough protection, we felt, for the residential consumers," said Al Sterman, vice president of the Arizona Consumer Council. "We felt that residential consumers and small businesses would be hurt by the new rules." Direct access "wasn't working," he said. "It didn't work in California. It wasn't working anywhere else."

The ACC approved certificates for 15 ESPs. The lower court threw out those certificates because, it ruled, the state constitution required the ACC to determine the "fair value of property owned by ESPs" in Arizona.

The appeals court concluded that the commission failed to determine the properties' fair value.

The commission argued that it complied with its constitutional mandate by allowing the market to set rates for ESPs, according to the appeals court.

"The constitution does not allow the commission to let the market dictate prices," Hogan explained.

"Although the commission may be influenced by market forces in determining what rates are 'just and reasonable,' the commission may not abdicate its constitutional responsibility to set just and reasonable rates by allowing competitive market forces alone to do so," the appeals ruling stated.

"Additionally, even assuming a customer chose an ESP due to its lower rates, once the ESP is established in the market, it may increase its rates within the approved rate without regard to consumer fairness or a fair return," the three-judge panel stated.

The superior court voided some rules because the commission did not obtain certification by the Arizona Attorney General, as required by the Administrative Procedures Act. The appeals court ruled that the lower court was correct in this regard.

The effect of the lawsuit would have been more important had direct access not stalled in Arizona, observers said. "There was never any retail competition in Arizona anyway," Hogan said. "They started to re-evaluate the wisdom of that course some time ago. Retail competition was a pipe dream."

The court of appeals ruled that a Maricopa Superior Court judge did err by vacating the restructuring rules adopted by the commission "in their entirety."

Presiding Judge Ann Scott Timmer wrote the decision, which was signed by her and two other judges [1 CA-CV 01-0068, CV1997-03748].

Murphy said the commission has not discussed the decision and whether to seek review by the Arizona Supreme Court.

Jack Davis, chief executive officer of Pinnacle West, told analysts Thursday that he does not expect the decision to affect Arizona Public Service's pending rate case. "We would not be surprised if this case was appealed by ACC or another party in the case," Davis said [John Edwards].