ARIZONA COURT OF APPEALS

DIVISION ONE

SUN CITY HOME OWNERS

ASSOCIATION,

Appellant,

v.

THE ARIZONA CORPORATION

COMMISSION,

Appellee.

EPCOR WATER ARIZONA, INC. and

VERRADO COMMUNITY

ASSOCIATION, INC.,

Intervenors.

No. 1 CA-CC 17-0002

Arizona Corporation Commission

Docket No. WS-01303A-16-0145

Decision No. 76162

APPELLANT’S CONSOLIDATED REPLY TO APPELLEE’S

ANSWERING BRIEF AND INTERVENORS’ RESPONSE BRIEFS

Robert L. Ellman (014410)

rle@elgarizona.com

Ellman Law Group LLC

330 East Thomas Road

Phoenix, AZ 85012

Telephone: (480) 630-6490

Attorney for Appellant

ii

TABLE OF CONTENTS

Page

TABLE OF CITATIONS ................................................................................................ iiiii

INTRODUCTION ............................................................................................................... 1

ARGUMENT ....................................................................................................................... 3

I. THE COMMISSION’S FAILURE TO CONSIDER COST OF SERVICE

RESULTED IN A DISCRIMINATORY, UNJUST TARIFF ........................................ 3

A. You can always stay within the lines if you have an eraser ................................. 6

B. The AB [Corporation Commission’s Answering Brief] erases the eraser ........... 8

C. Disretion abandoned is discretion abused........................................................... 15

D. The Commission and the D.C. Circuit can’t both be right ................................. 19

II. THE COMMISSION’S “EVENTUALLY THIS-WILL-BECOME-FAIR”

RATIONALE IS INCOMPATIBLE WITH ARIZONA’S HISTORIC TEST YEAR

COST-BASE STRUCTURE ........................................................................................ 23

III. BECAUSE THE ARIZONA CONSTITUTION GUARANTEES THE RIGHT TO

JUST, REASONABLE, AND NON-DISCRIMINATORY RATES, THOSE RIGHTS

ARE FUNDAMENTAL, AND THE STRICT SCRUTINY STANDARD APPLIES . 25

CONCLUSION ................................................................................................................. 30

EXHIBIT 1 ........................................................................................................................ 32

iii

TABLE OF CITATIONS

Cases

Alabama Elec. Coop., Inc. v. FERC, 684 F.2d 20 (D.C. Cir. 1982) ........................ 5, 19-23

Advanced Energy Mgmt. All. v. Fed. Energy Regulatory Comm’n, 860 F.3d 656

(D.C. Cir. 2017) .......................................................................................................... 21

Ariz. Corp. Comm'n v. State ex rel. Woods, 171 Ariz. 286 (1992) ........................... 16

Chalpin v. Snyder, 220 Ariz. 413 (App. 2008) ........................................................... 23

Diana H. v. Rubin, 217 Ariz. 131 (App. 2007) .......................................................... 26

Gallardo v. State, 236 Ariz. 84 (2014) ........................................................................ 28

In re Trico Electric Coop., 92 Ariz. 373 (1962) ......................................................... 28

Kenyon v. Hammer, 142 Ariz. 69 (1984) ............................................................... 26-29

Planned Parenthood Ariz., Inc. v. Am. Ass'n of Pro-Life Obstetricians &

Gynecologists, 227 Ariz. 262, 270 (Ct. App. 2011) ............................................... 27

Roosevelt Elementary Sch. Dist. No. 66 v. Bishop, 179 Ariz. 233, 244 (1994) ...... 27

Simpson v. Miller, 241 Ariz. 341 (2017) ..................................................................... 26

Other Authorities

J. Bonbright, Principles of Public Utility Rates (1961) .................................................. 4, 6

Consolidated Water Rates: Issues and Practices in Single-Tariff Pricing, EPA-

816-R-99-009 (Sept. 1999) ........................................................................................... 5

Constitutional Provisions

Ariz. Const. art. XV ...................................................................... 1, 3, 19-20, 25, 27-28, 30

Statutes and Rules

A.R.S. § 40-334 .......................................................................................................... 1-2, 30

1

INTRODUCTION

The Appellee and Intervenors, particularly the Arizona Corporation

Commission (Commission), repeatedly attack positions Appellant does not take.

The Sun City Home Owners Association (SCHOA) argued in its opening brief

(OB) that the Commission’s failure to consider cost of service (a/k/a cost

causation) in its rate setting resulted in a discriminatory, unjust tariff. Instead of

rebutting that argument, the Commission’s answering brief (AB) reframed the

issue as whether Arizona law compels the Commission to strictly follow cost of

service studies and to set rates based solely on cost of service in individual

districts. SCHOA did not make that argument. It is a straw man fallacy.

SCHOA explained in the opening brief how the Commission redefined cost

causation in a way that effectively removed it from consideration in the rate

making process. The Commission’s reinvention of cost causation displaced the

duty to create just and reasonable rates with “mechanical formula-based rate

setting”1 that would always result in consolidation, and which could only be lawful

if Arizonans amended Article XV of their Constitution and A.R.S. § 40-334(A).

While Decision No. 76162 (the Decision) rationalizes the Commission’s

putative consideration of “cost-causation principles” under a construct that erases

1 The AB acknowledges that Arizona courts have previously faulted the

Commission for doing this. AB at 23.

2

cost causation from rate making altogether, the AB defends the error by distorting

the Commission’s statements and then misapplying them to SCHOA’s arguments.

In that manner the AB defends an unjust and discriminatory rate without

acknowledging, much less addressing, the manifest unfairness of a scheme that

permits EPCOR to collect 48 percent of its revenues from the low-income

community that causes only 29 percent of its costs (while EPCOR’s four wealthier

districts cover only 52 percent of its total costs). Rather than address the analytical

infirmity that created this jarring result, the AB invokes the Commission’s “broad

constitutional authority” and “expertise-based discretion” as if SCHOA were

asking this Court to narrow the scope of the Commission’s authority or to

substitute its own judgment.

The AB similarly defends the single rate tariff on the premise that it will

eventually become fair, because it contemplates “substantial projected capital

expenditures” to Sun City infrastructure and avoids rate shock. AB at 27. The first

consideration is inappropriate and the second is false. Anticipating costs five to

ten years into the future is illegitimate in a rate making process that creates a

revenue requirement based on historic costs in an expired test year, augmentable

only under strict criteria that do not include distant eventualities. Spreading a 74.5

percent rate hike over five years gradualizes shock but does not reduce it any more

3

than Congress would reduce tax shock with a five-year phased in 74.5 percent

income tax hike.

Finally, although the Commission abused its discretion, the strict scrutiny

standard of review applies. The Commission, EPCOR and Verrado Community

Association (Verrado) ignore or misapply Arizona case law holding that rights

explicitly granted in the Arizona Constitution are fundamental. Article XV

recognizes the right to a just and reasonable rate and the right to a non-

discriminatory rate. The AB erroneously argues that strict scrutiny only applies to

rights that are fundamental and violate the Equal Protection Clause. The EPCOR

response brief (ERB) and Verrado response brief (VRB) do not follow that lead,

but they provide no authority for treating the rights guaranteed under Article XV

differently from all other rights explicitly guaranteed by the Arizona Constitution.

I. THE COMMISSION’S FAILURE TO CONSIDER COST OF

SERVICE RESULTED IN A DISCRIMINATORY, UNJUST

TARIFF.

The Commission’s decision to fully consolidate these five districts and

impose a single rate tariff violated its constitutional and statutory duty to set just

and reasonable non-discriminatory rates. While the responsive briefs insist that the

Commission considered cost causation, the Decision’s explanation of how it did so

reveals a fundamentally flawed rationale that erased cost causation from

consideration.

4

The AB and other responsive briefs stand on the Commission’s defective

logic but recast the Decision’s language to change its meaning and imply a

reasoned consideration that cannot possibly have occurred in setting a single tariff

under the circumstances of this case. Where different groups of customers have

widely disparate costs of service, a uniform rate is wholly inappropriate. It is

irreconcilable with the theory that the Commission gave any consideration to cost

causation, and possible only after the Commission did away with the “traditional”

cost causation principle.

The manifestly unjust result, which the AB, ERB and VRB deny altogether,

was predictable. Consolidation and single tariff pricing are most appropriate

where costs of service are comparable, and least appropriate where those costs vary

greatly.2 The Commission’s single rate tariff under the circumstances of this case

would violate law, public policy or both under the laws of some other states,

regardless of the rate setter’s rationale.3 The Federal Energy Regulatory

2 J. Bonbright, Principles of Public Utility Rates 67 (1961) (“Rates found to be far

in excess of cost are at least highly vulnerable to a charge of ‘unreasonableness.’

Rates found well below cost are likely to be tolerated, if at all, only as a necessary

and temporary evil.”). 3 The source for the following information is Consolidated Water Rates: Issues and

Practices in Single-Tariff Pricing, EPA-816-R-99-009 (Sept. 1999) (Joint

publication of EPA and Nat’l. Assoc. of Regulatory Utilities Commissioners).

• Texas statutes ban consolidation absent a majority of customer support and a

substantially similar cost of service between systems. The OB observed that

the Decision violated the spirit of democracy (OB at 45), and the AB

responded that “rates are not set based on popular opinion” (AB at 34).

5

Commission has long recognized that “[p]roperly designed rates should produce

revenues from each class of customers which match, as closely as practicable, the

costs to serve each class or individual customer.” Alabama Elec. Coop., Inc. v.

FERC, 684 F.2d 20, 29 (D.C. Cir. 1982). This case starkly illustrates why failure to

incorporate any matching of costs and rates can result in an unfair, discriminatory

tariff.

Sun City residents generate 29 percent of EPCOR’s costs, but under the

Decision they will pay 48 percent of EPCOR’s bill. See Exhibit 1. Sun City

residents are the only EPCOR customers whose rates go up under consolidation,

and they go up by 74.5 percent. These unjust results demonstrate that applying one

tariff to customers in disparate districts is no less discriminatory than applying

different tariffs to customers in comparable districts.

These discriminatory consequences arose from the Commission’s failure to

include any cost of service component into the rate structure, if a single tariff can

be called a “structure” at all. See Dec. at 162, 166 (summarizing EPCOR witness’s

statements about the “benefit” that consolidation and “uniform rate structures”

• The general goal of Virginia’s Utilities Commission is to have uniform rates

unless the districts are very different and noncontiguous.

• Mississippi public service corporations may permit single tariff pricing, but

not when there is a large capital improvement to one system.

• Maine requires utilities to establish uniform rates within the territory

supplied “when the cost of service is substantially uniform.” (emphasis

added).

6

provide to customers). A single rate tariff always necessarily subsumes cost of

service considerations. So, while cost of service is not the only relevant

consideration in rate setting, it must be considered if erasing it from the rate

making process results in rate discrimination. Where the rate far exceeds the costs

generated by a readily defined, geographically distinct group of customers, the rate

is “at least highly vulnerable to a charge of ‘unreasonableness.’” Bonbright, 67.

A. You can always stay between the lines when you have an eraser.

As the opening brief demonstrated, the Commission disregarded cost

causation by redefining it out of existence. OB at 28-29. Instead of assessing the

cost of service in each geographically defined district as it had “traditionally done,”

the Commission decided to “diverge” from “traditional cost-causation ratemaking”

while claiming not to “repudiate” it. Dec. at 202. Under the Commission’s new

construct, cost of service disparities among wastewater districts vanish “if all of

EPCOR’s wastewater systems are viewed as one unit with one set of customers

who get broken up into classes not constrained by geography.” Id. (emphasis

added). Thus, the Decision rests on the indefensible premise that combining

districts eliminates all cost of service disparity because a district cannot be

different from itself.

Like the Commission’s order, the AB and ERB ignore the fallacy, adopting

the Commission’s notion that cost causation need not be considered “in such a

7

narrow manner as in the past based upon geography and individual districts,” and

“can instead be considered for customer classes that span across all geographic

areas where EPCOR serves wastewater customers.” AB at 35; ERB at 14.

The illogic is obvious. California and Colorado are no longer “different” if

you ignore “geographical constraints,” treat them as “one unit,” and create

Calirado. Freeing itself from the shackles of geography and “traditional” cost

causation (and the bonds of demographics and economics) the Commission

rendered Sun City and the other four districts indistinguishable by treating them as

if they were already consolidated into one jumbo district. Eliminating any doubt

that it meant what it said, the Commission summarized its view as this:

[F]ull consolidation can be approved without any violation of cost-

causation principles, provided that customer classes are viewed for

EPCOR’s wastewater operations as a whole rather than based on the

current geographically defined stand-alone districts or the potential

geographically and system-defined fully reconsolidated districts.

Decision at 202.

By redefining cost causation in this way, the Commission claims to have

acted consistently with cost-causation principles. It did not. Its reinvention of cost

causation removed it from consideration altogether.

B. The AB Erases the Eraser.

Just as it reframed SCHOA’s argument to suit its purposes, the AB

reframed the Commission’s unmistakably erroneous treatment of cost-

8

causation to render it innocuous. Citing page 202 of the decision, where the

Commission committed this error, the AB recasts this part of the Decision as

a statement that “single-tariff pricing is not theoretically incompatible with

the principle of cost causation.” AB at 44 (Emphasis supplied) (citing

Decision at 202). As the above-quoted passage make clear, that is not what

the Commission stated. The Commission stated that combining districts

with disparate costs of service eliminates the disparity and is therefore

consistent with cost causation.

Regardless, SCHOA did not argue that single-tariff pricing is

“theoretically incompatible with the principle of cost causation.” Single-

tariff pricing is compatible with cost causation principles when applied to

different districts with comparable costs of service. Rather than addressing

what the Commission actually said or what SCHOA actually argued, the AB

pretends that SCHOA argues for “strict” adherence to cost of service and

rate setting based “solely” on cost of service, and attacks that. See, e.g., AB

at 42. The VRB and ERB make similar mischaracterizations. See VRB at

16 (“SCHOA wrongly invites the Court to create a judicial line that stops the

Commission’s discretion at an indeterminate difference between the costs of

service attributed to any subgroup of customers within a single service

class”), 19 (“There is no requirement in the Arizona Constitution that rate

9

design within or without customer classes be controlled as a matter of law by

a single factor – class cost of service or any other factor”); ERB at 14 (“Sun

City argues that charging the same rates in different localities constitutes

discrimination”), 20 (“Although strict adherence to cost causation is not

mandated by the law, Sun City’s argument ignores that the Commission did

set rates based on cost causation”).

The AB re-uses this tactic at pages 30-31. First it quotes a finding of

fact made by the Commission, i.e., that strict application of cost causation

would categorically require that every district consist solely of one

wastewater treatment system’s users.4 Dec. at 225, ¶ 91. Then the AB

states, “[t]o adopt SCHOA’s position would result in a continued state of

disparate treatment among EPCOR’s water districts.” AB at 31. The

Decision did not characterize that finding as “SCHOA’s position,” and it

isn’t. In fact, SCHOA advocated partial consolidation. Dec. at 192-93.

The AB, ERB, and VRB also attempt to circumvent the Commission’s

error by mischaracterizing it as a discretionary weight assignment with

which SCHOA disagrees. AB at 25, 32-33; ERB at 26-27; VRB at 1, 24.

The AB falsely portrays SCHOA’s position as “[m]ere disagreement” with

the Commission’s weighing of facts, AB at 45, and “overreliance on the

4 The five districts included seven separate wastewater systems. Dec. at 8.

10

weight of [cost of service study],” id. at 52. SCHOA argued that the

Commission ignored cost of service (and other facts that distinguish Sun

City), failing to consider it, not that the Commission should have assigned it

greater weight.5 SCHOA does not ask this Court to reweigh the record facts.

It assigns error to the Commission’s failure to consider the gross disparity in

cost of service by reinventing it in a way that eliminated cost of service from

consideration altogether.

The redirection is vexing given the prominence of the point that the

Commission, EPCOR and Verrado all distort, a central premise of the

opening brief. See OB at 1 (“[T]he Commission abandons the bedrock rate-

making principle of cost causation” and replaces it with “an identical rate for

all consumers untethered to the unique costs and circumstances of

historically-independent wastewater districts and individual communities”),

2 (“The Commission’s decision to remold and jettison cost causation was

arbitrary and unreasonable”), 13 (heading assigns reversible error to

Commission’s approval of “a rate design that violates Arizona law and

5 SCHOA has consistently held this position. See Dec. at 192 (“SCHOA argues

that a Commission decision to establish fully consolidated rates would ‘ignore cost

causation, geographical separation, lack of interconnection, economic efficiency,

clear price signals, and other traditional cost-of-service principles’ and would be

arbitrary unless there is substantial compelling evidence to support it, which there

would not be.”) (citing SCHOA Br. at 14).

11

abandon[s] cost causation”), 24 (the Commission “toss[ed] cost-causation

principles to the wind” and “broke the connection between costs and rates”),

26 (“the Commission ignored EPCOR’s unique cost to serve Sun City

residents, instead lumping all five districts together and spreading the

responsibility for EPCOR’s revenue requirement equally among them”), 42

(“The question is whether Arizona’s constitution requires the Commission to

meaningfully consider the circumstances of Sun City consumers before it

consolidates five districts and thrusts a 74.5 percent rate hike on those

consumers least able to bear it”), 47 (“Nor did the Commission consider

whether the Sun City district requires fewer wastewater services than the

other districts…”) (emphases supplied).

Notwithstanding its imposition of a single rate tariff that does not

adjust for cost of service at all, and an analytical defect that necessarily

strips cost of service of any weight, the AB states that “the Commission

carefully weighed the consumer impact for both rate consolidation versus

(sic) stand-alone rate design.”6 AB at 25; see also id. at 45 (“The

6 Verrado also conflates compiling and summarizing with considering, never

addressing the Decision’s grave conceptual defect in treating five districts as one

before consolidation. See VRB at 20 (“There is no dispute that the Commission

reviewed class cost of service information in this case as it does in many, but not

all, rate cases, and that the Commission specifically considered and discussed in

length both the cost of service evidence and other evidence in making its final

decision, ultimately rejecting SCHOA’s discrimination argument.”). Verrado’s

12

Commission weighed both the facts in support of and in opposition to rate

consolidation and approved single-tariff pricing based on those facts”).

Verrado followed the same crooked path even after quoting the OB’s

statements that the Commission had “abandoned cost causation” and

“tossed” away cost causation principles. VRB at 21.

The AB suggests that the Commission’s decision is well supported

because the record is “vast,” AB at 3, “fully developed,” id. at 34, and

“extensive,” id. at 38.7 The record was certainly adequate to support a well-

reasoned decision, but amassing a record is not the same as considering or

correctly analyzing a record. Merely saying that the Commission gave due

consideration to relevant information does not demonstrate due

consideration.8 And the fact that the Commission thoroughly recited the

parties’ and witnesses’ respective positions does not mean the Commission

treated them as relevant or valid or weighed them.

statement that there is “no dispute” that the Commission “specifically considered”

cost of service (other than to redefine it out of existence) is unsupportable. 7 See, e.g., AB at 34 (“the Commission had the benefit of a fully developed

record”), 35 (“SCHOA claims the Commission failed to consider the financial

resources of consumers in each district and their ability to pay. Again, this claim is

incorrect. The Commission had considerable evidence before it with respect to the

economic and demographic characteristics of EPCOR’s wastewater districts.”), 45

(“The record and Commission’s decision shows that its decision was made with

full consideration of the relevant facts…”). 8 To be clear, the Commission purported to consider the entire record. Dec. at 207.

13

The AB repeatedly asserts that the Commission considered cost of

service or the full record without citing any page in the 233-page Decision:

AB Page Citation Reference to Commission’s Action

3 None “considered costs”

3-4 None “carefully considered … the record evidence”

5 None “consider[ed] all of the evidence in the record”

12 None “After consideration of all the evidence”

27 None “After careful consideration of all the record

evidence”

45 None “record and Commission’s decision shows (sic)

that its decision was made with full consideration

of the relevant facts”

There is scant analysis to cite. The Decision devotes 150 pages to

procedural history, background on EPCOR and the intervenors, and how the

revenue requirement was calculated, none of which is at issue here. Dec. at

7-156. It then devotes 3 pages to tables showing how rates would differ

under the parties’ respective proposals and some 40 more pages to

summarizing the parties’ respective arguments. Id. at 157-201. The last six

pages before the formal findings contain the Commission’s actual analysis,

much of which reiterates record facts. Id. at 201-207.

The six-page analysis collapses on the second page, where the

Decision erases cost of service from consideration by treating different costs

in different districts as the same, ignoring geographic and all other

constraints and treating the districts as if they were one. Dec. at 202. The

14

Decision then memorializes other errors, such as the Commission’s

inappropriate reliance on distant future costs—which are not part of the

revenue requirement—to justify the single tariff rate on the theory that it will

eventually become fair (id. at 202-03); its ill-conceived view that

considering public comments reduces the process to a popularity contest (id.

at 203); and its conclusion that demographic and economic evidence are “of

little utility” in setting just and reasonable rates (id. at 203-04). Having

freed itself from the constraints that bound prior Commission decisions, the

analysis turns to the Commission’s justifications for equalizing the rate,

including administrative savings to EPCOR and the Commission itself (id. at

204-06) and the “mitigated impact” that a 5-year phase in will accomplish

(id. at 206).

Verrado calls this analysis “well-reasoned,” (ERB at 24), but its

discussion of the Commission’s “reasoning” is largely a reiteration of the

testimony the Commission summarized rather than its actual analysis. VRB

at 24-30. The VRB scarcely mentions SCHOA’s arguments in that

discussion, and fails to refute them beyond flat contradiction. Similarly,

EPCOR says the Commission “carefully considered these alternatives,”

meaning consolidation or stand-alone districts, and created a revenue

15

allocation “that was in the public interest and established just and reasonable

rates.” ERB at 26.

The Commission’s sparse, unsound analysis disprove the AB’s claim

that the Commission “carefully considered,” AB at 27, or “carefully

weighed,” id. at 25, the cost of service.

C. Discretion abandoned is discretion abused.

The AB emphatically admonishes the Court that ratemaking is a “complex

and specialized”9 treatment of “the most complicated subject in the economic

world.”10 Consequently, “the complexity of rate regulation requires the exercise of

expertise-based discretion by the Commission,” AB at 17, and calls for “great

judicial deference” to the Commission’s ratemaking decisions, id. at 16. SCHOA

acknowledges the Commission’s expertise and the complexity of sound rate

making. But the Commission reduced the “complex and specialized” treatment to

a simple mathematical calculation by removing cost causation—“the most widely

accepted measure of reasonable public utility rates and rate relationships”—from

the rate making process. No amount of discretion can insulate an abject failure to

apply the expertise that creates judicial deference in the first place.

9 AB at 16 n. 54, 23 n. 83. 10 AB at 16.

16

The proceedings below had only the badge of complexity. The

Commission’s Administrative Law Judge held six days of hearings to gather “all

available information,” mindful “[t]here are all sorts of things to be taken into

consideration in fixing rates.” AB at 16-17 (citing Ariz. Corp. Comm’n v. State ex

rel. Woods, 171 Ariz. 286, 294 (1992)). Those things included, among many

others, disparities in cost of service; geographic, economic and demographic

differences among districts; and even whether the wastewater services were

provided to all five districts by the same personnel (Sun City’s were not). The

“vast record” contained a great deal of information on all those things.

But assembling that vast record was for naught. The Commission

needed none of it to do what it did: reduce the complex and specialized

process to a simple fraction. All it needs to know to determine a tariff in

future consolidation attempts is the amount of the revenue requirement and

the number of customers in the districts to be consolidated (and they will

always be consolidated when the Commission treats them as “one unit” for

purposes of assessing cost of service).

As the AB aptly noted, “reviewing courts [have previously] criticized

the Commission for mechanical formula-based rate setting that failed to

consider all available information.” AB at 23. The Commission did that

here, to the great prejudice of Sun City ratepayers. After supposedly

17

engaging in the complex and specialized analysis of this complicated

subject, the Commission arrived at this: divide the revenue requirement by

the number of consumers. That is truly all there was to it.

The Commission did just that much math and the result was the single

rate tariff. The Commission fixed a one-size-fits all rate despite (i) two- and

three-fold cost of service disparities between Sun City (which creates a

sizeable profit for EPCOR), Anthem, and Agua Fria (which both create a

sizeable loss for EPCOR), (ii) geographic, demographic, and economic

differences that place Sun City at one end of a wide spectrum, and (iii) Sun

City’s unique status as an EPCOR district whose wastewater is treated by a

municipality rather than by EPCOR. Those facts, primarily the cost of

service disparity and the lopsided subsidy it creates under single tariff

pricing, defy the Commission’s insistence that “single-tariff pricing does not

bestow preferential treatment on one district or another.” AB at 49.

If the cost of service and other stark disparities on this record produced a

single tariff, it is difficult to imagine any case where the Commission would ever

find consolidation unjust, unreasonable, or discriminatory. That renders the

constitutional “just and reasonable” requirement superfluous, because

consolidating districts (regardless of proximity or likeness) and imposing a single

18

utility rate (regardless of differing costs of service) will always necessarily be just

and reasonable.11

The Commission needs no expertise, much less “complex and specialized

expertise,” to divide the revenue requirement by the number of customers. That is

not the probing endeavor the process demands, and it bears no semblance to

working through “the most complicated subject in the economic world.”12 The

result was plainly unjust and discriminatory: Sun City residents cause 29 percent of

EPCOR’s costs and pay 48 percent of EPCOR’s bill. If the disparities producing

that outcome do not affect the tariff here—and they do not at all—then no

distinctions ever would. Cost causation and all other distinguishing factors

become nugatory, and rate making is reduced to a simple mathematical formula.

On this record, the Commission either failed to consider the vast,

uncontested disparity in cost-of-service and other factors that weighed against

consolidation, as SCHOA argues, or it did consider them and imposed a manifestly

unjust rate anyway. Either eventuality failed the constitutional imperative to

11 The straw argument that the AB attributes to SCHOA—that the Commission

must strictly apply cost-of-service as the sole rate making criterion—would

likewise moot Article XV’s “just and reasonable” guarantee because all rates

would become simple cost-of-service derivatives. 12 Determining a utility rate involves two distinct stages: calculating the revenue

requirement based on historical costs, and then determining the rate for service

needed to meet the revenue requirement. The Commission’s determination of the

revenue requirement was complex and specialized, and Sun City does not

challenge it.

19

determine a just and reasonable result. The Commission’s shoulder-shrugging

consolidation decision could only be upheld if its discretion was unlimited, or if

Article XV, Section 3 of the Arizona Constitution was rewritten to require a

uniform rate rather than a just and reasonable rate.

D. The Commission and the D.C. Circuit can’t both be right.

The AB, ERB and VRB all attempt to minimize the impact of the D.C.

Circuit’s Alabama Elec. Coop., Inc. decision as persuasive authority by offering

inapt distinctions or mischaracterizing SCHOA’s arguments. Alabama Electric

squarely holds that a single rate tariff is unduly discriminatory when it requires one

group of customers to pay significantly more than its cost of service while

requiring another group to pay less than its cost of service. The AB and ERB call

this point “novel” (AB at 46, 49, 52; ERB at 16) even while discussing Alabama

Electric.

The AB dismisses Alabama Electric because “[t]he FERC cases are not

binding,” and because “even FERC” is not required to “strictly follow cost-of-

service when allocating a utility’s revenue requirement.” AB at 50. The first point

is both obvious and innocuous. SCHOA offered Alabama Electric as persuasive

authority because it holds that identical rates can be discriminatory even when the

same rate charged to two groups yields only a 0.45 percent difference in cost-

justified rates of return. Alabama Electric, 684 F.2d at 28. Here, the rate of return

20

difference is over 100.00 percent between Sun City and three of the four other

districts. See Exhibit 1. SCHOA agrees that Alabama Electric does not hold that

“applying the same rate to two classes of customers with different costs of service”

is per se discriminatory. AB at 50. The opinion qualifies that proposition because

the applicable federal statute, like its Article XV counterpart, proscribes any

unreasonable rate disparity and any undue preference or advantage, because

absolute equivalence of overall rates of return is “little more than an ideal.”

Alabama Electric, at 28 (emphasis in original). But Alabama Electric fully

supports SCHOA’s claim here:

While the typical complaint of unlawful rate discrimination is

leveled at a rate design which assigns different rates to customer

classes which are similarly situated, a single rate design may also be

unlawfully discriminatory. Such would be the case where, as is

alleged here, a uniform rate yielding disparate overall rates of return

on sales to different groups of customers. It matters little that the

affected customer groups may be in most respects similarly situated --

that is, that they may require similar types of service at similar (even

if varying) voltage levels. If the costs of providing service to one

group are different from the costs of serving the other, the two groups

are in one important respect quite dissimilar. And, as several

commentators have noted, “charging the same price to two purchasers

where the seller’s costs with respect to each differ must . . . be

considered discrimination,” just as charging different prices where the

seller’s costs are the same.

Id. at 27-28. The D.C. Circuit remanded the case to FERC, which the AB

and ERB find significant (AB at 50; ERB at 17), because FERC has “the

first-round responsibility to determine whether an identified discrimination

21

in a rate design is ‘undue’ and therefore unlawful.” Alabama Electric, 684

F.2d at 28.

The AB’s second point is a meaningless attack on the straw argument

SCHOA did not make, i.e. that the Commission must strictly follow cost-of-service

as the only relevant consideration in rate making. EPCOR follows that lead,

quoting a sentence in a post-Alabama Electric case to the effect that nothing in the

opinion means “that charging the same rates to differently situated customers

always constitutes undue discrimination.” ERB at 18 (citing Advanced Energy

Mgmt. All. v. Fed. Energy Regulatory Comm’n, 860 F.3d 656, 670 (D.C. Cir. 2017)

(emphases supplied)). “Always” and “undue” are not nuances. They distinguish

the position SCHOA took from the position ascribed to SCHOA by the

Commission and EPCOR. Alabama Electric obviously does not create a per se

rule applicable to any cost-of-service difference in every case. If it did, that would

be novel.

EPCOR, too, reframes SCHOA’s position and then addresses that position

instead of SCHOA’s argument. ERB at 19 (“There is no requirement in the

Arizona Constitution that rate design within or without customer classes be

controlled as a matter of law by a single factor – class cost of service or any other

factor;” “the D.C. Circuit in Alabama Electric correctly warned against total

reliance on the numbers in class cost of service studies”) (emphases supplied).

22

The ERB also accuses SCHOA of turning rate making “on its head” by “argu[ing]

that consolidation is discriminatory because it treats different ‘groups’ of

customers the same.” ERB at 16. First, requiring one customer to subsidize

another is not treating “different groups the same.” It is flagrantly discriminatory

to require one group to pay almost half of EPCOR’s bill while causing less than 30

percent of EPCOR’s costs.

Then EPCOR claims victory because the D.C. Circuit did not pronounce a

0.45 percent disparity between groups to be per se discriminatory. ERB at 17.

The distinctions yell for themselves. And the opinion stated elsewhere that “the

single rate schedule proposed by Alabama Power raised cognizable issues

concerning the rate’s discriminatory effects” and that “[t]here is no question

against this principle [one price to two groups generating different costs] that a rate

design yielding a 0.45 percent difference in cost-justified rates of return is

discriminatory.” Alabama Electric at 28-29. Those statements indicate that cost

differentials of 100 percent and more would be unduly discriminatory in the

extreme. And that is under an abuse-of-discretion standard rather than the strict

scrutiny standard applicable here. See Section III, infra.

II. THE COMMISSION’S “EVENTUALLY-THIS-WILL-BECOME-

FAIR” RATIONALE IS INCOMPATIBLE WITH ARIZONA’S

HISTORIC TEST YEAR COST BASE STRUCTURE

23

The Commission, EPCOR and Verrado offer a justification for the uniform

tariff that betrays the Decision as an abandonment of cost causation and the rate

making regulatory structure. There is no dispute that the revenue requirement—

the amount that rates are designed to meet—is derived from costs in an historical

test year, in this instance calendar year 2015. Dec. 34 at n. 55, 63, 78, 198 n. 276.

Additional post-test year costs (PTY) are limited in this case to ongoing or

committed expenses that look no further than 12 months ahead. Id. at 143, 156,

Exh. D p. 6. Yet the responsive briefs and the Decision cite anticipated costly

repairs to Sun City infrastructure that EPCOR says will occur five to ten years

from now as justification for the single rate tariff. Id. at 202; AB at 27, 33; ERB at

24; VRB at 30.

The responsive briefs simply presume that the Commission’s eventual-

fairness rationale is valid without any reference or response to the contrary

argument and authority cited in SCHOA’s opening brief. See OB at 51. The

Commission has therefore conceded it cannot justify the rate it set based on distant

future (and speculative) infrastructure repairs. Chalpin v. Snyder, 220 Ariz. 413,

423 n.7 (App. 2008) (“Failure to respond in an answering brief to a debatable issue

constitutes confession of error”).

Regardless, the “future fairness” argument is shamelessly deceptive. The

AB states that “63.66 percent of EPCOR’s overall projected wastewater capital

24

expenditures” over the next ten years are for Sun City and Sun City West. AB at

27. Why is the Commission coupling Sun City with another district to make this

point? Because it puts a gloss of reasonableness on an arbitrary decision.

The cited figures attribute $57.2 million of that projected capital amount to

Sun City and $46.7 million to Sun City West. AB at 27. Sun City thus stands to

benefit from 55 percent of the “63.66 percent of EPCOR’s overall projected

wastewater capital expenditures.” That means EPCOR plans to spend 35 percent

of its total projected capital improvements on Sun City—where 48 percent of the

consolidated district’s customers reside. EPCOR plans to spend a

disproportionately low amount of capital improvement on Sun City.

So even the Commission’s illegitimate rationale for consolidation is false.

In truth, under consolidation, Sun City pays far more than its share of EPCOR’s

costs now so it can subsidize the other four districts even more over the next ten

years. All three responsive briefs portray exactly the opposite, pretending Sun City

is the major beneficiary of EPCOR’s future capital improvement expenditures. AB

at 28 (consolidation and the much higher uniform rate keeps Sun City from

“hav[ing] to bear a massive increase” down the road); ERB at 24 (EPCOR has

“substantial capital expenditures planned for the Sun City and Sun City West

districts”); VRB at 30 (consolidation will mitigate the rate increase because it will

25

spread the cost of Sun City’s $57.2 million infrastructure improvements among

five districts). The Decision embraced this specious point:

Both Sun City and Sun City West face substantial projected

capital expenditures for infrastructure improvements over the next

five to ten years ($3l .8 million and $57.2 million over five and ten

years for Sun City, and $23.3 million and $46.7 million over five and

ten years for Sun City West), in the aggregate amounting to 63.66

percent of EPCOR's overall projected wastewater capital expenditures

during this ten-year period. Full consolidation would lessen the

burden that these expenditures would present to ratepayers within Sun

City and Sun City West.

Decision at 202. This clearly erroneous conclusion requires correction.

III. BECAUSE THE ARIZONA CONSTITUTION GUARANTEES

THE RIGHT TO JUST, REASONABLE, AND NON-

DISCRIMINATORY RATES, THOSE RIGHTS ARE

FUNDAMENTAL, AND THE STRICT SCRUTINY STANDARD

APPLIES.

The Arizona Constitution explicitly guarantees Arizonans the right to just

and reasonable rates and charges, Art. XV § 3, and non-discriminatory charges,

services, and facilities, Art. XV § 12. That means, under binding precedent, the

exacting strict scrutiny standard applies and the rate decision must be narrowly

tailored to further a compelling state interest.13 See OB at 12-13.

The Commission, EPCOR and Verrado deny that the strict scrutiny standard

applies. AB at 2, 19-20; ERB at 9-10; VRB at 3-5.

13 RUCO took the position below that cost-of-service ratemaking principles should

be followed unless compelling public policy supports a different outcome. (RUCO

Br. at 23.)

26

The Commission erroneously argues that strict scrutiny review applies only

to rights that are fundamental and protected under the federal Equal Protection

Clause. AB at 19. That contention is plainly wrong. Innumerable cases apply

strict scrutiny to fundamental rights in the absence of equal protection claims. See,

e.g., Diana H. v. Rubin, 217 Ariz. 131 (App. 2007) (applying strict scrutiny

standard to claims arising under Free Exercise Clause and federal constitutional

liberty interest in the absence of any equal protection claim). When a right is

fundamental by virtue of an Arizona constitutional guarantee, there are no

additional criteria to consider. See, e.g., Kenyon v. Hammer, 142 Ariz. 69, 83

(1984) (because the Arizona Constitution guarantees the right to pursue a tort

claim, it is therefore a fundamental right subject to strict scrutiny).

Although cases addressing fundamental rights under the federal constitution

do not always apply the strict scrutiny standard, that has nothing to do with the

Equal Protection Clause of the Fourth Amendment, and it is not Arizona doctrine.

See, e.g., Simpson v. Miller, 241 Ariz. 341, 347 ¶ 22 (2017) (“Ordinarily,

infringement of fundamental rights triggers strict scrutiny, which requires that the

government demonstrate a compelling interest to which the restriction is narrowly

tailored. A challenged law rarely survives such scrutiny. But the [United States

Supreme] Court has not consistently applied strict scrutiny to infringement of

fundamental rights.”) (internal citations and quotation marks omitted). The

27

Kenyon court also noted at the outset that “the opinion which follows [is] based

entirely on state constitutional grounds; federal authority is cited only for the

purpose of guidance and not because it compels the result which we reach”). Id. at

71.

Neither EPCOR nor Verrado make the Commission’s equal protection

mistake. But both err in denying that rights guaranteed by Article XV of the

Arizona Constitution are fundamental. Verrado and EPCOR stake their argument

on the fact that no published decisions have declared that the rights guaranteed in

Article XV are fundamental. VRB at 4; ERB at 9. Such precedent is unnecessary.

Arizona cases categorically treat rights explicitly guaranteed by the Arizona

constitution as fundamental. See Planned Parenthood Ariz., Inc. v. Am. Ass’n of

Pro-Life Obstetricians & Gynecologists, 227 Ariz. 262, 270 (App. 2011) (“[T]o

establish that a fundamental right to abortion exists in Arizona that is superior to

the federal right, PPAZ must show that right is explicitly or implicitly protected by

the Arizona Constitution”); accord Roosevelt Elem. Sch. Dist. No. 66 v. Bishop,

179 Ariz. 233, 244 (1994) (right to education); Kenyon, 142 Ariz. at 83 (right to

bring a tort claim). There is no authority for relegating Article XV guarantees to

some lesser status.

EPCOR’s notion that a discriminatory, unjust rate touches Sun City

residents “only peripherally” ignores the obvious distinctions between this case

28

and the cases it cites. ERB at 9-10. Gallardo v. State, 236 Ariz. 84 (2014), for

example, examined a statute that added two at-large seats to community college

governing boards in counties with over a million people. That amendment can

barely be said to affect the fundamental right to vote at all. The discriminatory rate

affects Sun City residents directly: they are the people who pay it. Gallardo would

help EPCOR if the amendment had imposed a poll tax, but then strict scrutiny

would have applied.

Article XV does not guarantee utility service. It guarantees just, reasonable

and non-discriminatory utility rates. Verrado wrongly contends that Article XV

guarantees do not apply because there is no fundamental right to utilities access,

VRB at 4. See In re Trico Elec. Coop., 92 Ariz. 373, 385 (1962) (“Having applied

for and received from the State a certificate of public convenience and necessity,

and having undertaken to serve thereunder, Trico may not arbitrarily refuse

membership to an applicant who qualifies, nor may it discriminate between

members as to service …”).

That point also undermines Verrado’s attempt, which EPCOR also makes,

to minimize the effect of the Commission’s ruling, characterizing it as “economic

regulation affecting a non-fundamental right—utility service.” VRB at 5; see also

ERB at 10. This case involves the right to just, non-discriminatory rate making,

not access to utility service. Arizona courts do not “usually” apply strict scrutiny

29

to “social or economic regulation.” Kenyon, 142 Ariz. at 78. That is because

regulation usually does not implicate a guaranteed constitutional right.

Verrado states that the “list of recognized fundamental rights worthy of strict

judicial scrutiny under those provisions is not a long one.” VRB at 4. “Those

provisions” Verrado refers to are rights guaranteed under the Arizona constitution,

but the authority Verrado cites is a federal case construing federally recognized

fundamental rights. Id. The “list” of rights guaranteed by Arizona’s constitution,

treated as fundamental and subject to strict scrutiny, is comprehensive.

EPCOR says discrimination cannot have occurred because the single rate

tariff “treats all customers within each class the same.” ERB at 10. This statement

is unclear but seems to mean discrimination never arises from imposing the same

rate on customers. That assertion contradicts all the authority cited in SCHOA’s

opening brief at pages 14-15, none of which EPCOR addresses in making its

erroneous contention. The proposition EPCOR does establish—that public service

corporations cannot “treat[] customers differently based on their ability to pay”—is

unrelated to the standard of review. Id.

Finally, SCHOA has not implicitly conceded application of the abuse of

discretion standard by not continually framing its assignments of error as strict

scrutiny violations. ERB at 11. An error that violates SCHOA’s rights under the

lower abuse of discretion standard necessarily violates SCHOA’s right under the

30

higher strict scrutiny standard. It was unnecessary to tie every argument to both

standards.

CONCLUSION

Neither the Commission, EPCOR nor Verrado have explained how the

Commission could have redefined cost causation out of existence while

simultaneously “carefully considering” it. They do not explain how a subsidizing

rate design that saddles one group of customers with a huge portion of the costs

caused by another group can be just, reasonable or non-discriminatory. They do

not explain how distant (and speculative) capital investment can justify a rate

structure designed to meet costs that occurred in 2015. They focus on the

Commission’s discretion and deemphasize its duty, unconcerned that Sun City

ratepayers pick up the tab for four other, wealthier districts.

The Commission’s decision to consolidate five dissimilar, historically-

independent districts violated the just and reasonable provision in Article XV,

Section 3 of the Arizona Constitution, the Anti-Discrimination Clause in Article

XV, Section 12 of the Arizona Constitution, and A.R.S. § 40-334(A) and (B).

Accordingly, Appellant stands on the request for relief set forth at page 55 of its

opening brief.

* * *

* * *

31

Respectfully submitted this 26th day of February, 2018.

/s/ Robert L. Ellman

Robert L. Ellman

Attorney for Appellant Sun City

Home Owners Association

1

EXHIBIT 1

THE UNJUST AND DISCRIMINATORY EFFECTS OF CONSOLIDATION

Cost of Service Cost of Service Percentage of Percentage of

District # Customers Pop % Per Customer* Per District* EPCOR’s Costs EPCOR’s Bill

Agua Fria 6,829 9.7 $71.87 $490,800 19 9.7

Anthem 9,025 13.6 $57.75 $521,193 20 13.6

Mohave 1,511 .02 $85.25 $128,813 4.9 0.02

Sun City West 17,450 26 $40.30 $703,235 27 26

Sun City 31,570 48 $23.70 $748,209 29 48

________

$2,592,250

• Sun City is the only (former) district that pays more than its share of the cost of service.

• The total annual increase in Sun City wastewater bills after the rate hike is fully phased in is $5.6 million.

That’s enough to pay for all other (former) districts’ wastewater bills combined** for three months.

______________________

* Monthly

** $1,844,041/month