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ACC’s Permissive Power Allows ACC to Appoint an
Interim Manager to Remedy Threats to Public Health and Safety
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Acken,
Albert H. Erman, Erica
A. Holcomb,
Scott A.

August
2020

Industry Alerts

The Arizona Supreme Court issued its long-awaited opinion in Johnson
Utilities, L.L.C. v. Arizona Corp. Comm’n on Friday, July 31, 2020,
vacating the Arizona Court of Appeals’ decision but affirming the Arizona
Corporation Commission’s (“ACC”) authority to impose an interim manager for a
privately held public utility.

The Short Story

The Arizona Supreme Court determined that the ACC had authority under its
permissive state constitutional powers to order an Interim Manager (“IM”). For
those following the Johnson Utilities (“Johnson”) and EPCOR litigation, this
means that EPCOR can and will remain in place pending some other challenge to
its actions. However, the Court held there are restrictions on the ACC’s
permissive authority, including limitations on its ability that would interfere
with other agencies’ concurrent statutory authority, such as ADEQ. In this
opinion, the Court took the time to explain and correct flaws and
inconsistencies in prior case law concerning the scope of the ACC’s exclusive
ratemaking and concurrent permissive authority under the Arizona
Constitution.  As a result, this decision is particularly
noteworthy as it resets the scope of, and basis for, the Commission’s authority
to regulate public service corporations in other matters that are not strictly
ratemaking.

A Deeper Initial Dive

What follows is a summary of the most important points of the opinion. The
Court began the opinion by walking through the history of the formation and
purpose of the ACC and identifying important ACC case law involving its
ratemaking authority and permissive authority. The Court noted that much of the
case law concerning the ACC’s authority was confusing and this opinion aimed to
clear up some of the confusion and misapplication of law. To that end, the Court
noted, in detail, why the Court’s reasoning in Woods [regarding the
management interference doctrine] was incorrect.

Importantly, the Court held that the ACC’s ratemaking
authority[1]
does not authorize the ACC to
appoint an IM to protect “the safety, health, comfort, and convenience of
[Johnson’s] patrons, employees, and the public” because it deemed Johnson’s
services, equipment, and facilities to be inadequate and unsafe—this connection
to ratemaking authority was considered to be too much of a stretch. However,
the Court recognized another avenue under the Arizona Constitution for the ACC
to appoint an IM: “[T]he Commission has the authority to appoint an interim
manager pursuant to its permissive power under article 15, section 3.”
Opinion, at ¶ 57.[2]
“This broad grant of authority necessarily includes appointing an interim
manager to remedy threats to public health and safety.” Id.

To prevent the impression that the ACC has unlimited permissive powers, the
Court then discussed the important limits the Arizona Constitution places on the
ACC’s permissive authority. These include the following: due process, limiting
the ACC’s purpose in using its permissive powers to protecting and preserving
the safety, health, comfort, and convenience of the public, and noting that any
order the ACC issues must be “reasonable.” Opinion, at ¶ 58. Permissive
authority is also limited by the legislature’s authority to regulate public
health and safety. Opinion, at ¶ 59.

Explaining another limitation, the Court noted that the legislature delegated
authority to ADEQ to enact and enforce water quality and wastewater standards,
as well as enforce those standards with civil remedies and criminal penalties:
“As a result, the Commission may not unilaterally exercise its permissive
authority in a manner that divests ADEQ of its broad regulatory powers over
water quality and wastewater.” Opinion, at ¶ 60.

The Court expressly declined “to extend Woods’ construction of the
managerial interference doctrine as imposing a limit on the Commission’s
permissive authority.” Opinion, at ¶ 61. The Court also noted that the
managerial interference doctrine has only been applied by Woods and its
progeny to limit the ACC’s ratemaking authority; it has never been applied to
the ACC’s permissive authority under Section 3. Id.

The Court then spent a significant amount of time explaining why the majority
(which included all the Justices save one) disagreed with the partial dissenting
opinion (written by Justice Bolick). It summarized the majority’s opinion thus:
“To summarize, the power of the Commission to issue an order appointing an
interim manager falls within its permissive authority under article 15, section
3. However, the exercise of that authority has limits. Section 3 expressly
requires that any such order must be ‘reasonable’ and confined to circumstances
predicated on, and limited to, protecting and preserving the safety, health,
comfort, and convenience of the public. Judicial review is available to assess
whether such an order is thereby ‘reasonable.’ Furthermore, issuing such an
order is subject to basic due process protections, including notice, a hearing,
and the opportunity to present evidence and cross-examine witnesses.”
Opinion, at ¶ 66.

Conclusion

The Court’s holding was limited to the legal question of whether the ACC has
the authority, under any circumstances, to issue an order appointing an IM; the
Court did not look at nor touch the factual issues underlying the legal
question. Opinion, at ¶ 72. “What is clear is that Johnson, as a PSC
operating under a CC&N, has dedicated its property to public use in exchange
for being granted a monopoly in its service area….As a result, Johnson’s
property is subject to regulation by the Commission, including any regulation
necessary to protect public health and safety.” Opinion, at ¶ 73. The
opinion offers helpful insight and clarity into the confusion in past Arizona
Supreme Court decisions on ACC’s ratemaking authority and paves a new path for
future decisions under the ACC’s limited permissive power.

You can read the Arizona Supreme Court’s opinion in full here: https://www.azcourts.gov/Portals/0/OpinionFiles/Supreme/2020/CV-19-0105-PR%20Johnson%20Utilities%20Opinion.pdf

[1]
Ariz. Const. art. 15, § 3.

Power of commission as to
classifications, rates and charges, rules, contracts, and accounts; local
regulation

Section 3. The corporation commission shall have full power to, and
shall, prescribe just and reasonable classifications to be used and just and
reasonable rates and charges to be made and collected, by public service
corporations within the state for service rendered therein, and make reasonable
rules, regulations, and orders, by which such corporations shall be governed in
the transaction of business within the state, and may prescribe the
forms of contracts and the systems of keeping accounts to be used by such
corporations in transacting such business, and make and enforce reasonable
rules, regulations, and orders for the convenience, comfort, and safety, and the
preservation of the health, of the employees and patrons of such corporations;
Provided, that incorporated cities and towns may be authorized by law to
exercise supervision over public service corporations doing business therein,
including the regulation of rates and charges to be made and collected by such
corporations; Provided further, that classifications, rates, charges, rules,
regulations, orders, and forms or systems prescribed or made by said corporation
commission may from time to time be amended or repealed by such commission.
(Italics added).

[2]
Ariz. Const. art. 15, § 3.

Contacts

Albert
Acken

Member
Phoenix

T:602-285-5030

E:[email-masked]

Erica
Erman

Associate
Phoenix

T:602-889-5342

E:[email-masked]

Scott
Holcomb

Member
Phoenix
Las Vegas

T:602-285-5028

E:[email-masked]

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