Phelps Dodge Corp. v. ARIZONA ELEC. POWER CO-OP., INC.

83 P.3d 573

207 Ariz. 95

PHELPS DODGE CORPORATION; Phelps Dodge Morenci, Inc.; Phelps Dodge, formerly known as Cyprus Climax Metals Corporation and formerly known as Cyprus Sierrita Corporation and formerly known as Cyprus Bagdad Copper Corporation and formerly known as Cyprus Mineral Park Corporation; Ajo Improvement Company; Morenci Water & Electric Company;

ASARCO Incorporated; Arizona Mining Association; Arizona Association of Industries and Arizonans for Electric Choice and Competition (collectively "AECC"), Intervenors-Appellants, Cross Appellees, Residential Utility Consumer Office, Intervenor-Appellant, The Arizona Corporation Commission, an agency of the State of Arizona, Defendant-Appellant, Cross Appellee, v. ARIZONA ELECTRIC POWER COOPERATIVE, INC.; Duncan Valley Electric Cooperative, Inc.; Graham County Electric Cooperative, Inc.; Sulphur Springs Valley Electric Cooperative, Inc.; and Trico Electric Cooperative, Inc., Plaintiffs-Appellees, Cross Appellants, Arizona Consumers Council, Plaintiff-Cross Appellant.

No. -0068.

Court of Appeals of Arizona, Division 1, Department B.

January 27, 2004.

Fennemore Craig, P.C., By C. Webb Crockett, Jay L. Shapiro, Karen E. Errant, Phoenix, Attorneys for Intervenors-Appellants, Cross Appellees Phelps Dodge Corporation; Phelps Dodge Morenci, Inc.; Phelps Dodge, fka Cyprus Climax Metals Corporation and fka Cyprus Sierrita Corporation and fka Cyprus Bagdad Copper Corporation and fka Cyprus Mineral Park Corporation; Ajo Improvement Company; Morenci Water & Electric Company; ASARCO Incorporated; Arizona Mining Association; Arizona Association of Industries; and Arizonans for Electric Choice and Competition.

Arizona Corporation Commission, By Janet F. Wagner, Janice M. Alward, Phoenix, Attorneys for Defendant-Appellant, Cross Appellee, Arizona Corporation Commission.

Residential Utility Consumer Office, By Scott S. Wakefield, Chief Counsel, Daniel W. Pozefsky, Phoenix, Attorneys for Intervenor-Appellant, Residential Utility Consumer Office.

Gallagher & Kennedy, P.A., By Michael M. Grant, Todd Wiley, Phoenix, Attorneys for Plaintiffs-Appellees, Cross Appellants, Arizona Electric Power Cooperative, Inc.; Duncan Valley Electric Cooperative, Inc.; and Graham County Electric Cooperative, Inc.

Waterfall, Economidis, Caldwell, Hanshaw & Villamana, PC, By Russell E. Jones, D. Michael Mandig, Tucson, Attorneys for Plaintiff-Appellee, Cross Appellant, Trico Electric Cooperative, Inc.

Hitchcock Hicks & Conlogue, By Christopher Hitchcock, Bisbee, Attorneys for Plaintiff-Appellee, Cross Appellant, Sulphur Springs Valley Electric Cooperative, Inc.

Arizona Center for Law in the Public Interest, By Tina A. Calos, Timothy M. Hogan, Phoenix, Attorneys for Plaintiff-Cross Appellant, Arizona Consumers Council.

OPINION

TIMMER, Presiding Judge.

¶ 1 Beginning in 1994, the Arizona Corporation Commission ("Commission") began restructuring the electric industry in Arizona by shifting from a system of regulated monopolies to a competitive market for the provision of electric generation and other services. The new structure does not affect the transmission and distribution of electric power by public service corporations that exist as monopolies subject to Commission regulation.

¶ 2 In these appeals and cross-appeals from consolidated cases, we are asked to resolve constitutional, statutory, and administrative challenges to the Retail Electric Competition Rules promulgated by the Commission to implement competition. We must also determine the validity of Commission decisions approving the entry of new competitive electric generators into the market. For the reasons that follow, we affirm in part, reverse in part, and remand to both the Commission and the superior court for further proceedings.

GENERAL BACKGROUND

¶ 3 Electricity is created and provided to consumers in three phases: generation, transmission, and distribution. Michael Evan Stern & Margaret M. Mlynczak Stern, A Critical Overview of the Economic and Environmental Consequences of the Deregulation of the U.S. Electric Power Industry, 4 Envtl. Law. 79, 84 (Sept.1997). Electricity is first generated in power plants by using fuels such as coal, nuclear power, or solar power. The generated electricity is transmitted over high voltage power lines before being transformed to low voltage power and then distributed to consumers. Ashutosh Bhagwat, Institutions and Long Term Planning: Lessons from the California Electricity Crisis, 55 Admin. L.Rev. 95, 97-98 (2003). With some exceptions, public service corporations, operating as monopolies regulated by the Commission, traditionally provided bundled packages of generation, transmission, and distribution services to consumers within designated geographical areas.

¶ 4 In December 1996, the Commission created the Retail Electric Competition Rules, Arizona Administrative Code ("A.A.C.") R14-2-1601 to R14-2-1616, to change the provision of electric generation and related services, such as metering, from a system of regulated monopolies to a competitive one. See A.A.C. R14-2-1601(7), (30) (listing competitive and non-competitive services). After multiple revisions, the Commission issued Decision No. 61969 in September 1999, which adopted the rules in the form challenged in the present case, A.A.C. R14-2-1601 to R14-2-1617 ("Rules"). The Commission determined that the Rules were exempt from the attorney general review and certification provisions of the Arizona Administrative Procedure Act ("APA"), Arizona Revised Statute ("A.R.S.") section 41-1044 (1999).

¶ 5 The Rules require an electric service provider ("ESP") desiring to offer competitive services to file an application with the Commission for issuance of a certificate of convenience and necessity ("CC & N"). A.A.C. R14-2-1603. Among other information, an ESP must submit a proposed tariff for each service that states the maximum rate applicable to the provision of that service. A.A.C. R14-2-1603(B). Upon approval of the tariff and issuance of the CC & N, the ESP could provide competitive services within a prescribed geographical area. A.R.S. § 40-281 (1996); A.A.C. R14-2-1605.

¶ 6 The Rules direct existing public service corporations that provide bundled services ("Affected Utilities") to allow ESPs access to transmission and distribution facilities. A.A.C. R14-2-1604, -1606(A), (C), -1609(A). Additionally, Affected Utilities must file with the Commission "unbundled" tariffs, which identify various services with associated rates, in order to allow consumers to compare rates for services. A.A.C. R14-2-1601(44), -1606(C).

¶ 7 With one exception, Affected Utilities cannot offer competitive services other than as part of their "standard offer" service, whereby a company provides all electric service, including generation and metering, in a bundled package and at a regulated rate. A.A.C. R14-2-1601(5), (39), -1606(A), -1615(B). Distribution cooperatives, see infra n. 1, can compete for generation services within their designated territories but not outside them. A.A.C. R14-2-1615(C). Consequently, Affected Utilities, other than distribution cooperatives, must divest themselves of competitive generation assets and services, although they may transfer such assets to corporate affiliates for a fair and reasonable value. A.A.C. R14-2-1615(A), (C). A corporate affiliate may provide competitive services after applying for and obtaining a CC & N, and after the Affected Utility files with the Commission a code of conduct describing procedures in place designed to prevent anti-competitive activities. A.A.C. R14-2-1603(A), -1616.

¶ 8 The Rules also provide procedures for Affected Utilities to recover "stranded costs" that are thought to be unrecoverable in a competitive market. A.A.C. R14-2-1607. "Stranded costs" include the difference between the net original cost of assets necessary to furnish electricity, such as generating plants and fuel contracts, and the market value of such assets as affected by the introduction of competition. A.A.C. R14-2-1601(40). The Commission may authorize Affected Utilities to recover such costs over time through distribution charges or other means. A.A.C. R14-2-1607(D). An Affected Utility's territory will not be opened for competitive services until its stranded-costs case has been resolved by the Commission. A.A.C. R14-2-1602(A).

¶ 9 Ratemaking under the Rules differs for Affected Utilities and ESPs. The Commission continues to set specific rates for Affected Utilities upon a resolution of a rate case. A.A.C. R14-2-1606(C). In contrast, the Commission sets a rate ceiling for competitive ESPs by approving proposed tariffs, which set forth services and the maximum rates for those services. A.A.C. R14-2-1603(B),-1606(H). The rate ceiling does not have to correspond to any rates set for Affected Utilities. An ESP may price its services at or below the specified maximum rates, "provided that the [rates are] not less than the marginal cost of providing the service[s]." A.A.C. R14-2-1611(E). The objective, according to the Commission, is that competitive market forces will drive rates down from rates set for Affected Utilities. The Rules declare that rates set by the market for competitive services are deemed just and reasonable. A.A.C. R14-2-1611(A).

¶ 10 Under the various versions of the Rules, the Commission granted competitive CC & Ns to fifteen ESPs within the service territories of several Affected Utilities. These Affected Utilities consist of four non-profit rural distribution cooperatives and the generation and transmission cooperative they formed to supply power. We refer to these Affected Utilities collectively as the "Cooperatives."¹

FACTS PERTINENT TO CONSOLIDATED CASES

¶ 11 In February 1997, Tucson Electric Power Company, Inc. ("TEP"), an Affected Utility, filed a complaint in the superior court challenging the Commission's decision to adopt the first version of the Rules.² The court allowed...