Johnson v. Acc

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

JOHNSON UTILITIES L.L.C., an Arizona limited liability company,
Petitioner,

v.

ARIZONA CORPORATION COMMISSION; TOM FORESE, BOB BURNS,
ANDY TOBIN, BOYD W. DUNN, and JUSTIN OLSON, in their official
capacities as members of the Arizona Corporation Commission,
Respondents.

No. 1 CA-SA 18-0197
FILED 3-7-2019

Special Action – Arizona Corporation Commission
No. WS-02987A-18-0050
The Honorable Sarah N. Harping, Administrative Law Judge

JURISDICTION ACCEPTED; RELIEF DENIED

COUNSEL

Fredenberg Beams, LLC, Phoenix
By Daniel E. Fredenberg, Christian CM Beams

Crockett Law Group, PLLC, Phoenix
By Jeffrey W. Crocket
Co-Counsel for Petitioner

Arizona Corporation Commission, Phoenix
By Andrew M. Kvesic, Maureen A. Scott, P. Robyn Poole
Counsel for Respondents
 JOHNSON v. ACC, et al.
Opinion of the Court

OPINION

Judge Peter B. Swann delivered the opinion of the court, in which Presiding
Judge Kenton D. Jones and Judge David D. Weinzweig joined.

S W A N N, Judge:

¶1 Johnson Utilities L.L.C. seeks special action relief from the
Arizona Corporation Commission’s order appointing a third-party interim
manager to conduct Johnson Utilities’ operations. It argues that the
Commission lacks authority to interfere with the internal management of a
public service corporation, and therefore that the Commission lacked
jurisdiction to issue the interim management order.

¶2 We accept jurisdiction but deny relief. Both the Commission’s
broad ratemaking power under Ariz. Const. art. 15, § 3, and its statutorily
delegated power to determine a “just” remedy for “inadequate” public-
utility equipment, facilities, or services under A.R.S. § 40-321(A), provide
the Commission with sufficient authority to impose an interim manager
under appropriate circumstances. It is for the superior court, however, to
decide whether the circumstances in this case supported the Commission’s
authority to issue the interim management order.

FACTS AND PROCEDURAL HISTORY

¶3 Johnson Utilities is a public service corporation that provides
water and wastewater services in Pinal and Maricopa Counties. In March
2018, the Commission held a 14-day hearing regarding the adequacy of
Johnson Utilities’ operations and issued a decision finding several
significant concerns with its billing practices and financial management, as
well as with the condition of its equipment and facilities. Finding it “just
and reasonable and in the public interest,” the Commission appointed
EPCOR Water Arizona (another water utility provider in the area) to
“conduct the business and affairs” of Johnson Utilities as an interim
manager. The Commission further ordered that Johnson Utilities may
apply for termination of the interim management appointment with
EPCOR “upon a showing that [Johnson Utilities’] services . . . are in all
respects just, reasonable, safe, proper, adequate, and sufficient and that
terminating the [appointment] would not present an unreasonable risk of
service.”

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Opinion of the Court

¶4 Johnson Utilities filed several actions protesting the
Commission’s order, including three unsuccessful requests to enjoin its
enforcement. Johnson Utilities also filed a “Statutory Special Action” with
the Arizona Supreme Court, and that court issued an order declining
jurisdiction “without prejudice to refile in the court of appeals.” Johnson
Utilities now petitions this court for special action review.

¶5 We issued a brief order accepting jurisdiction and denying
relief on September 21, 2018, noting that an opinion would follow. This is
that opinion.

JURISDICTION

¶6 We accepted special action jurisdiction because Johnson
Utilities’ petition presents a purely legal issue of immediate statewide
importance. See Ariz. Corp. Comm’n v. State ex rel. Woods, 171 Ariz. 286, 287–
88 (1992).1

DISCUSSION

¶7 Johnson Utilities contends that only the superior court, and
not the Commission, has authority to order that a third-party interim
manager operate a public service corporation. The ultimate question of
whether the Commission’s order was justified on the merits must be
decided on a case-by-case basis. We will not engage in such a fact-intensive
inquiry here. Instead, we address only the narrow legal issue presented by
this special action—whether an order for an interim manager falls within
the jurisdiction of the Commission.

¶8 “The Arizona Corporation Commission, unlike such bodies in
most states, is not a creature of the legislature, but is a constitutional body
which owes its existence to provisions in the organic law of this state.”
Miller v. Ariz. Corp. Comm’n, 227 Ariz. 21, 24, ¶ 12 (App. 2011) (citation

1 Both parties present novel arguments regarding jurisdiction. The
Commission argues that under A.R.S. § 40-254(F), special action jurisdiction
in this matter lies solely with the supreme court, and therefore this court
does not have jurisdiction to review the petition. Johnson Utilities argues
that § 40-254(F) creates a “statutory special action” under Ariz. R.P. Spec.
Act. 1(b), which mandates that the petitioned court accept review. But
because the supreme court explicitly permitted Johnson Utilities to refile its
petition with this court, and because we accept jurisdiction based on the
discretionary factors under Ariz. R.P. Spec. Act. 1(a), we need not address
either argument here.

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Opinion of the Court

omitted); see also State v. Tucson Gas, Elec. Light & Power Co., 15 Ariz. 294,
302, 306 (1914) (referring to the Commission as a fourth branch of state
government). The Commission derives its power to govern public service
corporations from two sources: Article 15 of the Arizona Constitution and
Title 40 of the Arizona Revised Statutes. See Phelps Dodge Corp. v. Ariz. Elec.
Power Coop., 207 Ariz. 95, 111, ¶ 54 (App. 2004). The Arizona Constitution
grants the Commission authority to set “just and reasonable” rates subject
to the requirements of Ariz. Const. art. 15, § 12, and to enact any rules,
regulations, or orders that are “reasonably necessary steps in ratemaking.”
Ariz. Const. art. 15, § 3; Woods, 171 Ariz. at 294. All other powers are left to
the Legislature, which may delegate its own power to the Commission by
statute, thus enlarging the Commission’s powers and duties. Ariz. Const.
art. 15, § 6; Phelps Dodge, 207 Ariz. at 111, ¶ 54. The Commission is required
to exercise its power, constitutional or statutory, in the public’s interest.
Woods, 171 Ariz. at 291–92.

I. THE ARIZONA CONSTITUTION PROVIDES THE COMMISSION
AUTHORITY TO IMPOSE AN INTERIM MANAGER.

¶9 Article 15, Section 3 of the Arizona Constitution includes, in
pertinent part, the following four clauses:

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 . . . .

(Line-breaks and emphasis added.)

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Opinion of the Court

¶10 The supreme court originally interpreted Section 3 to
establish a broad grant of power to the Commission. See Tucson Gas, 15
Ariz. at 302 (“It was clearly the policy of the framers of the Constitution,
and the people in adopting it, to take the powers of supervision, regulation,
and control of public utilities from the legislative branch and vest them in
the Corporation Commission . . . .”). The court then changed course and
interpreted the provision narrowly—concluding that only the first clause
contained an express grant of power—and held the Commission’s
constitutional power was therefore limited to setting reasonable
classifications, rates, and charges. See Corp. Comm’n v. Pac. Greyhound Lines,
54 Ariz. 159, 172–73 (1939) (noting that reading Section 3 too expansively
would result in other constitutional provisions becoming “so much Dead
Sea fruit turning to ashes upon the lips” (quoting Ariz. E. R.R. v. State, 19
Ariz. 409, 411–12 (1918))). Years later, the court interpreted Article 15 and
Pacific Greyhound to give the Commission the constitutional authority to
enact “rules, regulations, and orders concerning such classifications, rates,
and charges.” Ethington v. Wright, 66 Ariz. 382, 391–92 (1948).

¶11 More recent decisions afford deference to the Commission’s
determination of whether a rule, regulation, or order is “reasonably
necessary for effective ratemaking,” interpreting “necessity in light of the
framers’ intent of the Commission’s function . . . to protect consumers from
abuse and overreaching by public service corporations.” Woods, 171 Ariz.
at 294–95; see Miller, 227 Ariz. at 28–29, ¶¶ 27, 31 (deferring to the
Commission’s determination of whether a “sufficient nexus” exists
between a rule and the Commission’s ratemaking authority). On the other
hand, to “protect regulated corporations from over-reaching and micro-
management of their internal affairs by the Commission,” Miller, 227 Ariz.
at 27, ¶ 23, courts also must consider whether a proposed rule, regulation,
or order “so interfere[s] with management functions that [it] constitute[s]
an attempt to control the corporation rather than an attempt to control
rates,” Woods, 171 Ariz. at 297.2

2 Notably, throughout the century of jurisprudence on Ariz. Const.
art. 15, § 3, comparatively little focus has been placed on the force of the
fourth clause, which gives the Commission broad authority to make and
enforce orders affecting public welfare. See Pac. Greyhound, 54 Ariz. at 168,
176–77 (discussing only the first two clauses); Woods, 171 Ariz. at 294–96
(same); but see Ariz. E. R.R., 19 Ariz. at 414–16 (discussing in dicta whether
the fourth clause’s permissive language, when read together with the other
clauses, gives the Legislature and the Commission concurrent jurisdiction

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Opinion of the Court

¶12 Although no Arizona court has explicitly reviewed the
legality of imposing a third-party interim manager to run a public service
corporation, courts have reviewed other measures that interfered with
management.3 We look to these decisions—including particularly Woods,
Phelps Dodge, and Miller—and to the text of the constitution for guidance.

¶13 In Woods, the supreme court held that it was within the
Commission’s ratemaking power to require Commission approval for “all
transactions between a public service corporation and its affiliates that may
significantly affect economic stability and thus impact the rates charged by
a public service corporation.” 171 Ariz. at 295. The court addressed
arguments that the proposed rules would impermissibly interfere with a
corporation’s management, but held that monitoring transactions between
public service corporations and their affiliates had become necessary to
ensure the economic viability of the utility companies. Id. at 295–97. The
court reasoned that a utility company’s economic viability would impact its
rates. Id. at 297. Woods minced no words in its characterization of the
Commission’s power: “The Commission was not designed to protect public
service corporations and their management but, rather, was established to
protect our citizens from the results of speculation, mismanagement, and
abuse of power,” id. at 296, and “[t]o put it simply, the Commission was
given the power to lock the barn door before the horse escapes,” id. at 297.

¶14 In Phelps Dodge, we reviewed several policy-driven rules,
which the Commission maintained were necessary to effect its ratemaking
power. 207 Ariz. at 101–02, 112–15, ¶¶ 4–9, 57–76. One of the rules required
that utility companies sell off “competitive generation assets and

in non-ratemaking areas); Ariz. Corp. Comm’n v. Palm Springs Util. Co., 24
Ariz. App. 124, 127–28 (App. 1975) (referring to the Commission’s authority
to make orders respecting “convenience, comfort, and safety”).
3 This is not the first time the Commission has ordered the
appointment of an interim manager for a public service corporation. The
Commission points to several instances in which it issued interim
management orders for a troubled public utility, including Acme Water
Company, LLC in 2017 (Comm’n Dec. No. 75871,
http://docket.images.azcc.gov/0000176137.pdf), Citrus Park Water
Company in 2014 (Comm’n Dec. No. 74832,
http://docket.images.azcc.gov/0000159298.pdf), and American Realty and
Mortgage Company, doing business as Hacienda Acres Water System, in
2008 (Comm’n Dec. No. 70609,
http://docket.images.azcc.gov/0000090590.pdf).

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Opinion of the Court

competitive services,” and that, if companies opted to sell those assets to an
affiliate, they had to do so at a fair price as determined by the Commission.
Id. at 113, ¶ 62. We held that under its ratemaking power, the Commission
could control the price of an asset in a sale between a utility company and
its affiliate to avoid unfair cross-subsidization, but that it could not require
utility companies to sell off competitive assets when it could simply have
required the companies to not use the assets competitively. Id. at 113–14,
¶¶ 64–66. Acknowledging that the point at which managerial interference
becomes impermissible can be difficult to discern, we noted that “our
supreme court [in Woods] has suggested that the line is drawn between rules
that attempt to control rates, which are permissible, and rules that attempt
to control the corporation, which are impermissible.” Id. at 113, ¶ 64. We
held that the portion of the rule requiring the sale of assets (as opposed to
the portion controlling the sale price to affiliates) was an attempt to control
the corporation because there was a less intrusive means to reach the same
end, and there was no apparent justification related to ratemaking for
taking the more intrusive route. See id. at 114, ¶ 66. We also reviewed a
rule requiring utility companies planning to offer competitive service
through affiliates to file codes of conduct with the Commission for
approval. Id. at ¶ 70. We held that because the rule required the codes of
conduct to include procedures for preventing cross-subsidization between
affiliates, which would adversely impact rates, the rule was sufficiently
aimed at controlling rates despite interfering with management. Id. at ¶¶
70–71.

¶15 In Miller, we held that a sufficient nexus existed between rules
requiring public utilities to diversify their energy sources and the
Commission’s ratemaking power. 227 Ariz. at 29, ¶ 31. We reasoned that
“[p]rophylactic measures designed to prevent adverse effects on ratepayers
due to a failure to diversify electrical energy sources fall within the
Commission’s power ‘to lock the barn door before the horse escapes.’” Id.
(quoting Woods, 171 Ariz. at 297). We noted that, in exercising its
ratemaking authority, “[t]he Commission may take a ‘broader view’ and
consider, for example, risks associated with contemplated action or
inaction.” Id. at 28, ¶ 30. We discussed past applications of the so-called
managerial interference doctrine, but because the appellants were utility
customers, we found they lacked standing to argue interference, and
therefore did not apply the doctrine to restrict the Commission’s power. Id.
at 26–27, ¶¶ 19–23.

¶16 The common thread weaving through Woods, Phelps Dodge,
and Miller is that while the managerial interference doctrine requires courts
to look with disfavor on interference with a public service corporation’s

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Opinion of the Court

management, the doctrine does not create a bright-line rule that places such
interference outside the Commission’s jurisdiction. Instead, courts have
reviewed the merits of each case to determine whether a failure to interfere
could have a deleterious effect on rates or the public welfare. See also, e.g.,
S. Pac. Co. v. Ariz. Corp. Comm’n, 98 Ariz. 339, 343 (1965) (“[A] public utility
may, . . . in the exercise of its managerial functions, determine the type and
extent of service to the public within the limits of adequacy and reasonableness.”
(emphasis added)); Miller, 227 Ariz. at 27, ¶ 23 (“The managerial
interference doctrine is a judicial construct designed to protect regulated
corporations from over-reaching and micro-management of their internal
affairs by the Commission.” (emphasis added)); Metro. Edison Co. v. Penn.
Pub. Util. Comm’n, 437 A.2d 76, 80 (Pa. Commw. Ct. 1981) (“An obvious
corollary of the [managerial interference doctrine] is that if there has been
an abuse of managerial discretion, and the public interest has been
adversely affected thereby, then the Commission is empowered to
intervene.”). The distinction between rules that “attempt to control rates”
and rules that “attempt to control the corporation,” Woods, 171 Ariz. at 297,
focuses on what the Commission intends to achieve, and courts have
likewise framed their analysis in terms of the Commission’s attempted goal
or “aim,” see Phelps Dodge, 207 Ariz. at 113–14, ¶ 65 (holding that a rule
aimed at controlling rates was permissible despite its interference with
management). Reviewing the development of the doctrine, we hold that
neither our precedent nor the broad language of Article 15, Section 3
prohibits control of management incidental to the Commission’s attempt to
control rates.

¶17 In Woods and Phelps Dodge, the court only addressed proactive
measures that were permanent in nature, not temporary remedial orders.
See Ariz. Corp. Comm’n v. Palm Springs Util. Co., 24 Ariz. App. 124, 128 (App.
1975) (recognizing the Commission’s ability to accomplish some goals by
specific order pertaining to particular companies rather than by rules and
regulations of general applicability). In more urgent situations (as well as
in situations like those in Woods and Phelps Dodge), controlling the utility
company may be a necessary means to accomplishing the permissible ends
of controlling rates, i.e., in situations in which costly financial or structural
harm to the corporation is imminent but avoidable. We therefore conclude
that the Commission’s constitutional ratemaking authority permits, albeit
in limited circumstances, the appointment of an interim manager to run a
public service corporation.

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Opinion of the Court

II. THE COMMISSION’S STATUTORY POWERS PROVIDE IT
AUTHORITY TO IMPOSE AN INTERIM MANAGER.

¶18 When the Commission’s imposition of an interim manager is
not sufficiently related to its ratemaking power, it may nevertheless find
authority to issue such an order through its statutory powers. The
Legislature has delegated significant authority over public service
corporations to the Commission. See Ariz. Const. art. 15, § 6; see generally
A.R.S. tit. 40, ch. 2 (constellation of statutes delegating powers and duties
to the Commission). The Commission cites A.R.S. § 40-321(A), among other
statutes, as a source of its statutory power to impose an interim manager.
Section 40-321(A) provides:

When the commission finds that the equipment, appliances,
facilities or service of any public service corporation, or the
methods of manufacture, distribution, transmission, storage
or supply employed by it, are unjust, unreasonable, unsafe,
improper, inadequate or insufficient, the commission shall
determine what is just, reasonable, safe, proper, adequate or
sufficient, and shall enforce its determination by order or
regulation.

¶19 “[T]he language of a statute is the best and most reliable index
of its meaning,” Ariz. Sec. Ctr., Inc. v. State, 142 Ariz. 242, 244 (App. 1984),
and when possible, we will give the statute its plain and obvious meaning,
Bilke v. State, 206 Ariz. 462, 464, ¶ 11 (2003). Further, we must avoid
interpretations that render statutory provisions superfluous or void. Id.

¶20 While the Legislature may delegate authority to interfere with
the management of public service corporations to the extent that public
interest demands, we will not infer any such authority beyond that
provided by the “clear letter of a statute.” S. Pac. Co., 98 Ariz. at 343;
Burlington N. & Santa Fe Ry. v. Ariz. Corp. Comm’n, 198 Ariz. 604, 606, ¶ 11
(App. 2000) (“We will not imply any power beyond that expressly
bestowed by the statute.”). In other words, the language of such statutes
will not be “broadened by implication.” Chesapeake & Potomac Tel. Co. v.
Manning, 186 U.S. 238, 248 (1902) (cited by S. Pac. Co., 98 Ariz. at 343). “[T]he
standards laid down by the Legislature may be broad and in general terms
[and do] not have to supply administrative officials with a specific formula
to guide them when flexibility and adaptability are necessary.” Ethridge v.
Ariz. St. Bd. of Nursing, 165 Ariz. 97, 104–05 (App. 1989); see Phelps Dodge,
207 Ariz. at 112–13, ¶ 59 (stating that, although the court must read
empowering statutes narrowly, a statutory grant of authority may be found

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“if such authority ‘may be reasonably implied from the statutory scheme so
as to carry out the purpose and intent of the legislative mandate’” (quoting
Ethridge, 165 Ariz. at 105)).

¶21 Section 40-321(A) is broadly worded; it gives the Commission
broad authority to remedy certain problems within a public service
corporation. The Legislature did not restrict the specific means by which
the Commission could enforce “just, reasonable, safe, proper, adequate or
sufficient” remedies, except that it do so by “order or regulation.” We
therefore need not look beyond the express language of this statute to find
authority allowing the Commission to impose an interim manager. See S.
Pac. Co., 98 Ariz. at 343; Burlington N. & Santa Fe Ry., 198 Ariz. at 606, ¶ 11.

¶22 A reading of § 40-321(A) that permits imposition of an interim
manager is consistent with other Arizona statutes. For instance, Title 40,
Chapter 2 contemplates broad power for the Commission. See, e.g., A.R.S.
§ 40-202(A) (“The commission may supervise and regulate every public
service corporation in the state and do all things, whether specifically
designated in this title or in addition thereto, necessary and convenient in
the exercise of that power and jurisdiction.”); A.R.S. § 40-361(B) (requiring
utility companies to maintain adequate facilities and services for safety of
patrons); A.R.S. § 40-331(A) (granting power to make orders requiring
public utilities to improve facilities to promote the security and
convenience of the public). And two Arizona provisions outside Title 40
contemplate the existence of an interim manager of a public service
corporation. See A.R.S. § 49-355(B) (permitting monetary grants to “interim
operators, interim managers or owners” of small drinking water utility
companies to ensure compliance with Title 40, Chapter 2); Ariz. R. Sup. Ct.
31(d)(28) (“In matters before the Arizona Corporation Commission, a
public service corporation, an interim operator appointed by the
Commission, or a non-profit organization may be represented by a
corporate officer, employee, or a member who is not an active member of
the state bar . . . .”).

III. A.R.S. § 40-422 DOES NOT PROHIBIT THE COMMISSION FROM
ISSUING AN ORDER IMPOSING AN INTERIM MANAGER.

¶23 Johnson Utilities argues that under A.R.S. § 40-422(A), the
Commission could secure the appointment of an interim manager of a
public service corporation only from the superior court. Section 40-422(A)
requires the Commission to commence a proceeding in the superior court
“to have
. . . violations or threatened violations [of an order of the Commission]

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Opinion of the Court

prevented, either by mandamus or injunction.” This statute provides the
Commission a means to enforce its original order, but does not limit the
scope of the original order or affect whether the Commission has
constitutional or statutory authority to issue the order in the first instance.

CONCLUSION

¶24 We accept jurisdiction but deny relief. Subject to the
substantive limitations of the managerial interference doctrine, both Ariz.
Const. art. 15, § 3, and A.R.S. § 40-321(A) provide the Commission
jurisdiction to impose an interim manager for a public service corporation.

AMY M. WOOD • Clerk of the Court
FILED: AA

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