Determining Fair Value of Public Service Corporation
Our supreme court has consistently treated fair value determinations for public service corporations as constitutionally required. See Simms, 80 Ariz. at 151, 294 P.2d at 382 ("Under our constitution as interpreted by this court, the commission is required to find the fair value of the company's property and use such finding as a rate base for the purpose of calculating what are just and reasonable rates.");
Tucson Gas, Elec. Light & Power Co., 15 Ariz. at 303, 138 P. at 785 ("The 'fair value of the property' of public service corporations is the recognized basis upon which rates and charges for services rendered should be made, and it is made the duty of the commission to ascertain such value, not for legislative use, but for its own use, in arriving at just and reasonable rates and charges.").
But the supreme court did not rest its decisions on the existence of the companies involved as monopolies, but rather on their existence as public service corporations. See Simms, 80 Ariz. at 149-50, 294 P.2d at 381-82; Tucson Gas, Elec. Light & Power Co., 15 Ariz. at 307, 138 P. at 786.
Thus, because the Competitors are public service corporations, the Commission's treatment of the constitutional fair value clause as discretionary rather than mandatory as it applies to the Competitors runs contrary to constitutional precedent.
Telecommunications companies operating within Arizona, such as the Competitors, are public service corporations. See Ariz. Const. art. 15, 2; A.A.C. R14-2-1102(15).
All public service corporations operate under the terms of their tariffs, filed with the Commission, which set forth rates and charges.
The Commission's practice in the past has been to hold hearings to determine the fair value rate base of a public service corporation's property within Arizona, and then set a just and reasonable rate of return for its investment in the state on the basis of that information.
"The rate of return is the income earned by a utility after operating expenses ('net operating income') before the deduction of interest charges as divided by the fair value rate base." Turner Ranches Water & Sanitation Co. v. Arizona Corp. Comm'n, 195 Ariz. 574, 579 n.2, 991 P.2d 804, 809 n.2 (App. 1999). Setting rates in this fashion is commonly referred to as "rate-of-return" regulation.
See Scates, 118 Ariz. at 533-34, 578 P.2d at 614-15. US West's tariffs include rates and charges that were determined at hearings that established a fair value rate base and a just and reasonable rate of return, as contemplated by article 15, sections 3 and 14, of the Arizona Constitution.
In contrast, the Commission established initial rates for the Competitors without first holding hearings to determine a fair value rate base.
Instead, the Commission required the Competitors only to state their current and maximum rates and charges in tariffs filed with the Commission at least thirty days before providing service.
Thereafter, the Competitors could raise their rates up to the maximum stated in the tariff by giving the Commission written notice, but still without any fair value rate base determination. See A.A.C. R14-2-1109, R14-2-1110.
In Scates, this court held that a public service corporation cannot raise rates without first determining a fair value rate base. 118 Ariz. at 534, 578 P.2d at 615 (holding that the Commission "is required by our Constitution to ascertain the value of a utility's property within the State in setting just and reasonable rates").
Similarly, the Simms court stated that the Arizona Constitution requires the Commission "to find the fair value of the company's property and use such finding as a rate base for the purpose of calculating what are just and reasonable rates." 80 Ariz. at 151, 294 P.2d at 382.
But the trial court distinguished this case from Simms and Scates because they "do not address the circumstances of a competitive market," and because "there is no precedent for requiring a fair value determination in a competitive market."