ARIZONA LEGISLATIVE COUNCIL MEMO RE: DISCUSSION. Representative Chad Campbell. Ken Behringer General Counsel FROM:

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1 ARIZONA LEGISLATIVE COUNCIL MEMO February 27, 2012 TO: FROM: RE: Representative Chad Campbell Ken Behringer General Counsel House Bill 2789; Constitutionality (R ) QUESTION Does House Bill 2789 unconstitutionally infringe on the authority of the Arizona ` Corporation Commission (ACC)? ANSVVER House Bill 2789 would violate Constitution of Arizona, article III, which prescribes the separation of powers, and violate the ACC's exclusive ratemaking authority under Constitution of Arizona, article XV, section 3. DISCUSSION House- Bill 2789 would require all new rules or amendments to rules adopted by the ACC to be submitted to the Legislature and the Govemor. The rules could not be enforced by the ACC, Lmless they were approved by the Legislature or the Governor or until "the matter has been finally adjudicated in a court of competent jurisdiction." These requirements would not apply to rules that are the product of: quasi-judicial proceedings of the corporation commission, including commission orders that determine the fair value of a public service corporation's property and establish just and reasonable rates for utility service, that result from complaints against public service corporations and that relate to the certificate of convenience and necessity of a public service corporation. Separation of powers The ACC is a unique entity. Indeed, the ACC has been referred to as a fourth branch of government, possessing judicial, executive and legislative powers. Arizona

2 Corporation Commission v. State ex rel. Woods, 171 Ariz. 286, 291 (1992). The ACC "exercises its executive, administrative function in adopting rules and regulations, its judicial jurisdiction in adjudicating grievances and its legislative power in ratemaking." Id. The first question is whether House Bill 2789 constitutes a legislative infringement on the executive authority of the ACC in violation of the separation of powers provision inconstitution of Arizona, article Ill. The separation of powers is fundamental to constitutional government. Ahearn v. Bailey, 104 Ariz. 250, 252 (1969). The separation of powers clause of the Arizona Constitution prevents one branch of government from encroaching upon or ustuping the functions of another branch. State v. Montes, 226 Ariz. 194 (2011); Yes on Prop 200 v. Napolitano, 215 Ariz. 458, 465 (Ct. App. 2007). Resolving separation of powers disputes involves adhoc determinations aimed at ensuring sufficient checks and balances to protect each branch's core functions. State v. Donald, 198 Ariz. 406, 416 (Ct. App. 2000); JW Hancock Enterprises, Inc. v. Arizona State Registrar ofcontractors, 142 Ariz. 400, 405 (Ct. App. 1984). Four factors are considered when evaluating separation -of powers issues: (1) the essential nature of the power exercised; (2) the degree of control that one branch assumes in exercising the power of another; (3) the objective of the exercise of power; and (4) the practical consequences of_the action. McDonald v. Thomas, 202 Ariz. 35, 41, 40 P.3d 819, 825 (2002); San CarlosApache Tribe v. Superior Court ex rel. County ofmarz`copa, 193 Ariz. 195, 211 (1999). The Arizona courts have not applied the separation of powers clause to a requirement that administrative rules be approved by the legislature. However, courts in a number of other states have found that a requirement for legislative approval of administrative rules did violate the separation of powers doctrine. See Alaska v. A.L.I. l/.e. Voluntary, 606 P.2d 769 (Alaska 1980); State ex rel. Stephan v. Kansas House ofrepresentatives, 687 P.2d 622 (Kan. 1984); Opinion ofthe Justices, 431 A.2d 783 (N.H. 1981); New Jersey General Assembly v. Byrne, 448 A.2d 438 (N.J. 1982); State ex rel. Barker v. Manchin, 279 S.E.2d 622 (W.V. 1981); Missouri Coalition for the Environment v. Joint Committee on Administrative Rules, 948 S.W.2d 125 (l\/io., 1997); Gilliam Co. v. Oregon Dep't ofenvironmental Quality, 849 P.2d 500 (1993), rev'd on other grounds sub nom. Oregon Waste Systems v. Oregon Dep't of Environmental Quality, 511 U.S. 93 (1994); Legislative Research Comm. by and through Prather v. Brown, 664 S.W.2d 907 (Ky., 1984); Blank v. Department ofcorrections, 611 N.W.2d 530 (Mich. 2000). In Stephens, the Kansas Supreme Court applied the four part analysis set out in McDonald and San Carlos. The court stated that the power to adopt rules is an executive function. The legislature soughttotal control of the rule making process. The objective and practical effect of the statute was to put rule making authority in the hands of the legislature. The court held that the statute was a significant interference by the legislative branch with the executive branch and constituted an unconstitutional usurpation of powers. 687 P.2d at

3 - f f - - As stated in Woods, the ACC rule making authority is an executive function. House Bill 2789 provides the Legislature with veto power over this authority. The objective and practical effect of the bill would be to allow the Legislature and the Governor to control the ACC's rule making authority. Therefore, the Arizona courts would probably agree with the court in Stephens and find this an unconstitutional usurpation of the ACC's executive authority. The cases cited above reached similar conclusions, although not necessarily in the same way. However, these cases all stated that the legislature could address the subject of the administrative rules by following the constitutional requirements for enacting a law. But, if the procedures for approval of the rules did meet these constitutional requirements for enactment, the legislature was improperly invading the province _of the executive branch.1 The Alaska Supreme Court stunmarized this reasoning as follows: While the power to void agency regulations could be exercised by either the legislature, or by an agency, when the legislature exercises such power it must do so while acting as a legislature. lt may not grant itself the power to act as an agency. State v. A.L.I. VE. Voluntary, 606 P.2d 769, 778 (Alaska, 1980). Under House Bill 2789, the Legislature can stop an ACC rule from becoming effective by doing nothing. This non-action clearly does not meet the constitutional requirements for enacting law. Therefore, any action the Legislature would take under the bill would be an executive function and a violation of the separation of powers. ACC Constitutional Authority "TheArizona Corporation Commission, tmlike such bodies inmost 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. Arizona Corporation Commission, 227 Ariz. 21, _, jj 12 (App. 2011) quoting Ethington v. Wright, 66 Ariz. 382, 389 (1948). As noted above, the ACC has been referred to asa fourth branch of government. Arizona Corporation Commission v. State ex rel. Woods, 171 Ariz. at 291 (1992); Polaris International Metals Corp. v. Arizona Corporation Commission, 133 Ariz. 500, 506 (1982) (stating that the ACC has been treated as a fourth branch of government in Arizona); State v. Tucson Gas, Electric Light & Power Co., 15 Ariz. 294, 306 (1914) (discussing the functions of the ACC as neither legislative, executive nor judicial, but its duties and powers pervade all three, and it is infact another department of govermnent). In Mead v. Arnell, 791 P.2d 410 (Id. 1990), the Idaho Supreme Court stated that ldaho s executive branch agencies were not executing the law by promulgating rules, but were acting according to a legislative delegation of power. Therefore, it was constitutional for the legislature to override agency rule making activities without adhering to the formality of the enactment requirements of the Idaho Constitution. Given the Arizona Supreme Court s determination that the ACC's rule making authority is an executive function, this '.".".T.1."1 1 '2'_': -.. *. :-6 :"."."` ": f" 2".'T vuniav vv \./\» \;.\. A n u s v v A x v L A ; A/vusxnnné A1.1_.1\ / Ann.; - 4'L. 3 f '

4 1 Q.\ n However, the ACC's powers are not unlimited. The Corporation Commission s jurisdiction is limited to those powers given it by the Constitution and statutes of the state." Tucson Warehouse & Transfer Co. v. /11's Transfer, Inc., 77 Ariz. 323, 326 (1954). \ The Arizona Constitution provides: 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._._ Constitution of Arizona, article XV, section 3. In early cases analyzing the ACC's constitutional authority over public service corporations, the Arizona Supreme Court read this provision broadly, stating that "the power.. _ granted to the Commission is exclusive, and not to be exercised by the Legislature." State v. Tucson Gas, Electric Light & Power Co., 15 Ariz. 294, 307 (1914). In 1939, the court significantly narrowed this interpretation in Corporation Commission v. Pacific Greyhound Lines, 54 Ariz. 159 (1939). The court held that the paramount power to make rules and regulations governing public service corporations, if not specifically and expressly delineated in the constitution, rests in legislature, which may exercise powers directly or delegate them on such terms and limitations as it thinks proper to the ACC. Id. at The Supreme Court examined this history in Woods. Although it criticized the opinion in Pacific Greyhound, it noted that the case had been precedent for over fifty years. Therefore, it refused to overturn the opinion and determined the case in Woods based on the theory that the ACC has no regulatory authority under article XV, section 3 except that connected to its ratemaking authority. 171 Ariz. at In Ethington v. Wright, 66 Ariz. 382 (1948), the Supreme Court struck down a statute that prescribed the method the ACC had to use to determine fair property values for public service corporations. The court stated that fair market determinations are an essential part of ratemaking. Therefore, under the ACC's constitutional authority "it follows that the duty, power, and procedure to be followed to ascertain such fair values are likewise within the exclusive prerogatives of the Corporation Commission." Id. at

5 ' 1 ln Woods, the courtstated that inethington: [T]he court recognized that the Commission's power goes beyond strictly setting rates and extends to enactment of the rules and regulations that are reasonably necessary steps in ratemaking. Other cases have recognized that the Commission constitutionally "may exercise all powers which may be necessary or essential in connection with the performance of its duties."._. As we later explained, "[t]he commission in exercising its rate-making power of necessity has a range of legislative discretion." - Woods, 171 Ariz. at294 (citations omitted). The court further stated that "current events in this state and others prove the wisdom and necessity of a broader view of what is involved in ratemaking." 171 Ariz. at 296. See also Stare ex rel. Corbin v.arizona Corp. Comm'n, 174 Ariz. 216, 218, (App. 1992), "[t]he [C]ommission's power goes beyond strictly setting rates and extends to enactment of the rules and regulations that are reasonably necessary steps in ratemaking." Using this analysis, the court in Woods upheld ACC rules regarding transactions between public service corporations and their corporate affiliates. The court held that the rules were reasonably necessary for ratemaking. 171 Ariz. at 297. In Miller, the Court of Appeals held that rules regarding renewable energy standards and tariffs (REST) were within the commission's exclusive ratemaking authority. The court stated that the ACC looks at more than "setting a fair return on a predetermined value". 227 Ariz. at _, par. 30 (quoting Woods, 171 Ariz. at 296.) Under this broader view, the ACC may consider risks associated with contemplated action or inaction. Id The court held that "[p]rophylactic measures designed to prevent adverse effects on ratepayers due to a failure to diversify electrical energy sources" were within the ACC's exclusive rule making authority. Id at, par. 31. House Bill 2789 requires all rules of the ACC to be approved by the Legislature and Governor, except quasi-judicial proceedings including orders to detemiine the fair value of a public service corporation's property and to set just and reasonable rates. This language appears to address the narrow view of the ACC's authority (i.e., merely setting rates) and not the full authority described in Woods and Miller. The court of appeals made a similar distinction in statutory language in Arizona-American Water Company v. Arizona Corporation Commission, 209 Ariz. 189 (2004). Most appeals of ACC decisions must be made in superior court. However, direct appeals may be made to the court of appeals in cases involving ratemaking and rate design. Arizona Revised Statutes section Arizona-American had sought approval of a merger and the ACC imposed a condition that the company could not seek a non-emergency rate increase for three years. The company appealed this condition directlyto the court of appeals pursuant to section Id. at

6 v The court of appeals held that it did not have jurisdiction because the statute was inapplicable. The court stated that the ACC action fell within its constitutional ratemaking authority as described in Woods, however, the statute s applicability was narrower than this authority. The statute allowed appeals directly to the court of appeals of orders that only involve actual ratemaking. Id. at 194. The exception language of House Bill 2789 is similarly narrow. It only applies to quasi-judicial determinations including ratemaking orders. All other rules of the ACC would be subject to legislative and gubernatorial approval. Since the ACC s constitutional exclusive ratemaking authority is broader than the narrow exception, legislative action under the bill could infringe on this authority. CONCLUSION House Bill 2789 would allow the Legislature to usurp the executive authority of the ACC and impinge on the commission's exclusive ratemaking authority. Therefore, the bill is unconstitutional. cc: Elvy Barton 6