Court Opinion

ID: 9377339
Source: CourtListenerOpinion
Date Created: 2023-03-07 17:02:22.500621+00
Date Added: 2024-06-11T17:17:13.558286
License: Public Domain

IN THE
        ARIZONA COURT OF APPEALS
                      DIVISION ONE

          ARIZONA PUBLIC SERVICE COMPANY,
                     Appellant,

                            v.

         ARIZONA CORPORATION COMMISSION,
                         Appellee,
            _________________________________

 SIERRA CLUB and RESIDENTIAL UTILITY CONSUMER OFFICE
                       Intervenors.

                   No. 1 CA-CC 21-0002
                     FILED 3-7-2023

      Appeal from the Arizona Corporation Commission
                   No. E-01345A-19-0236

AFFIRMED IN PART; VACATED IN PART; AND REMANDED IN
                       PART
                                 COUNSEL

Osborn Maledon, PA, Phoenix
By Mary R. O'Grady, Joseph N. Roth, John S. Bullock
Co-Counsel for Appellant

Gibson Dunn & Crutcher, LLP, Washington DC
By William S. Scherman, Thomas G. Hungar, Jeffrey M. Jakubiak,
Matthew S. Rozen
Co-Counsel for Appellant

Arizona Corporation Commission, Phoenix
By Robin R. Mitchell, Maureen A. Scott, Wesley C. Van Cleve,
Samantha Egan, Stephen Joseph Emedi, Katherine Kane
Counsel for Appellee

Radix Law, PLC, Scottsdale
By Andrew M. Kvesic
Co-Counsel for Intervenors Residential Utility Consumer Office

Residential Utility Consumer Office, Phoenix
By Daniel W. Pozefsky
Co-Counsel for Intervenors Residential Utility Consumer Office

The Sierra Club, Oakland, CA
By Louisa Eberle, Rose Monahan, Michelle Endo
Co-Counsel for Intervenors The Sierra Club

                                 OPINION

Judge James B. Morse Jr. delivered the opinion of the Court, in which
Presiding Judge Jennifer M. Perkins and Judge Michael J. Brown joined.

M O R S E, Judge:

¶1            Arizona Public Service Company ("APS") appeals the Arizona
Corporation Commission ("Commission") ratemaking Decision No. 78317's
("Decision") determination of the fair value increment ("FVI"), return on
equity, and disallowance of investments associated with the installation of
Selective Catalytic Reduction equipment ("SCR").         We affirm the
Commission's FVI determination as a proper exercise of the Commission's

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discretion. Similarly, we affirm the Commission's discretionary base return
on equity determination but vacate the 0.2% reduction because the
Commission's use of customer-service metrics exceeded its rate-making
authority. We also vacate and remand the Commission's SCR investment
disallowance because the Commission failed to consider APS's contractual
obligations, and improperly considered post-investment data, in violation
of the applicable regulation.

             FACTS AND PROCEDURAL BACKGROUND

¶2             APS is a public service corporation owned and operated by
the Pinnacle West Capital Corporation, a private company.              The
Commission is a constitutional entity, empowered to set rates for public
service corporations. See Sun City Home Owners Ass'n v. Ariz. Corp. Comm'n,
252 Ariz. 1, 4-5, ¶¶ 14-16 (2021).

¶3            The Four Corners Power Plant ("Four Corners") is a five-unit,
coal-fired power plant. Before 2012, APS owned and operated Four
Corners with Southern California Edison ("SCE"), Tucson Electric Power,
Public Service Company of New Mexico, El Paso Electric Company, and
Salt River Project.

¶4            In 2006, California passed a law prohibiting utilities from
extending the life of an existing fossil fuel plant, requiring SCE to divest its
ownership in Four Corners. As a result, APS sought the Commission's
approval to purchase SCE's ownership share of Four Corners' Units 4 and
5 and retire Units 1 through 3. In response, the Commission issued Decision
73130, authorizing APS to purchase SCE's share of Four Corners.

¶5            In 2013, APS closed the purchase of SCE's interest in Four
Corners and requested the Commission's permission to include the
acquisition costs in its rates. On December 12, 2014, the Commission issued
Decision 74876, finding the acquisition costs prudent and allowing APS to
include these costs, and a reasonable return, in its rate base.

¶6             In August 2015, APS entered a consent decree with the United
States Environmental Protection Agency, in which APS agreed to install
SCRs at Four Corners. Later that month, APS entered into an SCR
construction agreement with Four Corners' co-owners. The next month,
construction on the SCRs began. Six months later, contractors began
installing the SCRs' structural steel. In January 2017, contractors began
installing the SCRs' reactors.

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                              Opinion of the Court

¶7            In December 2017, APS completed construction on Unit 5's
SCR. Five months later, APS completed construction on Unit 4's SCR. The
SCR installation took two years and seven months.

¶8             During the construction, APS began a rate case. In 2017, the
Commission issued Decision 76295, approving a settlement agreement to
resolve that rate case. The agreement allowed APS to request SCR
installation costs. In April 2018, APS requested these costs as part of the
rate base. Seven months later, the Commission's Administrative Law Judge
("ALJ") issued a Recommended Opinion and Order. The Commission did
not approve this recommendation and instead directed APS to begin a new
rate case.

¶9            In October 2019, APS initiated the current rate case. The
Sierra Club and the Residential Utility Consumer Office ("RUCO")
intervened. Before the hearing, APS announced that it planned to retire
Four Corners by 2031, instead of 2038. On January 14, 2021, the hearing
began. It spanned 26 days, involved 47 parties, and led to a 457-page
Recommended Opinion and Order. Weeks after the hearing, APS
announced that it would transition one Four Corners unit to seasonal use.
Over eight days, the Commission held an open meeting to consider the
Recommended Order and Opinion. Following the open meeting, the
Commission amended the recommendation and issued the Decision. In the
Decision, the Commission determined APS's return on equity, FVI, and fair
value base rate. Two of the five Commission members dissented. The
Commission then used this data to calculate APS's "fair value rate of
return."

¶10           On November 24, 2021, APS petitioned for rehearing. By
operation of law, the Commission denied the petition. APS sought appeal
with this Court. We have jurisdiction under A.R.S. § 40-254.01.

                                 DISCUSSION

¶11             "A utility is entitled to a fair rate of return on the fair value of
its property, 'no more and no less.'" Litchfield Park Serv. Co. v. Ariz. Corp.
Comm'n, 178 Ariz. 431, 434 (App. 1994) (quoting Ariz. Corp. Comm'n v.
Citizens Utils. Co., 120 Ariz. 184, 190 n.5 (App. 1978)); see Bluefield Waterworks
& Improvement Co. v. Pub. Serv. Comm'n of W. Va., 262 U.S. 679, 692-93 (1923).
A "determination of fair value is necessary with respect to a public service
corporation." US W. Commc'ns, Inc. v. Ariz. Corp. Comm'n, 201 Ariz. 242,
245, ¶ 12 (2001). 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

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calculating what are just and reasonable rates." Id. at ¶ 15 (quoting Simms
v. Round Valley Light & Power Co., 80 Ariz. 145, 151 (1956)). The fair-value
determination is within the Commission's discretion because our
"constitution does not establish a formula for arriving at fair value" and our
supreme court has never "prescribed one." Residential Util. Consumer Off. v.
Ariz. Corp. Comm'n, 240 Ariz. 108, 112, ¶ 15 (2016).

¶12            "The Commission's ratemaking authority under article 15,
section 3 is plenary." Johnson Utils., L.L.C. v. Ariz. Corp. Comm'n, 249 Ariz.
215, 221, ¶ 21 (2020). "Because the Commission exercises quasi-judicial
powers, we defer to its findings of facts and may disturb its decision only
if" the party challenging the decision proves by clear and convincing
evidence that "it is arbitrary, unlawful, or unsupported by substantial
evidence." Sun City Home Owners Ass'n, 252 Ariz. at 5, ¶ 17; Freeport Mins.
Corp. v. Ariz. Corp. Comm'n, 244 Ariz. 409, 411, ¶ 6 (App. 2018) (quoting
Litchfield Park Serv. Co., 178 Ariz. at 434); see A.R.S. § 40-254.01(E).
Moreover, "the Commission's decisions are entitled to a presumption of
constitutionality." Sun City Home Owners Ass'n, 252 Ariz. at 5, ¶ 17.

¶13            APS argues the Commission acted unlawfully, arbitrarily,
and without substantial evidence when it (1) established a 0.15% return on
the FVI; (2) established an 8.7% return on equity; and (3) disallowed $215.5
million of SCR capital investment, as part of the rate base.

I.     0.15% Return on FVI.

¶14            The FVI is the amount by which the value of APS's assets
exceeds those assets' original costs. Along with setting a rate of return on
the "original cost," the Commission sets the FVI as part of determining the
fair value of the public service corporation's properties.
A.A.C. R14-2-103(A)(3)(e), (h).      APS argues that Commission Staff
acknowledged that "the Commission has consistently used the risk-free rate
of return as the basis for calculating the return on FVI to properly satisfy
AZ law." The risk-free rate is the return offered by an investment that
carries zero risk and is traditionally tied to Treasury bonds. See Thierry J.
Sénéchal & John Y. Gotanda, Interest as Damages, 47 Colum. J. Transnat'l L.
491, 523 (2009). APS contends the Commission's practice has been to set the
return on FVI at half the risk-free rate. APS argues that the Commission
departed from that past practice, and acted arbitrarily, capriciously, and
without substantial evidence when it set the FVI at 0.15%.

¶15        To support its argument, APS points to two prior
Commission decisions. But neither reflects a practice of setting the FVI at

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                             Opinion of the Court

half the risk-free rate. In the first decision, the company recommended a
FVI of 2.05% and Commission Staff recommended a FVI of 1.25%, which it
calculated as half the risk-free rate. In re Application of Southwest Gas Corp.,
Docket No. G-01551A-07-0504, Decision No. 70665 at 31 (Ariz. C.C. Dec. 24,
2008). The Commission accepted the staff's analysis but rejected the
recommended FVI. Id. Instead, the Commission reduced the company's
FVI to 1.0%, less than half of the risk-free rate, which it concluded "properly
accounts for the effect of inflation." Id. at 32. In the second decision, the
Commission accepted a negotiated FVI of 0.5%, less than half of the risk-
free rate, after most of the parties reached a consensus on the appropriate
rate. In re Application of UNS Elec., Inc., 331 P.U.R.4th 250, 2016 WL 4467959,
at *12-15 (Ariz. C.C. Aug. 18, 2016).

¶16             As recognized by Commission Staff, the Commission has
used the risk-free rate to assist in setting the FVI. But in neither of the
decisions cited by APS did the Commission set the FVI at half the risk-free
rate. And, in other cases in which the Commission set the FVI at half the
proposed risk-free rate, it exercised its discretion rather than following an
established practice. Compare In re Application of Southwest Gas Corp., 2020
WL 8024093, at *54-55 (Ariz. C.C. Dec. 17, 2020) (adopting a FVI that was
half RUCO's proposed risk-free rate), with In re Application of EPCOR Water
Ariz., Inc., 2022 WL 493391, at *73, *76 (Ariz. C.C. Feb. 1, 2022) (setting a FVI
at less than half of Commission Staff's risk-free rate); see Ariz. Corp. Comm'n
v. Ariz. Pub. Serv. Co., 113 Ariz. 368, 370 (1976) (recognizing that the
Commission has a "range of legislative discretion" in exercising its rate-
making authority (quoting Simms, 80 Ariz. at 154)).

¶17            The parties presented the Commission with varying positions
on the FVI. APS initially recommended a FVI of 1.00% based on calculating
the risk-free rate at 1.41%, 2.72%, and 2.52% in three scenarios. APS argued
that the appropriate return on FVI would fall between the risk-free rate and
APS's recommended return on equity because an investor would expect a
return that at least exceeds the risk-free rate.

¶18           The Federal Executive Agencies ("FEA") used the same three
scenarios as APS, and calculated the risk-free rate at 1.09%, 1.85%, and
0.95%. FEA then averaged the calculations to determine a risk-free rate of
1.3%, which it halved to reach a proposed FVI of 0.65%.

¶19           RUCO recommended a FVI of 0.0%, arguing that FVI
represents inflation, not an investment, and allowing a FVI on investments
previously made is unfair for ratepayers. Despite this recommendation,
RUCO calculated a risk-free rate of 0.28% based on the 2021 fourth quarter

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                             Opinion of the Court

consumer price index inflation projection of 1.3% and subtracted that from
the 2021 second quarter nominal risk-free rate of 1.58%, for 30-year
Treasury bonds.

¶20            Commission Staff argued that FVI is inconsistent with
financial theory because it does not rely on investor financing and that this
return should instead be accounted for through APS's cost of capital.
Commission Staff concluded that APS and FEA's use of the real risk-free
rate would double the inflation rate. Thus, Commission Staff initially
recommended a FVI of 0.0%. Despite this position, Commission Staff
calculated a risk-free rate using a 2.0% inflation rate, which staff derived
from the Bureau of Labor Statistic's consumer price index, then deducted
that interest rate from a 2.6% nominal risk-free rate based on the staff's
calculation of the 2019 rate of return (yield) on long term Treasury
securities. Commission Staff then concluded that "any value between 0.0%
and 0.6% could be used as the cost rate on the FVI" and ultimately
recommended a FVI of 0.30%.

¶21              The Commission accepted the non-APS parties' arguments
that a FVI return does not represent an investment of capital. Noting that
"FVI represents the inflation recognized in the [Reconstruction Cost New
Depreciated Rate Base]," the Commission concluded that it was not
required to produce a positive FVI under the fair value standard because
"if a positive return on FVI is awarded, the risk for investors in an Arizona
utility is decreased." The Commission then concluded that increasing FVI
would be challenging for ratepayers. Based on these conclusions, the
Commission reduced the staff's recommendation by half, setting a return
on FVI of 0.15%. The Commission based its decision on the parties'
economic arguments and sought to fulfill its duty to set "just and reasonable
rates . . . that are fair to both consumers and public service corporations."
Phelps Dodge Corp. v. Ariz. Elec. Power Coop., Inc., 207 Ariz. 95, 106, ¶ 30 (App.
2004) (internal quotation marks omitted). Such balancing necessarily
represents a judgment call that the Commission, and not this Court, is best
suited to make. See Litchfield Park Serv. Co., 178 Ariz. at 437 (weighing
economic factors constituted a judgment call within the Commission's
discretion); cf. also Qwest Corp. v. Ariz. Corp. Comm'n, 496 F. Supp. 2d 1069,
1075 (D. Ariz. 2007) (observing that a court is not "a surrogate public utilities
commission to second-guess the decisions"). Thus, APS has not clearly and
convincingly demonstrated that the Commission's adoption of the 0.15%
FVI was arbitrary, capricious, or unsupported by substantial evidence. See
Litchfield Park Serv. Co., 178 Ariz. at 434.

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                            Opinion of the Court

II.    Return on Equity.

¶22            The return on equity is one of two "original cost" components
that form a utilities rate base. See A.A.C. R14-2-103(A)(3)(h); see also
Litchfield Park Serv. Co., 178 Ariz. at 435 (describing the difference between
return on equity and return on debt calculations). The Commission must
make a discretionary "judgment call" to determine the return on equity,
after considering all relevant factors. Litchfield Park Serv. Co., 178 Ariz. at
437 (quoting Sun City Water Co. v. Ariz. Corp. Comm'n, 26 Ariz. App. 304,
309 (1976), vacated on other grounds by 113 Ariz. 464 (1976)). The Commission
first determined that an 8.9% baseline return on equity was appropriate and
then reduced that baseline amount by 0.2% based on the Commission's
concerns about APS's customer service.

¶23          We first address the 8.9% baseline.       APS argues the
Commission's baseline return on equity calculation was arbitrary and not
supported by substantial evidence because the Commission relied on
RUCO's faulty analysis. We disagree. During the rate case, expert
witnesses from APS, FEA, Commission Staff, and RUCO provided
testimony, with another intervenor deferring to Commission Staff and
RUCO's equity determinations.

¶24           For their analyses, the parties each selected a proxy group of
publicly traded companies. APS's analysis included 14 companies; FEA
and Commission Staff used the same proxy group as APS. Even RUCO
used a similar proxy group, adopting 12 of the 14 companies identified by
APS. Thus, the parties formed a near consensus on the proper proxy group
and each used a series of analyses to calculate the proper return on equity.
These analyses included a discounted cash flow analysis, a capital asset
pricing model ("CAPM") analysis, and a comparable earning analysis. The
parties then proposed a single percentage to represent the return on equity,
and calculated a series of ranges for each analysis.

¶25          To calculate the return on equity, RUCO weighted each of its
analyses results, assigning the discounted cash flow and comparable
earnings analyses 40% each, assigning CAPM to the remainder. APS argues
that RUCO's CAPM analysis drove down RUCO's return on equity
calculation. However, RUCO's CAPM range is higher than, or within, the
ranges proposed by the other non-APS parties.

¶26            RUCO's analysis produced a range between 6.71% and 8.99%,
FEA's analysis created a range between 8.31% and 12.16%, and Commission
Staff's analysis created a range between 5.7% and 7.9%. Only APS's analysis

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                            Opinion of the Court

produced a higher range (9.54% to 10.42%), but APS acknowledged that it
excluded proxy group results lower than 7.0% from its analysis. And while
APS is correct that Commission Staff excluded the CAPM analysis from its
return on equity calculation, staff acknowledged that those "results should
be considered in determining where within the range APS's [return on
equity] should fall."

¶27           The Commission heard testimony on the data that supported
these analyses, including forward-looking and historical data, credit
ratings, risks associated with APS's power generating portfolio, and
projected economic outlooks. Based on this testimony, the Commission
adopted, as its starting point, RUCO's proposed 8.9% return on equity.
Thus, the Commission's adoption of an 8.9% return on equity was not
arbitrary, capricious, or unsupported by substantial evidence.

¶28            APS cites Bluefield to argue that RUCO's use of historical data
in its CAPM analysis renders the Commission's decision arbitrary,
capricious, and unlawful. In Bluefield, the company's engineer provided a
valuation "based on present and past costs of construction," but the Public
Service Commission ignored that recommendation and set a final figure
based "substantially on the basis of actual cost," almost cutting the
company's valuation in half. Bluefield, 262 U.S. at 692. This cut deprived
the company of a return equal to similar businesses, running similar
operations, in the same general part of the county. Id. at 692-93. If anything,
Bluefield approved the company's use of "past costs of construction," and we
do not read Bluefield as creating a categorical ban on the use of historical
data in setting valuations. Id. at 692. Three of the four recommendations
presented to the Commission included historical data, and only APS
rejected historical data and emphasized the need to use forward-looking
inputs and assumptions. Thus, APS has not clearly and convincingly
demonstrated that the Commission's use of historical data was arbitrary,
capricious, or unsupported by substantial evidence. See Litchfield Park Serv.
Co., 178 Ariz. at 434; see also Sierra Club—Grand Canyon Chapter v. Ariz. Corp.
Comm'n, 237 Ariz. 568, 575, ¶ 22 (App. 2015) ("Substantial evidence is
evidence which would permit a reasonable person to reach the
Commission's result.").

¶29           Second, APS argues the Commission's 0.2% reduction was
unlawful. We agree. At oral argument, the Commission argued its inherent
authority to protect ratepayers empowers it to mimic competition and
reduce the return on equity to reflect APS's customer service performance.
The Commission points to article 15, section 3 of the Arizona Constitution
to support its position. However, "the text of the constitution itself limits

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the Commission's exclusive ratemaking powers to ascertaining the 'fair
value' of [public service corporations] and prescribing classifications, rates,
and charges." Johnson Utils., 249 Ariz. at 226-27, ¶ 50. And "[n]either the
text of section 3, the records of the Arizona Constitutional Convention, nor
our prior caselaw state that we must defer to the Commission's
interpretation of its own ratemaking authority." Id. at 227, ¶ 52.

¶30            Our supreme court differentiated between "the Commission's
authority to 'prescribe just and reasonable classifications . . . rates and
charges' for [public service corporations]" and "the Commission's power to
regulate [public service corporations] to protect the health, safety, comfort,
and convenience of their customers, employees, and the public." Id. at 220-
21, ¶ 19 (alterations in original). "The Commission's permissive authority
is distinct from, and unrelated to, its ratemaking powers." Id. at 222, ¶ 27
(citing Ariz. E. R.R. Co. v. State, 19 Ariz. 409, 414-15 (1918)). "Under the
permissive clause, the Commission has authority to regulate [public service
corporations] to preserve and protect public health, safety, convenience,
and comfort." Id. at ¶ 26. Conversely, there "is no evidence indicating that
the framers envisioned the Commission's ratemaking authority as
including management decisions about the structure or organization of a
[public service corporation]." Id. at 226, ¶ 50.

¶31            The Commission adopted RUCO's 8.9% return on equity as
the proper calculation, then proceeded to reduce that rate by 20 basis points.
As justification, the Commission points to "deficiencies in APS's customer
service performance," including errors with APS's "Rate Comparison Tool,"
which resulted in a consent decree with the Arizona Attorney General.
These customer service concerns are management decisions of a public
service corporation subject to regulation through the Commission's
permissive authority, not its ratemaking authority. See id. at 222, ¶ 26. And
the Commission exceeded its ratemaking authority by reducing APS's
return on equity based on customer service complaints. See id. at 226, ¶¶
45-47 (disapproving the court's interpretation of the Commission's
ratemaking authority in Ariz. Corp. Comm'n v. State ex rel. Woods, 171 Ariz.
286 (1992)). As part of its ratemaking function, the Commission was limited
to ascertaining APS's "fair value" and using that to "prescribe[]
classifications, rates, and charges." Id. at 226-27, ¶ 50; see Simms, 80 Ariz. at
151 ("While our constitution does not establish a formula for arriving a[t]
fair value, it does require such value to be found and used as the base in
fixing rates. The reasonableness and justness of the rates must be related to
this finding of fair value."). Thus, we vacate the Decision's 0.2% reduction
as beyond the Commission's ratemaking authority.

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III.   Disallowance of the SCR Capital Investment.

¶32           To calculate the rate base, the Commission must determine
the "original cost rate base," which is an "amount consisting of the
depreciated original costs, prudently invested, of the property . . . at the end
of the test year, used or useful . . . ." A.A.C. R14-2-103(A)(3)(h). The
Commission argues that, pursuant to this rule, it can exclude property from
the original cost rate base if it determines such property was imprudently
invested, and not used or is not useful. 1 The Commission determined that
APS acted imprudently by investing $215.5 million installing SCRs. APS
challenges that decision. APS argues that the Commission misapplied its
regulation because it based the disallowance on the closure of Four Corners.

¶33           The Commission classifies prudent investments as
"[i]nvestments which under ordinary circumstances would be deemed
reasonable and not dishonest or obviously wasteful . . . at the time such
investments were made." A.A.C. R14-2-103(A)(3)(l). Investments are
presumed prudent unless rebutted with "clear and convincing evidence."
Id. We review interpretations of the Commission's regulations de novo.
Sun City Home Owners Ass'n, 252 Ariz. at 5, ¶ 18; Sierra Club—Grand Canyon
Chapter, 237 Ariz. at 573, ¶ 14.

¶34            APS argues it was committed to funding the SCR construction
by 2015, when it entered into the SCR construction agreement. Sierra Club
argues that the prudency determination must be made using information
that was known, or should have been known, when each investment is
made, i.e., each time a public service corporation spends money. However,
during oral argument, the Commission stated that the prudency
determination must be made when the project is completed. But the
Commission also acknowledged during oral argument that it conducted the
prudency evaluation based on information from 2018 or later, after APS
completed construction on the SCRs. Under A.A.C. R14-2-103(A)(3)(l), the
Commission must determine whether the investments are prudent "at the
time such investments were made." By 2018 all the investments had been

1      Our supreme court has held that the Commission "must find the fair
value of the properties devoted to the public use, and . . . cannot be guided
by the prudent investment theory." Ariz. Corp. Comm'n v. Ariz. Water Co.,
85 Ariz. 198, 203 (1959). No party cited that case to argue the
constitutionality of a prudence requirement or challenged the "prudently
invested" requirement in A.A.C. R14-2-103(A)(3)(l). Thus, we do not
address this issue.

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made. Thus, using information from 2018 as the basis for disallowance was
in violation of the Commission's regulation.

¶35            As justification for the disallowance, the Commission points
to Four Corners' early closure. Yet APS did not announce that it was closing
Unit 5 and transitioning Unit 4 to seasonal use until January 2020. The
Commission stated that "all indications were that the SCRs would provide
approximately a cumulative 484 months of service" but with "the now
planned retirement date of 2031 as well as the change to seasonal operations
in fall 2023, the SCRs will only provide approximately a cumulative 259
months of service," concluding that it would disallow $215.5 million "based
on the early (2031) retirement of the SCRs." But this information was not
available until after installation had been completed. Under its own
regulation, the Commission could not disallow the SCR investment as
imprudent based on Four Corners' closure.

¶36             The Commission accepted Sierra Club's argument, reasoning
"a utility has a duty to monitor the economics of its investments in a project
from the inception of the project and until the project is completed and that
each investment made along the way is subject to a prudency
determination." The Commission also stated, "a utility has a duty to alter
its choices and its course for a project if doing so makes sense economically
and is in the public interest, even if altering the course may not be as
advantageous to the utility's shareholders as completing the project would
be." However, the Commission must support its decision with substantial
evidence. Sun City Home Owners Ass'n, 252 Ariz. at 5, ¶ 17.

¶37            Even if we were to accept the Commission and Sierra Club's
formulation of prudency, the record does not include any evidence
showing whether APS could cancel the SCR construction contract or how
canceling that agreement would have impacted APS's finances or its
existing contractual obligations to Four Corners' partners. Absent such
evidence, the record cannot support a finding that APS violated a duty to
alter the course of the project "if doing so makes sense economically and is
in the public interest." While the Commission points to some evidence
related to its Decision, that evidence is focused on information available
after "the time such investments were made." A.A.C. R14-2-103(A)(3)(l).
For example, the Commission states that purchase power agreement prices
for solar and wind had fallen between 2009 and 2019; that Palo Verde
market prices were low in 2019 and expected to stay low through 2029; and
that natural gas prices at the "SoCal Border Hub" have declined
substantially since 2008 and are expected to stay low through 2029. But
because all those examples include evidence from after the SCR

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                           Opinion of the Court

construction was completed in 2018, the Commission did not point to
evidence showing the environment that existed "at the time such
investments were made," as the Commission's regulations require. A.A.C.
R14-2-103(A)(3)(l). Thus, we vacate the SCR disallowance portion of the
Decision and remand to the Commission for further proceedings consistent
with the Commission's regulations and this opinion.

                              CONCLUSION

¶38           For the reasons stated above, we affirm the Decision's FVI
calculation and 8.9% return on equity determination, vacate the Decision's
20-basis point return on equity reduction, vacate the SCR disallowance, and
remand for further proceedings.

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

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