Chaparral City Water Company - Appeal of Decision No. 68176

Docket Number
Assigned Staff
S. Wakefield
M. Diaz Cortez
Ben Johnson Ph.D. (Ben Johnson Associates)


On August 24, 2004, Chaparral City Water Company ("Chaparral" or "Company") filed an application for an increase in the Company's rates and charges with the Arizona Corporation Commission ("ACC" or "Commission"). During the rate case proceeding, expert witnesses from RUCO, ACC Staff and Chaparral ("The Parties") presented written testimony and faced cross examination during the evidentiary hearing on the Company's request for rate relief. On September 30, 2005, the Commission issued Decision No. 68176(link is external) which granted a rate increase to Chaparral. Following the Commission's decision on the matter, the Company filed an application for rehearing which the Commission took no action on. Chaparral subsequently filed an appeal with the Arizona Court of Appeals, Division One ("Court of Appeals"). The Company's appeal claimed that Chaparral was denied a fair rate of return on its invested capital as a result of the Commission's established method of calculating a level of operating income based on the Company's fair value rate base ("FVRB"). On February 13, 2007, Judge Lawrence F. Winthrop of the Court of Appeals issued a Memorandum Decision(link is external) which Affirmed in Part, Vacated, and Remanded Decision No. 68176 to the Commission for further determination.

On June 7, 2007, the Commission issued a Remand Hearing Procedural Order(link is external) which stated that, once a level of operating income (based on Chaparral's FVRB) has been calculated by an appropriate methodology, new just and reasonable rates will be designed to allow Chaparral to recover the amount of revenue that the Company is entitled to. The Remand Hearing Procedural Order also stated that if the results of the process demonstrate that the rates established in Decision No. 68176 are either too high or too low, the Commission should consider the necessity of providing a mechanism for either a surcharge or a refund. The Remand Hearing Procedural Order further stated that if The Parties' proposed methodologies for determining a return on investment based on FVRB result in a measurably different revenue requirement, it may be necessary to reassess rate design.

On June 22, 2007 a procedural conference was held for the purpose of making any needed adjustments to the established procedural schedule. On June 25, 2007, the Administrative Law Judge ("ALJ") assigned to the case issued a Second Procedural Order(link is external) that ordered that the hearing in the remand proceeding be continued on Tuesday, November 6, 2007 at 10:00 a.m. at the ACC's Phoenix Office at 1200 W. Washington.

Direct testimony was filed by Chaparral on Friday, July 13, 2007. Direct testimony from RUCO and ACC Staff was filed as scheduled on Thursday, August 30, 2007. On September, 11 2007, Chaparral filed a request asking that the date for filing the Company's rebuttal testimony be changed from Tuesday, September 25, 2007 to October 31, 2007. Neither RUCO or ACC Staff opposed Chaparral's request. On September 12, 2007 the ALJ assigned to the case issued a Fourth Procedural Order(link is external) granting Chaparral's request. On Tuesday, October 2, 2007, a procedural conference was held at the ACC's Phoenix office for the purpose of giving the parties to the case the opportunity to discuss modifications to the procedural schedule. The parties to the case tentatively agreed on dates for a hearing and for filing additional testimony.

On October 3, 2007, the ALJ assigned to the case issued a Fifth Procedural Order(link is external) which scheduled the evidentiary hearing on the matter for 10:00 a.m. on Monday, January 28, 2008. As scheduled, RUCO and ACC Staff filed surrebuttal testimony on Friday, December 7, 2007. Chaparral filed a final round of rejoinder testimony on Friday, January 18, 2008 (per a stipulation to extend the filing date). A pre-hearing conference, for the purpose of scheduling the appearance of expert witnesses, was held at 1:30 p.m. on Friday, January 25, 2008.

The evidentiary hearing on the matter began as scheduled on Monday, January 28, 2008 at 10:00 a.m. During the hearing RUCO's expert witness, Dr. Ben Johnson, was cross examined by attorneys representing ACC Staff and the Company. Dr. Johnson also answered questions from the ACC's Chief Administrative Law Judge ("CALJ") Lynn Farmer and from ACC Chairman Mike Gleason. RUCO's attorney cross examined expert witnesses who testified on behalf of the Company and for ACC Staff. The hearing was concluded around 4:00 p.m. on Tuesday January 29, 2008.

On February 22, 2008, the CALJ issued an Eighth Procedural Order(link is external) that granted a request from ACC Staff for an extension on the filing of closing briefs.

On March 5, 2008, attorneys representing RUCO, ACC Staff and Chaparral filed their initial closing briefs. Reply briefs were filed on Friday, March 21, 2008.

On June 30, 2008, after weighing all of the evidence presented during the proceeding, the CALJ issued a Recommended Opinion and Order(link is external) ("ROO"). The ROO recommended a modified version of the methodology recommended by RUCO witness Dr. Ben Johnson and reduced the Company's cost of equity capital by an inflation factor of 200 basis points (i.e. 2.00%). The resulting 6.40 percent weighted average cost of capital was then applied to Chaparral's fair value rate base to arrive at an appropriate level of operating income for the Company (the revised annual operating figure provides the Company with an additional $12,143 more than what was originally authorized in Decision No. 68176. The ROO recommended that the recovery, if any, of Chaparral's legal expenses incurred during the appeal and remand proceedings be considered in the Company's pending rate case proceeding.

At a special open meeting held on July 17, 2008, the ROO was adopted by a vote of four to one (a Hearing Division amendment correcting a minor typographical error was adopted by the five Commissioners prior to the final vote).

The Company plans to file a motion for rehearing. An appeal of the final decision is expected if the Commission decides not to rehear the case.