Performance audit, Residential Utility Consumer Office, residential utility consumer board

              PERFORMANCE AUDIT
RESIDENTIAL UTILITY CONSUMER OFFICE
RESIDENTIAL UTILITY CONSUMER BOARD
Report to the Arizona Legislature
By the Auditor General
October 1989
89- 6
DOUGLAS R. NORTON. CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
LINDA J. BLESSING. CPA
DEPUTY AUDITOR GENERAL
AUDITOR GENERAL
October 11, 1989
Members of the Arizona L e g i s l a t u r e
The Honorable Rose Mofford, Governor
Mr. Douglas M. Brooks, D i r e c t o r
Residential U t i l i t y Consumer O f f i c e
Mr. Met Hannah, Chairman
Residential U t i l i t y Consumer Board
Transmitted herewith i s a report of the Auditor General, A Performance
Audit of the R e s i d e n t i a l U t i l i t y Consumer O f f i c e and the R e s i d e n t i a l
U t i l i t y Consumer Board. This report i s i n response to a June 2, 1987,
r e s o l u t i o n o f the J o i n t L e g i s l a t i v e Oversight Committee.
The report addresses the Off i c e ' s e f f e c t i v e n e s s i n rate case proceedings
before the Arizona Corporation Commission. We found that RUCO plays an
important r o l e i n the rate- making process and has e f f e c t i v e l y represented
r e s i d e n t i a l ratepayers i n some cases we reviewed. In a d d i t i o n , RUCO has
taken steps to improve i t s e f f e c t i v e n e s s since our previous a u d i t .
However, RUCOts e f f e c t i v e n e s s was s t i l l hindered due to inadequate
preparation and presentat i o n of evidence and poor use of consultants. I n
a d d i t i o n , the report addresses the need for s t a t u t o r y changes to
strengthen RUCOts a b i l i t y to represent r e s i d e n t i a l u t i l i t y consumers i n
proceedings before the Arizona Corporation Commission.
The r e p o r t also addressed the Sunset Factors for the R e s i d e n t i a l U t i l i t y
Consumer Board. We found that e l i m i n a t i o n o f the Board would not harm
the p u b l i c h e a l t h , s a f e t y o r w e l f a r e . However, the RUCO d i r e c t o r and
s t a f f have indicated that Board members provide valuable i n p u t and are an
important l i n k between the community of r e s i d e n t i a l consumers and RUCO.
My s t a f f and I w i l l be pleased to discuss or c l a r i f y items i n the report
S i n c e r e l y ,
DRN: Imn
STAFF: William Thomson
Ceborah K. K l e i n
C, ndy G. Whi taker
Sarah J. Auvil
Lucy K. Bradley
{ Do? $ afsL RT. 4No.! rt? on! ?
~ u dt ojr General
2700 NORTH CENTRAL AVE. @ SUITE 700 @ PHOENIX, ARIZONA 85004 O ( 602) 255- 4385
RESIDENTIAL UTILITY CONSUMER OFFICE
The O f f i c e of the Auditor General has conducted a performance audit of
the Residential U t i l i t y Consumer O f f i c e ( RUCO) i n response to a June 2,
1987, r e s o l u t i o n of the J o i n t L e g i s l a t i v e Oversight Committee. This
performance audit was conducted as part of the Sunset Review set f o r t h i n
Arizona Revised Statutes ( A. R. S.) 5941- 2351 through 41- 2379.
RUCO was established by the Legislature i n 1983 ( A. R. S. $ 40- 462) to
represent the i n t e r e s t s of r e s i d e n t i a l u t i l i t y consumers i n regulatory
proceedings before the Arizona Corporation Commission ( A C C ) . To
accomp I i sh t h i s , RUCO analyzes proposal s made by pub I i c se rv i ce
corporations to the ACC, and then develops and presents recommendations
to the commission regarding the proposals. RUCO i s funded by monies
received from an assessment against large p u b l i c service corporations.
RUCO expended $ 880,803 during f i s c a l year 1988- 89. This i s our second
report on RUCO. In 1986, the Auditor General completed a performance
audit of RUCO: Report 86- 6, Residential U t i l i t y Consumer O f f i c e -
Residential U t i l i t y Consumer Board.
Although RUCO Has Taken Steps
To Increase I t s E f f e c t i v e n e s s , A d d i t i o n a l
E f f o r t s Are Needed To Improve I t s Representation
Of Residential U t i l i t y Consumers ( see pages 5 through 13)
Although RUCO has taken steps to improve i t s effectiveness i n
representing r e s i d e n t i a l ut i l i t y consumers i n rate case proceedings since
our 1986 performance a u d i t , f u r t h e r e f f o r t s are needed. RUCO continues
to play an important r o l e i n the rate- making process and has e f f e c t i v e l y
represented r e s i d e n t i a l ratepayers i n some cases we reviewed. For
example, RUCO's i n t e r v e n t i o n has resulted i n smaller revenue increases
and service charges to r e s i d e n t i a l consumers than o r i g i n a l l y requested by
the u t i l i t i e s involved. In one of those cases, RUCO negotiated an
a d d i t i o n a l $ 825,000 reduction for the r e s i d e n t i a l consumers.
However, i n other cases we reviewed, RUCO's effectiveness was hindered
due to inadequate preparation and presentation of evidence and poor use
of consultants. I n several cases, RUCO did not present supporting
evidence or provide information on how ideas presented could be
implemented by the u t i l i t y . In other instances, RUCO's arguments lacked
depth or contained judgment e r r o r s . RUCO's effectiveness has also
suffered because i t has not selected appropriate consultants and has not
always managed i t s consultants w e l l . I n one case for instance, RUCO did
not adequately review a c o n s u l t a n t ' s testimony p r i o r to hearing. This
resulted i n the consultant making recommendations c o n t r a r y t o applicable
S t a t e s t a t u t e s as we1 I as ACC h i s t o r i c a l precedents. In a d d i t i o n , the
consultant also recommended that the ACC use, for purposes of t h i s case,
a proposed but unpassed new tax law.
Some p a r t i e s involved i n the rate- maki ng process expect recent changes to
improve RUCO's effectiveness. A new d i r e c t o r began work at RUCO i n
October 1988. Based on RUCO's performance i n cases since his
appointment, some ACC commissioners and s t a f f , and u t i l i t y
representatives indicated that changes are being made which are r e s u l t i n g
i n increased effectiveness.
Statutory Changes Are Required To Ensure
RUCO's A b i l i t y To Adequately Represent
Resident i a l Ratepayers ( see pages 15 through 21 )
Statutory changes are needed to strengthen RUCO's abi l i t y to represent
r e s i d e n t i a l u t i l i t y consumers i n proceedings before the ACC. According
to a 1987 Attorney General o p i n i o n , c u r r e n t s t a t u t e s appear to l i m i t RUCO
to intervening only i n cases related to rate making o r r a t e design.
However, other types of cases, for example those i n v o l v i n g mergers, could
also uI timately impact r e s i d e n t i a l r a t e s . Although the ACC has
h i s t o r i c a l l y granted RUCO permission to intervene i n such cases, the
r i g h t to intervene i s not guaranteed. In some cases, p u b l i c u t i l i t i e s
have challenged RUCO's a u t h o r i t y to intervene i n cases which were not
s t r i c t l y rate making or rate design. Residential u t i l i t y consumer
advocacy groups i n other states we contacted have broader a u t h o r i t y than
RUCO and can intervene i n most any type o f case t h a t could p o t e n t i a l l y
impact r e s i d e n t i a l u t i l i t y consumers.
RUCO i s also l i m i t e d i n that i t lacks the s t a t u t o r y a u t h o r i t y to i n i t i a t e
cases before the commission. C u r r e n t l y , another p a r t y , as defined by
s t a t u t e , must i n i t i a t e a case before RUCO can become involved. However,
w i t h s i m i l a r a u t h o r i t y , RUCO could improve i t s a b i l i t y to represent
consumer i n t e r e s t s i n two ways. F i r s t , i t would enable RUCO, as the
i n i t i a t o r , t o h e l p the ACC define the scope of the case, ensuring that
issues important to r e s i d e n t i a l u t i l i t y consumers would be considered.
Second, i t would also allow RUCO to bring important cases to the
commission i n a timely manner, rather than r e l y i n g on another party or
the ACC to i n i t i a t e the case. For example, RUCO's d i r e c t o r c i t e d
overearning by u t i l i t i e s as the kind of case RUCO would l i k e the a b i l i t y
to i n i t i a t e . Both our research and that of RUCO's d i r e c t o r indicates
that i n at least 28 other s t a t e s , groups s i m i l a r to RUCO have t h i s
author i ty .
RESIDENTIAL UTILITY CONSUMER BOARD
The O f f i c e of the Auditor General has also conducted a l i m i t e d review of
the Residential U t i l i t y Consumer Board i n response to a June 2, 1987,
resolution of the Joint L e g i s l a t i v e Oversight Committee. This review was
conducted as p a r t o f the Sunset Review set f o r t h i n A. R. S. 5541- 2351
through 541- 2379. An i n t r o d u c t i o n , sunset f a c t o r e v a l u a t i o n , and board
response are included in t h i s r e p o r t .
The board was established i n conjunction w i t h RUCO i n 1983, and consists
of f i v e members appointed by the Governor. A. R. S. 540- 463 provides that
the board shall advise the RUCO o f f i c e on a l l matters r e l a t i n g to rate
making or rate design and i n v o l v i n g p u b l i c service corporations. During
monthly meetings, the board discusses RUCO's actions on s p e c i f i c cases
and gives advice to RUCO s t a f f regarding the necessity of f u r t h e r
a c t i o n . I n addition, the board serves an important r o l e i n that i t
provides RUCO w i t h input regarding the concerns and problems of
r e s i d e n t i a l u t i l i t y consumers throughout the State.
TABLE OF CONTENTS
Page
RESIDENTIAL UTILITY CONSUMER OFFICE
INTRODUCTION AND BACKGROUND . . . . . . . . . . . . . . . . . 1
FINDING I: ALTHOUGH RUCO HAS TAKEN STEPS TO
INCREASE ITS EFFECTIVENESS, ADDITIONAL EFFORTS
ARE NEEDED TO IMPROVE ITS REPRESENTATION OF
RESIDENTIAL UTILITY CONSUMERS . . . . . . . . . . . . . . 5
RUCO Has an Important Role and Has
Improved I t s Effectiveness. . . . . . . . . . . . . . . . 5
Some Factors Which Hinder RUCO's Effectiveness
Were S t i l l Apparent . . . . . . . . . . . . . . . . . . . 8
Other Parties Anticipate That Recent Changes
at RUCO W i l l Improve I t s Effectiveness. . . . . . . . . . 12
Reconendations . . . . . . . . . . . . . . . . . . . . . 12
FINDING II: STATUTORY CHANGES ARE REQUIRED TO
ENSURE RUCO'S ABILITY TO ADEQUATELY REPRESENT
RESIDENTIAL RATEPAYERS. . . . . . . . . . . . . . . . . . 15
RUCO's Statutory Authority Should Be Expanded . . . . . . 15
RUCOShouldBe Allowed to I n i t i a t e Cases. . . . . . . . . 18
Reconendation. . . . . . . . . . . . . . . . . . . . . . 21
OTHER PERTINENT INFORMATION . . . . . . . . . . . . . . . . . 23
SUNSET FACTORS. . . . . . . . . . . . . . . . . . . . . . . . 2 7
RES l DENT l AL UT l L l TY CONSUMER BOARD
INTRODUCTION AND BACKGROUND . . . . . . . . . . . . . . . . . 1
SUNSET FACTORS. . . . . . . . . . . . . . . . . . . . . . . . 2
AGENCY AND BOARD RESPONSE
APPEND I X
CASE EVALUAT l ON METHODOLOGY
LIST OF TABLES
Page
TABLE 1 - Residential U t i l i t y Consumer Office
Statement of FTEs and Actual Revenues,
Expenditures, and Changes in Fund Balances
Fiscal Years 1986- 87, 1987- 88,
and 1988- 89 ( unaud i ted ) . . . . . . . . . . . . . .
RESIDENTIAL UTILITY CONSUMER OFFICE
INTRODUCTION AND BACKGROUND
The O f f i c e o f the Auditor General has conducted a performance audit of
the Residential U t i l i t y Consumer O f f i c e ( RUCO) i n response to a June 2,
1987, r e s o l u t i o n of the J o i n t L e g i s l a t i v e Oversight Committee. This
performance audit was conducted as p a r t of the Sunset Review set f o r t h i n
Arizona Revised Statutes ( A. R. S.) 9941- 2351 through 41- 2379. This i s the
second performance a u d i t o f RUCO. I n 1986, the Auditor General completed
the f i r s t performance a u d i t of RUCO: Report 86- 6, R e s i d e n t i a l U t i l i t y
Consumer O f f i c e - R e s i d e n t i a l U t i l i t y Consumer Board.
The L e g i s l a t u r e e s t a b l ished RUCO i n 1983 ( A. R. S. 540- 4621 to represent
the i n t e r e s t s o f r e s i d e n t i a l u t i l i t y consumers i n r e g u l a t o r y proceedings
i n v o l v i n g p u b l i c service c o r p o r a t i o n s b e f o r e the Arizona Corporation
Commission. A . R . S . 940- 464 defines the powers and d u t i e s of the RUCO
d i r e c t o r . The s t a t u t e s t a t e s t h a t the d i r e c t o r may:
" Research, study and analyze r e s i d e n t i a l u t i l i t y consumer
i n t e r e s t s . . . Prepare and present b r i e f s , arguments, proposed
r a t e s o r orders and intervene or appear on behalf of r e s i d e n t i a l
u t i l i t y consumers before hearing o f f i c e r s and the c o r p o r a t i o n
commission as a p a r t y i n i n t e r e s t and also p a r t i c i p a t e as a
party i n i n t e r e s t pursuant to 340- 254 i n proceedings r e l a t i n g to
rate making o r r a t e design and i n v o l v i n g p u b l i c service
corporation^.^'
Staffing and Organization
For f i s c a l year 1988- 89, RUCO was authorized 12.25 f u l I - t i m e e q u i v a l e n t
( FTE) p o s i t i o n s . RUCO s t a f f p o s i t i o n s include a d i r e c t o r , three
attorneys, an engineer, three rate analysts, an a d m i n i s t r a t i v e services
o f f i c e r , a program/ project s p e c i a l i s t , two s e c r e t a r i e s , and part- time
legal i n t e r n s . RUCO's o f f i c e i s located i n c e n t r a l Phoenix.
Budget
RUCO operates using revenues i t receives from an assessment against
p u b l i c service corporations. A rate determined by the ACC i s applied
against the gross operating revenues of the c o r p o r a t i o n s ' i n t r a s t a t e
operations serving r e s i d e n t i a l customers t o determine the assessment
amount. Assessments are l i m i t e d to two- tenths of one percent of gross
operating revenues exceeding $ 250,000 ( of the precedi ng year). The
L e g i s l a t u r e appropriates RUCO's share of the monies received through t h i s
assessment, and places i t i n t o the R e s i d e n t i a l U t i l i t y Consumer O f f i c e
Revolving Fund. Revolving Fund monies do n o t r e v e r t to the General
Fund. RUG0 revenues and expenditures f o r f i s c a l years 1986- 87 through
1988- 89 are shown i n Tab l e 1 .
TABLE 1
RESIDENTIAL UTILITY CONSUMER OFFICE
STATEMENT OF FTEs AND ACTUAL REVENUES, EXPENDITURES
AND CHANGES IN FUND BALANCE
FISCAL YEARS 1986- 87, 1987- 88, AND 1988- 89
( unaudi ted)
FTEs 10.00 10.00 12.25
Revenue :
l n t rastate Ut i l i t y Assessment $ 839,826 $ 884,439 $ 913,414
Expenditures:
Personal services 355,448
Employee- related 60,775
P r o f . & outside services 276,354
T r a v e l , i n - s t a t e 10,001
o u t - o f - s t a t e 5,336
Other operating 82,896
Equ i pinen t
-
Total Expenditures
Excess of revenues over
expend i tures 39,842 224,865 32,611
Transfer out to State
General Fund - 310,50O( a)
Fund balance, July 1 824,274 864,116 1,088,981
Fund balance, June 30 $ 864.116 $ 1.088,981 $ 811.092
( a) House B i l l 2269, which was passed during the 1989 l e g i s l a t i v e session, r e s u l t e d
i n an operating t r a n s f e r out of RUCO's fund balance t o the State General Fund i n
March 1989 i n the amount of $ 310,500.
Source: Arizona F i n a n c i a l Information Systems and the State of Arizona,
Appropriations Report for the F i s c a l Year Ended June 30, 1989
Audit Scope and Purpose
This performance a u d i t was conducted to evaluate RUCO's o p e r a t i o n s ,
focusing on these two o b j e c t i v e s :
a To assess RUCOfs e f f e c t i v e n e s s i n r e s i d e n t i a l r a t e case i n t e r v e n t i o n .
0 To determine whether RUCO should be given a d d i t i o n a l a u t h o r i t y to
i n i t i a t e a c t i o n s b e f o r e the Corporation Commission and be involved i n
non- rate cases which may have the p o t e n t i a l t o a f f e c t f u t u r e
r e s i d e n t i a l r a t e s .
In a d d i t i o n t o these two o b j e c t i v e s , we reviewed RUCOfs e f f o r t s at
implementing the recommendations made i n the 1986 performance a u d i t . The
r e s u l t s of t h i s review are contained i n the RUCO Sunset Factors ( pages 27
through 30) and Finding I ( pages 5 through 12).
This report also contains Other P e r t i n e n t Informat ion regarding s t a f f
turnover and the impact of such turnover at RUCO.
This audit was conducted i n accordance w i t h generally accepted government
a u d i t i n g standards.
The Auditor General and s t a f f express a p p r e c i a t i o n to RUCOfs D i r e c t o r and
employees for t h e i r cooperation and assistance during the a u d i t .
FINDING I
ALTHOUGH RUCO HAS TAKEN STEPS TO INCREASE ITS EFFECTIVENESS,
ADDITIONAL EFFORTS ARE NEEDED TO IMPROVE ITS
REPRESENTATION OF RESIDENTIAL UTILITY CONSUMERS
The Residential U t i l i t y Consumer O f f i c e continues to play an important
r o l e i n rate case proceedings but could a t t a i n a greater degree of
effectiveness. To determine RUCO's e f f e c t i v e n e s s , we reviewed ACC
opinions and orders, t r a n s c r i p t s , and other legal documents, as well as
interviewed ACC commissioners, hearing o f f i c e r s and s t a f f , RUCOts
d i r e c t o r and s t a f f , and others involved w i t h the cases. ' our review
found that while RUCO has implemented some of the recommendations made i n
our 1986 performance a u d i t , inadequate evidence and poor use of
consultants have hindered RUCOts e f f e c t i v e n e s s i n some cases. However,
other p a r t i e s to the rate- making process a n t i c i p a t e t h a t recent changes
at RUCO w i l l improve RUCO's e f f e c t i v e n e s s .
RUCO Has an Important Role
and Has Improved I t s Effectiveness
RUCO plays an important r o l e i n r a t e case proceedings and has improved
i t s effectiveness i n the past three years. The o f f i c e has implemented
several recommendations made i n the previous performance a u d i t and has
demonstrated e f f e c t i v e n e s s i n some important cases.
RUG0 function important - RUCO continues t o p l a y an important r o l e i n
rate case proceedings. The L e g i s l a t u r e established RUCO i n 1983 to
represent ut i I i t y consumers' i n t e r e s t s i n r e g u l a t o r y proceedings, to
analyze proposals made by pub l i c service corporat i o n s , and to present
recommendations t o the Arizona Corporation Commission ( A C C ) . Our 1986
See Appendix f o r a discussion of the methodology used to evaluate RUCO1s
effectiveness.
audit report indicated the need for an agency w i t h such a mandate. Most
commissioners, ACC s t a f f , and u t i l i t y representatives we contacted during
the current audit reaffirmed the need. Generally, those interviewed
stated that RUCO's r o l e i s necessary for two reasons. F i r s t , RUCO serves
an important function i n that i t represents r e s i d e n t i a l ratepayers.
Commercial ratepayers and u t i l i t y companies h i r e lawyers and l o b b y i s t s to
represent t h e i r i n t e r e s t s . RUCO provides s i m i l a r services to represent
the i n t e r e s t s of r e s i d e n t i a l ratepayers.
Second, an i n s t i t u t i o n a l i z e d consumer advocate serves an important
function i n the rate- making process. The existence of a consumer
advocacy agency l i ke RUCO lends credi b i l i t y to the rate- mak i ng process by
ensuring r e s i d e n t i a l ratepayer i n t e r e s t s are represented, thus enhancing
public acceptance of the process as f a i r to a l l p a r t i e s involved.
RUCO has implemented recomnendations - RUCO has taken steps to improve
i t s effectiveness by implementing some of the recommendations made i n the
1986 audit r e p o r t . During the 1986 a u d i t , we made some recommendations
that would enhance RUCO's effectiveness i n representing r e s i d e n t i a l
ratepayers i n rate cases. F i r s t , we recommended that RUCO develop a more
accurate method of evaluating i t s effectiveness. RUCO previously claimed
credi t for the ent i re d i f ference between the ACC s t a f f ' s recommendat ion
and the commission's f i n a l decision, thereby ignoring the effectiveness
of other intervenors i n the case and other factors which a f f e c t
commi ss i on dec i s i ons. Second, we recommended RUCO evaluate i ts
effectiveness by i n d i v i d u a l issue. RUCO presumed i t had an impact on
each issue leading to the decision. Third, because of RUCO's l i m i t e d
resources we recommended that RUCO develop a method to determine the
necessity of intervention. During the 1986 a u d i t , we found that RUCO did
not adequately p r i o r i t i z e cases and thus could not d i r e c t i t s l i m i t e d
resources to the most important cases.
In response to the f i r s t and second recommendat ions, RUCO's new di rector
recently developed a p ~ l i c yr e q u i r i n g the s t a f f assigned to each case to
prepare a case summary. The summary shou l d i nc l ude RUCO' s pos i t i ons on
issues and the impact o f . these p o s i t i o n s on the f i n a l case outcome.
Impact may be c l a s s i f i e d as d i r e c t monetary ( adoption of an issue only
RUCO presented), shared monetary ( adoption of an issue RUCO and other
p a r t i e s presented), or nonmonetary ( adoption of an issue having no, or no
foreseeab le, monetary impact 1 .
In response to the t h i r d recommendation, RUCO1s d i r e c t o r stated that i t
i s o f f i c e p o l i c y to intervene i n cases i n v o l v i n g the large u t i l i t y
companies. For those cases i n v o l v i n g smaller companies, RUCO considers
the size of the rate increase request, the number of customer complaints,
the importance of the case issues, and the a v a i l a b i l i t y of o f f i c e
resources i n making an i n t e r v e n t i o n d e c i s i o n . ACC o f f i c i a l s a f f i r m that
RUCO now p r i o r i t i z e s b e t t e r , s t a t i n g RUCO always intervenes i n the " big"
cases and i s not as involved i n cases concerning only a few customers.
E f f e c t i v e i n some cases - RUCO e f f e c t i v e l y represented r e s i d e n t i a l
ratepayers i n several cases we reviewed. The f o l lowing case examples
i l l u s t r a t e RUCO's e f f e c t i v e n e s s .
0 Southwest Gas - Southwest Gas requested a 9.2 percent revenue
increase i n i t s Apache D i v i s i o n and a 25.9 percent revenue increase
i n i t s Papago D i v i s i o n , In 1987, RUCO p a r t i c i p a t e d i n negotiations
which resulted i n increases of only 6.61 percent and 21 percent,
respectively. According to hearing t r a n s c r i p t s , a Southwest Gas
senior vice president noted that during the n e g o t i a t i o n s " RUCO
received an a d d i t i o n a l $ 825,000 reduction for the r e s i d e n t i a l class,
which q u i t e f r a n k l y came out of the stockholders1 pocket."
0 Sulphur Springs Valley E l e c t r i c Cooperative, Inc. - Sulphur
Sgrings' service t e r r i t o r y covers most of Cochise and Darts of Santa
~ i u, z- Graham, and Pima - counties. The company requested an 8.82
percent revenue increase i n t h i s 1988 rate case. RUCO influenced the
case outcome i n three ways. F i r s t , the u t i l i t y proposed
disproportionately high rate increases for r e s i d e n t i a l and large
power classes and no increase for the i r r i g a t i o n class. RUCO and ACC
s t a f f proposed that the i r r i g a t i o n class share some of the t o t a l rate
increase; the commission adopted the recommendation.
Second, the u t i l i t y charged $ 7.50 for basic monthly service and
sought to increase t h i s figure to $ 12.50. The ACC s t a f f proposed an
increase to $ 9.00, but RUCO recommended maintaining the $ 7.50
charge. The commission adopted RUCO1s recommendation.
F i n a l l y , RUCO recommended that ACC require the u t i l i t y to provide
current data and to perform c e r t a i n studies for use d u r i n g f u t u r e
rate proceedings'. The commission also adopted these RUCO
recommendations.
a Citizens U t i l i t i e s Company - Several ACC o f f i c i a l s noted that RUCO
provided the impetus behind ACC ordering C i t i z e n s U t i l i t i e s to
j u s t i f y i t s rates i n c e r t a i n Arizona locations. Citizens i s a
Delaware corporation w i t h several operating d i v i s i o n s and
s u b s i d i a r i e s i n Arizona. The hearings resulted i n revenue decreases
of up to 23.4 percent.
In a d d i t i o n , ACC s t a f f stated that RUCO has introduced new ideas i n t o the
rate- making process. For example, RUCO f i r s t recommended e l i m i n a t i n g
Arizona Public Service's ( APS) Purchased Power and Fuel Adjustment Clause
( PPFAC) several years a g o . ( ' ) A t that time, the ACC did not adopt
RUCO's p o s i t i o n . Over the years RUCO continued to intervene i n cases
concerning fuel adjuster clauses. In a recent case the commission
eliminated the APS PPFAC. RUCO's i n t r o d u c t i o n of the idea several years
ago and i t s continued i n t e r v e n t i o n i n PPFAC cases proved e f f e c t i v e i n the
long term.
Some Factors Which Hinder RUCO1s
Effect iveness Were St i l l Apparent
Although RUCO has taken steps to improve i t s effectiveness i n
representing r e s i d e n t i a l ratepayers since the 1986 performance a u d i t , we
noted some factors which hindered RUCO's effectiveness. These factors
include inadequate evidence and poor use of consultants.
Inadequate evidence - RUCO d i d not prepare and present adequate
evidence for some cases, and t h i s adversely impacted i t s effectiveness.
( 1 ) Purchased Power and Fuel Adjustment Clauses ( PPFACs) are semi automatic mechani sins
which allow u t i l i t i e s t o m a i n t a i n c o n s i s t e n t rates of r e t u r n i n times of
f l u c t u a t i n g f u e l and purchased power costs. Fuel a d j u s t e r clauses were developed
i n the 1970s. a period of g r e a t l y f l u c t u a t i n g fuel p r i c e s . The clauses allowed
e l e c t r i c u t i l i t i e s t o charge customers a surcharge t o cover increased f u e l costs.
Thus, the u t i l i t i e s d i d not have to i n i t i a t e and defend f u l l r a t e cases t o recoup
the increased fuel costs. RUCO advocates t h a t PPFACs be eliminated f o r two
reasons. F i r s t , f u e l costs have decreased and s t a b i l i z e d , thereby e l i m i n a t i n g the
need f o r the clauses. Second, some u t i l i t y companies have a l l e g e d l y abused the
clauses by i n c l u d i n g other charges i n the surcharge. For example, i n a C i t i z e n s
Mohave and Santa Cruz E l e c t r i c case, the u t i l i t y requested t h a t the c a p i t a l costs
of gas t u r b i n e generating u n i t s be passed along t o ratepayers through the PPFAC.
Several ACC opinions and orders we reviewed dismissed RUCO's p o s i t i o n s
because RUCO d i d not present supporting evidence. The ACC can only adopt
p o s i t i o n s that are supported by evidence and that can be implemented by
u t i l i t y companies. Thus, arguments must be based on f a c t u a l information
relevant t o the s p e c i f i c u t i l i t y i n the case. In a d d i t i o n , the
commission must be able to p r e d i c t the e f f e c t o f adopting a
recommendation. I n some cases RUCO presented general, t h e o r e t i c a l ideas,
w i t h o u t p r o v i d i n g p r a c t i c a l information on how the u t i l i t y could
implement the ideas. In other instances, RUCO i n v e s t i g a t e d o n l y the
aspects of an analysis or law which would b e n e f i t r e s i d e n t i a l ratepayers,
without determining the t o t a l e f f e c t o f adopting the analysis or law. In
other cases RUCO's arguments lacked depth or contained judgment e r r o r s
The following case examples i l l u s t r a t e where RUCO d i d not develop
adequate ev i dence .
a APS Palo Verde 2 - RUCO raised 12 issues i n t h i s case, however 9
had no impact on the ACC's f i n a l decision ( RUCO was s o l e l y
responsible for the ACC adoption of one issue, and p a r t i a l l y
responsibly for the adoption of two o t h e r s ) . Even i n the issue where
RUCO had sole impact, the f i n a l impact was much less than RUCO sought
because RUCO d i d not base i t s p o s i t ion on r e l e v a n t f a c t u a l
information. RUCO proposed an $ 11.4 mi I l ion reduct ion i n operation
and maintenance expenses because of reduced r e l i a n c e on f o s s i l fuel
plants and increased r e l i a n c e on Palo Verde Units 1 and 2. I n the
decision, the commission agreed that " some adjustment should be
made." However, the commission could not adopt the RUCO
recommendat ion because the RUCO w i tness " provided no t h i ng more than
an unsupported a l l e g a t i o n . " Although the commission rejected the
$ 11.4 mi I l i o n adjustment, i t d i d adopt a $ 1.85 mi l l i o n adjustment
based on RUCO's testimony.
In another issue, one i n which RUCO had no impact, RUCO again d i d not
provide adequate supporting evidence for i t s p o s i t i o n although i t s
p o s i t i o n d i f f e r e d s i g n i f i c a n t l y from t h e other p a r t i e s involved i n
the case. This issue involved e s t i m a t i n g f u t u r e monies needed to
decommission the Palo Verde Unit 2 nuclear p l a n t . Both Arizona
Public Service ( APS) and ACC s t a f f agreed on an estimated cost
f i g u r e . RUCO's estimate, however, was four time g r e a t e r . I n the
opinion and order the commission commented, " Instead of supporting a
reasonable estimate based on what i s now known about decommissioning,
RUCO takes the p o s i t i o n that i n l i g h t o f the u n c e r t a i n t i e s the future
holds, we should s t a r t w i t h a high estimate and review i t every three
years ." The commi ssi on d i d not adopt the RUCO pos i t i on because RUCO
f a i l e d to provide supporting evidence for i t s p o s i t i o n . The
commission f u r t h e r responded, " Current ratepayers should not be
unnecessar i l y burdened w i th the add i t i ona I cost imposed by ( the RUCO
witness') unsupported contingency f a c t o r . "
a Citizens U t i l i t i e s Company - RUCO advanced several positions
without providing complete information on the r e s u l t s of the adoption
of the p o s i t i o n s . For example, RUCO did not present research s t a t i n g
the f u l l e f f e c t of i t s recommendation of changing an a l l o c a t i o n
methodology. RUCO proposed e l i m i n a t i n g one component of the " Four
Factor" formula for a1 Iocat i n g a d m i n i s t r a t i v e o f f ice expenses.
However, t h i s formula i s an accepted methodology i n a l l ten states
where Citizens provides u t i l i t y services. RUCO wanted to eliminate
the factor which allocated costs to consumers. According to one of
the hearing o f f i c e r s involved i n the case, the formula i s c a l l e d the
" Four Factor" model because each factor i s important. The commission
conc l uded :
" RUCO's proposed e l i m i n a t i o n of one of the factors would,
no doubt, be b e n e f i c i a l t o some e n t i t i e s and harmful to
others. Any change i n the a l l o c a t i o n methodology would, of
necessity, produce d i f f e r e n t r e s u l t s . However, without
some compelling reason to change, we w i l l continue to
approve the Four Factor method."
e Los Cerros Water Company - RUCO lacked adequate research and made
judgment e r r o r s i n several issues i t proposed i n t h i s case. In one
issue, RUCO attempted to depart from the " groundrules" established
for the case. A ut i l i t y company's rate increase app l i cat ion must be
based on an actual 12- month period of operation. The period from
which t h i s information i s drawn i s c a l l e d the " t e s t year." The test
year i s approved by the ACC at the beginning of the rate case.
Although the test year was already decided, the RUCO witness
recommended that a revenue- generating event which occurred a f t e r the
test year be added to t e s t year revenues. The ACC r e j e c t e d u c ~ ~ s
p o s i t i o n .
Further RUCO d i d not perform some basic research for t h i s case.
F i r s t , RUCO contacted a Phoenix company to obtain information on
charges for water management but did not t e l l the company the
information was for the Tucson area. As a r e s u l t , because Los Cerros
i s located i n Tucson, geographic differences made t h i s an i n v a l i d
comparison. In a second issue, RUCO f a i l e d to ask company o f f i c i a l s
why two company checks were w r i t t e n to d i f f e r e n t accounting f i r m s f o r
the same purpose. Therefore, RUCO made an erroneous assumption and
recommended a reduction to outside services expenses. However,
testimony of company representatives during the hearing showed that
Los Cerros had l e g i t i m a t e l y sought a second opinion about a
complicated new tax law. Here again, the ACC rejected RUCOrs
p o s i t i o n s on both of these issues.
Poor use o f consultants - RUCO's effectiveness has also suffered
because i t has made poor consultant s e l e c t i o n decisions and has not
managed i t s consul tants we1 I . In some instances RUCO has h i red
consultants who have hindered i t s effectiveness i n rate proceedings. For
example, RUCO has h i red consultants whose arguments had been rejected by
the commission i n previous cases or upon whose testimony the commission
cannot r e l y , as indicated i n the f o l l o w i n g cases
r APS PPFAC - A t least two problems were evident w i t h RUCO1s
involvement i n the 1987 APS PPFAC case - RUCO r a i sed an argument i n
the wrong type of case, and RUCO lacked adequate support for i t s
p o s i t i o n . In a 1986 APS PPFAC case, RUCO's consultant made a
recommendation that the ACC e i t h e r e l i m i n a t e the PPFAC or u t i l i z e a
new approach i n determining PPFAC charges. The ACC rejected RUCO! s
argument, but indicated they would be w i l l i n g to consider these
reforms i n f u t u r e rate cases. RUCO again raised t h i s issue i n the
1987 APS PPFAC case. However, the purpose of the 1987 APS PPFAC case
was to review actual 1986 fuel and purchased power costs and to
e s t a b l i s h a new PPFAC c o s t . Thus i t was an inappropriate time to
r a i s e the issue as i t was not w i t h i n t h e hearing scope. F u r t h e r ,
RUCO used the same c o n s u l t i n g f i r m i n t h i s case as i t had used i n the
1986 APS PPFAC case. The consultants presented testimony i n 1987
which resembled the testimony presented, and rejected by the
commission, i n the 1986 case. The consultants d i d not provide any
a d d i t i o n a l evidence as to why the ACC should adopt the argument. In
f a c t , i n the 1987 opinion and order the commission quoted the 1986
opinion and order i n dismissing RUCO's arguments.
a APS Palo Verde 2 - I n the APS Palo Verde 2 rate case RUCO used a
consultant who was not c r e d i b l e . The consultant had t e s t i f i e d before
the Federal Energy Regulatory Commission ( FERC) f i v e years before the
Palo Verde 2 case. I n h i s testimony before the FERC, he indicated
that APS should " continue to construct and r e t a i n i t s ownership share
i n ( Palo Verde) u n i t s 1 and 2." However, i n the Palo Verde 2 case,
the consultant t e s t i f i e d t h a t APS should have stopped c o n s t r u c t i o n or
sold i t s ownership share i n Palo Verde 2 i n 1981. Thus, the RUCO
consultant test i f ied t h a t APS should have known back i n 1981- 82 what
he himself d i d not know then. F u r t h e r , the FERC judge had made
unfavorable statements concerning the testimony of t h i s witness, and
during cross- examination, these statements were presented. The
commission noted i n the opinion and order:
" APS presented extensive r e b u t t a l evidence by a number of
witnesses concerning ( the RUG0 w i t n e s s ' ) presentation . . . .
However, we do not need to repeat a l l of t h e i r c r i t i c i s m s
or even summarize t h e i r conclusions. ( The RUCO w i t n e s s ' )
opinion i s not s u f f i c i e n t support f o r a f i n d i n g t h a t
construct ion o f and r e t a i n i n g the ownership i n t e r e s t i n
Palo Verde 2 was imprudent."
RUCO's effectiveness also s u f f e r s i n the management of i t s consultants.
This was evidenced i n several of the cases we reviewed. For example, i t
appears that RUCO s t a f f d i d not always adequately review testimony
compiled by t h e i r consultants p r i o r to ACC f i l i n g deadlines. This has
resulted, for example, i n RUCO's presenting testimony that does not
conform to Arizona law or ACC precedence, o r t h a t cannot be implemented.
The case below i l l u s t r a t e s poor consultant management.
Citizens U t i l i t i e s Company - I n t h i s case, RUCO's attorneys did not
adequately review a c o n s u l t a n t ' s testimony for compliance with
Arizona law. One consultant made recommendations contrary to
applicable Arizona s t a t u t e s . In t h i s case, RUCO l o s t c r e d i b i l i t y
because RUCO's attorneys did not provide guidance regarding Arizona
laws to an o u t - o f - s t a t e witness.
F i n a l l y , RUCO's consultant recommended the use o f the 1986 Tax Reform
Act i n c a l c u l a t i n g C i t i z e n s ' t e s t year tax expense. A t the time of
the hearing, the tax law was imminent but had not yet passed.
Further, the e f f e c t of the new tax law on Arizona taxes was unknown.
Thus, the ACC could not use the 1986 tax law at the time.
Other P a r t i e s A n t i c i p a t e That Recent Changes
a t RUCO W i l l Improve I t s Effectiveness
Recent changes at RUCO are expected to improve RUCO's effectiveness.
RUCO's new d i r e c t o r assumed h i s p o s i t i o n i n October 1988. As of the time
of the a u d i t , the commission had not issued opinions and orders on any of
the cases i n which the new d i r e c t o r provided guidance. However,
commissioners, ACC hearing o f f i c e r s and s t a f f , and u t i l i t y
representatives asserted i n i n t e r v i e w s t h a t the new d i r e c t o r i s making
changes which are r e s u l t i n g i n increased effectiveness. For example,
comments regarding RUCO's e f f o r t i n the Tucson E l e c t r i c Power ( TEP) case
i l l u s t r a t e the new d i r e c t o r ' s influence. Some ACC commissioners, hearing
o f f i c e r s and s t a f f noted that RUCO performed well i n the TEP case.
Spec i f i cal ly , RUCO proposed we l I- suppor ted arguments and h i red credible
consultants to use as witnesses.
RECOWENDAT I ONS
1. RUCO should continue to improve the qua1 i t y of evidence presented in
rate case proceedings by:
a. Conducting s u f f i c i e n t research to present we l I- supported
arguments which contain s u f f i c i e n t depth and presenting adequate
supporting evidence for i t s recommendations.
b . Determining and presenting to the ACC the e f f e c t of i t s
recommendat ions .
2. RUCO should continue to improve i t s s e l e c t i o n and management of
consultants i n order to enhance i t s e f f e c t i v e n e s s i n rate case
proceedings by:
a. Evaluating a c o n s u l t a n t ' s e f f e c t i v e n e s s f o l l o w i n g a rate case i n
order to determine any shortcomings i n h i s or her presentation,
and any actions needed i f the consultant i s used again i n the
f u t u r e . RUCO should also review the c o n s u l t a n t ' s effectiveness
i n other federal or s t a t e presentations to determine possible
shortcomings i n h i s or her approach.
b . Requiring consultants to submit testimony far enough i n advance
of the case hearing to allow RUCO attorneys and s t a f f s u f f i c i e n t
time to review the testimony, c l a r i f y any u n c e r t a i n t i e s w i t h the
testimony, and c o r r e c t any e r r o r s .
FINDING I I
STATUTORY CHANGES ARE REQUIRED TO ENSURE
RUCO'S ABILITY TO ADEQUATELY REPRESENT
RESIDENTIAL RATEPAYERS
Broadening RUCO's s t a t u t o r y a u t h o r i t y would enhance i t s a b i l i t y to
represent the i n t e r e s t s of r e s i d e n t i a l u t i I i t y consumers. C u r r e n t l y ,
RUCO's s t a t u t e s appear t o l i m i t RUCO to i n t e r v e n i n g i n only those cases
which d i r e c t l y a f f e c t r e s i d e n t i a l r a t e s . In a d d i t i o n , RUCO lacks the
s t a t u t o r y a u t h o r i t y to i n i t i a t e cases.
R 3
Should Be Expanded
The s t a t u t e s should be amended to provide RUCO w i t h the a u t h o r i t y to
intervene i n any case which could u l t i m a t e l y impact r e s i d e n t i a l u t i l i t y
rates. RUCO1s enabling l e g i s l a t i o n could be i n t e r p r e t e d as l i m i t i n g RUCO
to i n t e r v e n i n g o n l y i n cases i n v o l v i n g r a t e making and rate design.
However, there are a v a r i e t y of cases which f a l l outside of t h a t scope
which could u l t i m a t e l y impact r e s i d e n t i a l u t i l i t y rates. RUCOts
a u t h o r i t y to intervene i n these types of cases has been challenged by
p u b l i c u t i l i t i e s .
S t a t u t o r y l i m i t a t i o n s - Although the Arizona Corporation Commission has
allowed RUCO t o intervene i n a v a r i e t y of cases, RUCO1s enabling s t a t u t e s
could be i n t e r p r e t e d as l i m i t i n g RUCO's i n t e r v e n t i o n a u t h o r i t y only to
cases r e l a t e d to r a t e making and r a t e design. Arizona Revised Statutes
( A. R. S.) 940- 462 A . provides RUCO w i t h global a u t h o r i t y to represent
ratepayers before the commission, but A. R. S. 440- 464. A. 2. could be
i n t e r p r e t e d as r e s t r i c t i n g the type of cases i n which RUCO may
intervene. S p e c i f i c a l l y , the s t a t u t e s t a t e s , i n p a r t , that RUCO's
d i r e c t o r may:
" Prepare and present b r i e f s , arguments, proposed r a t e s o r orders
and intervene or appear on behalf o f r e s i d e n t i a l u t i l i t y
consumers before hearing o f f i c e r s and the c o r p o r a t i o n commission
as a p a r t y i n i n t e r e s t and also p a r t i c i p a t e as a p a r t y i n
i n t e r e s t pursuant to 40- 254 i n proceedings r e l a t i n g to rate
making or rate design and i n v o l v i n g pub1 i c service
corporat ions ." ( emphas i s added)
15
A 1987 Attorney General Opinion ( 187- 053) concluded that " RUCO i s
authorized only to p a r t i c i p a t e i n proceedings which both r e l a t e t o r a t e
making or design and also involve public service corporation^.'^ Stating
that " r e l a t i n g tou embraces more than " d i r e c t l y connected t o , " the
Attorney General Opinion i n t e r p r e t e d the s t a t u t e s as allowing RUCO to
p a r t i c i p a t e i n proceedings which have a reasonable r e l a t i o n s h i p to - rate
making or rate design ( emphasis added). In a d d i t i o n , a L e g i s l a t i v e
Council representative also s t a t e d t h a t RUCO's statutes do appear to
l i m i t RUCO1s i n t e r v e n t i o n a u t h o r i t y .
Authority should be expanded - Although RUCO's a u t h o r i t y appears to be
l i m i t e d t o r a t e cases, other types of cases also impact r e s i d e n t i a l
rates. In order to more f u l l y protect consumers' i n t e r e s t s , RUCO should
be allowed to p a r t i c i p a t e i n any case that has the p o t e n t i a l to a f f e c t a
u t i l i t y ' s cost of providing service or how those costs might be
d i s t r i b u t e d among the u t i l i t y ' s various classes of customers. There are
a v a r i e t y of cases which, s t r i c t l y defined, are not " r a t e making or rate
design," but which could u l t i m a t e l y impact r e s i d e n t i a l u t i l i t y rates.
Examples of such cases, which could be i n t e r p r e t e d as being beyond the
scope of RUCO's a u t h o r i t y t o intervene, include the following:
e Least cost e l e c t r i c u t i l i t y planning, ( 1 )
0 L i m i t i n g r e g u l a t i o n or deregulating telecommunications services,
0 Opening monopoly services to competition,
0 Mergers,
0 Changing the nature of how a u t i l i t y industry i s regulated, and
0 Determining whether a u t i l i t y i s obtaining supplies at the lowest
possible p r i c e .
Many of these cases could lead to rate increases. RUCO should be allowed
to influence the case i t s e l f , rather than waiting u n t i l the r e s u l t i n g
( 1 ) The ACC r e c e n t l y required e l e c t r i c u t i l i t i e s t o f i l e with the commission every
three years t h e i r plans f o r meeting demand for e l e c t r i c i t y over the next decade.
Following the f i l ings, the commission w i l l set hearing dates designed to allow
i n t e r e s t e d p a r t i e s t o review and c r i t i q u e the plans. These are r e f e r r e d to as
l e a s t cost planning reviews f o r e l e c t r i c u t i l i t i e s .
rate increase i s i n e v i t a b l e . By becoming involved i n cases at the
outset, RUCO would be i n a b e t t e r p o s i t i o n to represent r e s i d e n t i a l
ratepayers' long- term i n t e r e s t s .
RUCOfs a u t h o r i t y has been challenged - Although the ACC has
h i s t o r i c a l l y granted RUCO permission to intervene i n these types of
cases, p u b l i c u t i l i t i e s have challenged RUCO's a u t h o r i t y . Two recent
examples of u t i l i t i e s challenging RUCO's a u t h o r i t y t o intervene i n cases
which are not s t r i c t l y rate making or rate design are the Arizona Public
Service case on dividend payment p o l i c i e s , and the Tucson E l e c t r i c Power
merger case.
CASE 1 :
Arizona Public Service objected to RUCO intervening i n i t s current
case on dividend payment p o l i c i e s to i t s f i n a n c i a l l y troubled holding
company. APS argued that the case i s not a rate- making or rate
design case, and therefore, RUCO had no s t a t u t o r y a u t h o r i t y t o
intervene. RUCO argued that allowing APS to subsidize losses by
other n o n - u t i l i t y s u b s i d i a r i e s of the holding company w i l l u l t i m a t e l y
r e s u l t i n higher rates for APS consumers. According to RUCO, the
case i s " r e l a t e d t o r a t e making and rate design", and the impact of
the decision made i n t h i s case could u l t i m a t e l y a f f e c t r e s i d e n t i a l
consumer rates. In a d d i t i o n , RUCO has h i s t o r i c a l l y been allowed to
intervene i n cases which were not s t r i c t l y rate making o r r a t e design.
CASE 2:
Tucson E l e c t r i c Power objected to RUCO's motion to intervene i n i t s
merger w i t h San Diego Gas and E l e c t r i c . They claimed that RUCO did
not have the s t a t u t o r y a u t h o r i t y t o intervene i n the merger because
i t was not a rate- making or rate design case. RUG0 argued that the
merger would have a long- term impact on the cost of u t i l i t y service
i n Tucson.
Although the commission granted RUCO's p e t i t i o n to intervene i n these and
i n other cases i n the past, RUCO's r i g h t t o intervene i s not guaranteed.
The commission i s an elected body whose membership and o r i e n t a t i o n could
change completely w i t h the next e l e c t i o n . A d i f f e r e n t commission could
more narrowly define RUCO's role and r e s t r i c t i t s i n t e r v e n t i o n to cases
which s p e c i f i c a l l y address rate making or rate design. Further, i f the
commission's decision to allow RUCO to intervene were challenged i n
court, based on current s t a t u t e s , the court could deny RUCO the a u t h o r i t y
to intervene.
In other s t a t e s , the a u t h o r i t y t o intervene i n non- rate cases i s commonly
granted to agencies s i m i l a r to RUCO. A l l seven of the r e s i d e n t i a l
u t i l i t y consumer advocacy groups i n other states which we contacted
( Colorado, F l o r i d a , Michigan, Missouri, New Mexico, Ohio, and
Pennsylvania) have the s t a t u t o r y a u t h o r i t y to intervene i n non- rate
cases. We surveyed these p a r t i c u l a r states because they were ident i f ied
as having superior u t i l i t y consumer advocacy agencies by the
a d m i n i s t r a t i v e d i r e c t o r o f the National Association of State U t i l i t y
Consumer Advocacy Agencies or the d i r e c t o r o f RUCO.
According to a L e g i s l a t i v e Counci l representative, a s t a t u t o r y change
would be required to ensure RUCOts a u t h o r i t y t o intervene. He indicated
that d e l e t i n g the words " r e l a t i n g t o r a t e making or rate design" from
A. R. S. $ 40- 464. A. 2. should be s u f f i c i e n t to ensure RUCO's a u t h o r i t y to
intervene i n the types of cases i d e n t i f i e d above. I t i s t h i s phrase
which could be i n t e r p r e t e d as l i m i t i n g RUCO's i n t e r v e n t i o n to only rate
cases.
RUCO Should Be A1 lowed
t o I n i t i a t e Cases
In a d d i t i o n to p o t e n t i a l l y r e s t r i c t i n g the types of cases i n which RUCO
may intervene, s t a t u t e s f u r t h e r l i m i t RUCOts effectiveness by not
providing RUCO w i t h the a u t h o r i t y to i n i t i a t e rate cases before the ACC.
The a u t h o r i t y t o i n i t i a t e cases includes the power to define the scope of
the case and to i d e n t i f y the issues which w i l l be addressed. Other
states have awarded t h e i r u t i l i t y advocacy programs the power to i n i t i a t e
cases.
RUCO lacks s t a t u t o r y a u t h o r i t y - Currently, neither RUCO nor ACC
statutes empower RUCO to i n i t i a t e rate cases before the
commission."' RUCO1s statutes provide t h a t RUCO may intervene i n
( 1 ) RUCO i s also not empowered to i n i t i a t e non- rate cases. However, such a u t h o r i t y may
not be necessary. According t o an ACC o f f i c i a l , e i t h e r the ACC i t s e l f or the
p u b l i c u t i l i t i e s a r e r e q u i r e d t o i n i t i a t e a case before the commission p r i o r t o
t a k i n g various s i g n i f i c a n t actions, such as mergers, o r the sale of stocks or
bonds. Therefore, enabling RUCO t o intervene i n such cases should be s u f f i c i e n t .
rate- making and rate design cases before the ACC, but the statutes do not
permit RUCO to i n i t i a t e cases. Further, ACC statutes do not include RUCO
i n the l i s t of p a r t i e s which may i n i t i a t e cases before the ACC as to the
reasonableness of pub l i c u t i l i t y rates and charges. According to A. R. S.
540- 246 A . , only the f o l l o w i n g p a r t i e s may do so:
a The commission i t s e l f
II The mayor or the m a j o r i t y of the l e g i s l a t i v e body of the c i t y or
town where the u t i l i t y service i s i n question
o Not less than 25 consumers or prospective consumers of the
service. ( 1 )
Advantages o f power t o i n i t i a t e cases - Providing RUCO w i t h the
s t a t u t o r y a u t h o r i t y t o i n i t i a t e cases before the commission would enhance
i t s a b i l i t y to represent r e s i d e n t i a l ratepayers. F i r s t , the i n i t i a t o r
s i g n i f i c a n t l y influences the scope of the case. The concerns which they
i d e n t i f y and the issues which they define are the foundation upon which
the hearing i s based. While the commission i s u l t i m a t e l y responsible for
s e t t i n g the scope of the case, i t i s the i n i t i a t o r who frames the
debate. Intervenors, on the other hand, are allowed only l i m i t e d input
i n t o the scoping of the case.
Secondly, some issues o f i n t e r e s t to r e s i d e n t i a l u t i l i t y consumers may
not be addressed at a l l , or may not be addressed i n as timely a fashion,
unless RUCO i s given the a u t h o r i t y to i n i t i a t e cases. RUCO's d i r e c t o r
c i t e d overearning by u t i l i t i e s as an example of the kind of case RUCO
would l i k e the power to i n i t i a t e . In the past, p u b l i c u t i l i t i e s have
overearned due to changes i n tax laws r e s u l t i n g i n savings which the
company did not pass on to ratepayers. Under these circumstances the
company i s u n l i k e l y to f i l e for a rate increase which would bring i t
before the commission. Therefore, unless one of the p a r t i e s i d e n t i f i e d
above as having the a u t h o r i t y t o i n i t i a t e a case f i l e s a complaint with
( 1 ) According t o RUCO1s d i r e c t o r , even i f 25 c i t i z e n s do f i l e a p e t i t i o n t o i n i t i a t e a
hearing, RUCO does not have the s t a t u t o r y a u t h o r i t y to represent the group.
the commission, RUCO cannot take a c t i o n regarding the u t i l i t y ' s rates.
RUCO would l i ke the a u t h o r i t y to requi re the company t o j u s t i fy i t s rates
i n these instances.
Other s t a t e s ' advocacy agencies have a u t h o r i t y t o i n i t i a t e cases -
RUCO's d i r e c t o r recently surveyed 38 other s t a t e s ' u t i l i t y advocacy
programs and found that of the 29 that responded to the survey, a l l have
the a u t h o r i t y . to i n i t i a t e cases. ' In a d d i t i o n , we contacted seven
agencies i n states w i t h t h i s a u t h o r i t y . " ' These states c i t e d the
following examples of the types of cases they i n i t i a t e : reducing u t i l i t y
rates when companies were overearning due to tax w i n d f a l l s , removing a
nuclear power p l a n t from the rate base, and, challenging charges for
telephone d i r e c t o r y assistance. One d i r e c t o r s t a t e d t h a t the a u t h o r i t y
to i n i t i a t e cases before the commission enhanced h i s agency's a b i l i t y to
negotiate w i t h u t i l i t y companies.
Although most agencies s i m i l a r t o RUCO have the a u t h o r i t y to i n i t i a t e
cases, they appear to use t h i s a u t h o r i t y sparingly. The burden of proof
i s on the party i n i t i a t i n g the proceedings, and developing adequate
evidence i s time- consuming and c o s t l y . Therefore, none of the agencies
we surveyed have i n i t i a t e d more than one or two cases per year.
Statutory changes are needed - According to a L e g i s l a t i v e Council
representative, s t a t u t o r y changes would be necessary t o provide RUCO with
the a u t h o r i t y t o i n i t i a t e rate cases before the commission. A. R. S.
940-- 246 A. ( the l i s t o f p a r t i e s who may i n i t i a t e rate cases before the
ACC) would need to be expanded to include the d i r e c t o r of RUCO. In
addition, A. R. S. 540- 464 A . ( duties of RUCO's d i r e c t o r ) would need to be
expanded to include the r e s p o n s i b i l i t y for i n i t i a t i n g rate cases before
the commission. RUCO has attempted to have such l e g i s l a t i o n enacted i n
the p a s t , but has been unsuccessful.
( ' 1 According to RUCO1s d i r e c t o r , 39 states ( i n c l u d i n g Arizona and the D i s t r i c t of
Columbia) have u t i 1 i t y advocacy programs or agencies.
( * ) Colorado, F l o r i d a , Michigan, Missouri, New Mexico, Ohio, and Pennsylvania
RECOWENDATION
The L e g i s l a t u r e should consider amending:
r A. R. S. 540- 464 A . 2 . to expand RUCO's a u t h o r i t y t o p a r t i c i p a t e
i n any case before the Arizona Corporation Commission which
could u l t i m a t e l y impact r e s i d e n t i a l u t i l i t y r a t e s .
a A. R. S. $ 5 40- 246 A . and 40- 464 A . to grant RUCO the a u t h o r i t y to
i n i t i a t e r a t e cases before the c o r p o r a t i o n commission.
OTHER PERTINENT INFORMATION
During the course of the audit we obtained information regarding the
level of s t a f f turnover and the d i f f i c u l t y of a t t r a c t i n g attorneys w i t h
adequate experience to f i l l vacancies at RUCO.
S t a f f Turnover
Turnover at RUCO has been high, p a r t i c u l a r l y for attorneys and
d i r e c t o r s . The turnover of attorneys and d i r e c t o r s i s c r i t i c a l because
these p o s i t i o n s are major leadership r o l e s a t RUCO. The high level of
turnover i s largely a t t r i b u t a b l e to changes i n governors and d i r e c t o r s .
Turnover a t RUCO since July 1 , 1986, has been excessive - Our i ng the
last three f i s c a l years, RUCO has experienced a high level of turnover.
Six of RUCOts ten p o s i t i o n s turned over i n f i s c a l year 1986- 87, three of
i t s ten positions turned over i n f i s c a l year 1987- 88, and four of the
twelve p o s i t i o n s turned over during f i s c a l year 1988- 89. As of June
1989, only three of RUCOts employees had worked at RUCO for more than two
years.
Turnover has been p a r t i c u l a r l y h i g h f o r RUCO's d i r e c t o r and attorneys.
In the last three years, RUCO has served under three d i f f e r e n t d i r e c t o r s
and one acting d i r e c t o r . Since July 1, 1986, RUCO's chief counsel and
i t s junior attorney p o s i t i o n s have each been held by three separate
attorneys. Furthermore, d u r i n g t h a t same time period, RUCO's senior
attorney p o s i t i o n has turned over twice. This level of turnover seems
p a r t i c u l a r l y high when compared to that o f s i m i l a r p o s i t i o n s i n other
organizations. For example, during the same time p e r i o d o n l y one of the
seven attorneys at the U t i l i t y D i v i s i o n o f the Arizona Corporation
Commission l e f t , and none o f the rate r e g u l a t i o n attorneys used by US
West has l e f t .
The d i r e c t o r and attorney p o s i t i o n s a t RUCO are c r i t i c a l t o i t s
e f f e c t i v e operation - Turnover of RUCOts d i r e c t o r and attorneys strongly
impacts the agency because of the c r i t i c a l r o l e these positions' play.
Both types o f p o s i t i o n s provide essential leadership roles i n the RUCO
organizational s t r u c t u r e . RUCO1s d i r e c t o r sets the p r i o r i t i e s for the
agency. He or she i s u l t i m a t e l y responsible f o r s e l e c t i n g the cases i n
which RUG0 w i l l intervene, for representing the agency before the
Legislature and the p u b l i c , and for s e l e c t i n g s t a f f to serve RUCO. The
attorneys are responsible for representing RUCO before the Arizona
Corporation Commission. They help develop the strategy used i n
presenting RUCOts case, and they spearhead RUCOts e f f o r t s at hearings.
Change i n governors and d i r e c t o r s has led to most of RUCOis turnover -
I n s t a b i l i t y i n RUCOts d i r e c t o r p o s i t i o n has been caused by changes i n
governors. Since July 1, 1986, Arizona has had three d i f f e r e n t
governors. As new governors took o f f i c e , new d i r e c t o r s were appointed
w i t h d i f f e r i n g philosophies. The turnover i n d i r e c t o r s lead to s t a f f
turnover. We interviewed eight former RUCO employees to determine t h e i r
reasons f o r leaving, and f i v e stated that they q u i t for reasons d i r e c t l y
related to a RUCO d i r e c t o r . I n a d d i t i o n , another was f i r e d by a previous
di r e c t o r .
Adequacy of Attorneysi
Qual i f i c a t i o n s
RUCO has had d i f f i c u l t y a t t r a c t i n g and keeping q u a l i f i e d attorneys. As a
r e s u l t , RUCO has had to operate without experienced legal leadership.
The high level of expertise required, salary levels which are not
competitive with those offered by the p r i v a t e sector, and RUCO1s h i s t o r y
o f i n s t a b i l i t y a l l c o n t r i b u t e d t o i t s d i f f i c u l t y i n a t t r a c t i n g q u a l i f i e d
attorneys.
RUCO has had d i f f i c u l t y a t t r a c t i n g and keeping q u a l i f i e d attorneys -
RUCO1s d i r e c t o r s , past and present, have had d i f f i c u l t y a t t r a c t i n g
q u a l i f i e d applicants for the attorney p o s i t i o n s . Because only attorneys
who have passed the Ar i zona Bar may appear before the ACC, RUCO requi res
that a l l three of i t s attorneys be licensed to practice law i n the
State. A d d i t i o n a l l y , because of the nature and complexity of the issues
dealt with, RUCO requires that i t s chief counsel and seniar attorney have
f i v e years of experience i n the practice of public u t i l i t y law, a
subsection o f a d m i n i s t r a t i v e law. RUCO's current d i r e c t o r had d i f f i c u l t y
i n h i s recent attempt to f i l l the chief counsel p o s i t i o n . For example,
none of the o r i g i n a l applicants for the p o s i t i o n had any p u b l i c u t i l i t y
r a t e r e g u l a t i o n experience. The p o s i t i o n was u l t i m a t e l y f i l l e d by a
former RUCO attorney who was not i n the o r i g i n a l pool of applicants.
As a r e s u l t , RUCO has lacked experienced legal leadership - Because
RUCO has d i f f i c u l t y a t t r a c t i n g experienced attorneys, the d i r e c t o r i s
sometimes forced to h i r e someone who does not have s u f f i c i e n t experience
to e f f e c t i v e l y perform the job. A former RUCO d i r e c t o r stated that he
hired the highest q u a l i f i e d a p p l i c a n t s f o r the p o s i t i o n s o f chief counsel
and senior attorney. However, the chief counsel whom he hi red had not
practiced law during the f i v e years immediately preceding h i s appointment
at RUCO and had no u t i l i t y rate regulation experience. The senior
attorney whom he hired also had no experience i n u t i l i t y r a t e r e g u l a t i o n .
Another impact of the d i f f i c u l t y i n r e c r u i t i n g and maintaining
experienced attorneys i s that RUCO has been forced to operate without
experienced legal leadership. For example, the current entry level
attorney p o s i t i o n at RUCO i s intended to be a support p o s i t i o n under the
supervision of an experienced attorney. However, due to vacancies i n the
chief counsel and senior attorney p o s i t i o n s , the entry l e v e l attorney
received l i t t l e or no supervision for two and a h a l f months. This
attorney, a recent law school graduate, prepared motions to be presented
before the Arizona Supreme Court and the Superior Court, and represented
RUCO before the Arizona Corporation Commission. However, he lacked the
expertise and experience for such a high level of r e s p o n s i b i l i t y .
Causes o f d i f f i c u l t y i n a t t r a c t i n g and keeping q u a l i f i e d attorneys -
According to both the current d i r e c t o r and a p r i o r RUCO d i r e c t o r , several
RUCO and ACC s t a f f , and one u t i l i t y respresentative we spoke with,
several factors impede RUCO's attempts to a t t r a c t and keep q u a I i f i e d
attorneys. F i r s t , the pool of q u a l i f i e d attorneys i s l i m i t e d . Public
u t i l i t i e s rate regulation i s a highly t e c h n i c a l , s p e c i a l i z e d area, for
which a high level of expertise i s needed. Second, l i k e other State
agencies, RUCO i s unable t o o f f e r attorney s a l a r i e s which are competitive
w i t h the p r i v a t e sector. Third, RUCO's h i s t o r y of i n s t a b i l i ty has
reduced i t s a t t r a c t i v e n e s s as an employer. Lack of job s e c u r i t y may
deter experienced attorneys from applying f o r p o s i t i o n s at RUCO. The
attorney p o s i t i o n s are exempt, which means that they serve at the
pleasure of the d i r e c t o r who serves at the pleasure of the Governor.
F i n a l l y , according to RUCO's d i r e c t o r , a p o s i t i o n w i t h the ACC or the
Attorney General's o f f i c e i s seen as more p r e s t i g i o u s .
O f f i c i a l s from advocacy agencies i n other states reported simi l a r
problems i n a t t r a c t i n g attorneys w i t h appropriate backgrounds. As a
r e s u l t , they tend to h i r e inexperienced attorneys and t r a i n them.
However, because RUCO has been unable to r e t a i n a core of experienced
attorneys, i t lacks the means to provide t r a i n i n g t o new s t a f f .
Furthermore, many of RUCO's attorneys have served too short a tenure to
develop a high l e v e l o f e x p e r t i s e i n public u t i l i t i e s r a t e r e g u l a t i o n .
SUNSET FACTORS
In accordance w i t h Arizona Revised Statutes 541- 2354, the Legislature
should consider the following 12 factors i n determining whether the
Residential U t i l i t y Consumer O f f i c e should be continued or terminated.
1 . The o b j e c t i v e and purpose i n e s t a b l i s h i n g RUCO
RUCO was established i n 1983 ( A. R. S. 540- 462) to represent the
i n t e r e s t s of r e s i d e n t i a l u t i l i t y consumers of regulated u t i l i t i e s i n
proceedings before the Arizona Corporation Commission ( ACC).
According to the act e s t a b l i s h i n g RUCO, the agency i s intended to
represent the i n t e r e s t s o f r e s i d e n t i a l consumers, c r i t i c a l l y analyze
proposals made by public service corporations to the ACC, and
formulate and present recommendations to the commission.
2. The effectiveness w i t h which RUCO has met i t s o b j e c t i v e and purpose
and the e f f i c i e n c y w i t h which RUCO has operated
RUCO a c t i v e l y intervenes i n matters i n v o l v i n g r e s i d e n t i a l u t i l i t y
consumers before the ACC, and has taken some steps to improve t h i s
intervention e f f o r t since the 1986 performance a u d i t . However, RUCO
could f u r t h e r improve i t s representation of r e s i d e n t i a l ratepayers.
Auditor General s t a f f reviewed 12 f i n a l decisions issued by the ACC
since 1986. The review showed that RUCO has been e f f e c t i v e i n
impacting commission decisions i n some cases. However, RUCO was not
e f f e c t i v e i n some instances due to inadequate evidence. RUCO's poor
selection and management of consultants have f u r t h e r hindered i t s
effectiveness. Some commissioners and ACC hearing o f f i c e r s and
s t a f f i n d i c a t e d t h a t RUCO's new d i r e c t o r appears t o be taking steps
to improve RUCO's effectiveness ( see Finding I , page 5 ) .
In a d d i t i o n , RUCO has taken some action toward strengthening i t s
legal w r i t i n g . During the 1986 a u d i t , we found that RUCO could make
i t s legal w r i t i n g more e f f e c t i v e and persuasive by improving the
organization, c l a r i t y , and conciseness of i t s legal documents.
According to RUCO's current d i r e c t o r , i t i s now a p o l i c y t h a t , when
time permits, RUCO's c h i e f counsel and/ or d i r e c t o r review a l l
w r i t t e n legal documents for e d i t i n g purposes. Furthermore, to
strengthen t h e i r s k i l l s , RUCO attorneys are sent to continuing legal
education seminars. Although we d i d not conduct a formal evaluation
of RUCO's legal w r i t i n g due to time c o n s t r a i n t s , RUCO appears to
have made some improvements i n t h i s area.
3. The extent to which RUCO has operated w i t h i n the p u b l i c i n t e r e s t
RUCO has operated w i t h i n the public i n t e r e s t by representing
r e s i d e n t i a l consumers i n rate cases before the ACC. The adoption of
RUCO proposals by the ACC has the e f f e c t of reducing r e s i d e n t i a l
u t i l i t y b i l l s below what they would have been i f RUCO had not
intervened. In a d d i t i o n , RUCO's i n t e r v e n t i o n can r e s u l t in
nonmonetary b e n e f i t s . For example, i n one case, RUG0 monitored a
u t i l i t y company's compliance w i t h energy conservation e f f o r t s .
4. The extent t o which r u l e s and regulations promulgated by RUCO are
consistent w i t h the l e g i s l a t i v e mandate
Although the d i r e c t o r has the s t a t u t o r y a u t h o r i t y t o promulgate
r u l e s , RUCO has not done so. Our review d i d not reveal the need for
RUCO to develop any r u l e s .
5. The extent to which RUCO has encouraged input from the p u b l i c before
promulgating i t s rules and regulations and the extent t o which i t
has informed the p u b l i c as to i t s actions and t h e i r expected impact
on the public
Since RUCO has chosen not to promulgate r u l e s , input from the public
has not been necessary. However, RUCO does attempt to keep
r e s i d e n t i a l u t i l i t y consumers aware of i t s actions through the
issuance of formal media releases and statements. Further, the
d i r e c t o r p a r t i c i p a t e s i n forums and addresses c i t i z e n s and community
groups' meetings upon request. In a d d i t i o n , RUCO posts notices of
monthly RUCO board meetings which are open to a l l members of the
pub1 i c . These a c t i v i t i e s provide r e s i d e n t i a l consumers w i t h an
opportunity to learn more about the u t i l i t y rate- making process and
to voice t h e i r concerns and problems regarding u t i l i t y services.
6. The extent to which RUCO has been able to i n v e s t i g a t e and resolve
complaints that are w i t h i n i t s j u r i s d i c t i o n
During the 1986 performance audit we found that RUCO was
investigating consumer complaints against u t i l i t i e s . However, we
found that RUCO d i d not have the s t a t u t o r y a u t h o r i t y t o i n v e s t i g a t e
complaints and recommended that RUCO discontinue handling such
complaints since i t i s not a r e g u l a t o r y agency. As a r e s u l t , RUCO
no longer investigates consumer complaints. Occasionally RUCO s t i l l
receives complaints from r e s i d e n t i a l consumers. When t h i s occurs,
RUCO refers these consumers to the ACC's Consumer Services D i v i s i o n .
7. The extent t o which the Attorney General or any o t h e r a p p l i c a b l e
agency o f State government has the a u t h o r i t y to prosecute actions
under the enabling l e g i s l a t i o n
This factor i s not applicable since RUCO i s not a regulatory
agency. Legal representation of the o f f i c e i n proceedings before
the ACC and the courts i s provided by RUCO's own s t a f f attorneys,
pursuant to A . R . S . 541- 192.
8. The extent to which RUCO has addressed d e f i c i e n c i e s i n i t s enabling
statutes which prevent i t from f u l f i l l i n g i t s s t a t u t o r y mandates
RUCO's d i r e c t o r noted RUCO's inabi l i t y to i n i t i a t e a case w i t h the
ACC concerning excessive u t i l i t y rates as a major deficiency i n i t s
enabling s t a t u t e s . RUCO unsuccessfully requested l e g i s l a t i o n i n the
1988 and 1989 l e g i s l a t i v e sessions which would have enabled RUCO to
f i l e such complaints w i t h the commission ( see Finding 1 1 , page 15).
9. The extent t o which changes are necessary i n the laws o f RUCO t o
adequately comply w i t h the factors l i s t e d i n the Sunset Law
Based on our audit work we recommend that the L e g i s l a t u r e consider
the following changes to RUCO's s t a t u t e s .
0 Amend A. R. S. 940- 464 to expand and c l a r i f y RUCO's a u t h o r i t y to
p a r t i c i p a t e i n any case before the ACC that may have the
p o t e n t i a l to impact r e s i d e n t i a l rates i n the future ( see Finding
1 1 , page 15).
a Amend A. R. S. 9940- 246 and 40- 464 to grant RUCO the a u t h o r i t y to
i n i t i a t e cases before the ACC ( see Finding I I , page 1 5 ) .
10. The extent t o which the termination of RUCO would s i g n i f i c a n t l y harm
the p u b l i c h e a l t h , s a f e t y or welfare
Termination of RUCO could have an impact on the welfare of
r e s i d e n t i a l u t i l i t y consumers. RUCO's r o l e i n the rate- making
process i s important. RUCO's i n t e r v e n t i o n has had some impact i n
lowering r e s i d e n t i a l u t i l i t y b i l l s . In a d d i t i o n , RUCO's presence i n
the process ensures that r e s i d e n t i a l ratepayers' i n t e r e s t s are
presented and thus enhances public acceptance of the commission's
f i n a l decisions. I f RUCO d i d not e x i s t , r e s i d e n t i a l ratepayers
would have l i m i t e d representation. Although other consumer groups
or the ACC s t a f f could provide representation f o r r e s i d e n t i a l
ratepayers, many of the consumer groups may not have the f i n a n c i a l
resources or technical expertise to present arguments i n complex
cases. ACC s t a f f must balance the i n t e r e s t s o f the u t i l i t i e s and
a l l classes of ratepayers and thus cannot be as a t t e n t i v e to
r e s i d e n t i a l consumer needs as can RUCO.
11. The extent t o which the level o f r e g u l a t i o n exercised by RUCO i s
appropriate and whether less or more s t r i n g e n t levels o f r e g u l a t i o n
would be appropriate
This factor does not apply to RUCO since i t i s not a regulatory
agency.
12. The extent to which RUCO has used p r i v a t e contractors i n the
performance of i t s duties and how e f f e c t i v e use o f p r i v a t e
contractors could be accomplished
RUCO has extensively used p r i v a t e contractors i n i t s case
intervention. RUCO contracts w i t h experts to analyze and t e s t i f y on
issues because expertise i n s p e c i f i c areas of u t i l i t y r e g u l a t i o n i s
necessary to adequate ly understand and invest i gate the i ssues. RUCO
has also contracted w i t h p r i v a t e attorneys for l e g a l representation,
although t h i s has h i s t o r i c a l l y been done only when RUG0 has
experienced s i g n i f i c a n t turnover of experienced s t a f f counsel ( see
Other Pertinent Informat ion,' page 2 3 ) .
RESIDENTIAL UTILITY CONSUMER BOARD
INTRODUCTION AND BACKGROUND
The O f f i c e o f t h e Auditor General has conducted a l i m i t e d review of the
Residential U t i l i t y Consumer Board i n response to a June 2, 1987,
r e s o l u t i o n of the J o i n t L e g i s l a t i v e Oversight Committee. This
performance audit was conducted as p a r t of the Sunset Review set f o r t h i n
Arizona Revised Statutes ( A. R. S.) $ 541- 2351 through 41- 2379.
The board was established i n conjunction w i t h the R e s i d e n t i a l U t i l i t y
Consumer O f f i c e ( RUCO) i n 1983. A. R. S. 540- 463 provides that the board
shall advise RUCO on a l l matters r e l a t i n g t o r a t e making or r a t e design
and i n v o l v i n g p u b l i c s e r v i c e c o r p o r a t i o n s . The board i s s t a t u t o r i l y
empowered to i n s t r u c t RUCO's d i r e c t o r to withdraw any court act ion f i led
by RUCO, and to prepare, j o i n t l y w i t h the d i r e c t o r , RUCO's proposed
annual budget request. I n addi t ion, the board may also advise the
Governor and L e g i s l a t u r e on matters r e l a t i n g to RUCO.
The board consists of f i v e members appointed by the Governor, who serve
staggered five- year terms. No more than two members may reside i n the
same county. In a d d i t i o n , no more than three members may be a f f i l i a t e d
with the same p o l i t i c a l p a r t y . The board i s required to meet a t least
monthly and, i n order to f a c i l i t a t e input from r e s i d e n t i a l consumers, has
met i n various p a r t s of the State. Members are e l i g i b l e to receive
compensation for each day of a c t u a l s e r v i c e on t h e board, pursuant to
A . R . S. $ 38- 611 . Board expendi tures f o r f i s c a l year 1988- 89 were
approximately $ 6,480.
Scope of Audit
The scope of our audit included a l i m i t e d review of the board's
operations and functions. Our major a u d i t o b j e c t i v e was t o respond to
sunset f a c t o r s set f o r t h i n A . R . S . $ 41- 2354. D.
This audit was conducted i n accordance w i t h generally accepted government
a u d i t i n g standards.
The Auditor General and s t a f f express a p p r e c i a t i o n to the Residential
U t i l i t y Consumer Board members for t h e i r cooperation during the a u d i t .
SUNSET FACTORS
In accordance w i t h A. R. S. 541- 2354, the L e g i s l a t u r e should consider the
following 12 factors i n determining whether the Residential U t i l i t y
Consumer Board should be continued or terminated.
The o b j e c t i v e and purpose i n e s t a b l i s h i n g the board
The Residential U t i l i t y Consumer Board was established to advise the
Residential U t i l i t y Consumer O f f i c e on a l l matters r e l a t i n g t o r a t e
making or rate design and i n v o l v i n g p u b l i c service corporations.
The board i s s t a t u t o r i l y empowered t o i n s t r u c t RUCO's d i r e c t o r to
withdraw any court action f i l e d by RUCO, and i s mandated to prepare
j o i n t l y w i t h the d i r e c t o r the proposed annual budget request for
RUCO. In a d d i t i o n , the board may advise the L e g i s l a t u r e and the
Governor on a l l matters r e l a t i n g to RUCO.
2. The effectiveness w i t h which the board has met i t s o b j e c t i v e and
purpose and the e f f i c i e n c y w i t h which the board has operated
The board has generally met i t s o b j e c t i v e and purpose. According to
RUCO's board, RUCO's s t a f f are sometimes required to make decisions
regarding rate cases without board input due to time constraints.
To keep members informed, RUCO s t a f f maintain contact w i t h the board
throughout the month regarding s i g n i f i c a n t issues. During monthly
meetings, the s t a f f updates the board as to actions taken on
s p e c i f i c rate cases. A t that time, the board i s given the
opportunity to discuss decisions and give advice as to further
act i on needed.
3. The extent t o which the board has operated w i t h i n the p u b l i c
i n t e r e s t
The board's p r i n c i p a l r o l e i s advising RUCO on matters of rate
making and rate design i n v o l v i n g the regulated u t i l i t i e s of
Arizona. To the extent that the board renders such advice, i t
functions w i t h i n the pub1 i c i n t e r e s t by promoting f a i r u t i l i t y rates
f o r r e s i d e n t i a l consumers. I t also provides RUCO w i t h input
regarding the concerns and problems of r e s i d e n t i a l u t i I i t y
consumers. In addition, the board has pursued issues beyond the
scope of rate hearings t h a t also impact residential consumers. For
instance, according to the board, two of i t s members served on two
task forces set up by and for a telephone company to survey services
and rates. Another board member assisted in the development of
L i f e l i n e l e g i s l a t i o n designed to help the economically disadvantaged
i n paying for telephone and e l e c t r i c a l service. On various
occasions the board members, acting e i t h e r i n d i v i d u a l l y or j o i n t l y
as the board, have contacted the Legislature, the Governor, and the
Arizona Corporation Commission on matters involving u t i l i t y
companies.
Our review of RUCO board meeting f i les for the period January 1988
through June 1989 indicated that the RUCO board complied with State
open meeting laws, A. R. S. 538- 431.
4. The extent to which rules and regulations promulgated by the board
are consistent with the l e g i s l a t i v e mandate
The board's r e s p o n s i b i l i t i e s do not include the promulgation of
rules and regulations.
5. The extent to which the board has encouraged input from the public
before promulgating i t s rules and regulations and the extent to
which i t has informed the public as to i t s actions and t h e i r
expected impact on the public
The board has not promulgated rules and regulations.
6. The extent to which the board has been able to investigate and
resolve complaints that are w i t h i n i t s j u r i s d i c t i o- n
The board has no a u t h o r i t y t o , and does not investigate residential
consumers complaints.
7. The extent to which the Attorney General or any other applicable
agency of State government has the authority to prosecute actions
under the enabling l e g i s l a t i o n
The purpose of t h i s board i s to act as an advisor to RUCO.
Therefore, i t has no regulatory a u t h o r i t y , and consequently, no
enforcement powers.
8. The extent to which the board has addressed deficiencies i n i t s
enabi ing statutes which prevent i t from f u l f i l I ing i t s statutory
mandates
According to the board, i t s enabling statutes have not been changed
since i t s creation in 1983. According to current board members,
board statutes do not need modification.
9. The extent to which changes are necessary i n the laws of the board
to adequately comply with the factors l i s t e d i n Sunset Law
Our review did not i d e n t i f y needed statutory changes.
10. The extent to which the termination of the board would s i g n i f i c a n t l y
harm the p u b l i c h e a l t h , safety o r welfare
Elimination of the board would not d i r e c t l y harm the pub1 i c health,
safety, or welfare. Essential l y , the board has very limited power,
i t s most s i g n i f i c a n t power i s that of i n s t r u c t i n g RUCO to withdraw
f i l e d court actions. Further, because RUCO and i t s director make
decisions autonomously from the board, they could function without
board oversight. However, RUCO's director and s t a f f have indicated
that board members provide valuable input and are an important link
between the community of residential consumers and RUCO. In
addition, because discussion of actions contemplated and taken by
RUCO occur at monthly board meetings, these meetings have been a
valuable forum for the dissemination of timely information to the
media, public, and u t i l i t y companies in attendance.
11. The extent to which the level of regulation exercised by the board
i s appropriate and whether less or more stringent levels of
regulation would be appropriate
This factor does not apply to the board as i t has no regulatory
authority .
12. The extent to which the board has used private contractors i n the
performance of i t s duties and how e f f e c t i v e use of private
contractors could be accomplished
The board has not used the services of private contractors.
RESIDENTIAL UTILITY CONSUMER OFFICE
34 WEST MONROE SUITE 512. PHOENIX. ARIZONA 85003 . ( 802) 255- 1431 . FAX: ( 802) 255- 1483
Rose Mofford
Governor
Douglas M. Brooks
Director
October 10,1989
Douglas R. Norton
Auditor General
2700 North Central Ave.
Suite 700
Phoenix, AZ 85004
Dear Mr. Norton:
Attached are the respective responses of the Residential Utility Consumer Office ( RUCO) and the
Residential Utility Consumer Board ( Board) to the Performance Audit conducted by your Office.
We are pleased by your finding that RUCO has an important role to play in the regulatory process and
has been effective in fulfilling its mission of representing the interests of residential consumers in
utility- related matters before the Corporation Commission. We are especially heartened by your
finding that statutory changes are needed to enhance RUCO's ability to adequately represent
ratepayers, a position advocated by the Board and all of the Directors that RUCO has had.
With regard to the specific recommendations presented in the Report, RUCO and the Board accept
RthUosCe Om ahdaes ianl rceoandjyu nicmtipolne mweitnht eFdi ntdhien gr eIc oamndm eennddoartsioen tsh omsea dme awdei thin rceognajrudn ctoti otnh ew iqthu aFliitnyd ionB i1t1s.
presentations. RUCO and the Board believe that, with more attention paid to the quality of its
presentations and the selection and management of its consultants, RUCO will be an even more
effective advocate for Arizona's residential consumers.
Those items with which RUCO takes issue are discussed in the formal responses.
Thank you for the opportunity to respond to the Audit Report, and for the professional and objective
manner in which the audit was performed.
Very truly yours,
Douglas M. Brooks
Director
attachments
RESPONSE OF THE RESIDENTIAL UTILITY CONSUMER OFFICE ( RUCO)
FINDING I: ADDITIONAL EFFORTS ARE NEEDED TO IMPROVE RUCO'S
REPRESENTATION OF RESIDENTIAL UTILITY CONSUMERS.
While it is true that in some cases the preparation and presentation of issues and
recommendations by RUCO witnesses were not adequate, RUCO believes that its efforts have had a
positive effect on utility regulation and the rates paid by utility customers. The Audit Report
acknowledges the positive role RUCO has played and the contributions RUCO has made, and
presents cases illustrative of RUCO's effectiveness. RUCO acknowledges however that the
consistency of RUC07s work can be improved over what it has been in the past, and to this end has
initiated better training and supervision of RUCO staff and has emphasized the hiring of experienced
and better qualified individuals for staff positions.
While a majority of the specific examples of inadequate presentations or poor use of
consultants are accurate, RUCO believes that two are not. The first is that the criticism of RUCO's
presentation on the decommissioning cost issue fails to reflect the complexity and detail that went into
the witness7 recommendations. The Audit Report does not disclose that RUCO's witness levied
substantive criticisms against the decommissioning cost estimates of APS, which the witness felt were
unrealistically low. RUCO's witness brought forth examples of where the APS witness had in the past
underestimated the costs of decommissioning and had to revise his estimates upward. This is
important because the failure of an electric utility to collect sufficient funds over the life of a nuclear
plant to pay for its decommissioning will result in the utility having to raise significant funds from the
capital market at very high rates to pay the decommissioning bill. To the extent that the Commission's
discussion of this issue in its Opinion and Order failed to reflect the extensive criticism levied by
RUCO against APS' analysis, it did not accurately describe the sophistication of the RUCO witness'
analysis.
Further, the criticized argument was an integral part of RUCO's overall analysis of the
economics of Pa10 Verde. This analysis is centered on the finding that the current generation of
nuclear power plants, including Palo Verde, are uneconomic and will continue through their lives to
be more costly to ratepayers than reasonable alternatives. RUCO has recommended that, as a result
of these very high costs, as well as planning mistakes made by APS, significant amounts of the costs of
Palo Verde should not be passed through to ratepayers through higher rates. The rapidly increasing
estimates of the costs of decommissioning nuclear power plants is an important component of the
calculations of the lifetime cost of Palo Verde and determining that those costs are excessive.
RUCO also disagrees with the criticism expressed regarding RUCO's presentation of the
operation and maintenance ( 0 & M) expense issue in APS' Palo Verde 2 rate case. RUCO believes
that the ACC's decision oversimplified the analysis done by the witness in proposing his $ 11.4 million
adjustment. The witness found that some of the figures reported by APS for 0 & M expense levels
for particular kinds of generating stations were unusual when compared to industry averages. He
sought to correct the aberrant numbers by using figures recommended in a technical guide published
by the Electric Power Research Institute, a utility industry group. This adjustment was rejected by the
Commission, which apparently felt that industry average figures was too far removed in this instance
from the specifics of APS' experience. The Audit Report relies on the ACC's decision and its
characterization of the witness' analysis for the criticism of RUCO for failing to develop adequate
evidence. In so doing, however, the Audit Report accepts without question the Commission's opinion,
which of course is not always the same as RUCO's. RUCO believes that its witness brought to the
Commission's attention a very real discrepancy in APS's reported data and presented a well- supported
methodology for recasting APS numbers in a " closer- to- average" light. In addition, RUCO feels that
the Audit Report's discussion of this issue downplays the significance of the 0 & M adjustment that
was accepted by the Commission. By this adjustment the witness saved APS ratepayers $ 1.85 million
per year.
RUCO acknowledges that in some cases its oversight of the work of consultants has been less
than thorough. We agree that the quality of RUCO's representation of residential utility consumers
- 2-
suffers when this occurs. RUCO has therefore tightened up its contracts with outside experts to
require that witnesses must provide preliminary drafts of their testimony in time for RUCO to review
the drafts and correct errors before testimony is filed. RUCO is also more aggressive with regard to
maintaining contact with its consultants during the course of their work to ensure that they will
produce drafts of testimony in a timely fashion. In addition, RUCO now more extensively scrutinizes
the backgrounds of bidders before awarding a contract for expert witness services through a careful
review of bidders7 past work for quality and potential incompatibility with RUCO positions. RUCO
believes that these efforts will improve the quality of its performance, and is gratified that, according
to the Audit Report, other parties have noticed an improvement.
The Audit Report discusses only three instances in which RUC07s selection and supervision of
consultants were deficient. It is relevant to note that during the period covered by this audit ( roughly
FY's 87, 88 and 89) RUCO entered into and managed approximately 35 contracts for expert witness
services. While the Auditor General was unable in the course of its audit to review each and every
case in which RUCO used consultants, RUCO believes that it successfully utilized consultants in a
significant number of cases.
With regard to the specific recommendations presented by the Audit Report in conjunction
with this finding, RUCO accepts both sets of recommendations and has in fact begun their 0
implementation.
FINDING 11: STATUTORY CHANGES ARE REQUIRED TO ENSURE
RUCO'S ABILITY TO ADEQUATELY REPRESENT RESIDENTIAL RATEPAYERS
( I
RUCO agrees with the Audit Report's finding that the Office needs expanded statutory
authority for it to adequately represent the interests of residential consumers. We believe that the
adoption by the Legislature of both of the recommendations made in conjunction with this finding will
enable RUCO to more efficiently and effectively carry out its mission.
RUCO agrees with the Audit Report's recommendation that RUCO's authority to intervene in
any case which could impact residential utility rates be made clear. Utility companies, particularly
those in the electric industry, have been aggressive in attempting to keep RUCO from participating in
non- rate change cases that had the potential to significantly affect residential rates. The most
egregious examples are discussed in the Audit Report. RUCO and the consumers it represents have
been fortunate in having a Commission that believes the current statute can be interpreted broadly
enough to allow RUCO's intervention in those types of cases. Should the Commission change
however, or should a utility appeal the granting of RUCO's intervention in a non- rate change case to
I) the courts, RUCO runs the risk of having its statute interpreted and applied in a more restrictive way.
In the future many issues of great significance to the state's regulated utilities and their
customers will be heard and decided by the ACC in non- rate case settings. The types of cases listed on
page 16 of the Audit Report are just a sample of the new and different procedural settings in which
important issues will be raised and resolved in the future. RUCO will need to be involved in each of
them, and the statutes should make clear RUCO's ability to intervene in them.
RUCO is also concerned that its inability to bring to the Commission formal complaints
regarding excessive utility rates is a severe constraint on its ability to fulfill its statutory mandate.
RUCO was established to provide full- time, professional representation for residential consumers,
0 but without the authority to initiate proceedings, RUCO must rely upon others to bring formal action
against utilities who are overearning. Thus RUCO is reduced to waiting upon others whose agendas,
priorities and interests could be different from its own.
Similarly, the inability to file excessive earnings complaints can render RUCO a mere
spectator in settlement negotiations of excessive rate investigations. Every other party has the ability,
either by itself or in concert with others, to bring to the bargaining table the club of filing their own
- 4-
complaint regarding excessive rates. RUCO alone cannot do this. And, as the Audit Report reflects,
a survey undertaken by RUCO was unable to identify any other utility consumer advocacy agency in 0
another state that does not possess the power to initiate proceedings with its state utility commission.
RUCO urges the Legislature to take affirmative action with respect to the Audit Report's
recommendations regarding RUC07s powers. The result will be seen in more effective representation
of residential consumers.
OTHER PERTINENT INFORMATION:
STAFF TURNOVER AND ADEQUACY OF ATTORNEYS7 QUALIFICATIONS
RUCO appreciates the discussion found in this section of the Audit Report and believes it
( I
points to very real problems that RUCO has and will continue to experience. RUCO agrees that
turnover of directors and attorneys can cause difficulty for the agency, but does not believe that it can
be resolved in the context of a report such as this.
The discussion of the adequacy of attorneys7 qualifications is important, in that RUC07s
attorneys play such a vital role in presenting RUC07s positions to the ACC and the courts. RUCO
agrees with the Audit Report's conclusions regarding the causes for RUCO's problems in attracting
( I
and retaining qualified attorneys, and hopes that current efforts at increasing the quality and
professionalism of RUCO's work product will improve the image RUCO projects in the legal
community. RUCO also agrees that the inability of the State to offer attorneys salaries that are
0
competitive with the private sector has hurt its recruitment effort, and notes that RUCO itself appears
to lack competitiveness with other state agencies, particularly the Attorney General's Office and the
Corporation Commission, in the salaries it has actually been able to offer and pay.
Despite RUCO's agreement with this part of the Audit Report, it believes that two statements
made in this section require clarification. The first of these statements is that an entry level attorney
went without supervision for two and a half months due to difficulties encountered in hiring
supervisory attorneys. While RUCO agrees that for a period of time the entry level attorney was the
only attorney on staff, the period was only slightly more than one month ( from April 4th to May 15th).
In addition, the statement that an entry level attorney received little or no supervision for that period
of time is not entirely correct. The attorney represented RUCO in two proceedings during the time in
I, question with supervision and guidance from RUC07s Director, who, while not licensed to practice
law in this State, is licensed in another jurisdiction and has been actively engaged in practicing law
before a state utility commission for six years. Experienced staff personnel also assisted the new
I) attorney in dealing with the technical issues raised in the cases. The time in which the attorney did not
have direct supervision from a supervisory attorney was caused by the abrupt resignation of a staff
attorney and the difficulty, documented by the Audit Report, that the Director encountered in finding
I) and hiring an experienced Chief Counsel.
The report also states that RUCO lacks the means to provide training to new legal staff. While
RUCO acknowledges that an experienced in- house legal staff is the best source of education and
I, training for a new attorney, the Office ensures that new attorneys, as well as new technical staff
employees, receive training through attendance at two educational conferences designed for new
utility regulatory personnel. Education is an important part of the training of a new attorney, and
I) RUCO's policy is to send new attorneys to these programs within their first year of employment.
RESPONSE OF THE RESIDENTIAL UTILITY CONSUMER BOARD
The Residential Utility Consumer Board ( Board) agrees with the Audit Report's discussion of
the Board. We believe the Board serves a valuable purpose and should be continued, along with the
Residential Utility Consumer Office ( RUCO). While we recognize that the Auditor General's review •
of the Board was limited in nature, we believe it accurately sets forth the role the Board plays in
providing a link between RUCO and the community and functioning as a means of transmitting
consumer concerns. In addition members of the Board, both as a group and individually, work on ( I
behalf of residential utility consumers as members of task forces and other groups involved in
improving the provision of affordable utility services.
The Board has reviewed the findings and recommendations of the Auditor General with a
regard to RUCO, and concurs with the response provided by RUCO. We believe it should be
emphasized that the examples of poor development of evidence and the use of consultants cited in the
Audit Report took place before the current RUCO Director was hired. We are confident that RUCO
will continue to make improvements in its work, as recognized in the Audit Report, and that RUCO
will continue to be an effective representative of residential consumers' interests.
We heartily endorse the Auditor General's recommendation that RUCO's enabling statutes be
amended to: ( 1) expand RUCO's authority to participate in any case which could ultimately impact
residential utility rates; and, ( 2) grant RUCO the authority to initiate rate cases before the
Corporation Commission. The need for these changes are ably documented in the Audit Report, and ( I
it should be naoted that the Board has endorsed and worked for the passage of legislation that would
have granted RUCO the power to file complaints. We urge the Legislature to adopt the Auditor
General's recommendations when extending the statutory mandate of RUCO. 4
APPEND l X
Case Evaluation Methodology
In determining RUCO's e f f e c t i v e n e s s , we reviewed a p r i o r performance
audit report and analyzed a sample of cases i n which RUCO intervened. In
1986, Auditor General s t a f f conducted a performance a u d i t of RUCO. We
found t h a t , although RUCO had been e f f e c t i v e i n some cases, inadequate
evidence and preparation resulted i n RUCO's having l i t t l e impact i n many
cases. Following the 1986 r e p o r t , the L e g i s l a t u r e continued RUCO for
four years. During the current a u d i t , we reviewed RUCO's work and
operat ions since the previous a u d i t to determine i f f u r t h e r improvements
are needed at RUCO. As a part of our review, we analyzed 12 opinions and
orders for cases i n which RUCO intervened to determine RUCO's level of
effectiveness i n rate cases and to i d e n t i f y areas for improvement. ( 1 )
We defined our sample of cases by reviewing the cases i n which RUCO
intervened, and had been resolved, from January 1987 through May 1989.
During t h i s time, RUCO documents showed that RUCO was involved i n 36 cases
which resulted i n 55 opinion and orders. A l i s t i n g of these cases
and r e s u l t i n g orders was reviewed w i t h Arizona Corporation Commission ( ACC)
members, hearing o f f i c e r s , and s t a f f , u t i l i t y company representatives, and
RUG0 s t a f f . S p e c i f i c a l l y , we asked each party to i d e n t i f y cases i n which
RUCO had been very e f f e c t i v e and cases i n which RUCO had not been
At the conclusion of a hearing, the hearing o f f i c e r w r i t e s a recommended opinion
and order. The u t i l i t y company, ACC s t a f f , and intervenors may f i l e exceptions t o
the hearing o f f i c e r ' s recommended opinion and order. The commissioners decide
whether t o adopt the recommended opinion and order as w r i t t e n or t o modify i t . The
document d e t a i l i ng the commissioners' f i n a l decision i s c a l l e d an opinion and order.
( 2 ) However, RUCO may not have been involved i n a l l of these cases and opinions and
orders. Some may have been the r e s u l t of s t i p u l a t i o n s i n which RUCO may not have
been involved. I n a d d i t i o n , some opinion and orders were the r e s u l t o f ACC e f f o r t s
to consolidate two or more cases.
e f f e c t i v e . Most of the cases we analyzed were those which generated the
greatest consensus among the p a r t i e s interviewed.
Our analysis consisted o f reviewing the opinions and orders, case legal
f i l i n g s , and hearing t r a n s c r i p t s , and interviewing ACC hearing o f f i c e r s
and s t a f f , and representatives from other consumer groups involved with
the cases.