Controversial proposed Arizona legislation would impose limits on the authority of the state's elected utility regulators and make their recent groundbreaking zero-emissions mandate unconstitutional.

Senate Bill 1175 expresses longstanding concerns from some lawmakers regarding overreach by the elected Arizona Corporation Commission (ACC), stakeholders agreed. But those concerns were aggravated by the ACC's November approval of draft energy rules that included a zero emissions by 2050 mandate for electric utilities in the state, seen by some as an attempt to reverse the 2018 defeat of Proposition 127 and its 50% renewables by 2030 mandate.

Legislators are following Republican Gov. Doug Ducey's lead in attempting to amend Arizona law and prevent ACC from using its constitutional power to set "critical energy generation" policy.

"I want to see the corporation commission setting rates and the legislature setting energy policy and I hope that will be straightened out in this session," Ducey told the Arizona Chamber of Commerce Jan. 15.

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"National and international businesses are looking to locate in places with clean energy and our leaders are taking Arizona out of the running for those opportunities."

Court Rich

Senior Partner and Co-Founder, Rose Law Group

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The ACC voted 4-1 Nov. 13 to approve its draft rules. Three Republicans and one Democrats voted in favor, with only Republican Commissioner Justin Olson voting against. But the debate over SB 1175 has turned highly partisan, and opponents believe its inception was driven largely by that November vote.

The legislation "seems to be about the clean energy rules and not the constitutional issue because it is suspiciously retroactive to June 30, just before ACC staff filed the rules in July," said Democratic Sen. Kirsten Engel, who is leading opposition to the legislation. "And I have not been impressed by Republican bill supporters' constitutional arguments, which seem really about opposition to the clean energy rules."

The 2050 mandate can grow Arizona's economy and jobs, many in the business community say, but advocates for SB 1175 say the rules could raise electricity rates. The bill debate, however, centers on interpretations of constitutional law, and the final word may come from Arizona's Supreme Court after a long legal battle, both sides acknowledged.

Why Arizona? Why now?

In the U.S., only 11 states, including Arizona, have elected regulators and independent commissions like the ACC, according to Balletopedia. And New Mexico's 2020 constitutional amendment will shift its commission to governor-appointed after 2022. The remaining 39 states' regulators are appointed by the governor or the legislature.

The ACC's constitutional independence has allowed it to drive many kinds of energy initiatives. The 2006 Renewable Energy Standard and Tariff (REST) mandating 15% of each regulated utility's annual energy sales come from eligible renewable resources by 2025 led to a landmark legal challenge.  

The fundamental question then, as now, is whether imposing mandates on Arizona's regulated utilities falls under commission authority. Litigation over REST was settled in 2011 by the Arizona Court of Appeals' Miller v. ACC decision, which concluded that the ACC's "ratemaking authority under the Arizona Constitution" allowed approval of the REST rules.

The ACC's update of REST rules (Docket RU-00000A-18-0284) assumed ACC authority under the Miller ruling, advocates said. The rules would require regulated utilities to reduce greenhouse gas emissions 50% below 2016-2018 levels by 2032 and 100% by 2050. It would also require regulated utilities to use energy efficiency to meet 35% of 2020 peak demand by 2030.

"Studies show the new energy rules are good for business, jobs and cleaning our air," said Rose Law Group Senior Partner and Co-Founder Court Rich, a Republican who represents renewables sector companies. "National and international businesses are looking to locate in places with clean energy and our leaders are taking Arizona out of the running for those opportunities."

The new draft rules had been public less than two months when SB 1175 (and its companion House Bill 2248) were introduced in January. They would amend Arizona law to prevent the ACC, retroactive to June 30, 2020, from adopting or enforcing "a policy decision or rule" on "critical" generation "without express legislative authorization."

Energy is "necessary to ensure the public's health and safety," the bills state. But their language is less about energy than about the specific question of ACC constitutional authority now before lawmakers, bill opponents said.

The question before lawmakers

The debate essentially revolves around whether a 2020 Supreme Court decision reversed assumptions about ACC authority over energy policy established by the 2011 Miller decision.

The Arizona Supreme Court's July 31 Johnson Utilities v. ACC Arizona decision was about the ACC's authority, but not on energy policy. The court decided it was necessary and appropriate for the ACC to appoint a temporary manager for Johnson Utilities to protect the utility's customers from discovered mismanagement.

Constitutionally, the ACC's ratemaking authority has not been disputed. Regulators also have a more complicated "permissive" authority that allows some, but not all, action, the Johnson decision found. But neither authority "divests the legislature of its police power to protect the health, safety, and welfare of the public" on energy policy or other matters, it added. 

Opponents of the 2050 mandate want Johnson to displace Miller as precedent on the ACC's authority. Johnson "raises doubts about the Commission's authority to enact the proposed rules" because its ruling brought into question conclusions in the Miller decision, Commissioner Justin Olson wrote in his Jan. 22 docket filing, opposing the proposed energy rules.

Current Supreme Court Justice Clint Bolick was vice president for litigation with Arizona's Goldwater Institute during its unsuccessful Miller challenge. In the Johnson decision, he concurred with "the majority's analysis of the Commission's ratemaking powers," but dissented on other parts of the decision, regarding ACC permissive authority as "overly expansive."

This partial dissent opened the door to replacing Miller as governing precedent, Goldwater Institute Director of National Litigation John Riches told a Jan. 27 Senate committee hearing on Senate Bill 1175. By offering a different perspective on ACC authority, Johnson showed that the proposed bill calls for a more "proper exercise of the legislature's police powers" on the energy rules under ACC permissive authority, Riches said.

Arizona's constitution allows ACC ratemaking, he agreed. If, however, "there is a conflict between a commission rule and a legislative statute unrelated to ratemaking, the statute prevails."

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"I support Governor Ducey, but we have the constitutional authority to continue business as usual and move the energy rules forward."

Lea Marquez Peterson

Chair, Arizona Corporation Commission

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But Arizona's Supreme Court did not say in Johnson that energy mandates are outside ACC ratemaking authority, Western Resource Advocates (WRA) Arizona Government Affairs Manager Autumn Johnson said in Senate testimony.

And the ACC's "permissive authority is not delegated to it by the legislature but is conferred by the Constitution," she added.

Lawmakers can only act to override a proposed ACC policy if ACC and legislative energy policy are in conflict and within the legislature's police power over public health and safety, she said. That is not the case here, she added.

The authority of lawmakers aside, the companion bills are still working their way through the legislature.

SB 1175 was approved by the Senate Natural Resources, Energy and Water Committee Jan. 27 but is being held for further debate in the Senate Rules Committee. HB 2248 was passed by the House Natural Resources, Energy and Water Committee Jan. 26. It was temporarily delayed Feb. 1 when House Rules Committee Attorney Tim Fleming found the legislation to be "constitutionally doubtful."

The Johnson decision found "the legislature has police power and final say to protect health and safety in an energy policy conflict," he agreed. But it did not put "a blanket prohibition" on action by the commission. Despite Fleming's argument, the House Rules committee sent the bill to the floor on Feb. 9 and it could come up for debate as soon as Feb. 10.

The question of the bill's constitutionality and the Senate's inaction leave the future of the bill in doubt. But if the House approves it and Senate action follows, it would eliminate the zero-carbon mandate and threaten the ACC's authority.

Outcomes

If supporters do not find a way around Fleming's conclusions, the outcome may be the legislation being dropped or not passing, stakeholders acknowledged.

Republicans hold the majority in the House and Senate by just two votes, and there are divisions in the Republican party over COVID-19 and the certification of the state's 2020 Presidential election results, WRA's Johnson said. The bills could fail if Democrats remain united and if moderate, pro-business Republicans decide to support the ACC proposal.

The high likelihood of passage after the bills moved quickly through committees in both houses is now only 50-50, advocates and opponents agreed. "We are hopeful because the proposal is bad for Arizona's economy, but we are prepared for the worst," said Advanced Energy Economy Policy Principal Shelby Stults. "Preliminary indications are that Governor Ducey will sign it."

But the governor "should think about what Arizona can gain from clean energy," Sen. Engel said. "As he sees businesses become aware of the investments this bill could stop, he may have less enthusiasm for signing it."

The next step toward a zero carbon requirement for Arizona's electric utilities is a proposed final version of the energy rules from an administrative law judge. If the commission approves it, official certification by the attorney general and/or the secretary of state would take 60 days to 120 days.

If the legislation passes, bill proponents will use it to challenge the rules' constitutionality in court, stakeholders on both sides agreed. But if new ACC Chair Lea Marquez Peterson wants to avoid that court battle, it is within commission procedure for her to not call a final commission vote. In that case, the rules would expire after 120 days.

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"I believe in limited government and I would not be surprised if some at the legislature agree that these rules overturn the voters' will."

Justin Olson

Arizona Corporation Commissioner

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Marquez Peterson voted for the draft rules as a commissioner, when she had support from outgoing Republican Commissioners Robert Burns and Boyd Dunn. But now she is the decisive vote because Republicans Olson and Jim O'Connor oppose the new rules and Democrats Sandra Kennedy and Ana Tovar support them.

"I proposed the zero-carbon emissions mandate because it was important that we be technology neutral, not choose winners or losers, and focus on emissions," she said. "I support Governor Ducey, but we have the constitutional authority to continue business as usual and move the energy rules forward."

Nobody likes costly, time consuming legal challenges, "but the Supreme Court may be the best route to clarity," she added. "I want to ensure we're not violating the law."

The ACC "is a separate branch of government," said former ACC Chair Kristin Mayes, who faced similar pressure from opponents of the 2006 renewable energy standards and won in court with the Miller decision. "The commission should go about its business, finish the rules, ignore the legislation as unconstitutional, and let somebody sue."

Commissioner Olson disagreed.

The energy rules should not go forward, he said. "Arizona voters spoke loudly and clearly with a 68.6% vote in 2018 rejecting a 50% renewable energy by [2030] mandate on our utilities because of concerns about driving up rates. I believe in limited government and I would not be surprised if some at the legislature agree that these rules overturn the voters' will," he said.

Last year's Johnson ruling made it clear the Supreme Court "has a much narrower view of the commission's role than prior courts," he added. "I wouldn't presume to prognosticate, but the message in Johnson was clear and the voters' will is another key factor."

The current legislation has been slowed, but more bills are coming that could impede approval of the ACC's proposed rules, unfairly disadvantage clean resources, or impose unreasonable fines on the commission, WRA's Johnson said. "This 'death by a thousand cuts' seems to be about intimidating the commission and whether it will work is the question of the hour."

Concerns with ACC authority is not intimidation, Commissioner Olson responded. "This is an appropriate check on the commission's recent effort to broaden its scope beyond its constitutional authority. The House and Senate check each other, the Governor checks both, they check the Governor, and the courts check them all. That is how most public policy should be done."

But Chair Marquez Peterson seems determined to proceed with the new rules.

It does seem "there is a lot more attention on ACC authority this year," she said. "I'm concerned about any uncertainty for potential investors or industry groups that it might create, but Arizona is still embracing innovation and the commission is still moving forward with business as usual on the energy rules."