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Posted Jul 10, 2012, 10:12 am

Jon Talton Rogue Columnist

You might be tempted to pass on a story in Sunday's Arizona Republic with the process-y headline, "Case Asks Who Must Pay Taxes for Utility." Don't.

Ably reported by Ryan Randazzo, the article lays out a controversy in Sun Lakes. The small company that provides water for the "active living retirement community" wants a rate increase of about $6 a month from residents, the first such hike since 1994. Sounds reasonable. But it wants more: "About 40 percent of the increase would pay the utility owners' income taxes." The Residential Utility Consumer Office contends that the water company's "shareholders might have other business interests that lose money, and if they combine the tax credits of those operations with the tax liability from the water utility, they might not pay taxes at all, even though the customers would be paying a 'phantom tax.' 'When this happens, this is essentially free money for the shareholders paid by the ratepayers who receive no benefit from these payments,' RUCO wrote in a brief for the case."

This is about more than Sun Lakes. My sympathy is limited for people who want to buy houses in a leapfrogged, 98-percent white development with streets named after Michigan, Minnesota and Indiana, profaning our desert. But the case is a rare window into how power and influence work in the state. Power, especially, at what insiders call "the fourth branch of government," the Arizona Corporation Commission.

Outlanders, and even many natives, assume it is simply a public utilities commission. It appears in the news rarely, and when it does the coverage is limited to a utility rate increase. Yet the commission is so much more. Established in the Progressive Era state constitution, the ACC was intended as an independent check and regulator on businesses that affect the common good. At the time, that especially meant railroads. But its powers are much more far-reaching, ranging from securities to pipeline safety. When I was licensed as an emergency medical technician back in the 1970s, the regulatory agency wasn't the health department but the ACC. More importantly, the five elected commissioners are not merely regulators. They act in executive, legislative and judicial capacities. This is a tremendous amount of largely unaccountable power vested in one body that is rarely covered by the media. And needless to say, it long ago was co-opted by the powerful interests it was established to oversee.

The Sun Lakes case, which almost sneaked in without any coverage, is an instructive example. Sun Lakes was begun 40 years ago by Ed Robson, a hard-scrabble, old-school Arizona developer. When we would run ambulance calls there in the late '70s, it was far away and bleak. Now metro sprawl has reached it. Robson and his family own Pima Water Co., the monopoly that supplies Sun Lakes. If the case is decided in his favor, he will have essentially found a way to charge his own personal salary, profits and personal income taxes to his customers through the arcane rate-making process of the Arizona Corporation Commission. It's also a neat bit of estate planning for his family. You can say the boobs from the Midwest deserve it. But it would also reverse long-standing commission rules and have wide-ranging implications.

If I read the briefs and testimony correctly, Robson has come well-armed. For example, Mark Spitzer testified for approving Robson's request. Spitzer is a former commissioner himself (and served as chairman), as well as a former state senator and Bush appointee to the Federal Energy Regulatory Commission. In January, he joined the well-connected law firm of Steptoe & Johnson. There's nothing necessarily unseemly about this. Spitzer is a nice guy. But the Sun Lakes customers can't nearly match such high-profile lobbying firepower.

If Robson succeeds, the precedent will be used by developer/monopoly water providers around the state to get richer. If you live within the Salt River Project, good for you. But Arizona has some 200 small, private water companies. They are already "lightly regulated," to put it nicely. The state's water ownership is full of complexity and intrigue. The developer-connected water companies (the Johnson interests come to mind) know how to work the system with "ins" that the rest of us don't have. And the broader consequences for land use, water resources and sustainability are swept under a very crowded rug.

Thanks to air conditioning, Arizona leapfrog retirement developments made some people very rich in the second half of the 20th century. They were able to unload the externalities, such a traffic congestion, inadequate infrastructure, pollution, disrupted ecosystems, loss of farm land and the local heat island, onto the public. Most of those costs have still not been paid (e.g. the disaster along Hunt Highway). In some cases, freeways, flood control and wider highways were publicly financed to make otherwise worthless land valuable to well-connected players, no matter the damaging effect to the public good.

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It's an open question whether the Ponzi scheme can return after the Great Recession. Too many in the target demographic were financially ruined. Debt and leverage is heavy for the Real Estate Industrial Complex. Tastes are changing, too, with many baby boomers seeking "active retirement living" in vibrant cities. At least a stopgap measure for the players who survived the crash would be padding profits from the captive audience of house buyers at existing developments, such as Sun Lakes, by changing the rules. In theory, if you clone the retirement "community" model to many locations, as well as ownership of the utility companies serving those developments, and finally you get house owners to pay your salaries and income taxes on a continuing and forward basis, this is nearly a no-cost business model that would accrue to the developer and his family for generations. This is not the "free market," but a market fixed by public policy, set by an obscure governmental entity of great and quiet power.

It's a model that requires the right influence. The ordinary small-business owner needn't apply.

The Robson case is unique in its sweep. But the problem of accountability is widespread. Readers regularly send me complaints about little-known water companies tied to developers (some to very big developers) and the favorable treatment they receive on rates and mergers. One customer wrote, "We have communicated with the five ACC Commissioners about these issues and have participated as a community in the rule-making processes. Throughout the years I have been struck by the non-responsiveness of the ACC Commissioners (except one) and the insulated role they occupy." Phrases such as "the fix was in" and "behind-the-scenes deal" are common.

The commission is holding a hearing on the Robson case 10 a.m. Tuesday at the Sun Lakes Country Club's Navajo Room, 25601 N. Sun Lakes Blvd. Yes, Arizonans should vote in greater numbers, paying more attention to the ACC. But we also need a press that is a consistent watchdog over the fourth branch of government, the commissioners and the many ways the system can be gamed.