PHOENIX — A state regulator is taking the first steps to possibly kill a special tax break that was pushed through years ago by a now-indicted member of the Arizona Corporation Commission.
Andy Tobin wants his colleagues on the current commission to tell affected companies to immediately start putting the additional money they’re collecting from customers into an interest-bearing account, according to documents filed late Friday. In the interim, he said regulators will review the policy change enacted at the behest of Gary Pierce.
One of the companies that benefits is Johnson Utilities, the manager of which the federal indictment handed up last month says bribed Pierce to push for the change. Also indicted was Pierce’s wife, who the indictment says got more than $31,000 from George H. Johnson for minimal consulting work, and lobbyist Jim Norton who the indictment says acted as a go-between.
Tobin said having the money segregated will give the current commission members a chance to review the 2013 policy change to see if it really makes sense. The panel could vote to reverse the policy and, presumably, order a refund of the excess revenues.
The issue involves companies organized as “S-corporations” or as limited-liability companies.
In both cases, the companies have no earnings themselves, with those revenues passed through to the owners. And it is the owners who pay taxes on those earnings.
By contrast, “C-corporations” report and pay their own taxes. The commission policy has long been to allow those corporations to deduct those tax payments as an expense, essentially having the cost passed on to customers.
The change Pierce proposed — and the commission approved on a 4-1 vote — allowed the individual owners of the C-corporations and LLCs to charge their own personal income tax liability from those earnings to consumers.
One of the things Tobin told Capitol Media Services he wants to do as part of the investigation is speak to those who were on the commission at the time of the vote.
Of particular interest, he said, is the lone “no” vote by Brenda Burns.
“It was a change in policy,” Tobin said, saying he wants to find out what caused the shift.
The commission’s documents show only her dissent. But the indictment quotes her as saying the change “is neither justifiable nor good public policy.”
She could not be reached for comment.
But Bob Burns, who was a commissioner then as now, said the change was justified.
“It was a fairness argument,” he said, given how C-corporations can charge their taxes to customers. And Burns said he looked at this in the context of the commission’s role in setting rates for regulated monopolies like utilities.
“A regulated business is a cost-recovery business,” he said.
“I read it as taxes being part of the cost to do business,” Burns continued. And the record showed that smaller water companies were unable to earn the full return on equity authorized by the commission because of the tax costs, he said.
Burns said he supports Tobin’s desire to review the prior decisions of the commission. But he thinks it should go beyond that 2013 vote to what he called the “related area” of spending by outsiders, including Arizona Public Service and parent company Pinnacle West Capital Corp., on the 2014 election.
The connection, he said, is no stretch.
Pierce himself told Capitol Media Services last year that when the FBI came to talk with him, it was about the 2014 election.
That’s the one where two groups that won’t disclose the names of their donors put $3.2 million into the race to elect Republicans Tom Forese and Doug Little. That’s also been the focus of efforts by Burns — unsuccessful to date — to get Arizona Public Service and parent Pinnacle West to disclose what they spent on the race and whether they were the source of any of that cash.
And there are other connections.
The federal probe appears to have been as an outgrowth of an investigation originally started with the state Attorney General’s Office.
That included allegations that Pierce, while on the commission, had met secretly with Don Brandt, the CEO of Pinnacle West, and Don Robinson, his predecessor, while the utility was in the middle of a rate case before the regulatory agency. These were laid out in a letter from a “whistleblower,” later identified as a former commission staffer, to Attorney General Mark Brnovich and others.
That state investigation also was looking into the role that Scot Mussi, head of the Free Enterprise Club, played in the 2014 Republican primary race for secretary of state.
Mussi’s organization spent more than $500,000 on behalf of Justin Pierce, Gary’s son, who lost the primary election to Michele Reagan.
Wil Cardon, the third candidate in that GOP primary, publicly charged during the race that the elder Pierce was using his position on the commission to get financial support for his son’s campaign from companies that are regulated by the panel.
What all that means, Burns told Capitol Media Services, is the only reason there is an indictment now against Gary Pierce and others is because of the inquiry into that 2014 campaign.
“There may be another shoe,” Burns said, with the possibility of future charges.
The other thing that Tobin said in Friday’s filing is that he wants “a full review and audit” of Johnson Utilities, which provides water and sewer service in Pinal County, within 90 days. He said that will determine if commissioners will tell the company to file for new rates and charges.
What it also will show, Tobin said, is whether the company has the capability to expand its service territory beyond its current customer base.
Efforts to reach Johnson Utilities through one of its attorneys were unsuccessful over the weekend.