.21 45 s, I RICHARDS William A. Richards November 7, 2016 VIA ELECTRONIC MAIL AND U.S. MAIL Thomas Loquvarn, Esq. Arizona Public Service Company 400 North 5th Street, MS 8695 Phoenix, Arizona 85004 Re: Arizona Corporation Commission Dear Mr. Loquvam: I write to clarify Commissioner Bob Burns? position on supporting terms of an uncertain settlement for the pending dispute stemming from Arizona Public Service Company?s failure to fully comply with the Commissioner?s subpoenas. Commissioner Burns seeks to continue his inquiry into charitable and political contributions and also supports deveIOping robust new rules providing the transparency and accountability that will prevent such contributions from being used to undermine ACC objectivity and harm the rate-paying public. However, the Commissioner rejects any suggestion that he commit to new rules without a full Understanding of the scope and nature of the problem any new rules will address. He remains justly suspicious of any process by which new rules might be adopted without a complete understanding of APS and Pinnacle West Corporation?s (?Pinnacle West?) historic actions, or any efforts to abandon a careful, complete and transparent investigation of the threats facing Arizona rate-payers in favor of an inadequately informed proposal of general rules that are destined to fail under objections by other impacted entities. Given that contributions to independent expenditure groups in the 2014 ACC election have already led to substantial public suspicion that APS was attempting to buy undue in?uence with commission candidates, Commissioner Burns expects that APS and Pinnacle West leaders Understand why any sort of hasty move to foreclose disclosure concerning 2014 events in return for illusory new rule proposals could only heighten public perceptions that APS and Pinnacle West have something material to hide or have succeeded in procuring unfair protection from the ACC. Preserving public trust in the integrity of the ACC and 2901 North Central Avenue Suite 1150 I Phoenix, Arizona 85012 Telephone 602-812-7979 I Facsimile 602-595-7800 Thomas Loquvam, Esq. November 7, 2016 Page 2 proper protection of the rate-paying public demands well-infor1ned and well?vetted rules. In other words, the ACC needs to know what is broken before it can fix it. Any suspicion by APS or Pinnacle West executives that Commissioner Burns is playing some sort of waiting game, or engaging in pro-election political maneuvers, is wrong. If they harbor such suspicions, one may also justly wonder why APS and Pinnacle West leaders would so instinctually assume political gamesmanship? We hope that and Pinnacle West?s past interactions with the ACC have not given them reason to assume that everything done by a commissioner stems from some self-centered election motive or political gaming. If they have, that is all the more reason for Commissioner Burns to carefully examine past APS and Pinnacle West interactions with ACC candidates. Commissioner Burns trusts that, as a regulated monopoly utility, APS and Pinnacle West will respect that an objective and transparent system in which regulatory policy and decisions are made by commissioners who are not beholden to secret political donors best serves the collective interests of rate-payers. Commissioner Burns is looking into matters tied directly to ratemaking concerns. There is no more fundamental threat to proper ratcmaking than commissioners who are improperly in?uenced by and captive to an entity seeking rate adjustments. As APS should be acutely aware, a rate case requires ACC commissioners to make a myriad of assessments and determinations, each of which can have substantial impacts on rate calculations and approvals and therefore determine the ultimate burden on rate?payers. To ensure that rates are properly and fairly established, the Commission must operate through suf?ciently independent and objective commissioners whose decisions rest on facts. Commissioners who are materially motivated to bene?t or please a regulated entity as thanks for prior ?nancial support or in hopes of future largesse do, by de?nition, abdicate their responsibility to rate?payers and turn the rate approval process into an arbitrary, capricious, pro-determined and bad faith activity. Even if a commissioner just views all contested facts throngh the favorable prism constructed by improper in?uence, their decisions will be constantly inclined to favor rates higher than could be justi?ed by an objective decision-maker. Commissioner Burns? concerns therefore implicate very important ratemaking Issues. In the hope that APS and Pinnacle West will respect Commissioner Burns? objectives as sincerely motivated by the public interest, and will themselves continue helpful disclosure and dialogue conditions, Commissioner Burns has authorized me to reiterate the problems he has with hastily settling on a general set of rule proposals now. Generally, they fall into three categories. The first problem is that policy and rules, to be effective, must rest on a foundation of fact and a clear understanding of the problem they are designed to correct. While the commissioners may identify hypothetical circumstances in which regulated utilities or their proxy af?liates might clandestiner make ?nancial contributions designed to in?uence or capture the allegiance of a Thomas Loquvam, Esq. November 7, 2016 Page 3 candidate or commissioner, it may make little sense to try and prevent scenarios that will not realistically occur or to implement rules containing material loopholes or ambiguities that undermine their purpose. Knowing how real-world charitable and political contributions from regulated utilities or their affiliates work allows the commissioners to target realistically plausible programs with rules that are tight and effective. As an example, assume the commissioners worry that regulated utilities like APS might buy undue in?uence with ACC candidates or commissioners by making substantial, undisclosed contributions to charitable organizations with which a candidate or commissioner, or their close family, is interested or involved. Making this more concrete, consider the possibility that a commissioner has a spouse or child or parent who owns a building leased to a non?pro?t charter school, and the commissioner?s relative or their proxy approaches a utility or its affiliate for a sizeable ?nancial contribution to the non-pro?t school. The contribution may be used for operational expenses say purchase of computers or math curricula with no direct ?nancial bene?t to the commissioner?s relative. However, it materially alleviates other operating expenses, potentially allowing the non-pro?t to pay higher rents than it could otherwise, thereby indirectly bene?tting the landlord relative. Once that connection is established, the regulated utility or its affiliate not only earns immediate in?uence, but by keeping future annual contributions uncertain, it gains ongoing leverage and in?uence derived purely from. ?nancial interests. Few would question that such charitable contribution scenarios offer substantial indirect ?nancial arrangements of considerable personal value to ACC candidates or commissioners, thereby creating substantial risks that commissioners become captive to contributing entities or their regulated af?liates and forego their independent obligations to ratepayers. Yet, the fact that such contributions could be made does not con?rm that they are realistically plausible. Nor does it answer how they are best discouraged by new rules. For instance, assume that the commissioners learn that most regulated utilities and their af?liates limit charitable contributions to pre-designated categories of recipients who receive multi?year grants determined through independent corporate staff or foundation accounts entirely outside the in?uence of the executives or board of the regulated entity. Assume also that the commissioners learn that prominent utilities use internal criteria that require any applicants for a contribution to provide a sworn af?rmation that no ACC commissioner, candidate, or any family member of a commissioner or candidate has any af?liation with or relationship to the charitable organization. Armed with this knowledge, the commissioners may decide that the only new rules needed would focus on requiring utilities or af?liates that make direct charitable contributions, or that allow executives or board members to direct or in?uence the contributions, and who do not require af?rmation by the donees of their lack of af?liation with commissioners, candidates or their immediate family members to disclose all annual contributions and the person(s) making any decisions to distribute the funds. If such limited rules are passed, they would prove substantially less burdensome on regulated entities and their af?liates, as well as ACC staff, than a more general disclosure rule requiring, say, quarterly reporting of all charitable contributions by all regulated Thomas Loquvam, Esq. November 7, 2016 Page 4 entities and their affiliates. Without detailed knowledge and careful consideration of real-world activities, however, the commissioner would have to default to the most broad and burdensome rule to assure effectiveness. The world of political contributions is just as deserving of careful investigation and full understanding before new rules are implemented. In the context of APS, substantial concerns have been raised concerning the role of Pinnacle West in possibly making very large ?nancial contributions to ?independent expenditure? efforts bene?tting particular ACC candidates during the 2014 election. Commissioner Burns, and presumably all other commissioners who claim no connection to such activities, are still ignorant of precisely what happened and how such activities, or variations thereon, could be used to improperly in?uence successful candidates. Knowing how such operations work is critical to assessing whether and how they need to be addressed by new rules. As you know, the world of independent expenditure groups is often staffed by political operatives, lobbyists, or former campaign staff who have deep networks amongst the Arizona political parties and candidate campaigns. It is possible, then, for a well-organized corporation, employing experienced and deeply-networked staff and contractors, to very effectively coordinate Spending for a particular candidate, ensure the candidate understands and acknowledges the corporation?s support, and even place spending where and when the candidate most desires it by using networked communication through surrogates. Consider for example a corporate government relations expert who desires to Show a candidate formal, cooperative support without directly contacting the candidate or their campaign staff. It would hardly be a challenge for such an agent to employ third-party contractors they knew were in touch with ?friends? of the candidate and maintain ?plausible denia regarding coordination. So the government affairs specialist has lunch with a contracted lobbyist whom they know can get close to those running an ACC candidate?s campaign to express how supportive the corporation is of the candidate and how much the corporation is willing to commit to see the candidate succeed. Without asking the lobbyist to make any contacts, the government affairs specialist asks if the lobbyist has any ideas about how the corporation might mo st effectively spend its money in support of the candidate. A week later, after his or her own discussions with persons close to the candidate?s campaign, the lobbyist is suddenly a font of ideas about what type of advertising the corporation might want to support, through whom it should direct its support, and how much might be most appreciated. The money is spent with little if any paper trail to tie the candidate or their campaign staff to the corporate sponsor but with a clearly coordinated effort credited by the candidate to the corporation. As one can see, the foregoing scenario might take one of many different forms, with varying degrees of formality and deception involved. Exposing coordination between regulated entity or af?liate and candidate might be easily accomplished from disclosures by the corporate Thomas Loquvam, Esq. November 7, 2016 Page 5 donor and candidate alone, or the possibility of coordination may only become clear if disclosure goes several layers deeper into the proxies, ?friends?, or surrogates each camp uses. To assure that efforts at improper coordination and in?uence are effectively disincentivized, and that when they nevertheless arise they are effectively exposed and publicly scrutinized, the ACC commissioners need to understand the different variations by which they might be structured in Arizona. Overly focused disclosure rules might miss key facts that would otherwise draw untoward relationships into the light. And, unnecessarily broad disclosures may create interpretation problems, overwhelm regulators with unhelpful data, or even feed data into the system that can be easily misinterpreted. Commissioner Burns could offer many other hypothetical financial arrangements that might be deserving of serious concern and new rules, but the foregoing examples should suf?ce to con?rm why a detailed understanding of the processes currently employed by APS and Pinnacle West for charitable and political contributions is needed before any ?nal new rules could be formulated. This discussion should also clarify why jumping toward aperfunctory set of new rules without full factual disclosure, as well as debate over what new rules are precisely necessary, is unwrse. The second major ?aw in moving too hastily is the likelihood of creating pI'Oposed new rules that are illusory and will just elicit so much objection they will be a political dead?letter. For instance, we understand that APS favors a rule that would require Salt River Project and all other intervenors to submit to full disclosure of various contributions it or its af?liates make when they intervene in anyone else?s rate case. The risk of such intervenors employing regular ?nancial contributions to in?uence ACC elections or hold commissioners captive may be real, but it is likely different than the risk that APS and its parent would do so, mostly because some intervenors are not traditional AGO?regulated entities. Similar concerns exist for small regulated entities and intervenors who are unlikely to engage in the type of expensive in?uence-peddling that might be ?scally affordable to APS, Pinnacle West, or other large or sophisticated entities. Where such distinctions are valid, one would expect objections by such entities that preposed ?one-size??ts-all? rules overreach when it comes to them. Such objections would undoubtedly be accompanied by demands for special exemptions or adjustments, creating such counter-pressure that passing new rules becomes practically impossible. Knowing this, Commissioner Burns? concession to stop his investigation and support rules APS knows stand little practical hope of ever being passed would warrant criticism that he allowed APS to thwart exposure of and Pinnacle West?s past dealings in exchange for an illusory commitment to a lost cause. Commissioner Burns will not be party to any such tactics, nor would he expect any other commissioners to shed their integrity and the public?s con?dence in them for such a move. Thomas Loquvarn, Esq. November 7, 2016 Page 6 The third major problem with moving hastily to rule proposals without understanding the actions they are aimed at is that it enlists commissioners who have been painted publicly as potential bene?ciaries of or Pinnacle West?s gracious campaign support to slap together an ill-informed and potentially ineffective set of rules. In short, it invites allegations (no matter how unfair or unsubstantiated) of a cover-up in return for ?nancial support in election campaigns. This is especially true if APS were to try and bypass Commissioner Burns and railroad any hastily conceived rules proposals over his objection. There will likely be no end to critics who might assert that APS was enlisting commissioners it improperly captured to quash inquiry into potential wrongdoing. Irrespective of how factually inaccurate and unfair APS believes such assumptions are, they bring disrepute to the ACC and diminish public trust in its operations and decisions. Moreover, given all the reasons set out above for not proceeding over?aggressively, and for requiring exposure of facts before ending Commissioner Burns? inquiry, APS and Pinnacle West could be justly criticized if they were to ask other commissioners to carry their water and somehow overrun Commissioner Burns. After all, it would seem the only logical reason for switching to an expedited process over Commissioner Burns1 objection would be to prevent the rate-paying public from ever understanding how political and charitable contributions can really be used to improperly in?uence ACC business, and to prevent the ACC commissioners from actually passing new, effective rules to blunt such in?uences. Commissioner Burns therefore expects that APS and Pinnacle West desire to display the good faith and respect for the rate?paying public that the instant circumstances demand. That means considering the voluntary disclosure of facts needed by the ACC to effectively analyze risks to commissioner autonomy and propose effective disclosure rules that will expose when anyone attempts to gain improper in?uence, thereby serving as both a deterrent to and check upon such actions. With the risks appropriately triangulated, Commissioner Burns would welcome further input on how best to formulate new disclosure rules that foreclose those risks going forward. A transparent APS and Pinnacle West could add substantial value to this process. We hope that APS and Pinnacle West will renew efforts designed to expose facts and carefully craft new rules to bene?t the Arizona rate-paying public. In closing, please be clear that Commissioner Burns has been, and remains, committed to a process that will result in new accountability and transparency measures through meaningful, detailed disclosures concerning charitable and political contributions. As always, he welcomes APS, Pinnacle West, and all other interested stakeholdersa input in developing the best rules possible for Arizona?s citizens. But, he is not willing to trade the rights and responsibilities to undertake a meaningful investigation and develop such informed and effective rules for a hastily conceived proposal that will draw fire as illusory, politically expedient, and driven by desires of APS, Pinnacle West, or even other commissioners to hide the facts about how regulated entities Thomas Loquvam, Esq. November 7, 2016 Page 7 might try to control the regulatory system at the (literal) expense of their customers. We welcome any questions you or your clients may have and hope for productive discussions going forward. Sincerely, William A. Richards For the Firm Thomas A. Loquvam Associate General Counsel Pinnacle West Capital Corp, Law Department Mail Station 8695 PO Box 53999 Phoenix, Arizona 85072-3999 Tel 602-250-3616 November 10, 2016 VIA US. AND ELECTRONICMAIL A. Richards Baskin Richard, PLC 2901 North Central Avenue Suite 11 5.0 Phoenix, AZ 85012 brichard askinrich rds.com Re: Arizona Corporation Commission Bill: I unite in response to your November 7, 2016 letter. Your letter was disappointing, both because it conveyed Commissioner Burns? unwillingness to commit to dialogue over litigation and because of its tone. Of note is that your letter attempts to cast conduct and motives in a prejudicial light. This attempt, however, is rather curious given what APS has offered to resolve a pending lawsuit. As reflected in the attached document, APS made a good faith offer to help create a rule mandating more disclosure than is required by any law, rule, regulation, or court decision of which APS is aware. Moreover, this was not a take?it?or?leave?it offer, but instead was ?exible enough to add disclosure requirements that Commissioner Burns deemed important. APS also offered to work through any other modi?cations needed to ensure that the rule was not ?illusory,? but in fact would attract widespread support and withstand legal challenges. With this offer, APS committed its best efforts to help craft the rule, including the provision of continuous legal and regulatory expertise. And APS offered to support the rule in all forums, including in any subsequent court challenge to the rule that might result. Finally, APS offered to voluntarily comply with the rule while it was being promulgated over the next 18 months. William A. Richards Baskin Richard, PLC November 10., 2016 Page 2 The facts of offer speak for themselves, and belie any suggestions in your letter to the contrary. APS remains committed to pur3uing policies that are best for its customers and Arimna as a whole, whether that emerges from one on one dialogue with its Commissioners, or iiwolves a broader group of interested stakeholders. APS hopes that as time moves forward, substantial progress can be made on this issue. TAL If a party applies to the Arizona Corporation Commission for a. the establishment of rates; b. the creation of a docket; or c. intervention in a matter before the Commission, that party shall disclose political contributions made in support of, or opposition to, Arizona Corporation Commission candidates (?Contribution?). If the party,r described in paragraph 1 makes a Contribution, that party (the ?Contributing Party?) shall disclose within 10 days of making the Contribution: a. The dollar value of the Contribution; b. The Arizona Corporation Commission candidate(s) the Connibution was intended to support or oppose; and c. The nature and form of the Contribution, including whether the Contribution was direct or indirect, and whether the Contribution was monetary or in kind. . The Contributing Party must disclose Contributions when the}:r are made: a. directly by the Contribun'ng Party; or b. indirectly to an Arizona Corporation Commission candidate through one or more third-party intermediaries as speci?cally directed in writing by the Contributing Party. A Contributing Party must also make a disclosure under paragraph 2 within 10 days of learning that all of the following are true: a. the Contributing Partyr provided something of value to one or more third-parties; b. those third parties made a Contdbution; and e. the Contributing Partyr reasonably believes that the of value referred to in paragraph 4(a) was used to fund or otherwise support the Contribution referred to in paragraph . The disclosure must be made in a generic Commission docket that shall be held open for the purpose of cataloguing contribution disclosures. For purposes of this rule: a. the following ?lings and actions are among those that wonuld not trigger a disclosure requirement: submission of public comment, appearance at ACC open meetings, or other administrative ?lings not seeking af?rmative relief or applying for the establishment, con?rmation, or creation of a substantive right; and b. the requirement to disclose a Contribution arises if the Contribution is made by the Contributing Party itself; an af?liate, parent, or subsidiary of the Contributing Party; an individual or entity owning more than 5% of a Contributing Party; or (iv) any entity member of the Contributing Party if that Conhibuting Party is a trade association or other member association.