Arizona Utility Regulator's Business Ties Called Into Question

By Kristena Hansen
Published: Monday, August 24, 2015 - 12:25am
Updated: Thursday, August 27, 2015 - 4:37pm

(Photo via azcc.gov)
Susan Bitter Smith resigned from the Arizona Corporation Commission amid accusations of conflict of interest.

Anyone who has flipped a light switch, cooked over a gas stove, drank tap water or picked up a phone call from a land line has been personally affected by the Arizona Corporation Commission.

The commission’s role is so important that, in order to protect its powers and independence, it is established by the Arizona Constitution, rather than state statute, and its five commissioners are elected, rather than appointed.

Former Commissioner Bill Mundell said that combination has led legal scholars to describe it as one of the most powerful utility regulators in the United States, and with that comes high ethical standards.

“Because the commissioners are so powerful, the conflict of interest statute that governs them is much stricter than the general conflict of interest statute for other elected officials,” he said.

Mundell, a Republican, was appointed in 1999 to replace Tony West, who was removed from office after the Arizona Supreme Court ruled he was illegally elected under a conflict of interest-type law that’s specific to the commission.

Sixteen years later, questions are being raised about a current commissioner under that same law.

Tom Ryan is an Arizona attorney who is known for pursuing high-profile cases against politicians such as former Attorney General Tom Horne and former state Sen. Russell Pearce.

Ryan said he’s considering filing a complaint with the attorney general’s office calling for the removal of Commission Chair Susan Bitter Smith.

“This will not go quietly in the night and whoever she retains will no doubt fight it tooth and nail,” Ryan said. “But the state of Arizona deserves a Corporation Commission that is not bought and paid for by the very people it’s supposed to regulate, the very industries it’s supposed to regulate.”

Bitter Smith, a Republican, is a registered lobbyist for Cox Communications, a status she's held long before her 2012 election to the commission.

Cox is regulated for cable by the Federal Communications Commission and local municipalities. But because it also offers telephone services, Cox is regulated by the corporation commission, which oversees the local telecommunications industry.

That caught the eye of a Washington, D.C., watchdog group called the Checks and Balances Project, which has been in a highly publicized struggle with the commission this year for access to Commissioner Bob Stump’s cellphone records.

Checks and Balances raised conflict questions about Bitter Smith to KJZZ, which then conducted independent research and reporting that included a review of various public documents, tax records and interviews with Bitter Smith, former commissioners, a former attorney general and various ethics and Constitutional law experts and attorneys.

Bitter Smith told KJZZ that being a registered lobbyist for Cox doesn’t violate any laws.

“In fact, others agree with that,” she said. “There’s no nexus to that."

In addition to her lobbyist registration for Cox, records show Bitter Smith also heads a trade group for cable companies, whose employees sit on her board of directors and approve her annual salary. Bitter Smith has also voted on matters such as tariff increases and removing bond requirements for the telephone side of some of her members.

Former Attorney General Terry Goddard, a Democrat, said both the lobbying and trade group connections are concerning.

“If I were attorney general and I saw this set of facts, I would be bound to, very confidentially, start an inquiry as to what the nature of the relationship was. I don’t know that right now and I think the appropriate officials ought to dig into it,” Goddard said. “That’s not to say she’s committed an offense that would automatically remove her from office, but the trade group and the mixed votes both for and then abstaining from telecommunications issues certainly create a serious question. And that question ought to be resolved for the benefit of the commissioner and the public.”

Tony West And Securities

Tony West came under scrutiny shortly after winning the 1998 election because he was a registered securities broker to a regulated securities dealer. That meant West and the dealer were both regulated by the commission.

West terminated his securities registration before taking office, but the Arizona Supreme Court ruled in mid-1999 that he was illegally elected, citing a commission-specific statute that states anyone employed by or holding an “official relation” to a regulated corporation can’t be elected to or serve on the commission.

“Being thus licensed leaves no latitude under this provision of section 40-101 and places West squarely within the express definition as one holding an official relation,” the court opinion states. “West’s interpretation of section 40-101, that he is not in official relation to a regulated entity, would allow him to retain his license, use it, and still function as a commissioner. Such interpretation is not rational and would encourage serious conflicts of interest.”

Bitter Smith And Cable

Bitter Smith said she’s never been paid to lobby for Cox, nor has she ever actually lobbied for Cox.

“I’m not an employee, never have been an employee, never have had any relationship with Cox directly,” Bitter Smith said. “I’ve always worked for the cable TV association.”

She’s referring to the Southwest Cable Communications Association, a cable industry trade group where Bitter Smith is executive director.

Cox is one of her members, and the association, which is also a registered lobbying group, sponsors events and luncheons to which lawmakers are invited and Cox employees attend, she said.

So she said the lobbyist registration is simply for the purpose of putting everything out in the open.

“It’s just an abundance of caution to do that,” she said. “I think it’s good. I think it creates huge transparency.”

Cox spokesperson Andrea Katsenes also said the registration is solely for the purpose of being transparent.

"We listed her in an effort to over communicate and be completely transparent as she advocates for the cable industry in her capacity as the executive director of the [Southwest Cable Communications Association]," Katsenes said in an email. "The government work she does that may involve Cox is only in her capacity as the executive director of the cable association—no additional issues."

Members of Bitter Smith’s trade group are cable companies, but some, such as Cox and Suddenlink Communications, are regulated by the commission for the telephone services they offer in Arizona.

A handful of Cox and Suddenlink employees also sit on the association’s board of directors, which approves Bitter Smith's employment as executive director and her $150,000-plus annual salary, according to Bitter Smith and the group’s tax records and website. That’s roughly 40 percent of the group’s annual revenue, the vast majority of which is derived from member dues.

Bitter Smith stresses the telecom entities she regulates at the commission are always legally and financially separate businesses from the cable side of companies like Cox and Suddenlink.

“The video side of Cox is a member of the cable association. The telephone side is not. There’s no nexus there,” she said. “Their budgets are set in separate divisions and corporate entities. They are separate financially. They have to be because that’s how they’re taxed, that’s how they’re filing their financial reports.”

Mark Goldstein with the Arizona Telecommunications and Information Council said companies that are in the business of both cable and telecom do keep those operations separate, but more for regulatory purposes.

“The primary motivation is that they don’t want to poison the well, if you will, to have state regulation as part of any other part of their business,” Goldstein said. “And if they blended the phone service into the Cox general operating entity, then they would have a harder time sorting out what the commission had oversight or interest in. I think the structure is less about the financial … it’s more about isolating the phone regulation to the [commission] and nothing else.”

Bitter Smith said that, because the telecom entities are so separate, it’s OK to vote on telecom matters related to Cox, Suddenlink and other members at the commission. But she still tries not to.

“We thought about that, ‘Well, maybe just from the appearance sake it wouldn’t hurt,’” she said.

Since Bitter Smith took office in 2013, records show the commission has voted at least seven times on matters involving the telephone side of the cable association’s members.

She recused herself four of those times, such as last year when a tariff increase was approved for Cox.

But she didn't recuse herself on three matters, which she said was accidental, including another tariff increase for Cox approved in 2013.

“Probably should have, just didn’t catch it,” she said.“It was on the consent agenda, I zoomed through.”

She also didn't recuse herself in May from voting to rescind a $225,000-bond requirement for Mercury Voice & Data, an entity identified in public documents as doing business in Arizona as Suddenlink Communications. She said she missed that one accidentally as well.

“Suddenlink is my member, Mercury Voice & Data is not an entity that I’m familiar with,” Bitter Smith said. “If I had understood, I probably would have, you know, just for optics sake. There’s no legal reason I would need to do that but, had I understood that there was another entity that they now form with a new name, separate entity with a new name, I probably would have.”

Paul Bender, a former dean of Arizona State University’s Sandra Day O’Connor College of Law and a constitutional law expert, said recusal is always the safest way to go.

"If you have a connection that might lead reasonable people to think that you're not going to do it neutrally, to me, the best thing to do is recuse yourself," he said. "But not everyone does that."

Bitter Smith also said any regulation of telecom the commission does is, as she described, “perfunctory” because it's changed enormously over the past 15 years or so, which is why it's now a competitive industry as opposed to monopolies, such as Arizona Public Service Co. and other utilities.

Additionally, she said there isn't any correlation between her and the Tony West case, noting that that had to do with securities.

Goddard said he agrees this situation should be approached somewhat differently.

"In the Tony West case, the court said it didn't require that funds be exchanged. It was simply that his license was registered with a particular securities dealer was sufficient to establish an 'official relation,'" Goddard said. "Now that was that case, and it had to do with securities. I think you have to take a different look at it for telecommunications. It's actually more basic to the duties of the corporation commission than securities are."

Concerns

Bender said it’s possible, but not completely certain, the statute that removed Tony West is relevant in this situation with Bitter Smith.

“Is it clear that she can’t serve because of the Tony West opinion? It doesn’t sound to me that it is clear,” Bender said. “It sounds to me that there’s a possibility that she might be disqualified because of the connections, but you have to know what the connections are.”

But those are very abstract, fact-specific questions, he said, and it would take a lot to convince a judge or the attorney general to remove an elected official.

“The person that the people elected to serve on this commission can’t serve, I think a judge would say, ‘OK, people want this person, so I shouldn’t kick this person off that body unless it’s really clear that they can’t be there,’” Bender said.

Anthony Ching is the attorney who represented the petitioner, former Commissioner Renz Jennings, in the Tony West case. He said it's possible the law that removed West applies to Bitter Smith, but technicalities can matter from a legal standpoint.

"I think it may be argued that she is holding an 'official relation' with Cox or an employee of Cox because part of [her] salary can be attributed to Cox. I think the statute is there for the protection of the public and therefor should be interpreted broadly," Ching said in an email. "On the other hand, the court may say that it depends on the percentage of the salary, i.e. is it one percent or one thousandth [of a] percent? If it is really tiny then the court may apply the de minimus rule and say it is too small to matter."

Pat Quinn was most recently former director of the Residential Utility Consumer Office, or RUCO, which advocates for consumers at the commission. He’s also the former Arizona president of Qwest Communications.

He said Bitter Smith's explanation about the separateness of telecom entities from cable is making a "difference without a distinction."

“While you may be able to, accounting wise, separate your expenses between what you put in phone and what you put in cable, how do you take out of your mind, ‘Oh, they’re paying me over here and we do good things for them over here, but I’m going to be fair and unbiased when I look at not only Cox on the phone side, but any of the other phone providers,’” Quinn said, adding he thinks Bitter Smith should at the least be recusing herself to avoid any appearances of conflict.

Former Commissioner Mundell said Bitter Smith's situation seems less straightforward than the Tony West case.

“It’s more attenuated. That’s why it’s such a difficult case and why I think that no one’s ever really called her on it before, because it’s attenuated,” Mundell said. “It’s more egregious than the Tony West case because Commissioner Bitter Smith has voted on numerous cases involving members of her association. And she’s back there on their behalf splitting hairs saying, ‘I’m here on behalf of their cable side?'”

Craig Holman with the Washington, D.C., government watchdog group Public Citizen said conflict of interest laws are purposefully designed to be complex because they deal with abstract things, such as appearances of impropriety.

“A good conflict of interest law would not allow this person to sit on this corporate commission,” Holman said. “That raises that appearance of conflict of interest and this is where conflict of interest laws are supposed to step in.”

Renz Jennings, the former commissioner who was the petitioner in the West case, said he’s surprised Bitter Smith didn’t sever her outside ties before taking office.

“If this is lawful, then the statute should be changed so that it isn’t lawful,” Jennings said. “There’s a clear risk that she is going to be wearing the wrong hat when she’s making a decision based on where her own self interests lie versus where the public interest lies.”

EDITOR'S NOTE: This article has been modified to reflect the year in which Bitter Smith took office.

Updated 8/27/2015 at 4:37 p.m.

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