MUNICIPALITY OF ANCHORAGE d/b/a Anchorage Water & Wastewater Utility, Appellant,
REGULATORY COMMISSION OF ALASKA, and the Attorney General for the State of Alaska, Appellees.
Heather H. Grahame, Dorsey & Whitney LLP and James N. Reeves, Municipal Attorney, Anchorage, for Appellant.
Robert Stoller, Assistant Attorney General, and Steve DeVries, Assistant Attorney General, Anchorage, Talis J. Colberg, Attorney General, Juneau, for Appellees.
Before : FABE, Chief Justice, MATTHEWS, EASTAUGH, CARPENETI, and WINFREE, Justices.
The Municipality of Anchorage, doing business as Anchorage Water and Wastewater Utility (AWWU), operates a public utility providing water and sewage services in Anchorage. Because AWWU is a regulated utility, the Regulatory Commission of Alaska (RCA) must approve any rate changes AWWU proposes.  In 2003 the Municipality changed its regulations regarding payment in lieu of property taxes, and in 2004 AWWU applied for a rate change to cover the increased costs. RCA denied approval of AWWU's proposed rate increases. The superior court affirmed RCA's decision on intermediate appeal. Because there is no reasonable basis in the record for RCA's ruling, we reverse the superior court's decision and remand for further proceedings by RCA.
II. FACTS AND PROCEEDINGS
A. Rate-Setting Background
Setting the rates a utility may charge its customers is a two-step process. RCA first determines a utility's " revenue requirement," the amount of annual revenue a regulated utility needs to pay its operating expenses and to generate a reasonable return on investment. RCA then determines the rates a utility may charge to generate that amount of revenue.
When calculating the revenue requirement, property taxes are accounted for as operating expenses. Property taxes fund municipal services such as police and fire protection. Public utilities benefit from these municipal services but do not pay property taxes. A municipality may require public utilities to make " payments in lieu of property taxes" to contribute to the cost of municipal services. Reasonably calculated payments in lieu of taxes are also considered operating expenses when calculating the revenue requirement. RCA closely scrutinizes such payments as transactions between affiliated
In 1976 the Municipality passed an ordinance requiring its public utilities to make a payment in lieu of taxes known as a Municipality Utilities Service Assessment (MUSA). The MUSA payment was calculated as a percentage of the assessed value of utility assets, called " plant." There are two categories of plant: " non-contributed plant" is acquired at some cost to a utility; " contributed plant" is donated or acquired through grants from federal, state, or private sources, requiring no initial investment of capital by the utility. Under the 1976 ordinance the assessed value of both contributed and non-contributed plant was used to calculate the MUSA payment.
From 1976 to 1987 RCA's predecessor, the Alaska Public Utilities Commission (APUC), approved the Municipality's MUSA charges as legitimate operating expenses for AWWU's component utilities. In other words, APUC set AWWU's rates at a level that allowed AWWU to recoup the MUSA payment cost. 
In 1988 the Municipality changed its MUSA ordinance. The 1988 ordinance provided for a MUSA payment based on (1) a percentage of the assessed value of only non-contributed plant and (2) a gross receipts tax (similar to a sales tax). APUC allowed the non-contributed plant assessment portion of the MUSA payment to be computed in AWWU's revenue requirement, but determined that the gross receipts tax portion of payment functioned not as an operating expense, but rather as a dividend to the Municipality. Dividends, unlike operating expenses, are not recoverable from consumers through utility rate adjustments. APUC thus prohibited AWWU from increasing utility rates to recover any gross receipts tax payments to the Municipality. The Municipality apparently understood this to mean it could not collect the gross receipts tax from AWWU, and never did so.
From 1988 to 2003 AWWU made a MUSA payment to the Municipality based only on the assessed value of non-contributed plant. Under that arrangement AWWU made substantially smaller MUSA payments than it would have if either (1) the 1976 ordinance had remained in effect or (2) the 1988 ...