ACC Rules on APS Emergency Rate Case

Denies Emergency but Approves Temporary Increase

PHOENIX – The Arizona Corporation Commission approved a temporary interim rate increase designed to partially refund money Arizona Public Service (APS) has already paid for natural gas in 2005 and what APS projects it will incur in additional charges for 2006.  The increase is necessary to pay down debts that continue growing due to the unprecedented and sustained high natural gas and purchased power prices.

APS does not profit from this increase as the monies collected will be used solely to pay fuel costs.

The temporary increase represents approximately 7.6 percent on the typical residential customer’s bill, based on testimony given during Tuesday’s day long meeting.  The surcharge will end once APS collects approximately $140 million in fuel and purchased power prices.

Using calculations provided by the Commission staff, the average residential customer’s summer bill will increase by about $7.33.  Average winter bills will increase by about $4.74.

APS, which uses a weighted average across all customer classes (summer and winter, weighted by consumption and number of customers in each class), calculates the weighted average increase to be about $8.13 based on 1162 kilowatt hours of usage.  In reality, the individual customer impact will vary greatly by the amount of energy used, the relative energy efficiency of the home and the personal comfort level desired by the property owner.

The increase is temporary and will go away once the $140 million is collected, currently estimated to be at the end of 2006 or early 2007.

What is the origin of this case?

In January 2006, APS filed for an interim rate increase of $299 million in additional annual electric revenues, or approximately a 14 percent increase, to be effective April 1, 2006.  If granted, it would be subject to refund pending the Commission’s final decision in APS’ pending permanent rate application.  According to APS, this increase represents only the higher annual fuel and purchased power costs the Company expects to incur based on 2006 fuel and purchased power costs.  In March, APS re-estimated its fuel expenses using more recent pricing.  APS modified its request downward by $67 million, to $232 million, due in part to milder than expected winter conditions throughout the country which resulted in lower fuel costs.

We’ve heard a lot about a Standard & Poor’s downgrade.  What does that mean?

According the application, APS is experiencing a cash flow problem – the company has to spend more money today to buy fuel to run its power plants than its rates currently cover.  In other words, the company does not have enough income from rates to cover its operating costs.  This led Standard & Poor’s, a major ratings agency, to downgrade the value of APS’ debt to one rung above junk status.

How does a company’s debt rating affect consumers?

To draw a comparison familiar to consumers, it’s similar to a credit or debt rating.  If a person or company has a low rating, then the banks and finance companies face greater risk.  To compensate for the greater risk, the person or company is charged steeper interest rates when they go to buy a house or a car.  The same is true for APS.  If APS’ credit rating was lowered to junk, it would face higher borrowing costs when it needs money for capital improvements like building necessary power lines and other critical infrastructure.  Those increased costs are eventually paid by ratepayers unless action is taken to prevent a further downgrade.

Was anyone in favor of the emergency rate increase?

Parties supporting emergency rate relief included Arizona Utility Investors Association, Phelps Dodge, and Arizonans for Electric Choice and Competition, Southwestern Power Group II, LLC, Mesquite Power, LLC, and Bowie Power Station, LLC.

Who opposed it?

Parties opposed to the emergency increase included Commission Staff, the Residential Utility Consumer Office and the Federal Executive Agencies.  However, all of the parties thought that some relief might be necessary to help pay down the debt but that the case did not meet the technical definition of an “emergency,” based on prior cases.

Was there a hearing?

Yes.  The administrative law judge assigned to the case heard eight days worth of testimony, cross-examination of witnesses along with may questions from the Commissioners.

What happened after the hearing?

The administrative law judge reviewed the entire record in the case, including public comment from consumers and compared this case with prior “emergency” rate cases before issuing a recommendation.  The judge’s recommendation said that the case did not meet the criteria for an emergency but that there will be a large balance of unrecovered fuel and purchased power in 2006.  In order to prevent the continued build up of unrecovered costs and interest that will need to be collected from ratepayers beginning in February 2007, APS should be allowed to implement an interim adjustor to collect a portion of the 2006 purchased power and fuel costs that are above the base costs established in Decision No. 67744.

So there will be an increase but it won’t be an “emergency increase”?  I’m confused.  It sounds like word games to me.

Yes, there will be an increase but it will be temporary.  Once about $140 million is recovered, the surcharge will end.  Because some of APS’ costs remain uncollected, the Commission will have to address the issue in future proceedings.  There is an Attorney General’s Opinion that outlines the criteria to determine whether an emergency exists or not.  Several of the parties argued that APS’ circumstances did not meet the legal and technical definition of an emergency.  The judge agreed.  A true rate increase would be an adjustment to the base rates and would stay in effect until a new rate case is approved. 

So how will I be affected by this decision?

The decision will increase the average residential customer’s summer bill by about $7.33.  The average residential customer’s winter bill would increase by $4.74.  Pursuant to past Commission decisions, low-income customers do not pay either the adjustor rate or any surcharges, and will not pay this interim adjustor rate.

Now wait a minute, didn’t the Commission just grant APS an increase in February?

Yes.  But not for the same reasons and not under the same circumstances.  A prior Commission decision introduced a fuel cost adjustor that resets every year.  It can go up or down, depending on wholesale energy costs.  The February adjustor averaged about $5.15 (using APS’ weighted average across all customer classes).  The February decision recovered costs incurred during a different time frame.

What about APS’ full rate case?  How does that fit in?

There is another, completely separate case pending at the Commission.  The staff and parties are busy auditing APS’ expenses and income to determine what, if any, increase should be approved by the Commission in the future.  Today’s decision factors into the full rate case as sort of an “advance” on what APS asked for in the full rate case.

The company looked at its cash flow situation in light of the downgrade and significantly higher fuel costs and carved out the fuel portion of the overall pie.  APS asked the Commission, through this case today, to look at giving the company a little help now to prevent a bigger problem later.

The Commission’s decision in the full rate case will come after staff and the parties file testimony, have a full hearing and after an administrative law judge issues a recommendation.  The hearing is slated to begin on October 10, 2006 and will last several days, if not weeks.

Did the Commissioners and judge make other recommendations to APS about other ways to improve cash flow and cut costs?

Yes.  The Commission ordered APS to take all steps necessary to reduce its cost of service, which the Commission will analyze in APS’ pending rate case.  It also directs APS to look for ways to improve its cash flow, including expenses that are borne by shareholders and not ratepayers.

Accordingly, while the ROO does not impose restrictions on APS dividend payouts or dictate that certain expenses be eliminated in this proceeding, the Commission expects APS to manage its operations in a fiscally responsible manner.

What else did the Commissioners do to ensure that APS is being run responsibly?

Several amendments passed by a majority of the Commissioners require the company to:

• Look at cutting unnecessary expenses such as “branding” related advertising, sports sponsorships as contracts come up for renewal, out-of-state travel and other discretionary expenses (Mayes and Spitzer amendments);
• Cooperate with Commission staff to analyze off-system sales to see how off-system sales (sales of energy to other utilities) might be used to reduce costs for ratepayers (Mundell);
• Explore the potential for automatic enrollment in low-income discount programs for customers who already receive public assistance like food stamps and Medicaid (Mundell);
• More closely scrutinize and possibly eliminate bonuses and employee incentives in 2007 to see if that money could be better utilized to offset increased costs (Mayes);
• Conduct a benchmarking study on the effectiveness of APS’ natural gas purchasing and hedging practices to see how the company stacks up against its peer utilities (Mayes);
• Continue exploring natural gas storage projects through which APS could buy bulk natural gas when the prices are lower and store it in underground caverns until it is needed (Mayes).

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Once amended, signed and docketed, the final decision and related documents can be viewed through E-Docket at www.azcc.gov.  The docket number is:  E-01345A-06-0009.