Arizona Civil Service Profits Cut by Corporation Commission

Utility regulators on Wednesday approved a substantial reduction in the profitability of Arizona Public Service Co., but delayed decisions on two other major elements of the utility’s latest request to increase rates.

The reduction in APS ‘return on equity, the profit the regulated utility is allowed to make, and other decisions by the commission most likely mean the company will exit the two-year-old tariff case with lower price than when the process started.

The move is a major setback for the utility, which company officials say threatens its ability to fund things like new developments to attract businesses to the state and renewable energy projects.

The Corporation Commission also voted to deal with two major coal-related decisions in separate proceedings, meaning that at this time, APS will not receive tens of millions of dollars a year related to these initiatives.

The decision to reduce the return on equity to 8.7% alone reduces what APS is allowed to charge customers each year by about $ 34 million, according to Commissioner Justin Olson, who proposed the reduction. . APS currently has a 10% rate authorized by the Companies Commission.

It was adopted by 4-1, only President Lea Marquez Peterson voting against.

Return on equity is a crucial number for utilities. It determines how much companies are allowed to earn on their investments, and that figure was the subject of a United States Supreme Court ruling that determined that it must be sufficient to attract investment in a public service. .

APS wanted to keep its current yield of 10%. The order recommended by a judge was 9.16%. The Residential Utility Consumer Office, created by state lawmakers to represent customers in such hearings, recommended 8.7%, which Olson argued.

The Olson Amendment cited numerous customer issues, including an issue with an online price comparison tool that misled customers, first reported by The Arizona Republic, which led to refunds to customers. clients and a settlement with the Crown.

APS CEO Jeff Guldner pleaded with regulators not to lower the allowable rate and said he wanted to be able to change the company’s past and was working to change APS culture and direction.

“I wish I could change it, but I can’t,” Guldner said.

But he said lowering the allowed rate wouldn’t help his efforts to change the business, and it would hurt customers as well.

“I apologize for being persistent on this point, but it is not helpful in the long run for our clients as it will result in higher borrowing costs, which will ultimately be passed on to our clients,” said Guldner.

Earlier in the week, Guldner said a lowered rate and other commission rulings would likely force the company to file an emergency rate request shortly after the final vote on the current case.

The pricing case has several facets

Return on equity is only a small part of the pricing case.

APS had called for an annual rate hike of $ 169 million that would increase residential bills by about 4.9% on average, but the various parties involved in the case all suggested changes that would lower rates. much less important, even lower prices.

For now, the utility’s customers won’t pay for the hundreds of millions spent adding new environmental controls at a New Mexico coal-fired power plant or the more than $ 100 million APS wanted to provide to communities. affected by coal-fired power plant closures.

Commissioners voted to address these issues separately during the three-day hearing that began on Monday.

Wednesday gave some answers regarding APS rates and finances, but left others to decide on October 26 and 27 when the next public meeting is scheduled.

The questions voted on Wednesday are only amendments to the full rate decision, meaning they don’t take effect until the full decision is voted on.

The five elected commissioners begin with a recommendation from a judge in such cases. In this case, Judge Sarah Harpring recommends an annual cut in APS tariffs of $ 111 million, based largely on her opinion that APS should not charge customers for the hundreds of millions spent on the New Coal-fired plant. Mexico.

Commissioners spent part of Wednesday voting on amendments to Harpring’s roughly 450-page order, but did not go through the whole matter.

The Four Corners problem is not solved

The biggest chunk of the rate hike will remain under investigation by commissioners.

APS spent about $ 450 million on added pollution checks at the Four Corners power plant in New Mexico, starting in 2014, after the company bought a larger stake in two generators at the plant. It was part of a plan to shut down three older units at the plant.

APS has tried to collect the investment in this project since its last tariff case, but has been delayed. The judge in this case said the investment was not prudent and should not enter rates.

The project represents approximately $ 73 million per year of the price increase of $ 169 million requested by APS.

Throughout this week’s hearing, APS officials said that without the coal generators, the APS would not have had enough electricity for customers in the past three years and would have been faced emergency power shortages like neighboring California utilities during hot summer days.

Opponents of the claim, including the Sierra Club, argue that APS should have known that the plant and environmental controls were a bad investment. APS announced the closure of the plant in 2031, rather than 2038 as previously planned.

APS also announced this year that one of the two upgraded generators will only operate seasonally from fall 2023.

The commissioners voted 3-2 to deal with these costs in a separate proceeding in which they can explore the “securitization” of the investment. This is a financing mechanism like refinancing a house that would help lessen the financial blow to the utility and the customers that will come with the plant shutdown.

Commissioners Jim O’Connor and Sandra Kennedy voted for Marquez Peterson’s proposal.

Aid to coal communities delayed

One of the issues that sparked the most discussion during the hearing was APS’s proposal to provide millions in financial aid to the Navajo and Hopi tribes as well as other communities in Arizona. and New Mexico that are damaged when nearby coal-fired power plants and mines feed them.

APS has already proposed a $ 144 million plan to help these communities transition to new industries to support their economies.

Guldner said at the hearing that the company has pledged $ 25 million from shareholders of Pinnacle West Capital Corp., the parent company of APS, who would go to the cause, regardless of the decision of regulators.

Shareholder money comes from profits that would otherwise go to people who own shares in the company and is not billed back to taxpayers.

The administrative judge recommended a lower number, but the commission’s legal staff, RUCO and Olson all questioned whether forcing public service taxpayers to give money to non-APS customers and non-Arizona residents. was even legal.

The commission voted 3-2 to keep the question open to answer additional questions, including the legality of the proposal, although some want to immediately offer help to communities.

“This commission has failed in communities affected by coal,” Kennedy said, adding that the closures would hurt the tribes. “There will be pain very focused on those who need it and who least deserve it.”

Why rates increase between rate cases

Another issue that was not changed was the fuel price “fitter” on APS bills. Some customers and commissioners are frustrated to learn that bills can go up (or down) between rate cases as the price of natural gas goes up and down.

Indeed, rate cases focus on large investments – power plants, transmission lines, expanded infrastructure to serve new customers – while many bill adjusters are more narrowly focused on things like fuel.

Almost automatic adjuster increases have been established by previous commissions.

The APS has seven adjustment devices, including the fuel. They reset at different times of the year, but if they all increase in a given year, they can cause six rate hikes in the first six months of the year.

Harpring, in his recommendation, said commissioners should look at all adjusters in a new process and the commission should determine if there is a better and more transparent way to recover those costs.

The “power adjuster,” which tracks natural gas prices, usually has the most noticeable effect on customer bills.

The price that utilities pay for natural gas and electricity that they buy from other utilities is passed directly to customers without mark-up. When utilities pay lower prices, rates go down. When costs go up, prices go up.

APS simply calculates its gas and electricity expenses, taking into account the actual prices for the past year and the forecast prices for the coming year, and adjusts the prices up or down on February 1 according to of these calculations.

This year, customers have seen their bills increase by an average of $ 2 in April and will see about an additional $ 2 in November to cover the cost of natural gas to power power plants.

APS attributes the highest costs to the hottest summer on record in Arizona in 2020, forcing the company to buy more gas for its power plants as well as electricity from other utilities , and an increase in gas spending blamed on COVID-19.

The item for the purchase of electricity and natural gas is a fraction of a penny added to each kilowatt hour of electricity consumed by customers, so households that consume more than average will see larger increases and l he impact will be greater in summer than in winter, as people consume more energy in the warmer months.

Utilities have the right to recoup the money they spend to run the electricity grid, so there was little that regulators could do to reduce charges when APS proposed this year’s changes, although ‘they voted to spread the increase rather than having customers hit everything in the spring.

Kennedy and O’Connor proposed amendments that would change the automatic nature of the fuel adjuster, but in light of strong opposition from APS, they both withdrew those amendments.

Join reporter Ryan Randazzo at ryan.randazzo@ or 602-444-4331. Follow him on Twitter @UtilityReporter.

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