Arizona Water IssuesArizona Water Issues Setting Rates for Regulated Water Utilities

Nancy ScottNancy ScottUtilities DivisionUtilities Division

ARIZONA CORPORATION COMMISSIONARIZONA CORPORATION COMMISSION

June 30, 2011June 30, 2011

Arizona Corporation Commission (ACC)

– Securities– Legal– Utilities– Safety

– Administration– Corporations– Hearing– Information Technology

Five person panel elected in statewide vote

Eight divisions:

ACC Authority (Utilities)

Regulation of public service corporations (PSCs) that provide water, telecommunications, electric, and gas service.– PSCs are regulated monopolies given the

opportunity to earn a fair and reasonable return on their investments.

– PSCs are primarily investor-owned; by definition, does not include government entities.

Responsible for ensuring reliable utility service at fair, just and reasonable rates.

Number of Utilities

Water companies 300+

Sewer companies ~50

Telephone companies 100+

Electric companies 15

Gas companies 6

Utilities Division Sections

Financial & Regulatory Analysis (FRA)Telecommunications & Energy Consumer ServicesEngineeringDirector’s Office & Administration

Water Utility Cases

Certificate of Convenience and Necessity (CC&N)

RatesFinancingTariffsComplaints

Setting Rates

Two-Step ProcessDetermine the utility’s revenue requirement.Spread the revenue requirement over customer

classes and consumption to set rates.

Revenue RequirementCost-of-Service Method

Traditional Rate Base/Rate of ReturnRevenue requirement composed of:- prudently-incurred operations and

maintenance costs;- depreciation and amortization expense;- taxes; and- return on rate base (investment).

Test Year

The one-year historical period used in determining rate base, operating income and rate of return.

The end of the test year is the most recent practical date available prior to filing.

Pro forma and normalizing adjustments are made to test year data.

Rate Base

The investment base to which a fair rate of return is applied to arrive at the revenue requirement.

The total of the investor-funded plant, facilities, and other investments used by the utility in providing utility services to its customers.

Sample Rate Base CalculationOriginal Cost Rate Base

Plant in Service $ 798,267 Less Accumulated Depreciation $ 456,078 Net Plant $ 342,189 Plant Advances $ 57,017 Service Line & Meter Advances $ 1,200 Less Total Advances $ 58,217 Gross Contributions $ 196,718 Less Amortization of Contributions $ 48,930 Less Net Contributions $ 147,788 1/24 Power $ 115 1/8 Operation & Maintenance $ 3,960 Inventory $ 0 Prepayments $ 0 Plus Total Other Items $ 4,075

RATE BASE $ 140,259

Rate of Return (ROR)

Represents the amount allowed to be earned, expressed as a percentage of rate base.

ROR is intended to allow the utility to:– Meet its obligations to present investors– Compete on reasonable terms in the financial

markets for future capital requirementsOften the most controversial component

of the revenue requirement.

Revenue RequirementDebt-Service or Cash Flow Method

When little or no rate base existsRevenue requirement based on cash flow:prudently-incurred operations and

maintenance costs;taxes;refund payments;principal and interest on debt;reasonable allowance for contingencies; andsmall allowance to build equity.

Rate CaseEngineering Review

Inspect physical plant facilities.– verify plant inventory– determine used and usefulness

(including excess capacity)Evaluate system condition/operation and

identify any deficiencies.Recommend depreciation rates.Recommend meter/service line charges.

Rate CaseFinancial Review

Audit company’s books and records.Establish recommended rate base.Recommend allowable expenses.Recommend revenue requirement.Recommend rate design.

QUESTIONS???