Rate Case Roundup: Arizona

As the second quarter drew to a close and the summer season began, regulatory officials around the country continued their reviews of utility rate plans. As has become the norm, many of the commission decisions reported below rested on settlement proposals.

In Arizona, in a somewhat unusual rate case that involved only sewer service, the Arizona Corporation Commission authorized the utility, EPCOR Water Company, to increase its overall revenue requirement by $3.1 million and consolidate its five rate districts into one. As a result of that consolidation, customers in three of the affected divisions will actually see a decrease in their charges while customers in the other two will experience an increase. 

EPCOR had originally sought an increase of $5.1 million. In presenting its request, the company had included new rate schedules under three different scenarios: 

1. a stand-alone plan, which would continue the existing five-district structure; 
2. a full consolidation strategy, under which the utility's five separate sewer rate tiers would be reduced to one (the plan ultimately adopted); and 
3. a deconsolidation construct, under which the five current divisions would be reorganized and expanded into seven. 

In its rate application, EPCOR asked for rate base recognition of a significant amount of new plant and investments, much of which had been placed in service long after the relevant test year had ended. However, the utility noted that it had been required by prior commission order to file a new rate case by a date certain, with that deadline related to a particular test year. Thus, the company asserted, inasmuch as it had no choice but to file when it did and had no ability to perfectly match its capital projects with its test period, it should be allowed to include the post test-year additions in rate base. 

Although several parties protested that proposal, arguing that such treatment would disregard the commission's long-standing matching principle for rate base additions, the commission sided with the utility. The commission observed that EPCOR's unique circumstances warranted an exception to the matching principle. 

At the same time, however, the commission warned the company that going forward, it should not expect the same result for its post-testyear rate base claims. The commission said it had detected a pattern of posttest- year plant additions going further and further beyond the end of the test period, a trend the commission cautioned it would not countenance in the future. 

Besides the matter of post-testyear rate base adjustments, there also was widespread debate about an appropriate rate of return on equity (ROE) for the utility, with EPCOR seeking a 10.65% ROE but other parties recommending much lower ROEs of between 9.3% and 9.7%. A partial settlement listed a ROE of 10.0%. 

The commission, however, was not satisfied with the ROE reflected in the stipulation. It deemed it "troubling" that the 10.0% figure had been presented without any context as to how the parties had arrived at that value. The commission thus decided to revisit the ROE arguments made by the various participants on a presettlement basis. After closely examining those ROE cost model results, the commission found that a 9.7% ROE would be the most reasonable for the company. 

As to the issue of consolidated rate schedules, the commission commented that the five existing districts are relics from EPCOR's predecessor in interest, with there being significant disparity between the rates paid by customers from division to division. Agreeing with the company that consolidation would produce substantial operational cost savings, but concurring with opponents that consolidation could cause customer confusion and even rate shock, the commission concluded that consolidation of the five into one was the best option for the long run. 

Nevertheless, to ease the transition and give customers time to adjust to the new schedule of charges, the commission instructed the utility to phase in the new charges over a period of five years. The commission provided a district-by-district matrix of what the new rates should be during that five-year period. In the end, it averred, customers in all five divisions should be paying the same amount, namely a flat $38.98 a month. 

The commission acknowledged that for customers presently billed at the utility's lowest rate of $22.11 per month (the Sun City district), the change will mark a total increase of more than 75%. But, the commission said, that increase could not be considered excessive when viewed against historic and current monthly rates paid for the same service by ratepayers in other districts. 

Underscoring that point, the commission contrasted the final Sun City charges with those being paid by customers in the Agua Fria and Mohave districts, which now stand at more than $71 a month. The commission noted that by the end of the five-year transition period, the revised rates will provide those customers with significant rate relief through a decrease of more than 40%. Re EPCOR Arizona Water, Inc., Docket No. WS-01303A- 16-0145, Decision No. 76162, June 28, 2017 (Ariz.C.C.).