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???