WRDCWRDCFinance CommitteeFinance Committee

Nancy ScottNancy ScottUtilities DivisionUtilities Division

ARIZONA CORPORATION COMMISSIONARIZONA CORPORATION COMMISSION

March 17, 2011March 17, 2011

Arizona Corporation Commission (ACC)

– Securities– Corporations– Utilities– Safety

– Administration– Legal– 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.

To ensure reliable utility service at fair, just and reasonable rates.

Number of Utilities

Water companies 300+

Sewer companies 49

Telephone companies 100+

Electric companies 15

Gas companies 6

Utilities Division Sections

Financial & Regulatory Analysis (FRA)

Engineering

Consumer Services

Telecommunications & Energy

Director’s Office & Administration

Water Utility Cases

Certificate of Convenience and Necessity (CC&N)

Rates

Financing

Tariffs

Complaints

Funding Plant

Equity infusion

(includes reinvesting retained earnings)Debt financingContributions/Advances

(includes hook-up fees)

Setting Rates

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

classes and consumption to set rates.

Setting RatesCost-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).

What is Rate Base?

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

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

Rate CaseFinancial Review

Audit company’s books and records.

Establish recommended rate base.

Recommend allowable expenses.

Recommend revenue requirement.

Recommend rate design.

Rate CaseEngineering Review

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

Evaluate system condition/operation and identify any deficiencies.

Recommend depreciation rates.Recommend meter/service line charges.

Used and Useful

National Regulatory Research Institute defines Used and Useful as:

A test for determining the admissibility of utility plant as a component of rate base.

Plant must be in use (not under construction or standing idle awaiting abandonment) and useful (necessary to provide service)

Excess Capacity

Source production and storage capacity are evaluated.

If it is determined that the Company has too many wells or too much storage, then some of the plant may be taken out of rate base.

A five year projection is sometimes used.Not applied very often with small water

companies.

Sample Rate Base CalculationOriginal Cost Rate Base

Plant in serviceLess Accumulated Depreciation

Net PlantNet PlantPlant AdvancesService Line & Meter Advances

Less Total AdvancesLess Total AdvancesGross ContributionsLess Amortization of Contributions

Less Net ContributionsLess Net Contributions1/24 Power1/8 Operation & MaintenanceInventoryPrepayments

Plus Total Other ItemsPlus Total Other Items

RATE BASERATE BASE

$798,267

$342,189

$58,217

$147,788

$4,075

$140,259

$456,078

$ 57,017$ 1,200

$196,718

$ 48,930

$ 115$ 3,960$ 0$ 0

Setting RatesDebt-Service Method

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

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

Financing Case

Evaluate need for plant that is to be financed.

Evaluate amount of financing.Determine if request is compatible

with sound financial principles.No used and useful determination

(until the next rate case).

Advances/Contributions

Money, services, or plant provided by third-party non-investors.

Generally represent a reduction to rate base.Advances (customer service line and meter

installations and main line extension agreements with developers) are refundable.

Contributions (plant or money from developers) are not refundable.

Offsite Water Facilities Hookup Fees

One time charge for each new service connectionUsed to fund backbone plant such as wells, storage

tanks, large distribution mains, booster stations.Plant must provide benefit to all customersNon-refundable contribution in aid of

constructionFunds must be kept in separate account and

monitored

Regional Planning?

ACC jurisdiction only applies to investor-owned utilities.

Funding requires that the plant be necessary for service.

The ratemaking construct limits the utility to service in its specific certificated area (with the 5-year planning horizon).

Incentives for acquisition and consolidation of small water companies.

QUESTIONS???