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.