Business Context and Reporting Period
This Form 8-K, dated December 19, 2008, is a combined filing by Pinnacle West Capital Corporation and its subsidiary, Arizona Public Service Company (APS). The report details the status of the APS General Rate Case pending before the Arizona Corporation Commission (ACC). The filing documents the submission of initial written testimony by the ACC staff and other intervenors regarding APS's request for a rate increase.
Key Financial Metrics and Rate Request
APS is requesting a net rate increase of $278.2 million. This figure represents a base rate increase of $448.2 million less a $170 million reclassification of fuel and purchased power revenues from the Power Supply Adjuster (PSA) to base rates. The request is based on the following metrics:
- Test Year: Ended December 31, 2007.
- Rate Base: $5.4 billion.
- Base Fuel Rate: $0.0388 per kilowatt-hour (kWh) based on estimated 2010 prices (current rate is $0.0325 per kWh).
- Weighted-Average Cost of Capital: 8.86%.
- Return on Common Equity: 11.5%.
- Capital Structure: 46% long-term debt and 54% common equity.
- Non-Fuel Base Rates: $264.3 million (includes $58.8 million for post-test year adjustments and $79.3 million attrition adjustment).
- Impact Fees: Recovery of up to $53 million.
The filing text does not provide specific revenue, profit, cash flow, or liquidity figures for the company's overall financial position, as this report focuses exclusively on the regulatory rate case.
Material Changes and Regulatory Positions
Significant divergence exists between APS's request and the recommendations of the ACC staff and other intervenors:
- ACC Staff Recommendation: Recommends a reduction of $141.6 million to APS's base rate request. The staff proposes a total revenue increase of $155.1 million for non-fuel costs and $11.4 million for fuel costs. Key adjustments include:
- Lowering the weighted-average cost of capital to 8.58% (11.0% return on equity).
- Reducing the proposed rate base by $57 million, primarily due to excluding post-test year plant.
- Rejecting the $79 million attrition adjustment and modifications to the line extension policy.
- Exempting low-income customers from rate increases.
- RUCO Recommendation: The Arizona Residential Utility Consumer Office recommends no net rate change after reclassification, based on a $4.9 billion rate base and a 9.6% return on equity.
- AECC Recommendation: Arizonans for Electric Choice and Competition recommends reducing APS's request by $101.4 million.
Outlook, Risks, and Procedural Schedule
Management cannot predict the timing or outcome of the rate case or the resulting levels of regulated revenues. The procedural schedule is as follows:
- January 9, 2009: ACC staff and intervenors file rate design testimony.
- February 6, 2009: APS files rebuttal testimony.
- April 2, 2009: Hearings scheduled to begin.
Risks include the potential for significant cost disallowances, a lower authorized return on equity, and a reduced rate base compared to the company's request. The ACC staff also suggested APS propose a three-year interval between base rate filings to provide greater rate stability.
Investor Verification Checklist
- Verify the final outcome of the ACC General Rate Case hearings scheduled for April 2009.
- Monitor the approved return on equity and cost of capital, as the ACC staff recommended a reduction from APS's requested 11.5% to 11.0%.
- Assess the impact of the proposed $57 million reduction in rate base on future earnings.
- Review the final determination on the $79 million attrition adjustment, which the ACC staff recommended rejecting.
- Track the reclassification of PSA revenues to base rates and its effect on future fuel cost recovery mechanisms.