Business Context and Reporting Period
This Form 8-K is a joint current report filed by Pinnacle West Capital Corporation and its subsidiary, Arizona Public Service Company (APS), on August 18, 2006. The filing addresses the procedural status of a pending general rate case before the Arizona Corporation Commission (ACC).
Key Financial Metrics and Rate Case Details
The filing focuses on revenue requests and regulatory recommendations rather than historical financial performance metrics like profit or cash flow.
- APS Requested Increase: 21.3% ($453.9 million) in annual retail electricity revenues.
- Fuel and purchased power costs: $299.0 million (14.0%).
- Non-fuel increases: $155.2 million (7.3%).
- ACC Staff Recommendation: 9.8% ($208.3 million) increase in annual retail electricity revenues.
- Fuel and purchased power costs: $193.5 million (9.1%).
- Non-fuel increases: $10.5 million (0.5%).
- Environmental portfolio standard: $4.3 million (0.2%).
- Proposed Cost of Capital: ACC staff recommended a weighted-average cost of capital of 8.05% (based on 10.25% return on common equity and a 45% debt/55% equity structure).
- Other Intervenors:
- RUCO recommended a 10.89% ($232 million) increase.
- AECC and Phelps Dodge recommended a reduction of at least $131 million from APS's request.
Material Changes and Regulatory Proposals
The filing details significant proposed changes to the regulatory framework for APS:
- Power Supply Adjustor (PSA): The ACC staff proposed increasing the base fuel amount from $0.020743 per kWh to $0.027975 per kWh. The staff also raised for consideration (without specific recommendation) shifting the PSA to projected fuel costs and removing existing limitations on fuel cost recovery.
- Palo Verde Nuclear Station: The staff proposed establishing minimum three-year capacity factor targets based on comparable nuclear plants, with potential cost recovery adjustments for underperformance.
- Disallowances: The ACC staff recommended disallowing $17.4 million in PSA deferrals related to 2005 Palo Verde outages.
Outlook, Risks, and Contingencies
Management explicitly states that the timing and outcome of the rate case cannot be predicted, nor can the resulting levels of regulated revenues. The procedural schedule indicates:
- Additional testimony, including APS rebuttal, is due September 15, 2006.
- Hearings are scheduled to begin October 10, 2006.
The primary risk is the uncertainty of the final approved rate increase, which could range significantly from the staff's recommendation to the company's request or lower, depending on the ACC's final decision.
Investor Verification Checklist
- Verify the final ACC ruling on the rate increase percentage and dollar amount compared to the 21.3% request and 9.8% staff recommendation.
- Confirm the approved base fuel amount for the Power Supply Adjustor (PSA) and any changes to the PSA calculation methodology.
- Monitor the outcome of the $17.4 million disallowance recommendation regarding 2005 Palo Verde outages.
- Review the approved cost of capital and return on equity in the final order.
- Check for any new capacity factor targets imposed on the Palo Verde Nuclear Generating Station.