Business Context and Reporting Period
This Form 8-K is a joint filing by Pinnacle West Capital Corporation and its subsidiary, Arizona Public Service Company (APS), dated June 19, 2007. The report details the Arizona Corporation Commission's (ACC) approval of APS's general retail rate case and modifications to its Power Supply Adjustor (PSA).
Key Financial Metrics and Rate Decisions
- Net Retail Rate Increase: 6.8% effective July 1, 2007.
- Base Rate Increase: 15.1% (offset by the termination of an 8.3% interim PSA adjustor).
- Annual Retail Base Revenue Increase: Approximately $322 million (15.1%), comprising $315 million in fuel-related increases and $7 million in non-fuel increases.
- Rate Base: $4.4 billion (original cost).
- Capital Structure: 45% long-term debt / 55% common equity.
- Return on Equity (ROE): 10.75%.
- Weighted-Average Cost of Capital: 8.32%.
- Base Fuel Rate: $0.0325 per kilowatt-hour (kWh).
- Environmental Improvement Surcharge (EIS): $0.00016 per kWh, targeting approximately $4.5 million in annual cash recovery.
Material Changes and Regulatory Outcomes
The ACC approved a modified PSA structure effective July 1, 2007, shifting from historical deferred costs to a forward-looking estimate of fuel and purchased power costs. Key changes include:
- PSA Components: Introduction of Forward, Historical, and Transition components to reconcile expected versus actual costs.
- Sharing Arrangement: The 90/10 sharing mechanism (APS absorbs 10% of costs above base) was modified to exclude renewable energy resources and capacity components of competitively procured power agreements.
- Cost Recovery Limits: The cumulative plus/minus $0.004 per kWh limit over the life of the PSA was eliminated, though the annual change limit remains. There is no annual limit on total fuel cost recovery.
- Palo Verde Outage Deferrals: The ACC disallowed approximately $14 million (including interest) of deferrals related to 2005 unplanned outages ($8 million after-tax impact) but approved the recovery of the remaining $34 million via a temporary surcharge over 12 months.
- Denied Requests: The ACC rejected APS's requests for accelerated depreciation, inclusion of construction work in progress in rate base, and an "attrition adjustment."
Outlook and Risks
Following the issuance of the written order, parties have twenty days to file a motion for reconsideration. The decision requires APS and the ACC staff to develop "nuclear performance standards" for future consideration. The interim PSA adjustor, which did not affect earnings, is terminated, replaced by the new base rate and modified PSA structure.
Investor Verification Checklist
- Confirm the effective date of the 6.8% net rate increase (July 1, 2007) and its impact on cash flow.
- Verify the $8 million after-tax charge resulting from the disallowed Palo Verde outage deferrals.
- Monitor the 20-day window for motions to reconsider the ACC order.
- Review the new PSA mechanics, specifically the forward-looking cost estimates and the exclusion of renewable energy costs from the sharing arrangement.
- Track the development of the new "nuclear performance standards" mandated by the ACC.