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 April 27, 2007. The filing addresses a recommended order issued by an Administrative Law Judge (ALJ) of the Arizona Corporation Commission (ACC) regarding APS's general retail rate case and its application to recover deferrals under the Power Supply Adjustor (PSA).
Key Financial Metrics and Regulatory Recommendations
- Proposed Revenue Increase: The ALJ recommended an increase of approximately $286 million (13.5%) in APS's annual base retail revenues.
- Revenue Composition: The increase includes approximately $280 million related to fuel costs and $6 million in non-fuel related increases.
- Capital Structure Assumptions: The recommendation is based on a 10.75% return on equity, a 45%/55% long-term debt/common equity split, and a weighted-average cost of capital of 8.32%.
- Rate Base: The original cost rate base is set at $4.4 billion.
- Fuel Rate: The base rate for fuel and purchased power costs is set at $0.0312 per kilowatt-hour (kWh).
- PSA Deferrals: The ALJ recommended disallowing approximately $14 million of PSA deferrals related to 2005 Palo Verde outages (including $8 million in accrued interest after taxes). The remaining balance of approximately $34 million is recommended for recovery over 12 months via a temporary surcharge.
Material Changes and Regulatory Modifications
The recommended order introduces significant changes to the Power Supply Adjustor (PSA) mechanism effective June 1, 2007:
- Calculation Basis: The annual PSA adjustor will be based on projected fuel and purchased power costs rather than historical costs.
- Sharing Arrangement: The 90/10 sharing arrangement will be modified to exclude certain costs, such as renewable energy resources and fixed elements of long-term purchase power agreements.
- Cost Limits: The cumulative plus or minus $0.004 per kWh limit over the life of the PSA is eliminated, though the annual limit on rate changes remains.
- Recovery Limits: There will be no preset annual limit on the amount of fuel and purchased power costs recoverable through base rates and the PSA.
- Denied Requests: The ALJ recommended against adopting APS's requests for accelerated depreciation, inclusion of construction work in process in the rate base, or an "attrition adjustment."
Outlook, Risks, and Management Commentary
APS and other parties may file exceptions to the recommended order by May 15, 2007. APS is currently evaluating the order and expects to file exceptions by that date. The final outcome and timing of the rate case remain uncertain as the ACC must consider the ALJ's recommendations alongside filed exceptions. Additionally, the ALJ recommended the development of "nuclear performance standards" for future consideration. The filing explicitly states that the company cannot predict the timing or outcome of the rate case or the resulting levels of regulated revenues.
Investor Verification Checklist
- Verify the final ACC order following the May 15, 2007, exception filing deadline to confirm if the $286 million revenue increase is approved.
- Monitor the status of the $14 million disallowed PSA deferrals and the implementation of the temporary surcharge for the remaining $34 million.
- Review the specific modifications to the PSA sharing arrangement and cost exclusions to assess future margin volatility.
- Track the development of the recommended "nuclear performance standards" and their potential impact on future regulatory proceedings.
- Confirm the effective date of the new rates, currently recommended for June 1, 2007.