WRDC Finance Committee Nancy Scott Utilities Division ARIZONA CORPORATION COMMISSION March 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 companies100+ 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 financing Contributions/Advances (includes hook-up fees)

Setting Rates Two-Step Process Determine the utility’s revenue requirement. Spread the revenue requirement over customer classes and consumption to set rates.

Setting Rates Cost-of-Service Method Traditional Rate Base/Rate of Return Revenue 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 Case Financial Review Audit company’s books and records. Establish recommended rate base. Recommend allowable expenses. Recommend revenue requirement. Recommend rate design.

Rate Case Engineering 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 Calculation Original Cost Rate Base FPlant in service FLess Accumulated Depreciation Net Plant t Net Plant FPlant Advances FService Line & Meter Advances tLess Total Advances FGross Contributions FLess Amortization of Contributions tLess Net Contributions F1/24 Power F1/8 Operation & Maintenance FInventory FPrepayments tPlus Total Other Items tRATE 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

Setting Rates Debt-Service Method When little or no rate base exists Revenue requirement based on cash flow: prudently-incurred operations and maintenance costs; taxes; principal and interest on debt; reasonable allowance for contingencies; and small 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 connection Used to fund backbone plant such as wells, storage tanks, large distribution mains, booster stations. Plant must provide benefit to all customers Non-refundable contribution in aid of construction Funds 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.

QUESTIONS???