Arizona Corporation Commission poised to decide APS rate case
Arizona Public Service Co. (APS), an owner and operator of the Four Corners Power Plant, one of the largest coal-fired generating stations in the United States, awaits action on its 2019 rate case before regulators at the Arizona Corporation Commission (ACC) that could set precedent for other utilities across the state and nation.
The plant is located on Navajo land in Fruitland, N.M., about 25 miles west of Farmington, N.M., and provides power to about 300,000 households in New Mexico, Arizona, California and Texas, according to the Farmington Chamber of Commerce.
The Phoenix-headquartered APS serves 1.3 million homes and businesses in 11 of Arizona’s 15 counties and is the principal subsidiary of the publicly traded Pinnacle West Capital Corp., which during its Aug. 5 second quarter 2021 earnings call raised concerns about the pending Arizona rate case.
A recommended opinion and order (ROO) from an administrative law judge issued on Aug. 2 would, among other things, disallow certain emissions control investment at the Four Corners Power Plant, and approving the suggested ROO could reduce Pinnacle West’s annual net income up to roughly $90 million, according to company executives on the call.
“I will say that we are disappointed and concerned by the recommendation, which would not appropriately allow for the recovery of important investments needed to serve customers reliably,” said Jeffrey Guldner, board chairman, president and CEO of Pinnacle West, on the call. “However, I do want to note that this is a recommendation from the administrative law judge; it’s not yet a final order of the commission.”
Specifically, the administrative law judge’s ROO recommended a $3.6 million revenue increase or a non-fuel $29 million revenue decrease at 9.16 percent return on equity and implied 0.05 percent return on fair value, and recommends against APS recovering some $400 million spent on Four Corners Selective Catalytic Reduction System (SCRS) project costs that were incurred to control nitrous oxide emissions per a mandate by the Environmental Protection Agency (EPA). The SCRS technology was agreed upon by the EPA and environmental groups as the solution for complying with regional haze regulations, reducing nitrous oxide emissions by nearly 90 percent.
According to John Quackenbush, president at JQ Resources, LLC, a firm providing consulting services to participants in regulated utility industries, said that the ROO runs contrary to a key ACC staff recommendation by “severely lowering” the authorized return on equity to 9.16 percent, which he said is well below the ACC staff recommendation of 9.40 percent.
“This depressed ROE [return on equity] would serve as an additional constraint on APS’s ability to cost-effectively finance upcoming investments for Arizona customers,” Quackenbush told Daily Energy Insider in an email.
“Fortunately, the ROO is preliminary and the upcoming mid-September ACC decision provides an opportunity to restore some stability by altering the negative environmental cost recovery recommendation in the ROO,” wrote Quackenbush, who served as chairman of the Michigan Public Service Commission from 2011 to 2016.
Additionally, because regulators and customers typically value reliability, along with compliance with federal environmental mandates and the corresponding environmental benefits, Quakenbush said that the ROO also “heightens investment uncertainty, punishes reliability, and destabilizes economic development in the Navajo Nation.”
“SCRS cost recovery is important to maintain APS’ financial integrity so it can cost-effectively finance upcoming investments in clean energy and an advanced grid that will benefit its customers,” he said.
And without the SCRS investments, the Four Corners plant would have faced a federal mandate to shut down in 2018, Quackenbush wrote. “Four Corners has since proved crucial to Arizona avoiding a California-in-the-summer-of-2020-type reliability challenge,” he said.
Guldner appears to agree and said during the recent Pinnacle West earnings call that there’s “no question” that Four Corners has been a critical asset in serving APS customers, and without the EPA-mandated installation of SCRS, the plant would not have been allowed to operate. There just is not enough capacity in the West to reliably run the system without Four Corners.
“We continue to believe that the commission and other stakeholders recognize the importance of investing in assets such as Four Corners to maintain reliability, given the challenges that we’ve all seen in the West,” Guldner added.
At the same time, while Pinnacle West and APS plan to continue to work with the Arizona commission to recover investments and ensure that quality service is maintained for customers, Gulder said that an approved ROO could put that objective in jeopardy.
“The ACC has the opportunity to clarify that it values reliability, clean energy, and a modern grid as much as customers do,” explained Quackenbush. “The cost recovery issue is important to regulators because it will set the tone and clarify whether Arizona welcomes future clean energy and grid investments that will benefit Arizona customers, rather than raise the financing costs that customers ultimately pay.”
If the ROO is adopted by the ACC, that action would send a message that Arizona is out of step with other states around the nation, he added.
“The ROO sends an ironic message that a utility is at risk of getting punished for complying with federal mandates, reducing emissions, enhancing reliability for customers, and providing economic benefits to vulnerable communities,” Quackenbush said.
Moreover, compared to decisions in other states, the ROO would increase investor uncertainty about investment in Arizona utilities. “Customers, not just investors, benefit by having a financially stable utility with earnings and cash flow sufficient to attract capital on reasonable terms,” said Quackenbush. “If the ACC were to endorse the ROO, investors would be disappointed and concerned, assess higher risk in Arizona utilities, and likely require a higher return in order to provide capital to Arizona utilities.”
A decision on the APS rate case is expected to be issued during the third quarter.
“Investors consider the ACC unpredictable and are uncertain whether the ACC will follow the recommendation of its own staff or the ROO,” Quackenbush said. “If the ACC endorses the ROO, the resulting significant financial harm is expected to lead to an APS request for a re-hearing and a court appeal.”
Guldner said that if the outcome of the case does not provide for necessary investments to support customer growth and to maintain the financial health of the company, “we have the option to petition the commission for reconsideration of that decision, to challenge the legality of the decision through the court system, or to file another rate case.”
Following the conclusion of this rate case, all of those options will be evaluated, he said.
