WRDC Finance Committee Nancy Scott Utilities Division ARIZONA CORPORATION COMMISSION

1. WRDC Finance Committee Nancy Scott Utilities Division ARIZONA CORPORATION COMMISSION March 17, 2011

2. Securities Corporations Utilities Safety Administration Legal Hearing Information Technology Arizona Corporation Commission (ACC) • Five person panel elected in statewide vote • Eight divisions:

3. 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.

4. Number of Utilities • Water companies 300+ • Sewer companies 49 • Telephone companies 100+ • Electric companies 15 • Gas companies 6

5. Utilities Division Sections • Financial & Regulatory Analysis (FRA) • Engineering • Consumer Services • Telecommunications & Energy • Director’s Office & Administration

6. Water Utility Cases • Certificate of Convenience and Necessity (CC&N) • Rates • Financing • Tariffs • Complaints

7. Funding Plant • Equity infusion (includes reinvesting retained earnings) • Debt financing • Contributions/Advances (includes hook-up fees)

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

9. Setting RatesCost-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).

10. 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.

11. Rate CaseFinancial Review • Audit company’s books and records. • Establish recommended rate base. • Recommend allowable expenses. • Recommend revenue requirement. • Recommend rate design.

12. Rate CaseEngineering 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.

13. 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)

14. 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.

15. Sample Rate Base Calculation Original Cost Rate Base $798,267 • Plant in service • Less Accumulated Depreciation • Net Plant • Plant Advances • Service Line & Meter Advances • Less Total Advances • Gross Contributions • Less Amortization of Contributions • Less Net Contributions • 1/24 Power • 1/8 Operation & Maintenance • Inventory • Prepayments • Plus Total Other Items • RATE BASE $456,078 $342,189 $ 57,017 $ 1,200 $58,217 $196,718 $ 48,930 $147,788 $ 115 $ 3,960 $ 0 $ 0 $4,075 $140,259

16. Setting RatesDebt-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.

17. 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).

18. 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. Advances/Contributions

19. 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 Offsite Water Facilities Hookup Fees

20. 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.

21. QUESTIONS???