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APS profitability, recovery for coal investments in jeopardy in rate case

APS SRP Electricity power pole generic.png
Posted at 9:36 PM, Oct 06, 2021
and last updated 2021-10-08 17:50:45-04

PHOENIX  — After three days of marathon meetings, Arizona Corporation Commissioners (ACC) decided to approve a significant reduction in potential profits for Arizona Public Service (APS), on Wednesday.

The company which currently receives a 10% Return on Equity (ROE), had that number cut to 8.7% by regulators in its latest rate case.

The five-member regulatory board approves rates and operational decisions that impact rates for Arizona's investor-owned utilities.

In Commissioner Justin Olson's explanation of his amendment to reduce the ROE, he said he thinks it is an appropriate response to the company's struggles following the last rate case passed in 2017.

"Including the poor customer education, implementation, the challenges with the rate design tool, and the calculation of recommended rate and so on and so forth," Olson said. "I think that it is appropriate that there would be recognition of those challenges."

Commissioner Sandra Kennedy produced a similar amendment that would have reduced the company's earning by an even larger margin. It failed 4-1.

Prior to the vote APS CEO Jeff Guldner told commissioners any reduction below 9.1% would hamper the company's ability to make investments in the electrical grid to handle the influx of people and businesses moving the state.

Guldner went so far as to change his Zoom background to a picture of an electricity substation under construction for a new Microsoft data center facility.

"It will become our largest customer, and it's on track to becoming the largest employer-one of the largest employers in the state. And they depend on grid investment to operate," Guldner told commissioners.

He also said an ROE reduction that low would make it difficult to find lenders to fund the company's transition to clean energy.

Most of the commissioners were not swayed. Olson's amendment passed 4-1, with Chair Lea Marquez Peterson voting against.

"I don't think this ROE adequately recognizes the financial realities of our transition to clean energy," she said.

The issue of what to do about the $400 million that APS spent to update its Four Corner coal plant was not resolved during the meeting.

Commissioners were torn about whether investments the company made were prudent.

In 2013, APS bought a majority stake in the plant from Southern California Edison then installed the Selective Catalytic Reduction pollution controls to fulfill a settlement with the U.S. Department of Justice and Environmental Protection Agency for alleged violations of the Clean Air Act. Construction of the SCRs lasted from 2016 to 2018.

The company recently announced plans to drastically reduce its capacity by fall 2023, and it will be retired by 2031, years earlier than originally planned.

Conservation group Sierra Club argued that APS knew, or should have known, that there were less expensive alternatives prior to putting more money in the coal plant.

And in her Recommended Opinion and Order administrative law judge Sarah Harpring agreed saying that the prudence of the upgrades "had not been demonstrated" and that their costs should not be allowed to be charged to ratepayers.

On Tuesday, APS maintained that the plant is used and is useful and if the upgrade were not installed the company would have had to generate power in a different but also costly way. And that the solar and battery storage that Sierra Club suggested as an alternative was "science fiction" at the time decisions were being made about the Four Corners plant.

Prior to the vote, ACC staff reiterated that it believed the investments were prudent. Guldner said if recovery were delayed any longer the company would be forced to write off $75 million of the investment.

Likely setting up a legal battle, commissioners approved Marquez Peterson's amendment to hold the docket open and have additional hearings to get more information about prudence in a 3-2 vote. Marquez Peterson, Kennedy, and Olson voted in favor. Tovar and O'Connor against.

The Commission approved another Marquez Peterson amendment for immediate payment of $1.675 million in ratepayer funds to the Hopi Tribe to help with the impacts of coal mining pollution and coal plant closures.

Marquez Peterson and O'Connor appeared to be comfortable with the measure since Hopi are APS customers and believe they have jurisdiction. Those commissioners are not certain they have the same authority to authorize $100 million in ratepayer funds to the Navajo Nation since they are not APS customers.

Kennedy, who also voted in favor, called the vote the toughest of the proceeding for her since it helps Hopi but delays the Navajo.

"If the state legislature, the federal government, or any other jurisdiction does not take on this responsibility we should, and we must," Kennedy said. "Our failure as a commission is why I have no choice but to support this amendment."

Olson vote against citing his belief that ordering ratepayer funds to be used is outside of the Commission's jurisdiction.

Tovar voted against presumably because the Navajo Nation was excluded from payment.

The commission may take a final vote on the full rate case during the next open meeting on October 26.

APS is Arizona's largest utility with 2.7 million customers in 11 of Arizona's 15 counties.

(this story has been corrected to reflect the correct year of APS' prior rate case which was in 2017, not 2016)