With Arizona’s summer fast approaching, my mind has been on water lately. So, this makes two consecutive blogs on the topic.
First, we recently received some great news on water releases downstream on the Colorado River from Lake Powell into Lake Mead. According to the U.S. Bureau of Reclamation, the winter snowpack in the mountains will result in sufficient spring runoff to avoid triggering water shortages for a few more years.
Since Arizona’s rights to Colorado River water are junior to the other 7 states of the Colorado River management plan, we stand to lose most during years when a shortage condition is triggered. While this spring’s run-off is estimated at 20 percent above normal, it doesn’t mean that we can forget about conserving for a dryer day. Even with the release, Lake Mead will still be 100 feet below its highest level and only half full. Nobody should be ready to declare victory over the persistent drought we’ve experienced for over a decade. Still, Mother Nature – at least for the past few months -- has been especially kind to Arizona.
In other noteworthy water news, a friend sent me a report prepared by Janney Capital Markets (read it here) on how state regulatory commissions rank in their regulation of water utilities. Janney, which provides research and advice to investors on stocks and bonds, has developed a mechanism for scoring state regulatory regimes on several factors, including returns on equity and evidence of progressive regulatory practices. According to the Janney report, “regulatory climate is the single most important factor driving shareholder returns for water utilities.” The results from Janney’s inaugural Regulatory Climate Index, unfortunately, confirm what many of us that participate in rate cases and other matters at the Arizona Corporation Commission already suspected. The ACC ranks below average – way below average. In fact, Arizona ranks dead last on the Janney scale.
Janney’s research indicates that Arizona ranks at the very low end of authorized returns on equity, and that Arizona has not enacted regulatory mechanisms like future test years or distribution system improvement charges. We also take longer to process rate cases than other state regulatory commissions.
Regulatory climate is an ever present factor in our ability to compete for investment capital. AIC’s 2008 Infrastructure Study projects that Arizona’s capital requirements for investments to replace aging water and wastewater systems and to construct new systems to meet growth could reach $109 billion over the next two decades. This estimate includes both municipal water systems and investor-owned systems. The investor-owned portion regulated by the ACC accounts for about 10 percent. Nevertheless, that’s a lot of money to coax from investors who have other options to maximize their returns.
In all fairness, however, the Janney index does not account for institutional differences that set Arizona apart from other commissions. For example, the ACC is an elected commission and its plenary powers and duties are set forth in the Arizona Constitution. Some (not all) regulatory attorneys have questioned, for example, whether setting rates on a future test year basis (one of Janney’s progressive regulatory indicators) conforms to our state’s constitutional requirements. Although the matter of future test years has not yet been legally contested here, the threat of lawsuits (possibly brought by consumer groups) tends to have a chilling effect on both the utility companies and the regulators. Utility companies seeking to minimize regulatory risk might be inclined to look for safer avenues for gaining rate relief that might accomplish the same result as a future test year.
The other important item to note is that the Janney index is static. Its metrics reflect a specific point in time. However, all recent indications from the ACC are that the Commissioners are serious about changing the way they regulate water utilities. The ACC has held several workshops to gather input from stakeholders on water company ratemaking, and they have listened to utilities and organizations, like AIC, on the need to streamline the regulatory process and improve the climate for attracting investment capital to Arizona. The ACC has already implemented a few of the suggestions from AIC’s White Paper on Streamlined Regulation, like encouraging settlements and expanding the Chairman’s consent agenda.
So the ball is now in the ACC’s court – does it push the envelope on genuine regulatory reform or continue to score at the bottom of the Janney regulatory climate index.
Here’s hoping the Commission continues down the reform track.
