ACC Moving in the Right Direction
Regulatory lag - the time between when expenses are incurred and then recovered through rates -- is the bane to those investing in regulated utility companies. For the investor, regulatory lag results in earnings erosion, increased risk, and makes investing in investor-owned utility companies less attractive than investing in other industries. For the utility, it increases the cost of acquiring capital and makes it more difficult for utility companies to compete with other companies to attract capital necessary to invest in infrastructure to serve customers. Ultimately, customers suffer since the higher costs of capital are eventually passed through in rates.
In our 2008 White Paper, "Streamlining Administrative and Ratemaking Processes," AIC offered several suggestions for improving the ratemaking processes of the Arizona Corporation Commission to reduce regulatory lag. The suggestions included ideas like encouraging settlement agreements to speed contested cases to a decision, and enabling innovative rate designs to lessen rate spikes and better match costs with prices.
Over the past two years, the ACC has made remarkable progress in reducing regulatory lag and improving the overall regulatory climate - to the benefit of the companies and customers. For example, the Commission has directed and encouraged its staff to negotiate settlement agreements where appropriate with utility companies and intervening stakeholders. The settlement agreements brought to the Commission for consideration have included rate designs that allow for more timely recovery of costs, more gradual rate increases, and greater certainty for investors and customers. It has also allowed the Commission to reduce the amount of time for processing a case from 18 months to about 12 months, thus saving Commission resources as well. In recent months, the Commission has approved rate settlement agreements for several major utility companies, including Southwest Gas, Arizona American Water Company (now EPCOR) and APS, among others.
The ACC is to be congratulated.
In recent days, two credit rating agencies, Moody's and Fitch, upgraded credit ratings for APS. The upgrades stemmed from the Commission's recent action approving a rate settlement agreement for the company. According to the Moody's release, "[t]he upgrade reflects our view that APS' regulatory framework is more credit supportive as a result of the resolution of its recent rate case. . . [w]e also note that the rate case was decided in about 12 months from the filing, a significant improvement compared to past Arizona rate cases which were decided around 18 months after filing." Moody's goes on to say ". . . the 12-month time frame coupled with the post-test year adjustment significantly reduces potential regulatory lag on recovery and returns."
Fitch has a similar recognition of the improved regulatory climate facing APS from the ACC's actions. "The adoption of these proposals by the ACC is a constructive development for APS and PNW's creditworthiness as these mechanisms ameliorate regulatory lag and improve their business risk profiles."
The bottom line is that APS has improved access to capital markets at better rates and terms. APS can invest in infrastructure like transmission lines, transformers and solar power plants as well as energy efficiency programs to meet the power needs of its customers. And customers face greater rate stability and certainty.