Rate Regulation Summary

Detailed Information On Regulatory Matters

Regulatory developments are discussed in detail in a number of sections of the 2021 Annual Report on Form 10-K for Pinnacle West and APS. See "Current and Future Resources" and "Competitive Environment and Regulatory Oversight" in Item 1; "Regulatory Overview" in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7; and Note 4 of Combined Notes to Consolidated Financial Statements, "Regulatory Matters," in 
Item 8.

State Regulation

The Arizona Corporation Commission (ACC) regulates APS's retail electric rates and its issuance of securities. The ACC also must approve any transfer of APS's property used to provide retail electric service and must approve or receive prior notification of certain transactions between APS, Pinnacle West and their respective affiliates.

ACC Organization

The ACC consists of five elected commissioners with staggered terms. The terms are four years each, with a limit of two consecutive terms in office. Mid-term vacancies (due to resignation, etc.) are filled by appointment of the Governor to serve until the next general election.

Test Period

A historical test period is required by ACC rule; however, the ACC has discretion to consider certain matters subsequent to the end of the historical year.

Retail Base Rate Changes (and Interim Adjustments)

The table below shows APS's net retail base rate changes since 2012 ($ in millions):

* Total bill decrease of $4.8 million, including the effect of adjustors, but excluding temporary Coal Community Transition impacts

2019 Rate Case

On November 2, 2021, the Arizona Corporation Commission (ACC) voted on the APS 2019 rate case following multiple days of contentious deliberation. The decision contains numerous elements that are problematic, including: 

• A total bill decrease of $4.8 million, including the effect of adjustors; 
• Disallowance of a portion of the Four Corners Power Plant emission control assets of $216 million in a wrongful application of the state’s well-established standard of prudence; and
• A cut in the company’s return on equity from 10 percent to 8.7 percent – the lowest for any mid- to large-sized vertically integrated, investor-owned utility in the U.S. with 2020-2021 rate case results. 

You can review the final decision and other materials related to the rate case using the e-docket function on the ACC website. Search for docket no. E-01345A-19-0236.

2022 Rate Case

APS filed an application with the ACC on October 28, 2022 seeking an increase in annual retail base rates of a net $460 million. The average annual customer bill impact is an increase of 13.6%. APS requested that the increase become effective December 1, 2023. APS cannot predict the outcome of its request.

View the related 8-K and news release.

Filing

• Rate Case Application
• Executive Summary

Direct Testimony

• Theodore N. Geisler
• Jacob Tetlow
• Monica Whiting
• Andrew Cooper
• Justin Joiner
• Jessica Hobbick
• Jamie Moe
• Elizabeth A. Blankenship
• Dr. Roger Morin

You can find additional documents related to this rate case on the ACC’s website (docket #E-01345A-22-0144).

Adjustment Mechanisms

APS has received supportive regulatory decisions that allow for more timely recovery of certain costs through the following recovery mechanisms.

Transmission Cost Adjustor (TCA)

APS recovers annual changes in federally determined charges for transmission services to serve retail customers through the TCA. See “Federal Regulation” for additional details on FERC formula-based rates and the TCA.

Power Supply Adjustor (PSA)

The PSA was initially approved by the ACC in 2005 and most recently modified in 2017. The mechanism provides for the adjustment of retail rates to reflect variations in retail fuel and purchased power costs, subject to specified parameters and procedures. See page 8 of the 2021 Statistical Report for a summary of historical PSA balances and activity.

Deferrals – Beginning July 1, 2012, APS defers for recovery or refund 100% of the difference between actual retail fuel and purchased power costs (as defined) and the Base Fuel Rate. From April 2005 through June 2012, APS deferred 90% of the difference between actual retail fuel and purchased power costs (as defined) and the Base Fuel Rate. The table below summarizes the Base Fuel Rates determined in APS's rate cases and approved by the ACC (per kWh):

* Numbers are rounded

Recovery – The PSA rate is adjusted annually each February 1 (unless otherwise approved by the ACC). The PSA rate includes (a) a “Forward Component,” under which APS recovers or refunds differences between expected fuel and purchased power costs for the upcoming PSA year and those embedded in the Base Fuel Rate; (b) a “Historical Component,” under which differences between actual fuel and purchased power costs and those recovered through the combination of the Base Fuel Rate and the Forward Component are recovered during the next PSA Year; and (c) a “Transition Component,” under which APS may seek mid-year PSA rate changes due to large variances between actual fuel and purchased power costs and the combination of the Base Fuel Rate and the Forward Component.

Demand Side Management Adjustment Clause (DSMAC)

The Commission's Energy Efficiency Standard requires APS to submit an annual DSM implementation plan, including estimated amounts for program costs, for review by and approval of the ACC. In order to recover these estimated amounts for use on certain demand-side management programs, a surcharge is added to customer bills similar to that described above under the RES. The EES allows for the recovery of energy efficiency program expenses and any earned incentives. In June 2021, the ACC adopted clean energy rules package and additional procedural steps in the rulemaking process were required to be completed before the rules were to take effect. On January 26, 2022, the ACC reversed its prior decision and declined to send the final rules package through the rulemaking process. Instead, the ACC opened a new docket to consider all-source requests for proposal requirements and the Integrated Resource Planning process.

Tax Expense Adjustment Mechanism (TEAM)

As part of the 2017 Settlement Agreement, APS established a rate adjustment mechanism that enables the pass-through of certain income tax effects to customers as a result of the Tax Cuts and Jobs Act effective January 1, 2018. APS implemented the TEAM in three phases: the first, effective March 2018, reduced rates by $119.1 million annually to reflect the reduction in the corporate tax rate from 35% to 21%. The second, effective April 2019, returned an additional $86.5 million in tax reductions for non-depreciation related deferred taxes previously collected from customers. The third phase included a one-time bill credit of $64 million which was credited to customers on their December 2019 bills, and returned an additional $39.5 million annually to customers for depreciation-related deferred taxes effective December 2019. On November 20, 2020, APS filed an application to continue the third phase of monthly bill credit through the earlier of December 31, 2021, or at the conclusion of APS’s 2019 pending rate case. At the conclusion of the Company's 2019 rate case in November 2021, TEAM rolled into base rates, but the mechanism remains available to respond to future tax changes.

Renewable Energy Standard (RES)

In 2006, the ACC adopted the Renewable Energy Standard. Under the RES, electric utilities that are regulated by the ACC must supply an increasing percentage of their retail electric energy sales from eligible renewable resources, including solar, wind, biomass, biogas and geothermal technologies. In order to achieve these requirements, the ACC allows APS to include a RES surcharge as part of customer bills to recover approved renewable energy project expenses. Each year, APS is required to file a five-year implementation plan with the ACC and seek approval for funding the upcoming year’s RES budget. In June 2021, the ACC adopted clean energy rules package which would require APS to meet certain clean energy standards and technology procurement mandates, obtain approval for its action plan included in its IRP, and seek cost recover in a rate process. Since the adopted clean energy rules differed substantially from the original Recommended Order and Opinions, supplemental rulemaking procedures were required before the rules could become effective. On January 26, 2022, the ACC reversed its prior decision and declined to send the final rules package through the rulemaking process. Instead, the ACC opened a new docket to consider all-source requests for proposal requirements and the Integrated Resource Planning process.

Lost Fixed Cost Recovery (LFCR)

The LFCR mechanism permits APS to recover on an after-the-fact basis a portion of its fixed costs that would otherwise have been collected by APS in the kWh sales lost due to APS energy efficiency (EE) programs and to distributed generation (DG) such as rooftop solar arrays. The fixed costs recoverable by the LFCR mechanism established in the 2017 Settlement Agreement was approximately 2.5 cents per residential and non-residential kWh lost. The LFCR adjustment has a year-over-year cap of 1% of retail revenues. Any amounts left unrecovered in a particular year because of this cap can be carried over for recovery in a future year. The kWh lost from energy efficiency are based on a third-party evaluation of APS’s EE programs. DG sales losses are determined from the metered output from the DG units or if metering is unavailable, through accepted estimating techniques.

As a result of the 2019 Rate Case decision, APS’s annual LFCR adjustor rate will be dependent on an annual earnings test filing, which will compare APS’s previous year’s rate of return with the related authorized rate of return. If the actual rate of return is higher than the authorized rate of return, the LFCR rate for the subsequent year is set at zero.

Environmental Improvement Surcharge (EIS)

The Environmental Improvement Surcharge allows for the recovery of carrying costs for capital expenditures associated with government-mandated environmental controls, subject to an existing cents per kWh cap on cost recovery. The cap was increased to recover up to approximately $14 million annually with the approval of the 2017 Settlement Agreement.

Federal Regulation

APS is subject to regulation by the U.S. Federal Energy Regulatory Commission (FERC) in certain matters which include wholesale power sales and transmission services. The FERC is composed of five commissioners who are appointed by the President, approved by Congress and serve five-year terms.

The FERC continues to address issues related to standard market design for wholesale markets, regional transmission organizations to support non-discriminatory markets, and other issues related to restructuring wholesale power markets. APS is an active participant in these proceedings.

Formula Transmission Tariff and Retail Transmission Cost Adjustor

In July 2008, FERC approved an Open Access Transmission Tariff for APS to move from fixed rates to a formula rate-setting methodology in order to more accurately reflect and recover the costs that APS incurs in providing transmission services. A large portion of the rate represents charges for transmission services to serve APS’s retail customers (Retail Transmission Charges). In order to recover the Retail Transmission Charges, APS was previously required to file an application with, and obtain approval from, the ACC to reflect changes in Retail Transmission Charges through the TCA. Under the terms of the 2012 Settlement Agreement, however, an adjustment to rates to recover the Retail Transmission Charges will be made annually each June 1 and will go into effect automatically. Also, with the approval of the 2017 Settlement Agreement, a balancing account was added to the TCA. In May 2018, FERC approved modifications to the Formula Rate to: (1) reflect the reduced federal income tax rate resulting from the Tax Cuts and Jobs Act of 2017 ("TCJA"); (2) reclassify the excess accumulated deferred income taxes resulting from the federal income tax reduction from accumulated deferred income taxes to a regulatory asset and regulatory liability; and (3) provide transmission customers the future benefit of amortization of the excess accumulated deferred income taxes regulatory liability. The formula rate is updated each year effective June 1 on the basis of APS’s actual cost of service, as disclosed in APS’s FERC Form 1 report for the previous fiscal year.

The table below summarizes APS's transmission rate changes:

* Since changes in retail transmission charges are reflected through the TCA after consideration of 
 transmission recovery in retail base rates and the ACC approved balancing account, the retail revenue
 requirement decreased by $28.4 million, resulting in reductions to both residential and commercial rates.