Rate Regulation Summary

Detailed Information On Regulatory Matters

Regulatory developments are discussed in detail in a number of sections of the 2024 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 3 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 currently 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 2017 ($ in millions):

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 2024. 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 2023 Statistical Report for a summary of historical PSA balances and activity.

Deferrals – Beginning July 1, 2012, APS defers for “recovery” (as defined below) or refund 100% of the difference between actual retail fuel and purchased power costs 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 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. The PSA has a year-over-year cap on recovery of $0.006/kWh, which was approved in the 2022 rate case. In February 2023, the ACC approved accelerated recovery of an under collected balance that had accumulated in the PSA balancing account. A Transition Component, designed to recover the amount in the balancing account over a 24-month period, began on March 1, 2023 and will continue until further order of the Commission.

Demand Side Management Adjustment Clause (DSMAC)

The Commission's Energy Efficiency Standard (EES) requires APS to achieve a cumulative energy savings of 22% of prior calendar year retail sales by 2020. APS submits an annual DSM implementation plan to achieve this requirement, 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, an adjustment is added to customer bills. The EES allows for the recovery of energy efficiency program expenses and any earned incentives.

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 from March 2018 through December 2021, providing more than $245 million in annual tax reductions back to customers. At the conclusion of the Company's 2019 rate case, beginning in December 2021, these reductions were moved into base rates and the adjustor was set to zero, but the mechanism remains available to respond to any future tax changes.

Renewable Energy Adjustment Charge (REAC)

In 2006, the ACC adopted the Renewable Energy Standard (RES). 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, up to 15% of calendar-year retail sales by 2025. In order to achieve these requirements, the ACC allows APS to include a REAC 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.

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.

System Reliability Benefit (SRB)

The ACC approved the SRB mechanism as part of the 2022 rate case. The SRB allows for recovery of capital carrying costs of new APS owned generation facilities that are procured through an all-source request for proposals and have a minimum investment level of $50 million. The SRB includes an earnings test, a year-over-year annual increase limit of 3% of APS ACC jurisdictional base rate revenue requirement, a limit of no more than five annual reset applications between general rate cases, and a 1.0% discount from the Weighted Average Cost of Capital for purposes of determining the return on capital carrying costs. 

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.

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.