Arizona-American Water Company, Inc. - Anthem Water and Anthem/Agua Fria Wastewater Districts
Case Information:
On June 16, 2006, Arizona-American Water Company, Inc. ("Arizona-American" or "Company"), a wholly owned subsidiary of RWE AG, filed an application with the Arizona Corporation Commission ("ACC" or "Commission") requesting approval of a determination of the current fair value of the Company's utility plant and property; and for increases in rates and charges based thereon for utility service provided by Arizona-American's Anthem Water and Anthem/Agua Fria Wastewater Districts. Arizona-American is seeking revenue increases of 66.22 percent for the Anthem water system, and 40.75 percent for both the Company's Anthem and Agua Fria wastewater systems.
On June 27, 2006, RUCO filed a motion to intervene(link is external) in the case with the ACC's Hearing Division.
The Company's application entered the sufficiency phase of the proceeding on June 16, 2006. During that phase, ACC Staff had thirty days to determine if Arizona-American's application met the requirements of A.A.C. R-14-2-103.
On July 17, 2006 ACC Staff issued a deficiency letter(link is external) informing the Company that its application did not meet the requirements of A.A.C. R-14-2-103.
Between July 17, 2006 and September 26, 2006 the Company filed a revised application and schedules and addressed sufficiency issues raised by ACC Staff.
On September 28, 2006, ACC Staff issued a sufficiency letter(link is external) informing Arizona-American that the Company's revised application met the sufficiency requirements of A.A.C. R-14-2-103 and that the Company had been classified as a Class A wastewater utility1
On October 5, 2006, an Administrative Law Judge ("ALJ"), with the ACC's Hearing Division, issued a procedural order(link is external) which established the dates for the filing of testimony and exhibits and for the evidentiary hearing on the matter that began at 10:00 a.m. on May 29, 2007 at the Commission's Phoenix office at 1200 W. Washington.
On May 8, 2007 the ALJ assigned to the case issued a procedural order(link is external) that scheduled a public comment session for Thursday evening, May 24, 2007. The public comment session gave Anthem ratepayers the opportunity to express their opinions regarding Arizona-American's proposed rate increases. The public comment session was held at Boulder Creek High School Auditorium, 40404 North Gavilan Peak Parkway in Anthem.
Direct testimony from RUCO and a revenue requirements witness for the Anthem Community Council was filed on Tuesday, March 27, 2007. On that same day, the ALJ assigned to the case issued a procedural order(link is external) granting a three day extension for ACC Staff to file their direct testimony on March 30, 2007 and revising the filing dates for remaining testimony.
RUCO'S direct testimony made the following revenue recommendations for Arizona-American's water and wastewater operations:
DIRECT TESTIMONY REVENUE REQUIREMENT - WATER
(A)(B)
COMPANYRUCO
LINE OCRB/FVRBOCRB/FVRB
NO.DESCRIPTIONCOSTCOST
1Fair Value Rate Base$ 43,100,616$ 31,603,778
2Adjusted Operating Income (Loss)$ 797,742$ 845,739
3Current Rate Of Return (L2 / L1)1.85%2.68%
4Required Operating Income (L5 X L1)$ 3,590,281$ 2,316,557
5Required Rate Of Return On Fair Value Rate Base8.33%7.33%
6Operating Income Deficiency (L4 - L2)$ 2,792,539$ 1,470,818
7Gross Revenue Conversion Factor (RLM-1, Page 2)1.62861.6286
8Increase In Gross Revenue Requirement (L7 X L6)$ 4,548,026$ 2,395,426
9Adjusted Test Year Revenue$ 6,867,770$ 6,867,770
10Proposed Annual Revenue (L8 + L9)$ 11,415,796$ 9,263,196
11Required Percentage Increase In Revenue (L8 / L9)66.22%34.88%
12Rate Of Return On Common Equity11.75%10.27%
DIRECT TESTIMONY REVENUE REQUIREMENT - WASTEWATER
(A)(B)
COMPANYRUCO
LINE OCRB/FVRBOCRB/FVRB
NO.DESCRIPTIONCOSTCOST
1Fair Value Rate Base$ 24,636,158$ 18,188,546
2Adjusted Operating Income (Loss)$ 517,051$ 392,399
3Current Rate Of Return (L2 / L1)2.10%2.16%
4Required Operating Income (L5 X L1)$ 2,052,194$ 1,333,220
5Required Rate Of Return On Fair Value Rate Base8.33%7.33%
6Operating Income Deficiency (L4 - L2)$ 1,535,143$ 940,821
7Gross Revenue Conversion Factor (RLM-1, Pg 2)1.62861.6286
8Increase In Gross Revenue Requirement (L7 X L6)$ 2,500,188$ 1,532,254
9Adjusted Test Year Revenue$ 6,135,801$ 6,135,801
10Proposed Annual Revenue (L8 + L9)$ 8,635,989$ 7,668,055
11Required Percentage Increase In Revenue (L8 / L9)40.75%24.97%
12Rate Of Return On Common Equity11.75%10.27%
Under the water rates recommended by RUCO, a typical residential water bill (based on a 5/8 x 3/4 - inch meter charge and an average 9,022 gallons of consumption) would be $36.54 which is $8.48 higher than the present monthly bill of $28.06 or $11.08 lower than the $47.62 bill being proposed by the Company.
Under the wastewater rates recommended by RUCO, a typical residential wastewater bill (based on an average 9,682 gallons of consumption) would be $49.82 which is $11.70 higher than the present monthly bill of $38.12 or $8.04 lower than the $57.86 bill being proposed by the Company.
RUCO believes that it is important to point out that there are numerous reasons why Arizona-American filed for a potentially massive rate increase at this time. For instance:
1. Arizona statutes require the ACC to authorize utility rates, which provide a utility company with the opportunity to earn a profit on its prudent investment;
2. Del Webb created the new community of Anthem in an arid area that could never produce the water needed to support it;
3. To provide water for Anthem, Del Webb acquired an allocation of Colorado River water from the Ak-Chin Indian Community, along with delivery rights on the Central Arizona Project ("CAP");
4. Initially, Del Webb entered into an agreement with the Company's predecessor to provide water to service the territory;
5. To deliver the CAP water required the construction of a pumping station and a nine-mile pipeline;
6. To provide a guaranteed source of water to meet high peak loads, the Company had to also arrange for two other capacity sources, one with the City of Phoenix and another gravity fed reservoir tank that overlooks Anthem;
7. To provide drinking water and waste collection required state-of-the-art treatment facilities, storage and distribution system to integrate a potable water supply from a renewable resource with a wastewater facility that produced Class A+ reusable effluent, to meet the new federal arsenic standard and to satisfy stringent fire-flow requirements;
8. To provide service to a desert area that had no water supply required enormous investments. Actual unadjusted 2005 gross utility plant for Anthem cost $81.6 million for the water system and $82.7 million for the wastewater system. Much of this plant was financed by Contributions In Aid Of Construction ("CIAC") provided by the developer, Del Webb. Of course, these CIAC's would need to be paid back to Del Webb by the Company. Del Webb agreed to delay the refunds so that the impact on ratepayers would be lessened. Now that these contributions have begun to be refunded, the Company's rate base will more accurately reflect the true cost of the plant necessary to serve customers;
9. A Commission imposed three-year moratorium on filing a rate case postponed the timely recovery of this investment;
10. To date Arizona-American has been compensated for only a small fraction of this investment; and
11. Arizona-American anticipates additional refunds to the developer of $39.2 million by 2008. The Company expects to file another rate case as soon as this case concludes to recover the additional rate base that will be generated by these refunds.
On Friday, March 30, 2007, ACC Staff filed direct testimony.
Rebuttal testimony was filed by the Company on Thursday, April 26, 2007.
ACC Staff, RUCO and revenue requirements/cost of capital witnesses for the Anthem Community Council filed surrebuttal testimony on Thursday, May 17, 2007.
RUCO's surrebuttal testimony is recommending the following revised revenue requirements for the Company's water and wastewater operations:
SURREBUTTAL TESTIMONY REVENUE REQUIREMENT - WATER
(A)(B)
COMPANYRUCO
LINE OCRB/FVRBOCRB/FVRB
NO.DESCRIPTIONCOSTCOST
1Fair Value Rate Base$ 43,100,616$ 32,579,264
2Adjusted Operating Income (Loss)$ 797,742$ 965,789
3Current Rate Of Return (L2 / L1)1.85%2.96%
4Required Operating Income (L5 X L1)$ 3,590,281$ 2,353,526
5Required Rate Of Return On Fair Value Rate Base8.33%7.22%
6Operating Income Deficiency (L4 - L2)$ 2,792,539$ 1,387,737
7Gross Revenue Conversion Factor (SURR-RLM-1, Page 2)1.62861.6286
8Increase In Gross Revenue Requirement (L7 X L6)$ 4,548,026$ 2,260,117
9Adjusted Test Year Revenue$ 6,867,770$ 6,867,609
10Proposed Annual Revenue (L8 + L9)$ 11,415,796$ 9,127,726
11Required Percentage Increase In Revenue (L8 / L9)66.22%32.91%
12Rate Of Return On Common Equity11.7 5%10.01%
SURREBUTTAL TESTIMONY REVENUE REQUIREMENT - WASTEWATER
(A)(B)
COMPANYRUCO
LINE OCRB/FVRBOCRB/FVRB
NO.DESCRIPTIONCOSTCOST
1Fair Value Rate Base$ 24,636,158$ 18,895,465
2Adjusted Operating Income (Loss)$ 517,051$ 636,138
3Current Rate Of Return (L2 / L1)2.10%3.37%
4Required Operating Income (L5 X L1)$ 2,052,194$ 1,365,008
5Required Rate Of Return On Fair Value Rate Base8.33%7.22%
6Operating Income Deficiency (L4 - L2)$ 1,535,143$ 728,870
7Gross Revenue Conversion Factor (RLM-1, Pg 2)1.62861.6286
8Increase In Gross Revenue Requirement (L7 X L6)$ 2,500,188$ 1,187,063
9Adjusted Test Year Revenue$ 6,135,801$ 6,135,801
10Proposed Annual Revenue (L8 + L9)$ 8,635,989$ 7,322,864
11Required Percentage Increase In Revenue (L8 / L9)40.75%19.35%
12Rate Of Return On Common Equity11.75%10.01%
Rejoinder testimony was filed by the Company on Wednesday, May 23, 2007.
The required rates of return recommended by the parties to the case at the time of the evidentiary hearing were as follows:
ANTHEM
ACC COMMUNITY
COMPANYSTAFFRUCOCOUNCIL
8.1%7.3%7.2%7.2%
The evidentiary hearing began as scheduled at 10:00 a.m. on Tuesday, May 29, 2007. Expert witnesses for the Company, ACC Staff, the Anthem Community Council and RUCO all testified under oath and faced cross examination from attorneys representing the parties to the case. The Company concluded its case on Monday June 4, 2007. On July 2, 2007 the ALJ assigned to the case issued a procedural order that continued the hearing for 9:30 a.m. on Friday, July 13, 2007. During the continued hearing, a witness for Pulte Homes/Del Webb presented testimony and answered questions, posed by Commissioner Kris Mayes, the ALJ assigned to the case and attorneys representing the parties to the case, related to the advancement agreement underlying Arizona-American's request for a rate increase in this proceeding.
On October 9, 2007, the ALJ assigned to the case issued a procedural order(link is external) which suspended the timeclock rules in order to allow for additional time to complete the hearing on the matter. The decision to suspend the timeclock rules comes after an agreement was reached between Arizona-American and Pulte Homes/Del Webb to amend the existing advancement agreement in order to mitigate the effects of future rate shock on Anthem residents.
On October 24, 2007, ACC Staff filed a status update and request for procedural order(link is external) seeking an early start time on the continued hearing in order to accommodate the schedule of a witness from Pulte/Del Webb. ACC Staff's request was granted in a procedural order dated October 26, 2007.
The hearing on the Company's request for a rate increase reconvened at 8:30 a.m. on Wednesday, October 31, 2007. A witness from Pulte Homes/Del Webb answered questions posed by Commissioners Kris Mayes and Bill Mundell. Witnesses for RUCO, ACC Staff and the Company testified on the reallocation of costs that are associated with the Company's Northwest Valley Regional Treatment Facility which provides service to the Company's Anthem/Agua Fria and Sun City West Wastewater Districts. The Hearing concluded at 4:15 p.m. on Thursday November 1, 2007.
The Company's final schedules (with the exception of rate design) were submitted during the hearing as Exhibit A-33. RUCO, ACC Staff and the Anthem Community Council filed final schedules on Tuesday, November 6, 2007. The parties to the case filed closing briefs on Friday, November 30, 2007. Reply briefs were filed on Tuesday, December 18, 2007.
On March 13, 2008, RUCO filed a motion to reopen the record and schedule a hearing for the limited purpose of taking additional testimony to supplement the record concerning the appropriate allocation of the remaining portion of the North West Valley Treatment Facility (“NWVTF”) to the Anthem/Agua Fria District.
On March 17, 2008, Arizona-American filed a response in opposition to RUCO's motion to reopen the record.
On March 21, 2008 the ALJ assigned to the case issued a procedural order for the purpose of hearing oral arguments on RUCO's request for a hearing.
On March 25, 2008, ACC Staff filed a response in opposition to RUCO's motion to reopen the record.
On March 27, 2008, Counsel for Anthem Community Council filed a response in support of RUCO's motion to reopen the record.
On Friday, March 28, 2008, the ALJ assigned to the case heard oral arguments on RUCO's motion for hearing.
On Monday, May 12, 2008, the ALJ assigned to the case issued a procedural order(link is external) denying RUCO's motion for rehearing.
After weighing all of the evidence presented during the proceeding (including correspondence and public comment from concerned ratepayers) the ALJ assigned to the case issued a recommended opinion and order(link is external) ("ROO") on May 21 2008.
On May 21, 2008, RUCO filed Exceptions(link is external) to the ROO taking issue with the ALJ's recommendations on the Northwest Regional Wastewater Facility ("NWVTF") allocation, rate case expense, and operating expenses associated with the NWVTF.
At a Special Open Meeting held on Thursday, May 29, 2008, the five Commissioners heard public comment from Anthem residents, posed questions, about the ROO, to both the ALJ and the parties to the case, and also voted down a proposed amendment on the NWVTF. The meeting was adjourned at 5:00 p.m. During the continuation of the Special open Meeting on Wednesday, June 4, 2008, the five ACC Commissioners passed an amended ROO by a vote of 3-2. The amended ROO reduces the Company's authorized rate of return from 7.30 percent (recommended by the ALJ) to 6.7 percent. The lower rate of return will result in a $360,189 reduction in required revenue for the Anthem Water District, and a $199,677 reduction in required revenue for the Anthem/Agua Fria Wastewater District.
On Wednesday, July 2, 2008, Arizona-American filed an Application for Rehearing requesting that the ACC reconsider its decision to adopt an 8.8 percent cost of common equity which resulted in a rate of return of 6.7 percent on the Company's invested capital. The Commission has twenty days to act on Arizona-American's Application for Rehearing. If no action is taken by the Commission during the twenty day period, the decision stands. The next step for Arizona-American would be to appeal the Commission's final decision in the Arizona Court of Appeals.
1 Based on the Company's requested increase over Test Year Revenues. Under the Commission's time clock rules, a decision on the Company's request for rate relief would have to be made within 360 days of the issuance of a letter of sufficiency.