TABLE OF CONTENTS
DIRECTOR’S LETTER.................................................................................................... 1
RUCO ADMINISTRATIVE AND SUPERVISORY PERSONNEL .................................... 2
RUCO’S ORGANIZATION CHART ................................................................................. 4
RUCO AND THE REGULATORY PROCESS................................................................. 5
THE RATEMAKING PROCESS ...................................................................................... 5
RUCO BUDGET.............................................................................................................. 7
RUCO’S FUNDING MECHANISM .................................................................................. 7
RUCO’S CASE ANALYSES AND INTERVENTIONS ..................................................... 8
RUCO’S IMPACT ............................................................................................................ 8
CONSUMER EDUCATION AND OUTREACH ACTIVITIES ........................................... 9
ON-GOING CASES ............................................................................................... 10
CASES CLOSED IN FY 2004 ................................................................................ 20
THE RESIDENTIAL UTILITY CONSUMER OFFICE STAFF ........................................ 29
APPENDIX .................................................................................................................... 30

DIRECTOR’S LETTER
RESIDENTIAL UTILITY CONSUMER OFFICE

______________________________________________________________________
1110 WEST WASHINGTON STREET • SUITE 220 • PHOENIX, ARIZONA 85007 • (602) 364-4836 • FAX: (602) 364-4846
Janet Napolitano
Governor
Stephen Ahearn
Director

October 31, 2004

The Honorable Janet Napolitano, Governor
The Honorable Ken Bennett, President, Arizona Senate
The Honorable Jake Flake, Speaker, Arizona House of Representatives
Re: Fiscal Year 2004 RUCO Annual Report
I am pleased to submit this report of the activities of the Residential Utility Consumer
Office for this Fiscal Year. It has been a very successful year for our advocacy of
important consumer issues before the Arizona Corporation Commission.
This Annual Report covers activity through June 30, 2004. The “Case Summaries”
section also describes those cases open as of July 1, foretelling in part the Fiscal Year
2005 report.
It is understood that recent Legislative action removes the obligation for RUCO to put
together these Annual Reports. However, insomuch as we continually capture and
retain the data and other information contained herein for record-keeping purposes
and in anticipation of future audits, our generating and distributing such a report in an
electronic format requires virtually no additional staff time, and delivers a value for
Arizona consumers at zero incremental financial impact.
I would like to note my personal pride in the staff of this smallish agency, and to
specifically remark upon their professionalism and their demonstrated ability to
successfully and consistently achieve our mission of effective representation of
residential consumer interests.
Sincerely,

Stephen Ahearn
Stephen Ahearn
Director
SA:hs

1

RUCO ADMINISTRATIVE AND SUPERVISORY PERSONNEL
DIRECTOR
Stephen Ahearn was appointed by Governor Janet Napolitano as Director of the Arizona
Residential Utility Consumer Office (RUCO) on January 6, 2003. He is a native Arizonan, born
on Davis-Monthan Air Force Base in Tucson, and raised in Phoenix. He received his
undergraduate degree (B.A., International Relations) from Pomona College in Claremont,
California, and his graduate degree (MBA, International Finance) from UCLA.
Mr. Ahearn spent his early career after undergraduate school in operational, finance and
management positions for Los Angeles-based manufacturing firms. In the mid-1980’s, he
moved back to Arizona and co-founded companies that manufactured non-toxic,
environmentally-sensitive pesticides, building materials and recycled plastics products.
In 1990 he joined the Arizona Department of Commerce Energy Office as the Manager of
Planning and Policy. In that capacity he was responsible for implementation of the legislativelymandated state Energy Policy. He began to write and speak extensively about electric industry
restructuring as early as 1994, and was recruited to the Arizona Corporation Commission in late
1997 to advise the staff on electric industry competitive matters and to act as the agency’s
liaison to the Legislature.
He left the staff of the Corporation Commission in late 1999 to run for the office of Corporation
Commissioner. In the period just prior to being appointed Director of RUCO, he had founded
Ahearn & Associates, a consulting firm specializing in general business planning with a focus on
renewable energy project development and representation of renewable energy firms.
DEPUTY DIRECTOR
Ernest Nedd is a native Phoenician and graduate of the Phoenix Elementary School District No.
1 and Phoenix Union High School. He attended Brown University in Providence, RI, and after
serving in the U.S. Army, including a tour of duty in Vietnam, Mr. Nedd returned to Arizona and
earned a B.S. degree in Political Science from Arizona State University. He then attended the
College of Law at Arizona State and earned his J.D. degree in 1976.
Mr. Nedd has previously held positions with the State of Arizona as an Assistant Attorney
General, Assistant Commissioner of the Real Estate Department and Chief Hearing Officer of
the Department of Liquor Licenses and Control. He has served as a member of the City of
Phoenix Board of Adjustment, the Phoenix Inner City Planning Committee and the Phoenix
Transportation Advisory Committee. Mr. Nedd also is a former Chairman of the Board of
Directors of Valle del Sol, Inc. and he has served on the Board of Directors of the Valley
Christian Centers.
Mr. Nedd is currently a resident of the Coronado Historic Neighborhood in Central Phoenix.
CHIEF COUNSEL
Scott Wakefield has been RUCO’s Chief Counsel since 1998. He came to RUCO after serving
as a Hearing Officer at the Corporation Commission, where he handled numerous rate case
proceedings, consumer complaint hearings, and matters involving competition in the utility
industry.

2

Mr. Wakefield is a member of the Lorna Lockwood Inn of Court. He received his Juris Doctorate
cum laude from Arizona State University in 1990, and his Bachelor of Science degree in
accounting magma cum laude from Arizona State in 1987. He has served on the board of
directors for two non-profit organizations, and he currently volunteers with Recording for the
Blind and Dyslexic. He grew up and continues to live in Tempe.
Prior to his tenure as a hearing officer, Mr. Wakefield investigated and prosecuted investment
fraud with the Corporation Commission’s Securities Division. His work there resulted in caselaw
outlining when investments in limited liability companies can be considered securities under the
Arizona Securities Act.
Mr. Wakefield is knowledgeable on the process to appeal decisions of the Corporation
Commission, and lead the first RUCO success in appealing a Commission decision. He
participates in RUCO’s speaker’s bureau, and has made numerous presentations on utility
regulation and practice before the Arizona Corporation Commission in legal continuing
education seminars.
CHIEF ACCOUNTING & RATES
Marylee Diaz Cortez joined the Residential Utility Consumer Office in 1992, and has served as
head of the technical division for the past ten years. She is a graduate of the University of
Michigan and a Certified Public Accountant licensed in Arizona and Michigan.
Prior to joining RUCO, Ms. Diaz Cortez worked for the public accounting firm of Larkin and
Associates in the Detroit, Michigan area. Her private practice included regulatory consulting
services. Between her experience at Larkin and Associates and RUCO she has audited over 80
public utility companies including electric, gas, telephone, water, and sewer. She has provided
expert testimony in as many cases.
Ms. Diaz Cortez works with a staff of three in-house auditors as well as outside expert
witnesses. She is responsible for overseeing all testimony filed before the Arizona Corporation
Commission. In her 12 years with RUCO, she has worked diligently and successfully to protect
consumers from unjust utility rates.

3

RUCO'S Organization Chart

Stephen Ahearn
Director
Scott Wakefield
Chief Counsel

Marylee Diaz Cortez
Chief, Accounting & Rates

Dan Pozefsky
Attorney III

William Rigsby
Public Utilities Analyst V

Ernestine Gamble
Legal Secretary

Rodney Moore
Public Utilities Analyst V

Ernie Nedd
Deputy Director

Tim Coley
Public Utilities Analyst V

4

Cheryl Fraulob
Business Manager

RUCO AND THE REGULATORY PROCESS
The Residential Utility Consumer Office (RUCO) was established by the Arizona Legislature
in 1983 to represent the interests of residential utility ratepayers in rate-related proceedings
involving public service corporations before the Arizona Corporation Commission
(Commission).
Historically, utilities have had the exclusive right to provide services in designated areas. As
legal monopolies, utilities are regulated to ensure that the public is charged just and
reasonable prices. To establish the utilities' rates and charges, the Commission conducts
public hearings and examines evidence and testimony presented by various concerned
parties. RUCO represents the interests of Arizona's residents in these proceedings.
Every utility rate increase application filed with the Commission, regardless of the size of the
utility, receives a preliminary review by RUCO. As a matter of policy, RUCO always
intervenes and participates in rate cases involving Arizona's largest utilities. Intervention in
the cases of smaller companies is decided on a case-by-case basis, with particular attention
to the size of the increase sought, the rate history of the utility, and the availability of
resources at RUCO. Generally, RUCO does not formally intervene in small cases to avoid
causing unnecessary legal expenses for the small utility and its ratepayers.
RUCO is authorized 12 full-time employees, and often contracts with consultants for
assistance in analyzing utilities' requests for changes in rates and preparing testimony.
THE RATEMAKING PROCESS
The rates charged by Arizona's investor-owned utilities are established by the Commission.
The Commission authorizes a utility to charge rates, which will recover expenditures which
are appropriate and prudently incurred, and which provide an opportunity to earn fair return
on the utility’s capital investment.
A utility initiates the process to obtain a rate increase by filing an application with the
Commission. The application must be based on a “test year” of actual expenses and
investment during a recent twelve-month period. All of the utility's cost data are drawn from its
own records. The Commission requires that the utilities follow a standardized system of
accounting procedures that assures that the data can be easily reviewed and verified by the
Commission, RUCO and others.
In its application, a utility may propose certain adjustments to its actual test year costs and
investment. Historical costs and investment may be adjusted by annualizing changes which
occurred during the test year, such as payroll increases or tax changes, making them appear
as if they had been in effect for the entire year. In addition, historical costs may be normalized
to eliminate the effects of abnormal variations that actually occurred during the test year, such
as weather-related changes in consumption. Other adjustments may be proposed to include
the effects of known and measurable changes that occurred after the end of the test year,
such as wage increases and certain costs related to recently completed construction projects.
Upon receiving the utility's application and written summary or testimony, the Commission's
Staff reviews the application to confirm that it contains all the necessary accounting
information. If the application is complete, the Commission's Staff prepares a letter of

5

sufficiency. The determination of sufficiency triggers the Commission's “time clock” rule,
which establishes a deadline by which the Commission Staff must file its Staff Report or
testimony on the application, and a deadline by which the Commission must issue a final
order on the application. A hearing date is fixed for an application that requires a hearing.
After the application is determined sufficient, RUCO and other interested parties are
permitted to intervene in the case. As intervenors, parties have the right to obtain additional
information from the utility to assist in their review of the application. In addition, intervenors
may present evidence of their own on the application and may have their attorneys crossexamine other parties' witnesses and submit written briefs, which present their positions on
the issues in the case.
When the Commission Staff has completed its investigation, it issues recommendations in a
Staff Report or written testimony. Intervenors also provide their recommendations in the form
of written testimony prepared by their analysts or consultants. The utility has the opportunity
to respond through the filing of additional written testimony of its own.
In many cases, prior to the hearing on the application, the Commission holds public comment
sessions in the service territory of the utility. These meetings are intended to allow customers
to express their opinions about the rate request and to provide the Commission with
information that the customers feel is relevant to the case. It is not required, nor is it
expected, that customers making comments at these meetings be represented by counsel.
The Commission then holds a formal hearing on applications which require hearings. At the
hearing, the utility, the Commission Staff, RUCO, and other intervenors present witnesses,
offer evidence, and conduct cross-examination of other parties' witnesses on the issues
raised in the filed reports and testimony. Issues commonly disputed in rate cases include:
which expenses should be charged in rates to ratepayers; what a normal or prudent level of
expenses should be; whether all of the utility's investments in physical facilities were
prudently made and whether the facilities are needed for the provision of utility services; how
much of a return the utility's shareholders should be allowed to earn on their investment; and
how the cost of providing service should be allocated to, and recovered from, the utility's
various classes of customers.
After the hearing is concluded, the Commission's Administrative Law Judge reviews the
evidence and the parties' arguments and issues a Recommended Order. The Recommended
Order sets forth a recommended decision on all contested issues and recommends how
much of a rate increase, if any, the utility should receive. The parties are permitted to file
exceptions to the Recommended Order, asking the Commission to disregard the conclusions
of the Recommended Order and suggesting an alternate resolution. At a public meeting, the
Commission considers the Recommended Order, and the parties’ exceptions to it. The
Commission can adopt or deny the Recommended Order as originally written, incorporate
any of the suggested exceptions, or make its own amendments.
After the Commission issues its final decision, the parties have twenty days to request the
Commission to reconsider its decision. If the Commission declines to grant a rehearing, the
parties may appeal the decision to the Arizona Court of Appeals. Decisions of the Court of
Appeals may be appealed to the Arizona Supreme Court. Filing an appeal does not prevent
the rates approved by the Commission from taking effect.

6

RUCO’S BUDGET
RUCO receives no money from the general tax fund. Rather, RUCO receives 100 percent of its
operating budget from assessments of large utility companies that may, in turn, pass those
charges on to their residential customers. In this way, those who benefit from RUCO's work
fund its work. The utility ratepayers who pay these small assessments should consider their
money well spent. The following reflects FY 2004 activity for the appropriation year 2004,
excluding the professional witness budget and the approved amount for FY 2005.

EXPENDITURE
CATEGORIES

ACTUAL 2004

APPROVED
2005

PERSONAL SERVICES

$664,500

$673,700

EMPLOYEE
EXPENSES

$162,800

$174,100

ALL OTHER

$318,400

$320,400

TOTAL

$1,145,700

$1,168,200

RUCO’S FUNDING MECHANISM
Pursuant to A.R.S. § 40-401.01, funding of RUCO is accomplished through an assessment
made annually by the Commission. Each utility with annual residential revenues in excess of
$250,000, except those not required to hold Certificates of Convenience and Necessity, is
assessed.
The disposition of assessment proceeds is governed by A.R.S. § 40-409. All monies received
by the Commission under the provisions of A.R.S. § 40-401.01 are paid to the State Treasurer
and placed in the RUCO Revolving Fund. Monies in the fund are used, subject to legislative
appropriation, to operate RUCO pursuant to A.R.S. § 40-461. Appropriated funds not spent by
the end of a fiscal year do not revert to the General Fund. They revert to the RUCO Revolving
Fund and are used to calculate the ratepayer assessment for the next fiscal year. Based on the
information available at the end of FY 2004, the assessment for FY 2005 was $1,168,200.

7

RUCO’S CASE ANALYSES AND INTERVENTIONS
As previously described, RUCO generally seeks to avoid intervening formally in small rate
cases. Nevertheless, these cases are analyzed for potential cost impacts on ratepayers.
Generally, rate applications for small utilities do not warrant formal RUCO intervention, which
could unnecessarily increase costs to small utility ratepayers. The following table illustrates how
RUCO’s intervention activity over the past fiscal year compares to prior years:

NUMBER OF
CASES ANALYZED
NUMBER OF RUCO
INTERVENTIONS

2000

2001

2002

2003

2004

100

102

115

92

86

13

11

14

13

13

RUCO’S IMPACT
The following table illustrates RUCO’s impact on rate requests by utilities over the past fiscal
year, compared to prior years:

AVERAGE UTILITY
RATE REQUEST
(MILLIONS $)
AVERAGE RUCO
RECOMMENDATION
AVERAGE ACC
APPROVED RATE

2000

2001

2002

2003

2004

5.1

33.9

8

10.7

2.2

.8

5.9

1.8

7.8

.9

3.1

4.1

3.0

7.7

1.0

8

CONSUMER EDUCATION AND OUTREACH ACTIVITIES
Throughout calendar year 2004, RUCO has continued to engage in numerous activities
designed to reach, interact with and educate residential utility ratepayers. As in the past,
the primary vehicle for this outreach has been the agency’s website. During 2004,
RUCO has continued to upgrade this website to make it more user-friendly and contentrich.
Beginning in July of 2003 and continuing throughout 2004, RUCO has published and
distributed a bi-monthly, consumer oriented, electronic newsletter. The RUCO
Watchdog is sent to a database of over 450 subscribers and contains information about
ongoing rate cases and other items that are of interest to the agency’s constituents. The
Watchdog is published in both HTML and text formats to accommodate individual
subscriber preferences.
RUCO maintains a speaker’s bureau and responds to groups requesting presentations
about the Office. During 2004 RUCO staff members have made presentations at
seminars sponsored by the Safe Drinking Water Section of the Department of
Environmental Quality (DEQ) and also provided information at the DEQ Arsenic
Technology Fair. RUCO also attends public comment sessions when matters affecting
specific communities are pending before the Commission. Office personnel have
traveled to Mohave, La Paz, Yavapai, Santa Cruz and Pima counties to attend
Commission public comment sessions and to meet with local residential utility
consumers. Case-specific information brochures are distributed at these public
comment sessions.
In the future, RUCO will seek to take advantage of opportunities presented by the
Internet and other technologies to reach out to larger segments of its constituency in a
continuing effort to provide useful information to residential utility ratepayers.

9

CASE SUMMARIES
(Click here to review a list of acronyms and terms commonly used throughout the descriptions in
these Case Summaries).

ON-GOING CASES
(those not closed by June 30, 2004, listed in order of Docket-opening date).
Arizona Public Service - Approval of the Purchase of Generating Assets from
PPL Sundance Energy, LLC and for an Accounting Order and Determination of
Ratemaking Treatment – Docket No. E-01345A-04-0407
On June 1, 2004, Arizona Public Service Company (APS or Company) filed a joint
application with PPL Sundance Energy, LLC (PPL Sundance) requesting Commission
approval of APS' purchase of the Sundance Generating Station, and associated
assets, from PPL Sundance. The Sundance Generating Station is a 450-megawatt,
natural gas-fired power plant in Pinal County, located near the town of Coolidge,
approximately 55 miles south of Phoenix. The joint application also requests a
certificate of environmental compatibility authorizing the construction of a nominal 600megawatt natural gas-fired, simple cycle, peaking power generating facility.
RUCO filed a motion to intervene on June 10, 2004. After conducting discovery to
gain additional insight into the proposals contained in the Company's application,
RUCO filed direct testimony on September 17, 2004. Based on its analysis of the
Company's application, RUCO has recommended that APS' request for a deferral
accounting order be denied. In support of this recommendation, RUCO's witness
discussed normal ratemaking practices, exceptions to normal ratemaking practice,
regulatory lag, and the provisions in the proposed APS settlement agreement
regarding purchased power expense recoveries. RUCO is also recommending that
the Company's request for pre-approval of the ratemaking treatment of the PPL
purchase be denied, since it would constitute single issue ratemaking. RUCO instead
recommends that the assurance requested by APS can be adequately addressed with
a Commission finding in this docket that APS is allowed to acquire the PPL plant and
that the Commission will consider recovery of the associated costs in APS' next rate
case under traditional cost-of-service principles.
The evidentiary hearing on this matter commenced on October 4, 2004, at the
Commission's Phoenix office at 1200 W. Washington and lasted two days. Opening
and reply briefs are scheduled, after which the Administrative Law Judge will issue a
Recommended Opinion and Order.

10

APS Application for Pre-approval of Costs in Silver Canyon Pipeline – Docket No.
E-01345A-04-0273
On April 9, 2004, Arizona Public Service Company (APS or Company) filed an
application with the Commission requesting pre-approval of cost recovery for the
Company's participation in Kinder Morgan Energy Partners, LP's (Kinder Morgan)
proposed Silver Canyon Pipeline Project. The proposed pipeline will run roughly east
to west across Arizona from Window Rock (just north of Interstate 40 on the New
Mexico state line) to Ehrenberg (just north of Interstate 10 on the California state
line).
In the application, the Company stated that the agreement with Kinder Morgan would
provide APS with access to currently less expensive natural gas in the Rocky
Mountain supply basin. This will be in addition to the natural gas supplies that APS
now receives through pipelines operated by El Paso Corporation. In addition to
seeking pre-approval of the Company's additional capacity costs in the Silver Canyon
Pipeline, APS also asked that these new costs be recovered from ratepayers through
a Power Supply Adjuster (PSA) mechanism that is being proposed in the Company's
rate case application that is presently before the Commission. In the event that the
PSA is not approved in the pending rate case proceeding, the Company will seek an
accounting order that will allow it to record the pipeline costs in a separate deferral
account. APS will then seek recovery of the costs in a future rate case proceeding.
APS filed the application pursuant to a Commission policy statement issued on
December 18, 2003, in which the Commission recognized that the current need for
additional natural gas infrastructure in Arizona warranted the consideration of preapproval of costs and the adoption of alternative cost recovery methods. A similar
request by Southwest Gas Corporation was approved by the Commission on June 24,
2004.
RUCO filed a motion to intervene on May 10, 2004, and hosted two meetings with
Commission Staff and representatives from APS prior to the filing of the Staff Report
on the matter. On August 16, 2004, Commission Staff filed its Staff Report and
proposed order in the docket. On August 31, 2004, the Commission approved APS'
request for pre-approval of cost recovery.
UniSource Merger – Docket No. E-04230-03-0933
On December 29, 2003, UniSource Energy Corporation (UniSource) filed a Notice with
the Commission of its intent to merge with Saguaro Acquisition Corp. (Saguaro
Acquisition) which would result in UniSource becoming a wholly-owned subsidiary of
Saguaro Acquisition’s holding company. Saguaro Acquisition would cease to exist after
the merger, and UniSource would be the surviving corporation. The stock of UniSource
would no longer be publicly traded, and UniSource would be privately held post-merger.
UniSource is the holding company of Tucson Electric Power Corporation (TEP), UNS
Gas, Inc. and UNS Electric, Inc.

11

The merger, as proposed, would involve a total cash price to be paid by a group of
investors (Sage Mountain, LLC, KKR, J.P. Morgan Partners and WCP funds) of $880
million to be financed, in part ($556.7 million) by equity contributions from the investors.
The balance of the $1.2 billion purchase price, $660 million, will be borrowed. Also
$263 million of the total purchase price will be used to improve TEP’s equity ratio from
its current 25 percent to 40 percent and to fund the transaction costs.
Among the benefits the Company claims will result from the merger, the Company
highlights three:
1.

A cash infusion of up to $263 million into TEP which will increase its
equity ratio to 40 percent.

2.

The commitment to keep UniSource an Arizona-based and operated
utility.

3.

The ability of the Company to provide safe, reliable and adequate
service.

RUCO intervened in this proceeding and filed testimony on behalf of ratepayers. RUCO
opposes the proposed merger and has recommended that the Commission reject it.
RUCO analyzed the proposed merger and has concluded that the benefits highlighted
by the Company are all benefits that the Company has come along way in achieving
and will ultimately be fully realized in the near term. Moreover, the merger will introduce
more risk without any incremental benefits. Specifically, the merger will increase
UniSource’s debt leverage placing additional financial pressure on TEP to generate
income needed to service UniSource’s new debt.
Additionally, there are no
employment contracts in place which would indicate firm commitments by current
management to remain after the merger.
The parties filed their testimony, and a hearing was commenced on June 21, 2004.
Post-hearing Briefs were filed and the parties are awaiting a recommended opinion and
order from the Administrative Law Judge.
Arizona Public Service Company – Application for an Increase in Rates – Docket
No. E-01345A-03-0437
On June 27, 2003, Arizona Public Service Company (APS or Company) filed an
application to increase its rates by $175.0 million1, or an average of 9.80 percent, to
become effective on July 1, 2004. APS indicated that the requested increase includes
recognition of the cost of certain generation assets of APS’ affiliate Pinnacle West
Energy Corporation (PWEC), recovery of $234 million that APS wrote off pursuant to
the 1999 Settlement Agreement of APS’ stranded cost application, and recovery of all
costs APS prudently incurred to comply with the Commission’s Electric Competition
Rules.

12

APS is the largest provider of electric service in the state of Arizona. Based on
information provided in the Company’s application, APS served 902,000 customers (of
which approximately fifty percent are residential customers) in eleven of the state’s
fifteen counties during the test year ended December 31, 2002 (Test Year).
RUCO’s direct testimony on the proposed rate increase was filed as scheduled at 4:00
p.m. on Tuesday, February 3, 2004. RUCO opposed both the inclusion of the PWEC
generation assets in APS' rate base and the recovery of the $234 million that was
written off as part of the 1999 settlement agreement. The Commission Staff also filed
direct testimony on that date, as did other intervenors who are involved in the case. On
February 4, 2004, Pinnacle West Capital Corporation (the parent company of
APS) stated, in an 8-K filing with the U.S. Securities and Exchange Commission
("SEC"), that it will "vigorously oppose" the recommendations of ACC Staff and RUCO.
Below is a comparison of what APS is proposing in its application, and what RUCO is
recommending in its direct testimony:

DESCRIPTION
ADJUSTED RATE BASE

(A)

(B)

APS

RUCO

PROPOSED

RECOMMENDED

ORIGINAL

ORIGINAL

DIFFERENCE

COST

COST

[ (B) - (A) ]

($000's)

($000's)

($000's)

$4,207,476

$

(C)

3,051,479

$ (1,155,997)
(4,878)

ADJUSTED OPERATING INCOME

263,870

258,992

CURRENT RATE OF RETURN (L2 ÷ L1)

6.27%

8.49%

2.22%

REQUIRED RATE OF RETURN

8.67%

7.43%

-1.24%

REQUIRED OPERATING INCOME (L4 x L1)

364,788

226,578

(138,210)

OPERATING INCOME DE(SUF)FICIENCY (L5 - L2)

100,918

(32,414)

(133,332)

GROSS REVENUE CONVERSION FACTOR

1.6529

1.6537

GROSS REVENUE INCREASE

$ 166,807

CURRENT REVENUES – TEST YEAR ADJUSTED

13

1,940,146

$

(53,605)
1,885,120

$

(220,412)
(55,026)

PROPOSED ANNUAL REVENUE (L8 + L9)

2,106,953
8.60% 2

PERCENTAGE AVERAGE INCREASE
1

2

1,831,515

(275,438)

-2.84%

-11.44%

The Company's proposed jurisdictional revenue requirement of $166,807,000 plus $8,283,000
of competition rules compliance charges ("CRCC").
An average increase of 9.80% when the Company-proposed $8,283,000 of CRCC charges are
included.

Public comment on APS’ rate increase request was heard by both the Commission’s
Chief Administrative Law Judge (“CALJ”) and four of the five ACC Commissioners on
Wednesday, April 7, 2004. During the public comment session, various individuals,
including representatives from a number of Arizona school boards, voiced their
concerns on the proposed rate increase.
On Thursday, April 8, 2004, the director of the Commission's Utilities Division informed
all of the parties involved in the proceeding that representatives from APS had
approached ACC Staff about the possibility of conducting settlement discussions on the
proposed rate increase request. APS invited RUCO and all of the other parties to the
case to take part in an initial settlement meeting scheduled for April 19, 2004, at the
Commission's Phoenix office.
During a procedural conference held at the ACC's Phoenix office on April 28, 2004, the
CALJ and all five Commissioners heard from the parties to the case on the results of the
two settlement meetings held to date. Attorneys representing the parties to the case
stated that they believed that the meetings could produce meaningful results and that
the meetings should be continued. Both the CALJ and the Commissioners asked
questions of the parties and made suggestions on items such as the possible
intervention of state school boards. On April 29, 2004, the CALJ issued a procedural
order granting a stay of the proceeding until May 26, 2004.
On Wednesday, May 26, 2004, attorneys for the parties to the case reported to the
CALJ and the five Commissioners that progress was being made in the settlement
talks. The parties to the case, including RUCO, asked for a continuance of the stay on
the procedural time clock until Monday, June 14, 2004. The CALJ stated that she would
grant the request and issue a procedural order.
At the June 14, 2004 procedural conference, the ACC’s Chief Counsel (speaking on
behalf of the parties to the case) requested a thirty-day continuance of the stay on the
procedural time clock from the CALJ and two of the five Commissioners. The request
was granted by the CALJ.
At a scheduled procedural conference on Wednesday, August 18, 2004, the ACC’s
Chief Counsel announced that a settlement agreement (“Agreement”) on APS' request
for an increase in rates had been reached by a large majority of the parties to the case
including RUCO. The proposed Agreement represents the culmination of approximately
14

seventeen weeks of negotiations by representatives from APS, ACC Staff, RUCO and a
wide variety of other intervenors who chose to take part in the settlement discussions.
The Agreement will provide APS with a total revenue increase of $75.5 million over the
Company's adjusted 2002 revenues of $1.8 billion. This represents a 4.21 percent total
increase, 5.59 percent lower than the 9.80 percent rate increase sought by APS in its
original filing in June, 2003. APS will be permitted to acquire and include the generation
assets of PWEC in the Company's rate base. APS will be permitted to recover the
original cost of the PWEC generation assets less $148 million, which represents a
reasonable estimate of the value to APS' ratepayers of the remaining term of the
existing power supply contract between APS and PWEC. APS also agrees to forego
any present or future claims of stranded costs associated with any of these PWEC
assets. APS further agrees to forego any recovery of a $234 million write-off
attributable to Commission Decision No. 61973 that approved the 1999 APS settlement
agreement. The Agreement provides APS with a 10.25 percent return on common
equity, an embedded cost of long-term debt of 5.80 percent and a capital structure
comprised of 55.0 percent long-term debt and 45.0 percent common equity, for a
weighted cost of capital of 7.80 percent for the purpose of settlement.
The Agreement also adopts a power supply adjuster mechanism ('PSA") which will
allow APS to directly pass the costs of fuel to its customers. Other major points of the
agreement include $16 million in energy efficiency programs, including $1 million for
funding of programs targeted to low-income customers. The Agreement also allows for
$12.5 million in environmental portfolio standard and other renewable energy programs.
Finally, the Agreement includes provisions for the competitive procurement of power on
the wholesale market, nuclear decommissioning costs, a transmission cost adjustor
mechanism (similar to the PSA), distributed generation, and for recovery of costs
associated with bark beetle infestation.
The Agreement must be approved by a majority of the five ACC Commissioners who
will vote on a recommended order and opinion ("ROO") to be written on the Agreement
by the CALJ after an evidentiary hearing and review of filed testimony by parties to the
Agreement. The evidentiary hearing on the Agreement has been scheduled to begin
November 8, 2004. A final decision on the proposed Agreement will probably not be
voted on until late December 2004.
Rio Rico Utilities Inc. – Application for Permanent Increases for Water and
Wastewater Utility Services – Docket No. WS-0276A-03-0434
On June 25, 2003, Rio Rico Utilities Inc. (Rio Rico or Company) filed an application
requesting rate adjustments for both water and wastewater service. Rio Rico provides
utility service to approximately 4,200 water and 1,500 wastewater customers in the
community of Rio Rico in Santa Cruz County, Arizona.
On June 3, 2004, an Evidentiary Hearing was convened in Tucson, Arizona.

15

On August 17, 2004, the Hearing Division issued its Recommended Opinion and Order.
On August 31, 2004, the matter came before the Commissioners at its Opening
Meeting. The Commissioners expressed concerns whether the Company’s customers
were aware of the magnitude of the proposed increase for wastewater services.
Consequently, to insure that the views of consumers are adequately considered, the
Commission ordered a public comment session to be held in the local service area.
On September 17, 2004, Staff and Rio Rico filed a Stipulated Settlement for wastewater
utility service rates and proposed amendments. RUCO did not agree to the settlement.
On September 21, 2004, a public comment meeting was held at the Rio Rico
Community Center. On September 28, 2004, the Commissioners approved at its Open
Meeting the ROO.
The issues left unresolved, adjudicated by the Administrative Law Judge and approved
by the Commission in Decision No. 67279 were:
Rate Base:
The Commission approved the Company’s request to include post test year plant in rate
base. The preponderance of evidence indicated the plant was installed and serving
existing test year customers.
Revenues and Expenses:
The Commission approved Staff’s and Rio Rico’s methodology for the calculation of the
property tax expense.
For the Water Division, the Commission approved test year adjusted revenues of
$1,084,065; adjusted operating expenses of $1,052,711; producing operating income of
$31,354.
For the Wastewater Division, the Commission approved test year adjusted revenues of
$606,152; adjusted operating expenses of $711,400; producing operating losses of
$105,248.
Cost of Capital:
The Commission approved the midpoint between Staff and RUCO variables to provide
a reliable and reasonable determination that Rio Rico’s Weighted Cost of Capital is 8.7
percent.
Revenue Requirements:
The Commission approved an overall increase in revenue for the two Divisions of
$1,247,533 or 73.81 percent.

16

DOLLAR INCREASES
COMPANY BY DIVISION

COMPANY

RUCO

ORDER

RIO RICO UTILITIES, INC. (Decision No. 67279, Dated 10/05/04)
WATER

$ 362,223

$ 163,299

$ 547,430

WASTEWATER

$ 869,199

$ 702,351

$ 700,103

Rate Design:
The Commission approved Rio Rico’s phased-in rate design for the wastewater division.
The revenue increase for the wastewater division is so great a three year phase-in is
necessary and reasonable to ameliorate rate shock to customers.
In the first year, the typical residential 5/8 inch meter monthly bill for wastewater will
increase $12.86 or 40 percent, from $26.00 to $38.86. In the second year, the increase
will be another $12.86, or 33.1 percent over year one, from $38.86 to $51.92. In the
third year, the increase will be $4.44, or 8.6 percent over year two, from $51.92 to
$56.36.
The Commission approved Rio Rico’s 3 tier rate design for the water division believing it
appropriately addresses the goals of cost-based rates that encourage conservation
while providing that all meter classes bear an equitable proportion of the revenue
increase.
The typical residential 5/8 inch meter monthly bill for water will increase by $4.67 or 26.6
percent, from $17.61 to $22.28.
RUCO’s intervention was instrumental in illuminating its position on several rate making
elements; specifically:
The potential of creating mismatches between operating revenues, expenses and rate
base exist by including post test year plant additions. The only way to ensure proper
matching is to adhere to a historical test year model.
The pro forma adjustment of property tax expenses should be based on the ADOR
formula; when the formula is varied to project an inflated Fair Value Cash Value
increases the risk the Company will over earn.
The Commission traditionally allows for the treatment of income tax on a stand alone
basis.

17

Tucson Electric Power - Filing of General Rate Case Information by Tucson
Electric Power Company Pursuant to Decision No. 62103 – Docket No. E-01933A04-0408
In June 1999, Tucson Electric Power Company (“TEP” or “Company”) entered into a
settlement agreement with RUCO, Commission Staff, members of Arizonans for Electric
Choice and Competition, and the Arizona Community Action Association.
The Commission approved that settlement agreement in Decision No. 62103, dated
November 30, 1999, which resolved pending litigation regarding the Commission's
Retail Electric Competition Rules, provided TEP with the opportunity to recover
stranded costs, implemented two rate reductions, and froze the Company's rates until
2008. TEP was also required to file a general rate case application by June 1, 2004
pursuant to Commission Decision No. 62103.
TEP filed a general rate case application with the Commission on June 1, 2004, as a
rate check on the Company as ordered in Commission Decision No. 62103.
Commission Staff requested additional information from TEP to satisfy general rate
case information requirements, and RUCO intervened on June 10, 2004.
On September 15, 2004, TEP filed additional witness testimony that more specifically
addressed the original June 1, 2004 filing.
In that application, TEP stated that (based on data collected during a 2003 test year) it
is experiencing a revenue deficiency of $112 million and the Company could be
requesting a rate increase of 16.0 percent. However, because of the rate freeze
requirement in Decision No. 62103, TEP cannot increase its rates seeking a
determination of fair value (for the purpose of setting rates) at this time. However, TEP
customers could experience a rate decrease if it is ultimately determined that the
Company is over-earning.
At this time, Commission Staff is determining sufficiency of TEP’s rate filing and then
the Commission will issue a procedural order.
RUCO has performed an initial review of the filing, and in the coming months, RUCO's
staff will conduct a thorough review and analysis of the Company's application in order
to determine if the information presented in TEP's application is a fair and accurate
picture of the Company’s performance during the test year ended December 31, 2003.
RUCO's Staff will then file written testimony, presenting the results of its analysis, and
will be a part of the record in the proceeding.
Electric Industry Restructuring – Docket Nos. RE-00000C-94-0165 and E-00000A02-0051.
In May 1994, the Commission’s Utilities Division Staff (Staff) opened Docket No. RE00000C-94-0165, to study electric industry restructuring for the State of Arizona. After

18

public input, the Commission adopted new rules A.A.C. R14-2-1601 through R14-21616 (Competition Rules) in December 1996 in Decision No. 59943.
In August 1998, the Commission adopted amendments to the Competition Rules on an
emergency basis. Included in those amendments were requirements that incumbent
utilities divest their generation resources to an affiliate or a third party, and that
incumbent utilities acquire power for standard offer customers through competitive bids.
In December 1998, the Commission adopted permanent amendments. In January 1999,
the Commission suspended the Competition Rules pending further consideration. After
taking additional comment on the Rules, the Commission adopted revised Competition
Rules in September 1999.
Beginning in December 1998, the Commission issued CC&Ns to a number of
competitive Electric Service Providers. Several of the incumbent utilities appealed the
decisions granting CC&Ns to the Superior Court. In November 2000, Judge Campbell
issued judgment to vacate the Competition Rules and CC&N decisions. A number of
parties, including RUCO, appealed Judge Campbell’s decision to the Court of Appeals.
In January 2004, the Court of Appeals issued its decision finding portions of the rules
unconstitutional, finding other portions beyond the scope of the Commission’s authority
to adopt, finding other portions required certification by the Attorney General, and
vacating the CC&Ns.
In October 2001, Arizona Public Service Company filed an application for a partial
variance from the Commission’s rule requiring competitive procurement of power for
standard offer customers, and for approval of a purchase power agreement with APS’
affiliate to which it was planning to transfer its generation assets. APS’ application was
based on its perception that western wholesale electricity markets were unstable and
that competitive acquisition of power in that market was imprudent.
In January and February 2002, each of the three Commissioners issued letters seeking
information pertaining to the restructuring of Arizona’s electric industry. The
Commission opened a new docket (E-00000A-02-0051) to examine electric
restructuring issues. Interested parties provided responses to the Commissioners’
questions, and in March 2002 Staff issued a report and recommended that certain
issues be addressed in the new docket.
Prior to considering APS’ application for a partial variance and approval of a purchase
power agreement, the Commission ordered that certain threshold issues (primarily
wholesale market power and the transfer of generation assets by the incumbent utilities)
be considered in what became known as Track A of the new generic docket. In addition,
the Commission instructed that competitive solicitation issues be considered in a
second Track B. A hearing on Track A issues was held in June 2002. In September
2002, the Commission adopted an order resolving the Track A issues. That order found
that APS and Tucson Electric Power Company (TEP) have market power in certain
areas; that the wholesale electricity market applicable to Arizona is poorly structured
and susceptible to possible malfunction and manipulation. The order concluded that the

19

requirement that incumbent utilities transfer their generation assets to others is not in
the public interest at this time, and suspended that rule. The Order further required APS
and TEP to file necessary modifications to their codes of conduct, and required that a
review of the Competition Rules be undertaken.
Track B issues were initially addressed in workshops. A hearing on unresolved Track B
issues was held in November 2002, and the Commission issued its order in March
2003. APS and TEP solicited power from the wholesale market pursuant to the
requirements of the Track B order. As a result, APS executed three contracts and TEP
executed two contracts with alternative wholesale suppliers.
During 2003, the Commission sought comments from interested parties on possible
revisions to the Electric Competition Rules. In addition, the Commission held several
workshops on environmental risk management to develop criteria to weigh the
environmental impact of offers received in future solicitations, and to discuss the costs
and benefits of environmental mitigation. In addition, the Commission held workshops
to address demand-side management (DSM) issues. No final Staff Reports have been
issued on these matters yet.
----------

CASES CLOSED IN FY 2004
(listed in order of closing date)
Arizona Public Service Company – Request for Rate Adjustor Mechanisms Docket No. E-01345A-02-0403
On May 31, 2002, the Arizona Public Service Company (APS) filed a request for
approval of several rate adjustment mechanisms. The request was filed pursuant to the
1999 APS settlement agreement (Decision No. 61973) that provided that “the
Commission shall approve, by December 31, 2002, an adjustment clause or clauses
which will provide full and timely recovery beginning July 1, 2004, of the reasonable and
prudent costs.” APS’ request included the following four adjustor mechanisms:
1)
2)
3)
4)

Purchase power and fuel adjustor;
Large customer power supply adjustor;
Transition cost recovery mechanism; and
System benefits adjustor.

RUCO filed testimony in this docket on February 13, 2003, opposing the approval of the
purchase power and fuel adjustor mechanisms. RUCO argued that the terms of 1999
settlement agreement related merely to a purchased power adjustor, not a fuel adjustor.
RUCO further argued that since the stay of generation asset divesture in Decision No.
65154, the purchased power mechanism was no longer warranted and did not meet the
definition for automatic adjustment as defined by the Commission and the courts.

20

A hearing on this matter commenced on April 7, 2003. On November 18, 2003, the
Commission approved Decision No. 66567. RUCO's arguments were successful as the
Commission approved a purchased power adjustor, but not a fuel adjustor.
Arizona Water Company - Eastern Group Rate Case – W-01445-02-0619
On August 14, 2002, Arizona Water Company filed an application for a permanent rate
increase for each of the eight water systems that comprise the Company’s Eastern
Group. The case involved water systems that provide service to customers located in
Apache Junction, Bisbee, Miami, Oracle, San Manuel, Sierra Vista, Superior and
Winkelman.
The evidentiary hearing for the case was held at the Commission’s office in Phoenix
during the entire week of September 22, 2003. During the hearing, an administrative
law judge heard testimony presented by witnesses from Arizona Water Company,
RUCO and Commission Staff. RUCO witnesses faced a total of four-and-one-half
hours of cross-examination by the Company’s attorneys.
During the proceeding, RUCO argued that the Commission should adopt RUCO’s
recommended rate base and operating expense levels which perfectly matched all of
the Company’s ratemaking elements. A comparison of the proposed increases in
revenue by the Company, Commission Staff and RUCO are as follows:
COMPANY

ACC STAFF

RUCO

EASTERN GROUP SYSTEMS

REQUESTED

RECOMMENDED

RECOMMENDED

APACHE JUNCTION

8.80%

-9.24%

-6.36%

BISBEE

51.12%

30.09%

24.97%

MIAMI

44.62%

14.24%

17.41%

ORACLE

26.97%

10.52%

-2.01%

SAN MANUEL

90.87%

74.83%

65.89%

SIERRA VISTA

44.15%

24.84%

8.76%

SUPERIOR

68.46%

47.76%

39.64%

WINKELMAN

34.86%

18.42%

20.68%

21

At a scheduled special open meeting held on Wednesday, March 10, 2004, the
Commissioners approved (by a vote of 3 to 2) an amended recommended opinion and
order written by the Administrative Law Judge who weighed the evidence presented at
the Eastern Group hearing. The final order, Decision No. 66849, dated March 19, 2004,
granted the following required increases in revenue to the eight systems that comprise
Arizona Water's Eastern Group:
FINAL
EASTERN GROUP SYSTEMS

ORDER

APACHE JUNCTION

-3.00%

BISBEE

32.54%

MIAMI

24.24%

ORACLE

13.04%

SAN MANUEL

77.54%

SIERRA VISTA

27.82%

SUPERIOR

50.60%

WINKELMAN

24.16%

RUCO’s intervention significantly impacted this case and provided substantial cost
savings to Arizona Water Company’s Eastern Group ratepayers. For instance, the
Company requested an approximate 50 percent average increase on all combined eight
water systems. Whereas, RUCO recommended a 21 percent increase, which included
rate decreases in two of the Group’s eight systems. The Commission’s Final Order
granted a 30.87 percent overall combined increase on the eight water systems with one
rate decease (-3%) for the largest system – Apache Junction.

22

US West Communications, Inc.’s (now Qwest Corporation) Compliance with
Section 252 of the Telecommunications Act of 1996 – Docket No. RT-00000F-020271
In 1996, the Congress enacted the Telecommunications Act of 1996, which detailed the
requirements for incumbent local exchange carriers to offer in-region interLATA
services. Section 252 of the Act provides, among other things, that any interconnection
agreements shall be submitted for approval to the State Commission. The purpose of
the Act is to protect competition and competitors from discriminatory behavior. Section
252 facilitates the Act by requiring the filing of interconnection agreements in order that
competitive local exchange carriers can opt-in and be afforded the same opportunities
as their competitors
On March 8, 2002, AT&T filed a motion with the Commission which alleged that Qwest
had not filed certain agreements with the Commission under Section 252(e) of the 1996
Act. The Commission’s Staff opened a separate docket on April 8, 2002, to consider
the 252 issues. RUCO intervened in the 252 docket and undertook a very aggressive
investigation. RUCO determined that reasonable grounds existed to believe that Qwest
entered into a scheme with McLeodUSA and Eschelon to discriminate against other
competitors and against competition in general. RUCO requested additional time to
audit the three companies in an effort to determine exactly the full extent of the scheme.
A procedural conference was held on September 19, 2002, to determine the procedure
that the Commission would follow in considering the issues.
On November 7, 2002, the Administrative Law Judge issued her Procedural Order
setting forth due dates for the filing of testimony and scheduling a hearing. The hearing
took place from March 17-20, 2003. Post-Hearing Briefs were filed. On July 25, 2003,
prior to the issuance of a Recommended Opinion and Order, Staff and Qwest filed a
Notice that they had reached a Settlement Agreement resolving the outstanding issues
in three dockets (including the 252 docket) and requesting a procedural conference.
The Settlement Agreement provided for, among other things, approximately $22 million
in payments by Qwest through a variety of measures designed to remedy the harm
caused by Qwest’s improper conduct.
RUCO considered the Settlement Agreement but believed that it did not go far enough
to remedy the harm. RUCO believed that Qwest needed to be held accountable either
by a finding of the Commission that Qwest engaged in unlawful conduct or that Qwest
admit to its improprieties. Other interveners also opposed the Settlement Agreement
and the matter was scheduled for hearing. A hearing was held to consider the
proposed Settlement Agreement on September 16 and 17, 2003. Thereafter, the
parties filed Post-Hearing Briefs.
The Administrative Law Judge issued her decision, exceptions were filed and the matter
was scheduled for Open Meeting. On April 30, 2004, the Commission issued its
Decision. The Commission rejected the Settlement Agreement and found that Qwest’s
actions violated Section 252 of the 1996 Telecommunications Act, as well as various

23

state laws and the Commission’s Rules. The Commission, among other things,
assessed a penalty against Qwest for its violations of federal and state law of
$8,764,000. Qwest was further ordered to pay its Arizona competitors a sum not to
exceed $11,650,000. The Commission imposed further regulatory safeguards on
Qwest to assure Qwest continues to comply with the law in the future.
RUCO was instrumental in bringing this case before the Commission. RUCO was
steadfast in making sure Qwest was held accountable for its misconduct. The
Commission concurred and for the first time in Arizona, Qwest was found to have
willfully and intentionally violated state and federal laws before this Commission. The
penalty assessed is the largest the Arizona Corporation Commission has ever assessed
against any utility.
Southwest Gas Corporation - Pre-Approval of Costs in Silver Canyon Pipeline
Project – Docket No. G-01551A-04-0192
On March 12, 2004, Southwest Gas Corporation (“Southwest Gas” or “Company”) filed
an application with the Commission requesting pre-approval of cost recovery for the
Company's participation in Kinder Morgan Energy Partners, LP's (“Kinder Morgan”)
proposed Silver Canyon Pipeline Project. The proposed pipeline will run roughly east to
west across Arizona from Window Rock (just north of Interstate 40 on the New Mexico
border) to Ehrenberg (near Interstate 10 on the California border).
In the application, the Company stated that the agreement with Kinder Morgan will
provide Southwest Gas with access to currently less expensive natural gas supplies in
the San Juan Basin (located in New Mexico) in addition to natural gas supplies it now
receives from the West Texas Permian Basin (through pipelines operated by El Paso
Corporation). In addition to seeking pre-approval of the Company's additional capacity
costs in the Silver Canyon Pipeline, Southwest Gas is also proposing that these new
costs be recovered from ratepayers through the Company's existing purchased gas
adjustor (PGA) mechanism in the same manner in which its present interstate pipeline
capacity charges are being recovered. Southwest Gas filed the application pursuant to
a Commission policy statement issued on December 18, 2003, in which the
Commission recognized that the current need for additional natural gas infrastructure in
Arizona warranted the consideration of pre-approval of costs and the adoption of
alternative cost recovery methods.
RUCO filed a motion to intervene on March 25, 2004. In the months that followed,
RUCO's staff issued data requests to gain additional insight into the Company's request
and hosted several meetings with Commission staff and representatives from
Southwest Gas. After weighing the information that was obtained during this period,
RUCO staff concluded that the Company's request was reasonable and that ratepayers
would not be impacted adversely by it. RUCO's support of both Southwest Gas'
position and the Commission Staff's recommendations in the matter were noted in the
Commission Staff report that recommended approval of the Company's request. In the
regular open meeting held at the Commission’s Phoenix office on June 24, 2004,

24

Commissioners approved Southwest Gas' request for pre-approval of cost recovery by
a 5 to 0 vote.
Arizona-American Water Company, Inc. - Application for Increases in Rates and
Charges for Water and Wastewater Services in Ten of its Districts – Docket No.
W-01303A-02-0887 et al.
On November 22, and December 13, 2002, Arizona-American Water Company, Inc.
(Arizona- American, AZ-AM or Company) filed an application for a determination of the
current fair value of its utility plant and property and for increases in its rates and
charges based thereon for utility service in selected water and wastewater districts.
This consolidated proceeding requests increases in the rates and charges for ten
systems (Districts) under the ownership umbrella of Arizona-American.
These ten Districts were previously owned by Citizens’ Communications (Citizens or
CUC). Arizona-American purchased all of the water and wastewater assets of Citizens
in Arizona as approved by the Commission in Decision No. 63584, dated April 24, 2001,
with AZ-AM assuming operational control on January 15, 2002.
The Company had requested increases ranging from 6.80 percent to 86.74 percent.
RUCO’s testimony recommended rate decreases for 4 out of the 10 systems ranging
from –17.98 percent to 31.70 percent. RUCO’s testimony clearly showed the rate
increases proposed by the Company were unwarranted.
A nine-day Evidentiary Hearing began in Phoenix on December 4, 2003.
Rate Base:
The Commission approved Staff’s adjustments to the Rate Base related to Plant in
Service and corresponding adjustments to Accumulated Depreciation. The Company
was unable to provide a logical and appropriate explanation of its treatment of
unidentified, retired, salvaged and/or used and useful plant.
The Commission authorized the Company’s unusual methodology to use the HalfMonth Convention for determining depreciation expense levels for plant additions and
retirements.
The Commission approved RUCO’s adjustment to correct the Mohave District’s
Advances In Aid of Construction balance and the Mohave District’s Contributions In Aid
of Construction balance.
The Commission approved Staff’s and AZ-AM’s methodology for the calculation of the
property tax expense.

25

Fair Value Rate Base:
The Commission ordered that the average of the adjusted OCRB and RCND provides a
reasonable measurement of the current value of the Company’s property dedicated to
public service. A 50/50 weighing of the OCRB and RCND is the legitimate basis to
determine the Company’s FVRB and there was no legitimate basis presented by the
Company for departing from this traditional ratemaking methodology.
Operating Income:
The Commission approved RUCO’s expense levels for Corporate Overheads, Service
Company charges, and Salaries and Wages.
The Commission approved RUCO’s Rate Case Expense level. The Commission
agreed with RUCO that the Company chose the test year for its application and believes
that ratepayers should not be made to bear the burden of the Company’s choices to
incur unreasonable increases in expenses. The Commission concurs with RUCO that
at some point the Company must mitigate the costs associated with retaining outside
counsel or consultants to prepare and litigate its rate case filings.
Cost of Capital:
The Commission approved the methodology and variables used by Staff to provide a
reliable and reasonable determination that AZ-AM’s Weighted Cost of Capital is 6.5
percent.
Rate of Return:
The Commission authorized the traditional ratemaking methodology of applying a fair
value rate of return to the Company’s FVRB, as recommended by both RUCO and Staff
and determined it is in accordance with the mandates of the Arizona Constitution.
Authorized Increase/Decrease:
The Commission approved an overall increase in revenue for the ten Districts of
$1,340,249 or 3.79 percent.

DOLLAR INCREASES
COMPANY BY DIVISION

COMPANY

RUCO

ORDER

ARIZONA-AMERICAN WATER COMPANY (Decision No. 67093, Dated 06/30/04)
SUN CITY WEST WATER

$

1,482,414

$

545,792

$

547,430

SUN CITY WEST WASTEWATER

1,965,956

1,079,850

934,366

SUN CITY WATER

5,371,706

1,572,021

1,476,373

26

SUN CITY WASTEWATER

639,391

(856,821)

(745,794)

TUBAC

216,475

50,353

81,434

AGUA FRIA WATER

1,788,275

(241,111)

(269,577)

ANTHEM WATER

1,610,727

(305,056)

(280,170)

ANTHEM WASTEWATER

1,200,604

74,649

226,725

MOHAVE WATER

685,950

(698,249)

(675,701)

HAVASU WATER

206,142

2,467

45,163

TOTAL

$ 15,167,640

$

1,223,895

$

1,340,249

On July 12, 2004, the Company filed for a rehearing on the following basis:
Rate Base issues violate fair value standards are unlawful and violates the Arizona
Constitution.
Authorized Rate of Return failed to recognize recent increases in interest rates.
Rate Case Expense is unrealistic in view of the actual costs exceeding $1 million.
On August 27, 2004, the Company appealed to the Court of Appeals of the State of
Arizona for a review of Decision No. 67093. At the time of publication, the outcome of
this appeal is unknown.
RUCO’s intervention was instrumental in illuminating the inappropriateness of the
Company’s filing, resulting in excessive, unsubstantiated expense levels; specifically:
1)

The Company’s selection of a test year in which it did not own or operate
the systems made the entire process suspect, unreliable, complicated and
time consuming.

2)

The Company’s inaccurate calculations of Corporate Overheads, Service
Company charges, and Salaries and Wages were grossly inflated.

3)

The Company’s determination to use non-traditional unconstitutional
ratemaking principles to recover the acquisition premium was contrary to a
prior Commission Decisions.

4)

The Company’s attempt to inflict upon the ratepayers the excessive rate
case expenses from the runaway costs associated with pursuing
precedent setting RCND issues is unconstitutional.

5)

The Company’s request to include unknown and unmeasured charges
associated with the expansion of the Tolleson Wastewater Facilities
violated established ratemaking principles.
27

RUCO was able to effectively demonstrate the errors in the Company’s assertions in
such a way that the Administrative Law Judge and the Commissioners agreed with
RUCO on most of the major issues. RUCO’s diligence in this proceeding had a direct
impact on AZ-AM’s residential customers by reducing the overall rate increase from the
Company’s request of 27.58 percent to an acceptable 3.79 percent.

28

]]]

THE RESIDENTIAL UTILITY CONSUMER OFFICE STAFF
DIRECTOR

Stephen Ahearn

DEPUTY DIRECTOR

Ernie Nedd

BUSINESS MANAGER

Cheryl Fraulob

LEGAL

Scott Wakefield, Chief Counsel
Daniel Pozefsky, Staff Attorney
Ernestine Gamble, Legal Secretary

TECHNICAL

Marylee Diaz Cortez, Chief Accounting & Rates
Timothy Coley, Public Utilities Analyst
Rodney Moore, Public Utilities Analyst
William Rigsby, Public Utilities Analyst

]]]

29

APPENDIX
COMMONLY-USED ACRONYMS AND TERMS
The following terms are used throughout the case summaries:
ACC – Arizona Corporation Commission
ADOR – Arizona Department of Revenue
APS – Arizona Public Service Company
AZ-AM – Arizona-American Water Company
CALJ – Chief Administrative Law Judge
CC&N – Certificate of Convenience and Necessity
Citizens – Citizens Communications Company
Commission – Arizona Corporation Commission
DEQ – Department of Environmental Quality
DSM – demand-side management
FVRB – fair value rate base
OCRB – original cost rate base
PSA – power supply adjuster
PWEC – Pinnacle West Energy Corporation
RCND – reconstruction cost new depreciated
ROO - Recommended Opinion and Order
Saguaro Acquisition – Saguaro Acquisition Corp.
Staff – ACC Utilities Division Staff
TEP – Tucson Electric Power Company
UniSource – UniSource Energy Corporation (parent of TEP)

30