Tucson Electric Power - Request for an Increase in Rates - User's Guide

Q.      What exactly is the Residential Utility Consumer Office, or RUCO?

A.      RUCO is an agency of the executive branch of Arizona State Government.  We fall directly under the Governor.  The agency was established by the Arizona Legislature in 1983 to represent the interests of residential utility ratepayers in rate case proceedings that involve public service corporations that seek rate increases from the Arizona Corporation Commission or ACC.  Presently we are involved in a number of rate case proceedings that include Tucson Electric Power Company, or TEP.

Q.      So you’re a watchdog organization that represents residential ratepayers as a class?

A.      Yes.  Because the ACC grants investor-owned utilities, such as TEP, an exclusive right to provide service in designated areas with no competition, the utilities are regulated to ensure reasonable costs.  Before granting an increase in rates and charges, the ACC conducts public hearings and examines evidence and testimony presented by various concerned parties including RUCO.  Our accountants perform an independent audit on rate increase applications filed with the ACC, and present their findings in written testimony.   They also appear as expert witnesses during evidentiary hearings, like the one that will be held for TEP, and are subject to cross examination by attorneys representing utilities.  Our lawyers represent the interests of Arizona ratepayers during these same hearings.  In short, we make recommendations that the five ACC Commissioners can adopt in their final decisions on requests for rate increases.

Q.      Can you provide some background information on TEP?

A.      Sure.  TEP is the second largest investor owned electric utility in Arizona.  The company provides electric power to over 394,000 customers in Tucson and southern Arizona.  TEP is presently operating under a rate moratorium which was established in a 1999 settlement agreement with RUCO, members of Arizonans for Electric Choice and Competition, and the Arizona Community Action Association.  The settlement agreement was approved by the ACC in Decision No. 62103, dated November 30, 1999.  The moratorium freezes the Company's rates through December 2008.

Q.      When did TEP file its application requesting a rate increase?

A.      TEP filed its application with the ACC on July 2, 2007.  The company is requesting that the new rates go into effect no later than January 1, 2009.

Q.      Has RUCO filed testimony in this case?

A.      Yes.  RUCO filed its first round of direct testimony on Friday, February 29th.  You can see it on our website at www.azruco.gov.        

Q.      What is TEP primarily seeking in its rate application?

A.      TEP is primarily seeking a general rate increase under one of three different methods.

Q.      What are the three methods that TEP is proposing in its application?

A.      TEP is proposing a market method, which the Company claims would result in a 21.9 percent increase over current rates, a traditional cost-of-service method, that would increase current rates by approximately 23.0 percent, and a hybrid methodology which is a mixture of the market and traditional methodologies just noted.  The hybrid method would result in an increase of 14.9 percent over TEP's current rates.

Q.      What method is RUCO recommending that the ACC adopt?

A.      RUCO is recommending that the ACC adopt the traditional method.  Our outside consultant on the competitive issues in this case has recommended that the ACC reject both the market and hybrid methods because they will result in excessive rates that are unreasonably volatile and will impose an unnecessary and unreasonable burden on TEP’s customers.

Q.      Does that mean that customers will have to bear the 23.0 percent increase in rates that TEP is asking for?

A.      Not at all.  Our accountants have made adjustments to the financial information presented in TEP’s application and are recommending an increase in TEP’s revenues of not more than 4.04 percent under the traditional cost-of-service method.

Q.      So TEP is asking for approximately 23.0 percent and you’re saying it shouldn’t be more than 4.04 percent.  That’s quite a drop.  What caused the difference?

A.      RUCO is recommending a $64 million decrease in the company’s proposed level of invested capital, or rate base, which financed TEP’s electric utility plant assets.  RUCO’s auditors also determined that the Company’s operating income, or the difference between operating revenues and expenses, was $104 million higher than what TEP filed in its rate increase application.  RUCO’s adjusted operating revenues were also $184.5 million higher than what the company reported.

Q.      What were some of the major items that you removed in your adjustments?

A.      One of our largest adjustments involved TEP’s proposed Implementation Cost Regulatory Asset or ICRA. 

Q.      Can you explain what the ICRA is?

A.      Yes.  TEP wants to recover $47.0 million, under the traditional cost-of-service method, for certain software costs and coal contract costs that were related to the implementation of retail electric competition – which never developed here in Arizona.  TEP refers to these costs as an Implementation Cost Regulatory Asset or ICRA.  RUCO is recommending that the ACC reject a large portion of the ICRA and has made adjustments to remove those costs from TEP's proposed dollar levels of rate base and operating expense.  If RUCO's adjustment is adopted by the ACC, it will reduce TEP's proposed rate base by $33.2 million and also reduce operating expenses associated with the ICRA by $8.311 million. RUCO's analysts are also recommending that the ACC reject the Termination Cost Recovery Asset or TCRA that the company is asking for.

Q.      What is the TCRA?

A.      The Company claims that the TCRA is a regulatory asset “that represents the economic harm” that will have been suffered by TEP if the 1999 Settlement Agreement is not honored and generation service rates are based solely on cost-of-service principles.  RUCO simply doesn’t see any merit in TEP’s claim that it will suffer economic harm if rates are set under the traditional cost-of-service method.

Q.      TEP is seeking an overall 8.35 percent return on its invested capital.  What rate of return on investment is RUCO recommending?

A.      RUCO’s analyst is recommending an overall rate of return of 7.76 percent.  This produces a level of operating income of $72.7 million which, is $9.4 million lower than what TEP asked for in its rate application.

Q.      So after all of your accounting adjustments and rate of return estimates are taken into consideration, what amount of increase in revenue is RUCO recommending?

A.      RUCO’s total recommended increase in operating revenue is $36.3 million or $121.9 million less than the $158.2 million that TEP is seeking.  That is the 4.04 percent increase in required revenue stated earlier.           

Q.      Is TEP asking for anything else besides an increase in its base rates?

A.      Yes.  In addition to an increase in its existing rates, TEP is seeking approval of a purchased power and fuel adjustment clause, known as a PPFAC, which will allow the company to flow forward-looking increases and decreases in its purchased power and fuel costs with no profit markup to its customers.

Q.      Does RUCO support TEP’s request for a PPFAC?

A.      Partially.  RUCO’s analysts have concluded that the majority, almost 81.0 percent, of TEP’s total fuel costs are for coal, which has a relatively stable price compared to the prices of the remaining 19.0 percent of fuel which includes natural gas and electric power purchased on the open market.  Since the cost of coal is relatively stable and predictable, RUCO is recommending that the PPFAC should be limited to only the incremental increases or decreases in the costs for natural gas and electric power purchased on the open market.

Q.      Is TEP asking for any new types of rate plans in its application?

A.      Yes. TEP is also proposing that the Commission adopt significant changes that involve time-of-use and lifeline electric rates for TEP's customers.  Our specific recommendations on rate design will be included in our direct testimony that will be filed on March 14, so stay tuned.

Q.      Is TEP asking for anything related to demand side management, or DSM, programs?

A.      TEP is asking the ACC for a demand-side management cost recovery mechanism surcharge that will allow it to recover costs associated with demand side management programs.

Q.      What is RUCO’s position on TEP’s DSM request?

A.      RUCO generally supports DSM programs because they provide ratepayers with the tools that they can use to conserve energy and manage their monthly electric bills.

Q.      What happens after all of the rounds of written testimony have been filed?

A.      The evidentiary hearing has been scheduled to begin at 10:00 a.m. on May 12, 2008 at the ACC’s offices here in Tucson.  After the hearing is concluded, the attorneys for the parties to the case will most likely file two rounds of legal briefs arguing the parties' positions on the various issues raised during the proceeding.  After reading the briefs, the ALJ assigned to the case will weigh all of the evidence presented during the proceeding, including public correspondence and comment from ratepayers, and write a Recommended Opinion and Order or ROO. 

Q.      Is the ROO the final order?

A.      No.  The ROO will be voted on at a scheduled open meeting by the five ACC Commissioners.  The Commissioners can either accept, reject or amend the ROO in order to arrive at a final decision on TEP's request for a rate increase.

Q.      When do you expect a final decision on TEP’s request?

A.      Depending on the length of the evidentiary hearing, a final decision on TEP's request for an increase in rates will probably not be made by the five ACC Commissioners until sometime during the last three months of 2008.

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