Intervenors recommend lower water rate hike
More increases on the horizon
by Kathleen Stinson

ANTHEM– Both intervenors in Arizona American Water’s rate hike case have calculated the company should reduce its proposed increases by 30 to 40 percent.

Rate analysts for the state Residential Utility Consumer Office and Anthem Community Council have studied AAW’s numbers– revenue requirements and expense calculations used to justify a rate hike–and filed last week preliminary recommendations in written testimony with the Corporation Commission. The commission’s in‑house staff recommendations are due this week.

The commissioners will make a final decision after a public hearing in May.

AAW is proposing a 69.71‑percent increase in residential water rates. By contrast, RUCO has  recommended a 30‑percent increase, said Bill Rigsby, public utility analyst for RUCO and expert testifying in the case.

According to the testimony of Anthem Community Council rate analyst Sonn Rowell, AAW’s proposed water rate increase should be reduced by an average of 30 percent across customer classes. The council recommends a proposed wastewater rate increase should be reduced by an average of 17.5 percent. Rowell is a managing member of Ahwatukee‑based Desert Mountain Analytical Services PLLC.

“This is only a preliminary recommendation,” said Frank Grimmelmann, Anthem Community Council board member.

“This is only the first round of testimony, and we do expect to identify other (rate) decreases as the case progresses.”

The council’s recommendation does not include, for example, consideration of AAW’s cost of capital or return on equity calculations, Grimmelmann noted. The council intends to retain a cost‑of‑capital expert to examine these numbers, and this information may further lower the council’s rate increase recommendation.

The first the community learned about AAW’s need for a rate increase, based on the utility’s obligation to repay the bulk of Del Webb Corp. advances for the system infrastructure at the end of community build‑out, was when the rate application was filed, Grimmelmann pointed out. These advances are treated as equity contributions which the Corporation Commission allows companies to recapture in their return on investment, he said.

Because the proposed rates increase will not provide for repayment of the entire cost of the infrastructure, AAW will continue to seek additional rate increases based on these continuing repayments.

Both Grimmelmann and RUCO say a deal was struck 10 years ago between developer Del Webb (Pulte Homes), Citizens Utility Co., former owner of the Anthem water system, the Arizona Corporation Commission and RUCO that places the brunt of infrastructure cost on residents starting at community build‑out. That decision spreads the bulk of the cost over the largest number of customers.

Grimmelmann said although nothing can be done to change the reality of that decision, the council hopes to ensure the rate increase is fair and reflects only that to which Arizona American is entitled.

According to the council’s expert testimony, AAW included in its calculations an expense outside the 2005 Test Year which should not be allowed in consideration of a rate increase. Typically, a utility uses expenses and revenues from a test year, usually the year prior to a filing, to base its claim for a revenue increase or rate adjustment.

“By adjusting AAW’s proposed rate base numbers to remove items beyond the Test Year end Dec. 31, 2005, the rate base will be decreased by almost $11 million,” Rowell said. “The rate base reduction results in a total decrease to the annual revenue requirement of $1.477 million, which will lower the tariff rates proposed...by an average of 30 percent across customer classes.”

Arizona American has asked that two $1 million payments to the City of Phoenix be included in the rate base, Rowell pointed out. The company is repaying Phoenix for the cost of constructing an interconnection between the Phoenix and Anthem water systems. The council recommends only one of the payments be included because the other $1 million payment had not been made at the time the application was filed and was not scheduled to be made until about six months after the test year.

“AAW included $109,589 in amortization for the payments to the City of Phoenix... the amortization must also be reduced by $54,795,” Rowell stated in his recommendation to the commission.

RUCO recommends AAW’s revenue requirement be decreased on the water side from $4.5 million to $2.4 million–a $2.15 million or 31‑percent reduction, as stated in its summary of adjustments filed with the commission last week.

AAW contends its wastewater revenue requirement is $2.5 million, compared to RUCO’s assessment of $1.5 million–a $967,934 or 15.7‑percent difference.

Arizona American spokesman Todd Walker stated the company has no comment at this time on the intervenors’ recommendations.

“We’re in the process of reviewing all the information submitted by the (commission) staff and intervenors,” Walker said.