APS presses for rate hike
Utility grapples with fuel costs, credit rating

Ken Alltucker
Dec. 23, 2005

Arizona Public Service Co. warned state regulators on Thursday that soaring natural-gas prices have sent fuel and power costs so high that it may need to seek an emergency rate hike early next year.

Such a move would provide immediate cash for the Phoenix-based utility and appease a Wall Street rating agency that signaled that APS' credit could be downgraded to junk status by January unless regulators allow it to charge more for electricity.

APS already has two cases before the Arizona Corporation Commission and plans a third "adjuster" case in April. All three cases seek to hike electricity bills to raise cash and recover money the utility spends on fuel for power plants and purchased electricity.

But as those cases work through the state's lengthy administrative process, APS said it has received signals that it needs to recover money more quickly.

Standard & Poor's Ratings Services this week knocked down the utility's corporate credit rating one notch and warned that it could tumble to junk status by January unless state regulators approve electricity bill increases. Such a credit downgrade would send the utility's borrowing expenses soaring, a cost that the utility would ultimately seek to pass along to customers.

"It's a half-billion-dollar issue here," said APS Chief Executive Officer Jack Davis, citing the company's growing fuel-cost deficit. "They (Wall Street) want to see a positive action by this commission."

Davis and other APS executives took the unusual step of attending a routine Corporation Commission scheduling conference Thursday to underscore the utility's financial jam.
Commission's inquiry
Not all commissioners were happy with what they described as undue pressure from APS.

"Every inch of it needs to be scrutinized," Commissioner Kris Mayes said. "If that means we need to take our time, then we need to take our time."

Among the areas that need to be scrutinized, Mayes said, are the utility's pension deficit and the higher-than-normal outages this year at Palo Verde nuclear plant. The Corporation Commission will seek to hire an outside expert to examine the Palo Verde outages.
Amount of increase
In the first of its three cases before the commission, APS seeks to recover $80 million for fuel and purchased-power costs, which would raise the typical residential electricity bill by 1.6 percent. A hearing on the request was held this fall, and the case is awaiting a final ruling from an administrative law judge and approval from the Corporation Commission.

APS will return in April to seek an unspecified amount as part of its "adjuster," which allows the company to pass fuel costs to customers.

The largest and likely the most contentious case is the utility's request to hike electricity bills 20 percent to raise $409.1 million. About $247 million of that amount would pay for fuel and purchased-power costs, but the balance would cover other expenses such as the purchase of a power plant and pension-funding deficits.

Representatives of APS and the Corporation Commission agreed that they would attempt to file all necessary paperwork for the rate case in time for a hearing next fall.

APS lawyer Tom Mumaw said the utility may seek to file for an emergency rate increase before the rate-case hearing if the utility's financial rating worsens or if the process drags on too long.

Corporation Commission Chairman Jeff Hatch-Miller sympathized with the utility's pay-me-now or pay-me-later stance.

Hatch-Miller urged the utility, Corporation Commission staff and other interested parties to do everything possible to ensure a quick but thorough rate-case review. Otherwise, the utility's financial jam could result in unnecessary bill hikes for utility customers, he said.

"I'm concerned there will be additional costs to the ratepayers," Hatch-Miller said.