Pinnacle West Capital Corp. Chairman, President and CEO Jeffrey Guldner said he will be forced to take legal action against state regulators if they adopt a recommendation and proposed amendments that would slash subsidiary Arizona Public Service Co.'s return on equity to 8.7% from 10.0% and severely weaken the utility's balance sheet.
Since the Arizona Corporation Commission voted Oct. 6 in favor of the ROE decrease, which was lower than an administrative law judge's 9.16% recommendation (Docket No. E-01345A-19-0236), and decided to delay a decision on whether Arizona Public Service, or APS, can recover the costs of installing selective catalytic reduction equipment at the 1,540-MW coal-fired Four Corners plant, Pinnacle West shares have tumbled over 9.5% to settle at $67.07 on Oct. 25.
The commission's next open meeting is scheduled for Oct. 26.
Fitch Ratings downgraded Pinnacle West and Arizona Public Service's issuer default credit ratings Oct. 12 to BBB+ from A-, citing heightened business risk from actions taken by the commission.
On Oct. 21, commission Chairwoman Lea Marquez Peterson proposed an amendment to the rate proposal to reduce the utility's average retail rates to 9 cents/kWh by 2030 from 11.72 cents/kWh in 2020. Marquez Peterson's proposal also includes a performance incentive mechanism.
"With this amendment, the Commission aims to ensure that the investor-owned utility offers superior customer service and grid reliability to customers at an affordable rate, while ensuring that investors earn a just and reasonable rate of return for devoting their used and useful and prudently invested capital to public use," Marquez Peterson said.
Guldner was not receptive to the amendment.
"Not only do we find this proposal to be wholly unlawful and unsupported by anything in the record, it would also hamper our investment in infrastructure to provide reliable service to our customers, and it is not in the best interest of Arizona residents or customers," the CEO said in an Oct. 25 letter to the commission.
'Immediate legal action'
If the rate proposal and amendments are adopted, Guldner said APS "is prepared to take immediate legal action," including to the Arizona Supreme Court.
"This is absolutely the last thing I want to do as CEO of the largest utility in Arizona," he said. "The process that has unfolded in this rate case has not been constructive and leaves me little choice."
Guldner also made a counter-proposal stipulating that APS would be "willing to forgo all earnings" on its Four Corners selective catalytic reduction equipment costs if the commission authorizes a debt return on that investment, decreases the utility's ROE to no lower than the administrative law judge's 9.16% and "adopt[s] no other harmful amendments." In return, APS would put another $10 million toward its coal communities transition plan but "not without financial harm to our investors, who will be adversely impacted by an estimated $50 million write-off this year," the CEO said.
"The reality is that an 8.7% ROE hinders the company's ability to attract the capital needed to support the growth in Arizona, and APS will be seeking a significantly higher ROE in its next rate case," Guldner said.
A 9.16% ROE alone would require the utility to implement a $111.4 million rate reduction, and some equity analysts described the 8.7% ROE as "draconian."
"Arizona Corporation Commission is now confirmed to be the single most value destructive regulatory environment in the country as far as investor-owned utilities are concerned," Guggenheim Securities LLC told clients Oct. 7.
Regulatory Research Associates, a group within S&P Global Market Intelligence, counted it "among the lowest ROEs RRA has encountered in its coverage of vertically integrated electric utilities in the past 30 years."