Pinnacle West Capital Corp. subsidiary Arizona Public Service Co. said it will sue the Arizona Corporation Commission after the agency voted to cut the utility's rate of return on equity to 8.7% and denied recovery of $215.5 million in pollution control costs at the Four Corners coal-fired power plant.
The commission on Nov. 2 decided in a 3-2 vote to approve the $119 million revenue decrease and disallow the selective catalytic reduction, or SCR, investment recovery, according to an ABC 15 Arizona report. (Docket No. E-01345A-19-0236) A copy of the approved decision was not immediately available.
In response, Arizona Public Service, or APS, called the decision "short-sighted" and committed to taking legal action as promised by company Chairman, President and CEO Jeffrey Guldner.
"Though customers will see some near-term benefits, the overall outcome will raise costs for customers in the long run and put our state's economic future at risk, leaving us no choice," the utility said in a Nov. 2 statement.
The Sierra Club applauded the commission's rate case vote for potentially saving "ratepayers upwards of $1 billion," but noted that "it falls far short of what is required to support the clean energy transition and to spur economic development needed by the Navajo Nation and Hopi Tribe" for the coal communities transition plan.
Guldner had made a counter-proposal stipulating that APS would be "willing to forgo all earnings" on its Four Corners equipment costs if the commission authorized a debt return on that investment, decreased the utility's ROE to no lower than the administrative law judge's recommended 9.16% and adopted "no other harmful amendments." In return, APS would put another $10 million toward its coal communities transition plan.
Guggenheim Securities LLC analysts told clients Nov. 2 they expect APS to take its case to the Arizona Supreme Court and file another rate case in 2022. In the meantime, Pinnacle West will have to decide how to stabilize the utility's balance sheet.
"Given ... the lack of palatability of cutting the dividend in order to grow equity on the balance sheet more quickly, we instead see a cash infusion (potentially of ~$1 billion) from parent PNW as APS' most viable option to raise its equity layer," the analysts said.
Pinnacle West shares were down about 1% in morning trading on Nov. 3.
Fitch Ratings downgraded Pinnacle West and Arizona Public Service's issuer default credit ratings on Oct. 12 to BBB+ from A-, citing heightened business risk from actions taken by the commission.
Regulatory Research Associates, a group within S&P Global Market Intelligence, counted the 8.7% rate "among the lowest ROEs RRA has encountered in its coverage of vertically integrated electric utilities in the past 30 years."
