Environmental and Natural Resources

by Timothy J. Sabo

Water is essential to Arizona. Hundreds of thousands of Arizonans are served by privately-owned water companies regulated by the Arizona Corporation Commission (ACC).  There are hundreds of these companies.  They range widely in size, financial condition, and expertise.  Perhaps the hardest job is faced by the smallest utilities, who must provide service with limited resources while grappling with complex regulations from the EPA, ADEQ, ADWR and the ACC.  While many of these small companies do a great job on a shoestring budget, others are in crisis, sometimes even leaving communities without water.

The issues facing small water companies were at the forefront of water policy workshops held by the ACC in May and June 2016. On July 25, the ACC issued Decision No. 75626, adopting new water policies based on the workshops.  A copy of the decision is available here.

The ACC observed that “The private water utility industry in Arizona is highly fragmented and problematic. This Commission has seen first-hand the extent to which small water utilities sometimes struggle both financially and operationally.” The ACC approved nine new policy statements, six proposed by ACC Chairman Doug Little, and 3 proposed by Commissioner Andy Tobin.  These nine new policies are summarized below.

Water policies proposed by Chairman Little

1. Small Water Company Rate Case Issues. This policy is designed to simplify the rate case process for small water companies, who often can’t afford attorneys and regulatory accountants to help them. The ACC explained that “When small utilities are unable to prepare a rate case or complete the rate case process, their rates will become out-of-date due to inflation and other factors, affecting their financial viability as well as their ability to fund necessary maintenance and capital improvements. This can lead to service quality issues and to rate shock for customers when rates are finally increased.”  The policy approved a number of steps to simplify the rate process, including creating processes for emergency surcharges, system improvement funds, and for the small water systems fund established by the Legislature.  The ACC will also simplify the rate application for the smallest companies.  The Commission will also pay more attention to cash flow in setting rates for small utilities.
2. Rate Design.  This policy statement tries to balance water conservation with revenue stability. It promotes a three-tiered rate design (where the price goes up as you use more water), and because this rate design will reduce the volume of water sold, suggests that the reduced consumption be considered in setting rates. The policy statement also provides guidelines on designing rate tiers and how to allocate revenue between the monthly customer charge and each of the three rate tiers.
3. Cost of Capital Reforms and Income Issues. The ACC will review the cost of capital processes used in Florida and California, and consider adapting them in Arizona.  The Florida and California processes involve developing a standardized process for determining return on equity (ROE), with ROEs determined once a year, rather than relying on reams of expert reports in each separate case.  The ACC hopes this will reduce the regulatory burden on small companies.  The ACC also established guidelines on operating margins and will consider small firm risk in setting ROEs for small utilities.
4. Water Utility Acquisition Process. The ACC explained that “consolidation of small water utilities through acquisition…  can result in real benefits to small utilities’ customers.”  The ACC is therefore starting a rulemaking to allow the largest utilities to buy small ones without getting separate ACC approval each time.
5. Consolidation of Small Water Utilities. The ACC comments that “While we do not believe that consolidation is a panacea, there can be no doubt that in some circumstances consolidating small systems into larger entities will have real benefits for customers. Consolidating systems can allow for greater and less expensive access to capital, more professional management, an ability to diversify against business risks and flexibility with rate design.” The ACC therefore approved a set of incentives to encourage larger utilities to buy the smallest, non-viable utilities, modeled on the policies used in Pennsylvania.
6. Policy Regarding the Acquisition of Viable Systems. This policy, also modeled on one from Pennsylvania, allows for incentives in consolidating viable utilities, but only if the acquiring utility has “a demonstrated record of acquiring and improving the service provided to the customers of non-viable water systems.”

Water policies proposed by Commissioner Tobin

1. Water Emergency Team. This policy establishes an inter-agency task force to address crisis situations for small water companies, such as communities without water.  The team is “designed to provide greater coordination among state agencies and industry officials in cases where a water emergency (e.g., a water outage or contamination of water in excess of environmental standards) poses an imminent threat to public health and safety”, and to answer the question of “Who picks up the phone when emergency strikes?”
2. Simplifying Regulatory Burden on Small Water Companies. This policy directs the ACC Staff to develop a simplified annual report for the smallest water companies, and to evaluate ways to simplify and streamline the rate case and financing approval processes.
3. Creation of Commission Small Water Ombudsman Office. This policy creates an Ombudsman office for small water companies.