APS 2015 Annual Report Download - page 110

Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Appellate Review of Third-Party Regulatory Decision ("System Improvement Benefits" or "SIB")
In a recent appellate challenge to an ACC rate decision involving a water company, the Arizona Court of Appeals considered
the question of how the ACC should determine the “fair value” of a utility’s property, as specified in the Arizona Constitution, in
connection with authorizing the recovery of costs through rate adjustors outside of a rate case. The Court of Appeals reversed the
ACC’s method of finding fair value in that case, and raised questions concerning the relationship between the need for fair value
findings and the recovery of capital and certain other utility costs through adjustors. The ACC sought review by the Arizona Supreme
Court of this decision and APS filed a brief supporting the ACC’s petition to the Arizona Supreme Court for review of the Court of
Appeals’ decision. On February 9, 2016, the Arizona Supreme Court granted review of the decision and oral argument is set for March
22, 2016. If the decision is upheld by the Supreme Court without modification, certain APS rate adjustors may require modification.
This could in turn have an impact on APS’s ability to recover certain costs in between rate cases. APS cannot predict the outcome of
this matter.
Four Corners
On December 30, 2013, APS purchased SCE’s 48% ownership interest in each of Units 4 and 5 of Four Corners. The 2012
Settlement Agreement includes a procedure to allow APS to request rate adjustments prior to its next general rate case related to APS’s
acquisition of the additional interests in Units 4 and 5 and the related closure of Units 1-3 of Four Corners. APS made its filing under
this provision on December 30, 2013. On December 23, 2014, the ACC approved rate adjustments resulting in a revenue increase of
$57.1 million on an annual basis. This includes the deferral for future recovery of all non-fuel operating costs for the acquired SCE
interest in Four Corners, net of the non-fuel operating costs savings resulting from the closure of Units 1-3 from the date of closing of
the purchase through its inclusion in rates. The 2012 Settlement Agreement also provides for deferral for future recovery of all
unrecovered costs incurred in connection with the closure of Units 1-3. The deferral balance related to the acquisition of SCE’s interest
in Units 4 and 5 and the closure of Units 1-3 was $70 million as of December 31, 2015 and is being amortized in rates over a total of 10
years. On February 23, 2015, the Arizona School Boards Association and the Association of Business Officials filed a notice of appeal
in Division 1 of the Arizona Court of Appeals of the ACC decision approving the rate adjustments. APS has intervened and is actively
participating in the proceeding. The Arizona Court of Appeals has suspended the appeal pending the Arizona Supreme Court's decision
in the SIB matter discussed above, which could have an effect on the outcome of this Four Corners proceeding. We cannot predict
when or how this matter will be resolved.
As part of APS’s acquisition of SCE’s interest in Units 4 and 5, APS and SCE agreed, via a “Transmission Termination
Agreement” that, upon closing of the acquisition, the companies would terminate an existing transmission agreement (“Transmission
Agreement”) between the parties that provides transmission capacity on a system (the “Arizona Transmission System”) for SCE to
transmit its portion of the output from Four Corners to California. APS previously submitted a request to FERC related to this
termination, which resulted in a FERC order denying rate recovery of $40 million that APS agreed to pay SCE associated with the
termination. APS and SCE negotiated an alternate arrangement under which SCE would assign its 1,555 MW capacity rights over the
Arizona Transmission System to third-parties, including 300 MW to APS’s marketing and trading group. However, this alternative
arrangement was not approved by FERC. On December 22, 2015, APS and SCE agreed to terminate the Transmission Termination
Agreement and allow for the Transmission Agreement to expire according to its terms, which includes settling obligations in
accordance with the terms of the Transmission Agreement. APS has established a regulatory asset of $12 million at December 31, 2015
in connection with the expiration of the Transmission Agreement, which it expects to recover through its FERC-jurisdictional rates.
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