Initial thoughts on the TEP rate case decision
Impact
Modestly negative, but highlights benefits of regulatory diversification
First impression
Overall, we view the ACC’s rate case decision as a modest negative.
Although we believe that Tucson Electric Power (TEP) avoided a decision that could have been materially negative to both earnings and optics, we still came away from the Arizona Corporation Commission (ACC) meeting thinking that Fortis may face greater regulatory headwinds in Arizona going forward. The following represent some of the key aspects of the 3-2 decision to approve the rate case based on the Recommended Order and Opinion (ROO), as amended.
ROE: Arizona commission did not support what would have been one of the lowest ROEs in the U.S. We were concerned about a proposed amendment by Commissioner Olson that would have reduced the ROE to 8.97% (down from the ROO of 9.35%), which was not passed (4-1 vote). Relative to our current estimates that include a base ROE of 9.50%, we forecast that the 9.35% ROE in the ROO is not material to our earnings estimates for Fortis.
We look to see whether TEP challenges the fair value return amendment in court. We note that the ACC voted in favour of reducing the fair value rate of return by 8 basis points from what was in the ROO. Based on the figures in the proposed amendment by Chair Burns, the impact on the revenue requirement would be just under US$4 million (roughly $0.01 to EPS; less than 0.5% of 2021E EPS).
ACC does not support the proposed removal of assets from rate base. In what was another potential negative decision, the commissioners voted 4-1 against proposed amendments by Commissioner Kennedy to remove assets from rate base related to Springerville, Four Corners, Gila River unit 2, and the Reciprocating Combustion Engines (RICE).
Proposal to delay rate implementation to October 1, 2021 did not pass.
Commissioner Marquez Peterson proposed delaying the implementation of new rates until October 1, 2021, which would have been negative to TEP based on foregone revenues/earnings, particularly given Arizona’s historical test year framework. The proposed amendment did not pass based on a 3-2 vote.
Diversification helps, as all of Arizona is only 25% of Fortis’s segment earnings. Although TEP is the largest of Fortis’s Arizona-based utilities, the overall impact of the decision is moderated by Fortis’s diversification across multiple North American regulatory jurisdictions. As such, a challenging regulatory decision or outlook in any single jurisdiction is unlikely to have a particularly material impact on the overall company.