Arizona Corporation Commission

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Arizona Corporation Commission

• Meeting the Challenges Facing Arizonas Small
  Water Utilities
• Arizona Small Utilities Association Annual Board
  Meeting
• Commissioner Kris Mayes
• February 6, 2006

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Presentation Outline

• ACC Background
• Identifying the Challenge facing Arizonas Small
  Water Companies
• Orders Preliminary
• Integrated Water and Wastewater Companies
• Use of Effluent
• Consolidation of Distressed Water Companies
• Next Steps
• -2-

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ACC Historical Overview

• The Commission was established upon statehood in
  1912, as a Constitutional authority
• The framers established the Commission as a
  separate, popularly-elected branch of state
  government
• Originally made up of 3 commissioners expanded
  by popular vote to 5 commissioners in 2000
• Arizona voters have protected the independence of
  the Commission--especially its provisions
  regarding election of commissioners--from
  constitutional amendment on numerous occasions
• The Commission has constitutional authority to
  regulate public utilities, corporate filings,
  securities, and railroad and pipeline safety
• -3-

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Utilities

• Utilities Public Service Corporations
• Public Service Corporations - all corporations
  other than municipal, engaged in furnishing
  energy or water collecting or disposing of
  sewage
• ACC regulates over 350 water companies
• Today, the ACC continues to issue decisions that
  are rooted in the broad language of the
  Constitution and in the spirit of Arizona Corp.
  Commn v. Woods and the early cases affirming its
  position as the exclusive regulator of public
  service corporations in Arizona.
• -4-

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(No Transcript)
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Challenges Facing Arizona

• Arizona recently surpassed Nevada as the fastest
  growing state in the nation
• The ACC is encountering more challenges arising
  from small water companies
• Many of these small companies have old,
  dilapidated infrastructure
• The number of interim manager-run companies is on
  the rise
• Many have not been in before the Commission for a
  rate case in decades
• The confluence of growth and troubled water
  companies presents a tremendous challenge to both
  the ACC and ASUA
• -6-

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Lessons Learned From McLain to Diamond Valley

• McLain system Located outside Sierra Vista
  seven water systems with a total of approximately
  1331 customers.
• Companies poorly constructed with numerous
  issues leaky tanks, pipes, no accurate mapping
  of the system.
• ACC appointed ASUA interim manager after years of
  mismanagement and bankruptcies by original owner.
• ASUA operated the system while the Commission
  works to establish new rates, institute a hook-up
  moratorium and set an unprecedented purchase
  price.
• ACC held several public meetings in Cochise
  County requested 12,000 from Governor for an
  emergency well pump during a two-week outage.
• -7-

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McLain System Sierra Sunset Pump
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McLain System Coronado Storage Tank
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McLain System Crystal Storage Tank
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McLain System Horseshoe Tank
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McLain System Horseshoe Pump
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McLain System Miracle Well Site
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McLain System Miracle Storage Tank
Notice the Leak
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McLain System Mustang Storage Tank
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McLain System Sierra Sunset Well Site
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Lessons Learned McLain to Diamond Valley

• Diamond Valley Small system tucked between
  Prescott and Prescott Valley.
• Started by land fraud king Ned Warren owned and
  operated by several individuals and entities over
  the years.
• System poorly constructed (shallowly buried
  asbestos pipe, tanks overflowing, no accurate
  mapping of the system. Pipes located when leaks
  occurred). Rates were kept low for decades, few
  repairs made, leaks rampant.
• Most recent owner/operator of the system
  abandoned it system has been operated by two
  interim managers since.
• ACC forced to get new legislation passed to allow
  it to transfer the assets of an abandoned
  non-profit water company into a water district.
• -17-

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Lessons Learned From McLain to Diamond Valley

• Sabrosa Water Company Located north of Phoenix
  60 customers.
• System has been operated by two interim managers
  Arizona-American and Global Water Resources.
• Company has suffered chronic shortages in recent
  years, having been built in an area of limited
  water supplies. Poorly constructed pipes, tanks.
  
• Residents have sunk their own wells to avoid
  water outages, other issues at the water company.
• -18-

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Lessons Learned McLain to Diamond Valley

• Lessons learned The Commission must require
  companies to keep their systems updated and
  identify companies that are failing to come in
  for rate cases years of neglect will yield a
  nearly impossible situation.
• ACC should reach out to D and E Companies and
  encourage them to file regular rate cases.
• Process is streamlined and can be carried out
  efficiently and fairly for both owners and
  ratepayers.
• ACC should cultivate a farm team of willing
  interim managers throughout the state.
• ACC should hold regular meetings designed to
  address issues for small water companies,
  identify trouble spots.
• -19-

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ASUA and ACC Interaction

• How can small water companies and the ACC better
  interact to ensure healthy water systems and
  prevent crises?
• Communication Need better communication on
  troubled companies and to identify problems
  before they occur
• Funding Continued and increased funding of Small
  Water Systems Utility Fund.
• Currently 750,000 appropriated to WIFA for
  distressed water companies that have an interim
  manager. Must get ACC recommendation must be
  designed to prevent an outage or an emergency.
• ACC should seek legislation expanding fund
  eligibility.
• -20-

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ASUA ACC

• Study of Problem Water Companies
• Every year, California identifies small water
  companies that have financial or other problems
  and targets them for acquisition or assistance
• ASUA, ACC work with legislature and Governor to
  develop a similar program in Arizona
• Small, troubled water companies will only
  continue to increase as Arizona grows into their
  service territories.
• -21-

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Moving Beyond Crisis Management

• Need for greater cooperation between agencies
  with responsibility for regulating water
  companies. ADEQ, ADWR and ACC should coordinate
  and communicate their actions where possible and
  appropriate to identify struggling water systems
  and provide assistance.
• Infrastructure costs let growth pay for growth.
  Where possible, ACC should encourage the use of
  hook-up fees and other up-front financing
  mechanisms.
• Encourage early intervention WIFA grant writing
  assistance, rate case help.
• -22-

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Moving Beyond Crisis Management

• ACC has been responsive to companies that file
  rate cases designed to address clear
  infrastructure needs.
• Rates should be set to allow small water
  companies to recover costs and to avoid rate
  shock down the road.
• Consumers first and foremost want clean, reliable
  water and are willing to pay additional rates to
  make it happen.
• Arsenic remediation is an example, though the ACC
  has addressed numerous recent cases designed to
  build new tanks, wells, pumps to rehabilitate old
  systems or meet new growth.
• -23-

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Orders Preliminary

• For decades, the practice of the Commission has
  been to issue conditional CCNs, granting the
  CCN, conditioned upon the water companys
  fulfillment of a series of requirement that can
  be met after the CCN is issued to the company.
• Developers have favored this form of CCN because
  it allows them to proceed with construction and
  implementation of a water company while the
  company works on fulfilling the conditions.
• The Commission has begun to question the
  usefulness of the conditional CCN, at least in
  cases involving water companies outside Active
  Management Areas.
• -24-

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Orders Preliminary

• A seldom utilized form of CCN, Orders
  Preliminary are authorized under ARS 40-282(D)
  .
• In moving toward the issuance of Orders
  Preliminary outside AMAs, the Commission was
  attempting to avoid situations in which it
  granted a water company a CCN allowing it to
  begin serving customers, and later found that the
  company had failed to meet the conditions for the
  CCN.
• In August, 2006 the Commission directed Staff to
  begin using Orders Preliminary as a matter of
  standard practice when preparing recommendations
  on all new CCN applications and CCN extensions
  outside the states AMAs .
• -25-

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Orders Preliminary

• Using Orders Preliminary, the Commission can
  outline conditions to be met by companies that
  are specific to the needs and particular concerns
  of the service area in question.
• The Orders Preliminary can be used to require a
  company to prove that it has demonstrated to
  third party agencies that it has secured an
  adequate or assured water supply, as required by
  the Arizona Department of Water Resources (ADWR),
  or an Approval to Construct, as required by the
  Arizona Department of Environmental Quality
  (ADEQ).
• -26-

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Orders Preliminary

• The practical effect of using Orders Preliminary
  is that while construction of a given subdivision
  may be delayed during the time that it takes a
  developer to obtain the permits called for by the
  Order Preliminary, the Commission will have
  assured that the new water company in question
  has actually proven that it has an adequate or
  assured water supply, an approval to construct,
  and has obtained the necessary county franchise
  permit, prior to serving customers.
• -27-

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Orders Preliminary

• The consequence of this decision for the internal
  operations of the Commission is that most if not
  all of the Recommended Opinion and Orders (ROOs)
  in cases involving new CCN requests and CCN
  extensions in areas outside AMAs that come before
  the Commission for our final vote, will come to
  us in the form of an Order Preliminary.
• This will create a bifurcated licensing process
  The Commission will issue an Order Preliminary
  Companies will then meet the conditions once
  these conditions are met, the Commission will
  issue a CCN.
• -28-

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Effluent

• How should the ACC work with companies that dont
  provide wastewater service?
• Given the current drought in AZ, should there be
  a prohibition on using groundwater for golf
  courses, ornamental lakes irrigation?
• DWR has requirements/regulations for the use of
  effluent in AMAs.
• The Commission has begun conditioning approval of
  a water company on assurances that groundwater
  wont be used for golf courses and other
  ornamental features.
• -29-

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Consolidation of Distressed Water Companies

• Most of the 350 water companies the ACC regulates
  are small companies
• We have a few large companies such as
  Arizona-American, Arizona Water, Global
• What policies can the ACC enact in order to
  consolidate the small companies into larger
  systems?
• Benefits
• Rate increases like for arsenic can be spread
  across more customers
• Infrastructure costs
• Simplified billing
• -30-

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Consolidation of Distressed Water Companies

• To date, rate premiums and acquisition
  adjustments have not been formally blessed by the
  Commission via either a rulemaking or policy
  statement.
• There are no known instances of the Commission
  allowing a rate premium, and the Commission has
  turned down proposed acquisition adjustments on
  several occasions.
• Since the 1993 Water Task Force report was
  issued, the Commission has only approved an
  acquisition adjustment once, in a case involving
  the acquisition by a Class A utility of a small
  distressed company in southeastern Arizona
  (McLain).
• -31-

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Consolidation of Distressed Water Companies

• Acquisition adjustments and rate premiums hold
  promise for use when the Commission desires to
  encourage the consolidation of small, troubled
  water companies.
• Strengthening the two dozen or so small water
  companies that currently find themselves on the
  financial ropes would dramatically improve the
  opportunities for implementing water conservation
  programs and conservation measures at those
  companies.
• The Commission should first endeavor to identify
  those water companies it believes are the
  likeliest targets for consolidation.
• It should then establish a policy statement
  informing the water company community that
  acquisition adjustments and rate premiums will be
  considered in cases where the conditions laid out
  by Staff in the 1999 Water Task Force are met.

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ADWR Conservation Ratemaking

• Water companies have long argued that they cannot
  implement conservation programs because they are
  unable to obtain rate relief from the Commission
  for their conservation efforts.
• The Commission has never been asked for rate
  recovery of these programs, and Commission Staff
  have made it clear that they would be receptive
  to filings from Companies seeking to recover in
  rates the costs of implementing conservation
  programs, in particular those designed to satisfy
  ADWRs new rulemaking.
• The Commission should continue to make it clear
  that it is ready to facilitate conservation
  efforts by water companies, especially those
  programs that are necessary to meet DWRs new
  rules.
• -33-

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ADWR Conservation Ratemaking

• The Commission should notify water companies that
  they can file tariff applications with the
  Commission that are designed to implement
  conservation programs.
• For example, these tariffs could be designed to
  allow water companies to carry out conservation
  measures in the same way municipalities do.
• Such water company tariffs could condition
  service on the installation of low flow toilets,
  low flow shower heads, or minimal or zero usage
  of groundwater for outdoor irrigation.
• The Commission could adopt these tariffs as part
  of rate cases, CCN applications or CCN
  extensions.
• -34-

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Conclusion

• As Arizona enters the second half of the first
  decade of the new century, small water companies
  will continue to play a pivotal role in meeting
  the states water needs.
• The Commission stands ready to work with ASUA and
  small water companies to meet the many challenges
  facing the industry.
• Thank you.