Item 8.01 - Other
Events.
TEP
Rate Case Proceeding
As
previously reported, Tucson Electric Power Company (TEP) has a proceeding
underway before the Arizona Corporation Commission (ACC) to establish new retail
rates.
On
May 29, 2008, a settlement agreement (2008 Proposed Settlement Agreement) in
TEP’s rate proceeding was filed with the ACC. A majority of the
participants in TEP’s rate proceeding are signatories to the 2008 Proposed
Settlement Agreement, including ACC Staff, Arizonans for Electric Choice and
Competition, Phelps Dodge Mining Company, Arizona Community Action Association,
United States Department of Defense, Arizona Investment Council, International
Brotherhood of Electric Workers Local 1116, Mesquite Power, LLC, Southwestern
Power Group II, LLC, Bowie Power Station, LLC, Sempra Energy Solutions and The Kroger
Company.
The 2008 Proposed
Settlement Agreement is subject to a hearing before an ACC administrative law
judge (ALJ) and approval by the ACC. The 2008 Proposed Settlement
Agreement is available on the UniSource Energy website at www.UNS.com.
The procedural
schedule is as follows:
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Date
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Testimony
from TEP and intervenors supporting the settlement
agreement
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June 11,
2008
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Testimony
from intervenors opposing the settlement agreement
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July 2,
2008
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Rebuttal
testimony from TEP and intervenors supporting the settlement
agreement
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July 8,
2008
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Hearings
before ALJ
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July 9,
2008
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TEP cannot predict
the outcome of the settlement agreement hearing.
The terms of the
2008 Proposed Settlement Agreement include:
Base Rate
Increase
A
base rate increase of approximately 6% over TEP’s current retail rate of 8.4
cents per kilowatt-hour (kWh). The proposed increase will result in
an increase in annual revenues of approximately $47 million, which would
increase TEP’s 2006 test year base revenues of approximately $781 million to
$828 million. The average cost of fuel and purchased power embedded
in base rates is approximately 2.9 cents per kWh.
Ratemaking Methodology for
Generation Assets
Rates for
generation service, including Springerville Unit 1 (SGS 1) and the Luna Energy
Facility (Luna), will be based on a cost-of-service methodology. For
any rates in effect after 2012, all generation assets acquired by TEP
after December 31, 2006 but before December 31, 2012 shall be included in TEP’s
rate base at their respective original depreciated cost, subject to subsequent
review and approval by the ACC in future rate cases or other regulatory
proceedings.
SGS 1 non-fuel
costs will be recovered at $25.67 per kilowatt (kW) per
month. Luna will be included in TEP’s original cost rate base at its
net book value of $48 million as of December 31, 2006.
Cost of
Capital
TEP’s capital
structure for ratemaking purposes will be comprised of 57.5% debt and 42.5%
common equity. TEP’s allowed return on equity will be 10.25% and the
embedded cost of debt will be 6.38% for ratemaking purposes..
Depreciation and Net
Negative Salvage
Upon the effective
date of an ACC order approving the 2008 Proposed Settlement Agreement, TEP will
implement new depreciation rates that include; a component for net negative
salvage value for all generation assets except Luna;and new depreciation rates
for distribution and general plant assets that will extend the depreciable lives
of these assets. The new depreciation rates will result in
an increase in depreciation expense of approximately $11 million per year, based
on a December 31, 2006 test year.
Implementation Cost Recovery
Asset and Coal Costs
TEP’s original cost
rate base will include an Implementation Cost Recovery Asset (ICRA) of $14
million to reflect costs incurred by TEP to transition to competition under the
1999 Settlement Agreement. For ratemaking purposes, the ICRA will be
amortized over a four-year period.
The 2008 Proposed
Settlement Agreement will also allow TEP to recover, over a nine-year period,
approximately $9 million of costs related to the buy down in 2000 of a coal
contract for the San Juan Generating Station.
Purchased Power and Fuel
Adjustment Clause
The purchased power
and fuel adjustment clause (PPFAC) will be effective starting January 1,
2009. The PPFAC allows recovery of fuel and purchased power costs,
including demand charges and the prudent costs of contracts for hedging fuel and
purchased power costs. The PPFAC will consist of a forward component
and a true-up component.
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The forward
component will be updated on April 1 of each year, starting in
2009. The forward component will be the forecasted fuel and
purchased power costs for the 12-month period from April 1 to March 31,
less the base cost of fuel and purchased power of 2.9 cents per kWh, which
is reflected in base rates. TEP will have the ability to
request an adjustment to the forward component should an extraordinary
event occur that causes a drastic change in forecasted fuel and purchased
power costs.
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The true-up
component will reconcile any over/under collected amounts from the
preceding 12 month period and will be credited to or recovered from
customers in the subsequent year.
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TEP will credit the
following against the PPFAC: 100% of short-term wholesale revenues and 50% of
the revenues from the sales of sulfur dioxide (SO2) emission
allowances.
Renewable Energy and
Demand-Side Management Adjustors
TEP will also
collect two surchages from retail customers to fund energy efficiency and
renewable energy programs.
The Renewable
Energy Standard Tariff (REST) adjustor mechanism was approved by the ACC in
April 2008.
A
demand-side management (DSM) adjustor mechanism will provide initial funding of
$6 million for DSM programs. TEP will file for ACC approval to reset
the DSM adjustor rate by April 1 of each year.
Base Rate Increase
Moratorium
TEP’s base rates
will be frozen through December 31, 2012. TEP will be prohibited from
submitting a base rate application before June 30, 2012. The test
year to be used in TEP’s next base rate application must be no earlier than
December 31, 2011.
Notwithstanding the
rate increase moratorium, base rates and adjustor mechanisms may be changed in
emergency conditions which are beyond TEP’s control if the ACC concludes such
changes are required to protect the public interest. The moratorium
does not preclude TEP from seeking rate relief in the event of the imposition of
a federal carbon tax or related federal carbon regulations.
1999 Settlement
Agreement
Upon the ACC’s
issuance of a final, non-appealable order approving the 2008 Proposed Settlement
Agreement, TEP and all the parties to the 2008 Proposed Settlement Agreement
shall forego all claims related to the 1999 Settlement Agreement and the ACC
order adopting the 1999 Settlement Agreement.
Fixed CTC True-up
Revenues
According to a May
2007 order of the ACC, TEP’s current retail rates shall remain in effect,
including the collection of an amount equal to the Fixed Competitive Transition
Charge (CTC), until the effective date of a final order in the rate case
proceeding. The incremental revenues (true-up revenues) collected as
a result of continuing to collect an amount equal to the Fixed CTC after May
2008 when it would otherwise terminate under the 1999 settlement (estimated to
be $65 million from June 1, 2008 to December 31, 2008), shall accrue interest
and shall be subject to refund or credit or other such mechanism to protect
customers, as determined by the ACC. The true-up revenues will not be
recorded on TEP’s income statement and will be deferred until the ACC issues a
final order in the rate case proceeding.
The 2008 Proposed
Settlement Agreement does not address the amount or the treatment of any true-up
revenues, but would provide, to the extent the ACC determines that the true-up
revenues are to be credited to customers, that TEP will credit up to $32.5
million of true-up revenues to customers through the PPFAC. The ACC
will determine the disposition of additional true-up revenues, if any, above
$32.5 million.
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SIGNATURES
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Pursuant to
the requirements of the Securities Exchange Act of 1934, each registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
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Date: May 29,
2008
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UNISOURCE
ENERGY CORPORATION
——————————————————
(Registrant)
/ s
/ Raymond S. Heyman
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——————————————————
Senior Vice
President and General Counsel
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Date: May 29,
2008
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TUCSON
ELECTRIC POWER COMPANY
——————————————————
(Registrant)
/ s
/ Raymond S. Heyman
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——————————————————
Senior Vice
President and General Counsel
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