Sedona City Manager Anette Spickard sent a letter to the Arizona Corporation Commission on March 17 supporting the Arizona Water Company’s March 13 testimony requesting a rate increase but opposing the Arizona Corporation Commission’s staff recommendation that AWC be allowed to recover a portion of the costs from its East Sedona Tank Project through an additional rate increase specifically for Sedona customers.

Spickard’s Letter

“The city encourages the commission to apply the same rate structure to all customers in the Northern Group in this current rate case, rather than deconsolidating the 6,300 Sedona customer connections,” Spickard’s letter stated. “Because AWC operates no less than nine other water storage tanks in Sedona, many Sedona customers will not be specifically served by the new under ground tank, with some customers located more than eight miles from the new tank. These customers would receive no more benefit from the new tank than would AWC customers in other communities within the Northern Group, resulting in a concern that the additional surcharge may be arbitrary and unfair if not equally shared by all Northern Group customers.”

The Northern Group serves approximately 21,700 customers across eight public water systems.

“Deconsolidation for purposes of the East Sedona Water Tank would be a step backward and would set a precedent for future utility rate cases to isolate specific costs to be passed along to only certain customers, which defeats the purpose of consolidation,” Spickard continued. “Arguably, due process issues may arise by the Sedona customers being blindsided by an additional surcharge not shared by all customers in the fully consolidated Northern Group.”

Spickard’s letter included the argument that “most full-time Sedona residents are not wealthy” and that a specific rate increase to pay for the tank could pose a financial hardship to those on a fixed income.

Additionally, Spickard’s letter pointed out that Feb. 6 testimony filed by commission staff had misstated the city’s zoning rules with regard to water tanks.

ACC Testimony

AWC Chief Operating Officer Fredrick K. Schneider testified that AWC and commission staff had agreed upon an increase in revenue of $6,340,139, which AWC Vice President for Rates and Revenues Nick Liu testified would work out to a 28.95% increase for a customer using 4,250 gallons per month. Liu had previously told the Sedona City Council on Jan. 14 that the rate increase would be about 36% for an average customer if including surcharges in the base rate for the calculation, or 48% without including them.

“The rates are just and reasonable,” Schneider said, arguing that the rate increase was warranted due to “the largest capital expenditure in its history,” “looming regulatory mandates for ‘forever chemicals’” and the “need to replace vast amounts of aging infrastructure.”

However, with regard to AWC’s new tank under construction in the Chapel area, “Arizona Water and staff did not agree on how the total revenue requirement associated with that project should be recovered,” Schneider testified. “Staff and [the Residential Utility Consumer Office] assert that the cost difference between constructing the Sedona Tank Project below ground and above ground should be recovered from Sedona residents through a dedicated surcharge.”

“Staff recommends that the costs to build a typical above-ground storage tank be recovered from all Northern Group rate payers, as this is a benefit of consolidated rates, but that the incremental cost of undergrounding the tank be recovered specifically from the Sedona ratepayers, since the undergrounding of the tank is not an operational requirement,” Briton Baxter, co-director of the ACC’s Utilities Division, testified on March 13.

Baxter placed the cost of the East Sedona Tank at $20,021,445, which he stated “results in an incremental revenue requirement associated with the incremental costs of undergrounding the tank of $525,661.” To recover this cost, he recommended that AWC be allowed to increase rates for Sedona residents by 54.2% rather than the previously suggested 38.8%.

The settlement agreement would be in the public interest, Baxter stated, and would allow AWC “the opportunity to earn an overall return of 4.85%.”

“I understand this perspective but respectfully disagree because such an approach would undermine the principles behind rate consolidation,” Schneider testified. “It took Arizona Water decades after the three-group system was established to achieve a single rate for the Northern Group … Consolidated rates allow the cost of service to be spread across large groups of customers, reducing rate impacts, especially for customers of smaller systems.”

“We are concerned about taking a major step backwards,” Schneider added.

The tank is expected to become operational this month. The ACC is currently scheduled to hold hearings on the proposed increase between April 11 and 17 in Phoenix.