Requested rate increase
EPCOR requests $2,775,370 more per year, citing investment in the water system, higher operating costs, and a higher capital-return allowance.
Capital costs included in the request
The PRC determines how much customers pay each year for EPCOR’s shareholders’ investment and borrowing costs. EPCOR requests 60% equity, 10.50% ROE and 4.61% debt cost.
Equity share: 60%
The portion of investment treated as funded by the owners, including retained earnings. EPCOR asks the PRC to treat $60 of each $100 of recognized utility investment as owners’ capital and the other $40 as borrowed funds.
ROE: 10.50%
The annual earnings EPCOR asks the PRC to allow on the owners’ portion. At 60% equity, $60 × 10.50% = $6.30 per year for each $100 of investment. Actual earnings depend on the revenue EPCOR collects and the expenses it incurs.
Existing loan cost: 4.61%
The weighted average annual cost of EPCOR’s existing long-term loans: interest plus loan-issuance costs spread over their repayment periods. This is the embedded debt cost. At 40% debt, $40 × 4.61% = $1.844 annually per $100 of investment.
Rate base: $45,474,118. The value of utility investment on which EPCOR requests earnings and debt-cost recovery. Income-tax recovery is calculated separately below.
Company request: Petition, executive summary, PDF pp. 3–4. The request is company evidence, not a Commission finding. No later revision is incorporated.
Capital structure and supporting testimony
Boizelle’s explanation
EPCOR Water New Mexico’s actual equity percentage is approximately 64%. Boizelle proposes using 60% to calculate rates because he considers that percentage more typical.
He says EPCOR Water New Mexico owes its three long-term loans to EPCOR USA, the company that owns EPCOR Water New Mexico. The 4.61% loan cost includes interest and issuance-cost amortization.
Howard’s explanation
Howard supports 60% because EPCOR’s five-year average actual equity percentage was 60.56%. The utilities he selected for comparison used equity percentages from 39.31% to 56.93%.
Because 60% gives EPCOR more owners’ capital—and less debt—than those companies, Howard reduces his estimated ROE by 0.32 percentage point for lower financial risk. He separately adds 0.50 percentage point for EPCOR’s smaller size.
Why the equity percentage matters
At 50% equity, the calculation assigns $50 of every $100 of investment to owners and $50 to debt. At 70% equity, it assigns $70 to owners and $30 to debt. With ROE at 10.50% and loan cost at 4.61%, assigning more investment to owners increases the amount customers pay. Assigning more investment to debt reduces that amount, including the income-tax effect of interest.
More borrowing also leaves the utility with more interest and principal to pay on schedule. Owners absorb the remaining earnings or losses after those payments. The relevant question is whether a lower equity percentage would require higher ROE or borrowing costs large enough to eliminate the customer savings.
Boizelle, printed p. 10; Howard, printed pp. 11–12 and 45–49. These are witness positions; their reasonableness remains under evaluation.
Revenue effects at 50%, 60% and 70% equity
The first comparison changes only the equity percentage. ROE remains 10.50% and existing loan cost remains 4.61%, so the dollar difference is attributable to the equity percentage and its associated income-tax calculation.
| Annual calculation | 50% equity / 50% debt | 60% equity / 40% debt | 70% equity / 30% debt |
|---|
Show every calculation for these three cases
| Calculation / formula | 50/50 | 60/40 | 70/30 |
|---|
Model inputs are inherited from the initial A-1, A-4, A-5, G-3 and H-9 schedules. Default tax assumption: the full modeled debt-return change affects deductible interest. Rounded reference inputs are not forced to reproduce the filed return exactly.
Financing assumptions and revenue calculation
Moving the equity percentage from 60% to 50% reduces the investment assigned to owners from $60 to $50 per $100. At 10.50% ROE, their annual earnings allowance falls from $6.30 to $5.25 per $100. The table shows that reduction for EPCOR and the resulting revenue and residential bill changes.
Annual effect on EPCOR and customers
| Measure | Selected amount | Change from EPCOR’s request |
|---|
Green: higher allowed owners’ earnings for EPCOR, or lower required revenue and bills for customers.
Red: lower allowed owners’ earnings for EPCOR, or higher required revenue and bills for customers.
Colors show direction for each party, not whether a rate is reasonable. The earnings allowance is not actual profit.
Residential monthly rate impact by meter size
Each cell shows the illustrative alternative base bill, followed by its change from EPCOR’s proposed bill. Green is lower for the customer; red is higher. Includes the same usage in every meter column.
| Monthly usage | 5/8–3/4 inch | 1 inch | 1½ inch | 2 inch |
|---|
Alternative bills apply the revenue-change allocation assumption described under Residential rate impact. Taxes, riders and other separately billed charges are excluded.
An increase from 10.50% to 11.50% is 100 basis points. A new issue’s coupon should not replace the cost of the entire debt portfolio without an issue-level calculation.
Uses the average change from the reconstructed 60% case, keeping EPCOR’s requested 10.50% at 60%. Calculation and precision comparison appear in the assessment below. Turn off to enter an independent ROE assumption.
Interest is deducted before taxable income is calculated. The default assumption changes that deduction by the change in the loan-cost allowance; the other options test a different tax treatment.
Revenue calculation
| Step | Calculation | Annual result |
|---|
Tax rate = 5.90% + (1 − 5.90%) × 21% = 25.661%. Revenue-conversion factor = 1.3632. That factor converts the change in earnings and taxes into the required revenue change, allowing for taxes and expenses that vary with revenue. These calculations change the financing allowance and associated marginal taxes, preserving other filed items. Confirm tax synchronization and native workbook precision before a final exhibit.
Residential rate impact
5/8-inch or 3/4-inch residential meter. Current and proposed base bills below use the filed tier rates. The alternative assigns the capital-cost change to classes by their filed rate base, then recalculates residential tier prices using filed billing volumes.
The second option separately corrects the baseline proof discrepancy. It does not treat that correction as a capital-cost saving.
| Monthly usage | Current base bill | EPCOR proposed | Illustrative alternative | Alternative − proposed |
|---|
Residential bill calculation
| Component | CCF in tier | Current calculation | Proposed calculation | Illustrative alternative calculation |
|---|
View source rates and reconciliation limits
| Residential component | Current | Proposed |
|---|---|---|
| Monthly service charge · 5/8 or 3/4 inch | $15.06 | $16.34 |
| First 6 CCF · $/CCF | 2.9398 | 3.1891 |
| Next 14 CCF (6–20) · $/CCF | 3.6836 | 4.4645 |
| Above 20 CCF · $/CCF | 4.1635 | 5.0795 |
The petition’s rounded gallon-based examples do not exactly reconcile when converted using its stated 750 gallons/CCF. This model uses entered CCF directly and the displayed rates, without intermediate rounding; approximate gallons are descriptive. It is not an exact reconstruction of the billing system.
Weaver, printed pp. 13–14: tier boundaries, commodity rates and service charges by meter size. Petition Exhibit A, p. 4: bill examples and unit convention.
Revenue recovery and utility risk
A lower-cost alternative can identify a potentially excessive requested allowance. It does not establish what EPCOR has actually earned or collected.
| Question | Test | Consequence if established |
|---|---|---|
| Is the requested capital allowance excessive? | Calculate the annual revenue needed at a supported alternative equity percentage, ROE and loan cost. Compare that amount with the company request. | A supported reduction could lower the proposed requirement. It does not establish historical excess collections. |
| Is the proposed allowance inadequate? | Forecast the borrowing company’s cash receipts and payments, debt due, available credit and performance under adverse conditions. | Persistent cash shortfalls can make debt repayment harder, increase borrowing rates or delay needed investment. The equity percentage alone does not establish whether those problems would occur. |
| Is EPCOR over- or under-earning at current rates? | Compare normalized jurisdictional earnings with the corresponding authorized return and explain sales, cost, rate-base and lag effects. | May support a rate review or justified relief. Neither refunds nor recovery of a shortfall follow automatically. |
| Has a rider over- or undercollected? | Reconcile eligible costs and collections under that rider’s tariff and order. | Apply that mechanism’s approved reconciliation; do not infer the balance from WACC. |
Loquvam, printed pp. 7–8. Consequences described here are analytical possibilities; the applicable tariff, order, law and financial evidence determine the remedy. Open the technical appendix for the separate earnings and financing screens.
Assessment of alternatives
The calculations support prioritizing a lower equity percentage for review. They do not support increasing the allowance to 70% on the evidence summarized here.
Selected assumptions: annual revenue effect
Financial-risk adjustment: recalculated MRH-7
Reducing equity leaves owners responsible for a smaller share of utility investment while debt payments have priority. Howard’s methods compensate owners for that additional financial risk with a higher earnings rate. Holding ROE at 10.50% therefore overstates the savings relative to a comparison that applies his methods consistently.
| Calculation | 60% company reference | 56.93% equity | 50% equity |
|---|
MRH-7 formulas, anchoring and precision
Inputs printed in MRH-7: comparison equity 56.93%; ROE 10.50%; debt cost 4.61%; tax 25.66%; beta 0.57; market risk premium 9.78%; risk-free rate 4.90%. Beta measures how strongly the comparison utilities’ share prices respond to market movements. The Hamada calculation adjusts that measure for the debt/equity percentages.
The first method holds the total pre-tax capital cost constant. Its result follows that assumption; it does not independently demonstrate that customers must pay the same total at every equity percentage. The second method changes the required equity earnings rate through beta. The scenario averages the two adjustment changes, matching Howard’s two-method approach.
Using the printed inputs without intermediate rounding reconstructs a −0.3001 percentage-point average adjustment at 60%, versus the reported −0.32. The printed 0.57 beta produces a 0.545625 beta at 60%, whereas MRH-7 prints 0.54; the native precision and formula sequence are not available here. The slider applies 10.50% + reconstructed adjustment at the selected percentage − reconstructed adjustment at 60%. This keeps the company reference intact and holds the witness’s other judgments constant; it is a conditional reapplication of his method, not an independent ROE estimate.
Replacing the filed −0.32 directly instead produces 10.82% at 56.93% equity (saving $21,674) and 11.6330% at 50% (saving $87,272). It also produces 10.5199% when reconstructed at 60%, rather than the requested 10.50%. That approximately two-basis-point precision difference is shown rather than forced away. Both treatments materially reduce the fixed-ROE savings.
Howard, Schedule MRH-7, PDF pp. 77–78. Revenue effects retain the calculator’s 4.61% debt-cost reference, 25.661% income-tax rate, synchronized interest and 1.3632 conversion factor. MRH-7 itself prints a 25.66% tax rate.
EPCOR USA loans: debt-cost reconciliation
Schedule G-3 lists three notes; Boizelle identifies EPCOR USA as the lender. The filed schedule shows $19 million of principal outstanding. Scheduled maturity is the date the remaining principal is due, not a forecast that the loan will be refinanced.
| Outstanding principal | Issued | Due | Interest rate | Issuance expense | Annual cost |
|---|
Loan-cost calculation and filing reconciliation
Recoverable loan-cost conclusion: the evidence summarized in G-3 does not support substituting a new interest rate solely because the allowed equity percentage changes. Retain the existing weighted loan cost for this comparison. A different recoverable cost needs identified borrowing or repayment, its date and terms, and a calculation of the resulting portfolio cost. G-3 establishes scheduled balances and costs; it does not supply the note agreements, early-repayment provisions, cash-payment history or EPCOR USA’s own funding costs. Those missing terms prevent a finding that refinancing is required or that an affiliate financing charge is excessive.
The unrounded G-3 quotient reproduces the filed interest deduction and return to the nearest dollar. The calculator keeps its original 4.61% reference so the existing comparisons remain consistent; the $808 reference-return residual above is explained by rounding, rather than evidence of excess earnings.
G-3, printed p. 37; A-1 and H-9; Boizelle, printed p. 10.
Class allocation and residential revenue proof
Apply the selected capital-related revenue change to each class in proportion to the utility investment assigned to that class in the filed cost study. This allocates the marginal capital cost using the existing class rate-base allocation. It preserves the company’s other class targets and does not repeat its policy choices about limiting or redistributing class increases.
| Class | Filed rate base | Share | Capital change | Revised class target |
|---|
Multiplying N-2’s displayed residential bill counts and tier volumes by its displayed prices gives $9,465,994.12, $363.12 above N-2’s printed residential proof. It is $46,026.12 above the printed $9,419,968 residential target. The calculation below uses the displayed billing inputs consistently and reports that separate difference. The rate-design selector above either preserves it or explicitly corrects it.
| Residential tier | Annual CCF | Proposed $/CCF | Calculated $/CCF | 4-decimal tariff |
|---|
Billing determinants, revenue proof and tariff rounding
Assessment: the filed data support a quantified capital reduction and a revenue-neutral way to pass that reduction through residential usage rates. Correcting N-2’s excess proof is a separate issue that should be resolved before adopting tariff rates. Lower earnings allowances do not establish historical over-recovery, and the rate-proof excess is not a refund balance.
N-1 and N-2, printed pp. 106–107; M-1 class rate-base allocation. These are marginal allocation calculations from displayed filing data, not a replacement native cost-study workbook.
Sources are linked beside the relevant claims. The technical appendix retains the previous detailed guide and original source audit. Working assessment, not a Staff or Commission recommendation. Shared link: epcor-clovis-review.pages.dev.