OREANDA-NEWS. Fitch Ratings believes the regulatory compact in Arizona has improved meaningfully in recent years and continues to be a key factor driving the improved credit profiles of the state's investor-owned utilities (IOUs).

This view is supported by more constructive general rate case (GRC) decisions and reduced regulatory lag observed over the past five years. During this time period, Arizona-based IOUs received more than 50% of their requested revenue increases, on average. In addition, the adoption of revenue decoupling mechanisms for both electric and gas utilities and implementation of regulatory mechanisms to facilitate cost recovery outside of GRCs, support relatively stable IOU earnings and cash flows. Rate case duration has been decreasing, contracting from more than 20 months, in at least one instance, to approximately 11 months.

Nonetheless, regulatory lag remains a concern for IOU's given Arizona's high customer growth rate and use of historic test years in GRCs. Balanced rate outcomes that allow adequate recovery of capex on a timely basis will be critical to maintaining IOU credit quality. Fitch estimates combined capex for the three largest Arizona IOUs will be over $5.8 billion over the next three years, an increase of roughly 25% over the previous three years.

The competitive impact to the Arizona utilities' creditworthiness from distributed generation (DG) is not currently material given that DG installations represent a relatively small proportion of kilowatt-hour (kWh) sales in Arizona. However, Fitch believes strong expected DG growth supported by state net metering policy is a potential secular threat to IOU creditworthiness. Arizona Corporation Commission (ACC) proceedings underway to address net metering and related residential cost shifting issues are, in Fitch's opinion, a constructive credit development for the Arizona IOUs.