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Case Study - Pinnacle West Capital Corporation



             The utilities industry was a highly regulated industry in the United States. In Arizona, the Arizona Corporation Commission (ACC) regulated electricity rates. Although there had been sporadic attempts at deregulation, competition in retail electricity markets seemed to be unlikely in the near future based on the disastrous deregulation experience in California during 2000 and 2001. In 2006, the ACC approved a renewable energy standard increasing the renewable energy generation percentage from 1.5 per cent in 2007 to 15 per cent in 2025. A significant percentage of renewable energy had to be generated from distributed sources (i.e. small-scale generating equipment at customer locations). In order to meet the projected 60 per cent increase in customer peak demand by 2025, APS identified several key initiatives including increasing energy efficiency, doubling renewable energy production and adding additional nuclear power capacity. Operating revenue for 2008 was more than $3.1 billion with a net income of $262 million. .
             Arizona's projected growth posed unique challenges for APS. Given the environmental concerns, APS had to continuously improve the reliability of its power generation and distribution capabilities. The capital investment requirements for energy production were quite substantial - APS expected to spend around $1 billion per year for energy infrastructure. Major utilities in the United States, including APS, faced the challenge of replacing aging distribution infrastructure. Major initiatives were underway by APS to upgrade the power grid and install "smart" meters. In a regulated price market, APS found it challenging to keep up with the commodity price and increasing fuel cost. Investment per new customer had risen from less than $10,000 in 1987 to more than $25,000 in 2007. These challenges called for efficiency improvements throughout the organization to achieve savings in operations costs.


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