Greetings, and welcome to the Pinnacle West Capital Corporation 2019 fourth quarter and full- year earnings conference call. At this time, all participants are in a listen-only mode. A brief question- and- answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stefanie Layton, Director of Investor Relations. Thank you. You may begin.
Thank you, Christine. I would like to thank everyone for participating in this conference call and webcast to review our fourth quarter and full-year 2019 earnings, recent developments, and operating performance. Our speakers today will be our Chairman and CEO, Jeff Guldner, and our Chief Administrative Officer, Jim Hatfield. Ted Geisler, CFO, Daniel Fletcher, APS's President and COO, and Barbara Lockwood, Senior Vice President, Public Policy, are also here with us. First, I need to cover a few details with you. The slides that we will be using are available on our investor relations website, along with our earnings release and related information. Note that the slides contain reconciliations of certain non-GAAP financial information. Today's comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our 2019 Form 10-K was filed this morning.
Please refer to that document for forward-looking statements cautionary language, as well as the Risk Factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through February 28th. I will now turn the call over to Jeff.
Thanks, Stefanie, and thank you all for joining us today. Before I review our 2019 achievements and provide operating and regulatory updates, I want to look forward to the future and share more information about our focus areas and priorities. Our strategy is anchored by four concepts that align with industry trends and shape the way we do business. Those concepts can most simply be stated as clean, affordable, reliable, and customer-focused. Let me talk briefly about each one. Clean is about decarbonizing our generation mix with our new goal to deliver 100% clean, carbon-free energy by 2050. Affordable is planning and operating our business to maintain reasonable electricity prices for the people, businesses, and communities we serve. Reliable means serving our customers with dependable power safely and efficiently. Customer-focused is about developing new solutions, products, and services to meet the changing needs and expectations of our customers.
With these in mind, we created a long-term plan and targets to track our progress along the way. First, we recently announced our goal to deliver 100% clean, carbon-free electricity to customers by 2050. This goal includes a nearer-term target of 65% clean energy, with 45% coming from renewables by 2030, and a commitment to exit coal by 2031. Importantly, our plan includes flexibility to ensure that we're able to execute in a way that maintains affordability for customers. As Jim will discuss, we expect this plan will require considerable capital investment. We believe a carbon-free future is possible while keeping customer rates over time at or below the rate of inflation with timely recovery of clean energy investments. To support the affordability of our transition to a carbon-free resource mix, we will have a sharp focus on economic development in Arizona.
Growing our customer base allocates costs across more customers, which helps keep rates affordable and increases shareholder value by growing our company. Supporting an internal culture focused on reducing costs and maintaining a financially strong company to access low-cost capital are also key in delivering 100% clean energy future affordably. In the area of reliability, we believe putting the responsibility on the utility to maintain high-performing, well-run resources is important. In pursuit of our clean energy plan, we will acquire resources that appropriately balance reliability, cost, and flexibility for our customers. This includes both owning new resources and considering supplemental generation from purchased power as appropriate. Our fourth concept reinforces that customers are at the core of what we do every day. We're committed to providing options that make it easier to do business with us.
We plan to continue developing innovative programs that connect customers with advanced technologies to help manage their bill. In addition, we'll be convening an advisory panel of customers to gain a deeper understanding of the customer experience through individual perspectives, so a little design-basis thinking. As we work to execute in all these strategic areas, we'll focus on strengthening our relationships with stakeholders. Going forward, we plan to continue working collaboratively with those who have a vested interest in Arizona's future and our company's role as the state's largest electricity provider. For our regulators, we are committed to maintaining an open dialogue, listening, and ensuring transparency. We have a lot of important work ahead of us, and we'll be sharing information about our progress as we advance through the year.
While I'm excited about our future opportunities, I also want to recognize our team and the hard work completed last year. We finished 2019 with our best-ever reliability performance if you exclude outages from voluntary proactive fire mitigation efforts, and Palo Verde once again achieved a capacity factor above 90%. Our goal to reach 100% clean, carbon-free energy by 2050 is new, but our efforts to move towards a cleaner energy mix are not. In 2019, we maintained our environmental, social, and governance A rating from MSCI, and we are ranked in the electric utility sector's top quartile by Sustainalytics. Notably, APS was one of 10 American companies and the only U.S. utility to make CDP's A List for both climate change and water security in 2019.
We accomplished all this while reducing the average residential bill by 7.8%, or $11.68 on average since January of 2018, due primarily to savings from federal tax reform and operating cost savings that have been passed on to customers. 2019 was also a busy year for our state regulatory team. Some of the work that we began in 2019 will continue this year. Key dockets for 2020 include our rate case, retail choice, disconnection rules, and modifications to the commission's energy rules. A number of workshops have already been scheduled to discuss these topics, and you can find a list of key dates in the appendix to our slides. The next milestone in our rate case proceeding is May 20th, the date that commission staff and other interveners file testimony. However, I would note that commission staff has indicated that they may need an extension, so watch that proceeding.
Outside of our regulated operations, our Bright Canyon subsidiary acquired minority equity stakes in two wind farms being developed by Tenaska, the 242-MW Clear Creek Wind Farm in Missouri and the 250-MW Nobles 2 Wind Farm in Minnesota. We expect these wind farms to be operational in Q1 and Q4 of this year, respectively. Our objective with these investments is to gain experience in the construction, ownership, and operation of wind assets and to partner with a proven developer in Tenaska. Our overall strategy with Bright Canyon is to develop, own, operate, and acquire infrastructure within the electric energy industry. Investments in renewables, electric transmission, and microgrids represent some of the opportunities that Bright Canyon has been evaluating, and I want to emphasize that these are close adjacencies. We will continue to pursue attractive growth opportunities consistent with our core strengths.
We have ambitious goals and a talented team to achieve them. At the officer level, I recently made changes to our organizational structure that better aligns our experience and talent to our strategic focus areas and to strengthen our succession pipeline. I'm excited about our future, all the possibilities, and the team I have the privilege of working with. Before I turn it over to Jim for a financial discussion, I want to do three quick shout-outs. First, to the team at Palo Verde for their work on a short notice outage at unit three in getting the necessary work done safely and the unit back online ahead of schedule. Second, to our T&D engineering and construction team for their outstanding work on the new substations associated with the Microsoft Data Center build-out.
Third, to the Arizona State Sun Devils for their win last night over number 14 Oregon. Jim, go ahead and take it away.
Thank you, Jeff. Thank you again, everyone, for joining us today. This morning, we reported our financial results for the fourth quarter and full-year 2019. Before I review the details of our 2019 results, let me briefly touch on some of the key factors from the quarter, which can be found on slide three. For the fourth quarter of 2019, we earned $0.57 per share compared to $0.23 per share in the fourth quarter of 2018. Our results were largely impacted by a one-time tax refund to customers related to the TEAM Phase III refund and lower adjusted O&M expenses. We also experienced another quarter of mild weather. For the full-year 2019, we earned $4.77 per share compared to $4.54 per share in 2018. 2019 earnings reflect our growing infrastructure to support the strong Phoenix economy and 2% customer growth.
Other key items for 2019 was negative weather, which decreased gross margin by $37 million or $0.25 per share. The negative impact was more than offset by lower O&M. Year-over-year, lower adjusted O&M expense increased earnings $0.52 per share, primarily driven by lower planned outage expenses and lower public outreach costs at the parent level. As I mentioned last quarter, we are committed to enhancing our customer and shareholder value through cost management. The implementation of Lean Sigma will be the mechanism that allows us to improve the customer and employee experience while eliminating waste. As a result of our cost management efforts, we made great strides in reducing O&M in 2019, allowing us to reach the low end of our original guidance range, despite the mildest Metro Phoenix cooling season in 10 years.
We expect to continue our cost savings efforts by reducing O&M approximately $20 million in 2020. As Jeff mentioned in his comments, we are on a path to deliver 100% clean, carbon-free electricity. Part of that plan includes ending our use of coal-fired generation seven years earlier than previously projected. The reduction in fuel costs as we use less fossil fuels and more renewables will be a source of cost savings to our customers in the future. Our journey to a carbon-free future will require intelligent investment in renewable resources and developing technologies. As you can see on slide 14, we rolled forward our CapEx forecast for one year. Our 2022 CapEx forecast reflects nearly $800 million of investment related to new clean generation resources and reflects a conservative mix of owned resources.
While we don't know the exact mix of ownership versus purchase power at this point, we will need an appropriate mix to ensure long-term value and reliability for customers. That said, we believe there is potential upside to our capital investments, especially as we get past 2022. As Jeff alluded to, customer affordability will be top of mind. We would expect customer rates to increase no more than the rate of inflation over time. In terms of financing our clean energy future, we would expect that we will issue equity sometime after 2020. While the exact amount has not yet been determined, we would expect the amount to be in the $300 million-$400 million range. The timing of the offering around the next rate case minimizes dilution and is ultimately accretive for our shareholders.
Our financial health, including a solid equity layer, will continue to provide our customers the benefits of low-cost access to capital and competitive returns to our shareholders. In 2020, we expect to issue up to $1 billion of term debt at APS and $450 million at Pinnacle West. Overall liquidity remains strong. In the fourth quarter, APS issued $300 million of new 30-year unsecured debt at 3.5%. We used the proceeds to repay commercial paper and to fund $100 million of our $250 million par value 2.2 notes, which matured in mid-January. At the end of the fourth quarter, Pinnacle West had $115 million of short-term debt outstanding, and APS had no short-term debt outstanding. Due to the tax benefits associated with both the TEAM Phase II and Phase III, an optimized use of income tax incentives, our effective tax rate for 2019 was a - 2.9%.
We anticipate an effective tax rate in 2020 of 14%. Continued use of income tax incentives, including tax credits associated with clean generation investments, will reduce cash taxes in the year our projects are placed in service. A quick note on pension. The funded status of our pension remains healthy at 97% as of year-end 2019. This is due to strong portfolio returns during 2019, continued contributions, and the continued success of our liability-driven investment strategy, which has helped mitigate risk to our benefit plan-funded status. 2019 was a great year for economic development in our service territory. We saw high-profile data centers and manufacturing plants break ground in the West Valley. We successfully connected two new data centers to our power grid, including the Microsoft Data Center, and began prep work to add an additional six data center feeds in 2020.
In addition to growth in the commercial sector, Arizona is benefiting from residential population growth. According to a December 2019 report from the U.S. Census Bureau, Arizona ranked third in population growth behind Texas and Florida. Arizona's population grew by approximately 120,000 people between July 2018 and July 2019. Reflecting the steady improvement in economic conditions, APS's retail customer base grew 2.2% in the fourth quarter of 2019. We expect that this growth rate will continue in response to the economic trends in our service territory. The Metro Phoenix area continues to show strong job growth and has consistently been above the national average. In 2019, employment in Metro Phoenix increased 2.9%, compared to 1.6% for the entire U.S. Construction employment in Metro Phoenix increased by 9.6%, and manufacturing employment increased by 5.2%.
According to the U.S. Bureau of Labor Statistics, Arizona's job growth ranked second in the nation in 2019. The Metro Phoenix residential real estate market has also continued its upward trend. In 2020, we expect a total of 31,100 housing permits driven by both single-family and multi-family permits. We continue to expect Pinnacle West's consolidated earnings for 2020 to be in the range of $4.75-$4.95 per share. A complete list of key factors and assumptions underlying our 2020 guidance can be found on slides six and seven. In closing, our long-term rate base growth outlook remains intact at 6%-7%, and we expect to achieve a weather-normalized annual consolidated earned return on average common equity of more than 9.5% in 2020. The new year is off to a great start with the announcement of our bold, clean energy plan, coupled with organic growth in our service territory.
We are excited to embark on a path that will help create a healthy and prosperous Arizona that benefits our customers, communities, and shareholders. This concludes our prepared remarks. I will now turn the call back over to the operator for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Michael Weinstein with Credit Suisse. Please proceed with your question.
Hi. Good morning, guys.
Hey. Morning, Michael.
Hey. You mentioned that there would be potentially some upside after 2022 in the capital plan as a result of your carbon reduction and greenhouse gas goals, trying to achieve that going forward. Is there any way maybe we could kind of frame that up and talk about some more of the specific opportunities you see ahead, particularly maybe in battery storage or in generation?
Well, on average, between now and to hit the interim target at 2030, we're going to need at least 300 MW of battery storage and 3-500 MW of other resources to meet that goal. Ultimately, you have some competing plans out there, all toward green and clean, at different dates, and we'll have to see exactly how it plays out. We're being very conservative in how we think about our CapEx budgets at this point.
Got you. I think maybe I missed this, but did you talk about equity needs going forward? I know it's a little bit early considering the rate case is still pending and everything, but can you talk about maybe a normalized equity need going forward and how that might change depending on the outcome of the case?
We don't expect to issue equity in 2020, Michael. We expect the next offering we have will be in the $300 million-$400 million range. It'll be teed up closer to the next rate filing. A lot of that will be what shakes out ultimately in the capital expenditures as we move forward, PPA versus owned.
Does that complete your question?
Oh, is that block equity or ATM-type equity?
Yeah. We haven't decided the how yet at this point. We'll have to Details to follow on that as we get closer.
Okay, got you. Thank you very much.
Thanks, Michael.
Our next question comes from the line of Greg Gordon with Evercore. Please proceed with your question.
Thanks. Good morning.
Morning, Greg.
A couple of questions. Other than the rider that you have for APS Solar Communities, which I believe is for rooftop, we should be assuming that to move this capital through into rates that, I think you already said this pretty explicitly, you will need to file another rate case post the one that's going to be closing this year to or you'll be in sort of serial filing mode to get these investments into revenues. Is that fair?
It may depend a little bit, Greg, on how this case moves forward. We've got an RES adjustment mechanism. There's some potential for that to come into play. I think what you'd see is if you moved with a more traditional rate-basing process, then yeah, you would be looking at rate cases that would be filed periodically to reflect the changing capital. One of the things I think we'd like to have a conversation with the commission about is, are there either mechanisms we have today or other ways that we can look at doing that so that we're not in serial rate making mode?
Understood. When I look at the 2022 rate base target or aspiration, it just looks a little bit low to me relative to the increase in CapEx. Maybe I'm wrong, should I presume that the CWIP balances would be perhaps a bit larger and the AFUDC portion of your income statement would be a little bit bigger in 2022?
Greg, this is Jim. I know the slide is 2020 to 2022. The six to seven we think is a long-term outlook and wouldn't necessarily just reflect the period that's shown. The math looking at what's shown is more like 8%, but we're looking at into the future.
No, I understand that. I'm asking a more basic question. When I think about the earnings guidance for this year with AFUDC expected to be $35 million ±, that's on slide six.
Yep.
I'm just sort of saying, maybe I'm stating the obvious, but as your capital expenditures accelerate up that CWIP and therefore the contribution to earnings from AFUDC should grow going forward?
That would be correct, Greg.
Okay. Final question, guys. I think there was some work the PUC or, sorry, the ACC outside of the Tucson case and outside of your pending case, has been workshopping several different issues, including making a policy decision on how to deal with fair value adjustment, how to deal with post-test year adjustments and rate cases. I think there was one other item which frankly I'm embarrassed I can't remember. I think hopefully you are knowledgeable about what I'm referencing and could you give us an update on that, where those stand on those two or three items?
Yes. Greg, this is Barbara Lockwood. There has been some conversation about taking a look at those outside of rate cases. Frankly, there hasn't been much activity on that recently. They've been focused on some other topics.
Okay, there's no sort of formal process for coming up with policy statements on those with a date certain?
No, there's not at this time.
Okay. Thank you very much. Take care.
Thanks, Greg.
Thanks, Greg.
Our next question comes from a line of Insoo Kim with Goldman Sachs. Please proceed with your question.
Thank you. First question, could you maybe give a little bit of an update on your thoughts on the retail competition docket and a couple of the proposals that were made, and just your thoughts on the feasibility of that and what potential impact that could have on the system and on APS as well?
Yeah. Insoo, it's Jeff. The process, there's been some draft rule proposals that were put out. If we want to go into any more detail, I'll let Barbara talk about it. One of the major challenges we have here in Arizona is that we're not in an organized market. To make the retail competition effective, we think you've really got to be in an RTO and have that underlying framework. You've also got to have a fair amount of infrastructure around resource adequacy. We're in a time, if you go back to the original competition discussion back in the early 2000s, there was a lot more capacity. There was an overbuild of capacity. Capacity was not as tight. We're in a much tighter capacity market, it would be really risky to move forward without strong resource adequacy frameworks.
This is a pretty lean commission, how you would put in place the infrastructure that would ensure resource adequacy, how would you deal with the market structure that moves beyond an Independent Scheduling Administrator, which is what we had in the last go around, into an actual RTO type of independent system operator, and then how would you actually address the arbitrage, the gaming that could happen around the trading and prices and customer-facing situations. It's just really difficult for me to see how you'd put all those in place to make this effective. Obviously, this is early in the discussion on where those rules are, we'll engage and share that perspective with the commission.
Got it. Thank you for that insight. The second question, just going back to the storage and other clean energy investments. I think the 300 of storage and the 300-500 MW of other resources, what timeframe was that for? I heard a 2030 timeframe, and I didn't know what the overall opportunity set you may have spoken about in this next 10-year period.
Yeah. I was referencing the sort of interim 45% renewable target in 2030. Over that timeframe from now to 2030, our need is about 300 MW a year of battery storage and three to 500 MW of renewable generation a year in that timeframe.
Got it. When I was just looking at the clean energy investments in 2021, 2022, it seems like the dollar amounts, if you do some rough math, would imply pretty high hundreds of megawatts. I don't know. Is what you're talking about already being captured in this next couple of years, or am I doing the math wrong?
No, it's been captured. Remember, it's an average over the timeframe. Yeah, we see significant opportunity in storage and renewables.
Got it. Okay, I'll follow up. Thank you.
Thanks.
Our next question comes from the line of Julien Dumoulin-Smith with Bank of America Merrill Lynch. Please proceed with your question.
Hey, good morning, team. Thanks for the time. Can you hear me?
Hey, Julien.
Hey. Howdy. Just to follow up and clarify the early equity commentary. When you talk about that $300 million-$400 million, it seems as if that you're basically saying 2021 upon rate case resolution. Just also want to clarify, does that include 2022? At least contemplate no equity in 2022 as you true up your capital structure in 2021, given that you've now provided CapEx in 2022? Sorry for the little detail there, but I just wanted to clarify that.
Yeah, no.
Oh, yeah. Go for it. Go for it.
I was just saying, Julien, if I implied it was going to be in 2021, that wasn't what I was trying to imply. I was just trying to imply as we look out, we see our CapEx, we'll need to issue equity to support the capital structure in the next rate case. I made no assumption on when that rate case would be filed.
Okay. Just to clarify that is reflective of the CapEx at least through 2022 as it sits today, not necessarily indicative of perhaps equity subsequently, post 2022, right?
Yeah. The next time we go to market, I expect it to be in the $300-$400 range, that would be refined based on what we ultimately do on the CapEx front and so on.
Got it. Excellent. Thank you. The second question, coming back to the rate case dynamics, obviously it's a little bit more protracted here. How do you think about settlement and the timing of having those settlement conversations, just given how long of a process it is? Just to what, well, I'll leave it easy.
Yeah. Originally, if you remember, Julien, that there was a lot of discussion. This was a case that we were directed to file by the commission. I think that the assumption was that this would be a fully litigated rate case. Obviously, we would, I think, like to talk about settlement. I think there's a lot of benefits of settling cases, particularly in the sense that you can come up with solutions that both sides, you can have a win-win kind of an outcome. Often in litigated cases, you're much more in a binary outcome where it's kind of one or the other. I think there's value in settlement. It's probably too early. We haven't even got staff or intervener testimony yet. That's going to come in May, likely. It's early yet to see if there's a dynamic that could come into play there.
Just to be realistic, the Commission had said that this is a case that they want to see fully litigated. If that changes or if the opportunity presents itself, I think we'd certainly be interested in doing that, but that's not the path that we're on right now.
Got it. Just to clarify that has not changed in recent months there? At least your understanding on this case.
Yeah. Again, Julien, it's also early in the process for it to have really done anything.
Sure.
Normally that's going to come after you see staff and intervener testimony come in.
All righty. Excellent. Thank you all very much.
Okay. Thanks, Julien.
Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.
Hey, good morning.
Hey, Paul.
First question is on the renewable energy outlook and potential cost impact. You guys are putting more effort in renewable energy. Costs have come way down. I'm just wondering how you, when you look at your rate base and your CapEx projections and everything, obviously there are going to be lots of variables. What are you guys thinking about what the potential rate impact might be with this outlook?
Yeah. Paul, what we've really been focused on is trying to manage through this plan with essentially real prices remaining flat, so keep the rate pressure at or below the rate of inflation. Obviously, part of what you can look at with that is, as you put more storage resources into the system, you're able to trade out some fuel expense. I think we're probably $1 billion or so of fuel expense right now in what we see. If you can do a little fuel for steel, you're able to translate that fuel expense into, you have rate base growth, but importantly, it takes the rate pressure off customers so that you're able to make that trade-out and get the capital investment, but also mitigate the rate impacts. Really important other component to this plan is the work that we've been doing.
You see it reflected in, I think, some of the earnings that we were able to announce this quarter, is the work around the Lean Six Sigma transformation, where we're trying to really look at doing work differently and eliminate waste and streamline processes. That's going to be important because we've got to keep the O&M flat or lower so that as you're making these capital investments, you're not just putting the rate increases through to consumers. It's going to have to be a combination of that, looking at how you can do some fuel for steel and save on fuel expense, and then how you can find the O&M savings. Just the third component, which is different from the internal pieces, but is just driving growth in the state.
When you see the large high load factor customers come in, like the data centers, they pick up a significant amount of the fixed costs, and so you're able to more efficiently use the system. It's really tying those three things together that we think can help mitigate rate pressures on this.
Okay, great. I guess on the other element that you mentioned at the beginning of the call, this rate design issue. As you know, it seems to me, at least from watching all this, that the rate design issue that was implemented in the last rate cases caused, or really actually probably caused a lot of the regulatory issues that we're now encountering. I know that you guys are trying to do customer education and what have you. Coming from it from more of a consumer perspective.
Yeah
like the technology and stuff, when you have to educate the consumer, that sometimes is seen in of itself as being kind of a drawback. I'm wondering whether or not there's an effort of maybe thinking about, and I don't really see it, I guess, in the current rate case, and if it's there, I apologize, but the idea of maybe just simplifying the whole thing. I guess what I'm wondering is, customers may not want to be educated. You know what I'm saying?
Yeah
they might want simplicity. I'm just wondering, I know you guys are doing a stakeholder thing.
Yeah
discussing it with stakeholders and what have you. I'm wondering if there's any plan potentially of making it so that you don't have what we, I guess have come up with, in which you have people having a really difficult time with just dealing, outside of rates, just the complexity of what at least some of these customers seem to be dealing with.
Yeah. Paul, a couple of points to that. First, we are absolutely looking at those issues. We've got a proposal in the case for essentially a flat bill. Similar to what you see cell phone companies offer, which is, here's what your monthly plan would be. It's fixed. We don't do a true-up at the end. There's a nuance to that that actually says if you tie it to allowing us to put a smart thermostat in the house, you'd get a lower risk rate on that. What's really important, I think you're going to see this still continue across commissions around the country, is as you move into this advanced energy economy. As we're making this transition, there is absolutely a role for customers, not just commercial and industrial.
We're working a lot with some of our commercial and industrial customers who are asking for demand-side options so that they can manage around the prices that we see at the wholesale level, the duck curve issue that we've got, which is causing wholesale prices to be very low or negative in the middle of the day. The need to shift load off into the evening hours when you've got no solar production coming onto the grid. The commercial industrial customers are absolutely taking advantage of that. A lot of the rate design pieces are simply to align rates that we've had for decades. We've had time use and demand rates in our service territory for decades, so the rate concepts aren't new.
The issue was that if you have a 12 to seven peak period and you've got negative prices occurring at noon, that is a crazy price signal to send customers. There's no way you can long-term operate a system with that kind of time use period. The first change is shifting the time use off to three to eight, which aligns it with what we actually see as the peak and gets some of that shift. With the demand rates, we've had the largest demand rate participation in the country for, again, decades, because in Arizona, a lot of cases, you've got two air conditioners. When you have a demand rate, your average, your consumption, your energy cost, the cents per kilowatt hour is lower because it's picked up on a demand charge.
Even back 20 years ago, there were technologies like load controllers that could allow customers to manage their demand. Yeah, we're going through an education process, but what we're seeing in the rate design is real customer response to those price signals. We're seeing customers are able to take advantage of demand response programs with smart thermostats that we simply would not be able to offer without that rate design. Really importantly, as you move forward, to me, you can't leave residential customers out of this advanced energy economy, and we have to be able to take advantage of the thermal storage that's in the 1.1 million residential homes that we have in our service territory through smart water heaters, smart thermostats, things like that. None of that really works without the rate design.
Sorry for the long answer, but to try to get to your question, yeah, let's put together some options like the flat bill so that we can target or give something to folks who really don't want to do that. Recognize that there are a lot of folks who don't want to worry about it. Now there's technology like smart thermostats that can do it without them having to actively do things. I think increasingly you'll see the technology take the consumer behavior out of the equation, and they'll just be doing things, and the customer won't notice. To get to that point, you've got to have these price signals that are there. Again, sorry for the long answer, but that's how we're thinking about it.
I appreciate it. Thanks a lot.
Our next question comes from the line of Charles Fishman with Morningstar. Please proceed with your question.
Hi. Hey, the only thing I had left is the disconnect policy that you brought up last quarter. I see it's still on the bullet points on your 2020 drivers. Did that get resolved between the $20 million and $30 million?
That $20 million and $30 million was our projection going into 2020. Keep in mind, you're just now having people come off the sort of four-month payment plan, a lot of this is we'll see later this year what that impact will be. We did increase our bad debt reserve last year in June. We are picking some of that in just our reserve, where that shakes out remains to be seen. We will hopefully adjust that reserve once we have an annualized pattern that we feel good that that's the right amount.
Yeah, Charles-
Okay
The rulemaking is still underway at the Commission. They've not landed on final rules for that yet.
Okay. Got it. That's all I had. Thank you very much.
Thanks, Charles.
Our next question comes from the line of David Peters with Wolfe Research. Please proceed with your question.
Yeah. Hey, good morning, guys.
Hey, David. Good morning.
I would be curious just to kind of get your guys' view of the legislation that's been proposed to potentially move the ACC to an appointed commission. Do you sense there is a level of support for this at the legislature and from voters, or should we expect to kind of see a similar result that we saw in the past?
Yeah. I think, David, it didn't get out through a committee. There's a committee that it failed out of, that was exactly the comment that was made, is that the committee members said that they believed it was important to allow the voters to have the right to elect a commission. It's working its way through the process right now. Just again, to be clear, this was not something that we proposed or that we were trying to move forward with. Just to give you a flavor on that, I think if it were, it's still unclear as to whether it would ultimately get out of the House or out of the Legislature to the ballot. It would have to go to the ballot. You'd have to actually have voters decide to do this.
As you know, I made the commitment that we weren't going to participate in Commission elections. I think within the spirit of that commitment, we would not be participating in something like an independent expenditure to try to promote this, because I just think that would be too close to violating the spirit of what we had committed to do with the Commission. Legislature will do what they're doing, and I think we said we'd work with Commissioners, obviously, whether they're appointed or elected. This would be a long road.
Great. Just quickly on the Bright Canyon Energy business, as you kind of think about it today, do you expect or is the intention to ever get this to the scale of where it's kind of a material earnings driver for you guys?
Yeah, it's a little early in that, but I think when you look at the adjacency opportunities, that's what I try to emphasize in the prepared remarks, is that we're not trying to go out far beyond what we believe is really core expertise. We've got expertise in working with wind and solar. We're working on more expertise around battery storage. We had phenomenal performance at our microgrid. We had an event in Yuma with a microgrid that we'd installed for the Marine Corps Air Station, where they actually lost the substation, and in eight seconds, that microgrid kicked in and picked up the entire load of the base from a black start, held the load until the substation was repaired, and then was able to seamlessly transition the base back into service.
For what the military is looking for in their base resiliency work, those kind of projects are good. We've got great expertise, I think, in doing those. A little early to see how much is really there, but I don't want to leave that expertise untapped. We are looking at how we can expand Bright Canyon into more opportunities like that. It's a competitive environment. We're not going to do something that doesn't make sense, obviously, for our investors, but we do think there's some opportunity there.
Great. Thank you.
Our next question is a follow-up question from Michael Weinstein with Credit Suisse. Please proceed with your question.
Hey, guys. Just a quick one. How much equity is usually issued to the employee plans every year, and how much can that absorb of that future $300 million-$400 million?
We don't have employee plan. We have a DRIP, and I think the revenue through the DRIP is $11 million-$12 million a year. It's not significant.
Got you. Okay. All right. Thank you.
Okay. Thanks, Michael.
Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.
Thank you for joining us today. This concludes our call.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.