PHOENIX — Arizona utility regulators rejected pleas by seniors and consumer advocates on Tuesday when they voted 3-2 to adopt a new model for setting rates. Energy experts say the vote means the Arizona Corporation Commission departs from more than 100 years of precedence in how it regulates for-profit water and power companies.
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Support for the proposal came from utilities, construction groups, and the Arizona Chamber of Commerce. Opposition included the Arizona Attorney General, the AARP and consumer rights advocates.
The way the Commission made the historic change – by voting for a policy statement as opposed to holding a formal rules hearing – is also the subject of sharp criticism.
“Trying to implement formula rates through a policy statement rather than through rules is inappropriate, illegal and in this case denies due process,” said attorney Dan Pozesfsky of RUCO, the state agency representing utility customers.
“Illegal” or “A Good Thing?”
Commissioners supporting the new policy say they acted within their purview.
“The policy statement does not require anything from our utilities. It is not changing our existing ACC rules. It is simply giving the option to utilities to reduce the number and frequency of rate cases which is ultimately a good thing for customers,” Myers said.
Whether the new model is good for customers is debatable. The commission’s own expert who was invited to discuss formula rates in October said it’s the for-profit utilities that historically benefit, not consumers.
“Formula rate plans have resulted in large rate increases with very few rate decreases and no measurable improvement in reliability of service,” said Michael Deupree of Acadian Consulting Group.
New formula relies on “informal” process for utilities
Republican Commissioners Myers, Jim O’Connor and Kevin Thompson voted yes. Republican Lea Marquez Peterson and Democrat Anna Tovar voted no. Both Marquez Peterson and Tovar expressed a lack of transparency in the process.
Arizona’s formula rate policy will rely on a preset formula of costs for a given utility. Arizona’s 300 utilities regulated by the Commission will have the option to stay with the current ratemaking process or use the formula rate model.
Participating utilities will file a rate case, then use the formula to report their costs annually in “informal” meetings with stakeholders; The Commission will set annual rates based on those reports.
The current ratemaking model requires utilities to apply for rate hikes (typically every 2-3 years) in a process that involves sworn witnesses, legal exhibits, and oversite by an administrative law judge.
Supporters of formula rates say they will promote small, gradual hikes instead of larger hikes that cause sticker shock to consumers every two to three years. They also say formula rates will provide certainty to utilities and reduce “regulatory lag,” the time between a utility’s actions and the government’s response.
“Building generation stations, transmission lines and substations cost a lot of money and will always cost a lot of money,” said Paul Walker, an energy markets consultant who spoke at Tuesday’s meeting at the invitation of Myers. “FRPs allow you to track expenses as close to current as possible.”
Opponents say formula rates reduce incentives for utilities to manage costs and instead provide “perverse incentives” to utilities to grow their rate base. They worry about a lack of guardrails and say utilities will not feel a legal burden to prove each year they are doing everything in a cost-efficient manner.
“Residential customers will likely pay much more under formula rates,” said RUCO attorney Sarah Barrios Cool in a legal filing to the commission. “No utility has provided any evidence to show a causal link between formula rate schemes and lower costs of debt.”
Commissioners ignored their own plan, rushed to schedule vote
A senior citizens group from Sun City was among those represented at Tuesday’s meeting who expressed concern about the hasty way Tuesday’s vote happened, and in fact, Chair Jim O’Connor ignored his own timeline by holding the vote.
Since last year, the Commission has explored alternative ways to regulate utilities as there is widespread agreement that regulatory lag remains a problem.
During an October workshop, O’Connor acknowledged there were many questions that remained about one of those proposals, formula rates. However Commissioners indicated they were intent on exploring the formula rate option as opposed to others, and O’Connor said there would be another workshop for community leaders. He also ordered the Commission Staff to provide a legal opinion about creating an official formula rate policy.
“Give us feedback. Bring us guardrails,” O’Connor said to stakeholders at the Oct. 3rd workshop. “I eagerly look forward to that kind of input at our next workshop.”
But there was not another workshop.
There was no published legal opinion.
Instead on November 20th O’Connor and Myers released a written policy statement about formula rates and said a discussion and vote would take place two weeks later.
Several stakeholders were blindsided and requested more time, noting the gravity of such a decision.
Describing the policy change as a “tectonic shift,” Attorney General Kris Mayes said giving the community fewer than 10 business days to vet, provide comments on, and vote on the Policy Statement exposed the Commission to unnecessary legal risk.
The commission moved forward anyway. On Tuesday, O’Connor did not address why he ignored his own plans for a legal opinion and a workshop. Instead, O’Connor lashed out at stakeholders in attendance, accusing them of not bringing solutions to the table in previous months.
At least two speakers, including an attorney representing Google and Microsoft, said O’Connor’s accusation was not true and pointed to filings they submitted to the Commission months ago.
Diane Brown of the nonprofit Arizona PIRG Education Fund, told the Commission the vote was taking place while major questions remained.
“This is precisely to me why it was so important to have the legal memo that this Commission said they would get,” Brown said. “While there are statements that there will be increased transparency, I’m not seeing evidence of that. It is troubling to me that we haven’t heard from the ALJ (administrative law judge). We have not heard from Staff.”
Tovar and Marquez Peterson said the rushed process was one reason they voted no.
“There is probably still a way to implement formula rates while still complying with the constitution and case law,” Tovar said. “But this should be done through rulemaking procedures.”
“I would much prefer to see a full public rulemaking process which would ensure the details are thoroughly vetted through a transparent process that we and the public understand the impact and any unintended consequences for ratepayers,” Marquez Peterson said.
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