Arizona Utility Claims: "No State Has Implemented Retail Competition Without The Creation Of An RTO/ISO"

Utility Says ACC's Authority To Authorize Municipal Aggregation Absent Statute Is "Questionable"

Utility Says Retail Choice Is Actually "Re-regulation"

July 26, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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Arizona Public Service Company submitted comments to the Arizona Corporation Commission on a Staff report on draft rules for retail electric competition (details here) and a proposed list of tenets for retail choice proposed by Commissioner Justin Olson (details here)

APS said in its comments that, "Our state currently benefits from an increasingly clean energy portfolio and great reliability. Additionally, a number of innovations in the energy marketplace are occurring. For example, Arizona utilities are collaborating with other utilities across the west to create more efficient wholesale markets, which are significantly benefiting all customers. The Energy Imbalance Market (EIM), a real-time energy market, continues to reduce costs for all consumers and helps integrate growing amounts of renewable generation. These same utilities are also in the early stages of exploring a day-ahead market that could bring additional customer benefits. Neither of these market structures could support the type of retail competition proposed in the Draft Rules or as envisioned by Commissioner Olson without the additional structure of a Regional Transmission Operator (RTO) or Independent System Operator (ISO)."

APS said in its comments that, "No state has implemented retail competition without the creation of an RTO/ISO."

While the term "retail competition" is not defined by APS, we note that Oregon, which is not a member of an RTO, currently allows non-residential customers above 30 kW to take service from a competitive retail supplier (such choice existed well before its EDCs joined the EIM). While this is not full retail competition, it is more comparable, in many respects, to the proposal from ACC Staff, which would limit choice to customers above 400 kW or aggregations of at least 5 MW. Granted, a key aspect of the most economic (and therefore popular) choice program in Oregon (the long-term opt-out) is subject to a participation cap, but under tariff, all customers over 30 kW in Oregon could elect retail choice under a less economic annual program, and such competitive load would be accommodated without the use of an RTO

APS said in its comments that, "An RTO or ISO is necessary to create a robust retail market. The EIM is not a sufficient market structure to support retail competition; indeed, the introduction of retail competition may be incompatible with participation in EIM by Arizona utilities."

APS said, "Arizona may consider creating its own [RTO], but the relatively modest scale of an Arizona-only market would raise concerns with the Federal Energy Regulatory Commission (FERC) that the market could not produce just and reasonable rates. Therefore, an Arizona-only market is unlikely. Arizona utilities would likely need to join an existing RTO or ISO, or form a new multi-state RTO. The most likely choice would seem to be the California Independent System Operator (CAISO) for its proximity and the size of the market."

APS said, "In any event, if this Commission adopts the Draft Rules proposed by Staff or Commissioner Olson's proposal, it would lose control over resource planning, resource type, and generation price charged to customers who switch to competitive suppliers. Regulation of generation resources serving retail customers would transition from the Commission to FERC. In essence, a move toward retail competition is re-regulation with regional or federal entities having much more influence on the Arizona energy industry. The Commission would arguably be abdicating some of its responsibilities under the state Constitution."

APS said that adopting retail choice, "cedes Commission authority to other states and the federal government."

APS said, "This is a much different approach than the market innovations discussed earlier in our comments where the Commission would retain the full authority over resource and transmission planning. The EIM and the potential day-ahead markets are being designed with the intent to avoid the complications of joining a RTO/ISO and the subsequent loss of state authority, which the Draft Rules compel."

APS further said, "APS has also made a significant commitment to battery storage as part of a clean energy future based on Arizona's current market structure. The viability of both the markets (EIM and day ahead) and battery efforts would have to be reconsidered as we work through this renewed effort for retail competition."

APS said, "The Draft Rules contain significant gaps that can diminish reliability and conflict with other beneficial innovations taking place today in the state of Arizona, which are outlined below."

APS said, "The Draft Rules fail to address reliability. Neither does the proposal from Commissioner Olson address reliability nor identify who would have responsibility for ensuring resource adequacy."

APS said, "Under the Draft Rules, the Commission would retain control over resource planning for jurisdictional utilities in the state. If this is the case, and retail competition materializes in Arizona, then the vast majority of retail electric customers would be left without reliability assurance because it appears an Electric Service Provider would have no requirement to engage in resource planning or to acquire capacity sufficient to maintain minimal levels of resource adequacy. To achieve such resource adequacy, all providers must be required to participate in the Commission's resource planning process and accept, in some manner, financial responsibility for reliability."

APS said, "Texas often is cited as a successful example of retail competition. However, the Electric Reliability Council of Texas (ERCOT) is forecasting an 8.5% reserve margin for the summer of 2019. This is significantly below standard utility reserve margin planning levels across t he country. Unfortunately, this is not new for Texas customers in ERCOT, who continue to be exposed to the risk of rolling blackouts and brownouts. California, in response to a similar concern, is considering a law that would allow a state agency to procure energy resources to meet the state's climate, clean energy and reliability goals due to concerns that the proliferation of CCAs and intermittent resources in the state will cause a detrimental decline in reliability and resource adequacy in the near future."

APS said that the proposed rules do not resolve constitution barriers to retail choice

APS said, "The Draft Rules strike some portions of the original rules that were declared unconstitutional by the Arizona Court of Appeals in 2004, and include minor revisions to others. These revisions in the Draft Rules, although intended to remove constitutional barriers, are not robust enough to meet the constitutional requirements of just and reasonable rates that consider the fair value of the provider's assets. Commissioner Olson's proposal raises the same constitutional issues that would have to be addressed by the Commission."

APS said, "Additionally, the Draft Rules contemplate the creation of municipal Community Choice Aggregators (CCAs) not previously considered in the rules or embodied in Arizona law. CCAs in other states have been created through legislative enactments, not by Commission rules. The legal authority of the Commission to take this step is questionable at best. If the Commission chooses to move forward with rules that incorporate CCAs, numerous conflicts with existing state law must be resolved."

APS said, "Retail competition conflicts with a number of energy policies the Commission is currently considering as well as energy innovations taking place today."

APS said, "The Commission is currently considering a number of important reforms to its energy policies including renewable and clean energy rulemakings, deployment of infrastructure to support electric vehicles, demand response programs and PURPA, among others. Retail competition conflicts with each of these policies and would require, at a minimum, reconsideration of those rules and the prospect that it may be more difficult to achieve some of these goals."

APS said, "In particular, the ability to reach the proposed clean energy goals would become more difficult. Palo Verde Generating Station, the single largest non-carbon emitting resource in the state, could be adversely affected by retail competition. We have seen other states struggle to properly value nuclear resources for the benefits they bring to clean energy goals as round-the-clock emissions-free generators. As a result, nuclear plants have been closing in retail choice states as they struggle to compete with natural gas. Further, there could be implications to how, from whom, or even if utilities would continue to purchase power from behind-the-meter generation. And there could be far-reaching implications for the ability of utilities to make substantial investments in new clean generation, storage and other innovative measures."

Docket RE-00000A-18-0405

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