Utility: Arizona Law Would Require ACC To Regulate Return On Equity For Retail Supplier Under Electric Choice

December 2, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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Tucson Electric Power Company (TEP) and UNS Electric, Inc. (hereafter, "TEP") said in comments to the Arizona Corporation Commission, concerning the ACC's review of retail electric choice, that, under electric choice, the ACC would be required, under its constitutional charge, to set the return on equity for competitive suppliers

TEP said that under Arizona law, "service must be provided at just and reasonable rates that reflect fair value."

"Establishing a fair rate of return on equity is necessary to this determination, lest competitive providers be given free rein to earn unjust, unreasonable returns," TEP said

"Even though no other state with a restructured market limits return on equity for competitive providers, the Commission would be required to do so here in the process of establishing the maximum rates those suppliers could charge Arizona customers. If a provider's costs subsequently increase, that provider would need to file a rate case requesting Commission approval of a new, higher maximum rate. The Phelps Dodge ruling prohibits the Commission from simply deferring these rate making decisions to the market. This limitation is one of many reasons why electric 'competition' in Arizona would bear little resemblance to the free markets that drive growth and generate wealth in other sectors of our economy," TEP said

More broadly, TEP said regarding retail electric choice, "The evidence is clear that restructuring Arizona's regulatory system to allow retail electric competition would not serve the public interest. The steep cost of transitioning to such a system would drive fixed service costs higher, eliminating savings opportunities for all but the largest energy users. That situation would only get worse after out-of-state energy marketers cherry-pick large industrial customers. Residential customers and small businesses would bear a larger share of system costs in a complex, confusing marketplace that, in other states, has all too frequently resulted in overcharging and consumer fraud. Competitive energy providers accustomed to offering multiple market-based rates in other restructured markets would instead be required under the Arizona Constitution (and in accordance with the Phelps Dodge ruling) to submit requests for Commission approval of similar rates here. In addition to determining whether "free nights and weekend" rates, "friends and family" packages and other such offerings are just, reasonable and based on fair value, the Commission would be pressed into implementing and policing new market manipulation and consumer protection rules while hoping that a regional RTO or perhaps CAISO keeps an eye on Arizona's energy resource needs and reliability concerns."

In separately filed comments, APS said that, "The Commission will lose direct jurisdiction over generation policy," under retail competition

APS further said, regarding the surrender of authority over generation to FERC under restructuring that, "As environmental concerns have grown in importance, states that introduced retail competition have struggled to reassert some control over resource planning. This has precipitated significant conflict when it comes to state clean energy plans, which have come under scrutiny by the Federal Energy Regulatory Commission ("FERC") as an intrusion into FERC-jurisdictional capacity and energy markets. Conventional generators in competitive markets continue to pursue legal and administrative remedies to state efforts to incentivize clean energy, and the outcome could significantly increase the cost to customers of maintaining state clean energy plans."

"[O]nce a state makes a decision to enact retail competition, state clean energy policies can impact wholesale market prices and, therefore, become a key concern of the federal regulators that have jurisdiction over these wholesale markets," APS said

Due to its lack of jurisdiction over wholesale generation (from which retail suppliers will source their supply and set rates), APS said that, "Importantly, the Commission will also lose its ability to ensure that electricity prices remain just and reasonable."

Regarding costs of creating a new RTO for Arizona, APS said, "In 2013, an analysis estimated that start-up costs for a stand-alone Arizona RTO would be at least $100 to $300 million, the implementation would take 4 to 5 years and it would have an annual operating cost near $100 million."

In separately filed comments, the Salt River Project said, "States that have moved to retail competition: cede jurisdiction to the Federal Energy Regulatory Commission (FERC), experience high levels of consumer fraud, have consistently demonstrated an inability to provide new generation capacity to ensure reliability, and have not seen any clear evidence of price benefits for residential consumers."

"[A]s the restructured industry develops, the just and reasonable requirement will pose significant challenges, challenges which may cause the observer to seriously question the term 'deregulation'. It does not seem likely that the Commission can insure just and reasonable rates by simply setting a range of rates, all of which are just and reasonable. This is because a rate that might be considered just and reasonable in one point of time and set of circumstances, might not be just and reasonable under other circumstances," SRP said

Docket RE00000A-18-0405

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