Arizona regulators narrowly approved a controversial proposal to allow utility companies to seek yearly rate increases over opposition from consumer protection advocates and the state’s attorney general.
On a 3-2 vote, the Arizona Corporation Commission approved a “policy statement” that allows the electric, water and gas companies it regulates to seek yearly rate adjustments based on their rates of return.
Those “formula rate plan” adjustments would take place more frequently than the current rate case system used by the commission to consider rate increases. That process, which uses expense data from a prior year to determine rates, can take years to complete.
Consumer advocates argued the new process includes less opportunities for the public to weigh in on a suggested rate increase.
“We have seen individual rate payer interveners in multiple recent proceedings, including last year's [Tucson Electric Power] and [Arizona Public Service] cases and the recent Southwest Gas case,” said Chanele Reyes, an attorney with the Arizona Center for Law in the Public Interest. “Those interveners would be particularly disadvantaged under the current proposal.”
Commission Chairman Jim O’Connor and Commissioner Nick Myers, the Republicans who proposed the change, said they are not dumping formal rate cases altogether. Instead, the new proposal gives utility companies the option to seek annual adjustments in between those rate cases, which they argue will combat “rate shock” for consumers.
“A big thing for me is that it promotes gradualism in the rates … customers want this,” Myers said. “They don't want to have a massive jump in their rates every three to five years.”
In fact, the commissioners accepted an amendment suggested by solar advocacy group AriSEA to require utility companies that receive annual formula rate plan adjustments to go through a full rate case at least every five years unless the commission approves an alternative schedule.
O’Connor and Myers argued the shift to a formula rate plan option is needed to improve the stability of Arizona’s grid.
It does this, supporters said, by reducing “regulatory lag,” or the lengthy wait times utilities can expect between when they request a rate increase and receive approval from the commission.
“Unfortunately, the current regulatory approach, which relies on the historic test year model, creates significant regulatory lag, and this delay impedes utilities ability to not just recover instruments, but also undermines timely infrastructure development and allows them not to act as efficiently as they could,” said Arizona Chamber of Commerce CEO Danny Seiden, who supported the measure alongside several of the state’s utilities.
But critics, who ranged from renewable energy advocates to Sun City HOA members, argued the policy statement crafted by O’Connor and Myers is vague and gives few details on how formula rate plans would actually make good on those promises.
They argued it simply shifts financial risks from utilities and their shareholders to consumers.
“Formula rate plans are designed to stabilize utility profits, but they don't fully account for the financial risks that they might shift on to their customers, leading to unpredictable and possibly higher costs,” said Caryn Potter with the Southwest Energy Efficiency Project.
The Residential Utility Consumer Office, a state agency that advocates for ratepayers, also opposed the change, arguing Arizona has used its current system for over a century and citing data from Illinois and Maryland showing formula rate plans in those states led to higher rates.
And critics said there's another issue with the commission’s vote, arguing it violates a state law governing the way regulatory bodies approve new rules.
In a letter to the commission, Attorney General Kris Mayes, a former corporation commissioner, said state law requires the commission to undergo a lengthy formal rulemaking process if it wants to change the way it approves utility rates.
She argued that the commission erroneously referred to the change as a “policy statement” instead of a rule change.
“Despite its name, the proposed Policy Statement is not a "substantive policy statement within the meaning of the [Arizona Administrative Procedure Act]. ... Policy statements are advisory only, meaning that they can only interpret current law or rules,” Mayes wrote.
Democratic Commissioner Anna Tovar and Republican Commissioner Lea Márquez Peterson, who both voted against the measure, expressed similar concerns.
“I think, right now, what has been proposed is defective, substantially and procedurally,” Tovar said. “The policy statement is attempting to circumvent rulemaking.”
Márquez Peterson said she didn’t necessarily oppose changing the way the commission approves utility rates but that “this decision is being made hastily without thorough vetting.”
A spokesman for Mayes declined to say how the attorney general plans to respond to the commission’s vote to approve the change.
“We’re evaluating the situation but I’ll have to decline to comment today,” spokesman Richie Taylor said after the vote.
O’Connor said he received legal guidance that the formula rate plan proposal did not have to go through the formal rulemaking process.
EDITOR'S NOTE: This story has been updated to correct the spelling of Caryn Potter's name.
