The Arizona Corporation Commission approved a policy statement on Dec. 3 giving the state’s 300 utility companies the option to request annual increases based on formula rate-making without having to go through the usual two-to-three-year process required to apply for rate hikes.
“Formula rate plans are mechanisms that allow utilities to adjust their rates annually based on a pre-established formula, which accounts for specific cost inputs,” an ACC press release stated. “Unlike traditional rate cases, which can be lengthy and expensive, FRPs provide a more streamlined and predictable method for setting rates.”
“Formula rates will upend over 100 years of rate-making in Arizona. Residential customers will likely pay much more under formula rates,” Residential Utility Consumer Office attorney Sarah Barrios Cool said in a written statement to the commission.
Chairman Jim O’Connor and Commissioners Nick Myers and Kevin Thompson, all Republicans, voted to approve the “formula rate plan” adjustment, arguing it would reduce regulatory lag and thereby prevent companies from asking for large increases every few years, such as the Arizona Water Company’s recent request to raise rates by nearly 50% in Sedona.
“The policy statement is not requiring anything from our utilities,” Myers said during the meeting. “It’s not changing any of our existing ACC rules. It’s simply giving the option to the utilities to reduce the number and frequency of the rate cases, which is ultimately a good thing for customers. It’s also promoting rate gradualism … something that the customers have been desperately wanting.”
Organizations that wrote in support of the formula rate plan included the Arizona Restaurant Association, Arizona Lodging and Tourism Association, Arizona Cattle Feeder’s Association and Arizona Chamber of Commerce.
“[AWC] believes formula rates will be an effective means of addressing regulatory lag to the benefit of both utilities and customers, as costs change year over year,” AWC contract attorney Meghan H. Grabel told the commission. “Also the relative certainty in cost recovery will allow utilities to better plan for utility investments and implement those utility investments, thereby improving reliability.”
“Bottom line, formulaic rate-making is a proven regulatory mechanism. Fifty-four utilities in 12 states, including high-growth peers in Georgia and Texas, have retail formulas, while 48 states utilize a FERC transmission formula,” Chamber President Daniel Seiden wrote in a statement to the commission. “If adopted for use in Arizona, formula rates will reduce regulatory lag and preserve commission oversight through an annual review process of the utilities’ costs to ensure that a provider has not over- or under-earned.”
Dana Kennedy, state director for AARP Arizona, and Arizona Attorney General Kris Mayes, a Democrat, called the move a “a tectonic shift away from more than a century of historic test year-based rate-making” in a Nov. 29 letter to the ACC.
“The proposed policy statement places additional burdens on the state’s utilities and, more importantly, on the general public,” Kennedy wrote. “Under the proposed policy, a utility customer will need to monitor the website of each utility so that they do not miss an annual meeting announcement. In addition, the proposed policy would reduce the customer’s opportunity to participate in a utility rate case.”
Kennedy also argued that the new policy would not increase customer affordability.
“During the 11-year formula rate experiment in Illinois, utility rates soared by 40% before the formula rates were ultimately terminated,” Kennedy wrote. “During those 11 years, the public, stakeholders and even the Commerce Commission itself had limited ability to review utility spending and rate increase requests.”
An amendment to the policy statement will require that utilities on a formula plan come before the commission every five years for a full rate case unless they are on an alternate schedule.
