Phoenix, Ariz. – The Arizona Corporation Commission hosted a workshop on Thursday, October 3, 2024 to hear from experts and interested parties who have experience using a formula rate methodology to establish just and reasonable rates.  The Commission is eager to gather information to aid the Commission as it deliberates implementing a different approach to rate making.

Currently, the ACC requires utilities to base their rate applications on an historical test year – a prior year of actual expenses and investments.  The Commission is considering alternatives to the use of historic test years for several reasons, including reducing regulatory lag, improving infrastructure maintenance, and better balancing the needs of both utilities and their customers.

Formula ratemaking is a process first established by the Federal Energy Regulatory Commission (FERC) in the early 1990’s in which utilities and customers agree upon a formula for calculating the utility’s cost of service, including clear definitions of inputs to that formula and a process for updating rates every year as the utility’s costs change.  Subsequent rates are trued up annually based on actual financials. 

ACC Chairman Jim O'Connor kicked off the day-long workshop by saying, “It’s a change. We’re open to change, we’re open to a better way to make rates more affordable for customers.  We’ve got to look at better methods to do a better job for our ratepayers.”  He underscored the fact that customers end up paying a higher price for energy and water services when the utility’s credit ratings are downgraded, resulting in higher interest charges to fund capital projects, that get passed down to customers.

Commissioner Nick Myers, who helped spearhead the effort to move the Commission to examine alternatives, said “The method we use today tends to slam ratepayers with huge increases on a semi-regular basis.  Formula rates have the ability to make increases more gradual, it closer aligns the utility ratemaking with the economic and inflationary trends in the country… that’s much more palatable for utility ratepayers.”

Members of FERC staff participated in the workshop virtually, taking time to explain and answer questions regarding the formula ratemaking approach it currently utilizes.   FERC regulates rates for interstate electricity and natural gas transmission, and is responsible for ensuring that the rates, terms, and conditions of the transmission of energy in interstate commerce are just, reasonable, and not unduly discriminatory or preferential. 

Representatives from other interested parties, such as the Maryland Office of People’s Counsel, AARP, and experienced consultants delivered presentations, as well as Arizona’s Residential Utility Consumer Office (RUCO).  Regulated utilities were also part of the discussion.  Some of Arizona’s largest electric utilities – including Arizona Public Service Company, Tucson Electric Power, and UNS Electric - provided their experiences with formula ratemaking based practices.

The Commission and ACC staff agreed to continue moving forward in their exploration of alternative rate making approaches toward a system that better balances utility and ratepayer interests in a rapidly growing state.

The ACC has the difficult task of regulating public service corporations in a way that balances the costs, reliability, affordability and the sustainability of the services they provide, and the sustainability of energy and water in Arizona.  During the summer months, the resiliency of the electric grid can be a matter of life or death, and it has been the priority of this Commission to ensure that the electric grids that serve our customers are resilient and reliable.  Despite the record-breaking heat wave and record electricity use this past summer, Arizonans did not experience widespread power outages and our utilities were able to meet the record-high demands every day. 

According to the most recent data on electricity prices collected by the U.S. Bureau of Labor Statistics and the U.S. Energy Information Administration, Arizona’s electricity rates remain BELOW the national average.

To watch a recording of the workshop, go to https://azcc.granicus.com/player/clip/6119?view_id=3&redirect=true

Sources:

BLS  https://www.bls.gov/regions/midwest/data/averageenergyprices_selectedareas_table.htm

EIA: https://www.eia.gov/electricity/monthly/epm_table_grapher.php?t=epmt_5_6_a