Arizona Corporation Commission revisiting issue of electric competition

Regulators seek stakeholder input; critics say risks outweigh benefit of lower rates
2013-06-30T00:00:00Z 2014-07-02T12:02:47Z Arizona Corporation Commission revisiting issue of electric competitionDavid Wichner Arizona Daily Star Arizona Daily Star

A decade after Arizona scrapped rules to open the state's retail electric market to competition, state regulators are mulling a new move to allow consumers to choose their power providers.

The move would allow ratepayers to choose who supplies their power - though it would still be delivered by local utilities - and could offer consumers lower rates and more services.

But critics say any rate benefit would be outweighed by other risks.

The move to competition is being driven by a political shift at the elected Arizona Corporation Commission, businesses that want to save money by choosing power providers, and power retailers eager to tap into Arizona's electric markets.

But results in the 17 states that have some form of retail electric competition have been mixed - particularly for residential ratepayers - and groups such as AARP say the move would do little to lower electric bills and could open consumers up to abusive market practices.

Mindful of such concerns, the Corporation Commission will move cautiously before formally adopting any competitive plan, Chairman Bob Stump said.

"Our constituents who pay the bills are first and foremost on our minds," said Stump, adding that all five commissioners have gone on the record with similar concerns.

But the commission is preparing to move quickly to decide whether to proceed - aiming to vote as soon as September on whether to start formulating new competitive rules.

Déjà vu

Arizona passed its first rules to make retail power markets competitive in 1996, separating generation from the transmission and distribution of electric power so that competitors could sell power in competition with incumbent utilities like Tucson Electric Power Co.

The state essentially abandoned the rules after California's botched attempt at a competitive power market made headlines in 2000 and 2001, and a state appellate court found Arizona's competition rules fatally flawed.

Now, with an all-Republican commission in place after two Democratic members lost re-election bids last year, the utility panel believes it's time for a new look at retail electric competition.

Stump acknowledged that the new makeup of the commission had much to do with restarting the competition discussion.

"What has brought this up is the openmindedness of the five commissioners to consider this issue anew, based on new facts, at a new point in Arizona history in which competition may or may not be appropriate for Arizona ratepayers," he said.

A chief proponent of electric competition said the time has come to put the issue back on the table.

Stan Barnes, president of Arizonans for Electric Choice and Competition (AECC), said customers of all classes stand to benefit from price competition and new services competitors can offer.

Founded in 1998, the AECC is supported largely by major power users including Asarco LLC, Walmart, Intel, Honeywell and Freeport McMoRan Copper & Gold.

"We've all been brought up to believe that you just plug in and pay the bill," said Barnes, a Republican former legislator. "It's about more than just the price. We live in an entirely new world of empowerment of individuals, and that is where the action is."

Ratepayer risk

But opponents, including the seniors group AARP and Tucson's biggest utility, Tucson Electric Power Co., say retail competition is too risky, particularly for residential ratepayers.

"In our view, it has not been successful for residential consumers," said Janee Briesemeister, senior legislative representative for AARP.

"Not only are they not getting the savings they were promised, but there are numerous ways customers have suffered market abuses. We don't think any state, including Arizona, should move forward."

Briesemeister said residential customers in competitive states have been subjected to a confusing array of options, contracts and marketing tactics including door-to-door sales.

TEP - which could be forced to spin off its power plants depending on how the state's competitive rules are written - opposes the move to retail competition, though it will comply with any commission ruling, a spokesman said.

"Competition could expose our customers to higher costs, and there are some risks involved," TEP spokesman Joe Barrios said.

Barrios acknowledged that some customers could get lower rates, but TEP worries about more costs being shifted to residential ratepayers if competitive power retailers cherry-pick many large commercial customers. As the incumbent utility, TEP would likely be required to provide service as a "provider of last resort."

"The question is, where does that leave residential customers?" Barrios said. "Their rates would go up, because they would have to cover more of our fixed costs."

Business savings

While there is little evidence to show that competition has resulted in steep price drops, some data suggest it has helped keep prices down - at least for business users.

A national pro-competition group, the Compete Coalition, issued a report last year showing that electric rates in competitive states rose an average 2.2 percent from 1997 to 2011, while rates in noncompetitive states showed an increase of 8.5 percent. Residential rates in competitive states fell 2 percent over that period, while rising 3.8 percent in traditionally regulated states, the group found, citing federal figures.

A separate report based on federal data by the American Public Power Association, which comprises government-owned and cooperative utilities, shows that in states with competitive markets (excluding Texas), average revenue per kilowatt-hour rose 3.6 cents from 1997 through 2011, to 12.6 cents per kilowatt hour. Over the same period, average revenue in noncompetitive states rose 3 cents, to 8.9 cents per kilowatt hour.

But rates tended to be higher in competitive states - including California, New York, Michigan and Pennsylvania - than the national average, and the increase in those states from 1997 through 2011 was about 40 percent, compared with more than 50 percent in noncompetitive states.

Other federal data show that business ratepayers, not individuals, are benefiting most from lower rates.

The percentage of residential power sales by competitive providers in 2010 reached 15 to 19 percent in Massachusetts, Connecticut and Ohio, but was below 10 percent in most states, says the U.S. Energy Information Administration.

Another competition proponent said that Arizona doesn't need to look at other states' experience but only to its own brief foray into competition.

Greg Patterson, director of the Arizona Competitive Power Alliance, said the competitive rules prompted the state's biggest investor-owned utility, Arizona Public Service Co., to cut rates 16 percent. The alliance's membership is made up largely of independent power generators.

"It provides a downward pressure on rates, because utilities have to compete for customers," said Patterson, another Republican former legislator and a former director of the state's Residential Utility Consumer Office. "People say, 'We did this last time and it didn't work' - that's not true."

Arizona's initial competitive rules also prompted a "power plant boom," as independent power producers built several natural-gas plants in anticipation of serving a competitive market, Patterson said.

Questions abound

The rules haven't been written yet, and at this point the Corporation Commission has more questions than answers.

Specifically, the commission has asked stakeholders including TEP, prospective power providers and consumer groups for responses to 18 questions regarding their views on retail competition and its possible effects on ratepayers and utilities.

Stakeholders must submit their comments to the commission by July 15, and responses can be filed by Aug. 16. They have been asked to submit comments and concerns on a variety of related issues, including competition's effect on rates, other benefits or risks. As of Friday, none of the stakeholders had filed comments.

The Arizona rulemaking process is being closely watched by Wall Street analysts who track Arizona's biggest investor-owned utilities, TEP and Arizona Public Service Co.

Paul Fremont, an analyst with Jefferies & Co., noted that APS parent Pinnacle West Capital Corp. in a recent securities filing said it was putting on hold its planned purchase of two generating units at the Four Corners power plant in New Mexico from Southern California Edison - specifically citing the Arizona Corporation Commission's competition proceedings.

Under traditional regulation, utilities recover power-plant costs through rates over time. It is unclear how they would recover those costs in a new, competitive market, though regulators have allowed utilities to recover some of their so-called "stranded costs."

"I think it introduces a large element of uncertainty, which likely becomes an overhang on the Arizona companies until people get some clarity on what's going to happen," Fremont said.

The uncertainty created by the competition talks makes it more imperative that the Corporation Commission signal its intentions as soon as practical, commission members Brenda Burns, Susan Bitter-Smith and Gary Pierce said at a staff meeting last week.

The commission plans to hire a consultant to help sort through the stakeholder comments, research other states' experiences and possibly help with rulemaking, Stump said.

There are still myriad issues to flesh out, including expected effects on various customer classes, the structure of a competitive market, how to overcome the legal issues that sank the old competition rules and the effect of competition on current state mandates for renewable energy and energy efficiency.

"The issues are grand in scale, and we'll see how they come to maturity," said Barnes, of Arizonans for Electric Choice and Competition. "Customers are standing at the door. To the commission's credit, it broke the inertia."

Contact Assistant Business Editor David Wichner at dwichner@azstarnet.com or 573-4181.

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