Customers of Tucson Electric Power Co. will see their monthly home bills rise by an average of just over $5 per month, or about 6%, while business customers will see a decrease starting with the new year, after state regulators approved new rates for the utility late Tuesday.
The Arizona Corporation Commission rejected proposals to delay the rate increase to ease customers’ financial burden during the COVID-19 pandemic.
But more TEP customers will qualify for the company’s low-income discount rates as the utility panel voted to increase the income threshold for such programs.
And TEP business customers will see average rate decreases as regulators move to reduce the subsidies business customers have long made to residential rates.
The new rates will increase the average monthly bill for TEP residential customers on its most-popular basic rate plan by about $5.20 per month over the year. The actual impact will vary monthly with usage, and customers who use more energy will see a larger increase.
For typical residential customers using TEP’s Time-of-Use, Demand or Demand Time-of-Use pricing plans, the proposed rates would increase average bills by $6.01 per month compared to 2020 bills, TEP said.
To help low-income customers, monthly discounts under TEP’s Lifeline program will increase from $15 to $18 and will be available to families with household income up to 200% of the federal poverty level – an increase from the previous 150% cap.
Most TEP business customers are expected to pay lower bills under the new rates, the company said.
The average bill for a typical Small General Service customer on TEP’s basic pricing plan is expected to decrease by about $14 per month compared to 2020 bills. Decreases are expected to average about $50 monthly for a typical Medium General Service customer and $560 for businesses that use TEP’s Large General Service pricing plans, though TEP noted the savings will vary widely depending on usage.
RATE CASE TIMING
In the rate case filed by TEP in April 2019, the utility requested new rates that would boost revenues by $99.5 million and — partly offset by a $38.9 million reduction in charges for fuel costs — to start recovering $1.2 billion in system improvement costs since its last rate case.
That would have increased the average monthly residential bill by about $7, or about 7%, including a proposed $2 increase in the current $13 monthly basic service charge paid by most customers.
But the commission’s staff and consumer advocates had pushed for a much smaller increase and successfully cut TEP’s allowed expenses and profit and kept the basic monthly charge at $13.
The new rates were approved on a 3-2 vote, with Republican Commissioner Lea Marquez Peterson and Commissioner Sandra Kennedy voting against the final order after Marquez Peterson’s amendment to delay the effective date of the increase by nine months to Oct. 1 failed.
Marquez Peterson, the only Tucsonan on the ACC, and Kennedy, the panel’s lone Democrat, said it was not appropriate to increase rates when many families are struggling with the financial impact of COVID-19.
TEP President and CEO David Hutchens told commissioners during the virtual open meeting that the utility’s rate case had already been delayed by six months and delaying the rate increases would cost the utility about $50 million it would have to recover later.
He cited the current state-ordered moratorium on utility disconnections during the pandemic and noted that the company has doubled its donations to low-income assistance programs to $300,000, and sister utility UniSource Energy Services has donated $1 million to local COVID-19 relief efforts.
TEP says the increase will help cover the cost of flexible new generating resources, more resilient energy systems and other upgrades that are already serving customers.
“TEP is on track to provide 30% of our power from renewable resources next year with rates that reflect our commitment to safe, efficient operations,” said Hutchens, who is stepping down as chief at TEP at the end of the year to become CEO of TEP’s Canadian parent, Fortis Inc.
“We’re now well-positioned to provide affordable, reliable and sustainable service for years to come,” he said.
The new rates, originally requested more than 20 months ago, are projected to produce a revenue increase that amounts to less than 1% per year since TEP’s last base rate increase in February 2017, the company said.
“We’re doing everything possible to keep our service affordable as we build a smarter, stronger grid with lower emissions and more wind and solar resources,” TEP President and Chief Operating Officer Susan M. Gray, who will succeed Hutchens as CEO on Jan. 1, said in prepared remarks.
In its rate filing, TEP said its residential electric rates have increased about 1% per year, on average, over the past 20 years, and when adjusted for inflation over that period, its rates have actually fallen by about 1% per year.
But from 2010 to this year, TEP’s average residential rate rose an average 2.7% annually, from about 9.6 cents per kilowatt hour to 12.2 cents in 2018.
COMMUNITIES IN NEED
A provision in the rate decision pushed by Kennedy directs TEP to participate in planned stakeholder workshops examining how utilities can help the Navajo Nation and the Hopi Tribe and other communities hit hard economically by the retirement of coal-fired power plants such as the Navajo Generating Station, which was shut down last year.
TEP had a minority ownership in the plant, which served several utilities in the region and was operated by the Salt River Project.
“Our transition to cleaner, less carbon-intensive resources should include investments in the sustainable economic growth of the communities that have supported our generating operations,” Gray said.
During an open meeting that ran into Tuesday night, Marquez Peterson said the rate increase should be delayed until October to help customers during the pandemic, vowing to vote against the rate proposal if the effective date wasn’t postponed.
“I understand this rate case before the pandemic, but struggle with the impact on customers in this pandemic,” she said.
Kennedy read several letters from consumers relating how they are struggling to pay their bills because of financial problems caused by COVID-19.
But Hutchens said delaying the new rates would be unwise and likely lead to an immediate downgrade of the TEP’s credit rating, which would lead to higher borrowing costs that would ultimately be passed on to ratepayers.
“By the time we hang up, we will have a downgrade message in our email,” Hutchens said during the commission’s virtual open meeting where the proposed delay failed on a 2-3 vote.
Hutchens also objected to a proposal by Commissioner Justin Olson to cut TEP’s allowed return on equity — a critical measure of profit based on the value of a utility’s assets.
TEP had sought a return on equity of 10%, up from 9.75%, but after rate-case hearings an administrative law judge had recommended a return of 9.35%.
Olson wanted to cut that to 8.97%, citing findings by the state Residential Utility Consumer Office that TEP had overstated its market risk and future borrowing costs.
But Hutchens said Olson’s proposal would have a “severe impact” on TEP by raising its borrowing costs as it invests increasingly large sums in the transition to cleaner solar and wind power generation.
“It will absolutely cause our debt costs to increase, which will be passed along to customers, which means we can’t do as much with renewable energy as we have in our resource plan,” he said, adding that even the 9.35% was too low.
Olson’s proposal failed to attract support of the other commissioners.
Another failed proposal by Olson would have greatly expanded a pilot “buy-through” program allowing commercial customers to buy power from third-party generators.
“All customers ought to have the right to participate in that program,” said Olson, who proposed adopting an expansive buy-through plan floated by a group of third-party power marketers based on a pilot program adopted by Arizona Public Service Co.
But TEP attorney Michael Patten said the proposal went far beyond the APS pilot and was inappropriate for a utility of TEP’s size, estimating lost sales under the Olson proposal would shift an estimated $11 million in costs to other customers.
Commissioners Kennedy and Boyd Dunn said the proposal was a form of retail competition that requires more discussion on a statewide policy.
The Corporation Commission adopted rules to make retail power markets competitive in 1999 but dropped the effort after a state appellate court found the rules unconstitutional.
The commission also voted down an amendment offered by Kennedy to take two of TEP’s most recent natural gas-fired additions to its generating portfolio out of the rate base used to determine rates.
She cited research by the Sierra Club that TEP’s $165 million purchase under option of the 550-megawatt Gila River Unit gas-fired power plant, and a 180-MW bank of gas reciprocating internal-combustion engines at the H. Wilson Sundt power plant in Tucson were imprudent and the company could have saved money in the long run by adding more solar farms with battery storage.
But TEP says the quick-starting plants are a key part of its plan to add massive amounts of renewables, since they can quickly ramp up to supply power as the sun goes down or when the wind doesn’t blow.
Though both the Gila River and Sundt plants went into initial service last year, after the test year of 2018 used to set rates in the case, TEP said that it had a right to begin recovering their costs.
Hutchens said TEP analyzed the costs of adding solar with batteries instead of the gas plants and found that the comparable amount of renewables, plus supplemental power, would cost hundreds of millions of dollars more than the gas plants he described as a bargain.