Local opinion: Billed to you, given to Blue

This is a response to Chris Norman’s March 12 op-ed.

Project Blue is a bad deal for everyone, including TEP, and the reason is simple: It shifts major costs and risks from private investors onto everyone else.

Data centers use enormous amounts of electricity. Right now, new generation is very expensive — far more expensive than existing power resources. Under TEP’s current rate structure, those higher costs are spread across all customers.

That creates a cross-subsidy. To illustrate: if existing power costs $10/MW and new power costs $30/MW, combining them equally produces a blended cost of $20/MW. At $20/MW, Project Blue would pay less than the true market cost of the power it requires, while existing ratepayers would pay more than the cost of the power they actually need. In effect, ordinary customers would subsidize Project Blue.

And ordinary customers do not need that new, expensive generation. According to TEP’s own regulatory filings, residential demand has been relatively flat for years because of efficiency gains and rooftop solar, even with population growth, electric vehicles, and rising temperatures. Project Blue is what creates the need for new generation.

Other Arizona utilities have started to confront this problem. APS and SRP — the two largest electric utilities in Arizona — have begun adopting new or revised data center rates and contract terms designed to reduce or prevent cross-subsidies. TEP has not.

The stakes are enormous. Fortis, TEP’s parent company, recently told investors that new generation for Project Blue could cost up to $2 billion. TEP then admitted under oath before the ACC that its first contract with Project Blue does not seek to recover any marginal generation costs — whether new or existing resources — but future contracts might.

That means rate increases are not just possible. They are built into the deal.

Nor is this a future problem. TEP’s current 14% rate increase request already includes generation resources it intends to dedicate to Project Blue. That means you are paying for them now and will pay again when they must be replaced at market cost to serve their original purpose.

The contract creates another major risk: stranded costs. TEP’s agreement with Project Blue lasts only ten years. But generation assets are typically depreciated over much longer periods — often 30 years or more. That mismatch is a problem. If Project Blue leaves, downsizes, or renegotiates before those assets are paid off— as the 10-year term makes entirely foreseeable — TEP and its remaining ratepayers could be left holding the bag.

That is not just a bad deal for customers. It is a bad deal for TEP that could result in insolvency.

The ACC should have rejected this contract and sent the parties back to the drawing board. Instead, all but one commissioner — Rachel Walden — voted to approve it. Her dissent is worth a read if you have the time.

And, despite TEP admitting to these issues before the ACC, its public relations team continues to claim that Project Blue is a great deal that will save ratepayers money.

So what would a good deal look like?

First, it would prevent cross-subsidies by requiring the data center to pay the marginal market cost of any generation it requires — either through special rates, additional premiums, or direct financing.

Second, it would prevent stranded cost risk by requiring security guarantees sufficient to cover the cost of whatever generation it puts at risk of abandonment.

Ideally, those protections would be built into rates rather than negotiated contract by contract. But until TEP takes these issues seriously, contracts are the only tool available.

Under the current contract and TEP’s current rate structure, Project Blue is not economic development. It is a transfer of cost and risk from private investors onto everyone else.