Arizona opinion: Get ready for utility rate increases every year

Arizonans should be skeptical of anyone promising to end utility “rate shock,” especially when their so-called solution is a policy that makes onerous rate increases automatic.

Arizona Corporation Commissioner Rachel Walden recently voted for a formula rate plan for UNS Gas. Other utilities are lining up to get approval. In her recent op-ed, Walden argues these plans will smooth out utility bills and protect consumers. But the reality, backed by evidence from other states, tells a very different story.

Formula rate plans don’t eliminate rate increases. They eliminate accountability.

Walden’s central claim is that Arizona’s current system leads to sudden, painful spikes in utility bills. But those increases come after a rigorous, public process. In full rate cases, utilities must justify every dollar, under oath, with the opportunity for regulators, consumer advocates and the public to challenge them.

Formula rates replace that scrutiny with autopilot.

Instead of comprehensive reviews, rates are adjusted annually through a pre-set formula. That means less time, less transparency and fewer opportunities to catch errors or abuse. Oversight doesn’t just depend on whether a review happens. It depends on how thorough that review is, and under formula rates, that rigor is weakened.

Even more troubling: if the formula is flawed, those errors get baked into the system for five years until a full rate case. They can’t be meaningfully fixed in annual reviews. Consumers are stuck paying the price.

This is why the Residential Utility Consumer Office and Attorney General Kris Mayes are asking the Corporation Commission to reconsider this first-of-its-kind rate plan and its new policy, which allows all monopoly utilities to take advantage. They point out these plans benefit the companies and shift significant risk to ratepayers.

Make no mistake, formula rates are a gift to the utilities — one that the Corporation Commission has given without going through the normal rule development process.

Walden points to states like Mississippi, Arkansas and Louisiana as success stories. But the evidence from those states doesn’t support her argument.

At a Corporation Commission’s October 2024 workshop, an expert hired by Corporation Commission staff found there are “no real-world examples nor evidence that shows ratepayers have received meaningful benefits” from formula rates. They certainly haven’t seen lower rates.

In Arkansas, regulators have warned formula rates “do little to incentivize a utility to control its costs.” In that state, capital spending by the largest electric utility — where a utility earns a profit — has nearly doubled since 2012.

In Louisiana, customers have seen average annual increases of more than 5% for nearly a decade.

That’s not stability. That’s a steady upward climb beyond most people’s income growth.

Walden also argues the current system allows utilities to “game the system” using outdated data. But formula rates don’t solve that problem.

Utilities still propose their own spending and revenue needs. The incentive to inflate those numbers doesn’t disappear. What does disappear is the time and scrutiny needed to challenge them.

And if affordability is truly the goal, there’s a far more direct solution that Walden doesn’t mention: Reduce utility profits.

Arizona’s largest monopoly utilities are thriving, and their executives and shareholders are reaping the rewards. Arizona Public Service reported more than $618 million in profit last year, with roughly 13% of customer bills going to shareholders. Tucson Electric Power brought in more than $283 million, with more than 16% of your bills becoming their profits.

These are guaranteed returns from captive customers.

If the concern is keeping bills affordable, why not start there? Why not lower the return on equity for monopoly utilities to reflect their lower risk, rather than locking in a system that virtually guarantees annual increases?

Arizonans deserve reliable service at fair prices. Fairness requires vigilance and accountability by the Corporation Commission, not less oversight of the state’s largest monopoly corporations.

Formula rate plans don’t end rate shock. They normalize it.

And that’s a plan Arizona consumers can’t afford