Arizona regulators have ushered in a new form of ratemaking using annual pre-determined formulas, with the stated benefit of solving “regulatory lag” and high rate increase shocks – but not everyone is convinced that customers will benefit.
The Arizona Corporation Commission (ACC) voted 3-2, on Tuesday to approve an amended version of the Arizona Corporation Commission Policy Statement Regarding Formula Rates. The policy statement allows regulated utilities to propose formula rates in future rate cases. Under this approach, the ACC reviews and accepts as the rate a pre-determined formula for calculating the utility’s cost of service, including definitions of inputs to that formula and a process for updating rates every year as the utility’s costs change. Utilities regulated by the ACC will have the option to adopt this new process or stick with the state’s traditional ratemaking process.
The ACC said that formula rates will still be monitored closely to ensure that the utility does not over-earn relative to the cost of service for providing service plus a “reasonable return” on invested capital. The Policy Statement Regarding Formula Rates provides a new option to calculate a utility’s rate base, and does not forego the current use of a historical test year in the determination of utility ratemaking, the ACC said.
Supporters of the policy argue that it will help reduce “regulatory lag,” or the time between a rate increase request and subsequent approval or denial. Additionally, ACC Commissioner Nick Myers said that customers “don’t want a massive jump in their rates every three to five years,” which he argued is the case with the current ratemaking process, Chamber Business News reports.
Opponents of the new policy include the Arizona attorney general, the AARP, and consumer rights advocates, 12 News reports. Attorney Dan Pozesfsky of RUCO, the state agency representing utility customers, told 12 News that “trying to implement formula rates through a policy statement rather than through rules is inappropriate, illegal and in this case denies due process.”
“The policy statement does not require anything from our utilities,” Myers said, 12 News reports. “It is not changing our existing ACC rules. It is simply giving the option to utilities to reduce the number and frequency of rate cases which is ultimately a good thing for customers.”
In October, the ACC invited Michael Deupree of Acadian Consulting Group to discuss formula rates, 12 News reports. However, Deupree said that “formula rate plans have resulted in large rate increases with very few rate decreases and no measurable improvement in reliability of service.”
Commissioners Anna Tovar and Lea Marquez Peterson were the two dissenting votes, maintaining that the process was rushed and lacked transparency. Attorney General Kris Mayes also lamented that the community was given less than 10 business days to digest the new policy.
“There is probably still a way to implement formula rates while still complying with the constitution and case law,” Tovar said. “But this should be done through rulemaking procedures.”
“I would much prefer to see a full public rulemaking process which would ensure the details are thoroughly vetted through a transparent process that we and the public understand the impact and any unintended consequences for ratepayers,” Marquez Peterson said.
