APS Summarizes Its Responses to ACC Deregulation Questions

July 19, 2013

The Arizona Corporation Commission (ACC) is exploring the potential in Arizona for electricity deregulation. The ACC asked stakeholders to respond to a series of questions about the issue. Below is a summary of the answers we filed on July 15. You may also wish to review the full 64-page response.

Question 1.        Will retail electric competition reduce rates for all classes of customers—residential, small business, large business and industrial classes?

No. All customer classes have not experienced reduced rates in restructured states and typically only customers well positioned to exploit the market model actually save money. Average rates show residential rates in restructured states are 26% higher than those in regulated states.

Question 2.        In addition to the possibility of reduced rates, identify any and all specific benefits of retail electric competition for each customer class.

Proponents of deregulation argue that deregulation would spur technology advancements. However, there is little evidence to support this claim.

Retail energy providers only focus on innovations that bring profits. Some of these include bundling of services, pricing schemes and billing preferences.

Question 3.        How can the benefits of competition apply to all customer classes equally or equitably?

There is no workable way to ensure that benefits or costs apply to all customer classes equitably; that goes against the very nature of a competitive market.

Question 4.        Please identify the risks of retail electric competition to residential ratepayers and to the other customer classes. What entity, if any, would be the provider of last resort?

Retail competition exposes customers to price increases, price volatility, loss of reliability, loss of regulatory oversight and prices that no longer reflect many public policy goals.

The “provider of last resort” (POLR) serves as the power supplier for customers who don’t choose an alternative supplier or who lose their alternative supplier. This is typically the incumbent utility.

Question 5.        How can the Commission guarantee that there would be no market structure abuses and/or market manipulation in the transition to and implementation of retail electric competition?

The Commission cannot guarantee against market structure abuses or market manipulation in the transition and implementation of retail electric restructuring for two reasons: (1) the competitive wholesale marketplace would not be under the Commission’s jurisdiction, and (2) such abuses and manipulation are both profitable and difficult if not impossible to eliminate.

Question 6.        What, if any, features, entities or mechanisms must be in place in order for there to be an effective and efficient market structure for retail electric competition? How long would it take to implement these features, entities, or mechanisms?

A functioning Regional Transmission Organization (RTO) and wholesale market is a prerequisite to full retail competition. An RTO is generally responsible for: (1) operating the regional bulk electric power system; (1) developing, overseeing, and administering the wholesale electricity marketplace; and (3) managing the power system planning processes. If an RTO was created, it would need numerous regulatory approvals including negotiations and filings with the Federal Energy Regulatory Commission (FERC) and other reliability governing bodies. In addition, processes for designing the market and determining competition rules must be addressed. Overall, the initial formation of an RTO and establishment of energy, ancillary and potentially capacity markets and related financial hedging tools should be expected to take at least five years and an investment in the hundreds of millions of dollars.

Question 7.        Will retail electric competition require the divestiture of generation assets by regulated electric utilities? How would FERC regulation of these facilities be affected?

Divestiture was recommended by proponents of deregulation largely to avoid the potential for market power or market abuses by incumbent utilities. While the proponents of restructuring argued that divestiture was essential for retail competition to be effective, not all states that restructured required regulated utilities to divest their generation.

A previous legal decision found that mandatory generation divestiture is unconstitutional in Arizona.   Any divestiture would need to be voluntary on the part of incumbent utilities or require a constitutional amendment for mandatory divestiture.  

Question 8.        What are the costs of the transition to retail electric competition, how should those costs be quantified, and who should bear them?

The costs involved in restructuring the electricity industry will be substantial, likely in the billions of dollars, and will ultimately be paid by customers.

Question 9.        Will retail electric competition impact reliability? Why or why not?

Retail electric competition has the very real potential to significantly harm reliability in a number of ways. For example, in a deregulated market, regional wholesale markets and regional transmission organizations (regulated at the federal level) replace Commission-regulated utility Integrated Resource Planning and the oversight of all generation additions and retirements.

In deregulated states, existing power producers focus on short-term financial gains, instead of the long-term needs of the region being served. Because of this, they don’t have incentives to operate with a comfortable reserve margin. In fact, these suppliers make windfall profits when there are power shortages. This is evidenced by Texas’ reserve margins falling well below their target this summer.

Question 10.      What are the issues relating to balancing area authorities, transmission planning, and control areas which must be addressed as part of a transition to retail electric competition?

The establishment of an RTO is a prerequisite to the introduction of full retail electric restructuring in Arizona.  It is the RTO and the established rules that would handle the functions and responsibilities for balancing area management, transmission planning and control area coordination.

Question 11.      Among the states that have transitioned to retail electric competition, which model best promotes the public interest for Arizonans? Which model should be avoided?

From APS’s perspective, there is no model for restructuring that is working well. There is no existing retail competition model that can be used to adequately address the unique characteristics of the electric industry in Arizona and promote the public interest of Arizonans.

Question 12.      How have retail rates been affected in states that have implemented retail electric competition?

Rates in deregulated markets are 26% higher than in regulated markets, and rates have risen more, and more quickly, in deregulated markets (60%) than in regulated markets (48%) from 1990 through 2011.

Question 13.      Is retail electric competition viable in Arizona in light of the Court of Appeals’ decision in Phelps Dodge Corp. v. Ariz. Elec. Power Coop., 207 Ariz. 95, 83 P.3d 573 (App. 2004)? Are there other legal impediments to the transition to and/or implementation of retail electric competition?

The Phelps Dodge decision found that competitively set electric rates violate Arizona constitution.  If all the problems of Phelps Dodge are somehow solved, ignored or simply wished away, there are other significant legal issues left unaddressed. The most obvious is that of rate and service discrimination. The Arizona Constitution prohibits discrimination in pricing or services. Yet the ability to segment markets and tailor prices to individual customer demands is part of a restructured market.

Price transparency is another issue. Arizona law requires all prices be open for public inspection. Competitive electric service providers are notoriously secretive about their individual pricing schemes.

Question 14.      Is retail electric competition compatible with the Commission’s Renewable Energy Standard that requires Arizona’s utilities serve at least 15% of their retail loads with renewable energy by 2025? (See AAC. R14-2-1801 et seq.)

(14 and 15, answered jointly)

Question 15.      Is retail electric competition compatible with the Commission’s Energy Efficiency Standard that requires Arizona’s electric utilities to achieve a 22% reduction in retail energy sales by consumption by 2020? (See AAC. R14-2-2401 et seq.)

Because Integrated Resource planning is effectively eliminated in restructuring, with market forces deciding what resources get built, investment in energy efficiency and renewable resources cannot be optimized, which will occur at the expense of ratepayers and state economies.

Question 16.      How should the Commission address net metering rates in a competitive market?

Fundamentally, the issue of net metering is an electricity generation issue. Therefore, one potential approach is for the competitive retail supplier to provide a credit to the net metering customer based on the supply cost that they would have otherwise paid the retail supplier during those hours. If the Commission pursues retail competition further it would need to revisit its net metering policies. In fact, should net metering become a significant portion of electric utility load, it would be appropriate for the Commission to reevaluate its policies in advance of retail competition in order to gather evidence on the significance of cross-subsidies and cost-shifting under the current net metering tariff.

Question 17.      What impact will retail electric competition have on resource planning?

The introduction of full-scale retail competition and the reliance on wholesale capacity markets to drive major capacity decisions that are now made by regulated entities effectively eliminates resource planning and all of the benefits that it provides.

Question 18.      How will retail electric competition affect public power utilities, cooperatives and federal controlled transmission systems?

Currently, APS does not believe public power utilities and federally controlled transmission systems can be required to participate in a competitive retail electric market by the ACC. If they choose not to participate in the competitive market, there will be little change. If public power utilities and federally controlled transmission systems choose to participate in a competitive market, such entities would be subject to FERC jurisdiction.

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