Joseph KavetskyMembers of the Arizona business community on Tuesday, including the Arizona Chamber of Commerce & Industry, spoke out in support of a proposal by Arizona Corporation Commission Chairman Jim O’Connor and Commissioner Nick Myers to adopt Formula Rate Plans, which advocates say would lead to more predictable rates for ratepayers and would reduce regulatory lag.
Under the plan, utilities must submit an annual update using historical test year data and a valuation of the company to justify rate increases for customers. Unlike the current process, these updates would not require a hearing before the commission for approval.
What are Formula Rate Plans?
Formula rate plans are a method of setting utility rates that uses a predetermined formula to automatically adjust prices based on specific cost factors, enabling regular rate updates without lengthy regulatory proceedings. This approach keeps the utility’s revenue closely aligned with its costs by adjusting rates in response to factors such as fuel prices or operating expenses.
What is regulatory lag?
Regulatory lag refers to the time gap between a utility’s request for a rate increase and the commission’s approval of that request. This delay prevents utilities from immediately passing costs onto ratepayers, which can be a source of inefficiencies.
The view from the Chamber
In a letter to the Corporation Commission the Arizona Chamber wrote, “Bottom line, formulaic ratemaking is a proven regulatory mechanism. 54 utilities in 12 states, including high-growth peers in Georgia and Texas, have retail formulas, while 48 states utilize a FERC transmission formula. If adopted for use in Arizona, formula rates will reduce regulatory lag and preserve Commission oversight through an annual review process of the utilities’ costs to ensure that a provider has not over or under earned.”
Arizona has a fast-growing economy thanks in part to the state becoming a hub of advanced manufacturing in the United States. However, Arizona’s current regulatory environment complicates efforts to address growth challenges and to meet the energy needs of job creators. The state’s reliance on a historic test year model and an extended rate case process creates a significant delay between when utilities invest capital and when they can recover those costs.
What commissioners said
“Customers want this,” Myers said. “They don’t want a massive jump in their rates every three to five years.”
“Let me be very clear: the notion that formula-based rates are bad for customers of utilities is blatantly false,” O’Connor said.
“The policy statement is not requiring anything from our utilities,” Myers said. “It’s not changing any of our existing ACC rules. It’s simply giving the option to the utilities to reduce the number and frequency of the rate cases, which is ultimately a good thing for customers.”
The decision
The Arizona Corporation commission voted to approve the proposal 3-2. O’Connor, Thompson, and Myers supported it, while Tovar and Marquez Peterson opposed.
The policy was approved with two amendments: one requiring utility companies on a formula plan to undergo a full rate case before the commission every five years, unless an alternate schedule is established, and another that modified the language.
Danny Seiden
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