Arizona ushers in changes in direction of electric competition

PHOENIX, Ariz., August 29, 2002 — Late Tuesday, after a full seven hours of debate, the Arizona Corporation Commission voted to change the course of deregulation in Arizona.

The changes arose out of a process that began in December 2001 when Commission Chairman Bill Mundell requested that the Commission undertake a full review of electric competition in light of changes in the marketplace.

“Many of the representations made to the Commission by the proponents of deregulation when the original deregulation plans were enacted have proven to be wrong,” Chairman Bill Mundell explained. “Arizona utility consumers rely on the Commission to protect them from price volatility, unreliable service and other failures that can occur during a transition to deregulation. The Federal Energy Regulatory Commission (FERC) has been ineffective in providing that protection, therefore we must.”

A key provision of Arizona’s electric competition plan required Arizona Public Service (APS) and Tucson Electric Power (TEP) to move their power plants into a separate subsidiary or sell them to another unrelated company. The Commissioners agreed to eliminate the divestiture requirement.

The purpose of the asset transfers was to ensure that the majority of the power necessary to serve Arizona customers was purchased on the wholesale market. Price spikes on the wholesale market, transmission constraints and uncertainty in the role that the federal government will play in constructing a wholesale market caused the Commission to retract the mandatory divestiture provision.

There was much discussion on why closing the door on mandatory divestiture would end any continuing costs for ratepayers. APS rates have gone down 7.5 percent resulting from a 1999 settlement with the Commission. The settlement requires APS to file a rate case in 2003, which will put the case on track for a decision in 2004 when the settlement expires.

TEP’s rates are frozen until 2008. The company is required to file its rate case in 2007. Both TEP and APS incurred costs preparing for divestiture. Whether those costs will mean higher prices for ratepayers remains to be seen. What is certain is that those transition costs will now stop accumulating. A variety of factors go into the ratemaking process in which the company bears the burden of proving that any specific costs should be borne by ratepayers.

The Track A proceedings, as this docket became known, dealt with four key issues that would determine the course of future Commission proceedings. They are: Market Power, Divestiture, Code of Conduct/Affiliate Transactions and Jurisdictional Issues. Contrary to earlier, erroneous, news reports, residential competition was not included in yesterday’s decision.

All four issues were discussed thoroughly in a recommended opinion and order drafted by Administrative Law Judge Lyn Farmer. (Access Farmer’s July 23, 2002 draft order at

Tuesday’s proceedings resulted in several substantive amendments, a number of which were offered verbally. A final order incorporating the amendments should be posted in the same location by next week.

Some of the amendments included:

* Clarification that APS and TEP have market power today in their Phoenix, Yuma and Tucson load pockets. Full divestiture would limit the jurisdictional ability of the Commission to protect Arizonans from market power abuses. The Commission found that mandatory divestiture at this time and under these circumstances, was not in the public interest.

The Commission added a requirement that APS file a separate application to transfer generating assets from Pinnacle West Energy Corporation to APS. The Commission will evaluate the merits of this transaction in a future docket. The Commissioners debated over the issue of whether sufficient evidence existed to order APS to transfer the new West Phoenix units and new Red Hawk generating assets at this time. Pinnacle West stated that the company’s goal, for financing purposes, was to “unify” their generating assets in the same place.

The Commission directed the parties to continue working on plans for a competitive procurement process through the “Track B” proceedings. This process will require competitive solicitation for a significant portion of APS and TEP load, thus ensuring Arizona ratepayers the economic and environmental benefits of recently-built, newer, cleaner power generation. APS and TEP will begin the competitive solicitation process for summer power needs no later than March 1, 2003.

An amendment added clarification that the market power findings included in the final order are for the purposes of resolving the mandatory divestiture issue. The Commission did not make its findings about FERC’s determination of market power for use in a FERC proceeding or other forum. Ordering APS and TEP to work on a plan to address concerns about reliability must-run power plants (RMR).

There were concerns that these plants, located within transmission constrained areas, are being relied upon – or could be relied upon in the future – instead of building transmission lines to alleviate the constraints. An amendment requires the utilities to develop a study process to resolve these concerns.

At one point, Commissioner Spitzer admonished the parties in the case, saying “the ratepayers, with all due respect, are more important than shareholders.” Spitzer was explaining his amendments to the order, which were “designed to protect ratepayers and provide certainty in the regulatory environment.”

Spitzer explained his vote on all the Track A issues by saying: “We have embarked upon a path that will eliminate a serious financing issue affecting both companies [TEP and APS]…and which protects ratepayers (from) potential costs arising from our justifiable ‘second look’ at electric deregulation. Finally, the whole point of the move to electric competition was to provide ratepayers with cheaper, cleaner power. That goal remains in our decision.”

Commissioner Jim Irvin said that the order develops a plan “that will assure reliability, but most importantly, price stability” for Arizona electric customers.

Commissioner Irvin and his colleagues cited California’s deregulation plan, which also included mandatory divestiture, as one of several pitfalls that led to price hikes for consumers.

“This should now set the course for what is vitally necessary, which is a process that protects ratepayers,” Irvin said, “from the kind of disaster that befell California utility customers.”

“When I started this process, I said that we had to reevaluate deregulation. I wanted to make sure that Arizona residential and small business customers were protected from price spikes and blackouts as occurred in California,” Chairman Mundell explained. “We want the benefits of a competitive market with cleaner and cheaper power. We need to ensure that we have a viable wholesale market without price gouging, volatility and market manipulation – this order is a key step toward that goal.”

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