Tucson Electric Power's steep rate-hike request faces pushback

Consumer advocates say the request is too much, too soon after a 2021 rate increase, and Arizona regulators say TEP deserves an increase amounting to less than $4 on monthly home bills.

Renewable-energy advocates say TEP can save ratepayers money, as well as help combat rapid climate change, by accelerating a shift to renewable energy like solar and wind.

Tribal advocates want compensation for the economic impact of early coal-plant closures.

And those are just some of the issues that surfaced at the initial hearing in TEP’s rate case before the Arizona Corporation Commission, held Wednesday at the ACC’s Tucson office.

TEP’s request — which comes after a 6% increase that went into effect in January 2021 — would, starting in September, boost the average monthly bill for residential customers on TEP’s most popular, basic rate plan by more than 12%, or $14.11, down slightly from the company’s original request in June 2022.

Customers on TEP’s basic residential time-of-use rate plan, which charges less for off-peak power usage, would see an average monthly bill increase of $13.48.

Small general service business customers would see an average monthly bill increase of 11.9%, medium general service customers would see an average 12.6% increase and large general service customers would get an average 5.4% increase.

Scores of TEP customers have submitted feedback opposing the increase at a series of public-comment meetings that ended with a session before the formal rate hearing on Wednesday.

‘Epic’ increase

TEP customer Ellen Parrish said at the session that TEP’s rate increase proposal would be devastating to lower-income families and the utility can handle the transition away from coal better.

“I can’t see anyway TEP can spin such an epic rate increase, nearly 12%, as necessary and the best way to handle the shifting energy paradigm,” Parrish said. “For families earning six figures the rate increase won’t hurt, but those could be catastrophic for struggling working families, retirees like myself, and nonprofits; and businesses will certainly pass the cost along, as well.”

She and other commenters said TEP should boost its efforts to transition to renewables.

TEP has committed to generating 70% of its power from renewable resources by 2035 while reducing carbon emissions by 80% and has added significant renewable generating resources.

But the utility but has also invested in new gas-fired generation it says it needs to provide peak power when solar and wind resources aren’t producing enough energy.

Longtime TEP customer Benjamin Nead said solar energy paired with energy storage is the cleanest and cheapest way to generate power.

“It’s time for Tucson Electric Power to finally kick the fossil-fuel habit,” Nead said. “TEP is asking for a rate increase from its customers but doesn’t seem to be making any new commitments to move beyond methane and coal for power generation, and in my eyes that’s unacceptable.”

Recouping costs

In an opening statement, TEP attorney Michael Patten said the company needs the new revenue to cover increased costs, including $1.9 billion TEP spent in the last three years on needed system upgrades.

Besides the challenges of providing service during a pandemic, TEP has faced high inflation, interest rates have increased significantly and supply chains have yet to fully recover from the pandemic, Patten said.

“During the past three years, TEP has worked hard to maintain and to continue to provide reliable service to its customers and has invested in infrastructure to meet the increasing peak demand on its system,” he said, adding that the company’s requested increase would still keep the company’s rate growth lower than the inflation.

At the same time, TEP’s peak demand has increased 6% since the last rate case, and the capacity of Western power markets continue to tighten, Patten said.

“TEP continues to need to address the increasing challenges of the tightening Western capacity markets, as well as the increasing demand on its system,” Patten said. “Addressing these issues will require larger projects with significant capital costs.”

“To meet these needs requires a financially strong utility that can attract the necessary capital to put in place, to keep the lights on,” Patten said. “And keeping the lights on as economically as possible in the long term requires some foresight, and a willingness not to be penny wise and pound foolish at this time.”

Patten said much of the rate request will go to fund investments TEP has made to transition away from coal-fired generation, including the $370 million Oso Grande Wind project in New Mexico, which was turned on in 2021.

Profits and capital

Patten said regulators need to approve a higher allowable return on equity — a key measure of utility profitability — to help keep borrowing costs low to save the company and its ratepayers money.

Return on equity became a major issue in Arizona Public Service Co.’s last rate case in 2021, when regulators cut the company’s allowed return to 8.7%, partly to penalize APS for poor customer service. APS appealed the ACC ruling and in mid-March, the Arizona Court of Appeals said that part of the profit cut was improper.

Since its initial filing, TEP has lowered its requested return on equity from 10.25% to 9.75%, which Patten said is slightly lower than the average return on equity awarded to investor-owned utilities in 2022 and will help the company maintain its credit rating. Regulators approved a 9.35% return on equity in TEP’s last rate case.

TEP also has proposed a new mechanism to begin recouping costs for large new projects put into service between complex rate cases, similar to what the ACC has allowed for small water companies to avoid costly rate cases.

Patten said the company’s proposed “system reliability benefit” mechanism will help mitigate “regulatory lag” for large capital projects that improve grid reliability and “help to smooth out the lumpy rate increases that those large capital expenditures can create,” while giving the company a way to pass through to customers any tax credits related to those projects.

Cutting back

Wednesday’s proceedings kicked off several weeks of evidentiary hearings before ACC administrative law judge Belinda Martin, who will weigh TEP’s request and testimony filed by parties to the case and ultimately make a recommendation to the full Corporation Commission for a final decision this summer.

The commission’s Utilities Division staff has proposed slashing TEP’s proposed rate increase by nearly 75%, to an average of $3.77 per month or an increase of 3.1% for home customers on the basic rate plan. The average monthly bill for customers on the residential two-part time-of-use rates would increase by $6.05, or 5.1%.

The commission staff supports TEP’s request for a $2 increase in the basic monthly service charge, to $15 per month for most home customers, which customers must pay no matter how much energy they use.

The Residential Utility Consumer Office, a state agency that represents ratepayers in rate cases, has recommended cutting TEP’s rate request by nearly one-half, which would still result in a monthly increase of about $10 per month for most home customers.

But RUCO wants to limit the increase in the residential basic service charge to 55 cents, to $13.55 per month.

RUCO attorney Jon McCarty said TEP’s requested increase would add another burden on residential ratepayers, especially after TEP recently filed separately to recover another $148 million in fuel and purchased-power costs through a surcharge that is reset periodically.

“TEP customers are not in a good situation here,” McCarty said in RUCO’s opening statement. “And given the potential rate increases, the commission must prioritize the ratepayers interests in this rate case.”

Among other issues in the case:

Coal compensation

Community groups based in the Four Corners area want TEP and other utilities to provide funding to help communities impacted by the early closures of coal-fired power plants on tribal lands.

Four groups intervening in TEP’s rate case — the San Juan Citizens Alliance, Dine C.A.R.E., TO NizhOni Ani, and the Black Mesa Trust — cite TEP’s partial ownership of the now-closed Navajo Generating Station and the San Juan Generating station in Arizona and the Four Corners power plant in New Mexico, which is partly shut down.

TEP has said it will follow the lead of other coal-plant owners in determining possible future transition funding for communities affected by coal closures but has opposed including it in the pending rate case.

Boosting batteries

TEP must do more to support rooftop solar and home energy storage, said Court Rich, an attorney representing the Arizona Solar Electric Industries Association.

Rich said the group has proposed as part of the rate case that TEP adopt a “bring your own device” program that offers compensation to customers who buy their own home battery systems.

“That compensation we provide that customer is less than the cost that the utility would have otherwise had to incur if it bought its own battery or had to procure peak power those times, so this is just a way to save money,” Rich said.

Buy-through power

Two independent energy producers want TEP to improve and expand a pilot energy “buy-through” program, known as MP-EX for “Market Pricing-Experimental” approved in the last rate case that allows large industrial customers to buy power from independent power producers.

Representatives of Calpine Energy and NRG say the program is too restrictive.

The ACC staff has recommended filing a report on the MP-EX program before making and changes or expanding the program

Low-income help

TEP’s proposal would increase the discount on its Lifeline rate plan for customers making up to 200% of the federal poverty level by $2, from $18 to $20.

Tim Hogan, an attorney representing the low-income advocacy group Wildfire, said that while that offsets the proposed increase to the basic service charge, TEP should look at changing the program.

Hogan, of the Arizona Center for Law in the Public Interest, said TEP should consider setting up two tiers of customers based on income, with customers of least means getting more help, or establishing a discount of 25% per bill rather than the flat $20 discount.