Tucson Electric Power home customers could see their monthly bills rise by as much as $13, under the company’s proposed plan to recover about $108 million for higher wholesale power and fuel costs.
In a filing with the Arizona Corporation Commission, TEP proposed the increase to a surcharge used to offset higher than expected costs for power the utility buys on the wholesale market and for natural gas used to fuel its own power plants.
The Corporation Commission will decide the eventual change to TEP’s so-called “Purchased Power and Fuel Adjustment Cause,” or PPFAC, which is adjusted up or down annually to reflect actual costs and the latest forecast of future costs.
The PPFAC rate, which is applied to each customer’s bill based on usage per kilowatt hour, results in a surcharge when a utility’s costs are higher than collections, or a credit when costs are lower than expected.
TEP agreed to defer recovery of its excess costs in 2020 and 2021 to help customers survive the economic havoc caused by the COVID-19 pandemic.
As a result, TEP accumulated $18 million in excess costs for purchased power and fuel it would have normally collected in 2021, the utility said in a filing with the Corporation Commission.
The other $90 million in cost recovery TEP is seeking stems from spiraling natural-gas and wholesale power costs since 2019, including an average 88% increase in gas costs in 2021 and a 149% spike in wholesale power costs at the Palo Verde Nuclear Generating Station transmission hub last summer.
Tight power supplies in the Southwest and uncertainty over the ability to buy power from California and the cost trend prompted TEP to lock in summer power-purchase contracts, the utility said.
Unplanned power-plant outages also contributed to higher purchased-power costs, TEP said.
Weather events such as the record-setting heat wave last June and winter storm Uri in Texas during February 2021 led to record-high natural gas and power prices, “adding unforeseeable costs,” the utility said.
Surcharge impact on TEP customers
The utility has proposed three options to recover the under-collection of the PPFAC surcharge, including one option to recoup the entire $108 million in 12 months that would increase the average residential customers’ monthly bill by $12.68, based on average household usage of 797 kilowatt hours.
A second option would recover $72 million of the surcharge shortfall over 18 months, deferring $36 million in collections to 2023 and increasing the average home customer bill by $9.27 per month.
A third option would collect an additional $54 million over 24 months and defer $54 million in recovery to 2023, resulting in an average $7.56 monthly bill increase.
Last week, the Corporation Commission Utilities Division staff recommended that the five-member panel approve TEP’s second collection option, which would defer some costs and result in a $9.27 monthly surcharge increase for the average home customer.
The Corporation Commission is scheduled to consider the TEP surcharge at its next open meeting on April 12.
Higher power bills could lie ahead
TEP is willing to accept the longer 18- or 24-month cost recovery period “as we recognize that our customers continue to face financial challenges and a longer recovery period would reduce bill impacts,” TEP spokesman Joe Barrios said.
“However, it is crucial that we recover these fuel and purchased power costs in a timely manner,” Barrios said. “Shifting costs further into the future would only lead to higher costs and higher bill impacts later for customers.”
The costs caused by unplanned power-plant outages were related to various causes, Barrios said, including the collapse of a cooling tower at the San Juan Generating Station in June and a fire at TEP’s H. Wilson Sundt Generating Station in Tucson in September.
Barrios noted that adjustor mechanisms like the PPFAC are used in all 50 states, and also convey reductions in fuel and wholesale power costs.
“TEP customers have received bill credits in recent years through this mechanism,” he said.
TEP’s proposal has met some resistance, though few comments have been filed in the matter so far.
The Arizona Residential Utility Consumer Office in comments filed March 8 called TEP’s proposal “remarkable,” noting that at $108 million the request is slightly less than double the amount of $57.9 million authorized by the Corporation Commission in TEP’s most recent rate case, decided in December 2020.
RUCO, a state agency that represents consumers in rate cases at the ACC, said the power-supply adjustment mechanism was intended to “levelize rates” by accounting for specific operating expenses in between general rate cases, but TEP’s big request shows it isn’t working.
“The amount of increase is indicative of a larger problem,” RUCO Chief Counsel Daniel Pozefksy wrote. “Adjustor mechanisms, such as TEP’s PPFAC, come at a cost to ratepayers. Among other things, these expenses are not considered in the context of a rate case which provides additional ratepayer safeguards and a higher level of scrutiny.”
RUCO said TEP has done nothing wrong, but its request is indicative of a larger problem, citing “numerous large under-collected balances associated with adjuster mechanisms” that have sparked debate before the commission in other cases.
Cap on increase proposed for TEP
RUCO said TEP’s proposed options to defer recovery of some of its under-collections to soften the impact on ratepayers is welcome, but the agency recommended that the Corporation Commission reevaluate all such adjuster mechanisms.
Mining giant Freeport McMoRan, TEP’s biggest industrial customer, filed comments proposing that TEP’s PPFAC be capped at $0.004, or four-tenths of a penny, per kilowatt hour, citing a limit the Corporation Commission imposed on Arizona Public Service Co. for a similar power-supply adjustment.
TEP’s proposal to recover its PPFAC deficit over 12 months would result in a surcharge increase of more than 1.5 cents per kWh.
In a filing in response to Freeport, TEP said the proposed cap would violate the company’s approved plan of administration for the PPFAC and lead to “regulatory uncertainty” that could indirectly raise costs by hurting TEP’s credit rating.
Phoenix-based APS, the biggest state-regulated utility, also has increased its similar surcharge to cover excess purchased power and fuel costs, called the Power Supply Adjustment.
APS attributed its surcharge increase in 2021 to higher natural-gas prices and increased customer usage and strained regional power supplies during the record heat of summer 2020.
The Corporation Commission ordered an independent audit of APS’ Power Supply Adjustment last year but an audit contract has yet to be awarded.
Meanwhile, APS has sued the Corporation Commission over its decision last November to cut the utility’s annual revenue by $119 million.
Construction under way in 2022 on the Chirreon facility north of Tucson. The 90-acre solar and battery storage project, by Trico Electric Cooperative, went online in the fall of 2022. Video by: Mamta Popat
