Tucson Electric home bills could go up by $18 a month under new proposal

Home customers of Tucson Electric Power would see their bills rise an average of nearly $18 per month — more than the company has requested — as they would bear the brunt of increased costs under the latest proposal in TEP’s pending rate case.

The rate recommendation by a state administrative judge is part of an effort to reduce the burden on business customers, who have historically subsidized residential electric rates by paying a disproportionate share of utility costs.

But even TEP says that proposed rate order from an Arizona Corporation Commission administrative judge is too much for residential ratepayers, and it has proposed alternatives that would result in an average increase of $10 to $11 per month, compared to a increase of about $14 it originally requested.

The Corporation Commission will have the final say when it takes up TEP’s rate case for final consideration in early August.

TEP filed for new rates with the Arizona Corporation Commission in June 2022, requesting more than $150 million in new revenues to start recovering its costs for some $1.9 billion in system additions and improvements.

That requested increase, which includes a $2 increase to basic monthly service charges on all residential rate plans, would boost the average TEP residential bills by about $14 per month.

TEP’s proposal drew opposition from consumer advocates who wanted to cut the bill increase by half, and the commission’s Utilities Division staff, which had recommended an increase that would raise TEP home bills by less than $4 per month.

Judging rates

After weeks of public hearings in March and April, ACC Administrative Law Judge Belinda Martin issued a proposed rate order July 12 that would shift most of the burden of the rate increase to residential customers.

Starting Sept. 1, the proposed rates would increase the monthly bill for more than 300,000 TEP residential customers on its most popular, basic rate plan by $17.88 monthly, or 14.8%, based on yearlong average monthly usage of 803 kilowatt hours.

Other home rate plans including its time-of-use and demand plans, and TEP’s basic Lifeline rate for low-income households would see varying but commensurate increases, though the Lifeline customers would see their monthly discount rise to $20 from $18 now, to offset the increase in the basic monthly service charge.

Meanwhile, small- medium- and large general service business customers would see increases ranging from about 1% to 4%, though 11 large high-voltage power service customers would see an average increase of 9.7%.

Martin said her rate proposal reflects earlier commission directives to reduce the residential subsidies business customers have long paid in the form of higher electric rates and move toward rate parity, while observing a policy of “gradualism” to avoid customer rate shock.

She said her plan provides the greatest relief to customer classes paying the highest subsidies under present rates.

“The adopted allocations are modest in recognition of the principle of gradualism,” Martin wrote. “Under the adopted rates, the greatest increases are allocated to the most subsidized classes, and the most benefit is to the classes paying the highest subsidies.”

Major TEP customers including Freeport Minerals Corp., Walmart and Kroger Co. have pushed to shift more costs onto residential ratepayers, who cost TEP the most to serve because they use most of the neighborhood-level power distribution system.

Paring subsidies

The Corporation Commission has moved to pare back those subsidies, and it shifted more costs to home ratepayers in its last TEP rate decision, which boosted residential rates an average of $5 or about 6% per month starting in January 2021.

TEP has said it supports efforts to reduce residential rate subsidies but remains neutral on the allocation of costs and rate increases across customer classes, leaving that up to regulators to decide.

But in a reply to the judge’s recommended rate order, TEP said the effort to move to cost parity among rate classes is too much.

The company noted that under Martin’s plan, residential customers would bear 77% of the revenue requirement increase, while business customers on the utility’s small general service rate would pay less than a half of one percent of the increased cost.

“Although TEP generally supports reducing cross-subsidies between customer classes, TEP believes the (recommended order’s) approach may be too aggressive,” the company said.

TEP’s amended proposal would increase its annual revenues, which were $1.12 billion in 2021, by about $111 million or 9.89%, compared with the net increase of $136 million the company had initially sought.

The company proposed using a customer-class revenue allocation it had proposed earlier that would allocate more of the increase to business customers and raise the median home bill by about $10 to $11 per month, depending on a key metric of allowed profit regulators approve.

Using a 9.4% return on equity — a measure of profit based on invested capital — as recommended by the judge, the median home bill would increase by $10.60 per month.

Using TEP’s requested return on equity of 9.75%, the median home bill would increase by $11.38 per month, the utility said.

Judge Martin recommended a 9.4% return on equity for TEP, up from an effective rate of 9.15% approved in the last rate case.

Freeport — whose Sierrita Mine near Green Valley is the sole customer on TEP’s high-voltage industrial rate — said Martin’s plan didn’t go far enough to provide rate relief to TEP’s largest customers.

Instead, Freeport proposed a plan that would spread more of the increase to small- and medium general service customers — and in the bargain save Freeport more than $3 million in costs on an annual TEP power bill that would rise to more than $25 million under the proposed rate order.

Plan raises concern

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The head of a state agency that represents residential ratepayers in rate cases said the large increase in TEP home rates recommended by the administrative judge is disappointing.

“That is the primary issue that we remain concerned about,” said Cynthia Zwick, director of the Residential Utility Consumer Office, adding that RUCO is still studying the recommended rate order and working out how to respond.

“I think on initial review, we’re going to support the company’s amendment, which I believe reduces the impact on low-income and residential customers,” said Zwick, who spent about 20 years heading Phoenix-based anti-poverty nonprofit Wildfire before she was appointed to head RUCO by Gov. Katie Hobbs in December.

Meanwhile, the commission’s utilities division staff has proposed slashing TEP’s proposed rate increase to an average bill increase of just $3.77 per month or 3.1% for home customers on the basic rate plan.

The judge also agreed with TEP’s request to raise fixed basic monthly service charges by $2, to $15 from $13 now for most customers on the basic plan and to $12 from $10 for customers on time-of-use rates.

RUCO had proposed just a 31-cent increase in the residential basic monthly charge.

Zwick said the proposed increase would pose a particular hardship on consumers, on top of a recent hike in a surcharge for purchased power and fuel that is costing TEP home customers an average $10 a month for a year.

While the judge’s recommended order is not binding on the full Corporation Commission, which may adopt or change the provisions, such orders tend to carry a lot of weight with regulators.

The ACC is tentatively set to decide the case at its next open meeting Aug. 8-9.

“We are we are hopeful that there’s still an opportunity there to impact the final decision, as we go forward in the process,” Zwick said, adding that much will depend on the level of return on equity the Corporation Commission approves for TEP.

Bottom-line debate

The return on equity authorized for TEP in its last rate case is 9.35%, but after a downward adjustment related to an incremental adjustment for the current fair value of assets, the company’s effective authorized return is 9.15%, Judge Martin noted.

RUCO has proposed that TEP’s return on equity be set at 9.13%, while the commission’s Utilities Division staff recommended 9.5%.

TEP said its return-on-equity proposal was on par with similar utilities.

The company said the lower return on equity approved in its last rate case weakened its credit rating, but Martin cited findings by the staff and RUCO that the utility’s credit rating was superior to peer utilities.

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.

Helping coal areas

The judge declined to prompt TEP to use ratepayer funding to help communities facing economic hardship as coal-fired power plants such as TEP’s Springerville Generating Station are closed down.

TEP owns minority stakes in the now-closed Navajo Generating Station and San Juan coal-fired power plants and the Four Corners Generating Station, set for early closure in 2031 by operator Arizona Public Service Co.

TEP also operates and owns two of four generating units at Springerville, near St. Johns in Apache County, with plans to ramp down those units in cooler months before retiring Unit 1 in 2027 and Unit 2 in 2032.

Case intervenors including the Navajo Nation, the Hopi Tribe, several tribal community groups and the Sierra Club had urged the ACC to require TEP to come up with a plan to compensate coal communities, citing a plan the commission approved in 2021 for APS to contribute $10 million to affected communities over three years and another $1 .5 million in direct payments in the first year.

The ACC held stakeholder meetings on coal-transition issues over two years under a generic proceeding that was closed in April without yielding a specific plan for coal-community funding.

TEP, which has committed $1 million in shareholder funds to help coal communities, said it’s not opposed to supporting the coal communities but more guidance is needed from state regulators before ratepayer funds can be used, and RUCO and staff also said a formal funding framework is needed.

Martin agreed and recommended that the ACC staff set up a task force to identify government funding sources and report on current coal-community aid efforts.

That didn’t sit well with the tribal groups, who said the overarching issues had been addressed in the statewide coal-community case and the time is right for TEP to commit to funding, backing amendments proposed by the Sierra Club to prompt TEP to develop and commit to a funding plan.

Among other findings in the recommended rate order:

Card fees: The judge rejected a TEP proposal to eliminate transaction fees for most credit-card payments from residential and small business customers as well as for cash payments made at third-party payment processors, instead folding the cost into overall rates.

Renewable-energy charges: Martin also opposed a TEP proposal to shift charges that fund renewable-energy incentives and energy-efficiency programs from special surcharges to base rates, but she approved of a TEP plan to require it to submit plans for energy-efficiency programs every three years, instead of annually.

Low-income rates: The judge also advised against a proposal by Wildfire to set up a two-tiered rate structure for TEP’s Lifeline discount rates for low-income customers, which TEP opposed because of its added cost and complexity, instead recommending TEP be directed to meet with stakeholders to discuss the idea.

Time-of-use rates: The recommended order also rejects pleas by the Southwest Energy Efficiency Project and the Arizona Solar Energy Industries Association to prompt TEP to adjust its time-of-use rates to make them more attractive to customers. TEP noted that it proposed a modest increase in the differential between on-peak and off-peak pricing, but deeper changes would require more study and consumer education.

Energy storage: The judge recommended that TEP be required to meet with stakeholders to discuss ways to improve a special “R-Tech” rate for home customers pairing technologies like rooftop solar and storage batteries, and a commercial rate designed to encourage installation of energy storage, which have failed to gain traction.