Rate increases for TEP, APS electricity accelerated in recent years

Electricity rate increases for two big utilities including Tucson Electric Power accelerated in recent years, intensifying debate among Arizona Corporation Commission candidates over whether the commission is too cozy with utilities.

Democrats and activist critics say it is, and say the commission suffers from “regulatory capture” by utilities, boosting corporate earnings while sticking it to consumers.

Republicans and utility officials say the rate increases are responding to underlying causes such as inflation, the need for more utility infrastructure and continued growth in customer demand.

Figures provided to the Star by TEP show its residential rates have risen as fast in the past four years as they had in the decade from 2010 to 2020. For Arizona Public Service customers in the Phoenix area and 11 counties statewide, residential rates have risen faster in the past two years than in the previous nine years, figures provided by that utility show.

In fact, for TEP, residential rates have risen almost as fast, percentage-wise, in the three years through 2023 as they did in the 22 years from 1998 through 2020.

In addition, while various analyses differ as to whether existing Arizona electric rates are higher or lower than national averages, increases in electric rates have risen faster in the past few years in the Phoenix area than nationally, U.S. Bureau of Labor Statistics records show.

The bureau compares monthly changes in electric rates for nearly 25 of the country’s largest metro areas including the Phoenix-Mesa-Scottsdale area, although not for the Tucson area or for states as a whole. APS serves the Phoenix area along with the Salt River Project, a quasi-public utility that isn’t regulated by the Corporation Commission.

Critics see ‘rubber stamp’

The quickening pace of Arizona electric rate increases is drawing sharp criticism from Democratic candidates for the commission as well as various activist and watchdog groups such as the regional Southwest Energy Efficiency Project and the nationally based Energy Policy Institute and Conservatives for Responsible Stewardship.

They’ve criticized the rate increases on a number of grounds but in particular, Democratic candidates say the utilities and commission need to temper future increases by investing in and pushing for more renewable energy projects which now cost less than plants for the fossil fuels coal and natural gas.

Officials of TEP and APS say their increases in rates and bills have been driven by higher costs in general, their need to keep investing in upgrading their grids due to growing electricity demand, and increasing summer peak demand loads on their systems due to increasing temperatures and numbers of customers.

Plus, “the cost of fuel and wholesale energy also has increased significantly, driving up costs that we pass along to customers without any markup,” TEP spokesman Joe Barrios told the Star, and APS spokeswoman Katie Conner echoed those comments.

Three commission seats, two now controlled by Republicans and one by a Democrat, are being contested on the Nov. 5 ballot.

The Democrats and various nonprofit energy activist groups have complained in recent months that the current commission has grown more receptive to utility interests since 2022, when Republicans boosted their majority on the commission from 3-2 to 4-1.

“I’m becoming increasingly convinced that the commissioners see their job not as serving the people of Arizona but as serving the utilities’ out-of-state investors,” said Joshua Polacheck, a Democratic commission candidate from Tucson.

He noted that the latest increases for the two utilities were approved over objections of the state Residential Utility Consumers Office, commonly known as RUCO. Part of the governor’s administration, RUCO is supposed to act as a watchdog on behalf of consumers on rate and other economic-related issues before the commission. RUCO also unsuccessfully opposed five other rate-related and other economic-related cases before the commission starting in 2023.

TEP got a 10% rate increase from the commission in in August 2023 that boosted a typical homeowner’s monthly bill by about $11. In February 2024, APS received an 8% increase that will boost monthly residential bills by about $10 to $12. Both increases drew fierce opposition from consumer and environmental groups as well as numerous individuals who sent the commission written comments.

TEP also received a 6% rate increase from the commission in January 2021. Before this increase, APS’ last rate increase came in 2017, although increases in its fuel costs have also added to the utility’s base rates that cover its investments and other expenses.

In the Phoenix area, the group Conservatives for Responsible Stewardship recently posted billboards saying “Arizona Corporation Commission saying ‘Rate Hikes R Us.”

The group’s membership consists of 24,000 people who generally consider themselves politically conservative but are interested in environmental stewardship, said David Jenkins, its president.

They see utility rates as being directly linked to environmental issues because the cost of solar and wind energy projects has declined to the point where they’re often more economical than coal and natural gas plants, he said.

In the years immediately before 2022, the commission had a 3-2 Republican majority, but it was more likely to trim or deny utility rate increases because they thought they weren’t in the best interest of ratepayers, Jenkins said. Since then, with a 4-1 Republican majority, the board’s dynamic has changed completely, he said.

Now, “we’re trying to draw attention to the fact that the ACC is rubber stamping all these rate hikes,” Jenkins said.

He said his group is not endorsing anyone in the current ACC race but wants to point out how rate hikes increased since two new Republican commissioners — Nick Myers and Kevin Thompson, who aren’t up for re-election — took office in 2023.

“These utilities are monopoly utilities. They are not subject to the free market. If you are served by TEP, you can’t say ‘I don’t like the rates they’re charging, I’m going to go to APS’,” Jenkins said.

‘Power prices across U.S. increased’

Incumbent Republican commissioner Lea Marquez Peterson’s rejoinder to critics of the higher rates is “all prices are up.” She’s seeking re-election this year.

“Groceries, building supplies and the cost of labor to name a few. We’ve heard from many of our regulated utilities about supply chain issues and the impact of inflation and increased costs on their utility expenses as well as on the consumer. Power costs across the U.S. have increased,” said Marquez Peterson, a Tucsonan.

In a rate case, utilities present their expenses “and as the commission, we base our decisions on hundreds of pages of testimony and information provided by the parties to the case,” she said. “We conduct a financial and economic analysis and make a determination on what is ‘just and reasonable’ per our constitutional requirement. In a rate case, utilities have an opportunity to recover costs and to receive a return on their investment to attract future capital.”

She notes that the commission pared this year’s APS rate increase by $200 million from its original request, although $100 million of that cut was itself controversial. It killed an APS proposal to compensate Navajos and others living in northern Arizona and New Mexico for economic losses they suffered due to closures and cutbacks of coal-fired plants there, including the shuttered Navajo Generating Station near Page, Arizona.

Tribal members and environmental groups, along with Democratic commissioner Anna Tovar, who dissented on that vote, said the ACC decision hurt many vulnerable people and communities in need of financial help. But Marquez Peterson said, “Generally, I find it problematic that customers should pay extra money for alleged obligations and would be responsible for expenses that do not relate to their cost of service.”

TEP: ‘Our rates are needed’

In raw numbers, the electric rate increases per kilowatt hour don’t seem like that much. TEP’s residential rates have risen a little more than 5 cents per kilowatt hour used since 1998 to 14.97 cents. That amounts to an average increase of 1.9% annually, less than the average annual inflation rate of 2.5% since then, the utility said.

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From 2013 to 2023, APS’ residential rates rose a little less than 3 cents per kilowatt hour to 15.31 cents. If the utility’s May 2024 rate of 15.76 cents a kilowatt hour continues through this year, the APS rate will have increased a tiny bit more than 3 cents a kilowatt hour since 2013.

If you multiply such per kilowatt hour increases by the number of kilowatt hours used monthly by a typical residential customer, however, the numbers get bigger.

At TEP’s average residential monthly usage for 2023, 5 cents per kilowatt hour translates to $40 monthly or $480 annually, although that figure doesn’t represent the actual, historic electric bill increase because a typical customer’s use changes every year.

Utility spokesman Barrios pointed to a TEP web page to defend its most recent rate increase from August 2023.

“The cost of providing safe, reliable service is increasing rapidly as inflation exacerbates the impacts of supply chain challenges, regional energy capacity constraints and more extreme weather,” said Susan Gray, TEP’s president and CEO, on the web page. “Our rates are needed to support systems and infrastructure that protect and upgrade our grid, expand our use of cleaner energy and help us serve the expanding energy needs of our growing community.”

Peak energy demands on the utility have risen 5.7% since 2019, due to hotter summers and the addition of more than 14,000 new customers since then, the utility said.

‘The cost of fuel and wholesale energy also has increased significantly, driving up costs that we pass along to customers without any markup,” TEP said.

TEP also invested nearly $1.8 billion since 2018, when its last rate increase prior to the 2023 increase took effect, to upgrade and reinforce its system and facilities, it said. The investments include new solar and wind energy projects, new substations and other energy grid improvements, “especially in response to more extreme weather and higher temperatures,” the utility said.

Plus, the utility said over the summer that it had actually managed to lower peoples’ electric bills $10 monthly due to decreases in its fuel costs — a year after fuel cost increases had sent its bills upward. For June and July, TEP tacked on another $6 monthly decrease due to a reduction in a utility surcharge to return money it hadn’t spent or committed to spending for energy efficiency programs.

As for APS, its rate increases help cover an annual utility investment of more than $1.5 billion annually “to strengthen infrastructure to ensure we can continue delivering some of the most reliable power in the country for our customers,” utility spokeswoman Kelly Conner said.

APS’ increased charge to its customers from 2022 to 2023 was for onetime cost increases for natural gas and other fuels, and costs of providing services that it doesn’t recover due to state-required energy efficiency projects, Conner said.

Called “adjustors,” these cost increases — and periodic decreases — “are part of the overall cost of electric service — they keep pricing more reflective of the actual costs to serve our customers,” Conner said.

They’re set differently than the “base rates” that the commission approves for longer periods and rise or fall “at certain times in the year to fund important customer programs and services,” she said.

‘Utilities increasing their profits’

Critics in turn fought and continue to hammer at the commission’s decisions in 2023 and 2024 to boost TEP’s and APS’ return on equity, a key measure of profit based on invested capital.

TEP’s return on equity rose from 9.15% to 9.55% in last year’s rate increase, although that was lower than the utility’s initial request of 10.25%. APS’ rate rose in this year’s rate increase to 9.55% from 8.7% previously, although that, too, was lower than what the utility had requested.

“We see utilities increasing their profits with rate increases,” and utilities and commissioners “want investors to see Arizona as a good regulatory environment,” said Keriann Conroy, a research associate for the Energy and Policy Institute, a national utility watchdog group.

At the same time, “customers are saying they can’t take it anymore,” she said.

But TEP executive Gray told the commission that holding the return on equity to 9.4% would place it among the lowest such rates in the nation.

“It’s hard for me to understand why, as a company that provides consistent reliability and high customer satisfaction, why we should be further penalized,” by a low return on equity, Gray said, adding that would “send a troubling signal to the company and the capital markets.”

As for TEP’s actions to lower electric bills this year due to what it said were unspent and uncommitted energy efficiency funds, an official of an energy efficiency advocacy group wasn’t impressed.

TEP has had plans for those energy efficiency funds approved by the ACC, including detailed budgets for how surcharges to consumers to raise the funds will be spent, observed Caryn Potter, Arizona representative for the Southwest Energy Efficiency Project.

“While TEP customers may see a $6 decrease in their bills from June and July, those dollars would have been better spent if they were deployed through the utilities’ energy efficiency programs, designed to provide long-term relief for its customers,” Potter said.

Democratic commission candidate Jonathon Hill acknowledged that TEP officials in particular have made valid points about rising costs, considering very high inflation in 2021 and 2022 and pandemic-induced supply chain problems and other shortages. He also agreed utilities have had to make major infrastructure investments to accommodate growth in customer demand.

But he said some of the rate increases approved by the commission date back to years before inflation accelerated, and that inflation rates have declined significantly since 2022, yet the rate increases continue.

“We’re saying the current commission is going way above and beyond adjusting for inflation,” said Hill, a research scientist at Arizona State University. “Rate increases used to be not a common thing. Now we’re seeing them time after time.”

Also, many other utilities nationally have faced some of the same issues Arizona’s have faced with rising costs and demand, but the Bureau of Labor Statistics’ figures show the Phoenix area’s rates are rising faster than the national average for cities, Hill said.

Republican commission candidate Rene Lopez said of the higher rates, “I can appreciate that rates have gone up. Have they gone up more than in other cities? Possibly, probably.

“But is this apples to apples? Are you comparing us to cities such as Chicago that are not growing? When we have 300 people moving into Maricopa County every day? And when we have more businesses moving in?”

“I can’t say if we’re going up enough or going up too much. The devil is in the details,” Lopez added. “You can’t compare us to other cities. That’s like trying to compare Phoenix to Eloy, or Tucson to Flagstaff. It’s not apples to apples.”

But when asked if he thought any of the commission’s rate increases might have been excessive, he replied, “I am open to possibilities there are probably things that may have snuck by in rate cases that didn’t belong,” although he couldn’t cite any specifics.

“It’s a balance — a doubled-edged sword. If we go too low on the rate of return, the next time APS goes out to investors, they will demand a higher (rate) or the investors don’t come to Arizona,” said Lopez, a Chandler city councilman. “You lower the rates, we can’t pay our investors and nobody is willing to invest in the future of Arizona.”