Arizona Corporation Commission Greenlights Annual Rate Hikes

The Arizona Corporation Commission (ACC) approved a significant policy statement on December 3, allowing the state’s approximately 300 utility companies to pursue annual rate increases through formula rate-making. This decision eliminates the lengthy two-to-three-year process typically required for rate hikes.

According to the ACC, “Formula rate plans enable utilities to adjust rates each year based on a defined formula that considers specific cost inputs.” The commission emphasized that this approach streamlines the rate-setting process, making it less burdensome and more predictable for utility companies.

However, critics like Sarah Barrios Cool, an attorney with the Residential Utility Consumer Office, expressed concerns over potential consequences. “Formula rates will radically change over 100 years of rate-making in Arizona,” she stated, implying that residential customers may face higher charges under this new system.

The decision was supported by ACC Chairman Jim O’Connor and Commissioners Nick Myers and Kevin Thompson, all from the Republican Party. They argued the policy would mitigate regulatory delays, preventing large rate increases from occurring every few years—citing the Arizona Water Company’s recent proposal to boost rates by nearly 50% in Sedona as a case in point.

Commissioner Myers noted that the policy doesn’t impose new requirements on utilities or alter existing ACC rules. Rather, it offers utilities an option aimed at decreasing the frequency of rate cases, thereby aligning with customer desires for gradual rate increases.

Support for the formula rate plan emerged from various organizations, including the Arizona Restaurant Association and the Arizona Chamber of Commerce. Meghan H. Grabel, a contract attorney for the Arizona Water Company, highlighted that formula rates could effectively address regulatory delays, allowing for improved reliability and informed utility investments.

Furthermore, Chamber President Daniel Seiden pointed out that “formulaic rate-making is a proven regulatory mechanism.” He noted that other states have successfully implemented similar systems, which help maintain oversight through annual reviews of utility costs.

In contrast, AARP Arizona’s state director Dana Kennedy, along with Arizona Attorney General Kris Mayes, warned of the potential drawbacks. In a letter to the ACC, they described the policy as a “tectonic shift” from traditional rate-making practices, suggesting it would create additional burdens for utility customers. Kennedy raised concerns about the implications for consumer participation, stating that customers would need to keep vigilant over announcements about annual meetings.

The consequences of adopting formula rates, according to Kennedy, could negatively impact customer affordability. She referenced an Illinois experiment with formula rates that led to a 40% increase in utility rates over 11 years before the plan was ultimately revoked due to insufficient oversight.

To address some concerns, an amendment to the policy will mandate that utilities utilizing a formula plan report to the commission every five years for a complete rate case, unless they are on an alternate schedule.