“The only support for this ‘policy statement’ came from the utilities themselves. The Commission is charged to protect ratepayers by regulating the utilities, not the other way around. The Commission should pump the brakes, not rush through major rulemaking decisions in a lame duck session.” – The Arizona Free Enterprise Club

The Arizona Corporation Commission (ACC) approved a significant change in utility rate-setting, allowing for-profit water and power companies to adopt formula rate plans. The 3-2 decision, passed on December 3, 2024, is a marked departure from traditional rate-setting practices. You can read the adopted ACC Policy Statement here.

Formula rate plans enable utilities to adjust rates annually based on a predetermined formula that reflects specific cost inputs. This approach contrasts with the traditional method, where utilities undergo comprehensive rate cases every few years, involving detailed reviews and public hearings. Proponents argue that formula rates can lead to smaller, more predictable rate changes, thereby reducing “rate shock” for consumers. They also claim that this method minimizes “regulatory lag,” allowing utilities to recover costs more promptly and invest in infrastructure more efficiently.

Supporters of the policy include utilities, construction groups, and the Arizona Chamber of Commerce. They assert that formula rates provide financial stability for utilities, encouraging timely infrastructure development and potentially enhancing service reliability.

However, the policy has faced criticism from consumer advocates, the Arizona Attorney General, and organizations like the AARP. Opponents express concerns that formula rates may lead to higher consumer costs and diminish transparency and public participation in the rate-setting process. They argue that without the rigorous scrutiny of traditional rate cases, utilities might have less incentive to control costs, potentially resulting in unjustified rate increases.

The ACC’s approval process for this policy has also been contentious. Critics contend that the Commission expedited the decision without adequate public input or formal rulemaking procedures, which traditionally involve comprehensive reviews and stakeholder engagement. Some legal experts and consumer representatives have questioned the legality of implementing such a significant policy change through a policy statement rather than through formal rulemaking, suggesting it may deny due process.

On October 3, ACC Chairman Jim O’Connor (R) emphasized the importance of public input and requested that the ACC staff provide an opinion to be presented at a later workshop. However, these plans were set aside. On November 20, O’Connor and Commissioner Nick Myers (R) issued a policy statement, announcing that a vote would be held two weeks later.

Commissioners Anna Tovar (D) and Lea Márquez Peterson (R), who voted against the new rate-making process, expressed concerns over the ACC’s hasty approach, highlighting it as a key reason for their opposition.

Tovar emphasized, “There’s definitely a path to implement formula rates while still adhering to the constitution and existing legal precedents. However, it’s crucial that we follow a proper rulemaking process.”

Echoing her sentiments, Peterson added, “I believe a comprehensive public rulemaking process is essential. This approach would allow for a detailed examination of the proposal, ensuring transparency and giving both us and the public a clear understanding of the potential impacts and any unforeseen consequences for ratepayers.” Their calls for a more deliberate and open procedure underscore the importance of accountability in decision-making.

The conservative Arizona Free Enterprise Club issued a statement supporting Peterson’s “no” vote.

“Following contentious double digit rate hikes being approved and ESG Resource Plans committed to going ‘Net Zero’ by 2050 being rubber stamped, the Commission has rushed through approving new rules masquerading as a mere ‘policy statement’ that could insulate utilities and the Commission from having to face ratepayers in future rate cases. The ‘policy statement’ would depart from traditional rate making and pursue ‘formula based rates’ offloading risk from investors to ratepayers and baking in automatic rate increases with little transparency or opportunity for ratepayer engagement.”

(R) pushed back on social media with a vote of confidence for the new formula rate-making. She posted on X, “Formula rate-making isn’t related to energy generation or net zero. Rate-making is the Commission’s Constitutional mandate to oversee a just and reasonable recovery of costs for services provided. If utilities adopt formula rates, you will see incremental adjustments, not rate spikes.”

Critics express concern that gradual adjustments will result in almost automatic annual rate increases.

Adopting a formula rate plan is optional for the approximately 300 utilities regulated by the ACC. Utilities that choose this model will file an initial rate case and subsequent annual cost reports in informal meetings with stakeholders. The Commission will then set annual rates based on these reports. While this approach aims to streamline the rate-setting process, consumer advocates worry it could lead to more frequent rate increases with less opportunity for public oversight. Ultimately, it could potentially result in higher utility bills for residents.

The ACC’s adoption of formula rate plans represents a significant shift in Arizona’s utility regulation, arguably to modernize the rate-setting process. However, it has sparked a debate over the balance between regulatory efficiency and consumer protection, with concerns about impacts on transparency, public participation, and, ultimately, utility costs.