Arizona Rejects Electric Industry Restructuring

Arizona deregulated its electric industry in the late 1990s, along with a number of other states. Fortunately for Arizona the 2000 meltdown in California stopped Arizona’s efforts at deregulation in its tracks. In 2002 the Arizona Corporation Commission undid a key component of deregulation, the divestiture of generation by the incumbent utilities. In 2004 the Arizona courts found aspects of the planned industry restructuring to violate the Arizona Constitution.

In March of this year a group of power marketers and a handful of large customers convinced the Commission to open a docket to reexamine whether Arizona should restructure its electric industry. The concept of restructuring was also strongly supported by conservative think tank The Goldwater Institute.

The Commission established a two step process to examine the issue. The first step was to consider whether it is a good idea to restructure the industry. The second step was to work through the many issues inherent in restructuring.

The issue was hot in Arizona. The proponents engaged in an extensive media campaign including full page advertisements and opinion pieces. The proponents also went directly to the public through speakers and written materials. Many community members, including consumer groups, chambers of commerce and elected officials joined with the incumbent utilities to oppose the move.

On behalf of the Salt River Project, Jennings Strouss and Salmon submitted written material opposing restructuring. JSS pointed out that Arizona is doing quite well with its vertically integrated structure. Arizonans enjoy relatively low electric prices and reliable service. Arizona utilities offer a wide variety of choices and options and provide award winning customer service.

JSS argued that restructuring would put Arizona’s success at risk. The incumbent utilities who are now dedicated only to providing service to Arizona customers would be dismantled, and replaced with out of state power marketers motivated to maximize profits. Under a market based structure reliability would suffer, as evidenced in other states as their deregulated markets mature. Assets important to Arizona, particularly the coal-fueled generation facilities, would be put at risk under a structure that encourages only new generation that is cheapest and quickest to the market.

JSS argued that without the commitment by the incumbent utilities to fuel diversity and system stability, customers will be subjected to significant price swings. JSS pointed out that the innovation and choice touted by the proponents already exist in Arizona. And, in a deregulated market there are winners and losers. The likely losers would be residential and small business customers.

JSS also pointed out that Arizona would lose significant control over its electric industry, as the oversight of electric prices (now determined by the wholesale market) and the transmission system (which would move into an RTO) would be by FERC, no longer by the Corporation Commission.

Finally JSS pointed out that prices will be higher, not lower in a restructured market. In Texas, for example, the prices in the non-deregulated areas (public power entities who did not participate in restructuring) have consistently been lower and more stable than prices in the deregulated areas. And this makes common sense as restructuring only adds expense; it does not reduce the fundamental cost of generating electricity.

On September 11 the Corporation Commission, in a surprise move, voted 4 – 1 to close the docket and end the inquiry into electric industry restructuring. While restructuring proponents are talking about a run at the same issue in the legislature, or even through a constitutional amendment, it is probable that, as a practical matter, the Commission vote again ends the restructuring movement in Arizona.