Electric Deregulation rears its ugly head in the Copper State…Again

Energy Fairness is pleased to have Dave Lock, CEO of the Grand Canyon State Electric Cooperative Association, convey his thoughts on the status of retail electric competition in Arizona.  Dave has over 30 years of experience in the electric utility industry at the electric cooperative and municipal utility levels.

Dave Lock, CEO, Grand Canyon State Electric Cooperative Association

Although in Arizona the Arizona Corporation Commission (ACC) is proposing Retail Electric Competition (REC) under a rulemaking process to only include commercial and industrial customers, REC is rearing its ugly head in other states like Florida via the citizens’ initiative process. In Arizona, our foremost concerns are stranded costs, untenable cost-shift to our residential customers, the costly and jurisdictional implications of establishing a Regional Transmission Organization (RTO), and system reliability.

Arizona’s regulated electric utilities have an obligation to serve all their customers, something that does not exist in truly competitive markets. In competitive markets, no one is required to provide a product to any given customer.  However, in moving toward competition in the energy market, it quickly becomes apparent that a possibility exists that certain “undesirable customers” might not get served.  Due to the essential nature of electricity, deregulation ultimately results in requiring utilities to be the provider of last resort for all their customers, that is, utilities are required to provide power to all their customers at a set price should other options not be available.  

Additionally, third party merchant suppliers may only be interested in serving large load customers that are more profitable. These are the “big box” stores, mines, grocery stores, factories, hotels etc. This practice will result in shifting fixed costs to the remaining small business and residential customers for our rural electric cooperatives to meet existing debt obligations and other fixed costs. 

The experience in other states is that a well-functioning wholesale energy market is essential to successfully deregulating the retail market.  A Regional Transmission Organization (RTO) or Independent System Operator may be required to facilitate retail competition. While these organizations have been formed in California (CAISO) and other parts of the country, the development process is time-consuming and expensive, and ultimately, the costs may outweigh any potential market benefits. 

Shifting the responsibility from existing utilities to an RTO is both expensive and complicated. The excessive cost of implementing REC in a state without an existing Regional Transmission Organization, such as Arizona, will result in a significant financial burden. This excessive expenditure will be for the up-front costs of establishing an RTO with new computer system and technologies as well as on-going long-term costs for operation and maintenance the system. 

Then there’s the relinquishing of state constitutional jurisdiction and sovereignty to the federal government. In the creation of an RTO, the Commission would surrender a part of its jurisdiction to the Federal Electric Regulatory Commission (FERC), losing a key part of its decision-making authority to the federal government. States like Illinois are facing challenges with their RTO because FERC’s direction does not support the state’s current energy goals. For example, FERC is exerting jurisdiction over storage technologies and several states have sued to protect their jurisdiction.  Increased federal involvement is not as ideal as leaving these decisions at the state level, where consumers can access their representatives and participate in a public process.

Many have lauded Texas’s Electric Reliability Council of Texas (ERCOT) as the model for how competition should be executed.  Valid comparisons between the electric system in Texas and other states is virtually impossible. Texas operates within its own electric grid, ERCOT, which centralizes the authority and control of the system whereas Arizona operates within the western grid that encompasses 14 states, portions of Canada and Mexico. The negative effects on grid reliability, as witnessed in the ERCOT market over the past two summers, should concern any public utility oversight body. The recent issuance of an Energy Emergency Alert (EEA1), the third in five years by ERCOT, because reserves fell below expected demand. The resulting unplanned outages are evidence that REC can be detrimental to electric utilities and the customers who rely upon them.  

In two decades, no state in the country has implemented REC and several have reversed course, such as Virginia and our neighbors in New Mexico. Of course, there are other lessons learned from states which have experienced REC. Attorneys General and regulators in a handful of states have opened formal investigations as a result of deceptive marketing practices targeting the elderly, low-income and non-English speakers, variable rate contracts resulting in exceptionally high bills during periods of price volatility, door to door aggressive sales practices, and misleading introductory teaser rates. 

Finally, there’s the thriving economy we are currently experiencing. Why would Arizona want to inject uncertainty into our energy market that can have a detrimental and destabilizing impact?

For all these reasons, Arizona’s Rural Electric Cooperatives oppose retail electric competition.