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Red flags raised as Arizona weighs deregulating electricity

As the Arizona Corporation Commission (ACC) considers retail electric restructuring, experts are pointing out that energy deregulation has presented challenges in other states.

Arizona has considered retail electric choice initiatives in the past, and most recently the commission held a workshop in July on retail electric competition where it heard views from a diverse group of stakeholders.

Arizona Public Service Co. (APS), which serves about 2.7 million people in 11 of Arizona’s 15 counties, highlighted the potential negative effects of opening the electricity market to competition in the state in a docket it filed in July with the ACC.

“We strongly encourage the Commission to reflect on the stable, reliable and increasingly clean framework for the provision of electric service that exists in the state today, much of it attributable to the Commission itself, before moving too quickly down an alternative path,” APS wrote.

The company argued in its filing that retail electric competition is not in the best interest of customers because reliability would be jeopardized, conflicts would be created with existing law, and a number of clean energy policies under consideration by the commission would be more difficult to achieve.

The United States has a variety of regulated and deregulated energy markets, although regulated energy is still the norm. There are 19 states, plus the District of Columbia, with either full or partial retail choice, and two states that are considering it. Two others previously considered restructuring but rejected it.

The Arizona Energy Policy Group (AEGP), led by former ACC commissioner Bob Stump, commissioned a July report on retail competition in electricity that noted Arizona’s wholesale markets produce more than 80 percent of the state’s electricity.

ACC Commissioner Justin Olson has been vocal about his support of moving toward a retail energy market in the state.

“Though there is no perfect solution, I believe retail competition stands out as a priority reform that can ease ratepayers’ burdens,” he wrote in an op-ed in a local newspaper a few days after APS filed its docket.

“Not only are customers in Texas more pleased with their energy providers, they are paying less as well,” Olson said. According to U.S. Energy Information Administration (EIA) annual data, the average retail price of energy is 21.2 percent lower in Texas than in Arizona.

However, the AEPG report noted, “In general, available evidence does not support the assertion that retail competition will necessarily lower rates for residential customers. While some studies conclude positive or negative price impacts, other academic and industry research finds that there is no conclusive link between pricing advantages for retail customers and electric industry restructuring.”

Olson has cited Texas as a model that has proven successful and beneficial to ratepayers.

But Texas’ electric market has experienced challenges. The Electric Reliability Council of Texas (ERCOT), the state’s grid manager, sent out emergency alerts in August and September because power reserves were in short supply, calling on customers to conserve power. The EIA has stated in a report that ERCOT “typically has one of the lowest anticipated reserve margins in the country.”

And this summer there were power-related data errors that increased electricity costs for Texas consumers by millions of dollars. ERCOT, which manages the flow of electric power to more than 25 million Texas customers, says it should not be forced to fix the errors.

Connecticut and Massachusetts have also deregulated their electric markets, but with mixed results.

In Connecticut, the Connecticut Consumer Counsel earlier this year announced an effort to end deregulation in the state, citing predatory practices by third-party electric suppliers. “Simply put, retail electric deregulation is a failed experiment for residential customers,” said Consumer Counsel Elin Swanson Katz. “Not only has it cost electric consumers more money but it has also failed to bring meaningful innovation into the electric market.”

Massachusetts Attorney General Maura Healey released a report in 2018 about the possibilities of opening up the state’s retail energy market and found that Massachusetts residential consumers paid competitive electric suppliers $76.2 million more than they would have paid for electricity from their utility between July 2017 and June 2018. After releasing the initial report in 2018, Healey requested an end of a third-party electricity market and filed legislation in January 2019 to ban suppliers from contracting with residential customers directly.

Other risks can be involved with restructuring.

The AEPG report noted that stranded costs must be recovered from customers through their bills because in many restructured states, investor-owned utilities were prohibited from owning generation and had to divest of their generating assets.

“In states that have restructured – including California, Connecticut, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, Pennsylvania and Texas – utilities have been authorized to recover over $40 billion in stranded costs from customers,” the report said.

In their filing, APS also wrote about a number of substantial changes in the industry since the original rules went into effect.

“Technology, the marketplace, the availability of renewable resources (including customer-sited and associated net metering frameworks), customer interests, western energy markets and the intricacies of grid interoperability have changed significantly,” APS said. “The electric industry has evolved in ways that were unforeseen just ten short years ago. The Draft Rules contain significant gaps that can diminish reliability and conflict with other beneficial innovations taking place today in the state of Arizona.”

APS’s investment in renewable sources, including battery storage, would have to be reconsidered in relation to retail electric competition. Renewable resources are considered an important part of the conversation when states are deciding whether to deregulate.

AEPG found that although many of the top producers of solar and wind are not in restructured states, the trend line for renewable growth is nearly identical in both regulated and deregulated states. The report found that there are a number of factors that lead to the potential growth of renewable resources, including location, distributed resources, and cost declines in wind and solar generation.

In addition, there is more storage activity in restructured states. However, the report also stated that “some restructured markets in particular struggle with how to enable achievement of the full suite of benefits,” due to state statutes that will often preclude a utility from bidding on storage output as a resource or owning generation in wholesale energy or capacity markets.

APS also mentioned other energy reforms currently being considered by the ACC, including the deployment of electric vehicle infrastructure and demand response programs.

“Retail competition conflicts with each of these policies and would require, at a minimum, reconsideration of those rules and the prospect that it may be more difficult to achieve some of these goals.”

Jaclyn Brandt

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