Staff Responses to the Questions attached to Commissioner Spitzer’s Letter dated January 22, 2002
1. In a vertically integrated utility model, what incentives (regulatory, financial and ratemaking) exist for the expanded use of renewable energies?
In the simplest terms, in a vertically integrated utility model the incentives to expand the use of renewable energy exist in the form of approved generation plants that qualify for rate base treatment. If a renewable generator is easier to site and easier to include in rate base than a fossil-fueled plant, then the utility will favor the renewable generator even if its production costs are higher.
In many states, there are standards or goals (some voluntary, some mandatory) for expanding the use of renewable resources. To the extent that these standards and goals can only be met through the addition of new renewable generation units, then an incentive is in place that will encourage the expanded use of renewable resources.
There are currently only a few explicit incentives for use of renewables in the vertically integrated utility model. Some of the most commonly adopted explicit incentives in the nation are portfolio standards for renewables, system benefits charges, and renewable energy funds.
However, the Commission, in Decision No. 57589, the Commission's 1991 Integrated Resource Planning decision, found that environmental costs and other externalities must be considered by resource planners in making informed decisions about new electric energy resources and services. The Commission established a Task Force to identify and quantify environmental costs and externalities. The Externalities Task Force met during 1992 and published the "Report of the Externalities Task Force" in December 1992 (Docket No. U-0000-92-035). For the purposes of the Commission’s efforts, an externality was considered an impact on society not accounted for by the producers or consumers of electricity in the course of production or consumption of electricity.
In compliance with Commission Decision No. 58237, the Commission established the Externalities Prioritization Working Group, which met in 1993 and early 1994. The report and recommendations of the Working Group were published in March 1994 (Docket No. R-0000-93-099).
In 1994, Staff commenced development of draft rule amendments to include externalities in the Commission's Resource Planning rules (R14-2-701 through 705). Later in 1994, after California published its Blue Book on Restructuring and Arizona decided to move toward consideration of electric competition, the rule-making effort ended. The Commission later suspended portions of the Resource Planning rules.
If Arizona were to decide to continue with a vertically integrated utility model, the externality effort could be included in Resource Planning rules. Alternatively, the Power Plant and Transmission Line Siting Committee could use externalities as a way to evaluate potential power plants before making recommendations on Certificates of Environmental Compatibility. Since many renewables are generally less environmentally damaging than conventional, fossil fuel generators, the consideration of externalities could act as an incentive for renewables.