Deregulation at the State Level
The Arizona Corporation Commission (Commission), pursuant to the Arizona
Constitution, has regulatory authority over public utility companies serving the state. Prior to
electric restructuring, the Commission provided for utilities to operate as regulated monopolies,
providing each utility a Certificate of Convenience and Necessity (CC&N) to serve an exclusive
territory. The Constitution excepts the Salt River Project, a state owned utility, and municipally
owned and operated utilities from regulation. Pursuant to its regulations, the Commission set
and approved the tariffs and terms and conditions of service of each regulated utility. Regulated
utilities that have provided service to the Navajo Nation in Arizona are APS 3 and Continental
Divide Electric Cooperative, Inc. (CDEC).
In October 1999, the Commission adopted the amended Electric Competition Rules
(ECR) for the purposes of establishing a transition of the regulated entities as restructured
entities, providing customers with competitive choice for generation and other retail services,
providing for rate reductions during the transition period, and for the recovery of stranded costs
and other regulated assets by the utility companies. Each regulated entity was required to file
plans to transition to a restructured entity participating in a competitive market, to file
competitive and standard offer tariffs, and claim stranded costs. During the period of transition,
the number of customers (both residential and non-residential) eligible for competitive choice
would be increased yearly in accordance with a schedule approved by the Commission, with all
customers becoming eligible to receive competitive services on January 1, 2001.
Once the distribution systems of the regulated entities are opened to retail access,
companies providing competitive services (Electric Service Providers) can deal directly with the
customers. These companies have to file an application for a CC&N with the Commission, and
they are also required to file the competition rates for their services.
APS presently serves the western portion of the Navajo reservation, including Tuba City,
Arizona, and the Hopi Indian Reservation. In a Settlement Agreement approved by the
Commission, APS agreed to open its state-wide distribution system for retail access effective
July 1, 1999, on a phased-in basis in accordance with the Electric Competition Rules, and to
provide an additional 140 MW for eligible non-residential customers. APS further agreed to
open its distribution system to retail access for all customers on January 1, 2001.
Arizona Public Service Company was reorganized with Pinnacle West Energy Corporation
as the holding companyand Arizona Public Service Company, an electric utility company,
as a major subsidiary. Other subsidiaries include SunCor Development Company, APS
Energy Services, an Electric Service Provider, and Pinnacle West Energy, a competitive
energy generation company. The term "APS" hereafter refers to Arizona Public Service Company.
Concerning APS rates, it agreed with the Commission that its current rates would be the
standard offer rates in its service territory and filed another schedule of competitive rates to be
effective July 1, 1999. APS agreed not to increase its standard offer rates during the transition
period and further agreed to reduce such rates by 1.5% for customers having loads less than 3
MW, to be effective on July 1, 1999, July 1, 2000, July 1, 2001, July 1, 2002, and July 1, 2003.
These reduced rates have to be filed and approved by the Commission.
For customers with loads greater than 3 MW, standard offer services are reduced by 1.5%
each year on July 1 for the years 1999-2002. These rate decreases also become effective when
filed and approved. There is a further requirement that APS reduce its unbundled rates as set
forth in the filed schedule of rates.
Finally, APS agreed to accept $350,000,000 as stranded costs for generation. These costs
will be recovered from the customers in the form of a transition charge approved by the
Commission. Customers staying with APS will not have to pay these charges, and the charges
will be billed to those customers choosing an alternative Electric Service Provider. Most, if not
all, APS customers are staying with APS because the standard offer prices are significantly less
than the filed competitive rates. It was expected that 20% of residential customers would switch,
but less than 1% statewide have actually done so.
APS will have fulfilled its end of the Settlement Agreement in 2004 after which time it
will be free to charge its customers competitive rates for its services and pass through the costs
of generation and transmission.
It is NTUAs intention to acquire APS subtransmission and distribution facilities serving
the Navajo Nation and discussions have been initiated with APS, the Navajo Nation and the Hopi
Tribe regarding such acquisition.
In New Mexico, the voters in 1996 created a Public Regulation Commission (PRC) to
assume all the authorities previously exercised by the New Mexico Public Utility Commission
and the New Mexico Corporation Commission. By adopting the Electric Utility Restructuring
Act of 1999, New Mexico has acted to deregulate the electric industry under the supervision of
Before 1999, New Mexico, like Arizona, provided CC&Ns to public utility companies
serving the state and designated their exclusive areas of service. As did Arizona, New Mexico
provided in its Restructuring Act for a phase-in of retail access and competitive services,
allowing for electric customers to choose their electricity suppliers beginning in 2002. The law
also provides for stranded cost recovery (50% to 100%) by the utility companies that lose
Electric utilities that serve New Mexico portions of the Navajo reservation are New
Mexico Public Service Company, CDEC, Jemez Mountain Electric Cooperative, and the City of
Farmington. Municipalities and electric cooperatives are exempt from deregulation, unless they
choose to opt in.
The widely publicized experience of Californians with electric restructuring has caused
New Mexico to delay competition by five years, by act of the New Mexico Senate in February
2001. If approved by the House and Governor Johnson, customers in New Mexico will have to
wait until 2007 for full retail access and competition.
At present, Utah has no plans to deregulate its electric industry.
The volatile California energy market has impacted wholesale and retail prices for
electricity in all Western states as well as the Navajo Nation. Market prices for electricity in
Arizona and the northwest states, as evidenced by the DJ Palo Verde and DJ Mid-Columbia
indexes, have risen to levels less than but nearly equal to California prices.
The roots and causes of the California energy crisis are many. When California adopted
its electric utility restructuring legislation in 1996, the investor owned utilities agreed to divest
themselves of their generation and to purchase their power needs through short-term contracts on
the spot market through the California Power Exchange (CPX). Stranded costs were authorized
by the restructuring legislation, however the utilities were prohibited from passing through the
costs of electric power and energy to their customers until all stranded costs are recovered.
Due to a combination unanticipated demand for power in the state, transmission
constraints, increased costs of natural gas for generation, a shortage of water for hydroelectric
generation in the Northwest, and power plant maintenance downtime, market prices for
electricity in the state skyrocketed beginning in the summer of 2000. There have been
allegations of unfair trade practices and manipulation of the markets against producers and
marketers of electricity and natural gas, and some lawsuits have been filed, but these complaints
remain to be proven.
Two of the largest electric utilities serving the state, Southern California Edison (SCE)
and Pacific Gas & Electric (PG&E), have defaulted on their payments to the CPX and the CPX
has now gone out of business. At last count, the two companies have run up $12 billion in debt,
which cannot be passed on to the customers without a rate increase approved by the California
Public Utility Commission. Generators are refusing to sell power to the California utilities,
without adequate assurance of payment, and the result have been rolling blackouts in California.
The state has now placed its financial resources behind the two utilities so that they will not have
to file for bankruptcy.
In San Diego, San Diego Gas & Electric recovered all its stranded costs and began
passing through the purchase price of power to its customers in 2000. As a result, electric bills to
customers in San Diego increased by as much as 300%.
Significantly, in California, the municipal utility companies were not required to
restructure, divest themselves of generation, or open their territories to competition. Their
customers as a result have not suffered rolling blackouts or rate increases as have the
The Bush Administration has strongly iterated its belief in free markets and has stated
that California, having instituted a flawed deregulation regime, must solve its own problems.
Legislators and customers in California are now beginning to accept the fact that part of the
California solution will require substantial retail rate increases.
The Governor and legislature in California are taking extraordinary measures to resolve
the crisis. Some of these measures include construction of more generating plants in the state,
authorizing bond issues by SCE and PG&E to pay debts incurred for power purchases, rate
increases, and eliminating the requirement that the public utilities divest themselves of
generation. The state has already spent several billion dollars of state funds purchasing power on
behalf of the utilities, with the expectation of being paid back eventually.
Market conditions on the Navajo reservation have similarities to conditions in California.
First of all, the Nation does not own any generation and it has not authorized NTUA to generate
its own power or to participate in generation ventures. The Nation therefore, like California, is
dependent on outside supplies of electricity, which must be purchased at market prices. The
increasing Navajo population has resulted in growth of NTUAs electric loads, placing more
demands on its system. Wholesale natural gas prices in the San Juan Basin are at an all time
high. Shortage of water for hydroelectric generation by the Colorado River Storage Project has
also resulted in decreased deliveries by WAPA of Sustainable Hydro Power, which must be
replaced by higher priced Western Replacement Power. Finally, there are constraints on the
transmission lines delivering the bulk of electric power to the Nation.
Copied from "The White Paper" by the Navajo Nation.
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