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 NTUA’s 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.



New Mexico

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

the PRC.


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

non-municipal customers.


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 NTUA’s 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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