TEP seeks 15% rate hike, cites several rising costs

Jul 14 - Arizona Daily Star


By DAVID WICHNER

Average residential bill would see $13 monthly increase

Tucson Electric Power Co. has filed to raise rates by more than 15 percent, saying it needs its first increase since 2008 to cover rising costs and recoup more than $1 billion in system investments.

But the utility also wants a rate mechanism to recoup the cost of lower power sales resulting from new energy-efficiency programs - as well as a surcharge to offset the cost of pollution-control upgrades expected under a spate of pending federal regulations.

If approved as filed on Monday, the rate request would increase the typical residential customer's average monthly bill by about $13, to $98.58 - not including any special surcharges.

The filing begins a rate-review process by the Arizona Corporation Commission, a five-member elected body that regulates utilities.

That process, which will include hearings in Tucson, typically takes about a year; TEP is seeking the new rates no later than August 2013.

The new rates would be TEP's first base-rate increase since 2008 and only the third such increase in the last 20 years.

TEP's base rates have risen 8 percent since 1992, while the Consumer Price Index has increased nearly 60 percent over that time, the company said.

Growth in demand normally would help the utility keep pace with costs, but demand has been flat or worse since 2008, the company said.

Paul Bonavia, chairman and CEO of TEP and its parent company, UNS Energy Corp., said TEP's current rates don't reflect the significant investments and expenses the company has incurred over the last five years.

The requested rates, Bonavia said, will cover those costs while supporting continued investment in renewable energy and energy efficiency.

Under Arizona's traditional cost-of-service rate-making process - which is based on costs plus a maximum rate of return - the last rates were set based on costs in a 2006 "test year," Bonavia noted.

"When they (TEP) were negotiating new rates, Lehman Brothers was still in business," said Bonavia, who was named to the company's top post in 2009.

"Everybody knows the data is a little stale by the time the commission rules, but over the years nobody worried about that very much, because you had sales growth, and in Arizona, we had a lot of sales growth," Bonavia said. "You had a pretty strong sales increase, and that kind of offsets a lot of problems."

But that growth has stalled badly since the run-up to the recession.

After rising 4.7 percent in 2007, TEP's retail power sales actually fell around 1 percent each year from 2008 through 2010, before rising a scant 0.4 percent last year. This year, the company projects a sales decline of 0.7 percent.

Per-customer usage has been essentially flat the last few years, while the number of new customers added to TEP's system fell from 4,931 in 2007 to just 1,506 last year.

The head of the Arizona Residential Utility Consumer Office (RUCO), a state agency that represents residential utility ratepayers in regulatory proceedings, said TEP may indeed be in line for an increase but it remains to be seen how much is in order.

"RUCO's mainly concerned with the size of the increase," RUCO Director Jodi Jerich said, noting that the $127.8 million base revenue increase doesn't include the other surcharges TEP is requesting.

"We support recovery of prudently incurred expenses, we just want to make sure these expenses are reasonable," she said.

RUCO generally supports the concept of a cost-recovery mechanism to offset the cost of company-owned renewable-energy installations and demand dampened by energy-efficiency programs, Jerich said.

She noted that RUCO supported a similar mechanism in Arizona Public Service Co.'s last rate case, with a provision giving customers the option of paying a fixed surcharge rather than a usage- based charge.

Bonavia said that since the last rate case, the net investment TEP made in its power plants and distribution grid grew from $1 billion to $1.5 billion, not including depreciation and other costs the company can't recover.

The company has spent $300 million to overhaul and maintain its power plants, $200 million on distribution equipment like power line and meters and $130 million on power-plant environmental upgrades, Bonavia said.

And that environmental tab is expected to rise dramatically, as the Environmental Protection Agency prepares to roll out new pollution-control requirements on "regional haze," mercury and other air-toxin emissions, coal ash, greenhouse gases and cooling water.

Overall, TEP - which generates about 80 percent of its own power from coal - says it expects to spend about $300 million to $400 million on additional environmental controls over the next five years, and incur tens of millions of dollars in additional annual operating costs, depending on final EPA rules.

TEP is proposing a new "environmental compliance adjuster" monthly bill surcharge to help the utility recover its costs incrementally. The amount of any environmental surcharge is uncertain and will ultimately be decided by the Corporation Commission.

RUCO's Jerich said her agency cautiously supports the concept of an EPA surcharge to help TEP recover its costs without waiting years for the next rate case.

"It strains their cash on hand and their financial strength, so a more timely recovery is not something we necessarily oppose on principal, but we want to make sure it's structured appropriately," Jerich.

In its rate request, TEP also has proposed:

* Modifying a bill adjustment for fuel and purchased-power costs, which are passed through directly to ratepayers and fluctuate with TEP's costs, to remove a component for those costs from base rates, and adding some costs like wholesale energy broker fees.

* Consolidating the utility's rate classes, from more than 50 different basic residential and commercial rates, including the elimination of some "frozen" legacy rates that apply to only a handful of customers.

Contact Assistant Business Editor David Wichner at dwichner@azstarnet.com or 573-4181.

By the numbers

15.3%

Overall base-rate increase proposed by TEP

.07%

Expected decline in TEP power sales this year

4.7%

Increase in TEP retail power sales in 2007

-0.7%

Decrease in TEP retail power sales projected for 2012

Source: TEP rate filing

Originally published by DAVID WICHNER, ARIZONA DAILY STAR.

(c) 2012 Arizona Daily Star. Provided by ProQuest LLC. All rights Reserved.