Deregulation Fails to Pass in Arizona

A huge upset to Arizona residents: Utility regulators voted to close the proposed deregulation of electricity markets, which had been under consideration since May.

The Arizona Corporation Commission opened the docket on the issue intending to gather information on how Arizona might allow competition among electricity companies. The docket set in motion what could have been a multi-year effort to allow customers to choose their electric provider in the state.

During a recent meeting, regulators spent about an hour in executive session discussing deregulation. When they emerged, the head legal counsel for the commission, Janice Alward, said that electric competition faced legal challenges from the state's last attempt to open its electric markets.

With that information, the commissioners voted 4-1 to close the docket. Meetings on the issue scheduled through the remainder of September and into October have been canceled.

"Everyone knows I'm ideologically sympathetic to competition in most any policy arena," Chairman Bob Stump said after the vote. "But the Constitutional impediments are simply too great with regard to electric retail competition in the state."

Deregulation separates the electricity market into three stages: generation, transmission, and distribution. In deregulated states, utilities are forced to sell off their means of production and can only profit from distribution and transmission; thus creating a market for electricity suppliers.

In total, sixteen states in the Unites States have competitive electricity markets including: Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Oregon, Ohio, New York, New Jersey, New Hampshire, Pennsylvania, Rhode Island, and Texas.

Arizona previously began planning utility deregulation in the 1990s, at the same time many other states were attempting to open their markets. The California energy crisis related to that state's deregulation the early 2000s caused many states to back off their own efforts.

In Arizona, a 2004 Appeals Court judge decided portions of deregulation as it had been drafted were unconstitutional, essentially ending the program here. The case was Phelps Dodge Corp. vs. Arizona Electric Power Cooperative.

Among the many provisions of deregulation that were problematic for the judge in that case were allowing the market, not regulators, to set the fair price for electricity, and requiring utilities to divest their power plants.

At the time, utilities in Arizona were bracing for competition and forming separate companies to market and generate electricity. But shortly after the first large utility customers began to select their power providers, the effort was shut down.

Proponents of electric competition have said the markets could be opened in a way that gets around that court decision, but the regulators disagreed.

"One remedy would of course be to go to the ballot (and change the state Constitution)," Stump said. "This may be a remedy the proponents need to explore.

Among the topics the commission planned to explore was whether the rules could be written in a manner consistent with the state Constitution.

"Whether she was for or against retail competition, she wanted to learn as much as possible on these issues," said her policy advisor Thomas Galvin.

The companies pushing for retail competition in Arizona include large service providers that offer electricity to customers in deregulated states, utility companies that hoped to sell more power into Arizona, and big electric users such as mines and hotel chains that hoped to find better deals with competitive electric providers.

Arizona Public Service (APS) had opposed the latest push for deregulation, as did AARP and some chambers of commerce.

The decision might not have been a surprise for them. In August, APS officials told investors during a conference call they were confident Arizona would not allow retail competition and the issue was not a threat to their business.

"Once the commission has the chance to review all the comments and reply comments, they will have a good sense there are not too many good opportunities here for Arizona customers," Don Brandt, president/CEO of APS parent company Pinnacle West Capital Corp., said at the time.

APS issued a statement after the vote agreeing with the decision, and stating the utility would continue with a planned deal to acquire a larger stake in the Four Corners Power Plant in New Mexico. That deal had been on hold because the utility was unsure if it made sense had deregulation taken place.