An Arizona judge has recommended that utility regulators scrap the state’s current retail-rate net metering policy for rooftop solar customers, and instead credit customers based on short-term valuation methods. The order is part of the Arizona Corporation Commission’s value-of-solar proceeding that seeks to end protracted policy battles over distributed solar in the state.

For two years, regulators have delayed acting on contentious proposals to raise solar rates filed by Arizona Public Service, Tucson Electric Power and UNS Electric until the overarching value-of-solar (VOS) docket comes to a close. The next round of comments in the proceeding were initially due on October 31, but were extended last week to November 15. Arizona regulators are scheduled to vote on the docket in December -- but discussions still may not end there.

Chief Assistant Administrative Law Judge Teena Jibilian’s recommended order and opinion (ROO) published last month states that net metering, and the banking of distributed generation (DG) exports associated with net metering, “should eventually be eliminated and replaced with a mechanism for the direct purchase of excess solar power by utilities.”

Under the current rules, customers with rooftop solar receive are credited for excess energy they produce and export to the grid at the retail rate for electricity. Customers can bank or carry over credits month to month.

Compensation for rooftop solar should reflect the actual value of DG, Jibilian wrote. Valuation, including the environmental costs and benefits of DG, should be based on an avoided-cost methodology. However, she determined that quantifying the societal and economic development benefits of DG in an avoided-cost forecast would be “speculative and inappropriate for ratemaking purposes.” The cost of utility-scale solar provides a reasonable proxy for DG solar because it diminishes concerns for the inclusion of externalities like societal and environmental factors, she wrote. Also, long-term forecasts should not be used due to the risk of speculation.

As alternatives, Jibilian supported two rate proposals put forward by regulatory staff. The first proposal, the Resource Comparison Proxy methodology, would use a five-year rolling average of a utility’s solar PPAs and utility-owned solar projects as a proxy for the valuation of distributed solar exports, to be reassessed every few years in each electric utility’s rate case. The second proposal, the Avoided Cost Methodology, would use five-year forecasting to evaluate eligible costs and values of energy, capacity and other services delivered to the grid from DG.

In the Resource Comparison Proxy case, compensation for solar exports in Arizona would remain around 11 cents per kilowatt-hour, on par with the retail rate, until each utility’s next rate case comes up in four or five years' time. But once the five-year price average is updated to account for new, lower-cost projects' rooftop solar compensation could drop by more than half.

In the Avoided Cost scenario, compensation for solar exports would likely fall to less than half of the retail rate in the near term, but could increase over time as energy prices go up.

Solar advocates took issue with the proposals, and with the short valuation period in particular. 

"[The ROO] does not allow for a full consideration of the costs and benefits that customers' solar energy systems provide because it restricts the analysis to a 5-year planning window or limits the compensation based on the price paid for other resources," Vote Solar Program Director Briana Kobor said in a statement.

"This narrow calculation could make solar a bad deal for Arizonans, putting clean energy progress and solar jobs at risk in the state,” she said. “The ACC requires utilities to plan the rest of their energy system over a 15-year horizon, and there's no reason that customer-driven solar should not be planned for in the same way."

In welcome news for the solar sector, given the upset in Nevada this year, the ROO recommends grandfathering in existing solar customers at their existing credit rates. Judge Jibilian said decisions to grandfather existing customers should be made in each utility rate case, but should only apply to customers who decide to go solar after the new rates go into effect.

Overall, some 30 parties took part in the VOS proceeding, and they had mixed responses to the ROO. The order is not the final outcome of the docket, but will inform Arizona utility commissioners as they prepare to vote on the matter in December.

The Residential Utility Consumer Office (RUCO) praised the judge for providing a foundation for future discussions, but expressed concern that some of the inputs within the two proposed methodologies have yet to be determined, including questions like, should transmission benefits be included in the avoided-cost option? Or should pricing from a solar project built on an existing site qualify for the cost proxy analysis?

“We want to make sure that the methodology is right, but a real focus has to be on how the methodology is implemented and if it’s good for ratepayers at the end of the day,” said Lon Huber, energy policy consultant at Strategen Consulting and adviser to RUCO, in an interview. “You could have a methodology that could lead to weird market outcomes, if implemented in a way that isn’t cost-conscious or [doesn't] provide enough certainty to potential solar adopters.”

The ROO also states that the most reasonable option in the VOS docket is the adoption of both the avoided-cost methodology and the resource proxy cost methodology. However, the report does not explain how to combine the two methods, creating uncertainty for all parties.

In light of these unanswered questions, it’s possible there could be another round of VOS discussions in Arizona in order to address the technical details.

Tucson Electric Power declined to offer a comment while preparing to submit clarifying questions and some exceptions to the ROO. However, spokesperson Joseph Barrios noted that TEP has a proposal pending before the ACC that would compensate solar customers for excess energy with net metering credits valued at the same price the utility pays for community-scale power -- currently 5.8 cents per kilowatt-hour.

Arizona Public Service said its assessments show rooftop solar customers should be compensated even less, at around 3 cents per kilowatt-hour. Both utilities claim the changes are needed to eliminate the subsidization of solar customers at the expense of non-solar customers. Solar industry groups reject the view that solar adds costs to the system, and claim the utility proposals would effectively kill Arizona’s residential solar market.

The battle over solar policy in Arizona has bled into the Arizona Corporation Commission election, with APS and SolarCity launching ad campaigns in favor of their preferred regulators. Three seats are up for grabs in the November election.

Further reading on the value of rooftop solar in Arizona: