by Julia Pyper
May 03, 2016

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UPDATE: On April 25, Chairman of the Arizona Corporation Commission Doug Little filed a letter encouraging involved parties to explore "other alternatives to mandatory three-part rates." In response to Chairman Little's letter, UniSource stated that it is willing to return to its initial proposal that places mandatory demand rates on all rooftop solar customers, but not on all residential customers. Stakeholders are now scheduled to hold settlement talks this week to discuss different rate design options. Talks are being held between intervenors in the UniSource rate case, and are separeate from settlement talks referenced below between solar companies and Arizona Public Service.

The rate request for a small, rural utility in Arizona could set a precedent for how electricity tariffs are designed throughout the state, and possibly in other parts of the country.

UniSource Energy Services, with roughly 90,000 customers, is seeking to implement a three-part rate with a mandatory demand charge of about $5 per month for all residential electricity customers. Demand charges are based on a customer’s highest average usage over a given period of time, and are typically offset by lower volumetric rates at other times.

Demand charges are common among commercial ratepayers, but no utility in the U.S. currently requires residential customers to pay them. 

In addition to the demand charge, UniSource has requested to increase fixed charges from $10 to $15 per month. The utility is also seeking to lower the net-metering credit for rooftop solar customers to roughly half of its current value -- from 10.5 cents per kilowatt-hour to 5.8 cents per kilowatt-hour.

The UniSource case unfolds as solar advocates and lawmakers agreed last week to drop competing ballot initiatives on net metering. Solar companies and Arizona’s largest utility, Arizona Public Service (APS), have agreed to launch separate talks to try to settle on a mutually acceptable tariff structure going forward.

Net metering credits aren’t the only issue up for discussion. Like UniSource, APS plans to file a request for mandatory demand charges in June. Tucson Electric Power, UniSource’s sister utility, could introduce demand charges in its rate case too. Both utilities are closely monitoring developments in the UniSource proceeding, which is the first to go before the commission.

Stakeholders participated in a week of hearings on the UniSource proposal in March. Regulators have since held multiple public meetings and intervenors have filed responses (E-04204A-15-0142). An administrative law judge is expected to write a recommendation on the case within the next two months. The ACC will then vote on an outcome over the summer, to be implemented in 2017.

In its initial filing, UniSource filed to make the demand charges optional for residential and small business customers and mandatory for solar customers. Then, during the week of hearings, regulatory staff issued testimony in support of mandatory demand charges for all customers, which UniSource then adopted as part of its request. The utility, which has seen retail electricity sales fall by nearly 8 percent since the last rate case, argues demand charges are a fairer way to allocate costs among ratepayers.

“There’s been a lot of discussion about mandatory rates not existing anywhere in the country -- and there may be some truth to that. But it is also true there are customers on three part rates with a demand charge who have used them successfully for a number of years,” said Joe Barrios, spokesperson for UniSource, also known as UNS Electric. “APS alone has over 100,000 residential customers who receive service under three-part rate.”

“We feel strongly that our customers have demonstrated they appreciate how rates work and can take advantage of them to lower their bill,” he added. “They’re smart. They are.”

The opposition

While it’s possible for customers to adapt to demand charges by reducing their maximum energy use, the proposal has received pushback. At a recent public hearing, a crowd of UniSource customers expressed confusion and concern regarding the proposed changes.

Arizona’s consumer advocate believes the UniSource proposal would adversely impact consumers. The Residential Utility Consumer Office (RUCO) has opposed the three-part rate, arguing UniSource doesn’t have the experience to implement universal demand charges without further study and a robust customer education plan.

The fact that staff proposed mandatory demand charges, rather than the utility, suggests that the utility is not prepared to manage a complex rate change at this time, according to consumer advocates.

“RUCO believes that an intelligently designed TOU demand charge can work well for residential customers. The key to success rests in what tools customers have at their disposal to respond to the new price signals and how the new rates are implemented,” said Lon Huber, director at Strategen Consulting, speaking on behalf of RUCO. “For instance, after evaluating the facts in the UNS rate case, RUCO believes that customers should have choice and a fair opt-out rate.”

To address the needs of solar customers, RUCO filed a proposal that would fix the net metering credit near the retail electricity for all customers who go solar starting next year, and lower the credit for new customers over a number of years until the incentive declined to wholesale rates. Whatever credit level a customer signed on for would be locked in for 20 years. This aspect of the proposal is similar to a plan introduced, and ultimately defeated, in Maine.

In addition, RUCO proposed offering solar customers a credit for excess generation of 8.5 cents per kilowatt-hour, coupled with a $12 minimum bill and a $16.5 per kilowatt demand charge, but only during peak times in summer. Sophisticated customers that want to couple solar with other technologies to control their usage and possibly save money would be drawn to the demand rate. This also offers solar customers a potentially more palatable option than the utility's proposed credit of 5.8 cent per kilowatt-hour, coupled with a $15 fixed charge and year-round demand charge.

Meanwhile, solar industry stakeholders are pushing to keep the status quo in the UniSource case. Advocates argue the imposition of new fees effectively killed the rooftop solar market in other utility territories, and that Arizona’s regulated utilities could be headed in the same direction.

“It’s pretty devastating and changes the rules of the game,” said Jessica Scott, regional director for Vote Solar. “The demand charge plus the changes to net metering will likely do the same thing that we saw in Salt River Project and Nevada where [the new rates] essentially stalled the residential market.”

Solar advocates see the UniSource proceeding as a test case for Arizona’s larger utilities. In an unusual move, APS sent multiple experts to testify on the UniSource case, including representatives from Harvard University, Brattle Group, Navigant Research and APS itself. Solar and consumer advocates see this as an attempt to steer the statewide discussion.

“I think that APS is really intervening in the UNS case to use this as a blueprint for APS territory and the rest of the state,” said Scott. “They were counting on UNS being a smaller, rural utility and that they could kind of sneak this through. I think the feedback from the public has been more dramatic than they were expecting.”

Implications for Rooftop Solar

If approved, the UniSource rate proposal would bring significant and potentially damaging changes to the Arizona solar market. However, it differs from other recent filings in several ways.

For one thing, the proposed $5 demand charge is significantly lower than the $30 fee imposed on solar customers by Salt River Project (SRP), an independent electric utility agency in Arizona. A preliminary review of SRP’s program one year in shows that just 14 percent of solar customers are saving money, while all others are paying more. Rooftop solar applications have dropped precipitously since SRP applied the demand charge in December 2014.

By comparison, UniSource’s $5 demand charge would likely have a modest impact on the solar market. Still, solar companies are worried the combination of UniSource’s proposed rate changes will be damaging.

The net-metering arrangement UniSource has proposed would see the credit for excess rooftop solar generation drop from the retail rate of 10.5 cents per kilowatt-hour to 5.83 cents per kilowatt-hour -- the rate paid for generation from large solar projects connected to the distribution grid. The utility believes using the same rate for all solar systems connected to the distribution system offers a fair valuation.

UniSource is also seeking to change the compensation from an energy credit to a dollar credit. Under that arrangement solar customers would receive a cash credit on their monthly bills for every kilowatt-hour reported based on the 5.83-cent rate, and would not be able to roll over credits for months on end.

Under the utility proposal, any household that installed their system prior to June 1, 2015 would be grandfathered onto new rates. UniSource believes these existing customers should be able to stay on the two-part rate and continue to be credited for excess generation at the retail rate until 2035 -- 20 years after the cut off date. Solar customers that filed for interconnection after June 1, 2015 would be subject to a new net metering arrangement and a mandatory three-part rate.

If this scenario is adopted, there will be a group of customers that purchased solar after June 1, 2015 and before the implementation date that will be forced on to new, less favorable rates. This seems to create a Nevada-like situation, where existing solar customers were not grandfathered in to new rates and now expect their monthly savings from going solar to disappear over time. Many customers called it a “bait and switch,” finding themselves on new rates after taking advantage of NV Energy’s solar subsidy program.

There are important differences between the UniSource and NV Energy scenarios, however. UniSource has not proposed raising fixed fees specifically for solar customers, and the excess generation credit customers receive is several cents larger (5.86 cents per kilowatt-hour versus a decline to 2.6 cents per kilowatt-hour in Nevada).

In addition, far fewer customers would be affected if the UniSource proposal was approved. There were around 17,000 solar customers in NV Energy territory when the new rates took effect, and there are currently around 1,800 in UniSource territory. A couple hundred customers are believed to have gone solar since June 1, 2015 and will face the grandfathering issue if the rate changes are implemented.

Warnings were posted on TEP's and UniSource's websites noting that a possible rate change was pending. Customers were also required to sign a disclosure form acknowledging that their rates could change. As a result, no customer should be able to claim they were given a "bait and switch," according to the utilities. Regardless, the few hundred customers who have gone solar in recent months are likely to push back against new rates.

Staff oppose grandfathering

ACC staff did not want to address net metering in its testimony. “Staff is attempting to keep the commission out of the technology conflict,” said Tom Broderick, director of the ACC staff, in an interview.

UniSource has stated that if the mandatory three-part rate design is approved, the utility could table the net-metering discussion until a later date. Under the three-part rate structure solar customers would pay a new demand charge, but the retail electricity price would drop as a counterbalance, which would reduce the net-metering credit anyway. The annual average would be around 8.5 cents per kilowatt-hour, a couple cents lower than the current residential rate of 10.5 cents.

While staff did not weigh in on how to address the issue of setting a value for distributed generation, staff did introduce mandatory demand rates for all customers, including existing solar customers.

“Staff’s view is that in the short-term, that will be hard to do,” said Broderick. “But in the long term, we think we’ve given customers a power tool to reduce their bill and also to the company to reduce costs if customers in fact reduce their demand.”

Notably, no solar customers would be grandfathered onto the demand charges under staff’s proposal. In recent discussions, UniSource reiterated that existing customers should see some form of protection. In response, staff suggested that rooftop solar customers prior to June 1, 2015 be moved to the three part rate, but receive a 15 percent bill credit to partially mitigate the changes.

Arizona regulators have a number of proposed solar policies before them in the UniSource case, including RUCO’s fixed-credit option, the utility’s wholesale net-metering credit option and the solar industry’s status-quo option, as well as staff’s proposal not to grandfather. The ACC could choose one of these options, or defer the entire discussion on compensation for distributed energy systems to a value-of-solar proceeding that kicked off last month (E-00000J-14-0023).

That general docket could guide the level of compensation established for solar-specific rates for utilities across the state. However, it’s unclear how the ACC will incorporate the results.

“In my opinion, a case like UniSource is on track to proceed without any significant input from the [value-of-solar] docket,” said Broderick. “Then, as that value-of-solar docket progresses, depending on what the findings are, that can inform cases over time.”

APS to introduce demand charge

Last year, APS withdrew a request to increase fixed fees on rooftop solar customers in APS territory from $5 to $21 per month. The move provoked a major backlash, which prompted the value-of-solar proceeding.

As the solar proceeding progresses, APS has decided to step away from a proposed fixed-charge increase and is instead planning to pursue universal demand charges in its next rate case, said Jeffrey Guldner, senior vice president of public policy at APS, in a recent interview. He said the decision stems from changes in the wholesale market more so than the growth in residential solar.

Large-scale solar projects are producing large amounts of energy during the day, which is making wholesale prices negative. Right now, Arizona is getting paid to take California’s surplus solar energy, rather than pay to have those electrons. Very soon Arizona utilities will be in the same position, said Guldner. Price signals need to change so that customers are incentivized to consume electricity when resources are available and to reduce evening peaks when the grid is constrained.

Distributed solar adds to the problem. Rooftop solar customers are getting a net-metering price signal that their electricity is worth the full retail electricity rate in the middle of the day when the wholesale prices have bottomed out, creating a mismatch in the energy market. At the same time, the distributed solar element makes it hard to enact change, Guldner said.

“There’s a lot of political pressure right now to do nothing, saying it’s too hard,” said Guldner.

“With wholesale markets changing very quickly, we cannot continue to move at the same pace as regulated utilities for the next 20 years, because we’re going to see the two markets diverge and inefficiencies [increase],” he said.

APS recently commissioned Navigant Research to conduct a study that found that solar companies earn a 40 percent project return on rooftop solar leases in UniSource territory. The study was submitted as part of the UNS rate case. The study has since been critiqued and APS has responded.

Guldner said the Navigant report was intended to open a conversation about changing current policies, and is not intended to prescribe what the changes should be. “We’re trying to rebut the argument that you can’t touch anything or you implode the whole [rooftop solar] business,” he said.

According to Guldner, demand charges engage consumers to help solve grid issues. APS already operates a successful optional demand-charge program, and companies like Nest, Honeywell and ecobee have technologies to help make the shift to demand rates seamless. But solar advocates view universal demand charges as anti-solar, which Guldner says paralyzes the entire rate-case conversation.

“It’s hard to find compromise…when you've got such an unwillingness to move or to have a constructive dialogue,” he said.

Last week’s agreement to launch mediated talks between solar companies and Arizona’s utilities could offer a pathway to compromise. Whether or not these discussions will have any bearing on the UniSource rate case is yet to be seen.


This story was updated to note that in addition to warnings posted on utilities' websites, TEP and UniSource solar customers were required to sign a disclosure form acknowledging a pending rate change.