Arizona Republic
Jun. 28, 2003
Max Jarman

After a decade of rate decreases, Arizona Public Service Co.'s almost 1 million customers could see a big jump in their electric bills by July 2004.

The state's largest electric utility asked regulators Friday for a $175 million per year rate increase that would boost the average monthly bill for residential, commercial and industrial customers 9.8 percent. Average residential consumers, using 1,100 kilowatts of electricity per month, would see their bills jump to $103.57 per month from $94.33.

It is the first rate increase sought by the utility since 1991 and would substantially erode a 15.7 percent drop in rates since 1994.

"Ahhhhh!" said retiree Mort Greenberg, 81, of Scottsdale. "The middle of a hot, hot summer (would be) a hell of a time to be raising rates."

APS President Jack Davis said the utility is reluctant to raise rates, but it is necessary to cover higher costs for natural gas, used to produce electricity, and for building power plants and transmission lines.

Those costs "are not included in current prices," he said.

The proposed new rate structure also would allow APS to pass future costs of producing or purchasing electricity along to consumers. That means that ratepayers could have more exposure to volatile energy markets. Due to rate caps, most Arizona consumers were unaffected by soaring power prices in 2000 and 2001.

While some California consumers saw power bills quadruple in 2000, APS customers saw theirs drop 1.5 percent.

APS customers will see one more 1.5 percent drop on July 1, which satisfies a 7.5 percent reduction mandated under Arizona's deregulation rules.

How the process works

An Arizona Corporation Commission judge will review the proposed rate hike and make a recommendation. The five-member commission will ultimately decide how much, if any, of the rate increase customers will pay. The commission could rule by the middle of next year.

The proposed increase in utility rates could be hard on people living on fixed incomes.

Chandler resident Dorothy Ruoff and her husband live on Social Security benefits and pay about $250 per month for electricity during the summer.

"My biggest concern would be for the elderly on fixed incomes," she said.

"These folks probably need air-conditioning more than anybody else. But probably the first thing they would do is shut it off and use fans if that rate goes."

Businesses also would be hit, particularly those that use large amounts of electricity.

Paul Ringer, senior vice president of the Greater Phoenix Economic Council, said the increase could affect the agency's ability to attract new businesses to the area.

"We've enjoyed a competitive advantage because rates have been going down," he said.

Indeed, rates in many other Western states have increased significantly while APS' rates have declined.

Egg ranch has big bill

Glenn Hickman, general manager of Buckeye's Hickman Egg Ranch, cringed at the thought of higher electric rates.

His business uses massive amounts of energy to run 800 fans and evaporative coolers to keep chickens cool and laying eggs.

"Our utility bill is staggering," he said.

Arizona's second-largest utility, Salt River Project, declined to comment on the APS request.

But SRP officials said they have no current plans to increase rates permanently, though SRP imposed a temporary 2.5 percent hike in October, to last for 18 months.

APS' Davis noted that since last year, the cost of electricity the company has to purchase to cover shortages has gone up 63 percent and the cost of natural gas, used to power many of its power plants, has risen 68 percent.

Many of the costs also are associated with the state's ill-timed foray into electric deregulation.

Almost $1.5 billion in costs APS is seeking to recover from ratepayers would not have been allowed had the Corporation Commission continued the state's march toward deregulation last year.

Under deregulation rules, approved in 1999, APS had to write off $234 million of its investment in power plants and transfer the plants to an unregulated affiliate called Pinnacle West Energy.

Because APS was prevented from owning power plants, Pinnacle West Energy built two new power plants, valued at more than $1 billion.

Now that the Corporation Commission has significantly altered the terms of the deregulation agreement, Pinnacle West Energy wants to transfer the plants to APS and recover its $1 billion investment from ratepayers.

It also wants ratepayers to reimburse the utility for the $234 million write-off and other expenses.

Dispute over plants

But regulators have so far been unwilling to force consumers to pay for the plants, insisting they were built to sell electricity to the highest bidder. Such plants are called merchant plants. APS disputes the claim.

"If these were merchant plants, we would have sold the output to California at a big profit," Davis said. Instead, much of the capacity is being sold to APS at reduced prices.

The plants have been a sore spot for APS' parent Pinnacle West Capital Corp., which obtained short-term construction loans for the plants.

Without a guaranteed payback from ratepayers, banks have been reluctant to provide long-term financing for the facilities, given the depressed power market in the West.

To keep its securities from being downgraded by rating agencies, Pinnacle West had to earlier this year borrow $500 million from APS to pay off loans that were coming due.

Bill Meek, head of the Arizona Utility Investors Association, is concerned that the price of Pinnacle West's stock could be hurt if the commission refuses to allow the new plants into the rate base.