Arizona Capitol Times
Opinion-Editorial
By Marc Spitzer
July 25, 2003

As Arizona continues to deal with the implications of drought and massive population growth, an entity many people have 'never heard of' and few people understand will be at the forefront of water issues. To understand how those decisions will be made, it is important to understand a brief history of utilities regulation in Arizona (don't worry - it's not that boring).

The Arizona Corporation Commission (the "Commission") is unlike public utility or public service commissions in most other states. The Commission's authority is derived from Arizona's 1912 Constitution, so its jurisdiction over utilities doing business in Arizona is not circumscribed by the Legislature or the Governor - as in other states (see California's electricity crisis).

Arizona's populist founding fathers held a healthy distrust of utilities, so the Commission was made subject only to the will of Arizona's voters, and the direct election of Arizona's Commissioners again makes the Commission a distinct, and populist minority among public utilities commissions.

Aside from structural considerations, utilities regulation is subject to a debate over the scope of such regulation. One school of thought holds that the regulator's role is that of pure rate regulation - essentially an accounting exercise. Under this model, the sole objective is to achieve reliable service (water, gas, electric, and telecommunications) for the lowest possible price. The universe of issues subject to debate is narrow, but complex. For example, determinations of systemic redundancy and reserve margins are necessary, which require a balancing of cost versus reliability. Accounting questions predominate, such as the utilities' cost of capital and rate of return, and the timing of plant and equipment being placed in service. The foregoing decisions, upon arithmetic computation, lead to the rates paid by customers.

A more enlightened analysis of utilities' regulation, at least in my view, includes the consideration of the effects of public utility service on the environment. Arizona law would appear to support this view. See Arizona Revised Statutes Section 41-360, et. seq. (authorizing the Arizona Power Plant and Line Siting Committee).

Just as the Legislature acknowledged the impact upon the environment from Commission decisions on power plant and transmission line siting, we also must recognize the effects of the Commission's decisions in gas, electric and water rate cases on the environment. For this reason, the Commission has become increasingly active in evaluating the sources of water and the appropriateness of those sources and in mandating that all water companies adopt curtailment plans for water shortages before the shortage occurs.

In one example of the Commission's focus on the environmental impacts of water use, the Commission found that the Sun Cities' water company should cease using groundwater to irrigate golf courses and replace it with available, untreated CAP water - and ensure that the groundwater not be pumped from the aquifer for any other reason. The resulting order will save more than 6,500 acre-feet per year of groundwater and have a dramatic effect on the region's aquifer.

The Commission is now faced with a great challenge: keeping rates affordable at the 287 small water companies in Arizona while dealing with the financial costs of the new U.S. Environmental Protection Agency arsenic standard. Some early cases have already begun, and in some small water systems the cost of meeting the arsenic standard is greater than the total value of the water system.

Whether the arsenic standard is justifiable under scientific risk analysis or not is now irrelevant - federal law is clear and the EPA standard must be met. The Commission has worked closely with the Arizona Department of Environmental Quality (ADEQ) and the Arizona Department of Water Resources (ADWR) to coordinate and develop an Arsenic Master Plan. ADEQ will collaborate with water companies to identify methods to remove arsenic; ADWR through the Water Infrastructure Financing Agency will strive to provide financing to the companies that need it; and the Commission will work with the companies and the ratepayers to ensure that those costs are recovered without exceeding the ability of ratepayers to pay.

The Commission will increase its use of tiered rate structures, which will mean that as a customer uses more water he bears proportionally more of the total costs - the equivalent of progressive taxation. Water companies will have to adopt Commission-approved curtailment tariffs that make clear to all customers (in advance) what steps they will have to take should the company's sources of water become constrained. Our hope in adopting tiered rates and curtailment plans is that we begin to raise the public awareness of the value of water in Arizona - and in so doing, see a reduction in water use in high-use areas.

My first vote as a member of the Commission in January 2001 was to create the "Environmental Portfolio Standard," by which the Commission ordered all Arizona load-serving electric companies to use renewable energy sources. No one has complained about the modest cost, because Arizona voters collectively value the environmental ethic. Public policy is all about balancing competing interests. The Arizona Corporation Commission now believes that environmental impacts of utility regulation must be considered. That was not always the case - but I believe the principle is now firmly part of Arizona law, as it should be.

Marc Spitzer is chairman of the Arizona Corporation Commission. This was originally published as a "Guest View" in the May-June 2003 issue of Arizona Water Resource, a newsletter produced by the University of Arizona's Water Resources Research Center in Tucson.