Implications if Potential for the Arizona Power Sector To Be Deregulated in 2022

Across the United States, the utility sector notoriously must operate in a patchwork fashion. The handful of regional grids all have their own independent markets and unique rules. Then within each state, utilities must follow different regulations on how the power sector is run. On top of those factors, federal involvement also comes into play via the Federal Energy Regulatory Commission (FERC).

Because of these layers of oversight and bureaucracy, the utility companies naturally operate in varying ways from one state to the next, with one of the starkest potential contrasts coming from whether the power sector in each jurisdiction is regulated or deregulated. Currently, 19 states and the District of Columbia offer full or partial deregulation of power providers, with other ones regularly considering such a move. The rest of the country, however, operates under a regulated monopoly, meaning customers must utilize their local existing power provider with no alternative options. Because of this monopoly, the state utility regulators retain tight governance over the regulated power providers to try and protect the customers’ rights, but customers in these regions are calling more loudly to take matters into their own hands with deregulation.

In a deregulated market, customers have the ability choose their power provider, much as they would in any other commercial sector, incentivizing utilities to not just satisfy regulator requirements but also to compete and innovate to provide the best possible services at the most competitive prices, lest those customers opt for one of the other providers available to them. In this way, deregulation is often seen as a way to put the customer first, so it’s no surprise that ratepayers and politicians are increasingly investigating these opportunities more and more.

The latest state that’s dipping its toes into the world of utility deregulation and considering retail energy choice in power markets is Arizona. So, what’s the current state of the debate and how would it impact stakeholders should deregulation come to fruition?

Current State of Arizona Power Market

The utility landscape in Arizona is currently dominated by two major utilities: Arizona Public Service (APS) and Tucson Electric Power (TEP), providing the customers in their coverage areas with no option but to utilize their services in the regulated market. That said, Arizona’s wholesale markets do produce more than 80% of the states’ electricity.

Increasingly, though, Arizonans have been pushing their utilities to embrace more clean energy. This clean energy can be provided as a default part of the grid mix or via opt-in programs that allow customers to direct their bills to go towards more renewable energy generation.

While regulators are pushing for Arizona utilities to reach 100% clean energy targets, these deadlines are far out and thus the projects to move in that direction are going much slower than many customers would like to see. And that’s exactly where the grassroots push for deregulation comes from.

What’s Behind the Deregulation Push

To match this customer push for clean energy options, Green Mountain Energy (a subsidiary of NRG Energy) has formally petitioned the state to be allowed to bring its 100% renewable energy citizens to Arizona citizens. Specifically, Green Mountain Power seeks to serve as an alternative option for APS and TEP customers who want to opt into such services but don’t currently have the option, a model that Green Mountain Power has already successfully implemented in 7 other states.

To try and make this happen, Green Mountain Energy filed an application to the Arizona Corporation Commission (ACC). Despite not being in a formally deregulated market that is traditionally necessary for new entrants like them, their petition argues that Arizona law actually allows for such a move. In the application they write:

“Approval of this application is in the public interest because it will result in more options for customers and expand the availability of renewable energy in Arizona. Indeed, by approving this application the commission can enable Arizonans to not only choose their electricity provider, but also choose the type of generation they would like to receive. Green Mountain is uniquely qualified to provide these new options to Arizonans.”

Path Forwards and Potential Impact if Deregulation Goes Through

Unsurprisingly, the existing and powerful utilities have much to say about this proposal, and they are poised to fight hard against this proposal by Green Mountain Power. In response to the petition, these utilities are appealing to the Corporation Commission to protect their monopoly, and failing that they are prepared to bring the process through the court systems to debate the legality of it. and poised to bring any decision otherwise to the courts.

In fact, previous attempts like this one have been tried and ended up getting shot down by the judicial system, but where Green Mountain Power’s move may differ is that the Arizona State Supreme Court offered a decision last year that allowed that the state legislature may overrule the Corporation Commission on energy industry matters. This decision, lawyers for Green Mountain Power posit, could open the door for legislation or even popular vote to allow deregulation.

Surveys done on this topic highlight that customers do, in fact, want this type of choice, seeing it as inherently benefitting them. Further accentuating that fact is Green Mountain’s internal data that suggests they would expect to sign up 20,000 customers in the first five years that the state of Arizona allowed them to operate.

Green Mountain Power is seeking to bring this 100% renewable energy option to customers, where APS and TEP power mixes both remain under 15% renewable, despite forward-looking targets to grow that figure. Were deregulation to come to Arizona, Green Mountain Power would rely upon power purchased from other plants. All the electricity gets mixed into the same grid, so it’s impossible to separate which electrons come from renewables compared with fossil fuels, but the amount of energy used by signed up customers would be verified with renewable energy certificates (RECs) to ensure their power use is directly associated with renewable power generated and sold into that grid. Further, customers would receive utility-consolidated bills, meaning they’d still get bills from APS or TEP, who would manage and charge for the transmission and distribution of power, but an extra line item would call out the power generated and sold via Green Mountain Power.

Note, also, that this isn’t the first move towards deregulation in Arizona, as in fact they first tried to institute it in the 1990s. However, back then there was too much resistance and uncertainty which ultimately doomed those efforts. The Corporation Commission has since reviewed the idea multiple times, most recently in 2019, but there’s been a large effort from the utilities fighting back. The other states that have already made such a move, though, highlight opportunities for study—and in fact they’ve seen a mixed bag of results, some more positive and some more negative. However, that simply highlights that deregulation success is less about whether to do it or not and more about how to do it intelligently for maximum customer benefit. Arizona can avoid the hard lessons other states may have had to learn, while modeling their system after the more successful implementations of deregulation.

As of today, the latest development is that the Corporation Commission ruled that the application shall be “held in abeyance pending the issuance of an opinion from the state attorney general related to retail electric competition, as requested by the Commission and Commissioners.” So, stay tuned for potential fireworks in 2022 when that happens!


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