Retail Choice in Arizona to Cost $1 Billion!

1 billion

That is “officially” the latest information reported to the Arizona Corporation Commission (  But before we all throw our hands up and resign ourselves to remaining hostages of Arizona Public Service and Tuscon Electric Power, let’s take a quick look at the facts to make sure we understand what’s going on.

First, let’s not discount that the “$1 billion” value comes from Arizona Public Service themselves.  (Even Tucson Electric Power wasn’t quite that bold; they only said that the transition would cost $500 million.) If you ask yourself who stands the most to lose from Arizona transitioning to a deregulated electricity market, you’ll quickly come to the conclusion that Arizona Public Service has the most to lose.  Right now, they make money on both the delivery and the supply of electricity in Arizona.  In a Retail Choice market, Arizona Public Service would only be guaranteed a return on the delivery of electricity, while other companies would compete to supply electricity to end customers.  I don’t know about you, but when the used car salesman tells me that the 1977 AMC Gremlin is “just the car I’ve been looking for!”; I tend to take what he says with a grain of salt.



So, let’s take a look at just what they’re saying and see if any of it holds water.  Their first point is that Arizona would need to be part of a Regional Transmission Operator (RTS) or an Independent System Operator (ISO).  (ISOs and RTOs are responsible for operating the transmission grid which sends electricity over long distances.  I covered their operation more in detail in a previous blog post –  Both APS and TEP are correct that in order for Arizona to have a Retail Choice market, Arizona does need to have an RTO or an ISO.  However, they’re missing the mark with some of their costs and complexity.  First of all, Arizona doesn’t necessarily need to build its own RTO / ISO.  Texas has one (ERCOT) that has been operating effectively for a while which Arizona should be able to join.  Also, California has one (Cal-ISO) that has also been operating for a while.  The one in California is geared to retail choice even though California has never fully allowed Retail Choice down to the individual residential customers.  Arizona and California already share transmission lines and generation, so sharing an ISO shouldn’t be that big of a deal.

One of APS and TEP’s additional points with regards to an ISO / RTO relate to the additional cost necessary to operate the ISO / RTO every year.  They peg this operating cost at about $40 million per year.  I think it’s a little high, but I’ll let them have this point.  What they fail to mention is that each of them, APS and TEP, are both currently operating a similar system to an ISO / RTO for each of their utility territories.  They need to determine which power plants to operate in order to deliver the needed electricity to the grid.  That’s what an ISO / RTO does as well.  When they mention the operating cost for the ISO / RTO, they happy to tout the cost “increase”, but they forget to mention that there are cost reductions as well associated with both APS and TEP no longer need to have those functions in house.  And, since APS and TEP’s current functions are redundant, I would suspect that the overall cost would be less than what’s currently being spent on this.  But, for argument’s sake, I’d just call this a $0 cost “increase”.

TEP’s last point regarding an ISO / RTO is that the Arizona Corporation Commission would lose its responsibility for “resource adequacy”, or ensuring that enough power plants get built in order to address future electricity requirements.  Amazingly enough, the states of Illinois, New Jersey, Pennsylvania, Ohio, Massachusetts, Maryland, Delaware, Connecticut, Rhode Island, Maine, and New Hampshire have all survived even though the “resource adequacy” is being determined by their respective ISOs or RTOs.  (Both New York and Texas operate their own ISO / RTO, so I’ve excluded them from the list.  And, even though the ISOs / RTOs fall under FERC jurisdiction, they are still beholden to the needs of their member states.  (Regardless, Arizona will end up with much more say in their chosen ISO / RTO than Illinois, which is actually split between PJM ISO and MISO.)


For the Good

Conveniently, all of APS and TEP filings neglect to point to all the good that retail choice can have in a market.  The point of a deregulated electricity market is to give all electricity customers the ability to choose their electric supplier.  This in turn forces the suppliers to compete against each other, and competition has a tendency to keep prices low.

Let me take a moment to address one of the biggest counterpoints that opponents for the deregulation of electricity prices almost always bring up.  They say, “Look at the deregulated electricity markets.  They have some of the highest electricity rates in the country!”  They are correct in their facts here – deregulated electricity markets (with the notable exceptions of Hawaii and California) tend to be the most expensive electricity markets in the United States.  But, their causal logic is incorrect.  Those opponents would have you believe that the high electricity prices in those markets are a result of electricity deregulation.  In reality, these states had the highest prices for electricity even before deregulation occurred in any state.  Additionally, if you analyze the data, you’ll discover that the increase in electricity prices in these deregulated markets has been slower than in other markets across the United States.  At the end of the day, deregulation does work.  It’s just a matter of determine how best to implement it.

And, the reason you want to do this is because of choice and because you’ll have companies competing for your business.  In Texas, where deregulation has been active for a very long time, everything comes through your electricity supplier.  They set up your electricity when you move.  They provide your electricity.  And, they’ve even begun providing other services like including programmable services and demand response programs to ultimately save you more money on your electricity bill than by just reducing your electricity rate.  I’ve even heard of a few companies offering to install solar panels on your house as part of choosing them as a supplier!

The Point

So, I ended up picking a green plan, which means that every time I use electricity, I’m supporting the development of wind turbines and solar farms.  (It makes me feel warm and fuzzy every time I pay my electricity bill.)  It’s not an option I would have gotten from my old utility, and I’m really glad I made that choice.  The ultimate point is that the freedom to choose is good.  We all prefer to have options and to have the freedom to choose what we want.  And, electricity deregulation / retail choice allows us to choose when it comes to our electricity.



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