Legislative study committee final report

              Arizona Legislature

Joint Legislative Study Committee

on Electric Industry Competition

LEGISLATIVE STUDY COMMITTEE

FINAL REPORT

Submitted to the Arizona Legislature

December 31,1997

CO- CHAIRS

Speaker Jeff Groscost

MEMBERS

Representative Ken Cheuvront

Representative Harry Clark

Representative Bill McGibbon

Representative James Weiers

Senator John Wettaw

Senator Scott Bundgaard

Senator Chris Cummiskey

Senator George Cunningham

Senator John Huppenthal

COMMITTEE AUTHORIZATION

The Joint Legislative Study Committee on Electric Industry Competition was established by Laws

1996, Second Regular Session, Chapter 276 ( HI3 2504). The committee membership consists of

five Representatives appointed by the Speaker of the House and five Senators appointed by the

President of the Senate. In conjunction with the Legislative Study Committee an advisory

committee was established to provide technical assistance, support and information regarding

electric industry competition.

COMMITTEE DUTIES

The committee duties were to:

1) Study and make recommendations on the following issues in regards to electric retail

competition:

a) The financial issues including but not limited to the financial impact to customers,

the financial impact to the utilities, state and local tax implications, and recovery of

stranded costs.

b) The legal issues including issues of federal and state jurisdiction, current state law

and rule, interstate reciprocity, universal service and the protection of proprietary

information.

c) The social issues including the efficiency and sufficiency of an aggregate supply of

energy, environmental impacts, the impacts on developing renewable resources,

and the method to ensure fair and equitable treatment among all consumers.

d) Issues related to system planning, operation and reliability

e) Issues related to market structures

f) Additional issues related to retail electric competition

2) Complete a report to the Legislature with a proposal to implement electric retail

competition.

COMMITTEE RECOMMENDATIONS

The Committee met a total of five times. The Committee heard testimony on the following issues:

1) October 9, 1996: An Overview of the Electricity Utility System and a History of the

Electric Utility System in Arizona and Nationally

2) November 13, 1996: A Review of the Proposed Arizona Corporation Commission Rules

on Retail Competition

3) April 18, 1997: Formation of three work groups to study 1) a date certain to begin

competition; 2) Kilowatt taxes in lieu or property tax, and 3) the Legislative role in

implementing competition.

4) June 19, 1997: Review of the work group work plans and testimony on the California

deregulation legislation.

5 ) October 16, 1997: Review of the work group final reports and testimony from Legislative

Counsel on legal issues involved in retail competition

The minutes from the meetings are attached in appendix A.'

The Committee did not adopt any recommendations or proposals on how to implement electric

retail competition. However, the work groups that were established by the Study Committee

completed reports containing recommendations and testimony on specific issues relating to

electric retail competition. The executive summary and recommendations from the work group

reports are contained in appendix B. The complete reports are on file at the Chief Clerks Office

of the House of Representatives.

' Due to audio difficulties, the minutes from the June 19, 1997 meeting are not available.

2

Appendix A

Study Committee Meeting Minutes

ARIZONA STATE LEGISLATURE

JOINT LEGISLATIVE STUDY COMMITTEE ON

ELECTRIC INDUSTRY COMPETITION

Minutes of the Meeting

Wednesday, October 9, 1996

2: 30 p. m., House Hearing Room 2

MEMBERS PRESENT

Representative Bundgaard

Representative Cheuvront

Representative McGi bbon

Senator Barnes

Senator Huppenthal

Senator Peiia

Senator Wettaw, Co- chairman

Representative Groscost, Co- chairman

MEMBERS ABSENT

Representative Clark

Senator Cummiskey

STAFF

Teri Grier, House Analyst

Debbie Johnston, Senate Analyst

Co- chairman Groscost convened the meeting at 2: 45 p. m. and roll call was taken. He

acknowledged Bill Twardy, Jack Davis, Gary Yaquinto, Charles Bayless, John Underhill,

Tom Delawder and Steven Olea as members off the working group which would make the

Electricity Utility System presentation later in the meeting. He additionally acknowledged

Steve Glaser, Dennis Criswell, David Berry, Martin Schultz, Michael Curtis, Ray

Williamson, Russell Smoldon and Tom Jones as members of the working group which

would make the History of the Electrtic Utility System presentation.

Representative Groscost next introduced members of the Advisory Committee on Electric

Industry Competit~ on, established by law to provide technical assistance, support and

rnformat~ onre garding electric industry competition to the Committee. He named George

Allen, Mark Bonsall, Ken Evans, Steven Glaser, Jack Haenichen, Renz Jennings, Roy W.

Jones. Tom Jones. Joe Lane, Thomas S. Martin. Bill Meek, David Mills, Greg Patterson,

Pete Peterson. Darrell Pichoff, Martin Schultz, Chuck Shipley, Jeff Schlegel, David Spaur,

Donald Vance, Lisa V. Wayne and Anne Wendell. Members' affiliations are listed on a

handout drstributed at the meetrng ( filed with original minutes).

Teri Grier, House Research Analyst, provided a brief overview of the Committee charge,

noting that its report to the Legrslature, due no later than December 31, 1997, shall include

an assessment of areas including financial, legal and social issues, issues related to

system planning, operation, reliability, identification and review of potential market

structures and other issues not mentioned specifically but related to generation, sale and

transmiss~ ono f electric energy. Each aspect of the charge is further defined in a handout

Ms Grier distributed ( filed with orig~ naml inutes)

October 9,1996

Page 2

STUDY COMMITTEE ON ELECTRIC

INDUSTRY COMPETITION

ELECTRICITY UTILITY SYSTEM PRESENTATION

Charles Bayless, Tucson Electric Power ( TEP), gave a slide presentation ( copies filed

with original minutes) entitled " Electricity 101 ." He began with an explanation of how

electricity is generated, continuing with a description of generation resources, generation

dispatch, transmission and distribution. He noted that one of the major driving forces

which has changed the electric industry is the gas turbine engine which can be now

obtained for under $ 500 per kilowatt hour ( kwh). Mr. Bayless explained that in the past

each generating station was unique, but since ~ t 1s now possible to mass assemble gas

turbine engines, prices have fallen. He noted that the idea of customers generating thelr

own power IS now plausible wrth the rad~ cadl ecrease in generation cost and plant size.

Mr. Bayless explained that in Arizona, nuclear and coal energy resources domlnate In

producing power.

Mr. Bayless indicated the other thing that has changed the electric industry dramatically

is transmission, changing the industry from a natural monopoly operating on rules and

regulations passed in the 1930' s to 1950' s to a vast, interdependent interstate market. He

explained that this interstate commerce is regulated by Federal Energy Regulatory

Commission ( FERC), which the states must now develop a working relationship with In

considering deregulation. -_

Mr Bayless explalned that transmlsslon has become very complex, notlng that rellabll~ ty

1s accompl~ shedb y llnklng companies' power plants to the same grld, allowlng energy to

be accessed from the most available source, thereby reduclng the reserve margln

necessary for any one company He explalned that In 1968 the North Amerlcan Electrlc

Rellablllty Councll ( NERC) was formed In response to the widespread power blackout In

the northeastern Unlted States In contrast Mr Bayless noted the recent August 10 1996

power loss In the western Unlted States d~ dno t result In a blackout but rather deliberately

scattered outages In response to a voltage collapse In southern Oregon on that day He

lndlcated that 95 percent of customers' power was restored In less than 2 hours Mr

Bayless noted the Western Systems Coordlnatlng Councll ( WSCC) 1s also charged wlth

settlng rellablllty crlterla to Insure there are no repeats of blackouts and settlng up an

Interconnected system throughout the entlre western Unrtea States He explalned that the

generat~ ono f electrlclty constltutes 50 percent of energy costs transmlsslon constltutes

40 percent and dlstrlbutlon constltutes 10 percent

Mr. Bayless revlewed the events of the power outages on August 10, 1996 in the. western

United States, explaining this event was caused by neglected tree trimming at an Oregon

plant. He explalned how power was shifted all over the west to avoid major blackouts.

Mr. Bayless related that when TEP started In the 1930' s it was a natural monopoly.

unrelated to other Arizona Publlc Servrce or the Salt River Project, or any other power

STUDY COMMITTEE ON ELECTRIC

INDUSTRY COMPETITION

October 9, 1996

Page 3

company, and noted that laws passed then reflected this premise. He emphas~ zedth at

this premise no longer exists; that it has been demonstrated the electric industry is not a

natural monopoly and can transition to operate in a competitive environment. Mr. Bayless

expressed his wish to work with the Committee to develop a rational transition process to

competition, while at the same time, insuring that energy delivery remains reliable.

Senator Wettaw asked what the capability is of importing energy resources from outside

the west and what safeguards exist to prevent blacking out the whole country In doing so.

Mr Bayless responded that lmport limits into each area are observed, so it is known

beforehand how much can be brought in on any transmiss~ onli ne. He acknowledged that

amount of energy which can safely be Imported is an issue that must be investigated.

Senator Wettaw asked if it would be possible to totally deregulate the electric industry

across the states if there are import limits established for safety purposes.

Mr. Bayless acknowledged this is a critical question that needs to be answered, because

there will be limits maintained. He noted that FERC is currently dealing w~ thth ~ sp roblem

and is considering the idea of an " independent system operator" that would take over

transmission and operate it for all companies, insuring that whoever needed energy could

obtain it.

Representative Groscost questioned what the chance would be that power would be

transported gr~ dto grid, suggesting that, realistically, competition will occur within each

grid.

Mr Bayless noted that the WSCC grid IS so big w~ th a natural barrler of the Rocky

Mounta~ vs that not much trdnsfer would be seen there However, he noted that In ' he

northeastern Un~ tedS tates there IS no reason why there could not be such transfer Mr

Bayless noted th~ sIS a FERC questlon and ~ t IS wrestl~ ngw lth how to operate the system

under deregulation

Representatwe McGlbbon asked ~ f by adding more potentially independent suppliers to

the local grld i e Fort Huachuca more energy reserves mlght be added ~ f out- of- state

systems go down

Mr. Bayless acknowledged it both helps and hurts. He noted it helps in the sense it

provides more energy that can be generated qu~ ckly, but noted that in an unstable

condition, it IS sometimes harder for the small independents to follow. Mr. Bayless

expressed h ~ svi ew. that the Independent suppliers will overall create a more stable

sltuat~ onb ecause they can come on line very qulckly and are dispersed.

October 9, 1996

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STUDY COMMITTEE ON ELECTRIC

INDUSTRY COMPETITION

Representative Groscost suggested reliability may become an element of competition and

the opportunity could arise to offer this as a sales point in imposing limits. He suggested

a company such as Motorola may choose to pay a higher rate for 99 percent reliability,

whereas another, such as one of the mines, may choose a lesser percentage of reliability

for a lower rate.

Mr. Bayless agreed reliability will become a marketing tool, however, suggested it needs

to be determined who IS responsible for the system stability and noted utilities would want

to be compensated if it was determined to be their responsibility.

Representative Groscost acknowledged that ~ f additional effort is required that costs more

than an incremental amount, the user should be paying more.

Senator Barnes asked Mr. Bayless to describe his view of the Committee's charge and

also asked what he hopes to see happen in the Legislature as a result.

Mr. Bayless expressed his view that the charge of the Committee is to explore a move

towards competition, but acknowledged it is a very delicate matter. He noted it would take

a cooperative effort, with the outcome being a fully competitive, reliable electric market,

and the Legislature assessing what laws are necessary to put this into place.

Senator Barnes asked Mr. Bayless whether he thinks the Corporation Commission is more

responsible for making rules, or the Legislature more responsible for making laws, in

regard to this move toward competition.

Mr. Bayless expressed his opinion that both the Legislature and the Corporation

Comm~ ss~ ohna ve authority to effect different parts of the move to competition. He

suggested ~ t may take a constitq~ tionaalm enc'lnent, because the Commission is a

const~ tut~ onabol dy wlth rate- setting powers. Mr. Bayless expressed his hope that the

entitles wlth specialized powers work together and realize it must be a cooperative effort.

Mr Bayless emphasized ~ t IS generation of electrlclty where competition IS going to happen

and w~ lsl tart wlth the hlgh megawatt users and go on down.

Representatwe Groscost commented that certainly electric deregulation will be different

than long- distance telephone calling, but suggested that in the future competition may

develop In the elements of transmiss~ ona nd distribution and reliability, elements that we

now take for granted.

Senator Wettaw asked if all 50 states develop multiple power companies and facilities, the

net effect down the road will be to merge Into 3 or 4 different power companies.

STUDY COMMITTEE ON ELECTRIC

INDUSTRY COMPETITION

October 9, 1996

Page 5

Mr. Bayless suggested there will be a radical " unbundling" of services first, e. g. meter

reading companies, transmission companies, etc. and this will drop prices. Later, he

suggested, " rebundling" would occur in a move to market the convenience of buying all

services from one company. Mr. Bayless acknowledged there may be massive

aggregation and mergers.

In response to Representative Cheuvront's inquiry about the relative cost- effectiveness

of different energy sources, Mr. Bayless acknowledged the price of the cheap gas turbine

energy will go up as everyone seeks it.

HISTORY OF THE ELECTRIC UTILITY SYSTEM IN ARIZONA AND NATIONALLY

Michael Curtis, Arizona Municipal Power Users Association ( AMPUA), explained his

organization of 17 entities represent over 1.5 million customers throughout Arizona. He

presented an historical account of the electric industry in Arizona, emphasizing the electric

industry is one of the most extraordinarily welldesigned and well- built systems of providing

comfort and convenience the world has ever seen. Mr. Curtis emphasized the industry

was not built to " overkill," but to withstand the demands of a growing economy.

Mr. Curtis presented overhead slides showing pre- 1935 Arizona when generators existed

in cities in towns and operated independently. Mr. Curtis related that in the mid- 1 930' s,

with the Rural Electrification Act, isolated cooperatives with diesel engines sprang up in

rural areas as an element of economic development. He noted there was no participation

in plans or transmission, but starting in 1948, Arizona Public Service had an operation in

West Phoenix that, at the time, was projected to take care of all conceivable needs into the

future.

In 1937 and 1240' s the Psrker- Davis system was built and the private utilities and

cooperatives decided to join with them and the phenomenon of participation was seen.

He noted that most of the present integrated, monopolistic, centralized system has

developed slnce 1968 and now will be broken up by the move to competition. Mr. Curtis

emphas~ zed that th~ s proves that resources are a function of technology; that as

technology improved, resources were found. He suggested the Committee will need to

consider how technology creates resources and how these will be allocated legislatively.

Mr. Curtis po~ ntedo ut that 32 power entities are now operating on the strength of the

security afforded by their certificates of convenience. He explained these plants were built

to fulfill the bargains they made to sell electricity at reasonable rates. Mr. Curtis noted that

now technology poses the possibility of bringing all these entities into generation

companies, buyer companies, transmission companies and distribution companies, each

competitively priced to reduce the cost of electricity to everyone. He asserted this

October 9, 1996

Page 6

STUDY COMMITTEE ON ELECTRIC

INDUSTRY COMPETITION

transition can be made and should be made with concomitant restructuring of rules and

regulations to be competitive.

Senator Huppenthal asked, in regard to the loss in value in California, if there has been

any action in the Arizona equity values in the time preceding the Corporation

Commission's deliberations.

Mr. Curtis indicated that everyone else discounted the electric utility; and since notice of

what is going to happen in Arizona has been sufficient, adequate and long enough, all the

rating agencies and investor groups throughout the country have sized- up and published

a valuation of every one of Arizona's utilities. He cautioned this multi- million dollar

situation should be treated with a certain amount of predictability and rules.

Senator Huppenthal asked what the " book" value is of Arizona's aggregate utility system.

Mr. Curtis responded it is worth approximately $ 15 billion to $ 20 billion, with the Palo

Verde plant being valued at $ 10 billion. He noted most of this money has been borrowed,

so therefore represents a lot of debt and must be made secure.

Representative Groscost asked what has happened in California since they seem to have

gotten back on track.

Mr. Curtis explained investors in California are now beginning to explore diversity

opportunities. He noted discussion is ongoing about developing generation or

transmission companies and diversified energy investment organizations. Mr. Curtis

further explained California Edison has divided, renamed and created a cluster of

organizations, as has San Diego, to take advantage of the economy which exists when

properly- structured group competition in power transmission takes place In an honest

market. He emphasized there will be hundreds of millions of dollars in savings if thts is

properly done. Mr. Curtis acknowledged California is still proceeding in a rush and figuring

things out " on the fly."

Representative McGibbon asked how Arizona would encounter problems meshing with the

schemes of other western states once it determines its own scheme.

Mr. Curtis ind~ catedth e activities of other states are betng monitored hourly, noting that

if Arizona beg~ nsin the time period it seems to be allocating right now, it will not be behind

or too far in front. He emphasized that the electric industry is working three years ahead

and therefore, any decision made today will not have an impact for three years into the

future.

STUDY COMMITTEE ON ELECTRIC

INDUSTRY COMPETITION

October 9, 1996

Page 7

Mr. Curtis expressed his eagerness to work with the Committee and cautioned members

to keep an eye on the pocketbooks of the residential, commercial and industrial customers

as well as the billions of dollars which have been borrowed and the commitments already

made by the electric industry.

Representative Groscost thanked presenters for educating the Committee, indicated the

next meeting time and date will be decided next week and notification will be issued. He

also indicated the next meeting would be either one all- day seminar or a two- day seminar,

meeting the afternoon of one day and the morning of the next. The topics tentatively to be

covered include: an historical overview of the deregulation of transportation and public

service industries, an overview of the Energy Policy Act of 1992 and timelines; an overview

of the FERC regulatory rulings and an overview and examples of other states' electric

competition programs. Representative Groscost additionally mentioned as topics: an

overview of the actions taken by the Arizona Corporation Commission regarding

deregulation and a brief explanation of major issues, such as stranded investments,

universal services, market organization, renewables, conservations programs, unbundling

of services, certificates of conveniences and spot markets.

Without objection, the meeting was adjourned at 4: 35 p. m.

Respectfully submitted,

Alice Kloppel,

Committee Secretary

( Tape and attachments on file in tne Office of the Senate Secretary)

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ARIZONA STATE LEGISLATURE NOV 2 5 1996

JOINT LEGISLATIVE STUDY COMMITTEE ON

ELECTRIC INDUSTRY COMPETITION

Minutes of the Meeting

Wednesday, November 13, 1996

2: 30 p. m., Senate Hearing Room 1

MEMBERS PRESENT

Senator Stan Bames

Senator Chris Cummiskey

Senator Manuel " Liton Peiia

Representative Scott Bundgaard

Representative Bill McGibbon

Representative Harry Clark

Representative Ken Cheuvront

Representative Jeff Groscost, Co- chair

MEMBERS EXCUSED

Senator John Huppenthal

Senator John Wettaw, Co- chair

STAFF

Debbie Johnston, Senate Analyst

Alan Ecker, House Analyst

Senator Bames, serving as Chair protempore, convened the meeting at 250 p. m. and the

attendance was noted.

REVIEW OF PROPOSED ARKONA CORPORATION COMMISSION RULES ON RETAIL

ELECTRIC COMPETITION

Gary Yaquinto, Director, Utilities Division, Arizona Corporation Commission ( ACC),

presented overhead slides relating the development of rules for retail electric competition,

begun in 1994 and drafted in 1996, and the rationale for them. He noted that draft rules

were submitted to the ACC in October 1996 and public comment about them was then

solicited in Phoenix, Tucson, Yuma, Flagstaff and Kingman.

In talking about changing what has been a monopoly to a competitive product, Mr.

Yaquinto discussed six guiding principles which have been employed:

+ To provide opportunity for customer choice + To avoid unnecessary disruptions to the extent possible

4 To preserve and protect system reliability + To protect the small consumer + To protect utility investors + To promote development of solar generation sources

Mr. Yaquinto indicated a working group on electrical reliability, which first met October 30,

1996, has been set up to develop recommendations on ways to maintain reliability when

the transmission and distribution of electricity is sold competitively. He also indicated this

working group is charged with examining whether an Independent System Operator ( ISO)

November 4 3,1996

Page 2

STUDY COMMITTEE ON

ELECTRIC INDUSTRY COMPETITION

ought to be established. Mr. Yaquinio explained an IS0 insures that electricity is

transmitted into our state grid and that it is delivered to the proper places.

Mr. Yaquinto explained the ACC has chosen to set aside 15 percent of the first 20 percent

of the electric market for residential customers when the electric industry is opened up for

competition. He further explained there is requirement for incumbent utilities to provide

a " standard offer" to those residential customers not wishing to choose a competitive

supplier of electricity.

Mr. Yaquinto indicated that protection of public policy programs such as those designed

for low- income residents, conservation, energy efficiency has been built into the rules as

well through a " systems benefits charge" levied on new suppliers into the market. He also

related that methods to recover " stranded investments," referring to the investments made

by utility companies many years ago, will also be developed. Mr. Yaquinto related the

intent to promote tapping solar energy in Arizona and create a viable solar energy industry.

Mr. Yaquinto indicated the ACC has no regulatory jurisdiction over city- owned utilities,

municipal utilities or the Salt River Project ( SRP) and its rules will affect only these

investor- owned utilities: Arizona Public Service, Tucson Electric Power, Citizens Utilities,

AEPCO ( Arizona Electric Power Cooperative) and most cooperatives, including Navapche

Coop. He explained the phase- in of the competitive generation supply of electricity will

begin in January 1999 filling 20 percent of the retail demand, filling 50 percent by January

2001 and all retail demand by January 2003.

Mr. Yaquinto also related that a limit has been placed on the amount of competitive

demand available to the very largest customers, restricting the competitive demand to one-half

of the amount available for customers with demands larger than 3 megawatts.

Mr. Yaquinto reviewed charts showing competitive market estimates for the affected

utilities and a map of affected utility service areas. He also reviewed competition rules

related to certificates of convenience and necessity to compete; to services required of

affected utilities; to stranded costs recovery from the competitive market; to a solar

portfolio standard; to service quality, consumer protection and billing; in- state reciprocity

and system benefits. Mr. Yaquinto also related that working groups have been created

to consider participant selection, unbundled and standard offer services, stranded costs,

system reliability and safety and legal issues.

Renz Jennings, Chairman, ACC, provided an overview of why he arrived at the decision

to move from a monopoly to competit~ onin the electric industry. He explained that new

turbine technology and the concomitant decrease In energy prices created by its use in the

energy industry nationwide drives the move to competition. Mr. Jennings also suggested

the perception that competition is inevitable and that the generation of electricity is no

November 13,1996

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STUDY COMMITTEE ON

ELECTRIC INDUSTRY COMPETITION

California is in this context currently. He suggested " merger manian will be a hot topic ir?

the not too distant future, as utilities will have to decide to " eat or be eatenn in order to

survive. Mr. Jennings acknowledged the move to competition will be problematic, but

emphasized the need to think about the long- term, not rig the marketplace, actively

address research and development and determine how much of a safety net is necessary.

Senator Cummiskey asked how tanffs are going to be negotiated between affected utilities.

Mr. Jennings indicated the transition costs will be recovered from the competitive market,

and to the degree a challenging utility comes in to take customers away, the customer is

going to have built- in to the price of electricity, fair charges for using that part of the

incumbent's system which are used. He suggested it will be " open network architecture."

Representative Groscost suggested the unbundling and rebundling process could produce

a cheaper cost for the rebundled services and Mr. Jennings agreed this is what is being

attempted, though acknowledged there is a huge risk because the incumbent utilities will

be prone to resisting full and fair competition. He explained that transmission of energy

will probably remain as a public service or be highly regulated as a monopoly, as there are

not an infinite number of natural corridors for competitors to run power iines through. Mr.

Jennings suggested that in a future with roof- top solar panels and fuel cells in the

basement, utilities will look like a battery, be brokered or be something other than a

generator, distributor or biller of services.

Senator Barnes asked Mr. Jennings what the Legislature needs to do as opposed to the

ACC needs to do in regard to the move toward competition. Mr. Jennings suggested the

Legislature needs to become involved in regard to the SRP issue, who has joined in

criticizing the ACC rules. He suggested SRP has had some advantages over the years

and also suggested it cannot ultimately be compelled to be in a statewide reciprocal

marketplace.

Mr. Jennings emphasized there are big issues to resolve and suggested it may take three

months of hearings with sworn testimony, more appropriately accomplished through the

offices of the ACC than at the Legislature. He asserted the hearings at the ACC could

narrow the issues between utilities which the Legislature then needs to address.

Mr. Jennings indicated that ACC attorneys have said that what the ACC has put in motion

is possible, whereas the utilities disagree with that position. He suggested the Legislature

needs to empower the ACC to go forward or not, and set public policy, but suggested it

would not want the day- to- day management of hearings.

Senator Barnes acknowledged the utilit~ esp' osit~ onth at there are problems left to be

resolved in terms of stranded Investments, reliability and obligation to serve and asked Mr.

Yaquinto to comment on all that seems undone while at the same time the ACC is moving

STUDY COMMllTEE ON

ELECTRIC INDUSTRY COMPETITION

November 13,1996

. Page 3

longer a monopoly has also driven the move to competition. He also noted the electric

industry, almost from inception, has been a costdeclining industry. Mr. Jennings

emphasized that the move toward competition in the electric industry will have a public

interest like no other, as its product does not store well, its product is used simultaneously

to its production and because the electric industry is the dirtiest in the country. He further

emphasized that this is a big money issue, as one- quarter of the domestic private capital

in the United States is invested in utility infrastructure and therefore has a bearing on how

healthy the country is and what direction it moves in.

Mr. Jennings emphasized the need to address stranded investments, the need for

legislators and regulators to ensure the incumbent utilities are treated equitably and the

need to address the issues particular to SRP. He emphasized the need to move to a one-half

percent solar energy standard because its cost is historically declining, because the

U. S. may have to back out of using carbon intensive fuels in light of global warming and

increasing prices and because the addition of solar energy will help fortify the competitive

market with options that will contain the prices of coal and natural gas.

Representative Groscost asked how much faster solar can be moved along than it already

is and how much effort Mr. Jennings forsees directed in this area. Mr. Jennings explained

the range of technologies for solar energy will be explored to determine which are best

suited to bulk energy delivery and indicated there will be continued federal participation

in this. He explained the solar Sterling Engine looks plausible for use in the next three to

five years and that along with Solar 11, could be producing $. 07 electricity. Mr. Jennings

also noted that once services are unbundled and rebundled it should be cheaper than the

~ ncumbenut tilities' prices. He emphasized solar energy makes good public policy, noting

there will be economic development benefits which flow from the concomitant research and

development of solar energy.

In response to Representative Groscost's inquiry about what the comparative output of

solar energy is now compared to the one- half percent standard, Mr. Jennings responded

current output is very modest. Mr. Jennings clarified that one- half percent refers to the

amount of generation of solar energy in the energy portfolio and not an amount of money.

Representative Groscost suggested an aggregate of consumers may develop who are

willing to pay more for " green" energy because they know it is accomplishing good things.

Mr. Jennings agreed this is a probable reality and also suggested that micro generators,

gas feeds to property and fuel cell technology may bring energy back to the point of use

as opposed to using huge remote energy plants.

Representative McGibbon asked whether out- of- state utilities will be able to physically

come into Arizona and underbid its in- state utilities. Mr. Jennings explained that to some

degree there will be some " gaming" between large buyers and large sellers, noting that

STUDY COMMIITEE ON

ELECTRIC INDUSTRY COMPETITION

November 13,1996

Page 5

to a competitive plan. Senator Barnes suggested this seems bad for the utilities but also

for customers who need electricity at their own residences.

Mr. Yaquinto explained it has not been the intention of the ACC to " flash- cutn to a

competitive world, but to set up a process with a phase- in beginning in 1999, recognizing

numerous issues, such as stranded costs, have to be fully developed. He emphasized the

ACC rules incorporate a process to resolve the issue of stranded costs, for example,

beginning 15 days after the rules are finally adopted. Mr. Yaquinto indicated the same

goes for unbundled tariffs within 45 days after the ACC rules are finally adopted. He

emphasized the rules set up a framework with target dates for all parties to meet and

develop a transition from a monopoly to a competitive market.

Senator Barnes acknowledged that working groups address unanswered questions, but

related the situation of a working group in another committee that could not arrive at a

solid solution in a timely manner. He suggested working groups may produce reports that

are inconclusive and cautioned that the process may be putting the " cart before the horsen

at a time when investors' money is at stake and consumers are not assured of reliability.

Mr. Yaquinto acknowledged there are millions of dollars at stake in stranded costs, and

agreed he would be surprised if the working group came back with a consensus answer

to this issue. He suggested it will be found that parties taking a risk will begin to narrow

the issue during the course of the year and it is anticipated, as well as required, that a

series of evidentiary hearings with testimony by every stakeholder take place to determine

how those stranded costs are to be recovered.

In response to Senator Barnes' request to know what will happen if the working group does

not arrive at a consensus, Mr. Yaquinto indicated the ACC will decide the issue. He

suggested that the working group report will look like a recitation on each party's view of

the solution to stranded investments, but will also provide a forum for participation by the

Commissioners, so their thinking on their issue can be shared as well.

Senator Barnes asked how the Palo Verde Nuclear Generating Plant plays into the plans,

and Mr. Yaquinto explained the ACC has begun a process to help APS speed up the

depreciation of the plant to allow the amortization of regulatory assets that would otherwise

become stranded investments.

Senator Barnes asked about reliability to customers and Mr. Yaquinto explained

competition will bring choices and build layers of quality of service at different prices which

customers may choose from. He noted that the largest customers already have

interruptible service in place, to reduce costs when energy is least used. Mr. Yaquinto

emphasized that the ACC rules require that all new entrants into the market must follow

National Electric Reliability Council guidelines and Western Systems Coordinating Council

November 13,1996

Page 6

STUDY COMMITTEE ON

ELECTRIC INDUSTRY COMPETITION

guidelines. He also noted the reliability working group has three subcommittees

developing recommendations for sustaining reliable service.

Representative Groscost asked about the obligation on the part of utilities to serve,

suggesting this may be a highly political problem. Mr. Yaquinto indicated the rule requires

that a standard offer be provided by incumbent utilities to customers not interested in

shopping competitively for electric. He noted that utilities receive the ability to recover

stranded costs from the competitive customers in return and entrance into other markets.

In response to Senator Bames' concern that a constituent in a remote area may be denied

service because the cost to run a line out to his property is competitively prohibitive, Mr.

Yaquinto noted that this situation exists currently, as there is no requirement on the part

of the utility to extend service under extraordinary circumstances if the customer does not

want to pay the cost.

Senator Bames suggested it is not right to ask the utilities in a competitive market to allow

another utility to join the market. He asked where legal authority is derived to do this.

Mr. Yaquinto responded that the ACC has no regulatory jurisdiction over SRP, but stated

the ACC rules enable it to become a participant. He explained that if SRP voluntarily

decides to participate, it must reciprocate in terms of opening up its service territory to the

other participants.

Senator Barnes questioned why the rules state that the other participants must

unanimously agree to SRP's particrpation first. He questioned why the ACC has the power

to delegate its authority to a competitor of SRP.

Mr. Yaquinto suggested it is not a delegation of authority or power, as much as a way to

enable a siluation to occur that otherwise would not happen. He indicated ACC has

offered its good offices to help mediate this series of negotiations and emphasized all

entities have to feel comfortable that SRP would enter the competitive market on a level

basis and not have an unfair advantage. Mr. Yaquinto clarified that ACC cannot require,

but can enable this to happen.

Senator Barnes asked whether Mr. Yaquinto believes there is any incentive for another

utility to allow SRP to come into the competitive market. He suggested this amounts to an

automatic veto of SRP's participation.

Mr. Yaquinto disagreed it amounted to a veto and explained to the extent that SRP is

allowed to enter the competitive marketplace on an equal basis, the other utilities have the

incentive of also benefitting from be~ nga ble to enter into SRP's territory.

STUDY COMMllTEE ON

ELECTRIC INDUSTRY COMPETITION

November 13,1996

Page 7

Senator Barnes questioned whether the ACC rules would create an island or fence around

the SRP customers and not allow them to participate in the competitive market which will

be available to all other residents in the State.

Mr. Yaquinto reiterated that the ACC rule does not create this situation and that incentive

does exist for SRP's management to enable competition if their customers want it. He

acknowledged statewide competition will not work very well if SRP is left on the sideline.

Mr. Jennings emphasized the related ACC amendment which passed unanimously was in

the alternative, that if there was a way for SRP to voluntarily participate, it could and

another way was if the Legislature authorized it. He suggested the ACC would be

influenced by a thoughtful position taken by the Legislature.

Senator Barnes asked if Mr. Jennings feels comfortable allowing the competitors to veto

another's entrance into the marketplace. Mr. Jennings indicated that as a practical matter,

with SRP's current advantages, its entrance would not create a fair marketplace. He

emphasized the Legislature has tremendous authority over SRP and could declare that it

be in the competitive market.

Representative Groscost asked about the delineation between the co- ops and major

competitors and Mr. Yaquinto indicated there is a special provision in the ACC rule that

would enable the electric co- ops, given their tax exempt status, to modify the applicability

of the transition to competition. He indicated there would also be a requirement that they

show the ACC what progress they are making in allowing their customers some choice.

Senator Barnes inquired about the experiences of other states and Mr. Yaquinto indicated

that California is being closely monitored and, from its experience with pooling, it was

decided not to repeat this arrangement in Arizona. He also indicated the New Hampshire

experiment is being followed to judge the manner in which customers are accepting

competition as well as are the experiences of New York and Illinois.

In response to Senator Barnes' request to know what went wrong with the California

model, Mr. Yaquinto explained the long time period for working out problems as well as the

complex financing arrangements and customer surcharges for recovering stranded costs

contributes to the complicated situation there.

Senator Barnes commented that the change to electric industry competition moved through

the California Assembly with unanimous approval and acknowledged this must mean there

is something worth looking into.

November 13,1996

Page 8

STUDY COMMITTEE ON

ELECTRIC INDUSTRY COMPETITION

In response to Representative Groscost's inquiry, Mr. Yaquinto clarified that the set aside

for residential customers was 15 percent of the first 20 percent in the 1999 phase- in, not

15 percent of 100 percent. Representative Groscost questioned whether this is enough.

Mr. Yaquinto acknowledged there will be a lot of inertia, barriers and hurdles that will have

to be overcome to reach the residential sector to convince them choice and change is the

appropriate way to go. He suggested, though the percentage sounds low, it is at least

sufficient to begin to monitor and examine how competition will extend itself to the

residential sector.

Representative McGibbon asked how the survival of the co- ops will be insured. Mr.

Yaquinto acknowledged that rural co- ops with high revenue producing customers, such as

the mines, are very much at risk. He explained the ACC rule addresses this in allowing

the co- ops to petition the ACC for a delay in the implementation of competition in their

service territories. He further explained these co- ops have been renegotiating their

contracts with the mines to meet the competitive demands that are facing them. Mr.

Yaquinto explained a particular co- op is currently operating as a pass- through, delivering

electricity from a source identified by the mine and reaping a profit.

Representative McGibbon suggested that ultimately the isolated customer will be paying

higher costs in making up the necessary revenues to keep the m p s viable. Mr. Yaquinto

asserted the co- ops are faced with this risk today and competition will not exacerbate this

risk, at least In the short term. He explained in the long term the co- ops may be taken over

by larger energy companies.

Representative McGibbon emphasized the co- ops are membership owned and may not

be taken over as easily as a utility owned by stockholders.

Representative Groscost agreed with Mr. Yaquinto that the co- ops will be taken over by

larger energy companies, noting the co- ops exist for the very reason that the investment

to supply power to these areas was never made. He also suggested that in an

unregulated environment utilities will be willing to acquire that investment. He suggested

it will be a no lose situation for current co- op members because they have the ultimate say.

David Sparr, economic development representative to the Advisory Board,

commented on the solar proposal, suggesting it should be freestanding and competing on

its own as a utility and not be subsidized. He confirmed Senator Barnes' understanding

that he feels it is Incongruous to be requiring participation of a specific utility, i. e., solar

generation, when the State IS heading towards a competitive market.

Jay Moyes, Phoenix, AZ, attorney, explained he represents small municipal irrigation and

electrical entities which serve without ownership of transmission facilities. He related his

STUDY COMMllTEE ON

ELECTRIC INDUSTRY COMPETITION

November 13,1996

. Page 9

experiences at a recent conference on lSOs put on by the Southwest Regional

Transmission Association, where information was conveyed about states proceeding with

implementation of plans pursuant to adoption of concepts, such as Arizona is doing

pursuant to the adoption of the ACC rules. He concluded that after hearing this

information that the difference between the conceptual framework and the reality of

application is a vast chasm with many issues and problems to solve, and that resolving

them is extremely expensive.

r,

Mr. Moyes questioned where the savings or benefit to ratepayers will be in all of this. He

- suggested the move to deregulation is actually just reregulation self- imposed by the

utilities among and between themselves; and that the resulting cost will be passed along

to the residential ratepayers. Mr. Moyes emphasized the move to electric industry

competition deserves an extremely careful study and analysis to see where the economic

fallout is going to occur.

Representative Groscost envisioned electric industry competition will provide economic

development incentives, producing cheaper power rates across the board with the

advantage of the creating more jobs and attracting new business to the State.

Maureen Bureson, Mesa, AZ, representing herself, asserted the impact of electric

industry competition on residents and businesses in Arizona will be enormous. She

expressed support for the ACC intention to have working groups to increase the

consumer's opportunity to participate in proceedings, emphasizing that consumers cannot

afford to be represented by attorneys in evidentiary hearings. - Representative Groscost asked how Ms. Bureson views the ongoing Rhode Island pilot

project, for example, where rates have been shown to have decreased with competition.

Ms. Bureson indicated she has not followed this project and Representative Groscost

offered to provide this information.

Without objection, the meeting was adjourned at 5: 00 p. m.

Respectfully submitted,

r I Alice Kloppel,

Committee Secretary

( Tapes and attachments on file in the Office of the Senate Secretary)

Hearing Room No. - K /

MEETING - OcF OQJ

t

WIT 1 \ - \ 3 - 9 G 1

E L E L T ~ ~ C R L T Q D U ~ T 2L :~ 3~ 0M ~ ~ ~ ~ . ,

- NAME - RE PRESENTING BILL NO.

Please Print

MINUTES RECEIVED ,

CHIEF CLERK'S OFFICE

f- 2j37- 7

ARIZONA STATE LEGISLATURE

Forty- third Legrslature - First Regular Session

JOINT LEGISLATIVE STUDY COMMITTEE ON

ELECTRIC COMPETITION

Minutes of Interim Meeting

Friday, April 18, 1997

House Hearing Room 1 - 8: 00 a. m

( Tape 1, Side A)

Cochair Groscost called the meeting to order at 8: 55 a. m., and attendance was noted by the secretary

Members Present

Senator Bundgaard

Representative Cheuvront

Senator Cummiskey

Senator Cunningham

Senator Huppenthal

Senator John Wettaw, Cochair

Representatative Groscost, Cochar

Members Absent

Representative Clark

Representative McGibbon

S~ eakersP resent

Carl Dablestein, Director, Utilities Division, Arizona Corporation Commission

Establish Sr~ bcommittee Assi~ nments:

Cochair Groscost announced that subcommittees will be formed to review the following issues that may

require the drafting of legslation prior to the next regular session of the House:

1) Date certain for deregulation

2) K~ lowatet xcise tax in lieu of property tax

3) Legslative role in process to parallel commission process

Cochair Groscost explained that members for the subcommittees will be assigned by the cochairmen withln

the next week. and notification of membership and the time line for upcoming summer meetings will be

made available.

Joint Legislative Study Committee On

Electric Compeuuon

0411 8/ 97

Coruoration Commission ( U~ dateS tatus of Deregulation: Time Line Direction)

Carl Dablestem, Director, Utdities Division, Anzona Corporation Commission, summarized six committees

formed by the Corporation Commission to address the following issues:

Comrmssion rules on regulating restructuring; examine various aspects of deregulation; review the

technical and legal aspects requiring consideration.

Evaluating reliability and safety; identify, define and calculate stranded costs. The most

controversial issue in electric restructuring is stranded costs, dealing with how to handle the

expendtures that utdities have made under a system of regulation that will likely be unrecoverable

in a competitive power environment.

Accounting, tax and finance issues in connection with stranded investment quantification recoveq*:

evaluate the implications on state and local taxes as a result of electric industry restructuring.

Legal issues and their implications on stranded costs, government, legislation and federal issues

Customer selection will review the process for identibng which customers will be participating

in the first phase of deregulation. Under present rules, 20 percent of the existing load of the

utilities will be subject to retail competition on November 1999.

Analyzing unbundling and standard offer: the distribution and delivery aspects of electricity under

a competitive situation.

Review the creation of an independent system operator and spot market development.

Mr. Dabelstein stated that the committees have identified September 30, 1997 ( for most committees) as

the delivery date for submission of reports and recommendations to the Corporation Commission. The

charge of the committee reviewing unbundling and standard offer is to ensure that by December 3 1, 1997,

companies will be able to provide the Commission with filings containing unbundled tariffs.

Senator Wettaw suggested expansion of agenda item 2 0 to include the federal government. Mr. Dabelstein

concurred and expllned that the charge of the committee ( Legislative Role in Process to Parallel

Commission Process) will require addressing four specific areas: stranded costs; governmental issues; state

legislative issues; and federal government issues.

Senator Wettaw pointed out that because deregulation of unlities is a very complex issue and inuustry terms

are confusing, the committees must consider language that can be comprehended by the public.

Mr. Dabelstein concurred and added that the Commission is reviewing deregulation activities in other states

in an effort to develop recommendations that will enable Arizona to avoid the same mistakes. He advised

that most of the Commission committees have a specific agenda item that recogmzes the need to

disseminate information to the public for understanding of options and expectations.

Cochair Groscost requested the Commission's time line regarding committee reports and

recommendations. Mr. Dabelstein reiterated that the Commission has imposed a September 30, 1997

deadline on most of the subcommittees for submission of reports and recommendations to the Commission.

The committee reviewing unbundling and standard offer has a deadline of October 3 1, 1997. By the end

of 1997, the companies will have to file their unbundled tariffs.

Joint Legislat~ veS tudy Committee On

Electnc Compeltion

0411 8197

C o c k Groscost requested the Commission's view on the statutory time line. Mr. Dabelstein responded

that the Commission has rules in place for the time h e described in earlier testimony. The committees will

be reviewing the reasonableness of the obtainable goals in the time line. The intent is to move forward

rapidly and diligently to open up the industry to competition.

Senator Wettaw queried if bond holders are being addressed by the Commission committees. Mr.

Dabelstein replied that is basically the thrust of the stranded cost issue. He explained that the utilities have

issued bonds and stock to acquire the funds to invest in the generation facilities under a traditional

perceived regulatory contract where the state will regulate the prices it charges for its service, ( and given

a reasonable opportunity to recover those costs over a period of time.) With the influx of competition and

industry deregulation, there is a strong potential that many of the costs will not be recoverable. In each of

the subcommittees the Commission is attempting to include a broad representation of the public to deal

with these issues.

Senator Wettaw proposed that the tax implications of deregulation ( federal and local) is an issue that must

also be addressed in determining required future legislation. Mr. Dabelstein concurred.

Cochair Groscost pointed out that the Joint Legislative Study Committee on Electric Competition was

formed as an implementation committee to oversee the activities of the Commission, not to parallel the

committees formed by the Commission.

Without objection, the Committee adjourned at 9: 26 am.

( Original minutes and tape on file in the Chief Clerk's Office.)

drh

0411 9/ 97

Joint Legislative Study Commitkc On

Electric Competition

041 18/ 97

ARIZONA STATE LEGISLATURE

Forty- third Legislature - First Regular Session

JOINT LEGISLATIVE STUDY COMMITTEE ON ELECTRIC INDUSTRY

COMPETITION

Thursday, October 16, 1997

Senate Hearing Room 1 - 3 : 1 5 p. m.

( Tape 1, Side A)

Senator Wettaw called the meeting to order at 3.32, and roll was called by the secretary

Members Present

Senator Cunningham

Senator Huppenthal

Senator Wettaw, Cochair

Representation Cheuvront

Representative Groscost, Cochair

Members Absent

Senator Bundgaard

Senator Cummiskey

Representative Clark

Representative McGibbon

S~ eakerPs resent

Ken Behringer, General Counsel, Arizona Legislative Council

Tom Broderick, PG& E Energy Services

Martin L. Shultz, Lobbyist; Work Group Chairman, Arizona Public Service ( APS)

Jack Davis, Executive Vice President of Commercial Operations, Arizona Public Service ( APS)

Knox Kimberly, Lobbyist; Streich Lang Law Firm

Webb Crockett, Cyprus Minerals

Jim Bush, Lobbyist; Arizona Mining Association

Michael A. Curtis, Arizona Municipal Power Users Association

Guest List ( Attachment 1)

on en in^ Remarks

Representative Groscost thanked the working groups for their hard work on the electric competition

issues over the summer months He referred to the Memo from Ken Behringer, General Counsel,

Arizona Legislative Council, ( Attachment 2), which is in response to questions concerning the

Jolnt I, cg~ slat~ vSct udv CornlnlUcc

on IClcctr~ cl ndustry Compctltlon

10~ 16~ 97

authority of the Arizona Corporation Commission ( ACC) in deregulation of the electric utility

industry and addresses changes that may need to occur. He requested input in writing on the legal

opinions. He advised that there will be another meeting of the Committee on November 12, 1997,

2: 30 p. m., with more time given for public input.

Senator Wettaw advised that the period for written comments on Mr. Behringer's legal opinions has

been extended to October 27, 1997

Review of Lepislative Council Legal Oninion

Ken Behringer, General Counsel, Arizona Legislative Council, summarized the issues addressed in

his Memo of October 1, 1997 ( Attachment 2) He stated that the memo is in response to questions

asked on behalf of the Committee concerning the authority of the ACC in deregulation of the electric

utility industry.

Senator Wettaw addressed the Arizona Constitution regarding regulation of utilities as compared to

other states. Mr. Behringer stated that he believes the Arizona Constitution provision is relatively

unique. Entities similar to the ACC exist in other states, but are not created by the Constitution, and

it is that facet that causes additional issues to arise in deciding what entity has authority over

regulation. There is a mandate in the Arizona Constitution that the ACC must deal with these issues,

but a different scope will exist if these provisions are in statute rather than in the Constitution.

Presentation and Comments bv Date Certain Work G r o u ~

Tom Broderick, PG& E Energy Services, representing Jerry Porter, Chairman, Date Certain Group,

stated that the work group received testimony, asked many questions and drafted recommendations,

which are contained in the report ( Attachment 3) After considering the testimony presented before

the work group, it made the following recommendation:

Legislation to establish a date certain for electricity competition is unnecessary.

Only legislation which clarified the a~ thorityo f the ACC is appropriate. The

ACC is in the best position to evaluate any on- going date certain issues.

Although the work group recommended that legislation was not necessary, alternatives to the current

phase- in approach to the existing ACC rules were discussed and are contained in the report

( Attachment 3 - pages 3- 4). Mr. Broderick emphasized that the Committee does not support a flash-cut

delaying the January 1 , 1999 start date, except for the Tucson Electric Power Company.

Senator Wettaw asked for comments on the relation of the time certain to the memo issued by Mr

Behringer, since it appears some of the legal opinions may have enormous ramifications on the time

table that various alternatives put forth. Mr. Broderick answered, on behalf of himself and his

employer, that comments submitted on the legal opinion support a minimum legislative agenda; i. e.,

legislation which only clarifies the authority of the ACC.

Representative Cheuwont noted that the conclusions state that the Legislature has no role to play in

setting a date certain, but Mr. Behringer's memo states that the ACC does not have jurisdiction over

municipalities such as SRP ( which is considered a municipality) He questioned if the Legislature is

not involved, how will the electric providers be brought into competition with the other providers.

Mr. Broderick advised that Salt River Project ( SRP) testimony indicates that it believes it can open

up in time for the January 1, 1999 start date, and does not believe it requires regulatory or legislative

approval to immediately begin competition

Mr. Cheuvront asked if the ACC will be mandating to other electric providers, but on SRP's good

will, it will implement its deregulation in compliance with the other providers. Mr Broderick

responded that entering into an intergovernmental agreement is one option for ACC and SRP.

Representative Groscost asked if the work group discussed moditjling the current phase- in being

anticipated, and ifthe current time schedule is retained, did it discuss implementation that will focus

on how to encourage participation. Mr. Broderick advised that the work group spent very little time

on that issue once the decision was reached that legislation is not necessary. He referred to

Alternatives 2 and 3 on that issue in the report ( Attachment 3). He stated that there was some

support to transition without regard to restrictions on customer class, and ideas for opening the

market and allowing the motivated and interested customers to obtain contracts and request service

dates. He said that he believes the general sentiment was to accelerate the 2003 date up to the 200 1

time frame.

Representative Groscost queried whether, if there was a lack of enthusiasm towards moving rapidly

and allowing the market to determine who was going to compete, discussion was held to open up the

~ iiarket and begin with 20 percent That will allow the first 20 percent, on a certain date, through

the door to be the 20 percent that participates and then move forward on the remainder of the

schedules to some degree.

Mr Broderick concurred that was discussed, noting that the percentages in the ACC rules were

minimums. Testimony was received about the possibility of stair stepping once at the 20 percent

level, not waiting until two years later to get to 50 percent, but going on the capabilities of the

utilities.

Representative Groscost requested that, as an economist, Mr. Broderick state his opinion on the best

niethod to determine those hnctions of the market necessary to prepare for deregulation; i. e., to

motivate the largest number of persons with innovative technology and upgrades necessary. Mr.

Broderick advised he would emphasize market parameters and not encourage regulatory back stops.

He advised that he is in favor of a situation where the utilities have to provide the reasons for the

weights and provide that information to customers

Jo~ nlt, cg~ slat~ vSctu dv Cornrn~ tlcc

Mr. Cheuvront voiced concern about moving too quickly, since Arizona has had a regulated

monopoly for many years, consumers are not as educated as they should be and may make rash

decisions. Ifthat occurs, the state may have to expend more money and time to fix the mistakes. Mr

Broderick indicated that Arizona utilities are learning much from their experience in California. He

pointed out that Arizona is still a year away from the January 1, 1999 start date, and can learn still

more from states elsewhere.

Senator Wettaw pointed out the need to educate the public regarding deregulation of electricity, since

the average person does not understand deregulation other than what is presented in television ads

Mr. Broderick concurred and offered to assist in the educational process

Presentation of Working Group on Taxation Work Group Report

Martin L. Shultz, Work Group Chairman, Arizona Public Service, summarized the Taxation Work

Group Report ( Attachment 4). The goal of the Taxation Work Group was to look at the effect of

electric competition on Arizona's current tax structure and to provide the Joint Legislative Study

Committee on Electric Competition with tax alternatives that are revenue neutral. Based on the

facts and conclusions the work group made the following recommendations:

The effective date for changes, if any, to the tax laws is not necessary

until restructuring is implemented or until a need is demonstrated for

the change.

The work group recommends that the tax issues related to electric

competition continue to be studied. The Committee may want to

consider session law to require update reports on the tax revenue

impacts restructuring has had on neighboring states and on Arizona

once competition is implemented.

Senator Wettaw questioned California's approach to Arizona's exported power regarding taxation

Mr. Shultz said that all the states that have enacted competition are looking at that issue He noted

that he is not aware of any significant changes that have been enacted in law. He stated that he

believes the Transaction Privilege Tax ( TPT) in California will apply to in- state sales.

Representative Groscost queried if any states in the region have onerous property tax on electric

utilities such as Arizona. Mr. Shultz said that in the Western grid, there is no state that has the same

level of onerous burden of property tax on electric utilities.

Representative Groscost indicated there may be a necessity to look more closely at that issue through

other states who do not have such a dependency on that taxing stream. Mr. Shultz advised that

Arizona has historically relied on electric utilities on all class 1 and 2 properties in Arizona.

Joint I, cg~ slatrvc Sludv Comm~ llcc

on IJlcctr~ cl ndustrv Compct~ tlon

I O/ l61O?

Senator Wettaw questioned whether another state can be emulated as far as changing Arizona's tax

structure. Mr. Shultz responded that one reason Arizona has an onerous burden on class I ( mines),

and class 2 ( utilities) properties is because the assessment ratio is 2.6 times higher than home owners

He opined that Arizona has an assessment ratio that discriminates against business generally ( class

3), and classes 1 and 2 Some kind of equity in the assessment ratio will actually create more equity

in the tax system. He opined that there are many ways the state can create equity within its property

tax system, and expressed willingness to submit a program in writing to the Committee on how to

create more equity in the property tax system in Arizona.

Mr. Shultz stated that the work group was specifically charged to consider the implications of a new

kilowatt hour ( kwh) tax in lieu of the current Arizona property tax paid by electric providers. The

k w h tax will be a tax on the end consumer of electricity in Arizona. As discussed in the report

( Attachment 4, pages 12 and 13), this is not the only alternative that the work group considered, nor

is this alternative necessarily the choice recommended by the work group.

Mr. Shultz commented that no one disagrees with the proposition that should the structure of electric

utilities change marketably due to regulation or deregulation that the tax laws will not apply in the

TPT, use tax, property tax ( PT), and sales tax areas and must be examined. Also, that the PT laws

are onerous and burdensome and must be examined as well, in order to have a competitive industry

in Arizona. He concurred that there may be some unintended shifts, not only to customers in

Maricopa County. The state impact on rural areas who depend largely on PT from electric utilities

must be examined carefidly before structuring the new ACC regulations and new statutes.

Senator Cunningham pointed out a possible error on page 1 of the Executive Summary ( Attachment

3) which states " The electric utilities participating in the report paid over $ 250 million in state and

city TPT and use taxes in 1996." He suggested that the word " paid" be stricken and insert " collected

From utility customers." Mr. Shultz said he believes that is a typographical error. The work group

recognized the error and noted that the second line of the same paragraph is correct on this issue.

Senator Cunningham said currently about $ 2 9 billion in property tax liability is collected by all

jurisdictions; approximately 1 1 percent from utility property. He questioned, if equity is created in

the system by either lowering the assessment ratio with the result of decreasing the burden on utilities

( assuming revenue neutral is maintained), whether the tax will shift to other types of properties. Mr.

Shultz advised that it will.

Senator Cunningham questioned whether Mr. Shultz recommends that the tax shift onto residential

property. Mr. Shultz replied that it is not a targeted recommendation that will impact just residential

property taxpayers. Under the scenario, taxes will shift to other classes of property, and also back

to the utilities and the proportion of propenv they have, particularly in school districts. He explained

that the issue must be examined district by district and area by area in order to get a tpe impact.

Jolnt LcplslaQvc Study Cornrn~ tlcc

Representative Groscost requested the amount of taxes Arizona Public Service ( APS) currently pays

that are not collected from the utility customers. Mr. Shultz said that taxes are reflected in the rate

structure, and the property tax payment to the jurisdictions in Arizona is approximately $ 100 million.

Representative Groscost questioned, beyond the taxes represented in the rate structure, what other

taxes APS is collecting and paving and where they are collected from other than utility bills. Mr.

Shultz responded that APS pays federal and state taxes, franchise fees, license tax, TPT, use tax, and

property tax. He noted that in a regulated environment the consumer is ultimately paying the tax

However, in a derebwlated environment the property tax ( PT), the generation component, is another

onerous cost of doing business Because it will be subject to market forces rather than regulated

rates, the customer may not be paying all of the cost, and market forces may cause other shifts

internally.

Representative Groscost recapped that currently APS customers are paying the taxes, but under

deregulation they will be paying only some of the taxes, and taxes may be lowered. Mr. Shultz

replied that historically, the policy of the Legislature has been a special focus on electric utilities

( classes 1 and 2) and commercial property ( the assessment ratio has been two and one- half times

higher). He concurred, that in the case of electric utilities, those costs shifted from an equitable

burden to an inequitable system, and tax costs have been shifted through electric rates to the

customer.

Senator Cunningham asked if there are currently consumers outside the state that are paying for

electrical services and as a result reducing the burden on Arizona consumers. Mr. Shultz said the cost

of taxes is reflected in the wholesale rates and some are paid by out- of- state people.

Senator Cunningham contended that if the state converts to where other taxes are paid out- of- state,

no analysis has been conducted to determine if taxes will be more or less if paid out- of- state as a

result of deregulation. Mr. Shultz stressed that is the point of the report ( Attachment 4). A more

careful analysis needs to be completed based on the tax implications of the new market structure.

Senator Cunningham addres~~ thde concept of inventory burden and who is actually payin for

services and taxes. He hrther noted the concept that certain products and services and certain

mandatory services like taxes, if paid by a business, are in part paid by the owners of capital. If it is

paid directly by a consumer, the consumer is disadvantaged as a result of paying it direct. Mr. Shultz

agreed.

( Tape 1 , Side B)

Mr. Shultz explained that regarding the regulated electric utilities, the legislators that made the

conscious decision about societal benefits knew that the regulated utilities would ultimately take that

new burden to the ACC and attempt to have them reflected in the rate structure.

Senator Wettaw asked currently what percentage of power generated is exported out- of- the state and

imported into Arizona.

Jack Davis, Executive Vice President of Commercial Operations, Arizona Public Service ( APS)

advised that he can provide the 1996 figures for all suppliers within the state.

Representative Groscost maintained that the prime directive of the work group was to come up with

a revenue neutral structure that maintains the tax flow while reducing the possible impact on

indigenous providers. He noted that if the in lieu tax is not the answer, then other avenues must be

explored.

Mr. Shultz stated that he believes the work group provided some tools to accomplish that directive

He explained that other tools are becoming available such as the fact that the ACC is now considering

an open ruling as far as the market is concerned. When that issue is determined there will be a clearer

understanding of what the new structure is going to be. The tables in the report ( Attachment 4), plus

a joint study the Arizona Tax Research is conducting with mines and utilities, will add some additional

data. Information is also forthcoming from a national perspective to assist in determining where

Arizona is and what other states are doing.

Senator Cunningham pointed out that currently there is objective revenue neutrality, but that can

change dramatically. He suggested that right now the consumer does not pay everything, and there

needs to be a sensitivity to the shifting of the incidence and the burden as well as the revenue

neutrality. Mr. Shultz concurred.

Presentation of Work Groun on Legislative Role Re~ ort

Knox Kimberly, Lobbyist; Streich Lang, gave a brief summary of the Legislative Role Report

( Attachment 5). The work group strongly supports electric competition and believes that customer

choice will benefit all Arizonans directly or indirectly The work group recomme~ ds that the

Committee seek legislation during the 1998 Session to do what is necessary to bring electric

compstition to Arizona. The Legislatl~ rea lso has a rob to provide clarifying legislation es necessary.

However, legislation that will duplicate the ACC jurisdiction is not necessary and should be avoided,

particularly if it delays bringing electric competition to Arizona.

The work group was established by the Committee to examine issues in regard to the legislative role

and the necessary legislation to facilitate electric competition. Pursuant to the Committee's request,

the work group has gathered information and testimony from interested parties on these issues and

recommends the following:

The work group concludes that the only critical legislation necessary to

implement electric competition is statutory language stating that the public

policy of Arizona is one of competition with respect to the generation of

electricity, and statutory language confirming that the ACC has the full power

and authority to establish rules and regulations necessary to implement such a

competitive system.

The work group also identified several specific issues that may need clarifying legislation ( Attachment

5 - page 2).

Webb Crockett, Cyprus Minerals, testified before the Committee. He opined that the consumers in

Arizona will greatly benefit from the implementation of competition. He explained that in discussing

the tax structure, it only applies to competition in the generating of electricity. The remaining

services will still be hlly regulated by the ACC ( distribution and transmission).

Mr. Crockett advised that electricity is being imported into the state from generating units outside

the state and being exported to areas outside the state It must be ensured that cheap electricitv

generated in Arizona is not exported out of state, and residents being left with expensive electricity.

He stated that he believes that can be the scenario if electric utilities remain regulated and competition

is not allowed into the market.

Mr. Crockett stated that he believes the role of the ACC is constitutional. Regarding legislation

changes, he advised that the public policy needs clarification that the state should be one of

competition as opposed to regulated monopoly, which is consistent with the provisions of the

Constitution.

Mr. Crockett submitted that before there is a loss of revenue from the generating units, there must

be either a closure of the plant or a write- off of the plant.

Mr. Crocket explained that the kwh tax is an in- user tax on the customers, and the federal

government will not pay an in- user tax All of the revenue presently generated from any agency in

the state of Arizona will be immune from payment of Kwh tax If PT's are shifted, which are

presently being paid by the federal government to an in- user, it will also be immune from paying any

property taxes The Department of Revenue has recently changed regulations to ensure that

electricity coming From outside of the state will be taxed unless exempted He submitted that ACC,

who has the jurisdiction to determine under what conditions these providers will provide electricity,

can establish the proper nexus so that the TPT can continue and that electricity coming from outside

can continue to be taxed.

Jim Bush, Lobbyist; Arizona Mining Association, opined that the most significant and accurate finding

in the report on page 8 ( Attachment 4) states that, " At this point, predictions on tax revenue losses

or gains are highly speculative " He advised that it is the Association's position that it will be an

unwise decision to attempt to predict that there will be a loss of revenue before there is experience

under deregulation to know if there is any revenue loss. It is known that Arizona residential

consumers have a higher rate by 18 percent than the national average, and 27 percent more than

neighboring states. Mr. Bush indicted that if the tax rate drops 25 percent, it will result in a savings

in electricity costs to consumers of $ 925 million a year.

Mr. Bush stated that the Department of Revenue ( DOR) has changed its rule on the TPT, which now

states " a person engaged in business under the utilities classification is subject to tax on the gross

receipts from sales of electricity, gas or water produced outside this state, that is delivered through

transmission lines or pipe lines to a point for use in this state unless an exemption applies."

He emphasized that the clients he represents are opposed to replacing the PT with a kwh tax. He

explained that utilities do not pay PT, franchise taxes, etc. They are all paid by consumers and users.

In competition, the share holders will have to bear part of the burden of the propertv tax. If PT is

replaced with kwh, industry will be able to compete in the free market without the burden of a PT.

. As far as changing the tax laws to level the plaving field, the Association believes that is poor policv.

The goal of competition is not to equalize the outcomes of competitors, but to ensure that the

consumer gets the best price. Mr. Bush contended that as the state moves into deregulation, it should

not alter the tax structure as a condition of deregulation.

Michael Curtis, Arizona Municipal Power Users Association, stated that he believes some legislation

may be necessary to help the cooperatives, but supports the ACC process. He indicated that there

may be some element of rates and rate making that perhaps have not been taken into account, which

will be addressed in writing. Mr Curtis noted that it may have been overlooked that municipalities,

in order to compete, will, in the Association's opinion, adopt ordinances that are driven by the

electorate, and those ordinance will allow the walls of competition to come down so that voters will

have the right of customer choice Regarding the legal opinions, he stated that he believes there are

some clarifications that may be necessary

Representative Groscost and Senator Wettaw expressed their appreciation to staff for their hard

work.

Written testimony was submitted to the Committee from the Electric Competition Coalition ( ECC)

from Douglas C. Nelson, Executive Vice President ( Attachment 6).

Without objection, the meeting adjourned at 5: 04 p. m.

Diann Haney, committee#& retary

( Original minutes with attachments on file in the Ofice of the Chief Clerk. Tape on file in the Office

of the Chief Clerk.)

drh

10 11 07

Joint I, cg~ aldt~ vSct udy Commitlcc

oil I: lcc\ rlc: Induhfrv Compct~ tlon

IO/ l6' 07

Appendix B

Work Group Report Executive Summaries

Arizona Legislature

Joint Legislative Study Committee

on Electric Competition

DATE CERTAIN WORK GROUP

FINAL REPORT

Submitted to the Joint Legislative Study Committee on Electric Competition

October 16,1997

Work Group Members:

Jerry Porter, Work Group Chairman, Governor's Ofice Steven Glaser, TEP

Commissioner Carl Kunasek, Chairman, ACC Jack Haenichen, Commerce Department

Tom Broderick, PG& E Energy Services Bill Murphy, City of Phoenix

Ken Evans, Farm Bureau Federation David Spaur, Mega. Corp.

Forward

This report was prepared at the request of the Joint Legislative Study Committee on Electric

Competition ( JLSC- EC). The work group was established by the JLSC- EC to examine

establishing a date certain for electric competition in Arizona. Pursuant to the JLSC- EC request,

the work group has gathered information and testimony from interested parties on this issue.

Taped recordings of the work group meetings are available in the Chief Clerk's Ofice in the

House of Representatives.

Recommendation Summary

After considering the testimony presented before the work group, the work group made the

following recommendation:

Legislation to establish a date certain for electricity competition is unnecessary. Only

legislation which clarifies the authority of the ACC is appropriate. The ACC is in the best

position to evaluate any on- going date certain issues.

Although the work group recommended that legislation was not necessary, alternatives to the

current phase- in approach to the existing Arizona Corporation Commission ( ACC) rules were

discussed. Following is a brief discussion of the ACC rules and the alternatives that were

discussed by the work group. The alternatives are presented for information purposes only. Once

the work group decided no legislation action was necessary, the alternatives proposed were moot

as legislative proposals.

Overview of Arizona Corporation Commission Rule

In December 1996 the Arizona Corporation Commission adopted rules on retail electric

competition. The adopted rules called for a phase- in of electric competition. The phase- in is

structured in the following manner:

1. January 1, 1999: All affected utilities shall make at least 20% of its 1995 system retail

peak demand available for competition.

a. No more than 10% of the demand can be procured by large customers ( 3MW)

Date Certain Final Report 10/ 1 6/ 97 Page 1

b. At least 3% of the demand will be reserved for residential consumers.

2. January 1, 2001: All affected utilities shall make at least 50% of its 1995 system retail

peak demand available for competition.

a. No more than 25% of the demand can be procured by large customers ( 3MW)

b. At least 15% of the demand will be reserved for residential consumers.

3. January 1, 2003: All affected utilities shall make all of their retail demand available for

competition.

The following alternatives to the ACC rule were discussed at the last work group meeting.

Again, the alternatives are presented for information purposes, only.

Alternative 1:

4 Competition should begin as scheduled on January 1, 1999. The existing ACC rule

provides that competition begin by January 1, 1999. The work group discussed that the

start date be maintained.

4 The Corporation Commission should set a time table for transitioning to competition. The

transition should have a goal that choice will be available to all customers by a date certain

{ the work group never decided on an end date). However, the ACC should be able to

extend the deadline if necessary.

The work group discussed that there will be a natural transition to competition as

customers become aware of their choices and as technology changes occur. However, in

order to make sure that competition is not unduly delayed, the work group considered

that the ACC should set a transition timetable. Based on the testimony that was presented

before the work group, the work group discussed shortening the transition period.

+ Transition to competition should be phased- in by load without restrictions on customer

class.

In order to avoid customer discrimination, the work group discussed transitioning

competition in by load without restriction to customer class. This allows the customers

selection process to be decided by the customer. The transition schedule could be

developed on a monthly or quarterly basis so that the availability of competitive choice is

accessible more rapidly.

Date Certain Fitrnl Report 1011 6/ 97 Page 2

Alternative 2:

+ The current phase- in approach should be changed to a flash- cut with 100 percent

customer access commencing January 1,200 1.

A flash- cut would lessen the potential for customer complaints of discriminatory treatment

by those left out during a transition period. It would hrther avoid the adverse technical

and operational consequences that Affected Utilities would encounter from operating in

both a traditional regulated world and a competitive world at the same time. ( See TEP's

position paper filed in these proceedings).

+ In order to help develop procedures for implementing full scale competition and work out

operational and technical challenges that will attend the transformation to full competition,

a pilot program should be adopted that allows a selected number of customers from each

class to choose third party suppliers for competitive services beginning January 1, 1999

( this number would, however, be less than the 20% level contemplated by the current

rules).

+ To facilitate the development of operational an technical procedures and protocols

designed to meet the requirements of the new competitive market, a protocol committee

should be formed consisting of representatives of AfYected Utilities, third party suppliers

and the Commission.

Alternative 3

+ Competition should begin as scheduled on January 1, 1999.

+ The Corporation Commission should expedite the timetable for transitioning to

competition. The transition should have a goal that choice will begin January 1, 1999 and

all customers be fully eligible by September 30, 1999. The ACC can modify this second

deadline if later found necessary.

The work group discussed that there will be a transition to competition as customers

become aware of choices and technology changes. To make sure that competition is not

unduly delayed, the work group discussed that the ACC implement the transition

timetable. Based on the testimony that was presented before the work group, the work

group discussed shortening the transition period.

Date Certairi Firral Repor. t 1 O/ 16/ 97 Page 3

+ Transition to competition should commence as described above without restrictions on

customer class.

In order to avoid promulgated discrimination, the work group recommends that the

transition provide choice to all customers seeking choice at the earliest time possible. This

allows the selection process to be decided by customer preferences. The transition

schedule should be made available on a monthly or quarterly basis so that information on

the availability of competitive choice is accessible more rapidly. Any customer waiting for

choice should be told the reasons for waiting by their incumbent utility.

Attached in appendix A are copies of the written testimony presented before the work group.

Attached in appendix B is a summary of other state legislation in regards to establishing a date

certain or phase- in approach.

Date Certain Fitial Report 101 16/ 97 Page 4

Arizona Legislature

Joint Legislative Study Committee

on Electric Competition

LEGISLATIVE ROLE

WORK GROUP

FINAL REPORT

Submitted to the Joint Legislative Study Committee on Electric Competition

October 16,1997

Work Group Members:

Dr. Michael Block, Work Group Chairman, Goldwater Institute

Commissioner Carl Kunasek, Chairman, ACC Knox Kimberly, Steich Lang

Mark B. Bonsall, SRP Jerry Porter, Governor's Ofice

Tom Jones, GCSEC Ed Zub, Southwest Gas

Forward

This report was prepared at the request of the Joint Legislative Study Committee on Electric

Competition ( JLSC- EC). The work group was established by the JLSC- EC to examine issues in

regards to the legislative role and the necessary legislation to facilitate electric competition.

Pursuant to the JLSC- EC request, the work group has gathered information and testimony from

interested parties on these issues.

At the first substantive meeting of the work group, work group members and interested parties

identified a number of issues to consider. In subsequent meetings, the work group discussed

these issues and heard testimony from the interested parties. The record reflects that electric

competition is a complicated issue with numerous stakeholders articulating many strongly held

views.

This report contains an outline of the identified issues and the work group's recommendations on

those issues. For the most part, the work group's recommendations provide general policy

direction without suggesting specific legislative changes. However, interested parties have

submitted letters outlining specific legislative changes believed necessary to implement electric

competition. Except as set forth herein, the work group does not make any recommendations on

the specific changes suggested but have included these letters in an appendix for the JLSC- EC's

consideration.

Recommendation Summary:

Competition in the free market is at the heart of the American and Arizona economies, and the

electric industry may be among our Nation's last great industries to taste both the benefits and

challenges of competition. Competition will bring customer choice of the kind enjoyed by

Arizonans in nearly every other economic sector. Competition will bring lower prices and

improved service through the time tested impact of customer choice. Competition will spur

economic development and job creation, and the absence of competition will hinder economic

development and job creation to the extent other states advance ahead without Arizona.

The work group strongly supports electric competition and believes that customer choice will

benefit all Arizonans directly or indirectly. The work group recommends that the JLSC- EC seek

legislation during the 1998 Session to do what is necessary to bring electric competition to

Arizona. The Legislature also has a role to provide clarifLing legislation as necessary. However,

legislation that would duplicate the Arizona Corporation Commission's ( ACC) jurisdiction is not

necessary and should be avoided; particularly, if it delays bringing electric competition to Arizona.

Legislative Role Final Report 101 161197 Page 1

The work group concludes that the only critical legislation necessary to implement electric

competition is statutory language stating that the public policy of Arizona is one of

competition with respect to the generation of electricity, and statutory language confirming

that the ACC has the full power and authority to establish rules and regulations necessary

to implement such a competitive system.

The work group also identified several specific issues that may need clarifying legislation. While

the work group indicated that legislation may be necessary for the following issues, the work

group also indicated that the legislation should only be pursued if the ACC believed it was

necessary to implement competition. None of the following issues were viewed to be exclusively

legislative issues, but issues that the ACC and Legislature should work together to resolve.

1) Recovery of Stranded Costs: The work group believes that the ACC should be

responsible for determining what stranded costs will be recoverable and how those costs

will be recovered. However, legislation on this area may be necessary if the ACC

determines that the ACC does not have the authority to implement the proposed recovery

plan of if the proposed plan could be circumvented in any way.

2) Protection of Proprietary Information: During the transition to competition and if the

ACC determines legislation is necessary, competitive information submitted by any utility

to the ACC or other regulatory bodies should be protected from public disclosure so that a

company's competitive position is not harmed.

3) Co~ itinuingO bligation to Serve: Legislation may be needed to clarify that there will

remain an obligation for distribution utilities to connect customers. In addition, legislation

may also be necessary to provide policy guidance on how a provider of last resort will be

chosen and compensated. For example, if the ACC determines that a systems benefit

charge and hnd are necessary to guarantee access to electrons, legislation may be

necessary to implement this policy.

In addition to the broad policy areas outline above, work group members and other interested

parties participating in the process have submitted specific statutory changes. These submission

include both technical and substantive changes to statute. The work group did not discuss the

suggested changes at any length and, except as set forth herein, does not make a recommendation

endorsing or opposing the changes. The work group has forwarded all suggested statutory

changes to the JLSC- EC as part of the record of the work group's proceedings and for the JLSC-EC's

consideration.

Legislative Role Fitral Report 101 161197 Page 2

Issue List

The following table contains the issue list that was developed and discussed by the work group.

The table indicates which branch of government has primary oversight for the issue. Issues with

<< , 77 x s in more than one column indicate that multiple jurisdictions may have oversight

responsibility for that issue. The issue list also contains a brief description of the issue and the

work group's recommendation.

The recommendations are the consensus opinion of the work group members. On issues where

more than one work group member disagreed with the consensus recommendation, the dissenting

view has been noted. Work group members were also invited to submit letters explaining their

dissenting view on any issue not noted in the table. These letters are included immediately

following the issue table.

The issue list was developed primarily from Laws 1996, Chapter 276 and a copy of this legislation

is included in appendix A. A copy of the written testimony provided to the work group on these

and other issues is included in appendix B. In addition, a summary of the legislation adopted by

other states on the issues identified in this report is included in appendix C. And finally, a glossary

of electric competition terms has been included in appendix D.

Taped recordings of the work group meetings are available in the Chief Clerk's Office of the

House.

Legislarive Role Firial Repot- r 10/ 16// 97 Page 3

Legislative Role Final Report 1011 6/ 97 Page 4

Recommendation: The work group received testimony from interested parties on technical statutory changes that may be necessary to

implement competition. The work group presents these changes to the JLSC- EC for their consideration but does not make specific

recommendations on any of the changes.

I I I I I I I

Financial Issues

1. Residential x

customers,

business

customers,

shareholders

& stakeholders

interests

2. Recovery of x x

Stranded

Cost

Issue Defined: This issue included the financial impacts electric competition will have on customers, investors and other stakeholder

Related issues included the fairness of rates, bills and services; the stability and predictability of rates and bills; the reliability and qualit!'

of the power supply, the ability of customers to understand the potential choices; the importance of a fair dispute resolution process;

and the potential for rates to reflect the customer's desired level of reliability and availability.

Work Groun Recommendation: No recommended legislative action.

Issue Defined: Stranded costs are costs incurred by a utility which may not be recoverable under market- based retail competition.

Examples include undepreciated generating facilities, deferred costs and long- term contract costs.

Work Groun Recommendation: Currently, the ACC is examining what costs will be recoverable and how those costs will be

recovered. No recommended legislative action for this issue unless legislation is sought by the ACC to 1) implement the ACC

proposed recovery plan and 2) ensure that the ACC rule can not be circumvented.

The work group notes that some parties believe stranded costs may be a damage issue for the courts to resolve.

3. Pricing of x

Transmission

&

Distribution

4. Unbundling x

Costs of

Services

-

Legal Issues

5. State, tribal,

and federal

jurisdiction

6. Interstate

reciprocity

x Issue Defined: There are three major electric services: generation, transmission, and distribution. Generation involves making the

electricity while transmission and distribution involve transporting the electricity. Electric competition will deregulate generation whil

transmission and distribution will likely continue to be regulated.

Work Group Recommendation: No recommended legislative action. FERC and ACC have jurisdiction over the pricing of

transmission and distribution as long as these services remain regulated services.

Issue Defined: Unbundling refers to selling various component parts of a product or service separately, usually at a price that reflect

costs for only that component of the product or service. To facilitate electric competition, the costs for generating, transmitting,

distributing and ancillary services will be unbundled.

I II Work Group Recommendation: No recommended legislative action since ancillav services will be competitive.

II Issue Defined: This issue included a discussion of state, tribal and federal jurisdiction issues as it relates to electric comnnerce.

Work Group Recommendation: No recommended legislative action. The work group discussed sending a JCR to Congress asking

for clarification on this point. However, on further examination the work group decided that the JCR was not crucial and only if the

ACC requested the clarification.

Issue Defined: This issue involves agreements between states to allow electric providers outside their territories to compete at the reta

level. Basically, if competitors from outside of Arizona compete in Arizona, than Arizona utilities should not be barred from competin

in those competitors' markets.

Work Group Recommendation: No recommended legislative action. This is an interstate commerce clause issue undcr the

jurisdiction of Congress.

Dissenting View: Other states have passed legislation or adopted policies that require reciprocity. The Legislature does have a region

role and right to debate and take action on this issue.

-

Legislative Role Final Report 1011 6/ 97 Page: 5

Legislative Role Final Report 1011 6/ 97 Page 6

regulatory body should be protected from public disclosure.

Work G r o u ~ Re commendation: If requested by the ACC, legislation may be necessary that would ensure that competitive

information submitted from any utility to the ACC or to any other regulatory body remain confidential.

Work Groun Recommendation: Distribution will remain a regulated activity with ACC oversight. However, legislation providing

policy statement that there remains an obligation to connect may be advisable if the ACC determines statutory authority is necessary .

Work G r o u ~ Re commendation: The ACC may need policy and enabling direction from the Legislature on this issue.

Social Issues

Issue Defined: This issue relates to the planning by utilities to ensure that all possible supply options are explored.

Work Group Recommendation: This will be a competitive issue and no legislative action is recommended. Oversight for integrated

resource planning falls within the jurisdiction of the ACC and FERC.

10. Integrated

resource

planning

1 1. Efficiency

&

sufficiency

of the

energy

supply

x x

Issue Defined: This issue provides assurance that supply for electricity meets demand for electricity.

Work Groun Recommendation: This will be a competitive issue and no legislative action recommended. Oversight for this issue

, emains an ACC and FERC issue.

x x x

Issue Defined: This issue involves a utility marketing its power as environmentally " friendly."

Work Grouv Recommendation: There are already truth- in- labeling statutes in other consumer areas. The Legislature may want to

explore special truth- in- labeling statutes in order to protect utility consumers. Thb bsue is not critical to implementiv: compdicion

but it is an issue that may need to be addressed in the future.

Issue Defined: This issue involved a discussion regarding the issues involved the policy of how power plant sites are approved.

Work Groun Recommendation: No legislative action recommended However, the Legislature may need to examine existing siting

statutes to determine if the statutes facilitate power pland and transmission siting in a competitive environment.

Issue Defined: System benefit charges are charges for low income, demand side management, environmental, renewables, and

nuclear power plant decommissioning programs.

Work Groun Recommendation: Because system benefit charges will continue to be charged by the distribution utility, the Work

Group concluded that the ACC will maintain jurisdiction over these charges. Therefore, no legislative action recommended unless tl.

ACC seeks statutory clarification.

Issue Defined: This issue deals with the reliability of electric supply under competition. 1 Work Grouv Recommendation: No legislative action recommended. The ACC will retain responsibility for system reliability

issues.

Issue Defined: Administrative and operational issues include the applicability of regulatory reliability criteria to non- utility market

participants, the form requirements of contracts for the sale or purchase of electricity, metering and billing issues, and the regulation o

ancillary services.

Work Grour, Recommendation: NO legislative action recommended. To the extent that any of these activities remain regulated, the

ACC retains iurisdiction. 11

-

Legislative Role Final Report 1011 6/ 97 Page 7

Legislative Role Final Report 10/ 1 6/ 97 Page 8

Issue Defined: A market that sets the price of a commodity or service for short- term transactions. This price can change with each

transaction and this price reflects the continually changing balances between supply and demand. It may be used to set prices at

numerous nodes in the system.

Equity Issues

19. City Utilities

20. SRP

2 1. Electric

Cooperatives

Issue Defined: Any competitive advantages or disadvantages that city utilities may have as unregulated municipalities including tax

and interest benefits.

Work Groun Recommendation: No legislative action recommended at this time.

Issue Defined: Any competitive advantages or disadvantages that SRP receives as an agriculture improvement district ( enjoys

municipal status).

Work Groun Recommendation: No legislative action recommended at this time.

Issue Defined: Electric cooperatives are non- profit customer- owned and run entities which however, are regulated by the ACC. The

ACC rules require cooperatives to open their territories for competition, but current statutes prohibit them from competing to seek

replacement customers outside their territories.

Work G r o u ~ Re commendation: If it becomes Arizona's public policy that cooperatives should be able to compete outside their

service territories, revisions to title 10 will be necessary to allow the cooperatives to compete.

22. New

Market

Entrants II Issue Defined: Any competitive advantages or disadvantages that new market entrants face. II

II Work Groun Recommendation: No legislative action recommended at this time. See tax work group report for specific discussion

on tax issues. II

Work Group Member Dissents to Above Recommendations:

Policy Issues: Endorse Competition ( Dissenting View, Tom Jones, Grand Canyon State Electric Cooperative Association

( GCSECA)):

The Arizona Constitution contains some hurdles which stand between today's market and competition as provided for in the rules

adopted by the Arizona Corporation Commission. The most critical are in Article 15, Sections 3 and 14 and in Article 15, Section 2.

In addition, if the goal is deregulation to bring about true competition in the electric energy industry, many revisions to A. R. S. Title 40

are necessary to allow competition to work.

Financial Issues # 1 Residential customers, business customers, shareholders & stakeholders interests ( Dissenting View, Tom1

Jones, GCSECA):

Article 15, Sections 3 and 14 of the Constitution, prohibit the ACC from authorizing market based rates as it has in its rules. Left

unaddressed, this issue will affect stability and predictability of customer rates and bills and will impact utilities and potential

competitive suppliers as well.

-

Legislative Role Final Report 1011 6/ 97 Pagt: 9

Financial Issues # 4 Unbundling Costs of Service ( Dissenting View, Tom Jones, GCSECA):

Billing, metering and other services are not defined in the Constitution as functions of public service corporations so the ACC may not

have the authority to oversee these services. Also, certain statutes don't allow the ACC to deregulate or streamline rate and other

regulations concerning competitive services. Finally, the Constitution requires that rates be based on " fair value" not market value.

Legal Issue # 7 Use and protection of proprietary information ( Dissenting View, Michael Block, Goldwater Institute):

The legislative work group has recommended that during the transition from regulation to deregulation information submitted by any

utility to a regulatory body remain confidential. This recommendation is too broad since by including any utility it encompasses utilities

operated by the cities and Salt River Project. It needs to be emphasized that these organizations are public entities; and allowing

government agencies undue power to keep secrets is an anthema to the principles on which government in this country and state are

founded.

Private companies are allowed to safeguard proprietary information to protect the investment of their owners. Governments are

allowed to keep secrets in situations where life and limb are at risk: soldiers during wartime, spies in enemy countries and witnesses

against the mafia; or where confidential personal information might be at issue. Who needs to be protected by allowing public utiities to

keep proprietary information? As customers of the utility, the public does not gain if certain information is kept secret. As taxpayers

who are ultimately financially responsible for a public utility's liabilities, the public certainly does not benefit if the publicly owned utility

can keep information from them. The sole rationale for publicly owned utilities is to serve the public, hence their name. Letting them

keep secrets overlooks this crucial point, and sets a harmfbl precedent for fbture situtations. Governments that operate in the dark are a

breeding ground for mischief.

Legal Issue # 8 Continuing obligation for a distribution utility to serve customers ( Dissenting View, Tom Jones, GCSECA):

Constitutionally, the ACC has no jurisdiction over municipal utilities. There are several issues concerning service by them and

competitive service in their territories which need to be addressed.

Legislative Role Final Report 1011 6/ 97 Page 10

Arizona Legislature

Joint Legislative Study Committee

on Electric Competition

TAXATION WORK GROUP

FINAL REPORT

Submitted to the Joint Legislative Study Committee on Electric Competition

October 16,1997

Work Group Members:

Martin L. Shultz, Work Group Chairman, APS

Commissioner Carl Kunasek, Chairman, ACC

Ron Ballard, City of Tucson

Jim Bush, Arizona Mining Association

Kevin McCarthy, ATRA

Greg Patterson, Director, RUCO

Jeff Schlegel, Schlegel & Associates

Russell D. Smoldon, SRP

Executive Summary

& Summary of Recommendations

The taxation work group was established to provide information to the Joint Legislative Study

Committee on Electric Competition ( JLSC- EC) on the effect electric competition will have on

Arizona's tax system. Specifically, the work group was asked to develop information on

establishing a kilowatt hour ( kwh) tax in lieu of the current property taxes charged electric

utilities.

Pursuant to the JLSC- EC request, the work group has gathered data and information on utility

taxation in Arizona and in surrounding states. The work group also sought to identi@ issues

related to electric competition that may have considerable tax implications to state and local

governments. Based on the information that the work group was able to gather, the following

facts and conclusions were reached.

Findin~ osf Fact

4 Electric utilities provide approximately 11% of the total property tax revenue in Arizona.

In those taxing jurisdiction containing power plants, electric utilities provide the majority

of property tax revenues. In total, electric utilities paid over $ 300 million in Arizona

property taxes in 1996. Property taxes represent about 47% of all the state and local

taxes paid by Arizona electric utilities. Traditionally, electric utility property taxes have

been passed through to customers.

4 Arizona's property tax burden ( tax as % of full cash value) on electric utilities is one of the

highest in the Western Grid.

4 Transaction Privilege Tax ( TPT) and franchise fees charged to electric utilities are paid by

utility customers and are also major sources of state and local revenues. In FY 1996, TPT

and use taxes charged to electric utilities represented approximately 7% of the total state

TPT and use tax collections. The electric utilities participating in the report paid over

$ 250 million in state and city TPT and use taxes in 1996. In addition, the electric utilities

participating in the report paid approximately $ 30 million in franchise fees collected by the

cities.

Conclusions

4 The kwh tax, as discussed in this report, may be one way to address potential losses in

revenue and therefore, legislation implementing such a tax change should be considered in

the event that any losses should occur. However, implementing a kwh tax would be

complicated and many issues would need to be resolved before implementing such a tax.

These issues include, but are not limited to, amending the Arizona Constitution,

developing a mechanism that would secure current and future bond issues, and developing

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a distribution formuia for the tax. A discussion ofthe TWh tax begins on page tweive or'

this report.

+ Specific statutory language changes to the TPT and use tax statutes should be considered

by the JLSC- EC. Possible clarifications and changes include, but are not limited to,

adding the definitions of generation, distribution, and transmission to the utility

classification. This should help ensure tax revenue is not lost as a result of unbundling.

Because of the short time frame and the complexity of the issues involved, portions of the work

groups study were not completed at the time of this report. However, based on the facts and

conclusions the work group were able to reach, the work group makes the following

recommendations to the JLSC- EC.

+ The effective date for changes, if any, to the tax laws are not necessary until

restructuring is implemented or until a need is demonstrated for the change.

+ The work group recommends that the tax issues related to electric competition

continue to be studied. The JLSC- EC may want to consider session law to require

update reports on the tax revenue impacts restructuring has had on neighboring

states and on Arizona once competition is implemented.

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