Heating up again: Arizona turns to solar valuation after demand charge decision delayed

Regulators want to wait for the conclusion of a value of solar docket to reform incentive policies, but politics remains a constant distraction

Arizona, long a hotbed for solar policy issues, is heating up again.

Home to recurring, often acrimonious debates over how to compensate rooftop solar customers for the excess energy they send to the grid, Arizona regulators, utilities and the rooftop solar sector are still struggling to settle on a method that can satisfy both sides.

At issue is net energy metering, a policy that rewards rooftop solar customers with credits equal to the retail rate of electricity for power their systems send back to the grid. While it generates big savings for solar customers, utilities claim they do not pay their fair share for grid upkeep,  forcing non-solar customers to cover their costs.

Solar advocates, meanwhile, claim utilities, and often regulators refuse to acknowledge the benefits rooftop solar systems offer the utility system.

Following unsuccessful attempts to devise a replacement for retail rate net metering —  and a particularly bitter regulatory election cycle in 2014 — the Arizona Corporation Commission (ACC) opened a value of solar docket last year they hoped would inform the cost-shift debate.

But while parties debate in that docket, utilities continue to raise the question of solar cost-shifting in separate proceedings on their rate structures. UniSource Energy Services (UES), was the first in the queue, filing a rate proposal to impose demand charges on new residential solar customers last year.

How regulators ruled on the UES case was expected to set a precedent for upcoming utility proposals in Arizona as well as other states.  After three days of hearings last week, the 5-member ACC approved the proposed rate structure with some amendments — including an alternative option to net metering — but chose to delay a decision regarding solar remuneration rates until after the separate value of solar docket concludes in October.

By delaying a ruling on the solar rates, regulators sought to avoid a national controversy similar to the one in Nevada, where some large installers have ceased operations after a decision last year to cut net metering rates.

Their decision underscored the importance regulators, solar advocates and utilities have pinned to the value of solar docket, where it could inform future rate design and financial value of solar nationwide. But the hearings also showed political issues and lingering distrust from past policy battles could distract from policymaking during the rest of 2016.

“We’re not going to be Nevada,” Commissioner Andy Tobin said during the hearings. “We’re going to find a good policy compromise along the way.”

Arizona’s solar saga

Considered a top state for solar energy potential — and home to a robust rooftop solar sector — Arizona’s current net metering policy debates started in 2013, when utility Arizona Public Service sparked controversy with a fee proposal for rooftop solar customers that regulators ultimately scaled back to a $5 grid access charge.

The rooftop solar issue soon became a central theme in the 2014 campaign for the Arizona Corporation Commission, and allegations swirled that APS contributed funds to outside groups that supported two current commissioners, Tom Forese and Doug Little.

Those charges, and the subsequent discovery that installer SolarCity funded a watchdog group targeting utilities and the ACC, did little to build trust between the sectors going into 2015, when  APS requested to raise the grid access fee to $21 outside of a general rate case. Tucson Electric Power (TEP), a sister company of UES, also proposed to cut down the retail net metering rate, but later withdrew the request to propose it instead in their general rate case. 

After more hearings, the ACC decided it needed a more comprehensive approach to solar incentives, and voted 4-1 to open a generic docket to assess the value of solar. APS withdrew its solar proposals to wait for the results of the docket.

But before the value of solar docket could conclude, UES’s rate case filed last year again revived the debate, quickly becoming the most closely watched proceeding in the state. UES sought approval for a three-part tariffs – energy, fixed and demand charges – for new solar customers, with an opt-in feature for standard customers. Changes to net metering were included as well as UES sought to reduce the retail rate.

But solar advocates condemned the proposal for mandatory demand charges for residential solar customers, as well as the push to cut down on net metering.

Demand charges apply a fee for a customer’s peak usage over a certain period — typically a month. While common for commercial and industrial customers, they are “difficult to understand” for residential consumers, said Court Rich, an attorney for The Alliance For Solar Choice (TASC), which opposes UES’s rate proposal.

Rich pointed out demand charges meant customers would have to buy more equipment to manage their energy usage. Conversely, time-of-use rates, which apply higher electric rates during peak use hours, were simplistic enough for the average customer to understand and a more refined way to price electrical use, Rich said.

“I guess the concept if you can figure out, there’s still a better way, like time-of-use rates that can be more understandable and get the right results,” Rich said. “[Demand charges] are overly burdensome.”

In other states, too, utilities are mulling residential demand charges to recover fixed costs and manage DERs. But Arizona utilities are the pioneers, especially after public utility Salt River Project implemented a mandatory demand charge on virtually all its customers last year. Critics say the decision contributed to the 90% decline in new rooftop solar applications within its service territory.

After UES filed its demand charge proposal, TEP and APS followed suit, including demand charges for all or a select group of customers in their proposals as well.

Already, the proposals have proved controversial beyond the solar sector. UES’s original plan actually included demand charges as the default option for all residential customers, but it revised the proposal after public backlash.

Solar sector concerns got new traction in the UES rate case after an order from a regulatory judge last month.

In a July 22 order, Administrative Law Judge Jane Rodda recommended a smaller rate increase, and rejected the proposal to levy demand charges on solar customers, saying more customer education would be needed before they could be fairly implemented.

“The public distrust or antipathy to the proposal has convinced the [utility] and the Commission that any transition to three-part rates will require a massive public education effort before we can say with any degree of certainty that mandatory residential demand rates in [UES Electric’s] service territory are in the public interest,” Rodda wrote in the analysis. She pushed for small businesses and consumers to be put on time-of-use rates instead.

Additionally, new rate designs and incentive structures for rooftop solar customers — such as a net metering reform — should wait until after the value of solar docket concluded, Rodda added in her ruling.

“It is anticipated that the Value of [distributed generation (DG)] docket will yield significant new information about how DG solar should be compensated,” she wrote.

Commission Chair Doug Little noted in the hearing that the valuation docket would have ample information to compose a rate design.

“My concern is we do it correctly and with the best available information,” he said.

In that spirit, Rodda’s recommendation became the backbone for the ACC’s decision last week to divide the rate case in half — approving the more routine elements of the UES proposal and waiting until after the value of solar docket concludes in October before deciding residential solar rates.

“Generally speaking, the proceedings were encouraging because there was a lot of good discussion about the need to update our rates and our net metering policy,” said Joseph Barrios, spokesman for UES.

Under the modified proposal, UES customers will now pay an increased service charges and a $1.58 monthly fee for an extra meter if they are net metering customers. Residential solar customers also have an alternative option to net metering that could become a middle ground between utilities and solar advocates.

A new common ground?

In pushing off their decision on solar compensation, regulators hoped find common ground in the valuation docket that could satisfy both utilities and solar installers.

In the UES proceeding, however, one intervenor thinks he may have the seed of a compromise.

Presented in the hearing as an alternative to net metering, the RPS Bill Credit option seeks to value the entire production of a solar system instead of just the excess energy exported to the grid.

If a solar user, for instance, produces 6 kWh of solar energy and exports 1 kWh to the grid, they would receive compensation for the full 6 kWh. A solar user can also just choose to be compensated for the exported energy.

Lon Huber, a consultant for the Residential Utility Consumer Office (RUCO), introduced the option, but solar advocates pushed back against it.

“The proposal is not one that is sound at this point. It needs further investigation,” TASC’s Rich told Utility Dive. “There are a lot of problems with the way it’s designed … it would need a lot more work before it would be something significant.”

Under the RPS Bill Credit, UES can break up solar systems under a certain capacity and assigned a credit to that group. The first group would receive a retail rate of $0.11/kWh for their production or excess energy, while the next group would net a slightly lower rate. All these credits are locked in a fixed 20-year contract.

Huber described it as a market-based approach with a step-down mechanism, similar to the one he proposed in Maine.

“I think it can provide what I consider it as a third way in a sense of a policy that can be adaptable to changing markets,” Huber said. “I think it does provide a reasonable assumption that everyone can get behind. It’s sort of a triple win.”

A main issue for solar advocates is the step-down in tranches. During the hearing, Rich questioned where Huber and his clients got their numbers to assign capacity and group size, suggesting they may not be accurate. Huber told Utility Dive later that the pricing and capacity numbers came from tariffs and renewable energy compliance targets for UES.

So far, UES would be the first utility to test this program, Huber told Utility Dive, while RUCO also filed the program proposal in the value of solar docket. Data collected from the UES program would overlap with the value of solar docket, and be able to show its value, Huber added.

“It seamlessly works with the value of solar docket. In the value of solar docket, say they say ‘according to this methodology, solar is worth $0.12/kWh’ — this is just a number — you can base this policy off of that,” Huber told Utility Dive. “You can put first tranche at $0.12/kWh, and have it so it has small stepdowns from there based on how solar goes out on the marketplace from there.”

While there are no solidified plans to file this type of option in other rate cases, Huber hasn’t ruled out the possibility. But he hesitates to describe the proposal as a compromise.

“Every market is a bit different. I don’t just file things, I have to be engaged with particular states, but I think the general benefits … in the docket are benefits that every state can find valuable, particularly those in a stalemate battle over NEM (net metering).”

“The only reason I just shied away (from calling it a compromise) is because I don’t think any party is compromising too much.”

But whether or not solar advocates will be on board eventually remains to be seen.

Political distractions

As the conclusion of value of solar docket approaches, utilities and solar advocates are gearing up to present their data to the best advantage.

The UES spokesman said changes in their rate design will not significantly impact benefits for solar customers.

“What we said all along we still feel very strongly there will be significant benefits available to new solar customers even after changes to our rates and net metering plan even after these changes take effect,” Barrios said.

While settled for now, Barrios said UES could still propose demand charges for customers in future rate cases.

For utilities like APS, whose rate case won’t be decided until after the value of solar docket concludes, the future rate design is still elusive as regulators, solar advocates and utilities debate the value of residential demand charges.

Meanwhile, the memory of the 2014 election continues to dog the ACC, and holds the potential to distract from the complex solar issues at hand.

Those allegations led Burns, who is up for reelection this year with SolarCity's backing, to hire an outside attorney to investigate the ratemaking process two weeks ago.

Though he didn't name a particular targets, Burns has previously expressed frustration with Pinnacle West, the parent company of APS, for not disclosing political contributions.

At the end of the three-day hearing, regulators met in another meeting to discuss Burns’s inquiry into those outside influences.

In a heated exchange, Chairman Little said the inquiry was a waste of time and degraded the integrity of the Commission. Little, along with Commissioners Andy Tobin and Bob Stump voted 3-1 to kill the contract for the attorney, but said Burns could spend money from his own office budget.

There was a moment, the Arizona Republic reported, that all the commissioners acknowledged that outside political contributions affect the ACC’s regulatory process. Where they differ remains in how they see their role in managing that system.

"This is legal," Stump said of the dark money contributions. "It may not be nice, but only a change in the law will prevent it from happening again."

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Filed Under: Solar & Renewables Distributed Energy Regulation & Policy
Top image credit: Wikimedia; DGustafson