What's solar worth? Inside Arizona utilities' push to reform net metering rates

Solar advocates call the proposed changes an attack on self-generation

Utilities and solar advocates are once again nose to nose on net energy metering in Arizona.

Both Tucson Electric Power (TEP) and Arizona Public Service (APS) have proposed new ways to reimburse net metered customers. They say their plans make the policy more equitable. Solar advocates say the plans are a veiled attack on self-generation.

“Customers who install distributed generation (DG), like rooftop solar, do use the grid — 24 hours a day. But because of a rate design that the Commission has found to be ‘unfair' and ‘defective,’ customers with DG don’t pay their fair share for that use,” APS explained in its filing for Arizona Corporation Commission (ACC) Docket 13-0248

In that filing, APS requested that the regulators cut the rate it pays rooftop solar customers for the electricity their panels produce. Specifically, it wants its lost fixed cost recovery (LFCR) adjustment to “be reset to $3 per kW, an amount the Commission has already found to be reasonable.”

The LFCR is the amount of money a utility recovers from customers when they reduce their utility bills by generating their own power through rooftop solar. In 2013, the ACC set the LFCR for APS at $0.70 per kW, meaning that utilities charge customers that amount for each kW that they produce from their solar panels, instead of buying from a utility. APS, complaining of a cost shift to non-solar customers, wants that rate more than quadrupled to $3 per kW. 

Tuscon Electric Power, another investor owned utility in Arizona, wants a different kind of change.

“The reimbursement rate should be changed from the retail rate to the rate the utility pays for wholesale solar generation from utility-scale projects connected to its distribution system,” argued TEP's Energy Supply Senior Director Carmine Tilghman in describing the request in TEP’s (docket 15-0100) filing.

“I can buy solar energy from a larger scale project on my distribution system, paid for by my ratepayers, at $0.058 per kWh," he said, "half the price I am forced to credit people who push energy back on the grid from net metered systems.”

The solar industry opposes any changes to the net metering rates.

“Leave it at retail rate net metering,” responded attorney Court Rich, who represents The Alliance for Solar Choice (TASC), a solar industry advocacy group. “The overwhelming majority of studies around the country back up the fact that retail rate reimbursement is fair and might even be low in some cases. It is also easy for the customer to understand and it fairly compensates them for the electricity they provide to the grid at peak moments.”

Rate design vs. net metering

TEP's proposal to change its net metering rate to what it pays for solar from larger, utility-scale installations was filed in March, while the APS docket has been open since July 2013. Both utilities and their intervenors are now working through procedural issues and public meetings on the proposals, but APS has indicated it wants a decision to take effect by August. 

With only a 2% solar penetration in Arizona, Rich argued, there is no reason to be concerned with a cost shift.

The issue, he said, is that much of a utility’s costs are fixed while much of its revenues come from variable charges.

“They argue they need to have a better connection between their costs and the rate people pay,” he explained. “They don’t have a solar issue. They have a rate design issue.”

TASC would support a broad-based look at rate design that "doesn’t single out solar customers and put them at a disadvantage," Rich said. “But the utilities should deal with net metering in a rate case and not use it as an excuse to attack solar.”

“To the extent that net metering is rate design, I would agree it is rate design,” responded APS Director of State Regulation Greg Bernosky. “We think net metering is a concept that needs to be looked at in the contexts of rate cases going forward. But this filing is about an adjustor mechanism specific to us and we think it is the right incremental gradual step to address the ongoing and defined cost shift between solar and non-solar customers.”

In 2014, APS added 7,800 DG systems, the utility’s filing reported, creating a cost shift to non-solar owning customers of $126 million over the 20 year lives of the systems. With rooftop solar likely to continue growing in its territory, the $3 per kW LFCR Adjustment offers “incremental progress in addressing a looming $800 million cost shift."

"Because fixed costs continue to accumulate each day, APS urges the Commission to act promptly on this Motion, ordering a reset to take effect on August 1, 2015," the filing reads.

Both Trico and Sulphur Springs Electric Cooperatives have similar filings with Arizona’s regulators, creating a momentum of action from utilities that is forcing all stakeholders to think hard about the direction solar will go.

The SRP precedent: Solar charge changes outside a rate case

The utilities are using the recent approval of a monthly charge on solar owners by public power provider Salt River Project’s Board as a precedent, Rich said. “They are trying to overwhelm the commission and the solar industry and get immediate and unwarranted remedies outside a rate case.”

APS is also asking the commission to ignore multiple statements its representatives have made that any change to net metering is a rate design issue and should be taken up in a rate case, Rich argued.

“Until the SRP decision, it seems to not have occurred to APS to try this outside a rate case,” he said.

Should the ACC take up the utilities’ requests, the commissioners would also be ignoring their staff’s recommendation that this issue should be part of a rate case, he added.

“Even the SRP decision came in a rate case," Rich said. "There is no precedent for doing it outside a rate case. The commission, just within the last 2 months, punted a decision about smart meters for APS to the next rate case. That is the precedent.”

“We have the right to pursue this outside a rate case,” Bernosky insisted. “We understand the broader issue of rate design changes should happen inside a rate case. But our LFCR for DG was established outside a rate case. It was contemplated that we could come back outside a rate case cycles to revisit that adjustor.”

The regulatory staff’s recommendation was likely based on the assumption that a rate case provides a forum in which the most and best information can inform the commissioners’ decisions, explained an Arizona policy expert who spoke on the condition of anonymity due to close proximity to the issue. But, the source added, the utilities may, in fact, have proposals that can legitimately be argued outside a rate case.

“The solar industry says these changes must be done in a rate case but Arizona’s net metering wasn’t created in a rate case,” Tilghman said. “When net metering was created, nobody ever said it should only be done in a rate case or that it was in violation of agreements from previous rate cases.”

Each of the utilites' filings will go before an Administrative Law Judge (ALJ) before it goes to the commissioners. In each case, the ALJ will decide the question of whether modifications to the LFCR and the net metering remuneration rate can be taken up outside a rate case.

Opinions from the ALJs and the staff will be based on the efficient use of the ACC's time and resources, but that won’t change the fact that net metering was created outside a rate case, Tilghman said.

“Why it could be created outside a rate case but it cannot be modified outside a rate case because it is a change to rate design is something they should have to explain," he said.

Both TEP and APS raised the cost shift issue in their last rate cases and both were awarded the LFCR, but both are now asking the commission to ignore past precedents and the staff’s recommendation and let them re-litigate that decision, Rich said.

UNS (TEP's parent company) also filed for a net metering modification but has since filed a rate case with their request,” Rich added. “UNS realized there was no chance they could make a legitimate case for doing it outside a rate case.”

Struggling to value solar

Whether or not regulators allow Arizona's utilities out side of a rate case, stakeholder seem sure to have to address long-standing issues of how to value solar on the distribution system. On that issue, solar advocates and the utilities are still miles apart on how they value the costs and benefits of solar on the grid. 

“Waiting to address the entire cost shift in one instance might cause undue disruption,” the APS filing argued. A fair cost allocation would impose a fixed monthly charge on DG customers of $67, the utility said.

“Increasing the LFCR Adjustment to $3 per kW now would be an incremental step towards fair rate design,” the filing explained. “It would also be consistent with principles of rate gradualism and give customers and the rooftop solar industry time to adjust before fixed costs are (more) fairly allocated in APS’s next rate case…[and] make APS’s next rate case more manageable.”

In the 2013 proceeding, both Rich and Bernofsky acknowledged, the settlement included the conclusion, agreed to by all participants, that there is a cost shift from solar owners to non-solar customers.

"There was no appeal of that because it was viewed as a victory when the commission cut the APS request from $50 to $5,” Rich said. “Given the costs and benefits of an appeal, we decided it was something we could live with.”

As a result, critics say APS operates on the assumption there is really a cost shift $67 per month for each rooftop solar arrays, despite many studies showing solar provides more benefits than costs to a utility’s system.

“I can't address all studies but the ones used in the 2013 proceeding evaluated theoretical benefits and potential future benefits,” Bernosky said. “We cannot collect future perceived benefits. We can only collect the costs of the services and benefits we deliver.”

APS’s change in the LFCR to $3 per kW per month would destroy the economics of rooftop solar, Rich said. Annually resetting rooftop solar owners’ remuneration to the changing wholesale price of solar electricity would equally compromise the business case.

“Market prices change, but we fail to see why energy pushed onto the grid from rooftop systems shouldn’t be paid for at the same price that we can buy solar from other sources. That is the basis of the TEP filing,” Tilghman said.

Tilghman also rejected the argument that a changing reimbursement rate would discourage solar customers.

“For net zero customers, roughly 60% of their solar output is consumed onsite and roughly 40% is pushed back to the grid,” he explained. If 60% of the average residential system’s 9 year payback is unaffected by the changed remuneration, that means 5.4 years of the payback is unchanged, he estimated.

If the retail remuneration of about $0.12 per kWh is cut in half to the wholesale $0.058 per kWh by TEP’s proposal, 40% of the payback time would be doubled from 3.6 years to 7.2 years, he added. 

“That means the total payback time is 12.6 years for a system designed to last 25 years or longer,” Tilghman said. “Solar companies can figure out how to finance and plan for that.”

Rich, however, doesn't buy the utility argument, and says their actions will push investment away.

“It pains me to say it,” Rich said, “but Arizona has got to be the worst place in the country to be in the solar industry because it is non-stop, utility-created chaos. Utilities are fighting solar at every level of government. They are pushing for higher property taxes, higher solar charges in rates, and revisiting settled issues. Utilities tout regulatory certainty and know the problems uncertainty can cause and they are using uncertainty as a weapon against solar.” 

Top image credit: Flickr; mickey barry