Smaller, More Gradual Changes to Rates
How are electric rates set? It looks something like this:
Imagine you're in charge of a restaurant. Every week, you buy food, pay your employees and serve customers to keep your business running smoothly. You purchased a new ice cream machine, and you're paying higher prices for supplies and equipment. But instead of charging more, you’re told: “Keep all your receipts, and in three years, we’ll look at what you spent and then decide if you can change your prices to recover those investments.”
That’s essentially how traditional utility rate-setting works.
Utilities like TEP make big investments—like upgrading power lines or building new substations—to keep electricity reliable. But they don’t get reimbursed for additional costs until years later, after a lengthy public review process. This backward-looking system is even harder for utilities than other businesses because we must plan and build for years in advance to make sure our system is ready for future energy needs.
Tucson Electric Power and other regulated energy providers in Arizona have asked state regulators to consider a new method, sometimes called formula rates, that would allow for those additional costs to be considered in a more timely way.
The request is aligned with a recent policy statement from the Arizona Corporation Commission, signaling a preference for such proposals, in the interest of rate stability, gradualism, administrative efficiently and more timely cost recovery.
TEP requested approval of the Annual Rate Adjustment Mechanism (ARAM) in its recent application for a rate review. The rates our customers pay are based on the cost of providing service to their homes and businesses. The ARAM would allow timely, systematic recovery of changing costs over time, smoothing out potential bill changes between rate proceedings.
All costs considered through this formula rate mechanism must be proven and justified. They also remain subject to oversight by the Arizona Corporation Commission (ACC) to ensure that only necessary, cost-effective investments and prudently incurred expenses are recovered.
Reducing the amount of time it takes for the ACC to consider such requests helps to keep capital investment costs down, which supports lower bills for all customers. The process also would allow for the elimination of certain other surcharges on TEP’s bills.
The new process would be based on longstanding protocols that TEP already uses for transmission rates that are subject to the jurisdiction of the Federal Energy Regulatory Commission. In addition, customers already pay for service using rate adjustor mechanisms that are reviewed and authorized by the ACC. These adjustor mechanisms are updated annually to increase or decrease customer bills for specific costs including fuel and purchased power.
TEP still incurs risk and shoulders the initial financial burden of these investments. Although TEP has maintained top-tier reliability for more than a decade, we must continue to maintain and improve our local grid.
FAQs
What is a formula rate?
Formula rates offer a simpler, more predictable way to manage energy costs. They allow utilities to adjust rates up or down each year based on a formula approved by the elected members of the Arizona Corporation Commission and would reflect TEP’s actual costs.
Why is TEP proposing this change?
Our proposal is aligned with a policy by the Arizona Corporation Commission, encouraging utilities to develop and submit formula rates. The formula rate helps avoid large, sudden rate increases that occur every few years by instead making smaller, more predictable adjustments each year. It also reduces delays in recovering costs needed to maintain reliable service. Reducing that regulatory lag could in turn allow TEP to access capital at lower interest rates, reducing costs that contribute to higher electric rates.
Will my bill go up every year?
Not necessarily. Rates can go up or down or stay the same depending on actual costs and are influenced by many factors such as sales growth, customer growth, weather, and interest or income tax rate changes. If costs decrease, customers benefit from lower rates. Other adjustors within our rates operate on an annual basis. Our Purchased Power and Fuel Adjustment Charge (PPFAC) was reduced two years in a row as a result of lower energy costs, resulting in real savings for customers.
Who reviews and approves these rate changes?
The elected members of the Arizona Corporation Commission review TEP’s costs each year and approve any rate adjustments to ensure they’re fair, prudent and in the public interest.
What are the benefits to customers?
New rates do not take effect until long after we have built the resources that customers rely on for safe, reliable service. Allowing recovery of those costs to begin sooner through annual adjustments would result in smaller, more gradual increases, making energy costs more manageable over time and easier to budget for. Customers can expect more predictable rates and a reliable grid that keeps pace with our community’s energy growth, while continuing to maintain the transparent oversight that is a hallmark of the existing rate review process.
Do we have mechanisms like this in our rates right now?
Yes. The Commission has authorized other rate adjustor mechanisms that are updated annually to increase or decrease customer bills for certain types of costs, such as fuel and purchased power.
Would approval of this formula rate change other parts of my TEP bill?
Yes. If the formula is approved, TEP would phase out several existing adjustors - such as the Lost Fixed Cost Recovery mechanism, the Tax Expense Adjustor Mechanism, and the Environmental Compliance Adjustor - simplifying your bill and making it easier to understand.