But that system could be dismantled if the Arizona Corporation Commission favors a push to allow other companies to compete over electric service here.
Consequently, APS is hesitating about its plan to purchase two plants at the Four Corners Generating Station and retrofit them to comply with federal emission standards. Those investments would cost the company at least $550 million.
In this Aug. 2 interview, Mark Schiavoni, APS vice president for operations, argued that Arizona’s regulated model has worked for more than a century and there is no reason to plunge into the unfamiliar waters of competition. APS spokesman Jim McDonald also sat in for the chat with Arizona Capitol Times reporter Luige del Puerto.
Del Puerto: What you’re saying is the energy mix that you have right now is a guarantee that the prices will be predictable?
Schiavoni: Yeah, no one fuel source will take our pricing — whether it’s our Palo Verde, whether it’s [the] wind portfolio we have, whether it’s the small biomass we have, whether it’s solar we have, gas, or coal. You look back in time, when gas was at $10, $11, $12 in the marketplace. Our rates were fairly flat. So our customers were not getting as impacted as those states that were deregulated got impacted.
Del Puerto: Natural gas — right now, it is cheap, and it looks like it is going to be cheap for quite some time.
Schiavoni: We thought that in 1998, too.
Del Puerto: Oh, is that right?
Schiavoni: Oh, yeah. We thought it was going to be less than $2 forever, and there was a mad dash to gas.
Del Puerto: I was reading stories about how we would need about 2,000 [more] miles of pipeline to pipe this energy. So it looks like at least in the next decade, given the reserves that we have, it looks like it’s going to stay cheap.
McDonald: Well, is 10 years a long time?
Del Puerto: No.
McDonald: I mean, how old are you?
Del Puerto: I’m 33.
McDonald: You want cheap gas until you’re 40 and then prices would triple?
Del Puerto: I guess those are the risks of a competitive environment, right?
Schiavoni: Absolutely. You hit it on the head.
Del Puerto: I guess my question is: Why should we not take advantage of those very cheap prices now by fully opening up our markets here?
Schiavoni: Once you do it, though, there is no turning back. And so, you can’t say, “Well, today, let’s go deregulate the state or restructure the state.” It’s a supply and demand. It’s pure economics.
If I were a supplier, what do I want? I want a tight market. I want a low level of supply, because that’s going to drive pricing. And so what incents anybody to come into that market and build? You’re only going to put a new plant in if you think you can make a profit… It takes three to five years to build a new power plant. So, can you predict today that three to five years from now, the prices are going to be same and I’m going to able to get a return on my investment? You can’t.
Del Puerto: There are people who have faith in the market system, and their argument is that if there is a demand, the companies will be there to make sure it’s satisfied. And they’re saying, “We’ve seen that in the other markets as well.”
Del Puerto: Well, in the airline industry.
Schiavoni: It’s not the same. It doesn’t take three to five years to build a new plane.
Del Puerto: It seems like what you’re really saying is that you can have faith in a competitive environment, but it just does not work in this industry.
Schiavoni: Right. It’s not like going down to Verizon and getting a different telephone. It takes a major financial investment as well as some certainty around future forecasts for the return on investment, because the shareholders are the ones picking up all of that risk.
Del Puerto: Greg Patterson (director of the pro-electric retail Arizona Competitive Power Alliance) — I’m sure you know him — told me yesterday that, basically, if you’re hesitating (to pursue investment plans for the Four Corners Power Plant) because you don’t know what the competitive environment will be… that’s a good thing for customers because now they’re not on the hook.
McDonald: Higher prices are good for customers?
Del Puerto: Well, his point is that they’re not on the hook to pay for the investment that you’re making when you can get the energy (elsewhere). His assumption is always that you can get the energy much cheaper elsewhere. He said, “When it became clear that it would have to compete in the open market, they decided it wasn’t worth buying it, and I think that is a great example of how competition works. When the ratepayers were going to pay for Four Corners, APS said, “Oh, it’s a great deal. We’ve got to have it,” and now that they have some risk in the transaction, they say, “It’s too risky for us to purchase.”
Schiavoni: It’d be nice if Mr. Patterson was going to guarantee me cost recovery on investments if we move forward some and this market doesn’t develop as he thinks it may. You don’t know the game you’re playing… and until you know the rules. Why would you or anybody make an investment and say, “I’m going to do this.” You know, I would not make an investment on a new gas plant. I wouldn’t make an investment on anything today with that uncertainty out there. It just makes no sense.