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The Arizona Corporation Commission, water issues and your pocketbook

Greg Eisert

Greg Eisert

Lately, accusations of impropriety within the ranks of the Corporation Commission have been released in various news media. It is imperative that the officials of the most powerful group affecting the pocketbooks of the greatest portion of the state’s population remain unbiased and deal with only “the facts at hand” over the rate cases they preside.

It’s not just about electricity.

Small water/wastewater systems have long troubled our Arizona commissioners. Many of the commission-regulated water/wastewater systems are small in size, which poses certain public policy problems. Particularly problematic are the very small systems that were the product of unchecked real estate development and lax local and area zoning policies. Many of these systems are geographically isolated, which often precludes interconnection with another system. Lacking economies of scale, smaller water systems typically must charge a much higher rate for service than larger systems. Further, most of these companies are not financially stable and lack the resources to adequately service their mandated ratepayer needs.

Higher rates make water/wastewater service less affordable for customers of smaller water systems. These smaller, financially challenged operators are good targets for acquisition or mutual consolidation with larger companies. This is “not” the same as price consolidation (single-tariff pricing).

It is clear that tens of thousands of ratepayers could bear the brunt of huge rate increases under the guise of “consolidation” and the forced subsidy of ratepayers supplied by inefficient operations state wide.  It is imperative that this does not happen. Both the governor and the Legislature need to pay attention to this unfolding situation. The ACC is beginning this process slowly with EPCOR as a test case with the “presumed” expectation of accelerated implementation once the initial transformations are in place. Such actions could quickly impact ratepayers’ statewide.

Historical pricing behaviors with cost-of-service principles enhance allocative efficiency: Customers of systems with higher costs pay higher rates and customers of systems with lower costs pay lower rates. The degree of subsidy or inefficiency introduced with single-tariff pricing (EPCOR district consolidations), depends in part on the differential in costs among systems. In this case, it is apparent that the extent of cost averaging through consolidated pricing would constitute an inappropriate level of subsidy, undue price discrimination, or more generally, an abuse of monopoly power.

Importantly, consolidated pricing is a pricing strategy, not a costing strategy. By itself, consolidated pricing may not provide significant economies of scale because only the costs associated with the pricing process itself (including analytical, administrative, and regulatory costs) can be considered.

Yes, consolidation of underperforming/non-conforming water/wastewater companies makes sense. What must take place is an equitable pathway that does not unduly penalize the majority of the state’s ratepayer base. We need to look at acquisition avenues, fines, infrastructure equity transfer standards, etc.

It’s up to the commissioners to prove the pundits wrong. Meet with your constituents.

– Greg Eisert is director and chairman of government affairs for the Sun City Home Owners Association.

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