The Arizona Corporation Commission voted 3-2 to allow formula ratemaking on Tuesday after a marathon hearing that at times got contentious.  

Three Republican commissioners approved a policy statement that will allow utilities to apply for formula rate plans, bypassing the traditional rate case process that utilities go through to implement rate increases. Democratic Commissioner Anna Tovar and Republican Commissioner Lea Marquez Peterson voted against the policy.

Under the plan, utilities will be required to submit an annual update using historical test year data and a determination of the company’s value to increase rates for customers. Companies would not have to defend the update during a hearing process before the commission, which is how rate increases are approved currently. 

The policy was passed with two amendments, one that would require utility companies on a formula plan to come to the commission for a full rate case every five years unless an alternate schedule is determined and another that softened the language.

Several advocacy groups and the Residential Utility Consumer Office and the Attorney General’s Office opposed the policy and said it was being implemented outside of the commission’s traditional rulemaking process. But the policy has support from business groups like the Arizona Chamber of Commerce and Industry and the Arizona Lodging and Tourism Association.  

At the hearing, Republican Chairman Jim O’Connor – one of the commissioners who introduced the policy statement – said the stakeholder groups’ arguments against formula rate plans were a “gross misperception” of the concept. 

“Let me be very clear, the notion that formula-based rates are bad for customers of utilities is blatantly false,” O’Connor said. 

At one point, O’Connor raised his voice in frustration after nearly two hours of testimony that featured many speakers opposing the plan.

“Everybody at that microphone that is downing this idea: skeptics, naysayers, doubtful…” O’Connor said. “Raise questions. Use hyperbole. Keep it going. This is now political.”

The policy was announced in a letter from O’Connor and Republican Commissioner Nick Myers on Nov. 20, which caught several stakeholder groups by surprise, according to documents filed to the ACC. 

Advocacy groups and state entities like RUCO asked the commission to delay the vote, saying more time was needed to respond to the statement and for public comment to be given. Additionally, several stakeholders said they were under the impression another workshop would be scheduled and the implementation of formula rate plans came as a surprise. 

The commission opened a docket in 2023 to explore changes to ratemaking at the direction of Myers, with a focus on using future test years in rate cases. A workshop was held on the issue in March 2023, and the commission voted in July to hold two more workshops exploring future test years and formula rate plans. 

The commission held a workshop on Oct. 4 focused on formula rate plans, but a third workshop has yet to occur.

Marquez Peterson seemed surprised by the speed of the policy statement when asking questions of fellow commissioners and indicated she also thought a third workshop would be coming. While explaining her vote, she agreed with stakeholder groups that expressed concern and asked for more time to workshop the policy.

“This decision is being made hastily, without thorough vetting,” Marquez Peterson said. “I do not oppose the concept of formula ratemaking, but I question whether a possible drastic change in our ratemaking process, if utilities should decide to pursue [formula rates], should be dealt with as a policy statement.”

During Tuesday’s hearing, Myers rejected the idea that allowing formula rate plans would significantly change ratemaking. 

“The policy statement is not requiring anything from our utilities,” Myers said. “It’s not changing any of our existing ACC rules. It’s simply giving the option to the utilities to reduce the number and frequency of the rate cases, which is ultimately a good thing for customers.”

O’Connor and Myers lambasted stakeholder groups for complaining about a lack of time to respond, saying the docket has been open since 2023 and two months have passed since the workshop on the issue.

“I have to assume the lack of meaningful feedback from those who oppose the idea of formula rates is due to one of three reasons,” Myers said. “First off, they’re just simply not very good at their jobs. Secondly, they’ve not prioritized this topic. Or third, and the one I choose to believe, is that they analyzed the policy statement and were unable to find or identify any areas that need improvement.”

Tovar, who also voted to reject the policy statement, went so far as encouraging stakeholders and state entities to intervene, whether before the commission or in a county court. 

“I think the biggest issue here is that it is not a proper policy statement,” Tovar said. “I believe it violates the statute on what a policy statement is supposed to be. I’m hopeful that one of the stakeholder groups will challenge it …”

Intervenors can request a reconsideration from the commission or they can file suit in Maricopa County Superior Court. It is currently unclear whether any group will take either action.