Key Points:

• APS and TEP are seeking formula rates to allow annual adjustments instead of periodic large hikes

• Supporters say it reduces regulatory lag, critics warn of weak consumer protections and accountability

• The policy faces court challenges and strong public opposition

Formula rates are a hot topic at the Arizona Corporation Commission as the state’s two major electric utility companies seek double-digit rate increases. 

The concept of formula rates has been broached at public comment sessions, rate case hearings and even the commission’s most recent May 18 Republican primary debate. Incumbent Commissioners Nick Myers and Kevin Thompson, who are seeking another four-year term, voted to enact formula rates and defended the concept on the Clean Elections debate stage.

“As part of that formula rate process, we’re requiring that they come in every single year to readjust that formula,” Myers told moderator Steve Goldstein. “Which means that if natural gas prices fall off, inflation takes a dip, whatever the case is, you actually have a chance of a rate decrease, which is something we’ve never had before.”

Myers spearheaded the adoption of formula rates, opening a docket at the commission in 2023 to explore new ways to address the regulatory lag that utility companies argued was contributing to double-digit rate increase requests. Arizona Public Service and Tucson Electric Power are both in the process of asking the commission for 14% rate increases. 

The commission approved a policy statement in late 2024 allowing utility companies to request a formula rate mechanism. If granted, a utility would be allowed to annually adjust the rates it charges customers without the typically rigorous examination involved in a normal rate case. 

That policy statement was challenged in court by the Residential Utility Consumer Office, with the Arizona Court of Appeals ultimately determining that the commission violated rulemaking statutes in adopting it. The commission appealed that ruling, but the Arizona Supreme Court sent it back to the Maricopa County Superior Court for further review. 

Despite the ongoing litigation, the commission approved the state’s first formula rate mechanism for UNS Gas in February. RUCO appealed that decision shortly thereafter, citing the pending legal questions and the lack of consumer protections included in the mechanism. 

That didn’t stop APS and TEP, the state’s two largest electric utility providers, from filing for 14% rate increases and commission approval for formula rate mechanisms in June 2025. 

Both companies argue that a formula rate mechanism would prevent the build up of large rate increases over time by instead spreading them out into smaller rate increases annually, essentially allowing the utility companies to more quickly recover the costs incurred to serve customers.

For example, APS’ current rate application is based on what the company spent and borrowed in 2024. But by the time the commission approves the company’s new rates, those costs could be three years out of date.

Under formula rates, the commission would instead be given one year to review and vote on a rate adjustment request, and utilities would be required to come in for a full rate case every five years. 

APS President and CEO Ted Geisler testified in the company’s rate case that its proposed formula rate mechanism would also allow it to annually update the cost to serve large load customers like data centers. He argued the mechanism is critical to prevent cost shifts to residential ratepayers as more data centers come online across the state. 

“As we look to add substantial amounts of new large customers onto the grid, the costs driven by that customer class is going to change dramatically each year,” Geisler testified. “It’s going to be very, very different, and if we’re not updating that on an annual basis, you will inherently start to create a cost shift and an affordability issue for residential and small business customers.”

Additionally, both APS and TEP have proposed “deadbands” along with their rate adjustment mechanisms to prevent unnecessary adjustments. The deadbands would prevent a rate adjustment if the utility’s revenue falls within a certain range of its commission-approved rate of return.

APS is requesting a 10.7% rate of return and a 20 basis point deadband, meaning it could not seek a rate adjustment if its rate of return fell between 10.5% and 10.9%. TEP is proposing the same deadband for its requested 10.5% rate of return.

Not everyone is convinced that formula rate mechanisms will benefit Arizona’s residential ratepayers. Several of the intervenors in the rate cases for APS and TEP presented evidence and testimony urging the commission to reject the formula rates. 

Cynthia Zwick, director of RUCO, said her office would want to see far more consumer protections if the commission ultimately adopts the mechanisms. RUCO is advocating for caps on annual rate adjustments — which the utilities oppose — to ensure customers aren’t overwhelmed with increases as the cost to provide utility services shows no sign of going down. 

RUCO is also concerned with the sheer number of utility companies asking for formula rates. If a customer receives gas, water and electricity from commission-regulated utility companies, all three of those bills could increase because most of the state’s utilities are asking for or plan to ask for a formula rate. 

According to the commission, nine utility companies are currently asking for a formula rate in a rate case. That includes APS and TEP, as well as one gas utility and six water/wastewater utilities. 

Additionally, one member of the all-Republican commission has consistently voted against formula rates. Commissioner Lea Márquez Peterson voted against adopting the policy statement in 2024 and voted against adopting UNS Gas’ rate adjustment mechanism in February.

Márquez Peterson argued at a Feb. 19 commission meeting that nothing in the evidentiary record for the UNS Gas rate case suggested a formula rate would benefit customers.

“A formula rate is a tool, not an entitlement,” Márquez Peterson said at the meeting. “Its use must enhance, not erode the commission’s constitutional duty to protect public interest.”

And despite claims from the commission and utility companies that formula rates will ultimately benefit customers, ratepayers themselves are vehemently opposed to formula rates. Several APS customers made that clear during a public comment hearing on May 18.

“Accountability is extremely important,” said Allan Lenefsky, a Sun City resident. “The formula will cause accountability to decrease tremendously. Consumers deserve better than that.”