Tucson Electric Power Company (TEP) has requested its first rate increase in more than a decade to help cover the rising cost of serving its growing customer base.
"TEP customers are paying lower rates today than we charged in 1994 despite a 42 percent increase in consumer prices since then and even more dramatic increases in the cost of providing electric service," said James S. Pignatelli, Chairman, President and CEO of TEP and its parent company, UniSource Energy Corporation (NYSE: UNS).
"I'm pleased that we've been able to provide our customers with safe, reliable service at such stable prices," Pignatelli said. "But we simply cannot maintain our same high level of service and prepare for our community's future growth without rates that reflect the higher cost of fuel, materials and labor that we've experienced in recent years."
In its rate case filed today, TEP asks the Arizona Corporation Commission (ACC) to use one of three proposed methods to set new rates that would take effect no later than January 1, 2009. The proposals would increase retail rates by an average of 15 to 23 percent, depending on the approach used.
Under each of the proposed methods, TEP's retail transmission and distribution rates would be based on historic cost-based calculations. But rates for generated power would be calculated differently under each approach.
One method would base TEP's generated power charge on prices paid in the wholesale energy market. TEP maintains that this "market method" was the basis for the 1999 Settlement Agreement it entered into to bring about retail electric competition in Arizona. If the ACC adopts this alternative, TEP projects that retail rates would increase by an average of 22 percent.
The proposed "cost-of-service method" bases the generated power rate on historic costs. It also incorporates a charge tied to TEP's transition from market-based rates under the 1999 Settlement Agreement to a cost-of-service rate for generation. This alternative would produce an average retail rate increase of 23 percent.
A third alternative that blends these two approaches would produce an average 15 percent rate increase. Under this "hybrid method," TEP would base its power charge on traditional cost-of-service rules while selling the output of certain generators on the wholesale energy market.
The average TEP residential customer would experience a 13-percent rate increase under the cost-of-service method, a 10-percent increase under the market method and less than an 8-percent increase under the hybrid approach. The increase for individual customers would vary based on their energy use, with larger increases going to customers with above-average usage.
"We want to provide meaningful rewards for energy conservation," Pignatelli said. "Customers who use less energy will pay lower rates under our new, progressive rate structure, and new customers will pay variable time-of-use rates that encourage moderation during periods of peak system usage."
Rates for the first 500 kilowatt hours (kWh) that residential customers use each month would be lower than those for subsequent usage, increasing the savings that can be realized by conserving energy. The typical TEP residential customer uses an average of 980 kWh per month over the course of a year.
Proposed revisions to TEP's time-of-use rates would help customers manage their energy usage in a way that reflects the varying cost of service throughout the day. The proposed rates would be higher during peak usage hours and lower during other periods, allowing customers to reduce their monthly bills by shifting usage to off-peak hours. New TEP customers would be signed up for time-of-use rates automatically, while existing customers would be able to switch to the plan.
Along with its request for new rates, TEP has proposed expanding its energy conservation efforts. The company has asked the ACC to approve new programs including rebates for consumers who install energy efficient air conditioners, discounts for compact fluorescent light bulbs and incentives for developers and business owners who improve the energy efficiency of their buildings and equipment. The programs would be funded by a usage-based surcharge that initially would add about 55 cents per month to the average residential customer's bills.
The three alternatives proposed in the rate case have been discussed as part of a regulatory process that began in 2005 when TEP first asked the ACC to identify the method it would use to set the company's future rates. The question arose when some parties to the 1999 Settlement Agreement questioned TEP's right to charge a market-based rate for generation after the rate cap expires December 31, 2008.
"Although the 1999 Settlement Agreement provided that TEP would begin charging a market-based generation rate in 2009, we would settle for another approach that recognizes the significant costs we've incurred under the agreement and properly balances the interests of the company and our customers," Pignatelli said. "I'm hopeful that this rate case will provide all parties with enough information to help us reach a timely resolution to the issues at stake in this proceeding."
TEP's rates have remained unchanged since July 2000, when the last of three annual 1-percent rate decreases took effect. The company's rates were last increased in 1996, and the subsequent reductions resulted in rates that remain below the levels charged in 1994. Consumer prices have risen more than 42 percent since the beginning of that year, while the cost of fuel, raw materials and other expenses involved in providing electric service have risen more dramatically.
After determining whether TEP's rate case filing is complete, the ACC will set deadlines for the submission of testimony and other evidence and schedule an open hearing before a state hearing officer. The hearing officer will forward a recommended opinion and order to the ACC, which will consider the matter at an open meeting. This review process typically takes a year or more.
Tucson Electric Power, a subsidiary of UniSource Energy, provides safe, reliable electric service to more than 394,000 customers in southern Arizona. For more information, visit TEP.com. For more information about UniSource Energy, visit uns.com.
This news release contains forward-looking information that involves risks and uncertainties, that include, but are not limited to: changes in accounting standards; the outcome of regulatory proceedings; the ongoing restructuring of the electric industry; regional economic and market conditions which could affect customer growth and the cost of fuel and power supplies; changes to long-term contracts; performance of TEP's generating plants; the weather; changes in asset depreciable lives; changes related to the recognition of unbilled revenue; the cost of debt and equity capital; and other factors listed in UniSource Energy's Form 10-K and 10-Q filings with the Securities and Exchange Commission. The preceding factors may cause future results to differ materially from outcomes currently expected by UniSource Energy.
