SRP: We’re Lowering Our Prices

This just in from SRP. Their customers are receiving this email Monday morning:

We’re pleased to announce that SRP is temporarily lowering prices for the second time in less than a year. The 10-month reduction will be in effect for the January through October 2017 billing cycles.

The decrease will save the typical residential customer just under a dollar per month during the winter billing months and approximately $2.50 to $3.50 per month during the summer billing months. Prices will return to the original winter season prices with the November 2017 billing cycle.

We are able to lower prices for these reasons:

  • The continued low price of natural gas, which is a primary fuel in many power plants
  • Careful management, which is enabling us to meet our environmental program goals at lower-than-expected costs
  • Greater-than-anticipated energy sales

Sincerely,
SRP

Customers can then click on a link in the SRP email that takes them to the SRP newsroom where they can read details about the rate reduction:

SRP Board OKs $40 Million Price Decrease
Temporary Measure will Reduce Prices by an Average 1.6 % for next 10 Months

For the second time in less than a year, SRP’s Board of Directors has approved a decrease in electricity prices for its more than 1 million customers. The 10–month temporary decrease, effective with the January 2017 billing cycle, averages an overall 1.6 percent.

The decrease will save the typical residential customer just under a dollar per month during the winter billing months and around $2.50 to $3.50 per month when the summer billing season begins in May. Prices will return to original winter season prices approved in 2015 with the November 2017 billing cycle.

“Utility customers are generally more used to seeing price increases than decreases, so we are very happy to be able to lower our prices,” said SRP General Manager and Chief Executive Officer Mark Bonsall. “At SRP, our team works hard to identify market opportunities and cut costs where possible to keep our prices low, and this temporary decrease is reflective of our success in these areas.”

The temporary decrease is possible because SRP has been able to reduce expenses in two components of its electric prices.

One of the price components – the Environmental Programs Cost Adjustment Factor, or EPCAF – tracks costs and revenues related to SRP’s renewable energy and energy-efficiency programs adopted to comply with SRP’s sustainable portfolio standard. The temporary reduction reflects SRP’s ability to meet its sustainable goals at a lower cost to customers.

SRP’s Board has set a goal to meet 20 percent of SRP’s retail electricity requirements through sustainable resources by the year 2020. Currently, SRP is ahead of schedule –providing more than 14 percent of retail energy needs with sustainable resources, which include solar, wind and geothermal energy, hydro power and energy-efficiency programs. SRP currently has 746 megawatts of renewable energy owned or under contract in its system.

The second component – the Fuel and Purchased Power Adjustment Mechanism, or FPPAM – recovers fuel costs incurred to generate electricity as well as power purchases to serve customer needs. Savings in this area are primarily because of lower-than-anticipated natural gas costs.

The costs of these two components to SRP are directly passed through to customers without any markup. SRP previously instituted a temporary reduction of 3.7 percent in the EPCAF and FPPAM for the 2016 July and August billing cycles.

The latest temporary reduction will decrease EPCAF and FPPAM revenue collection by about $40 million.

SRP is a community–based, not–for–profit public power utility and the largest provider of electricity in the greater Phoenix metropolitan area, serving more than 1 million customers. SRP also is the metropolitan area’s largest supplier of water, delivering about 800,000 acre–feet annually to municipal, urban and agricultural water users.

AZ Electric Utility Rates: Regulated Monopoly or Free-Market Competition?

gavel1-300x223In May, 2013, the Arizona Corporation Commission (ACC) opened a docket to gather information on how Arizona might allow competition among electric companies. On September 11, they shut down the docket with a 4-1 vote, citing “legal issues” that were apparently just too much trouble to tackle. Maybe the ACC will tell us more about that later(?).

So until & unless a new docket on the subject is opened, it’s over.  Of course, Arizona residents do still have a choice: either sign up with the one company legally allowed to provide electric service in your area or go without electricity altogether.

APS and SRP are regulated monopolies. The ACC sets the rate of return that they are allowed to earn on their capital investment in generating stations, transmission lines, and so on*. Their day-to-day operating expenses, depreciation expenses, taxes, etc. are fully covered, dollar-for-dollar, by their customers (you and me). That’s the law.

power-transmissionIs that so bad? Yes, it can be. This is the classic problem of regulated monopolies. While their rate of return is firmly capped by ACC, what are the incentives these monopolies have to hold down their capital expenditures on which they earn that guaranteed return? And what are their incentives to minimize expenses such as payroll? Technically, there aren’t any, other than their own good will and the ACC looking over their shoulder.

So can’t the ACC guarantee that the monopolies are run efficiently?  Oh, would that it were!  No, ACC politicians can’t hope to micromanage a monopoly for efficiency.  On the other hand, if there were competition, the utility would have to run itself efficiently or lose customers to a more efficient competitor that could charge lower prices.

Even when the monopolies are run by people of good will and good intentions**, they can easily slip into inefficient behaviors when there is no overriding free-market, profit-motivated, competitive incentive to stay efficient and keep prices down.

Bell_System_1939I’ve been through deregulation before. From 1969 to 1984, I worked at Bell Laboratories, the research arm of the biggest regulated monopoly ever — the old Bell System (“Ma Bell”).  We even had our own tightly coupled manufacturing arm called Western Electric.  The old Bell System was heavily regulated at the federal, state, and (in some states like Texas) local level.

In the old Bell System our advertising proudly claimed that we provided the world’s best telephone service at the world’s lowest prices. And we really did. But the DOJ Antitrust Division broke up AT&T anyway in 1984, opening the long-distance and equipment manufacturing businesses to competition. It was traumatic for us.  It was complicated.  But the job got done, and today’s telecom industry is much more competitive, innovative, entrepreneurial, and a lot cheaper than it would be if we still had one grand national monopoly.

powerlinesWouldn’t it be nice if the same thing happened with electric power in Arizona?  It could — but not until the ACC opens another docket and attacks those “legal issues” anew.

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*Correction: As shown on the ACC website, ACC regulates rates for APS, but on SRP, ACC is only involved when SRP wants to build large power plants (100 Megawatts) or very high voltage transmission lines (115 kVolts.)  ACC also regulates Tucson Electric Power (TEP).

** Regarding good intentions:  A look at the SRP and APS websites will show that these utilities are indeed responsible corporate citizens, offering ratepayers tips, a choice of rate plans, rebates, and other assistance to help customers lower their electric bills. Both utilities and their employees are involved in conservation, and I know first-hand of their contributions to public education in Arizona. But business is business, and there’s nothing like the pressure of competition and the incentive of higher profits to drive a company to run the most efficient operation and offer the lowest prices possible.