Direct Access: Why it Makes Sense for Arizona

1. Direct Access:Why it Makes Sense for Arizona Presentation by Kevin Higgins Principal, Energy Strategies On behalf of Arizonans for Electric Choice and Competition August 27, 2013

2. What is Direct Access? Direct Access means that competitive power suppliers are permitted to utilize the transmission and distribution system to deliver power to retail customers. Unless a state authorizes direct access service, the transmission system generally cannot be used for serving retail customers by parties other than the incumbent monopoly.

3. What Implementation of Direct Access in Arizona Does Not Mean: Implementation of Direct Access in Arizona does not mean that electric service in Arizona would be “deregulated.” The Arizona Corporation Commission (ACC) can choose to require that bundled service (including generation) from incumbent utilities be provided at cost-based rates. Rates for unbundled transmission and distribution service would be remain regulated on a cost-of-service basis. The ACC would oversee the certification of competitive Electric Service Providers (ESPs)

4. What Implementation of Direct Access in Arizona Does Not Mean: Implementation of Direct Access in Arizona does not mean that utility generation assets must be divested. Other states have implemented direct access without requiring divestiture. Implementation of Direct Access in Arizona does not mean that the ACC must cede its jurisdiction over retail generation rates of regulated utilities to FERC. Such a transfer would only occur in Arizona if the Commission voluntarily and expressly ceded jurisdiction as part of an approved divestiture plan.

5. What Implementation of Direct Access in Arizona Does Not Mean: • Implementation of Direct Access in Arizona does not require that a Regional Transmission Organization (RTO) first be in place. • Even though an RTO would help facilitate direct access, it is not a necessary precondition if utility generation remains under the ACC’s jurisdiction. • Arizona utilities began working on forming a western RTO over 13 years ago. The failure to develop one should not now be used as a pretext to thwart direct access in Arizona. • The Arizona Independent Scheduling Administrator (AZ ISA) was formed specifically to ensure non-discriminatory access to the transmission system prior to – or in the absence of – an RTO.

6. What Implementation of Direct Access in Arizona Does Not Mean: • Implementation of Direct Access in Arizona does not mean that reliability of the grid will be compromised. • Operation of the transmission and transmission grid will remain in the hands of the incumbent utilities and will continue to be regulated on a cost of service basis. • Competitive suppliers would simply be granted access to the transmission system and would pay to use it. • Direct access customers would continue to pay the local utility for distribution service. • Integrated Resource Planning does not have to be discontinued, but would include direct access as a variable.

7. What Direct Access Does Mean: Direct access means giving customers pricing options, environmental choices, and innovative products that allow them to better manage their energy costs. Direct Access means helping Arizona businesses compete in the world marketplace, creating and preserving jobs. Direct access means giving those customers who want to purchase their power at market prices the opportunity to do so. Direct access means providing customers the ability to purchase a blend of renewable energy that is tailored to their choice. Direct access means increased competition – multiple buyers and sellers – creating downward pressure on retail prices

8. Lessons from Arizona’s Past Experience with Direct Access • After the initial direct access rules were passed, Arizona stakeholders worked together to resolve stranded costs and implementation issues. • Prior to the Phelps Dodge decision, there were Arizona customers that participated in direct access under the ACC’s rules. • Contrary to concerns expressed at the time, not all customers tried to shop at once. • The California energy crises occurred after implementation of direct access in Arizona, but because of how Arizona’s program was structured, Arizona customers were not harmed.

9. Can Other Direct Access Models Work in Arizona? An example to consider: Portland General Electric (PGE) Multi-Year Opt Out • PGE has not divested its generation and is subject to cost of service regulation by the Oregon PUC • There is no RTO operating in Oregon • Eligible PGE customers transition to market over a five-year period during which they either pay or receive transition charges. (In Arizona, prior disposition of stranded costs would need to be addressed.) • Limitations on total participation (at about 40% of eligible load.) (In Arizona, a phase-in applicable to all customer classes may be reasonable.) • Limited to customers with individual site demands of at least 250 kW that can aggregate at least 1 MW. (These specific restrictions are negotiated components of the PGE program and need not be applied to Arizona.)