I had to drive down to Phoenix, Arizona on the 17th and 18th of this month (October) so I could attend a big meeting at the Arizona Corporation Commission (ACC) – they are like the Public Service Commission here in Utah, and were meeting to discuss the option of implementing an Impact Fee to pay for new growth, like we do here in Utah. By way of background, my electric utility currently serves 2,000 customers in Mohave County, Arizona, as well as another 12,000 customers in southwest Utah, and while we have experienced nearly 20% growth every year since 2000, we have not imposed a rate increase upon our members since 1994. We attribute these long-term stable rates in the face of such steep growth, which is in fact the steepest growth in the country for the past six years according to the U.S. census bureau, to our implementation of an Impact or “Hook-up” Fees program in 1988. After the ACC staff initiated the meeting by introducing the topic, they were bombarded by negative comments from the investor owned utilities (gas and electric) as well as the private developers and home builders who claimed that the whole concept was unheard of and why was the commission trying to solve something that wasn’t a problem anyway? The commission responded with the fact that skyrocketing rate increases WERE a problem that needed solving and that there already WAS an electric utility in Arizona that utilized Impact Fees – ours. So, I volunteered to speak next, and introduced our company, our proud history, and the concept behind the implementation of Impact or Hook-up Fees. After that I was asked to speak on each of the following twelve Points for Discussion:
1. How do we pay for growth? Rates or Hook-up fees? We believe that the only fair way to recuperate increasing utility costs associated with growth is to assess them on those who cause them. Just as rates for energy consumption by the various customer classes should be set to reflect the costs to serve that particular customer class, the cost of growth should be assessed to those who caused those costs. In the case of growth, the costs of additional infrastructure built to serve that growth should be assessed to those new customers in the form of Hook-up Fees rather than burdening all customers, old and new, with ever increasing utility rates.
2. What are the fairness and equity issues associated with imposing or not imposing hookup fees? Is it more equitable to have current utility customers pay through their rates or to assign those costs to new customers for whom the infrastructure must be built? It is exactly fair and equitable to assign the costs of growth to the new customers who caused that increased cost. Then, after the hook-up fees have been charged, each customer has only to pay the cost of their consumption along with their fair share of the operations, maintenance, and other costs associated with running a utility. In contrast, imposing the incremental costs of growth on all utility customers through rates is patently unfair to the existing customers, who could have been happily served with the previously existing infrastructure. In this latter case, customers on fixed incomes may be forced to relocate to non-growing areas with more reasonable utility rates.
3. Should hook-up fees be limited to extraordinary growth areas only? How do we define extraordinary growth? Hook up fees should be applied across the board in a uniform fashion in order to be fair and equitable with all customers, regardless of where they live on a utility’s system or within a commission’s jurisdiction.
4. What are the economic development implications? Who is helped? Who is hurt? In our experience, economic development is benefited by having long-term stable utility rates. Even though we apply Hook-up/Impact Fees, home builders, businesses, and industries chose to locate within our service territory because of our low utility rates. Under this equitable system where everyone is paying their fair share of costs, everyone is helped and no one is hurt.
5. What are the implementation issues? Is a phase-in period necessary? How should a phase-in period be properly done? When implementing hook-up fees for the first time, or modifying the application of hook-up fees, the utility should phase in the implementation, applying the new fees to new projects while honoring the fee schedule in place at the time projects already in-progress were initiated.
6. What are the unique implications of assessing hook-up fees to gas companies? We are not a gas company and therefore have no first-hand experience as such, but can not conceive of why a gas company would face any unique problems with hook-up fees as opposed to electric or water companies.
7. Effectiveness of hook-up fees: full or limited benefit? Tax implications? Our experience has shown that if the hook-up fees are treated as income then the utility receives the full benefit of the hook-up fees collected.
8. What are the competitive issues or concerns? Our experience to-date is that in an environment where all utilities are paying for the costs associated with new growth via hook-up fees, then there are no competitive concerns, as each utility has a standard cost recovery structure (an initial hook up fee and then a monthly charge for consumption) as well as an incentive to keep both at a minimum in order to remain competitive with neighboring utilities and competing energy sources.
9. Would hook-up fees create customer confusion? What customer education would be necessary? In our extensive experience with this issue, customers (either residential or commercial) are easily educated on this subject at the time that they solicit new connections and rarely, if ever, experience confusion on this issue.
10. What types of infrastructure should be included in a hook-up fee? We currently include the costs associated with new growth, including in-system transmission lines, substations, and back-bone distribution lines. There is certainly an argument to be made in this capacity constrained environment also to include a component for the eventual addition of generation capacity.
11. Should hook-up fees attempt to pay for a new customer’s full incremental cost? In an ideal situation, each new customer should pay their full incremental cost through the hook-up fees. However, in a competitive environment where service territory is not always guaranteed, it is a fact that the hook-up fees that we assess is set at the level of our competitors and is currently something less than the full incremental costs.
12. Should different sized customers pay different hook-up fees? We have differentiated hook-up fees by customer class and size. For example, the new residential customers in Arizona currently pay $750 per service and new commercial customers pay $60/kW of connected load as determined by the electrician’s calculations in accordance with the NEC and then reduced by a coincidence factor in accordance with our experience. This methodology ensures that each customer, regardless of size, has paid their fair share of their impact on the existing utility system.
I didn’t make a lot of friends at the meeting – the investor owned gas and electric utilities, who have raised rates in Arizona by 25% in the last four years, didn’t like the concept because it would keep down rates (and they want to collect as much money as possible) and the home builders didn’t like me either because they don’t care what the electric rates are, they just want their homes to be as cheap as possible so they can maximize their profit margin. But the actual commissioners, who are trying to look out for the consumer, liked what I had to say, so at least I made friends in the right places.
1. How do we pay for growth? Rates or Hook-up fees? We believe that the only fair way to recuperate increasing utility costs associated with growth is to assess them on those who cause them. Just as rates for energy consumption by the various customer classes should be set to reflect the costs to serve that particular customer class, the cost of growth should be assessed to those who caused those costs. In the case of growth, the costs of additional infrastructure built to serve that growth should be assessed to those new customers in the form of Hook-up Fees rather than burdening all customers, old and new, with ever increasing utility rates.
2. What are the fairness and equity issues associated with imposing or not imposing hookup fees? Is it more equitable to have current utility customers pay through their rates or to assign those costs to new customers for whom the infrastructure must be built? It is exactly fair and equitable to assign the costs of growth to the new customers who caused that increased cost. Then, after the hook-up fees have been charged, each customer has only to pay the cost of their consumption along with their fair share of the operations, maintenance, and other costs associated with running a utility. In contrast, imposing the incremental costs of growth on all utility customers through rates is patently unfair to the existing customers, who could have been happily served with the previously existing infrastructure. In this latter case, customers on fixed incomes may be forced to relocate to non-growing areas with more reasonable utility rates.
3. Should hook-up fees be limited to extraordinary growth areas only? How do we define extraordinary growth? Hook up fees should be applied across the board in a uniform fashion in order to be fair and equitable with all customers, regardless of where they live on a utility’s system or within a commission’s jurisdiction.
4. What are the economic development implications? Who is helped? Who is hurt? In our experience, economic development is benefited by having long-term stable utility rates. Even though we apply Hook-up/Impact Fees, home builders, businesses, and industries chose to locate within our service territory because of our low utility rates. Under this equitable system where everyone is paying their fair share of costs, everyone is helped and no one is hurt.
5. What are the implementation issues? Is a phase-in period necessary? How should a phase-in period be properly done? When implementing hook-up fees for the first time, or modifying the application of hook-up fees, the utility should phase in the implementation, applying the new fees to new projects while honoring the fee schedule in place at the time projects already in-progress were initiated.
6. What are the unique implications of assessing hook-up fees to gas companies? We are not a gas company and therefore have no first-hand experience as such, but can not conceive of why a gas company would face any unique problems with hook-up fees as opposed to electric or water companies.
7. Effectiveness of hook-up fees: full or limited benefit? Tax implications? Our experience has shown that if the hook-up fees are treated as income then the utility receives the full benefit of the hook-up fees collected.
8. What are the competitive issues or concerns? Our experience to-date is that in an environment where all utilities are paying for the costs associated with new growth via hook-up fees, then there are no competitive concerns, as each utility has a standard cost recovery structure (an initial hook up fee and then a monthly charge for consumption) as well as an incentive to keep both at a minimum in order to remain competitive with neighboring utilities and competing energy sources.
9. Would hook-up fees create customer confusion? What customer education would be necessary? In our extensive experience with this issue, customers (either residential or commercial) are easily educated on this subject at the time that they solicit new connections and rarely, if ever, experience confusion on this issue.
10. What types of infrastructure should be included in a hook-up fee? We currently include the costs associated with new growth, including in-system transmission lines, substations, and back-bone distribution lines. There is certainly an argument to be made in this capacity constrained environment also to include a component for the eventual addition of generation capacity.
11. Should hook-up fees attempt to pay for a new customer’s full incremental cost? In an ideal situation, each new customer should pay their full incremental cost through the hook-up fees. However, in a competitive environment where service territory is not always guaranteed, it is a fact that the hook-up fees that we assess is set at the level of our competitors and is currently something less than the full incremental costs.
12. Should different sized customers pay different hook-up fees? We have differentiated hook-up fees by customer class and size. For example, the new residential customers in Arizona currently pay $750 per service and new commercial customers pay $60/kW of connected load as determined by the electrician’s calculations in accordance with the NEC and then reduced by a coincidence factor in accordance with our experience. This methodology ensures that each customer, regardless of size, has paid their fair share of their impact on the existing utility system.
I didn’t make a lot of friends at the meeting – the investor owned gas and electric utilities, who have raised rates in Arizona by 25% in the last four years, didn’t like the concept because it would keep down rates (and they want to collect as much money as possible) and the home builders didn’t like me either because they don’t care what the electric rates are, they just want their homes to be as cheap as possible so they can maximize their profit margin. But the actual commissioners, who are trying to look out for the consumer, liked what I had to say, so at least I made friends in the right places.
And speaking of Arizona, the photo that I've attached is one I took from our summer trip to the Aztec Ruins in Aztec, New Mexico. Actually, that doesn't have anything to do with Arizona except for the fact that both Arizona and New Mexico have great Anasazi ruins - I heartily recommend a visit.
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