THE IMPACT OF UTILITY DEREGULATION IN ARIZONA

I. INTRODUCTION Whereas the Federal Energy Regulatory Commission began handing down rulings that relaxed interstate price controls in the early 1980s, it was not until the mid-1990s when various state regulatory commissions began actively pursuing intrastate utility price deregulation that was intended to increase price competition for natural gas and electricity. This article explores the short-run impact that deregulation has had to date on commercial and industrial natural gas and electricity prices in Arizona as well as the long-run industrial response on the whole. While utility rate structures in the retail market were deregulated within Arizona in 2000, utility prices remain higher than those nationally and the evidence suggests that these deregulation policies have been largely ineffective to date in promoting price competition. Nationally, although price restructuring and deregulation on the state level in the natural gas and electricity industry have generally been seen in the both retail and wholesale markets, there has only been partial deregulation in Arizona. In 1998, HB2663 was enacted allowing the Arizona Corporation Commission (ACC) to open service territories to competition. In 1999, the ACC approved R14-2-2 deregulating retail markets, which allowed residents and businesses to shop for their utility provider. However, electricity competitive conditions, as set forth in the Retail Competition Rules, have not occurred as anticipated and competition has not materialized for Arizona's small customers. For the most part, this is attributed to continued wholesale regulation as well as legislation that imposed a nonbypassable system benefits charge on direct access customers. (1) Since 2000, Arizona has continued to work toward a competitive retail electricity market; however, it is contingent upon competitive wholesale market conditions. In 2004, the ACC Administrative Law Division issued a ruling stating that the "... wholesale market does not appear workably competitive ..." and therefore may not create an ideal environment for overall competitive change (Arizona Corporation Commission, Docket No. CV1997-03748). As such, the traditional utilities are still basically the only provider of service within their franchised areas in the state and there appears to be little if any price competition. Meanwhile, in the natural gas market, the ACC only enacted open-access provisions for large volume commercial and industrial customers. Thus, small business customers are unable to take advantage of unbundled services, and there are no provisions for residential customer choice. Moreover, even the eligible large industrial customers seemingly prefer the existing favorable interruptible status as opposed to transportation bypass. This all has consequences. Intuitively, the regional cost of energy has always been an important industrial location factor (Blair and Premus, 1987). As such, given the obvious significance of differing utility energy costs, deregulation presents a new wrinkle that could potentially affect interstate competition for industry. (2) States that have not fully promoted the deregulation of utility rates may be at a competitive disadvantage that could negatively affect economic development. It is therefore appropriate to ask how much more competitive (i.e., elastic) commercial and industrial utility energy prices are apt to be in a deregulated environment. The existing (and somewhat dated) body of energy elasticity evidence neither tests this proposition directly nor even makes it explicit. Moreover, in the past, the focus is generally directed toward total energy demand. In instances where analysis is conducted by energy type, far greater attention is often given to the residential sector and less consideration is given toward the commercial or industrial sectors. In addition, more recent literature devotes little attention to price elasticity after deregulation. …