I.

Introduction

In the past five years, it has become clear that an inexorable change in
the way Americans consume energy is underway, as more individuals
and businesses reach for the opportunity to produce their own energy,
or procure it from providers that can offer energy in greener, more
inexpensive, or more socially desirable ways. However, even as
consumers seek out new ways to power their homes and businesses,
critics have argued that energy consumers who move to exit the grid,
either in whole or in part, should pay exorbitant fees in order to protect
the ratepayers who remain from future rate increases. However, this
paper argues that high exit fees are not necessary, especially in light
of our findings that in those places where exits have occurred in the
past, rates have not gone up as a result of the departures.
Specifically, this white paper undertakes an analysis of seven examples
of large energy users who exited the grid, either through a statutory
regime that permitted the exit or through municipalization of the
utility, and found that in none of these incidences did the departure of
the large energy user cause a rate increase. In some cases, rates did
rise, but in none of the instances examined were the rate increases
caused by the exiting customer. In at least two of the cases, it can be
argued that the departure of the large energy users could very well
result in rate decreases or rate stabilization over time, as utilities are
freed up from having to purchase new generation or fuel to serve the
departed customers and where the utility has the opportunity to sell
the excess energy created by the departure into the market.
Additionally, in this white paper we: document the growing number of
entities that are seeking to produce their own energy and are being
facilitated in that effort by states and local governments; detail the
handful of state-led efforts that are designed to address the coming
transition to decentralized energy; and argue that states like Nevada
can be a part of this facilitated transition through the fair
implementation of efforts to depart the grid.
We also explore the likelihood that utilities in the Southwest including
and especially Nevada Energy will continue to post strong financial
returns over the next five to ten years, as they increasingly access
newly emerging energy markets and policies like the California
Independent System Operators (CAISO) Energy Imbalance Market and
the Federal Energy Regulatory Commissions Order 1000. There are
few regions in the nation more financially capable of addressing the
growing desire of customers to provide their own power than the
1

Southwest, due to the development of these markets, and the

continued persistence of load growth due to in-migration.
Finally, this white paper offers a series of recommendations to
policymakers who are being asked to address the desire of large
energy consumers to self produce or procure energy from sources
other than the incumbent utility.

II. A growing number of large users are

demanding the right to exit the grid/selfproduce
The applications by four large energy users in Nevada to exit the grid
are emblematic of a larger movement that is beginning to emerge
across the nation. A growing chorus of energy consumers, both small
and large, is voicing a desire to self-produce, for a variety of
motivations, ranging from reducing costs, to energy independence, to
the ability to reduce their carbon footprint. Some energy consumers,
like Wynn Las Vegas, Sands and MGM in Nevada and the City of
Boulder, Colorado are pressing forward with plans to largely exit the
service of the incumbent utility, and others, like the United States
military, are adopting technology that would allow themselves to island
certain facilities on demand.
In this section we discuss the efforts of large energy users and groups
of users who are pushing forward with plans to provide an increasing
amount of their own energy, including three instances Boulder,
Colorado, Minneapolis, Minnesota and Maui, Kauai and Parker Ranch,
Hawaii, where energy users made or considered proposals similar to
the ones made under 704B in Nevada, to procure or produce all of their
energy from a source other than the incumbent utility.

A.

Boulder, Colorado

The City of Boulder is one of the most recent entities to seek to form a
new municipal utility and exit the service of its incumbent utility, Public
Service of Colorado (PSCo, d/b/a Xcel Energy). As stated in recent
testimony to the Colorado Public Utilities Commission, the citys
objectives in forming this municipal utility are: greater local control
and self-determination over its electric delivery system and supply.
This includes the Citys goals of democratization, decentralization and
de-carbonization of its power supply.1
1https://documents.bouldercolorado.gov/WebLink8/0/doc/129277/Electronic.aspx
2

The city has spent significant effort to achieve these goals, including
the citys approval of $214 million in bond funding to cover 1) the
purchase of PSCos transmission and distribution assets and 2)
payment for stranded costs that would otherwise be shifted to
remaining customers. 2 Boulders efforts to municipalize have
captivated the attention of many in Colorado and across the country,
as both sides continue to debate the right of a large energy user like a
City to leave the local utility, under what conditions, and at what cost
to the municipality.3

B.

Minneapolis, Minnesota

In 2014, in an effort to achieve its own ambitious clean energy goals,

the City of Minneapolis, Minnesota considered the possibility of
municipalizing, creating a city utility by purchasing the assets of two
utilities Xcel Energy and CenterPoint Energy. While it ultimately
opted not to go the route of outright municipalization,4 Minneapolis did
use the threat of municipalization to achieve a number of its
objectives, as well as expiring franchise agreements that allowed the
city to negotiate with the utilities for cleaner energy sources and other
energy-related objectives.
An analysis conducted on behalf of the City of this option determined
that significant legal and financial risk stood in the way of
municipalization, but ultimately recommended that the City use its
franchise agreements with the utilities to require changes in the way
distribution infrastructure was implemented, and that the City waive its
right to municipalize in return for a Clean Energy Agreement that
would help the City achieve its carbon reduction goals.5

C.

Hawaiian entities

With utility rates that outstrip those of any other U.S. state, Hawaii has
become fertile ground for efforts to exit the grid. Record numbers of
2 https://documents.bouldercolorado.gov/WebLink8/0/doc/129277/Electronic.aspx
3 Boulder has filed an application before the Colorado Public Utility Commission for
the transfer of Xcels assets in the City. It has also made a purchase offer to Xcel,
which the utility has declined. See
https://documents.bouldercolorado.gov/WebLink8/0/fol/129263/Row1.aspx. See also
http://www.utilitydive.com/news/a-utility-in-the-making-the-municipalization-ofboulder-colorado/300268/.
4 See Energy Pathways Study,
http://www.ci.minneapolis.mn.us/www/groups/public/@citycoordinator/documents/we
bcontent/wcms1p-121587.pdf, at 57.
5 Id at 62.

individual homeowners have gone solar in Hawaii, aided by rates that

encourage the adoption of solar, while several large energy users,
including a County and a major landowner, have initiated efforts to
leave the grid altogether. In the County of Maui, local leaders have
begun discussing the possibility of leaving the incumbent, in part in
reaction to the recent announcement by NextEra that the Florida based
company was pursuing an acquisition of HECO.6 In Waimea, on the Big
Island of Hawaii, the owners of what is known as Parker Ranch, have
similarly been making plans for energy self-determination, at one time
discussing with the surrounding community members the possibility of
providing power to the area in an effort to boost renewable energy
usage while at the same time cutting energy costs.7 And in 1999, in
Kauai, business leaders decided to exit the electric utility by forming an
electric cooperative, the Kauai Island Utility Cooperative (KIUC), and
purchasing the assets of the former utility for $215 million.8 Interest in
determining the nature and disposition of energy provision in Hawaii is
intense and growing, and should continue to unfold over the next
several years.

D.

The United States Military

In the past five years, the United States military has become of the
nations leading developers of renewable energy, as it seeks to meet
an ambitious internal renewable energy goals of reducing its
dependence on petroleum, and making its energy infrastructure
impervious to outside attack.9 Several military branches have also
launched major investments in transforming their bases and
installation into microgrids, including the United States Navy, which
recently announced it would create a centrally controlled grouping of
6 See Trabish, Herman. "Inside Hawaii Activists' Push to Ditch HECO and Transform
the Utility Business Model." Utility Dive. Industry Dive, 28 May
2015.http://www.utilitydive.com/news/inside-hawaii-activists-push-to-ditch-heco-andtransform-the-utility-busin/399492/.

7 See "Parker Ranch Community Electric Supply Options." Paniolo Power. Parker
Ranch, 2014. http://paniolopower.com/wp-content/uploads/Parker-Case-StudyCommunity-Solution-White-Paper-20140403-Final.pdf.

8 Kauai Island Utility Cooperative. About Us. Kauai Island Utility Cooperative. 2013.
http://website.kiuc.coop/content/about-us-0.
9 See http://www.defense.gov/home/features/2010/1010_energy/. See also Daly,
John. "U.S. Armys $7 Billion Interest in Renewable Energy." Oil Price. CNBC, 24 Feb.
2014. http://oilprice.com/Energy/Energy-General/U.S.-Armys-7-Billion-Interest-inRenewable-Energy.html, and see Erwin, Sandra. "Renewable Energy Boom Underway at U.S.
Military Bases." 2014. National Defense Industrial Association.
http://www.nationaldefensemagazine.org/blog/Lists/Posts/Post.aspx?ID=1380.

microgrids that would be both interconnected and cyber-secure.10

Additionally, the Marine Corp recently began developing a microgrid
project at its Twentynine Palms facility in California, that would allow
the Marines to island the facility on command.11 The militarys focus
on diversifying its energy sources and finding new ways to become
autonomous from the grid represent another significant reason for
developing policies that would facilitate such departures.

E.

Nevadas 704B Applicants

Beginning in 2014, four corporations in Nevada Wynn Las Vegas,

Sands, MGM and Switch filed applications before the Nevada Public
Utilities Commission (PUCN) seeking to exit the service of the
incumbent utility pursuant to a state statute known as 704B.12 The
statute allows large energy users to purchase energy on the wholesale
market from competitive entities other than Nevadas incumbent
utilities, provided that they meet a number of specific criteria, and
after a hearing and approval by the NPUC.13 Most recently, the
Commission launched an investigatory docket designed to examine
whether Nevada should examine non-by-passable or ongoing charges
as a means to address the desire of large power users to exit the
grid .14 Among the issues that docket is addressing are whether exiting
customers should be required to pay a tariff or exit fee that includes
legacy contracts of the utility, costs associated with closing and
abating a coal plant, and whether departing customers should be able
to share in the benefits of emerging energy markets like the Energy
Imbalance Market (see discussion below on the EIM).15 The 704B
process in Nevada is another indicator of the interest among major
energy users in producing or procuring their own energy, and is a sign
as well of the need to craft tariffs and exit policies that are fair to all.

F.

Arizonas AG-1

10 The microgrids will be created at Navy installations in San Diego, California. See
http://www.greentechmedia.com/articles/read/connecting-the-military-microgrid-dots.
11 See https://www.greentechmedia.com/green-light/post/dod-turns-to-ge-formarine-corps-base-microgrid-project.
12 See Docket No. 14-11007. Switch was the first to have its 704B application
processed by the NPUC, and in June 2015, its application was denied. As of the
writing of this report, Switch had withdrawn its application, and Wynn Las Vegas,
MGM and Sands were proceeding ahead with their 704B proposals.
13 See NAC704B.310, at https://www.leg.state.nv.us/NAC/NAC704B.html#NAC704BSec310.
14 See Docket No. 15-06015.
15 Id.

Arizona began experimenting with allowing customers to exit the grid

in 2012, when the Arizona Corporation Commission approved a limited
pilot program dubbed AG-1, a new tariff that allows commercial and
industrial customers to choose their own energy providers.16 The new
program has proven to be a run-away success, with eight customers
and 700 accounts taking service under the tariff since its inception.17
Under the new rate rider, large commercial and industrial customers
capable of aggregating at least 10 MWs of load can utilize competitive
generators for their energy demand, while also utilizing APS as the
scheduler of the energy.18 No more than 200 MWs could be subscribed
under the program, which was slated to run for four years, until the
utilitys next rate case. Major subscribers to the tariff include Walmart,
Safeway, and Freeport-MacMoran.19 Service providers of the
competitive energy include Noble Solutions, Constellation NewEnergy,
Shell and Direct Energy Business, LLC.20 Participants in the AG-1
program are now seeking its extension, an effort that likely will play
out in 2016 when the utility files its next rate case.21 The success of
the AG-1 program is particularly compelling demonstration of the
desire for energy self-determination, given how quickly it was
subscribed and the push by the current subscribers to expand the
tariff.

G.

Fortune 500 Corporations

Like the enterprises described above, a number of U.S. Corporations

have in recent years begun pressing for greater levels of energy
autonomy, in particular focusing on renewables and efficiency as a
means toward that end. While this list is long and growing, none is
more emblematic than Walmart,22 which has been actively striving
16 See In the Matter of Arizona Public Service Companys Application for a Hearing to
Determine the Fair Value of the Utility Property of the Company for Ratemaking
Purposes, to Fix a Just and Reasonable Rate of Return Thereon, and to Approve Rate
Schedules Designed to Develop Such Return, Decision No. 73183, Docket Number E01345A-11-0224.
17 See Joint Motion to Extend Experimental Rate Rider, Docket Number E-0134A-110224.
18 The AG-1 tariff was designed such that APS took title to the energy from the
competitive provider, thus avoiding the question of whether retail competition would
exist in Arizona. The tariff covers energy supplies only, not distribution or ancillary
services. See Decision No. 73183, id.
19 See Joint Motion to Extend Experimental Rate Rider, Docket Number E-0134A-110224, id.
20 Id.
21 See Joint Motion to Extend Experimental Rate Rider, Id.
22 Other companies with ambitious internal renewable energy goals include Google,
Apple, Ebay, Coca-Cola, BMW, Volkswagon and Yahoo.

toward energy independence.23 The companys three objectives for

reaching a sustainable future consist of developing new renewable
energy projects at scale, driving down the cost of renewable energy,
and securing cost-effective, stable renewable energy pricing 24. In
2005, Walmart began working toward its goal of being supplied by 100
percent renewable energy with the implementation of its first on-site
solar project in the United States. Shortly after, in 2006, Walmart
launched its first large-scale wind power agreement with Mexico25.
Today, Walmart is the largest on-site renewable user and is considered
a global renewable energy leader, with more than 335 renewable
energy projects worldwide26. The projects provide Walmart facilities
over 2.2 billion kilowatt hours of renewable electricity annually or 24.2
percent of the Companys electricity needs globally. In addition, the
Company has already achieved 32 percent of its goal to procure 7
billion kilowatt hours of renewable energy by 2020. Fulfillment of the
Companys objective would avoid approximately 9 million metric tons
of GHG emissions per year27 and Walmart asserts that its new energy
policy will result in $1 billion in annual savings on energy bills. It is
also worth noting that the Company strenuously argues that its targets
could be more easily met through changes in public policy that would
allow it to contract directly with the providers of renewable energy,
without having to route their PPAs through utilities.28

III. Large customers who have exited the grid

have not driven rate increases
Despite the predictions of the opponents of the right to exit the grid, in
most locations analyzed for this report, the decision to allow an entity
to exit the grid was not followed by significant rate increases. In fact,
in those places where a departure from the grid by a large energy user
was allowed, rates remained relatively stable, and remaining
customers did not experience any substantive differences in either the
cost or quality of the electric service provided by the incumbent utility.
Most notably, there is no evidence that the grid departures caused rate
23 See e.g. http://cleantechnica.com/2013/04/23/walmart-targets-ambitiousrenewable-energy-energy-efficiency-standards-by-2020/
24 "Walmart's Approach to Renewable Energy." Walmart. Walmart Stores.
http://cdn.corporate.walmart.com/eb/80/4c32210b44ccbae634ddedd18a27/walmarts
-approach-to-renewable-energy.pdf.
25 Renewable Energy." Walmart. Walmart Stores, 2015.
http://corporate.walmart.com/global-responsibility/environment-sustainability/energy.
26 "Walmart's Approach to Renewable Energy." Walmart. Walmart Stores.
http://cdn.corporate.walmart.com/eb/80/4c32210b44ccbae634ddedd18a27/walmarts
-approach-to-renewable-energy.pdf.
27 Id.
28 Id.

increases, and in several instances it seems likely that the departures

could facilitate downward pressure on rates for remaining customers.
This section of the report looks at seven specific examples of large
energy users who exited the grid, pursuant to state laws that allowed
them to do so or through municipalization: Direct Access in Oregon;
municipalization in Page, Arizona; Community Choice Aggregation in
California; municipalization in Winter Park, Florida; municipalization in
Jefferson County, Washington State; the proposed municipalization of
Boulder, Colorado; and the municipalization of Hermiston, Oregon. We
chose these examples because they are all located in states that, like
Nevada, continue to have traditional regulatory regimes with vertically
integrated utilities, but where, also like Nevada, the state has adopted
a statute that permits users to exit the grid under certain conditions.29
Indeed, in many respects, NRS 704B is similar to policies in other
states that permit customers to select alternative providers for electric
services. The following examples illustrate how customers in other
states have successfully exited service from their incumbent electric
provider without harming other ratepayers.
A.Community Choice Aggregation, California
Californias Community Choice Aggregation (CCA) policy provides one
example of how a state can allow customers to select alternative
providers of electric services without leading to a significant
detrimental impact on remaining utility customers.
CCA enables local governments to aggregate electricity demand within
their jurisdictions and procure alternative energy supplies for that
demand. Meanwhile, the incumbent utility is still compensated for
providing distribution services. In 2002, California passed legislation
that enabled CCA by requiring that All electrical corporations shall
cooperate fully with any community choice aggregators that
investigate, pursue, or implement community choice aggregation
programs.30
In implementing the CCA policy, the CPUC outlined steps to prevent
costs from being shifted from CCA customers to remaining bundled
customers.31 This is accomplished primarily through a Cost
29 We did not choose to analyze grid departures in full retail choice states, believing
that the more apt comparisons are in states whose regulatory regimes and industry
structures are most like that of Nevada: rate of return regulation with vertically
integrated utilities.
30 AB 117, http://www.leginfo.ca.gov/pub/01-02/bill/asm/ab_01010150/ab_117_bill_20020924_chaptered.pdf
31 http://docs.cpuc.ca.gov/PUBLISHED/FINAL_DECISION/42389.htm

Responsibility Surcharge (CRS) which accounts for costs incurred on

behalf of CCA customers prior to their transferring to the CCA. These
include costs associated with long-term power contracts, bonds, utility
owned generation, or other commitments in approved resource plans.
The CRS analyzes the liabilities that would otherwise be assumed by
bundled utility ratepayers when the CCA begins serving local
customers. Those liabilities would then be incorporated in the CRS so
that bundled utility ratepayers are not penalized by the utilities' loss of
energy customers, thus maintaining ratepayer indifference.
Since enabling CCA in California, several communities in Pacific Gas
and Electrics (PG&E) service territory have offered CCA programs,
including the City and County of San Francisco (2010), Marin County
(2010), San Joaquin Valley (2007), and Sonoma County (2014).
Moreover, the CPUC has proactively sought to empower the formation
of CCAs in accordance with California law. For example, in 2010, the
CPUC found that Pacific Gas and Electric Company (PG&E) had not
been cooperative enough in allowing communities to develop CCA
programs and ordered the company to cease its efforts to thwart
them.32
Meanwhile, there is little evidence that CCA places any significant
burden on remaining PG&E ratepayers. This is demonstrated in PG&Es
most recent General Rate Case. As of this writing, the rate design
portion of this case is still pending before the CPUC, however parties to
the case have reached a settlement agreement on how PG&Es
revenue requirement should be allocated. The proposed rate design
suggests that PG&Es bundled customers would have a cost
responsibility that is a lower share than what would have occurred
under the previous rate structure.33 This is true despite a significant
increase in CCA customers since PG&Es previous rate case. While
rates for bundled customers might increase due to an overall increase
in PG&Es revenue requirements, there is no evidence that this is
directly attributable to CCA. In fact, additional CCA may reduce the
load obligation for remaining bundled customers and help to limit
future rate increases by limiting the need to procure new generation.

32 http://docs.cpuc.ca.gov/PUBLISHED/NEWS_RELEASE/117229.htm
33 http://docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M152/K869/152869229.PDF
9

Figure 1. Source: PGE 2014 GRC Phase II Settlement

One noteworthy aspect of the discussion on CCA in California is the
fact that CCA customers who are paying to cover the costs of longterm power contracts are also entitled to receive this power
physically.34 Indeed, the CPUC stated: As a general matter, we believe
a CCA should have the opportunity to take delivery of any portion of a
DWR or utility contract for which it pays through the CRS.35 Any
attempt to develop an exit charge for departing customers in other
states should similarly consider whether customers should be credited
for power they are already paying for through the exit charge.
B.Municipalization in Winter Park, Florida
In 2005, citizens of Winter Park, Florida36 elected to depart from the
service of their incumbent electric provider (Progress Energy Florida -now Duke Energy via merger) and start their own municipal electric
provider.
34 The CPUC has not yet weighed in on the method for accomplishing this.
35 http://docs.cpuc.ca.gov/PUBLISHED/FINAL_DECISION/42389-03.htm#P197_55927
36 Winter Park, FL is a suburban city located in Orange County with a population of
approximately 28,000 people. The city is roughly 9 square miles and consists mostly
of residential areas.

10

The idea of municipalization was raised initially in 2001 when the citys
30-year franchise agreement with Progress Energy expired. Progress
Energy, head-quartered in North Carolina, achieved revenues nearing
$30 million a year from Winter Park citizens and, in the view of the
community, offered little in the way of improved reliability or local
accountability to the residents37. Consequently, Winter Park leaders
chose not to renew the franchise, in favor of municipalization. Shortly
after, both Winter Park and Progress Energy conducted feasibility
studies for future municipalization.38
At the time, Progress Energy Florida mounted a significant publicity
campaign to oppose Winter Parks municipalization that raised
questions about the impact on rates. However, there is little evidence
that Winter Parks actions have negatively affected Progress Energy
ratepayers. The chart below illustrates changes to remaining Progress
Energy Florida customer electric bills following the municipalization.
The most significant changes are primarily due to fuel adjustments39
and a surcharge to cover hurricane damage costs40 that were unrelated
to Winter Parks actions.

37 "City of Winter Park: Our Municipalization Story." City of Winter Park.

http://static1.squarespace.com/static/5504a1ffe4b08eb858c42afd/t/555ddd77e4b0ca
1ccdae7c54/1432214903577/The+Winter+Park+Muni+Story.pdf.
38 The City of Winter Park determined that the municipalization would cost nearly
$28.5 million while Progress Energy concluded it would cost nearly $106 million. In
2003, arbitration was held and the price was set at $42.3 million. See id.
39 https://www.progress-energy.com/company/media-room/news-archive/pressrelease.page?
title=Progress+Energy+Florida+rate+settlement+approved+by+PSC&pubdate=0907-2005
40 https://www.progress-energy.com/company/media-room/news-archive/pressrelease.page?
title=PSC+rules+on+Progress+Energy+Florida+hurricane+cost+recovery+filing+&p
ubdate=06-21-2005

11

Figure 2. Data Source: FL Municipal Electric Association,

http://publicpower.com/electric-rate-archive/

At the time that Winter Park municipalized, Progress had a base rate
increase request pending. In subsequent months, this matter reached a
settlement in which base rates were frozen for four years.41 Progress
filed its next request for a base rate increase nearly four years later in
March 2009.42 This request was subsequently rejected by the Florida
Public Service Commission (PSC).43 Notably, Winter Park was not
among the reasons cited for requesting this rate increase, which were
as follows:
Inflationary increases in labor, material and equipment costs
Increased costs of health care, property insurance, and liability
insurance
$4.5 billion in capital costs to add 3,000 MW of generation,
additional transmission, and substation, and distribution
facilities.
State and federal regulatory requirements.
41 http://www.psc.state.fl.us/library/FILINGS/05/09207-05/09207-05.PDF
42 Progress Energys 2009 Rate Application:
http://www.floridapsc.com/library/FILINGS/09/02412-09/02412-09.pdf
43 PSC Order: http://www.floridapsc.com/library/FILINGS/10/01530-10/01530-10.pdf

12

The fact that Progress Energy did not predicate any portion of its rate
increase request on the Winter park municipalization is compelling
evidence that rates did not increase as a result of it.
C.Oregons Direct Access
Since 2002, Oregon has permitted qualifying non-residential customers
to participate in Direct Access, whereby they are able to directly
purchase power from a wholesale supplier rather than the incumbent
utility.44
To participate, customers are required to pay a transition adjustment
over a certain period of time to ensure that they are paying their fair
share of energy production costs that the utility already incurred to
serve them. After this period the customer can opt-out of the utilitys
cost-of-service energy prices and is no longer required to pay for
energy supply or the transition adjustment.45 Direct Access customers
are still responsible for paying the public benefits charge that goes to
fund energy efficiency, renewable energy, and low-income
programs. Additionally, the customer can opt back in to bundled costof-service pricing at a later date.46
Of Oregons large investor-owned utilities, PGE stands out with
approximately enrollment of 20 percent eligible customers in the Direct
Access program.47 For customers who elect Direct Access, PGE offers
multiple options for opting out of its cost-of-service (COS) rate. One of
these options is a short-term opt-out that permits customers to elect
an alternative provider for a single year. Another option is a long-term
opt-out that includes both 3-year and 5-year transition periods after
which no additional transition adjustment is required.48
Notably, Oregon does not presume that the effect of opting out of COS
pricing will always shift costs to remaining bundled customers. By
reducing the load the utility has to serve, direct access can actually
provide a benefit to remaining customers by increasing the utilitys
ability to sell excess capacity into the wholesale market. Indeed, in
some years, such as 2006 and 2007, the transition adjustment for PGE
44 http://www.oregon.gov/energy/cons/pages/sb1149/business/restruct.aspx
45 Oregon Administrative Rules (OAR 860-038),
http://arcweb.sos.state.or.us/pages/rules/oars_800/oar_860/860_038.html
46 See Oregon PUC Fact Sheet: http://www.puc.state.or.us/consumer/Electric
%20Industry%20Restructuring%20Nonresidential%20Customers.pdf
47 See http://www.sanger-law.com/new-pacificorp-direct-access-tariff/.
48 See Portland General alternative pricing plan information:
https://portlandgeneral.com/business/medium_large/energy_pricing/pricing_plans/ope
n_enrollment_faq.aspx

13

was actually negative and provided a credit to participants. This

occurred due to the fact that the market value of energy was higher
than the cost to produce it under the utilitys cost-of-service. The chart
below illustrates how the transition adjustment can vary depending on
market conditions. Indeed, Direct Access and similar programs should
not always be construed as a cost shift to remaining bundled
customers.

Figure 3. This chart highlights two examples of the 5-year transition cost
adjustment payments required for Direct Access customers. For customers enrolling
in 2008, a credit was provided in each year over the 5-year period. For customers
enrolling in 2011, a payment was required each year. In both cases, the transition
adjustment falls to zero after five years.

Moreover, a review of the 2006 rate case of Portland General Electric

(PGE) that occurred in the wake of the adoption of Direct Access in
Oregon reveals that PGE did not seek to claim that its requested 1.7
percent rate increase was related to the departure of customers from
its system under Direct Access, but rather that the relatively small
increase sought was associated with the addition of a new gas power
plant, costs associated with the re-licensing of hydro-electric facilities,
advanced metering infrastructure implementation, and the rising cost
of natural gas at the time, which put upward pressure on rates

14

overall.49 Despite the implementation of a new tariff that allowed large

customers to choose competitive energy providers, while paying a
time-limited exit fee, the utility did not attempt to persuade its
regulators that lasting damage was being done to the utility or its
customers.50
D.City of Boulder
As described above, the City of Boulder is in the throes of an effort to
exit the incumbent utility, and importantly, has demonstrated
convincingly that it will be able to do so without harming remaining
ratepayers. Specifically, the City has developed a gradual transition
approach, which prevents additional cost shift to other PSCo customers
and could potentially even yield some benefit to remaining PSCo
customers. As the City stated in its recent testimony: By gradually
departing from the PSCo system, Boulder absorbs the excess capacity
that could result from its complete, immediate departure. This
approach protects against added costs for other ratepayers and
ensures that PSCos capacity remains used, useful and of value to its
ratepayers. Boulder developed this transitional power supply plan to
avoid unfairly shifting Boulders share of the carrying costs for existing
PSCo generation to its other non-Boulder customers. 51
The chart below illustrates this point further. Over time, Boulder will
gradually absorb load obligation from PSCo. This will effectively
mitigate PSCos need to procure additional energy resources and
should lead to reduced costs for PSCos remaining ratepayers since
fewer generation resources are needed.

49 See http://apps.puc.state.or.us/edockets/edocs.asp?
FileType=HTB&FileName=ue180htb12256.pdf&DocketID=13199&numSequence=7, Testimony
of Piro-Lesh at 8.
50 The utility did discuss the existence of Direct Access, along with other factors,
and its potential to impact cost of capital, but seemed to conclude that the direct
access charge as structured was neutral in its impact on the utility and its remaining
customers . See Id, at 21.
51 https://documents.bouldercolorado.gov/WebLink8/0/doc/129270/Electronic.aspx.

15

Figure 4. Source: Chart excerpted from testimony of City of Boulder,

https://documents.bouldercolorado.gov/WebLink8/0/doc/129270/Electronic.
aspx

Jefferson County, Washington State

In 2010, Jefferson County, Washington purchased the distribution

system of Puget Sound Energy after a hard fought battle over the
Countys plans to municipalize.52 Following a threat of condemnation,
PSE agreed to sell its assets for $100 million.53
An analysis of the two rate cases that occurred in the aftermath of
Jefferson Countys departure from PSE indicates that the utility did not
assert that the Countys exit led to either requested rate increase.
More specifically, in 2011, PSE requested a rate increase of 8.1
percent, largely associated with $1.1 billion in utility capital
investments in 2009 and 2010.54 Among the main drivers of the
utilitys rate request:
52 See http://www.cobar.org/repository/Inside_Bar/Enviro/Recent%20Municipalization
%20Efforts.pdf, at C-2.
53 Id.
54 See Pre-filed Direct Testimony of Kimberly J. Harris on Behalf of Puget Sound
Energy, Inc. Docket No. UE-111048, at 2.

16

The Companys Lower Snake River Wind Project

$320 million in new gas and electric transmission projects
Compliance tied to reliability and safety needs.55

In 2013, PSE submitted an application for a .02 percent increase in

rates, which was also unrelated to the exit of Jefferson County. In that
filing, the utility sought to recover costs associated with three of its
generating units. The Company later agreed to a rate decrease in a
Settlement Agreement approved by the Washington Utilities and
Transportation Commission.56

H.

Hermiston, Oregon

In 2001, the City of Hermiston, Oregon voted to separate its energy

service from its incumbent utility, Pacific Power and Light (now
PacifiCorp), and form its own utility through municipalization. The
condemnation effort drew the opposition of the utility, but following a
court decision upholding the condemnation, Hermiston purchased the
service territory and its assets for $8 million.57
The question of Hermiston, Oregons departure from the PacifiCorp
system did arise at the Oregon Public Service Commission in the form
of an Order by the PSC to require that the gains made by PacifiCorp on
the sale of the assets to Hermiston be placed in a balancing account
for later amortization in a rate case, and presumably, for the benefit of
the utilitys remaining customers.58 Additionally, the Commission
ordered PacifiCorp to reduce its rate base by the amount of the
departed assets, leading to a cut in the Companys revenue
requirement of $675,575, also a benefit to remaining customers. 59
It does not appear that PacifiCorp ever attempted to make a significant
claim to the PUC that the departure of Hermiston represented a harm
to its ratepayers. The issue was not raised in either of the utilitys
subsequent rate cases, and was not cited by either the utility or the
Commission as a primary driver behind the need for the rate increases.
More specifically, in 2004, PacifiCorp sought a 12.5 percent rate
increase in November 2004, primarily related to increased fuel costs,
capital expenditures, the newly created Transition Adjustment
55 Id at 5.
56 See Puget Sound to Reduce Electric Rates, October 23, 2013, at
http://www.utc.wa.gov/aboutUs/Lists/News/DispForm.aspx?ID=222.
57 According to the American Public Power Association (APPA), this was twice the
appraised value of the assets. See http://blog.publicpower.org/sme/?p=171.
58 See Order No. 02-343 at 4, Docket UE 134.
59 Id.

17

Mechanism (TAM) to implement Direct Access in Oregon (see

description above of Direct Access); and an Oregon-specific tax issue
impacting the Companys revenue requirement. The Commission
granted a 3.17 percent increase at the time.60 Two years later,
Pacificorp was back before the Commission with a 13.2 rate increase
request. That filing dealt with:

Capital expenditures related to de-carbonizing and making more

efficient its generation fleet
Increasing operations and maintenance costs
The so-called 408 tax issue specific to Oregon
An ROE that the Company asserted hobbled it in its efforts to
make capital expenditures
Resolution of cost allocation related to a class of irrigation
customers.61

I.

Page, Arizona

In 1985, the City of Page, Arizona voted to municipalize a utility by

condemning the service territory of Arizona Public Service Company
(APS) in and around Page.62 The vote of Page residents to municipalize
occurred in the wake of a feasibility study conducted on behalf of the
town demonstrating significant savings would occur, and following a
general sense by the community that the incumbent utilitys prices
were rising and that service could be improved under a city-run
regime.63 Both former and current officials interviewed for this
whitepaper described the municipalization process as a contentious
one, with the incumbent utility fighting hard to prevent the departure
of Page from its system.64 As predicted by the feasibility study, the
Page municipalization resulted in significant savings to the City, and
Page has retained stable rates and strong reserves in the decades
60 See In the Matter of PACIFIC POWER & LIGHT COMPANY, dba PacifiCorp, Request
for a General Rate Increase in the Companys Oregon Annual Revenues, Docket UE170. See also Rebuttal Testimony of D. Douglas Larson, id.
61 See Trial Brief, Pacificorp, In the Matter of Pacificorp Filing of Revised Tariff
Schedules, Docket UE-179.
62 Page, Arizona is located in far northern, Arizona, bounded by Lake Powell, the
Grand Canyon, and Monument Valley. It is home to approximately 7,500 residents,
but swells to a much larger number during tourism season. In 1985, at the time of
municipalization, the Citys peak load requirement was approximately 11 MWs.
63 Telephonic interview with former City Attorney Charles Stoddard, July 22, 2015.
Stoddard served as Page City Attorney from 1975 to 2002, and helped to preside over
the municipalization process in 1985. Stoddard currently is in private practice in
Page, Arizona.
64 Stoddard interview, id. Following the vote of the citizens of Page to approve the
condemnation of the APS facilities in and around Page, APS sued the city. The utility
ultimately settled the lawsuit, and Page purchased the system from APS.

18

following the municipalization vote.65 Though the condemnation

purchase was hotly disputed, according to one key participant, in the
end the sale of the APS assets did not include costs beyond those
related to the physical assets being transferred.66
Importantly, a review of the rate cases during and following the
municipalization of Page revealed that despite its efforts to fight the
departure of Page, APS did not attempt to claim that the departure of
the customer caused the need for a rate increase. More specifically, in
its 1991 rate case, APS sought a 5.2 percent rate increase, tied
primarily to the recovery of costs associated with the construction of
the Palo Verde Nuclear Generating Station (PVNGS).67 Additionally, a
review of the record in the Companys 1986 rate case revealed that all
of the issues addressed by the Arizona Corporation Commission at that
time pertained to cost recovery of the PVNGS, and not to any claimed
costs related to the Page municipalization.68
Indeed, a review of the record demonstrates that APS did not make any
filings before the Arizona Corporation Commission related to the Page
municipalization and condemnation proceeding, except to withdraw
the tariff it once utilized to serve the City.69

I
NV Energy profits are strong now and the
Company will likely benefit from upcoming
transmission and energy markets and future
load growth in the Southwest
Several emerging policy developments in the West argue strongly in
favor of allowing large energy users to exit the grid, and against the
position that doing so will cause rate increases in the incumbent
utilities service territory. More specifically, in the Southwest, Nevada
65 Current and former city officials attribute the success of the Page municipalization
in part to the structure of the utility, which is to some degree separate from the city,
via governance by a separate Board. The utility structure, which was accomplished
through an ordinance passed prior to the municipalization, also requires that the
general manager of the electric utility report directly to the utilitys board.
66 Stoddard interview, id.
67 See Decision No. 57649, in Docket No. U-1345-89-162, December 6, 1991. See
also Direct Testimony of Jaron B. Norberg, Docket No. U-1345-90-007.
68 See Decision No. U-1345-85-156, in Docket No. U-1345-85-156, December 5,
1986. See also the 1988 Annual Report of Arizona Public Service Company, in which
the Company details its financial and operational status for shareholders, and filed at
the Arizona Corporation Commission in Docket No. U-1345-90-007. The 1988 Annual
Report does not mention the Page condemnation.
69 See Decision No. 55140, in Docket No. U-1345-86-168, August 6, 1986.

19

Energy is well positioned to be the beneficiary of the Energy Imbalance

Market under development now by the California Independent System
Operator (CAISO) and other off-system sales, as well as Order 1000, to
the degree that Nevada Power decides to build transmission between
California and other states under the new federal rule. Additionally,
like other utilities in the desert Southwest, Nevada Power is likely to
benefit from future load growth. Unlike other regions in the nation,
Nevada and Arizona continue to see strong population growth.70

A. Off-system sales, including those enabled by the

Energy Imbalance Market.
As experience has demonstrated in other states (notably Oregon) the
departure of some customers from an incumbent utility can benefit
remaining customers by freeing up generation resources for off-system
sales. These sales opportunities are poised to increase since wholesale
markets in the Western U.S. are rapidly evolving. The recent
establishment of an Energy Imbalance Market (EIM) is indicative of this
evolution.
In November, 2013, Nevada Energy announced that it would enter the
EIM, citing the results of a 2012 study that determined the utility would
receive benefits in 2017 of between $6 million and $9.5 million,
escalating by the year 2022 to between $7.7 million and $12.2 million.
The entry of NV Energy into the EIM was approved by the Nevada PUC
in 2013, and as of this writing, NV Energy was poised to begin
operation in the EIM in October 2015. The EIM has gained steam and
traction steadily since its inception, most recently attracting the
membership of Arizona Public Service Company, which estimates its
own benefits from joining the market could top $18 million annually.71
It is important to note that the benefits of the EIM to its participants
grow as the market itself grows and become more liquid, such that it is
almost certain that the benefits of the EIM will outstrip the initial
estimates of the utilities.72

70 Between 2010 and 2014, Nevadas population grew 5.1 percent, compared with
the U.S. growth rate of 3.3 percent. Private, non-farm employment increased 3.3
percent compared with the national average of 2 percent from 2012-2013.
71 APS estimates it will see annual benefits from the EIM totaling between $7 million
and $18 million. See
https://www.aps.com/en/ourcompany/news/latestnews/Pages/arizona-public-serviceto-participate-in-energy-imbalance-market-.aspx.
72 An example of this is found in the estimates of Arizona Public Service Companys
EIM benefits calculation. APS announced that its entry into the EIM would throw off
annual benefits of between $3 and $6.5 million for the existing EIM participants. See
id.

20

Indeed, the presence of the EIM represents the outer edges of what will
likely be a larger energy market presenting untapped opportunities for
revenue growth to the member utilities,73 and the opportunity for rate
mitigation for the ratepayers of these entities. In most states,
regulators have the opportunity to require that some portion of the
revenues associated with EIM participation and off-system sales be
shared with ratepayers, and it is safe to assume that regulators
charged with the responsibility of deploying just and reasonable rates
will see to it that ratepayers are at least the partial beneficiaries of the
EIM windfall.

Order 1000

In 2011, the Federal Energy Regulatory Commission issued Order 1000,

a landmark policy designed to speed the pace of development of extra
high voltage transmission lines in the U.S through the reform of FERCs
rules governing planning and cost allocation for transmission lines.74
This failure to build needed new electrical infrastructure was believed
to be a threat to the reliability of the grid, and one reason why
renewable energy was not being built out in far-flung, but resource rich
areas of the country.75 The view of many at the time was that
transmission projects had become bogged down, as it was difficult in
many instances to determine who should pay for a given transmission
line spanning multiple states, and as in some cases, individual utilities
and states fought to prevent transmission lines from being built
through their service territories. FERC Order 1000 established a
process by which utilities and states are required to come together on
a regional basis to form a cost allocation mechanism that can then be
used to assign to utilities the costs of building new transmission.76
Order 1000, which is currently being implemented by the states
through regional organizations77, is likely to be a source of additional
revenues for those utilities that actively participate in the build-out of
transmission, including NV Energy, which is part of Berkshire Hathaway
Energy, a holding Company with significant interest in transmission
73 In recent months, Berkshire Hathaway officials have touted and promoted the
expansion of the EIM and the ability of NV Energy and PacifiCorp to assist in its buildout. See e.g. http://www.utilitydive.com/news/why-warren-buffett-is-backing-awestern-grid-balancing-market/254333/.
74 See http://www.ferc.gov/media/news-releases/2011/2011-3/07-21-11-E-6factsheet.pdf.
75 Id.
76 See http://www.ferc.gov/industries/electric/indus-act/trans-plan.asp.
77 The regional organization implementing Order 1000 in the Southwest is
Westconnect. See
http://www.westconnect.com/planning_order_1000_stakeholder_process.php.

21

build-out.78 In fact, it is worth noting that with the acquisition of NV

Energy, and most recently AltaLink, the Canadian transmission
company, Berkshire Hathaway has transformed itself into a holding
company with transmission assets throughout most of the Western
United States, as well as western Canada.79
Indeed, some of the very utilities that are seeing some load loss due to
efforts to exit the grid, will see a concomitant increase in revenues
from transmission build-out, suggesting that some portion of revenue
loss associated with grid departures will be mitigated. Earnings
sharing mechanisms established by regulators for these activities
would allow the Commission to require Berkshire Hathaway to share
profits made by NV Energy or other Berkshire Hathaway Energy
subsidiaries doing business in Nevada, to be shared with ratepayers,
and if large customers continue to leave the system, more of the
profits from activities like FERC Order 1000 transmission projects will
go to the remaining customers.

III. An increasing number of states are

addressing the right to produce power and exit
the grid and are designing the Utility of the
Future
The efforts of entities like Wynn Las Vegas, Sands, and MGM to exit the
grid, along with attempts at municipalization in Boulder, and the near
attempts in Minneapolis and Hawaii described in this whitepaper, are
representative of a grassroots push across the county to self produce
energy, a desire on the part of many residential and commercial
customers to exit the grid that is leading regulators in those states to
consider wholesale reforms to the utilitys regulatory regime and
business models. Minnesota, New York, Hawaii, Arizona,
Massachusetts, California and in a sense Nevada through the 704B
process, are coming to grips with the growing desire for
decentralization and distributed generation through public dockets and
workshop processes that could lead to new ways to regulate utilities
and new methods for utilities to operate, and that would facilitate the
78 See e.g. http://www.elp.com/articles/2014/04/more-than-164-billion-intransmission-planned-being-built.html.
79 See https://www.berkshirehathawayenergyco.com/. Berkshire Hathaway Energy
now owns NV Energy, BHE U.S. Transmission, and PacifiCorp, all companies with
transmission assets in the West. Most recently, Berkshire Hathaway Energy
announced the acquisition of AltaLink, the Canadian transmission company with
assets in Western Canada. See http://www.utilitydive.com/news/buffetts-berkshirehathaway-energy-agrees-to-buy-altalink-for-29b/258784/.

22

departure of customers from the grid, while at the same time

protecting ratepayers.
Perhaps the most aggressive and advanced of these state-led efforts at
reform is New Yorks Reforming the Energy Vision (REV) process.
Under REV, the New York Public Service Commission is designing a new
utility regulatory system in which decentralized energy will play a
much more significant role in providing the states energy needs, and
in which the incumbent utilities will become the platforms that
enable energy consumers to freely access energy services.80
Importantly, the REV effort in New York has drawn hundreds of
stakeholders, and has resulted in multiple Orders being issued to date
by the NYPSC,81 leading many to believe that the process will likely
result in significant changes to the utility system in New York that will
drive innovation and allow large energy consumers to determine nearly
every aspect of their energy service, most importantly who provides
it.82
Other states are gearing up for a very different utility and energy
services future, as well. In Minnesota, a variety of stakeholders have
launched what is known as e21, a collaborative effort aimed at
developing utility reforms to address decentralization. The e21 effort,
which includes the states utilities, environmental groups and
observers from the states Public Utilities Commission, is predicated on
the idea that utility business models and regulation are no longer
effective, and that customer demands for new energy choices are
driving the need for change.83
80 See New York Public Service Commission CASE 14-M-0101 Proceeding on Motion
of the Commission in Regard to Reforming the Energy Vision, at pg. 12. The
reformed electric system will be driven by consumers and non-utility providers, and it
will be enabled by utilities acting as Distributed System Platform (DSP) providers.
Utilities are responsible for reliability, and the functions needed to enable distributed
markets are integrally bound to the functions needed to ensure reliability. Technology
innovators and third party aggregators (energy service companies, retail suppliers
and demand-management companies) will develop products and services that enable
full customer engagement. The utilities acting in concert will constitute a statewide
platform that will provide uniform market access to customers and DER providers.
81 See
http://www3.dps.ny.gov/W/PSCWeb.nsf/All/C12C0A18F55877E785257E6F005D533E?
OpenDocument#RULINGS for a complete listing of the Commissions REV Orders.
82 See http://www.greentechmedia.com/articles/read/5-key-proposals-for-new-yorksgrid-transformation; see also http://switchboard.nrdc.org/blogs/jmorris/reving_it_up_in_new_york_a_lo.html.
83 See
http://www.betterenergy.org/sites/www.betterenergy.org/files/e21_Initiative_Phase_I_R
eport_2014.pdf. In short, new customer expectations, public policy goals, and the
changing utility marketplace are driving the need for a modern electric system that
can support new ways for electricity to be generated, delivered, and used.

23

In Massachusetts, state utility regulators have issued an order

requiring regulated utilities to engage in 10 year distributed planning
and to submit grid modernization plans that provide the platform for
the increased use of distributed generation, energy efficiency, and
smart metering.84
In Hawaii, where extremely high penetration rates for distributed solar
and keen interest in exiting the grid by several large energy users has
emerged, regulators have directly ordered the states large utilities to
devise new business models that would assist the state in
accommodating distributed energy while protecting ratepayers. In
particularly dramatic fashion, the Hawaii PUC rejected an Integrated
Resource Plan submitted by Hawaii Electric Company (HECO) and laid
out a number of steps it would like to see the utility take, including
allowing independent power producers to provide energy services to
consumers, and the unbundling of services, such that energy
consumers could benefit from lower cost energy choices.85
And in California, the Staff of the states Public Utilities Commission
recently issued a whitepaper examining new utility business models to
address the rapid advance of distributed generation in that state.86
The whitepaper acknowledges the reality of the disruptive challenges
to the existing utility business model, and outlines for California
regulators three new utility business models being proposed across the
country.87

84 See http://www.mass.gov/eea/docs/dpu/electric/12-76-a-order.pdf.
85 See http://puc.hawaii.gov/wp-content/uploads/2014/04/CommissionsInclinations.pdf.
86 See http://www.cpuc.ca.gov/NR/rdonlyres/929E2B29-F72F-4BBD-9CD12C06DF249785/0/PPDElectricUtilityBusinessModels.pdf. A picture of what the
electric grid of the future looks like has begun to form: smarter, more flexible, more
integrated, more market-based, and more democratic. Lines are beginning to be
blurred in terms of who is providing services and who is consuming them, especially
when consumers start morphing into pro-sumers customers who consume as well
as produce energy. Whereas the old grid was a oneway communication system and
the roles were clear and the lines between them were in bold ink, the new grid is far
less rigid and far more integrated. This new integrated grid and its new
communication functionalities challenge the industry to revisit the business and
regulatory model of the electric utility that has existed for over 100 years.
87 Id.

24

FIGURE: 'Utility of the Future' Projects; Source: Greentech Media

Like the other states described in this report, Nevada has an

opportunity to become a leader in the effort to transition the nations
100-year old utility system to one more responsive to customers and
capable of providing safe, reliable and cost effective service. In fact,
as several other states have noted, getting ahead of the curve when it
comes to regulatory and utility business models makes it more likely
that a state and its ratepayers will win out: innovators are more likely
to flock to Nevada, large energy users are less likely to want to leave
Nevada for another state offering more energy choices, and the
introduction and integration of new energy technologies is likely to
take place in a more orderly and cost effective way.
Indeed, and perhaps most importantly, from Nevadas standpoint it
makes more sense for state policymakers to allow for an orderly
transition that allows companies to stay in Nevada, while also
producing their own power than to resist allowing them to choose their
own energy providers, and risk their decision to expand elsewhere, or
to locate elsewhere in the first instance.
The fact that nearly a half a dozen states are now looking at sweeping
regulation or new business models that would accommodate requests
like the ones being made by Wynn Las Vegas, MGM and Sands in
Nevada, leads to the inescapable conclusion that soon, large energy
users will have choices about where they are best able to manage and
direct their own energy services and those choices will be located in
states that have launched and completed utility regulatory reform
efforts and are actively allowing energy users to engage in the energy
25

marketplace. Energy users will increasingly be beckoned to and

drawn by the states that have designed a regulatory model that
provides for self-determination by all energy users.

IV. If companies do not feel they are receiving

value from their utility they should be
permitted to go elsewhere, and increasingly
they can: the case of eBay in Arizona
There are several factors that must be weighed when considering the
cost responsibility of a departing load customer. While there may be a
desire from regulators to maximize cost recovery from these customers
(e.g. through large exit fees) to prevent a cost shift to other customers,
this must be weighed against the alternative whereby the customer
simply relocates without paying any exit fee or surcharge, thus
transferring 100 percent of their cost responsibility to other customers.
This is especially relevant to facilities like data centers whose services
are easily relocated. These considerations may warrant some relief
granted to the customer to prevent shifting even greater costs to other
customers.
A recent case in Arizona illustrates this point. In this case eBay, which
operates data centers in the state, sought a discounted rate from its
electric supplier, Arizona Public Service (presumably at a level lower
than its true cost responsibility). Although eBay was not seeking an
alternative supplier, the example illustrates the real possibility that a
customer could voluntarily leave a utilitys service territory at their own
discretion. APS proposed, and the Arizona Corporation Commission
approved, a lower rate to prevent even greater cost shifting if the
customer left altogether.88 As APS said in requesting this discounted
rate:
APS believes this ESA is appropriate and necessary to both retain
eBays present load and to encourage eBay to continue to grow in
APSs service territory. eBay has data centers in other jurisdictions and
can choose to site their business at any location that has the
appropriate infrastructure, chiefly power and fiber. If eBay were to
move its operations to a location outside of APSs service territory, a
substantial amount of revenue requirement responsibility would be
shifted to other APS customers.89

88 ACC Order: http://images.edocket.azcc.gov/docketpdf/0000162456.pdf

89 http://images.edocket.azcc.gov/docketpdf/0000160605.pdf
26

Finally, it should be noted that corporate earnings including those of

utilities are generally seen as being tethered to the level of value
being provided by the company in the marketplace. If the utility is not
able to provide this value, as indicated by the desire of energy
consumers to look elsewhere for their power services, regulators and
other policymakers should begin to seriously consider whether the
earnings they are receiving are justified. Moreover, policymakers
should factor this lack of confidence in the incumbent into decisions
about when and how energy consumers should be allowed to choose
alternative energy providers.

V.

Recommendations

As we have demonstrated, there is no evidence that the departure of

large energy consumers from the grid causes rate increases. As a
result, policymakers who are increasingly being called upon to mediate
the question of how and when these departures should be allowed to
go forward must exercise caution when being asked to assess exit fees
to the departing customers. Fairness and equity are important
objectives in the rate making process, and must be the guiding
principle when addressing all affected interests in such cases.
We offer the following recommendations to regulators, legislators and
the executive branch, in dealing with grid departures:
1. Exit fees should be time limited: Fairness and business certainty
require that exit fees and departure tariffs be implemented for a
finite period. Policymakers should consider departure tariffs or
exit fees be limited to no more than three to five years, a period
that is long enough to capture any possible negative impact to
remaining customers.
2. Exit fees and departure tariffs should be constrained to a finite
number of impacts: Fees and tariffs that include items such as
stranded costs associated with large scale power plants are
unfair and should not be considered by regulators.
3. Mitigation for a utilitys profitability should be included in fees:
Utilities that are experiencing extreme profitability are not in
need of exit fees and departure tariffs and should be asked by
regulators to utilize a percentage of dividends that otherwise
would have been provided to investors to mitigate any alleged
costs associated with departed customers. Where regulators
believe that an exit fee or departure tariff is still necessary, a
utilitys ability to withstand lost revenues should be considered
by regulators in the design of the fees and tariffs.

27

4. Credit for a utilitys participation in EIM and off-system sales

should be available: Clearly, fairness and equity demand that
exit fees and departure tariffs should include an offset for a
utilitys participation in the EIM and off-system sales. Departing
customers were a part of building the utility into an entity
capable of participating in the EIM, and therefore should be able
to benefit from the fruits of the EIM process.
5. Any departure tariff or exit fee should be functionally capable of
going negative: If the market value of energy is higher than the
cost to produce it under the utilitys cost-of-service, departed
customers should receive a credit under any exit fee or
departure tariff.
6. Exiting customers should be allowed to physically take the
energy of the projects the contracts of which are included in their
exit fees: As seen in California CCA program, policymakers
should be sure to allow exiting customers to take the physical
power of any renewable energy project whose contract the
departing customer is being asked to pay for through an exit fee
or departure tariff. When a former ratepayer is asked to continue
to pay for a contract, that ratepayer should be permitted to
continue to directly benefit from the power being created as a
result.
7. In those states where departures are not currently permitted,
policymakers should enact legislation that allows for exiting the
grid and set out the procedure, following the principles outlines
above, by which this would occur.

VIII.

Conclusion

As more and more consumers become pro-sumers of energy,

demanding the opportunity to choose the manner, quality, and source
of their power, regulators and lawmakers will increasingly be called
upon to be the facilitators of this choice, and the judges of whether
there will be costs associated with these departures. However, as this
paper has demonstrated, those policymakers should reject the
hyperbolic claims of the opponents of the right to exit the grid that
allowing such departures will result in higher rates for remaining
consumers. History tells us something very different. In those
instances where large energy users have departed the grid, rates have
either remained stable over time, or have edged up slightly, and in
none of the cases examined for this paper did the utility attempt to
claim that the high rates sought over time were associated with the
decision of their customers to exit the utility system. Indeed, in two
cases analyzed for this paper, we determined that it is actually
possible that remaining customers could, over time, experience lower

28

rates following the departure of the large energy consumers, as the

utility no longer is required to rate base expensive energy projects
needed to serve the departed customer, and as it is able to sell the
resulting excess power created in the wake of the exit, thereby
minimizing the need for large future rate increases.
Moreover, a number of states in the West and Southwest are likely to
be home to utilities that flourish financially, even in the face of the
growing departure of large and small customers. The West is
experiencing a renaissance of opportunity for energy providers,
particularly those capable of accessing extra high voltage transmission
systems and selling excess energy and services into the Energy
Imbalance Market. Moreover, utilities like Nevada Power And Arizona
Public Service Company have opportunities to participate in the
development of high voltage transmission projects that will be eligible
for cost allocation under FERC Order 1000. The benefits of the
revenues from these activities will more than offset any short-term
negative effects of departing customers, and will redound to the
betterment of both the utilities shareholders and its remaining
customers.

29