A small Arizona utility’s latest rate case has garnered an enormous amount of attention, as it could set a precedent for how regulators design electricity rates across the Grand Canyon State.

UniSource Energy Services (UNS), which serves 93,000 customers in Santa Cruz and Mojave counties, is seeking regulatory approval to lower the net-metering credit for rooftop customers from the retail electricity rate to the wholesale electricity rate. The proposal is part of a general rate case that kicked off earlier this month (E-04204A-15-0142).

UNS, which is owned by the same parent company as Tucson Electric Power, is also seeking to increase fixed charges from $10 to $15 per month, and wants to introduce demand charges for all customers based on their highest hour of power use in a month. In switching to the new rate, customers would pay a lower variable price for energy.

The UNS proceeding has drawn input from a wide array of stakeholders, including consumer groups that strongly oppose the mandatory demand charges, and solar advocates that argue demand charges coupled with a reduced net-metering credit would be a death sentence for the state's rooftop solar industry.

Meanwhile, the Arizona Investment Council, which represents people who invest in utilities, and Arizona Public Service, the largest utility in the state, have filed testimony in support of the UNS proposal.

As part of the UNS proceeding, APS recently released the results of a study that seeks to shift the thinking on net metering. The report, conducted by Navigant Consulting, estimates that solar companies earn a 40 percent project return on rooftop solar leases in UNS territory, which undermines claims that rate reform will cripple the industry and kill jobs.

“We conclude that solar TPO [third-party-owned] providers have headroom to adjust to some changes in rate structures while maintaining project returns,” the report states.

Jeff Guldner, senior vice president for public policy at APS, said the report is designed to end the gridlock on solar policy discussions. All of Arizona’s investor-owned utilities maintain that net metering amounts to a subsidy for solar customers at the expense of other ratepayers.

“[The study] is really responding to arguments we’ve heard for years that say there’s no room to make any changes to net metering, because if you do, you will destroy the value proposition of solar,” Guldner said in an interview on the sidelines of Opower’s PowerUp event last week. “The point we’re trying to establish in the UNS case is, if you look at project returns on UNS installations, it looks like the project returns are really good.”

Room to make net metering changes?

Numerous factors went in to Navigant’s calculation of project return, or the internal rate of return, including the initial capital outlay, operation and maintenance costs, debt-financing cash inflow and interest payments, federal tax credits and other applicable incentives, accelerated depreciation for tax purposes and lease pricing.

The authors say their research shows that solar leasing companies are focusing their business operations on locations where they can maximize their return by undercutting utility rates. They also found that lease prices track utility rates and are higher in jurisdictions with higher electricity prices.

In UNS territory, the report states that solar leasing companies recently increased lease prices from 8.7 cents per kilowatt-hour to 9.5 cents per kilowatt-hour. This increase, combined with the reintroduction of a 50 percent bonus depreciation allowance, indicates that third-party solar providers could see project returns increase to around 80 percent in 2016.

A Navigant analyst is expected to testify on the results as part of the UNS rate case, for which hearings are scheduled through the week.

Guldner acknowledged that businesses need to see healthy project returns. His issue with solar leasing companies is that many of them said they were preparing their businesses for a reduction in the federal Investment Tax Credit at the end of 2016, but when the ITC was unexpectedly extended in December, lease prices in UNS areas actually went up. This started to make solar returns look suspiciously high.

“This doesn’t equate to me,” he said. Solar companies need to explain why they need such a high rate of return (assuming the Navigant results are accurate) when the ITC was recently extended and lease prices increased, Guldner said.

The point of the Navigant study is to show that there’s room to make net metering changes, he added. “We’re not saying what those changes are, but don’t just say you can’t.”

SolarCity spokesperson William Craven responded that the premise of the study is flawed.

Study finds rooftop solar provides a net benefit

“APS believes the Arizona Corporation Commission’s job is to protect utilities from competition, not to protect the people from monopolies like APS and UNS,” Craven said.

“This study shows how distorted APS’ views are,” he added. “There has never been a cost-benefit study commissioned on rooftop solar in Arizona, ever. There is zero data in Arizona to support increasing fees on solar companies or solar customers. So why are we talking about a study designed to show how much pain successful businesses can take for the benefit of a utility?”

Solar companies refute that any changes to net metering are needed.

A recent study conducted by Crossborder Energy on behalf of The Alliance for Solar Choice (TASC) found that the benefits of residential solar are in line with the costs, and that any significant change to rate design would upset this balance.

The study determined that the benefits of rooftop solar in APS territory are worth an average of 18.7 cents per kilowatt-hour, and up to 31 cents per kilowatt-hour when factoring in societal benefits such as reduced air pollution. Meanwhile, the costs amount to 17 cents per kilowatt-hour for people with solar, and 17.9 cents for customers without solar, according to the report. The authors analyzed costs and benefits levelized over 20 years.

“Our work concludes that the benefits of residential [distributed generation] on the APS system are in balance with the costs, such that new residential [distributed generation] customers will not impose a burden on APS’ ratepayers,” the report states.

The study was filed in an Arizona value-of-solar proceeding that regulators will take up next month (E-00000J-14-0023). The docket was opened after APS withdrew a request to increase monthly fees on rooftop solar customers amid a backlash last year.