Formula for the Future: The Arizona Corporation Commission’s Move Towards Formula Rates

By Michael W. Patten, Paloma Scheiferstein, and Sukhmani K. Singh

In December 2024, the Arizona Corporation Commission (ACC or the Commission) adopted a Formula Rate Plan (FRP) Policy Statement, allowing regulated utilities to propose a mechanism for annual rate adjustments through a formula-based approach in between traditional rate case proceedings.¹ The policy, led by the previous Chairman, Jim O’Connor, and Commissioner Nick Myers, aims to improve rate stability, provide gradualism for rate increases, transparency, and administrative efficiency while reducing regulatory lag.² The policy development process included multiple workshops with utilities, consumer advocates, and policymakers, ensuring diverse input. FRPs have been widely used by the Federal Energy Regulatory Commission (FERC) for transmission cost recovery and have gained traction in various states.³

FRPs allow utilities to update their rates annually based on a formula that reflects actual updated costs and revenues since their last general rate case, reducing the delays associated with standard rate cases.⁴ Annual true-ups ensure that any over-collections or under-collections are corrected, preventing large swings in utility earnings or customer rates. The ACC clarified that utilities opting for FRPs must still file rate cases periodically based on a historical test year and demonstrate compliance with Arizona’s constitutional fair value requirement, ensuring rates remain just and reasonable.⁵ The FRP mechanism is voluntary, and utilities must receive regulatory approval before implementing it.⁶

Despite these assurances, consumer advocates, including the Arizona Attorney General and the Residential Utility Consumer Office (RUCO), raised concerns that FRPs could lead to more frequent rate increases and reduce consumer protections. In February 2025, the ACC denied applications for rehearing, reaffirming that FRPs do not allow automatic rate increases and that all rate adjustments remain subject to regulatory review.⁷ The Commission emphasized that FRPs are designed to reduce rate shock, promote gradual rate adjustments, and lower financing costs by ensuring timely cost recovery.⁸ The ACC also clarified that any utility implementing an FRP will still be subject to full ratemaking scrutiny through annual compliance filings and periodic full rate cases.⁹

Looking ahead, the ACC will monitor the implementation of FRPs and assess their impact on utilities and ratepayers. The Commission may consider additional regulatory safeguards based on early adopters’ experiences to ensure FRPs remain balanced and fair for both utilities and customers. As this policy evolves, the ACC aims to maintain a transparent regulatory framework that protects consumers while allowing utilities to recover necessary costs efficiently.