Transcript: Conference Call between Arizona Corporation Commissioner Justin Olson and Credit Suisse Analyst (May 18, 2018)
Olson: …my background, with my MBA in finance, my experience in the private sector in tax, as well as my experience in the public sector and public service at the state legislature, and address the important issues that come before the Commission, it’s been a real honor.
Weinstein: That’s great, maybe we can take a few minutes and just update on the status of the pending voter initiatives in Arizona and the renewable standards, and also, you know, the competing proposals from the legislature on the same goals.
Olson: Excellent, yeah. So, certainly I’m sure many folks on the call are aware that, uhh, Tom Steyer has funded a signature gathering effort in Arizona to place a measure on the ballot in Arizona to put an amendment into our state constitution to increase the renewable energy standards in Arizona to a 50% renewable energy standard by 2030. That effort is underway. It’s an effort that I don’t support. I don’t think that that’s the right solution for Arizonans. I believe that it would significantly drive up the cost of energy for Arizonans, and in addition to that it’s also placing that policy into the state constitution, which is going to create a situation where it would be very difficult to adjust that policy in the future should the need arise. I think it’s more appropriate that those decisions remain at the Corporation Commission and that the Corporation Commission work together to ensure that – that the balance of energy production in Arizona is a balanced portfolio that meets the sometimes competing priorities of reliability, resiliency and affordability, in addition to ensuring that we maintain a clean environment and clean air and reduce carbon emissions. I think that we can accomplish those priorities in a measured approach that can be successful but I don’t think the Steyer initiative is the right approach. The signature gathering process is underway, and we’ll have to see if they’re successful in getting it to the ballot, and then if they are, if the voters decide that that is the solution for Arizona, and certainly if the voters do enact that, it becomes a constitutional requirement and that will be something that the Corporation Commission will comply with as the Commission is certainly required to follow all constitutional requirements. But you mentioned there are some other competing initiatives. Commissioner Andy Tobin has put forward an energy modernization plan, grid modernization plan for Arizona, and that is in the process of being evaluated and will move forward. When it moves it will move through the rule making process at the Arizona Corporation Commission.
What Commissioner Andy Tobin has called for is an increase to an 80 percent renewable energy standard by 2050. His renewable energy standard would be a clean energy standard and he uses that term because he would include all carbon-free energy generation as part of that standard.
Notably that would include the Palo Verde Nuclear Generating Station because this is a major source of carbon free generation. So there are some differences between the two. I think some benefits of Andy – of Commissioner Tobin’s plan is that it is something that would be enacted by the Commission so that the Commission can respond to changing circumstances in the future. We’re talking about several years into the future and the Steyer plan is more than – it’s about 12 years into the future. With Commissioner Tobin’s plan, we’re looking at 20, 32 years into the future. And so I think that we need to have some humility looking forward into the future, recognize that we can’t know exactly where the technology will lead and so I think that that’s a benefit of Commissioner Tobin’s proposal is that it does enable more flexibility to respond to changing circumstances as new technologies develop. I also think that it is beneficial to include the nuclear generation in that discussion as this is a major source of carbon-free energy generation in Arizona. It’s actually the largest carbon-free generating plant in the country which provides continuous carbon-free energy day in and day out every day. So I think that that’s an important consideration, an important distinction between the two plans. In addition, Commissioner Tobin’s plan also has a lot of other components in it, as well as the renewable energy or the clean energy standard. He’s also addressing or asking the commission to address the electrification of the transportation system. Among other things such as thinning the forest – we have a significant amount of forest land in Arizona that has not been well managed by the Department of Forestry which has resulted in significant wildfires, and so his desire is that by using biomass energy generation we can also thin the forest and reduce those wildfires and decrease that risk to the forest as well as to structures and the neighboring communities.
Weinstein: By its very nature voter initiatives can be much simpler than a full proposal, right? It’s basically just, people are going to be voting on one sentence. Is that basically kind of the idea?
Olson: Yeah it definitely can be simpler but it can be much more complex to adjust as the need arises. So should the situation arise where the cost of generation increases substantially to the point where voters feel that the renewable energy standard that was enacted may not have been the most prudent approach to accomplishing the desired goals, then it would be very difficult to change the policy that was enacted so – but certainly Commissioner Tobin’s plan is a much more robust plan addressing many more components of what the future of energy generation, transportation, and the grid in totality should look like in Arizona.
Weinstein: What do you think would happen to Palo Verde under the voter initiative? Is there a concern about an early retirement situation that might be forced on it?
Olson: You know that’s certainly a concern that I have and it’s a concern that I share with voters as I describe my position on the Steyer initiative. If the renewable standard is increased to a point that the generation has to – that the baseload generation has to be curtailed then it certainly can create the situation where some of these baseload assets that the ratepayers have already paid for become more costly to run. So that’s a concern that I have. I did ask my policy adviser to compare what is the cost of energy in Arizona on average relative to the cost of energy for rate payers in California who have a similar renewable energy standard as the one that Tom Steyer would enact in Arizona. And I was surprised to see the amount of the disparity between the two. Arizona ratepayers pay significantly less than the ratepayers in California. Ratepayers in California are paying about 50 percent on average more than ratepayers in Arizona. So that’s the concern that I have. I want to ensure that we are providing energy generation in Arizona in a manner that is cost-effective for ratepayers and that is also ensuring that we have reliability, resiliency, and that we’re generating energy in a manner that is friendly to the environment that’s keeping our emissions low, our carbon emissions low and keeping our skies clean. But we’re doing it in a method that’s cost-effective for rate payers.
Weinstein: That makes sense. I think investors on the call might be wondering right now, what would happen if Palo Verde were to be retired early. I think you indicated there’s a lot of cost that had been basically baked into it already. And sunk costs would have to be dealt with in some way. What’s your personal feeling, realizing that you’re speaking for yourself and not the whole Commission, on recovery of that kind of a rate-based asset for investors. Who would bear the burden. Would it be customers or would it be investors in that case?
Olson: Well what I think is essential is that that those of us that are involved here in Arizona from public servants, elected officials, folks involved in civic community continue to educate voters on what will be the impact of this initiative because that’s a scenario that I think most hope can be avoided because it would be it would be quite costly. So my expectation is that we avoid that scenario so that we don’t end up with a stranded asset that was very costly, that would be very costly to ratepayers.
Weinstein: So, more of a detailed question now regarding preferences. You know, right now the Commissioners have indicated a preference for more renewables versus more natural gas in the future generation mix. So within the renewables mix, what do you think is a better investment, rooftop distributed solar, or centralized utility-scale solar? Going forward, a general…
Olson: That’s a great question. I think there are advantages and disadvantages to each and I think that it’s important that those be considered when those decisions are being made on which asset to pursue in Arizona. I think the utility-grade solar generation has some significant advantages in cost. Utility-grade solar generation is quite cost effective and it’s actually competitive with traditional energy generation sources. And so I think that’s a great success story that all can be excited about. Those that are interested in keeping rates as affordable for rate payers. Those that are interested in renewable generation and keeping our skies clean can all be excited about that fact that the cost of generation using utility-grade solar is quite effective. And so that’s the significant benefit with going with utility-grade solar generation. The cost of installation is about a third of the cost of rooftop solar. In addition are added benefits of utility-grade solar that it can track with the sun throughout the day which increases the efficiency of the energy generation. So more energy can be produced during the peak periods on the system. These are some significant advantages of utility-grade solar. Now the advantage of rooftop solar is clearly that that many customers want to have rooftop solar on their houses. And I recognize that there is that desire.
I think that the compromise that the commission enacted in the Value of Solar Docket some time ago is a good compromise that will continue to be operative in Arizona and will provide for the opportunity for those who desire to have rooftop solar to continue to have it in Arizona. Like I said the cost is a little bit higher for installation so it’s not going to be quite as effective. They can’t track the sun throughout the day to increase that efficiency in the generation. But there’s the added advantage to those homeowners who want to have that knowledge that they’ve got their generation on top of their house and so they’ll continue to be able to do that under the Value of Solar compromise that was enacted to the Commission before I was appointed.
Weinstein: Right. When it comes to rooftop solar, do you think that – some of the utilities have pilot programs out there to install rooftop solar within rate base, actually have the utilities operating at expense. And I’m just wondering if that’s the best way to go forward? Or is it more of an encouraging of third party-solar companies coming in and installing rooftop solar with net metering clauses in effect. What is the preferred method do you think at the Commission?
Olson: I certainly support pursuing the least-cost approach to energy generation that meets the desires that are needed in the particular type of generation. So I think there is a clear benefit in using the lower-cost installation method. In addition to using that method when the utility is generating electricity or purchasing electricity through a third party that’s using utility-grade generation to keep that cost down, I think having the ability for those homeowners who want that knowledge is having their own rooftop solar is still in place in Arizona and is I think a balanced approach that makes sense. Using that lower cost approach wherever possible and then still having the option for homeowners to have rooftop solar on their homes as well.
Weinstein: Gotcha. We mentioned the Clean Energy Standard before. It sounds like you are definitely more in favor of a Clean Energy Standard rather than a Renewable Standard, right?
Olson: I definitely think that if the goal is to reduce carbon emissions then it would be foolish to ignore the fact that the largest carbon-free generating plant in the country is a very valuable asset in accomplishing that goal. So I think that that makes sense to recognize that and to take that into consideration as we’re crafting policies to reduce carbon emissions.
Weinstein: How important is it to have a clean peak standard within that clean energy standard? How much of a difference does that make?
Olson: A clean peak standard, in addition to that – was that part of the modernization plan?
Weinstein: yeah, it talks about a clean peak standard, to encourage more, you know, more renewables at the peak load time…
Olson: Sure. No, certainly. And you know again I think that a balanced approach to accomplishing the competing priorities between resiliency, reliability, affordability and reducing carbon emissions is the approach that should be taken. I think that we should use an all-of-the-above approach to generate electricity in the method that is most effective at accomplishing those desired goals using a balanced approach.
Weinstein: Maybe give us an idea of the debate within the Commission or maybe your own feelings on purchase power agreements versus rate-based generation assets. I know that in the state there’s been a lot of talk and controversy back and forth on this issue especially you know with the moratorium in place right now on Arizona Public Service building new gas fire generation. What is the, what is the general belief? Should it be a 50-50 mix? Is there a desire for competition that generates a desire for PPAs? What drives one versus the other, what are the benefits and the takes and puts of each type of ownership method?
Olson: You know I think that those discussions are best dealt with in our IRP process. I think that it’s important for us to look at the totality of the plan, what our utilities are looking to do to meet future demands on their systems and evaluate the entire approach to determine – you know is this a balanced approach? And really when it comes to you know what method is being used, whether it’s a power purchase agreement, whether it’s utility generation, whether it’s conventional generation versus renewable standards. I think that it’s important that we have that balanced approach, that we’re enacting policies that meet those competing priorities, that do it in a balanced manner.
That keep our rates affordable for ratepayers, make sure that we’re able to meet the peak demand on those hot summer days and those cold winter evenings to ensure that when folks turn the lights on and they’ve got that reliable resource available to them and that it’s available at an affordable rate to them. But I think what it really comes into the specifics on what type of generation, where it’s going to be generated, I think the IRP process is a great process to use to make those determinations when we’re looking at the entire portfolio comprehensively.
Weinstein: And on batteries, Commissioner Tobin’s plan includes plans for another 500 MW of battery storage over the next 15 years. I’m just wondering if you think batteries could become an even greater disruptive force to traditional utility generation? And at what price point or at what timeframe do you think this becomes that disruptive force?
Olson: Yeah it’s a great question. And you know I think that the answer is it depends. I think it depends on where the technology leads. Right now the cost of storage is significant, that moving to a significant amount of energy being generated through a storage mechanism could raise the question of affordability for the ratepayers. But very likely the technology will lead us to a future where that’s not the case. And so if the technology leads us there, then that could be the scenario in the future that we see years from now is one where we’re able to generate electricity using renewable sources and store that energy for usage during the peak demands using a cost-effective energy storage system, but it just depends on where the technology goes. If that cost of energy storage falls substantially, then it’s very likely that could be where we end up. Right now if we were to move to a significant amount of energy generation being provided through energy storage, it certainly could significantly increase the affordability for ratepayers.
Weinstein: Just switching over to energy efficiency now. Do you see that progress and energy efficiency programs is satisfactory at this point, or these programs should be extended further in some way?
Olson: You know I think that energy efficiency has been quite successful in Arizona at bringing down the demand. Significant progress has been made in these programs. Utilities have reconfigured their offerings to align with the way customers use their energy with the focus now being on the high-value demand side management that’s being executed and using smarter, more efficient technologies that are smarter than what historically has been using just simply tracking kilowatt hour reductions. So I think there’s been some significant advances in energy efficiency and I think that this has certainly helped to reduce that peak demand on energy resources that has helped to accomplish the goals of the Commission which are again providing those public services in a reliable manner at the least-cost approach that keeps rates affordable for ratepayers.
Weinstein: Now switching over to electric vehicles. What are the plans currently that you know of for the future of electric vehicles in the state? Who provides the infrastructure for charging stations and upgrades to the distribution system? Is that an opportunity for the utilities to invest? Or utility investors to participate in or is it something that you don’t … (couldn’t understand, mumbles)
Olson: Well that’s certainly something considered in Commissioner Tobin’s grid modernization plan. And so that will be something that we will continue to discuss as that moves forward through the rate or through the rule making process. In addition, Arizona has previously entered into a memorandum of understanding to provide charging infrastructure, and entered into this understanding with six other Western states to try to create an Intermountain West electric vehicle corridor that would make it possible for folks to drive an electric vehicle across major transportation corridors in the West. So that’s something that Arizona has already done. Arizona and other states will leverage the funds provided by the Department of Energy state energy programs to accomplish this in addition to that there’s the outstanding question that Commissioner Tobin has raised in his grid modernization plan of requiring utilities to invest in the electric vehicle charging station infrastructure.
I think that this is still an open question, I want to make sure that that is the appropriate approach for creating this infrastructure. I think that there are perhaps opportunities using the energy efficiency programs that are already in place that the state has already enacted. That may be an appropriate method for investing in this technology. But I also think that it’s important for us to consider whether this is something that the free market can provide and should provide it and should not be funded by the ratepayers. So that’s something that we were going to be discussing in the debate and the discussion that takes place on Commissioner Tobin’s grid modernization plan.
Weinstein: Okay got it. And then, a little bit of a wrap up here with the future of coal generation in Arizona. Not to put you on the spot but I remember last year I met with Commissioner Little at NARUC, and he was under the belief that there was enough coal generation in the region not necessarily even Arizona, but in the region. That there was no need to build any additional replacement generation for it. That Arizona could rely on coal generation that already exists for most of its power, and basically that the region was long. I don’t know if that’s what you feel, but I guess with the 300 megawatts coming out from Navajo in 2019, eventually there’s going to be some discussion of replacement for that. You know, should it be demand side management, or energy efficiency, should it be gas-fired generation or renewables? Maybe there’s no need for it at all- I don’t know really. Have you had an opportunity to have any thoughts on this kind of situation going forward, what the future of coal is?
Olson: Certainly, you know I think that what you described could be the case, again going back to the IRP process, I think that’s the appropriate time to evaluate what is the appropriate generation that we ought to see in Arizona. And when you look back to our recent IRP process, none of the utilities that were involved in that process were bringing forward proposals to build new coal generating stations. But having said that I do understand that there are still folks that are working to see if there might be an opportunity to prolong the life of the Navajo Generating Station for another few years that would be done in a manner that is consistent with the clean energy plan, and so that’s something that we’re watching to see what happens there. That’s not something that is necessarily a question for the Commission, but that’s something that I’m watching to see what takes place.
But when it comes to the question of what should replace that energy – it’s a significant amount of energy that will be going away and I think again that we would need a balanced approach that that meets those priorities of being able to provide reliable sources and doing it in an affordable way that also meets those desires that we have to maintain clean skies and reduce carbon emissions.
Weinstein: Do you think joining Western Interconnect Energy Imbalance Market a few years ago has had a positive effect on the ability to defer generation for customers? Have you seen any positive benefits from them?
Olson: Absolutely. I think this has been a great development. I think it’s a win-win for everybody involved; it’s a win for ratepayers because it keeps rates lower by taking advantage of the disparities in diverse markets. If the sun is shining in Arizona and we’re able to generate more electricity than we need and it’s cloudy somewhere in the Midwest then there are differences in those marketplaces and ratepayers can benefit from taking place and participating in an exchange when there are differences in the marketplace.
When we joined the eastern – sorry, the Western Energy Imbalance Market in October 2016 since then, yes, customers have saved over 45 million dollars in fuel costs. So I think that this has been something that’s been a significant benefit for ratepayers, for Arizonans, and certainly something that we should continue.
Weinstein: Great. One last question: maybe we could just talk about the economy in Arizona and how it’s affected load growth going forward. You know you see things moving forward for the state.
Olson: Yeah, absolutely. You know one of the good news stories for our state is that we’re rapidly growing again. You know we saw an explosive growth in the early part of the millennium in the early 2000s through 2008 when the Recession hit, and it’s nice to see that growth again. Maricopa County has been the fastest growing county in the country in each of the last two years. So that’s something that’s good for our economy, and it’s also good for rate payers as well. But responding to this rapid population growth is something that continues to be something that the policymakers have to take into consideration. I think that Phoenix is poised to have had its best years for permits of new housing units since 2007. I think this is something that’s good for it’s good for the economy, folks that are involved in construction. It’s good for homeowners as it increases the value of those assets that lost a lot of value in the Great Recession and so that’s good news and that’s something exciting to see.
Housing demand is increasing and the supply is trying to keep up but the supply is still trailing somewhat behind demand which has caused our vacancy rates to be at record lows. As a consequence the price of single family homes and apartments are appreciating which is helping to support continued new development. But despite the modest increases in housing costs in the last couple of years Phoenix remains affordable, housing prices are nearly three to four times the price of Phoenix-area homes if you look to our neighbor to the West and southern California. So that’s something that’s very beneficial for Phoenix which continues to be a draw to folks that are looking to relocate to a community that’s got a low cost of living because housing is a significant component of that cost. The continued population growth and demand for housing is also creating good conditions for job growth which is good news for folks who are looking for work as well as those that are employed as that creates upward pressure on incomes and compensation. It’s also good news for the state as well as it makes it easier for the state to meet the demands on its budget. These strong economic indicators are also translating into solid electric customer growth. APS’ retail customer growth in the last several quarters has been between 1.5% and 2%. And these new customers mean increasing demand for electricity, but the increases from new customers have largely been offset by continued penetration of rooftop solar with existing residential customers and the impacts of the company’s energy efficiency programs with existing residential and commercial and industrial customers as well. So there’s lots of good news in Arizona. I think the future looks very bright. It looks bright for our economy and for families that are working in that economy, and for ratepayers as well who are trying to meet the demands of their household and doing it in a way which creates the least burden on their household budgets.
Weinstein: You know I apologize, there is one other question which I really should ask before I go. Now on M&A, how has the acquisition of TEP been viewed. Now it’s been a few years so I guess having a private equity owner of that utility, has that gone well, have there been any concerns that we should be aware of? And also what does the Commission look for in terms of benefits from a merger when looking at approvals? I think I can ask this now because there’s nothing pending…
Olson: Yeah that’s a great question. As I mentioned previously I was appointed to the Commission just about seven months ago in October of last year so I wasn’t involved during that time when that merger and acquisition took place. But you know I can speak broadly that the priorities that I look for in mergers and acquisitions are no different than the priorities that I look for in all of the questions that come before the Commission. It’s important that the merger acquisition is going to increase the ability of the utility to provide these essential public services in a reliable fashion and that they’re able to do it in a manner that’s affordable for ratepayers. If we’re able to accomplish that, if the utilities are able to accomplish that through a merger and acquisition that improves the ability to achieve those priorities, then I think that’s a good thing for ratepayers and for the end users of these public services. So that’s certainly what I look for when these questions come before me.
Weinstein: And I’m sorry, I had one more thing. This really is the last question. The last, last question. About appropriate ROEs. It’s always an interesting question to ask, between rate cases is a good question to ask that. And with rising interest rates and bond yields, do you see ROEs on the rise going forward?
Olson: Those are those are great questions. Certainly the question about the return of equity is an important, critical question of any rate case. The approach that I take to determining what I think is an appropriate return on equity is not that different than how I approach any other questions within the rate case itself. And it is that I put to the evidence. Does the evidence justify a particular return on equity? I try to approach these questions, these financial questions within a rate case from an agnostic perspective, about whether a particular return on equity should be increased or decreased, it should be what the market says what that ought to be. And there’s plenty of evidence out there that we can turn to and look to: what is the appropriate way to equity. Our Constitution requires the Commission to establish just and reasonable rates of return and so that’s what I strive to do using my background with an MBA in finance to evaluate the available evidence to determine: is this just and reasonable? Does this get us to the point that the return that the company is receiving is comparable to the return that the company would receive if the company were operating in a perfectly competitive environment, a perfectly competitive marketplace? If we can accomplish that then ratepayers are being well served, the necessary capital will flow to the company to provide the necessary services in a reliable manner and in the most affordable manner possible.
Weinstein: Do you think that ROEs are rising as a result of higher bond yields?
Olson: You know I haven’t made a recent analysis of the data to be able to answer that question for you at this point. When the rate cases come before me I will evaluate what does the data determine in terms of what the ROE would be and I would use that analysis to guide my decision.
Weinstein: Okay. Thanks very much for your time today, we all appreciate it very much. I’m looking forward to coming out to Phoenix tomorrow, to the American Gas Association conference. To all of our investors listening, we have 17 meetings lined up with different companies. You’re all more than welcome to come to any of them. Just shoot me an email and I will get you on the schedule. In the meantime I just want to say have a good weekend, Commissioner, and thank you very much again.
Olson: Thank you so much for having me. It’s been a pleasure.