By Rachel Walden, Vice Chair of the Arizona Corporation Commission

* This is an op-ed that has been published in several online Arizona news outlets.

Affordability has quickly become the word of the year for 2026. Across the political spectrum, people are working to define what affordability looks like. For my efforts at the Arizona Corporation Commission, affordability means leveraging every tool available to keep costs down and minimize rate increases for customers. 

The Commission recently approved its first Formula Rate, known as the Annual Rate Adjustment Mechanism (ARAM) for UNS Gas, a Class A electric utility. This method of setting rates has multiple benefits to help reduce costs versus the traditional method the Commission has been using. It eliminates costly regulatory lag which in turn provides utilities access to lower interest rate loans and capital to invest in building and maintaining critical infrastructure; savings can be captured annually; expenditures have more scrutiny; and rate increases exacerbated by time are removed as utilities no longer wait years before coming in for a rate case review.  

UNS Gas went 14 years between rate cases. A 10.3% rate increase was approved. Using traditional ratemaking with a historic test year, customers see the increase all at once as the utility’s cost of doing business has outpaced the approved rates they are allowed to collect. Using Formula Ratemaking, the increases, if any, will instead be gradual, enabling households to budget annually if there is any change in the rates. 

For the traditional method of rate setting, expenditures and capital investments are only evaluated for the chosen year for evaluation, known as the test year, and not for all the years in between rate cases. This gives utilities the opportunity to game the system. They may hold off on repairs and projects until the test year to then demonstrate a bloated revenue requirement that is not representative of normal operating procedure. Under traditional historic test year ratemaking, the Commission and stakeholders have no means to assess whether a utility’s business operations are in line with prior years, or whether there was unusual activity that cannot be easily explained.

Under the ARAM, all expenses and capital outlay will now be reviewed every year. The tests for prudency and used and usefulness will still be performed. The Commission maintains the authority to remove or revise the expenditures that are included in the rates and will still vote in an Open Meeting before any changes are finalized. The difference now is that we will have increased oversight to review costs from year to year in real time. We can ensure that spending is not excessive in relation to the cost of providing safe and reliable service. 

The ARAM will allow savings to be passed directly onto customers, such as the corporate tax cuts from the One Big Beautiful Bill. In the traditional rate setting method, if the utility’s test year that is used in their rate case is outside of the year when federal or state tax cuts are applicable, the savings do not get passed down to the rate payer. Using the ARAM, tax savings will be passed down to rate payers each year they occur. The ARAM also gives the opportunity for a rate decrease, which does not exist in the method the Commission has traditionally used.

Though the vote to pass the ARAM for UNS Gas represented a historic moment for Arizona, this method of rate making is not at all new. The Federal Energy Regulatory Commission has used Formula Rates to set transmission rates for all 50 states for the past 60 years. And states like Mississippi, Louisiana, and Arkansas, to name a few, utilize Formula Ratemaking, some since the early 1990’s. The U.S. Energy Information Administration data show that every one of these states have affordable electricity rates well below the national average, and enjoy some of the lowest electricity rates in the nation. 

Formula Rates can and are used for setting rates for any type of utility service. If you support increased transparency, strong regulatory oversight, and affordability, join me in support of Formula Ratemaking. 

https://www.havasunews.com/opinion/rachel-walden-the-end-of-rate-shock-the-case-for-formula-based-utility-bills/article_25c6e462-5c88-40d4-ae81-2dadb55538cd.html