Utility Rate Changes Continue To Surface - This Time It's Arizona Public Service

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Includes: PNW, SPWR, TSLA, VSLR
by: EnerTuition

Summary

Arizona Public Service Co has become yet another utility to go ahead with a rate change proposal adverse to solar interests.

While the current proposal is modest, APS is indicating that this is an interim solution and is setting the stage for further rate structure changes in 2016.

We expect the lease/PPA market in APS territory to decline by about 30% if the change is implemented in August as expected.

Arizona Public Service Co. (APS), Arizona's largest electric utility, has filed for a rate revision that impacts the pricing of solar customers in its territory (the white part and about half of the yellow part in the picture below).

Thankfully for solar interests, APS, a subsidiary of Pinnacle West Capital Corp. (NYSE:PNW), has requested relatively minor increases in solar related fees for this round. APS is requesting the local utility commission to approve $3 per KW of grid access fee for any newly installed solar systems. APS estimates that the total grid access fee will be about $21 per month for the average solar customer in its territory. Similar to the Salt River Project's rate structure, the new solar rate plan grandfathers current solar customers and protects them from this new fee.

New residential solar customers can escape this grid access fee by opting for a demand-based rate plan. However, the demand rate plan is complex and is tailored mainly toward commercial customers. This rate structure is ill-suited for most residential customers and we do not expect many customers to adopt this plan.

The rationale for the tariff changes is the same for APS as it is for other utilities. According to APS President Don Brandt:

The growth of rooftop solar doesn't lessen the need for the grid. In fact, it's just the opposite. The continued growth of rooftop solar depends on a modern grid that supports the two-way flow of electricity, accommodates the highly variable nature of solar power while maintaining reliability and backs up solar power with fast-starting, flexible conventional power sources.

APS is looking for the proposal to be ratified and implemented by the August billing cycle. A review of the local politics that discusses APS's chances of success with this rate proposal can be found here. Based on the post mid-term election landscape and based on SRP's revised rate structure, we believe that APS will be able to push this rate change through successfully.

Overall, the proposal is good news as much as the solar lease companies can reasonably expect. Unlike what happened in the SRP territory, we expect this rate plan will shrink the target customer base but will not bring the business to a standstill.

Investors may wonder why APS is going for more modest rate changes than SRP. Part of the answer to the question has to do with a comprehensive rate review that's due in the APS territory in 2016. APS realizes that the current proposal is not sufficient, but opted for a quick fix based on the success SRP has with its rate change. To quote APS:

The APS proposal would not fully resolve the cost shift and is intended to be an interim solution until the issue is addressed in the next APS rate case or another proceeding.

Given the ability of utilities to revise rates at several different opportunities, it would be a case of mistaken optimism to think that the current limited APS rate forms a new trend toward a more favorable lease industry dynamic.

SolarCity (SCTY) and Vivint Solar (NYSE:VSLR) investors and customers should take note. Not only is the 2016 rate change likely to lead to yet another jump, but some of the grandfathering provisions from this interim fix may be bypassed.

While it is difficult to model customer response to these types of rate changes, we expect the lease/PPA market in APS territory to shrink by about 30% (compared to the 90%+ in SRP territory). SolarCity with its MyPower product will likely see a smaller drop than its peers.

Compared to lease/PPA providers, the news is less bad for companies that sell solar systems instead of leasing them. Cash purchase customers are likely to be more affluent and more economically savvy and may look to go ahead with solar even with the less favorable tariff regime. SunPower (NASDAQ:SPWR), as well as most local installers are more likely to fit in to this purchase category and we expect the market for purchased systems to shrink by a more modest 20%.

However, lease companies and customers rushing to have solar installed before the August deadline, or the future ITC deadline, should realize that the comprehensive rate change planned for 2016 may turn the grandfathering clock to address installations in earlier years.

All things considered, starting August, we expect installers like SolarCity and Vivint Solar will see a shrinkage in their lease/PPA business, in both absolute and market share basis, in the APS market. The business opportunity will decline further after the ITC expiration.

Investors who saw the SRP decision as a one-time event also should stop to ponder the APS development. We now have Arizona, New Hampshire and Wisconsin as states following through with significant rate changes. It would be foolish to expect utilities from other states to not follow this model given the growing threat of solar penetration.

While all of these rulings will have a cumulative impact on the residential lease/PPA market size, the big domino to fall in 2015 is likely to be California. With considerable amount of left leaning politics and PUCs, California is unlikely to veer as hard in the utilities favor as some of the other states but given the large size of the California market, even modest changes can lead to substantial reduction in the overall US TAM.

Given the ability of utilities to revise rates at several different opportunities, it would be a case of mistaken optimism to think that the current limited APS rate forms a new trend toward a more favorable lease industry dynamic.

SolarCity and Vivint Solar investors and customers should take note. Not only is the 2016 rate change likely to lead to yet another jump but some of the grandfathering provisions from this interim fix are likely to be bypassed. Lease companies and customers rushing to have solar installed before the August deadline should realize that the comprehensive rate change planned for 2016 may turn the grandfathering clock to address installations in earlier years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.