TEP: Flawed Energy Study Delivers False Promises to City of Tucson

In Brief

• The initial draft of an energy study conducted for the City of Tucson is compromised by flawed assumptions about how much time and money would be needed to form a municipal utility.
• The study ignores factors that would increase Tucson's energy costs, reduce reliability and drive a city-run utility's rates higher in the future relative to TEP's rates.
• Accepting the study's risky recommendation would undermine productive collaboration between the City of Tucson and TEP, create barriers to future economic development, and slow our community's progress to a cleaner energy future.

Tucson Electric Power (TEP) is cautioning the City of Tucson that a third-party study of alternative energy supply options for city residents is profoundly flawed.

A draft Energy Sourcing Study produced for the city by GDS Associates, Inc. relies on faulty assumptions that produce inaccurate results and conclusions, misleading city leaders about the prospects for a city takeover of TEP's local energy grid.

"Taking this report at face value could put our community's future at risk," said Susan Gray, TEP President and CEO. "The city has not received the sound advice it sought regarding the cost and consequences of a hostile takeover of the systems we all depend on for safe, reliable energy."

The draft study suggests that the City of Tucson pursue condemnation to seize TEP's electric distribution and lower-voltage transmission systems within city limits, as well as some of its buildings, equipment and other facilities. The city could then form a utility to serve about 250,000 customers, the study says, with TEP's highly trained union workers and other skilled employees left to serve customers outside city limits.

Forcing the sale of TEP's assets would require voter approval and litigation that would likely take a decade or more, based on efforts in other cities. Yet the study projects costs based on a city utility that would begin operating in January 2028 - only two and half years from now. This highly unrealistic premise and other mistaken assumptions result in artificially low projections for the purchase and operating costs that are then used as the basis for claiming that a city-run utility could charge lower rates than TEP.

This foundational error is compounded by many other shortcomings, producing results that significantly understate the long-term cost of a city-run utility. Specifically, the study:

• Ignores the efficiencies TEP realizes by serving the entire Tucson metropolitan area. A city utility and TEP each would need separate work forces, inventories, vehicle fleets, computer systems and other facilities to serve customers that, in some cases, would be on opposite sides of the same street. This would increase costs for both utilities above the level assumed in the study, leading to higher rates and creating barriers to future economic development.
• Assumes a municipal utility would invest much less in grid maintenance and upgrades than would be needed to maintain safe, reliable service for Tucson, particularly during hot summer months and monsoon storms.
• Suggests the city would acquire older 46-kilovolt (kV) facilities that TEP is replacing with a higher-capacity 138-kV system to maintain reliability. Those facilities would be unable to meet future energy needs or support additional rooftop solar and battery storage systems for customers.
• Disregards the need to separate city-seized assets from TEP's remaining system at thousands of locations. This costly, time-consuming process would require construction of new substations and other facilities by both utilities to preserve top-tier reliability for TEP customers outside the city. The resulting systems would operate less efficiently, with more points of potential failure that lead to longer outages and higher costs.

"Rather than the credible, thorough analysis called for by the city's Climate Action and Adaptation Plan, GDS has provided the city with false promises, expressed in misleading forecasts, tables and charts built from faulty assumptions," Gray said.

The $300,000 study encourages the city to allocate even more "significant upfront capital" for "substantial, additional due diligence" to prepare for a potential takeover of TEP's local grid. It warns of "likely opposition from TEP" but says "promising outcomes" can be achieved with "strong resolve and leadership from City officials."

"The study seems intent on driving a wedge between the City of Tucson and TEP at a time when we should be working together to address our city's long-term needs," Gray said. Just last week, the Tucson Mayor and City Council approved a letter of intent to work with TEP toward a new franchise agreement, a clean energy supply agreement for the city, and other collaboration opportunities.

"We hope the city and its residents aren't misled," she said. "The time and money that would be wasted in pursuing this unrealistic, unaffordable option would only increase our electric bills and slow our progress toward a cleaner energy future for our community."

TEP provides safe, reliable electric service to 455,000 customers in Southern Arizona. For more information, visit tep.com. TEP and its parent company, UNS Energy, are subsidiaries of Fortis Inc. (TSX/NYSE:FTS), a leader in the North American electric and gas utility business, with regulated utilities that serve more than 3.4 million customers across Canada and in the United States and the Caribbean. For more information, visit fortisinc.com.

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