TEP Midtown Reliability Project

Table of Contents

1. Introduction
2. Controversy
1. Local Laws
2. The ACC Process
3. TEP Greatly Exaggerates Costs
4. TEP’s Imprudent Spending
5. But TEP Cares About Ratepayers
3. Parties
4. Other Issues
1. ACC Cost Recovery Inconsistency
2. Low Voltage Attachers & Service Drops
5. Pragmatic Solutions
1. The Halfway Solution
2. The Tunnel Solution
6. Relevant Documents from Underground Arizona

Introduction

Tucson Electric Power (”TEP”) has proposed a new 138kV substation and transmission lines in Central Tucson near the University of Arizona that would connect to two existing substations and create a loop. It calls this project the Midtown Reliability Project. In 2024, it applied for and was approved for a Certificate of Environmental Compatibility (“CEC”) by the Line Siting Committee of the Arizona Corporation Commission (”ACC”) in Docket L-00000C-24-0118-00232. In 2021, TEP had previously applied for the same project in Docket L-00000C-21-0288-00192 before withdrawing its application.

Controversy

Local Laws

The University of Arizona area where TEP has proposed placing its new high voltage transmission lines and substation is part of the historic, tourist, and economic heart of the region. Tens of thousands of out of state students attend the University of Arizona and help drive tourism and economic activity for the entire region. As such, the area has had various ordinances and plans requiring aesthetic improvement, historic preservation, and encouraging infill development for decades—including requiring the undergrounding of new electric lines.

Some examples of ordinances and plans requiring or encouraging undergrounding are the city’s Gateway Corridor Zones, Historic Preservation Zones, and the University Area Plan. All of these ordinances and plans were enacted in the 1980s after the APS v. Town of Paradise Valley decision by the Arizona Supreme Court in 1980, which found that a municipality had the right to require utility undergrounding. Given the city center was already well-developed in the 1980s, these laws were enacted to protect the city center from new utility lines.

TEP believes that it is above these laws because undergrounding has a higher upfront cost than overhead lines. However, undergrounding has always had a higher upfront cost, including in 1980 when the Arizona Supreme Court determined municipalities had these powers. If the Legislature wanted to remove these powers from municipalities, it has had 44 years to do so. The challenge for utilities is that undergrounding has happened in communities of all political persuasions, so getting the Legislature to put the utilities above local land use laws is not a simple partisan political game. It’s a corporate power vs. community power political game.

Moreover, in 2000, TEP voluntarily agreed to a franchise agreement with the city that was subsequently approved by voters. In that franchise agreement, TEP agreed to underground where required by local law at its own expense. While the franchise agreement has exceptions to this requirement, those exceptions explicitly exclude cost. This franchise agreement is currently in effect.

See Section 21 here:

SECTION 21. UNDERGROUNDING (a) In General. subject to Subsection (c), in any area where the Company is not already required, pursuant to federal, State, or local law or agreement, to place its transmission or distribution lines underground, in any new construction or relocation of aerial transmission or distribution lines, the City may require the Company to place such lines underground if the City pays the difference between the cost of placing such lines underground and the cost of placing them aerially. … (c) Exception to Undergrounding. The Company shall be required to place new aerial transmission or distribution lines underground only when such placement is feasible for technical or system reasons. Such reasons cannot include the monetary cost of the proposed undergrounding project. [Emphasis Added]

UAZ-21 ORD 9429 City of Tucson-TEP Franchise OCR.pdf19081.4KB

In 2024, TEP argued in Superior Court that state laws enacted since 1980 preempt a city’s right to require undergrounding. The Superior Court could find no support for TEP’s position and TEP lost. It did not appeal.

See page 8 here:

The State has also preempted the City’s ability to determine where, but not how, transmission lines are constructed. The State clearly intended the Arizona Corporation Commission (ACC) to have exclusive authority over line siting for high-capacity transmission lines. A.R.S. § 40-360, et seq. See also 1971 Session Laws Ch 67, § 1. The purpose of this is to simplify the process of expanding Arizona’s electrical grid, which is necessarily a matter of statewide importance. However, the Court has been unable to locate any law which restricts the City’s authority to regulate how transmission lines are constructed. TEP is correct that there is no law which explicitly grants the City the authority to require undergrounding, but neither is there a specific law which purports to exempt utilities from all zoning regulations. Therefore, the Court finds that, as a matter of law, the City has the authority to require undergrounding of transmission lines. [Emphasis Added]

TEPCO - Ruling.pdf378.9KB

The ACC Process

Despite these conflicts with local laws, in May 2024, TEP applied for a CEC with the ACC’s Line Siting Committee and requested that it supersede any and all local laws that increase its costs on the basis that the ACC will not allow it to recover those costs from ratepayers. This is controversial because it requires the Line Siting Committee to make a pre-determination on the recoverability of costs from ratepayers, which is not one of its statutory duties. The Line Siting Committee also explicitly lacks jurisdiction on underground lines.

The Line Siting Committee granted this request and went so far as to also determine that the City of Tucson’s laws are superseded if costs are to be recovered from the utility—meaning TEP’s ownership—and not just ratepayers.

See Finding of Fact 10 here:

[G]iven the Commission's Policy Statement found in Decision No. 79140 (October 4, 2023), the Committee finds pursuant to A.R.S. § 40-360.06(D) that any local ordinance or plan that requires TEP to incur an incremental cost to construct the Project below ground ‘is unreasonably restrictive and compliance therewith is not feasible in view of technology available." This finding is conditioned on the City and TEP not finding a means to, within six (6) months of the date of the Commission's approval of this Certificate, either (a) fund the incremental cost to construct the Project below ground from a source other than through TEP's utility rates or from TEP, its affiliates, subsidiaries, or parent companies absent agreement between the parties; or (b) obtain the City's authorization to construct the Project above ground through the City's special exception or variance process, provided that TEP files a special exception or variance application for the route approved within ten (10) weeks of the Commission's approval of this Certificate. [Emphasis Added]

The Line Siting Committee relied on TEP’s representation of costs and a controversial policy statement issued by the ACC in October 2023. You can read more details on our problems with the policy statement in our “Petition for a Rulemaking” and “Application for Rehearing” at the end of this section.

Notably, the Line Siting Committee admitted it was not the right forum for resolving legal questions and inserted Finding of Fact 9 in recognition of its limitations.

TEP Greatly Exaggerates Costs

To comply with the City of Tucson’s laws would require the undergrounding of approximately two miles of transmission lines. In its application and testimony, TEP said the incremental cost of undergrounding those two miles would be $67 million—or $33.5 million per mile.

See page 29 of TEP’s CEC application here:

The shortest overhead line route is estimated to cost $17 million, while the same line with portions undergrounded within the Gateway Corridor Zone is estimated to cost $87 million. This extra $67 million [sic] in cost is significant and would result in higher rates for all TEP customers if included in rate base.

In 2020, TEP’s original estimate put the total cost of undergrounding two miles at $16.4 million. After subtracting out an above ground cost of $2 million per mile, or $4 million total, we get a total incremental cost of $12.4 million—or an incremental cost of $6.2 million per mile. See page 16 here:

Based on the underground estimate developed in this analysis, an underground transmission line would cost approximately $16.4 million.

UAZ-1 TEP-138-UG-Report-Rev.-0-signed.pdf1866.7KB

See also page 26 of TEP’s 2021 ACC Application:

New estimates prepared for the various routes presented in the application range from $2 to $2.8 million per mile for [above ground] routes within the Gateway Corridor.

Kino-to-DMP-138kV-CEC-Application_Exhibits-A-thru-I-Reduced.pdf84543.2KB

Thus, by 2024, TEP had ballooned this incremental cost estimate by over 5 times—from $6.2 million per mile to $33.5 million per mile. Is its engineering firm that bad or did it start inflating the numbers when it became possible TEP might have to cover the cost?

For further comparison, in late 2021, In Line Siting Case 195, SRP presented to the ACC that it would be undergrounding three miles of transmission lines in Chandler at a total incremental cost of $17 million—or $5.7 million per mile. This Chandler project was a mile longer, higher voltage, had two duct banks instead of one, and was through narrower rights-of-way, among other things, and therefore should have been at the high end of cost estimates. Thus, TEP estimating a cost 6 times higher than this actual SRP cost is a huge red flag as to the credibility of its estimates.

At the ACC hearing, TEP blamed inflation. However, the biggest cost in an underground transmission line project is the XLPE cable. And, XLPE cable cost is driven primarily by the price of copper. The price of copper spiked in early 2021 and is flat or down since then. Even if it doubled, that would not translate to a project price increase of 5 to 6 times, let alone a doubling.

Here are other examples of recent actual costs in Arizona from our website. All of our data are pulled from legal filings. None of these incremental costs come anywhere close to $33.5 million per mile. In fact, we have never seen an incremental cost of even a third of that much. TEP’s high estimates seem to be driven by its agenda rather than its agenda being driven by realistic estimates—and that’s unfortunate for the community and for ratepayers.

To put it simply, there is no way that the cost of undergrounding two miles of 138kV in Tucson is higher than the $17 million cost of undergrounding three miles of 230kV in Chandler.

As such, we estimate the total incremental cost to be no more than $15 million—or $7.5 million per mile—based on nearby comparable projects.

TEP’s Imprudent Spending

In its ACC testimony, a copy of which is available at the bottom of this page, TEP claimed that it had already spent over $10 million band-aiding its existing infrastructure because of delays to the project. And, that is not including its legal costs from a court case and two CEC applications, among other things. It claimed that if the project gets delayed past 2027, it will have to spend an additional $10 million. And, if it gets delayed past 2030, it will have to spend an additional $50 million. And that’s all without accomplishing its goal of creating a 138kV loop, which will be another cost in the tens of millions of dollars. Delay has a cost to ratepayers and avoiding delay is prudent.

The problem is these delays were entirely self-imposed and avoidable. TEP was aware—or reasonably should have been aware—of the city’s plans and ordinances, as well as court precedent. If TEP had planned for and accounted for these laws, this project could already be done. Given our estimate that undergrounding should cost no more than $15 million, TEP spending or threatening to spend more than $70 million to avoid following the law without accomplishing any of its goals should be a far bigger concern to regulators and ratepayers.

How can this wasteful spending be considered legally prudent and recoverable from ratepayers but following the law and saving tens of millions imprudent and unrecoverable?

But TEP Cares About Ratepayers

In case it isn’t already obvious, TEP needs inflated numbers so that its pretext of protecting ratepayers seems credible. Otherwise, its actions are transparently imprudent and wasteful. In its SEC filings and ACC presentation, TEP has said it will be spending $3.5 billion over the next five years on infrastructure. If it spends $15 million more—or $3.515 billion instead of $3.5 billion—the impact on ratepayers is negligible and likely non-existent. We explain why below.

You can find more detail here but the basics are the following: TEP is required by law to spread its costs out over the useful life of an asset. Current ACC and FERC approved depreciation rates for underground assets are about 1.5% per year. Thus, if TEP spends $15 million, the cost to ratepayers might be up to 1.5% times $15 million—or $225,000 per year for 67 years. TEP currently collects ~$1.3 billion per year in revenue and will comfortably collect more than $100 billion over 67 years. If it recovers the full $225,000 per year cost of undergrounding from ratepayers, the impact to bills could be a maximum increase of 0.017% ($225,000 divided by $1,300,000,000).

In 2023, TEP pushed Prop 412, which was defeated. In Prop 412, TEP wanted the city to collect a new fee of 0.75% on its bills so that it could be directed to TEP’s required undergrounding expenses. This represented a customer bill increase 47 times higher than could be achieved through the normal ratemaking process—0.017% compared to 0.75%. Thus, TEP has no problem with much larger increases in costs to its customers.

That all being said, an increase of 0.017% is a worst case scenario, ignores the aforementioned wasteful spending, ignores inflation, and it is extremely unlikely that there would be any bill increase—relative or otherwise—as a result of TEP following the law and avoiding delay. TEP will be retiring 8 substations and 19 miles of existing electric lines. Those costs would be retired from the rate base and removed from bills. In addition, studies show that underground lines can save substantial sums when storm and outage costs are accounted for (climate change hardening). And the savings from those maintenance and repair costs can make the total cost of ownership of underground lines comparable to overhead lines.

There is also the issue of private property owner lawsuits for diminution in private property values, which we go over here. Presumably, these costs would also be passed to ratepayers and are completely unaccounted for by TEP or in this analysis.

Thus, TEP’s concern for the impact to ratepayers is a red herring. Not only has it already spent more than undergrounding reasonably would have cost, it asked for a fee increase 47 times higher than would be allowed by the normal ratemaking process, and undergrounding—even setting aside TEP’s imprudent spending—can actually save ratepayers money.

Parties

The University of Arizona has invested substantial sums into the aesthetics of its campus and buildings. One would therefore expect the university to oppose TEP’s attempts to run new transmission lines immediately adjacent to its property. However, in 2019, the University of Arizona signed a contract with TEP that required it to support TEP’s project. The University of Arizona has not been a vocal proponent of ignoring the city’s laws but its silence has been noticeable given its sizable interest in protecting and improving the area. For contrast, roughly 8 miles of transmission lines were undergrounded adjacent to ASU and Tempe Town lake.

See Section 6.2 here for the contractual requirement that the University of Arizona support TEP’s project:

To help facilitate the ACC’s grant of applicable CECs for the 138kV Transmission Lines, the UA shall publicly support the CEC applications and participate in the CEC’s public processes. … To help facilitate development of the UA North Substation, the UA shall publicly support TEP’s applications for any zoning approvals and required permits associated with development of the UA North Substation, and participate in the applicable public processes.

UAZ-20 20190813 UA-TEP Electricity Agreement.pdf13595.0KB

University Banner Medical Center has opposed any above ground lines on its property, on Campbell, or in the Northern viewsheds of its new buildings.

See a statement from Banner here:

Banner Health is strongly opposed to the approval, permitting, or construction of any overhead transmission line at that location given its negative impact on the community greenspace/buffer between the B—UMCT campus and the adjoining neighborhoods. Banner Health is also highly concerned with the potential impacts of such a high voltage line on Banner Health’s current and future operations at the B—UMCT campus, including flight operations. Banner Health strongly supports undergrounding the proposed transmission line along Ring Road.

UAZ-18 2021-08-02 Banner Health Statement of Opp.pdf242.9KB

The City of Tucson believes it can enforce its land use laws. Indeed, the Line Siting Committee’s decision to try to supersede the city’s laws may lead to interesting court battles. We have every reason to expect the City of Tucson to succeed given precedent and the plain language of the law but nothing is guaranteed. Moreover, municipalities tend to be reactive rather than proactive and are not in the business of policing the ACC.

Most, if not all, of the neighborhoods surrounding the university formed the Underground Coalition in 2020 to fight for the enforcement of the city’s laws and the principle that TEP is not above the law. The Underground Coalition represents at least 25,000 City of Tucson residents.

Underground Arizona is supported by the Underground Coalition.

Other Issues

ACC Cost Recovery Inconsistency

An argument we have heard from TEP is that uncertainty is bad for business. We agree. However, all uncertainty related to this project has been avoidable and/or artificially created. For example, see here how TEP caused the creation of a controversial and counterproductive ACC policy statement. If anything, it is the ACC’s ahistorical and inconsistent interpretation of the law—with TEP’s encouragement—that has increased uncertainty for the utilities.

Here’s an example of the inconsistency problem within a single ACC case: In its most recent ACC presentation, TEP stated that it would voluntarily underground 4.6 miles of distribution lines along the transmission line route. This will require trenching 4.6 miles of right-of-way, compared to only 2 miles for the transmission line. As far as we know, TEP expects to recover this incremental cost of distribution line undergrounding from ratepayers. See Condition 16 of the CEC, on page 13:

The Applicant shall move all existing parallel overhead lower voltage distribution lines underground, currently located within the same road right-of-way as the Project as constructed.

So, is recovering the incremental cost of undergrounding from ratepayers allowed by the ACC or not? On the one hand, TEP says it is not allowed for transmission lines but that it is allowed for distribution lines? TEP and the ACC need to pick an interpretation and be consistent. It is this inconsistency that is bad for business. A utility has to gamble on how the current or a future ACC will interpret its actions.

Our position is: if undergrounding is required by law, then utilities must be allowed to recover those costs from ratepayers. Furthermore, given court precedent, we believe the utilities would win a case against the ACC if it chose to deny the recovery of legally-required costs as imprudent. Quite simply, following the law has to be prudent. Otherwise, the ACC is creating a much larger mess for private investors because following the law—any law—becomes a financial gamble on the ever-changing disposition of the ACC.

If the ACC or Line Siting Committee do not like the effect a law will have on costs to ratepayers, they can propose alternative routes that avoid said law or deny the CEC and send the utility back to the drawing board. If there are no good alternative routes, then the most financially prudent course of action for the utility and ratepayers is to comply with the law.

Low Voltage Attachers & Service Drops

Another argument TEP has made is that undergrounding some distribution lines satisfies the City of Tucson’s undergrounding requirements.

A problem is that the laws require the undergrounding of new lines—not existing lines. And those new lines are 2-3x taller than any other pole that exists in the area (see the images at the top of this page), which significantly impacts aesthetics and adjacent land uses.

Furthermore, TEP has no control over what low voltage attachers or private property owners will do. Attachers may install their own poles or use orphaned poles, like the image on the right. And, underground distribution lines require service drops to private property owners. If the existing drop is overhead—which most are—unless the private property owner pays for undergrounding, a pole will be required for every service drop. Thus, undergrounding distribution is likely to result in a substantial increase in poles and visual clutter, in addition to the new, much taller transmission poles.

Pragmatic Solutions

The Halfway Solution

Another talking point that TEP likes to use is: this is urgent! As we have already outlined, TEP could have followed the law from the beginning and this project would already be done. It can pivot to following the law at any point and choose to fight the ACC’s opposition to it recovering legally-required costs. That’s a shorter and more winnable fight, in our view, and aligns TEP’s interests with the community’s interests. Quite simply, if we allow utilities to create crises to justify their preferences, guess what we’ll see more of? Manufactured crises.

That said, in the interest of pragmatism, to address TEP’s urgency arguments, the Underground Coalition proposed the “Halfway Solution.” The idea was that, if this was a genuine emergency, TEP could deliver its three times increase in power (46kV to 138kV) to the area by building the Vine substation and making only one of the connections—the one with less land use conflicts. This is what TEP did with its Kino substation and how the city has operated for a hundred years. The advantage is that it would minimize conflicts with local laws and deliver the new power while allowing TEP to fight whatever laws it wants to fight. TEP claims that these new transmission lines are far more reliable than the existing system and so even a new radial connection is an improvement over the status quo.

See the good faith proposal here:

TEP rejected the Halfway Solution, which raises doubts as to the seriousness of its urgency argument.

The Tunnel Solution

Another solution that we proposed to TEP was the installation of a tunnel. Las Vegas is currently having 68 miles of tunnels installed by The Boring Company. The Boring Company will install a 12ft diameter tunnel 30 feet underground for ~$10 million per mile, all-in at its own cost risk, inclusive of engineering costs. This allows for a project to be done more quickly and without any above ground disruption to traffic or public and private property.

Therefore, a two mile tunnel would cost about $20 million. Because of the tunnel’s size and ventilation, TEP would not need as large of or as many cables, reducing its upfront costs. And, repair and maintenance would be much easier because of ease of access, resulting in operational cost savings.

From a financial standpoint, TEP, or a third party owner, could lease the tunnel to other utilities or the University of Arizona and thereby share the cost among many users. This would bring the per-user cost down substantially, perhaps bringing it well below our $7.5 million per mile trenching cost estimate and closer to TEP’s recent above ground cost estimate of about $2.8 million per mile.

We believe this is a realistic solution that has many wins for both TEP and the community. Unfortunately, it has been difficult to get TEP to entertain creative thinking when it is so vehemently opposed to any form of undergrounding.

Relevant Documents from Underground Arizona

1. July 2024 ACC Intervenor Presentation
UAZ Exhibit 62 Fixed.pdf6751.6KB
2. July 2024 ACC Closing Statement Presentation
UAZ-63 Closing Presentation.pdf531.1KB
3. July 2024 ACC Hearing Transcripts
Line Siting Case 232 July 2024 Full Transcripts (89MB).pdf87430.2KB
Line Siting Case 232 July 2024 Full Transcripts-ocr (1.2GB).pdf1220180.7KB
4. September 2024 Application for a Rehearing
5. September 2024 41-1033 Petition for a Rulemaking