Residential customers of Arizona Public Service (APS) will see their rates go up by about 8 percent and a new "demand charge" under the utility’s proposed rate changes.

On Wednesday, the utility filed its much anticipated rate case that will set the stage for months of hearings at the Arizona Corporation Commission.

The new revenue will help the utility invest more than three billion dollars over the next three years to upgrade the grid and its power plants. For the average residential customer, the rate hike equals about $11 a month ($139 to $150).

“These new rate options would give customers more ability to control their energy bills by taking a few simple actions,” APS CEO Don Brandt said in a statement.

That “control” will come in the form of a third charge tied to the hour window between 3 p.m. and 8 p.m. when a household uses the most power. According to the utility, this will better reflect the cost of meeting high demand during on-peaks hours.

More than 100,000 customers already voluntarily use demand charges. 

“The current rate structure has two parts, which only provides customers with two ways to save money,” said Stefanie Layton, APS director of revenue requirements. “With the new structure, the demand component offers three ways to save money. They can still reduce total usage and shift from on-peak to off-peak. But they can also reduce their bill by staggering their use of major appliances.”’

She said currently there’s a mismatch between the cost of serving customers and how they are billed.

While 30 percent of the utility’s costs are variable, 70 percent are fixed. In contrast, the vast majority of a customer’s bill is variable.  

“We build our system, the grid, to support that one hour of that one day of the year when our customers are collectively using the most energy,” said Layton

Layton said the demand charge is not so much in addition to existing charges as it is changing the way a bill is “carved up.” The cost of energy will go down under the new rates, and customers can choose from three different rate options with varying basic service and demand charges.

But critics argue moving residential customers to demand-based rates — typically reserved for commercial and industrial ratepayers — amounts to a punishment for customers.

“There’s a reason why no other regulated utility in the entire country has demand charges for residential customers because it’s absurd, it’s not the way people live their lives,” said Court Rich, an energy attorney who represents solar companies at the corporation commission.

Rich said customers can be vigilant about energy usage all month and have their savings undone by accidentally running too many appliances on just one evening.

The small Arizona utility UNS also tried to move residential customers to demand charges earlier this year. However, after substantial backlash from ratepayers and consumer advocates, UNS withdrew that proposal.

The APS rate case also promises to be the latest battleground over the future of rooftop solar.

The utility is proposing to dramatically lower how much rooftop solar customers are reimbursed for the excess power they produce, known as net-metering. Currently, homeowners with solar panels get paid at retail rates, which is close to 14 cents per kilowatt hour. The new rates would drop that down to just about 3 cents.

According to the utility, net-metering is a “lucrative subsidy” that has already resulted in a cost shift of one billion dollars onto all the other ratepayers.

“It’s time for our industry to adapt its pricing model to reflect new energy technologies and the changing way customers are using electricity,” APS CEO Don Brandt said. “There will be the usual naysayers who want to protect the status quo for their short-term financial gain, but Arizona has delayed too long already.”

The 40,000 existing solar customers would be grandfathered at their current rates. APS also plans to include any new solar customers who finish their applications by July 2017.

The utility said that more than 1 percent of the 8-percent rate hike for residential customers can be attributed to rooftop solar.

But the solar industry is already sounding the alarm.

Kris Mayes is a former corporation commissioner and now represents the Energy Freedom Coalition of America, which plans to intervene in the rate case on behalf of solar companies.

She calls the billion-dollar figure a “ridiculous claim.”

“All these proposals would ultimately result in the decimation, the destruction of the solar energy industry in Arizona and would mean Arizonans could no longer affordably go solar,” she said.

Mayes said they plan to dispute many of the utility’s numbers, which fail to include all the benefits of rooftop solar.

“Rooftop solar means APS and other utilities don’t have to build new power plants, as many new transmission or distribution lines, all of which costs customers money.”

Mayes had led the campaign Yes on AZ Solar that sought to enshrine certain protections for rooftop solar in the constitution, including net-metering. That effort fell through after competing ballot proposals were introduced by lawmakers during the session.

APS and Solar City are now in negotiations, facilitated by the governor’s office, to reach a consensus, but Mayes said this latest rate proposal is “counter-intuitive and hopefully not APS’s starting point.”

While demand charges cut back savings for solar customers, Mayes points out it poses challenges for everyone, especially because most people don’t have the tools to monitor their energy consumption so closely.

“You can think of this as a surge pricing scheme that APS is proposing, yet people don’t have real-time visibility into their energy use,” she said.

All of the proposals will be hashed out at the Arizona Corporation Commission in the coming months and the rates would take effect in July of next year.