Arizona regulators decided in a late-night vote to end net metering as a matter of policy for rooftop solar customers, ending a two-year-long proceeding for determining the value and cost of distributed generation.

Over the objections of solar parties, the Arizona Corporation Commission voted 4-1 on Dec. 20 to lower the compensation amount for power that customers send to utilities from their solar panels. Commission Chairman Doug Little and Commissioners Bob Stump, Tom Forese and Andy Tobin voted for the change. Commissioner Bob Burns dissented.

The decision does not immediately make any changes in utility rates, but both Arizona Public Service Co. and Tucson Electric Power Co. have rate design proceedings pending before the commission, so those changes will be forthcoming.

The commissioners agreed to grandfather net metering for existing solar customers, but the eligibility cutoff date and terms are subject to individual rate cases.

Pinnacle West Capital Corp. subsidiary APS has proposed in its rate case to grandfather its solar customers under current net metering rules for 20 years, providing those customers have completed applications for rooftop solar by July 1, 2017, and install their systems within 180 days of that date.

Following the vote, Wells Fargo Securities reiterated its "outperform" rating of Pinnacle West. Evercore ISI maintained its "hold" rating and $77 price target.

Arizona's utilities have argued for years that net metering shifts a utility's fixed costs of building and running its electric system from solar customers to nonsolar customers. In net metering, customers get a kilowatt-hour credit off their bills for power they get from the utility in return for each kilowatt-hour they produce.

The commissioners decided to replace net metering with a complex formula-based approach that uses projected wholesale power costs from proxy generation assets and an avoided cost and benefit valuation methodology to arrive at a compensation rate for rooftop solar power put on the grid.

The vote came after commissioners debated more than 20 amendments they had introduced to change Administrative Law Judge Teena Jibilian's recommended order.

The Alliance for Solar Choice attorney Court Rich urged the commission to take a more gradual approach to reducing solar credits to give the rooftop solar industry time to adjust. Rich argued that the commission's proposed "resource comparison proxy," or RCP, would result in an immediate 30% drop in net metering credits and further future cuts.

Rich warned the commissioners against killing off the rooftop solar industry before it has a chance to evolve with residential battery storage and other innovations that would contribute greatly to reducing utility peak demand costs.

The commissioners debated over how long to consider the benefits of solar in weighing compensation, with arguments over whether the "valuation term" should be five years, 10 years or longer. Solar advocates urged the commissioners to take a 20-year view because customers make long-term financial commitments to realize benefits over costs of their systems. Thousands of customer-sited solar systems will help utilities avoid the need for huge plant investments, they said.

"Limiting the valuation to five years is putting your thumb on the scale," Rich said. "If you only look at it for five years, you won't see that you'll avoid the next $1 billion power plant or transmission line."

In addition to solar associations and solar equipment installation and leasing companies, consumer advocates, utilities, investor groups, merchant power providers and environmental groups presented arguments.

Arizona Investment Council representative Meghan Grabel said the solar rooftop industry should not continue to be subsidized on the backs of nonsolar customers. She argued that even the RCP will provide a subsidy because it will fix rooftop solar customers' compensation far in excess of utility avoided costs for much cheaper utility-scale solar.

Grabel warned that the commission would still be on a path of burgeoning rooftop solar development that would lead Arizona to having a surplus of solar power it would have to export to other states at a considerable loss to utilities and their customers. She argued for simply fixing compensation at the wholesale cost of utility power purchase agreements.

TEP attorney Michael Patten said the Fortis Inc. subsidiary and sister utility UNS Electric Inc. support an RCP that is updated annually with an export rate. The annual reductions will result in gradually reducing credits for successive annual tranches of solar customers. New entrants would get less in fixed compensation for their multiyear term than customers who interconnected the year before, and so on.

Rich and other solar advocates argued this would steeply reduce the credits from levels existing customers receive because those customers are entitled to successive increases in retail rate credits as electric rates rise with future increases. Under the RCP model, customers will no longer be entitled to increases to compensate for higher rates, he said.

Residential Utility Consumer Office Chief Counsel Daniel Pozefsky said the appropriate level of compensation paid to rooftop solar customers should factor in self-consumption as well as exported energy. That is critical for encouraging solar customers to use battery storage with their solar systems, he said.