Southwest Gas (SWG) is proposing a $101 million rate increase for its Arizona ratepayers, seeking nearly a 10.5% increase for residential customers. This rate case comes just over one year after the Arizona Corporation Commission (ACC) approved a 7.5% increase for SWG’s rates.

SWG’s application includes a request for return on equity (ROE), the profit percentage the utility can earn on shareholders’ equity portion of capital investments, which would be its new record high in Arizona. In 2025, the ACC approved a 9.47% ROE, its highest to date. SWG is now requesting a 10.25% ROE, as the company boasts record profits for its shareholders. SWG’s former President and CEO Karen Haller earned more than $10 million in 2025, a nearly $2 million increase from 2024. An EPI analysis found that SWG is one of several utilities that tie executive pay to ROE increases. Justin Brown succeeded Haller as SWG President in May.  

SWG’s ROE rose with each new rate case since 2021, reaching its current high in 2025.

SWG secures formula rates, presenting high risks for customers

This is SWG’s first rate case since the ACC implemented its controversial 2024 policy statement on formula rates. Arizona’s utilities supported the ACC’s policy changes, with SWG among the earliest participants in the docket, thanking the ACC for its approach to “improve the regulatory climate in Arizona.”

The ACC is in the midst of ongoing litigation over the policy statement, with plaintiffs including the Residential Utility Consumer Office (RUCO) arguing that adopting formula rates through a policy statement rather than rulemaking allows the Commission to sidestep stakeholder input, impact studies, and public comment. Despite the lawsuit, all of Arizona’s investor-owned electric and gas utilities have proposed formula rates during rate case proceedings since adoption of the policy statement.

After the vote to adopt formula rates, then-Chairman Jim O’Connor noted that over 600 comments opposed the policy statement. Commissioner Kevin Thompson, up for reelection this November, called the opposition “alarmism.” During last month’s debate between candidates for the ACC, when asked about opposition to formula rates, Thompson doubled down, saying, “It’s part of the misconceptions that media and other people are feeding into that they just don’t understand.” 

Thompson worked for SWG for 12 years earlier in his career.

Critics of formula rates raise concerns about rising customer costs and limited regulatory oversight. In testimony for SWG’s pending rate case, RUCO requested a lower ROE than SWG’s proposal, which RUCO argued “inappropriately rewards investors given the relative low risk of investment” in SWG, and recommends a larger decrease if the formula rate is approved. The consumer advocate explained, “A formula rate plan uses a pre-approved formula to adjust base rates between general rate cases, usually on an annual basis.” If the formula rate mechanism is adopted, RUCO recommended a 9.2% ROE because the utility will have less time between rate updates than in a traditional rate case. RUCO recommended a 9.4% ROE if the mechanism is not adopted. 

According to RUCO, approving a formula rate plan impacts the ROE recommendation because “the benefits of having reduced regulatory lag, guaranteed revenues and income, and general improved financial predictability will reduce the overall business risk” for SWG. 

ACC Staff recommended approval of the formula rate in SWG’s pending rate case, suggesting a 9.75% ROE if it is not approved, and a lower rate if it is, but did not specify other than to keep it in the suggested lower range of 9.5%.

During an ACC-hosted workshop before the adoption of the policy statement, several consumer groups expressed concerns about modifying the test year, including Arizona’s Attorney General’s Office, RUCO, Maryland’s Office of People’s Counsel, the AARP, and Arizona’s Large Customer Group. The ACC’s own staff witness, Michael Deupree of Acadian Consulting Group, testified, “Formula rate plans have resulted in large rate increases with very few rate decreases and no measurable improvement in reliability of service.” 

Deupree’s presentation noted rising rates for customers in other states that utilize formula rates, including Arkansas, Mississippi, and Louisiana. Arkansas Commissioners have warned that formula rates “do little to incentivize a utility to control its costs.”

SWG is actively pursuing formula rates across its service territory. Nevada’s legislature recently passed a bill allowing gas utilities in the state to engage in “alternative rate making,” including formula rate plans. When the bill was introduced, then SWG CEO Karen Haller promised shareholders that, with a formula rate in place in Arizona and Nevada, the regulatory structure would shift from nonlinear to “more of a linear growth.” 

Records EPI obtained show that SWG President Justin Brown and SWG lobbyist Dylan Keith sent letters to Governor Joe Lombardo days before the end of Nevada’s legislative session asking for his support of the bill. Lombardo signed the bill the following week, and Haller issued a release saying the decision would lead to “improved timeliness of recovery of our costs.” Three weeks later, SWG received an upgraded stock rating and Dwayne McClinton, then executive director for Lombardo’s Office of Energy and a former SWG lobbyist, reached out to Lombardo’s policy advisor requesting signed copies of the bill on behalf of Southwest Gas.

The Nevada bill is now undergoing a rulemaking process at the Public Utilities Commission of Nevada, with many stakeholders voicing concerns. Nevada’s Bureau of Consumer Protection said it was not convinced of the benefits of formula rates because “they tend to allow utilities unfettered and unreviewed cost increases.”

No evidence SWG’s “integrity mechanism” is working as it raises customers’ bills

In its current Arizona rate case, SWG is proposing to modify its “system integrity mechanism” (SIM), a regulatory tool, previously called the system improvement benefit, approved in its last rate case that allows the gas utility to adjust rates between rate cases to recover the revenue requirement for non-revenue-producing investment, including pipeline replacement. Subject to approval of SWG’s proposed formula rate, the utility proposes that the SIM increase the annual capital expenditure cap from $50 million to $100 million, doubling the amount SWG can spend on these non-revenue-producing projects each year, which customers will then pay for.

In SWG’s previous rate case, intervenors raised concerns about the SIM, with RUCO stating SWG’s need for it was “predicated on questionable cost recovery issues – not safety,” and cited additional issues regarding the proposal’s lack of transparency, ratepayer protections, and incentives for the utility to be cost-effective.

Regulatory tools like SWG’s SIM in Arizona are scrutinized in the Future of Heat Initiative’s (FoHI) recent report, “Spending and Safety Outcomes in U.S. Gas Distribution Systems.” The analysis underscores unprecedented spending by the gas distribution sector on infrastructure over the last 15 years, highlighting pipeline replacement programs, “through which this spending flows,” that are “supported by accelerated cost recovery mechanisms.” 

FoHI’s findings show that despite the 200% increase in spending, measured safety outcomes have not improved because the regulatory process lacks risk assessment and evaluation of alternatives. ACC Staff testimony in SWG’s rate case emphasizes this point on lack of oversight in integrity management planning, with staff witness Richard Kuprewicz stating, “I find it concerning that SWG has taken the effort to develop detailed written procedures, only to find that the Company has not been diligently following such written procedures.”

SWG’s SIM aligned with other utilities pushing costly, nonessential pipeline replacement

In other states where utilities have implemented ratemaking mechanisms allowing expedited recovery of pipeline replacement costs, like SWG’s SIM, it has resulted in higher gas bills for customers. The Council of the District of Columbia filed a petition with the Public Service Commission of the District of Columbia to investigate Washington Gas Light Company’s pipeline replacement project, “PROJECTpipes.” The Council cited its own climate goals as misaligned with the project, arguing that as more homes and buildings electrify, the system would become obsolete and more expensive for Washington Gas customers. The Office of People’s Counsel (OPC), the consumer advocate for D.C.ratepayers, found that since PROJECTpipes began in 2014, the Washington Gas system has had more gas leaks, and replacement has fallen short of projections. The budget does not align with the utility’s initial proposals.

The Maryland PSC began a comprehensive review of its utility gas system in its Future of Gas docket, opened in 2025, in response to the Maryland Office of People’s Counsel’s report that gas rates rose significantly after implementing its 2013 STRIDE statute for gas pipe replacement.

The Massachusetts Legislature implemented the Gas System Enhancement Plan (GSEP) in 2015 to speed up replacement of old, leak-prone pipes by allowing gas utilities to pass costs onto customers right away. A 2025 analysis found that costs of the GSEP reached $901 million, up 300% over 10 years. In response, the Massachusetts Department of Public Utilities lowered the cap on gas company spending to focus on leak repair instead of replacement. This starkly contrasts the approach SWG proposes, seeking to double the annual cap for its SIM tool.

SWG requests customers shoulder unfair costs

SWG included costs in its application that do not appear to serve ratepayers’ best interests. SWG is requesting a 56% recovery of Board of Directors expenses from its customers, totaling $1,864,765. SWG included these costs in the rate case, despite the ACC disallowing a larger percentage of them in previous cases. RUCO recommended the ACC remove 100% of allocated Board of Director fees from the rate case. ACC staff recommended certain executive perquisites be excluded from cost recovery in the rate case, but redacts the exact numbers as confidential. Staff argued that these SWG additions are “beyond the normal compensation paid to employees, and it is not reasonable to charge such parent company costs to ratepayers.”

SWG has a history of shifting these costs onto customers, and recently came under fire in its Nevada rate case for trying to pass along costs to captive customers for luxury hotels, extravagant meals and alcohol expenses, limo rides, and international travel. Among the charges was a $5,088 dinner, attended by 13 guests, at Durango Steakhouse for former President and CEO Karen Haller.

SWG also included $400,000 in “rate case expenses” in its rate base, which means it is seeking to recover them, plus its rate of return. Rate case expenses are associated with utility employees’ attendance at, participation in, preparation for, or appeal of the rate proceeding. They typically include the utility’s attorneys’ fees and fees to retain expert witnesses or consultants. Put simply, SWG is asking for customers to pay for the costs of arguing for its rate increase. 

RUCO recommended removing the rate case expense from the recovered costs, arguing that including it wrongly allows the company to earn a return on the expense. It will “force ratepayers to pay a return on costs that were incurred to fight for positions that were directly opposed to the ratepayers’ financial interest, and it will over-charge ratepayers and unfairly enrich shareholders.”

RUCO also recommended disallowing $565,061 that SWG is trying to pass on to customers for meal expenses related to training and non-travel meals for SWG’s employees. According to RUCO, these expenses are non-essential and inappropriate because they “will require ratepayers to subsidize the personal living expenses of employees,” and “increase rates for ratepayers making their bills less affordable.”

Consumer advocate recommends removing political organization membership dues from costs recovered by customers

Utilities like SWG often seek cost recovery of membership dues, including for various trade associations. In this case, RUCO recommended the ACC remove at least 50 percent of the membership dues SWG pays to the American Gas Association (AGA), the trade group for U.S. gas distribution utilities and their corporate parents. The consumer advocate argued the ACC removed trade association expenses in previous rate cases, including in UNS Gas and Arizona Public Service recent cases, and that AGA “represents the interests of Southwest Gas, not ratepayers, many of which are political in nature,” using language from AGA’s own website to highlight this point. AGA promotes methane gas use and seeks to influence federal, state, and local energy policy through broad political advocacy.

RUCO underscores that “ratepayers should not automatically pay for 100% of the cost of the membership dues,” and lists the other organizations included in SWG’s request for customer cost recovery. Among them is Western States and Tribal Nations (WSTN), a fossil fuel-funded group advocating expansion of gas markets in the western U.S. WSTN is closely linked to the fossil fuel front group Consumer Energy Alliance (CEA) and its managing PR and lobbying firm, HBW Resources. CEA receives funding from Arizona Public Service, and recently released ads promoting the conversion of Cholla Power Plant from coal to gas, which Commissioners Myers and Thompson celebrated on their personal social media accounts. WSTN President and CEO Andrew Browning is a partner at HBW Resources and a former federal lobbyist for the American Petroleum Institute. During Commissioner Nick Myers ’ workshop for an Inquiry into the Future of Gas Infrastructure and Storage docket, WSTN filed a letter supporting continued use of methane gas in Arizona and presented on expanding gas infrastructure in the state.  RUCO pointed to several benefits for shareholders, rather than ratepayers, of membership in these groups, including regulatory advocacy and lobbying, and suggests other membership dues are split 50/50.

SWG’s rebuttal testimony must be filed by November 2, and intervenors have the opportunity to respond by November 20.