Legislature(2009 - 2010)BELTZ 105 (TSBldg)
03/22/2010 01:30 PM Senate JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| SB239 | |
| SB277 | |
| HB319 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 239 | TELECONFERENCED | |
| += | SB 153 | TELECONFERENCED | |
| += | SB 277 | TELECONFERENCED | |
| + | HB 319 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 277-PUB. UTILITY EXEMPTION: RENEWABLE ENERGY
1:36:39 PM
CHAIR FRENCH announced the consideration of SB 277.
MICHAEL PAWLOWSKI, Staff to Senator Lesil McGuire, said SB 277
attempts to streamline the regulatory process and clarify in
statute that renewable independent power producers in Alaska are
exempt from regulation by the RCA if the projects were placed in
service before 2016, generate less than 65 megawatts, and do not
receive state tax credits or grants. The experience in other
states has been that streamlining the regulatory system
facilitates the development of renewable power. In Alaska,
independent power producers are a relatively new entrant into
the market and the regulations are fairly new, but early on a
project in South Fork and one in Eagle River received
exemptions. According to the RCA, it took about five months to
receive these exemptions.
1:39:36 PM
SENATOR MCGUIRE joined the committee.
ETHAN SCHUTT, Senior Vice-President, Cook Inlet Region,
Incorporated (CIRI), said he is testifying in support of SB 277.
CIRI believes this will help to set boundaries that will foster
a fair regulatory environment and enable an independent power
producer (IPP) to negotiate with utilities to sell a commercial
block of power without having to run the regulatory gauntlet
that was structured to regulate the public utilities that sit in
the Railbelt today. These are utilities that have customers and
monopoly service territories whereas IPPs have none of these
things, he said.
MR. SCHUTT said CIRI believes that this version of the bill
strikes the right balance. It will encourage rapid development
of renewable power while protecting the public interest. With
the modifications made in the prior committee, both of these
interests can be served. As currently written, this bill is good
public policy, he said.
CHAIR FRENCH asked if the current law would in any way force a
utility to buy power from the CIRI wind project.
MR. SCHUTT said no and that doesn't change under this bill. CIRI
believes that the utilities have sufficient leverage to
negotiate fair business points on their power purchase
agreements and there is nothing that would compel them to buy
power from CIRI.
1:42:54 PM
CHAIR FRENCH summarized if the utility reaches a point of
impasse in their negotiations with CIRI, they can walk away and
CIRI would be forced to change its business practice "get back
in the ballgame."
MR. SCHUTT replied that's correct; if no compromise can be found
on any particular point, the IPP can concede the point to the
utility, find another customer, or find another project.
1:44:16 PM
MR. PAWLOWSKI said the March 18 letter from CIRI raised a
concern about a qualifying facility (QF) under federal law.
Whereas this bill regulates a person or a facility, federal law
is specifically related to a facility and the type of power
being generated. Both relate to renewable energy, but what is
somewhat confrontational about qualifying facilities is that
under federal law a qualifying facility has the power to compel
purchase of their power. Absent something like SB 277, the de
facto encouragement is for potential independent power producers
to go the federal qualifying facility route. Although facilities
of certain sizes can be exempt from state regulation through QF,
the bill seeks an Alaska solution that is in between the QF
status and still allows for commercial negotiations.
CHAIR FRENCH asked if the CIRI project is too large to be a
qualifying project.
MR. PAWLOWSKI said that's correct.
CHAIR FRENCH asked for a summary of the 3/5/2010 legislative
research report for the record and noted that it appears as
though Alaska is an outlier with respect to the way it handles
this kind of transaction.
MR. PAWLOWSKI said legislative legal offered the view that the
regulatory environment in Alaska is somewhat interesting. If an
individual facility sells power to another person and receives
more than $50,000 in income, the facility is regulated. Other
states don't regulate that way, but the power market in the
Lower 48 isn't stranded, it's much more competitive, and power
has the ability to move across state lines. Even Hawaii, which
is also stranded from a national grid, doesn't regulate in this
manner.
The policy call in this legislation is to remove the regulatory
impediments to renewable energy to incentivize private sector
investment, which will encourage commercial negotiation between
utilities and power suppliers.
1:47:40 PM
CHAIR FRENCH recapped that in the Lower 48 this type of project
would be exempt from local regulation. FERC would be the
regulatory body and would look at it as a matter of intrastate
power sales. He asked if FERC would still regulate if an IPP in
Colorado was selling to a utility with no intrastate aspect.
MR. PAWLOWSKI replied it would depend on the size of the
facility and if it was a qualifying facility, but his
understanding is that intrastate sales are not typically
regulated.
SENATOR MCGUIRE pointed out that the research report indicates
that some states specify that the local regulatory body
regulates by virtue of regulating the utility that the IPP sells
to, which is what this bill does. She agreed that if it doesn't
cross a state line, FERC would not by definition have authority.
She emphasized importance of alternate energy to people here and
pointed out that this is the first meaningful commercial-level
project in the state. It's a project that could move forward,
but it has an excessive regulatory burden that has the potential
to add years to the project and could possibly kill it
altogether. The consumer certainly has to be protected at some
level, but that occurs because the utility is regulated and RCA
oversees that utility. She asked the committee to think about a
broad-level solution and noted that the philosophy that's been
adopted by many other states is one of competition. The price to
the consumer will ultimately decrease as more IPPs enter the
marketplace and the supply of independent power increases, she
said.
1:51:32 PM
SENATOR COGHILL asked her to discuss the thought process for
selecting 65 megawatts because the Alaska Power Association
(APA) has indicated that it may be too high.
SENATOR MCGUIRE said it was a compromise. Senator Wielechowski
in particular had concerns that regulations increase once a
project reaches the 100 megawatt range. She said she's open to
discussion because her view is that the consumer is protected by
the very specific language about selling to a utility and Alaska
law is very clear that utilities are regulated by RCA.
SENATOR COGHILL said his thought was that this is obviously for
the utility in the Anchorage and Southcentral area so the
assumption must be that 65 megawatts is reasonably possible.
SENATOR MCGUIRE said the previous committee received a number of
letters from people in Fairbanks who want to participate in the
market and sell power and she wonders if the net effect of the
bill will be to open up more competition in places like that.
SENATOR COGHILL remarked that the problem in the small Fairbanks
market is how to accept certain power and have a base load that
can compensate for the fluctuations in wind power. He mused that
somewhere along the line that's going to be an expensive problem
to solve.
1:56:07 PM
MR. PAWLOWSKI said he would provide Senator Coghill's office
with more information on the QF process because the bill is
specifically trying to avoid situations where small players get
to a place where they force local utilities to purchase their
power.
CHAIR FRENCH asked for clarification that the bill doesn't rely
on the FERC process to the extent that a qualifying power
producer of 35 megawatts or less would bring a federal mandate
for a power sales agreement with the utility.
MR. PAWLOWSKI said that's correct.
1:56:58 PM
CHAIR FRENCH asked him to discuss the timing aspect and the
federal aid.
MR. PAWLOWSKI said the stimulus tax credits have a very short
timeline within which to complete construction and he
understands that it takes about five months to get an exemption
from the RCA.
SENATOR COGHILL noted that the state put about $300 million into
renewable power and asked the rationale for saying that an IPP
that's state funded will be regulated.
MR. PAWLOWSKI said it's an important policy call to say that
when the state contributes money to a project the RCA should be
involved to ensure that the state's contribution travels through
to the consumer. If the state doesn't have its private risk
capital on the line, then having the RCA regulate the return on
equity or the overall economics of the project is not
appropriate. That should be left to the commercial negotiations
between a regulated utility and the IPP.
SENATOR MCGUIRE added that that too was part of the compromise.
2:00:13 PM
BOB PICKETT, Chairman, RCA, said he's available to answer
questions.
CHAIR FRENCH asked if he'd like to amplify or correct the record
about anything he'd heard so far.
MR. PICKETT clarified for the record this will be a policy call
for the Legislature. The RCA hasn't adopted a position on SB
277, but they have had conversations with the sponsor's staff to
identify areas that should be considered.
CHAIR FRENCH asked if he agrees that five months is a realistic
estimate for how long it might take to apply for and obtain an
exemption.
MR. PICKETT replied, "Given our workload, a four to five month
timeframe would not be unrealistic." The maximum statutory
period is six months.
CHAIR FRENCH asked what factors RCA would consider when it
analyzes the application.
MR. PICKETT replied it would essentially be a rate case.
2:01:57 PM
STUART GOERING, Assistant Attorney General, Civil Division,
Commercial and Fair Business Section, Department of Law (DOL),
informed the committee that he had been assigned to advise the
RCA. Responding to Senator French's last question about RCA
approval of an exemption, he explained that the standard in AS
42.05.711(d), which is the RCA's power to partially or wholly
exempt public utilities from regulation under the Public
Utilities Regulatory Act, is a question of whether or not the
exemption is in the public interest. The evidence presented by
the applicant and other parties who might intervene in the
process would certainly be included in the determination, but
generally the public interest looks at factors that are similar
to those in an application for a Certificate of Public
Convenience and Necessity (CPCN). That is if there is a public
need for the public utility service and if there is some
demonstration that, even with the exemption, the applicant would
be able to provide the public utility service on a reasonably
continuous and reliable basis.
2:03:10 PM
SENATOR EGAN joined the committee.
CHAIR FRENCH asked if in this case it would be a factor in the
RCA's considerations that the IPP is selling power to a utility
in an arm's length transaction and that the resulting power
selling agreement is subject to RCA approval.
MR. GOERING said that has been a consideration in the past and
was found to be a compelling factor in the Fishhook Renewable
Energy application for an exemption. In that case the RCA
specifically found that the sole customer of the project was
going to be a sophisticated regulated utility and therefore
there was no public interest reason to regulate the project as a
public utility. He emphasized that in any given situation the
RCA's determination is based not only on past considerations,
but also by the factual evidence that's brought by the
contracting parties and other interveners. He noted that in this
case, no interveners had problems with the analysis, but it's
difficult to say that the RCA would handle every exemption
application in the same way.
2:05:34 PM
CHAIR FRENCH said that's an important caveat. He asked how much
power was at stake in the Fishhook application.
MR. PICKETT answered it was a small, 2 megawatt hydro project
that had firm and dispatchable power, as opposed to intermittent
power. He added that it hasn't been discussed, but there has to
be an interconnection agreement between the IPP and the utility,
and the utility's perspective may be that expenses may be
required to connect and maintain system reliability.
CHAIR FRENCH asked if that negotiation would be separate from
the power sales agreement.
MR. PICKETT said the technical issues would have to be addressed
in a separate interconnection agreement.
SENATOR MCGUIRE asked if the commission had discussed adding
positions or establishing a separate section within the RCA to
deal with renewable energy.
MR. PICKETT replied the RCA has received 3-4 year stimulus
funding for two positions to target this subject. One position
is a financial analyst and the other is an engineering position.
2:08:12 PM
MARILYN LELAND, Executive Director, Alaska Power Association,
said APA is the trade association for more than 30 utilities in
the state. She related that APA members provide power to most
Alaskans and she is testifying in opposition SB 277. She asked
that the letter that APA sent to the sponsor when the bill was
initially filed be made part of the record. It details some of
APA's concerns and states that they couldn't support the bill at
that time. Since then the APA board has met to discuss the bill
more thoroughly and they voted unanimously to oppose the bill
for the reasons stated in the letter.
APA believes that the exemption may not be necessary. Under
federal law, renewable energy utilities that propose to sell
power only to another electric utility can already become exempt
from state regulations by becoming a qualifying facility. They
can also petition the RCA to become exempt by demonstrating that
the exemption would be in the public interest.
MS. LELAND said a primary concern is that the exemption may
impair the ability of the RCA to ensure that the rates, terms,
and conditions of service are just, reasonable, and non-
discriminatory. In the case of a utility entering into a power
purchase agreement with an exempt facility, the RCA would have
to approve the agreement because the utility is regulated.
However, the RCA could not compel the IPP to provide full access
to its costs. This could be particularly problematic if the
exempt facility was selling power to more than one utility. The
big concern there is that the IPP could broker different deals
with different utilities. That is not in the public interest.
One suggestion the commission made to the sponsor was to hold a
meeting of all interested parties to discuss the issues. We're
again making that suggestion, she said.
2:11:13 PM
DEAN THOMPSON, Legal Counsel for Alaska Power Association, said
he also represents several electric utilities that are members
of APA and he regularly practices before the RCA. He clarified
that APA's concern is to ensure that the public interest is
protected and that the RCA is equipped to protect the public
interest in these cases.
MR. THOMPSON reiterated Ms's Leland's statement that a majority
of renewable resources facilities would be able to be exempt
from RCA regulation by becoming a qualifying facility. Earlier
he heard a statement that facilities don't want to go that route
because that involves forcing the utility to purchase power from
the IPP, but that need not be the case. There are qualifying
facilities that enjoy the benefits of exemption from regulation
by RCA, but if they have a product to sell at a price and under
terms and conditions that a utility would find beneficial, they
are free to do that. He said he understands the dichotomy
between qualifying facilities and independent power producers,
but he doesn't see that becoming a qualifying facility is
unappealing. It's a simple self-certification process with FERC.
CHAIR FRENCH asked if the CIRI project is too large to qualify
under that federal statute.
MR. THOMPSON said if the CIRI project is above 30 megawatts it
wouldn't have exemption from state regulation, but that goes to
another issue with the bill, which is that the limitations are
very broad. It applies to a CIRI wind farm and all sorts of
projects that could be developed in the next several years.
Moreover, it would apply to facilities that use waste heat
energy. This could mean cogeneration, which means the Ship Creek
Power Plant that uses natural gas for a thermal purpose when the
real goal is to use natural gas to produce electricity to sell
to the utilities.
2:15:09 PM
CHAIR FRENCH asked if the Ship Creek facility would generate
electricity entirely from renewable energy including the
cogeneration portion.
MR. THOMPSON replied he believes that would be the case since
the statute referenced in the bill includes waste heat recovery.
He explained that often the electric cycle of cogeneration is
produced from the leftover heat from a thermal cycle, but at
bottom the thermal cycle is fueled by natural gas or diesel or
some other fossil fuel. He said he realizes that particular
aspect probably wasn't intended, it was simply convenient to
reference that statute. That demonstrates how broad this
exemption actually is and it's a concern, he said.
CHAIR FRENCH said he doesn't see how you get to "entirely" if
the thermal cycle is fueled from natural gas, which wouldn't
qualify.
MR. THOMPSON said the thermal process typically wouldn't be a
regulated utility service. He continued:
Say the facility is producing heat to warm fish
hatchery water, so they use the fossil fuel to
generate that heat process. That's not typically
regulated by the RCA and then whatever waste heat that
results from that, they convert that to electricity
and sell that. In the Lower 48 there are a number of
processes like that that make sense and Alaska hasn't
seen those types of projects. Typically it's difficult
to find a truly useful and beneficial thermal process,
but the developer wants to sell the electricity so
they invent a thermal process in order to either get
qualifying facility status to compel the utilities to
purchase power as we discussed earlier or in this case
it would be to enable them to become exempt from RCA's
regulation.
CHAIR FRENCH asked him to continue with his prepared testimony.
2:18:12 PM
MR. THOMPSON restated that APA's interest is to ensure that the
RCA has the ability to protect the public interest. They have
the expertise to do that. He related that the main argument he's
heard for this bill is that RCA regulation is a large impediment
to development of renewable resources facilities, but having
gone through certificate proceedings, rate cases, and public
interest exemption cases, he questions how large the burden is.
He said he has heard that it's a four to five month timeline to
grant an exemption from regulation, but the commission can move
faster than that if there's a good reason. A request for
expedited consideration in some cases requires a certificate of
public convenience and necessity, which isn't difficult but it
does take time. You have to prove that you're able to provide
the service and you have to prove that it's in the public
interest.
MR. THOMPSON said the goal of rate regulation is to ensure that
the utility and ultimately the utility's end use customers don't
pay rates that are unjust or unreasonable. Typically the utility
will enter into a long-term, 20 plus year, contract with the IPP
because that's the only way these projects get financed.
Ordinarily the commission looks at the rate adjustment
procedures in the contract or how that contract compares to
other contracts to other customers to ensure that the public is
protected.
MR. THOMPSON pointed out that in some cases the utilities that
want to purchase power from an IPP will support the request for
an exemption, but this broad statutory fix would put an absolute
exemption on whatever project. It may not always be a good idea
and the utility isn't always going to know if it's in the public
interest for the entities to be unregulated until the contract
is negotiated or close to that point in time. But once this
statute is adopted, the RCA will lack jurisdiction to regulate
service.
He said the problem with the argument that the public utility
can protect its rights when it negotiates the contract with the
IPP is that it doesn't adequately contemplate unforeseen
circumstances and unresolved disputes. When the utility is
regulated and there's an unresolved dispute, the utility can go
to the RCA and complain and the RCA can review the situation.
With this broad statutory exemption, the utility's only recourse
is to file a complaint in state or federal court. This is
costly, involves huge delays and sometimes a request for
injunctive relief. Ultimately you're dealing with an adjudicator
who doesn't understand the subtleties of utility rate making or
cost allocation. Whereas the RCA is a very convenient forum for
adjudicating complaints in these very long-term contracts.
2:23:50 PM
CHAIR FRENCH asked him to comment on Ms. Leland's concern that
there could be situations in which an IPP has brokered different
deals with different utilities, and why that would be a concern.
MR. THOMPSON said some of the most contentious rate cases he's
participated in at the RCA were between Chugach Electric
Association and its wholesale customers. They have long-term
power sales agreements, but when they have a dispute it's about
rates and costs and all the things the RCA looks at. In
addition, there have been allegations from one wholesale
customer that Chugach cut too good a deal for one of the other
wholesale customers, which is discriminatory. The most recent
case involved how firm the service was to one customer. Chugach
and that customer agreed that the rate and the interruptibility
were reasonable, but the other wholesale customer thought that
the deal they cut was too good. That dispute was taken to the
RCA for adjudication.
In the IPP context it might be that a subsequent customer
imposes degradation of the reliability of service to the other
customers. Then you'd have to look at the contract to see the
reliability of service that was contracted. To sort this out you
have to get into the operational data of the facility and
compare the contracts. The RCA does a good job at this sort of
analysis.
MR. THOMPSON said he understands that it's a completely
different situation for IPPs in the Lower 48 because they're
supplying power into a very robust competitive grid with
regional transmission organizations. This is mostly interstate
commerce so FERC has jurisdiction, but FERC has allowed IPPs to
set market-based rates because the market is regulating
wholesale transactions. He said he can't speak for Hawaii, but
in Alaska wholesale competition is not robust. There are few
buyers and even fewer sellers and the market can't be depended
upon to do the regulating. The RCA is charged by statute to do
that and has been doing so for the last 30 years for these types
of transactions.
2:28:30 PM
MARK FOSTER, Principle, Mark A. Foster and Associates, said his
testimony represents his own views and not necessarily any past,
present, or future client. He related that he was an APUC
commissioner when the telecommunications market was opened to
competition. Subsequent to that he worked in the energy industry
and other regulated industries looking at transactions between
IPPs, industrial buyers, and the utilities. He said he was
struck by how much of the testimony on this legislation
parallels the conversations about telecommunications competition
in Alaska in the '80s and '90s.
MR. FOSTER encouraged the committee to review AS 42.05.800 for
the findings of the bill that opened the market to competition
and some of the purported benefits. He suggested they think back
on that and look at today's market and realize that there were a
number of benefits that were generated from opening the market
to new players. It basically changed the pricing around and let
new and innovative things come into the marketplace. As a
general proposition I would encourage the committee to consider
moving in the direction of SB 277 and create less regulation for
the new players to get into the marketplace, he said.
MR. FOSTER mentioned the particulars in Section 3 and suggested
that instead of placing a narrow timeframe as it does on lines
9-10, another alternative is to extend that out to allow more
opportunity for biomass, geothermal, tidal, or hydro IPPs
because project development lead time takes a fair amount of
time. Keeping it narrow might unduly narrow the availability of
IPPs to take advantage of this light regulation scheme.
"Ultimately if you sell to a regulated utility, there will be
limits on the kinds of deals you can cut and the utility getting
those approved, as we've learned all too well in the gas markets
in Cook Inlet," he said.
CHAIR FRENCH said he's been analyzing this from the perspective
that the utility and the IPP are sophisticated business entities
that are operating in an arms-length transaction and with the
ability to agree to or reject the offerings that will take place
in the course of negotiating their power sales agreement. He
asked Mr. Foster if he sees this as a protection for consumer
that's built into the negotiating process.
MR. FOSTER replied a utility that is considering buying from an
IPP or a QF will evaluate their avoided cost for each option. If
an IPP has the better idea and a power block that they can sell
at less cost, they have leverage in the negotiation. The utility
can look at it as an opportunity to get lower cost power to
their rate payers. The tension that you ultimately face is the
extent to which someone can compel you to buy cheaper power. In
that regard, there is certainly the federal qualifying facility
regime. In the history of the APUC and RCA there are instances
of other entities going directly to the RCA saying they are
offering the better deal and the utility should therefore be
buying their power. There is that tension but utilities
basically have a concern about spending a lot of money defending
those kinds of cases. He suggested that one way to get through
that is to ultimately ask the RCA to streamline that process
rather than taking them on an ad hoc basis, one at a time. That
may be an area where additional regulatory clarity would be
helpful, he said.
CHAIR FRENCH closed public testimony and announced he would hold
SB 277 in committee.
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