Legislature(2021 - 2022)ADAMS 519
04/15/2021 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Power Cost Equalization Then and Now | |
| Power Cost Equalization Program and Fund: Legislative Finance Division | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 69 | TELECONFERENCED | |
| += | HB 71 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
April 15, 2021
1:35 p.m.
1:35:08 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:35 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Bryce Edgmon
Representative DeLena Johnson
Representative Andy Josephson
Representative Sara Rasmussen
Representative Adam Wool
MEMBERS ABSENT
Representative Bart LeBon
Representative Steve Thompson
ALSO PRESENT
Alexei Painter, Director, Legislative Finance Division
PRESENT VIA TELECONFERENCE
Meera Kohler, Retired President and CEO, Alaska Village
Electric Cooperative.
SUMMARY
PRESENTATION: POWER COST EQUALIZATION
Co-Chair Foster reviewed the meeting agenda.
^PRESENTATION: POWER COST EQUALIZATION THEN and NOW
1:36:12 PM
MEERA KOHLER, RETIRED PRESIDENT AND CEO, ALASKA VILLAGE
ELECTRIC COOPERATIVE (via teleconference), provided a
PowerPoint presentation titled "Power Cost Equalization
Then and Now: Presentation to the House Finance Committee,"
dated April 15, 2021 (copy on file). She began on slide 2
showing a historical map of Alaska's early electrification.
She shared that 1890 was the first time there was any
history in Alaska accompanied by the gold rush days. At the
time, Alaska had a population of 32,000, about the same
number of people that Alaska Village Electric Cooperative
(AVEC) currently served. By 1900, Alaska's population had
doubled because of the gold rush in various parts of the
state, mostly in Nome. Electricity was scarce and only
available in those communities where there was some sort of
resource development activity underway. For example, at the
time, gold mining was going on in Juneau. As a point of
interest, Alaska Electric Light and Power, the electric
utility that currently served Juneau, opened in 1893.
Ms. Kohler continued that Nome also had gold mining
activity and electrified with diesel power. Cordova's
Kennecott Copper Mine started in the early 1900s and with
it came electricity. Many people were not aware that the
first oil development was in Katalla, an area in Southeast
Alaska between Cordova and Yakutat. Anchorage was a tent
city of about 2,000 people. Its first electric plant was a
9,000 kilowatt (kW) coal-fired steam system. It was all of
the demand that existed at the time. The hydroelectric
project that currently operated in Eklutna and served Eagle
River, Matanuska Electric, and Anchorage, was developed in
the late 1920s by a private developer. It was later sold to
the Municipality of Anchorage and eventually taken over by
a small Alaska power administration. Alaska had a federal
power administration to manage the two major power projects
- the Eklutna project and the Snettisham project that
served Juneau.
Ms. Kohler recounted that until the Rural Electrification
Act was passed in 1935, following the depression, there was
no rural electrification anywhere in the country. She noted
that 90 percent of rural Americans did not have access to
electricity which was true for rural Alaskans as well. The
first electrification that took place under the Rural
Electrification Act was when the pioneers were resettled
from the Midwest to the Palmer area. About 1,000 families
were resettled. They started the effort to develop
Matanuska Electric Association so that they could receive
power from the Eklutna Project. The Matanuska Electric
Association was formed in 1940. Shortly afterwards, other
cooperatives formed.
1:41:17 PM
Ms. Kohler highlighted that Alaska was the most heavily
cooperative state in the nation. She indicated that at
least 75 percent of Alaska's population was served by an
electric cooperative rather than by a municipal utility or
an investor-owned utility which was the norm in the Lower
48. The rural hub communities were energized in the early
1960s such as the communities of Naknek, Dillingham, and
Kotzebue. They were all diesel-fired utilities.
Ms. Kohler moved to slide 3 to discuss village
electrification. There were about 200 very small,
scattered, and hard-to-reach villages in Alaska. It
remained a challenge to reach them but less so, as there
was air traffic and barge service available. There were
cases of spotty electricity in the villages mostly because
large commercial enterprises, such as the Alaska Commercial
Company, established large stores in communities where
there was typically fish processing or other activities
taking place. They would energize nearby homes or
businesses during the time they were in operation. The same
applied to schools. Schools that had self-generation that
occurred on a seasonal basis would extend power to some of
the homes and businesses around them. There was virtually
no village central station service before 1960.
Ms. Kohler pointed out there was also no Alaska Energy
Authority (AEA) in the 1960s. The Alaska Energy Authority
was originally formed as the Alaska Power Authority
established in 1972. The Alaska Public Utilities Commission
(APUC) was established and became more ubiquitous in the
early 1970s. Currently they were the Regulatory Commission
of Alaska (RCA).
1:43:44 PM
Ms. Kohler turned to slide 4 titled "Seeking the Way
Forward." Rural Alaska wanted to have power which led to a
movement to bring electricity to the villages. Governor
Hickel, in his first term in the mid-1960s, appointed a
task force which included Willie Hensley, Dian Carpenter,
Jimmy Hoffman, Morris Thompson, and David Peterson. They
looked for solutions to bring electricity to villages in
Alaska. They were dedicated to their job meeting several
days at a time as often as a couple of times per month. The
task force identified the cooperative model as the best
fit. The Alaska Village Electric Cooperative was
incorporated in 1967 and required funding. The funding
source for AVEC was a $5.2 million loan from the Rural
Electric Administration (REA), currently known as the Rural
Utility Service (RUS).
Ms. Kohler continued that the RUS was highly skeptical that
a cooperative model could succeed. The villages were remote
and not connected to each other. In order for the
cooperative to function, it had to have a headquarters
distant from the villages it served. Anchorage was selected
as the headquarters location rather than Bethel, as Bethel
was too small and did not have enough hub-related activity.
A condition of AVEC membership was that a community had to
have a working government of some kind that could provide
direct oversight in the communities of the village
operations. The requirement triggered a wave of
municipalities to form in rural Alaska.
Ms. Kohler elaborated that the majority of second-class and
third-class cities were established for the sole purpose of
getting electricity from AVEC. She reported that AVEC
executed agreements with the village municipalities in
which the cooperative would build a plant and own the
facility while the local government would hire the power
plant operators and provide supervision of the power plant
operation. The arrangement allowed AVEC to have a more
meaningful operation in the villages. She noted that 80
percent of the residents had to sign up for service paying
a $5 membership fee and becoming a member of the
cooperative. Another requirement was that the Bureau of
Indian Affairs, the entity operating the schools in the
villages at the time, had to sign up to be an anchor tenant
guaranteeing to buy electricity of an amount sufficient to
carry a large portion of the operating costs in each
community. She explained that without the schools as anchor
tenants the cost of electricity in the villages would be
much higher than it was presently.
1:47:42 PM
Ms. Kohler advanced to slide 5 which provided a picture of
Alaska before the Trans-Alaska Pipeline System (TAPS) went
into operation in 1977. There was virtually no transmission
in Alaska other than a transmission line built by Chugach
Electric in 1968 to connect a power plant in the Beluga
River gas field to Anchorage. The gas field was developed
in the 1960s and was heavily subsidized to make it a
functional source of energy for South Central Alaska. It
was a pillar of Southcentral electrification. Most of the
homes and businesses in Anchorage were heated with diesel
fuel and coal until TAPS was built and Enstar was able to
bring gas into Anchorage.
Ms. Kohler reported that Fairbanks relied on local heavy
oil and coal. Presently Fairbanks remained reliant on those
sources of power, although it imported a significant
portion of its power from South Central Alaska with the
intertie the state built. Diesel fuel was the primary
energy source elsewhere in the state. About 120
megawatts (MW) of hydro power existed in the state: The
Eklutna Project; the Cooper Lake Project which produced
20 MW and was built in the mid-1950s by Chugach Electric;
the Snettisham Project in Juneau; and a few small projects
scattered throughout Southeast Alaska.
Ms. Kohler addressed slide 6 titled "Then Came Oil - 1977."
Oil came and along with it came royalty and taxes. The
state was swimming in revenues and began trying to
judicially spend its wealth. The state did an excellent in
recognizing that underpinning all economic development and
activity was a reliable and affordable energy system. The
state started looking at how it could deliver affordable
energy across its expanse.
Ms. Kohler continued that the state started on a
transmission project to build a tie line to Fairbanks. It
would allow Fairbanks to start importing energy from South
Central Alaska. The Susitna mega project had been
considered in the 1950s but had been shelved. The project
was reignited in the late 1970s. The Alaska Energy
Authority (AEA) was formed to develop these hydro projects.
She noted that the Bradley Lake Project outside of Homer
was started when the Four Dam Pool projects were built
hydro projects in Valdez, Kodiak, Ketchikan, and one that
served Wrangell and Petersburg. She reported that a massive
study was commissioned to identify projects that could help
reduce the cost of power across the state.
Co-Chair Foster recognized that Representative Rasmussen
had joined the meeting.
1:51:12 PM
Ms. Kohler moved to address slide 6 to explain the
evolution of Power Cost Equalization. As the state was
doing studies to find solutions for rural Alaska, the oil
embargo occurred in the late 1970s. At the time the cost of
oil skyrocketed dramatically increasing the cost of fuel to
rural Alaska. The state implemented a short-term, 1-year
Power Production Cost Assistance (PCA) Program. It was
specifically aimed at the high cost of diesel fuel. The
utility was subsidized directly to reduce the cost of fuel
for their communities.
Ms. Kohler continued that the following year the program
was transitioned out and replaced with the Power Cost
Assistance Program. The program was never intended to be a
long-term program, rather, it was intended to
self-extinguish within 5 years. She elaborated that the
floor (the minimum to which the electric cost would be
lowered) and the ceiling (the maximum assistance that would
be given) came together quickly over a 4-year period. The
program essentially phased out within a 5-year period.
During that time, the legislature received a report from
Stone and Webster, the company who did a massive study, and
determined that there was not silver bullet solution for
Alaska. The company recommended that a long-term permanent
subsidy be put into place until such time as new and less
expensive generation and transmission options came into
being. It became the Power Cost Equalization (PCE) Program.
There was a straight transition from the PCA Program to the
PCE Program.
Ms. Kohler under the PCE Program, any utility that used
diesel to generate at least 75 percent of its electricity
during the full calendar year of 1983 would automatically
be eligible to participate in the program. If they were
eligible in 1983 due to their 1983 production, even if they
were later able to generate their power by other sources
such as hydro, solar, nuclear or wind, they still remained
eligible for PCE.
Ms. Kohler continued that the cost of power was equalized
to the average of the cost of power in Anchorage,
Fairbanks, and Juneau. At the time the amount was set at
$.085 per kilowatt hour (kWh). The amount was actually
slightly higher than the cost per kWh in the three
communities, but the amount was a fair compromise. The
ceiling was set at $.525/kWh. She detailed that if a
utility incurred costs that were higher than $.525/kWh the
costs above $.525/kWh were not considered in the PCE rate.
Ms. Kohler furthered that at the time, in 1984, there were
one or two communities whose cost of electricity was more
than $.525/kWh. She noted Lime Village, a very small
Interior community, with a population of 19-20 people.
Their power had always been very expensive because small
quantities of fuel were flown in. At the time, the cost was
more than $1/kWh. Presently, the cost was over $2/kWh. She
reiterated that costs about $.525/kWh were not covered.
Ms. Kohler cited that all users of electricity were
eligible for PCE on the first 750 kWh used. Community
facilities providing a public service such as street
lights, city halls, girls' and boys' clubs, and water and
sewer treatment facilities, were eligible on all of the
kWhs they used. It was determined by a formula: 70 kWh was
the allowable limit every month for each resident of the
community that they could use community facility PCE. As a
practical matter it was more than enough for most
communities. Very few communities went above the threshold
of their community facility PCE usage.
1:56:16 PM
Ms. Kohler advanced to slide 8. She would provide a quick
overview of AVEC and tell members where AVEC was presently.
As she pointed out earlier, AVEC was incorporated in 1967
and, by the end of 1968, had already built generation and
distribution facilities to serve three communities. The
intent of AVEC was to develop electric service for up to
ten communities per year. She noted that in those days the
cost to build a generation and distribution facility in a
village was typically less than $100,000. Currently, the
cost was 20 to 50 times that amount. Presently, Avec served
58 communities. The cooperative just added a 59th
community, the community of Twin Hills. It was not yet
completely an AVEC community but, it would be soon. Twenty
of the communities received part of their power from
renewables. In the community of St. Mary 49 percent of the
electricity that was consumed in 2020 came from wind. She
thought it was a remarkable number.
Ms. Kohler reported that AVEC had 49 power plants and
served a population of 32,000. The cooperative represented
about 38 percent of the total PCE population and about 41
percent of the total PCE that was consumed. The smallest
AVEC community was less that 100 in population. She noted
Shageluk was the smallest AVEC community, with at least 4
or 5 communities with less than 100 people. She reported
that Anvik and Shageluk competed to be the smallest
community every year. Bethel was the largest AVEC community
with a population of more than 6,000. She offered
perspective that Anchorage had a population of almost
300,000. The average size of an AVEC community, other than
Bethel, was less than 400. She added that over 90 percent
of the population AVEC served was Alaska Native.
Ms. Kohler posed the question on slide 9: "Why are we
subsidizing Rural Alaska?" She answered that it was the
compromise that was reached in 1984 when the legislature
recognized there was no other answer to bring affordable
power to rural Alaska. By comparison, in 1985, the cost of
diesel for the average PCE utility was $1.17 per gallon
which was 25 times the cost of 1,000 cubic feet of gas in
the Railbelt a remarkable difference. Another issue was
that billions of dollars were being spent or committed to
reduce power costs for urban Alaskans. She added that
Railbelt communities in South Central Alaska were presently
and had always been heavily subsidized in terms of what the
cost of the natural gas used to generate all of the
electricity and space heat. By contrast, in Rural Alaska
PCE only impacted 30 percent of the electricity sold and
did not touch heat. Even in the present day the taxes on
Cook Inlet gas were capped at $0.177 per thousand cubic
feet. It equated to about $.025 per gallon of diesel fuel.
2:00:40 PM
Ms. Kohler addressed the PCE Endowment Fund on slide 10.
The fund was established in 2000 via House Bill 446. It
followed chronic underfunding of the PCE Program. After the
first few years of the program being established, there was
an annual battle at the legislature about who would support
funding for PCE. There was a constant rural-urban jockeying
which made it clear something had to be done to preserve
the program. Establishing an endowment fund for rural power
ensured that the source of funding came out of the
endowment rather than the general fund.
Ms. Kohler discussed how the PCE Endowment Fund was
capitalized. In 2001, the fund received $100 million from
the Constitutional Budget Reserve (CBR). At the time, it
was determined that the Four Dam Pool Hydro projects were
going to be sold back to the communities they served for
about $70 million and was added to the $14 million in
reserves totaling $84 million. In FY 07 Governor Murkowski
authorized a deposit of $182.7 million into the endowment
fund, and a final deposit of $400 million was made in
FY 12. The total deposited into the endowment fund was
approximately $765 million to fully capitalize it to spin
off enough money to provide for PCE into the future. She
pointed out that in 2008, when there was an enormous spike
in the cost of oil, the cost of PCE was almost $50 million.
The state needed to have a corpus large enough to earn that
kind of money.
Ms. Kohler reported that the fund had done well. Part of
the reason for its success was the inclusion of language
requiring that the amount available for PCE was 7 percent
of the average balance of the preceding 3 years. Once the
fund was fully capitalized, it spun off enough money to pay
for PCE. However, it took several years before it was fully
funded. At the end of March 2021, the value of the fund was
$1.13 billion. In FY 19 the fund earned $74 million, and in
FY 20 it earned $48.3 million. In the current fiscal year
$56.4 million had been withdrawn to pay for PCE and
municipal assistance.
2:04:24 PM
Co-Chair Foster recognized that Representative Edgmon
joined the meeting earlier.
Ms. Kohler continued that in 2016 SB 196 was enacted and
proposed changes to the way the endowment fund was invested
and operated. Originally when the fund was created, it was
expected and invested to yield a return of 7 percent per
annum, which meant that it was very high risk. As a result,
when the state had a serious downturn the value of the fund
declined 40 percent. She noted that the same decline was
seen with the Permanent Fund and other funds of the state.
It was too high of a risk to tolerate. The bill changed the
return to 5 percent which led to the fund being more
conservatively invested.
Ms. Kohler continued that the legislation also limited the
amount that could be withdrawn to 5 percent of the corpus.
The bill included language that allowed 70 percent of the
excess earnings of the fund above the amount needed for PCE
to be available for other purposes. The bill also defined
how the excess earnings could be used. The first
$30 million of excess earnings could be used for municipal
assistance revenue sharing. Anything above that up to $25
million could go to the renewable energy fund or be used
for rural power system upgrades or bulk fuel facility
upgrades. Any remaining funds after the specified uses
would stay in the corpus of the fund.
Ms. Kohler reported there had not been a year in which
there were so much excess earnings that the municipal
assistance was funded at $30 million and the renewable
energy fund was funded at $25 million. The best the fund
had performed was 3 years prior when the excess earnings
funded municipal assistance at $30 million and the
renewable energy fund at $15 million.
Ms. Kohler would discuss how PCE was funded on slide 11.
The governor's budget included PCE in AEA's operating
budget. The funding source for the program was typically
the PCE Endowment Fund, as was the case in the current
year. An alarm sounded for some people a couple of years
prior when the governor pegged the general fund as the
source to fund the PCE program. There had been talk about
rolling the endowment fund into the general fund which
would have meant struggling to finance the program similar
to the struggle from 15 years prior.
Ms. Kohler continued that the governor's budget included
the funding for PCE. The legislature would decide on the
final amount and the funding source. If the legislature
appropriated less than was needed for the program, the
Regulatory Commission of Alaska (RCA) would prorate the PCE
rate for all utilities to match the amount that was
available. Between 1992 and 2007 PCE was prorated for
15 years, sometimes by as much as 50 percent of what was
needed. The endowment fund was intended to replace general
funds to fund PCE, and there had been no draws on the
general fund since 2014. Once the endowment fund approached
the full funding level, it could spin off enough in
earnings under the 3-year average scenario to fully pay for
PCE. Since 2008, PCE had cost a total of $424 million of
which $349 million had come from the endowment fund.
2:08:55 PM
Ms. Kohler reviewed the mechanics of PCE on slide 12. In
order to be eligible for PCE, 75 percent of the power that
was generated had to have been from diesel fuel. A utility
submitted a very detailed cost and operational data to the
RCA. The Regulatory Commission of Alaska then determined
which of the costs were eligible, sometimes rejecting
certain costs, then computed the PCE rate. In turn, the
utility billed its customers for its tariff and showed the
amount of PCE credit on each bill. She indicated there was
specific language required to appear on bills that
indicated the PCE credit paid by the State of Alaska. the
customer was required to pay the bill after the PCE credit
was applied.
Ms. Kohler continued that the utility took all of its bills
and submitted a request to AEA for a reimbursement of the
PCE credits applied to its electric bills. In turn, AEA
reviewed the reports and reimbursed the utility for PCE.
The utility had to file an annual updated report with the
RCA detailing the prior year's activities. Based on the
report, the RCA recalculated the PCE rate. Every time a
utility had a fuel cost change up or down the utility was
required to file the change within 30 days so that the PCE
rate could be appropriately adjusted up or down based on
the fuel cost. The RCA reviewed non-fuel costs every 3
years to 5 years or upon the utility's request. However, it
was typically triggered by the RCA's schedule.
Ms. Kohler would look at the changes that took place
between 1985 and 2020 on slide 13. The floor, which was
$.085 when the program started, was up to $.2063/kWh. It
had increased 2.5 times. In 2008, the ceiling was raised
from $.525 to $1.00. A number of utilities, at least 25 or
30, were above $.525. There were about 8 to 9 utilities
above $1.00 per kWh. The amount of electricity eligible for
PCE was reduced in two tranches but was currently 500 kWh
per month per consumer. Eligible electricity had been
reduced by one-third from 750 kWh to 500 kWh. All
commercial customers were taken off of PCE and could no
longer receive it. Fuel costs had increased modestly.
Although it had gone up 127 percent. In FY 20, the average
cost was $3.07 KWH per gallon of diesel compared to $1.17
when it started in 1984. She pointed out that efficiency
had increased 32 percent. The fuel cost per kWh had gone
from approximately $.1033 to $.1901. She continued that
non-fuel costs per kWh were up 37 percent. She indicated
that figures worked out to less than 1 percent per annum.
They were $.14 in 1985 and $.193 in FY 20. The full cost of
the PCE program in FY 86 was $17.8 million, and in FY 20 it
was $29 million.
2:13:32 PM
Ms. Kohler presented the program changes since FY 86 in a
table on slide 14. The total number of Alaskans served went
from 62,000 in FY 86 to 82,000 in FY 20. Kilowatt sales had
doubled from 225 gigawatt hours (GWh) to 456 GWh. Power
Cost Equalization sales had gone up modestly from 108 GWh
to 131 GWh. She continued that when the program started
48 percent of electricity sold in rural Alaska was eligible
for PCE. Presently, the number was 29 percent. She
highlighted the change in fuel cost per gallon which had
gone from $1.17 to $3.07. The fuel consumed had gone from
21 million gallons to 28 million gallons, a 33 percent
increase while total sales had doubled. The total utility
cost between fuel and non-fuel costs had increased from
$55 million to $174 million. She pointed to the bottom of
the chart that showed the percent of total costs that PCE
covered. In FY 86 the amount was 32.4 percent while in
FY 20 it was only 16.6 percent. The point was that
83.4 percent of all costs were carried by local
communities.
Ms. Kohler advanced to slide 15 to address the most common
question that she received. She was commonly asked whether
most of PCE went to overheads. She responded in the
negative. She explained that of the total amount of PCE
that was allocated only one-third of fuel costs were
covered and none of the non-fuel costs were covered. In
other words, it covered one-third of non-fuel costs and
nothing else. She thought the PCE Program was modest but
supportive of rural Alaska. It kept the lights on and local
governments open. She speculated that without PCE the cost
to small municipal utilities and community facilities would
double or triple overnight. Rural communities would no
longer be able to pay their utility bills. She welcomed any
questions.
2:16:25 PM
Representative Josephson stated he was missing something
fundamental. He heard her say that the cost would be 2 to 3
times higher, but the percentage of the total cost covered
by PCE was 16.6 percent. He wondered how both could be true
simultaneously.
Ms. Kohler answered that it was an interesting conundrum.
She explained that community facilities received PCE on all
of their kWh. In the case of a water facility in a location
where the cost of fuel was higher, PCE would end up
reducing their electric bills by 60 percent to 70 percent
because of the way the rates were structured. For example,
AVEC had a declining rate structure. For municipalities
AVEC structured its rates so that they received highest at
best value for their electricity. They actually paid less
than a residential user for their electricity and they
received PCE for all of their kWhs. In a typical community
residential users would receive PCE for the majority of the
kWh they used in the summer. In the winter electric usage
tended to be higher and the PCE would not apply to all of
the usage. The community facility represented only about 30
percent of the PCE that was provided. However, it was much
more of a substantial cost-reducing factor for
municipalities than for home owners. She reiterated that 70
percent of all electricity that was sold did not receive
any PCE distorting the value of those who receive it.
2:19:03 PM
Representative Wool surmised that the total electricity
cost of $174 million [slide 15] included commercial
customers that did not receive PCE. Therefore, the
16 percent of total costs covered by PCE would have a much
larger impact on the individual users potentially doubling
or tripling costs to residents. He asked if he was correct.
Ms. Kohler replied in the affirmative.
Representative Wool referenced a statement made by Ms.
Kohler that Railbelt communities received subsidies for
natural gas. He hoped Fairbanks was excluded.
Ms. Kohler responded that Fairbanks received a chunk of its
electricity from the Bradley Lake Hydro Project which was
state subsidized. Fairbanks also bought economy energy when
it was available. The transmission line that brought
Southcentral and Fairbanks economy energy was Chugach
Electric. She was trying earlier to quantify economy
energy. She explained that when the intertie was energized
Fairbanks was 100 percent dependent on oil and coal. At the
time they only had Healy 1. The majority of Fairbank's
electricity came from heavy oil.
Ms. Kohler recalled that Fort Knox's electric bill went
down by 50 percent when the economy energy started flowing
up the transmission line from Southcentral Alaska.
Currently, she did not believe Fairbanks was getting nearly
as much economy energy. She relayed that economy energy
resulted from all of the systems on the common transmission
line having to maintain a set amount of spinning reserve to
provide stability to the system. If a generator went down,
the spinning reserve would crank up to provide the energy
that went down. It was a substantial size of spinning
reserves, typically 100 MW. The spinning reserve was
surplus electricity that could be used on an interruptible
basis to satisfy the needs of the Southcentral utilities.
It was shipped to Fairbanks for use. Fairbanks was just
paying the incremental cost of the gas that was used to
generate electricity. It was not a substantial portion of
Fairbanks' energy source like it had been 20 years prior.
The balance had changed over the years.
Ms. Kohler agreed with Representative Wool that Fairbanks'
cost of energy was substantially higher than Southcentral
Alaska. However, the fact that the floor for PCE was at
nearly $.21 per kWh, pointed out that the average cost of
kWh for Anchorage, Fairbanks, and Juneau was quite high.
She confirmed that Fairbanks was, by far, the highest. Her
cost of electricity in Anchorage was about $.22 per kWh
while Fairbanks' cost was $.24 per kWh. Juneau's average
cost was $.12 to $.13 per kWh.
2:23:11 PM
Representative Wool stated that Fairbanks did get a portion
of its electricity from Southcentral and from Bradly Lake.
He argued that the spinning charges were high. He knew that
PCE went to offset electric bills. He asked if there had
been discussions about overall energy costs since other
sources of power other than diesel were being used. He
wondered if there was a way to fold them altogether. He
suggested that the PCE money could be spent to overall
energy. He knew he was not asking a simple question.
Ms. Kohler responded that her pet project for many years
had been to embrace a plan to tie together all of Alaska
electrically. Alaska lacked a transmission grid even though
it had a transmission system, a radio transmission system
between Anchorage and Fairbanks. However, the vast majority
of Alaska's landmass was unserved by any type of
transmission system which is what necessitated having a
power plant every 30 miles to 40 miles to serve rural
Alaska. It was the reason there were 40 power plants. The
state had managed to build some generation but would always
be a fraction of energy needed to power communities. Until
rural communities could be tied together, it would be
difficult to bring down energy costs in all directions. She
agreed that PCE offered some benefit to the cost of
electricity for a homeowner and did nothing for the cost of
heat.
2:26:00 PM
Co-Chair Foster referenced Representative Wool's remark
that Fairbanks might not be as much of a recipient in terms
of state assistance. He noted that the PCE program was a
program to help support rural Alaska. He had been asked why
the state was supporting rural Alaskans' energy needs. He
typically responded that the state had supported the entire
state. He referenced slide 6. He explained that it had
started when the 4-dam pool was first proposed. The state
was going to make a substantial investment in four dams to
help certain parts of the state. It was a deal that was
struck in order to help Alaskans statewide in their energy
needs. The Bradley Lake Project was later added to the list
along with the transmission line that was already mentioned
that ran to various other parts of the state. It was a
grand package that helped Alaskans overall.
Co-Chair Foster explained that the PCE Fund was a fund with
spin-off earnings that paid for assistance to rural
communities. There were other more recent things the state
paid for. He noted that a little under 10 years ago
Anchorage had started to see brownouts and there was a need
to spur exploration in the Cook Inlet. The state spent
about $1 billion in tax credits to help with exploration.
He mentioned that the state did not tax the natural gas
that came out of Cook Inlet which was gas that fed
Southcentral. There were numerous things that had been done
to help both the urban and rural parts of the state. He
suggested that some of the things resulting from state
assistance were in the form of hard infrastructure whether
it be the hydro project at Bradley Lake or a transmission
line. They were things that could not be easily liquidated.
On the other hand, the PCE Fund had always been of interest
to some people and a bit of a target. However, the fund was
the best the state could come up with as a compromise
because of the rural communities being spread all over the
state. His answer to the common question he received about
why rural Alaska received PCE funding was that the entire
state had received assistance.
2:30:40 PM
Ms. Kohler pointed out that the state had spearheaded and
taken ownership of the interior utility gas project. The
state had put a significant amount of free and low-interest
money into that project. It also heavily subsidized a
natural gas storage project that was built to boost
electric gas supply for Southcentral Alaska. The incentive
to encourage the development of gas fields, recognizing
that the Alaska market was a small one. The cost to develop
natural gas in Cook Inlet and to keep it flowing was quite
high and had been deliberately subsidized in the form of
reduction tax credits, reduced royalty taxes, and no
production taxes. She asserted that energy was the
underpinning of any economy. Even with the subsidies in
Southcentral Alaska, the cost of energy in the whole state
was high. She thought the state needed to continue working
towards reducing energy costs.
Representative Edgmon thanked Ms. Kohler for the
comprehensive presentation. He looked at Alaska as a
high-cost state in all areas. Alaska had tried to equalize
costs whether through community assistance, bypass mail,
oil tax credits for the Southcentral area, or PCE. The
Power Cost Equalization Program had been around for many
years. He hoped the endowment would continue to grow and
serve its purpose well into the future. He recalled doing
research and found that the only place with a similar
program to PCE was Nova Scotia. He asked if the PCE Program
was unique to Alaska.
Ms. Kohler believed PCE was unique. The only examples that
she could think of that were similar were in national
regimes. She cited Norway as an example. The country had
proactively enacted a policy in which the cost of
electricity was the same no matter where a person was
located in the country. A similar type of program operated
in Canada. She believed that the cost of power in most
communities, at least in British Columbia, was equalized.
She had driven to a small community in British Columbia on
vacation. She inquired about the cost of electricity there.
The person she asked had no idea what they paid per KWH but
indicated their bill was $36.00 every 2 months. They were
paying the same rate as people in the more populated areas
of B.C. but were powered by diesel generation.
2:35:45 PM
Representative Edgmon emphasized Alaska's uniqueness in
terms of the challenge of providing some equality of power.
He thought it was interesting that the governor had
recently introduced a bill to create a green bank in the
state. He thought that with the passage of that bill, the
state might have the opportunity to revisit the whole issue
of the energy challenge in the state that continued to be
daunting.
Representative Rasmussen asked if there were projects that
had been identified more recently that would expand
infrastructure in the energy sector. She thought there
might be an unintended blessing from COVID with funds from
the federal government for infrastructure. She thought an
area of focus might be to work on some of the projects that
would reduce the cost of energy. She believed that both
residents and private sector businesses would benefit from
such projects.
2:37:59 PM
Ms. Kohler replied there was always a long list of energy
projects. The Alaska Energy Authority recently published a
request for proposals to look at the next round of projects
that might be partially financed through the renewable
energy fund. The fund was for renewable energy and energy
conservation including recovered heat. The Alaska Energy
Authority had a list of projects that had been submitted,
but in terms of larger major projects there were not any.
She reported that AVEC had a small hydro power project they
had been pursuing for years in Old Harbor. The project cost
was $10 million and would serve about 250 people. The
cooperative had not been able to find the money for the
project.
Ms. Kohler believed the state needed to embrace a larger
project rather than the smaller one-off project. She
suggested some sort of large generation transmission hub
project that could begin to tie hubs together making power
available for resource development. She noted that Donlin
Creek continued to move in the direction of a gas pipeline
project to serve themselves. She thought it would be
wonderful to build a transmission line that could carry
liquified natural gas from Canada. She mentioned the
Susitna Dam project being shelved in 1986. It would have
been a 1600 MW project and could have produced power for
about $.04 per kWh. The state did not pursue the project.
She asserted that the state needed to be ambitious about
developing large scale generation which would foster
business. The world needed more energy, and Alaska had the
resources. The smaller projects in rural Alaska would not
take the state anywhere in a meaningful way. They were
expensive projects that would not generate high capacity or
reduce the cost of power significantly.
2:41:29 PM
Representative Rasmussen asked what Ms. Kohler would
suggest as the next step for the legislature in
facilitating an early planning stage. She asked if it would
be more appropriate to come from the executive branch as an
RFP for a consultant or whether there was something else to
act on.
Ms. Kohler believed the legislature could appropriate
$5 million to $10 million for the specific purpose of
developing a long-range ubiquitous affordable energy plan/
project for Alaska. The administration could direct it to
the Alaska Industrial Development and Export Authority
(AIDEA) or AEA. She thought AIDEA would be the appropriate
entity to tackle the issue. She did not want to hear about
the loads not existing. They did not exist because the
state did not serve them. She stated it was a classic case
of "build it, and they will come."
Representative Johnson thanked Ms. Kohler for her
presentation. She shared that she had been the president
for the Conference of Mayors about 5 years previously. She
explained that when the mayors got together, the
conversation would inevitably move to the topic of how much
everyone paid per kWh. She had been asked how much she paid
which she did not know at the time. She went home and
looked at her electric bill which showed she was paying
about $.15 per kWh compared to other areas of the state. It
had been an eye opener for her to find that the highest
paid amount in the state was about $.85/kWh. At that point
she decided she would never complain about an electric bill
again.
Representative Johnson believed she currently paid about
$.22/kWh because Matanuska Electric Association (MEA) had
added additional generators for combined fuel. It was
astounding to see how much people paid outside of the
Railbelt and how fortunate the Railbelt was to have the
energy it did. She spoke of having spent time working at
the Susitna-Watana Dam site in the 1980s and thinking the
project would move forward. She agreed that energy was not
a pie that ever got filled. She really appreciated the
presentation and considered it to be visionary. She
asserted that the more people knew about the topic, the
better.
2:46:08 PM
Representative Wool referred to claims that solar and wind
would not significantly decrease electric costs or solve
the high energy cost problem. Rather, something akin to a
distribution of power would be a better pursuit. He argued
that getting distribution to several communities spread
throughout the state would be cost prohibitive and not
really feasible. He thought the distances would be too
great. An advancement in technologies would be a better
solution. He reviewed several possibilities. He asked her
to comment about the unlikelihood of a technological
breakthrough.
Ms. Kohler answered that AVEC had put together the "Alaska
grid" that would build a backbone transmission system that
would be tied to major generation sources such as gas-fired
power plants that already existed across the state. She
mentioned several locations. There was a massive industrial
operation that was taking place in at the North Slope
presently. They were using gas powered generation because
it did not cost much. If a 2GW generation project was
development the state could be use the North Slope gas and
reducing the cost of electricity on the North Slope to
about $.04/kWh.
Ms. Kohler suggested that a transmission grid could use a
high-voltage direct current (HVDC) which was less expensive
to build and had little to no losses in transmission. It
would then radiate across the state to hub communities such
as Kotzebue, Nome, and Bethel. It would form a grid,
although not all communities could be connected, a
substantial number of them could be connected. She reported
working towards the HVDC concept which was being used for
tens of thousands of miles of transmission being built
across the world. Connecting entire countries was becoming
possible with this very feasible and viable technology. She
continued to review her vision.
Representative Wool did not realize that the HVDC, the
Nicola Tesla versus Thomas Eddison, war was still going on.
Ms. Kohler answered in the affirmative and indicated it was
and was doing very well.
2:51:50 PM
Representative Josephson referenced slide 9 of the
presentation. Ms. Kohler had stated that the cost of the
original village plant like the one in Kalskag was
presently 20 to 30 times greater. He asked her if she
recalled saying something to that effect.
Ms. Kohler referenced slide 9. She replied that in 1985,
the first full year of PCE, the cost of fuel to the PCE
facilities was about $1.17 per gallon. The cost of Railbelt
gas at the time was $0.35 per 1000 cubic feet. She reported
that 1000 cubic feet was about 7.5 gallons of diesel fuel.
The equivalent cost of natural gas per kWh and diesel per
kWh was 25 times in rural Alaska.
Representative Josephson recalled that she had stated that
the typical powerhouse used to be $100,000 and now it was
many times that amount.
Ms. Kohler responded that Representative Josephson was
absolutely correct. She elaborated that at the time when
the state first built the power plants and borrowed the
first $5.2 million from REA, the cost to build a system
locally which included 3 generators and a distribution
center to serve about 100 meters was projected to be about
$50,000. The cost today to serve about 200 meters with a
1500 KW plant would be about $3 million for the plant and
with a tank farm and a distribution system the cost would
between $5 million and $6 million. The cost was
substantially more the 50 years prior.
^POWER COST EQUALIZATION PROGRAM AND FUND: LEGISLATIVE
FINANCE DIVISION
2:54:47 PM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
provided a PowerPoint presentation titled "Power Cost
Equalization Program and Fund: House Finance Committee,"
dated April 15, 2021 (copy on file). He would be talking
more about how the state funded the PCE program and how the
PCE endowment worked in practice.
Mr. Painter began with slide 2 providing a brief background
about the find. The PCE program began in FY 85 and was
funded with UGF appropriations through FY 94. Starting in
FY 94 the legislature created the Power Cost Equalization
and Rural Electric Capitalization Fund. It was originally
capitalized from an appropriation out of the Railbelt
Energy Fund. However, the fund did not provide enough
funding to fully fund the PCE Program. There was some
discussion in the late 1990s about a new funding source.
The legislature created the PCE Endowment. The Legislative
Finance Division (LFD) eventually deactivated the code for
the PCE and Rural Electric Capitalization Fund that was
still on the books but was without funding.
Mr. Painter continued that the PCE Endowment Fund began in
2000 with a capitalization from the Constitutional Budget
Reserve (CBR) and the proceeds from the sale of the Four
Dam Pool Hydro Electric Project. The earnings of that were
currently used to fund the PCE Program.
Mr. Painter turned to a bar chart on slide 3 which showed
the history of how the PCE program had been funded since
FY 00. He indicated that the red showed the PCE and Rural
Electric Capitalization Fund which underfunded the program.
Eventually, there were the last few payments out of that
fund and unrestricted general funds began to supplement the
program in FY 09. The PCE Endowment Fund began fully
funding the program in FY 15. He pointed out the trend of
the actual funding amounts. The fund was underfunded in the
early 2000s, the funding amount spiked, then the amount
started to decrease in the previous few years as oil priced
had declined. There had been a small decrease in the amount
required for the PCE Program.
2:57:45 PM
Mr. Painter advanced to slide 4 showing the history of the
PCE Endowment balance. He pointed to the $100 million
capitalization money from the CBR, the increase resulting
from the sale of the Four Dam Pool Hydro Electric Project,
another deposit in FY 07 from the general fund, and another
deposit in FY 12. The growth since then was the result of
investment earnings. Currently, the fund balance was just
over $1.1 billion. He highlighted the substantial growth in
investments in the strong markets over the past decade.
Mr. Painter indicated that slide 5 showed the same
information as the previous one but was in a table form.
The information was from the Treasury Division of the
Department of Revenue (DOR). The actual returns could be
seen on the slide. There had been some negative years in
the bad markets because the funds were invested more
aggressively in the past. There were negative figures in
FY 01, FY 02, FY 08, and FY 09. There had been some
significantly strong returns since then. In a couple of
years there had been earnings of more than 20 percent. In
the current year, the earnings so far had been about $105
million through March 2021.
Mr. Painter reviewed slide 6 titled "AS 42.45.085 - Use of
PCE Funds." In terms of the use of the funds from the
endowment, there was a Point of Market Value (POMV) payout
that was a limit of how much could be spent on the POMV
[PCE] Program. From a practical sense with the current fund
balance, the cost of the PCE Program did not approach the
limit. The limit was 5 percent of the fund value. Since the
fund value was over $1 billion and the program was about
$32 million the limit was not an issue. In 2016 the
legislature passed a bill that allowed the earnings of the
endowment to also be used for additional programs.
Mr. Painter moved to the following slide, slide 7 which
provided a visual to AS 42.45.085 (d) the "PCE waterfall."
Starting with the PCE Fund balance, the statute stated to
take the prior year earnings and subtract the current year
PCE budget to arrive at the excess earnings. The
legislature was allowed to spend 70 percent of the excess
earnings and 30 percent went right back into the PCE
Endowment Fund. The statute indicated that the first $30
million could be used for the Community Assistance Program
and any remaining funds up to $25 could be used for various
energy programs such as the Renewable Energy Grant Fund,
the Bulk Fuel Revolving Loan Fund, or rural power system
upgrades. If there were any remaining funds, which there
never had been, they would be returned to the PCE Fund.
3:00:42 PM
Mr. Painter relayed that slide 8 showed how the PCE
waterfall worked in practice in the current fiscal year. He
explained that the earnings in the prior year referred to
FY 20 because it was the prior closed fiscal year. The
current year (FY 21) PCE budget was $30.6 million which
rendered $17.7 million in excess earnings. He conveyed that
30 percent of the excess earnings equaled $5.3 million and
went back into the fund. The mount available for
appropriation, $12.4 million, could be appropriated to the
Community Assistance Fund. Since that amount was less than
$30 million the waterfall stopped.
Mr. Painter continued that the governor's budget included
the appropriation of $12.4 million to the Community
Assistance Fund. He concluded his presentation and was
available for questions.
Representative Josephson asked where the employees who
administered the PCE Program were housed. Mr. Painter
answered that the program was administered by AEA. The
Alaska Energy Authority's programs were administered by
employees of AIDEA. There was a time in the 1990s when the
program was administered by the Division of Energy within
the former Department of Community and Regional Affairs. He
explained that when the department was dismantled, that
function moved to AEA.
Representative Josephson relayed that if the program was
fully administered by a corporation, the Hickel versus
Cowper case suggested that the fund was not sweep-able. A
previous attorney general stated recently that the fund was
sweep-able. The legislature's attorney stated it was not
sweep-able. He asked if LFD took a position.
Mr. Painter answered that LFD did not take a position on
legal matters. From a practical standpoint, the legislature
had not passed a bill defining what was sweep-able. The
administration's interpretation was the operative
interpretation until a statute was passed to change it or a
lawsuit overturned it. He reiterated that LFD did not have
an opinion on the matter.
Co-Chair Foster announced an amendment deadline for HB 169
for Friday at 5:00 p.m. He reviewed the schedule for the
following morning.
ADJOURNMENT
3:04:43 PM
The meeting was adjourned at 3:04 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| PCE Kohler HFin 04152021.pdf |
HFIN 4/15/2021 1:30:00 PM |
HFIN Presentation PCE |
| LFD - HFIN PCE Presentation 4-15-21.pdf |
HFIN 4/15/2021 1:30:00 PM |