Legislature(1999 - 2000)
02/09/2000 08:10 AM House URS
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON UTILITY RESTRUCTURING
February 9, 2000
8:10 a.m.
MEMBERS PRESENT
Representative Bill Hudson, Chairman
Representative John Cowdery, Vice Chairman
Representative Pete Kott
Representative Brian Porter
Representative John Davies
Representative Ethan Berkowitz
Representative Joe Green (alternate)
MEMBERS ABSENT
Representative Norman Rokeberg
OTHER HOUSE MEMBERS PRESENT
Representative Mary Kapsner
Representative Carl Morgan
COMMITTEE CALENDAR
POWER COST EQUALIZATION
HOUSE BILL NO. 323
"An Act relating to the employment of hearing examiners,
arbitrators, and mediators by the Regulatory Commission of
Alaska; repealing a requirement that the principal office of the
Alaska Oil and Gas Conservation Commission move to the same
location as the principal office of the Regulatory Commission of
Alaska; relating to the sharing of record-keeping facilities and
clerical staff by the two commissions; and providing for an
effective date."
- SCHEDULED BUT NOT HEARD
PREVIOUS ACTION
No previous action to record.
WITNESS REGISTER
ERIC YOULD, Executive Director
Alaska Rural Electric Cooperative Association
703 West Tudor
Anchorage, Alaska 99503
POSITION STATEMENT: Provided a presentation on power cost
equalization (PCE).
JOE GRIFFITH, CFO
Chugach Electric Association, Inc., and
Member, PCE Blue Ribbon Committee
5601 Minnesota Drive
Anchorage, Alaska
POSITION STATEMENT: Offered information about PCE.
KEVIN RITCHIE, Executive Director
Alaska Municipal League and
Member, Denali Commission
217 Second Street, Suite 220
Juneau, Alaska 99801
POSITION STATEMENT: Discussed the Denali Commission's view as
well as AML's view regarding PCE.
RANDY SIMMONS, Executive Director
Alaska Industrial Development & Export Authority (AIDEA)/
Alaska Energy Authority (AEA);
Member, PCE Blue Ribbon Committee
480 West Tudor Road
Anchorage, Alaska 99503
POSITION STATEMENT: Discussed PCE and the statewide energy
study.
ACTION NARRATIVE
TAPE 00-2, SIDE A
Number 0002
CHAIRMAN BILL HUDSON called the House Special Committee on
Utility Restructuring meeting to order at 8:10 a.m. Members
present at the call to order were Representatives Hudson,
Cowdery, Kott, Davies, Green and Berkowitz. Representative
Porter arrived as the meeting was in progress. Also in
attendance were Representatives Kapsner and Morgan.
Power Cost Equalization
Number 0106
CHAIRMAN HUDSON announced that the committee would take up the
issue of power cost equalization (PCE). He noted that there is
quite a bit of action going on with the PCE issue. Although PCE
is an expense factor that must be dealt with one way or another
in the next budget, that falls under the purview of the Finance
Committee and therefore will not be addressed by the current
committee. Rather, this committee will attempt to deal with a
couple of concepts such as the universal service concept. The
committee will also receive some input regarding other aspects
that could, hopefully, lead to reducing the cost of power
generation in rural Alaska. Referring to the CH2M Hill report,
Chairman Hudson indicated he interprets that as follows: Mr.
Rabago of CH2M Hill was essentially suggesting that the committee
concentrate on the high cost of power in the rural parts of the
state. Therefore, the committee will begin by reviewing that
issue. He announced that first the committee would hear an
overview and report on the status of this particular issue from
Eric Yould.
Number 0267
ERIC YOULD, Executive Director, Alaska Rural Electric Cooperative
Association (ARECA), informed the committee that ARECA is the
trade association that represents the utility industry in Alaska.
He noted that ARECA's members collectively provide about 90
percent of the electricity throughout the state. He also noted
that ARECA's membership ranges from the biggest utility in the
Railbelt to some of the smaller utilities in rural Alaska.
MR. YOULD offered some perspective, suggesting that the committee
follow along on the hard copy of the presentation entitled "Power
Cost Equalization; Electricity Powers Healthy Communities." He
referred to page 2 and commented that the United States has a
totally interconnected system. There are transmission lines
throughout the country, and there is almost no community in the
Lower 48 that is not interconnected in some way. This allows
communities to share in economic power from one geographic sector
to another.
MR. YOULD continued with page 2 of the presentation. He noted
that Alaska is superimposed on the map of the United States.
Although Alaska stretches from the northern borders of Minnesota
and Canada down to the Atlantic Ocean at Georgia and then all the
way out to the Pacific Ocean in California, Alaska's entire
infrastructure - that is, the transmission line system - goes
from the middle of Iowa down to the middle of Missouri.
MR. YOULD pointed out that the job of the electric utility
industry [in Alaska] has been to provide cost-effective and
reliable electricity throughout the state. Essentially in place
since the early 1980s, PCE has been integral in bringing
affordable and reliable electricity to Alaska. Without PCE, many
of the amenities Alaska enjoys, certainly in rural Alaska, would
not be possible. Furthermore, Alaska would not have some of the
economic development and municipal facilities without PCE because
many of the utilities would not exist. He acknowledged that
there would be Honda generators, but before PCE not all of the
villages had electricity, and those that did had very expensive
electricity.
Number 0492
MR. YOULD directed attention to page 3 of the presentation, a
summary of the history of PCE. The program began in 1980 as a
temporary program referred to as the Power Production Cost
Assistance Program. That program was in response to the Energy
Program for Alaska. Mr. Yould explained that in the early 1980s,
the state placed much money into renewable energy projects for
the entire state. The cornerstone was the Susitna Hydropower
Project; there were a number of other projects such as the Four
Dam Pool, Bradley Lake and the Anchorage-Fairbanks Intertie.
Given that Alaska would have largely funded those projects, it
was believed that those projects would be the financial intertie
to the rest of the state and thus create a postage stamp rate for
the rest of the state. Until those projects could come online,
the state wanted an interim solution, which was the Power
Production Cost Assistance Program. He commented that, at the
time, he testified in favor of that program.
MR. YOULD explained that as the cost of oil increased and the
economics of the Susitna Hydropower Project declined and the
amount of money to the state decreased, the Energy Program for
Alaska ended. However, the need in rural Alaska remained.
Therefore, in 1984 the legislature institutionalized the program
and put it in place for the long term as the Power Cost
Equalization Program. The PCE program was largely funded with
general funds (GF) until 1993, when the legislature divided up
money in the Railbelt energy fund for interties in the Railbelt
[and] Southeastern Alaska.
MR. YOULD noted that at the same time, $63 million was made
available for the PCE program; a policy statement was included
which said that it was the legislature's intent to fund the PCE
program for the next 20 years, through the year 2013. Obviously,
this was subject to appropriation. In 1999 the energy fund
available for PCE was dry, and the legislature decided to review
the program and re-tailor it to make it more cost-efficient. The
legislature actually passed legislation last year, SB 157.
MR. YOULD pointed out that SB 157 significantly changed the [PCE]
program. It raised the floor for eligibility from 9.5 cents to
12 cents. The legislation reduced the amount of kilowatt hours
(kWh) eligible for the PCE program from 700 kWh to 500 kWh. It
also eliminated commercial consumers and schools from the
program.
Number 0728
REPRESENTATIVE BERKOWITZ commented that the state experienced a
lot of savings when schools were included in the program. He
asked whether there are any cost estimates with regard to
excluding the state [schools] from the program?
MR. YOULD replied that the schools were receiving the same 700
kWh per month as residents. Therefore, it was not much of a
program for the schools. By eliminating the schools, around
$200,000 was eliminated from the program. Although the
commercial consumers were given the same 700 kWh per month, he
believed that the commercial consumers were hit a little harder.
MR. YOULD returned to the presentation. Realizing that the
funding had to be appropriated annually, the legislature
attempted to identify funding sources for the program for the
long term. Basically, the legislature included 60 percent of the
revenue from the Four Dam Pool, about $6 million per year, and
allocated future funds from the National Petroleum Reserve-Alaska
(NPR-A) lease sale. The funds from the NPR-A lease sale have
turned out to be an empty bucket, at least for PCE; it appears
that money is coming into the program, but there are other calls
on the money before any is available for PCE. He agreed with
Chairman Hudson that, effectively, there is no money in the
bucket.
MR. YOULD directed the committee to page 5 of the presentation,
which illustrated the upshot of the changes encompassed in SB
157. The cost of the totally funded program would be about $16
million as opposed to the cost of the program before the changes,
which was approximately $22 million. He commented that as energy
demands in rural Alaska increase, as a result of new services
such as water and sewer, the program itself will probably grow as
well. With regard to whether there is really a need for PCE, Mr.
Yould emphasized that the answer is yes.
MR. YOULD turned attention to page 6 of the presentation, which
notes that the average cost of electricity in urban Alaska is
roughly 9.5 cents per kWh. He pointed out, however, that the
average cost of electricity in the PCE communities is 42 cents
per kWh, more than four times the average cost in urban Alaska.
That difference can be explained because in the Anchorage area
there is very inexpensive natural gas, there is a large economy
of scale, and there is an interconnected system. In rural
Alaska, on the other hand, the preponderance of electricity comes
from expensive diesel generation; furthermore, the systems are
small, there is no economy of scale, and the systems are not
interconnected.
MR. YOULD directed attention to page 7, which lists energy rates
for various rural communities as compared to Anchorage. That
list demonstrates the concept of economy of scale and how
spreading the costs over a larger population allows for cheaper
power. Still, PCE does not fully equalize.
Number 1001
MR. YOULD explained that the concept of PCE is that those in
rural Alaska would receive the same rate as those in urban areas.
However, the PCE formula results in an average cost of 21
cents/kWh in PCE communities, while the Anchorage area has an
average cost of 9.5 cents/kWh. Therefore, PCE does not decrease
the cost of power to the level that is enjoyed in urban areas.
With regard to the notion that PCE is a disincentive to energy
conservation, he directed the committee to page 9 of the
presentation. Page 9 points out that the urban areas consume
roughly 688 kWh/month, while the consumption in rural Alaska is
326 kWh/month. "Even with PCE, the cost of electricity is so far
beyond the point of elasticity that there is a strong incentive
to energy conservation."
MR. YOULD turned to the issue of whether rural families can
afford energy costs, which he outlined on page 10 of the
presentation. He pointed out that the typical household income
in urban Alaska is roughly twice that of the typical household
income in rural Alaska. Therefore, not only is the cost of power
greater in rural Alaska, but those in rural Alaska do not have as
much disposable income to pay for the power. Furthermore, he
understood that 18 percent of the families in rural Alaska fall
below the poverty line, and many of the elders are on fixed
incomes.
MR. YOULD asked, "Yet, how has the utility industry itself done
over the years with power cost equalization?" One might conclude
that with PCE there is no incentive to reduce the cost of power,
he said. However, the graph on page 11 of the presentation
illustrates that in 1978, before PCE, the cost of electricity in
the Alaska Village Electric Cooperative (AVEC) system was some 35
cents/kWh. He noted that AVEC serves some 51 villages. More
than 20 years later, the cost of power is only 42 cents/kWh; that
is in nominal dollars. If the cost of inflation is factored in,
the cost of electricity in the AVEC villages has dropped by half.
He emphasized that to be a very significant figure because it
illustrates that the utilities are working very hard to keep the
cost of electricity down. However, given the fact that rural
Alaska remains a diesel generation economy, is a good job being
done of utilizing the scarce fuel out there?
MR. YOULD noted that the graph on page 12 illustrates that in
1975 the efficiency was roughly 6 kWh per gallon of diesel fuel
burned in rural Alaska. Twenty years later, rural Alaska has an
efficiency of 12 kWh per gallon of diesel fuel burned.
Therefore, the efficiency of the units has increased. He
mentioned that due to computer technology, some villages in AVEC
are experiencing efficiency as high as 16 kWh per gallon of
diesel fuel burned. He reiterated that the utilities have done a
good job, during PCE, in increasing efficiency and reducing the
cost of power, and yet rural costs are four times as high as
those in the Railbelt area.
Number 1213
REPRESENTATIVE BERKOWITZ related his understanding that if some
rural communities are receiving 16 [kWh per gallon of diesel fuel
burned] and the average is 12 [kWh per gallon of diesel fuel
burned], then some communities fall below the average. He asked
what could be done to bring those communities up to the average.
MR. YOULD replied, "The answer partially is cost of money. Is it
economic to go in and ... retrofit an existing diesel [system]
with fuel injected computer-control technology? It may not be
economic to do it." He indicated that these must be reviewed on
a case-by-case basis. Additionally, the PCE program as
administered by the Regulatory Commission of Alaska (RCA)
requires a certain level of efficiency or the full PCE is not
received. That element of the program creates an incentive for
the communities to actually get the efficiency rate up to 16 [kWh
per gallon of diesel fuel burned].
CHAIRMAN HUDSON asked whether there are ongoing evaluations to do
that cost analysis.
MR. YOULD replied yes. He noted that it is a responsibility of
the RCA, which is required to review the efficiencies.
REPRESENTATIVE GREEN noted that in the urban areas there are
often penalties for [use during times of] peak demand. Would
such a disincentive help further the efficiencies in the rural
areas?
MR. YOULD commented, "Certainly, more pain is going to help."
However, he pointed out, the rural areas are so far beyond price
elasticity that peak demands will not be as great a factor.
REPRESENTATIVE GREEN said he was thinking along the lines that
schools alternate starting and finishing times. Perhaps, the
same concept could be utilized in rural areas.
MR. YOULD pointed out that demand charges are primarily aimed at
capacity to reduce capital costs. In a small village with one
diesel generator, there would not be so much of a savings by load
management because the village would still be generating off that
one generator. However, he acknowledged that if that village is
generating more electricity, it may be more efficient than on the
lower end of the efficiency curve. Although the demand charges
in rural Alaska are valuable, he was not sure the economic
incentive would be that great.
Number 1383
MR. YOULD turned attention to the notion that communities in
rural Alaska should look at alternatives rather than continued
use of PCE. Although Mr. Yould agreed with that notion, as do
the utilities, he emphasized that the alternatives are very
expensive. He pointed out that [Alaska] has some of the greatest
reserves of anywhere in the U.S. - on a percentage basis - of the
following resources: hydro[electric], natural gas, oil, wind,
biomass, coal, solar and geothermal. The coal reserves have been
estimated to be 60 percent of the total reserves in the U.S.
Furthermore, Alaska's hydro[electric] potential is one-third of
the untapped hydro[electric] potential in the U.S. He commented,
"We're like the ancient mariner: Water, water everywhere, nor a
single drop to drink." He likened it to Alaska's energy
situation because it is very expensive to develop these
[alternative energy] systems, primarily in rural Alaska.
MR. YOULD noted that he had attempted to outline some of the
capital costs associated with some of the aforementioned
alternatives. For example, a diesel plant costs roughly $1,000
per kW, while a wind plant that was reviewed for placement on
Prince of Wales [Island] costs roughly $10,000 per kW. He noted
that hydroelectric power is site-dependent. One hydroelectric
project being reviewed at Old Harbor costs roughly $5,000 per kW.
He commented that hydroelectric power is firm energy, while the
wind power is not only expensive but also requires diesel fuel as
backup.
MR. YOULD said micro-turbines are also a very expensive
alternative. He recalled committee discussion at a previous
hearing that mentioned fuel cells as an alternative. Although
fuel cells may be an answer in the future, there are problems
now. First, fuel cells are very expensive, with a high capital
cost. Second, there are no diesel "feed stock" fuel cells
commercially available at this time. Virtually all fuel cells
use natural gas as the feed stock. Furthermore, moving propane
or natural gas through rural Alaska could be difficult. The
alternative of methane gas also has problems. First, the gas
must be found, and the cost of drilling is $1 million per hole;
who would pay for that? Therefore, the cost of these
alternatives is the disincentive for bringing them online.
Still, the utilities are looking for alternatives.
REPRESENTATIVE GREEN asked whether a gas-fired or coal-fired
plant would be similar to diesel.
MR. YOULD explained that some of the simple-cycle gas-fired
plants are very inexpensive. He estimated the capital cost of
these simple-cycle gas-fired plants to be around $500 per kW. He
agreed with Representative Green that a coal-fired plant would be
much higher because it would probably cost around $1,500-$2,000
per kW.
Number 1571
REPRESENTATIVE BERKOWITZ pointed to the chart that refers to the
capital costs for these alternatives and asked if there is a
comparable chart for operating costs.
MR. YOULD said he does not have that information, but he offered
to provide it. He noted that there is not a direct comparison
between each alternative. For instance, the hydropower project
is firm generation. He stated, "The fuel cells, you might say,
well, that's a high capital cost, but if you're getting 80
percent efficiency out of the fuel, then the cost per kilowatt -
at least the cost per Btu - is low." Therefore, Mr. Yould felt
that fuel cells do have a place in Alaska in the future.
However, he reiterated that the fuel cell would have to be one
which could use diesel as a feed stock. He mentioned that the
University of Alaska is working on that through the federal DOE
[U.S. Department of Energy] to develop feed stock for fuel cells
that could be used in rural Alaska. He strongly encouraged the
legislature to support that program, which could be part of the
answer.
CHAIRMAN HUDSON asked: Is the highest cost factor in rural
Alaska the cost of the fuel, the equipment, the maintenance, or
all three?
MR. YOULD clarified that it depends upon the location. He
informed the committee that virtually all of the villages or
utilities that he represents fund all of the capital costs
through loans. Therefore, there is a large debt-service
component. However, many smaller villages were able to get their
diesel generators funded directly by the legislature or through
some other means; thus they do not have any debt service. Still,
the cost of electricity in those villages remains high.
Therefore, diesel is a large component, but those [villages] with
debt service might have a fuel component of no more than 20 or 30
percent of the total cost.
CHAIRMAN HUDSON noted that he had seen the deteriorated
conditions of the storage facilities and the extremely high cost
of fuel delivery to the villages. He recalled winters when some
villages ran out of fuel, which had to be airlifted during the
emergency. Chairman Hudson said he hoped that could be reviewed.
Alaska is drowning in oil, and Alaska has the capability to break
it down into refineable products that can be used elsewhere in
the world. Therefore, he did not believe that should be a cost
factor that cannot be modified.
REPRESENTATIVE GREEN commented that past deliberations in various
committees have brought up average income for villages for very
different reasons. Nonetheless, some of those average incomes
were surprising. He asked if Mr. Yould had a chance to review
those average incomes; if so, would he concur with those high
incomes or are those incomes inflated in some way? Although
Representative Green acknowledged the high cost of energy, he
said "it's not a destitute community, and they don't pay the
taxes the urban areas do." Perhaps, there is a perceived
imbalance in the presentation.
MR. YOULD stated that he has seen cost per community, per capita,
figures, which are "all over the place." Given that there is
always an average, with some falling above and below, he agreed
that what Representative Green had indicated is probably true.
Number 1805
MR. YOULD said, in conclusion, that affordable electricity in
rural Alaska is essential if there is to be economic development,
healthy communities, jobs, education and safe environments. The
Blue Ribbon Committee on PCE hired the Institute of Social and
Economic Research in order to [find out] the value of PCE in
rural Alaska. One thing that was discovered was that if PCE
disappeared, there would be a death spiral. In other words, as
people pay the full cost of electricity, they would use less and
the cost would increase. As the cost increased, the people would
use even less and, ultimately, it would be possible that up to
half of the utility systems in rural Alaska could fail.
Basically, ARECA's goal is a long-term funding source for PCE.
He commented that it is impossible for any community to have any
kind of economic development, if that community does not know
what the cost of electricity will be from one year to the next.
Certainly, businesses will not enter these communities, either.
Mr. Yould reiterated the need to develop a long-term funding
program for PCE.
REPRESENTATIVE GREEN commented that he is one of the many
Alaskans who believe the true answer to the rural community is a
source of energy. He asked whether, in the process of solving
this energy problem, there is a risk of altering [the rural
communities].
MR. YOULD likened that to the Pacific Northwest, where, due to
the development of the Columbia River system through Bonneville
Power, the costs, per kWh, fell to mills. That stimulated
industry to come in and now look what has been generated. Still,
it is some of the cheapest electricity in the U.S.
Philosophically, inexpensive and affordable services are a
cornerstone of economic development. However, there are a number
of other economic developments that must take place, not to
mention the resources, desire, and so forth. For example,
Barrow, Alaska, has its own program in place, with an energy cost
that is somewhat affordable, averaging around 15 cents/kWh, to
his recollection. He noted that Barrow does have an economy that
is based on extractable and affordable resources.
REPRESENTATIVE GREEN surmised, therefore, that these communities
could be helped without ruining them.
MR. YOULD said he did not think these communities would be
ruined.
Number 2065
REPRESENTATIVE MORGAN turned to the issue of energy conservation.
He commented that even with conservation, there is a point at
which the generator will run. If there is too much conservation,
then a "dummy load" has to be placed on the generator system,
because in order to be efficient, it must have a load. Rural
Alaska does conserve, as exemplified with the requests to place
freezers outside and not to plug in heaters for automobiles.
However, there are requests over the television for Anchorage
residents to plug in their automobiles.
MR. YOULD agreed with Chairman Hudson that Representative Morgan
has a good point. He then pointed out that some federal laws
change things as well. For instance, the federal government is
attempting to outlaw two-cycle engines. Two-cycle engines are
nice in rural Alaska because they are easy to start in the
extreme cold, whereas a four-cycle engine would need to be
plugged in. Therefore, electrical demand will increase when
four-cycle engines are dictated by the Environmental Protection
Agency (EPA).
CHAIRMAN HUDSON announced that the video presentation would be
held later in order to get to the others who are prepared to
speak today.
Number 2164
JOE GRIFFITH, CFO, Chugach Electric Association, Inc., and
Member, PCE Blue Ribbon Committee, testified via teleconference.
He commented that he would add a few key points to Mr. Yould's
comments. He directed attention to page 4 of the Alaska
Industrial Development and Export Authority (AIDEA) document that
the committee had. Mr. Griffith emphasized the need to find a
stable source of long-term funding. The PCE program was put in
place for a good reason, and the legislature reemphasized that in
1993. The PCE program is important to rural Alaska as well as
the Railbelt; PCE does affect jobs in the Railbelt, although most
people do not make that connection.
MR. GRIFFITH reported that the PCE Blue Ribbon Committee came to
the conclusion that a universal service fund (USF) was probably a
reasonable way to achieve a stable source of long-term funding.
Telephone service has headed in that direction recently. If the
choice is to not fund PCE, he believes that the opportunity for
"cherry picking" the electrical service in the rural areas will
become a problem because it already is nearly a problem. He
predicted that four-cycle reciprocating-engine generators will
move in and take the best loads in the villages and thus increase
the cost to those who need the "lifeline" electrical service.
MR. GRIFFITH said that with regard to whether technology could
resolve the problem, he agrees that technology could certainly
help. However, that technology requires the ability to maintain
it. In some cases, the fuel supplies are not adequate.
Furthermore, such technology would require a large capital outlay
to make it happen. He recalled the comment about the need for
load on generators; he mentioned that one could envision battery
storage devices, but those are costly. Mr. Griffith concluded by
saying that, as a member of the Blue Ribbon Committee, it appears
that PCE is necessary. He reiterated that USF would be a good
start at addressing the funding for "lifeline" residential
[energy].
REPRESENTATIVE DAVIES turned to the issue of economy of scale.
He noted that last year the legislature decided not to include
the schools and the "commercials" in the PCE, which seems to head
in the wrong direction. He surmised that in looking at economic
development, one would want as many people online as possible in
a given location, in order to achieve the maximum economies of
scale. With respect to USF, he asked whether the [Blue Ribbon
Committee] commission had review surcharges on bulk fuel
distributions as opposed to retail ones.
MR. GRIFFITH clarified that the surcharge discussed was regarding
the surcharge on electrical consumption, not on fuel for the USF.
He said the committee did not review surcharges on bulk fuel
distributions. Regarding whether the PCE should be spread across
the schools and the commercial facilities, Mr. Griffith recalled
that earlier testimony stated that the numbers were relatively
small because consumption was above the PCE limits in many cases.
He commented that anything done to increase usage of power [in
the rural areas] - while it costs more in terms of fuel and
direct operating costs - spreads the fixed costs over a larger
amount of kilowatt hours. In effect, that can serve to reduce
the rates. The [Blue Ribbon] Committee had discussed that; the
committee had concluded that it made better sense to deal with
the residential "lifeline" concept than to subsidize schools or
commercial facilities.
CHAIRMAN HUDSON asked if any sort of capacity analysis was ever
performed. Is there more electrical capacity for growth than is
currently being utilized?
MR. GRIFFITH said that it is almost specific to the site. In the
Railbelt it appears there is excessive capacity. However, thanks
to the avalanches that took out the intertie, that excess
suddenly is not excess. Similar situations will be found in the
villages.
TAPE 00-2, SIDE B
MR. GRIFFITH commented that with the addition of large electrical
users, additional capacity would have to be added. He indicated
that most of the smaller systems could not accommodate fish
processors. However, he noted that it is easy to add on, if one
has enough money and the load is present.
Number 2410
KEVIN RITCHIE, Executive Director, Alaska Municipal League (AML);
Member, Denali Commission, informed the committee that the Denali
Commission was created by Congress and has been in operation for
almost a year. The members of the Denali Commission are
statewide folks; there are no regional responsibilities. The
current members of the Denali Commission are as follows: Henry
Springer, Associated General Contractors; Mark Hamilton,
University of Alaska; Lieutenant Governor Fran Ulmer [Co-Chair,
acting for Governor Knowles]; Julie Kitka, Alaska Federation of
Natives; Mano Fry, American Federation of Labor and Congress of
Industrial Organizations (AFL-CIO); Jeff Stacer (ph) [Federal Co-
Chair]; and Kevin Ritchie, AML and the Alaska Conference of
Mayors.
MR. RITCHIE explained that, in the area of energy, the Denali
Commission first decided "that to fulfill its responsibility for
economic development, for training, for general quality of life,
for health and safety and rural development, the first thing you
have to do is be able to turn on the lights." In that vein, the
Denali Commission has funded off the list of fuel tank upgrades
and repairs and consolidations, in particular. A number of
communities have a variety of oil tanks. Therefore, managing and
maintaining those fuel tanks, as well as having the ability to
purchase bulk fuel, depends upon having a central system. That
is one effort to lower the cost of energy and maintain the flow
of oil for electric development. The Denali Commission has also
been working on energy upgrades. The commission has found that
there really is not an energy plan for the state. Therefore, the
Denali Commission, the Rural Development Assistance Division of
the Department of Agriculture, and the state Division of Energy
are working together to draft and develop a plan.
MR. RITCHIE commented that the Denali Commission believes it can
make some inroads if there is a good plan with regard to
obtaining federal funding for some of the upgrades that are being
discussed. Some of the capital money probably needs to be placed
into some of the areas that can benefit from technology and lower
costs. As Mr. Yould stated, it is not possible or economically
feasible in a substantial number of areas. With regard to PCE
itself, that is not an area that the Denali Commission can become
involved with. As U.S. Senator Ted Stevens cautioned, the
commission should be cautious about replacing state
responsibility with federal money.
MR. RITCHIE pointed out that in order for the Denali Commission
to remain funded as a federal agency, the commission should be
recognized by Congress as something that makes life better, not
merely lowering the cost of operating state government. He
informed the committee that one of the line items in President
Clinton's budget was the Denali Commission. Furthermore,
President Clinton is asking for a Delta Commission that would be
similar to the Denali Commission and the Appalachia Commission.
Number 2237
CHAIRMAN HUDSON inquired as to the funding level of the Denali
Commission.
MR. RITCHIE replied that the funding level was $20 million in
President Clinton's budget. However, beyond that there is the
interest from the federal government's Trans-Alaska Pipeline
System (TAPS) fund. That federal TAPS fund will potentially
provide a continuing source of $7 or $8 million. He noted that
U.S. Senator Stevens would like to use the Denali Commission in
order to focus different types of federal funding. Therefore,
there is the possibility that as the Denali Commission works with
the state and federal agencies to develop an energy plan, the
commission will be justifiable for additions of federal funding.
MR. RITCHIE turned to the standpoint of the AML and noted that he
had provided the committee with a list of AML's priorities.
Power cost equalization is one of the top six priorities for the
AML. The top priority for the AML is to work with the state to
develop a financial plan. Mr. Ritchie said, "The bottom line,
frankly, obviously, is to fund PCE as a need; it's not really an
optional expense for much of the state." With regard to revenue
sharing, AML does not feel that is optional at this point,
especially in light of last year's 33 percent cut in funding. He
informed the committee that there are communities that did have
full-time police service nor a Village Public Safety Officer nor
an Emergency Medical System; however, they do not now. Mr.
Ritchie said, "When the public generally says, 'Yes, we think
cutting the state budget is good,' they don't mean decreasing the
safety and health and lives of people anywhere in the state."
The AML is hoping to work with the legislature and take part of
the responsibility for developing some of the solutions.
MR. RITCHIE turned to Representative Green's question regarding
the tax equity throughout the unorganized borough. He informed
the committee that most of the people in unorganized boroughs
live in communities that are first-class or home-rule
communities; those communities have virtually the same
responsibility as a borough. First-class and home-rule
communities have exactly the same responsibility for funding a
school district as Anchorage, Fairbanks or Juneau; therefore,
they are essentially mini-boroughs. Many of them receive PCE,
which is a different issue with regard to the economy.
Number 2074
RANDY SIMMONS, Executive Director, Alaska Industrial Development
& Export Authority (AIDEA) and the Alaska Energy Authority (AEA);
Member, PCE Blue Ribbon Committee, testified via teleconference
from Anchorage. Mr. Simmons commented that Mr. Yould, Mr.
Griffith and Mr. Ritchie have covered most of the topics.
However, he said that he would like to provide some additional
information and cover PCE funding in more detail, as well as the
statewide energy plan, which should have an impact on PCE in the
long term.
MR. SIMMONS directed the committee to page 3 of the document
entitled "An Overview of PCE and the Statewide Energy Study." He
informed the committee that there are approximately 190
communities served through PCE. All but eight of those
communities have populations of less than 1,000. The average
population of a PCE community is about 264. With regard to
earlier testimony that the typical cost of PCE power is 42
cents/kWh, he said the cost ranges from about 62 cents/kWh in
some communities to below 20 cents/kWh. That illustrates the
large divergence as to the actual cost [of energy] in those
communities before PCE.
MR. SIMMONS then turned to page 4 of the aforementioned document,
which lists the major items that the PCE Blue Ribbon Committee
recommended. With regard to earlier mention of the lifeline
concept, Mr. Simmons said that was an important concept to the
PCE Blue Ribbon Committee. That committee felt that it is
necessary to make affordable power available to those essential
electrical uses. It was also felt that if the cost of power at
the margin is the full cost, then that would provide an incentive
to the consumer to conserve as well as to the utility company to
reduce the cost. Mr. Simmons reiterated the committee's
recommendations with regard to the funding pieces. He stated:
If you [the legislature] were to fund the program that
we [the PCE Blue Ribbon Committee] had recommended,
which was a program of roughly $14.7 million a year -
50 percent of it for the Four Dam Pool and the
remainder from the universal service fund - it would
roughly cost the residential consumer about $13 to $14
a year.
MR. SIMMONS acknowledged the concern that, for the large
commercial users, that number could be hundreds of thousands of
dollars. Therefore, in looking at any USF it must be determined
how to limit what the total would be to anyone. If it [the USF]
is limited to the "commercials," then that would increase the
cost a little for the residential consumer.
Number 1888
MR. SIMMONS directed the committee to page 5 of the document,
which lists the statutory changes to the PCE program that were
adopted in 1999. In response to Representative Berkowitz's
earlier question, he said it was projected that taking the
commercial customers and schools out of the PCE program would
save around $2.7 million a year. As it relates to schools, that
is a small amount. He indicated that those hit hardest by that
exclusion were probably the smaller commercial users. Reducing
the kWh from 700 kWh per month to 500 kWh per month was a
projected savings of $1.6 million. Reducing the PCE subsidy rate
from 9.5 cents to 12 cents gave a savings of roughly $2.7
million. Therefore, the total projected savings was $7 million,
which brought the PCE program funding close to the level - $15.7
million - that the legislature actually appropriated. The
recommendation that the Four Dam Pool amount contributed from the
Department of Revenue be increased from 40 percent to 60 percent
was accepted. However, last year's legislative session did not
produce a long-term funding plan for the PCE program.
MR. SIMMONS turned to page 6, which provides an example of what
would happen in a typical rural village if PCE is eliminated.
That example was based on the community of Elam, which has a
population of 281. With regard to elasticity, Mr. Simmons found
that a 20 percent decrease in consumption would result in
increased prices and reduced sales. If that elasticity fell to a
30 percent decrease, there would be the likelihood that utilities
would become financially insolvent. Therefore, elasticity is
very important. He also pointed out that the state and federal
governments have spent billions on infrastructure in rural
Alaska; therefore, it is important to keep in mind that there
could be a negative effect on that infrastructure with the
reduction of PCE.
MR. SIMMONS continued with page 7, which discusses what the Rural
Energy Group is doing to reduce PCE. He said Mr. Ritchie had
discussed this [because] most of the funding for these programs
is coming from the Denali Commission. The Rural Energy Group is
looking at rural power system upgrades. He believed that $8
million of "our" budget is being targeted for rural power system
upgrades on a yearly basis. Although the circuit rider program
has been reduced, some funding remains and has the effect of
reducing the cost of power as maintenance and operator training
are reviewed.
MR. SIMMONS pointed out that the conservation program is part of
the Rural Energy Group. That program presents a dilemma. In
many cases when power is conserved, it may reduce the cost of the
utility overall but could increase the cost to the consumer in
the long run because the fixed costs still have to be spread over
a smaller kWh. Therefore, conservation is important, but it is
not the ultimate solution. With regard to alternative energy
projects, they are important and should be reviewed. Still,
alternative energy projects are a long-term solution, not a
short-term solution, for PCE. As of yet, no magic bullet
relating to alternative energy projects has been found.
Alternative energy projects are capital-intensive projects.
Number 1633
MR. SIMMONS moved on to page 8, which discusses PCE funding. He
informed the committee that in FY00 the PCE fund had a beginning
balance of approximately $2.3 million, a carryover from FY99.
Approximately $5.5 million was added to that for the Four Dam
Pool revenue, which totals $7.8 million. The additional money
was supposed to come from NPR-A. By the end of December, all of
the dollars in the fund had been obligated to PCE, and thus there
is no additional money to be obligated. Knowing that there are
problems with the NPR-A funds, the Governor had requested review
of a contingency. To his belief, Mr. Simmons said the Governor's
supplemental budget proposed using an additional dividend from
AIDEA of roughly $8 million in order to fund the rest of PCE for
FY00.
MR. SIMMONS mentioned Government Accounting Standards Board
(GASB) rule 31, which says that all governmental entities must
recognize income or losses on "our" investment at the end of the
year, whether those are realized or not. Initially, he told
members, the budget was calculated by trying to ignore GASB 31,
which was how the first FY00 dividend number was determined.
After more study, the decision was made not to ignore GASB 31,
and thus more money could be put forth from a dividend
standpoint. They also reviewed the projections for projects and
loans and determined that they were behind for capital money.
Therefore, staff is recommending to the AIDEA board that an
additional dividend of $8 million and, as stated, the Governor is
saying in his supplemental budget that money can go to PCE for
FY00. If the legislature accepts that, the PCE program will be
fully funded at the $15.7 million level for this year.
MR. SIMMONS turned to the tougher issue of long-term funding. He
said the Governor had requested that proposals to fund PCE in the
long term be reviewed. He pointed out that the right side [of
page 8] lists the long-term funding options that were reviewed.
The Blue Ribbon Committee has reviewed federal funds, and there
have been discussions with Washington, D.C., about federal funds.
He believed that Mr. Ritchie had fairly well summarized the
position of Alaska's congressional delegation in relation to PCE.
There has also been review of pots of money and their potential
use for PCE; however, for every pot of money, there are probably
100 constituencies for that money. Therefore, there is no
proposal at this time.
Number 1344
MR. SIMMONS directed the committee to page 9 [and page 10], the
statewide energy plan. He explained that AIDEA, the U.S.
Department of Agriculture and the Denali Commission began a
project to redo the statewide energy plan. The plan was
separated into three regions: the rural region, which is
basically the PCE communities; the Railbelt region, which is
Anchorage, Fairbanks and the Kenai Peninsula; and the Four Dam
Pool - Juneau and Sitka. He pointed out that there could be some
overlap in the communities. However, that is being reviewed.
MR. SIMMONS noted that the plan was broken up into three places
and two phases. Phase 1, completed in October 1999, basically
attempted to accumulate some background and inventory of the
system, identify the major energy problems and issues, and list
all the possible solutions. He specified that Phase 1 was not to
start all over, but rather to take all the information from the
last 10 or 20 years and summarize that information in one
document. Furthermore, Phase 1 was not intended to promote one
solution over another, nor to throw out any potential solutions
or problems. Those documents were created; the rural document is
public information.
MR. SIMMONS said Phase 2 is really the energy plan. Under Phase
2, they had worked with the stakeholders in the communities and
attempted to narrow the issues with the potential solutions.
They had attempted to put forward policies as well as a plan
regarding how to implement that policy. He explained that the
rural areas would be tackled first, which is a 12-18 month
project, followed by Southeast Alaska and then the Railbelt. He
explained that the Railbelt/Southeast pieces of Phase 1 have not
been released because discussion with stakeholders in those areas
have revealed that there may be changes. Thus there is no reason
to make a document available because it may be moot later.
Therefore, an internal call has been made to put those on the
shelf. When nearing Phase 2 for those regions, then those "Phase
1s" will come off the shelf.
MR. SIMMONS said for the rural areas, the various levels of
management, maintenance and operation affect the cost of power
and reliability. He noted that the management, maintenance and
operations piece has already started and is led by USDA. With
regard to the high cost of liability, a request for proposals
(RFP) is being prepared. He was hopeful that in July or August
there would be information regarding the capital needs on the
rural power system upgrades. The remainder of the plan for rural
energy will probably be completed in the next six to eight months
after that. In conclusion, Mr. Simmons pointed out that page 12
addressed the rural cost reduction options.
CHAIRMAN HUDSON commented that the development of this plan is
only ten years late.
Number 1032
REPRESENTATIVE GREEN asked about the sale of the Four Dam Pool
under this conceptual plan.
MR. SIMMONS informed the committee that the utilities have
offered a two-pronged sales price. The utilities have offered
$60 million in cash today and a $10 million "kicker" that may be
available 20 years out, based on certain assumptions. Of course,
the value of that $10 million is substantially less in the future
than it is today. He pointed out that if there was a cash sale
today of the utilities, the state holds a $14 million insurance
fund. If these projects were sold to the utilities and that
state got out of the risk completely, that $14 million could be
made available. Therefore, the sales to the utilities would
roughly result in $74 million.
REPRESENTATIVE GREEN clarified that he was referring to the
future of PCE with that portion - the Four Dam Pool - being out
of the mix.
MR. SIMMONS reiterated that there is a great short-term plan to
fund PCE, which will last about five years, after which there
will be no money.
CHAIRMAN HUDSON made announcements about future meetings. He
then discussed PCE as a subsidy in rural Alaska. He also
expressed the need to review options such as fuel cells. He
discussed his vision of having a company such as General Electric
manufacturing fuel cells in the Matanuska-Susitna Valley in order
to be a test bed. Discussions with fuel cell manufacturers
indicate that the highest cost is the cost of the fuel, he noted.
Chairman Hudson hoped that Alaska would not just sit on its
laurels but would actively find alternatives. He thanked all of
the participants.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Utility Restructuring meeting was adjourned
at 9:35 a.m.
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