Legislature(2023 - 2024)ADAMS 519
04/16/2024 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB307 | |
| HB393 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 393 | TELECONFERENCED | |
| *+ | HB 307 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 307
"An Act relating to the taxation of independent power
producers; and increasing the efficiency of integrated
transmission system charges and use for the benefit of
ratepayers."
1:39:53 PM
JULIE SANDE, COMMISSIONER, DEPARTMENT OF COMMERCE,
COMMUNITY AND ECONOMIC DEVELOPMENT, introduced the
PowerPoint presentation "Integrated Transmission Systems"
dated April 16, 2024 (copy on file). Ms. Sande moved
quickly through slides 2 titled "The Railbelt Electrical
Gridand 3 titled "Railbelt Transmission Systems" that
portrayed maps of Alaskas grid and transmission system.
She elaborated that the Railbelt was the interconnected
electrical grind extending from Homer to Fairbanks that was
approximately 700 miles long and served roughly 75 to 80
percent of Alaska's population. Slide 3 depicted the
transmission line and the colored areas represented who
owned part of the transmission line. The lines were owned
by either the Alaska Energy Authority (AEA) or the Railbelt
utilities. She maintained that the current transmission
system in Alaska was an inefficient system. The system was
connected but not integrated and comprised of separate and
independent utilities that were stand-alone. She noted that
the committee would hear a lot of discussion regarding
"wheeling" and "pancaking" rates. She explained that
wheeling or pancaking rates was the charge per megawatt
hour as the line crossed each section of the grid.
Specifically pancaking meant the rates were "stacked." She
likened the grid and wheeling rates to a toll road versus a
highway. She indicated that the current model lacked
integration and prevented the ability to lower rates for
the rate payer. She furthered that if the bill became law
the Regulatory Commission of Alaska (RCA) would establish a
process to transition from the current system to a new
transmission cost recovery mechanism where transmission
wheeling rates would be eliminated. Wheeling rates hindered
wholesale power transactions and reduced the ability for
Independent Power Producers (IPP) to enter power purchase
agreements with utilities.
1:44:32 PM
Ms. Sande moved to slide 4 titled "Independent Power
Producers." The bill would also amend AS 10.25.540, the
statute related to the taxation of cooperative to extend
its tax relief provisions to IPPs to sell their power to
non-profit electric utilities. Taxes were a large portion
of the overall cost structure for IPPs, which negatively
impact competitiveness. The process of negotiating project
related taxes often delays or kills projects. Extending tax
relief to the IPP's ensured that all sources of power
generators are treated equally.
Ms. Sande continued to slide 5 titled "What Does House Bill
307 Do?:
House Bill 307 aims to:
• Increase competition and efficiency within
Alaska's transmission system.
• Reduce costs to the rate payer.
• Encourage the development of new power projects.
It aims to do this by:
• Requiring the Regulatory Commission of Alaska
(RCA) to change the current mechanism of
transmission cost recovery in the Railbelt.
• Eliminating transmission "wheeling" rates for
inter-utility movement of electricity.
• Extending tax relief provisions enjoyed by
Electric Co-ops to Independent Power Producers
(IPPs).
Co-Chair Foster noted that Co-Chair Edgmon joined the
meeting.
1:46:39 PM
ANDREW JENSEN, POLICY ADVISOR for ENERGY SECURITY, OFFICE
OF THE GOVERNOR, ANCHORAGE (via teleconference), read
through the sectional analysis of HB 307 (copy on file):
Section 1 - Updates the uncodified law of the State of
Alaska by setting forth the purpose of the
legislation: to eliminate pancaked rates and increase
efficiency of integrated transmission systems of the
state.
Section 2 - The bill amends AS 10.25.540(b)related to
the taxation of electric cooperativesto include
independent power producers. Under the bill,
independent power producers would pay a "sales" tax on
the kilowatt hours of electricity in lieu of any state
or local ad valorem, income, or excise tax. The bill
defines an independent power producer as a utility
that only sells wholesale power to cooperative or
municipal utilities.
Section 3 - The bill creates a new article in AS 42.05
relating to integrated transmission system cost
recovery (AS 42.05.900 - 42.05.915).
Proposed AS 42.05.900 states the legislative findings
for increasing the efficiency of providing electricity
service to consumers.
Proposed AS 42.05.905 requires the Regulatory
Commission of Alaska ("RCA") to establish a
transmission cost recovery mechanism and to provide a
process where the electric utilities will transition
from recovering transmission costs in utility rates to
a transmission cost recovery mechanism. More
specifically, this section requires the RCA to develop
a cost recovery mechanism that achieves the
legislative findings and allocates transmission costs
in a way that recognizes a load-serving entity's local
consumption compared with the total consumption on the
system as a whole. The section further requires the
RCA to establish a process whereby the transmission
owning utilities will gradually transition from the
current cost recovery mechanism, in which transmission
costs are recovered in base rates and wheeling
charges, to the new transmission cost recovery
mechanism.
Proposed AS 42.05.910 provides that the RCA will
require all transmission-owning utilities to form an
association whose only purpose is to have a tariff
setting out how the transmission cost recovery
mechanism is collected and disbursed, and to collect
and disburse the transmission costs through the new
recovery mechanism. The association will be regulated
as a public utility.
Proposed AS 42.05.915 provides definitions for the new
article. The section clarifies what sort of electric
utility assets are deemed to be "transmission assets,"
subject to the cost-recovery mechanism of the new
article. These include AEA's contractual charges for
transmission to the Railbelt utilities but would
exclude radial transmission lines that are built to
connect independent power producers who sell their
power to utilities under wholesale contracts. The cost
of such radial lines will instead continue to be
recovered in the cost of power provided, as is
customary. This ensures that a load-serving entity
that is not buying power from the independent power
producer is not forced to shoulder the cost of
connecting that power to the grid. The section also
provides definitions for the terms "electric
reliability organization" and "load-serving entity."
1:50:24 PM
Mr. Jensen elaborated that section one eliminated the
current system of transmission rates for systems that were
subject to integrative resource planning processes of an
"Electric Reliability Organization" (ERO), which was the
Railbelt Transmission System; the only one in that state.
Representative Josephson pointed to Section 2 and wondered
what the impact of a sales tax on local governments was
versus the current tax structure. Mr. Jensen responded that
it would essentially "level the playing field" for all
types of electrical generation. He explained that most of
the system's electricity was provided by cooperatives and
member owned utilities where under state statute were not
subject to local property tax. However, an IPP was subject
to the tax and created an unfair advantage for power
generation. As long as the provider was selling to a non-
profit cooperative, it removed an unequal barrier towards
increasing power generation in the Railbelt system.
Representative Galvin understood that the provision was
seeking to remove barriers and wondered if it was similar
to what was happening in the lower 48 states, which had
more IPPs. She wondered whether IPPs in other states paid
taxes. Mr. Jensen responded that he was not familiar with
all of the tax structures in the lower 48 states. He was
aware that Alaska cooperatives were different than in other
states because they generated most of their own power
versus merely being buyers and distributors of power.
1:54:21 PM
Representative Ortiz referred to slide 2 he asked if the
administration would be opposed to amending the bill's
title to include "to prevent inadvertent taxation of
utilities that were not within the Railbelt He understood
that the bill was intended to focus solely on the Railbelt.
Ms. Sande replied that she had not addressed the question
with the governor but would follow up.
Representative Coulombe ascertained that the legislation
created one rate for the entire Railbelt with the intention
of reducing the cost to the rate payer, but she was not
sure that was the case for Chugach Electric. She thought
that Chugach was using wheeling rates to keep rate payers'
costs down. She asked if the provision was positive for the
whole Railbelt.
Mr. Jensen first replied to Representative Ortiz's question
that the way Section 1 was structured regarding EROs there
was only one such system in the state, however an ERO could
be formed in any part of the state. Therefore, the bill was
not specific to the Railbelt by intention.
Mr. Jensen proceeded to answer Representative Coulombe's
question. He believed that initially there would be only
minor adjustments in rates. The bill provided for a gradual
unwinding of current revenue structures. He believed that
in the long term it would lead to lower rates and benefit
the entire system. He offered that currently, the cost of
transmission was charged at the point of power generation
or at the point of transaction between utilities. However,
by shifting the system to an end user cost, the cost of
power would not include fixed costs that existed no matter
what. He elaborated that approximately $69 million out of
an overall revenue requirement of about $905 million were
transmission costs or 7.5 percent of the average rate.
Presently, independent power projects were regionally
constrained due to wheeling traffic that crossed multiple
system and could negatively impact the cost of power. He
provided an example of a proposed 100 megawatt wind farm in
the Interior. In order for a large project to share power
that crossed multiple lines wheeling rates and tariffs
would be involved. The legislation, over time, would
benefit the entire system by allowing projects at a much
larger scale that could serve the entire system instead of
smaller regional projects.
1:59:47 PM
Representative Coulombe asked whether it was fair to say
that some rate payers might see an initial increase in
rates. Mr. Jensen responded that it would remain to be
seen The legislation required the utilities to
collaboratively develop a structure that was fair to the
rate payers. He added that the utilities had already begun
discussions and he felt that the result would be fair and
beneficial. He could not guarantee how the rates would end
up regionally. The answer would unfold once the utilities
developed its cost recovery system. Representative Coulombe
wondered whether the attempt to integrate the transmission
line was focused on creating renewable energy. Mr. Jensen
answered in the negative and stated that the bill was not
restricted to renewables and was open to any form of power
generation produced by IPPs. He emphasized that the
governor favored developing the lowest cost power
generation. Representative Coulombe asked Mr. Jensen to
identify a few IPPs. Mr. Jensen identified Renewable IPP
that developed soar farms in Willow and Houston and were
currently developing a large project on the Kenai
Peninsula. In addition, Alaska Renewables was vetting the
development of wind farms in Susitna Valley and in the
Interior. Another IPP, Fire Island Wind was owned by Cook
Inlet Region, Inc. (CIRI). Representative Coulombe remarked
that the examples were all renewable energy. She expressed
concern that renewables were more costly and not consistent
and once the tariffs and pancake rates were changed would
not result in lower costs for the rate payer. Mr. Jensen
explained that currently, when a IPP made a deal with a
utility the rate had to be lower than the current rates for
power generation in order for Regulatory Commission of
Alaska approval. He believed that the bill would diversify
the energy mix for the Railbelt system and potentially for
other parts of the state. He noted that more generation in
the system would reduce demand for natural gas as an added
benefit.
2:04:45 PM
Representative Stapp favored the bill and thought that it
created equity in the Railbelt and unified the effort to
reduce energy costs, which affected PCE rates as well. He
referenced the governor's Transmittal Letter (copy on file)
that mentioned the burden of wheeling rates that could
derail new types of power generation that were
"geographically dependent." He asked if his assessment was
correct. Mr. Jensen responded in the affirmative. He added
that recovering transmission rates via a surcharge on a
utility bill would remove a large barrier to system wide
larger power projects versus a regional project in order to
avoid transmission charges. Representative Stapp recalled
Mr. Jensen's testimony regarding the elimination of
wheeling rates spurring extra generation making the system
less reliant on natural gas generation prolonging the life
of gas in Cook Inlet. He inquired if his recall was
correct. Mr. Jensen replied in the affirmative and believed
it was a "crucial" element to relieve demand for natural
gas for power generation. He furthered that additional
sources of power generation made it easier to project a
fixed cost into the future versus a variable price for
natural gas due to price volatility. Representative Stapp
asked whether the bill was a crucial first step in tackling
the gas situation in Cook Inlet, especially for Anchorage.
Mr. Jensen responded in the affirmative. He elucidated that
the transition to the new cost recovery would take a few
years, but the bill's fixes would enable project
development to accelerate by creating cost certainty.
2:11:22 PM
Representative Ortiz referenced section 2, page 2, line 1
of the bill: "each electric cooperative and independent
power producer shall pay to the state,?" and page 2 lines 5
to 7: "independent power producer" means a utility that
only sells wholesale power to cooperative or municipal
utilities. He deduced that the provision included IPPS
outside the Railbelt and asked if it was the intent of the
bill was to tax IPPs outside the Railbelt. Mr. Jensen
responded that the bill applied only to utilities within an
ERO. The only way it could apply outside the Railbelt was
if those utilities formed an ERO.
Representative Hannan shared that she had similar concerns
as Representative Ortiz. She explained that the utility in
Juneau was investor owned. She determined that it appeared
the legislation excluded an IPP from getting a tax
advantage for selling to an investor owned utility. She
asked if she was correct. Mr. Jensen responded in the
affirmative. He related that the cooperatives did not pay
local property taxes, which was why the bill stipulated
that if power was only sold to a tax exempt entity, then
the seller would be treated the same from "a local taxation
purpose." An investor owned company was already paying
local property taxes for power generation therefore both
the IPP and investor owned utility would pay property taxes
and be on equal footing. Representative Hannan inquired
whether the legislation required an IPP selling to a
cooperative utility to share its tax advantage with the
consumer. Mr. Jensen deferred part of the answer to the
Regulatory Commission of Alaska. He reported that any power
purchase agreement between an IPP and a cooperative utility
was subject to a review and approval by the RCA. The
commission had a process in place to assure a tax exemption
was part of the rate.
2:16:25 PM
ROBERT DOYLE, CHAIR, REGULATORY COMMISSION OF ALASKA (via
teleconference), affirmed that as part of the approval
process, the commission would ensure the rate payers and
utilities were part of a calculation called avoided
costs. He defined avoided costs as a negotiated rate that
was both just and reasonable for both the rate payers and
the utilities. The IPP bearing any part of a tax exemption
would be a part of the review process. Representative
Hannan ascertained that just and reasonable did not mean
lower. She exemplified a situation where there was
insufficient power generation and the IPP could produce
more power but at a higher cost. She wondered whether that
scenario of increased costs would be just and reasonable.
Mr. Doyle responded in the affirmative and added that there
was no guarantee that just and reasonable was always less;
there were multiple factors that had to be considered. He
countered that if a truly open access system was in
operation that lacked wheeling rates, a point of "economic
dispatch" could exist within a "tight pool." He elaborated
that the concept was that whoever could produce the power
at the lease cost and cover its debt covenant should be the
utility in operation. He would like to encourage a tight
pool and economic dispatch stretching from Homer to
Fairbanks in an open, non-wheeling transmission program
without pancaking costs. It would allow the economic
dispatch to take place and help lower costs. He maintained
that there was no rate guarantees for utilities or IPPs
with an RCA approved return on an investment and there was
no guarantee that rates would increase. He indicated that
for Power Purchase Agreements, long-term contracts included
escalating costs that accounted for inflation, etc.
2:19:35 PM
Representative Hannan directed her comments and question to
Mr. Jensen. She reiterated that the discussion was
exclusively about the Railbelt transmission grid and the
reason that narrowing the scope was unnecessary was because
no other transmission system formed an ERO. She reiterated
that Juneau's investor owned utility was excluded in the
bill. She relayed that there was a long development of an
IPP plan in Juneau that would likely result in an intertie
between Lynn Canal communities and mine power generation.
She deemed that the bill impacted both the generation
rates, regulation, and created a tax disadvantage for the
IPP to operate and collaborate with the existing utility.
She was concerned with the unintended consequences of the
bill. She wanted the bill narrowed to the Railbelt, and
some language changed. She deduced that if the Juneau
utility became part of an ERO in 5 years it would be tied
to other EROs (like Bradley Lake) costs that were
irrelevant. She wondered how HB 307 could be crafted to
help the Railbelt but not have ripple effects for other
utility groups.
Mr. Jensen answered that he appreciated her perspective and
acknowledged that he heard similar concerns from others.
He emphasized that he would be happy to work with her to
address any potential unintended consequences. He
elucidated that the Bradley Lake project was mentioned [in
the bill] because it was state owned, managed differently
than a regulated utility, and had a fairly unique cost
recovery structure. The administration wanted to ensure
that the utility was accounted for in the definitions
included in the bill. He was not suggesting Bradley Lake
rates could stretch into Southeast Alaska and impact rates.
2:23:01 PM
Representative Galvin noted the discussion around creating
the opportunity for IPPs and concerns around "pancaking."
She inquired whether there was a way to include a provision
that protected rate payers during the transition period
against rate increases. Mr. Jensen replied that the bill
was not overly prescriptive and provided for a gradual
process due to the time it would take utilities to develop
a cost recovery system. He offered that the unfolding
transition process allowed for mitigation through the new
tariffs, RCA rate approval, and a gradual implementation of
the changes to ensure minimal if any impact on rate payers.
He emphasized that it was a small percentage of costs of
the overall system and believed that the bill had
protective measures as he described. Representative Galvin
appreciated the intention of the bill and wondered if there
were any additional measures that could be built-in to keep
the rates low or whether the RCA had the ability to
maintain lower rates. Mr. Jensen commented that there was a
robust public process for tariff setting. He noted that
well-established protections were already in practice that
applied to the provisions in the bill.
2:26:43 PM
Representative Coulombe believed that the legislation would
not reduce costs to the rate payer. She was "pushing back"
on the claim that integration would reduce costs but
understood the need for the bill. However, she determined
that the bill was not a cost saving measure. She asked for
more information on the commission and wondered who was
overseeing the initiative and thought there was a different
governing body. Mr. Jensen responded that he whole
heartedly agreed that the measure alone was not a rate
reduction tool. However, he believed that with greater
energy generation over time, in the long run, it would
result in lower rates, especially when compared to the
specter of importing liquefied natural gas (LNG). He
believed that ultimately it would reduce rates because the
bill allowed for greater competition, greater diversity of
energy supply, and less reliance on natural gas where a
great deal of price volatility was anticipated in the
future. He explained that a coalition of utilities would be
required to work cooperatively to bring a proposed
transmission cost recovery tariff to the RCA for review,
modification, and approval. Ultimately, it would be
established by the RCA.
HB 307 was HEARD and HELD in committee for further
consideration.
2:29:58 PM
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB393 Presentation ver. R 4.12.24.pdf |
HFIN 4/16/2024 1:30:00 PM |
HB 393 |
| HB393 Sponsor Statement ver. R 4.12.24.pdf |
HFIN 4/16/2024 1:30:00 PM |
HB 393 |
| HB393 Sectional Analysis ver. R 4.12.24.pdf |
HFIN 4/16/2024 1:30:00 PM |
HB 393 |
| HB 307 Public Testimony Rec'd by 041524.pdf |
HFIN 4/16/2024 1:30:00 PM |
HB 307 |
| HB307 PowerPoint Presentation to HFIN 4.16.24.pdf |
HFIN 4/16/2024 1:30:00 PM |
HB 307 |