Legislature(2023 - 2024)BUTROVICH 205
03/13/2024 03:30 PM Senate RESOURCES
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SB217 | |
Presentation: Alaska Energy Authority (aea) | |
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+= | SB 217 | TELECONFERENCED | |
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SB 217-INTEGRATED TRANSMISSION SYSTEMS 3:31:51 PM CO-CHAIR GIESSEL announced the consideration of SENATE BILL NO. 217 "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." 3:32:20 PM CO-CHAIR GIESSEL announced invited testimony on SB 217. 3:32:11 PM SENATOR DUNBAR joined the meeting. 3:32:39 PM ANTONY SCOTT, Director, Economic and Regulatory Analysis, Renewable Energy Alaska Project (REAP), Anchorage, Alaska, presented SB 217 on behalf of the administration. He stated that he is an economist and former commissioner at the Regulatory Commission of Alaska (RCA), with decades of experience in economics and policy analysis in the state. REAP is a member- based organization. Its membership includes public utilities, independent power producers, labor groups, Native associations, consumer groups, and others. He moved to slide 2 and detailed REAP support for SB 217. [Original punctuation provided.] REAP supports SB 217 • Creates favorable economic conditions for new investment that will create ratepayer value by solving two significant existing problems: 1. Inefficient cost recovery mechanism for transmission system infrastructure costs impede economic development and raise rates paid by consumers 2. Inefficient and inequitable local tax burdens for Independent Power Producers (IPP) increase their investment costs and raise rates to utility customers • It offers a simple and understandable approach • It does so with a minimum of overhead costs and institutional disruption • It refrains from using overly prescriptive mechanisms 3:34:42 PM MR. SCOTT moved to slide 3 and explained wheeling charges: [Original punctuation provided.] Inefficient Transmission System Cost Recovery (current "toll-road" system) • Significant portion of transmission system costs are currently recovered through "wheeling rates" Example: for Homer Electric Assoc to buy power from a wind producer in Fairbanks, HEA pays for both cost of generating the power plus the combined costs to "wheel" the power across the various components of the Railbelt transmission system: o $0.00531/kWh to Golden Valley Electric Assoc (GVEA) to use its transmission system o $0.00512/kWh to Alaska Energy Authority (AEA) to use the Intertie, o $0.00415/kWh to Matanuska Electric Assoc (MEA) to use its transmission system o $0.01412/kWh to Chugach Electric Assoc (CEA) to use its transmission system Total transmission wheeling charges = $0.0287/kWh • The actual costs of transmission are not increasing with this use, but • These additional "toll" charges can prevent an otherwise economic generation project from being built MR. SCOTT stated that the inefficiencies in transmission system cost recovery are a significant issue. A portion of transmission system costs are recovered not from a utility's own ratepayers but through wheeling charges. When one utility uses another utility's transmission system, they pay a $1 per kilowatt-hour charge for moving electricity over that transmission system. These charges essentially function as a tax on the transaction of power generated in one area and consumed in another, and this tax is quite inefficient. It can be likened to a toll paid on a road because the costs of the transmission system do not change even when it is being used. The result is that these individual wheeling charges can render an otherwise economically beneficial project uneconomic, preventing the project from proceeding. The example on the slide illustrates that if Homer wished to purchase wind power from a development north of the range in Fairbanks, it would have to pay for the cost of generating that power to the Independent Power Producer (IPP). Even if Golden Valley built the wind power themselves, they would still have to pay for the power's generation cost and the combined cost of wheeling that power across various components of the rail belt transmission system. These combined charges amount to almost three cents per kilowatt-hour, which is enough to prevent the transaction from happening. This would be unfortunate for economic development in the Fairbanks region and a loss of value for Homer ratepayers. It also increases Homer's difficulty in incorporating more wind power into the system, as having a geographically diverse source of renewables is beneficial for overall system reliability. The cost reallocation in this example, specifically the nearly three cents per kilowatt-hour, raises concerns. 3:38:11 PM SENATOR WIELECHOWSKI asked how the wheeling charges are set and what exactly differentiates these rates. He expressed appreciation for slide 3, noting that it was the first time he had seen the information broken down in this way. 3:38:29 PM MR. SCOTT replied that wheeling charges are set through general rate cases. Each utility, excluding AEA, determines their rates through a rate proceeding at the Regulatory Commission of Alaska (RCA). Utilities calculate their total system costs, which include their transmission, generation, and distribution infrastructure. For example, Chugach Electric's transmission system is used by other parties. In its rate case proceedings, Chugach allocates a portion of their transmission costs to be recovered from these other parties. This allocation is often contentious, but once determined, it is converted into a dollar per kilowatt-hour or cents per kilowatt-hour rate. Chugach's total transmission costs are divided based on the agreed-upon allocation percentage, and this amount is then applied to the projected power transmitted over their lines by third parties. 3:40:46 PM SENATOR WIELECHOWSKI noted that Chugach might argue that their ratepayers have paid higher bills to cover the cost of building their transmission systems, and that the wheeling charges are their way of recovering those costs. He questioned how one would respond to Chugach's position if the company says they are losing revenue for each kilowatt-hour transmitted through their system, which their ratepayers have already funded. 3:41:30 PM MR. SCOTT replied that it is entirely reasonable for Chugach to argue for cost recovery. However, the allocation of costs and benefits of transmission infrastructure is inherently arbitrary. As a former regulator, he explained that while there are various mechanisms for determining the appropriate split, the process often involves considerable debate and negotiation, similar to choosing between different types of cuisine. If a utility can build transmission infrastructure for the benefit of its own customers and have others partially cover the costs, it might not incentivize the construction of the most efficient transmission systems. All users benefit significantly from being part of an interconnected grid. This interconnection improves reliability and increases opportunities for power transactions. The current system of wheeling charges, which turns a fixed cost into a variable cost, acts as a tax and reduces these overall benefits. Moving to a lump sum collection system would allow for a fairer allocation of system costs without treating them as a tax on the movement of electricity. This approach would still involve debate over the best allocation method, but it would recover costs based on fair system usage rather than per- kilowatt-hour charges. 3:44:24 PM SENATOR WIELECHOWSKI asked if a levelized rate, such as seven or eight cents per kilowatt-hour, would result in other utilities receiving a bit more for their transmission while Chugach might receive a bit less. He inquired about how much this might cost Chugach's customers. 3:44:53 PM MR. SCOTT replied that SB 217 wouldn't replace multiple wheeling rates with a single wheeling rate; instead, it would eliminate wheeling rates altogether. However, he acknowledged that the question of cost responsibility and the best way to address it remains. The bill recognizes the need for a gradual transition to this new cost recovery mechanism, though it does not specify the pace of this transition. This will be determined by the interested parties before the RCA. SB 217 acknowledges the current historical arrangements that produce specific cost responsibilities and revenue streams. A gradual transition over a period, such as one to three years or five, might be sensible. In the interim, the hope is to build new transmission assets, partly with federal support. REAP supports this and aims to ensure that new transmission is used efficiently for economic development and ratepayer benefits. Over time, the lump sum approach to allocating costs is expected to benefit the greatest number of people through the integrated planning process managed by the RRC. This process will involve broad stakeholder input to determine which transmission projects are needed, the cost responsibilities, and the methods for cost recovery, ultimately leading to a more efficient and fair system. 3:47:48 PM CO-CHAIR BISHOP asked if debt is included in the cost recovery equation. 3:48:05 PM MR. SCOTT replied that debt is absolutely part of the cost recovery equation. He explained that cost recovery encompasses the entire cost of service, including debt payments, depreciation, and operation and maintenance (O&M) expenses. Therefore, the full cost of service associated with transmission will be recovered. 3:48:32 PM SENATOR CLAMAN asked if the importance of Grid Resilience and Innovation Partnerships (GRIP) funding, which provides federal support for building additional transmission infrastructure without requiring utilities to finance it themselves and pass those costs to their ratepayers, is a significant reason why this approach makes sense today. 3:49:07 PM MR. SCOTT replied that transitioning from the current system makes sense regardless of the situation, but it is especially important given the need to enhance the robustness of the transmission system, which will involve significant expenditures from ratepayers, the state, and the federal government. He emphasized the importance of ensuring that these large investments provide the greatest value for Alaska consumers. While there is a strong reason to focus on this now, due to the new transmission projects, he suggested that the current system of wheeling charges should be fixed and eliminated even if no new transmission were ever built. 3:50:21 PM SENATOR CLAMAN asked if SB 217 would create a structure where wheeling rates are eliminated for transmission. He inquired if the bill mandates that, in the absence of federal funds, any new transmission built will have its rates evaluated at a system- wide level, ensuring that the transmission cost is uniform regardless of where electricity enters the grid. He wondered whether this approach is necessary even without federal funding, to ensure an equal transmission rate across the system. 3:51:08 PM MR. SCOTT replied that the legislation would eliminate wheeling rates entirely. Instead of a unified transmission charge, the bill proposes that transmission costs be allocated directly on an annual basis to each load-serving entity. At the beginning of each year, each utility would receive a bill from the association detailing their transmission cost responsibility, such as $25 million for one utility and $35 million for another. These costs would then be recovered from the load customers. For example, Chugach would receive a bill for its total transmission cost responsibility and would recover these costs from its load customers. This would replace the current system where transmission costs are embedded in energy and demand charges on customer bills, even though no separate transmission charges are itemized. The issue with the current system is not that third parties contribute, but how they contribute. The $1 per kilowatt-hour or cents per kilowatt-hour wheeling charges act as a tax on the movement of electricity. 3:53:36 PM MR. SCOTT moved to slide 4 and spoke to the new freeway system: [Original punctuation provided.] SB 217 Eliminates wheeling rates (Creates a new "freeway" system) Steps 1. Adds up all transmission system costs ("ownership") 2. Allocates those costs on an annual lump-sum basis to each loadserving entity (i.e. utilities) based on their proportionate load ("cost responsibility") 3. Utilities then recover those costs from their rate-payers MR. SCOTT noted that all transmission system costs would first be pooled into a single bucket. The total costs in this bucket would then be apportioned to each load-serving utility, though the exact method for proportionality is not fully detailed in the legislation. SB 217 would direct the commission to allocate costs based on each utility's proportionate electricity consumption relative to the total system consumption. Every end user benefits from being part of an integrated grid, which enhances reliability and provides opportunities for transactions that improve ratepayer value. In the final step, each utility would recover its allocated transmission costs from its own customers. Essentially, this replaces the per-kilowatt-hour wheeling charge for electricity movement with a per-kilowatt- hour charge included in the utility's overall billing to its ratepayers. The rate may vary depending on how the cost responsibility is ultimately apportioned. 3:56:10 PM CO-CHAIR BISHOP asked for an explanation of the difference between ownership and cost responsibility. 3:56:34 PM MR. SCOTT replied that the percentages shown for ownership and cost responsibility are hypothetical, as he did not have time to review filings for the current actual numbers. He explained that entities like AEA, Chugach, MEA, Golden Valley, and Homer own various transmission assets, such as the Alaska Intertie. The costs associated with owning these assets include interest payments, depreciation, and operation and maintenance (O&M) expenses. These ownership costs make up the annual cost of maintaining the assets. If SB 217 becomes law, the cost responsibility for the entire system would be allocated based on percentages determined through a regulatory proceeding. These percentages would be based on load ratio shares and other factors reviewed during the regulatory process. 3:58:47 PM MR. SCOTT moved to slide 5 and spoke to the transmission cost allocation approach: [Original punctuation provided.] SB 217 Transmission Cost Allocation Approach • An "Association" made up of all transmission- owning entities calculates total system ownership costs and files a tariff to be regulated by the RCA • The "Association" is essentially an accounting construct established to manage the cost allocation process • Alaska's telecom industry employs a similar kind of association currently the Alaska Exchange Carriers Association (AECA) created via AS 42.05.850 • AECA has just one paid employee MR. SCOTT addressed the cost allocation process and ownership of the transmission tariff under SB 217. He clarified that the tariff would not be levied on a cents per kilowatt-hour basis but as a lump sum to each utility, which would then recover these costs from their customers. The proposed association would comprise all transmission-owning entities. Although it might initially seem intimidating, he likened it to the Alaska Exchange Carriers Association (AECA), established under AS 42.05.850. AECA, an industry association of intra-state and interstate inter-exchange carriers, performs a similar cost and revenue allocation exercise. He noted that AECA's role is essentially an accounting exercise managed with minimal overhead, as it operates with just one employee and files annual tariffs with the Commission. The members, who are the affected inter-exchange carriers, handle the necessary accounting tasks. He emphasized that the intent behind SB 217 is to create a straightforward, low-overhead organization focused on bookkeeping, similar to AECA. 4:01:17 PM MR. SCOTT moved to slide 6 and spoke to the taxation process: [Original punctuation provided.] SB 217 Addresses Inequitable Tax Burden For Independent Power Producers (IPP) • Municipal and Cooperative Electric utilities are exempt from state income and local property taxes • This helps ensure lowest cost of energy, as property taxes are passed along to consumers in their utility rates • IPPs must recover all costs in the rates they negotiate with purchasing cooperatives or municipal utilities • Property taxes can be a very substantial portion of those rates • Existing property tax rates can and do prevent IPP projects from progressing, which ultimately impact ratepayer costs • No property taxes can be collected from unbuilt or failed power projects MR. SCOTT said that municipally or cooperatively owned electric utilities are exempt from state income tax and local property taxes. The policy rationale is that without these exemptions, such taxes would be passed on to consumers through higher utility rates. Independent power producers (IPPs), however, must recover all their costs through the rates they negotiate with purchasing cooperatives and municipalities. This means that any taxes imposed on IPPs can significantly increase the rates charged to consumers, potentially making some projects economically unfeasible. This creates an uneven playing field that can hinder project development and negatively impact ratepayers in two ways: by increasing costs for projects that do proceed and by preventing many projects from moving forward at all. MR. SCOTT suggested that if it is reasonable to exempt cooperatives from property taxes on their own generation and transmission assets, it would also make sense to extend this exemption to IPPs selling power to cooperatively owned utilities. Addressing both issues would alleviate a significant burden on project development in the state, delivering greater value to consumers, creating jobs, and fostering a more robust state economy. 4:04:01 PM CO-CHAIR GIESSEL concluded invited testimony and opened public testimony on SB 217. 4:04:39 PM MATTHEW PERKINS, representing self, Anchorage, Alaska, testified in support of SB 217. He introduced himself as the CEO of Alaska Renewables and said the company is working on several large power plants aimed at providing low-cost, reliable energy to the Railbelt. He sought support for two critical policies: property tax exemptions for independent power producers (IPPs) and the elimination of tariffs between electric cooperatives and IPPs. These changes would help reduce rates, remove barriers to collaboration, and increase competition. The difference between export resource financing and domestic renewable energy market financing. IPP contracts are structured as long-term fixed-price agreements with financial inputs contracted upfront, making any taxes a pass-through cost to consumers. He also noted the importance of removing barriers to collaboration among utilities, citing the pooling of projects like Shovel Creek and Little Mount Susitna as an example that could significantly reduce no-wind periods. He raised concerns about specific issues in the bill's wording: a redundant tax on kilowatt-hours generated by IPPs and ambiguity regarding the removal of wheeling rates. He requested support for these free-market principles and limited government intervention, and asked for amendments to the bill to eliminate the double tax and ensure the full removal of wheeling tariffs. SENATOR CLAMAN asked that Mr. Perkins be allowed to briefly address Senator Wielechowski's question. 4:07:32 PM MR. PERKINS said that in response to Senator Wielechowski's question about the benefits to Chugach's members or any electric cooperative members, the numbers are indeed calculable. He mentioned that he is working with the dispatch and engineering teams to determine specifics. He emphasized that the broader economic benefit comes from allowing more arbitrage among markets, aligning with fundamental free market principles. The benefit, as shown by their modeling and other reviewed models related to energy on the Railbelt, is significantly greater than minor differences in individual gains, such as one group making 10 cents versus another making 11 cents. In response to Senator Claman's question about transmission costs, he explained that it is most likely that for each project, transmission lines will need to be built, increasing the associated costs. These costs would be included in the total Power Purchase Agreement (PPA) for the project and recovered through the sale of electricity to participating utilities. 4:09:02 PM CO-CHAIR BISHOP asked if he is referring to building transmission lines, meaning constructing a line from the project to the substation. MR. PERKINS replied yes. 4:09:37 PM PENNY GAGE, representing self, Anchorage, Alaska, testified in support of SB 217. She introduced herself as the Managing Director for Launch Alaska, a nonprofit focused on accelerating the energy transition by integrating the latest technologies into Alaska's energy, transportation, and industrial sectors. Launch Alaska works with a portfolio of 32 for-profit startup companies from around the world, addressing climate challenges and creating economic opportunities in Alaska. She expressed support for SB 217, particularly the provision that would grant independent power producers (IPPs) the same local tax exemption received by non-profit electric cooperatives. Gage noted that Launch Alaska's CEO, Isaac Vanderburgh, who was appointed by Governor Dunleavy to the Alaska Energy Security Task Force, co- chaired the incentives and subsidies subcommittee. This tax provision change was a key recommendation in the final report of that task force, which Mr. Vanderburgh championed. The provision would attract private investment, support energy development, and lower energy costs for Alaskans. However, according to a Department of Energy (DOE) report, less than five percent of Alaska's electricity is generated by IPPs, compared to over 40 percent in lower 48 states. SB 217 would send a positive market signal to investors and developers, accelerate the deployment of low-cost renewable energy, level the playing field, diversify the electricity mix, and support job creation. 4:12:06 PM DOUG JOHNSON, representing self, Anchorage, Alaska, testified in support of SB 217. He introduced himself as the Director of Development for Ocean Renewable Power Company and said the company has been actively developing hydrokinetic power in Alaska since 2006. SB 217 would provide a thoughtful, elegant, and workable solution to two key problems facing the energy industry. The first problem as the inequity in taxation of independent power producers (IPPs), requiring the need for a level playing field for all power producers. The second issue is the application of wheeling charges across the Railbelt. He highlighted the need for a standardized and proportionate cost recovery mechanism as envisioned in SB 217. The bill offers a straightforward approach to addressing these industry challenges in Alaska. He expressed a desire for the swift resolution of these issues through the passage of SB 217, emphasizing its critical importance to the future of the emerging industry. 4:13:46 PM KEN HUCKEBA, representing self, Wasilla, Alaska, testified in opposition to SB 217. He stated that much of the support for SB 217 is based on fictitious claims. He characterized the bill as a 'gold rush grab' for Inflation Reduction Act (IRA) funds by opportunists seeking to advance the transition to green New Deal policies. SB 217 focuses solely on eliminating transmission charges, particularly benefiting independent power producers (IPPs) of solar and wind energy. However, he argued that these energy sources are unreliable, with wind farms producing only around 30 percent of their capacity even on good days. On windless, snow-covered days, they contribute nothing, exacerbating costs for utilities and ratepayers who must back them up with reliable power sources. Existing utilities, owned by ratepayers and cooperatives, are forced to cover the costs associated with the poor performance of these renewable energy sources. He criticized the bill for allowing IPPs to operate without contributing to the costs of maintaining and upgrading the legacy energy system. The tax savings touted by the bill come from taxpayers and existing infrastructure owners, rather than some external source. He rejected the idea that renewable energy sources are truly lower in cost. Their affordability is a result of subsidies and the absence of charges for the additional impacts they cause. He described SB 217 as a takeover of infrastructure by special interests. He also criticized the use of the term 'stakeholders,' asserting that these entities do not represent ratepayers or taxpayers. The United States is a representative republic that should prioritize the interests of its citizens, not special interest groups or nonprofit NGOs. 4:16:27 PM DAVID BRAILEY, representing self, Eagle River, Alaska, testified in support of SB 217. He noted that he is one of the owners of the Juniper Creek hydroelectric system in Eagle River, a 300- kilowatt facility with a 60 percent capacity factor, meaning it operates at full capacity 60 percent of the year. He acknowledged that he could not improve on former Commissioner Scott's explanation of why the bill is beneficial for the grid, independent power producers, and ratepayers. He emphasized that because the bill is good for ratepayers, it is also beneficial for cooperative utilities. He shared his experience, noting that he has been working on his project for about 13 years, though it has not produced electricity for the past three years. He expressed that the Alaska rail belt market is one of the most disadvantageous for independent power producers in the United States. He believes that SB 217 would help level the playing field between independent power producers and utilities, turning things around in favor of a more balanced energy market. 4:18:11 PM SENATOR WIELECHOWSKI asked what recommendations could be made to improve the situation so that the state is more open to independent power producers (IPPs) and other potential utility generation options. 4:18:28 PM MR. BRAILEY replied that Alaska's Railbelt is one of the few places in the United States where capacity has zero value, despite being allowed by regulation. He noted that no renewable energy producer or independent power producer (IPP) has ever been paid for capacity in the Alaska Railbelt. Zero emissions have no value in Alaska, as there is no market for renewable energy credits. He explained that all power purchase agreements between IPPs and utilities in the state require the IPPs to give away at least 50 percent to 100 percent of their renewable energy credits. He questioned why a private business would give away something of value and explained that the condition of interconnection, particularly with his utility, Matanuska Electric, forces the IPP to cover all interconnection and integration costs, including building the interconnecting power line. Despite these costs, the utility still takes the renewable energy credit. He described the situation as a monopsony system, where utilities hold all the cards. If an IPP disagrees with the terms of the agreement, they are told to find another buyer, but that option is blocked by pancaking charges that prevent selling to another utility. The system is rigged in favor of the utilities. 4:20:41 PM JENN MILLER, representing self, Houston, Alaska, testified in support of SB 217. She stated that she is the CEO of Renewable IPP, an Alaska-grown small business focused on developing, constructing, and operating renewable energy projects in Alaska. She mentioned their Willow and Houston projects and spoke to the company's dual commitment to advancing renewable energy and suppressing energy prices for Alaskans. She said she recently served on the governing Energy Security Task Force, which aligned with their mission to diversify energy generation, improve affordability, and maintain reliability. Independent power producers (IPPs) play a crucial role in this diversification and affordability, while also meeting reliability standards. For their projects to advance, they must agree on power purchase agreements with utilities and remain competitive with current generation costs. The Houston project is currently 10 to 20 percent below the existing cost of generation, making it essential to have a level playing field. SB 217 would equalize their cost base by addressing property taxes and eliminating pancaking charges. This would help reduce their power purchase prices and, in turn, lower costs for utility members. Additionally, having an established tax policy for IPPs would reduce uncertainty for investors and incentivize private investment in new generation projects. This would aid in deploying various energy sources, including wind, solar, and hydro, contributing to a more stable energy supply. She emphasized the urgency of passing this bill to incorporate reduced cost bases into power purchase agreements and pass those savings onto members. 4:24:24 PM CO-CHAIR GIESSEL closed public testimony on SB 217. 4:24:41 PM CO-CHAIR GIESSEL held SB 217 in committee.
Document Name | Date/Time | Subjects |
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SB 217 Letter of Support 3.12.24.pdf |
SRES 3/13/2024 3:30:00 PM |
SB 217 |
AEA Update SRES Presentation 3.13.24.pdf |
SRES 3/13/2024 3:30:00 PM |
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SB 217 REAP SRES Presentation 3.13.24.pdf |
SRES 3/13/2024 3:30:00 PM |
SB 217 |
AEA Responses to Senate Resources-Wheeling Charges.pdf |
SRES 3/13/2024 3:30:00 PM |