Legislature(2021 - 2022)ADAMS 519
05/09/2022 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB243 | |
| HB170 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 243 | TELECONFERENCED | |
| + | HB 5 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 170 | TELECONFERENCED | |
CS FOR SENATE BILL NO. 243(FIN)
"An Act relating to the power cost equalization
endowment fund; relating to power cost equalization;
and providing for an effective date."
1:32:55 PM
Co-Chair Merrick discussed the meeting agenda.
TIM GRUSSENDORF, STAFF, SENATOR LYMAN HOFFMAN, introduced
the legislation. He explained that SB 243 raised the number
of kilowatt-hours for each residential customer per month
from 500 to 750 kilowatt-hours (kWh). The provision
returned Power Cost Equalization (PCE) to its 1985 level of
support. The bill also changed the investment strategy of
the Power Cost Equalization Endowment Fund from the four
percent nominal target return to using the prudent-investor
rule. He noted that the historic consumption limits between
1985 to 1993 funded 750 kilowatt-hours and from 1993 to
2000 the amount was decreased to 700kWh and since 2000 it
has remained at the 500kWh level. He furthered that in FY
2021, 176 communities were eligible for PCE payments. The
additional 250kWh would add approximately $16 million in
Designated General Funds (DGF) to the annual payment. The
PCE program supported communities across the state and the
PCE fund totaled $1.1 billion as of March 31, 2022.
1:35:14 PM
Co-Chair Foster asked what the average residential PCE
usage was. Mr. Grussendorf replied that he did not know the
answer. He offered that the most recent Institute of Social
and Economic Research (ISER) study of the PCE program found
that the rural residents used about 40 percent of the kWh
amount urban Railbelt customers used. Co-Chair Foster
restated that the additional 250kWh would add about $16
million DGF annually from the PCE fund. He communicated
that the PCE fund had an excess amount going into the
waterfall equation for Community Assistance and Renewable
Energy. He emphasized that the $16 million was not
Undesignated General Funds (UGF). He indicated that the
full $16 million was based on all households using the
extra 250kWh, which would likely not be the case. He asked
if he was correct. Mr. Grussendorf answered affirmatively.
Vice-Chair Ortiz asked for verification that the
sustainability of the PCE fund would remain solid with the
adoption of the bill. Mr. Grussendorf answered in the
affirmative. Vice-Chair Ortiz requested an average
breakdown per household of the additional support.
1:37:30 PM
Mr. Grussendorf responded that he did not have a breakdown
available. He elucidated that 500kWh per month was minimal.
He remarked that at Christmas time there were not holiday
lights up in many villages because they could not afford to
exceed the 500kWh per month limit. Vice-Chair Ortiz asked
if the situation he described may be alleviated if the bill
was adopted. Mr. Grussendorf guessed that recipients would
be able to keep a bit more heat on or increase some other
electrical usage, but people tend to stay within the usage
limit.
1:38:50 PM
Representative Wool asked if many people used electricity
for heat. Mr. Grussendorf answered that that some did but
the majority used diesel. Representative Wool appreciated
the goal of the bill. The only concern he had was if the
increase disincentivized installing solar panels to reduce
electric bills or some other alternative measure. He asked
if the legislation would disincentivize the idea of
renewable energy. He asked how the $16 million affected the
cascade of PCE funding for the Renewable Energy Fund. Mr.
Grussendorf replied that the waterfall was based strictly
on the earnings of the endowment and the increase would not
affect the renewable energy piece. He explained that the
endowment prioritized the 5 percent of the fund available
for the PCE program. Currently, the PCE program used about
2.2 percent and the remainder was returned to the fund.
Under the bill, 4.6 percent of the 5 percent draw would be
used for PCE. The waterfall was entirely dependent on the
earnings of the fund separate from the PCE 5 percent
payout. He deduced that the fund could lose 2.6 percent
from passage of the bill, but that amount was so minimal it
did not measurably affect the endowments earnings.
1:41:35 PM
Representative Wool shared that he paid about 0.26kWh in
Fairbanks. He imagined that even with the PCE increase the
rural cost of power would remain high enough to not
disincentivize alternative energy solutions. He asked if
the rural power costs would still remain high. Mr.
Grussendorf responded that power costs were likely around
the amount paid in Fairbanks. He deemed that if rural
energy consumers could find a way to use solar or other
sources that would be cheaper, they would likely choose
that option to save money for other bills. Representative
Wool guessed the bill would be good for sources like heat
pumps that used electricity and did not require diesel use.
1:43:41 PM
Representative Josephson referenced Mr. Grussendorf's
mention that in the 1980s the PCE program provided more
subsidy. He wondered why it was decreased. Mr. Grussendorf
replied that in 2000, the PCE endowment was formed. He
elaborated that one reason the subsidy was decreased was
because the fund was unable to support the PCE payout at
750kWh and every year supplemental General Funds (GF) were
necessary. The program needed General Fund support until
2014, when the endowment matured. The fund had paid for PCE
without any additional GF since 2014. He highlighted that
the other reason for the reduction was to allow the
endowment to grow.
Representative Edgmon referenced Representative Wool's
question. He noted that part two of the bill was to allow
the endowment to be invested similar to the Permanent Fund
(PF) and not cap the earning potential. He delineated that
the endowment had started out with a 7 percent investment
return target rate that was decreased to 5 percent in 2016.
The endowment was managed for long-term growth rather than
in a more aggressive manner. He ascertained that if the
fund was managed like the PF and earned as much as possible
in high earing years, the earnings could easily accommodate
the increased demands of the bill and the waterfall paying
PCE costs first, then community assistance, and finally
renewable energy. He pointed to communities like Kipnuk,
Stebens, Gustavus, or Togiak and maintained that the
equalization had an impact due to the cost of diesel
driving the cost of electricity causing some communities
electricity costs to be much higher than other communities
using hydropower or supplemental alternative wind energy.
He reminded the committee that PCE was part of a grand
bargain for Bradley Lake, the Four Dam Pool and other
power projects. He strongly supported the bill. He
referenced the decreases in the subsidy and noted that in
some years in the 1990s PCE was not funded and created the
need to start an endowment in 2000. He strongly supported
the bill. He favored changing the investment strategy to
help the fund pay for the increase in the bill. He thanked
the sponsor for the bill.
1:48:36 PM
Representative Carpenter referenced the concept of the
prudent-investor rule versus the 4 percent target rate. He
asked about the commiserate increase in risk for the
principle of the fund. Mr. Grussendorf replied that the
prudent-investor rule allowed investors to look at the
markets and adjust accordingly. He pointed out that
currently the fund took a 5 percent draw but was investing
at a 4 percent nominal return. The Department of Revenue
(DOR) was struggling to figure out the best way to invest
the fund. He noted that the Higher Education Endowment Fund
had a 7 percent target and outperformed the PCE fund. He
detailed that the PCE fund earned 14.4 percent the previous
year compared to 27.2 percent for the education endowment
fund. He deduced that the 4 percent nominal return
investing strategy cost the PCE endowment $20 million to
$30 million. Representative Carpenter asked if there were
examples when the PCE fund did not lose as much when other
funds lost more. Mr. Grussendorf responded that when the
target was set at 7 percent there were some years where the
fund had struggled, which was the impetus for lowering the
target to 5 percent, which was an overreaction. He
reiterated that the bill enabled the fund to invest with
the same guidelines as the Permanent Fund and related that
there always would be risk. He voiced that the fund was
currently healthy enough and had mechanisms in place over
time to make up for bad years.
1:52:16 PM
Representative LeBon stated that the prudent investor rule
worked two ways; investing money and spending from an
endowment. He asked if investing expectations were unmet
whether there was flexibility to return to the lower per
kilowatt hour rate if lower returns were realized on the
endowment. He asked if the bill locked the higher number
in. Mr. Grussendorf answered that the bill would lock the
increase in. He detailed that currently, if the 5 percent
draw was not sufficient to pay for the full cost of the PCE
program the subsidy and DORs cost to manage the fund would
be prorated equally. Representative LeBon clarified that
the flexibility existed if the financial variables caused
the department to take that action. Mr. Grussendorf
answered in the affirmative and added that the subsidy was
prorated to the amount available.
Co-Chair Merrick OPENED public testimony.
NILS ANDREASSEN, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL
LEAGUE, felt that he was between a rock and a hard place
with his opinion of the legislation. He spoke about the
importance of PCE to many AML members and rural residents,
which did offset in parallel investments made to urban
residents. He believed that the value of the increase for
rural communities was significant. He weighed the potential
unintended impacts of SB 243 on AML's entire membership of
165 cities and boroughs on community assistance that was
one of the eligible programs funded out of the PCE
endowment. He related that it was worth noting how the
support intersected. He noted that for rural and small
communities, community assistance could be as much as 80
percent of a community's annual budget. The assistance
helped in delivering things like power, water, and sewer to
residents. He added that the community assistance program
contributed to washeterias, and the bill did not add any
funding for items like that. He relayed that his biggest
concern was the bill did good things for many Alaskans, but
the broader concern was it did not safeguard against the
possibility if funds were not available for community
assistance. He suggested some modeling to understand at
different levels how community assistance may be impacted.
He acknowledged that there was no surety, but he wanted to
feel confident that an increase in the PCE program could
fund the community assistance and the renewable energy fund
under a variety of fiscal scenarios.
1:58:40 PM
Mr. Andreassen referenced the conversation just prior to
public testimony and offered that a range could be
considered so the waterfall affect could be continued, and
the proposed increase would go into effect after community
assistance and renewable energy fund payouts. He commented
that the prudent-investor rule did not automatically result
in higher returns. He added that both the prudent investor
rule and investment target could co-exist. He believed that
the PF and pension assets were invested under both
investment strategies.
Representative Wool referenced the chart ["State of Alaska:
Alaska Energy Authority Analysis based on FY 21 PCE Data"
provided by AEA dated June 30, 2021 (copy on file)] and
noted that communities charged different amounts and were
given a PCE reduction, so the resulting rates were varied.
He asked Mr. Andreassen to explain the legislations effect
on the waterfall. He wondered if the waterfall payouts were
covered under the 5 percent draw.
2:01:26 PM
Co-Chair Merrick wanted to address the question after
public testimony.
Mr. Andreassen deferred the answer to investment experts.
He believed that if the endowments earnings were inadequate
the waterfall payouts were not funded.
Vice-Chair Ortiz restated Mr. Andreassens concern. He
asked if there were many communities that would benefit
from the bills increase and also be negatively impacted
because the municipality did not receive the community
assistance payment. He asked if it was a likely
possibility. Mr. Andreassen believed it was the concern. He
agreed that there was overlap between residents that
benefitted but the community might have to close its doors
or cities would not be able to operate. Vice-Chair Ortiz
deduced that the scenario could get translated into
specific services that the communities could no longer
provide by losing community assistance for the residents
benefitting from the increase in the PCE subsidy. Mr.
Andreassen answered in the affirmative and agreed it was
the concern.
2:04:05 PM
Representative Edgmon appreciated the position Mr.
Andreassen was in and understood his dilemma. He stated
that an increase in PCE was far more beneficial for his
constituents. He noted that the village of Kipna would
receive $288 thousand under the bill and received much less
community assistance. He pointed to a larger community like
Dillingham that would still get more from the bill in PCE
than from community assistance, which if fully funded was
$30 million per year in total. He pointed to much larger
communities that likely did not participate in PCE but did
receive community assistance. He understood the tradeoffs.
2:05:41 PM
JOHN HANDELAND, MAYOR OF NOME, NOME (via teleconference),
spoke in support of the cap increase in the bill. He
relayed that he also managed the water, sewer, and electric
utilities for the city. He lacked an opinion on the other
components of the bill in relation to investment
strategies. Currently, Nomes customers paid 0.40kWh and
the PCE rate paid 0.16kWh with a net of 0.24kWh. The
increase would assist the customers that struggled with
rising costs due to ever increasing costs of fuel in the
community. He urged the committee to adopt the provision to
increase the cap.
Co-Chair Merrick CLOSED public testimony.
Co-Chair Merrick asked for a review of the fiscal note.
CURTIS THAYER, EXECUTIVE DIRECTOR, ALASKA ENERGY AUTHORITY,
DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT,
reviewed the published fiscal impact fiscal note for the
Department of Commerce, Community and Economic Development
(DCCED) appropriated to the Alaska Energy Authority (AEA)
(FN1 (CED). He explained that the increased kilowatt hours
amounted to approximately $15.7 million based on PCE costs
of the current year. He elaborated that AEA budgeted $32
million for 500 kilowatts and increasing that amount by 50
percent added the $15.7 million. The total PCE program was
anticipated to cost $46 million.
Representative Edgmon shared that there were many villages
that did not have the ability to graduate up to the 750kWh.
He asked whether that scenario had been factored into the
fiscal note. He deduced that the fiscal note was based on
speculation. Based on his familiarity of rural Alaska,
smaller communities would not use the full 750kWh. He
thought the fiscal note was based on a linear straight line
analysis where all communities rise to the level of 750kWh.
He requested that Mr. Thayer comment. Mr. Thayer answered
that AEA had assumed that the total increase of all
communities using the 750kWh was a high end cost
estimate. He noted that there were 193 PCE communities and
AEA looked at the average PCE community and used an average
based on 750kWh. He furthered that there were other
complicating factors for determining the fiscal note. He
explained that PCE paid $0.20 to $0.75 over a base rate and
not all communities use the subsidy at $0.75. He
exemplified that for some communities PCE paid 0.10 and for
others PCE paid the full 0.55 difference. The factor was
accounted for to help approximate the high end fiscal note.
2:10:35 PM
Representative Edgmon ascertained that the actual fiscal
impact would not be as high as what the fiscal note
projected.
Co-Chair Foster cited the AEA document and referenced the
chart showing totals of the FY 21 residential energy
consumption by community. He asked for a summation of
column K that listed the proposed PCE maximum in order to
compare the actual consumption in 2021. He wanted to
determine if the numbers were under or above the fiscal
note projection and it the full 750kWh would be used. He
asked for the information prior to the next meeting on the
bill.
Mr. Thayer replied that AEA would follow up with the
information.
Representative Wool asked how a community qualified for
PCE. Mr. Thayer answered that one of the qualifications was
rural communities not connected by the road system,
communities off the grid, and the size of the community. He
furthered that the reimbursement amount is calculated based
on the cost (base rates were established by the Regulatory
Commission of Alaska (RCA)) for a similar level of service
in Anchorage, Fairbanks, and Juneau. He detailed that for
some communities like Lime Village the cost was $0.75kWh.
2:13:51 PM
Mr. Grussendorf referenced a question by Representative
Wool whether the 5 percent contributed to the waterfall. He
emphasized that the 5 percent was the payout from the
endowment solely for the PCE program. He reiterated how it
worked. He furthered that the waterfall was strictly funded
through extra earnings over the PCE payment. He noted a
year when the fund made $180 million in earnings, which was
the impetus for the waterfall earnings model for community
assistance by Senator Hoffman. He delineated that the
community assistance payout was still based on the original
model of 3 years at $30 million out of a $90 million total.
Lacking sufficient funding, the community assistance payout
would be one-third of the amount available. He addressed a
question by Vice-Chair Ortiz about whether a community
could benefit via PCE but lose services through
underpayment of community assistance. He answered that the
scenario could happen. However, even if the community
assistance payout was $20 million most smaller communities
received the base payment of $100 thousand. He indicated
that at a certain population limit per capita larger
communities benefitted by receiving over the base rate.
2:16:37 PM
Representative Wool stated his understanding of how the
endowment fund paid out for the three programs. He deemed
that using most or all of the 5 percent for the PCE program
affected the extra earnings for community assistance and
renewable energy. He surmised that the PCE increase could
affect the earnings of the fund, which would impact the
waterfall going forward and it would impact community
assistance because more than 5 percent would be used for
PCE. He asked whether he was correct. Mr. Grussendorf
replied that considering the earnings, the fund would not
earn a lot more lacking $16 million with the corpus of the
fund at $1 billion. He thought that the fund would have to
lose a lot more for a number of years in a row to affect
the waterfall. Representative Wool thought that it would be
interesting to know what the total consumption was in PCE
communities.
Co-Chair Foster stated that he supported the bill. He asked
for a simple example of a calculation. He did some quick
calculations for the village of Wales and estimated a total
maximum of 228,000/kilowatt hours. He noted the AEA
document showed that Wales used 156224/kWh. He wanted to
understand the calculation and why his numbers were skewed.
He requested historical data on the fund regarding its
earnings and payout over the prior 5 years. He underscored
the earlier comment about community assistance. He reported
that in the House Operating Budget the community assistance
was restored to $90 million so there would be less of a
need for the waterfall because the community assistance
fund would be self-sustaining.
2:21:22 PM
Representative Josephson referenced 2014 reforms that
funded community assistance off of the UGF books. He
wondered why the state could not supplement community
assistance with extra funding. Mr. Grussendorf replied that
when Senator Hoffman offered the original community
assistance program it was funded at $180 million and one-
third was used totaling $60 million, which was all GF.
Representative Carpenter asked for a couple of projections
from the Legislative Finance Division (LFD) on the PCE
payment and the waterfall projection compared to
projections of the proposal in the bill going forward.
Co-Chair Merrick asked her staff to reach out to LFD.
Representative Wool requested historical data on
consumption.
2:24:40 PM
CSSB 243(FIN) was HEARD and HELD in committee for further
consideration.
2:24:52 PM
AT EASE
2:29:06 PM
RECONVENED
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 243 AEA Response to Question HFIN 050922.pdf |
HFIN 5/9/2022 1:30:00 PM |
SB 243 |
| SB 243 Response toQ HFIN PCEAnalysis-LegReq-IncFrom500To750.pdf |
HFIN 5/9/2022 1:30:00 PM |
SB 243 |
| CSSB 243 Fin sectional.pdf |
HFIN 5/9/2022 1:30:00 PM |
SB 243 |
| SB 243 Supporting Document - AEA PCE Analysis from 500 to750.pdf |
HFIN 5/9/2022 1:30:00 PM |
SB 243 |
| HB 170 Public Testimony Rec'd by 050922.pdf |
HFIN 5/9/2022 1:30:00 PM |
HB 170 |
| HB 61 Public Testimony Rec'd by 050922.pdf |
HFIN 5/9/2022 1:30:00 PM |
HB 61 |