Legislature(2001 - 2002)
04/10/2002 09:44 AM Senate FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 280(RES)
"An Act permitting grants to certain regulated public
utilities for water quality enhancement projects and water
supply and wastewater systems."
This was the second hearing for this bill in the Senate Finance
Committee.
SENATOR GENE THERRIAULT, sponsor, reminded that questions were
raised during the previous hearing regarding whether grants
received could be "charged off" to rate-paying customers, as well
whether stockholders of a utility would benefit from grants
received in the event of the sale of that facility.
Senator Therriault informed the Regulatory Commission of Alaska
(RCA) submitted a letter dated April 8, 2002 [copy on file] that
clarifies the matters in that it essentially answers no to both
questions. He indicated an enclosed graph further explains the
method in which rates are set.
Senator Hoffman asked if 36 communities participate in this program
Senator Therriault stated he would provide a list of those
communities.
Senator Austerman referenced the first paragraph of the
aforementioned letter that states that the grant funds could not be
used to assess the new value through the utility; however,
elsewhere the letter states that the value is set based upon cash
flow. He suggested this is a contradiction because if the facility
were doubled utilizing the grant funds, the cash flow would also
double.
Senator Therriault clarified the cash flow is the rates the utility
is allowed to charge and that the RCA only allows rates based on
the private capital contributed. Therefore, he explained if more
customers were served, but the private investment was not
increased, the RCA would require the rates to be lowered. He
furthered that the purchaser, in the event of the sale of the
utility, would examine the cash flow, which would be based only on
the private investment. He pointed out that the purchaser would not
pay for the "transparent assets" because those assets could not be
recouped. He emphasized that the RCA is directed to require the
utility to charge rates only to cover the actual debt and to allow
for "an ongoing economic enterprise".
Co-Chair Kelly understood that a purchaser would establish a
capitalization rate, which would "ultimately be tied to the dollar
amount" customers could be charged. He explained that if the grant
revenues could not be charged back to the customers, the grant
funds invested in the expansion of the utility would never "flow
back" and be available for reinvestment in the business or as
profit.
Senator Therriault affirmed and reiterated that the transparent
asset, which is the "product of the grant" could not be "built
into" the rates.
Co-Chair Kelly furthered this is despite an increased number of
customers.
Senator Austerman understood the utility could double in size
although the rate structure could not be increased. However, he
asserted that because the facility has doubled, the cash flow would
increase because of the increased number of customers paying the
existing rate structure.
Senator Therriault responded the RCA would require the utility to
reduce the rates so individual ratepayers rather than the
shareholders who have not increased their investment would realize
the benefit of the grant.
Senator Therriault again referenced the letter, pointing out that
if a utility is sold, at the time of the facility's overall rate
review, the RCA is directed by statute to establish a new rate
based on the purchase price or the "book value", whichever is
lower. He defined book value as that portion of the capital that
was contributed by private industry. Therefore, he noted, if the
purchaser buys the facility at an amount lower than the book value,
the RCA would require rates based on the "good deal" obtained;
however, he noted if the purchase overpaid for the facility, the
RCA would only allow a rate structure based on the private capital
investment. He suggested that an overpayment of a utility could be
rejected by the RCA if it determines the utility would be an
"unworkable business operation."
Senator Leman clarified that operation expenses resulting from an
expansion are recoverable, although capital expansion costs could
not be recuperated.
Co-Chair Donley asked what would happen if a utility went out of
business and the assets were liquidated.
Senator Therriault replied that most assets are "pipes in the
ground", and that only a utility operator would be interested in
purchasing them.
Senator Hoffman asked about property owned by the utility.
Senator Therriault answered that the utility does not generally own
the land where pipes are located. He doubted grants would be
awarded for the construction of office buildings and other
facilities not directly related to actual utility delivery.
Senator Ward and Senator Therriault next discussed privatization,
competition and a monopoly.
Senator Therriault stated the utilities are regulated service
providers.
Senator Ward suggested that if established utilities were awarded
these grants, there would be no possibility of another operator
entering the market and competing to provide the services.
Senator Therriault informed there is no prohibition from
undertaking the process to start competition and qualifying to
receive the grants. He predicted this would not occur because this
legislation only applies to water and sewer utilities and the rate
base could only "support so much".
Senator Hoffman asked if other utility providers benefit from a
similar grant program.
Senator Therriault answered that some electric utility providers
participate in a grant program.
Senator Leman clarified these are cooperative utility companies.
Senator Hoffman specified privately owned utility companies.
Senator Austerman commented he would not oppose reporting this bill
from Committee although he was not convinced to vote for its
passage from the Senate.
Senator Leman moved to "report SB 280 from Committee with
individual recommendations and I don't agree with the fiscal notes,
I'll read them, move them along and recommend appropriate action be
taken at the time when fiscal notes are passed."
Senator Ward objected to comment on separate legislation that was
passed from a different committee with "an understanding that when
they bought it they knew what they were getting. And I allowed that
one to go back. I certainly am going to remove my objection and let
this one go out at this time, but I just want the Committee to know
when people buy stuff, and they know what they're buying, I think
that's a pretty fair indication as to they're sophisticated buyers
and then to come back in either case and ask the public to then
change the agreement to purchase I think that there has to be a
clear public purpose in there. And I'm not saying that there isn't
in this case and the previous one, but I'm not quite there where I
see it yet."
Senator Ward removed his objection to the motion to report the bill
from Committee.
Senator Leman WITHDREW his motion to report the bill from Committee
at the request of Co-Chair Kelly for the purpose of addressing the
fiscal note.
Co-Chair Kelly moved to adopt a forthcoming zero fiscal note for
the Department of Environmental Conservation.
There was no objection and a new fiscal note was ADOPTED.
Senator Leman re-offered his motion "with the revised fiscal note."
Senator Wilken informed that he owns ten percent of the utility
this legislation specifically would impact. He stated the
ratepayers would benefit from this bill, as savings from lower
operating costs would be passed along to the customers. He also
noted that Fairbanks Water and Sewer is one of the first private
utility operators in the United States, and therefore the processes
are new. He supported this legislation.
Senator Hoffman agreed with Senator Wilken's assessment, which is
why he asked about the possibility of privatized electric utilities
participating in a grant program. He surmised if all utilities were
funded with grants, operating costs would be reduced, resulting in
less dependence on the Power Cost Equalization (PCE) program.
Co-Chair Donley commented that to be successful rates must be
reduced. He spoke of the Anchorage Water and Sewer utility and the
lower percentage of per capita financial assistance it has received
over ten years compared to other areas of the State.
Senator Hoffman again requested the list of utilities. He pointed
out his water and sewer expenses in Bethel of approximately $270
per month are considerably higher than that of any other Committee
member.
There was no objection and CS SB 280 (RES) MOVED from Committee
with a zero fiscal note written by the Senate Finance Committee
4/10/02 for the Department of Environmental Conservation.
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