Legislature(2009 - 2010)BUTROVICH 205

02/22/2010 03:30 PM RESOURCES


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 220 ENERGY EFFICIENCY/ ALTERNATIVE ENERGY TELECONFERENCED
Heard & Held
*+ SB 277 PUB. UTILITY EXEMPTION: RENEWABLE ENERGY TELECONFERENCED
Heard & Held
Bills Previously Heard/Scheduled
                                                                                                                                
        SB 277-PUB. UTILITY EXEMPTION: RENEWABLE ENERGY                                                                     
                                                                                                                                
4:12:10 PM                                                                                                                    
CO-CHAIR   WIELECHOWSKI   announced  SB   277   to   be  up   for                                                               
consideration.                                                                                                                  
                                                                                                                                
MR. PAWLOWSKI,  staff to Senator  McGuire, explained that  SB 277                                                               
addressed the  section of law  they were just talking  about with                                                               
the  Regulatory   Commission  of   Alaska  (RCA).  That   is  the                                                               
definition of  public utility, which is  relatively circular. The                                                               
definition of "utility"  refers to "public" which  then refers to                                                               
"utility"  which  refers  back  to "public."  So  there  is  some                                                               
confusion about  what the appropriate  role of  independent power                                                               
producers is.  Traditionally, Alaska has had  large locally owned                                                               
cooperatives  or   municipally  owned  utilities  serving   in  a                                                               
regulated  marketplace. Senator  McGuire  discovered through  her                                                               
research  that  the  rate  of  penetration  of  renewable  energy                                                               
sources   within    regulated   and   unregulated    markets   is                                                               
fundamentally   different.  He   said  their   packets  contained                                                               
information  about competitive  electricity  markets; the  author                                                               
suggested that  the difference  in approach  to a  project's risk                                                               
profile   is   fundamentally   different  between   a   regulated                                                               
monopolistic utility versus an investor owned utility.                                                                          
                                                                                                                                
SB  277  attempts  to  exempt   from  the  regulations  that  are                                                               
explicitly  in  statute  now  independent  power  producers  that                                                               
generate entirely from renewable energy  sources and then sell to                                                               
a  regulated  utility.  The  theory   being  that  the  layer  of                                                               
protection  available  to the  consumer  comes  at the  regulated                                                               
utility level, but in a familiar  way as in gas contracts in Cook                                                               
Inlet where  the producer  of the  gas is  not regulated  but the                                                               
contract for gas is regulated. Looking  at that type of model for                                                               
renewable  power in  Alaska, he  said,  Senator McGuire  believes                                                               
will  encourage the  development of  renewable energy  in Alaska,                                                               
and  removing  some  of  what  could  be  considered  duplicative                                                               
regulation in statute could open  the door for private investment                                                               
in the  sector so  that the goal  of 50-percent  renewable energy                                                               
could be met by 2020.                                                                                                           
                                                                                                                                
4:14:15 PM                                                                                                                    
He said the  bill is actually fairly simple. Sections  1 and 2 on                                                               
page 1, line  10, and page 2, line 1,  insert conforming language                                                               
to the exemption that is prepared  in Section 3. The exemption is                                                               
from the RCA  authority over the renewable  energy generator when                                                               
they sell to one or more utilities that are regulated by it.                                                                    
                                                                                                                                
4:15:15 PM                                                                                                                    
DANIEL PATRICK O'TIERNEY, Chief  Assistant Attorney General (AG),                                                               
Department  of  Law  (DOL), Supervisor,  Regulatory  Affairs  and                                                               
Public Advocacy Section,  said he was available  for questions on                                                               
SB 277.  He explained that  his section performs the  AG's public                                                               
advocacy role in regulatory matters under AS 44.23.020(e).                                                                      
                                                                                                                                
CO-CHAIR WIELECHOWSKI  asked if  he has  experience with  this or                                                               
indirect regulation of power producers or energy suppliers.                                                                     
                                                                                                                                
MR. O'TIERNEY answered  that he assumed he meant  that this posed                                                               
no  direct regulation  on a  cost basis  of an  independent power                                                               
producer (IPP). The  IPP's provision of power  would be submitted                                                               
in  a  contract form  with  the  utility  to the  commission  for                                                               
approval. The commission would engage  the contract at that point                                                               
in the  process. If that  is what he meant,  he said he  had some                                                               
experience with it.                                                                                                             
                                                                                                                                
CO-CHAIR WIELECHOWSKI asked if Enstar  purchasing gas from a Cook                                                               
Inlet provider would be a  correct analogy in deciding whether or                                                               
not the RCA can look at the costs of getting that gas to Enstar.                                                                
                                                                                                                                
Mr.  O'TIERNEY replied  that he  thought  it was  similar in  the                                                               
sense that direct  regulation would be focused upon  a cost basis                                                               
for the  purposes of determining revenue  requirement and related                                                               
rate base  return that yields  rates in a  regulated environment.                                                               
When a  contract is submitted  to the commission for  its review,                                                               
from  his perspective  in  practicing before  the  RCA, it  would                                                               
apply its just  and reasonable standard, but it  doesn't have the                                                               
capability of  scrutinizing the costs  involved in  providing the                                                               
service. So, it's then faced with  having one party to a contract                                                               
submitting a contract and not  having jurisdiction over the other                                                               
party  in the  contract. It's  the  party that  has produced  the                                                               
power and presumably  has the related costs that  normally is not                                                               
reviewed by  the commission.   He said he  would leave it  to the                                                               
Commission to  speak to  how it has  dealt with  the difficulties                                                               
involved in reviewing contracts under this standard.                                                                            
                                                                                                                                
CO-CHAIR WIELECHOWSKI asked if he  believed the public's interest                                                               
could  be  adequately  protected  under  this  bill  through  the                                                               
process of exempting IPPs from regulation.                                                                                      
                                                                                                                                
MR.  O'TIERNEY answered  that  any  end user  of  a commodity  or                                                               
product  wants  some assurance  that  the  price it's  paying  is                                                               
price-disciplined  in  some  fashion. In  a  capitalist  economy,                                                               
competition   usually   provides   that  price   discipline   and                                                               
regulation is  a proxy for  marketplace price competition  to the                                                               
extent there is  no market or there isn't an  effective market to                                                               
do that job.  Usually regulation  is a substitute for free market                                                               
competition  to  the  extent  that  there  is  no  market  or  no                                                               
effective  market to  do that  job. If  he were  looking at  this                                                               
proposal, he  would be asking  the question: is  there sufficient                                                               
competition in  the market that  would produce  independent power                                                               
contracts  for  provisioning   utilities  that  are  sufficiently                                                               
market-disciplined. If not, then he  would have some concerns and                                                               
one would ask why they wouldn't be regulating that service.                                                                     
                                                                                                                                
4:21:05 PM                                                                                                                    
CO-CHAIR  WIELECHOWSKI asked  him to  submit an  opinion on  this                                                               
bill over the next few days.                                                                                                    
                                                                                                                                
MR.  O'TIERNEY agreed  and added  that generally  you have  to be                                                               
able  to  compare  apples  to  apples.  So,  if  markets  outside                                                               
involving IPPs are generally unregulated  you have to compare and                                                               
contrast what  our marketplace looks  like for this  service here                                                               
in  order to  be able  to determine  whether that  is a  relevant                                                               
factor in determining  how to handle it in Alaska.  He is not the                                                               
person to  provide that  analysis, but  there are  certainly some                                                               
who could.                                                                                                                      
                                                                                                                                
CO-CHAIR WIELECHOWSKI said  he is the person who  is charged with                                                               
protecting consumers.                                                                                                           
                                                                                                                                
MR. O'TIERNEY said  he is not an expert on  IPP status in outside                                                               
jurisdictions.                                                                                                                  
                                                                                                                                
CO-CHAIR WIELECHOWSKI  said he understood that,  but still wanted                                                               
his input.                                                                                                                      
                                                                                                                                
4:22:57 PM                                                                                                                    
BOB  PICKETT, Chairman,  Regulatory Commission  of Alaska  (RCA),                                                               
said  this  would  also  mean  that  IPPs  wouldn't  file  for  a                                                               
Certificate of  Public Convenience  and Necessity (CPCN).  A CPCN                                                               
makes  findings,  for  instance,  that this  utility  service  is                                                               
actually needed by the public  at this particular location, point                                                               
and  time  and  that  the financial  managerial  and  operational                                                               
capacities are there to provide the service that is applied for.                                                                
                                                                                                                                
He said the  FERC issued a Notice  of Inquiry a few  weeks ago to                                                               
address a lot  of these issues in the renewable  energy arena. It                                                               
wants to  promote renewable  energy resources but  in a  way that                                                               
guarantees  just  and  reasonable  rates  while  eliminating  the                                                               
impediments to  these resources accessing  the grid in  the Lower                                                               
48.                                                                                                                             
                                                                                                                                
As Mr. O'Tierney stated, Mr.  Pickett said, Alaska has an "island                                                               
grid" that is disconnected and  for all practical purposes is not                                                               
under  the jurisdiction  of the  FERC.  The FERC  has taken  used                                                               
market forces as a proxy for  regulation in the Lower 48 and they                                                               
focus  on  the  competitive   wholesale  electric  markets.  They                                                               
continuously monitor these markets  and then enforce market rules                                                               
as needed with  a fairly well established regime.  They have also                                                               
come  to the  conclusion  that system  reliability is  critically                                                               
important and that is the purpose of the Notice of Inquiry.                                                                     
                                                                                                                                
MR. PICKETT said  he understood their concerns  about timing with                                                               
a  lot  of the  IPPs  that  many  times find  themselves  without                                                               
significant public subsidy - whether  that be from the state, the                                                               
federal government,  direct subsidies or tax  credits or whatever                                                               
- for projects  that will not pencil out or  make sense and could                                                               
not  provide  power  at  a  competitive  rate  to  the  regulated                                                               
utilities. He  said Fishhook, a  small hydro  project, petitioned                                                               
the RCA earlier for a strategy to address some of these.                                                                        
                                                                                                                                
4:26:10 PM                                                                                                                    
JAMES KEEN,  Chief, Engineering, Regulatory Commission  of Alaska                                                               
(RCA),  explained  that last  year  the  Commission released  two                                                               
different orders  exempting small IPPs from  certification on the                                                               
basis that it would see  these utilities come forward through the                                                               
regulated  utility they  would be  selling  power to  in a  power                                                               
purchase agreement.  The RCA believes  it could serve  the public                                                               
interest  by  simply looking  at  the  power purchase  agreement,                                                               
alone, regulating that rate to make  sure a fair price is flowing                                                               
through to  the ultimate  consumers, but  removing the  burden of                                                               
certification  and economic  regulation  from the  IPP. This  was                                                               
done in the  case of Fishhook Renewable Energy,  which is putting                                                               
in a small river hydro in  Hatchers Pass, and South Fork Hydro in                                                               
Eagle River.  Both of those  would be selling power  to Matanuska                                                               
Electric Association (MEA).                                                                                                     
                                                                                                                                
MR. PICKETT added that another  approach is a qualifying facility                                                               
(QF) qualification under  the FERC in which an IPP  fills out the                                                               
application.   If  the   FERC  grants   QF   status,  the   state                                                               
jurisdiction is  preempted. Then  the QF will  sell power  to the                                                               
regulated utilities at an avoided cost basis.                                                                                   
                                                                                                                                
4:27:55 PM                                                                                                                    
CO-CHAIR  WIELECHOWSKI  asked  if   a  company  is  not  directly                                                               
regulated,  does the  RCA have  access  to information  regarding                                                               
power production  costs when it  is reviewing a  contract between                                                               
the IPP and a regulated utility.                                                                                                
                                                                                                                                
MR. PICKETT answered no.                                                                                                        
                                                                                                                                
CO-CHAIR  WIELECHOWSKI  asked  if  Cook  Inlet  natural  gas  had                                                               
created pricing issues for the RCA.                                                                                             
                                                                                                                                
MR.   PICKETT  answered   that  it   has  created   some  intense                                                               
challenges. While several contracts  have been recently approved,                                                               
it depends  on how  a case is  presented, what  interveners after                                                               
the filing  is noticed  become parties, and  the strength  of the                                                               
evidence presented  in their  arguments. Everybody's  due process                                                               
rights are protected, but there is uncertainty, for sure.                                                                       
                                                                                                                                
CO-CHAIR WIELECHOWSKI  asked if  he had concerns  over regulating                                                               
IPPs.                                                                                                                           
                                                                                                                                
MR. PICKETT  answered that he  wouldn't speak for  the Commission                                                               
on  adopting  a   formal  policy  on  any   particular  piece  of                                                               
legislation  or offer  direct input;  that takes  an action  at a                                                               
public meeting.  But just speaking from  what he has seen  in his                                                               
time as  commissioner and chairman,  it does raise  some question                                                               
marks,  particularly if  timing is  a  big issue.  It's going  to                                                               
depend  on  the  nature  of  what  the  IPP  brings  in  for  the                                                               
interconnection  agreement, which  they  will  have to  negotiate                                                               
with a  regulated utility.  Price is not  the only  issue. System                                                               
stability  is very  important. On  the price  side, they  need to                                                               
negotiate  the power  sale agreement  with the  utility and  then                                                               
present it to the RCA. The  agreement will be reviewed as a whole                                                               
as  to  its reasonableness,  and  whether  it  is in  the  public                                                               
interest.                                                                                                                       
                                                                                                                                
SENATOR STEDMAN  asked if someone was  to come in and  build a 50                                                               
mgW hydro, would they need at CPCN if this bill passed.                                                                         
                                                                                                                                
MR. PICKETT  replied their  read is  that they  would not  need a                                                               
CPCN.                                                                                                                           
                                                                                                                                
SENATOR STEDMAN asked if he should be concerned about that.                                                                     
                                                                                                                                
4:31:49 PM                                                                                                                    
STEWART GARY,  Assistant Attorney  General Representing  the RCA,                                                               
Department of Law  (DOL), clarified that his role is  found in AS                                                               
42.04.040(a),  where  it  says   it  the  responsibility  of  the                                                               
Attorney General to provide legal  counsel to the Commission. So,                                                               
from the Commission's perspective he  would echo what Mr. Pickett                                                               
said - the  IPP would not be  required to apply for  or receive a                                                               
CPCN from  the Commission. But  other questions about  the extent                                                               
that other provisions might apply  are open, particularly related                                                               
to interconnection.                                                                                                             
                                                                                                                                
SENATOR STEDMAN asked again if he should be concerned.                                                                          
                                                                                                                                
MR.  GARY  answered  yes.  The   CPCN  process  is  a  gatekeeper                                                               
function. For  practical purposes, it determines  what someone as                                                               
an individual  investor decides  to build  is something  that the                                                               
public  actually needs  - the  public  convenience and  necessity                                                               
part of it. The other aspect is  the fit, willing and able part -                                                               
is the proposed  party financially capable of doing  it, are they                                                               
managerially  capable of  doing  it, and  are they  operationally                                                               
capable of doing it. CPCNs  protect the public from interruptions                                                               
in utility service.  Society has come to  expect public utilities                                                               
to meet a  higher standard and that is to  provide their services                                                               
reliably  24 by  7.  The only  way  to do  that is  to  put up  a                                                               
threshold across which the utility has  to pass. Yes, he would be                                                               
concerned.                                                                                                                      
                                                                                                                                
4:34:59 PM                                                                                                                    
MR. PICKETT said he would stand by for questions.                                                                               
                                                                                                                                
4:35:20 PM                                                                                                                    
ETHAN SCHUTT, Cook  Inlet Region, Inc. (CIRI), said  he wanted to                                                               
provide  some  context on  SB  277.  It  is important  in  making                                                               
regulatory  fit   amenable  with   the  private   development  of                                                               
renewable resources for IPPs while  striking a balance to protect                                                               
the  public interest  to  make  sure the  rate  is  fair and  the                                                               
service is reasonable.                                                                                                          
                                                                                                                                
He  said that  the  status  quo is  that  they  only have  public                                                               
utilities  providing  electrical  service on  the  Railbelt.  The                                                               
CPCN, the rate case and  regulatory oversight functions that take                                                               
place with  the RCA  are entirely  appropriate given  that public                                                               
utilities  have  been established  in  areas  where they  have  a                                                               
monopoly service for electricity. So  to the degree that a public                                                               
utility  makes good  or bad  business or  financial judgments  or                                                               
investments or that they are  operationally efficient or not, the                                                               
cost  and benefit  of  all  that decision  making,  he said,  the                                                               
bottom line is  that existing public utilities have  a rate case.                                                               
So,  for better  or worse,  their decision  making as  it affects                                                               
their cost structure  gets passed through to  their customers who                                                               
can't do anything about it.                                                                                                     
                                                                                                                                
CIRI  is  not proposing  to  have  retail customers,  but  rather                                                               
developing a project  and then having to go  through a negotiated                                                               
process for  power sales through  PPAs with two or  more existing                                                               
public utilities  in order  to sell their  power to  a commercial                                                               
customer who happens to be  a regulated utility. They envision as                                                               
part of  that process, that  the utilities will demand  a certain                                                               
amount  of  information  justifying  their  own  costs  into  the                                                               
project.  That same  package  of information  that  they use  for                                                               
their  own purposes  for the  negotiation  will also  be used  in                                                               
making their  case to the RCA  - why this contract  is allowed to                                                               
be put into their rate and be part  of their rate base as part of                                                               
their regulated function.                                                                                                       
                                                                                                                                
RCA staff  and lawyers  have testified that  they won't  have any                                                               
ability  to look  at costs,  but  that from  a strictly  absolute                                                               
interpretation. It's a little misleading  in that these utilities                                                               
aren't just  going to  buy power  without being  able to  look at                                                               
certain financial and cost information.                                                                                         
                                                                                                                                
MR. SCHUTT  pointed out in the  notion of a market  that the cost                                                               
is not  the only  piece of  the puzzle on  the financial  side. A                                                               
significant amount  of risk is allocated  to the IPP side  of the                                                               
table  that remains  long  after the  contract  has been  entered                                                               
into. Some of the more significant  risk that remains in the case                                                               
of a wind  project is the resource risk. In  their case they have                                                               
10 years, a  long history, of data from Fire  Island, much longer                                                               
than the  two or three years  that are commercially used  in many                                                               
locations of  two or three years.  If the IPP gets  that wrong in                                                               
negotiating  its  price  of  power,  and  the  wind  resource  is                                                               
actually less  than what  the modeling  indicates it  should have                                                               
been, that loss falls on the IPP  side of the ledger. There is no                                                               
real way  to allocate  that risk any  differently through  a long                                                               
term contract.                                                                                                                  
                                                                                                                                
IPPs also maintain the long  term risk of equipment failure, cost                                                               
overruns  or  other executional  issues  in  the construction  or                                                               
operation  of  the plant  itself.  By  contrast,  if this  was  a                                                               
project  that was  developed by  a public  utility, all  of those                                                               
risks would be borne directly by the rate payer.                                                                                
                                                                                                                                
4:42:59 PM                                                                                                                    
MR. SCHUTT said  the current structure proposed by  SB 277 fairly                                                               
allocates risks and rewards for  an IPP with a renewable resource                                                               
when the only customers are a regulated utility.                                                                                
                                                                                                                                
4:44:47 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI  said that  he would keep  public testimony                                                               
open. Finding no  further questions, he adjourned  the meeting at                                                               
4:44 p.m.                                                                                                                       
                                                                                                                                

Document Name Date/Time Subjects
SB 220 version K.pdf SRES 2/15/2010 3:30:00 PM
SRES 2/18/2010 3:30:00 PM
SRES 2/22/2010 3:30:00 PM
SRES 2/24/2010 3:30:00 PM
SB 220
SB 277 Bill Packet.pdf SRES 2/22/2010 3:30:00 PM
SB 277
Possible Amendment - 26-LS1197K.11.pdf SRES 2/22/2010 3:30:00 PM
Possible Amendment - 26-LS1197K.10.pdf SRES 2/22/2010 3:30:00 PM
Possible Amendment - Energy Policy_Nuclear.pdf SRES 2/22/2010 3:30:00 PM