Legislature(1995 - 1996)
03/14/1996 09:10 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
JOINT HOUSE AND SENATE FINANCE
COMMITTEE MEETING
March 14, 1996
9:10 a.m.
TAPES
SFC-96, #41, Side 1 (000-575)
SFC-96, #41, Side 2 (575-460)
CALL TO ORDER
Representative Richard Foster, Co-chairman, House Finance
Committee, convened the joint House and Senate Finance
Committee meeting at approximately 9:10 a.m.
PRESENT
The following committee members attended:
House Senate
Representative Foster Senator Donley
Representative Grussendorf Senator Phillips
Representative Navarre Senator Sharp
Representative Parnell Senator Zharoff
Representative Therriault
OTHER LEGISLATORS PRESENT: Representative Ivan,
Representative Moses, and Representative Ogan.
ALSO ATTENDING: Percy Frisbe, Director, Division of Energy,
Dept. of Community and Regional Affairs; Gloria Manni,
Assistant Director, Division of Energy, Dept. of Community
and Regional Affairs; Dave Hutchens, Executive Director,
Alaska Rural Electric Cooperative Association; Brad Reeves,
General Manager, Kotzebue Electric Cooperative; Charles
Walls, General Manager, Alaska Village Electric Cooperative;
Mike Greany, Director, Legislative Finance Division;
Virginia Stonkus, fiscal analyst, Legislative Finance
Division; and aides to committee members and other members
of the legislature.
PARTICIPATING VIA TELECONFERENCE: Randy Simmons, Alaska
Industrial and Export Authority, Dept. of Commerce and
Economic Development, Anchorage; Al Unok and Joe Mike,
Manager of the local utility, Kotlik, Alaska.
SUMMARY INFORMATION
POWER COST EQUALIZATION PROGRAM
Representative Richard Foster, Co-chairman, House Finance
Committee, welcomed participants to the meeting and noted
teleconference links to legislative information offices at
Anchorage, Barrow, Bethel, Cordova, Delta Junction,
Dillingham, Fairbanks, Juneau, Kotzebue, Nome, and Tok as
well as additional links to offnet sites at Anchorage,
Kwethluk, Kotlik, Hooper Bay, and Mountain Village.
Co-chairman Foster attested to the need for and benefits
derived from the Power Cost Equalization Program and noted
financial concerns that place the program in jeopardy. He
then advised that representatives of both the Division of
Energy, Dept. of Community and Regional Affairs, and the
Alaska Rural Electric Cooperative Association (ARECA) were
present to review the current program and recommend changes
to enable the program to continue, in light of reduced
funding.
DAVE HUTCHENS, Executive Director, Alaska Rural Electric
Cooperative Association, explained that ARECA is composed of
18 electric cooperatives and regional electrical authorities
and 19 other public utilities. Of the 37 members, a subset
of 17 are members of the ARECA Rural Issues Forum, the group
which requested the present hearing. Mr. Hutchens asked
that managers, directors, and management employees of rural
utilities, in the audience, stand and be recognized.
BRAD REEVES, General Manager, Kotzebue Electric Cooperative,
advised that issues relating to the Power Cost Equalization
Program have a direct impact on the health, life style,
education, and employment of an estimated 75,000 Alaskans
and hundreds of businesses in both rural and urban Alaska.
He explained that the ARECA Rural Issues Forum requested
committee discussion of rural electricity, the fate of the
PCE program, and what might happen without the program and
without fair and equitable support of rural Alaska through
power cost equalization.
Mr. Reeves focused on modern necessities made available
through electricity. He noted that while these necessities
are taken for granted by urban residents, they are recent
improvements to the lives of those in rural areas. He noted
that Healy Lake Village got central station electric service
in 1994.
As background information, Mr. Reeves observed that the
state has used part of its revenues gained from resources
(oil, fish, timber, and minerals) in rural Alaska to finance
electrical infrastructures in urban areas. To balance those
expenditures, and in fairness to rural areas where there are
few alternatives to expensive diesel generation, the state
has helped rural utilities and rural residents receive safe,
reliable, affordable power. The Power Cost Equalization
Program has been the state's most effective tool toward that
end. PCE began in 1980. A total of 175 communities
representing 75,000 people participate in the program.
Benefits of the program flow directly to consumers of 103
utilities, including residences, vital community facilities,
businesses, and schools. PCE is used to pay a significant
part of electric bills, especially in small rural
communities without economic advantages. Such funding helps
to keep the cost of this essential service in line with
electricity costs in Fairbanks, Anchorage, and Juneau.
Commencing a slide presentation, Mr. Reeves noted that a
comparison of power costs between urban areas and village
settings evidences that even with PCE, rural residents pay
almost double what urban areas pay for electricity. Only a
third of the electricity sold in eligible communities
qualifies for PCE. The other two-thirds is fully paid by
consumers. Mr. Reeves stressed that rural electric costs
that are twice that of urban areas occur in settings where
population is increasing, the costs of goods and services
are much higher, and average income is much lower. In rural
Alaska, the cost of affordable power is a serious matter.
Rural residents pay a much higher percentage of income for
the same amount of power as urban residents. Costs of rural
power are higher for four reasons:
1. Higher capital costs.
2. Higher fuel costs.
3. Higher transportation costs.
4. Lack of economies of scale.
In addition to directly helping people, PCE also maintains
basic utility infrastructures in rural communities. It
keeps water and wastewater treatment utilities functioning,
keeps street lights on, and community centers and community
health clinics open. The stable revenue source PCE provides
allows communities to qualify for necessary financing to
improve systems and services and maintain affordable power.
The program should not be viewed as a give-away or handout.
It is an investment that saves Alaskans money, saves lives,
helps educate citizens, assists with health, and allows the
state to continue to benefit from its rich resources. PCE
continues to accomplish a great deal that directly benefits
the state. Because of the Power Cost Equalization Program,
rural communities and residents have been able to move into
modern times.
Mr. Reeves stressed that to maintain equity the state must
ensure that revenues from Alaska's abundant resources, most
of which derive from rural locations, are used to build and
improve utility infrastructure and citizen services
statewide. The history of the state's rural electric
assistance programs is intertwined with state efforts to
build hydroelectric projects to provide urban areas with
inexpensive power. PCE improves safety, services, and
communications. It helps keep power costs affordable for
community water and wastewater facilities--utilities that
have a direct relationship to health. The program helps
support the cost of vital community services and keeps rural
Alaskans in touch with the rest of the state through
telephones, faxes, computers, and radios.
PCE creates affordable power to support Alaska's rural
economy and resources while sustaining a necessary labor
pool to develop those resources. Numerous businesses in
Anchorage, Fairbanks, and Juneau are closely connected to
rural economies. Fishing, timber, mining, oil, tourism, and
transportation of basic consumer goods are examples of
Alaska's largest industries that depend upon rural areas and
affordable and reliable power. PCE ensures that these
businesses will continue to grow, develop, and prosper.
An abrupt end to power cost equalization would create an
economic crisis that would impact all of Alaska. The state
needs a reasonable plan to ease rural residents off PCE in a
manner that ensures a soft landing. Rural communities that
have lost PCE have become economically stressed. Loss
created serious problems with delivery of health and other
basic human services.
ARECA Rural Issues Forum members serve 70% of the PCE
consumers. The 103 utilities participating in the program
consist of numerous types: cooperatives, municipals,
locally-owned, and employee-owned. They provide much needed
services. They care about their consumers. And they are
intent upon ensuring that their consumers join the twentieth
century and prepare for the twenty-first. Despite rising
costs and growing populations, when adjusted for inflation,
Alaska's rural utilities have managed to lower the cost of
electricity while improving service and continuing to meet
demand.
Mr. Reeves next spoke to cost saving efficiencies such as
the cooperative effort between AVEC and a diesel
manufacturer to retrofit a diesel truck engine with an
electric generator. The result was improved efficiency of
13% and lower overall costs to consumers. Cost containment
at Naknek Electric has reduced the average cost of retail
kilowatt hours from 22 cents in 1989 to 19.3 cents today.
Kotzebue Electric has begun to install the first utility-
grade wind turbines in Alaska. The foregoing innovations
will help the Northwest region lower costs.
Successful management, productive partnerships, and
innovations have enabled rural utilities to keep power rates
down. However, costs remain considerably higher than rates
in urban areas. Without the stabilizing force of power cost
equalization, power in rural Alaska would be seriously
threatened. The issue facing all of Alaska is the potential
disaster of shutting off the lights of rural areas by
prematurely "killing the Power Cost Equalization Program."
Projections show that, based on current usage, the program
will end abruptly in 1999.
PERCY FRISBE, Director, Division of Energy, Dept. of
Community and Regional Affairs, next came before committee.
He expressed appreciation for an opportunity to explain the
Power Cost Equalization Program to members and advised that
staff would speak to the financial condition of the program.
GLORIA MANNI, Assistant Director, Division of Energy, Dept.
of Community and Regional Affairs, came before committee.
Utilizing tabulations illuminated by an overhead projector,
she explained that the fund would contain approximately
$47.5 million at the end of FY 97. For the upcoming two
years, expected revenue from the four-dam pool transfer fund
will total $13.5 million and investments will total $5
million. The foregoing produces a total of $66 million for
power cost equalization. With current utilization of $20
million per year, the fund will be exhausted by 1999.
Ms. Manni explained that the above-noted $13.5 million
derives from the four-dam pool consisting of:
1. Terror Lake (Kodiak)
2. Tyee Lake (Wrangell/Petersburg)
3. Swan Lake (Ketchikan)
4. Solomon Gulch (Valdez/Glennallen)
built for a total cost of $475 million from $295 million in
state grants and a $180 million state loan. The debt
service on the state loan is the source of revenue to three
statutory funds. Forty percent of the debt service is
allocated to the Power Cost Equalization Program. There is
no certainty regarding a continued stream of revenue to fund
PCE.
Ms. Manni next spoke to utilization of power cost
equalization moneys, advising that $11.1 million is used for
residential services. It reflects increased and stable
growth in rural communities. Funding for commercial use has
decreased since 1993 when the legislature removed state and
federal-funded facilities from eligibility. Services for
community facilities have grown, reflecting additional
water, sewer, and other infrastructure projects in rural
areas for which PCE provides funding. The population served
totals approximately 76,000 people in 175 communities. Each
residential consumer utilizes only 343 kilowatt hours per
month. That is extremely conservative. Average use in
Anchorage is double. Each residential PCE customer receives
$557 in annual benefits.
Directing attention to charts and graphs, BRAD REEVES noted
that state financial support for PCE has remained stable
over the period of the fund. That stability has allowed
rural communities access to basic human services. It has
also allowed for increased community facilities (water and
sewer) which have aided in solving health problems. As part
of the overhaul of energy programs in 1993, the legislature
included intent to stabilize the PCE program at $17 million
for twenty years (to the year 2013). That time frame was
intended to provide rural areas an opportunity to build
better alternatives, work on other projects to solve rural
energy needs, and move into the future.
The Governor's budget for FY 97 proposes $17 million.
Recipients of the program have agreed to pared down funding
in the spirit of developing reasonable low-cost, long-term
solutions.
Mr. Reeves noted that the fund was never adequately
capitalized. Support for PCE at a predictable level is
essential for protection of rural consumers.
Mr. Reeves next spoke to changes in the program recommended
by the Alaska Rural Issues Forum, as a result of declining
funding:
1. Termination of grant fund provisions to save $1.4
million and extend the life of the program.
2. Deletion of commercial customers since they can
raise revenues to cover differences. The maximum
per month kilowatt usage is only 700. This
change would thus not have a great impact on
commercial consumers and would reduce the
program by $2.5 million per year.
3. Raise the floor from the current 9.5 cents per
kilowatt
hour to $9.7. That would shift PCE dollars from
towns to villages.
4. Lower the percentage of covered costs from the
current level of 95%. That would cut program dollars
equally for all participants.
Remaining PCE funding would then flow to the highest
priority: residential consumers and community facilities
(street lights, water, and sewer). Schools would continue
to be eligible. Mr. Reeves stressed that reliable and
affordable power is the common denominator to solve many of
the problems in rural areas.
The ARECA Rural Issues Forum agrees with the intent of the
legislature that the fund end in a reasonable length of
time. Mr. Reeves then questioned what would be considered
"reasonable" and suggested that it should provide adequate
time to continue statewide efforts to improve efficiencies,
find alternatives, develop new technologies, and better
establish necessary infrastructure.
CHARLES WALLS, General Manager, Alaska Village Electric
Cooperative, and Chairman, ARECA Rural Issues Forum, next
came before committee. He referenced written materials
submitted to members and advised that he would respond to
questions. Representative Foster inquired concerning the
impact of four-dam pool divestiture. Mr. Walls stressed
that PCE is intertwined with the four-dam pool hydroelectric
projects. PCE participants feel they have a claim on 40% of
the revenue stream and 40% of the proceeds should the state
sell the projects.
Senator Sharp referenced the proposal to eliminate the grant
program and voiced his understanding that the intent of the
grants was to promote innovative power projects in rural
Alaska to provide a long range solution to the high cost of
energy. Mr. Walls concurred in that understanding but
advised that research of the 1993 legislative records
indicates that the intent did not "get into the
regulations." Grant provisions in the PCE program have
resulted in general grants with no direction toward
innovation. It was the understanding at the time of the
1993 overhaul that grants were to fund only projects which
reduced the cost of PCE. That has not been the case in
practice. The grant program has generally been used to meet
capital life, health, and safety needs.
Senator Randy Phillips inquired regarding alternative power
sources. Mr. Walls advised of several hydroelectric
projects (Black Bear Lake, Prince of Wales Island; Power
Creek, Cordova; and Old Harbor were specifically mentioned).
Kotzebue Electric Association is pioneering work in wind
energy. Turbines are scheduled to go into service this
year. Research and development funding was provided by the
federal government.
Discussion followed between Senator Phillips and Brad Reeves
pertaining to a joint project with a telephone cooperative,
utilizing battery chargers to aid in communications with
remote cabins and camps.
Representative Grussendorf asked if ARECA members voiced
concern regarding funding for PCE in the course of the 1993
legislative overhaul. He said that upcoming problems were
evident to him at that time and asked if members expected
the program to end in 1998-99. Mr. Walls acknowledged that
members did not like many elements of the 1993 restructuring
but ended up having to work with the result. While intent
language speaks to continuation for 20 years, it is intent
only. ARECA is thus back before the legislature to speak to
continuing need in rural areas. Representative Grussendorf
again asked if testimony in 1993 expressed concerns now
being raised. DAVE HUTCHENS again came before committee.
He explained that he represented ARECA during the 1993
restructuring. He recalled that he had no opportunity to
testify on the version of the bill which ultimately passed,
at its single hearing in House Finance Committee.
RANDY SIMMONS, Alaska Industrial and Export Authority, Dept.
of Commerce and Economic Development, next spoke via
teleconference from Anchorage. Speaking to the impact of
divestiture on PCE, Mr. Simmons explained that the state
entered discussions with the five utilities in the four-dam
pool in August of 1995 to examine the possibility of selling
the hydro projects to the utilities. Monthly meetings
attempted to set parameters for a sales price. All agreed
it had to be in the best interest of both the state and the
utilities to effect the sale. At a meeting four weeks ago
where price was to be discussed, the state made its initial
presentation of what it believed the price should be. The
utilities responded by saying that the price was "much
higher than they even fathomed." Both parties mutually
agreed to put off further discussions of divestiture. The
state recently received correspondence from representatives
of the utilities asking if it would make sense to go back to
the table. The state has not yet responded to the letter.
Divestiture talks are thus on indefinite hold at this time.
Mr. Simmons next noted potential impact on PCE of AEA
funding of up to $25 million in repair bonds. SB 284 and HB
492 change the manner in which moneys flow from the 40/40/20
split, contained in 1993 legislation, and allow AEA first
call on the $11 million in annual debt service to pay off
bonds for repairs. The remaining amount would then be
divided per the above split. Terms of agreements with
utilities call for up to $25 million in bonds up to 25 years
in duration. If debt service on the bonds amounts to
approximately $5 million a year, the impact on PCE would be
$2 million.
Representative Grussendorf inquired concerning numbers
involved in purchase negotiations and attached liability.
Mr. Simmons said that:
The state threw out on the table, roughly, a number of
$84 million with the utilities taking over
responsibility for the repairs, that we're talking
about right now, to the Tyee and Terror Lake projects.
Estimated numbers for those repairs are somewhere
around $20 to $25 million . . . . The numbers that we
got back from the utilities . . . was [sic] they may be
willing to pay somewhere between zero and $20 million
for the projects.
AL UNOK, next spoke via teleconference from Kotlik and
introduced JOE MIKE the manager of the local utility. Mr.
Mike asked if the legislature intended to cut funding for
the PCE program. Representative Foster responded
negatively, advising, "That's why we're having the panel
today." He acknowledged that questions were "looming ahead
of us . . . in the next three or four years that we'd like
to address right now." Various legislative committees have
not yet come up with "an idea on what to do with PCE." Mr.
Mike attested to the benefit of PCE for Kotlik consumers.
In response to a question regarding whether cuts in the
program would be equally applied to all communities,
Representative Foster noted that the panel was attempting to
develop background information in response to the
administration's proposed 12% decrease to the program.
END: SFC-96, #41, Side 1
BEGIN: SFC-96, #41, Side 2
Mr. Mike urged that cuts in the program be made from the top
down rather than across the board. He stressed that PCE
should help those who need it most.
Representative Foster directed attention to written
testimony (copy on file) from the Tanana Chiefs Conference
and the Tuntutuliak Traditional Council. He then thanked
those in attendance and on teleconference for their
participation.
Representative Ivan expressed concern over what might happen
three years from now when PCE funding runs out. He voiced
appreciation for efforts to identify alternative sources of
energy but stressed that many areas have neither the economy
nor resources to "come up with alternative resource plans in
three years." A longer time frame is needed.
Representative Foster noted that panel discussion at this
time was intended to highlight the PCE problem before it
became a crisis. He acknowledged need for continuing work
to find alternations or options to allow for a soft landing.
Representative Ogan, sponsor of HB 394, explained that his
bill deals with an "across-the-counter leasing program for
shallow gas that would help develop . . . alternative energy
sources for rural Alaska." He pointed to many coal bed
deposits along river beds in rural areas and deposits of
shallow gas. The legislation would simplify and streamline
the process for independent drillers to access these
resources and convert rural communities to natural gas. He
advised that his aide would make additional information on
the bill available to interested parties.
ADJOURNMENT
The meeting was adjourned at approximately 10:00 a.m.
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