HB 336 - ELIGIBILITY FOR POWER COST EQUALIZATION [Three microphones were out of order during this meeting, and some portions are difficult to hear on the tape.] Number 0033 CHAIRMAN GREEN announced the first item of business would be HB 336, "An Act relating to eligibility for power cost equalization." Number 0041 REPRESENTATIVE GENE KUBINA, sponsor, advised members that he represents District 35 and the community of Cordova. Before coming to the legislature, he had served for five years on the board of directors for the Copper Valley Electric Cooperative. A previous bill of his, passed by the legislature, had related to power line extensions. He has worked with the community of Cordova on trying to find a way to lower their electric base. REPRESENTATIVE KUBINA told members that with power cost equalization (PCE), the individual's rate is lowered. However, PCE really does nothing for business. For example, Cordova's many fish processors, that community's main industry, have very high rates and are therefore looking for ways to get alternative energy. Representative Kubina cited a hydroelectric project that wouldn't be a dam but that would funnel water in-line to a turbine. They have been working with U.S. Senator Stevens and have about $4 million appropriated from the federal government. Although the cost will be $15 million, they hope to get federal and state grants and then propose to give up $750,000 per year in PCE. By getting this going, they could lower their rates. Number 0221 REPRESENTATIVE KUBINA referred to the individual residential rate and explained, "They have promised them that their rates will not go up with this project, but they would be able to go down to about where they are at the subsidized rate now." However, he said, they would be able to lower the business rates, which would help immensely in providing jobs for the community. This bill sets up that program. A utility receiving PCE may apply to the state for a grant, which for this situation would be $7.5 million, and for up to ten years of PCE. Once granted that, they would build an alternate energy project. After that project is done, six months later they would no longer be eligible for PCE. REPRESENTATIVE KUBINA explained that it is a trade-off, with capital costs provided and ten years' worth of PCE. But as soon as they get this project done, they will be off PCE. It is an incentive for communities, worded to also apply to geothermal or wind projects, "anything to get off this shipping out diesel fuel." Number 0337 REPRESENTATIVE KUBINA concluded, "I recognize that the money part of this is not even in this bill, and that is something that is in the Finance Committee and obviously will be part of this whole mix. The bill that we have before us just sets up this program in statute, to allow it to happen if the legislature appropriates the money." Number 0369 REPRESENTATIVE CON BUNDE said he applauds the efforts of communities to get away from PCE. Noting the ongoing discussions about whether that will continue, however, he asked what would happen if this bill passed, Cordova got ten years of guaranteed PCE, and in two years the legislature cut off the PCE program. He suggested the community would actually get a little extra PCE in that case. REPRESENTATIVE KUBINA concurred that there is no guarantee PCE will be funded in any year. However, if they'd had a program like this in place 10 or 15 years ago, many people would have been off of PCE. He suggested it isn't fair to say they don't if it will exist next year or ten years from now but still not address the problem. REPRESENTATIVE KUBINA told members there has been a helter-skelter energy policy in Alaska for a long time. For example, Valdez has a dam that some believe actually keeps rates a little higher; they pay a high cost but are not eligible for PCE because of it. In contrast, the Railbelt has a lot of money for energy projects. Representative Kubina again agreed there is no guarantee PCE will continue, adding, "But I still think that we should go forward as best we can to help economic development of the state and diversify our economy. And doing the best we can to get people in the rural areas to have energy that comes closer to what the Railbelt energy is will help diversify that economy and make people more self-sufficient and se Number 0581 REPRESENTATIVE BUNDE asked whether there has been discussion of a local match. REPRESENTATIVE KUBINA replied that there has been discussion on this project for many years. One reason it hasn't been built yet is that it will not meet year-round needs; diesel generation will still be necessary. Without grant money, they couldn't tell the people they provide energy to that their rates will be as low as with PCE. People in the community haven't wanted to build a project that would result in higher rates. Number 0687 REPRESENTATIVE ERIC CROFT referred to the 75 percent and the fact that the project wouldn't carry the entire electrical need. He asked about that and mentioned the match. REPRESENTATIVE KUBINA explained that at certain times of year when the river is flowing, the project will supply all needs. But in winter, they will need diesel generation, which the utility will still pay for, but at a much higher rate. REPRESENTATIVE CROFT said there will be no PCE money to cover that. REPRESENTATIVE KUBINA concurred. He indicated the community is willing to give up that $750,000. Number 0762 REPRESENTATIVE BUNDE stated his understanding that average consumers would pay about the same as they pay now; although they would pay more in the cold months, they could pay less in the warmer months, so the total cost would be a wash. REPRESENTATIVE KUBINA replied that the total bill they would pay is the same as what they pay with the PCE subsidy. He noted that Valdez has a similar situation, with a hydroelectric project that doesn't provide all the energy for Valdez; at times of the year, it doesn't work because there isn't enough water. He told members that the PCE law contains a stipulation that if they put in hydroelectric power, they are no longer eligible for PCE. He suggested that should have been carried forward with an offer to help built a hydroelectric project if that will help take that community off the PCE. That is what this bill does. Number 0871 REPRESENTATIVE NORMAN ROKEBERG asked whether there is a provision built into the companion bill for failure of the legislature to fund the PCE in the future. REPRESENTATIVE KUBINA explained that the other bill that would go with this merely says that according to the provision, that is a $7.5 million appropriated for this project. He stated, "Let's say, though, that there's no intention, really, of passing that bill. It was just a mechanism to go along with this, to discuss it, and if there is any money that would go for this project, we'd go through the normal budget process, ... through the capital budget, with the stipulations, you know, that the legislature set according to this program." Number 0909 REPRESENTATIVE ROKEBERG asked, "Strategically, for the folks in your district and Cordova, what you would like to do is basically pass this particular bill, and then work on the appropriation as a separate item and endeavor to get a capital appropriation; is that correct?" REPRESENTATIVE KUBINA said that is correct. Number 0927 REPRESENTATIVE ROKEBERG stated his understanding that there is a little pool of PCE money in an endowed account now or something. He asked, "You're not going to ask to reach into that money?" REPRESENTATIVE KUBINA said the appropriation bill he'd introduced with this just says "general funds." He doesn't want to do anything that would have other small communities that depend on PCE think they are being attacked; some of those communities may want it even more than Cordova, and they might be paying 50 cents a kilowatt hour without PCE. "So, I did not specify anything like that," Representative Kubina concluded. REPRESENTATIVE ROKEBERG asked whether the 75 percent of the total electric load in HB 336 is essentially to accommodate the circumstances in this particular project. He asked whether the problem relates to the reservoir not being big enough. REPRESENTATIVE KUBINA explained that some people had felt that if PCE was removed, a project like this should be a full 100 percent of what they are providing. However, he had felt that was asking too much and that if they could get their rate down to what the PCE rate was, it was fair to give up PCE. Representative Kubina concluded that for Cordova, that number seems to work. However, a different number may be better elsewhere. Number 1051 REPRESENTATIVE ROKEBERG, requesting correction if he got the nomenclature wrong, suggested that in power generation there is normally a need for "what is called a spinning reserve, other reserves that are behind your ability to meet your demand load at one point in time, in case there's spikes in the load." He posited that rural Alaskan communities would have generation capacity less than that and which could never meet an "engineered spinning reserve load." He suggested this is another argument for having less than 100 percent. He asked Representative Kubina to define what 100 percent of load means, saying it means different things to different people, especially taking into account something like the spinning reserve. Noting Chairman Green's background, he asked whether this is on the right track. CHAIRMAN GREEN replied, "Somewhat, yes. I think that's a little different, but I understand what you're coming from." Number 1122 REPRESENTATIVE ROKEBERG pointed out that in the Nineteenth Alaska Legislature, he and Representative Ogan passed a bill that set up a leasing program for shallow gas development. He asked, "Because of the proximity to Katalla and maybe some other known potential gas reserves in the Cordova area and Prince William Sound, is there any possibility that any gas could be found, explored, or it might create another alternative to this particular thing and may even be more prospective? Do you know if they've looked into that?" Number 1161 REPRESENTATIVE KUBINA replied that a road is being designed right now by the Chugach Native Corporation to go into that area. However, that is probably five years down the line. He indicated that ARCO Alaska, Incorporated, in particular, has shown great interest there. Representative Kubina said testimony would show that the community already has permits for this project, and the engineering is done. He pointed out that this is a renewable resource that will always be there. Number 1210 REPRESENTATIVE KUBINA referred to a previous question and advised members that Version H, not yet adopted, changes the language from "supplies more than 75 percent" to "is designed to supply more than 75 percent." Someone applying for this grant will do so under this section. He stated, "And it's very clear that when you apply under this section, you are no longer going to have PCE once it's done, so that nobody can try to weasel out on this 75 percent level." Number 1250 REPRESENTATIVE ETHAN BERKOWITZ suggested one collateral benefit of this program is priming the pump of the local economy by doing a construction project there. REPRESENTATIVE KUBINA answered that the construction project itself is always good for any community. The main benefit, however, is lower electrical costs for the fish processors, which will provide long-term employment. Cordova has been a fishing town for a very long time but has lost processors to other places, including Valdez, because of cheaper rates. Representative Kubina stated, "They've worked, they've deregulated themselves so to try to give the best rate they can, but they have to make enough to pay for that diesel oil." He added that getting this project will do much towards sustaining the fish processing in the community. Number 1301 REPRESENTATIVE BERKOWITZ commented that it seems there is a wider benefit than simply weaning a community from PCE. REPRESENTATIVE BUNDE suggested that enough opposition had existed there to stop logging. He asked what level of support there is in Cordova for expanding economic development. He further asked how big an impact this fish processor has, as a guaranteed purchaser of potential electrical energy, in a time of worldwide instability of fish prices. Number 1402 REPRESENTATIVE KUBINA said that both Native corporations have had logging operations going on for some time. While it has caused some debates and disagreements in the communities, he doesn't believe those corporations stopped because of that. As for the road planned towards the Katalla area, the first project out there will be a logging operation that the community is well aware of. Representative Kubina maintained, however, that Cordova's long-term base is fishing. While the price of fish doesn't help, he said that everything we can do to lower electric costs, so they can better compete with Chilean fish, is to our advantage as a state. Number 1461 REPRESENTATIVE BUNDE responded that he doesn't disagree, but the question is what happens to this plan if that processor goes away. REPRESENTATIVE KUBINA explained that there are at least four processors, three of which are major processors that employ a lot of people during the season. He said they have offered them the best rate they can to keep open in the winter, to process pollock, for example, or to attract cod fisheries to come onshore; they are trying to expand beyond salmon, to operate year-round. He suggested that testifiers from the community could speak to that. Number 1521 CHAIRMAN GREEN said that is a good point. He noted that the major resources of timber, fish and hydrocarbons are all subject to fluctuations, although the state has often weathered those. He asked if there were further questions of the sponsor, then called upon testifiers from Cordova who were present. Number 1569 JIM ROBERTS, General Manager, Cordova Electric Cooperative, Incorporated (CEC), told members that CEC's debt service is one of the highest in the state. They had become a cooperative in 1978, prior to which they were a municipally-owned utility. Consequently, they could not qualify for federal funding at the lower interest rate and had had to borrow money. Their average cost of power in 1997 was more than 20 cents per kilowatt hour; with grant financing, the projected cost would be lowered to an average of 15.8 cents per kilowatt hour, quite a savings. Canneries, for example, would then be on a par with Seward and other communities that have access to the Railbelt energy, which he indicated is their objective. MR. ROBERTS referred to the project status, indicating they had received the Federal Energy Regulatory Commission (FERC) license on December 24. They had been going through the licensing process and working on this since 1992. He indicated they've said all along that if they could get 50 percent funding from the state, they would be willing to give up PCE. Mr. Roberts commented that in addition to logging, Cordova will have cruise ships this year for the first time, which will provide a new industry. He said the CEC has received $4 million in grants from the federal government and is lined up for an additional $3.5 million this year; they are basically trying to finance the whole project with grant funds. Number 1718 REPRESENTATIVE BRIAN PORTER asked whether the estimated $7.5 million in state contributions is on top of the additional $3.5 they are trying to get from the federal government. MR. ROBERTS said yes. The total project cost is $15 million. They are looking at $7.5 million from the state. They've already received $4 million from the federal government and are in for an additional $3.5 million. They have already set up a line of credit with their supplemental lenders because they are basically set to start this spring. Number 1774 REPRESENTATIVE ROKEBERG stated his understanding that the CEC would have no capital costs in this. He asked about the transmission lines, for example. CHAIRMAN GREEN said they are existing. [Mr. Roberts' reply was indiscernible.] REPRESENTATIVE ROKEBERG noted that the lowered per-kilowatt-hour cost would be 15.82 cents. He said testimony he'd heard that morning was that the statewide average cost is slightly more than 10.4 cents per kilowatt hour. He asked whether that is right. MR. ROBERTS replied that he believes that what they receive through PCE is lower. REPRESENTATIVE ROKEBERG stated his understanding that the 15.8 cents excludes any PCE. Number 1833 MR. ROBERTS concurred. REPRESENTATIVE ROKEBERG commented that he'd be a little disappointed if it wasn't lower than that, particularly if there was no capital cost. He then asked the reason for the requested six-month delay in the cessation of PCE in the bill. MR. ROBERTS pointed out that peak production from the river is in the summertime, the CEC's highest load period. If the project comes on-line in fall or winter, they won't have 100 percent of what they need out of it, because the water isn't there. Therefore, this is a transition period. REPRESENTATIVE BUNDE stated his understanding, with round numbers, that there is a $15 million package, with $7 million from PCE. The grants from various governments would be a local contribution. MR. ROBERTS said that is basically correct. Right now, they have a $1 million loan through the state Division of Energy, used for permitting. REPRESENTATIVE BUNDE suggested that $1 million loan is a local contribution, and the rest would come from grants. MR. ROBERTS noted that to date, they have spent approximately $350,000 that is not reimbursable under the grants. Number 1912 CHAIRMAN GREEN asked whether essentially 25 percent would be generated with diesel year-round, with a big increase in both hydroelectric power and in the load during the summer. MR. ROBERTS said no. They got a small hydroelectric wheel in 1991; depending on rainfall, that provides 10 to 15 percent of their needs right now. This additional hydroelectric power will cover all community needs during the summertime. However, during the winter, that will drop off and must be supplemented with diesel. Number 1956 REPRESENTATIVE ROKEBERG noted that he had been to Cordova this past summer for the Alaska Rural Electric Cooperative Association (ARECA) convention. He had seen a huge, expensive machine digging an underground electrical service wire over some five or six miles, with two houses at the end of this road. He asked who financed that and what the purpose is. MR. ROBERTS answered that they had borrowed money through the federal Rural Utility Service (RUS) for a line extension and upgrade, putting lines underground. He indicated there are more than two houses out there, and there is a new subdivision. REPRESENTATIVE ROKEBERG suggested that loan is in their rate base. MR. ROBERTS concurred. REPRESENTATIVE ROKEBERG asked who had financed the small hydroelectric project mentioned earlier. MR. ROBERTS replied that there was a $1.5 million debt from a supplemental lender, and he believes there were state grants also. Number 2048 HAP SYMMONDS, Plant Manager, Ocean Beauty Seafoods; Vice President, Board of Directors, Cordova Electric Cooperative, Incorporated, came forward to testify, indicating his company is the largest private employer in Cordova. He characterized HB 336 as a vehicle that provides a win/win situation. It allows communities to seek alternatives to diesel generation, and it allows the state to wean Bush and rural communities from PCE. MR. SYMMONDS discussed the importance of non-Railbelt communities having access to competitively priced electrical services, suggesting that Cordova's Power Creek hydroelectric project will save the state more than $700,000 per year in PCE, as well as save over one million gallons of diesel fuel. The reduction in the cost of electricity will help Cordova processors be more competitive with other processors in Alaska. Mr. Symmonds concluded, "The amount of PCE received by industry is insignificant, and it is the lower power cost of the hydro project which is of the greatest importance." Number 2113 REPRESENTATIVE BUNDE asked Mr. Symmonds if he is aware of any other area that has a project which would take advantage of this bill, or if this is basically a Cordova bill at this point. MR. SYMMONDS said although it is a Cordova bill now, it is a vehicle that could fund wind generation, hydroelectric generation or other alternate energy projects that would fit into the rural communities' needs. Number 2143 REPRESENTATIVE CROFT stated his understanding that this is the general bill, which could apply to any plant, anywhere, for any type of electrical generation. MR. SYMMONDS agreed, adding that HB 337 would set out funding for the Power Creek project. Number 2174 REPRESENTATIVE ROKEBERG asked how many jobs per year they can provide. He also inquired about the fishing season. MR. SYMMONDS stated his belief that the fishing season will be as good as or better than the previous year. He indicated his company provides more than 250 jobs in the community, noting that they have a one-million-pound cold storage in town that hasn't operated since 1992 because of the cost of electricity. He told members that as a company, they would like to do much more value-added production in Cordova. He pointed out that their electrical costs in Cordova are approximately 20 percent of the entire overhead of the plant annually, a very significant number. Number 2215 REPRESENTATIVE BUNDE asked for confirmation that the $750,000 annual savings to the state, mentioned earlier, wouldn't be realized for ten years, because there would be ten years of PCE. MR. SYMMONDS replied, "I don't know if I'm the one to speak to this, but ... I feel that the legislature's going to have to do something for the rural communities. We can all sit here and say that PCE is going to run out. Many of the rural communities are not going to be able to afford essential services without some sort of help from the state government, be it called PCE or whatever. ... In some form, this program is going to continue. We're just saying that given a grant to the City of Cordova, we, as your largest customer, will go away. That money will be available for other rural communities. Hopefully, with Representative Kubina's bill, other communities will take a look at the same type of thing. ... I'm quite sure that they don't want to be hung on this type of financing on an annual basis. If they could set up some sort of a project that would get them off PCE, I'm sure that there are a number of communities that ... would do that. And HB 336 sets that mechanism into place." Number 2323 REPRESENTATIVE BUNDE said he doesn't disagree but is trying to get a handle on the amount of money the state would save. Giving it with one hand instead of the other is still providing money. He agreed that after ten years the state would realize some savings, but not until then. Number 2339 CHAIRMAN GREEN asked what percentage Mr. Symmonds' company or the fishing industry uses of the total electricity sold. MR. SYMMONDS said Cordova has two major processors and a minor one, which use more than 20 percent of Cordova's total. Number 2363 CHAIRMAN GREEN asked whether they pay a discounted amount now for electricity. MR. SYMMONDS said their rate is lower than the residential rate. CHAIRMAN GREEN asked whether it is significantly lower. MR. SYMMONDS indicated Jim Roberts would know that. CHAIRMAN GREEN asked whether it is 20 percent of the use or 20 percent of the total dollars. MR. SYMMONDS replied, "Revenue." Number 2390 CHAIRMAN GREEN said, "What I'm getting at is if there were to be a reduction because of the position that Representative Bunde mentioned earlier, there would be a 20 percent decrease in the revenue to the system but a significantly greater amount of reduced power demand." MR. SYMMONDS responded, "But there would be no reduction of PCE." CHAIRMAN GREEN asked whether the total dollars would decrease but the rate would stay the same. MR. SYMMONDS replied, "No, because the PCE line on my electric bill, which can be $50,000-plus a month, is a constant $54.86. I mean, that's what I get out of PCE." CHAIRMAN GREEN asked whether that is true for everyone on the system. MR. SYMMONDS explained, "It's based on 700 kilowatt hours. You get PCE on your first 700 kilowatts, and that's it." Number 2423 CHAIRMAN GREEN asked, "If you reduce the total consumption from the system, is it the same? Would it be prorated directly on the number of reduced kilowatt hours that you'd have to generate?" He suggested perhaps he should have asked Mr. Roberts, then stated, "So, let's just say you cut it in half, the amount of power that you're actually using. You're only paying 20 percent, but maybe you're using 50 percent. If all of that went away, the PCE total dollar value should decrease, that the state pays." MR. SYMMONDS replied that of the two major processors that contribute 20 percent of the revenue to CEC, the state would save $108 in PCE if those went away, because it is only on the first 700 kilowatt hours which those two canneries use that they get PCE. TAPE 98-19, SIDE B Number 0006 REPRESENTATIVE CROFT asked, "And is that why you said that the PCE that goes to industry is negligible when you started out?" MR. SYMMONDS said that is correct. Number 0014 REPRESENTATIVE BERKOWITZ suggested it may make sense, now that money is relatively cheap and interest rates are low, to let them have the money, rather than paying PCE in perpetuity. Number 0055 ERIC YOULD, Executive Director, Alaska Rural Electric Cooperative Association (ARECA), informed members he represents most of the utilities in the state, both large and small. He is also on the Governor's PCE task force, which has a twofold charge: to identify potential sources of revenue that could be considered in the long-term solution to identify constructive changes to the program that would perhaps be an incentive for the utilities to get off of PCE. MR. YOULD told members ARECA has always been a strong component of the PCE program, because it provides cheaper electricity, primarily in rural Alaska "where we have a very weak underpinning to the economic base in the first place." Consequently, they have supported PCE strongly in the past. They feel that this particular bill is very good, and they support it. They feel it is a good incentive and a good way to put in place capital-intensive projects and to provide long-term solutions. MR. YOULD pointed out that they are talking about a hydropower project that will very possibly be in place for 50 or 100 years. The hydropower project in Ketchikan has been in place for almost a hundred years now, and there is no reason to believe most hydropower projects such as this won't be in place for a long time. Mr. Yould said they are talking about giving up ten years of PCE, with a capital appropriation, that essentially will help ensure that a long-term solution is put in place. He likened it to buying a house, which is expensive up-front, versus renting. He concluded by saying a capital-intensive project like hydropower is basically an inflation-fighter, and it is there for the long term. Number 0171 PERCY FRISBY, Director, Division of Energy (DOE), Department of Community and Regional Affairs, came forward to testify. [Some of Mr. Frisby's testimony is particularly difficult to hear.] He informed members he had been working with Cordova for the last three years developing and trying to put a financial package together. In addition, the DOE loaned Cordova $1 million to kick the whole effort off. He referred to the Governor's PCE task force and indicated that while the worst-case scenario would be eliminating that program, they are looking at alternative programs including shallow gas, small coal developments and a (indisc.) project in Kotzebue. MR. FRISBY said that for these new technologies, they are trying to determine whether they may be applied in areas of rural Alaska. He said the problem they are dealing with in rural Alaska now is that there are systems using generators with an output as small as 60 kilowatt hours. A hydroelectric or wind project is hard to apply to such a system, and Mr. Frisby suggested they may need more time to do that. He complimented Cordova for coming up with an innovative way to put their financial package together. He said the power cost equalization (indisc.) committee is going to address a lot of these issues. Number 0314 REPRESENTATIVE KUBINA said he could have several other people speak, but he believed the committee had the gist of it. He offered to answer questions. Number 0325 REPRESENTATIVE PORTER commented that this is the easy part of the equation, as this bill is enabling but not funding, which will be the challenge. He also congratulated Cordova for coming up with a plan that he believes is "very appropriate to be considered for state government to make an expenditure for infrastructure that gets away from the continual state allotment." He said it is not only the right thing to do but is timely, considering the current revenue projections. Number 0367 REPRESENTATIVE ROKEBERG asked about the fiscal note and alleged savings. He said the fiscal note makes a lot of assumptions, then suggested it could be argued either way. He stated that he doesn't necessarily agree with what it says. "I don't think that damages your cause or anything," he added. REPRESENTATIVE KUBINA expressed confidence that it would be a good debate in the House Finance Standing Committee as to whether it is appropriate. Number 0397 REPRESENTATIVE CROFT made a motion to adopt Version H [0-LS1132\H, Cramer, 2/18/98] as a work draft. There being no objection, it was so ordered. Number 0450 REPRESENTATIVE CROFT made a motion to move the proposed committee substitute for HB 336 [Version H] from committee with individual recommendations and attached fiscal note. CHAIRMAN GREEN asked whether there was any objection. REPRESENTATIVE BUNDE objected for discussion purposes. He said this is innovative, although it sounds like somewhat creative financing. He suggested its stature would be enhanced by requiring legitimate or actual local contribution, as he doesn't look at federal grants or state grants as a local contribution. Number 0483 REPRESENTATIVE ROKEBERG concurred, then congratulated the sponsor, indicating this is the type of mechanism needed in rural areas, particularly for alternate energy sources such as shallow gas, coal and so forth. He suggested it is even perhaps a good use of capital monies. Representative Rokeberg said he would be voting for this bill and wished the sponsor good luck in the House Finance Standing Committee. He added that vote for this bill should not be viewed as an endorsement of the PCE program. REPRESENTATIVE BUNDE removed his objection. Number 0565 CHAIRMAN GREEN announced that there being no further objection, CSHB 336(JUD) was moved from the House Judiciary Standing Committee.