HB 235 - ELEC UTILITY SERVICE Number 2175 CHAIRMAN ROKEBERG announced the next item of business was House Bill No. 235, "An Act relating to findings necessary before a certificate of public convenience and necessity is issued to an electric utility under certain circumstances; and relating to the definition of `general public' with respect to the regulation of electric utilities." CHAIRMAN ROKEBERG advised members that HB 235 was submitted at the request of Eric Yould's organization. Following Mr. Yould's presentation, they would hear testimony via teleconference. If Sam Cotten of the Alaska Public Utilities Commission (APUC) was still available, he would also testify. Number 2175 ERIC YOULD, Executive Director, Alaska Rural Electric Cooperative Association (ARECA), explained that their membership consists of 38 utilities statewide: 18 Rural Electric Association (REA) cooperatives and 20 municipal or investor-owned utilities. He speculated that collectively, ARECA's utilities provide 95 percent or more of all electricity in Alaska. MR. YOULD advised members that on December 6, the board of directors, which includes members from the 18 electric cooperatives throughout the state, unanimously adopted a resolution with language similar to this bill. MR. YOULD provided a detailed history. The need for the legislation began the previous year, but its genesis goes back several years. The previous session, SB 54 had attempted to establish specific exclusive service areas for electric utilities throughout Alaska. The reason for that bill was a conflicting opinion between the electric utilities throughout Alaska and the APUC as to whether there are exclusive services areas. This confusion stems from the genesis of the APUC itself, which he believes was started in 1959 under AS 42.05. Because of that statute and subsequent statutes governing electric service through municipal utilities (Title 29), throughout the 1960s there were occasionally service areas on top of each other, which were basically duplicate service areas. Number 2258 MR. YOULD said as a result, two lawsuits in 1967 attempted to clarify who had jurisdiction to serve certain clients; the first was between Homer Electric Association and the City of Kenai, and the second was between Chugach Electric Association and the City of Anchorage. The two lawsuits were heard ultimately by the supreme court; it adjudicated them, but it also indicated to the legislature that there was confusion between Title 29 and the generic statutes of the APUC, and it requested that a change be made to clarify jurisdiction. MR. YOULD said in 1970, the legislature significantly amended the APUC statutes, to at least the utility industry's belief, reserving specific areas for individual utilities. From 1970 through recent times, it has been the general impression of the electric utility industry that each had a specific, exclusive service area. However, with the more recent national interest in deregulation of the electric utility industry, there has been increasingly more discussion within the APUC that, in fact, they have authority within the commission to issue competing jurisdictional service areas. "And they cite the case law going back to 1967," he stated. Number 2371 MR. YOULD advised members that the electric utility industry has indicated they don't agree with the APUC's interpretation but believe the changes made in 1970 by the legislature should prevail. Because of the confusion, last year Senator Tim Kelly introduced SB 54, which reserved exclusive service areas for electric utilities throughout the state; that bill passed in the Senate but not the House. He suggested part of the reason for that was the pending federal deregulation. MR. YOULD said the electric utility industry realizes some form of retail "wheeling" may be considered in the future by the federal government. They believe HB 235 gives the APUC the statutory authority, which they don't believe it presently has, to provide that. More important to the utilities, HB 235 sets criteria by which the APUC may consider duplicate certification, thereby precluding arbitrary standards and removing the possibility that utilities would fight over new or existing customers. Number 2395 MR. YOULD explained that Section 1 simply establishes that electric utilities are the only entities affected by this legislation. Section 2, the meat of the bill, does two things: It allows the APUC the authority to provide retail "wheeling," and it establishes a criteria and standard for them to allow that to happen. For example, in order for the APUC to provide duplicate certification, it must first find that there is clear and convincing evidence that it is in the public interest and will not adversely affect service or rates to certificated service areas. The bill attempts to ensure that one utility cannot go into another's service area, "cherry pick" the best customers and leave the rest high and dry to pay the cost of the "imbedded plant" and the capital for which the utility and its customers will have to assume payment. TAPE 97-42, SIDE B Number 0006 MR. YOULD read from a letter that discussed "cherry picking." It said while this predatory practice may cause rates to go down for certain large commercial customers, rates for residential and small users would almost surely go up. Eventually, because of the need to pay the long-term debt service and stranded investment, the original utility may experience financial difficulties or be forced out of business, leading to higher overall rates. Number 0036 REPRESENTATIVE RYAN wondered whether this legislation would have cured a problem that once existed in Fairbanks. People using the municipal utility system paid 40 percent more for electricity than if they could have obtained it from Golden Valley's utility system. The problem was resolved through sale of the utility. He asked what precludes that from happening under this legislation or what the bill would do to cure that situation. MR. YOULD said he believes HB 235 would preserve the status quo of those two service areas, the Fairbanks Municipal Utilities System (FMUS) and the Golden Valley Electric Association (GVEA). He noted that a GVEA representative would testify that day. Mr. Yould believes the ultimate and proper solution is taking place: The GVEA is in the process of buying out FMUS. As he understands it, the sale is under review by the APUC, which apparently has ultimate authority on whether this will be allowed to happen. Number 0105 REPRESENTATIVE RYAN asked, "Am I to assume, then, that the Anchorage utility will maintain that area and won't have any competition from anybody else, as far as the ability to lower the rates?" MR. YOULD replied, "From the standpoint of this present piece of legislation, it would not allow, for instance, Golden Valley to come into Chugach's territory and try and pick up their customers; that is correct." Number 0124 REPRESENTATIVE SANDERS said he realizes how significant this is in smaller towns and villages in Alaska. He asked whether Mr. Yould believes this competition poses the same problem in Fairbanks and Anchorage as in the rest of the state. MR. YOULD said this issue is being debated nationwide. "And I can tell you that Senator Murkowski is going to be a major player in how it is ultimately adjudicated throughout the United States," he said. "There were original attempts made by certain congressmen in the Lower 48 to dictate what the deregulation standards shall be. I think that Senator Murkowski has taken the position that every state is so different that instead they will mandate deregulation, but it shall be up to the individual states and their legislators to establish what works best for their individual states." MR. YOULD said Alaska is very different from the Lower 48. In Alaska, perhaps 95 percent of all power is produced by REA cooperatives or municipal utilities, and their savings go back to the rate-payers. In contrast, the Lower 48 has investor-owned utilities, and their benefits may go back to investors instead. MR. YOULD suggested electricity produced in California could end up, at least on paper, in New York. It is different in Alaska, with the exception of the railbelt area. He stated, "And I would say that this piece of legislation does exhibit many of the same problems in the railbelt area that we have throughout rural Alaska. But certainly rural Alaska, because it's not an ... inter-connected entity, has a more chronic problem." Number 0124 REPRESENTATIVE SANDERS recalled when they were deregulating telephone utilities; there was a limit, a certain number of telephones, that "threw Anchorage outside of the rest of the state." He asked whether that might be possible or prudent here. MR. YOULD said he couldn't answer that. This bill has gained almost unanimous, but not total, support throughout Alaska. He believes there is concern because the utilities use different types of generation: Anchorage uses natural gas and a little hydro- electric power; Fairbanks uses predominantly coal; and rural Alaska uses diesel. It creates unlevel playing fields that allow one utility to have predatory pricing capability. However, there is not a preponderance of investor-owned utilities with large pools of capital reserves that allow them to get into predatory pricing, hook customers, drive other entities out of business, and then raise prices. Number 0274 REPRESENTATIVE BRICE asked what the standard is for clear and convincing evidence. MR. YOULD offered to read a definition that he believed to have legal standing. CHAIRMAN ROKEBERG requested that he afterwards provide a copy. MR. YOULD read: "Clear and convincing is a legal standard/burden of proof which is used throughout civil cases. A fact is established by clear and convincing evidence if the evidence induces belief in the minds that the alleged fact is highly probable. It is not necessary that the alleged fact be certainly true or true beyond a reasonable doubt or convincingly true. However, it must be more than probably true." REPRESENTATIVE BRICE suggested it was in between "beyond a reasonable doubt" and "a preponderance of evidence." Number 0329 REPRESENTATIVE COWDERY asked when Mr. Yould foresees federal deregulation happening. He further asked whether it would be appropriate to wait for that and then adjust Alaska's statutes. MR. YOULD replied that from everything he'd read, federal deregulation is probably at least two or three years away; it is hard to say. He restated that Senator Murkowski is probably a key player regarding "what federal deregulation looks like" and how it would be applied across the nation. Mr. Yould stated his personal belief that if Alaska enacted a statute and brought that to Senator Murkowski, he could ensure that the federal regulation is friendly to Alaska's needs. REPRESENTATIVE COWDERY asked which Alaskan utilities produce the cheapest electricity. MR. YOULD replied, "I wish I had done a little bit more homework before coming here. But I suspect that Chugach's would be as low as anybody's. ... And I can tell you that throughout the railbelt, the rates are becoming much more competitive. And certainly when the Healy clean coal project comes on board, that will have an impact on Golden Valley's rates as well. And I can also tell you that right here in Juneau, partially because of a prior investment in hydro-power, that the rates are competitive here as well." REPRESENTATIVE COWDERY suggested that while this was a deregulation bill of sorts, they were also asking the APUC to restrict or regulate some aspects. MR. YOULD responded, "We believe that it's inevitable that eventually deregulation will take place on a national basis and that we might as well get ahead of the power curve and see if we can't get something that's friendly to the industry." REPRESENTATIVE COWDERY asked how many utilities are in Anchorage. MR. YOULD said essentially two: Anchorage Municipal Light and Power (ML&P) and Chugach Electric Association. Farther out toward Eagle River, he believed that came under Matanuska Electric Association (MEA). REPRESENTATIVE COWDERY asked whether ML&P was going to testify. CHAIRMAN ROKEBERG said not to his knowledge. There was a lengthy letter from MEA. REPRESENTATIVE COWDERY asked what position MEA and ML&P took on the bill. Number 0474 MR. YOULD noted that there was a letter in support from ML&P, as well as a lengthy letter in support from MEA. Number 0484 REPRESENTATIVE RYAN asked, "What if this body, in its infinite wisdom, were to make APUC go away? What would that do to the competitive structure and your ability to conduct business?" MR. YOULD replied, "I suspect there'd be a loud cheer, for starters. But frankly, I guess I would also have to say that APUC provides a certain amount of order that is positive. Our concern ... is the timeliness of decisions that we get out of APUC. And frankly, under regulation, if APUC is still in existence and we have a utility that's subject to APUC, we would not be able to respond very well to a utility coming in from outside that would try and ... `cherry pick' some of our customers." Number 0526 CHAIRMAN ROKEBERG announced there were several people on-line to testify. He asked that Mr. Yould stand by to answer questions. Number 0544 BOB MARTIN, General Manager, Tlingit Haida Regional Electrical Authority (THREA), testified via teleconference from Anchorage in support of HB 235. A generation and distribution utility serving seven Southeast villages, THREA has headquarters in Auke Bay (Juneau). They use diesel engines, which is extremely expensive; with increasing regulations and inflation, it is getting worse. MR. MARTIN said like all utilities, THREA is required by law to serve all customers in the service area. Some are less expensive to serve, on a per-kilowatt-hour basis, simply because of the big loads that use lots of energy at a single point. These are highly desirable loads for a utility, and THREA has put a lot of thought into attracting and nurturing them. MR. MARTIN explained, "For instance, for the very largest loads in our villages, those with the capability of generating their own needs, we created a special rate at slightly above our incremental cost of generation. In the three years since we implemented those rates, those loads have grown ... to a point now that they consist of 24 percent of our total sales. Those loads have generated a great deal of stability ... to our rates. Our concern is based on the fact that these large loads are cheaper to serve. And as a public utility, we have to serve everyone. And we have to install generation and distribution to meet those highly variable loads. MR. MARTIN continued, "A competitor currently can come in, provide generation for only the largest loads, and offer rates that we simply could not compete with. For instance, a school in the wintertime and a fish processor in the summer are complementary loads; it would be simple and inexpensive and would use the same generation (indisc.). The loss of that revenue would raise the fixed cost components of our rates per kilowatt hour, because then we would be selling fewer kilowatt hours. While this would be good for the large loads, those lost revenues would have to be made up by the remaining customers, small commercial and the residential customers." MR. MARTIN said THREA now has several loads that consume more than one million kilowatt hours per year. At 12 cents per kilowatt hour, which is about as low as possible with diesel generation, that is more than $120,000 per year in revenue, which would easily qualify an independent generator as a public utility. He concluded by saying HB 235 would protect the smallest consumers, whom the utility was created to serve. He urged its passage. Number 0715 VAYLA COLONELL, Manager of Member Services, Golden Valley Electric Association (GVEA), testified via teleconference from Fairbanks in support of HB 235 and the position of ARECA. She said approval of competitive electric service without due consideration of possible adverse impacts on rates or service to all retail electric consumers has a strong potential for creating winners and losers among consumers; the losers would almost certainly be the residential and small commercial customers. MS. COLONELL offered some history of GVEA's interactions with the Fairbanks Municipal Utilities System (FMUS). The FMUS serves the interior of Fairbanks, while GVEA's service territory completely surrounds it. For a number of years, because GVEA's commercial rates are considerably lower, GVEA has been approached by FMUS customers asking to receive service from GVEA. However, the certified service areas are currently protected, which has prevented GVEA from taking on those customers. MS. COLONELL reported that during the past year, GVEA has entered into a complex contract with the City of Fairbanks, PTI and Fairbanks Sewer and Water to purchase the electric utility system from FMUS. They are now engaged in a complex and time-consuming process with the APUC to show that they are ready, fit and able to serve those customers without adverse impacts on the rates or quality of service to customers of GVEA or FMUS. MS. COLONELL said this is the way it should be. However, without this kind of legislation, the potential was there for GVEA to take only the large industrial loads from the city, adversely affecting the remaining FMUS customers, whose rates would have increased substantially to cover the existing debt, imbedded costs and costs of service. "But this is our community, and we have no interest in creating severe problems for the people that live here," she commented. On behalf of GVEA's 22,000 member-owners and rate- payers, she urged the committee's support of HB 235. Number 0893 CHAIRMAN ROKEBERG asked for confirmation that GVEA is an REA or member-owned utility. MS. COLONELL replied, "Yes, we are a member of the cooperative, and REA, of course, is now RUS, the Rural Utility Service, but we are an RUS." CHAIRMAN ROKEBERG asked whether Chairman Sam Cotten of the APUC was available to testify. Number 0959 ALYCE A. HANLEY, Commissioner, Alaska Public Utilities Commission, testified via teleconference from Anchorage, informing members that Mr. Cotten had had to leave. With her from the APUC were Bob Lohr, Executive Director, and Tim Cook, Commissioner. MS. HANLEY stated, "We haven't taken an official position on this bill. Last year we did; we felt that Senate Bill 54 was certainly anti-competitive and locked the door to ... any competition. While we haven't taken an official position on this bill, I think that this bill may open the door a crack. We still consider it anti- competitive. And I think the `clear and convincing' standard is certainly greater and will be more difficult in our findings than the `preponderance of evidence.'" Number 1010 BOB LOHR, Executive Director, Alaska Public Utilities Commission, testified via teleconference, indicating he would point out several specific elements concerning the bill and previous testimony. MR. LOHR stated, "The lawyers can better speak to interpreting supreme court cases than I can, but in 1967, it was mentioned, the supreme court did address the issue of what the commission's certificate means. And that was in the case of Chugach Electric Association vs. City of Anchorage, and the citation to that is 426 P.2d 1001, and it was in 1967. The holding of that case was, quote, `We adhere to our decision in Homer Electric and hold that appellant Chugach's certificate of public convenience and necessity does not, in relation to the City of Anchorage's electrical utility system, act in a monopoly to furnish electrical energy throughout the service areas which have been allotted to it. There is no exclusivity in the eyes of the supreme court with respect to commission certificates.'" MR. LOHR stated, "There is no way that the commission could issue overlapping certificates of public necessity to (indisc.) utilities, as in fact occurred in the Mat-Su Valley and in Anchorage, if this exclusive certificate provision were as previously stated. In fact, the only way that overlap is possible is because those certificates do not confer a monopoly grant or an exclusive grant of certificate." MR. LOHR referred to the "clear and convincing" standard and stated, "The difficulties of that are in particular related to how they are linked to a commission making a negative finding that the customers and the quality of service in existing service areas would not be impacted by this. The combination of a higher standard of proof ... with such vague findings, it would be very difficult to sustain. And, as a result, the commission did prepare and approved a fiscal note reflecting the need for expert witnesses and one additional staff person to handle that kind of work load. We do expect that ultimately that would taper off, if, as predicted, competition comes to the state." Number 1143 MR. LOHR said in the opinion of the assistant attorney general advising the APUC on this matter at a public meeting held the previous morning, no additional authority is required for the APUC to undertake a competitive approach toward electric utility service. MR. LOHR stated, "That authority is quite broad, in her interpretation, and is found in the commission's general powers and duties, as well as in AS 42.05.221. The commission has used that authority in the past to allow competing utility service where, based on a careful examination of the applicant's ... fitness, willingness and ability, and the market conditions for the particular utilities involved, the commission felt like that was in the public interest." Mr. Lohr said to his knowledge, none of those decisions had been overturned in court in terms of allowing that competing market structure. Number 1197 MR. LOHR agreed that "cherry picking" is a genuine risk. However, he believes the APUC has ample existing authority to deal with it and control it. He also agreed that the GVEA did not have authority to go into the City of Fairbanks itself and offer a lower commercial rate; they would have needed to apply to the APUC to get that authority. Although he could not speak for the APUC on that matter, his guess was that the commission would have looked critically on any effort to "cherry pick" and would have asked, "What about others?" MR. LOHR stated, "The commission is well-versed and works with the public to ensure that the public interest concerns are represented, and those certainly include the interests of small customers, to make sure that they're not adversely affected by some kind of organization that deals with the largest customers. There's a very, very great deal of attention paid to balancing of rates here among different customer classes; it's what we call the `cost of service.' And in every rate case of any significance, there is a component of the case that deals with the cost of service, which is allocating costs to customer classes according to the cost to the utility of serving them. ... It's one of the most (indisc.) that we deal with. And believe me, we have ample pull to do so." Number 1272 MR. LOHR agreed with Commissioner Hanley that the bill is anti- competitive. It attempts to hold back what is clearly a national tide to bring increased competition to the electric industry and to treat it less like a regulated natural monopoly. While Senator Murkowski is in a position of great influence, he cannot change that national tide. The sooner Alaska utilities start to plan intelligently for competition, the better. That competition is likely to come first to urban areas, where Mr. Lohr believes the focus perhaps should be at this point. MR. LOHR stated, "Representative Cowdery asked a very valid question: Why not wait? I think that's an excellent question. Since the authority does exist at this point, possibly legislative oversight of how the commission approaches this question is appropriate. But I'm not sure at this point that legislation is needed. Each utility can certainly speak for itself, but my understanding is that the utility representing half of the customers in this state does not support this approach or this legislation. If that's the case, I'd urge the committee to take a very careful look at it." Number 1339 REPRESENTATIVE RYAN said he was not trying to be unduly critical, but seemingly everybody whom the APUC regulates comes to him or testifies publicly that one of the largest costs of doing business is trying to deal with the APUC, that the time and costs involved in trying to get a decision are extraordinary and burdensome. He asked whether the APUC could expedite any of these so that people don't have to constantly have the same complaints. Number 1377 MR. LOHR said as competitive forces come in, in the long run it will mean less need for commission decisions on issues better handled by the market. However, the transition period between full-blown monopoly and introducing competition is a difficult time to make the kind of regulatory decisions that are needed. He stated, "It's more complicated, because sometimes what you might end up with is relaxed regulations but still a lot of monopoly power in the market. And an unregulated monopolist is the worst of all possible worlds, from the point of view of incentives to maximize profit at the expense of customers." MR. LOHR said otherwise, it is a fairly straightforward resource question, and the commission has identified specifically what resources they feel are needed to address that problem. He believes there has been good progress toward accomplishing those additional resources this year. They are funded entirely by the regulatory cost charge, which is from customers of regulated utilities; therefore, he believes there is broad-based support from the utilities on the need for those resources, which has been very helpful. With the two additional positions requested, Mr. Lohr hopes the APUC can make a substantial dent in the backlog. MR. LOHR pointed out that the most significantly delayed cases involve market structure issues. Those are quite complex cases involving a lot of work. There is no statutory clock ticking on those, whereas in other cases such as individual tariffs, if the APUC fails to act on the tariff request within 45 days, it automatically becomes law. To avoid having unreviewed tariff provisions become law through default, the APUC gives those priority, and those more complex proceedings necessarily take longer. It is a concern at the APUC, and they are doing their best to address it with the resources they have. Number 1509 REPRESENTATIVE RYAN commented that he was looking forward to the APUC's resolving problems in Anchorage relating to "GCI and Pacific Telecom and ATU, so that we can get on and take advantage of the deregulation and telecommunications act from the federal government." Mentioning possible substantial savings to consumers, he encouraged a little more prompt action if possible. MR. LOHR replied, "At this time, both GCI and (Indisc.) Alascom are authorized by this commission to provide local service in Anchorage in competition with ATU. In addition, ATU has formed a subsidiary, which is a long-distance company, which has also been authorized by this commission to provide long-distance service statewide. And there are several other applications pending from local exchange companies to form long-distance subsidiaries and provide service statewide. And I think we're seeing the market become competitive within the first year after the federal legislation authorizing (indisc.--coughing) such competition. And I think the commission has moved expeditiously in that area and is actively considering regulations to bring increased competition to those (indisc.)." Number 1583 CHAIRMAN ROKEBERG asked which assistant attorney general is assigned to the APUC, indicating there were follow-up questions for that person. MR. LOHR replied that Virginia Rusch gave the opinion to the APUC at the public meeting. Ron Zobel is also an assistant attorney general for the commission. CHAIRMAN ROKEBERG asked whether they were located in Anchorage. MR. LOHR said yes. Number 1604 CHAIRMAN ROKEBERG referred to their fiscal note. He stated, "There's only really one logical competing area in the state right now, in the Anchorage area. And so, I'm kind of curious who you think would be coming into the market to ask for a competitive certificate of operation, number one; and number two, are you aware of any profit-making utilities in the state of Alaska that are on the railbelt grid right now?" MR. LOHR replied for the first part of the question, the possibilities are twofold. First, under the Energy Policy Act of 1992 that amends old federal legislation called the Public Utility Regulatory Policies Act of 1978 (PURPA), competition at the wholesale level, at the transmission level, has been encouraged. He mentioned "exempt wholesale generators" and "co-generators" that are actively considering projects. For example, he had received a call the previous day from an attorney whose unidentified client was interested in coming to the state and wanted to know the rules of the game for applying for a certificate. Although Mr. Lohr didn't know how quickly that would bear fruit in terms of an application in front of the APUC, it was actively being discussed. MR. LOHR said the second possibility would be by an existing regulated public electric utility. There had certainly been competition discussed within the Anchorage market, and he understands that one major electric utility is interested in the possibility of competition and considering proposing legislation to clarify the legislative findings that might be made in that area. MR. LOHR said one profit-making, investor-owned utility came to mind: Alaska Electric Light and Power Company (AEL&P), which serves Juneau. In addition, the "power side" of Alaska Power and Telephone, under its new holding company, Alaska Power Company, is investor-owned, serves a number of communities throughout Southeast Alaska and the Interior, and is on a fairly aggressive expansion campaign to buy additional small village utilities. CHAIRMAN ROKEBERG thanked Mr. Lohr and asked that APUC representatives stand by in case there were further questions. Number 1803 NORMAN L. STORY, General Manager, Homer Electric Association, testified via teleconference, saying his organization serves 21,000 consumers on the Kenai Peninsula between Kenai and Homer. Including three large industrial facilities, roughly 14 percent are commercial operations that provide 56 percent of their annual revenue. This is a much higher ratio of commercial-to-residential consumers than found in national averages. The system is about 2,200 miles in length, with approximately 10 consumers per mile. MR. STORY said obviously, the loss of large loads is of concern because it would have an adverse financial affect on them; it would probably result in higher rates and reduced quality of service to remaining consumers, whom they would be required to serve under a "must serve" obligation. This bill would require the APUC to be convinced that a competitor's offer of service to their larger loads would be in the public interest and would not be likely to reduce quality of service for remaining consumers. He indicated further comments would duplicate others' testimony. He urged approval of HB 235 by the committee. Number 1933 CHARLES Y. WALLS, President and CEO, Alaska Village Electric Cooperative (AVEC), testified via teleconference from Anchorage. Referring to testimony by Bob Martin, he said AVEC's system is similar to THREA's, serving some 50 villages scattered throughout Western Alaska and using diesel plants. He believes they are highly vulnerable to "cherry picking" and its negative results. MR. WALLS stated, "Listening to some of the comments from the APUC, I don't see where we have a lot of difference here." He said the bill opens the door to competition, but with caution that there is a downside to unbridled competition. It gives the APUC tools and provides guidance as to how this opened competition market should be ushered into the state. He urged favorable action on HB 235, emphasizing that AVEC considers it a consumer protection bill. Number 2068 ROBERT WILKINSON, General Manager, Copper Valley Electric Association (CVEA), testified via teleconference from Glennallen. The CVEA is an RUS utility with 3,100 members. They have extremely high rates, due primarily to the environment in which they do business and to the fact that they serve two different and discrete communities. Geographically, CVEA's service territory is roughly the size of Ohio. MR. WILKINSON had listened with interest to testimony about coming competition. He believes competition in Alaska is alive and well, particularly in CVEA, where it is intense. They are "under attack" by three independent operators who are attempting to take all of CVEA's large commercial and industrial customers. He believes HB 235 is needed to help CVEA with that and to ensure that there is no catastrophic impact to remaining customers. MR. WILKINSON cited examples. Entities are attempting to secure CVEA's largest customer, a Valdez refinery that uses about 20 percent of their total system load; the Valdez schools, their fourth largest customer; and the U.S. Coast Guard, their eleventh largest customer. Together, these represent 25 to 30 percent of CVEA's total load. They are concerned that a company that comes in to displace these loads be subject to a reasonable and appropriate standard, which they believe HB 235 accomplishes. MR. WILKINSON emphasized that CVEA is not philosophically opposed to competition. Their strategic plan adopted six months before aims squarely at beating the competition, and their goal is to become the "least cost" energy provider and source within their franchised service territory. MR. WILKINSON expressed concern, however, that competing utilities be held to an appropriate standard: an APUC finding of clear and convincing evidence that competitive electric service is in the public interest and will not adversely affect the quality of service or the rates provided by existing retail utilities. He believes HB 235 clarifies that standard and ensures that the public interest remains paramount in the APUC's decision-making process. Number 2422 ROGER KEMPPEL, Attorney at Law, Kemppel, Huggman and Ellis, PC, testified via teleconference from Anchorage, saying he is general counsel for ARECA and many of the cooperatives. He referred to cases cited by Bob Lohr, Chugach Electric Association vs. City of Anchorage and Homer Electric Association vs. City of Kenai, from 1967 and 1969. [Testimony cut-off mid-speech by tape change.] TAPE 97-43, SIDE A Number 0006 MR. KEMPPEL said in 1969 and 1970, the legislature passed the present Alaska Public Utilities Commission Act, making the APUC a full-time commission and giving them the necessary tools, including those under AS 42.05.221. Subsection (d) of that states, "In an area where the commission determines that two or more public utilities are competing to furnish identical utility service and that this competition is not in the public interest, the commission shall take appropriate action to eliminate the competition and any undesirable duplication of facilities." He said clearly, the thrust of the act passed by the legislature in 1970 was to solve this problem and eliminate fighting between utilities. MR. KEMPPEL reported that the APUC did that, starting in 1971; it resolved service areas and split up the Chugach Electric Association and ML&P service areas. The 1970 act re-regulated electric municipal utilities and required that they have a certificate, which was not previously required. Suddenly, there were competing, overlapping certificates. MR. KEMPPEL stated, "And the courts said, ...`Your certificate is not a[n] exclusive certificate.' But you have to remember the context they said that in, nonexclusive certificate because for the first time we have competing, overlapping certificates, and so we're going to take away some peoples'. And, in fact, the commission did that, took away some of Chugach's certificate and took away some of the municipality's, ... and set the service area boundaries so that they were exclusive." MR. KEMPPEL said he didn't believe they need to argue whether the commission has jurisdiction over competition in the electric utility industry. If they have it, they don't have it specifically; Mr. Kemppel doesn't believe anything in AS 42.05 gives the commission specific authority to put competition in place in the electric utility industry. This bill would give them that specific statutory authority. Number 0228 MR. KEMPPEL discussed the standards of "clear and convincing" and "preponderance of the evidence." The APUC in some other areas must find certain facts by the preponderance of the evidence; that standard is that a fact is probably true, more likely than not to be true, with the chance of its being true even slightly greater than the chance that it is false. MR. KEMPPEL explained that for "clear and convincing," however, it must be highly probable that it is true. It is not necessary that it be true, nor that it be true beyond a reasonable doubt; the latter standard is much higher, a criminal standard. Rather, for "clear and convincing," it must be more than just probably true. If the APUC were to grant competition that adversely affected rates and services in an existing area, he believed they ought to be more than just quite a bit convinced that there would not be adverse effects. MR. KEMPPEL advised members that he had been quoting from the pattern jury instructions for the state, specifically, those relating to a civil case on defamation because that particular issue has both "preponderance" and "clear and convincing" standards. Number 0419 CHAIRMAN ROKEBERG noted that AS 42.05.311 has a provision that transmission facilities are to be shared if it won't result in substantial injury to the owner or to the detriment to service to customers of the owners. While it seems to give some authority to the APUC, testimony from the APUC had indicated they believe they have the authority. In addition, Mr. Kemppel had indicated it would be moot if HB 235 passed. Chairman Rokeberg asked what would happen if HB 235 did not pass. MR. KEMPPEL responded that AS 42.05.311 is titled, "Joint use and interconnection of facilities." It applies to all utilities and requires them to interconnect with each other. However, it does not necessarily require utilities to open up their whole systems and allow the sharing of customers or the serving of each others' customers. It is simply an interconnection statute. MR. KEMPPEL pointed out the significant difference in how electric utilities and telephone utilities are set up. The experience with competition in the telephone industry doesn't apply across the board to the electric industry. For instance, there are economies of scale in the electric industry that aren't there in the telephone industry. There are also high "stranded costs" in the electric industry, if large loads or customers are lost, that don't exist in the telephone industry. MR. KEMPPEL suggested if HB 235 doesn't pass, presumably the APUC would still have the power to open up the transmission system and allow electric utilities to transmit on a wholesale basis, between each other, over the systems of another utility. "Here, this bill is a retail bill," he concluded. Number 0611 CHAIRMAN ROKEBERG said he took it that Mr. Kemppel had experience in utility law. Noting the APUC's indication that they have adequate protection to prevent "cherry picking," Chairman Rokeberg asked whether a statutory provision could be adopted to prevent that yet not impede competition. MR. KEMPPEL stated his belief that HB 235 is just that, an "anti- cherry picking" bill that puts in the "clear and convincing" standard before the APUC can order competition. Number 0674 JOHN HANDELAND, Mayor, City of Nome, testified via teleconference from Anchorage, stating that the city owns and operates a certificated electrical utility through its Nome Joint Utility System. The city and the utility boards support HB 235. They presently are evaluating system additions. He believes they need a guarantee that the large-load, stable users, which are cheaper in many cases to service, are not pulled from their system. High costs, infrastructure and huge investments by the communities need to be amortized. While they certainly don't oppose competition, it must be clear that adding another provider or providers will not adversely affect consumers. They believe HB 235 sets the standard and would serve the public interest. Number 0753 REPRESENTATIVE COWDERY asked whether Nome uses diesel generation. MR. HANDELAND said yes. REPRESENTATIVE COWDERY asked what the cost is per kilowatt hour. MR. HANDELAND said about 16 cents a kilowatt. Number 0793 TIM COOK, Commissioner, Alaska Public Utilities Commission, testified via teleconference from Anchorage, restating that the APUC had taken no formal position on the bill. He offered background on their philosophy and where they are headed. There had been a recent change in the APUC's make-up. Mr. Cook believes for the first time since its inception, a majority of commissioners very much favor competition. He believes this bill is, in essence, a result of that change in philosophy, because as the APUC pushes forward with competition, many entities, particularly the monopolies, have "a certain fear." Although couched as opening the door for competition, by raising the bar to this "clear and convincing" standard, the bill actually makes the APUC's job more difficult in introducing competition into these markets. MR. COOK advised members, "Under our statutes, we have, we believe, and the Attorney General has indicated ... that we have the ability to allow competition or to prevent competition, whichever is in the public interest of that particular community. And to do so, we will get a preponderance of the evidence, whether it's probably in the best interest of that community. If you raise the bar to the `clear and convincing' standard, it makes it much more difficult; we have to do a huge analysis, and the net effect is that it makes it almost impossible to allow new competition into an area." MR. COOK suggested the standard of "any harm to a utility" approaches ludicrous. He reported having been in a hearing where federal officials testified that if rates were raised one cent for one customer, that wouldn't serve the federal purpose under the federal regulations. MR. COOK stated, "In essence, that's what this bill is doing, is if it raises the rates one cent to one customer but lowers it two cents to the remaining customers, it's not in the federal purpose. It's a very convoluted concept, but what it does is it creates a situation where it's almost impossible to allow competition. And I think that I speak for the majority of the commissioners here when I say that this commission wants to promote competition and that, if that's where the legislature wants to go, this bill is not the way to do it." CHAIRMAN ROKEBERG thanked Mr. Cook and noted his previous statement that the APUC had not taken a position on the bill. REPRESENTATIVE SANDERS asked whether Mr. Cook feels that HB 235 is appropriate for both the metropolitan and rural areas in Alaska. MR. COOK replied that he hadn't given a great deal of thought to rural versus metropolitan areas. He did understand there is a great problem in rural areas because of stranded investments and so forth. He said the real problem with HB 235 is raising the standard to "clear and convincing," for either rural or metropolitan areas. Number 1070 CHAIRMAN ROKEBERG requested of Mr. Lohr that the APUC prepare a paper outlining basic definitions and procedures that would justify the assertion that the APUC now has this authority. He also requested a background report on: what a `certificate of need and convenience' is; what rights that certificate conveys; and what responsibilities the certificate holder has, including legal requirements to provide service to everybody. He suggested they could provide copies of relevant case law. However, he didn't want it to be too voluminous or place a burden on the APUC staff. Number 1137 MR. LOHR said they would be happy to do that. He noted that there had been two assertions: that the APUC has authority to undertake competition under existing statute and that the APUC can deal appropriately with "anti-cherry picking." He asked whether Chairman Rokeberg wanted both covered. CHAIRMAN ROKEBERG said yes, indicating the need to establish a "comfort zone." He stated his intent to send HB 235 to a subcommittee and his belief that this issue is extremely important to Alaskans. He wanted to ensure that this committee gave it a full hearing, with a full understanding. He suggested that with private-sector companies wanting to move into Alaska, the legislature needs to enlighten itself. Number 1204 MR. LOHR asked whether the committee was seeking a position paper from APUC on the bill as well. CHAIRMAN ROKEBERG replied that he'd prefer to get the backup first. Further analysis would be fine, but he didn't want to slow down the process. CHAIRMAN ROKEBERG referred to the fiscal note and the request for a Range 21 engineer. He asked Mr. Lohr whether any applications for certification were on the agenda or requested of the APUC. Number 1270 MR. LOHR replied that there were no pending applications for competitive electric service that he was aware of, except for under the old PURPA. As Mr. Wilkinson from the CVEA had mentioned, there is a "pending application there for (indisc.) costs, as a calculation, and a qualifying facility, a coal-fired facility in Valdez." MR. LOHR said the fiscal note assumes that by the fourth quarter of FY '98, such proceedings would be active, which is why the position is not scheduled to begin until then. He concluded, "That's why the lower amount for personal services during the FY '98 reflects an assumption that that's when that engineering analyst would be needed." Number 1315 CHAIRMAN ROKEBERG asked Don Edwards to present his views on the competitive angle. Number 1339 DONALD W. EDWARDS, General Counsel, Chugach Electric Association, came forward to testify, saying HB 235 had caught their attention because it raises the issue of competition. They didn't want to speak against this bill so much as express concern about competition in Anchorage, where they had favored retail competition for some time. Nor did they want to speak to areas outside of Anchorage, where this may be appropriate. However, they are confident that circumstances in Anchorage are ripe for retail competition; they don't want to see anything that would raise the bar, as this might, to create an impediment to competition there. MR. EDWARDS handed out a diagram of an electric system to demonstrate which portions of the electric system they believe are open to competition: the generation plant and retail transactions. Others will remain "regulated and monopoly facilities," and they aren't looking at anything that might duplicate those facilities. Nor are they seeking an outcome such as in the past, when "they had to break up a fight between Chugach and ML&P, where there were facilities running down both sides of the street." Number 1473 CHAIRMAN ROKEBERG asked, given the federal legislation about wholesale "wheeling," whether this is unusual just because it is Alaska and whether there is wholesale "wheeling" now in Alaska. MR. EDWARDS responded, "There's a debate among lawyers about whether the federal legislation requires transmission access here. Chugach has always taken the position that its system is open, and it's willing to provide transmission access to people who need to use it." Number 1503 CHAIRMAN ROKEBERG asked whether that was because it was paid for in large part by the state. MR. EDWARDS replied, "Some parts of it were. Parts were paid for by our rate-payers as well. So, I don't think the transmission system is really the main issue here. ... Our concern is mainly with retail competition. There already is competition at the generation level. ... We compete with ML&P for the Fairbanks load. We compete with them for Copper Valley. Seward, we're right now competing. What we would like to do is to leave the way open for competition at the retail level." MR. EDWARDS pointed out that competition at the retail level also strengthens competition at the generation level. Under current circumstances, the cost of a mistake in acquiring power at the generation level can be passed through to retail customers, who are "captive customers." Number 1572 MR. EDWARDS indicated he'd been absent for a portion of the APUC's comments, then stated, "I think we agree with them. We believe that under existing law, the commission does have the ability to permit competition. And we believe that there's authority there as well for requiring access over distribution facilities. And I also agree that the [A]PUC is there and available, and empowered by existing law, to deal with `cherry picking' problems." MR. EDWARDS said the statute, which Mr. Kemppel had read, assumes that competition can occur; if competition occurs and the APUC finds that the way the competition is happening is harmful, the commission is empowered to step in and sort it out. Mr. Edwards stated, "Now, he's correct that the context of that legislation was with power lines running down both sides of the streets and some fairly wild-and-wooly competition. The circumstances now are different, because we're not talking about that. But the authority for the commission to deal with problems like that, should they arise, is there." MR. EDWARDS said that one person's "cherry picking" is another's competition. He suggested looking at other industries that had gone through a process of becoming more competitive. Suggesting the natural gas industry may be a good example, he stated, "Except where utilities had their rates completely out of whack, there really have not been negative impacts of that." MR. EDWARDS pointed out that in Anchorage for the last several years, there has been retail competition in natural gas, including small companies picking off large customers. To his knowledge, it hasn't negatively impacted retail gas customers there. There has been heavy "cherry picking" in the telephone long-distance business as well, and to his knowledge, the residential customers have done fine through that. He believes it is highly questionable whether that practice will do harm in Anchorage. He again specified that he wasn't familiar with other areas. MR. EDWARDS said it is important to remember whom they are trying to protect. They should think about the consumers, from large to small, and not worry about whether an electric utility loses a customer so much as the impact on other customers. They need to ensure that competition occurs and is open at all levels. MR. EDWARDS proposed an example: "If Chugach were to lose a load to ML&P after competition, and we were to try to simply take other costs and jam them through to our retail customers, if there was no competition allowed at the retail residential level, then we might be able to get away with that. But if there's competition at that level, then we can't do that, because if we do, we'll lose those customers because our price will go too high." He said the marketplace can solve those problems if allowed to run. MR. EDWARDS mentioned residential customers and the role of load aggregation. For example, airlines give package-tour companies excellent deals on tickets; the tour companies aggregate a group of customers and bargain with the seller for those. Similarly, he believes that could be expected in the retail residential market in the electric industry. He explained, "You will see people go out and gather up a group of customers and then come negotiate with the electric ... power providers. And that's a way in which residential customers will ... package themselves as cherries ripe for the plucking and be able to do just fine after retail competition occurs." MR. EDWARDS said, "What we think makes sense for Anchorage is an `access now, litigate later' kind of approach. ... It may be beneficial to arrange a situation where access is required immediately and you develop a[n] access charge immediately, based upon ... each utility's most recent filing with the commission. And that would allow competition to start immediately and quickly, without a high hurdle to get over, because in Anchorage, we know we've got two capable, qualified electric utilities that can and presumably, in our view, quickly open to competitive pressure, because we think it will result in benefits to the customers." Number 1856 REPRESENTATIVE RYAN said he was familiar somewhat with tour companies' buying large blocks of hotel rooms and airline tickets. If they can't fill them, they discount them and take the loss or try to recover it, which results in substantial discounts. He asked: If competition came into Anchorage with ML&P, what benefits could the consumer see in cents per kilowatt hour? MR. EDWARDS said it would depend on whether the competition got started at the large-customer or mass-market level. Except for residential customers, current and traditional rate-making is that the customer is charged two different prices, for the amount of kilowatt hours used and the demand placed on the system. Therefore, for nonresidential customers, it is difficult to make a broad pronouncement on rates without looking at each customer and that customer's load pattern. MR. EDWARDS said obviously they think there are savings to be given to customers; otherwise, they wouldn't be interested. His company feels strongly that competition will happen eventually, as it is happening in the Lower 48 and worldwide. People have figured out that the generation and retail components are not natural monopolies, don't have to be rate-regulated, and can be opened to competition. He believes the best way to prepare for that day is to "start doing it." Number 1971 REPRESENTATIVE RYAN said, "You would have to do some kind of a market survey to present a rate change to APUC. ... The usual pattern of APUC is taking forever-and-a-day to get anything done and charging a bunch of money for that service." He asked how that impacts Chugach Electric Association's time, value, money and opportunity to be competitive. MR. EDWARDS said he was going to be careful not to be critical of the agency that regulates them, but it definitely figures in his company's decisions about whether to compete for a load and how to price services. That is one reason they would rather not have HB 235 apply to Chugach Electric Association and ML&P in Anchorage; they don't want the ability to get into competition contingent upon this process that would be required in front of the APUC to get regulatory approval. They like it better the way it is. They'd prefer that nothing be done, as far as Anchorage goes. He re- emphasized that he wasn't talking about the rest of the state. MR. EDWARDS suggested one option for initial competition, at least, would be offering some services on the basis of existing tariff rates rather than new rates. Number 2075 REPRESENTATIVE COWDERY asked what retail rates are in Anchorage. MR. EDWARDS indicated it is 9 or 9-1/2 cents for residential use, somewhat less for commercial loads. REPRESENTATIVE COWDERY asked what areas Chugach Electric Association serves and how far south they go. MR. EDWARDS indicated they serve Cooper Landing, Girdwood, Portage, Alyeska and Whittier. REPRESENTATIVE COWDERY asked whether their rates change in various areas. MR. EDWARDS replied, "No, postage-stamp rates throughout the Chugach retail service area." Number 2113 REPRESENTATIVE COWDERY asked what area would be attractive to them for possible "wheeling." MR. EDWARDS said they believe their existing retail service territory and ML&P's are sufficient to allow them to compete. He added, "... we take it more seriously than that, but if you want to think of it as an experiment, you could." REPRESENTATIVE COWDERY asked, "Are your energy costs about the same?" He specified he was referring to generation costs. MR. EDWARDS replied that they are comparable. "But we, of course, don't know what their generation costs are," he said. "If you're talking about prices, our prices are similar. In fact, I saw a publication from ML&P that showed their prices lower on a number of customer classes than ours." REPRESENTATIVE COWDERY said he was talking about production costs. MR. EDWARDS indicated he didn't know ML&P's production costs. Number 2173 CHAIRMAN ROKEBERG suggested those production costs may change in the next few years, "given the acquisition of a large amount of fuel source by ML&P, the purchase of a portion of the Beluga gas field." CHAIRMAN ROKEBERG asked whether Mr. Edwards' association would be comfortable with a form of legislation that allowed people outside the Anchorage area to maintain their relative exclusivity and yet opened Anchorage for more competitive review by the APUC. MR. EDWARDS replied that he'd have to discuss it with "my board and so forth." However, it struck him as a reasonable proposition, and it was similar to what they had been thinking for Anchorage. He restated that they didn't want to presume to say what is appropriate elsewhere. CHAIRMAN ROKEBERG pointed out that committee files contained a letter from ML&P supporting HB 235, indicating they would probably oppose Mr. Edwards' view. MR. EDWARDS said that didn't surprise him. Number 2246 CHAIRMAN ROKEBERG asked Mr. Yould, "If we could draft some type of legislation that basically left the status quo but gave you ... a little further comfort and allowed the Anchorage area to fight it out amongst themselves, do you think that would satisfy most of your membership? Or have you had that kind of conversation?" MR. YOULD replied that they hadn't had that kind of conversation. Given that MEA, ML&P and Chugach Electric Association are all three members of his service organization, he suspects it would have some fracturing effect on the organization itself. He stated, "But what's really important is what is best for the consumers. We have at least two of those entities [that] have indicated that they would not like to see competition at the retail level. And Chugach, I have to say - in all fairness to their position, and I understand the awkward position that they're in - they would like to see some sort of retail `wheeling.'" MR. YOULD stated, "It was mentioned that some sort of competition will take place in the future no matter what. `Dow Jones Reporter' indicates that some time in the future, if deregulation goes through, that we will probably see, rather than a preponderance of utilities throughout the United States, probably eight large mega- corporations throughout the United States. I guess I would presume that one of those would be up here in Alaska, if what Mr. Edwards says is true; that is, we would have some sort of competition." MR. YOULD continued, "The problem that I have is, is if we bring in investor-owned utilities to the state of Alaska, because it will not be an REA co-op or it will not be a municipal entity where all the benefits go straight back to the consumers, instead, we're going to have an entity that has to pay taxes, which I'm not necessarily against in this day and age; it certainly has to be considered." Number 2353 MR. YOULD continued, "They're going to have to charge a 15 percent rate on return. They're going to have to have dividend distributions, probably to somebody in the Lower 48. They're going to have management that I can tell you has a salary structure probably ten times greater than the salary structure that we have in the state of Alaska right now. We're going to have entities that have to get their financing from other than where our present utilities do, and that is generally through some sort of tax-exempt entity or state or federal entity that gives favorable interest rates." MR. YOULD continued, "And then, finally, and this is maybe a negative in your own way of thinking, but because we are all owned by the people, any subsidy that goes to our utilities as a result of a state appropriation or a federal appropriation goes straight back to them, not the case with an investor-owned utility. So, I find it hard to believe that an investor-owned utility that comes up to the state of Alaska can truly, without predatory pricing, provide power for the long term cheaper than what the existing utility structure can, which really means that what you're going to see ... is some early-on predatory pricing until they gain the ... strangle-hold. And then in the future you will see the cost of electricity going up. That's what I see with deregulation in the state of Alaska." Number 2402 REPRESENTATIVE RYAN mentioned the 600,000 people in Alaska, as well as infrastructure costs and everything being spread over long distances. He said he didn't see where an industrial-owned company could come to Alaska and be profitable. MR. YOULD responded that he seriously questioned that also. "And frankly, they don't have a technology better than what Chugach already has," he stated. "I mean, we are providing state-of-the- art power generation. I don't see it happening, either." However, someone could pick off the local school and an industrial facility of a small village, for example, leaving other customers stranded. "They could do that," he said, "That's the problem. And the same thing could happen in the railbelt as well." Number 2433 CHAIRMAN ROKEBERG announced that the public hearing on HB 235 would be held open. He requested that Mr. Yould ask the three members about the question posed earlier, to have that information available for the subcommittee he was appointing. CHAIRMAN ROKEBERG appointed Representative Sanders as chairman of the subcommittee, with Representatives Cowdery and Brice as additional members; he offered to participate as well. He noted that they expected to receive background information requested that day from the APUC, and he suggested that they communicate with Mr. Yould, Mr. Edwards, and Mr. Stahr from ML&P, in particular. He further suggested that they talk with Mr. Wilkinson again about the Copper Valley situation. TAPE 97-43, SIDE B Number 0006 CHAIRMAN ROKEBERG mentioned focusing on "cherry picking" and looking at whatever legislative mandate exists in statute, indicating that information should be provided by the APUC. (HB 235 was held and assigned to a subcommittee.)