CS FOR SENATE BILL NO. 280(RES) "An Act permitting grants to certain regulated public utilities for water quality enhancement projects and water supply and wastewater systems." This was the first hearing for this bill in the Senate Finance Committee. SENATOR GENE THERRIAULT, sponsor of the bill, reported that "under current law, privately owned public water and wastewater utilities are not eligible to participate" in certain State grant funding opportunities. He commented this ineligibility places the privately owned utilities' ratepayers at a disadvantage when compared to ratepayers of municipally owned utilities. He explained this legislation provides "for inclusion of privately-owned water and waste water utilities in the State water and wastewater grant program, if the Regulatory Commission of Alaska (RCA) regulates the rates." He noted that the Senate Resources Committee version of this bill "removes criteria inserted by the Senate Labor & Commerce Committee" stipulating that the utility must serve as the primary utility for the municipality. He explained the Resources version of the bill thereby expands the "pool" of utilities the bill would apply to. Senator Therriault noted "that regulation by the RCA ensures that all the economic benefits of these grants" would provide funding for utilities' upgrades and expansions without forcing ratepayers to burden the expense. He furthered that this bill would also allow utilities "to expand in areas that are on the peripheral of the existing system, thereby providing water and wastewater services to families" who are currently outside of the service area. Senator Therriault noted the Resources Committee substitute makes grants available for public water and wastewater utilities; however, restricts grants for solid waste improvements to municipality owned utilities. Senator Therriault summarized the intent of this bill is to make grant funds available to provide Alaska's residents with safe water and sewer regardless of whether the water and wastewater utility is owned by a municipality or a private group. Senator Therriault reiterated that the Labor & Commerce Committee version of this bill is more narrowly drafted than the Resources Committee version; therefore, a zero fiscal note from the Department of Environmental Conservation accompanies the Labor & Commerce Committee's version, while a $93,000 fiscal note from the Department accompanies the broader Resources Committee version. Co-Chair Kelly inquired if Senator Therriault agrees with the analysis supporting the $93,000 fiscal note. Senator Therriault responded the Resources Committee version allows for a larger pool of utilities to qualify for the grants; and not all of them have sophisticated accounting systems or are sizable entities with a sufficient number of employees to manage the grant application process. He continued that the Resources version would allow small utilities such as trailer park operators, who might not have much grant processing expertise, to apply for the grants. He commented this might result in the State needing to provide staff to assist recipients during the grant process; therefore, he noted, some of the fiscal note is legitimate. Senator Therriault communicated to the Committee that the language of the bill is drafted to apply to utilities statewide, and would allow municipally owned water and waste water utilities that are grappling with privatizing their utilities to make that decision without being burdened with complying with the current grant funding restrictions. Senator Olson asked why the initial grant program excludes private water and wastewater utilities. Senator Therriault responded that initially, municipalities managed most of the systems and current scenarios were not anticipated. ANDY WARWICK, Chair, Board of Directors, Fairbanks Water & Sewer, Inc., testified via teleconference from Fairbanks, and voiced that Fairbanks Water & Sewer's customers would be "favorably" impacted by the passage of this bill. Senator Therriault commented that the Regulatory Commission of Alaska (RCA) would not permit any grant monies used to expand a facility to be calculated as part of the rates paid by the utility's users. He clarified that ratepayers could not be charged as if the utility had acquired a loan or invests private capital; therefore, "because of the RCA rate regulation, the benefit of the grant does flow through to the individual ratepayer." Senator Green asked if a utility's ratepayers would absorb the costs of improvements if a grant were not in place. Senator Therriault noted that costs incurred for improvements, upgrades, expansions and the like would be passed on to the ratepayers if a private or commercial loan were in place. Senator Green asked if RCA has different criteria considerations for grant requests from a municipally owned utility grant application compared to a privately owned for profit utility. WILL ABBOTT, Commissioner, Regulatory Commission of Alaska, Department of Community and Economic Development, testified via teleconference from Anchorage and responded there are no differences in the process. Senator Green inquired how many utilities would be affected by this legislation. Senator Therriault answered that 36 utilities are eligible under current regulations, with projections of another 50 utilities qualifying under the Resources Committee version and a relatively small number of additional utilities qualifying under the Labor & Commerce Committee version. Senator Green asked for characteristics and locations of the additional utilities. Senator Therriault responded that the additional 50 utilities would include small ones such as trailer parks and some subdivisions. Senator Green requested a list of the utilities be supplied to the Committee. She asked if an option for low-interest loans was considered, as she is concerned the expansion of the program might compete with other statewide requests for grant funding. Senator Therriault noted that other legislation does allow utilities to be eligible for the State's low-interest loan program; however, he agreed that the Resources "version of the bill brings in a lot of new competitors for the available grant dollars." Senator Ward asked for clarification that the fiscal note would provide Department support to the fifty new utilities that might apply for the grants. Senator Therriault responded in the affirmative, as a number of the utilities have never participated in the grant program and would need assistance in the application process. Senator Ward asked why assisting these utilities in completing their grant applications would result in the need for additional staff. Senator Therriault responded that in any application process, the Department provides assistance to the applicants. He commented that municipalities that have previously applied for the grants are familiar with the process. Senator Ward questioned why it is the responsibility of the Department to assist in helping people apply for these grants. Senator Green noted that grant writing is the issue. Senator Leman questioned if the owner's equity increases as a result of the grant supported improvements, and who is compensated for the improvements if the utility is sold to another party. Senator Therriault responded that if improvements were made, the value of the asset would increase; however, RCA regulations guarantee that ratepayers could not be charged for the improvements through paying higher rates. Senator Therriault commented that the asset base of the utility does increase regardless of whether it is publicly or privately owned. He reiterated that the underlying goal is to provide safe water and sewer systems to Alaskans. Senator Leman asked if the RCA grant regulations would protect ratepayers from paying higher rates to a new owner who purchased the grant-improved utility. Mr. Abbott clarified that the increased assets are called "contributed capital," and "recorded in the books," they remain there. He continued that if the facility transfers from a municipally owned to a privately owed business, the contributed capital remains on the books, and the new owner could not claim a rate of return from it. Co-Chair Kelly surmised that the contributed capital would be reflected in the sale price. Mr. Abbot responded that would be correct. Senator Austerman asked for further clarification of the value process when a private utility sells its grant improved utility to another private enterprise. Senator Therriault stated the assets transfer from one owner to another; however, any improvements resulting from grants as "contributed capital" remain "on the books." He furthered that the new owner would not be paying for something that could not be recouped. Co-Chair Kelly noted the improvements could be reflected in the sale price of the utility, but could not be reflected in the rates. Senator Austerman commented that state grants would enable an owner to "build a bigger and better machine," which would garner the current owner more profit when the utility is sold regardless of the rate structure. Co-Chair Kelly concurred, but stressed the new owner would be aware "that a certain portion of that asset you can't recoup costs on through the rate structure." Senator Austerman responded that if a utility is improved and enlarged, it could serve more customers and reap more revenue and other benefits. Senator Ward voiced the understanding that these grant dollars could not be used for expansion, but only for refurbishing. Senator Therriault corrected that the grants could be used for expansion or for refurbishment of a utility. Senator Ward noted that using grant money for maintenance on a utility would "free up" the owner's money for other expansion needs and, in this situation, the expansion would not be classified as contributed capital. Mr. Abbott concurred. Senator Ward furthered that if a utility received a five million dollar grant and used those funds for maintenance expenses, and subsequently invested five million dollars of private funds to expand their facility, the expansion would be treated as an asset. Again, Mr. Abbott concurred. Senator Therriault stated his understanding that the dollar amount of the grant would be considered as contributed capital, no matter what it is used for, and; therefore, could not be considered in the rate base. Mr. Abbott concurred. SFC 02 # 42, Side B 10:07 AM Senator Ward reiterated that if a private utility receives grant money for maintenance needs; this would essentially free up the owner's money for capital improvements. He asserted that by using grant money in this fashion, the owner's capital improvements would increase the value of the utility because those improvements would not be classifieds as grant capital improvements. Mr. Abbott stated that regardless of how a grant is utilized by a utility the funds are considered contributed capital from which an owner could not profit. He furthered that the cost of expansions and improvements made to the utility using private funds could be recouped with rate increases. Senator Ward questioned if the RCA, in its grant request process, reviews an entire utility's operation. Mr. Abbott responded that all components are considered by RCA during the grant request process. Senator Green questioned the previous sale of the Fairbanks North Star Borough water and wastewater utility to a private entity considering that the municipally owned utility would have qualified for State grants. Senator Therriault responded that the sale of the Fairbanks utility to a private entity disqualified the utility from applying for the grants. He opined the Fairbanks North Star Borough's decision to sell its utility "was a smart decision" because the privately owned group managing the utility has upgraded the utility and made it a much more efficient operation. He predicted that numerous local governments would be grappling with the decision as to whether to sell their water and wastewater utilities in the upcoming years. He questioned if, in the pursuit of achieving higher levels of efficiency, the current eligibility for grants criteria might be a deterrent. Senator Green asserted the for-profit nature of private ownership would "set it apart" from publicly owned facility where the revenue generated supports the facility or is deposited into a municipality's budget. Senator Therriault contended that much of the profit in the Fairbanks's utility is reinvested in the facility; whereas before the municipality "siphoned off money, quite a bit of the money." He asserted that the facility "suffered" because of that, and under the current private ownership, the facility is becoming more modernized and efficient. Senator Austerman applauded the privatization of the utility; however, voiced concern over a policy change on how state grants would apply to the private sector resulting in the "potential for profitability" from receiving those grants. He cautioned that the Senate Resource Committee version of the bill "opens the door quite a bit" and may result in "opening Pandora's box." Co-Chair Kelly inquired if Senator Austerman prefers the Senate Labor & Commerce Committee version of the bill. Senator Austerman stated that the versions are similar "philosophically." Senator Therriault understood the concern with expanding the grant applicants beyond the eligible original pool and agreed that the Senate Resources Committee substitute does expand the program significantly, resulting in a sizable fiscal note. He noted the Senate Labor & Commerce committee substitute only extends eligibility to utilities that are the primary water and wastewater utility servicing a community. Senator Ward inquired as to the number of privately owned utilities that would be eligible under provisions in the Senate Labor & Commerce committee substitute. DAN EASTON, Director, Division of Facility Construction & Operation, Department of Environmental Conservation responded that of the 36 municipality utilities the Senate Labor & Commerce committee substitute would apply to, only the utility operating in Fairbanks is privately-owned. He noted that the Kake Tribal Corporation currently owns the City of Pelican's water system; however, ownership is being transferred to the City of Pelican. Senator Ward inquired if there is a list available of the communities that would be eligible under the Senate Resources committee substitute of the bill. Mr. Easton responded that of the approximately 50 utilities that could be eligible under the Senate Resources committee substitute of the bill, RCA maintains a list of the 20 currently regulated by RCA. Senator Ward asked why the State is obligated to supply personnel to help utilities apply for these State grants as indicated by the fiscal note from the Department of Community and Economic Development. Co-Chair Kelly stated there are regulations in the Department of Community and Economic Development program that obligates the State to provide assistance to small communities. Mr. Easton elaborated that in addition to the State assisting small communities with their grant applications, the majority of the Department's efforts are in the actual administering of the grant. He explained that the Department does not disperse grant funds in a lump sum, but rather reimburses the grantee as a project progresses. He continued that ten percent of the grant funds are withheld until a project is finished, and the State completes a final audit on the project. Senator Ward asked the witnesses if the majority of the funding in fiscal note accompanying the Senate Resources committee substitute is for administration of the grants. Mr. Easton affirmed that is correct. AT EASE 10:20 AM / 10:24 AM Co-Chair Kelly requested Senator Therriault to further analyze the differences between the two-committee substitutes. Co-Chair Kelly noted the bill would be held in Committee at this hearing. Senator Wilken disclosed he is a minority shareholder in the Fairbanks Sewer & Water utility company. Senator Wilken commented that the sale of the Fairbanks North Star Borough's water and wastewater utility to a private company is reflective of a new trend in the industry. He continued that as this trend continues, other changes in regulations might occur. Senator Wilken contended that the passage of this bill would benefit the ratepayers, not the shareholders of a utility. Mr. Abbott reiterated there is no rate of return or profit on improvements funded by contributed capital. Senator Wilken characterized contributed capital "as a transparent asset," for it could not be reflected in the sale price nor could the prospective buyer profit from it. Mr. Abbott agreed with Senator Wilken's comments. Senator Ward asked if the private business group that purchased the Fairbanks' utility knew it was ineligible for the State grants. Senator Wilken responded that being ineligible for these State grants was a concern of the new owners of the Fairbanks' utility; however they felt they could operate the utility more efficiently with or without those funds. Senator Green asked if the additional grant applicants allowed through the Senate Resources committee substitute would be considered at the same level as the original pool of applicants. Mr. Easton responded that all applicants would be added to the grant pool; however, the new applicants would be at a "slight disadvantage" as the current grant system prioritizes by assigning points to projects that are already underway or in stages of development. Senator Green asked about incentives to utility systems to expand into new service areas. Mr. Easton responded that at some point it would be important to clarify "whether these grants would be available to developers to be used as part of constructing a new development." Senator Green voiced that any expansion in the number of eligible participants would affect the grant "pool." Senator Austerman asked if the RCA is involved in the sale of a utility and its sale price, or if involvement is limited to the rate structure. Mr. Abbott responded that the RCA is involved in a sale to the extent of determining if the sale price is "reasonable" and within the ability of the utility to recover the purchase price from rates levied and continue to be viable. He contended the RCA does not intend to get too involved in ownership transfers as "it is a sale between two consenting parties, and as long as the purchasing party understands what they could base their rate structure on," the RCA is satisfied. Co-Chair Kelly asserted this bill would be held in Committee to afford the sponsor additional time to address concerns. Co-Chair Donley voiced support for the State to investigate avenues to enable this program to be self-sustaining; perhaps using program receipts to recoup costs associated with the program. The bill was HELD in Committee.