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 second hearing for this bill in the Senate Finance Committee. SENATOR GENE THERRIAULT, sponsor, reminded that questions were raised during the previous hearing regarding whether grants received could be "charged off" to rate-paying customers, as well whether stockholders of a utility would benefit from grants received in the event of the sale of that facility. Senator Therriault informed the Regulatory Commission of Alaska (RCA) submitted a letter dated April 8, 2002 [copy on file] that clarifies the matters in that it essentially answers no to both questions. He indicated an enclosed graph further explains the method in which rates are set. Senator Hoffman asked if 36 communities participate in this program Senator Therriault stated he would provide a list of those communities. Senator Austerman referenced the first paragraph of the aforementioned letter that states that the grant funds could not be used to assess the new value through the utility; however, elsewhere the letter states that the value is set based upon cash flow. He suggested this is a contradiction because if the facility were doubled utilizing the grant funds, the cash flow would also double. Senator Therriault clarified the cash flow is the rates the utility is allowed to charge and that the RCA only allows rates based on the private capital contributed. Therefore, he explained if more customers were served, but the private investment was not increased, the RCA would require the rates to be lowered. He furthered that the purchaser, in the event of the sale of the utility, would examine the cash flow, which would be based only on the private investment. He pointed out that the purchaser would not pay for the "transparent assets" because those assets could not be recouped. He emphasized that the RCA is directed to require the utility to charge rates only to cover the actual debt and to allow for "an ongoing economic enterprise". Co-Chair Kelly understood that a purchaser would establish a capitalization rate, which would "ultimately be tied to the dollar amount" customers could be charged. He explained that if the grant revenues could not be charged back to the customers, the grant funds invested in the expansion of the utility would never "flow back" and be available for reinvestment in the business or as profit. Senator Therriault affirmed and reiterated that the transparent asset, which is the "product of the grant" could not be "built into" the rates. Co-Chair Kelly furthered this is despite an increased number of customers. Senator Austerman understood the utility could double in size although the rate structure could not be increased. However, he asserted that because the facility has doubled, the cash flow would increase because of the increased number of customers paying the existing rate structure. Senator Therriault responded the RCA would require the utility to reduce the rates so individual ratepayers rather than the shareholders who have not increased their investment would realize the benefit of the grant. Senator Therriault again referenced the letter, pointing out that if a utility is sold, at the time of the facility's overall rate review, the RCA is directed by statute to establish a new rate based on the purchase price or the "book value", whichever is lower. He defined book value as that portion of the capital that was contributed by private industry. Therefore, he noted, if the purchaser buys the facility at an amount lower than the book value, the RCA would require rates based on the "good deal" obtained; however, he noted if the purchase overpaid for the facility, the RCA would only allow a rate structure based on the private capital investment. He suggested that an overpayment of a utility could be rejected by the RCA if it determines the utility would be an "unworkable business operation." Senator Leman clarified that operation expenses resulting from an expansion are recoverable, although capital expansion costs could not be recuperated. Co-Chair Donley asked what would happen if a utility went out of business and the assets were liquidated. Senator Therriault replied that most assets are "pipes in the ground", and that only a utility operator would be interested in purchasing them. Senator Hoffman asked about property owned by the utility. Senator Therriault answered that the utility does not generally own the land where pipes are located. He doubted grants would be awarded for the construction of office buildings and other facilities not directly related to actual utility delivery. Senator Ward and Senator Therriault next discussed privatization, competition and a monopoly. Senator Therriault stated the utilities are regulated service providers. Senator Ward suggested that if established utilities were awarded these grants, there would be no possibility of another operator entering the market and competing to provide the services. Senator Therriault informed there is no prohibition from undertaking the process to start competition and qualifying to receive the grants. He predicted this would not occur because this legislation only applies to water and sewer utilities and the rate base could only "support so much". Senator Hoffman asked if other utility providers benefit from a similar grant program. Senator Therriault answered that some electric utility providers participate in a grant program. Senator Leman clarified these are cooperative utility companies. Senator Hoffman specified privately owned utility companies. Senator Austerman commented he would not oppose reporting this bill from Committee although he was not convinced to vote for its passage from the Senate. Senator Leman moved to "report SB 280 from Committee with individual recommendations and I don't agree with the fiscal notes, I'll read them, move them along and recommend appropriate action be taken at the time when fiscal notes are passed." Senator Ward objected to comment on separate legislation that was passed from a different committee with "an understanding that when they bought it they knew what they were getting. And I allowed that one to go back. I certainly am going to remove my objection and let this one go out at this time, but I just want the Committee to know when people buy stuff, and they know what they're buying, I think that's a pretty fair indication as to they're sophisticated buyers and then to come back in either case and ask the public to then change the agreement to purchase I think that there has to be a clear public purpose in there. And I'm not saying that there isn't in this case and the previous one, but I'm not quite there where I see it yet." Senator Ward removed his objection to the motion to report the bill from Committee. Senator Leman WITHDREW his motion to report the bill from Committee at the request of Co-Chair Kelly for the purpose of addressing the fiscal note. Co-Chair Kelly moved to adopt a forthcoming zero fiscal note for the Department of Environmental Conservation. There was no objection and a new fiscal note was ADOPTED. Senator Leman re-offered his motion "with the revised fiscal note." Senator Wilken informed that he owns ten percent of the utility this legislation specifically would impact. He stated the ratepayers would benefit from this bill, as savings from lower operating costs would be passed along to the customers. He also noted that Fairbanks Water and Sewer is one of the first private utility operators in the United States, and therefore the processes are new. He supported this legislation. Senator Hoffman agreed with Senator Wilken's assessment, which is why he asked about the possibility of privatized electric utilities participating in a grant program. He surmised if all utilities were funded with grants, operating costs would be reduced, resulting in less dependence on the Power Cost Equalization (PCE) program. Co-Chair Donley commented that to be successful rates must be reduced. He spoke of the Anchorage Water and Sewer utility and the lower percentage of per capita financial assistance it has received over ten years compared to other areas of the State. Senator Hoffman again requested the list of utilities. He pointed out his water and sewer expenses in Bethel of approximately $270 per month are considerably higher than that of any other Committee member. There was no objection and CS SB 280 (RES) MOVED from Committee with a zero fiscal note written by the Senate Finance Committee 4/10/02 for the Department of Environmental Conservation.