SENATE BILL NO. 243 "An Act relating to power cost equalization; and providing for an effective date." 9:08:42 AM Co-Chair Bishop relayed that it was the second hearing for SB 243, and the committee would consider a Committee Substitute (CS), cover fiscal notes, and look to the will of the committee. Senator Hoffman MOVED to ADOPT proposed committee substitute for SB 243, Work Draft 32-LS1573\I (Klein, 4/26/22). 9:09:21 AM AT EASE 9:09:58 AM RECONVENED Co-Chair Bishop OBJECTED for discussion. 9:10:11 AM ERIN SHINE, STAFF, SENATOR CLICK BISHOP, discussed an Explanation of Changes document (copy on file): Version 32-LS1573\B to 32- LS1573\I New Section 1 Page 1, line 4 Page 2, line 6 Adds a new section to the bill amending AS 42.45.080(a)(2) to remove the four percent nominal target return when investing of the Power Cost Equalization Endowment Fund and replaces the investing guidance for the commissioner of the Department of Revenue with the prudent-investor rule. Ms. Shine explained that the new language had been taken from the investment responsibilities for the board of the Permanent Fund, which could be found in AS 37.13.120 (a). Co-Chair Stedman asked if the committee could discuss what was being replaced by the change, including the target return. Ms. Shine stated that currently in statute the Power Cost Equalization Fund (PCE) Endowment Fund had a targeted return of four percent. The CS proposed to replace the four percent target with the Prudent Investor Rule, outlined on page 1, line 10 of the bill. She offered to read the text aloud. Co-Chair Stedman thought it was important to read the passage. He referenced the "Prudent Man Rule, which had evolved into the Prudent Investor Rule. Ms. Shine read from Section 1 of the bill: the "prudent-investor rule" as applied to investment activity of the fund means exercising the judgment and care under the circumstances then prevailing that an institutional investor of ordinary prudence, discretion, and intelligence exercises in the designation and management of large investments entrusted to it, not in regard to speculation, but in regard to the permanent disposition of funds, considering preservation of the purchasing power of the fund over time while maximizing the expected total return from both income and the appreciation of capital Co-Chair Stedman thought further explanation was warranted. He thought that the current four percent targeted return was not applicable to an endowment style portfolio, and that the PCE Endowment Fund should be managed similarly to the Permanent Fund in perpetuity. He discussed the growth of the principal after inflation, and asserted that a four percent target rate was too low. He supported the change to the bill. 9:14:10 AM Senator Wielechowski asked if the proposed CS would lead to a higher rate of return. Ms. Shine answered affirmatively, if the PCE Endowment Fund was invested as the Permanent Fund, which was had current targeted returns 6.2 percent. She expanded that the proposed change to the bill would likely result in greater returns. Senator Wielechowski asked how the returns on the PCE Endowment Fund had compared to the returns on the Permanent Fund or the Alaska Retirement Management (ARM) Board. Ms. Shine did not have the information at hand, and offered to provide the information at a later time. She cited that in years past the fund had targeted the four percent return in statute and there were potentially monies that the fund was not receiving. 9:15:44 AM CURTIS THAYER, EXECUTIVE DIRECTOR, ALASKA ENERGY AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT (via teleconference), considered the five-year average of the PCE Endowment Fund, and cited returns of $150 million in the current year and $48 million the previous year. He acknowledged the fluctuation in returns and highlighted that it was partly due to the Department of Revenue's (DOR) management of the fund, which had been extremely conservative one year and had only yielded $48 million in returns. Senator Wielechowski wondered if anyone from DOR could comment on how the bill might change the investment philosophy. Co-Chair Bishop relayed that there was no one from the department available at the present time. Senator Wilson commented that the department had been managing to the four percent return that was currently in statute, and he had felt that removing the four percent would encourage the department to work towards a higher return. Senator von Imhof guessed that the investment would be less bonds and more equities to rebalance the portfolio. She knew that equities were associated with greater returns but higher volatility. She emphasized that greater returns meant greater risk. She mentioned inflation. She mentioned the goal of returns being over inflation over time. She wanted to confirm that the PCE Endowment Fund had a five percent draw, like the percent of market value (POMV) draw from the Permanent Fund, and had a five-year lookback based on the draw. Mr. Thayer answered in the affirmative. He cited annual returns of $112 million in 2017, $76 million in 2018, $74 million in 2019, $48 million in 2020, and $150 million in 2021. Co-Chair Stedman thought there was a three-year look back rather than five years, which was more volatile. He thought the smoothing mechanism made the draw more predictable. Ms. Shine agreed that the POMV from the PCE Endowment Fund had a three-year lookback and a five percent draw. 9:19:57 AM Co-Chair Bishop WITHDREW his OBJECTION. There being NO further OBJECTION, it was so ordered. The CS for SB 243 was ADOPTED. Co-Chair Bishop addressed a new fiscal note from the Department of Commerce, Community and Economic Development (DCCED), OMB Component 2602. The fiscal note showed an appropriation for the Alaska Energy Authority with $15 million in Designated General Funds (DGF) in FY 23, with the same amount in the out years until FY 28. Senator Hoffman MOVED to report CSSB 243(FIN) out of Committee with individual recommendations and the accompanying fiscal note. There being NO further OBJECTION, it was so ordered. Senator von Imhof asked if there had been public testimony on the bill. Co-Chair Bishop answered "yes." CSSB 243(FIN) was REPORTED out of committee with six "do pass" recommendations and one "amend" recommendation, and with one new fiscal impact note from the Department of Commerce, Community and Economic Development. 9:21:37 AM AT EASE 9:24:46 AM RECONVENED