SB 280-WATER/SEWER/WASTE GRANTS TO UTILITIES  CHAIRMAN STEVENS announced SB 280 to be up for consideration. MS. WILDA RODMAN, Staff to Senator Therriault, sponsor of SB 280, explained that it allows privately owned public water and waste water utilities to apply for water and waste water grants under AS 46.03.030 if they are regulated by the Regulatory Commission of Alaska (RCA). The regulation requirement ensures that all the economic benefits of the grants guarantees that the benefits of the grants would be passed on to the ratepayers. Currently, only municipalities can apply for these grants, making it unfair to all. This would allow privately owned utilities to make utility infrastructure improvements without forcing ratepayers to pay the full burden through increased rates. Additionally, the bill would increase the ability of the utility to expand in areas that are on the peripheral of existing systems thereby providing water and waste water services to families that are currently on wells and septic systems. There was a letter in support from the Fairbanks North Star Borough attesting to the fact that there are at least two areas in Fairbanks that would benefit from being able to have services expanded to their areas. SENATOR LEMAN said he thought this made sense, but he was concerned about the fiscal note from DEC that adds another position in Construction Facility and Operation from the general fund. He thought they needed to look at that. MS. RODMAN said that she understood the fiscal note was because the smaller utilities might not be as savvy as the municipal utilities in applying for these grants, so it would take more staff time to prepare them. SENATOR LEMAN responded that he would like to see something similar to the RCA, that the utilities requesting this pay a fee rather than it just coming out of the general fund. SENATOR AUSTERMAN said page 2, section 2, talks about prorating and asked if municipalities have the same ratio. MS. RODMAN said that is the same. CHAIRMAN STEVENS asked what was the total number of utilities that could be eligible for this. MS. RODMAN replied according to DEC it would increase by 50 and currently there are 35 municipalities that can apply. Of the 50, 15 are water, about 5 in sewer…[END OF TAPE] TAPE 6, SIDE B    2:48 p.m.   CHAIRMAN STEVENS asked what size grant they can currently apply for. MR. DAN EASTON, Director, Facility Construction and Operation, DEC, replied about $2 million per year. He said their mission is to assist communities in improving sanitation conditions. They do that by providing both grants and low interest loans to communities and this bill deals with one of their grant programs - the Municipal Water, Sewer and Solid Waste Matching Grant Program. They do not have a position on it, since it deals with policy issues, but he had information that he thought would be helpful. He explained that they make grants to communities for things like replacing water and sewer lines, building new water and sewer lines to serve new areas, building or upgrading sewage treatment plants, building or closing or adding on to landfills and building things like water storage tanks - capital projects. He said the program is primarily state funded and in FY 03 the budget is $24 million. He said they are allowed to use some federal grant funds in some of the smaller communities. Of the $24 million, $8.5 million is federal grant funds. The balance is from the state. Currently, only municipalities are eligible to participate in the grant program. In the last 10 years, 36 municipalities have received grants from them. There is a local match requirement that varies from 15 - 50 percent depending on population. Grants are made on a progress reimbursement basis. They do not give the people the money ahead of time. There is a 10 percent holdback until the project is completed including a satisfactory audit and every project is audited. Their two programs are staffed entirely with seven positions: four engineers, a management position, an internal auditor and a program coordinator. MR. EASTON said there is a sequence every year that they go through distributing applications to municipalities. When the applications are returned, they are ranked in priority by public health and environmental impacts and communities' capacity to operate and maintain the sanitation systems. The list of projects is the basis for the governor's capital budget proposal. Once a fiscal year budget has passed, grant offers are made and accepted and the division administers the grants. He said the bill would extend eligibility in the program to non- municipal, but RCA regulated, utilities and there are about 50 of those. Thirty-six currently participate in the program. With the exception of Fairbanks, the 50 new non-municipally owned utilities are largely private systems that serve subdivisions and trailer parks. There is a fiscal note for a single engineer position from the general fund, although there could be different ways to come up with the funding. They see an increase in the number of grants managed by their engineers from $8 million per engineer in FY 98 to $12 million in FY 03. This is one of their budget performance measures. SENATOR AUSTERMAN said they were talking about a potential 86 utilities asking for loans under this program. Mr. Easton acknowledged that was correct. He asked if there would be a dwindling amount of money for the individual utilities and that they should be looking at more money for the program. MR. EASTON replied that there is a pie sharing element to it. On the other hand he pointed out that by virtue of their size the grants to the municipalities would be larger than the ones to subdivisions and trailer parks since the magnitude of their needs would be different. SENATOR AUSTERMAN asked if the general fund contributed $15.5 million to the fund. Mr. Easton said that was correct. CHAIRMAN STEVENS asked what the benefit would be from going independent. MR. EASTON replied that most of them don't have a choice to hook up. It's a matter of distance and it's simply being cost prohibitive. CHAIRMAN STEVENS asked if there was any reaction from the existing 36 grantees of this program to this bill. MR. EASTON replied that he hadn't heard much so far. MR. ANDY WARWICK, Board Chairman, Fairbanks Sewer and Water, said they are a privately built company that was formed in 1996 to acquire from the City of Fairbanks its water and waste water utility. The city was participating only minimally mainly because there weren't many grants available. Now, grants for water and sewer projects are increasing in importance. Because Fairbanks has privatized its utility, we are the only community in the state that is ineligible to participate with the exception of some of the smaller utilities you've been discussing. SB 280 remedies this inequity by allowing privately owned public utilities that are regulated by the RCA to apply for grants under AS 46.03.030 (b). This puts Fairbanks ratepayers right there in the same position as ratepayers in every other community in the state. I want to stress that under RCA regulations all the economic benefits of the grants are passed on to the ratepayers. Our company gets no rate of return on the plant built by the grants and we get no depreciation of the grant included in our rates. Economic regulation essentially may turn companies economically neutral. However, the benefits to the ratepayers are obvious. SB 280 will reduce the burdens to our ratepayers and improvements we made to our water and waste water system. It will also increase the ability of the utility to expand its water and waste water system to include families and businesses that currently use utilize wells and septic systems. The vast majority of Fairbanks residents are not hooked up to a public utility water and waste water system which in some cases results in sanitary problems that could be resolved by connecting to our utility system. MR. BRUCE JONES, City Manager, Petersberg, opposed SB 280. I worked with a DEC workgroup on capacity and development, which ended up supporting that part of the public utility have access to loan funds for both the drinking water and waste water. The bill's sponsor statement said that by not having access to matching grant funds, the privately owned utilities are at a disadvantage. I disagree. There is now way to fairly compare the two. Privately owned utilities operate on profit and loss. Most utilities like Petersberg, if required to operate the same way would be considerably more expensive. The municipalities are lucky to break even. The grant program and the low interest loan program will not be able to respond to infrastructure needs and in most cases cannot account for depreciation. The sponsor goes on to say that the bill would increase the ability of the utility to expand into areas that are on the peripheral of existing systems, thereby providing water and waste water services to families that are currently on well and septic systems. This is a business decision faced by every utility. Every utility wants to sell more service because it increases revenue, but at what cost? MR. JONES continued saying that if private facilities have access to these funds, there will be even less for the municipal projects. "In my mind, this is not an appropriate use of public funds." CHAIRMAN STEVENS asked if there were any private utility providers in the City of Petersberg with water and sewer. MR. JONES replied no. SENATOR LEMAN asked him if he heard him say that decisions on expansion for utilities shouldn't be made on the basis of whether or not you get grant funds. MR. JONES replied yes. SENATOR LEMAN responded that probably every utility in Alaska is making its decisions on whether or not it can get grant funds. He thought Petersberg residents had done that consistently, too. Possibly Mr. Jones was wondering if a publicly owned utility should be allowed to do that and not a privately owned one. MR. JONES agreed that they all make those decisions. MR. TIM ROGERS, Legislative Program Coordinator for the Municipality of Anchorage, said he is also the Public Works Subcommittee Chair for the Alaska Municipal League. Their concern is that there are limited source of funds for these grants and further diluting the pot is going to create some concerns and some problems for municipalities around the state. Their water and waste water utility last year received $2.75 million in funds for projects working out to a little over 11 percent of the total amount available in the grants. For FY 03 they are up to $3 million, which works out to 12.8 percent. We have worked very hard to ratchet up the amount of money that's available for capital projects through this program and we see this dilution as a concern to amount of money that will be available to us for those projects. MR. ROGERS said there is one very large multi national corporation [Waste Management] that deals in the solid waste services that would also be eligible for this fund and it would be tough for municipalities to compete with a $12 billion a year organization for these funds. SENATOR DAVIS said she is concerned that there is only one particular agency that is really interested in this legislation, the group from Fairbanks and the fact that they are private and not public. She thought that something needed to be done about their needs without bringing in the 86 other groups. CHAIRMAN STEVENS asked if another source of funds existed for utilities and if there were figures on what percentages of monies go to water systems, waste water systems and solid waste. MR. EASTON said he guessed that most of the funds would go to drinking water and then waste water and then solid waste. CHAIRMAN STEVENS asked if the $24 million feeds all of those functions and if there was one dominant area. MR. EASTON replied that drinking water projects tend to compete better, because they have a bigger public health impact. Of the $24 million, more drinking water projects get funded. SENATOR THERRIAULT, sponsor, said: I didn't anticipate opening this up to any large multi national, that being Waste Management. So if there's a way to easily carve them out of the participation, I would certainly be amenable to that. With regard to the concern of any municipality being opposed to anyone else being in the pool competing, certainly the residents in the Fairbanks utility were in that pool up until the time that the decision was made to sell the utility. I think the community made a wise decision in moving in that direction. In fact, I think across the nation, municipalities and constituency groups are considering that - private management versus the public management of water systems. I don't know, though, that having made that decision that the residents in the Fairbanks area are any less deserving of having access to safe water and sewer systems than anyone else in the State of Alaska. So, I think the public policy call we need to make is how do we use limited funds to benefit the overall constituency in the State of Alaska as far as the attainment of safe water and sewer systems. I don't know that we should penalize communities or restrict or try to deter them from making the decision of whether they want to sell their utility. I can see if any other group is making a pitch for the purchase of a municipal system, privatizing a municipal system, that it would be brought up - well, you do that and you're going to cut off any access to state grant funds. I'm not sure that's the type of system that we want to put in place here. Hopefully, with these grant funds we're able to serve the largest number of the most deserving citizens in the State of Alaska and we do that through a sort of scoring system in the grant process, not necessarily differentiating [between private and municipal systems]. SENATOR AUSTERMAN asked him to comment on Senator Davis' idea about dealing with Fairbanks on its own and leaving the grant program alone. SENATOR THERRIAULT replied that he would consider those discussions, but they would still be excluding a large number of Alaskans from even being considered for participation. The vast majority of systems are very small. So the impact on the grant funds would be "fairly diminimous." He thought there would be some that wouldn't even be sophisticated enough to apply. SENATOR AUSTERMAN said that the issue of profiting from state funding needed to be answered. SENATOR THERRIAULT agreed. He said that was brought up when access to the loan funds was considered. The legislature made a determination that they should serve the citizens of Alaska with access to the loan fund. By linking it to the regulated utilities, we have tried to make sure that you're not pumping up the profits so that the dividend on a yearly basis, which is the way the gentleman from Petersberg portrayed it, would be pumping up dividends paid to shareholders every year. With regulated utilities, they would not be able to build into their rate base a return of that capital. It is not capital that they as shareholders brought into the system. So, by having them come under the regulation of the RCA, I don't believe that they are able to reap a benefit that they would then pay a dividend back to the shareholders on a yearly basis. SENATOR THERRIAULT said he asked the RCA that question and they should have their response in their packets. SENATOR LEMAN asked if the private utility gets to book that investment as equity. SENATOR THERRIAULT replied he understands that it would become overall equity, just like it becomes equity of the municipal system, too. SENATOR LEMAN said he could understand people's concern. CHAIRMAN STEVENS said they would hold SB 280 for further work to make the parameters "more refined." SENATOR THERRIAULT agreed.