SB 205-RCA RATE CHANGE  2:27:03 PM CHAIR PASKVAN announced SB 205 to be up for consideration. 2:27:45 PM SENATOR WIELECHOWSKI, sponsor of SB 205, said this bill tells the RCA in statute that it may not compensate a for-profit public utility for its negligent conduct, recklessness, or intentional violation of the law. For-profit utilities are operating monopolies; therefore, if allowed to recoup from reckless behavior, a for-profit utility has no incentive to be efficient or to act as a reasonable or prudent company because if a utility makes a mistake, the consumer can't go down the street to another utility because they have a regulated monopoly. This bill encourages efficiency and encourages utilities to act in a reasonable and prudent manner that will ultimately keep costs down and protect the consumers of the State of Alaska. He said SB 205 has a zero fiscal note. SENATOR THOMAS asked for an example of a case like this. 2:29:51 PM SENATOR WIELECHOWSKI answered that he knew of a highly publicized incident, but essentially a company could intentionally be violating the law, and under current RCA law they could pass that cost on to the consumers. SENATOR THOMAS asked if this bill related to situations in the realm of maybe a company extended some utility lines and did sloppy work or used a product that wasn't for that application and it failed; it would get replaced and then the company would come back to the RCA who would then have the authority to deny any increase in rates to consumers. SENATOR WIELECHOWSKI answered something like that; SB 205 is not trying to penalize companies for making a mistake if it was legitimate; they could file with the RCA for it and be compensated. But if the company was truly acting negligently, typically defined as breaching their duty which was the cause of the damages that follow, then they wouldn't be able to recoup those expenses. He couldn't think of many instances in the American free enterprise system where companies can be compensated for their negligence like that. 2:32:29 PM SENATOR THOMAS asked what the utilities' recourse would be if they were found to be negligent. SENATOR WIELECHOWSKI replied if the RCA ultimately determines under this bill that there was negligence or recklessness for- profit utilities would not be able to be compensated from the consumers. That money would have to come from their profits. SENATOR THOMAS asked if that decision could be taken to court. SENATOR WIELECHOWSKI answered yes. SENATOR BUNDE asked who makes the determination of reckless. SENATOR WIELECHOWSKI answered the RCA, but he understands there is a right to appeal that decision to the court. SENATOR BUNDE asked if someone makes a huge mistake and it makes the utility go bankrupt, is there something in place to make sure it continues operating. SENATOR WIELECHOWSKI answered that companies go bankrupt now, but they just look for another better company to continue operation. SENATOR MEYER asked if recklessness already has some ramifications. 2:35:19 PM SENATOR WIELECHOWSKI answered that nothing in law says the RCA can't allow a rate to compensate a utility for negligent reckless conduct - and the RCA determines what is just and reasonable - so it could find that allowing a rate for negligence was just and reasonable. This bill would prevent them from doing so. 2:35:56 PM CHAIR PASKVAN said current statute, AS 42.05.431(a), indicates that the Commission can find that a rate demand or a practice affecting the rate is unjust, unreasonable, unduly discriminatory or preferential. Is SB 205 adding anything here? SENATOR WIELECHOWSKI answered yes; he thought it was. But the in the specific case from which this issue stems, the RCA allowed Enstar to collect on the backs of Southcentral consumers for months and months even though it was clearly negligent. They even admitted it was negligent conduct. He didn't think the language is as clear as they would like; the facts of what has been allowed already prove that. CHAIR PASKVAN said he understood that a determination would be coming out in a couple of weeks as to whether that collection can be retained, and maybe it would be proper to defer this issue until they know the outcome. SENATOR WIELECHOWSKI answered that a decision in that particular case is expected on March 1, but this is really about an overarching principle. He explained that the RCA can come out and say this particular case is unjust or unreasonable, but they can't make law that will protect consumers in future cases. Whatever happens to this bill will have no bearing on that case; it would not be ex post-facto. 2:39:07 PM SENATOR MEYER said he supported protecting consumers, but wanted to know how far-reaching this bill would be. He asked if it was going after the for-profit utilities that include ACS, GCI, and AT&T and what it would do to ML&P that is owned by the City of Anchorage. SENATOR WIELECHOWSKI answered that ML&P is not considered a for- profit utility; it is owned by a political subdivision. As he was thinking this through, he concluded that it would be very difficult to cover co-ops or companies that are owned by political subdivisions because they have nowhere else to go for the compensation. Chugach Electric Association, for instance, is owned by all the ratepayers. The co-ops and companies that are owned by political subdivisions are held in check by the citizens who have a right in those cases to vote out the members of the boards or assemblies. For-profit companies, however, can pay for mistakes out of their profits. 2:42:41 PM TIM MCCLOUD, President and General Manager, Alaska Electric Light and power (AEL&P) Juneau, opposed SB 205, because he said it discriminates against the investor-owned utilities. If it included the other utility structures they would be expressing similar concerns, because they all operate under the same regulatory principles. MR. MCCLOUD said he is confident that the RCA would not allow a utility, profit or non-profit, to receive compensation under existing regulations unless it could demonstrate that the rationale is just and reasonable. The proposed language would eliminate the RCA's discretion to rule on very complex issues. It could lead to higher utility rates by encouraging unreasonable investments in system redundancy, maintenance operations, and inspections that a company might want to have to protect themselves from being considered negligent for a system failure. For instance, he asked if under this bill a utility could recover the cost of repair as a result of a heavy snow storm or would it be negligent for not burying the lines even though the investment would result in a higher rate to the customers. 2:45:13 PM SENATOR BUNDE asked where AEL&P gets its money and if it provides a dividend to its investors. MR. MCCLOUD answered that it pays a small dividend. Most of their profits go into repairs and upgrades to the existing system - the same as a non-profit utility's would be used. SENATOR BUNDE said under current law, the public ends up paying, but under this law it would just be another part of the public that would end up paying, because with reduced profits there would be reduced dividends and return on investment. MR. MCCLOUD said that is correct. It is important for utilities of all types to be healthy, because the financing is critical to maintaining low rates. The cost of borrowing money, which is how they get their money, could end going up very high. 2:47:00 PM SENATOR THOMAS asked if they generally self-perform on interties. MR. MCCLOUD replied that AEL&P is not an intertie, but generally they do their own construction work on transmission lines. Sometimes they subcontract. SENATOR THOMAS asked if he was concerned that this measure would make him responsible for someone else's work. MR. MCCLOUD answered that he hadn't considered that. CHAIR PASKVAN asked his current understanding of how the RCA deals with reckless conduct. MR. MCCLOUD answered that the RCA rules correctly on these issues. A company could not be compensated for intentionally being reckless. He would hate to take away that discretion because these cases are very complicated. 2:49:54 PM CHAIR PASKVAN asked what the RCA experience and capacity is to conduct hearings on reasonable practice. JAN WILSON, Commissioners, Regulatory Commission of Alaska (RCA), answered that the RCA has conducted extensive hearings in many proceedings on those kinds of issues. 2:50:52 PM SENATOR BUNDE asked if this bill would be a tool in their endeavors. MS. WILSON answered that the commission had no position on this bill. SENATOR BUNDE asked if it would be a help or a hindrance to their work. MS. WILSON answered that the commission takes its guidance from statutes the legislature passes and executes them in the best way they can. Currently the commission operates under the just and reasonable standard, and the concept of cost-based rates underlies that standard. However, she suggested that the just and reasonable standard may not be a very good standard by which to judge the kind of conduct this bill is trying to prohibit. She added that a "prudent management" concept also underlies utility rate making principles. Even if a utility spends money that is definitely for the service it is providing, but it does so imprudently, then the commission would normally not allow those actions to be collected in rates. SENATOR BUNDE asked if the commission needs more clarification on the standard. MS. WILSON replied that the general rate making principles under which they now operate have always guided them since enactment of AS 42.05, but if the legislature wants to give them more specific guidance, the commission is capable of administering it. SENATOR BUNDE stated that the commission's job is to protect the consumer and asked if they are able to do that now or do they need this bill. MS. WILSON replied that the commission would have to have a meeting to take an official position on it. She was speaking for herself at that time. She added that the imprudent standard has a lot of precedent, but if the legislature wants to establish a negligent standard they could administer that, too. SENATOR BUNDE suggested that the commission meet and take an official position. MS. WILSON said they could certainly do that. 2:55:50 PM SENATOR MEYER asked if someone is intentionally negligent, would that also be imprudent. MS. WILSON answered probably, but the imprudent standard is one that says "a prudent manager under the same circumstances at the time the decision was made would not have made the decision that lead to these costs" - a little bit different than the negligent standard. 2:56:56 PM SENATOR MEYER said the reason for this bill is to protect the consumer from a for-profit utility and the fact that the consumer doesn't have a choice. He was concerned that going after one kind of utility would adversely impact others. The telephone industry, for instance, is very competitive and the consumer has multiple choices. 2:58:00 PM RICH GAZAWAY, Staff, Regulatory Commission of Alaska (RCA), said Senator Meyer was correct in that the telecom arena is competitive in several markets. How the carriers are rated depends in large part on how competitive the market is and whether the competitor is the incumbent or the entrant. 2:59:08 PM MATT WALLACE, Alaska Public Interest Research Group (AKPIRG), said he supported SB 205 for two reasons. One is that companies will respond to financial incentives and two, standard competitive market forces don't apply to utilities. The incentive in SB 205 provides additional protection for consumers by prohibiting companies from putting their mistakes or reckless behavior on their backs. 3:01:33 PM SENATOR BUNDE said in his view, one of the reasons for the high cost of medicine in this country is that providers practice defensive medicine to avert lawsuits. Could something like this cause a lot of similar defensive behavior by a utility company with the unintended consequence that the rates go up for the consumer - maybe doing more harm than good when that happens? MR. WALLACE answered that this situation is substantially different than with health care - mainly because those situations often have very large awards that are the result of civil suits for malpractice. This bill would simply prevent companies from passing the costs of their negligence or reckless behavior on to consumers. SENATOR THOMAS asked if he is concerned that adding this language creates a different standard for non-profits versus for-profits and another classifications of utility that might lead to confusion. MR. WALLACE answered no one can say for sure, and he wasn't as concerned about that type of situation mostly for the reasons outlined by Senator Wielechowski. Other co-op utility structures tend to have other avenues for consumers' voices. 3:07:06 PM BOB GRIMM, President and CEO, Alaska Power and Telephone, said he viewed this as a reaction to a single incident that will be remedied by the RCA using existing statutes. This legislation, while well-meaning, targets only one segment of the utility, and the electric industry is a very small minority. It could handicap that segment of the industry and become a potential barrier for an IOU to enter into that segment of the industry. He was also concerned that regulatory administrative law is a body with precedent that goes back many years and is practiced in every state of the union. SB 205 comes up with a remedy to a situation which he was sure had occurred in the past in the practice of public utility administrative law, and was dealt with in an effective manner. He believed this is overreacting to a single instance. 3:10:13 PM Finally, Mr. Grimm said that by regulation, the RCA's powers and duties are to be deliberately construed by the courts; this means when they make a decision they have a higher standing than a normal statute under the law. Also, under state law, the RCA has the ability to levy civil penalties and fines upon public utilities that exhibit repeated behavior that might be at the root of this proposed legislation. Finally, Alaska Power and Telephone is an investor-owned utility; the largest part of their equity is owned by their own employees. So, the actual burden for any hardship, due or undue under this change, would be borne by them. He directed this question to the sponsor - if any other state has this specific language or provides specific guidance to regulatory agencies dealing with public utility regulation similar to the RCA. 3:11:42 PM PAT LUBY, Advocacy Director, AARP, supported SB 205. He said if a negligent error is made, the company should be responsible - for instance, like Toyota. Their profits will be lower and their shareholders will lose some of their profits, but Toyota's customers are not responsible for the cost of the error. That is how it should be for Alaska utilities. He said the RCA should be empowered to hold the party who made the negligent error responsible and the customer should be held harmless. CHAIR PASKVAN thanked him and finding no further testimony, held SB 205. He said he would reopen public testimony later if needed. 3:14:09 PM There being no further business to come before the committee, he adjourned the meeting at 3:14 p.m.