SB 277-PUB. UTILITY EXEMPTION: RENEWABLE ENERGY  4:12:10 PM CO-CHAIR WIELECHOWSKI announced SB 277 to be up for consideration. MR. PAWLOWSKI, staff to Senator McGuire, explained that SB 277 addressed the section of law they were just talking about with the Regulatory Commission of Alaska (RCA). That is the definition of public utility, which is relatively circular. The definition of "utility" refers to "public" which then refers to "utility" which refers back to "public." So there is some confusion about what the appropriate role of independent power producers is. Traditionally, Alaska has had large locally owned cooperatives or municipally owned utilities serving in a regulated marketplace. Senator McGuire discovered through her research that the rate of penetration of renewable energy sources within regulated and unregulated markets is fundamentally different. He said their packets contained information about competitive electricity markets; the author suggested that the difference in approach to a project's risk profile is fundamentally different between a regulated monopolistic utility versus an investor owned utility. SB 277 attempts to exempt from the regulations that are explicitly in statute now independent power producers that generate entirely from renewable energy sources and then sell to a regulated utility. The theory being that the layer of protection available to the consumer comes at the regulated utility level, but in a familiar way as in gas contracts in Cook Inlet where the producer of the gas is not regulated but the contract for gas is regulated. Looking at that type of model for renewable power in Alaska, he said, Senator McGuire believes will encourage the development of renewable energy in Alaska, and removing some of what could be considered duplicative regulation in statute could open the door for private investment in the sector so that the goal of 50-percent renewable energy could be met by 2020. 4:14:15 PM He said the bill is actually fairly simple. Sections 1 and 2 on page 1, line 10, and page 2, line 1, insert conforming language to the exemption that is prepared in Section 3. The exemption is from the RCA authority over the renewable energy generator when they sell to one or more utilities that are regulated by it. 4:15:15 PM DANIEL PATRICK O'TIERNEY, Chief Assistant Attorney General (AG), Department of Law (DOL), Supervisor, Regulatory Affairs and Public Advocacy Section, said he was available for questions on SB 277. He explained that his section performs the AG's public advocacy role in regulatory matters under AS 44.23.020(e). CO-CHAIR WIELECHOWSKI asked if he has experience with this or indirect regulation of power producers or energy suppliers. MR. O'TIERNEY answered that he assumed he meant that this posed no direct regulation on a cost basis of an independent power producer (IPP). The IPP's provision of power would be submitted in a contract form with the utility to the commission for approval. The commission would engage the contract at that point in the process. If that is what he meant, he said he had some experience with it. CO-CHAIR WIELECHOWSKI asked if Enstar purchasing gas from a Cook Inlet provider would be a correct analogy in deciding whether or not the RCA can look at the costs of getting that gas to Enstar. Mr. O'TIERNEY replied that he thought it was similar in the sense that direct regulation would be focused upon a cost basis for the purposes of determining revenue requirement and related rate base return that yields rates in a regulated environment. When a contract is submitted to the commission for its review, from his perspective in practicing before the RCA, it would apply its just and reasonable standard, but it doesn't have the capability of scrutinizing the costs involved in providing the service. So, it's then faced with having one party to a contract submitting a contract and not having jurisdiction over the other party in the contract. It's the party that has produced the power and presumably has the related costs that normally is not reviewed by the commission. He said he would leave it to the Commission to speak to how it has dealt with the difficulties involved in reviewing contracts under this standard. CO-CHAIR WIELECHOWSKI asked if he believed the public's interest could be adequately protected under this bill through the process of exempting IPPs from regulation. MR. O'TIERNEY answered that any end user of a commodity or product wants some assurance that the price it's paying is price-disciplined in some fashion. In a capitalist economy, competition usually provides that price discipline and regulation is a proxy for marketplace price competition to the extent there is no market or there isn't an effective market to do that job. Usually regulation is a substitute for free market competition to the extent that there is no market or no effective market to do that job. If he were looking at this proposal, he would be asking the question: is there sufficient competition in the market that would produce independent power contracts for provisioning utilities that are sufficiently market-disciplined. If not, then he would have some concerns and one would ask why they wouldn't be regulating that service. 4:21:05 PM CO-CHAIR WIELECHOWSKI asked him to submit an opinion on this bill over the next few days. MR. O'TIERNEY agreed and added that generally you have to be able to compare apples to apples. So, if markets outside involving IPPs are generally unregulated you have to compare and contrast what our marketplace looks like for this service here in order to be able to determine whether that is a relevant factor in determining how to handle it in Alaska. He is not the person to provide that analysis, but there are certainly some who could. CO-CHAIR WIELECHOWSKI said he is the person who is charged with protecting consumers. MR. O'TIERNEY said he is not an expert on IPP status in outside jurisdictions. CO-CHAIR WIELECHOWSKI said he understood that, but still wanted his input. 4:22:57 PM BOB PICKETT, Chairman, Regulatory Commission of Alaska (RCA), said this would also mean that IPPs wouldn't file for a Certificate of Public Convenience and Necessity (CPCN). A CPCN makes findings, for instance, that this utility service is actually needed by the public at this particular location, point and time and that the financial managerial and operational capacities are there to provide the service that is applied for. He said the FERC issued a Notice of Inquiry a few weeks ago to address a lot of these issues in the renewable energy arena. It wants to promote renewable energy resources but in a way that guarantees just and reasonable rates while eliminating the impediments to these resources accessing the grid in the Lower 48. As Mr. O'Tierney stated, Mr. Pickett said, Alaska has an "island grid" that is disconnected and for all practical purposes is not under the jurisdiction of the FERC. The FERC has taken used market forces as a proxy for regulation in the Lower 48 and they focus on the competitive wholesale electric markets. They continuously monitor these markets and then enforce market rules as needed with a fairly well established regime. They have also come to the conclusion that system reliability is critically important and that is the purpose of the Notice of Inquiry. MR. PICKETT said he understood their concerns about timing with a lot of the IPPs that many times find themselves without significant public subsidy - whether that be from the state, the federal government, direct subsidies or tax credits or whatever - for projects that will not pencil out or make sense and could not provide power at a competitive rate to the regulated utilities. He said Fishhook, a small hydro project, petitioned the RCA earlier for a strategy to address some of these. 4:26:10 PM JAMES KEEN, Chief, Engineering, Regulatory Commission of Alaska (RCA), explained that last year the Commission released two different orders exempting small IPPs from certification on the basis that it would see these utilities come forward through the regulated utility they would be selling power to in a power purchase agreement. The RCA believes it could serve the public interest by simply looking at the power purchase agreement, alone, regulating that rate to make sure a fair price is flowing through to the ultimate consumers, but removing the burden of certification and economic regulation from the IPP. This was done in the case of Fishhook Renewable Energy, which is putting in a small river hydro in Hatchers Pass, and South Fork Hydro in Eagle River. Both of those would be selling power to Matanuska Electric Association (MEA). MR. PICKETT added that another approach is a qualifying facility (QF) qualification under the FERC in which an IPP fills out the application. If the FERC grants QF status, the state jurisdiction is preempted. Then the QF will sell power to the regulated utilities at an avoided cost basis. 4:27:55 PM CO-CHAIR WIELECHOWSKI asked if a company is not directly regulated, does the RCA have access to information regarding power production costs when it is reviewing a contract between the IPP and a regulated utility. MR. PICKETT answered no. CO-CHAIR WIELECHOWSKI asked if Cook Inlet natural gas had created pricing issues for the RCA. MR. PICKETT answered that it has created some intense challenges. While several contracts have been recently approved, it depends on how a case is presented, what interveners after the filing is noticed become parties, and the strength of the evidence presented in their arguments. Everybody's due process rights are protected, but there is uncertainty, for sure. CO-CHAIR WIELECHOWSKI asked if he had concerns over regulating IPPs. MR. PICKETT answered that he wouldn't speak for the Commission on adopting a formal policy on any particular piece of legislation or offer direct input; that takes an action at a public meeting. But just speaking from what he has seen in his time as commissioner and chairman, it does raise some question marks, particularly if timing is a big issue. It's going to depend on the nature of what the IPP brings in for the interconnection agreement, which they will have to negotiate with a regulated utility. Price is not the only issue. System stability is very important. On the price side, they need to negotiate the power sale agreement with the utility and then present it to the RCA. The agreement will be reviewed as a whole as to its reasonableness, and whether it is in the public interest. SENATOR STEDMAN asked if someone was to come in and build a 50 mgW hydro, would they need at CPCN if this bill passed. MR. PICKETT replied their read is that they would not need a CPCN. SENATOR STEDMAN asked if he should be concerned about that. 4:31:49 PM STEWART GARY, Assistant Attorney General Representing the RCA, Department of Law (DOL), clarified that his role is found in AS 42.04.040(a), where it says it the responsibility of the Attorney General to provide legal counsel to the Commission. So, from the Commission's perspective he would echo what Mr. Pickett said - the IPP would not be required to apply for or receive a CPCN from the Commission. But other questions about the extent that other provisions might apply are open, particularly related to interconnection. SENATOR STEDMAN asked again if he should be concerned. MR. GARY answered yes. The CPCN process is a gatekeeper function. For practical purposes, it determines what someone as an individual investor decides to build is something that the public actually needs - the public convenience and necessity part of it. The other aspect is the fit, willing and able part - is the proposed party financially capable of doing it, are they managerially capable of doing it, and are they operationally capable of doing it. CPCNs protect the public from interruptions in utility service. Society has come to expect public utilities to meet a higher standard and that is to provide their services reliably 24 by 7. The only way to do that is to put up a threshold across which the utility has to pass. Yes, he would be concerned. 4:34:59 PM MR. PICKETT said he would stand by for questions. 4:35:20 PM ETHAN SCHUTT, Cook Inlet Region, Inc. (CIRI), said he wanted to provide some context on SB 277. It is important in making regulatory fit amenable with the private development of renewable resources for IPPs while striking a balance to protect the public interest to make sure the rate is fair and the service is reasonable. He said that the status quo is that they only have public utilities providing electrical service on the Railbelt. The CPCN, the rate case and regulatory oversight functions that take place with the RCA are entirely appropriate given that public utilities have been established in areas where they have a monopoly service for electricity. So to the degree that a public utility makes good or bad business or financial judgments or investments or that they are operationally efficient or not, the cost and benefit of all that decision making, he said, the bottom line is that existing public utilities have a rate case. So, for better or worse, their decision making as it affects their cost structure gets passed through to their customers who can't do anything about it. CIRI is not proposing to have retail customers, but rather developing a project and then having to go through a negotiated process for power sales through PPAs with two or more existing public utilities in order to sell their power to a commercial customer who happens to be a regulated utility. They envision as part of that process, that the utilities will demand a certain amount of information justifying their own costs into the project. That same package of information that they use for their own purposes for the negotiation will also be used in making their case to the RCA - why this contract is allowed to be put into their rate and be part of their rate base as part of their regulated function. RCA staff and lawyers have testified that they won't have any ability to look at costs, but that from a strictly absolute interpretation. It's a little misleading in that these utilities aren't just going to buy power without being able to look at certain financial and cost information. MR. SCHUTT pointed out in the notion of a market that the cost is not the only piece of the puzzle on the financial side. A significant amount of risk is allocated to the IPP side of the table that remains long after the contract has been entered into. Some of the more significant risk that remains in the case of a wind project is the resource risk. In their case they have 10 years, a long history, of data from Fire Island, much longer than the two or three years that are commercially used in many locations of two or three years. If the IPP gets that wrong in negotiating its price of power, and the wind resource is actually less than what the modeling indicates it should have been, that loss falls on the IPP side of the ledger. There is no real way to allocate that risk any differently through a long term contract. IPPs also maintain the long term risk of equipment failure, cost overruns or other executional issues in the construction or operation of the plant itself. By contrast, if this was a project that was developed by a public utility, all of those risks would be borne directly by the rate payer. 4:42:59 PM MR. SCHUTT said the current structure proposed by SB 277 fairly allocates risks and rewards for an IPP with a renewable resource when the only customers are a regulated utility. 4:44:47 PM CO-CHAIR WIELECHOWSKI said that he would keep public testimony open. Finding no further questions, he adjourned the meeting at 4:44 p.m.