SB 143-RAILBELT ENERGY & TRANSMISSION CORP.  4:08:23 PM CO-CHAIR WIELECHOWSKI announced SB 143 to be up for consideration. CO-CHAIR MCGUIRE moved to adopt CSSB 143(), 26-LS1041\S, for discussion purposes only. There were no objections and it was so ordered. 4:09:08 PM CO-CHAIR WIELECHOWSKI objected for an explanation. 4:09:37 PM JIM STRANDBERG, Project Manager, Alaska Energy Authority, said he was happy to be here discussing the Greater Railbelt Energy Transmission Corporation (GRETC) bill. He said that last week he provided an overview of it. He is now back with the CS in hand. MR. STRANDBERG said they worked collaboratively with the utilities using two key documents to create the statute: the REGA study (business study) and Integrated Railbelt Resource Plan. What keeps coming back is the capital shortfall. It the state may in some way be involved financially, it would make sense that the vehicle they construct for that should be done in a partnership fashion between the state and the utilities so it can handle the money. 4:13:26 PM SENATOR FRENCH said he didn't understand how combining six utilities makes them stronger. Their assets don't go up and their balance sheet doesn't get any better. But he could see how adding state money would make a difference. MR. STRANDBERG answered REGA projected that if utilities joined together, that would provide more efficient use of infrastructure and get financing on better terms. Appendix B done by Seattle Northwest discusses that. SENATOR FRENCH asked if there is a multiplier effect. MR. STRANDBERG replied that the company is designed to capitalize itself through equity injections from, perhaps, the state. When you build a company you need a certain amount of skin in the game. If you do that you are able to borrow money. First they need bylaws and a board and then it needs to create equity so they can borrow money. This bill is a framework through which these processes can occur. When the company sells bonds, they are rated and the lower the risk the lower the interest rate. 4:16:59 PM MR. STRANDBERG explained that the other question is why not allow the utilities to form a joint action agency (JAA), an existing business structure. A fully functional generation and transmission entity in a mature network should be able to do four tasks: manage the transmission system, evolve towards regional economic dispatch so that the generators are used most efficiently, be able to have long range regional planning for major projects, and do joint project development. In many ways the JAA language is focused on the fourth element, joint project development. A portion of the JAA language is relatively open architecture; so there are ways for the utilities to use that to move forward to do things together. But GRETC is really designed to embrace those four elements of the future network in an ordered fashion and in a manner that the utilities are comfortable with. It is a more complete solution. 4:19:14 PM BRIAN BJORKQUIST, Senior Assistant Attorney General, Department of Law (DOL), said he has represented the AEA and the AIDEA for about 13 years and has been involved with the acquisition of the Snettisham Hydro Electric Dam and the financing of that, the divestiture of the Four Dam Pool by the AEA and the financing of that by AIDEA, AEA's Bradley Lake Hydro Electric Project and the Alaska Intertie. He explained that the corporation in the CS is modeled after a generation and transmission (G&T) cooperative, a type of entity where utilities get together to jointly provide for their generation and transmission needs. The utilities in a G&T-type format are still the distribution element; so the utilities would take wholesale power from the G&T cooperative and then sell it to their retail customers. The original bill created one specific corporation. This bill has been changed to provide a general law for creation of a form of energy and transmission corporation. Within it there are limitations on who can form. It has to be four or more municipal or cooperative utilities and there has to be approval by law for the formation. The bill has the actual authorization for the formation and is modeled similar to the one used in AS 42.310 to form a JAA (Joint Action Agency) requiring legislative approval for the acquisition of a project from the AEA. This legislation subtly shifts from the original bill that was a little more of a quasi-public corporation with the corporation anticipated to take on more of a function for the Railbelt region, in particular. This bill provides a little bit more flexibility for the utilities. They are not required at any point, and there is no expectation that they have to, to obtain all their power from this one entity. The last bill had an implication that they would. It still has elements of being a quasi-public entity as this entity would be performing public services for the region that is serves. 4:23:11 PM MR. BJORKQUIST said this draft also reflects a combination of long work with the task force, the utilities, and most recently with the DOL and Legislative Legal and attempts to clean up the language and achieve the intent. He said this draft responds to every question that was raised with one exception at Legislative Legal's suggestion - to clarify that there is no issue with some of the rate regulation exemption provisions and how they can apply. 4:24:14 PM He elaborated that sections 1, 4, and 5 deal with exemptions from rate regulation. These three sections will become effective in 2015 after which there will be five years of regulation under the Regulatory Commission of Alaska (RCA) and then rate regulation takes place. The rate regulation provisions exempt this corporation from regulation by municipalities and the RCA. Provisions in the Municipal Code and RCA statutes basically provide that if an entity is exempt from regulation by RCA, a municipality, city or borough can regulate. This exempts it from municipal and RCA regulation in combination. SENATOR FRENCH asked him to explain why that is a good idea. MR. BJORKQUIST answered that they would hear from the utilities that the cost of regulation outweighs the benefits, and that a G&T cooperative-type model elsewhere is not subject to rate regulation. And for a variety of reasons they would also hear from them why that might be appropriate. SENATOR FRENCH said he would flag that issue for later. 4:26:16 PM CO-CHAIR WIELECHOWSKI asked him about the practical impact of the five-year exemption and if that would apply to projects that were built during that five years or projects that were permitted during that five years. MR. BJORKQUIST replied during the first five years it would apply to any business that the corporation would be involved with whether it was with an existing asset that they acquired or a new asset that was built during the five year period of time. The contemplation in the formation of the corporation is that there may not be many assets put into the corporation early on, because the utilities have the flexibility to retain the current assets. But the bill also contemplates that the GRETC might not need to acquire title to an asset in order to exert operational control over it like Mr. Strandberg talked about. For the first five years it is going to be subject to rate regulation no matter what, but after that it would be exempt from regulation from basically any power that it sold. CO-CHAIR WIELECHOWSKI asked if Chugach Electric owned a generation plant under its name and the board wanted to get a rate approved they would still have to go through the RCA process, but if they put the asset into GRETC then they are exempt for five years. MR. BJORKQUIST answered for the first five years they are subject to rate regulation, but not after five years. CO-CHAIR WIELECHOWSKI asked if GRETC wanted, in six years from passing the bill, to go out and build Susitna Hydro to provide electricity for the entire Railbelt, then they wouldn't have to go before the RCA. MR. BJORKQUIST replied yes. CO-CHAIR WIELECHOWSKI asked but if they want to do it in year five, they have to go to the RCA. MR. BJORKQUIST answered at least for that one year of operation. SENATOR FRENCH asked if rate regulation means going before the RCA to get approval for rates. MR. BJORQUIST answered yes. SENATOR FRENCH asked if GRETC would sell power to individual customers or through Chugach, ML&P and Golden Valley. MR. BJORKQUIST replied that the contemplation as he has heard from the task force is that most of the power will be sold at whole to individual utilities. The corporation has the authority to sell power to industrial customers with some limitations. It cannot sell power to an industrial customer in a service territory of another public utility unless that public utility consents (AS 42.50.090 (24)). SENATOR FRENCH asked if Homer Electric decides to participate in GRETC, can they participate as much or as little as they like. Can they decide what portion of their association's assets they want to turn over to GRETC or not? MR. BJORKQUIST answered that it doesn't work exactly that way. SENATOR FRENCH asked what you have to pay to get into GRETC. MR. BJORKQUIST answered nothing has to be paid to become a member. Those that provide a sufficient letter of intent to AEA by the deadline can become a member. There is no obligation for a member to acquire any level of services or anything else. Getting to the point of what assets would be in and what assets would be out, it's not just a matter of what the utility would desire but also a negotiation with the corporation, itself. The utility might not want to provide the best of assets and GRETC would want the best. CO-CHAIR WIELECHOWSKI said he thought the utilities would have a very high burden to prove why not being regulated after five years is a good thing. But they would testify tomorrow. MR. BJORKQUIST said section 2 would become effective in 2015 and provides that a wholesale agreement for the sale of power from GRETC to a utility is not subject to approval or review by the RCA until all the long term debt incurred for the project is retired. This provision currently applies to the Bradley Lake Hydro Electric Project and Swan Lake and Lake Tyee, two of the Four-Dam Pool project,. Its purpose is to assist in financing projects by helping with a reliable source of repayment. This provision does that. CO-CHAIR WIELECHOWSKI asked him to explain what kind of contracts they would have for storage in Section 2. MR. BJORKQUIST said the language there is similar to the exemption language for Bradley Lake and Four Dam Pool. It might be storage of electricity, but the only part of the system in the Railbelt that he is familiar with is Golden Valley that has a BESS system. It also might be water storage in a dam. CO-CHAIR WIELECHOWSKI asked if that would apply to gas storage. MR. BJORKQUIST answered that it potentially could. CO-CHAIR WIELECHOWSKI asked if this might be exempting them from gas storage regulation. MR. BJORKQUIST answered this would be an exemption from the wholesale contract between GRETC and the public utility for that service. 4:35:23 PM MR. STRANDBERG added that this was not meant for gas or fuels. It is for repurchase of power and power is electricity. SENATOR FRENCH said he was considering an amendment to insert "electric" in front of "power" on line 16, to make it clear. 4:36:28 PM MR. BJORKQUIST went to Section 6 on page 3 that is the bulk of statutory section for an energy and transmission corporation. Lines 16-19 speak of four or more electric utilities if authorized by law can form a corporation. Lines 20-25 outline why the corporation is formed: to acquire, operate or maintain projects from the AEA, and for planning, coordinating and addressing generation and transmission concerns of the region. He highlighted a few of the purposes on page 3, line 30; one was to be a primary recipient of state financial assistance for G&T projects in the region. This is not a legal obligation, but for a decade the Railbelt utilities have been told that they need to organize and coordinate with each other if they are going to get access to the Railbelt Energy Fund. This is the mechanism for them to organize to get access to those funds. 4:37:38 PM CO-CHAIR WIELECHOWSKI said on page 3, line 13-19, it says "four or more municipal or cooperative public utilities may organize an energy and transmission corporation." So, it appears there could be multiple corporations. MR. BJORKQUIST pointed out that line 18 also says "if first authorized by law." So the legislature would have to allow that to happen. SENATOR FRENCH asked if something else was needed in terms of authorization language. MR. BJORKQUIST replied that the authorization that is required by law is in Section 13. It authorizes four or more of the listed Railbelt public utilities to form a G&T corporation, the GRETC. Section 14 provides for the letter of intent to the AEA for a conditional membership. SENATOR FRENCH asked if subsequent legislation is necessary in order for GRETC to form itself. MR. BJORQUIST answered not with this bill. CO-CHAIR WIELECHOWSKI asked why not say "organize the Greater Railbelt Energy and Transmission Corporation" just so they are perfectly clear on page 3, line 18. MR. BJORKQUIST replied there are two interrelated reasons for having an active general law. As Legislative Legal pointed out it helps address that potential constitutional problem. And, the task force changed the bill to make GRETC a little bit less of a quasi-public corporation and a little bit more of a private corporation. He explained that the original bill was modeled after CFAB, which is a quasi-public type organization that is private in many ways, but serves a public function. 4:41:18 PM Provisions on page 4, lines 3-21, focus on the detail of the planning that this corporation would provide. Some general provisions are similar to the original bill as to what the powers, intentions and purposes for the corporation are. Page 4, lines 28 through page 5, line 1, subsection (g) has language emphasizing that this corporation provides interconnection-type services. Other provisions in the bill talk about it providing operating standards. That is important particularly in the Railbelt, because the current operating standards between utilities is partially voluntary and partially by contract. MR. BJORKQUIST said the Alaska Intertie Agreement includes reliability and operating standards that are supposed to apply to the Railbelt. Not all the utilities in the Railbelt are signatories to them, but several of the utilities voluntarily follow those standards. That agreement is scheduled to terminate in October. So, a GRETC formed under this legislation will fill a void that otherwise would be missing as to liability and interconnection standards. 4:42:33 PM He also pointed out that (b)(2) in Section 8 on page 18 amends AS 42.50.100 (that takes effect in 2015) to clarify that this organization would not be able to preclude independent power producers (IPP) from getting access to the transmission system. This means that the RCA's jurisdiction over joint use and interconnection would continue over this organization even after it is no longer subject to regulation. This is the one point that Legislative Legal suggested and that is the intent. 4:44:41 PM CO-CHAIR WIELECHOWSKI said you have an IPP, Fire Island for instance, and they want to put their power into this system, how would the interconnection work? What if they can't come up with an acceptable cost agreement? MR. BJORKQUIST replied that two statutes under RCA regulation are cited in that section; one provides an obligation on utilities to negotiate for joint use and interconnection. The second reference says that if utilities don't negotiate an adequate deal that the RCA can step in and order joint use and interconnection as well as establish rules that would apply to that. CO-CHAIR WIELECHOWSKI asked the question again - how (b)(2) on page 18, lines 7-9, prevents exclusion of an IPP, because he thought this would be a big issue down the line. MR. BJORKQUIST responded that AS 42.05.311 requires utilities to negotiate joint use and interconnections so that an IPP can put its power onto a transmission system for sale to its purchaser. The utilities have an obligation to negotiate that to happen, and if they fail to do that, the second statutory provision is when the RCA steps in and orders that to happen with the terms and conditions that would be applicable. CO-CHAIR WIELECHOWSKI asked if that would happen after a comprehensive hearing with the RCA. MR. BJORKQUIST answered that he had only been involved with joint use and interconnection in one context and that had to do with the 19 miles of the original Alaska Intertie that was subject to contract between the AEA and Matanuska Electric. Matanuska Electric terminated the contract, and in order to not allow a disruption of services, the other utilities went to the RCA to get joint use and interconnection. Negotiations happened for a period of time, followed by a hearing before the RCA that ordered joint use and interconnection with the terms and conditions. 4:47:14 PM MR. BJORKQUIST said language on page 5 explains the makeup of the board of directors. Each public utility GRETC member will have two directors, the governor will select another one from a list of directors submitted by the public utility members. He said language on page 7, line 17, describes membership. There are two types of members of a G&T corporation - the two public utility director representatives and then members who are other entities that purchase power services from that, but they do not have representative directors. The qualifications for membership as a public utility member include: it has to be a municipal or cooperative and it has to be electrically interconnected. It excludes affiliates of public utility members so there aren't duplicate voting rights. CO-CHAIR WIELECHOWSKI assumed that the membership definition includes the seven Railbelt utilities. MR. BJORKQUIST answered that originally section 13 listed six eligible Railbelt utilities that could become a member that don't go through this process. If they satisfy the condition under Section 14 they will become an original public utility member as well. Others would have to satisfy those criteria and then be approved for membership by a two-thirds vote of the board of directors. CO-CHAIR WIELECHOWSKI asked if his definition of a public utility member starting on page 7, line 23, included the six public utilities. MR. BJORKQUIST answered yes. He added that language starting on page 9, line 25, listed most of the powers of electric cooperatives as the general powers of the corporation. He highlighted that section (a)(8) on page 10, line 13, allows for sales to industrial customers if it is to a public utility with a service territory, and that section (a)(15) on page 11, line 8, is the power to exercise eminent domain. This power is granted to every public utility but it has a limitation. GRETC cannot exercise eminent domain to take generation or transmission assets from another public utility. So, it has lesser powers than a public utility has, but no more. Language on page 12, lines 10-14, contains a limitation to protect the GRETC members' preclusion from having bilateral contracts with others for a power sale or wheeling. 4:51:41 PM Four sections starting on page 12, line 21 provide for regional planning, one of the areas where GRETC may provide some significant advantages. Rate regulation generally doesn't address rate issues until after a project is built; so you miss an opportunity to pick between alternatives. He said that the best opportunity to save money for ratepayers frequently is before it is spent constructing a project, a point in time where the best choice can be decided upon. Having regional planning can be effective in a number of ways to help that process. First, the information is available to the corporation and members to help them make better decisions. But the ratepayers will have the information as well as the legislature, which will have that information both for oversight activities and in dealing with state financial assistance to the corporation. If there are choices being made in the regional planning that the legislature would question, that will come up when the state financial assistance is being discussed. SENATOR WAGONER asked why have GRETC be capable of exercising the power of eminent domain if all the member organizations already have it and they are much more answerable to the constituents that live in that district where eminent domain is going to be used. He said he has always had trouble with taking private property for a public purpose, and he wasn't comfortable with that section. MR. BJORKQUIST replied that the purpose of this section is to give the entity that would be needing the property to be able to develop their project the power to achieve that. If the corporation did not have that power, it would have less power than any other public utility and arguably wouldn't be able to develop a project unless some other entity would be willing to exercise its powers of eminent domain. It might create problems also because eminent domain requires paying for what is being taken. There is a synergy to having the entity that is developing the project and going to be responsible for the payment having that power. 4:55:02 PM SENATOR WAGONER said he hated to argue the point, but some property owners haven't always been paid what they think their property is worth, and he thought they were "going a step too far with this eminent domain." He could envision Homer Electric, for instance, objecting to a project in their area and hiding behind this organization that is taking property through eminent domain. A lot of people wouldn't understand this organization. 4:57:00 PM MR. STRANDBERG said he shared his concern about "the heavy hand of government taking away land for public purposes." But one of the most difficult parts of the company is going to be securing property so it can actually build transmission lines. The AEA has been working with ML&P on a new transmission line from Hatcher Pass down to Knik where they face those issues. While the eminent domain power is there, he said, in practice "we do not even look at going there." And it is very common for G&T organizations throughout the United States to have some form of eminent domain power. The hope is to have the right board structure and the right governance so that concerns from the retail customer flow up into the governance of the new company. 4:58:18 PM CO-CHAIR WIELECHOWSKI said it would be a policy call. MR. BJORKQUIST said this bill contemplates that state financial assistance will be provided and that language in AS 42.50.150 on page 14, lines 11, listed types of state financial assistance that the corporation may obtain. He pointed out that nothing in this bill obligates the state to provide any financial assistance and neither does it limit the strings the legislature can impose with any state financing that is provided. There is also every expectation that there will be negotiations about terms and conditions that are going to be attached to it. This bill is just a starting point for a lot of the terms and conditions that might be imposed more specifically on a project by project basis. 5:00:00 PM Going back to page 12, lines 25-30, Mr. Bjorkquist pointed out that in the integrated resource plan and the long-range fuel supply plan, the corporation is obligated to evaluate and consider state energy plans or other plans, and if they chose to deviate from them they have to include a report explaining the differences. This is important because it creates transparency and political accountability. He said the many other terms and conditions in the bill tie to corporate type functions while some are unique to GRETC. He offered to answer questions about details. 5:02:55 PM CO-CHAIR WIELECHOWSKI said they really appreciated his testimony and that SB 143 would be held for further work. He said they had a lot to digest and adjourned the meeting at 5:02.