SB 143-RAILBELT ENERGY & TRANSMISSION CORP.  3:34:44 PM CO-CHAIR WIELECHOWSKI announced SB 143 to be up for consideration. He said they would focus on the issue of how the new Greater Railbelt Energy and Transmission Corporation (GRETC) entity would be regulated by the Regulatory Commission of Alaska (RCA). 3:35:02 PM MARK JOHNSON, General Counsel, Chugach Electric Association, and staff to the Joint Utility Task Force as well as former chair of the RCA, said the task force does not support GRETC regulation by the RCA, but they have agreed with the Governor's Office to accept RCA regulation for five years. GRETC, like the utilities that will provide the governance for it, will operate on a not- for-profit basis to serve their member owners at the lowest reasonable cost. GRETC is founded on the Bradley Lake model that has worked well for 20 years; its books and operations are open to the public and audits are performed annually. "If you follow the Bradley Lake model, regulation is unnecessary," he said. The governance of the boards and the board of GRETC are democratically elected with one member appointed by the governor. Mr. Johnson said this makes GRETC very different than a for-profit utility and it is important to keep this in mind throughout the discussion on regulation. MR. JOHNSON said that Chugach does not believe GRETC needs to be rate regulated, because nationally Chugach finds itself as the only generation and transmission (G&T) cooperative that accesses the public markets for all of its financing needs that is regulated. Financers have told them they are concerned because this increases risk in financing. They do not want to see GRETC affected by the same risk. He related that the state, through the just completed Regional Integrated Resource Plan (IRP), has looked into the future and analyzed what energy and transmission are required by comparing customer needs with what is available, and further what new resources, power supply and conservation measures can be brought to bear on those needs. One of the greatest threats to consumer interest is when utilities make large scale decisions on investment without a transparent and public process. Currently the IRP has substantially advanced transparency and public process. If a utility or GRETC is going to follow the IRP in the development of a particular project, that project is a presumptively prudent and necessary investment decision. It doesn't need additional regulatory review. He asked the It appears now there are some pretty well defined regulatory goals. 3:38:29 PM MR. JOHNSON said the committee to consider regulatory goals in a broader context and referred them to slide 3 that illustrated how regulatory goals are addressed through the GRETC legislation. One of the top ones was to protect consumers; and the people who will govern and receive the services of GRETC are the consumers. They will buy the energy and will have an enormous interest in making sure that electricity and services are reasonably priced and best serve consumers. 3:39:22 PM SENATOR STEDMAN joined the committee. 3:40:32 PM MR. JOHNSON said other more specific goals of regulation were taken from a treatise called "The Regulation of Public Utilities" by Charles Phillips. One is that regulation is intended to prevent monopoly prices. In the case of GRETC the entities that would be GRETC's customers also have other options. They are not limited to a monopoly provider in GERTC; they can choose to self-generate electricity or buy it from IPPs. Another goal is an effort to contain and define utility investments. GRETC will act in compliance with the IRP plan, and the directors that sit on the board have no interest (since they are the consumers) in overinvestment. They want the best prices for the companies that are going to buy energy. He said the lenders also have a very strong interest in a right size of utility plant and services. 3:41:45 PM Along with the regulatory goal of insuring the lowest cost to consumers, Mr. Johnson said, it's important to remember that the generation of electricity is one of the few industries and circumstances where you actually have economies of scale in production. Consumers benefit from large projects because they reduce overall costs to them, and that is one of the market characteristics that exists in the case of electric generation. MR. JOHNSON said the GRETC utilities have no interest in high operating costs. When it comes to capital investment, GRETC has a superior risk profile for investors and will, therefore, have greater access to capital. So, they believe GRETC is a superior arrangement in terms of insuring low overall capital cost to consumers. As it relates to certain consumer protection issues, whether or not consumers are being fairly treated in the market place by providers, Mr. Johnson said, GRETC will not serve retail customers; the customers are at the wholesale level with the large electric utilities. So, those concerns do not arise in its case. He stated that this legislation also addresses rate discrimination and that some utilities feared making investments they could not recover and wanted to be regulated. In the case of GRETC, they seek to define very clearly how rate making would take place. Another issue is market failure, and that boils down to whether or not a utility is required to insure service availability to various customers. Once again, GRETC has insured statutorily that it will coordinate the functions of transmission to distribute electricity throughout the Railbelt. Also in the category of market failure is the question of preventing duplicate facilities. If GRETC is complying with the IRP process, it will have a very exceptional ability to insure that they have appropriate facilities that serve all the potential consumers of the energy produced by the utility. Finally, Mr. Johnson said, the legislation addresses two other potential regulatory goals - the environment and safety by providing for the legislature to enact whatever state laws it thought appropriate in addressing those issues. 3:44:47 PM MR. JOHNSON said one of the goals over the years regarding utility regulation is to promote economic development, a matter of great interest to him when he was on the RCA. In the case of the GRETC legislation, it is conceived to promote economic prosperity and to provide low cost energy. They believe it is a superior model. To sum up, he said, they believe this GRETC legislation adequately addresses all the goals has see no compelling need for closely crafted economic regulation. MR. JOHNSON said in his opinion the legislation has been crafted to provide a good framework for GRETC to move forward without regulation. He said regulation is a red flag issue when it comes to obtaining low cost financing; and the dangers of obtaining fuel supplies under regulation are well known. Also, he mentioned a significant risk in inconsistent application of the regulations. Because statutes rarely provide the kind of guidance that one would like to have, that unfortunately raises the prospect that regulators, however well-intentioned, will reach for solutions that aren't necessarily good ones. This is not a good risk to take and it won't produce benefits to consumers. Again, he said, they believe the classic formulation of regulatory goals is addressed by this legislation. 3:49:09 PM SENATOR FRENCH asked if anything in the bill forces GRETC to follow the IRP in the development of a project or is that an option - in referenced to Mr. Johnson's testimony that if a utility or GRETC is willing to follow the IRP in the development of a particular project, that project is a presumptively prudent and necessary investment decision and it does not need additional regulatory review. MR. JOHNSON answered that language on page 12 says that GRETC will adopt an IRP and follow it. 3:50:33 PM CO-CHAIR WIELECHOWSKI thanked Mr. Johnson for his testimony and held the bill. He then announced an at ease from 3:50 to 3:52 p.m. 3:52:00 PM SB 143-RAILBELT ENERGY & TRANSMISSION CORP.  CO-CHAIR WIELECHOWSKI announced SB 143 to be back before the committee. He asked Mr. Pickett to give his thoughts on the bill. BOB PICKETT, Chairman, Regulatory Commission of Alaska (RCA), said he was referring to work draft version S and that the legislative intent in section on page 2, starting on line 2, was very critical in this matter. It provides the basis for the interim five-year period that the RCA is being asked to provide some sort of regulatory function. He said that "In setting or reviewing rates" language on page 2, line 27 was confusing, and explained that generally a utility sets or changes its rates, files the tariff revision and then the commission investigates and either approves or modifies those revisions. He asked in what context the Commission would actually review rates without setting them. Moving on to "rates for" he said generally the Commission sets rates "of" the utility and he wanted to know if something different was meant. 4:11:08 PM Line 28 said "The Commission may not disallow in traditional rate making that focuses on the end result just and reasonable rates." It has none of the intermediate steps of determining the revenue requirements, rate of return or rate base, and Mr. Pickett wondered how this would be reviewed by the courts. Will just and reasonable rates at the end of the process be the source of the inquiry or will the rate making process now become a mechanical application of some formula to the component parts? Towards the end of line 28 in "a rate base or revenue requirement" he wondered why "a" is used. Will GRETC have more than one each? It's unclear. The subsection does apply to the GRETC so the requirements are addressed to a single entity at a time. 4:12:05 PM Going down to the line that has "amounts necessarily reasonable" he asked by what standard "reasonable" would be measured. He said this is a new concept and asked how will the Commission would know what a reasonable amount is when it is presented. What evidence should be produced to support the proposition or is it sufficient for the management to just assert that it's reasonable? On lines 29-30 "for the corporation to fund a cost reasonably anticipated" Mr. Pickett asked if costs that were anticipated but never incurred would be subject to repayment to ratepayers and if costs that are anticipated and incurred but never benefit ratepayers ever removed from rate base. How do you calculate depreciation or amortization of an anticipated cost? To become a just and reasonable cost (line 30) - he said costs themselves are not generally evaluated as "just and reasonable" except in the aggregate when the rates themselves are reviewed. The usual method of evaluating operating costs is whether they are related to the provision of public utility service and in an amount that is not excessive. The usual method of evaluating capital related costs is whether the investment is used and useful in an amount that is prudently incurred. 4:13:28 PM On page 2, line 31 through page 3, lines 1 and 2, he asked if "including costs for the repair, replacement and retirement of a project owned and operated by the corporation" meant they can recover future capital replacement cost of an asset they don't own. And if so, based on what theory? He asked if the language on page 3, lines 3 and 4" "including costs to permit the corporation to build reasonably necessary equity for future operations" is an attempt to allow the corporation to derive a desired profit number and kind of set the rates to achieve that target. He explained that usually the attraction and accumulation of equity is not a cost; it's a capital transaction or the product of profitable operations. He also questioned using the conjunctive "and" in language saying "including costs by the corporation and incurred to permit". Do both conditions have to be met or is it just a list of non-exclusive costs that can be passed through to the ratepayers? MR. PICKETT said a number of policy and technical questions had arisen. An underlying policy assumption that auditing equals regulation, but the Commission has not taken a position on that, and he said, "I think nothing could be further from the truth." Also, he said language on page 13, lines 28-31, references the corporation issuing equity and debt. How is it proposed that GRETC will issue equity? He was under the impression GRETC was a not-for-profit, and was this a contribution on the part of the members? MR. PICKETT said he had other questions. Bradley Lake has often been sighted as an example of a project that clearly demonstrates there is no need for regulatory oversight of GRETC. It is fair to raise the example of Healy clean coal and if deregulation is a de facto main goal of GRETC, that decision should be transparent and out in the open with the ratepayers well aware of what is going on. Currently in AS 42.05.711(h) and AS 42.05.712 there are clear provisions for deregulation - elections. He said the Commission would be taking this up at 9am on Wednesday. 4:16:50 PM SENATOR FRENCH said if the Bradley Lake model is so successful, why is that not a good example to look at in considering this bill. MR. PICKETT replied that it is a successful example of the public private partnership, but it is important to keep in mind that it produces a very small percent of the overall electrical generation capacity of the Railbelt. Comments last week about one of the major changes in this version of GRETC versus what was originally presented to the legislature is a bit of a softening of its monopolistic posture that perhaps it had in the earlier version. The individual utilities could choose to opt out for instance. MR. PICKETT stated that it is also fair to say that this bill has positioned GRETC as being the primary recipient of state funds, and there are good public policy reasons for that. Mr. Johnson raised the concern of the capital markets, and at its inception GRETC will have minimal assets. The key and critical element is going to be how it will generate equity. Will the legislature have to fund it or will there be riders to build up equity from the respective member cooperatives and participating utilities to prefund capital projects? Those are good questions and in the end that will be what will shape GRETC's ability to attract capital. CO-CHAIR WIELECHOWSKI asked his views on sunsetting the RCA review after five years. MR. PICKETT answered that he is a skeptic and believes in checks and balances for federal and state government. He didn't think that auditing was an adequate proxy for regulation. There are models that address rather unique situations which GRETC will present such as the area of capital project surcharges and the use of operating ratios rather than rate of return for utilities that are essentially startups or that have contributed plant or are fully depreciated, simplified rate making rules, and adjustment clauses for fuel and purchase power costs. CO-CHAIR WIELECHOWSKI said he had given them a lot to think about and it is obvious that the bill has some questions that still need to be answered and it would not move today. SENATOR STEDMAN commented that this bill came into the body late in the session it and should be set aside and worked on over the interim. CO-CHAIR WIELECHOWSKI agreed.