HOUSE SPECIAL COMMITTEE ON UTILITY RESTRUCTURING February 9, 2000 8:10 a.m. MEMBERS PRESENT Representative Bill Hudson, Chairman Representative John Cowdery, Vice Chairman Representative Pete Kott Representative Brian Porter Representative John Davies Representative Ethan Berkowitz Representative Joe Green (alternate) MEMBERS ABSENT Representative Norman Rokeberg OTHER HOUSE MEMBERS PRESENT Representative Mary Kapsner Representative Carl Morgan COMMITTEE CALENDAR POWER COST EQUALIZATION HOUSE BILL NO. 323 "An Act relating to the employment of hearing examiners, arbitrators, and mediators by the Regulatory Commission of Alaska; repealing a requirement that the principal office of the Alaska Oil and Gas Conservation Commission move to the same location as the principal office of the Regulatory Commission of Alaska; relating to the sharing of record-keeping facilities and clerical staff by the two commissions; and providing for an effective date." - SCHEDULED BUT NOT HEARD PREVIOUS ACTION No previous action to record. WITNESS REGISTER ERIC YOULD, Executive Director Alaska Rural Electric Cooperative Association 703 West Tudor Anchorage, Alaska 99503 POSITION STATEMENT: Provided a presentation on power cost equalization (PCE). JOE GRIFFITH, CFO Chugach Electric Association, Inc., and Member, PCE Blue Ribbon Committee 5601 Minnesota Drive Anchorage, Alaska POSITION STATEMENT: Offered information about PCE. KEVIN RITCHIE, Executive Director Alaska Municipal League and Member, Denali Commission 217 Second Street, Suite 220 Juneau, Alaska 99801 POSITION STATEMENT: Discussed the Denali Commission's view as well as AML's view regarding PCE. RANDY SIMMONS, Executive Director Alaska Industrial Development & Export Authority (AIDEA)/ Alaska Energy Authority (AEA); Member, PCE Blue Ribbon Committee 480 West Tudor Road Anchorage, Alaska 99503 POSITION STATEMENT: Discussed PCE and the statewide energy study. ACTION NARRATIVE TAPE 00-2, SIDE A Number 0002 CHAIRMAN BILL HUDSON called the House Special Committee on Utility Restructuring meeting to order at 8:10 a.m. Members present at the call to order were Representatives Hudson, Cowdery, Kott, Davies, Green and Berkowitz. Representative Porter arrived as the meeting was in progress. Also in attendance were Representatives Kapsner and Morgan. Power Cost Equalization Number 0106 CHAIRMAN HUDSON announced that the committee would take up the issue of power cost equalization (PCE). He noted that there is quite a bit of action going on with the PCE issue. Although PCE is an expense factor that must be dealt with one way or another in the next budget, that falls under the purview of the Finance Committee and therefore will not be addressed by the current committee. Rather, this committee will attempt to deal with a couple of concepts such as the universal service concept. The committee will also receive some input regarding other aspects that could, hopefully, lead to reducing the cost of power generation in rural Alaska. Referring to the CH2M Hill report, Chairman Hudson indicated he interprets that as follows: Mr. Rabago of CH2M Hill was essentially suggesting that the committee concentrate on the high cost of power in the rural parts of the state. Therefore, the committee will begin by reviewing that issue. He announced that first the committee would hear an overview and report on the status of this particular issue from Eric Yould. Number 0267 ERIC YOULD, Executive Director, Alaska Rural Electric Cooperative Association (ARECA), informed the committee that ARECA is the trade association that represents the utility industry in Alaska. He noted that ARECA's members collectively provide about 90 percent of the electricity throughout the state. He also noted that ARECA's membership ranges from the biggest utility in the Railbelt to some of the smaller utilities in rural Alaska. MR. YOULD offered some perspective, suggesting that the committee follow along on the hard copy of the presentation entitled "Power Cost Equalization; Electricity Powers Healthy Communities." He referred to page 2 and commented that the United States has a totally interconnected system. There are transmission lines throughout the country, and there is almost no community in the Lower 48 that is not interconnected in some way. This allows communities to share in economic power from one geographic sector to another. MR. YOULD continued with page 2 of the presentation. He noted that Alaska is superimposed on the map of the United States. Although Alaska stretches from the northern borders of Minnesota and Canada down to the Atlantic Ocean at Georgia and then all the way out to the Pacific Ocean in California, Alaska's entire infrastructure - that is, the transmission line system - goes from the middle of Iowa down to the middle of Missouri. MR. YOULD pointed out that the job of the electric utility industry [in Alaska] has been to provide cost-effective and reliable electricity throughout the state. Essentially in place since the early 1980s, PCE has been integral in bringing affordable and reliable electricity to Alaska. Without PCE, many of the amenities Alaska enjoys, certainly in rural Alaska, would not be possible. Furthermore, Alaska would not have some of the economic development and municipal facilities without PCE because many of the utilities would not exist. He acknowledged that there would be Honda generators, but before PCE not all of the villages had electricity, and those that did had very expensive electricity. Number 0492 MR. YOULD directed attention to page 3 of the presentation, a summary of the history of PCE. The program began in 1980 as a temporary program referred to as the Power Production Cost Assistance Program. That program was in response to the Energy Program for Alaska. Mr. Yould explained that in the early 1980s, the state placed much money into renewable energy projects for the entire state. The cornerstone was the Susitna Hydropower Project; there were a number of other projects such as the Four Dam Pool, Bradley Lake and the Anchorage-Fairbanks Intertie. Given that Alaska would have largely funded those projects, it was believed that those projects would be the financial intertie to the rest of the state and thus create a postage stamp rate for the rest of the state. Until those projects could come online, the state wanted an interim solution, which was the Power Production Cost Assistance Program. He commented that, at the time, he testified in favor of that program. MR. YOULD explained that as the cost of oil increased and the economics of the Susitna Hydropower Project declined and the amount of money to the state decreased, the Energy Program for Alaska ended. However, the need in rural Alaska remained. Therefore, in 1984 the legislature institutionalized the program and put it in place for the long term as the Power Cost Equalization Program. The PCE program was largely funded with general funds (GF) until 1993, when the legislature divided up money in the Railbelt energy fund for interties in the Railbelt [and] Southeastern Alaska. MR. YOULD noted that at the same time, $63 million was made available for the PCE program; a policy statement was included which said that it was the legislature's intent to fund the PCE program for the next 20 years, through the year 2013. Obviously, this was subject to appropriation. In 1999 the energy fund available for PCE was dry, and the legislature decided to review the program and re-tailor it to make it more cost-efficient. The legislature actually passed legislation last year, SB 157. MR. YOULD pointed out that SB 157 significantly changed the [PCE] program. It raised the floor for eligibility from 9.5 cents to 12 cents. The legislation reduced the amount of kilowatt hours (kWh) eligible for the PCE program from 700 kWh to 500 kWh. It also eliminated commercial consumers and schools from the program. Number 0728 REPRESENTATIVE BERKOWITZ commented that the state experienced a lot of savings when schools were included in the program. He asked whether there are any cost estimates with regard to excluding the state [schools] from the program? MR. YOULD replied that the schools were receiving the same 700 kWh per month as residents. Therefore, it was not much of a program for the schools. By eliminating the schools, around $200,000 was eliminated from the program. Although the commercial consumers were given the same 700 kWh per month, he believed that the commercial consumers were hit a little harder. MR. YOULD returned to the presentation. Realizing that the funding had to be appropriated annually, the legislature attempted to identify funding sources for the program for the long term. Basically, the legislature included 60 percent of the revenue from the Four Dam Pool, about $6 million per year, and allocated future funds from the National Petroleum Reserve-Alaska (NPR-A) lease sale. The funds from the NPR-A lease sale have turned out to be an empty bucket, at least for PCE; it appears that money is coming into the program, but there are other calls on the money before any is available for PCE. He agreed with Chairman Hudson that, effectively, there is no money in the bucket. MR. YOULD directed the committee to page 5 of the presentation, which illustrated the upshot of the changes encompassed in SB 157. The cost of the totally funded program would be about $16 million as opposed to the cost of the program before the changes, which was approximately $22 million. He commented that as energy demands in rural Alaska increase, as a result of new services such as water and sewer, the program itself will probably grow as well. With regard to whether there is really a need for PCE, Mr. Yould emphasized that the answer is yes. MR. YOULD turned attention to page 6 of the presentation, which notes that the average cost of electricity in urban Alaska is roughly 9.5 cents per kWh. He pointed out, however, that the average cost of electricity in the PCE communities is 42 cents per kWh, more than four times the average cost in urban Alaska. That difference can be explained because in the Anchorage area there is very inexpensive natural gas, there is a large economy of scale, and there is an interconnected system. In rural Alaska, on the other hand, the preponderance of electricity comes from expensive diesel generation; furthermore, the systems are small, there is no economy of scale, and the systems are not interconnected. MR. YOULD directed attention to page 7, which lists energy rates for various rural communities as compared to Anchorage. That list demonstrates the concept of economy of scale and how spreading the costs over a larger population allows for cheaper power. Still, PCE does not fully equalize. Number 1001 MR. YOULD explained that the concept of PCE is that those in rural Alaska would receive the same rate as those in urban areas. However, the PCE formula results in an average cost of 21 cents/kWh in PCE communities, while the Anchorage area has an average cost of 9.5 cents/kWh. Therefore, PCE does not decrease the cost of power to the level that is enjoyed in urban areas. With regard to the notion that PCE is a disincentive to energy conservation, he directed the committee to page 9 of the presentation. Page 9 points out that the urban areas consume roughly 688 kWh/month, while the consumption in rural Alaska is 326 kWh/month. "Even with PCE, the cost of electricity is so far beyond the point of elasticity that there is a strong incentive to energy conservation." MR. YOULD turned to the issue of whether rural families can afford energy costs, which he outlined on page 10 of the presentation. He pointed out that the typical household income in urban Alaska is roughly twice that of the typical household income in rural Alaska. Therefore, not only is the cost of power greater in rural Alaska, but those in rural Alaska do not have as much disposable income to pay for the power. Furthermore, he understood that 18 percent of the families in rural Alaska fall below the poverty line, and many of the elders are on fixed incomes. MR. YOULD asked, "Yet, how has the utility industry itself done over the years with power cost equalization?" One might conclude that with PCE there is no incentive to reduce the cost of power, he said. However, the graph on page 11 of the presentation illustrates that in 1978, before PCE, the cost of electricity in the Alaska Village Electric Cooperative (AVEC) system was some 35 cents/kWh. He noted that AVEC serves some 51 villages. More than 20 years later, the cost of power is only 42 cents/kWh; that is in nominal dollars. If the cost of inflation is factored in, the cost of electricity in the AVEC villages has dropped by half. He emphasized that to be a very significant figure because it illustrates that the utilities are working very hard to keep the cost of electricity down. However, given the fact that rural Alaska remains a diesel generation economy, is a good job being done of utilizing the scarce fuel out there? MR. YOULD noted that the graph on page 12 illustrates that in 1975 the efficiency was roughly 6 kWh per gallon of diesel fuel burned in rural Alaska. Twenty years later, rural Alaska has an efficiency of 12 kWh per gallon of diesel fuel burned. Therefore, the efficiency of the units has increased. He mentioned that due to computer technology, some villages in AVEC are experiencing efficiency as high as 16 kWh per gallon of diesel fuel burned. He reiterated that the utilities have done a good job, during PCE, in increasing efficiency and reducing the cost of power, and yet rural costs are four times as high as those in the Railbelt area. Number 1213 REPRESENTATIVE BERKOWITZ related his understanding that if some rural communities are receiving 16 [kWh per gallon of diesel fuel burned] and the average is 12 [kWh per gallon of diesel fuel burned], then some communities fall below the average. He asked what could be done to bring those communities up to the average. MR. YOULD replied, "The answer partially is cost of money. Is it economic to go in and ... retrofit an existing diesel [system] with fuel injected computer-control technology? It may not be economic to do it." He indicated that these must be reviewed on a case-by-case basis. Additionally, the PCE program as administered by the Regulatory Commission of Alaska (RCA) requires a certain level of efficiency or the full PCE is not received. That element of the program creates an incentive for the communities to actually get the efficiency rate up to 16 [kWh per gallon of diesel fuel burned]. CHAIRMAN HUDSON asked whether there are ongoing evaluations to do that cost analysis. MR. YOULD replied yes. He noted that it is a responsibility of the RCA, which is required to review the efficiencies. REPRESENTATIVE GREEN noted that in the urban areas there are often penalties for [use during times of] peak demand. Would such a disincentive help further the efficiencies in the rural areas? MR. YOULD commented, "Certainly, more pain is going to help." However, he pointed out, the rural areas are so far beyond price elasticity that peak demands will not be as great a factor. REPRESENTATIVE GREEN said he was thinking along the lines that schools alternate starting and finishing times. Perhaps, the same concept could be utilized in rural areas. MR. YOULD pointed out that demand charges are primarily aimed at capacity to reduce capital costs. In a small village with one diesel generator, there would not be so much of a savings by load management because the village would still be generating off that one generator. However, he acknowledged that if that village is generating more electricity, it may be more efficient than on the lower end of the efficiency curve. Although the demand charges in rural Alaska are valuable, he was not sure the economic incentive would be that great. Number 1383 MR. YOULD turned attention to the notion that communities in rural Alaska should look at alternatives rather than continued use of PCE. Although Mr. Yould agreed with that notion, as do the utilities, he emphasized that the alternatives are very expensive. He pointed out that [Alaska] has some of the greatest reserves of anywhere in the U.S. - on a percentage basis - of the following resources: hydro[electric], natural gas, oil, wind, biomass, coal, solar and geothermal. The coal reserves have been estimated to be 60 percent of the total reserves in the U.S. Furthermore, Alaska's hydro[electric] potential is one-third of the untapped hydro[electric] potential in the U.S. He commented, "We're like the ancient mariner: Water, water everywhere, nor a single drop to drink." He likened it to Alaska's energy situation because it is very expensive to develop these [alternative energy] systems, primarily in rural Alaska. MR. YOULD noted that he had attempted to outline some of the capital costs associated with some of the aforementioned alternatives. For example, a diesel plant costs roughly $1,000 per kW, while a wind plant that was reviewed for placement on Prince of Wales [Island] costs roughly $10,000 per kW. He noted that hydroelectric power is site-dependent. One hydroelectric project being reviewed at Old Harbor costs roughly $5,000 per kW. He commented that hydroelectric power is firm energy, while the wind power is not only expensive but also requires diesel fuel as backup. MR. YOULD said micro-turbines are also a very expensive alternative. He recalled committee discussion at a previous hearing that mentioned fuel cells as an alternative. Although fuel cells may be an answer in the future, there are problems now. First, fuel cells are very expensive, with a high capital cost. Second, there are no diesel "feed stock" fuel cells commercially available at this time. Virtually all fuel cells use natural gas as the feed stock. Furthermore, moving propane or natural gas through rural Alaska could be difficult. The alternative of methane gas also has problems. First, the gas must be found, and the cost of drilling is $1 million per hole; who would pay for that? Therefore, the cost of these alternatives is the disincentive for bringing them online. Still, the utilities are looking for alternatives. REPRESENTATIVE GREEN asked whether a gas-fired or coal-fired plant would be similar to diesel. MR. YOULD explained that some of the simple-cycle gas-fired plants are very inexpensive. He estimated the capital cost of these simple-cycle gas-fired plants to be around $500 per kW. He agreed with Representative Green that a coal-fired plant would be much higher because it would probably cost around $1,500-$2,000 per kW. Number 1571 REPRESENTATIVE BERKOWITZ pointed to the chart that refers to the capital costs for these alternatives and asked if there is a comparable chart for operating costs. MR. YOULD said he does not have that information, but he offered to provide it. He noted that there is not a direct comparison between each alternative. For instance, the hydropower project is firm generation. He stated, "The fuel cells, you might say, well, that's a high capital cost, but if you're getting 80 percent efficiency out of the fuel, then the cost per kilowatt - at least the cost per Btu - is low." Therefore, Mr. Yould felt that fuel cells do have a place in Alaska in the future. However, he reiterated that the fuel cell would have to be one which could use diesel as a feed stock. He mentioned that the University of Alaska is working on that through the federal DOE [U.S. Department of Energy] to develop feed stock for fuel cells that could be used in rural Alaska. He strongly encouraged the legislature to support that program, which could be part of the answer. CHAIRMAN HUDSON asked: Is the highest cost factor in rural Alaska the cost of the fuel, the equipment, the maintenance, or all three? MR. YOULD clarified that it depends upon the location. He informed the committee that virtually all of the villages or utilities that he represents fund all of the capital costs through loans. Therefore, there is a large debt-service component. However, many smaller villages were able to get their diesel generators funded directly by the legislature or through some other means; thus they do not have any debt service. Still, the cost of electricity in those villages remains high. Therefore, diesel is a large component, but those [villages] with debt service might have a fuel component of no more than 20 or 30 percent of the total cost. CHAIRMAN HUDSON noted that he had seen the deteriorated conditions of the storage facilities and the extremely high cost of fuel delivery to the villages. He recalled winters when some villages ran out of fuel, which had to be airlifted during the emergency. Chairman Hudson said he hoped that could be reviewed. Alaska is drowning in oil, and Alaska has the capability to break it down into refineable products that can be used elsewhere in the world. Therefore, he did not believe that should be a cost factor that cannot be modified. REPRESENTATIVE GREEN commented that past deliberations in various committees have brought up average income for villages for very different reasons. Nonetheless, some of those average incomes were surprising. He asked if Mr. Yould had a chance to review those average incomes; if so, would he concur with those high incomes or are those incomes inflated in some way? Although Representative Green acknowledged the high cost of energy, he said "it's not a destitute community, and they don't pay the taxes the urban areas do." Perhaps, there is a perceived imbalance in the presentation. MR. YOULD stated that he has seen cost per community, per capita, figures, which are "all over the place." Given that there is always an average, with some falling above and below, he agreed that what Representative Green had indicated is probably true. Number 1805 MR. YOULD said, in conclusion, that affordable electricity in rural Alaska is essential if there is to be economic development, healthy communities, jobs, education and safe environments. The Blue Ribbon Committee on PCE hired the Institute of Social and Economic Research in order to [find out] the value of PCE in rural Alaska. One thing that was discovered was that if PCE disappeared, there would be a death spiral. In other words, as people pay the full cost of electricity, they would use less and the cost would increase. As the cost increased, the people would use even less and, ultimately, it would be possible that up to half of the utility systems in rural Alaska could fail. Basically, ARECA's goal is a long-term funding source for PCE. He commented that it is impossible for any community to have any kind of economic development, if that community does not know what the cost of electricity will be from one year to the next. Certainly, businesses will not enter these communities, either. Mr. Yould reiterated the need to develop a long-term funding program for PCE. REPRESENTATIVE GREEN commented that he is one of the many Alaskans who believe the true answer to the rural community is a source of energy. He asked whether, in the process of solving this energy problem, there is a risk of altering [the rural communities]. MR. YOULD likened that to the Pacific Northwest, where, due to the development of the Columbia River system through Bonneville Power, the costs, per kWh, fell to mills. That stimulated industry to come in and now look what has been generated. Still, it is some of the cheapest electricity in the U.S. Philosophically, inexpensive and affordable services are a cornerstone of economic development. However, there are a number of other economic developments that must take place, not to mention the resources, desire, and so forth. For example, Barrow, Alaska, has its own program in place, with an energy cost that is somewhat affordable, averaging around 15 cents/kWh, to his recollection. He noted that Barrow does have an economy that is based on extractable and affordable resources. REPRESENTATIVE GREEN surmised, therefore, that these communities could be helped without ruining them. MR. YOULD said he did not think these communities would be ruined. Number 2065 REPRESENTATIVE MORGAN turned to the issue of energy conservation. He commented that even with conservation, there is a point at which the generator will run. If there is too much conservation, then a "dummy load" has to be placed on the generator system, because in order to be efficient, it must have a load. Rural Alaska does conserve, as exemplified with the requests to place freezers outside and not to plug in heaters for automobiles. However, there are requests over the television for Anchorage residents to plug in their automobiles. MR. YOULD agreed with Chairman Hudson that Representative Morgan has a good point. He then pointed out that some federal laws change things as well. For instance, the federal government is attempting to outlaw two-cycle engines. Two-cycle engines are nice in rural Alaska because they are easy to start in the extreme cold, whereas a four-cycle engine would need to be plugged in. Therefore, electrical demand will increase when four-cycle engines are dictated by the Environmental Protection Agency (EPA). CHAIRMAN HUDSON announced that the video presentation would be held later in order to get to the others who are prepared to speak today. Number 2164 JOE GRIFFITH, CFO, Chugach Electric Association, Inc., and Member, PCE Blue Ribbon Committee, testified via teleconference. He commented that he would add a few key points to Mr. Yould's comments. He directed attention to page 4 of the Alaska Industrial Development and Export Authority (AIDEA) document that the committee had. Mr. Griffith emphasized the need to find a stable source of long-term funding. The PCE program was put in place for a good reason, and the legislature reemphasized that in 1993. The PCE program is important to rural Alaska as well as the Railbelt; PCE does affect jobs in the Railbelt, although most people do not make that connection. MR. GRIFFITH reported that the PCE Blue Ribbon Committee came to the conclusion that a universal service fund (USF) was probably a reasonable way to achieve a stable source of long-term funding. Telephone service has headed in that direction recently. If the choice is to not fund PCE, he believes that the opportunity for "cherry picking" the electrical service in the rural areas will become a problem because it already is nearly a problem. He predicted that four-cycle reciprocating-engine generators will move in and take the best loads in the villages and thus increase the cost to those who need the "lifeline" electrical service. MR. GRIFFITH said that with regard to whether technology could resolve the problem, he agrees that technology could certainly help. However, that technology requires the ability to maintain it. In some cases, the fuel supplies are not adequate. Furthermore, such technology would require a large capital outlay to make it happen. He recalled the comment about the need for load on generators; he mentioned that one could envision battery storage devices, but those are costly. Mr. Griffith concluded by saying that, as a member of the Blue Ribbon Committee, it appears that PCE is necessary. He reiterated that USF would be a good start at addressing the funding for "lifeline" residential [energy]. REPRESENTATIVE DAVIES turned to the issue of economy of scale. He noted that last year the legislature decided not to include the schools and the "commercials" in the PCE, which seems to head in the wrong direction. He surmised that in looking at economic development, one would want as many people online as possible in a given location, in order to achieve the maximum economies of scale. With respect to USF, he asked whether the [Blue Ribbon Committee] commission had review surcharges on bulk fuel distributions as opposed to retail ones. MR. GRIFFITH clarified that the surcharge discussed was regarding the surcharge on electrical consumption, not on fuel for the USF. He said the committee did not review surcharges on bulk fuel distributions. Regarding whether the PCE should be spread across the schools and the commercial facilities, Mr. Griffith recalled that earlier testimony stated that the numbers were relatively small because consumption was above the PCE limits in many cases. He commented that anything done to increase usage of power [in the rural areas] - while it costs more in terms of fuel and direct operating costs - spreads the fixed costs over a larger amount of kilowatt hours. In effect, that can serve to reduce the rates. The [Blue Ribbon] Committee had discussed that; the committee had concluded that it made better sense to deal with the residential "lifeline" concept than to subsidize schools or commercial facilities. CHAIRMAN HUDSON asked if any sort of capacity analysis was ever performed. Is there more electrical capacity for growth than is currently being utilized? MR. GRIFFITH said that it is almost specific to the site. In the Railbelt it appears there is excessive capacity. However, thanks to the avalanches that took out the intertie, that excess suddenly is not excess. Similar situations will be found in the villages. TAPE 00-2, SIDE B MR. GRIFFITH commented that with the addition of large electrical users, additional capacity would have to be added. He indicated that most of the smaller systems could not accommodate fish processors. However, he noted that it is easy to add on, if one has enough money and the load is present. Number 2410 KEVIN RITCHIE, Executive Director, Alaska Municipal League (AML); Member, Denali Commission, informed the committee that the Denali Commission was created by Congress and has been in operation for almost a year. The members of the Denali Commission are statewide folks; there are no regional responsibilities. The current members of the Denali Commission are as follows: Henry Springer, Associated General Contractors; Mark Hamilton, University of Alaska; Lieutenant Governor Fran Ulmer [Co-Chair, acting for Governor Knowles]; Julie Kitka, Alaska Federation of Natives; Mano Fry, American Federation of Labor and Congress of Industrial Organizations (AFL-CIO); Jeff Stacer (ph) [Federal Co- Chair]; and Kevin Ritchie, AML and the Alaska Conference of Mayors. MR. RITCHIE explained that, in the area of energy, the Denali Commission first decided "that to fulfill its responsibility for economic development, for training, for general quality of life, for health and safety and rural development, the first thing you have to do is be able to turn on the lights." In that vein, the Denali Commission has funded off the list of fuel tank upgrades and repairs and consolidations, in particular. A number of communities have a variety of oil tanks. Therefore, managing and maintaining those fuel tanks, as well as having the ability to purchase bulk fuel, depends upon having a central system. That is one effort to lower the cost of energy and maintain the flow of oil for electric development. The Denali Commission has also been working on energy upgrades. The commission has found that there really is not an energy plan for the state. Therefore, the Denali Commission, the Rural Development Assistance Division of the Department of Agriculture, and the state Division of Energy are working together to draft and develop a plan. MR. RITCHIE commented that the Denali Commission believes it can make some inroads if there is a good plan with regard to obtaining federal funding for some of the upgrades that are being discussed. Some of the capital money probably needs to be placed into some of the areas that can benefit from technology and lower costs. As Mr. Yould stated, it is not possible or economically feasible in a substantial number of areas. With regard to PCE itself, that is not an area that the Denali Commission can become involved with. As U.S. Senator Ted Stevens cautioned, the commission should be cautious about replacing state responsibility with federal money. MR. RITCHIE pointed out that in order for the Denali Commission to remain funded as a federal agency, the commission should be recognized by Congress as something that makes life better, not merely lowering the cost of operating state government. He informed the committee that one of the line items in President Clinton's budget was the Denali Commission. Furthermore, President Clinton is asking for a Delta Commission that would be similar to the Denali Commission and the Appalachia Commission. Number 2237 CHAIRMAN HUDSON inquired as to the funding level of the Denali Commission. MR. RITCHIE replied that the funding level was $20 million in President Clinton's budget. However, beyond that there is the interest from the federal government's Trans-Alaska Pipeline System (TAPS) fund. That federal TAPS fund will potentially provide a continuing source of $7 or $8 million. He noted that U.S. Senator Stevens would like to use the Denali Commission in order to focus different types of federal funding. Therefore, there is the possibility that as the Denali Commission works with the state and federal agencies to develop an energy plan, the commission will be justifiable for additions of federal funding. MR. RITCHIE turned to the standpoint of the AML and noted that he had provided the committee with a list of AML's priorities. Power cost equalization is one of the top six priorities for the AML. The top priority for the AML is to work with the state to develop a financial plan. Mr. Ritchie said, "The bottom line, frankly, obviously, is to fund PCE as a need; it's not really an optional expense for much of the state." With regard to revenue sharing, AML does not feel that is optional at this point, especially in light of last year's 33 percent cut in funding. He informed the committee that there are communities that did have full-time police service nor a Village Public Safety Officer nor an Emergency Medical System; however, they do not now. Mr. Ritchie said, "When the public generally says, 'Yes, we think cutting the state budget is good,' they don't mean decreasing the safety and health and lives of people anywhere in the state." The AML is hoping to work with the legislature and take part of the responsibility for developing some of the solutions. MR. RITCHIE turned to Representative Green's question regarding the tax equity throughout the unorganized borough. He informed the committee that most of the people in unorganized boroughs live in communities that are first-class or home-rule communities; those communities have virtually the same responsibility as a borough. First-class and home-rule communities have exactly the same responsibility for funding a school district as Anchorage, Fairbanks or Juneau; therefore, they are essentially mini-boroughs. Many of them receive PCE, which is a different issue with regard to the economy. Number 2074 RANDY SIMMONS, Executive Director, Alaska Industrial Development & Export Authority (AIDEA) and the Alaska Energy Authority (AEA); Member, PCE Blue Ribbon Committee, testified via teleconference from Anchorage. Mr. Simmons commented that Mr. Yould, Mr. Griffith and Mr. Ritchie have covered most of the topics. However, he said that he would like to provide some additional information and cover PCE funding in more detail, as well as the statewide energy plan, which should have an impact on PCE in the long term. MR. SIMMONS directed the committee to page 3 of the document entitled "An Overview of PCE and the Statewide Energy Study." He informed the committee that there are approximately 190 communities served through PCE. All but eight of those communities have populations of less than 1,000. The average population of a PCE community is about 264. With regard to earlier testimony that the typical cost of PCE power is 42 cents/kWh, he said the cost ranges from about 62 cents/kWh in some communities to below 20 cents/kWh. That illustrates the large divergence as to the actual cost [of energy] in those communities before PCE. MR. SIMMONS then turned to page 4 of the aforementioned document, which lists the major items that the PCE Blue Ribbon Committee recommended. With regard to earlier mention of the lifeline concept, Mr. Simmons said that was an important concept to the PCE Blue Ribbon Committee. That committee felt that it is necessary to make affordable power available to those essential electrical uses. It was also felt that if the cost of power at the margin is the full cost, then that would provide an incentive to the consumer to conserve as well as to the utility company to reduce the cost. Mr. Simmons reiterated the committee's recommendations with regard to the funding pieces. He stated: If you [the legislature] were to fund the program that we [the PCE Blue Ribbon Committee] had recommended, which was a program of roughly $14.7 million a year - 50 percent of it for the Four Dam Pool and the remainder from the universal service fund - it would roughly cost the residential consumer about $13 to $14 a year. MR. SIMMONS acknowledged the concern that, for the large commercial users, that number could be hundreds of thousands of dollars. Therefore, in looking at any USF it must be determined how to limit what the total would be to anyone. If it [the USF] is limited to the "commercials," then that would increase the cost a little for the residential consumer. Number 1888 MR. SIMMONS directed the committee to page 5 of the document, which lists the statutory changes to the PCE program that were adopted in 1999. In response to Representative Berkowitz's earlier question, he said it was projected that taking the commercial customers and schools out of the PCE program would save around $2.7 million a year. As it relates to schools, that is a small amount. He indicated that those hit hardest by that exclusion were probably the smaller commercial users. Reducing the kWh from 700 kWh per month to 500 kWh per month was a projected savings of $1.6 million. Reducing the PCE subsidy rate from 9.5 cents to 12 cents gave a savings of roughly $2.7 million. Therefore, the total projected savings was $7 million, which brought the PCE program funding close to the level - $15.7 million - that the legislature actually appropriated. The recommendation that the Four Dam Pool amount contributed from the Department of Revenue be increased from 40 percent to 60 percent was accepted. However, last year's legislative session did not produce a long-term funding plan for the PCE program. MR. SIMMONS turned to page 6, which provides an example of what would happen in a typical rural village if PCE is eliminated. That example was based on the community of Elam, which has a population of 281. With regard to elasticity, Mr. Simmons found that a 20 percent decrease in consumption would result in increased prices and reduced sales. If that elasticity fell to a 30 percent decrease, there would be the likelihood that utilities would become financially insolvent. Therefore, elasticity is very important. He also pointed out that the state and federal governments have spent billions on infrastructure in rural Alaska; therefore, it is important to keep in mind that there could be a negative effect on that infrastructure with the reduction of PCE. MR. SIMMONS continued with page 7, which discusses what the Rural Energy Group is doing to reduce PCE. He said Mr. Ritchie had discussed this [because] most of the funding for these programs is coming from the Denali Commission. The Rural Energy Group is looking at rural power system upgrades. He believed that $8 million of "our" budget is being targeted for rural power system upgrades on a yearly basis. Although the circuit rider program has been reduced, some funding remains and has the effect of reducing the cost of power as maintenance and operator training are reviewed. MR. SIMMONS pointed out that the conservation program is part of the Rural Energy Group. That program presents a dilemma. In many cases when power is conserved, it may reduce the cost of the utility overall but could increase the cost to the consumer in the long run because the fixed costs still have to be spread over a smaller kWh. Therefore, conservation is important, but it is not the ultimate solution. With regard to alternative energy projects, they are important and should be reviewed. Still, alternative energy projects are a long-term solution, not a short-term solution, for PCE. As of yet, no magic bullet relating to alternative energy projects has been found. Alternative energy projects are capital-intensive projects. Number 1633 MR. SIMMONS moved on to page 8, which discusses PCE funding. He informed the committee that in FY00 the PCE fund had a beginning balance of approximately $2.3 million, a carryover from FY99. Approximately $5.5 million was added to that for the Four Dam Pool revenue, which totals $7.8 million. The additional money was supposed to come from NPR-A. By the end of December, all of the dollars in the fund had been obligated to PCE, and thus there is no additional money to be obligated. Knowing that there are problems with the NPR-A funds, the Governor had requested review of a contingency. To his belief, Mr. Simmons said the Governor's supplemental budget proposed using an additional dividend from AIDEA of roughly $8 million in order to fund the rest of PCE for FY00. MR. SIMMONS mentioned Government Accounting Standards Board (GASB) rule 31, which says that all governmental entities must recognize income or losses on "our" investment at the end of the year, whether those are realized or not. Initially, he told members, the budget was calculated by trying to ignore GASB 31, which was how the first FY00 dividend number was determined. After more study, the decision was made not to ignore GASB 31, and thus more money could be put forth from a dividend standpoint. They also reviewed the projections for projects and loans and determined that they were behind for capital money. Therefore, staff is recommending to the AIDEA board that an additional dividend of $8 million and, as stated, the Governor is saying in his supplemental budget that money can go to PCE for FY00. If the legislature accepts that, the PCE program will be fully funded at the $15.7 million level for this year. MR. SIMMONS turned to the tougher issue of long-term funding. He said the Governor had requested that proposals to fund PCE in the long term be reviewed. He pointed out that the right side [of page 8] lists the long-term funding options that were reviewed. The Blue Ribbon Committee has reviewed federal funds, and there have been discussions with Washington, D.C., about federal funds. He believed that Mr. Ritchie had fairly well summarized the position of Alaska's congressional delegation in relation to PCE. There has also been review of pots of money and their potential use for PCE; however, for every pot of money, there are probably 100 constituencies for that money. Therefore, there is no proposal at this time. Number 1344 MR. SIMMONS directed the committee to page 9 [and page 10], the statewide energy plan. He explained that AIDEA, the U.S. Department of Agriculture and the Denali Commission began a project to redo the statewide energy plan. The plan was separated into three regions: the rural region, which is basically the PCE communities; the Railbelt region, which is Anchorage, Fairbanks and the Kenai Peninsula; and the Four Dam Pool - Juneau and Sitka. He pointed out that there could be some overlap in the communities. However, that is being reviewed. MR. SIMMONS noted that the plan was broken up into three places and two phases. Phase 1, completed in October 1999, basically attempted to accumulate some background and inventory of the system, identify the major energy problems and issues, and list all the possible solutions. He specified that Phase 1 was not to start all over, but rather to take all the information from the last 10 or 20 years and summarize that information in one document. Furthermore, Phase 1 was not intended to promote one solution over another, nor to throw out any potential solutions or problems. Those documents were created; the rural document is public information. MR. SIMMONS said Phase 2 is really the energy plan. Under Phase 2, they had worked with the stakeholders in the communities and attempted to narrow the issues with the potential solutions. They had attempted to put forward policies as well as a plan regarding how to implement that policy. He explained that the rural areas would be tackled first, which is a 12-18 month project, followed by Southeast Alaska and then the Railbelt. He explained that the Railbelt/Southeast pieces of Phase 1 have not been released because discussion with stakeholders in those areas have revealed that there may be changes. Thus there is no reason to make a document available because it may be moot later. Therefore, an internal call has been made to put those on the shelf. When nearing Phase 2 for those regions, then those "Phase 1s" will come off the shelf. MR. SIMMONS said for the rural areas, the various levels of management, maintenance and operation affect the cost of power and reliability. He noted that the management, maintenance and operations piece has already started and is led by USDA. With regard to the high cost of liability, a request for proposals (RFP) is being prepared. He was hopeful that in July or August there would be information regarding the capital needs on the rural power system upgrades. The remainder of the plan for rural energy will probably be completed in the next six to eight months after that. In conclusion, Mr. Simmons pointed out that page 12 addressed the rural cost reduction options. CHAIRMAN HUDSON commented that the development of this plan is only ten years late. Number 1032 REPRESENTATIVE GREEN asked about the sale of the Four Dam Pool under this conceptual plan. MR. SIMMONS informed the committee that the utilities have offered a two-pronged sales price. The utilities have offered $60 million in cash today and a $10 million "kicker" that may be available 20 years out, based on certain assumptions. Of course, the value of that $10 million is substantially less in the future than it is today. He pointed out that if there was a cash sale today of the utilities, the state holds a $14 million insurance fund. If these projects were sold to the utilities and that state got out of the risk completely, that $14 million could be made available. Therefore, the sales to the utilities would roughly result in $74 million. REPRESENTATIVE GREEN clarified that he was referring to the future of PCE with that portion - the Four Dam Pool - being out of the mix. MR. SIMMONS reiterated that there is a great short-term plan to fund PCE, which will last about five years, after which there will be no money. CHAIRMAN HUDSON made announcements about future meetings. He then discussed PCE as a subsidy in rural Alaska. He also expressed the need to review options such as fuel cells. He discussed his vision of having a company such as General Electric manufacturing fuel cells in the Matanuska-Susitna Valley in order to be a test bed. Discussions with fuel cell manufacturers indicate that the highest cost is the cost of the fuel, he noted. Chairman Hudson hoped that Alaska would not just sit on its laurels but would actively find alternatives. He thanked all of the participants. ADJOURNMENT There being no further business before the committee, the House Special Committee on Utility Restructuring meeting was adjourned at 9:35 a.m.