HOUSE SPECIAL COMMITTEE ON UTILITY RESTRUCTURING March 22, 2000 8:09 a.m. MEMBERS PRESENT Representative Bill Hudson, Chairman Representative John Cowdery, Vice Chairman Representative Pete Kott Representative Norman Rokeberg Representative Brian Porter Representative John Davies Representative Ethan Berkowitz Representative Joe Green (alternate) MEMBERS ABSENT All members present COMMITTEE CALENDAR HOUSE BILL NO. 248 "An Act relating to consumer choice for electric energy in Alaska; and providing for an effective date." - HEARD AND HELD HOUSE BILL NO. 169 "An Act relating to including the costs of expansion activities and political activities in rates of electric cooperatives." - HEARD AND HELD PREVIOUS ACTION BILL: HB 248 SHORT TITLE: ELECTRIC UTILITY COMPETITION Jrn-Date Jrn-Page Action 5/19/99 1651 (H) READ THE FIRST TIME - REFERRAL(S) 5/19/99 1652 (H) URS, L&C 3/15/00 (H) URS AT 8:00 AM CAPITOL 120 3/15/00 (H) -- Meeting Postponed to 3/22 -- 3/22/00 (H) URS AT 8:00 AM CAPITOL 120 BILL: HB 169 SHORT TITLE: ELEC.COOPS:EXPANSION & POLITICAL ACTIVITY Jrn-Date Jrn-Page Action 3/31/99 625 (H) READ THE FIRST TIME - REFERRAL(S) 3/31/99 625 (H) URS, L&C 4/28/99 (H) URS AT 8:00 AM CAPITOL 120 4/28/99 (H) SCHEDULED BUT NOT HEARD 5/05/99 (H) URS AT 8:00 AM CAPITOL 120 5/05/99 (H) SCHEDULED BUT NOT HEARD 3/15/00 (H) URS AT 8:00 AM CAPITOL 120 3/15/00 (H) -- Meeting Postponed to 3/22 -- 3/22/00 (H) URS AT 8:00 AM CAPITOL 120 WITNESS REGISTER PAT HARMAN, Staff to Representative Pete Kott Alaska State Legislature Capitol Building, Room 118 Juneau, Alaska 99801 POSITION STATEMENT: Presented information regarding HB 248 on behalf of the sponsor. GENE BJORNSTAD, General Manager Chugach Electric Association, Inc. P.O. Box 196300 Anchorage, Alaska 99519-6300 POSITION STATEMENT: Testified on HB 248. ERIC YOULD, Executive Director Alaska Rural Electric Cooperative Association 703 West Tudor Anchorage, Alaska 99503 POSITION STATEMENT: Testified on HB 248. NORMAN L. STOREY, General Manager Matanuska Electric Association 163 East Industrial Way Palmer, Alaska 99645 POSITION STATEMENT: Testified on HB 248. CHARLES WALLS, President and Chief Executive Officer Alaska Village Electric Cooperative 4831 Eagle Street Anchorage, Alaska 99503 POSITION STATEMENT: Testified on HB 248. MEERA KOHLER, General Manager Anchorage Municipal Light and Power 1200 East First Avenue Anchorage, Alaska 99501 POSITION STATEMENT: Testified on HB 248. GEORGE KITCHENS, Executive Vice President Golden Valley Electric Association 758 Illinois Street Fairbanks, Alaska 99701 POSITION STATEMENT: Testified on HB 248. DAWN BISHOP, Special Staff Assistant Regulatory Commission of Alaska 1016 West Sixth Avenue Anchorage, Alaska 99501-1963 POSITION STATEMENT: Relayed questions on HB 169. JEFF LOGAN, Staff to Representative Joe Green Alaska State Legislature Capitol Building, Room 214 Juneau, Alaska 99801 POSITION STATEMENT: Presented information on HB 169. ED WILLIS [Member, Matanuska Electric Association] 22424 North Birchwood Loop Chugiak, Alaska 99567 POSITION STATEMENT: Testified on HB 169. TUCKERMAN BABCOCK, Manager of Government and Strategic Affairs Matanuska Electric Association 163 East Industrial Way Palmer, Alaska 99645 POSITION STATEMENT: Testified on HB 169. ACTION NARRATIVE TAPE 00-5, SIDE A Number 0001 CHAIRMAN BILL HUDSON called the House Special Committee on Utility Restructuring meeting to order at 8:09 a.m. Members present at the call to order were Representatives Hudson, Cowdery, Kott, Porter and Green. Representatives Rokeberg, Davies, and Berkowitz arrived as the meeting was in progress. Number 0106 CHAIRMAN HUDSON called attention to a draft of a letter to U.S. Senator Frank Murkowski, saying it puts [committee members] on record in support of Senator Murkowski's proposed amendment [federal legislation S. 422], which would help Alaska get small hydroelectric plants without going through a very expensive and time-consuming court procedure. Chairman Hudson requested the signatures of those who agree with it. HB 248 - ELECTRIC UTILITY COMPETITION Number 0163 CHAIRMAN HUDSON announced that the committee would consider HOUSE BILL NO. 248, "An Act relating to consumer choice for electric energy in Alaska; and providing for an effective date." He clarified for the record that the work draft before the committee was 1-LS0923\D, Cramer, 2/1/00 (Version D). Number 0240 REPRESENTATIVE KOTT, Alaska State Legislation, sponsor of HB 248, explained that the bill had been introduced late in the last session. Considerable work had gone into it over the interim, resulting in the proposed committee substitute, Version D, before the committee. He had introduced the bill because a number of studies had recommended that Alaska proceed cautiously in a competitive environment. Rather than table those studies to collect dust, he had decided to introduce a bill that would at least generate discussion to see what direction the state would like to take as it diversifies and develops its energy resources. Number 0380 PATRICK HARMAN, staff to Representative Pete Kott, Alaska State Legislature, began his testimony with the disclosure that he had been a commissioner on the Anchorage Municipal Light and Power Commission for nine years and had served as chairman during the acquisition of the gas field. He stated that his loyalties at this time are to Representative Kott and the members of District 24. Mr. Harman proposed that he present a neutral introduction of HB 248, leaving it to the witnesses to provide their various viewpoints. MR. HARMAN said Section 1 consists of findings, which are relatively self-explanatory. Turning to Section 2, he called attention to a technical change that adds regulatory oversight, by the Regulatory Commission of Alaska (RCA), of power aggregators and power marketers. A power marketer means an entity that acts as an agent or intermediary in the purchase of electric energy, he explained, but does not take title to that energy. A power aggregator actually takes title and owns the electricity in the process of marketing it. Section 2 provides for the retail sale of electricity and introduces the concepts of power aggregators and power marketers into the statute. Number 0548 MR. HARMAN emphasized that Section 4, starting on page 4, is the "meat" of the bill. Lines 4-6 provide for an effective date and allow consumers to choose their electric service provider. Lines 7-15 describe the role of the RCA in the new competitive market. The RCA will have a major role if Alaska adopts competition or restructuring of the electric utility industry. The RCA will basically set the ground rules, but its rate-making ability will be severely curtailed. In a competitive market, it is not necessary to have the rates set by a regulatory commission. Mr. Harman highlighted lines 16-17, saying they would allow for rural competition by January 1, 2002, if the commission allowed. He imagined that the committee would be revisiting those particular two lines during testimony, he added. Number 0670 MR. HARMAN explained that page 4, line 8, through page 5, line 16, further refines the issues that the RCA will be required to address. On line 8, subsection (7), the generation, transmission, distribution services and costs are unbundled in service areas open to competition. A critical task for the RCA to undertake is the unbundling of the network. This allows people to sell electricity across the current service areas, becoming common carriers. Without unbundling the distribution and transmission network, duplicate facilities would have to be built. MR. HARMAN said page 5, lines 20-28, deals with recoverable stranded costs. This is a complex issue and is probably the core of a level playing field - what is and what is not allowed as a recoverable cost. MR. HARMAN turned to the last page and read the definition of recoverable stranded cost: "Recoverable stranded cost means the cost of public utilities subject to economic regulation by the company will be allowed to recover as either a transition surcharge or other recoverable rate category." If an asset is not allowed to be recoverable, and that asset is not producing revenue, he said it is probably indebted by bonds and will not be allowed to repay that debt with revenue from the rates. This primarily involves generation facilities. He surmised that there would be lots of testimony in this area because it is critical to having a level playing field in the competitive electricity industry. MR. HARMAN said page 6, lines 9-10, restricts competition to urban areas unless otherwise allowed by the RCA. Page 6, lines 11-28, has definitions of terms used in HB 248. Section 5 establishes an effective date. Mr. Harman volunteered to answer questions. Number 0915 CHAIRMAN HUDSON asked if the definitions are new ones, not previously published. MR. HARMAN said the definitions are not new, but they have not been published in statute. CHAIRMAN HUDSON noted for the record that Representatives Davies and Berkowitz had joined the meeting. Number 0943 REPRESENTATIVE PORTER asked why on page 5, under "recoverable stranded costs," it refers specifically to investments made after 1995. He asked what is magic about 1995. MR. HARMAN answered that the legislature does not often act retroactively, but this recognizes that the gas field was purchased in 1996. Number 0995 REPRESENTATIVE GREEN inquired about the last line on page 5, where it talks about the power marketer that is not a public utility being subject to regulation by the RCA "only as provided in this section." He asked whether "this section" means AS 42, 42.05 or AS 05.915? MR. HARMAN pointed out that the next page goes into what the commission will require of power aggregators and power marketers. It requires registration with the RCA and bonding, and on line 7 there is a price cap, which is an attempt at consumer protection. REPRESENTATIVE GREEN pursued clarification that "this section" refers only to AS 42.05.915. MR. HARMAN affirmed that. Number 1048 REPRESENTATIVE GREEN referred to page 3 where it says there is a price cap. He said he could not tell what the cap is applied to. MR. HARMAN replied that the cap would apply to the carrier of last resort, which would probably be the utility that was historically in the service area. If the older utility was charging 10 cents and somebody new was bringing in electricity for 9 cents, the recoverable stranded costs would be recovered in the "wheeling rates," the fee that the carrier would charge for delivery of the electricity. Number 1125 REPRESENTATIVE GREEN said that was his concern, that it could be an unfair advantage to a new supplier because the original utility would have to charge [an extra 2 cents] to recover its stranded cost. MR. HARMAN confirmed that Representative Green was getting at the crux of a public policy call, in that if there are going to be winners and losers, what happens to that investment they [the losers] have made? CHAIRMAN HUDSON noted for the record that Representative Rokeberg had joined the meeting. Number 1189 REPRESENTATIVE DAVIES asked about the definition, at the bottom of page 6, of an "urban area," which determines where HB 248 is applicable. He noted that the definition is quite loose, referring to "a municipality served by interconnected public utilities." He wasn't sure what "interconnected" means. MR. HARMAN agreed that it was a weak, broad definition that probably needs work. Number 1300 CHAIRMAN HUDSON announced that RCA staff was listening online and would take questions. Number 1341 GENE BJORNSTAD, General Manager, Chugach Electric Association, Inc., began his testimony by saying the group's members, like consumers in other parts of the country, support competition in the electric utility industry and favor having the option to choose their power supplier. Chugach Electric Association, a consumer-owned cooperative, supports competition and the consumers' right to choose. Inaction is the wrong action, he said. Each year that passes without customer choice is a year during which the customer is denied the opportunity to benefit from exercising choice, "and when innovation and efficiency are not compelled by the pressured of competition." MR. BJORNSTAD said Chugach Electric recognizes that regulation will be required to assist with the transition to competition, and it supports a thoughtful and cautious approach. It supports a price cap at least for a few years to allow for a smooth transition. It supports HB 248 because it begins consumer choice cautiously with plenty of oversight by the RCA. He stressed that there is no reason to delay customer choice. Studies have been going on for several years, and no one has come up with any "terrifying problems." Those opposed to competition and deregulation advocate more and more studies just to delay a decision, he alleged. Number 1597 MR. BJORNSTAD said that, in a nutshell, HB 248 would allow the RCA to develop regulations to allow customer choice by July 1, 200l, so that customer choice would start in the Railbelt by September 1, 2001. The bill contains substantial consumer protections. It addresses stranded investments. The bill establishes that power marketers or aggregators, while not subject to full regulation as public utilities, are subject to consumer protection by the RCA. The bill provides authority for the RCA to prevent undue discriminations by vertically integrated utilities in favor of their own retailers. It gets the RCA out of the business of deciding when and where to site new generation resources. It caps retail rates offered by aggregators and marketers at the level set by the RCA for carriers of last resort, which are the utilities. It reaffirms the authority of the RCA to establish open-access tariffs for transmission facilities. MR. BJORNSTAD cautioned that in testimony to follow, listeners should be alert for the smokescreen word "complex," which he said translates to "let's delay and study some more." He also suggested they listen for loose references to problems in the Lower 48 with deregulation and competition. "We're talking about the Railbelt, and the Railbelt is not particularly complicated," he said. Mr. Bjornstad concluded that HB 248 is a good vehicle for transition to consumer choice. It is safe, simple, and should be implemented now. Number 1838 REPRESENTATIVE BERKOWITZ asked what the price benefits would be to consumers. MR. BJORNSTAD said he would not want to predict any specific price decreases or changes. He didn't think prices would go any higher with the price cap; they should go lower. Number 1868 REPRESENTATIVE DAVIES asked if Mr. Bjornstad's reference to the Railbelt indicated he thought the Railbelt was what HB 248 meant by an "urban area." MR. BJORNSTAD said that was his interpretation. REPRESENTATIVE GREEN asked if all the states that have started down this road or have [deregulated] still favor deregulation. MR. BJORNSTAD said he thinks there are some concerns, in some states, that deregulation is not working as well as they thought it would. He didn't think any of them have turned around and gone the other way, however. Number 1928 REPRESENTATIVE GREEN wondered if, without a reliable intertie along the Railbelt, the various generators would be able to offer excess power at a lower rate than they are charging their customers now. Could an aggregator buy wholesale power and redistribute it at a more competitive rate? MR. BJORNSTAD said he didn't think Chugach or anybody else could afford to sell below the cost of producing power. "But obviously," he said, "when we negotiate wholesale contracts, we negotiate different terms for different contracts. And the same thing would happen with an aggregator if we had one." Number 2020 REPRESENTATIVE GREEN asked, if the co-ops are already operating at the lowest cost, how an aggregator would be able to sell for less. MR. BJORNSTAD replied that Chugach is operating at the lowest cost now, but that he couldn't speak for the other utilities. Number 2049 REPRESENTATIVE ROKEBERG asked about the cutoff date of 1995 for the recovery of stranded investment. MR. BJORNSTAD explained that it was about 1995 when people in the country started talking seriously about retail competition and deregulation. If a utility built new generation after 1995, it was with the knowledge that competition and deregulation might come, and that utility was running the risk of having stranded investment. Number 2081 REPRESENTATIVE ROKEBERG asked what was meant by "unbundling" of services. MR. BJORNSTAD said "unbundling" in the electric utility industry means breaking down the costs associated with generation, distribution, transmission, and other services so the customer can see the costs itemized for each one of those areas instead of having them combined in one rate that covers everything. Number 2116 REPRESENTATIVE ROKEBERG asked about the possibility that there would be a dual tariff on one line. MR. BJORNSTAD said he did not think there would be a dual tariff. REPRESENTATIVE ROKEBERG said it would be interesting to see what major capital investments have been made in the Railbelt area from 1995 and since. He asked if the committee staff could get that information for him. Number 2248 REPRESENTATIVE GREEN observed that on page 6, it says, "a price cap for retail electric energy equal to the rate charged by the carrier of last resort for similar electric load." He wondered if that rate might include some payout of what would become stranded costs if someone else took part of those customers. He asked Mr. Bjornstad if that meant a newcomer would have an unfair advantage, or if Chugach Electric would restructure its rates to be competitive. Number 2203 MR. BJORNSTAD said he thought that if it were a recoverable cost, the power marketer or aggregator would have to have that in its rates, too. That would be something set by the legislature or the regulator. CHAIRMAN HUDSON asked if that would be something the RCA would determine. MR. BJORNSTAD said he thought it would. Number 2221 CHAIRMAN HUDSON summarized: We require unbundling so the consumer can see all of the associated elements of cost, and the RCA would be responsible for making certain that the stranded costs would be recovered in one form or another. And if competition were to come in and take over certain customers, the competitor would also have to take over the underwriting of the recoverable costs of the stranded investments. MR. BJORNSTAD concurred with that summary. Number 2248 REPRESENTATIVE GREEN said he thought that somewhere in HB 248, the RCA was excluded from dealing with that. CHAIRMAN HUDSON said he thought so, too. Number 2262 REPRESENTATIVE GREEN referred to page 5, where it says that "other than that the power aggregator or the power broker would not be subject to the RCA," other than as provided by AS 42.05.915. He asked Mr. Bjornstad, "Does that give that [aggregator] an advantage over your organization?" MR. BJORNSTAD replied, "No, I don't believe it does." CHAIRMAN HUDSON noted that three people in Orlando, Florida, were online waiting to testify. Number 2316 ERIC YOULD, Executive Director, Alaska Rural Electric Cooperative Association (ARECA), was the first to testify by teleconference from Orlando. He said there was only one other witnesses left to testify, as the third had left to catch an airplane. He explained that ARECA is the trade association for the electric utility industry in Alaska. The industry includes most of the utilities throughout the state, virtually all of those in the Railbelt plus the major utilities in rural Alaska. Collectively, the member utilities generate about 90 percent of the state's electricity. MR. YOULD cautioned that there might be some confusion in subsequent testimony because the original HB 248 never received a committee hearing; hence all of his members had been going under the assumption that they would be discussing the original draft of the bill, which was quite a bit different from Version D. The original bill required wholesale competition before going to retail competition. It also had provisions for exclusion of competition in rural Alaska, whereas the industry seriously questions whether rural competition is even possible there, physically or economically. MR. YOULD indicated he would like to update the committee on where the industry is now and where it is trying to go with retail competition, and then to comment on what the industry thinks about retail competition. Ultimately, he stated, "what we are trying to do is not pass a bill for the bill's sake, but first try and decide whether retail or wholesale competition is even good for Alaska, and we haven't done that yet." He said there a big question in some people's minds as to whether a state that is not overwhelmed by investor-owned utilities, that has a very immature and weak transmission system with very few competitors, provides the template for a successful [competitive] venture. Number 2422 MR. YOULD recalled that in 1998, the legislature set up a special committee to study deregulation over the next six months. One of that committee's recommendations was that the issue, which is complex, needs more study. It then recommended a joint venture with the then-Alaska Public Utilities Commission, a study to determine whether or not retail competition should come to Alaska. The legislature brought in CH2M Hill to do the study. CH2M Hill subsequently gave its recommendations to the legislature. Last year, based on the recommendation of the special committee, the House had created the Special Committee on Utility Restructuring. TAPE 00-5, SIDE B [Numbers run backward] MR. YOULD continued. At the same time, he said, the RCA was put in place, totally replacing the Alaska Public Utilities Commission. The chair of the RCA has said that the commission will not be able to render an opinion on restructuring until next year. At the conclusion of the legislative session last year, the House Special Committee on Utility Restructuring concluded that this is a complex issue that should remain the purview of the legislature, and that the regulators should keep their hands off until the policy makers decide what should be done. Number 2443 MR. YOULD recalled that the CH2M Hill study said that benefits could come out of retail competition, but the cost of achieving those benefits might outweigh those benefits. As a result, Alaska may not want to proceed into retail competition. Basically, it said that other steps need to be taken beforehand. One step is conducting modeling studies. The CH2M Hill study suggested that would be a substantial effort and cost about $2 million. Competition in the electric utility industry is a major decision being made for the state, and Mr. Yould said he thinks it is premature to consider HB 248 until a decision has been made about whether we [Alaska] should actually be restructuring. MR. YOULD noted that it had been recommended earlier that deregulation would be good because there wouldn't be as much regulation. He does not think there has been any less regulating as a result of deregulation of the telecommunications industry. Two weeks ago, RCA Commissioner Will Abbott indicated that the RCA felt there would be significantly more regulation as a result of deregulation of the electric utility industry. Number 2365 MR. YOULD said the utility industry has been wrestling with what the values of deregulation are to Alaska. "I frankly think our people [those in the electric utility industry] are in the best position to make that determination," he said. "We respect the opinion that Chugach Electric has expressed, but the rest of our [ARECA] membership has a different opinion. MR. YOULD said Chugach Electric favors retail competition, but not wholesale competition, because "they presently maintain and control about 95 percent of the wholesale power market." Other ARECA members, especially in the Railbelt, feel that if competition comes to Alaska, it should come at the wholesale level first to preclude an unbalanced playing field. Others feel that competition would reduce reliability in the Railbelt and could increase the ultimate cost of power. Number 2302 MR. YOULD said most ARECA members oppose the idea of conducting pilot programs as a prelude to competition. He added: There is a strong feeling that we could probably better learn by watching some of the pilot programs that are taking place in the Lower 48 and the competition that is taking place down there, as opposed to trying to conduct pilot programs in Alaska. MR. YOULD said the industry group also strongly feels that it is going to be a long time before any type of competition is going to work in rural Alaska, which has even less of an economic [base] and infrastructure than does the Railbelt. He restated his opinion that it is premature to consider HB 248, saying ARECA particularly opposes Version D because "it doesn't appear to provide the level playing field that is needed if we are truly going to have retail or wholesale competition in Alaska." Number 2223 CHAIRMAN HUDSON thanked Mr. Yould for his testimony. He then commented that he did not think it premature to take up the issue of deregulation at this time. Throughout the entire previous session, the committee had been looking at the studies and educating itself. He said he thinks it is time for "a snapshot as to just where this issue is." He agreed that the dialogue needs to be finished before making a decision, but thinks it is timely to take a look at the issue again. Number 2189 NORMAN L. STOREY, General Manager, Matanuska Electric Association, a member-owned cooperative, said he did not think either the original version or the revised version of HB 248 should be passed. A law that restructures the entire utility business in Alaska without first knowing that a change of this magnitude would be in the best interests of Alaska is a high-risk situation. If the benefits cannot be confirmed, then HB 248 should be set aside until those questions can be answered. Restructuring should yield benefits. So far, there is no hard evidence that there would be benefits. Restructuring may seriously impact the reliability of electric systems because a change of this magnitude in industry infrastructure could cause a change in the way that the business operates. For example, erosion of some of the utility's financial resources could result in the rethinking of re-investment into systems. It also may inhibit the utility's ability to finance long-term plant maintenance projects. MR. STOREY said Version D leaves in place the existing hopes of power agreement. Homer Electric Association is a wholesale contract load for Chugach Electric, under binding contractual obligations through the year 2014. A large power supplier like Chugach, holding long-term purchase agreements, will have advantages over the smaller utilities if restructuring should occur. Neither HB 248 nor Version D resolves this problem. Number 2077 MR. STOREY reminded the committee of recent testimony from the RCA chair, Nan Thompson, who said more time would be needed to fully understand the issues of electric utility restructuring, and that the RCA wished to take the time needed to do that. There are so many issues involved in restructuring, affecting every consumer in Alaska, that it is best to move slowly and deliberately, he said. The RCA must be given latitude and time to be thorough in its review of the issues. In his opinion, HB 248 is not in the best interest of the public. Number 2011 CHARLES WALLS, President and Chief Executive Officer, Alaska Village Electric Cooperative (AVEC), testified by teleconference from Anchorage. He said deregulation may be appropriate for the Railbelt but it is not appropriate for rural Alaska. He then noted that on page 4 under Section 4, subsection © says that by January 1, 2002, the commission may adopt regulations to allow consumers outside the urban area to choose their electric supplier. He thinks it "opens the door wide, exposing the rural areas of the state to the provisions of this bill." He asked for deletion of that section. MR. WALLS revisited the definition of "urban area" on page 6. He noted that AVEC serves interconnected rural villages, which would fit under that definition of "urban area," and he does not think that was the intent. He suggested that the language be amended to specify that it is referring to the Railbelt, or to specify a population threshold such as "municipalities of more that 25,000 people." He concluded by saying that retail competition would not make any sense in the tiny markets of the rural villages. Number 1907 MEERA KOHLER, General Manager, Anchorage Municipal Light and Power (ML&P), testified by teleconference from Anchorage. She said since 1997, Chugach Electric Association has been engaged in "a strenuous effort to leapfrog the logical processes leading toward restructuring of the electric industry by advocating the immediate imposition of full retail competition in the Anchorage area." House Bill 248 originally moved toward retail competition by first instituting wholesale competition, then unbundling rates and cost allocations, next considering a retail competition pilot program, and finally moving into full retail competition. MS. KOHLER reported that since HB 248 was introduced, valuable lessons have been learned in the Lower 48 about the complexities and dangers of restructuring. One critical problem that has been identified concerns the physical limitations of the transmission systems. In recent months, significant reliability problems have emerged in an interconnected system hundreds of times the size and capacity of Alaska's. Number 1828 MS. KOHLER reported that there has been animated debate in the Lower 48 focusing on what size market - 20,000, 30,000 or 50,000 megawatts - is large enough to limit market power to acceptable levels. Alaska's entire Railbelt market is 700 megawatts, smaller than pilot programs in the Lower 48. Ms. Kohler recalled that the CH2M Hill report on restructuring in Alaska expressed concern about the issue of market power. Number 1790 MS. KOHLER said Congress has been grappling with restructuring bills over the last few years, and it has become clear that no comprehensive electricity restructuring bill will be enacted at the federal level this year. She called HB 248 "a thinly disguised effort by Chugach Electric Association to advance its agenda of retail competition in Anchorage while it is still able to leverage its market power to full advantage." Additionally, she said, "the new language [of Version D] that disallows stranded cost recovery for assets acquired after 1995 very clearly targets the $125 million gas field that we [ML&P] purchased in 1996." She stated that ML&P strongly supports a considered, structured approach to competition in the electric industry. She added, "We believe that this legislature and the RCA have given this important issue the critical scrutiny that it merits, ... and a lot more remains to be done." Number 1724 MS. KOHLER commented on several points made by Mr. Bjornstad. First, he had said he thought Chugach Electric was already supplying reliable power at the lowest cost; Ms. Kohler said she believes both ML&P and Golden Valley are doing so, too. She said the contract recently awarded to ML&P to supply power to Golden Valley Electric in Fairbanks is very small, "not even a blip on the radar screen of the larger wholesale competition market." MS. KOHLER disagreed with Mr. Bjornstad's assertion that the Railbelt is not complex, and that it should be a simple matter to institute competition there. She explained, "Smaller is more complex. We have a very fragile transmission network, and there are a lot of issues that need to be addressed long before any form of competition." Ms. Kohler also said the purpose of the open-access tariff Chugach recently filed was "so that they could step in and serve a very small, firm-power load to Elmendorf Air Force Base." She commented, "We're talking about a one to two- megawatt sale here, and Chugach wants to step in and snatch that away from us as well." Number 1603 GEORGE KITCHENS, Executive Vice President, Golden Valley Electric Association, testified by teleconference from Fairbanks. He said that in general, Golden Valley agrees that competitive markets are more efficient that are regulated markets. He added, "The intent of HB 248 to push along the agenda of electric restructuring is laudable, but we can't support the bill at this time." MR. KITCHENS said regulation has served the country well, developing infrastructure to bring electricity to places in the United States and in Alaska where it might not have been otherwise. However, he thinks the job of regulation is not complete in Alaska, which is not completely interconnected to other states or to Canada. Furthermore, he said, Alaska does not have enough buyers and sellers for competition to work effectively. Number 1436 MR. KITCHENS said Golden Valley does not support the use of pilot programs as a means to test competition. Winning new customers through advertising and marketing efforts is expensive, and electric power marketers are reluctant to enter pilot programs and incur huge expenses for a temporary shot at the market. So pilot programs are not very convincing as a demonstration of what competition truly is like. MR. KITCHENS told members that Golden Valley is concerned about stranded costs from the wholesale marketplace. If a non- generating utility has a long-term purchase power commitment with a power generation utility, an element of that contract usually contains contract demands that will not go away even as the load decreases, so one is going to leave that cost with people who are buying wholesale power and are seeing their demand drop from a loss of customers. In closing, he said that while some elements of HB 248 are good, it is not the comprehensive look and carefully crafted piece of legislation that will best serve all Alaskans. Number 1236 REPRESENTATIVE GREEN noted that he, as well as several other legislators, is a member of the National Energy Council, made up of ten oil and gas producing states, Venezuela, and the Canadian province Of Alberta. Electrical deregulation has been a major issue in that group's quarterly meetings for the past three years. Three years ago, deregulation was the "greatest thing since sliced bread," and states were converting to it. As time has progressed, however, that issue has begun to dim. "Some states that went into it have rescinded," he remarked. "Others are really questioning it." REPRESENTATIVE GREEN said the group's opinion has shifted away from an attitude favoring a national policy on deregulation. Various states still have various attitudes on deregulation, but the overwhelming and absolute unanimity now is that the individual states should decide, because one size does not fit all. Representative Green emphasized that he believes competition has made this country great, but just because it says "competition" doesn't necessarily make it good. He stated: What we have found is that the more rural a state, the less advantageous competition is. Texas, Oklahoma, Louisiana, and New Mexico are in favor of deregulation because they have tremendous numbers of generations [of electric power]. Mississippi, Colorado, and Wyoming, on the other hand, are vehemently against deregulation. Alabama, Arkansas, and Alaska are in the process of trying to determine. So it is a real mixed bag, and I think that is why they decided against a national energy policy. Number 1097 REPRESENTATIVE GREEN said the group has found that vertical disaggregation has been advantageous, but that it is not necessarily beneficial to go into an area where there are very few generators and then try to encourage retail deregulation and competition. Number 1061 REPRESENTATIVE PORTER asked the RCA representative online whether the RCA, now or in the near future, could tell the committee if the electrical utilities - at least the major ones in the Railbelt - are working at appropriate levels of cost versus rates. DAWN BISHOP, Special Staff Assistant, Regulatory Commission of Alaska, answered that the commissioners had asked her to take any questions so they could respond. However, she said she knew that they had been looking at all of those aspects. CHAIRMAN HUDSON asked Ms. Bishop to take back not only the question Representative Porter had just asked, but also the other questions that had come up during the testimony. He said it would be helpful to have the RCA's responses, questions or suggestions for further consideration by the committee on the subject of deregulation. He then addressed Representative Kott, saying he thought the committee needed some additional information from the new RCA. Number 0868 REPRESENTATIVE ROKEBERG observed that HB 248 is a very broad piece of legislation and the committee substitute [Version D] is a substantial change from the original bill. He said he had numerous questions, and that he thought the bill needed further work before it is moved to the House Labor and Commerce Standing Committee, which he chairs. He said he would be happy to work with the sponsor of HB 248 on some of his questions. Number 0797 CHAIRMAN HUDSON asked the committee staff to assemble information on certain topics that had been raised, such as including wholesale power and a revised definition of "urban." He said he would like to put out a product that looks like it is going to do something constructive for the consumer and garner some broader level support from what he considers to be some of the experts out in the field. [HB 248 was held over.] [A brief at-ease was taken.] TAPE 00-6, SIDE A CHAIRMAN HUDSON called the meeting back to order at 9:35 a.m. HB 169 - ELEC.COOPS:EXPANSION & POLITICAL ACTIVITY Number 0046 CHAIRMAN HUDSON brought before the committee HOUSE BILL NO. 169, "An Act relating to including the costs of expansion activities and political activities in rates of electric cooperatives." REPRESENTATIVE GREEN, speaking as sponsor of HB 169, explained that over the past few years, there has been a lot of money expended through the media for a potential takeover involving two cooperatives in the Anchorage and Matanuska-Susitna areas. Prior to that, there was some problem involving the Matanuska Electric Association and Chugach Electric Company. He said all of that had been done without the approval of the members of the co-ops involved. Those costs constitute a considerable amount of money that in an efficiently run organization could reduce the ratepayers' costs for electricity. That was the premise upon which this bill was introduced. Number 0153 JEFF LOGAN, Staff to Representative Joe Green, Alaska State Legislature, noted that when HB 169 was scheduled last year, former Representative Ed Willis waited for a couple of hours and didn't have a chance to testify. CHAIRMAN HUDSON said he was aware of that, and would call on Mr. Willis first. MR. LOGAN asked members to keep in mind the idea of customer choice that they had heard repeatedly from supporters of HB 248. He said the core mission - and reason for being - of Alaska's member-owned cooperatives is to provide electricity to their members. Thus HB 169 only affects those members. Co-ops will have to comply with HB 169 only if they engage in political or expansion activity, both of which are defined in the bill. MR. LOGAN noted that the co-ops' obligations under HB 248 also are clearly specified in the bill. The co-op must advise the member/owner that a portion of the rate is going to be used for political or expansion activity; identify how much of the rate will be used; tell the member/owner that the management of the cooperative will not refuse to serve or discriminate if the member/owner does not wish to participate; and receive the consent of the customer. MR. LOGAN referred to another bill, which he said was really this bill with a different number, that was heard in the committee in 1998. He said the message in opposition to that bill then was, "It's too early. We don't need it." While the utilities were before the legislature saying the bill was not needed, however, they were spending hundreds of thousands of dollars of members' rate money on expansion activities. Representative Green has re- introduced the bill because he thinks it is needed, Mr. Logan explained. The assumption [of co-op members] is that they are only paying to have electricity delivered to their house, and they should be able to decide if they want to pay for other activities. Number 0490 ED WILLIS, Member, Matanuska Electric Association(MEA), an electric power cooperative, began his testimony by reading: MEA wants to finish what it started. Joining Chugach will make MEA stronger when deregulation arrives, and huge savings still await us. Members should benefit from those savings. That's why your MEA board proposes a $500 payment to each member. MR. WILLIS said that statement, taken from a direct-mail piece that MEA had sent to its members, illustrates the connection between deregulation and one utility's very expensive reaction to it: the attempted hostile takeover of a much larger neighbor utility. "That incredibly expensive and ultimately totally unsuccessful takeover plan by MEA is what prompted me into action," he said, "and why I am now before you supporting this legislation, HB 169." MR. WILLIS said last year he co-chaired a committee formed to recall members of the MVA board of directors. The dissidents' position was that the board's actions with respect to the failed takeover attempt had not been in the members' best interests. Mr. Willis said MEA management had vigorously fought the recall effort and the petition to place a bylaw amendment before the members. Ultimately, after having to go to court repeatedly to get the judge to order MEA to act according to its own bylaws, the voters were allowed to vote on both matters, but not before MEA spent hundreds of thousands of dollars of ratepayers' [payments] to fight the effort. MR. WILLIS said he thinks it is wrong for a member like himself to be forced to pay for an expensive legal battle in order to get MEA management to comply with the cooperative's own bylaws. It was only after a court order that MEA ultimately disclosed $740,000 in expenses for the Chugach Electric Association takeover. "Why should the membership have to get a court order to have their cooperative disclose how much they are spending and on what?" he asked. Number 0709 MR. WILLIS said he objects to the spending and does not want to pay for it in his light bill. After another court battle, the dissident group was able to compel MEA to place on the annual meeting ballot a proposed bylaw amendment to accomplish what HB 169 seeks to do. MEA spent hundreds of thousands of dollars fighting the amendment. Mr. Willis said co-op administrators purposely placed the amendment on the back of a voters' packet to create confusion about the bylaw amendment and then duplicated the amendment so it was unreadable. MR. WILLIS testified that the amendment almost passed. He is sure that it would have done so if MEA had not spent ratepayers' funds to defeat it. The court ordered MEA to pay the dissidents' legal fees totaling $89,000. The co-op has appealed the decision, and Mr. Willis says he strongly objects to members' fees being spent for the costs of that appeal. MR. WILLIS emphasized that electricity is vital. He said he has no qualms about paying for costs associated with its generation, transmission, and distribution. However, he strongly objects to being forced to pay for "speculative, non-necessary expenses." He said he believes HB 169 is good public policy to employ while debate over restructuring is underway. Once a long-term, defined plan for the future of electric deregulation is in place, it might be appropriate to revisit the issue. Meanwhile, stopping the kind of wasteful spending such as that in the MEA service area would be a positive step for all the member/owners of electric cooperatives throughout the state, he said. Number 0921 TUCKERMAN BABCOCK, Manager of Government and Strategic Affairs, Matanuska Electric Association, said he certainly could sympathize with Mr. Willis' position. However, he pointed out, the board of directors at MEA, like those of every other co-op, is elected by the members. There are annual elections, incumbents are defeated, and changes take place in that fashion. He took issue with the premise that it was unwise for MEA to have spent money on the effort to acquire Chugach Electric. "Why is it unwise to spend $500,000 or $600,000 if what's on the table is saving $100 million?" he asked. He suggested that for membership, it had been a wise effort, even though it was ultimately unsuccessful. MR. BABCOCK pointed out that MEA members had endorsed the effort to acquire Chugach with a 59 percent advisory vote. Members voted against the bylaw amendment, 54 to 46 percent, and MEA suggests that the legislature not force a method of business operation where any particular member of 32,000 can object to any particular activity undertaken at any particular time and get his or her 2.5 cents or 5 cents back with each objection at each stage of that process. Mr. Babcock said the appropriate method for making changes in co-op structure is through the board of directors. He urged the committee to leave the existing structure in place and not support HB 169. Number 1045 CHAIRMAN HUDSON declared that discussion of HB 169 would be continued at the next meeting. He apologized to those waiting on the teleconference network and said staff would contact them when HB 169 was going to be considered again. [HB 169 was held over.] CHAIRMAN HUDSON said he would like to have a round-table discussion on Power Cost Equalization at the next meeting, inviting Representatives Barnes and Berkowitz, along with anyone else who had ideas on funding for power cost equalization. He indicated a desire to put together a plan to guide work over the interim. Number 1128 REPRESENTATIVE PORTER suggested inviting the co-chairs of the House Finance Standing Committee or that committee's staff to participate. CHAIRMAN HUDSON said he would do so, and he would contact a number of people who are working on the subject, in order to see, from a policy perspective, "what's shakin' out there." ADJOURNMENT Number 1154 There being no further business before the committee, the House Special Committee on Utility Restructuring meeting was adjourned at 9:50 a.m.