HOUSE SPECIAL COMMITTEE ON UTILITY RESTRUCTURING April 12, 2000 9:12 a.m. MEMBERS PRESENT Representative Bill Hudson, Chairman Representative John Cowdery, Vice Chairman Representative Pete Kott Representative Norman Rokeberg Representative Joe Green (alternate) MEMBERS ABSENT Representative Brian Porter Representative John Davies Representative Ethan Berkowitz COMMITTEE CALENDAR HOUSE BILL NO. 169 "An Act relating to including the costs of expansion activities and political activities in rates of electric cooperatives." - MOVED CSHB 169(URS) OUT OF COMMITTEE PREVIOUS ACTION 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 3/22/00 (H) Heard & Held 3/22/00 (H) MINUTE(URS) 3/29/00 (H) URS AT 8:00 AM CAPITOL 124 3/29/00 (H) Heard & Held 3/29/00 (H) MINUTE(URS) 3/31/00 (H) L&C AT 3:15 PM CAPITOL 17 3/31/00 (H) 4/05/00 (H) URS AT 8:00 AM CAPITOL 120 4/05/00 (H) 4/12/00 (H) URS AT 9:00 AM CAPITOL 120 WITNESS REGISTER NANETTE THOMPSON, Commissioner/Chair Regulatory Commission of Alaska Department of Community and Economic Development 1016 West Sixth Avenue Anchorage, Alaska 99501-1963 POSITION STATEMENT: Testified on HB 169. ACTION NARRATIVE TAPE 00-8, SIDE A Number 0001 CHAIRMAN BILL HUDSON called the House Special Committee on Utility Restructuring meeting to order at 9:12 a.m. Members present at the call to order were Representatives Hudson, Cowdery, Kott, Green and Rokeberg. HB 169-ELEC.COOPS:EXPANSION & POLITICAL ACTIVITY Number 0064 CHAIRMAN HUDSON announced the first order of business would be HOUSE BILL NO. 169, "An Act relating to including the costs of expansion activities and political activities in rates of electric cooperatives." [The bill had been presented at the committee's March 22 meeting, and testimony was heard on March 29.] Number 0093 REPRESENTATIVE GREEN, sponsor of HB 169, explained that the thrust of the bill is to ensure that cooperatives do not misuse funds in political or other non-essential business. Because co- ops are charged with providing the most reliable, lowest-cost energy, it seems to him a misuse of funds for them to get into advertising wars and major media [campaigns]. He pointed out that Chugach [Electric Association, Inc.] had expended nearly $800,000 - and he doesn't even know how much MEA [Matanuska Electric Association] expended - in a hostile takeover attempt in 1998. That is what prompted this bill. The intent is to try to ensure that the existing laws are upheld and that expenditures made by a regulated agency are reviewed on behalf of the ratepayers. Number 0261 VICE CHAIRMAN COWDERY asked whether it would be a correct analogy to say that it [the utilities' use of funds] would be very similar to the legislature's taking general fund money to get members re-elected or others defeated. Number 0299 REPRESENTATIVE GREEN said a better analogy might be if those funds were used to be persuasive to a political party. He added, "That is the amendment we are going to make, Mr. Chairman. There is a reference to candidates, and we're going to strike that." He introduced Amendment 1 [1-LS0766\D.2, Cramer, 4/11/00], which he said had been drafted in response to Representative Porter's concern. It read: Page 2, line 28: Delete "or for a candidate" Page 2, line 29: Delete all material. Reletter the following subparagraph accordingly. Number 0435 REPRESENTATIVE GREEN moved to adopt Amendment 1. There being no objection, it was so ordered. He indicated that he might have a conceptual amendment after the committee heard from Ms. Thompson. Number 0468 NANETTE THOMPSON, Commissioner/Chair, Regulatory Commission of Alaska (RCA), Department of Community and Economic Development, testified by teleconference from Anchorage. She confirmed that she had heard and understood Amendment 1. CHAIRMAN HUDSON asked her to comment about the bill and the substance of it, as amended. Number 0483 MS. THOMPSON said she does not disagree at all with the intent of the bill, but she does not think it is necessary because of the existing statute. Right now in AS 42.05.381, the costs of political contributions or public relations expenses, except for some limited exceptions, are not allowed in rates. That being the case, she surmised that the committee would want to know why the contrary appears true. She said it is important to understand the distinction between the rate-setting procedures now in use and what the bill proposes. She explained: The bill here talks about asking for customers' permission before a particular expense is incurred by the utility. The way utility rate making is structured, the utility has to get approval from the RCA for a specific rate; they have to prove that all the costs that go into making that rate are allowable. We see [that] in the context of requests from a utility for tariff changes or a major rate increase. They can't do it until we approve it. Sometimes we approve it, if it is relatively minor. ... If we don't have enough information, we suspend it and do an investigation. We sometimes have a hearing, require further financial filings. But this issue of political contributions is one that arises in the context of rate cases. Number 0613 MS. THOMPSON recalled her earlier testimony that the Alaska Public Utilities Commission [predecessor to the RCA] had not been doing a lot of rate cases, so the rates that utilities were charging had not been reviewed, as a whole, for some time. She said the RCA has scheduled rate cases for all of the major electric utilities this year, and the issue of political contributions or campaigns is an issue in at least two cases that are now pending. She elaborated: What happens after we approve a rate is, basically, the utility is allowed to charge according to those costs. We only allow them what costs are directly related to generating electricity or delivering phone service or whatever it is. If they decide to spend additional monies, we don't always necessarily always know where that's coming from. Presumably, if it [the utility] is privately held, it's stockholder dividends. But we do look at this issue in the context of a rate case. They don't have to get permission from us if they're charging approved rates; they don't have to come back for permission again about where those costs come from. What we approve is the final rate, after doing a detailed review of all the components, and we're in the process of doing that. ... The basic answer is that it's an issue that we are concerned about. We are looking at it. We look at it in the [context] of overall rates. The current law does require us to exclude those expenses, and we do. That's what the case law is from the previous commission as well as decisions from this commission. Number 0754 MS. THOMPSON explained that the difference between HB 169 and current law is that the bill suggests that the utility would have to get pre-approval from its members about this type of expenditure. She said her only concern about that is that it "kind of opens the door to review of a lot of different specific rate issues and it might be difficult to define expansion activities." She added that this is something that the utility might be able to find a way around easily enough. Number 0786 REPRESENTATIVE GREEN referred to an e-mail from [Ms. Thompson] to the chairman and commented, "That was just really great. It seems like ...[the RCA is addressing] at least one of the concerns that I've had now [that] you have indicated that you are going to be very active in this field." He asked whether the RCA was going to be taking any retroactive action. MS. THOMPSON replied that when a utility requests a rate change, the RCA suspends that [increase in the rate] during the time it is reviewing the requests. The RCA's decision is retroactive to the date when the change was requested. However, beyond that the courts say basically that [the RCA] as an agency cannot make retroactive adjustments. Number 0871 REPRESENTATIVE GREEN asked whether the "million-plus" that has been expended would just end up somehow in the rate that the members paid. MS. THOMPSON said she can check on that particular utility if he wants to know the suspension date. She asked if the "million- plus" was in reference to a particular utility. Number 0899 REPRESENTATIVE GREEN said there were two utilities involved: Matanuska Electric Association and Chugach Electric Association. He added: The concern I have is that it [RCA action] won't help those of us who have been rate paying on what I think are extravagant expenses that I had no choice about making. I joined a utility .... The two things that I kept looking for were dependable power and the lowest possible cost. Number 0973 MS. THOMPSON said she appreciated his concerns and would be happy to provide him with the suspension dates for those two utilities. Number 0992 REPRESENTATIVE ROKEBERG asked if he understood correctly from prior testimony that cooperatives could expend certain moneys [other than rates], and that would not be prohibited. MS. THOMPSON answered that if membership equity is analogous to stockholder's equity, the answer is "maybe." She said she could not give a definite answer because it has to do with the way the co-op is legally structured. [REPRESENTATIVE ROKEBERG and REPRESENTATIVE GREEN briefly discussed the concepts of "margin" and "retained earnings." General discussion related to those topics followed.] Number 1129 REPRESENTATIVE ROKEBERG said he still had a concern about whether expansion and public relations expenses can be paid out of margin moneys that are not part of the tariff or rate filings that the RCA would review. MS. THOMPSON said it was a question of interpreting the law under which the cooperative is organized. That is where to look regarding their ability to do that. She said she thinks cooperatives are organized under a federal law. The cooperatives' margin money is analogous to shareholders' equity in the private sector, and the RCA does not tell the co-ops how to spend their shareholders' equity. They are responsible to their shareholders [regarding that]. Number 1194 REPRESENTATIVE GREEN noted that AS 42.05.381 states that a public utility rate may not include an allowance for costs of political contributions or public relations except for reasonable amounts spent for energy conservation efforts, public information designed to promote more efficient use of the utilities facilities, informing shareholders and members of a cooperative meeting, and emergency situations. He said he did not see any of those four exceptions justifying the expenditures that were made "on this war of newspapers and media blitz." Number 1248 REPRESENTATIVE ROKEBERG theorized that better utilizing facilities might include expansion into a different market area if the utility had excess capacity. REPRESENTATIVE GREEN said that was not the case in the situation with which he had concern. Number 1270 CHAIRMAN HUDSON addressed Ms. Thompson, saying: It looks like you and the majority leader agree on the role that you have. If I understand correctly from your testimony, you believe that you already have sufficient language in the law and guidance in order to assume that responsibility, but that nothing in Representative Green's bill would preclude you from essentially doing what you already have the power to do; is that correct? You could live with the bill; is that correct? Number 1304 MS. THOMPSON said she is in agreement with the philosophy, the purpose of the bill, but thinks if the bill is passed, "it might create some confusion if some expenses had to be pre-approved by members and others were looked at in another context by us [the RCA]. She said by the time the legislature reconvenes next year, the RCA will have been through these rate cases, and she can then provide some specific examples that might be helpful to better understand the context in which it comes up and the consequences. Number 1385 REPRESENTATIVE ROKEBERG asked Ms. Thompson if she had indicated that she had concern about the definition of expansion. MS. THOMPSON said she finds it confusing. Unclear language can lead to varying interpretations, argument and litigation over whether one is in compliance with the law. Number 1409 REPRESENTATIVE ROKEBERG suggested it might be appropriate to draft an explicit definition of what expansion means because there have been concerns expressed by ARECA [Alaska Rural Electric Cooperative Association]. MS. THOMPSON said that would be helpful to the RCA. Number 1471 CHAIRMAN HUDSON said he does not want to hold up this bill because of the late date in the session. He added, "This is an important issue, and I think even having this meeting today has been very constructive." It identified a concern, he said, and the committee and the RCA are nearing a cooperative resolution. He asked Ms. Thompson to have the RCA review the bill and make specific suggestions for improving it. Then, even if the bill does not pass, the record would be established regarding what this committee and the RCA believe are the responsible actions to take. MS. THOMPSON said she would be happy to do so. Number 1533 REPRESENTATIVE ROKEBERG asked Ms. Thompson to look also at AS 32.05.381 to see if modifying that particular statute might be another way to address some of the concerns brought up in the bill. Number 1564 REPRESENTATIVE GREEN observed that the concept [of the bill] was germinated when there was a different commission and perhaps a different [level of] enthusiasm. He offered a conceptual amendment to add a "sunset" clause so that if [the legislature] finds that, yes, the new commission is doing what it is already is charged to do, then this would go away, but it would add some impetus to be sure that it is done. He suggested a sunset date of December 31, 2002. He also indicated it could be added in the next committee. Number 1636 CHAIRMAN HUDSON remarked, "We appear now to have a new RCA that is very professional, highly skilled, and a bunch of hard-working folks over there; I'm really quite pleased with them." He said a sunset clause could be addressed in the next committee of referral with a specific amendment. He suggested that the current committee had amended the bill well and established a policy concern, and that it was proper to send the legislation forward. Number 1681 REPRESENTATIVE COWDERY made a motion to move HB 169, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 169(URS) was moved from the House Special Committee on Utility Restructuring. CHAIRMAN HUDSON noted that this could be the last meeting of the House Special Committee on Utility Restructuring. REPRESENTATIVE ROKEBERG thanked Chairman Hudson for his leadership of the committee for the past two years and taking a lot of work off his own shoulders [as chairman of the House Labor and Commerce Standing Committee]. He expressed appreciation for "the work this committee has done in looking at issues that have far-reaching, long-term effects on the future of the state in terms of delivering utility services to the citizens on a more affordable basis. Number 1730 CHAIRMAN HUDSON advised members that his staff was drafting a letter speaking to the culmination of the committee's efforts. He invited them as individuals to "sign off on" its conclusions and recommendations. [An informal conversation regarding shallow gas deposits ensued.] Number 1833 ADJOURNMENT There being no further business before the committee, the House Special Committee on Utility Restructuring meeting was adjourned at 10:45 a.m.