MINUTES JOINT HOUSE AND SENATE FINANCE COMMITTEE MEETING March 14, 1996 9:10 a.m. TAPES SFC-96, #41, Side 1 (000-575) SFC-96, #41, Side 2 (575-460) CALL TO ORDER Representative Richard Foster, Co-chairman, House Finance Committee, convened the joint House and Senate Finance Committee meeting at approximately 9:10 a.m. PRESENT The following committee members attended: House Senate Representative Foster Senator Donley Representative Grussendorf Senator Phillips Representative Navarre Senator Sharp Representative Parnell Senator Zharoff Representative Therriault OTHER LEGISLATORS PRESENT: Representative Ivan, Representative Moses, and Representative Ogan. ALSO ATTENDING: Percy Frisbe, Director, Division of Energy, Dept. of Community and Regional Affairs; Gloria Manni, Assistant Director, Division of Energy, Dept. of Community and Regional Affairs; Dave Hutchens, Executive Director, Alaska Rural Electric Cooperative Association; Brad Reeves, General Manager, Kotzebue Electric Cooperative; Charles Walls, General Manager, Alaska Village Electric Cooperative; Mike Greany, Director, Legislative Finance Division; Virginia Stonkus, fiscal analyst, Legislative Finance Division; and aides to committee members and other members of the legislature. PARTICIPATING VIA TELECONFERENCE: Randy Simmons, Alaska Industrial and Export Authority, Dept. of Commerce and Economic Development, Anchorage; Al Unok and Joe Mike, Manager of the local utility, Kotlik, Alaska. SUMMARY INFORMATION POWER COST EQUALIZATION PROGRAM Representative Richard Foster, Co-chairman, House Finance Committee, welcomed participants to the meeting and noted teleconference links to legislative information offices at Anchorage, Barrow, Bethel, Cordova, Delta Junction, Dillingham, Fairbanks, Juneau, Kotzebue, Nome, and Tok as well as additional links to offnet sites at Anchorage, Kwethluk, Kotlik, Hooper Bay, and Mountain Village. Co-chairman Foster attested to the need for and benefits derived from the Power Cost Equalization Program and noted financial concerns that place the program in jeopardy. He then advised that representatives of both the Division of Energy, Dept. of Community and Regional Affairs, and the Alaska Rural Electric Cooperative Association (ARECA) were present to review the current program and recommend changes to enable the program to continue, in light of reduced funding. DAVE HUTCHENS, Executive Director, Alaska Rural Electric Cooperative Association, explained that ARECA is composed of 18 electric cooperatives and regional electrical authorities and 19 other public utilities. Of the 37 members, a subset of 17 are members of the ARECA Rural Issues Forum, the group which requested the present hearing. Mr. Hutchens asked that managers, directors, and management employees of rural utilities, in the audience, stand and be recognized. BRAD REEVES, General Manager, Kotzebue Electric Cooperative, advised that issues relating to the Power Cost Equalization Program have a direct impact on the health, life style, education, and employment of an estimated 75,000 Alaskans and hundreds of businesses in both rural and urban Alaska. He explained that the ARECA Rural Issues Forum requested committee discussion of rural electricity, the fate of the PCE program, and what might happen without the program and without fair and equitable support of rural Alaska through power cost equalization. Mr. Reeves focused on modern necessities made available through electricity. He noted that while these necessities are taken for granted by urban residents, they are recent improvements to the lives of those in rural areas. He noted that Healy Lake Village got central station electric service in 1994. As background information, Mr. Reeves observed that the state has used part of its revenues gained from resources (oil, fish, timber, and minerals) in rural Alaska to finance electrical infrastructures in urban areas. To balance those expenditures, and in fairness to rural areas where there are few alternatives to expensive diesel generation, the state has helped rural utilities and rural residents receive safe, reliable, affordable power. The Power Cost Equalization Program has been the state's most effective tool toward that end. PCE began in 1980. A total of 175 communities representing 75,000 people participate in the program. Benefits of the program flow directly to consumers of 103 utilities, including residences, vital community facilities, businesses, and schools. PCE is used to pay a significant part of electric bills, especially in small rural communities without economic advantages. Such funding helps to keep the cost of this essential service in line with electricity costs in Fairbanks, Anchorage, and Juneau. Commencing a slide presentation, Mr. Reeves noted that a comparison of power costs between urban areas and village settings evidences that even with PCE, rural residents pay almost double what urban areas pay for electricity. Only a third of the electricity sold in eligible communities qualifies for PCE. The other two-thirds is fully paid by consumers. Mr. Reeves stressed that rural electric costs that are twice that of urban areas occur in settings where population is increasing, the costs of goods and services are much higher, and average income is much lower. In rural Alaska, the cost of affordable power is a serious matter. Rural residents pay a much higher percentage of income for the same amount of power as urban residents. Costs of rural power are higher for four reasons: 1. Higher capital costs. 2. Higher fuel costs. 3. Higher transportation costs. 4. Lack of economies of scale. In addition to directly helping people, PCE also maintains basic utility infrastructures in rural communities. It keeps water and wastewater treatment utilities functioning, keeps street lights on, and community centers and community health clinics open. The stable revenue source PCE provides allows communities to qualify for necessary financing to improve systems and services and maintain affordable power. The program should not be viewed as a give-away or handout. It is an investment that saves Alaskans money, saves lives, helps educate citizens, assists with health, and allows the state to continue to benefit from its rich resources. PCE continues to accomplish a great deal that directly benefits the state. Because of the Power Cost Equalization Program, rural communities and residents have been able to move into modern times. Mr. Reeves stressed that to maintain equity the state must ensure that revenues from Alaska's abundant resources, most of which derive from rural locations, are used to build and improve utility infrastructure and citizen services statewide. The history of the state's rural electric assistance programs is intertwined with state efforts to build hydroelectric projects to provide urban areas with inexpensive power. PCE improves safety, services, and communications. It helps keep power costs affordable for community water and wastewater facilities--utilities that have a direct relationship to health. The program helps support the cost of vital community services and keeps rural Alaskans in touch with the rest of the state through telephones, faxes, computers, and radios. PCE creates affordable power to support Alaska's rural economy and resources while sustaining a necessary labor pool to develop those resources. Numerous businesses in Anchorage, Fairbanks, and Juneau are closely connected to rural economies. Fishing, timber, mining, oil, tourism, and transportation of basic consumer goods are examples of Alaska's largest industries that depend upon rural areas and affordable and reliable power. PCE ensures that these businesses will continue to grow, develop, and prosper. An abrupt end to power cost equalization would create an economic crisis that would impact all of Alaska. The state needs a reasonable plan to ease rural residents off PCE in a manner that ensures a soft landing. Rural communities that have lost PCE have become economically stressed. Loss created serious problems with delivery of health and other basic human services. ARECA Rural Issues Forum members serve 70% of the PCE consumers. The 103 utilities participating in the program consist of numerous types: cooperatives, municipals, locally-owned, and employee-owned. They provide much needed services. They care about their consumers. And they are intent upon ensuring that their consumers join the twentieth century and prepare for the twenty-first. Despite rising costs and growing populations, when adjusted for inflation, Alaska's rural utilities have managed to lower the cost of electricity while improving service and continuing to meet demand. Mr. Reeves next spoke to cost saving efficiencies such as the cooperative effort between AVEC and a diesel manufacturer to retrofit a diesel truck engine with an electric generator. The result was improved efficiency of 13% and lower overall costs to consumers. Cost containment at Naknek Electric has reduced the average cost of retail kilowatt hours from 22 cents in 1989 to 19.3 cents today. Kotzebue Electric has begun to install the first utility- grade wind turbines in Alaska. The foregoing innovations will help the Northwest region lower costs. Successful management, productive partnerships, and innovations have enabled rural utilities to keep power rates down. However, costs remain considerably higher than rates in urban areas. Without the stabilizing force of power cost equalization, power in rural Alaska would be seriously threatened. The issue facing all of Alaska is the potential disaster of shutting off the lights of rural areas by prematurely "killing the Power Cost Equalization Program." Projections show that, based on current usage, the program will end abruptly in 1999. PERCY FRISBE, Director, Division of Energy, Dept. of Community and Regional Affairs, next came before committee. He expressed appreciation for an opportunity to explain the Power Cost Equalization Program to members and advised that staff would speak to the financial condition of the program. GLORIA MANNI, Assistant Director, Division of Energy, Dept. of Community and Regional Affairs, came before committee. Utilizing tabulations illuminated by an overhead projector, she explained that the fund would contain approximately $47.5 million at the end of FY 97. For the upcoming two years, expected revenue from the four-dam pool transfer fund will total $13.5 million and investments will total $5 million. The foregoing produces a total of $66 million for power cost equalization. With current utilization of $20 million per year, the fund will be exhausted by 1999. Ms. Manni explained that the above-noted $13.5 million derives from the four-dam pool consisting of: 1. Terror Lake (Kodiak) 2. Tyee Lake (Wrangell/Petersburg) 3. Swan Lake (Ketchikan) 4. Solomon Gulch (Valdez/Glennallen) built for a total cost of $475 million from $295 million in state grants and a $180 million state loan. The debt service on the state loan is the source of revenue to three statutory funds. Forty percent of the debt service is allocated to the Power Cost Equalization Program. There is no certainty regarding a continued stream of revenue to fund PCE. Ms. Manni next spoke to utilization of power cost equalization moneys, advising that $11.1 million is used for residential services. It reflects increased and stable growth in rural communities. Funding for commercial use has decreased since 1993 when the legislature removed state and federal-funded facilities from eligibility. Services for community facilities have grown, reflecting additional water, sewer, and other infrastructure projects in rural areas for which PCE provides funding. The population served totals approximately 76,000 people in 175 communities. Each residential consumer utilizes only 343 kilowatt hours per month. That is extremely conservative. Average use in Anchorage is double. Each residential PCE customer receives $557 in annual benefits. Directing attention to charts and graphs, BRAD REEVES noted that state financial support for PCE has remained stable over the period of the fund. That stability has allowed rural communities access to basic human services. It has also allowed for increased community facilities (water and sewer) which have aided in solving health problems. As part of the overhaul of energy programs in 1993, the legislature included intent to stabilize the PCE program at $17 million for twenty years (to the year 2013). That time frame was intended to provide rural areas an opportunity to build better alternatives, work on other projects to solve rural energy needs, and move into the future. The Governor's budget for FY 97 proposes $17 million. Recipients of the program have agreed to pared down funding in the spirit of developing reasonable low-cost, long-term solutions. Mr. Reeves noted that the fund was never adequately capitalized. Support for PCE at a predictable level is essential for protection of rural consumers. Mr. Reeves next spoke to changes in the program recommended by the Alaska Rural Issues Forum, as a result of declining funding: 1. Termination of grant fund provisions to save $1.4 million and extend the life of the program. 2. Deletion of commercial customers since they can raise revenues to cover differences. The maximum per month kilowatt usage is only 700. This change would thus not have a great impact on commercial consumers and would reduce the program by $2.5 million per year. 3. Raise the floor from the current 9.5 cents per kilowatt hour to $9.7. That would shift PCE dollars from towns to villages. 4. Lower the percentage of covered costs from the current level of 95%. That would cut program dollars equally for all participants. Remaining PCE funding would then flow to the highest priority: residential consumers and community facilities (street lights, water, and sewer). Schools would continue to be eligible. Mr. Reeves stressed that reliable and affordable power is the common denominator to solve many of the problems in rural areas. The ARECA Rural Issues Forum agrees with the intent of the legislature that the fund end in a reasonable length of time. Mr. Reeves then questioned what would be considered "reasonable" and suggested that it should provide adequate time to continue statewide efforts to improve efficiencies, find alternatives, develop new technologies, and better establish necessary infrastructure. CHARLES WALLS, General Manager, Alaska Village Electric Cooperative, and Chairman, ARECA Rural Issues Forum, next came before committee. He referenced written materials submitted to members and advised that he would respond to questions. Representative Foster inquired concerning the impact of four-dam pool divestiture. Mr. Walls stressed that PCE is intertwined with the four-dam pool hydroelectric projects. PCE participants feel they have a claim on 40% of the revenue stream and 40% of the proceeds should the state sell the projects. Senator Sharp referenced the proposal to eliminate the grant program and voiced his understanding that the intent of the grants was to promote innovative power projects in rural Alaska to provide a long range solution to the high cost of energy. Mr. Walls concurred in that understanding but advised that research of the 1993 legislative records indicates that the intent did not "get into the regulations." Grant provisions in the PCE program have resulted in general grants with no direction toward innovation. It was the understanding at the time of the 1993 overhaul that grants were to fund only projects which reduced the cost of PCE. That has not been the case in practice. The grant program has generally been used to meet capital life, health, and safety needs. Senator Randy Phillips inquired regarding alternative power sources. Mr. Walls advised of several hydroelectric projects (Black Bear Lake, Prince of Wales Island; Power Creek, Cordova; and Old Harbor were specifically mentioned). Kotzebue Electric Association is pioneering work in wind energy. Turbines are scheduled to go into service this year. Research and development funding was provided by the federal government. Discussion followed between Senator Phillips and Brad Reeves pertaining to a joint project with a telephone cooperative, utilizing battery chargers to aid in communications with remote cabins and camps. Representative Grussendorf asked if ARECA members voiced concern regarding funding for PCE in the course of the 1993 legislative overhaul. He said that upcoming problems were evident to him at that time and asked if members expected the program to end in 1998-99. Mr. Walls acknowledged that members did not like many elements of the 1993 restructuring but ended up having to work with the result. While intent language speaks to continuation for 20 years, it is intent only. ARECA is thus back before the legislature to speak to continuing need in rural areas. Representative Grussendorf again asked if testimony in 1993 expressed concerns now being raised. DAVE HUTCHENS again came before committee. He explained that he represented ARECA during the 1993 restructuring. He recalled that he had no opportunity to testify on the version of the bill which ultimately passed, at its single hearing in House Finance Committee. RANDY SIMMONS, Alaska Industrial and Export Authority, Dept. of Commerce and Economic Development, next spoke via teleconference from Anchorage. Speaking to the impact of divestiture on PCE, Mr. Simmons explained that the state entered discussions with the five utilities in the four-dam pool in August of 1995 to examine the possibility of selling the hydro projects to the utilities. Monthly meetings attempted to set parameters for a sales price. All agreed it had to be in the best interest of both the state and the utilities to effect the sale. At a meeting four weeks ago where price was to be discussed, the state made its initial presentation of what it believed the price should be. The utilities responded by saying that the price was "much higher than they even fathomed." Both parties mutually agreed to put off further discussions of divestiture. The state recently received correspondence from representatives of the utilities asking if it would make sense to go back to the table. The state has not yet responded to the letter. Divestiture talks are thus on indefinite hold at this time. Mr. Simmons next noted potential impact on PCE of AEA funding of up to $25 million in repair bonds. SB 284 and HB 492 change the manner in which moneys flow from the 40/40/20 split, contained in 1993 legislation, and allow AEA first call on the $11 million in annual debt service to pay off bonds for repairs. The remaining amount would then be divided per the above split. Terms of agreements with utilities call for up to $25 million in bonds up to 25 years in duration. If debt service on the bonds amounts to approximately $5 million a year, the impact on PCE would be $2 million. Representative Grussendorf inquired concerning numbers involved in purchase negotiations and attached liability. Mr. Simmons said that: The state threw out on the table, roughly, a number of $84 million with the utilities taking over responsibility for the repairs, that we're talking about right now, to the Tyee and Terror Lake projects. Estimated numbers for those repairs are somewhere around $20 to $25 million . . . . The numbers that we got back from the utilities . . . was [sic] they may be willing to pay somewhere between zero and $20 million for the projects. AL UNOK, next spoke via teleconference from Kotlik and introduced JOE MIKE the manager of the local utility. Mr. Mike asked if the legislature intended to cut funding for the PCE program. Representative Foster responded negatively, advising, "That's why we're having the panel today." He acknowledged that questions were "looming ahead of us . . . in the next three or four years that we'd like to address right now." Various legislative committees have not yet come up with "an idea on what to do with PCE." Mr. Mike attested to the benefit of PCE for Kotlik consumers. In response to a question regarding whether cuts in the program would be equally applied to all communities, Representative Foster noted that the panel was attempting to develop background information in response to the administration's proposed 12% decrease to the program. END: SFC-96, #41, Side 1 BEGIN: SFC-96, #41, Side 2 Mr. Mike urged that cuts in the program be made from the top down rather than across the board. He stressed that PCE should help those who need it most. Representative Foster directed attention to written testimony (copy on file) from the Tanana Chiefs Conference and the Tuntutuliak Traditional Council. He then thanked those in attendance and on teleconference for their participation. Representative Ivan expressed concern over what might happen three years from now when PCE funding runs out. He voiced appreciation for efforts to identify alternative sources of energy but stressed that many areas have neither the economy nor resources to "come up with alternative resource plans in three years." A longer time frame is needed. Representative Foster noted that panel discussion at this time was intended to highlight the PCE problem before it became a crisis. He acknowledged need for continuing work to find alternations or options to allow for a soft landing. Representative Ogan, sponsor of HB 394, explained that his bill deals with an "across-the-counter leasing program for shallow gas that would help develop . . . alternative energy sources for rural Alaska." He pointed to many coal bed deposits along river beds in rural areas and deposits of shallow gas. The legislation would simplify and streamline the process for independent drillers to access these resources and convert rural communities to natural gas. He advised that his aide would make additional information on the bill available to interested parties. ADJOURNMENT The meeting was adjourned at approximately 10:00 a.m.