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Susitna Joint Venture Document Number

QS.J9 ------Please Return To DOCUMENT CONTROL

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December 15, 1984

Board of Directors Alaska Power Authority 334 west Sth Avenue Anchorage, Alaska 99501

On November 9, 1984, Governor Sheffield appointed an Advisory Committee on· Statewide Power Production Costs. The committee reporting directly to the Board of Directors of the Alas~a Power Authority, was asked to investigate the economic, financial, political, and administrative feasibility of a comprehensive Statewide program to establish a basis for equitable power pro­duction costs in Alaska through purchase and resale agreements.

The committee was asked to deliver its report by December 15, 1984. Please find herewith the requested report.

Quantitative information and related analysis was p ·ovided by OMB and the APA staff. While the resulting numbers provided in this report appear reasonable, further analysis may be required to confirm their accuracy$

A list of the Advisory Committee members follows this letter. Each of these members is to be commended for his or her hard work, creative thinking, and team spirit. Without such coopera­tion, we could not have produced the attached report in such a short period of time.

we appreciate having had the opportunity to contribute to such an important issue. Hopefully, our efforts will provide a useful direction for further discussions.

Very truly yours,

el~~ Charles P. Sitkin Chairman

CPS:pj

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ADVISORY COMMITTEE ON STATEWIDE POWER PRODUCTION COSTS

Charles P. Sitkin, Arthur Young & Company, Chairman Nels A. Andersen, Jr., co-Ma Services Charles Freeman, Mayor, Ketchikan

Loyd Hodson, Gen. Mgr., Alaska Village Electric Cooperative David Hutchens, Exec. Director, ARECA Loren Karro, ·Tlingit-Haida REA

Robert Marti~, Jr., Gen. Mgr., Chugach Electric Association Don Mellish, National Bank of Alaska

David Nease, Gen. Mgr., Kodiak Electric Association

Tom Stahr, Gen. Mgr., Anchorage Municipal Light & Power

Ivan Forsheim, Board President, Golden Valley Electric Assoc. Eric Meyer, AKPIRG

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I I. COMMITTEE REPORT

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I. COMMITTEE REPORT

-----------------A. INTRODUCTION

This report is a compilation of thF, documentation developed by the Advisory Committee on Statewide Power Production Costs.

The report is divided into several sections. Committee Report, contains this introduction, and:

Section I,

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The Conceptual Framework--to serve as background for the committee report,

the Power Cost Equalization Conce2t--developed and recommended by the Advisory Committee.

Section !I contains four reports:

• "Pl:·oblems Addressed by the Advisory· Commit.tee"--A. defi­nition of the electric energy supply problem prepared by ARECA.

• 11 Sub-Committee Report on Power Hodson, Chairman Equal i z.a t ion" -"'""Loyd

• "Sub-Committee Report on Capital Requirement,s for Rate Equalization"--Tom Stahr, Chairman

• "Sub-Committee Report on Organization"~-Bob Martin, Chairman

The Appendix of the report contain~; a copy Df the Governor • s letter establishing the Advisory Cornmi ttee and a list of the Committee members.

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B. CONCEPTUAL FRAMEWORK

Alaskan electric utili ties, the State administration, and the '

legislature have been attempting for a number of years to provide

reliable electric energy to all Alaskans at a reasonable cost"

This has not been an easy task since Alaska has a great tange of

community sizes, the communities are geographically isolated, and

there is a great disparity in the cost to generate electricity.

Various attempts have been made to reduce electric costs to the

consumer. These have ranged from grants to purchase generation

and distribution systems and state financing of hydroelectric

projects to subsidies of retail electric costs. On one hand,

some very low cost electricity is currently available because of

relatively old F~derally financed hydroelectric p~ojects in

Anchorage and Juneau, and relatively old and soon to expire

favorable gas purchase contracts in the Anchorage area •

Current electric generation costs in Alaska are unstable as we

look to the future. Old hydroelectric facilities are being used

to capacity. Gas contracts are about to expire. The power cost

equalization program that subsidizes rural diesel-fired electric

generation systems are provided on a year by year basis, subject

to approval by legislature. The cost of providing electricity to

the utilities throughout the State varies greatly and symptoms

have been addressed on a '1Squeaky wheel" basis (e.g New hydro

projects, the Fairbanks-Anchorage Intertie, SusitnaiBradley Lake

feasibility studies and license applications, power cost equali­

zation program, alternate energy subsidies. and wa~te heat

recovery grants).

The economic planning for capital additions has also be(!<n piece­

meal. The construction of the 11 Four Dam Pool" was accomplished

without thinking through how ·the dams would best fit into the

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recognition that additional electric generation capacity will be

required in the Railbelt, the method of f:tnancing such additions

is unclear. Certai.nly without a comprehensive program, each

~ individual utili'ty will have to plan for its immediate capacity

shortfalls within its ability to raise funds. Some coherent

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solution is necessary to provide for a more fair basis for

establishing electric energy costs and for allocating State

resources.

In particular, the allocation of State resources to subsidize

high current electric costs should be provided in a manner that

will contribute to a long term solution rather than merely pro­

viding immediate relief, which by so doing delays com~ng to grips

with the hard d1ecis ions necessary for a long term solution.

The underlying electric supply problem in Alaska is due to the

geographic isolation of its approximately 250 pop~lation centers

that range from 50 to 250,000 people. Except in a few isolated

instances, there is no interconnection of these communitiese By contrast, in the Lower 48 the electric transmission grid is

extensive and includes almost the entire population.

In the Lower 48, because of this transmission grid, one utility

can take the lead and build a new generation plant with capacity

in excess of its needs. Neighboring utilities can then purchase

power from the first utility at a price that may be higher than

its current electric generation costs, but may well be less than

the cost for these nei·ghboring utili ties to build added capacity

at that time. As demand grows and the total demand placed upon.

the fiist utility's newest plant approaches its capacity, a

neighboring utility could commit to build a gel1eration plant,

once again, in excess of its needs; the extra capacity is then

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sold to neighboring utilities. Through thLs natural marketing

mechanism, electric power generation costs are kept more or less

in line between utilities over time.

U~ilities within the State of Alaska do ntot enjoy the cost

leveling effects made possible by the electric transmission grid

in the Lower 48. To compensate for this eondition, it is

necessary to cr~ate administratively a system through which

energy costs can be pooled in a manner analagc,us to the ;ehysiS!!.

pooling available through the intercont.~ction possibilities of an

electric transmission grid.

A method for doing this can be accomplished through a statewide

electric power marketing agency. This agency would purchase

ele{:tric energy from each participating utility in the State at

an established rate .Per kilowatt-hour and then resell this power

to the utility at an average statewide rate. This concept shifts

subs1idizing the higher cost utilities from the State GE~neral Fund

to the consumers who currently enjoy lower C(:)St elect;ric rate-­

primarily, the Anchorage and Juneau areas. In order to make this

marketing agency logically attractive to Anchora~re and Juneau,

now enjoying electric generation costs less than the state

average, it is necessary to establish an air-ti.ght mechanism

through which these communi ties future electric costs will be

maintained at a rate significantly lower than would be possible

otherwise.

If the equ•alization program is to work, a· constitutional change

will be necessary to provide continued State funding: also, the

agency responsible for electric generation costs equalization and

for the prudent development of capital additions must be orga­

nized so that its mission can be accomplished over time in a con­

sistent, objective manner.

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The next section will discul:;s the elements of the power cost equalization concept developed by the Advisory Committee based on

the framework just described. The cc•ncept has three equally

important and necessary components:

• Statewide power production cost equalization

• Planning and development of a statewide power g9neration system to minimize the average cost of electric genera­tion.

• The organization that will manage the first two com­ponents to occur in the most cost beneficial way.

C. POWER COS'r EOUALIZATION CONCEPT

Utility rate making is based on the concept of averaging the cost of a service within a common class of consumers. Using this con­

cept, the committee is defining a comm9n class of consumers to be all electric energy consumers in the State of Alaska. The reason for defining the class in this manner is based on social and eco­

nomic considerations aiscusseG ~lsewhere in this report.

The concept should be viewed as having three components. Each of

the three components must be able to support itself conceptually and all three together are necessary for a workable program. The three legs of the stool are:

• • •

The mechanism for power cost equalization

The mechanism for providing capital additions

The organization to plan, implement, and administer ele­ments of this concept.

,, Each component: of the concept will be presented in 'the following sub-sections.

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1. Power Cost Equalization 9 . ..

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. The way in which power costs throughout the State of Alaska

could be equalized is for each utility to sell its power"to a

marketing agency at its cost, and then repurchase t:he same

numbe-r of kilowatt-hours from the marketing agenCl' at the

state-wide average cost. 1

The unit cost (per kilowatt-hour) of consumption for each

utility should be established on an annual basis. Basically,

an accepted set of power pr(')duction cost categories should be

developed such as those used in REA Form 12f plus the alloca­

tion of general and administrative expenses to the power pro­

duction function. Once the unit cost of power for a utility

has been established, the monthly sales to the marketing

agency would be the product of the kilowatt-hours sold

multiplied by the established unit cost per kilowatt~hour for

the utility.

The cost to repurchase of power on a monthly basis would ~hen

be based on the Statewide average cost of power multiplied by

the same number of kilowatt-hours that were sold to the

marketing agency. The average cost would be the cost of the

total kilowatt-hours purchased by th~ marketing agency from

all the participating utilities plus the marketing agency's

cost of operation divided by the total kilowatt-hours

purchased.

In this report, the term pt,wer, electric generation, and power production are used interchangeably. The unit of measure is kilowatt-hours. The cost associated with power production are those generation and transmission costs necessary to produce electricity and deliver it to a utility's distribution system plus an appropriate allocation of the utility's general and administrative expenses (G&A) •

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' The Statewj_cte average cost per kilowat t-nou1: is the rate at

which the consumer should be charged. This calculated power

production cost should be a direct charge to the co1nsumer,

specifically broken 9ut on his bill. The m1~st si·gnificant

reason for this. is that di.rect billin.g Of th·e customer by the

marketing agen.(:y is neceJssary for the mark1~t:inQ agt:!ncy to

qualify for tax exempt: bonds to finance the capital

additions--necessary in the second component c1f the

co~.mi t tee' s concepf;.

Using 1983 .~lectric rates and consumption stat::i!'stics, the

average power producti.on cost for the State would be 5. 0¢ •

By way of comparison using this av·erage power production

cost, Anchora.ge Municipal Light & Power's revised retail rate

would be 6'. 9¢1 (as opposed to 5. 5¢) per kilowatt-hou~ a 27% increase in the retail rate. Alaska Village Electric

Cooperative 16.5¢- (as opposed to 44.8¢ without Power Cost

Equalization per kilowat:t:-hour, a 63 .. 2% decre.ase. It is

important to note that considering current cost of heating

oil ($1.90 per gallon), electricity a·t 10¢ per ki.lowatt hour

or less becomes an attrac,tive alternzttive for s~~.ace heating.

The AVEC retai.l rate of 16.5¢ per kilowatt-hour is clearly

above that 10 ~ threshold. The Cornmi t tee does not expect a

significant amount of space heating fuel switching to occu.r

under its power cost avera~1ing conc;ept. Furthermore, sinr.:e

no arbitrary life line limitation on kilowatt hours consurr1ed

is assumed in this concept, we believe that more commercial

and industrial enterprises. in rural Alaska would be

encouraged to purchase power· from the recognized utilities

(rather than self generation), thereby, further increasing

the efficiency of utilities operation.

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Since the marketing agency will be averaging the cost of

power statewide, there will be a strong interest on the part

of all consumers to hold this average cost dt:>wn. This elt~·­

ment of the concept creates the· condition iJnder which the

other two components of the concept be,come imperative and

viable--the mechanism for capital additives and the organiza­

tion to manage and administer the concept.

Capital additions must be thoroughly planned for and intro­

duced whether they be a small, highly cost beneficiatl system

enhancement in the Lower Kuskokwim, or a major multi-hundred

megawatt project in the Railbelt. The justification for

capital additions would be based on lowering the average cost

per kilowatt-hour for the statewide network.

Some Anchorage and Juneau consumers at this point, may be

concerned· about the potential for their rates to increase

under this concept. The committee believes that th:ts concept

offers a win-win solution wherein all the State consumers

benefit--current rates are generally lowered and stab i 1 i zed

and an environment is created to develop capital additions to

produce economic electric generation capacity tsignificantly

more efficient and cost-beneficial over the lc~r.g term than

would be otherwise possible.

Under the concept presented by the cownittee, the State will

immediately proceed with a capital additions program to

significantly reduce the Statewide average cost of power pro­

duction. The cost of these capital additions would be

financed by tax exempt revenue bonds. During the transition

period, from the time of enactment of the program to when the

new capacity comes on line, the State.1 would provide funding

to equalizs the power costs of the consumers whose power pro-

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duction costs are above the statewide average. Their power

costs would be brought to the point of their average cost of

pvwer without the capacity addition bonding costs. The State

would further subsldize the consull'llers '"i th rates lower, than

the state~ide average (without the capital additions bonding)

so that their rates would remain on their historically

inc:reasing trend, as if they were not participants in the . statewide program. These State subsidies would continue

until such time that the capacity additions would provide for

equal to or lower electric rates than would be possible··

without the capital additions. (This concept is discussed

further in the' next section).

Mechanism For Capital Additions

. In the concept developed by the Committee, the subsidy for high-cost power production by the State has been shifted from

the State to a form of cross-subr:;idy by the rate payer. In

order to have a program that will be acceptable to all con­

cerned (i.e., both those who receive the benefit of the

cross-subsidy, and those who would now be paying the extra

cost to provide the cross-subsidization)f it is necessary to

eft:ect sufficient economies· overall such that the long run

electric costs will be lower for all. Additionally, although

it is not necessary to justify the economic viability of the

total concept, the Conwittee believes that the electric

costs, of those who currently enjoy low~r than average power

production costs not increase above what they otherwise would

experience in absence of the cost equalization program.

The Statewide objective under the concept of power cost

equalization would be to develop an electric generation

system that would offer the lowest possible average power

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production costs t:o all consumers. The organization pro­viding oversight to this operation would have the commitment

to the consumers to make cost-bene£icial judgements on capi­

tal additions, wherein the cost of that add!i tion will, ov·er a

reasonable period of time, be more than justified through

lower power production costs. Certainly opportunities fo:r

such capacity additions through the consolidation of genera-

tion between several independently c1wned utili ties in rural

Alaska may, contribute to the reduction of the average

generation costs; however, the only place where economies ar~~

of sufficient scale to affect the ovaral~ Statewide average

po_~er price in the Railbelt. By cortstruction of t.he lowest

life cycle cost electric power alternative, the Susitna Hydro

Electric Project, it will be possible to lower Statewide

rates substantially below what they otherwise would have been

under the best t.hermal alternatives using natural gas and

coal-fired generation.

Using the lowest life cycle cost mix alternative yields lower

electric rates for all Alaskans from about 2007 and beyond.

The figure following this page shows the nominal cost of

power production in cents per kilowatt hour plotted against

time, assuming 100% tax exempt financing. One curve

increasing upwards over time, is the Anchorage, Juneau, and . Four Dam Pool average nominal power production cost without

Bradley Lake or susi tna. The curve slightly above it pre­

sents a statewide average rate without Bradley Lake or

susitna. The third curve represents the statewide average

power production· cost per kilowatt-hour with susitna and

Bradley Lake. Note that from about 1996 to 2007 the nominal

power production cost statewide would be higher than without

susi tna and Bradley Lak~. After 2007, the statewide power

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production cost with these two dams would be significantly

below the statewide cost "''i thout the:! dan1s, and as time goes

by the cost advantage to the con$umer '~ould become greater

and greater_.

It is the position of this Committ~:~e, that the best way to

meet the long term electric energ}? needs of all Alaskans is

for the State to provide economic relief by means of rate

stabilization during this tt'ansition period from 1996 to

2007. Bt.~fore 2007, it is the Committee's recommendation that

the State provide a certain amount of rate stabilization to

prevent rr!tes from rising above what they would have been

under the thermal alternative. This rate stabilization will

require a fund established over 8 years, 1986 to 1993, inclu­

sively, to be made up of eight equal deposits of approxima­

tely $250 million wi"':h all interest accruing to th~ fund~~

This is the approximate amount required, assuming tax ~xempt

financing is used for the 1major projects. To ensure this

possibility under today' s tax laws r direct billing by the

State wide agency for energy is necessary v1ith each utility

showing the power ~reduction cost as a separate line item on

its bill.

1•hus to achieve an equal:i.zat i.on of power production costs

throughout the State, to minimize electric rates statewide

over the long run, and to endow a program that will assume

complete responsibility for meeting statewide power genera­

tion requirements far into the future, the State would pro­

vide funds to initially equalize power generation costs

throughout the State during the transition period. And if it

is deemed appropriate that thob3 in the Juneau and Anchorage

area, currently enjoying lower than a ierage power production

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costs, continue to maintain these lower rates; rate stabili­

zation funds would be provided durir1g the early years of

Bradley Lake and susi tna generation in order to stabilize

power production cost:s at a level that would be experienced

if these capital additions had not been undertaken.

Funding power cost stabilization until the crossover in

approximately 2007 will require setting aside approximately

$250 million per year for 8 years, and rate equalization will

require approximately $100· million per year fot· the same 8

year period as mentioned above. The total cost to the State

being $350 million per year for 8 years. In total, that

number is not. significantly different than the amount of

money being allocated by the State currently for diverse

electric en'ergy generation programs. The above amounts can

be corre~ted as required for provisions of end to end equity

enacted for·citizens not tied to electric utility systems, as

suggested by the Power Equalization subcommittee in Section

II of this report.

The power cost equalization concept described so far in this

and the previous section. will result in lower electric rates

immedia~ely for all portions of the State with higher than

average power production costs, and at the same time assure

rates for those parts of the State with lower than average

power production costs that will be no higher than that which

they would experience otherwise.

This short term cost wilJ. assure long term bene£ its for all

Alaskans for years to come. After ;2007, all areas of the

State will experience power production costs substantially

less than they would have experienced without this program.

Financing of all requirei power production projects will be

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assured, including Bradley Lake, Crater Lake, susi tna, and

the bush additions required to meet load increases engendered

by this program in the most efficient manner.

3. The Organization

The Alaska Power Authority has a mission that requires a com­

mitment to the future. The duration of its job will

necessarily extend beyond the time in which any of its Board

of Directors will hold their position. This fact is not

dissimilar from the situation facing any corporation.

Corporations typically deal with this situation by building a

degree of perpetuity into their Board of Directors by having

specific staggered terms of office. The current law,

established during the Hammond Administration, has the

majority of the Board positions filled by Commissioners

·within the State administration. Changes to the Board's com­

position result from the personal career directions of the

Commissioners, and the fact that the outside members of the

Board are appointed for four years. A situation is created

where the organizational life of the Board of Directors is

shorter than the period between key decision points on major

capital projects. As a result, there is a whip-sawing of

policy, commitment, and knowledge that has been a detriment

to long term energy policy development and planning.

It is the belief of this c·ommi ttee that the organizational

component . of the Power Production Cost Equalization Concept

presented herein requires equal attention as those cf. the two

aforementioned components. The Committee believes that the

Board of Directors of the organization that will plan,

operate, monitor, and control the activities inherent in this

power production cost equalization concept must have the

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degree of independence and perpetuity necessary for a con­

sistent long term cost-beneficial program such as described.

in this document. There should be full recognition of the

management commitment that is nec~ssary for the long term

capital co:mmi tment and long term construction cycles of the

electric generation facilities inherent under this concept.

The Commit tee assumes that the Alaska Power Authority ( APA)

will be the organization to administer this program. Since

State funds will be involved, the legislature and administra­

tion will continue to be interested in the success of the

program.

. It is the recommendation of the Committee that a nine member

board be created with the fiduciary .responsibility of setting . policy and directing the operation of the Power Authority.

The Board would be constituted as follows:

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The Commissioner of Commerce and Economic

Development--This would be the only Board member

without a fixed term and would. be the specific per­

son charged with representing the int~rests of the

Governor and his administration.

Four Directors appointed by the Governor for

staggered six year terms and approved by the

legislature--These four members should include one

member from the banking industry and one a consumer

representative and two from business and industry.

Four Directors from the Alaska Systems Coordinating

Council (ASCC)--The Alaska Systems Coord~nating

Council is an existing group of electric utility

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managers wqo on ad hoc basis are now coc,rdinating --the development of electric generation and

transmission sy~tems within the State. The

Go~ernor should appoint and the legislature approve

these ·four Directors--two Railbelt, one Southeast

Alaska, and one bush utility manager. The ASCC

should make reconn11enda t ions to the Governor. As

with the other a.ppointed members, the ASCC

Directors should serve six year staggered terms.

An important function of the Board of Directors will be to

set electric power development policy and to assure that

cost-beneficial planning and operations are conducted by the

APA that will benefit all Alaskan consumers. In order to

insure that generating capacity additions are the ones which

result in minimum cost, are compatible to long range plans

and contribute to system optimization, any equalization

payments for prospective units must be based solely on pre­

construction approval by the Power Authority Board. In no

event should the Authority be required to purchase power . either directly or indirectly through a participating system

which was not generated by said participating system.

over the past few years, the State of Alaska has provided

loans or grants for substantial sums of monies to develop

generation capacity--most notable examples are the !-"our Dam

Pool and the Fairbanks-Anchorage Intertie~ It is the recom­

mendation of this committee that these loans be converted to

grants by the State and be considered as equity of the Alaska

Power Authority. These projects ·ob"iously fit within the

context of the concept presented by the Committee, in that

they contribute to lowering the cost of generation for all

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Alaskans. Furthermore, the accumulation of equity within the

Power Authority, in conjunction with the more stable Board of

Directors, and the concept for power cost price stabilization

and equalization, will together present a more professional

and lower risk picture to revenue bond underwriters.

4. Summary

In summary, it is the recommendation of the Advisory

Conunittee on Statewide Power Production Costs that:

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a marketing agency be established to purchase electric power from utili ties within Alaska and resell this power to these utili ties at an average cost,

this same agency provide for future capital addi­tions to.meet the energy needs of the State in the most cost-beneficial long term manner,

the State provide interim power cost stabilization and equalization relief until such .time that the capital additions provided by the Agency offer lower power production costs than would be available absent these capital additions,

• the Alaska Power Authority be established as this marketing and electric power development agency with the Board of Directors of the APA reconsti­tuted to assure perpetuity of the Board and con­sistency in policy development and decision-making.

The Committee believes that certain constitutional changes

will" be required to assure the continued funding necessary

for this concept. It is the recommendation of the Committee

that as many of the features as pos~ible discussed above be

incorporated in the Constitutional change. This will assure

the consut;ners o£ the State's commitment to the concept, the

consistency in the provisioning of electricity in the future,

and that the Alaska Power Authority will have the expertise

to perform its mission over the long term.

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II. SUBCOMMITTEE REPORTS

Problem~ .Addressed. by the Advisory Committee Davia Hutchens, ARECA

Power Equalization Loyd Hodson, Chairman

Capital Requirements for Rat·e Equalization Tom Stahr, Chairman

Organization Robert Martin, Chairman

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PROBLEMS ADDRESSED BY THE ADVISORY COMMITTEE

by David Hutchens, ARECA

DISPARITY IN ELECTIC RATES

J ~ Alaska has a far greater disparity in electric rates than any

.J other state in the country. D~pendent on where you live in

j ~ Alaska, you could be paying anywhere from less that 6 cents per ;j I ~ kilowatt hour to over 50 cents per. kilowatt hour for electricity.

!I ~or example, residents in Anchorage are enjoying a rate for I; d

~ ~ electricity that is below the national average; however, residents

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of rural villages se.rved by the Alaska Village Electric

Cooperative are paying over 44 cents per kilowatt hour far

electricity, or nearly 8 times as much as Anchorage residents

pay.

The primary reason for the low cost of electricity in the

Anchorage area is the price utili ties are paying for natu!:al gas • .

In 1965, Chugach Electric, now serving some: 60,000 consumers in

the Anchorage area, signed long~term contracts to purchase natural

gas from the Cook Inlet fields. The price for this natural gas is

now 26 cents per thousand cubic feet. As a result of those

contracts, Chugach Electric has one of the lowest costs for fuel

of any utility in the country. The same natural gas, if purchased

today, would cost about $3.00 per thousand cubic feet.

Unfortunately, neither the contracts nor the Cook Inlet supply of

natural gas will last forever. By the year 1990 1 it is expected

that C:bugach Electric and Anchorage Municipal Light & Power will

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have to find new sources for natural gas or an alternative source

of fuel. The cost of fuel to Anchorage utili ties ·will increase

dramatically by the end of this decade.

Alaska residents.in rural areas of the state, except Barrow, have

never enjoyed the benefits of low~cost natural gas. Because of

the remote locations of many villages and the cost of transporting

fuel, diesel powered generation of electricity has proved to be

the least expensive alternative. Even today, despite the high

cost of diesel fuel, studies have shown there is no commercial

technology available to most rural Alaska utilities that is more

economical than diesel. No matter what source of energy is used

to generate power, it is very expensive to provide electricity to

rural areas of Alaska.

PROBLEMS ASSOCIATED WITH HIGH COST OF ELECTRICITY

This disparity in electricity rates is a significan-t contributor

to Alaska's uneven economic development. There are relatively few

industrial or commercial businesses operating outside the urban

areas of Alaska. Of course, the high cost of energy is not the

only reason for the lack of development in rural areas, but

extremely high electricity costs are a major factor. It takes a

large amount of electricity to meet the power requirements of an

industrial consumer, such as a fish processing plant. There are a

number of coastal Alaska communities that could benefit from the

establishment 'of a fish processing facility in their communities.

But because of the high cost of power, processors have generally

avoided such investments. It is economically

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have to find new sources for natural gas or an alternative source

of fuel. The cost of fuel to Anchorage utili ties will increase

dramatically by the end of this decade.

Alaska residents.in rural areas of the state, except Barrow, have

never enjoyed the benefits of low~cost natural gas. Because of

t_J>a remote locations of !l',any villages and the cost of transporting

fuel, diesel powered generation of electricity has proved to be

the least expensive alternative. Even today, despite the high

cost of diesel fuel, studies have shown there is no commercial

technology available to most rural Alaska ut~lities that is more

economical than diesel. No matter what sovrce of energy is used

to generate power, it is very expensive to provide electricity to

rural areas of Alaska.

PROBLEMS ASSOCIATED WITH HIGH COST OF ELECTRICITY -------------------------------------------------------·

This disparity in electricity rates is a significan·t contributor

to Alaska's unev(,., economic development!l' There are relatively few

industrial or commercial businesses operating outside the urban

areas of Alaska. Of course, the high cost of energy is not the

only reason for the lack of development in rural areas, but

extremely high electricity costs are a major factor. It takes a

large amount of electricity to meet the power requirements of an

industrial consumer, such as a fish processing plant. There are a

number of coastal Alaska communities that could benefit from the

establishment 'of a fish processing facility in their communiti~s.

But because of the high cost of powerf processors have generally

avoided such investments. It is economically

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advantageous for processors to either fly their fish southward for

processing or to transfer fish to large off~shore ships~~ usually

foreign~~which serve as processing facto~ies.

Another business that suffers because of the high cost of

electricity is the retailer~ A grocery or general store in rural

Alaska. must deal not only with the high cost of transportation,

but the high cost of electricity as well. Many rural villagers

find it less expensive to order their supplies from either

Anchorage or Fairbanks than to purchase their supplies from the

local merchant. Partly because of the high cost of electricity,

the rural business is at a great disadvantage in ccmpeting with

urban retailers for local sales.

Rural Alaska villagers have been unable to take full advantage of

electrical service. Because of the high cost of electricity in

rural areas, villagers must limit their electric consumption to

minimal needs. Some of the more common appliances routinely used

in urban areas are just too costly to us~ in rural Alaska.

Residential consumers in areas served by th1~ Alaska Village

Electric Cooperative averaged using only 209 kilowatt hours per

month during 1983. At the same time, residential consumers in . .

Anchorage served by Chugach Electric had an average use of 842

1 ~~ kilowatt hours per month in 1983. The cost today of those 209 kwh

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to rural Alaskans is $96.35 while the cost of 842 kwh to Anchorage

residents is only $50.52. That's four times the electricity at

half the cost.

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Legislators representing rural Alaska have long recognized the .

disparity in power costs within the state. Over the past few

years, rural lawmakers have successfully sponsored assistance

programs designed to provide some financial relief to rural

residents burdened by the high cost of electricity. The most

recent of these programs to be implemented is the Power Cost

Equalization Program (PCE) e Legislator$ approved PCE during the

1984 session and approptiated $27 million to fund the program

through FY 1985. The program does provide considerable assistance

to rural residents and in some cases has cut many villagers•

e.l~ctic bills in half. But Power Cost Equalization is not a

long~term solution to the problem of high electricity costs. The

reason is two~fold. First, the program is totally dependant on

legislative appropriation. Each year the legislature must examine

the program and judge whether or not it should be funded.

Depending upon the mood of lawmakers in Juneau, the program could

be eliminated at any time leaving rural Alaskans without the

assistance they have come to depend upon. The second problem with

this program is the limit placed on the number of kilowatt hours

that can be considered for assistance. A consumer may only

receive aid under the program for the fj.rst 750 kwh used in a one

month period. This is adequate for residential consumers, but it

does not give significant assistance to industrial and commercial

consumers. 750 kwh is only ~ fraction of tne power uped by most

industrial consumers, so this program provides little incentiv,e

for such businesses to establish or maintain operations in rural

areas.

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NEED FOR A STATEWIDE ENERGY PROGRAM

To re.solve the energy problems we face in Alaska, the state must

develop a comprehensive statewide energy policy and program.

During the last ten years the legislature and the successive

administrations have dealt only with local or regional problems.

In addition to the PCE program, another example of this approach

is the four~dam pool. Local communities in southeast and

southcentral Alaska wanted the state to assist with the

construction of four hydroelectric projects to serve their

communi ties~· A strong lobby effort won approval for the projects,

and the state has now invested more than $400 million in the

four~dam pool. This provides residents in the five affected

communities with the opportunity to have low~cost, or at least

stable cost, electricity well into the next century. However, this .

left other areas of the state without such promise, and residents

not qirectly served by those projects can· see no benefit to

themselves from their construction. Bradley Lake and the Susitna

hydroelectric projects have been identified as the lowest cost

alternatives over the long run to supply power to the railbelt . region. These projects will require substantial state assistance

in order to avoid rate shocks to the consumers in the early years

of their operation. Regionalism which persists in the absence of

a statewide energy program threatens the construction of these

projects just as it threatens the continuation of the PCE

program.

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REPORT OF SUBCOMMITTEE' ON POWER EQUALIZATION . by Loyd Hods<)n

Subcommittee Chairman

Definition of Problem

Electric rates across the State of Alaska have a far greater disparity than any other state in the United States. Average retail revenue per kilowatthour rates in :11aska range from a low of some_ 5¢/KWH to a high well in excess of SOt/KWH on a true cost basis in ·many small isolated village con1nunities.. This range of 1,000% change compares to Nebraska where the differentia 1 across the state is only some 20%. Rate disparity of this type is causing severe restriction on usage in' certain communities where the full benefits of electricity are not being derived. Perhaps iiRJre important is the fact that many opportunities for short and longer term economic development could be substantially boosted by lower cost electric e11ergy. The full benefits of an improving educational system will not be realized unless more communities have lower cost electrical energy available to encourage economic activity, resultant jobs and u 1 timate 1 y more se 1 f suffi­ciency ••

Areas of Rate Equalization Investigation

The Committee studied three possible basis for cost impacts of various equalization methods. These were:

1. A postage stamp without usage limit at the retail level.

2& A postage stamp with usage limit at the retail level.

3. A blended postage stamp rate considering power production and transmission costs only at the point of delivery to a distribution system.

The Results

1. The Postage Stamp at Retail: The results of this study are attached and identified as Table I (left hand columns). The overall average retail costs would' currently be approximately 8.2¢/KWH. Estimated percentage changes in retail rates to achieve this are estimated.

Advantages of this Approach:

a,. This approach assures absolute equity in electric rates across the entire State of Alaska.

b. There would be virtually no regional restraints to feasible power production capital investment in any area of the State since reduced overall costs would benefit all segments of the population.

c. There would be a much more unifonn climate for economic development across the entire State of Alaska as much as the cost of electricity is one of the key elements in economic development.

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Disadvantages of this Approach:

a. This stnJcture is substantially the most expensive initially.

b. Both the direct equalization and capital costs would go up substan­tially more than the initial cost due to substantially increased demand that would be created in many areas of the State.

c. This rate is at a level that would encourage the use of local space heat in many areas of the State which are heated by oil causing waste­ful and inefficient conversion of diesel fuel into electricity and back into heat.

d. This in turn would result in very substantially increased capital requirements for generation and distribution in some of the smaller non-interconnected utilities in the near term. The program would have to be initiated in phases to prevent a cascading of rapid and over­~helming requirements for increased generation capacity in a large number of smaller isolated diesel generator served conmunities.

2. Postage Stamp at Retail with Usage Limit: After initial consideration, this approach was not explored in depth since of the disadvantage of net creating an improved climate for economic development if there was a limita­tion on all consumers of 750 KWH usage per month. While this solves the rate problem for the residential consumer, it does little for the bigger p·roblem of trying to establish more favorable rates for economic develop­ment.

3. Blended Postage Stamp Rate: The plan. believed to be most desirable in the world of economic reality and achievability was detennined to be a blended rate at the power production level. Costs would be allocated on an acceptable accounting basis to establish comparable power production cost in all cases. The overall average state production bus bar is estimated to be 5.0¢/KWH, based on CY 1983 data. Projections to the current time would not change the figure more than an estimated maximum of 0.2¢/KWH.

Advantages of this Approach:

a. This approach is less costly than the alternative of an average postage stamp rate at retail in both the short term and the long term.

b. There would still be some retail price restraints on high usage of electricity in the state.

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c. The resultant retail rates would by and large be above levels that could result in costly use of space or installed electric heating and resultant massive need for quick increases in remote generation unit investments.

d. Since all State entities would be interested in holding the overall average power costs down, there would be increased interest in larger, more effic·ient generation facilities~ which would benefit all consumers across the State to some degree.

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e.. Ifalso has the advantage of creating a much more desir;i.ble clima-te for economi~ development, sin-ce there would ntJt be a cut o·f·f a-t 750 KWH per month per consumer as under the current program.

fo Overall east of living could oe reduced in outlying areas.

g. Cost of school operations ~ould be lowered in many areas.

Disadvantages of this Appro~ch:

a., Thet·e is no significant disadvantages of this approach compared to other areas investigated, other than the general point that the overall package must have equity to become attractive in all parts of the State in the form of the proper blend of short, intermediate and long range benefits for general acceptance.

Potential Problem of Electric Heat

There needs tci be more understanding of potential for problems associated with electric rates that encourage space heating with electricity in many remote Alaska communities served by diesel generation. Items causing the situation in remote communities to be different are the following:

1. The heating fuel of choice is #1 ( or #2) heating oil for the overwhelming majority of new homes, public facilities, schools, etc. In a few areas there is a- fair amount .of heating by wood. Natural gas for heating is not available with the ~xception of Barrow.

2. High delivered retail price of diesel fuel oil makes electric heat attrac­tive if electricity is priced at a low enough level (see attached chart, "Heating & Break Even Points, ·No 1 Heating Oil vs. Electricity").

3. The efficiency cf. conversion of the o i 1 into heat j s a key factor in the relative desirabi~ity of electricity for space heating. The higher the oil furnace efficiency, the lower retail electric prices can be without crossing the point to encourage electric heat.

The conversion of electricity into heat is considered to be 100% efficient; all of the energy from heating elmnents is released within the heated space. In the case of oi 1 fired furnaces, th,e effi ci enci es generally range from from a 1 ow of 35% to 75% in some new systems. For purposes of calculation, an efficiency value of 50% selected for a 11 pot'' type fuh"'nace. Newer "gun 11 type oil furnaces range near 65-75% efficient. ·. ·

In many coastal or railbelt communitiES in Alaska, the retail delivered price of heating oil is in the vicinity of $1.25 per gallon. Typical retail delivered price in villages is currently $1.90 per gallon. However, a few communities pay as much as $3 per gallon. In addition, in large areas of the railbelt, natural gas is available for heating, which is much more competitive for space heat than oil or electricity in virtually all cases.

Placing the retail price of electricity below the level of equivalent oil heating can cause severe problems. This would result in a rapid increase in electrical

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demand or smaller isolated systems requiring major increased investment in diesel generation capacity.

Where excessive hydro generated electricity is available, the case could be made for use of power for electric heat to save other energy. However, this is def­initely not true where you must put in diesel power generation to supply el~!ctric heating needs. The energy conversion efficiency is very low, much worSE! than even the poorest pot-type stove.

This problem is particularly aggravated ·in the outlying areas of Alaska. In a typical village of 600 people, the peak winter load is currently running near 300 KW. This is for all uses of electricity, including the schools, public facil­ities, water and sewer, coiTITiunications, business, etcc There would be appr•'xi­mately 150 homes served by electricity~ A plug-in electric space heater ratea at 1500 watts { 1. 5 KW) can be purchased for $50. Units for four rooms would cost $200 and can be plugged in immediately representing 6 KW of new load per house­hold. A total of 900 KW of new load. Adding this to the 300 KW, we arrive at 1200 KW of DEMAND on a cold winter evening, or FOUR times the current peak load capability. Plug-in heater use would be virtually impossible to control by l"egulation in residences. Further, substantial po.rtions of this load could be connected very rapidly in only two or three weeks time, since the portable electric heaters could arrive from mail order houses in that time. 6 KW demand stated per household is a relatively low estimate of actual potential heating load if electricity at retail would be priced below the break even point to make usage desirable relative to heating oil.

All small community diesel generation facilities, and much of the distribution systems, would have to be replaced with considerably larger facilities. The answer to this problem is for the retail price. of diesel generated electricity to be at not less th-!·n 20% above the break even point for oil heat. Electric heat has advamtages over oil to require some differential, including lower initial cost of electric heating units and no oil to store or handle, etc.

The pro9ram proposed will provide resultant retail rates that generally avoid this problem since market price signals are still present. If retail rates are much lower, then consumption restrictions or irNerse rates would need to be cons:idered. This type of measure could defeat one primary purpose of allowing high usage required by many business at improved rates to create a much improved opportunity for community economic a'tivity.

There will be load growth under the proposed program, but at a much more orderly pace in accordance with valid corrmunity growth and increasing business activity.

How to Control Possible Abuses

One questions is, nhow do you maintain some reasonably uniform level of service in various types of cormnunities without abusive and inefficient operation and maintenance practices?.. Due to inherent limitations on smaller generation units, the quality of power will not be the same in smaller communities as it is in the larger communities, nor is the type of around the clock manning affordable to give the same reliability as in larger communities. However, with the proper planning and initial investment, even small community unmanned plants can have power re 1 i abi 1 i ty in .the order of 99% or better. Achieving the 1 ast 1% of

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reliability, or to attempt to tighten other operating parameters to an excessive degree, is extremely expensive.

There might be a p.ossibility that a very small community might wi"sh to provide employment for full time around the clock Operators. This wi 11 not stand the test of independent economic feasibilitY- review in a small community~ Howeve~, in some communities this is being done, for instance, the North Slope Borough as a matter of pol icy. However, true electric rates become very high under these conditions. The Borough through tax revenue does subsidize rates down to a reasonable level. The balance of the state will not likely be willing to provide funds for unreasonab1e high levels of O&M costs.

Alaska Village Electric Cooperative, Inc. is an example of a reasonably low cost operation with cost constraints serving many Jutlying areas and represents a sampling of a large number of small coiJITJunities and conditions encountered. Therefore, AVEC•s experience and accurate accounting records can give a good idea of typical true costs of operation over a number of years. Records from AVEC, or the il i nget-Ha ida Electric Authority in Southeast as ex amp 1 es, can pro vi de a reference basis for reasonab 1 e costs. A band of reference costs can then be developed for comm.mities of similar size and geographic/environmental condi­tions.

Here and to the point are possible major areas of abuse and a suggested method of control:

1. Unreas~nably high O&M costs per capita or unit of output.

2. Excessiverassignment of expenses to assisted cost segment.

3. Too high or non-feasible capital expenditure·s.

The group recorrmends that a committee of Electric Utility Managers be selected and empowered to make judgements on· these matters. A panel of not less than seven Electric Util·ity Managers representing a good cross section of the state wo!{ld be appointed to this committee. They would meet periodically to establish ihitial standards and to monitor· possible areas of abuse as detennined from repor·ted data or as otherwise addressed to the group. The committee, by majority vote of a quorum, would make decisions in regard to whether questionable expenses should be allowed or further investigated. If closer investigation expenses were outside of an acceptable range of reasonable standards, then the corrmunity or organization involved would be asked to voluntarily bring costs more in-line. After a reasonable period of tim~ for corrective action, costs would be disallow­ed outside of the established tolerance band established for communities with similar personal characteristics and size range.

There could be a further ultimate appeal to a higher level of authority for absolute, final binding determination of any disputed findings of the Manager's Committee. This could be either directly to the APUC Commissioners or as an alternative an "Energy Czar11 type of person, similar to a baseball commissioner. This would basically be in the form of a selected arbitrator well versed in utility operations and maintenance and fiscal matters to assure timely, intelli­gent and fair decisions. Ideally, the person would be familiar with diesel generation utilities since most questions will be in this area.

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Improper assignment expenses could best be controlled by a carefully considered format of what expenses should be assigned to each category. Basically, all utilities, even in the smaller communities, should set up some standards for cost accounting so that expenses fall into proper general categories. Also, there should be unifonn treatment in regard to payment for insurance or self-insured risk, depreciation reserves and/or proper a11owances for future capital needs. Many of the plants in smaller. conmunities have been constructed with donated state capital. Generally, no provision is- currently being made in the rates for replacement purposes. This prob~em needs to be separately studied and addressed. The Cortmittee feels that this would be &n ideal task for Alaska Public Utilities Corrmission or such qualified auditing finns tha~ might assist.

This is a real serious problem for many smaller utilities across the state and needs to be addressed. In addition, this causes artificial rate differences compared to utilities that maintain books as perpetual entities with the ability

· to borrow in the future, including some equity buildup. Contrast this with util­ities that have no margin (TIER) requi.raments and no provision in the. rates for depl .. eciation costs, no interest costs, are running without insurance, either property or liability, as ~xamples requiring more unifonn control and cost accounting.

Accounting on a uni·form basis, it would soon become evident that generally utilities operating as a group are more efficient than small individual indepen­dent utilities. This structure is even more important when continuing capita.l requirements into the next century for future generation and distribution systems to, m~2et new requirements and for replacements are considered as state revenues diminish. There is considerable misinformation and misunderstanding about this df!veloping situation requiring clarification.· If not, many small utilities will simply continue to run untii there i"s no lof1ger any state money available and then cease to operate. In the near future, State grants will probably not be a!Va i 1 ab 1 e, hence the need to ro 11 into a much more orderly program across the ~;tate, as is suggested by the avera 11 thrust of this Report.

The primary idea of this review conmittee, with powers of initial or final ;judgement, is to use a combination of persuasion and assistance to keep the

. overall average power costs across the state at a fair level without excessive abuse at any level where others would be required to pay the bill for gross inefficiencies or abuses. If a _cross subsidization program is to work, controls of th·is type are fe1t to be absolutely essential and mandatory. If not, horror stories of abuses wi11 soon tear down the integrity and therefore support for the overall program concept.

_Community Size

Another area of investigation of this Sub-Committee on Power Equalization was related to 11What should be the lower cutoff size of a community for participation in the program? 11 Possible areas of definition include:

1. A census count of at least 50 from the latest U.S. census.

2. Census data from Community & Regional Affairs• definition of communities by organization types, such as municipality, first class city, IRA, etc.

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3.

4.

There must be at least enough school age population for at least one teacher and an organized school.

Other areas can center on definition by the number of fami.ly dwelling units or so many dwelling units within a certain areaa

The Committee obtained a list of c~~unities organized as second class cities or higher from th~ Community & Regional Affairs based upon December 31, 1983 popula­tion (attached). The total population therein is estimated at 497,822~ Included in this figure is the population from the unorganized areas of six boroughs totaling 96,526 people. The overall estimated Alaska population on December 31,. 1983 was 515,324 people. Other statistical data was related to the estimated average size of Alaska households presented as 2.93 persons.

Next, the Committee took the number of residential hookups from ail of the listed utilities in the statistical base and came up with a total of an estimated 162~000 residential consumers connected on all the utilities in the state as of December 31, 1983. Next, multiplying that number by the afore mentioned 2. 93 persons per household, arriving at the maximum number of 474,660 as the estimated number that would be covered under the program out of the total state population of 516,324. The balance of perhaps 41,664 persons, or 14,220 households, might not be directly affected except by future 1 ower costs of goods and services purchased in many communitieso

End to End Equity

The Committee believes that we should target to have end to end equity in the State of Alaska, and also discourage attempts at very small 24 hour a day util­ities where they may not be economically sound and resultant very high subsidies. This can best be done by having a method of direct payment to people that are not tied onto one of the regular utilities.

The recommended method of handling. this is to determine the average benefit cost to consumers of a large representative isolated utility, such as Alaska Village Electric Cooperative, Inc., on the basis of the average benefits per household per year. That is a differential between the retail rate and what the true total costs basis would be, multiplied by the average kilowatthour usage per residen­tial service per year •. This figure could be adjusted periodically after data is availabl~~ and standards established for a new period. For instance, the data from CY 1985 could be used to estab 1 ish standards that cou 1 d be effective for payment in a fiscal year starting July 1, 1986, or Calendar Year 1987.

The proposed method of administration would be similar to the way the Permanent Fund Divitiend Program is handled through the Department of Revenue. Generally, the feeling is that the PFDP forms have been well human engineered with clear instructions and a similar program could be set up. Penalties for abuse should also be very severe to hold down the necessary cost of enforcement.

Additional analysis needs to be determined as to the exact number of people eligible for this program. From the above data, a quick estimate is that there might be 14,22~ households possibly eligible, based on average figures applied uniformly across the state. Based upon an assumed maximum possible benefit level of approximately 28t/KWH and statistical data from AVEC using an average of 225

-7-

1\

KWH/month/res i denti a 1 consumer x 12 months x the number of househo 1 ds, leads to the initial annual cost of this segment of the program of approximately $10,750,000. This number is very likeiy high. This data should be refined with more time and analysis by Community & Regional Affairs or other staff elements. The impacts of military populations must be investigated. Also, the benefits may need to be scaled to the equivalent energy rates in certain zones of residence to parallel actual retail rate differentials in the zone. This could reduce the approximate maximum cost listed. With ·this provision of payment, then smaller groups of two, three or fou~ families would more likely opt for the most effic­ient way to handle their energy needs in very small clusters rather-'than attempt to qualify an around the clock utility with resultant very high costs. It may very well be that ultimately some standards may need to be established regarding just how small a community could be involved. This could best be determined with some experience with a program such as a comparison of the costs of direct pay­ment to approximately 16 families individually, versus the combined population of approximately 50 people running a small village utility around the clock and the overa 11 resultant cost impact. It .is a we 11 supported fact that the average cost per kilowatthour across the state tends to go up as the size of the communities go down. This concept requires further investigati'on but some payment to most persons not served by elect_ric utilities is reco11111ended.

Sunmary

In surrmary, we · reco~Y~TJend that the State go to a program that would bring a blended power production costs at the power plant transmission substation bus bar to a uniform state-wide rate. The projection of this initial blended rate is 5.0¢/KWH. The retail rate to the consumer would represent, in addition to this,. the other cost elements primarily related to the distribution systems, consumer account expenses and the remaining administrative and general costs, plus mar·· gins.

A table of possible net resulting retail rates under this program is attached hereto as Table I (right hand columns). The Conrnittee reconmends that an Elec ... tric Utility Management group be set up for the purpose of establishing reason­able service ~tandards and management practices under diverse Alaskan conditions with a minimum expenditure! of time and effort. Choices for possible source of appeal to higher authority can either be a High Commissioner set up specifically for this purpose to arbitrate and make final decisions in regard to reasonable­ness or directly to the AIPUC Conmissioners. The first wouid be the most effi­cient, considering the othE~r case load of the Commission.

I

The Conrni ttee further reconmends that a program be further investigated to reimburse Alaska residents who do not live in areas served by electric utilities to receive some benefit upon application under rules established by the Depart­ment of Revenue.

Implementation of this program will ensure lower cost electric rates at levels that affordable far into the future for all Alaskans. Wider support of large scale capital projects required to pull down overall state power costs into the fut~re will be established since all citizens would benefit to some degree in the future with continued lower average power production costs.

-8-

........ _. . ....... ~ .. ___ ..... ~ ........ !.. ... "f •• ·~· •

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A much imp~oved climate for economic development across the State of Alaska will be created" Competition between individual communities, solely based upon electric rlltes, will be minimized substantially. Larger corrmunities will generally still enjoy lower electric rates due to the effects of the economy of a large scale operations, but the ratio of rates across Alaska will be substan­tially reduc:ed more in line with ratios that may be typical in other states.

-9-

. ~· ~"' . ,.. . ~ ~ ~·---:

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5.5 6.5 7.:1

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11,.116

161,MI 14,1136 16,131 7,336

271 14,591

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111417.1 l,I2:S, 91l J.l

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76.7 191.7

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Table I 3 of 3

N 0 T E S

Explanation

Retail Operating Revenues - does not include wholesale power sales. b.Y Chugach.

Retall energy sales.

(Jolumn 1/Column 2) x 100.

(Statewide Average Retail Rate - Column 3) x Column 2.

100

1 - ( Statewide Average Retail Rate) . Column 3 . •

Includes operating costs and depreciation incurred in production and transmission accounts and allocations of interest and taxes to pro­duction and transmission.· Als'o includes allocation of ndministration and general expenses and depreciation, interest, and taxes incurred by General Plant. A & G and General Plant expenses are allocated based on the ratio of the eXpenses in the remaining categories.

Energy Production before distribution ·losses.

(Column 6/Column 7) x 100.

(statewide Ave~~ Rate - Columna 8) x Column 7.

1 -(

Statewide Average Rate ) • Column 8

(Column 9/Column 1) x 100.

( 1 +' ( Col.umn 11 I 1 00) ) x Column 3 •

r

i I

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HEATING -BREAK EVEN POINTS NO.I HEATING OIL VS. ELECTRICITY

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MUNICIPAL POPULATIONS FOR BOROUGHS & CITIES As of December 1983

Name

Anchqrage Unorganized· Areas Juneau Fairbanks Unorganized Areas

Unorganized Areas Ketchikan Sitka Kodiak Unorganized Areas

Kenai Valdez Bethel Nome Unorganized Areas

Soldotna Homer Petersburg Kotzebue Wasilla

Barrow Unorganized Areas Palmer Wrangell Cordova

Unalaska Dillingham Seward Haines Delta Junction

Northpole Craig Sand Point Galena Hoonah

Skagway Unalakleet Mt. Vi11age Hooper Bay Enlnonak

Organization

Municipality Fa1 rbanks/North Star- Borough C1 ty I Borough Borough Subdivision·- Fairbanks Mat-Su Borough

Kenai Peninsula Borough Borough Subdivision - Ketchikan City & Borough Borough Subdivision - kOdiak Kodiak Island Borough

Borou,n Subdivision - Kenai First C1ass City Second Class City Ffrst.C1ass City Ketchikan Gateway Borough

Borough Subdivision - Kenai Borough Subdivision - Kenai First Class City Second Class City Borough Subdivision - Mat-Su

Borough Subdivision • North Slope North Slope Borough Borough Subdivision - Mat-Su First C1 ass City First Class City

First Class City First Class City Borough Subdivision - Kenai Borough Second Class City

Borough Subdivision - Fairbanks First C1ass City First C1ass City First Class City First Class City

·First Class City Second Class City Second Class City Second Class City Second Class City

Page 1 of 4

Population

230,846 37,274 27,519 2.7,103 24,280

20,790 a,414 8,221 6,072 5,825

5,721 3,687 3,681 3,620 5,557.

3s353 3,237 3,046 2,981 2,944

2,882 2,800 2,738 2,376 2,307

1,922 1,896 1,871 1,847 . 1,044

934 907 889 876 865

790 787 666 651 641

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Name Organization

Ft. Yukon Second Class City Kake First Class City Houston Borough Subdivision - Mat-Su Selawik Second Class City St. Paul Second Class City

King Cove Ffr-st Class Cfty Nenana First Class City Pt. Hope Borough Subdivision - North Slope Alakanuk Seco~d Class City St. Mary's First Class City

Angoon Second Class City Togiak Second Class City McGrath Second Class City Chevak Second Clas! City

·Anderson Second Class City

Noorvik Second Class City Seldovia Borough Subdivision - 'Kenai Klawock First Class City Kwethluk Second Class City Tanana First Class City

. Wainwright Borough Su~d~vision - North Slope Savoonga Second Class Cfty Quinhagak Second C1ass Cfty . Gambell Second Class City Yakutat First Class City

Aniak Second Class City Akiachak Second Class City Hydaburg First Class City Katl ik Second Class City Shi shmare.f Second Class City

Pilot Station Second Class City Kasigluk Second Class City Nulato Second Class City 01d Harbor Borough Subdivision - Ked1ak Kiana Second Class City

Toksouk Bay Second Class City Nunapitchuk Second C1ass City Saxman Borough Subdivision - Ketchikan · Stebbins Second Class City New Stuyahok Second Class City

Page 2 of 4

Population

641 631 606 600 595

586 586 570 564 563

562 545 535 528 521

517 510 508 507 485

483 477 477 464 462

459 451 429 413 412

404 394 382 375 363

357 353 343 339 337

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Name

Tununak Nuiqsut Thorne Sly Napakiak *nokota~

St. Michael Shungnak Port lions · KachemaJc Pmbler

Fortuna Ledge Tuluksak Kivalina Chefornak Holy Cross

Eek Whittier Lower Kalskag Napaskiak Kaltag

Scanmon Bay Akiak Cold Bay Teller Huslia

Atmautluak Ouzinkie Ruby Aleknagik Atqasuk

Anaktuvuk Pass Buck'land Goodnews Bay Pelican Grayling

E1im Kaktovik Nondalton Koyuk Mekoryuk

Organization

Second Class City Borough Subdivision - North Slope Second Class City Second Class Cf~ Second Class City

Second Class City Second Class City Borough Subdivision - KOdiak Borough Subdivision - Kenai Second Class City

Second Class City Second Class City Second Class City Second Class City Second Class City

Second Class City Second Class City Second Class City Second Class City Second Class City

Second Class City Second Class City Second Class. City Second Class City Second Class City

Second Class City Borougw Subdivision - Kodiak Second Class City Second Class City

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Borough Subd1 v·f s ion - North S1 ope

Borough Subdivision - North Slope Second Class City Second Class City First- Class C1 ty Second Class City

Second· Class City Bon,ugh Subdivision • North Slope Second Class City Second C1ass City Second Class City

Page 3 of 4

Population

327 324 316 306 299

295 292 291 287 281

276 272 272 268 266

265 . 263

261 260 257

251 250 250 247 241

239 233 233 232 231

228 219 215 213 211

205 203 200· 198 192

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Akutan Newtok Larsen Bay St. George Allakaket

Rus~1an Mission Shaktoolik Brevig Mission White Mountain Deering

Diomede Nigh'tllllte Tenakee Springs Eagle Shageluk

Newha.len Upper Kalskag Wales Chi gni Jc Chuathbaluk

Golovin Anvik Nikolai Shelden Point Akhiok

Hughes Koyukuk Port Alexander Port Heiden Kobuk

Clark • s Point • Ekwok Kasaan P1atinuat Kupreanof

Organization Papulation

Se~ond Class City 188 Second CllSS City 181 Borough Subdivision - Kodiak 180 Second Class City 175 Second Class City 175

Second Class City 175 Second Class City 171 Second Class City 159 Second Class City 158 Second Class City 158

Second Class City 154 Second Class City 145 Second Class City 144 Second Class City l42 Second· Class City 142

Second Class City. 133 Second C1ass City 133 Second Class City 129 Second Class City 124 Second Class City 124

Second Class City 121 Second Class City 115· Second Class City 110 second Class City 107 Bor-,.-Jgh Subdivision - Kodiak 103

Second Class C1ty 99 Second Class City 99 Second Class City 98 Second Class City 94 Second.C1ass City 86

Second Class City 80 Second C1ass City 78 Second Class City 70 Second Class City 59 Second Class City 50

Total 497,822

Overall Stat& Population Estimate 516,324

Average Household Size 2.93

Page 4 of 4

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CAPITAL REQOIRm!BNTS FOR RATE EQOALIZATI~N By Tom Stahr, Subcommittee Chair.man

Rate equalization alone will initially require transfer payments f~om the areas with low cost power to the areas with high cost power in the general range of $40 million to $50 million per year. tii th normal load growth and inflation this required t~t'ansfer payment would increase to over $600 million per year in nominal dcllara by 2015. Price induced load growth as a consequence of r~to aqualization could increase this amount further. In order to have a program that w~uld be acceptable to all concerned, i.e., both those who receive the benefit of the transfer payment and those who otherwise would make the transfer payment, it is neces.sary to· effect sufiicient economics overall. such that in the J..onq run. costs wr.luld be lower for all. Additionally, it is necessary that costs do not increase for those who currently enjoy lower power costs above what they otherwise would in the absence of this program ..

• The only place economies of sufficient scale to effect overall state averaqe power prices can be made are prospectively in the Rail belt. By construction of the lowes1:. life cycle cost alter·­nativer the Susitna Hydroelectric Project, it will be possible to lower state wide r~tes substantially below what they otherwise ha~~ been under tha best thermal alternative using natural gas and coal ·fired gen~ration. Using the lowest life cycle cost alter­native yields lower rates i:r(Jm a.bout. 2007 and beyond. Before this date it is necessary to apply certain amounts of rate stabiliza­tion to prevent rates from r.ising above what they would have been under the thermal al·ternativeo · This is .sho'.m quite clearly in Figure ··$··where the state wide average ra-:.:.e without Susitna and Bradley increase dramatically over the period shown. The a.veraqe rate for Anchorage, Juneau ar.td the four d.am ,pool, v;~it:hout Susitna and Bradley also i::1crea.ses i .. n a simila~r fashion, bu·t rema.i.ns at a somewhat lower level. Also it c~n be seen that the diff~r~nce between these two rates a.lso cor.ttinuaiJ.y incr.eases . 'rhe .state wide rate with Susitna and Bradl(!Y is s,ig·ni.fic.?J.ntly lower t:.han either of the other two ove:r most of the perioci shown. Betw~~·sn 1996 and 2007. the state wiie rate with Susitna and Bradley is noticeably hi9·her and this is the period the Inajor portion of the rate stabilization is required •

. For projects of this type using state t:mds for ra.tt~ stabilizat.i<-Jn rather than directly for construction yields the maximum 'renefit for the leest amount of mon~y. To achieve the same degree of e3.rly· year rate reduction through direct funding of construction would require several times as much money. Funds used for rate stabilization shoruld be capitalized just like interest during construction is capitalized because it is necessary to enable c.;onEJtruction of the project. This rate stabilization will require a fund established over eight years, 1986 to 1993 inclusive, made up of equal deposits of approxi:matel::,. $250 million, with all i.r.tterest at:cruing t.o the fund. This l.5 the minimum amount required assuming tax exempt financing is used for the major pro­jects. To insure t~x exempt fini:kncing ~~ndE~r today 1 s tax laws, direct billing b 1:~: 't:'le state wide au<:.:.-~}cf for energy is necessary, wil~.h each ut.ility .oi, l.ii~g by separat:,- :· .ine i tent its other costs.

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Thus to achieve rate equalization at the bus bar level throughout the state, to minimize electric rates state wide over the lonq run and to endow a program which will assume complete responsibility for meeting state wide bus bar electrical energy requirements far into the futureu the two capital requirements identified abov~ must be met. F·u.,.,ding, rate equa.lization until. the cost cross over in approximately 2007 will require setting aside approximately $100 million pe,r year for eight years plus accrued interest and rate stabilizat.ion will require approximately $250 million per year for the sa~e eiqht year period. The total cost to the state beinq around $:~50 million per year for eight years o

Existinq Power Authority projects and appropriations such as the dams in the fc•ux· dam pool, the Anchorage-Fairbanks tie line and current Bradley and Susitna construction appropriations should be included in the equity endowment in addition to the amounts pre­viously cited. Also the state loan to the four dam pool should be conve?ted to an equity grant. This will insure that all potential savings from these projects will be shared equally and make maxi­mum contribution to lowering the state wide power cost.

The above program will result in lower rates immediately for all portions of the state with higher than average power prod~ction

· costs and no higher rates for th~~~ parts of the state with lower than average power costs. After 2007, all areas of the state will experience bus bar pgwer rates substantially less than they other­wise would. Financing of all required power production projects will be assured including Bradley Lake, Crater Lake, Susitna and the Bush addi tiona· required to meet load increases engendered by this program.

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ORGANIZATION

by Robert Ma~tin, Subcommittee Chairman

We assume the AL!ska Power Authority. (APA) will be the organiza­

tion to administer this program. Since state funds will be

involved, a state-wide, electrical power-production rate will

have to be determined, an an enormous amount of staff work must

be a-ccomplished, it is simpler to assign these duties to an

existing organization than to create a new one. The APA will

continue to plan, design, finance, and construct new generation

and transmission facilities.

The Committee strongly feels that the APA is unable to carry out

all those duties under its current organization. The APA is

essentially a utility and like all utilities, it must be a very

stable organization in order to secure favorable financi.ng, to

more easily predict their future requirements, and to give their

consumers the s~~nse of security they need to live out their daily

lives. The APA. is, and has been for the past several years, an

unstable organization because a majority of the Board of

Directors are political appointees of, and in fact ~abinet mem­

bers of the Governor's Administration.

Cabinet members serve at the pleasure of the Governor and change

whenever the State elects a new governor. Turnover is typicall:f

high even during an governor's tenure, thus practically guaran-. teeing there will always be new board members. Every four or

eight years, an entirely new board is created, with a new agenda,

new goals and objectives, new ways of doing business--a new man­

date, if you will, of .the people of Alaska. Commissioners are

extremely busy people and more than 50% of the time will send an

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appointee. This creates an educational problem at every meeting

and detracts from the consistency of board action. In addition"

commissioners' prime responsibility is to their own departments-­

a significant situation when APA is competing for limited funds.

For many similar reasons, the APA must enjoy a greater measure of

autonomy then it currer:&tly does. The APA is seen. to a politica·l

extension of the Governor and many times is the center of

L~gislative/Administrative confrontation. The Board and its

staff must be able to make sound business decisions free from the

pressures of politics, able to stand through any change of admi­

nistrationc The APA needs to be able to report directly to the

Governor and the Legislature rather than being a budgetary part

of the Department of Commerce and Economic Development as it is

now.

The Co~mittee believes the necessary stability is achievable within the APA, but only with a drastic change in the make-up of the Board and in the way the Board is chosen. First, the Board

should be a nine-member body, eight of whom would be appointed by

the GQvernor for staggered six-year terms and approved by the

Legislature; and one to be the Commissiongr of Commerce and

Ecgnomic Development who would serve at the pleasure of the

Governor. These members shold not only be regionally represen­

tative, but should contain oner person from the banking industry

and on consumer representative. Four of the eight ~hould be uti­

lity representatives recommended .from the membership of the

Alaska State Coordinating Counc1.ls (ASCC). Two of the utility

members should be from the railbelt, one from the southeast, and

one from the bush.

2

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The ASCC is an existing body of electrical utility managers simi­

lar to other coordinating councils throughout the us and Canada

who make the difficult and complex decisions regarding intercon­

nected genera tiona and transmission systems. The ASCC has been

in existence for several years and is representative of and open

to all Alaskan electric~! utilities.

Th_e Committe believes the experience and expertise which exists

within the ASCC could be extremely benaficial to the Board of APA

and the staff of APA.., In fact, we recommend that the A.SCC be

authorized to act in an advisory capacity both to the Board and

the staff. The organization would prevent unnecessary and expen­

sive duplication of effort, would add to the stability of the APA

and would look like this:

. BOARD OF DIRECTORS

. .

.

ASCC

STAFF J .

Using the ASCC in this mar1ner relieves the APA from having to

support a large committee systeM, since the ASCC is self­

supporting. Also, since the ASCC is made up primarily of utility

3.

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managers, they each have available to them whatever support staff exists in each utili"Cy. In some cases, the individual staffs exceed in size and expertise that which is currently available to the APA.

One organizational scenario which deserves greater study is the possibility of changing the APA into a Regional Electrical

Authority simila to the one already in existence, except that the

,E!C:::ion served would be all of Ala·ska. This scenario would require some statutory changes, but would change the APA into a political subdivision of the state with all of the powers of a

municipality. The organization we envision would be very similar to the Nebraska Public Power District.

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APPENDIX

Governor's Letter Establishing the Committee

List of Committee Members

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STATE 0 F ... ~1. .. -\.S K.A CF'F'lC:£ CF'.nH: :OCVE:RNCR

November 9, 1984

Mr. Charles Sitkin Arthur Younq & Company 1031 West Fourth Avenue Anchorage, AK 99501

Dear psi tkin:

It is my pleasure to appoint you to the Advisory Committee on Statewide Power Production Costs. The task of this Committee is to investigate the economic, financial, political, and administrative feasibility of a comprehensive State program to estei:blish a basis for equitable power production costs in Alaska through purchase and resale agreements. Specifically 7 the Committee is to: ·

1) investiqate the application of power cost averag:i.ng techniques elsewhere, such as in Alberta, Nebraska, New York,· and the ar'ea served by the Bonneville Power Administration~

2)

3)

;explore the workability of the concept in Alaska; and

consider possible strategies for implementing it if it is fqund to be a feasible ideae

. . The Committee will report directly to the Board of Directors of the Alaska Power A,uthority. Larry Crawford, Executive Director of the Alaska Power Authority, will be in touch with you about the details of the Committe~, including activities, schedules, technical support, and the working relationship with the Board of 9irectors.

Let me explain briefly the reason for creating this Committee. I believe that Alaska 1 s energy policy needs additional . direction and coherence. We have completed several expensive hydroelectric projects around the state, and we are planning more. We are pushing ahead with small-scale energy programs in rural areas, and last year t.-Te expanded the State·' s direct subsidy program for high-cost rural electrical systems.

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All of this activity in the energy fiela is good because it helps lower electric rates to the consumers. But I am concerned because the State's cash contribution to energy projects is not benefiting all Alaskans equally. The problem of disparity in benefits becomes even greater when we consider funding major new electric projects in urban areas.

We currently have in statute an Energy Program for Alaska. This program addresses the fairness issue in a very limited way, through the debt-poolinq concept. We h&ve found that even this mechanism may not be workable because of the unwiJ .. lingness of customers to expose themselves to rate increases caused by debt financing of future projects in the system. This is the lesson of the still-unfinished negotia­tions between the Alaska Power Authority and the utilities in the 4-dam-pool communities.

My ide.a is to look at averaging power production costs across ~he state through an administrative mechanism that allows the State to purchase power from producing utilities and resell it at a blended statewide rate.

This new program could be a· solid basis for power sales contracts for the 4-dam pool, for the Bradley Lake project, and for Susitna. If this idea is considered feasible bv the Advisory Committee and the Board of Directors of the Power Authority, it could give new purpose and direction to the Energy Program for Alaska.

Sincerely,

Governor

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ADVISORY COMMITTEE ON STATEWIDE POWER PRODUCTION COSTS

Charles P. Sitkin, Arthur Young & Company, Chairman Nels A. Andersen, Jr., Co-Ma Services Charles Freeman, Mayor, Ketchikan

Loyd Hodson, Gen. Mgr., Alaska Village Electric Cooperative David Hutchens, Exec. Director, ARECA

Loren Karro, Tlingit-Haida REA Robert Martin, Jr., Gen. Mgr., Ch~gach Electric Association

Don Mellish, National Bank of Alaska David Nease, Gen. Mgr., Kodiak Electric Association

Tom Stahr, Gen. Mgr., Anchorage Municipal Light & Power Ivan Forsheim, Soard President, Golden Valley Electric Assoc. Eric Meyer, AKPIRG