Alaska’s electric utilities facing changes

Changes are coming to the regulations that guide Alaska’s electric utilities.

Where those changes come from and how broad they are will be decided in the next six months, but nothing appears to be off limits.

In the Legislature, House Bill 78 is being scrutinized by the House Energy Committee. In the Regulatory Commission of Alaska, draft rules would bring state regulations more in line with Federal Energy Regulatory Commission requirements that guide utilities in the Lower 48.

The RCA has direct oversight of Alaska utilities and power producers because the state’s power grids are separate from the Lower 48 network that traverses state lines.

HB 78 sponsor Tammie Wilson, R-North Pole, contends her bill would spur private investment in Alaska’s renewable and nontraditional power generation. Wilson says it would level a regulatory playing field that has been tilted towards utilities for more than 30 years and provide “open access” to Alaska’s transmission lines, particularly the Railbelt grid.

The legislation would direct the RCA to establish a standard tariff for Railbelt transmission that now has numerous tariffs due to fragmented ownership of the system by regional utilities. Tacking multiple tariffs on power being sent through the system leads to what is known as “rate pancaking” and can make transmitting once-economic power unfeasible.

Advocates of the bill are quick to note that much of the Railbelt transmission infrastructure has been paid for by the state over decades, and therefore claim utilities should not be able to charge individual tariffs.

A potentially major matter the RCA has taken up deals with how the cost of power generation is defined. It all comes down to “average” versus “incremental.”

The Alaska Independent Power Producers Association, a group of nine companies that produce small-scale power or otherwise promote and work in the industry, insists the state’s utilities — again with an emphasis on the large utilities in the Railbelt — need to calculate power cost on an incremental basis. That would mean determining which generation source they use is the most expensive and requiring them to purchase power from another entity if it can be produced cheaper.

Currently, most utilities calculate their average power cost across all generation platforms as the cost another power source would need to beat, also known as their avoided cost.

The RCA put a draft rule out for public comment March 4 that would, among other things, most notably defines avoided cost as incremental. It is out for public comment until April 3.

“This rulemaking has the opportunity to open the door to the kind of private investment that will help shape and expand Alaska’s energy system for the next 30, 40, 50 years,” Teresa Clemmer, an attorney for Alaska Environmental Power, testified to the RCA.

Alaska is the only state in the country that adheres to the average avoided cost structure, she said.

Without the change, independent producers cannot get the long-term purchase agreements needed to secure private financing for generation infrastructure, the producers claim.

In concert with the rule, HB 78 would push utilities to purchase power from an independent source when the cost of that power is “at or below the utility’s avoided cost,” according to an analysis of the bill from Wilson’s office.

The Alaska Railbelt Cooperative Transmission and Electric Co., a consortium of Railbelt utilities known as ARCTEC, insists the legislation is duplicative to what the RCA is doing and attempts to solve problems best left to energy regulatory experts.

The draft rule was spurred by a proposed rulemaking docket submitted by Alaska Environmental Power — the Delta wind farm — which has been haggling with Golden Valley Electric Association for years over a long-term power purchase agreement. AEP owner Mike Craft has a two-megawatt sale contract in place with the Interior utility and has said repeatedly that he wants to expand his two-turbine wind farm, but can’t without a larger incremental cost-based contract that Golden Valley won’t agree to.

Craft says Golden Valley chooses to spurn wind power and burn more expensive fuel oil to retain control of its generation.

Cook Inlet Region Inc. energy development director Suzanne Gibson said to the RCA that the Southcentral Alaska Native corporation supports HB 78 and a change to incremental avoided cost rules.

She said CIRI couldn’t expand its Fire Island Wind project because it could not find a buyer for the power, despite the fact that the cost of the power came in below the incremental avoided cost of most Railbelt utilities.

“The lack of a regulatory framework and a mandate regarding fair consideration and integration of independent power is the primary barrier preventing successful development of Phase 2 (of Fire Island),” Gibson said.

Golden Valley and other utilities say it’s not nearly that simple.

They generally agree that the tariff issue needs to be resolved and say they’ll always buy the cheapest power. However, integrating a small, often highly variable power source into a large grid can be prohibitively expensive, the utilities assert.

Mike Wright, Golden Valley’s vice president of transmission and distribution testified to the House Energy Committee that all the Railbelt utilities offer open access to the transmission system.

Golden Valley doesn’t charge integration costs to producers less than two megawatts, he said, and they can choose between paying a quarterly adjusted tariff or negotiating a long-term rate.

Utilities buying power from a variable, or non-firm, source must produce back-up power to offset fluctuations in generation from a source such as wind, he said. That can even lead to excess generation during peak production times.

ARCTEC CEO David Gillespie told the House committee that avoided cost varies “minute to minute, hour to hour, day to day,” as utilities adjust production for demand and therefore is difficult to accurately project long-term, as small producers need.

“The utility is required to make an estimate about that avoided cost over the next 20 years and about the only thing you can say about that estimate is that it will be wrong,” Gillespie said.

Thus, utility shareholders end up taking the risk associated with a long-term purchase contract, he said. Matanuska Electric Association General Manager Joe Griffith said in an interview the incremental avoided cost concept “simply won’t work” because independent producers will be able to claim a utility’s highest cost generation option, whether it’s in use or not, is the avoided cost they need to beat.

Utilities are always happy to buy truly cheaper power, he said, given they work on such small, and regulated, return margins. MEA’s annual rate of return is less than 5 percent, according to Griffith.

“(The independent producers’) idea of open access means no cost is not the way it works,” he said.

Docket timelines

HB 78 would also shorten the RCA’s statutory rulemaking timeline from two years to one. Shortening the rulemaking process would benefit projects that require quick resolution for private investment, according to Wilson’s office, and would also be consistent with the state’s energy policy to streamline regulatory practices. RCA Chair Bob Pickett testified to House Energy that the commission receives between 700 and 900 filings per year and the current requirement was set by the Legislature out of necessity.

“Ideally, we would like to get a rulemaking process to its conclusion sooner than the two-year deadline and that would be entirely possible if we didn’t have the workload we currently have,” Pickett said.

Moving complicated dockets quickly while still giving each side ample opportunity to state a case is very challenging, if not nearly impossible, according to Pickett.

Elwood Brehmer is a reporter for the Alaska Journal of Commerce.