HEA subsidiary also to have deregulation election

As Homer Electric Association proceeds with its election to withdraw from the oversight of the state utilities regulator, the Regulatory Commission of Alaska, the HEA subsidiary Alaska Electric and Energy Cooperative is also planning a deregulation election.

The subsidiary legally owns HEA’s generation and transmission infrastructure and operates as a separate cooperative with HEA as its sole member. According to an HEA information sheet, AEEC has a nine-member board of directors who historically have been identical to the HEA board of directors and also shares HEA’s general manager.

Alaska statute allows a publicly regulated utility cooperative to withdraw from regulatory oversight by a majority vote of its members. HEA mailed the first ballots in its deregulation election on Oct. 5, and members will return the final ballots by Nov. 27 to the regulatory commission, which will count the ballots and announce the results in December.

The commission announced AEEC’s petition to deregulate on its website Friday. According to the commission’s notice, both companies’ board of directors unanimously voted for the deregulation election at their May 10, 2016, meeting.

Following Alaska statute, the AEEC will hold a public meeting on the deregulation on Dec. 13 at 3 p.m. in HEA’s Kenai office. The HEA board of directors, as the representatives of AEEC’s sole member, will receive the ballot eight days later, on Dec. 21.

According to an HEA information sheet, AEEC was formed in August 2001 after the dissolution of the Alaska Electric Generation and Transmission Cooperative, a subsidiary group that played a similar infrastructure-owning role with HEA and the Matanuska Electric Association as its two members.

In a previous Clarion interview, HEA and AEEC General Manager Brad Janorschke said AEEC is “a financial tool to allow us to remove the upward pressure on rates” by borrowing money on more favorable terms.

The cooperatives together hold about $372 million in debt. Janorschke said HEA owes about 60 percent of this debt to the National Rural Utilities Cooperative Finance Corporation, a non-profit finance corporation that lends to electrical cooperatives, while the rest — about $150 million — is owed by AEEC to the U.S. Department of Agriculture’s Rural Utility Service.

Janorschke said the company took on most of this debt between 2011 and 2014 when HEA was building or acquiring three gas-fired power plants in its Independent Light project.

Janorschke said power lines are expensive to insure because they are relatively fragile and exposed to the elements. Insurers for transmission infrastructure therefore require owners to generate greater revenue in order to demonstrate their ability to pay insurance, which would have raised HEA’s rates if ownership of the lines hadn’t been assigned to a different entity.

Janorschke said the arrangement with AEEC saves HEA about $2.5 million a year. According to the HEA information sheet, two cooperatives’ respective lenders require HEA to earn 35 percent more revenue than its debt obligation, while requiring AEEC to earn 5 percent more than its debt obligation.

Taking on debt

AEEC’s debt acquisition has been controversial in the past. In November 2010, the watchdog group HEA Members Forum sent an informal complaint to the RCA about an April 2010 AEEC resolution that allowed its four officers — president, vice president, secretary, finance director and general manager — all positions then filled by the same people who held them at HEA — to borrow up to $180 million for 35 years.

“(The resolution), substantially, authorizes any one or all of the individuals listed to act at their individual discretion to commit the HEA financially as they determine to be in the best interest of the HEA,” the group wrote in a November 2010 letter to the regulatory commission signed by eight HEA members. In January 2011 the Members of Homer Electric Association, Inc. called for a formal RCA investigation into the relationship between HEA and AEEC, and the AEEC’s authority to take on debt. In the request, David Bear, a member of the association, wrote that “the present relationship between HEA and AEEC serves to preclude meaningful oversight by HEA member/owners…”

The regulatory commission denied the investigation request in an order issued July 19, 2011.

“We fail to see how … concerns over the debt limitations of HEA and AEEC would warrant an investigation by the commission at this juncture,” the order states. “The adoption of debt caps for HEA and AEEC are matters for the Boards of Directors of HEA and AEEC, not the commission. We find that MHEA’s allegations concerning HEA and AEEC’s debt limitations are internal cooperative governance issues that do not warrant an investigation by the commission.”

The possibility of AEEC following HEA’s deregulation election was discussed at an RCA meeting on Oct. 12. Bob Shavelson, executive director of conservation nonprofit Cook Inletkeeper and a signer of the HEA Member Forum’s 2010 RCA complaint, submitted questions to the commissioners at that meeting, some of which were about AEEC.

“Will HEA — which solely controls AEEC ­— turn right around and deregulate AEEC?” Shavelson wrote to the commission. “If so, why didn’t HEA tell its members in the official notice of the deregulation election? How would a deregulation vote affect AEEC financing? Do AEEC’s financing institutions view deregulation as a good thing or a bad thing in regard to debt service, and why?”

RCA consideration

In the Oct. 12 RCA meeting, Assistant Attorney General Stuart Goering was asked about the possibility of AEEC deregulating.

Goering cited as precedents two previous RCA cases which he said suggested “that generation to transmission cooperatives that are owned either by a single member or by a small number of utility members would have to have essentially a pass-through election where the actual consumers of those utilities would vote to deregulate as opposed to having simply the sort of formal members of the cooperatives vote.”

One of the decisions Goering cited was a 1985 case in which AEEC’s predecessor Alaska Electric Generation and Transmission Cooperative — with HEA and Matanuska Electric Association as its two members — sought to exempt itself from RCA oversight to order to more quickly install a generator.

The decision by the RCA predecessor agency Alaska Public Utilities Commission concluded “that it would be appropriate to place (the cooperative) on notice that, pending further consideration and order of the Commission, any election to be exempt from the Alaska Public Utilities Commission Act (AS 42.05) must be based on the vote of the consumers of the members of (the Alaska Electric Generation and Transmission Cooperative).”

“The Commission has preliminarily examined the applicable statutes, and believes that these statutes do not clearly establish whether an election by (the cooperative) to be exempt from regulation must be based on a vote of its two members, through their Boards of Directors, or on a vote of the consumers of HEA and (Matanuska Electric Association),” the decision states. “It does, however, seem clear that the Legislature contemplated an election by the actual consumers, because at the time the statute was passed no generation and transmission cooperatives existed, and all cooperatives had actual consumers as their members.”

Ben Boettger is a reporter for the Peninsulca Clarion. He can be reached at ben.boettger@peninsulaclarion.com.