Electric Utility Regulation in Alaska
Robert M. Pickett
Chairman, Regulatory Commission of Alaska
December 8, 2008
The challenges faced by Alaska’s electric utilities are immense. Extreme volatility in
fuel prices has come at a most difficult time. Many rural electric utilities are struggling
with staggering fuel oil price increases this winter, and some were unable to secure
adequate fuel supplies to carry them through next spring. Financial, technical and
managerial capacity issues are a threat to the long-term survival of a number of rural
utilities. The railbelt electric utilities are facing their most significant organizational and
capital investment decisions in a generation. These decisions will be made at a time when
the financial markets are in disarray, and long term utility planning assumptions are under
assault. This is the current environment surrounding electric utility regulation in Alaska.
Before discussing specific issues relating to the regulation of Alaska’s electric
utilities, I must offer a comment on what I can and can’t say. I can give an overview of
the statutory and regulatory framework for electric utility regulation in Alaska. I will
also speak about regulatory issues relating to Alaska’s Energy Plan, the Railbelt Energy
Grid Authority Study, and Integrated Resource Planning. I cannot speak about any issues
of fact, law, or policy in any pending Regulatory Commission of Alaska (RCA)
adjudicatory proceeding.
The Alaska Public Utilities Regulatory Act (AS 42.05) provides the legal framework
for public utility regulation in Alaska. The starting point for utility regulation is the
Certificate of Public Convenience and Necessity. A certificate may not be issued by the
RCA unless the Commission finds that the applicant is fit, willing and able to provide the
utility services applied for and that the services are required for the convenience and
necessity of the public. The certificate must describe the nature and extent of authority
granted in it, as appropriate for the services involved, a description of the authorized area
and the scope of operations of the public utility. A public utility may not operate and
receive compensation for providing a commodity or service without first having received
a Certificate of Public and Necessity. Upon complaint or upon its own motion, the
Commission, after notice and opportunity for hearing and for good cause, may amend,
modify, suspend, or revoke a certificate in whole or in part. Article 3 of AS 42.05 covers
Services and Facilities, with Section 42.05.291 describing the standards of service and
facilities. Approximately 122 electric utilities in Alaska currently have Certificates of
Public Convenience and Necessity.
Economic regulation of Alaska’s utilities is covered in Article 4 of AS 42.05, Rates
and Rate Schedules. Exemptions from economic regulation are described in 42.05.711.
Thirty-two electric utilities are economically regulated, and ninety are exempt from
economic regulation. The foundation of economic regulation is based on all rates being
just and reasonable, as described in Alaska Statutes Section 42.05.381. In order for the
Regulatory Commission of Alaska to make a determination as to whether an electric
utility’s proposed rates are just and reasonable, a number of factors must be carefully
evaluated, and certain findings must be made. A cost of service methodology is used in
making this determination.
Every economically regulated electric utility is required to file a complete Tariff with
the RCA. A Tariff is a set of policies, procedures, terms and conditions under which a
utility offers its services and facilities. A Tariff Advice (TA) filing is a procedure utility
companies must use to change its legally filed and effective tariff rate, charge, toll, rental,
rule, regulation, or condition of service. The review process for the filing prescribed by
AS 42.05.361-AS 42.05.441, includes a period for public comment (published under
Notices in local newspapers) This allows the Commission up to 45 days to approve,
reject, or suspend the tariff filing for further investigation. If the filing is suspended for
further investigation, statutory timelines (42.05.175) govern the issuance of final RCA
orders:
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The Commission shall issue a final order not later than 270 days after a complete
Tariff filing is made that does not change a utility’s revenue requirement or rate
design.
The Commission shall issue a final order not later than 450 days after a complete
Tariff filing is made that changes a utility’s revenue requirement or rate design.
RCA regulations (3 AAC 48.510) identify the following primary objectives for the
pricing of electricity:
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The cost causer should be the cost payer;
The revenue requirement or utility financial need;
Equity, which includes the fair-cost apportionment of revenue among customer
classes;
Conservation; and
Optimal use, which includes considerations of efficiency.
The Commission will, in its discretion, consider other pricing objectives on a case-bycase basis.
Several key areas are addressed in a complete electric utility tariff filing:
1. A test year is identified. This is a twelve month period used to compute the
revenue requirement of the utility.
2. The size of the utility’s rate base must be determined. The rate base is the
utility’s investment in its facilities and the working capital, or cash necessary to
pay for day-to-day operations.
3. Expenses must be identified and allocated. Depreciation expense is one of the
key elements of an electric utility’s revenue requirement. Depreciation records
the decline in service capacity of property. Alaska statutes (42.05.371) allow a
public utility to provide for the loss in service value of its property by charging
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adequate but not excessive depreciation expense for each major class of utility
property “used and useful” in serving the public.
4. Revenues for the test year must be identified, and fairly allocated among the
customer classes.
5. An allowable return on investment must be approved. This return is the return or
profit that the utility is given an opportunity to earn. It is calculated as a
percentage of the utility’s rate base.
6. A rate design that is shaped by the “cost causer-cost payer” principal must be
utilized.
The burden of proof is with the utility making the filing, and the utility must meet a
preponderance of the evidence standard in supporting its filing.
Several tools are used by the RCA to streamline adjustments to an electric utility’s
rates. Cost of Power Adjustment (COPA) is a mechanism that allows a power company
to adjust its rates to coincide with changes in fuel costs (3 AAC 52.503). Simplified
Rate Filing (SRF) is a process in which an electric utility may adjust its rates as
frequently as quarterly, but may not exceed a cumulative 20 percent in any three-year
period or a cumulative eight percent in a twelve-month period. Rate adjustments under
SFR regulations are in addition to purchased and fuel cost rate adjustments (AS
42.05.381(e) and 3 AAC 48.700).
Another responsibility given to the RCA concerns the Power Cost Equalization (PCE)
Program. PCE is a program administered by the Alaska Energy Authority (AEA),
designed to reduce the electric bills of residential customers living in rural Alaska.
Under the PCE program, the State of Alaska pays a portion of the electric bills for
consumers served by utilities participating in the program. The RCA determines if a
utility is eligible to participate in the program, and establishes the PCE rate (cents/kWh)
applicable to each participating utility, regardless of whether the utility is subject to
economic regulation. The Alaska Energy Authority determines eligibility of community
facilities and residential customers, and authorizes payment to the electric utility.
Commercial customers are not eligible to receive PCE credit. Participating utilities are
required to reduce each eligible customer’s bill to reflect the amount the State pays for
PCE.
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This ends my brief overview of the regulatory environment for Alaska’s electric
utilities. Now, let’s look forward. With the numerous challenges currently confronting
the industry, it is important to reflect upon the physical and organizational realities of the
State’s electric utilities. Alaska’s electrical energy infrastructure is very different than
the electrical energy systems in most of the United States. Our main electrical energy
grid only serves South-central Alaska and the Fairbanks area. Most of the 120
certificated electric utilities are in small, isolated communities with limited back-up
options, facing extreme environmental challenges. Many of the remote areas of Alaska
are also experiencing a population out-migration, which raises issues relating to a
sustainable customer base for the utilities. This is a daunting business environment for
any utility to successfully operate in.
In the spring of 2008, the State of Alaska began the development of the Alaska
Energy Plan, under the direction of the Alaska Energy Authority. The objectives of the
Energy Plan include providing a focus tool for energy opportunities, improving local
economies, and working towards sustainable communities. The implementation schedule
includes a roll-out of community and regional focusing tools in December. The Alaska
Energy Authority will coordinate with utilities, municipalities, and native corporations.
Of particular significance to Southcentral Alaska and Fairbanks was the release of
the Railbelt Energy Grid Authority Final Study in September 2008. This study evaluated
the feasibility, and economic and non-economic benefits, associated with the formation
of a regional generation and transmission (G & T) entity called the Railbelt Energy Grid
Authority (REGA), whose purpose is to manage and dispatch electric power on the
Railbelt grid. The state objectives of the study were to:
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Identify and assess a list of options for the management, operation, access
rules, resource planning, and regulatory structures of the Railbelt generation
and transmission system.
For certain agreed upon options, further analyze and provide recommendations
of possible alternative structures to manage and dispatch electric power
throughout the Railbelt region.
Provide a final work product for stakeholders and decision-makers to consider
in planning how to meet the Railbelt region’s needs over the next 30 years.
The Final REGA study included conclusions, recommendations, and an implementation
plan for the development of a regional G & T entity. The Regulatory Commission of
Alaska has been coordinating with the Alaska Energy Authority throughout the REGA
process, and has been assessing the potential regulatory impact upon the affected utilities
and ratepayers.
Decisions made over the next several years will shape the electric utility industry
in Alaska for a generation. These include State of Alaska policy and funding decisions,
the direction and amount of electric utility investments, and the impact of Federal
energy policy directions upon the State.
We live in interesting times, with great
challenges before us
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