Current PCE program

This report is not an effort to justify the existence of the Power Cost Equalization Program (PCE) in any way or form.  Whether PCE stays or goes is a policy decision.  Information on the support for and the history of PCE can be found in the Business Cache Volume 7, Number 3, cover page, of the Alaska Digest October-November 1997, page 11, and the Anchorage Daily News, Friday October 17, 1997, Page B8.   Once it is agreed that PCE is a state program which is beneficial and desirable for all Alaskan residents, the next question is how the existing program can be made more effective.

This is one person's opinion, which currently works for an electric utility, of what changes should be made to improve the existing PCE program.  The goal of the PCE program should be to lower the cost paid for electricity by rural consumers.  In its current form, PCE compensation is cost based.  Therefore, utility costs, up to a State determined ceiling, drive the amount of an electrical bill paid by the State of Alaska for the customer.  This is just bad protocol.  The electric utility which has the control of costs has no real incentive to minimize costs, since the State of Alaska will pay 95% of the verifiable and reasonable costs between $0.095 and $0.525.  To compound this situation an overwhelming majority of electrical Utilities receiving PCE are unregulated.  Therefore, the APUC only does a cursory annual review of the operating expenses and rate base.  To further complicate the situation the State of Alaska gives grants to utilities. Alot of the grant money is directed towards municipal owned electric utilities for resolving problems the utilities should have resolved internally.  These are the same utilities that are not regulated by the APUC.

One method to change PCE from a cost to an incentive based program, would be to do a regression analysis on the fuel and non-fuel expenses in relationship to size, miles from the major distribution point, miles of plant, peak load, average load, access to a road system, production size, corporate size, and any other factor which would influence the cost of electricity.  From the regression analysis a PCE rate could be calculated for each utility based on the utilities specific characteristics in relationship to the total electrical industry. If this method is followed there will and should be long debates over which factors should be included "in the regression analysis”.  However, through this method an absolute standard of costs based on the utilities specific characteristics would be developed.  This would give utilities falling outside the typical cost area incentive to improve their performance while at the same time rewarding companies who are performing well.  At some predetermined interval of time the regression analysis should be performed again to keep the formula current with individual company and industry wide changes.  Companies who fall outside the typical costs as determined by the regression analysis would start to feel pressure from their consumers to improve efficiency and/or management.  Unlike administering PCE via a cost based method this incentive based method allows market forces to work.

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The ultimate beneficiary of the PCE program is the rural customers, but the electric utilities are the net beneficiaries.  The current method of distributing PCE funds is based on company costs which determines the rate of compensation from the PCE program.  The State of Alaska has only minor standards for the electric utility to meet in the form of kWh produced per gallon of fuel consumed.  At the risk of offending some of the rural electrical producers, it should be made known that the lack of professional management and practices in the electric utility business are causing part of the rural electrical cost problem.  The majority of electrical utilities are not regulated.  The only oversight is the local city council which may or may not be sufficient.  If the true goal of the PCE program is to lower the cost paid for electricity by rural consumers, the program should include some controls on utility management.  Utility management should include that all participants in the PCE program keep their accounting records according to the standard FERC account codes and be submitted electronically for review annually.  The review should include a comparative analysis of operating and capital expenses (which should include grants even though a dollar figure may not be spent by the utilities) with similar utilities.  Utilities that have expenses which fall outside of the normal expense boundary should be specifically worked with to lower their expenses.  This would be a process similar to the annual state access filings for the telephone utilities.  The review would also ensure that proper practices are being followed for capital purchases, like when a generator is being replaced does the utility have funds to replace the generator.  For utilities regulated by the RCA, submitting the accounting would be little different from submitting the Form M report.  For non-regulated utilities it would make the utilities receiving PCE much more accountable to the State of Alaska, a small price to pay for receiving PCE.  Another valuable practice would be to have individuals knowledgeable in electrical utility operations review the day to day practices and facilities of the utilities participating in the PCE program.  The reports produced from these visits would then provide suggestions for improvements for efficiency to the utilities receiving PCE and then monitor whether the suggestions were followed through with the financial reporting.

While the State grants and loans are not part of PCE, the funds impact rural power costs.  Much of the grant money is directed towards municipal owned electrical utilities.  The utility's corporate structure should have nothing to do with the ability to get a grant.  Grant money should not be, but is being used to purchase generators and other items which are considered part of the cost of typical operations.  This practice is unfair and breeds dependence on the State rather than fostering self sufficiency and good management practices.  One of the criteria for grant selection is based on health and safety issues.  In reality if the utility is creating an unsafe condition and is causing health and safety concerns, one needs to step back and consider whether or not the utility should be in business.  By granting the money for typical

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operating expenses which should be paid for by the utility, the State of Alaska only breeds dependence on itself.  There are many conditions where State funds are needed, take for example the bulk tank environmental compliance.  This is an extraordinary expense brought about by government regulation, and will not have to be dealt with again.  Outside of extraordinary expenses, as mentioned above, State grants and loans should be used for projects which lower the cost of power production or improves efficiency.  A project which lowers the cost of producing electricity will create less demand on PCE, not promote dependence on the state.

The goal of the PCE program is to lower the cost paid for electricity by rural consumers.  The existing program is wonderful in that it is very simple and gets PCE funds directly to those customers with high electrical costs.  The problem with the current PCE is that it rewards for costs with no accountability.  Changing the PCE compensation formula to reflect industry cost is an attempt to create accountability of each utilities cost to that of similar utilities in Alaska.  Having all utilities participating in PCE supply standardized financial information and have their facilities reviewed and critiqued makes the utilities accountable to the State of Alaska.  Changing the criteria and goals of grant and loan programs will create an overall approach to rural energy between different state programs.  Removing the state as a possible funding source for the typical cost of doing business will create greater accountability of the utility to its customers.

The State of Alaska has been generous with its funding of rural energy needs.  The problem is that these programs do not have the accountability controls built into them to accomplish the goal of lowering the cost of electricity for rural residents.  Instead of the programs leading to lower energy costs, over time State energy programs have lead many utilities to depend on the State of Alaska for operating and capital expenses. Rural Alaskan residents do need help with their electrical needs however, along with that help should be the responsibility of making the most of the available resources.  Any programs aimed at lowering rural energy costs must have built in controls and accountability.

            As PCE has controls and accountability associated with it, the PCE program needs stable consistent funding.  In the near future, Rural Alaska will be supplied with electricity by diesel generation.  Therefore, an annuity must be in place so that funding is available.  A possible mechanism for funding is a large initial sum of money invested in conjunction with the permanent dividend fund.  Revenues that were generated from the investment could be used for the annual PCE funding.  Any type of annuity that was set up must have the initial principal protected, to prevent use. The amount of principal required for such an annuity would be about 200 million dollars.  Revenue

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overages from the fund could be reinvested to cushion the years when there are revenue short falls.  If fewer demands were put on the PCE program, as should happen if it is revised, the excess funds could be used to fund some of the existing utility improvement programs which would cause even less demand on the PCE program.  At some point in time when the PCE program is no longer needed then the initial principal could be used as the legislator sees fit.  The current method of funding is only for the short term and needs to be changed.

            There is one last issue which needs to be dealt with that directly affects the PCE funding, Fuel costs in rural Alaska are artificially high.  The artificially high fuel price is caused by a lack of competition or regulatory oversight in the bulk fuel supply business in rural Alaska.  Essentially what is in place is an unregulated bulk fuel supplier monopoly. For example, a company purchasing 125,000 gallons of fuel a year flies fuel in 120 air miles because it is 10 cents a gallon cheaper flown in than purchasing from the barge bulk fuel supplier.  PCE rates are artificially high because electrical producers are paying artificially high fuel costs.  In the short term regulation is necessary of the monopolistic bulk fuel business.  In the long term, roads need to be constructed to connect communities to their supply centers.  Rural roads would have a tremendous impact on the cost of living in rural Alaska.

The following is a recap of the Suggestions for improving the PCE program:

1)    Change the method of PCE compensation from a cost based system to an efficiency or         standards based system

2)    In order to participate in the PCE program utilities must be accountable to the State of        Alaska.

3)     Tie available State funding for Rural Electric Utilities to the overall goal of driving down   rural electric customer costs

4)     Set up a stable funding mechanism for PCE.

5)     Take steps to lower the artificially high fuel costs in rural Alaska.

      Rural Alaska's electric situation needs help. If we don't do something now, the customers in these rural communities as well as the State of Alaska will be paying the high price.