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New power rates set to overcollect

Posted: Sunday, April 27, 2008

Economic shocks make for a big story, and exaggerated descriptions of potential economic impacts are often found in such stories. Loss of Juneau's connection to low-cost power from the Snettisham hydro project was no exception.

"AEL&P is burning through $1 million every three days in diesel fuel costs to keep Juneau's juice flowing," wrote an Empire reporter, paraphrasing an official of Alaska Electric Light & Power, the local electric utility. The statement may have been true at the time, but it soon became untrue as the utility's customers made the expected sharp reductions in usage. Last week the utility estimated its use of diesel had fallen to less than two-thirds the rate initially stated.

Even at the reduced level, the cost of diesel is $200,000 per day. That's 5.4 percent of the average daily income of Juneau residents. How that money is going to be extracted from the pockets and purses of Juneau residents and the cash registers of Juneau businesses is what this story is about.

AEL&P wants state regulators to approve an emergency rate increase that would boost a hypothetical $125 monthly residential electric bill to $561. According to AEL&P's calculations the new rate will raise $300,000 of additional revenue per day.

But wait; $300,000 is $100,000 more than AEL&P claims it needs to pay its daily fuel bill. What gives?

AEL&P explains that they started burning additional fuel on April 16. By the time the new rate is supposed to go into effect, on May 1, the company will already have used two weeks of extra diesel. Their plan front-loads the rate, allowing them to collect in four weeks their projected fuel cost for six weeks. The company says that's OK, because it will "true-up" later, adjusting the rate downward after power consumers have caught up on what they "owe" the utility.

In terms of softening the blow to the Juneau economy, one could have hardly chosen a worse scheme. Instead of trying to shoehorn six weeks of costs into a four-week billing cycle AEL&P should be seeking ways to stretch the payments out. The company will be paid, but it doesn't need to be paid in such a hurry. If cash flow were that big a problem, then the company wouldn't be sufficiently creditworthy to be in the utility business.

Other elements of the AEL&P's proposed emergency rate also deserve scrutiny. AEL&P continues to draw power from three small hydro projects that remain connected to the Juneau grid. With overall power consumption reduced by 20 percent, as it was in the first week after the line went down, the low-cost hydro plants supply 21 percent of area power needs. If efforts since that first week have further reduced power use, then the percentage of low-cost hydro in the mix has risen. If that's the case, as more recent data indicates, then AEL&P's emergency rate is set to overcollect for this reason as well.

Eliminating the front-loading would reduce the hypothetical residential May billing from $561 to $416. Further reductions would result from a more realistic estimate of conservation. The reductions won't cause backsliding on conservation, it's still going to hurt, but it would moderate the peak of the impact on Juneau's economy, easing the economic shock on households and local businesses.

It is not clear how the Regulatory Commission of Alaska will handle AEL&P's proposal.

"If the commission disagrees, they can let us know," said Connie Hulbert, AEL&P's secretary-treasurer.

The commission could let the new rate to go into effect as soon as May 1, without even a hearing or review. If readers believe the rates deserve a second look, they should communicate soon with the Regulatory Commission of Alaska. The e-mail is rca.mail@alaska.gov. Reference proposed tariff TA360-1.

The ultimate economic impact of the busted transmission line depends on how long it is down. Whatever that duration, the additional costs of diesel fuel will be paid by Juneau consumers. Consumers have moderated the economic shock by reducing consumption, allowing a bigger percentage of the load to be covered by the remaining hydro plants. It makes no sense to undo much of that economic gain by front-loading the emergency rates, or by overstating the rate increase needed by underestimating the effectiveness of Juneau's conservation effort.

Correction: In my April 6 column I said Rep. Les Gara, D-Anchorage, wanted a special cash payout of state money to "go only to the poor." Gara's proposal would have given the money to the more than half of the state's residents with household incomes less than 300 percent of the federal poverty level. I should have made that clear.

• Economist Gregg Erickson is the owner of a Juneau consulting firm (www.EricksonEconomics.com).He can be reached at gerickso@alaska.com.



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