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A cost question for the Railbelt; debate continues over grid reform
The question of how best to manage the Alaska Railbelt’s power transmission grid has long been a subject of debate. And, with the Regulatory Commission of Alaska having this summer recommended the use of an independent transmission company to manage the grid, and with the Railbelt electric utilities engaged in a voluntary project aimed at grid management reform, matters seem to be coming to a head.
The primary purpose of grid reform is to reduce the cost of electricity for Railbelt consumers through the optimum use of available power generation facilities, while also ensuring that acceptable levels of power supply reliability are sustained. As it currently stands, the grid infrastructure is aging and has single points of failure. Because of limited transmission capabilities, the grid tends to become congested, thus limiting the possibility of shipping relatively cheap hydropower from the southern Kenai Peninsula, for example, or gas-fired power from Southcentral Alaska, to wherever it may be needed.
General agreement There seems to be general agreement that appropriate grid upgrades could significantly decongest the system, while system wide economic dispatch, to make use of the cheapest available power source at any moment in time, could significantly reduce overall power costs.
Different portions of the grid are currently owned and operated by five independent utilities and the state of Alaska. The concept behind grid reform is to facilitate necessary investments in grid upgrades and enable economic dispatch through some form of grid unification. Grid unification could also eliminate the “pancaking” of transmission rates, a mechanism whereby each utility adds its transmission fees to the cost of shipping power across multiple sections of the grid.
During the Alaska Energy Authority board meeting on Jan. 13 David Gillespie, CEO of the Alaska Railbelt Transmission and Electric Company, talked to the board about the potential benefits of having a transmission company, or transco, manage the grid, while also having a unified system operator, or USO, set the rules under which the transco operates. ARCTEC is an entity formed by some of the Railbelt utilities to pursue the USO concept.
Complex issues Gillespie and Tony Izzo, general manager of Matanuska Electric Association, discussed with AEA board members some of the questions that the complex issue of grid reform faces. MEA, while actively engaged with the other utilities in the grid reform efforts, is questioning assumptions that the transco is necessarily the optimum solution for the Railbelt grid and wants to see a thorough cost/benefit analysis completed and assessed before any final decisions are made.
A transco is typically a private for-profit company, operating as a government regulated utility. The company makes money by investing capital in the transmission grid infrastructure and then earning a return on that capital investment. The return on investment would come from the fees that the transco charges for shipping power over its transmission network. Provided that the benefits in power cost savings that come from transmission system upgrades exceed the return on the investment in those upgrades, electricity consumers should see a net reduction in their electricity rates.
The cost of finance Gillespie said that, typically, a transco would finance grid upgrades using around 80 percent debt and 20 percent equity, with an expectation of a 10 percent rate of return on equity. He likened the formation of a transco to the creation of a toolkit, with the possibility of various forms of financing, including private equity and state-backed bonds. However, because the cost of energy dominates the overall cost of electricity in the Railbelt, differences in the rates of return on capital for transmission upgrades would have minimal impacts on electricity rates, he suggested.
However, there was a lengthy discussion on potential financing costs. The current utilities are non-profit, member-owned cooperatives with relatively modest requirements for return on capital. And Alaska state loans may be available through the Alaska Industrial Development and Export Authority, with a rate close to 4 percent being a possibility.
Izzo expressed caution that, by comparison, current rates of return on the privately owned gas pipelines in the Cook Inlet region are 12.5 percent. And, if applied to transmission costs, “12.5 percent is a big, thick pancake,” he commented.
There is also a debate over how much money actually needs to be invested in the grid, to achieve the required reductions in grid congestion. Based on a 2013 Alaska Energy Authority analysis into desirable grid upgrades, people have been using a figure of about $900 million. That level of investment would encompass major improvements to the southern section of the grid, enabling the flexible transmission of power off the Kenai Peninsula, and improved capacity and reliability for the transmission system in the northern part of the grid, between Southcentral and the Fairbanks region, in the Interior.
MEA has suggested that a substantial portion of the anticipated transmission benefits could be achieved at a much lower cost, perhaps for as little as $200 million.
Changing the business model A primary justification that has been put forward in the past for grid unification is the apparent inability of the electric utilities to invest in the grid, given the balkanized nature of the grid ownership and management. And Gillespie commented that the current Railbelt business model does not support interregional planning or investment. It is very difficult for the utilities to plan inter-regionally when costs that appear in one utility’s territory generate benefits for one of the other utilities, he said.
The utilities have in the past also commented that they are stretched financially, given their recent major investments in new power generation facilities.
Izzo has commented to Petroleum News that while $900 million in transmission system upgrades is probably beyond the borrowing capabilities of the utilities, a question remains over whether significant benefits could be achieved a step at a time at a lower and more affordable cost. And issues will arise over the relative merits of specific transmission upgrades for different utilities, regardless of whether or not a transco is implemented, Izzo said.
Izzo emphasized that MEA is fully committed to the USO and transco effort that the utilities are pursuing but, without discounting the transco arrangement, the utility wants to make sure that all options for the grid are fully considered.
Gillespie told the AEA board that at the highest level all of the utilities are trying to accomplish the same thing, making the best use of assets that customers have paid for. He said that he was hopeful that over the coming months the utilities would narrow down those areas where there are differences of viewpoint.
- ALAN BAILEY
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