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Providing coverage of Alaska and northern Canada's oil and gas industry
November 2018

Vol. 23, No.45 Week of November 11, 2018

Some questions over ML&P purchase

Utilities answer RCA questions over the terms under which Chugach Electric proposes to buy municipal electricity business

Alan Bailey

Petroleum News

During a Regulatory Commission of Alaska public meeting on Nov. 7 officials from Chugach Electric Association and Municipal Light & Power talked to the commissioners about the status of the proposed purchase of ML&P by Chugach Electric, and answered some commission questions about the takeover deal. The commission has opened a docket to gather information about the purchase, in advance of the formal process that will be required for regulatory approval.

In particular the commissioners asked about the legal or regulatory basis for allowing the Municipality of Anchorage to recover payments in lieu of taxes, or PILT payments, from Chugach Electric as part of the purchase arrangements. The commission also wants to understand the implications of a commitment by Chugach Electric to ensure that base rates for customers do not increase as a result of the purchase: Does this impinge on the commission’s statutory duty to ensure just, reasonable and nondiscriminatory rates?

Agreements negotiated

The move to combine the two utilities was approved by Anchorage voters in April. Since then the municipality and Chugach Electric have been negotiating the details of the deal and are now close to finalizing the terms of the purchase. There are actually four components to the complete deal: an agreement for the purchase of ML&P’s assets by Chugach Electric; an agreement for the purchase by Chugach Electric of electricity from ML&P’s interests in the Eklutna hydropower generation project; an agreement on how to handle the use and accounting of natural gas fuel from the Beluga River gas field; and the agreement that Chugach Electric will make annual PILT payments to the Municipal of Anchorage.

The utilities told the commission that the Chugach Electric board of directors has authorized CEO Lee Thibert to sign off on the four agreements, subject to certain conditions. The entities involved are in the process of finalizing the agreements. The Anchorage Assembly is scheduled to conduct a public hearing and make a decision on the deal during its Dec. 4 meeting, with the Dec. 18 assembly meeting being available as a backup, should a decision not be made on Dec. 4.

Assuming that the deal is agreed, that would lead to a filing with the RCA in the first quarter of 2019, asking for approval of certificate of public necessity and convenience modifications and for advanced approval of the recovery by Chugach Electric of costs associated with the acquisition. A decision by the RCA is anticipated in the second half of the year, leading to the deal closing within 120 days, if the commission approves the purchase transaction.

PILT payments

Much discussion during the Nov. 7 meeting revolved around the proposed PILT payments. Currently, ML&P makes PILT payments to the Municipality of Anchorage as a means of ensuring that the municipality receives revenues as a consequence of its ownership of ML&P. The idea is that Chugach Electric would continue making these payments to the municipality for a period of 50 years. Until 2033 the payments would be recovered from the rates charged to customers in the current ML&P service area, in the same manner as the payments are dealt with currently. After 2033 the payments would be recovered through the rates of all Chugach Electric customers. The total 50-year PILT commitment by Chugach Electric amounts to a net present value of around $166.8 million.

The manner in which the payments would initially be recovered from the ML&P service area reflects a commitment by the two utilities not to have the merger cause an immediate change to electricity base rates. Presumably, the rate structures for the two utility areas would tend to converge over time, eventually merging as the PILT recovery mechanism is also merged.

Linkage to Beluga gas

Utility attorneys explained to the commissioners that the PILT mechanism is also linked to the proposed mechanism for handling the accounting of natural gas obtained from the Beluga River field. Both ML&P and Chugach Electric own significant working interests in the field and obtain a substantial amount of their fuel gas from the field. But ML&P owns a higher proportion of the field than Chugach Electric, and each utility has its own protocol for pricing the gas. The consequence is that the cost benefit from the use of Beluga gas is higher for ML&P customers than for Chugach Electric customers.

The idea is that, following the merger, the accounting of the gas would remain separate for the two utility service areas, continuing the current procedures and enabling customers within the ML&P service area to continue to enjoy the benefits of relatively cheap gas. Again, the idea is to engineer the takeover without any immediate impact on electricity rates. Attorneys commented that the benefit of cheap gas in the ML&P area would be offset by the need to continue to fund PILT payments.

And, again, this dual arrangement for gas accounting would merge in 2033, in synchronization with the merging of the PILT arrangements.

Legal issues?

A potential legal issue arises over the PILT payments because by law, as a member-owned cooperative, Chugach Electric is not required to pay property taxes. Attorneys commented that, although a utility of this type cannot be compelled to pay taxes, there are legal precedents for agreements where PILT-type payments are made.

Commissioner Antony Scott questioned whether the PILT payments would be viewed as a type of “acquisition adjustment” for the ML&P purchase - in general, except in special circumstances, acquisition adjustments cannot be recovered through rates, he said.

Attorneys reiterated that ML&P already makes PILT payments, and that these payments would simply be transferred to Chugach Electric. Moreover, the transfer of the PILT payments is ultimately to the benefit of Anchorage electricity consumers, they said. Without the continuing revenue from PILT, the Municipality of Anchorage would not be willing to sell ML&P. And, without the sale of ML&P to Chugach Electric, consumers would not see the cost benefits achievable as a consequence of the merger of the two utilities.

Questions over rate rises

The commissioners’ concerns regarding their ability to ensure acceptable electricity rates result from a commitment by the utilities not to raise base rates as a consequence of the ML&P purchase. The worry is that this may limit in some way a rate ruling that the commission can make.

Attorneys for the utilities commented that this component of the deal would be to the benefit of consumers and would not impact the commissioner’s ability to regulate the rates. Some discussion revolved around the question of how practical it might be to distinguish components of a base rate change not related to the ML&P purchase.

Concern was also expressed that it needs to be clear to customers that the rates in question are base rates, and do not include the recovery of fuel costs. Moreover, given the impacts of inflation, it is likely that electricity rates will increase over time, regardless of the ML&P purchase. However, given the economies of scale and efficiencies that can result from the utility merger, rates would rise less rapidly than they would, if the utilities remain separate, the utilities said.

“We would not be here today if we didn’t think there were substantial savings from consolidating these two utilities,” Thibert told the commission.






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