RCA lets Chugach recover contract costs

Utility can include $197M in future rates, AG and dissenting commissioner say RCA didn’t have enough time to deliberate

Eric Lidji

For Petroleum News

Chugach Electric Association will be allowed to pass on nearly $200 million in contracts for a new power plant to its ratepayers, according to a ruling by Alaska regulators.

The Regulatory Commission of Alaska on Oct. 5 decided that Chugach could recover the $197 million cost of three equipment and construction contracts through future electricity rates. However, RCA did not say whether it considered Chugach’s decision to build the Southcentral Power Project to be a prudent one, a distinction Chugach also requested.

The ruling could potentially be precedent setting, as some believe it is the first time state regulators in Alaska have “pre-approved” a major energy infrastructure project in the state.

The precedent, however, is nuanced. Historically, regulators have allowed Alaska utilities to recover the cost of major infrastructure projects through rates, without pre-approval.

Chugach asked for pre-approval in late June as a way to get better financing, it told the RCA. The utility said that if it could guarantee potential investors that costs would be recovered through rates, it could decrease the risk of the project, leading to lower interest rates that would ultimately save ratepayers $1.3 million to $2.6 million a year.

Chugach said that risk could be reduced further if RCA formally called the new power plant and the three contracts “prudent” decisions, in regulatory terminology.

Chugach asked for a quick decision, saying that mid-October presented the best timeframe to seek financing because of current market conditions and low interest rates.

Chugach said this quick timeframe wouldn’t be problematic because the utility believed RCA already gave a favorable nod to the proposed power plant. During a 2008 rate case, when Chugach said it planned to build a new power plant rather than repair an existing one, RCA said that Chugach reached its decision after “extensive analysis.”

The Alaska Attorney General’s office argued that the precedent set by the case could potentially change how Alaska utilities went about financing major infrastructure projects, and therefore justified a longer investigation. The AG proposed ways to decrease the risk of the project in the eyes of potential investors using existing statutes and regulations.

The ruling will not impact local electricity prices until the next Chugach rate case.

Lisankie writes dissent

First, it declined to say whether it considered Chugach’s decision to build a new power plant to be prudent. Because Chugach committed to build the power plant back in August 2008, RCA said it was now too late to make such a determination.

Second, while Chugach now knows it can recover the $197 million through future rates, RCA seemed to consider the ruling to be somewhat redundant. The regulator noted that Chugach is a cooperative governed by a member-elected board of directors. That board decided to build the power plant, and Chugach’s bylaws outline how the board must go about seeking large contracts. The RCA found that Chugach followed its own rules.

“We believe it is unlikely that any portion of the $197 million at issue here would be disallowed in future rate-making determinations by this tribunal,” RCA wrote.

However, RCA Commissioner Paul Lisankie dissented to the ruling, writing that Chugach “denied us the opportunity to employ the deliberate process I believe must precede the making of substantial changes in our procedures or decisional standards.”

He noted, for instance, that the right to pre-approve a project logically implied the right to “disapprove” a project, in other words: to halt construction. That notion would naturally be very controversial, and Lisankie said RCA needed time to iron out such kinks.

Regulated utilities are not required to get approval before taking on major infrastructure projects because RCA considers those undertakings to be “management decisions.”

However, utilities are also not required to get regulatory approval for fuel contracts, but invariably do as a way to guarantee that fuel costs can be passed on through rates. That process usually takes a considerable length of time, sometimes a year or more. RCA sets rates for regulated utilities, including the large Railbelt electric cooperatives.

MetLife wouldn’t finance

With the credit crunch, Chugach worried about financing, but “after some initial reluctance by a potential lender, Chugach was still convinced that after credit markets settled, it could proceed without a prior prudency review,” Michael Cunningham, chief financial officer for Chugach, wrote in June filings to the RCA. “However, Chugach has concluded that the least cost financing will be obtained if it first obtains a determination of prudence and assurance of cost recovery as proposed in the accompanying petition.”

In the September hearings, Chugach said it approached the insurance company MetLife in early 2009 about financing $50 million to $75 million of the power plant project as a way to both “test the market” and to take advantage of interest rates at that time.

MetLife, though, declined the offer, pointing to several potential risks, including the fact that Chugach had to pay for the plant before it knew whether it could recover costs.

Chugach said it took until June 2010 to decide to ask RCA for pre-approval and put together an application of testimonies and supporting documents to back up its request.

The Southcentral Power Project is a joint venture between Chugach and Anchorage Municipal Light & Power. Chugach will manage the facility and own 70 percent of it, while ML&P will own the remainder. The plant will produce about 183 megawatts from three natural gas fired turbines. Chugach expects the facility to come online around 2013.