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AG challenges Chugach on power plant Chugach argues that pre-approval will save ratepayers money, but the AG believe it will only shift the project risks to consumers Eric Lidji For Petroleum News
As Chugach Electric Association seeks financing for a $300 million power plant, it says that regulatory support will yield better terms that could save ratepayers $2 million a year. The state Attorney General is skeptical of those claims, though, saying the largest electric utility in Alaska simply wants to shift the risk of the project onto ratepayers.
Chugach and partner Municipal Light & Power are building the Southcentral Power Project to replace aging generation facilities in the Anchorage area. The utilities recently signed three major contracts. Typically, in Alaska, regulators would not consider whether those contracts were a good decision until the utilities ask to recover the cost of those contracts by increasing electricity rates, sometime after turning on the plant.
Chugach, though, wants the Regulatory Commission of Alaska to make that decision now, before construction begins. Chugach said that by reassuring lenders that the cost of the project will someday be recovered through rates, the utility can get better terms on financing, eventually saving ratepayers between $1 million to $2 million every year.
Chugach is not actually asking for new rates at this time, though.
“Sooner or later the Commission will review the (Southcentral Power Project) and determine whether its costs can be included in rates,” Chugach said in Aug. 24 filings to the RCA. “Chugach has asked the Commission to perform this useful function sooner.”
Alaska AG skeptical The Attorney General is skeptical. In Aug. 31 filings, it wrote that Chugach “has provided virtually no support for its assertions of cost savings; only bald assertions that Chugach may obtain estimated savings if its Petition is granted in the very near future.”
“Just and reasonable recovery of Chugach’s plant investment is assured by statute,” the Attorney General wrote, pointing to Alaska Statute that requires regulators to set rates high enough for a utility to cover its debt obligations. As such, the Attorney General believes that Chugach’s request is really “an upfront shift onto Chugach’s ratepayers of the economic and timing risks associated with implementing a major capital project.”
“Just as there are speculative benefits to be gained by the Commission granting the requested pre-approval, there are an equal number of speculative problems to be avoided,” the Attorney General wrote, hypothesizing about a situation where Chugach would be allowed to pass along the cost of contracts that don’t turn out as expected.
Chugach sees precedent Chugach said regulators in the Lower 48 have used pre-approval to signal their intentions to potential investors for decades, anytime the country needs new generation facilities.
But Chugach also said that pre-approval isn’t unprecedented in Alaska, either.
It pointed to gas supply contracts. Producers and utilities bring negotiated contracts to the RCA for approval before the utility seeks to add the fuel costs into its rates. Chugach pointed to a similar process when distribution utilities buy electricity from generators.
The Attorney General said that in those cases, the actual contract is placed on the record to be examined in a long review process. But because of the length of the three contracts at issue in this case, and the expedited timeline Chugach has requested, the Attorney General doesn’t believe the RCA can review the documents in a “meaningful” way.
Chugach wants the review to be completed by this fall.
Chugach doesn’t think the process should take long though, because it believes the RCA already did much of the review work a few years ago. When the question of whether Chugach should build a new power plant came up during a 2006 rate case, the RCA found that Chugach reached its decision after “extensive analysis.”
At the time, Chugach was deciding whether to repair an aging power plant, Beluga 8, or spend significantly more money to build an entirely new power plant. The utility commissioned several studies, and decided the fuel savings justified the new facility.
The Attorney General said the RCA didn’t consider the specifics of this project.
Have the ratepayers spoken? The Regulatory Commission of Alaska is holding hearings on Sept. 10, 13 and 14 to take testimony from Chugach, ML&P, Homer Electric Association and the Attorney General.
The RCA did not allow two independent power companies, Alpine Energy and Tiqun Energy, to join the case, saying their concerns fell outside of the scope of the proceeding.
Commissioner Kate Giard recently noted that Alaska Statute does not require utilities to get approval for new infrastructure projects before starting construction, and that it’s rare for an Alaska utility to not be allowed to recover construction costs through rates.
“So, while it is interesting and thought-provoking to consider the pre-approval process that occurs Outside, the request before us is driven not by statutory or regulatory requirement, but by the credit community,” Giard wrote on Sept. 3. “Credit is tight. Financial markets now want guarantees of rate recovery, even before the shovel hits dirt, because advance approval shifts the credit risk from the lender to the ratepayer.”
But, Giard noted, as a cooperative, Chugach green lit the plant only after getting the go-ahead from a board of directors elected by the ratepayers who will incur the cost. “If Chugach over-builds or poorly constructs the plant, the same owner/ratepayer is going to absorb the loss, either through increased rates or reduction in capital credits,” she wrote.
Chugach and Municipal Light & Power will jointly own the power plant. Chugach will manage the facility and own 70 percent of it, while ML&P will own the remainder.
The power plant will produce about 183 megawatts from three natural gas fired turbines.
Chugach expects the facility to come online around 2013.
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