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Timeline extended again
RCA moves deadline for its ruling on Chugach Electric purchase of ML&P to May 28 Alan Bailey for Petroleum News
For a third time issues relating to the proposed acquisition of Anchorage electric utility Municipal Light & Power by Chugach Electric Association have caused the Regulatory Commission of Alaska to extend the timeline for its review of the takeover deal. The deal requires commission approval before it can proceed. The latest deadline for a decision in the case had been Feb. 28 - the commission has now extended that deadline to May 28. The potential impact of the delay on the timeline for the acquisition, assuming that the RCA allows the acquisition to proceed, is unclear.
Acquisition premium The latest delay results from uncertainty over what is referred to as the acquisition premium, the amount by which the cost to Chugach Electric of the ML&P purchase will exceed ML&P’s book value. Chugach Electric wants to recover the acquisition premium through the rates that it will charge its customers. However, the commission says that, under state statutes, it cannot approve this rate recovery unless Chugach Electric can demonstrate that the recovery of the acquisition premium through rates is in the public interest: Chugach Electric must show that the benefits to utility ratepayers resulting from the acquisition are at least equal to the component of the rates that results from the acquisition premium.
The RCA says that Chugach Electric and ML&P have not yet provided the required data, to demonstrate that the recovery of the acquisition premium can be approved.
“Chugach and ML&P have been particularly derelict in timely providing us with accurate acquisition premium information,” the commission wrote in a Feb. 27 order extending the statutory timeline in the case.
Rather than refusing to approve the acquisition because of the failure of the parties involved to provide required information in a timely fashion, there is good cause to extend the timeline for issuing a final order in the case, the commission wrote.
Expected efficiencies The utilities have said that, by combining the two Anchorage based utilities into a single entity, it will be possible to achieve improved efficiencies and economies of scale, and hence lower electricity rates for consumers in the long term.
But, for various reasons, the takeover deal is complex.
There are three major components to the financial arrangements: an upfront payment; annual payments by Chugach Electric to the Municipality of Anchorage for power from the municipality owned Eklutna hydroelectric power plant; and annual payments in lieu of tax to the municipality. The payments in lieu of tax would avoid an increase in Anchorage property taxes by compensating the municipality for the loss of revenue it currently receives as a consequence of its ownership of ML&P. As conceived at the time of the request to the RCA for approval of the deal, the total cost of the deal, including all three financial components, came in at around $1 billion spread over 50 years. The estimated book value of the ML&P assets is around $715 million.
Stipulation filed During the course of the RCA hearing, as a consequence of disagreements between various stakeholders in the deal, the stakeholders filed a formal stipulation with the commission, specifying some changes to the deal. The commission subsequently agreed to rule on the stipulation.
The stipulation included a number of provisions that would result in the reduction of the acquisition premium by $10 million, or perhaps more, the RCA has said. But dealing with some disagreements by parties in the docket over some aspects of the stipulation had already caused the commission to extend the timeline for the docket to Feb. 28.
And there are other complications. As part of the ML&P acquisition arrangements, Matanuska Electric Association has an option to acquire a share of ML&P’s ownership interests in the Eklutna Hydroelectric Project. Were MEA to do this, Chugach Electric’s payments to the Municipality of Anchorage would be reduced, thus lowering the acquisition premium. But the parties involved did not provide until late January evidence that MEA will exercise this right, the commission said.
Moreover, in another RCA docket the Alaska Superior Court has ordered the commission to determine whether ML&P had adequately demonstrated that its construction of Plant 2A, a new gas-fired power plant in Anchorage, had been prudent. A finding of imprudence would, in effect, exclude the value of that plant from ML&P’s book value, thus reducing the book value by around 44% and, hence, significantly increasing the acquisition premium.
Information needed In its latest order, further extending the timeline for its review of the case, the RCA said that, although the stipulation was filed nearly four months ago, the parties in the case have yet to provide the commission with adequate information regarding the acquisition premium. Hence, the commission can only speculate on the impact of the stipulation on that premium, the order says.
The consequence of all of this is that the RCA is unable at this point to determine whether a waiver of the requirement to exclude the acquisition premium from cost recovery through the electricity rates can be justified, the commission says.
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