|
Deal now going to RCA
Chugach Electric applies to commission for approval for the purchase of ML&P
Alan Bailey Petroleum News
On April 2 Anchorage electric utility Chugach Electric Association filed a request with the Regulatory Commission of Alaska for approval of the acquisition by Chugach Electric of Municipal Light & Power. ML&P is owned by the Municipality of Anchorage and provides electricity to customers in central Anchorage. Chugach Electric’s service territory includes those parts of Anchorage not served by ML&P.
The idea behind the acquisition is to reduce the long-term cost of energy for consumers by means of economies of scale and improved efficiency achievable through utility consolidation. In April 2018 Anchorage voters gave the municipality authority to sell ML&P. Since then the two utilities have been working out the details of the deal, in preparation for the RCA filing.
“After thousands of hours of thought, analysis, and negotiations, we are very pleased to reach this milestone,” said Chugach Electric CEO Lee Thibert. “We know we will save electric ratepayers money over the long-term with this acquisition. We look forward to outlining our case to the RCA and moving forward with this effort that will have a positive impact in Anchorage for decades to come.”
“The amount of work and effort from Chugach, ML&P and the city getting to this point has been outstanding,” said Bettina Chastain, chair of the Chugach Electric board. “The timing was right and everybody came together, putting their best foot forward to do something that will be good for the community as a whole.”
$200 million in savings Chugach Electric told the RCA that it anticipates a net present value of more than $200 million in savings over the next 40 years as a consequence of the merger of the two utilities. Chugach Electric anticipates the approval process taking about six months to complete. During that time teams from Chugach Electric and ML&P will formulate a plan for combining the utilities, to minimize disruption to customers, employees and the community. Assuming that closure of the deal would take about 120 days after RCA approval, the two utilities would finally merge around February 2020.
RCA approval is needed for the contractual and financial arrangements for the deal, and for the future recovery from electricity rates of the costs of the merger. Chugach Electric’s certificate of public convenience and necessity will also need to be modified to reflect, among other things, the change to the utility’s service territory.
Two key commitments in the deal are that no employees will be laid off and that customers’ electricity rates will not change when the merger takes place. Over time, employment levels in the consolidated utility will drop through natural attrition, thus enabling cost savings. Electricity rates will ultimately change, as the economics of the electricity supplies evolve. However, Chugach Electric anticipates those rates being lower than they would have been, had the two utilities remained separate.
Three components There are three components to the financial arrangements for the deal: an upfront payment of about $768 million by Chugach Electric; 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 resulting net present value of what Chugach Electric will pay to the municipality for the ML&P acquisition will be around $1 billion spread over a 50-year period.
Chugach Electric told the RCA that the upfront payment includes the cost of paying off ML&P’s bonds and amounts to $48 million in excess of the net book value of ML&P’s assets.
Eklutna power purchase The agreement for the purchase of Eklutna power, which would continue for 35 years, was formulated as an alternative to an original concept of Chugach Electric simply making annual payments to the municipality, in addition to the upfront payment - that original concept suffered from, in effect, being unsecured financing for the purchase. Instead, the municipality will retain ownership of the Eklutna power station while Chugach Electric will operate the facility for the municipality. Pricing for the Eklutna power that Chugach Electric will purchase will be based on the avoided cost of power generation that Chugach Electric would otherwise have needed. Payment for the Eklutna power will have an equivalent end result to making those originally conceived annual payments.
In recognition of the fact that some Matanuska Electric Association members live within the northern part of Anchorage but would not directly benefit from the sale of ML&P, MEA has an option to purchase an increased share of the Eklutna plant. That would enable the MEA customers to benefit from access to more relative cheap hydropower but would reduce the municipality’s income from the hydropower plant.
PILT payments The annual payments in lieu of tax will exactly replace the municipality utility service assessment, or MUSA, that the municipality currently receives from ML&P via the rates that ML&P charges its customers. In effect, the MUSA payments represent income to the municipality from its ownership of ML&P. Chugach Electric emphasized to the RCA that the proposed PILT payments would not represent an incremental cost to customers, because the PILT payments will be exactly equivalent to those current MUSA payments.
Moreover, to maintain that equivalence and ensure that Chugach Electric existing customers are not penalized, until 2033 the PILT payments will only be recovered from customers inside ML&P’s current service area.
And the PILT payments, by maintaining an existing revenue stream for the municipality, will enable the municipality to sell ML&P without having to increase property taxes in Anchorage as a consequence.
Beluga gas Another complication results from the fact that both Chugach Electric and ML&P own portions of the Beluga River gas field on the west side of Cook Inlet and obtain some of their power station fuel gas from that field. The prices that the two utilities pay, in effect for their own gas, differ with the ML&P gas being cheaper. As with the PILT payments, accounting for the cost of the gas would remain separate for the ML&P service area until 2033, thus enabling the relatively cheap gas to offset the impact of the PILT within the service area.
|
