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Conditional approval
RCA says Chugach Electric can purchase ML&P if some changes made to deal
Alan Bailey for Petroleum News
The Regulatory Commission of Alaska has approved Chugach Electric Association’s proposed purchase of Municipal Light & Power, to consolidate the two Anchorage based electric utilities, but requires changes and additions to the terms of the agreement between the parties involved in the deal. In a May 28 order the commission specified modified components of the deal that the parties would need to agree to, if the purchase is to close.
The general concept behind the ML&P acquisition is relatively simple: The idea is to gain efficiencies of scale and operational efficiencies by combining the two utilities into a single entity. But, given the differences between the manner in which the two utilities operate, and taking into account the need for fairness for existing utility customers and Municipality of Anchorage taxpayers, the details of the deal are complex. Moreover, rather than making a straightforward upfront payment for ML&P, Chugach Electric wants to spread some of the cost over an extended time period.
Complexity challenging In its order, the commission commented that, while it supports the concept of merging the two utilities, the complexities of the proposed transaction have proven challenging to evaluate and rule on. The commission’s hearing into the proposed transaction has continued for many months and has several times been extended. However, combining the utilities could lead to economies of scale in employment, the more efficient use of generation and transmission assets, more efficient inventory management, better planning of future electrical system developments, and an improved business environment resulting from consistent electricity rates, the order says.
“We are still reviewing the order and the conditions imposed by the RCA to determine whether they are acceptable to Chugach,” said Chugach Electric CEO Lee Thibert in a May 29 press release, responding to the order. “Assuming they are, we look forward to moving toward closing and a smooth transition for existing Chugach members and the new members from the ML&P system.”
“The decision clearly states that it is in the public interest for the sale to move forward. We are assessing the issues raised by the proposed conditions and will continue to work with Chugach and other partners to conclude what has been a monumental effort,” said Anchorage Mayor Ethan Berkowitz. “I would like to thank all involved, especially ML&P, the negotiating teams and municipal employees, who’ve helped us reach this milestone.”
Four components In general terms, there were four major components to the deal that the RCA has reviewed: an upfront payment to close the purchase; payments in lieu of tax, or PILT, to the Municipality of Anchorage over a period of 50 years, as compensation to the municipality for the loss of tax revenue from ML&P as a municipality-owned entity; a commitment to purchase electricity from the Eklutna hydroelectric power facility from the municipality for 35 years; and an agreement to reserve for ratepayers in the ML&P’s service area benefits associated with ML&P’s part ownership of the Beluga River gas field in Cook Inlet. A significant complication arises from the fact that Chugach Electric and ML&P both own portions of the Beluga River field, and use gas from the field as fuel under different commercial parameters - the proposed purchase arrangements would maintain separate accounting for gas attributable to Chugach Electric’s and ML&P’s portions of the field ownership and its cost to ratepayers in the two utilities’ current service areas.
The total cost to Chugach Electric of the purchase, including the deferred payments, would amount to around $972 million.
Acquisition premium One stumbling block for the commission has been the fact that the total purchase price would be considerably higher than the book value of ML&P’s assets, and that Chugach Electric wants to recover this “acquisition premium,” the excess of cost over asset value, from the rates that it charges its customers. Under state law, a utility cannot recover an acquisition premium in this manner unless it can demonstrate that the benefits of the arrangement outweigh the costs.
In its order, the commission says that it will be satisfied that the proposed deal is in the public interest, provided that the terms of the deal are modified in the manner that the commission requires.
A further complication had arisen from an appeal over the prudence of ML&P’s construction of its Plant 2A power generation facility and, hence, whether the value of that facility should be included in ML&P’s book value. However, that appeal has been resolved, with Plant 2A remaining part of the valuation.
Adequate equity? The commission is also concerned that the cost to Chugach Electric of purchasing ML&P will drain Chugach Electric’s equity to a point that could weaken the utility’s financial position, thus exposing its customers to unknown rate risks. In its order, the commission says that it may require an early rate case, should Chugach Electric’s equity levels not rebound as quickly as planned, following the ML&P purchase. The commission is also concerned about uncertainty over Chugach Electric’s future obligations relating to the management of the Beluga River field.
The commission strongly objects to the utilities’ proposals to maintain different electricity rates for ratepayers in the current ML&P and Chugach Electric service areas for many years into the future, as part of the arrangements for PILT payments and for accounting for Beluga River field gas.
“One of the main goals of Anchorage electric utility consolidation should have been to eliminate Anchorage’s electric rate bifurcation,” the order says.
And, although as one of their parameters for the deal the two utilities had set an objective of no immediate change to customers’ electricity rates, the commission says that, while the utility consolidation would likely have long-term benefits, rate increases in the short term may be necessary to ensure Chugach Electric’s continued financial health. The commission order requires the approved deal not to commit to keeping electricity rates unchanged.
New conditions mandated To maximize the benefits to ratepayers of the proposed consolidation of the two utilities and address the commission’s concerns, the commission has added three new conditions that need to be met, for approval of the deal: the use of a single cost of power adjustment associated with the use of gas from the Beluga River field; the implementation of a single rate structure for all ratepayers in the consolidated utility, rather than the recovery of PILT costs only from customers in the current ML&P service area, as had been proposed; and a requirement that, prior to closing the deal, Chugach Electric and Matanuska Electric Association form an agreement for the implementation of security constrained merit order dispatch across their service areas.
That last condition relates to a long-term effort to achieve a more unified approach to the management and operation of the Alaska Railbelt electrical system. Economic dispatch involves the continuous use of the most efficient available power generation. Chugach Electric, ML&P and MEA had been working towards joint implementation of economic dispatch but put that initiative on hold in the light of the proposed purchase of ML&P by Chugach Electric.
To further protect Chugach Electric’s financial health, the commission is also requiring the utility to file a rate case by the end of 2023, and to demonstrate an adequate equity level before any reduction in the utility’s operating margins.
Major deal components approved The commission is approving major components of the proposed deal, including the PILT payments and the payments for Eklutna power. However, the commission requires that Chugach Electric will compensate ML&P ratepayers for capital that they have contributed to the Beluga River field through their rates - compensation would take the form of a negative surcharge over a 10-year period. And the commission is approving a proposed transfer of $36 million from the Municipality of Anchorage to Chugach Electric to fund a rate reduction account for legacy ML&P customers over a period of three years.
The order says that, under a range of parameters for the future electricity market for the Chugach Electric and ML&P service areas, modeling indicates future financial benefits for electricity consumers if the ML&P purchase transaction proceeds.
To implement consistent rates across Chugach Electric’s expanded service area, the utility will need to merge its existing certificate of public convenience and necessity with that of ML&P. The commission has agreed to a deadline of the end of 2023 to complete the consolidation of the expanded services under Chugach Electric’s certificate. ML&P’s existing certificate would be revoked.
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