Anchorage utility consolidation pondered

  • From left to right, Chugach Electric Association Board Chair Janet Reiser, Anchorage Municipal Light and Power General Manager Mark Johnston, Anchorage Mayor Ethan Berkowitz, Matanuska Electric Association General Manager Tony Izzo and Chugach Electric Association CEO Lee Thibert discuss a power sharing deal on Jan. 30 in Anchorage. A national consultant told business leaders that the next logical step is for Chugach and ML&P to consolidate into a single utility to capture further cost savings. (Photo/Elwood Brehmer/AJOC)
  • The Beluga Power Plant owned by Chugach Electric is seen here. The plant is supplied by natural gas from the Beluga River Unit in North Cook Inlet, which Chugach and Anchorage Municipal Light and Power partnered to buy the one-third share previously owned by ConocoPhillips in 2016. The move is estimated to save ratepayers about $9 million per year. (Photo/Courtesy/Chugach Electric Association)

Consolidation is the next natural step for Anchorage’s electric utilities to take in their ongoing efforts to reduce costs, according to a national consultant.

NERA Economic Consulting Director Kurt Strunk spoke March 30 to a small group of Anchorage business leaders about possibilities to mitigate energy price spikes in the city.

The roundtable discussion was the second in a series of meetings hosted by the Anchorage Economic Development Corp. about the state of the city’s electric utilities.

City-owned Municipal Light and Power services Downtown and Midtown Anchorage, as well as Joint-Base Elmendorf Richardson. Chugach Electric Association, a cooperative utility, covers the remaining majority of the city and small portions of the northern Kenai Peninsula Borough.

Strunk, who has testified before the Regulatory Commission of Alaska on utility matters in the past, said full consolidation of Chugach and ML&P is the single biggest thing the utilities could do to capture operational savings.

Similar utility consolidation has already occurred across the Lower 48, he said; it’s common as markets mature.

“If the two Anchorage utilities combine they would be the size of a very small utility in the Lower 48,” Strunk described. “The scale of diseconomies when you’re operating very small utilities is huge.”

Current Anchorage electric rates are on par with Lower 48 averages, but a request to the RCA by ML&P to increase its rates to offset the cost of its new $300 million East Anchorage 2A power plant would push rates above national averages, he said.

ML&P’s request, which is under investigation by the RCA, is for a nearly 30 percent rate increase to the demand and energy portions of a customer's monthly bill.

However, the 2A plant is expected to immediately save ML&P about 16 percent on annual fuel costs compared to 2015 and over the long-term benefit the utility’s ratepayers through fuel savings and improved reliability.

More generally, declining customer demand due to more energy efficiency efforts by customers and Alaska’s economic downturn have made it harder for utilities to hold rates down as fixed costs are spread over fewer kilowatt hours.

In 2015, the RCA issued a blunt letter warning to Alaska’s six Railbelt utilities that the commission would seek the authority to impose collaboration amongst the utilities if they did not voluntarily start to work better together. The commissioners characterized the Railbelt utility scene as “fragmented and balkanized.”

Somewhat before, but more drastically since the RCA scolding, Railbelt utility leaders have been investigating ways to pool resources for expensive improvements to the region’s aging and overloaded transmission lines and other infrastructure.

Industry experts have said the Railbelt utilities from Fairbanks to Homer have about as many customers as an average Lower 48 utility, albeit over a comparatively vast geographical region.

It is those intra-region distances that forced multiple utilities to form in the cities’ early days.

In January, Chugach, ML&P and adjacent Matanuska Electric Association announced a voluntary power pooling agreement through which the three will trade power down to the hour based on demand requirements.

Pooling demand and generating capacity allows the utilities to more fully capture the fuel savings and other operational efficiencies provided by the new generation plants each has put into service since 2013.

The working details of the pooling agreement are still being hashed out, but it is expected to save ratepayers of the three up to $16 million per year in reduced fuel consumption once the operations are optimized after about a year, according to utility leaders. The pool is open for other utilities to jump in, too.

Chugach and ML&P have recently partnered on other ways as well. In 2016 they bought into the Cook Inlet Beluga River natural gas field to gain a reliably priced long-term fuel supply. Buying directly into the gas field is expected to save the utilities’ customers up to $9 million per year, according to estimates when the deal was announced.

The two also jointly own the west Anchorage Southcentral Power Project generation plant built in 2013.

Chugach is the majority owner of the high-efficiency SPP plant.

“There isn’t much other than a combination that can be done further,” Strunk said.

ML&P spokeswoman Julie Harris wrote in an email that the utility “is working closer than ever with Chugach and other Railbelt utilities and will continue to do so.”

She noted the aforementioned collaborations and said ML&P will keep evaluating all opportunities to serve its customers better.

Julie Hasquet, of Chugach, said unification has been discussed numerous times over the past 30 years, with the last time being about a decade ago in a different economic situation.

“At Chugach, we are always looking for ways to serve our members more reliably and efficiently. In light of current economic conditions and the state’s fiscal climate, it may be time to re-evaluate how Anchorage’s two utilities can work together more efficiently and effectively to the benefit of their combined customers,” Hasquet said.

“We look forward to the recommendations of the AEDC working group.”

Strunk also noted the fact that Chugach, as a cooperative utility that is directly member-owned and ML&P, which is ostensibly member-owned, would make a merger easier because there would not be the inherent conflict over who should benefit financially as there can be when investor-owned utilities are involved.

Such utility mergers usually take about six months to a year to complete once the commitment is made, he added.

Further, he said one Anchorage electricity provider would make it a little easier to coordinate who gets Bradley Lake hydropower — which each Railbelt utility has some rights to — and when.

It would also give the other Railbelt utilities access to a bigger trading partner and could spur further coordination, according to Strunk.

“I couldn’t see how the RCA would say no to this,” he said.

Depending on how the deal would be structured, it could require an Anchorage voter referendum to change ML&P’s structure because the municipality owns it.

Roundtable participants also noted the organic operational efficiencies — one headquarters, for example — would almost certainly lead to job cuts at a time when Anchorage and Alaska are already fighting through a recession.

Strunk acknowledged the downside, but said utility workforce reductions have often been done voluntarily in other mergers and would be a relatively small negative compared to the overall prospective economic benefits to the city.

Elwood Brehmer can be reached at [email protected].

04/06/2017 - 7:57am