RCA report recommends realignment of Railbelt utilities

Issues of reliability and cost in Alaska’s Railbelt electric transmission system are slowly coming to a head.

The Regulatory Commission of Alaska released its recommendations on how to improve power dispatch through the region June 30 in a six-page letter signed by RCA Chairman Robert Pickett to Senate President Kevin Meyer and House Speaker Mike Chenault.

In 2014, the Legislature appropriated $250,000 to the RCA to provide its input on how to improve the Railbelt system the commission called “fragmented” and “balkanized” in its letter.

Upgrading the Railbelt system has the potential to save ratepayers between $146 million and $241 million per year, according to the RCA.

Those upgrades amount to a $900 million overhaul. More than half of the work, about $480 million worth, is in the northern portion of the intertie, according to the Alaska Energy Authority. That would improve line capacity and reliability to the Interior and regional utility Golden Valley Electric Association.

Getting power from Southcentral natural gas-fired power plants and the Bradley Lake Hydro project, located east of Homer near the end of Kachemak Bay, helps lower rates for Golden Valley ratepayers by offsetting high-cost fuel oil generation.

“Right now the utilities can get Bradley power but they don’t always have access to it at the optimum time of the day,” AEA Energy Policy Director Gene Therriault said during a presentation at the authority’s June 25 board of directors meeting.

Not being able to draw power from a relatively cheap hydro source thus kills the economic benefit of Bradley Lake, he said.

Increasing transmission capacity and efficiency would also be a must if the Susitna-Watana Hydro project were to come to fruition.

The transmission work largely involves adding transformers, substations and line capacity and redundancy. While the current intertie can handle more electricity in most places, trying to push more power through the lines increases transmission losses exponentially, Therriault said.

Additionally, redundancy in the lines could help keep the system operating smoothly in the event of a natural disaster.

By maximizing economic dispatch of power, each Railbelt consumer would save 3 cents to 6 cents per kilowatt-hour, according to AEA. Those savings would be the avoided cost increase of doing nothing, AEA Railbelt Energy Infrastructure Engineer Kirk Warren said to the authority board.

The State of Alaska owns 173 miles of transmission line between Willow and Healy, which is operated by AEA. The state authority works with the owner utilities through the Intertie Management Committee.

How the overhaul of the Railbelt system is configured and paid for are the big unknowns.

“A key weakness in the current Railbelt electrical system is the lack of an institutional structure to finance significant transmission assets crossing the service areas of several utilities,” the RCA letter states.

Along with AEA, each utility along the intertie owns at least a small portion of the transmission infrastructure. That individual ownership complicates and challenges wholesale change to the system.

Unified command

To rectify the separate ownership of transmission assets, the RCA in its letter recommends an independent transmission company, or TRANSCO, be created to operate the system and execute major maintenance projects.

Alaska Railbelt Cooperative Transmission and Electric Co. CEO David Gillespie said in an interview that his member utilities are largely in support of the RCA’s findings. However, actually realizing the savings projected by the RCA is the difficult part, he said.

ARCTEC, as the member organization is known, is made up of five Railbelt utilities. Anchorage’s Municipal Light and Power and Homer Electric are not members.

Gillespie said ARCTEC is in favor of establishing both a TRANSCO and an independent system operator; the combination would oversee all aspects of the complex Railbelt electric regime.

The TRANSCO would be made up of transmission asset-owning utilities — each with an ownership stake equivalent to their asset value — and a separate firm, which would bring liquid capital to the table, Gillespie envisions.

The organization would be managed however the utility leaders decide, by another entity or in-house. He emphasized the utilities do not want to outsource this responsibility.

The utilities could then collectively decide which major transmission projects to tackle and use the pooled resources and added capital to fund the big work, he said.

Any outside or contracted firms would be used as sources of capital, expertise and labor, Gillespie said.

Midwest utilities Xcel Energy Inc. and American Transmission Co. have presented to the Legislature and the RCA over the past two years about their work to form TRANSCOs in that part of the country and expressed interest in entering the Alaska market.

American Transmission Co., or ATC, was established in 2001 as the country’s first multi-state, transmission-only utility.

Xcel is a generation and transmission utility.

An independent, or unified, system operator would govern the actions of the TRANSCO. This would almost likely include determining the proper balance between utility returns and economic dispatch, as well as setting fair transmission tariffs.

Establishing a TRANSCO would also prompt utilities to implement a “postage stamp” transmission tariff, or a single rate to wheel power along the entire Railbelt system. Currently, each utility has its own tariff, which leads to what is known as “rate pancaking.”

Stacking the tariffs has hurt the economic feasibility of some renewable energy projects, including Cook Inlet Region Inc.’s planned expansion of its Fire Island Wind project outside of Anchorage. The issue has been one of contention for small power producers in the state.

Gillespie said ARCTEC would need to be a facilitator of a TRANSCO and could be a vehicle organization to start a system operator.

An independent system operator, if modeled after Lower 48 groups, would be comprised of non-partisan industry experts. Simply finding enough such individuals in Alaska — those without direct ties to certain interests — could be another little hurdle, Gillespie and others have said.

The RCA demanded a report on development of a TRANSCO by Sept. 30 and another report on the process of transmission restructuring by the end of the year.

Gillespie said TRANSCO discussions are ongoing among Railbelt utilities.

“Failure to file these reports will be construed as a failure of the current voluntary efforts to develop an independent Railbelt electric transmission company,” according to the RCA letter. “If voluntary efforts fail, the commission will work with the Legislature and the administration to develop and implement specific legislation and to prioritize actions necessary to create an independent Railbelt electric transmission company.”

 Past efforts to transform the Railbelt electric system have failed and the RCA was blunt in emphasizing the lack of trust that has formed as a result among independent power producers and large power customers in its findings.

A reliance on state appropriations to fund transmission work has also led to this “dysfunctional history,” according the to the commission.

Thus, the strict reporting timelines were called for.

A push for merit order economic dispatch was also recommended. The RCA states in its letter that it should use its authority to “strongly promote economic dispatch, and seek new statutory as needed to promote this goal.”

House Bill 78, currently in House committees, would clarify the RCA’s authority over electric transmission and direct the authority to bring state regulations in line with federal rules. Bill sponsor Tammie Wilson, R-North Pole, has said it would provide open access to small power generators and ease tariff disputes.

Opponents, including several Railbelt utility leaders, claim the RCA already has much of the authority the bill calls for and say the legislative directive is not the way to handle complex regulatory matters.

Gillespie said everyone believes there are significant opportunities to save ratepayers money, but achieving real economic dispatch is extremely difficult in practice.

The fundamental flaw is that savings from the upgrades necessary to benefit one end of the Railbelt, for instance, don’t show up everywhere, he said. Thus, one utility ends up paying for infrastructure it doesn’t really need.

“The costs show up in one pocket and the benefits show up in another pocket,” Gillespie said.

Further, utilities have invested in nearly $1.5 billion of new generation over the last five years, as noted by the RCA. Those power plants have debt tied to them, which can only be paid for if they are making power.

AEA’s Therriault and Gillespie said this power plant debt service and gas purchase contracts the utilities have can be unavoidable impediments to seemingly common sense dispatch.

“Our desire to be able to predict cost and benefits is very high and our ability to do so is very low,” Gillespie said.

Still, Therriault said Chugach Electric Association projected annual savings of $60 million from the $900 million transmission system rebuild in its worst-case scenario.

“The cost-benefit ratio is tremendous,” he said.

Transmission line bondholders would likely be open to a compromise on short-term returns if it meant more use of the system in the long-term, according to Therriault.

“If you’re holding the paper on a piece of transmission infrastructure that basically is a means of wheeling a commodity, you want to see that piece of infrastructure used as much as possible,” Therriault said. “Right now, what we’re suggesting is the existing system is not being used to its full potential.”

The utility boards have a narrow view out of necessity to protect their own assets and customers, Gillespie said, which can inhibit them from taking long-term views.

AEA’s Warren said everyone on the Railbelt would ultimately benefit from the new system.

“We’ve continuously said we don’t believe there are any losers, there’s just people winning at different levels,” Warren said to the AEA board.

If or when the Railbelt electric hierarchy is sorted out, the matter of paying the $900 million bill for the transmission upgrades will still linger.

Gillespie said a public and private financing combination would likely be the best solution, based on what the utilities have found now that direct state grants are boots up.

“Return on equity is trivial,” Gillespie said. “There is not a material difference to customers whether it’s publicly or privately financed.”

The best role for the state would be in backstopping private bonds, according to Gillespie.

Therriault said the challenge ahead is finding a governing structure to maximize ratepayers’ savings and then capturing “one or two of those pennies to use for financing.”

Elwood Brehmer can be reached at [email protected].

11/20/2016 - 3:54pm