Analysis: Inside the “titanic” legal case that will help determine Alaska’s energy future

Should Anchorage residents who consume more electricity, and use up more of the region’s dwindling supplies of natural gas, have to pay a higher price to reflect the steeper cost of the imported fuel that will replace it?

How much will developers of wind and solar projects have to pay to move the electricity they generate across power lines they don’t own?

And how can businesses and residents be encouraged to reduce their energy use and thereby delay the need for expensive gas imports?

All those are questions that now must be answered by the gubernatorially appointed members of the Regulatory Commission of Alaska, following the recent conclusion of a month-long public hearing.

Their ruling will help decide the future of Anchorage’s energy supply; the price of electricity for the city’s residents, businesses and other users; and the costs that developers of wind and solar farms could face to connect their projects to the grid.

The wide-ranging hearing addressed a request by Anchorage-based Chugach Electric Association, the state’s largest utility and one of its largest buyers of natural gas, to raise its rates for all types of customers by an average of 5.5%.

The proceeding, known as a rate case, involves a sprawling array of subjects connected to Chugach’s operations and its 90,000 members — including efforts to delay the impending depletion of the region’s natural gas deposits.

That’s where a request from Renewable Energy Alaska Project, or REAP, an advocacy group that intervened in Chugach’s case, comes in.

Citing a state law that calls for the “conservation of resources” in electricity generation, the Anchorage-based advocacy group is making an unprecedented request: that the commissioners force Chugach to create a new payment scheme for its residential customers to reward reduced consumption.

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Chugach wants to charge those customers 15 cents per kilowatt hour of electricity, regardless of their total use. REAP, with help from the environmental law firm Earthjustice, is asking for two tiers of charges.

The first tier would charge residential customers 13 cents per kilowatt hour to use up to 450 kilowatt hours a month — roughly the same amount that the median Chugach member household now uses.

The second tier would boost rates to 17 cents per kilowatt hour for each one above 450 — an increase of roughly 30%.

That increase, REAP says, would align the second tier with the higher prices Chugach customers will face once the company fuels its power plants with imported liquefied natural gas, instead of local supplies. REAP says the bump in cost would send “an appropriate price signal to consumers.”

“The gas supply crunch will arrive sooner if the commission does not promote conservation of gas through Chugach’s rates,” Hannah Payne Foster, an Earthjustice attorney working with REAP, said in her closing arguments at the hearing last month. “Our proposal is to send real cost signals to consumers that reflect the true cost of their consumption decisions.”

Chugach’s attorney, Dean Thompson, didn’t directly address REAP’s proposal in his closing arguments, and a spokeswoman for the utility, Julie Hasquet, declined to comment.

But in its final written brief, filed last week, Chugach said that REAP’s expert witness, under cross examination, couldn’t predict just how much gas would be saved by the organization’s “drastic and novel recommendations.” The proposal, Chugach added, would “arbitrarily” boost prices above costs and send “signals to consumers that may not be in the consumer’s best interest.”

A $10,000-an-hour hearing

REAP’s proposal is far from the only one that asks the commissioners to adjust the rate increase requested by Chugach: A dozen other parties, from businesses to utilities to government agencies, also intervened in the case.

Each is asking the commission to adjust the proposed rates that Chugach wants its members to pay.

The monthly checks that those members have to write to the utility are not solely tied to the number of kilowatt hours of electricity each of them uses. Instead, they hinge on complex formulas that divide up the utility’s different cost categories — like fuel, power plant construction and customer service — and assign shares to different classes of members, like residential customers or large users like hospitals and universities.

Though they have drawn little public attention, the technical arguments over those components, and how they’re divided and assigned in the future, have filled hundreds of pages of written testimony to the commission.

That’s in part because of the huge stakes of the rate case, with commissioners asked to decide how to apportion payments of the roughly $260 million in yearly revenue that Chugach needs to operate.

Some of Anchorage’s biggest power consumers — including the federal government, the University of Alaska Anchorage and JL Properties, a major commercial real estate developer — are participating in the case. At the commission’s month-long hearing, so many attorneys and experts were present that one of them referred to the proceedings as “titanic” and estimated they were costing the parties, collectively, some $10,000 an hour.

Several key areas of dispute have emerged since Chugach initially filed its rate request in June 2023.

One is the profit margin that the commissioners allow for Chugach, calculated using a financial benchmark called “times interest earned ratio,” or TIER. Chugach wants to raise its TIER — a ratio expressing how much the utility’s yearly earnings exceed its required debt payments — to 1.75 from 1.55.

Critics, like JL Properties, say the TIER increase would add $9 million to Chugach’s profit margin and isn’t needed because the utility’s financial health is already sound. Chugach argues that the higher TIER would allow it to borrow money at lower rates, better respond to unexpected costs and emergencies and maximize its options as it brings renewable power projects online and contends with the natural gas shortage.

Another major disagreement is over Chugach’s proposed 19% increase in the rate it charges other utilities to ship electricity across its transmission lines.

Chugach says that hike aligns with inflation over the years since the rate last went up, and would help cover the cost of infrastructure Chugach acquired when it bought Anchorage’s city-owned utility in 2020.

Power lines connecting Chugach’s Beluga power plant to the rest of the electric grid cross the Susitna River. (Photo by Nathaniel Herz/Northern Journal)

That infrastructure sits between a major power plant on the Kenai Peninsula that sometimes ships power through Anchorage toward Fairbanks.

But the city-owned utility did not previously require payment from the other utilities whose electricity traveled across its lines.That’s one of the objections that those other utilities, including Kenai Peninsula-based Homer Electric Association and Fairbanks-based Golden Valley Electric Association, are making to Chugach’s proposed boost in transmission charges.

The other utilities also argue that higher transmission rates will discourage construction of large-scale renewable power projects, which would face steeper costs to ship their electricity through Chugach’s territory.

REAP targets “gas supply crunch”

The proposal from REAP, meanwhile, is most focused on Chugach’s residential customers, as is a proposal from the Alaska branch of the AARP, a group that advocates for the interests of Americans over 50 years old.

Broadly, the two organizations want Chugach’s rates to be more reflective of the overall amount of electricity used by customers and less influenced by other elements of the cost-setting formula — a structure that would give those customers more ability to control the size of their bills.

If adopted by the commission, they say, their proposals would encourage consumers to use less natural gas. They say their proposals would also give Chugach flexibility to tinker with per-kilowatt hour rates to help match demand with the variable power supplies generated by wind and solar projects.

One of AARP’s arguments targets Chugach’s request to boost its monthly flat-rate, customer service fee for its pre-existing households — those that were members before the 2020 acquisition.

Those pre-existing households had been charged a flat fee, regardless of the amount of power they used, of $8 a month, in addition to their per-kilowatt hour bills. Chugach now wants to raise those flat fees to $13.68, to match the higher service fees charged to former members of the city-owned utility who are now Chugach customers .

The AARP’s expert witness, in his written testimony, said that proposal could boost overall monthly bills as much as 16% for the Chugach households that consume the least amount of power. The witness, Ron Nelson, proposes that the flat fees instead be set at $10 for both sets of customers.

Both the AARP and REAP also target substantial charges in Chugach’s current pricing formula, and its proposed new one, that are tied to customers’ highest single hour of electricity use over the course of a year.

Those charges are intended to account for the fact that utilities must build and maintain power plants to meet the peak demand of their entire system — even if far less power is being used during the rest of the year. As a result, rates are often designed to assign the cost of maintaining plants to meet peak demand to customers that contribute to that demand the most.

REAP argues that Chugach has long had more than enough generating capacity to meet peak demand — and that its newest power plants were built not to meet its system’s maximum load, but to boost efficiency and reduce fuel consumption.

As a result, REAP argues, the demand charges should be reduced, since the newest power plants weren’t built to meet the system’s peak load. Instead, the group says, Chugach’s rates should be more tightly linked to the overall amount of electricity each customer consumes. That would give customers even more incentive to reduce their power use — and, consequently, Chugach’s use of natural gas.

“We are in a system with significant excess capacity built primarily not to serve peak demand, but to produce energy more efficiently,” Foster, REAP’s attorney, said in her closing arguments. “And this system runs primarily on natural gas, for which we are facing a major supply crunch within this decade.”

The public hearing on Chugach’s requested rate increase ended July 18.

The commissioners are expected to issue their final ruling within the next two months. Any of the parties involved can appeal the decision to the courts.

Nathaniel Herz is an Anchorage-based reporter. Subscribe to his newsletter, Northern Journal, at northernjournal.com. Reach him at natherz@gmail.com.