MEA argues CEA case

ANCHORAGE -- Matanuska Electric Association attorneys alleged Thursday that Chugach Electric Association, in asking the Regulatory Commission of Alaska to approve an average rate increase of 5.7 percent, is trying to recoup money lost through bad investments and financial mismanagement.

A rate case filed by CEA was in its final week of hearings before the RCA this week, and a decision was expected to be reached by Friday. In the filing, CEA requested that RCA approve rate increases to offset changes the company has faced in the fifteen years since its last general rate case. According to Chugach attorneys, three significant things have changed at the company -- increased labor rates for bargaining unit employees, capital cost increases related to improving the performance of Chugach generators and a downward adjustment resulting from reduced borrowing costs through Chugach's debt management program. As a result, Chugach is asking for its rates to be increased and its method of accounting be changed to separate the two primary functions of the company -- generation and transmission for wholesale customers and distribution to residential and business members. The two functions have different rates under the existing system, but Chugach proposes increasing the amount of margins, or money above the cost of providing service, allowed on its wholesale customer accounts higher than the proposed amount for its distribution customers.

"Chugach's retail customers provide twice as much equity as wholesale customers, even though sales to wholesale customers are equal to sales to retail customers, and much of Chugach's capital expense has been to serve the G&T function," wrote Chugach attorneys in a statement of issues presented to the commission. "Chugach, however, views this build-up in equity from only one customer class as discriminatory and an unreasonable difference as to rates between classes of service."

MEA attorney Kyle Parker, with Patton Boggs LLP, Thursday, argued that the commission has a duty to "ensure that Chugach's rates are just and reasonable," and pointed out the commission has previously interpreted its responsibilities to include the duty "... to inquire into the management of a public utility and to issue such orders regarding those practices which will assure the utility provides reasonable and adequate facilities and services to the public at the lowest possible cost."

Three witnesses for MEA took the stand Thursday, to be cross-examined by CEA attorneys, to answer questions from attorneys for Homer Electric Association, another CEA wholesale customer. They also answered questions from attorneys for the Public Advocacy Section, a state section geared to keeping the public's needs in mind.

Although the witnesses had previously filed their testimony, CEA attorneys raised several questions about the testimony submitted. They questioned MEA witness Bert Solomon, of financial company GDS Associates, about his finding that Chugach lacked prudent financial management.

"The only reference I could find to management [in a recent Standard and Poor report focusing on CEA was that] 'Chugach benefits from a strong, forward-looking leadership," said CEA attorney James Torgerson, of Heller, Ehrmann, White & McAuliffe LLP. He added that a note in the report mentioned CEA's "acrimonious relations with MEA," which could have diverted the attention of CEA's management away from its financial duties.

Solomon disagreed with Torgerson's view that the S&P report was only complimentary of CEA's management.

"Certainly they were, but in other areas, they were not," Solomon said. "No other cooperative has assumed refinancing risk ... to the extent Chugach did in 2000 and 2001. It certainly indicated it was concerned about the risks associated with that refinancing."

Solomon said the report found four strengths and four weaknesses, one of which was the contentious relationships between CEA's two largest wholesale customers, which may speak to CEA's management tactics, he said.

Don Zoerb, MEA's chief financial officer, was also cross-examined Thursday. He was asked by CEA attorney Don Edwards to defend his assertion that, instead of increasing CEA's rates, the commission should lower them to what Zoerb suggested was a lower level that would provide Chugach with about $3.5 million in yearly margins, about $740,000 of which would come from MEA and Homer Electric as CEA's wholesale G&T customers. Edwards estimated that about $200,000 of CEA's total margins would then be coming from MEA -- a fraction of MEA's $33 million payment to CEA.

"You're not particularly disturbed by the idea that, over the years, the G&T sector has made almost no equity?" Edwards asked.

"I believe that's bogus," Zoerb said. When Edwards asked whether Zoerb believed Chugach should operate with almost no margin, or equity, from the G&T side of the house, for MEA's benefit, Zoerb disagreed, stating that MEA was asking the commission to lower rates for customers across the board, not just MEA.

Edwards pressed Zoerb further, asking Zoerb about cash flow coming in and how it gets designated for use.

"Would you agree that the 60 to 70 percent of the plant Chugach has is G&T related?" Edwards asked. Zoerb agreed. Edwards followed by asking whether some of the money coming from Chugach's distribution customers likely went toward G&T projects. Zoerb agreed, but clarified that it's almost impossible, once money enters the revenue stream, to track its flow through the cooperative.

"When MEA extracts equity from its members, you don't send us a share of the cash as extra equity," Edwards asked.

"When MEA receives excess margins, we do one of two things," Zoerb said. "We reduce rates or we return the margins as capital credits."