Closing arguments heard in rate case

ANCHORAGE -- Five parties involved in Chugach Electric Association's rate filing that proposes to increase rates for wholesale and retail customers an average of 5.7 percent wrapped up their arguments last week, leaving the matter to be decided by Regulatory Commission of Alaska commissioners.

Each group had suggestions for the commission as to how to proceed through the deliberative process and what their decision should include.

The rate filing presents two major issues, the first is a rate increase that would be applied to different kinds of Chugach customers on a different scale -- Chugach retail customers, for example, would see a 5.7-percent increase in rates while the increase for Seward wholesale customers would be 2.9 percent. The proposed increases would restructure how Chugach's margins, or money left after capital and operating expenses are accounted for, are structured. The company has said the majority of its margins came from distribution, or retail customers, while the generation and transmission, or wholesale customers, pay very close to the costs for operating expenses.

The second significant portion of the case would change the way Chugach structures its accounting. The co-op proposed a change from a TIER, or Times Interest Earned Ratio accounting method, used by several co-ops around the state, to a return-on-rate base marketing. The different structure, Chugach attorneys contend, is needed because Chugach relies on different lenders than most co-ops around the state, and needs to structure their standards to meet the demands of those larger lenders.

In closing arguments, Andrew Hoge, attorney for Homer Electric Association, said the increase is a ploy for Chugach to recover money lost through unprofitable business decisions by targeting the largest customers, those in the wholesale realm.

"The result of what Chugach wants in the G & T (generation and transmission) TIER ... has to be added on to the rates of HEA's customers and of MEA's customers," Hoge said. "It can only mean higher rates for them."

Hoge suggested the commission consider "a relatively small downward adjustment to the base rates," rather than Chugach's proposed increase. Chugach, he said, has not justified the need for increased rates and, in requesting the increase, overstated what was actually spent.

"It includes major cost-of-service increases, and ignores off-setting growth in revenues at the same time," Hoge told the commission.

Hoge advocated against changing the structure of Chugach's accounting method, stating that the new method is largely used in for-profit energy companies and isn't appropriate for a co-op.

"The comparable utilities cited by Dr. Olson aren't comparable," Hoge said, referring to Chugach's witness testimony defending the return-on-rate base structure. "A few went bankrupt ... and virtually all were in competitive enterprise. In Alaska, we have regulated monopolies ... [for members of the utilities] it is not an investment, it's a service."

Kyle Parker, attorney on behalf of MEA, asked the commission to keep in mind that Chugach was proposing to offset $16.1 million in debt through rates, and cited past commission rulings that show the commission's commitment to low rates.

"The commission has long held that it has a responsibility to establish the lowest rates available," Parker said.

Parker said Chugach has been successful with its current rates. Raising rates was unnecessary, he said, and asked the commission to lower them instead -- even further than HEA had requested. According to information presented through the case, Chugach's current overall TIER is currently 1.35 and Chugach is requesting a TIER of 1.50. Hoge advocated lowering the TIER to 1.25, while Parker said MEA is advocating a TIER of 1.15.

"This 1.15 overall TIER would yield margins of roughly $3.5 million," Parker said.

Parker also asked the commission to keep Chugach's rate structure on the TIER system, pointing out that Chugach's expert witness, in recommending the structure change, had not done his homework well.

"He misunderstood the difference between a cooperative utility and an investor-owned utility," Parker said. "He reportedly stated Chugach's customers should receive a rate of return for their investment."

Parker said Olson's misunderstanding of the concept of a not-for-profit utility called into question his approval of the marketing strategy Chugach proposed. The return-on-rate base strategy, he said, is geared toward making money for investors, when a not-for-profit utility should focus instead on providing efficient service for the lowest cost possible.

Seward Electric System spokesman Dean Thompson told the commission adopting Chugach's proposed rates would set the co-op on a dangerous path.

"If Chugach's proposal is approved, apart from and significant to Chugach's increase, it would set Chugach customers on a path of building equity at a very aggressive rate, mostly on the back of its wholesale customers," Thompson said. "There are long-range implications."

Thompson, too, asked the commission to deny Chugach's request to go to a return-on-rate base marketing strategy, claiming that the focus toward generating margins would jeopardize the company's non-profit, tax-exempt status.

He disputed Chugach's claim that, because some of its wholesale contracts are approaching the end of their term, the company should take advantage of those remaining years to build margins. That argument, Thompson said, was self-defeating.

"This is what makes the generation function so much riskier than the distribution function -- Chugach doesn't know if it's going to have wholesale customers," Thompson said. "If they're going to be rewarded with a higher rate of return because they don't have long-term contracts with wholesale customers, why would they want to enter into another long-term contract? ... Chugach has more of an incentive than wholesale customers to delay or not enter into an agreement, especially if it can come and say [that end] is riskier and get a higher rate."

Steven DeVries, an assistant attorney general representing the state's public advocacy section, took a slightly different stance than the utilities who have contracts with the cooperative.

"Unlike every other party, the public advocacy section is a neutral, objective participant whose sole goal is to make sure you have an adequate record," DeVries said.

DeVries did not ask the commission to set a specific rate or suggest that the rate proposed by Chugach was too high or too low, although he did challenge several of the arguments that Chugach said led it to request the higher rates.

The section stood in support of changing to the return-on-rate base marketing structure, a stance DeVries argued would make the amount Chugach customers pay toward margins and capital projects -- many of which relate directly to generation and transmission costs -- more fair.

"Chugach's retail customers should not be forced to subsidize HEA and MEA's retail customers," DeVries said. "That's all we're saying."

Chugach wrapped up the closing testimony, stating that the impact of the rate increase would be relatively slight -- less than the rate of inflation, according to Department of Labor statistics. The increase, Chugach said, would be offset by a fuel cost savings from efficiencies put into place when two plants were revamped in 2000 and 2001.

Under the HEA and MEA proposals, Chugach attorney Mike Dotten pointed out that Chugach would be operating close to the bone.

He said Chugach, unlike other G & T co-ops, has a greater risk of a loss of half its generation load and should therefore be at the high end of the allowed margins for generation and transmission. He asserted that, although Chugach's wholesale customers are provided with good service, they "don't believe they have any obligation to build equity."

The rate increase and change in accounting structure, Dotten said, would eliminate discrimination among its customers.

"The split TIER should be eliminated and wholesale customers should be required to provide additional margins to bring their equity level up," Dotten said, "but that is a commission decision -- Chugach is merely providing evidence of a problem. The policy choice of 'how much discrimination is too much,' and therefore undue discrimination is the commission's decision to make."

Hearing Examiner Patricia Clark said the case, heard by commissioners Patricia DeMarco, Will Abbott and James Strandberg, is now under consideration by the commission and a decision will be made in the coming months.