Re-Tooling PCE for the 21 st Century Remarks to Rural Alaska Energy Conference April 2004 Steve Colt Institute of Social and Economic Research University of Alaska Anchorage

Two Assertions PCE is important and effective PCE is being eroded

Three Suggestions Inflation-proof the payments, else watch them decline and decline and decline Carve out some funds for diesel efficiency and non-diesel alternatives Trial run of fixed payments

PCE is Important Serves about 79,000 people About 4,000 overall kWh per residential customer, of which about 3,500 is PCE-eligible Compare to 8,145 kWh per residential customer in Railbelt

PCE is Effective, Overall Supports water and sanitation systems Supports clinics Supports schools Supports basic residential needs

PCE is small potatoes compared to federal spending

Fed grants are only half of fed spending in rural AK

PCE covers small portion of Total True Cost of $116 million/yr Source: ISER Sustainable Utilities Study, 2003

PCE is Being Eroded

Suggestion #1 Inflation-proof the program –Reduce spending now, if necessary –Move to POMV-type draw on endowment

Suggestion #2 Carve out a portion of PCE for diesel efficiency and non-diesel alternatives –Mandated efficiency standards were not very effective

Fuel Cost per kWh: Anchorage vs. Rural Alaska

Actual Range of Fuel Costs

NonFuel Cost per kWh

Nonfuel cost includes Generators (machines) Distribution lines and meters (equipment) Operations, Maintenance and Management (people)

Nonfuel cost per kWh for small rural utilities

Suggestion #3 Allow several utilities to receive fixed PCE payments on a pilot basis

Fixed Payment Pilot Program Payments made to utility Determined based on historical factors – hold harmless concept Overall up-down ratchet based on overall funding, share of population Otherwise, fixed for at least 5 years

Theoretical Benefits of Fixed Payments Rewards efficiency Rewards innovation Rewards investment in non-diesel Nullifies incentives for cost-shifting and cost hiding

Two Practical Problems 1) What cost elements are under management control, and what elements are not? 2) How should possible bottom-line savings be shared with customers

Cost factors not under Mgmt Control: Population served Fuel price (? – hedging) –If fuel price rises for all, PCE payment would stay approximately same

Factors under Mgmt Control Everything else! –Fuel efficiency –Fuel choice –Nonfuel expenses –Financial Structure –Line loss –Management structure –Load management

Example for Discussion: AVEC total PCE payments 2003 = $6.2 million Fixed payment set at that level

Automatic Adjustment for change in share of PCE population AVEC now has 27% of PCE population If AVEC’s population increases by 10%, it’s share of total increases to 29%. This increase would result in a new fixed PCE pmt of $6.6 million

All internal cost savings are retained: If AVEC reduces fuel consumption by 10%, under current formula they “give back” 45% or $274,000. Under fixed payments, they would see the full savings of $637,000 Savings even more dramatic if they invest in non-diesel generation

Practical Problem 2 How should fixed PCE payments be apportioned to customers? –Could use current formula within the utility –If utility promotes load reduction, PCE retentions might be used to replace lost rates income

Overall Goals of Re-Tooling Make best use of current funding Secure additional funding by demonstrating innovation and efficiency Continue to provide reliable and affordable electric power

We’re all still in this together. ~The End

References PCE FY00, FY03 statistics ISER/AIDEA Electric Power Statistics, 2004 ISER/MAFA Sustainable Utilities in Rural Alaska, 2003