Loading...
HomeMy WebLinkAboutChairman's Report to the Governor on the Alaska Energy Policy Task Force, February 1988Chairman’s Report to the Governor on the Alaska Energy Policy Task Force February 1988 February 24, 1988 The Honorable Steve Cowper Governor Office of the Governor P.O. Box A Juneau, Alaska 99811-0101 Dear Governor Cowper: At your request, I have prepared this special report which elaborates on the recommendations contained in the primary report of the Alaska Energy Policy Task Force. My special report is informal to the extent that I have incorporated by personal views on the various issues. Sincerely, Neil Davis ND/ds 1802/817 CHAIRMAN'S REPORT TO THE GOVERNOR ON THE ALASKA ENERGY POLICY TASK FORCE January 1988 INTRODUCTION This special report is separate from the Task Force's primary report to Governor Steve Cowper. In part, the preparation of this extra report is motivated by Governor Cowper's request for a discussion on the spectrum of views on major issues considered by the Task Force during the course of its work during the period August 1987 to January 1988. BACKGROUND Several significant events have created the situation Alaska now finds itself in toward the end of the 1980's, and which have led Alaska's governor to establish the Alaska Energy Policy Task Force. Less than 10 years after Alaska achieved statehood in 1959 and began to set up its state government, the supergiant Prudhoe oil field was discovered. Barely adolescent Alaska suddenly became rich and, not surprisingly, did not spend all its money wisely. The rapid increase of oil prices enforced on the world by the Organization of Petroleum Exporting Countries (OPEC) during the 1970s added to Alaska's richness and sense of euphoria when oil began to flow from Prudhoe through the trans-Alaska pipeline in 1977. Just the building of the pipeline itself wrought many changes to Alaska, the $8 billion task being the the most expensive undertaking in the history of private construction. Many aspects of Alaska's current situation were accurately predicted by World Bank economist Alan Gelb during a talk given to the Governor's Council of Economic Policy when it met in Anchorage in November 1982. He noted that Alaska then was much like a number of Third World countries which had suddenly acquired oil wealth--Algeria, Equador, Indonesia, Iran, Nigeria, Trinidad and Venezuela. When the happy event occurred, each government set for itself three commendable goals: to convert the new wealth to stable, job-creating industrial growth perhaps based on renewable resources, to improve public education and to elevate the general quality of life. As each government set about its task, none, Gelb said, “was so foolish" as to curtail (as Alaska did) its normal taxation. But, said Gelb, in each country the oil wealth declined sooner than expected, and each country generally failed to meet its objectives. In many ways the countries were worse off than before their oil bonanzas because the public's CHAIRMAN'S COMMENTARY 2 expectations and desires for government services grew to the level where the cost of providing services demanded by the increased activity exceeded the income government received from the added employment. Also, the government's well- intentioned action tended to weaken rather than strengthen the private industry sector: during the spending spree, industry became overly dependent on government subsidy and direct spending, and it consequently failed to develop the vigor that would sustain it once the spending declined. How right Alan Gelb was. Welcome, Alaska's state government, to the club of unfortunates. Alaska's recent actions have proved that history repeats itself, and that Alaska is not that much different from the cited Third World countries--except that Alaskans were smart enough to establish the Permanent Fund, and smarter yet than Albertans who choose to invest a similar fund internally within the province. Sadly, Alaskans were not clever enough to retain the income tax first enacted during Territorial days. During the last ten years Alaska has put $1.6 billion of its oil riches into energy programs and another billion or two dollars into grants to local organizations for various purposes. The state wasted $160 million on the Susitna hydroelectric project and it built the Four-Dam Pool hydroelectric projects and the Anchorage-Fairbanks Intertie (combined capital assets currently $700 million). State government has worked to electrify much of rural Alaska and has legislated a permanent subsidy program to help pay for it (The Power Cost Equalization Program; current annual cost approximately $20 million). The government has established various loan funds that have allowed Alaska residents to borrow money less than well constrained by prudent fiscal policy, one current result being defaults and bank failures. The State currently owns 2200 public buildings scattered around Alaska. Most of these were built during the past 15 years, and many of them are not adequately designed and constructed for Alaska's several climatic zones. Thousands of state-financed residencies suffer from the same problem. It is not just a question of energy efficiency and energy conservation; part of the problem is that many of these public and private structures are failing prematurely owing to damage caused by the consequences of inadequate thermal design. As it grew to richness, Alaska developed a complex array of energy programs, somewhere between 20 and 30 separately identifiable ones. No grand plan guided the development, rather Alaska mostly followed along in the footsteps of the federal government, patterning its programs after the national ones. Some of the energy programs were, to some extent, proxies for addressing issues only partly CHAIRMAN'S COMMENTARY 3 related to energy. Alaska has not had a cohesive energy strategy policy this past decade, As a primary tool for implementing a portion of its energy programs, Alaska established a publicly-owned corporation in 1978, the Alaska Power Authority (APA). From the beginning, the APA has done precisely what the Legislature and the Executive Branch has wanted it to: build electrical generation and transmission projects, and provide technical and other assistance to rural communities. The idea was to invest oil income in renewable energy resource development, build job-creating economic infrastructure and elevate the quality of life--the usual goals, according to Alan Gelb. The centerpiece was the ill-fated Susitna hydroelectric project which some persons predicted might cost as much as $20 billion. A controversial issue almost from the start, the project was abandoned several years ago. Even though this and perhaps other ill-advised endeavors were pursued by APA at the direction of the Executive and the Legislature, the APA took the heat. Accepting its assigned role as proponents for major energy developments, the Alaska Power Authority, together with its major contractors contributed to the perception that the APA was running out of control. That perception still lingers. Just four years ago, in FY 1985, Alaska budgeted $480 million for energy programs. This amounted to 12.3 percent of the state's budget; only the transportation and public facilities budget ($600 million) and the education budget ($500 million) exceeded that for energy. The Governor's FY 89 budget request for all energy programs is in the neighborhood of $50 million. Obviously, a major decline in energy expenditures has occurred, the decline coming in a reduction in investments in hydropower and intertie projects while maintaining former levels for subsidy programs. According to statutory requirement, Alaska's energy agencies have, these past few years, prepared the annual Alaska Energy Plan, a series of documents that give information on energy resources and programs. The Plan documents tend to regurgitate information from those of previous years, and they generally fail to provide the critical information one desires when wishing to evaluate programmatic performance. The Energy Plans evidently have met with limited acceptance by the Legislature and others, and the Legislature did not appropriate money to prepare the documents this year. In 1984 Governor Sheffield appointed the Advisory Committee on Statewide Power Production Costs which concluded and reported late in that year. This committee, composed largely of persons associated with electrical utilities in Alaska came up with a quite remarkable set of recommendations which were then ignored--and rightfully so. CHAIRMAN'S COMMENTARY 4 The committee based their recommendations on the assumption that every Alaskan household deserves electricity and that power rates should be uniform around the state. It not being technically feasible to meet this objective, the committee stated that it must be met administratively, (i.e. with money). Those households too remote to be hooked up to distribution lines, some 14,000 of them, would receive annual cash payments in lieu of electricity, the total annual subsidy amounting to nearly $11 million. The committee proposed the formation of a Super-APA which was to receive at least $3 billion which it would be free to spend as it chose with minimal interference from the Legislature and the Executive Branch for a period of twenty years. Super-APA would be controlled and largely staffed by the electrical utilities. It would buy electrical power from the utilities at their cost and then sell it back at a uniform rate. The committee desired that Super-APA not be required to abide by the federal PURPA statute. That is, it would buy power only from members of the existing utility club. It seems incredible that any group could come up with such a blatantly self-serving set of recommendations, but then those were heady times when the supply of money seemed infinite and wild ideas were commonplace. FORMATION AND MEETINGS OF THE ALASKA ENERGY POLICY TASK FORCE Recognizing the need to establish a stated energy policy for Alaska, Governor Steve Cowper appointed the Alaska Energy Policy Task Force in August 1989 and charged it with coming up with a policy framework to guide future energy programs. He also asked it to examine the current energy programs and to make such recommendations as it saw fit on how to make those programs effective and affordable. The 13 appointed members of the Task Force were deliberately chosen to provide a spectrum of diverse viewpoints from persons all knowledgeable about some aspect of energy in Alaska, including energy resources, energy production and transmission, urban and rural electrical power distribution, energy end-use, energy conservation and energy consumption. Ex-officio members assigned to the group were the Executive Director of the Alaska Power Authority, the Chairperson of the Alaska Public Utilities Commission, the Commissioner of the Department of Regional and Community Affairs, the Director of the Division of Policy from the Office of the Governor, two Senators and three Representatives. Over a six-month period the Energy Policy Task Force held eight regular meetings lasting a total of 13 days, it held a two-day statewide teleconference hearing, and members CHAIRMAN'S COMMENTARY 5 participated in seven other related public functions, primarily regional mayors' meetings at various locations around Alaska. Travel and other costs, including staff support, were provided by a $200,000 capital appropriation by the Alaska Legislature. Task Force members served without pay. FIRST PHASE OF THE TASK FORCE'S WORK A. Initial Attitudes Prior to any group discussion, the Task Force members responded to a questionnaire designed to determine basic attitudes and the spectrum of views on a number of seemingly relevant issues. Two somewhat surprising results of the tabulation of responses were: 1) No detectable differences appeared in responses from the appointed and the ex-officio members, and 2) While not everyone agreed on all points, the level of agreement on many issues was quite high. Summary of Questionnaire Results Relating to the Proper Role of State Government in Energy The Task Force members were moderately or strongly in agreement with the following ideas: * Alaska's state government is too much involved in energy matters, particularly in the production of energy and in providing energy subsidies. : * It is the proper role of state government to assist in the provision and use of energy by providing information and technical assistance to producers in private industry and others and to promote the production of energy without direct fiscal involvements that go much beyond the costs of these services. * The primary responsibility for the production and delivery of energy is not within the realm of federal or state government, rather it should be a shared responsibility of user-owned co-ops, private industry and local government. * State government's actions in energy matters should be such as to strongly encourage individual, family and community self-reliance. * State government should (with the exception of regulation) minimize modification of free-market forces that affect the production, delivery and use of energy. * CHAIRMAN'S COMMENTARY 6 provide financial incentives in the form of direct subsidies * State government should maintain a moderate to high level of effort aimed at information generation, information transfer and to the development of energy technology appropriate to Alaska. * State government should take strong account of regional differences in Alaska and should decentralize decision-making to the regional and local levels as much as possible. * State government should try to fiscally structure its energy programs to be as self-sustaining as possible, i.e., no net drain on the State's General Fund. * * * The Task Force members initially were divided on their views as to the proper role of state government in the ownership and operation of energy generation and transmission facilities. About half the members thought the state should get out of the business altogether even if it meant selling at a loss. The other half were in agreement with the idea that the State should continue present ownerships and take a very conservative approach to increasing ownership in new facilities. * * * B. Development of a Policy Framework During the course of its first three meetings the Energy Policy Task Force developed a set of 14 statements intended to describe its recommended framework for State energy policy. The Task Force reviewed these statements during its last meeting in January 1988, making minor modifications to a few, and added a 15th. The 15-statement policy framework is intended to serve as a guide for operational strategy and evaluation of programs. The principles espoused in the policy statements are mutually complementary--none contradicts any other, and the recommended guidelines are intended to be timeless and generally independent of overall budgetary considerations. In principle, if the State chooses to adopt the suggested policy framework, it should conduct no energy programs or take any strategic actions that are counter to the intent of any one policy statement. The Task Force believes that if this advice is followed closely by the Executive Branch and the Legislature then Alaska will be able to conduct effective, affordable energy programs which CHAIRMAN'S COMMENTARY 7 will always be in the long-term best interest of current and future Alaskans. After initially formulating the policy framework and then beginning to use it to evaluate current energy programs, it came apparent that the essence of the overall framework was contained in the meaning of an old adage rephrased as follows, "Give a man a fish and he will eat for a day; give him a fishing pole and he will eat for life." All one has to do in evaluating an ongoing or proposed program or strategy is to ask the question, "Does it hand out fish or fishing poles?" If the answer is that the activity provides fish then it probably should be rejected out of hand. If the activity looks like it provides fishing poles then it might be a good program. Some programs deliver both fish and fishing poles, in which cases one should seek means to alter the fish-like portions to give them more the characteristics of fishing poles. The following section presents the final version of the 15-statement recommended policy framework together with the chairman's interpretation of the intent of each and commentary on how the statement might apply to specific strategies of current interest in Alaska. It is unlikely that all members of the Task Force will agree with some of the chairman's interpretations. * * * CHAIRMAN'S COMMENTARY 8 RECOMMENDED GUIDING PRINCIPLES FOR ALASKA'S OVERALL ENERGY POLICY 1. The overall goal of Alaska's energy policy should be the long-term availability to all Alaskans of an adequate supply of energy at the lowest total costs to the users, the environment and the state. Chairman's Commentary: This is in part a motherhood statement that acknowledges energy as a necessity of life and that the planet must be protected for future generations, but the phrasing "lowest total costs to the users...and the state” has a strict and very important meaning: In the evaluation of any proposed activity the total short- and long-term cost (not just the direct cost to some segment of Alaska's population) should be a major consideration. * * * 2. Recognizing the need to avoid rate-shock--particularly in those rural areas of Alaska where energy costs are very high, it is the policy of the State to avoid actions that in themselves create rate-shock, and also to pursue strategies intended to achieve the lowest combined costs to the State and the consumer. Chairman's Commentary: In making this recommended policy statement the Task Force is acknowledging that changes in strategy might, from time to time, be needed, but these changes should be phased in or otherwise made in such a way that sudden consumer cost increases do not occur. A s Deliberate State actions of past years have extended electrification to many cash-poor rural communities. ‘The | Power Cost Equalization Program subsidizes about 45 percent of the electricity generated in rural Alaska, bringing that proportion of the cost borne by the users as a whole to a level close to that paid in the state's three largest cities. But the program is costly, roughly $20 million this year, and the cost is likely to increase beyond a level that the State can afford. Worse yet, anges are needed, but the Task Force is saying that these changes should be in a form that does not radically increase consumer costs. To avoid rate-shock, modifications to the Power Cost Equalization Program must be accompanied by investment in technical improvements that can improve efficiency while still maintaining low net costs to rural consumers. In short, State government actions of the past have created an unfortunate situation. It is unfair to rural CHAIRMAN'S COMMENTARY 9 consumers to suddenly dump the problem off on them. The State created the problem, and it should solve the problem-- it will cost money to do that. Specifically, the Legislature, during the coming few years, needs to annually appropriate funds beyond that called for in the current budget. Something like $5 million annually invested in physical improvements would do the job. * * * 3. Recognizing the value of free-market forces in bringing about the most effective uses of energy at the least overall cost, state government shall seek to develop a climate that fosters private industry, and in general, the state shall not compete with private enterprise. Chairman's Commentary: This statement contains two important strictures that government in general has difficulty in dealing with. Regarding the first, history has demonstrated over and over that interference with free- market forces eventually leads to inefficiencies that have high cost and may even hurt or destroy the societal sectors the original interferences were intended to aid. Pressures from special-interest groups are always high, making it difficult for government to resist their demands. Government can help, but it must do so in the right fashion. Government is prone to try to help in the wrong ways because these are easier and are generally approved of by the recipient special-interest groups. These easy methods include the awarding of subsidies and tax-incentives. The Task Force itself had problems with this issue. As a group, its members could endorse the concept of non- interference with free-market forces, but when it came down to specific issues (perhaps related to the personal interests of individual members) we began to hear about "market failures" or other excuses for interferring in the unfettered play of free-market forces in the Alaska energy arena. It seemed that what was good for the goose or the flock as a whole was not necessarily good for the gander. Regarding the second element in this recommended policy statement, the role of state government relative to that of private industry was a persistent topic of discussion throughout the work of the Task Force. The chairman thinks that the Task Force members, both appointed and ex-officio, reflect the mainstream of Alaskan thinking on this issue: the State should rely on private industry and assist it in genuinely helpful ways; whenever the private sector can do the job, government should refrain from competition. Two energy-specific sub-issues were on the minds of Task Force members. One is the recognition that each time the State builds an energy generation facility, that action CHAIRMAN'S COMMENTARY 10 may preclude private industry from building some other facility. The Task Force did not delve deeply enough into this issue to discuss when it might be appropriate for the State to construct generation facilities. Receiving more discussion was the question of how much involvement the private sector should have in technical assistance activities conducted by the State. All agreed that these activities should be expanded, and there was consensus that steps need to be taken to establish specific guidelines which can be followed in an attempt to create an effective partnership between government and private industry in the delivery of energy services. The Alaska Power Authority plans to initiate action on this matter. * * * 4. Recognizing that Alaska's current mix of energy programs may not be the most effective and cost-effective, and that some programs may work at cross-purposes to others, it is an immediate objective of State energy policy to integrate and modify the various energy programs where necessary to effectively serve the needs of Alaska's citizens, and with the least overall cost. Chairman's Commentary: If Alaska currently had no energy programs and yet wished to have a substantial effort in energy, a good-sense decision would be to place the entire effort in one operating organization.* The Task Force was not unanimously in favor of integrating energy programs. The one or two persons most strongly opposed might have taken that view because they recognized that continuing fragmentation of programs is likely to lead to reductions even beyond those occurring in the past three years and perhaps to a natural death of some components owing to lack of funding. The Energy Conservation and Weatherization programs currently administered in the Department of Community and Regional Footnote: Somewhat as an aside, this is a good a place as any to ask if Alaska should have any energy programs at all. One of the Task Force's members has repeatedly voiced the opinion that Alaska would be better off if the State were out of the business altogether. Even if everyone agreed with that idea, we would not be acting in the long-term best interest of Alaska--and be very damaging to some Alaskans-- if we abruptly terminated the State's involvement in energy. The State has built for itself an ongoing obligation by helping to hook rural Alaska on the habit of consuming high- cost electricity, and the State owns $700 million worth of hydro generation and electrical transmission facilities. We can change our direction if we want, but we are ill-advised and probably immoral if we do it too quickly. CHAIRMAN'S COMMENTARY ll Affairs may be in the greatest danger because they now are mostly funded by federal "Oil Overcharge" funds which will run out in about two years. If these programs are to be continued at current levels the direct cost to the State must dramatically increase when the Overcharge funds are gone. Department of Community and Regional Affairs personnel appear to be strongly in favor of retaining the energy programs they currently operate (two involving approximately 13 staff). he seonoste developaent. He sees no sine chairaan does organization, which primarily is an outreach department Shetgy programs chan its oy shay and public buildi in ’ puret-commenrerens THY SEPSTESHSEY SF Gey CURSE WEYL es provided by various agencies. The department should, of course, have a helping role in all of these delivery services. Rural communities need all the help they can get in dealing with state and federal agencies and in the ongoing task of building effective local government. The Department of Community and Regional Affairs has an important role, but that role need not necessarily include the direct delivery of energy or other services. The Energy Policy Task Force recognized the value of combining the various energy-related loan programs into one general loan fund and made a strategic recommendation to that effect. The particular programs involved are: Power Development Revolving Loan Fund (DCED) Current Outstanding Pricipal: $186.1 million Power Project Fund (APA) Current Outstanding Principal: $22.2 million Rural Electrification Revolving Loan Fund (APA) Current Outstanding Principal: $6.7 million Bulk Fuel Loan Program (DCED) Current Outstanding Principal: $0.3 million Residential Energy Conservation Loan Fund (DCED) Current Outstanding Principal: $2.9 million Alternative Energy Loan Program (DCED) Current Outstanding Principal: $10.2 million Total Outstanding Principal: $228.4 million The Residential Energy Conservation and Alternative Energy loan programs are essentially inactive, and the Rural Electrification loan fund program has such complex requirements that it is difficult to administer and apply CHAIRMAN'S COMMENTARY 12 for. Despite its subsidized interest rate, it is under- used. Consolidation of these loan funds into one fund offers several advantages, and no apparent disadvantages: 1. A single loan fund can serve all energy-related needs if administered as a unit. The administration of a single fund is likely to be more economical for the State and also more economical and easier for users. 2. The combined loan program can facilitate dispersal of funds to wherever most needed. 3. Perhaps most importantly, a loan administration that also is responsible for providing technical assistance and other related services to users can help assure the most effective use of funds since the monies invariably are applied to technical improvements. morandum g As a bode, the Task Force seemed hazy on its cadarvabandisa of what it means operationally to enforce integrated budgeting. Some integration already is in effect as part of the normal Executive Branch budget preparation process--Office of Management and Budget does already, at least in principle, review the various energy budgets to assure their reasonableness and consistency. The Task Force clearly is suggesting something more than that. The most effective mechanism for integrated budgeting is, of course, program consolidation. vu OMws om CHAIRMAN'S COMMENTARY 13 The reasons the Task Force could not reach a consensus on endorsement of this concept at this time are probably several. ; d i This perception does not square with reality since there is little real difference between the management of this public corporation and the management of a state agency. Every State agency maintains an ongoing staff which reports to a commissioner and deputy commissioners appointed by the Governor and who serve at the pleasure of the Governor. The Alaska Power Authority maintains an ongoing staff which reports to an Executive Director who is appointed by the Governor through the Board of Directors, the majority of whom (four of seven) are commissioners or other officials appointed by the Governor and who serve at the pleasure of needs further education in the ways of government. | Having now served for six months on the APA Board of Directors as one of its three public members (who are appointed by but do not serve at the pleasure of the Governor) and having during that time acted as its chairperson, the chairman has developed some appreciation for the advantages of such an organization having a board rather than only a commissioner. The four members who serve at the pleasure of the Governor bring to the management of the corporation a working knowledge of the affairs of the other state organizations they also manage. Their service on the board creates a broad multichanneled conduit between the corporation, the Governor and the other agencies. The three public members contribute by bringing to bear whatever expertise they have, and they also bring in a non-government viewpoint and their own informational conduits. One other important advantage of this management scheme is that it allows the option of hiring a chief operating officer who, while he or she may be a political appointee, can be a person chosen strictly on the basis of energy and financial expertise and management ability. All things considered, the public corporation has a management structure that makes it more likely than a conventional department to be consistently effective and internally well managed. And this public corporation is no less under the thumb of the Governor and the Legislature than any line agency. Furthermore, all meetings of its Board are open to the public, and all actions of the corporation are open to public scutiny. CHAIRMAN'S COMMENTARY 14 anning Right now, most of the energy supply and some of the energy use activities are within APA, and some of the energy use activities are in the Department of Community and Regional Affairs. Whether or not the Governor opts for full program integration, consideration might be given to placing the Commissioner of DCRA on the APA Board. * * * 5. Recognizing that energy conservation is in the best interests of Alaska's citizens, and that efforts directed toward conservation can be more cost-effective than development of additional energy resources, the State's energy policy shall be to promote energy conservation by various means that include education, technical assistance, development of use technologies, and perhaps direct assistance. Chairman's Commentary: Energy conservation simply makes good sense, from every point of view. The less energy used in cash-poor rural Alaska the more money remains in the villages to be used for other vital needs. Properly built houses and public buildings not only use less energy, they last longer. Efficient stoves and appliances save money and fuel, as do efficient electrical generation and distribution systems. The State can do much to encourage conservation by educating users, providing technical assistance and by developing and applying appropriate energy technologies. The last three words in the recommended policy statement are essentially the only sop to subsidy in any of the 15 recommended policy statements. The meaning of these three words is that it might sometimes be advisable to subsidize, by direct grants or low-interest loans certain conservation efforts. In Alaska's energy program mix we have only one effort that is purely a conservation subsidy. This is the Low-Income Weatherization Program, funded more than 95 percent during FY 88 by federal or Oil Overcharge funds (State contribution: $200,000). Since 1981, the State has invested $15.1 million in this program, the federal government $14.8 million, and Oil Overcharge funds have contributed $4.0 million. Ten percent of the houses in Alaska, some 15,000 of them, have been weatherized, and another 30,000 need it. If the State wants to do so it can pour money into weatherization forever, at a rate of $5 million to $10 million annually without ever finishing the job. CHAIRMAN'S COMMENTARY 15 Might it not be better to give the people of Alaska the education and technical assistance that will encourage people to do the job themselves? The homes belong to them, it really is their problem. One of the tenets of "human effectiveness training" is that each time one person solves another person's problem for him he takes away a bit of that person's humanity. As now structured, the Weatherization program does help to conserve energy, but it takes away a bit of humanity that many Alaskans do not need to lose. The program should move toward handing out fishing poles rather than fish--and all of Alaska's future conservation efforts should have the same goal. * * * 6. Recognizing that state government should take the primary role in necessary energy-related regulatory activities, the State's energy policy shall be to conduct those regulatory activities efficiently and cost-effectively and, as much as is practical, in coordination with other state activities. Chairman's Commentary: Regulations are like taxes: we need them but we don't like them. This recommended policy statement is a plea to future lawmakers for them to create regulations carefully and not to overdo it. The chairman does not think that the statement is voicing any particular criticism of the State's existing regulatory functions. * * * 7. Recognizing that the federal government has been conducting energy programs in Alaska and that it may continue these or similar programs in future, Alaska's energy policy shall be to coordinate closely with the federal government so that the combined federal and state activities are mutually complementary and are directed toward the long-term benefit of Alaska's citizens. Chairman's Commentary: Alaska's fragmented energy program mix undoubtedly makes it awkward for federal agencies to deal with the state, and it may have led to some federal programs not being effectively used, and to our own programs not being as effective as they should be. Both the State and the federal government certainly have made their mistakes. An often-cited example is the HUD housing program which has constructed many energy-inefficient houses in rural Alaska. Somehow, Alaska and the federal government should have gotten together to work out a better solution to the perceived problem. We ought to try to do better in future, at minimum we should no longer use public funds to finance improperly built housing. Nor should we provide CHAIRMAN'S COMMENTARY 16 State assistance to electrify new housing developments that do not meet the State's thermal standards. * * * 8. Recognizing that Alaska has copious energy resources of nearly all forms--including petroleum crude, natural gas, coal, hydropower, geothermal energy, wind energy and biomass--the State's energy policy shall be to make these resources available for development. Chairman's Commentary: The motivation behind this recommended policy statement is the worry by those in the energy supply business that the State might not make available certain energy resources that might be developed by private industry. We should not forget, of course, that these resources do belong to the people of the state as a whole, and therefore should be made available at a fair and reasonable cost. * * * 9. Recognizing the diversity of Alaska's peoples and the fact that they live in a variety of settings within a land having several distinctly different climatic zones, the State's energy policy shall be to conduct the State's energy activities with a high awareness of the differing regional needs. Chairman's Commentary: The distances between Ketchikan and Point Barrow, and between Eagle and Attu are great; much diversity of climate, geography and society lies between. This recommended policy statement is a reminder that what may be good for one part of Alaska may not be so good for other parts. In relation to this general issue were some suggestions within the Task Force that Alaska should have two energy policies: one for urban Alaska and one for rural Alaska. The majority seemed to think that we need not encourage such divisiveness as already exists between the two areas. * * * 10. Recognizing the value of a proper level of planning, it is the policy of the State of Alaska, where expenditure of State funds is involved, to assist as is necessary in such planning activities as are required to accommodate the future energy needs of the state. Chairman's Commentary: The intent of this recommended policy statement is that state government should not build up a major planning bureaucracy. Planning, of course, is needed, and a suitable mechanism must exist. The Alaska Statutes relating to the activities of the Alaska Power Authority define a planning and evaluation procedure for any CHAIRMAN'S COMMENTARY 17 major projects that might come up for consideration. This procedure contains seemingly adequate safeguards against capricious actions by either the energy corporation or the Legislature. It might be well to examine the statutes carefully to see if some improvement could be made to encourage further examination of alternatives to any proposed project. In essence, this is Least-Cost planning philosophy. On the other hand, as one of the Task Force members noted, it is hard to legislate good sense. The Task Force discussed, and generally seemed to be in favor of the idea that some separation between the planners and the builders is a good thing. If the same people perform both functions they may tend to become biased proponents. Whatever the organizational structure employed, this concept should be kept in mind. In part, this idea is responsible for the chairman's suggestion that it would be useful for the APA to have a technical advisory committee, although he envisions a larger purpose for such a group. * * * 11. Recognizing that the State, at no or minimal cost to itself, can sometimes assist local and regional organizations in reducing capital cost of energy-related projects, it is the policy of the State to provide such assistance by either offering at cost (market-rate) loans or by assisting entities to obtain loans from other sources at the lowest cost. Chairman's Commentary: The Task Force is endorsing the use of the borrowing power of the state to provide funds for capital projects that might be built or owned by local and regional organizations, or even by the State. The proposed purchase of Snettisham is an example. The cost to the State is minimal, regional electricity users who pay the costs achieve stabilized rates and, after a few decades, the State ends up owning a valuable facility. Everyone gains. Task Force members also voiced concern over whether enough assistance is being given to private industry through the provision of market-rate loans. Note that nothing in Statement 11 suggests making subsidized loans. * * * 12. Recognizing that it is the proper role of the state to develop information and to provide it to all parties-- private industry, publicly owned organizations, and energy users--the State shall promote and participate in the collection, archiving, analysis and dissemination of information needed for the conduct of energy activities; and CHAIRMAN'S COMMENTARY 18 to foster and participate in education and in research and development of energy technologies specifically useful in Alaska. Chairman's Commentary: In the chairman's opinion--and he thinks he holds this opinion much more strongly than most other members of the Task Force--this is really where it's at for Alaska if the state wants to develop. By its failure to establish and maintain an adequate level of effort in energy resource information and technology development, Alaska is proving its desire to retain its Third World status. We are content to squander money but not to invest it in the immediate and distant future. It took Nature millions of years to put the oil riches in the ground, and this generation is content to suck them out out as quickly as possible without any thought for our children. For ourselves and for them we need to use some of our one-time- available fiscal resources to generate new knowledge and to build new and better fishing poles. The direct cost is quite small compared to the total we are spending on energy programs. * * * 13. Recognizing that Alaska is highly subject to natural disasters, and also that Alaska is a non-contiguous state which occupies a strategic location in world affairs, thereby making it subject to man-made disasters, the State's energy policy shall be to encourage local and regional energy self-sufficiency so as to mitigate the effects of such events. Chairman's Commentary: No one likes to think about wars or other disasters, but we live in a fool's world if we think they will be absent from Alaska's future. When one does not know what will happen next, diversification and local independence in energy supply are good avenues to follow. Some Task Force members expressed some concern that this recommended policy statement could be interpreted as being against the construction of electrical interties. It is not meant to be that, rather it is intended to lend additional encouragement to efforts to develop local sources of energy supply. Even such small-scale efforts as the construction of frozen food storage facilities that do not depend on electricity can do much for Alaska's northern and western communities. * * * 14. Recognizing the high cost of energy in rural Alaska and the relative insecurity of rural economic and energy systems, it is the policy of the State of Alaska to give emphasis to the special energy needs of rural areas. CHAIRMAN'S COMMENTARY 19 Chairman's Commentary: The biggest problems are in rural Alaska where inexpensive fuel transportation facilities largely are lacking and the low population prevents economies of scale. Fortunately, any solutions to rural Alaska's problems also apply to those who live in urban Alaska, so no one is shorted by a focusing on the rural problems. * * * 15. Recognizing that it is in the financial interest of Alaska to do so, the State should continue to own the present power production and transportation systems. It should avoid ownership of any new generation facilities if local or regional utilities can plan and build the facilities at lower combined cost to the State and the consumers. The State should continue to be involved in the planning, building and financing of transmission facilities in those cases where it is determined that the utilities or the private sector cannot provide the facilities at lower total cost to the State and the users. Chairman's Commentary: This recommended policy statement shows that toward the end of its deliberations the majority of the Task Force recognized the advantages to Alaska of retaining current ownerships. The group urges the State to take a very conservative approach to new ownerships, and it is urging state government to aid and rely on private industry and to aid and rely on local and regional organizations to the greatest extent possible. In essence, the Task Force is asking that the State apply the test of the market-place in any decisions regarding new generation and transmission facilities. It was noted in the deliberations, however, that an argument can be made that certain transmission facilities might be thought of as like roads or railroads--they can be components of an economic infrastructure, the economic value of which may be very real and, of course, hard to evaluate. The chairman acknowledges that the argument has merit, and that if a particular project appears to even marginally meet a pure market-test, consideration of the intangible benefits related to the building up of economic infrastructure should enter into the final decision. He thinks the majority of the Task Force would agree. This policy statement has direct relevance to two proposals currently before the State: upgrading of the Anchorage-Fairbanks intertie, and construction of a gas pipeline between the two cities. In each case investment of public funds in equity is being requested. CHAIRMAN'S COMMENTARY 20 SECOND PHASE OF THE TASK FORCE'S WORK After formulating its overall policy framework the Task Force set about a review of the State's energy programs. The results of this review are contained in the Task Force's main report. This probably was the most comprehensive review of energy programs in recent years, and it involved an attempt to understand and evaluate the performance of each program. However, a full understanding and evaluation would require more time than the Task Force could afford. The one program most carefully looked at was Power Cost Equalization. The overall review was very helpful to the Task Force, and positive benefits no doubt accrued to the involved program personnel as well. Reviews of this type should occur on a regular basis. THIRD PHASE OF THE TASK FORCE'S WORK The last three meetings of the Task Force were devoted to trying to develop specific strategy recommendations. The group considered a "strawman" list of recommendations proposed by the chairman, retaining some and rejecting others. Readers of the Task Force's report might keep in mind that some of the adopted recommendations were written during the closing hours of the last meeting when there was little time for reflection and review. The recommendations were adopted by majority vote of the appointed members. Ex- officio members did not vote. The chairman elected not to vote except in the case of a tie, a situation which did occur once on a minor issue. If he had voted he would have created a tie vote on two major issues. THE TASK FORCE'S STRATEGIC RECOMMENDATIONS RECOMMENDATION 1. The Energy Program for Alaska should shift its emphasis from electric power project development toward a more balanced approach that includes equal consideration of thermal and energy conservation options. Chairman's Commentary: As worded, this recommendation may be a little off the mark as it refers specifically to the statutorily defined "Energy Program for Alaska" operated by APA, however the intent clearly is aimed at APA's overall programmatic effort. Under its current management the Alaska Power Authority is already moving rapidly in the direction recommended, probably more so than many members of the Task Force realized. * * * CHAIRMAN'S COMMENTARY 21 RECOMMENDATION 2. The Task Force recommends that the State of Alaska develop a strong program for applied research, development, demonstration and transfer of energy resources and technologies, and that this effort be administered by the Alaska Power Authority. Chairman's Commentary: This recommendation has the whole- hearted support of the chairman. He thinks this is one of the most important strategy recommendations the Task Force is making and he urges the Executive and the Legislature to adopt it and provide the necessary fiscal support--at the expense of other energy programs if necessary. * * * RECOMMENDATION 3. Consolidation of all energy activities into one agency is not presently recommended because of significant differences in program missions. The Task Force recommends elimination of duplicative efforts between agencies and improved coordination between programs that serve similar needs. Better coordination can be achieved with Memorandums of Agreement between the Alaska Power Authority, Department of Community and Regional Affairs (energy conservation programs), Department of Commerce and Economic Development (loans), and the Department of Health and Social Services (LIHEAP) and by interagency coordination of energy program planning and budgeting. Chairman's Commentary: The group split almost right down the middle on this one, the recommendation carrying by only one vote. One result is a minority report urging consolidation (attached as an appendix to the main report), and which the chairman is in general, but not detailed, agreement with. Recommendation 3 calls for the status quo and asks for formalized agreements to cooperate. An unsigned Memorandum of Agreement between APA and DCRA has been lying around for two years, for reasons that are unclear. See also the Chairman's Commentary relating to Policy Recommendation 4. Note that if the recommended consolidation of loan programs occurs a Memorandum of Agreement between APA and DCED is not needed. Nor does the chairman see need for a new Memorandum of Agreement involving the Department of Health and Social Services. During discussion, it was noted that a Memorandum of Agreement was little more than a toothless Reimbursable Services Agreement. * * * RECOMMENDATION 4. Incorporate the various existing loan funds into one single fund that should be called the Alaska Energy Revolving Loan Fund. CHAIRMAN'S COMMENTARY 22 Chairman's Commentary: See commentary given on Policy Recommendation 4, Note that if the State should adopt the self-financing concept for energy programs the name “Alaska Energy Revolving Loan Fund" would become "Alaska Energy Revolving Fund", RECOMMENDATION 5. Pending the outcome of ongoing studies, the State should reaffirm its policy of setting aside the Railbelt Energy Fund solely for energy expenditures within the Railbelt. Chairman's Commentary: This is a fiscal issue that must be decided by the political process, probably without much consideration of strategic energy policy. The Task Force's majority vote in favor of retaining the fund for the Railbelt probably derives from consideration of the equality issue (if the bush is going to get PCE then the Railbelt should get the Fund) flavored a bit, perhaps, by vested interests of Task Force members. From the viewpoint of strategic energy policy for the Alaska it would be best to forget the equality issue and then apply the Railbelt Energy Fund to the energy needs of the state as a whole. Regardless of where the money is spent, if it is effectively spent than all Alaskans will benefit, including those in the Railbelt. The chairman believes that would be the best thing to do. In any case, the Task Force is saying that the State should not commit the Railbelt Energy Fund to any specific project or projects until the APA has completed various studies underway and which relate to the possible uses of the fund. The chairman suggests that one means of holding onto the fund is for this Legislature to appropriate a part or all of the money to the proposed "Alaska Energy Revolving Fund". * * * RECOMMENDATION 6. The Power Cost Equalization Program should remain at its current funding level of $21 million. However, a decrease in funding requirements is needed. Changes to the program should be implemented which provide incentive to the utilities to reduce costs and provide incentive, through rate structures, for consumers to minimize consumption. Resultant savings to the State should be reinvested in rural energy efficiency and conservation measures. Chairman's Commentary: The Task Force, its staff and others cooperating with the Task Force have devoted much attention and effort to the PCE program. The group would CHAIRMAN'S COMMENTARY 23 have liked to make ver ecific recommendation on how to proceed, but it Le reenremaeity 6. This is a very complex issue with some aspects that need further study, despite all the efforts already made. The next | for consideration Even if it is not feasible to change the statutes this year, it is rational to proceed with strong efforts to beef up the State's technical assistance program. The long-term answer to reducing subsidy costs must come from technical improvements, and that is going to cost money. To make these improvements (and to cover the costs incurred in Recommendation 7, below) we should be spending several million dollars a year more than current PCE formula requires, the excess being devoted to technical improvements and assistance programs. * * * RECOMMENDATION 7. Expand the Alaska Power Authority's Rural Technical Assistance Program to establish a circuit-rider program that helps small communities maintain electrical generation and distribution facilities, maintain waste heat systems and provide local operator training. This effort should utilize private industry wherever possible. . Chairman's Commentary: This recommendation is addressing the widely recognized problem of inadequate expertise in many rural communities. One idea the Task Force is thinking of here is that a circuit-rider program could form the basis for developing regional cooperatives that would be far more capable of dealing with generation and distribution facilities than the individual small communities. In other words, this would be a first step toward a long-term solution. * * * RECOMMENDATION 8 Establish a working relationship between the Alaska Power Authority and private industry which fosters the growth of the private sector and also protects the needs of communities. Chairman's Commentary: See commentary given under Policy Recommendation 3. * * * RECOMMENDATION 9 The State's policy shall not be to use loan receipts to self-finance energy programs but to use CHAIRMAN'S COMMENTARY 24 legislative appropriations to fund the operating budget, capital budget and loan programs of those State agencies that have energy programs. See also Minority Report Chairman's Commentary: As on the issue of program consolidation, the Task Force split right down the middle on the self-financing issue. That might seem to be a curious action in view of the statement on initial attitudes given on page 6 of this document: "State government should try to fiscally structure its energy programs to be as self- sustaining as possible, i. e., no net drain on the State's General Fund." The chairman does not think anyone is abandoning her or his earlier beliefs; it is merely a question of the mechanics of the process. The self-financing proposal suggests that the State consider past equity acquisitions as investments which can be relied on to fund energy programs in future. The concept carried out in full would require the Legislature to appropriate the income streams from outstanding energy loans and equity holdings in energy projects into a single fund which might be called the Alaska Energy Revolving Fund, and also appropriate a substantial portion or all of the remains of the Railbelt Energy Fund to this fund. Then, each year, the energy agency or agencies would develop a proposed budget limited by the expected income stream from the fund. Each annual budget would have to be approved by the Legislature in the same fashion as now, and that budget would be expected to provide for all energy programs so that no extra drain on the General Fund would occur. By taking this action, the Legislature would be putting the energy programs on the same financial footing as the Student Loan Program, the Alaska Industrial Development and Export Authority, and the Alaska Housing Finance Corporation. Proponents of the self-financing concept argue that it should foster better long-range planning and stability of the overall energy program and, at the same time, deter all involved parties--the Executive, the Legislature and energy agency personnel--away from any inclinations toward use of other funds from the General Fund for energy programs. One major advantage envisioned is that the equity already in energy programs and the cash stream it generates could be leveraged to provide financing for future projects and programs, not from the General Fund, but from financial markets. Individually and collectively, the Task Force's members found the self-financing concept difficult to understand and be totally comfortable with. In their somewhat limited deliberations on this issue the Task Force's members were all worried about going against Constitutional intent-- CHAIRMAN'S COMMENTARY 25 recommending any action that might reduce Legislative oversight of expenditures. Also, some members wondered, if it would be possible for the income from energy equity investments to eventually become greater than the monies needed to operate a proper level of effort in energy programs. These are legitimate concerns that might have been overcome given further discussion, since the chairman thinks it fair to suggest that most or all members of the Task Force recognized the pragmatic advantages of self- financing. * * * RECOMMENDATION 10. The State of Alaska may make or facilitate low-cost loans or make grants to local or regional entities for the purpose of building and financing energy infrastructure, provided that the private sector is not able to do it at a reasonable cost to the end-user and that long-term economic feasibility is demonstrated. Chairman's Commentary: See first the commentary on Policy Recommendation 15. The chairman is not enamored of this recommendation. Acceptance of it has to be predicated on the belief that energy infrastructure is somehow different from energy program delivery or other types of energy facilities because all of the Task Force's other policy and strategic recommendations, by direct statement or omission, shy away from the awarding of subsidies of any form. The recommendation makes sense and is compatible with other recommendations only if it is viewed in the light that a particular infrastructure project--an electrical intertie or a gas pipeline--might have sufficient value to the public that the citizenry as a whole should pay for it. One would like to think that such decisions can be made on the basis of careful analysis that truly balances costs against benefits. But, Alaska's citizens, Caveat emptor. * * * CHAIRMAN'S COMMENTARY 26 RECOMMENDATION 11. The Task Force strongly supports the aggressive implementation of thermal energy standards as planned on January 1, 1988. These standards, originally legislated in 1980, apply only to residential buildings constructed with State financial assistance. Chairman's Commentary: It is sad, if not scandalous, that State government has failed to follow legislative intent by delaying for eight years the implementation of thermal standards for residential buildings financed with public monies. The result is the construction of many homes inadequate for the climates of Alaska. If people want to build energy-inefficient houses, let them do it with their own money. * * * RECOMMENDATION 12. The Task Force recommends that the federal weatherization program be continued and that the State supplement this program sufficiently to restore the program to the State's FY 84 and FY 85 guidelines. Chairman's Commentary: The State was contributing more than $5 million annually to the approximately $14 million spent during those two fiscal years on the Weatherization program. In FY 88 the State appropriation was $200,000 and the rest ($4.3 million total) was from federal funds or from Oil Overcharge funds the latter soon to be gone. So this recommendation is suggesting that Alaska radically increase its appropriations for this program. Weatherizing houses is worthwhile, no one questions that. But the chairman cannot agree with this Task Force recommendation. This program is nearly all "fish" with little or no provision of "fishing poles". The program is an endless sink of funds that do nothing to help people help themselves or build for the future. The program seems to be predicated on the idea that we will always have a substantial segment of Alaska's population too ignorant to manage their own affairs. Of course some people do need help, those who are truly physically incapable. The remaining Oil Overcharge funds and such funds as the federal government wishes to contribute could be more usefully applied to training and educational programs that would motivate people to weatherize and do the work themselves. With our energy programs we ought to try to elevate people instead of putting them down by solving their problems for them. CHAIRMAN'S COMMENTARY 27 RECOMMENDATION 13. The Task Force encourages the Alaska Power Authority to work toward improving waste heat recovery technology and to develop waste heat systems wherever they prove to be economically feasible. Chairman's Commentary: By making this recommendation the Task Force is acknowledging the value of APA's work in waste heat recovery and urging the organization to continue and also to undertake more work in the development of the relevant technology. * * * RECOMMENDATION 14. The Task Force recommends continuation of the Low Income Home Energy Assistance Program as it is currently administered since it appears to be working well and has no adverse impact on other energy programs. However, consideration should be given to modifying the eligibility requirements so that the program does not serve seasonal workers with moderate to high annual incomes. Chairman's commentary: This is a direct subsidy program paid for by the federal government and so costs the State nothing. Happily, the program is structured in such a way that it does not discourage energy conservation, and some of the program monies actually are used for conservation measures. The program seems to be very well managed. The Task Force heard some charges of program abuses that might be corrected in future, but the Task Force recognizes that in programs of this type some abuses are inherent, and perhaps not worth worrying about. * * * RECOMMENDATION 15. The Task Force commends and encourages programmatic efforts such as the Alaska Craftsman Home Program and the Energy Rated Homes program which encourage the construction of energy-efficient buildings and the public's acceptance of energy conservation measures. Chairman's Commentary: These are the kind of programs that we need in Alaska. They are effective and inexpensive because they provide "fishing poles" instead of "fish". The Weatherization program referred to above should be more like these programs. * * * RECOMMENDATION 16. It is recommended that the assets of the Bulk Fuel Loan Program be transferred to the Alaska Energy Revolving Fund and that future loans be made from that fund and be managed by the Alaska Power Authority. The Bulk Loan Fuel Loan Program could then be eliminated as such, without any loss of service to communities. Loans made to CHAIRMAN'S COMMENTARY 28 communities should be allowed for longer than 9 months in cases where storage capabilities permit purchases of fuel every other year. See Chairman's Commentary under Policy Statement 4, * * * RECOMMENDATION 17. It is recommended that the assets of the Residential Energy Conservation Loan Fund be transferred to the Alaska Energy Revolving Fund and that this program be eliminated as a separate entity. If it is deemed desirable to continue to offer loans to finance residential energy conservation improvements, these loans could be made from the Alaska Energy Revolving Fund. See Chairman's Commentary under Policy Statement 4. * * * RECOMMENDATION 18. It is recommended that the assets of the Alternative Energy Loan Program be transferred to the Alaska Energy Revolving Fund, and that this program be eliminated. See Chairman's Commentary under Policy Statement 4. * * * RECOMMENDATION 19. It is recommended that the assets of the Rural Electrification Loan Fund be transferred to the Alaska Energy Revolving Fund, and that further loans for the purpose previously served by the former fund be under the same terms as those currently awarded from the Power Project Fund. Chairman's Commentary: See also commentary under Policy Statement 4. Note that this strategic recommendation and related others also imply combining the Power Project Fund and the Power Development Revolving Loan Fund into the new Alaska Energy Revolving Fund and then using essentially the same criteria and interest rates for all loans. Note also that the current interest rate on the rural electrification loans is 2 percent, an artifact traceable back to the 1930's when REA interest rates were set at essentially market-rate, then 1.8 percent. CHAIRMAN'S COMMENTARY 29 RECOMMENDATION 20. The Task Force recommends that the State sponsor a total energy upgrade project aimed at developing and demonstrating energy efficiency and conservation methods appropriate for rural Alaska, in one or more rural communities. Chairman's Commentary: This recommendation is compatible with proposals from APA and DCRA. Proposed specific details are contained within the body of the Task Force's report. * * * RECOMMENDATION 21. The Task Force endorses the general concept of voluntary least-cost planning as applied to all State programs and projects, regardless of size. See also Minority Report, Appendix E. Chairman's Commentary: The Task Force's members wholeheartedly endorse the general planning concept often referred to as "Least-Cost". In most other states the method is in use, and in some it is mandated. The Task Force is inclined to take a wait-and-see approach rather than recommending that the method be mandated. If the larger utilities do not display good sense by voluntarily giving equal consideration to all supply and demand options then appropriate legislation may be desirable, and there is no harm in mandating that the State itself use Least-Cost planning methods.