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Alaska Energy Policy Task Force Final Report, February 1988
ALASKA ENERGY POLICY TASK FORCE FINAL REPORT February 1988 1359/814/1 ALASKA ENERGY POLICY TASK FORCE FINAL REPORT February 1988 1359/814/1 February 26, 1988 The Honorable Steve Cowper Governor State of Alaska P.O. Box A Juneau, Alaska 99811 Dear Governor Cowper: Enclosed is the final report of the Alaska Energy Policy Task Froce. The report contains a recommended policy framework (embodied in 15 statements) for the conduct of the state's future energy programs, and also a number of strategic recommendations. Two minority reports are contained as a appendices under separate cover. I am also submitting to you a report giving additional commentary. Sincerely, Neil Davis, Chairman Energy Policy Task Force ND/ds 1359/814/2 1. EXECUTIVE SUMMARY The deliberations of the Alaska Energy Policy Task Force over a six-month period commencing in August 1977 have led to the formulation of a recommended energy policy framework which is embodied in a collection of 15 statements. The Task Force believes that if this policy framework is adopted as a guide for future decisions on energy programs, Alaska will be able to pursue programs which are effective, affordable and in the long-term best interest of current and future Alaskans. The recommended policy framework suggests integration of programs and an increased emphasis on a holistic approach to Alaska's energy problems, rather than the past approach which has emphasized production and distribution of electricity. This policy framework emphasizes technical rather than administrative fixes to problems. It suggests: LA transition in programmatic thrust toward one which embodies the development and application of productian, delivery and use technologies appropriate to Alaska, especially rural Alaska; 2) Increased emphasis on technical assistance and educational programs; 3) A strong emphasis on energy conservation and 4) A de-emphasis on subsidies involving equity investment in energy facilities and those involving subsidized loans or direct transfer payments. Pursuit of the recommended policy requires a substantial change in the thrust of, and elimination of some, programs currently conducted by the Alaska Power Authority and the State's departmental agencies. Contained in this report are the results of a relatively comprehensive review of all of State's energy programs, during which the Task Force sought to determine if each program was properly oriented and how well each was working. One result of the review is a group of recommendations suggesting the consolidation of several loan programs into one to be administered by the Alaska Power Authority or its successor organization. The Task Force went beyond its primary mandate--to suggest a viable energy policy for Alaska--by offering a series of strategic recommendations that form a partial basis for further development of an overall strategy. That effort must involve the people charged with the delivery of energy programs. The Task Force urges the Governor to proceed with deliberate speed. 1359/814/3 2. TABLE OF CONTENTS Page 1. pea a ae 3 2. Table of Contents... .. ccc ccc cece cece rere cece eee e reece eeees 4 3. Recommended Guiding Principles for Alaska's Energy Policy... 5 4. Barriers to Policy and Conduct of Energy Programs............ 8 5. Recommendations on Specific Actions and Strategies........... 10 6. Summaries and Analyses of Current Energy Programs............ 15 A. State-Owned Generation and Transmission Facilities...... 15 B. PEM PrOJOCE FUNG. on ccc ccccccsowaceccocccevccrccccencsce 7 C. Rural Electrification Revolving Loan Fund............... 25 D. Residential Energy Conservation Loan Program............ 28 E. Alternative Energy Loan Program........ccceccccccccccees 29 F. Bulk Fuel Loan Program.........cccccccccccccccccscescees 30 G. Rural Technical Assistance (Support) Program............ 32 H. Waste Heat Recovery Program.........sccccceccccccececees 34 I. State Energy Conservation Program...........sceeceeeeees 35 J. Weatherization Program........cccccccccccccccccccecceees 40 K. Power Cost Equalization Program.........ccececceescecees 45 L. Low Income Home Energy Assistance Program............... 48 M. Energy Research and Development Programs.........-..e00. 50 N. Energy Conservation Standards. 0. Utility Regulations......... ie oasis Sas oes es sa cig ee sccrd P. Energy Planning........ccececcceevee ae oe Q. Municipal Grants........ccececcccecccee 7. Acknowledgements...........e00. wg 60 ere10 6 0 si0isle 5 « 4isieie's Slaton 00 eels 71 8. Appendices............. Sielele 6.0 cle 6c 6 sire0 bps ioisie.6.0:6 sieie 4 eisjsie 0.0.0 icles 72 A. Members of the Energy Policy Task Force.........seseeeee 72 B. Summary of Work of the Energy Policy Task Force......... 73 C. Task Force Meetings and Participations....... aes o% D. Summary of Statewide Teleconference Hearing —. An Energy Conservation Initiative for Rural Alaska eogess 83 F. Minority Report (Murphy and Evans).......seeeeeeeeeeeees 92 G. Minority Report (Clarissa Quinlan)........ceeeeeessceeee 96 1359/814/4 3. RECOMMENDED GUIDING PRINCIPLES FOR ALASKA'S OVERALL ENERGY POLICY Governor Steve Cowper charged the Energy Policy Task Force with recommending a policy framework for the conduct of the State's energy programs. The following 15 statements comprise that recommended framework. All of the statements are mutually complementary; the set should be considered as a whole. 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. ae 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. 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. 4. Recognizing that Alaska's current mix of energy programs may not be the most efficient 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. 5. Recognizing that energy conservation is in the best interest of Alaska's citizens, and that efforts directed toward conservation can be more cost-effective then development of additional energy resources, the State's energy policy shall be to promote cost-ef- fective energy conservation by various means that may include education, technical assistance, development of specific end-use technologies, and perhaps direct assistance. 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. 7. Recognizing that the federal government has been conducting energy programs in Alaska and that it may continue these or similar programs in the future, Alaska's energy policy shall be to coordinate closely with the federal government so that the combined federal and state 1359/814/5 10. Le 12. 13. 14. 15. 1359/814/6 activities are mutually complementary and are directed toward the long-term benefit of Alaska's citizens. Recognizing that Alaska has copious energy resources of nearly all forms -- including crude oi], natural gas, coal, hydropower, geothermal energy, wind energy and biomass -- the State's energy policy shall be to make these resources available for development. 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. 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 necessary in planning activities required to accommodate the future energy needs of the state. Recognizing that the state, at no or minimal cost to itself, can some- times assist local and regional organizations in reducing capital costs 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. 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 to foster and participate in education and in research and development of energy technologies specifically useful in Alaska. 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 possibly 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. Recognizing the high cost of energy in certain areas of rural Alaska and the insecurity of rural Alaska economic and energy systems, it is the policy of the State of Alaska to give emphasis to the special energy needs of rural areas. Recognizing that it is in the financial interest of Alaska to do so, the State should continue to own the present power production and transmission systems. It should avoid ownership of any new generation facilities if local or regional utilities can plan and build 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. 1359/814/7 4. BARRIERS TO THE ESTABLISHMENT OF VIABLE ENERGY POLICY AND TO THE EFFECTIVE CONDUCT OF THE STATE'S ENERGY PROGRAMS During the course of its work the Task Force has discussed or otherwise has been made aware of certain realities which it recognizes as constituting barriers to the establishment of viable energy policy or to the effective conduct of energy programs. Whether these be real physical barriers or those of societal nature, it is well to recognize them for what they are so that they can be dealt with through concerted action of all concerned. THE GEOGRAPHY BARRIER The shear size of Alaska and its geographic diversity involving several climatic zones make energy supply and energy program delivery difficult. The needs of one region of the state may be quite different from those of another. Copious energy resources of energy abound, but they do not necessarily occur at locations where energy is needed. Transportation routes are few, and the cost of moving people, materials and fuel is usually expensive. THE CONVENIENCE BARRIER It is simply human nature that most of us prefer to do things the easy way, even if it costs us more. During recent decades the energy use patterns have changed dramatically in both urban and rural Alaska. Most communities in the State are now electrified with systems that depend on imported fossil fuel. Homes are now heated with electricity, gas and fuel oil] rather than locally available wood, coal or animal fats. Most of Alaska remains roadless; nevertheless, gasoline now powers most forms of transportation. Except for recreation, no longer do we sail, paddle, walk or ride a dogsled. Almost no one wants to go back to the old ways, and we are often disinclined even to utilize locally available energy sources that may require more labor or are perhaps less convenient than what we are now used to. THE POLITICAL PROXY BARRIER In Alaska during the past 15 years we have tended to use energy as a proxy for non-energy issues or as a tool for social purposes. Be this use good or bad, the practice readily leads to decisions on energy issues that might not be made if the issues were being considered only on the basis of strategic energy policy alone. Desires to create jobs, to foster economic development, to distribute wealth and to stabilize communities have, at least in part, determined the nature of the energy programs the State now operates. These desires are unlikely to go away, and their continuing presence poses a serious accommodation problem. For example, should the Task Force suggest an action that appears to make sense from an energy strategy point of view but which might run counter to some more general 1359/814/8 social strategy? Also, it may be difficult to know what the general social strategies are since they do change with time, especially here in Alaska which is still a young state. DEPENDENCE ON STATE GOVERNMENT BARRIER Among many community leaders, the first-thought-of line of attack for a solution to any problem appears to be a request to the State for more money. The high level of State funding this past decade is the chief culprit, and many people do not seem to fully realize that those days are now gone and probably will not return. Until this realization occurs, it seems that it is hard for many people to seriously consider other alternatives. It has been said that problems tend to hide behind a mask that makes them look like money problems, regardless of their true nature. URBAN-RURAL_ EQUITY PERCEPTIONS BARRIER Rural Alaskans are inclined, to believe that the big money years gave too much energy subsidy to urban dwellers, and what rural areas got in return was the Power Cost Equalization subsidy program. The issue is compounded by the perception of some persons that rural residents deserve a bigger share of State support than urban residents, simply because it costs more to maintain an urban standard of living in a rural area than it does in an urban area. THE QUICK SOLUTIONS BARRIER In the interest of getting a job done quickly, we -- and state government in particular -- are sometimes prone to leave out crucial steps or to have little patience with tasks that take longer than a _ legislative or gubernatorial term. A specific example in the energy arena was the rush several years ago into alternative energy demonstration projects before doing the necessary applied technology development and controlled testing. The result was general failure and a lasting impression among many government persons that alternative energy cannot work in Alaska. LOCAL GOVERNMENT INEXPERIENCE BARRIER Many local governments are very small and lacking in management experience and continuity of personnel. Ouring its reviews of energy programs the Task Force was repeatedly told of the problems small communities have in managing their affairs and in dealing with central government entities. This problem, of course, also adversely affects the delivery of energy and other programs. At the same time, people living in these communities frequently express their desire to manage their own affairs, and they recognize the value of the right forms of assistance from the State -- assistance designed to enhance local abilities to govern, not to displace them. 1359/814/9 5. RECOMMENDATIONS ON SPECIFIC ACTIONS AND STRATEGIES The following recommendations were adopted by majority vote of the appointed members of the Task Force. They represent the majority view of a portion of the strategies needed to bring about changes in energy programs under the guidelines of the recommended overall policy framework. RECOMMENDATION 1 (Task Force Vote: 6 For, 4 Against; Non-voting Chair Favors in Principle) 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. week RECOMMENDATION 2 (Task Force Vote: 7 For, 1 Against; Non-voting Chair in Favor) The Task Force recommends that the State of Alaska develop a strong program for the applied research, development, demonstration and technology transfer of energy resources and technologies and that this effort be administered by the Alaska Power Authority. nee RECOMMENDATION 3 (Task Force Vote: In Favor 6, Against 5; Non-voting Chair is Opposed) 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. (Also see Minority Report, Appendix F) xe 1359/814/10 RECOMMENDATION 4 (Task Force Vote: 10 For, 1 Against; Non-voting Chair Favors) Incorporate the various existing energy loan funds into one single fund that should be called the Alaska Energy Revolving Loan Fund. x ek RECOMMENDATION 5 (Task Force Vote: Unanimous; Non-voting Chair is Opposed) 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. zee RECOMMENDATION 6 (Task Force Vote: 10 For, 1 Against; Non-voting Chair Favors) 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 conserva- tion measures. (See also Minority Report, Appendix F) eee RECOMMENDATION 7 (Task Force Vote; 5 For, 2 Against; Non-voting Chair Favors) 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 provides local operator training. This effort should utilize iit industry whenever possible. (See also Minority Report, Appendix G. x*e 1359/814/11 RECOMMENDATION 8 (Task Force Vote: 9 For, 2 Against; Non-voting Chair in Favor) 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 the communities. xe RECOMMENDATION 9 (Task Force Vote: 6 For, 5 Against; Chair is Opposed) The State's policy shall not be to use loan receipts to self-finance energy programs and projects but to use legislative appropriations to fund the operating budget, capital budget and loans programs of those State agencies that have energy program. (See also Minority Report, Appendix F) xe RECOMMENDATION 10 (Task Force Vote: 8 For, 0 Against, Non-voting Chair is Opposed) 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. weer RECOMMENDATION 11 (Task Force Vote Unanimous; Non-voting Chair in Favor) 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. zee RECOMMENDATION 12 (Task Force Vote: 10 For, 1 Against; Non-voting Chair is Opposed) 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. week 1359/814/12 RECOMMENDATION 13 (Task Force Vote: Unanimous; Non-voting Chair in Favor) 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. wee RECOMMENDATION 14 (Task Force Vote Unanimous; Non-voting Chair in Favor) 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. kee RECOMMENDATION 15 (Task Force Vote Unanimous; Non-voting Chair Favors) 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. weak RECOMMENDATION 16 (Task Force Vote: Unanimous; Non-voting Chair in Favor) 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 Fuel Loan Program could than be eliminated as such, without any loss of service to communities. Loans made to communities should be allowed for longer than 9 months in cases where storage capabilities permit purchases of fuel every other year. wee 1359/814/13 RECOMMENDATION 17 (Task Force Vote: Unanimous; Non-voting Chair in Favor) 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. RECOMMENDATION 18 (Task Force Vote: Unanimous; Non-voting Chair in Favor) 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. ’ eek RECOMMENDATION 19 (Task Force Vote: Unanimous; Non-voting Chair in Favor) 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 RERLF be under the same terms as those currently awarded from the Power Project Fund. wee RECOMMENDATION 20 (Task Force Vote: 10 For, 1 Against; Non-voting Chair in Favor) 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. RECOMMENDATION 21 xe (Task Force Vote: 10 For, 1 Against; Non-voting Chair in Favor) The Task Force endorses the general concept of voluntary least-cost planning as applied to all State programs and projects, regardless of size. (Also see Minority Report, Appendix F.) week 1359/814/14 6. | SUMMARIES AND ANALYSES OF CURRENT ENERGY PROGRAMS This section contains descriptions of the current status of energy programs and activities together with the results of the Task Force's program reviews. A. STATE-OWNED GENERATION AND TRANSMISSION FACILITIES (ENERGY PROGRAM FOR ALASKA) Alaska Power Authority CURRENT STATUS--Through its publicly owned corporation, the Alaska Power Authority, Alaska currently owns fixed assets totalling $709 million: $4 million in buildings and equipment; $497 million in the Four-Dam Pool electrical generation plants; $127 million in continuing projects; and $54 million in construction in progress in connection with Bradley Lake hydro project. State funds used for such projects have been appropriated by the Legislature into either the Power Development Fund (AS 44.83.382) or the Power Project Fund AS 44.83.170). The operative distinction between these two funds is that appropriations to the former are intentional direct subsidies, whereas those put into the latter are to be used as loans which must be paid back by revenues from projects. The Anchorage-Fairbanks Intertie--This intertie running along the Railbelt from Willow to Healy ties together the Anchorage and Fairbanks areas, making it feasible to transmit low-cost power generated at the southern end for use at the northern. Trial operation began in September 1985, and commercial operation began on May 1, 1986. The capital cost of the intertie, $122.6 million was appropriated by the legislature with the intent that this would be a direct subsidy not to be recovered. Wheeling charges now amount to 0.58 cents/kWH (plus an annual capacity charge of $2.02/KW) and are intended only to cover operations and maintenance costs. The electricity being transmitted over the intertie is now approaching the initial design capacity of 70 MW (expandable to 350 MW), and the actual use is about 80 percent of that initially predicted. Although the State is not receiving a return on the equity invested, present estimates of savings to Railbelt utility customers are $12 million per year, $9 million being saved by those at the northern end and $3 million by the generating utilities at the — end. The intertie is still experiencing some technical problems. The Four-Dam Pool--The Four-Dam Pool consists of hydro generating plants a Swan Lake (near Ketchikan), Tyee (near Wrangell), Solomon Gulch (near Valdez) and Terror Lake (near Kodiak). The plant characteristics are as follows: 1359/814/15 Plant Inst. Cap. Firm Output Pk. Demand FY 86 Sales (MW) (GWH) (MW) (GWH) Swan Lake 24 68 10-12 48 Tyee 20 130 6-7 29 Solomon 12 39 8.4 38 Terror 20 137 15 76 The capital costs of these plants were financed by a total of $293.3 million in direct subsidy appropriations and $185.3 in loans to be paid back by the state. Power sales revenues from the Four-Dam Pool amounted to $5.6 million in FY87, up from $3.5 million in FY86. A continuing increase is expected, partly as a result of growing sales of interruptible power. Bradley Lake (near Homer)--This 90-MW capacity plant with annual firm output 0 will serve as a peaking facility for the Railbelt users and provide 5 percent of the current need in the Railbelt. Its construction is being financed by a direct subsidy appropriation of $175 million and authority to sell revenue bonds amounting to $175 million. However, the State will eventually receive a return on its equity investment subsidy once the revenue bonds are retired. The completed facility is expected to be available for service in 1992. Susitna--The State has invested over $140 million in feasibility studies for the proposed Susitna Hydroelectric project which would be midway between Anchorage and Fairbanks. As a result of these studies, in 1986 the Power Authority Board of Directors determined that the Susitna Hydroelectric project was not financially feasible in the foreseeable future and withdrew the project license application to the Federal Energy Regulatory Commission. One remnant of the endeavor is the Railbelt Energy Fund, originally amounting to $285 million, which the State is still contemplating how to spend. 1359/814/16 B. POWER PROJECT FUND Alaska Power Authority PURPOSE The purpose of the Power Project Fund (PPF) is to provide electric utilities, units of local government, and Native corporations with financing for the development of small-scale, non-nuclear power projects or potable water projects. ELIGIBILITY AND CONDITIONS As stated by the statutes (AS 44.83.170), organizations that are eligible for PPF loans include electric utilities, regional electric authorities, municipalities, cities, boroughs, regional and village corporations, village councils, and nonprofit marketing cooperatives. The only significant conditions regarding the type of power project that can be funded is that it be small-scale and not use nuclear energy. Neither the statutes nor the regulations (3 AAC 94.070-94.100) define small-scale. Virtually any power project (including transmission/ distribution lines and fuel storage facilities) that uses either fossil fuels, a renewable source of energy, or waste heat would qualify for a loan. Furthermore, the PPF can be used to fund virtually any phase of on development (from reconnaissance studies to construction to expan- sion). Although potable water projects can also be financed by the PPF, none have been. Terms for PPF loans are established by statute. These are; - The interest rate is to be established by the average yield on municipal bond rates for the past 12 months or a rate that allows the project to be financially feasible, whichever is less, but not less than 5%. According to policy proposed by the Alaska Power Authority, financial feasibility would be determined by the effect that the interest rate is expected to have on retail rates once the project comes on line. Rate increases of 10% or less are considered to be acceptable. The term is not to exceed 50 years. ° Loans can be unsecured only if the borrower is regulated by the APUC and has a good credit history. 1359/814/17 s Loan repayment can be deferred until the project has sufficient earnings but cannot be deferred by more than 10 years. : The legislature may forgive a loan for a reconnaissance or a feasibility study if the project is not feasible. © There is no limit to the size of loan that can be made with the PPF. Regulations describe how the Alaska Power Authority is to review loan applications and what requirements are to be met. PROGRAM HISTORY AND CURRENT STATUS Milestones for the PPF are as follows: 1978-The Power Project Revolving Loan Fund is established and is to be administered by the Alaska Power Authority. 1980-The Power Project Revolving Loan Fund is amended by eliminating the revolving feature, changing the terms, and merging it with the Water Resources Revolving Loan Fund. Since April 1978, the Alaska Power Authority has approved 28 loans from the PPF totaling $22,229,030. Table I lists the loans that have been made. There have been no delinquencies or defaults with any of these loans. Prior to FY 86, funding for PPF loans was by appropriation from the general fund to specific projects. Since then, appropriations have been to the loan fund rather than specific projects. FY 87 loan receipts for the PPF amounted to $6,626,316. Loan receipts for FY 88 are expected to be $3,100,000. The reduction in receipts is due to AEL&P paying off $3.8 million in PPF loans. Retention of loan receipts by the PPF is prohibited by statute which states that “loan repayments and interest earned by loans from the power project fund shall be deposited in the state general fund". DISCUSSION AND ANALYSIS Unlike many of the State's loan programs, interest rates for most PPF loans are not state subsidized, low-interest (below market) rates. Except for two special situations, its rates are similar to other tax-exempt public financing issues. 1359/814/18 As Table I illustrates, until recently, utilities that have used the PPF have been mostly investor owned utilities (i.e. AEL&P and Bethel). These utilities have not received state grants during the early 1980's and PPF interest rates were more favorable to them than other sources of financing. Until recently, municipal and cooperative utilities usually had other, more favorable options for financing power projects. Often, municipally owned utilities received State grants to finance their power projects. In other cases, several municipally owned and cooperative utilities now purchase power from Alaska Power Authority-owned projects (e.g. the Four Dam Pool) that were financed with equity contributions and low-interest loans. Because of the recent reduction in State revenues, financing power projects with grants, equity contributions, or low-interest loans is becoming the exception rather than the rule. In addition, cooperatives are having difficulty in obtaining REA/FFB financing. Consequently, publicly owned utilities and cooperatives, as well as investor owned utilities, are starting to consider the PPF as an important source of financing fo project development. ; However, it appears that the current funding level of the PPF may not be able to accommodate this interest. In preparation for its FY 89 budget, the Alaska Power Authority surveyed utilities throughout the state to determine how much future interest there might be in the PPF. The survey found that about $128 million worth of power projects are being considered by utilities throughout the state. Legislation (SB 206) has been introduced to amend the PPF in order to expand its capabilities. SB 206 would consolidate Alaska Power Authority's loan programs, including the PPF, into one revolving loan fund. Receipts from this loan fund could be used as security for revenue bonds, loans to utilities, or equity contribution for State owned projects. Considering recent changes in the State's ability to finance power projects and the continuing financial needs of utilities, this is an appropriate time to review the purpose and function of the PPF. Listed below are some key policy issues. 1. Purpose of the PPF-Perhaps the most fundamental issue is; should the PPF continue as is or should it be amended to more fully accommodate utility financial needs by funding loans with revenue bonds? Status Quo--If the PPF is not changed (continues to be funded by the general fund), its level of funding may not be sufficient to meet the financial needs of the state's utilities. Consequently, maintaining the status quo may, in essence, indicate that the State wishes to minimize its involvement in financing power projects. 1359/814/19 It should be noted, however, that even if there were no additional funds appropriated to the PPF, the State would still have two other financing programs that utilities may find advantageous to utilize. The Alaska Industrial Development and Export Authority (AIDEA) and the Municipal Bond Bank could provide conventional financing to the private sector and municipalities, respectively. (But there would have to be an amendment to AIDEA's enabling legislation to explicitly allow for financing of power projects.) Each agency capitalizes its loans with bonds rather than appropriations from the general fund. Interest rates for these loans may be lower than what most utilities are able to attain individually. Amended Power Project Fund - Amendments to the PPF may be necessary if it is to use revenue bonds, rather than general fund appropriations, as its principal source of funding. (Amendments will be needed to clarify how the fund will be used and to alleviate technical concerns by potential bond buyers.) Capitalizing the PPF via revenue bonds could provide the level of funding that would be needed to more adequately meet the financial needs of utilities. Interest rates with this funding arrangement would probably be lower than what most utilities are able to acquire on their own. New tax laws put a cap on the amount of tax-exempt Industrial Development Bond's that can be issued by each state. These laws could limit the amount of bonds issued for loans to cooperative and investor owned utilities. A policy decision may be needed regarding how much of Alaska's tax-exempt Industrial Development Bond's should be allocated to power projects. 2. Retention of Loan Receipts--Should PPF loan receipts be deposited in the general fund or be retained by the loan fund? In essence, this question asks whether the State should adopt a strict or liberal interpretation to the dedicated fund provisions of Alaska's constitution. A strict interpretation would require that all possible sources of revenue be deposited in the general fund. These revenues would then be appropriated by the legislature as it sees fit. This approach maximizes general fund revenues and provides the legislature with the most flexibility in annually appropriating program funding. A criticism of this approach is that it does not provide much stability for funding power projects which often take years to complete. A more liberal interpretation, and the one currently in practice, is that retaining principal repayments with revolving loan funds is legally acceptable and generally consistent with legislative intent. However, interest payments should be specifically appropriated to a loan fund before they are to be used by the fund. This approach tends to provide more stable funding for a program and gives it some 1359/814/20 protection from political whims. A criticism of this approach is that a revolving loan program may eventually accumulate more funding than it actually needs and pursue the development of unnecessary projects simply because funding is available. Another criticism is that returning loan receipts to a revolving loan fund may be at the expense of other programs that have greater need and no "endowment". 3. Use of Loan Receipts--If there is agreement that the PPF should be amended to allow use of its loan receipts, there are three options to consider which are; a) security for a revenue bond, b) new loans, and c) grants and/or equity contributions. Which options are most suitable? a. Security--Bond holders generally require some form of security that they can call on if the revenue generated by a project falls short of its debt service requirements. Better security results in less risk and lower interest rates. As previously mentioned, the statutes currently require that loan receipts be deposited in the general fund. The statutes would have to be amended if PPF loan receipts are to be used as security for revenue bonds. If debt service payments are made and the loan receipts are not used, presumably the loan receipts could then be deposited in the general fund. This option would delay but not preclude the use of loan receipts by the general fund. b. New Loans--If the PPF were amended to become a revolving loan fund, principal repayments could be used to fund new loans. If interest payments were to be used for new loans, the payments would probably have to be appropriated to the PPF to comply with Alaska's constitutional prohibition on dedicated funds. SB 206 establishes a revolving loan fund in which principal repayments can be used for new loans without appropriation by the legislature but interest payments must be appropriated before being used for new loans. If the PPF were a revolving loan fund, loan receipts could also be used to pay the administrative costs for originating and maintaining loans. This would be consistent with other loan programs that internalize administrative costs rather than have these costs become a burden on the general fund. c. Grants/Equity Contribution--Under this option, loan receipts that are not pledged as security for revenue bonds would be retained by the Alaska Power Authority and used to provide grants or equity contributions for new power projects. Grants would apply 1359/814/21 when the project is to be owned by the utility. Equity contributions would apply when the Alaska Power Authority is to be the project owner. During the past several years the State has made extensive use of grants and equity contributions in order to provide financial assistance for developing numerous power projects. More than $40 million in grants has been appropriated for electrification and bulk storage projects and nearly $560 million has _ been appropriated as equity contributions to projects that are owned by the Power Authority. Although grants and equity contributions have been used to provide much of the financing needed to develop new power projects, concern has been expressed as to whether or not the State can afford to continue this policy and if it has been a cost-efficient practice. Another consideration regarding this option is whether or not loan receipts can be used for grants and/or equity contributions without appropriation by the legislature. It is generally agreed that using principal repayments for new loans without prior appropriation does not violate the dedicated fund provisions of the constitution, but does this also apply when the principal repayments are being used for grants or equity contributions rather than loans? The revolving loan fund that would be established by SB 206 seems to allow the fund to be used for equity contributions, providing that the project is economically feasible and results in the lowest power costs. However, the bill is silent on whether or not the wholesale rates for a project should include any rate of return to the State for its equity. Since the wholesale rate for projects built under the Energy Program for Alaska (i.e. the Four Dam Pool) do not include any rate of return on equity, presumably, the same applies to SB 206. SB 206 does not appear to allow the fund it establishes to be used for project grants. However, it does allow the fund to be used for PCE subsidy payments. 4. Loan Terms--Are the statutory conditions for the PPF acceptable or should there be amendments? Following, are some changes to the statutes that might be considered. a. Financial Feasibility-Some utilities that have applied for PPLF loans have expressed concern that they would experience rate shock if interest rates for their loan were based on the average 1359/814/22 1359/814/23 municipal bond rate for the past 12 months. To accommodate this concern, the Alaska Power Authority has proposed a policy suggesting that the interest rate for a loan should not increase retail rates by more then 10%. Recently, Cordova Electric has objected to this policy stating that the policy favors large projects instead of a combination of smaller projects. In essence, a large project should have a bigger impact on rates than a smaller project and, therefore, is more likely to receive a loan with a lower interest rate. This could result in a bias for larger projects even if their benefit/cost may not be as favorable as smaller projects. An alternative policy that may satisfy Cordova Electric and other utilities is to achieve acceptable rates by deferring interest payments (which current status allows) rather than reducing interest rates. If the deferred interest payments were paid back in terms of present value, in the long run, the large project would not be bfased over smaller projects by having more favorable terms. Energy Conservation--The status for the PPF allows loans for energy conservation facilities such as waste heat projects, but, according to a legal opinion, does not allow loans for demand-side technologies. One could speculate that the demand-side technologies would have been specifically mentioned by the statutes if the concept has been in existence at the time, but this doesn't change much. If the PPF is amended, should these amendments include language that allows PPF loans to -be used for demand-side technologies? Th Third Party Financing--The statutes do not list third party developers as being eligible for PPF loans. Third party developers have expressed interest in using the PPF to finance the development of a few small power projects in Alaska. If the PPF is to be amended, should these amendments allow loans for third party financing? Small Projects--Currently the statutes allow the PPF to be used only for small-scale projects although small is not defined. If broader use is to be made of the PPF, it is appropriate to restrict its use to small-scale projects? Table 4 ALASKA POWER AUTHORITY LOAN PROGRAMS--PROJECTS FUNDED (Prepared 10/15/87) Loan Original Interest Date Borrower Amount Rate(%) Purpose POWER PROJECT FUND LOANS: 4/78 AEL&P (Juneau) 500,000 6.50 Automate Annex. Creek hydro 8/80 City of King Cove 200,000 7.00 Acquire 2 300 kw generators 10/80 INNEC (Iliamna area) 300,000 8.60 Initial electrification 10/80 AEL&P (Juneau) 1,000,000 8.60 Substation & 69 kv trans line 8/81 Bethel Cogen. Util. 1,000,000 5-11 Construct waste heat system 12/81 AEL&P (Juneau) 2,300,000 11.80 Upgrade trans & dist system 8/82 AEL&P a 1,700,000 13.23 Upgrade trans & dist system 8/83 AEL&P (Juneau) 1,000,000 9.95 Upgrade Lwr Salm Crk hydro 8/83 AEL&P (Juneau) 2,000,000 9.29 Upgrade trans & dist system 4/84 AEL&P (Juneau) 500,000 9.95 Upgrade Lwr Salm Crk hydro 4/84 AEL&P (Juneau) 2,000,000 9.95 Upgrade trans & dist system 4/84 AEL&P (Juneau) 2,000,000 9.29 Upgrade trans & dist system 8/85 Tanana Power Co. 130,000 9.55 Finance new powerhouse 9/85 G&K Inc. (Cold Bay) 1,283,836 9.80 Upgrade system-phase 1 8/85 Levelock Elect. Coop. 30,000 8.90 Acquire new diesel generator 11/85 Middle Kusk. Elec. Coop. 250,000 5.00 Initial electrif (Red Devil) 8/86 City of King Cove 120,000 7.95 Acquire new diesel generator 9/86 City of Clarks Point 177,000 7.50 Initial electrification */87 G&K Inc. (Cold Bay) 1,000,000 8.45 Upgrade system-phases 2 & 3 9/86 Chitina Electric, Inc. 101,500 7.65 Complete constr. of mini-hydro 5/87 Cordova Elec. Coop. 1,950,000 5.00 Desg & Constr Humpback Crk Hydro */87 City of Galena 1,350,000 7.71 Expansion to serve Air Force 2/87 Kwig Power Company 25,000 5.00 Acquire new diesel generator 6/87 City of Galena 245,000 6.86 Acquire new diesel generator */87 City of Ouzinkie 350,000 7.34 Desg & Constr small hydro 6/87 Coffman Cove Util. Ass'n. 70,000 6.86 Expanded service to new customers 8/87 City of Larsen Bay 493, - He Desg & Constr small hydro 9/87 Middle Kusk. Elec. Coop. 153 ,00 -56 P'house upgrades & line extension 22,229,030 RURAL ELECTRIFICATION REVOLVING LOAN FUND: amna area »340,000 2.00 Initial electrification 1/83 Andreanof Elec. Co. 200,000 2.00 Injtial electrif (Atka) 7/83 INNEC (Iliamna area) 230,202 2.00 Initial electrification 10/83 Egegik Light & Power 130,000 2.00 Cnnct 12 new homes (& 36 future) 11/83 Yakutat Power, Inc. 134,000 2.00 ASHA subdivision extension 1/84 City of Unalaska 250,000 2.00 Cnnct harbor, dock & airport 1/84 City of Unalaska 1,560,486 2.00 Feeder-cnnct Unak. & Amknk. Ph's 7/84 Egegik Light & Power 83,830 2.00 Phase 2 of 1983 project (above) 7/85 City of Saint Paul 687,285 2.00 Elrmnigts, wndfrm, USCG, arprt; Dock 9/86 City of Clarks Point 250,000 2.00 Initial electrification 6/87 GVEA (Fairbanks) re ans 2.00 Tungsten Subdivision extension ’ ’ GOVERNOR'S DISASTER FUND LOANS: > inc. (Co ay 500,000 6.00 rep] gen's destroyed by fire 3/86 Venetie Village Council 50,000 5.00 rep] gen lost to mjr break-down 00 rep] gen's destroyed by fire 2/87 Venetie Village Council 65,000 5. —ST5,000 LOANS AUTHORIZED BY SPECIFIC APPROPRIATION: uneau 3 7.00 Automate Upr Salm Crk Ph 8/82 City of Sitka 15,000,000 4.00 Finance Green Lake Hydro 11/85 Far North Util. (Central) 200,000 9.05 Initial electrification Total Loan Approved 73,199,833 *Loan approved by Board, agreement not yet completed 1359/814(24) C. RURAL ELECTRIFICATION REVOLVING LOAN FUND Alaska Power Authority PURPOSE The purpose of the Rural Electrification Revolving Loan Fund (RERLF) is to provide financial assistance, via low-interest loans, for the extension of electric service to consumers who are not being served by a utility. ELIGIBILITY AND CONDITIONS The eligibility and conditions for the RERLF are established by statutes (AS 44.83.361) and regulations (3 AAC 94.210). For a proposed line extension to be eligible for a RERLF loan, the loan must: 1. Be to an electric utility that is certified by the Alaska Public Utili- ties Commission, ets Extend electricity to an area that the utility can serve, 3. Provide immediate service to at least three consumers, 4. Include an investment by the utility to install one pole, one span of line, one transformer, and one service drop for each initial customer that is to be served, and; 5. Be recommended by a loan advisory committee. Conditions for the loan are: 1. The interest rate is to be 2%. 2. The principal repayment is determined by a formula that is based on the number of customers who are added after installation. 3. The loan can not be made if an analysis of the application indicates that full repayment of principal is not likely to occur within ten years. 4. After the loan is made, full repayment of principal may be deferred indefinitely if there actually are not enough new customers, and; 5. The size of the loan is limited to a maximum of $500,000 or $250,000 if the fund balance is less than $3 million at the time of application. PROGRAM HISTORY AND CURRENT STATUS The RERLF was established in 1981 as part of an omnibus energy bill that also created the Energy Program for Alaska. The problem that the RERLF was to address was the dilemma between residents who were close to but not being served by a utility and could not afford to pay for a line extension, and cooperatives who would also not make the investment because of the cost and the risk to their existing customers that these costs might not be recovered by hook-up fees from new customers. The RERLF was expected to rectify this 1359/814(25) problem by offering subsidized interest rates and assuming the risk that there would eventually be additional customers who would help repay the principal. The statute establishes the RERLF interest rate at 2%. It seems this number was selected since this was the interest rate for REA loans in the 1930's when the West and Midwest was being electrified and it was felt that the electrifi- cation of Alaska was in a similar stage of development. However, it should be noted that in the 1930's, market rates were also about 2%. The statutory language regarding principal repayment is rather ambiguous. The regulations that were promulgated for the RERLF attempted to clarify matters by establishing a fixed term of 20 years. Cooperative utilities, who were expected to benefit most by the RERLF, objected on the grounds that a fixed term puts the risk on them that there will be a sufficient number of new customer hook-up fees to repay the principal. They also objected to the collateral requirements of the regulations because REA financing would not allow this. The Alaska Power Authority Board of Directors, feeling that the State should not have to assume the risk for repayment of principle, especial- ly since it was already offering utilities subsidized interest rates, did not at first agree to changing the regulations so that the term for RERLF loans would be open-ended. However, after lengthy consideration, the Board, in October 1985, did agree to accommodate the objections of the utilities. The regulations were changed so that the RERLF assumes the risk of principle pe nk there is no longer any conflict with REA policy with respect to collateral. Although the amended regulations are now more acceptable to utilities, there still seems to be confusion as to how principle repayment is to be made. Appropriations to the RERLF include: Fiscal Year Amount. 1982 $6,500,000 1984 1,000,000 1986 1,000,000 1987 1,779,900 Total ee Table I list the RERLF loans that have been made. None of these loans are in default or have delinquent interest payments. However, in FY 87, only INNEC and Yakutat made any principal repayments ($36,500 and $4,600 respectively, for a total of $41,100). It is suspected that other utilities should have made principal repayments but, without an audit, this can not be verified. ie Alaska Power Authority projects that principle repayments in FY 88 will be 50,000. The Alaska Power Authority estimates that for FY 89, new loan applications may amount to $1,255,800 and require about $25,000 for administration. 1359/814(26) DISCUSSION AND ANALYSIS The RERLF has been a confusing and, as a result, controversial program. In several key places, its statutes are either ambiguous or contradictory. As previously described, there has been confusion regarding principal repayments. In addition, the statutes state that the loan advisory committees are to make determination regarding the economic feasibility of proposed line extensions. On the other hand, the implicit intent of the RERLF is to have the State subsidize line extensions that tend to be considered too expensive for either the customer or the utility. Also, given the complexity of the program, it is doubtful that the loan advisory committees understand their role well enough to provide meaningful or objective advice. Another controversial aspect of the RERLF has been its subsidy. The interest rate is low enough that it would be to the advantage of a utility to not make principal repayments, conservatively invest the money, and use part of returns to make the interest payments. Also, having the State, via the RERLF, assume the risk for principal repayment is comparable to a bank, rather than the borrower, putting up the collateral for a loan. SB 206 proposes to consolidate the Alaska Power Authority loan programs, including the RERLF, into one revolving loan fund. If this bill were enacted, for all intents and purposes, the RERLF would continue as is with the one exception; that is, one-half of the available funds are to be used to extend service along state roads. 1359/814(27) D. RESIDENTIAL ENERGY CONSERVATION LOAN FUND Department of Commerce and Economic Development Division of Investment PURPOSE: To finance energy conservation improvements in existing buildings. ELIGIBILITY AND CONDITIONS: Statutorily contingent on the applicant not having past due child support obligation. Loans may not exceed $5000 or the amount equal to the estimated total energy savings attributable to the improvement over a 10-year period. Interest rates are equal to an average of municipal bond yields for the 12 months preceding the loan. PROGRAM HISTORY AND PRESENT STATUS: When this program began in 1980 it also allowed grants or refunds up to $300 if an energy audit demonstrated adequate savings. The authority to make refunds and grants was repealed in 1983. The total money committed to this program over the years is $8.3 million, and 2332 loans having been made. No funds were appropriated after FY 84, and only 2 loans were made during FY87. As of June 30, 1987 the outstanding loans numbered 1163, and the outstanding principal on loans was $2.9 million. At that time, the delinquency rate was 6.4% and the number in default was 3.1%. DISCUSSION AND ANALYSIS: The Task Force was presented little information on this program. It now appears to be a non-functioning program. The Task Force heard no arguments for its continuation, although it would seem that this program could serve as a mechanism for homeowners to finance energy conservation measures, including weatherization measures. It is not clear why homeowners are not taking advantage of the loan program: the administering agency may not be encouraging new loans, or it may be a general lack of public interest. 1359/814(28) E. ALTERNATIVE ENERGY LOAN PROGRAM Department of Commerce and Economic Development Division of Investments PURPOSE: Evidently to encourage the use of alternative (to diesel) sources of energy and to encourage the development and application of those alternative energy sources in Alaska. ELIGIBILITY AND CONDITIONS: No statutory eligibility other than that the applicant does not have a past-due child support obligation as established by court order or by the cognizant state agency. The maximum loan amounts are $30,000 over 20 years at 5 percent interest for the first $15,000 and 15 percent for the amount of the loan that exceeds $15,000, computed as a composite rate. PROGRAM HISTORY AND CURRENT STATUS: The history starts in 1978; it is long and lurid. Various statutory changes were made over the years, culminating in the establishment of a special foreclosure reserve account and of property disposal procedures in 1985. Altogether, 2994 loans have been made, but there was only 10 in FY87. The total loaned is $19.3 million, and as of July 30, 1987, the outstanding principal due was $10.2 million, in 1483 loans. No legislative appropriations were made in FY87 (and probably none in FY88). The number of delinquent loans (those past due for at least 60 days but not in litigation) was, on July 30, 1987, 4.4%; and 4.6% were delinquent. For all practical purposes this is a dead program--except that it has assets: $10 million in principal due. DISCUSSION AND ANALYSIS: The Task Force was presented with little information on this program. One is led to the conjecture that the program--while it seemed to be a good idea at the time--has met with limited success. It was easy to get money from the program; people took it, and perhaps later regretted their action. No one seems to have come forward to argue for its continuation. 1359/814(29) F. BULK FUEL LOAN PROGRAM Department of Commerce and Economic Development (Division of Investments) PURPOSE: Provide organized municipalities or unincorporated villages with the funds needed to make annual bulk purchases of fuel oil, thereby reducing overall costs. The intent is that villages will eventually be able to self-finance their annual fuel oi] purchases. ELIGIBILITY AND CONDITIONS: Any organized municipality or unincorporated village which is a social unit, with population under 2000, is eligible. Loans are for bulk fuel oi] up to a maximum of $50,000, but not to exceed 90% of the wholesale price of the fuel purchased. DATES OF ESTABLISHMENT AND OF SIGNIFICANT CHANGES: 1980--Program established (AS45.87) 1983--Regulations establishing interest rates: A community is presumed to be able to pay no interest on its first bulk fuel loan, it is presumed that the community cannot afford more than 5% on the second loan, but, thereafter, the interest shall equal the percentage of the average weekly yield of 30-year municipal bonds for the 12 months preceding the date of the loan. The current interest rate is 7.6%. DCEC Commissioner is allowed to eliminate or reduce the interest charged if it is determined that the community cannot repay the interest (this provision in original statutes). 1985--Special foreclosure reserve account and property disposal procedures established. PROGRAM HISTORY AND CURRENT STATUS: From FY83 to FY85, 150 loans were made totalling $5.63 million. Currently the program is funding 55 loans totalling 1.5 million. From FY81 through FY87 the total program expen- diture was $9.2 million on 254 loans. One person in the Division of Investments handles the loans; that person has other duties as well. The loans are set up to provide payback in 9 months. AS of June 30, 1987, the outstanding loans amounted to $333,000; 48.1% of these loans were delinquent, and 1.3% were in default. The current default rate is approximately one per 20 loans, or 5%, but the loans do not stay in default long; they typically are repaid as soon as the borrower receives new monies from some other source of funds, usually the State. During FY88, new loans are being funded by repayment of previous loans. DISCUSSION AND ANALYSIS--While there seems little doubt that this program has given communities the financial where with all to purchase fuel oil] in bulk quantities, thereby reducing the costs of fuel oil, it appears that the program's secondary intent--to help make communities more self-sufficient--has not been realized. Several reasons were advanced for this failure, and most to these reasons have nothing to do with this a program. In this regard, two major problems were brought out in discussion. A major problem is the hand-to-mouth fiscal situation in many villages. While it was hoped that the bulk fuel loan program would help communities to build up reserve funds for fuel purchases, the communities have failed to do so. It was pointed out that the both individuals and communities 1359/814(30) have evolved an economic system that depends on credit. For example, a rural family often meets its needs by buying on credit, it being expected that the bill would be paid each year during the fish run, the trapping season, etc. Rural communities often operate the same way. A second major problem identified that has affected the performance of this and other state programs is the rapid turnover in personnel involved in local government. People are in office one year and not the next. There is too little continuity in local government--whoever jis running a government now does not know what happened that year before. (A partial solution suggested during discussion is to encourage local governments to extend terms of office from one to two years.) We heard that one community forgot to make its bulk fuel oi] purchase this year. A third problem noted, one of general nature, is rapid change in regula- tions and procedures by State government. Local governments find it difficult to keep up with the changes. However, the bulk fuel oi] program itself has been stable, both in funding and regulations. One problem specifically relating to the bulk fuel loan program is the 9- month payback period. Some .communities have enough bulk storage capability to buy for two years at a time. For these villages it was noted that the payback period may be too short. 1359/814(31) G. RURAL TECHNICAL ASSISTANCE PROGRAM Alaska Power Authority PURPOSE: Provide assistance to rural communities in their efforts to develop, upgrade and operate electrical utility systems in order to decrease community dependence on diesel fuel. Currently involves provisions of engineering, planning, and financial advice, direct on-location engineering services, and sometimes equipment. ELIGIBILITY AND CONDITIONS: Any organized municipality, unincorporated village or rural utility requesting it is eligible to receive technical assistance. The assistance is often given in conjunction with capital project appropriations to the APA or in conjunction with loans or grants awarded to the recipient organizations by the legislature, either through the Alaska Power Authority or other administering agencies. In some cases the APA conducts the planning, design construction and initial acceptance operations while retaining ownership of the facilities; then the ownership is transferred to the recipient organization. PROGRAM HISTORY AND CURRENT STATUS: Within its Program Development Directorate the APA maintains the Rural Technical Support Group consisting of 7 persons but with funding for about 1 full-time equivalent position. The requested funding for the program for FY89 is $500,000 in the APA Capital Budget. The APA's October 1987 “Active Projects List" indicates that approximately 30 separate technical assistance projects are underway, not including waste heat recovery projects or reconnaissance and feasibility studies. The projects include planning, construction, upgrading and operation of electrical distribution lines; development of small hydro generating facilities, assessments of community needs for technical assistance; energy conservation demonstration projects; community electrification projects; and assistance in obtaining right-of-ways or with other administrative and financial problems. The rural technical assistance given by the APA Is actually somewhat broader than implied above; personnel involved in the program give communities needing it some administrative assistance and aid that goes beyond what we think of as strictly technical assistance. DISCUSSION AND ANALYSIS: The overall rural technical assistance program operated by APA is one that has slowly evolved during recent years as a result of the availability of that organization's technical capabilities and a growing awareness by the legislature and by rural communities of the value of applying this capability to rural problems. Whereas direct fiscal awards without oversight often have been made in the past, there seems to be a growing tendency to award grant or loan monies through APA in order to ensure technical oversight and an effective expenditure of the funds. That trend may be only apparent--it may be more the result of an overall reduction in capital appropriations. In Alaska's rural areas this program evidently is highly regarded. Many rural residents appear to believe that programs of this type are one of the best means to improve electrical services and reduce costs. However, an interesting question has been raised about the way in which this program is currently conducted. The suggestion has been made that the program has moved in a direction that has led APA into improper competition with private industry--it being suggested that the original intent for APA's involvement was only to provide oversight on expenditure of state funds, 1359/814(32) conduct assessments of problems and needs, coordinate personnel training programs, and provide emergency services. Specified detailed issues raised include: 1. In its efforts to reduce project costs is APA entering too much into project design, construction management and procurement of materials? (It is pointed out that the procurement of materials [only contracting for labor with private entities] removes the ability of a private entity to mark up the cost of the materials, thereby reducing the cost of the materials, and the total profitability to the private entity.) On the other side of the issue, APA personnel have commented that over the years they have felt obligated to take a greater role because of such problems as ill-advised design work by contractors which has led to the installation of excessive generating capacity and equipment not appropriate to the situation. Assuming that there may be some truth to the statements offered on both sides of this issue, what programmatic modifications could be made to make more use of the private entities while also ensuring that they perform work in a cost-effective manner? 2. Another issue raised is the danger of taking too much of a "big brother" approach which removes responsibility and decision-making from rural communities, even perhaps preventing them from doing planning, construction and operations work that the communities would prefer to do themselves, perhaps using force account labor or by contracting with private companies. Is this actually happening in the program? Related to this issue is the more general question of the advisability of encouraging very small communities to have complex utility systems (water, sewer, electrical) that they may not have the expertise and inclination to operate efficiently. If these small communities are to have the facilities, should they be expected to maintain them by themselves, or instead should there be lav er organizations like AVEC to take over the responsibility-- pe: $ using some combination of local labor and circuit rider personne! These and similar legitimate questions appear to need more investi- gation. While only raised in conjunction with this specific program, these questions have broader implications for all of the state's programs of technical nature. In summary, the Rural Technical Assistance Program seems to be a popular and an effective one that is helping to reduce rural energy costs and improving the quality and safety of electrical supply. But the program's operation in its present form might be considered to be removing opportunities from private industry, and it might be having a tendency to remove initiative and responsibility from the local level. 1359/814(33) H. WASTE HEAT RECOVERY PROGRAM Alaska Power Authority PURPOSE: To reduce overall energy costs by increasing, by as much as a factor of two, the recovery of energy from diesel fuel used to generate electricity, the additional energy recovery being typically used to heat public buildings located near rural generating facilities. ELIGIBILITY AND CONDITIONS: Any electric utility is eligible for receiving technical advice and assistance. The APA typically assesses each individual situation to determine the cost-effectiveness of a proposed installation and if it is found that payback can be obtained in 10 years or less the project is considered feasible. PROGRAM HISTORY AND CURRENT STATUS: This program began in 1981 and has been continued since. Although a stand-alone program, it is essentially administered as part of the Rural Technical Assistance Program, and waste heat recovery projects are often pursued in conjunction with other electrical system improvements. In some cases the waste heat recovery doubles the energy extracted from the diesel fuel; it is possible to obtain paybacks in a few as two or three years. The APA has installed 19 systems, has assessed 42 other potential installations, and has requests for assistance from approximately 50 villages. The economic feasibility of this type of project is high enough that APA is prepared to sell revenue bonds on the open market to finance a number of additional installations. DISCUSSION AND ANALYSIS: This program appears to be an example of an activity of sufficient economic viability that it can pay for itself, while at the same time reducing overall costs and the consumption of a fossil fuel, specifically diesel oil. It would seem then that many potential projects can be completed by offering only technical assistance and no subsidy. If that be true, a natural question is if private industry could not pursue this work on its own or with the assistance of APA. Clarification is needed on the current extent of involvement of private industry in the waste heat recovery activities. Relevant to this issue was a comment by one of the APA presenters that in the early phase of the program APA did contract out the feasibility work but then determined that the process was not giving good results. At that point apparently APA began to involve itself to a greater extent in the performance of the feasibility work, design and construction management. It was noted in the presentation that savings from the heat recovery program in part accrue to the state through reduced costs incurred in heating schools and other state-owned facilities, and in some cases the projects may reduce the Power Cost Equalization subsidy. 1359/814(34) I. STATE ENERGY CONSERVATION PROGRAM Department of Community and Regional Affairs PURPOSE: Presentations to the Task Force indicated that the administering agency views this program as a tool for fostering community stability and development. The stated main thrust of the program is toward reducing space heating costs through technical assistance, education and financial aids. ELIGIBILITY AND CONDITIONS: The general program is somewhat diffuse in nature, and it serves several audiences, primarily rural communities. Activities conducted under the program are determined by a process that annually updates a three-year plan and which undergoes a public hearing process. Since most of the funds that support the activities are Oil Overcharge funds, programmatic guidance is also provided by the legisla- tively mandated 0i] Overcharge Consumer Advisory Board. PROGRAM HISTORY AND CURRENT STATUS: This general program has involved from the remnants of several programs previously conducted within the Division of Energy and Power Development (DEPD) of the Department of Commerce and Economic Development and which were then transferred to DCRA when DPED was abolished in 1983. Approximately 8 staff positions are involved, not including 5 others in the Weatherization Program also operated by DCRA and closely related to this program (See separate description of the Weatherization Program). The FY88 operating budget is $1.57 million and there is a $400,000 capital budget for the Institutional Conservation portion of the program. Of the operating budget, $448K is from the General Fund, and $1.12 million is from the federal EXXON funds. The overall program has the following components: 1. Technical and financial assistance to schools and hospitals aimed at helping them achieve energy efficiency and thereby reduce operating costs. 2. Assisting rural communities with bulk fuel purchasing, and providing technical assistance to rural residents in the maintenance of home heating systems. 3. Efforts aimed at increasing the energy efficiency of Alaska's housing stock through the adoption and implementation of energy standards and on-going technical marketing support of the Energy Rated Homes and the Alaska Craftsman Home Program. 4. Promotion of least-cost planning concepts and the privatization of energy conservation through innovative financing methods. DISCUSSION AND ANALYSIS: Of major operational concern is the current funding picture for this general program. Both the federal and State governments have made major cutbacks on funding, and the program is now largely paid for by Oil Overcharge funds. The Oi] Overcharge Consumer Advisory Board, a group advisory to DCRA and which includes several members of the Energy Policy Task Force, notes that: "Since 1984, State funding for energy conservation has decreased 91% and federal funding has also decreased...The Advisory Board has recommended to the State that the remaining oil overcharge funds be allocated in FY89 and that the 1359/814(35) expenditure of these funds take place over two fiscal years. The result is that, beginning the FY90, there will be only a small amount of State and federally-funded programs to support energy conservation." See attached sheet entitled "Energy Conservation Funding" for a summary of past and expected future funding. Because of the one-time availability of the Oil Overcharge funds that support the bulk of this program, personnel are making it a priority to develop operational models that can be picked up and made on-going by either the private sector or other organizations, the Energy Rated Homes program being an example. The development of rating sheets, training and first-year marketing was funded by the program, and now the private sector entirely operates the program. A very important battle that program personnel are fighting is for the adoption of thermal and lighting standards and the general adoption of good building practices. The Task Force has heard ample evidence in support of constructing better buildings, an endeavor far from fully supported by all concerned. The Alaska Home Builders Association is in fact lobbying to get a two-year delay on enforcement of the standards being adopted on January 1, 1988--these standards only pertain to construction wherein the State has fiscal involvement; the standards are not mandatory otherwise. See also the following “Rural Energy Issue Briefing" prepared by the Department of Community and Regional Affairs. 1359/814(36) ENERGY CONSERVATION FUNDING Y FY F Y FY89 FY90 FY91 FUNDING SOURCE 7/83-6/84 7/84-6/85 7/85-6/86 7/86-7/87 7/87-6/88 7/88-6/89 7/89-6/90 7/90-6/91 $000 $000 $000 $000 $000 $000 $000 $000 EXXON (Restricted to existing Federal Program) -0- -0- -0- 2,500 3,000 3,199 538 090 STRIPPER WELL -0- -0- -0- -0- -0- 3,743 -0- FEDERAL 2,078 1,350 3,023 2,720 2,220 2,147 1,900 1,800 (estimate) (estimate) (estimate) STATE 7,406 7,232 3,362 1,361 698 698 698 698 (estimate) (estimate) (estimate) TOTAL 9,484 8,582 6,385 6,582 5,918 6,045 6,879 2,498 (estimate) (estimate) (estimate) 1359/814(37) RURAL ENERGY ISSUE BRIEFING Department of Community and Regional Affairs S Energy represents one of the largest outflows of cash in many rural communities, severely limiting community development opportunities. 7 Rural Alaskans spend a considerable portion of their incomes (16-37%) on staying warm and on lighting. (This compares with 2-3% for Anchorage). o Staying warm constitutes the greatest residential energy expense (68%, as compared with electrical - 20%). BURDEN OF ENERGY COSTS ON RURAL FAMILY (based on rural family income) a ase ther (121) inal lectrical (20%) OTHER (70.00%) ENERGY (30.00%) eating (6 1359/814(38) : Energy conservation presents the most practical and cost-effective long-term solution to high heating costs. Examples of how various energy conservation measures can reduce the cash leaving the family and community are: * Weatherization can reduce low income Alaskas' energy consumption in existing buildings by 18 to 20%; By building superinsulated homes, heating bills can be reduced as much as 80% over standard construction; High efficiency stoves and proper maintenance can result in 50% savings; Cooperative bulk fuel purchases can save communities 19-23% in fuel costs. This saving can be further enhanced through effective fuel management and appropriate financing. ve Every dollar saved through conservation represents at least a dollar reinvested in the community, creating jobs or strengthening the economy. 1359/814(39) J. LOW INCOME WEATHERIZATION Department of Community and Regional Affairs Rural Development Division PURPOSE: the Low-Income Weatherization program is a federally sponsored program that is administered by the State. The purpose of the program is to reduce the home heating costs of low-income residents using standard energy conservation measures such as weatherstripping, caulking, vapor barrier and insulation as well as improved heating systems. The program provides the materials, transportation, and labor that are needed to install the energy conservation improvements that are determined to be appropriate for each home. ELIGIBILITY AND CONDITIONS: Regulations by the U.S. Department of Energy (DOE) established the eligibility and conditions that apply to the Low- Income Weatherization program. There are two ways that a household can qualify for weatherization: , 1. By qualifying for AFDC, Social Security, Disability, or adult public assistance, or 2. By having a household income that is 60% of the mean income for the State. These regulations are essentially the same as those used for the federally sponsored Low-Income Home Energy Assistance Program (LIHEAP) except that household income is based on the last 12 months for weatherization instead of the last 3 months for LIHEAP. Current federal regulations limit the amount of assistance to an average of $1,600 per home, which includes the cost of materials transportation to the respective communities and install. Federal regulations give DCRA the discretion to allocate program funding but legislative intent limits this discretion. The legislative intent for the weatherization program is that funding should be allocated on the basis of; 1) cost of fuel of], 2) heating degree days, and 3) percentage of homes not weatherized. ODCRA uses these criteria to determine what percentage of its annual funding should go to each of six regions in the State (five rural regions and one region that includes urban centers). The next step in the allocation process is to identify those communities that best meet the criteria. To achieve some economies-of-scale, the funding is targeted to a few communities at a time in order to complete the entire community rather than spread throughout the entire region. After the communities are prioritized, an RFP is issued to allow contractors to bid on the weatherization program. The contractors perform energy audits to identify cost saving energy conservation measures and then weatherize 1359/814(40) those homes that qualify. By federal regulation, preference is given to the elderly and handicapped. Federal regulations also require that the contractor be either a non-profit organization or a local government and that the previous contractor be used if possible. DATES OF ESTABLISHMENT AND OF SIGNIFICANT CHANGES: 1975 1977 1978 1979 1982 1982 1983 1986 1986 1359/814(41) The federal government, through its Community Services Administration, establishes the winterization program which attempts to use energy conservation measures to provide low- income homes with relief from rising oi] prices. DOE is organized and takes over federal energy-related pro- grams. States, including Alaska, receive funding from DOE to adminis- ter the weatherization (winterization renamed) program. In Alaska, DCRA is initially given this responsibility. Weatherization program is transferred to the Division of Energy and Power Development (DEPD) in DCED. LIHEAP provides supplemental funding to the weatherization program. This funding is not as restrictive and provides opportunity to use other conservation measures such as more efficient oi] heaters. The State provide $2.3 million in capital appropriations for the weatherization program in order to compensate for some of the problems that have been caused in Alaska by federal regula- tions. The principal problem is that the regulations do not allow the value of improvements per home to be adjusted by regional cost differentials. Legislature does not fund DEPD but establishes a new Office of Energy in the Department of Community Affairs which is to administer the weatherization program. Oil revenues are declining and the State does not provide capital appropriations for the weatherization program. Exxon overcharge funds are used to provide partial funding for the weatherization program. Weatherization Funding History FISCAL YEAR DOE LIHEAP STATE EXXON TOTAL 1981 $ 1.4 mil -- -- -- $ 1.4 mil 1982 $ .8 mil $ .5 mil -- -- $ 1.3 mil 1983 $ 1.3 mil $ .3 mil $ 2.3 mil -- $ 3.9 mil 1984 $ .9 mil $ .3 mil $ 5.1 mil -- $ 6.3 mil 1985 $ 1.8 mil $1.0 mil $ 5.2 mil -- $ 8.0 mil 1986 $ 1.5 mil $ .8 mil $ 2.1 mil -- $ 4.4 mil 1987 $ 1.4 mil $ .7 mil $ .2 mil $2.0 mil $ 4.3 mil 1988 $ 1.4 mil $ .7 mil $ .2 mil $2.0 mil $ 4.3 mil $10.5 mil $4.3 mil Si5.1 mil $4.0 mil $33.9 mil Homes Weatherized Total Homes As of 1987 —% Weatherized Anchorage 70,724 3,206 5 Fairbanks 22,628 974 4 Juneau 7,656 307 4 Rest of State 50,644 10,541 21 Total 151,652 15,028 10 Based on the 1980 census, it is estimated that about 45,000 homes in Alaska may qualify for weatherization. PROGRAM HISTORY AND CURRENT STATUS: The weatherization program (which operates on a federal fiscal year) is just completing its FY 87 efforts. During FY 87, about 1800 homes have been weatherized. Contractors for this effort include: CONTRACTOR REGION SERVED CONTRACT VALUE Municipality of Anchorage Anchorage $ 985,406 RurAL CAP Western Alaska 894,133 AK Comm. Dev. Corp. Southcentral 894 ,033 SIH Fairbanks 469,365 Tanana Chiefs Doyon 318,482 TOTAL $3,561,419 A substantial portion of the contract with SEACAP to serve Southeast communities, was canceled due to some irregularities that appeared after an 1359/814(42) audit of previous contracts. Both the FBI and the Juneau Police are also investigating SEACAP. It is anticipated that the remaining amount of funds will be reprogrammed to Southeast communities. In FY 88, the funding for the weatherization program is to include: Operating Budget $354.8 CIP 5 positions Capital Budget $ 250.0 GF 1,700.0 Federal 2,000.0 Exxon $3,950.0 Total DISCUSSION AND ANALYSIS Low-income households, particularly those in rural Alaska, spend a consid- erable portion of their income on energy. Data from DCRA indicates that about 30% of a rural family's income is spent on energy. Of that 30%, about 68% is spent on heating, 20% is spent on electricity, and 12% is spent on gasoline and other fuels. Heating costs in rural Alaska ar2 high because fuel oil is expensive, the climate is severe, and the housing stock tends not to be energy efficient. To illustrate the differences in fuel oi] costs between urban and rural Alaska, DCRA reports that in 1985, Number One heating oil cost $1.18 per gallon in Anchorage and ranged form $1.30 (Interior) to $2.44 (Arctic Slope) per gallon in rural Alaska. The weatherization program has demonstrated that it can reduce heating costs. It has been estimated that weatherization can reduce energy con- sumption for heating by an average of about 20 percent. In addition, the program creates opportunities for seasonal employment which is particularly beneficial in rural Alaska where such opportunities are often scarce. Although the weatherization program has been effective in reducing heating costs, the spending limit per home that is imposed by the federal regula- tions does not typically allow sufficient expenditure to install all of the energy conservation measures that can be cost-effective. On the other hand, if a more adequate effort could be made, the available funding would benefit fewer homes. What appears to be the most serious issue facing the weatherization program is its future funding. The Table below illustrates the problem. 1359/814(43) Projected Funding for All Conservation Programs Funding Source FY 88 FY 89 FY 90 FY 91 Overcharge Funds Exxon 3,000 3,199 538 0 Stripper Well 0 0 3,743 0 Federal 2,220 2,147 1,900 1,800 State 698 698 698 698 TOTAL 5,918 6,045 6,879 2,498 Although the potential for a precipitous drop in funding for energy conser- vation programs is still at least two years away, it often takes government a year or two to respond to a problem. Therefore, if there is to be continuity in the weatherization program, now is the time to devout atten- tion to this potential problem. It should be noted that there may be some obligation for the State to restore general fund appropriations to the weatherization program since the allocation by the federal court of the overcharge funds was based on the premise that these funds would not be used to supplant other sources of funding. State funding for the capital budget portion of the program was eliminated about the time that the overcharge funds became available. Future funding for the weatherization program raises the issue as to when the program can expect to have completed its job. Considering that: 1. It has taken about eight years to weatherize about one-third of the homes that are expected to qualify for weatherization (based on the 1980 census); 2. That the energy conservation measures being installed are essentially skimming the cream and do not include everything that could be cost- effective; and 3. That since 1980 there has been a considerable increase in the amount of housing stock in Alaska, much of it poorly built and needing weatherization: The need for weatherization exceeds the amount of program funding that can be expected in future. 1359/814( 44) K. POWER COST EQUALIZATION PROGRAM Alaska Public Utilities Commission and Alaska Power Authority PURPOSE: The purpose of the program, as given in Alaska Statute 44.83.11, is for "equalizing power cost per kilowatt-hour statewide at a cost close to or equal to the mean of the cost per kilowatt-hour in Anchorage, Fairbanks, and Juneau by paying money from the fund to eligible electric utilities in the state". ELIGIBILITY AND CONDITIONS: The eligibility and conditions are spelled out in detail in Statute 44.83.12. Eligible utilities are any organizations that owns, operates, manages, or controls a plant or system for the fur- nishing, by generation, transmission or distribution, of electric service to the public for compensation. The utilities must satisfy certain condi- tions which limit the size of the utility such that utilities not receiving power from the Four Dam Poo] and which are outside the Railbelt are gener- ally eligible, if the utility has applied or if 25% of the customers of a utility that is subject to rate regulation so petition. PROGRAM HISTORY AND CURRENT STATUS: The PCE program is a successor to two previous subsidy programs, the Power Production Cost Assistance Program (PPCA) enacted in 1980, and Power Cost Assistance Program (PCAP) which replaced it in 1981. The 1981 action broadened the scope of allowable costs and increased the average subsidy. In 1984 the PCE program was enacted. The biggest change from the previous programs was to increase the size of the window for covered costs: 750 KWH per customer plus not more than 70 KWH per resident for local community facilities (in aggregate), the payment amounting to 95 percent of costs over 8.5 cents/KWH up to a maximum of 52.5 cents/KWH. The legislation specifies that all utility costs except return on equity are allowable. It also specifies that the 8.5 cent/KWH floor is to be adjusted each year by APUC, but the commission has never done that. To date just under $100 million has been expended on these Ree ie estimated cost of the PCE program in FY87 is approximately 5 m on. DISCUSSION AND ANALYSIS: Several recent documents present data and discus- sions on the PCE program. These include House Research Agency Report 85-C, “Rural Energy, An Overview of Programs and Policy," by Gretchen Keiser and 0. Alexander Hoke (1985); an unpublished document prepared as part of a graduate studies program by Judy White entitled “Power Cost Equalization--A Critical Appraisal," and which appears under the authorship listing of Pat Brown, Shawnnen Conover and Judy White (1986); a document prepared by George Matz and now in publication, entitled "Energy Policy Report for the Governor's Energy Policy Task Force--The Power Cost Equalization Program"; a document prepared for the Task Force by Alan Mitchell entitled, "The Effect of Electricity Subsidy Programs on the Economic Incentives for Improving Generation and End-Use Technologies"; plus various informal 1359/814(45) documents submitted to the Task Force by personnel of the Alaska Public Utilities Commission and those prepared by the Task Force itself. The discussion and analysis presented here derives from these documents, from public testimony given to the Task Force and from discussions held by the Task Force. Without question, the PCE and previous subsidy programs have contributed to the electrification of rural Alaska and to the lowering of direct costs for electricity users there. The initial subsidy program was intended to be a temporary measure, but the PCE program is now enacted as a permanent subsidy. In a newspaper column entitled “Power rate equalization is biggest the biggest turkey yet," former Governor, Jay Hammond, who had always been against such subsidies, spoke against the PCE program because of its "hidden dividend," lack of equity and great costs. It is generally acknowledged that the program also is counterproductive to other energy programs intended to lower the actual cost of electricity in rural areas-- it hampers local initiative to seek alternatives to diesel generation and it creates a somewhat false target for technically oriented energy programs to shoot toward--the lowering of PCE costs to the State. The target is not entirely false since only about 45 percent of the electricity generated in rural areas receives PCE subsidy. So when the target is hit, costs are lowered both for the State and for affected rural energy users. Perhaps the most serious problem with PCE is that it is acknowledge as a political trade for State funds spent in the Railbelt and in the Four-Dam Pool service area, and those now designated for the Railbelt Energy Fund. That being the case, any reduction in the overall total PCE benefit to the rural areas reduces the “equity” of the original trade-off, and so may be viewed by rural Alaskans as representing an unacceptable loss. Rural legislators are put in the awkward position of needing to fight to maintain what “equity” has already been achieved, perhaps causing then to be less than supportive of any changes to PCE that might reduce the total expendi- ture of State funds on the program. Another favorite “equity” argument is that too much of the State's petroleum income goes to urban areas, and since the PCE program serves as a tool for distributing some of this wealth to rural areas, the program should not be reduced. Various formulas have been suggested for altering the PCE program in ways that would create more incentive for energy conservation and reduction in electrical costs. Each suggested formula also reduces the total PCE program cost. One suggested means of altering the program is to reduce the amount of subsidized electricity from the present 750 KWH/mo per residen- tial customer. This is a large amount of electricity to subsidize because it is not far from the average residential use in the entire United States, and it is generally recognized that approximately 200 KWH/mo will satisfy the minimal needs of a household. A reduction in the subsidy to cover only that amount would largely eliminate the incentive problem and it would greatly decrease the overall program cost. Another suggested mechanism is to reduce the percentage figure of the subsidy from the present value of 95 1359/814(46) percent of the allowable portion, so that customers will bear a larger fraction of the true cost. Aside from whatever other changes might be made to the structure of the PCE subsidy program, cognizant APUC and APA personnel have urged that steps be taken to alter the program in ways that would simplify it--mainly for the benefit of small communities or utilities who find the required reporting procedures difficult and relatively expensive. In this respect, the program somewhat discriminates against the small communities. An issue of some concern is that the PCE program is now structured could be prohibitively expensive for that State. For example, if every customer actually used at least 750 KWH/mo, the current annual cost of the program would be approximately $70 million rather than about $20 million. On the average, PCE communities receive only approximately 28 percent of the subsidy possible under current rules. 1359/814(47) L. LOW INCOME HOME ENERGY ASSISTANCE PROGRAM (LIHEAP) Federally Funded by Block Grants to Department of Health and Social Services Division of Public Assistance and Nine Tribal Grantees PURPOSE: To provide assistance to low-income households to offset the cost of home heating that is excessive in relation to household income, by means of payments made to energy suppliers on behalf of each household. ELIGIBILITY AND CONDITIONS: The annual benefit given to an eligible household varies from $200 to $900 depending on household size and income; geographic location of residence; type, annual usage and cost of local fuel; size and type of housing. Those households with incomes below 150% of the poverty level defined for the state do qualify as do those with incomes less than 60% of the median income for Alaska. For example, a family of four with an income of $22,943 qualifies. Determination of eligibility is based on family income during the past 3 months. Households containing an individual receiving Aid To Families with Dependent Children, food stamps, Supplemental Social Security Income, or certain income-tested VA benefits are automatically eligible. Amounts actually awarded may be limited by the total funds available. PROGRAM HISTORY AND CURRENT STATUS: The program has been operating for 8 years. The Division of Public Assistance services approximately 12,000 applicants, and the tribal organizations service about 8,000. Only about half of the 40,000 eligible households in Alaska apply, but the money available during most years has been just enough to take care of those who do. This past year the average DPA grant was $480, with the regional average in Southeast Alaska being $420 and that in northern Alaska being $990. This year the grants will be reduced by 20% due to a cut in federal funding. The money goes mostly for home heating fuel but some (25% or less) may go into electrical because electricity may be required to operate heating units. The State has federal approval to use up to 15% of its block funds for low-cost home weatherization, the money being transferred from DPA to DCRA for its weatherization program. Jeff Weltzin reported that the Tanana Chiefs used 15% of the funds received for weatherization, and that they expended monies also to purchase high-efficiency wood stoves. He said that federal regulations really allowed as much as 25% of the funds to be used for energy-conserving hardware and weatherization, and that Tanana Chiefs preferred that this course be taken. Other tribal groups evidently are spending almost all of their block grant funds on fuel payments. The estimated planning and administration cost for the DPA portion of the program during FY88 is $560,000, well below the 10% limit allowed by the federal government, so there appears to be little or no net cost to the state. 1359/814(48) Of concern to DPA is the level of federal funding for the program, de- scribed as "whimsical". Since a 16% cut was made for the coming year, DPA has been limited the grants accordingly, and has recommended that the tribal organizations do the same. It appears that they are not all cutting back, so problems may lie ahead. The Division of Public Assistance holds back some money to be used for emergency assistance: additional money is occasionally given to grantees when they are in particularly desperate straits. Funding this current year is $8.4 million, down from $9.9 million last year and $11 million the previous year. These are program totals, the amount being split between DPA and the tribal organizations. Concern was expressed that in a weakening economy more applicants will come forward to ask for support from the program. DISCUSSION AND ANALYSIS: Except for the fact that this program encourages a degree of reliance on government, it is rather innocuous from an energy policy point of view. It serves those people who most need help, without appearing to remove incentive to save money and energy. The Task Force did not receive much information about the administration of the program by tribal organizations, but it appears that the Division of Public Assistance is doing a good job of administering its part. The federal regulations on conduct of the program seem comprehensive but adequately flexible, and this apparently proper degree of control no doubt contributes to the quality of the program. Obvious contrasts appear between the LIHEAP and PCE programs. LIHEAP subsidizes residential heating costs; PCE subsidizes electricity. LIHEAP does not encourage increase energy consumption, whereas the PCE program does (at least for users of less than 750 KWH/mo). LIHEAP givers assistance on a need basis: PCE does not. LIHEAP contains provisions for funding energy conservation measures: PCE does not. LIHEAP is federally funded: PCE is state-funded. 1359/814(49) Chairman'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.0. 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 M. ENERGY RESEARCH AND DEVELOPMENT PROGRAMS (Various Organizations) HISTORY AND CURRENT STATUS--When OPEC began raising petroleum prices in the early 1970's the federal government increased its support of energy re- search and development activities. The new interest and support led to much new work in Alaska, aimed mostly at definition of the State's copious supply of energy resources of essentially every kind. The State's hydro- power potential had been long recognized, and federal agencies had been working for some years on building up a description of the resource. It appeared in the early 1908's that a stable program of energy research and technology development was being established in Alaska, but then a decrease in federal and state interest occurred, and most of the activities were halted or drastically curtailed. During the buildup period, a number of alternative energy demonstration projects were established around Alaska. These all involved bringing in technologies developed elsewhere, and these technologies were not subjected to controlled testing or modified for use in Alaska. State government was too impatient to undertake the work that really needed to be done first. Consequently, the demonstration effort was mostly a failure, and some people have come to accept the idea that alternative technologies are of little value in Alaska, or at least are not worthy of active pursuit at the present time. One of the few on-going applied energy research and development programs in Alaska is conducted by the University of Alaska Fairbanks in its Emil Usibelli Memorial Coal Laboratory, originally established by private funds provided by the Usibelli family. The laboratory maintains a small effort directed toward evaluation of the equity and nature of the Alaskan coals and their benefication. Listed research expenditures during FY86 amounted to approximately $130,000. University faculty associated with the institute of Northern Engineering have done research related to the Anchorage-Fairbanks interties, and a small project sponsored by APA (less than $20,000) is continuing. They also have performed analysis work on the quality of rural electrical power systems and on energy performance of buildings and building materials for the Department of Transportation and Public Facilities. That organization maintains its Research Division on the University Campus, resulting in an application of University capabilities to departmental problems unequaled by any other State agency. Another cooperation that was served the State well is between the Depart- ment of Natural Resource's Division of Geological and Geophysical Surveys and units of the University involved in the geological sciences. Of 1359/814/50 primary relevance here is the work that these groups have done on the identification and development of geothermal resources, an activity in which APA also has participated. This work has led to identification and partial development of the potentially viable major resource at Unalaska, and also identification of potential resources elsewhere. Mainly dependent on federal funding, the DGGS and University efforts in geothermal resource identification and development are now at low ebb. The University effort is now essentially defunct, available personnel being forced to work on problems for which funding is available, those mostly of national rather than Alaska interest. The picture regarding applied energy research and development of technolo- gies directly useful to Alaska' is even bleaker. In no State-funded organization is there any formal program which, more then peripherally, seeks to keep abreast of developments elsewhere which might be applied to Alaska's energy problems. An exception may be in the area of biomass--in that field that APA operates a small program which is largely federally funded. Another exception .is in the area of geothermal resources: The University, DGGS and APA efforts have been sufficient for cognizant person- nel to keep up with most developments elsewhere. ANALYSIS AND DISCUSSION--Being a non-contiguous state and the only part of the United States at high latitude, Alaska has many certain characteris- tics, opportunities and problems unique to its location and which are not in the mainstream of the national interest. When it has been in the national interest to do so, the federal government has expended funds in Alaska, and that expenditure has provided most of the information we have about energy resources in the State and how they might be used to advantage by Alaskans and those elsewhere. Yet, far too little work has been accom- plished on topics of special interest to Alaskans, particularly the devel- opment and application of modern technology to living in the State, espe- cially in the rural areas. The greatest immediate need for the application of what already is known to the problems of small-scale electrical genera- tion at remote locations, to development of high-quality and energy effi- cient residential and community buildings, and to the use of locally avail- able alternative energy resources. Quick returns can be expected by focusing effort in these areas, accompanied by strong educational and technical assistance programs. Concurrent with efforts expected to bring early returns should be at least a modest program aimed at the development of application of new technology and better definition of energy resources. Except for one crucial element, Alaska has everything needed to move forward: the resources, the potential to use the resources, and the requisite scientific and engineering capabil- ity. The lack, so far, is a general appreciation for the value of moving in this direction and a consequent lack of social will to proceed with the fiscal investment required. Were the investment made, additional federal and private investments probably would be forthcoming, so the effort itself 1359/814/51 could bring more money into the state--and also help provide a more favor- able climate for the development of private industry in Alaska. 1359/814/52 N. ENERGY CONSERVATION STANDARDS Department of Community and Regional Affairs Division of Community Development PURPOSE In order to improve the energy efficiency of Alaska's building stock, the legislature enacted legislation (AS 46.11.040) in 1980 stating that "State financial assistance may not be approved or granted for the construction of a new residential or commercial building if construction of the building begins after December 31, 1980, unless the building is in compliance with thermal and lighting energy standards." After some delay and a lengthy public review process, the Department of Community and Regional Affairs (DCRA) has promulgated regulations that establish thermal energy standards for new residential buildings. These standards are now supposed to become effective on January 1, 1988, although DCRA personnel have reported that they may delay yet another eight (8) months. ELIGIBILITY AND CONDITIONS The energy conservation standards that have been promulgated by DCRA apply to residential buildings that receive State financial assistance. This includes: 1. Detached single-family dwellings, 2. Buildings that are four stories or less and have a heating unit that provides heat to no more than six dwelling units, and 3. Additions that increase the dwelling floor space by 50 percent or more, and being construction after January 1, 1988. It should be noted that mobile homes and transient housing need not comply with these standards. The regulations establish thermal standards for new residential construc- tion but not lighting standards. The standards may be satisfied by comply- ing with one of three methods which are the: 1. Prescriptive method, 2. Performance method, or 3. Building budget method. The two principal State agencies that provide financing for new residential buildings are: 1. The Alaska Housing Finance Corp. (AHFC), and 1359/814/53 2. The Housing Assistance Division (HAD) of DCRA. PROGRAM HISTORY AND CURRENT STATUS The milestones for the residential energy conservation standards are as follows: 1980 - The legislature passes an omnibus energy bill which includes the requirement that residential and commercial buildings must comply with thermal and lighting standards if they are to receive State financial assistance. The Department of Commerce and Economic Development is to adopt regulations that establish these standards. 1983 - The legislature amends AS 46.11.040 so that responsibility for adopting regulations is now with the Department of Community and Regional Affairs. OCRA establishes a 16-member advisory committee to help establish standards. 1984 - The advisory committee recommends that commercial standards be separated from the residential standards and that residential lighting standards not be included. 1985 - Draft residential thermal standards are developed by the advisory committee. 1986 - Extensive public hearings are held on the draft standards. Stan- dards were finalized at the end of the year and adopted by DCRA. 1987 - Regulations are approved by the Lt. Governor's Office. Regulations are to become effective January 1, 1988. Although the Office of Energy Programs in DCRA was responsible for adopting the energy conservation standards, this agency does not have responsibility for enforcement. In effect, enforcement of the standards essentially rests with AHFC and HAD which provide State financing for housing. AHFC has said that to comply with the energy conservation standards, it “intends to require builder certification that newly constructed homes have been built in accordance with the law". However, they do not intend to conduct construction inspections. "If a builder certifies to AHFC that a house was built in accordance with AS 46.11.040 and that certification proves false, this violation would be more appropriately dealt with by the State's Contractor's Licensing Division or the court system." HAD has made efforts to comply with the standards by informing banks that service its loans that they "will be required to include in your loan purchase packages a notarized affidavit from the builder that the structure was built according to the standards and a copy of the builders certificate 1359/814/54 showing he or she completed the Alaska Craftsman Home Program Energy Efficiency Workshop." DISCUSSION AND ANALYSIS Despite the economic and comfort benefits of residential energy conserva- tion measures, most new homes built in Alaska are not built to the most energy efficient standards that could be justified by life-cycle costing. Listed below are some obstacles that often result in less than optimal construction. 1. With most new homes, the builder, rather than the home owner who will be paying the heating bills, decides what energy conserva- tion measures should be included. Making changes to these energy conservation measures, if they are inadequate, adds unnecessary expense. 2. The building industry generally perceives that the added expense of energy conservation measures make it more difficult for them to be competitive and/or profitable despite the advantage to the home owner. 3. To be effective, many energy conservation measures have to be properly installed. Once the house is completed, it is often difficult to tell if proper installation has taken place. 4: Energy conservation measures are usually upfront costs which may appear to be expensive or unaffordable to the consumer even though the savings that are expected to result over the lifetime of the project are greater than the cost of the product. Mandatory thermal standards for new homes can protect the future home owner from having to pay more expensive heating bills as the result of a home builder who reduced his costs by using energy conservation measures or construction practices that are substandard. The thermal standards also protect the State's interest, particularly if the homeowner forecloses on an AHFC or HAD mortgage. The Alaska State Home Builders Association has recently voiced opposition to the energy conservation standards. There objections generally relate to five points which are: 1. The cost of construction will be greater ($4,000-5,000 for a $110,000 home in a developed area) and the cost will have to be covered by the builder through reduced rates and additional down payment by the home buyer. DCRA disputes that the cost will be that much more. 1359/814/55 2. Environmental quality is a problem with tight houses. This can affect the health of the occupants and damage structural compo- nents (because of moisture build up). It should be noted that the standards do include ventilation requirements and recommend air-to-air heat exchangers which should prevent these prob- lems from occurring. 3. There is a lack of experience with the building methods needed to meet these standards and “no program for training is contemplat- ed" nor are any public awareness programs planned. It should be noted that DCRA does provide public information on energy conservation measures and the Energy Extension Service has provided home builders with training through its Alaska Craftsman Home Program Workshop. 4. There is no enforcement of the standards. Enforcement is via the agencies that finance new home construction. AHFC and HAD have both indicated that they would comply with the statutes. HAD plans to take a more active posture by require builder certification and AHFC is also considering this approach. 5. The energy savings do not justify the increase in costs. This objection seems to be based on the premise that the economic analysis should be based on the current average life of the loan (less than seven years) rather than a thirty year amortization. This is not a technically correct approach if the useful life of the energy conservation measure exceeds the average life of the loan. The recommendation of the home builders is to delay implementation of the standards for two years. During this time, the home builders would like to resubmit the issue back to the legislature to review its appropriateness under current conditions and to provide a more thorough analysis of the need for the standards as well as its cost-effectiveness. Issues that are of concern include the following. 1. The principal issue with the energy conservation standards is whether or not to its effective date (January 1, 1988) should be postponed as recommended by the Alaska State Home builders Association. The discussion above should provide adequate information for considering this issue. 2. As stated earlier, enforcement of these standards is up to the State agencies that provide financing for new home construction. Clearly, these agencies have an obligation to comply with the regulations. However, there is some discretion as to whether the agency should 1359/814/56 assume a passive or active role in this enforcement. The most active role that an agency could assume in enforcing the standards is to inspect each home that it mortgages to assure compliance. But, obviously, this would entail additional costs. An issue to discuss is how actively should agencies enforce these standards. 3. The purpose of the energy conservation standards is to protect the home buyer from experiencing unnecessarily high heating bills due to inadequate conservation measures or building practices by the home builder. Does the home buyer need protection? Also, how effective have voluntary methods, such as the Energy Rated Homes program, been in accomplishing the same purpose? 4. We are all aware that Alaska's shelter industry is experiencing severe economic problems. Do the energy conservation standards add to these problems by increasing the cost of new homes and perhaps reducing the profit margin of the home builder, or will the standards have a positive affect on the shelter industry by making it more difficult for modular housing to penetrate the Alaska market as well as home builders who come to Alaska without the experience of building in cold climates? 1359/814/57 0. UTILITY REGULATIONS Alaska Public Utilities Commission PURPOSE: The Alaska Public Utilities Commission (Commission) is the State agency authorized to certificate and regulate public utilities and pipeline carriers. Certification means that the utility or pipeline service is required by the public and that the provider is fit, willing and able to provide the service; regulation requires that the rates charged for the services and the terms and conditions under which service is provided are just and reasonable. In addition, regulation requires that service delivery be adequate, efficient and safe. SPECIFICS: A public utility providing service for compensation to more than ten customers is required to obtain a certificate of public convenience and necessity from the Commission. However, electric utilities with gross revenues of less than $50,000 are exempt from certification requirements unless 25% of their customers petition for regulation. A certificate describes the nature and extent of authority granted to a public utility, including a description of the authorized service area and the scope of operations of the utility. Those electric and gas utilities that are economically regulated are required to receive Commission approval before instituting any change in rates and terms and conditions of service. In addition, regulated electric utilities must comply with service and safety regulations. A number of certificated utilities are exempt from economic regulation by the Commission pursuant to AS 42.05.711. Electric and gas utilities that are exempt include: 1. Those owned and operated by a political subdivision of the State, that are not in competition with any other utility UNLESS the political subdivision elects to be regulated by the Commission. 2. Electric utilities with gross revenues of less than $50,000 unless 25% of their customers petition to be regulated. Consumers of certain categories of electric utilities may vote to be exempt from economic regulation including: 1. Consumers of investor-owned electric utilities with annual gross revenues of less than $325,000. 2. Consumers of electric cooperative utilities organized under AS 10.25. 1359/814/58 Of 25 electric utilities whose consumers have or had the option to vote to become deregulated, 12 have exercised this option, 8 are now deregulated, and one is conducting a deregulation election. The Commission has adopted regulations, affecting electric and gas utilities and pipeline carriers, in the following categories to carry out its duties: Practice and procedure, deregulation elections, simplified rate filing procedures for electric cooperatives, energy conservation, electric service and safety standards. PROGRAM HISTORY AND CURRENT STATUS: The Alaska Public Utilities Commission Act (AS 42.05), enacted in 1970, created a full time administrative agency to regulate public utilities within the State. In 1980, the duties of the former Alaska Pipeline Commission were assumed by the Commission. In addition to utilities that provide electric and gas service and pipeline carriers that transport natural gas and oil, the. jurisdiction of the Commission extends to telecommunications, water, sewer and garbage utilities. There are five commissioners appointed by the Governor and confirm by the Legislature for six-year terms of office. In addition to two consumer commissioners, there are specific qualifications for the business, engineering and law commissioners. The Commission employs an executive director and a staff of 34 authorized positions (FY88). This is a reduction of 28% from the 47 staff position that were authorized in FY85. The Commission's FY88 budget is $3,453,600 which includes $2,208,300 in general funds and $1,245,300 in program receipts. The latter are aaiys used for expenses relating to specific proceedings before the Commission (usually the costs of expertise not available on staff, court reporter services, travel associated with audits) and are reimbursed to the State by the parties to a proceeding through an allocation process provided for in AS 42.05.651. There are 307 utilities that are certificated by the Commission of which three are gas and 72 are electric utilities. All of the gas utilities and 40 electric utilities are economically regulated. Fourteen pipeline carriers currently hold certificates of public convenience and necessity and are economically regulated. ENERGY POLICY One of the major objectives of the Energy Task Force addresses regulatory policy: "Recognizing the state government should take the primary role in necessary energy-related regulatory activities, the state's energy policy shall be to 1359/814/59 conduct those activities efficiently and cost-effectively and, as much as is practical, in coordination with other state activities." IDENTIFICATION OF ISSUES FOR FUTURE CONSIDERATION: Ne Funding - Since its inception the Commission has been funded through the State's general operating budget. In light of the current revenue shortfall should “user fees" fund the Commission? This would mean that the consumers who receive the public protection provided by the Commission would pay for the cost of regulation. Deregulation - If user fee funding is instituted or even if it is not, should the option of deregulation by consumer vote be available to all energy-related utilities regardless of size or level of annual revenues? Competition - In the event competition emerges in the provision of electric and/or gas utility service, should the oversite of the Commission be reduced or eliminated? : Cogeneration - Should the State, through regulatory policy or other means, encourage or discourage the cogeneration of electricity by qualifying facilities? Least-Cost Planning - There seems to be general agreement that the concept of Least-Cost planning has merits for electric utilities but there is no consensus as to whether this should occur on a voluntary basis or by regulation from the APUC. Which approach would be most suitable in Alaska? 1359/814/60 P, ENERGY PLANNING Alaska Power Authority Department of Community and Regional Affairs PURPOSE: Generally speaking, the purpose for energy planning is to anticipate future energy needs and to determine which available alternative or alternatives should best meet these needs based on cost, safety, reliability and envi- ronmental concerns. ELIGIBILITY AND CONDITIONS: To some degree, each State agency that administers energy programs does some level of planning. In some cases the planning is informal and there are no eligibility requirements or conditions. Also, most agencies rou- tinely collect data on programs that they manage and this data is often essential for budgeting or analytical planning efforts. In other cases, a planning process is explicitly required by statute or regulation or by a federal agency that provides program funding. Plans that are required are usually published and subject to public review. The following energy plans are required. Alaska Power Authority All of the statutory requirements, regulations, and board policies that affect the planning and development of an Alaska Power Authority power project have been brought together and included in what is called a Project Approval Process. This 22-step process is illustrated in Table I. Further details on these elements of this process that are required by statute are given below. 2 AS 44.83.177--Reconnaissance Study; The purpose of a reconnaissance study is “to identify power project alternatives and energy consump- tion patterns (thermal as well as electric) and needs for a community or region”. Regulations (3 AAC 94.055) specify what should be includ- ed in the analysis of alternatives and the demand projections, what criteria should be used for the economic and financial analysis, and the review procedures. o AS 44,.83.181--Feasibility Plan; The feasibility plan is used to assess the technical, economic, and environmental aspects of a proposed power project and to compare it to the base (existing) system and other alternatives. A benefit-to-cost ratio is used to determine if the project is economically feasible. The procedures for doing this analysis are specified by regulations (3 AAC 94.060). 1359/814/61 ¢ AS 44.83.181--Plan of Finance; If the feasibility study identifies a project that appears to be technically and economically feasible, a detailed plan of finance is completed to determine the most appropri- ate means for project financing. Regulations (3 AAC 94.065) require that the plan of finance identify the most appropriate means to achieve the lowest cost electric power for consumers while minimizing the amount of state assistance required. The regulations also require that the expected cost of power be calculated using certain criteria and that it be compared to the costs for the base system. Another statutorily required planning process that has been delegated to the Alaska Power Authority, but not included in the Project Approv- al Process, is the Long-term Energy Plan. c AS 44.83.224--Long-Term Energy Plan; The statutes direct the Depart- ment of Commerce and Economic Development to submit to the legislature by February 1 of each year a long-term energy plan. Since 1985, this responsibility has been delegated to the Alaska Power Authority. The major components of the plan are to include; : 1. An end-use study, 2. Energy development needed to meet projected thermal, electrical and transportation needs of the state, 3. An energy conservation component, 4. Emergency energy conservation measures, and 5. A report on research, development, and demonstration projects involving local energy sources, alternative energy systems, and energy conservation. Another planning-related activity of the Alaska Power Authority is its Annual Power Statistics report for the state and the Railbelt. This report includes vital statistics for all of Alaska's significant utilities. This effort was initiated a number of years ago by the federal Alaska Power Administration and continued by the Alaska Power Authority in 1985 when the federal agency lost funding for its planning efforts. Program plans are required for the energy conservation programs in the Department of Community and Regional Affairs (DCRA) that receive funding from the U.S. Department of Energy (DOE) or the 011 Overcharge funds. These include: ¢ Low-Income Weatherization--In order to receive federal funding for low-income weatherization, DCRA annually submits a plan to DOE ex- plaining how it will spend the funds that have been allocated to Alaska and how these expenditures will comply with DOE regulations. ° 0i1 Overcharge Funds--In appropriating the FY89 011 Overcharge program receipts to DCRA, the legislature attached intent language stating that a Consumer Advisory Board should be established to provide 1359/814/62 oversight and recommendations to DCRA regarding the allocation of these funds to various energy conservation programs. The Consumer Advisory Board has developed an expenditure plan for the oil over- charge funds which DCRA is following. PROGRAM HISTORY AND CURRENT STATUS: The milestones for the Alaska Power Authority planning functions are as follows: 1980--Legislation enacted that established reconnaissance studies, feasibility studies, and plans of finance. Statutes amended to establish an annual long-term energy plan. 1981--Regulations for reconnaissance studies, feasibility studies, and plans of finance became effective. 1984--Alaska Power Authority Board of Directors adopted project approval process in order to properly sequence existing statutory, regulatory, and policy requirements. 1985--Alaska Power Authority takes over Alaska Power Statistics from the Alaska Power Administration. Also, Alaska Power Authority given responsibility and funding for the Long-term Energy Plan that year. During the past several years, the Alaska Power Authority completed recon- naissance studies for most rural communities, undertook several feasibility studies which concluded that the projects were not feasible (the most notable being the Susitna Project), and completed feasibility studies and plans of finance for several major projects that have since been developed (e.g. Anchorage/Fairbanks Intertie and the Four Dam Pool). Several rela- tively small feasibility studies are currently underway as well as is a major feasibility study for the Railbelt. The Alaska Power Authority continued the Alaska Electric Power Statistics publication even though there has been no recent funding for this effort. However, the annual Long-term Energy Plan, which also has not received recent funding, has been discontinued for the time being. There has been no change to the planning requirements for DCRA's energy conservation programs. An additional effort of DCRA was to sponsor a Least-Cost planning conference in October 1987 which was well attended by those who have responsibility for some aspect of energy planning. 1359/814/63 DISCUSSION AND ANALYSIS: Good energy planning can be a relatively expensive endeavor; but poor energy planning can be even more expensive. In recognition of the importance of good planning, the Alaska Power Author- ity has developed a project planning process that evaluates the economic and financial feasibility of a project using reasonable assumptions for key criteria (i.e. oil prices). The economic analysis does not include infla- tion, since inflation is virtually impossible to forecast over the twenty year planning period that is required by regulation, nor does it include the possibility of subsidies which can distort the conclusions. While this process usually results in an objective comparison of a proposed project to an existing system, it has some weaknesses. One, the feasibility of other supply alternatives could be underrated if sufficient effort has not .been given to determining the most economic version of other alternatives. Two, placing too much value on the long-term economic benefits of a capital- intensive project can create a situation where the project, in terms of its life cycle costs, appears to be economically feasible but is not financially feasible without subsidy. Theoretically, if the right criteria are used, a project that is economically feasible should be financiable. Three, the Alaska Power Authority project feasibility process was developed at a time when most energy planners considered only supply-side alterna- tives when planning for new capacity. Demand-side technologies were, for the most part, too new and unproven for most utilities to seriously consid- er. During the past few years, demand-side technologies have established credibility with many utilities. In order to adequately incorporate demand-side technologies into the planning process, a new planning approach has evolved which is called Least-Cost planning. The objective of Least- Cost planning is to recognize the potential for demand-side technologies and to assure that these technologies are evaluated on the same basis as supply-side technologies. Perhaps the biggest difference between Least-Cost planning and conventional energy planning approaches is that Least-Cost planning requires extensive end-use data in order to determine how much energy conservation would result if certain energy conservation measures were used. Least-Cost planning tends to place greater emphasis on economic analysis than supply-side feasibility studies. Perhaps this is why Least-Cost planning often encounters resistance from utility managers who tend to be 1359/814/64 engineering-oriented and are uncomfortable with some of the uncertainties inherent in forecasting end-uses. There seems to be growing awareness that Least-Cost planning may benefit the State as well as many of Alaska's utilities. However, this will require more extensive end-use data for making energy forecasts then what has been typical in the past. It may also require some changes to the planning process as well as devising strategies that result in greater penetration of demand-side technologies with consumers. 1359/814/65 Some questions related to energy planning are given below. a Would it be appropriate for the State to actively support Least-Cost planning? If so, who should be responsible for developing Least-Cost plans; the utilities, or state agencies, or both? If Least-Cost planning is to be done by utilities, should it be on a voluntary basis or required by APUC? If APUC is to require Least-Cost planning, should its authority be limited to approval of a utility plan or should it be able to mandate certain alternatives? If State agencies, particularly the Alaska Power Authority, are to adopt Least-Cost planning concepts, what changes, if any, are needed to the present planning process? The State, particularly the Alaska Power Authority, has assumed significant responsibility for energy planning. Would it be more appropriate for the utilities to assume all of this responsibility? Or are some utilities too small to have planning capabilities and may have to depend on the State if acceptable plans can be expected? What role should the APUC have in Alaska Power Authority's planning pro- cess? Data is an essential element of planning. A frequent complaint in Alaska is that the data base is too weak to result in reliable fore- casts. What should be done to improve the data base and what role should a State play in the collection, assimilation and distribution of data 1359/814/66 TABLE 1 Alaska Power Authority Project Approval Process Sequence of Events March 20, 1984 All significant power projects that are undertaken by the Alaska Power Authority will follow the sequence of events listed below unless modified by Board on a project specific basis. Some events may be concurrent. Approved By Step No. Description Staff Board OM8 Leg Ne Annual Plan for -Reconnaissance Studies xX as Appropriation Request for Reconnaissance Studies x x x a5 Award Contract for Reconnaissance Study Xx 4. Authorization to submit Reconnaissance Study to OMB Xx 5. Approval of Reconnaissance Study x* 6. Annual Plan for Feasibility Studies Xx 7. Appropriation Request for Feasibility Study Xx Xx x 8. Award Contract for Feasibility Study Xx 9 Approve conditional Power Sales Agreements Xx 10. Authorization to submit feasibility study, and preliminary plan of finance to 0M8 and Legislature x Ps Recommend Project Approval or Dis- approval to Governor and Legislature . x* 125 Authorization of Project and Construction Cost x* 135 Approval to submit license application to FERC X 14, Annual Plan for Design x 1S. Appropriation Request for Design Xx Xx x 16. Approval of Initiation of Detailed Design, updated Power Sales Agreements, : and Updated Plan of Finance x We Award Contract for Detailed Design x 18. Annual Plan for Construction Xx 4 19% Approval of Final Plan of Finance and Power Sales Agreements x 20. Appropriation for Construction Xx x x 21. Approval of Start of Project Construction Xx 22 Award Construction Contracts x * Statutory requirements. | LZ ef (( -e4 Approved Date Chairman Note: OMB's review is required for new projects that are larger than 1.5 MW for generation projects or cost more than $3,000,000 for transmission Projects. @ 412Q/Q1A/K7 Q. MUNICIPAL GRANTS Department of Administration Department of Community and Regional Affairs PURPOSE: Municipalities receive grants from the State in order to help finance the development of capital improvement projects (such as transportation facili- ties, water and sewer systems, electrical systems, and community buildings) that will provide local benefits. This discussion focuses on municipal grants for rural electrification systems. ELIGIBILITY AND CONDITIONS: The municipal grant program,was established under As 37.05. 315 for incor- porated communities and AS 37.05.317 for unincorporated communities. Incorporated communities must agree to spend the grant in accordance with the appropriation, make the facility available to the public, and agree to pay all operation and maintenance costs. A grant to an unincorporated municipality can be received by a incorporated entity, preferably a nonprofit organization, if it agrees to administer the funds in accordance with the appropriation. If there are no eligible incorporated entities in the community, the grant can be administered by the State. PROGRAM HISTORY AND CURRENT STATUS: The statute for grants to incorporated municipalities became effective in 1980 and was amended in 1982. These grants are administered by the Depart- ment of Administration (DoA). Since 1980, $1,750 million has been appro- priated to this program. About $19.4 million has been appropriated for rural electrification and waste heat projects (see Table I). The statute for grants to unincorporated municipalities became effective in 1982. These grants are administered by the Department of Community and Regional Affairs (DCRA). Grants for electrification systems (including some grants that were made previous to the enactment of the statute) have totaled about $8.6 million (see Table I). 1359/814/68 Table I Rural Electrification Grants ($000) Fiscal Year DoA DCRA T981 1,603.4 215.0 1982 4,329.4 5,326.6 1983 4,650.0 830.8 1984 2,934.5 863.5 1985 4,573.0 1,151.8 1986 1,001.4 120.0 1987 262.6 61.2 1988 46.0 0.0 19,400.3 5,568.9 DISCUSSION AND ANALYSIS: Since 1980, municipal grants have provided a significant source of funding for the electrification of many rural communities. However, many of the utilities in these communities do not themselves have the technical experi- ence that is needed to properly oversee the development of an electrical system. It appears that some firms may have, intentionally or unintention- ally, taken advantage of this situation. As discussed in the report on Power Cost Equalization, many of the electrification systems that have been installed have been too large for the community and unnecessarily expensive to install. As a result, many of these systems have been inefficient and costly to operate. In addition, some systems have also been poorly built and have had safety problems. The oversight authority for the two agencies that administer the grants (DoA and DCRA) is essentially limited to seeing that the money is spent in accordance with the appropriation. The agencies do not have the authority or experience to determine if an electrification system is either cost-ef- fective or in compliance with safety codes. Suggestions have been made that municipal grants for electrification should be appropriated to the Alaska Power Authority (APA), rather than DoA or DCRA, and that APA be allowed to have technical oversight of the electric generation and transmission/distribution systems that are to be developed. The purpose of having APA oversight is to assure that the system is cost- effective, complies with safety codes and provides better opportunity to consider alternatives. APA oversight may not require an amendment to the statutes if it, rather than DoA or DCRA, were to receive appropriations for electrification grants. Although technical oversight of electrification grants could result in more efficient and safer systems, there may be some resistance to the idea. 1359/814/69 Some legislators tend to believe that administrative oversight often results in delays and unnecessary expenses. Also, they would rather trust the judgement of local people rather than an agency from a distant part of the state. In addition, some contractors have expressed the opinion that APA involvement tends to take business away from the private sector. * he ¢ 1359/814/70 7. ACKNOWLEDGEMENTS The members of the Energy Policy Task Force appreciate the assistance and testimony received from various State agencies, other organizations and individuals. These include: Alaska Power Authority Alaska Public Utilities Commission Department of Community and Regional Affairs Division of Policy, Office of the Governor Department of Commerce and Economic Development Department of Health and Social Services Department of Administration Senate Advisory Council House Research Agency University of Alaska, Fairbanks Special acknowledgement is due the Alaska Rural Electric Cooperative Association, Inc. for providing the staff services of Ken Johnson to the Task Force at no cost. The primary support for the Task Force's work was provided by the Alaska Legislature through an appropriation of $200,000 to the Alaska Power Authority. 1359/814/71 APPENDIX A MEMBERS OF THE ENERGY POLICY TASK FORCE Appointed Members: Richard Barnes, 3000 Spenard Road, Anchorage 99503 Neil Davis (Chair), 375 Miller Hill Road, Fairbanks 99709 Nancy Lee Evans, 18221 Spain Drive, Anchorage 99516 Rocky Gutierrez, P.0. Box 522, Sitka 99835 Loyd Hodson, 4831 Eagle Street, Anchorage 99503 Phil Kaluza, P.0. Box 843, Nome 99762 Mike Kelly, P.0. Box 1249, Fairbanks 99707 Bob Martin, Sealaska Plaza, Juneau 99802 Joyce Murphy, 12531 Seward Highway, Anchorage 99515 Clarissa Quinlan, 11221 Olive Lane, Anchorage 99515 Richard Seifert, 1196 Violet Drive, Fairbanks 99712 Joe Usibelli, 1012 Kellum Street, Fairbanks 99701 Jeff Weltzin, 201 First Avenue, Fairbanks 99701 Ex-Officio Members: Senator Jack Coghill Senator Jan Faiks Representative Kay Brown Representative Sam Cotton Representative Lyman Hoffman Carolyn Guess, Commissioner, Alaska Public Utilities Commission David Hoffman, Commissioner, Dept. of Reg. and Comm. Affairs Robert LeResche, PhD, Executive Director, Alaska Power Authority Mary Halloran, Associated Director, Division of Policy Staff Steve Baden, Chief, Conservation Programs, Department of Community and Regional Affairs Ken Johnson, Information Director, Alaska Rural Electric Cooperative Assoc., Inc. George Matz, Senior Policy Analyst, Division of Policy, Office of the Governor Susan White, Special Assistant, Alaska Power Authority James Wright, Program Coordinator, Alaska Power Authority 1359/814/72 APPENDIX B SUMMARY OF THE WORK OF THE ENERGY POLICY TASK FORCE At the first meeting of the Energy Policy Task Force on August 24, 1987, Governor Steve Cowper gave the group its charge, to recommend a suitable energy policy for Alaska in the long-term best interest of its citizens, and to examine the State's energy programs to see what changes are required to fit in with the recommended policy. The Task Force directed the efforts of its first three meetings toward establishing a set of goals and objectives statements--statements that would present a desired encompassing philosophy and serve as guidelines for specific strategies and programs. The general thrust of the overall philosophy is contained in the meaning of the old adage which might be worded, "Give a man a fish and he will eat for day; give him a fishing pole and he will eat for life.", That is, the Task Force is recommending the state government's energy programs be oriented toward providing the techni- cal knowledge and assistance Alaska's people and communities need to solve their energy problems, rather than being oriented toward the State solving the problems for them. Relevant to this recommended policy is the idea that if someone solves another person's problems he removes from that person a bit of his humanity. While well intended, many State and federal government actions of the last decade have not helped to preserve the humanity of Alaska's people, especially of those who live in rural areas. The next step in the Task Force's work was to review each of the State's 20-some energy programs. A summary of the findings of that review is contained in this report. During this process the Task Force continued efforts to obtain as much public input as possible. Members and staff participated in various meetings held by other groups and, on December 14-15, 1987, conducted a statewide teleconference hearing. Much input also was obtained from persons attending regular meetings of the Task Force. Several hundred letters soliciting input were written to local and other officials, and input was invited during several interviews with the press. The Alaska Public Radio Network was particularly helpful in publicizing the work of the Task Force. During December 1987 and January 1988 the Task Force formulated its recom- mendations and prepared this report. It contains a number of recommenda- tions, some of broad scope and others of more specific nature. Some of the recommendations are meant as helpful suggestions directed toward those charged with the conduct of specific energy programs. 1359/814/73 APPENDIX C ENERGY POLICY TASK FORCE MEETINGS AND PARTICIPATIONS IN OTHER PUBLIC FUNCTIONS The Task Force was appointed by Governor Steve Cowper in August 1987. August 24-25, 1987, First Regular Meeting in Anchorage September 9, 1987, Regular Meeting in Anchorage. September 24, 1987, Paper on Task Force given to the Arctic Science Conference in Anchorage. September 25, 1987, Regular Meeting in Anchorage. September 25, 1987, Task Force represented by member Rocky Gutierrez at Southeast Mayors' Conference in Sitka. October 7-9, 1987, Task Force chairman and staff participated in Yukon- Kuskokwim Delta Mayors' Conference at Bethel, including visit to Napaskiak. , October 15-16, 1987, Task Force chairman and staff participated in the North and Northwest Alaska Mayors' Conference at Kiana. October 22, 1987, Chairman and staff participated in Workshop on Rural Energy conducted by Representatives Adelheid Herrmann and Kay Wallis in Anchorage. October 23, 1987, Regular Meeting in Anchorage. October 26, 1987, Chairman and staff participated in House Resources Committee hearing chaired by Representative Sam Cotton in Anchorage. October 26-27, 1987, Task Force members and staff participated in the Least-Cost Energy Planning Conference held in Anchorage. November 9-10, 1987, Regular Meeting in Anchorage November 12, 1987, Task Force chairman participated in Alaska Municipal League Meeting in Anchorage. December 7, 1987, Regular Meeting in Anchorage. December 14-15, 1987, Statewide Teleconference Hearing moderated from Fairbanks (14 linked locations) with members and staff participating at Dillingham, Bethel, Kotzebue, Anchorage, Sitka and Juneau. January 8, 1988, Regular Meeting in Anchorage. January 18-19, 1988 Regular Meeting in Juneau. 1359/814/74 APPENDIX D SUMMARY OF ENERGY POLICY TASK FORCE STATEWIDE TELECONFERENCE HEARING, DECEMBER 14-15, 1987 The Energy Policy Task Force conducted a statewide teleconference hearing on December 14-15, 1987. Moderated from Fairbanks, the hearing involved teleconference sites at Anchorage, Nome, Kotzebue, Juneau, Bethel, Kodiak, Soldotna, Ketchikan, Sitka, Barrow, Dillingham, Fort Yukon, Homer, Wasilla, Ouzinkie and Cordova. During the teleconference Task Force members or staff were located at Fairbanks, Anchorage, Juneau, Sitka, Bethel, Dillingham and Kotzebue. Available at each site was a document listing 10 of the issues and which the staff had prepared to provoke discussion--this was quite useful. Twenty-four persons other than Task Force members and staff gave testimony or otherwise participated in the discussions. Some discussions were quite extended as there was not need to curtail speakers because of time con- straints. Some persons at outlying sites evidently had listened to most or all of the proceedings, as they entered into the discussions several times. In retrospect, a one-day hearing would have been sufficient, although a few people did speak on the second day who might not have, had the allocated time been shorter. SUMMARY OF TESTIMONY AND DISCUSSION December 14 John Stein, Wasilla --Urged construction of the gas pipeline proposed by Enstar--and however the Railbelt Energy Fund was spent it should spent on the railbelt area. Thomas R. Quick, Deputy Mayor of Ouzinkie--Cited the hydro development at Ouzinkie, stating that the help of APA was needed--Urged more development of small hydro and other alternative energy sources available to small communities--Cited financing as a major problem needing more attention-- suggested that the PCE program be modified to permit it to help in providing capital to projects and for feasibility studies--the need also for loan guarantees because the banks were not equipped or inclined to accept risks--Urged State continue technical assistance programs rather than subsidies-discussion ensued about need to look at giving loans to provide industry as well as communities. Mr. Quick also submitted a letter discussing these and other matters; it has been distributed to the Task Force. Among the suggestions are more involvement of the University in helping to develop small-scale appropriate energy technologies, and greater emphasis on this effort.- 1359/814/75 Scott Thompson, Private energy developer from Kodiak--The idea of loan guarantees is good, it would satisfy the needs of private industry--need that more than more technical assistance from the State--an extended discussion on solutions to financing needs between Thompson, Quick and Task Force members and staff. After the teleconference, Scott Thompson and the moderator entered a telephone conservation in which they discussed further the issue of the role of APA relative to communities and private industry and talked about ways to improve the perceptions on this issue. Mike Scott, Kotzebue, representing Utility Policies Section of Alaska Municipal League--Urged continuation of grants and loans to support con- struction of energy projects and maximizing benefits to PCE recipients. He then cited specific energy-related resolutions passed by the Municipal League: Resolution 88-12 supporting the work of the Task Force and the development of long-term energy policy; Resolution 88-13 supporting APA rural technical assistance programs, stating that they were excellent; Resolution 88-16 relating to petroleum development in the Arctic Wildlife Refuge; Resolution 88-19 relating to the transportation of plutonium in Alaska; Resolution 88-22 relating to the PCE program; relating to the PCE Program; and Resolution 88-36 urging improvement in support of the Univer- sity of Alaska's Petroleum Technology Development program. Mr. Scott cited the importance of developing locally available alternative energy resourc- es, of technical assistance programs, and of the PCE program. In response to the question on implementation of residential construction thermal standards, he said walk carefully, he was concerned over the problem of air pollution in tightly built houses. Later in the hearing he discussed the history of the PCE program, stating that the idea had been to essentially make PCE part of the Energy Program for Alaska (also Weatherization) as a tradeoff for money put into the Four-Dam Pool--mentioned the concept of level funding for PCE. Bob Grove, Fairbanks (SIH Executive Director, a non-profit organization involved in the Weatherization program)--He said he thought that the State should be move involved in weatherization, that it should fund the program more heavily, especially when oi] overcharge funds are gone--stated that many of the recipients were elderly, of low income or otherwise unable to do the work themselves--if the State does not wish to provide weatheriza- tion subsidy funds itself then it needs to find some alternative--suggested market forces in themselves are not sufficient to cause people to weatherize themselves--suggested that the program is a useful means of wealth distribution. Later in the hearing Mr. Grove again discussed means of financing programs, suggesting that the Railbelt Energy Fund might be used to fund the PCE and Weatherization programs--also said that weatherization efforts stimulate the local economy, that the money stays in the community. Todd Hoener, Fairbanks (Tanana Chiefs and SIH)--Stated agreement with previous remarks by Bob Grove and said that energy conservation is very 1359/814/76 important--said that the results of weatherization efforts can be seen in the improvement of attitudes of recipients. Betty Breck, Palmer--Expressed major concern over the consumption of fossil fuels in Alaska because of the greenhouse effect--gave an extended discus- sion of the overall problem and cited the Matanuska-Susitna Borough's Resolution 87-001 dealing with this issue. Bart Johnson, Dillingham (Bristol Bay Building Authority)--Questioned if the Bristol Bay area was properly categorized in the codes of thermal standards, noting that the number of heating degree-days did not seem to justify the designation. Bob Brean (DCRA) responded saying that factors such as humidity, wind and cost of construction enter into the area categorization--Mr. Johnson described the board spectrum of activities the Bristol Bay housing authority is involved in: various aspects of community development--he noted that while various regional schools were currently in the business of selling electrical power, they wished to get out of it. Pat Ivey, Fairbanks (University of Alaska Statewide Assembly)--Stated that the University faculty wanted to be involved in energy programs and wanted to help in any way possible--She described how the University's electronic communication system could be used for communicating and offered its use to the Task Force. Doug Bechtel, Cordova, (Cordova Electric Cooperative, Inc.)--Spoke to the importance of PCE program, noting that it is a well managed program and that we have not seen the cost go up because of abuses by recipients--Noted lack of incentives in program to encourage cost reductions and also stated that the program discourages use of small-scale hydro or other locally available alternatives to diesel fuel--noted that APA staff is of good quality but that State policy has not given the right encouragements--APA tends to throw in massive funds to small projects; it loses sight of small solutions--it should let communities take a more active role--He cited the LIHEAP program, a saying that the 3-month income determination allows for abuses which do occur because of the seasonal nature of fishing and other work in Alaska--people with high annual incomes can apply and receive monies--suggests this be changed--Noted that State energy investments in one community can upset the normal competition between communities by giving certain ones advantages--Suggested that the State should build inter-community transmission systems. Phillip Guy, Kwethluk (Chairman of Kwethluk, Inc., Speaking from Bethel)- Spoke in favor of continuing State funding of the PCE program; it has helped reduce energy costs--Currently lack of commercial fishing income in his area has caused problems, making it difficult for some people to pay utility bills--Urged establishment of a regular annual review process for the PCE program. 1359/814/77 Frank Nicori, Kwethluk (Speaking from Bethel)--Cited Kwethluk Joint Resolu- tion 87-05, urging the Energy Policy Task Force to suggest improvements to the PCE program that do not reduce or eliminate it. Questioned the need for duplicate reporting to APUC and to REA in Washington, D.C.--Brent Petrie spoke to this issue. December 15 John Sullivan, Kodiak (Involved in Alaska Home Craftsman Program)--spoke to the need for energy conservation stating that the technology is available and industry is involved--Urged use of incentives, but that it is necessary in ensure proper construction techniques be allowed--has been working to encourage the Legislature to provide subsidies that might involve loans or grants--Suggested that once good housing is available on the market that the concept will get public acceptance. Dave Bowker, Kodiak (Nushigak Electric)--Urged continuation of technical programs aimed at increasing energy efficiency in rural areas--Recommended consolidating energy programs into one agency and urged that this agency be manned with trained electrical engineers--was critical of some APA work that had been done by civil engineers--A discussion involving several people ensued, the topic centering mostly around levels of efficiency in the use of diesel fuel--Mr. Bowker then suggested in response to a question on PCE incentives that perhaps the program should require some reasonable floor on fuel efficiency that recipients would have to meet. He then suggested that the 95% PCE share be lowered slowly as a means of promoting efficiency.--Noted that in his area no homes at all are being heated by electricity--recommended that APUC not allow payments to utilities where home heating is used--stated no evidence that PCE has caused wasteful use of electricity--led to discussion by several persons expressing the view that PCE does interfere with the development of alternative resources. Lyle Larsen, City Manager of Dillingham--Stated that Dillingham's City Council had passed a resolution in favor of a legislative grant through APA for continuing work on the peat resources in the area--also spoke about the advantages of the waste heat facility and urged continuing state support for such facilities. John Quincy, Barrow (North Slope Borough Public Facilities)--Spoke in support of the PCE program, stating that it has been a great help of them. Richard Bussman, Wasilla: (Energy Conservation Instructor)--Spoke to various items on the issues document: urged consolidation of energy programs, suggesting into DCRA--Strongly believes in the idea of self- financing of energy programs--Stressed value of energy conservation and efficiency activities, including the Home Craftsman Program--Urged heavy reliance on industry, but without subsidies--Stated thermal standards should be implemented. 1359/814/78 Nels Anderson, Former Legislator from Dillingham--Spoke to the items on the issues document: increase technical assistance to rural areas--there is need for better public understanding of the technical assistance programs-- Urged consolidation of energy programs; give APA the authority and keep prodding and poking it to keep it going the right directions-approved from idea of self-financing of energy programs (on statewide basis, not local)-- there may be merit in the idea of having the APA changed to an Alaska Energy Authority, this really being the original intent some years back, but have not progressed as far as expected this past decade--Stressed need for technical assistance, depending on private industry as much as possible; may need to supplement with low-interest loans--with regard to the Railbelt Energy Fund, look at and follow original legislative intent-- with regard to PCE, look at how program can be improved; if the program is decreased it can be the straw that breaks the back--it was an implied contract with local areas that also included the intent to proceed with the development of locally available energy resources, but have not done a good job of that--expressed support of the implementation of residential and other thermal construction standards. A discussion ensued on the desirability of wealth distribution on a per capita basis, Mr. Anderson stating that this may not be the best, that it may be better to put relatively more into the lightly populated areas to promote their development. Frank Sheldon (Location ?)--Spoke in support of PCE program, stating that APA has been generally helpful and suggested if an administrative change is made that APA would be the best location for the program. In late morning there was a general discussion, lasting one-half hour, of the issue of proper relationship between APA and private industry with about six persons participating. Walter Brown, Soldotna--Spoke to the advantages of having State agency assistance to private industry and inventors, mentioned some ideas he had on specific ways of increasing the effective of automobile engines and solicited aid on that. The hearing formally terminated in early afternoon. This summary was complied by the chairman of the Task Force using notes taken during the hearing. He apologized for any error in his interpretation of the remarks made by persons participating. xe Intending to testify orally but unable to do so, Conrad Jr. submitted a letter a the end of the hearing. It follows: 1359/814/79 Rural Alaska . ie Community Action Program: Ine. To: Energy Policy Task Force From: Conrad Zipperian, RurAL CAP Energy Department Director Re: Remarks prepared for testimony on December 35, 1967. Date: December 16, 1987. (Note: The audio conference was aborted befores§--wag able to be present this testimony. } eA = I shall limit most of — to rural SSP rae 19: - fe First, though it may be rapamekog, the obvious; : tws: facts: hee: 3 The The majority of people in rural Alaska have - Eetle. cash income and are oo eteeaetcsn maintain a difftoewle- balance between 4 r ; and a cash — They need both in S$ survives. Seg 2. Petroleum products are the essential fuels for deli energy services in rural Alaska. Though altermeti: technologies may semeday have a role, currestdy;. immediate future, ruzel Alaska will move aieet, make electricity, gathex_s™ make heat: antkcoee. with petroleum products — a to rural Given these two facts. lets Alaska is 35 energy problem i al, aime rs a ais plagued with! ’ ; Seo - i for the more of € improvements. t! Actions 1. Te iow ose lack of cask C di ; crete i ; mpard to their health an@ ty ; ree : £5 PER ST Administration + P.O. Box 200G0M; Anciibeage. Alaska 99520 + (907) 279-2511 2. To help overcome market failures that inhibit homeowners, local governments, utilities, and businesses from investing in cost-effective efficiency improvement projects. No State money should be spent to deal with energy concerns in rural Alaska that are not consistent with both of these goals. Given these broad recommendations the following specific actions should be considered: 1. Establish a long range plan for the Power Cost Equalization program. This plan should include changing the program to a formula-based, fixed payment and a scheduled five year stabilization in funding at a level which is politically acceptable and economically sustainable. This program should become a secure and established part of the State's long term support for rural Alaska. PCE is a critical assistance program. However, it currently is fraught with administrative complexity, inequitable distribution, and negative incentives for efficiency improvements. It needs to be there, but it also needs to be improved. Establish a rebate program to support replacement of inefficient heating systems. Rural Alaskans waste vast amounts of wood and oil by using inefficient wood stoves, drip pot burners, and old oil burners. This is currently the most effective and cost-effective conservation measure available to rural Alaskan homeowners. If the State intends to spend money to help rural Alaskans cope with the high cost of heating, this is the best bet. Promote superinsulated construction and retrofits. Do this through the following: a. Reactivate and restructure the Residential Energy Conservation Loan Program. Make this program appropriate for rural Alaska by enabling the Department of Community and Regional Affairs to coordinate loans for cost-effective conservation. b. Provide additional funding to Housing and Urban Development to ensure that all new construction in rural Alaska meets maximum cost-effective energy use standards. C. Fund the Alaska Craftsman Home program with a strong retrofit emphasis in both the educational and financial incentive components of the program. d. Encourage DCRA to fully implement the Rural Economic Development Initiative. DCRA should encourage rural communities to engage in energy conservation as a priority economic development strategy. e. Evaluate the federal D.O.E. weatherization program and implement changes which would make this program more effective in Alaska. This program has benefit as a home repair program for low income Alaskans as well as an energy conservation program. As such, it has value and should be supported. Education should be a major component and homeowners whose houses have good conservation potential should be encouraged to get Residential Energy Conservation loans for measures which have short paybacks. A restructured PCE program will help facilitate efficiency. However, to facilitate additional progress toward efficient use of electricity the following should be done: a. Direct the APA to make necessary steps to allow the Power Project Loan fund to be used for conservation projects in addition to waste heat recovery. b. Provide rebates to rural homeowners who purchase the most energy efficient freezers and refrigerators. Finally, some general comments. 1. The Lighting and Thermal Standards should be implemented as soon as possible. These standards will help reduce the long term operating costs of houses built in the state. Short term relief for the building industry should not supercede the long term savings to consumers. The future of funding for the Low Income Home Energy Assistance Program may be in doubt. However, as long as the program is available and to the extent possible, homeowners should be given the option of choosing to invest the LIHEAP payment in conservation rather than having it apply to their heating bill. The "fish vs fishing pole" concept which has been discussed by the task force has value IF it is recognized that the primary problem is not so much that rural people do not know how to be more energy efficient but rather that they cannot afford to be because they lack sufficient capital. Thank you for this opportunity to submit comments to the task force. Yours is an important undertaking and I am hopeful that you will be able to provide specific, concrete, recommendations to the governor and legislature. Sincerely, Conrad Zipperian APPENDIX E AN ENERGY CONSERVATION INITIATIVE FOR RURAL ALASKA Prepared For: The Energy Policy Task Force By: Nancy Lee-Evans January 5, 1988 1775/827/83 INTRODUCTION The high cost of energy has been an unresolved policy and program issue for the State of Alaska for ten years. Fragmented efforts have been made to address this issue over the years with limited success. Most notable of these are weatherization and power cost equalization. The Energy Policy Task Force has expressed interest in a more comprehensive approach to rural energy problems. The following is an attempt to formulate such a proposal. This paper is meant as a working document, to be critically reviewed and revised, as the success of this endeavor requires the broadest audience and support. CRITERIA In developing this program, the same criteria has been used as has been put forth so often to support continuation of power cost equalization as a program. It is intended to: significantly reduce energy costs for rural Alaska , continue to stabilize bush utilities. In addition, it addresses the nearly universally agreed upon need to implement energy conservation in rural Alaska by overcoming several barriers that have hindered program delivery there. ° poor economies of scale in isolated areas bd lack of information, expertise and capital for conservation ° potential for conservation to undermine the efficiency or solvency of bush utilities . lack of attention of village leaders on the capital drain represented by energy expenditures. PROGRAM DESCRIPTION The program would focus on whole village conversions to higher energy efficiency. As sweeping as this sounds, it would simply expand existing, though scattered State efforts and focus them for a period of three years on a single village. This would by no means exhaust the performance capability of a given program, i.e., weatherization, which could continue to serve other areas. Three to four villages can be targeted at a time, perhaps with staggered start up. The three-year window provides a span of time in which incentives could operate and accommodate the seasonal and annual flux of income, product, lifestyle, etc. Program elements are as follows: Space Heating: ° HUD Housing - designed to Alaska Craftsman standards, regional housing authorities would focus on the target village, if they have 1775/827/84 not too recently provided houses there. If so, move on to Super Weatherization. The achievement of Alaska Craftsman standards depends upon supplementing the federal per house allotment with additional state and federal funds. An alternate route would entail using a Canadian system for constructing federally supported housing in northern Ontario and the Northwest Territories. Structural components are site-built on simple templates by local labor. Very attractive 1200-1500 sq ft. houses are built in this manner for the equivalent of $43,000 US dollars. Super Weatherization - add $1,500 to the current federal weatherization budget per household to return the program to 1984 Program standards. Negotiate the LIHEAP program to allocate its 10% conservation option to high efficiency heaters in these houses. If LIHEAP funding cuts prevent this option, increase weatherization funding from the State to $2,500 to cover the cost of installation of high efficiency heaters. Estimated average energy savings 35% - 50%. ; Owner-Paid Super Weatherization for Non Low-Income Homes and Commercial Buildings - The economies of scale achievable by bulk purchase of materials and utilizing labor and expertise already geared up to work in the village makes offering weatherization to non-qualifying villagers attractive. A long-term zero-interest loan would provide capital to finance contractor installed conservation measures. Local labor can be used to supplement the contractor in installation with obvious advantages to the community. Repayment could be made through the local utility or fuel vendor with a modest handling fee. Permanent Fund Dividends can serve as collateral. High Efficiency Heater Rebates - Offer $400 rebates on specific brands or specifications of high efficiency heaters. Super Insulated Retrofits of Public Buildings - Supplement or augment the Institutional Conservation Program to reinstate the ability of local governments to use this program to pay for conservation in community owned buildings. High operating costs of community facilities is a major drain on village resources. Super Ineatavice is stressed as it can have a dramatic impact on this problem. Multivillage or Multiregion Bulk Fuel Purchasing - Bulk fuel distributors to western Alaska have a marketing monopoly that apparently allows a mark up on heating and diesel fuel from 40% - over 100%. Villages are disorganized relative to this situation and have too small a volume alone to have much effect on suppliers. However, a large number of villages buying cooperatively could leverage more favorable pricing and significant savings for 1775/827/85 villages. The state can continue to assist this process by providing infrastructure tools and guidance, such as the bulk buying coop manual. Electricity s Residential and Commercial Lighting Retrofits - As the single greatest method of reducing PCE costs, undertake a complete state financed high-efficiency lighting conservation throughout the village. S Appliance rebates - offer $150 rebates for replacement of existing freezers and refrigerators with high-efficiency models. Offer the same for replacement of electric ranges with propanet stoves. Offer $40-$75 to replace some existing models of TVs with efficient models. : Electricity Utility. Overhaul - In order to secure the continued stability of the village electric utility, it will be necessary to determine the new load configuration of the village and downsize generators as necessary. This is a good time to outfit for waste heat recovery and address insufficiencies in distribution, services entries or the powerhouse. What About Everyone Else? The strength of the total village approach is that the impact of conservation programs is consolidated and the impact on fuel purchase, village operating costs and utility requirements can be handled in a timely, planned for manner. It is also very thorough. The weakness of this approach is that it is very slow in addressing the rural energy problem as a whole. Most of the program elements can continue on a fragmented basis as they are now, with some inherent liabilities. In space heating the liabilities are more limited in that HUD housing, weatherization and the loan financed weatherization can continue independently to other villages not in the “total village" program. Superinsulated retrofits of community buildings can be financed through the state capitol budget. In electricity, there will be some point at which the random utilization of appliance rebates and lighting conversion will made a serious impact on the local utility. The utility may choose to promote the use of the rebates and apply for a loan to downsize its generators and a grant for the full village contractor installed lighting retrofit. This way individual homeowners need not wait indefinitely for the "total village" option, while providing the utility with a way to manage destabilization should it occur. 1775/827/86 Program Administration ° Slow Start-up - This program is ambitious program. It is critical that start-up of this program be well planned and cautiously implemented to prevent the kind of overextension that undermined the energy audit program. It should begin as a pilot program in two villages to see if results anticipated can be achieved. A program evaluation must be designed in from the beginning and will serve as the basis of adjustments. Contractors will qualify for the program on the basis of expertise, rural experience, financial management, and quality of service. Each must then complete a training program in specific conservation techniques and pertinent state contracting procedures. The contractor is then free to market services to a village or regional entity for participation in the program. The project will be inspected for quality of completion and adherence to specifications by the administering state agency. This procedure should provide quality control for the consumer while minimizing government control over the contractor. Villages must qualify by demonstrating an ability to gain cooperation of the village council(s), utility, housing authority, qualified contractor, school district, etc. The village must also demonstrate need and capability in financial and project management. Reg tonal Housing Authorities may wish to become involved with offering loan nanced super weatherization to its mortgagors living in villages not involved in the “total village" project or other weatherization villages. They could lien repayment of the loan on the existing mortgage. Promotion is a key element of this program. The administering state agency would undertake an aggressive energy education effort coupled with a commitment to foster the infrastructure that will support the program. For instance, it can not only encourage Alaska commercial companies to stock energy efficient appliances, it can supply the names and addresses of suppliers and facilitate bulk buys with other large scale distributors like Spenard Builders. Similarly, the state may be able to facilitate the formation of public/private partnerships and shared savings agreements between the private sector and public entities. Financing of the program can be accomplished through the sale of bonds or use of the revolving energy development fund under discussion by the Task Force, or both. 1775/827/87 Ay ANALYSIS NORTH NY 3511 Tanglewood, #A * Anchorage, AK 99517 (907) 243-8757 RURAL ENERGY-EFFICIENCY POTENTIAL Electrical End-Use Measures Lighting Retrofit: The immediate replacement of all incandescent lighting fixtures with fixtures utilizing compact fluorescent lamps. The immediate replacement of all standard fluorescent lamps and ballasts with high-efficiency units. Freezer Retrofit: The immediate replacement of standard freezers with the most efficient currently available chest model (500 kWh/year). Efficient Refrigerators: The replacement of refrigerators as they naturally are retired over the next 20 years with the most efficient models available. Water Heater Conversions: The immediate replacement of all possible electric water heaters with oil-fired units. Range Conversions: The immediate replacement of all possible electric ranges with propane units. Efficient TVs: The replacement of TVs as they are naturally retired over the next 20 years with the most efficient models available. 1359/814/88 68 /p18/6SET Lighting Retrofit Freezer Retrofit Effic. Refrigerators Water Htr Conversion Range Conversion Efficlent TVs Analysis North, 1988 | Total Benefits - $102 mil. Total Coste = $28) mil. Net Benefits = vi mil. | | ' | 20 40 60 80 PRESENT VALUE ($ million) COSTS MMB BENEFITS he ANALYSIS NORTH NY 3511 Tanglewood. #4 « Anchorage, AK 99517 (907) 243-878 RURAL ENERGY-EFFICIENCY POTENTIAL Space Heating Measures + : This measure represents the benefits and costs of upgrading the next 20 years of rural residential home construction from the Alaska Thermal Standard level to the life-cycle cost optimum level of construction, i.e. the Alaskan Craftsman Home level. High Efficiency Heaters: This measure represents the immediate retrofit of all heating systems with seasonal efficiencies less than 70% with high-efficiency heating systems (80%+). Attic Insulation: The immediate upgrade of all attics with R-30 or less insulation to the R-50 level. Caulk and Seal: The immediate caulking and sealing of all rural homes that have not been weatherized within the last six years. Window Retrofits: The immediate retrofit of all single and double pane windows with either interior storm windows, high- performance glass (R-5.0), or a complete vinyl window with R-5.0 glass. Reor Retrofits: The immediate replacement of all uninsulated wood doors with R-7 metal insulated doors. a te 1359/814/90 TO/VLB/OSEL RURAL ENERGY-EFFICIENCY POTENTIAL Prelim. Data - Residential Space Heating Alaska Craftsman + New Construction High Effic. Heaters | Total Benefits + $300 mil Total Costs = $100 mil. Net Benefit = $200 mil. | Attic Insulation Caulk and Seal Window Retrofits Door Retrofits 40 80 PRESENT VALUE ($ million) Costs MMB BENEFITS Analysis North, January 1988 = 3 = OS APPENDIX F Alaska Energy Policy Task Force Minority Report By Or. Joyce Murphy Nancy Lee Evans This report is prepared as a clarification of our opinions and votes on certain issues which the Task Force examined. We feel the following items were not addressed completely nor with the outcome we would have preferred. Te Intergration or consolidation of energy programs: We believe there would be economic and consumer benefits to a consolidated, organized energy system. Because of prior “history”, there are some persons who are skeptical of the Alaska Power Authority being the sole agency of energy programs and some feel that DRCA is not staffed or equipped to handle large energy projects, We feel that the best metgod of integration would be a separate Department of Energy with the Alaska Energy Authority as ‘an element of this department. This Department of Energy would handle all energy projects, programs and loans (see attachments). It could be staffed by existjng Alaska Power Authority and DRCA personnel. = om % Self-financing of energy programs: s. We recommend self-financing as a proper ‘tool for the "Department of Energy” to maintain some stability and continuity for the state energy programs. Self-financing means that if the State does provide financing for a power project, then; a. Energy projects should be financed with debt, such as revenue bonds or market rate loans, rather then equity contributions (for State owned projects) or grants (for State financed projects). b. Loan receipts from previous energy project loans can be pledged as security for revenue bonds in order to obtain more favorable interest rates. c. But, the Legislature must first appropriate the loan receipts before they can be used as security for revenue bonds or any other purpose. 1775/827/92 3. Power Cost Equalization: The Task Force made a recommendation on PCE which we supported, but we firmly believe it was not strong enough. We firmly believe that direct subsidies like PCE in its current format undermine rural Alaska's efforts toward self-determination and independence. PCE must continue for the next 2-3 years at it's present level while changes are made in the program now to increase conservation efforts. We believe the amount subsidized must be decreased to a type of "lifeline" rate. Strong incentives must be given to the rural communities for energy conservation and enforcement of thermal standards of housing. 4. Least Cost Planning: We strongly urge the state to adopt a mandatory program of least cost planning in all state financed and built projects. The state should also strongly urge all other entities involved in energy projects to use least cost planning. ; 5. Alaska Power Authority or Alaska Energy Authority: If the Alaska Power Authority is retained as the major energy organization for the state, then we feel there must be internal changes to improve the accountability and control of the Alaska Power Authority. We believe the change of name to Alaska Energy Authority is indicated to convey the intent of dealing with all forms of energy. a. There needs to be more continuity and accountability for board members. They should not be subject to political terms or political "whims". b. There should be an external advisory council which meets twice yearly to review and audit the energy projects and programs of the Alaska Energy Authority as well as review the state energy policy and determine if the energy policy needs revision or additions. Membership should be 50% Alaskan and 50% National and International leaders. 1775/827/93 DEPARTMENT OF ENERGY Energy Finance energy revolving loan funds (consolidated); facilitating financing/ownership agreements; and 2 public/private partnerships. Energy Information S energy information gathering, analyzing, cataloguing, and dissemination. Planning overall department program planning community and regional energy management emergency preparedness statewide energy plan and forecasts evaluate energy economics, reliability and cost of energy technologies. ooo 0 Oo Conservation weatherization perform energy outreach activities adopt thermal and lighting standards appliance efficiency/rebates encourage investment by utilities in commercial and residential load management develop consumer incentive and information programs for al] sectors develop local government assistance programs ooooe? Technology Assistance and Transfer - determine target energy technologies fhe research agenda to be implemented by the University of aska a develop basic information about the cost of energy technologies, their environmental effects and their development status (cost evaluation may be assigned to planning) accelerate and promote maximum use of technologically feasible and cost effective measures © alaska appropriate energy resources and _ technologies, particularly renewable energy and conservation 1775/827/94 demonstrate these resources and technologies in specific end- use applications accelerate the transition from demonstration to widespread commercial use by removal of financial and technical barriers y assist Alaska businesses in marketing their energy projects to other countries provide technical assistance to public and private entities in installation and management of energy technologies Mi recommend policy changes ° Alaska Power Authority within the Department of Energy as it is now part of the Department of Commerce and Economic Development 2 0 & M of State owned facilities 2 bonding ability ° development of future projects as they emerge. 1775/827/95 APPENDIX G —_ Kinetic Energy Systems ES i ii EE LOE ELIE EET, NC 11221 Olive Lane / Anchorage, Alaska 99515 (907) 344-2631 FAX 907-344-0644 February 23, 1988 Mr. Neil Davis, Chairman Alaska Energy Policy Task Force Alaska Power Authority P. O. Box 190869 Anchorage, Alaska 99519-0869 Subject: Minority Report - Alaska Dear Neil: The purpose of this letter is to clarify my negative above referenced Task Force Power Authority's (APA) Technical decline in Assistance state Program funding I strongly support the need for levels electric utility systems are constructed, Energy Policy Task Force Recommendation 7 vote on the recommendation regarding the Alaska Rural Technical Assistance Program. continuation of the APA's Rural By necessity, the continued mandates that rural village operated and maintained as efficiently and cost-effectively as possible. The Rural Technical Assistance rural communities in the Program should continue to support following ways: ° provide technical and financial oversight of electrification construction projects funded by the State of Alaska to ensure proper and efficient use of Public monies. ° conduct assessments of existing village power systems to identify problem areas and prepare recommendations for correcting known deficiencies and for increasing operational efficiencies. ° coordinate and conduct powerplant operator and management personnel training programs in conjunction with other State agencies. ° assist the Division of Emergency Services in responding to rural energy related emergencies. An example is loss of a village powerplant due to fire or flood. 1139/814/96 a CONVENTIONAL AND ALTERNATIVE ENERGY SYSTEMS cee 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, fob-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 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 1988 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 reala of federal or state government, rather it should be a shared responsibility of user-owned co-ops, private industry and local gevernsgent. * 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. * State government should promote economic development by providing education, informational services, technical assistance and coordination efforts, but that it should not CHAIRMAN'S COMMENTARY 6 provide financial incentives in the form of direct subsidies or tax incentives. * 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 specific example is the Power Cost Equalization Program. 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, the program provides no incentive to reduce electrical costs--it is totally "fish- like". Changes 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 CHALRMAN'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 hart 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 41 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). The main argument they make is that these programs comprise an integral part of the tools used by the department in its efforts to promote community stability and economic development in rural areas. The chairman does not accept that argument. He sees no reason why this organization, which primarily is an outreach department which helps communities to receive services of other agencies, should have any more role in the delivery of energy programs than it should have in the delivery of health care, construction of roads and public buildings in rural communities, law enforcement or any other services 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 Loaa Program (DCED) Current Outstanding Principal: $0.3 million Resideatial 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. The Task Force could not bring itself to making a recommendation for full ¢onsolidation of programs, but it did recognize the need for integrated budgeting of all energy programs and did make a specific strategy recommendation that this be done and that the various involved agencies should operate under a collection of Memorandums of Agreement. As a body, the Task Force seemed hazy on its understanding 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. The chairman proposed to the Task Force that it recommend a consolidation created mainly by merging the Department of Community and Regional Affairs (DCRA) energy programs with those of the Alaska Power Authority (APA) to create a new mix of programs which would be administrated by a new unit to be called the Alaska Energy Authority. The new authority would operate essentially as the current authority does, but with a clearly established role in all energy matters. It would be staffed by the current personnel of APA augmented by staff moved to the new organization from DCRA, and perhaps a few other persons from other agencies. The thrust of the new energy authority would also be changed. It would take on a much greater role in the development of energy technology appropriate for use in Alaska and also strengthen its efforts toward building partnerships with private industry that could foster economic development in the State. 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. One is the lingering perception that the APA is a beast capable of running wild, not under the same constraints and control as the State's departmental agencies. 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 the Governor. Anyone who does not understand that all significant actions of the Alaska Power Authority are accomplished with the approval of the Governor of Alaska 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 a It is the chairman's personal recommendation that the corporate form of the Alaska Power Authority be retained in the new energy organization and that the primary energy programs be placed in it. A major reason for integrating programs is facilitation of a proper balance between energy supply- and use-considerations, one of the tenets of so- called "Least-Cost Planning". 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 sore cost-effective than development of additional energy resources, the State's energy policy shall be to promote energy conservation by various seans 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 auch 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. Recogmizing 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 paythe 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 bh © 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 sore 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 ol 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 os s of the money to the proposed "Alaska Energy Revolving und”, * * * RECOMMENDATION 6. The Power Cost Equalization Progras should remain at its current funding level of $21 million. However, a decrease in funding requirements is needed. Changes to the program should be implemeated which provide incentive to the utilities to reduce costs aad 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 a very specific recommendation on how to proceed, but it wisely refrained from doing so. This is a very complex issue with some aspects that need further study, despite all the efforts already made. The next logical step is formation of a working group to formulate changes to Alaska Statutes relevant to the PCE program. It is possible that such a group could prepare recommended legislation for consideration during the current legislative session. 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 grovth 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 sake 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 om 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 prograrg. 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 Programs as it is currently administered since it appears to be working well and has no adverse impact on other energy progrags. However, consideration should be given to sodifying 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 programs 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. = s s RECOMMENDATION 15. The Task Force commends and encourages programmatic efforts such as the Alaske Craftsman Hose Program and the Energy Rated Homes program which eacourage the constructiorg of energy-efficient buildings and the public's acceptaace 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 progrags. = * s 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 sonths 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. * * 2 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 loaas 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 menbers 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.