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Sustainable Rural Alaska Utilities Inherent Incentive Systems and Their Impact 2003
SUSTAINABLE RURAL ALASKA UTILITIES INHERENT INCENTIVE SYSTEMS AND THEIR IMPACT ON SUSTAINABILITY A REVIEW AND ASSESSMENT OF RECOMMENDED ACTIONS FOR DENALI COMMISSION 510 L STREET,SUITE 410 ANCHORAGE,AK 99501 PREPARED BY MORAN MANAGEMENT CONSULTING GROUP 510 L STREET,SUITE 400 ANCHORAGE,AK 99501 January 13,2003 1.IsI>aI>TABLE OF CONTENTS PROJECT OVERVIEW........ccsscssssssssssssscssssssssscsssssscssssssssesonssenssesensssonscscsenssseassossenssesenesees 4 1.1 BACKGROUND &PURPOSE .......cccccssssesssssssscesssecssesesseseessceessseeessssecessnscensssecssesevsneesesnees 4 12 STATEMENT OF OBJECTIVES -ORIGINAL ......cscccesssscescesescsecesscesesssesessssuessssssucusseaccassessesnes 4 13 STATEMENT OF OBJECTIVES =REVISED ......sccsssccssscsssscssssessecsscessacceseccsssesesessesesesseneeseeses 5 L.4 SCOPE vice eeecccsscsssssccscestesscessesseessecssecsecssesesessessseseeeseessecsucesssessessecsatessseasesecenscetessessssnenss 5 T.5)APPROACH ......scsesescesssesesssccessesessnecessnecessccescessesescsssnsssessssecsacsscssessssseseseuaveueusecessesesseseeeses 6 1.6 REPORT ORGANIZATION ....sesccesssesssesscesesssesestecssecescesssecessecesusesessessesescaesussesssscssscensecuseves 6 17 SUMMARY OF KEY FINDINGS &RECOMMENDATIONS .....ccssscsssssssesssessessssscssesessaseesoescees 7 INCENTIVE EFFECTS OF CURRENT UTILITY PROGRAMS 18 2.1 INCENTIVE EFFECTS .....cccccscsssessscescesscssecesesssesessneesscessecssescesevanssenseuacsusesssessesesssesesessacens 18 2.2 STAKEHOLDER RESPONSIBILITY .......ccccsssscssessestcsssssesscsrssesssscercnessessessscecsesscsesssesevsssenees 18 2.3,ACTION MATRIX......cscssssscsssssssccessessesscssssccasessessessessestsstesescssssssnseraveucueussssacesscsssensesecseee 18 PRICE COST EQUALIZATION (PCE)19 3.1 SUMMARY OF ISER CONCLUSION .....cccccccscscssscssssssesssssscssscssssscessssssecseecscsceserseseaccereceeees 19 3.2 SUMMARY OF ISER RECOMMENDATION .....cccccsssscccsscsssssesesesssccsssessessscssscsscesseceateaserasens 19 3.3 STAKEHOLDER RESPONSE -REGULATORS ......cccccsssssssesscsscssesscssssesesvessssssscesssssesecssenaceas 20 3.4 STAKEHOLDER RESPONSE -FUNDING AGENCIES ....cccccccssssccsssccssecccscesssecsseseseccesseeeacevens 21 3.5 |STAKEHOLDER RESPONSE -UTILITY MANAGERS.....cccssssssssssscsscsscesssssssseassasescecsneeeeens 22 3.6 ASSESSMENT &FURTHER RECOMMENDATION ....s.cccscssssscssssssessssssssscssecsecsscessecseseseracens 25 O&M SUPPORT FOR WATER &SEWER INFRASTRUCTURE 28 4.1 SUMMARY OF ISER CONCLUSION .....csccscssscsecssesscesseessessscsessescesssssscsascesesscesseseacesasenscees 28 4.2.SUMMARY OF ISER RECOMMENDATION ......cssssscssssssscsesssscssssssssssseccssesscsssescsseasersseerees 28 4.3.STAKEHOLDER RESPONSE -REGULATORS ......ccscccscsssssscsssssscsscccscsseesecescessceseccesseassnsccess 29 4.4 STAKEHOLDER RESPONSE -FUNDING AGENCIES ......cscccsssssssssssssssscscesssesssscssessecesceeeeess 30 4.5 STAKEHOLDER RESPONSE UTILITY MANAGERS.......csssssscsssssscsssssscssccsscsssesssssesseeseaeees 31 4.6 ASSESSMENT &FURTHER RECOMMENDATION ....cccccscssssscceseccecesscesssesevscesacsececseceseensees 32 MONITORING UTILITY EXPENSES &MEASURING SUSTAINABILITY...........35 5.1 SUMMARY OF ISER CONCLUSION ....cccsccssscstesscessssssesecsssessssesscssecsecscssesesesseseasensecasensacs 35 5.2.SUMMARY OF ISER RECOMMENDATION .......cccscssssessssssssesscssssscscssesssssccessssueceseseserseeeess 35 3.3.STAKEHOLDER RESPONSE -REGULATORS ....cscsscsscsssesssscscsessesctesscssessserscsccesssssssesseaeees 36 5.4 STAKEHOLDER RESPONSE -UTILITY MANAGERS.......csccssssscstessestcessssessecesvscsrssscesaseseeaes 37 3.5 ASSESSMENT &FURTHER RECOMMENDATION ......ccccsscsssesseessessecsssesecessecsecscsssssssesasenees 38 FUNDING CRITERIA 39 6.1 SUMMARY OF ISER CONCLUSION .....cccccscsssessessesscssesscseessessecsectesessacesesesssecesssasasesasaeeess 39 6.2 |SUMMARY OF ISER RECOMMENDATION ......sccsscsssessecssessessrecstccseessessseesssesecessssseseseseecees 39 6.3 STAKEHOLDER RESPONSE -FUNDING AGENCIES .......ccccscsssssssscesscesssscsssscessssssssssscensoecss 40 6.4 ASSESSMENT &FURTHER RECOMMENDATION .....cssssscsssssessessessssssessesseseecsecssesscenesesensens 4] 2 1/13/2003 TABLE OF CONTENTS (Continued) 7.DESIGNER/ENGINEER PERFORMANCE 43 71 SUMMARY OF ISER CONCLUSION ......ccscsssscecssscecsssscssececessesessecscssscescssssscssueesenscecseseasenss 43 72 SUMMARY OF ISER RECOMMENDATION ......csssccesssssssssecssscccesscessssseecesenscesececesecersssecerss 43 7.3.STAKEHOLDER RESPONSE -FUNDING AGENCIES .......csccssssssssssesssescscssccseesccesseeseecnsseseees 43 7.4 ASSESSMENT &FURTHER RECOMMENDATION ......ccscccsscsssssssssscssseseccesesscsesseseceeneceeeeasees 44 8 DESIGNER/ENGINEER''FEES 46 8.1 SUMMARY OF ISER CONCLUSION ......cssessssscsssecesseecessesecesscsesscesesssscscsssescsaseecesaceeesnacersas 46 8.2.SUMMARY OF ISER RECOMMENDATION ......scccssscsssscssescsscsesssssssssscsececeseseeesaceasenecsesenees 46 8.3 STAKEHOLDER RESPONSE -DESIGNERS/ENGINEERS .....csccscscessesccescsssccesececeeesseasceascencens 46 8.4 ASSESSMENT &FURTHER RECOMMENDATION ....cccscesssssscsssssevssececcesscseecesevenseesesseesecenee 47 9.UTILTIY DESIGN WARRANTY 49 91 SUMMARY OF ISER CONCLUSION .....ccsscscssscssssssessscsssssessecessceacesseseseceneessessesessenscescseners 49 9.2 SUMMARY OF ISER RECOMMENDATION .....cccscssssscssssssevscecscsceceseccesesececacececsesecesseeacensens 49 93 STAKEHOLDER RESPONSE -DESIGNERS/ENGINEERS .....cscccsccsscesccescsescceesessceececssecssceacens 49 9.4 ASSESSMENT &FURTHER RECOMMENDATION .......cssccesescccsscccccescccsssscesseccessuesessusecnees 50 10.DESIGN &ENGINEERING REVIEW PROCESS 51 10.1 SUMMARY OF ISER CONCLUSION .......cccccescssscccsccssecccesseseccessscesssesscecsscccssscsesecesscenseseseee 51 10.2 SUMMARY OF ISER RECOMMENDATION .......ccscccecsccocessccesscccssssccesssccsssacessasscsssaceccsasense 51 10.3.STAKEHOLDER RESPONSE -DESIGNERS/ENGINEERS ......c:ccccsssscscssscsscsscecsesecessscccecssesenes 51 10.4 ASSESSMENT &FURTHER RECOMMENDATION .....c:.ccccsscossssecssssccesssecessesessecacecssacesscsceese 52 11.APPENDIX 53 11.1 APPENDIX 1]-SUBSIDIES,INCENTIVES,STABLE O&M FUNDING ACTION MATRIX ......53 11.2.APPENDIX 2 -INTERVIEW SUMMARIES -REGULATORS ......ccscccsssscesesseceetssessssecsscccecesess 54 11.3.APPENDIX 3 -INTERVIEW SUMMARIES -FUNDING AGENCIES ........ccesccececesececcecsececeseee 56 11.4 APPENDIX 4 -INTERVIEW SUMMARIES -DESIGNERS/ENGINEERG........ccssessecesescececcceeee 63 11.5 APPENDIX 5 -INTERVIEW SUMMARIES -UTILITY MANAGERS ...ccscccccseccscccesecseccecceoeeece 64 3 1/13/2003 Project Overview 1.PROJECT OVERVIEW 1.1.BACKGROUND &PURPOSE Nearly two years ago,a coalition of various state and federal agencies,tribal organizations, cooperatives and private utilities (the "Sustainable Utilities Steering Committee”)was formed to address the issue of sustainable utilities in rural Alaska.Their goal was to "assess impediments to,and to recommend actions to achieve,reliable and sustainable utilities for all Alaskans,” while "providing economic opportunities in rural Alaska,protecting cultural integrity and promoting self-governance in Alaska's villages.” As a member of this coalition,USDA Rural Development and the Alaska Science and Technology Foundation funded a Sustainable Utilities in Rural Alaska study in cooperation with the Alaska Energy Authority,and the Denali Commission.The study,conducted by the University of Alaska's Institute of Social and Economic Research,was undertaken to explore, document,and evaluate the management,maintenance and operation of rural utilities.That study was used by the coalition as the basis of discussion in two facilitated workshops that resulted in the development of a set of guiding principles and recommendations to serve as a prerequisite to the development of a more comprehensive set of action plans.The steering committee categorized and assigned the resultant recommendations by "implementing agency.” In addition to several recommendations common to all member federal,state and "granting” agencies,six agency specific recommendations/action items were assigned to the Denali Commission.One of those assigned action items is the subject of this report. 1.2 STATEMENT OF OBJECTIVES -ORIGINAL The original objectives of this study were to: e Provide an analysis of current techniques for accountability and incentive structures affecting Alaska village utilities and imposed by various support,monitoring and regulatory agencies. 4 1/13/2003 Project Overview e Identify those incentives that would promote sustainability and those that detract from the goal. Our preliminary investigation began with a thorough review of the findings and recommendations presented in an earlier report prepared by the Institute of Social &Economic Research at the University of Anchorage.!We quickly recognized that the ISER report already included a comprehensive review and analysis of current subsidies and incentive structures affecting utilities in Rural Alaska.It also included an examination of the incentive (and disincentive)effects of current subsidies,and a proposed series of recommended actions sorted by major stakeholder group (summarized in "Action Matrix to Move Toward Sustainable Rural Alaska Utilities”).?So as not to duplicate the efforts of the earlier study,we recommended a revision to the original objectives of this study as noted below in Section 1.3 -Statement of Objectives-Revised. 1.3 -STATEMENT OF OBJECTIVES -REVISED The revised purpose of this engagement is to conduct a limited assessment of the industry response to the ISER recommended actions concerning "subsidies,incentives and stable O&M funding”presented in the "Action Matrix,”to include: e Asummary of the ISER report's key recommendations and underlying conclusions concerning "subsidies,incentives,and stable O&M funding”that affect Alaska village utilities. e Asummary and assessment of representative stakeholder group responses,to refine "next steps”for implementation of ISER recommendations. 1.4 SCOPE The scope of this report is limited to an assessment of the recommended actions,and underlying conclusions concerning "subsidies,incentives and stable O&M funding”presented in the "Action Matrix to Move toward Sustainable Rural Alaska Utilities.” 'Sustainable Utilities in Rural Alaska:Effective Management,Maintenance and Operation of Electric,Water, Sewer,Bulk Fuel,Solid Waste,Institute of Social and Economic Research,UAA,May 14,2001.(According to one of the authors,the report was never completed beyond the "review draft”stage).?Ibid,Page 173;An extract from this matrix is presented in Appendix 1 5 1/13/2003 Project Overview The predominant emphasis of subject recommendations relate to electric,water and sewer utilities.Some underlying principles,however,may also be applicable to bulk fuel and solid waste utilities,although we do not attempt to assess those relationships in this report. Solicited "stakeholder group”responses were limited to representative members from the "Regulator”,"Funding Agency”,"Designers/Engineer”and "Utility Manager”stakeholder groups.Although critical to any ultimate policy implementation,"Policy Maker”and "Community”stakeholder groups were not approached in this assessment.Specific respondents have been identified within each applicable section of the report. 1.5 APPROACH Our approach included the following key elements: e A thorough review of earlier research presented in the ISER report e Asummary the ISER report's key recommendations,and an identification of underlying conclusions concerning subsidies and incentive structures affecting Alaska village utilities e Interviews with representative members of key stakeholders groups,to collect and assess their overall response to these recommendations e Interviews with representative members of key stakeholders groups,to collect and assess their assessment of major implications to their organizations e Interviews with representative members of key stakeholders groups,to collect and assess their assessment of key impediments to implementation e Interviews with representative members of key stakeholders groups,to collect and assess their assessment of the "next steps”for implementation of recommended actions 1.6 REPORT ORGANIZATION A summary of key findings and recommendations is presented in Section 1.7.Section 2 presents an overview of the ISER report's identification of at least seven major incentive effects of current utility subsidies and assistance programs.Our report sorts the ISER recommendations, underlying conclusions and our related assessments into eight key topics.Each assessment includes applicable stakeholder group responses (general response,impact to stakeholder organization,impediments to implementation,and next steps),and our own further assessment 6 1/13/2003 Project Overview and recommendations.Each of these key topics is reviewed individually in Sections 3 through ya10,as follows:b 0°uo Section 3:Price Cost Equalization (PCE)Pab4Section4:O&M Support for Water &Sewer Infrastructure , Section 5:Monitoring Utility Expenses &Measuring Sustainability Progress d in Section 6:Funding Criteria f oof Section 7:Designing/Engineering Performance o” Section 8:Designer/Engineer Fees ? Section 9:Utility Design Warranty an oeSection10:Design &Engineering Review Process The appendix in Section 11 includes an extract from the ISER report's "Action Matrix”,infollowedbysummariesofstakeholdergroupinterviews.Jo is BM!Os £ 1.7__SUMMARY OF KEY FINDINGS &RECOMMENDATIONS 7 le |Key Issue:Price Cost Equalization (PCE)3 ISER Conclusions The current Power Cost Equalization (PCE)prograpf discourages sustainable utilities.PCE rules reward high-cost operations and discourage demdnd-side efficiency improvements,i.e.there are few rewards for efficiency improvements in utility operations or power consumption in homes and buildings. ISER Recommendations Ae Policy makers should make PCE payments fixed,based on formula or regulatory review |@ Policy makers should incorporate an approach to utility subsidies that rewards,rather hndiscourages,progress toward sustainability. e Utility managers should used fixed subsidies for intended O&M purposes e Utility managers should help draft a transition mechanism to mgve fo Suent system i> L |fixed subsidy method Further Assessment e We concur -the current PCE program does not encourage sustainable utility operations, nor does it encourage operational or power consumption efficiencies.If sustainability and q 1/13/2003 Project Overview improved operational/utilization efficiencies are deemed strategic goals for the PCE program,then fundamental conditions and requirements (the PCE "rules”)must be changed to create appropriate incentives that encourage the desired results. The "fixed subsidy”concept may encourage increased efficiencies,but negatively impact sustainability unless coupled to a requirement that first reallocates any savings to satisfy O&M deficiencies or under-funded reserves for other anticipated life cycle costs. Although the Sustainable Utilities Steering Committee has agreed to a definition of "sustainability,”specific sustainable performance criteria and related performancemeasureshavenotbeenclearlydefined.? Smaller utilities or those currently without resources adequate to manage sustainable operations,could benefit from collaborate or strategic partnerships to strengthen management,share operational resources and potentially induce savings through economies of scale. Actual "sustainable”performance must be effectively monitored and measured,yet not all PCE participants are required to maintain or report verifiable financial or operational information in a standardized format conducive to such review. Further Recommendations and Next Steps Key stakeholder groups should cooperate to clarify and/or redefinePCEprogram goalsandobjectives.Develop stakehofder group consensus around "sustainability”as one of the key principles and performance objectives of a PCE program,and present to State Legislature for consideration approval. Key stakeholder groups should cooperate to develop and define "reasonable and prudent” sustainable performance criteria and related performance measures for utilities,and tie to ongoing PCE eligibility. Regulators should assess and rate individual utility performance against sustainable performance criteria.Where applicable,develop long-term "sustainable performance improvement plans”for "deficient”utilities,and hold each accountable for meeting plan objectives and milestones.Tie ongoing PCE eligibility to each utility's commitment and demonstrated ability to meet sustainable performance criteria or prescribed improvement plan milestones.. Regulators and funding agencies should encourage "deficient”utilities to develop "management or mentoring partnerships”with other "successful”regional electric utility operators,other water &sewer operators,other electric cooperatives etc.,to optimize the >The Sustainable Utilities Steering Committee has defined a sustainable utility as "one where available financial resources,from all sources,are at least equal to the total cost of the utility.Total cost includes management, operation,cost of capital renewal and replacement (after design life has been achieved”and necessary maintenance for the facility to perform at an acceptable level of service for future generations.” 8 1/13/2003 Project Overview benefits from management and operational expertise.Where deemed necessary,tie this requirement to ongoing PCE eligibility and/or funding approval (See related recommendation in "Funding Criteria'). Policy makers and/or regulators should require,as a condition of PCE eligibility,that applicable utilities/communities be subject to higher standards of financial reporting (i.e. audited financial results in a prescribed format)to verify they meet standard or planned levels of sustainability. Regulators should revise and standardize applicable PCE financial reporting requirements to include formats that facilitate sustainable performance reporting,monitoring and measurement. Key stakeholder groups should cooperate to develop a pilot program of several targeted utilities to test the theory that a "fixed subsidy”will encourage efficiency improvement. For pilot program participants,consider holding PCE subsidy fixed (and not tied to actual cost)for a minimum of 2-3 years,and allow utilities to retain marginal cost savings that occur from efficiency improvements.Require pilot program participants to meet the same sustainable performance criteria and annual reporting requirements as all other utilities. 9 1/13/2003 Project Overview Key Issue:O&M Support for Water &Sewer Infrastructure ("Sanitation Cost Equalization”) ISER Conclusions Although existing subsidies provide large amounts of targeted support for capital construction of water &sewer infrastructure,there is little or no external support for proactive preventative maintenance of the same investment.In extreme cases,the current system can actually reward improper operations and maintenance (O&M)by funding the replacement of capital infrastructure when it fails,rather than encouraging proper maintenance and sustainable operations on the front end. ISER Recommendations e Policy makers should implement a sanitation cost equalization (SCE)program,as a counterpart to PCE,to encourage appropriate levels of O&M spending and,therefore, enhanced levels of sustainability. e Policy makers should incorporate an approach to utility subsidies that rewards,rather than discourages,progress toward sustainability. e Utility managers should used fixed subsidies for intended O&M purposes e Utility managers should help draft a transition mechanism to move from current system to fixed subsidy method Further Assessment We agree that the lack of a continuous and comprehensive O&M program will significantly impact the total cost of owning and operating a functioning utility infrastructure (i.e.additional cost due to a higher incidence of emergency repairs,reduced overall expected life-cycle of investment,etc.).However,addressing to the O&M issue may require different solutions for existing systems versus new systems. Further Recommendations and Next Steps Existing Utility Systems:Key stakeholder groups should forma task force to: e Develop and define a clear set of goals and objectives for a proposed SCE program that provides temporary and interim financial assistance to encourage sustainable performance levels of O&M.activities. 10 1/13/2003 Gn,tra fas F"Foal rdt Project Overview Assess the overall financial requirements to fund an SCE program that meets the defined goals and objectives,and determine feasibility of securing a funding source.Consider requiring a "matching”O&M spending commitment from utilities,funded by other cost savings or increased rates. Determine if the return on investment (i.e.the cost or capital savings or other tangible benefits derived from a public investment in an SCE subsidy)meets acceptable investment criteria. Develop a transition plan that ultimately phases out the subsidy and gradually transfers the total financial burden for O&M to the utility and/or rate payer,over a predetermined period of time. Tie ongoing SCE eligibility to a utility's commitment and a demonstrated ability to operate at prescribed sustainable performance levels. Tie ongoing SCE eligibility to a utility's ability to satisfy standardized financial reporting requirements and provide audited financial results. Identify responsibility for external oversight,monitoring and administration of SCE program,as well as the on-going measurement of sustainability. Submit proposal to appropriate authorities for review and consideration. New Utility Systems: For new systems,funding agencies should require utilities requesting funding to submit business plans that demonstrate a commitment to and an ability to achieve "sustainable performance criteria,”which should provide for appropriate levels of O&M (See "Funding Criteria”).This group would be ineligible for an SCE subsidy. 11 1/13/2003 Project Overview Key Issue:Monitoring Utility Expenses and Measuring Sustainability ISER Conclusions A utility's reported financial results can provide meaningful insight into its ability to operate sustainable facilities ISER Recommendation Regulators should more thoroughly monitor utility expenses to assure utility operations meet a "reasonable and prudent”standard of performance Further Assessment Existing inconsistencies in utility reporting standards (i.e.for those that are economically regulated vs.those that are not)inhibit the ability to conduct comprehensive and standardized monitoring of utility costs,as a means of measuring progress toward sustainability.In those cases where there 1s an absence of standardized reporting requirements,as well as verifiable financial data,any monitoring system will be ineffective in evaluating relative levels of sustainability from one utility to the next. Further Recommendations and Next Steps e Policy makers and regulators should require that all utilities requesting public assistance (i.e.capital grants,PCE,and other subsidies)be subject to higher standards of financial reporting to verify their operations meet a "reasonable and prudent”standard of sustainability.This may require applicable utilities,as a condition of eligibility for public funding,become economically regulated and/or be required to undergo an annual financial audit. e Regulators should revise and standardize applicable financial reporting requirements to allow monitors to identify potential gaps between "reported cost”and "true cost” ("sustainability cost gap”),and to assess the degree to which each utility provides for (from rates,subsidies,etc.)its true cost. e Regulators establish evaluation criteria and related tools to measure utility progress toward sustainability. 12 1/13/2003 Project Overview Key Issue:Funding Criteria ISER Conclusions New utility capital projects funded or subsidized with public investment should only occur in communities that demonstrate capacity to manage sustainable utilities. ISER Recommendation Funding agencies should develop funding criteria to reward long-term O&M behavior,and use criteria to reward O&M commitment and progress toward sustainability. Further Assessment Although recent evidence demonstrates that some funding agencies have begun to address this issue,(i.e.The Denali Commission,Alaska Energy Authority)typical funding criteria do not require or encourage requestors to demonstrate ability to manage and maintain sustainable utilities.Funding agencies can be the critical "gatekeeper”by applying reasonable due diligence to assure the investment of public funds is applied to utility projects where there is a commitment to sustainability and corresponding O&M practices. Further Recommendations and Next Steps e Although the Sustainable Utilities Steering Committee has agreed to a definition of "sustainability,”all major stakeholder groups should cooperate to develop specific "sustainable performance criteria”and related performance measures. e Funding agencies should cooperate to develop "funding criteria metrics”that are integrated with and supportive of "sustainable performance criteria.” e Funding agencies should require utilities requesting funding to submit business plans that demonstrate a commitment to,and an ability to achieve "sustainable performance criteria.” e Funding agencies should encourage "deficient”utilities to develop "management or mentoring partnerships”with other "successful”regional electric utility operators,other water &sewer operators,other electric cooperatives etc.,to optimize the benefits from management and operational expertise.Where deemed necessary,tie this requirement to funding eligibility. 13 1/13/2003 Project Overview Key Issue:Utility Designer/Engineer Performance ISER Conclusions There are currently few links between designer accountability and long-term performance of utility designs.Consequently,the current process does not encourage sustainable designs. ISER Recommendations Funding agencies should establish "sustainability report cards”to rank designers and engineers. Further Assessment We agree with the general consensus from respondents that the first priority should be to establish "sustainability design criteria”to which designers and engineers can be held accountable.In the absence of such criteria,it would unfair and inequitable to use the feedback system (i.e.the suggested "report card”technique)as the basis of rating and ranking designers and engineers as an input to the contract award process.Nonetheless,a feedback system could still be used to provide meaningful feedback from community users. Further Recommendations and Next Steps e Funding agencies should work with designer/engineer group to develop objective sustainable design criteria.This should be the primary measurement metric to which designers and engineers are held accountable. e Funding agencies should develop simple monitoring system to evaluate design/engineering firms'performance in meeting design criteria. e Funding agencies may consider a simple "report card”system to assist communities in providing feedback over time to the engineering and design community to let them know how their designs perform overall,which solutions work,which don't,etc. 14 1/13/2003 Project Overview Key Issue:Utility Designer/Engineer Fees ISER Conclusions Conventional design and engineering fee structures may reward maximization of initial cost and professional culture may reward complexity of design. ISER Recommendation Designers/Engineer should propose new fee structures not tied directly to system cost. Further Assessment Under the current fee convention,sustainable solutions requiring innovative designs,that also reduce capital costs and/or complexity will likely result in lower fees or payroll for private sectors designers/engineers and construction contractors.Consequently,inherent incentives do not encourage cost-effective and sustainable designs.If sustainability is the goal,we believe a more effective approach would utilize Life-Cycle Cost Analysis (LCCA)techniques to evaluate the total life-cycle costs of alternative projects to determine which provides the best value per dollar spent.By requiring alternative and/or competitive design proposals and using LCCA techniques,utility owners and funding agencies could evaluate the "fee”issue in a much broader and more meaningful perspective while encouraging innovation with competitive procurement policies. Further Recommendations and Next Steps e In the presence of sustainability design criteria (previous recommendation)utility owners and funding agencies should require multiple alternative and/or competitive design proposals for each new facility to encourage competitive and innovative design alternatives. e Utility owners and funding agencies should adopt Life-Cycle Cost Analysis (LCCA) techniques to evaluate alternative proposals to determine which results in the lowest predicted life-cycle cost. e Funding agencies and utility owners/communities should establish contract award criteria based upon LCCA to encourage designers,engineers and construction contractors to develop cost-effective and sustainable utility designs proposals. e Consider developing fee guidelines that disassociate design/engineering fee proposals from construction cost proposals. 15 1/13/2003 Project Overview Key Issue:Utility Design Warranty ISER Conclusions Again,there are currently few links between designer accountability and long-term performance of utility designs.Consequently,the current "process”does not necessarily encourage sustainable designs. ISER Recommendation Designers and engineers should develop and provide extended system warranty options. Further Assessment Accountability and responsibility for system failures would necessitate a determination of fault, i.e.is the failure related to design,component failure,construction or fabrication,inadequate or improper maintenance?Generally,only failure related to the design would be the responsibility of the designer or engineer,in which case,they should be held accountable.To that extent, perhaps a related warranty is reasonable. Further Recommendations and Next Steps e Again,utilities owners/communities and funding agencies should begin by establishing formalized sustainability design criteria,to strengthen the linkage between designer accountability and sustainable design performance. e Such design criteria should delineate performance and warranty expectations applicable to the elements of design/engineering,component parts,fabrication,as well as utility or "owner”responsibilities in terms of operation and routine/preventative maintenance. e Reasonable initial warranties should apply on an element-by-element basis,with the representative contractor or vendor held ultimately responsible for correcting the failure, although the general contractor may take primary responsibility for resolving with the utility.A requirement for extended warranties "options”,similar to those commonly available for automobiles,appliances,etc.,at an additional cost,could be established on an element-by-element basis within sustainability design criteria. 16 1/13/2003 Project Overview Key Issue:Utility Design &Engineering Review Process ISER Conclusions Professional risk aversion,on the part of designers and engineers,can also retard or discourage innovation in proposed design solutions. ISER Recommendation Designers/engineers should establish formal rapid review process for adopting innovative technology and updating cold region utility practices. Further Assessment Concur with ISER recommendation and respondent's comments.Continued technical innovation,and the ability to rapidly adopt related solutions into industry best practices,will have a potent effect on the design of systems that are easier to maintain and achieve longer lives. Further Recommendations and Next Steps e Designers/engineers should develop and implement a formalized rapid review/peer review procedure for publicly funded utility projects. e Designers/engineers,funding agencies and utility owners/communities should establish a threshold for projects (i.e.size,value)where peer review is required for final design. e Designers/engineers should establish eligibility requirements for individuals to qualify as peer reviewers. 17 1/13/2003 2.1 Incentive Effects 2.INCENTIVE EFFECTS OF CURRENT UTILITY PROGRAMS INCENTIVE EFFECTS According to the ISER study,current utility subsidies and assistance programs have at least seven major incentive effects: 2.2 They are biased toward capital-intensive water and sewer technologies. Understaffed agencies are under extreme pressure to move large amounts of money and to measure success by the number of projects completed.In this environment,it is very difficult for agencies to devote resources to the community planning and interaction required for sustainability. Current programs tend to respond to perceived "needs,”rather than rewarding sustainable performance. They provide large amounts of targeted support for capital construction,but little or no targeted support for preventive maintenance. PCE rules reward high-cost operations and encourage cost shifting and discourage cost cutting. Cost-saving innovation is discouraged. Current subsidies focus on the supply side and can penalize efficiency improvements. STAKEHOLDER RESPONSIBILITY The need to preserve expensive infrastructure is a shared responsibility that depends on shared values.Everyone needs to understand the importance of caring for utility assets so that they can be provided to all Alaskans in a timely manner and ultimately replaced when they finally do wear out.This fundamental concept of sustainability,and the responsibility to properly maintain and care for utility assets,is an underlying principle in the development of recommended actions. 2.3.ACTION MATRIX The ISER report translates and converts the identified incentive effects into a matrix of recommended actions and responsibilities by key stakeholder group.The assessment of those recommended actions is the subject of this report. 18 1/13/2003 PCE 3.PRICE COST EQUALIZATION (PCE) 3.1 SUMMARY OF ISER CONCLUSION Conclusion The current Power Cost Equalization (PCE)program discourages sustainable utilities. The PCE program is a State program designed to support and partly offset the costs of electric service delivery to approximately 80,000 residents in rural Alaska.Total PCE disbursements in FY ended 6/30/2001 were approximately $17.1 million. PCE rules reward high-cost operations and encourage the loading of general government costs on the electric utility.The current Power Cost Equalization (PCE)program sends mixed messages to utility managers,because PCE reimburses a portion of all types of costs.Those who view utility operation a source of jobs and local income have a positive incentive to incur additional costs,but little incentive to incur those costs in a way that improves services or better preserves capital infrastructure.PCE rules also discourage demand-side efficiency improvements,i.e.there are few rewards for efficiency improvements in homes and buildings. When PCE is occasionally funded at a percentage of the appropriated allocation,local residents are faced with the dilemma of funding the remaining portion of O&M costs from their own pockets or deferring the cost of utility O&M altogether.The current program also encourages utility managers and local officials to "load up”the cost of shared human resources onto the .electric utility.To the extent this occurs,funds are diverted away from O&M and toward rural employment.In addition,not all utilities recognize and/or provide for the complete or total cost of long-term sustainability (true life cycle costs)and consequently,any allocation of PCE may only temporarily defer the ultimate premature failure of improperly maintained utility infrastructure. 3.2 -SUMMARY OF ISER RECOMMENDATION Recommendation Policy makers should make PCE payments fixed,based on formula or regulatory review 19 1/13/2003 PCE Utility subsidies should be modified to reward,rather than discourage,sustainable utilities.One way to do this is to make PCE payments to each utility fixed and not tied to reported actual costs. The ISER report also suggests that subsidies,such as PCE,should be restructured and fixed for a substantial period of time rather than be tied to reported actual costs,so that the utility would "see”the real reward from their own cost cutting efforts.One way to determine the fixed subsidy amount is to use a relative simple formula based on community size,geography,climate and technology.Alternatively,the fixed subsidy amount could be determined by the RCA as part of the full economic regulation of the utility (the RCA currently reviews annual PCE filings and all certificated utilities currently have the option to be economically regulated,so tying subsides to this type of regulation is feasible with adequate staff resources).In summary,ISER concludes that a fixed PCE subsidy would encourage utilities to increase efficiency and reduce costs. Relationship to Other ISER Recommendations: e Policy makers should incorporate an approach to utility subsidies that rewards,rather than discourages;progress toward sustainability. e Utility managers should used fixed subsidies for intended O&M purposes. e Utility managers should help draft a transition mechanism to move from current system to fixed subsidy method. 3.3._STAKEHOLDER RESPONSE -REGULATORS Respondent e Regulatory Commission of Alaska (RCA)-Nan Thompson General Response e Agrees that the approach to PCE should be changed,but the "goal"needs to be clarified first before the solution is implemented.Ifa primary goal is "sustainability"then there needs to be clear consensus with key stakeholder groups first. e Ifthe goal is long-term sustainability with an eventual phase out of PCE,instead of a subsidy,PCE might be more effective as a long-term or revolving loan program with local performance covenants.If performance covenants are not achieved,then control might shift to an alternative provider. e For the foreseeable future there needs to be an "economic equalizer.” 20 1/13/2003 PCE Implications to Stakeholder Organization e Ifpayments were fixed,impact would likely be minimal,but would be dependent upon the changes to reporting &monitoring requirements. Impediments to Implementation e Believes the "Sustainability Committee”(a representation of key stakeholders)still has varying ideas about the goals of the PCE program.These goals would require clarification and consensus for a successful implementation. Next Steps e Reach stakeholder consensus on "sustainability”as one of the key goals of the PCE program e Consider taking small incremental steps that might in include a "pilot project”to test the "fixed payment”theory. e Consider "regionalization”or "mentoring”of local utility management to encourage communities to "work together”rather than trying to become completely independent. e The "community voice”is often overlooked in decisions affecting rural communities. Some attempt should be made to identify a representative spokesperson. 3.4 STAKEHOLDER RESPONSE -FUNDING AGENCIES Respondents e AIDEA -Jim McMillan e USDA Rural Development -Jill Smythe e Denali Commission -Al Ewing General Response e Unanimous agreement that the PCE formula needs to be changed from a cost based to an incentive based system to encourage long-term sustainability. e Some concern that the "fixed formula”approach may not be the only optional solution worth considering,but none suggested an alternative approach. e Any change in the formula needs to recognize the location specific variations in cost of fuel,transportation of parts/supplies,etc. 21 1/13/2003 PCE Implications to Stakeholder Organization e None of the funding agencies perceived a change in the PCE formula as having a material impact on their organizations. Impediments to Implementation e Political resistance and indecision;a change in the formula is perceived as being a major political issue,(i.e.negative repercussions from PCE recipients -political constituencies - who would experience a net decrease in their allocation under a revised program. e Any new PCE proposal may provide the State Legislature "another opportunity to tinker with the formula,”which could result in a revised formula inconsistent with sustainability objectives. Next Steps e Key stakeholder groups need to reach consensus on the overall goal of a revised PCE program,i.e.sustainability,cost equalization,etc. e Key stakeholders need to identify a PCE proposal "champion”to lead the process toward a more comprehensive evaluation of PCE change alternatives. e Develop a strategy for presenting alternative proposals to the State Legislature for consideration. 3.5 STAKEHOLDER RESPONSE -UTILITY MANAGERS Respondents e Alaska Power &Telephone -Bob Grimm e AVEC -Meera Kohler e Tanana Power -Don Eller e McGrath Light &Power -Ernie Baumgartner e Petersburg MP&L -Dennis Lewis 22 1/13/2003 PCE General Response -Summary General consensus that the PCE program needs to be changed if intended to encourage sustainability,cost reduction or efficiency.Two of the five utility managers were prepared to accept a "fixed formula,”while three were not sure if the fixed approach that the optimum solution. One respondent believed a revised PCE distribution formula should ignore "actual” location costs,and be based upon a criteria of standardized factors,i.e.nature of power generation,transmission &distribution infrastructure,fuel delivery logistics. One respondent was not convinced that a fixed PCE subsidy will be potent enough to have the desired effect of increasing rural utility efficiency. All respondents agreed they would participate in drafting a transition mechanism to a modified PCE program,although not all were convinced,without future assessment,that the "fixed method”was the optimum approach. General Response -by Utility AP&T:Absolutely would accept.The current PCE program is inherently "backwards”, and not progressive,in that is does not reward increased efficiency.Agrees that subsidies should be used for intended O&M purposes.He believes those entities that "load up costs”and those that don't include real life cycle costs balance the overall financial impact to PCE.Any form of a PCE subsidy should consider a facility's true O&M costs,not just 94oneyear's "snapshot”of reported costs. AVEC:Not sure if this is the best solution.In general,not opposed to the concept but fearful of the potential implications.Does not believe a fixed subsidy would be an incentive for AVEC to be more efficient -as AVEC is already aggressive about promoting efficient operations.Believes the resultant "incentive”will be more applicable to smaller utilities.Did not comment on the designated the use of subsidies for O&M purposes. Tanana Power:Agrees absolutely.He is an advocate of changing the PCE process from being "cost based”to "incentive based.He definitely believes the changed approach would reward progress toward sustainability.A revised PCE distribution formula should "ignore”actual costs and be based upon a variety of standardized factors including the nature of the power generation,fuel delivery,transmission &distribution infrastructure, etc.,at each location.Agrees that subsidies should be used for intended O&M purposes. Proper O&M is a necessity,regardless of the source of income.He believes all grants & subsidies should be predicated on utilities driving cost down. McGrath Light &Power:Not convinced that a fixed PCE subsidy will be potent enough to have the desired effect of increasing rural utility efficiency Regardless,fixed subsidy may be the best alternative.Organizations that are "far off the efficiency curve,won't do anything unless forced into it,because the financial support "safety net”of grants and 23 1/13/2003 PCE subsidies has always been there.For profit,and in particular,investor owned utilities (such as McGrath)will continue to strive to optimize profitability though increased efficiencies. Agrees that subsidies should be used for intended O&M purposes. Petersburg MP&L:Not sure about the fixed subsidy approach without more information. The current PCE program needs to be overhauled,as the current PCE formula does not result in a fair and equitable distribution.PCE should be limited to "remote”villages,and not available to larger utilities (i.e.AP&T)serving rural locations.Ifa fixed subsidy policy would simplify the budgeting and PCE reporting -then it might be beneficial.He believes PCE should be used as an offset to the variation in fuel costs,and not be used for other O&M costs. Implications to Stakeholder Organization AP&T:No additional responsibilities.Some initial learning curve associated with changes in accounting for subsidy.Changes in policy would require RCA &AEA to provide clear guidelines and compliance instructions. AVEC:Proposed changes to PCE would "heighten PCE profile”and potentially subject PCE to legislators looking for SOA budget saving opportunities -thereby jeopardizing PCE allocation.If the policy change resulted in less structured reporting for utilities serving PCE recipients,it could have a positive affect. Tanana Power:Minimal,but positive.He believes policy makers and legislators will perceive the industry more favorably if it proposes its own constructive changes.PCE management should be easier when you can expect a fixed amount.Frequency of PCE reporting should be reduced -monthly reporting should no longer be required under a fixed/incentive based formula. McGrath Light &Power:None unless the amount of PCE allocated to his operation is reduced. Petersburg MP&L:N/A Impediments to Implementation AP&T:The political considerations and hard choices required by policy makers.The need to overcome the traditional "cost based”approach to cost and rate regulation (particularly on the part of the RCA). AVEC:Does not believe the "timing”is right to explore changes until the State's legislators balance the State's budget.Any solution will have to be sold to constituents as a defendable and innovative program. Tanana Power:There will be a "bloodbath”in the process of coming up with an equitable formula."Naysayers”who believe the political timing isn't right for making changes to PCE.Determining a "fair and equitable”distribution.The process of agreeing on what 24 1/13/2003 PCE "true”operating costs should be considered &included in determining the allocation. There will never be sustainability in rural communities until there is accountability. Current PCE reporting doesn't provide that. McGrath Light &Power:Fear of the unknown”-i.e.what will happen after the initial determination of fixed PCE allocation?Will the PCE allocation be reduced after initial fixed period?Will the achievement of cost efficiencies result in receiving lower PCE allocations for subsequent fixed periods?Clarification of the goals of a new PCE formula -Is it to encourage utilities to move toward efficiency and sustainability,and maintain rate equalization? Petersburg MP&L:Not discussed. Next Steps 3.6 AP&T:Encourage policy makers to make decision to move toward fixed subsidy policy. Provide input to the design of an alternative regulation and set of corresponding compliance guidelines. AVEC:Evaluate alternative solutions to solving the PCE incentive/disincentive issue before accepting the fixed subsidy concept.Organize a small,manageable,and representative task force to study and recommend alternative solutions first.Consider solutions that would allow utility to retain a portion for capital infrastructure reinvestment (R&R).Get the State budget "in order”before promoting a change.Change should be a "mid-term”goal-over the next two years. Tanana Power.Gather-"hardcore”information from all PCE eligible utilities/communities to be able to make fair/equitable judgments about PCE needs of each location.Conduct analysis and assessment of data.Develop proposed fixed subsidy distribution formula.Establish more rigorous standard requirements for comprehensive financial information,from all communities requesting PCE,to increase overall accountability. McGrath Light &Power:Clarify goals of a revised PCE policy.Consider requiring all PCE eligible communities to be regulated to force accountability. Petersburg MP&L:Not discussed. ASSESSMENT &FURTHER RECOMMENDATION Conclusion We concur -the current PCE program does not encourage sustainable utility operations, nor does it encourage operational or power consumption efficiencies.If sustainability and improved operational/utilization efficiencies are deemed strategic goals for the PCE program,then fundamental conditions and requirements (the PCE "rules”)must be changed to create appropriate incentives that encourage the desired results. 25 1/13/2003 PCE e The suggested "fixed subsidy”alternative may encourage increased operational efficiencies if utilities are allowed to retain any marginal savings from their efforts to reduce cost.As an "incentive,”however,it may have little or no positive impact on sustainable performance unless coupled to a requirement that first reallocates any savings to satisfy O&M deficiencies or under-funded reserves for other anticipated life cycle costs. e Although the Sustainable Utilities Steering Committee has agreed to a definition of "sustainability,”specific sustainability performance criteria and related performancemeasureshavenotbeenclearlydefined.' e Smaller utilities or those currently without resources adequate to manage sustainable operations,could benefit from collaborate or strategic partnerships to strengthen management,share operational resources and potentially induce savings through economies of scale. e To evaluate performance against sustainability criteria,actual performance must be effectively monitored and measured.However,not all PCE participants are required to maintain or report verifiable financial or operational information in a standardized format conducive to such review. Recommendations e Key stakeholder groups should cooperate to clarify and/or redefine PCE program goals and objectives.Develop stakeholder group consensus around "sustainability”as one of the key principles and performance objectives of a PCE program,and present to State Legislature for consideration and approval of modified policy. e Key stakeholder groups should cooperate to develop and define "reasonable and prudent” sustainable performance criteria and related performance measures for utilities and tie to ongoing PCE eligibility. e Regulators should assess and rate individual utility performance against sustainable performance criteria.Where applicable,develop long-term "sustainability performance improvement plans”for "deficient”utilities,and hold each accountable for meeting plan objectives and milestones.Tie ongoing PCE eligibility to each utility's commitment and demonstrated ability to meet sustainable performance criteria or prescribed improvement plan milestones. e Regulators and funding agencies should encourage "deficient”utilities to develop "management or mentoring partnerships”with other "successful”regional electric utility operators,other water &sewer operators,other electric cooperatives etc.,to optimize the benefits from management and operational expertise.Where deemed necessary,tie this *The Sustainable Utilities Steering Committee has defined a sustainable utility as "one where available financial resources,from all sources,are at least equal to the total cost of the utility.Total cost includes management, operation,cost of capital renewal and replacement (after design life has been achieved”and necessary maintenance for the facility to perform at an acceptable level of service for future generations.” 26 1/13/2003 PCE requirement to ongoing PCE eligibility and/or funding approval (See related recommendation in "Funding Criteria”). Policy makers and/or regulators should require that all utilities/communities requesting PCE be subject to higher standards of financial reporting (i.e.audited financial results in a prescribed format)to verify they meet standard or planned levels of sustainability.Tie ongoing PCE eligibility to each utility's ability to meet standardized financial reporting requirements (See related recommendation in "Monitoring Utility Expenses &Measuring Sustainability). Regulators should revise and standardize applicable PCE financial reporting requirements to include formats that facilitate sustainable performance reporting,monitoring and measurement.(See related recommendation in "Monitoring Utility Expenses &Measuring Sustainability). Key stakeholder groups should cooperate to develop a pilot program of several targeted utilities to test the theory that a "fixed subsidy”will encourage efficiency improvement. For pilot program participants,consider holding PCE subsidy fixed (and not tied to actual cost)for a minimum of 2-3 years,and allow utilities to retain marginal cost savings that occur from efficiency improvements.Require pilot program participants to meet the same sustainability performance criteria and annual reporting requirements as all other utilities. 27 1/13/2003 O&M Support for Water &Sewer Infrastructure 4.O&M SUPPORT FOR WATER &SEWER INFRASTRUCTURE 4.1 SUMMARY OF ISER CONCLUSION Conclusion Although existing subsidies provide large amounts of targeted support for capital construction of water &sewer infrastructure,there is little or no external support for proactive preventative maintenance of the same investment.In extreme cases,the current system can actually reward improper O&M by funding the replacement of capital infrastructure when itfails, rather than encouraging proper maintenance and sustainable operations on the front end. In spite of this lack of support,ISER found that many communities make heroic efforts to maintain their systems,despite the relatively high cost of doing so.They also conclude the system further discourages preventative maintenance because it requires ratepayer money up front while "emergency”repairs are often provided by external agencies at no cost to the user, although there is little evidence to suggest this is a significant issue. 4.2 /SUMMARY OF ISER RECOMMENDATION Recommendation Policy makers should implement a sanitation cost equalization (SCE)program,as a counterpart to PCE,to encourage appropriate levels of O&M spending and,therefore, enhanced levels of sustainability. As a move toward increased sustainability,ISER concludes that public financial resources now directed at rural sanitation could be restructured for allocation to both O&M and capital.Their research concludes that nearly all related subsidies go toward capital projects and none to O&M costs.They recommend that a "sanitation cost equalization”or "SCE”subsidy program could be implemented to provide similar fixed payments for sanitation O&M,and therefore encourage sustainable utility performance.They suggest,for example,that new systems with relatively high operating expenses could be constructed with an O&M reserve placed in escrow at the time of construction.The appropriate amount could be determined by considering several factors including community size,geography,climate,infrastructure technology,(i.e.flush haul vs. pipes),etc.Alternatively,the fixed subsidy could be determined by the RCA as part of the full 28 1/13/2003 O&M Support for Water &Sewer Infrastructure economic regulation of the utility.In any event,this would be a new program requiring careful review and analysis prior to implementation. Relationship to Other ISER Recommendations (Same as "Other”identified for "PCE”): e Policy makers should incorporate an approach to utility subsidies that rewards,rather than discourages,progress toward sustainability. e Utility managers should used fixed subsidies for intended O&M purposes. e Utility managers should help draft a transition mechanism to move from current system to fixed subsidy method. 4.3 |STAKEHOLDER RESPONSE -REGULATORS Respondent e Regulatory Commission of Alaska (RCA) General Response e The concept is worth considering,but critical comment is impossible in the absence of a defined plan with an estimated cost. Implications to Stakeholder Organization e Would require new systems and unknown levels of additional staffing to monitor,if the RCA were responsible for same Impediments to Implementation e Clarification of goals e A source of funding for SCE would have to be determined e The RCA would have to be staffed and trained to accommodate the additional work load Next Steps e Additional more comprehensive impact analysis of SCE program e Consider an evaluation to determine if there could be "economies of management”by combining rural utility managements (i.e.same management for power,water,etc.),as a means of improving the ability of rural utilities to more effectively manage and administer appropriate O&M levels. 29 1/13/2003 O&M Support for Water &Sewer Infrastructure 4.4 STAKEHOLDER RESPONSE -FUNDING AGENCIES Respondents: e USDA Rural Development e Village Safe Water (VSW) e Alaska Native Tribal Health Consortium (ANTHC) General Response e Agree philosophically. e The subsidy is a good idea,but a framework should be established to reward the behavior (i.e.the goal of the program).An ideal program would be performance based. e It would be "dangerous”to construct a subsidy for rural sanitation modeled after PCE program. e In advance of an SCE program,there should be some mechanism in place to encourage or possibly require the formation of regional water &sewer entities or management structures to minimize inherent management and operational inefficiencies in small utilities. e Rather than a subsidy,existing "capital”grant programs could be expanded beyond just construction costs to include all projected life-cycle costs necessary for optimum sustainability. Implications to Stakeholder Organization e USDA Rural Development:Minimal.Current federal statute prohibits funds from the USDA RD Alaska Village grant program (including the required 25%State match),as well as funds from direct Water and Waste loan and grant program (including the required 25%non federal match)from being used for operations &maintenance costs. e VSW:Could see themselves being the "implementers”by providing the "review”function in determining and monitoring SCE needs.Unknown impact on staffing and other resources. e ANTHC:None.An effective solution to the O&M dilemma would actually make his organization's work more rewarding. Impediments to Implementation e Undefined program and unknown impact on the aggregate resources of industry agencies. 30 1/13/2003 O&M Support for Water &Sewer Infrastructure A source of funding and an unknown cost that could be significant. If funding is expected from the State legislature,then it should be designed as a cost savings measure. Political unwillingness to get involved with or support another subsidy program.Political climate in Washington,DC -perception is that now is not a good time to support a "perpetual”subsidy. A major change in funding rules for both VFW and Indian Health Services (IHS)would most likely be necessary.It may be easier to obtain some form of federal assistance for a pilot program rather than a wholesale change to existing federal programs. Next Steps 4.5 An analysis to determine,and reach consensus among key stakeholders,regarding an achievable and practical level of sustainability in rural water &wastewater utilities. An analysis to determine cost &resource implications. Identification of funding source(s). Explore ways to encourage the rural utility cooperative concept to yield more effective management and cost economies through size/scale. Pilot project,perhaps though a regional entity (i.e.the Northwest Arctic Borough)to test concept. STAKEHOLDER RESPONSE -UTILITY MANAGERS Respondents Rural Utilities Business Assistance Program (RUBA)-Mike Black Through the RUBA program,management assistance and financial training related to water and wastewater utilities are provided to cities and villages in Alaska.We believe RUBA,through its intimate familiarity with rural utility systems in Alaska,is uniquely positioned to provide a response representative of this utility manager stakeholder group. General Response Agrees with the general concept -would completely support any program that provided financial support of water and wastewater utility O&M costs. Any program that encourages and/or provides an incentive to utility managers to recognize and provide for "total costs”would have a positive impact on sustainability. 31 1/13/2003 O&M Support for Water &Sewer Infrastructure Implications to Stakeholder Organization Performance:The need to satisfy newly established minimum operations/performance criteria -Staffing:The need to hire or outsource properly trained utility operator and bookkeeper. Accountability:The ability to verify eligibility and proper use of funds though required formal reporting Impediments to Implementation Access to a source of funding Political support for another subsidy program The general lack of properly trained utility managers,operators and bookkeepers Turnover in the local work force Incremental costs of training or outsourcing properly qualified staff Next Steps 4.6 Identify overall goals of program Determine overall financial requirement Identify source of funding Establish minimum qualification and performance criteria Establish financial/operating information requirements Establish responsibility for external oversight,monitoring and administration of SCE program , ASSESSMENT &FURTHER RECOMMENDATION Conclusion Clearly,sustainable utilities require ongoing and stable O&M funding.The lack of a continuous and comprehensive O&M program will significantly impact the total cost of owning and operating a functioning utility infrastructure (i.e.additional cost due to a higher incidence of emergency repairs,reduced overall expected life-cycle of investment,etc.). 32 So,1/13/2003 O&M Support for Water &Sewer Infrastructure We generally concur with the key elements of the RCA response to the concept of SCE -that the concept is worth considering,but critical comment is impossible in the absence of a defined plan, an estimated cost,and an authorized source of funding. Any approach to the O&M issue may require different solutions for existing systems versus new systems.A subsidy program for existing systems will face many of the challenges of a PCE program,not the least of which is funding responsibly,i.e.who will pay? On the other hand,an SCE program applicable to new systems may be more effective if linked to funding criteria that require business to demonstrate a commitment to and an ability to maintain sustainable operations. Recommendations It is not the intent of our review,nor would it be practical to analyze and assess the SCE concept without a more comprehensive plan definition.Nonetheless,we offer the following broad recommendations: Existing Utility Systems:Key stakeholder groups should form a task force to: e Develop and define a clear set of goals and objectives for a proposed SCE program that provides temporary and interim financial assistance to encourage sustainable performance levels of O&M.activities. e Assess the overall financial requirements to fund an SCE program that meets the defined goals and objectives,and determine feasibility of securing a funding source.Consider requiring a "matching”O&M spending commitment from utilities,funded by other cost savings or increased rates. e Determine if the return on investment (i.e.the cost or capital savings or other tangible benefits derived from a public investment in an SCE subsidy)meets acceptable investment criteria. e Develop a transition plan that ultimately phases out the subsidy and gradually transfers the total financial burden for O&M to the utility and/or rate payer,over a predetermined period of time. e Tie ongoing SCE eligibility to a utility's commitment and a demonstrated ability to operate at prescribed sustainable performance levels. e Tie ongoing SCE eligibility to a utility's ability to comply with standardized financial reporting requirements and provide audited financial results. 33 1/13/2003 O&M Support for Water &Sewer Infrastructure e Identify responsibility for external oversight,monitoring and administration of SCE program,as well as the on-going measurement of sustainability. e Submit proposal to appropriate authorities for review and consideration. New Utility Systems: e For new systems,funding agencies should require utilities requesting funding to submit business plans that demonstrate a commitment to and an ability to achieve "sustainable performance criteria,”which should provide for appropriate levels of O&M (See "Funding Criteria”).We recommend this group not be ineligible for an SCE subsidy. 34 1/13/2003 Monitoring Utility Expenses &Measuring Sustainability 5.MONITORING UTILITY EXPENSES &MEASURING SUSTAINABILITY 5.1 SUMMARY OF ISER CONCLUSION Conclusion A utility's reportedfinancial results,including a detailed breakdown of its costs,are an indicator of its ability to operate sustainable facilities Because "cost”has been the traditional basis for establishing utility rates,and determining PCE and/or other subsidies,it should (ideally)reflect the utility's "true cost,”i.e.the recognition of reasonable and prudent levels of O&M,reserves for repair and replacement of major components (R&R)and/or depreciation,interest expense,etc.Unfortunately,however,reported utility costs do not always reflect the "true cost”of operation.This is particularly true in smaller utilities. There are two major reasons.First,utility assets funded by public grants are often not reflected on a small company's books,as these assets (or the corresponding depreciation)are generally not allowable,and thus not reported,for PCE purposes.Second,cash constrained utilities may elect to ignore or defer some operating or maintenance expenses (or choose not to fund R&R reserves).The accuracy of reported costs is also subject to the utility's ability to comply with financial reporting standards,properly complete forms,code or classify expenses,etc.In reality,the true cost of utility service is not avoided for any of these reasons,only deferred.The magnitude of any "gaps”between true cost and reported cost can be an indicator of the utility's relative sustainability. 5.2 /SUMMARY OF ISER RECOMMENDATION Recommendation Regulators should monitor utility expenses to assure utility operations meet a "reasonable and prudent”standard ofperformance An assessment of utility costs will assist in the overall determination of a utility's level of sustainable performance.Utility rates should reflect the "true costs”of operation,including "reasonable and prudent”levels of O&M costs,as well as repair and replacement of major components (R&R),interest expense,etc.,(although ISER suggests the cost of major parts replacement for water and sewer infrastructure could probably be excluded,as most major water and sewer capital projects in small communities are typically carried out as public works 35 1/13/2003 Monitoring Utility Expenses &Measuring Sustainability investments in the U.S.).In any event,total costs should be reported and reviewed to assess relative levels of sustainable performance for each utility,and to determine a fair and equitable allocation of utility subsidies (i.e.PCE). Relationship to Other ISER Recommendations: Regulators should evaluation tools to measure utility progress toward sustainability 5.3 -STAKEHOLDER RESPONSE -REGULATORS Respondent Regulatory Commission of Alaska (RCA) General Response Concur -RCA does this now to the extent accurate and complete information is provided by local utilities. Once performance criteria are established,evaluation tools could be created. Economically regulated utilities can be held to a much higher standard of financial reporting.Not all utilities serving PCE eligible communities,for example,are economically regulated. Implications to Stakeholder Organization Not all PCE eligible utilities are economically regulated,and as such,are not required to maintain and submit complete financial information.In many cases,information received by the RCA is incomplete and inaccurate. The measurement of progress toward sustainability may necessitate all PCE utilities to submit complete financial information,similar to regulated utilities.Comprehensive financial review and measurement of all utilities would have a direct impact on additional staffing requirements. Impediments to Implementation Getting complete,accurate and timely financial information from all utilities serving PCE eligible communities. Not all utilities are capable of submitting accurate,timely and complete financial information.Communities would have to train or locate appropriate accounting resources 36 1/13/2003 Monitoring Utility Expenses &Measuring Sustainability e The RCA would have to be staffed and trained to accommodate the additional workload related to more comprehensive monitoring and measurement. Next Steps e Not clear regarding next steps specifically. e Generally,establish revised PCE program and sustainability measurement criteria. 5.4 STAKEHOLDER RESPONSE -UTILITY MANAGERS Respondent e Meera Kohler,AVEC,representing ARECA Rural Issues Forum General Response Ata recent Rural Issues Forum meeting in late November 2002,attending members of ARECA (Alaska Rural Electric Cooperative Association)decided to develop an educational program and white paper to bring newer legislators and others up to speed on PCE and to compose a resolution that would strongly urge RCA and AEA to do what they are already directed to by the enabling statutes -namely to ensure that efficiencies are being realized and that abuse of the program is not permitted.The resulting draft resolution strongly urged regulators to assure that PCE recipients comply with the PCE program's guiding principles,by promulgating key utility standards regarding power generation efficiency,collections/write-offs,cost standards,and other operating practices.It also recommended that regulators conduct periodic on-site audits of PCE utilities to be sure only bona fide allowable costs are included in annual reports. Implications to Stakeholder Organization e No discussion Impediments to Implementation e No discussion Next Steps e A draft of the resolution has been circulated to ARECA members for review and comment. 37 1/13/2003 Monitoring Utility Expenses &Measuring Sustainability 5.5 ASSESSMENT &FURTHER RECOMMENDATION Conclusion Existing inconsistencies in utility reporting standards (i.e.for those that are economically regulated vs.those that are not)inhibit the ability to conduct comprehensive and standardized monitoring of utility costs,as a means of measuring progress toward sustainability.In the absence of standardized reporting requirements and verifiable cost data for all subject utilities, any monitoring system will be ineffective in evaluating relative levels of sustainability from one utility to the next. Recommendations e Require that all utilities requesting public assistance (i.e.capital grants,PCE,and other subsidies)be subject to higher standards of financial reporting to verify their operations meet a "reasonable and prudent”standard of sustainability.This may require applicable utilities,as a condition of eligibility for public funding,become economically regulated and/or be required to undergo an annual financial audit. e Revise and standardize applicable financial reporting requirements to allow monitors to identify potential gaps between "reported cost”and "true cost”("sustainability cost gap”), and to assess the degree to which each utility generates revenue (from rates,subsidies, etc.)to provide for true cost. e Establish evaluation criteria and related tools to measure utility progress toward sustainability. 38 1/13/2003 Funding Criteria 6.FUNDING CRITERIA 6.1 SUMMARY OF ISER CONCLUSION Conclusion New utility capital projects should only occur in communities that demonstrate capacity to manage sustainable utilities. The typical criteria used by funding agencies do not require or encourage requestors to demonstrate ability to manage and maintain "sustainable”utilities,although recent evidence demonstrates that funding agencies have begun to address this issue.A collaborate commitment to maintaining and preserving the investment in expensive infrastructure is absolutely essential to the overall thrust toward increased sustainability.The funding agencies can be perceived as a critical "gatekeeper”in the cycle,if applying reasonable due diligence to assure the investment of public funds is applied to utility projects where there is a commitment to appropriate O&M practices.Once a system is built and funded,the leverage of this "incentive”is diminished.In extreme cases,according to ISER,current programs can reward the failure to maintain capital by replacing when it fails,while offering little or no incentive for preventative maintenance prior to failure. 6.2 -SUMMARY OF ISER RECOMMENDATION Recommendation Funding agencies should develop funding criteria to reward long-term O&M behavior,and use criteria to reward O&M commitment and progress toward sustainability As an incentive to encourage sustainable utilities,ISER concludes that external funding of new utility capital projects should only occur in communities that demonstrate capacity to manage sustainable utilities.They suggest the following several elements of sustainable utility operation can be used as intermediate goals.We suggest these goals could be considered in the development of funding criteria: e Healthy infrastructure:The full design service life of capital investments is achieved based on a sound preventative maintenance plan 39 1/13/2003 Funding Criteria e Appropriate Design:Systems designed for robust performance appropriate to the utility's operational and management capacity e Adequate reliable service that meets customer expectation and major regulatory requirements e Fiscal capacity to ensure sufficient revenue is collected for operation and maintenance including a community business plan which includes collections,insurance,and replacement parts reserve accounts e Community commitment/ownership resultingin full participation in all phases of utilitydesign,construction,and operation e Community capacity:An adequate knowledge base and human resource base to manage and operate efficient and sustainable utilities 6.3 -STAKEHOLDER RESPONSE -FUNDING AGENCIES Respondents e USDA Rural Development e AIDEA e Village Safe Water (VSW) e Alaska Native Tribal Health Consortium (ANTHC) General Response e Unanimous agreement e Funding criteria that incorporates "sustainability”requirements may be able to help stop the "vicious cycle”of capital being reinvested to replace previous infrastructure investment not properly maintained local entities. e Key stakeholder groups have increased their awareness of/and planning for this veryimportantconsideration. Implications to Stakeholder Organization e USDA:Since USDA Rural development funding is not permitted for O&M costs,this recommendation would be more applicable to other funding agencies. e AIDEA:They are already in the process of developing funding criteria to encourage long- term sustainability. 40 1/13/2003 Funding Criteria e VSW:Likely minimal,but depends on design of program and who is made responsible for various parts of the process.VSW's core competencies are construction and construction management and not sustainable utility operation.To monitor an SCE program,for example,applicable skills/experience for the monitoring/reward process would have to be acquired or (more likely)provided by some other entity. e ANTHC:The Denali Commission has been an interesting catalyst toward sustainability, specifically the community business plan concept (i.e.communities need to present business plans that demonstrate sustainability to qualify for funding)has carried over to other agencies as the "politically correct "approach to this issue. Impediments to Implementation e There may be some political "fallout”with tougher funding criteria. e Community "buy in”-some communities have been slow to embrace the sustainability concept and business plan process as necessary elements of proper utility management. e Some communities are so small and/or remote that it may not be practical to get a cost effective solution to sustain proper O&M. e Agency access to funds to properly plan and develop corresponding systems. e Needs to be a broader mechanism across all funding agencies that measures and rewards progress toward long-term sustainability.The business plan concept,by itself,is not a viable incentive toward improvement in the O&M area. Next Steps e Develop a clear definition of sustainability and build consensus around it. e Clearly define revised funding criteria objectives. e Develop sustainability "metrics”so that performance can be objectively monitored, measured and rewarded. e Each funding agency develop criteria for inter-agency review and standardization. e Acontinuation down the path being blazed by the Sustainable Utility Steering Committee. 6.4 ASSESSMENT &FURTHER RECOMMENDATION Conclusions Although some funding agencies have begun to address this issue,typical funding criteria do not require or encourage requestors to demonstrate ability to manage and maintain "sustainable” 4\1/13/2003 Funding Criteria utilities.Funding agencies can be the critical "gatekeeper”by applying reasonable due diligence to assure the investment of public funds is applied to utility projects where there is a commitment to sustainability and corresponding O&M practices. Recommendations e Although the Sustainable Utilities Steering Committee has agreed to a definition of "sustainability,”all major stakeholder groups should cooperate to develop specific "sustainable performance criteria”and related performance measures. e Funding agencies should cooperate to develop "funding criteria metrics”that are integrated with and supportive of "sustainable performance criteria”. e Funding agencies should require utilities requesting funding to submit business plans that demonstrate a commitment to,and an ability to achieve "sustainable performance criteria.” e Funding agencies should encourage "deficient”utilities to work together to develop "management or mentoring partnerships”with other "successful”regional electric utility operators,other water &sewer operators,other electric cooperatives etc.,to optimize the benefits from management and operational expertise.Where deemed necessary,tie this requirement to funding eligibility (See related recommendation in "Price Cost Equalization -PCE”). 42 1/13/2003 Designer/Engineer Performance 7.DESIGNER/ENGINEER PERFORMANCE 7.1 SUMMARY OF ISER CONCLUSION Conclusion There are currently few links between designer accountability and long-term performance of utility designs.Consequently,the current "process”does not encourage sustainable designs. One contributing factor resides in the performance assessment process -there is no existing formalized communication loop to provide direct feedback to designers and engineers to let them know how their designs perform overall,which solutions work well,which don't,which systems are easier to maintain,etc. 7.2 _SUMMARY OF ISER RECOMMENDATION Recommendation Funding agencies should establish sustainability "report cards”to rank designers and engineers The establishment of sustainable design criteria along with a corresponding evaluation system will encourage designers and engineers to develop systems that are easy to maintain and achieve longer lives.A simple system of "report cards”might allow communities to provide the desired feedback over time to the engineering and design community and to each other about which ideas are working well and which are not. 7.3 _STAKEHOLDER RESPONSE -FUNDING AGENCIES Respondents e USDA Rural Development e AIDEA e Village Safe Water (VSW) e Alaska Native Tribal Health Consortium (ANTHC) 43 1/13/2003 Designer/Engineer Performance General Response e USDA Rural Development:It is difficult to see how an effective "report card”system could be realistically accomplished,as judgments would be subjective,and designers and engineers move between firms.It may be more feasible to give recognition to individual projects that meet certain performance criteria. e AIDEA:Agree.The engineers/designers should be held accountable for designs meeting specified criteria. e VSW:Disagree.This is the "wrong solution to the right problem.”The correct approach should define sustainability design criteria and compute the type of project a community can afford.The solution should be to design and construct to meet the combined construction plus sustainability budget. e ANTHC:Disagree.The primary task should be to focus on establishing specific design criteria that meets collective objectives and then holding firms accountable to such criteria. Implications to Stakeholder Organization e AIJDEA already uses contractor track records to some extent in its evaluation process. Impediments to Implementation e AIDEA:The need to get the engineer/designer stakeholder group to buy into the process. Next Steps e Develop objective sustainability design criteria rather than focus on grading firm performance. 7.4 ASSESSMENT &FURTHER RECOMMENDATION Conclusion We agree with the general consensus from respondents that the first priority should be to establish "sustainability design criteria”to which designers and engineers can be held accountable.The "report card”system would provide more effective feedback in the presence of clearly defined performance objectives (design criteria).Again,in the absence of such criteria,it would unfair and inequitable to use the feedback system as the basis of rating and ranking designers and engineers.Nonetheless,a feedback system could still be used to provide meaningful feedback from community users. 44 1/13/2003 Designer/Engineer Performance Recommendations Funding agencies should work with designer/engineer stakeholder group to develop objective sustainable design criteria.This should be the primary measurement metric to which designers and engineers are held accountable. Funding agencies should develop simple monitoring system to evaluate design/engineer firms'performance in meeting design criteria. Funding agencies may consider a simple "report card”system to assist communities in providing feedback over time to the engineering and design community to let them know how their designs perform overall,which solutions work,which don't,etc. 45 1/13/2003 Designer/Engineer Fees 8.DESIGNER/ENGINEER FEES 8.1 SUMMARY OF ISER CONCLUSION Conclusion Conventional design and engineering fee structures may reward maximization of initial cost and professional culture may reward complexity of design According to the ISER,water &sewer planners and designers,for example,are discouraged from aggressive technical innovation.They claim,other things being equal,innovations that reduce capital costs and/or complexity also tend to reduce fees for private sectors designers and local construction employment payroll.Consequently,conventional fee structures "tied”to the cost of the project do not always result in cost-effective and sustainable solutions. 8.2 /SUMMARY OF ISER RECOMMENDATION Recommendation Designers/Engineer should propose new fee structures not tied directly to system cost Sustainable design criteria and performance contracting should reward engineers and system designers for systems that are easy to maintain and achieve longer lives. 8.3_-STAKEHOLDER RESPONSE -DESIGNERS/ENGINEERS Respondents e PDC Consulting Engineers,Jim Pressley,Principal and P.E. e Denali Commission,Joel Niemeyer,P.E.,Project Manager General Response e Agrees with concept,but does not believe engineers and designers should be penalized (under a revised fee structure)for innovative designs that result in reduced capital investment or complexity. 46 1/13/2003 Designer/Engineer Fees Implications to Stakeholder Organization Engineering &design fees could be negatively impacted for some projects,if not "protected”in a new approach. Incentives should reward designers &engineers for innovative approaches to minimizing overall life-cycle costs. Impediments to Implementation "Owners”and funding agencies often view engineers as a commodity,and are resistant to any higher initial costs for better designs. Better quality designs that result in greater sustainability or lower overall predicted life- cycle costs should deserve higher fees. Next Steps 8.4 Utilities and funding agencies need to overcome their misconception that the mostimportantselectioncriterionistheinitialcost. Long-term sustainability,if it is a goal,should be clearly defined and integrated into design criteria for applicable projects. Establish "the minimization of overall predicted life-cycle costs”as a primary design criteria. Develop fee guidelines that "divorce”engineering and design costs from construction costs. Establish a steering committee to propose a new fee structure that rewards engineers for innovative system design. ASSESSMENT &FURTHER RECOMMENDATION Conclusions We concur -conventional design and engineering fee structures may reward maximization of initial cost and professional culture may reward complexity of design.Cost effective and sustainable facility designs may tend to reduce capital costs and/or complexity,resulting in lower fees or payroll for private sectors designers/engineers and construction contractors. Consequently,inherent incentives do not encourage cost-effective sustainable designs. 47 1/13/2003 Designer/Engineer Fees Utilities and funding agencies should recognize that initial design/construction costs should not necessarily be the primary selection criteria.In fact,with sustainability as the goal,a more effective approach would utilize Life-Cycle Cost Analysis (LCCA)techniques to evaluate a facility's total expected life-cycle cost.Life cycle cost would represent the total discounted dollar costof owning (including the original investment in design and construction),operating, maintaining,and disposing of a (facility)over a period of time.The real value of LCCA, however,is its ability to compare the cost of alternative projects to determine which provides the best value per dollar spent.For example,an engineering firm has two possible configurations for a new bulk fuel storage facility.Both project scenarios have the same initial planning and design cost.One of the projects has a lower construction cost,but higher operating and maintenance costs.LCCA can determine which alternative provides the best value. By requiring alternative and/or competitive design proposals and using LCCA techniques,utility owners and funding agencies can evaluate the "fee”issue in a much broader and more meaningful perspective. Recommendations e Inthe presence of sustainability design criteria (previous recommendation)utility owners/communities and funding agencies should require multiple alternative and/or competitive design proposals for each new facility to encourage competitive and innovative design alternatives. e Utility owners/communities and funding agencies should adopt Life-Cycle Cost Analysis (LCCA)techniques to evaluate alternative proposals to determine which results in the lowest predicted life-cycle cost. e Utility owners/communities and funding agencies establish contract award criteria based upon LCCA to encourage designers,engineers and construction contractors to develop cost-effective and sustainable utility designs proposals. *Utility owners/communities and funding agencies should consider developing fee guidelines that disassociate design/engineering fee proposals from construction cost proposals. 48 1/13/2003 Utility Design Warranty 9.UTILTIY DESIGN WARRANTY 9.1 |SUMMARY OF ISER CONCLUSION Conclusion Again,there are currently few links between designer accountability and long-term performance of utility designs.Consequently,the current "process”does not encourage sustainable designs. 9.2 -SUMMARY OF ISER RECOMMENDATION Recommendation Designers/Engineer should develop extended system warranty options In addition to use of sustainability design criteria,Life Cycle Cost Analysis,and the "report card”feedback system,more formal systems of extended warranties or bonding could be considered to strengthen the linkage between designer accountability and sustainable design performance. 9.3_-STAKEHOLDER RESPONSE -DESIGNERS/ENGINEERS Respondents e PDC Consulting Engineers,Jim Pressley,Principal and P.E. General Response e Disagree.Suggests that alternative "preventative maintenance agreements”as an optional cost would achieve long term warranty goal. Implications to Stakeholder Organization e None.Many firms already include extended warranties or PM agreements in other designs,as an additional cost.The construction firm is generally responsible for performing the warranty work. Impediments to Implementation 49 .1/13/2003 Utility Design Warranty e Minimal;Does not believe the cost of an extended warranty program would be an impediment to design selection. Next Steps e Utilities and funding agencies would need to specify the extended warranty as a requirement within system design criteria. 9.4 ASSESSMENT &FURTHER RECOMMENDATION Conclusion Accountability and responsibility for system failures would necessitate a determination of fault, i.e.is the failure related to design,component failure,construction or fabrication,inadequate or improper maintenance?Generally,only failure related to the design would be the responsibility of the designer or engineer,in which case,they should be held accountable.To that extent, perhaps a related warranty is reasonable. Recommendations Again,we believe the fundamental solution to strengthening the linkage between designer accountability and sustainable design performance is for communities and funding agencies to begin by establishing formalized sustainability design criteria.Such criteria should delineate performance and warranty expectations applicable to the elements of design/engineering, )component parts,fabrication,as well as utility or "owner”responsibilities in terms of operation and routine/preventative maintenance. Reasonable initial warranties should apply on an element-by-element basis,with the representative contractor or vendor held ultimately responsible for correcting the failure, although the general contractor may take primary responsibility for resolving with the utility. (Failures due to improper operations or inadequate maintenance practices should logically be the responsibility of utility owners).The inclusion of extended warranty "options”,similar to those commonly available for automobiles,appliances,etc.,at an additional cost,could be part of sustainability design criteria. 50 1/13/2003 Design &Engineering Review Process 10.DESIGN &ENGINEERING REVIEW PROCESS 10.1.SUMMARY OF ISER CONCLUSION Conclusion Professional risk aversion on the part of designers and engineers can also retard or discourage innovation in design proposals "The Cold Regions Utilities Monograph (ASCE 1996)defines the prevailing industry standards for design and construction.Innovation under this broad umbrella is generally limited to:1) adjustments for local conditions,2)selection of specific products,such as pumps,and 3)system integration and control.There is some evidence that technical innovation is subject to professional inertia even when it reduces costs and increases system resilience.A good example of this is the length of time (several years)that it took to adopt "freeze-friendly”plastic pipe technology.Although plastic pipe reduced labor and materials requirements,the use of iron pipe was a well-established national practice.”° 10.2 SUMMARY OF ISER RECOMMENDATION Recommendation Designers/engineers should establish formal rapid review process for adopting innovative technology and updating cold region utility practices Continued technical innovation,and the ability to rapidly adopt related solutions into industry best practices,will have a potent effect on the design of systems that are easier to maintain and achieve longer lives. 10.3.STAKEHOLDER RESPONSE -DESIGNERS/ENGINEERS Respondents e PDC Consulting Engineers,Jim Pressley,Principal and P.E. *Ibid,Page 123 51 1/13/2003 Design &Engineering Review Process General Response e Agree;too many "cold region”facilities fail without appropriate input from properly qualified or experienced engineers.He likes the idea of "peer reviews”for large projects. Implications to Stakeholder Organization e None -their organization has extensive experience in cold region engineering practices and strive to stay on the leading edge of technology Impediments to Implementation e Designer/engineer ego;resistance by many engineers to accept constructive criticism of their design e Cost -peer reviews will necessitate additional cost Next Steps e Establish a threshold for projects (i.e.size,value)where peer review is required for final design. e Establish eligibility requirements for individuals to qualify as peer reviewers 10.4 ASSESSMENT &FURTHER RECOMMENDATION Conclusion Concur with ISER recommendation and respondent's comments.Continued technical innovation,and the ability to rapidly adopt related solutions into industry best practices,will have a potent effect on the design of systems that are easier to maintain and achieve longer lives. Recommendations ¢Designers/engineers should develop and implement a formalized rapid review/peer review procedure for publicly funded utility projects. e Designers/engineers,funding agencies and utility owners/communities should establish a threshold for projects (i.e.size,value)where peer review is required for final design. e Designers/engineers should establish eligibility requirements for individuals to qualify as peer reviewers. 52 1/13/2003 11.APPENDIX 11.1.APPENDIX 1 -SUBSIDIES,INCENTIVES,STABLE O&M FUNDING ACTION MATRIX Policy Makers Subsidies,@ Make PCE Incentives,|__|payments fixed,based StableO&M -_|on formula or Funding regulatory review 2 e Implement -oS sanitation cost equalization (SCE) counterpart to PCE e Reward progress toward sustainability Regulators Funding Agencies e Monitor utility” expenses to meet "reasonable and prudent”standard e Establish - evaluation tools to measure progress toward sustainability ¢Develop fundingcriteriatorewardlong- termO&M e Use funding criteria to reward O&M commitment,and progress toward sustainability e Establish sustainability "report cards”to.rank designers and engineers Designers /Utility Managers Engineers Communities °Accept fixed subsidies policy : e Use fixed subsidies for intended O&M purposes =: e Help draft transition mechanism tomove from current system to fixed subsidies _7 ¢Propose new fee structures not tied directly to system cost e Develop extended system,warranty options. e Establish formal, rapid review process for adopting innovative technology and updating cold © region utility practices - |e Accept fixed subsidies e Support full use of . subsidies for O&M e Fill out sustainability report cards for installed systems. e Establish internal rewards for customer commitment to NIF Source:Sustainable Utilities in Rural Alaska:Effective Management,Maintenance and Operation ofElectric,Water,Sewer,Bulk Fuel,Solid Waste,Institute of Social and Economic Research,UAA,May 14,2001,Page 173 Moran Management Consulting Group 53 1/13/2003 11.2 APPENDIX 2 -INTERVIEW SUMMARIES -REGULATORS Stakeholder Group: Stakeholder Name: Contact Name: Regulators Regulatory Commission of Alaska (RCA)Page 1 of 2 Nan Thompson,Chairperson ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to implementation Next Steps Make PCE payments fixed, based on formula or regulatory review e Agree that the approach should be changed,but the "goal"needs to be clarified first before the solution is implemented.If a primary goal” is "sustainability"then there needs to be clear consensus with key stakeholder groups first. e If the goal is long-term sustainability with an eventual phase out of PCE,instead of a subsidy,PCE might be more effective as a long-term or revolving loan program with local performance covenants. If performance covenants are not achieved,then control might shift to an alternative provider. e For the foreseeable future there needs to be an "economic equalizer” e If payments are fixed,impact would likely be minimal,but would be dependent upon the reporting requirements. Believes the "Sustainability Committee”(a representation of key stakeholders)still has varying ideas about the goals of the PCE program.These would require clarification for a successful implementation. Reach stakeholder consensus on "sustainability”as one of the key goals of the PCE program Consider taking small incremental steps that might in include a "pilot project'to test the "fixed payment”theory. Consider "regionalization”or "mentoring”of local utility management to encourage communities to "work together” rather than trying to become completely independent. The "community voice'is often overlooked in decisions affecting rural communities. Some attempt should be made to identify a representative spokesperson. Implement sanitation cost equalization (SCE) e The concept is worth considering,but critical comment is impossible in the absence of a defined plan or an estimated cost. e Would require new systems and unknown levels of additional staffing to monitor Clarification of goals Funding for SCE would have to be determined The RCA would have to be staffed and trained to accommodate the additional work load. Consider an evaluation to determine if there could be "economies of management” by combining rural utility managements (i.e.same management for power,water, etc.). Reward progress toward sustainability e Concur e Unknown Unknown No response Moran Management Consulting Group 54 1/13/2003 Stakeholder Group: Stakeholder Name: Contact Name: Regulators Regulatory Commission of Alaska (RCA)Page 2 of 2 Nan Thompson,Chairperson ISER Recommendation Stakeholder Response Implications to Stakeholder Impediments to Next Steps Organization Implementation Monitor utility expenses to meet e Concur-RCA does this now e Not all PCE eligible utilities are |e Complete,accurate and timely |«Unclear"reasonable and prudent" standard to the extent accurate and complete information is provided by local utilities. e Economically regulated utilities can be held to a much higher standard of financial reporting. Not all utilities serving PCE eligible communities are economically regulated. economically regulated,and as such,are not required to maintain and submit complete financial information.In many cases,information received by the RCA is incomplete and inaccurate. financial information from all utilities serving PCE eligible communities. Establish evaluation tools to measure progress toward sustainability e Once the performance criteria are established,evaluation tools could be created. e Again,not all PCE eligible communities/utilities are economically regulated,and as such,are not required to maintain and submit complete financial information.The measurement of progress toward sustainability may necessitate all PCE utilities to submit complete financial information,similar to regulated utilities. Comprehensive financial review and measurement of all utilities would have a direct impact on additional staffing requirements. e Not all utilities are capable of submitting accurate,timely and complete financial information. Communities would have to train or locate appropriate accounting resources. e The RCA would have to be staffed and trained to accommodate the additional work load. e Establish revised PCE program and establish sustainability measurement criteria. Moran Management Consulting Group 55 1/13/2003 11.3 >APPENDIX 3 -INTERVIEW SUMMARIES -FUNDING AGENCIES Stakeholder Group: Stakeholder Name: Contact Name: Funding Agencies USDA -Alaska Jill Smythe,Special Projects Director Page tof 2 ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Make PCE payments fixed, based on formula or regulatory review e Generally agrees. e The fixed formula should consider the variations of cost of fuel and transportation of parts/supplies/outside technical help by location. PCE communities already report fuel cost date to the RCA e None Political impact as it is likely that new formula would evoke constituent backlash if reallocations occur Any new PCE proposal could also give the State legislature another opportunity to "tinker” with the formula e Identify proposal "champion” e Conduct study to assess cost shifting implications Develop formulas for the different regions/communities that incorporate the fixed rate adjusted for fuel cost differentials and the costs of doing business. Present proposal to State legislature Implement sanitation cost equalization (SCE) e Agree philosophically. e In advance of an SCE program,there should be some mechanism in place to encourage or possibly require the formation of regional water &sewer entities or management structures to minimize inherent management and operational inefficiencies in small utilities e Minimal.Current federal statute prohibits funds from the USDA Rural Development Alaska Village grant program (including the required 25% State match),as well as funds from direct Water and Waste loan and grant program (including the required 25% non federal match)from being used for operations & maintenance costs. e Funding e If funding is expected from the State legislature,then it should be designed as a cost savings measure It may be easier to obtain some form of federal assistance for a pilot program rather than a wholesale change to existing federal programs Identify funding source Pilot project,perhaps though a regional entity (i.e.the Northwest Arctic Borough)to test concept. Moran Management Consulting Group 56 1/13/2003 Stakeholder Group: Stakeholder Name: Contact Name: Funding Agencies USDA -Alaska Page 2 of 2 Jill Smythe,Special Projects Director ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Develop funding criteria to reward long-term O&M e Agree e USDA believes utilities that operate to sustain long-term operations should be rewarded e None.Since USDA Rural development funding is not permitted for O&M costs,this recommendation would be more applicable to other funding agencies The State's funding agencies would have to develop the criteria There may be some political "fallout.” Each funding agency develop criteria for inter-agency review and standardization Use funding criteria to reward O&M commitment and progress toward sustainability e Same as above e Same as above Same as above Same as above Establish sustainability "report cards”to rank designers and engineers e Not sure.Itis difficult to see how this could be realistically accomplished,as judgments would be subjective,and designers and engineers move between firms e It may be more feasible to give recognition to individual projects that meet certain performance criteria e None None See comments to "stakeholder response” Moran Management Consulting Group 37 1/13/2003 Funding Agencies AIDEA Stakeholder Group: Stakeholder Name: Contact Name: Page tof 2 Jim McMillan,Acting Executive Director ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Make PCE payments fixed,e Not sure the fixed formula is based on formula or regulatory the best option,although is review convinced the formula needs to be changed to be more of a positive incentive to long-term sustainability «Probably more than one optional solution that should be considered e There are 2 key issues:the allocation formula and the underlying endowment e Needs more information before being able to render a more comprehensive opinion e Probably minimal;a change in the "formula”probably won't impact AIDEA's (AEA's)ability to administer the program e Major political issue -i.e. negative repercussions from recipients (political constituencies)who would experience a net decrease ina revised PCE allocation e Key stakeholder groups need to reach consensus on the overall goal of a revised PCE program,and then present alternative ideas to State legislature Develop funding criteria to reward |e Good idea long-term O&M e It may be able to help stop the "vicious cycle”of capital being reinvested to replace previous infrastructure investment not properly maintained local entities e They are already in the process of developing funding criteria to encourage long-term sustainability e Community "buy in”;some communities are slow to embrace the sustainability concept and business plan process as necessary elements of proper utility management e Some communities are so small and/or remote that it may not be practical to get a cost effective solution to sustain proper O&M e Not discussed Use funding criteria to reward e Same as above O&M commitment and progress toward sustainability e Same as above e Same as above e Same as above Moran Management Consulting Group 38 1/13/2003 Stakeholder Group: Stakeholder Name: Contact Name: Funding Agencies AIDEA Jim McMillan,Acting Executive Director Page 2 of 2 ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Establish sustainability "report cards”to rank designers and engineers e Agree e The engineers/designers should be held accountable for designs meeting specified criteria e AIDEA already uses contractor track records to some extent in its evaluation process e The need to get the engineer/designer stakeholder group to buy into the process e Not discussed Moran Management Consulting Group 59 1/13/2003 Other Agencies Village Safe Water Stakeholder Group: Stakeholder Name: Dan Easton,Director of Facility Construction &Operations -Dept.of Environmental Contact Name:Conservation Page 1 of 2 ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps implement sanitation cost e Agrees,but believes it's equalization (SCE)"dangerous”to construct a subsidy for rural sanitation modeled after PCE program e Rather than a subsidy, existing "capital”grant programs could be expanded beyond just construction costs to include all projected life- cycle costs necessary for optimum sustainability. e An ideal program would be performance based Could see themselves being the "implementers”by providing the "review”function in determining and monitoring SCE needs Unknown impact on staffing and other resources Undefined program Unknown cost that could be significant Unknown impact on the aggregate resources of industry agencies A major change in funding rules for both VFW and HIS would most likely be necessary Political unwillingness to get involved with or support another subsidy program An analysis to determine and reach consensus among key stakeholders regarding an achievable and practical level of sustainability An analysis to determine cost &resource implications Develop funding criteria to reward |«Agreelong-term O&M See below See below See below Use funding criteria to reward e Agree O&M commitment and progress toward sustainability Likely minimal,but depends on design of program and who is made responsible for various parts of the process The organizations core competencies are construction and construction management and not.long term or sustainable utility operation. To monitor an SCE program, applicable skills/experience for the monitoring/reward process would have to be acquired or (more likely)provided by some other entity Not discussed Define program Develop a clear definition of sustainability and build consensus around it Develop sustainability "metrics” so that performance can be objectively monitored, measured and rewarded Moran Management Consulting Group 60 1/13/2003 Stakeholder Group: Stakeholder Name: Contact Name: Other Agencies Village Safe Water _ Dan Easton,Director of Facility Construction &Operations -Dept.of Environmental Conservation Page 2 of2 ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Establish sustainability "report cards”to rank designers and engineers Disagree.This is the "wrong solution to the right problem.” The correct approach should define sustainability;compute the type of project a community can afford.The solution should be to design and construct to meet the combined construction plus sustainability budget e None expected e Not discussed e No additional comment Moran Management Consulting Group 61 1/13/2003 Stakeholder Group: Stakeholder Name: Contact Name: Funding Agencies ANTHC Not disclosed at respondent's request Page tof 1 ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Implement sanitation cost equalization (SCE) e The subsidy is a good idea, but a framework should be established to reward the behavior (i.e.the goal of the program). e None e An effective solution to the O&M dilemma would actually make his organization's work more rewarding e Political climate in Washington, DC -Perception is that now is not a good time to support a "perpetual”subsidy e Explore ways to encourage the rural utility coop concept to yield more effective management and cost economies through scale Develop funding criteria to reward long-term O&M e Agree e Key stakeholder groups have increased their awareness off and planning for this very important consideration e The Denali Commission has been an interesting catalyst toward sustainability,whereby the community business plan concept (i.e.communities need to present business plans that demonstrate sustainability to qualify for funding)has carried over to other agencies as the "politically correct "approach to this issue. e Agency access to funds to properly plan corresponding systems e The need for a mechanism across all funding agencies that measures and rewards progress toward long-term sustainability The business plan concept is not a viable incentive toward improvement in the O&M area,in itself, without such a mechanism e Acontinuation down the path being blazed by the Sustainable Utility Steering Committee. Use funding criteria to reward O&M commitment and progress toward sustainability e Same as above e Same as above e Same as above e Same as above Establish sustainability "report cards”to rank designers and engineers e Disagree;A more effective solution would be to focus on establishing specific design criteria that meets collective objectives and then holding firms accountable to accordingly : e Not sure e Not discussed e Develop objective design criteria rather than grading firm performance Moran Management Consulting Group 62 1/13/2003 11.4 APPENDIX 4-INTERVIEW SUMMARIES -DESIGNERS/ENGINEERS Stakeholder Group: Stakeholder Name: Contact Name: Designers/Engineers PDC Consulting Engineers,Anchorage,AK Page 'of 1 Jim Pressley,Principal ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Propose new fee structure not tied directly to system cost e Agrees with concept,but does not believe engineers and. designers should be penalized (under a revised fee structure) for innovative designs that result in reduced capital investment or complexity. Engineering &design fees could be negatively impacted for some projects,if not "protected”in a new approach Incentives should reward designers &engineers for innovative approaches to minimizing overall life-cycle costs "Owners”and funding agencies often view engineers as a commodity, and are resistant to any higher initial costs for better designs. Better quality designs that result in greater sustainability or lower overall predicted life-cycle costs should deserve higher fees. "Owners”and funding agencies need to overcome their misconception that the most important selection criterion is the initial cost. Long-term sustainability,if it is a goal,should be clearly defined and integrated into design criteria for applicable projects Establish "the minimization of overall predicted life-cycle costs” as a primary design criteria Develop fee guidelines that "divorce”engineering and design costs from construction costs. Establish a steering committee to propose a new fee structure that rewards engineers for innovative system design Develop extended system warranty options e Disagree.Suggests that alternative "preventative maintenance agreements”as an optional cost would achieve long term warranty goal None.Firms already include extended warranties or PM agreements in other designs, as an additional cost.The construction firm is generally responsible for performing the warranty work. Minimal;Does not believe the cost of extended warranty would be an impediment to design selection "Owners”and funding agencies would need to include the extended warranty as a requirement within system design criteria Establish formal,rapid review process for adopting innovative technology and updating cold region utility practices e Agree;too many facilities fail without appropriate input from properly qualified or experienced engineers None -they have extensive experience in cold region engineering practices and strive to stay on the leading Ego;resistance by many engineers to accept constructive criticism of their design Establish a threshold for projects (i.e.size,value)where peer review is required for final design. edge of technology Cost -peer reviews will Establish eligibility requirements necessitate additional cost for individuals to qualify as peer reviewers Moran Management Consulting Group 63 1/13/2003 11.5 APPENDIX 5-INTERVIEW SUMMARIES -UTILITY MANAGERS Stakeholder Group: Stakeholder Name: Contact Name: Utility Managers -Electric Alaska Power &Telephone Bob Grimm,President Page 1 of 1 ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Accept fixed subsidies policy Absolutely would accept.The current PCE program is inherently "backwards”,and not progressive,in that is does not reward increased e No additional responsibilities e Some initial learning curve associated with changes in accounting for subsidy Changes in policy would e The political considerations and hard choices required by policy makers e The need to overcome the traditional "cost based” e Encourage policy makers to make decision to move toward fixed subsidy policy Provide input to the design of an alternative regulation andefficiency.require RCA &AEA to provide approach to cost and rate set of corresponding clear guidelines and regulation (particularly on the compliance guidelines compliance instructions part of the RCA). Use fixed subsidies for intended e Agree None e Same as above e No responseO&M purposes e He believes those entities that "load up costs”and those that don't include real life cycle costs balance the overall financial impact to PCE. Any form of a PCE subsidy should consider a facility's true O&M costs,not just one year's "snapshot”of reported costs Help draft transition mechanism to move from current system to fixed subsidies Agrees There is an existing procedure that allows review and comments to proposed regulation changes.He suggests this be used in regard to proposed changes in PCE policy e Minimal e Only the PCE policy decision e Same as above Moran Management Consulting Group 64 1/13/2003 Stakeholder Group: Stakeholder Name: Contact Name: Utility Managers -Electric AVEC Meera Kohler,President Page 1 of1 ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Accept fixed subsidies policy Not sure if this is the best solution In general,not opposed to the concept but fearful of the potential implications Does not believe a fixed subsidy would be an incentive for AVEC to be more efficient -- as AVEC is already aggressive about promoting efficient operations Believes the resultant "incentive”will be more applicable to smaller utilities e Not sure e Proposed changes to PCE would "heighten PCE profile” and potentially subject PCE to legislators looking for SOA budget saving opportunities - thereby jeopardizing PCE allocation e Ifthe policy change resulted in less structured reporting for utilities serving PCE recipients, it could have a positive affect e Does not believe the "timing”is right to explore changes until the State's legislators balance the State's budget e Any solution will have to be sold to constituents as a defendable and innovative program Evaluate alternative solutions to solving the PCE incentive/disincentive issue before accepting the fixed subsidy concept Organize a small,manageable, and representative task force to study and recommend alternative solutions first Consider solutions that would allow utility to retain a portion for capital infrastructure reinvestment (R&R). "Get the State budget in order” before promoting a change Change should be a "mid-term goal-over the next two years Use fixed subsidies for intended O&M purposes Did not discuss e Did not discuss e Did not discuss Did not discuss Help draft transition mechanism to move from current system to fixed subsidies See comments on "next steps” under "accept fixed subsidies policy.” e Did not discuss «Did not discuss See comments on "next steps” under "accept fixed subsidies policy.” Moran Management Consulting Group 65 1/13/2003 Utility Managers -Electric Tanana Power Don Eller Stakeholder Group: Stakeholder Name: Contact Name: Page 1 of 1 ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Accept fixed subsidies policy e Agrees absolutely e Heis an advocate of changing the PCE process from being "cost based”to "incentive - based. He definitely believes the changed approach would reward progress toward sustainability A revised PCE distribution formula should "ignore”actual costs and be based upon a variety of standardized factors including the nature of the generation,fuel delivery, transmission &distribution infrastructure at each location Minimal and positive e He believes the industry will be perceived more favorably by policy makers and legislators if it proposes its own constructive changes PCE management should be easier when you can expect a fixed amount Frequency of PCE reporting should be reduced -monthly reporting should no longer be required under a fixed/incentive based formula There will be a "bloodbath”in the process of coming up with an equitable formula. "Nay Sayers”who believe the political timing isn't right for making changes to PCE. Determining a "fair and equitable”distribution The process of agreeing on what "true”operating costs should be considered & included in determining the allocation There will never be sustainability in rural communities until there is accountability.Current PCE reporting doesn't provide that. Gather-"hardcore”information from all PCE eligible utilities/communities to be able to make fair/equitable judgments about PCE needs of each location Conduct analysis and assessment of data Develop proposed fixed subsidy distribution formula Establish more rigorous standard requirements for comprehensive financial information,from ail communities requesting PCE, to increase overall! accountability. Use fixed subsidies for intended O&M purposes e Agrees e Proper O&M is a necessity, regardless of the source of income. He believes all grants & subsidies should be predicated on utilities driving cost down None -his operation is already using PCE for O&M purposes See impediments listed above See next steps listed above Help draft transition mechanism to move from current system to fixed subsidies e Agrees It would depend upon how much time is required to be a part of the process See impediments listed above See next steps listed above Moran Management Consulting Group 66 1/13/2003 Stakeholder Group: Stakeholder Name: Contact Name: Utility Managers -Electric McGrath Light &Power Ernie Baumgartner Page 1 of 1 ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Accept fixed subsidies policy e Not convinced that a fixed PCE subsidy will be potent enough to have the desired effect of increasing rural utility efficiency e Regardless,fixed subsidy may be the best alternative e Organizations that are "far off the efficiency curve,won't do anything unless forced into it,” because the financial support "safety net”of grants and subsidies has always been there. e For profit,and in particular, investor owned utilities (such as McGrath)will continue to strive to optimize profitability though increased efficiencies. e None unless the amount of PCE allocated to his operation is reduced e "Fear of the unknown”-i.e. what will happen after the initial determination of fixed PCE allocation?Will PCE allocation be reduced after initial fixed period?Will the achievement of cost efficiencies result in receiving lower PCE allocations for subsequent fixed periods? e Clarification of the goals ofa new PCE formula -Is it to encourage utilities to move toward efficiency and sustainability,and maintain rate equalization? e Clarify goals of a revised PCE policy e Consider requiring all PCE eligible communities to be regulated to force accountability Use fixed subsidies for intended O&M purposes e Agree completely e Minimal if any e Same as above e Same as above Help draft transition mechanism to move from current system to fixed subsidies e Agree e Non discussed e Same as above e Same as above Moran Management Consulting Group 67 1/13/2003 Stakeholder Group: Stakeholder Name: Contact Name: Utility Managers -Electric Petersburg MP&L Dennis Lewis -Superintendent Page 1 of 1 ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Accept fixed subsidies policy e Not sure about the fixed subsidy approach without more information e The current PCE program needs to be overhauled,as the current PCE formula does not result in a fair and equitable distribution e PCE should be limited to "remote”villages,and not available to larger utilities (i.e. AP&T)serving rural locations e Ifa fixed subsidy policy would simplify the budgeting and PCE reporting -then it might be beneficial e NA e Not discussed e Not discussed Use fixed subsidies for intended O&M purposes e PCE should be used as an offset to fuel costs,and not be used for other O&M costs e NA e Not discussed e Not discussed Help draft transition mechanism to move from current system to fixed subsidies e Agree e Not discussed e Not discussed e Not discussed Moran Management Consulting Group 68 1/13/2003 Stakeholder Group: Stakeholder Name: Contact Name: Utility Managers -Water &Sewer* RUBA* Mike Black Page 1 of 1 *Through the RUBA Program,management assistance and financial training related to water and wastewater utilities is provided to cities and villages.We believe RUBA provides a unique and meaningful perspective,representative of "utility managers”on the "SCE”issue. ISER Recommendation Stakeholder Response Implications to Stakeholder Organization Impediments to Implementation Next Steps Implement "sanitation cost equalization”(SCE),counterpart to PCE,as a fixed subsidy No such program currently exists Agree;would completely support any program that provides financial support of water and wastewater utility O&M costs Any program that encourages and/or provides an incentive to utility managers to recognize and provide for "total costs” would have a positive impact on sustainability Performance:The need to satisfy newly established minimum operations/ performance criteria Staffing:The need to hire or outsource properly trained utility operator and bookkeeper. Accountability:The ability to verify eligibility and proper use of funds though required formal reporting e Access to a source of funding Political support for another subsidy program The general lack of properly trained utility managers, operators and bookkeepers Turnover in the local work force Incremental costs of training or outsourcing properly qualified Staff Identify overall goals of program Determine overall financial requirement e Identify source of funding Establish minimum qualification and performance criteria Establish financial/operating information requirements Establish responsibility for external oversight,monitoring and administration of SCE program Use fixed subsidies for intended O&M purposes Agree Same as above Same as above Same as above Help draft transition mechanism to move from current system to fixed subsidies Did not discuss Did not discuss Did not discuss Did not discuss Moran Management Consulting Group 69 1/13/2003