Re-Tooling PCE for the 21st Century

Remarks to

Rural Alaska Energy ConferenceApril 2004

Steve ColtInstitute of Social and Economic Research

University of Alaska Anchorageemail steve_colt@uaa.alaska.edu

Two Assertions

• PCE is important and effective• PCE is being eroded

Three Suggestions

• Inflation-proof the payments, else watch them decline and decline and decline

• Carve out some funds for diesel efficiency and non-diesel alternatives

•Trial run of fixed payments

PCE is Important

• Serves about 79,000 people• About 4,000 overall kWh per

residential customer, of which about 3,500 is PCE-eligible

• Compare to 8,145 kWh per residential customer in Railbelt

PCE is Effective, Overall

• Supports water and sanitation systems

• Supports clinics• Supports schools• Supports basic residential needs

PCE is small potatoes compared to federal spending

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

PCE per person Fed grants per person

Fed grants are only half of fed spending in rural AK

PCE covers small portion of Total True Cost of $116 million/yr

Source: ISER Sustainable Utilities Study, 2003

PCE

Total Cost

PCE is Being Eroded

-

50

100

150

200

250

300

350

400

1990 1995 2000 2005

pce

$ p

er p

erso

n

$/person

real $/person

Suggestion #1

• Inflation-proof the program– Reduce spending now, if necessary– Move to POMV-type draw on

endowment

Suggestion #2

• Carve out a portion of PCE for diesel efficiency and non-diesel alternatives– Mandated efficiency standards were

not very effective

Fuel Cost per kWh: Anchorage vs. Rural Alaska

2

9

0

2

4

6

8

10

cent

s pe

r kW

h

Anchorage high-wind communities

Actual Range of Fuel Costs

King Cove, City of Quinhagak Togiak Perryville, City of Chauthbaluk Noatak

0.5

1.0

1.5

2.0

2.5

3.0

$ p

er

Ga

llo

nPCE Recipient Communities

Box Plot - Median, Upper & Lower Quartiles, Outer Fences, Outliers

Source: FY96-FY00 PCE Annual Report 0ct 01 Oct. 22, 2001 11:47:46 AM

NonFuel Cost per kWh

8

27.5

0

5

10

15

20

25

30

cent

s pe

r kW

h

Anchorage AVEC

Nonfuel cost includes

• Generators (machines)• Distribution lines and meters

(equipment)• Operations, Maintenance and

Management (people)

Nonfuel cost per kWh for small rural utilities

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000

kWh Sold

$/k

Wh

Village Non-Profit

Village For Profit

Regional Non-Profit

Regional For-Profit

Kotlik-99

Kotlik-97

Kotlik-98

Tuntutuliak

AVEC

Arctic Village

Pedro Bay

Napaskiak

Venetie

Suggestion #3

• Allow several utilities to receive fixed PCE payments on a pilot basis

Fixed Payment Pilot Program

• Payments made to utility• Determined based on historical

factors – hold harmless concept• Overall up-down ratchet based on

overall funding, share of population

• Otherwise, fixed for at least 5 years

Theoretical Benefits of Fixed Payments

• Rewards efficiency• Rewards innovation• Rewards investment in non-diesel• Nullifies incentives for cost-shifting

and cost hiding

Two Practical Problems

• 1) What cost elements are under management control, and what elements are not?

• 2) How should possible bottom-line savings be shared with customers

Cost factors not under Mgmt Control:

• Population served• Fuel price (? – hedging)

– If fuel price rises for all, PCE payment would stay approximately same

Factors under Mgmt Control

• Everything else!– Fuel efficiency– Fuel choice– Nonfuel expenses– Financial Structure– Line loss– Management structure– Load management

Example for Discussion:

• AVEC total PCE payments 2003 = $6.2 million

• Fixed payment set at that level

Automatic Adjustment for change in share of PCE population

• AVEC now has 27% of PCE population

• If AVEC’s population increases by 10%, it’s share of total increases to 29%.

• This increase would result in a new fixed PCE pmt of $6.6 million

All internal cost savings are retained:

• If AVEC reduces fuel consumption by 10%, under current formula they “give back” 45% or $274,000.

• Under fixed payments, they would see the full savings of $637,000

• Savings even more dramatic if they invest in non-diesel generation

Practical Problem 2

• How should fixed PCE payments be apportioned to customers?– Could use current formula within the

utility– If utility promotes load reduction, PCE

retentions might be used to replace lost rates income

Overall Goals of Re-Tooling

• Make best use of current funding• Secure additional funding by

demonstrating innovation and efficiency

• Continue to provide reliable and affordable electric power

We’re all still in this together.

~The End

ReferencesPCE FY00, FY03 statisticsISER/AIDEA Electric Power Statistics, 2004ISER/MAFA Sustainable Utilities in Rural Alaska, 2003