Utility regulators to investigate HEA subsidiary’s deregulation election

In an order issued Wednesday, the Regulatory Commission of Alaska opened an investigation into whether the Homer Electric Association Board of Directors or HEA members will participate in an election to deregulate HEA’s infrastructure-owning subsidiary, Alaska Electric and Energy Cooperative.

The generating plants, wires, towers, poles and other infrastructure that bring electricity to HEA’s 22,892 members on the Kenai Peninsula are legally owned not by HEA, but by AEEC — a cooperative with no employees with HEA as its sole member and a board of directors identical to HEA’s.

By legally separating AEEC’s ownership of electrical generation and transmission assets from HEA’s role as power distributor, the cooperative is able to get cheaper financing for infrastructure development. In a previous interview, HEA/AEEC general manager Brad Janorschke said because electrical infrastructure — in particular, the hundreds of wooden poles standing outside in harsh weather and the fragile wires strung between them — is a high insurance risk, HEA saves about $2.5 million annually by assigning infrastructure ownership to a different entity. Utility financing agencies typically put stricter loan requirements on generation and transmission entities than distributors, he said.

Alaska statute allows cooperatives overseen by the Regulatory Commission of Alaska — the state’s public utility regulator, also known as the RCA — to withdraw from RCA oversight by a majority vote of their members. HEA recently finished such an election, the first ballots of which were mailed to members on Oct. 5. The RCA began counting the returned ballots on Thursday and expects to announce the results of HEA’s deregulation election by the end of the month.

On May 10, the AEEC board of directors voted unanimously for the subsidiary cooperative to also hold a deregulation election and arranged for ballots to be the sent to their sole member — the HEA board of directors, comprised of the same people — on Dec. 21. That scheduled election is now pending the results of the RCA investigation. If the five RCA commissioners support the argument made by HEA members Peter McKay and Bob Shavelson, the voters in AEEC’s deregulation election will not be AEEC’s one legal member — the HEA board — but the HEA members who ultimately use the service AEEC provides.

McKay and Shavelson, who is also the executive director of the conservation nonprofit Cook Inletkeeper, have publicly criticized HEA’s deregulation bid. Their Nov. 15 complaint to the RCA alleges “that HEA members are being denied their right to participate in the (AEEC) deregulation decision.”

“The AEEC holds all of the HEA Generation and Transmission assets and a very substantial amount of AEEC debt,” their complaint states, referring to the about $150 million in loans that AEEC owes to the U.S Department of Agriculture’s Rural Utility Service — about 40 percent of the combined HEA/AEEC debt to financing agencies of $372 million.

AEEC’s ability to take on debt is an issue Shavelson expressed concern about in 2010, when he was one of seven HEA members to question in a letter to the RCA whether HEA would be able to borrow through AEEC beyond its member-mandated debt cap.

HEA has had a debt cap, approved by a two-thirds vote of its members, since the cooperative began in 1945. The most recent cap was set in 2004 at $450 million, according to an email from HEA spokesperson Melissa Carlin. Carlin wrote that AEEC has no debt cap in its articles of incorporation. The RCA declined to investigate AEEC’s borrowing authority in an order issued July 19, 2011, calling it an internal cooperative governance issue.

Shavelson and McKay both said their present complaint rises from a lack of information about the AEEC deregulation election, citing the fact that HEA representatives hadn’t mentioned the AEEC board’s vote to hold the election at public information meetings HEA held this summer in Kenai and Homer, nor in an October RCA meeting at which commissioners speculated on whether or not such an election could occur.

HEA management representatives had not returned an emailed request for comments by press time Saturday evening. In previous interviews with the Homer News, HEA attorney Rick Baldwin said when voting on AEEC’s deregulation, he believed the HEA board of directors plans to follow the results of HEA’s deregulation election. Shavelson said he’d been unable to get information about the possibility of an AEEC deregulation from HEA staff, an experience he said demonstrates his concern that a deregulated HEA would decrease its members’ ability to stay informed about the cooperative.

“If the RCA was not intervening here, HEA would just be blowing us off,” Shavelson said. “That’s why this deregulation vote is so important.”

In their Wednesday order the RCA commissioners didn’t address Shavelson and McKay’s allegations of non-transparency, but decided to investigate whether the HEA board can legally deregulate AEEC in light of two previous RCA decisions in which cooperatives owned by other cooperatives were made to seek deregulation votes from the members, rather than the board, of the owning cooperative.

One of these precedents is a 1985 case in which AEEC’s predecessor Alaska Electric Generation and Transmission Cooperative — a similar infrastructure-owning cooperative with HEA and Matanuska Electric Association as its two members — sought to exempt itself from RCA oversight in order to more quickly install a generator.

The commissioners decided that deregulating AEG&T required a vote of HEA and MEA’s membership, rather than their directors, by interpreting the Alaska statutes that allow utility deregulation — statutes that “do not clearly establish whether an election by AEG&T to be exempt from regulation must be based on a vote of its two members, through their Boards of Directors, or on a vote of the consumers of HEA and MEA,” commissioners wrote in their decision.

“It does, however, seem clear that the legislature contemplated an election by the actual consumers, because at the time the statute was passed no generation and transmission cooperatives existed, and all cooperatives had actual consumers as their members,” the commissioners wrote.

On this basis, they ruled that AEG&T’s deregulation votes must be cast by the members of the two owning cooperatives.

The AEG&T deregulation election that commissioners debated in 1985 never actually came to pass, but the condition remained with AEG&T after HEA withdrew from it and formed AEEC in 2001, leaving AEG&T with MEA as its sole member. Although AEEC inherited AEG&T’s role of owning HEA infrastructure, it didn’t inherit the 1985 condition, being a new cooperative.

In its Wednesday order, RCA commissioners stated that this condition is “based on the overwhelming public interest in the regulation of (generation and transmission) cooperatives for the benefit of the purchasing distribution utility’s consumers,” and “is generally applicable to all single/limited membership (generation and transmission) cooperatives without an explicit condition on the certificate.”

The condition’s omission from AEEC “is at most (a) historical accident,” the commissioners wrote. Attorney Gregory Stein, representing HEA, filed to dismiss Shavelson and McKay’s complaint on Nov. 30, stating that “there are no facts or issues of law in dispute” and that the AEEC deregulation election is an internal cooperative governance issue that the RCA has no authority over.

The RCA declined to dismiss the case on Dec. 1 and required HEA to file a reply by the next day — a period that Stein called in his answer an “unreasonably shortened” timeframe.

Among other arguments in his response, Stein wrote that an investigation would be improper because “the (RCA) has a direct financial interest in HEA remaining regulated since it stands to lose $340,000 if HEA is deregulated and thus cannot act as a fair and impartial tribunal.”

HEA Manager Janorschke has said regulatory expenses cost HEA about $340,000 annually, which is distributed among members as a charge equal to about $4.55 annually for the average HEA customer.

Wednesday’s decision by the five-member RCA gives HEA until Dec. 14 to argue for their view of the AEEC deregulation election. RCA Commissioner Bob Pickett was absent for the decision, and commerisioner Janis Wilson dissented. McKay said although the RCA’s decision to investigate “validated kind of what we thought,” the outcome remains uncertain

“I don’t think it’s a slam dunk,” he said. “I think it’s actually a fairly complex legal question. Homer Electric could choose to take it to Superior Court. It’s one of those decisions that’s not over until it’s over.”

 

Reach Ben Boettger at ben.boettger@peninsulaclarion.com.

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