Legislature(2003 - 2004)
03/17/2004 03:20 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 515-MUNICIPAL WATER AND SEWER UTILITIES CHAIR ANDERSON announced that the next order of business would be HOUSE BILL NO. 515, "An Act relating to the regulation of municipal water and sewer utilities not in competition with other water and sewer utilities." Number 0268 CHAIR ANDERSON introduced HB 515 on behalf of the House Labor and Commerce Standing Committee, sponsor. He said it's fairly straightforward as it exempts the Anchorage Water and Wastewater Utility (AWWU) from regulation by the Regulatory Commission of Alaska (RCA). He explained that no other municipally owned water or wastewater utility is regulated by the RCA, save the City of Pelican, which requested regulation of its water utility. He said the Municipality of Anchorage (MOA) believes current RCA regulation processes are cumbersome, slow, expensive, and unresponsive to local needs. Therefore, he said, Mayor Begich and the MOA assembly believe the proposal encompassed in HB 515 would be more efficient and positive for the ratepayers. Chair Anderson explained: Ratepayers in Anchorage are required to pay for the expense of RCA regulatory process as a surcharge on every bill. That means our constituents are paying this every month, and that's whether or not the utility has a case pending. ... A good example is from 1993 until 2003, AWWU never had a rate increase from the RCA or the APUC, the former Alaska Public Utilities Commission. ... The ratepayers still had to pay the regulatory assessment on every bill. ... In 2004, AWWU ratepayers are projected to pay about $500,000 ... to the RCA to cover the costs of this regulation. The greatest costs appear to be in the form of regulatory delay in obtaining approval of a requested change. The [MOA] is directly accountable to ratepayers served by the utilities, and they are the voters, obviously. The municipality has experienced successfully regulating enterprise activities; that's the reason they want it under their purview. Examples of this are the Port of Anchorage, solid waste services, and, of course, Merrill Field. All of those are financially sound and, I think, they provide first-class consumer and customer service. The municipal public hearings are held on any proposed rate increase, and the public is really involved with the hearing process. Under this format, rather than RCA, it's amenable to easier access, going to the [municipality] versus going to the RCA and those fairly complicated meetings. Number 0493 CHAIR ANDERSON read from page 2, lines 5-8, which states: (B) a water utility owned by a political subdivision that does not directly compete with another water utility; or (C) a sewer utility owned by a political subdivision that does not directly compete with another sewer utility. He noted that subparagraphs (B) and (C) would be exempt from RCA regulation under this proposed bill. Number 0533 MARK PREMO, General Manager, Anchorage Water and Wastewater Utility, testified in support of HB 515, which would exempt AWWU from economic regulation by the RCA and place it in the same status as every other municipally owned water and wastewater utility in Alaska except one. Providing background, he said AWWU consists of two separate utilities, both subject to economic and service area regulations by the RCA. The water utility, a former municipal utility, has been under RCA regulation since inception of the [former] APUC in 1970. The Anchorage sewer utility was formerly owned by the Greater Anchorage Area Borough, and was voluntarily submitted to the APUC for regulation in 1971. He continued: An umbrella organization, AWWU was formed in 1975 following the unification of the Municipality of Anchorage. The Municipality of Anchorage in 1991 petitioned the then-APUC to exempt AWWU and its electrical utility from regulation. The decision split evenly by a vote of 2-2 on the question of exempting the electric utility and AWWU. The opinion by the commissioners opposing self- regulation cited competition by the municipality's electric utility/cell phone utility with other utilities as the primary reason why AWWU should remain regulated by the state. No commissioner suggested then, or has since suggested, that competition between water and wastewater utilities was present, nor is there any competition there today. There are a number of small, private, class D (indisc. - coughing) water systems in Anchorage that are not publicly owned and which do not receive regular water service from AWWU. Ten are certificated by the RCA. Seven of those are also economically regulated by the RCA, and the other three appear to be community systems run as cooperatives, therefore exempt from economic regulation. House Bill 515 does not apply to any of these small systems, since none is publicly owned with public oversight. Number 0691 MR. PREMO continued: Why does the Municipality of Anchorage desire exemption from RCA regulation? The current RCA regulations and procedures are slow and expensive. From 1993 to 2003, AWWU never requested a rate increase, yet AWWU ratepayers have paid approximately 2.8 million [dollars in] regulatory assessments to the RCA during this period as part of every monthly bill, and are projected to pay just short of $500,000 in 2004 to cover the cost of regulation. One of the two supporting documents I sent to Juneau two weeks ago, at the time of local regulation of municipal water and wastewater utilities, [has] dates listed incorrectly with regards to the timeframe in which AWWU had no rate increases. It has 1993 to 2004. It should be corrected to be 1993 to 2003, as the chair correctly stated. Number 0755 MR. PREMO continued: During the last decade there were a number of minor, relatively simple procedural tariff filings during this period of time for action, such as minor service- area adjustments and tariff-rule changes. However, the greater cost to AWWU and its customers is in the form of the cost of preparing filings and regulatory lag. History shows that local regulation is faster, less structured, and more economical. Current RCA regulations and procedures are nonresponsive to local need, which is our second point. The RCA process was designed for private utilities and is not entirely appropriate for municipal utilities. The RCA process is very structured. The municipality is more responsive to local needs and is directly accountable to the ratepayers who are served by these utilities. These customers are also municipal voters. Hearings are held by the municipality in all rate matters. I ask for the committee's support on House Bill 515. Self-regulation has worked effectively across the nation and in other Alaskan communities and in Anchorage. Actually, Anchorage has regulated some of its own public utilities for many years, many more years, in fact, than the state regulators. Anchorage has a proven record and has effectively regulated the Port of Anchorage, Merrill Field, Solid Waste Services; all are financially strong, high reputable enterprises that provide excellent customer service. Number 0834 MR. PREMO continued: AWWU has provided its customers with excellent service, low, stable rates, and sound finances. For more than a decade, ratepayers have benefited from no rate increases as AWWU has reduced positions and expenses by leveraging technology, improving business processes, while at the same time increasing spending on system repairs and rehabilitation, all without the direction and assistance from RCA. Over the years, the mayor and the assembly made sound decisions in their oversight of AWWU and other municipally owned utilities. Most recently, in January of 2004, AWWU filed for water and wastewater increases to be effective in 2004 and 2005. These rate increases are for increased payments in lieu of taxes, operating expenses, and debt-service costs of facilities constructed in prior years. Effective February 23, 2004, the RCA granted AWWU interim refundable rate increases. I expect the RCA approval to make these rates permanent in the fourth quarter of 2004. The Municipality of Anchorage and the administration support the establishment of a strong, independent board to oversee and regulate AWWU in lieu of the RCA. In conclusion, with the passage of House Bill 515, municipal regulation of AWWU will balance consumer protection with ... financial soundness, and AWWU will continue to operate on a sound business basis. The RCA would still continue to regulate AWWU water and wastewater certificated service areas. Number 0940 REPRESENTATIVE GATTO asked for clarification about MOA and Pelican as the only two entities currently under RCA regulation. MR. PREMO replied that this was correct with regard to publicly owned water and wastewater utilities. REPRESENTATIVE GATTO wondered if Pelican would have to pay a higher cost because of an exemption to the MOA. MR. PREMO deferred to Mark Johnson, commissioner and chair of RCA. REPRESENTATIVE ROKEBERG asked Mr. Premo to explain the AWWU billing process. MR. PREMO replied that it's done on an independent line item so the customer can identify the charge. The present rate is 0.867 percent for both the water and the wastewater, since they are billed separately. He said the interim increases granted on February 23, 2004, were 13.61 percent for water and 8.06 percent for wastewater. He explained that AWWU pays $500,000 a year for regulatory compliance to file tariff charges; this increase was the first granted since 1992 and, in fact, in 2001 there was a lowering of the rate for wastewater of 2.75 percent. Emphasizing that the $500,000 passed on to the RCA was for the RCA to conduct its work, he noted that AWWU must also prepare cases that go to the RCA commission; these costs are in addition to the $500,000 and are incorporated into the RCA charge. Number 1221 REPRESENTATIVE ROKEBERG asked what effect HB 515 would have on the recently granted interim rate increases, and if AWWU would have to conduct hearings to establish permanent rate increases. MR. PREMO responded that the rate increases before the RCA have undergone the public process and been passed by local ordinance. He recommended keeping these increases in place because the long-range financial plan had included this income. REPRESENTATIVE ROKEBERG asked for the anticipated amount of the net revenue increase resulting from the February 2004 increases for water and wastewater. MR. PREMO replied that in 2004 the interim refundable increase would result in $5.9 million and, when the rates become permanently established, the AWWU has projected a collection of $6.1 million over a 12-month period. Number 1382 CHAIR ANDERSON suggested this has nothing to do with the current rate increase. MR. PREMO agreed and noted that this bill has to do with the internal financial workings of the utility and keeping them economically healthy. REPRESENTATIVE GATTO asked Mr. Premo to think of it from the point of view of a ratepayer in Anchorage. He said: There is an interim rate increase for about $6 million; it's before the RCA. Before the RCA can determine, you come to the legislature and get the RCA out of the process, and the rate increase becomes permanent because there is no other entity to control it. Therefore, the ratepayer looks at us and says, "Well, you couldn't do it through the RCA, so you got legislation to do it." Am I correct? MR. PREMO replied: I don't think you're totally correct, Representative Gatto, in the fact that, when we file a rate increase the process is a two-step process. I'm sure Chairman Johnson [of the RCA] can speak to it. We filed the rate increase in January. .... There's a permanent part of the rate increase they'll make permanently effective based on RCA's ruling, but in addition, at that point in time, we asked for what we call interim rates. Those interim rates are established approximately 45 days on with the commission. Those interim rates have been granted; we're collecting those interim rates today, already. When the commission finally rules, I expect, the fourth quarter of this year, ... those interim rates will be made permanent. There may be some adjustments in what the actual rate structure is, within a point and a half, a point, would be my expectations at the most. Should we have been overcollecting, in the RCA's viewpoint, in this point in time, we'd actually have refundable. That's why we say they're interim, refundable rates. So, in essence, the RCA has already approved the interim request, sir. Number 1438 CHAIR ANDERSON commented that RCA is cumbersome and expensive, that AWWU wants to join the large majority of entities not regulated by RCA, and, while he appreciated Mark Johnson's chairmanship of RCA, AWWU wanted to make it easier and less expensive for its customers through local control of water and wastewater utilities. He said, "It's more of a payment that isn't necessary, because you're not using them as a regulatory body, because there hasn't been the need." MR. PREMO agreed and stated: We believe we'd be much speedier with respect to our own regulatory process that we would set up here in Anchorage to overview the utility, which would be a very strong board-type of overview. We think depoliticizing any decisions is important. We need to make sure there's long-term health stability of the utility, and, obviously, we need to be customer- responsive in the fact that we'd be over the purview of the local assembly, with the local assembly being - they're voters - also being ratepayers, much more responsive, nominally in the decrease of the RCA surcharge, but, more importantly, in the interaction and the cost of interaction with the RCA ... and, ultimately, the speed with which we could conduct our business internally. Number 1588 REPRESENTATIVE LYNN asked what difference HB 515 would make to a homeowner's pocketbook. MR. PREMO said he couldn't answer directly, but AWWU had a long- range financial plan and he anticipated a decrease in the cost of regulation to the overall utility; this decrease would affect the cost to the ratepayer. He said local control creates a higher level of accountability because the voters can make their wishes known. He said: Right now, quite candidly, I see it as just the opposite. What you have ... is a situation where you have local control in the fact that any rate increase goes through the assembly through an ordinance and public hearing process. However, how many times have I seen a local assembly member stand up and say, "Well, you know, this is going to be looked at and approved by the RCA before it becomes implemented." So they, in essence, are saying, "Yes, we've done our job, but really the RCA is accountable." Well, now, what we're doing is we're transferring that back around and making those local officials really accountable for their actions. REPRESENTATIVE LYNN said, "I guess that answers my question. The potential for the future is, there's going to be less money out of pocket for the individual user of these utilities. That's what I wanted to hear. That's the odds are." Number 1711 MARK K. JOHNSON, Commissioner, Chair, Regulatory Commission of Alaska (RCA), Department of Community & Economic Development, testified that a fundamental policy call is before the legislature as whether municipal self-regulation of a water or sewer utility is the appropriate way to proceed. He said: In general, we believe that the regulatory cost charges that have been paid to RCA by the municipality, by AWWU, have been overstated in their decisional document. That was the document that was placed in front of the assembly. ... Fundamentally, from the RCA's perspective, ... we believe that AWWU is a pretty well-run utility. Nonetheless, we believe there are some inherent problems in the local self- regulation. ... MR. JOHNSON pointed out the significant benefits to consumers from RCA jurisdiction over the years. The primary benefit has been relative rate stability over an extended period of time. Although it is likely attributable in part to wise management, he said certainly declining interest rates had a lot to do with it, in addition to significant consumer benefits when a utility that sets rates knows it is subject to RCA jurisdiction and review. He continued: We suggest that what you have before you is a fundamental alteration of that framework. We don't believe that the benefits are as clear as maybe stated. For example, it should not be overlooked that the municipality, ... if they intend to stand for self-regulation through a board, ... will have significant expenses in setting up that board and staffing it. ... What is clear is that if this legislation passes today, rates could be set by the Anchorage Assembly with the adoption of a municipal ordinance. As noted, that is not a difficult process. There's no question, at least in my view, that without the RCA in the picture, the degree of scrutiny that those rate decisions might be exposed to might be substantially reduced. I say it's a municipal ordinance process; it could be introduced and heard before the assembly in a very, very short period of time. And we believe that it would probably usher in an era of rate instability that would not at all be beneficial to the consumer. Number 1891 MR. JOHNSON continued: The additional thing that I would call to your attention is the history of self-regulation is really not all that clear. ... In Fairbanks, the water and sewer utility used to be owned and run by the municipality. The experience in Fairbanks was not a positive one. ... Staff informs me that, in fact, the public was very much urging that the municipality no longer run that utility and turn it over to private hands. And that utility today rests in private hands. I suggest that the transitional process ... may not be quite as clear as some would suggest to you. We have a process that's very well established; we adjudicate these matters, usage of a written record; when ... commissioners we hear a variety of matters from multiple utility groups. The process is very familiar to those that participate in it. ... The municipality would have to establish something comparable and, as I suggested, nothing of that nature has been established by the municipality so far. We believe that the RCA is particularly well suited to deal with the problems which are inherent in self- regulation by a municipality. One of those issues relates to the reasonableness and the collection of payments in lieu of taxes. In the case of AWWU, that takes the form of the MUSA [Municipal Utility Service Assessment] and other payments. Of course, you have self-regulation, as you have a municipal assembly that on the one hand has an appetite for spending money, and yet they would also be placed into the category of setting the rates. I suggest that there's an inherent conflict in that approach. ... We view this as a fundamental policy call in front of the legislature. Number 2024 REPRESENTATIVE GATTO observed that the fiscal note indicated RCA staff would be reduced by two positions, saving $258,000. He asked if this was accurate. MR. JOHNSON replied that a full year's reduction would actually be $345,000; there wasn't a direct match between two positions and the $345,000. He said he hadn't yet broken out the proposed reductions among the various operating-expenditure categories listed on the fiscal note. REPRESENTATIVE GATTO asked if Pelican would be forced to assume a higher RCA cost as a result of RCA's losing the revenue from AWWU. MR. JOHNSON replied that the impact on Pelican would be quite small. Number 2099 REPRESENTATIVE ROKEBERG asked if the refundable interim rate increase would not apply if AWWU assumed authority. MR. JOHNSON replied that it would depend on the effective date of the legislation and on whether the Anchorage assembly wanted to make the rate increase permanent. REPRESENTATIVE ROKEBERG offered his belief that the attorney general's office staffs an office in the RCA that represents the public's concerns about rate matters. He asked, if there were going to be a hearing on rates, whether this office would take up the case, as a rule. Number 2167 MR. JOHNSON replied that the attorney general or his/her designee would make that decision. He mentioned audits and investigations and that the attorney general participates in this kind of a case, but said there was no scheduled hearing at this time. REPRESENTATIVE ROKEBERG asked if there is a six-month timeframe in which RCA has to take up this matter or it would become a permanent rate increase. MR. JOHNSON affirmed that, saying he preferred to comment no further on this current rate case. Number 2234 REPRESENTATIVE ROKEBERG noted that RCA is supposed to be an independent body acting outside the purview of politics so it can give fair, reasonable, and just hearings on tariffs and dockets. He also noted that an office of public advocacy exists within RCA, and said the purpose is to have a regulatory authority rather than self-regulation on the part of politicians. MR. JOHNSON replied that he thought, in every state, that publicly elected officials determined the extent to which they wanted self-regulation by entities that have other due process procedures in place. He noted that the Anchorage assembly acts pursuant to public notice and provides opportunities for the public to participate in its process; he reiterated that this issue is a fundamental policy call of the legislature. He said regulation could come from RCA or the legislature could choose to establish a different process to permit municipal self- regulation. CHAIR ANDERSON suggested losing $500,000 from AWWU could result in RCA's losing positions. MR. JOHNSON replied that RCA could increase cost charges on the remaining utilities it regulates or could reduce its budget. He said he believes the responsible thing to do would be to reduce RCA's budget. CHAIR ANDERSON asked if he agreed that Mr. Premo could reduce or stabilize rates as a result of not having to pay $500,000 to RCA. MR. JOHNSON acknowledged that as a possibility, but said he didn't believe the committee could predict with any certainty whether the reductions would be passed on to ratepayers, since the outcome would be out of the hands of RCA and the legislature, and into the hands of the Municipality of Anchorage. Number 2341 ROBERT LOHR, Office of Management and Budget, Municipality of Anchorage, stated support for HB 515 and said: I do have three comments. First, as the chairman of the RCA has indicated, this is a fundamental policy call for the legislature. But actually the legislature has made the policy call, and that is that municipally owned utilities are exempt from regulation by the RCA, with very limited exceptions. Currently, as has been indicated by Mr. Premo and other testimony, the only publicly owned water-sewer utilities that are currently regulated by the RCA with respect to rates, services, and practices are AWWU and the City of Pelican. In the latter case, Pelican has asked to be economically regulated by the commission. So this policy call's been made, and this bill is a small adjustment to that policy to make it clear that AWWU can qualify for the same treatment as other publicly owned water and sewer utilities have. TAPE 04-27, SIDE B Number 2397 MR. LOHR continued: I worked with the regulatory commission or its predecessor, the APUC, for nine or ten years, and I was there when the regulatory cost charge was created ... in 1992. So I'm very familiar with that mechanism. But with respect to ratemaking, the process that will be followed in the future by AWWU is extremely similar to that that is followed in preparing a rate case for the RCA; namely, the revenue requirement is established, and that's based on the cost of operating the utility. It is a rate-based, rate-of-return model that is very familiar to all of those involved with public utilities. That process would not change. The cost-of-service study to allocate those costs among the customer classes properly would not change. And, third, nor would the rate redesign phase, where the costs are adjusted to match those costs of providing service such that the cost causer becomes the cost payer. Those techniques are well known. They are industry standards, and they would be followed under AWWU, as a self-regulated utility. I am sure that the board of directors of AWWU will insist on it. Number 2329 MR. LOHR continued: As Mr. Premo's already indicated, there is accountability in the fact that the voters and the ratepayers are one and the same. And the mayor and the assembly would continue to be fully accountable. I would make just one note: the assembly has not, in fact, approved the rates. What they have done is approved the filing of the rate case with the RCA. The permanent rate decision would remain. The third comment I'd like to make is that recent legislative audits have asked the commission, the RCA, to focus on small ... water and sewer utilities, because there are 65 utilities out there that are not certified, which the commission is aware of. I would respectfully suggest that this would be a good area of attention. I know that the commission has, in response to the legislative audit, adopted some regulations to relax the certification process for those utilities. But, to date, I believe many of them remain uncertified. Number 2271 REPRESENTATIVE ROKEBERG asked about the status of the small water utilities. He said in his area of Anchorage, for example, there are a number of class "a," "b," and "c" designations by the Department of Environmental Conservation (DEC). He asked, "Those small co-op or neighborhood-type water utilities that are privately owned in the main, are they regulated by the RCA now?" MR. JOHNSON replied that, in fairness, he is still new at his job and learning a lot. He said in general, as it relates to the small water and sewage utilities, there are a larger number than 65, and the RCA has made efforts to provide some rudimentary form of regulation to them. He said the primary regulatory framework at this time is through DEC, which has various classes, although he didn't know how those classes would relate to RCA's proposed limited certification. He said although RCA is moving into that area of regulation, it remains to be seen how it intends to pay for those efforts. Number 2206 REPRESENTATIVE ROKEBERG said in Anchorage there are several hundreds of these type of water systems. He asked if the municipal water service competes with these small private water systems. MR. PREMO responded: We need to kind of differentiate the classes of utilities. ... Regarding how the RCA classifies utilities, which is on a very class description, a class "a" would be one like the [AWWU]. We have $1 million or greater [of] revenue, all the way down to a class "d," which is less than $250,000 of revenue. There are 11 of those utilities within Anchorage. All but AWWU are rated as a class "d" system, less than $250,000 in revenue annually. Of those, all but three are economically regulated, and they are privately owned. There are three that are not economically regulated, but they are run, in essence, as a cooperative. They are outside of regulation. The other thing that I think you are speaking to is that there are also an additional 90 water systems within the Municipality of Anchorage that report to the DEC as a small water utility. I think that's what you were referring to. So, that might give you a basis for the number. Number 2107 REPRESENTATIVE DAHLSTROM noted that she was from Eagle River and that her community had been discussing secession from the MOA. She asked Mr. Johnson what the changes being discussed in HB 515 would be if Eagle River did secede. MR. JOHNSON replied that he thought parts of Eagle River were served by AWWU. He noted a broader question: What is the ownership interest in the utility? He said people who live in the Chugiak area, for example, live in the MOA, but aren't served by AWWU; they still have an ownership interest in the utility. He said it's an extremely complex question, and it would depend on the terms of the separation of Chugiak/Eagle River from the MOA. Number 2011 MR. LOHR added, "I believe that the RCA would retain full authority over certificates. That is, service territories and their boundaries would continue to be regulated by the RCA, even if this bill was adopted and enacted." REPRESENTATIVE GATTO asked Mr. Johnson if the RCA was likely to approve the two increases requested by AWWU. MR. JOHNSON declined to comment. CHAIR ANDERSON said he thought this bill was for the consumer; that rates would be lowered or stabilized; and that, from the perspective of the Anchorage legislators, the consumers would save money and still get efficient service. Number 1930 CHAIR ANDERSON moved to report HB 515 out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, HB 515 was reported from the House Labor and Commerce Standing Committee.