Pandemic leaves Chugach Electric Association facing a revenue shortfall

With many once-bustling Anchorage office buildings dimmed as a result of the pandemic, Chugach Electric Association is having a hard time meeting its financial obligations, and utility leaders are asking for help from state regulators.

Attorneys for the state’s largest electric cooperative in early July filed a petition with the Regulatory Commission of Alaska asking to modify its detailed and highly technical approval of Chugach’s $1 billion purchase of formerly city-owned Municipal Light and Power, so Chugach can remain in good standing with its lenders and avoid raising electric rates. The long-discussed deal closed in October 2020.

Chugach spokeswoman Julie Hasquet wrote via email that the pandemic “has taken a toll” on the utility’s revenue, noting that power demand from commercial customers is down about 8 percent for the Anchorage-area utility.

“Like many businesses, we are feeling the effects of the economic downturn. In response, we are managing costs, and we are asking the RCA to allow us to modify the stipulation (agreement) that was accepted when we bought ML&P,” Hasquet said. “The modification, if accepted by the RCA, would provide a reprieve on the treatment of certain expenses over the next several years. This reprieve would allow revenues to recover and additional savings to be realized through integration efforts. We certainly don’t want to raise rates in a pandemic.”

Chugach leaders emphasized before the deal was final that rates for customers of both utilities would not increase as a result of the purchase.

More specifically, Chugach leaders are asking the RCA to allow the utility to forgo amortization of $19 million in fees and other costs related to the ML&P deal if it cannot maintain a “margin for interest” ratio of at least 1.20 on portions of the debt it took on to buy ML&P, according to the petition.

Chugach would continue to operate and maintain its books as if it will hit its original targets, but would “be entitled to reverse entries in its books associated with the amortization” if the margin for interest ratio is less than 1.20 at year’s end, the petition states.

Chugach borrowed approximately $800 million in private markets to purchase ML&P, according to Hasquet.

On Sept. 30, the state-owned Alaska Energy Authority became the latest stakeholder organization to back Chugach’s plan in filings with the RCA. AEA Director of Planning T.W. Patch, a former RCA commissioner, during the agency’s board meeting called the issue “inordinately complex” even in the oft-arcane realm of utility regulation.

“Chugach has failed or is on the cusp of failing to meet certain covenants in its debt structure,” Patch described to the AEA board.

“If you borrow money and you promise that you will pay that money back, there is a cost to that money if you don’t meet certain earnings targets. That is the nexus of the present case before the RCA,” he added.

Patch also highlighted that no other stakeholders, such as the other Railbelt utilities, have offered what he believes would be a better solution; they have largely supported Chugach’s petition.

“Frankly, I’m not sure that there’s a better way to protect the ratepayers, which is what Chugach is attempting to do,” he said, adding he believes it’s likely the RCA will approve the request.

RCA officials do not comment on issues before the commission.

Chugach leaders once expected to close the year with margins of $12.6 million and a margin for interest of 1.30 when they approved the utility’s 2021 budget late last year. However, that changed when Chugach received ML&P’s financial statements from the municipality the following month, according to the petition.

“Upon review, it became apparent ML&P (and now Chugach) was experiencing a significant decline in North District sales and revenues,” the filing states.

Chugach’s amended budget, including the updated ML&P figures, calculated out to year-end margins in the $600,000 range.

The not-for-profit cooperative utility model is largely based on thin operating margins to keep members’ rates as low as possible. The structure typically works well in the highly regulated and mostly predictable power industry, but it often leaves little financial cushion for utilities when the balance is upset.

ML&P’s former service area in the north and east portions of Anchorage included the Downtown, Midtown and U-Med areas, which have some of the highest concentrations of offices and other businesses in the city.

According to the petition, power sales from Chugach’s North District — the former ML&P service area — were down 14 percent and billing demand was off nearly 16 percent for the 12 months ending May 31. That resulted in a $16.2 million decrease in base revenue for the North District, while Chugach saw revenue from its more residential Southern District decline by just about $400,000 over the same period.

More broadly, Chugach and other large energy utilities in Alaska are facing flat or declining demand now and for the foreseeable future from a declining state population, as well as more efficient appliances causing households to use less energy.

Chugach’s purchase of ML&P had been contemplated for decades and was supported by some prominent Anchorage business leaders. Chugach officials insist it has still been beneficial to the community and ratepayers overall. They note ML&P would be facing the same situation if it were still a standalone utility and Chugach has so far captured savings of approximately $21 million in fuel, labor and not needing to account for inter-governmental charges, according to Hasquet.

“We are saving roughly $1 million each month in fuel alone. We expect savings to continue to materialize over the next several years as integration efforts are completed,” Hasquet wrote.