The ML&P Buyout by Chugach Electric Will Shock Anchorage Wallets

In the upcoming Anchorage election, voters are being asked to vote on the proposed buyout (Proposition 10) of the Anchorage Municipal Light & Power (ML&P) by Chugach Electric. What prompted this buy-out proposal and will consumers benefit from it?

First, some background. ML&P serves the urban portions of Anchorage and is owned by the people of the entire Municipality of Anchorage. Chugach Electric is a not-for-profit member-owned utility that serves Anchorage other than downtown, midtown and close-lying areas.

In the past ten years, both utilities wanted their own power generation plants and ML&P built a plant for which consumers are now being asked to pay. ML&P consumers currently are being shocked by a 37.3% base rate increase over the past two years, to pay for ML&P’s newly constructed generation plant. Now the Alaska Railbelt has twice the needed generation capacity and consumers are being asked to bail the utilities out.

That is why the Anchorage municipal administration is looking for Chugach Electric to absorb ML&P and spread the rate increases across a broader customer base. So not only will ML&P consumers be paying for this excess capacity, but Chugach consumers will also be saddled with the long-term debt—millions of dollars for decades. Why would Chugach consumers want to subsidize this buyout for the Municipality? Better yet, why does the Municipality want to sell ML&P to Chugach Electric?

The Municipality wants to sell ML&P so it can cover itself for a bad decision in overbuilding generation capacity. If this sale happens, the Municipality can wash its hands of the entire debacle. More importantly, the Municipality can funnel some of the sale proceeds into its general government accounts which it can spend as the Anchorage Assembly sees fit. This would be an infusion of hundreds of millions into the Municipality’s coffers that could be spent on its current priorities of trails, homeless shelters, and a more walkable city (as opposed to public safety and road maintenance). The sale process leaves much to be desired as well.

It is unclear what the sale process entailed because the documentation for the process has not been released by the mayor. It appears as if the sale process was a sole source to Chugach Electric and a competitive bid process was not followed as recommended by the Goldman Sachs study. A competitive sale process usually brings a much better price/value to the seller (Municipality). Until the mayor provides all documents relating to this proposed sale (including emails), we will never know if the taxpayers got the best deal possible.

When two similar entities are consolidated, the result is usually some synergy and reductions in duplicative functions requiring fewer workers. However in this case according to Lee Thibert, CEO of Chugach Electric, there will be no layoffs and the combined workforce will be reduced only through attrition and reorganization. Does this mean there will be two accounting functions, two personnel functions, two warehouse functions, and all other duplicative functions? Mr. Thibert says that personnel savings would take 30 to 40 years to attain. That seems an extremely long time for attrition and personnel savings due to consolidation. Unfortunately, labor savings seem minimal, if any. Here is wording from the Anchorage Ordinance for the ballot:

“Retention of employees. Chugach Electric would commit to not lay off any ML&P or Chugach Electric employees as a result of the transaction and would succeed to all rights of the collective bargaining agreement covering ML&P employees.”

Translation: There will be absolutely no savings from this buyout.

But shouldn’t utility rates go down if this buyout happens? The mayor’s office says that utility rates will not increase. Here is a quote from the Anchorage Ordinance for the ballot:

“Base rates for existing ML&P and Chugach Electric rate payers would not increase as a result of the transaction.”

Note the wording “base rates.” These rates may not increase as a “result of the transaction” but other rate charges may increase on your bill similar to the Fire Island Wind Farm surcharge and the surcharge for burying power lines. And even the “base rates” may increase due to other factors, not as a result of the transaction. Buyer beware. The large print taketh and the small print taketh away, as the saying goes.
The Goldman Sachs study of the buyout notes:

“Assumptions under all scenarios: Beginning in 2020, the utility will raise rates every two years to achieve a 10.9% return on equity target, a threshold agreed upon by ML&P, MOA, and their regulatory counsel. In the event that this does not generate enough income to achieve the target return on investment, the utility will pursue rate increases in successive years until the ROE is achieved.”

And we are all aware of what a monopolistic utility can demand from the regulatory agency—higher rates, especially if there is no consolidation of personnel.

Finally, this entire buyout proposal has been cloaked in darkness with little to no disclosure to voters. The mayor’s office has filtered the information to the public. And now the Anchorage Assembly has changed the voter approval rate for this buyout from a required 60% vote to a mere 50% majority. Voters need to beware of a deal cut behind closed doors and pushed through to protect the wasteful decision-making of ML&P to build an unnecessary generation plant.

With Proposition 10: Buyer Beware

SOURCES

Proposition 10: https://www.muni.org/Departments/Assembly/Clerk/Elections/2018%20Election/AO%202018-1(S).pdf

https://www.adn.com/alaska-news/anchorage/2018/01/26/mlps-1-billion-price-tag-confidential-report-sheds-light-on-deal/

http://www.alaskajournal.com/2017-12-21/anchorage-utilities-mayor-announce-1b-consolidation-deal#.Wqlrsnwh2dE

https://www.adn.com/opinions/2018/03/08/combining-utilities-is-a-laudable-goal-but-the-mlp-ballot-measure-lacks-transparency-and-manipulates-the-city-charter/

Goldman Sachs Study: https://s3.amazonaws.com/arc-wordpress-client-uploads/adn/wp-content/uploads/2018/01/26044421/MOA-Summary-Report-Aug-9-2017.pdf