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RCA hears cost analysis of reforming Railbelt power grid

  • Author: Alan Bailey
  • Updated: September 28, 2016
  • Published May 2, 2015

A debate has raged for many years over the question of whether or how to improve the transmission grid that carries electrical power around the Alaska Railbelt. The aging grid is operated by five independent utilities, suffers from some single points of failure and lacks the capacity to make optimum use of the power that is generated at various points along its length.

Some, including the Alaska Energy Authority, have at various times recommended both upgrades to the grid infrastructure and major changes to the way in which the grid is managed, perhaps bringing the entire grid under a unified management structure, for example.

RCA investigation

Following a directive from the state Legislature, the Regulatory Commission of Alaska is investigating the thorny question of whether there would be benefit in transferring the management of the grid to some form of independent operator. Proponents of this option have said that a single operator could oversee the unified dispatch of power on the grid, thus bringing the benefits of using the lowest cost power generation to the maximum extent possible while also easing the ability to make major decisions over grid upgrades.

Anthony Scott, senior economist and energy analyst at the Alaska Center for Energy and Power, is conducting a series of presentations to the commission, presenting analyses of the costs and benefits that may be associated with changes in the way in which the grid is managed. And, in an April 29 presentation, Scott honed in on the cost side of the cost-benefit equation, saying that while change could be expensive and risky, some potential costs associated with operation under a single private company do not appear to be prohibitive.

Complex system

He prefaced his remarks by commenting that the current transmission grid system and its mode of management form a complex, multidimensional entity that requires more than just a simple cost-benefit analysis. In general, for example, the benefits of system reliability cannot readily be quantified. The utilities that currently manage the grid appear to have made decisions that optimize the operation of the grid from each utility's perspective. And, perhaps, what appears to be an optimum situation for each utility may be optimum for the grid as a whole, he conjectured.

Moreover, any change to a new arrangement would involve significant transition costs, he said.

However, on the assumption that there would be benefit from some form of unified operation, Scott proceeded to describe some ballpark cost data for that approach, to at least see if change appears feasible from a cost perspective.

Scott said that he had used data from FERC filings for the Railbelt power utilities for 2013 and made a number of simplifying assumptions to derive cost data for the transmission grid. Overall, it appears to cost about $38 million annually to operate the grid, about 4 percent of total Railbelt power utility operating costs, he said.

In terms of the current book value of the transmission system, it turns out that Southcentral utility Chugach Electric Association owns about half of the system, with Golden Valley Electric Association, the Fairbanks utility, owning about quarter. As a result the percentage of each utility's revenue requirement needed to support the transmission network, a measure of each utility's financial interest in the system, also varies from one utility to another, with Chugach Electric being the highest at 6.2 percent. Matanuska Electric Association has the lowest estimated revenue requirement, at less than 1 percent.

Postage stamp rate

It follows that if the revenue needed to operate the grid were to come from a consistent or "postage stamp" rate across the whole grid, as a consequence of some form of unified rate structure, the rates for Chugach Electric and Golden Valley would drop while those for the other utilities would rise. However, the rate change for Chugach Electric, by far the largest of the changes, would just be around half a cent per kilowatt hour, a figure that might represent a $3.19 drop in a typical consumer's monthly electricity bill.

If this postage stamp rate were to result from a private transmission company taking over the grid, that company would incur a higher cost of capital than the current utilities and would also be liable for federal and state income taxes, Scott said. The net impact of those additional costs might amount to an increase of 60 cents per month in an average customer's electricity bill, thus reducing the gain from a postage stamp rate for a Chugach Electric customer to around $2.59 per month. Under this scenario, the biggest monthly cost increase for a consumer would come from Matanuska Electric Association, with an increase of perhaps $2.94.

Based on these numbers, Scott said that from his perspective having a private party with private equity returns operating the grid does not appear to be a big deal in terms of its cost implications. Scott deferred discussion of benefits that might arise from a unified grid to a further talk that will revolve around the benefit question.

System upgrades

However, while emphasizing that the question of having a private transmission company take on the grid has no implications in terms of upgrades to the grid, Scott commented that the Alaska Energy Authority had recommended major upgrades, to improve the grid reliability and to prepare the grid to be able to handle power supplies from a planned major hydropower system at Watana on the Susitna River. The authority had actually determined that the upgrades would pay for themselves, even without the Watana dam, mainly as a result of the heightened efficiency of the dispatch of power over the upgraded system, Scott said.

Scott commented that the concept of expecting the state to fund transmission upgrades of this type appears questionable, if a private company is able to raise capital to invest in the system.

Scott also provided some cost estimates for enforcing reliability standards on the grid, and for unifying the dispatch of power.

This story originally appeared in Petroleum News and has been republished with permission.

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