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With our powers combined: Utility merger pencils out for Anchorage

  • Author: Anchorage Daily News editorial board
    | Opinion
  • Updated: November 10, 2019
  • Published November 10, 2019

ML&P's plant 2 and 2A power generation facilities are located near the Glenn Highway in northeast Anchorage. Photographed on October 28, 2019. (Marc Lester / ADN)

There’s one hurdle left for the sale of Anchorage’s Municipal Light and Power to Chugach Electric Association, but it’s a big one. With an agreement now in place between the municipality and Chugach, the deal is before the Regulatory Commission of Alaska for final approval. It’s a big deal — nearly a billion dollars. And it can be hard for those of us whose primary interaction with the power business is paying our electric bill once per month to know if a deal so big and complex is a good one. But Anchorage residents can rest easy, and here are some reasons why:

Two utilities serving Anchorage doesn’t make sense

Usually, competition is a good thing. We’re so used to expecting multiple firms offering the same product that we often see that as the main way we can be sure that we’re not being gouged. But that’s not how it works with utilities, and power companies in particular. The massive infrastructure and energy generation costs lend themselves to natural monopolies; having multiple utilities serve the same area is a recipe for both to go broke, and for customers to pay high rates because of the duplicated infrastructure.

As Anchorage Economic Development Corp. CEO Bill Popp has said, there’s no other municipality of Anchorage’s size in the U.S. served by two different power utilities. There is significant duplication in the companies’ administration. The merger, over time, will reduce that, and should make the combined utility leaner and stronger as a result. In early 2018, according to reporting by ADN columnist Charles Wohlforth, Chugach CEO Lee Thibert “said savings will most likely will come as Chugach closes ML&P’s oldest plant, near Ship Creek, and its offices, and shuts down Chugach’s own oldest plant and another older unit to be determined, and as it allows attrition, around 5% per year, to reduce staff over five years.”

Merging the companies’ generating power will allow for a more efficient power mix

In another example of the inefficiency of a two-utility system, the past decade has seen the completion of two new plants — one by Chugach and one by ML&P — that are more efficient than older facilities but which provide significantly more capacity than is needed to serve the customers in the Anchorage Bowl. That means more debt to pay down — a bad thing. But with the new plants operated by one utility, both can run at full steam, replacing less efficient generation options and helping keep down the per-unit electricity cost. Chugach will still be saddled with the debt for both plants, but supplemental documents the utilities submitted to the RCA last week indicate that the merger isn’t expected to overburden Chugach’s credit rating or send power costs shooting upward.

Anchorage is getting a fair value for ML&P

As part of the sale process, the municipality reached out to other prospective buyers to see what they would be willing to pay to take over ML&P. They received five price estimates, ranging from $750 million to just more than $1 billion. The final sale price to Chugach, if the sale is approved, will be $999 million — at the upper end of that range. What’s more, Chugach has agreed to a rate freeze and layoff moratorium, lending some measure of fiscal certainty to customers and employees alike.

The municipality will gain capital and taxpayers should benefit

The sale price for ML&P is hundreds of millions of dollars more than its outstanding debt, so the Municipality of Anchorage will have a substantial pot of money left over. What happens to that money will be up to the Assembly, but it’s a safe bet that it will be used to establish a trust that can generate money to pay for services, pay down other debt, or some combination of the two. Either option is a win for taxpayers, as the money will offset funds that would otherwise come from property taxes.

The city will also use $15 million resulting from the sale to establish an addiction services center, a facility health experts, social workers and families of those struggling with addiction say the city desperately needs. The center will help to reduce drug-seeking behavior in Anchorage, and there is no such thing as an isolated problem. Addiction is also a significant driver for both homelessness and property crime, two other issues Anchorage has struggled to combat in recent years.

The sale of ML&P won’t solve all of Anchorage’s social woes. But it should allow the municipality to make some headway in dealing with them.

The bottom line

Taking into account the considerable upside of the merger for Anchorage residents (including money held aside by the municipality to make sure former ML&P customers don’t see rate increases in the first three years after the deal), and the limited potential downside, the purchase by Chugach makes sense for all parties involved, including residents.

Power utilities elsewhere in the state, which rely on some of the same generation sources as Chugach and ML&P, have expressed understandable reservations that their costs could go up indirectly because of the way the combined utility uses power. But those concerns shouldn’t be incompatible with the merger, and the RCA should be able to ensure Anchorage’s gain in a larger, more efficient utility isn’t the rest of the state’s loss. The RCA board has until Feb. 17 to make its decision on the deal. Based on what we’ve seen, it should be an easy call.