Defunding Power Cost Equalization Would Gut a Lifeline for Rural Alaska

Posted: November 12, 2020

By Meera Kohler, President/CEO of AVEC

A year and a half ago, the Power Cost Equalization (PCE) endowment was on the verge of disappearing into the Constitutional Budget Reserve, when the Legislature reversed the sweep and the endowment remained intact. During election season, we heard from some legislative candidates who believe the PCE endowment is just a pot of money that can be used to fill the budget gap. This would be a one-time infusion that would gut a lifeline program for rural Alaska.

Understanding PCE is a challenge for folks who are unfamiliar with rural Alaska, so a brief history of the program might help. Rural Alaska has been tied to diesel fuel since villages were first electrified. Most of that electrification happened after statehood — long after Southcentral Alaska, with its majority population, switched to cheap natural gas made possible by subsidized oil and gas development in Cook Inlet.

Until the late 1970s, when the cost of oil rose precipitously, both electricity and heat were affordable to most. With the construction of the trans-Alaska oil pipeline, wealth poured into urban Alaska in the form of well-paying jobs and, once the oil started flowing, into the state’s coffers. Forward-looking politicians in those early days of oil wealth acknowledged that the bedrock of economic development lay in affordable electricity, and extensive studies were launched to identify options to bring low-cost power to communities across the state.

By 1983, the state was pursuing many projects to reduce the cost of energy for the Anchorage-Matanuska Valley area, Fairbanks and medium-sized communities with hydro potential. More than a billion dollars was poured into those efforts.

Unfortunately, there was no silver bullet for rural Alaska; most of those communities were too small and too dispersed. So in 1984, a short-term program called Power Cost Assistance — that had been established in 1981 — was rewritten to provide ongoing benefit for rural Alaskans. The program was renamed Power Cost Equalization. The objective was that PCE would help rural Alaskans with their energy costs as cheap natural gas, hydro development and interties were benefitting the more developed parts of the state. Ongoing PCE was to help balance out the longevity of natural gas supplies and power supply construction.

The PCE program began 1984. It reduced the cost of the first 750 kilowatt-hours of electricity to 8 cents — a little more than the average cost in Anchorage, Fairbanks and Juneau. Even then, more than half the electricity sold in rural Alaska was not eligible for PCE. The program cost about $17 million per year.

In 1986, the bottom dropped out of the oil market. For a time, a sockeye salmon was worth as much as a barrel of oil. The Susitna Hydroelectric Project for the Railbelt (estimated then to cost $2 billion) was shelved. And PCE ran into choppy waters. The program’s promise turned into an annual legislative struggle for funding. PCE was drastically rewritten so that eligible kilowatt-hours were reduced by 40% and the threshold for PCE eligibility was raised by 50%. Even so, the program was underfunded.

For 15 years, despite the lowered cost of the program, communities received between 10% and 20% less than under the formula. Meanwhile, the cost of oil in rural Alaska rose inexorably. The 1989 Exxon Valdez oil spill resulted in significant and expensive changes to how oil was transported and stored. Rural households found themselves paying between 30% and 50% of their disposable income on energy. In urban Alaska, that number was between 2% and 5%.

In 2000, urban and rural legislators reached yet another compromise. The PCE Endowment Fund was created and seeded with $100 million from the Constitutional Budget Reserve, plus the proceeds from the sale of four hydroelectric projects that were built in the mid-80s during the times of plenty. The projects were sold to the communities they benefitted for 20 cents on the dollar.

Two additional deposits were approved by the Legislature to the PCE endowment, in 2006 and 2012. Both were the result of urban-rural compromises to balance out the power supply assets built for urban Alaska. PCE assistance had to suffice for rural Alaska.

Today, the PCE endowment is invested by the state to yield 5%, and up to 5% of the corpus of the endowment can be used to help rural consumers with their high electric bills. In years that the fund earns more than needed for PCE, 70 percent of the “excess earnings” can be used for up to $30 million in municipal assistance (formerly known as revenue sharing) for local governments, large and small. If there are still available PCE endowment earnings, they can be used for renewable energy or to upgrade rural power systems.

Today, only about 30% of electricity sold by rural utilities is eligible for PCE. Last year, the $28 million cost of the program equated to only 16% of what it actually costs to produce and deliver electricity to eligible consumers. It is also important to understand that rural residents are largely heating their homes with diesel fuel. Retail fuel costs $5-plus per gallon and as much as $10 or more. Again, the cost of transportation and storage contribute significantly to these very high costs. Heating fuel is not subsidized by any state program.

Looking at the cost of energy in Anchorage for a minute, Chugach Electric Association’s fuel cost component is just under 5 cents per kilowatt-hour. The fuel cost component averages 19 cents in PCE communities – from approximately 15 cents per killowatt-hour in larger communities to as much as 75 cents per killowatt-hour in smaller villages. Chugach’s non-fuel costs are 15 cents per killowatt-hour. In rural Alaska, the number is 19 cents per killowatt-hour, with a range of about 14 cents to 40 cents, depending on population. And a utility’s size figures mightily into its overall cost of operation. The major urban utilities in Alaska sell 400 times as much electricity as the average rural utility — a staggering difference.

We hope the incoming Legislature will educate itself about the challenges faced by rural Alaska, and recognize that we are all residents of one beautiful, diverse state and that we all bring much to the table. It is in our collective best interests to nurture each other and to support each other through these trying times.