Power Cost Equalization
Since 1980, programs (i.e., Power Production Cost Assistance and Power Cost Assistance) have been enacted by the legislature to assist citizens of the state burdened with high power costs. The Power Cost Equalization program (PCE), which became effective in October 1984, is the latest effort aimed at assisting Alaska consumers faced with extreme electric costs. The PCE program provides economic assistance to communities and residents in rural areas of Alaska where, in many instances, the kilowatt hour charge for electricity can be three to five times higher than the average kWh rate of 12.83¢ (July 2007) in Anchorage, Fairbanks, or Juneau.
The PCE program was established to assist rural residents at the same time that state funds were used to construct major energy projects to assist urban areas. Most urban and road-connected communities were benefiting from major state-subsidized energy projects such as the Four Dam Pool, Bradley Lake, and the Alaska Intertie. To help spread benefits to more remote communities, power cost equalization funds are distributed to eligible utilities, which in turn reflect the state payment by lowering monthly bills to individual customers. The program insures the viability of the local utility and the availability of central station power. The PCE Endowment Fund was created and capitalized in FY 2001 with funds from the Constitutional Budget Reserve and proceeds from the sale of Four Dam Pool Project. The fund was further capitalized in FY2007 with general funds and now totals around $280 million.
Eligibility and monthly PCE payment amounts are determined by formula specified in state statute (AS 42.45.110-150). The primary formula variables include:
- the number of eligible kWh (up to 500 for residential and 70 per community resident per month for community facilities)
- the maximum per kWh power cost (52.5 cents)
- the minimum per kWh power cost (12.83 cents)
- the percentage of actual costs in excess of the minimum, but less than the maximum (95 percent)
A formula is used to determine PCE levels that represents 95% of a utility’s costs between the floor (12.83 cents per kWh) and the ceiling (52.5 cents) If the eligible costs are more than 52.5 cents/ kWh, then PCE level is 37.69 (52.5 – 12.83 = 39.69 cents / kWh x 95% = 37.69 cents). The base may vary on annual basis per AS 42.45.110(c)(2).
As a result of increases in the number of utilities participating, changes to the subsidy formula, rising oil prices, and increased population, payments under the program grew from $2.2 million in fiscal year 1981 (FY81) under the power cost assistance program, to approximately $17.7 million in FY87. In FY88, 102 utilities serving 170 communities and 24,455 customers in rural Alaska were eligible to participate. The average disbursement was $686 per customer.
In the late 1980s, AEA expected the PCE program to grow at seven percent annually. As a result, the legislature changed the formula by lowering the number of kWhs eligible per customer from 750 to the current 500 kWh per month. The minimum per kWh power rate floor was also raised from 8.5 cents to 12 cents and was to be adjusted as the average cost in Anchorage, Fairbanks, and Juneau changed. Probably the most significant change from a fiscal perspective was removing commercial consumers from participation in the program. In addition, a mechanism was put in place to allocate dollars across customers if the annual appropriation was insufficient to fully fund the program.
During FY07, approximately 78,500 Alaskans living in 183 communities participated in the program at a cost of $25.4 million. Total utility costs for the period were $142.7 million, so PCE covered approximately 17.8% of utility costs. Despite the growth in the number of utilities and customers, nominal program costs and average disbursements per customer were lower in most years since FY87. This shifted in FY06 and FY07 with rapidly increasing fuel costs. In real dollars, program costs and per customer disbursements have declined.
The PCE program only pays a portion of approximately 30% of all kWhs sold by the participating utilities, and household electricity usage is lower in PCE communities.
|Average kWh Usage per household|
|PCE communities: 412 kWhr|
|Anchorage: 725 kWhr|
|National Average: 750 kWhr|
The Regulatory Commission of Alaska determines the PCE level for each utility based on fuel and non-fuel expenses such as salaries, insurance, taxes, interest and other reasonable costs. AEA administers the PCE fund based on appropriation by the legislature, monthly reports submitted by participating utilities, and eligibility determination.
++Wind Power and other Alternative Energy Impacts on PCE Rates
According to AEA, rates are affected only if wind or alternative energy generation reduces a utility’s costs. While there are no implicit incentives in PCE legislation for renewable energy, there is the economic incentive to keep a downward pressure on utility costs and subsequent costs to customer. The greatest incentive is if customers consume more than the 500 kWh program maximum or if the utility’s rate is above or close to the 52.5 cent program maximum rate.
However, because of the state’s role in funding PCE, which makes it a de facto ratepayer, the state has an incentive to invest in alternative energy that lowers the cost of the PCE program. In addition to direct financial benefits, alternative energy and energy efficiency displacing diesel fuel reduces the risks of fuel spills and greenhouse gas emissions.
Wind power will not completely displace diesel, but it can reduce fuel consumption. For example, in 2007 Kotzebue reduced diesel consumption by 100,000 gallons, saving the community an estimated $450,000. Kotzebue now gets 7% of its energy from wind and hopes to reach 20% in the next several years. Similarly, the fuel cost per kWh is 25% less than it would have otherwise been in the five communities served by wind projects in Toksook Bay and Kasigluk.
PCE Reports and Documents
The following link will take you to the Alaska Energy Authority's Power Cost Equalization page which provides links to program reports and additionally data.