City of Seward Pursues Sale of Municipal Electric Utility
By Brian Kassof
The Seward City Council voted on August 8 to move ahead with a plan potentially to sell the city’s municipal electric utility, Seward Electric. The decision followed a July 25 presentation by the Director of Seward’s Electric Department, Rob Montgomery, in which he laid out what he believed were the potential benefits and drawbacks of selling the utility. He concluded that it was a good idea for the city to pursue a possible sale to a larger electric utility. The city will now solicit proposals from potential buyers. If the City Council decides to pursue an offer, the final decision on whether or not to sell the utility would be put before Seward voters next May. The ballot measure would need to receive at least 60 percent of the vote to pass and for a sale to be finalized.
The decision to explore selling the utility is motivated by concerns about its relatively small size. According to Montgomery, Seward Electric’s customer base of only 2900 meters prevents it from being able to offer customers a full range of programs and services. Montgomery also believes the utility’s small size leaves customers vulnerable to significant rate hikes if the utility were to incur major expenses (such as repairs or upgrades to its equipment). He expects that a potential buyer would be one of the Railbelt electric cooperatives.
Montgomery did address a number of potential drawbacks of a sale. The foremost of these would be the loss of the funds Seward Electric contributes to the city budget each year. Other concerns expressed by Seward Electric customers about a sale include worry about the loss of local control over their electric system and how to ensure Seward’s needs and interests will not be overlooked by a larger utility. The last attempt to sell Seward Electric in 2000 failed to win sufficient backing from city residents.
Reasons for Selling:
With the sale of Anchorage’s Municipal Light & Power (ML&P) to Chugach Electric Association (CEA) in 2019, Seward Electric remains the only significant municipally-owned electric utility in the Railbelt. It does not own any significant generation facilities, purchasing most of its power from CEA, as well as drawing a relatively small amount of power from the Bradley Lake hydroelectric project. The city does own a small, diesel-powered, 5-megawatt generation plant at Fort Raymond that is used for backup and emergency power.
In his July 25 presentation to the City Council, Montgomery detailed the potential benefits for both customers and the city if Seward Electric were sold to a larger utility. Seward Electric is small in size compared to the Railbelt electric cooperatives; the smallest of these, Homer Electric Association (HEA), has 36,000 meters, over 10 times the number served by Seward. According to Montgomery, being part of a larger utility would be beneficial in several ways.
One advantage, according to Montgomery, is that a larger utility would be able to offer customer programs and new technologies that Seward is unable to provide due to its size. These include access to technologies like smart meters and on-line outage maps, as well as cost-leveling programs and assistance with weatherization and energy efficiency upgrades. Since a Railbelt cooperative is the most likely buyer of Seward Electric, Montgomery also pointed out that Seward’s customers would enjoy the benefits of being member-owners of a cooperative. These includes receiving capital credits and the right to vote in cooperative Board elections.
Montgomery also believes that, because Seward Electric has so few customers, they are vulnerable to sudden rate changes if the utility were required to make a major investment in infrastructure or deal with a significant emergency. The larger size of one of the Railbelt co-ops would protect rate payers from such dramatic changes, since the costs of such investments would be spread across a larger pool of customers. Other advantages identified by Montgomery include the fact that the larger co-ops are able to carry spare parts and equipment in inventory, allowing for faster repairs during emergencies. Their larger size allows them to employ more in-house experts, such as engineers, billing specialists, and vegetation management crews (Seward has to outsource some of these tasks).
Montgomery also made the case that a sale would help the city in several ways. It would no longer be responsible for maintenance and would not have to issue bonds or seek grants to pay for infrastructure improvements. The city passed a $19.5 million bond this past January for upgrades to parts of Seward Electric’s system, which will impact rate payers going forward. (These bonds would be repaid by the proceeds of a sale). Montgomery noted that the utility’s small size was making it difficult to offer competitive salaries to recruit and retain skilled workers, and that they face staffing problems.
Potential Drawbacks and Criticisms of a Sale:
In his presentation Montgomery also discussed the possible drawbacks of selling Seward Electric. The most significant of these was the loss of the utility’s annual contributions to the city’s budget. Each year Seward Electric pays a transfer fee for administrative services provided by the city and a payment in lieu of taxes. In 2021 these totaled $2.1 million. The city may also lose the revenue it gets from selling power to docked cruise ships.
Montgomery and several members of the City Council noted that one way around this problem would be to take some of the proceeds from the sale and place them in a permanent fund, whose annual interest would go to the city budget. Another possibility is requiring the buyer to make annual payments to the city for a set number of years (CEA made a deal of this type when it purchased ML&P from the city of Anchorage).
The sale of Seward Electric might also lead to the loss of a few administrative positions. It was emphasized, however, that any deal would have to ensure the jobs of local line and generation crews, who would become employees of the new owner.
Another area of concern is that the city would lose control over its electric system and that some services would be shifted away from local personnel. Long-time Seward resident David Paperman wonders how a sale might impact service, especially if local administrative expertise were to be lost. Paperman says he is open to supporting a potential sale, but only if certain guarantees were included in the deal. These include the retention of local back-up generation capacity, assurances that the current number of Seward-based line-crews would be maintained, and that net-metering remain available to families who currently have home solar power systems. He also would like to see assurances that Seward will have dedicated representation on the board of a purchasing cooperative, a point also raised by Montgomery and other members of the public. Paperman said he was initially apprehensive about the idea of a sale, but appreciates the City Council’s decision to make sure residents have a chance to consider any possible deal before being asked to vote on it.
At the City Council meetings addressing the possibility of a sale, several members of the public raised a final issue—the fact that many Seward Electric customers will not be able to take part in the final vote on the sale, because they are not residents of the city. Members of the City Council acknowledged this concern, and discussed possible remedies. The most often mentioned was holding an advisory vote for customers who lived outside city limits. It is unclear how such a vote would work, or what impact its results would have—the City Charter clearly states that a sale only requires the backing of 60 percent of the Seward city voters who take part in the election.
Next Steps:
At its August 8 meeting the City Council approved starting the process that could lead to a sale, and set May 2, 2023 as the date for the special election. It appropriated funds to pay for a special election and an additional $25,000 for voter education. The Council also instructed the city administration to issue a request for proposals from interested buyers, which went out on August 17 and closed on September 7.
At the same time, it is commissioning an outside consultant to provide a market valuation for the utility. The City Council will meet in executive session on September 12 to evaluate the bids it has received (additional executive sessions will be held at a later date if needed). If it decides one of the bids is worth pursuing, it will enter into negotiations with the potential buyer, with an eye to reaching a tentative agreement by the end of November.
If an agreement is reached, the City Council will vote in December whether or not to approve the sale. City officials suggested that two potential buyers have already expressed interest in Seward Electric. If the City Council approves a potential deal, it will trigger the May 2 special election. The prospective buyer will then have four months to try to convince voters the sale will benefit them.
Potential Buyers:
As stated earlier, the expectation is that the most probable bidders for the utility would be some of the Railbelt electric cooperatives. Two cooperatives, HEA and CEA, are considered the most likely candidates. HEA already serves most of the Kenai Peninsula, while CEA provides Seward with power and owns the transmission lines leading to its territory. Matanuska Electric Association is another possible, but less likely, bidder. It is highly unlikely that the fourth Railbelt co-op, Golden Valley Electric Association, would be interested in purchasing Seward Electric, which is hundreds of miles outside its service area.
Both HEA and CEA face potential complications if they were to purchase Seward Electric. Since CEA owns the transmission lines leading to Seward, HEA would have to negotiate a tariff (or payment rate) for any power it sent over those lines. HEA would also not be able to provide its own power to Seward until the end of 2024, when the city’s current contract with CEA ends.
CEA would face its own challenges. It just finished integrating ML&P customers into its system, and it assumed a considerable amount of debt in purchasing the Anchorage utility in 2019. CEA’s board structure might also complicate a potential deal. As noted earlier, Montgomery and some members of the public believe that any deal should guarantee Seward representation on a cooperative’s board. This would not be an issue for HEA, which elects board members by district. But CEA elects its seven board members to at-large seats representing its entire membership. Guaranteeing Seward representation would require it to alter its board structure—otherwise, the voices of Seward Electric’s 2900 customers could be lost amid the existing 144,000 CEA customers.
Attempted Sale in 2000:
This is not the first time that the city of Seward has considered selling its electric utility. The most recent attempt to do so was in 2000. At that time, there was concern that potential deregulation of the electric market in Alaska might lead to intense competition. In particular, there was fear that other utilities might try to poach some of Seward’s biggest customers, leaving it with an even smaller number of users to support its operation. HEA was interested in a possible purchase, and even made a presentation to the City Council.
The vote to sell Seward Electric in 2000 received 52 percent of Seward voters’ support, failing to reach the required 60 percent threshold. One reason for the failure to win approval was likely the vote’s timing—in 2000, after some debate, the City Council asked the voters to approve selling the utility before they had a formal offer. The City Manager at the time, Scott Janke, argued that this approach would yield the best possible deal for the city. The possible impact of the 2000 vote’s timing was cited during current discussions of a sale, perhaps influencing the decision to set the election after a formal deal had been negotiated, so voters know what they are approving.
