Seward Electric Sale Back on Ballot
By Brian Kassof
On July 24 the Seward City Council voted 4-2 to ask voters in October to approve the sale of the city’s electric utility (often referred to as Seward Electric System or SES) to Homer Electric Association (HEA). A vote on May 2 to sell SES to HEA failed to reach the required 60 percent threshold by just seven votes. The terms of HEA’s offer remain the same. If voters approve the deal, it will still require approval by the Regulatory Commission of Alaska (RCA). Only those living within the city limits are eligible to vote.
The City Council also approved placing a second proposition on the Oct. 3 ballot that would reduce the threshold for voter approval to sell the city’s utility assets from 60 percent to a simple majority. The city attorney confirmed that, if voters approve this proposition, the lower threshold would be applied to the Oct. 3 vote on selling the utility.
The City Council’s decision to put the issue back on the ballot came soon after it had created a citizens’ Ad Hoc Committee charged with determining what it would cost for Seward to continue operating SES. It also followed Rob Montgomery’s recent resignation as SES’ General Manager, a post he held for three years. Montgomery will continue in his position as a consultant until the end of the year.
The sale process has been marked by contentious debates and controversy. One major issue has been whether the sale of SES is really necessary. The City Council voted unanimously last August to offer SES for sale following a presentation by Montgomery. He argued that its sale to a larger utility would head off potential steep rate increases and allow SES to provide a greater range of services to its customers. This position has been challenged by a small, but vocal group of SES customers.
Another debate concerns the Council’s decision to select HEA’s bid over one from Chugach Electric Association (CEA). Supporters of HEA’s bid point to its shared interests with Seward as part of the Kenai Peninsula Borough, its willingness to create a seat on its Board for Seward, and its ability to address future challenges faced by Railbelt utilities. Those critical of the Council’s choice point to CEA’s lower base rates and larger size.
A document circulated by CEA in April criticizing the bidding process and highlighting its lower rates was also a source of controversy. And some in Seward have been critical of the City Council’s use of executive session during the bidding process, something the Council says was done at the cooperatives’ request.
After running an extensive informational campaign in Seward ahead of the May election, HEA has said it will not be conducting any additional events before the October vote. An HEA spokesperson said that the cooperative felt it had achieved its main goals in the spring--to provide SES customers information about HEA and its values and about how the sale would benefit both parties. The decision, they continued, now lies with Seward voters.
The Decision to Put a Sale Back on the Ballot
After the May vote the City Council asked Montgomery to report on possible paths forward. In a June 12 presentation to the Council, he identified four possibilities: doing nothing, rebuilding the utility, outsourcing many of SES’ functions to contractors, or putting SES up for sale again. He dismissed the first option as unacceptable—rates would continue to escalate indefinitely, it would be difficult to fund capital improvements, and the utility lacks the personnel needed for essential technological upgrades. In Montgomery’s opinion, the third option, outsourcing, might offer a temporary solution to some of SES’ challenges, but it would be expensive and subject to regulatory and union-related complications.
Montgomery said that rebuilding the utility or selling it are the only realistic long-term solutions. He felt that rebuilding the utility, so it could operate properly and meet new regulatory requirements, would require hiring four to six additional personnel, mostly in technical and administrative positions. He warned this would be expensive and that filling some of the new positions would require paying higher wages, something that could impact the wage scale for all city employees. Montgomery also said he believed that another $7-8 million in system upgrades for SES would also be necessary.
The other option was to put the sale of SES back before voters. Both HEA and CEA had expressed continued interest in buying the utility. According to the City Attorney, if HEA agreed, its previous offer could be put before voters again so long as no major changes were made. If the Council wanted to make significant changes or reconsider CEA’s offer, he recommended restarting the entire process and putting out a new Request for Proposals.
Members of the City Council did not act immediately on Montgomery’s recommendations. At the June 12 meeting they did create an Ad Hoc Committee made up of local residents to “review the current status of SES” and determine how much it would cost to rebuild along the lines described by Montgomery. This was done, at least in part, to address skepticism among some community members regarding Montgomery’s estimates of potential rate increases and SES’ future needs. Members of the Council believed this skepticism had contributed to what Councilman Robert Barnwell characterized as “credibility issues” around the May vote.
On July 10 the Council voted to appoint all ten applicants to the Committee (one person later withdrew, leaving the Committee’s size at nine). The Committee’s membership included several vocal critics of the proposed sale to HEA, as well as some who had supported it. The group’s skepticism about Montgomery’s claims were apparent at their first meeting when the Committee voted to ask the Council to remove references to “rebuilding” and “expansion”—things Montgomery insists are necessary for SES to remain independent—from their mission. The City Council declined to make these changes at their July 24 meeting.
At its July 24 meeting the Council voted to follow Montgomery’s other recommended option and put the sale of SES to HEA back on the October ballot. They also decided to put a proposition lowering the voting threshold to approve a sale on the same ballot. Both measures—Proposition 1 (whether or not to sell SES to HEA) and Proposition 2 (to change the City Charter to reduce the threshold to approve the sale of a municipal utility from 60 percent to a simple majority) were passed by identical 4-2 votes, with Councilmembers Calhoon, DeMoss, Osenga, and Wells voting in favor, and Barnwell and McClure voting against (Councilman Finch was absent from this meeting).
The May vote to sell SES failed after receiving 58.4 percent approval; a vote to sell SES to HEA in 2000 failed with 52 percent of the vote. After both resolutions were passed, the City Attorney clarified that, if the proposition changing the voting threshold (Proposition 2) were passed, it would apply to the proposition selling SES (Proposition 1) that appeared on the same Oct. 3 ballot.
The timing of the vote was dictated by an August 9 deadline to place any measures on the October ballot. According to city administration, HEA agreed to extend its offer, but only through October. Any potential sale after that date would require either a new Request for Proposals or at least a new set of negotiations with the buyer.
A number of residents, including members of the Ad Hoc Committee, spoke against placing both propositions on the ballot during the citizen comment periods of the July 24 Council meeting. Some said the decision to sell should be delayed until the Committee was able to finish its work, a point echoed by Councilman Barnwell in explaining his no votes. Other Councilmembers pointed out that the Ad Hoc Committee’s purpose was not to decide if SES should be sold, but to see what work was needed to keep it operating. They also said they believed that, even if it did not complete its work by October, the Ad Hoc Committee would likely provide information that could inform voters’ choices.
Next Steps and Terms of HEA’s Offer
SES is currently conducting a rate study which Montgomery expects to present to the City Council in September. He has said he expects this will lead to a rate increase of around 10 percent. SES customers will also see an additional rate increase of 2 to 2.5 percent in September, after the RCA approved an interim rate hike for CEA while it considers its rate case (SES currently buys its power wholesale from CEA). These changes will occur regardless of the outcome of the October vote.
Proposition 1 (approving the sale of SES to HEA) and Proposition 2 (lowering the approval threshold for the sale) will appear on the Oct. 3 ballot during Seward’s regular municipal election. If voters do not approve the sale, the City Council will have to decide its next steps. Based on the findings of the Ad Hoc Committee, they may decide to restructure SES and continue to operate it themselves. Or they could decide to issue a call for proposals and restart the sale process.
If voters approve the sale (with either 60 percent of the vote if Proposition 2 fails, or a simple majority if it succeeds), HEA will ask for RCA approval of the terms of the sale. The RCA will almost certainly open an investigation into the sale, a process that can last up to 450 days.
The terms of HEA’s offer are the same ones approved by the Seward City Council on March 28, 2023. (For an in-depth examination of HEA’s offer, see this AETP piece). The sale price is $25.25 million dollars. The actual amount HEA pays upon the closing of the sale (which would be after RCA approval) will depend on the value of work SES does on its system and the depreciation of its assets in the interim. These are expected largely to offset one another, so the actual payment is still expected to be close to $25 million. HEA will also pay the city ten annual payments of $1.1 million starting one year after closing.
HEA will immediately grant Seward an observer’s seat on its Board of Directors (to be filled by a member of the City Council or SES staff). HEA will ask its members in 2024 to approve a change to the cooperative’s Bylaws that will create a new electoral district and board seat for Seward once the deal closes. If this bylaw change fails, HEA will be obligated to put it before their members at least two more times.
HEA will freeze SES’ base rates for three years, effective the end of 2023 (after this fall’s expected increases go into effect). Rates will still be subject to COPA (cost-of-power-adjustment) rate changes that reflect shifts in the price of fuel. Unless the city is able to break its contract, it will continue to purchase wholesale power from CEA until the end of 2024, at which time HEA will start to provide Seward’s power. Other aspects of the deal include a commitment by HEA to offer jobs to all current SES employees and HEA leasing the office space used by SES from the city for the next 20 years (at a cost of $45,000 a year).
An offer by HEA to share with the city any potential revenue from sales of electricity to cruise ships docked in Seward was dropped from the deal at the behest of the City Council. This is not a service currently offered and would require millions of dollars of infrastructure work. The mechanism for this payment involved a long-term lease of city land—the City Council struck this part of the deal at its March 28 meeting, in order to retain control over the designated parcel.
One concern voiced by some sale opponents is how to replace SES’ annual contribution to Seward’s General Fund--the 2021 total was $2.1 million. The City Council has discussed using a substantial portion of the $25 million in proceeds from the sale and placing it in a trust, the interest of which would go toward the city’s budget. They anticipate this would average about $1 million a year, which, together with the ten annual payments of $1.1 million, would match the $2.1 million contribution for the first ten years after the sale.
The Decision to Sell and Selection of HEA’s Bid
The City Council began considering SES’ sale in the spring of 2022—Montgomery laid out a case for doing so in a presentation to the City Council in July 2022. His main concerns were that SES’ small size left it unable to offer its customers many services available from other utilities and made it vulnerable to significant rate increases. Montgomery also had concerns about cybersecurity and new regulations by the Railbelt Reliability Council. (For an in-depth discussion of the decision to sell, see this AETP article).
The city set May 2, 2023 as the date for a special election to win voter approval of a potential deal and issued a request for Letters of Interest (LOI). After receiving the initial bids, Seward offered each cooperative a chance to amend them. HEA increased their initial offer to match CEA’s financial terms, while CEA did not change their bid. As discussed below, CEA would later claim that they were not given a chance to amend their bid, a charge members of the City Council say is untrue. The City Council then heard presentations from both cooperatives on Oct. 27 and decided to accept HEA’s offer. This kicked off a prolonged period of negotiation that lasted until late March.
In an Action Memorandum submitted for the Aug. 14, 2023 Council meeting, Councilmembers Wells and DeMoss summarized the Council’s reasons for selecting HEA’s bid. These primarily revolve around two sets of issues. One is a belief that HEA is a better fit for Seward. Although Seward is geographically separated from HEA’s service territory, both are in the Kenai Peninsula Borough (KPB)—HEA has even offered to change its name to the Kenai Peninsula Energy Cooperative if the sale goes through. (CEA currently serves several KPB communities.) HEA’s ability to offer Seward a dedicated seat on its Board of Directors also played a role—Seward is geographically isolated and much smaller than either cooperative (Seward has 2900 metered locations, while HEA has 38,000 and CEA 113,000), and the Council is concerned Seward’s interests might be overlooked without dedicated board representation.
The other set of reasons the Council gives for selecting HEA’s offer focus on what they describe as its stability and preparedness for future challenges. They state that HEA is ahead of other Railbelt utilities in terms of cybersecurity and other technologies, and that they believe that HEA has a strong, long-term strategic plan. This, they believe, offsets CEA’s main advantages, which include lower base rates and control of the transmission lines running into Seward. CEA, whose directors are elected at-large, cannot offer a dedicated seat on its Board.
The Lead-Up to the May Vote
HEA began campaigning in Seward in support of the sale in February (the City Council appropriated funds to boost voter turnout for the May election, but took no official position on the sale). HEA created a website stressing the common interests of HEA and Seward and sent members of its staff and Board of Directors to hold multiple open houses and information sessions. HEA’s efforts also included mailers and newspaper and radio advertising. According to filings with the Alaska Public Offices Commission (APOC), HEA spent approximately $175,000 on its efforts to win over Seward voters (at least one-third of this was for staff-time and the use of official vehicles).
HEA’s efforts were met with a mixture of support and opposition in Seward. While many supported the deal, including individual members of the City Council and business leaders, there were also vocal opponents. Criticism coalesced around several issues. SES customers living outside the city were unhappy that they could not participate in the election--since SES is municipally-owned, only city residents, who make up just over one-half of its customers, are eligible to vote on its sale. The Council had discussed creating some semi-formal mechanism to allow non-city SES customers to voice their opinion, but did not end up pursuing any.
Critics of the sale also pointed to a lack of transparency as a reason for their lack of faith in the Council’s decision. The reception of the LOIs and presentations by both cooperatives were done in executive session, as was the Council’s discussion of which offer to accept. The Council acknowledged people’s frustration with the closed nature of the sale process, but later said it was largely out of their control. According to comments by Councilman Randy Wells at the July 24 meeting, the process had occurred in executive session because both HEA and CEA asked that their bids and presentations be kept confidential. The Council, he said, released information as soon as it was possible.
Those opposing the sale focused much of their attention on two questions. Should Seward sell SES? And if they should, was CEA a better option than HEA? Opinions and debate on these questions were publicly voiced through a number of channels—during public comment periods at City Council meetings, on social media, and in letters to the Seward Journal. Some of those questioning the sale wondered if SES’ financial situation was as dire as Montgomery had described. Others worried about making up the money that SES contributes to the city’s General Fund.
A vocal portion of sale critics believed that, if SES needed to be sold, the City Council should have chosen CEA’s bid. Their primary reason was CEA’s lower base rates, which are currently 25-30 percent lower than HEA’s. Supporters of the sale have acknowledged that CEA can offer lower rates, but also said they expect the gap to narrow considerably in coming years, anticipating, in part, CEA’s recent request to increase its rates as part of its on-going rate case. They also believe the rate differences were offset by the other benefits (shared regional interests, a dedicated board seat) that HEA could offer.
Further controversy ensued in April when a two-page electronic document produced by CEA circulated in Seward. The document, (which CEA calls a “fact sheet”) implied that the bidding process had been unfair. It provided a chronology that said HEA was given an opportunity to submit an amended bid in response to CEA’s original offer, but that “Chugach was not given the opportunity to submit supplemental material, and, at the time, had no knowledge of the supplemental submitted by Homer.” The second page of the flyer included rate comparisons between CEA and HEA for different customer classes. A full description of the flyer can be found in this Seward Journal article.
In the document, and again in a May 30 letter to the Seward City Manager from CEA CEO Arthur Miller, CEA explained the document was created in response to requests for information about CEA’s proposal from people in Seward and other communities. They said it was only sent to those who requested information about CEA’s involvement in the sale process.
Members of the Seward City Council have pushed back against CEA’s claims, saying that they contributed to “misinformation” that was being spread ahead of the election. In a letter to the Seward Journal on April 27, Councilwoman Liz DeMoss said that CEA was given an opportunity to update their proposal at the same time as HEA, but that it chose not to. She did not specify if CEA was made aware of HEA’s amended offer or its contents. DeMoss also suggested that the rate comparison was disingenuous, since it failed to mention CEA’s upcoming rate case. These sentiments were echoed by Councilman Wells at the July 24 Council meeting. Montgomery has said that he felt the document omitted important information.
The May Election and its Aftermath
Voting in the May 2 election was extremely close. The initial count on election day had just over 58 percent of votes in favor of the sale (186 in favor, 134 against). This meant that the election was not decided until absentee and contested ballots were counted on May 4. When those ballots were added in, the final total was 227 in favor of the sale (58.4 percent) and 162 against (41.6 percent), falling just short of the 60 percent needed for the sale to proceed.
There has been some fallout from the May election. The Council’s use of executive session during and after the sale process has remained a target for criticism. The publisher of the Seward Journal, Michael Paschall, while not taking a position on the sale, has written several opinion pieces criticizing the Council’s use of executive session.
It was during an executive session at its May 22, 2023 meeting that the Council received advice from the City Attorney on three issues related to the sale vote. One was a potential complaint to APOC concerning CEA’s intervention in the election--this was likely concerning the CEA fact sheet. To date Seward has not filed a complaint with APOC.
The second issue was the termination of SES’ wholesale power agreement with CEA. It is not clear if the Council sought an early termination of the deal, which runs through the end of 2024, or if they simply wanted to clarify what steps needed to be taken to end the contract at that time. In recent financial forecasts CEA has been assuming it will not provide power to Seward after 2024, instead anticipating that it will be paid for the power another producer sends through CEA transmission lines connecting Seward to the rest of the Railbelt (wheeling fees).
The last issue the City Council considered in executive session at its May 22 meeting was the status of HEA’s offer—this is possibly when the logistics of placing the sale back on the ballot were discussed. This also may have been when the Council instructed the City Manager to look into drafting Proposition 2, which reduces the threshold required to approve the sale, since this topic was not discussed in open session between the May election and the proposition’s introduction on July 24.
