Seward Selects Homer Electric Association’s Bid For Electric Department
[Editor’s note: Portions of this article dealing with the specifics of HEA’s offer were revised on 5/1/23 to reflect the terms of the final offer approved by Seward’s City Council on 3/28/23). Revisions are noted in the text.]
By Brian Kassof
On November 14 the Seward City Council voted unanimously to select an offer from Homer Electric Association (HEA) to buy the city’s municipal electric utility. Seward voters will make a final decision on whether or not to accept the offer in a referendum to be held in May 2023. The deal would then have to clear additional hurdles before it was finalized.
The Seward City Council voted in August to accept offers to buy its Electric Department (referred to in the proposal as Seward Electric System, or SES), which serves the city and surrounding areas. It was motivated by concerns that the utility’s small size was preventing it from taking advantage of new technologies and made customers vulnerable to significant rate increases. The Council received two bids—one from HEA and another from Chugach Electric Association (CEA).
The winning bid from HEA calls for the city to be paid $36.25 million over a ten-year period ($25.25 million up front, followed by ten annual payments of $1.1 million), along with other considerations. Seward will also be given a seat on HEA’s elected Board of Directors. As part of the deal, HEA promises to hire all of SES’ current employees. HEA also raised the possibility of renaming the combined utility Kenai Peninsula Energy Cooperative. Some details of the deal are still being finalized.
The sale must clear several hurdles before it is completed. First, the offer must win at least 60 percent approval from Seward voters in a referendum to be held on May 2, 2023. The deal will then have to be approved by the Regulatory Commission of Alaska (RCA), which regulates electric utilities. And HEA members will have to approve changes to the cooperative’s Bylaws in order to create an additional seat on their Board. A previous offer from HEA to buy SES in 2000 failed to win the necessary support from Seward voters.
The Decision to Sell:
The Seward City Council made the decision to sell SES after a presentation given by the Department’s Director Rob Montgomery on July 25. In his presentation, Montgomery said that the utility’s small size (about 2900 customers) left it unable to offer some new technologies (such as on-line outage maps and smart meters). He also voiced concern that its small customer base was vulnerable to sudden rate increases if a significant facility repair or upgrade was needed. (A more detailed discussion of the city’s decision to sell can be found here). Both these problems would be solved, Montgomery suggested, if SES was sold to one of the much larger Railbelt electric cooperatives.
The City Council voted on August 8 to move ahead with the sale process, accepting bids into early September. As anticipated, the only bids came from HEA and CEA, two of the Railbelt electric cooperatives. The City Council discussed the bids in a series of closed sessions in September and October, and entered into negotiations with the potential bidders. The Council decided to accept HEA’s bid during an Executive Session on October 27, and voted to ratify the decision at its November 14 meeting.
There were reasons that both of the bidding cooperatives made sense as potential partners with Seward. CEA has long sold electricity to Seward (SES is responsible for the local distribution system and customer service, but buys its energy from CEA), and it controls some of the transmission lines linking Seward to the rest of the Railbelt. HEA already serves most of the Kenai Peninsula’s population and shares regional interests with Seward, a point underlined by its offer to consider changing its name to the Kenai Peninsula Electric Cooperative if Seward selected its bid.
HEA’s Offer:
HEA’s offer included monetary and non-monetary elements (a copy of the offer is on pp. 217-81 of this packet) [link updated on 1/9/23]. The most important financial components are a $25.25 million payment up front, plus additional annual payments of $1.1 million for ten years. The main non-financial components are a guaranteed seat on HEA’s Board of Directors, a promise to retain all current SES employees, access to HEA technologies and customer programs, and a three-year rate freeze starting in 2024. (HEA had originally promised to keep Seward’s back-up generation plant at Fort Raymond—this was not written into the final contract—revised 5/1/23).
HEA’s original offer, submitted on September 7, is a payment of $25.25 million to Seward for HEA’s physical assets (transmission and distribution lines, generation plant, equipment). The offer also allows Seward to retain SES liquid assets (which HEA estimates to be worth about $5 million). After negotiations with the city, on September 19 HEA submitted an amendment to its proposal that added two long-term revenue streams: The annual payment of $1.1 million for ten years and a twenty-year lease on city-owned office space currently used by SES.
(HEA had also offered an arrangement by which it would provide the city with a percentage of any revenue it received by selling power to cruise ships docked in Seward, a service that is currently not offered. The arrangement would have involved a lease of city-owned land, with rent pegged at 8 percent of potential revenues from power sales to cruise ships. On March 28 the Seward City Council decided that retaining control over the parcel involved was more important that any potential payment, and voted to remove this element of the deal—revised 5/1/23).
The addition of these elements addressed a major concern voiced by the City Council when considering whether to offer SES for sale—how to replace the funds it contributes to the city’s annual budget. These contributions, made in the form of a payment-in-lieu-of-taxes and an administrative fee, amounted to $2.1 million in 2021. HEA’s initial proposal suggested that the city could place some sale’s proceeds in a special account that would provide annual income in the manner of Alaska’s Permanent Fund. This apparently did not satisfy the City Council, which likely raised the issue in negotiations.
When discussing the proposed sale, the City Council was clear that it expected Seward to be given a dedicated seat on the winning bidder’s elected Board of Directors. Members of the City Council believed that, given the city’s relatively small population vis-à-vis the bidding cooperatives and its geographic isolation from their other service territories, a guaranteed seat was critical to ensuring their interests were considered in the future. (HEA’s current membership (25,000 member-owners and 38,000 meters) is about ten times larger than SES’ customer base (2900 meters).
The offer promises that the Seward City Council will be able to appoint an ex-officio (non-voting) member to the HEA Board immediately after the referendum’s passage in May 2023, giving it an advisory voice about future decisions. This will convert to a voting seat once the RCA approves the sale and HEA members amend their Bylaws. At that time the City Council will appoint a Director for the first regular three-year term; after that, the Director will be elected every three years by the members living in the newly created Seward District. HEA also guarantees that all SES customers can become HEA members as soon as the deal receives regulatory approval. (HEA also promised that its $5 membership fee would be waived for SES customers—this language was not in the final contract, although the offer may still stand—revised 5/1/23). HEA will also honor Seward’s existing contract with members of the International Brotherhood of Electrical Workers (IBEW), and offer positions to all of SES’ non-union employees.
In a letter that accompanied the offer, HEA General Manager Brad Janorschke indicated several other ways that HEA could assist Seward. It could provide immediate technological and administrative support even before the deal receives regulatory approval. HEA is also prepared to apply for federal funds made available through the Inflation Reduction Act and the Infrastructure Investment and Jobs Act, some of which could be used in Seward.
How Will the Sale Impact Consumers?
In his letter to Seward that accompanied the initial offer, Janorschke asserted that HEA’s purchase of SES would ultimately benefit both Seward and HEA’s current members-owners by allowing for greater economies of scale, and that a combined utility would be better positioned to deal with future economic and regulatory challenges. According to Janorschke, a combined utility would also better be able to address issues of interest to the entire Kenai Peninsula.
Joining with HEA will have other benefits for Seward customers, according to Janorschke. They will gain access to services and technology such as on-line outage maps, smart meters, financing for efficiency upgrades, and energy calculators. HEA has committed to offering net-metering to all SES customers who currently have solar arrays.
Another benefit for Seward customers will be that, as member-owners of a cooperative, they will have the opportunity to vote or run in its Board elections and help shape the cooperative’s policies and direction. Currently SES customers are divided into two groups—those who live within city limits and those who live outside them. The former group can vote for the city officials who make policy for SES (and in the May 2023 Referendum on the sale); the latter group cannot vote in Seward elections. This distinction would be erased under a cooperative, with all customers becoming member-owners.
Janorschke stressed that becoming part of HEA will also help Seward adapt to possible changes to Alaska’s regulatory landscape. Within a few years utilities will have to meet new transmission and reliability standards that will be introduced by the newly certificated Railbelt Reliability Council. Janorschke also argued that HEA, which has a target of 50 percent renewable power generation by 2025, will be well-prepared for potential increases in the price of natural gas. The shift to renewables will also be important if the Legislature passes the Renewable Portfolio Standard (which set minimums for renewable power generation) that was introduced last year.
It is not clear what impact the sale would have on the rates paid by SES customers—this will depend on a number of factors. Initially the deal will not have any direct impact—Seward’s power-purchasing agreement with CEA runs through the end of 2024, so the price it pays for electricity will follow CEA’s rates for the next two years. After that, HEA will supply power to Seward customers. In its amended proposal, HEA promised to freeze the rates paid by Seward customers at the time the deal closes (60 days after it receives RCA approval). This freeze would last until the RCA finishes hearing HEA’s next rate case—the case will begin in 2025, but its approval by the RCA could take up to two years.
HEA’s power currently costs about 25-30 percent more than CEA’s. It is also possible that HEA will have to pay CEA wheeling fees (charges to move electricity over its transmission system) to get its power to Seward. In his letter accompanying the amended offer, Janorschke argues that the gap between HEA and CEA base rates will start to close in the near future. He points out that CEA is currently awaiting decisions about its debt management (relating to the purchase of Anchorage’s Municipal Light and Power in 2019) from the RCA that may compel it to raise its rates in 2023. He also argues that HEA’s long-term generation plan, with its emphasis on renewables, will have a positive impact on future rates. The City Council also stated that it believes that HEA’s investments in technology and its generation plan will make its power prices more competitive in the near future.
In its amended offer, HEA offered further options for softening the impact of potentially higher rates. After the rate freeze ends (when the RCA approves HEA’s next rate case, sometime between 2025 and 2027), Seward is being offered two options. It could request that any rate increases be phased in over a five-year period. Or it could ask for the creation of a separate rate zone, based on the geographic separation of it and the rest of HEA’s territory. Whether the latter option would favor Seward would not be clear until HEA runs a “load survey” in 2024 to determine the cost of delivering power to customers in Seward.
In his presentation to the City Council in July, SES Director Rob Montgomery warned that electric rates probably would rise steeply if the city did not sell its utility. The city recently borrowed $19.5 million to upgrade parts of the electrical system, and repayment of this debt would have to be factored into customers’ bills starting in 2023, leading to a ten percent increase in prices. (Seward will need to repay these bonds before the sale closes). Montgomery told the City Council that if SES remained independent, customers would likely see additional increases of ten percent or more every two to four years for the foreseeable future, as it updated its technology and infrastructure. One of the things that is attractive to joining a larger utility, like HEA, is that it would insulate Seward customers from having to bear the full costs of such system improvements alone.
Next Steps:
Now that the City Council has selected HEA’s bid, there are three steps that must occur for the deal to be completed. First the sale must be approved by Seward voters, which means getting at least 60 percent of the vote in the May 2023 Referendum. As mentioned above, only city residents can vote in the referendum—the City Council has discussed options for giving SES customers outside the city some way to voice their opinion, but they cannot participate in the election. The City Council has said that, now that it has selected an offer, it will not take a position on whether or not the sale should proceed. It will be up to HEA to persuade Seward voters to approve the deal. A 2000 referendum to sell SES to HEA failed, with only 52 percent of voters approving. The City Council rejected another offer from HEA in 2002.
The next step would be receiving RCA approval. The timetable for this not clear—if the RCA chooses to open an investigation into the sale, the process could take more than a year. It is possible that the RCA may reject elements of the deal or demand changes, which would also complicate the situation.
Finally, current HEA members will have to vote to amend their Bylaws. Bylaw changes would include the addition of a tenth seat to the HEA Board, the creation of a new electoral district, and, potentially, changing the cooperative’s name to the Kenai Peninsula Electric Cooperative. According to an HEA spokesperson, a vote to amend the Bylaws to add a new election district and board seat would not be held until after the deal receives RCA approval, meaning that it is unlikely to happen until spring 2025 at the earliest. It is not clear what would happen to the deal if HEA voters did not approve the necessary changes. An HEA spokesperson expressed confidence that members would recognize that the deal is “a win-win for both SES and HEA” and that they will vote to approve any necessary changes to the Bylaws.
