6. The Transfer Application: Discussion
Below, we evaluate the Application against a number of applicable criteria in order to make a determination that the proposed transaction is not, at a minimum, adverse to the public interest. We primarily focus on the impact on rates; however, we also evaluate the impact on utility service as well as the impact on quality of management and the effect of the transfer and sale on current MU employees.
6.1. Impact on Rates
Mountain Utility customers currently see average rates around $0.470/kilowatt hour (kWh), which are significantly higher than residential retail rates paid by customers of other small IOUs in California.31 A large component of the current rate structure is a pass-through of diesel fuel costs, which can fluctuate widely from month to month. 32 MU's tariff is set such that customers see a base rate of $0.280/kWh, which includes approximately $0.080/kWh of built-in diesel fuel costs and $0.200/kWh attributable to overhead and cost of capital.33 The built-in diesel fuel costs amount to a diesel fuel price of approximately $0.75/gallon. In recent times, diesel fuel prices have been far greater than $0.75/gallon, resulting in the high rates seen by MU customers.
KMPUD anticipates offering a similar rate structure upon completion of the transfer of control. As Tom Henie, General Manager for KMPUD, stated during the evidentiary hearing, "You're dealing with an isolated utility, not on the grid. You're dealing with a small customer base, and you're dealing with diesel prices that, as we all know, can fluctuate widely. And if you didn't set up some type of fluctuating rate based on diesel prices, there would just be no way that you could run the utility."34
As discussed below, Joint Applicants acknowledge that construction of the new powerhouse will, necessarily, result in rate increases going forward, regardless of whether MU or KMPUD is the service provider.35 Construction of the new powerhouse will require a significant capital investment to be recovered from a small customer base.36 As such, our evaluation of the impact on rates will focus heavily on which provider is better equipped to provide electricity service to Kirkwood residents at the least cost, despite the inevitable increase in rates that customers will see in the near future.
The acquisition purchase price for MU's electric and propane assets is $3 million.37 The Joint Applicants estimate the total cost to pay for the acquisition of MU's assets and to complete construction of the replacement powerhouse is at least $15 million.38 KMPUD anticipates financing the asset acquisition, replacement powerhouse construction and other needed infrastructure improvements in phases. As discussed below, even when considering the costs of construction of the new powerhouse, the difference in rates for customers will be minimal due to efficiencies inherent in operating new, more efficient engines.39 Therefore, the sale price of $3 million for acquisition of MU's assets will have a negligible impact on rates. As a result, we focus more heavily on the cost of constructing the replacement powerhouse.
Joint Applicants estimate that the cost to construct the replacement powerhouse is around $13.8 million.40 Mountain Utilities does not believe that it can cost-effectively raise this amount in the debt markets due to its historical losses, small customer base, extreme seasonal electricity usage patterns, and lack of load diversity (one customer- Kirkwood Mountain Resort-represents the large majority of MU's load).41 Despite being faced with many similar circumstances, KMPUD is a non-profit public utility district, putting it in a better position to make the necessary infrastructure investments at a lower cost to ratepayers due to access to tax exempt financing, among other efficiencies. In the Application, Joint Applicants present a table detailing estimated rates per kilowatt-hour for MU and KMPUD absent fuel adjustment costs. The table shows a difference of nearly $0.140/kWh between the two utilities' estimated costs to build the new powerhouse and operate the system. The difference is attributable to the debt service interest rate available to each entity and to KMPUD's expected $300,000 in annualized savings due to efficiencies in providing all utility services to the Kirkwood community as part of one operation.42
The Joint Applicants expect the overall increase in rates to be minimal if KMPUD undertakes construction of the new powerhouse. Joint Applicants explain that, while the new powerhouse will result in an increase in rates, much of the increase will be offset by reduced diesel fuel usage as a result of operating new, more efficient turbines.43 We find that KMPUD is in the best position to build and operate the new powerhouse at the least cost to ratepayers. While ratepayers may experience a small increase in rates, such an increase was inevitable, and KMPUD's access to low-cost financing as well as other operational efficiencies will mitigate rate increases that would result if MU undertook construction of the replacement powerhouse.
KMPUD anticipates financing the asset acquisition, replacement powerhouse construction, and other needed infrastructure improvements in phases. The first phase will consist of a bond anticipation note to cover the costs associated with the initial construction of the replacement powerhouse. In the next phase, KMPUD will issue revenue bonds or bond anticipation notes to cover the final construction for the replacement powerhouse and the asset acquisition.44 Financing of the full cost of the project is anticipated to be complete by July 2011.45 As of the writing of this decision, KMPUD has already secured a $5.5 million bond46 and has put together a financial package seeking the additional funds.47
Given that KMPUD has already secured a large portion of the necessary funds to purchase MU's assets and build the replacement powerhouse, we find that KMPUD is likely to obtain the remaining financing. Joint Applicants plan to finish construction of the replacement powerhouse in 201148, and acquisition of the remaining financing is a central component to maintaining this timeline. If KMPUD is unable to obtain the necessary financing in 2011 and the close of the transaction is delayed beyond the end of 2011, we direct Mountain Utilities to submit a letter to the Director of the Commission's Energy Division and serve it on the official service list in this proceeding within 15 days of knowledge of the delay detailing the reason for the delay and the anticipated remedy (along with an updated estimated completion schedule).
The temporary energy generation configuration in use by MU is unsustainable in the long-run. We encourage the Joint Applicants to move forward with the close of the transaction and construction of the new powerhouse as quickly as possible. In an excess of caution, we wish to put forth a course of action in the event that the APA is terminated, for whatever reason. If the APA is terminated, MU must come before this Commission within 30 days of the termination date with a plan to finance and construct a replacement powerhouse.
The APA requires KMPUD to examine ways to connect the Kirkwood area to the regional power grid through the construction of a new power line (the Out Valley Project).49 The Out Valley Project is not part of the assets being transferred, nor does it require Commission approval; however, we find it prudent to consider the potential impact on rates of its construction as part of our overall evaluation. There are several advantages of connection to the regional power grid including service stability, lower fuel costs and reduced air emissions from obtaining electricity from sources that are cleaner than diesel fuel generators; however, construction of the new power line comes with a cost, and such costs must be borne by a small number of ratepayers.
Joint Applicants estimate that the impact on electric rates for Kirkwood residents as a result of construction of the new power line will be around $0.070/kWh in addition to the minimal increases already seen from construction of the replacement powerhouse. The costs of the new line will be offset in large part by the reduced (and more stable) energy costs of grid power.50 We find that, despite the potential cost implications of construction of the new power line, it is in the best interest of Kirkwood ratepayers for reasons of stability and reduced air emissions to pursue consideration of the Out Valley Project.
6.2. Impact on Quality of Service
As a result of the January 1, 2010 fire, MU has been providing service on an emergency basis using several portable diesel generators, which are less efficient than the original powerhouse. As discussed above, construction of the new powerhouse will result in the use of more fuel-efficient generators that are optimally configured to meet the generation needs of the Kirkwood area. Furthermore, KMPUD is in a better position to obtain financing to construct the replacement powerhouse, thus resulting in a more expeditious removal of the portable diesel generators. KMPUD's operation of the electric system will result in overall operational efficiencies as a result of overhead efficiencies that come from operating all utility services under one roof. Finally, if KMPUD proceeds with the Out Valley Project, which would connect the Kirkwood area to the electricity grid, long-term electric service stability for the area will be achieved. We find that there will be no adverse impacts to ratepayers in the quality of electric service as a result of the transfer and sale. In fact, we believe service improvements are likely both in terms of quality of electricity generated and the ease of obtaining all utility services through one company.
6.3. Impact on Quality of Management
KMPUD's current experience with owning and operating electric generation resources comes solely as a result of owning three, 360 kW generation units used to meet its own electric needs. However, as discussed below, KMPUD is currently interviewing MU employees for the purposes of retaining local expertise in the electric system. Furthermore, KMPUD provides most, if not all, other public utility services to the Kirkwood community, and managerial synergies most likely exist across public utility operations. We find that KMPUD will have competent, professional management in place to operate electric generation resources.
6.4. Impact on Mountain Utilities' Employees
Kirkwood is a small, relatively isolated community located in the Sierra Nevada Mountains. As such, any change in the overall electric or propane operations in the Kirkwood area could have a significant impact on MU's current employees. Therefore, our evaluation of the proposed sale and transfer should weigh the impact on current MU employees as members of the public against the overall public benefit of the transaction. Joint Applicants state that "to ensure there is no degradation in service upon closing of the acquisition and that transaction is fair and reasonable to affected MU employees, KMPUD is interviewing MU employees for purposes of retaining local expertise in the electric system."51 Joint Applicants note that although the benefits of this action are difficult to quantify, they are substantial. We agree and find that current MU employees will not be harmed as a result of the transaction.
6.5. Impact on Commission Jurisdiction
MU requests that, upon close of the transfer and sale, it be relieved of its obligation to provide public utility electric service to customers within its service territory. It has long been established that this Commission does not have jurisdiction to regulate municipal electric utilities.52 Thus, the transfer and sale of MU's electric generation assets to KMPUD also represents a transfer out of our jurisdiction.
6.6. Conclusion
This authority sought in the application is granted. For the above reasons, we find that the transfer and sale of MU's electric assets to KMPUD is not adverse to the public interest and will, in fact, be in the public interest. KMPUD is in a better position to provide electric service to the Kirkwood community at the lowest possible cost. Furthermore, KMPUD can provide the Kirkwood community with the simplicity of almost all, if not all, utility services being provided by one company. Finally, connection to the regional power grid will likely provide long-term service and price stability to Kirkwood area ratepayers. Rejection of the transfer and sale of assets would obligate MU to pursue rebuilding the powerhouse at a significantly higher cost to ratepayers and is not an optimal outcome.
Upon final closure of the sale and transfer of MU's assets to KMPUD, MU will be relieved of its obligation to provide public utility electric service to customers within its service territory. MU must notify the Director of the Commission's Energy Division in writing of the transfer and sale of assets of MU to KMPUD within 30 days of the date of the transfer and must serve the letter on the official service list for this proceeding.
31 Application at 7.
32 Tr. at 20-21.
33 Id.
34 Tr. at 22.
35 Application at 12.
36 Id.
37 The cost of the electric assets is $966,666 (Application at 13) and consists of only the electric distribution system. (Tr. at 15.)
38 Application at 6.
39 Tr. at 25-26.
40 Application at 8.
41 Application at 8.
42 Application at 13.
43 Tr. at 24.
44 Application at 6-7,
45 Application at Exhibit 2.
46 Id.
47 Tr. at 54.
48 Construction of the replacement powerhouse began in 2010. (Tr at 16).
49 Application at 12.
50 Tr. at 27.
51 Application at 14.
52 City of Pasadena v. Railroad Commission of California (1920) 183 Ca. 526, 536, Cal. Constitution, Art. XII, § 3, Cal. Pub. Util. Code § 218.
