All-Alaska Rate Electric Power Pricing Structure

Economists at the Institute of Social and Economic Research, University of Alaska Anchorage were asked to research the potential options and impacts of establishing an All-Alaska Rate as an alternative to the current Power Cost Equalization (PCE) program funding formula. We were asked to provide a history of the PCE program and information on electricity rates and patterns of consumption across regions of Alaska. This report provides the results of this analysis. Alaska is unique in many ways, including its consumption and pricing of electricity. There are large regional differences in consumption and prices that result from proximity to different types and quantities of resources. Differences in remoteness and population size also influence costs. Urban areas in the southern Railbelt benefit from larger economies of scale and access to natural gas and hydroelectric resources; the majority of hydroelectric facilities are located in Southcentral and Southeast Alaska. Most communities in rural Alaska depend on volatile and high price fossil fuels for the generation of electricity. The Alaska statewide weighted average residential rate for electricity (17.6 cents per kilowatt (kWh) in CY2011) is higher than the U.S. average of 11.8 cents per kWh (U.S. EIA, 2012). Alaska now trails behind Hawaii (34.5 cents), New York (18.4 cents) and Connecticut (18.1 cents) based on ranking of average residential price per kWh. Hidden in the Alaska statewide average is considerable variation with some communities paying less than the national average and some paying considerably more.Senate Finance Committee, Alaska State Legislature.Executive Summary / Introduction / Review of Current Residential Consumption and Price of Electricity / Power Cost Equalization History / Electricity Rates and Levels of Consumption / Customer responsiveness to price changes / All-Alaska Rate / References / Appendix A. Price elasticity of demand in PCE communities / Appendix B. PCE funding levels per year / Appendix C. PCe appropriations and disbursements over time / Appendix D. Communities/Locations in the Railbeld region / Appendix E. Residential and effective rates of PCE communities, 2001-2010 / Appendix F. Effective residential rates and consumption of electricity in PCE communities, 2008-2010 / Appendix G. PCE communities characteristics of importance as factors of electricity production and deman

Power Cost Equalization Funding Formula Review

The purpose of this study is to examine the current Power Cost Equalization (PCE) program formula’s impacts on incentives for implementation of energy efficiency and renewable energy measures. In addition, it examines if alternative formula structures might improve market signals that are more conducive to investment in energy efficiency and renewable energy in rural Alaska. As part of the analysis we also present information on the history of the PCE program and levels and patterns of electricity consumption across regions of Alaska. Alaska has large regional and intra-regional differences in energy consumption and prices that result from a number of factors including proximity to different types and quantities of resources, community population, remoteness, and transportation costs. Most communities in rural Alaska depend on volatile and high priced fossil fuels for the generation of electricity, space heating and transportation. The Alaska statewide weighted average residential rate for electricity (17.6 cents per kWh in CY2011) is substantially higher than the U.S. average of 11.8 cents per kWh (U.S. EIA, 2012). Yet in Alaska the average residential rate per kWh is currently lower than in Hawaii (34.5 cents), New York (18.4 cents) and Connecticut (18.1 cents). Hidden in the Alaska statewide average is considerable variation with some communities paying less than the national average and some—generally those least able to afford it—paying among the highest in the country. The Railbelt and Southeast regions have the lowest average residential electric rates (Appendix I map). North Slope residential customers also have lower average rates because of access to natural gas and North Slope Borough energy payments in addition to PCE disbursements. Most other regions have rates two to three times as high as Alaska urban rates. Some communities with hydroelectric power have notably low rates but customers are not paying the full, true cost of power because the cost of construction was heavily subsidized by state and federal governments. In Table 3 (p. 20) we present average annual residential electricity consumption and rates for different regions of Alaska.National Renewable Energy LaboratoryTable of Figures and Tables / Executive Summary / Introduction / Power Cost Equalization History / Electricity Rates and Levels of Consumption / How the current Power Cost Equalization funding formula works / Analysis / Policy considerations / References / Appendix A. PCE funding levels per year / Appendix B. PCE appropriations and disbursements over time / Appendix C. Residential and effective rates of PCE communities, 2001-2010 / Appendix D. Effective residential rates and consumption of electricity in PCE communities, 2008-2010 / Appendix F. PCE communities characteristics of importance as factors of electricity production and demand / Appendix G. Monthly Customer Payments under Current PCE Formula and Seasonal Fixed Payment Formula / Appendix H. Data sources and methods / Appendix I. Map of Alaska Energy Region

A Reconciliation between the Consumer Price Index and the Personal Consumption Expenditures Price Index

The Bureau of Labor Statistics (BLS) prepares the Consumer Price Index for All Urban Consumers (CPI-U), and the Bureau of Economic Analysis prepares the Personal Consumption Expenditures (PCE) chain-type price index. Both indexes measure the prices paid by consumers for goods and services. Because the two indexes are based on different underlying concepts, they are constructed differently, and tend to behave differently over time. From the first quarter of 2002 through the second quarter of 2007, the CPI-U increased 0.4 percentage point per year faster than the PCE price index. This paper details and quantifies the differences in growth rates between the CPI-U and the PCE price index; it provides a quarterly reconciliation of growth rates for the 2002:Q1- 2007:Q2 time period. There are several factors that explain the differences in growth rates between the CPI and the PCE price index. First, the indexes are based on difference index-number formulas. The CPI-U is based on a Laspeyres index; the PCE price index is based on a Fisher-Ideal index. Second, the relative weights assigned to the detailed item prices in each index are different because they are based on different data sources. The weights used in the CPIU are based on a household survey, while the weights used in the PCE price index are based on business surveys. Third, there are scope differences between the two indexes— that is, there are items in the CPI-U that are out-of-scope of the PCE price index, and there are items in the PCE price index that are out-of-scope of the CPI-U. And finally, there are differences in the seasonal-adjustment routines and in the detailed price indexes used to construct the two indexes. Over the 2002:Q1-2007:Q2 time period, this analysis finds that almost half of the 0.4 percentage point difference in growth rates between the CPI-U and the PCE price index was explained by differences in index-number formulas. After adjusting for formula differences, differences in relative weights—primarily “rent of shelter”—more than accounted for the remaining difference in growth rates. Net scope differences, in contrast, partly offset the effect of relative weight differences.