CHUGACH ELECTRIC RATECASE (U-01-08) 

2002 CHUGACH ELECTRIC ANNUAL REPORT (ISSUED MARCH 2003) SUMMARY OF RATE CASE
http://www.chugachelectric.com/pdfs/2002_annual_report.pdf  

Notes to Financial Statements
Annual Report 2002 - Financial Statements

Regulation

Chugach filed a general rate case on July 10, 2001, based on the 2000 test year, requesting a permanent base rate increase of 6.5%, and an interim base rate increase of 4.0%. On September 5, 2001, the RCA granted a 1.6% interim increase effective September 14, 2001. Chugach filed a petition for reconsideration and on October 25, 2001, the RCA approved an interim base rate increase of 3.97%. The additional rate increase was implemented on November 1, 2001. The interim rate increase was based on a normalized (adjusted for recurring expenses) test year and a system ratemaking Times Interest Earned Ratio (TIER) of 1.35. In this filing for permanent rates, Chugach proposed that margins be calculated using a rate base/rate of return methodology rather than the TIER methodology previously used.

As anticipated in Chugach's July 2001 original filing, on April 15, 2002, Chugach submitted a filing with the RCA to update certain known and measurable costs and savings that had occurred outside the 2000 Test Year. In the updated filing, Chugach reduced its base rate increase request from 6.5% to 5.7%, or approximately $0.9 million in the revenue requirement on a system basis. The revised filing also reflected an increase in depreciation expense of approximately $1.5 million due to the completion of the Beluga Unit 7 re-powering project and a reduction in annualized interest expense, due to Chugach's recent refinancing efforts, of $2.4 million. In this revised filing, Chugach continued to request $11.9 million in margins. As a result of reduced interest costs, this would yield an equivalent system TIER of 1.47.

Three intervenors filed pre-filed testimony with the RCA in July 2002 opposing various aspects of Chugach's proposal. Chugach filed its reply testimony with the RCA on October 1, 2002. The hearing to resolve the outstanding issues associated with the 2000 test year rate case took place in November and December of 2002, concluding on December 13, 2002.

On February 6, 2003, Chugach received Order U-01-108(26) from the RCA, which among other things included the following.

Chugach will be required to use TIER in calculating return levels. Chugach's system overall TIER was revised downward from 1.35 to 1.30, a difference that would reduce margins by approximately $1.3 million based on the 2000 test year and that would also have similar impacts in subsequent years.

Chugach will be required to treat AFUDC/IDC as a reduction to long-term interest expense, which reduces the revenue requirement by approximately $1.2 million.

The RCA reduced Chugach's normalized interest rate of 3.8% to 2%, which equates to a revenue requirement reduction of approximately $1.1 million.

Chugach's overall Depreciation Study was approved, although the RCA did require approximately $0.7 million in downward adjustments, which will not affect margins in future years.

Chugach's analysis of the financial impact of the Order is still preliminary. There are several outstanding questions regarding interpretation of the Order that have not yet been clarified. However, based upon this preliminary analysis, the Order would require a refund of revenues collected in 2001 of approximately $1.1 million of revenues collected in 2002 of approximately $6.0 million, which amounts were recorded as a reduction to operating revenues in 2002. The ultimate amount, which may be refunded, may change based upon RCA's reconsideration of the Order and Chugach cannot predict the outcome of reconsideration of the issues
inherent in the Order.

The Order would also require a reduction in estimated 2003 revenues of approximately $6.0 million. Chugach has calculated, that based on the budgeted revenues and expenditures, under Order 26, Chugach may have insufficient margins to yield margins for interest equal to at least a 1.10 in 2003.

The CoBank Master Loan Agreement requires Chugach to establish and collect rates reasonably expected to yield margins for interest equal to at least 1.10 times interest expense. CoBank waived the rate covenant as of December 31, 2002, and reduced the rate covenant for 2003 from 1.10 to 1.08. Chugach believes that they will achieve compliance with the covenant as revised. The Amended and Restated Indenture also requires Chugach, subject to any necessary regulatory approval, to establish and collect rates reasonably expected to yield margins for interest equal to at least 1.10 times total interest expense. If there occurs any material change in the circumstances contemplated at the time rates were most recently reviewed, the Amended and Restated Indenture requires Chugach to seek appropriate adjustments to those rates so that they would generate revenues reasonable expected to yield margins for interest equal to at least 1.10 times interest charges, subject to any necessary regulatory approval or determination.

In order to maintain Chugach's compliance with these covenants, Chugach is taking the actions described below.

On February 13, 2003, Chugach filed a Motion with the RCA asking the RCA to stay the effect of its Order until after the RCA considers Chugach's Petition for Reconsideration of Order 26.

On February 18, 2003, the RCA granted, in part, Chugach's motion for stay. Specifically, the RCA stayed, until further order of the RCA, Ordering Paragraph 1 of Order U-01-108(26) which states, "Chugach's rates will be established on the basis of the 2000 test year revenue requirement recomputed in accordance with our decisions set out in the body of this Order." The RCA stayed the two Ordering paragraphs of the Order that would have required Chugach to put the new rates into effect. The RCA also allowed a one-week extension until February 28, 2003 to comply with ordering paragraphs 2 and 3, which require Chugach to recalculate its revenue requirement and cost-of-service studies reflecting the impact of Order U-01-108(26) on Chugach's rates. The RCA also extended the time to file Petitions for Reconsideration of Order U-01-108(26) one week to February 28, 2003. Chugach filed the Petition for Reconsideration with the RCA on February 28, 2003. The Public Advocacy Section (PAS), also filed a Petition for Reconsideration that, in part, seeks to remove, from depreciation expense that the RCA allowed, certain depreciation associated with Beluga Units 6 and 7 because the plant was added outside the 2000 Test Year upon which the rates were based. The RCA issued an Order on March 4, 2003, extending the time for filing responses to petitions for reconsideration from March 10 to March 14, 2003, and determined that the period for ruling on the petitions for reconsideration should be extended from March 31 to April 15, 2003. Management is uncertain as to the outcome but will vigorously defend its position. Under Alaska law, Chugach's financial covenants in the Amended and Restated Indenture are valid and enforceable, and rates set by the RCA must be adequate to meet those covenants. If the RCA does not modify the Order to allow Chugach to charge rates reasonably expected to yield margins for interest equal to at least 1.10 times interest expense, Chugach intends to bring action to enforce that provision of the Alaska state law described above.

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