On the high-tech cutting edge

HEA builds competitive advantage

Posted: Thursday, March 01, 2001

Alaska's electric utilities could someday face competition. To prepare, Homer Electric Association is working to maintain competitive rates.

"That means we must compare ourselves with other electric utilities in the state and be among the top performers," said Sandra Ghormley, HEA manager of member relations. "How do we lower rates? By being the best we can in every corner of the operation and by looking at new business opportunities."

Last year, HEA switched on a new $2.5 million fiber-optic line connecting its Homer and Kenai offices and leased the excess capacity to Alaska Communications Systems. HEA expects $300,000 per year in benefits.

By March, VECO Construction Inc. should finish moving the under-utilized Soldotna 1 generator to Nikiski, where it will run full time and supply heat to Agrium Inc. HEA expects $33 million in benefits over the next 13 years.

Now, HEA is exploring purchase of Seward's electric utility and looking with Unocal and Enstar Natural Gas Co. at construction of a natural gas pipeline from Kenai to Homer.

"If all goes well with the natural gas, that looks like a very favorable project," Ghormley said. "Acquisition of the city of Seward utility looks like a very good deal both for Seward residents and for our members."

Tactics like that have allowed HEA to lower its rates eight times in six

years, most recently in January, despite rising rates from Chugach Electric Association, where HEA buys 90 percent of its power.

Fiber-optic savings

HEA began planning the fiber-optic line in 1996 as a way to cut its own communication costs, Ghormley said. The feasibility study also found a need in the community at large. HEA now shares four of the cable's 24 strands with the Kenai Peninsula Borough School District and leases the rest to ACS. (See related story, page C-1.)

Norm Story, HEA general manager, said the fiber-optic line has allowed HEA to give up a high-capacity telephone line it previously leased for $50,000 per year. It also eliminated the need for a costly state microwave link from the Bradley Lake Hydroelectric Project to Chugach Electric in Anchorage.

HEA now beams Bradley communications over a microwave link to Homer, then routes them through the fiber-optic cable to the Chugach Electric microwave system in Kenai. HEA receives $90,000 per year for that service from other utilities that share in the Bradley project.

Now, HEA is considering how to build a fiber-optic link to Anchorage and the Lower 48. Story said that would increase the value of the Homer-Kenai cable.

He said he was discouraged by the estimated $4 million to $5 million cost of laying fiber-optic cable along the existing electric transmission line from Kenai to Anchorage. However, he said, it may be less expensive to lay cable from Kenai to Moose Pass, linking there to a fiber-optic cable that runs from the Lower 48 to Seward and Anchorage.

The least expensive option may be to lay fiber-optic cable with construction of the Southern Intertie, a second electrical transmission line Railbelt utilities hope to build from Anchorage to the peninsula.

Joint venture yields mutual gains

The 39 megawatt, gas-fired Soldotna 1 generator was installed in 1985 by Alaska Electric Generation and Transmission Inc., incorporated by HEA and Matanuska Electric Association. However, expected demand for the $17.4 million generator never materialized. Soldotna 1 sat idle much of the time.

Ghormley said the idea to move it arose when Unocal considered whether to replace aging generators at its Nikiski fertilizer plant -- since sold to Agrium Inc. -- or buy electric power from a utility company. The project includes installation of boilers to turn waste heat from the generator into steam for the fertilizer plant. AEG&T is paying $23 million of the cost and Agrium is paying $6 million.

When the work is done, Agrium will supply natural gas for the generator, cutting HEA's costs for producing electricity. In return, Agrium will receive heat to make steam. The generator will run full time, increasing reliability of the electrical grid. HEA will sell the power to Chugach Electric, and Agrium, which previously made its own electricity, will buy 5 megawatts from HEA.

If the fertilizer plant ever closes, Story said, HEA can add a turbine to make electricity using steam from the waste heat boilers.

Pondering a pipeline

In December, HEA, Enstar and Unocal agreed to study the feasibility of building a 75-mile gas pipeline from Kenai to Homer. Spurs would carry gas to customers and pick up gas from fields along the route. AEG&T would own the main line, expected to cost about $45 million, and Unocal, skilled at finding and producing gas, would ship gas through it. Enstar would build and operate retail distribution spurs. Construction could begin next year.

The pipeline to Homer would connect southern peninsula gas finds to existing pipelines from Kenai to Anchorage. Ghormley said it is the prospect of bringing south peninsula gas to larger markets to the north that makes it seem feasible to supply communities such as Homer and Ninilchik.

Story said HEA has access to low-cost financing and requires less return on capital than its for-profit partners.

"Our participation brings feasibility to the project," he said.

Providing gas to the south peninsula would foster economic development, compensating some of the loss in demand for electricity as south peninsula customers switch to gas-fired appliances, he said. The pipeline would produce revenue for HEA and allow construction of a gas-fired electrical generator on the south peninsula, if that ever is needed.

Homer City Manager Ron Drathman said access to reasonably priced natural gas would be wonderful for Homer.

"It's a good clean fuel. It's a darn sight cheaper than electricity," he said. "If you've got a heating source, that broadens the types of businesses you can have here."

Broadening the base

Building infrastructure is not the only way HEA seeks to maintain its competitive edge. It also has proposed buying Seward's city-owned electric utility. Ghormley said HEA could offer lower rates for Seward utility customers. HEA would consolidate billing, accounting and purchasing services, she said, cutting the cost of running Seward's utility and spreading HEA's overhead over a broader base. Story said he hopes the purchase also would bring lower rates for HEA customers.

However, a city ballot proposition authorizing the city to negotiate a sale failed in November. While 55 percent of Seward voters approved, a 60 percent margin was required for passage. Ghormley said many voters wanted to see more details before approving a sale. HEA will work with the city council to put a more specific proposal before them, she said.

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