Members of a troubled Southwest Alaska electric power cooperative have raised concerns about the utility’s proposed bankruptcy reorganization plan.
Naknek Electric Association in September 2010 was forced to file for Chapter 11 protection from creditors due to complications with a geothermal energy program.
A committee representing the interests of Naknek Electric members on Nov. 28 filed a six-page objection to the co-op’s disclosure statement for its reorganization plan. The filing was in advance of a scheduled Dec. 1 hearing on the plan in U.S. Bankruptcy Court in Anchorage.
The members committee raised concerns about the possibility of the co-op continuing with its geothermal drilling project, and the risks this could pose to the utility and to ratepayers.
Co-op members are concerned that Naknek Electric “emerges from this process with a future,” the objection said.
Members are further concerned the utility “will be pushed to raise additional cash by increasing rates, but the members do not have deep pockets, and raising rates will also raise the risk that larger users, with the capacity to buy their own generators, will abandon their membership thus actually reducing” co-op revenue, the objection said.
Expensive well
Naknek Electric serves the Bristol Bay area, known for its enormous summer salmon fishery. It was incorporated in 1949 and began distributing electricity in 1960. It is a nonprofit business, owned by its members. The utility has about 700 members and 1,100 meters in and around the villages of Naknek and King Salmon.
The utility’s major commercial customers are fish processing plants. It also has an important wholesale customer in the U.S. Air Force at King Salmon.
In the 1990s, Naknek Electric began looking at alternatives to expensive diesel for running its generators.
In early 2008, the co-op bought a 120-acre drill site some 17 miles outside of King Salmon, and the following year bought a National 1320 drilling rig.
It began drilling its first exploratory geothermal well on Aug. 16, 2009.
But problems securing grants, unexpected regulatory requirements and technical problems with the well — which refused to flow as hoped — drove the utility into bankruptcy court.
By the Sept. 29, 2010, bankruptcy filing date, Naknek Electric said it “had incurred approximately $40 million of debt that was in one way or another associated with the geothermal project.”
‘Independent verification’ sought
Naknek Electric filed its disclosure statement and reorganization plan on Sept. 15. The plan proposes, among other things, selling off the drilling rig, valued at $11 million, according to the disclosure statement.
The co-op said that, going forward, it would focus again on diesel electricity generation. But it held out the chance that the geothermal program might continue, contingent on federal grants coming through.
The co-op has said it was pursuing a $50 million loan guaranty from the U.S. Department of Agriculture’s Rural Utilities Service, or RUS. The loan would be used to pay off debt and develop more wells and a geothermal power plant.
The members committee, in its Nov. 28 objection, said members need to be fully engaged in the co-op’s plans.
The committee requested more information about how the co-op used its existing loans.
And the committee seemed wary of getting in deeper with what it called “a failed attempt to switch from diesel power to geothermal.”
“The Members Committee believes that before the Debtor again attempts a geothermal project, the proposal should be subjected to independent verification of assumptions and the Committee should be allowed to weigh in on behalf of the general membership,” the objection said. “For example, if the Debtor proceeds with a RUS loan guarantee for $50 million (half of which is used to pay off existing geothermal obligations) and the geothermal assumptions are erroneous, area communities would be swamped in huge rate increases to service that additional debt. The Debtor should explain the process it intend to follow in deciding whether to proceed with geothermal power and whether it will do so without court approval, independent consulting to verify its assumptions, and involvement from the Members Committee.”
Keeping customers
Naknek Electric is expected to file a revised disclosure statement following the Dec. 1 court hearing.
A big worry for the co-op, and for the members, is retaining the utility’s major customers, which could elect to generate their own power if rates increase significantly.
The members committee said it also is concerned about the co-op’s ability to handle new power demand. Some fish processors “report they have been turned down by Debtor when inquiring of their expansion plans,” the committee’s objection said.
“An inability to accommodate expansion, actually leads to rate base shrinkage, as commercial users either take the plunge to self-generate for the expansion (developing expertise and comfort going it alone) or begin to expand outside of Debtor’s service area,” the objection said.
The committee also noted Naknek Electric’s diesel plant is old and needs upgrading. It said the co-op should include an analysis of the issue in its revised disclosure statement.
