The assignment asks a series of questions related to the Alaska Power Cost Equalization (PCE) program administered by the Alaska Energy Authority (AEA). The PCE program provides grants to rural Alaska electric utilities to subsidize retail rates to residential consumers. The subsidized retail rate is calculated as 95% of the "eligible costs" per kWh between a floor price and a ceiling price of $1.00/kWh for the first 750 kWh. The floor price, or "base rate," is determined by the average of recent Anchorage, Fairbanks, and Juneau retail electricity prices. It also subsidizes up to 70kwh per month per community resident for "community facilities" such as a washeteria. When residential customers use more than 750 kWh threshold in a month, they pay the full rate for consumption above the threshold. Schools, government agencies, and commercial customers do not receive a subsidy. For example, if the floor price is 20 cents per kWh, and the utility retail electricity rate is 50 cents per kWh, of which 40 cents/kWh is "eligible costs," then the subsidy is $0.40 - 0.95*($0.40-$0.20) = $018 /kWh, and customers pay $0.50 - $0.18 = $0.32 per kWh for the first 750 kWh in a month. For a residential customer that used 500 kWh in a particular month, their bill that month would be $0.32*500 = $160. Without PCE, they would pay $250, so you can see that PCE is important for making electricity affordable for rural Alaska households. For contrast, the average Alaska household living in urban Alaska would be paying about $0.20 per kWh, so their monthly bill for 500 kWh would be $100. Two things about PCE are important to keep in mind as you answer the questions. First, the utilities participating in the PCE program are all subject to rate regulation by the Regulatory Commission of Alaska (RCA). Second, the "eligible costs" for the subsidy are basically the utility's costs. The Alaska legislature, in enacting the PCE program, did not want to subsidize the utility's full regulated electricity rate, because that would mean subsidizing the utility's profits. The data for the following questions are adapted from real costs reported by an actual rural Alaska utility to the AEA in 2023. The floor price (base rate) in 2023 was 19.58 cents per kWh. The three tables below describe the utility's operations, and assumptions required to answer the questions that involve calculations. The blank cells represent numbers you have to calculate to answer the questions. Question:

While contracting with Independent Power Producers provides utilities a mechanism for preserving the benefits of PCE for residential customers, there are often financial, organizational, and logistical barriers to formation of IPPs in rural Alaska. Given what this example based on a real rural Alaska utility illustrates about the disincentives that the PCE program provides for renewable electricity generation, what reforms to the PCE program might you suggest that could reduce or remove those disincentives while also retaining fiscal responsibility?

Utility electricity demand and power plant data

	(1)	(2)	(3)	(4)	(5)
	Diesel power alone	Diesel with wind (utility owned)	Diesel with wind (IPP owned)	Diesel power alone with carbon tax	Diesel and wind with carbon tax
Projected electricity demand (mWh/year)	2,000	2,000	2,000	2,000	2,000
Diesel fuel used (gallons per year)	150,000		same as col 2	150,000	same as col 2
Diesel generation heat rate (MMBtu/kWh)		same as col 1	same as col 1	same as col 1	same as col 1
Diesel generation conversion efficiency (%)		same as col 1	same as col 1	same as col 1	same as col 1
Price of diesel fuel ($/gallon)	$4.10	$4.10	$4.10	$4.10	$4.10
Annual fuel costs ($/year)	$615,000		same as col 2	615,000	same as col 2
Annual non-fuel operating expenses (excl. tax)	$700,000	$720,000		$700,000	$720,000
Carbon tax ($/year)	0	0	0
Total expenses (fuel costs + non-fuel costs + tax)	$1,315,000
Regulatory allowed rate of return	10%	10%	10%	10%	10%
Rate base	$1,450,000	$3,450,000	$1,450,000	$1,450,000	$1,450,000
Regulatory allowed profit
Total regulatory revenue requirement
Regulated electricity rate ($/kWh)

Wind turbine parameters

Capital cost	$2,000,000
Capacity (mW)	0.4
Projected load factor	0.30
Expected life (years)	30
Annual operating costs	$20,000
Projected annual generation (mWh)
Levelized cost of wind power ($/kWh)

Carbon tax

	Diesel power alone	Diesel with wind
Carbon tax rate ($/metric ton)	$100	$100
CO2 emissions (kg/year)
Carbon tax ($/year)

Power Cost Equalization (PCE)

	(1)	(2)	(3)	(4)	(5)
	Diesel power alone	Diesel plus wind (utility owned)	Diesel plus wind (IPP owned)	Diesel alone with carbon tax	Diesel and IPP wind with carbon tax
Total expenses ($/kWh)
PCE base rate ($/kWh)	$0.196	$0.196	$0.196	$0.196	$0.196
PCE subsidy (0.95*(total expenses - $0.196)
PCE subsidized electricity rate ($/kWh) (subtract PCE subsidy from regulated electricity rate)