Workers pouring cement at the Blue Lake dam in June, 2014 (KCAW photo/Rachel Waldholz)

Workers pouring cement at the Blue Lake dam in June, 2014 (KCAW photo/Rachel Waldholz)

The Sitka Assembly voted down a proposed electric rate increase at its meeting Tuesday night. But that doesn’t mean rates aren’t going up.

As the full cost of the Blue Lake dam expansion hits city books, the question isn’t whether rates will rise, but by how much. And city staff have found some creative ways to soften the impact.

Downloadable audio.

To understand why Sitka is looking at another electric rate increase, we need to talk about…municipal bonds. No, don’t click away quite yet! We’ll keep it quick. And this is important, because this determines how much you have to pay for electricity each month.

Basically, Sitka is paying for the Blue Lake dam expansion, which increased the city’s ability to generate hydro power.

This is how Finance Director Jay Sweeney put it: “We’re a town of 9,000 people. We have two hydroelectric dams. The current dam cost$160 million dollars,” Sweeney said. “The debt service on that is not insignificant.”

And that debt service is what’s driving electric rates. Sitka issued four bonds to pay for the Blue Lake dam. And when the city issues a bond, what it’s actually doing is getting a loan from the Alaska Municipal Bond Bank Authority. (The Authority buys bonds from communities across the state, and then turns around and sell its own bonds on the national market — but that’s a longer story.)

The key point is that in return for the money it lent to Sitka, the Authority requires  the city to maintain a cash flow equal to 125% of the debt service. This is called a “rate covenant.” And it means the Electric Department has to have a certain amount of money coming in each year, or the city defaults on its bond.

That may sound onerous, but Sweeney told the Assembly it’s as good as borrowing gets.

“There are those who would say that we got a bad deal,” Sweeney said. “I would say we got an awesome deal. We got and achieved the best possible funding scenario we could have ever achieved, borrowing over 35 years at fixed interest rates that we will probably never again see in our lifetimes.”

That said, it’s still a lot of money.

The city was going to raise rates back in the fall, when it issued the fourth — and final — Blue Lake bond. But officials decided to wait, to see if a cold winter would generate enough revenue to keep rates fairly low.

That didn’t happen. Instead, Sitka had a mild winter, and electricity use dropped. The Electric Department now expects to be about $2.5-million short of the amount required by the rate covenant this year — and, unless electricity use changes, every year going forward.

That brings us back to the plan the Assembly rejected on Tuesday night. City staff put forward a rate increase that would bring Sitka up to the level required by its bond obligations.

Here’s Deputy Mayor Matt Hunter, speaking to Utility Director Chris Brewton:

Hunter: This one increase – this is finishing our commitment to build this dam. This is programming in the payments for the last bond issuance, and any future increases would be to keep up with inflation or something like that? This is the last big increase. Is that correct?

Brewton: Yes, that is correct.…this does cover the final bond for Blue Lake.

But the proposed rate hike was pretty steep.

For instance, an average Sitka household might use 1,000 kilowatt-hours of electricity each month. Right now, that costs about $93. Under the plan before the Assembly, that would have gone up to almost $129, or $35 more each month.

The proposed rate hike prompted outrage on social media, and Assembly members said they received an earful via email. But only two member of the public spoke during the actual discussion, Sitka residents Allison Bayne and Amanda Roberts. Roberts said Sitka’s high cost of living is driving people away.

“People are leaving. And businesses are leaving,” Roberts said. “And it’s getting harder and harder for families, especially young families to be able to sustain here…It seems like there’s so many rates going up at once, and it seems like it’s one thing after another after another after another. People are struggling.”

Assembly members said they share Roberts’ concern. But Hunter issued a full-throated defense of the rate increase.

“I don’t want to have a future generation look back and say, I sure wish they’d paid their own way. Because no one’s paid their own way for years in this town,” Hunter said. “Truth be told, all of our rates are below a sustainable level for practically all of our services in this town, and the reason is, we’ve relied on state funding when oil’s been big.”

Hunter reminded listeners where Sitka was several years ago: the city had exhausted its hydro power and was facing the rising cost of diesel.

“We ended up at this point where we are maxed out on electrical power generation. We cannot provide any more, we’re using every single watt that comes out of that dam, plus diesel, and we had nothing in the bank for a new dam. No one had saved up,” Hunter said. “Well, I am going to make sure we do the responsible thing, that we pay our own way as painlessly as possible.”

To keep the rate increase as painless as possible, city staff suggested an alternative.

Sitka has about $2.6-million in a rate stabilization fund. The city could drain that fund to cover the deficit in FY2015. To help cover costs in following years, Sweeney suggested transferring funds from the Southeast Alaska Economic Development Revolving Loan Fund, also known as the Stevens Fund. That’s a $3.5-million pot of money earmarked for economic development.

Sweeney estimated that if the city transferred, say, $1.25 million into the rate stabilization fund, it could cut the rate increase for the coming year in half.

In the end, the Assembly asked staff to develop an ordinance based on that proposal. The larger rate hike failed, 2 to 4, with only Assembly members Ben Miyasato and Michelle Putz voting in favor. Hunter voted with the opposition, in a maneuver that allows him to bring the motion again. So the rate increase will be back on the table when the Assembly meets next month.

At the end of the meeting, Brewton reminded listeners what that rate increase is buying.

“Blue Lake dam, we’re going to pay for it for 35 years, but that dam will be there for well over a hundred years. That’s the beauty of hydro,” Brewton said. “For the next hundred years, we are going to have a reasonable, fixed cost energy source for our community that is clean and renewable. That’s the benefit, and that’s what we’re making the decision to purchase. ”

And that purchase has already been made. Now it’s a matter of paying the bill.