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HomeMy WebLinkAboutSE Intertie Trassmission Line 1999 SOUTHEAST TRANSMISSION LINE FILE NO. 2 To: Lillian Ruedrich From: “échelle Fabrello, 3974 Jan 8 2000 9:53 AST Page 2/3 "sy : SOUTHEAST CONFERENCE sania “. Working for strong economies, healthy communities, and a quality environment in Southeast Alaska a December 20, 1999 Ron-44621 | Governor Tony Knowles RE FIVET ) P.O. Box 110001 Juneau, AK 99811-0001 DEC23 p99 OFACE OF THE GOVERNOR Dear Governor Knowles: The Southeast Conference at its annual meeting in Sitka on September 30, 1999 adopted resolution #00-04, “A Resolution Supporting Development of the Southeast Alaska Regional Electrical Generation and distribution Grid” A copy of this resolution is enclosed for your consideration. Sincerely, ewe | A Uy, ce bv 4 Fi Homan Be Executive Director Kw fee you ce: Senator Murkowski Senator Stevens Representative Young | Enclosure: Resolution 00-04 213 Third Street - Suite 124 Juneau, Alaska 99801 _—Tel. (907) 463-3445 FAX (907) 463-4425 To: Lillian. Ruedrich From: “*chelle Fabrello, 3974 737 8 2000 9:54 AST Page 3/3 “. » SOUTHEAST CONFERENCE anitie a Working for strong economies, healthy communities, and a quality environment in Southeast Aleska * A RESOLUTION SUPPORTING DEVELOPMENT OF THE SOUTHEAST ALASKA REGIONAL ELECTRICAL GENERATION AND DISTRIBUTION GRID (Resolution 00-04) WHEREAS reliable, stable, inexpensive electric power is essential to the economic strength and social well-being of communities in Southeast Alaska; and, WHEREAS communities in Southeast Alaska currently independently generate and WHEREAS _ construction of a regional hydroelectric-based electric generation and distribution (intertie) system in Southeast Alaske would result in more efficient generation, distribution, and consumption of electric energy, bringing commumitios more reliable, stable, inexpensive electric power; and, WHEREAS _ construction of a hydroelectric-based regional intertie would contribute to conservation of non- renewable natural resources by helping get communities off of expensive diesel power and on to less expensive hydroelectric power; and, WHEREAS Southeast Conference has prepared a plan for construction of a regional hydroelectric-based electrical generation and distribution system and created a standing committee to bring the region’s commmmities together to implement that plan; and, WHEREAS communities in Southeast Alaska support implementation of the Southeast Alaska Electrical Intertie system Plan as expressed in a Southeast Alaska Conference of Mayors letter to Governor Knowles. NOW THEREFORE BE IT RESOLVED THAT: Southeast Conference urges Governor Knowles and his administration to embrace the Southeast Alaska Electrical Intertie System Plan and join with the region's communities in implementing the plan by identifying it as a “priority project” for authorization and funding by the federal government. Southeast Conference urges Alaska's Congressional delegation to join with the state and the region's communities in obtaining federal authorization and funding for implementation of the Plan. Southeast Conference urges Governor Knowles and his administration to facilitate financing of Phase I (the Swan -Tyve intestie). ADOPTED BY SOUTHEAST CONFERENCE ON SEPTEMBER 30,1999. 213 Third Street - Suite 124 Juneau, Alaska 99801 Tel. (907) 463-3445 FAX (907) 463-4425 FRANK H. MURKOWSKI 222 West 7TH Avenue, Box 1 ANCHORAGE, AK 99513-7570 ALASKA (907) 271-3735 COMMITTEES: 101 12TH Avenue, Box 7 FAIRBANKS, AK 99701-6278 CHAIRMAN United States Senate er ENERGY AND NATURAL RESOURCES P.O. Box 21647 WASHINGTON, DC 20510-0202 Juneau, AK 99802-1647 FINANCE (907) 586-7400 (202) 224-6665 VETERANS’ AFFAIRS (202) 224-5301 FAX 130 TRADING Bay Roao, Suite 350 Kenai, AK 99611-7716 AFFAIR: INDIAN iS (907) 283-5808 109 Main STREET KETCHIKAN, AK 99901-6489 November 8, 1999 artes nao 851 E. WestroinT Drive, Suite 307 Wasitta, AK 99654-7142 (907) 376-7665 Mr. Dennis Lewis Chairman, Project Management Committee of the Four Dam Pool Petersburg Municipal Power & Light Post Office Box 329 Petersburg, AK 99833 Dear Dennis: Thank you for your letter enclosing the Resolution of the Project Management Committee of the Four Dam Pool supporting the Swan Lake - Lake Tyee intertie. I understand and appreciate the need for the construction of interties to maximize the use of existing power generation assets while providing a boost to economic development in Ketchikan, which has been hard hit by the closure of its single largest employer, the Ketchikan Pulp Mill. I believe that interconnection of the electricity grid, which is taken for granted in much of the United States, will provide clear economic and environmental benefits, while making the electrical system in Southeast Alaska more reliable. I have strongly supported the inclusion of funding for intertie projects in the Fiscal Year 2000 appropriation bills. However, even with an intertie, there is a clear need for new hydroelectric facilities to provide new sources of power and displace expensive diesel generation, which, in turn, provide economic and environmental benefits to Southeast Alaska. To this end, I continue to strongly support legislation to provide an exemption from Federal Energy Regulatory Commission licensing process for small hydroelectric facilities of 5 megawatts or less. We must do everything we can to tap this clean, abundant source of power. Again, thank you for your letter. I believe that all of these projects represent vital steps in our continuing effort to develop a modern energy infrastructure in Alaska. I look forward to continuing to work with you to make these projects a reality. ‘ Sincerely, CG) KL DR Seal KI. Dyn Lm EW) Frank H. Murkowski United States Senator D6 SE whthtie File WORLD WIDE WEB HOME PAGE E-MAIL ADDRESS we | ai @ ALASKA INDUSTRIAL DEVELOPMENT _ AND EXPORT AUTHORITY / = ALASKA mm =EENERGY AUTHORITY ere 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 269-3000 FAX 907 / 269-3044 MEMORANDUM TO: Karl Reiche FROM: Art Copoulos KE DATE: May 27, 1999 SUBJECT: — Lead Paint Contamination — Snettisham Cable Project Testing has revealed the presence of lead in the paint that is being removed from both the East and West Terminal Buildings at the Snettisham cable project. Prior to identifying the problem, and conclusively verifying the presence of lead, some paint removal work was done. The “chain of events” leading up to this discovery, and the subsequent response, are documented in the attached e. mail and memo. David and | have been in close touch with AEL&P on this issue, have provided our suggestions, and feel comfortable that AEL&P is taking the necessary steps to mitigate the problems at this stage of their response. We expect to hear back soon about the results of the Industrial Hygienist’s investigation and the results of blood testing of workers for lead contamination. ce: David Germer Dennis McCrohan —— = Sent By: Alaska Electric Light ~ “ower; 907 463 6398; May-< 9 4:14PM; ’ MEMORANDUM io“ © DATE: May 26, 1999 TO: Jim Williams, North Pacific Steel Erectors Bill Bernier, Alcan Electrical John Sherry, Alcatel John Walsh, AELP Power Generation Foreman All AEL&P Duty Engineers cc; David Gort FROM: Corry V; Hi an ofect Manager SUBJECT: Lead Cortenttn Peiy at East & West Terminals With reference to our Memorandum to you dated May 25, 1999, regarding potential of lead content in paint at the East and West Terminals, we have received preliminary results from a local laboratory that performed the tests. The results show a positive indication of lead content in all samples taken to the lab. These results still have to be finalized however we will be taking actions based on these preliminary results. AEL&P has contracted with Randy Bayliss of Smith Bayliss and LeResche, Inc. and an industrial hygienist from Fairbanks in order to evaluate the situation at the East and West Terminals. This evaluation will be done in accordance with OSHA Regulation 29 CFR 1926.62, in order to insure the health and well being of all personnel and to make the working environment as safe as possible. As a result of these findings, we recommend that no activities take place inside the East and West Terminal buildings until further notice. We will be working as quickly as possible to bring closure to this situation and to resume the work at the terminal buildings. We expect to be able to provide safety practice recommendations for the contractor and all subcontractors as soon as the hygienist has completed their evaluation. We will keep you informed of the situation as it develops. You may contact me at 463- 6320 or David Buss at 463-6387 if you have any questions. Thank you. Page 1/1 ‘ Art Copoulos From: Corry Hildenbrand [Corry.Hildenbrand@aelp.com] Sent: Wednesday, May 26, 1999 8:16 AM To: Stephen Petershoare; *Duty Engineers Ce: Bill Corbus; 'David Germer’; 'Art Copoulos' Subject: FW: Chain of events FYI. Corry wooo Original Message----- From: David Buss Sent: Tuesday, May 25, 1999 5:39 PM To: Corry Hildenbrand Subject: Chain of events This is the chain of events that led to the lead contamination issue. On May 24, 1999, Dale Sams called me and asked if we ever got our results for the paint. | called John Walsh and asked him. Walsh indicated he had asked Randy Bayliss and Bayliss gave him a home test kit. They tested the paint and it showed negative for lead. | called Dale Sams back and let him know, he told me that they (him and the steelworkers) had tested the paint with their own home test kit at the site. The test indicated positive for lead. | went to the site with in the next two hours and took my own sample and sent it to John Walsh. | also left a message for Randy Bayliss to come to the site the next day. When | got back into town Walsh notified me that the test showed positive for lead. The tests being performed may be inaccurate if the paint has red pigment in it. The primer paint we have been testing does have a red pigment. On May 25, 1999, | contacted Dale Sams before he went to the site and notified him that the test we performed also indicated lead in the paint. | told him that we should assume there is lead in the paint and where the proper respirators if working with the paint until we can have the paint tested. | took the samples | collected the prior day and asked Chad to find a lab to test them ASAP. Chad found a lab in Juneau that could have the results within 3 days. The sample was dropped off. | contacted Randy Bayliss in the morning. | made plans to visit the site with Bayliss and take samples of the paint. We took samples from several places at the West Terminal Building. Randy Bayliss took those samples to be evaluated at the Juneau lab. Bayliss then contacted an Industrial Hygienist and researched the OSHA laws for lead exposure in construction. In order to continue work at the site, workers that are believed to be exposed to lead above set limits, must be protected as outlined in OSHA regulations 1926.62. Bayliss will assist in setting up any necessary plan to meet all OSHA regulations. We will now wait for the results from the Juneau lab. David DRAFT CONFIDENTIAL Revised Southeast Intertie Plan April 22, 1999 Revised Intertie Proposal e KPU's existing $77.2 million Intertie proposal abandoned e Analysis shows that this plan is not economic e KEC (APT/Cape Fox) immediately develops the Mahoney Lake project e KPU enters into long term power sales agreement with KPU e Mahoney can be on line within 18 months e A High Voltage Direct Current (HVDC) Intertie linking the Ketchikan area with the Tyee (Wrangell/Petersburg) area is developed e Intertie could be completed in 4-5 years and then be available to serve KPU’s excess energy needs for the long term e KPU would seek a guaranteed maximum price contract for construction of the Intertie and appropriate guarantees covering the technology and performance e HVDC intertie development is less expensive than development conventional AC intertie technology; projected cost for HVDC Intertie is as low as $40 million HVDC technology is considered to be more environmentally benign HVDC would follow a different route with more undersea crossings thus minimizing environmental impacts Benefits of Plan e HVDC technology minimizes environmental impacts e Less visual impact e Narrower right-of way e Proposed route places greater portion of line off-shore e HVDC technology reduces operational problems associated with connecting isolated generating sources e May be supported by Clinton Administration and environmental groups e Ketchikan gets both the Mahoney Lake project and the Intertie e Because state bonds are not required for development, the state could consider reducing the state portion of the Four Dam Pool power rate on Tyee power sales over the Intertie e HVDC technology lowers costs for the Intertie and if successful could lower projected costs for other segments of the proposed Southeast Interconnect System plan e Development of both Mahoney and the Intertie increases power reliability to the interconnected communities and provides greater flexibility in the event of low water conditions in the Ketchikan area. i DRAFT CONFIDENTIAL e Risks associated with Plan e HVDC technology is not commercially proven e To date there are very few completed projects utilizing the technology e Risk can be mitigated by obtaining appropriate technology and other guarantees from developer and technology owner e HVDC route includes increased use of undersea crossings e Undersea crossings generally have greater risk e Risk can be mitigated with appropriate warranties from the cable manufacturer e Funding Proposal for HVDC Intertie e The following summarizes the HVDC Intertie funding proposal: State Grants Received but not yet committed $ 3,100,000 Federal Grants Authorized/Received 9,900,000 FY 99 proposed Southeast Energy fund grant 4,400,000 Proposed additional federal funding 20,000,000 Additional state grant-DCRA authorized loan released 8,000,000 Total available funds (excluding interest) $45,400,000 e The following highlights particular aspects of the funding plan: ¢ $20.0 million or more in additional federal funding would be sought. e Anenergy bill recently introduced by the Clinton Administration includes $20 million in authorization for the Intertie (no appropriation yet introduced) e The Clinton Administration appears interested in developing the more environmentally friendly HVDC technology e The existing $20 million dollars appropriated to DCRA to be used for an Intertie loan would be re-appropriated as follows: e $8 million (plus future interest earnings) would be appropriated to the Southeast Energy fund to be used for grants for the Intertie e Grant funds would only be released upon AIDEA’s approval of a finance plan showing the Intertie can be completed within available funding sources e The remaining $12 million would be appropriated to the PCE fund e The 40% of Four Dam Pool revenues currently allocated to the Southeast Energy Fund would continue to be devoted to the Intertie e However, upon approval by AIDEA of a finance plan showing the 40% is not needed for completion of the Intertie, the 40% share will automatically be reallocated to the PCE fund Revised Southeast Intertie Plan April 22, 1999 Page 2 DRAFT CONFIDENTIAL Interested parties to be contacted e Jack Shay, Ketchikan Borough Mayor Bob Weinstein, Ketchikan City Mayor Pete Eckman, Legislative aid to Rep. Bill Williams Senator Robin Taylor Dave Carlson, Chair of the Four Dam Pool divestiture committee and former Petersburg Mayor e Dennis Lewis, Chair of the Four Dam Pool Project Management Committee e Other Four Dam Pool representatives e@ Robert Wilkinson, General manager Copper Valley Electric Association e Ed Kozack and Walter Sapp, Kodiak Electric Association Revised Southeast Intertie Plan April 22, 1999 Page 3 C7 a ma Comardvrobon t, SE nespomae ~ batten copy of ReiTh'a K nis gee AY wan agped tk be bed * Cote Neo foo: Ney - Wer. Gov. ae esetnal to Debby nanel) uPon We MAS Stake cori bala , Sou, auppats Fed © Naha — KPU oeoken: va ney ae ta & dig, itty ZW S. Be wall da we MAY- 4-99 TUE 17:43 03 FAX NO, 02 P, 02 MAY-G4~99 O5:04 PM P.02 File 9b (4) KETCHIKAN PUBLIC UTILITIES OFFICE OF THE GENERAL MANAGER Kar R. Amylon, General Manager Korry |, Olsen, Executive Secretary Ronald L. Setje, Administrative Manager Richard D. Trimble, Power Projects Manager ie 10; The Honorable Mayor and City Council FROM: Kari R. Amylon, General Manager DATE: April 20, 1989 RE: Swan LakelLake Tyee infertio Update - Alaska industrial Developmant and port Authority (AIDEA) Project Review Attached for City Council review is a copy of the analysis of KPU's proposal for funding and constructing the Swan Lake/Lake Tyee Intartie, which was performed by the Alaoka Industrial Development end Expert Authority (AIDEA). If accopted at face value, fhe report does not provide a favorable opinion regarding the conatrvallon of the Intertie 8S Opposed {0 pursuing other energy allernadives that may be available to the groater Ketchikan community, At the same time the analysis addressed the Issue from very specific perspectives end, as a reauit, does not necessarily provide an objective assessment of KPU’s position and efforts to dale, While staff has no: had an opportunity to do an in-depth analysis of AIDEA's report, some immediate concerns are briefly ae In the attached mamorandum from the Power Projects Manager, Richard mblo. As a relative “newcomer to the discussions regarding the Intertie, from my perspective the AIDA reporl does not rasatve the Issue of whether the Interlie should of shauld not proceed, It clearly should not be considered the “last chepter” regarding the Intertie. If nothing wise, the AIDEA repor reinforces my belief that the project cannot pe considered In Isolation and an ultimate decision as to whether to proceed will be influenced by a number of external factora: Adgitiane! federel funding of the project; 8 $20,000,000 euthorizatian ior | the project Is contalned within the current Cimion Administration Energy _ Bill. The AID did not give full Consideration t ——e funding Ined {o date, Orie po re funding. The development of a realistic analysis of the future cost of diese) Ae C ) we ¥ . generation that tho Utlity will have to incur. The likelihood of divestiture of te Four Dam Pool end what, if any, woes impact the sale of the projects could hava on the construction of the i gq wv ! Intertio, C oy | Ty * OW O'c Md 80:80 SNL 88-bO-AKh MAY- 4-99 TUE 17:43 03 MAY-84-99 95:54 PM FAX NO. 02 P. 03 P.Bs L0'c Nd 03:80 BNL 66-p0-AR%, Qi C4) paged Southeast Confersncs's altympts fo secure 2 federal autherizsilon for the (es Southeast Alaska electrical grid of which the Swan Lake/Lake Tyee alas Intertic would be the first leg. Ko Five cm APO oO A realistic assessment of alternative technolagy being prepesed by () ort Alaska Power and Telephone which, if viable, could reduce the cost of { the Intertis. Such technology would have to be evaluated agalnat the = of any new permitting fequiraments and/or the possibility of demenstratian grants. - ‘The ability of the Borough and KPC to market the former Wad Cove pulp mill site and attract rew industry to Ketchikan, File on Geis at Te ae of these issuee may noi be resolved in the rear future, It Is my bellef that the next rod elghinen to twenty-four months will determine whether or not the Intertie Is a viable project. In the interim staff ls cde te licensing of Connell and Whitman Lakes. Al the sare tima nothing Ulitty from continuing discussion with Cape Fox and Alaska Power et Tolep! regarding voney A oho project or with Metiskata(t may be in the end " ‘iat May find Its ) tC option is to competitivaly bid 3 bulk power selas agreement, pir rer Ws eee ~} 1 ug 22 S-454! 5 AGENUA - YW/99 » KFUMRS 90 'c Wa (9:89 SNL 66-b0-A¥i. MAY- 4-98 TUE 17:43 03 FAX NO. 02 MAY-64-99 65:84 PM P. 04 P.04 Fh (4) ry <3 mm ELAN PUBLIC TI TES ee Memorandum Tot Karl Amylon, City Maneget From: Richard Trimble, Power Projects Manager 7 Date: Aprli 27, 1999 Subjects Initial Response to AIDEA Southeast Ynterile Review The principal difference between AIDBA’s analysis and our own evalsations 4s in the trcatment of grant funds. This report "ignores the funding sources for the various projects and intead compares the total capital and operations costs of the projects.” AIDEA's Viewpoint in that “the total societal cosy” should be considered. So from this perspective, it fs an inevitable conclusion that at today’s fuel prices, diesel combined with small local hydro is a cheaper alternative than a $77 million Intertic, KPU and the Four Dam Pool have always acknowledged that at full cost, the Intertle is not the mast cast effective energy resource, However, our perspective has always been that both srare and Sederal grant funds reduce the caplre) cost, Grant funds are neither ‘a loan, nor an investment requiring a return. It is the remaining unfusded cost that must be Coxhpared to our dissel/amall hydro alleanative, not $77 million, Jn Zact, our goal has been to obtain sufficient state and federal grant Cunding to make the Intertio more economical than the alternative of diesel augmented with small local hydro, ATDEA did create two other scenarios that credited some grant funds against the Intertio’s capital cost (tho “Incremental” and “Incremental State" costs), but bot) stopped short of crediting all grant funds, Further, AIDEA understated the amount of federal funda potentially — available to this projec red $17.4 million in worl federal furiding, We believe the total — | ig likely to be at least$30 million. The other key varlable leading to a small hydro/diesel conclusion is the assumed cost of diesel fuel. AIDA assumes the cost of diese] will increase from 58 cents per gallon is 1999 to 66 cents in 2018, They consider separately a high cost case at 85 cents per gallon. Unfortunately, these costs are unrealistically low. The average cost of #2 diasel in the Stare of Alaska over she past tmenty years has been 95 cents per gallon, Bven a purchase by KPU'earlier this month war at a eH cost of 83 cénts por gallon. Assuming lower costs for the neat twenty yeara Is Imprudentatbes. ny 2 Ch There are other economic assumptions and findings we question. Ong example Is an assumption that KPU pay an amount greater than the wholesale rate for energy. Our view is that an intetruptible sale should be at 2 lesser rats than the firm wholesale rate, Another {s the assumption that the project would not qualify for wx-exempt bonding, We believe it Is prenvature ty fle out % tax-exempt bonding, which would decrease the interest rte from 7% to 5% significantly improving the economics of the project. 'g i £0'd Hd 9b: 69 SAL 66-bO-27, MAY- 4-99 TUE 17:44 03 FAX NO. 02 P. 05 _ MAY"64-99 65:05 PM NAY-O4-99 TUE C9:12 PM °,03 P.@S Owe ree M4. —~ 1 Aside from purely economic considerations, "the total societal cost" of the Inlertis Is well balanced by the otal societal value, The AIDEA report notes that this is the first step {n the creation of a Southeast Alaska electrical grid, While the report conaklera this s “distant prospect,” the reliability and efficiency of a transmission grid is enjoyed by the Alaskan Raljbelt, and most of North America, Rather than being downplayed, the leadership of Southeast Alaska is actively pursuing whe grid as the key to the economle vitality of the region. A policy decision to abandon this project Jn favor of diesel generation is short sighted, While the report notes the various local hydro projects that could be developed, it docs not clearly portray the limited capacity of these projects, They are all inadequate and must be augmented Ly dievel generation in the near-term. A decision against the Intertie Js a decision in favor of diese! generation, , MAY- 4-89 TUE 17:44 933 MAY—-@4-99 OS:s5 PM . FAX NO, 02 P, 06 P.86 KETCHIKAN PUBLIC UTILITIES OFFICE OF THE GENERAL MANAGER Karl R. Amyion, General Manager Kory L. Owen, Executive Secretary Ronald | Sette, Administrative Manager . Richerd D. Trimble, Power Projecte Manager — TO: ‘The Honorable Mayor and City Counall FROM: Karl R, Amylon, General Manager DATE; Apel 30, 1999 RE: Swan Lake/Lako Tyee Intertie Update - Alaska Industrial Development and Knpart Authority (AIDBA) Project Review The attached memorandum from the Finance Director, Bob Newell, was recelved by my office after the agenda raport regarding AIDEA's asseesment of the Intertie had been submitted to the City Clerk. Mr, Newell rales some interesting points and confirms my belief that » final decision regarding the Interte Is fikaly to be at least elghtoen to twenty-four months away. AGENDA - 6/6189 « KPUMRA(s) b0'c Wd 66:89 3 6B-b0-AYK MAY- 4-99 TUE 17:44 3 MAY=84-99 o5:e5 PM FAX NO. 02 P,07 WAV-04-88 TUE 08:11 Pt oe ‘ 4b (4S) Pased ' Memorandum To! . Karl R, Amylon, KPU General Manager From: Beb Newsll, Finance Director Date: April 28, 1995 ( Subject: Initial Reviow of the AIDEA Analysis of the Swan Lake-Lake Tyee Interle Project The conclusions of the AIDEA report shvvid come as no surprise anyone that has been fallowing the Swan Lake-Lake Tyee Intartle Project (the ‘interfie’), The Intertle is not and never will be economically feasible In & pure financial sense, Our own financial advisor, Alan Dashen, reached the same conclusions In February 1928 when he issued his financial analysis. ; Aster reviewing @ number of different financial snalyeoe prepared by Alan Oashen, H.W, Back and now the AIDEA repor, | think everyone agrees thal tho numbers Just aren't there ta support the Intertle. Hawever, | boheve If a long-term perspactive le applied, the Project Ie still important for the fulure economic development of the Aommunilles located within Southern Soulherat Alaska and the development of a Southeast Alaska powy! grid. The intertio Is an excellent way to achieve two of (he Stain’s primary goals of attaining power cost equalization and developing a power grid for Southeast Alaska. As | understand jt, the Intertle will become part of the proposed power grid. Tho devalopment of the power grid wit allow high-cost powér communktes td purchase power from low-cost power communities. Thic ls s very rations! end reasonable approach to powbr cost equalization. The strongest and correct argument for the Intertie continues to be long-term economic development, The State of Alaska has canatructed major Infrastrusture projects that, In the short-term, were ecoriornloally unfeasible, but still vital io the economic well being of the communilles served by the projects. Consider, for example, highways, airports and ferry systems. Many of these projects were expensive to develop and construct, were nal evononilcelly fwasible at the thne thay wore concoived, and some of therm etil! required operating and maintenance subsidise, The AIDEA report wes put together by well respected professional firme, and In many inclances, the sonclusion» reached In the report were similar to ihrose that have been reported by our own consullants, There were, howaver, a few conclusions that | found to be inconsistent with other Information In the raport or (hat | view differently, ¢ The analysis does not consider the additional federal ($20 milan leas $7.5 million) and state funding ($4.44 millon) for the Intertie that the Clty Is anticipating, If this funding dose materlaltze, the economic justifieation for issuing the AIDEA revonus bonde |inproves significantly. © ‘The analysis Indicates that, in order for AIDEA to Issue Invesiment grade bonds, there must be 8 suificiant rayénue stream avallable to provide for adequate debt MAY- 4-99 TUE 17:45 03 MAY-O4-99 O9S:96 PM FAK NO. 02 P. 08 P.es ab Cas) Page 2 _—~ Karl R, Amyion April 28, 1998 Page 2 Bervice coverage, As the analysi¢ noted, annual debi service would amaunt lo about $4.13 million. As you are aware, 40% of the Four Dam Pao! revenues (debt service component) have been “pledged” to the Southeast Energy Fund, aubject to an annual appropriation by the State Legislature, This revenue stream gould be used to provide for tho debt service on the AIDEA bonds. The analysts reached @ similar canclusion, Sut further noted thel, ameng other things, that Wiis revenue stream would amount to approximately $4.3 milan in fiscal year 19@9. it was thelr opinion that the avaliable reyenus stream would not provide for adeyuate debt service coverage. { reached a different conclusion. A typical debt service coverage ratio for investment grade bonds would mogt likely range between 1.10 fo 1.25 times annual debt service, Assuming caverage of 1.25 Gimes annual debi service debt, a revenue Stream of $5.16 million woukd bs required, On the surface, It looks like AIDEA would not be able to lssve investment grade revenue bonds, Hewever, | believe the analysis overlooked the polential revenues to the State of Alaeke from Lake Tyco sales to KPU. 11 would seem remsonable that the amount available for debt service rp aw —j should Include the present 40% revenue stream Pus. 100% of fre Lake Tyee onies = 2 a0 to KPU. Considering both revenue streams, the medium ani energy sales tv SX Tarecaets would generate edequate dabt service coverage. 1 should also be noted that the 40% revenue does Indeed fluctuate es the analysis noted. The most the Chy has recelved under this program waa $4.6 million. For more information, ploase refer fo the diecussion in the third paragraph on page 12 and Table 0-3 of the AIDEA report. The report noted thera were two potential ravanue etraams, but it did not consider them together, { «The analysis noted thet the Project may nol be eligible for tax-exempt financing, tis |}. Ca my understanding that the Intertie will be used by KPU to purchase power from Lake a wie ‘Tyee for the purposo of providing eneray to al KPU rate payere and to slow KPUto | © | sell power to the rate payers of Wrangell snd Petersburg, Under thie arrangement, | question whether tax-exempt financing should be ruled out. | would .gfrongly Guggost that the tox-axempt jesue be reviewed again. A tax-exempt bond issue could reduce annual debt service by $400,000 to $500,000 and significantly improve _ the economics of the Intertie. «In several scenarios the financial analysis was favorable towards the Mahoney Lake un Project. However, Swan Lake and Mahoney Lake share the agme watershed, From C NS v the perspective of managing power gengfation resources etd ensuring that tho ON. community of Ketchikan hee @ sufficient eupply af powar to maet Its needs, sharing the same watershed may Impact the Mahoney Project's abillty to contribute to cur energy load requirements. Fot exampis, ff Swan Lake is down due to Inadequate supply of water, Mahoney may also experience similar operating problems, Event Mahoney Ip a low-cost alternative under certaln load forecasts, it becomes a very high-cost alternative If it unable o generate pawer when It ls needed. Trg 90'c . Wd 6P:8) WL 6B-~F0-AtK MAY- 4-99 TUE 17:45 03 FAX NO. 02 MAY-84-99 GBSI86 PM ie “AHY-04-99 TUE CO: 12 PM ie Ss ‘ : Karl R. Amylon 98cr ‘ pee ' April 28, 1999 Page 3 A similar argument, albet to a leseer degree, could be made regarding the decision tg bring the Intertie in at Swan Lake, If the Swan Lake {ransmicejon line fails, power from Lake Tyee ls eseontally cut-off. Conekieration ghould be given to changing the location of where the Iniertie connects to our syafam. - Changing the location may Cefer the need to acquire eddillonal diesel generation. « The analyzia for the diese! silernstive Is partially Nawad baseuse the projected cosls for diese! fuel do nol appear to bear any semblance te markel prices nor has any adjustment been made to recognize the volatility of diesel fuel prices, However, K should be noted that KPU’s own consultants also used prices which did not appesr lo be reflective of the market. « The analysis suggested that the debt gervice needs to be guaranteed by # sufficiently creditworthy entity. Can the State of Alaske guarantee the debt service? Can the State of Alaeka lesue it own general obligation bonds to finance the Intertiv? The Clty hee successfully Issued genera! obligation bende for enterprise fund activition that arc typically financed with revenve bonds, This strategy has resulled in lower interest costs, no reserve requirements, and lower ennus) debt service payments. : « On page 13 of the AIDEA report, 4 statement was made that 4 plan needs to be developed fo ensure the bondholders that sufficient funds are avuilable te pay for the foplacement cost of the {ntertle. While this is not = eslgnificant Issue, | think bondholders would be more Interested in the payment of operations, malntenance and repair costa, As long aq (he interlle \s being well maintained during the term of the bonds. replacement should not be a major issue for the bondholders, The above comments are based on s cursory review of the AIDEA report, Please let me know # you have any questions or If you want @ mors In-depfh snalysia. Just for your information, | have been advised by Alan Dashen that the four Dam Pool has angsyed him to review the AIDEA report and prepare a response. | auggest that we wart until Dashen completes his review before staff undertakes any Surther analysis, ere) MNS IVI VD vo roa Wwe ve leu 2501 K Stes NW, Su'te 9A AWashington, DC 20037 # (202) 342-168¢F ax (202) 342-2066 211 Fourth Street, Suite 302-0 # Juneau, AK 98801 # (907) 463.9836 ax; (907) 463.3611 MAIL: POR 244902 # Anchorage, AK 99524-4902 (807) 245-2252/Fax. (997) 248.4973 Markley & Company ax To: Dave Russell, Lisa Sutherland From: LARRY MARLEY Fax: 202-224-2354/202-228-0248 Pages (including cover sheet): 24 Phone: Date: 4/28/99 Re: Southeast intertie/Mahoney Lake Project cc: O Urgent O For Review 0 Please Comment ®@ Comments: Here is the 15-page executive summary of the Tyes-Swann Lake intertie report released Monday by the State. My client, Ketchikan Electric Company (a joint venture of Cape Fox Corporation and Alaska Power & Telaphone Company), wants to develop the Mahoney Lake Hydroelectric Project but has supported and continues to support constuction of a Tyee-Swann Lake intertie. Contrary to what you may hear, this support is straightforward. It does not represent some devious plan to delay and destroy the intertie. Period. What we are suggesting is that we can have our cake and eat it, too, energywise in the Ketchikan area. We have said this to everybody all along and we believe it. Here's why: Mahoney Lake is a 10-megawatt hydro project that is fully licensed by FERC and ready to go. It can be built for $17.5 million within 14 months by the private sector with no tocai or state financial support. Power will be offered to Ketchikan Public Utilities at a flat rate of 6.5 cents/kilowatt hour for the life of the contract, This is lower than the 6.8 cents/kilowatt hour proposed for intertie power. Any federal assistance will further Jower the Mahoney rate. Only about four miles of line will be needed to connect the project to the existing KPU system, and reliability to Ketch{xan residents will be enhanced because there will be an additional power source and a separate line for it, A Mahoney Lake fact sheet is also attached. The intertie is necessary as long-term regional infrastructure (much as a road or water fine) that could be part of a Southeast intertie system stretching from Ketchikan to Juneau. They key here is to get the cost down. The current cost, using conventional high-tension AC technology, is $77.2 million, for which we understand there are about $21 million in grants on hand ($10 million federal, $11 million state). We continue to add our voice to those who hope at lec:st another $20 million in federal grants can be obtained. What we believe can make all this come together for the intertie is the use of much less expensive “HVDC Light” transmission technology, which would bring the cost cown from the current $77 million to as little as $40 million. (For $60 million, an all-submarine cable route could also connect Prince of Wales Island.) The HVDC technology, which is more environmentally benign than AC, would MmrK-coO7-99 WEY 10+99 US PHA NU. Ud r.Uo April 28, 1999 welcome any serious, independent review, The new technology has b2en developed and is warranted by AAB, a $30 billion intemational consulting engineering firm. There is more than one way to skin any cat, and interties are no exception. Aitached is a letter on the HVDC altemative. As | said, the proponents of this option welcome any meting, with anybody, at any time. It appears that one of the problems here is that all the parties aren't communicating effectively with each other. eS COIS WEY 10:94 US PHA NU. Uc KETCHIKAN ELECTRIC COMPANY, LLC Owner and Developer of the Mahoney Lake Hydro Project April 22, 1999 ¢ Both the Mahoney Lake Hydoelectric Project and the Swan-Tvee Intertie can be built Mahoney Lake is fully licensed and can be built by the private sector without state cr local financial support. Using advanced technology. the intertie can be built for between $40 to $50 million. well below the present estimate of $77 million. * Mahoney rate is lower than Four Dam Pool rate Four Dam Pool rate is currently 6.8 cents per kilowatt-hour (kWh). KEC’s offer to KPU is at 6.5 cents per kWh fixed for the terin of the contract (10 to 35 years). * Tiuing is now! Mahoney is ready to go, Intertie ig 4 to 5 years away Mahoney can be operational by the fall of next year. while work progresses on the intertie. « Why rt if it is cheaper to produce power here locally The Intertie should not be viewed strictly as a source of power for Ketchikan. Ketchikan should consider all local possibilities for hydropower first and view the Intertie as the regional infrastructure that allows the power to flow freely in either direction throughout Southeast. * Mahoney Lake Hydro will reduce the number of power outages and brown outs Connecting Mahoney Lake via the Beayer Falls transmission line means increased reliability for the power into Ketchikan. If Swan Lake or the Intertie goes down, there will still be significant power available via Mahoney Lake through the Beaver Falls line. * Mahoney Lake Hydro supports the Intertie The Intertie is a basic infrastructure for Southeast Alaska similar to building a higiway project. It serves important economic development objective to connect different parts of Southeast Alaska. The electric needs of SE Alaska over the next 20 to 30 years will require efficient electric gencration such as Mahoney Lake, which will flow over intertics such as Swan-Tvee * Mahoney will supplant fossil fuels KPU will be able to meet its capacity, energy and stand-by reserve requirements for many years without using diesels. This will minimize retail rates in Ketchikan for many years to come. * No new public investment by Ketchikan ; : KPU will have access to Mahoney Lake energy and capacity without making ans further investment in new hydros. The investment will be made by Ketchikan Electric Company. a joint venture of Cape Fox Corporation and Alaska Power & Telephone Company. ¢ Enhanced funds available for Intertie . : a Mahoney Lake will free up all of KPU's cash and credit for use on the Intertie project by eliminating the need for investment in other generating projects. ¢ Enhanced economic development with the _ Mahoney Lake will provide important electrical stability to the KPU system once the Intertie is on line. When this occurs. Ketchikan’s long-term access to low cost all hydro capacity and energy resources will put the city in a pre-eminent posilion to attract economic development. * Immediate local economic development . , Mahoney Lake will be a local project within the Ketchikan Gateway Borough. It will provide local construction and operating jobs, and will be owned by a local corporation. ° Intertie support a KEC has supported and will continue to support the intertie. tua Ou ee ome aUutuy vs Pnn we ve beut ALASKA POWER & TELEPHONE COMPANY P.O. BOX 222 ¢ 191 OTTO STREET PORT TOWNSEND, WA 983968 (280) 385-1749 © (600) 982-0136 March 1, 1999 FAX (960) 285-5177 Randy Simmons, Executive Director Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage, Alaska 99503 Dear Mr. Simmons: One of the problems you are facing with the proposed Swan/Tyee Intertie is the overall cost of the project, We have been investigating other construction methcids and technologies now available that offers a cost advantage over the proposed method. In the early 1980’s high voltage direct current (HVDC) transmission facilities were studied as a means of interconnecting southeast Alaska, HVDC has many advantages when compared to traditional alternating current transmission. However at the time the prior studies where conducted HVDC was only used for very high capacity transmission facilities. The primary reason driving this was the very high cost of the Acipc converter stations required at each end of the facilities. Recently, ABB Power Systems has developed a new design that is based upon voltage sourced converters, This has significantly lowered the cost and thus, allows the economic use of HVDC for the transmission of smaller loads (20 to 30 mW). This technology also uses cable, either buried or submarine, or low impact overhead, rather than high tension transmission that requires tall towers. These require large right-of-ways teducing both the land resources consumed and the visual impacts of the faculties upon the remaining Jand. We have been working with ABB and have studied several different routes that would connect the Swan Lake and Tyee Lake Projects, The four alternatives studied range in prices from $40 to 50 million. This represents substantial saving over the current 138 kV high-tension design of $77 million. If these savings are extended to all of the electrical interconnections currently under consideration the savings are enormous. In addition, fiber optic technology can be easily and economically incorporated into the design that will allow the construction of not only an electrical grid throughout southeast but also a broad band network capable of providing high capacity voice and data services. I have enclosed a proposed route map and background information developed by ABB that describes this technology. In addition, we prepared a cost estimate that provides a fixed-price tumkey amount for each of the routes, We based our estimat? primarily on a submarine with short overhead sections that cross the Cleveland Peninstila at three different locations. We understand that the Cleveland Peninsula is a sensitive area and further investigation will be needed to determine the best crossing point’ Also the current EIS issued by the Forest Service for the Swan/Tyee Intertie will need to updated or supplemented. Because the impact upon the National Forest of the HVIXC alternative is only a small fraction of that documented for the 138 kV high-tension design we do not min cu vv wey ivi vs roa We ue teu view this as a significant problem, if agreement can be reached among the interested parties. One of the concerns we have had in regards to the HVDC concept is the lack of operating history and experience; some still view this technology as experimental, We have done significant research and are convinced that this concern can be overcome. ABB is one of the largest companies in the world and is willing to provide satisfactory warranties. In addition, IEEE is now (Feb. 1999) balloting on a standard that will be izicluded in the specifications of all HVDC converter stations. This standard documents the best practices that have been used worldwide for the last 29. years in the purchase, operation and maintenance of high voltage direct current installations. We believe this is an exciting development that may help us all to interconnect southeast Alaska. We believe HVDC is superior to the existing design electrically, has a smaller impact upon the resources of the area, and does so at a substantially lower cost. We remain willing to work with KPU, the Intertie Committee of the Sovtheast Conference, Alaska Municipal League, and others to move the iuterconjection of Southeast Alaska forward. Please let me know if you would like additional information. Sincerely; Lf. Robert S. Grimm, Predident Cc Mayor Weinstein, City of Ketchikan Beme Miller, Southeast Conference 7 Jerry Ingersol, USFS : Enc. ABB Information Route Map +- 51 kV de Cost estimate MPN~cO-99 WLY 10194 us FHA NU. uc i've Swan/Tyee Intertie Total er : Routes: Fixed-price Mile Route A Miles Type Ward Cove to Helm Bay 23 sub Helm Bay to Meyers Chuck 6 oh Meyers Chuck to Wrangell Island South 40 sub 69 $46,822,280 $47,000,000] $681,159 B Leask Lake to Naha Bay 6 oh Naha Bay to Yes Bay 27 sub Yes Bay to Santa Anna 6 oh Santa Anna to Wrangell Island South 16 sub 55 $39,951,080] $40,000,000} $727,273 Cc Leask Lake to Naha Bay 6 oh Naha Bay to Port Stewart 14 sub Port Stewart to Vixen Inlet 6 oh Vixen Inlet to Wrangell tsland South 30 sub 56 $40,336,640] $40,000,000] $714,286 Oo Leask Lake to Naha Bay 6 oh Naha Bay to Helm Bay 17 sub Helm Bay to Meyers Chuck 6 oh Meyers Chuck to Wrangell Island South 40 sub 69 $45,348,920] $46,000,000] $666,667 E Ward Cove to Thorne Bay 37 sub Thorne Bay to Wrangell Island South 43 sub 80 $60,576,800} $60,000,000} $750,000 F Swan/Tyee 138 Kv Overhead ey $73,200,000 $1,370,787 Sitka/Kake/Petersburg Sitka to Warm Bay Springs 13 oh Warm Springs to Kake 35 sub Kake to Duncan Canal 26 oh Duncan Canal to Mitkop Istand 27 sub 101 $54,235,720] $55,000,000] $544,554 ew ew butt Pa awe ve sland Liem Staton eh sere Valleriar Pt Weg PROPOSED SUBMARINE/ ss... eae OVERHEAD ROUTES S 2 SWAN/TYEE INTERTIE a ~, + 51kV HVDC/40MVA cr Clove Bay LEGEND; o. ee Ai—]{f- Ee > bak Bieeessas Fie ——— “Sdn” toe - CH EXISTING it~ D: ~—~— Memorandum Ta: Kari Amylon, City Manager From: Richard Trimble, Power Projects Manager £727 Date: April 27, 1999 Subject: Jnitial Response to AIDEA Southeast Intertie Review The principal difference between AIDEA’s analysis and our own evaluations is in the treatment of grant funds, This report “ignores the funding sources for the various projects and instead compares the total capital and operations costs of the projects." ATDBA’s viewpoint is that “the total societal cost” should be considered, So from this perspective, it is an inevitable conclusion that at today's fuel prices, diesel combined with small local hydro is a cheaper alternative than a $77 million Intertie. KPU and the Four Dam Pool have always acknowledged that at full cost, the Intertie is not the most cost effective energy resource. However, our perspective has always been that both state and Jedera! grant funds reduce the capital cost. Grant funds are neither a loan, nor an investment requiring a return, It is the remaining unfunded cost that must be compared to our diesel/small hydro alternative, not $77 million. In fact, our goal hag been to obtain sufficient state and federal grant funding to make the Intertie more economical than the alternative of diesel augmented with smal} local hydro. AIDEA did create two other scenarios that credited some grant funds against the Int:rtie's capital cost (the “Incremental” and “Incremental State” costs), but both stopped short of crediting all grant funds. Further, ATDEA understated the amount of federal funds potentially available to this project. They assumed $17.4 million in total federal funding. We believe the total is likely to be at least $30 million, The other key variable leading to a small hydro/diesel conclusion is the assumed cost of diesel fuel. AIDEA assumes the cost of diesel will increase from 58 cents per gallon in 1999 to 66 cents in 2018, They consider separately a high cost case at 85 cents per gallon, Unfortunately, these costs are unrealistically low. The average cost of #2 diesel in the State of Alaska over the past twenty years has been 95 cents per gallon. Even a purchase by KPU earlier this month was at a cost of 83 cents per gallon, Assuming lower. costs for the next twenty years is imprudent at best. There ure other economic assumptions and findings we question, One example is an assumption that KPU pay an amount greater than the wholesale rate for energy. Our view is that an interruptible sale should be at a lesser rate than the firm wholesale rate, Another is the assumption that the project would not qualify for tax-exempt bonding. We believe it is premature to rule out tax-exempt bonding, which would decrease the interest rate from 7% to $% significantly improving the economics of the project, Aside from purely economic considerations, “the total societal cost” of the Intertic is well balanced by the total societal value. The AIDBA report notes that this is the first step in the creation of a Southeast Alaska electrical grid, While the report considers this a “distant prospect,” the reliability and efficiency of a transmission grid is enjoyed by the Alaskan Railbelt, and most of North America. Rather than being downplayed, the leadership of Southeast Alaska is actively pursuing the grid as the key to the economic vitality of the region. A policy decision to abandon this project in favor of diesel generation is short sighted. While the Teport notes the various local hydro projects that could be developed, it does not clearly portray the limited capacity of these projects. They are all inadequate and must be augmented by diesel generation in the near-term. A decision against the Intertie is a decision in favor of diese! generation. APR. -28' 99(WED) 13:07 KPU *"™“'NISTRATION TEL:**~ 225 1000 P. oo APR.26.1999 12:2@PM R 4E0N ENGINEERS NO. 864 P.27i1 : KUSTT Raytheon Infrastructure Inc, Raytheon Enginaers Raytheon eaters ——— -—-— - ——— ——--—_—_—_———__ 8 Constructors AaooO Plaza Center Building ‘ Post-It™ brand fax transmittal memo 7671 10900 N.€. 8th Street Ce. eS ri Syite $00 PD. McCchan/RSimmae™ RiCh Trimble | Bellevue, WA 98004-4405 yy bd 425.451.4980 fax JE pee PE DS ID 5 April 26, 1999 = azo _| i RS Ci - SL Mr. Rich Trimble Intertie Project Manager Ketchikan Public Utilities 2930 Tongass Avenue Ketchikan, AK 99901 Dear Rich: SUBJECT: SWAN LAKE-LAKE TYEE TRANSMISSION LINE INTERTIE PROJECT AP&T MESSAGE OF APRIL 20, 1999 REGARDING HVDC CONCEPTS This responds to your request that I review the information you received in a document from Mr, Robert Grimm of Alaska Power and Telephone (AP&T) dated April 20, 1999 which is unaddressed but titled Swan/Tyee Intertie Project. In this document Mr. Grimm provides commentary on my letter to you of March 24, 1999 on the same subject, | | Before proceeding, it is essential to clarify Raytheon’s position with respect to our analysis of the AP&T HVDC alternative. Raytheon does not want to be, nor should it be, cast in the position of a “combatant” with AP&T. It must be understood that Raytheon undertook the design of the Swan Lake, Lake Tyee transmission line in 1994 following a cost competitive selection process by KPU who was seeking the services of an engineering firm to design and provide the construction support for a transmission line that’s basic route and concept had been developed through numerous studies for the Alaska Power Authority over many years. The study that established the basic route and concepts that have now been designed by Raytheon was prepared for the APA by the firm of R. W. Beck and Associates and was finalized in 1993. By reference, this plan was made a part of Raytheon’s work scope with KPU. The design of this line is now virtually complete, Raytheon has designed the line to reliably withstand the harshness of the environment and to be constructable using tried and true design techniques and concepts. Because of the attention to detail provided in the design and the fact that the towers are steel instead of wood, outages due to mechanioal failures of the system are expected to very minimal. Furthermore, because it is an overland line, any such outages should be able to be located and repaired relatively quickly and the line restored to service promptly. The permitting and environmental evaluations have been comnleted Thea ramaining hurtle naw te ta canure finenninag far ite annetriatian ec, RL DRS De APR. -28' 99(WED) 13:08 KPU *"°™INISTRATION TEL 225 1000 P. 002 APR.26.1999 12:20PM | HEON ENGINEERS NO.864 P.37%1 Lr. J. Pains to R. Trimble April 26, 1999 Page 2 of 7 Admittedly, it is an expensive line to construct on a per mile basis because of the fact that it has been designed to withstand both harsh weather and the rugged terrain, Other factors that contribute to its high cost are the remoteness of the area in which it is to be built and the multi season work sequencing and costly staging that will be required to construct it. These are facts of life when constructing such a line in southeast Alaska and in many other areas within Alaska, AP&T’s proposed HVDC alternative to this transmission line is vastly different than any of the previously studied alternatives and of this recently completed design. The proposal is based upon the application of recent research by ABB to develop a low cost, high voltage, direct current transmission system to compete with alternating current transmission systems for relatively short, interconnecting lines that may be used to transfer relatively small amounts of power between small but separated utilities. Without having studied this new concept in considerable detail Raytheon is not in a position to critique it in depth but, as stated previously, we recognize the concept may have some benefits with regard to the electrical interface of one system to another. While those benefits relate to better system isolation, and independence when interconnected, some of the benefits of a combined system locked together in synchronism cannot be achieved by this method. It’s acceptance within the utility community is still to be proven. While we have limited technical information on the proposal and for this reason are not able to critique the system being suggested in detail at this time, as an advisor to KPU we can identify questions for which answers should be provided before a decision is made to abandon a solid, conventional design which is based upon many years of experience and application throughout Alaska and the world in favor of an emerging technology which is in the demonstration phase. In Mr, Grimm’s message of April 20, he clarifies that their proposal would follow a totally different route than the one for which the design and environmental assessments haye been completed. AP&T’s proposal includes route options through and or around the Cleveland Peninsula. Each option will tie the northern end of the interconnection line into the existing Tyee to Wrangell line at the south end of Wrangell Island. The southern end of the interconnection line would be tied in to KUP’s system at Ward Cove or apparently somewhere near Leask Lake on the existing 115kV line from Swan Lake to the Bailey Substation. The degradation of the multiple generation fax copy of the map of the route alternatives and tabular list of the line elements by length provided to me for review made it difficult to interpret clearly what the proposal really is. There are no technical details contained in the proposal only simple alternative routings and a table of line types and lengths. It appears to be more of a “trust me” type of proposal than one that is aimed at providing a clear level of detail to build confidence in its technica] suitability. Having worked now for several years with KPU staff, I am certain thet many more details will be required to be provided before a recormmendation to proceed with this alternative would be considered prudent. Because this proposal is set forth so forcefully and with an apparent hard money price, I feel that it is in KPU’s best interest to seek immediate answers to the following comments and questions: ¢ There is a notable lack of any electrical one Jine diagrams of the configuration. Such diagrams would normally be available to assess such a technical proposal, especially one that has already been priced. KPU should determine if such a diagram exist. If so KPU should secure this for review, If it does not exist, one should be required to be provided before proceeding further. APR. -28' 99(WED) 13:09 KPU INISTRATION TEL: 225 1000 P. 003 APR.26.1999 12:21PM F HEON ENGINEERS NO.864 P.4711 Ltr. J. Paine to R. Trimble April 26, 1999 Page 3 of 7 Mr. Grimm, in his April 20 document, says that the real issue is submarine versus overhead, I concur that this is a major issue and deserves considerable attention. However, it is not the only significant issue, A second essential issue is not mentioned or responded to by Mr. Grimm and that is that the technology being proposed is currently only operating as a demonstration at an ABB project in Sweden, When considering the application of a developing technology, KPU and AIDEA will recall their reluctance to accept solid dielectric cables for the submarine options considered for the Behm Canal crossing option even though they have been applied with some regularity in Europe. All participants should be made fully aware of the level of development of this technology. While a demonstration project can be interesting to be involved in, it also means being the testing point for the early application of the technology, sometimes with good results, sometimes with the opposite. AP&T should be required to disclose to AIDRA and KPU complete information on the status of the development process, where these facilities have been installed, how long they have been operating, the problems that have been experienced, the life expectancy of the equipment, the advancements that are likely, how similar any demonstration project has been to the purposed of this project, and what level of acceptance has been generated among utilities here and elsewhere in the world. An occasional result of such a test program is that it is found to be unsuitable and is abandoned which would appear to result in an untenable situation. ¢ If have properly interpreted the information, it would appear that the underwater routes for the suggested configurations will require, at a minimum, some 27 miles of continuous underwater cable if the Swan Lake to Bailey line is intercepted near Leask Lake. In any other of the alternatives, the shortest submarine cable is estimated to be a minimum of 30 miles in length and for one case up to 43 miles (see attached Table 1, and the composite scaled regional map marked with the alternative routes both of which were recreated from the almost illegible route information available to me), The shortest total underwater length is 43 miles. Given this information it will be apparent that these are long underwater circuits from any viewpoint. Such a cable will undoubtedly require multiple splices which are always a concern from a reliability standpoint, for any type of cable construction, Manufacturers are supremely confident in their ability to fabricate and splice these cables, however, things do happen. The information I haye seen contains no details regarding the technical features of the cable, its performance in salt water, its ability to resist nautical and marine environment accidents, i.e., anchoring in busy marine waters, unstable slopes in the water way, etc. These are real issues. The longer an underwater line is, the more potential it has to be impacted by these types of problems, Because of the heavy reliance this proposal makes on underwater routes, KPU should seek specific details on the design of the cable to be provided, the extent of the bathymetric studies that will be undertaken to design the installation, how the cable will be installed to prevent premature failure and accidents, how it will be protected electrically and mechanically and how failures will be located and repaired. @ AP&T should also be required to provide details about experience they have with such lines, particularly of this length in submarine applications, where they have installed them and the experience they have in locating and repairing failures should they oceur. It should be noted that directly buried installations are not equivalent to submarine applications. An important decision to APR. -28' 99(WED) 13:10 KPU °~"“INISTRATION TEL: 225 1000 P. 004 APR.26.1999 12:21PM F 4EON ENGINEERS NO. 864 PabZit Ltr. J. Paine to R. Trimble April 26, 1999 Page 4 of 7 be made will be to determine who will be responsible for the routine maintenance of these long underwater lines, This should be addressed. « Mr, Grimm indicates that ABB will provide guarantees for the equipment. I expect that the life of the project is intended to far exceed the guarantee timeframes that ABB will provide, Overhead lines are relatively easy to repair and their repairs are fairly “low tech”. Locating failures and repair of long underwater lines is certainly not “low tech”. It should be noted that if deterioration of the cable occurs in any portion of its length because of salt water and electrolytic corrosion, which I expect can be a real problem for DC systems, the likelihood is that the entire cable will have been affected meaning that the entire length may need to be replaced under sych circumstances. This should be addressed, # Mr, Grimm speaks of the good track record that the State has experienced with submarine cables. It must be kept in mind that, heretofore, such cables have traditionally been meticulously designed and installed at the shortest possible lengths to minimize all of the aforementioned problems and exposures. The proposal here is totally different and is based upon the premise that long underwater circuits should be used to avoid other types of construction costs and maintenance problems related to conventional overhead circuits. A change in paradigms is required to accept this as the solution without a great deal more information. @ The equipment to be used at the terminal points to convert from AC to DC and visa versa is also not common to the maintenance or operating staffs at Wrangell or Ketchikan. In conventional overhead facilities and interface substations, the equipment and its features are generally common to most utility maintenance workers. Routine maintenance and troubleshooting is relatively easy and when a failure occurs, with proper backup relaying, it is often possible to bypass a switch or breaker under emergency conditions and restore the system operation relatively quickly, I doubt that one can bypass a converter under any conditions. Failures and repairs of this equipment will require a different level of knowledge and skill than is presently in place. KPU should know what experience AP&T staff offer to maintain this equipment should it be installed. KPU should also know ifa maintenance contract was to be placed with AP&T, what its cost will be and the timeframe to have support available under severe emergency conditions, i.e, winter holidays at night. AP&T may not have that ability itself. It may require a contract with ABB, This should be examined, @ KPU should know where the terminals are to be located at the north end and at the south end. Locating the northern terminal point at the south end of Wrangell Island as proposed would seem to defeat one of the critical goals that was desired for the line at its inception, that is to be connected at the primary source of the generating resource. The proposed location on the south end of Wrangell Island will require total reliance upon the existing overhead line from the Tyee plant to the tap point and then into Wrangell. It will be installed as an intermediate tap point and, to allow sectionalizing and fault isolation, will require a three way switching system with breakers which will reduce the reliability of the connection that now exists to Wrangell. KPU should know how this tap point will be designed and how the line will perform electrically for all possible fault scenarios, @ The AC line which has been designed interconnects at existing terminals at Tyee and at Swan Lake. Both locations are presently manned or staff is readily able to get to these plants and communicate from them. KPU should know the intent with respect to crew availabilitv ta the terminal sites if thev APR. -28' 99(WED) 13:11 KPU ~~ INISTRATION TEL: 225 1000 P. 005 APR.26.1999 12:22PM f 4EON ENGINEERS NO. 864 P.6/11 Ltr.-J. Paine to R, Trimble April 26, 1999 Page 5 of 7 are to be remote unmanned sites, If the sites are to be unmanned, how will they be monitored and operated under normal and during emergency conditions? @ tis understood that the long term goal for Ketchikan and Southeast Alaska in general is to develop a strong interconnection grid between its major cities. This DC link if constructed provides the ability to move power between otherwise isolated cities but does nothing to provide the stability or “strength” that comes from all systems being tied together synchronously. KPU should be sure to understand the implications of this decision if a DC link is the only intertie that will ever be constructed, @ The environmental issues are another important topic. KPU has gone through a lengthy environmental review process for the overhead line. This resulted in an approval to allow construction of the overhead line as designed. AP&T has taken the position that the environmental issues are insignificant for the methods proposed here, As KPU knows however, this is a very involved process and waterways have their own requirements which differ substantially from land based issues. While I expect that the issues are substantially different I don’t know that it is wise to say they are non-existent, AP&T should provide some proof to KPU that they can in fact get the approvals needed to proceed with such a project. @ AP&T seems willing to say that the line is not a critical link because each separated utility has all of the resources needed to run independently during the period that the line may be out of service thus they dismiss the problems of an extended outage due to failure of the submarine cable, During its design, the overhead circuit was not considered to be expendable for long periods, Considerable effort was given to designing the AC overhead line to minimize failure, Furthermore, helicopter landing sites will be provided and maintained to allow prompt access to any line segment for quick repair. KPU should have some quantitative answer from AP&T about the length of time that will be required to find and repair a failure in such long submarine lines. This should be backed up by references to real experiences AP&T has had under similar conditions, There are many more questions that can be asked. As can be seen by those presented above however, there is much to still to be known about the plan. It is essential that the parties to any such agreement have a thorough understanding of the proposed plan and the implications to the growth of the area if this concept is to be adopted. If such a project is to be undertaken in lieu of the already designed overhead AC line, specifications should be prepared and the proposal of AP&T adjusted to comply with those specifications. A sole source lump sum proposal] from one party on a “trust me” basis that does not respond to a carefully thought out plan and specifications satisfactory to all parties, can result in two or more very disappointed participants. The proposal, is submitted as if the concept is intuitively simple and unquestionable. While a low cost proposal will always have an appeal, it is critically important that the implications of proceeding with this concept, especially as an experimental demonstration, be carefully and fully evaluated to be sure that the long term goals of a stable grid system for Southeast Alaska are not jeopardized. APR. -28' 99(WED) 13:12 KPU INISTRATION TEL: 225 1000 P. 006 APR.26.1999 12:22PM F HEON ENGINEERS NO. 864 iP, e74at Liv. J. Paine to R. Trimble April 26, 1999 Page 6 of 7 T hope this helps you as you evaluate this alternative. Should you have any questions about this information, please feel free to call me at 425-451-4206 or fax me at 425-451-4648. Very truly yours, cae Project Manager cc: G. Brewer TEL 225 1000 P. 007 APR. -28' 99(WED) 13:12 KPU *7**INISTRATION APR.26.1999 12:22PM Ff EON ENGINEERS NO.864 P.B/i1 Ltr: J. Paine to R. Trimble April 26, 1999 Page 7 of 7 Table 1 Miles By Type of ; t Route Alternative and Elements Constructic : aoe o. Ecos Louomarine | Overhead | PA Ward Cove to Helm Ba Pf Helm Bay to Meyers Chuck PE [Meyers Chuck to Wrangell IslandSouth_ [40] PO Sub Totals] es} LS Total Route Miles] 69 $47,000,000 | $684,159 | Pee PB Leask LaketoNahaBay INahaBaytoYesBay Yes Bay to SantaAnnainiet [Santa Anna Inlet to Wrangell Island South | 46] Po Sub Totals] 4st at Total Route Miles] 55 $40,000,000 | $727,273 | ag eee ceil aetna aemen nen pe LeaskLaketoNahaBay fd [Naha BaytoPort Stewart [Port Stewartto Vixen Inlet Vixen Inlet to Wangell Isiand South} SOP po Sub Totals] TQ} } Total Route Miles;| 56 $40,000,000 | $714,286 | Pe PD Leask LaketoNahaBay Naha BaytoHelmBay Helm BaytoMeyersChuck 0 P Meyers Chuck to Wrangell Island South | 40) Pp Sub Totals] SPT | Total Route Miles] seo | $46,000,000 | $666,867 | ba ee a ef ems Bsns acest need mememeniosa PO Ward CovetoThorne Bay [Thorne Bay to Wrangell island South | QT Poo Sub Totais:| BOY pa Total Route Miles:| 80 $80,000,000 | $750,000 | Eo Cn ee nee Te ress penser emnoestens Ace ennasencnn aapeaenemanst 4 oven sammacasnsalnsieaichancall Swan | ake /| ake Tvee Quarkaad An APR re 99(WED) 13:13 ners APMINISTRATION Sy . ~ seul) fy 12:23PM EZERI EON ENGINEERS S Waray ra \\4 Sr apt Was Tenaga . ROL AY mr We } S eee ne ANS IHS / a (Ot aaind Carico= Pet hLY Ve AA Oi AEH aN YOY Y ; ACS TS * D2 LG io eas .-28' 99(WED) 13:15 KPU -"""NISTRATION TEL: °* 225 1000 a PR. 26, 19991 e : 2Ae FON ENGINEERS ee SPRY es og 0,884, FIP. 1 ; A ee Soy 10, uN a SR ee a ‘Boe SYR hs ive £ 3 , 4 Ki, rs . iia a ak artis - | S es 2 fi ‘ io i \ri = i Pall hs o , : i F ate nh HY 6 Bed | 5 APR. ~28' 99(WED) 13:18 KPU INISTRATION 225 1000 a LAR APR, 26. 1999\/12:26PM/ yf — -HEON ENGINEERS : el ANY (ny AS «ARE SE O18 Te dd ; i ely C7 # Asks rN 2 DM Se ie" aN aS a» Ne 5 Pe 1B We ws Dennis McCrohan _ a From: David Germer Sent: peed April 06, 1999 3:32 PM To: Randy Simmons; Keith Laufer; Dennis McCrohan Subject: HVDC Transmission Systems | received a copy of the short memo/news article suggesting review of high voltage direct current transmission (HVDC) systems for the Southeast Intertie from Larry Markley. Last fall AEL&P did some research on this technology and wrote a brief memo describing the system and a graph showing the cost per mile for a 40MVA system. The cost per mile is based on all DC submarine cable for transmission. If you're interested, | still have copies of the memo and graph in my files. ABB, the supplier of HVDC systems, has a web page that describes their HVDC Light system (surprisingly only describes the advantages). http://www. abb.se/pow/lite1. htm <http://www.abb.se/pow/lite1.htm> To summarize, due to high cost of voltage source converters on the ends of the line the economics of this system type (cost/mile) significantly improve with distance (starts to stabilize at 50 miles). The technology is fairly new so manufacturer's warranty is critical. There are some advantages to the DC system that ABB has outlined on their Web page. Based on my limited understanding of this technology, | believe it warrants review. Mar-30-99 04:58P p P.O, Box 222 191 Otto Street Alaska Power & Port Townsend, WA. 98368 Telephone Company 1-800-982-0136 ext. 120 fax 360-385-7538 Ceil 360-531-0320 5 : bobapt@olympus.net Timployee-owned and Community Minded. Fax To: Randy Simmons From: Bob Grimm Fax: 907-269-3044 Pages: Phone: 907-269-3000 Date: 03/30/99 Re: HVDC Transmission CC: Bob Weinstein, Berne Miller OUrgent XQ For Review 0 Please Comment 0 Please Reply 0 Please Recycle ® Comments: Dear Randy: Enclosed is an article from the February issue of Utility Business. It Is an announcement by Hydro-Quebec directlink using ABB’s HVDC light technology to connect the Australian states of New South Wales and Queensland via a 42 mile long, +- BOKV, HVDC transmission line. The line will be rated at 180 Megawatts and will cost $70 million. This compares with the proposal sent to you, where we proposed several routes connecting the Tyee and Swan Lake projects using the same technology. Our shortest route the voltage was +- 51KV, 55 miles long rated at 35 megawatts at a cost of $40 milllon. It seems that others have faith in this technology as we do. -O1 Transmission Line To Link Australian States a a North American energy provider based in Montreal, announced that its subsidiary, TransEnetgie U.S. Lrd., will play a key role in the construction and operation of Directlink, a new interconnection linking the states of New South Wales and Queensland, Australia. The project, estimated at $70 million, will be completed early in 2000, using ABB high-voleage direct current light technology. Another subsidiary, Hy- dro-Quebee Internacional, has become a co-owner of the new interconnection in partnership with the Que- hee Solidarity Fund, the investment arm of the Que- bec Federation of Labor, and NorthPower, an Austra- lian electrical distribution company. Transénergie U.S. Ltd. will provide technical expertise during che construction and operation of the intercon- nection, as well as transmis- sion marketing expertise. Hydro-Quebec Intemational is investing 33.33 percent of the total project cost, the Quebec Solidarity Fund is investing 16.67 percent, and NorthPower, 50 percenc. ABB will supply the cables and converters and provide technical expertise during other phases of che project. The 180 megawatt inter connection will link the two existing grids via 80 kilo- volt direct-current under- ground cables over 42 miles, with alcernating current and direct current converters at each end. Hydro-Quebec Interna- tional and NorthPower will each independently market their own 90 megawatt of transmission capacity through an auction to be held later this year. The difference in energy and capacity prices berween the two stares will allow sur- plus electricity produced in New Sourh Wales to be sold at competitive prices in Queensland. GPU Acquires Argentine Holding Company GPU Inc. officials have pur- chased Emdersa, an Argentine holding company that owns three electric distribution companies—Edesa, Edelar and Edesal—for $435 million. The three companies serve approximately 335,000 cust- omers throughout a service territory of approximately 322,000 kilometers in north- west Argentina. Emdersa’s principal operation is electric distribution, and assuming timely regulatory approvals, GPU expects to close the transaction by March. Edesa is the largest of the three operating companies and is located in the province of Salta, Edelar is located in La Rioja, and Edesal is in the prov- ince of San Luis. The provinces have a population of about 1.5 million people represent- ing 4 percent of Argentina's gross domestic product Colombia Plans for Privatization The Colombian govern- ment plans to complete the first sales of 10 to I4 distributors and other power companies owned by the state by the middle of 1999, The distributors slated for sale serve the depart- ments of Choco, Narino, Cauca, Quindio, Hulla, Tollma, Boyaca, Cundin- amarca, Caqueta and - Meta, The government :” is deciding whether to seek private Investors for distributors In Norte de Santander and Santander, and for the companies known as Chec and Eade, Eade is the only firm In which the government does not hold a majority stake, The government ac- knowledges that the sales face problems, which Include a worsen- ing security situation and rising economic troubles. The government has concluded the sale must come soon In order to ensure that private buyers make the invest- ments necessary over the next few years to assure reliable power supplies. Energy Corporation to Study Electricity Usage in Thailand Architectural Energy Corp. is one of five U.S. firms on a team selected by the Electric- ity Generating Authority of Thailand to study electricity usage in Thailand. The cor- poration will work under subcontract to the Electric Power Research Institute, Palo Alto, Calif. 22 February 1999 The energy corporation was selected because of its ¢x- perience conducting similar projects in the United States. The study will enable che Thailand authority to under stand usage patterns of elec- tricity throughout Thailand, and as a result, to design pro- grams to increase efficiency and reduce greenhouse gas emissions. Architectural Energy Carp. is responsible for determin- ing the amount of electricity used every hour of the year throughout Thailand for ma- jor end uses. Usage patrerns will be studied in rural and urban environments. The re- sulting database on energy consumption will form a sta- tistically representative foun- dation from which the Gen- erating Authority of Thailand can determine and forecast electricity demand and con- sequently evaluate existing enerpy efficiency programs or design new ones. us Usiliry Business APR. -15' 99 (THU) 14:39 KPU_ —NISTRATION TEL: 225 1000 P. 001 Post-It™ brand fax transmittal memo 7671 [#etpeges> 4 | Raytheon Engineers Raytheon rm Onn DO eC {Pre ch, Lima | & Constructors L _ L\ 10900 NE. Bth Street er eet seen March 24, 1999 ALO t-te 425.451.4500 425.451.4980 tax Kuss Mr. Rich Trimble Intertie Project Manager c 1 ‘ Ketchikan Public Utilities cc: ae 2930 Tongass Avenue 23 Ketchikan, AK 99901 KA : a RSIMMONS Dear Rich: ; DMeCrohayn Buaginslesn SUBJECT>= - SWAN LAKE~ LAKE TYEE TRANSMISSION LINE INTERTIE PROJECT- 8. miller DC TRANSMISSION CONCEPT : Lrgesb! At your request, I have explored the concept of the HVDC transmission alternative for the a Lake, Lake Tyee Intertie presented in the letter from Alaska Power & Telephone Company dated March 1, 1999. This letter was addressed to Randy Simmons, Executive Director of Alaska Industrial Development and Export from Alaska Power and Telephone Company. The information contained in the letter suggests that new advances made by ABB Power Systems in High Voltage Direct Current (HVDC) transmission, if used for the referenced inlertie, could substantially reduce its cost and environmental impacts. The letter’s content is very general in nature and limited in technical detail and unsupported in its conclusions about cost. I contacted ABB to explore their recent advances in the application of DC to transmission systems which they are marketing under the trade name “HVDC Light”. The concept is apparently exclusive to them at this time. They provided me some technical literature about it. They see this system being particularly suited to using HVDC lines to interconnect relatively small, widely separated loads or energy sources, The concept involves “breakthrough” technology in the application of “Voltage Source Converters” which they have successfully adapted to use for their HVDC line interface converters. According to the literature, the application offers some interesting capabilities that could be well suited to use in smal] power level, widely separated systems. The technology is at the evolutionary stage in its development. ABB has onc demonstration system in operation now which is near its headquarters in Sweden. It is reported to be working well. It is marketing the concept aggressively throughout the world with the hope to install several sitcs in the next couple of years. The key advantages claimed for the system are lower cost equipment, lower installation costs and fewer impacts to the environment than for an equivalent AC line. Further it is suggested that the lines could be installed underground or underwater at much lower costs than for a conventional AC system. It is also indicated that “low impact” overhead designs could be used in lieu of high tension, tall tower designs required for AC systems, It must be remembered however, that the route over which this line is to be constructed is characterized by rugged, and vers racky manntainans canmtry which would realistically eliminate the votential of burving the APR. -15' 99(THU) 14:40 KPU *"“INISTRATION TEL 225 1000 P, 002 Ly, J, Paine to R. Trimble March 24, 1999 Poge 2 of 3 conductors. An all under water route for this intertie would be very long and difficult to implement too because of the geographical constraints between the terminal ends of the line. To build any circuit overhead will require spanning between ridges and over valleys to minimize the number of structures and clearing of the right of way that is not spanned above the trees, The terrain is not like the relatively flat and clean terrain what would be suitable for an economical low tension system. If an underwater route was to be given serious consideration, the complexities of maintaining such a circuit, if it is to be a critical connection link between resources with minimal downtime, must be considered. Rapid repair of underwater systems is virtually impossible. While the reliability problem may be reduced by adding contingent cables, the economics begins to be quickly impacted. Because only two conductors are required fora DC line instead-of three for an AC line, it may be possible to reduce the width of the-right of way if the HVDC line were constructed overhead, however, the savings to be achieved because of the technology are not likely to be as great as one would hope. This is due to the fact that the primary cost of constructing anything in this rugged area is tied to the logistics required to work in such a remote location. A key element of the construction costs is the cost to stage crews and construct foundations for the supporting towers for the conductors from floating bases. Access to the work areas is limited largely to helicopters regardless of the design, Although the foundations required for a two conductor, overhead line may be slightly less complex, the logistics of getting to the tower locations with the tools and equipment to install them is still the biggest cost component and remains a requirement regardless of the design concept. The additional costs of the equipment to convert AC to DC may offset the additional conductor and right of way costs. In terms of line miles, the route currently considered most suitable is approximately 57 miles in length. It is probably the least length of line that could be constructed and comply with the agency requirements for impact to streams etc. As stated earlier, because of the rocky, rugged nature of the terrain, a buried line, the construction of which is also very destructive in sensitive terrain, is not a practical consideration in this area. Any overhead line will require a cleared right of way to maintain the line’s integrity. While two conductor DC line would be narrower than a three conductor AC line, it would not be a great deal narrower thus the incremental savings in clearing would not bé expected to be an overriding factor. With respect to the costs of constructing the line, the estimates developed during the course of the project give a range of costs to construct only the line, without substations, licensing, permitting and other necessary costs is approximately $53 million. These other costs, when added in, result in a total project cost of nearly $77 million. The figure of $53 million must be compared to the cost of the work stated in the letter which range from $40 to $50 million rather than comparing this to the $77 million amount which contains much more than just the construction of the line. Further more, much of that money has already been spent on the environmental assessments and detailed design, neither of which were considered in the costs presented in the letter. The conclusion must be that the costs of the two systems are not that far apart, so the savings to be gained by application of this new technology, in this area specifically, will not be nearly as significant is represented. APR. -15' 99(THU) 14:40 KPU “"“INISTRATION TEL 225 1000 P. 003 ‘ Lo, J, Paine ys R. Trimble Maret 24, 1999 Page 3 of 3 In summary, while there may be interesting technical features to the concept, it must be considered developmental at this time. For us to recommend that you consider the application of this technology now would not be inconsistent with our intent to provide you tried and true concepts rather than experimental ones. Furthermore, the costs presented in the letter, which are offered without details, do not appear to represent savings anywhere near as significant as those indicated, Certainly, they should not be considered firm without further careful evaluation. I will be available to answer any questions you may have regarding the above. Please feel free to call me at 425-451-4206. Very truly yours, Je: ie Project Manager §P\RT990324L doc DC CONCEPT REVIEW.doe cc: J. Elkins G. Brewer TYEE LAKE HYDROELECTRIC PROJECT HYDROLOGY TYEE LAKE OUTLET OVERFLOW WATER SPILLED FROM TYEE LAK & ACRE-FEET TOTAL PER MONTH DATE 19 1993 1994 1995 1996 1997 1998 Average KWH Jan 0 57 0 0 0 19 23,33: Feb 0 8 0 0 0 1 1,60 Mar aa |) 0 0 0 0 0 0 ! Apr 1,480 0 0 415 0 316 394,79) May 15,170 1,776 3,820 4,870 4,910 6,108 7,634,58: June 11,100 §,292 12,690 15,690 17,320 13,375 16,718,21. July 4,500 4,660 7,110 9,310 13,210 7,851 9,814,281 Aug 2,260 876 5,270 7,110 6,990 4,921 6,151,07° Sept 2,470 6,063 5,140 7,690 8,990 7,326 9,157,67! oe 4,816 6,290 12,060 7,750 11,620 8,841 11,051,25( ‘ Ov 2,273 556 1,930 304 4,820 2721 3,400,62! dec 590 ) 90 0 2,360 619 773,75¢ ¢ TOTAL 67,344 44,659 25,578 48,110 53,139 70,220 52,097 65,121,18€ naa KWHIYR ces CAC 40,997,000 39,516,000 44,060,660 54,070,650 46,281,334 > Klong AFIYR @ (250 KWH/_¢ 32,798 37,613 ~ 35,249 43,257 37,025" ZOTALAF 77,457 57,191 83,359 96,396 107,245 96,820,750 71,488,125 104,198,160 120,494,400 134,056,334 105,411,554 = KWH KWH/YR (Prorect ED) a previous average _ 98,250,359 ——$$< wr HI 1 B Th Vo est 1 eae The Alaska Industrial Development and Export Authority (AIDEA) was asked to perform a review of the proposal being advanced by Ketchikan Public Utilities (KPU) for funding and construction of the proposed Southeast Intertie. The review has two primary aspects. The first provides an economic analysis and EF Introduction comparison of the Southeast Intertie (using the KPU proposal) to other a alternative projects that could serve Ketchikan’s needs. The second aspect examines the financing issues surrounding the KPU proposal. 4 AIDEA engaged CH2M Hill to perform the economic analysis and comparison pe pr aspect of the review. CH2M Hill performed two analyses for this purpose. The Economic/Resource Analysis compares the actual cost to build and operate the Intertie, irrespective of who pays for those costs, to costs for the other alternatives. The Rate Impact Analysis examines the rate impacts to the Ketchikan energy consumers of the various alternatives. AIDEA engaged it’s financial advisor, Pat Clancy of Clancy Gardiner and Pierce, to analyze the various financing issues related to KPU’s proposal. Mr. Clancy examined the existing Four Dam Pool payment structure and identified various changes that would likely be required in order to issue revenue bonds as proposed by KPU. This memorandum will provide background information with respect to the project, describe the original financing plan for the Intertie, describe the new KPU proposal, and describe and summarize the results of the CH2M Hill and Clancy Gardiner and Pierce analyses. Finally, this memorandum will highlight some additional factors that should be considered in determining whether to proceed with the KPU proposal. Il. Background A. Southeast Intertie 1B M w/ at (Sea The proposed Southeast Intertie would connect the Tyee Hydroelectric Project (a part of/the Four Dam Pool Projects) with the City of Ketchikan. Unused surptts” power from the Tyee project (now serving only Petersburg and Wrangell) would be transmitted via the Intertie to Ketchikan ee herd ego } Currently, Ketchikan’s primary source of power is the Swan Lake Hydroelectric Project (also a part of the Four Dam Pool). The Swan Lake Project does not supply sufficient power to cover all of Ketchikan’s needs and therefore KPU supplements Swan er ' As energy loads grow in Petersburg and Wrangell less energy would be available for transmission to v Ketchikan over the Intertie. {I assume Pee CH2M Hill analysis takes this into account; Right?} i jar ee eels NU ute \ohe Wighr ALD Lae TAN 45 Te Mund Pektlruria bncota capab\ly fae Pea ee Fe Te Sg and 8 ii 2® @ CONFIDENTIAL DRAFT L Introduction The Alaska Industrial Development and Export Authority (AIDEA) was asked to perform a review of the proposal being advanced by Ketchikan Public Utilities (KPU) for funding and construction of the proposed Southeast Intertie. The review has two primary aspects. The first provides an economic analysis and comparison of the Southeast Intertie (using the KPU proposal) to other alternative projects that could serve Ketchikan’s needs. The second aspect examines the financing issues surrounding the KPU proposal. AIDEA engaged CH2M Hill to perform the economic analysis and comparison aspect of the review. CH2M Hill performed two analyses for this purpose. The hey ‘ Economic/Resource Analysis compares the actual cost to build and operate the RQ cA Intertie, irrespective of who pays for those costs, to costs for the other alternatives. The Rate Impact Analysis examines the rate impacts to the Ketchikan energy consumers of the various alternatives. AIDEA engaged it’s financial advisor, Pat Clancy of Clancy Gardiner and Pierce, to analyze the various financing issues related to KPU’s proposal. Mr. Clancy examined the existing Four Dam Pool payment structure and identified various changes that would likely be required in order to issue revenue bonds as proposed by KPU. This memorandum will provide background information with respect to the project, describe the original financing plan for the Intertie, describe the new KPU proposal, and describe and summarize the results of the CH2M Hill and Clancy Gardiner and Pierce analyses. Finally, this memorandum will highlight some additional factors that should be considered in determining whether to proceed with the KPU proposal. Il. Background A. Southeast Intertie The proposed Southeast Intertie would connect the Tyee Hydroelectric Project (a part of the Four Dam Pool Projects) with the City of Ketchikan. Unused saggiis power from the Tyee project (now serving only Petersburg and Wrangell) would WN) be transmitted via the Intertie to Ketchikan.’ {Dennis, How much excess IB mM power in MW is currently available at Tyee; How much additional power 7, w Wh would be available with the addition of another turbine} Currently, (a5 FOS Ketchikan’s primary source of power is the Swan Lake Hydroelectric Project (also a part of the Four Dam Pool). The Swan Lake Project does not supply sufficient power to cover all of Ketchikan’s needs and therefore KPU supplements Swan Nang oe tacts Vi vn bey ' As energy loads grow in Petersburg and Wrangell less energy would be available for transmission to Ketchikan over the Intertie. {I assume the CH2M Hill analysis takes this into account; Right?} 2 ee CONFIDENTIAL DRAFT capital cost, an additional turbine could provide significant additional capacity to accommodate future Ketchikan load growth. Under certain circumstances the Intertie could provide additional reliability and reserve potential in Petersburg and Wrangell by permitting the transfer of Swan Lake or other power generated in the Ketchikan area to be transmitted those areas. to B. Factors opposing the Intertie The following are some additional factors opposing the Intertie that should be considered. Vill The KPU proposal requires significant State investment (40% of State Four Dam Pool revenues for 25 years) to support a region that already has some of the lowest power rates in the State. The Mahoney Lake project, a private sector project, requires no state funding or bonds yet results inlower rates unde (host scenarid§ than the Intertie. The funding and federal license are already in place for the Mahoney Lake project. Following execution of a power sales agreement with KPU, KEC estimates Mahoney could be operational in 14 months. The Intertie requires additional federal funds, enactment of state legislation and the issuance of revenue bonds. In addition, the Intertie requires two constructions seasons to complete. Given these requirements, it will likely be several years before the Intertie could be operational. The additional State revenues generated by the sale of Tyee power over the Intertie are not sufficient to pay the cost of the Intertie. The State retains substantial risks related to the Four Dam Pool. Moreover the purchasing utilities have recently asserted that the State is responsible for certain outage and other costs. In this environment, additional state ownership and financing for the Intertie may be unwise. Divestiture of the Four Dam Pool projects has been pursued for the last few years. Issuance of revenue bonds tied to the Four Dam Pool Revenue stream creates complications that would make divestiture much more difficult. Conclusion Southeast Intertie Review March 18, 1999 Page 12 2® ee CONFIDENTIAL DRAFT The Resource analysis performed by CH2M Hill indicates that in almost all cases the Intertie is not the best economic choice to meet Ketchikan’s future load requirements. Moreover, CH2M Hill's rate impact analysis indicates that the Intertie would increase power rates in the Ketchikan area relative to the other power options available. As noted above, however, there are a number of other factors that could be considered in addition to a strict economic analysis. For long-term policy reasons, the State may wish to proceed with the Intertie. If an election were made to proceed with the Intertie, we believe the following basic elements would be required to proceed: <yabn AR {. e Legislation sung the project, authorizing ownership and the issuance of revenue bonds to finance the remaining construction costs and devoting 40% of the Four Dam Pool re enue streal to the 1007 AL w Brewis of debt ebt servicg for the bonds asa) xvi ars e Cost overruns and debt service on the bonds would need to be guaranteed by some credit worthy entity or entities, presumably KPU and/or the other Four Dam Pool purchasing utilities. e Appropriate contractual arrangements would be required to ensure that the State has no financial responsibility for operation and maintenance or reserve and replacement costs related to the Intertie. Additionally, we would recommend that appropriate contractual arrangements be in place to assure that KPU purchases all of its excess power needs from the Tyee project so long as power is available from the project. This will ensure the State obtains the maximum possible recovery of its Intertie investment. Southeast Intertie Review March 18, 1999 Page 13 v® @ CONFIDENTIAL DRAFT Lake power with diesel generation. The proposed Intertie would allow a mek wt d | ratio ndern Ww growth in Soe 5 ernie ere Per ees 4 for diese pl tiehiceme bs Ae aes seth The Southeast Intertie would, for the first time, link two of the Four Dam Pool projects. Depending on the rate at which power were purchased, sale of power to Ketchikan from the Tyee project would somewhat lower the operating costs of the Four Dam Pool on a kilowatt hour basis thereby reducing power costs for all of the Four Dam Pool communities. State revenues from the project would also increase. In addition, the Intertie could open the possibility of future generation projects in the Petersburg area. The Southeast Intertie is part of the first phase of a proposed $436 million Southeast Alaska Electrical Intertie System Plan developed for the Southeast Conference. This System Plan was developed to integrate development of proposed intertie segments with new hydroelectric generation capacity for the region. To date, funding proposals for the remainder of the System Plan have not been developed. B. Alternatives In addition to the Southeast Intertie, other projects have been proposed which could serve Ketchikan’s energy needs for the future. The Mahoney Lake project O.6 MW 18 af40-47-gWh} hydroelectric project being promoted by Ketchikan Electric Company (KEC). KEC holds a Federal Energy Regulatory Commission permit for the project. KEC is a joint venture between Alaska Power and Telephone (APT) and the Cape Fox Corporation. eee te os eeu S YAN —partners}. Other proposed hydroelectric projects include the itman Lake project, and the ,t6-g¥v/h Lake ee eee ee theintormation tof inthis paragraph) —>C RWW d a footnote explaining Why theseWweren’t éxamined KPU currently uses diesel generation to supplement its Swan Lake power. Subject to air permitting requirements, KPU could add new diesel facilities to increase its generation capacity. Even if the Intertie or another hydroelectric alternative were chosen to meet Ketchikan’s energy requirements, under certain cout scenarios additional diesel generation will nonetheless be required to meet backup reserve requirements. Il. Original Financing Proposal A DAW RA Sho In 1993, legislation was enacted that formed the basis for the original financing proposal for the Southeast Intertie. Uni r the legislation, KPU was to et the DUG renga Us pete oe om ivtrcenngAian ustle KP, Theawort A hudrodddie Ky KV Swabs [ Is, each Southeast Intertie Review agen gene Aialeck\a. equ pu > Diese Sialh hada ey? y KP goad Wave te loud ld Ag tvs comedian Z z Sh nde Anurn at acoata (per wid 3® @ CONFIDENTIAL DRAFT Intertie for the benefit of the utilities participating. The legislation created three potential funding sources. First, $20 million was appropriated to the Department of Community and Regional Affairs to be used as a loan to the participating utilities for the Intertie. This loan was to have a term of 15 years and bear interest at 3%. Second, subject to appropriation each year, the legislation allocated 40% of the State’s Four Dam Pool revenue stream to the Southeast Energy Fund.” This fund was to be used to make grants to the utilities participating in the Southeast Intertie for power projects, repayments of loans and for payments on bonds. To date, all grants from the Southeast Energy Fund have been utilized for Southeast Intertie related activities. Finally, the legislation authorized AIDEA to issue up to $40 million in revenue bonds to finance the Intertie. In addition to the funding sources for the Intertie identified in the 1993 legislation, KPU has actively sought federal funding for the Intertie. To date, $9,900,000 in federal grants has been made available for the Intertie and additional federal funds have been requested. Based upon the various funding sources identified, KPU developed its original financing proposal. Recognizing that the cost of power from the intertie would be ? Under the Power Sales Agreement (PSA) for the Four Dam Pool, the Alaska Energy Authority (AEA) sells power from the projects to the five local utilities serving the Ketchikan, Wrangell, Petersburg, Kodiak, Glennallen and Valdez areas. Power from the projects is sold to the utilities at a rate determined under the PSA. The rate has two components. The power cost production component covers the actual operation and maintenance costs for the projects. This component also includes a fixed $500,000 per year contribution to a project reserve and replacement fund to be used for renewals and replacements of project facilities and equipment. The debt service component provides for payments to the State based upon a schedule contained in the agreement. Under the PSA, the State is responsible for certain significant project liabilities. These include uninsured facility failures, substandard performance and deficiencies in the reserve and replacement fund. The PSA provides that the utilities may withhold the debt service component payments to the State if AEA is unable to otherwise obtain funds to meet its obligations under the PSA. This right is generally referred to as the utilities’ self-help. In FY +998+the uniform Four Dam Pool rate wes {6.8 cents per kWh} IAAT ' As part of legislation passed in 1993 that reorganized the AEA (see footnote 2), subject to annual appropriation, the Legislature pre-allocated the debt service payments received by the State as follows: 40% to the Power Cost Equalization and Rural Electric Capitalization Fund, 40% to the Southeast Energy Fund and 20% to the Power Project Fund. No portion of the debt service payment was allocated to AEA to fulfill any of its obligations under the PSA. 3 The 1993 legislation was part of an overall reorganization of the Alaska Energy Authority (AEA). Previously, AEA’s primary mission was to construct, own and operate energy infrastructure projects for the benefit of local utilities and consumers. The 1993 legislation signaled a change in policy with respect to state ownership of energy projects. The legislation curtailed AEA’s ability to finance and construct new projects. Wherever possible, AEA was to contract with local utilities for the operation of the existing facilities. These policy changes are reflected in the legislative treatment of the Southeast Intertie. Despite the fact that the Southeast Intertie was to link two AEA owned Four Dam Pool facilities, the legislation called for KPU ownership of the Intertie. Moreover, the Intertie was to be financed by loans and bonds to be repaid directly from payments made by KPU and the other participating utilities. Southeast Intertie Review March 18, 1999 Page 3 w® @ CONFIDENTIAL DRAFT unacceptable if KPU were required to pay the uniform Four Dam Pool rate for power, pay the operating costs for the intertie and also make the debt service payments contemplated in the 1993 legislation, KPU proposed that it pay for the Tyee power at reduced rate. KPU proposed that the rate for Tyee power be at a level that when added to its other Intertie related costs (debt service, operation, maintenance, etc.) resulted in a total cost of power in Ketchikan equal to the uniform Four Dam Pool rate of [6.8 cents per kilowatt hour]. Put another way, KPU proposed reducing the uniform Four Dam Pool rate by an amount sufficient to cover its entire Intertie related costs. KPU’s analysis indicated that, initially, no payments could be made for the Tyee power. Moreover, to ensure no increase to the Ketchikan ratepayers in the early years of operation, KPU indicated it might require access to a working capital loan. KPU proposed that it obtain such a loan from AIDEA for this purpose. After significant analysis and discussions with its financial advisor, KPU determined that it would not be prudent for the Ketchikan community to incur the level of debt required by the original financing plan. The KPU debt contemplated in the original proposal would have severely impacted Ketchikan’s future borrowing ability. Accordingly, KPU has abandoned the original financing proposal. Star In the fall of 1998, KPU formulated a new financing plan for the Southeast Intertie. Under the KPU proposal the 6tat@)would own the Intertie.* The state, presumably through AEA, would issue revenue bonds in an amount sufficient to provide proceeds to fund the remaining costs of the Intertie. Debt service for these bonds would be paid from the 40% share of the State’s Four Dam Pool revenues currently allocated to the Southeast Energy Fund. Under KPU’s proposal the $20,000,000 DCRA loan contemplated in the 1993 legislation would not be utilized and could be immediately released for other purposes. KPU would enter into ar-interruptibte power sales agreement 44) for power received over the Intertie from the Tyee facility. While KPU has indicated that an acceptable (5 2. 4P6A will need to be negotiated, KPU has assumed that Tyee power would be sold to KPU at or near the current Four Dam Pool rate. The following table depicts the current KPU funding proposal. IV. Current KPU Proposal Funding Available: State Grants Authorized/Received 11,200,000 Fed. Grants Authorized/Received 9,900,000 Timber Sale Credit 3,800,000 24,900,000 Additional Funding Proposed: ‘ As the Southeast Intertie would connect two AEA owned Four Dam Pool projects, AEA is the logical choice for State ownership. Southeast Intertie Review March 18, 1999 Page 4 Dower’ 2® @ CONFIDENTIAL DRAFT Additional Proposed Federal Grants 7,500,000° Proposed State Bond Proceeds 44,600,000* 52,100,000 Total Estimated taterte-@est (as of 9/98) $77,000,000 {what do we have that documents the Timber number. Should we just use 73.2 million — net of Timber?, DRS to look for information in nis notes} KPWa vw cot DW BIZAM NCH V. Economic Analysis Intertie. F CH2M Hill evaluated both the economics*and rate impacts e Intertie and the various power resource alternatives. The CH2M Hill report ‘describes in detail the assumptions utilized and the conclusions reached. CH2M Hill's assumptions were shared with KPU. Based on KPU’s comments, CH2M Hill modified certain assumptions, The following Sectiog’ will briefly describe key elements of the report. ad ery BOWS arnabiper ( Attach vot C >). A. Load Forecasts In performing its analysis, CH2M Hill was not tasked with developing new energy load forecasts for the Ketchikan area. Rather, CH2M Hill utilized the June 1998 load forecasts prepared for KPU by the Institute of Social and Economic Research (ISER). ISER had developed three load forecasts assuming high, medium and low growth assumptions for the Ketchikan area. CH2M Hill examined these forecasts and made adjustments based upon actual loads for Yrs Low quash 1998, whe result of these adjustments was to increase the ISER forecast loads in all thtee growth scenarios. These adjusted load forecasts were than used by CH2M Hill in performing its economic analysis. <Needte-cheek-onthisit- Reviewed-— wodkum and Wi a \oad af B. Alternativ: Wall added tre awkeripatod Le Dearor rt? . : a Prego ta. . ; ; Based on available information, in performing its economic analysis CH2M Hill examined the following alternative cases: All Diesel --This case assumes that no other alternative is chosen and therefore Ketchikan’s future energy demands are satisfied entirely by adding additional diesel generation. > KPU is seeking more than this amount in additional federal grants for the project. Any increase in federal grants would reduce the amount of state bond proceeds required. Southeast Intertie Review March 18, 1999 Page 5 2® @ CONFIDENTIAL DRAFT phe medium and lrg Creu DCONGNVOA, Southeast Intertie -- This case assumes construction of the Southeast Intertie. The option also assumes additional reserve diesel generation will be required in the future. $7he timing of the diesel reserve requirement is dependent on the particular load forecast a jurtle lig Mahoney Lake -- This case assumes development oe the\Mahoney Lake project based upon proposals advanced by KEC. ne load forecast lo ‘etitized, replacement diesel reserve generation is-alseinctuded. 7 wed: @ an Small Hydro — This case assumes development of the Whitman Lake hydroelectric project and,/depending on the load forecast, subsequent development of th diesel reserve units are included i in the high load forecast case. Un cA ony paged | ow TAS loc \eceed Horch, C. Economic Resource Cost Analysis 1. Purpose and Assumptions CH2M Hills Resource Cost Analysis compares the present value of the Lake hydroelectric project. Replacement t+ ron (robe alternative energy projects based upon the various load forecasts. This analysis ignores the funding sources for the various projects and instead compares the total capital and operational costs of the projects over theimprejeetedtives? 0. yew. —{projectedtives_or 20 year peried?} This methodology had typically been used by AEA and continues to be used by the Division of Energy in examining proposed energy projects. The methodology is designed to examine the total societal cost of choosing one energy resource over another. The Resource Cost analysis requires consideration of the capital costs of the projects being compared. Because existing funds have already been devoted to the Intertie and a substantial amount of additional federal funding is proposed, CH2M Hill developed three cases for examination of the Southeast Intertie: Full Cost — This case utilizes the full capital cost of the intertie including all costs expended to date (the “sunk” costs) and all additional costs required t complete the project. fe) Incremental Cost — This case utilizes as capital costs only those additional costs required to complete the project. It excludes all sunk costs. This case is the most helpful for comparing the additional costs required for the Intertie versus the other alternatives. Incremental State Cost — This case utilizes as capital costs only those additional costs required to complete the project which are to be funded with state dollars. The analysis excludes both sunk costs and future costs to be funded with federal grant dollars. Southeast Intertie Review March 18, 1999 Page 6 o® @ CONFIDENTIAL DRAFT e\lowed by the Two separate construction cost estimates weré utilized in examining the Mahoney Lake Project. KEC estimates the cost gf Mahoney at approximately $17.5 million. A separate 1998 RW Beck analysis projects the Mahoney cost at $28.5 million. CH2M developed two Mahoney caées, a high and low capital case, -{Considerremoving $265; aaa the differing consiustan — ae ition tho estime Sore: , eanatysis?} Yn od ~ 2, a S arch and) Avro Edam oe CH2M Hill draws several conclusions from the Resource Cost analysis. Among the most significant are: e Inalow growth scenario, the Small Hydro alternative is the least costly by a substantial margin fettowedtby-the-At-Bieselalternative- e In amedium growth scenario, the low cost Mahoney case is the least costly by a substantial margin e Ifthe high cost Mahoney case is considered, in a medium growth scenario, the Small Hydro,alternative is the least costly, folewed by Wie get ereiints OBS Ilourel by Mohgen e In ahigh growth scenario, the 7 tale fren coreiidered at incremental ake state cost nape 3 the least costly alternative fetowed by Mahoney ) n a high growth scenasiONf the Intertie\is cons) d at inefemental co oney lake js‘the | Ost altetnative followed By th rtie The CH2M Hill epee analysis demonstrates that except in the high growth scenario, the Jrftertie is not the low cost alternative. Evenina high growth scenario, the Intertie’4é onty-Rarginatly less expensive than the low cost Mahoney alternative. Moreover, utilizing the high growth forecast, the Intertie is only the low cost alternative when considered at the incremental state cost. When the intertie is considered at full cost or incremental cost, the Mahoney Lake project is the low cost alternative. D. Rate Impact Analysis 1. Purpose and Assumptions CH2M Hill performed a Rate Impact Analysis. The purpose of this analysis is to compare the actual power rate impact to the consumer of the Intertie and the other alternative power resources. The analysis uses as a base case the All Southeast Intertie Review March 18, 1999 Page 7 2® @ CONFIDENTIAL DRAFT ak Ls Or2ed te compod ; esel alternative and comparce-the-rate implcations-ef undertaking each of the other alternatives. The assumptions utilized in the analysis are described in the CH2M Hill report. The following will highlight a few of the more significant assumptions: All Diesel — As KPU would be the owner of the facilities, this case utilizes the projected capital financing and operation costs for the diesel facilities. This case assumes fuel costs of 63 cents per gallon in 1998 and 58 cents per gallon in 1999 than escalating to 66 cents per gallon in 2018. deli s Swittie Southeast Intertie This case assumes that KPU purchases power generated from the Tyee project at 6.8 cents per kWh, the current uniform Four Dam Pool ratexgDees-+thi e-into-accou entpower?-Whatabotut R&R? law -pased onthe tast KPtHetter?} This is the same assumption provided by KPU in the information forwarded to AIDEA. KPU has indicated that it would seek to negotiate a lower iptessems#le power rate with the other Four Dam Pool utilities and AEA. Any changes in the actual rate would require that the Rate Impact Analysis be adjusted to reflect that rate. Srarnterecaise anette Mahoney Lake -- This case assumes that KPU would purchase power generated from the Tyee project at 6.5 cents per kWh. KEC has indicated its willingness to enter into a long-term power sales agreement for Mahoney power at this rate. KEC has indicated that this rate could be lowered if federal grant funding were made available for the Mahoney Lake project. Because no grant funds have been identified the analysis does not consider this possibility. Additionally, KEC has stated it will not perste- P a7ed UQ_ State grant funding for the project. p lua ord) inchaaive J CAR Small Hydro — This case utilizes the project capital financing and operation costs for the Whitman Lake Lake projects assuming KPU ownership and tax exempt financing. \ ‘de anlame 2. Findings Among the most significant findings from the CH2M Hill Rate Impact Analysis are: e The Southeast Intertie would increase KPU rates relative to the other alternatives examined including All Diesel e In almost all cases the Small Hydro alternative would result in the lowest cost to KPU ratepayers Southeast Intertie Review March 18, 1999 Page 8 2® @ CONFIDENTIAL DRAFT Vi. Financing Issues KPU has proposed that the State issue bonds to finance the remaining costs of the Intertie. KPU has indicated that it expects to receive an additional $7,500,000 in federal funding for the Intertie. If KPU were successful in obtaining these funds, under KPU’s proposal, bond proceeds of $44,600,000 would be required to fund the project. KPU has proposed that the debt service on these bonds be paid from the 40% share of the State’s Four Dam Pool revenues currently allocated to the Southeast Energy Fund. AIDEA asked its financial advisor, Pat Clancy of Clancy Gardiner and Pierce to review KPU’s financing proposal and analyze the various bond-financing issues. A copy of Mr. Clancy’s report is attached as Exhibit “B.” In order to obtain $44.6 million in bond proceeds, Mr. Clancy estimates that approximately $51.3 million in bonds would need to be issued. This amount includes estimated issuance costs and the amount necessary to fund a debt service reserve fund. Mr. Clancy estimates the net annual debt service on the bonds would be approximately $4.13 million after taking into account earnings on the debt service reserve fund. This amount assumes a level 25- °"| amortization of the bonds at a taxable rate of approximately 7%. In order to issue bonds, Mr. Clancy has indicated that a stable revenue stream earmarked for payment of the debt service must be identified. The Four Dam Pool revenue stream is currently subject to annual appropriation and accordingly as currently structured would not provide an earmarked source of payment sufficient to issue the bonds. Presumably, this problem could be remedied with appropriate statutory changes. More importantly, however, Mr. Clancy has indicated that the Four Dam Pool revenue stream is not sufficiently stable under the Power Sales Agreement (PSA) for the projects. Under the terms of the PSA, the revenues received by the state vary with production. Because the contract is not “take or pay,” a reduction or interruption in energy generation from the Four Dam Pool projects reduces payments to the State. In addition, the purchasing utilities’ “self-help” right can interrupt the State’s revenue stream if funds are needed to fulfill State obligations under the PSA. Self-help has been utilized on several occasions over the last few years to cover major repairs to the projects. ° KPU has indicated that it may actually be able to obtain federal funds substantially in excess of the projected $7,500,000. Any additional federal grant amounts received would reduce the amount of bond proceeds that would be required. ’ It appears that under Internal Revenue Code rules, the Intertie would serve more than two contiguous “counties” and would therefore not qualify for tax exempt financing. Southeast Intertie Review March 18, 1999 Page 9 ve e CONFIDENTIAL DRAFT D441 venue stream in the fiscal year Mr. Clancy also notes that 40% of the Sta ending June 1998 would have been only $4.12 million, an amount insufficient to cover estimated net debt service for the b of $4.13 million. While future growth projections indicate that the 40% revenue stream would be sufficient to cover the debt service in the future, the bond markets typically require “coverage,” revenues in excess of the required debt service. It is unlikely that 40% of Four Dam Pool revenue stream would be sufficient to provide sufficient coverage. [Check-Clancy’s numbers, this may-net be right Based on Elaine’ tal ved forty3s=T]— Mr. Clancy has identified a number of structural changes that could be made to address the issues identified. First, Mr. Clancy suggests that the entire debt service payment from the Four Dam Pool could first be pledged to the bond debt service. Any amounts not needed for debt service would then flow to the other allocated uses. This would provide sufficient coverage and alleviate concerns related to annual revenue changes from energy generation changes. This approach, however, would make the Intertie debt service the first priority and could limit the amount of funds ayailable i] State.to allocate for other uses. 7 ‘ W) wr KpNowms nou, In order to eliminate the oan that exercise of self-help could interrupt bond payments, Mr. Clancy sugg¢sts that the PSA could be amended to limit the utilities exercise of self-help.y¥AIDEA believes it is unlikely the utilities would agree to such a limitation. Even if such an amendment were possible, limitation of self-help might pose other problems. In recent years, self-help funds have been the only source of funds available to AEA to make major repairs to the Four Dam Pool projects. Restrictions on the availability of self-help funds could impede AEA’s ability to fulfill its obligations, potentially jeopardizing the reliability of the projects and the State’s Four Dam Pool revenues. More importantly, limitation of self-help in order to provide sufficient funds to make bond payments merely postpones self-help and ultimately reduces the State revenues available to allocate for other uses. aro Mr. Clancy has suggested another approach that does not require modifications to the Four Dam Pool PSA or pledging of the entire State Four Dam Pool revenue stream. Mr. Clancy suggests that the 40% revenue stream could be backed by a guarantee by some sufficiently credit-worthy entity or entities. It is unclear if KPU or the other Four Dam Pool utilities have the willingness or financial strength to provide such a guarantee. Finally, Mr. Clancy notes that, under whatever structure is utilized, a plan would need to be developed that ensures the bondholders that sufficient funds from some source are available to pay the projected operation, maintenance, repair and replacement costs of the Intertie. Mr. Clancy analysis indicates that the KPU financing proposal as currently envisioned would not provide a sufficient structure for the issuance of revenue Southeast Intertie Review March 18, 1999 Page 10 CONFIDENTIAL DRAFT bonds. The following structural changes would be required to allow financing utilizing the 40% Four Dam Pool revenue stream: e Statutory shaAges-necessary to pledge 40% of the State Four Dam Pool revenue stream toward debt service for the bonds e Debt service guaranteed by a sufficiently credit entity or entities e Development of an acceptable financing plan for operation, maintenance, repair and replacement costs for the Intertie Vil. Additional Factors The economic and financial analyses discussed above do not necessarily resolve the question of whether the State should support the KPU proposal. Instead, these analyses provide a framework for consideration of the various public policy issues surrounding the Intertie. This section will highlight some additional factors that should be considered in making a determination whether or not to proceed. A. Additional factors favoring the Intertie The following are some additional factors favoring the Intertie that should be considered. e Assuming there is support for the Southeast Alaska Electrical Intertie System Plan, the Southeast Intertie is the first part this comprehensive plan, which could ultimately provide benefits to a large portion of Southeast Alaska. Failure to proceed with the Southeast Intertie reduces the likelihood that any other elements of the System Plan will proceed. e The leadership positions of our congressional delegation provide an opportunity to receive federal funding for the Intertie now. It is unlikely that such an opportunity will arise again. Moreover, it is not clear that federal funding will be available for any of the other alternatives considered. - _ : An XQ go couple’ wil oe ineeees e The Intertie providegiiong-term benefits that may not be adequately wa ? reflected in the {twenty=year] econgmic analyses performed by CH2M Hill. In a high growth environmentythe Intertie may be the best economic choice over a longer term (i.e. in excess of 25 years). e Tyee Lake has the capacity to create additional generation by adding an additional turbine. With the Intertie in place, for a small marginal Southeast Intertie Review March 18, 1999 Page 11 CONFIDENTIAL DRAFT capital cost, an additional turbine could provide significant additional capacity to accommodate future Ketchikan load growth. e Under certain circumstances the Intertie could provide additional reliability and reserve potential in Petersburg and Wrangell by permitting the transfer of Swan Lake or other power generated in the Ketchikan area to be transmitted those areas. \ te. B. Factors opposing the Intertie The following are some additional factors opposing the Intertie that should be considered. e The KPU proposal requires significant State investment (40% of State Four Dam Pool revenues for 25 years) to support a region that already has some of the lowest power rates in the State. e The Mahoney Lake project, a private sector project, requires no state funding or bonds yet results in lower rates,under most scenarios/than the ntertie: e The funding and federal license are already in place for the Mahoney Lake project. Following execution of a power sales agreement with KPU, KEC estimates Mahoney could be operational in 14 months. The Intertie requires additional federal funds, enactment of state legislation and the issuance of revenue bonds. In addition, the Intertie requires two constructions seasons to complete. Given these requirements, it will likely be several years before the Intertie could be operational. e The additional State revenues generated by the sale of Tyee power over the Intertie are not sufficient to pay the cost of the Intertie. e The State retains substantial risks related to the Four Dam Pool. Moreover the purchasing utilities have recently asserted that the State is responsible for certain outage and other costs. In this environment, additional state ownership and financing for the Intertie may be unwise. e Divestiture of the Four Dam Pool projects has been pursued for the last few years. Issuance of revenue bonds tied to the Four Dam Pool Revenue stream creates complications that would make divestiture much more difficult. Vill Conclusion Southeast Intertie Review March 18, 1999 Page 12 CONFIDENTIAL DRAFT The Resource analysis performed by CH2M Hill indicates that in almost all cases the Intertie is not the best economic choice to meet Ketchikan’s future load requirements. Moreover, CH2M Hill’s rate impact analysis indicates that the Intertie would increase power rates in the Ketchikan area relative to the other power options available. As noted above, however, there are a number of other factors that could be considered in addition to a strict economic analysis. For long-term policy reasons, the State may wish to proceed with the Intertie. If an election were made to proceed with the Intertie, we believe the following basic elements would be required to proceed: e Legislation authorizing the project, authorizing ownership and the issuance of AEA revenue bonds to finance the remaining construction costs and devoting 40% of the Four Dam Pool revenue stream to the payment of debt service for the bonds. e Cost overruns and debt service on the bonds would need to be guaranteed by some credit worthy entity or entities, presumably KPU and/or the other Four Dam Pool purchasing utilities. e Appropriate contractual arrangements would be required to ensure that the State has no financial responsibility for operation and maintenance or reserve and replacement costs related to the Intertie. Additionally, we would recommend that appropriate contractual arrangements be in place to assure that KPU purchases all of its excess power needs from the Tyee project so long as power is available from the project. This will ensure the State obtains the maximum possible recovery of its Intertie investment. Southeast Intertie Review March 18, 1999 Page 13 March 11, 1999 ; That TO: Keith Laufer, AIDEA Valorie Walker, AIDEA FROM: Pat Clancy RE: Swan-Tyee Intertie Pursuant to your request, we have analyzed the various financing issues surrounding a proposal being advanced by Ketchikan Public Utilities (KPU) for the Southeast Intertie. KPU has asked the State to consider issuing revenue bonds to fund approximately $45 million of costs relating to construction of the Intertie. KPU’s proposal is to use 40% of the State’s Four Dam Pool revenue stream to provide a revenue stream with which to pay debt service on the bonds. The Southeast Intertie has been the subject of considerable study and discussion over the past decade. The Intertie would link the Tyee hydroelectric project (a part of the Four Dam Pool) to the Ketchikan area. The proposed funding package is as follows: Funding Available: State Grants Authorized/Received 11,200,000 Fed. Grants Authorized/Received 9,900,000 Timber Sale Credit 4,000,000 25,100,000 Additional Funding Proposed: Additional Proposed Federal Grants 7,500,000 Proposed State Bond Proceeds 44,600,000 52,100,000 Total Estimated Intertie Cost (as of 9/98) $77,200,000 ) In order to have approximately $44,600,000 in bond proceeds available for Intertie construction costs, we estimate that approximately $51,300,000 in revenue bonds would need to be issued. The increased bond size is needed to provide proceeds for bond issuance costs and to fund a debt service reserve fund. Although the amounts could vary, for this purpose we have assumed that issuance costs will amount to approximately 3% of the principal of the bonds and that a debt service fund equal to approximately 10% of the bond principal would be required. Since, under KPU’s proposal, completion of construction is not required to produce the revenue stream required for payment of the bonds, I have assumed that no provision for capitalized interest would be required. SE Intertie Financing Page 2 We have assumed that the project would likely not qualify for tax exempt financing. If the bonds could be structured to be “investment grade, ” we assume the taxable interest rates on the bonds would be approximately 7%. We have also assumed the bonds would be amortized over a 25-year term. Based upon these assumptions, we estimate that the annual debt service on the bonds would be approximately $4.38 million. After taking into account the projected earnings on the debt service reserve fund, we estimate the annual net debt service for the bonds would be approximately $4.13, Revenue bond financing requires a predictable stream of revenue to repay the bonds over time. However, there is currently no revenue stream that has been earmarked to pay debt service on such bonds and the Intertie will not generate significant new revenue. Therefore the first task toward issuing bonds would be to identify a viable revenue stream for debt service payments. The State receives “debt service” payments from the Four Dam Pool participants. Subject to annual appropriation, currently these State payments are allocated: 40% to the Power Cost Equalization and Rural Electric Capitalization Fund, 40% to the Southeast Energy Fund and 20% to the Power Project Fund. KPU has proposed that the 40% of these funds currently being allocated to the Southeast Energy Fund be utilized to pay for the debt service on the proposed bonds. Because the State’s Four Dam Pool revenue stream is currently subject to annual appropriation, that revenue stream would not be sufficiently predictable and stable for the issuance of bonds. Presumably statutory changes could be made to remedy this deficiency. The total State “debt service payment” (before self help) for fiscal year 1999 is $10.8 million. A diversion of 40% of the current “debt service” payment would result in $4,320,000 per year potentially available for repayment of the proposed bonds. This would provide a baseline payment source for the bonds of 1.05 times the projected bond payments. The State’s revenue stream is projected to grow over time and potentially increase debt service coverage. The State’s debt service payments however, are subject to significant fluctuation based on Four Dam Pool energy production and are also subject to interruption under certain conditions referred to as “self help”. Each of these conditions make it unlikely that the coverage provided by a pledge of 40% of the State’s payment would be sufficient to structure a viable investment grade bond issue. These two difficulties could be remedied by amending the power sales agreement to ensure State payments sufficient to pay debt service regardless of energy production and revenue interruptions created by the exercise of self-help. In terms of the sufficiency of revenues, it would be possible to pledge the all of the State’s Four Dam Pool revenue stream toward the bonds. Under this approach, all of the State’s debt service payment would first be pledged to the bonds. Once the bond payment was made the remainder of the State revenues could be released for other purposes. This approach would create the potential of reducing the amount of Four Dam Pool revenues available for the other allocated uses. Using the State’s fiscal year SE Intertie Financing Page@, 1999 revenues of $10.8 million this would result in bond debt service coverage in excess of 2.6 times. This level of coverage, in normal circumstances and with normal reserves, should lead to an investment grade bond issue. However, the concept of self-help creates a second hurdle. Self-help is a unique ability of the Four Dam Pool purchasing utilities to interrupt the State debt service payments to obtain funds for certain State obligations for and other costs associated with the projects. Over the last several years self-help has been utilized to meet the obligations for major repair of the project. In fiscal year 1999 alone, the State’s $10.8 million payment was reduced by $5.5 million of self-help. To avoid the possibility of self-help interrupting bond payments, it might be possible amend the Four Dam Pool power sales agreement to limit the utilities’ ability to invoke self-help. In the last few several years however, self-help funds have been the only source of funds available to AEA to make major repairs to the Four Dam Pool projects. Restrictions on the availability of self-help funds could impede AEA’s ability to fulfill its obligations. Both of the structural changes described above would need to be designed to contractually guarantee sufficient revenues to the State so that debt service payments could be made. Assuming such changes were made, the State could contractually commit those payments to debt service on the bonds. Another approach to the financing might be to divert only 40% of the revenue stream toward the bonds without modifying the power sales agreement or pledging the entire revenue stream. In this case the any deficiency in the revenues available to pay debt service would need to be guaranteed by a sufficiently credit worthy entity. Ketchikan Public Utilities might be considered the most appropriate entity but may lack the financial strength to make a guarantee on $45 million meaningful. Another option might be to back the debt service payments by a “general obligation” pledge of all of the 4 Dam Pool participants. The value of any guarantee is dependent on the guarantor’s ability to make good on the guarantee in the event that the revenue stream failed to materialize. In summary, a reliable revenue stream for repayment of the financing needs to be developed. Forty percent of the current debt service paid by the 4 Dam Pool is not sufficient to structure an investment grade bond issue. While it might be possible to modify the existing structure to create a sufficient revenue stream by pledging all the debt service payment and limiting self-help provisions, this solution seems unlikely for a number of reasons. In addition to solving the pledged revenues question we believe the following would be required prior to issuing bonds: ¢ The development of an operating plan for the SE Intertie that covers O&M and R&R expenditures and any known risks associated with the Intertie. e Identification of a payment stream that can not be interrupted by legislative actions. e Dedication of sufficient revenues to pay the debt service, operate the system and make timely maintenance and repairs to the facility. e A third party guaranty by a credit-worthy entity. SE Intertie Financing Page 2 Please feel free to contact me if you have any questions regarding my analysis. PMC Contribution Harza Risk Loss Insurance Prem. PMC Reduction Total $ 11,500,000.00 NPV@7% — ($8,835,641.53) $2,664,358 1995 1996 1997 1998 1999 1,100,000 1,100,000 1,133,000 1,166,990 1,202,000 qi 2000 1,238,060 500,000 325,000 -313,060 2 2001 325,000 -365,201 3 4 5 7 8 2002 2003 2004 2005 2006 2007 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 1,133,000 1,275,201 1,313,458 1,352,861 1,393,447 1,435,251 515,000 530,450 546,364 562,754 579,637 325,000 325,000 325,000 ~418,908 -474,225 -531,201 325,000 -556,888 1,166,990 1,202,000 1,478,308 1,522,657 597,026 614,937 325,000 325,000 583,344 -610,594 9 2008 1,238,060 1,568,337 633,385 325,000 -638,662 10 2009 1,275,201 1,615,387 652,387 325,000 -667,572 14 2010 1,313,458 1,663,849 671,958 325,000 -697,349 12 2011 1,352,861 1,713,764 692,117 325,000 -728,020 13 2012 1,393,447 1,765,177 712,880 325,000 -759,610 14 2013 1,435,251 1,818,132 734,267 325,000 -792,149 15 14 1,478,308 1,872,676 756,295 325,000 -825,663 16 17 2015 2016 1,522,657 1,568,337 1,928,857 1,986,722 778,984 802,353 325,000 325,000 -860,183 -895,739 18 2017 19 2018 1,615,387 1,663,849 2,046,324 2,107,714 826,424 325,000 -932,361 851,217 325,000 -970,082 20 2019 1,713,764 2,170,945 876,753 325,000 -1,008,934 21 2020 1,765,177 2,236,074 903,056 325,000 ~1,048,952 22 2021 1,818,132 2,303,156 930,147 325,000 -1,090,171 23 2022 1,872,676 2,372,250 958,052 325,000 -1,132,626 24 1,928,857 2,443,418 986,793 325,000 -1,176,355 25 2024 4,986,722 2,516,720 1,016,397 325,000 “1,221,395 26 2025 2,046,324 2,592,222 1,046,889 325,000 “1,267,787 27 2026 2,107,714 2,669,989 1,078,296 325,000 -1,315,574 28 2027 2,170,945 2,750,088 1,110,645 325,000 -1,364,788 29 2028 2,236,074 2,832,591 1,143,964 325,000 -1,415,481 30 2029 2,303,156 2,917,569 1,178,283 325,000 -1 467,696 31 32 2030 2031 2,372,250 2,443,418 3,005,096 3,095,249 1,213,631 1,250,040 325,000 325,000 1,521,477 -1,576,871 Dennis McCrohan bs real N\ ot Dohobs From: Gray, Dave/SEA [DGray@CH2M.com] Sent: Tuesday, March 16, 1999 4:05 PM To: ‘McCrohan, Dennis/AIDEA'; Dick Emerman Ce: Brooks2, Bob receee Subject: Swan-Tyee Based on our conversation yesterday, we are revising the analysis as directed. | am inclined to send you the basic analysis as soon as we have it complete and before we prepare a written analysis. The purpose of this e-mail is to simply confirm that what we are doing is correct and to suggest some presentation options. Analysis 1. Add one case to the resource analysis: construction of both Mahoney Lake and the Intertie (this will be the new leader for top cost). This will not be added to the rate impact analysis. It would not be a big deal to do so if you decide it is Wan needed. 2. Revise the Mahoney Lake case to include small hydro instead of diesel when additional resources are needed beyond Mahoney. Rename this alt to Mahoney Lake/Small Hydro. Rename the Small Hydro alternative to Small Hydro/Diesel. a 3. Delete the 1990 forecasts. Improve format of figure 3. WA 4. Sensitivity analysis for the resource case: 85 cents per gallon for fuel oil. High, medium, and low forecasts. 5. Develop more rational for using the 63 cents for the base case. JS 6. Drop "Perspective B" and all reference to perspective A & B from analysis J 7. "Perspective A" will become the base case. Se 8. Run a sensitivity to determine the interruptible rate if the net cost to KPU after payment of the O&M (including R&R) ie were to equal 6.5 cents per kWh (the rate proposed by KEC for Mahoney power). This will be done for the medium and high load forecasts only. 9. Calculate the impact on the 4 Dam Pool rate (O&M component only) if the Intertie is built and greater Tyee sales result. This would simple spread the O&M dollars over more kWh. This will be done for the medium load and high load forecasts only. 10. Mention that diesel generation permit limitations would further increase All-Diesel costs under high load forecast el conditions. This will essentially quote from the KPU letter. We will also mention that this would pertain to the Small Hydro/Diesel alternative under the high load forecast. Eee w J 11. Calculate the gross (at 4 cents per kWh) and net revenues (4 cents per kWh less the debt service on the Intertie) to / the state under each of the load forecasts. y sSes=> 12. We will adjust the first column in Tables 3.1 through 4.3 to include nominal inflation at 3 percent per year. 13. We will mention GWh availability from Tyee vs. KPU needs. We will project this out under each of the load forecast eo conditions. 14. We will mention that these analyses were based on KPU's power supply planning model. — Presentation | am thinking that we' should first present the base analyses for resource costs and rate impacts. We could follow that with sensitivity analysis and other information in a question and answer format. This would allow a lot of discussion of diverse issues with very little continuity from one fact to another. What do you think of that idea?--Dave dG MAR. -12' 99(FRI) 15:43 KP MINISTRATION TE] 7 225 1000 P, 002 ELEPHONE 807-226-1000 FAX 307-225-1588 2930 TONGASS AVENUE KETCHIKAN, ALASKA 90001 MUNICIPALLY OWNED ELECTRIC TELEPHONE WATER March 11, 1999 Mr. Dennis McCrohan Deputy Director, Energy AIDEA 480 West Tudor Road Anchorage, AK 99503-6690 Subject: Response to your draft Swan-Tyee Intertie study assumptions Dear Dennis: Thank you for the opportunity to review a draft of the assumptions being considered for your evaluation of the Swan-Tyee Intertie. I believe that this evaluation by AIDEA has greater potential of either making or breaking this project than any prior study, including our $2 million EIS! So I trust you will weigh my comments carefully as AIDEA’s recommendation will have significant implications to Ketchikan, Southeast Alaska, the Four Dam Pool communities and the State. The sale of surplus energy from Tyee to Ketchikan will result in additional Four Dam Pool and / State revenues. The Four Dam Pool revenues will act to reduce kWh rates significantly to all the J Four Dam Poo] communities (see attached), The additional State revenues can apply to debt service payments, PCE or whatever. The former should clearly be taken into account in your economic evaluation of the Intertie. The latter should at least be noted in this period of budget shortfalls. your period of analysis is relatively short, perhaps just twenty years? A shorter period of analysis will lend itself to a lower capital approach. Under such an analysis, we never would have built Swan Lake because diesel would have looked better in the shorter term. I urge AJDEA to insure that the period of analysis is at least as long as the economic lifetime of the projects in question, We can all acknowledge that the Intertie is not a short-term (i.e. twenty year) project. do/ Zo \ eA, The assumption that fuel will cost 66 cents per gallon in 2018 certainly leads ta a diesel Fun conclusion, whether or not it is augmented by the small hydro potential we have locally. I understand the math behind escalating today’s price of 58 cents by inflation to get the future price, but that doesn’t do our ratepayers any good when the price jumps back up to the level they |. Qf yy were just two years ago. Our average fuel costs were between 82 and 85 cents for the four years Oe prior to 1998. Is it really prudent to assume they only escalate from 58 to 66 cents in the next » gt cc. D& DE » / You note that your Mahoney scenario does not require new diesel. This leads me to believe that 13 \ Q \ MAR. -12' 99(FRI) 15:44 KPI’ *"MINISTRATION ; TEL **7 225 1000 P. 003 Dennis McCrohan, AIDEA March 11, 1999 Page 2 twenty years? To have any basis in reality, your analysis has to include reasonable assumptions for fuel price increases based at least on what we have historically experienced. Also, I suspect the projected diesel usage is not taking into account our current permitted limit. Your spreadsheet model probably increases diese] generation until limited by capacity and plant factor, However, our current permit will only allow the following generation: Units #1 and #2 combined: (1650 hours)x 3.55 MW= 5,775 MWh Unit #3: (2900 hours) x 5.5 MW = 15,950 MWh Daawit Unit #4: (4450 hours) x 10.5 MW = 46,725 MWh x by On A. Total permitted annual diesel: 68,450 MWh If the model exceeds this amount in any of the scenarios, the costs associated with increasing our permitted operation need to be taken into account. This would include professional services (the emissions modeling was not cheap), capital improvements and emissions monitormg. The scenarios noted on your fax are basically diesel, Intertie, Mahoney and small hydro. | request that you label the last two scenarios as Mahoney/diesel and small hydro/diesel. Even ina twenty year projection of load, you know that these scenarios rapidly rely on base loaded diesel. The decision makers (many of whom may not read past the titles and graphs) need to understand that a decision to develop local hydro is a decision to rely on future diese] generation, Tyee energy is assumed to be sold at the Four Dam Pool rate plus O&M and R&R. Does this | roo mean that Ketchikan is paying O&M and R&R in addition to PMC wholesale rates? This is at Giwy least inconsistent with our proposal, From Ketchikan’s point of view, this will be an Gi interruptible agreement. We should pay less for interruptible Four Dam Pool power than we currently do for firm power. The energy availability from Tyee is not mentioned in the assumptions. The latest and most comprehensive evaluation of Tyee energy availability was an audit performed by R. W. Beck dated October 9, 1998. They conclude that 129 GWH is our best assumption. This is likely what you are using, but I wanted to make sure it was mentioned as I have heard different numb mentioned. Finally Dennis, and perhaps most importantly, the addition of the Swan-Tyee Intertie to the Four Dam Pool infrastructure allows the sale of a significant amount of surplus energy. To overlook the value this adds to an asset of the State would be a big mistake. I have attached my list of benefits associated with construction of the Intertie. I hope all of these points find their way into your report, In earlier discussions with Randy he indicated that both he and T would look at the Intertie as a project that in the long-term offers significant benefits; and he mentioned that that point might not be sellable in the political arena, I hope this report addresses the future and not current political thought. I truly believe that not taking advantage of current federal dollars is a huge mistake that will be regretted in the future (if people remember) particularly when you consider the strong commitments repeatedly expressed by Senators Steven’s and Murkowski and Renresentative Youne. T also hone von nnint ant if van arrive at a MAR. -12'99(FRI) 15:44 KP" ““MINISTRATION TE] 7 225 1000 P, 004 Dennis McCrohan, AIDEA March 11, 1999 Page 3 negative conclusion regarding the Intertie that the Southeast Alaska Electrical Grid is even more difficult to justify. Thanks again for the opportunity to review your assumptions. As I've indicated, I am concemed that these are tailored to a short-term conclusion and overlook other benefits to the State and Four Dam Pool. J trust AIDEA will work hard to make this a fair review of the issues. incerely, John A. Magyar General Manger JAM:RDT:klo Attachments MAR. -12' 99(FRI) 15 45 KPI" AMMINISTRATION TEL"? PMC RATE REDUCTIONS WITH SWAN-TYEE INTERTIE SALES 1999 INTERTIE MWH SALES $000 40000 15000 20000 25000 26798 30000 35000 40000 45000 §0000 $5000 60000 65000 70000 75000 gooa0 85638 Notes: PMC wholesale kWh rate: Intartie interruptable kWh rate (3): Intertie O&M at (1): FY 1999 Projected PMC sales: Contracted forecast kWh salas (2): INTERTIE O&M = INTERTIE O&M COMPONENT COMPONENT REVENUE REVENUE (2) AT $0,028 AT $0.038 $0 $0 $140,000 $0 $280,000 $0 $420,000 $0 $519,148 $55,442 $519,148 $245,442 $519,148 $313,766 $519,148 $435,442 $519,148 $625,442 $519,148 $815,442 $519,148 $1,005,442 $519,148 $1,105,442 $519,148 $1,385,442 $519,148 $1,575,442 $519,148 $1,765,442 $519,148 $1,955,442 $519,148 $2,145,442 $519,148 $2,335,442 $519,148 $2,549,686 $0.068 $0,068 $133,626 258802 277343 INTERTIE O&M COMPONENT REVENUE LESS INTERTIE O&M ($133,626) $6,374 $146,374 $286,374 $440,964 $630,964 $699,288 $820,064 $1,010,964 $1,200,064 $1,390,964 $1,580,964 $1,770,964 $1,960,964 $2,150,964 $2,340,964 $2,530,964 $2,720,964 $2,935,208 RATE REDUCTION OVER ALL PMC SALES ($0.001) $0.000 $0.001 $0.001 $0.002 $0,002 $0.002 $0.003 $0.003 $0,004 $0.005 $0.005 $0.006 $0,006 $0.007 $0.007 $0.008 $0.008 $0,009 225 1000 P, 005 RESULTING 1999 PMC RATE $0.069 $0.068 $0.067 $0.067 $0.068 $0.066 $0,066 (4) $0.065 $0,065 $0.064 $0.063 $0.063 $0.062 $0.062 $0,061 $0.061 $0,060 $0.060 $0.059 (5) (1) Intertle first year O&M based on R. W. Beck 1992 feas|bility study at $108,650 escalated from 1992 ta 1999 at 3% (2) Fram Power Sales Agreement exhibit D. Sales over this amount are at 3 rather than 4 cents/kWh debt service, (3) Intertie sales at same rate and debt se;vice as firm sales. Interruptable agreement would likely have different term (4) KPU diesel generation in calendar year 1998. (5) Maximum Tyee interruptable sale in 1998 would have heen 129,000 - 43,362 MWh projected firm sales. Assumptions: (a) Intertie Is entirely grant funded. (b) This analysis is based on FY 1999 PMC projected sales and current rate of $0.068/kWh R.D. Trimble, PE 3/12/99 MAR. -12' 99 (FRI) 15:45 KPI! ADMINISTRATION TE! “°7 225 1000 P. 006 Swan-Tyee Intertie With nearly half of Ketchikan's power coming from Swan Lake in a typical year. This project has by far the greatest potential for reducing KPU’s wholesale and retail power rates in the future. A fully utilized Tyee Project has the potential of reducing the Swan Lake wholesale rates from |“ the current 6.8 cents to the 6 cent per kWh range. Additionally, as an interruptible Tyee power consumer a special negotiated price below the r standard Four Dam Pool wholesale rate is(likely for KPU. ‘ This project is supported by the Four Dam Pool communities since it is the only possible way of — reducing the power purchase rate under the power sales agreement with the state. The state is curently analyzing the project to determine if they are willing to bond for this i¢ project, A state divestiture of the Four Dam Pool projects (something that has been sought intermittently ol by the Four Dam Pool communities and the state for years) and acquisition of Swan Lake by KPU will allow power (20 years out) to be a bargain like Ketchikan Lakes, Silvis lake and Beaver Falls power is today with generation costs under 2 cents per kWh. This project will open up the possibility of future generation sources in the Petersburg area, and is Va the first phase in a SE Alaska grid. The EIS is complete. Record of Decision has withstood appeals. This project is ready to a construct. Must be developed and have priority over other future generation projects in order to hold we on fo the federal funding now in hand. This project is less attractive economically if it falls behind other resources such as Mahoney, Metlakatla or Whitman. The Governor has repeatedly stated that his support is tied to the economics of the project. Unless we think he is fooling us, we cannot believe the contention that the intertie will be built by the state just because it’s good infrastructure. Under the Four Dam Pool power sales agreement with the state and the other Four Dam Pool Communities, KPU is obligated to buy available power from the Four Dam Pool initial projects immediately after our existing hydro resources. Ketchikan should honor that commitment. Certainly, if another resource, such as Mahoney, has available power and Ketchikan needs it, we should buy such pawer at reasonable prices but we should not sign an agreement that directly conflicts with an existing agreement. Construction of this project will provide an economic boost for the community with jobs, ate and materials/service spending. G:\USERVOHNM\WINWORD\PUBLICVITS0212.D0C Dennis McCrohan From: Dennis McCrohan Sent: Monday, March 15, 1999 9:51 AM To: Randy Simmons Ce: Keith Laufer Subject: SE Intertie Report Mel Krogseng of Senator Taylor's office had tried to get you and was referred to me. She wanted to know when the report would be available. | said we had received lots of comments to the analysis assumptions from KPU and that these had to be worked through. The report was at least a week from being completed. Dennis Sa FY Gea a f 34 wal & £84 FEA aA taukell OCT. -09' 98(FRI) 11:11 Kl. DM. . STRATION 03/12/1999 12:36 206-7*" -8523 BROOKS & ASSO°T4STES PAGE @1 Post-it* Fax No’ 7671 I~ KETCHIKAN PUBLIC UTILITIES Memorandum To: The Honorable Bob Weinstein & Cffp Council From: Jobn A. Magyar, KPU General Date: September 25, 1998 Subject: SE Alaska Intertic (Swan-Tyee) Fuading Request ‘This ig to request City Council authorization in seek funding from the Stare of Alaska generally as set forth in the amtached Comununiry of Ketchikan Legislarive Liation project dacument and w seek sipport for cis funding approach from other interested partes in southeast and thronghour the sar of Alaska. In answer to same questions you may have: © Why would the Four Dam Poo! communities/operaring udlities support this? Because construction of tha imertie will permit full utilizarion of the Tyee Project and reduce per kWh Operating cosy to these wrilines and their rate payers. Four Dam Pool support for the internie is greater than it has ever been and. I believe this finding cpproach and the possibility of speeding up the project has greaz support by the the Four Dam Pool comomotities. * Why would the sare consider bonding for the intertie? Because construction of the intertie will: (1) typrove efficiency and figure revenue generarion af the Four Dam Pool projects which is srongly supported by rhe voters in the Four Dam Pool commumitics and the operating utilities; (2) begin construction of a SE Alaska electrical grid thax is universally supported by commumities and utilirles throughowt SE Alaxka {including Cape Far Corporaron and Alaska Power and Telephone); (3) allow construction of the intertie to go forward with just a linle more funding help from srateffederal sources: anid, (4) allow $20 million to be freed up for PCE, rail ~~ bete wilitles or other state uses. * Why would such entities as Cape Fox Corporating and Alaska Power and Telephone support the intertie? Because the intertie will serve as a highway for elecrrical generarion from the Lake Mahoney Project. it creates other generating and marketing possibilires and it opens the door for AP&T to participate in construction of chs line. parrpahGicenen] Pe See SST Fa At DEA |? zoe 2d es, It is my insene to seek a resolution from Ciry Council supporting this finding plan after further discussions with the PMC, Southeast Conference, em. Recommended Motiqn: T move that the Cicy Council direct the KPU General Manager ta seek flurdine from che Creve no stant. —_n- 3/12/1999 12:36 286-74" 9523 BROOKS @ ASSOCTATES, = PAGE 2 . COMMUNITY OF KETCHIKAN SOUTHEAST ALASKA - ELECTRIC INTERTIE Funding Sources 4 Requested S$ 4,400,000 Matching/Local Total - Annual $ 4,400,000 PROJECT SUMMARY: The SE Alsaka Intertie is a proposed 57 mile transmission line connecting the Four Dam Pool hydroelectric projects at Swan Lake an the Upper Carroll Inlet and Lake Tyce on the Bradfield Canal. STATEMENT OF NEED AND SUPPORT: © The SE Intertie has been rated the number one regional priority by the community of Ketchikan since the lace 1980s. The electrical power so badly needed by Ketchikan is readily available es surplus at Lake Tyce. = Surplus energy sold at Lake Tyee will directly benefit utility rate payers in the Four Dam Pool commmumtiries of Kodiak, Copper Valley, Petersburg, Wrangell and Ketchikan. e Itwill help reduce dependence on back-up diesel generation and the attendam air emissions. = It is universally supported by southeast Alaska operating unlities and communities, by the Southeast Conference, by the Four Dam Poo! operatmg utilities end communities, by Ketchikan SL eae en Be ee aS Lee A ees ek Se . elephone. e Itis the first leg in a regional electrical grid that will provide efficient and reliable electrical power to the residents of southeast Alaska from Juneau, to Sitka, Petersburg, Kake, Wrangell, Ketchikan, Medakatla, and eventually Prince of Wales Island communities. PROJECT STATUS: The EIS for the SE [nrertie is complete and the US Forest Service has issued its Record of Decision which has withstood appeal. Design wark is complere, Other permits from the Corps of Enginecrs, Coastel Zone Management and other regulatory agencies are im the final stages. The two-year 8 construction phase can begin as scan as s complete finding program is in place - as early ax tho ° summer of 1999, EUNDING STATUS: Estimated Interrie Cost with Domestic Timber Credit $73,200,000 State Grants Authorized/Received Le wees, , $11,200,000 Federal Grants Authorized/Received <P 9,900,000 Stare Loan Authorized (has oot been accepted by voters) 20,000,000* Federal Grant Anticipated in FY99 Budget 2,300,000 Tow! Funding Avuilable/Anticipated 43,600,000 Funding Needed $24,600,000 *Funding Needed (If $20 million Ioan declined by Kerchikan) $44,600,000 Tom (= i +174 (200, coco q Goo ,200 L(/ (00,200 MAR. -12' 99(FRI) 11:18 KPU *"MINISTRATION TEL ““7 225 1000 KETCHIKAN PUBLIC UTILITIES 2930 Tongass Avenue, Ketchikan, Alaska 99901 (907) 225-1000 (907) 225-1888 Fax P. 001 FAX TO: Dennis McCrohan 3/12/99 AIDEA 907-269-3044 FROM: Rich Trimble 2 Dennis, The attached sheets show the basis of the $52 million construction cost figure I gave you on the phone. You can see I did take the domestic timber sale into account. If you wish to back the timber credit out, the construction cost would be $56.4 million in 1998$ Call if you have any more questions. - Thanks, Rich ~J/ C. Potential credit for timber Subtotal 2 (construction costs A + B +C) Other Costs Licensing/Permitting Engineering/Investigations Const. Mgmt. at 5.0% of Const. Cost; Right of Way Costs (Stumpage) Contingency at 15.0% af Const. Cost: Subtotal 3 (construction + other costs) Owner's Cast at 4.5% of Subtotal 3 Subtotal 4 (constr. + other + owner costs) OTALES 2. COs’ MAR. -12' 99(FRI) 11:19 KPL — AINISTRATION TEL 7? 225 1000 P. 002 us : T\OxK UY ' {OG | COmcag LAKE TYEE - SWAN LAKE TRANSMISSION LINE INTERTIE J Hes PROJECT CAPITAL COST ESTIMATES (1997$) Al)-Fes i COST ITEM January 1998 Estimate With minimum With maximum With no timber ee timber export imber credit credit credit Cons! Cos: A. Transmission Line (57.5 miles) Segment 1: Tyee Lake - Bell Arm $20,203,988 $20,203,988 $20,203,988 Segment 2: Bell Arm - Bahm Narrows $4,213,145 $4,213,145 $4,213,145 Segment 3: Behm Narrows - Shrimp Bay $9,665,300 $9,665,300 $9,665,300 Segment 4: Shrimp Bay - Swan Lake $18,955,976 $18,955,976 $18,955,976 Subtotal of A. $53,038,410 $53,038,410 $53,038,410 B. Switchyards / Substations Tyee Lake Switchyard $300,000 $300,000 $300,000 Swan Lake Switchyard $1,200,000 $1,200,000 $1,200,000 Bailey Substation $750,000 $750,000 $750,000 Subtotal of B. $2,250,000 $2,250,000 $2,250,000 Subtotal 1 (construction costs A + B) $55,288,410 $55,288,410 $55,288,410 ($4,300,000) ($11,300,000) $55,288,410 $50,988,410 $43,988,410 $2,000,000 $2,000,000 $2,000,000 $5,500,000 $5,500,000 $5,500,000 $2,764,420 $2,549,420 $2,199,420 $48,000 $48,000 ‘$48,000 38,293,261 $7,648,261 $6,598,261 $73,894,092 $68,734,092 $60,334,092 $3,325,234 $3,093,034 $2,715,034 $77,219,326 $71,827,126 $63,049,126 $77,219,326 $71,827,126 $63,049,126 MAR. -12' 99(FRI) 11:19 KPL MINISTRATION TEL 7 225 1000 P. 003 1997$ 1998S 2% Transmission line $53,038,410 $54,099,178 Switchyards/Substations $2,250,000 $2,295,000 Subtotal $55,288,410 $56,394,178 Domestic timber credit ($4,300,000) ($4,386,000) Subtotal $50,988,410] $52,008,178 Licensing/Permitting $2,000,000 $2,040,000 Engineering/Investigations $5,500,000 $5,610,000 Construction Management $2,549,420 $2,600,408 Stumpage $48,000 $48,960 Contingency $7,648,261 $7,801,226 Subtotal $68,734,091 $70,108,773 Owner's costs $3,093,034 $3,154,895 Total Project costs $71,827,125 $73,263,668 196 MAR- 9-99 TUE 12:24 AM MAR-@9-99 89:55 BRIN Ade _ agencies. ~Kwee, a _ Federal Regulatory Commis- sion, SCOTT BOWLEN Daily News Staff Writer ; Ketchikan Public Utilities is con- sideringaboosttoitspowersupply by Ibuildingnew hydroelectric plants that use water from the existing dams at Connell Lake and Whitman Lake. “the start, KPU wants to heas from the public and interested giermment “The whole poalhere is ftobave] no Surprises at the end,“ said Carter and state hs mie, a projects’ potential a ‘The public and agencies have until May3tosubmit commentsto Wesoxp that sugeest items tobe consideredin the studies, said Thompson. : Wescorpexpects to produce a draft Environmental Assessment and sub- mit a formal license application to the aL U tures LuReSs Jor Future power sli a power oo The Whitman and Conpell Lakes projects are two of the options thaiKPU funding for the interGe, which is est: 4 y- is esther considering or actively pursu- pated to cost more than $70 million. ballot, said Trimble. The projects ing help it keep up withthe Ketchikan Other 5 being con- could be put gut for bids in 2002 Te ares chikan used abour 164,000 mega: ee kt eet a onnell Late i ~ - watt hours of energyin 1998, according theKetchikenElecticCom- The ‘Lake project would regula: to KPU, A conservative forecast of en- pany {a joint-venture of the Cape Fox use the dam built in 1952 by Ketch>- / exgy requirements indicates that the and Alaska Power & Telephone}, kan Pulp to provide wale® By PEG: grea’s demand could reach as high a5 on en , Bocarcing (0 - “Associt; 100 wati-hours by 2023. a on Annette Zr meget ne Shape wn stort | nar et the proposed Swan Lake-Tyee Lake in- projects are of KPU's “back-up distance through exsbog ae Goual Oil Spill tertie. : ste im the event that the Swan- stave pipeline to a powerhouse day. speadone! The wehave, unt? ‘Tyez mtertic is mot built soon, said Soted either oa the Ketchikan Pulp | tycre” in adv. AXE pV MAR- 9-99 TUE 12:24 03 AW FAX NO. 02— P, 03 Necpery fi @9-99 39:53 AM Twat Wetec are me wanes generalorel pe erhouse ve ncepacity of 1,9 megawatts. To locrense the walter Tow Into lout Connel) Lake, a, Une plan we fd divert days. Soper reach of the pond mletoet © pipe lo Ward "ies oe : So HPU information, xe: oereing fourt tees en Dope wo Eh #00 a 6 ar LER Of Fial f ne Come sald that wus : Pepols: fal as of salmon and trou! jeu recais Cove, Ward Iie an Ree 4280 Pishery ee Jas They said ibe salen should consider Br. fishery issuos such ay fish passage, wa- driv ter quality, disease Wanamiosiog and (he 30 dn Ceicice eueedeat elfects — a0 caused by water fe ie the powerhouse cuttall Oa ve vt ing a bHef discussion of whal ny, ee pastage should ba con: ponde ited ncuding nbc of he a), arms phorapeca paid the project waan't likely br eppen Uf en expensivn Ouh passage ok ovuse Wor - jus Yores cane mlntve Tyee Trek bighlighled ted the recreatlonal ees existing and develop: hanplie onal ae reece Foreat Servica concerns. io the atat De ‘iment ockin aio a ate epesnan fin el Wares Menagement said ‘that fred ms igh deed Nereviopnian ap on water Water can't on for pm us known future use, ksown or Sepyoranie uaa ehoakd Denved now, he Whitman Lake were We he eile ‘ 7? day about the Whlunan Lake poe The boxnd areas are the eT locations of the Connell and Whitman Ikkes power propasal, exisag doe wor built in 1937, 5 ae F i : n morn te XPU Information, It was Le an rr c ; ‘ 100, allona-perday wouter mii ce eae as vet gemoteuwiignaes ay T eeate of Peat be OO eect "i merate electtell for Its cane ly, However, Whi would , ‘However, t mare i Hee ae venion viet tebe Doan 4 Gane wall went to know in Skewers Would + Fishand etter mY ce caehwideete “STE sae a ane, * Her ¢ aay bat dom eet ia etructu Whitman Creek below phchans rate (ee ieee ‘and Gamo. Weesealot water righ tn lralted rupply ly y sound, but {I Ww! ruc Aa situation, the associ yep io make It last through She, 0 Stevo Hoffman of Fish and Gere pficrily to draw its allocation. Fos of the nt added sha} the agency has been work: The associallon’s stopreneavalives alse ; the Feder Treble * 1, 600+foat ‘on. Ueinch dlaineter Feprnalnen inept “oaman Seec ah ieeveler reiet. Tes edbythe Southern Sauthenat Regional —" Seoond sist ate Me | Maes Peeno, ove of Hunn nee 2 eS ‘The recond diversion site'would bs , © Anincryased flow ol freshwaterin'o J.umbor Company, said - 4 “flows Into Whitman eae would make fuses og te Test op ves id ae « 43-inch Ulametax Aten Pipolln on a creek that now tog water Pro Whitgdan Deen 8 Cove, weserding to los, the pis ioctl Hering Polk giver version bave two (wb) sagteeraior Gala witha gravel. a i combtact capacity of 4.6 mege Hiabery com Waite the Couael) Lake propos al, the Biicicnen Cresk iar Waitouap Lake project woeld wee watet Wie Sek ap ee Association. 1c propored project would ball 0 about 4,000 feet on fare > % DE MMe lea ene ors Sule BOD, Mercer Istsud, Wath., 98040. jt PeaceHealth ~- /, Vv [AK Governor Tony Knowles . ~ UNS iar 1 as , P.O. box 110001 niger HeAn mau Ketchikan Juneau, AK 99811-0001 General Hospital Dear Governor Knowles, | am writing this letter in support:of the Ketchikan Swan -TYee Interie Project,. Ketchikan General Hospital strongly supports development of the Swan -Tyee Intertie. The reason for our support is many fold . The most important is a need for a reliable source of power at reasonable cost in the future for our patients. There is a need for the community to have long term power generation capabilities/ From the data presented on the alternatives, the intertie has by far the greatest potential for reducing our current rates both retail and wholesale in the future. It will allow other Southeast communities, especially the Petersburg area .to be opened up as a power generation source and would be the first phase in a SE Alaska grid. Since we have received federal funding for this project | strongly urge you to make this a probity over other future generation projects to maximize the efforts Rs of our Congressional delegation and to help allow us to receive reliable power for _ future economic development. eae ee me f. o i- ng 2. fq] (incl dv” nden ~ Sincerely, § far = Tons Ad i Savas abe ron Grek : Bra Min Edward Mahn be fk om my Administrator’ eet $G.4 W) 1% (9st ce . - cc: Randy Simmons,:AIEDA 1977 siom f wr an Jim Elkins / “ aéat— 520 11 ADI: bi, 2 cc randy From adia? Jaim elkins 3100 Tongass Ave. BL, ministry with the Sisters of St. Josepi of Peace Ketchikan, AK 99901-5794 Tel. (907) 225-5171 Fax (907) 228-8322 Dennis McCrohan From: Emerman, Richard [REMERMAN@comregaf.state.ak.us] Sent: Wednesday, March 10, 1999 2:23 PM To: ‘DGray@CH2M.com'; 'McCrohan, Dennis' Subject: Tyee-Swan comment Dave -- One more comment. Please delete any reference to Perspective B from the rate impact analysis segment of your report. We agreed on this end that Perspective B probably confuses matters more than it helps. Thanks. Dick Dennis McCrohan From: Emerman, Richard [REMERMAN@comregaf.state.ak.us] Sent: Tuesday, March 09, 1999 9:38 AM To: ‘McCrohan, Dennis' Subject: Tyee-Swan We talked about this before but | don't remember where we left it. How about having Dave Gray do a scenario -- at least with respect to resource costs -- of building both Mahoney Lake and the intertie. | just think this suggestion could easily come up again as a way to get the best deal for Ketchikan ratepayers (Mahoney) plus a way to satisfy the intertie advocates (long term benefits, all capital cost covered by grants and SE Energy Fund). | can imagine both KPU and Bob Grimm pushing the idea. So why not run the scenario -- the outcome should be that the present value of costs look pretty bad. Dick Raneurnce, O Assumptions (High Load Forecast) Load Forecast ¢ Based on ISER high load forecast for KPU (1998). e Adjusted to include KPC sawmill and veneer plant loads plus marine layups (4 per year); adjustment adds 5.4 MW and 47,360 MWh/year. Resource Alternatives All Diesel: e Assumes fuel cost of $.63/gal in 1998, $.58/gal in 1999, then increasing to $.66/gal in 2018. e Replacement diesel (reserve) units required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998). Intertie (full cost, including sunk costs): e $73.2 million capital cost. e Zero incremental cost of Tyee output. ¢ Replacement diesel (reserve) units required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. Intertie (incremental cost): ¢ $73.2 million capital cost less $8.1 million expended = $65.1 million. e Zero incremental cost of Tyee output. ¢ Replacement diesel (reserve) units required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. Intertie (incremental state cost): ¢ $65.1 million capital cost less $17.4 million federal grants = $47.7 million. e Zero incremental cost of Tyee output. e Replacement diesel (reserve) units required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. Mahoney Lake: © $28.5 million (per 1998 Beck analysis) and $17.5 million (per KEC/HDR). e Capacity credit since connection is at Beaver Falls. e Replacement diesel (reserve) units required in 2007 and 2015; includes new power plant ($9 million in $1998). Small Hydro: e Assumes Whitman Lake (added in 2002) and Connell Lake (added in 2005). e Replacement diesel (reserve) unit required in 2011; includes new power plant ($9 million in $1998). Real Discount Rate vat 3.0 percent Rae Sowpeet aQ ok 6.5% Per jsoyor a Capital dinom Ruy duderi ae nt Bsa Bed Rabe ud oan Gndading, a entry ‘Sc rece a Assumptions Vis. (Medium Load Forecast) Load Forecast e Based on ISER base (medium) load forecast for KPU (1998). e Adjusted to include KPC sawmill load and marine layups (2 per year); adjustment adds 2.8 MW and 17,050 MWh/year. Resource Alternatives All Diesel: e Assumes fuel cost of $.63/gal in 1998, $.58/gal in 1999, then increasing to $.66/gal in 2018. e Replacement diesel (reserve) unit required in 2005; includes new power plant ($9 million in $1998). Intertie (full cost, including sunk costs): e $73.2 million capital cost. e Replacement diesel (reserve) unit required in 2005; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. e Zero incremental cost of Tyee output. Intertie (incremental cost): ¢ $73.2 million capital cost less $8.1 million expended = $65.1 million. e Replacement diesel (reserve) unit required in 2005; includes new power plant and power hours ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. e Zero incremental cost of Tyee output. Intertie (incremental state cost): e $65.1 million capital cost less $17.4 million federal grants = $47.7 million. e Replacement diesel (reserve) required in 2005; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. e Zero incremental cost of Tyee output. Mahoney Lake: en ¢ $28.5 million (per 1998 Beck analysis) and $17.5 million (per KEC/HDR). ass e Capacity credit since connection is at Beaver Falls; no new diesel required. Small Hydro: e Assumes Whitman Lake (added in 2002) and Connell Lake (added in 2012). ¢ No new diesel required. Real Discount Rate: 3.0 percent Assumptions (Low Load Forecast) Load Forecast e Based on ISER low load forecast for KPU (1998); no adjustments. Resource Alternatives All Diesel: e Assumes fuel cost of $.63/gal in 1998, $.58/gal in 1999, then increasing to $.66/gal in 2018. e No replacement diesel (reserve) units required. Intertie (full cost, including sunk costs): ¢ $73.2 million capital cost. e Zero incremental cost of Tyee output. e No replacement diesel (reserve) units required. Intertie (incremental cost): ¢ $73.2 million capital cost less $8.1 million expended = $65.1 million. e Zero incremental cost of Tyee output. e No replacement diesel (reserve) units required. Intertie (incremental state cost): ¢ $65.1 million capital cost less $17.4 million federal grants = $47.7 million. e Zero incremental cost of Tyee output. e No replacement diesel (reserve) units required. Mahoney Lake: ¢ $28.5 million (per 1998 Beck analysis) and $17.5 million (per KEC/HDR). e Capacity credit since connection is at Beaver Falls. e No replacement diesel (reserve) units required. Small Hydro: e Assumes Whitman Lake (added in 2002). e No replacement diesel (reserve) units required. Real Discount Rate: 3.0 percent Qwers O4W) March 8, 1999 TO: Randy Simmons Keith Laufer Dick Emerman FROM: Dennis McCrohan SUBJECT: Draft Report SE Intertie Atttached is Dave Gray’s draft. Please let me know as soon as possible any changes which are necessary. March 8, 1999 awotate ei Yorn op yon: Mr. Dennis McCrohan ; Deputy Director — Project Development and Operations C meee ° Alaska Industrial Development and Export Authority \ \ p t. ow. eu a == 480 West Tudor Anchorage, Alaska 99503 Dear Dennis: At your request, we have evaluated the economics and potential rate impacts of power resource options for Ketchikan, Alaska. The analysis has particular focus on the Swan Lake-Tyee Intertie (the “Intertie’). Our findings are summarized in the two attachments to this letter. The first attachment, Economic Analysis, provides economic analysis of the resource options; the second analysis, Rate Impact Analysis, provides projected rate impacts of the same options. \ » \ ou’ Major conclusions to our study are as follow: Ag! yn The lowest resource costs are for either Mahoney Lake or Small Hydro (Whitman and Connell Lakes) development. Even with $17 million in Federal funding, the Intertie is ee to $29) million more expensive than the Mahoney and Small Hydro alternatives. — Only under high load forecast conditions is the Intertie the least-cost option. However, Mahoney Lake is almost as inexpensive under that forecast. c Creu Under financing alternatives considered in this study, the Intertie would increase Ketchikan Public Utilities rates relative to other power supply resource options. Under medium load forecast conditions, these relative increases would range from 0.8 to 2.3 cents per kWh sold. The financing considerations included A.) AIDEA paying for construction of the Intertie and KPU purchasing Tyee power at normal rates and paying for Intertie O&M, and B.) KPU paying all costs of the Intertie as well as normal rates for Tyee power. Please call me if you have any questions about these findings or the attached materials. Sincerely, David A. Gray Director of Energy Economics CH2M HILL Economic Analysis of Power Supply Resource Options at Ketchikan, Alaska 1. Under medium load forecast conditions, the least cost option is Mahoney Lake, if it can be built for $17.5 million. If the cost of Mahoney Lake is more likely to be $28.5 million, Small Hydro (Whitman and Connell Lakes) is the least cost option, followed by Mahoney Lake. 2. Even with $17 million in Federal funding, it is $29 million more expensive than the low cost Mahoney Lake estimate, $24 million more expensive than the Small Hydro alternative, and $18 million more expensive than the high cost Mahoney Lake estimate. (This assumes the medium load forecast.) 3. Under the high load forecast, the Swan Lake-Tyee Intertie is the least cost option to for Alaska (excluding consideration of sunk costs and assuming $17 million in Federal grants for the project). However, Mahoney Lake is almost as inexpensive. 4. Under the low load forecast, Small Hydro is the least cost alternative by a substantial margin. 5. Small Hydro provides staging opportunities that substantially reduces risk associated with uncertain future loads. 6. Mahoney Lake and Small Hydro do not require new diesel plants for reserve capacity because they are not dependent upon the transmission line between Swan Lake and Ketchikan; the Intertie ties in to this line at Swan Lake. 7. These conclusions are based on economic analysis of the resource costs associated with new generation for service to Ketchikan. They are supported by Table | and Figures 1 and 2. These documents shows the present value of new resources required! for each resource option. Also attached for reference is Table 2--the full power supply costs for Ketchikan. This includes sunk costs of existing facilities at Ketchikan Public Utilities (KPU), rates paid for power supply from Swan Lake, and costs of the new generation resources shown in each row. 8. Assumptions for this analysis are attached for the medium, high, and low load forecast cases. High and low load forecast assumptions that vary from the medium forecast case assumptions are printed in bold. 9. These medium, high, and low load forecasts are shown in Figure 3 as the Revised 1998 forecasts. Also shown in this chart are the load forecasts prepared by the Institute of Social and Economic Research (ISER) in 1990 and in 1998. E«peis ' Exceptions to this are shown for the Swan Lake Intertie. The new resource cost is the option entitled “Intertie (incremental)”. The Intertie (full cost) option includes costs that are already sunk in the project. It therefore overstates new resource costs associated with the Intertie. The Intertie (incremental state cost) optionincludes)consideration of grant funds from the Federal government. As such, it considers resource costs only from the perspective\of Alaska. Table 1 Economic Analysis of Swan/Tyee Intertie* Summary of Results Present Value of Costs ($ millions) Medium High Low Forecast Forecast Forecast Resource: All Diesel 84.7 207.3 17.6 Intertie (full cost) 91.1 176.8 67.8 Intertie (incremental cost) 84.6 170.3 61.3 Intertie (incremental state cost) 69.1 154.8 45.8 Mahoney Lake ($17.5 million) 40.3 156.1 29.1 Mahoney Lake ($28.5 million) 50.9 166.6 39.7 Small Hydro 45.3 175.2 9.7 Index (All Diesel = 100) Medium High Low Forecast Forecast Forecast Resource: All Diesel 100 100 100 Intertie (full cost) 108 85 385 Intertie (incremental cost) 100 82 348 Intertie (incremental state cost) 82 75 260 Mahoney Lake ($17.5 million) 48 75 166 Mahoney Lake ($28.5 million) 60 80 225 Small Hydro 54 85 5S * Excludes costs associated with Swan Lake, existing diesel units, and existing KPU hydro. 32! Ketchikan Resource Options3.xls 3/8/99 Table 2 Swan/Tyee Intertie Analysis Full Cost Analysis * Present Value of Costs ($ millions) Medium High Low Forecast Forecast Forecast Resource: All Diesel 2159 379.7 218.5 Intertie (full cost) 282.2 349.2 268.6 Intertie (incremental cost) 275.8 342.7 262.2 Intertie (incremental state cost) 260.2 327.2 246.6 Mahoney Lake ($17.5 million) 23125 328.5 230.0 Mahoney Lake ($28.5 million) 242.0 339.0 240.5 Small Hydro 236.5 347.6 210.5 Index (All Diesel = 100) Medium High Low Forecast Forecast Forecast Resource: All Diesel 100 100 100 Intertie (full cost) 102 92 123 Intertie (incremental cost) 100 90 120 Intertie (incremental state cost) 94 86 113 Mahoney Lake ($17.5 million) 84 86 105 Mahoney Lake ($28.5 million) 88 89 110 Small Hydro 86 92 96 * Includes costs associated with Swan Lake (at Four Dam Pool Wholesale Power Rate) and existing diesel units (fuel and O&M, plus amortized capital cost of new 1998 diesel unit); excludes all costs associated with existing KPU hydro. Ketchikan Resource Options3.xls 3/8/99 180 160 | = i ‘Se Present Value ($ Millions) S ©S 120 - Figure 1 -Mahoney Lake vs. Intertie || EIMahoney Lake ($17.5 Million) Ea Intertie ($47.7 Million) Present Value ($ Millions) 200 180 | 160 | 140 120 | 100 | 80 — 60 40 20 Figure 2 Small Hydro vs. Intertie Medium - OSmall Hydro - Intertie ($47.7 Million) MWh Figure 3 KPU Load Forecasts 500,000 , 450,000 | 400,000 350,000 | 300,000 | 250,000 | 200,000 | 17~ 4 150- 150,000 | 100,000 | hS_ —_ 50,000 | \So O_O? BP _ D_ BD ?_? MM _ MG GP GF _ GH GM gd og? oS SESE EES —— Medium 1998 ~~ Medium (revised) 1998, ——High 1998 ~~~ High (revised) 1998 — Low 1998 ~~ Low (revised) 1998 VY L ’ roa! Sut- Rate Impact Analysis of Power Supply Resource Options At Ketchikan, Alaska The Swan Lake Intertie would increase Ketchikan Public Utility (KPU) rates relative to other new power supply options including diesel generation, Mahoney Lake, and Small Hydro (Whitman Lake and Connell Lake). In all cases considered, the Intertie would result in an increase in rates relative to continuing with diesel generation. In most cases, Mahoney Lake and Small Hydro would decrease rates relative to diesel generation. The lowest rate impacts would likely come from the Small Hydro option. Under almost all cases considered by this review, it would result in the lowest cost to KPU ratepayers. These findings are based on two different perspectives on rate impacts to the utility: Q e Perspective A: For power from over the Interie, KPU would pay 6.8 cents per kWh plus the cost of O&M (including renewals and replacements) for the Intertie. Mahoney Lake power to meet requirements beyond those met by Swan Lake would be available to KPU for 6.5 cents per kWh. Small hydro would be built with tax-exempt financing. i) x & ¢ Perspective B: It is assumed KPU would not receive any subsidies and would build facilities itself. The Intertie would be built without tax-exempt financing (two-county rule) and KPU would be responsible for paying all debt service and operating costs for the project. KPU could build Mahoney Lake with tax- exempt financing since the project will be within one county at a cost of $17.5 million. Similarly, KPU could build Small Hydro with 5.5 percent financing. Rate projections (in nominal, or current year, prices) for Perspectives A and B are shown in Tables 3 and 4, respectively. Each of these tables has three components. Tables 3.1 and 4.1 are based on the medium load forecast; Tables 3.2 and 4.2 are based on the high load forecast; and Tables 3.3 and 4.3 are based on the low load forecast. Table 3.1 Rate Impact Analysis: Perspective A Medium Load Forecast Average Retail Rate Under Do-Nothing Alternative Estimated Rate Impacts (cents/kWh) 2 Year (cents/kWh) ' Intertie * Mahoney “small Hydro . 1998 92 - - - 1999 9.2 - - - 2000 9.3 - - - 2001 9.4 0.3 0.2 - 2002 9.4 0.3 0.2 (0.3) 2003 9.5 0.3 0.2 (0.3) 2004 S35 0.4 0.2 (0.3) 2005 10.5 0.4 (0.7) (1.2) 2006 10.6 0.4 (0.7) (1.2) 2007 10.6 0.4 (0.7) (1.2) 2008 10.7 0.4 (0.7) (1.2) 2009 10.7 0.5 (0.7) (1.1) 2010 10.8 0.5 (0.7) (1.1) 2011 10.8 0.5 (0.7) (1.1) 2012 10.9 0.6 (0.7) (1.1) 2013 10.9 0.6 (0.7) (1.1) 2014 11.0 0.7 (0.7) (1.1) 2015 1d 0.7 (0.7) (1.1) 2016 ll 0.8 (0.7) (1.0) 2017 11.2 0.8 (0.7) (1.0) 2018 12 0.9 (0.7) (1.0) Levelized 10.3 0.5 (0.3) (0.7) Notes: 1 Represents All-Diesel case; capital financed at 5.5% over 20 years. Assumes non-power supply costs are constant. 2 Relative to All-Diesel case. 3 At Four Dam Pool rate plus O&M (incl. renewals and replacements 4 KEC proposal (6.5 cents/kWh), subordinate to Swan Lake. 5 Assumes capital cost financed at 5.5% over 30 years. ) Table 3.2 Rate Impact Analysis: Perspective A High Load Forecast Average Retail Rate Under Do-Nothing Alternative Estimated Rate Impacts (cents/kWh) . Year (cents/kWh) ' Intertie ° Mahoney * small Hydro 5 1998 9.2 - - - 1999 of - - - 2000 9.3 - - - 2001 9.4 0.3 0.2 - 2002 10.2 0.3 (0.5) (1.0) 2003 10.2 03 (0.5) (0.9) 2004 10.2 0.3 (0.5) (0.9) 2005 10.2 03 (0.5) (0.9) 2006 10.6 03 (0.9) (1.2) 2007 10.6 03 (0.8) (0.5) 2008 10.6 03 (0.8) (0.5) 2009 10.7 03 (0.8) (0.5) 2010 10.7 03 (0.8) (0.5) 2011 10.7 03 (0.2) (0.5) 2012 10.8 0.3 (0.2) (0.5) 2013 10.8 03 (0.2) (0.5) 2014 10.8 0.4 (0.2) (0.5) 2015 11 03 (0.5) (0.4) 2016 11.2 03 (0.4) (0.4) 2017 11.2 0.3 (0.4) (0.4) 2018 11.2 03 (0.4) (0.4) Levelized 10.4 0.3 (0.4) (0.5) Notes: 1 Represents All-Diesel case; capital financed at 5.5% over 20 years. Assumes non-power supply costs are constant. Relative to All-Diesel case. At Four Dam Pool rate plus O&M (incl. renewals and replacements KEC proposal (6.5 cents/kWh), subordinate to Swan Lake. Assumes capital cost financed at 5.5% over 30 years. nk WN Table 3.3 Rate Impact Analysis: Perspective A Low Load Forecast Average Retail Rate Under Do-Nothing Alternative Estimated Rate Impacts (cents/kWh) 4 Year (cents/kWh) ' Intertie * Mahoney * small Hydro : 1998 9.2 - - - 1999 9.2 - - - 2000 9.3 - - - 2001 9.3 0.1 0.0 - 2002 9.4 0.2 0.0 0.3 2003 9.5 0.2 0.0 0.3 2004 9.5 0.2 0.0 0.3 2005 9.6 0.2 0.1 0.2 2006 9.7 0.2 0.1 0.2 2007 9.8 0.2 0.1 0.1 2008 9.9 0.3 0.1 0.1 2009 9.9 0.3 0.1 0.0 2010 10.0 0.3 0.1 0.0 2011 10.1 0.3 0.1 (0.0) 2012 10.2 0.4 0.1 (0.1) 2013 10.5 0.4 0.1 (0.1) 2014 10.6 0.5 0.1 (0.1) 2015 10.7 0.5 0.1 (0.2) 2016 10.8 0.5 0.1 (0.2) 2017 10.9 0.6 0.1 (0.2) 2018 11.0 0.6 0.1 (0.3) Levelized 9.9 0.3 0.1 0.0 Notes: 1 Represents All-Diesel case; capital financed at 5.5% over 20 years. Assumes non-power supply costs are constant. 2 Relative to All-Diesel case. 3 At Four Dam Pool rate plus O&M (incl. renewals and replacements 4 KEC proposal (6.5 cents/kWh), subordinate to Swan Lake. 5 Assumes capital cost financed at 5.5% over 30 years. Table 4.1 Rate Impact Analysis: Perspective B Medium Load Forecast Average Retail Rate Under Do-Nothing Estimated Alternative Estimated Rate Impacts (cents/kWh) 2 Year (cents/kWh) ; Intertie * Mahoney 4 Small Hydro > 1998 9.2 = : 1999 9.2 - : : 2000 93 5 7 - 2001 9.4 2.6 0.3 - 2002 9.4 2.5 0.2 (0.3) 2003 9.5 2.4 0.1 (0.3) 2004 9.5 2.3 0.1 (0.3) 2005 10.5 2.2 (0.9) (1.2) 2006 10.6 2.1 (0.9) (1.2) 2007 10.6 2.1 (1.0) (1.2) 2008 10.7 2.0 (1.0) (1.2) 2009 10.7 1.9 (1.1) (1.1) 2010 10.8 1.8 (.1) (1.1) 2011 10.8 1.7 (1.2) (1.1) 2012 10.9 1.7 (1.2) (1.1) 2013 10.9 1.6 (1.1) (1.1) 2014 11.0 1.6 (1.1) (1.1) 2015 111 1.4 (1.1) (1.1) 2016 1 13 (1.1) (1.0) 2017 11:2 1.2 (1.1) (1.0) 2018 11.2 1.2 (1) (1.0) Levelized 10.3 1.6 (0.6) (0.7) Notes: 1 Represents All-Diesel case; assumes non-power supply costs are constant. 2 Relative to All-Diesel case. 3 Assumes $65.1 million capital cost financed at 7.0% over 30 years. 4 Assumes $17.5 million capital cost financed at 5.5% over 30 years. 5 Assumes capital cost financed at 5.5% over 30 years. Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Levelized Notes: nh WN Table 4.2 Rate Impact Analysis: Perspective B High Load Forecast Average Retail Rate Under Do-Nothing Alternative Estimated Rate Impacts (cents/kWh) : (cents/kWh) : Intertie * Mahoney + Small Hydro ? 9.2 - = = 9.2 - = = 9.3 - = = 9.4 1.0 (0.2) - 10.2 0.8 (1.0) (1.0) 10.2 0.6 (1.0) (0.9) 10.2 0.5 (0.9) (0.9) 10.2 0.4 (0.9) (0.9) 10.6 0.3 (1.3) (1.2) 10.6 0.3 (1.2) (0.5) 10.6 0.3 (1.2) (0.5) 10.7 0.4 (1.2) (0.5) 10.7 0.4 (1.2) (0.5) 10.7 0.4 (0.5) (0.5) 10.8 0.4 (0.5) (0.5) 10.8 0.4 (0.5) (0.5) 10.8 0.4 (0.5) (0.5) Wl 0.4 (0.8) (0.4) 11.2 0.4 (0.8) (0.4) 12, 0.4 (0.8) (0.4) 112 0.4 (0.7) (0.4) 10.4 0.4 (0.7) (0.5) Represents All-Diesel case; assumes non-power supply costs are constant. Relative to All-Diesel case. Assumes $65.1 million capital cost financed at 7.0% over 30 years. Assumes $17.5 million capital cost financed at 5.5% over 30 years. Assumes capital cost financed at 5.5% over 30 years. Table 4.3 Rate Impact Analysis: Perspective B Low Load Forecast Average Retail Rate Under Do-Nothing Alternative Estimated Rate Impacts (cents/kWh) Z Year (cents/kWh) Intertie * Mahoney * Small Hydro ° 1998 9.2 - - - 1999 9.2 - - - 2000 9.3 - - - 2001 9.3 3.9 1.2 - 2002 9.4 3.9 12 03) 2003 9.5 3.9 1.2 0.3 2004 9.5 3.8 1.1 0.3 2005 9.6 Sef Ll 0.2 2006 9.7 3.6 1.0 0.2 2007 9.8 3.6 1.0 0.1 2008 9.9 30 0.9 0.1 2009 9.9 325 0.9 0.0 2010 10.0 3.4 0.9 0.0 2011 10.1 3.4 0.8 (0.0) 2012 10.2 3.3 0.8 (0.1) 2013 10.5 3.3 0.7 (0.1) 2014 10.6 3.3 0.7 (0.1) 2015 10.7 3.2 0.7 (0.2) 2016 10.8 3.1 0.6 (0.2) 2017 10.9 3.1 0.6 (0.2) 2018 11.0 3.0 0.6 (0.3) Levelized 9.9 2.9 0.7 0.0 Notes: 1 Represents All-Diesel case; assumes non-power supply costs are constant. 2 Relative to All-Diesel case. 3 Assumes $65.1 million capital cost financed at 7.0% over 30 years. 4 Assumes $17.5 million capital cost financed at 5.5% over 30 years. 5 Assumes capital cost financed at 5.5% over 30 years. Cents per kWh — om MO #& OD CO O NN Perspective A Rate Impact Analysis Medium Load Forecast | See in i ene —— —— — —| — Intertie - ——Mahoney_ | fer eee ac Ber ene MIE Een Ten IEE EET Ts | NEA Hydro | cnn fee QD dy eo OO bk © ,% S © © S OS NX Nt Ss * S\ SHS S SS HS SS 8 Perspective B Rate Impact Analysis | Medium Load Forecast 14 [BQ 42 - ao & 10 |— : Sg Sd |= 6- - 28 ce — Intertie | | —— Mahone 6 i — smal Hyeto — — —| HS QO dd & oO Oo OO VM Ak © Ow DY LD’ LY YO WH ev A AO aN N FIPS HSH LHS HS Dennis McCrohan To: DGray@CH2M.com Subject: Draft Report Dave Received your March 9, 1999 e mail sent to Dick. Please note that we modified the assumptions regarding Connell and Carlana. Apparently we did not get it right. Please check in the final draft. Dennis Z ALASKA INDUSTRIAL DEVELOPMENT =_ AND EXPORT AUTHORITY / = ALASKA @@E_ ENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 269-3000 FAX 907 / 269-3044 MEMORANDUM TO: Dave Gray Director of Environmental Economics CH2M Hill FROM: Dennis V. McCrohan, P.E! Deputy Director — Project Development and Operations DATE: March 9, 1999 SUBJECT: Southeast Intertie Report The main comments are concerning the need for more background text. This could be done by adding a section to the report or expanding the cover letter. We have the following comments: 1. The report needs to be expanded to include the following discussions: * Short introduction paragraph; + Describe sources of information; + Describe the major critical assumptions; + Describe any caveats to the report; + Describe the methodology, which was to update previous studies with current information (not create a new study). 2. Prepare a resource analysis for both the Intertie and Mahoney Lake together. 3. Compute and include in the report the PW of the revenues to the State for the Low, Medium, and High forecasts. 4. Revise the assumption tables, which are attached, to include the rate impact assumptions. 5. Issue the report draft. Please call Dick and me to discuss when you return. Attachments CG; Dick Emerman, Division of Energy Assumptions (Medium Load Forecast) Load Forecast e Based on ISER base (medium) load forecast for KPU (1998). e Adjusted to include KPC sawmill load and marine layups (2 per year); adjustment adds 2.8 MW and 17,050 MWh/year. Resource Alternatives All Diesel: e Assumes fuel cost of $.63/gal in 1998, $.58/gal in 1999, then increasing to $.66/gal in 2018. e Replacement diesel (reserve) unit required in 2005; includes new power plant ($9 million in $1998). Intertie (full cost, including sunk costs): e $73.2 million capital cost. e Replacement diesel (reserve) unit required in 2005; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. e Zero incremental cost of Tyee output. Intertie (incremental cost): ¢ $73.2 million capital cost less $8.1 million expended = $65.1 million. e Replacement diesel (reserve) unit required in 2005; includes new power plant and power hours ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. e Zero incremental cost of Tyee output. Intertie (incremental state cost): e $65.1 million capital cost less $17.4 million federal grants = $47.7 million. e Replacement diesel (reserve) required in 2005; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. e Zero incremental cost of Tyee output. Mahoney Lake: ¢ $28.5 million (per 1998 Beck analysis) and $17.5 million (per KEC/HDR). e Capacity credit since connection is at Beaver Falls; no new diesel required. Small Hydro: e Assumes Whitman Lake (added in 2002) and Connell Lake (added in 2012). e¢ No new diesel required. Real Discount Rate: 3.0 percent Rate Impact Analysis: Capital financed at 5.5% over 30 years. KEC rate at 6.5 cents per kWh, subordinate to Swan Lake Tyee energy at Four Dan Pool Rate plus Intertie O&M (including renewals and replacements) Non-power supply costs are constant. Assumptions (Low Load Forecast) Load Forecast e Based on ISER low load forecast for KPU (1998); no adjustments. Resource Alternatives All Diesel: e Assumes fuel cost of $.63/gal in 1998, $.58/gal in 1999, then increasing to $.66/gal in 2018. e No replacement diesel (reserve) units required. Intertie (full cost, including sunk costs): ¢ $73.2 million capital cost. e Zero incremental cost of Tyee output. e No replacement diesel (reserve) units required. Intertie (incremental cost): ¢ $73.2 million capital cost less $8.1 million expended = $65.1 million. e Zero incremental cost of Tyee output. e No replacement diesel (reserve) units required. Intertie (incremental state cost): e $65.1 million capital cost less $17.4 million federal grants = $47.7 million. e Zero incremental cost of Tyee output. e No replacement diesel (reserve) units required. Mahoney Lake: e $28.5 million (per 1998 Beck analysis) and $17.5 million (per KEC/HDR). e Capacity credit since connection is at Beaver Falls. e No replacement diesel (reserve) units required. Small Hydro: e Assumes Whitman Lake (added in 2002). e No replacement diesel (reserve) units required. Real Discount Rate: 3.0 percent Rate Impact Analysis: Capital financed at 5.5% over 30 years. KEC rate at 6.5 cents per kWh, subordinate to Swan Lake Tyee energy at Four Dan Pool Rate plus Intertie O&M (including renewals and replacements) Non-power supply costs are constant. -_ Assumptions (High Load Forecast) Load Forecast e Based on ISER high load forecast for KPU (1998). e Adjusted to include KPC sawmill and veneer plant loads plus marine layups (4 per year); adjustment adds 5.4 MW and 47,360 MWh/year. Resource Alternatives All Diesel: e Assumes fuel cost of $.63/gal in 1998, $.58/gal in 1999, then increasing to $.66/gal in 2018. e Replacement diesel (reserve) units required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998). Intertie (full cost, including sunk costs): ¢ $73.2 million capital cost. e Zero incremental cost of Tyee output. e Replacement diesel (reserve) units required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. Intertie (incremental cost): e $73.2 million capital cost less $8.1 million expended = $65.1 million. e Zero incremental cost of Tyee output. e Replacement diesel (reserve) units required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. Intertie (incremental state cost): ¢ $65.1 million capital cost less $17.4 million federal grants = $47.7 million. e Zero incremental cost of Tyee output. e Replacement diesel (reserve) units required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. Mahoney Lake: e $28.5 million (per 1998 Beck analysis) and $17.5 million (per KEC/HDR). e Capacity credit since connection is at Beaver Falls. e Replacement diesel (reserve) units required in 2007 and 2015; includes new power plant ($9 million in $1998). Small Hydro: e Assumes Whitman Lake (added in 2002) and Connell Lake (added in 2005). e Replacement diesel (reserve) unit required in 2011; includes new power plant ($9 million in $1998). Real Discount Rate: 3.0 percent Rate Impact Analysis: Capital financed at 5.5% over 30 years. KEC rate at 6.5 cents per kWh, subordinate to Swan Lake Tyee energy at Four Dan Pool Rate plus Intertie O&M (including renewals and replacements) Non-power supply costs are constant. Dennis McCrohan From: Gray, Dave/SEA [DGray@CH2M.com] Sent: Tuesday, March 09, 1999 10:19 PM To: Dick Emerman Ce: ‘McCrohan, Dennis/AIDEA’; Brooks2, Bob Subject: Swan Lake/Tyee Intertie Dick--I meant to answer some of the questions you asked last week about the draft economic and rate impact analyses for the subject project proposal. Here they are. Sorry for the delay. Question: Is Carlanna Lake misspelled or mis-identified? Answer: No. In the 1998 Beck update to the KPU power supply study, "small hydro" included the 5.3MW. Whitman Lake project (2002) and the 1.9MW Connell Lake project (2009) under the medium load forecast and Whitman (2002), Connell (2009), Carlanna Lake (2011), and a new diesel unit (2013) under the high forecast. In the analysis conducted for AIDEA, only Whitman Lake (2002) and the 1.2MW Carlanna Lake project (2012) are needed under the medium load forecast. Under the high forecast, Whitman (2002), Carlanna (2005), and 2 new diesel units (2007 and 2015) were included. Whitman does it all under the low load forecast. | don't know why John left out Connell Lake. | will ask him. Question: Aren't fuel prices low relative to historical levels? Should we use higher prices to show that the Intertie does not compare well even under higher prices? Answer: The $0.63 price we used compares well with the last 3 years and is higher than KPU is currently paying: 1993 .71 per gal 1994 82 1995 85 1996 85 1997 84 1998 58 1999 ytd 53 1997-99 avg. .64 We chose not to change the analysis because it would involve rerunning the full analysis. | agree that using a higher diesel price would sell better. And we will if you and Dennis would like to do so. Question: Why is Intertie PV of the incremental costs associated with the Intertie lower than $73.2 million in the low load forecast? Answer: There are some savings in fuel costs because the Intertie offsets diesel generation. So the net cost is less than the cost of the Intertie. Question: Why is there a progressively smaller difference between the incremental costs in table 1 and full costs in table 2 as loads grow from one forecast to the next higher forecast? Answer: The answer has to do with the way rates are calculated for Four Dam Pool power. For example, the difference between full cost and incremental cost for each of the medium forecast scenarios is $191.2 million (PV). The difference between full cost and incremental cost for each of the high forecast scenarios is $172.4 million. As you know, the wholesale power rate is calculated by dividing the O&M cost by the kWh sales. The rate is lower for the high forecast since the O&M costs (which is constant for all forecasts) are divided by more kWh. This cost differential is part of the economic effect of changes in loads and is the same for each alternative within each forecast scenario. While strictly speaking the effect should be included in the economic analysis, it is not important since adding a constant to each alternative would not change the dollar differentials among alternatives. Please let me know if you have further questions or would like to discuss. --Dave 3 ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY —_ ALASKA @@e ENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 269-3000 FAX 907 / 269-3044 MEMORANDUM TO: Randy Simmons Executive Director Keith Laufer Financial and Legal Affairs Manager Dick Emerman Planner IV, Division of Energy FROM: Dennis McCrohan Gh e Deputy Director — Projeef Development and Operations DATE: March 8, 1999 SUBJECT: Draft Report Southeast Intertie Attached is Dave Gray’s draft report. Please let me know as soon as possible of any changes which are necessary. Attachment cc: David Germer, Acting Business Development Manager HAR-O3-93 WED 63:28 PH CH2H HILL FaX NO. 4254625357 Es cc . about the new power plan! ce 15 CH2MHILL «ax To: 1. Dennis McCrohan From: Dave Gray 2. Dick Emerman Company: AIDEA Date: March 3, 1999 Fax No.: 1. (907) 683-2998 Total Pages: 15 2. (907) 269-4685 Voice No.: Message: Attached are the revised economic analyses and the draft rate impact analyses of the Swan ‘ Lake project and its alternatives. With regard to the economic analysis, | did not respond to Dennis’s comment that Ketchikan would bear no capital cost risk. | was not sure how to make that relate to the “resource . cost” analysis. We need to tat abouthow to make this point fit. Dennis also asked “what $9 millioh:for the low load forecast. Under that forecast, KPU would have adequate reserve capacity with its existing plants. | have e-mailed these materials to both of you. This is especially relevant to trying to make sense of the load forecast chart. It is understandable in color; not so in B&W. 2 | can write a cover letter that summarizes everything once we are agree on content. Dennis—Sorry this was not available this a.m.as hoped. | conked out last night. Itis a better product for having had a nights sleep!--Dave Please call if pages are missing or lliegible or if you receive this fax in error. MAR-03-99 WED 03:26 PM CH2M HILL FAX NO. 4254625957 P, 02/15 © Economic Analysis of Power Supply Resource Options at Ketchikan, Alaska Preliminary Findings 1. Under medium ata high load forecast conditions, the least cost option is Mahoney, Lake, if it can be built for $17.5 million. Nn If the cost of Mahoney Lake is more likely to be the $28.5 million estimate, the léast cost option under the medium and low load forecasts is small hydro (Whitman Lake Lake). Under the high load forecast, it is the Swan Lake Intertie (excluding consideration of sunk costs and assuming $17 million in Federal grants for the project). 3. Small Hydro is the least cost alternative by a substantial margin under the low load forecast. 4. Small Hydro provides staging opportunities that substantially reduces risk associated with uncertain future loads. 5. Mahoney Lake and Small Hydro do not require new diesel plants for reserve capacity because they are not dependent upon the Intertie WA 6. Even with $17 million in Federal funding of the Intertie costs, it ifS19 million more expensive than the low cost Mahoney Lake estimate, and($14 million more expensive than the Small Hydro alternative under the medium load forecast. \_- 7. These conclusions are based on an analysis of the resource costs associated with new generation for service to Ketchikan. They are supported by Table ]—Swan/Tyee Imertie Analysis—Summary of Results (Incremental Analysis)”. This table shows the present value of new resources required’ for each resource option. Also attached for reference is Table 2- the full power supply costs fer Ketshikan, This includes sunk costs of evisting faribition at Ketchikan Public Utilities (KPU) as well as the cost of resource alternatives for new. ~ generation. 8. Assumptions for this analysis are attached for the medium, high, and low load forecast cases. High and low load forecast assumptions that vary from the medium forecast case assumptions are printed in bold font. 9. These medium, high, and low load forecasts are shown in Figure | as the revised 1998 forecasts. Also shown in this chart are the load forecasts prepared by the Institute of Social and Economic Research (ISER) i in 1990 and in 1998. These assumptions define each of the resource alternatives. ' Exceptions to this are shown for the Swan Lake Intertie. The new resource cost is the option extitled “Intertie (incremental)”. The Intertie (full cost) option includes costs that are already sunk in the project. It therefore oversates ucw resource Costs associated with the Intertie. ‘The Intertic (incremental state cost) option includes consideration of grant funds from the Federal government. As such, it considers resource costs only from the perspective of Alaska. WAR 85 8S WER Oh.2P Pi SHAN TELL BANG JES4E2 5538 Table 1 AIDEA: Swan/Tyee Intertie Analysis Resource: All Diesel Intertie (full cast) Intertic (incremental cost) Intertie (incremental state cost) Mahoney Lake ($17.5 million) Mahoncy Lake ($28.5 million) Small Hydro Resource: All Diesel Intertie (full cost) Intertie (incremental cost) Intertie (incremental state cost) Mahoney Lake ($17.5 million) Mahoncy Lake ($28.5 million) Smal] Hydro Summary of Results (Incremental Analysis *) Bog13 me Present Value of Costs ($ millions) Medium High Low Forecast ._Forecast__ _ Forecast 84.7 207.3 116% 914 176.8 67.3) 84.6 170.3 GUD, ok ak 69.1 154.8 or : 40.3 156.1 2911 “AP 50.9 166:6 39.7 45.3 175.2 97 Index (All Diesel = 100) Medium __ Forecast 100 108 100 82 48 60) 54 85 High Low _Forecast____ Forecast _ 100 100 85 385 82 348 75 260 75 166 80 225 55 * Excludes costs associated with Swan Lake, existing diesel units, and existing KPU hydro. Ketchikan Resource Options.xls 3/3/99 MAR-03-99 WED 03:27 PM CH2M HILL FAX NO. 4254625957 _ P, 04/15 Table 2 AIDEA: Swan/Tyee Intertie Analysis Summary of Results (Full Cost Analysis *) Present Value of Costs ($ millions) Medium High Low Resource: i All Diesel 275.9 379.7 218.5 Intertie (full cost) 282.2 3492 § » $268.6 Intertie (incremental cost) 275.8 3427 +. +-:262.2 Intertie (incremental state cost) 260.2 327.2 : 246.6 Mahoney Lake ($17.5 million) 2315 328.5 230.0 Mahoney Lake ($28:5 million) 242.0 339.0 240.5 Small Hydro 236.5 347.6 | 210.5 Index (All Diesel = 100) Medium High Low Forecast_ _ Forecast __ Forecast __ Resource: All Diesel 100 100 100 Imertie (full cost) 102 92 123 Intertie (incremental cost) 100 90 120 Intertie (incremental state cost) : 94 86 113 Mahoney Lake ($17.5 million) 84 86 105 Mahoney Lake ($28.5 millon)’ 88 89 i 110 Small Hydro 86 92 96 Includes costs associated with Swan Lake (at Four Dam Pool Wholesale Power Ratc) and existing dicsel units (fuel and O&M, plus amortized capital cost of new 1998 diesel unit); excludes all costs associated with existing KPU hydro. Ketchikan Resource Options.xls i 3/3/99 MAR 03 99 WED 03:28 PM = CII2M HILL FAX NO, 4254605957 i P,OS18 Assumptions (Medium Load Forecast) Load Forecast ; e Based on ISER base (medium) load forecast for KPU (1998). © Adjusted to include KPC sawmil) load and marine layups (2 per year); erty adds 2.8 MW and 17,050 MWh/year. Resource Alternatives er All Diesel: © Assumes fuel cost or§sovenhin 1996 C55 1998, Ceie9 in 1999, then increasing to $.66/gal in 2018. e Replacement diesel (reserve) unit required in 2005; eee new power plant ($9 million in $1998). Intertie (full cost, including sunk costs): © $73.2 million capital cost. © Replacement diesel (reserve) unit required in 2005; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. © Zero incremental cost of Tyee output. Intertie (incremental cost): e $73.2 million capital cost less $8.1 million expended = $65. million: © Replacement diesel (reserve) unit required in 2005; includes new power plant and power hours ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. e Zero incremental cost of Tyee output. Intertie (incremental state cost): ¢ $65.1 million capital cost less $17.4 million federal grants = $47.7 million. ¢ Replacement diesel (reserve) required in 2005; includes new pawer plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. ¢ Zero incremental cost of Tyee output. Mahoney Lake: © $28.5 million (per 1998 Beck analysis) and $17.5 million (per KEC/HDR). © Capacity credit since connection is at Beaver Falls; no new diesel required. Smal! Hydro: © Assumes Whitman Lake (added in 2002) and Carlanna Lake (added in 2012). e No new diesel required. Real Discount Rate: 3.0 percent HAR-O3-99 WED 03:28 PH CH2H HILL PAX NO, 4254605957 _ P. 06/15 : Assumptions (High Load Forecast) Load Forecast e Based on ISER high load forecast for KPU (1998). e Adjusted to include KPC sawmill and veneer plant loads plus marine layups (4 per year); adjustment adds 5.4 MW and 47,360 MWh/year. Resource Altematives All Diesel: : e Assumes fuel cost of $.63/gal in 1998, $.58/gal in 1999, then increasing to $.66/gal‘in 2018. e¢ Replacement diesel (reserve) units.required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998). Intertie (full cost, including sunk costs): e $73.2 million capital cost. ¢ Zero incremental cost of Tyee output. e Replacement diese] (reserve) units required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. Intertie (incremental cost): © $73.2 million capital cost less $8.) million expended = $65.1 million: ¢ Zero incremental cost of Tyee output. e Replacement diesel (reserve) units required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. Intertie (incremental state cost): © $65.1 million capital cost less $17.4 million federal grants = $47.7 million. © Zero incremental cost of Tyce output: e Replacement diesel (reserve) units required in 2002, 2006, and 2015; includes new power plant and power house ($9 million in $1998) to meet reserve requirements for the Swan Lake intertie. Mahoney Lake: © $28.5 million (per 1998 Beck analysis) and $17.5 million (per KEC/HDR). © Capacity credit since connection is at Beaver Falls. ¢ Replacement diesel (reserve) units required in 2007 and 2015; includes new power plant ($9 million in $1998). Small Hydro: e Assumes Whitman Lake (added in 2002) and Carlanna Lake (added in 2005). ¢ Replacement diesel (reserve) unit required in 2011; includes new power plant ($9 million in $1998). Rea] Discount Rate: 3.0 percent HOR 03.99 WED 03:20 PM NGM ITLL FIX NO, 4cS4bC5S57 Pons Assumptions (Low Load Forecast) Load Forecast ¢ Based on ISER low Joad forecast for KPU (1998); no adjustments. Resource Alternatives All Diesel: ¢ Assumes fuel cost of $.63/gal in 1998, $.58/gal in 1999, then increasing to $.66/gal in 2018. vy ¢ No replacement diesel (reserve) units required. Intertie (full cost, including sunk costs): © $73.2 million capital cost. © Zero incremental cost of Tyee output. © Noreplacement diesel (reserve) units required. Intertie (incremental cost): ¢ $73.2 million capital cost less $8.1 million expended = $65.1 million. e Zero incremental cost of Tyee output. © Noreplacement diesel (reserve) units required. Intertie (incremental state cost): © $65.1 million capital cost less $17.4 million federal grants = $47.7 million. ¢ Zero incremental cost of Tyee output. e Noreplacement diesel (reserve) units required. Mahoney Lake: © $28.5 million (per 1998 Beck analysis) and $17.5 million (per KEC/HDR). e Capacity credit since connection is at Beaver Falls. © No replacement diesel (reserve) units required. Small Hydro: ¢ Assumes Whitman Lake (added in 2002). e Noreplacement diesel (reserve) units required. ‘ Real Discount Rate: 3.0 percent M MO AO A MU A ey 500,000. + - - soe — Figure 1 | 450,000 KPU Load Forecasts t -] 1 400,000 | 350,000 - oc fend fsclou 300,000 | Titi = 250,000 + | = 200,000 | i | 150,000 | 100,000 | 1 1 i | 50,000. + | tt HH tt tH st on ee i oh 6 S & Y o RS Dd 6) 0 0d 0 0 AN ad | PIPPI FPF PHP GP PH FP PP gi gs? gs s —Medium 1990 = = ——Medium 1998. —~—~—~—«Medium (revised) 1998! ‘——High 1990 —High 1998 High (revised) 1998 | prev Low. 1990... 2S Lowy 1998 ... Low (revised) | 1998 — | CH | Energy graphs.xls Wd GJICO CIM GC CO UW TIT WUIIO 0500rS0b “ON NVI 1 L MAR-03-99 WED 03:30 PM CH2M HILL FAX NO, 425464957 P, 09/15 Rate Impact Analysis of Power Supply Resource Options At Ketchikan, Alaska Preliminary Findings 1 The Swan Lake Intertie would'inorcase Ketehikan Public Utility (KPU) rates relaylve to other new power supply options including diesel generation, Mahoney Lake, and Small Hydro (Whitman Lake and Carlanna Lake). } 2. Imall cases considered, the Intertie would result in an increase in rates relative to continuing with diesel generation. In most cases, Mahoney Lake and Smal] Hydro would decrease rates relative to. diese! generation. 3. The lowest rate impacts would likely come from the Small Hydro option. Under almost all cases considered by this review, it would result in the lowest cost to KPU ratepayers. 4. These findings are based on two different perspectives on rate impacts to the utility: e Perspective A: For power from over the Interie, KPU would pay 6.8 cents per kWh plus the cost of O&M (including renewals and replacements) for the Intertie.. Mahoney Lake power to meet requirements beyond those met by Swan Lake would be available to KPU for 6.5 cents per kWh. Small hydro would be built with tax-exempt financing. © Perspective B: It is assumed KPU would not receive any subsidies and would build facilities itself. The Intertie would be built without tax-exempt financing (two-county tule) and KPU would be responsible for paying all debt service and operating costs for the project. KPU could build Mahoney Lake with tax-exempt financing since the project will be within one county at a cost of $17.5 million. Similarly, KPU could build Small Hydro with 5.5 percent financing. 5. Rate projections for Perspectives A and B are shown in Tables 3 and 4, respectively. Each of these tables has three components. Tables 3.1 and 4.] are based on the medium load forecast; Tables.3.2 and 4.2 are based on the high load forecast; and Tables 3.3 and 4,3 are based on the low load forecast. MAR-03-99 WED 03:30 PM = CH2MHILL Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Levelized Notes: wVbwn FAX WO, 4254625957 Table 3.1 Rate Impact Analysis: Perspective A Medium Load Forecast Average Retail Rate Under Do-Nothing LEE A Alternative Estimated Rate Impacts (cents/kWh) * (cents/kWh) ' Intertie ° Mahoney“ — Small Hydro” 9.2 - : - 92 - 9.3 - - - 9.4 0.3 0.2 - 9.4 0.3 0.2 (0.3) 9.5 0.3 0.2 (0.3) 9.5 0.4 0.2 (0.3) 10.5. 0.4 (0.7) (1.2) 10.6 0.4 (0.7) (1.2) 10.6. 0.4 (0.7) (1.2) 10.7 0.4 (0.7) (1.2) 10.7 0.5 (0.7) (1.1) 10.8 0.5 (0.7) (LD) 10.8 0.5 (0.7) (1.1) 10.9 0.6 (0.7) (il) 10.9 0.6 (0.7) (1.1) 11.0 0.7 (0.7) (1.1) Ll 0.7 (0.7) (1.1) WA 0.8 (0.7). (1.0) 11.2 0.8 (0.7) (1.0) 11.2 0.9 (0.7) * (1.0) 10.3 0.5 (0.3) (0.7) Represents All-Diesel case; capital financed at 5.5% over 20 years. Assumes non-power supply costs are constant. Relative to All-Diese] case. yndh, Rar At Four Dam Pool rate plus O&M 36a renewals and replacements. KEC proposal (6.5 cents/kWh), subordinate to Swan Lake. Assumes capital cost financed at 5.5% over 30 years. P, 10/15 iY) MAR 09 90 WCD 09191 PN ONOM WILL PAN HO. 42040P5957 _ PONG $$$ re ad Table 3.2 Rate Impact Analysis: Perspective A High Load Forecast Average Retail Rate Under Do-Nothing Alternative Estimated Rate Impacts (cents/kW' h) 2 Year (cents/kWh) " Intertic * Mahoney “_ Small Hydro x 1998 9.2 - - : - 1999 9.2 - : - - 2000 , Che ; : 2001 9.4 0.3 0.2 - 2002 10.2 0.3 (0.5) (1.0) 2003 10.2 0.3 ~ 5) (0.9) 2004 10.2 0.3 (0.5) (0.9) 2005 10.2 0.3 ; (0.5) (0.9) 2006 10.6 0.3 0.9) (1.2) 2007 10.6 0.3 (0.8) (0.5) 2008 10.6 0.3 (0.8) (0.5) 2009 10.7 0.3 (0.8) (0.5) 2010 10.7 0.3 (0.8) (0.5) 2011 10.7 0.3 (0.2) (0.5) 2012 10.8 03 (0.2) (0.5) 2013: 10.8 0.3 *(0.2) (0.5) 2014 10.8 0.4 (0.2) (0.5) 2015 nist 0.3 (0.5) (0.4) 2016: 11.2 0.3 (0.4) (0.4) 2017 11.2 0.3 (0.4) (0.4) 2018 11.2 0,3 (0.4) (0.4) Levelized 10.4 ¢ Gay (0.3) (0.5) Notes: ‘ l ‘Represents All-Dicsel case; capital financed at 5.5% over 20 years. Assumes non-power supply costs are constant. Relative to All-Diesel case. At Four Dam Poo! rate plus O&M and renewals and replacements. KEC proposal (6.5 cents/kWh), subordinate to Swan Lake. Assumes capital cost financed at 5.5% over 30 years. Verb wWH $$$ $$$ rr MAR-O3-SS WED 63:31 PH CH2H HILL FAX NO. 425d6""**7 P, 12/15 Table 3.3 Rate Impact Analysis: Perspective A Low Load Forecast Average Retail Rate Under Do-Nothing ; Alternative Estimated Rate Impacts (cents/kW h)* Year (cents/kWh) ' Intertie* __ Mahoney” Smalf Hydro” 1998 9.2 : - i “ 1999 972; - |) FF ‘- 2000 9.3 : - i - 2001 9.3 0.1 0.0 th 2002 9.4 0.2 0.0 0.3 2003 9.5 0.2 0.0 5 | 03 2004 9.5 ; 0.2 0.0 0.3 2005 9.6 0.2 0.1 0.2 2006 9.7 0.2 0.) 0.2 2007 9.8 0.2 0.1 0.1 2008 9.9 0.3 0.) 0.1 2009 99 0.3 0.1 0.0 2010 10.0 0.3 0.1 0.0 2011 10.1 0.3 0.1 / Y ¢0.0) 2012 10.2 04 0.1 (0.1) ° 2013 10.5 0.4 OF || « (0.1) 2014 10.6 0.5 0.1 — (0.1) 2015 10.7 0.5 0.1 (0.2) 2016 10.8 0.5 0.1 (0.2) 2017 10.9 0.6 0.1 (0.2) 2018 11.0 0.6 0.1 (0.3). Levelized 9.9 0.3 0.1 (0.1) Notes: 1 Represents All-Diese} case; capital financed at 5.5% over 20 years. Assumes non-power supply costs are constant. Relative to All-Diesel case. At Four Dam Pool.rate plus O&M and renewals and replacements. KEC proposal (6.5 cents/kWh), subordinate to Swan Lake. i Assumes capital cost financed at 5.5% over 30 years: MUeWnN a MAR-03-99 WED 03:31 PM CH2M HILL FAX NO, 4254624957 _P. 13/15 Table 4.1 Rate Impact Analysis: Perspective B Medium Load Forecast Average Retail Rate Under Do-Nothing Estimated Alternative Estimated Rate Impacts (cents/kWh) “ Year (cents/kWh) ' Intertie? _ Mahoney” © Small Hydro” 1998 9.2 - : - - 1999 9.2 - - : - 2000 9.3 - - - 2001 94 2.6 0.3 - 2002 9.4 25 . 02 (0.3) 2003 9.5 2.4 0.1 (0.3) 2004 9.5 23 0.1 (0.3) 2005: 10.5 2.2 (0.9) (1.2) 2006 10.6 = (0.9) (1.2) 2007 10.6 2.1 : (1.9) G2) 2008 10.7 2.0 (1.0) (1.2) 2009 10.7 19 (1.1) (1.1) 2010 10.8 1.8 (1-1) (1.1) 2011 10.8 1.7 (1.2) (1.1) 2012 10.9 1.7 (1.2) (1.1) 2013 10.9 1.6 (1.1) (1.1) 2014 11.0 1.6 (1.1) (1.1) 2015 Ht 14 (ii) (1.1) 2016 Wal 1.3 Ga) (1.0) 2017 11.2 1.2 (il) (1.0) 2018 11.2 1.2 (1.1) (1.0) Levelized 10.3 1.6 (0.6) (0.7) Notes: ; 1 Represents All-Diesel case; assumes non-power supply costs are constant. Relative to All-Diesel case. : Assumes $65.1 million capital cost financed at 7.0% over 34) years. Assumes $17.5 million capital cost financed at.5:5% over 30 years. Assumes capital cost financed at 5.5% over 30 years AP wv MAR 09 99 WCD 09192 PM = ONOM TILL TAN NO, 4004096957 die P1415 Table 4.2 Rate Impact Analysis: Perspective B High Load Forecast Average Retail Rate Under Do-Nothing ; i Alternative | Estimated Rate Impacts (cents/kWh) “ Year (cents/kWh) ' Intertic * Mahoney * ‘Small Hydro” 1998 9.2 - - - 1999 9.2 - : : 7 2000 9.3 - - : - 2001 94 1.0 (0.2) - 2002 10.2 0.8 (1.0) (1.0) 2003 10.2 0.6 (1.0) (0:9) 2004 10.2 0.5 (0.9) (0.9) 2005 10.2 04 (0.9) (0.9) 2006 10.6 0.3 (1.3) (1.2) 2007 10.6. 0.3 (1.2) (0.5) 2008 10.6 0.3 (1.2) : (0.5) 2009 10.7 04 (1.2) : (0.5) 2010 10.7 04 (1.2) (0.5) 2011 10.7 0.4 (0.5) (0.5) 2012 10.8 0.4 (0.5) (0.5) 2013 10.8 0.4 (0.5) (0.5) 2014 1038 0.4 (0.5) (0.5) 2015 Vl 0.4 (0.8) (0.4) 2016 12,2 04 (0.8) (OA) . 2017 1p li? 0.4 (0.8) (0.4) 2018 i 0.4 (0.7) (0.4) Levelized 10.4 0.4 (0.7) (0.5) Notes: 1 Represents All-Diesel case; assumes non-power supply costs are constant. Relative to All-Diesel case. Assumes $65.1 million capital cost financed at 7.0% over 30 years. Assumes $17.5 million capital cost financed at 5.5% over 30 years.’ Assumes capital cost financed at 5.5% over 30 years UP wh Mak US VU WEY USi de ITI Vilcr HILL ria Nu vv Table 4.3 4c34te "ft Rate Impact Analysis: Perspective B Low Load Forecast Average Retail Rate Under Do-Nothing Alternative Epes Rate oe (cents/kWh) 4 Year (cents/kWh) ' Intertie* Mahoney * Small Hydro> 1998 9.2 - : . : 1999 9.2 - - - 2000 9.3 - - = 2001 9:3 3.9 12 : 2002 9.4 3.9 1.2 0.3 2003 9.5 3.9 1.2 0.3 2004 9.5 3.8 1) 0.3 2005 9.6 3.7 LI 0.2 2006 9.7 3.6 1.0 0.2 2007 9.8 3.6 1.0 0.1 2008 99 3.5 09 0.1 2009 9.9 3.5 0.9 0.0 2010 » 10.0 3.4 0.9 0.0 2011 10.1 3.4 0.8 - (0.0) 2012 10.2 3.3 0.8 (0.1) © 2013 10.5 3.3 0.7 (0:1) 2014 10.6 3.3 0.7 (0.1) 2015 10.7 3.2 0.7 (0:2) 2016 10.8 Ri 0.6 (0,2) 2017 10.9 3.1 0.6 (0.2) 2018 11:0 3.0 0.6 (0.3) Levelized 9.9 2.9 0.7 0.0 Notes: 1 Represents All-Diesel case; assumes non-power supply costs are constant. Relative to All-Diesel case. Usa WN Assumes $65.1 million capital cost financed at 7.0% over 30 years. Assumes $17.5 million capital cost financed at 5.5% over 30 years. Assumes capital cost financed at 5.5% over 30 years 1x Mar-O1-99 11:08A p , - ce FVM KAU ALASKA POWER & TELEPHONE COMPANY P.O. BOX 222 © 191 OTTO STREET PORT TOWNSEND, WA 96358 March 1, 1999 800 38817 9 wht ¥o 4° Randy Simmons, Executive Director 2 Alaska Industrial Development and Export Authority yond — 480 West Tudor Road Anchorage, Alaska 99503 Dear Mr. Simmons: One of the problems you are facing with the proposed Swan/Tyee Intertie is the overall cost of the project. We have been investigating other construction methods and technologies now available that offers a cost advantage over the proposed method. In the early 1980's high voltage direct current (ITVDC) transmission facilities were studied as a means of interconnecting southeast Alaska. HVDC has many advantages when compared to traditional alternating current transmission. However at the time the prior studies where conducted HVDC was only used for very high capacity transmission facilities. The primary reason driving this was the very high cost of the AC/DC converter stations required at each end of the facilities. Recently, ABB Power Systems has developed a new design that is based upon voltage sourced converters. This has significantly lowered the cost and thus, allows the economic use of HVDC for the transmission of smaller loads (20 to 30 mW). This technology also uses cable, either buried or submarine, or low impact overhead, rather than high tension transmission that requires tall towers. These require large right-of-ways reducing both the land resources consumed and the visual impacts of the faculties upon the remaining land. We have been working with ABB and have studied several different routes that would connect the Swan Lake and Tyce Lake Projects. The four alternatives studied range in prices from $40 to 50 million. This represents substantial saving over the current 138 kV high-tension design of $77 million. If these savings are extended to ail of the electrical interconnections currently under consideration the savings are enormous. In addition, fiber optic technology oan be easily and economically incorporated into the design that will allow the construction of not only an electrical grid throughout southeast but also a broad band network capable of providing high capacity voice and data services. [have enclosed a proposed route map and background information developed by ABB that describes this technology. In addition, we prepared a cost estimate that provides a fixed-price turnkey amount for each of the routes. We based our estimate primarily on a submarine with short overhead sections that cross the Cleveland Peninsula at three different locations. We understand that the Cleveland Peninsula is a sensitive area and further investigation will be needed to determine the best crossing point. Also the current EIS issued by the Forest Service for the Swan/Tyee Intertie will need to updated or supplemented. Because the impact upon the National Forest of the HVDC alternative is only a small fraction of that documented for the 138 kV high-tension design we do not cc Da Cw \ Dare Ger Mar-O1-99 11:09A p view this as a significant problem, if agreement can be reached among the interested parties. One of the concerns we have had in regards to the HVDC concept is the lack of operating history and experience; some still view this technology as experimental. We have done significant research and are convinced that this concern can be overcome. ABB is one of the largest companies in the world and is willing to provide satisfactory warranties. In addition, IEEE is now (Feb. 1999) balloting on a standard that will be included in the specifications of all HVDC converter stations. This standard documents the best practices that have been used worldwide for the last 29 years in the purchase, operation and muaintenance of high voltage direct current installations. We believe this is an exciting development that may help us all to interconnect southeast Alaska. We believe HVDC is superior to the existing design electrically, has a smaller impact upon the resources of the area, and does so at a substantially lower cost. We remain willing to work with KPU, the [ntertie Committee of the Southeast Conference, Alaska Municipal League, and others to move the interconnection of Southeast Alaska forward, Please let me know if you would like additional information. Cc Mayor Weinstein, City of Ketchikan Berne Miller, Southeast Conference Jerry Ingersol, USFS Enc. ABB Information Route Map +- 51 kV Cost estimate P.o3 Mar-O1-99 11:O9A p “Island - \acitimeage XISTINGH 15k¥. . -t rat “me et BR PROPOSED SUBMARINE i = OVERHEAD ROUTES SWAN/TYEE INTERTIE % +51kV HVDC/40MVA LEGEND: . "a we A: fe Es me —O— sare . Islands . a : Metres, From Mapuperey C: H+4-++ EXISTING ‘nder 2%, C: i Sad eat ll eld Mar-01-99 11:09A p Swan/Tyee Intertie Routes: A Ward Cove to Helm Bay Helm Bay to Meyers Chuck Meyers Chuck to Wrangell Island South B Leask Lake to Naha Bay Naha Bay to Yes Bay Yes Bay to Santa Anna Santa Anna to Wrangell Island South c Leask Lake to Naha Bay Naha Bay to Port Stewart Port Stewart to Vixen Iniet Vixen Inlet to Wrangell Island South D Leask Lake to Naha Bay Naha Bay to Helm Bay Helm Bay to Meyers Chuck Meyers Chuck to Wrangell Island South E lard Cove to Thome Bay jome Bay to Wrangell Island South F Swan/Tyee 138 Kv Overhead $47,000,000 $40,000,000 $40,000,000 $46,000,000 $60,000,000 $73,200,000 P.04 per Mile $681,159 $727,273 $714,286 $666,667 $750,000 $1,370,787 Projected \ Surplus Tyee Sales (MWh) Year Medium High Low 1998 - - - / 1999 - L / 2000 . - . / 2001 25,719 64,448 4,474 / 2002 27,953 69,251 4,745 2003 29,508 73,790 5,179 | 2004 31,092 78,125 6,119 “2005 32,599 82,443 7,062 2006 34,227 85,477 8,110 2007 35,778 84,407 9,361 2008 37,452 83,249 10,135 2009 39,049 82,130 10,815 2010 40,769 81,071 11,600 2011 42,413 80,111 12,391 2012 44,081 79,131 13,187 2013 45,974 78,101 13,888 2014 47,990 77,012 14,695 2015 50,032 75,884 15,508 2016 52,098 74,725 16,326 2017 54,190 73,547 17,050 2018 56,308 72,359 17,880 e e e e e e e e e e e e 2047 56,308 72,359 17,880 Intertie use.xls 2/25/99 re ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY /= ALASKA Mm =EENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 269-3000 FAX 907 / 269-3044 MEMORANDUM TO: David Gray, Director of Environmental Economics , CH2M Hill i St: FROM: Dennis. V.McCrohan, p-€ «/). |ber / Ie. / Deputy Director - Project Development ar Operations DATE: January 29, 1999 SUBJECT: Corresponding Data Economic Analysis of the Swan/Tyee Intertie Project Attached is a listing and the corresponding documents to the Swan/Tyee Intertie Project Economic Analysis for your review. More information will follow the early part of next week. Please let me know if | can be of further assistance. Attachments cc: Dick Emerman, DCRA -— Division of Energy File CO Dan 3 Dawe &- Southeast Intertie Documents 1998 Update Power Supply Planning Study Ketchikan, Alaska February 23, 1998 R.W. Beck Memorandum to Michelle Detwiler of Ater V\ ynne from Rich Trimble of KPU Subject: PMC Discussion of Swan-Tyee Intertie Financing Dated: December 21, 1998 Letter and Report on Audit of Energy Estima es from Stephen Hart of R.W. Beck to Rich Trimble of KPU Subject: Lake Tyee Energy Audit Dated: October 9, 1998 DRAFT Interruptible Power Sales Agreeme: Four Dam Pool of Alaska Energy Authority Dated: February 2, 1998 Letter to John Magyar of KPU from Randy £ mmons of AIDEA Subject: Southeast Intertie Developme: t Dated: November 24, 1998 Letter to John Magyar of KPU from Percy Frisby of DCRA Subject: Swan-Tyee Intertie Grant Fund Dated: December 1, 1998 Letter to Randy Simmons of AIDEA from John Magyar of KPU Subject: Financing and Construction — Swan Lake-Lake Tyee Intertie Dated: November 3, 1997 Memorandum to Bob Weinstein & City Council from John Magyar of KPU Subject: Swan-Tyee Intertie Construction Sequencing and Timber Handling Dated: February 10, 1998 Memorandum to Bob Weinstein & City Council from John Magyar of KPU Subject: Power Supply Options — Staff Opinions Dated: February 27, 1998 Memorandum to Bob Weinstein & City Council from John Magyar of KPU Subject: Ketchikan Electric Company (KEC) Information Dated: March 4, 1998 Page 1 of 3 Financing Plan Update for the Tyee-Swan Lake Intertie Dated: February 23, 1998 Prepared by: A. Dashen & Associates Memorandum to Robert Newell, John Magyar and Rich Trimble from Alan Dashen Subject: Ketchikan Public Utilities Debt for the Tyee-Swan Lake Intertie Dated: August 17, 1998 Memorandum to Dennis McCrohan of AIDEA from Rich Trimble of KPU Subject: Swan-Tyee Intertie — Expenditures to Date and Estimated Project Cost Dated: September 18, 1998 Executive Summary Dated: October 2, 1998 Memorandum to Bob Weinstein & City Council from John Magyar of KPU Subject: SE Alaska Intertie (Swan-Tyee) Funding Request Dated: September 25, 1998 Letter to Dennis Egan, Mayor of the city and Borough of Juneau and Chairman of the Southeast Alaska Conference of Mayors from Tony Knowles, Governor Subject: Southeast Intertie Grid Concepi Dated: October 7, 1998 Letter to Randy Simmons of AIDEA from Percy Frisby of DCRA Subject: Swan-Tyee Intertie Dated: February 11, 1998 Memorandum to Bob Weinstein & City Counci! from John Magyar of KPU Subject: Swan-Tyee Intertie Update Dated: November 12, 1997 Project Status Swan-Tyee Transmission Line Intertie Dated: December 4, 1997 Memorandum to Bob Weinstein & City Council from John Magyar of KPU Subject: Swan-Tyee Intertie Update Dated: December 29, 1997 Letter to Wendy Huggins of U.S. Department of Energy from John Magyar of KPU Subject: Swan Lake-Tyee Lake Transmission Line Intertie Grant Application Dated: February 6, 1998 Memorandum to Bob Weinstein & City Council from John Magyar of KPU Subject: Ketchikan Electric Company (KEC) Information Dated: March 4, 1998 Page 2 of 3 Legislative Material — State Government Paperwork Memorandum to Pete Ecklund of Rep. Williams Office from Rich Trimble of KPU Subject: Intertie Financing Dated: January 21, 1997 Letter to Alan Dashen of Seattle Northwest Securities from Rich Trimble of KPU Subject: Revised Revenue and Cost Projections for the Swan-Tyee Intertie Dated: February 6, 1996 ISER Report — Ketchikan Public Utilities Electric Load Growth Study By: Scott Goldsmith, Professor of Economics Prepared for: KPU Dated: June 5, 1998 Initial Draft - Power Supply Planning Study Ketchikan, Alaska December 1996 R.W. Beck Page 3 of 3 + @2-05-1999 11:24 9 25 5075 CITY OF KETCH P.@1 ar = 334 Front Street City of Ketchikan, Alaska 99901 Ketchikan Telephone: (907) 225-3111 FAX : (907) 225-5075 a FACSIMILE TRANSMITTAL To 60 AIDEA ATTENTION Dennis Me Crohan @ FROM es lurks OFFice > DATE & TIME les FAX NUMBER 9O7- 2669 - 30O4L NO. OF PAGES 3 Cove Notes: Hard copy will follow: Yes No x CC | Dawe boo ~ Yax Di Je. CARA NG UE DRS i; 22-05-1999 11:25 g 225 5075 CITY OF KETCH | P.@2 KETCHIKAN ELECTRIC COMPANY, LLC Owner and Developer of the Mahoney Lake Hydro Project February 4, 1999 . is lower Fi Four Dam Pool rate is currently 6.8 cents per kilowatt-hour (kWh). KEC's offer to KPU is at 6.5 cents per kWh fixed for the term of the contract (10 to 35 years), . Mahoney can be operational by the fall of next year. * Why import if it is cheaper to produce power here Jocally The Intertie should not be viewed strictly as a source of power for Ketchikan, Ketchikan should consider all local possibilities for hydropower first and view the Intertie as the infrastructure that allows the power to flow freely in either direction throughout Southeast. e WABDODC) eit S * oro rea Be CUS vi DOV ie 5 ma OUL Connecting Mahoney Lake via the Beaver Falls transmission line means i: reliability for the power into Ketchikan. If Swan Lake or the Intertie goes down there will still be significant power available via Mahoney Lake through the Beaver Fails line. * Mahoney Lake Hydro supports the Intertic The Intertie is a basic infrastructure for Southeast Alaska similar to building a highway project. It serves important economic development objective to connect different parts of Southeast Alaska. The electric needs of SE Alaska over the next 20 to 30 years will require efficient electric generation such as Mahoney Lake. e Mahoney Lake will create reliable electricity locally that will improve costs and reliability. The Intertie achieves area wide goals, which can best be paid by a combination of Federal and State resources. % ° Don't pit one against the other Ketchikan needs both the Intertie and Mahoney and can have both, ¢ Alldydro KPU will be able to meet its capacity. energy and stand-by reserve requirements for many years without using diesels. This will minimize retail rates in Ketchikan for many years to come. © Nonew public Investment KPU will have access to Mahoney Lake energy and capacity without making any further investment in new hydros. The investment will be made by Ketchikan Electric, without any public funding. Enhanced funds available for Intertie Mahoney Lake will free up all of KPU's cash and credit for use on the Intertie project by eliminating the need for investment in other generating projects. e anced economi ment Mahoney Lake will provide important electrical stability to the KPU system once the Intertie is on line. When this occurs, Ketchikan’s long-term access to low cost all hydro capacity and energy resources will put the city in a pre-eminent position to attract economic development. ¢ Immediate local economic development Mahoney Lake will be a local project within the Ketchikan Gateway Borough. It will provide local construction and operating jobs, and will be owned by a local corporation. P.@3 CITY OF KETCH 225 5075 9 22-05-1999 11:25 KETCHIKAN ELECTRIC COMPANY MAHONEY LAKE HYDROELECTRIC PROJECT February 4, 1999 ESTWMATED RATE COMPARISON MAHONEY LAKE ¥S FOUR DAM POOL Source of Four Dam Pool rate is from Table 6 of report prepared for KPU by RW Beck, November 9, 1996. Page 2 Dennis McCrohan From: Dennis McCrohan Sent: Friday, February 05, 1999 11:33 AM To: Keith Laufer; Randy Simmons Subject: SE Intertie At the Ketchikan Council meeting on February 4, the following was discussed as per Rich Trimble's interpretation: 1. Cape Fox proposed that Mahoney Lake must have priority over Swan Lake. 2. Magayar said Intertie had priority because of PSA 3. Grimm said Intertie is state infrastructure and should be funded by the State. Mahoney Lake is a private venture and should be funded by the rate payers. 4. Council took no action. Weinstein, Mayor of Ketchikan, is aware that AIDEA is looking at the options for the State. Dennis Dennis McCrohan From: Dennis McCrohan Sent: Friday, February 05, 1999 7:46 AM To: Keith Laufer; Randy Simmons Subject: SE Intertie John Magayar called and said that KEC was offering their version of a PSA for Mahoney Lake to the Ketchikan Council. John said it included the clause that Swan Lake energy would be subordinate to Mahoney Lake. John discussed the impacts to the 4 Dam Pool and also the SE Intertie. He just wanted to test his arguements which were: 1. 4 Dam Pool takes precedence over any KEC/KPU PSA. 2. Impact of Mahoney Lake would be an increase in 4 Dam Pool rates and a decrease in State receipts from the debt service. 3. Mahoney Lake would diminish the Intertie energy flow and thereby impact the financial funding of the SE Intertie. He said he would send us copies of any material which KEC makes available. Dennis ce. Dave Coa BAL Eom Dennis McCrohan From: Gray, Dave/SEA [DGray@CH2M.com] Sent: Wednesday, January 27, 1999 11:37 AM To: ‘McCrohan, Dennis/AIDEA’; Dick Emerman Subject: Swan/Tyee Data Needs Dennis and Dick--Here is a list of data we will need to do the Swan-Tyee Intertie economic analysis. Would you look it over and send us what you can. We will get the remainder. Would you mind sending an e-mail to KPU, Wrangell and Petersburg telling them that we are doing the project and will likely be contacting them? Please copy me so | will know who to contact at each utility. John Heberling also mentioned that Metlakatla has some excess capacity that they have proposed to deliver to KPU via a submarine cable. It apparently was receiving attention at one point but has quieted down. As you know, review of that resource is not specifically included in our assignment. | will undoubtedly learn more about it as we proceed. Do you have a read on this alternative?--Dave Swan-Tyee data needs.doc - Dick . January 27, 1999 » \naod Gry Cévs REQ \ame, WOR? * We ane aap! Wim Mr. Dennis McCrohan To mah , Alaska Industrial Development and Export Authority 480 West Tudor , c Anchorage, Alaska 99503 Jom n\ Dear Dennis: Subject: Swan-Tyee Intertie We are pleased to submit this proposal to assist the State of Alaska by providing economic analysis of the Swan-Tyee Intertie. As you, Dick Emerman, and I discussed this work would include the following components: Task 1 e Evaluate the current requirements level as a basis for the projected growth of requirements for the long term. Adjust the existing load forecasts as necessary. Task 2 ¢ Subcontract with R.W. Beck to use the model they recently developed for analysis of power supply options for Ketchikan Public Utilities e Direct revisions to this model to facilitate economic analysis of options from the State of Alaska perspective. This will include analysis of variations in perspective including the a.) total cost of the Intertie including costs already sunk into the project, b.) total costs of the Intertie excluding costs that have already been sunk into the project, and c.) total costs of the Intertie less costs that have already been sunk into the project and less costs that will be funded by the Federal government. Task 3 e Prepare an economic analysis of the Intertie and alternatives to the Intertie. This will be similar to the Copper Valley Intertie economic analysis we prepared for AIDEA approximately 3 years ago. Alternatives will include Mahoney Lake, small hydro (augmented by diesel as necessary to meet requirements), and all diesel. ¢ Cost estimates for the Intertie and alternative resources will be those included in the 1998 Update to the KPU Power Supply Planning Study except as noted below. ¢ Review projected Intertie renewal and replacement costs for long-term adequacy and adjust this forecast for the economic analysis if warrented. Mr. Dennis McCrohan January 27, 1999 Page 2 e Obtain a Beck review of the Mahoney Lake cost estimates. The construction cost review will include consideration of recent AP&T/Cape Fox construction cost estimates. If significant differences are found from cost estimates included in the base assumptions, both the base and the alternative cost estimates for Mahoney Lake will be evaluated and compared with the Intertie in the economic study. Task 4 e Develop and test sensitivity cases to evaluate a range of plausible alternative assumptions Task 5 e Prepare a draft report for submittal to AIDEA by February 15. Receive comments and prepare a final draft within one week of receipt of the review comments. As we discussed, we estimate the cost of this effort to be approximately $20,000. This includes funding for Beck subcontract work but excludes any travel to Alaska. Of the $20,000 total, 18,000 will be for labor (including subcontractor labor) and $2,000 will be for expenses. As always, please do not hesitate to call if we can answer questions or provide you with additional information. I look forward to working with you again. Sincerely, David A. Gray Copy: Dick Emerman CH2M HILL ‘ 777 108th Avenue NE Bellevue, WA ip CH2MIHILL , Bi | 98004-5118 : how AM A | Mailing address: > P.O. Box 91500 : YH Bellevue, WA z 98009-2050 ee i Tel 206.453.5000 January 25, 1999 ; a Fax 206.462.5957 Mr. Dennis McCrohan Alaska Industrial Development and.Export Authority 480 West Tudor Anchorage, Alaska 99503 Dear Dennis: Subject: Swan-Tyee Intertie We are pleased to submit this proposal to assist the State of Alaska by providing economic analysis of the Swan-Tyee Intertie. As you, Dick Emerman, and I discussed this work would include the following components: Task 1 e Evaluate the current requirements level as a basis for the projected growth of requirements for the long term. Adjust the existing load forecasts as necessary. Task 2 e Subcontract with R.W. Beck to use the model they recently developed for analysis of power supply options for Ketchikan Public Utilities e Direct revisions to this model to facilitate economic analysis of options from the State of Alaska perspective. This will include analysis of variations in perspective including the a.) total cost of the Intertie including costs already sunk into the project, b.) total costs of the Intertie excluding costs that have already been sunk into the project, and c.) total costs of the Intertie less costs that have already been sunk into the project and less costs that will be funded by the Federal government. Task 3 e Prepare an economic analysis of the Intertie and alternatives to the Intertie. This will be similar to the Copper Valley Intertie economic analysis we prepared for AIDEA approximately 3 years ago. Alternatives will include Mahoney Lake, small hydro (augmented by diesel as necessary to meet requirements), and all diesel. ¢ Obtain a Beck review of the Mahoney Lake construction cost estimates and O&M costs. The construction cost review will include consideration of recent AP&T/Cape Fox construction cost estimates. If significant differences are found from cost estimates included in the base assumptions, both the base and the alternative cost estimates for CC; Cu® Mr. Dennis McCrohan ve January 25, 1999 ————— Page 2 ———— : ahonéy Lake will be evaluated and compared with the Intertie in the economic\study. The O&M cost analysis will have particular focus on the adequacy of the R&R f e Developa Sitivity cases to evaluate a range of plausible alternative assumptions Task 5 e Prepare a draft report for submittal to AIDEA by February 15. Receive comments and prepare a final draft within one week of receipt of the review comments. As we discussed, we estimate the cost of this effort to be approximately $20,000. This includes funding for Beck subcontract work but excludes any travel to Alaska. Of the $20,000 total, 18,000 will be for labor (including subcontractor labor) and $2,000 will be for expenses. As always, please do not hesitate to call if we can answer questions or provide you with additional information. I look forward to working with you again. David A. Gray Copy: Dick Emerman “907 269 4645 CRA/DIV OF ENERGY O1/08/99 10:32 P.002/008 January 8, 1999 To: Dave Gray CH2M Hill Dennis McCrohan AIDEA Keith Laufer AIDEA From: Dick Emerman [wer Division of Energy Attached is my first cut to define a scope of work for the Swan-Tyee intertie economic and financial review. Please note: 1. Keith — | think the “Financial Review — Scope of Work" beginning on page 4 probably overlaps with the work you had in mind for AIDEA's financial advisor. Please take a look. Maybe we need only one financial review, not two separate ones as we discussed the other day, and maybe the financial advisor should take the lead with CH2M Hill providing any needed support. 2. Dave — My understanding is that Dennis will be back in the office on Monday or Tuesday and that we'll call you at that time to discuss further. | haven't gone over this with anyone yet and there could be significant changes, but this should be enough for a start. cc: Percy Frisby Division of Energy B907 269 1645 CRA/DIV OF ENERGY 01/08/99 10:32 P.003/008 Swan-Tyee Intertie Evaluation January 8, 1999 A. Background and Purpose of Study Construction of a transmission line linking the Swan Lake and Tyee Lake hydro projects in southeast Alaska has been the subject of several studies since the mid-1980s. Most recently, the feasibility of the proposed Swan- Tyee Intertie was evaluated in the following two documents: . Power Supply Planning Study (Initial Draft), prepared by R.W. Beck for Ketchikan Public Utilities, December 1996. . Power Supply Planning Study (1998 Update), prepared by R.W. Beck for Ketchikan Public Utilities, February 23, 1998. According to the 1998 Update, the estimated capital cost of the Intertie is $73.2 million in 1998 dollars. State and federal grant funds totalling approximately $25 million have either been approved or are currently available for the project. Ketchikan Public Utilities (“KPU”) has asked the Alaska Industrial Development and Export Authority (the “Authority”) to consider issuing $40 million in State bonds to finance most of the Temaining project costs. To consider this financing proposal, the Authority needs to obtain an independent review of the economic and financial feasibility of the project: ie The economic review is needed to compare the underlying life- cycle costs of the Intertie scenario and its primary altematives. Its purpose is to focus on basic economic logic; specifically, to determine which scenario meets the estimated long-term power requirement in the Ketchikan area with the lowest present value of resource costs across a broad range of plausible assumptions. 2 The financial review is needed to determine: a. the minimum revenue and security commitments needed for the Authority to issue $40 million in investment grade bonds for the project; b. the minimum and maximum rates that could be charged to KPU for power delivered over the Intertie in view of these commitments, in the context of the Four Dam Pool power sales agreement and KPU avoided costs; and c the possible allocation of financial benefits to KPU ratepayers, the State, and the other Four Dam Pool participants. "Bg07 269 4645 TRA/DIV OF EWERG! 01/08/99 10:33 P.004/008 Swan-Tyee Intertie Evaluation January 8, 1999 Page 2 B. Economic Review — Scope of Work The intent of this assignment is to review and, as necessary, to build upon the work that has already been completed for KPU. This implies the following: te The contractor is expected to subcontract with R.W. Beck for the use and operation of Beck's Swan-Tyee economic model. The idea is to use the same approach that was successful in the Sutton- Glennallen intertie review: to evaluate the model and, if necessary, provide Beck with model revisions needed for the present analysis; and to direct Beck to run the model with sets of assumptions provided by the contractor. The contractor will use the estimated capital and O&M costs for the Intertie and for other resource alternatives as they appear in the 1998 Update prepared by Beck unless more recent estimates are available and are judged by the contractor to be suitable for planning purposes. The Mahoney Lake hydro project is one case where the contractor must consider the magnitude and reliability of more recent cost estimates. Intertie O&M costs must also be determined to include whatever annual contributions are necessary to fund an adequate renewal and replacement fund. Load forecast scenarios will be based on the following two reports: a. Electric Load Forecast for Ketchikan, Metlakatla, Petersburg and Wrangell, Alaska: 1990-2010, prepared by ISER for the Alaska Energy Authority, June 25, 1990. b. Ketchikan Public Utilities Electric Load Growth Study, prepared by ISER for KPU, June 5, 1998. KPU indicates that the latter study underestimated 1998 generation by a considerable amount, which suggests that future years may be similarly underestimated. The contractor will need to determine the reason for such variance in the initial year of the most recent forecast and determine whether further adjustments are warranted in future years. Task 1 Review load forecasts cited above and consult with ISER and KPU. Establish high, medium, and low forecasts of energy and peak demand over the first 20 years of the economic analysis period. “BOOT 269 4645 CRA/DIV OF ENERGY O1/08/99 10:33 P.005/008 Swan-Tyee Intertie Evaluation January 8, 1999 Page 3 Task 2 Review Power Supply Planning Study, including the 1996 Initial Draft and the 1998 Update cited above. Review the R.W. Beck economic model and the economic analysis methodology used in the two studies. In both studies, the annual cost of power delivered over the Intertie was assumed to be equal to the actual export volume of energy times the Four Dam Pool wholesale power rate. Both the capital and O&M costs of the Intertie were assumed to be zero. These assumptions must be reversed for purposes of this economic review. There is zero resource cost attached to the production of surplus power from the Tyee Lake hydro project. However, the full capital and O&M costs of the Intertie must be accounted for in estimating the life-cycle cost of the Intertie scenario. Provide Beck with any model revisions determined to be necessary, including those described immediately above. Unless the contractor determines them to be inappropriate, elements of the economic analysis that can be carried forward without change include (but are not necessarily limited to): a. Zero inflation. b. A 20-year projection period, during which loads, real prices, resource additions, and other costs are allowed to vary. Cc; A 50-year analysis period, with all costs, loads, and other assumptions held constant for the final 30 years. d. Definition of reserve requirement. e. High, medium, and low fuel prices. f. 3.0% real discount rate. g. Expected loads for Wrangell and Petersburg. h. Diesel generation efficiency and estimated line losses. In consultation with KPU, R.W. Beck, and the Authority, determine whether there are any significant uncertainties or weak points in previous analyses that need further attention. For example, the contractor should determine whether there are any issues related to water availability at O90" 269 4645 CRA/DIV OF ENERGY O1/08/99 10:33 P. 006/008 Swan-Tyee Intertie Evaluation January 8, 1999 Page 4 Tyee Lake that could further constrain the volume of surplus power available for export over the Intertie. Task 3 Define a limited set of primary alternatives to the Intertie consisting of those which previous studies have found to be most competitive. Define and characterize the reliability of capital and O&M cost estimates for each alternative. Include as one additional alternative the construction of both the Intertie and the Mahoney Lake hydro project. Although the Intertie capital cost presented in the 1998 Update will be used in the present analysis, the Authority also requires that the contractor conduct an assessment of the Intertie cost overrun risk in terms of probability and amount. Task 4 Define the set of base case assumptions and a sufficient range of sensitivity cases to evaluate a broad range of plausible assumptions. Provide these cases for R.W. Beck to input to the economic model. Deliverables Twenty copies (and one camera-ready copy) of a draft report must be provided to the Authority no later than March 15, 1999. The draft report will fully describe the analysis undertaken by the contractor and its results. An executive summary must be included. Following receipt of comments on the draft from the Authority, the contractor will make any necessary changes to the analysis and produce a final report. Fifty copies (and one camera-ready copy) of the final report, including an executive summary, must be provided to the Authority within two weeks of the receipt of comments, unless additional time is approved by the Authority to account for any substantial additional work that needs to be completed. ion Financial Review — Scope of Work Task 1 The Authority has determined that interest on bonds for the Intertie would be taxable. In consultation with the Authority and with KPU, estimate the likely range of interest rates and annual debt service on investment grade, taxable bonds that would provide $40 million in proceeds for Intertie development. “Q907 269 4645 CRA/DIV OF ENERGY O1/08/99 10:34 P.007/008 Swan-Tyee Intertie Evaluation January 8, 1999 Page 5 Task 2 Background: Construction of the Four Dam Pool was financed in part by a loan from the State. The Four Dam Pool power sales agreement provides that the participating utilities will pay annual debt service to the State in repayment of that loan over the term of the agreement, which expires in 2030. Presently, the amount of annual debt service is defined as 4.0 cents per kWh times the number of kWhs delivered from the projects to the utilities each year — approximately $11 million at this time. Legislation enacted in 1993 allocates 40% of this annual debt service to a “Southeast Energy Fund,” which is intended to help finance the Swan-Tyee Intertie. This 40% share is not a dedicated source of revenue, however, and can be appropriated by the legislature for any purpose at any time. The Four Dam Pool power sales agreement provides that the participating utilities can withhold debt service that would otherwise be due the State if the funds are needed to repair certain project deficiencies. This is referred to as the agreement's “self-help” provision. This adds significant uncertainty to the flow of funds into the Southeast Energy Fund in any future year. For example, self-help withholding is expected to reduce Four Dam Pool debt service by $1.6 million next year. KPU has proposed that the annual flow of funds into the Southeast Energy Fund be used to pay the debt service on the $40 million AIDEA bond issue for the Intertie. Additional security will be needed for the bond issue to earn an investment grade rating. Assignment: In consultation with the Authority and KPU, describe and evaluate all viable options to provide the necessary debt service revenue and repayment security. Assume that no other debt will be required to finance Intertie construction — i.e. that additional grant funding will be obtained for remaining capital costs. Task 3 Based on analysis of avoided cost, determine the maximum rate per kWh that KPU could pay for energy delivered over the Intertie without incurring a net increase in its overall costs. Assuming Intertie O&M costs are recovered from rates for delivered energy, determine the O&M component of Intertie energy rates for the “Ooo? 269 4645 CRA/DIV OF ENERGY O1/08/99 10:34 P.008/008 Swan-Tyee Intertie Evaluation January 8, 1999 Page 6 high, medium, and low load forecasts. The difference between the maximum rate and the O&M component is the amount that is available either to help pay debt service or to allocate as a financial benefit to KPU, the State, and the Four Dam Pool. Task 4 Describe and analyze the Tyee Lake power sale terms that have been proposed by KPU and by the Four Dam Pool, and determine the extent to which these proposals are compatible with the revenue and security requirements that would be needed for the $40 million bond issue and with the rate constraints identified in Task 3. Task 5 Present no more than three scenarios under which the Authority could issue investment grade bonds to raise $40 million for Intertie development, with each scenario consisting of a set of commitments, rates, and terms from KPU, the Four Dam Pool, and the State sufficient to provide the necessary revenue stream and security. Deliverables Twenty copies (and one camera-ready copy) of a draft report must be provided to the Authority no later than March 31, 1999. The draft report will fully describe the analysis undertaken by the contractor and its results. An executive summary must be included. Following receipt of comments on the draft from the Authority, the contractor will make any necessary changes to the analysis and produce a final report. Fifty copies (and one camera-ready copy) of the final report, including an executive summary, must be provided to the Authority within two weeks of the receipt of comments, unless additional time is approved by the Authority to account for any substantial additional work that needs to be completed. January 19, 1999 ee TO: Keith Laufer, AIDEA Valorie Walker, AIDEA FROM: Pat Clancy RE: Swan-Tyee Intertie Ketchikan Public Utilities has asked AIDEA to consider issuing $40 million in State bonds to finance certain costs relating to construction of a transmission line linking the Swan Lake and Tyee Lake hydro projects in Southeast Alaska. The Swan-Tyee Intertie has been the subject of considerable study and discussion over the past decade. The estimated capital cost for the project is $73.2 million. State and federal grant funds totaling approximately $25 million have been either approved or are currently available for the project. This memorandum reviews the feasibility of issuing debt by AIDEA for this project. There is currently no revenue stream that has been earmarked to pay debt service on bonds issued for the Intertie. Therefore the first task toward issuing bonds would be to identify a viable revenue stream for debt service payment. The State currently receives “debt service” payments from the Four Dam Pool participants which become part of the State’s general funds. These funds could be committed to the Intertie bonds. The debt service payments however, are subject to fluctuation based on usage and are subject to interruption under certain conditions referred to as “Self Help”. These two difficulties could be remedied by amending the power sales agreement to project payments sufficient to pay debt service regardless of use and limitations placed on the Self Help provisions of the current agreement. Both amendments would need to be structured to contractually guarantee sufficient revenues to the State so that debt service payments could be made. Assuming such amendments were made, the State could contractually commit those payments to debt service on the bonds. It should be noted however that such an approach would deprive current programs that use the debt service payments of those funds. In either of the above scenarios, it seems likely that a general backing by the State or by a state agency in the form of a “general obligation” type pledge would be necessary to get the proposed bonds into the investment grade rating category. (It is possible, give sufficient language in the amended power agreement for the Four Dam Pool and contractual obligations to use the Four Dam Pool debt service by the State to pay the bonds, might on its own merits become investment grade.) Yet another approach to the financing might be to divert revenues from the Four Dam Pool debt service payments without modification and to structure a guarantee with Ketchikan Public Utilities. The value of such a guarantee would be dependent on the Utilities ability to make good on the guarantee in the event that the revenue stream failed to materialize. In summary, there is not a current revenue stream to repay the proposed bonds. While it may be possible to issue bonds which are a general obligation of the State or of AIDEA without such a revenue stream, the State will still need to determine how to pay the debt. The revenue stream the state currently receives from the Four Dam Pool debt service is not sufficiently predictable to support investment grade bonds and therefore will require legislation or a guarantee from some entity which has the financial strength to make good on payments should the identified revenue stream turn out to be insufficient. Please feel free to contact me if you have any questions regarding my analysis. January 11, 1999 TO ALL INTERESTED PARTICIPANTS: RE: Postponement of Meetings EME NWie JAN 15 1999 Alaska Industrial Development and Export Authority Whitman Lake Hydroelectric Project (FERC No. 11597) and Connell Lake Hydroelectric Project (FERC No. 11599) The Initial Consultation and Scoping Meetings scheduled for the first week of February 1999 have been postponed. The meetings and site visits are currently being rescheduled, and all Participants will be informed of the new schedule as soon as possible. We apologize for any inconvenience. Sincerely, WESCORP Don Meregcn— Donald J. Thompson Project Manager CC} | aan 3035 Island Crest Way, Suite 200, Mercer Island, WA 98040 « Tel: (206) 275-1000 ¢ Fax: (206) 236-1226 B907 269 4645 DORA/DIY OF ENERGY OL/13/99 16:09 P.001/002 A Fax From The Department of Community & Regional Affairs Division of Energy Mailing Address: Physical Address: 333 West 4th Avenue, Suite 220 333 West 4th Avenue, Suite 220 Anchorage, AK 99501-2341 Anchorage, AK 99501-2341 Main Telephone Number: (907) 269-4625 Director's Fax Number: (907) 269-4645 Engineering Fax Number: (907) 269-4685 Deliver Fax to: Pons Lieckicabon Company Name: LUDED xe Company Address: Fax Phone #: ZE9- = Oo2° Sender: eyed Eevor, Sender's Phone # 24 G- LY # of Pages Sent: Z- (Includes this cover page Date Fax Sent: Ea If you don't receive all of this fax, please call the sender DIRECTLY at the phone number listed above. SPECIAL INSTRUCTIONS TO FAX RECIPIENT: Demos = ech md Tbk 3 loon ite-Swa Upelate Hie ate foros Le tn, (led ¥ Hh CELES, 7-73 Sth, SHLAA Cag ABE ts ieee peeing a Vhein (Vee Cas He Tood 95 (erpord 2 yy res mR) B907 269 4645 DORA/DIY OF ENERGY OL/ 13/99 16:09 P.002/002 b = 1998 UPDATE - PowER SUPPLY PLANNING STUDY a Table 3 CUMULATIVE PRESENT VALUE OF COMPARABLE POWER SUPPLY COSTS FOR ALTERNATIVE POWER SUPPLY SCENARIOS i ($000) 7 Load Scenario Resource Scenario Low Medium (Base) High mR: Base Diesel 45,622 88,960 172,634 Intertie = Medium PMP&L Load (1) 44,739 87,052 168,788 z: High PMP&L Load (2) 44,739 87,215 170,660 _ Mahoney Lake 66,088 66,423 132,041 E Small Hydro 36,051 47,433 122,547 Metlakatla Interconnection | Power Sales at 2.0¢/KWh 37,499 48,169 125,466 Power Sales at 4.0¢/kWh 42,236 52,906 130,202 ig (1) Assumes that PMP&L loads increase at the forecasted medium growth rate and that power sales to KPU from Lake Tyee are priced at the Four Dam Poo! power sales rate. = (2) Assumes that PMP&L loads increase at the forecasted high growth rate and that pawer sales to KPU from Lake Tyee are priced at the Four Dam Pool power sales rate. ~ Figure 3 CUMULATIVE PRESENT VALUE OF COMPARABLE POWER SUPPLY COSTS FOR RESOURCE SCENARIOS 180,000 cme eee cee oe ee ee er ———a-.=-— gj 160,000 +- | Fel 140,000 + Cl Low Loads OMedium Loads 120,000 100,000 OHigh Loads 80,000 + J (1998 Dollars (00) 60,000 40,000 20,000 0 _j Diesel Intertie Mahoney Small MP&L T- Lake Hydro Line (2.0 (Whitman) ¢/kWh) KETCHIKAN PuBLic UTILITIES R.W. Beck 14 2 B907 269 4645 DORA/DIV OF ENERGY O1/08/99 10:32 P.002/008 January 8, 1999 To: Dave Gray CH2M Hill Dennis McCrohan AIDEA Keith Laufer AIDEA From: Dick Emerman [ver Division of Energy ( <¢ Attached is my first cut to define a scope of work for the Swan-Tyee intertie economic and financial review. Please note: ne Keith — | think the “Financial Review — Scope of Work" beginning on page 4 probably overlaps with the work you had in mind for AIDEA’s financial advisor. Please take a look. Maybe we need only one financial review, not two separate ones as we discussed the other day, and maybe the financial advisor should take the lead with CH2M Hill providing any needed support. 2. Dave — My understanding is that Dennis will be back in the office on Monday or Tuesday and that we'll call you at that time to discuss further. | haven't gone over this with anyone yet and there could be significant changes, but this should be enough for a start. cc: Percy Frisby Division of Energy 2 907 269 4645 DORA/DIY OF ENERGY O1/08/99 10:32 P.003/008 Swan-Tyee Intertie Evaluation January 8, 1999 A. Background and Purpose of Study Construction of a transmission line linking the Swan Lake and Tyee Lake hydro projects in southeast Alaska has been the subject of several studies since the mid-1980s. Most recently, the feasibility of the proposed Swan- Tyee Intertie was evaluated in the following two documents: . Power Supply Planning Study (Initial Draft), prepared by R.W. Beck for Ketchikan Public Utilities, December 1996. . Power Supply Planning Study (1998 Update), prepared by R.W. Beck for Ketchikan Public Utilities, February 23, 1998. According to the 1998 Update, the estimated capital cost of the Intertie is $73.2 million in 1998 dollars. State and federal grant funds totalling approximately $25 million have either been approved or are currently available for the project. Ketchikan Public Utilities (“KPU”) has asked the Alaska Industrial Development and Export Authority (the “Authority”) to consider issuing $40 million in State bonds to finance most of the Temaining project costs. To consider this financing proposal, the Authority needs to obtain an independent review of the economic and financial feasibility of the project: ls The economic review is needed to compare the underlying life- cycle costs of the Intertie scenario and its primary altematives. Its purpose is to focus on basic economic logic; specifically, to determine which scenario meets the estimated long-term power requirement in the Ketchikan area with the lowest present value of resource costs across a broad range of plausible assumptions. a. the minimum revenue and security commitments needed for the Authority to issue $40 million in investment grade bonds for the project; b. the minimum and maximum rates that could be charged to KPU for power delivered over the Intertie in view of these commitments, in the context of the Four Dam Pool power sales agreement and KPU avoided costs; and Cs the possible allocation of financial benefits to KPU ratepayers, the State, and the other Four Dam Pool participants. DORA/DIV OF ENERGY O1/08/99 10:33 P.004/008 Swan-Tyee Intertie Evaluation January 8, 1999 Page 2 B. Economic Review — Scope of Work The intent of this assignment is to review and, as necessary, to build upon the work that has already been completed for KPU. This implies the following: ls Task 1 The contractor is expected to subcontract with R.W. Beck for the use and operation of Beck's Swan-Tyee economic model. The idea is to use the same approach that was successful in the Sutton- Glennallen intertie review: to evaluate the model and, if necessary, provide Beck with model revisions needed for the present analysis: and to direct Beck to run the model with sets of assumptions provided by the contractor. The contractor will use the estimated capital and O&M costs for the Intertie and for other resource alternatives as they appear in the 1998 Update prepared by Beck unless more recent estimates are available and are judged by the contractor to be suitable for planning purposes. The Mahoney Lake hydro project is one case where the contractor must consider the magnitude and reliability of more recent cost estimates. Intertie O&M costs must also be determined to include whatever annual contributions are necessary to fund an adequate renewal and replacement fund. Load forecast scenarios will be based on the following two reports: a. Electric Load Forecast for Ketchikan, Metlakatla, Petersburg and Wrangell, Alaska: 1990-2010, prepared by ISER for the Alaska Energy Authority, June 25, 1990. b. Ketchikan Public Utilities Electric Load Growth Study, prepared by ISER for KPU, June 5, 1998. KPU indicates that the latter study underestimated 1998 generation by a considerable amount, which suggests that future years may be similarly underestimated. The contractor will need to determine the reason for such variance in the initial year of the most recent forecast and determine whether Lee djustments are warra fanted | ye in future years. eae Aveo GnsLonn ne 2 yw o> Review load forecasts cited above and consult with ISER and KPU. Establish high, medium, and low forecasts of energy and peak demand over the first 20 years of the economic analysis period. soni AAR Yorpe- 69 4645 DORA/DIY OF ENERGY Q1/08/99 10:33 P.005/008 Swan-Tyee Intertie Evaluation January 8, 1999 Page 3 Task 2 Review Power Supply Planning Study, including the 1996 Initial Draft and the 1998 Update cited above. Review the R.W. Beck economic model and the economic analysis methodology used in the two studies. In both studies, the annual cost of power delivered over the Intertie was” assumed to be equal to the actual export volume of energy times the Four ~e Dam Pool wholesale power rate. Both the capital and O&M costs of the Intertie were assumed to be zero. These assumptions must be reversed ~ for purposes of this economic review. There is zero resource cost attached to the production of surplus power from the Tyee Lake hydro : project. However, the full capital and O&M costs of the Intertie must be K accounted for in estimating the life-cycle cost of the Intertie scenario. Provide Beck with any model revisions determined to be necessary, including those described immediately above. Unless the contractor determines them to be inappropriate, elements of the economic analysis that can be carried forward without change include (but are not necessarily limited to): a. Zero inflation. b. A 20-year projection period, during which loads, real prices, resource additions, and other costs are allowed to vary. c. A 50-year analysis period, with all costs, loads, and other assumptions held constant for the final 30 years. d. Definition of reserve requirement. e. High, medium, and low fuel prices. f. 3.0% real discount rate. g. Expected loads for Wrangell and Petersburg. h. Diesel generation efficiency and estimated line losses. In consultation with KPU, R.W. Beck, and the Authority, determine whether there are any significant uncertainties or weak points in previous analyses that need further attention. For example, the contractor should determine whether there are any issues related to water availability at 69 4645 DORA/DIV OF ENERGY O1/08/99 10:33 P.006/008 Swan-Tyee Intertie Evaluation January 8, 1999 Page 4 Tyee Lake that could further constrain the volume of surplus power available for export over the Intertie. Task 3 Define a limited set of primary alternatives to the Intertie consisting of those which previous studies have found to be most competitive. Define and characterize the reliability of capital and O&M cost estimates for each alternative. Include as one additional alternative the construction of both the Intertie and the Mahoney Lake hydro project. Although the Intertie capital cost presented in the 1998 Update will be Xe used in the present analysis, the Authority also requires that the contractor — conduct an assessment of the Intertie cost overrun risk in terms of probability and amount. Task 4 \ LD wu Define the set of base case assumptions and a sufficient range of oe F sensitivity cases to evaluate a broad range of plausible assumptions. (¥V Provide these cases for R.W. Beck to input to the economic model. A Deliverables Monroy provided to the Authority no later than Marc 1999. The draft report will fully describe the analysis undertaken by the contractor and its results. An executive summary must be included. Twenty copies (and one To ter than le 15> draft report must be Following receipt of comments on the draft from the Authority, the contractor will make any necessary changes to the analysis and produce a final report. Fifty copies (and one camera-ready copy) of the final report, including an executive summary, must be provided to the Authority within two weeks of the receipt of comments, unless additional time is approved by the Authority to account for any substantial additional work that needs to be completed. Cc. Financial Review — Scope of Work Task 1 The Authority has determined that interest on bonds for the Intertie would be taxable. In consultation with the Authority and with KPU, estimate the likely range of interest rates and annual debt service on investment grade, taxable bonds that would provide $40 million in proceeds for Intertie development. DORA/DIV OF ENERGY O1/08/99 10:34 P.007/008 Swan-Tyee Intertie Evaluation January 8, 1999 Page 5 Task 2 Background: Construction of the Four Dam Pool was financed in part by a loan from the State. The Four Dam Pool power sales agreement provides that the participating utilities will pay annual debt service to the State in repayment of that loan over the term of the agreement, which expires in 2030. Presently, the amount of annual debt service is defined as 4.0 cents per kWh times the number of kWhs delivered from the projects to the utilities each year — approximately $11 million at this time. Legislation enacted in 1993 allocates 40% of this annual debt service to a “Southeast Energy Fund,” which is intended to help finance the Swan-Tyee Intertie. This 40% share is not a dedicated source of revenue, however, and can be appropriated by the legislature for any purpose at any time. The Four Dam Pool power sales agreement provides that the participating utilities can withhold debt service that would otherwise be due the State if the funds are needed to repair certain project deficiencies. This is referred to as the agreement's “self-help” provision. This adds significant uncertainty to the flow of funds into the Southeast Energy Fund in any future year. For example, self-help withholding is expected to reduce Four Dam Pool debt service by $1.6 million next year. KPU has proposed that the annual flow of funds into the Southeast Energy Fund be used to pay the debt service on the $40 million AIDEA bond issue for the Intertie. Additional security will be needed for the bond issue to earn an investment grade rating. Assignment: In consultation with the Authority and KPU, describe and evaluate all viable options to provide the necessary debt service revenue and repayment security. Assume that no other debt will be required to finance Intertie construction — i.e. that additional grant funding will be obtained for remaining capital costs. Task 3 Based on analysis of avoided cost, determine the maximum rate per kWh that KPU could pay for energy delivered over the Intertie without incurring a net increase in its overall costs. Assuming Intertie O&M costs are recovered from rates for delivered energy, determine the O&M component of Intertie energy rates for the ot BN0T 269 4645 DORA/DIT OF ENERGY O1/08/99 10:34 P.008/008 Swan-Tyee Intertie Evaluation January 8, 1999 Page 6 high, medium, and low load forecasts. The difference between the maximum rate and the O&M component is the amount that is available either to help pay debt service or to allocate as a financial benefit to KPU, the State, and the Four Dam Pool. Task 4 Describe and analyze the Tyee Lake power sale terms that have been proposed by KPU and by the Four Dam Pool, and determine the extent to which these proposals are compatible with the revenue and security requirements that would be needed for the $40 million bond issue and with the rate constraints identified in Task 3. Task 5 Present no more than three scenarios under which the Authority could issue investment grade bonds to raise $40 million for Intertie development, with each scenario consisting of a set of commitments, rates, and terms from KPU, the Four Dam Pool, and the State sufficient to provide the necessary revenue stream and security. Deliverables Twenty copies (and one camera-ready copy) of a draft report must be provided to the Authority no later than March 31, 1999. The draft report will fully describe the analysis undertaken by the contractor and its results. An executive summary must be included. Following receipt of comments on the draft from the Authority, the contractor will make any necessary changes to the analysis and produce a final report. Fifty copies (and one camera-ready copy) of the final report, including an executive summary, must be provided to the Authority within two weeks of the receipt of comments, unless additional time is approved by the Authority to account for any substantial additional work that needs to be completed. DEG. -21' 98 (MON) 15:14 KPU ADMINISTRATION TEL:907 225 1000 P. 001 =m KETCHIKAN PUBLIC UTILITIES 2930 Tongass Avenue, Ketchikan, Alaska 99901 (907) 225-1000 (907) 225-1888 Fax FAX TO: Michelle Detwiler 12/21/98 4ter Wynne LLP (503) 226-0079 FROM: Rich Trimble, Acting KPU General Manager bo SUBJECT: PMC Discussion of Swan-Tyee Intertie Financing Michelle: John Magyar asked me to request an agenda item for discussion of the Swan-Tyee Intertie. KPU has recently proposed a new financing concept for the Intertie whereby the 40% dedicated to the Southeast Intertie could be used directly by AIDEA to issue a bond. A bond issued with this cash flow would cover most, if not all, of our current funding shortfall. AIDEA has recently posed a number of questions regarding our funding concept. We would like to share our responses with the PMC. We would also like to open a dialog with the PMC as to how best to proceed at this point. Thanks, Rich Co; Dennis Lewis, PMC Chairman DEG. -21' 98 (MON) 15:14 KPU ADMINISTRATION TF! 907 225 1000 P. 002 ( i KETCHIKAN PUBLIC UTILITIES KETCHIKAN, ALASKA 99807 TELEPHONE 807-226-1000 FAX 307-225-1988 220 TONGAS§ AVENUE December 10, 1998 MUNICIPALLY OWNED ELECTRIC TELEPHONE WATER Mr, Randy Simmons, Executive Director Alaska Industrial Development & Export Authority (AIDEA) 480 West Tudor Road Anchorage, AK 99503-6690 Dear Randy, I want fo thank you and your staff for taking the time and making the effort to review and research the possibilities relative to our proposed SE Alaska (Swan-Tyee) Intertie funding plan. Enclosed you will find our responses to the questions you posed regarding the project, its implications and the intent of our proposed plan. As you well know, we believe that this intertie is a most important piece of infrastructure for Ketchikan, Petersburg and Wrangell. We believe that it will prove to be vital for fume economic development throughout southeast Alaska, We believe thar the communities of Kodiak, Glenallen and Valdez as well as all of Alaska will also benefit from the consrruction of this intertie. We have a small window of time to make a commimment to build this intertie. The existing federal appropriation of $10 million will expire in two years, Our Congressional delegation continues to pursue additional federal funding during FY 1999. We sincerely seek your assistance in placing the proposed state bonding plan in the governor's legislative package; and, in maintaining this intertie as a priority need. Thanks again for meeting with Ciry Councilmember Tom Friesen and me on October 27. We are at your disposal and willing to respond to other questions or comments you may have. Rich Trimble and I remain the primary contacts for KPU on this project, Sincerely, John A. Magyar Genera] Manager JAM: Enclosure ce: Mayor & City Council KPU Advisory Board Document? DEG. -21' 98 (MON) 15:15 KPU ADMINISTRATION Ss VE TEL:907 225 1000 What is the long-term benefit to the State of the SE Intertie? The long-term benefits to the State of Alaska are: A) B) Zz Additional revenue to the State through sales of additional energy from the State’s Tyee project, and; Improved infrastructure directly supporting the viability of Southeast Alaska, a region geographically and economically vital to the State, What are the benefits of distributed ys. inter-connected generation for the Southeast? We believe the benefits of the Southeast Alaska Intertie can best be summarized by the following Two quotations: St -Tyee Intertie Fi “The underlying purpose and need to which this project responds is for KPU to 1) provide a reliable and efficient source of power for the City of Ketchikan’s intermediate and long-range needs at reasonable rates while 2) establishing an important link in the long-proposed electrical network for southem Southeast Alaska so the 3) more communities would have access to more power sources or more power customers,” [pg. 1-6] o A ctr ie (developed by Southeast Alaska communities December 1997) “At present, most every community in Southeast Alaska generates its own power in a largely isolated electrical environment. In an area with rich hydroelectric potential, most smaller communities remain entirely diesel dependent. Even in larger communities such as Juneau, Ketchikan and Sitka which currently have hydroelectric power, those facilities are reaching the limit of their capacity and supplemental diesel power is being pursued or contemplated. This, despite the fact there is adequate hydroelectric potential to serve all of Southeast for decades to come if an intertie system existed to transport power to the load centers, The communities of Southeast Alaska therefore support the concept of a southeast clectric grid as a means of reducing or avoiding diesel dependence, encouraging economic development and stabilizing and equalizing power rates.” What is the current financing plan including specifics? KPU invested significant time and energy into a financing plan whereby the City of Ketchikan would accept the $20 million loan authorized by the state in 1993, We proposed in return that the State of Alaska offset power rates such that KPU could cover debt service and O&M costs. Although this plan seemed to offer the best compromise, it was ultimately not acceptable to P. 003 DEG. -21' 98 (MON) 15:15 KPU ADMINISTRATION TEL:907 225 1000 P. 004 either the State or the City. The State was concerned thar rate reduction was excessive, and our analysis demonstrated that the financial burden to the City was unacceptable. KPU has recently proposed that a mutually satisfactory solution might be to devote the cash flow set aside in the 1993 legislation for the Southeast Intertie (40% of the Four Dam Pool payment to the State) to a bond issued by the State for the project. This would provide sufficient capital to cover most of the current shortfall. KPU would propose that the $20 million currently set aside by the State for the $20 million loan would be released for other purposes. This proposal is provided as attachment (A). KPU stands ready to negotiate the specific details of the plan. 4. What are the economic benefits of the Southeast transmission corridor for multiple uses such as fiber optics, communications, etc. ? Although the current design for the Swan-Tyee Intertic does not include provisions for fiber optics, that can be modified if that appears to be economically jusufied or desirable. In fact, KPU has been in contact with Alaska Fiber Star regarding a fiber spur between Juneau and Ketchikan via Petersburg and Wrangell. If the inclusion of fiber optics in the design is an option AIDEA or others wish to pursue, KPU is prepared to negouate the terms and revise the design. With respect to other multiple uses, the Final EJS offers our best and most comprehensive review of this matter. In particular, the corridor was specifically routed along a logical road corridor to minimize environmental impact of that future development. 5. What municipal actions are necessary to implement the financing plan? The City of Ketchikan has approved the concept as presented in attachment (A). The City can continue to act as the project manager and would take such action as we have in the past to authorize and oversee project activities. City Council approval would be needed to ratify a power sales agreement with the Four Dam Pool and if needed a financing agreement with the State of Alaska. Regional] Questions dis What are the current SE Intertie project costs assumed for Four Dam Pool debt service. R&R, and Four Dam Pool O&M costs? As an interruptible power sales agreement has not been executed with the State and the Four Dam Pool, these issues are all subject to negotiation. Generally KPU assumes that construction of the Intertie would be state owned, that energy would be sold to KPU at or near current Four Dam Pool rates but is dependent on KPU’s continuing risk and responsibility for the project. These are issues KPU assumes are subject to negotiation and we stand ready to begin that process with the State and the Four Dam Pool. DEG. -21' 98 (MON) 15:15 KPU ADMINISTRATION TEL:907 225 1000 P. 005 c 2. What is the cost of power sensitivity in Petersburg, Wrangell, and Ketchikan to extended transmission line outages, e.g, 60 days, berween Ketchikan and Swan Lake and between Tyee Lake and Swan Lake? Our view of the Swan-Tyee Intertie is that it allows the additional sale of available Four Dam Pool power, economically benefiting the State and the Four Dam Pool communities through revenue from an interruptible sales agreement. An outage today between Swan Lake and Ketchikan would not have a defined cost of power sensitivity, the sale would simply resume at the wholesale rate when service was restored. Lost revenue from that outage would ultimately be taken into account in setting the Four Dam Pool rate for the next year. We have a similar view of an outage that would affect a Four Dam Pool interruptible sale to Ketchikan over the Intertie. The thrust of this question may be to suggest terms in an interruptible power sales agreement that would define costs, risks and responsibilities for outages. KPU stands ready to negotiate those terms. 3: What is the cost of power impacts of extreme high and low water scenarios of Tyee and Swan Lake occurring together or in opposition? Raytheon Infrastructure Services conducted an intertie operations study in April, 1995 to evaluate the combined operation of Tyee and Swan Lake provided as attachment (B). This study includes consideration of historical water availability, but it does not draw conclusions regarding the rate impact of extreme conditions. Our view is that analysis of cost of power impacts for abnormal conditions at any of the Four Dam Pool projects cannot be considered in isolation, because the costs and revenues are ultimately pooled. For example, in a given year low water conditions at Terror Lake may be balanced by high water conditions in the Swan-Tyee system, resulting in no impact to the Four Dam Pool cost of power. We assume however that the impact of extreme low water conditions in the Swan-Tyee system would result in a reduction of interruptible Tyee sales to Ketchikan as Petersburg and Wrangell have first right to that power. 4. How do you see the revenues, costs, and risks being shared among the State, Four Dam Pool, Petersburg and Wrangell, and Ketchikan? Our view is that the sale of Tyee power to Ketchikan would be defined under an interruptible sales agreement. Ultimately, all these terms are subject to negotiation. We see a negotiated allocation of revenue to the State and the Four Dam Pool communities for the additional sales. Previously, there has been reluctance by the State and Four Dam Pool to accept either costs or tisks associated with the project. Therefore, KPU has been prepared to negotiate an assumption of various costs and risks, provided the City has reasonable compensation for those costs and risks. On the other hand, we are prepared to negotiate a division of those risks, costs and compensation with the State and Four Dam Pool. Further, we have always viewed this project as an improvement to the Four Dam Pool facilities and are open to negotiating the addition of this project to those facilities. DEG, -21' 98(MON) 15:16 KPU ADMINISTRATION TEL:907 225 1000 P. 006 J, Whar are the reductions in generation reserves for Petersburg, Wrangell, and Ketchikan resulting from the Intertie and haw do these reductions impact cost of power for each city? Please note our response to question 3 abave. The Raytheon study utilizes a certain operational model] based on assumed monthly loads and average reservoir inflows. The generation reserve, or combined storage depicted in this model varies by month and year. An example is shown for the year 2013 in figure 5. However, Petersburg and Wrangell have a first right to Tyee power and we assume this would have to be protected through responsible reservoir management, just as we manage our reservoir levels today to avoid extreme conditions. 6. Are there opportunities for British Columbia sales or generation purchase which are enhanced by the SE Intertie? An electrical intertie with British Columbia has been considered by various studies and at various locations. Our view is that the development of a grid in Southeast Alaska creates a greater pool of both resources and loads creating more potential for cither future sales or generation purchase with the North American grid through BC Hydro. etc: ons ds How has the actual capital and O&M cost of the new KPU diesel generation impacted the cost of power? R. W. Beck has recently calculated our avoided cost of electrical generation. That document is provided as attachment (C). We refer you to tables 6 - 8 for detail of diesel costs. KPU rates have not been adjusted as a result of the addition of the new diesel engine. The City Council has largely concluded a review of KPU’s budget and has eliminated a 5% rate increase from KPU’s 1999 budget request. 2. How do you see the SE Intertie affecting the Mahoney Lake project and vice yersa? Our view of the interrelationship of the Intertie and various small hydro projects, including Mahoney Lake, is best detailed in attachment (F). 3. What is the wholesale cost of power, escalation indices, reliability factors, and term of Mahoney Lake and 4 Dam Pool proposals for the power sales agreements? KPU has not received any detailed proposals for the purchase of Mahoney Lake power. We have a general proposal from AP&T to purchase power at the Four Dam Pool wholesale rate or our avoided cost, whichever is greater. KPU had provided a draft interruptible power sales agreement to the Four Dam Pool under our previous financing plan, which ultimately was not acceptable to either party. We are prepared to enter into negotiations for a revised interruptible power sales agreement Intertie power. We would expect to negotiate these issues in that process, DEG. -21' 98(MON) 15:16 KPU ADMINISTRATION TEL:907 225 1000 P. 007 4, How do ISER load growth predictions for 1998 compare to actuals? What new industries have been included in ISER projections? What new industries may occur or be attracted to Ketchikan and what is the impact cost of power (e.g. 10 MW industrial load in 2005)? What is the impact (e.g. a 10 MW hydro plant) independent power producer on-line in 2005 on the cost of power? ISER projections for 1998 compared to our estimated actual for 1998 are: ISER base case: 146,117 MWH ISER high case: 147,607 MWH ISER low case: 145,794 MWH Estimated actual 1998 gross generation: 164,000 MWH The summary of the ISER study is provided as attachment (H). ISER notes that they make conservative assumptions for the base case. Further, they note that they do not include new large scale commercial or industrial load in their projections, For example, they exclude the KPC sawmill because of the future uncertain of the timber industry even though KPU currently serves this load. The cost impacts of additional load and/or additional generation (independent or otherwise) are best detailed in attachment (C). Js What is the impact of the transmission right-of-way maximum timber sales or no sales, storage, and disposal on the cost af power? Attachment (E) considers various approaches to construction sequencing and timber handling. It also includes a comparison of capital costs for different timber sales assumptions. Generally KPU assumes that construction of the Intertie would be state owned, that energy would be sold to KPU at or near the wholesale rate depending on KPU’s continuing risk and responsibility for the project. We view the cost of power as being a negotiated rate in an interruptible power sales agreement. We stand ready to enter into those negotiations with the State and the Four Dam Pool. 6. What is the cost of power impact of failure to receive the $4M appropriation (e.g. for 2 years). Failure to receive state and federal grant funding in general will result in delayed construction and completion, whether that is one year or ten years. The City of Ketchikan has proposed a financing scheme in attachment (A) that does rely on the 40% Four Dam Pool debt service allocation set up by the State in 1993, but also releases $20 million for other uses. Additionally, the existing federal funding of $10 million will lapse if not used by end of the federal fiscal year 2000. See also our response to question 10 below, 7. What is the impact of Intertie 25% capiral cast overrun and/or 25% O&M cost overrun on cost of power? DEG. -21' 98 (MON) 15:16 KPU ADMINISTRATION TEL:907 225 1000 P. 008 es t { We assume that these impacts would be defined in a negotiated interruptible power sales agreement. Generally KPU assumes that the Intertie would be state owned, but we are prepared to negotiate an assumption or division of risk and reward, including those associated with the capital cost of the project. We stand ready to begin that process with the State and the Four Dam Pool. 8. What are the costs of power impacts of necessary coordinated and limited scheduled outages on Tyee Lake and Swan Lake on the communities? Please see our response to Regional Question 2. 9. What is the term of the current EIS/ROD? The EIS and Record of Decision do not have a defined term. We are advised by our consultant and the USFS that the more time that passes before construction begins, the greater risk we have that a successful argument will be made that conditions have changed enough over time to warrant a supplemental EIS. 10. What are the KPU action plans if they fail to receive any additional Federal grants? Failure to receive additional federal funding in general reduces the state’s incentive to pursue bonding of the project. KPU plans in the absence of sufficient federal/state funding for the Swan-Tyee Intertie are best described in Attachment (F). See also response to Ketchikan question 6 above. (Us What is the impact on the cost of power of Tyee energy (e.g, 6.8 cents/KWH or interruptible rate, say 4.0 cents/KWH)? Our view of the Swan-Tyee Intertie is that it allows the additional sale of available Four Dam Pool power, economically benefiting the State and the Four Dam Pool communities through revenue from an interruptible sales agreement. The interruptible rate is subject to negotiation. The additional revenue received from those interruptible sales would be allocated to the State and Four Dam Pool. The resulting benefit to the communities and projects could be calculated for a variety of rate scenarios, We stand ready to negotiate the terms of an interrupuble sales agreement, and perform associated calculations estimating the beneficial impact of those sales to the State and Four Dam Pool communities. 12, Will compensation (SVC) be required for the Intertie. What is the cost of power impact? The addition of a static var compensator (SVC) to the design has been discussed, but is not currently included in either the design or the cost estimate. 3; What is the Intertie cost of power difference between the second best alternative and the SE Intertie for low, medium, and high growth scenarios and what amount of investment does the reduction justify? DEG. - 21° 98 (MON) 15:17 KPU ADMINISTRATION TEL:907 225 1000 P. 009 ‘ : t Generally KPU assumes that construction of the Intertie would be state owned, that energy wauld be sold to KPU at or near the wholesale rate depending on KPU’s continuing nsk and responsibility for the project. The avoided cost calculation is provided as attachment (C), That calculation assumes the Intertie is not constructed and that KPU proceeds with the small hydro alternative detailed in attachment (F), To compare the costs of our preferred alternative (the Intertie) with our second best alternative (smal) hydro), one is comparing our negotiated interruptible rate to the avoided costs detailed in attachment (C). The thrust of this question may to be establish the economic value to KPU of pursuing the Intertie over the alternative. Since the interruptible rate is not yet negotiated, we would propose that economic value be established through the negotiation process. 14. What is the impact on the cost of power of actual capital cost, shorter life, higher fuel cost, and higher O&M cost for the new diesel? All of these variables could be modified in the models presented in attachment (C), Also see our response to Ketchikan question | above. 15. What are the impacts of current and future air quality regulations and diesel emissions on cost of power and Ketchikan future growth? Our construction permit is provided as attachment (D). The operating limitations are detailed on page 8/19, section IV.A.5. At this point, the hourly limitations are set significantly higher than we have required in the past. We do not expect to exceed these limitations for some years, at which point we hope to have augmented our hydroelectric supply decreasing our reliance on diesel generation. This could change if the Intertie was not to be built and for one reason or another Whitman and Connell Lakes were not deemed to be economically developable as a result of FERC or other agency requirerpents. 16. What is the cost of power impact of 1% vs. 3% line losses? We assume that establishing the point of metering and sale of interruptible power would be established in negotiations. The cost of interruptible power established in negotiation would be influenced by those decisions, as well as our mutual assumptions for line loss. We stand ready to negotiate these issues. TZ: What limits does the Ketchikan financing plan place on Ketchikan's current loans and future borrowings? KPU has attempted to seek a compromise financing plan whereby the City of Ketchikan would accept the $20 million loan authorized by the state in 1993. We proposed in return that the State of Alaska offset power rates such that KPU could cover debt service and O&M costs. Under this plan, Ketchikan’s future borrowing ability would have been severely impacted. An analysis demonstrating this was prepared recently by Alan Dashen and is provided as attachment (G). This funding plan has since been abandoned by the City. DEC. -21' 98(MON) 15:17 KPU ADMINISTRATION TEL:907 225 1000 P. 010 = s KPU has recently proposed that a mutually satisfactory solution might be to devote the cash flow set aside in the 1993 legislation for the Southeast Intertie (40% of the Four Dam Pool payment to the State) to a bond issued by the State for the project. This would provide sufficient capital to cover most of the current shortfall. KPU would propose that the $20 million currently set aside by the State for the $20 million loan would be released for other purposes. This proposal is provided as attachment (A), KPU stands ready to negotiate the specific details of the plan. As an alternative, the $20 million could be used for Intertie construction thus requiring reduced bonding by the state for the remaining shortfall. 18. How will project insurance be provided and has the cost been included in the cost of power? We assume the mechanism, cost and responsibility for project insurance would be subject to negotiation. Through that process we can evaluate the impact of insurance, and other factors, on the negotiated cost of interruptible power. 19. What is the security for failure to make bond payments? We have proposed that AIDEA issue a bond with payments guaranteed by the State of Alaska through allocation of 40% of the Four Dam Pool debt service payments. This proposal presents a variety of issues to be considered and negotiated. We stand ready to work with AIDEA to define the security for the bond, and resolve other issues associated with this proposal. DEG. -21' 98 (MON) 15:17 KPU ADMINISTRATION TEL:907 225 1000 P. O11 Attachment 1 - = . KETCHIKAN PUBLIC UTILITIES Memorandum To: The Honorable Bob Weinstein & City Council t , KPU General —e From John Magyar, KP neral Manager Of, a Date: February 27, 1998 Subject: Power Supply Options—Staff Opinion There are two basic hydroelectric strategies that staff has been pursuing. One is construction of the Swan-Tyee Intertie which will allow us access to surplus energy at the Lake Tyee project. The other is a combination of local small hydroelectric projects. Staff recommends that Council continue to pursue the Intertie strategy while developing the small hydroelectric alternative. Pursuing licensing efforts for the Whitman, Connell and Carlanna projects, considering proposals for Metlakatla and Mahoney power sales and developing the most cost effective construction sequence for these options will provide us a backup plan if the Intertie fails to obtain necessary funding or voter approval, While this memorandum address staff opinion with regard to both Swan-Tyee Intertie and small hydroelectric strategies, action requested by staff at the March 5, 1998 Council meeting simply relates to the timing of initial construction activities of the Intertie using grant funds. Unless explicitly directed by Council to the contrary, staff will continue to pursue the Intertie as the primary strategy and small hydroelectric as an alternative strategy. If we are unable to proceed with full construction of the Intertie for lack of funding, we would be in a position to make a full commitment to the small hydroelectric alternative with a bond election for the Whitman project in the year 2000, Staff recommends that we use these next two years to seek a complete funding package for the Swan-Tyee Intertie, A discussion of the Intertie and small hydroelectric strategies follows. Swan-Tyee Intertie: Staff continues to consider the Swan-Tyce Intertie as the strategy that would best meet the energy needs of Ketchikan over the long term. In the early 1990's, the Intertie was investigated as a means to make surplus available at Lake Tyee to meet the hydroelectric shortage in Ketchikan. In 1993 the State enacted legislation which provided a combination of annual grants and $60 million in loans and bonds to KPU for the project. This funding allowed us to begin the engineering and permitting efforts in 1994. The Swan—Tyee Intertie is an expensive project but provides unique opportunities to the community which cannot be overlooked. The sale of surplus Tyee energy is a win-win H:\USER\NANCYL\WP\DATA\007-DI .MEM DEC. -21' 98 (MON) 15:18 KPU ADMINISTRATION TEL:907 225 1000 P. 012 Mayor and Council, Power Supply Options—Stafl Opinion February 27, 1998 Page 2 proposition for Ketchikan as a customer and a member of the Four Dam Pool, allowing us to supply our ratepayers with low-cost hydroelectricity while enjoying a portion of those revenues through the Four Dam Pool. The Intertie will allow us the reliability and flexibility of sharing regional! resources, giving us the same kind of benefits the Bonneville Power Administration has given the Pacific Northwest. Access to large regional hydroelectric: resources wil] allow Ketchikan to avoid dependency on fossil fuel generation for decades into the future. Finally, we would be taking advantage of our delegations’ strong position in Washington D.C. as well as a sympathy factor there for the harm done to the Southeast Alaska timber industry, a combination of events we are unlikely to ever see again, With the news of the pulp mill closure in Seprember of 1996, we were no longer able to depend on enough revenue to fund the Intertie. What is worse, we also were losing the backup generating capacity that the mill was often able to offer us. Without the mill, the loss of Ketchikan’s single largest generation facility (Swan Lake) would put the community into a rotating blackout situation. The Ketchikan voters in October of 1996, the month after the mill closure was announced, voted to approve a $13.7 million bond issue for a diesel generator, This generator will allow us to provide sufficient backup power to avoid blackouts when Swan Lake is off-line, Ketchikan's energy demand had not diminished but we had lost generating capacity and revenue to fund the Intertie with the closure of the pulp mill, With that in mind, City Council approved a lobbying plan to seek federal funding for the Intertie. Due to the efforts of Senators Stevens and Murkowski, and Representative Young, $10 million was provided for the Intertie in the FY98 federal budget. Another $30 million will be sought in FY99. Since this project became a regional priority in the late 1980’s, City Council has been asked on numerous occasions—Do we continue with the Intertie or stop now? We are at another decision point. Do we proceed with bidding first year construction? Senator Stevens and his staff were very clear when we visited last year—the federal government budgets one year at a time, if you are seeking federal funding you've got to recognize that you must proceed on faith. In turn, our lobbying group responded that we can do that provided that we are not obligated to spend local dollars until the last year of construction. Staff believes that a decision not to proceed will result in the loss of the existing $10 million federal allocation, Senator Stevens needs to know by mid- March whether the Intertie is going forward in order to seek FY99 funding. If one is optimistic about the Ketchikan economy, the Swan-Tyee Intertie is clearly our most cost effective power strategy for the future. While we have commissioned and distributed an Electric Load Forecast that considers the closure of the pulp mill, there is significant difference between the high, base and low forecasts. Staff recommends that in planning for future power supply infrastructure that we act conservatively and consider how we might meet the higher demands. In particular, Council should note that the “base” case does not assume new demands from new industry at the pulp mill site, or our need to supply energy to the KPC saw mill resulting from their recently announced closure of their power house. H:\USER\NANCY L\WP\DATA\0O7-D].MEM DEC. -21' 98 (MON) 15:18 KPU ADMINISTRATION TEL:907 225 1000 P. 015 < as ~— Mayor and Council], Power Supply Options—Staff Opinion February 27, 1998 Page 3 Despite the advantages just noted, staff does have some unresolved concerns about the Intertie, One major concern is the risk «associated with low load growth. Under our current proposal, a short-term loan through AIDEA. would allow us to meet our expenses during years of low load in the first years of Intertie operaticns. But we are depending on load growth in later years to pay back that loan, If the load growth does not develop, we could be left with a significant debt at the end of the loan term. Another concern is the risk associated with project cost overruns. We will definitely experience cost increases if the project is delayed for lack of additional grant funding. In addition, as with any construction project, there is always the risk of cost overruns for other difficulties such as unknown field conditions, weather, etc. In either case, KPU would bear the risk of cost overruns or be forced to terminate the project after considerable expense of public funds. Unless otherwise directed, Staff will continue to seek loan and power sales terms that will mitigate these risks. In addition, staff suggests considering an escalation of lobbying efforts to seek State development of the Swan-Tyee Intertie. It has always seemed appropriate to have the owner of the Four Dam Pool (the State of Alaska) develop and own this improvement to their facilities. Small Hydro Alternative: Staff opinion is that the most logical alternative to the Swan-Tyee Intertie is phased development of local small hydroelectric projects. These would include Whitman Lake, Lake Connell, Carlanna Lake, a Metlakatla Intertie, Mahoney Lake and upgrade of Beaver Falls. The recommended approach would be to develop the most cost effective projects first and proceed with future development as demand grows. Under the ISER medium load growth case for example, we could commission the Whitman Lake project in 2003 and the Lake Connell project in 2009. In 2016 we could seek a power purchase agreement with Metlakatla or Cape Fox since both offer similar energy capability. Under the medium load growth scenario, this combination would offer hydroelectric energy beyond the year 2030. An advantage of this strategy is that these projects could be developed as needed. So if Whitman Lake were the first to be developed, our only near term obligation would be the construction cost of $7.5 million, If in fact we experience the ISER forecast low load growth, we would have no additional capital requirements until 2025 when we would need to commission the next project. Therefore, if low loads are considered a possibility, this approach minimizes our risk. The primary disadvantage of this strategy is that we will eventually be in need of an Intertie when our loca! small hydroelectric resources are exhausted. Under the ISER high load growth case, all local hydroelectric options would be fully exhausted in 2022 (assuming development of Whitman, Connell, Carlanna, Metlakatla, Mahoney and an upgrade of Beaver Falls). At that H:\USER\NANCYL\WP\DATA\O07-D 1. MEM DEC. -21' 98(MON) 15:18 KPU ADMINISTRATION TFI.:907 225 1000 P. 014 Mayor and Council, Power Supply Options—Staff Opinion February 27, 1998 Page 4 point, we would need the Swan-Tyee Intertie to access the next major cost effective hydroelectric resource. With respect to the individual projects, staff offers the following comments. The Whitman Lake project turns out to be surprisingly cost effective under the design concept offered by WEScorp (4.8 cents per kWH). The Lake Connell project provides less energy at a slightly higher price (6.7 cents per kWH) but is the next most cost effective option. Staff is not as enthusiastic about Carlanna Lake as it is even smaller and more expensive (9.1 cents per KWH). However, we recommend that any hydroelectric option at a cost less than diese] not be abandoned at this point. The two largest local hydro options are the Metlakatla Intertie and Mahoney Lake. Our initial sense is that the Metlakatla Intertie offers the more cost effective energy of the two projects, but we lack firm data to support this. Our major concern is the lack of an independent review of the proposed improvements to the Metlakatla system, On the other hand, we have had substantial review of the Mahoney Lake data. It appears that Mahoney Lake energy would be more expensive than Whitman or Connell, but less expensive than Carjanna. Staff has two noteworthy concerns regarding Mahoney at this point. The first is cost risk associated with the significant amount of underground work. Unlike our other alternatives, a lot of this project cost is loaded into underground work which is more difficult to estimate with certainty. The second is the highly encumbered license obtained by Cape Fox for this project. Pursuing this as a PURPA project has placed Cape Fox in a more difficult position with respect to negotiating terms with the regulatory agencies. If this project were to be pursued, KPU would probably be in a better position to have the existing license vacated and negotiate a new license with FERC. It should be noted however that both Metlakatla and Cape Fox have indicated an interest in negotiating a deal with KPU. Understanding that we may not realize the funding necessary to complete the Intertie, staff believes it is in the best interest of the rate payers to entertain proposals from both of these groups. Our view is that proceeding with the preparation of certain construction activities for the Swan-Tyee Intertie in no way interferes with our efforts to position the most cost effective small hydroelectric projects for development in the event they are needed. JAM:RDT:nll Attachment H:\USBR\NANCYL\WPADATA\007-DI.MEM HYDROELECTRIC ENERGY SUPPLY AND DEMAND 300 250 + | 200 - 150 - 100 + MEGAWATT-HOURS (MWH) Thousands 50) i- : | betiririttipirtirisrtiriririy | 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 YEAR 0 Pe | a a a a Oe feel SWAN-TYEE INTERTIE (2000) | ‘090 61:S1 (NOW) 86 .IZ- NOL LVYLSININGY dy OOOT $2? L06:T4L $10 ‘d SUPPLY AND DEMAND FOR LOW LOAD GROWTH 300 ~ | 7 250 + | r = = 200 |- Fa wo | > 2 ae = 4 150 | v i © Pa = 100 | O e Lu = 50 + 0 prorat lit dtl 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 YEAR [WHITMAN (2003), CONNELL (2025) ‘030 61:S1 (NOW) 86 17- NOILYYLSININGY Ady OOOT $22 L06: TL 910 ‘d HYDROELECTRIC ENERGY SUPPLY AND DEMAND FOR MEDIUM LOAD GROWTH 300 250 YDRO— 200 | IsuPPLY | _ L 150 - 100 IDEMAND MEGAWATT-HOURS (MWH#) Thousands 3 — 0 Willy ed teste telalbcMsel hla A he elle Mella MEDIUM LO’ nea 1j4t 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 YEAR WHITMAN (2003), CONNELL (2009), METLAKATLA (2016) 2025 “90 61:S1 (NOW) 86 .12- NOILVULSININGY dy 0001 $@2 £06: 14L L10‘d = HYDROELECTRIC ENERGY { SUPPLY AND DEMAND FOR HIGH LOAD GROWTH 300 - HIGH 250 YDRO 200 SUPPLY ee lee 150 |- 4 100 t \ IDEMAND MEGAWATT-HOURS (MWH) Thousands 50 | , 0 LEIEIE IE) Lotttrettrtps tetry tt faut | Pheylriupi ti tripytripp tiny 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 YEAR WHITMAN and CONNELL (2003), METLAKATLA (2006) } MAHONEY (2015), CARLANNA and BEAVER FALLS (2022) ‘40 Al: CT (NOW) RA 17- NOLLVALSINIWAY Nd OO0T $22 206: 74. 810 ‘d October 9, 1998 EMEWWE i D)leUEUVE | | LM oct 20 1998 LY Mr. Rich Trimble a Ketchikan Public Utilities |..).5 |ndustrial Development 2930 Tongass Avenue and Export Authority Ketchikan, Alaska 99901 Subject: Lake Tyee Energy Audit Dear Rich: Enclosed is our report on the audit of the energy estimates of Lake Tyee Hydroelectric Project that was performed by IECO and Raytheon. The IECO study produced two estimates of generation, which were 133 GWh and 138 GWh. The difference in the energy estimates was from the range of lake levels allowed in the operation. The higher estimate assumed lake level varying between El. 1430 and El. 1250, while the lower estimate assumed an operating range from El 1396 to El. 1250. Because the normal maximum operating level of Lake Tyee is El. 1396, the lower of the two estimates is more accurate. The Raytheon model contained several assumptions that is inconsistent with Project operation, which makes their estimate of 128 MWh unreliable. For example, generator capacity of{25 MW was assumed when only 24 MW) is available for generation. The operating range of Lake Tyee was limited between El. 1250 and El. 1390, which ignores the upper 6 feet of available storage. Further, while turbine efficiency was adequately addressed, generator efficiency was not included. Finally, the Raytheon model only used nine years of flow record, when 28 years were available. It is better practice to use as longa record as available to account for variations of wet and dry years. It is our opinion that KPU should use the IECO study results, but with the following reductions to their estimate: 1. Apply a 2% reduction of the energy estimate to account for wetter hydrology used from the Harding River basin; 2. Apply up to a 7% reduction to the energy estimate to account for plant and transmission line outages that was ignored in the IECO study; and 3. Apply up to a 6% addition to the energy estimate to account for a 24 MW installation when 20 MW has been assumed. Accordingly, rather than assuming energy production of 133 GWh from Lake Tyee, we suggest that KPU assume 129 GWh of generation from the Project. However, if KPU believes that Lake Tyee outage can be reduced to a 3 to 4% reduction, which typically occurs at other hydroelectric projects, then KPU could increase generation back to the IECO estimate of 133 GWh. The generation estimate assumes that KPU can make use of all available excess generation from Lake Tyee and does not consider system operation and future load demands. If KPU was to account for this factor then Lake Tyee generation would likely need to be reduced further. File: —11-00171-10101-0101\3101 o:\Hart\SMH274.doc 1001 Fourth Avenue, Suite 2500 Seattle, WA 98154-1004 Phone (206) 695-4700 Fax (206) 695-4701 ® Mr. Rich Trimble October 9, 1998 Page 2 If KPU would like R. W. Beck to perform an operation model of the Lake Tyee Project, we could do so at a modest cost. The model would make adjustments to the Harding River gaging data and use other data sources to produce 45 years of hydrologic records. We would use suitable parameters in our model, e.g., use of actual available storage, use efficiency levels provided by the turbine-generator suppliers, account for transmission losses and plant outages. Finally, actual plant output would be based on projected load growth from the Wrangell, Petersburg and Ketchikan communities. Our model could take into account your more recent load projections to provide a more realistic estimate of future Project generation with the Intertie plus the provide an estimate of Lake Tyee energy amount available to KPU. If you have any questions about our energy audit or would like us to submit a proposal for a new energy study of the Lake Tyee Project, please give me a call. Very truly yours, R. W. BECK, INC. 4 Stephen Hart,PE Project Manager Enclosure File: — 11-00171-10101-0101\3101 o:\Hart\SMH274.doc REPORT ON AUDIT OF ENERGY ESTIMATES INTRODUCTION Several energy estimates had been performed for the Lake Tyee Hydroelectric Project as a part of the original design and for the Swan-Tyee operations study. The two studies given the most credence by Ketchikan Public Utilities (KPU) were those performed by IECO in 1984 and Raytheon in 1995. The hydrology used to develop the Tyee lake inflow in those studies were based on a correlation of discharges between gage data at the Harding River near Wrangell and the gage at Tyee Creek at its mouth near Wrangell. The Tyee power plant has had only a few years of operation since these studies were performed. Nevertheless, an evaluation of the hydrology and energy estimates is possible by estimating Tyee Lake inflows based on gaged data at the Lake outlet, flow through the power plant and, to the extent possible, the change in storage in the Lake. KPU have contracted with R.W. Beck to conduct an audit of the energy estimates prepared in IECO and Raytheon studies to determine whether they have sufficient predictors of power production, in light of the historical power generation at Tyee Lake. The audit consisted of a review and evaluation of the hydrology, head losses, reservoir operation, turbine and generator efficiencies and other factors. PREVIOUS HYDROLOGY ESTIMATES The flow data used in the IECO and Raytheon energy estimates were determined from a correlation between two gages. The first gage (15020100), located downstream from the project on Tyee Creek at its mouth near Wrangell, has a drainage area of 16.1 square miles and a period of record from August 1963 to September 1969. The second, or base, gage (15022000) is located on the Harding River near Wrangell, with a drainage area of 67.4 square miles. Its period of record runs from August 1951 to September 1996. Since both gages are at similar elevations, they were expected to have similar hydrologic characteristics. Thus, a direct correlation between the two gages provides an adequate regression equation to extend the record of the Tyee Creek Gage data. The two gages have a coincident period of record between August 1963 and September 1969. IECO performed a correlation on those years and then estimated discharges for the Tyee Gage from the regression statistics to generate a synthetic period of record from October 1951 to September 1978. Lake inflows were estimated by adjusting the Tyee Creek data by a ratio of the drainage areas REPORT ON Ai ~-T OF ENERGY ESTIMATES but also by taking into account the snow pack and elevation differences between the sites (the IECO method). The resulting inflows are shown in Table 1. Raytheon did not conduct a hydrologic analysis, but used the results of IECO’s analysis for its energy estimate. A Corps of Engineers Study Documentation described a second method that used a correlation with the discharges for the Dorothy Creek Gage (15040000). However, it does not appear that the Tyee Lake inflows derived from this study were used in the energy analyses by either IECO or Raytheon. Thus, this method was not considered further in this audit. EVALUATION OF HYDROLOGY The regression equations, used in the IECO method, were not available for R.W. Beck’s review. Therefore, we developed approximate relationships for each month between the average monthly recorded flows at the Harding River Gage and the Lake Tyee monthly inflows in Table 1. Since IECO’s flow adjustments were dependent on the variation in snow pack and runoff characteristics from season to season, we correlated the Lake Tyee inflows in Table 1 on a monthly basis with the average monthly flows of the Harding River for water years 1952 through 1978. Separate regression equations were developed for each month as shown in Table 2. The good correlation between the Lake Tyee inflows in Table 1 and our estimates as shown in the plots in the appendix, indicated that derived equations were appropriate to extend the record for Lake Tyee inflow using the Harding River Gage data through 1996. This provided a benchmark upon which to compare the lake inflow estimated from the plant operation. To provide a flow estimate for a portion of the period of plant operation, the data were extrapolated through 1996 by applying the monthly regression equations to the average monthly Harding River flows through September 1996 (Table 3). The flows estimated above were compared to the Tyee Lake inflows estimated by adding the average monthly discharge from the Tyee Lake outflow (15019990) to the average monthly flow estimated from the plant generation and the change in storage in Tyee Lake during each month. From the data supplied to us from the Thomas Bay Power Authority in a fax transmittal dated April 5, 1998, there is about four months of data that includes unit generation and penstock flow. With these data, we performed a regression analysis on the power versus flow data and developed an equation to approximate plant discharge based on plant output. The correlation shown in Figure 1 indicates that the equation predicts plant discharge with sufficient accuracy. Spill from Tyee Lake is recorded at the Tyee Lake Outlet Gage. The only remaining variable in estimating Lake Tyee inflow is the variation in storage from lake level fluctuations. Unfortunately these data are not presently available O:SMH275.DOC 10/9/98 R. W. Beck 2 REPORT ONAL sr OF ENERGY ESTIMATES because lake level has not been recorded. If it is assumed that, during periods of no spill, the plant is essentially operated as run-of-river, then the Lake inflow can be estimated from the generation only. Table 4 shows the comparison of the flow estimated by the above two methods. During the months of December through March, the comparison of the flow data indicates that the two methods produce similar results. During these months, the amount of spill either remains flat or is slightly less than the previous month, which provides a stable flow condition for the comparison. The overall difference for the four months for 1993 through 1996 is about 2 percent. This indicates that the flow predicted from the Harding River is 2 percent higher than that predicted by the plant generation and the lake spill. Although the period for which the analysis was done is short and the lake level data is not available, it is our opinion that the hydrologic methodology used in the IECO and Raytheon studies predict the Tyee Lake Inflow sufficiently accurate to be suitable in the energy estimates. However, for planning purposes, we suggest that the results of the energy estimates be adjusted downward by 2 percent. Since the flow monitoring system installed in February 1998, at the plant has an algorithm to estimate Lake level, consideration should be given to calibrating that output and recording lake levels and plant flows. These data then can be used in future studies to analyze and possibly optimize the plant operation. PERFORMANCE DATA Both the IECO and Raytheon studies used approximations for the plant and turbine characteristics. The turbine efficiency and the head losses were both assumed to be constant. The IECO study assumed an overall efficiency of 86 percent, which we believe to be reasonable when the generator and turbine efficiencies are combined. The Raytheon study used an efficiency of 90 percent, which is appropriate value for a Pelton turbine. However, the study did not appear to provide allowance for generator efficiency. The generator capacity assumed in the IECO study was 20 MW, while Raytheon assumed 25 MW. Actual plant capacity is reportedly 24 MW. This represents a slight over estimation of energy in the Raytheon model and an underestimate of energy in the IECO model. Discharge capacity in the COE model used by IECO, is not specified, however, discharge is apparently limited by the power capacity. In the Raytheon analysis the turbine discharge capacity is set at 240 cfs. Because the turbine generator set is rated at 25 MW, the Raytheon model predicts more power for a given discharge, especially at the higher heads. The only other difference between the two studies was the range of allowable fluctuation of the Lake level. [ECO used two different ranges. The first was from Elevation 1430 ft to 1279 ft and the second was from Elevation 1396 ft to 1250 ft. Raytheon used water level operation limitations between Elevation 1390 ft to 1250 ft. Because of the similarities in the ranges, our evaluation of the energies were between the second IECO range and that used by Raytheon. O:SMH275.DOC 10/9/98 R. W. Beck 3 REPORT ON A’ 1T OF ENERGY ESTIMATES Finally, each study method used a monthly distribution for target generations based on anticipated loads. Raytheon used a maximum demand for the winter months of November through March and a minimum demand for April through July. IECO used a minimum demand for April through June and a maximum for July through March. A comparison of the parameters used by each in their analyses is shown in Table 5 It is our opinion that the overestimation of plant capacity and the efficiency by Raytheon would tend to overestimate the potential energy produced by the plant. However, the range used by Raytheon was slightly narrower than that used by IECO, thereby reducing energy production and somewhat compensating for the higher efficiency and capacity. EVALUATION OF ENERGY ESTIMATES The Raytheon report concludes that average annual energy production from the Lake Tyee Project would be 128 Gwh, even though its calculated estimate is 138 Gwh. We can only speculate that the energy reduction was an adjustment for outages or transmission losses. The 10 Gwh difference amounts to about a seven percent allowance, which we consider reasonable, given the 3 week annual shutdown of the project for maintenance and inspection of the plant equipment and transmission line. The IECO estimate was 133 Gwh but no adjustment for outages or losses were stated. Consequently, a similar seven percent reduction to the generation estimate should be applied. Another flaw in the Raytheon study is the use of only nine of the available 28 years of flow record. It is a better practice to use as long a record as is available to account for the variation of highs and lows over the period. The years selected in the Raytheon study averaged slightly lower than the average of the period of record, and it also covered the critical low flow period in 1956. Thus, the bias in the estimate is erring on the low side. We are of the opinion that the results of the IECO study are consistent with feasibility level estimates. Although the assumptions made are slightly conservative, they did not account for outages or losses due to ice, trash or transmission. Based on the correlation of flows and the assumptions made in deriving those correlations, we estimate that the predicted gross generation of the IECO model at about 2 percent high. Combining this with the outages noted above, we believe that the IECO energy estimate would be about nine percent high if the powerplant had an installed capacity of 20 MW. However, because plant capacity is actually 24 MW, the powerplant could produce additional generation by as much as 4 to 8 percent. Although the results of the Raytheon study are similar to those of IECO, they are not as reliable because of the higher generator capacity and the shortened period of the IECO flow record. A two percent reduction should be applied to the gross generation estimate as above. An additional five percent should be applied for the assumption of a greater generator capacity. Similarly, combining these O:SMH275.DOC 10/9/98 R. W. Beck 4 REPORT ONA _ T OF ENERGY ESTIMATES adjustments with the outages, we believe that the Raytheon energy estimate of 138 Gwh is about 14 percent high. It should be noted that both models were set up to provide the maximum generation possible to meet a monthly load pattern. Because of low demand, the actual operation of the plant is quite different than assumed in the models. From the plant data records, it is also noted that the lake levels are not varied ina manner similar to that assumed in the energy analyses. Thus a comparison of actual annual energy production with that predicted in the models would not be meaningful. Both models use average monthly flows and operations to estimate the energy. When the intertie begins operation, and the full potential of the project may be utilized, it may be possible to better model the operation to increase generation at critical times using a daily operation model. However, at this stage it does not seem appropriate to undertake such a study. CONCLUSIONS AND RECOMMENDATIONS Based on the review of the two energy studies and the assumptions noted above, it is concluded that: 1. Meaningful correlations of calculated lake inflows could only be done for the months of December through March, because lake level data were not available; 2. The flows for the months of December through March, based on the Harding River Gage, are about 2 percent greater than those determined from the plant flows and lake spills; 3. The head losses and plant performance assumptions for the IECO model are reasonable; 4. The efficiency assumed in the Raytheon model is optimistically high for a Pelton wheel, if the generator efficiency was included; 5. The gross energy estimate prepared by IECO is reasonable for the operation of the plant and lake levels described in their model; 6. The gross energy estimate prepared by Raytheon may be unreliable because of the short periods of record and the overestimation of the generator capacity; 7. The gross average annual energy estimates are about 2 percent high in relation to the potential plant output, based on the flow correlations from the Harding Gage for the months of December through March; and 8. The Raytheon gross energy estimate should be reduced, an additional 5 percent because of the overestimation of generator capacity. O:SMH275.DOC 10/9/98 R. W. Beck 5 REPORT ON A°*71T OF ENERGY ESTIMATES We recommend that KPU use the results of the IECO study with the following modifications: 1. Apply a 2 percent reduction adjustment to the energy estimate to compensate for the overestimation of the flow data; 2. Apply a 7 percent reduction adjustment to the energy estimate for plant and transmission line outages; and 3. Apply a 6 percent increase adjustment to the energy estimate to account for a 24 MW installation rather than 20 MW. 4. When the plans for the intertie operation are prepared, re-run the model with the most current monthly load demand. We also recommend that KPU maintain records of the plant discharge and the lake levels so that lake inflows may be determined and plant operation optimized. REFERENCES 1. USGS Flow Data, Station 15022000, Harding River near Wrangell, AK, Daily flows, August 1951 through September 1996, Internet file 2. USGS Flow Data, Station 15020100, Tyee Creek at Mouth near Wrangell, AK, Daily flows August 1963 through September 1969, Internet file 3. USGS Flow Data, Station 15019990, Tyee Lake Outlet near Wrangell, AK, Daily flows October 1979 through September 1996, Internet file 4. USGS Flow Data, Station 15040000, Dorothy Creek near Juneau, AK, Daily flows June 1944 through December 1967, Internet file 5. Application for License, Volume 1, Alaska Power Authority, prepared by International Engineering Company (IECO), December 1979 6. Design Criteria, Tyee Lake Hydroelectric Project, Section 1.2, prepared by TECO, January 1984 7. Rivers and Harbors in Alaska, Sitka and Petersburg/Wrangell Study Areas, Study Documentation, Section A, Alaska District, Corps of Engineers, March 1979 8. Tyee/Swan Lake Intertie Operations Study, prepared by Raytheon Engineers and Constructors, April 1995 9. Fax Transmittal, Penstock Reports, Thomas Bay Power Authority, May 5, 1998 10. Fax Transmittal, Tyee Output, Thomas Bay Power Authority, May 12, 1998. O:SMH275.DOC 10/9/98 R. W. Beck 6 Water Year 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 Average Maximum Minimum Oct 150 325 361 242 198 192 176 4715 348 453 598 251 293 295 383 195 239 196 148 229 179 151 167 510 158 242 277 275 598 148 TYEE LAKE HYDROELECTRIC PROJECT TABLE I-1 MONTHLY DISCHARGE (IN CFS) AT TYEE LAKE OUTLET Nov "1 114 101 198 94 132 155 113 112 111 98 157 56 91 52 110 133 108 322 138 83 73 41 101 55 162 15 113 322 41 Dec 55 44 66 WW 29 133 55 84 186 104 39 218 96 66 42 42 46 32 102 51 39 31 92 42 97 126 34 76 218 29 Jan 22 25 28 51 18 31 87 34 56 62 168 127 54 74 21 30 26 1 28 34 24 48 25 31 71 43 29 47 168 n Feb Mar 14 15 16 21 122 16 30 21 W 1 14 13 22 24 20 25 33 34 53 37 43 49 101 30 40 22 37 34 15 38 21 16 41 81 10 9 41 36 13 13 41 54 20 19 49 23 15 18 39 36 87 28 28 26 36 28 12281 10 = 9 Apr 58 53 14 39 48 42 77 55 88 87 85 49 45 64 63 19 36 60 41 33 22 45 64 26 58 86 62 53 88 14 May June 215 321 303 338 138 329 129 328 338 277 236 371 249 327 214 376 205 324 | 196 371 178 365 181 306 134 420 138 340 188 352 240 464 218 298 253 400 156 414 162 362 227 385 198 327 157 293 113 291 201 339 126 451 123 268 193 350 338 464 113 268 July 338 244 261 301 273 268 207 395 338 276 301 245 320 294 289 287 273 268 282 263 414 282 320 414 367 195 188 293 414 188 Aug Sep 260 279 170 230 156 167 345 231 350 150 158 198 256 124 225 177 276 214 285 209 240 266 96 256 287 177 148 97 244 281 221 363 166 392 224 140 276 270 269 176 328 218 277 234 258 257 235 192 294 290 175 159 215 133 238 218 350 392 96 97 Average 151 158 147 170 151 150 147 184 186 188 204 168 163 141 165 168 163 143 177 146 169 143 146 167 168 157 122 161 204 122 Water Yr 1992 1993 1994 1995 1996 Oct 324 204 326 263 235 Nov 163 162 222 33 84 January February March April May June July August September October November December Table 2 Regression Equations Q, = 0.220*Q, + 2.8 Q, = 0.161°Q, - 0.3 Q, = 0.168*Q, - 1.4 Q, = 0.192*Q, - 8.4 Q, = 0.297*Q, - 66.5 Q, = 0.226*Q, + 35.2 Q, = 0.227*Q, - 21.1 Q, = 0.229*Q, - 35.3 Q, = 0.213*Qy - 15.5 Q, = 0.286*Q, - 29.6 Q, = 0.260°Q, - 12.3 Q, = 0.234*Q, Flows Estimated from Harding River Data Dec 171 45 102 31 66 Jan 105 60 95 38 47 Table 3 Feb Mar 83 77 95 44 24 82 35 29 36 50 Apr May Jun 115 243 383 92 290 257 132 247 325 88 238 258 68 128 464 Jul 258 177 294 174 251 Aug 154 102 178 112 180 Sep 342 154 370 147 186 Table 4 Comparison of Flows Flow Based on Plant Data plus Spills (cfs) Overall Difference of the Harding River Correlation and the Plant Data for December through March is -2% Table 5 Performance Characteristics Distribution of Demand IECO Raytheon Percent|Percent MW 8.4%| 8.0% 23.46 8.8%| 9.9% 29.03 9.6%| 9.5% 27.7 8.5%} 9.4% 27.59 7.8%| 9.1% 26.7: 8.8%] 8.5% 25.1 7.5%| 7.6% 22.36 7.6%| 6.5% 19.22 7.5%| 7.4% 21.70 7.6% 22.4 Aug 8.7%| 8.6% 25.1 Sep 8.4%| 7.9% 23.25 Annual} 100%| 100% 293.75 9° Zz o < qj Fe s 2|> =| i Performance Data [ECO |ECO 2 Period of Record 10/52 -9/78 10/52 -9/78 10/52-9/59 Maximum Lake Level 1430 ft 1396 ft 1390 ft Minimum Lake Level 1250 ft 1250 ft 1250 ft Head Losses 5 ft 5 ft 3-4 ft Turbine Efficiency 0.86 0.86 0.9 Generator Capacity 20 MW 20 MW 25 MW Energ 138 Gwh 133 Gwh 138 Gwh* * Output from ARSP was 138 Gwh, value in text of report was 128 Gwh Tyee Lake Energy Audit Power vs Discharge 90 TTA TAHT ATTA TTT MTTINTTAT PRT TTTTTOe TTT TT PT MTT LTR MTT TTTRTICT RTT RTETRT RTT TE TTR MIN TERM RET TTT . | Co t i [Q = 7.84*MW + 4.27 ° 70 t— — iad ie tr 7 —+—-}—— —— ate = 3 eo | % a oF ole? er |¢ a ’ e e [He Ds i LndTeaatnon Tamla ANG aT Aaa HUMAN TANG IG (ease SUNT LL & ° fol EEL | ALLELE a 2 Ss acne ani Taras ara nn PU Ae ee reas ace Po ee Fanaa aia all TH 20 nem men ef ed oeeaeelienomell oan dent 10 + + ++ jeans esiniathceee sarees sa = a oe 0 ttf ttl a eS ttf i i} 0 a 2 3 4 5 6 7 8 9 10 Power (MW) @ Measured Discharge Calculated Discharge Data from Jan 1 - Apr 30, 1998 Figure 1 APPENDIX January 180 160 [Qr = 0.220*Q) + 2.8 | 140 120 }- 8 Tyee Outlet (cfs) & 0 100 200 300 400 500 600 700 800 Harding River (cfs) @ Gaged Calculated Ketchican Public Utilities Energy Audit February QT = 0.161*QH - 0.3 Tyee Outlet (cfs) 100 200 300 400 500 600 700 Harding River (cfs) @ Gaged Calculated Ketchican Public Utilities Energy Audit March Qy = 0.168*Qy - 1.4 70 s T Tyee Outlet (cfs) & 10 ° 50 100 150 @ Gaged 200 Harding River (cfs) Calculated Ketchican Public Utilities Energy Audit April .192*Qy - 8.4 Tyee Outlet (cfs) 100 200 300 Harding River (cfs) @ Gaged Calculated Ketchican Public Utilities Energy Audit May Q, = 0.297°0, - 66.5 ———— = ————— 600 700 800 900 1000 1100 1200 1300 1400 Harding River (cfs) @ Gaged Calculated Ketchican Public Utilities Energy Audit June Qyz = 0.226*Qy + 35.2 Tyee Outlet (cfs) 8 200 + 1000 1100 1200 1300 1400 1500 Harding River (cfs) @ Gaged Calculated 1600 1700 1800 1900 Ketchican Public Utilities Energy Audit July Qy = 0.227FQy, - 21.1 | 1000 1200 1400 Harding River (cfs) @ Gaged Calculated | 1600 1800 2000 Ketchican Public Utilities Energy Audit August Qy = 0.229*Qy, - 35.3 Tyee Outlet (cfs) 1000 1200 Harding River (cfs) @ Gaged —— Calculated 1400 1600 1800 Ketchican Public Utilities Energy Audit September 0.213*Qy - 15.5 3 8 Tyee Outlet (cfs) @ Gaged 1000 1200 1400 1600 1800 Harding River (cfs) Calculated Ketchican Public Utilities Energy Audit October Q; = 0.286*Qy, Tyee Outlet (cfs) 1000 1500 Harding River (cfs) @ Gaged —— Calculated Ketchican Public Utilities Energy Audit November 600 800 Harding River (cfs) @ Gaged Calculated L culated | Ketchican Public Utilities Energy Audit December 250 — Qy; = 0.234*Q, 200 150 3 5 fo) 8 100 ; 50 0 —— aa SEER ——— ——_- ee 0 100 200 400 500 700 Harding River (cfs) @ Gaged Calculated 1000 Ketchican Public Utilities Energy Audit . p . drape” at 4DP ‘ATER WYNNE 2/4l4k PINC wostng, 6o— 222 S.W. Columbia HEWITT Portland, Oregon 97201-6618 (503) 226-1191 DODSON & Fax (503) 226-0079 SKERRITT, LLP ATTORNEYS AT LAW Wad) vats eae Tobe Wage proitatio, MEMORANDUM pir TO: Four Dam Pool Project Management Committee FROM: Ron Saxton and Larry Hittle DATE: February 2, 1998 RE: Proposed Ketchikan Interruptible Power Sales Agreement We have prepared an initial draft of Agreement, based upon the materials furnished by KPU and Alan Dashen. The basic provisions of the attached draft Agreement follow the outline provided by KPU in its November 3, 1997 letter. The Agreement sets up the obligations of KPU to purchase interruptible power, as well as the determination of development or incentive benefits that KPU will derive from taking on the responsibility of building the Intertie line. 1. Basic Terms of Agreement. ond prarrtboan a. KPU Financing, Design, Construction and Operation of Tyee- } Swan Intertie. KPU will finance, design, construct and operate the Intertie and be liable for all debt, and costs of the line. The Four Dam Pool will have no direct responsibility for such costs, except through the offsets of costs and debt service against revenues owed by KPU under the Agreement. b. No Negative Impact to the Purchasing Utilities under the Four Dam Pool Power Sales Agreement. The cost of power and the rights to purchase power will not be affected by the sale of CL KL power under the proposed Agreement. Cs Sharing of Benefits. Once payment of the debt service on the loan from the State is paid, the deficiency (carry forward Seattle, Washington (206) 623-4711 Fax (206) 467-8406 * San Francisco, California (415) 421-4143 Fax (415) 989-1263 - ATER WYNNE deficiency) in previous payments is made up and the annual power revenues from KPU exceed the annual cost of the Intertie, 7 one-third of the net wi ‘ urchasers and Tyee Proj ; Wrangell). x ay Quon en Ze Payment For Power and Offsets and KPU Benefits and Incentives. a. Cost of Power. The base price for energy will be the cost of power to the Power Purchasers under the Four Dam Pool Powep pee u Purchase Agreement. (waa 2 (od Ss ta? b. Ketchikan Development or Incentive Benefit. The cost of 7 interruptible power sold to KPU will be discounted by an agreed ° percentage (KPU-preposes-+0%} until sales of interruptible power reach a specified level (not in KPU proposal). cy KPU Offsets. KPU will deduct its costs connected with owning and operating the Intertie from the amounts it owes for interruptible power delivered,during a Contract Year. Those costs are: te The Li Wine, wane, coi wt at ai \ (1) KPU Intertie O&M and A&G Costs. KPU’s direct O&M a, Dose costs and associated A&G costs (estimated in advance) ¢ will be deducted from the monthly revenues to be paid to cet A AEA each month. (vx. st to AEA °) ASvidu rahe) (2) Debt Service Owed the State. One-twelfth of KPU’s debt service obligations to the State will be deducted from monthly revenues to be paid to AEA.(Ni> ) (3) Intertie Renewals and Replacements and Other Non- budgeted Intertie Expenditures. KPU’s cost of renewals and replacements not provided for under annual O&RM&R budgets in excess of a stated amount will be financed separately and the debt service for such renewals and replacements will be deducted from monthly revenues to be paid to AEA. \)o ee (4) Carry Forward Losses From Previous Contract Years. To the extent annual cost of power owed by KPU is less than \ Kd pad <OVv\ \oon. LGH\1115igh.mem -ATER'WYNNE the amounts needed to provide for the offsets under this provision c, the difference will be accumulated as an interest bearing loan to be offset from power payment obligations of KPU in future Contract Years. Teenage Sl lg eel ute ea (5) Order of Payments. In any Contract Year that the amounts owed by KPU are less than the offsets provided above, the priority for offset shall be in the order stated above (i.e., (1) is offset first, then (2) is offset second and so forth). - dt d. Extra O&M Costs at Tyee. If the Tyee Project sustains abnormal he additional operation, maintenance or replacement costs as the result of the delivery of power under the Agreement, AEA shall determine the extent of such costs and consult with KPU and the PMC regarding the extent of such costs and the additional amount per kWh to be paid under the Agreement. The amount to be paid by KPU will be increased if such increase is justified by the facts. 3: Tyee Project Third Unit. The one-third share of net revenues to Tyee power purchasers, once Intertie debt is repaid due the Tyee Project, could provide a source of income to finance the installation of the third generating unit at Tyee. The installation of a third unit would improve Project operation and firm up deliveries of power from Tyee for both Ketchikan and Thomas Bay parties. 4. Use of the Intertie. If a Power Purchaser, including KPU, arranges for wheeling of power from a source other than Tyee, the rate per kWh charged by KPU should its share of annual costs of O&M&R of the Intertie. Any additional cost recovery should be based upon debt payments and other related direct line costs. Tom Friesen, John Magyar, Ketchikan nnaad? apr Scott Seabury, William Privett, Wrangell Robert Wilkinson, Michael Easley, Copper Valley Or , cA T David Carlson, Dennis Lewis, Petersburg Walter Sapp, Tom Hendell, Kodiak : Ed Kozak, Kodiak Gc ‘ter Lhe PU how the arcet te purchtag sD oyrsy opie W rane ehh a it -3- LGH\1115igh.mem me ‘ATER WYNNE QUESTIONS FOR PMC DISCUSSION REGARDING KPU INTERRUPTIBLE POWER SALES AGREEMENT es Initial Cost of Power. KPU, after the offsets and discounts suggested by KPU, will not pay the Four Dam Pool any revenue until 2013. All of the revenue will be used to pay debt service, project O&@M&R and revenue underruns. Alan Dashen’s spread sheet indicates the first year of net revenue would be 2013. Question: Should KPU pay a minimum amount Py kWh delivered while the Intertie costs exceed power income? ™ 2d_ 25 KPU Development or Incentive Benefit. KPU proposes that the cost of power under the Agreement be discounted 10% as a development or ownership incentive fee. "SO Question: Is the 10% discount acceptable to the PMC? Question: Should KPU accept a smaller discount until the debts are paid and the PMC is receiving positive benefits? 3s Use of the Intertie by Power Purchasers. KPU will own the Intertie and have the right to charge for transmission of power other than power generated by Tyee. Question: If a Power Purchaser wants to use excess capacity in the Intertie, what is a fair wheeling charge? Annualized OM&R per kWh wheeled? “OW about aQat verte ADD pay -1- LGH\1115igh.mem DRAFT 02/02/98 3:25pm Ater Wynne Hewitt Dodson & Skerritt, LLP INTERRUPTIBLE POWER SALES AGREEMENT FOUR DAM POOL OF ALASKA ENERGY AUTHORITY THIS AGREEMENT is entered into by and among the CITY OF KETCHIKAN d/b/a as Ketchikan Public Utilities ("«PU") and the ALASKA ENERGY AUTHORITY ("AEA") to provide for the sale, delivery, and purchase of interruptible power from the Lake Tyee Hydroelectric Facility ("Tyee"), which is part of the AEA’s Four Dam Pool - Initial Project. WITNESSETH: WHEREAS, the AEA is a public corporation of the State of Alaska duly created, organized and existing pursuant to AS 44.83, and authorized by law to sell electric power generated by Tyee; and WHEREAS, Tyee’s generation exceeds and will exceed the requirements of the Cities of Petersburg and Wrangell ("Cities") for power from Tyee under the Long-Term Power Sales Agreement Four Dam Pool - Initial Project ("Long-Term Agreement") for the foreseeable future; and WHEREAS, KPU, a power purchaser under the Long-Term Agreement, intends to construct, operate and maintain the proposed Swan-Tyee Intertie Project ("Intertie") to enable KPU to purchase excess power available at Tyee; and WHEREAS, AEA, the Cities and the other Purchasers under the Long- Term Agreement have concluded that the sale of interruptible power from Tyee to KPU under the terms and conditions of this Agreement will provide ce: DES -1- LGH\1111Igh we igh.agr DRAFT 02/02/98 3:25pm Ater Wynne Hewitt Dodson & Skerritt, LLP additional revenues to the benefit of the Cities and the other Purchasers and benefit the ratepayers of KPU; NOW, THEREFORE, IN CONSIDERATION of the mutual covenants set forth herein, the parties hereto agree as follows: SECTION 1. Term. This Agreement shall become effective upon execution by the Parties and shall continue in effect until the date the Long- Term Agreement terminates. en EVE NK & iia Thewag Way SECTION 2. Sal d Purchase of Interruptible Power. (a) (AEA)agrees to sell to KPU and KPU agrees to purchase Interruptible Power when available from Tyee and KPU’s hourly power requirements exceed the hourly amount generated by KPU’s Resources. For the purposes of this Agreement, KPU’s Resources means and Interruptible Power means power available from Tyee in excess of the requirements of the Cities under the Long-Term Agreement and any other ot (eau Tyee as Electric Power pursuant 7 to such Agreement. KPX RA cote pies ap pans VOyelace Tyee at wrt > (b) | KPU shall pay for Interruptible Power delivered to bk Intertie in accordance with Section 3. (c) Any sales of power other than Interruptible Power to KPU from Tyee shall be made in accordance with Section 3 of the Long-Term Agreement. (d) For the purposes of this Agreement, KPU resources shall mean the generating resources listed in Exhibit A. Exhibit A may be amended from aK time to time upon the agreement of the Parties that a 2s that a listed resource is __ retired or a resource providing KPU firm power for a period greater than one- year is owned or contracted for by KPU. -2- LGH\1111igh.agr DRAFT 02/02/98 3:25pm Ater Wynne Hewitt Dodson & Skerritt, LLP SECTION 3. Rates and Billing. (a) KPU Payment Obligation and Billing. KPU shall pay AEA)for Interruptible power delivered in each month based upon percent of the estimated Wholesale Power Rate determined under Section 5(c) of the Long- Term Agreement, less the offsets and charges provided in this section, until KPU’s annual purchase exceeds kwhs. For interruptible power delivered in excess of ____kwhs, the cost per kwh shall be 100% of the amount determined in such Section 5(c), less such offsets and charges. (b) KPU O&M and A&G Offset. The amount paid by KPU under Subsection (a) above shall be reduced by KPU’s actual cost of operation and maintenance during such month and the monthly amount of administrative and general expenses established prior to each Contract Year. (c) Intertie Debt Service. The amount paid by KPU under Subsection (a) above shall be reduced by one-twelfth of the annual debt service on bonds issued to finance KPU’s cost of construction of the Intertie due and payable in the Contract Year. Once the bonds are issued, KPU shall provide AEA the schedule of debt service due and payable for each Contract Year. In the event the cost of constructing the Intertie is less than the amounts of bonds issued for such purpose and any additional grants or other contributions toward construction of the Intertie received by KPU, KPU shall amend such schedule of debt service to reflect KPU’s reduced debt service requirements. (d) Renewals and Replacements. KPU’s cost of renewals and replacements shall be reflected as costs of operation and maintenance pursuant to Subsection (b) above. To the extent the costs of renewals and replacements exceed % of the capital cost of the Intertie, KPU, at AEA’s request, shall use its best efforts to finance such costs on an appropriate repayment schedule. (e) Other Intertie Expenses and Carry Forward Losses. The Parties recognize that the above categories of Intertie expense, less revenues = 3 = LGH\1111Igh.agr DRAFT 02/02/98 3:25pm Ater Wynne Hewitt Dodson & Skerritt, LLP received pursuant to Section 6, may exceed the payment obligations of KPU under Subsection (a) above in a Contract Year and that there may be expenses connected with KPU’s ownership of the Intertie which are not covered by Subsections (b) through (d) above. To the extent the revenues in any Contract Year exceed the costs in such subsections and any revenues paid for transmission of power under Section 6, any surplus available shall be used first to offset any such expenses in the order listed and agreed by AEA to be appropriate Intertie costs and second to make up for KPU costs not recovered in a Contract Year. edt eB CeO ecovered in a Lontract Year (f) Sample Calculation of Payments, Offsets and Credits. Exhibit A provides sample calculation of KPU’s payments, offsets and credits as provided in this section. SECTION 4. Obligations Under the Long-Term Power Sales Agreement and Surplus Revenues From Sales to KPU. (a) Nothing in this Agreement shall require any Purchaser under the Long-Term Agreement to pay a higher Wholesale Power Rate than would occur absent this Agreement. The Parties agree that this Agreement shall assure a ate revenues a osts of the ertie inconsistent with we the purposes of this section. \ : oper Jeup Y (b) To the extent that revenues in a Contract Year exceed the costs and expenses under Section 5(b) through (e), the surplus revenues in the Se P Contract Year shall be credited one-third to AEA for any purpose determined by AEA, one-third as a credit to the following Contract Year’s Annual Cost of the Purchasers under the Long-Term Agreement and one-third as a credit to the following Contract Year’s payment obligation of the Cities under the Long-Term Power Sales Agreement. SECTION 5. Construction and Operation of the Intertie. KPU agrees to construct and operate the Intertie in accordance with Prudent Utility Practices as defined in the Long-Term Agreement. KPU shall keep the AEA and the Purchasers informed regarding the schedule for completion of the =4. LGH\1111Igh.agr DRAFT 02/02/98 3:25pm Ater Wynne Hewitt Dodson & Skerritt, LLP Intertie and provide to the AEA a complete accounting of costs and contributions to construction of the Intertie. Except as provided in Section 3 of this Agreement, nothing in this Agreement shall obligate AEA or any Power Purchaser to be responsible for paying any debt or cost incurred by KPU in the construction, operation or maintenance of the line. SECTION 6. Use of Intertie by Power Purchasers. The Power Purchaser’s shall be entitled to use excess Intertie capacity over the amount needed to transmit power to KPU under this Agreement. Payment for such use shall be based upon the average cost per kWh of transmission in a Contract Year, including debt service payable in such year. SECTION 7. Definitions. Any capitalized term not defined herein shall be as defined in the Long-Term Agreement. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed, each on the date written below. CITY OF KETCHIKAN ATTEST: 6b Te a pebyaurd ALUN pea” -5- LGH\1111igh.agr 02/02/98 3:25pm Ater Wynne Hewitt Dodson & Skerritt, LLP ALASKA ENERGY AUTHORITY By: Title: Date: 7 6 a LGH\1111Igh.agr ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY = ALASKA @@e™ SCENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 269-3000 FAX 907 / 269-3044 November 24, 1998 Mr. John A. Magyar General Manager Ketchikan Public Utilities 2930 Tongass Avenue Ketchikan, Alaska 99901 Dear John: Thank you for your letter of November 4, 1998. We enjoyed meeting with you and Tom Friesen and hearing the latest news regarding the development of the Southeast Intertie. As we discussed at our meeting, there are a number of questions that we believe should be answered regarding the development plan for the Intertie. We request that you respond to the enclosed list of questions that Dennis McCrohan has prepared. Other material that you have provided may have already answered some of the questions. Nonetheless, since the financing plan has been evolving over the last few months, we believe it would be helpful for you to provide responses to all the questions in light of the recent developments. John, | recognize that we are providing an extensive list of questions and that some of the questions call for subjective answers. We believe however, that, as the Legislature and Administration consider the Intertie, responses to these questions will be required. It will be to everyone’s advantage to have the answers early in the process. Should you have any questions, please feel free to call Dennis, Keith or myself. | look forward to hearing from you soon. Sincerely, _ D. Randy SJmmons Executive Director ORS:bif H:\ALL\KEITH\Southeast Intertie\Letter to Magyar.doc cc; Keith A. Laufer, Financial & Legal Affairs Manager a Dennis V. McCrohan, Deputy Director-Project Development & Operations ib Statewide Questions PONS a What is the long-term benefit to the State of the SE Intertie? What are the benefits of distributed vs. inter-connected generation for the Southeast? What is the current financing plan including specifics? What are the economic benefits of the Southeast transmission corridor for multiple uses such as fiber optics, communications, etc? What municipal actions are necessary to implement the financing plan? Regional Questions What are the current SE Intertie project costs assumed for Four Dam Pool debt service, R&R, and Four Dam Pool O&M costs? What is the cost of power sensitivity in Petersburg, Wrangell, and Ketchikan to extended transmission line outages, e.g. 60 days, between Ketchikan and Swan Lake and between Tyee Lake and Swan Lake? What is the cost of power impacts of extreme high and low water scenarios of Tyee and Swan Lake occurring together or in opposition? How do you see the revenues, costs, and risks being shared among the State, Four Dam Pool, Petersburg and Wrangell, and Ketchikan? What are the reductions in generation reserves for Petersburg, Wrangell, and Ketchikan resulting from the Intertie and how do these reductions impact cost of power for each city? Are there opportunities for British Columbia sales or generation purchase which are enhanced by the SE Intertie? Ketchikan Questions 1. 2. 3 10. Ts How has the actual capital and O&M cost of the new KPU diesel generation impacted the cost of power? How do you see the SE Intertie affecting the Mahoney Lake project and vice versa? What is the wholesale cost of power, escalation indices, reliability factors, and term of Mahoney Lake and 4 Dam Pool proposals for the power sales agreements? How do ISER load growth predictions for 1998 compare to actuals? What new industries have been included in ISER projections? What new industries may occur or be attracted to Ketchikan and what is the impact cost of power (e.g. 10MW industrial load in 2005)? What is the impact (e.g. a 10 MW hydro plant) independent power producer on-line in 2005 on the cost of power? What is the impact of the transmission right-of-way maximum timber sales or no sales, storage, and disposal on the cost of power? What is the cost of power impact of failure to receive the $4M appropriation (e.g. for 2 years)? What is the impact of Intertie 25% capital cost overrun and/or 25% O&M cost overrun on cost of power? What are the costs of power of impacts of necessary coordinated and limited scheduled outages on Tyee Lake and Swan Lake on the communities? What is the term of the current EIS/ROD? What are KPU action plans if they fail to receive any additional Federal grants? What is the impact on the cost of power of Tyee energy (e.g. 6.8 cents/KWH or interruptible rate, say 4.0 cents/KWH)? Page 1 of 2 12. 13. 14. 15. 16. 17. 18. 19. Will compensation (SVC) be required for the Intertie. What is the cost of power impact? What is the Intertie cost of power difference between the second best alternative and the SE Intertie for low, medium, and high growth scenarios and what amount of investment does the reduction justify? What is the impact on the cost of power of actual capital cost, shorter life, higher fuel cost, and higher O&M cost for the new diesel? What are the impacts of current and future air quality regulations and diesel emissions on cost of power and Ketchikan future growth? What is the cost of power impact of 1% vs. 3% line losses? What limits does the Ketchikan financing plan place on Ketchikan’s current loans and future borrowings? How will project insurance be provided and has the cost been included in the cost of power? . What is the security for failure to make bond payments? H:\ALL\BJFVAEA\SE Intertie Questions.doc Page 2 of 2