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HomeMy WebLinkAboutCopper Valley Memos and Comments 1995TO: Riley ee Goes with the Summary Table for Back-Up Assumption and Fact Sheet Medium High Load Forecast: 2.5% with Petro Star forever Medium Low Load Forecast: 2.5% with Petro Star gone on 2019 Medium High/Low Forecast Without Petro Star: 2.5% Petro Star gone now. Low Fuel Escalation: -1.18% real High Fuel Escalation: .45% real Energy Requirements in 1994: § Aleyeska: 50,000,000 kwh CVEA: 70,000,000 kwh including approximately 14,000,000 kwh for Petro Star Discount Rate: 4.5% =< i] So) Sen Clemotbn Rdg hs He © Bagels Eran y <a New 39,000 # /G,000 Mur 20% M-H S56, g00 2Z sco MWh 26h Mek Foe Oo 22, S00 MWh 26% | 14th ~) var for 12,22 MLK a Expaneio Lo febe aA (?¢7 ~ coufivmodl by Peo sbar a lf - | { ee | A No. Fonthce qu voustl. assumed Ge Pare They | wn projections | | | 4 Expansion ate Lanre _# 3s- 4o fe | |" Ww sep = : con sams Cem ___| (( wp aoe cont bend tot | 7 Peko Cheer _ | Sains el / ey on andl pr) prow unser meat | gtO\ || : Sama = ; : | | a] - low Furl eg le Fol | ttt —a/—$§o_| Mgube tote lL. Cr neuarer fren 30,080 loo rncly we 5O0,8& Vora in 1997, ree ae equi valid Met) | Bere 6,080, 6D KOH Ob 37,595. deo Amine h@va.o- = | No 4a thon now) avrume of {& Pete Stan, | 4k Pate oter den vat 4 corel Bn DOC, 800 > Kea RB. 088 f, t “2000, 200 /YR Kot ’ / 3000 nonidondy KeITO/yR = = S00, oon FER | Pawan ee ie ea + 36,000 , 000 KVANK B.cegeon = (000,800 (YR Ona aad ez n 41400, 086 /vpP “ho W 386,060, DDO KO4LI Sox nde rra® wa2U 8 AS O80, OOD \vaw ADRaidl Quer. FO AEWA, Uy loo, eHo /YR Proouk voaluo $100, 800/YR W & 10M TI. nab Nek A 6 35 o> LD T4 B aM Sow ws Gon ASSOCIATION, INC. October 16, L995 David Ramseur Director of Communications Office of the Governor P.O. Box 110001 Juneau, Alaska 99811-0001 Kurt Parkan Special Staff Assistant Office of the Governor P.O. Box 110001 CHUGACH @ECIRIC ASSOCIATI EGENN Alaska Industrie! Development oct 191985 and Export Authority Patrick Pourchot Legislative Director Office of the Governor P.O. Box 110001 Juneau, Alaska 99811-0001 Mike Irwin, Commissioner Department of Community & Regional Affairs P.O | Box | 212100 ENE N. BJORNSTAD, P.E. General Manager Juneau, Alaska 99811-0001 Juneau, Alaska 99811-2100 Dear David: We appreciate you taking the time to meet with us on the Copper Valley Intertie. We want to ensure that the decision on approval of the loan is made with an understanding of the full potential of this line to enhance the prudent development of the Copper Valley and Valdez areas, the gateway to the Wrangel St. Elias Park. In particular, we are concerned that the decision be made with a broad understanding of the real world enhancements which the project will deliver. This decision is critical to providing the basis for sound and sustained economic health in the area. The potential economic stimulative effect of this project ranks it second only to installation of the Transalaska Pipeline and Valdez Oil Terminal in its historical impact. It is undoubtedly the most important and high profile decision this administration will make affecting the residents of this area and is very important to the residents of this area. It would be a mistake to make the decision turn on narrow study assumptions such as whether to impute interest to a zero interest loan, assume that fuel prices will decline at 1% per year forever, or assume that electric power consumption will not increase even if the price drops substantially. For these reasons, it is essential that Copper Valley Electric Association, Inc. (CVEA) and Chugach Electric Association, Inc. (Chugach), the stakeholders willing to substantially invest in the line, have an opportunity to carefully review the CH2MHill study and make a presentation to the decision maker before the decision is taken. CVEA and Chugach are member-owned cooperatives and as representatives of our members, we have an obligation to work for their best interests over the long tern. When the decision was first made to approve the loan to support this intertie, a power sales agreement was not in place. The situation is vastly 5601 Minnesota Drive ¢ P.O. Box 196300 « Anchorage, Alaska 99519-6300 Phone 907-563-7494 © FAX 907-562-0027 David Ramseur October 16, 1995 Page 2 different now. Chugach and CVEA have agreed in principle to the structure of a power sales agreement and the parties are in the process of developing the actual text of the document. It is now very realistic to expect rate decreases for CVEA members on the order of 15% with the prospect of additional savings from closer coordination of the two utilities’ operations. Now that the word is out, the residents of the area are very excited in anticipation of the possibilities. Chugach and CVEA are also working hard to help Petro Star Valdez Refinery to obtain the benefits of the lower rates the intertie will bring. Without the intertie, Petro Star has clearly indicated it will cogenerate and leave the CVEA system. Of course, CVEA will do its best to protect its customers from cost burdens associated with this change, but the resulting loss to CVEA of approximately 20% of its load will inevitably cause rate. increases for those remaining customers (who already suffer the highest unsubsidized electric rates in the State) as the high fixed costs of replacing the 20 year old diesel plant with new diesels are spread over fewer sales of electric energy. We can only move forward or take a giant step back. There is no business as usual option available. Once again, we appreciate your attention to this matter of fundamental importance. If you have additional information about the process toward decision or if you have any questions, please do not hesitate to contact either one of us. Sincerely, CHUGACH ELECTRIC ASSOCIATION, COPPER VALLEY ELECTRIC INC. ASSOCIATION, INC. aa eea eee Eugene\N) Bjornstad\ on Hurless General Manager General Manager cc: The Honorable Tony Knowles Jim Ayers, Chief of Staff Governor, State of Alaska Office of the Governor P.O. Box 110001 P.O. Box 110001 Juneau, Alaska 99811-0001 Juneau, Alaska 99811-0001 John T. Shively, Commissioner Riley Snell, Executive Director Dept. of Natural Resources AIDEA 400 Willoughby Avenue 480 West Tudor Road Juneau, Alaska 99801-1796 Anchorage, Alaska 99503 Ofiz} ass a of _} ~ pate PROJECT NO. BY Q CT. okio - ee ? Gst PV + Lobe te*Gst Pv SUBJ! are REV 9/93 FORM 13 CR/7T/AT We at:7T i T ' | : | — ‘cbniatic- ptt lage \ 200/700 Me nr of yew p penal ¢ A eo _abhcbons Tea yeceouree hors £ optiatuons | : sane |e fuel costs stl sey de Resels . Cee a ET TT eT TT LTT | Discount abe pe vie Arcovwt wer UT | eee A) dela _neot Ateocutad Ge aaa ee ul __L. BG ea. ob et ate eae Led | hyweys __| a i @ Novi od. Pe whuees =| SOU eli ee Hunan ein eb | 23 a el Tae ea Leaini Pie nee LULU | PIE tes naa ea wapent i Le ama ‘| ag le | - ta rneat cases Vhere” One o- - Se eeu || peta J sea eMervahor, ira | SOE EEE igre nee UE EL Ee TT TTT eta aee aN ei | L t. x3 G -5¢ | _ Fefakun SS me ELLLae ece el Lee ae al Le | . : j eee Sutton-Glennallen Intertie Policy Issues relating to “Yes” decision: TOS ro -Promotes economic development -Saves jobs/creates new jobs -Fuel diversification for Copper Valley -$35 million is not grant but a loan -Favorable environmental externalities -Study confirms existing DCRA finding -Expands Railbelt grid system Politics relating to “Yes” decision: Pro’ in -Jobs -Labor support -Community support in Glennallen & Valdez -Native Corp. support -Ability to play hardball with Alyeska > Con’s -$25 million in lost opportunity -$35 million not available for other uses -Must reverse existing finding of feasibility -Quantitative cost benefits are small -Negative environmental impacts from new development Con’s -Damage environmental support -Sutton Community opposed -Daily News opposition -Lose opportunity to throw back to legislature September 19, 1995 TO Riley Snell, and John Rubini FROM: Dennis McCrohan SUBJECT: CVEA/CEA Meetings and ?Executive Summary On September 18 Dave Gray and I met with CVEA and CEA. The purpose of the meeting was to discuss the assumptions which were used in the 1994 Beck Intertie study, the 1995 Beck Power Supply study, and the update by CH2M Hill to the 1994 study. CEA indicated some dissatisfaction that we were limiting the discussions to the assumptions. CEA wanted to know the impact of the assumptions on the results. The attached comparison of input assumptions served as the agenda for the meeting. All parameters were reviewed. While there was considerable discussions on each item, CH2M Hill assumptions were agreed by all parties to be reasonable excluding the following: 1. A discount rate of 4.5% was used in the resource analysis of both Beck and CH2M Hill. Both CVEA and CEA strongly disagreed. Their argument was that the State’s investments should not be discounted since this was not done on other infrastructure projects such as highways, etc. The legislature by its actions had verified the worthiness of the investment. W. at w i its for Vv 2. We discussed the firm and integrated railbelt energy values used by CH2M Hill. It was agreed that the 1994 rates had been used in the rate payer analysis and that 1995 published CEA rates should be used. This correction will be made by CH2M Hill. 3. We discussed the integrated or enhanced diesel cases extensively. CVEA maintained that the integrated diesel scenario was developed exclusively for the 1995 Power Supply Study and while perhaps achievable under some circumstances, may not be practical nor was it ever adopted by its Board. The integrated diesel case was developed by CVEA with Beck assistance as the most optimum diesel arrangement and compared to the RFP responses by CEA and M&LP and the joint participation of CEA and CVEA in the Intertie. The conclusion of the 1995 Power Supply Study was that the joint Intertie was a better choice for CVEA. CVEA maintained that if the Intertie were not approved, CVEA would not proceed with the integrated diesel case but would rather rework their entire resource plans. A aoe peg eae a a ase. We made no commitments as to whether we would anne our assumptions regarding this case. CEA questioned the rationale for proceeding with isolated oil dependent energy projects as opposed to an integrated Railbelt approach. CEA also questioned the validity of the integrated diesel capital and O&M costs. Both CEA and CVEA wanted to know what consideration the analysis gave to air quality impacts, disruptions to oil supplies and oil price shocks, impacts on Power Cost Equalization, and future growth which might be enhanced by lower cost energy in the CVEA area. Our response was that only future load growth was considered but not from a price/demand elastic standpoint. The other factors were not considered in the analysis. Both CEA and CVEA wanted to know if the Committee would participate in the stakeholder meetings. I said this was undecided. Attached is also a revised draft of part of the Executive Summary showing the revised findings as we discussed in our September 12 meeting with CH2M Hill. We will continue to work on the summary and incorporate Item 2. above. Regarding Items 1 and 3, we will review CVEA’s forthcoming letter and also the requirements for the discount rate selection. Item } involves legal and legislative considerations. We must then decide how to proceed with the draft report. er ee av ay wuNeN vurive Linveriy Precwur von yey roa eee VALLEY ELECTRIC ASSOCIATION, i - P.O. Box 45, eremneeee Ack 90588 (907) 822-3211 FAx 822-5586 VALDFZ (907) 835-4301 Fax 835-4328 September 22, 1995 Mr. Dennis MeCrohan Deputy Director of Energy Alaska Industrial Development of Export Authority 480 West Tudor Road Anchorage, Alaska 99503-6690 SUBJECT: — Copper Valley Intertic - Additional Written Comments Dear Dennis: The purpose of this letter is to provide additional comment about two issues, which T understand from discussions with Dave Gray, may not be properly addressed in the report to the interagency committee. Al the risk of sounding like a broken phonograph, [am going to repeat my arguments concerning the unwillingness to attribute State financial assistance to the intertic and about the obvious cconomic development benefits of a long term infrastructure project over a short term, short-sighted band-aid fix (diesel case). STATEFINANCIAL ASSISTANCE The most significant difference between DCRA’s Feasibility and the Interim Final Report evaluation of the intertie case is the imputation of an interest rate on the $35 million loan. The State insists they are required by their guidelines to impute an interest rate. CVEA has argued unsuccessfilly that it should not be imputed. ‘The Legislature has authorized and appropriated the money for $35 million, zero interest, 50-year loan. The legislation was signed by then Governor Walter Hiekel and in July of 1994 Edgar Blatchford, then Commissioner of the Department of Comniunily and Regional Affairs found the project was feasible and financeable. From CVEA’s point of view, the public policy decision has been made and the Sutton to Glennallen transmission line (SGL) should receive the benefit of those legislative and administrative actions when compared to any other power supply alternative. ‘le Serving the Copper River Basin and Valdez voroer uy aveay AVTUUPPO! valiuy Live iy Pmasrwur vee wu roe September 22, 15 Pave 2 LUSTORY AND FUTURE OPPORTUNITIES Copper Valley Electric Association, Inc. has been engaged in a concerted effort since the mid- 1970's to identily a yenerating resource alternative to replace the two diesel plants currently beng operated to provide ils supplemental power requirement to the Solomon Gulch Hydro project. The relative short life expectancy of diesel engines (15-20 years), the potential volatility of diesel fuel prices, CVEA's inability to hedge the future against large fuel price increases, the inability to meet an unexpected large load requirement such as the proposed HAARP project or the Danish Pork Farm and the inability to achieve scheduling or dispatch efficiency of three isolated power plants has provided the basis for conclusion that adding a new isolated power generating plant, regardless of the fuel type, or upgrading the existing diesel plants simply docs not solve CVEA's long term power supply and high rate problems. CVEA serves a large geographical area along approximately 245 miles of the Glenn, Richardson. and Edgerton Highways. The system begins at Caribou Creek on the West and extends to Gilennallen. It starts in Valdez on the South and extends te Hogans Hill at Mile 156 on the Richardson Highway. From Gakona Junction it extends to Mile 12 on the Tok CutolT and to Mile 18 on the Edgerton Highway from the junction of the Edgerton and Richardson. The potential to serve unserved areas or areas currently being served that are eligible for Power Cost Equalization (PCT) is substantial. The potential for tuture natural resource development. is considered to be huge and increased use of the Wrangell St. Elias National Park is inevitable. ‘The eventual extension of the transmission system to Cordova, Chistochina, Slana, and Tok to provide the opportunity to eliminate PCE payments to those areas, and further economic development opportunities are dependent on having an adequate supply of competitively priced power available ‘The availability of an adequate supply of competitively priced power is dependent on construction of the SGL. Otherwise this entire area of the State will be relegated forever to high cost power generated by isolated generating plants. RELATIVE ECONOMICS The near term economic feasibility of the SG. is no different than the economics of other large infrastructure projects. Essentially all major additions to an electrical system whether they are for generation, transmission, or distribution will have marginal economic feasibility in the early years of operation. It is only when we look to the long term thal we can determine the resource alternative which will work to the best advantage of the area being served Isolated generating plants are inherently inefficient The benefits of intezration and interconnection have been demonstrated for many years all over the world. Interconnection to a larger integrated system has always been the first choice of utilities who are searching for ways-te become more efficient and to make certain they have adequate resources to serve unexpected load growth. To continue to rely on an isolated generating system. if there is a better alternative, that is planned to serve a very conservative load forecast with only cnough reserve capacity to meet emergency requirements, is shortsighted at best, particularly in an area of the State that has been and will continue to be burdened by extraordinary high electric rates. vorcer vy aveay AU UUPeeE vu Leer Perwer VOR Vw toe September 22, 1995 Page 3 It is CVEA’s position that the only viable long term solution to our power supply and high rate problems are to construct and operate the SGI. The project has significant advantages over any other resource alternative such as becoming immune from future inflation afler completion of construction. Utilities use a standard life cyele of 50 years for a transmission line for comparative analysis and amortization. A well maintained transmission line constructed to current standards will have essentially an unlimited real life span. The SGI. will provide a significant margin of reserve capacity lo serve long term economic development of not only CVEEA’s service territory but also provide the opportunity for extension to other areas of the State that are being served by isolated generating units. Ht will provide access to a power supply that is protected from the volatility in fuel prices by long term contracts that have limiting provisions to prevent uncontrolled fuel cost escalation due to an international upset. The project also provides a means of future transportation for a significant block of power from CVEA’s area to the Railbelt, should one become available, ic. the utilization of waste heat from the proposed gas liquefaction plant in Valdez. WHERE WE ARI! Chugach and CVEA have been working for some time developing a joint action plan that will significantly benefit CVEA's ratepayers in the short term and provide long term benefits to both CVEA and the Railbelt Systems. The plan is in the process of formulation and negotiation. Both Chugach and CVA Boards of Directors have passed resolutions directing their management to proceed on the development of the necessary agreements to cllect the transaction. That process is progressing satisfactorily with every indication that it will be successfully consummated. If we are successful, our apreement will result in a long term power supply at near Railbelt prices being provided to the Copper Valley and Valdez regions of the State. Yours truly, € Clayton Hurless General Manager w:\word\cdh\9S-147nh.doc COPPER VALLEY ELECTRIC ASSOCIATION, INC. P.O. BOX 45 GLENNALLEN, ALASKA 99588-0045 Glennallen (907) 822-3211 Valdez (907) 835-4301 Telefax # (907) 822-5586 ONFIDENTL August 22, 1994 TO: Jim Woodcock - Acting General Manager Matanuska Electric Association, Inc. FROM: Clayton waa Mala SUBJECT: — Sutton to Glennallen Intertie This memorandum is to follow up on our conversation this morning about the possibility of putting the proposed 138 kv line on the same right-of-way as Matanuska Electric Association’s (MEA's) O'Neill to Lionhead distribution line. On several occasions over the past few months as I have been returning from Anchorage, I have looked carefully at the existing distribution line route. I have been surprised at the small amount of the line that is visible from the highway, even in the early spring without the added screening that occurs when the trees leaf out. The information contained in this memorandum is highly sensitive as it will begin an official discussion of a concept that has been the subject of rather casual conversations over the past several months. If the information gets to the wrong people, or the right people, depending on your point of view, the concept could be killed without receiving a complete or fair hearing. I have discussed the idea with Eric Yould of EBASCO Environmental in some detail and asked his objective opinion whether the concept has sufficient merit to warrant further study and investigation. Eric is of the opinion that it is sufficiently meritorious to justify some additional investigation because on the surface it appears it could be a win-win situation for everyone concerned. The Concept The concept is to conduct an investigation into the possibility of incorporating the transmission line right-of-way with MEA’s existing distribution line through most of the Matanuska Valley, probably as far as Hicks Creek or Pinochle Creek. SERVING MEMBER-OWNERS IN THE COPPER RIVER BASIN AND VALDEZ ’ Sutton to Glennallen Intertie August 22, 1994 Page 2 History The Northeast Intertie Study conducted in 1988 and 1989 proposed to construct a large capacity 230 kv line from Sutton to Delta Junction via Glennallen. If constructed, the line would have provided essentially unlimited transfer of power from the Railbelt System to CVEA and a loop transmission feed for the Fairbanks area. The Alaska Legislature was heavily lobbied in 1990, 1991, and 1992 to fund the first segment of the line from Delta Junction to Glennallen. The only reason given for proposing construction of this section of the line first was the hope of obtaining some federal help based on improved service to the presently served military bases and to provide service to the Black Rapids cold weather training site, which is not currently served with central station service. During the public meetings held to receive public input on the proposal, strong opinions were voiced by residents along the proposed route in opposition to building the line along the Glenn Highway. Some measure of acceptance of the line was indicated by a group known as the Northeast Intertie Concerned Residents if the line was constructed away from the highway and avoided private property to the extent possible. At the conclusion of the 1992 legislative session, key legislators told CVEA and others that we were wasting their time and ours on the project because of the pessimistic outlook for Alaska oil revenues. Two key legislators told CVEA they might look favorably on an alternative proposal if one could be identified that would serve the utility’s power requirements and be constructed more economically. Tom Stahr, General Manager of ML&P, suggested that a smaller capacity transmission line might be a viable alternative and constructable within achievable funding limits. CVEA’s staff discussed the suggestion with the Board of Directors and retained POWER Engineers (PEI) to do the initial screening study of a 138 kv line. That study was the impetus of development through a number of subsequent Board decisions into the full blown feasibility analysis (Beck Study). During the first round of public meetings held in conjunction with the Beck Study, it became clear the line would face stiff opposition if constructed along the road on the initial preferred route suggested by the 1989 Northeast Intertie Study. In an attempt to gain some measure of public acceptance, CVEA pledged to abandon that route and move the line route further away from the road (the back country route) and to make a serious effort to avoid private property. It became very apparent during the second round of public hearings in the fall of 1993 that this commitment had done nothing to cause any measurable change in the strong opposition to the project. ‘ Sutton to Glennallen Intertie August 22, 1994 Page 3 CVEA has continued to communicate and work with the Glacier View Community Council and others to find an acceptable, mutually agreeable compromise. It is our intuitive feeling that we have not been as successful in that endeavor as we would like to have been, although a line route up Boulder Creek might pass muster with the Glacier View group. The community councils in Chickaloon and Sutton have voiced strong opposition to the line regardless of its location. The major points of opposition are as follows: 1. Cutting a 100 to 150 foot right-of-way through the Matanuska Valley would open up the back country to additional people and be damaging to the moose population. (A Fish and Game biologist has recently been quoted as saying that cutting a right-of way would open additional area that would grow back with young tender bushes that would be beneficial for the moose). The line would be detrimental to the aesthetics along the Glenn Highway and the area’s trail systems and would cause an adverse impact on tourism. Concern relative to the occasional exposure to Electromagnetic Fields (EMFs) when walking or riding under the power line. The Bonneville Power Administration, in a study of EMFs, determined that double circuit lines, in some instances, reduce the total EMFs through a cancellation process. This is further verified in my discussions with PEI who has recently completed a study for San Diego Gas and Electric in analyzing methods to reduce EMFs. As you well know, this issue is more emotionally charged than it is factually based as none of the many studies throughout the world have developed conclusive evidence that there is any link between EMFs and cancer. Notwithstanding the lack of known facts relative to EMFs, it will be difficult to convince people that EMFs do not necessarily cause degradation of human health. Voiced a rather indignant objection to the project because they would not receive any benefit from the project. Objected to the proposed project because CVEA had not, in their opinion, analyzed other available alternatives, i.e., developing the “known” natural gas field in the Copper Basin, interconnection with Alyeska, other hydro projects, conservation, etc. In the minds of some of the opposition, even if the above objections could be satisfactorily resolved, the line would cause damage to their quality of life beyond description and tolerance. . Sutton to Glennallen Intertie August 22, 1994 Page 4 The third round of public meetings seemed to indicate no change in the opposition to the project. In my judgment, this fact would negate my commitment to move the line back from the road that was offered as an incentive for at least nonopposition to the project, which obviously has not occurred. I believe this discussion points out that it will be very difficult to achieve any voluntary support from those against the project unless it can be credibly proven there is an alternative that could meet at least some of their objections. The first and most important aspect of gaining acceptance of the new alternative is to be able to convince the Sutton and Chickaloon residents that further discussion as to whether or not line will be constructed is moot and a waste of time. CVEA will need to convince a majority of the opponents it is serious about proceeding with the project and will commit the necessary resources to achieve the stated objective. CVEA also needs to communicate its willingness to discuss reasonable alternatives in routing, etc., that would not have a significant adverse impact on cost which could be mutually beneficial. What are the benefits of using the existing right of way? 1. It would avoid the cutting of an additional right-of-way through the Matanuska Valley which has been one of the loudest objections. 2. There would be very little additional impact from the line as the majority of the impact exists with the distribution line. It may be possible with some re-routing to actually improve the aesthetics of the existing facilities. 3. MEA retained Dryden & LaRue to conduct a study of the line from O’Neill substation to Lionhead to determine the best approach to upgrading the reliability and capacity of the line. While I have not read the study, it is my understanding the recommendation is to upgrade the existing line instead of installing a new substation near Index Lake. It is also my understanding that most, if not all, of the poles will need to be replaced. It is obvious that if the transmission line was constructed using ruling spans that would accommodate a distribution underbuild, it would result in a significant savings to MEA in future years by not having to replace the poles as they upgrade the facility. 4. The overbuild/underbuild construction scheme would not extend the full length of the existing distribution line. As mentioned above, we would probably have to route up Hicks Creek or Pinochle Creek in order to avoid the Matanuska Glacier and Sheep Mountain areas. ce me Sutton to Glennallen Intertie August 22, 1994 Page 5 Se Routing the transmission line in the existing right-of-way should take a great deal of the speculation and conjecture out of the environmental discussion as the impacts of the existing line, if any, could be identified and ameliorated. 6. The pole height could be reduced for the shorter spans and still maintain necessary clearances. This should mitigate to some extent the objection to the 80-foot towers Emerman used in his presentations. When I discussed this concept with John McGrew of PEI, he expressed concern that the shorter spans and greater number of structures might negate any savings attained from the reduced right-of-way cost. He made it clear it was only his gut feeling and a fairly detailed study would be needed to arrive at a credible estimate. CVEA would prefer the concept produce a cost savings but that may not be as important as developing a plan which will satisfy prudent environmental standards. The ultimate goal would be to convince those who will eventually make the final decision that the alternative is the best approach available to reduce the environmental impact to the lowest degree possible. Jim, obviously this is a sketchy conceptual proposal, but it does give you an idea of an alternative that could yield mutual benefits. Please give it your consideration, and let me know what you think. d:\word\cdh\95-153cf - COPPER VALLEY ELECTRIC ASSOCIATION, INC. P.O. Box 45, GLENNALLEN, ALASKA 99588 (907) 822-3211 Fax 822-5586 VALDEZ (907) 835-4301 Fax 835-4328 July 12, 1995 Mr. David A. Gray, Division Manager Environmental Planning and Management CH2M Hill 777-108th Ave. N. E. Bellevue, Washington 98009-2050 Dear Dave: In a recent conversation with Tom Stahr, he told me of your call and his suggestion to you that the proposed Sutton to Glennallen Line (SGL) was over designed and as a result of the over design, the estimated cost is higher than necessary. Tom apparently indicated to you that he believed a single pole line could be constructed on or near the existing right-of-way that would serve CVEA's needs adequately and be much less costly to construct. Bob LeResche called on Monday, July 10, and reported he had had a telephone conversation with you and that among other things, you discussed the size of the SGL. Bob indicated you suggested if a smaller line could be constructed at less cost, it would have a significant, positive impact on the results of your analysis. Dave, there is a significant amount of history you have had no way of knowing about that supports your observation. I will attempt to summarize that history for you as briefly as possible. In 1988 the Alaska Energy Authority (AEA) retained POWER Engineers, Inc. (PEI) to conduct a reconnaissance study of the Northeast Intertie Project (NIP), a 230 kv transmission line that would begin at Palmer and extend to Delta Junction via Glennallen. The primary purpose of the project was to provide a loop feed to the Fairbanks area. Secondary benefits were to serve the supplemental needs of CVEA and to potentially provide service to military installations along the Richardson Highway that were not served by central station service. An aggressive but unsuccessful lobbying effort to obtain funding for the project was sustained in the 1990, 1991, and 1992 legislative sessions. The reason the effort was not successful was not that the majority of legislators did not support and recognize the need for the line but because the decline of oil production was beginning. The coincident reduction of revenue to the State caused them to be reluctant to obligate for such a large project ($156 million in 1989 dollars). Serving the Copper River Basin and Valdez Mr. David A. Gray July 12, 1995 Page 2 At the conclusion of the 1992 legislative session, four or five of the key legislators who supported CVEA's effort to become interconnected to the Railbelt System suggested that CVEA investigate alternatives to see if a more economical solution could be identified. This group believed that a less expensive alternative would be successful in obtaining some State financial assistance because the utilities’ lobbying effort had made the legislators all very much aware of the need for interconnection of CVEA's system to the Railbelt. During a post legislative session discussion of state wide utility managers at an Alaska Rural Electric Cooperatives Association, Inc. (ARECA) meeting, Tom Stahr suggested that CVEA conduct a preliminary study to determine the financial and technical feasibility of a smaller capacity line. In June of 1992 CVEA's Board of Directors approved a preliminary screening study for a 115 ky or 138 kv line from Sutton to Glennallen. PEI was retained to conduct the study, and in August 1992 the first draft was submitted to CVEA for consideration. The results were very encouraging, indicating the line could be constructed at a cost of $27 million to $33.5 million. In September 1992 CVEA's Board authorized the study to be extended to test the assumptions and verify the findings of the draft. CVEA requested that PEI submit the draft study to a number of Alaska electric utility engineers and contractors who had extensive Alaskan experience with transmission line design and construction for their review and critique. CVEA then invited all of the Railbelt utilities to have their engineers attend a review of PEI's draft study to exchange viewpoints and provide an opportunity for PEI to test their assumptions and conclusions. To facilitate the review, CVEA provided all of the utilities with a copy of the draft study, well in advance. Seventeen engineers and participants from Chugach Electric Association, Matanuska Electric Association (MEA), AEA, PEI, and CVEA met on October 15, 1992, and dissected the first draft of PEI's study, making numerous suggestions for improving the document. A copy of the notes of that meeting are included as Appendix F of the final study report. Mike Gearhart, General Manager of Newberry Alaska, and Aaron Downing, an independent contractor located at Palmer, also provided a number of helpful comments. PEI submitted the second draft of the study in December 1992 and the final report in January 1993. Using a combination of steel single pole and H-frame construction, PEI estimated the line cost at $40.4 million in 1992 dollars. A copy of the first draft and final report are being transmitted to you under separate cover. Prior to the time AEA was disbanded by legislative action in 1993, State law required a detailed feasibility study be conducted for any project requiring or requesting significant State financial assistance. AEA had traditionally conducted the studies required for power transmission line projects. The studies were funded through their normal budget process. In late 1992 AEA was in the middle of the FY93 budget year and wouldn't have been able to start the study until after the beginning of FY94 budget year, assuming the Legislature and Governor would approve a budget that included funds for the study. Mr. David A. Gray July 12, 1995 Page 3 In January 1993 AEA and CVEA executed a Memorandum of Agreement that stipulated CVEA would provide the funding for Phase One of the study which would occur prior to the beginning of the new fiscal year on July 1, 1993. AEA agreed to request $500,000 in their FY94 budget to reimburse CVEA and fund Phase Two to the completion of the study. The study was to be managed by AEA. Dick Emerman, an AEA economist, was appointed project manager. The project manager was granted full authority to select the consulting firm to conduct the "independent study." One of the first decisions of the project manager was that all prior documents and studies prepared for or by CVEA were to be disregarded by the study contractor including the PEI screening study, CVEA Power Requirements Study, and Financial Forecast. The contractor could have access to those documents but was instructed that the Feasibility Study was to be completely "independent" from any previous study. The first major point of contention between CVEA and AEA was the choice of traditional Alaska steel X-frame construction design for the line. It was obvious that if the line were constructed to traditional specifications, traditional cost would result. As a result of a number of intense discussions, some modifications to the original design were agreed to but had an inconsequential effect on the estimated cost of the project. CVEA's request to have some consideration for single pole construction in the study was ignored. R. W. Beck (Beck) estimated the cost of the line at $47.6 million in 1993 dollars. Beck also estimated that inflation, financing cost, and interest during construction would increase the total cost of the line to $56.2 million in 1998 dollars. At the outset of the Feasibility Study, MEA had indicated a desire to participate in the line, at least in that portion located in their service territory. MEA operates a 25 kv distribution line from Sutton to near Caribou Creek, a distance of approximately 45 miles. The line is nearing its capacity, and MEA was giving some thought to constructing a substation which would tap the SGL in the area of Index Lake to upgrade and expand their service to the area. A small but very vocal group of MEA's members in the Sutton-Chickaloon area are intensely opposed to the SGL, and at a series of public meetings conducted by AEA, they spoke strongly against any involvement by MEA. The opposition prompted MEA to retain Dryden & LaRue to conduct a study to identify the best and most economical way to upgrade service to the area. The Dryden & LaRue study concluded that because the existing distribution line was nearing its life expectancy and entering a period of high maintenance costs, MEA would be well advised to replace the distribution line before considering a substation. In subsequent conversations with MEA's General Manager, the idea was spawned to look at constructing the transmission line with a single pole design a 400 to 450 foot ruling span on or near the existing right-of-way which : Mr. David A. Gray July 12, 1995 Page 4 would allow MEA to underbuild their distribution line. The present and future savings of using this approach could be substantial and significant, both to MEA and CVEA. I have enclosed a copy of a memo that I wrote to MEA’s Acting General Manager in August of 1994 on this subject. It was decided not to attempt to interject this concept into the Feasibility Study process because we believed it would be summarily dismissed by AEA's project manager. Strategically, we believed it was better to wait until the study was finished and the financing secured before taking the idea public. The reason behind this strategy was that we needed to obtain financing for the most expensive design concept in the event we were forced by the "powers that be" to construct to their specification. The idea of a single pole, double circuit line on or adjacent to the existing right-of-way is still very much alive in CVEA’s planning and would be aggressively evaluated prior to beginning construction of the project. CVEA has a situation very similar to MEA's relative to its distribution line from Glennallen to Eureka Lodge, a distance of approximately 60 miles. The line has been in service nearly 30 years and will be in need of replacement within 10 to 15 years. We hold the preliminary view that it makes just as much sense for us to use the same concept as would be used in the MEA service area to take advantage of the future savings that would occur by not having to replace the poles for the distribution line. Bob LeResche mentioned that you referred to the possibility of constructing a 10 mw line in lieu | of the proposed 40 mw line. 138 kv lines that have the transfer capacity of 40 mw, such as the proposed SGL, have been successfully constructed in a single pole, double circuit configuration for many years. It was Bob's impression that you might be suggesting taking a look at a heavy distribution line, but my experience with long 25 kv lines has proven conclusively to me that that kind of facility would not provide a viable answer to CVEA’s future power supply. I believe that if you will check again with Tom Stahr, you will find that he was referring to constructing the line to a different design specification at 138 kv and not to reducing the overall capacity of the line. As I mentioned previously, I have mailed the referenced PEI screening study draft and final report to you under separate cover. I believe a quick review of the Executive Summaries of both reports and Appendix F of the final report will provide a fundamental understanding of our thinking as outlined in this letter. Mr. David A. Gray July 12, 1995 Page 5 Dave, if you have any questions or comments, please feel free to call me. If necessary, I will be available to meet with after your return to Bellevue to discuss any issues relative to this vitally important project. Yours truly, Lifton Clayton Hurless General Manager Enclosure w:\word\cdh\95-116jw.doc July 6, 1995 oa TO: Riley and Randy FROM: Dennis SUBJECT: CH2M Hill Intertie Study My thought s on CH2M Hill facsimile: 1. What is the plant load factor assumption for Petrostar? What is the project life for Petrostar? 2. Does CH2M Hill have the alternative information for the Allison Lake project? Or should they use the original configuration used by Beck and CVEA in their analysis. 3. I don’t agree on deletion of the Solomon Gulch costs assuming the original proposed Allison Lake configuration. DCRA has always maintained since the State owns Solomon Gulch that 6.4 cent/K WH charge is not applicable. In fact the generation through Solomon Gulch impacts the 4. Dam Pool O&M costs, life of project, and Power sales agreement. I cannot imagine any scenario where the State could unilaterally decide to delete the cost and the 4 Dam Pool participants would agree and not insist on some compensation. 4. Who has verified that diesels are less expensive now? Beck is pushing diesels. I am no sure that selective changes should be made to the study basis without some validation by CH2M Hill. CH2M Hill should verify these low costs are indeed true. Likewise who verifies the change in O&M? Where does CVEA get the money for the diesels or more importantly are financing feasibility and financing costs considered for all options? 5. Intertie line loss changes seem quite large. What is the reason for the change? Again I suggest that CH2M Hill must verify. 6. What is the Valdez coal plant? Is this a new option and should it be considered? 7. When does he consider CEA and Aleyeska? Suggestion is to do the analysis as presented which demonstrates a need for CEA involvement and them consider any special proposals from CVEA and perhaps Aleyeska. 8. I assume that we should use the latest fuel projections. 400/100) Date: October 12, 1995 CHM HILL FAX TRANSMITTAL FORM FOR IMMEDIATE DELIVERY FAX OPERATOR: TIME SENT: AM _ PM__ To: Dennis McCrohan Office: Firm Name: A ~EA City: State: Fax Phone Nur itb: 907) 561-8998 Verification P :one Number: Total number « * 5 s, including this page: 4 Return original?: «YES NO From: Dave Gi-y Office: SEA Employee No.: 760 IF YOU DC (JOT RECEIVE ALL OF THE PAGES OR THE TRANSMISSION IS UNCLEAR, PLEASE _ CONTACT YOUR FAX OPERATOR. | REMARKS: Dennis-- At your reques’. J have updated the analysis of AIDEA’s long term real cost of money originally conducted by F ick Emerman in 1992. I have followed the approach outlined in Dick’s December 21, 1992, memo to Ronald Garzini. Briefly, Dick’s approach was to estimate AIDEA’s long term real cost money for both taxable and nontaxable 5onds. The real taxable bond rate was estimated on the basis of the difference between projected interest rates for A-rated utility bonds and inflation as measured by the national CPI; the real nontaxable bond rate was estimated on the basis of the difference between the projected in'erest rates as measured by the Tax-Exempt Revenue Bond Index published in the Bond Buyer and inflation as measured by the national CPI. In this update, projections were from the “Consensus Forecast” published for long term trends in the October 1, 1995, issue of Blue Chip Economic Indicators. Projections for the Tax-Exempt Revenue Bond Index were ratioed off of the Blue Chip forecast for interest rates on 30- Year Treasury Bonds on the basis of the historic ratio of the interest rate associated with each. Forecasts for each of these parameters is shown in the chart entitled “Consensus Forecast of Inflation and Interest Rates”. The difference between the projected interest rate for each of the three securities and the projected rate of inflation is shown in the chart entitled “Consensus Forecast of Real Interest Rates”. The top line in this chart is for A-rated utility bonds. This is the parameter that Dick concluded most closely represented AIDEA’s long term real cost of moncy for projects that would be financed with taxable bonds. Dick’s analysis showed that this parameter was 5 percent. Jn this update, the parameter is about 4.5 percent. As you know, the 10-12-95 A11:30 OUT Se, Xva og:It 66/21/01 FAX TRANSMITTAL Page 2 October 12, 1995 real long term cost of money was set at 4.5 percent in the 1994 Intertie Study and in our update to that study. The long term real cost of money for nontaxable securities was calculated to be 3.1 percent in Dick’s 1992 analysis on the basis of the implicit forecast of tax exempt revenue bonds. As shown in the second chart, this is now forecast to be lower at 2.5 percent. In conclusion, long term real interest rates are about 0.5 percent lower than they were when Dick originally calculated these rates for the 1994 Intertie Study. However, the real long term interest rate on taxable bonds used in the 1994 Intertie Study was 4.5 percent--the real rate now indicated for A-rated bonds by Blue Chip. --Dave a — — a Xva TS:TT S6/zT/0T 7100/2002 £8'd reer Z | ------Tax Exempt Revenue Bonds ——— MYear Treasury ation and Interest Rates Consensus Forecast of Infli WELLE: TT S66T ‘er 10 aay noseassnonnamanennanesttnaneanitaanant sea eS 8668 T9S 486 :0L YAS-TIIH W2HD :WOuNs Source: Blue Chip Financial Forecasts 10/1295" Sheets Chart 2 ~ —— Utility A-rated Bond Yields © —— — Year Treasury Tax Exempt Revene Bonds 2004 26 2903 2022 Consensus Forecast of Real Interest Rates 2001 Reem reer er ee oe piece ebed wenen Spe nietee eee 1999 1998 1987 1996 5.5% §.0% 45% 4.0% 35% 3.0% i 2.5% 2.0% a 5% i% 0.0% pa'd PEBH WYEE:TT S66T ‘ZT 100 8668 T9S 486 :0L Y3S-TIIH W2HD:WOwSs 10/12/95*Sheet1 Chart 3 CHM HILL FAX TRANSMITTAL FORM FOR IMMEDIATE DELIVERY To: Dennis McCrohan Firm Name: AIDEA City: Fax Phone Number: (907) 561-8998 Total number of pages, including this page: 2 From: Dave Gray save aaa wuvVar vue Date: September 27, 1995 FAX OPERATOR: TIME SENT: AM _ PM Office: State: Verification Phone Number: Return original?: #+YES NO Office: SEA Employee No.: 760 IF YOU DO NOT RECEIVE ALL OF THE PAGES OR THE TRANSMISSION IS UNCLEAR, PLEASE CONTACT YOUR FAX OPERATOR. REMARKS: Dennis-- At your request, I have updated the analysis of AIDEA’s long term real cost of money originally conducted by Dick Emerman in 1992. J have followed the approach outlined in Dick’s December 21, 1992, memo to Ronald Garzini. Briefly, Dick’s approach was to estimate AIDEA’s Jong term real cost money for both taxable and nontaxable bonds. The real taxable bond rate was estimated on the basis of the difference between projected interest rates for A-rated utility bonds and inflation as measured by the national CPI; the real nontaxable bond rate was estimated on the basis of the difference between the projected interest rates as measured by the Tax-Exempt Revenue Bond Index published in the Bond Buyer and inflation as measured by the national CPI. In this update, projections were from the “Consensus Forecast” published for long term trends in the March 1, 1995, issue of Blue Chip Economic Indicators. Projections for the Tax- Exempt Revenue Bond Index were ratioed off of the Blue Chip forecast for interest rates on 30-Year Treasury Bonds on the basis of the historic ratio of the interest rate associated with each. Forecasts for each of these parameters is shown in the chart entitled “Consensus Forecast of Inflation and Interest Rates”. The difference between the projected interest rate for each of the three securities and the projected rate of inflation is shown in the chart entitled “Consensus Forecast of Real Interest Rates”. The top line in this chart is for A-rated utility bonds. This is the parameter that Dick concluded most closely represented AIDEA’s long term real cost of > \ *h io al 23 == meee eee eee ewe evve eee eee saunas VV a Ue FAX TRANSMITTAL Page 2 September 27, 1995 money for projects that would be financed with taxable bonds. Dick’s analysis showed that this parameter was 5 percent. In this update, the parameter is slightly lower at 4.8 percent. As you know, the real long term cost of money was set at 4.5 percent in the 1994 Intertie Study and in our update to that study. The long term real cost of money for nontaxable securities was calculated to be 3.1 percent in Dick’s 1992 analysis on the basis of the implicit forecast of tax exempt revenue bonds. As shown in the second chart, this is now forecast to be slightly lower at 2.8 percent. I will check in with you tomorrow to see if you have any questions or need additional information. Best regards. -—Dave WJUUL/SUUS rAs Lorik U9/Z27/95 9.0% + 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 10% 9/27/95*Sheet1 Chart 2 Sheet1 Chart 2 Consensus Forecast of Inflation and Interest Rates —--—CPI ‘A Ulility Bond Yields ——— WYear Treasury - +++ +Tax Exempt Revenue Bonds IZUU03/003 rAA 1d:14 UY/ZI/¥d 5.0% 3.5% 3.0% 1.5% 9/27/95*Sheet1 Chart 3 Consensus Forecast of Real Interest Rates ‘A Utility Bond — — — 30-Year Treasury ++ +--+ +Tax Exempt Revene Bonds SutGin NPV Cash Flow 1,000,000 1,000,000 1,000,000 Year 1 100,000 300,000 1,000,000 100,000 Year 2 100,000 200,000 100,000 Year 3 200,000 100,000 0 Year 4 300,000 100,000 250,000 Year 5 200,000 100,000 Year 6 100,000 200,000 1,000,000 NPV @ .02 929,717 941,136 980,392 887,971 425,117 Cost/Benefit 1.00 0.99 0.95 1.05 2.17 NPV @ .04 866,267 888,008 961,538 790,315 402,311 Cost/Benefit 1.00 0.90 1.10 2.15 NPV @ .06 808,839 839,907 943,396 704,961 381,363 Cost/Benefit 1.00 0.86 1.15 2.12 Page 1 1 DGO3 Corp FMC Hit <PAGE> for more info or <MENU> for list of curves. FAIR MARKET SECTOR CURVES Page 1 of RANGE - 7.40 Al UTIL oormeH< 6.20 6.00 5.80 1 36 1 Bloomberg-al Princeton: 60: 1 1 1 1Is 60 rights reserved. Frankfurt :69-920410 Hong Kong: 2-521-3000 London:171-330-7500 New York:212-318-2000 - 273-3000 Singapore : 226-3000 Sydney: 2-777-8600 Tokyo: 3-3201-8300 Washington DC:202-434-1800 MO92-138-5-0 28-Sep-95 18:40:11 oe Page DGO3 Corp FMC Screen printed. FAIR MARKET SECTOR CURVES Page 2 of 2 3MO 5.80 6MO 6.01 1YR 6.18 2YR 6.34 3YR 6.40 4YR 6.49 5YR 6.55 7YR 6.73 10YR 6.82 20YR 7.17 30YR 7.28 #1 = Al UTIL #2 = #3 = #4 = #5 = #6 = Bloomberg-all rights reserved. Frankfurt:69-920410 Hong Kong:2-521-3000 London:171-330-7500 New York:212-318-2000 Princeton:609-279-3000 Singapore:226-3000 Sydney: 2-777-8600 Tokyo:3-3201-8900 Washington DC:202-434-1800 M092-138-5-0 28-Sep-95 18:36:56 26 Muni GBY Screen printed. G.O. MUNICIPAL BONDS BLOOMBERG DAILY GENERIC OAS YIELDS THURSDAY CLOSE DATE: 9/28/95 AAA MUNICIPALS AAA AA A BAA1 AS % OF GOVTS SECTOR 49 SECT. 104 SECT.159 SECT. 631 1 YR 1996 3.74 3.84 4.03 4.2 65.3 2 YR 1997 3.94 4.04 4.23 4.4 66.6 3 YR 1998 4.09 4.19 4.38 4.58 68.1 4 YR 1999 4.24 4.34 4.53 4.73 70.1 5 VR 2000 4.34 4.44 4.63 4.88 71.2 7 YR 2002 4.54 4.64 4.83 5.13 73.6 9 YR 2004 4.74 4.84 5.03 5.33 76.0 10 YR 2005 4.84 4.94 5.13 5.43 77.2 12 YR 2007 5.14 5.24 5.43 5.71 81.6 14 YR 2009 5.34 5.44 5.63 5.93 84.3 15 YR 2010 5.44 5.54 5.73 6.03 85.7 a7 TR 2012 5.62 5.72 5.91 6.18 88.1 19 YR 2014 5.68 5.78 5.97 6.27 88.6 20 YR 2015 5.71 5.81 6 6.3 88.8 25 YR 2020 5.83 5.93 6.12 6.38 89.6 30 YR 2025 5.85 5.95 6.14 6.42 88.8 Bloomberg-all rights reserved. Frankfurt:69-920410 Hong Kong:2-521-3000 London:171-330-7500 New York:212-318-2000 Princeton:609-279-3000 Singapore: 226-3000 Sydney: 2-777-8600 Tokyo:3-3201-8900 Washington DC:202-434-1800 M092-138-5-0 28-Sep-95 18:28:48 keith-~_ into. previously sent to L_.id Gray attached FYI. Dic, said that NC: WKS discount rates are always used when studies are done under the a statutes applicable to this project. Attached memo explains DAS YL regulations require a discount rate when a feasibilty study ie done. --procedure for highway projects and-other infrastructure projects not built under these statutes is not on point. Dick’s memo (attached) recommends/explains a 5% discount rate. This rate was used in the draft R.W.Beck study put out in January 1994. In response to comment, Dick went back and reviewed interest rate and inflation rate forecasts and lowered the discount rate to 4.5%. He thinks its defensible. He has more info. if you want. In general ~--with a higher discount rate, future savings are weighted less, therefore projects with high front end costs dont look as good under a higher discount rate. When comparing a hydro project to an intertie the discount rate decsnt matter as much because both of those projects are capital intensive up front. However, when comparing increased diesel generation with building a new transmission line--parties who want the tranemiesion line will argue that a lower discount rate be used in the analysis because the intertie has higher up front costs. Jick is available at 2695-4644. :\GILSONM\KEITH1 Dec 1 Pg 1 Ln 4.67" P we as 9 [20/@- Sutton [6lennaldon Teneo Doras? a K —— SENT BY:DCRA. DOE > 6-16-95 + 12:12: bURA uly ur crcKuI— 2UU B¥e Guueee 2 Alaska Energy Authority | | | | | December 21, 1992 To: Ronald A. Garzini Executive Director - From: Richard Emennan /' ( Senior Economist |}\. Subject: Discount Rate for Project Evaluation Requirement | Existing regulations for the conduct of reconnaissance and feasibility studies require that the Energy Authority adopt a discount rate for project evajuation each year, 3AAC 94.055 (c)(5) provides as ‘follows: E (S) using a discount rate which represents the estimated long-term real cost of money, the present worth of the cost of each plan over the planning period will be calculated as of the reference date, with adjustment for the economic life of each project; the discount rate or a range of discount rates will be established each year by the authority. not later than July 1 after consulting with federal and state energy and budget agencies but may be changed from time to time as economic and financial conditions change or as the authority considers prudent; | | Background a The Energy Authority Board of Directors most recently considered this subject three years ago, in October 1989. Staff has not committed the time to prepare a new analysis each year because the outlook for real interest rates has remained relatively stable, and because other issues have taken priority. The discount rate assumptions adopted in 1989 are as follows: 1) 3.0% for projects that qualify for tax-exempt financing. 2) 4.5% for projects that do not qualify for tax-exempt financing. These are "real" discount rates, representing real interest rates after netting out inflation. ' There are several theories for developing a discount rate for public sector project evaluation. However, the language of the regulations effectively narrows the field down to two alternatives: | oTo/eo00 S X¥d =€0:80 £6/00/60 SENT BY:DCRA. DOE + P-LOTyD + 12-10 + LA ue ur ni euy sue sees oT0/tOOB Ronald A. Garzini December 21, 1992 Page 2 ! 1) the estimated long-term real cost of money assuming that projects are market: financed with borrowed funds (i.e. the interest rate on borrowed funds); ,; 2) the estimated long-term real cost of money assuming that projects are! financed with State general fund grants or loans (ie. the real rate of return that the State would realize from alternative use of its funds). ! The problem with the second approach is that a consensus does not exist on the rate, of return from alternative use of State funds (i.e. the “opportunity rate of return”). The rate of return on Permanent Fund investments could be estimated, but; investment in the Permanent Fund is not the likely alternative use of funds. The likely alternative use is expenditure for other purposes in the operating or capital’ budget, but the opportunity rate of return from such expenditure is unknown and, for: all practical purposes, unknowable. As a result, the Energy Authority policy has been to base the discount rate exclusively. on the cost of borrowed funds, regardless of the financing approach under consideration for a particular project. It is suggested that if a power project can demonstrate a rate of return in excess of the cost of funds for 100% market financing, then it will have passed a reasonable test of economic feasibility. Methodology To estimate "rea]” (i.e. inflation adjusted) interest rates, it is necessary to know the nominal interest rate at the time of project financing and also the inflation rate throughout the term of the Joan. While this is necessarily speculative, our approach has been to base the estimates of future interest and inflation rates on a broad sampling of professional judgment provided in the publication "Blue Chip Financial Forecasts." The relevant excerpt from the October 1992 issue is attached and includes (on the last page) the following: 1) a listing of the forecasters included in the sample; 2) the average of all forecasts submitted (labeled the "consensus"); 3) the average of the top ten and. bottom ten respondents. To represent taxable interest rates for Energy Authority project financing, the 1989 analysis used the “Blue Chip" forecast of Corporate Aaa bond yields. However, further review suggests that this series represents a higher bond rating and a lower interest rate than the Energy Authority is likely to obtain. For example, the Bradley Lake revenue bonds were rated "A" prior to the purchase of bond insurance. While bond insurance raised the rating to Aaa, the insurance premium captures a substantial share of the benefit. The forecast of "A" rated utility bond yields is now Tecommended as the appropriate series to represent the interest rate available to the X¥d F0:80 £6/02/60 SENT BY:DCRA. DOE + 6-16-95 ; 12:15 + DCRA DIV OF ENERGY- 2ub 402 Op0/-F 0T0/s00B Ronald A. Garzini December 21, 1992 Page 3 Energy Authority for taxable revenue bond financing. This will result in a somewhat higher real discount rate for projects that do not qualify for tax exempt financing. To represent tax exempt interest rates for Energy Authority project financing, the 1989 analysis generated a forecast of bond yields for the Bond Buyer 20-Bond Index, which represents bond yields for highly rated municipal] general obligation bonds. Again, further review suggests that the 20-Bond Index represents a higher bond. rating and a lower interest rate than the Energy Authority is likely to obtain for tax exempt revenue bond financing. As a result, the forecast of bond yields for the Bond Buyer Revenue Bond Index is now recommended as the appropriate series. Analysis Shown in Figure 1 is the "consensus" forecast for the consumer price index as reported through 2002, with the following two modifications: 1) the history of the CP] is shown from 1960 to the present; 2) the forecast is extended in the graph through 2010, and is extended beyond 2010 in the calculations to estimate real interest rates on long-term bonds issued over the next several years. Shown in Figure 2 are estimates of nominal bond yields as follows: 1) "A" rated utility bonds. These are taxable bond yields representing the history of "A” rated corporate utility bonds from 1988 to the present, and the “consensus” forecast from 1993 through 1997. 2) 30 Year Treasury Bonds. History since 1988 and "consensus" forecast through 1997. This series is used solely for estimating a consistent forecast of tax exempt bond yields, as described below. 3) Bond Buyer Revenue Bond Index. History of the index since 1988, and forecast based on relationship with 30 year Treasury Bonds. The average spread between the 30 year Treasury Bond yield and the Revenue Bond Index since 1988 has been about 1.0%. To construct a forecast of the Revenue -Bond Index, that spread was applied to the "consensus" Treasury Bond forecast. X¥A -F0780 £$6/02/60 + SENT BY:DCRA, DOE )O-L079D - 12-40) VORA wir i UMA ayy ze wees Ronald A. Garzini December 21, 1992 Page 4 FIGURE 1 CONSUMER PRICE INDEX Percent Change 14% — 12% fp History Forecast =| 3% ost 4GF 26h 1960 1970 1980 1990 2000 2010 Year FIGURE 2 COMPARATIVE BOND YIELDS HISTORY AND FORECAST Yield 12% 10% 8s 6% 4% Forecast History «| history O% ; 1988 1989 1990 1991 1992 i999 1994 1995 1996 1997 Year —— °A’ Taxable Util —t 30 Yr. Treasury =“ Tax Exempt Rev. Bond 0T0/9008 XV4d ¢0:80 §©¢6/02/60 v SENT BY:DCRA. DOE 2 6-16-95 lztib + UNA WIV yr cicRuIn ayy rue seu Ronald A. Garzini December 21, 1992 Page 5 Shown in Figure 3 are the estimates of real interest rates for long term taxable and tax exempt securities of the Energy Authority based on the assumptions and “consensus” forecasts described above. These are calculated by assuring issuance at the forecast nominal interest rates follawed by inflation as forecast over the term of the bond. Average real interest rates for taxable long term debt issued between 1993 and 1997 are estimated in this fashion at 5.0%. Average real rates for long-term tax exempt debt issued between 1993 and 1997 are estimated at 3.1%. FIGURE 3 REAL INTEREST RATE FORECASTS TAXABLE AND TAX EXEMPT REVENUE BONDS ink Lo see ease ey 1993 1994 1995 1996 1997 GMM Texeos 8H tax Exemor Fayed or titlity 7A* & Bond Buyer Index oF0/200R Xvd 0:80 6/02/60 SENT BY.:DCRA, DOE > 6-16-95 : 12:16 : DCRA DIV OF ENtkUY- Zuo 402 a7a0—= 1 Ronald A. Garzini December 21, 1992 Page 6 Recommendation I recommend that discount rates for project evaluation be established as follows: ie For projects that qualify for tax-exempt financing: Base Rate = 3.0% : Rates for Sensitivity Tests = 2.0% (Low) and 4.0% (High) This represents no change from our previous assumption, Using the Bond Buyer Revenue Bond Index instead of the Bond Buyer 20-Bond Index did nat make enough difference, given other marginal changes in the "consensus" outlook, to warrant an increase in the tax exempt discount rate. 2. For projects that do not quality for tax exempt financing: Base Rate = 5.0% Rates for Sensitivity Tests = 4.0% (Low) and 6.0% (High) This represents an increase from the 4.5% Base Rate that was previously used by the Energy Authority. The major reason for this change is selection of the "A" rated utility bond rather than the Corporate Aaa as the series that would most closely represent Energy Authority taxable financing. Attachment x 0T0/800@ X¥d 90:80 6/02/60 SENT BY: DCRA. DOE FORECASTS Vol, 11, No. 10 © 6-16-85 =) 12: 17 +) UCRA UIY Ur cycnuin 6UU tye suuisr cep EF LNANCIAL, what top analysts are saying about tam Cm tate monetary policy October 1, 1992 Poltical And Economic Uncertainty Have Credit Markets Nervous Summary -- Continved economic lethargy is 1 to keep short-term interest rates low throagh the end of this ear, according to the consensus results of ow Sepiember 28 survey, About a third of the panel members foresee afiother imminent easing of policy by the Federal Reserve. Panaives. te Dales peed wala eee: Ee © stand par. In 1993, -lerm Faies are expected lo ries about 100 basis points as the pace of economic growth gains momenmum, bringing with it a modest revival in private-sector borrowing. Long-srm yields, wo, ae expected to edge higher next year, but by Jess than half the rise in short-term raiss. consensus expects inflati Pressures w remain relatively subdued. The U5. dollar should begin to iata in value next year as Overseas interest rates fall in the face of weak econamic growth (see page 2 for a summary of all consensus forecasts), Interest Rate Outlook -- Unexpected weakness in ae Prompted the Fed to cut its funds raze get lo 3% on September 4. And a lot of bond traders are etting that history will repear itself on October 2 when the September employment data is released. Third quarter Real GDP will be weaker than earlier thought -« perhaps even failing to maich the anemic 1.5% mic of growth registered in the 2nd quarter. Whils the September jobs data will be skewed by the end of the joveriment's summer jobs program and the effects of oxen Andrew, the report may nonetheless prompt anotber easing by the Fed, predict about a third of the panel members, With both the funds raze and the discount rate at 3%, each would have to drop, though not necessarily by the same amount, if the Fed chooses tp ease, If the Fed does case, commercial banks will likely cut the prime rate. Those who think there will not be additional easing believe the Fed won't to the Sepiermber data since the statistically-dampening effecis of the hurricanc will uluimately be transitory. In fume months, as these effects are reversed out of the data, the pace of economic activity is likely to become tem; ily overstaled, oe causing an unjustified ase in bond pele that could te compounded if the Fed were to push shart rates even lower, they wam. Also arguing against additional Fed easing is the ero geno eps Se ring the recent turmoil in Europe’s currenc: dollar enjoyed a bricf reprise of its role as a ae haven, Sut in recent days, the dollar has come under renewed sault, dropping to new all-time lows against the and cakening anew against the D-mark. Additional Ped easing would likely result in further losses in the dollar's value, hurting U.S. bond and equity prices in the process. Maasrricht is dead — not because of the close vou in the French referendum, the U.K. and Italian pullout of the European Rate Mechanism. ar the Dutch saying they didn't want a single European currency aftcrall. I's because the fiscal and monetary circumstances of the member nations are .oo different Trade barriers will candnne to fall in Europe, but political union and a single currency ere many years sway. In the meantime, song money supply th may keep the Bundesbank from easing soon or by a ot, bur European interest rates have peaked and will fall in fits and starts in 1993. This will gradually alleviaie one source of on U.S. eredit markess and evenmally produce a rebound in the dollar's valuc. The ibility of ive economic satistics and a weak dollar are not the only problems the credit markets. will face over the next several months, There's also that’ matter of who will be the next president of the U.S. If Bill Clinton wins — an increasing ibiliry — oe, is going to begin thinking ly about lications for the budget Geficit of a Democrucally-congolied White House and Congress and @ public clamoring for government acuon to stimulate the economy. es Bush on the need io get the economy moving, deficit reduction is not going ta be Clinton's first priority if he wins, Lump together the $45 billion in financing the RTC will need next year, and some fiscal stimulus courtesy of the new president and Can; . and you get a 1993 budget deficit larger than this year’s record high. Key Assumptions -- tations about future economic growth continue t be pared. It’s now generally assumed that Real GDP th in the 3rd will be no beuer than the paltry 2nd quarter pace of 1.5%. The consensus forecast of Real GDP growth in the 4th quarter of this year fell wo-ientha of a tage point to 2.4%. The consensus forecasts for GDP growth in the 1s; and 2nd quarter of 1993 also fell this month and now stand at 28% and 2.9%, respectively. The consensus forecastiof the annual rate of increase in consumer prices during the 4th quarter was immed by a bit, but for the most part, there was litile change fram last month in the cortsensus oudook for inflation, ite the dollar's recent volatility, it remains the consensus view that the gretnback will experience a modess rise in value on a tade-weighted basis during the bulk of next year (see top of page 2). pecial Questions -- See page 10 for the results of our semiannual survey of the panel's long-range ouvook. Contributor's Corner — This monut's interview is with Aubrey Zaffuto, Chief Economist, AZ Advisory, inc. in Far Hills, New Jersey (see pages 2-9). Bie Chic Panera! Forecasizs ISSN. 9741-8345) Pudiegned Oy Capuol Pyoucanens, Inc 1101 King St, PO. Bas 1454, Aleaandna, ve 279'4 e054 a = Inc 1800) 327-7202 Editgnal (703) 663-4100; Surwiens & 0T0/600 Plaats socrege euilonai faunas to EXECUTIVE EDITOR: RANDELL MOCRE Cassel Pusne sens ine "101 King Sireot BD 69x 1454 Alevanona. Va 27779 2084 18001 327 “209 inlormabsr SUPINE HW IMIS BUENEALON 15 (MOYEN te Se FACIE Dut ators 2 Copyright 1992 by Capitol Pudilearions, inc, Rapraaucion in any Ihr wihoul writes Circulanen: +703) 739-6—44 Bybhener Helen Heat. Eracutve dior’ Ranoe Moore, Markenng Oiewersr Lisa Animeny CUSTOMER SERVICE MANAGER’ LIZ SOPER XVd 90:80 £6/02/60 SENT BY iDCRA. DOE BLUE CHIP FINANCIAL FORECASTERS Sere eww rent Mee Group, Mantord, CT [E} darren Wt. Grtin Jr. YS je Fas ble, (8) Sens ae ia, Torome, Garage (Z) Ge, Warren Jatin carey eT Barred Baie, lnc, J aotacrrtin. Fl (\(] Gr, dana M4. Gea P. Viner ewe 8 SoM. ID at eeenee NY. “into Woe Capi Prtliowsone. re. Aierareita. VA [i] Chana bilan haan Bank NY, NY [2] Chemical Comp. NY, NY Dy Sree mle 2 Commnam Sark, Detrat . Mi (OC) fos Choe corinne an. Papaein. FA ft Cot cl Cone: Rrra VARA CRT Gowernmert Saouries, na., [MO] oT0/oTOm > 6-16-¥5 > iz-.o. UNA UIY Vw unus uy awe =H. rae! LONG-RANGE ESTIMATES!: The uble below contains CONSENSUS estimates for she ears 1993 through 1997 and the five-year period, eludes the poe cil long-range oi coma from the Congressional 1998-2002. For com SOT, We have udger Office (CBO)? and ths Bush Adminisealon? APPLY ALL THESE PROJECTIONS CAUTIOUSLY. sswAVerage for the Year------- -Average- Tam Ruy! ia eee 199g 1986 1997 isms: _ “Toplbay. ¢f 40 90 92 93 89 Top lOAvg. 6.8 . . . Ei Bot 10 Ay; 2 a5 2. LIBOR, 3-Mo. Consensus Pi 4 4. St re 4 5.2 2 i" Avg 45° 58 7.0 7.4 u 7.0 [a Ay: 3. Fed Funds Rate Cansensus - 4 id 3 4 5.3 0 a 6 Avge. 42 = a 71 a 1H ‘ i. 10 Avg. 4. Commarcial Paper, 1-Mo. Consensus ‘ 4 47) 32 4 5.4 3.1 i ag Ayg. 43 $7 6.3 il 7 se L 10 Ay, 5, T-Bills Yields, 3-Mo. Consensus : 8 4 44 36 50 48 Top lO Avg. 4.2 5.4 6.6 6.8 7.0 6.4 Bor lOAvg, 30 3.4 35 3.4 3.2 32 CBO Forecast’ a 3 54 5 5,6 ha Resists na 6. T-BU Yielis, 6Mo. Consensus S28 2 2 ee a 2 Avg. a 3.6 ee 3 33 5.6 . 10 Avg. ; 7. T-Bill Yields, 1-Yr. Consensus i 4.0 # $3154 S56) # ong te Avg. 4.6 58 7.0 a is aa it. 10 A 8. T-Now Yields, 2-Yr. Consensus ie 4 # 4 $8 5.8 + Top 8 Avg. 5.4 64° 75 ct 16 a Bot 10 A 4 0 9. T-Not Yields. 5-Yr. Consensus Be $8 4 @ 6.6 2 63 ter 19 Avg. x cH 8.1 83 85 ye jot 10 Avg. 4 aT oe 1. Tie Went. come’ 2 Hh 8H zp 10 — 70 BH & He e a 14 4 . Ne. 11, T-Bond Yields, 10-Yr. Consensus ' 34 72 8 14 «643 10 Top 10Avg. 75 81 86 B89 9.0 83 Bot 10 Avg. 63 62. 62) 6:0) 537 $4 CBO Forecast §9 e 70 2 B he Adminismaion s . L} 2 theta. foe § HH HH ng e ave. 8.0 fa 8.9 re 23 es te 13. Carp. Aaa Bond Yields Consensus she & 8.2 #4 8.4 # is = 10 ig 7 99 9.5 35 re 9.3 jou. 7 4 14, A Utility Bond Yields Consensus 83 # # 8.8 8.8 4 a pd Avg, 3 $4 0 = er fe 10 Av 15. Homa Mortgage Rams Conmenss Ey i O7a7 Us 83 Top 10 Avg. 8a 9.2 99 10.1 103 97 Bot 10 Avg. 7.5 DOS hon) 6.8 Ke sammgions ion Wood" [eos e0¢' door ioasenie A. Trade-Weighied Dollar Consensus 873 89.9 918 91.2 95 (92.7 Top 10 Avg. 93.6 986 101.5 100.5 101.2 104.0 Bot 10 Avg. ug 823 a8 # Ou aes —-Yeur-over-Y ear, ~Average- 192 1984 1998 1955 issazdee B. Real GDP Consensus 28 BB eas, ra ToplOAvg 34 34 3.7 35 3.5 3.0 Bot 10 Avg. 2.0 ae ies tT Leip iel TT CBO For=ast = 3.1 28 Fr 24 22 fa, Administration C. OP ink ttm foo’ &§ 2H HH Hu ToplOAvg, 34 41 43 46 47 8 42 Bot ]0Avg 20 24 23 #24 24 23 CBO Forecwt = 3.0 o 30 30 28.0 aia: Administration 3 D. Consumer Price Index Consensus # 34° «3.4 #8 Yd % Top l0Avg. 37 41 44 48 5.0 44 Bot 10 Avy. 28 26 25 eG iipiese aa CBO Forecast 34 34 34 . 34 3.4 na. Adsinisraion 3.2 S23. S32 ss na. {Baemad on enimatan Grom 38 member. 2 Tae Economic and Buys Musloak.” CBO. Angun 1992, p. % Midna Raviow of the Budge.” OMB, July 28, 1992. p &. “Sow p. 9 Jor dadinixions of variables end sources af dasa. JAvernge mie af mer iseulng On a Gtoou bers XVd 20:80 ¢6/072/860 a suber 6lenallix. Ztehe Tet Tene Bolt, he Cag y fave bre i Sit e ey N@d peokh “fer wturkial )derumeaceal va ie (ootimg ef 25 4 rt 3.7 Mw cour ; Than own fee eons une Kan ~ wr 7 ; 3 we rg dor both 2/2 fits Aare & 7 gyi ae. _iabecep AO mW per gv — uel Fax Telephone: (907) 344-2661 (907) 267-6429 July 18, 1995 Mr. Riley Snell Director AIDEA 480 W. Tudor Road Anchorage, AK 99503-6690 Dear Mr. Snell: As a follow up to our discussion on the Sutton to Glennallen intertie project, its impact on Petro Star Valdez Refinery (PSVR), and the future power requirements of PSVR, I would like to submit the following: Petro Star Valdez Refinery believes the intertie project to be crucial to the development of new and existing electrical generation facilities and the efficient distribution of power throughout central Alaska. As we discussed, PSVR is currently developing plans for a small scale co-generation project to address the high cost of its own power. This is a quick solution to an immediate problem that we face at our refinery and will not address the long-term need for reliable low cost power in this portion of the state. With the anticipated schedule for completion of the intertie line (seven years), a small co-generation facility can be installed and serve a useful economic life prior to delivery of power over the intertie. Continued operation of this - co-generation facility by PSVR after completion of the intertie and the availability of lower cost power would have to be determined at that time. Ce ri @TRo st UTR INC. — hs 201 Arctic Slope Avenue, Suite 200 Anchorage, Alaska 99518-3030 esEIVE hj JUL 2 6 1998 Alaska industrial Davelopment and Export Authority However, with the intertie line in place, a whole new realm of opportunities will exist for the generation and/or use of power for this portion of the state. An interim PSVR project will in no way detract from the long-term need for reliable, low cost power provided for by the intertie. The PSVR project would provide, however, an interim power supply alternative for CVEA pending completion of the Sutton to Glennallen transmission line, a solution for PSVR’s short term problem, and a potential standby source of power once the transmission line is completed. A Subsidiary of Arctic Slope Regional Corporation / Letter to Mr. Riley Snell @ @ July 18, 1995 Page 2. If you have any questions or concerns, please feel free to contact me. Sincerely, rae James F. Bolf = VP, Engineering & Technical Support CG: Clayton Hurless, CVEA Stephen T. Lewis, PSI Mike Irwin, Commissioner, DCRA John Shively, Commissioner, DNR tdm/JFB/snell0718.doc PAP 7 P tL E == vEMoranpulh “State of Alaska Department of Natural Resources» ” Sifice of the Commissioner Ac end bidtustial Davelopme: TO: Marilyn Heiman and Export AuthdParE: " November 1, 1995 Special Assistant Natural Resources FILE NO: TELEPHONE NO: 465-2400 a FAXNO: 465-3886 vely SUBJECT: Alyeska and FROM: 3 Commissioner the Intertie A couple of days after the Governor's meeting with the Alyeska Pipeline owners I got a call from Norm Ingram who has been working on the power issue for them. He wanted to clarify a couple of issues about Alyeska's relationship to the intertie. First, under virtually no circumstances will Alyeska purchase power if the intertie IS built. This is because their power system is part of the vapor recovery system and is needed to dispose of the vapors collected from the piping and storage system. In addition, Alyeska believes they can produce power more cheaply than they could purchase it. If the intertie were built Alyeska might hook into it, in order to have a back-up power supply in case something went wrong with their plant, but this is not something that could be considered in the economics of the intertie. Alyeska would consider selling power into the CSVEA system if that made economic sense. This would require somebody building an interconnect between Solomon Gulch and the terminal in order that the power could be wheeled into the system. Alyeska's talking about a selling price of around 13 cents a kilowatt hour but have not made a definate determination on that price. Although I'm not an expert in pricing a wholesale power, that does seem to me to be a little high. However, Alyeska's indicated a willingness to work on that arrangement if people are interested. I believe all of this information has been shared with the consultants which AIDEA has hired. If you have any questions about this let me know. cc: Mike Irwin, Commissioner Department of Community and Regional Affairs eid Se. “wees o-4 wipe cathe: = hare 3 Mo lasS Mw = 44¥ woods fe wp a TVW ( bnher uv coral 5) shera. mod ) = not ciecetad 4 aa | qed ft mes, | toe eo Emo me Low abnasildhy unk telat ay Bb nf Vepan tmndeo| — 94s (ten Cr€. Cs. co thy Lo ohig oyhom Una F = cond power: ee leah ls ae = eosh aS ih Sint aes sles a3 mets 2 er (cob, Linz = ey akin pesttion — Pay de spent (nat anne od ie abd 67 se, sel “nal og = ars «th a Os ey oo a = Baik wick tp be pad pa ltreal ssf Soon So rey FE Se ee ean © att ct nobel ax BOL, - hel blll, “h Z. Vag es ver 5 eegnaenries - rwn~ Lode ah postin CB nibh coca feud ~t0 snd Ras 6 T3om. tS | eae sift 5 ba Rtg SE “ge ee — eae Sola eile, pat ee Sted ae aed te Deaws 4 Fad, MN Alyeska pipeline +835 SOUTH BRAGAW S7REET ANCHORAGE. ALASKA 395°2 David Pritchard President & CEO June 13, 1995 Mr. Mike Irwin, Commissioner APSC Letter # 95-3009-G Department of Community and Regional Affairs 333 W. 4th Avenue, Suite 220 Anchorage, Alaska 99501-2341 Subject: Sutton - Glennallen Intertie Dear Commissioner Irwin: We have received your letter dated June 2, 1995 regarding the Sutton - Glennallen Intertie. We appreciate the inclusion of Alyeska in the Governor's review process for this project. The issue of power import or export for the Valdez Marine Terminal is a complex issue and one which we are currently reviewing in the light of the anticipated regulations for tanker vapor control. The following represents our perspective on the Sutton - Glennallen Intertie and the questions posed in your letter. The Valdez Marine Terminal (VMT) was designed and has been operated since start-up as a stand alone facility in terms of electrical power. The VMT power is generated by steam driven turbines with the steam being created in boilers fired by a combination of diesel fuel and hydrocarbon vapors from the tank farm vapor control system. There are three boiler/steam turbine generator trains each capable of producing 12.5 Megawatts (MW) of power for a theoretical total of 37.5 MW. Actual VMT power need/usage is currently in the range of 6-9 MW. This is expected to increase to 7-11 MW when tanker vapor control is implemented at year end 1997. The design of the VMT power facilities is such that the power generation and existing vapor control systems are integrated. As such, by-products from the power generation operation - steam and inert (flue) gas, are used as key elements of the vapor control system. This philosophy will be continued when tanker vapor controls are added at the terminal. Alyeska is keenly interested in running its operation‘as cost effectively as possible. As such, the cost of operating the power and vapor control system has and will continue to be studied periodically in the light of changing fuel costs, alternate power sources, power export potential, improved technology, etc. Import and/or export of power may be of interest, but only based on of a rigorous understanding of the technical, economic, reliability, legal and tax issues involved. Technical and economic considerations require the cost of changing the existing power/vapor system, to allow vapor control to be accomplished essentially on a stand-alone basis, to be attractive relative to the cost of + dw * ur. Mike Erwin, Commissioner + Sutton-Glennallen Intertie June 13, 1995 Page 2 imported power when taking into account the remaining life of the VMT. Reliability questions regarding imported power are another significant factor to Alyeska given the vulnerability of remote transmission lines particularly through the Thompson Pass area. Given the complexity of the VMT situation it is unrealistic to expect that the necessary power purchase price and availability information could be known with sufficient certainty until significantly later in the implementation phase of bringing the state power grid to Valdez. Accordingly, Alyeska has taken the position that the decision on whether or not to proceed with the intertie should be addressed without account of whether Alyeska will buy or sell electricity, or remain a stand alone facility. This remains our position. We would welcome an opportunity to meet with you and your staff to discuss this further. Please contact Norman Ingram (265-8730) David Pritchard President & CEO DP:NI/csc . . . TONY KNOWLES, GOVERNOR ee : GO P.0. 80x 112100 o a - JUNEAU, ALASKA 90611-2100 PHONE: (907) 485-4700 DEPARTMENT OF COMMUNITY AND = REGIONAL AFFAIRS Ol a3. «7H AVENUE SUITE 220 ANCHORAGE, ALASKA 99501-2341 PHONE: \500 OFFICE OF THE COMMISSIONER aan FAX: (907) 289-4620 June 2, 1995 i oie Pritchard, President lyeska Pipeline Service Compan Mailstop soe Y 1835 South Bragaw Anchorage, Alaska 99512 Subject: Sutton-Glennallen Intertie Dear Mr. Pritchard: | The State of Alaska is continuing to review the merits of the proposed Sutton-Glennallen intertie, which would allow transmission of bulk power from the Anchorage area to Valdez. Governor Knowles has| appointed a cabinet-level committee to re-examine a limited set of issues that are key to the intertie’s feasibility. Because the benefit of the project depends on the amount of power to|be transmitted over the line, the future source of power for Alyeska’s Valdez terminal is an important piece of the puzzle. - In the intertie feasibiliry study leted a year ago, it was assumed in all scenarios that the Alyeska terminal would remain iso indefinitely from the utility grid and would continue to self-generate all of the terminal's power requirements. We understand, however, that utilities are interested ir supplying power to the terminal -- power that would be generated in a eee te eens ae. A decision by Alyeska to purchase most or all of its Valdez terminal power supply over the intertie would be a dominant factor in the project economics, and therefore it is essential that we factor in to our analysis whatever you can tell us about the ean future power supply _ plans. | understand there may be important technical issues in addition to considerations of reliability and cost. i If you suggest that there is an even chance -- or a better than even chance -- of purchasing power for the terminali over the intertie, we would consider this an important factor in deciding whether the project development process should be kept alive. In the future, it project financing upon it, actual purchase commitments would clearly be needed fore the start of project construction. If, on the other hand, you suggest that it is unlikely that Alyeska would purchase power over the proposed intertie, we would base our recommendations to the Governor on the project’s viability without regard to possible future interconnection of the Valdez terminal. I would certainly appreciate an opportunity for a member of our review team to formally discuss this matter with you, and I will contact your office by phone in the near future. ~ Sincerely, ' - «: Mike Irwin, Commissioner Department of Community and Regional Affairs | ALASKA INDUSTRIAL DEVELOPMENT =~ * AND EXPORT AUTHORITY = ALASKA @m ~=ENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 561-8050 FAX 907 /561-8998 July 28, 1995 Mr. J. K. (Ken) Thompson, President ARCO Alaska, Inc. P.O. Box 100360 Anchorage, AK 99510-0360 RE: Sutton-Glennallen Intertie Dear Mr. Thompson: As the agency facilitating the review of the proposed Sutton-Glennallen Intertie, Department of Community and Regional Affairs (DCRA) Commissioner Mike Irwin asked that | respond to your letter related to the project. We realize that your company’s internal production forecasts are proprietary and we appreciate the information you were able to provide in your letter. The information will be shared with CH2M-Hill, the consulting firm under contract to provide a report of the project to the review team. As suggested in your letter, we may want to meet with you at a later date to discuss in greater detail your assessment of future North Slope oil and gas production, potential oil and gas investment in Alaska and other related issues. Thank you for responding to the DCRA letter of June 2, and sharing your views with us. Sincerely, BOQ vot iam R. Snell Executive Director cc: Commissioner Mike Irwin Ys a ' . ARCO Alaska, Inc. or , up ye Post Offlee Box it} a ue. 4 Anchorage Alaska 99510-0360 ’ Telephone 907 265 6511 og a J » J. K. (Ken) Thompson } cA oye “gna ‘ President 'D Ee ow i at SN RECEIVED 1995 JUL 14 RECD Cc Gil Mr. Mike Irwin iin Tie Commissioner Department of Community and Regional Affairs P.O. Box 112100 Juneau, Alaska 99611-2100 Subject: Sutton-Glennallen Intertie Dear Commissioner Irwin: I have received your letter of June 2 and would be pleased to meet and discuss with you or members of your staff ARCO Alaska’s general assessment of future North Slope oil and gas production and how development and production of those resources may impact TAPS. i Our long-term production forecast is confidential. However, I can share our general view of’ what may occur given the resource base available and our current expectations as they relate to potential markets, energy prices, the state’s tax and regulatory regime and our own efforts to reduce the cost of finding, developing and operating new fields. TAPS is a strategic asset to ARCO Alaska, the Alaska oil industry, the state and the nation. I can assure you that ARCO is doing all it can to preserve this asset and extend its useful life as far into the future as possible. That said, I must emphasize that predicting events 30 years in the future is impossible. We cannot provide you with hard, fast answers. All we have to offer is an assessment of what may occur, ARCO Alnska, Inc. Is » Subsidiary of Atlantic Richfield Company Commissioner Mike Irwin June 27, 1995 Page 2 ARCO Alaska, Inc. has no position on whether the state should invest in construction of the Sutton-Glennallen Intertie. However, if you believe our general views on continued North Slope production would be useful to you, I would he pleased to meet with you and discuss them. Sincerely, ag J. K. Thompson ALASKA INDUSTRIAL DEVELOPMENT =_ > ¢ AND EXPORT AUTHORITY = ALASKA @@m™ ENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 561-8050 FAX 907 /561-8998 July 28, 1995 Mr. John C. Morgan, President, Alaska BP Exploration P.O. Box 196612 Anchorage, AK 99519-6612 RE: Sutton-Glennallen Intertie Dear Mr. Morgan: As the agency facilitating the review of the proposed Sutton-Glennallen Intertie, Department of Community and Regional Affairs (DCRA) Commissioner Mike Irwin asked that | respond to your letter related to the project. We realize that your company’s internal production forecasts are proprietary and we appreciate the information you were able to provide in your letter. The information will be shared with CH2M-Hill, the consulting firm under contract to provide a report of the project to the review team. As suggested in your letter, we may want to meet with you at a later date to discuss in greater detail your assessment of future North Slope oil and gas production, potential oil and gas investment in Alaska and other related issues. Thank you for responding to the DCRA letter of June 2, and sharing your views with us. Sincerely, 5 Qboor Fat Niltiam R. Snell Executive Director CG: Commissioner Mike Irwin a mee me re me teen wwe wwe wer RECEEVE 26. Morgan ae Presiqiant, Alaska F \ BP EXPLORATION a oot i be : tone . BHU xplersition (Alaska) bac Ee © $00 Fast Hunson Boulevard y PO Box 196tily Anchorage. Alaska 9919 6612 ‘i (307) 964 5422 Z July 6, 1995 RESENVET Mr. Mike Irwin Commissioner JUL 13 {985 Department of Community and Regional Affairs P.O. Box 112100 COMMISSIONER'S OFFICE Juneau, Alaska 99811-2100 COMMUNITY & REGIONAL AIT ARS Re: Sutton-Glennallen Intertie Dear Commissioner Irwin: Thank you for inviting KP Exploration (Alaska) Inc. t provide input to your review of the Sutton-Glennallen Intertic as indicated in your letter dated June 2, 1995. | recognize the complexity of this issue and the challenge your team has in sorting out a balanced decision. According to Alaska Depurtment of Natural Resources projections, North Slope production in 2015 will be 160,000 barrels a day. While the decline in North Slope production is well underway, many positive opportunities exist which could reduce the. decline rates significantly. BP's internal production projections are proprictary, but I can tell you thal with ongoing investment in these opportunities, we believe our net production within Alaska could be equal to 1995 figures in 2005. As you know, our ability to transform this potential into projects and production will depend on factors such as oil pricc, devclopment costs, fiscal structure, exploration Opportunities, new technology and Alaska’s ability to compete globally for oil industry investment. Such investment will be critical both to Alaska’s future and to the industry’s future in Alaska. Half of the production currently projected for the year 2000 depends on investments yct to be made. Without these invesunents, both near-term and long-term production will decline significandy. I believe that there is a bright future for oil development in Alaska, but as the Natural Resources forecast indicates, there are many challenges ahead to ensure viable operations well beyond the year 2020, oi ] would be happy to discuss this further with your review team. \L Regards, Ne Z ? 5 | Boo sett? hmgat. Bee ok : John C. Mprgan es R. A, Malone J of" » J. A. Palmer A