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HomeMy WebLinkAboutMahoney Lake Hydro and Intertie option 2000* - Keith Laufer From: David Germer Sent: Wednesday, June 07, 2000 8:13 AM To: Keith Laufer Subject: FW: Mahoney plus intertie SE intertie plus Mahoney findi ased on Dick's review, it would appear that we did analyze a intertie and Mahoney case. ----- Original Message----- From: Richard Emerman Sent: Tuesday, June 06, 2000 2:46 PM To: David Germer Subject: Mahoney plus intertie The economic analysis conducted by CH2M Hill examined a case combining both Mahoney Lake and the Swan-Tyee intertie. The summary of results is shown in Table A-1 of the report: . Under the medium load forecast and other base case assumptions, the least cost alternatives were identified as follows: Alternative Present Value of Cost ($ Millions Mahoney Lake (low capital cost estimate) $40.3 Small hydro (i.e. Whitman and Connell Lakes) 41.8 Mahoney Lake (high capital cost estimate) 50.9 Mahoney Lake (low capital cost in 2001) plus Intertie (State cost only, constructed in 2011) 58.7 . For the combination of Mahoney Lake and the Intertie to be competitive, either the high load case or the high oil price case must be assumed. These findings are stated on page 9 of the AIDEA report and again on the first several pages of the CH2M Hill report. ALASKA INDUSTRIAL DEVELOPMENT = * AND EXPORT AUTHORITY f= ALASKA @E™ ENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 269-3000 FAX 907 / 269-3044 June 8, 1998 Mr. Robert Grimm Alaska Power and Telephone Company P.O. Box 222 191 Otto Street Port Townsend, Washington 98368 Subject: Mahoney Lake Hydroelectric Project Indemnification Agreement Dear Bob: Enclosed are two originals of the Indemnification Agreement between Ketchikan Electric Company and the Alaska Energy Authority. Please sign both originals, retain one for your files and return the other to the Authority. If you have any questions, please do not hesitate to call. Sincerely, a D. Randy Simmons Executive Director eee) | 9 of hoe Vo or Rg ih v OS ||| (0) INDEMNIFICATION AGREEMENT This Indemnification Agreement (“Agreement”) is entered into between Ketchikan Electric Company (“KEC”) and the Alaska Energy Authority (“AEA”) as of the day and year last written below. RECITALS WHEREAS, the KEC is a joint venture between Cape Fox Native Corporation and Alaska Power and Telephone that has requested and desires to obtain federal matching funds for the Mahoney Lake Hydroelectric project ("Mahoney Lake"); and WHEREAS, the financial feasibility of Mahoney Lake involves obtaining federal matching funds to offset capital costs and that KEC enter into a power sales agreement with Ketchikan Public Utilities (““KPU”) that may require KPU to purchase from KEC, on a priority basis, electric power generated by Mahoney Lake; and WHEREAS, KPU is contractually obligated pursuant to the Long-Term Power Sales Agreement, Four Dam Pool-Initial Project of the Alaska Power Authority ("Long-Term Power Sales Agreement") to purchase power generated by the Swan Lake Hydroelectric facility ("Swan Lake") on a priority basis; and WHEREAS, KPU's contractual obligation under the Long-Term Power Sales Agreement may conflict with the proposed power sales agreement between KPU and KEC to provide for priority purchase of Mahoney Lake Power; and WHEREAS, the AEA is the successor state agency to the Alaska Power Authority under the Long-Term Power Sales Agreement; and WHEREAS, the AEA has considered opposing KEC’s request for federal matching funds for Mahoney Lake on the grounds that the proposed funding and power sales agreement may adversely impact the financial interests of AEA and the Four Dam Pool Purchasing Utilities (the “Purchasing Utilities”) in the Long-Term Power Sales Agreement; and WHEREAS, AEA's and the Purchasing Utilities financial interests in the Long-Term Power Sales Agreement can be adequately protected without the AEA opposing federal matching funds for Mahoney Lake if KEC indemnifies the AEA and the Purchasing Utilities for any lost revenues that might result from Mahoney Lake power replacing Swan Lake power, and if KEC further agrees to defend, indemnify, and hold harmless the AEA from any claim or liability arising out of, or related to, the AEA entering this agreement. NOW, THEREFORE, in consideration of the mutual covenants set forth, the parties hereto agree as follows: 1. The AEA agrees that it will not oppose KEC's request for federal matching funds for Mahoney Lake. 2. KEC agrees to indemnify the AEA and the Purchasing Utilities for any lost revenues that might result on an annual basis from Mahoney Lake power replacing Swan Lake power that would otherwise be purchased by Ketchikan Public Utilities or by any other Swan Lake energy purchaser. 3. KEC further agrees to defend, indemnify, and hold harmless the AEA from any claim or liability arising out of, or related to, the AEA entering this agreement. 4. The Purchasing Utilities are an intended third party beneficiary of this Agreement. 5. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings with respect to the subject matter hereof. 6. This Agreement shall not be altered, modified or otherwise amended except by an instrument in writing signed by both parties. 7. Should an action be brought to enforce or interpret the provisions of this Agreement, the prevailing party in such action shall be entitled to recover reasonable attorney fees and other costs of litigation in addition to any other relief awarded by the court. IN WITNESS WHEREOF., the parties have caused this agreement to be executed the day and year last written below. ALASKA ENERGY AUTHORITY KETCHIKAN ELECTRIC COMPANY By: Robert Grimm General Manager Date Indemnification Agreement Page 2 January 29, 1997 ’ ra REceive D Ms. Lois Cashell, Secretary Federal Energy Regulatory Commission JAN 31 1997 888 First Street NE, Room A-1 : Washington, D.C. 20426 Alseka Industria! Development and Expat Authority Re: Mahoney Lake Hydroelectric Project FERC Project No. 11393 Response to Comments, Final Terms & Conditions, Recommendations and Prescriptions Dear Ms. Cashell: HDR Engineering, Inc., on behalf of the City of Saxman, Alaska, encloses for filing an original and eight copies of our response to the following agency comment letters filed as a result of the FERC Public Notice dated August 14, 1996: United States Department of Agriculture, Forest Service, Alaska Region, Ketchikan Ranger District, dated December 2, 1996 United States Department of the Interior, Fish and Wildlife Service, Southeast Alaska Ecological Services, dated November 4, 1996 State of Alaska, Department of Fish and Game, Habitat and Restoration Division, dated November 26, 1996 Confirming previous telephone conversations with Vince Yearick, FERC Staff, we do not object to the content of the letters with one exception. Comment no. 2 in the Department of Interior letter states the following: “Flows of at least 30 cfs must be maintained in Upper Mahoney Creek immediately below the tailrace at all times between August | and July 15, to maintain water flow through salmon spawning areas. Such flows may come from natural inflow to Upper Mahoney Creek, the proposed 12-inch bypass pipe, or through the turbine jets.” According to our analysis of the project operation in low water years, 30 cfs would be an unobtainable goal and compliance by the Applicant would be impossible due to the lack of water. A review of actual gage and simulated data for Upper Mahoney Creek indicates HDR Engineering, Inc. Suite 1200 Telephone 500 108th Avenue, N.E. 206 453-1523 Bellevue, Washington Fax Employee-owned 98004-5538 206 453-7107 Ms. Lois Cashell, Secretary -2- January 29, 1997 that it is not uncommon for Upper Mahoney Creek to see natural flows average at or below 5 cfs during the winter months during low flow times. We have been working directly with representatives of the U.S. Fish & Wildlife Service (USF&WS) to review project operations and minimum flow requirements for Upper Mahoney Creek. At a January 27, 1997, meeting with USF&WS in Juneau, Alaska, an agreement was reached to establish 5 cfs as the minimum, year-round instream flow requirement in Upper Mahoney Creek as measured downstream of the tailrace at or near the existing gaging site. We will be making a written request to USF&WS, citing our recent meeting, to establish this flow. Per our discussions with Mr. Steve Brockman of USF&WS, they will then forward a written confirmation of this agreement to you. If you have any questions or require additional information, please let me know. Respectfully, HDR ENGINEERING, INC. TOV. Eo Ce Michael V. Stimac, Manager Licensing & Environmental Services Enclosures CG; Service List J. J. DeHerrera, USFS J. D. Durst, ADFG Steve Brockman, USF&WS Vince Yearick, FERC h:\hyd\mahoney\agency\comresp.do MAHONEY LAKE HYDROELECTRIC PROJECT FERC NO. 11393 Certificate of Service I hereby certify that I have this day served the Applicant’s January 29, 1997, Response to Comments, Final Terms & Conditions, Recommendations and Prescriptions for the Mahoney Lake Hydroelectric Project upon all persons listed below in accordance with the requirements of Section 385.2010(h) of the Rules of Practice and Procedure: U.S. Fish & Wildlife Service Mr. Tom Fitzgerald Mr. Nevin D. Holmberg, Field Supervisor City Administrator 3000 Vintage Blvd., Suite 201 City of Saxman Juneau, AK 99801-7100 Route 2, Box 1 Ketchikan, AK 99901 Mr. Robert H. Loeffler (KPU) Morrison & Foerster LLP Mr. Doug Campbell 2000 Pennsylvania Ave., NW, Suite 5000 Cape Fox Corporation Washington, D.C. 20006 2851 S. Tongass P.O. Box 8558 ‘Mr. William R. Snell Ketchikan, AK 99901 Executive Director Alaska Energy Authority Mr. Michael V. Stimac, Manager Attn: Stanley E. Sieczkowski Licensing & Environmental Services 480 West Tudor Road HDR Engineering, Inc. Anchorage, AK 99503 500 - 108th Ave. NE, Suite 1200 Bellevue, WA 98004 Mr. Keith A. Laufer (AEA) Assistant Attorney General Mr. Donald H. Clarke Department of Law Wilkinson, Barker, Knauer & Quinn General Civil Section 1735 New York Ave. NW 1031 West Fourth Avenue, Suite 200 Washington, D.C. 20006 Anchorage, AK 99501 Mr. John Braislin Ms. Joanne Kiein Betts, Patterson & Mines Deep Bay - Moser Bay D.P.B. 800 Financial Center via Ketchikan, AK 99950 1215 Fourth Avenue Seattle, WA 98161-1000 Dated at Bellevue, Washington, this 29th day of January 1997. 2 me i: ‘ Bonnie Lindner h:\hyd\mahoney\app\service.doc Mahoney Lake Hydroelectric Project Service List -I- FERC No. 11393 COPY FOR You INFORMATION FISH AND WILDLIFE SERVICE 1011 E. Tudor Rd. Anchorage, Alaska 99503-6199 IN REPLY REFER TO: AES/ESO/SEES NOV 26 1995 Ms. Lois D. Cashell Federal Energy Regulatory Commission 888 First Street, N.E. Washington, D.C. 20426 - MOTION TO INTERVENE - Applicant: City of Saxman FERC Project Number: 11393-001, AK Motion Filed by: US. Fish and Wildlife Service 1011 East Tudor Road Anchorage, Alaska 99503-6199 (907) 786-3542 Point of Contact: US. Fish and Wildlife Service Nevin D. Holmberg, Field Supervisor 3000 Vintage Blvd., Suite 201 Juneau, Alaska 99801-7100 (907) 586-7240 Interest of the Petitioner: Dv™ San Den DEC Alaska Industria and Export United States Department of the Interior am EEN Re coe I Development Authority The Petitioner, U.S. Fish and Wildlife Service, is the principal agency through which the Federal Government carries out its responsibilities to conserve, protect, and enhance the nation’s fish and wildlife and their habitats for the continuing benefit of the people. The agency’s responsibilities and title have evolved and expanded since Congress originally established the U.S. Fish Commission in 1871. The Service’s major responsibilities now include migratory birds, endangered species, certain marine mammals, and fresh-water and anadromous fish. Grounds for Filing: Lower Mahoney Lake and Lower Mahoney Creek support spawning runs of sockeye and pink salmon, species of commercial and recreational importance, both locally and regionally. Dolly Varden char and rainbow trout also inhabit these waters. Spawning habitat for the sockeye salmon (gravel) is concentrated at the lake inlet, immediately downstream of the proposed power house. . Water currents that sustain eggs and pre- emergent salmon fry are believed to be primarily upwelling from Upper Mahoney Creek flows, which largely go underground a short distance from the proposed power plant location. Impacts on water temperature, quality, and quantity are predicted to have little or no effect on salmon and other resident fish species. Several unknowns, however, limit the applicant’s ability to predict impacts with certainty, as follows: 1. Predicted changes to water temperature at the spawning site rest largely on unproven assumptions that the discharge (typically colder) from the power house will mix with groundwater from the bypass reach, and will result in little effect on timing of hatching; 2. The proportion of upwelling water supplied by surface flows, and the amount contributed by groundwater are unknown; 3. The effects of delayed hatching, if it occurs, are unknown, although in natural systems fry development usually coincides with natural availability of plankton, upon which the fry feed; 4. Effectiveness of a proposed 12-inch bypass pipe in maintaining adequate flows in the event of a turbine shutdown is unknown; and 5. The effects of the project on a continued supply of gravel to the spawning area are unknown. Monitoring of the salmon population is proposed for a period of 10 years after project start-up. If population declines are noted during monitoring, it will be difficult to tell what contribution the hydropower project makes toward that decline. Regardless, no commitment is made for initiation of remedial action should declines be documented. Other important wildlife resources in the project area include nest sites for bald eagles (a protected species), and possibly Queen Charlotte goshawk. The transmission line corridor will cross a high-density winter range for Sitka black-tailed deer, which serves as the primary food for the Alexander Archipelago wolf. The status of goshawk and wolf are both currently being reconsidered by the Service for listing as threatened or endangered under the Endangered Species Act. Position of the Petitioner: The Service is concerned that fishery or wildlife resources may be impacted to a degree not anticipated by the applicant in their filings to date. The Service believes that as an intervenor, we could provide assistance to both the Federal Energy Regulatory Commission and the City of Saxman in developing alternative strategies should remedial action become necessary. The Service respectfully requests that the Commission grant the agency intervention in this proceeding. Sincerely, Di, £6. Gul David B. Allen Regional Director bee: ADF&G, Ketchikan NMFS, Juneau Mr. Tom Fitzgerald, City of Saxman, Route 2, Box 1, Ketchikan, AK 99901 Mr. Doug Campbell, Cape Fox Corporation, P.O. Box 8558, Ketchikan, AK 99901 Mr. Michael V. Stimac, HDR Engineering, Inc., 500 - 108th Ave. NE, Suite 1200, Bellevue, WA 98004 Mr. Donald H. Clarke, Wilkinson, Barker, Knauer & Quinn, 1735 New York Ave. NW, Washington, DC 20006 Mr. John Braislin, Betts, Patterson & Mines, 800 Financial Center, 1215 Fourth Ave., Seattle, WA 98161-1000 Mei arRASHENY Alaska Energy Authority, 480 West Tudor Rd., Anchorage, AK 99503 Ms. Ernesta Ballard, Cape Fox Corp., P.O. Box 8558, Ketchikan, AK 99901 Mr. John A. Magyar, Ketchikan Public Utilities, 2930 Tongass Avenue, Ketchikan, AK 99901 Mayor, City of Saxman, City Hall, Saxman, AK 99901 Mr. Keith A. Laufer, 1031 West Fourth Ave., Suite 200, Anchorage, AK 99501 Mr. Ron Settje, Ketchikan Public Utilities, 2930 Tongass Avenue, Ketchikan, AK 99901 Mahoney Power 210 WA: "496A °° about’ 80, megawatts. mtn a Capé¥ox and AP&T have worked for seven years and spent millions of dollars to ready, the Mahoney Lake project for constoHon,. said .Peter Gigante, the new chief executive officer o Cape Fox. A requisite-federal license is in place, he said: ‘A’ road: to’ the site is nearly complete; : “As sopn as we have a power sales agreement (with KPU)}, we can begin generating power in 14months," Gigante said. "...We're ready to go.” The power sales agreement proposed by Ketchikan Electric has two promi- nent parts. One is the price. Ketchikan Electric wants to'sell Mahoney Lake power to KPU at a non-changing, long-term rate of 6.5 cents per kilowatt-hour. That's less than the 6.8 cents KPU now pays for power from its main source, the 22.5 megawatt Swan Lake project operated by the Four Dam Pool. It's less expensive than KPU’s diesel-generated power. And, says Ketchikan Electric, it will be cheaper than intertie power. bits definitely below the cost of the intertie,” said Bob Grimm, president of AP&T and general manager of Ketchi- kan Electric. The company expects the total cost of building Mahoney Lake will be less than $20 million, said Grimm. The other component of the pro- posed power sale agreement is the order in which KPU would use Mahoney Lake power. Ketchikan Electric wants KPU to make use of the power generated by Swan Lake and KPU’s other hydroelec- tric facilities first. Mahoney Lake power would be third in line, followed by KPU's diesel gen- erators and the Swan-Tyee intertie when it's built. "We believe ... that it is in the vital economic interest of the Ketchikan area to ensure, that Mahoney power is uti- lized ahead of new imported power via the intertie," wrote Gigante and Grimm in a Jan. 28 letter to KPU General Man- ager John Magyar. They say it's vital in part because it ‘ would prevent Ketchikan from relying * too heavily on imported power, it's less , expensive and it would keep the rev- “ enues in town. _ "If you can produce power cheaper than at you can import, why im- port?” Gigante said. While they firmly believe the Mahoney Lake project should be built now- ane that’ KPU should purchase its ‘ power ahead of'the intertie - Gigante , and Grimm also say they believe that ' the intertie is a needed project. "The intertie is a broad goal for all of 0330 Zl _ Southeast Alaska," Grimm said. i When built, the intertie will provide along-term, regional power supply, and provide backup if smaller power facili- ties experience a failure, they said. “As power needs grow throughout Southeast Alaska, the intertie will be a vital link in transporting available gen- eration from wherever it is produced to wherever it is needed,” Gigante and Grimm wrote. But because the intertie would be a regional project with regional benefits, Ketchikan Electric argues that the bur- den of keri for it shouldn't be borne by Ketchikan alone. v We do not believe that Ketchikan- area ratepayers should have to shoulder the ‘expense and risks of a regional inter- tie," they said. They aaeied however, that they do support KPU's latest proposal for fi- nancing the 57-mile intertie, which is estimated to cost about $77 million. KPU is asking the state of Alaska to bond for $45 million for the project. The remaining cost would be paid mostly by federal and state grant money already available to KPU, while sales of timber from the intertie route is expected to generate another $3.8 million. The power source would be the 20- megawatt Lake Tyee project, which now provides power to Petersburg and Wrangell. Its generating capacity is greater than the demand from those towns. Like Mahoney Lake, the intertie project is ready for construction. “We are in a position to proceed - except for the dollars," said KPU Gen- eral Manager John Magyar in October. Obtaining those dollars is not ex- pected to be easy due to state politics. The funding proposal could re-open a variety of at energy issues and emo- tions on the state level, said Sen. Robin Taylor, R-Wrangell, in October. “It's just impossible to talk about it without talking about all the players and factions," Taylor said. Building the Mahoney Lake project before the intertie -and requiring that its power be bought before intertie power - would raise concerns about the eco- nomic feasibility of the intertie and dampen its political support, said Magyar. He notes that Ketchikan has had a commitment toward building the inter- tie since the 1980s, and the project has been near or at the top of the community's legislative list of priorities for some time. : During talks with Ketchikan Electric, KPU has taken the position that Mahoney power should be used prior to KPU's diesel-generated power, but after power purchased from the intertie, wrote Magyar in a Jan. 29 memo to the City Council. The advantages of that arrangement would be lower Four Dam Pool power rates to increased sales. It also would open “other significant hydro resources,” Magyar wrote. In addition, the intertie is the first phase of a region-wide electrical grid that's believed to be important for eco- nomic development, he wrote. "There is also the reality of a cur- rently well- Fa congressional delega- tion a the likelihood that existing federal funding will have to be returned to the federal (government) if the inter- tie is further delayed,” he wrote. He also warned that "buying cheaper re today could resultin significantly igher cost additional power in the fu- ture." The City Council is the governing body for KPU, which is the municipal utility owned by the City of Ketchikan. Magyar said Monday that the utility has forsed its current Mahoney Lake position based on the City Council’ s previous commitment to pursue the in- tertie. In his memo to the council, he wrote: “Hopefully, the (Ketchikan Electric Co.) presentation will help the City Council and the community decide if it wants to continue their commitment toward building the intertie or place that project on the back burner.” The issue of new power generation is taking on increased importance because power demand in the Ketchikan area is nearing the upper limits of the existing supply. Ketchikan’s total energy require- ment was estimated at 145,200 mega- watt-hours in 1998, according to the -R.W. Beck consulting firm. Depending on the scenario, Ketchi- kan would need between 162,400 and 272,100 megawatt-hours by 2023, ac- cording to R.W. Beck. KPU is researching several other po- tential power projects besides the inter- tie and Mahoney Lake. These projects include new hydroelectric generating plants using Whitman, Carlanna and Connell Lakes as well as a transmission “line connecting Ketchikan's grid with Metlakatla Power & Light, which has surplus hydroelectric capacity. 480 WEST TUDOR ANCHORAGE, ALASKA 5 907 / 216 Cb. cc. Mahoa a XC. = i) @ vig, to Cuet? Soy eg, Leys ALASKA INDUSTRIAL DEVELOPMENT = wes > ¢ AND EXPORT AUTHORITY Te ALASKA @z__EN AUTHORITY GielWe FAX 90 2)/69-3044 Jun 2 9 1998 ae \ ent ka ystrial Developm mee’ | is prem Authority Mr. Robert Grimm Alaska Power and Telephone Company P.O. Box 222 191 Otto Street Port Townsend, Washington 98368 Subject: Mahoney Lake Hydroelectric Project Indemnification Agreement Dear Bob: Enclosed are two originals of the Indemnification Agreement between Ketchikan Electric Company and the Alaska Energy Authority. Please sign both originals, retain one for your files and return the other to the Authority. If you have any questions, please do not hesitate to call. Sincerely, By D. Randy Simmons Executive Director eisai eet wt f) of baer Ho ps L INDEMNIFICATION AGREEMENT This Indemnification Agreement (“Agreement”) is entered into between Ketchikan Electric Company (“KEC”) and the Alaska Energy Authority (“AEA”) as of the day and year last written below. RECITALS WHEREAS, the KEC is a joint venture between Cape Fox Native Corporation and Alaska Power and Telephone that has requested and desires to obtain federal matching funds for the Mahoney Lake Hydroelectric project ("Mahoney Lake"); and WHEREAS, the financial feasibility of Mahoney Lake involves obtaining federal matching funds to offset capital costs and that KEC enter into a power sales agreement with Ketchikan Public Utilities (“KPU”) that may require KPU to purchase from KEC, on a priority basis, electric power generated by Mahoney Lake; and WHEREAS, KPU is contractually obligated pursuant to the Long-Term Power Sales Agreement, Four Dam Pool-Initial Project of the Alaska Power Authority ("Long-Term Power Sales Agreement") to purchase power generated by the Swan Lake Hydroelectric facility ("Swan Lake") on a priority basis; and WHEREAS, KPU's contractual obligation under the Long-Term Power Sales Agreement may conflict with the proposed power sales agreement between KPU and KEC to provide for priority purchase of Mahoney Lake Power; and WHEREAS, the AEA is the successor state agency to the Alaska Power Authority under the Long-Term Power Sales Agreement; and WHEREAS, the AEA has considered opposing KEC’s request for federal matching funds for Mahoney Lake on the grounds that the proposed funding and power sales agreement may adversely impact the financial interests of AEA and the Four Dam Pool Purchasing Utilities (the “Purchasing Utilities”) in the Long-Term Power Sales Agreement; and WHEREAS, AEFA's and the Purchasing Utilities financial interests in the Long-Term Power Sales Agreement can be adequately protected without the AEA opposing federal matching funds for Mahoney Lake if KEC indemnifies the AEA and the Purchasing Utilities for any lost revenues that might result from Mahoney Lake power replacing Swan Lake power, and if KEC further agrees to defend, indemnify, and hold harmless the AEA from any claim or liability arising out of, or related to, the AEA entering this agreement. NOW, THEREFORE, in consideration of the mutual covenants set forth, the parties hereto agree as follows: 1. The AEA agrees that it will not oppose KEC's request for federal matching funds for Mahoney Lake. 2. KEC agrees to indemnify the AEA and the Purchasing Utilities for any lost revenues that might result on an annual basis from Mahoney Lake power replacing Swan Lake power that would otherwise be purchased by Ketchikan Public Utilities or by any other Swan Lake energy purchaser. 3. KEC further agrees to defend, indemnify, and hold harmless the AEA from any claim or liability arising out of, or related to, the AEA entering this agreement. 4. The Purchasing Utilities are an intended third party beneficiary of this Agreement. 5. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings with respect to the subject matter hereof. 6. This Agreement shall not be altered, modified or otherwise amended except by an instrument in writing signed by both parties. 7. Should an action be brought to enforce or interpret the provisions of this Agreement, the prevailing party in such action shall be entitled to recover reasonable attorney fees and other costs of litigation in addition to any other relief awarded by the court. IN WITNESS WHEREOF, the parties have caused this agreement to be executed the day and year last written below. ALASKA ENERGY AUTHORITY KETCHIKA C COMPANY £a Grimm General Manager C6 -~22- a Date Indemnification Agreement Page 2 (907) 274-1056 Date JUN 04 199 KETCHIKAN DAILY NEWS Client No. 4ror Council delays Mahoney Lake decisio1 Members vote to Ziom 4209 31e 330 bdo 6430 yoy By DARREN FRIEDEL Daily News Staff Writer Controversy surrounding the pro- posed Mahoney Lake Hydro-Electric Project and whether or not it would make it difficult to obtain funding for the Swan-Tyee Lake Intertie resurfaced once again at Thursday night's council meeting. Heated debate between Council Members Tom Coyne and Tom Friesen brought about a rare use of the gavel by Mayor Bob Weinstein after Peter Gigante, CEO of Cape Fox Corp., gavea brief presentation concerning the need for the council to put together an agree- ment that could be discussed. Gigante emphasized that he was not against the intertie and that both projects could be completed. Ifthe a sed Mahoney Lake project was bui L Cape Fox ould give priority status to the intertie after eight years of operation, said Gigante. Friesen said the intertie would not receive funding from the federal govern- ment if the Mahoney Lake project took precedent. Friesen cited the pore position of Sen. Ted Stevens, whois the chairman of the Senate Appropriations Committee, and the status of Sen. Frank Murkowski as one of the reasons Ketchikan should not commit to the Mahoney Lake project until the status of the intertie is clear. Coyne was not sure the two senators could help. “These are the same two senators that were in these positions when the pulp mill closed,” Coyne said. “They are not ” going to get us anything. Council Member Lew Williams III stressed that the intertie is the main project but said he would like to see both projects accomplished. "I want to get the two sides together and try to make this thing work,” Will- iams said. “There is a way to work on this, but I'd like to see us talking instead of casting the (project) away.” City Manager Karl Amylon was not as optimistic about the possibilities of com- pleting the two proposed projects. “Negotiating with Cape Fox on Mahoney Lake is going to adversely affect the intertie project,” he said. Coyne then moved to have the city manager continue discussions with Cape Fox. ~ The motion failed, 3-2. Williams a approve solid waste disposal fee increase Friesen cast the no votes while Council Member Robert Norton abstained. Instead, the council decided to obtain updated information concerning the intertie’s funding and time schedule. In other business, the council ap- stipe a disposal fee of $15 per house- old within the city limits. The new ordinance will require in- city customers to pay $9.72 for collec- tion and $15 for dispc*..1, which totals $24.72 per m: <h. TL. old ordinance totaled $19.76 er moh. The new disp sal,“ 2e not only cludes the cost foe res.=sntial solid waste disposal but also th cost for spring cleanup and the har -dous waste dis- posal program... & A sat “Our goal ist “try a Siget eva: y thing to “ERS ‘Conde page 8 Co unc il — Continued from page 1 BOM Ya0g 210330, 620 obso UC] the a and not on the side of the road or in the city dumpsters," Weinstein sail The new ordinance passed 5-1. Coyne cast the lone no vote. In other business the council: © Approved a general tax on personal and real property of 6.4 mills, which is the same as last year's fiscal mill levy. The levy is expected to generate more — $3.3 million in property tax revenues. wether es the addition of $49,842 toward the second phase of renovations and additions to Ketchikan General Hospital. The addition modifies the original contract with. McGraw Custom Conitstion Inc. from $9.38 million to $9. 43 million. The original bid was accepted by the council on Jan.'6, 1998. * Approved the dedication of property adjacent to the Deer Mountain Trail for conservation purposes. The property will be preserved for wetlands and wildlife habitats and restrict development on the property. A deed transfecting ownership of the property to the city already has been recorded.» =» > © Designated June 5 as Safe Night USA. Safe Night USA is a national youth violence and substance abuse prevention program. The program encourages youth and adults in communities to work together to identify key issues iteoting young people. y (907) 274-1056 Date JUN 0 3 1999 KETCHIKAN DAILY NEWS Client No. \a2 oA Mohors Adee, Solid waste, Mahoney Lake on council agenda 2QloR. #304 Ziv 330 By DARREN FRIEDEL Daily News Staff Writer Anordinance that would establish an area-wide solid waste disposal fee is one of the topics on the table at the Ketchi- kan City Council meeting Thursday. Council members approved the first reading of the ordinance at the May 20 council meeting. The ordinance would set a disposal fee at $15 per household within the city limits and would take effect Oct. 1. However, the effective date is contin- gent upon the adoption of the fee by the Ketchikan Gateway Borough Assembly for households outside the city limits. Under the current code, which totals $19.76 per month, in-city customers pay $11.93 for collection and $7.83 for disposal. The new ordinance, which totals $24.72 per month, would require customers to pay $9.72 for collection and $15.00 for disposal. The new disposal fee would not only include the cost for residential solid waste disposal but also the cost for spring cleanup and the hazardous waste disposal program. The purpose of the fee is to protect the public health and enhance the envi- ronment, according to city information. A general tax on personal and real property of 6.4 mills also will be consid- ered by the City Council. The tax, which is the same as last fiscal year, is expected to generate more than $3.3 million in revenues. Even though the Alaska Legislature has reduced the funding for the fiscal year 2000 Revenue Sharing and Safe Communities programs by 33 percent, City Finance Director Bob Newell said in amemorandum to City Manager Karl Amylon that he is not recommending an increase in the city's mill levy. He cited the reserves in the city's general fund as being more than ad- equate to absorb the state funding cut. The council also will consider the dedication of property for conservation. Ownership of property adjacent to the Deer Mountain Trail has been trans- ferred to the city. The council will con- sider preserving the property for wet- lands and wildlife habitats and restrict development on the property. A presentation by Cape Fox Corp. regarding the proposed Mahoney Lake Hydro-Electric Project also is on the agenda. Ketchikan Electric Co., a partnership between Cape Fox Corp. and Alaska Power and Telephone, is pushing to have the city purchase Mahoney Lake power. KPU is concerned that purchas- ing Mahoney Lake power will make it difficult to obtain funding for the Swan- Tyee Lake Intertie. The meeting is scheduled for 7 p.m. in the council chambers, 334 Front St. f 3 Ketchikan Electric Company D FE G E V E 1) 2727 Tongass Avenue MAR -5 1999 L-/ Ketchikan, Alaska 99901 ee 907-225-1950 Alaska Industrial Development 907-225-4169 fax and Export Authority February 23, 1999 Via Fax and US Mail Randy Simmons, Executive Director Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage, Alaska 99503 Dear Mr. Simmons: Thank you for making the time to meet with us today, especially on such short notice. During the meeting you asked us to provide some additional information specific to the Mahoney Lake Project. We had previously provided information to you in our letter dated February 10, 1999 (copy attached). In that letter we provided the rates and possible terms of a power supply contract with Ketchikan Public Utilities. I would like to confirm that we remain prepared to supply wholesale energy to Ketchikan Public Utilities at those rates and terms and further clarify we are not proposing an inflator to the flat rate. As we stated, the flat rate would remain at 6.5 cents for the term of the power sales agreement. As you can understand we can not keep our offer open forever but are willing to allow a period of 90 days for due consideration. Finally, we are not and will not be seeking any state funding assistance during the current legislative session. I also offered to provide additional information and thoughts in regards to the plan of finance for the Swan/Tyee Intertie. This information will require additional time to develop and will be forwarded to you as soon as possible. Robert S. Grimm, General Manager cc Peter Gigante G04 - 764-2 4F FEB-23-99 63:49 PM KETCHIKAN ELECTRIC COMPANY 2727 Tongass Avenue Ketchikan, Alaska 99901 (907) 225-1950 (907) 225-4168 February 10, 1999 Mr. Randy Simmons, Executive Director Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage, Alaska 99503 Dear Mr. Simmons: This letter is to apprise you of the status of the Ketchikan Electric Company (KEC) Mahoney Lake Hydroelectric Project, as a means of assisting your pending analysis of the proposed Swan-Tyee Intertie project. We understand that the analysis is scheduled to be completed in the March 1 time frame. Several recent Mahoney-related materials are enclosed as background. _ Que at least In part to Ketchikan's current dependence on diesel generation (27,000 mWh were generated with diesel last year), the community appears to be in immediate need of an additional increment of power. We believe the Mahoney project fits that need. Mahoney is fully licensed and ready for construction pending @ power sales agreement. The project could be In full operation within 14 months. Unfortunately, KEC's nearly year long-efforts to engage in meaningful power sales negotiations with KPU have not progressed, presumably because Ketchikan Pubilc Utillties (KPU) Is concerned about how Mahoney might affect chances of the intertle. ‘As you may know, SEC I is prepared to supply Mahoney power to KPU at a flat rate of 6.5 cents per kWh for a term of 10 to/ 65 years. This is below the current Four-Dam Pool rate of 6.8 cents per kWh for Swan Lake power (which T would fi not be preempted) and presumably below what Tyee power would cost Ketchikan. Moreover, while the cost of Four-Dam Poot power would be expected to escalate in the future, Mahoney power would remain at 6.5 cents for the term of the contract. The cost of Mahoney power could even be lowered prior to or after a sales agreement, depending on whether and how much grant funding might be obtained. As it has been throughout, KEC’s position continues to be that the Intertie and Mahoney are different types of projects and both should be pursued and bullt. The Intertie represents a very worthwhile regional infrastructure project that is at least three years off, while Mahoney is a local, largely privately financed, market-competitive project that could be in operation within 14 months. We believe it would be useful to factor the status of Mahoney into your analysis, and toward that end we would appreciate the opportunity to share our current information with your Intertie consultant. We would also like to give you a personal briefing at your earllest convenience. Sincerel Robert S. Grimm, General Manager P.a4 49 PM FEB-23-99 03 KETCHIKAN ELECTRIC COMPANY MAHONEY LAKE HYDROELECTRIC PROJECT February 4, 1999 ESTIMATED RATE COMPARISON MAHONEY LAKE VS FOUR DAM POOL Source of Four Darn Pool rate is from Table 6 of report prepared for KPU by RV Beck, November 9, 1996 ’ FEB-23-939 63:49 PM KETCHIKAN ELECTRIC COMPANY, LLC Owner and Developer of the Maloney Lake Hydro Project February 4, 1999 i in Fy Roar 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), now! M. rtie is 4 to 5 ationey can be operational by the fall of next year. e« Why rt If it is c! 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. Connecting scan Lae via >the Beaver Falls a line means ns increased reliability for the power into Ketchikan. If Swan Lake or the Intertie goes down there will still be significant power ‘available via Mahoncy Lake through the Beaver Fails line. ¢ Muhoney 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 6 En Mahoney Lake will create reliable electricity 7 that will al costs and reliability. The Interti¢ 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. © All Hydro 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. blic investment KPU will = 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. ds ayallable for Intertie adionas 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. * Enh yelopment 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 position to attract economic development. . diate local econo. vel ni 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. Mar-12-99 03:42P p wo KETCHIKAN PUBLIC UTILITIES Memorandum To: John Magyar, KPU General Manager From: Richard Trimble, Power Projects Manager AE Date: February 10, 1999 Subject: Ketchikan Electric Company Presentation Ketchikan Electric Company has recently made statements regarding the Mahoney project at Council and in the press. At your request, I am pointing out areas where I believe we either disagree or have at least have a different perspective. KEC indicates the Intertie is four to five years away. Actually, it only requires a two season construction period. My understanding is that Mahoney also requires a two season construction period. So aside from funding for either project, their construction periods are similar. KEC indicates the Intertie should be viewed as infrastructure, rather than a source of imported power. I realize this is a matter of perspective, but it should be noted that Ketchikan “imports” power from Swan Lake everyday. Imported power from Lake Tyee is no different than imported power from Swan Lake. I think we agree that the Intertie should be viewed as infrastructure, but AIDEA is looking strictly at the economics in making a recommendation to the Governor and the legislature, These economics vanish if we give priority to other projects to supply that energy. KEC notes that Mahoney Lake supports the Intertie. I believe we agree that if funding is not an issue, both projects are valuable infrastructure additions for Southeast. But the State has made clear that they will make their funding decisions based on the projected Intertie energy sales. Regardless of the infrastructure value of both projects, economic reality may dictate that only one project is built in the near future. KEC cites “no public funding” as an advantage. Whether or not this is an advantage is a matter of Council policy and direction. But it should be noted that prior public investment in Beaver Falls, Silvis and Ketchikan results in a significantly lower rate today. The price of energy from those facilities would be higher today if we were purchasing it from a third party at market price. In my opinion, KEC’s statement that Mahoney makes “enhanced funds available for the Intertie” is somewhat misleading. The Council’s position and our proposed funding plan do not rely on Ketchikan funding. If one considers that the State will make grants based on economic value of the Intertie, then a commitment to another project will diminish our opportunity for funding, rather than enhance it. 2 LS Mar-12-99 03:42P p KEC stated in the February 4 newspaper article that Mahoney at 6.5 cents is cheaper than diesel. This is not correct. R. W. Beck has calculated our avoided cost of generating diesel at 5.0 cents in 1998 and 4.8 cents in 1999. While we do not want to plan on diesel as a long-term solution, we can today generate more energy at less cost than Mahoney can provide. KEC argues that our diesel surcharge in 1998 proves diesel costs more. I believe the surcharge only proves that our budget for both diesel and purchased power did not anticipate a year of record energy sales. Purchased power from Mahoney at 6.5 cents would have required more of a surcharge than diesel in 1998. KEC stated in the February 4 newspaper article that Mahoney was cheaper than the Intertie. This could end up being the case. But in my opinion, it is premature to claim that any of our small hydro alternatives are less expensive than Intertie power until we negotiate a power sales agreement with the Four Dam Pool. This would be an interruptible sale so it would not be unreasonable to seek a lower cost than the current wholesale rate of 6.8 cents. KEC has occasionally stated that Mahoney provides 46 gigawatt-hours (gwh) of energy while the Intertie only provides about 60 gwh. This appears misleading to me. A conservative estimate of energy available at Tyee is 129 gwh. Of this amount, 83 gwh of energy would have been available as surplus in the last fiscal year. On the other hand, while 46 gwh is claimed in the FERC license for Mahoney, 42 gwh was previously derived in their feasibility study and 35 gwh was estimated by R. W. Beck on behalf of the City. Having noted these differences in perspective, I do believe that Mahoney and the other small hydro projects play a key role in our planning for the future. If the Swan-Tyee Intertie remains unfunded, we will want to reduce our long-term reliance on diesel energy as much as possible. In that event, I would foresee developing local small hydro projects in order of least cost. «LG Mar-12-99 O03:40P p Paid KETCHIKAN PUBLIC UTILITIES Memorandum To: The Honorable Bob Weinstemm & City cil From: John A. Magyar, KPU General Manag) Date: February 11, 1999 Subject: Ketchikan Electric Company (KEC) - Mahoney Lake Project vs Swan-Tyee Intertie At the last meeting City Council asked me to provide additional information on KEC’s Mahoney Lake Project, and implications for the Intertie, In response to that request I am providing information that, I hope, will be helpful in understanding KEC’s presentation and Ketchikan’s power generation needs. In my view Ketchikan’s next electric generation project should attempt to balance five basic needs: (1) it should be large enough to provide for economic development needs, (2) it should provide reliable generation in times of low local rain fall, (3) it should provide the lowest possible short-term power costs, (4) it should provide the lowest possible long-term power costs, and (5) it should enhance the development of low cost future power generation. I say balance, because none of the projects provides for all four of these needs. Good examples of this balancing from the past are the Ketchikan Lakes, Silvis Lake and Beaver Falls Projects. All of these projects were likely built at costs that exceeded the cost of diesel generation at the time. Today, these KPU hydro projects allow KPU to provide power to its retail customers at 8.75 cents. While customers in Kodiak and Valdez and Glennallen are paying double those rates. And why is that? It’s because these other communities have no old, low cost generation facilities to offset power they have to buy at current market rates (diesel and Four Dam Pool). So, what next projects are available to Ketchikan? There are six: Tyee (Intertie), Mahoney, Whitman, Connell, Metlakatla surplus and diesel. Attached are information sheets that provide both comparative and project summary information all of these projects. Also attached is Rich Trimble’s memorandum of February that takes issue with specific points in KEC’s presentation and my memorandum of February 27, 1998 that clearly shows that KPU staff's position has consistently supported the Intertie as the next project. KPU has continued to take the position that the Intertie is Ketchikan’s next generation project. This has been Counceil’s policy and only Council can change this policy. Attachments GAUSERUOHNM\WINWORD\PUBLICMIT90212.D0C Mar-12-99 03:41P p Project Summaries Short-term (ST) Project Energy kWh cost (Est.) Intertie (Tyee) 75-80 gWh © 6+ cents Whitman & 25 gWh 5+ cents Connell 10 gWh Under 7 cents Mahoney - 40-47 gWh Avoided cost or KEC market Metlakatla 44 gWh Avoided cost or (Surplus) market Connell 10 gWh 7+ cents Existing Diesel 68 gWh Market - 4.8 to 5.6 cents Long-term (LT) kWh cost (Est.) Lower than ST Lower than ST Lower than ST Avoided cost or market Avoided cost or market Lower than ST Market Power Available in 2 to 3 years 4 to 6 years 4 to 6 years 2 years 2 years 3 to 4 years 1.5 to 2 years Avoided costs have been calculated by KPU’s consultant, RW Beck. Current avoided costs are in the 5+ cent range. KEC has contended that our avoided cost calculation is too low. We expected them to make such a claim. They want the avoided cost as high as possible in order to increase the rate they can charge for their power. The lower our wholesale rate is the better it is for our rate payers. G:AUSERJOHNM\WINWORD\PUBLIC'T90212-DOC P.l2 Mar-12-99 S k 03:41P p P.13 Swan-Tyee Intertie eo! 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 5 to 5.5 cent per kWh range. Additionally, as an interruptible Tyee power cousumer a special negotiated price below the standard Four Dam Poo! 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 currently analyzing the project to detente if they are willing to bond for this project. A state divestiture of the Four Dam Pool projects (something thar has been sought intermittently 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 fixture generation sources in the Petersburg area, and is the first phase in a SE Alaska gnd. The EIS is complete. Record of Decision has withstood appeals. This project is ready to construct. Must be developed and have priority over other future generation projects in order to hold on to the federal funding now in hand. This project is less attractive economucally 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 Why Pool Communities, KPU is obligated to buy available power from the Four Dam Poo} “OT ge initial projects immediately after our existing hydro resources. Ketchikan should honor that ~ \r ra commitment. Certainly, if another resource, such as Mahoney, has available power and ve: Ketchikan needs it, we should buy such power at reasonable prices but we should not sign vi an agreement that directly conflicts with an existing agreement. Construction of this project will provide an economic boost for the community with jobs, and materials/service spending. GAUSERVOHNM\WINWORD\PUBLICMITS90212.D0C Mar-12-99 03:41P p P.14 Whitman Lake This project will provide the lowest cost additional hydro power for Ketchikan, Development of this project now will serve to reduce the economic feasibility of the Intertie. With its low estimated cost of power, this project along with Connell can be developed if additional state/federal Intertie funding does not occur. This project should be easy to license since the dam is already in place and since City Council has been fisheries friendly by directing KPU to absorb the costs for modifying SSRRA’s facilities and lost generation capacity. Our children as owners of this project in the future will reap the benefit of low power costs once the debt on Whitman has been paid. Our low power costs today are primarily due to the debt free Ketchikan Lakes, Silvis Lake and Beaver Falls hydro projects. Development of Whitman will pass this favor on to our children. Mahoney Lake This is a good project for Ketchikan and the stock holders of Cape Fox Corporation and Alaska Power and Telephone. As with Whitman, development of this project now will serve to reduce the economic feasibility of the Intertie. This project is licensed and ready to construct. Construction of this project will provide an economic boost for the community with jobs, and materials/service spending. Connell Lake This is a good project when coupled with Whitman as an alternative to the Intertie. As with Whitman, development of this project now will serve to reduce the economic feasibility of the Intertie. DF&G has focused on Connell and costs of this project may rise significantly if fish passage and/or large stream flow requirements reduce its effectiveness. Diesel and other What has to happen if current economic development efforts are to be successful in the absence of hydro projects.. G:\USERVOHNM\WINWORD\PUBLICMT90212.00C ' . Mar-12- ca D 99 03:37P p Plot dere CC \cCAC : . hv Ketchikan Electric Company an 2727 Tongass Avenue MALL D.E. Ketchikan, Alaska 99901 Wii wails eo 907-225-1950 Postit*FaxNote 7474 907-225-4169 fax kanoy To: The Honorable Bob Weinstein & City Council From: Ketchikan Electric Company Date: 2-22-99 Subject: Mahoney Lake IJydroelectric Project John Magyar, KPU General Manager and Richard Trimble, KPU Power Projects Manager, provided the Mayor and Council Memorandums dated February 11 and 10", respectively. Ketchikan Electric would like the opportunity to respond to those presentations. The council was provided an internal KPU Memorandum from Richard Trimble, KPU Power Projects Manager, to John Magyar, KPU General Manager, that, according to Mr. Magyar, takes issuc with specific points ip our presentation. 1. Mr. Trimble takes issue with KEC’s statement that the intertic is four or five years away. He further asserts that the intertie can be constructed in two construction scasons. The important distinction is that the Mahoney Lake Project is ready. The Federal license has been issued, our funding is in place, and once a power supply contract is signed by KPU, construction can begin immediately and be completed in 14 months. On the other hand, it is hard to see how the Swan/Tyee intertie could be in place by February 2001. First, there is no funding package in place and KPU has not reached agreement with the PMC on the modification of the existing power sales agreement. KPU does not have a firm power purchase agreement on what rate will be paid for power over the proposed intcrtie. ‘The state has made no decision on KPU’s proposed financial plan which would necessitate legislative action to authorize increases of over $40 million in state bonds. Given the current fiscal situation of the state and the financial magnitude of the project, it is reasonable to assume that it could take several yeurs just to put this part of the funding package together. Bid specifications have not yet been issued and a construction contract has not becn awarded. Consequently, this is why we believe it will take a minimum of four or five years for the Swan/Tyee intertie to be in operation. It is interesting to note how the estimated cost of the intertie keeps increasing'. Mahoney can be in operation within 14 months. It is interesting to note that KPU has been asking that the Mahoney Lake Project be delayed since at least 1994? on the basis that it would adversely impact a funding package under consideration. Since that time that funding package has come 14992 RW Beck $55.6 million, 1990 Draft EIS $64.6 million, 1997 Raytheon Update 69.8 million, 1998 RW Beck Planning Study Update $73.2 million, 2 City of Ketchikan to Forest Dewitt City of Saxman, July, 1994. al aa Ee _Mar-12-99 O03:37P p P.o2 and gone and now another funding package is under consideration. In the meantime, the energy necds are being met by diesel generation. Just how long should we delay this time? 2. In the fifth paragraph of the memorandum there is another troubling asscrtion that re- occurs in all of KPU’s presentations: that KP has the ability to perform some type of magic and that KPU is the only organization that can provide for the energy nceds of our children. Government has long proven that it is not necessarily the most efficient provider of goods and services. Generally, in America it is thought that private enterprise and the free market is the most efficient provider and allocator of economic resources, Further, the role of government should encourage - not inhibit, as appears the case here - private enterprise to grow and succeed. Generally, in America when government has grown to the point that it is using public resources to inhibit or displace private enterprise it becomes part of the problem, not part of the solution. 3. In the seventh paragraph, regarding the diesel surcharge on consumers bills, KPU states that “the surcharge only proves that our budget for both diescl and purchased power did not anticipate a year of record energy sales.” While this might sound like a reasonable explanation, it docs not make sense. Lf record energy sales were the reason a diesel surcharge was required it would appear to us that the diese/ surcharge was at the least misleading in its description. When the statement is analyzed further it would seem that KPU is saying: diesel is the lowest cost of any of its existing energy resources; diesel is used after KPU’s own hydropower resources and purchases from Swan Lake, and thus, was added last to meet the cnergy demands of the area. It would logically follow that the budget results would improve once diesel is required - not the other way around. It could be possible that if KPU felt is was necessary to place a diese! surcharge to collect additional revenue for other reasons. However, the simple question remains, if diesel is less expensive than energy from Swan Lake, why was a diesel surcharge is necessary? 4. In the ninth paragraph of the memorandum, the basis of KEC’s energy projections for both the amount of excess power available for Tyce and the annual cnergy output of Mahoney are questioned and the memorandum indicates the KEC information is misleading. We strongly disagree. Wc believe that the annual energy output of the ‘Tyee Project is about 109 gWh’®. We believe that the annual energy requirements of Petersburg and Wrangell are about 49 gWh. ‘his means that the excess energy available is about 6U g Wh on an annuai basis. it is very important to keep in mind that as the energy requirements of the communities of Petersburg and Wrangell increase over time thai the amount of excess energy available is reduced. This is because those communities have a priority right to the energy produced by the Tyee Project. It is also interesting to note that Silver Bay I_ogging (now operating a sawmill in Wrangell) is requesting to purchase interruptible power from the four-dam pool. This poses the additional question of whether industry located in the Petersburg/Wrangell area should be deducted when calculating the amount of excess * Risk Assessment, Harza, Feb 1996 _Mar-12-99 O03:37P p P.o3 energy available from the Tyce Project. In any event, based upon the Harza Report and reported actual sales form the Tyee Project, we stand by our estimate of the excess energy available at Tyee and that excess energy will decrease over time. ‘The annual energy capacity of Mahoney Lake is 46 gWh and this is confirmed in the license issued by the Federal Energy Regulatory Commission (FERC). We used 42 gWh in our feasibility analysis to be conservative. The study done by R.W. Beck was paid for by KPU and was generally critical of our private enterprise efforts to enter the Ketchikan energy market. The Mayor and Council were also provided a KPU memorandum dated February 11, 1999. That memorandum outlines five criteria the next electric generation project should mect. ‘The Mahoney Lake Project casily meets those criteria when viewed objectively. In the third paragraph of the memorandum, statements are made aboul KPU’s success in keeping electrical rates down. We agree. While the comparison with Kodiak, Valdez, and Glennallen arc helpful, it is also helpful to review the rates in Juneau. Juneau rates are as low or lower than Ketchikan’s and the power is supplied by an investor-owned utility. The Table comparing project summurics is helpful. We have made footnoted modifications thal we believe make the table more accurate and useful: Table Project Summaries Project Energy ST’Cost LTCost Available in Intertie 60 gwh* 6+ 8.6° 4 to 5 years® Whitman & Connell to early to tell 4 to 10 years Mahoncy 40 to 47 gwh 6.5 6.5 2 years Metlakatla to early to tell 4 to 10 years Existing Diesel 68 gwh 5.6 to 6.57 Ready “ Actual sales to Petersburg Wrangell deducted from Energy Potential determined by Harzai in the Risk Assessment prepared on the Tyee Project. * Because the amount of excess energy available from the Tyee Project will decrease over time the long-term costs will be more than the short term under the scenario offered by KPU, ® Because the funding plan Is not approved, power purchase rates are not firm or approved by PMC and bid specifications, award, and contractor mobilization we remain convinced that this project is at least 5 years away, If not more. 7 Diesel prices are currently very low thus has a 90% chance of increasing. 3 ,Mar-12-99 03:38P p P.o4 Bullet item # 1 under the Swan-Tyec Intertie heading: indicates the potential of reducing KPU’s retail rates in the future. True, any reduction in cost or rates associated with the Four-Dam Pool Projects will benefit Ketchikan. However, KPU does not have unilateral control over these items. The PMC of the Four-Dam Pool determines rates. Even if KPU can achieve significant savings from operating expenses or sales volumes the benefit is not realized solely by KPU. The benefit, if any, is shared by all of the purchasing utilities (Kodiak, Petersburg, Wrangcll, Valdez, Glennallen, and Ketchikan). Thus, any economic benefit created by the actions and efforts of KPU are discounted and could be absorbed by increased operating expenses, used for deferred maintenance, and/or local employment in the other communities. This is exactly why it is so important for KPU to firm up the actual rates and terms associated with purchasing excess energy over the intertie. I believe that all the purchasing utilities have a vote that will make this task difficult and time consuming. Bullet item #2: An assertion is made that the rates from a fully utilized Tyee may have a favorable impact upon the rates now paid under the PSA. Again, there is always potential, while busbar cost may be reduced through increased volumes there is usually a cost associated with the gain. Even if the power could be reduced to 5.5 cents the power is still at [yee. There will be capital costs associated with the construction of the intertie, on-going operation and maintenance costs, and cost associated with the renewal and replacement of the intertie. We believe that once the cost is recognized, the cost of this energy delivered to Ketchikan will be about what is now paid for Swan Lake energy (6.8 cents per kw-hr). Bullet item #3: ‘he interruptible rate has always been available to KPU through the PSA. However, one would not want to place too much assurance upon an energy source that may be there and may not be there. It is also a two-edged sword. Currently, the Silver Bay Logging Company wants to purchase at the interruptible rate that will reduce the energy available over the intertie, In it’s letter to ALDA*, KPU has firmly stated that the energy needs of the Petersburg/Wrangell area will have priority prior to energy being exported to Ketchikan. Does this include industrial energy users, current and future, that are located in that area? Based upon what we know, this very well could be the case. It is interesting to note that interruptible sales to the Wrangell Sawmill will have the same adverse effect upon the finance plan for the Swan/Tyee Intertie as Mahoncy. However, they do not seem to be suffering from the negative comments as Mahoney nor are they being asked to delay the development of their sawmill. Bullet item #4: It is stated that the Four-Dam Pool supports the Swan/Tyee Intertie. I think this is uc. If the other communities (Kodiak, Petersburg, Wrangell, Valdez, and Glennallen) can possibly benefit without any downside, it is in their best interest to support it. However, this is not the question before the Council. The question is: Should Mahoney Lake energy be purchased before energy over the intertie and js this in the best ° KPU to AIDA dated 12-10-99 M = = = . ar-12-99 03:38P p P.05 interests of the rcsidents of Ketchikan? The best interests of the other communities (Kodiak, Petersburg, Wrangell, Valdez, and Glennallen) are not the point. Bullet item #5: Points out that the State of Alaska is currently analyzing the latest plan of finance for the proposed Swan/Tyce Intertie. The analysis by the State is a prudent and correct measure. The administration needs to consider if they support the idea of selling bonds to partially finance the intertic. It is also important that the State analyze the implication of the Mahoney Project upon the latest plan of finance. ‘lo ignore those implications could make the findings of the analysis inaccurate. We support the Swan/lyee Intertic but we fecl it is the best interest of the Ketchikan residents to purchase Mahoney Lake energy prior to purchasing excess energy over the intertie. Bullet item #6: The idea of KPU purchasing the Swan Lake Project is really outside the scope of this discussion. While the eventual purchase of the project may bring with it some benefits, it is important to recognize the huge risks associated with direct ownership, The residents of Ketchikan are currently protected via the Power Sales Agreement with the State, for uninsured losses, sub-standard project performance, natural disasters, project relicensing and decommissioning costs. Bullet Item #7: Agreed, we support the intertie and the interconnection of all of southeast Alaska via a comprehensive intertie program not unlike the one being proposed by the Southeast Conference. However, we fcel that the funding for such a program must be equably spread over all of the communities that may benefit. We do not believe it is appropriate to demand or expect the Ketchikan residents to pay more than their fair share of this long-term infrastructure investment. Bullet item #8: Having the EIS on the Swan/Tyee Intertie is certainly an advantage when it comes to timing. However, an important distinction when comparing the relative status of the Mahoney Lake Project and the Swan/Tyee Intertie is funding. Our funding is in place and, once a power supply contract is signed by KPU, construction can begin immediately. Can the intertie be in place by in place by February 2001? First, there is no funding package in place nor has KPU reached agreement with the PMC on the modification of the existing power sales agreement. KPU docs not have a firm power purchase agreement on what rate will be paid for power over the proposed intertie. The funding package will require legislative action to issue over $40 million in state bonds. With the current fiscal situation of the state we think this is a major decision and will take several years just to put this part of the funding package together, In addition, the bid specifications have not yct been issued nor has a construction contract been awarded. No contractor is in place or on site. It is of interest to note that KPU has been asking that the Mahoney Lake Project be delayed since at least 1994? on the basis that it would adversely impact the funding package under consideration. Since that time that funding package has come and gone and now another funding package (the latest) is under consideration. In the meantime, the energy needs are being met by diesel generation. Just how long should we delay this time? * City of Ketchikan to Forest Dewitt Clty of Saxman, July, 1994. 5 » Mar-12-99 03:38P p P.06 Bullet item 49: A statement is made that the federal funding requires that the Swan/Tyee Intertie be placed ahcad of Mahoney. We do not agree, We are not aware of any such covenant attached to the federal funding. If there is a written document that supports this statement we need to see it, as would the council. Bullet item # 10: No Comment; an unsupported statement in regards to the Governor’s position on the intertie, Maybe it would be useful to ask the Governor to state his opinion or position himself rather than relying upon KPU’s assertion. Bullet item #11: In this item KPU asserts that KPU is obligated under its existing power sales agreement to purchase excess power from Tyee over an intertie that currently does not exist prior to purchasing power from Mahoney. Most disturbing is that KPU apparently believes this is trac and in the public interest. Attached is a legal opinion from our attorney that correctly finds that no obligation exists and the commitment only applies to the initial project and then only sometimes. If KPU has a legal opinion from the City Attorney that supports their statement, perhaps a copy can be made available to Council and the public. Apparently KPU is so intent and unwilling to purchase power from a private enterprise, at a price that is below what it is currently paying, and below what it wants to pay in the future, that they are making this unsupported assertion. A verbal statement that KPU has already made a decision in regards to the obligations, if KPU may have any under the existing Power Sales Agreement with the State, is telling to say the least. I would not only be surprised but also appalled at the notion that you can sign an agreement that specifically defined the “initial project” and then be contractually obligated to purchase energy over transmission facilities that do not cxist. We do not believe that a legally binding obligation exists and have attached support for our position. If KPU has support for their statement, that the obligation cxists, then they should provide it. Bullet item Whitman Lake: This project is 4 to 10 years out in the future. The actual cost and energy output are not yct defined enough for these assertions to be made. However, we believe at some future time when the costs of licensing and cost estimates have been refined, the devclopment of this project may make sense. We remain unconvinced that only KPU has the ability to perform some type of magic and that KPU is the only organization that can provide for the energy needs of our children. This type of Public vs. Private philosophy has been tried in other countries and has failed. Government has long proven that it is not the most efficient provider of goods and services. Generally, in America it is thought that private enterprise and the free market is the most efficient provider and allocator of economic resources. Further, the role of government should be limited to encouraging private enterprise. Generally, in America when government has grown to the point that it is using taxpayer supported resources to displace private entcrprise it has grown too big and has become part of the problem, not part of the solution. Bullet item Mahoney Lake: We arc in general agreement. Bullet item Connell Lake: See our comments on Whitman Lake. However, it appears oMar-12-99 03:39P p that Lake Whitman may prove to be a better project than Connell. Bullet item diesel and other: We arc in general Agreement. Attachments: i. Letter dated February 3, 1999 from Davis Wright Tremaine, letter opinion on interpretation of Power Sales Agreement-Four Dam Pool. 2. Two page Memorandum dated February 10, 1999 from Richard Trimble to John Magyar. 3. Four page Memorandum dated February 11, 1999 from John Magyar to Honorable Bob Weinstein and City Council. as