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HomeMy WebLinkAboutThe Energy Program for Alaska Origins & Evolution 1985Laman RECEIVED MAR 18 1985 ALASKA POWER AUTHORITY The Energy Program for Alaska; Origins and Evolution Division of Strategic Planning March, 1985 OM B STAFF PAPERS AND REPORTS STATE OF ALASKA OFFICE OF MANAGEMENT AND BUDGET BILL SHEFFIELD, GOVERNOR TABLE OF CONTENTS CHAPTER PAGE 1. Introduction . . 2. .« « © © «© © © © © © © © © © 1 Gordon S. Harrison, Associate Director Office of Management and Budget Division of Strategic Planning 2. Energy Legislation, 1975 - 1983 ........ 13 Margo Waring, Principal Analyst Office of Management and Budget Division of Strategic Planning 3-6 Power Rates under SB 25 and HB9........ «89 Richard Emerman, Senior Economist Alaska Power Authority 4. Alaska Power Authority Legislation, 1984 Session . . . 6 2 2 ee ee ew ew ew ee ee 9D Martha Fox, Assistant Attorney General Alaska Department of Law Appendices ... 2. 2. ee ee ee ee ee ee ew ew ee 123 Chapter 1 INTRODUCTION The purpose of this publication is to provide background information for understanding the evolution and current status of the laws governing the Energy Program for Alaska. The Energy Program for Alaska concerns’ the acquisition, construction and operation of sizeable state-owned power projects (AS 44.83.380-398). Adminis- tration of this program is the major activity of the Alaska Power Authority (AS 44.83). At the present time there are four hydroelectric projects in the program: Swan Lake near Ketchikan, Tyee Lake near Wrangell and Petersburg, Terror Lake on Kodiak Island, and Solomon Gulch at Valdez. The Anchorage-Fairbanks Intertie is also part of the program. Legislators and others have raised questions about the program from various perspectives, and it is likely to receive further attention in the Four- teenth Legislature. The Energy Program for Alaska was created in 1981 by enactment of SB 25. However, creation of the Alaska Power Authority and initiation of a hydroelectric development program antedate SB 25 by several years. Important amendments were made to SB 25 in 1982 by HB 9, and again in 1984 by SB 4l1l. This legislative history of the State's involvement in electric energy development is reviewed by Margo Waring, "Energy Legislation, 1975-83," and Martha Fox, "Alaska Power Authority Legislation, 1984 Session." At the heart of the statutory Energy Program for Alaska is a formula for setting the wholesale price of power to purchasing utilities. The rate-making formula in SB 25 and HB 9 both involve the pooling of debt service among all the projects, but they differ in important ways. Dick Emerman's chapter, "Power Rates Under SB 25 and HB 9," is an explanation of these differences and how the two methods are designed to work. Assessment of the Current Situation Those who take issue with underlying principles and policies of the Energy Program for Alaska can make a more expansive critique of the statutes than that which fol- lows, which simply questions whether these laws do well what they were intended to do. The present laws are a patchwork contrivance that makes workable an otherwise unworkable rate-setting mechanism. Also, the statutes fail to give clear guidance to administrators of the Energy Program for Alaska on important policy matters, including the approval of projects for the program. Not so apparent is how serious a problem this is. For example, shortcomings with the statutory Energy Program for Alaska do not mean that the State of Alaska does not have an energy program. The State's overall energy program is much more inclusive than the Energy Program for Alaska in AS 44.83. This policy involves other energy development programs administered by the Alaska Power Authority, energy conservation programs administered by the Department of Community and Regional Affairs, and alternative energy programs and other activities carried out through the Department of Commerce and Economic Development. /1 Also, with regard to hydroelectric development, which has been the focus of the Energy Program for Alaska, we must not lose sight of the fact that the State's policy has been, and continues to be, to encourage and financially support projects that are economically feasible. /2 The statutory content of the Energy Program for Alaska con- cerns the details of selecting projects and selling the power. In the broader perspective of long-term State policy regarding electric power development, these details are comparatively insignificant. On the other hand, they are very significant to the citizens of the State who are now served by a State project or those who hope to be soon. Rate-setting Mechanism is Unworkable as Intended Central to the Energy Program for Alaska is a wholesale rate-setting scheme which involves the pooling of debt. Debt pooling first appeared in SB 25, although at that time it was not anticipated that there would be signifi- cant debt in the system. Amendments to SB 25 made by HB 9 /1 See 1985 Energy Plan of the State of Alaska, prepared by the Department of Commerce and Economic Development, January 1985. /2 Economically feasible projects means projects which are “optimal;" that is, projects which represent the lowest life cycle cost of electric power generation among alternative methods. in 1982 established the present rate-setting mechanism. In drafting the bill, key legislators and administration participants were concerned primarily about’ sharing equitably different amounts of State grants among the various projects; about encouraging efficient operation of the projects; about inducing widespread political support for funding of projects still in the planning stage; and about avoiding commitment to oversized projects. Not adequately considered at the time was the ability of the Alaska Power Authority to actually sell the power through long-term contracts with utilities, especially if economic conditions were to change. On-going negotiations over power sales agreements between the Alaska Power Authority and the utilities served by the Swan Lake, Tyee Lake, Terror Lake, and Solomon Gulch projects have indicated that the statutory debt-pooling concept will not work as intended. In anticipation of the issuance of revenue bonds by the Power Authority, important changes were made in the statutes during the 1984 legislative session to allow acceptable long-term power sales contracts to be drawn up. (This is discussed further below under the heading "Status of Contract Negotiations with the Four Dam Pool," and in detail in Chapter 4). One of these statutory changes was the combining of the four projects into one project for the purpose of allocating debt service, in place of the requirement in HB 9 that each project pay its own propor- tionate share of debt service, as modified by a transi- tional rate "cap" provision. Another critical change was an addition to the law that says "The authority may agree with a purchaser of power to limit rate increases caused by debt service payable to the authority on subsequent projects." What does this sentence mean, why was it necessary, and what are its implications? Under the current debt-pooling provisions of the law, the wholesale rate charged for the output of a project could increase significantly if a new project entered the pool with a higher proportion of debt than the average of the existing pool. (Dick Emerman's analysis of rate-setting under SB 25 and HB 9 shows how this can happen; as he points out, a key variable is interest rates on debt, therefore the relative amount of debt service is important rather than simply the proportion of debt). Exposure of consumers to uncontrollable rate increases (dramatized by the term "rate shock") from a new project, as well as from the working of the "Susitna blackmail clause," was an unacceptable consequence of the existing statutes. Negotiators for the project utilities insisted that long-term contracts provide explicit protection from rate increases caused by new projects in the system. The implication of the position taken by utility negotia- tors on new projects ("system increments") is that future projects in the Energy Program for Alaska may have the effect of lowering their rates, but not significantly raising their rates. For the rate-setting mechanism to result in lower rates, the future projects would have to have a greater proportion of State grants than the average of the existing projects (currently 60 percent). /3 If we assume that the utility negotiators' position reflects a fundamental unwillingness of any group of consumers to subsidize the rates of any other group, there is every /3 This imperative to seek a predetermined level of State grants and debt financing for a new project creates a conflict with the statutes and APA regulations, which require the plan of finance for a project to evaluate the "minimum amount of financial assistance from the state." reason to expect the consumers of the hypothetical new project with a high proportion of State grant financing to be just as unwilling to share their good fortune through subsidies to other consumers. If this is true, the HB 9 rate-setting mechanism of the Energy Program for Alaska is conceptually dead. In effect, we will have "stand alone" project financing and rate-setting. If so, it is not clear what remains of a "program" in the Energy Program for Alaska. Project Approval Process is Unclear There is considerable ambiguity in the statutory proce- dures for approving new projects in the Energy Program for Alaska, and there is considerable ambiguity in the meaning of legislative approval given to the Bradley Lake and Susitna River hydroelectric projects during the 1984 legislative session. One ambiguous feature of the approval process is the relationship between AS 44.83.183 and of AS 44.83. 185. The provisions of AS 44.83.183 require a formal review by the Office of Management and Budget (OMB) of a feasibility study and a plan of finance for each new project. The report is to be submitted to the Governor. The provisions of AS 44.83.185 require legislative approval of new projects. These provisions also require the Power Author- ity to submit a plan of finance for a new project, and for OMB to submit its report on the economic feasibility study and plan of finance to the Legislature when it is com- pleted. The statutory scheme implies that legislative approval or disapproval will be informed by the recommen- dation of OMB, but it does not require that the submission of the OMB recommendation precede a decision by the Legislature. What would be the meaning of legislative approval of a project if it came before the Power Authority had submit- ted to the Legislature a plan of finance, and before OMB had reviewed (or even received) a plan of finance from the Power Authority? The question is not hypothetical, because this is what happened in 1984 by SB 411 (169 SLA 84). The Legislature approved the Bradley Lake project and Susitna River project under AS 44.83.185 before plans of finance had been finalized by the Power Authority. Should this approval be construed as strictly a symbolic act without legal effect? Was it a clear directive to the Power Authority to proceed with the projects regardless of their economic feasibility and methods of finance? Or was it an authorization for the Power Authority to continue with the project according to its own procedures without further consultation with the Legislature? A letter of intent that accompanied the Senate action on the bill suggests something along the lines of the latter interpre- tation. However, the letter of intent was not adopted by the House. /4 An additional ambiguity in the statutes concerning the project approval process is the existence of AS 44.83.3000, which sets out a separate approval process for the Susitna River hydro project. Are these provisions to be followed in addition to the provisions of AS 44.83.185, or instead of them? /4 Nor was it rejected. A review of the legislative records indicates the Senate letter of intent was never (Footnote Continued) Status of Contract Negotiations with Four-Dam Pool Statutory changes made to the Energy Program for Alaska during the second session of the Thirteenth Legislature (1984 session) were intended to facilitate financing for the Swan Lake, Tyee Lake, and Terror Lake hydroelectric projects. The Solomon Gulch project, although completely financed with State grants, was included in the delib- erations and negotiations that occurred during this time because the wholesale rate for power generated by this project was linked by statute to the other projects. These four projects came to be known as the "four-dam pool." To finish construction of the Swan, Tyee, and Terror Lake projects, the Power Authority had obtained short-term financing that totalled about $200 million. As the session began, the projects were being finished and the notes would be coming due (the first one, for $35 million, would be due May 31). The assumption was that long-term revenue bonds would be sold to repay the short-term debt. For this to happen, the Power Authority needed long-term power sales contracts with the purchasing utilities that would assure a stream of income sufficient to meet the principal and interest payments on the bonds. (In addi- tion, the State would be required to appropriate money to a "rate stabilization" fund that would be used to help the utilities meet these repayment obligations and keep the retail price of power slightly below the price of power from their diesel generators.) (Footnote Continued) presented to the House for consideration. Excerpts from the Senate letter are quoted in Chapter 4. The Power Authority was already engaged in contract nego- tiations well before the session convened. It had become apparent that key elements of the existing statutory scheme stood in the way of an acceptable contract with the utilities. Therefore, several statutory amendments were introduced and eventually adopted. Toward the end of the session, the terms of contracts were endorsed in principle by the utilities and the Power Authority. An alternative financing scheme was proposed and adopted late in the session: the State would appropriate as a loan the money needed to repay the short-term debt. It was assumed, at least it was assumed by the APA and Administration participants in the deliberations, that the loan terms would be tied to the contract terms already negotiated by the utilities and the Power Authority. That is, the contracts would remain unchanged; merely the lender would change, However, once a State loan was substituted for long-term revenue bonds, the utilities repudiated their tentative agreements. The Power Author- ity did not agree to new contract terms proposed by the utilities. Thus, long-term power sales agreements have still not been signed. A short-term agreement, to run through June, 1985 has been agreed upon as a temporary measure. Further amendment to the statutes may be neces- sary to facilitate long-term power sales agreements if new approaches are taken to a settlement of the issues that cannot be accommodated within the existing law. In the fall of 1984, the Board of Directors of the Alaska Power Authority began a review of policy options for the Energy Program for Alaska. It was thought that further negotiation with the four-dam pool utilities should take place within the framework of a revised, comprehensive energy policy, if that were possible. It was in this context that the Advisory Committee on Statewide Power Production Costs was appointed to consider the possibility of blending wholesale rates on a statewide basis. However, at the time the Committee submitted its report, a steady downward trend in crude oil prices began to accelerate with alarming implications for the State's revenue in the immediate and mid-term future. It is apparent that this fiscal situation is now a major factor in consideration of options for our energy policy. The State must seek contracts with the four-dam pool utilities, as well as evaluate financing proposals for Bradley Lake, plan for major new additions to the generat- ing capacity in the Railbelt, and attempt to relieve the high cost of energy in rural areas, all in the context of revenue projections that may simply not support sizeable annual cash appropriation to electric energy subsidies. This page intentionally left blank. -1ll- Chapter 2 ENERGY LEGISLATION, 1975 - 1983 INTRODUCTION The following pages provide a summary history of legis- lation affecting energy and power development from 1975 through 1983. Although lengthy, this history is selec- tive. Bills which became law are discussed; those that did not are slighted. Technical discussions are minimized for a general readership. It has been necessary to be "thematically" selective. Many issues and the implica- tions and ramifications of those issues were discussed during the period 1975 - 1983. An attempt was made to select those issues which, from the evidence of files and interviews, seemed of greatest interest at the time and which have had the longest range impact. The passage of major legislation is typically linked to the passage of other legislation which is a priority of key legislative players. The history of energy legis- lation presented here generally omits discussion of those "linkages" which affected the outcome of the energy legislation reviewed in this study. The fuller under- standing which might have been gained was sacrificed to highlight and condense this very extensive and complex subject. -13- The history of energy legislation from 1975 - 1983 shows on-going and unresolved tension between competing points of view regarding the States energy priorities. During~ this time period, significant programs and programmatic changes were enacted almost on an annual basis. During the time period, 1975 - 1983, key policy issues were debated. These remained relatively unchanged over the years. 7 What's the best investment of State revenues? How much risk should be tolerated? How can investments in the Permanent Fund be compared with hydro investments? 7 Can or should power projects distribute State wealth? Should the distribution be through construction jobs? Eventually through low electric rates? How can the statewide distri- bution be equitable? ° Should we seek to finance and build projects providing lowest possible unit cost to consumers or those with higher rates for excess capacity for potential growth? ° How should the State assist power project financing? What about market tests and appro- priate rates of return? If subsidies are going to be given, how should they be distributed - at the generation or the consumption points? f What role should conservation play in the State's energy policy? i Should there be a single statewide power system or local control of projects? , Should the focus of energy policy be on elec- tricity and hydro power? i What organizational structure will best imple- ment energy policy? 1975 LEGISLATIVE SESSION The bill creating the Alaska Power Authority, HB 779, was developed and passed in the mid-1970s' oil crisis atmo- sphere. The price of fossil fuel was rising sharply and, in Alaska, there was concern about energy independence, about shifting away from diesel based generation, and concern that rising fuel prices would ruin the State's smaller communities. In 1975 the House Finance Committee, chaired by Representative Hugh Malone (D. Kenai), con- tracted with ISER to study the State's power needs. The report, "Alaska Electric Power Study," was prepared under the direction of Arlon Tussing, with Scott Goldsmith as the chief researcher and project manager. It presented information on electricity demand, generating and financ- ing alternatives. According to project staff, the purpose of the study was to provide statewide perspective and more balanced analysis in response to Southeast legislators' push to build hydro electric projects. Therefore, the report focused on economic analysis of projects. In the report, Tussing presented the idea of a public authority which would finance hydro projects through revenue bonding (p. 6-33). Tussing, in the section "Subsidies for Electric Power" (p. 6-42), states that "if it is socially desirable that power be made available to everyone, even if the cost of doing so exceeds the willingness or ability of some customers to pay the full cost...," then subsidy of generating and operating costs of utilities is preferable to direct subsidy payments to customers. Susitna appears in "Alaska Electric Power Study" as a possible source of Railbelt electricity, though the cost of transmission precludes its more statewide use. It is assumed to be a possibility only in so far as gas prices continue to rise. At the same time that certain legislators joined with local governments and consulting engineers to pressure to build hydro projects (see HB 799, H. Fin. Committee file), representatives of utilities in Fairbanks and rural Alaska were concerned about declining federal financing of electric generation projects. The Rural Electrification Administration and water resources project funding were declining, while the cost of capital was increasing. Electric cooperative managers, dealing with increased demand and deterioration of generator facilities, focused on a new source of funding for the capital needs of their cooperatives. In the Administration, Commissioners Motley and Gallagher saw revenue bonding for infrastructure financing and economic development as a preferred approach. Representatives Jim Duncan (D. Juneau) and Red Swanson (D. Nenana) introduced HB 799 on February 17, 1976. The bill was referred to the House Finance Committee on April 6, 1976. The bill as it was introduced and as it emerged from its first committee of referral established the Alaska Power Authority (APA) to finance hydroelectric projects through the sale of revenue bonds. Prior to the APA's creation, no energy development program existed in State government. The financing of electrical generation projects was accomplished either by traditional financial markets or, for electric cooperatives, by the Rural Electrification Administration which historically provided loans at 2-3% interest. The State's Water Resources Revolving Loan Fund made loans for reconnaissance and feasibility studies needed prior to local bonding. The bill establishing a power authority had been agreed to during the interim. Staff to the Committee indicate that an original concept had been to fund hydroelectric pro- jects through loans from the Permanent Fund. During the interim, it was agreed by Southeast legislators that they would drop the Permanent Fund approach in favor of an appropriation of $10 million for the Green Lake hydro project. Eventually reduced to $7 million by Hammond veto, this was the largest single capital appropriation to that date. Also it was agreed that a bill would be introduced for the future financing of hydroelectric projects. Using the model of the New York State Power Authority, the draft APA bill provided for an independent board of directors (one commissioner, four public members) and for financing through the revenue bond market. Ted Swick of the firm White Weld served as financial advisor, and Eric Wohlforth, an Anchorage attorney, gave legal advice to the House Finance Committee. The minutes of the House and Senate Finance Committees show the formative role of the House Finance Committee members, the lobbying support of Southeast legislators, engineers, and utilities, the lack of substantive adminis- tration commentary, and the role of Ted Swick (p. 187 Sen. Fin. Committee minutes 1976). Ted Swick, at a House Finance Committee meeting (3/29/76 p. 407), saw repayment as a crucial element of the pro- posed APA financing mechanism. The total cost for the statewide hydroelectric and alternative energy package would be $800,000,000, a "staggering" sum but one which, due to revenue bonding, would not, he assured the commit- tee, hurt the State's credit rating. The record is clear that that intention of the House Finance Committee version of HB 779 was to avoid the route of general fund appropriations for hydro projects; the preferred route was to be the tax exempt bond market that would, it was firmly believed, scrutinize the proposed projects by the strictest market test. The money of outsiders, rather than Alaskans' oil money, was to finance power projects. The rigorous project analysis by the bond market was also to assure that the costs were controlled. The independence of the board was considered necessary by some because the Administration was seen as uninterested in energy problems unattentive to planning for energy needs. In the House Finance Committee, the power revolv- ing loan fund was seen as a small program which would help those rural areas which were, for reasons of size and sophistication, unable to go to the bond market. Thus, oil revenues would fund rural projects, insuring the support of rural legislators. In the record, there is little questioning of the basic assumptions of the bill. Testimony and amendments tended to be technical, with the exception of Senator Ferguson's (D. Kotzebue) amendment at the last hearing on HB 779 to add the following new material: "(c) The authority may make loans from the fund, at such interest rates as it determines, to cities, boroughs, village corporations, village councils, nonprofit marketing cooperatives for purposes of constructing, equipping and the initial filling of fuel storage facilities, and for other energy requirements, including but not limited to electrical utilities, geothermal, solar, hydroelectric, or wind power energy production, or for natural gas line construct." At this same Senate Finance Committee meeting where Ferguson's amendment was adopted, Representative Duncan first presented the fiscal note for HB 779 - $291,500 for staff and feasibility studies. An appropriation of $3 million for hydroelectric projects had already passed the Legislature. Without dissent, the APA bill passed from House and Senate committees, was unanimously approved by the House which concurred with the Senate amendments. The bill was signed by the Governor on July 2, 1976, becoming Ch. 278, SLA 76. In his message to the House, Governor Hammond, having only recently seen the bill, wrote: I want to express a serious reservation about this bill. More power is conferred to the Authority than is consistent with the expressed purpose of the Authority. For example, loans may be made from the Power Project Revolving Fund for natural gas line construction, filling of fuel storage facilities, and other projects not directly related to the "estab- lishment of power projects." Conferring these powers and responsibilities to the Authority may not be consistent with the state's best interest because the public may not have adequate input into the decisions of the Authority. Like the Alaska State Housing Authority, this Authority is arguably too autonomous. Although the Authority is not directly under my control, I assure you that I will do all I can to encourage the Authority to be responsive to the people. That may require corrective legislation next session to accomplish that result. 1976 - 1977 1977 Interim Governor Hammond introduced a bill to amend the APA statute in April 1977 as HB 442. The thrust of the amendments proposed in HB 442 were to make the APA more responsive to the Governor, to require stricter standards in project selection and to assure that power sales contracts covered each customer's power production costs. A long-term electric development plan was to be prepared by the Department of Commerce and Economic Development (DCED) rather than APA, to separate the planners from the builders (file memo, Lehr 10/25/76). To the Board of four public members and the Commissioner of DCED were added the commissioners of the Department of Community and Regional Affairs, Department of Natural Resources, Public Works and Revenue as non-voting members. Proposed projects were to be submitted to the Governor for written approval two months prior to submission to the Legislature. The inclusion of the APA in the Executive Budget Act was of priority concern. The purpose of the APA became provision of power (instead of hydroelectric and fossil fuel genera- tion) at "reasonable" cost. Power projects would be subject to public bid requirements. Payments in lieu of taxes were to be made to local governments. The amendments were drafted and redrafted by the Gover- nor's Office staff, the commissioners of DCED and Revenue, Eric Wohlforth, the APA, Arlon Tussing and Ted Swick. The DPDP files on amendment to the APA Act’ indicate considerable resistance on the part of Commissioners Motley and Gallagher to amending HB 779 to limit the autonomy of the authority, changing its scope or relating it to other executive branch agencies (Memos: To LeResche from Motley, 10/20/76, To LeResche from Singer 10/21/76, To LeResche from Lehr 10/25/76). Certain issues remained unresolved (D. Lehr 10/25/76): 1) whether appropriated "seed money" for projects was to be repaid as part of the State's return on its equity, and 2) identification of rate structures that would address the issue of marginal cost pricing and peak load pricing. 1977 - 1978 LEGISLATIVE SESSIONS Through numerous drafts and in correspondence with legis- lators, Governor Hammond and his office continued to identify the important aspects of HB 442 as policy coor- dination and review, the APA's adherence to the Executive Budget Act and other reporting requirements. As Governor Hammond stated in a letter of March 8, 1978 to Representa- tive Steve Cowper (D. Fairbanks), House Finance Committee Chair, the major amendments supported by the Governor dealt with financing - to clarify the ability of the APA to finance projects for others, as well as constructing and owning its own projects and with review to assure executive branch evaluation of APA projects and trans- mission of findings of fact to the Legislature regarding full project costs and benefits. The Governor was also to review the power demand projections developed by the APA. A long-term energy plan was to be developed by DCED, and APA projects were to be consistent with this plan. The amendments clarified the role of the Alaska Public Util- ities Commission (APUC) and stressed financial accounta- bility and self-supporting projects by requiring the APA - 21 - to follow the Executive Budget Act, requiring that each project support itself, and requiring an annual report by the APA. As there was no limit in HB 779 on the APA's bonding ability for project completion after initial approval, it was hoped that the annual report requirement would serve as a disincentive to low estimates of power project costs. The Governor's staff was also concerned about project sub- sidies. In a memorandum from D. Lehr to Ulmer (3/2/78 re: APA), regarding project subsidy, Lehr notes that subsidies should not be hidden and that these "should not be left to the decision of the Authority and hidden among the com- plexities of bonding and pricing procedures." The House Commerce Committee passed a committee substitute of HB 442 which, in the opinion of the Governor's staff, "wrecked havoc on the Governor's intent" by having the APA review projects and submit a "finding of fact" to the Legislature. "Since the Authority is an advocate for its own projects, a comprehensive, objective evaluation cannot reasonably be expected." (D. Lehr to Dawson 12/15/77 re: APA) The Governor's authority to approve or disapprove power demand estimates was also deleted by the House Commerce Committee, as was the section clarifying that the APA was subject to the Executive Budget Act. The House Finance Committee file shows testimony from Eric Yould, newly appointed Executive Director of the APA, supporting the Governor's amendments but offering another which would exempt from approval processes those projects "adopted by a joint resolution of approval prior to the conclusion of the tenth Legislature." This proposal was adopted later in a similar form. Yould, according to Bob Ward, then APA Chair, in his first annual report to Hammond, had been hired by the Board, having been the Corps of Engineers' Susitna project manager. Jd. Williamson of R.W. Beck offered amendments in the House Finance Committee on behalf of "Southeast Communities" which would permit borrowing from the power project revolving loan fund at 3-5% interest for 50 years, with repayment beginning after 10 years of operation. This proposal was also rejected. The Alaska Center for the Environment questioned whether consumers benefitted from the language changing "lower consumer power costs" to "reasonable...costs," recommended for the APA by Battelle in their study "Alaskan Electric Power: An Analysis of Future Requirements and Supply Alternatives for the Railbelt Region." The Senate considered the second House Finance Committee substitute for HB 442 which reflected the Governor's original bill. In a letter of May 23, 1978 to Senate Finance Committee Chair John Sackett (R. Ruby), Yould urged the passage of HB 442, saying that passage was necessary to secure revenue bond financing for the Solomon Gulch hydro project ($33,000,000). In another letter from Yould to Sackett (June 9, 1978), Yould informed Sackett of his purchase, upon Sackett's recommendation, of "The Power Broker," a biography of Robert Moses, mentioned in a Senate Finance Committee meeting by Sackett who was concerned about the autonomy of the agency. The APA amendments, in a version similar to that proposed by Hammond, passed both the House and Senate without dissent and were signed into law by Governor Hammond on July 22, 1978, slightly more than two years after Governor Hammond signed HB 779, creating the APA. - 23 - Other Legislation Amending the APA Act was not the only energy legislation passed during the 1977 - 1978 Legislature. Two other bills were passed at the end of the 1978 session. HCS SB 601, Chapter 111, SLA 78, appropriated $6,000,000 (reduced to $500,000 by Hammond) to the power project revolving fund for loans for reconnaisance studies, design and preconstruction engineering of hydro projects. (The DPDP file 1F1l contains a letter of support for HB 906, a $5,000,000 appropriation for the power project revolving fund from the cities and electric utilities of Dillingham, Ketchikan, Cordova, Wrangell, Kodiak, Petersburg and from Tlingit Haida Regional Electric Authority [THREA] .) Additionally, $10,000,000 (reduced to $7,000,000 by Hammond) was appropriated as a loan to Sitka for Green Lake design, licensing and construction; "the terms and conditions of the loan are to be determined by the Commis- sioner of Revenue in consultation with the Commissioner of Transportation and Public Facilities." CS HB 266, Chapter 29, SLA 78 created an alternative power resource revolving loan program in the DCED for alterna- tive energy generation projects costing less than $10,000. Other bills were considered during this session. Despite the 1977 "agreement," the idea of relating hydro to the Permanent Fund did not end. The concept of Permanent Fund guarantees of hydro loans was mentioned by Ted Swick of White Weld regarding HB 595, "An Act relating to income of the Permanent Fund." (House Fin. Comm. file, HB 442). The House Finance Committee file on HB 442 contains a six page letter dated March 14, 1978, from Eric Yould to Clark Gruening outlining procedures for using permanent fund - 24 - earnings for bond guarantee purposes. For some commu- nities, which would not be likely to sell bonds, Yould noted that “hence, their best alternative would be State funds, presumably from earnings of the Permanent Fund." SR 12, sponsored by the Senate Rules Committee, chaired by Senator Robert Ziegler (D. Ketchikan), was sent to the Governor. The resolution cited the rising cost of fossil fuel and resolved that the Special Committee on the Alaska Permanent Fund consider and report on "methods by which money derived from the Permanent Fund could be used to assist in the development of hydroelectric projects in the state." The Special Committee on the Permanent Fund introduced SB 511, creating the Division of Energy and Power Development from the energy section in DCED. The new division was to have the APA's power to construct, acquire, finance, and operate hydroelectric and fossil fuel projects and to contract for the purchase, sale, exchange or transmission of power generated by a project. The bill did not move through the Senate. The 1978 session was not without discussion of Susitna. HJR 73 and SJR 50 were both introduced by the Rules Committee by request. HCSSJR 50 am H urges passage of certain federal legislation and approves APA revenue bond debt of $25,000,000 for Phase I Susitna feasibility studies, contingent on passage of the federal legislation which would reimburse the State for Phase I expenses if Susitna proved uneconomical or if the APA could not borrow construction costs within three years. Lifeline Rates Late in the session (4/17/78), the House Commerce Commit- tee introduced HB 937, "Providing lifeline electrical service to residential consumers of electrical energy." The aim of the bill was to provide electricity at "reduced cost and to establish reasonable energy price parity for electrical energy use throughout the state." Grants were to be made to electric utilities which subsidized an "electric energy usage block rate," the equivalent of 300 kw hours per month per residential customer. The net effect of the “lifeline bill" was to shift some of the utilities' costs to larger users, thus subsidizing the smaller, residential users. Companion legislation, HB 936 provided an appropriation of $5,400,000 to implement the "lifeline bill." The bill was part of Alaska Public Interest Research Group's (AKPIRG) package of rate struc- ture and utility reform bills. According to Joe McKinnon, then chair of the House Commerce Committee, since Alaska Village Electric Cooperative (AVEC) was experiencing problems, especially including rate jumps, the bush caucus was interested in this bill, as they saw little hope for the direct subsidy approach they preferred. The bill was introduced on the Senate side as SB 592 and 593 by the State Affairs Committee, chaired by Senator Jalmar Kerttula (D. Palmer). The bill had no hearings. 1978 Interim During the months between the end of the 1978 legislative session and the start of the 1979 session, the legislative branch appeared to take the lead in energy related activ- ities. - 26 - A legislative State Energy Policy Committee had been established by HCR 67 (1977) to conduct a "comparative survey of Alaska's energy potentialities." The Committee, chaired by Representative Bill Miles (D. Anchorage), focused on President Carter's National Energy Plan, natural gas, and royalty oil. The lion's share of the Committee's time during the 1978 interim was spent on leasing and royalty oil issues. However, policy guide- lines were adopted dealing with energy conservation: recommending increases in the residential fuel conserva- tion credit, expanding the Alternate Power Resource Revolving loan fund, supplementing the federal weatheri- zation program, recommending development of statewide lighting and thermal efficiency standards and recommending that the Reserve for Energy Facilities Development account (Chap. 168, SLA '78) with 5% of the State's mineral lease bonuses, rentals and royalties be used by the APA to finance construction of small hydroelectric projects. {"Energy Background Report For Legislators", No.3. Dec. 8, 1978, p. 32-33]. Lifeline Rates In the 1978 Interim, Senator Frank Ferguson chaired the "Committee on Rural Energy Policy." Staff, Kathy Brown, received instructions from Senator Sackett to look at the "lifeline" concept and at the rate structure relationship between AVEC and the REAA schools. [Memo from Brown to members 12/23/78 re: Activities and Issues.] In recount- ing her interim activities, Brown noted "that Anchorage legislators are not necessarily opposed to State subsidy of rural power, but they are concerned that the proposed subsidy is reasonable. The percentage of subsidy should be fixed despite fluctuations in fuel prices and other - 27 - costs. Establishing this "ceiling" would provide assur- ance that the energy subsidy would not be raised year after year by rural legislators and that consumers are paying their fair share" (p. 14). In discussing the proper shape of rural energy subsidy, Brown recounts (p. 9) a meeting with Dick Holden, Deputy Commissioner of the Department of Transportation and Public Facilities (DOTPF) who outlined a power production cost assistance program: Dick is also a member of the Governor's rural energy group and offered some suggestions for subsidizing rural energy. He said that the Lifeline Bill did not promote energy conservation; 300 kilowatts was more than the average person needed. The Lifeline Bill would have provided electric power practically free and therefore, would have encouraged wasteful con- sumption. Holden argued that subsidizing individual consumers would be an administrative nightmare. Subsidizing utilities at the "bus bar" or point of transmission of power to consum- ers, (as opposed to the "delivered" cost of power at the consumer's home) was far more practical. In this way the subsidy would be passed along to the consumer. Statutorily establishing a percentage of subsidy at the bus bar is far more politically realistic. Rural legislators might otherwise be pressed by consti- tuents to raise the subsidy every year. This would assure urban legislators that rural residential consumers would pay their fair share of any in- creases. A formula could be worked out to provide the same percent of subsidy for fuel and transpor- tation costs (p. 9). Susitna During the 1978 interim, federal legislation that would —=29=— have provided guarantees for Phase I Susitna studies died in Congress. Since bonded indebtness for Phase I studies had been dependent on passage of the federal bill, Susitna was again without funding. Governor Hammond, prior to the 1979 legislative session, announced his intention to request $7 million (of the $8.2 million identified by Yould) to provide guarantees for the studies projects so that decisions would be "based on fact, not guesses." Whether the Legislature or the Congress provided guaran- tees for revenue bond sales, before the studies could begin, the Army Corps of Engineers needed federal Office of Management and Budget (OMB) approval and Bureau of Land Management (BLM) land access permits had to be granted. ("Energy Background Report For Legislators", No. 3., Dec. 8, 1978, p. 30-1.) 1979 LEGISLATIVE SESSION Susitna The supplemental funding request for Susitna was submitted by Governor Hammond on January 18, 1979. In his letter of transmittal, he notes the changed circumstances of the federal legislation and states that "Due to the obvious complexity of the situation, including the possibility of complete State financing of the entire $25 million study effort should the Congress fail to adopt Senator Gravel's proposal, I request that you take the earliest opportunity to consider this appropriation and its companion resolu- tion in order to satisfy yourselves that this is the proper way to proceed on this project." The bill, SB 63, moved quickly through the Senate. On February 20, 1979, Yould, in testifying before the Senate - 29 - Finance Committee, requested $8.2 million for the first year and $7.5 million for the second, assuring the commit- tee of his belief that the State would be reimbursed either by Gravel's reimbursement bill or through revenue bonding the projects which would make the APA self-supporting (February 21, 1979, p. 128-129). Bonds, Yould thought, would be rated AAA and have a 6% interest rate (p. 129). In addition to the Committee's concern about the reimbursement of the funds, Senators Sackett and Hohman questioned the Corps of Engineers' local hire policy, as the Corps was to conduct the feasibility study. The major hearing on the House side was in the House Resources Committee. The Alaska Conservation Society (ACS) testified to the House Resources Committee on April 17, 1979, questioning the Susitna project. The testimony cited the federal OMB's questions about the Corps' fea- sibility study and the inadequacy of the "Interim Fea- sibility Report." For example, the federal OMB had noted that the feasibility study's contingency factor of 20% needed reevaluation as it was lower than experience (36%-500%) and that a 30% cost overrun would mean a net loss in the project. OMB, noting that coal was used as an alternative power source, requested information on under- utilized natural gas, on the smaller risk configuration of smaller power plants and also requested a sensitivity analysis. The Interim Report contained in the House Finance Committee files shows re-calculated power supply and demand estimates - a trend of average annual growth of 12.3%. Dal Piaz of Alaska Conservation Society pointed out that total electric consumption in 1978 in Fairbanks had declined and that Railbelt consumption increases had declined over a three year period. She urged considera- tion of decentralized alternatives: small hydro, conser- vation and natural gas. - 30- The House committee substitutes for SB 63 reworded the Governor's bill to stress that expenditures for Phase I studies would not be made unless the federal legislation passed or unless "a plan is developed that the APA con- siders a reasonable alternative for accomplishing the work required" for a FERC license. In addition to the $150,000 appropriated for the plan development, $200,000 was appropriated for an independent study of the "assumptions and findings" about power needs, population projections, and alternatives. SJR 6, the companion resolution, having passed the Senate, died in the House Committee of first referral, House Resources, chaired by Bill Miles. Conservation Legislation Miles also chaired the State Energy Policy Committee which, toward the end of the first session, introduced most of the other energy legislation of 1979. As the Committee's interim report recommended, HB 364, relating to State energy policy, sought greater use of waste heat, tax credits, amendment to the long-term energy plan which would add alternate technologies, use of the alternate power resource revolving fund for residential energy conservation, thermal and lighting standards, and energy audits and surveys of public buildings. Another bill, HB 309, sought to use the "reserve for energy facilities development account" for power project construction and sought amendments that would permit APA loans to be subordinate to APA revenue bonds. Neither of these bills had hearings. However, the thrust of the 1979 energy conservation and - 31 - alternate energy legislation was picked up by Representa- tive Brian Rogers (D. Fairbanks) who carried these concerns in legislation in 1980 and 1981. The State Energy Policy Committee responded during the 1979 interim and the 1980 session to the energy interests of Bill Miles, Brian Rogers, Terry Gardiner (D. Ketchikan) and Hugh Malone. During the 1979 session interim, these representatives were also members of the House Power Alternatives Study Committee, which allocated the $200,000 for independent Susitna studies. According to staff and members, formation of this group was considered necessary because of the recent demise of the Division of Legisla- tive Research. The remaining 1979 legislation was HB 476 for solar easements (Rogers), SB 68 (Kerttula) for use of pipeline waste heat for agriculture and HR 7 and SR 8, requesting an interim study by the National Conference of State Legislators (NCSL) on geothermal resources. During the 1979 interim, the Governor's office worked on an energy legislation package which was introduced on January, 1980. 1980 Energy Studies Before turning to Governor Hammond's energy package and the 66 pieces of other energy legislation introduced in 1980, it may be helpful for understanding the interest in energy issues and legislation to look at a chronological list of some of the energy reports released during 1980. January 1980 Swan Lake Report, Alaska Power Authority January 1980 Golden Valley Report, Alaska Power Authority January 1980 " A Concept for Power Production Assistance = 39 = to Electric Utilities A Report Prepared for Representative Nels A. Anderson, Jr." Arthur Young & Co. January 1980 "Initial Evaluation of the ISER Electricity Demand Forecast", Energy Probe. For House Power Alter- native Study Committee. January 1980 "Status Report". House Power Alternatives Study Committee. February 1980 "Interim Committee Report" February 6, 1980, Small Hydro and Geothermal Committee. February 1980 "Energy End Use Alaska's Northern Railbelt." For House Power Alternatives Study. Mark Baumgartner and Charles Bakus. April 1980 " Susitna Hydropower: A Review of the Issues," Arlon Tussing, Lois Kramer, Barbara Morse. May 1980 "Electric Power Consumption for the Railbelt: A Projection of Requirements," Scott Goldsmith and Lee Huskey. For House Power Alternative Study Committee. May 1980 "Introduction to Power Supply Planning," Arlon Tussing and Associates, Inc. May 1980 "Alaska Coal and Power Alternatives for Susitna" Gregg Erickson and Fred Boness. For House Power Alter- native Study Committee. May 1980 "A Review of Electric Power Demand Forecasts and Suggestions for Improving Future Forecasts," Bradford H. Tuck. June 1980 "Electric Power Consumption for the Railbelt with Technical Appendices," Scott Goldsmith and Lee Huskey. August 1980 "Preliminary Report Alaska State Energy Planning." L. Kirk Hall and Samuel A. Van Vector. August 1980 "Energy Alternatives for the Railbelt, A Study of End-Use Structure, Energy Conservation Potential, Alternative Energy Resources and Related Public Policy Issues." Victor Fischer, Alaska Center for Policy Studies. For House Power Alternative Study Committee. August 1980 "Industrial Energy - Rising Prices, Declining Demand," W.J. Levy Consultants Corp. September 1980, "Final Report House Power Alternative Study Committee." November 1980, "Renewable Energy Development Geothermal and Small Scale Hydro," NCSL Energy Program. November 1980, "Renewable Energy Development: Solar heating, wind power and biomass," NCSL Alaska Energy Project. November 1980, "Energy Emergency Preparedness" NCSL Alaska Energy Project. November 1980, "The Impact of Rising Energy Costs on Rural Alaska," Nebesky, Goldsmith and Digum. November 1980, "Alaska Energy Issues - Options for State Action," Division of Policy Development and Planning. December 1980, "Preliminary Inventory of Alaska's Energy Policies." NCSL. No date, "Executive Summaries" Power Alternatives Study Committee. The House Power Alternative Study Committee and the House Resources Committee also prepared a comprehensive energy conservation bill during the interim. 1980 LEGISLATIVE SESSION Governor's Legislation The Governor's legislative package (HB 652, 653, 655) expanded the Alternative Technology Revolving Loan Fund to include loans for residential and commercial energy conservation expenditures ($10,000 and $50,000 limits); modified the APA statutes to permit bonding for conserva- tion purposes; allowed a residential conservation tax credit; established a bulk fuel loan program with com- munity storage facilities and a short-term revolving loan fund; and established thermal and lighting standards. HB 758 —- Power Production Cost Assistance Representative Nels Anderson (D. Dillingham) introduced HB 758 relating to power production cost assistance. The bill was based on work done by Charles Sitkin of Arthur Young & Co., during the 1979 interim. The goal of the report and of the original legislation was to provide solvency to rural utilities facing sharply increasing fuel costs. Sitkin understood that in small rural communities, if electric rates got too high, consumers would simply cease to pay. Therefore, a sliding scale was established that would return certain power production costs to utilities in such a way as to encourage equipment effi- ciency without increasing consumer demand. - 34 - The Governor's staff at DPDP and the Division of Budget and Management crafted an amended version of HB 758 which substituted a lifeline rate that would be equally accessi- ble to all village utilities, even those which did not know their fuel costs. The APUC supported the original version of the bill, wanting utilities to provide justify- ing records and fearing that opening up the program would result in abuse. Rural utilities originally supported the Anderson bill, but soon switched their preference to the lifeline approach which offered higher levels of subsidy. The administration's lifeline approach would have sub- sidized 200 kwh/month. The average consumption at the time was, according to Sitkin's report, 150 kwh/month. In the House Resources Committee, Representative Vern Hurlbert (D. Sleetmute) proposed, and the Committee accepted, an amendment which raised the 200 kwh limit to 600 kwh/month. A provision of the bill specified an automatic "sunset" in five years, by which time the APA was to have found rural diesel alternatives. On the House side, according to staff, Finance Committee members allayed concerns about an increased subsidy by noting that as diesel prices rose, the subsidy would be limited because consumers would not increase consumption. (In the event, prices did not continue to rise.) HB 758, having had a hearing in the House Resources Committee, moved to the House Finance Committee where it was rolled into HCS SB 438, the omnibus energy bill. Several people involved felt the power cost assistance program was included as part of an understanding between the House Democratic Majority and certain rural senators whose desire for this bill translated into Senate concur- rence for the entire package. - 35 - HCSSB 438 am H - Omnibus Energy Bill The Governor's bill package, the bills of the House Power Alternatives Study Committee, and the bill appropriating funds for Susitna collected in the House Finance Commit- tee, chaired by Russ Meekins (D. Anchorage). Meekins, working on HB 60, delegated these and other bills to Vice Chairman, Representative Oral Freeman (D. Ketchikan). The result was an energy package which contained, in the words of the House Power Alternatives Study Committee, the following. (Appendix C "Final Report") Chapter 83, SLA 1980 (HCSSB 438 am H) --- An act relating to energy. Chapter 83 established several new programs related to energy use in Alaska and modified existing law concerning the Alaska Power Authority and long-term energy planning. The new programs include a variety of incentives and mandates for energy conservation and alternative energy use by individuals, state government and businesses; stan- dardizes the procedures leading to power project financing or construction by the Alaska Power Author- ity; establishes bulk fuel and bulk fuel facility assistance for rural communities and provides a power generation subsidy to high cost utilities. The committee did extensive work on two sections of the bill - the alternative energy and energy conservation programs, and the Alaska Power Authority Act amend- ments. The conservation and alternative energy sections of the legislation were designed to encourage greater efficiency and the substitution of renewable or local resources for high-cost petroleum-based energy use. Minimum energy efficiency standards were mandated for all state facilities, and for state-financed new construction. A business tax credit of 30% (up to $5,000) was provided for the adoption of conservation measures and alternative energy systems. A home conservation program was established to provide state subsidized energy audits. The audits then enable the homeowner or renter to qualify for a refund on up to $300 of energy improvements (200 per unit for multi-unit dwellings) and for a $5,000 loan at 5%. Funding was also provided to aid school districts in conservation planning for their facilities, and to - 36 - increase the awards made for development of local alternative energy innovative technologies. Total funding for these provisions of the legislation was approximately seven million dollars. The APA Act amendments were inspired by the tremen- dous increase in hydroelectric project funding which was in turn inspired by the tremendous increase in state revenues. Standard information and analysis was required of the reconnaissance and feasibility studies, to enable better decisions by the legis- lature and governor. The power project fund was "derevolved" to only consist of money appropriated by the legislature, and not to include power project loan repayments, again with public accountability for the money as the reason. HCS SB 438 (Fin) included the bulk fuel program, a busi- ness tax credit for energy conservation and power produc- tion cost assistance (from HB 758). Besides providing for the review by Budget and Management and by the Legislature of APA reconnaissance and feasibility studies and requir- ing a plan of finance, the amendments to the APA statutes also provided that the APA would own the projects it constructed and approved certain pending APA projects. Sec. 48 of the bill notes that the APA submitted recommen- dations for building and financing certain projects and setting "maximum amounts of revenue bonds and appro- priations necessary for the projects." The bill then authorized revenue bonds for Tyee ($70,000,000), Swan ($120,000,000), and Terror ($120,000,000) among 12 pro- jects and authorized the Anchorage-Fairbanks Intertie, noting that "This project may be financed by revenue bonds issued by the authority, appropriations from the general fund, or other funding sources approved by the Legis- lature." The package of energy bills provided in HCSSB 438 am H contained most of the energy legislation "on the table" of the Eleventh Legislature. It included items of interest - 37 - to the bush caucus (HB 758, Power Production Cost Assis- tance) to the Governor (HB 652, as amended by the House Resources Committee, and HB 653, Bulk Fuel) (see memo to Budget Review Committee from Luria May 5, 1980, re: Governor's Energy Legislation), but mostly it expressed the House Democratic Majority's concern for alternative technology and energy conservation. The studies prepared for the House Power Alternatives Study Committee were in accord with this approach. For example, the Alaska Center for Policy Studies found that 30% of the Railbelt's energy needs could be supplied by conservation. According to Representative Rogers, the first alternative energy conference, held during the legislative session, supplied the lobbying effort for the conservation bills. HCS SB 438 am H passed the House on May 17, 1980. House Democrats had anticipated an opportunity in free confer- ence committee to amend and correct parts of SB 438. Instead, because of power cost assistance, the Senate accepted the House's 45 page amendment to Senator Bettye Fahrenkamp's (D. Fairbanks) bill relating to APUC ex- emptions. For some, the trouble with SB 438 lay mostly with the inclusion of HB 758, the addition which appar- ently assured the bill's acceptance by the Senate. Hugh Malone voted against the bill because it included power cost assistance, even though the hydro amendments were largely of his authorship. The APA statute changes had been expected to be modified in Free Conference Committee and were, therefore, more, in the words of staff, “ivory tower" than they might have otherwise been. Until stopped by Keith Specking, Governor Hammond's legislative liaison, Eric Yould lobbied against these amendments. It should be noted that the APA hydro amendments were still based on the assumption of bond - 38 - financing and that once cash financing was introduced (as was envisioned by Kerttula in 1980's SB 294 [see below]) the effect of these hydro amendments changed. Governor Hammond nearly vetoed HCS SB 438 am H because of the power cost assistance provision. In his letter transmitting the signed bill, he notes his intention to submit legislation to "modify the subsidy design." This project was to occupy considerable executive branch time during the 1980 interim. SB 294 - Susitna Senator Kerttula introduced "An Act relating to Power Projects of the Alaska Power Authority and the Susitna River Hydro Project" on January 14, 1980. In its original form, the bill established the Susitna River project as two dams and reservoirs as described in the Corps of Engineers' "Plan of Study for Susitna Hydropower Feasibil- ity Analysis." The purpose of the project was defined as electric power to Homer, Seward, Anchorage and Fairbanks at minimized cost and minimized adverse social and economic impact. A preliminary report was required on January 30, 1981, with construction schedule and costs. No project contracts could be undertaken without legisla- tive approval of the preliminary report. Annual reports were required. The project was to be financed from the general fund. The Senate hearings on SB 294, SB 295 (appropriation bill), and SB 385 (Intertie authorization bill) highlight Alaskans' different perspectives on the building of Susitna and the Anchorage - Fairbanks Intertie. The file shows that supporters of the project saw it as a tool of future economic development and a massive public works - 39 - project that would provide jobs. Others questioned whether or not it was the most rational choice for provid- ing long-term Railbelt power supply. At two hearings (2/16/80 and 3/7/80) held by the Senate Resources Commit- tee, chaired by Bill Summer (R. Anchorage), Susitna Power Now arranged for a show of support for Susitna (see letter 4/16/80 from Summer to Dischner). Labor unions, engineer- ing firms, local governments turned out with the same message: build now for more jobs. The attraction of the project is stated by Yould "... Alaskans are already benefitting by being put to work on the project's studies." (unnumbered p. 3, "Abstract of Senate Resources Committee Hearing SB 294" 2/16/80). Dave Hutchens, lobbyist for the Alaska Rural Village Electric Cooperatives and Secretary of Susitna Power Now (and later a key figure in the writing of SB 25) urged "the State should (not) settle for any other than the best" and urged financing flexibility (unnumbered p. 4 "Abstract"). Roy Huhndorf, representing the Cook Inlet Region, Inc., suggested in a letter to Senator Summer that the bill could strengthen its local hire provisions. Senator Hohman (D. Bethel) turned Huhndorf's suggestion into the Senate Finance Committee's letter of intent for the bill. The Board of Susitna Power Now held its March monthly meeting in the Capital Building just before the Senate Resources Committee hearing. The lone dissenting opinion at the Committee hearing was voiced by the Alaska Conser- vation Society which questioned Susitna's demand assump- tions and its impact on wildlife resources. - 40 - During the first hearing (2/16/80) in Anchorage, former Governor Bill Egan advocated investing State revenues in Susitna, a call continuously made in 1981 by Senator Ed Dankworth (R. Anchorage). Egan said, "The time has come when we must do everything possible to turn public wealth from Prudhoe Bay oil production into an alternative source of power for use in Alaska." (Newsletter, Susitna Power Now). It is clear from the APA's fiscal note for SB 294 that the Anchorage-Fairbanks Intertie (SB 385) was seen as a portion of the Susitna Project which could be started prior to FERC licensing. The Senate Resources Committee file shows that Susitna Power Now supported SB 385 (Inter- tie funding) as a part of the Susitna project. The changes made to SB 294 in the House are illustrative of the fundamental concerns of the House Democratic majority. Among the changes made in the House Resources and Finance Committees were the inclusion of an APA report (due 4/30/82) recommending whether construction should take place, a prohibition on contracts for the Intertie until approval of the preliminary report by the Legisla- ture, an independent assessment of power alternatives for the Railbelt, legislative and executive oversight pro- visions and a change in the "Project Financing" from general fund appropriations to a "project shall be financed by general fund appropriations, general obliga- tion bonds, revenue bonds, or other plans of finance as approved by the legislature." House Democratic leaders took care to make this bill consistent with the House's version of SB 438, the omnibus energy bill (above). The House passed the amended version of SB 294, returning it to the Senate where the amendments were accepted, in -|41 - the opinion of some of those involved, partially as an agreement with Senator Kerttula to keep him from objecting to SB 438, the energy package, and partially to allow members to show support for Susitna in comfortable knowl- edge that the project's conclusion was being determined by the studies authorized in SB 438. The other energy bills which passed in 1980 were HB 687 (Chapter 148), establishing the Alaska Energy Center and amending the Alaska Council on Science and Technology's statutes; HB 779 (Chapter 175), the geothermal resources legislation; SB 125 (Chapter 1) an energy appropriation for rural fuel assistance, as 1979 saw another sharp increase in diesel fuel costs. The only other piece of energy legislation in 1980 was a bill to reorganize the energy functions of State govern- ment. The House HESS Committee, chaired by Representative Thelma Buckholdt (D. Anchorage), introduced HB 1020 late in the session. This bill would have established a Department of Energy and an Executive Energy Council. While the bill saw no legislative action, the subject of energy planning and reorganization of energy functions was to occupy considerable executive branch time during the 1980 interim and the first session of the Twelfth Legisla- ture. 1981 LEGISLATIVE SESSION Although the Governor's staff devoted considerable atten- tion during the interim to energy reorganization, amend- ments to the power cost assistance program, and power project financing, no legislation was ready early in the legislative session. After other energy legislation was - 42 - introduced by legislative members, Governor Hammond was never able to gain a lead role. The administration reacted to others' legislation and relied, as did many members of the Senate, on the House to protect their interests. In 1980, the House Democratic majority did not anticipate that SB 438 would need major amendment in 1981. If any legislation was needed, it was thought likely to be purely technical changes to facilitate administration of the programs. However, several events had occurred during the 1980 interim that altered these expectations. First, the Iranian crisis produced fuel shortages, fears of short- ages, and a surge in oil prices similar to the one in 1979 - 1980. Secondly, as a result of these events, interest rates, even on government revenue bonds, rose to 12-14%. These two events meant a re-evaluation of the project financing approach established in SB 438. A re-evaluation alone would have been of little effect, except that it was coupled in June and September by announcements of sharp increases in State oil revenues. Other important factors also set the stage for the 1981 Legislative Session. Senator Ed Dankworth (R-Anchorage) formed a coalition that organized the Senate. He was an ardent supporter of hydroelectric projects and sought cash appropriations for them, believing that Bonneville was a repeatable model which would bring economic growth (Sen. Fin. Comm.). If equity grants were given, projects could be a source of some general fund revenue in the future when the State needed it, he believed. Dankworth served as co-chair of the Senate Finance Committee. In the House, the Democratic majority had been reduced to 22. On June 12, a "coup" occurred which directly effected - 43 - energy legislation. Also, staff and members recall that poor communications existed between the House Democrats and Jerry Reinwand, Hammond's Chief of Staff, which affected legislative working relationships during the 1981 session. In Governor Hammond's Budget Message of January 15, 1981, he stated: Since last session, I have been exploring various power development financing proposals. Unlike, say, education, it is not the obligation of the State to provide its citizens with power. However, given ample resources, we should help the private sector do so at more reason- able rates. The problem with most proposals is that they either go far beyond the obligations of the State or, again, provide enormous selective subsi- dies. Accordingly, while I hope to submit specific legislation shortly, there are several criteria to be considered should you address interim alternatives: any acceptable power financing proposal should (1) grant priority to non-fossil fuel generation such as hydro. (2) it should require some percentage of private sector funding through revenue bonds to provide market tests as to the project's viability. (3) State assistance should be in the form of partial guarantees. (4) if subsidies are provided they should be distributed equitably on the basis of the number of prospective consumers served. There recently emerged two financial mechanisms which could provide enormous aid to the private sector, reduce power costs to consumers, and meet the above criteria without necessitating subsidy. Using the State's full faith and credit to partially guarantee financially viable projects can reduce interest costs. Additionally, by deferring a return on the State's contribution, we can greatly reduce front-end costs. Moreover, in the early years consumer rates would cover only generation costs and some bond indebtedness. Later when the facility is more fully utilized, consumer rates would also include repayment of the State's investment at market interest rate. Another potential of this concept is that the public vote required to pledge state faith and credit would give all Alaskans an informed choice. I'm working - 44 - with all interested parties to refine this mechanism which will require an energy development fund of from 200 to 400 million. Non-subsidized loans to power projects which yield market return to the State would not be subject to normal expenditure limitations. However, to the degree one is subsidized, it should require appro- priation of the subsidy which would be considered a limitable expenditure. Governor Hammond's intentions regarding project financing and amendments to the power cost assistance program were not clarified until well after the session began. HB 310, introduced March 10, 1981, contained the Governor's power project financing program and HB 359, introduced March 18, 1981, contained amendments to the power production cost assistance statutes. HB 461, introduced April 2, 1981, offered a program to develop alternative energy sources and conservation. Also, Governor Hammond favored reorganization of energy functions within the executive branch. His proposals for reorganization are quoted below: Energy Reorganization Objectives 1. To insure that activities of the Alaska Power Authority are consistent with overall energy objective of the Administration. Proposed Action: Restructure Power Authority Board to include a majority of Administration representatives as voting members. 2. To consolidate energy planning, project evalua- tion and program coordination and provide a policy, budgetary and program focal point for all in-state energy matters. Proposed Action: Create an Energy Management Office in the Office of the Commissioner of Commerce and Economic Development - 45 - 3. To consolidate all energy conservation activ- ities and provide "one stop shopping" for all conservation programs. Proposed Action: Create a Division of Energy Conservation out of the existing Division of Energy and Power Development. 4. To insure that energy research and development activities are coordinated with overall energy plan for Alaska. Proposed Action: Transfer administrative control over Alaska Energy Center from Depart- ment of Administration to Department of Commerce and Economic Development. 5. To create a comprehensive energy planning process that evaluates all end uses and supply options, that separates the planning function from the implementation function, and _ that generates a set of projects and programs designed to meet overall energy objectives of the Administration. Proposed Action: Transfer responsibility to conduct reconnaissance studies from Power Authority to Energy Management Office and broaden the scope of the studies. Governor Hammond's plan to reorganize energy responsibil- ities was given to the Legislative leadership in the form of a rough proposal which could be drafted into legis- lation. HB 359 - Power Cost Assistance Hammond's goals for amendments to power cost assistance were to increase equity and efficiency by subsidizing no more than 200 kwh/month for eligible consumers for 100% of the price charged between 15¢/kwh and 40¢/kwh. The program would be eliminated at the time of implementation of the Permanent Fund Dividend Program or at a 20% decrease per year. (Memo Ulmer to Hammond 1/2/81 re: Power Production Assistance Program). A subcommittee of the House Resource's Committee proposed a version of the Governor's bill which changed the subsidy limit to 12-60¢ for the first 400 kwh. This amendment, according to Hammond's criteria, failed to encourage utility efficiency and cost containment. Educational facilities were includ- ed in the program. The House Resources Committee passed CSHB 359 (Res) on to the House Finance Committee where the bill apparently repeated 1980 history, becoming a part of SB 25 (hydro financing) and assuring passage of that omnibus bill. The Free Conference amended power cost assistance to expand the subsidy limit to 12.6-42.75¢/kwh, to extend usage to community facilities from 600 kwh/month to 55 kwh/month multiplied by community population, to eliminate the 1991 sunset provision, to increase the minimum subsidized cost by 1¢ per year and to expand the definition of "community facility" to include "charitable educational facility." Hammond's goals for the power cost assistance program, which nearly sank 1980's’ energy conservation omnibus bill, failed. Hammond's desire to correct the program to assure greater equity and effi- ciency created a legislative opportunity to expand the program and make it permanent. HB 461 - Power Project Financing Governor Hammond's intention in proposing amendments to the APA Statutes for power project financing was to deal with the possibility of high interest rates for revenue bonds - high enough to create front end wholesale power rates which would exceed diesel generation rates. Inter- nally, a lengthy debate was conducted to determine the best proposal. Well into the session, there was no internal agreement, especially between Ron Lehr, Director - 47 - of Budget and Management, and Arlon Tussing, a consultant hired to assist in formulation of a method for power project financing. The files on this subject are volumi- nous and technical. But, in essence, the two choices were between State loan guarantees and State subordinated loans (used by the APA for Sitka's Green Lake project). "The two methods of State assistance have precisely the same purpose and economic effects, and either method can be structured to yield any desired level of initial electric rates, any desired allocation of costs and risks between the rate payers and the state treasury." (Tussing to Hammond 1/23/81 re: Power Project Financing). Staff had addressed several major policy issues; the central one of which was whether the principal objective of power devel- opment, particularly hydro power, is to provide the consumer with the lowest reasonable cost of power or to provide a public works project which would have substan- tial short-term economic benefits and potential long-term incentives for economic. growth. (Singer and Matz to Hammond re: Power Project Financing 1/21/81.) Hammond's choice was the former view, adopting a policy that pro- jects offering the lowest cost to consumers were the most equitable, as others required substantial subsidy and risk that excess capacity would not eventually be utilized. The Matz/Singer memo was distributed to legislators. The Governor's bill compromising the differing points of view, was introduced on March 10, 1981, (HB 310), estab- lishing a Power Project Equity Fund. Approved projects could draw $2,500 per capita from the fund. In addition, approved projects could apply for a "debt assistance loan" which levelized debt service. A "Power Project Completion Loan Fund" was established to provide completion loan funds in certain limited circumstances. Transitional and "grandfather" provisions were included. No hearings were - 48 - ever scheduled for the bill, because, in the words of a key House staff, "The train had pulled out of the station and left it in the dust." SB 25 Hydro Financing Senator Jalmar Kerttula introduced SB 25 to establish a power project revolving loan fund in the the Alaska Power Authority, and SB 26, its companion appropriation bill, on January 13, 1981. The bill was co-sponsored by Senators Ziegler, Ferguson, Bradly and Eliason. On February 4, 1981, the Senate Resources Committee, chaired by Senator Fahrenkamp, heard SB 8, a special appropriation for Susitna, SSSB 25 and 26 and passed them on to the Senate Finance Committee. SB 25 established a Power Project Revolving Loan Fund, consisting of appropriations and _ loan principal and interest payments. Management of idle cash was to be handled by the Department of Revenue. Loans could be made for reconnaissance and feasibility studies, construction costs for economically feasible projects designated by the Legislature and for power cost assistance. Determinations of economic feasibility used a 7% inflation factor, a 10% interest rate on borrowed funds, and an 11% annual rate of increase in the cost of oil, gas, and coal. Loans were to be made at 3% interest for either the actual life of the project or 100 years, whichever was less. Bonds could be sold by the APA if funds were insufficient for project completion. Repayments could be reallocated by the APA. At the teleconference hearing, 24 people testified. Many of the people who had been testifying for several years in support of Susitna spoke about "cheaper energy for urban - 49 - areas" and about construction employment (Senate Resource Committee Minutes 2/4/81). More testimony was heard from those who questioned Susitna's impact on fisheries and who cited conservation and alternative technologies as ap- proaches which merited attention. Dave Hutchens, Executive Director of the Alaska Rural Electric Cooperative Association (and member of Susitna Power Now), noted that "it is wise while the money is available from non-renewable income to put aside some of it so it can be used if and when Susitna is determined to be feasible" (Minutes 2/4/81 p. 4). Senator Jalmar Kerttula stated that "these bills represent an 8 year program. The basic philosophy behind the bills is that the oil revenues are here today which can be used to build a sound economic base for the future" (Minutes 2/14/81 p. 4). It was this policy which Hammond rejected in the preparation of his power financing bill. In the Senate Finance Committee, SSSB 25 and 26 were assigned to Senator Ed Dankworth (Minutes Senate Finance 2/9/81 p. 45). Dankworth favored a hydro grant program as a way to give people some of the State's wealth and to make a lasting contribution to future generations. (Senate Finance Minutes p. 127). He asked Dave Hutchens to serve as staff for him on the bill. On February 2, 1981, Dave Hutchens testified at a Senate Finance Commit- tee meeting that the Governor's proposal wasn't suitable to Susitna and that SB 25 and 26 provided "equitable funding distribution geared to needs around the state" (p. 38). Southeast utilities' representatives testified in support of the bills. On March 5, 1981, the Senate Finance Committee again - 50 - considered SB 25 and 26. The "new approach" was dis- cussed, having been presented to the Committee by Dave Hutchens. Besides the grant approach (Power Development Fund), the bill added public members and the Commissioners of the Department of Commerce and Economic Development (DCED), Department of Natural Resources (DNR), Department of Revenue (DOR), Department of Transportion and Public Facilities (DOTPF), and the Department of Community and Regional Affairs (DCRA) to the APA Board. (APA Executive Director, Eric Yould objected to any change in the board membership (Senate Finance Committee, SB 25). Projects would have to be able to provide revenues sufficient to cover operation, maintenance, equipment, and safety inspection costs. Projects were to be owned by the State and operated by qualified utilities. If by July 1, 1986, $5 billion had not been appropriated to the fund, projects would also have to "provide a rate of return to the authority of 7% a year of the amount allocated to the power project..." (This was the first appearance of the so-called Susitna "blackmail clause," a strategy to assure regional "equity" and support for the Susitna project: Southeast projects were being funded first; unless South- east supported Susitna and Susitna was funded, grants for Southeast projects would become repayable loans.) Surplus funds were to be reallocated by the Legislature. After Yould's comments on the Senate Finance Committee proposal, the bill moved from the Committee on March 5, 1981. CS SSSB 25 and 26 were calendared for March 10, 1981, and passed 19-0. However, many Senators, including several in the coalition who represented the Railbelt, were opposed to the bill. Senator Vic Fischer noted his unease with the bill in a floor speech. However, conversations with some members indicate that some of those with misgivings voted for SB 25 and 26 in the belief that the bills would be killed in the House. - 51 - House Action - SB 25 In the House, the bills, along with SB 244, a bill redes- ignating certain APA loans as grants, were referred to the House Resources Committee, co-chaired by Terry Gardiner and Fred Zharoff. Gardiner wanted a comprehensive energy policy, including power project financing applicable to the Swan Lake project and to all projects. House Demo- crats preferred community control and a loan approach. Representative Freeman (D. Ketchikan) is said to have stated, "If they get grants, there will be no incentive to even turn out the lights." House Democrates were opposed to what they called "Republican Socialism." Despite a growing interest among House members in grants, the House Resources Committee for hearings in order to develop the arguments against grants and to wait for the Governor's proposal. However, the House Resources Committee passed out SB 26, adding to the project list many research and development items, funding for the Alaska Energy Center, conservation and weatherization. On April 13, 1981, Representative Duncan, Speaker of the House, suggested in a memorandum to Gardiner an "Energy Program for Alaska," developed by the APA. The program was to require a 5% annual return on the State's invest- ment and, once Susitna was built, proposed to use the power cost assistance program to levelize power costs throughout the State. The APA explained the program in terms of an example - Green, Solomon Gulch, Swan and Tyee would produce wholesale power for 3.8¢/kwh, “while still allowing a 5% return on equity, less an average 1.5% for annual operating and maintenance expenses" (p. 1). "Funds generated by an equity return would be available by legislative appropriation for essential and related energy programs such as power production assistance, weather- ization..." (p. 2). On April 29, Representative Rogers, having reviewed the draft Resources Committee bill containing the APA pro- posal, wrote to Zharoff noting that the concept was an extremely inequitable method of distributing the state's wealth" ... offering "nothing for the rural areas of the state" (p. 1). The bill encouraged only hydropower, guaranteed the building of Susitna, would equalize rates only for consumers of State owned projects, and would only fund power cost assistance after Susitna. He noted that the 5% equity return bore no relationship to 3.5¢/kwh. HCS CSSS SB 25 (Res) also provided no standard test of economic feasibility, and provided that "industrial rates can exceed wholesale rates and may not be less than residential rates." The industrial rate provision was seen aS a way to assure that communities first receiving power projects could not use low electric rates to lure industry to locate in those communities; the industrial exemption also was believed to limit industrial subsidies. Bonds were to be issued if appropriations were insuf- ficient and if "the amount of interest" on the bonds "is not more than alternative costs of securing money..." Power Cost Assistance would subsidize rates from 12-45¢ for 600 kwh/month and 55¢ kwh per resident for community facilities. On May 8, 1981, Governor Hammond wrote to Representatives Gardiner and Zharoff his "understanding of terms and conditions relating to energy legislation." Hammond stated: In an effort to expedite legislative action and promote favorable consideration this year on other crucial legislation, I tentatively agreed to certain basic legislative proposals regarding energy financ- ing on the presumption that the leadership of both Houses had signed off on them. This should in no way cause anyone to presume I find such an approach preferable to the Administration's proposal. Moreover, if agreement on the above basics has not been met, as I had been lead to believe, then, of course, there was in fact no- such "agreement" to which I, in turn, might agree. Should there in fact be such an agreement, there are several issues which must be addressed in the energy legislation this year. These are as follow: A. Ensure that the APA Board of Directors is comprised of a majority of members directly accountable to the Legislature and Gover- nor. I would prefer a five member board, with three agency heads and two public members. As you know, the structuring of the APA Board in such a manner would parallel similar action taken by the Legislature last year regarding the Alaska Industrial Development Authority and Alaska Housing Finance Corporation boards. I understand the Committee is concerned about making certain that regional concerns are considered by the APA. I suggest that a citizens advisory committee be created to accommodate these concerns. Perhaps two citizens from each judicial district would be appropriate. B. Ensure that all funds appropriated to the APA are received only as expenditures require, and are otherwise under’ the control of and invested by the Commissioner of Revenue as is required of funds appro- priated of other State entities. Cc. Ensure that income earned from the invest- ment of money appropriated to the power development fund be appropriated annually by law. D. Ensure that the numerical factors used to determine the feasibility of a project not be set by statute. The numerical factors used to assess project feasibility must be sensitive to changes which reflect actual economic conditions. Additionally, I believe it appropriate that ultimate- ly all projects have keyed into their rate structure an equity return on true costs. Lacking some such "market test" to screen out the "lemons" it would behoove every community to strive for a project no Matter the cost. However, with the understanding that this feature will be addressed over the interim, I am willing, again conditionally, to for go addres- sing this issue at this time. Meanwhile, at the very least, however, a minimal 5% return on equity as proposed in the original "agreement" must be retain- ed. I want to make clear that it is my intent - and, as I understand it, also the intent of the leadership - to carefully study this issue during the interim and develop options for legislative actions next session. The House Resources Committee held a hearing on the Energy Program for Alaska prior to passing it to the House Finance Committee on May 20, 1981. The Governor's amend- ments were presented: funds should be invested by the Department of Revenue and disbursed after costs were incurred; income of the Power Development Fund was to go to the general fund; revenues were to be sufficient for a 5% return on the State's investment; APA authority to set industrial rates was deleted. The House Finance Committee file contains a statement in opposition from the Alaska Environmental Lobby and a resolution from Wrangell supporting SB 26 which will "provide the necessary funding for Tyee Lake Hydroelectric Project." The file also contains a letter from Bob Martin of Tlingit-Haida Regional Electric Authority (THREA) noting that, "It was obvious that diesel costs would exceed stabilized hydro costs at some time in the future..." and, therefore, they supported hydro legis- lation not based on a per capita formula which was unfair to rural areas. Southeast communities communicated their support (H. Fin. Comm. Minutes p.1327-1331). The House Finance Committee held its first hearing on SB 25, SB 26 and SB 244 on May 18, 1981 (H. Fin. Comn. Minutes p. 1325). Dick Ballard of Thomas Bay Power Commission (Tyee Project) explained that a program was needed because "interest rates are 'so out of whack'" that projects can't go to the bond market (p. 1325). Representative Malone explored with him and with others giving testimony whether they preferred grants or loans. Ballard expressed an abiding preference for 3-5% loans. On June 1, 1981, 55 people testified at a teleconference. Senator Dankworth began by stating that SB 25 was to establish "an equitable energy system throughout’ the State. The cost is roughly $5 billion. The Senate's position is this should be done as grants" (H. Fin. Comm. Minutes p. 1326). Opinions varied. There were no incentives to good manage- ment. It gave nothing to rural people. Feasibility studies should be done prior to appropriations. Bob Penny favored grants and opposed changes in the APA Board (H. Fin. Comm. Minutes p. 1331). The teleconference continued on June 2, 1981. Carolyn Guess of the APUC saw administrative problems (H. Fin. Comm. Minutes p. 1335-1356). Sterling Gallagher (John Nuveen & Co.) believed that projects should meet a realistic market test without which - 56 - the bill would create "infeasible projects" (H. Fin Comm. Minutes p. 1336). He went on to explain the problems associated with excess capacity, the history of Bonneville and the current plight of the Pacific Northwest, the myths of price elasticity of electricity and economic growth (H. Fin Comm. Minutes p. 1336-1340). Arlon Tussing explained the Governor's approach, why consumers should pay, and the problem of using "phony numbers" as the Senate bill did for feasibility studies (H. Fin Comm. Minutes p. 1340-1342). He noted the ways in which the proposed wholesale rate was a disincentive to efficiency and spoke against the proposed provision that industrial rates had to be higher than residential rates (H. Fin Comm. Minutes p. 1344). Oral Freeman was very concerned about ownership issues. Hugh Malone was concerned about a single State system and a common rate. Jim Ayers testified for RuralCap, noting that the bills were a wealth distribution plan, but that they were not an “equitable wealth sharing or an energy opportunity for rural Alaskans" (H. Fin Comm. Minutes p. 1349). He pointed out that for rural Alaska permanent subsidies would be part of the problem - not a solution. (H. Fin Comm. Minutes p. 1352). The hearing continued on June 3. Representative Ben Grussendorf (D. Sitka) said that Sitka preferred to control and own its own project, even if it meant higher interest rates (H. Fin Comm. Minutes p. 1357). (In fact, after passage of SB 25, Sitka withdrew from the "Energy Program for Alaska"). In response, Eric Yould noted that Sitka had been able to sell bonds at 7.58%, but that - 57 - current rates were 11-12% for 30 years (H. Fin Comm. Minutes p. 1358-1359). "{Yould] said this year there has been a shift to using power projects in general as a vehicle to distribute state funds to the general popu- lation" (H. Fin Comm. Minutes p. 1359). "He said the value of SB 25 is that it would provide cheap power and insure that everyone shares.... (H. Fin Comm. Minutes p. 1358). Regarding changes in the APA board, Yould called these “very unfortunate" and an attempt to stack the board against the private sector (H. Fin Comm. Minutes p. 1360). He also said that industry should not get a lower rate, "if there is a state subsidy in place" (H. Fin Comm. Minutes p. 1361). A decline in oil prices and, therefore, a decline in State revenues was predicted by Gregg Erickson (H. Fin Comm. Minutes p. 1362). The State, he maintained, would not have $5 billion for the energy program (H. Fin Comm. Minutes p. 1362). More testimony was received on June 4. On June 7, 1981, the Finance Committee substitute was in- troduced by Representative Freeman, with the new title, "An act relating to Energy." The bill contained Power Cost Assistance at 95% of power costs or at 12-45¢. A provision was made for grants to municipalities for power projects. A Division of Energy Conservation was estab- lished in DCED to administer the energy audit program, thermal and lighting standards, to determine "energy conservation" improvements, and to administer the bulk fuel program. The Office of Energy Management in DCED was to conduct regional and local energy planning, conduct reconnaissance studies, and review APA feasibility studies. The bill established the Bulk Fuel Storage - 58 - Facilities Grant Fund, placed the Alaska Energy Center in DCED, established a program of conservation refunds and grants for residential energy conservation ($300/resi- dence), and established Energy Conservation Assistance grants to low income individuals and small rural commu- nities. The bill also provided that loans from the existing power project fund were at 3% on the unpaid balance (applied to Green, Swan, Terror, Tyee). If by July 1, 1986, $5 billion had not been appropriated to the power project fund, the interest rate would become 6% on the unpaid balance. On June 8, the bill was passed out of committee with an amendment, introduced by Representative Sam Cotten (D, Eagle River), that authorized the Intertie and required the APA to consult with the Denali State Park regarding its alignment (H. Fin Comm. Minutes p. 1447). HCS CS SS SB 25 (Fin) was read on the House floor on June 8, 1981, and passed 24-15. At its reconsideration vote on June 9, 1981, Rogers offered a floor amendment to delete the section requiring staggered terms for APA Board members. The bill, with the Intertie amendment, passed 25-13. The 13 who voted against the bill were the Repub- lican minority. On June 10, 1981, staff reports that leaders of the Democratic majority agreed to a "compromise" bill that would incorporate the Governor's per capita grant, up to 25% of project cost, with a loan approach. The Democrats would seek an alliance with the Governor against the Senate's bills. A meeting was set for 8:30 a.m. on June 12, 1981. - 59 - On June 12, a coalition of rural Democrats and Republicans staged a "coup" in the House. The new leadership appoint- ed members to the Conference Committee (CC) (Senate: Dankworth, Rodey, Mulcahy; House: Duncan, Sutcliffe, Haugen). Dave Hutchens attended and worked as staff to Dankworth. Staff notes taken during the meeting show that among the issues discussed by the Conference Committee were the blackmail clause which, according to Dankworth, was there to assure equity. Duncan questioned what would happen if Susitna were found unfeasible. Also discussed was the specification of 1986, instead of specification of a $5 billion goal. Duncan, Sutcliffe and Rodey wanted the Committee to look at the Governor's bill and at loans. Discussion ended with votes on a series of amendments which failed and with agreement that "next year" they would look at a Department of Energy, changes to the APA board, and the "10% problem." An administration member who followed SB 25 recalls that after the Conference Committee acted, the administration requested the bill be returned to committee to correct the most glaring errors. Dankworth refused. Reinwand felt that correction would be possible after the session because the administration had secured control of the APA Board, the issue he felt to be most important. The APA sent a letter in support of SB 25 and 26 to Governor Hammond (dated 7/10/81, signed Conway). The bill is described as insuring power project financing and distributing "some of the state's wealth back to the people" (p. 1). "Given the various ways in which the subsidies could be made, the Energy Program for Alaska appears to be the most equitable at least for those communities that choose to participate" (p. 1). However, Conway notes that the proposed changes to Power Cost - 60 - Assistance will "only make the already inefficient rural utility systems worse" (p. 1). The Department of Law advised the bill become law without Governor Hammond's signature and noted that "Senator Dankworth [had] pledged his support to any conforming amendments which you may suggest for consideration during the second session to remedy many of the imprecisions in this bill." The letter then goes on for six pages to detail those "imprecisions", ranging from violation of the dedicated fund prohibition to the meaning of "legislative approval" of projects and to the blackmail cause. 1981 Interim As early as August 1981, Governor's office staff began to work on amendments to SB 25. Early on, Governor Hammond identified at least seven areas which needed remedial attention. In a November speech at the Alternative Energy Conference, he pledged amendments that would 1) provide a market test for proposed projects, 2) assure some rate of return on State investment, 3) expand local participa- tion, 4) assure more equitable benefits to Alaskans, 5) determine who should operate new facilities, 6) promote energy conservation, and 7) evaluate the best alternative energy source for a given area. (See also letter: Souby to Chair, APA Board, 9/30/81). The Division of Policy Development and Planning developed a paper, "Options to Improve the Energy Program for Alaska (SB 25)" and distributed it widely. Other technical and legal issues were identified for additional amendments. (Memo Souby to R. Lehr 9/8/81 re: Financial Parameters for Power Project Feasibility Studies: A 10% Test; Singer to Vasser 9/14/81 re: SB 25; distribution for Souby 11/19/81 - 61 - re: Remaining Policy Decisions for SB 25, memo Souby to Peterson, November 19, 1981 re: SB 25 Amendment). In 1981 Trustees for Alaska and the Northern Alaska Environmental Center filed suit against the State, raising two major general issues and several minor ones. The first major issue challenged SB 25 and SB 26 on the grounds that the bills violated the Alaska constitutional prohibition against the dedication of funds by authorizing the expenditure of money received from the sale of power without an appropriation, and by authorizing the payment of interest from appropriations to the power development fund without legislative appropriation. The second major issue raised in the Trustees' complaint related to the unconstitutionality of the "Susitna equity" or "Susitna black-mail" clause. That clause was allegedly unconstitutional because it violated the separation of powers doctrine by limiting the exercise of the Governor's veto power regarding future appropriations (i.e., an automatically higher wholesale power rate in the event the Legislature fails to appropriate the $4,000,000,000 to the fund by 1986) and because SB 25 would require a higher wholesale power rate in the future despite the Governor's executive power. (Information received from Rob Johnson, Wohlforth and Flint). The issue of revision to SB 25 was also gathering politi- cal heat. The Anchorage Times in an editorial of November 17, 1981, accused Hammond of mocking Senator Dankworth about the hydro program and trying to renege on his agreement to trade the hydro legislation for a spending limit. (Anchorage Times, 11/17/81, A-8). Hammond wrote to all legislators (11/24/81) to assure his willingness to - 62 - work with legislators "to harmoniously settle some of the complex issues facing us this session." Senator Arliss Sturgulewski (R. Anchorage) had identified in an October 8, 1981 letter to Hammond many of the same SB 25 issues as Hammond had identified. Hammond asked the APA to respond to her letter. Yould, in his reply letter of December 3, 1981, denied a need for a more stringent feasibility tests and disagreed with the concept of a surrogate market test, agreed that energy conservation incentives were needed but that economic tests should also be applied to their feasibility. About the Power Cost Assistance program, "one of the more inequitable subsidy programs that we have," he felt that it "should be rolled into the Energy Program for Alaska" (p. 3-4). Bonding Tyee While Yould was defending the Energy Program for Alaska for insuring project financing, on October 28, 1981, the APA notified the Legislative Budget and Audit Committee (LB&A) of its intention to sell authorized bonds for the Lake Tyee Project in the amount of $50,000,000. The APA Board met on November 13, 1981. On the agenda was "Consideration of Actions with Respect to Financing and Construction of the Lake Tyee Hydroelectric Project." At that meeting Sterling Gallagher outlined a plan to sell short-term commercial paper, backstopped by a line of credit from Bankers' Trust. Committee members, as many legislators, had believed that the funding provided in SB 26 was adequate for project construction. Queries were received about the new project construction costs. Meetings were held to discuss the "shortfall." Eric Yould and Charles Conway of the APA were invited to a meeting of - 63- the LB&A Committee on December 18, 1981. Staff prepared memos giving the history of the cost estimates of the projects, the method proposed for interim financing, iden- tified the issue of whether demand was sufficient to retire the bonds and whether long-term financing could be secured. What had happened with Tyee? In June 1979 the APA Board, at the request of the Wrangell-Petersburg Thomas Bay Power Commission, assumed control of the Tyee project, submit- ting a FERC license application in December 1979 showing a project cost of $39.6 million. The Tyee project received legislative authorization in Chap. 83, SLA 80 which also exempted Tyee and other projects from the review process also established in 1980. In the 1980 session, the Legislature authorized $70 million in bonds and appropri- ated $17 million for Tyee. In the summer of 1980, the project and its costs were revised to $51 million. In testimony during the 1981 session, the APA quoted a new cost of $60 million for Tyee. SB 26, the appropriation bill for the Energy Program for Alaska, appropriated an additional $45 million plus earned interest to the Power Development Fund for Tyee. In June 1981, an independent estimate revised Tyee costs to $96.7 million. At the August 1981 APA Board meeting, staff asked Board approval of construction contracts, assuring members that the project remained economically feasible. In September, the Board awarded construction contracts totalling $44.9 million ($13.5 million higher than estimated). On December 2, 1981 the APA completed a re-evaluation of Tyee's feasibility. The report, in the words of Budget and Management staff review, showed economic feasibility only at current cost and only at load growths above the "most likely" forecast level. - 64 - At the LB&A committee meeting on December 18, 1981, the Committee indicated its unwillingness to give their sense of whether additional general funds could be secured for Tyee and Swan and advised the APA to go ahead with interim bond financing, assuming that long-term bonds were sale- able. At the meeting, Yould stated that the Tyee project was still economical at the increased cost, but that "in the event there were no further appropriations for the project, they would have two alternatives: either long-term revenue bonds, which would dramatically increase the price of power, which would impact the ability to actually generate sufficient capital to secure the bonds; or future state appropriations." He said he thought the APA Board was "nervous about taking an action which might be construed as virtually boxing the Legislature into having to act" (Minutes, LB&A, 12/18/81, p. 3). Yould also mentioned putting "additional security in place, such as a cost assistance program and 'take or pay' contracts with the communities themselves" (Minutes, Pp. 3). He said "hell or high water" contracts would be entered into (Minutes, p. 4). The distribution of the debt was discussed, as well as the idea of abandoning the project (Minutes, p. 5). "Representative Cotten commented that the Legislature made decisions based on cost figures that now appear to be completely worthless. Mr. Yould agreed" (Minutes, p. 5). "Representative Cotten asked if the $50 million bond issue the APA is considering is a short-term measure with the - 65 - anticipated method of repayment being a future legislative appropriation. He asked if they were putting the Legisla- ture in a tight squeeze because if the Legislature doesn't make an appropriation, they will have to go to a long-term rate, and the cost of power will go up, so the Legislature really has no choice. Mr. Yould said it is a matter of whether the Legislature thinks it is no choice or not. He said it would be their intent, if the Legislature did not come up with the funds, to long-term bond the projects" (Minutes, p. 6). Eric Wohlforth, APA bond counsel, explained to the LB&A Committee that long-term revenue bonds would be secured by a capital reserve fund that might have to be replenished. "Representative Cotten said, then, regardless of the way the Legislature goes, there is an obligation that the APA is going to impose on the State - either to replace the capital reserve fund or to make the payments within three years." Wohlforth agreed (Minutes, p. 7). Thus, as legislators prepared for the second session, it was clear that the agreements set out in SB 25 and 26 were going to be revised. The administration was equally troubled by the changes in the cost of projects. As chair of the Budget Review Committee, Jerry Reinwand wrote to Charles Conway, ex- pressing his amazement at the APA's request for additional funds for Swan and Tyee and requesting an explanation. On November 27, 1981, Conway replied that the problem was in poor cost estimates and that procedures would be institut- ed to preclude this happening on the future. He stated, "Cost estimates have risen in real terms because there is a tendency on the part of certain engineering firms to underestimate costs of project costs [sic] in the early - 66 - stages of project planning and design" (p. 2). A chart was provided to show the percent increase, after inflation adjustment, in the project cost estimates: Terror at $173.4 million, a 91% increase; Tyee at $110.0 million, a 120% increase; Swan at $90.0 million, a 3% increase and the Intertie at $130.0, a 30% increase. Tyee construction began in October 1981. By May 1982 the revised cost estimate was $115 million. Less than a year later (April 1983), the cost estimate was revised to $124.9 million. After completion, project costs totalled $131 million. Wrangell and Petersburg use only 30% of Tyee's power, showing that the load forecasts used in the feasibility study were overly optimistic. 1982 LEGISLATIVE SESSION Background In the interim and early in the 1982 session, the House Research Agency developed hydro financing models and responded to House members' requests for electricity costs under different proposals. The Division of Budget and Management also had modelling capability. The federal Alaska Power Administration offered use of their long range repayment model to the Senate Resources Committee through Kurt Dzinich of the Senate Advisory Council. (Letter from Cross to Dzinich 2/26/82). The situation at the start of the session was summarized from House Democratic point of view by Representative Brian Rogers (All Alaska Weekly 1/25/82). may ee Last year, in the chaotic last days of the session, this legislature passed SB 25 and 26, establishing The Energy Program for Alaska. The program calls for spending cash to build a series of State-owned dams throughout the state, with no return on the money required. The theory was that Alaskans would all benefit from the availability of "cheap" power. I was, at the time, one of the chief critics of the proposal. I was bothered by the obvious inequities of the program, both between those Alaskans who would be served by the resulting dams and those who lived in areas that wouldn't be served, and between Alaskans who used a great deal of electricity and those who chose to live in a less profligate manner. I was concerned about the lack of a meaningful market test to weed out the uneconomical projects, and the fact that they would all be tied into the same rate structure, so that the better projects would be carrying ones which probably should not have been built at all. I was fearful that we'd end up with some incredible cost overruns and a commitment to spend too high a proportion of our oil wealth on one product, at the expense of so many other projects and services which Alaskans also need. Above all, I disliked the program because I knew that the goal of reasonably-priced and relatively stable electric rates could be reached at much less cost to the state, with less uncertainty, and without losing local control. At the risk of playing "I-told-you-so," it appears that my concerns are already being borne out, and more and more people are coming to share them. The Governor has stated that revision of the hydro law is his top priority, the mayors organization which met here last week also called it their first priority, the mail is running in favor of revision, and now a lawsuit has been filed by two environmental organizations. The lawsuit, filed by Trustees for Alaska and the Northern Alaska Environ- mental Center (formerly the Fairbanks Environmental Center) lists thirteen violations of the Alaska State Constitution. The Governor's hydro revision bill (HB 665) is, iron- ically, very similar to a version proposed last year by the House Democrats. Basically it changes the funding system from one of outright grants to one where the capital costs would be returned to the state over a 33-year period, without interest. To - 68 - prevent complete erosion of the value by inflation, a small (4% to begin) inflation rate would be built in. In addition, rather than being tied into a state system with a single wholesale rate, each project would have to stand on its own. Thus, there should be some weeding out of the most uneconomic projects, and those communities which choose to build an oversized dam would know that they, and not someone else, would be responsible for paying for the excess Capacity. Under the proposed legislation, the people in the communities to be served by a project would also be given the chance to vote on whether they, in fact, want such a project. SB 608 - Susitna In the Senate the focus of attention was on SB 608, an act making a special appropriation to the power development fund of the APA for the Susitna River hydroelectric project and other hydroelectric projects, introduced by Senator Kerttula. In the sponsor substitute form, the bill appropriated $25 million to Susitna and funds for other hydro projects. When it left the Senate Resources Committee, the bill appropriated $50 million for a variety of power projects. Hearings were held by the Senate Resources Committee on February 22, 1982, February 24, 1982 and March 3, 1982, March 12, 1982 and March 17, 1982. One of the new notes sounded among familiar refrains was a request (as Hammond had proposed in 1981) to bring the Susitna issue to a public vote. Jim Lazar, a consulting energy economist, spoke for the Alaska Environmental lobby about the history of Pacific Northwest power as it related to Susitna, explaining that excess capacity could not be relied on to bring economic growth. - 69 - The Susitna appropriation of $25 million was placed in the major appropriation bill (Chapter 101, Section 73). HB 758 - Project Financing In the House, Representative Eric Sutcliffe, co-chair of the House Resources Committee, introduced HB 758, amending the Energy Program for Alaska. He had been on the House side of the Free Conference Committee on SB 25, but felt that the bill addressed neither conservation nor equity of benefits. In a multipage letter (2/15/82) to all members, Sutcliffe warned against being "taken in by the allure of cheap power through grants for project construction" (p. 1). The attachment prepared by DPDP compares the Governor's and Sutcliffe's bills in terms of the issues important to the Governor. The House Resources Committee held a hearing on HB 758 on February 26, 1982. The House Resources Committee file contains one statement for and one statement against the bill. The statement against the bill is made by a repre- sentative of the Matanuska Electric Association who states that the bill might raise the wholesale cost of electric energy and, therefore, the cost to consumers. He also charges that the proposed inverted rate approach might cause hardships to all-electric homes. The supportive letter comes from a Soldotna resident who opposes the Energy Program for Alaska as wasteful. The bill was passed out to the House Finance Committee on March 31, 1982. - 70 - SB 784 - Power Authority Bonds On February 16, 1982, having considered the APA's testi- mony on Tyee in December, Senator Arliss Sturgulewski, Chair of LB&A Committee, introduced "An Act relating to issuance of bonds by the Alaska Power Authority." The bill proposed that the APA notify LB&A and the State Bond Committee of the establishment of capital reserve funds to secure bonds and include in the notification estimates of anticipated withdrawals. In the Senate Finance Committee, with the agreement of Senator Dankworth, SB 784 became the vehicle for the pledged agreement to amend SB 25. However, Dankworth remained firm that the general structure of SB 25 could not change. Those involved in the legislation recall that, as he did not seem to accept that the projects would be debt financed, the significant change made was to debt cost allocation. The key provision desired by the Gover- nor and Sturgulewski was to end the wholesale rate, which encouraged inefficient or unfeasible projects, by requir- ing each project to pay its own operation, maintenance and equipment replacement costs and by allocating debt accord- ing to the cost of the project and to distribute State benefits more equitably, by not penalizing projects with greater percentages of debt financing. Thus, in Sec. 8, the word "each" substituted for "all" project(s) and each project was required to pay for its "proportionate share of the debt service on state loans and bonds for all power projects in the energy program for Alaska..." Other provisions of Sturgulewski's bill as it emerged from the Senate Finance Committee included amending the costs to be included in feasibility studies; financial analysis requirements; legislative authorization of projects at a specific cost and re-authorization if cost estimates 71) = exceed authorization; amendments to provisions regarding transmittal of revenue from power sales, and amendment of the intertie authorization to permit, but not require, it to be located in the Denali State Park. As the bill moved out of the Senate Finance Committee, it replaced CS SSHB 9(Fin) (p. 158-159 Sen. Fin. Comn. Minutes). The bill it replaced, sponsored by Representa- tive Rogers, introduced March 19, 1981, sought changes in and additions to energy conservation programs. On May 11, 1982, the bill passed the Senate 20-0. The Conference Committee members were Senators Dankworth, Gilman, Sturgulewski and Representatives Rogers, Halford, and Bettisworth. The Conference Committee was marked by an abundance of suggestions, advice and assistants. For example, six people acted as staff, including Dave Hutchens and Ster- ling Gallagher. Many files exist with working papers and notes. Key issues were technical, and each "staff" person presented computer runs, spread sheets and other pieces of information. At the first meeting, considerable time was devoted to members' interpretation of the "wholesale rate." Yould and Ken Vassar, Department of Law, offered interpre- tations. Representative Sutcliffe presented amendments to include interties in the debt service sharing. Hutchens and others opposed this amendment which eventually was adopted in altered form. Sutcliffe wanted the APA to be required to have "take or pay" contracts - a "standard practice," he said - that assured a project's sale of electricity. Sturgulewski and Rogers supported this amendment, but were only able to get it included in the Conference Committee's Letter of Intent. As soon as the Conference Committee was appointed, re- search requests made by Rogers generated reports which indicated that Tyee and Swan's project share would be high and that, therefore, consumer rates would be high. On May 20, Dave Hutchens, reportedly with the assistance of Sterling Gallagher, suggested a ceiling be imposed on project rates. For the next several days, different language and calculations were presented. For example, Hutchens suggested that "power projects authorized for construction on or before July 1, 1982, shall not be required to pay a wholesale power rate more than 10 percent greater than the average rate under the provisions of the bill for all power projects." (Kreinheder to Rogers May 22, 1982, re: Effect of "10 percent Rate Limit" on HB 9 Power Costs.) On May 25, 1982, the following version was considered by the Conference Committee: "(h) Notwithstanding (g) of this section, in 1982 the proportionate share of debt service under (b) of this section for a power project that is author- ized for construction before July 2, 1982, may not exceed the average share of debt service for all power projects in the energy program for Alaska, but this debt service share limit shall be increased in 1983 to two percent above the average share of the debt service for all power projects in the energy program for Alaska and by an additional two percent above that average share in each succeeding calendar year. The debt service share limit imposed by this sub- section terminates when the limited share equals or exceeds the project's proportionate share of debt service calculated under (g) of this section. A utility that receives power from a power project that has its share of debt service limited under this subsection may not receive -.73 - power production cost assistance under AS 44.83.162 - 44.83.164." Staff meeting notes show that Hutchens, Gallagher, and Dzinich addressed the Committee on the different versions. Over the objections of Sturgulewski, Rogers and Ron Lehr, who wanted discussion of the power cost assistance lan- guage, Dankworth and Hutchens insisted on its elimination. However, members were still unsure of the effect of the amendment and asked for more information. On May 26, a memo to Committee members from Kreinheder, Dzinich and Matz explained the effect of the proposed cap. Based on these assumptions, Swan Lake and Lake Tyee are the only projects of the four considered which would have debt service costs (shares) high enough to qualify for the cap under Section (h). The cost of the unmet debt service for these projects which would result from the cap would be covered by Solomon Gulch in FY 85 and by Solomon Gulch and Terror Lake from FY 86 through FY 90. Although Bradley Lake would come on line about FY 88 as presently planned, we have not included it because of the uncertainty about financing and other factors. A debt service shortfall results from the reduction of debt service costs for Swan and Tyee - $5.8 million in FY 86. Therefore, it is necessary to allocate this shortfall among the remaining projects - Solomon Gulch and Terror Lake - in order to ensure that the debt service costs for all projects will be met. The attached entire memo shows the effect of the limit was to reduce Swan's FY 86 rate from 20.8 cents to 13.6 cents and Tyee's from 24.8 cents to 13.6 cents. Further discussion indicated a need to change the escala- tor from 2% to 4%. As work drafts were being reviewed, changes developed in the language. A May 27 staff memo says: ~ 74 3. The committee needs to deal with the issue of which projects should be eligible to be capped. It was staff's understanding that the cap was meant to just apply to Swan and Tyee. The last paragraph of the letter of intent was drafted accordingly. If that's the case, the committee will want to adopt the attached amendment (which has not been distributed.) The date of construction needs to be changed to January to avoid the possibility that construction of Terror may begin before July 2. If other projects are allowed to be capped, then the system doesn't work to either provide a disin- centive against poor projects or to support Swan and Tyee. The problem with the way the bill is currently drafted is that it is unclear what projects are eligible. However, at the final conference committee meeting on May 28, Hutchens argued that Terror should be in the system and suggested the language "for which a_ con- struction contract has been awarded before the effective date of this act." A Letter of Intent was adopted that included Dankworth's concerns about Susitna licensing and intertie con- struction, even in the absence of adequate appropriations; Gilman's concern about Bradley Lake construction; Roger's concern for an energy procurement policy; Sturgulewski's concern about APA contracting procedures; and the concern of Sutcliffe, Rogers and Sturgulewski about "take or pay" contracts, requiring an APA "study of the financial and policy issues involved in the interim financing of power projects and the advisability of assuring power marketa- bility through contracts with utilities." (Sen. Journal May 31, 1982.) The Letter of Intent also explained the "cap." Subsection (h) of section 16 provides for the phasing-in of a project's payment of its proportion- - 75 - ate share of all power project debt service. The legislature intends, in establishing this "cap" formula, that the weighted average share of debt service be computed by dividing the total annual debt service of all projects in the energy program for Alaska by the total annual electricity sales. An eligible project's share is then annually raised by 4% above the average until it reaches its actual share under the system described in (g), at which point the "cap" for that project terminates. Thus, in FY 1984, no eligible project would pay more than 104% of the average share; in FY 1985, no eligible project would pay more than 108% of the average share; and so forth. The "cap" assures that the allocation of debt service among projects does not place an undue burden on those projects which were begun under the previous hydro financing system. Further, it is the legislature's intent that the difference between an eligible project's share of the total debt service and the amount paid under the "cap" shall be made up by the shares paid by all other projects in the energy program for Alaska for which debt service is not limited under the "cap." Under the HB 9 formula - payment of a proportionate, but capped, debt share, each project would not be reduced to payment of its operation, maintenance, equipment replace- ment and safety inspections until all the pooled debt was retired. This was consistent with SB 25's intention that all projects share debt service, but was tempered by HB 9's insistence on project specificity in order to reduce the opportunity for bad project selection. The pooling of the debt was also seen as consistent with Hammond's desire for equity: the pooled debt offset the inequity in the distribution of the grants. Even after debt retirement, as had been envisioned in SB 25 and opposed by Hammond and the House Democrats, the State would continue to own the projects and to contract with utilities for their operation. Several of the Committee members and staff expressed unease with the cap- formula. As with all_ such predictions, they are no better than their assumptions. In this case, the key factors were project costs and load forecasts. As a part of the arrangement on HB 9, an extra $20 million was added to the Power Development Fund to change the debt/grant ratio. However, project cost estimates continued to increase. The HB 9 formula had been developed using the load forecasts used by the APA in the project feasibility studies, as staff had no time or authority to develop their own. Originally, both the APA and the Communities felt the load forecasts were "conser- vative." As the projects progressed toward completion, there was general agreement that the load forecasts were optimistic. Funding In 1981, SB 25 established power policy and SB 26, the appropriation bill, implemented that policy. In 1982, HB 9 amended SB 25 to encourage feasible project selection by eliminating the "postage stamp" wholesale power rate. HB 643, a major repeal and reappropriation bills, undid much of SB 26, indirectly transferring funds from hydro and energy projects to rural capital projects. Approxi- mately $90 million, slightly less than 25% of the general fund appropriations in SB 26, was repealed in HB 693 from such projects as Lake Elva, Green Lake, Solomon Gulch and rural feasibility studies. While some of the funds were reappropriated to other energy projects, an estimated $25 million went to miscellaneous rural projects. The Governor's Budget for FY 83, submitted in January, 1982, contained no additional capital funding for Swan, Tyee, or Terror, although the APA had requested an additional $10 million for Swan, $40 million for Tyee and $70 million for Terror Lake. a a7 1982 Interim Two agencies conducted energy related activities during the 1982 interim months. The leadership of the House requested an evaluation of the "State's present approach to power project development" and an exploration of "possible improvements to the program." (Letter from Kreinheder, July 2, 1982). The study, completed in January 1983 (summary attached) provided: (1) an assessment of the State of Alaska's current power project development program, with regard to the selection and design of power projects, the structure of wholesale power rates, and the equity of the program for Alaskans. (2) a review of alternative approaches to securing and allocating State funding for power projects (for example, a dedicated energy fund). (3) an analysis of current debt financing methods employed by the APA, with a discussion of viable alternatives, if any. (4) an assessment of the relative merits of State ownership of power projects, versus transfer of projects to municipal or utility ownership. By October, the Alaska Power Authority had issued $200 million interim debt financing - $35 million for Swan, $50 million for Tyee and $115 for Terror (letter 10/11/82, Yould to Conway). =| 38) « At the October 22, 1982, APA Board meeting, the Board agreed to continue to seek "incremental funding" of projects, defeating a motion to send full project informa- tion along with the incremental requests. It was also announced at this meeting that there had been a _ $70 million increase in project cost estimates, placing Swan at $109,450,000, Tyee at $132,000,000 and Terror at $200,440,000. During the interim the Alaska Power Authority formed a "working group" to propose new policies and procedures, a "plan of finance" and legislative amendments. Despite instructions from the Board that legislative amendments were to be prepared by the Department of Law, legislative amendments were prepared by the firm of Wohlforth and Flint. The final draft was finished in early November (Letter, 11/12/82, Wohlforth to Yould). On November 24, 1982, Lehr wrote to Conway about the proposed changes, some of which, he said, were "minor technical amendments" and others "major policy revisions." Some, he felt, were not in "the best interest of the State" (p. 1). Lehr urged Conway and the Board not to take any formal action on the proposed amendments at the specific request of the Sheffield transition team. The proposed amendments included prohibiting the APUC from acting on APA contracts and rates, making debt service coverage in bond trust agreements discretionary, reducing legislative control over cost overruns, permitting FERC licenses to be filed prior to legislative approval of a project, making discretionary the requirement that the APA enter into contracts for the sale or transmission of power from a project. On this last proposal, Lehr pointed out that "it would allow projects to be constructed based on speculation" and that it contradicted the intent of HB 9 FOI ee "towards increasing, not relaxing, the need for firm contracts before a project was constructed" (p. 9-10). Other amendments sought to decrease "the opportunity for public and agency participation" on the promulgation of APA regulations, to permit non-APUC certified cooperatives to qualify for Rural Electrification Loan funds. The APA sought again to have "the Department of Revenue transfer to the APA appropriations to the Power Development Fund when costs have been obligated" (p. 11). Lehr opposed an amendment which "states that the APA, rather than the State, would own projects which it acquires and con- structs" (p. 11). The APA proposed amendments sought to repeal the HB 9 section which required revision of feasibility studies and legislature reauthorization of projects whose final cost estimates exceeded original cost estimates by more than 7S. The APA also sought to remove the qualification that the Power Development Fund could only be used for "economical- ly feasible" projects which "provide the lowest reasonable power costs to utility customer...," despite Yould's frequent assurance to legislators and others that this requirement insured the ultimate success of the Energy Program for Alaska (see, e.g., LB&A Committee Minutes 12/18/81). On September 9, 1982, APA finance director Ray Benish replied to Senator Sturgulewski's request for the studies requested in the HB 9 Letter of Intent. The eight page letter explains contract terms and the relationships between "take and pay" contracts and revenue bonds, noting that "take or pay" contracts "logically follow" from the wholesale rate calculation (p. 4). However, in the - 80 - legislative amendments proposed that fall, Lehr notes (p. 15) that "take and pay" contracts are not requested. Benish states that "The Alaska Power Authority is current- ly evaluating take or pay agreements as a part of our long range revenue bond financing plan." Regarding multi-phase contractor questions, Benish pro- vides a lengthy description of the process used by the APA for contract awards. In the summer and fall of 1982 Arlon Tussing and Gregg Erickson worked on "Alaska Energy Planning Studies: Substantive Issues and the Effects of Recent Events." This work effort was commissioned by DPDP and provided a critique of the fuel cost and load growth assumptions used in the Acres' Susitna study, the Battelle "Alternatives" study, the "Long-term Energy Plan" and a study by Stanford Research Institute International of the extent to which low cost electricity was likely to stimulate Railbelt industrial development. Erickson and Tussing found that changed oil price expectations were not reflected in Acres, Battelle and the Long-term Energy Plan, that coal and gas price assumptions were unsupported, that high interest rates were not accounted for by Acres or Battelle and that these findings made Susitna less favorable. At the end of December 1982, APA financial consultants identified certain barriers to negotiation of power sales agreements with the "Four Dam Pool" utilities ("HB 9 Power Cost Study"). The weakening of diesel oil prices and HB 9's debt service provisions were seen as causing the problem of early years' hydro costing more than diesel, the problem of "systems increments" or new power projects increasing existing utilities' power costs, and the desirability for the utilities of industrial rate flexibility. Optional solutions were offered, including greater State equity contributions, low interest rate loans, "stand alone" legislation, standardization of the State's equity contribution to new projects, and the consultants' preferred approach of “equalization grants" whereby payments would be made to utilities to offset the higher cost of hydro power. The financial consultants also recommended eliminating the uniform industrial and residential wholesale rate and substituting an APA multi-rate tariff so that utilities could secure larger markets and lower unit prices. These two solutions, equalization grants and flexible rates, were considered necessary for successful negotiation of power sales agreements between the APA and the Four Dam Pool util- ities, according to APA's financial consultants and staff. (Yerkes to Yould, Dec. 28, 1982, "Marketing of Project Power Under the Energy Program for Alaska.") 1983 LEGISLATIVE SESSION The new Legislature met in an atmosphere of reduced revenue expectations. Only a few energy bills moved during the Governor's and Legislature's first session. In the first month of the session, bills were introduced in both houses relating to Susitna and other APA projects. SB 69 (Kertulla) and HB 121 (Hayes) sought approval of the feasibility study and plan of finance of Susitna with a January 1983 con- struction cost of $5.4 billion. No hearings were held on these bills. On March 9, 1983 Governor Sheffield introduced the techni- cal amendments to the APA statutes originally proposed in the fall of 1982 by financial advisors and bond counsel to the APA Board. The purpose of the amendments, SB 168, was to facilitate the issuance of long-term revenue bonds by the APA. SB 168 contained 23 sections. Most of the amendments either clarified existing provisions of law, gave greater security to bondholders, resolved legal ambiguities or amended statutory provisions challenged in the "Trustees for Alaska v APA" lawsuit. For example, Section 7 of the bill required the APA to enter into power sales contracts for energy transmission as well as (under existing law) production. Sections 8 and 9 provided that rural electrification loan interest payments be deposited in the general fund, a lawsuit claim. Section 13, con- sidered critical to the marketability of APA revenue bonds, specified "that money which has been appropriated to supplement bond proceeds financing a project may be segregated by the commissioner of Revenue or transferred to the Authority before costs are incurred," (Letter of Transmittal), thereby addressing bondholders' concern that a project would be left partially constructed due to withdrawal of appropriated funds. Section 15 clarified that the APA owns projects which it acquires or con- structs. Bond counsel felt this was "necessary to assure the authority's ability to pledge its receipts from projects to secure bonds." (Letter of Transmittal). Section 20 excluded interties from the energy program for Alaska's pooled debt provisions. The most controversial amendment in the bill sought to repeal the "Susitna blackmail clause" on the grounds that the clause "injected uncertainty into ratemaking, thereby impeding APA nego- tiations" with local utilities. In the Senate, Senator Vic Fischer proposed an amendment to require power sales contracts prior to construction. This amendment was opposed by the APA as limiting "the flexibility and bargaining position of the Authority" (Benish to Fahrenkamp April 21, 1983). In the Senate Finance Committee, discussion focused on the repeal of the ban on the industrial consumer preference. Senator Fischer pointed out that the ban was meant to be a disin- centive to overbuilding dams. Eric Yould pointed out that the language was intended to prevent a windfall to indus- trial consumers. The APUC opposed any non-cost based rates. Senators Bennett and Sackett were contacted (May 11, 1983) by the city manager of Petersburg about the energy program for Alaska and impending high hydro rates. In his letter, the city manager stated, "We recommend that the system approach be abandoned in favor of a project-by-project approach for financing the power projects developed under the energy program for Alaska" and that, for the short-term, Tyee should be sold to Wrangell/Petersburg which would be given State equity funds for the purchase. After much discussion, a letter of intent was developed by the Senate Finance Committee which requested the APA to report to the Legislature on the issue of selling APA projects and on incentive rates for industrial consumers. The Senate also changed from $5 billion to $3.5 billion the point at which the Susitna blackmail clause became effective. In the House, the same issues of selling projects and the industrial rate ban were discussed and amendments proposed. The House Resources Committee adopted a letter of intent for SB 168 which supported bonding of Four Dam Pool - 84 - projects, but requested the Governor "prepare a plan for providing the necessary equity for future projects in the Energy Program for Alaska." The final version of the bill, HCSCS SB 168 (Fin)am H, was substantially the same as Governor Sheffield's bill except that it did not repeal the Susitna blackmail clause. Instead, statutes were amended to postpone from 1986 to 1991 the date by which $5 billion needed to be appropri- ated or utility rates would be affected. Another amend- ment permitted industrial rates to be lower than residen- tial rates if it could be demonstrated that reduced industrial rates would cause lower residential rates. In addition, the final bill authorized a third generator for Terror Lake and authorized the Chester Lake hydroproject at $13 million. The Legislature also passed SB 281, sponsored by the Finance Committee. This bill amended the power production cost assistance program to encourage utility administra- tive cost savings and "cost effective energy conservation measures." Responsibility for reconnaissance studies, energy audits, and thermal and lighting standards was transferred from the Department of Commerce and Economic Development to the Department of Community and Regional Affairs. The APA's FY 84 capital budget request sought incremental funding for on-going APA projects. Reduced from the APA staffs' original request of $452,355,000, the APA request was pared back, but still included $54 million for the Intertie, $46 million for Bradley Lake, and $47 million for Susitna, among other projects. The budget bill, Chapter 107, SLA 83, contained only $28 million for Susitna, $25 million for the Intertie and no funding of other projects. - 85 - Conclusion This history has shown the changes in energy legislation from 1975 - 1983. During this time period, significant programs and programmatic changes were enacted almost on an annual basis. The Alaska Power Authority was established as a quasi independent public corporation in 1975 to use primarily debt financing to fund power projects. Following the rise in oil prices and resulting high State revenues in 1979 - 1980, power policy shifted to using general fund appro- priations for power project financing. As State revenues moderated, debt financing reasserted itself as a partial source of project financing. This period was also marked by a growing interest in energy planning and in energy conservation. During the oil crisis period, the House Democratic Majority sought to enact energy conservation programs that would’ be self-sustaining, would reduce the need to finance large projects and would, therefore, permit greater flexibility in the use of State general fund revenues. Legislative and executive branch files shows, over the eight year period, certain recurrent power policy themes. A central theme is the on-going tension between power project development as public works or wealth distribution and power project development as the least cost solution to known supply problems. Any given power project dis- tributes a "per capita" sum, any given power project finances thousands of construction jobs. Any given power project, to the extent it is financed by a source other than its consumers, may provide power at less cost than the source originally being used. Many have believed that the availability of electric power will lead to the economic development of their particular region. On the opposing side, there have been those who see that power can be provided less expensively and those who see alternative uses for State funds. They have argued that placing much of the State's available revenues in one development basket is a high risk game. Further, they point out that the State subsidy is unequitably distribut- ed. By accident of geography and necessary engineering design, some State residents receive a great deal of money per capita, and some receive none. Politically, this has lead to State subsidizes of production and consumption of electricity, the development of power cost assistance, subsidy of fossil fuel generating utilities and their consumers. Many of the proponents of the "least cost" approach (which includes feasible hydro, alternative generation, and particularly, conservation and weatherization) have been supporters of the Permanent Fund, preferring investment of State revenues in the Permanent Fund as a surer, longer term equitable use of "surplus" revenues. Thus, the period seems marked by "trades" among large development and more fiscally conservative projects, for example, in 1981 SB 25 (Hydro Grants) was linked with a constitutional spending limit. A second major theme during the time period is that methods selected to finance power projects have been directly related to the availability of State oil revenues. This means that the rationale for selection of Bae project financing mechanisms has been less related to the wisdom and effect of the method and more related to dollar availability. Thus, benefits which might accrue from, for example, a market test or a take-or-pay contract have been forsaken in flush times, risking, at least, selection of marginally feasible projects. The history of energy legislation in Alaska exemplifies the problems common to independent government agencies. In 1975, Governor Hammond nearly vetoed the bill estab- lishing the APA because of its autonomy. The next eight years are marked by attempts by the executive branch to control the APA, by the APA's attempts to assert its independence and autonomy from the executive, by the legislative branch's attempt to exercise oversight and control and to make decisions, by the APA's attempt to avoid oversight and to be the decision maker. The APA's constituency lobbied both the legislative and executive branches. Looking at the record of what happened, we see a history of conflict rather than agreement. The period was marked by continuing disagreement over basic issues: The goal of energy policy and assistance, the means of financing or implementing policy and the proper nature of the organi- zation to carry out those goals. - 88 - Chapter 3 POWER RATES UNDER SB 25 and HB 9 According to SB 25 as passed in 1981, power from all projects in the Energy Program for Alaska was to be sold at a single wholesale rate. Basically, all debt service costs and O & M costs of all projects were to be pooled together and divided by total sales from all projects to yield the standard wholesale rate. However, HB 9 as passed in 1982 provided for an amended wholesale rate calculation that produces a separate rate for each project. Basically, each project under HB 9 had to produce sufficient revenue to cover its own O & M costs plus its own "proportionate share of debt service." This memo provides a brief discussion of these two rate-setting methodologies, focusing on their contrasting effects on the allocation of debt service. For the examples discussed below, the following assump- tions are made for simplicity: 1) debt service constitutes the only cost associ- ated with the projects; 2) "proportionate share of debt service" for a single project equals capital cost of single project x total debt service capital cost of all projects for all projects - 89 - 3) the interest rate for debt financing is the same for all projects. A hypothetical "base case" consisting of three projects is presented in Table 1 below. Table 1 A B Cc TOTAL Capital Cost 1000 1500 3500 6000 Sales 500 500 700 1700 Total Debt 500 1500 1000 3000 Annual Debt Svc. 51.8 155.5 103.7 311.1 Debt Percentage 503% 100% 29% 50% Sales/Cap. Cost 0.50 0.33 0.20 0.28 SB 25 Rate 0.183 0.183 0.183 HB 9 Rate 0.104 0.156 0.259 To illustrate interpretation of the table, "Project A" is characterized as follows: ° the capital cost of Project A is $1,000; . the total annual sales from the project is 500 kwh; ° the total amount of debt incurred to build the project is $500; ° the annual debt service associated with that debt is $51.8. Any number of zeroes can of course be added to these figures to produce examples of more realistic magnitude. The "debt percentage" of Project A is 50%, meaning that - 90 - 50% of the capital cost was financed with debt (and implying that the other 50% was financed with State grants). As shown in the "total" column, the average debt percentage for all projects is also 50%. The "“sales/capital cost" ratio is an indicator of project efficiency. The higher the ratio, the more efficient the project. In this example, Project A is more efficient than either "B" or "C." The average efficiency of all three projects according to this index is .28. Under SB 25, the wholesale rate for all three projects is 18.3¢/kwh. Under HB 9, the rates vary from a high of 25.9¢/kwh for the least efficient project (Project C) to 10.4¢/kwh for the most efficient project (Project A). Table 2 shows what happens to the wholesale power rates if a new project with average efficiency and debt percentage is brought into the system. = 91 - Table 2 Debt tage [AVERAGE] - Efficiency [AVERAGE] Capital Cost 1000 1500 3500 10000 16000 Sales 500 500 700 2800 4500 Total Debt 500 1500 1000 5000 8000 Annual Debt Svc. 51.8 155.5 103.7 518.4 829.5 Debt Percentage 50% 100% 29% 50% 50% Sales/Cap. Cost 0.50 0.33 0.20 0.28 0.28 SB 25 Rate 0.184 0.184 0.184 0.184 (SB 25 base) 0.183 0.183 0.183 HB 9 Rate 0.104 0.156 0.259 0.185 (HB 9 base) 0.104 0.156 0.259 For this and all other examples below, the size of the new project is large relative to the existing system. This amplifies any effect that the new project has on existing rates. It should be noted that if the new project is smaller, then any effect on existing rates would be smaller. As shown in Table 2, however, if the debt percentage and efficiency of the new project matches the average of all existing projects in the system, then the power rates for existing projects will be unaffected under either rate-setting methodology. (The differences between 18.3, 18.4, and 18.5¢/kwh are all due to rounding). Table 3 shows what happens if the debt percentage of the new project equals the existing average but the efficiency of the new project is worse than the existing average. = 92 - Table 3 Debt %age [AVERAGE] - Efficiency [WORSE] A B Cc D TOTAL Capital Cost 1000 1500 3500 10000 16000 Sales 500 500 700 500 2200 Total Debt 500 1500 1000 5000 8000 Annual Debt Svc. 51.8 155.5 103.7 518.4 829.5 Debt Percentage 50% 100% 29% 50% 50% Sales/Cap. Cost 0.50 0.33 0.20 0.05 0.14 SB 25 Rate 0.377 0.377 0.377 0.377 (SB 25 base) 0.183 0.183 0.183 HB 9 Rate 0.104 0.156 0.259 1.037 (HB 9 base) 0.104 0.156 0.259 Under SB 25, all the rates for all existing projects increase as a result of the new project's relative inef- ficiency. Under HB 9, however, all existing rates remain the same - the consumers of power from the new project bear the full burden of the new project's relative ineffi- ciency. Table 4 shows what happens if the new project matches the average efficiency of the existing projects, but exhibits a higher percentage of debt financing than the existing average. Under both SB 25 and HB 9, the rates on existing projects go up. In fact, the percentage increase in the rate is the same in all cases (in this example, approx- imately 50%). - 93 - Table 4 Debt %age {HIGHER] - Efficiency [AVERAGE] A B Cc New Total Capital Cost 1000 1500 3500 10000 16000 Sales 500 500 700 2800 4500 Total Debt 500 1500 1000 9000 12000 Annual Debt Svc. 51.8 155.5 103.7 933.2 1244.3 Debt Percentage 50% 100% 29% 90% 75% Sales/Cap. Cost 0.50 0.33 0.20 0.28 0.28 SB 25 Rate 0.277 0.277 0.277 0.277 (SB 25 base) 0.183 0.183 0.183 SS a ee HB 9 Rate 0.156 0.233 0.389 0.278 (HB 9 base) 0.104 0.156 0.259 The opposite effects are seen in Tables 5 and 6. In Table 5, the new project exhibits average debt percentage but better than average efficiency. Under SB 25, all existing rates are lower due to the efficiency gain in the total system. Under HB 9, the existing rates are unaffected, and the consumers of power from the new project enjoy the full benefit of their project's relative efficiency. In Table 6, the new project exhibits average efficiency but a lower than average percentage of debt financing (i.e., a higher than average percentage of State grant financing). Under both SB 25 and HB 9, the rates decline for all projects, again by the same percentage in all cases (and again, in this example, by approximately 50%). =-94 - Capital Cost Sales Total Debt Annual Debt Svc. Debt Percentage Sales/Cap. Cost SB 25 Rate (SB 25 base) HB 9 Rate (HB 9 base) Capital Cost Sales Total Debt Annual Debt Svc. Debt Percentage Sales/Cap. Cost SB 25 Rate (SB 25 base) HB 9 Rate (HB 9 base) Table 5 Debt tage [AVERAGE] - Efficiency [BETTER] A B Cc New TOTAL 1000 1500 3500 10000 16000 500 500 700 6000 7700 500 1500 1000 5000 8000 51.8 155.5 103.7 518.4 829.5 50% 100% 29% 50% 50% 0.50 0.33 0.20 0.60 0.48 0.108 0.108 0.108 0.108 0.183 0.183 0.183 0.104 0.156 0.259 0.086 0.104 0.156 0.259 Table 6 Debt Sage [LOWER] - Efficiency [AVERAGE] A B Cc New TOTAL 1000 1500 3500 10000 16000 500 500 700 2800 4500 500 1500 1000 1000 4000 51.8 155.5 103.7 103.7 414.8 50% 100% 29% 10% 25% 0.50 0.33 0.20 0.28 0.28 0.092 0.092 0.092 0.092 0.183 0.183 0.183 0.052 0.078 0.130 0.093 0.104 0.156 0.259 = 95 = These examples illustrate two basic points: 1) 2) Existing rates under both methods of rate calculation are affected by the percentage of debt financing for new projects entering the system. If the percentage of debt financing on a new project is higher than the average for all existing projects, then existing rates will increase under either method. Note the assumption here, however, that the interest rate is the same for all projects. If the interest rate for a new project were sub- stantially lower than the average rate for existing projects, then the effect of the new project could be to lower existing rates even if the percentage of debt financing on the new project were above average. In other words, it is actually the ratio of "debt service to capital cost" that produces an effect on exist- ing rates, not the ratio of "debt to capital cost." However, assuming comparable interest rates, the latter can be used as a simplified proxy for the former. The relative efficiency of a new project enter- ing the system affects the existing rates under SB 25 but not under HB 9. In the former case (SB 25), the benefits of a relatively efficient new project are diffused throughout the system, as are the costs of a relatively inefficient new project. In the latter case (HB 9), all such costs or benefits attributable to the efficiency of a new project are borne exclusively by the consumers of power from the new project. Some mixed effects are therefore possible under SB 25 that would not occur under HB 9. For example, under SB 25 a relatively efficient new project could enter the system with a higher than average percentage of debt financing and still exert no negative influence on existing rates (or even exert a positive influence) depending on the relative magnitude of these two characteristics. Under HB 9, a higher percentage of debt financing (assuming comparable interest rates) means higher power rates for consumers in the existing system regardless of the relative efficiency of the new project. Chapter 4 ALASKA POWER AUTHORITY LEGISLATION, 1984 SESSION This chapter reviews the Alaska Power Authority (APA) legislation passed during the 1984 legislative session that affected the energy program for Alaska. Particular emphasis is given to the reasons for the legislation in the context of power sales negotiations with the four-dam pool utilities. The chapter also discusses events subsequent to the end of the legislative session and their relationship to the legislation that was passed. Long Term Power Sales Negotiations The Authority began negotiating long-term power sales agreements with the utilities sometime in late 1982. The Authority intended to issue long-term revenue bonds to retire approximately $200,000,000 in short-term debt in- curred for the construction of the Lake Tyee, Terror Lake and Swan Lake hydroelectric facilities. Long-term power sales agreements with utilities purchasing power from the Lake Tyee, Terror Lake, Swan Lake and Solomon Gulch - 99 - hydroelectric projects were essential to secure the bond issuance. 1/ The utilities were looking for a contract that would pro- vide to them the perceived benefits of hydropower. That is, stable low-cost power that would be reduced to opera- tions and maintenance costs only, once debt on the project had been paid. As a first option, the utilities wanted the Authority to sell the dams to them, possibly at the cost of the outstanding debt that would be bonded. This option would require some of the same state assistance discussed infra because early year costs on the bonded indebtedness would be higher than the utilities alterna- tive costs of generation. The Authority rejected this option because continued ownership of the projects by the Authority and pooling of debt service with subsequent projects were key aspects of the "energy program for Alaska" statutory scheme. While the issue of utility ownership of the projects never really went away, the Authority and the utilities focused their discussions on several basic problems that were pre- venting successful negotiation of the power sales agree- ment under the existing energy program for Alaska scheme. Under the terms of AS 44.83.398(b), the Authority is re- quired to charge a yearly wholesale rate for power from a 1/ Three of the utilities, Ketchikan, Kodiak Electric and Copper Valley Electric had signed long-term power sales agreements with the Authority. However, those agreements did not contain terms and conditions adequate for the agreements to serve as security for a bond issurance of the quality needed to obtain an acceptable interest rate. - 100 - project that it estimates will produce revenue sufficient to meet the Authority's obligations for project operations and maintenance costs and debt service for projects in the energy program for Alaska. Much of the focus of the power sales negotiations concerned the effect on the wholesale power rate of the debt service portion of the obligation. Estimates of the interest rate on the long-term revenue bond issuance ranged from 10% to 12% percent depending on the rating of the bonds and market conditions at the time of the issuance. This interest rate would result initial- ly in a wholesale rate for power from the dams that would be higher than any of the utilities' existing generation costs, and posed a major stumbling block in the negotia- tions. This initial high rate was due, in part, to low utilization of the dams, particularly Lake Tyee, in the early years of operation. Uncertainties concerning future rate increases that were created by the Susitna clause and the debt pooling pro- visions of the wholesale power rate were also major pro- blems. In addition, the utilities wanted to be able to charge a separate retail rate to industrial consumers; a practice prohibited by the existing statutes. Initial High Rates To address the initial high rate for power problems, the Authority suggested a plan to reduce rates in the early years of operation through use of a state subsidy referred to as "rate stabilization." In determining the amount of money necessary for rate stabilization, the Authority and the utilities focused on projecting what the alternative cost of thermal/diesel generation would have been for each community. The theory behind this approach was that the - 101 - communities should not have to pay any more than their alternative costs of diesel, so long as those alternative costs were less than the rate for the hydro project. The utilities' alternative costs were projected by devel- oping assumptions concerning load growth, inflation, esca- lation in fuel costs and other factors. The parties spent a great deal of time in early 1984 at the offices of R.W. Beck in Seattle working on these assumptions. There was considerable dispute concerning them. In particular, the utilities felt that load growth projections developed by the Beck staff were too optimistic. Eventually all of the assumptions were scaled down from original projections, 2/ although they still were not totally satisfactory to the utilities. The Authority also found that if all four projects shared the debt service on an equal basis, rather than on the basis of their proportionate share of debt service, less money would be needed in rate stabilization to bring all of the communities down to their respective alternative costs. This was primarily because the other communities would be picking up a share of the debt service on Lake Tyee for Wrangell and Petersburg, which had very low pro- jected utilization of the project. The other communities appeared willing to do this to get sufficient rate stabi- lization money. During the rate stabilization period, each utility would pay a rate for debt service based upon it's individual alternative costs. After the last utility reached the crossover point where hydro power was less 2/ These assumptions were also generally lower than those that had been developed for the feasibility studies on the projects when they were in the planning stages. - 102 - expensive than projected alternative generation costs, the utilities would pay a rate for debt service based on the actual interest rate on the bonds. Using this one-project-for-debt-service concept and the projected alternative costs of diesel generation, the Authority determined that approximately $35,000,000 in rate stabilization would be required to bring the util- ities' rates down to their alternative costs of generation for the eight years or so that it would take before all of the utilities had reached a point where hydropower was less expensive than diesel. Rate Uncertainty Problems Removal of the Susitna clause was considered necessary to getting the power sales agreements signed. The utilities were unwilling to sign agreements that would commit them to purchase power from a project for 50 years when they faced the prospect of their rates more than doubling over- night if $5,000,000,000 was not deposited in the power development fund by 1991. Because the power sales agree- ments were essential to the bond issuance, it was gener- ally acknowledged that the clause would have to be removed or there would be no bond issuance. The other rate uncertainty problem was caused by the debt pooling provisions of the statutes. Under the wholesale power rate formula in AS 44.83.398, all projects in the energy program for Alaska pay their proportionate share of all of the debt service from all of the projects in the system. Proportionate share is based on the relationship between the total costs for the particular project and the total costs for all projects in the system. - 103 - Dick Emerman's memo in Chapter 3 the effect of debt pool- ing on existing projects when a new project is added to the energy program for Alaska. The communities were con- cerned that the debt pooling aspect would cause their rates to go up dramatically with the introduction of a new project with a large amount of debt into the system. 3/ Their first preference was for no rate increases as the result of new projects. Short of that, they wanted some assurance that their rates would not suddenly jump dras- tically. The Authority proposed to limit the amount of any rate increase from new projects by agreement in the power sales contract. In doing this, the Authority was concerned with balancing the utilities' need for pro- tection from rate shock with the purpose of the debt pool- ing provision and the effect that the rate limitation would have on the financial feasibility of future projects. Retail Industrial Power Rate 3/ The proportionate share of the debt service provision was conceived to separate the feasibility considerations for each project and thereby discourage the construction of uneconomic projects. While disincentive to an uneconomic project exists for the ratepayers of that project, it may not exist for those elsewhere in the system. For example, an uneconomic project will not affect the debt service for existing projects as long as the debt/equity ratio is the same as the ratio for existing projects. On the other hand, an economic project, which can support a greater percentage of debt than that in existing projects because it is a good project, could raise the percentage of debt in the whole energy program and therefore increase the debt service for all projects. - 104 - The utilities wanted to be able to charge a retail indus- trial rate in order to increase their volume of sales by offering a good rate to large consumers of energy. As long as the industrial rate was not reduced too much below the residential rate, the increase in sales could have the effect of decreasing the overall rate the utility was re- quired to charge all consumers. This is because the wholesale power rate charged by the Authority is based on the total amount of money the Authority needs on a yearly basis to meet the debt service and project operation and maintenance expenses. This amount is divided by the pro- jected amount of power consumed to derive a cents per kilowatt hour rate. The effective rate charged over a year long period could be lowered by increasing consump- tion above the projected consumption on which the rate was based. 4/ 1984 Legislative Session As a result of the talks between the Authority and the utilities, the Authority proposed a legislation package for the 1984 session that would iS repeal the industrial rate limitation 2. combine the four dams into one project for the purpose of calculating the debt service portion 4/ There was also a side issue concerning whether retail rates should be controlled by statute which is what the industrial rate limitation did. - 105 - of the wholesale power rate (relates to rate stabilization) 35 repeal the Susitna blackmail clause 4. permit the authority to limit increases in rates caused by the addition of subsequent projects to the energy program for Alaska 5. appropriate $35,000,000 for rate stabilization. The legislation was introduced as HB 589 (amendments to the Alaska Power Authority statutes) and HB 684 (special appropriation) in the House, and SB 423 (amendments to the Alaska Power Authority statutes) in the Senate. The House took up HB 589 first. Committee substitutes for HB 589 were approved by the House Labor and Commerce, Resources and Finance Committees before the bill went to the House floor where the Finance Committee Substitute was amended before passing out of the House on March 30, 1984. The Senate Finance committee approved a committee substitute to the House version of the bill. This committee substitute was amended again on the Senate floor, and passed on reconsideration on June 2, 1984. However, the House adjourned without concurring in the Senate amendments. In the meantime, on May 30, the House Finance Committee took SB 411, a bill originally relating to preferential use of Alaska agricultural products, amended the title and inserted language similar to the version of HB 589 that had passed out of the House. That bill was amended on the floor then passed by the House on May 31, 1984. On June 8, the bill was returned to second reading on the House - 106 - floor where it was further amended. The bill passed on reconsideration and was reengrossed. The Senate concurred in the House amendments on the same date and SB 411 became law as ch 169, SLA 1984. The original four provisions in HB 589 survived the legis- lative process basically intact. The industrial rate repeal and the permission for the Authority to limit rate increases by contract were never changed. The "initial project" provision was mistakenly amended at one point by the House, but later corrected. The repeal of the Susitna clause went through a few changes that are discussed infra. There were a number of additional provisions also enacted by SB 411. The end result was that almost all of the leg- islation deemed necessary for a long-term bond issuance was passed. However, at the same time, the legislature established a loan program in the Department of Commerce and appropriated $210,000,000 to it for a loan to the Authority to retire the Authority's short-term debt. HB 684 went through numerous changes in both the House and the Senate before it was made a part of SB 409, one of the general appropriations bills. Those changes, along with the changes in HB 589/SB 411 are discussed by general topic area below. Repeal of Susitna Clause The House Labor and Commerce Committee voted out a com- mittee substitute to HB 589 which provided that the Susitna clause would only be repealed if the voters ap- proved a constitutional amendment establishing a major - 107 - projects fund and requiring that money in the fund be used to finance construction of the Watana Dam before any other capital expenditures from the fund were made. House Re- sources approved a committee substitute that made tech- nical corrections to the Labor and Commerce committee sub- stitute. House Finance approved a committee substitute that removed the contingency on repeal of the clause. The exchange for removal of the condition was the inclusion of $200,000,000 for the Watana Dam in House Finance's committee substitute for HB 684. (See discussion on HB 684, infra). Repeal of the Susitna clause without conditions remained in all subsequent versions of HB 589. When SB 411 was first changed by House Finance to incorporate APA legisla- tion, repeal of the Susitna clause was not included in the committee substitute. The first House floor amendment on May 31 returned the repeal provision to the bill. Obligation to Pay Notwithstanding Non-Completion of a Project After HB 589 was introduced, the Authority proposed an amendment to AS 44.83.092(4) that would have allowed mun- icipalities to agree to make payments on debt service in- curred for a project in the energy program for Alaska, even if the project was never completed and selling power. The Authority envisioned the possibility that it might obtain some of the financing for construction of future projects by using short-term bond issuances such as those used for the four-dam pool, or by issuing long-term bonds using the existing power sales agreements as security. - 108 - Under energy program for Alaska statutes, existing pur- chasers would have the obligation to contribute their pro- portionate share of debt service for any new projects. If the project was never completed the bond market would still look to the power sales agreement as a source of payment on the bonds. Whatever increase in rate that might result from the obligation would be limited by the proposed limitation on increases in rates in the power sales agreement. The attorneys for the municipalities felt that, after the WPPSS cases, the municipalities should have specific statutory authority to obligate them- selves to pay notwithstanding non-completion of a project. This amendment was added in the Senate Finance committee substitute to HB 589, and was also included in the House version of SB 411 that was originally passed by the House. On reconsideration, the bill was sent back to second read- ing and amended. One of the amendments removed this pro- vision, apparently on the recommendations of a legislative staffer. Approval of Bradley Lake and Watana Dam The Administration had introduced a bill, HB 683, that would have authorized the Bradley Lake project at a con- struction cost of $350,000,000. AS 44.83.185(c) requires submission of a project for approval by the legislature before money can be spent on final design work. While it is not absolutely mandated by statute, the statutory scheme indicates that this approval is supposed to be sought after OMB has reviewed the feasibility study and plan of finance and recommends approval to the legislature and the governor. =| 109: = The plan of finance was not complete at the time the leg- islation was introduced, but it was anticipated that it would be submitted to the Office of Management and Budget (OMB) and reviewed before the end of the legislative ses- sion. Approval during the 1984 session was requested because the Authority anticipated FERC approval of the project in the summer of 1984, and wanted to be able to proceed with final design work in the fall of 1984 rather than having to wait until the next legislative session for approval before the design work could begin. HB 683 never made it out of the House Labor and Commerce Committee. However, in amending the House Finance Commit- tee substitute for HB 589, the House authorized the con- struction of Bradley Lake at a cost of $350,000,000 and Watana Dam at a cost of $1,500,000,000. Both projects were approved under AS 44.83.185(c). Part- icularly in the case of the Watana Dam, this authorization was premature. In a memorandum of advise to John Shively (Inf. Op. Att'y Gen, April 2, 1984, 366-494-84) regarding these approvals, this office stated: AS 44.83.185 provides that no money can be spent on final design work and construction of a project until it has been approved by the legislature. The wording of that section does not absolutely require comple- tion of a feasibility study and plan of finance before legislative approval; however, the intent of the general statutory scheme is to require completion of a feasibility study and plan of finance before money is spent on final design and construction. Legislative approval at this point ignores the stat- utory procedures set up by the legislature to ensure that only economically and financially feasible pro- jects will be approved and built. However, all ex- penditures of appropriated money after approval appear to be permissive, not mandatory. Therefore, the APA could keep to its adopted policy of not = 110 - spending money on final design and construction until a final plan of finance is completed which incorpo- rates agreements with purchasing utilities on cost of power. 5/ The Senate reinforced this conclusion with the letter of intent that it adopted for both HB 589 and SB 411]. That letter stated in part: It is the intent of the legislature that the Alaska Power Authority spend no funds for detail design work on either of these projects until power sales agree- ments have been signed by the utilities which will purchase power from the projects. Further, no funds shall be spent until (1) the Alaska Power Authority Board of Directors adopts a written finding that the respective project is economically and financially feasible and recommends that it be constructed and (2) the provisions of AS 44.83.183 and AS 44.83.185 which require submittal by the Alaska Power Authority of a feasibility study, plan of finance and an independent cost estimate, and sub- mittal by OMB of a review report recommending approval or disapproval have been complied with. It is the intent of the legislature that the report by OMB be in written form. 1984 Senate Journal, pp. 3313-3314, 3557. 6/ Approval of both projects was also included in SB 411. The construction cost authorization for Watana Dam was increased to $3,750,000 in January, 1983 dollars. 5/ In the spring of 1984, the Board of Directors of the Authority adopted an internal policy that money would not be spent on final design and construction until conditional power sales agreements had been negotiated with utilities purchasing power from a proposed project, and a final plan of finance had been completed. 6/ This letter of intent was never considered by the House for adoption. - 111 - Special Appropriation HB 684, as introduced, requested a $35,000,000 appro- priation for rate stabilization "in accordance with the terms of the power sales agreements and bond covenants for the issuance of revenue bonds" for the four-dam pool. The House Resources Committee added a condition providing that the appropriation would not take effect until the day after the four-dam pool utilities had entered into power sales agreements. House Finance approved a committee substitute on March 29 that increased the appropriation for rate stabilization to $49,000,000. This increase was made at the request of the utilities. As discussed earlier, the utilities did not fully agree with the assumptions used to project their alternative costs of diesel generation. They felt that the projected costs should be lower. In order to protect themselves from the risk that the projected alternative costs were too high, as well as from the perceived risks of low load growth, defaults by other participants, low water years and less than projected capacity, the util- ities wanted the amount of rate stabilization to be in- creased sufficiently to take each utility one cent to one and one half cents below its projected alternative costs. In an information sheet entitled "Reasons For A Higher Rate Stabilization Fund," that was apparently provided to the Board of Directors and to the Legislature, the util- ities also indicated that increasing the rate stabi- lization fund "allowed the participating utilities to com- promise on 17 issues which were preventing final agree- ments." On March 20, 1984, the executive director of the Authority and the principal negotiators for the four-dam -:112 - pool utilities had entered into a Letter of Understanding which stated: The negotiating team representing APA, Ketchikan, Copper Valley Electric Association, Kodiak Electric Association, Petersburg and Wrangell have agreed on the terms and conditions of a power sales agreement incorporating the following: ni The written and oral understandings of the parties heretofore reached shall be placed in writing in agreed final form, and re- maining comments of the parties will be mutually and expeditiously resolved and also incorporated in the agreement. 2. A rate stabilization fund shall be estab- lished as proposed in the communities' 17 point proposal funded in part by a State appropriation of $49,000,000. ae The system increment proposal of the commu- nities shall also be incorporated in such agreement. We mutually recognize that certain statutory amend- ments are required to implement the agreements reached to date. We expect to conclude draft O & M agreements and in- terconnection agreements following a mutual review of proposed contract revisions. We will recommend to our respective boards and coun- cils that the agreements be adopted and that we be authorized to execute them and to assist in the steps necessary to complete the financing. The House Finance Committee Substitute increasing the appropriation for rate stabilization to $49,000,000 fol- lowed nine days later. In addition to increasing the amount of the appropriation, the House Finance Committee Substitute appropriated $200,000,000 for Watana Dam and made that appropriation effective the day after all power purchasers served by the (A 3) = Susitna hydroelectric project enter into power. sales agreements with the Alaska Power Authority. The House Finance Committee substitute was amended on the floor of the House to increase the appropriation for Watana Dam to $1,400,000,000 to be deposited to the power development fund in yearly increments beginning with fiscal year 1985 and ending June 30, 1991. The amendment also appropriated ten million dollars for power cost assistance. The Senate Resources Committee passed out a committee sub- stitute that retained the rate stabilization and power cost assistance appropriations but changed the Watana Dam appropriation to a continuing appropriation of $200,000,000 a year. The committee substitute also made a continuing appropriation of $50,000,000 per year to the power development fund for Bradley Lake. The bill provid- ed for repeal of the Susitna appropriations on June 30, 1991, and the Bradley Lake appropriation on June 30, 1988. Senate Finance passed out a committee substitute on May 28 that removed the appropriation for rate stabilization and substituted an appropriation of $210,000,000 to the power development revolving loan fund. (See discussion on loan fund, infra.) The bill also removed the appropriation for power cost assistance and replaced it with a continuing appropriation of $21,700,000 per year for the power cost equalization program. The Senate Finance Committee substitute was amended on the Senate floor on June 2. This amendment removed the con- tinuing appropriation provisions and replaced them with appropriations of $21,700,000 for power cost equalization, $200,000,000 for Susitna, and $50,000,000 for Bradley - 114 - Lake. The appropriation to the power development revolv- ing loan fund remained the same. An appropriation of $5,500,000 was added for the Seward to Davies Creek inter- tie. The House never voted on whether to accept the Senate amendments to HB 684. Instead, on June 8, 1984, the House voted to amend SB 409, a general appropriation bill. The House amendment added the three continuing appropriations, the appropriation for the Seward-Davies Creek Intertie and the appropriation to the power development loan fund to SB 409. The Senate concurred in the House amendments to SB 409 and it became law as ch 171, SLA 1984. Power Development Revolving Loan Fund The focus of the Authority's efforts during the session had been to get the legislative changes necessary to com- plete power sales contract negotiations with the four-dam pool communities. The goal of the Authority was to com- plete those negotiations in time to issue long-term reve- nue bonds to retire the Authority's short term debt. The first $35,000,000 of the debt came due on May 31, 1984. As of the end of March, HB 589 and HB 684 contained basically all of the statutory changes referred to in the March 20 Letter of Intent between the Authority and the utilities. However, there was continuing dissatisfaction in the legislature with the removal of the Susitna clause and uncertainty as to how to ensure adequate State funding for the project without the clause. There was also a resistance among some members of the legislature to the idea of using private financing, such as long-term revenue bonds, to retire the Authority's debt. The combination of Teo these factors created a great deal of uncertainty as to whether the legislative package required for successful power sales negotiations would be passed by the legisla- ture. Other than the Watana and Bradley Lake authorizations, there was very little activity on Alaska Power Authority substantive legislation between the end of March and the end of May. Then on May 28, Senate Finance passed out a committee substitute to HB 589 that created the power de- velopment revolving loan fund. The loan fund was an ad- ministration alternative to the revenue bond issuance and was intended to provide a means for retiring the Author- ity's short-term debt, while at the same time creating a debt on which the Authority could base the debt service portion of the wholesale power rate. The approach utilized a loan from the Department of Commerce to the Alaska Power Authority that would funded by an appro- priation of $210,000,000 to the loan fund. The loan statute was drafted to provide for a return to the State in excess of principal but did not set a definite yearly interest rate. This was because of the need to keep the wholesale power rate below the utilities' alternative generation costs during the period of time that the diesel alternative was less expensive than hydro power. There would be no rate stabilization funds avail- able to bring down rates to alternative costs. Therefore, the requirements for a return on the loan would have to be flexible enough to tailor a repayment schedule to the utilities' alternative costs. Instead of a set interest rate, the proposed bill gave the Department of Commerce fairly broad authority to establish repayment terms. It is clear from the language of the - 116 - bill, however, that the loan terms must include provision for a return to the State in excess of the principal and that in establishing the amount of the return and other terms, the department must take into consideration: the revenue that the authority could reasonably derive from the sale of power from the projects based upon (1) the market rate of interest for a loan of comparable size and duration at the time the loan is made; and (2) the estimated costs of alternative sources of energy generation for utilities purchas- ing power from a project financed with a loan from the fund. AS 44.33.620(a). These two criteria, alternative costs of generation and market rate of interest, were the guiding factors in de- veloping an acceptable wholesale power rate during the power sales contract negotiations. By considering those criteria in establishing a repayment schedule for the loan, the department could derive a rate of return on the principal. During Senate Finance Committee hearings on the proposed committee substitute, Larry Crawford tes- tified that the intent of the administration was to use the long-term agreements that were being negotiated with the utilities and that the utilities would pay wholesale power rates based on those agreements. (Senate Finance Committee Minutes, May 26, 1984, 9:20 a.m.). At the time the Administration proposed the bill there was concern that Petersburg would decline to purchase power from the Tyee project. The proposed loan statute provided that the department could agree to defer payments attrib- utable to an expected purchaser for up to five years if that purchaser did not buy power from the project. The - 117 - proposed statute also allowed loan funds to be used to pay operations and maintenance expenses attributable to an expected purchaser that chose not to buy power from a project. The power development revolving loan fund was included in the version of HB 589 that passed the Senate, and was also included in the House version of SB 411 which was con- curred in by the Senate. Events Since end of 1984 Legislative Session At the end of the legislative session the legislature had enacted all but one of the statutory changes the Authority had requested to complete power sales contract negotia- tions and issue long term bonds. At the same time, how- ever, a loan fund had been established that would enable the Authority to retire its short-term debt without issu- ing bonds. Shortly after the end of the session it became apparent that the utilities construed the passage of the power de- velopment revolving loan fund as signaling a change in approach to the long-term power sales negotiations. While the administration had proposed the loan program as a sub- stitute for a long-term bond issuance, with the State being in a similar position to the private financing market, the utilities did not feel that the legislature had intended the State to simply step into the shoes of the private financial market. They felt that the loan program presented an opportunity to negotiate a lower wholesale rate than they would have had to pay with a bond issuance. - 118 - In mid-August the Authority sent the utilities a version of the power sales agreement that made the revisions necessary to accommodate the agreement to a loan from the fund rather than a bond issuance. A few days later, the Authority met with the utilities and proposed a schedule of repayments that would give each utility a rate for debt service that was two cents below its projected alternative cost for diesel until the utility's projected cost for diesel was higher than the rate for debt service on a loan at 11% percent interest. The overall yield to the State on a 35-year repayment schedule was approximately eight percent. The utilities' rejected that proposal, and on September 21 they presented the Authority with a counter-proposal. The utilities proposed a fifty year loan agreement with a 5.85 percent interest rate on principal amortized over forty years. However, the obligation to pay interest would only arise on that percentage of the principal which represent- ed the amount of capacity of the initial project that was actually sold yearly by the APA to the utilities. The principal reflecting unused capacity would be repaid by the utilities, without interest, between the fortieth and the fiftieth years of the loan agreement. This approach reflects an underlying principle in the utilities' counter proposal that the State should bear the risk of unused capacity of the power projects. The loan package would also provide for an initial five-year "ramping" of rates which would involve deferral of some interest and princi- pal repayment. With the payment of interest on only a portion of the principal loaned, and the deferral of re- payment of interest free principal for forty years, the =.119_- effective yield to the state under the proposal is 3.3 percent. 7/ The 5.85 percent interest, or 3.3 percent return figure is a derived figure, just as is the Authority's 8 percent yield. As discussed above, the Authority's figure is based on a presumed 11% percent market rate of interest and on the projected alternative generation costs deve- loped during the power sales agreement negotiations in winter/spring 1984. The utilities' maintain in their written presentation to the Board of Directors from January 23, 1985, that their proposal also relates to rate of interest for a bond issuance and alternative costs of generation. The report and their oral presentation also acknowledge a number of other factors that were taken into consideration in developing the figure. The Authority and the utilities are currently at a stale- mate in resolving their long term power sales negotia- tions. 8/ 7/ Inf. Op. Att'y Gen., (December 6, 1984 - 366-292-85) examines whether the counter-proposal fits within the existing statutory provisions of the power development revolving loan fund and the energy program for Alaska. The utilities' included a rebuttal to this memorandum in their written presentation to the Board of Directors of the Alaska Power Authority dates January 23, 1985. 8/ The due date for payment of the first installment of debt was extended to September 28, 1984. Because of this impending obligation, on September 27, 1984 the Department of Commerce and the Authority entered into a Loan Agreement, the terms of which were based upon the Authority's August proposal to the utilities. There have been three loans made so far under the Loan Agreement. (Footnote Continued) - 120 - There seem to be some basic policy questions as issue in the resolution of this stalemate. The utilities claim that the State should bear the risk of unused capacity in the projects by forgiving interest and delaying principal payments on a portion of the debt, although the State has already paid for 60 percent of the cost of the projects. They also claim that the focus in setting the wholesale power rate should be on what the Authority could rea- sonably expect to derive from the utilities, not simply on the alternative costs of power. The centerpiece to the Authority's approach to these nego- tiations has been that a utility should not be expected to pay more than its thermal alternative for power, as long as the thermal alternative is less expensive than hydro. The Authority's efforts have been directed towards devel- oping a rate that is a few cents less than the projected thermal alternative to make the rate more attractive and to alleviate the risks perceived to be inherent in pro- jecting the alternative costs. The utility's maintain that, particularly where the State is the banker, other factors should also come into play. Whatever the resolution to these issues, the decisions should be made while taking into consideration the financ- ing of future projects as well as the present four-dam pool projects. It is quite likely that whatever approach (Footnote Continued) The Authority expects to sign Interim Power Sales Agreements through June 30, 1985 with the utilities in the near future. Those agreements should give the Authority sufficient revenues to meets its obligation to the Department of Commerce through fiscal year 1985. Under the interim agreements, the utilities are charged a flat rate for debt service of 2.64 cents. - 121 - is taken here will set a precedent for future power sales negotiations. Debt financing: for future projects may or may not come from the State, and the approach that is taken now should be one that can be expected to work under different financing scenarios. - 122 - Power Project Development and Financing in Alaska House Research Agency Alaska State Legislature January 1983 : | | House Research Agency Report 82-C 1 | SECTION I INTRODUCTION AND SUMMARY As was anticipated, the work involved in this study presented a challenging assignment. The scope of the study covered essen- tially all of the activities involved in Alaska's Power Project Development Program. In addition, a number of related issues have been addressed. One of the most challenging aspects of the work was the fact that we were dealing with what might best be termed a "moving train". During the course of the work a number of important ele- ments of the Program were under review and, in some cases, actually revised by the Alaska Power Authority and other agencies. To the extent possible we have recognized these changes but there are undoubtedly some instances where we have not been able to do this. Our work was undertaken within the framework of six separate tasks. These were: . Alaska Power Supply 7 Development Program of Alaska's Power Project ° Wholesale Power Rate Structure ° State Funding Alternatives for Power Projects 7 Debt Financing Alternatives for Power Projects 7 Alternatives for Disposition of Projects Upon Completion This section of the report provides a summary of the results of our work. To accomodate the reader with limited time, this material provides only our major observations and alternatives to present practices and procedures. The balance of the report provides a detailed discussion of the work under each of the tasks listed above. ALASKA POWER SUPPLY A number of organizations are involved in energy research, development and management activities directly and indirectly related to power supply in Alaska. Nearly every agency or department of state, local and federal government is involved to some degree in energy related pursuits, although these are not all related to power supply. Section 2 of the report provides an overview of the institutions and legislative directives relating to Alaska power supply. General Observations Our general observations of institutions and legislative directives relating to Alaska power supply are as follows: ° Legislative directives relating to Alaska power supply have evolved over a period from the early 1960's. Significant changes have been made, almost on an annual basis, beginning in the mid 1970's. ° The key agencies involved in Alaska power supply, in addition to the State's utilities are: - Alaska Public Utilities Commission (APUC) - Division of Energy and Power Development of the Department of Commerce and Economic Development (DEP - Alaska Power Authority (Authority) ° Other agencies and the Legislature itself are involved in the funding of power supply facilities independent of the Energy Program for Alaska and there exists a multitude of programs relating to electrical energy under several agencies, ° There are important areas of Alaska power supply development where there is overlapping responsibility. Particular examples of this are in the areas of planning, conservation, and renewable resources, al . for Consid . It may be time to stabilize existing responsibilities and programs to allow a maturing process in activities related to power supply. However, consideration might be given to some 1-2 consolidation of similar programs and clearer definitions of responsibility to take advantage of the expertise and experience of particular agencies. The objective of such an effort would be to minimize overlap and duplicative responsibilities and programs. An example of an alternative to accomplish this would be centralizing responsibilities, at the State level, for power supply activities with the APUC, the DEPD, and the Authority. The APUC might well be given the added responsibility for review and coordination of utility service area forecasts. The DEPD might assume full responsibility for the planning, assessment, and implementation of conservation programs and for the continu- ing assessment of renewable and alternative energy options. The Authority then, would be responsible for power suppy planning, reconnaissance studies, feasibility studies, and project financ- ing and development. These activities would utilize the work of the APUC on load forecasting, as well as the work of the DEPD on conservation and renewable resources, ALASKA POWER PROJECT DEVELOPMENT PROGRAM The work involved in our review and assessment of the Alaska Power Supply Development Program was the primary focus of the Study. The scope of this work included: 7 Power supply planning 7 Reconnaissance and feasibility studies leading to project selection 7 Project authorization process General Observations The following are general observations with respect to the power supply development program: 7 The Authority has inherited a variety of studies and data relating to all aspects of power supply as well as individual projects that were in one stage or another of development. The power supply planning process is an evolving one and, although the Authority has and continues to implement improvements, it is not yet mature. - Power supply planning areas have not been well defined beyond the Railbelt region. - Load forecasting has been undertaken by individual utilities as well as several State agencies. However, the credibility of load forecasts continues to be questioned and there has not been an integration of load forecasting and power supply planning. The DEPD's Long Term Energy Plan includes a section relating to electrical energy, but it does not constitute a power supply plan, even at the State level. For the most part, power supply plans for individual areas of the State have not been developed and periodically updated. The Authority has made significant improvements in their approach to and the methodology utilized in reconnaissance studies. However, with the introduction of a more disci- plined power supply planning process additional improve- ments in the reconnaissance level studies are required. The Authority has also made significant improvements in their approach to feasibility studies. The Office of Management and Budget (OMB) has provided a number of recommendations for improvements in the feasibility study process in addition to their oversight and review role of completed feasibility studies. However, there continues to be areas where further improvements in the feasibility study phase of power supply development can be made. 2 As the feasibility study provides an assessment of "economic feasibility", the financial plan does essen- tially the same thing with respect to "financial feasi- bility". The Authority's work with their financial advisors and bond counsel towards the end of developing overall financial policies has laid a good foundation for the development of financial plans This will be an important element in the decision process for future projects. 7 The project authorization process is unique in that the Legislature is, in effect, the final decision maker, with the concurrence of the Governor. This occurs because of the significant financial participation of the State in power project financing. The statutory restrictions which limit the power of one legislature to commit a future legislature, and the fact that the budgetary process deals only with a single year while power projects involve a commitment over an extended period of design and construction are complicating factors. : id ; It is emphasized that the power supply development process in Alaska is evolving and that the Authority, with input from the ona 1-4 and others, has made significant improvements in the several ele- ments of that process. However, we believe that additional improve- ments can and should be considered. In this regard, alternatives offered for consideration are summarized below: 7 The Authority, in consultation with other agencies inclu- ding DEPD, APUC, and OMB, might define power supply plan- ning areas consisting of population centers which are presently interconnected or which might be interconnected by transmission lines in the future. These areas would be in addition to individual communities, primarily located in bush areas, which would have to be dealt with onan individual basis for power supply planning. ° A formal assignment of responsibility for review and coor- dination of utility load forecasts and the development of independent load forecasts for power supply planning areas as well as individual communities and villages might be made. This responsibility could rest with the Authority or with DEPD, but serious consideration should be given to adding this responsibility to those of the APUC. A number of reasons for this should be considered, including the fact that load forecasts are an important part of other APUC responsibilities, not the least of which is their rate proceedings. ° Once initial load forecasts were developed for the various power supply planning areas, as well as individual communities and villages, a procedure might be developed that would provide for periodic review and updating. ° With defined power supply planning areas and compatible load forecasts, the credibility of which would be enhanced as a result of a formalized process discussed above, accurate power supply requirements can be determined. ° The reconnaissance level studies might then be focused on providing a pool of resources for further study that would be available to meet identified needs in the various areas of the State. Periodically, the reconnaissance level studies would be updated to reflect technological advance- ments in alternative and renewable resource technologies as well as changes in other factors. 1-5 . Consideration should be given to incorporating other economic evaluation methodologies, in addition to present value life cycle cost analysis, in the assessment of economic feasibility of alternative projects. It is sug- gested that a comparison of the busbar costs of power froa alternative projects might be developed both on a constans and current dollar basis. This methodology facilitates development of sensitivity analyses with respect to the several variables and assumptions involved in economic analysis. ° OMB should continue its oversight role in the review of all aspects of the power supply planning and project evaluation process. The Authority and OMB should cooper- ate in the development of documentation for decision makers which describes the entire power supply planning process as well as requests for project authorization. This documentation should be periodically updated and reviewed with the appropriate committees of the Legisla- ture and other State agencies. WHOLESALE POWER RATE STRUCTURE The Authority's wholesale power rate structure is based on very explicit rate directives provided by the Legislature, There has been a continuing evolution of legislative directives relating to the Authority's rates beginning with the initial legislation that created it. General Observations During the 1982 session, the Governor and Legislature undertooP a comprehensive review of the Authority's rate structure, Bills reflecting the Governor's position, as well as a House committee position, were considered and rejected. A compromise, HB 9, was ultimately passed and signed by the Governor. The changes in legislative direction concerning the Authority’? rate structure provided by HB 9 were significant. In place of the uniform or "postage stamp" rate previously in effect, a project- specific rate was established. HB 9 provided that there would be some levelizing of the debt service costs between projects subject to a cap. The predominate feeling on the part of those directly involved in the Authority's financing is that it is important that legislative direction relating to rates be stabilized. However, there are, relatively minor "housekeeping" and clarifying changes that will be suggested to the Legislature this year. Equally as important as the rates established by the Authority is the language of power sales contracts covering the output of the Authority's several projects. Our review of the most current draft power sales contracts indicates that they are consistent with the directives provided by HB 9 and that they do provide for adjustment of rates in the face of unforeseen circumstances, for example, abnormally low water conditions. - . for _Consid . Unless the language of HB 9 is interpreted to be broad enough to allow for inclusion of all project costs in the revenue requirement as well as for the inclusion of debt service coverage, then we would suggest that serious consideration be given to a legislative remedy. Also, we believe that consideration should be given to establishing rates for non-firm energy and for capacity in addition to the present single wholesale power rate. With respect to power sales contracts, consideration needs to be given to the timing of the execution of those contracts. Contracts will have to be executed prior to the Authority's undertaking of any revenue bond financing. However, the Legislature may wish to establish that power sales contracts be executed prior to major appropriations for design and construction of prajects. STATE FUNDING The State of Alaska's direct participation in the funding of the costs of construction of power projects is not only unique among Other States, but has been the key to electrification of bush areas 8nd the construction of hydro projects that will enhance service to the MOre populated areas of the State. General Observations Legislative appropriations for power project development have been made under several programs involving both the Authority and other State agencies. The major programs under which appropriations have been made include: ° Alaska Power Authority 7 Power Development Fund - Power Project Loan Fund - Rural Electrification Revolving Loan Fund 7 Legislative Grants for Power Development Projects 2 Department of Administration - Electric Power Grants : Department of Community and Regional Affairs = Legislative Grants for Bush Village Electrification After the 1982 session of the Legislature, the House Research Agency was requested to develop an approach involving a dedicated energy fund as an alternative to the present State funding prac- tices. The proposal developed in response to this request was to would provide a whole new set of jurisdictions centered on energy Management areas to assure that projects funded would have the Support of the areas that they would serve. alt ‘ for Consid ‘ Our consideration of alternatives to present State funding practices focused on the proposal discussed above. ° The State's commitment to partially fund power projects is a basic policy decision. Likewise, a commitment to create a dedicated fund with earmarked revenues is also a basic policy decision. 1-8 ° The dedicated fund alternative has certain advantages in terms of financial planning, primarily because it would provide assurance that funds would be available for power project financing and it would establish a formula to determine the amount of State participation, ° The proposal for the dedicated fund would involve the formation of local-energy management areas with their own boards and would provide for voter approval of projects. An alternative to this would be to provide legislative direction to the Authority for increased consultation, and perhaps an approval requirement, of already established local and regional governmental agencies. Submission to the voters for approval might be difficult because of the complexity of the decisions. ° Any alternative for State funding that would provide a basis for the level of that funding as opposed to the Present practice of addressing the question on a project by project basis and leaving uncertainty as to whether or not more funds can be obtained from the State, would enhance the Authority's ability to negotiate power sales contracts prior to construction of the projects. Also, multiyear appropriations for individual projects is another alternative for consideration. DEBT FINANCING ALTERNATIVES One of the more compelling reasons, if not the primary reason, for the formation of the Authority was to provide an entity that would have the statutory authority and the practical capability to undertake major financings for power projects. Although the scope of the Authority's responsibilities in this regard has changed since its creation in 1976, power project financing remains among the Authority's primary responsibilities. General Observations The Authority has successfully undertaken interim financing associated with power projects under construction. It has not yet, however, undertaken any long term revenue bond financing of these projects. The latter is imminent, and the Authority in Consultation with its investment bankers, financial consultants, and bond counsel has been finalizing a financing program during the Period of our work. We have had the opportunity to review the progress of this work with the Authority and its consultants. Our general observations with respect to the Authority's a) debt financing are as follows: ° The Authority's interim financing policies and practices are consistent with those generally utilized by publicly owned utilities and have successfully provided funds for construction financing. ° The Authority's work with consultants and bond counsel in developing a financing program represents a prudent business approach. 7 It is important that the Legislature and other agencies of State government involved work with the Authority to formalize its financing program and to provide any required statutory amendments. The timely completion of such a cooperative effort will enhance the ability of the Authority to successfully undertake the required long term financing. . It is important that any required modification in the Authority's rate directives to implement a financing program be adopted. Particularly, if it is determined that the existing statutes do not provide for inclusion of debt service coverage and the operation of funds to which those amounts would flow, legislative remedies must be developed in a timely manner. DISPOSITION OF POWER PROJECTS The questions addressed under this subject pertain both to ownership and operation of the Authority's projects upon completion Our discussions with the Authority's bond counsel and invest- ment bankers indicate that there is very little flexibility with regard to the question of ownership. If the Authority undertakes debt financing for a particular project, title to that project will have to be vested in the Authority. It is suggested that any further questions on this subject should be directed to the Authority's bond counsel or the Attorney General. With respect to the operation of completed projects, there is considerably more flexibility. Financing considerations dictate that assurance be provided that the projects will be operated and maintained by an agency that is competent to do this work. There- fore, any arrangement for operation and maintenance may have to be disclosed at the time of financing. Again, this question needs to be addresssed by the Authority's financial advisors and bond counsel. Alternatives that should be considered with respect to operation following: and maintenance of completed projects include the The Authority could operate and maintain all projects that they finance. Projects could be operated by the local utility serving the area where the project is located under a contrac- tual arrangement. (This has been done with the Solomon Gulch Project.) Even as the Authority contracts for the operation and Maintenance of one or more of its projects, certain economies of scale can be achieved if the Authority would maintain responsibility for, for example, training of plant operators, major overhauls, maintenance of spare parts and other activities of this nature. A number of power generation facilities have been constructed throughout the State with funds appropriated by the Legislature or obtained from State agencies other than the Authority. An alter- Native for operation of these projects that we believe should be considered would be a requirement, as a condition of providing funds, that arrangements be made for operation and maintenance of the generation facility. For example, the Alaska Village Elec- tric Cooperative might be able to efficiently fulfill this function within their service area. Chronology of the Development of Alaska Power June 30, 1976 July/August 1976 September 24, 1976 October 20, 1976 October 25, 1976 November /December December 23, 1976 January 5, 1977 January 14, 1977 January 21, 1977 Authority Amendments (HB 442) Governor signed Act which created the Alaska Power Authority with letter of transmittal which included serious reservations regarding the authority. Requested DPDP to recommend amendments which would: (1) increase public accountability and breadth of input to the authority (i.e., limit autonomy); (2) increase APA ability to operate in an efficient and business-like manner Development of original set of amendments. (Tom Singer of DPDP with financial and economic consul- tants, some agency participation, and discussions with legislative staff.) Discussion paper, draft amendments and rationale for them widely distributed to agencies, with nearly a month for their analysis, comments or other response, before interagency meeting. Meeting of participants to discuss amendments. A new set of amendments were distributed at the meeting by Commissioner Motley. These new amendments and a critique of the original set were written by Eric Wohlforth. An explanatory memo and a "synthesis" of the amendments (i.e., the results of the meeting plus some of Motley's suggestions) were sent to all participants by DPDP. (This was the first involvement by Dona Lehr. ) Discussions of "synthesized amendments" with each of the participants, review by consultants, discussion with bond market experts, memos with specific questions which arose in these discussions and previous meetings sent to Budget and Management and the Department of Law. Detailed summary of suggestions, changes, and pros and cons (as recommended in Nov. and Dec. discussions) distributed to all participants by DPDP. Memo outlining major decisions remaining, plus 3 attachments (dealing with the executive budget amendment, revolving loan fund and a rewrite of the planning and coordination section) sent to all participants by DPDP. Meeting with all participants to resolve remaining conflicts. Results of January 14 meeting distributed to all participants by DPDP. January 21 - February 16, 1977 Wait on comments and wording changes, which Commissioner February 18, 1977 March 2, 1977 March 7, 1977 March 8, 1977 March 18, 1977 April 6, 1977 April, 1977 May 5, 1977 December 15, 1977 January 9, 1978 January 29, 1978 February 7, 1978 February 8, 1978 Gallagher was having drafted by Eric Wohlforth, regard- ing cost overruns. Amendments officially transmitted to Department of Law for drafting approval. (Bob Maynard and Fred Boness of Law had been involved from the beginning of the process.) Memo from DPDP to Governor explaining the amend- ments and specifying areas where agreement had not yet been achieved. Meeting of participants with Governor, and final questions resolved. Wording changes resulting from previous day's meeting with the Governor sent to Department of Law. Amendments with drafting changes by the Department of Law distributed to all participants. Amendments transmitted to the House, referrals to Commerce and Finance. Hearings in House Commerce Committee. CSHB 442 referred to Finance Committee. Memo from DPDP to Kent Dawson, summarizing important aspects of the amendments and implications of the Commerce Committee Substitute. DPDP meeting with Keith Specking to brief him on the amendments. DPDP memo comparing original amendments and committee substitute, per request by Specking. DPDP meeting with Keith and Jessie to explain the committee substitute and look for common ground between HB 442 and CSHB 442. The next step was to have been discussion of such a possible compromise position with previous participants. APA board meeting and receipt by DPDP of a new set amendments written by Eric Wohlforth. These amendments had been submitted to the APA board on January 12, 1978. of ALASKA DUCHY DUNG AU GMS SUN THRU: FROM: DATE Jay S. Hammond, Governor * January 21, 1981 State of Alaska FILE NO. Fran Ulpe jrector TELEPHONE NO. Diviss 7 Policy Development & Planning Ronfld }. Lehr, Director = Power Project Financing Division of Budget and Management Tom sine Policy & Program Specialist Division of Policy Development and Planning George vat Program Analyst Division of Budget and Management As you requested, the Divisions of Policy Development end Planning and Budget and Management are developing an alternative plan for financing power projects. A review of existing power project financing practices and fiscal policy have revealed several ambiguities. Since the direction of a financial plan is dependent on fiscal policy, these ambiguities need to be clarified. The purpose of this memo, therefore, is to discuss the issues which need clarification and to propose policies which we think are most consistent with your prior policies. The proposed policies suggest general direction regarding an issue, recognizing that there may be exceptions. Rationale are presented which support each proposed policy. Other con- siderations, or opposing arguments to each proposed policy, are also pre- sented. Seven issues are discussed. None of these seven issues is distinctly seperate from the others. However, the central issue with power project financing is addressed first: whether the principal objective of power development, particularly hydropower, is to provide the consumer with the lowest reasonable cost of power or to provide a public works project which would have substantial short term economic benefits and potential long term incentives for economic growth. The reason for this distinction is that the project which best meets one objective is not always the best for the other objective. The other six issues also address this question but in terms specific to some aspect of a finance plan. This memo frequently uses two terms which require brief explanation. These terms are lowest cost and financial assistance. In this memo, lowest costs refers to the power production system which generates sufficient electrical power to meet probable demand at the lowest reasonable cost to the consumer. Probable demand is one of the more criti- cal factors in determining which alternative for increasing power cenera- tion will provide the consumer with the lowest cost power. Generally, the closest match between supply and demand for the least cost alternative results in power having the lowest actual unit (kwh) costs. To realize such a match requires demand projections which accurately forecast future Jay S. Hammond, Governor Page 2 January 21, 1981 conditions. Demand projections which are too low may result in under- capacity resulting in increased costs due to power outages and inefficient operation of the power system (e.g., peaking power being used for base load). Demand projections which are too high may result in overcapacity and capital intensive projects which are idle, thereby, failing to oenerate revenues needed to pay for capital costs, or resulting in a high unit cost to existing users. The definition of costs is subject to interpretation. For instance, some may interpret lowest costs to the consumer as not including externalities or subsidies provided by the State. Others may interpret lowest costs as being actual costs, which can be attributed to the project, whether or not they are borne by the consumer or some other party such as the State. The latter definition will be used in this memo. State financial assistance for development of power projects is usually provided through the Alaska Power Authority (APA). Low interest and/or subordinated loans are made by the APA for reconnaissance and feasibility studies, engineering and design and construction. A subordinated loan means that the obligation to repay other debt takes precedence over re- paying subordinated debt. In most cases, repayment of APA subordinated loans is deferred without a corresponding increase in interest rates for the time value of money resulting in an actual interest rate which is lower than the stated interest rate. The APA can also incur revenue bond in- debtedness for power projects providing the Legislature has passed a joint resolution approving the project and the indebtedness. In general, the proposed policies do not encourage the use of subsidies. However, it is our understanding that the administration's position on subsidies is that in specific cases these may represent appropriate public policy, providing that they are explicit and equitable. Jay S. Hammond, Governor Page 3 January 21, 1981 I. Issue: Should State financial assistance for power development favor projects which have the lowest actual unit costs to the consumer given most probeble demand projections or projects which might provide excess capacity as an incentive for economic growth? Proposed Policy: Power projects resulting in the lowest actual costs to consumers are more likely to pay their own way and provide the most rational and equitable approach to power development. If circumstances indicate that a higher cost project mey offer additional indirect benefits, the value of these benefits should be measured against the direct benefits of the least cost approach. Rationale: a. Lowest cost is essentially a quantitative approach which measures the cost-effectiveness of various options. This is frequently expressed aS a comparison between the present value costs (costs expressed in today's dollars rather than inflated future dollars) of the existing power generation system and an elternative pro- ject. If the cost ratio for a project is unfavorable (less than 1.0), the alternative which it is being compared with is more cost-effective. b. The Alaska Power Authority Act (AS 44.56.010) states that the development of power projects should provide the consumer with the lowest reasonable cost of power. The availability of low cost power is consistent with "beneficial long-term economic growth" to which the act also makes reference. c. Under revised regulations for reconnaissance and feasibility studies, the Alaska Power Authority will determine which poten- tial project has the lowest reasonable cost. This determination will compare the cost of the base (existing) system, which is often diesel generation, with alternatives such as hydropower projects. d. The FY 82 goal for the Energy Development Program is "to achieve Alaska's energy self-sufficiency in such a manner that strengthens and diversifies the economy by providing needed eneray énd power at the lowest reasonable economic, social and environmental costs with emphasis on supply from renewable and local resources." e. Under normal circumstances, the most economic project would receive State financial support (e.g. revenue bond financing). However, substantial current revenues in excess of operéting expenditures (i.e. the oi] revenue windfall) heve resulted in demands for power projects to be funded es public works projects. In these circumstances, projects which are not economically feasible could be pursued with a view toward secondary economic benefits rather than cost-effective enercy development. Such projects frequently have significant excess generating cepacity, requiring substantial subsidy, particularly if rete increases are Jay S. Hammond, Governor Page 4 January 21, 1981 to be avoided. Since load demand is not now increasing at the same predictable rate which it has for several] decades, there is some risk that excess capacity will not eventually be utilized. This could create a shortfall in revenues needed to meet debt service for the State's investment. There may be circumstances in which the future need for excess capacity is rational and predictable. Such projects would be selected since they would have the lowest unit cost based upon most probable demand. If the emphasis is not on the lowest unit cost, the only effec- tive lid on power project costs is the availability of State revenues. Due to the capital-intensive nature of most power projects, especially hydroprojects, expenditures for such pro- jects could divert a substantial amount of State revenues to power development at the expense of other energy needs (elec- tricity provides about 23% of the Railbelt's total eneray demand) or other programs which benefit State residents. Other Considerations: a. Even though some hydroprojects are not cost-effective, hydropower does provide an attractive source of energy for Alaska's future, because the availability of hydropower can not be interrupted by international events and generating costs are relatively stable (i.e., insulated from rising fossil fuel prices). Financial assistance for: projects which are uneconomic because of excess capacity is considered by some as an investment in future secu- rity rather than a present day subsidy. Power projects, particularly hydropower, provide a very visible infusion of construction jobs for a few years. Stable electric rates can benefit existing businesses and may provide an incentive for industrial expansion. Although the cost of energy is not as significant as many other factors, it is one of the parameters considered by industry for expanding or siting new facilities. As the cost of oi] continues to rise, substitution of electricity for fuel oi] for space heating Becomes more economically feasible. This could significantly increase electrical cemand. How much demand will increase is uncertain since conservation practices and emerging technologies should reduce the net eneray needed to provide an adequate emount of heat. Jay S$. Hammond, Governor Page 5 January 21, 1981 Il. Issue: Should State financial assistance for the construction of Power projects be in the form of a loan, equity participation or a grant? Proposed Policy: State financial assistance for power projects should be considered investments. Therefore, the assistance should be in the form of a loan rather than a grant. In certain circumstances, the tate's investment.may take the form of equity rather than a loan. (This is discussed further under Issue V). Rationale: a. Power projects generate revenues through the sale of a marketable commodity providing a means for repayment of loan principal and interest. b. Loans, rather than grants, will provide the State with a source of revenue decades from now when the abundance of oi] revenues will have diminished. c. Loans encourage greater fiscal reponsibility and more careful financial analysis particularly for capital-intensive projects. d. Alternative energy demonstration projects should be exempt from this proposed policy since the principal purpose of the project js to produce performance information rather than revenues. Other Considerations: a. Project advocates have favored grants rather than loans for power project reconnaissance and feasibility studies and, in some cases, project construction. b. Adequate reconnaissance and feasibility studies are expensive. Smal] utilities may have cash flow characteristics which result in sparse resources for such studies. Grants provide greater flexibility to investigate potentials for alternative sources of energy. These difficulties are at least partially offset since existing statutes already allow conversion of loans to orants if no revenue producing project results from the studies. c. Subsidized financing for power projects usually results in lower cost power to its consumers but does not necessarily reduce the actual cost of the project. Jay S. Hammond, Governor Page 6 January 21, 1981 III]. Issue: Should loans for power projects include a subsidy (i.e., below market interest rates) when revenue bond debt service and payments for nonsubsidized loans exceed projected revenues? Proposed Policy: Those who receive the benefit should be those who pay the costs. If a power project is determined to be economically feasible, it will generate sufficient revenues to meet debt service over the life of the project. However, if it is felt to be appro- priate public policy to provide subsidies, then these subsidies should be explicit and equitable. Rationale: a. Subsidized loans are in effect "selling" the State's capital at less than market value to reduce the price of electricity. This is no different than selling our royalty oi] or gas at below market value to reduce the price of refined products such as fuel oil or gasoline for the benefit of a select portion of the States residents. b. Development of the project which is not most cost-effective can lead to the need for a subsidy. Previous feasibility studies have not elways selected the project having the least cost to the consumer. However, the revised regulations required by SB 438 should correct this situation. c. A principle objective of a finanical plan is to provide a means for overcoming financial problems without subsidy. For instance, if the life cycle costs for a project indicate that it is eco- nomically feasible, but that the initial years of operation will substantially increase electric rates, State assistance could restructure debt so that @ portion of the payments are deferred to later years. This may increase the overall debt service, but with inflation and more customers, higher payments in later years would not be as burdensome as higher payments during initial years. This approach is similar to changes recently made in bank held mortgage programs which graduate mortgaoce payments. Other Considerations: a. The APA power project finance plans tend to price power et some level which is acceptable to the cost-causer by using subsidies such as low interest and/or subordinated loans. This is usually @ rate which is at or near existing rates. The cost-causers (those who will benefit) can be expected to support this approach. Jay S. Hammond, Governor Page 7 January 21, 1981 IV. Issue: When the preferred power project will result in substantial excess capacity should State financial assistance require a risk premium? Proposed Policy: Financial assistance should be based on acheiving the most economic power system. If substantial excess capacity is preferred by power consumers, a risk premium should be required. A risk premium is an additional payment set at a level to compensate for additional risk that the capacity wil] never be fully utilized and that, subsequently, revenues will be lower than expected and fail to meet debt obligations. Rationale: a. Current use of low interest and subordinated loans tends to shift the cost of excess capacity from the cost-causer to the general public. When this occurs, the incentive is to build the largest project which is politically achievable, not necessarily the project having the lowest actual unit cost. Since the risk premium shifts the cost of speculation back to the cost-causer, jt should provide a mechanism which discourages unsubstantiated excess capacity yet stil] allows for greater capacity for future demand under terms more acceptable than what the bond market may allow. b. Feasibility studies and financial plans done under the revised regulations should provide the information needed to determine the risk, if any, of excess capacity of a project. c. Building new capacity on a scale which is closest to most prob- able demand, reduces capital requirements, thereby reducing revenues needed to meet debt service. Other Considerations: a. Many communities feel that it should be State policy to fin- ancially support marginal projects without any risk premium. A financial plan which differentiates between lowest cost power vs. power for economic development could clarify tradeoffs. b. Substantial excess capacity postpones the need for future invest- ment in new power projects. c. Some have argued that the cost of construction of power cenera- tion facilities will be higher in the future, so that it is wise to build excess capacity now. However, higher costs in the future may be partially offset by any of the following factors: expressing the numbers in real (inflation adjusted) terms; the potential for more cost-effective emerging technologies; reduced risk regarding future demand and improved timing with financial market conditions. These tradeoffs are complex and should be evaluated on a case by case basis. Jay S. Hammond, Governor Page 8 January 21, 1981 Vv. Issue: Should the State provide equity capital to assist in financing power projects? Proposed Policy: Power project financing usually requires some form of equity capital or guarantee. It may be possible to structure State financial assistance to provide an equity contribution or limited third party guarantee without subsidy. Rationale: a. The conditions under which project financing (100% revenue bond debt) is feasible are when debt is secured either by the market (take-or-pay contracts) or by a third party guarantor. Without this security, some equity is required by other lenders to cushion the risk exposure of revenue bond debt. Presently, this cushion is provided through subordinated loans which receive a lower rate of return than might be the case with equity. The thrust of such an alternative financing plan would be to Jower revenue bond interest rate or defer debt service payments using either equity capital or a limited third party guarantee. Since this financial assistance will have a rate of return which is comparable to other investments, it will not damage the linkage between the economic feasibility and ability to finance a pro- ject, as do low interest or subordinated loans. The alternative financing plan must be in compliance with IRS arbitrage regulations. This eliminates some options for con- sideration such aS a guarantee fund which has the principal of the fund and interest earned from fund investment at market rates being pledged to the repayment of revenue bonds. Other Considerations: a. Some have suggested that hydropower projects should be project financed (100% revenue bond debt) which has considerable appeal. State loans, as a substitute for utility equity that is required by the bond market, have been preferred by project advocates because it lowers costs to power consumers of that project at the expense of other State residents. Jay S. Hammond, Governor Page 9 January 21, 198) VI. Issue: Should the State assume ownership of new power projects and sell wholesale power to utilities, or should the utilities assume the responsibtlity for power generation? Proposed Policy: To encourage local control and development of the private sector (considering utilities closer to the private sector than the APA), the responsiblity of project ownership should lie with the utilities. Rationale: a. As long as the State has revenue surpluses, it may be difficult for the State to charge actual costs for its power. Local utilities would not face such pressure. The ability of the APUC to protect the consumer would be uncer- tain if the State controlled power generation. AS 44.56, 090 (b) states that the "(Alaska Power) Authority is not subject to the jurisdiction of the Alaska Public Utilities Commission". Other Considerations: a. Expansion of power generation capacity often creates financial problems for utilities. Consequently, some of the State's utilities may prefer a middleman or retailing role with the State assuming the responsibility for expanded power generation. Certain Alaskan utilities may not have the critical mass needed for efficient management of power generation. Jay S. Hammond, Governor Page 10 January 21, 1981 VII. Issue: Should State financial assistance for power projects be dis- tributed on the basis of equal sharing or equal electric rates? Equal sharing of: State assistance refers to the allocation of benefits which have an equal dollar value to each person, regardless of residence, income, etc. Equal electric rates refer to the use of State assis- tance to equalize electric rates throughout the State. Proposed Policy: Availability of State financial assistance will be primarily bated on equal sharing. Due to wide variances in Alaska in the cost of power, equal sharing does not always result in equal rates. Rationale: a. If Alaskans were virtually guaranteed equal electric rates by the State, there would be little incentive to seek the most economi- cally efficient power generation option. In fact, this might create an incentive for speculation: that is, since the cost- causer would realize the benefits and not excessive costs, there could be a tendency to oversize new power projects to stimulate local development. Distribution of wealth based on equal sharing (with some adjustments for extreme situations) could avoid such speculation. b. State financial assistance for power generation should be avail- able for self-reliant (non-utility) as well as centralized (utility) power systems. This would provide equal accessability and terms for all types of alternative energy systems. c. The use of low interest and/or subordinated loans to adjust rates for hydroprojects is essentially an equal rates, rather than an equal sharing approach. This has resulted in unequal subsidies for power projects. d. In order to provide assistance in extreme cases, programs such as a modified Power Production Assistance Program or other approaches could be used, rather than trying to achieve rate relief solely through project financing schemes. Other Considerations: a. Due to economies-of-scale, remoteness, etc., the cost of power in rural areas is generally greater than the cost of power jin the larger urban areas. One response to this situation has been the establishment of the Power Production Assistance Program which is an equal rates approach. b. A precedent has been established for using low interest and/or subordinated loans to stabilize rates for new hydropower pro- jects. James M. Souby, Director June 22, 1981 Division of Policy Development and Plaming Tom Singer Bill Analysis of FCCS SB25 Division of Policy Development and Planning The following are the key provisions in FCCS S825. Detailed analysis follows the outline. AS.44.83.361-363 Rural Electrification Revolving Loan Fund. AS.44.83.400 AS .44.83.410 AS .44.83.430 AS .44.83.470 AS.44.83 .480 AS 44.83 .490 AS 44.83 .030 AS .44.83.105 Energy Program for Alaska Established. Power Development Fund Established. The Power Development Fund consists of appropriations for power projects under the Energy Program for Alaska providing equity investments for power projects. The existing Power Project Loan Fund remains in the APA under this bill but receives no appropriations in the companion appropriation bill. Existing loans of the Loan Fund are converted to grants under the Power Developaent Fund by HCS CSSB244 (Rules). Investment of Fund. The Power Develonment Find is invested by the Department of Revenue. Revenue ements. Power Deve tt Fund nay be used only for projects which have been approved through the project review process (A344 83177-1879 and are capable of providing armually a 5% return on invested funds. Operation of Power Project. Projects are owned and operated by the APA. If applicant utility meets certain conditions {t must operate the project. Sale of Power from Power Project. scr {| y delow, Hembership of the furor key: ‘our trat. rs and three public directors constitute the new Board of Directors. Bonds for Power Projects Under the Energy Program for Alaska. If appropriated sums are not sufficient to complete a project bonds must be sold. -2- AS.44.83.162 Power Cost Assistance. ve percent of costs of electricity between 12¢ and 45¢ will be paid by the State. The subsidy applies to the first 600 ki. tt hours of consumption per month, for each consumer; excepting certain local public facilities who will be subsidized to the extent of 55 kwh/month times the mmber of residents in the commmity. Section 14 Location of Transmission SAE! in Denali State Park. Approves ‘age-F intertie construction through Denali State Park. SEL of House Resources Committee Substitute which received Governor's it: iC. The Governor agreed to accept the Energy Progren for AisSHa a3 proposed by Representative Duncan and Senator The version of this proposal appeared as HCS CSSS SB25 (Resources). This proposal called for State investaent in and owmership of power projects. Statutory feasibility requirenents were maintained. Until operating capacity reached 500m, a 5Z equi equity return on investment from each project was required. After 500my's, a single wholesale rate for all projects was required to provide revenues to fund operation and maintenance, power cost assistance, debt service, and safety inspections. The requirement that $5 billion be appropriated to the power development fund or rates would rise to 10% was maintained. In his letter to the Resources Comittee Co-Chairman, the Governor specifically requested that; 1. The APA board consist of a majority of members directly accountable to the Legislature and the Governor (plus a citizens advisory committee); 2. All funds appropriated to the APA be received only as expenditures require, and are otherwise under the control of and invested by the Commissioner of Revemue; 3. Income earned from investment of money appropriated to the power development fund be annually appropriated by law; 4 The mmerical factors used to determine feasibility not be set by statute; and 5. Aminimal 52 return on as proposed in the inal Samat” wat be cent ors Summary of FCCS SB25 The bill passed by the Free Conference Comittee is a variation of the proposal as contained in the Resources Committee version. The bill -3- creates the Energy Progran for Alaska, and also establishes a Rural Electrification Revolving Loan Fund. The Loan Fis would finance the extention of new electric service (to at least three customers loan) with 2% loans. froa recon studies through construction and we sean ili a but the APA would be required to contract with local utilities (which meet certain conditions) to operate projects. Statutory feasibility requirements are maintained. However, the Revenue Requirements section has been amended to allow the APA to use money in the powar development fund without compliance with AS 44.83.177-187 (feasibility and review process) if the APA determines a project is economically feasible and can provide revenue sufficient to return anally five percent of the amount invested by the State in a project. There is no longer a distinction between pre and post 500ms financial conditions and no 5% return on equity requirezent. The APA must a single wholesale rate for power from all projects which will generate sufficient revenue to cover operation, maintenance, and equipment replacement costs, debt service (if bonds are sold), and safety inspections and investigations. All reference to power cost assistance has been removed. i i The §5 billion requirement by 7/1/86 remains, but is actually greater than $5 billion as interest earned on money in the fund is included. The penalty for not meeting this requirement rewains the greater of either 10% of the aazount invested, or the three expense items (O&M, debt service, and safety inspections.) In addition, the Power Development Fund as established consists of money appropriated to it by the Legislature end revenues collected from the sale of power that are not required by law to be deposited in the general fund (these are revenuss collected for operation, maintenance, and equipment replacenent and debt service). Only monies collected to pay for safety inspections and investigations would return to the general fund for appropriation. With respect to the above-listed specific requests by the Governor: 1. ‘The APA Board consists of seven mecbers - four commissioners (or the Director of Budget and Management) and three public members. An advisory committee is established to recommend to the APA on Rural Electrification Loans, but no more general advisory committee is established. 2. All funds are invested by the Comuissioner of Reveme in accordance with AS.37.10.070 and .075 (investment of general 3. Income earned on investment of woney appropriated to the power be appropriated annually by law. However, FCCS SB26 appropriates the interest earned on the investment of appropriated sums to the power development fund. 4. Numerical factors used to determine feasibility do not appear in the bill. 5. A winimal 5% return on equity as proposed in the “agreement” has not been retained. The APA has es' operation and maintenance costs will range fron 1. amounts invested. The Governor introduced HB359 to asend the Power Production Cost Assistance Program to provide for subsidization of costs betweeen 15¢ and 40¢/iwh for the first 200 kilowatt hours of electricity usage for all consumers. It was later agreed that subsidized usage could be expanded to 600 kilowatt hours per month for each customer. The version which passed the Legislature contains several itens which reflect the intent of the Governor's proposal. These include: full rather than partial costs as a basis for the subsidy; the inclusion of a usage limit; reduced information requiresents for non-regulated utilities; and increased technical assistance by the APUC for nor-regulated utilities. Major changes from HB359 are listed below: 1. The subsidy limits expanded froma the 15¢ - range moma. 7) a 2. Subsidized usage for local commmity facilities is expanded from the 600 kwh/month to 55 kwh/aonth times the population of a con- munity. (For example, a tow with a population of 100 would veceive subsidised power up to 5,500 kilowatt hours per month for these facilities.) 3. The 1991 sunset of the program is eliminated. 4. The 2¢ per year addition to the minimm cost which would be subsidized (gradual prograa phase out) was reduced to 1¢ per year. 5. The definition of “commmity facility” was expanded to include a “charitable education facility.” Other items not included in FCCS SB2S. Some additional items requested by the Governor do not appear in the bill. There is no reorganization of energy responsibilities, and recon timated that 5% to 3Z of -5- studies remain in the APA. However, there is a section requiring the APA to coordinate recon studies with the Division of Energy and Power Development. There is no enabling legislation for a low-income weatherization progres, and no funde are appropriated for this purpose in FCCS 8B26. There are no changes to the Alternative Technology and Power Resource Revolving Loan Fund to broaden financial assistance for alternative energy and small power producers. However, $5 million is appropriated in FCCS SB26 for alternative energy and energy conservation loan programs. Finally, there are no provisions providing equity in the distribution of benefits from the program. Benefits accrue based on the amount of electric power consumed and upon residence in a utility service area served by a State power project. T8/pd Comparison of SB 25: HB 655: HB 758 Listed below are comparisons of SB 25, HB 655 (introduced by the Governor) and HB 758 (introduced by Representative Sutcliffe). Governor's Improvements 1. 2. 3. Market Test Rate of Return Local Vote SB 25 No independent market test is required but projects must be econo- mically feasible and be able to provide a five percent annual return to the State. Economic feasibility is not defined. Since no return is required, and since no standards are in SB 25, there is very limited signifi- cance to the five per- cent return test. Other than possible implementation of the "Blackmail" clause, no rate of return is required. Only payment by consumers is for operation, maintenance and replacement costs, debt service (if any), and inspection costs. None required. HB 655 HB_758 No independent market ame as HB 655. test is required but the bill extends feasibility study procedures to pro- jects which are 1.5 MW ior less. The five per- cent return paper test is repealed and replaced by an updated economic feasibility review befor project construction be- gins. ame as HB 655, for hydro projects. The payment perioc is 3/4 of the economic life for other projects. A rate of return is re- quired. Each project must return to the state, within 33.3 years, its investment cost plus an adjustment based on the tong term rate of inflation as well as the operation, maintenance and replace- ment costs, debt service (if any) and inspection costs. Requires that a majority Same as HB 655 for project of voters approve a approval. Also requires project before it can public hearing by the be acquired or con- utility before establishing structed by the APA. lor amending rates for state owned projects. gor's ovements SB 25 HB 655 HB 758 Equitable Benefits », Energy Irganization . Energy onservation Benefits apply only to consumers of state owned projects. The amount of individual benefit is directly proportional to the amount of elec- tric consumption. Also, since SB 25 requires a statewide rather than project wholesale power rate, consumers for projects which are economically question- able will be receiving greater actual subsidy than consumers for projects which are economically sound. Reorganizes the APA Board of Directors to include the Director of the Division of Budget and Management and three Commissioners and three public members appointed by the Governor. SB 25 strongly en- courages electrical consumption and, con- sequently, additional generating facilities. Benefits apply only to consumers of state owned projects. Although the net amount of subsidy to a project is equal to HB 655, a required "essential energy" rate provides equal benefits to all customers for the first 250 kwh per month of consumption. A required inverted rate structure would result in diminishing benefits, for consumption greater than 250 kwh per month. Benefits apply only to consumers of state owned projects. The amount of individual benefit is directly proportional to the amount of elec- tric consumption. How- ever the amount of sub- sidized benefits are Tess than SB 25. Also, project specific power rates prevent economically question- able projects from costing more but paying the same as economically sound projects. HB 655 makes no further changes to the organiza- tion of state energy agencies but amendments are prepared which would reorganize the Division of Energy and Power Development, establish an Office of Energy Program (primarily for planning), possibly change the APA from an authority to a line agency, and have a Deputy Commissioner within the Department of Commerce and Economic Development oversee these agencies. No organizational changes. Since HB 655 subsidizes energy costs, it will encourage energy con- sumption but not to the same degree as SB 25. However, to achieve some level of "equal distortion", the Governor's Capital Budget request includes substantial funding for energy conservation grants, loans, and audits. Although HB 758 provides a project with a net subsic equivalent to HB 655, inverted rates provide a disincentive to more energy-intensive residentii customers. eovernuur > Im 7. 8. Emergency rovements Alter- native Energy Maintenance Fund 9. Dedicated 10. 11. Fund Black- mail Clause Reappro- priation SB 25 HB 655 HB 758 Because of the magnitude |Although HB 655 does HB 758 does not explicitly of subsidy, SB 25 dis- |not explicitly address address alternative energies courages the development jalternative energies, but the principal repayment of non-centralized the formla for prin- formula slightly favors alternatives. Also, cipal repayment favors jcapital intensive projects appropriations related jcapital intensive which have an economic to SB 25 heavily favor {projects having shorter |life shorter than 50 hydro projects. Non- economic lifes such years (hydro). hydro alternatives as wind generators. are not given equal Also, the Governor's emphasis. Capital Budget request asks for substantial funding for alternative energy projects. No special funding Establishes an Emergency |Same as HB 655. mechanism for emer- Maintenance Fund which gency maintenance. can provide a ready source of loans for maintenance and equipment replacement. SB 25 allows revenues HB 655 repeals language |Same as HB 655. to be deposited direct- |in SB 25 which allows ly into the Power the Power Development Development Fund with- |Fund to be treated as out appropriation. a dedicated fund. The intent of the The blackmail clause is |Same as HB 655. blackmail clause is to |repealed. require a 10% return on projects if the Legislature does not appropriate $5 billion to the Power Development Fund by July 1, 1986. According to SB 25 the |The section which con- jSame as HB 655. Legislatures ability to |tains these conditions reappropriate funds to jis repealed. other projects is sub- ject to certain condi- tions. The Attorney General advises that these conditions are not constitutional. ALASKA POWER AUTHORITY 333 WEST 4th AVENUE - SUITE 31 - ANCHORAGE, ALASKA 99501 Phone: (907) 277-7641 (907) 276-2715 July 10, 1981 Honorable Jay S. Hammond Governor Pouch A Juneau, Alaska 99811 Dear Governor Hammond: As per your request, I am submitting the Board's comments on SB-25 and SB-26. While we are disappointed with the realignment of the Board, we would urge that the new Board members be appointed early on so that the transition can take place as efficiently as possible. We would further recommend that as many as possible of the existing Board members be retained to insure continuity. The Legislature has chosen to establish a program that will not only insure project financing, but one which will distribute some of the state's wealth back to the people. This is a policy decision for which the Board has no official response. Individually, of course, I am sure that each of us has strong opinions. Given the various ways in which the subsidies could be made, the Energy Program for Alaska appears to be the most equitable at least for those communities that choose to participate. The level of appropriation would indicate that roughly 90% of the State's population would be benefiting from the program by the mid-1990's. We feel, however, that if the State is going to own the various projects being contemplated that the benefits should be distributed to all Alaska rather than to those directly receiving power from the projects. Thus, legislation should be submitted next year to more equitably distribute the power benefits. The bill also provides a means to finance the next generation of projects through the revenue bond market by using the future revenue generated by presently contemplated projects to secure future financing. This has significant value to the State in the future when oi] revenue may be on the decline. Also contained in SB-25 are amendments to the Power Cost Assistance Program. In our opinion, the amendments, while significantly increasing the subsidy and thus decreasing the cost of energy, only make the already inefficient rural utility systems worse. The subsidy should be applied only against power production costs, not total costs. The following discussion presents a more comprehensive statement of the Board's perspective of the major components of SB-25. The cost of energy derived from renewable resources such as hydropower is generally perceived by the public as being quite cheap, and hence ALASKA POWER AUTHORITY Honorable Jay S$. Hammond -2- July 10, 1981 desirable irrespective of financing terms. In fact, because of the capital intensive nature of hydropower, its very viability is almost solely dependent on the terms of financing. On the other end of the spectrum is the very low capital cost internal combustion generation, which is characterized by gas and diesel fired generation in which the cost of energy is heavily dependent on the present and future cost of fuels and is virtually insensitive to the cost and terms of financing. In between this range is coal fired generation whose cost of energy reflects moderately high capital costs but relatively low fuel costs. In trying to decide which type of generation is the most economical, the Alaska Power Authority has established a procedure which compares the cumulative net present worth of costs of various energy alternatives available to a community or region. The main ingredients of the analysis are the investment costs of the various alternatives, the "real" cost of money, present and projected fuel costs, and present and projected operation, maintenance and replacement cost. Budget and Management has reviewed and endorsed this method of analysis. The analytical process is complicated by the the potential for surplus power from any particular project and by uncertainties in the future growth of energy demand. Once an analysis of energy alternatives has been completed for a region, it would seem, environmental issues aside, that the optimum choice should be clear. However, in fact the choice often is muddled. First, if conventional financing is unconditionally available, the project which is clearly superior from an economic standpoint might actually result in energy which is initially more costly than the second best alternative. This is often the rule rather than the exception with hydropower in Alaska. Thus, even if financing is available, during the early years of a hydropower project, the consumers may not be able to afford it, may not use it and could default on the debt to the detriment of the investor and credit ratings in the state. Second, as a result of the situation mentioned above, financing would probably not be available for the most economic alternative, and hence a community would have to opt for the more financially secure but economically inferior thermal alternative. In fact, this is the very problem which every single hydropower project in Alaska faces. There is not a single project presently being studied or under construction in the state which could be financed through the revenue bond market without some additional security being added by the local, state or federal government. In recent times, the project which required the least additional security to insure financing was Green Lake which had almost 20% of the capital cost financed by a low interest subordinate state loan with deferred in- terest. Given the interest rates that presently prevail, it is doubtful that the same level of state assistance would be sufficient to secure Green Lake financing today. ALASKA POWER AUTHORITY Honorable Jay S. Hammond -3- July 10, 1981 Realizing the need for additional security required for successful financing of the various projects, previous legislatures required that the Power Authority report on what level of additional security was needed on a project by project basis. This procedure fell apart when high interest rates made the early year cost of power from these projects unpalatable even with substantial commitments of state funds. In addition, each project might require a different level of state assistance depending on the economic strengths of the communities and size and costs of the projects. Thus, since prior legislatures and the administration had established the precedence of providing the state security at a subsidized rate, the anticipated inequitable distribution of funds from one project to the next would result in an inequitable distribution of the states wealth. Many communities which do not have an economically feasible renewable resource available to them would receive no share of the state subsidy. Given this situation, both the legislature and the administration attempted to establish a blanket financing program that would be equitably applied throughout the state. However, the objective of establishing a program that would insure power project financing became lost in the desire to use the program to distribute a portion of the states wealth back to the general public. The policy decision to use hydropower to distribute a portion of the state's wealth is an interesting one with many complex considerations. From a money management standpoint, the issues of "leveraging", arbitrage, cash redistribution, higher taxes, and higher cost power are weighed against cheap power and its benefits to the economy and its impact on energy conservation. Regardless of the various considerations, SB-25 and SB-26 were passed by the legislature and are now under consideration by the Administration. SB-25 establishes a program whereby $5 billion would be appropriated by the state to invest directly in a number of power projects state-wide with benefits from these projects being spread equally to those communities participating in the program, and ultimately with no revenue return to the general fund. SB-26 appropriates in excess of $400 million to initiate the intent of SB-25. The following is a review of the two bills and presents more detailed opinions on some of the policies established: ALASKA POWER AUTHORITY Honorable Jay S. Hammond -4- July 10, 1981 SB-25: An Act relating to energy projects and programs of the Alaska Power Authority This bill addresses four principal areas, including: (1) Establishment of a "Rural Electrification Revolving Loan Fund"; (2) Establishment of an "Energy Program for Alaska"; (3) Amends the "Power Production Cost Assistance Program"; (4) Realigns the Board of Directors of the Power Authority. (1) The Rural Electrification Revolving Loan Fund is established to make loans to utilities certified by the Alaska Public Utilities Commission for the purpose of extending new electric service to areas presently not served by central generation. Terms of the loans are two percent interest rate with variable terms for repayment of principal. This program appears to be aimed at replacing the Federal REA program which is presently being phased out. While the concept of distributing the states wealth through subsidized loans may be an acceptable policy, this particular program does not insure an equitable distribution of state funds. However, this is no different than agricultural loans, fishery loans, and other programs attempting to broaden social and economic development in rural areas. SB-26 appropriates $6.5 million to capitalize this loan fund. (2) The Energy Program for Alaska established the Power Development fund from which projects may be studied, designed, constructed or acquired by the Power Authority. Projects would be owned by the state. Only economically feasible projects could be developed under the program, and, like the states oi] wealth, the benefits from these projects would be spread equally among those participating in the program. Appropria- tions to the fund would be invested by the Department of Revenue. In the event there are insufficient funds appropriated to complete construc- tion of a project, the Power Authority may issue completion bonds. On the other hand, surplus appropriated funds for a specific project lapse back to the general fund. Operation of the projects would be performed where possible by local qualified utilities. If by July 1, 1986 $5 billion has been appropriated to the fund, the Power Authority would collect revenue from the projects sufficient to pay operation, maintenance, Bond Dept Service and normal safety inspections. Should such funding not be available the Power Authority would set rates to generate revenue to earn a 10 percent return on the states investment. ALASKA POWER AUTHORITY Honorable Jay S. Hammond -5- July 10, 1981 Assuming the program is fully funded, the cost of power from the projects would be uniform and would eventually benefit roughly 90% of the states population. Given the dearth of economically feasible projects available to the remainder of the states population, the state would have to rely on continued funding through the Power Production Cost Assistance Program to insure an equitable subsidy state-wide. It was the Board's understanding that the benefits from the hydro development program would indeed be spread equally throughout the state regardless of geographic location of the projects. Without this tie in, there will be an effort by all communities to attain a power project regardless of economics. This is an unfortunate situation. Legislation should be introduced next session to insure that all state residents benefit from this program; not just those that are fortunate to have an economically feasible project close by. Regarding the basic policy of insuring a uniform rate from all of the projects, if it is the policy of the state to use hydro to distribute a portion of the states wealth, then the uniform rate is probably the most equitable. While the program may very well help to accomplish the objective of stimulating the economy, it may have a negative impact on energy conservation in that the cheap power will minimize the economics of conservation. In fact, however, the long lead time needed to bring the various projects on line, coupled with mandated building standards which require certain energy conservation measures, should help to alleviate any disincentives that might accrue to conservation as a result of the program. Ironically the "cheap power" benefits and costs argument would occur at some point in time no matter what the terms of financing. Even if the projects were financed at 12% interest rate, so long as the cost of thermal generation continues to follow inflationary trends, the cost of the hydro would become comparatively cheap at some point in time and consequently would result in the same benefits to consumers and disincentives for conservation that this program will create during the next decade. While it is the Board's opinion that the Energy Program for Alaska will accomplish many worthwhile social goals, hydropower in general does not need a long term subsidy for distribution of benefits. This is obvious in cases throughout the lower-48 in which conventional financing has been used to finance hydropower projects resulting in high early year costs, but comparatively very cheap power over the long run. The Pacific Northwest and Tennessee Valley areas are good examples. In recognition of this, it may very well have been more appropriate for the state to have enacted a program where a graduated equity return would be achieved which would still insure that projects are constructed and that relatively low cost power is available in the near term and the ALASKA POWER AUTHORITY Honorable Jay S. Hammond -6- July 10, 1981 distant future. This would also have insured that the state treasury would receive a greater return in the future when oil revenue starts to decline. This basic concept was introduced in the legislature during the last session in the form of SB-27. The basic ingredients necessary to accomplish such a goal are contained in SB-25. A significant benefit of SB-25 which should be mentioned is its provision for using the financial strength of the state funded program to secure debt financing in the future. Thus, even though the present program is aimed at foreseeable projects, the commitments made by the state in these projects will help secure the next generation of energy development through the private money market as needed. This alone could be one of the greatest benefits of the program. (3) The Power Production Cost Assistance program has been amended to the Power Cost Assistance program. The previous program insured that the state would subsidize a portion of the cost of producing energy above an arbitrary ceiling. The program has now been expanded to insure that the state subsidizes 95% of the total cost of electricity above 12¢/kwh and below 45¢/kwh for the first 600 kwh of electricity consumed. The policy of subsidizing total cost rather than power production cost is a poor practice. Once a utility reaches the threshold of 12¢/kwh, the state has virtually given a blank check to the utility to add to its staff at will and to expend state funds for imprudent transmission and distribution systems with state oversight only exercised through the Public Utilities Commission. The program should either be amended to include only power production costs or to have the state pick up a significantly smaller portion of the costs between 12¢ and 45¢/kwh. This new program exacerbates efforts to increase efficiency in high cost rural areas of the state. (4) SB-25 realigns the Board of Directors to include four public members and three private members. While we strongly oppose this measure, we view it as inevitable. The present Board has been very responsive to public needs and has been quite willing to invest its time to serve in formulating the states energy development policy. The Board has taken its job seriously and has made a significant positive contribution to the state. The Power Authority has been able to screen out inferior projects and has insured that only those that are economically feasible and environmentally sound are brought forward for consideration. While our time has been limited we have endeavored to be efficient and concise in providing management both policy and direction. Given the magnitude of the job which is encompassed in SB-25 and SB-26, it is more imperative than ever that the new Board be appointed early on and that it adjust quickly to the magnitude of the program at hand. We would encourage the new Board to make definitive decisions and that each Board member be ALASKA POWER AUTHORITY Honorable Jay S. Hammond -7- July 10, 1981 given the authority to exercise policy decisions both judiciously and expeditiously. In this regard it is important that the new public members fully participate in the decision process and that this not be delegated to their subordinates. Regarding the transitional phase, the necessity to take advantage of the present field season for environmental, geotechnical and surveying purposes necessitates expeditious appointments. In order to provide continuity, it is strongly recommended that as many as possible of the present Board members be retained. SB-26: An Act making appropriations to various state agencies for energy-related programs and projects, and repealing 1980 appropriations for a power project The Board is not aware of all of the projects being funded in this bill, but its non response on any one item should not indicate a negative assessment of that appropriation. The Board is viewing this Bill in the light of SB-25. In this regard, we wonder why some programs fall under the Energy Program for Alaska in some instances while other projects are for grants or loans. There is little consistency. We understand that the legislature appropriated almost full funding for some projects and only partial funding for others. We are sure that your staff is aware of this, and consequently we will generally not comment on the level of funding for individual projects. Those projects in Sec 1 & 2 are economically feasible and worthy of inclusion in the state-wide program. Sec 3. This project would allow wood fired generation from the Alaska Timber Corporation to displace more expensive diesel generation in Klawock and Craig. Ultimately the line would carry Black Bear Lake hydropower to both communities and it permits reserve sharing in the interim. Sec 6. These funds are needed to establish the feasibility of the various projects listed. The funding should not be reduced, however it is possible that some of the funds can be lapsed if the projects prove infeasible. Sec 7. These funds are needed for the initial reconnaissance studies for the communities listed. Sec 8. Funding would be used to complete the Takatz Creek Recon Study. Sec 9. We understand that these funds would be for a detailed investi gation of a Snettisham transmission line that was found to be feasible in a study by the Alaska Power Administration. ALASKA POWER AUTHORITY Honorable Jay S. Hammond -8- July 10, 1981 Sec 11. These funds should be restricted until the viability of the Tazimina project has been established. Sec 12. It is our understanding that this is not a feasible project but that other alternatives in the area may be. Sec 14 and 15 are a result of findings by the Power Authority as a result of a reconnaissance study. A detailed feasibility study should establish which of these projects, if either, should proceed to construction. Sec 22. Under the new Power Cost Assistance program this amount may not be enough. Sec 23, 24 & 25. These were identified as being feasible in our reconnaissance studies. Sec 27 & 28. These appear to be viable technologies whose application should be established in Alaska. Sec 29. This appears to be an economically feasible undertaking. Sec 32 & 34. These appropriations are necessary to straighten out an appropriation from last year. Both sections should remain unchanged. Sec 46(1). We would question the viability of this appropriation given the Terror Lake Project. Sec 46(2)(3) & (4). Valid appropriations. I hope that our comments will assist you in the evaluation of the merits of the legislation. Please call upon me if we may be of additional service. Sincerely, C cH] “C 7: Charles Conway - Chairman Alaska Power Authority CC/jark8 cc: Arnold Espe Thomas Kelly Rober Weeder Commissioner Charles R. Webber Eric Yould ALASKA STATE LEGISLATURE HOUSE OF REPRESENTATIVES RESEARCH AGENCY Pouch Y, State Capitol Juneau, Alaska 99811 (907) 465-3991 May 26, 1982 MEMORANDUM TO: Members of the Conference Committee on HB 9 FROM: Jack ren seargy Research Staff RE: Effect of the Section (h) Debt Service Cap This memorandum was prepared jointly by Kurt Dzinich of the Senate Advisory Council, George Matz of the Division of Budget and Management, and myself. This was done so that the Committee members could review a single set of figures on the impact of Section (h). We have agreed on a reasonable set of assumptions for the power projects being con- sidered and the method of applying Section (h) to the calculation of debt service obligations. 7 Table 1 summarizes the effect of the Section (h) cap on power rates from FY 85 to FY 9N. Table 2 lists the assumptions for the power projects concerning cost, financing, etc., which were used in calcu- lating the figures shown in Table l. Based on these assumptions, Swan Lake and Lake Tyee are the only pro- jects of the four considered which would have debt service costs (shares) high enough to qualify for the cap under Section (h). The cost of the unmet debt service for these projects which would result from the cap would be covered by Solomon Gulch in FY 85 and by Solomon Gulch and Terror Lake from FY 86 through FY 90, Although Bradley Lake would come on line about FY 88 as presently planned, we have not included it because of the uncertainty about financing and other factors. Although the Section (h) cap increases by two percent per year from FY 84 on, in practice the rate ceiling established by the cap would decrease by about 1-2 percent per year because the increase in project power sales would lower the average power rate on which the cap is based. The average rate of increase in annual power sales for the four projects is 3-4 percent. Application of the Debt Service Cap The debt service cap under Section (h) and the allocation of the debt service shortfall resulting from the cap would function as follows: HB 9 Conference Committee Members May 26, 1982 Page 2 The first step is the computation of the average debt service share, expressed as a power rate, for all power projects. This is done by dividing the total annual debt service for all projects by the total annual power sales. For example, in FY 86 the total debt service under our assumptions is $28.3 million and total firm power sales are 220 gigawatt hours, resulting in an average debt service cost per KWH of sales of 12.9 cents. The debt service cap in FY 86 as provided in Section (h) would be 106 percent of this amount, or 13.6 cents. The debt service cost for Swan and Tyee would be reduced to this level (13.6 cents) under Section (h). A debt service shortfall results from the reduction of debt service costs for Swan and Tyee -- $5.8 million in FY 86. Therefore, it is necessary to allocate this shortfall among the remaining projects -- Solomon Gulch and Terror Lake -- in order to ensure that the debt service costs for all projects will be met. The debt service shortfall is allocated according to the following formula: Project Investment Total Investment in (times) Shortfall (divided by) Project Projects not "Capped" Amount Sales (i.e. Solomon and Terror) This calculation results in the additional cents per KWH which must be added to Solomon and Terror in order to recoup the debt service shortfall. FY 86 example for Solomon Gulch: $1.28 million div. by 41 GWH = $45 million = .22 X $5.8 million $205 million 3.1 cents/KWH TABLE 1 DEBT SERVICE COSTS UNDER SECTION (h) LIMIT (Cents Per KWH) _ FY 1985 _ _ FY 1986 4 EY 98, FY 1988 FY 1989 LL Evi 2990 Without “with Power Project Limit Limit Limit Limit Limit Limit Limit Limit Limit Limit Limit Limit Swan Lake 13.0 10.5 20.8 13.6 19.9 13.5 18.9 13.3 18.0 13.1 17.2 12.9 Lake Tyee 14.8 10.5 24.8 13.6 24.2 13.5 23.6 13.3 23.0 13.1 22.5 12.9 Solomon Gulch 4.4 9.5 7.6 10.7 7.6 10.6 7.6 10.5 7.6 10.4 7.6 10.3 Terror Lake N/A N/A 9.3 13.2 9.0 12.6 8.6 11.9 8.3 11.4 8.0 10.8 Average Share 10.1 12.9 12.5 12.0 11.7 11.3 Share Limit (Cap) 10.5 13.6 13.5 13.3 13.1 12.9 Debt Service $0.4 $5.8 $5.6 $5.3 $5.1 $5.0 Shortfall ($Mil lions) TABLE 2 HYDRO PROJECT ASSUMPTIONS USED IN TABLE 1 (Millions of Dollars) Power On Amount Original Prorated First Year Firm Line Total Project Debt Debt Project Debt Power Sales Annual Hydro Project Date (FY Cost Financed Service Share Service GWH Energ Swan Lake 1985 $100 $25 $4.3 24% $6.8 31 85 Lake Tyee 1985 110 35 6.0 27% 7.6 30 127 Solomon Gulch 1983 45 0 0 11% 3.1 41 41 Terror Lake 1986 160 105 18.0 38% 10.8 116 129 $415 $165 $28.3 100% $28.3 ALASKA STATE LEGISLATURE HOUSE OF REPRESENTATIVES RESEARCH AGENCY Pouch Y, State Capitol Juneau, Alaska 99811 (907) 465-3991 May 28, 1982 MEMORANDUM TO: HB 9 Conference Committee Members FROM: Jack Krei eK Research Staff RE: Effect on Power Costs of Debt Service Cap Escalation Rates Representative Rogers requested for the conference committee an analy- sis of the effect of replacing the 2 percent annual escalation factor in the Section 44.83.398(h) debt service cap with higher escalation factors. This request was prompted by concern that a statutory 2 per- cent annual increase in the cap would result in an actual yearly decrease in the cap level in terms of cents per KWH (based on the assumptions listed in the May 26 memorandum). This decrease results because yearly increases in total power sales for all projects cause the average debt service power rate to decline faster than the cap in- creases. In order to obtain an actual rate of increase of 2 percent per year in the debt service cap, it appears that a statutory rate of about 7 percent per year would be required. A 4 percent statutory rate would result in an actual cap that is nearly constant from FY 86 to FY 90. The cap would decline by about 1.5 percent per year with the current 2 percent annual increase. The attached tables show the effect of 4, 6, and 7 percent escalation rates on debt service power costs for the years FY 85, 86, 88, and 90. The effect on power rates is greatest in FY 90. In contrast to the FY 90 debt service cap of 12.9 cents per KWH shown in the previous memo for a 2 percent increase, the 4 percent increase results in a cap of 14.5 cents, 6 percent yields 16.0 cents, and 7 percent has a cap of 16.8 cents. The increase in the cap for the Swan and Tyee projects at these higher escalation rates results in correspondingly lower costs for Solomon Gulch and Terror Lake, because of the lower debt service shortfall. Additional Considerations The Bradley Lake project has not been included in this analysis because of the uncertain financing of the project. However, it is important to note that the project would affect the affect the results of the debt HB 9 Conference Committee Members May 28, 1982 Page 2 service cap and the rate of escalation of the cap. Based on current information, it appears that if the project is about 50 percent debt financed, no significant change in the average power costs for all projects would occur. A higher proportion of debt financing could cause an increase in power costs, with reduced power costs if direct appropriations funded most of the project costs. Bradley Lake would reduce the power costs for Solomon Gulch and Terror Lake by absorbing a large share of the debt service shortfall for Swan Lake and Lake Tyee under the debt service cap. An additional effect of the Bradley Lake project is that the statutory annual escalation rate for the debt service cap would more closely match the actual rate of increase in the cap, in terms of cents per KWH. This is because the difference between the two rates is caused by the growth in annual power sales for all power projects. Bradley Lake will be fully utilized from the outset and would provide nearly two- thirds of the total power sales for all projects (until Susitna). Therefore, the average growth rate in power sales would drop substan- tially when Bradley Lake came on line. The significance of this point is that a lower escalation factor would be needed to provide a 2 percent annual increase in the debt service cap after Bradley begins operation. JK:dp Attachments TABLE 1 DEBT SERVICE COSTS WITH A 4 PERCENT ANNUAL CAP INCREASE (Cents Per KWH) FY 1985 FY 1986 _ FY 1988 FY 1990 Without “With Without “With Without “With Without “With Power Project Limit Limit Limit Limit Limit Limit Limit Limit Swan Lake 13.0 10.9 20.8 14.4 19.9 14.4 =18.9 14.5 Lake Tyee 14.8 10.9 24.8 14.4 24.2 14.4 23.6 14.5 Solomon Gulch 4.4 8.8 7.6 10.4 7.6 10.1 7.6 9.6 Terror Lake N/A N/A 9.3 12.9 9.0 11.5 8.6 10.2 Average Share 10.1 12.9 12.5 12.0 Share Limit(Cap) 10.9 14.4 14.4 14.5 Debt Service $1.8 $5.3 $4.6 $3.8 Shortfall ($Mil lions) TABLE 2 DEBT SERVICE COSTS WITH A 6 PERCENT ANNUAL CAP INCREASE (Cents Per KWH) _ FY 1985 FY 1986 ___ FY 1988 FY 1990 Without “With Without “With Without With Without With Power Project Limit Limit Limit Limit Limit Limit Limit Limit Swan Lake 13.0 11.3 20.8 15.2 19.9 15.6 18.9 16.0 Lake Tyee 14.8 11.3 24.8 15.2 24.2 15.6 23.6 16.0 Solomon Gulch 4.4 8.3 7.6 10.2 7.6 9.6 7.6 9.0 Terror Lake N/A N/A 9.3 12.5 9.0 10.9 8.6 9.5 Average Share 10.1 12.9 12.5 12.0 Share Limit(Cap) 11.3 15.2 15.6 16.0 Debt Service $1.6 $4.8 $3.8 $2.7 Shortfall ($Millions) TABLE 3 DEBT SERVICE COSTS WITH A 7 PERCENT ANNUAL CAP INCREASE (Cents Per KWH) FY_1985 _ _ FY 1986 _ FY_1988 Fy 1990 Without “With Without “With Without “With Without “With Power Project Limit Limit Limit Limit Limit Limit Limit Limit Swan Lake 13.0 11.5 20.8 15.6 19.9 16.2 18.9 16.8 Lake Tyee 14.8 11.5 24.8 15.6 24.2 16.2 23.6 16.8 Solomon Gulch 4.4 7.9 7.6 10.0 7.6 9.4 7.6 8.7 Terror Lake N/A N/A 9.3 12.3 9.0 10.7 8.6 9.2 Average Share 10.1 12.9 12.5 12.0 Share Limit(Cap) 11.5 15.6 16.2 16.8 Debt Service $1.5 $4.5 $3.4 $2.1 Shortfall ($Millions) STATE OF ALASKA / “= OFFICE OF THE GOVERNOR POUCH AM JUN. BUDGET & MANAGEMENT PHONE 1907) 4 “es2213 November 24, 1982 Mr. Charles Q. Conway, Chairman 2481 Belmont Drive Anchorage, Alaska 99503 Re: Alaska Power Authority Proposed Procedure, Legislation and Financing Dear Chuck, I want to complément the staff for their efforts in- presenting the Board with proposed: 1) Policy and Administrative Procedures, 2) Revisions to the Energy Program for Alaska Legislation, and the 3) Plan of Finance. This effort represents a definite step in the right direction. However, I do have some concerns that I want to convey to the Board. Staff proposals include a wide range of changes, from minor technical amendments to major policy revisions. Some of the changes are definitely needed, some have little significance and others will not, in my opinion, serve the best interests of the State. I do not believe that the Board should, at this time, take any formal action on these proposed changes for two reasons: 1. The Sheffield transition team has specifically requested that the Hammond administration not take any significant action before December 6 without their review. 2. Despite specific instructions by the Board to initially bring all legal matters to the Department of Law , they were not invited to participate in the "working group" nor did they receive a copy of the proposed legislation without request. I tend to think that the Department of Law's view on some of the substantive procedures and legislation may be different than the working group. The Board should have benefit of the Department of Law's review of these proposals before taking any action. In addition to the recommendations stated above, I specifically question a number of the proposals. The proposals that I am most concerned with are listed below. Attached is a more complete analysis of the proposals with November 24, 1982 nm ' Mr. Conway, Chairman - asterisks next to those proposals which I am most concerned with. The organization of the memo corresponds to the organization of the proposals. It should be noted that the section numbers for the legislative amendments correspond to the first draft received by the Board. Budget and Managements review was without benefit of participating in the “working group" despite statutory requirements for such cooperation. Consequently our understanding of some of the background information or the implications may not be entirely consistent with that of the APA staff. Hopefully, better cooperation in the future will alleviate such problems. Specific Concerns I Policy and Administrative Procedures Statutory Matters and Regulations - The Board should play a more active role in setting goals and objectives for staff. This procedure should be modified accordingly. Long Range Financial Plan - Here again, the Board should take a more active role in establishing policy guidelines for staff to follow. This procedure should be modified to require a policy discussion by the Board before the staff develops project specific or systemwide financial plans. Professional Services Contracts - Reconnaissance and feasibility study RFP's provide the Board some of the best opportunities to provide policy input to the project development process. To assure that this opportunity occurs, it would be reasonable to have the Board approve each RFP before it is released to consultants. After such approval, I foresee no problem with delegation of the actual contract approval process. Project Licensing and Design Decisions - I recommend against this proposed procedure. The Board needs to have independent review of a project before it endorses the feasibility study. Also, the Board should discuss what feasibility criteria should apply to smaller projects (generate 1.5 MW or less or transmission/distribution systems costing less than $3,000,000). Delegation of Authority - Generally speaking, the proposed procedures delegate too many key decisions to the staff. The Boards decisions would be too iate in the process to alter staff decisions without writing off significant expenditures for studies and the constituency momentum which would develop. II Energy Program for Alaska Legislation Section 5 and 9. More explanation is needed regarding the change from "shall" to "may". If the purpose of these sections is to reduce the obligation of the utility and the consumer to cover project costs, the proposed amendments are not desirable. Also bond covenants should be consistent with existing legislation. If not bond covenants could co-opt legislative intent. Mr. Conway, Chairman -3- November 24, 1982 Section 8. I recommend against this amendment. If a FERC license application can be submitted before legislative approval of the project, the significance of the apprcval is diminished. If the feasibility study is properly done, it should provide the legislature with sufficient information for making a decision. Section 10. Reducing the opportunity for public participation contradicts expressed public policy. The Alaskan public has consistently expressed an interest in knowing what is going on in government. I recommend dropping this proposed amendment. Section 15. I see no justifiable reason to provide the APA with an opportunity to establish an investment fund. Project appropriations should be left to elected officials not agencies, particularly those which are attempting to limit their exposure to public accountability. Consequently I recommend against this proposed amendment. Section 17. I recommend against this section for the simple reason that the APA needs more checks and balances not more autonomy. Allowing the APA to assume ownership of projects built with state funds will ultimately lead to a situation where project financing can be accomplished without legislative involvement. These are public projects and they should be subject to the full public approval process. Section 24. I strongly recommend against repealing AS 44.83.186 and 44.83.384(b). Both sections are essential to assure that construction cost estimates are realistic and projects are economically feasible. Frankly, I am surprised that the APA staff would recommend that project feasibility requirements be relaxed and state equity and security in a project be increased when, in a few years, state revenues will be dropping. III Plan of Finance Objectives - Including objectives is a good move but the objectives given leave a lot to be desired. First of all, there seems to be little correlation between the objectives and the regulatory purpose for the Plan of Finance (3 FAC 94.065) which is "to identify the most appropriate means to achieve the lowest cost elective power for consumers while minimizing the amount of State assistance required." Also, some of the objectives are conditions rather than objectives. Security - It appears that the Plan of Finance may have focused more on the concerns of the bondholders than on the concerns of the State. Despite a statutory mandate, there is no information which presents what the cumulative fiscal impact will be on the State if the Plan of Finance is accepted. Also, the likelihood of the State being able to provide this level of funding is not considered. Without this information one could be obligating long term expensive commitments which may cause a great deal of Mr. Conway, Chairman -4- November 24, 1982 financial difficulty or may not be met at all. Finally, the retained coverage account raises certain legal questions that need to be answered. I recommend that no action be taken regarding the proposed security arrangements until the Board has information on the full fiscal impact to the State. One again, I want to emphasize that the staff proposals are a step in the right direction. These are important issues and staff proposals have served as a catalyst towards Board action. With further information and the Department of Law's review, the Board should be able to make sound decisions regarding the merits of the proposals. Sincerely, “Rn Ub: Dr. Ronald D. Lehr Director c.c. Board of Directors Eric Yould