HomeMy WebLinkAboutAEA Board Meeting Sep 2019
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REDUCING THE COST OF ENERGY IN ALASKA
Alaska Energy Authority
BOARD MEETING MINUTES
Wednesday, September 18, 2019
Anchorage, Alaska
1. CALL TO ORDER
Chair Pruhs called the meeting of the Alaska Energy Authority to order on September 18,
2019 at 10:04 am. A quorum was established.
2. ROLL CALL: BOARD MEMBERS
Members present: Chair Dana Pruhs (Public Member); Vice-Chair Bernie Karl (Public
Member); Julie Anderson (Commissioner DCCED) (arrived 10:40 am); Bill Kendig (Public
Member); Greg Samorajski (Deputy Commissioner DOR), Albert Fogle (Public Member);
and Julie Sande (Public Member).
3. ROLL CALL: STAFF, PUBLIC
Staff present: Curtis Thayer, Bryan Carey, Brenda Applegate, Kirk Warren, Tim Sandstrom,
Linda Senn, Amy Adler, Betsy McGregor, Lex Sargento, Karsten Rodvik, Brandy Dixon,
Ashton Doyle, Terrence Cato (AEA); and Max Garner (Attorney General’s Office).
Others present: Ladonna Lindley (Accu-Type Depositions); Jerry Juday (Department of
Law); and Jim Gallagher (HDR).
4. AGENDA APPROVAL
Curtis Thayer, Executive Director, requested to move Item 8. after Item 9L. There was no
objection.
MOTION: A motion was made by Mr. Kendig to approve the agenda with the
amendment to move Item 8. after Item 9L. Motion seconded by Mr. Fogle.
The motion to approve the agenda with the amendment to move Item 8. after Item
9L. passed without objection.
5. PUBLIC COMMENTS - None.
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6. PRIOR MINUTES - August 7, 2019
MOTION: A motion was made by Mr. Kendig to approve the Minutes of August 7,
2019. Motion seconded.
The motion to approve the Minutes of August 7, 2019 passed without objection.
7. NEW BUSINESS
7A. Power Cost Equalization Endowment Fund Sweep Memo
Chair Pruhs expressed congratulations and appreciation to Mr. Thayer and staff for the new
boardroom. He believes it will provide easier access to the public and looks brighter. Mr.
Thayer highlighted the efforts of Terrence Cato, IT, and Lex Sargento, Procurement, in
finalizing the boardroom preparations. It is a work in progress.
Mr. Thayer reviewed the included Power Cost Equalization (PCE) Endowment Fund Sweep
Memo written by Brenda Applegate, Chief Financial Officer. In FY20, due to the reverse
sweep legislation, AEA anticipates a reversal of the FY19 transactions on the statement of
net position, resulting in a reduction of the liability, and an increase in net position. The
statement of activities reflects a transfer from the Constitutional Budget Reserve Fund
(CBR) consistent with the Department of Law opinion that the PCE Endowment Fund is
subject to sweep. Mr. Thayer anticipates a sweep transaction to occur on June 30, 2020,
which would create entries similar to those reported on June 30, 2019, adding a liability to
the CBR and reducing the net position. If the reverse sweep is passed in the FY20 sweep,
these entries will be reversed on July 1, 2020. Mr. Thayer explained AEA’s financials are
viewed differently because of these postings. The memo clarifies the ongoing work with
the auditors and the information that will be posted in the financials.
Chair Pruhs asked if the transaction is a net zero effect. Ms. Applegate explained the cash
will remain on the balance sheet because the cash did not get swept at June 30. There will
be a liability shown on the balance sheet to the CBR for the sweepable amount. The
sweepable amount is not necessarily the same as the cash balance amount. It is not a
complete offset. Showing the CBR liability on the books is a new process and is different
from previous years. A transfer-out will occur as an expense on the income statement at
June 30, 2019. On July 1, 2019, the entry will be reversed due to the reverse sweep
legislation that was passed. The liability will be reversed as a transfer-in and will show the
funds have come back in from the CBR.
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Deputy Commissioner Samorajski does not agree the net position should be reduced. He
noted the asset remains intact and the net position should remain the same amount. Ms.
Applegate explained the effective date of the reverse sweep legislation is July 1; the first
day of the next fiscal year. There cannot be a receivable until the legislation is effective.
Vice-Chair Karl believes the original intent of the Legislature was to permanently secure
the PCE funds. Mr. Thayer agreed to that intent, however, the constitution prohibits
dedicated funds, and the PCE funds are viewed as dedicated funds. Vice-Chair Karl
suggested Jerry Juday, Department of Law, assist in finding a permanent solution to work
around this issue. Mr. Thayer informed discussions have occurred with Legislature Audit
Finance, Division of Finance within the Department of Administration, and with AEA’s
auditors regarding addressing this issue. Ms. Applegate stated she will update the Board if
any changes to the process occur. Mr. Thayer explained the first tranche of earnings goes
to the PCE. The second tranche of earnings goes to public assistance for communities,
which is administered by the Department of Commerce. Additional earnings go to different
funds within AEA.
Chair Pruhs believes it would be beneficial to evaluate and appraise at replacement value
the Bradley Lake Dam and the Intertie at date-certain intervals. He suggested the asset
values can then be included in the financial statements as a footnote. Ms. Applegate agreed
the information can be included in the footnotes.
Vice-Chair Karl asked for the rate of return on the PCE fund last year. Mr. Thayer stated he
will find out the rate of return and provide the information to members. He advised there
was $60 million in PCE revenue last year, which is 6%.
Deputy Commissioner Samorajski commented the Department of Revenue (DOR), by
statute, makes the asset allocation decisions for the different funds. He believes the DOR
would be open to comments from AEA staff as to an appropriate asset allocation. Mr.
Thayer is agreeable and advised no conversations regarding asset allocation have
previously occurred.
9. DIRECTOR COMMENTS
9A. AEA Organization Chart
Mr. Thayer reported Chair Pruhs requested staff discuss and provide the AEA Organization
(Org) Chart. Mr. Thayer informed AEA is required to provide the Org Chart to the
Legislature every quarter. He will submit the current Org Chart to AEA members at the
meeting prior to the end of each quarter. Mr. Thayer reviewed the major components of
the Org Chart dated 9/4/19; AIDEA, AEA, Shared Services, and vacancies. He gave a
detailed comparison and review of the current structure compared to the Org Chart dated
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12/31/18. AEA’s current PCN count is 30 people, including vacancies. AEA is actively
recruiting for a Project Manager, a Rural Electric Utility Worker, and an Administration
position. Mr. Thayer advised the Chief Operating Officer and Director of Planning and
Programs positions will purposefully remain vacant.
Ms. Sande requested additional information regarding the vacancy rate and what is typical
for AEA. Linda Senn, HR Director, informed AEA typically has a high turnover rate between
20% and 25% each year.
Chair Pruhs suggested the Board conduct a work session to discuss Shared Services. Mr.
Thayer agreed and noted Shared Services is an ongoing consideration with Tom Boutin,
Executive Director of AIDEA. There was support from the Board regarding scheduling a
work session before January.
Ms. Sande inquired as to the length of time it takes to fill positions. Ms. Senn expressed
challenges in filling positions because of talent drain to the Lower 48. The State is also
competing with the private sector for talent. She discussed other issues to the hiring
process, including screening out unqualified applicants.
Vice-Chair Karl asked for the estimated cost of hiring a new employee. Ms. Senn explained
each position is different, but the general range is about a salary’s worth of cost. The hard
costs are advertisement costs and occasional travel costs to fill upper level positions. AEA
places effort on hiring Alaskans.
Mr. Fogle asked if exit interviews are conducted, and if so, can Ms. Senn provide an
overview of some of the reasons for the consistent high turnover. Ms. Senn noted the
general leadership change every few years seems to result in self-select employee turnover.
Mr. Fogle requested a poll of the long-term employees to determine their reasons for
continued employment.
Deputy Commissioner Samorajski asked if outside hiring agencies are utilized. Ms. Senn
informed outside hiring agencies are currently used for temporary contract positions. In
the event hiring becomes an onerous time constraint, an outside recruitment organization
would be utilized for support. Temporary agencies may also be used for new projects if the
PCN vacancies are not able to be filled in a timely manner.
9B. Status of Subrecipient Grant Closeout
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Mr. Thayer advised the issue of outstanding grants was identified. Staff is working to
remedy the process. As of August 1, 2018, there were 102 grants outstanding that should
have been closed. The value is over $100 million of grants that had not been fully closed
out. Some of the grants are four years old. Mr. Thayer reviewed the grant closeout process
and highlighted the unresolved training problem with double-entry in the system. He
advised 57 of the 102 grants have been closed out to-date, 33 more grants are pending
close-out within 30 days, and 26 are actively working on close-out. The unexpended funds
total approximately $4 million, which would be directed back to the Renewable Energy
Fund, bulk fuel upgrades, rural power system upgrades or alternatives, or returned to the
State general funds, depending on the type of grant it was.
Mr. Thayer made a commitment to the Board to close all of the grants within 60 days and
report back to the Board on the status. The training matter will be addressed during this
process.
Vice-Chair Karl asked why the auditor did not inform AEA of the discrepancy. Mr. Thayer
explained the auditor does not ask the question regarding outstanding grants. Vice-Chair
Karl inquired if safeguards are now in place to ensure future projects get closed out in a
timely manner. Mr. Thayer explained those safeguards are being created and enforced as
policy.
Chair Pruhs commented this matter is a fundamental flaw in management and raises
questions regarding the accuracy of project cost accounting. He requested additional
information regarding the processes in place now to ensure projects achieve final close-out.
Mr. Thayer explained one of the contributing factors is project managers leave employment
and their projects are left open, without reassignment from the division in Shared Services.
Ms. Sande inquired if this is a documentation and accounting process within the system.
Mr. Thayer agreed the projects are closed by the managers, but the projects remain open
within the system. There is no risk of fraud. It is an internal control issue.
Commissioner Anderson apologized for being late to the meeting due to a conflict. She
commented a typical project management structure includes a monthly status report for all
projects, which seems to be missing from the current process. Mr. Thayer advised a
monthly status report has been newly implemented and he receives it directly.
Commissioner Anderson conveyed the seriousness of the matter because of the
unexpended funds that could be redirected.
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Chair Pruhs expressed appreciation to Mr. Thayer and staff for directly addressing and
remedying the situation.
9C. Swan Lake Fire Update
Mr. Thayer reported on the Swan Lake fire. He provided a printed PowerPoint
presentation prepared by Homer Electric Association (HEA) from the recent emergency
meeting of the Bradley Lake Project Management Committee (BPMC). He advised Bradley
Lake is a stranded asset. The Soldotna to Quartz Creek transmission line (SQ Line) has
been damaged in the fire. It has been shut down for most of the summer. HEA has been
able to view the line with only partial helicopter access because of the danger of ash pits
and injuries to fire personnel. HEA has identified approximately 65 structures with 109
poles that need repair. The SQ Line is about 56 miles long and the damage is within
approximately 15 miles of the line.
Mr. Thayer explained Alaska has neither enough replacement poles nor contractors for the
utilities in South Central Alaska accomplish a quick repair of the line. The repairs have to
go through a process, which includes permitting, design, ordering, and construction. The
Bradley Lake dam has been spilling water for about 10 days. It is possible the line could be
out of commission for six months to a year.
Vice-Chair Karl offered his common sense suggestion the utilities continue to run power
through the line and replace the standing poles one at a time after it is safe, but while they
are hot and running power. He believes if there are any problems with the power, the
breakers will break. Vice-Chair Karl noted Bradley Lake would not be spilling water with
his plan, but would be producing power. Vice-Chair Karl asked if HEA is spinning their
turbine or if they are only buying from Bradley Lake. Mr. Thayer understands HEA is still
spinning a turbine and are taking all the power off of Bradley Lake. Vice-Chair Karl
believes AEA should talk with HEA regarding shutting off their turbine. Mr. Thayer advised
AEA can only make recommendations to HEA, but cannot direct outcomes.
Chair Pruhs commented he understood the line was shut down because of the safety of the
fire-fighting crews and not because of the integrity of the system. He asked if efforts have
been made to re-energize the system. Mr. Thayer advised the line was shut down initially
for safety reasons and remains shut down because of possible issues with conductors and
other hardware. AEA does not own nor operate the transmission line.
Chair Pruhs disagreed, and commented the State has invested a significant amount of
money in the transmission line. Chair Pruhs explained AEA has a vested interest in the
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transmission line and to the public regarding the cost of power. Chair Pruhs asked if
Karsten Rodvik, AEA, will deliver a press release informing Bradley Lake is stranded
power. Mr. Thayer does not believe it is AEA’s role to notify the public. Chair Pruhs
disagreed. Mr. Thayer believes it is the utilities’ responsibility to notify their customers of
any additional energy charges because of this fire. Chair Pruhs stated Bradley Lake is a
$500 million public asset that is stranded. The public should be informed with full
disclosure Bradley Lake is spilling water and the power is not being pushed up the railbelt.
Chair Pruhs agrees the utilities should inform customers regarding the economic impact.
Mr. Thayer reported the Anchorage Daily News was in attendance at the public BPMC
meeting. He feels there are too many unknown variables at this stage for AEA to present a
press release. Mr. Thayer assured the utilities are fully engaged in determining the extent
of the problems and how best to resolve them. AEA has a seat at that table.
Mr. Fogle inquired about insurance on the transmission line. Mr. Thayer understands there
is no insurance on the transmission line. Chair Pruhs inquired as to why no insurance
exists. Vice-Chair Karl responded from his experience, and explained utilities typically self-
insure. Utilities typically maintain a reserve account to make repairs. Some of the costs
may be added to the customer’s bill.
Chair Pruhs commented it is unknown which entity is responsible for repairing the
transmission line. Mr. Thayer advised the transmission line has been subject to several
lawsuits. The line was built by HEA. Chugach Electric Association (CEA) operated the line
for 30 years and then gave it back to HEA. However, it is outside of HEA’s service territory.
Mr. Thayer believes this is the time to discern the correct ownership of the line.
Discussions at the BPMC level include possible remedies, such as increasing the size of the
line, upgrading the line, or rebuilding the line. Decisions regarding who participates in the
remedy have to be determined at the BPMC level. At their Board meeting, the BPMC
requested AEA describe its role in this process. Mr. Thayer responded to the BPMC and
asked what role the BPMC would like to see AEA fill. No feedback on the role was defined.
Vice-Chair Karl inquired as to how much energy and dollars are being lost each day due to
this outage and the spillage. Bryan Carey, AEA, informed Bradley Lake is spilling about
1,000 cubic feet per second of water, which is about 2,000 megawatt hours a day, at about
$45 a megawatt hour. This is approximately 1% spillage a day. The gas generation in
Anchorage equates to about $85 a megawatt hour. This difference equals approximately
$80,000 a day. Currently HEA is taking about 45 to 50 megawatts a day.
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Chair Pruhs requested additional information regarding previous spills at Bradley Lake.
Mr. Carey explained previous spills have occurred ranging from a few days up to a week
long. The last spill was in 2014. The previous spillage resulted from storm involvement.
Chair Pruhs asked Mr. Thayer if there is a risk the utilities will not pay the bond. Mr.
Thayer explained the contract is take-or-pay, and the utilities are paying for the water
being spilled. The bonds are being paid as required by the Power Cost Agreement.
Ms. Sande believes AEA has an obligation to share information with rate payers. She asked
for additional guidance on AEA’s position. Chair Pruhs believes AEA has an obligation to
provide this information to the communities. Vice-Chair Karl agreed and believes the rate
payers deserve to have the information. Mr. Thayer is concerned a statement now would
be premature. He believes the full assessment of the damage must be determined before a
public statement can be made.
Discussion continued regarding the obligation AEA has to provide information, as well as
the specifics of the information, and on what timeline to provide the information. No
decision was reached as to what information AEA should provide and when AEA should
provide the information.
Chair Pruhs understands HEA owns the line and the State recently contributed $6 million
for maintenance on the line. It was explained the utilities reimburse HEA for the operating
costs, maintenance and ground clearing, but no funds are paid for capital reimbursement.
Chair Pruhs requested Mr. Carey determine the origination of the capital dollars to
construct the line.
Chair Pruhs requested Kirk Warren, AEA, to comment. Mr. Warren advised the Board is
raising the same questions that are the subjects of the litigation. He reported HEA is
asserting they deserve to be reimbursed for costs for operating a line that serves no
purpose for their members. Mr. Warren understands the Railbelt utilities in the BPMC,
absent HEA, have offered HEA $300,000, plus operation and maintenance, in order to
maintain access to the line. HEA has contended they have no intent of cutting off power
from Bradley Lake power by not using the line. Mr. Warren explained the Supreme Court
has ruled the transmission line does not fall within RCA jurisdiction and is a BPMC matter,
to be handled through the dispute resolution clauses within the Power Sales Agreement of
the Bradley Lake project. Mr. Warren believes this could be an opportunity for the Railbelt
utilities to come together and possibly work out a new ownership structure and alleviate
some of the pressure from the lawsuits.
9D. Audit Update
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Mr. Thayer informed AEA’s financial audit statement is underway by BDO auditors. The
preliminary work is completed and the final audit should be submitted by October 11. A
draft of AEA’s financial statement will be completed by approximately October 15, and final
issuance around October 28. This is on schedule with the timeline of the State’s CAFR. The
grant closeout process matters were discussed with the auditors and will now be included
within their purview.
9E. AEA Website Refresh Overview
Mr. Thayer provided an overview of the updates to the website. There is more information
regarding AEA’s energy planning, project development, and energy technologies, including
all public information on Susitna-Watana. Procurement regulations and opportunities are
available on the site. The format is more user-friendly. Circuit Rider manuals are now on
the site, as well as the processes for grants and loans. The website library is in the process
of being completed. AEA has 1,500 electronic documents that are not yet available to the
public. There are thousands of documents in the hard copy library.
Mr. Thayer informed there was an open house for Board members, members of the public,
and legislators to look at the powerhouses being constructed for rural Alaska. Mr. Thayer
invited Tim Sandstrom, Director of Rural Programs, to review the 360-degree walk-
through of the construction of the powerhouse modules. The 360-degree information is
also available on the website. The 360-degree capability will be a dynamic assistance to the
technical staff on each of the powerhouses. There is the ability to time-stamp different
views. The two modules shown are currently in transport on the water to Port Heiden.
The modules ship well and will reduce the contractor’s time onsite. Each 520 kW module
shipped, delivered, and installed costs approximately $3 million.
9F. Budget Graph
Mr. Thayer advised the process is ongoing with OMB and Department of Commerce on the
budget development for FY20. There is authorization of approximately $42 million, of
which PCE comprises $32 million. AEA has been requested to reduce its operating budget
by 15%. Commissioner Anderson clarified the 15% reduction is a request to reduce the
FY21 operating budget 15% from the FY19 operating budget. Mr. Thayer noted the budget
was held flat in FY20. PCE is a formula funded program and the Governor does not support
a reduction in PCE. Mr. Thayer will continue to provide the Board updates on the budget.
Mr. Thayer informed AEA did not request and did not receive a capital appropriation last
year. AEA will request a $10 million capital appropriation this year from OMB, which can
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be leveraged into approximately $20 million in federal funds to assist with additional bulk
fuel and powerhouses. Chair Pruhs requested Mr. Thayer provide at the next Board
meeting a listing and description of the planned expenditures for the $20 million, as well as
background information for each project chosen. Mr. Thayer agreed and will request
support from the Board at that time.
Chair Pruhs inquired regarding current erosion issues in any of the bulk fuel communities.
Mr. Sandstrom informed AEA is currently watching communities with erosion concerns.
No relocation measures are needed yet. The one erosion-related bulk fuel move occurred
two years ago in Port Heiden. Chair Pruhs requested the Board be provided with the
erosion issue watch list. Mr. Sandstrom agreed.
9G. Chugach/MLP Merger Update
Mr. Thayer requested Mr. Warren provide the update on the merger. The Regulatory
Commission of Alaska (RCA) hearings will resume on September 30, for another two
weeks. Mr. Warren advised AEA intervened in the docket on the acquisition of Municipal
Light & Power (ML&P) by CEA in order to receive discovery request information and
determine how AEA’s assets may be affected by the merger, if at all. After review of the
information, AEA determined the acquisition will result in minimal impacts on AEA’s
assets.
Mr. Warren discussed the economics of the acquisition and the nuances of the negotiations
in front of the RCA. The RCA can accept the proposal as-is, reject the proposal, or possibly
approve the proposal with conditions. The RCA ruling is due November 15.
9H. Denali Commission Update
Mr. Thayer reported the Denali Commission Awards information is included in the Board
packet. AEA has been working closely with the Denali Commission. Since August 1, 2019,
the Denali Commission has provided new matching funding of $5.7 million. The total
Denali Commission funds to-date for 2019 is $16.7 million. Approximately 30% of Denali
Commission’s annual budget is granted to AEA. A meeting is scheduled next week with
Denali Commission regarding anticipated additional funding. The project work executed
undergoes a statewide advertised bidding process. State of Alaska bid contractors get a 5%
bid preference.
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Mr. Sandstrom reviewed the process AEA maintains with the Denali Commission annually
regarding funding procedures for the list of prioritized projects. The projects’ scope,
schedule, and budget are required.
Vice-Chair Karl inquired if the SQ transmission line rebuild could be a project presented to
the Denali Commission for grant monies. Mr. Sandstrom does not believe that is possible
because it is not within the authority of the programs he oversees. Vice-Chair Karl
requested Denali Commission’s Board member information. Mr. Thayer agreed.
9I. AEA Bond Rating
Mr. Thayer discussed for the record the notification dated July 25, 2019 by Moody’s
Investor Service revising the State of Alaska’s outlook to negative from stable, and
affirming the State’s general obligation bond rating at Aa3. The rating on the moral
obligation supported bonds issued by AEA was affirmed to be A2, and the outlook is now
negative. A material events notice was filed with the Municipal Securities and Rulemaking
Board’s website for the Bradley Lake Hydro Project, Power Revenue, and Power Revenue
Refundable bonds, first series, fourth series, and sixth series. The filing is required by
AEA’s continuing disclosure covenants.
Chair Pruhs asked Deputy Commissioner Samorajski for the total amount of money the
State has, including funds like the Permanent Fund and PCE. Deputy Commissioner
Samorajski believes the total would be close to $100 billion. Chair Pruhs expressed his
amazement to the downgrade of a state that has close to $100 billion and a population of
735,000. Chair Pruhs stated his opinion for the record that bond rating agencies like to see
consistent tax revenues from the public. Ms. Applegate agreed bond rating agencies like to
see a tax revenue base.
Vice-Chair Karl asked for an explanation of the effects of the downgrade. Chair Pruhs
explained the cost of money increases. Ms. Applegate discussed if AEA were going to issue
additional rated debt, it is possible AEA would have to pay a more expensive interest rate.
AEA is rated on the State moral obligation. It is the State rating that is impacting AEA’s
bond rating.
9J. Compass Piece
Mr. Thayer informed the Compass Piece included in the Board packet was a creative
committee effort and submitted to newspapers. It was printed in the Anchorage Daily
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News. The focus is on PCE and AEA’s role in Alaska. Other AEA assets are also highlighted
in the article. Mr. Thayer thanked all those responsible for editing input.
Mr. Fogle expressed appreciation to Mr. Thayer for submitting the article. He believes it is
important for AEA to become more evident and visible in the public’s eye regarding
contributions to rural Alaska and to road system communities. Mr. Fogle would also like to
see AIDEA become more visible in the community.
9K. Dashboard and Loan Report
Mr. Thayer reviewed the provided Dashboard and Loan Reports. Chair Pruhs asked if
transmission projects may be considered for Power Project Fund Loans. Mr. Thayer
advised there are currently no transmission loans outstanding. He will research to see if
transmission loans are eligible and will provide the answer.
Mr. Thayer distributed new information regarding the federal congressional delegation
championing legislation waiving EPA emission controls for diesel generators in rural
Alaska. The President is expected to sign the bill.
MOTION: A motion was made by Vice-Chair Karl to go into Executive Session to
discuss confidential and financial information related to Bradley Lake. Motion
seconded by Commissioner Anderson.
Mr. Kendig informed he will not participate in the Executive Session due to a conflict
of interest.
The motion was approved without objection.
8. EXECUTIVE SESSION: 12:11 pm
Discuss confidential matters related to:
8A. Bradley Lake
The Board reconvened its regular meeting at 1:13 pm. Chair Pruhs advised the Board did
not take any formal action on matters discussed while in executive session.
9L. Next Regularly Scheduled AEA Board Meeting Wed. October 23, 2019