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HomeMy WebLinkAboutState of Alaska-General Correspondence 1995MEMORAND idle of Alaska 5 Department of Natural Resources | ” Ofice of the Commissioner A . 2 : De /elopme TO: Marilyn Heiman and Export Auth DATE: November 1, 1995 Special Assistant Natural Resources FILE NO: TELEPHONE NO: 465-2400 aa FAX NO: 465-3886 vely SUBJECT: Alyeska and FROM: 3 Commissioner the Intertie rail A couple of days after the Governor's meeting with the Alyeska Pipeline owners I got a call from Norm Ingram who has been working on the power issue for them. He wanted to clarify a couple of issues about Alyeska's relationship to the intertie. First, under virtually no circumstances will Alyeska purchase power if the intertie IS built. This is because their power system is part of the vapor recovery system and is needed to dispose of the vapors collected from the piping and storage system. In addition, Alyeska believes they can produce power more cheaply than they could purchase it. If the intertie were built Alyeska might hook into it, in order to have a back-up power supply in case something went wrong with their plant, but this is not something that could be considered in the economics of the intertie. Alyeska would consider selling power into the CSVEA system if that made economic sense. This would require somebody building an interconnect between Solomon Gulch and the terminal in order that the power could be wheeled into the system. Alyeska's talking about a selling price of around 13 cents a kilowatt hour but have not made a definate determination on that price. Although I'm not an expert in pricing a wholesale power, that does seem to me to be a little high. However, Alyeska's indicated a willingness to work on that arrangement if people are interested. I believe all of this information has been shared with the consultants which AIDEA has hired. If you have any questions about this let me know. ce: Mike Irwin, Commissioner Department of Community and Regional Affairs = yg SENT BY:DCRA. DOE > 6-16-95 : 12°12 > DUKA UIY ur oycRuI- 2UU BVE veuier 2 Alaska Energy Authority December 21, 1992 | To: Ronald A. Garzini Executive Director - _ | From: Richard Emerman f. (pe Senior Economist Subject: Discount Rate for Project Evaluation \ Requirement | Existing regulations for the conduct of reconnaissance and feasibility studies require’ that the Energy Authority adopt a discount rate for project evaluation each year. 3AAC 94.055 (c)(5) provides as follows: | (S) using a discount rate which represents the estimated long-term real cost of money, the present worth of the cost of each plan over the planning period will be calculated as of the reference date, with adjustment for the economic life of each project; the discount rate or a range of discount rates will be established each year by the authority. not later than July | after consulting with federa] and state energy and budget agencies but may be changed from time to time as economic and financial conditions change or as the authority considers prudent; ; | The Energy Authority Board of Directors most recently considered this subject three years ago, in October 1989. Staff has not committed the time to prepare a new analysis each year because the outlook for real interest rates has remained relatively stable, and because other issues have taken priority. Bac yu The discount rate assumptions adopted in 1989 are as follows: 1) 3.0% for projects that qualify for tax-exempt financing, 2) 4.5% for projects that do not qualify for tax-exempt financing. These are "real" discount rates, representing real interest rates after netting out inflation. ' There are several theories for developing 2 discount rate for public sector project evaluation. However, the language of the regulations effectively narrows the field down to two alternatives: | i 0T0/c00B : X¥d €0:80 6/02/60 SENT BY:DCRA. DOE . PrLOTUD = 12-10 + UA i ur ai oTO/FOOB Ronald A. Garzini December 21, 1992 : Page 2 ! 1) the estimated long-term real cost of money assuming that projects are market: financed with borrowed funds (ie. the interest rate on borrowed funds); i 2) the estimated long-term real cost of money assuming that projects are! financed with State general fund grants or loans (i.e. the real rate of return: that the State would realize from alternative use of its funds). The problem with the second approach is that a consensus does not exist on the rate, of return from alternative use of State funds (i.e. the “opportunity rate of return”). The rate of return on Permanent Fund investments could be estimated, but; investment in the Permanent Fund is not the likely alternative use of funds. The likely alternative use is expenditure far other purposes in the operating or capital budget, but the opportunity rate of return from such expenditure is unknown and, for: all practical purposes, unknowable. As a result, the Energy Authority policy has been to base the discount rate exchusively on the cost of borrowed funds, regardless of the financing approach under consideration for a particular project. It is suggested that if a power project can demonstrate a rate of return in excess of the cost of funds for 100% market financing, then it will have passed a reasonable test of economic feasibility. Methodology To estimate "real" (i.e. inflation adjusted) interest rates, it is necessary to know the nominal interest rate at the time of project financing and also the inflation rate throughout the term of the loan. While this is necessarily speculative, our approach has been to base the estimates of future interest and inflation rates on a broad sampling of professional judgment provided in the publication "Blue Chip Financial Forecasts." The relevant excerpt from the October 1992 issue is attached and includes (on the last page) the following: 1) a listing of the forecasters included in the sample; 2) the average of all forecasts submitted (labeled the "consensus"); 3) the average of the top ten and bottom ten respondents. To represent taxable interest rates for Energy Authority project financing, the 1989 analysis used the “Blue Chip" forecast of Corporate Aaa bond yields. However, further review suggests that this series represents a higher bond rating and a lower interest rate than the Energy Authority is likely to obtain. For example, the Bradley Lake revenue bonds were rated "A" prior to the purchase of bond insurance. While bond insurance raised the rating to Aaa, the insurance premium captures a substantial share of the benefit. The forecast of "A” rated utility bond yields is now recommended as the appropriate series to represent the interest rate available to the eyy zue wee X¥d F0°80 £6/02/60 SENT BY:DCRA. DOE + 6-16-95 «+ 12:15 : DCRA DIV OF ENERGY- ZUb 402 OD0/-% oT0/s00B Ronald A. Garzini December 21, 1992 Page 3 Energy Authority for taxable revenue bond financing. This wil] result in a somewhat higher real discount rate for projects that do not qualify for tax exempt financing. To represent tax exempt interest rates for Energy Authority project financing, the 1989 analysis generated a forecast of bond yields for the Bond Buyer 20-Bond Index, which represents bond yields for highly rated municipal general obligation bonds. Again, further review suggests that the 20-Bond Index represents a higher bond. rating and a lower interest rate than the Energy Authority is likely to obtain for tax exempt revenue bond financing. Asa result, the forecast of bond yields for the Bond Buyer Revenue Bond Index is now recommended as the appropriate series. Analysis Shown in Figure 1 is the "consensus" forecast for the consumer price index as reported through 2002, with the following two modifications: dH the history of the CP] is shown from 1960 to the present; 2) the forecast is extended in the graph through 2010, and is extended beyond 2010 in the calculations to estimate real interest rates on long-term bonds issued over the next several years. Shown in Figure 2 are estimates of nominal bond yields as follows: 1) "A* rated utility bonds. These are taxable bond yields representing the history of "A”-rated corporate utility bonds from 1988 to the present, and the “consensus” forecast from 1993 through 1997. 2) 30 Year Treasury Bonds. History since 1988 and "consensus" forecast through 1997. This series is used solely for estimating a consistent forecast of tax exempt bond yields, as described below. 3) Bond Buyer Revenue Bond Index. History of the index since 1988, and forecast based on relationship with 30 year Treasury Bonds. The average spread between the 30 year Treasury Bond yield and the Revenue Bond Index since 1988 has been about 1.0%. To construct a forecast of the Revenue ‘Bond Index, that spread was applied to the "consensus" Treasury Bond forecast. X¥d_ =«FO:80 £6/0¢/60 + SENT BY:DCRA, DOE i O-L0-ya - iz-ag: VORA WIY Ui Livin Ronald A. Garzini December 21, 1992 Page 4 FIGURE 1 CONSUMER PRICE INDEX Percent Changs 14% ize+ History Forecast 10% F a 6S PF 4Gr 2 Of : 1960 1970 1980 1990 2000 2010 Year FIGURE 2 COMPARATIVE BOND YIELDS HISTORY AND FORECAST Forecast - History | 1988 1989 1990 1991 i992 1999 1994 1996 1996 1997 Year —— °A’ Taxapia Util — 30 Yr. Treasury —m Tax Exempt Rev. Bond 010/900 a X¥d ¢0:80 ¢8/02/80 Oyu rye wees SENT BY:DCRA. DOE > 6-16-95 > lztlb +) DURA UIY Ur cYcRuI- 2yu TW. sewer Ronald A. Garzini December 21, 1992 Page 5 Shown in Figure 3 are the estimates of real interest rates for long term taxable and tax exempt securities of the Energy Authority based on the assumptions and “consensus” forecasts described above. These are calculated by assuming issuance at the forecast nominal interest rates follawed by inflation as forecast over the term of the bond. Average real interest rates for taxable long term debt issued between 1993 and 1997 are estimated in this fashian at 5.0%. Average real rates for long-term tax exempt debt issued between 1993 and 1997 are estimated at 3.1%. FIGURE 3 REAL INTEREST RATE FORECASTS TAXABLE AND TAX EXEMPT REVENUE BONDS 1993 18g4 1995 1996 1997 GMM Texans GMM tax Exempr Fy.cd or titty “A* & Bond Buyer Ingex Al OTO/L00R Xvid ¢0:80 £6/02/60 SENT BY:DCRA, DOE ; 6-16-95 : 12:16 : DCRA DIV OF ENtkGY- ZUQ 402 DIIIF ¢ Ronald A. Garzini December 21, 1992 Page 6 Recommendation I recommend that discount rates for project evaluation be established as follows: 1. For projects that qualify for tax-exempt financing: Base Rate = 3.0% i Rates for Sensitivity Tests = 2.0% (Low) and 4.0% (High) This represents no change from our previous assumption. Using the Bond Buyer Revenue Bond Index instead of the Bond Buyer 20-Bond Index did nat Make enough difference, given other marginal changes in the "consensus" outlook, to warrant an increase in the tax exempt discount rate. 2. For projects that do not quality for tax exempt financing: Base Rate = 5.0% Rates for Sensitivity Tests = 4.0% (Low) and 6.0% (High) This represents an increase from the 4.5% Base Rate that was previously used by the Energy Authority. The major reason for this change is selection of the "A" rated utility bond rather than the Corporate Aaa as the series that would most closely represent Energy Authority taxable financing. Attachment x oT0/800B 2 Xvd 90:80 6/02/60 SENT BY :DCRA. DOE > 6-16-95 : FORECASTS 12:17: UULRA UI¥ ue CORUNA euu tvs suuier we cep FE INAANCIAL, what top anglysts gare saying about interest rates and monetary policy Vol, 11, No, 10 October 1, 1992 Political And Economic Uncertainty Have Credit Markets Nervous Summary -- Continued economic lethargy is i to keep short-term interest rates low throagh the end of this i . aecording to the consensus results of our Sepiember 25 survey, About a third of the panel members foresee aflother imminent easing of palicy by the Federal Reserve. However, the majoriry of panel members expect the Fed to stand par. In 1993, shart-term rales are expected lo rise about 100 basis points as the of economic growth gains momentum, bringing with it a modast revival in Private-sector borrowing. Long-s«rm yields, too, are expected to edge higher next year, but by less than half the rise in shart-term rates. The consensus expects in. Pressures wo remain relatively subdued. The U5. dollar should begin to ints in value next year as overseas interest rates fall in the face of weak economic growth (see page 2 foc a summary of oll ccrssensns Forecasts. Interest Rate Outlook -- Unexpected weakness in pre es Bere ee ee et 10 on September 4. And a lot of bond traders are ing that history will repeat itself on October 2 when the September employment data is released. Third quarter Real GDP will be weaker than earlier thought -- perhaps even failing to match the anemic 1.5% rate of growth registered in the 2nd quarter. While the September jobs data will be skewed by the end of the poremoents summer jobs program and the effects of i Andrew, the report may nonetheless prompt another easing by the Fed, predict about a third of the pane} members, With both the funds rare and the discount rate at 3%, each would have to drop, though not necessarily by the same amount, if the Fed chooses io cass, If the Fed does case, commercial banks Will likely cut the prime rate. Those who think there will not be additional easing believe the Fed won't to the Septernber data since the staustically-dampening effecis of the hurricanc will uluimately be transitory. In funire months, es thes effects are reversed out of the data, the pace of economic activity is likely to become tem; ee eee an unjustified rise in Pond elds that could be compounded if the Fed were to push shart rates even lower, they wam. Also arguing against additional Fed easing ia the eroding value of the dollar, say some pane] members. During the recent turmoil in Europe’s currency markets, the dollar enjoyed a bricf reprise of its role as a safc haven. Sut in recent days, the dollar has come under renewed sault, dropping to new all-time lows against the yen and cakening anew against the D-mark. Additional Fed ing would likely result in further losses in the dollar's * value, hurting U.S. bond and equity prices in the process. i Blue Chic Ftanesal Forecasi ISSN. 9741-8345) Puoisned Oy Capuol Pyoucanens, inc 1201 King St. P G. Sox 1454, Aleasndna. va 225"9 20S a = Inc, 1800) 327-7202 Edignal (703) 683-4100; Guawiess & Crrculawen: 1799) 730-6e44 Bybnemar Malan Hews. 0T0/600 Executive Bdilot Ranocen Meere, Mareony Breet usa Arimeny CUSTOMER SERVICE MANAGER LIZ SOPER Maastricht is dead — noe because of the close vow in the French referendum, the U.K. and Italian pullout of the European Rate Mechanism. or the Dutch saying they didn't want a single European currency afterall. It's because the fiscal and monetary circumstances of the member ee eS een a Flip alae in , but political union a single currency are Sate pam sway. In the meantime, song money supply growth may keep the Bundesbank from easing soon or by a ot, bur European interest rates have peaked and will fall in fits and starts in 1993. This will ly alleviate one source of on U.S. credit markets and evenmually produce a rebound in the dollar's valuc. ive econamic satistics and a SS S weak dollar are not the only problems the credit markets. will face over the next several months, There's also that’ matter of who will be the next president of the U.S. If Bull Clinton wins — an increasing biliry — ee ee is going to begin thinking ly about lications for the budget Geficu of a Democraticall: y-congelled While House and Congress and @ public clamoring for government action to stimulate the economy. Aftcr hammering George Bush on the need ip get the economy moving, deficit reduction is not going ta be Clinton's first priority if he wins, Lump together the $45 billion in financing the RTC will need next year, and some fiscal stimulus courtesy of the new president and Can; . and you get a 1993 budget deficit larger than this year’s record high. Key Assumptions -- tations about future economic growth continue to be pared. It’s now generally assumed that Real GDP th jn the 3rd. will be no beger than the palory 2nd quarter pace of 1.5%. The consensus forecast of Real GDP growth in the 4th quartér of this year fell two-ienths of a tage point to 2.4%. The consensus forecasts for GDP growth in the ls; and 2nd quarter of 1993 also fell this month and now stand at 2.8% and 2.9%, respectively. The consensus forecast:of the annual rare of increase in consumer prices during the 4th quarter was dimmed by a bit, but far the most par, there was lide change fram last month in the corisensus audook for inflation, ite the dollar's recent volatility, it remains the consensus view that the gretnback will = experience a modess rise in value on a tade-weighted basis _ during the bulk of next year (see top of page 2). pecial Questions -- See page 10 foe the results of our semiannual survey of the panel's long-range quulook. Contributor’s Corner — This monu’s interview is with Aubrey Zaffuto, Chief Economist, AZ Advisory, inc. in Far Hills, New Jersey (see pages 8-9). Pleats scree eulonal -fautns to EXECUTIVE EDITOR: RANDELL MOCRE Castel Pugne sens inc 10) Kiag Sireor PO Goe 145@ Alevamaria. Va 2z]17 2084 1800) 32 IMlorMalsr SAMAINGS eri IMIS BYSNEAVON Ig InaYGes We Se THIAC!e Ds Copyright 1992 By Capitol Pudilearions, inc. Repraaucnon in any 1 XVd 90:80 £6/02/60 SENT BY=DCRA. DOE BLUE Gite asrens femwtrent Mot Group, Maton, CT tem. Grtin fr. * Tawi ein hee Mie, Nl (8) suitors Lapa § Ca. Ina NY. NY (O ey a Fy! FL (M4 ref, lf q . tee } NY. NY IY] ore re, Almada. VAL) i 5 f 2 3 a ef CRT Gowernmart Seoutios, v., [NO] Bhan R Rava? era enone oO Oabrrew 6: Darema. TN (4) Or seen Berea Peters Neroral Marpage Asan... Wasiingien Oc Be) By, Leona’ halt noe Ck. owt Maret mee Maire fase oe FS Natonat Sars of Chiowgo, L [5] Fin nara ri Pres. Soetoue, romps, DLJ er Tamme real Maral Lyrch, WY, NY [D0] Cr, Conai Stresabeirr, Mavepoitien (reurenas Compartir. NY, NY IM narigign Bate Asaonision, Want, OF m ' t= Aarne Nae A naam Reeve. Waah..C 1944 Hateral Cy Bek Canvataed, OF 1857 Ge, Theatre 6 T, Bering Frames Ecanare In, CA IR Deg Yr La Ireurarem Corus. NY, WY PP) orn Sater Intarramnional hey. MY. WY Ld] Carel Stra PNG Fixgncal Com, Pisteegh, PA Ph] Or, Sua aoe _ Toran of Arerin, Memar MQ Racrinet Capa Conauasre, inc, New Yorn, MY [¥¥1) a Robert 2, Ganaraat daacciecem, Chcage. LW) Senora Berman BEO_RY.NY f) ANALYST IDENTITY. CODE . « cibening the parm ‘cf panel rrerrtere 2D lorecasa loued on pages oT0/0TOR Later ' gates, > 6-16-45 12-16 ; VURNA VIY wo ouenus euy awe oe. - 1 LONG-RANGE ESTIMATES!: The uble below contains CONSENSUS eatimates (or the years 1993 through 1997 and the five-year included the mont race long-range pro and ths Bush Adminiseadon cons from the Congressional period. 1998-2002. For compart “50m, We have judget Offce (CBO)? APPLY ALL THESE PROJECTIONS CALTIOUSLY. XVd 40°80 --wAVerage for the Year------- *Average- . 193 ie 199s 1986 17 1938.2002 TT. Consensus 62 *AOl) | | fe6)) | ves eS ak Top 19 Avg. FA 8.0 30 92 93 " a y 2. LIBOR, 3-Mo. ee ee ee Be im Avg. 45 §§3 70 7.4 is 7.0 i. 10 Ay; 3. Fed Funds Ram Cansensus 7 # rr 33 8 3.3 Q — Ae Avge. 42 4 21 re 6.6 i i 10 Avg. 4. Commarcial Paper, 1-Mo. Consensus 4 At | SZ 4 5,4 zt Ky a Avg. 43 $7 6.3 ql 3 “ AY. S.TitbYiesms. cus’ 8 HHH # Top ld Avg. 42 5.4 6.6 6.8 7.0 6.4 pee iret le aes le 4. 4+ . Ta Administration? 4,7 32 Dk 6. T-BIl Yields, Mo. Consataus 7 4 # eae 5.0 ee ie —- a 3.6 cs a 3 56 it. ‘YZ. a 7, acl ve |!) egeamaomaes 0g 100 AR Me Ag lOAvg, 46 58 7.0 a 14 os . 10 AY : 8. T-Nots Yields, 2-Yr. Consensus Me i 4 4 $8 865.8 #8 a a Avg. 5.4 64 73 ne 1.6 Pa 9. T-Now Yields. 5-Yr. Commune Me 33 & @ 4 Py 63 Py 8 Ky $3 ig 8.1 oe 83 jot 10 Avg. 4 47 : 10. T-Now Yields. 7-¥r- Consensus ni 6.4 6.7 # 70 867.0 657 pe 19 ay 70 - a3 i H Hy h 7B. ; 7 11, T-Bond Yields, 10-Yr. Consensus i 4 72 3 ae 93 7.0 Top 1OAvg. 75 8.1 a6 BS 869.0 8.3 Bot 10 Avg. 63 G62 6:0) iy Si7; $.4 CBO Forecast So o 7.0 kk ee he Administration . 4 12, T-Bond Yields, 30-Yr. Cotensus 4 16 hs Al eamac tal ae me = v4 8.0 &s 8.9 9.1 93 8.7 t. 8 13. Carp. Aas Bond Yields Consensus" 82 tt it # 6 PS # i 99 9.5 35 re 9.3 ic y 4 14, A Utility Head Yals Como 2 6 HW H & Me = Avg, 5 a rd 102 ot 7 i. 10 Avg. 15. Homs Movtgage Rates Consensus 8.1 i a7) a 8s 2.3 Top 10 Avg. 88 92 99 101 103 57 BoedvAve, | 75) 76 5 es ae 68 Kee ssamgon! aaa ieot" ssc to8e ser ieascaiee A. Trade-Weighied Dollar Consensus 873 899 918 912 AS (927 Top 10 Avg. 93.6 98.6 1015 1005 101.2 104.0 Bot 10 Avg. ag 823 $5 a22 829 ee --Yeur-over-¥ ear, crr- | -Average- 1993 1984 1994 “Jods Tes7 1998-2002 B. Real GDP Consensus 28 FE Gy an = ar se 2 | ToplO Avg, 34 34 3.7 35 33 30 Bot l0avg, 20 22 15 14 11 17 CBO Forecast 3.1 28 FY a4 ||| 2:2) na. Administration no C. GDP Implicit Deflator Consonsus # # 33 | qt 33 Top 10 Avg. 3.4 41 43 #46 47 4.2 Bot lOAvg, 20 24 23 #24 24 23 CRO Forecast 3 36 38 3.0 20 . Ta Administration 3, D. Consumer Price Index © Consensus 3300 «340 (34 #8 3.6 & Topl0Avg. 37 41 44 48 5.0 a4 Bot 10 Avy, 28 2G ices ela a7 CBO Forecast 34 3.4 34 34 Fd na. Adminisraiian 3.2 a © Oe na. 1 Bemad on entimataen ora 38 member. Tas Economic and Sul yet Muloak.* CBO. Angun 1992, p. % + Midetnon Raviow of the Budge.” OMB, July 28. 1992. p & “Soop. 9 for dedinitiens of vaviablex end sources of daa. JAvernge me of new ismiad One Gacour baru. £6/02/80 ra 74 Wi IE , MEMORAND eg of Alaska Department of Natural wt ay ’ Office of the Commissioner Arcana bit cetrial Davelopme: : TO: Marilyn Heiman and Export AuthdPAyE: November 1, 1995 Special Assistant Natural Resources FILE NO: TELEPHONE NO: 465-2400 = FAX NO: 465-3886 vely SUBJECT: Alyeska and FROM: ; Commissioner the Intertie A couple of days after the Governor's meeting with the Alyeska Pipeline owners I got a call from Norm Ingram who has been working on the power issue for them. He wanted to clarify a couple of issues about Alyeska's relationship to the intertie. First, under virtually no circumstances will Alyeska purchase power if the intertie IS built. This is because their power system is part of the vapor recovery system and is needed to dispose of the vapors collected from the piping and storage system. In addition, Alyeska believes they can produce power more cheaply than they could purchase it. If the intertie were built Alyeska might hook into it, in order to have a back-up power supply in case something went wrong with their plant, but this is not something that could be considered in the economics of the intertie. Alyeska would consider selling power into the CSVEA system if that made economic sense. This would require somebody building an interconnect between Solomon Gulch and the terminal in order that the power could be wheeled into the system. Alyeska's talking about a selling price of around 13 cents a kilowatt hour but have not made a definate determination on that price. Although I'm not an expert in pricing a wholesale power, that does seem to me to be a little high. However, Alyeska's indicated a willingness to work on that arrangement if people are interested. I believe all of this information has been shared with the consultants which AIDEA has hired. If you have any questions about this let me know. CC: Mike Irwin, Commissioner Department of Community and Regional Affairs State of Alaska - Department 0. Community and Regional Affairs TONY KNOWLES Mike Irwin iovernor Commissioner P.O. Box 110001 907-465-4700 Juneau, Alaska 99811-0001 NEWS RELEASE FAX: 907-488-2948 FOR IMMEDIATE RELEASE: Nov. 9, 1995 UPDA REPORT LET Public Meetings Planned In Affected Communities The proposed Sutton-Glennallen electrical intertie appears economically feasible, according to a consultant’s study, but only If certain conditions are in place such as a commitment to buy power by a major Copper Valley user and a financing plan. Alaska Community and Regional Affairs (C&RA) Commissioner Mike Irwin, limited by state law to deciding the intertie’s future based on economic feasibility, said before the line is constructed, environmental studisés must ba completed, the line’s route needs further review and affected Alaskans should have adequate opportunity to voice their opinions. "If all the conditions are in place, building this intertie to provide lower cost power to the affected Alaskans and to facilitate economic expansion appears to make economic sense," Irwin said, upon receipt of a consultant’s updated study of the project. “Over the next several weeks, we'll be holding public mastings to see if Alaskans agree or have other suggestions about this project’s future.” This week, the engineering consulting firm CH2M Hill, presented an updated economic report to a Knowles administration working group represented by four state agencies. The study says that based on kay assumptions and under certain conditions, the intertie is feasible. After studying the report, the working group found it credible and recommended to Irwin that the project proceed, but only if several standards are met. They include: * A power sales agreement between Copper Valley Electric Association and the Valdez refinery Petro Star or another major power user. The two companies and the Chugach Electric Association recantly reached such an agreement. In addition, the working group proposed a credit enhancement be provided for Petro Star’s payment obligations. * Copper Valley and Chugach electric utilities agree to participate jointly in the project to help share the project’s financial benefits and risks. The general managers of the two companies already have tentatively agreed In principle to such joint participation. -more- Intertie -2-2-2- November 9, 1995 * Alaska Public Utilitias Commission approval of any power sales agreements. “ An updated finance plan must be in place, subject to C&RA approval. * Expenditure of funds from a $35 million state loan approved by the 1993 Legislature for the project must be repaid, even if the project is never completed. * Environmental conditions are fully complied with, including completion of an environmental study and consideration of alternate routing to minimize public concerns. All environmental and financial permits and plans must be in place before state funds are released for construction. Community and Regional Affairs officials will hold public meetings in coming weeks in Anchorage, Sutton, Glennallan and Valdez. After the hearings, Irwin will make a final decision about whether to proceed with the project. The working group includes officials fromm the state departments of Natural Resources, Transportation and C&RA and the Alaska Industrial Davelopment and Export Authority. ° In 1993, the Legislature appropriated a 835 million, no interest, 50-year loan to help construct the intertie, which then Gov. Walter Hickel signed into law. The measure also included a requirement for a project feasibility study and plan for finance satisfactory to the C&RA commissioner. In July 1994, Hickel’s C&RA commissioner found the studies satisfactory and approved the loan. Shortly after taking office, because of changing conditions and other factors, Gov. Tony Knowles asked this working group to review certain issues related to the financial feasibility of the intertise. That raview was completed this week by CH2M Hill, under contract to AIDEA. The new review says the intertie is viable from a resource cost standpoint, assuming medium load growths in the affected area. Greater load growth makes the project increasingly economically sound. Additional large power users in the area appear likely, such as construction of major tourist facilities. The study also reaffirmed that other alternatives, such as a Silver Lake hydroelectric project or generating power with coal, are more costly than the intertie. Currently, residential electric consumers in the Glennallen area pay some of the highest power rates in the region, about 18.4 cents per kilowatt hour. Anchorage ratepayers pay about 9 cents per kilowatt hour. Copies of the updated feasibility raport and a public meeting schedule are available from the Departmant of Community and Regional Affairs in Anchorage (269-4500) or Juneau (465-4700). -30- Contact: Commissioner Mike Irwin, 269-4510 (Anchorage); 465-4700 (Juneau).