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Additional Services Sutton-Glennallen 1996
i ALASKA INDUSTRIAL DEVELOPMENT =~ AND EXPORT AUTHORITY => ALASKA ENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 561-8050 FAX 907 /561-8998 MEMORANDUM TO: Tommy G. Heinrich Project Manager II FROM: Dennis V. McCroh Deputy Director - Energy DATE: January 9, 1996 SUBJECT: Additional Services for Sutton-Glennallen Intertie CH2M Hill Services Agreement No. 95-010 Attached is CH2M Hill’s proposal for additional services which are required as a result of Commissioner Mike Irwin’s request to answer questions raised in the December public meetings. The specific work includes: 1. An independent review and update of the construction costs for each generation alternative. 2; An overrun cost risk analysis for these updated construction costs. 3: A compilation and qualitative summary of the environmental and social impacts of each generation alternative. These analyses will be incorporated into a supplementary report. In addition, a separate letter report will be prepared which analyzes the application of the $35M zero interest loan for each generation alternative. Please prepare the necessary contract amendment and NTP. Thanks. Please let me know if | can be of assistance. Attachment cc: Riley Snell el PAGES INCLUDING THIS PAGE: i C wis MeCroha haat A levad. con care. ( (4/96 TOFS 14650 FAX # (707) 56(-8%99 FAX #: PHONE #: °° ay Engineers ec Planners CHMHILL Bifzeeeng an ey Sclentsis January 9, 1996 117526.CO.ZZ Mr, Dennis McCrohan Deputy Director-Energy Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage, Alaska 99501 Dear Dennis: At your request, CH2M HILL is submitting this proposal to conduct additional environmental, project cost, and risk analysis of the Copper Valley Intertie and its alternatives. The proposed workplan for this work is attached. Task A will be limited to a summary of environmental analysis previously performed by RW Beck and Dames & Moore as published in the 1994 Copper Valley Intertie Feasibility Study, This summary will include a matrix that shows the impact of each power supply alternative in 6 to 8 environmental categories (e.g. air quality, visual resources, socioeconomics). Impacts determined by RW Beck or Dames & Moore to be significant will be highlighted. Areas where analysis was not conducted or inconclusive will also be noted. The matrix will be accompanied by a written sumunary of the impacts. Task B will be cost and risk analysis for each alternative, The primary objectives for this task will be to: e Review existing cost estimates for the power supply alternatives and adjust these estimates as necessary to put them on a common basis. Given that the estimates arc based on levels of design that vary from one alternative to another, cost adjustments will be limited to arcas where estimating assumptions allow comparison. In cases where inconsistency in level of design do not allow direct comparison, implicit differences will be addressed as part of the risk analysis. Seattle Office 77/ 108th Avenue NE, Bellavue. WA 98004-5118 206 453-8000 P.O. Box 91800, Bellavue, WA 98009-2050 Fax Na. 206 462-5957 T@*d SOGH WdrE:T 966T ‘G6 NOL 8668 T9S 486 :0L ¥Y3AS-TIIH WHO :WOsSs e Determine major areas of risk in terms of construction cost, operation and maintenance cost, and plant output . Assign probabilities to the range of costs associated with cach area of major risk and develop risk-adjusted cost estimate ranges ° Perform economic analysis to determine how the refinements in cost and risk analysis affect the relative rankings of the power supply alternatives for CVEA These objectives will be accomplished througi performance of the 12 subtasks outlined for Task B in the attached workplan, As shown in the workplan, we estimate that this project will require about 35 labor days. Including labor costs, expenses, and support, the associated cost is estimated to be $35,000. Please call me if you have any questions. We look forward to being of continued service to you and the State of Alaska. Sincerely, Ea David A. Gray CO*'d S96H WdSE:T SE6T ‘G NOL 8668 T9S 406 :0L Y3SS-TIIH WHS: Woes Cost and Risk Analysis for Copper Valley Intertle and Alternatives Workplan A. Environmental/Soclal Costs 1 Review and summarize environmental impacts 3 (based on RW Beck and Dames and Moore work) B, Direct Project CosvAlsk Analysis 1 Plan wor'shop 1 2 Aequest updaied information from developers/owners of alternative projects; receive a d review 3 Preparati:“ for workshop by 7 paid participants (0.5 days each) 4 Workshor : review cost estimates, make changes as necessary, identify areas of uncertainty and assign risk factors (cost ranges and probabilities) 5 Review data from Hobbs Industries; Conference call with Hobbs re coal plant 6 Conference (or conference call) with CVEA re All Diesel alt. and probabilities 7 Follow up research from tasks B4, 5, and 6 8 Develop cost ranges for Individual line items in each of 5 project alternative cost estimates; determine 10, 50, and 90 percent cost probability points 1 9 Run ATRISK program to determine “Risk adjusted" cost estimates (ranges) for each alternative 2 10 Run resource cost analysis for each alternative based on low, medium, and high cost assumptions; conduct benefit-cost analysis based on results 4 (limit scenarios to 50) 11 Run cost of power analysis assuming loan available for Intertie only (25 scenarios) 3 12 Run cost of power analysis assuming foan available for all feasible alternatives (25 scenarios) 3 on o--Nn = C. Letter Report (3 pages) TOTAL 35 SCOPE3.XLS 1/9/98 S0'd 9IGH WdSE:T 96ST ‘6 NOL 8668 19S 286 701 BAS-TIIH WeHD:WOss “ re Cuts MeCrohan| trom Dawe C.. wry ore, ( (4 63 FAX # (407) 56(- 8928 FAX #: PHONE #: THIS PAGE: ® TORS 141 Engineers Ar as Ramey Planners Econcmists RE scien ss January 9, 1996 117526.CO.ZZ Mr. Dennis McCrohan Deputy Director-Energy Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage, Alaska 99501 Dear Dennis: At your request, CH2M HILL is submitting this proposal to conduct additional environmental, project cost, and risk analysis of the Copper Valley Intertie and its alternatives. The proposed workplan for this work is attached. Task A will be limited to a summary of environmental analysis previously performed by RW Beck and Dames & Moore as published in the 1994 Copper Valley Intertie Feasibility Study, This summary will include a matrix that shows the impact of each power supply alternative in 6 to 8 environmental categories (e.g. air quality, visual resources, socioeconomics). Impacts determined by RW Beck or Dames & Moore to be significant will be highlighted, Areas where analysis was not conducted or inconclusive will also be noted. The matrix will be accompanied by a written sununary of the impacts. Task B will be cost and risk analysis for each alternative, The primary objectives for this task will be to: e Review existing cost estimates for the power supply alternatives and adjust these estimates as necessary to put them on a common basis. Given that the estimates are based on levels of design that vary from one alternative to a another, cost adjustments will be limited to areas where estimating ce ’ QR \ assumptions allow comparison. In cases where inconsistency in level of design ‘ do not allow direct comparison, implicit differences will be addressed as part of the risk analysis. - Seattle Oftice 777 108th Avenue NE, Bellevue. WA 98004-5118 206 453-8000 P.O. Box 91800, Bellavue, WA 98009-2050 Fax No. 206 462-5957 TO'd SOGH Wdr£:T SE6T ‘6 NOL 8668 T9S 286 :OL BAS-TIIH WZHD :WOYs ° Determine major areas of risk in terms of construction cost, operation and maintenance cost, and plant output e Assign probabilities to the range of costs associated with cach area of major risk and develop risk-adjusted cost estimate ranges ° Perform economic analysis to determine how the refinements in cost and risk analysis affect the relative rankings of the power supply alternatives for CVEA These objectives will be accomplished througa performance of the 12 subtasks outlined for Task B in the attached workplan, As shown in the workplan, we estimate that this project will require about 35 labor days. Including labor costs, expenses, and support, the associated cost is estimated to be $35,000. Please call me if you have any questions. We look forward to being of continued service to you and the State of Alaska. Sincerely, Mele David A. Gray ZO'd 9S6H WdSE:7 9E6T ‘6 NOL 8668 T9S 406 OL BSS-TIIH WHO :WwOoYs Cost and Risk Analysis for Copper Valley Intertle and Alternatives Workplan A. Environmental/Social Costs 1 Review and summarize environmental impacts 3 (based on RW Beck and Dames and Moore work) B, Direct Project CosvAlsk Analysis 1 Plan wor' shop 1 2 Aequest updaied information from developers/owners of alternative projects; receive a d review 2 3 Preparati: « fer workshop by 7 pald participants (0.5 days eacti) a 4 Worksho" : re'iew cost estimates, make changes as necessary, identify areas of uncertainty and assign risk factors (cost ranges and probabilities) 7 5 Review data from Hobbs Industries; Conference call with Hobbs re coal plant 1 6 Conference (or conference call) with CVEA re All Diesel alt. and probabilities 1 7 Follow up research from tasks B4, 5, and 6 3 8 Develop cost ranges for Individual tine items in each of 5 project alternative cost estimates; determine 10, 50, and 90 percent cest probability points 1 9 Run ATRISK program to determine “Risk adjusted" cost estimates (ranges) for each alternative 2 10 Run resource cost analysis for each alternative based on low, medium, and high cost assumptions; conduct benefit-cost analysis based on results 4 (limit scenarios to 50) 11 Run cost of power analysis assuming loan available for Intertie only (25 scenarlos) 3 12 Run cost of power analysis assuming loan available for all feasible alternatives (25 scenarios) 3 C, Letiar Report (3 pages) 4 TOTAL = SCOPE3.XLS 1/9/96 £0°d SS6H WdSE:T 96ST ‘G Nor 8668 T9S 2406 701 B3S-TIIH WeHD :WOds COPPER VALLEY ELECTRIC ASSOCIATION, INC. P.O. BOx 45, GLENNALLEN, ALASKA 99588 (907) 822-3211 Fax 822-5586 VALDEZ (907) 835-4301 FAX 835-4328 January 3, 1996 EG Fi \ le | PY JAN 00 350 Alaska Industriz] Developrnent and Export Authority The Honorable Governor Tony Knowles P.O. Box 110001 Juneau, Alaska 99811-0001 SUBJECT: Copper Valley Intertie Dear Governor Knowles: On behalf of Copper Valley Electric Association (CVEA), its Board of Directors, and its members, I wanted to express my appreciation to you for the opportunity to meet with you and your staff concerning the Copper Valley Intertie on December 28, 1995. As we discussed during the meeting, CVEA believes this infrastructure project is the only alternative which allows the Copper River and Valdez regions to meaningfully participate in the future economic well being of the State of Alaska. . Should you have a moment to review them, I have enclosed those pages from our presentation which discuss the advantages and disadvantages of this project. We respectfully request your strong support for this very important project. Yours truly, “ Lhapn2or PAUSINI, Clayton Hurless General Manager Enclosures cp: Commissioner Mike Irwin Commissioner John Shively Mr. David Ramseur ¢ MrRandy:Simmons - w:\word\raw\96-002nh.doc —— Serving the Copper River Basin and Valdez Copper Valley Intertie _ Presentation to Governor Tony Knowles By: Copper Valley Electric Association | December 28, 1995 12/27/95 Copper Valley Electric Copper Valley Intertie (cont.) 12/27/95 _| Advantages Opens up new region of the State to economic development — Princess Hotel — Paving of Denali Highway — Wrangell-St. Elias National Park Eliminates buming 3 million gallons of diesel fuel annually in favor of clean buming natural gas , Provides for rate reduction to current and future members of CVEA Opportunity to market cogeneration, Alyeska or TAGS excess capacity back into the Railbelt Grid Long term advantages - Potential to get other communities off of PCE — Future further expansion of electric grid Ability to provide back up electrical service to Sutton area Copper Valley Electric 18 Copper Valley Intertie (cont.) ¢ Establishes ample capacity for the foreseeable future for CVEA and future economic development ¢ State Financial Assistance ¢ Membership and Community support ¢ Provides long term power supply solution * Only alternative which expands the Railbelt system with new energy sales ¢ Expand Copper Basin telecommunications infrastructure by incorporating fiber optic technology into intertie design * Provides price competitiveness with Railbelt energy markets ¢ Supported by numerous Utilities, Communities, and Organizations. 19 Copper Valley Intertie (cont.) =| Disadvantages High capital cost : Opposition from Sutton area residents Opposition from environmental community - Anticipated permitting difficulties - Anticipated legal challenges Jurisdictional land issues 12/27/95 Copper Valley Electric 20 In Summary _| CVEA Is only interested in the best solutions for its members _| Resource Alternatives other than the Intertie do not fulfill CVEA’s Vision Statement and Power Supply Planning Criteria _| The Intertie is the only alternative which facilitates and ensures future economic development for the Copper Basin and Valdez regions. _| The Intertie is the only alternative which develops infrastructure beneficial to the entire State of Alaska. SENT BY: 12-19-95 ; 3:40PM ; GOV. OFFICE: EAU~ s# 2/ 3 “SENT BT! ANUHUKAE, ALASKA 112-18-85 ; 9:26PM ; PEThy sTAR+ GOV. OFFICE-JUNEAU;# 2/ 3 COPPER VALLEY ELECTRIC PESOUIATION. I INC. ee <r STS P. O. Box 45, GLENNALLEN, ALASKA 99588 (907) 822-3211 Fax 822-5586 VALDEZ (907) 835-4301 Fax 835-4328 RECEIVED December 14, 1995 ” PERRO STAR INC. DEC 18 1995 cos Been EB ee) a Stephen T, Lewis sen Chairman/CEO Potro Star Inc. 201 Arctic Slope Avenue Anchorage, Alaska Gentlemen: As | explained in our meeting earlier this week, Copper Valley Electric Association, Inc. (CVEA) and Chugach Electric Association, Inc. (Chugach) remain hopeful about the prospects the proposed Sutton to Glennallen [ntertic holds for the savings to Petro Star and the other members on the CVEA system. CVEA has been working with Chugach to develop the contract necessary to allow the line to be built but we have not reached final agreement on terms, In addition, as you are aware, we have been at work with the State of Alaska in the public meetings to facilitate the State’s approval of the loan authorized by the legislauure which is the key to going forward with the Intertic. The anticipated date for decision by the State has shifted several times from the November 1 date in the Petro Star Memorandum of Understanding (MOU). Our current understanding is that the State may not make its decision umil the end of the year, Even then, State approval is expected to be with several conditions. Finally, the Chugach board has not yet approved of the MOU. It is clear that the conditions in th¢ MOU have not and cannot be satisfied before the December 31 deadline. Undor thes¢ circumstances, CVEA. and Chugach are unwilling to oxpose their customers to cogeneration deferral obligations and we want to be clear that we no longer consider Petro Star to be bound to defer cogeneration. Even in the face of these delays, we have not changed our view that the long term interests of Petro Star are to see the intertio completed and we remain committed to the our goal of supplying power to Petro Star at competitive prices. We hope to continue our dialog with Petro Star ta work together toward this comman goal. For example, Copper Valley has been discussing ways it can reduce power costs to Petro Star by using CVEA equipment in a joint cogeneration arrangement which may provide protections substantially similar to those we anticipated you might achieve through the cogeneration deferral mechanism. This approagh may even be preferable to the deferral contract approach. If you arc interested in discussing this or any other “Serving the Copper River Basin and Valdez 1# 3/3 95 ; 3:41PM; GOV. OFFICE ‘\EAU> SENTBY!,, nanmma, monn — ideigeus 2 S:2NeM PEunw STARY GOV. OFFICE-JUNEAU:# 3/ 8 Stephen T. Lewis December 14, 1995 Page 2 topic, including deferral of cogoncration, we would, be happy to meet to discuss this. On the other hand, we certainly understand that you may not be able to delay any longer and wish to release you from any obligation to do by this letter. Understand that these delays in no way dampen our resolve to do everything reasonably possible to achleve savings which we believe to be available through interconnection with tho railbelt clectrical system. Indeed, we regard our recent discussions of cogeneration as very positive efforts by all to achieve the savings needed to allow your business to grow and prosper while allowing the members of C'VEA‘s systein to access long term power rate reductlons and stability. As you know, it has taken us years to get this far and we remain commitied to seeing il through, Sincerely, Clayton Hurless eral anak | Buger Bic mera. General Manager w:\word\cdh\petrostr.doc ) INDUS TRIES, INC. January 12, 1996 | M-DaiiAGny ECEIVE PO Box 91500 Bellevue, Washington 98009-2050 : JAN 16.1956 Re: . Copper Valley Intertie - : Alaska Industrial Development Feasibility Study Update and Export Authority Sub: Small Cogeneration Alternatives Worth Further Consideration Dear Mr. Gray: After review of your Copper Valley Intertie Study and the associated work group report, I still strongly believe that small cogenration plants in Valdez and/or Glennallen represent the least cost alternatives for supplying the long term power needs of Copper Valley Electric. . . : Based on the most likely medium-low growth scenario combined with the possibility that Petro Star might generate its own power, leaves the all diesel alternative as the Study’s most favorable option. However, a small ( 5 - 10MWe ) COAL fired cogeneration plant in Glennallen, as originally offered to CVEA in early 1993, could easily provide the same capacity utilizing the same number of operators but with a much lower fuel input cost along with other beneficial features not possible with diesel generation. A small cogeneration plant in Glennallen would leave the option open for a small cogeneration plant in Valdez as well and would provide better overall reliability to CVEA consumers. Now that we have two studies that can be used to determine what the firm avoided costs are for CVEA to continue producing its own power from diesel generation, could make it a prudent choice to first grant the available small cogenerators their rights, that the APUC has said are mandatory under both State and Federal Regulation, to provide this needed capacity at or below the costs that CVEA would be faced with otherwise. I am confident that granted what are meant to be mandatory rights, instead of the run- around, that the available’small cogenerators can indeed provide this capacity. a price that. is competitive with that of continued diesel generation or the true cost of energy supplied over the intertie. Besides, what does the State or CVEA have to loose by willingly granting these small cogenerators their rights to provide this capacity. Sincerely Randy ei President CC: Dennis McCrohan/AIDEA cONt wal ee Comin Sy 29 Whitney Road + Anchorage, Alaska 99501 + (907) 278-7283 + FAX 278-7448 i ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY /= ALASKA @m_ ENERGY AUTHORITY ¥« 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 561-8050 FAX 907 /561-8998 MEMORANDUM TO: Riley Snell Executive Director Randy Simmons Development and Finance Manager \ FROM: Dennis McCrohan Wr Deputy Director - Enetgy DATE: December 20, 1995 SUBJECT: Supplemental Feasibility Analysis Sutton-Glennallen Intertie As we discussed, there appears to be 3 fundamental issues raised in the public meetings which may require further analysis by CH2M Hill to improve the Feasibility Update. These relate to the construction cost accuracy and associated cost overrun risk of the alternatives, the reliability risk associated with the Thompson Pass existing transmission line, and the environmental and social impacts of the alternatives. CH2M Hill has summarized the approach and status of the previous work and a proposed methodology for further analysis. The summary is attached. It should be noted that the environmental and social impact analysis, as outlined by CH2M Hill, is outside of the original scope. Key points are: 1. There is more detail in the Intertie construction cost estimates than the other alternatives. However, additional cost development including an overrun cost risk analysis can be undertaken to make all alternatives equivalent. It should be done for all alternatives. It will require about two weeks to complete. 2. The risks associated with Thompson Pass have been incorporated adequately in the Feasibility Update. A brief explanation may be prepared but no new work is required. Memorandum December 20, 1995 Page 2 3. The social and environmental analysis is difficult to accomplish and will certainly be contentious. There are no accepted methodologies for this analysis. CH2M Hill is recommending an approach similar to that used by lower 48 PUC’s for integrated resource plans. The analysis will provide some indirect _costs for environment_and_ social impacts but these will be highly subjective. This analysis will require at least 4 weeks. In addition, CH2M Hill has provided some thoughts regarding the duration of the Petro Star/CEA/CVEA agreement. Please let me know if any additional information is needed. Attachment From: Dave Gray 10: Dennis McCrohan Date: 12/20/95 Time: 12:30:18 Page 2 of 10 Copper Valley Intertie Feasibility Issue: Environmental and Social Impacts This paper briefly reviews the work done to date to assess the environmental and social impacts of the Copper Valley Intertie project (the ‘Intertie”’) and its altematives. It _ identities topics likely to be addressed in a broadly defined feasibility study (that includes both direct. and indirect costs), based on existing information and assessment. of other key areas of stakeholder concer. Finally, it presents some possible options for conducting such an evaluation, based on similar types of work CH2M HILL has undertaken in other states. Work to Date and Potential Key Issues To date, work regarding environmental and social impacts of the Intertie was presented in the Copper Valley Intertie Feasibility Study published in 1994. In addition to an economic evaluation of alternatives, the study contained a preliminary analysis of environmental issues and public concerns, as well as an overview of several analytical techniques that could be used to weigh the relative environmental and social costs of the alternatives. The feasibility study documented in some detail a number of concems related to natural resources. Tssues identified for the Intertie included its potential to affect. wildlife populations, water quality (including anadromous fish habitat), wetlands, and recreation/visual quality. However, the study addressed only briefly many of the potential social, cultural, and economic impacts of the Intertie. Impacts identified but not discussed in depth include the effects of increased access to game on subsistence hunting in the Matanuska Valley; the proximity of the apparent preferred route to the Nelchina Trail, a native migration route, and the consequent potential for cultural resource disturbance; and the economic effects of the project on businesses along the transmission line route that support the area’s tourism-based economy. An additional area not discussed in the analysis concerns the project’s ‘“second-level’’ impacts--those not associated immediately with the construction and operation of a transmission line or generating facility, but arising as an indirect result of the facility’s presence. For example, the economic development induced by the availability of a larger power supply has potential impacts of its own, including growth of Copper Valley communities, increased use of natural resources, and development along the Glenn Highway. Impacts associated with alternatives to the project have also been quantified to some extent in the existing analysis. Perhaps the most important for the diesel- and coal-fired alternatives are the impacts related to air emissions. While assumptions about air pollution control technology can be factored into direct project costs, impacts may occur even with the most. sophisticated technology available. For example, the 1994 Intertie Feasibility study notes that, even with the use of advanced fluidized-bed combustion techniques, the emission plume from a coal-fired facility could have adverse effects on nearby Class I airsheds. Water consumption, waste streams, and the effects of resource extraction are other issues that would require consideration in a weighting of relative From: Dave Gray 10: Uennis McUronan Date: 12/20/95 lime: 12:31:37 Page 3 of 10 impacts. Detail provided on alternatives to the Intertie in Appendix M of the feasibility study is not extensive, and would likely need to be expanded to support a credible comparative analysis. Given that CVEA has indicated that it will not invest in additional diesel facilities until it must in order to meet load requirements, it would be logical to add consider continuation of its existing diesel operation as a baseline alternative. As noted above, the 1994 Intertie Feasibility Study also included brief descriptions of several potential techniques for evaluating the relative environmental and social costs of the Intertie and its altemmatives. The specific applicability or relevance of these techniques to the project was not discussed in the report. The assessment of indirect costs is a rapidly changing field, with frequent updates and refinements both in technical analysis methods and in regulatory development; as a result, the appropriateness of the analytical techniques summarized in the 1994 work would need to be revisited in light of current practice in the field. Approaches to an Integrated Feasibility Analysis If the scope of the feasibility study is to be widened, additional work will be necessary to identify specific areas of the existing report that require supplementation and to provide the data necessary for analysis and decisionmaking. Equally important will be the development of a method of valuing and ranking dissimilar alternatives and issues. The data gathered to date represent the objective disclosure of potential environmental impacts, as required by NEPA and other environmental legislation; however, within the broad social, economic, and environmental context of the project, identified impacts may be seen as either adverse or beneficial, depending upon the values of project. stakeholders. To establish this context--and provide the parameters within which debate on the project will take place--requires an analytical framework for weighing the relative costs of the impacts. An integrated evaluation of both direct and indirect costs for environmental, cultural, and economic issues associated with the Intertie and the other alternatives under consideration will facilitate a decision on the feasibility of the intertie as a least-cost alternative. Such an evaluation would incorporate the principles of integrated resource planning (IRP), a process intended to help utilities and state regulatory commissions consistently assess a broad range of demand and supply resources to meet customer energy service needs cost-effectively. Approximately 34 states engage in some form of IRP activity, often associated with the preparation of least-cost electric generation resource plans under the requirements of state public utility commissions. Besides explicit consideration of demand- and supply-side options, key characteristics of the IRP approach include evaluation of the environmental and social costs of providing energy services and analysis of uncertainties associated with different external factors and resource options. The typical study approach for evaluations of this nature assumes that all economically viable options to meeting the power supply needs of the region will be considered on an From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:32:55 Page 4 of 10 equal basis!. Required regulatory compliance equipment and programs are calculated for cach option and added to direct project costs. Next, indirect impacts related to the environmental and social characteristics of the study area are identified. Typically, these indirect costs are evaluated through sophisticated decision science methods and. qualitatively valued. Ranking and weighting of impacts are developed on the basis of state and local priomties to allow the comparison of indirect costs among the options. Finally, all options are compared and ranked in a manner that weights direct and indirect costs to reflect these priorities. CH2M HILL’s experience in integrating indirect impacts into least-cost planning has identified approximately 135 potential areas of study that may affect the outcome of planning decisions to some degree. In practice, however, most evaluations limit the total number of issues to the most significant six or cight concerns, which then act as a surrogate for issues not specifically addressed in the analysis. An evaluation conducted for the Copper Valley Intertie would be likely to generally follow this typical approach. An integrated process of economic evaluation of the direct resource cost for all options (as done for the November 1995 Feasibility Study Update) would be coupled with an evaluation of direct and indirect costs related to environmental, cultural, and economic impacts in the study area. Indirect costs would most likely be treated in a qualitative integration scheme rather than “monetized,” since the disparate factors being weighed and the wide range of views among stakeholders would detract from the reliability of an approach that attempted to quantify costs in monetary terms. Identifying the indirect impacts to be analyzed and their relative weights would be a critical aspect of the evaluation. To reach conse::sus on the Intertie’s feasibility would require that the spectrum of stakeholder viewpoi. is be represented in the process. For example, if both environmental and business repr - sentatives participated in the selection and weighting of indirect cost considerations for ‘he analysis, impacts on wildlife and impacts on tourism could be supportably compar :. on a common basis. The same approach might be taken for the assignment of re’ live weights between direct costs of power supply and the direct and indirect costs of environmental and social protection and/or mitigation. A benefit of this approach--as demonstrated by favorable public teaction to the incorporation of direct and indirect costs in electric generation and transmission line planning--is that decisions arrived at by the consensus of an array of interests are far more defensible both in subseqii:nt environmental analysis and in legal challenges. 1 This can begin with a screening step in which alternatives with relatively high direct costs that are also judged to have significant indirect costs are screened out from future consideration. From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:34:08 Page 5 of 10 Copper Valley Intertie Feasibility Issue: Resource Alternative Capital Cost Estimates and Risk Factors The 1995 Update to the Copper Valley Intertie Feasibility Study included cost estimates for power supply resource alternatives (the Intertie and alternatives to the Intertie) taken from the original study. ‘lhese cost estimates came from a number of different sources. Concern has been raised that these cost data are inconsistent and therefore can lead the State of Alaska to an incorrect decision regarding the feasibility of the Intertie. Additionally, concern has been raised about the relative risk of the various projects exceeding their estimated cost. Each of these issues are addressed below in terms of the bases for each cost estimate and approaches to develop additional information to address the concerns. Capital Cost Estimates The American Association of Cost Engineers has defined three levels of cost estimates. They are; order of magnitude (+50% -30% accuracy range), budget (+30% -15% accuracy range) and definitive (+15% -5% accuracy range). The order of magnitude estimate is made without engineering data by using cost curves or scale up/down factors. The budget level requires some level of design data. The definitive level is developed from very complete engineering drawings and specifications. Most cost estimates included in the Copper Valley Intertie Feasibility Study were order of magnitude estimates. There are inconsistencies among the =mbers in that they were developed from different levels of effort and information. Implicitly, it was believed that this level of cost estimate accuracy was sufficient to assess the feasibility of the Intertie. The estimate for the Intertie is quite complete and includes more detail than usual for this level of design. It appears to be of a greater level of accuracy than the other estimates. The Intertie estimate used the input of local contractors on crew size and make-up and productivity. Design alternatives were evaluated to determine the least expensive design options. The All-Diesel alternatives were based on planning estimates with some input from vendors. Significant differences exist between 1994 and 1995 cost estimates and the bases for these estimates. Confusion generated from these differences could be cleared up through an independent review of capital and operating costs for the All Diesel alternative. ‘lhe estimates for the All-Diesel and hydro alternatives do not seem to share the same level of detail as the Intertie estimate. The Allison Lake cost estimate is based on a State of Alaska reconnaissance feasibility conducted by HDR in 1992. The level of detail to this study is perceived to be good but less than that developed for the Intertie alternative. The Intertie feasibility report does state that some issues would require further study and that these issues may affect the total cost of the project. From: Dave Gray 10: Dennis McCrohan Date: 12/20/95 Time: 12:35:22 Page 6 of 10 * Silver Lake design and cost estimates were developed by IIDR as part of the Allison Lake reconnaissance study. For these cost estimates, HDR relicd on work done by Stone and Webster in 1982 and 1983. The Silver Lake estimate by HDR/Stone & Webster shows a 20% contingency on equipment and a 30% contingency on the remainder. This is acommon amount of contingency for this level of estimate. Given the age of these estimates, they are not likely to be as accurate as the Allison Lake or Intertie cost estimates. The Silver Lake estimates provided by Whitewater Engineering in November 1995 are based in part on the HDR estimates with significant cost reductions identified for some design changes. No documentation was provided; cost estimates by a disinterested party would be needed for a realistic evaluation of this proposal for the Silver Lake option. Whitewater used a 15% contingency in its estimate. This is unusually low for this level of cost estimate. The Waldez Coal capital cost estimate was originally provided by Ilobbs Industries, Inc., the developer associated with this project. In its limited review of this capital cost for the Intertie Feasibility Study, R.W. Beck increased the estimate from $27 to $37 million. During the update, Hobbs Industries indicated that they disagreed with Beck’s treatment of their estimates. Accordingly, CH2M HILL reviewed the two estimates and concluded that the Beck estimate was more realistic. ‘I'he Valdez Coal capital cost estimate has an uncertain level of accuracy. However, it would be reasonable to assume that it would not be any lower than the estimate provided by Hobbs Industries. Even with this concession, the overall resource cost associated with this alternative is significantly higher than existing cost estimates the Intertie and All Diesel alternatives. The capital costs for the various power supplies could be put on a more comparable basis through various different approaches. The approach depends on the level of accuracy and comparability required. A limited approach would be to review detailed plans for each alternative and independently make cost adjustments where it appears to be appropriate. A more accurate approach would be to independently review, revise, and augment as necessary detailed plans for each alternative as a basis for developing cost estimates on a line by line basis. This would require site work and possibly additional conceptual design. Risk of Exceeding Estimated Capital Casts The risk of exceeding capital (and O&M) cost estin.ates can be evaluated and used as a basis for calculating “‘risk-adjusted capital costs.” .*. risk-adjusted capital cost results from the application of data on the probability of th. estimated cost being over- or under-estimated to the single, “‘most likely” cost es':mate. The result is an estimated cost range with probabilities estimated for points w:.nin the range estimate. The approach to calculating risk-adjusted capital costs begins by identifying all risks associated with a project alternative and determining how these risks might effect project cost estimates. After risks are identified, they are categorized as potentially high, medium, or low risks. Those identified as high or medium may require special From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:36:41 Page 7 of 10 study to determine the potential magnitude and characteristics of each risk. On the basis of expert judgment, these data are translated into a range of potential deviations from a specific cost component included in the base cost estimate. Probabilities are assigned to these potential deviations based primarily on judgment from one or more experts. On the basis of these risk assessments and adjusted ranges for cost components, Monte Carlo simulations are run to determine the range of probable costs for the overall project and probabilities of costs actually occurring at given cost levels. This in turn can be translated into risk profiles, or estimates of the probability of overall project costs being at or below certain levels. Risk profiles allow decisionmakers to understand the range of probable costs and level of risk associated with selection of one alternative vs. another. An example of this kind of capital cost risk analysis is shown in the attached study of excerpt from the DeLong Mountains Transportation System study conducted by CH2M HILL for AIDEA. From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:37:25 Page 8 of 10 Copper Valley Intertie Feasibility Issue: System Reliability Impact of Thompson Pass Outages-- Intertie Vs Other Power Supply Alternatives As shown on page IX-5 of the Copper Valley Intertie Feasibility Study, the generation reserve plan for CVEA is as follows: Generation Reserve Criteria (Local Generation Required) Load District With Intertic Without Intertic Valdez Peak Load plus Largest Generating Unit Peak Load plus Largest Generating Unit Glennallen Peak Load Peak Load plus Largest Generating Unit CVEA’s reserve plan? provides about the same level of reliability (0 CVEA customers whether or not the Intertie is built. An outage at Thompson Pass would cut off CVEA’s ability to send power between Valdez and Glennallen. This simply means that each community would need to operate on its own with its own resources except in the ‘With Intertie”’ case. In that case, Glennallen could continue to rely on power supply from the Railbelt and that supply source would provide additional reserves. Without the Intertie, each community would need to operate on its own exclusively with its own resources. Additional reserves would be available up to an amount equal to CVEA’s largest single local unit. So the only difference is that with the Intertie, Glennallen reserves would be available up to 15 MW (Intertie’s initial capacity) and without the Intertie, reserves would be available up to 2.2 MW (largest single operating unit in Glennallen). In the winter, the Copper Valley Intertie (Sutton-Glennallen) would provide power that would flow to Glennallen and to Valdez. An outage at Thompson Pass would cut off the Valdez supply, but Solomon Gulch would be available to immediately cover the loss. If the Thompson Pass outage were for a sustained period during the winter, Valdez would need to generate with its standby diesel units. In the summer, power flows north from Solomon Gulch (Valdez) to Glennallen. The Intertie would provide “spinning reserve” to Glennallen that it would not otherwise enjoy. Loss of the Valdez-Glennallen Intertie would be immediately replaced by Railbelt power over the Copper Valley Intertie. 2 this plan was included in the resource and cost of power models used in the Copper Valley Intertie Feasibility Study and the Updated Feasibility Study. From: Vave Gray 10: Vennis McLronan Dale: 12/2U/¥5_ Lime: 12:38:29 Page 9 of 10 If a new power supply resource other than the Intertie or Diesel alternatives were built (Allison Lake, Silver Lake, or Valdez Coal), it would be at the Valdez end of the Valdez-Glennallen Intertie. In this case power on the Valdez-Glennallen Intertie would flow almost exclusively to the north to supply relatively low-cost power to Glennallen. Under these circumstances, Glennallen would need to maintain generation reserves equal to the size of its peak load plus largest generating unit. From a cost standpoint, loss of the Valdez-Glennallen Intertie would be costly to CVEA during the winter when the Copper Valley Intertie would otherwise be providing low- cost Railbelt energy to Valdez. Assuming Allison Lake, Silver Lake, or Valdez Coal were built instead of the Copper Valley Intertie, loss of the Valdez-Glennallen Intertie would also be costly to CVEA any time of year, given that all low-cost power on the system would be generated at the southern end of this intertie. In the computer model used for the feasibility study and update, the Valdez-Glennallen line is assumed to be out of operation an annual average of 2 percent. From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:39:15 Page 10 of 10 Copper Valley Intertie Feasibility Issue: Length of Take or Pay Requirement for Petro Star In order to assure that adequate loads remain on its system and thereby qualify the utility for the $35 million interest-free state loan, CVEA is negotiating a lower rate for its largest customer, Petro Star. In return, CVEA would receive a 10-year credit enhanced take-or-pay commitment from Petro Star to purchase all of its electric requirements from CVEA. (This provision needs to be strengthened to include a minimum annual requirement. About 22.5 million kWh were assumed to be required when the Intertie operations begin.) This negotiation has been criticized for being short sighted in that CVEA needs Petro Star loads (or a replacement customer with similar or greater loads) through 2018 in order to enhance the likelihood that the Intertie will be the least cost resource choice for CVEA and for the state. Assuming 1999 as the first year of Intertie operation, a take-or- pay through 2018 would be a 20-year take or pay requirement. Critics of the arrangement with Petro Star argue that the 20-year take or pay should be mandatory. A 20-year take or pay obligation would provide the assurance critics are suggesting is needed. It is simply a matter of negotiation. In order to obtain a 20-year take or pay, CVEA would need to commit to a power sales rate that is lower than that needed to secure a 10-year take or pay commitment. The underlying issue is risk management. If a 20-year arrangement is needed to significantly reduce risk (or perceived risk), then less of the “‘rewards”’ from the Intertie will remain with CVEA (and its other customers) because a lower rate that would be needed to entice Petro Star to make such a commitment. If CVEA and its customers can live with a higher level of risk, a greater reward is potentially achievable by CVEA. A 20-year take or pay provision may be an unreasonable commitment from Petro Star’s standpoint. While the medium-low forecast assumes that Petro Star will remain as a customer of CVEA through 2018 (23 years from now), this in not a guarantee. It is likely that Petro Star would consider such a commitment to be too risky for a full take or pay commitment. An alternative to a take or pay commitment may help reduce risk for both Petro Star and CVEA. CVEA (and the State of Alaska) are seeking assurance that the investment in the Intertie would be covered. Currently, ‘“‘stranded investment” is a common concern among utilities. Rather than attempting to cover Intertie investment costs with take or pay provisions that also cover variable costs not actually incurred if Petro Star leaves the CVEA system, CVEA could require payment of a fixed customer charge that covers Petro Stars prorata share of the Intertie costs. (Energy and demand charges to Petro Star would be reduced proportionately.) Under these conditions, Petro Star would need only commit to a 20-year take or pay for the customer charge. Such a commitment could be reduced if other loads in the CVEA service area grow at rates higher than projected and thereby cover CVEA’s implicit investment in the Intertic. Such an arrangement may be more attractive to both Petro Star and CVEA. Some facts about interties I'll use this column to answer some of the questions I’ve heard asked about interties. What is an intertie? An intertie is an electrical transmission line which links different areas or major sections of a power grid. What are their benefits? They improve the overall reliability of the power system and allow the most cost-effective and efficient use of the area’s generation resources to meet customer needs. Do we have any in our area? Yes. In the 1980s the State built an intertie from Willow to Healy which linked the Southcentral and Interior power systems. There is also the one built in the early 1960s which ties the Kenai Peninsula and Anchorage together. How do Chugach members benefit from interties? An intertie which opens new markets for Chugach power sales could lower electric bills because more customers would share the cost of the power plants and other generation and transmission facilities on the system. Since 1986 Chugach has sold millions of dollars of power to Fairbanks utilities and used margins (profits) from the sales to lower rates for Chugach customers. Interties can also link the Chugach system to additional power plants that can provide more spinning energy on the system. Spinning energy is power that is instantly available from generators that are kept running in reserve without load to absorb the loss of a generating unit and helps prevent or mitigate outages. Additional generation helps us recover more quickly from some outages, since power can flow either direction across an intertie. Access to other generation resources allows Chugach more efficiency in scheduling both the operation and maintenance of its units. That access might also mean in the future Chugach may decide it’s cheaper to buy power from another entity than to add to or replace its own power plants. What intertie projects are being discussed? There are currently three interties planned for our area: a northern intertie from Healy to Fairbanks, a southern intertie from the Anchorage area to the Kenai Peninsula, and the r Valley intertie. The first tw would strengthen the existing Railbe’ power system, improve reliability and transfer capacity — allowing us to make the most efficient use of regional power plants. The third would link the Railbelt (for the first time) to a large area encompassing Glennallen and Valdez. What is the current status of the three projects? Golden Valley Electric Association expects to _ begin construction on the northern intertie in 1996. Chugach has hired a consultant who is just beginning the initial work on the route selection process for the southern intertie. By the end of December, the commissioner of the Alaska Department of Community and Regional Affairs is expected to announc a decision on a State loan for the Valley intertie. News notes, continued from page 1 Soldotna at 5 p.m., Feb. 1, at the Kenai Peninsula Borough Assembly chambers. This project, known as the southern intertie, is one of two transmission lines partially funded by the Legislature with $90 million in grants from the former Railbelt Energy Fund in 1993. The second line, a northern intertie between Healy and Fairbanks, is moving ahead with construction expected to begin in 1996: For more-information, call project manager Dora Gropp at 762-4626. ¢ The fuel surcharge increased this month from $0.00631 to $0.00807 per kilowatt-hour. The quarterly adjustment recovers the costs (both actual and anticipated) of fuel and purchased power expenses over and above the amounts recovered in the basic kilowatt-hour rate. The new surcharge rate will be in effect for the first quarter of 1996. The increase will add $1.32 to the {195039} average monthly bill for 750 kwh of residential service. 1996 budget, continued from page 1 percent from 1995. The capital budget funds long-lived generation, transmission and distribution projects, inventory, and facilities relocations to accommodate road improvements. Included in the capital budget is $2.2 million for Chugach’s share of the co- purchase of the federal Eklutna hydroelectric project. The operating budget is expected to produce margins of $6 million, sufficient to satisfy the requirements of Chugach’s bond indenture. Each component of the 1996 budget was reviewed in detail at a series of meetings with a board committee. Early in the process the board indicated its desire to avoid increasing base rates in 1996. To help achieve this goal 24 full-time positions were cut from the budget, reducing regular staff by 6 percent from 1995 to 1996. Chugach recently installed new a valves to better regulate the flow of natura gas into the gas house at the Beluga Power Plant. Two separate pipelines deliver fuel to the plant from different suppliers, providing both reliability and competitive pricing. Board TTL ENA cea acs lis The proposed intertie to link Copper Valley Electric Association’s system with the Railbelt power grid has generated a number of news articles and letters to the editor. Unfortunately, in the discussion of the Copper Valley intertie, conflicting assertions have been made which have left many people confused about the whole issue. I want to give you some perspective on the interties and why they're important to you as a Chugach member. In 1993 the Legislature authorized $90 million in grants to partially fund the northern and southern interties ero-interest loan to help build the Copper Valley intertie. Golden Valley Electric Association in {81242} Fairbanks was named to build the northern line and Chugach the southern. Since customers will pay any costs over and above the State grants, the Chugach board wants to make wise decisions when it comes to these projects. Each must be evaluated as a business investment in our future. Like other capital projects, the benefits and risks must be assessed within the Railbelt, and a $35 million, as realistically as possible. As your board, our job is to try and minimize the risks and maximize the benefits realized by ratepayers. In the case of the Copper Valley intertie, we must look at the project assumptions. Are the demand forecasts for future power too optimistic? If so, future revenues might be insufficient to offset debt payments from line construction. On the other hand, it would not serve you well to mistakenly rely on load forecasts which are too conservative, and consequently not build a project which would have produced profits and lowered future bills. If there were to be construction delays or cost overruns, the net benefit to Chugach ratepayers could be reduced or eliminated. However, there might be ways to cut construction costs. The Anchorage School District recently saved millions of dollars because intense bid competition between contractors drove down school construction costs. Several years ago a number of utilities — including Chugach — signed memorandums of Will the Copper Valley intertie lower your bill? understanding which would require use of International Brotherhood of Electrical Workers Local 1547 labor on the projects in exchange for lobbying by the IBEW for legislative funding. The board has retained consultants to evaluate whether these understandings would increase the cost of intertie construction by decreasing bid competition. Before going ahead on the Copper Valley intertie the board will consider a number of options. We want to know that the intertie will be built in a quality manner at the lowest cost and with the highest long-term benefit to you. We also want to try and minimize environmental impacts and be satisfied that the financial assumptions are realistic. If you have comments or questions for your board regarding these projects, please feel free to share them with us. Annual meeting notes Chugach's 1996 annual meeting will Convention Center on Thursday, April 25. Three directors will be elected at the meeting. Chugach members who wish to be considered by the Nominating Committee for a director's seat must submit a resume by the close business on Thursday, Feb. 1. The deadline to submit proposed changes to the bylaws is 5 p.m. on Wednesday, Feb. 7. For more information, call 762-4736. Board report, continued from page 4 * Approved activating the southern intertie bank account. ¢ Approved the 1996 business plan. * Approved the intertie contracting alternatives cost review. * Approved writing off $174,781.39 in uncollectible electric accounts for the six-month period ending Oct. 31, 1995. By comparison, Chugach wrote off $317,476.55 for the six-month period ending April 30, 1995. Even though the uncollectibles are "written off" in accounting terms, Chugach continues to aggressively pursue repayment of the debts. ¢ Approved writing off $13,452.57 in uncollectible miscellaneous electric accounts for the six-month period ending Oct. 31, 1995. By comparison, Chugach wrote off $2,493.80 for the six-month period ending April 30, 1995. Once again, Chugach also pursues repayment of these debts even after they've been written off. * Approved capital credit payments totaling $14,395.51 to 31 estates, bringing the 1995 estate payments total to $120,834.85. * Approved directors’ expenses. This report summarizes the major actions at Chugach board meetings. The board normally meets at 6 p.m. on the first and third Wednesdays of each month Board OKs operating and capital budgets At its Dec. 6 meeting, the board approved a 1996 operating budget which projects $132.2 million in operating revenues, $1 million in non- operating revenues, $127.2 million in expenses and $6 million in margins. (See story, page 1.) Chugach sold 184.9 million kilowatt- hours of electric service in October, about 8.4 million kwh more than projected by the budget. Wholesale power {242562} sales accounted for 77.1 million kwh, retail sales for 81.2 million kwh and economy energy sales for 26.6 million kwh. Year-to-date sales stood at 1.8 billion kwh, about 53.3 million kwh more than projected by the budget. Chugach finished October with operating revenues of $10.4 million, about $196,000 less than anticipated by the budget. Year-to-date operating revenues stood at $106.4 million, about $210,000 less than projected by the budget. October expenses were $9.8 million, about $399,000 less than projected by the budget. Year-to-date expenses stood at $99.9 million, about $2.9 million less than projected by the budget. At the end of October, Chugach's (call 762-4708 for the schedule). Meetings are held in the board room on the second floor of the headquarters building at 5601 Minnesota Drive. A time equity-to-total-capitalization ratio stood at 24.74 percent. By comparison, Chugach's year-to- date October 1994 power sales totaled 1.7 billion kwh, while operating revenues were $106.2 million and expenses were $93.3 million. Chugach's equity-to-total-capitalization ratio at the end of October 1994 stood at 24.07 percent. In other action at the December meetings, the board: ¢ Authorized the general manager to negotiate a one-year extension to the generation and transmission TIER agreement with Chugach's wholesale customers — provided that during this period there would be no challenge by the wholesale customers to interest during construction or other revenue requirement issues. TIER (times- interest-earned ratio) is the method used to earn margins based on equity. The original agreement signed in December 1990 also established a 10- year capital credit rotation cycle with Chugach's wholesale customers. ¢ Authorized the general manager to execute a $1,878,000 contract with is set aside in each board meeting for public comments. Once approved, board minutes are available to the public. SMIT for a 300-megavolt-amperes, 138/230-kilovolt spare transformer. * Rescinded Board Resolution 88-03-02 which stipulated that only firms with agreements with IBEW Local 1547 be permitted to bid on electrical construction work. ¢ Approved absences from two board meetings in January for Director Ed Granger. ¢ Appointed Harold Braspenninckx, Mary Dee Fox, Sara Pete and Jerry Tanner to the 1996 Nominating Committee. ¢ Approved the use of organization logos and abbreviations on och roel material included in the Chugach vote’ information mailout. see Board report, page 3 Residential Service Costs Customer charge $6.25/month 7.727¢ 0.807¢ 0.0322¢ 8.5662¢ Energy charge Fuel adjustment Regulatory cost charge Total per kwh PAGE 2 About interties PAGE 3 Board viewpoint: Intertie lower your bill? Annual meeting notes PAGE 4 Board report How to reach us Our service center at 5601 Minnesota Drive is open from 8 a.m. - 6 p.m., Monday-Friday. Switchboard hours are 8 a.m. - 5 p.m. Frequently called numbers MBC SINT J, = 5 aus > ins 6k + bk 9 563-7494 Tollfree ...... . ... (800) 478-7494 CORMIERGD BOPUING, 2556p foes o Fo yes cso 563-7366 GUTOR EREVIOO ABN 504 5:6 gs mict owe be 762-4678 GRR ry asa ese el Seek 563-5060 Ree nets rise oe oo a we 762-4731 TOGRIE TOG MINN ae ig. con's > chaise, oo «: 9 762-7227 Payment options You may pay your bill by mail, in-person at our service center or by using our curbside drop box. You may be able to pay by phone if your bank or credit union offers this service. Current payments may also be made at any Anchorage branch of the First National Bank of Anchorage. To report a power outage Monday - Friday, 8a.m.-5p.m. ......... 563-7366 After hours 563-7494 Outside Anchorage ............... (800) 478-7494 The Chugach Outlet A Publication of Chugach Electric Association, Inc. 5601 Minnesota Drive P.O. Box 196300, Anchorage, Alaska 99519-6300 Chugach Electric Association, Inc. is a not-for-profit member- owned electric cooperative and Alaska’s largest electricity supplier. Chugach’s mission is to meet the energy needs of members and customers by providing competitively-priced, reliable, safe energy and services today and into the future through prudent and responsible planning, maintenance and management of the assets of the cooperative. -Turnagain aicrown wel Lake Oceanview Satellite Park Ray Kreig, President Kathleen Weeks, Vice President Patricia Jasper, Secretary. Mary Minder, Treasurer Martin Bushue, Director Ed Granger, Director . Pat Kennedy, Director Gene Bjornstad, General Manager Printed in Alaska with vegetable inks on recycled paper (100% recycled, 20% post-consumer waste). News notes ¢ Customers can now do more business with Chugach over the telephone, thanks to new equipment installed in December. You may now access account and other information with a touch tone phone and leave detailed voice mail messages. ¢ Remember, you could win $50 if you find your member number in the Outlet. Every month three member numbers are inserted into the Outlet copy inside brackets like this {}. If you spot your member number (which is also printed on your bill), call our service center at 563-7366 to claim your prize. You may claim for either the current Outlet or the preceding month's issue. * The initial planning has begun for a new transmission line to connect the Anchorage area with the Kenai Peninsula. As part of the route selection process two public meetings will be held to outline project and the planning process, er questions and offer individuals an opportunity to provide input to the planning team. One meeting will be held in Anchorage at 5 p.m., Jan. 31, at the Loussac Library. A second will be in see News notes, page 2 THE GHUGAGH UTS oz. 1996 budgets approved In 1996 natural gas costs for generating power at Chugach's plants, like the Beluga Power Plant pictured above, are expected to increase dramatically. The 1996 operating budget approved by the board of directors on Dec. 6 attempts to hold the line on spending for the coming year. The budget projects operating revenues of $132.2 million, non-operating revenues of $1 million, expenses of $127.2 million and margins of $6 million. While the budget does show fuel expenses increasing, it does not anticipate any increase to the basic rates paid by customers for demand and energy charges in 1996. The budget predicts revenues from retail power sales will be $85.1 million. Wholesale sales are expected to generate revenues of $40 million, and economy energy sales $5.7 million. On a kilowatt-hour basis, retail sales are expected to increase 1.7 percent, wholesale sales 4.7 percent, and economy energy sales 12.9 percent. The 1996 budget is 2.3 percent larger than 1995’s projected budget. Most expense areas of the budget remained flat or saw a reduction from 1995 to 1996. However, increases in the cost of power produced and purchased, and higher depreciation and amortization expenses, accounted for the bulk of the increase from 1995 to 1996. The higher power costs are largely driven by the fact that about the middle of the year Chugach will use up the last of the inexpensive natural gas from contracts signed in the early 1970s. From that point on, all fuel will be priced under current contracts. The impact of the higher fuel prices will be partially offset by the return of $2.7 million from two reserve accounts to consumers through the fuel surcharge in 1996. The money will come from reserve accounts containing a portion of the margins earned on prior economy energy sales, and from funds set aside as an insurance reserve for submarine cable replacement. The increased depreciation expense is due to phasing in the last of the approved recommendations from a comprehensive depreciation study. New schedules for depreciating generation assets will go into effect, shortening the depreciable lifetime of the assets and raising annual depreciation expenses. The board also approved a capital budget of $30.1 million, down about 25 see 1996 budget, page 2 CONFIDENTIAL SUTTON-GLENNALLEN INTERTIE DELIBERATIVE PROCESS Additional Work Requirements Synopsis of Public Meetings Record Construction cost verification and risk analysis of all alternatives Analysis of Allison Lake -- 4 Dam Pool Issues Review Intertie reliability and risk analysis associated with Thompson Pass alignment Additional analysis of discount rate by alternative e Briefing on APUC standards for evaluating and approval of the various contracts. => Petro Star => CEA => Rate Payer Tariff Among Classes of CVEA Customers e Reasonableness of extending Petro Star’s Power Sales Contract beyond 10 years e Process of DCRA -- DOE issuing loan commitment e Review standards for requiring EIS analysis to include environmental considerations = Commissioner's Record of Decision Meeting with CEA’s General Manager and Chairman of the Board of Directors Is CEA committed to project and under what terms and conditions? Rate payer impact analysis Justification to APUC Project Labor Agreement Meeting with CVEA’s General Manager and Chairman of the Board of Directors All or nothing risk -- Court Challenge Further Legislative review and action CVEA Rate Structure - distributions of benefits Compromise project possibilities Need and commitment for environmental offsets and mitigation actions Scope of EIS to include environmentalconsiderations for all alternatives on equal basis IBEW -- Labor e All or nothing e No jobs => Earliest 1997 = Most likely 1998/1999 e Run on Project Labor Agreement -- all intertie work 5. Environmental Groups All or nothing Stay pending court ruling Throw it back for Legislative review and action Scope for EIS to include measurement of environmental externalities Administration prepared to introduce Legislation requiring all energy projects to be evaluated against an environmental externality formula which will be used by the APUC in its decision making process (1991 HB 121) ¢ Concerns Regarding Environmental Externalities There is no uniform, objective standard with which to study and analyze environmental externalities or their affects on given project. Utilities will strongly oppose in all likelihood. ¢ Concerns Express with Analysis to Date Treatment of subsidies for purposes of calculating the rate payers cost of project -- flows only to the one alternative. Rather than reflecting a balance consideration of benefit/costs among competing alternatives, $35.0 appropriation for intertie starts out analysis skewed in favor of intertie project. Hence, it results in a “best interest” finding that is nothing more than an expression of CVEA and DOE’s preference for the Intertie Project since the Legislature provided the subsidy for the Intertie than for some other alternative. ¢ Policy Issues Interconnection to Railbelt/State grid Haves vs. have nots State Energy Plan DRAFT Agenda Tuesday, December 5, 2:30pm. (Scheduled for 45 minutes) Meeting with Governor Knowles RE: Sutton-Glennallen Intertie Concerns Mark Foster (5 minutes) .The Feasibility Studies are fundamentally flawed ° The project just does not pencil out. ° The conditions recommended by the working group fall short. Chris Rose & Robin McLean (10 minutes) .The feasibility studies and the recommendations to Commissioner Irwin do not take into account Community Concerns ° Social costs are ignored e Sustainable tourism jobs in the Valley will be lost ACE - Kevin Harun, Dori McDonnald, Peg Tileston (10 minutes) .Environmental impacts are not taken into account. Eric Myers (5 minutes) .Chugach Electric Ratepayers ° The project essentially imposes a tax upon Anchorage to support a $60 million project which only provides very modest benefits for a few thousand residents Kay Brown(5 minutes) Is this an appropriate use of state money? General Recommendations Additional Attendees: Art Esch, Valley Resident Pat Lavin, Trustees for Alaska Peter Van Tuyn, Trustees for Alaska November 30, 1995 ae Snell and Randy Simmons FROM: Dennis McCrohan SUBJECT: Highlights of Mark Foster’s November 21 , 1995 Report The majority of the report by Mark Foster is argumentative about broad issues outside of the scope of the Feasibility Update. The report contains minimal documentation for Foster’s broad assertions since the report mainly footnotes opinions by the author Foster. There are a few relevant comments which are applicable the Feasibility Update. These are: Intr ion 1. Page 1. The issue is that Foster disagrees with the 1993 legislation. He interprets the scope of Beck’s and CH2M Hill’s analyses to test the legislative action. Circular Reasoning 1. Page 3. Foster’s assertion is incorrect that CH2M Hill only looked at whether the Intertie was feasible. CH2M Hill looked at numerous alternatives to determine which were feasible. Then CH2M Hill subsequently looked at the most feasible alternatives to determine which minimized the cost to the CVEA ratepayer. 2. Page 3. The scope of the study was not to determine the best investment alternative. Rather the study is whether the Intertie, given the State loan, is a good investment. 3. Page 4. The report does not assert that the Intertie is superior. The report says the Intertie is viable. This conclusion does not consider the State loan. 4. Page 4. This is a good point. The risk is indeed transferred to the CEA ratepayer. However the gain is also transferred to the CEA ratepayer. This could be substantial since CEA will sell energy at about 4 cents per KWH while generating at about 1.5 cents per KWH. Thus CEA has a large upside benefit if growth does occur. CH2M Hill has not analyzed the CEA rate impact. CEA should undertake this task and presumably has prior to signing the CEA/CVEA agreement. CEA shoul wer thi i istaken Assumption 1. Page. 4. Foster makes the point that Petro Star must stay a participant until 2020. This is a good point and addressed in the report. The draft Petro Star agreement does not extend to this time. 2. Page 5. Foster comments on the hydroelectric capital costs. It should be noted that the developers for Silver Lake and Allison Lake were both asked in July 1995 by CH2M Hill whether the developers wished to submit any cost data in addition to their 1994 submittals. Both declined. However it is a good point. CH2M Hill has analyzed the Silver Lake costs provided by a contractor, Whitewater. lf Whitewater costs were used for Silver Lake, the Silver Lake ratepayer test. CH2M hill has not made a decision yet whether to accept the Whitewater costs. The Whitewater is a contractor and does not own or operate any projects. CH2M Hill has difficulty accepting developer costs without validation. For example the Valdez coal plant might be feasible if the developers costs were accepted. 3. Page 6. Foster makes the point that Petro Star has a favorable rate which impacts the CVEA ratepayer negatively. This is a good point. We have estimated the impacts but ultimately the impact will be tested by the APUC when the agreement is reviewed. In addition an analysis requires assumptions about rate structure which is best left to CVEA.. CVEA hould answer thi ion. 4. Page 6. The discount rate discussions are interesting but not relevant to our report. The point that higher rates should be tested and that the 0% rate is meaningless are correct. We will make runs at higher discount rates. It is of interest that in the 1994 Foster provided extensive comments on the Beck report which assumed a discount rate of 4.5%. These comments indicated Foster though the Beck rate of 4.5 % was too high at that time. 5. Page 7. Foster makes the point that different discount rates could be applied to different alternatives. This is a valid point. CH2M Hill is reviewing this issue. However Beck and CH2M Hill adopted the approach that the alternatives should be made equivalent in terms of risk through capital costs. A case could be made that an intertie deserves a lower discount rate based on lower risk. In most states an intertie carries a lower environmental externallity penalty in resource evaluations than a hydro or diesel plant. If different discount rates were used, the capital costs would have to reviewed and perhaps revised. 6. Page 8. F rmak int that the Valdez lenallen intertie is a weak link. However with the new Intertie in place, the usage of Solomon Gulch can be modified to provide more back up for Valdez. In addition the CVEA reliability problems are primarily in Glenallen, not Valdez. 6. Te 9. The final comments on the Intertie costs are not technically accurate according to Beck. However we a investigate these costs again. The approach taken by Ere nd also CH2M Hill i: v oe by in nden nsultants, were th for h ital i nal . Uni h were provi in th preree of a meaningful contractual Saiiial the independent consultant estimates were Cc d CEA M&LP for the Intertie were contractual r n to the CVEA RFP. 7. Page 9. Foster’s remarks on the Telecommunications industry are interesting since he obviously supports a different standard for this industry than for the energy industry. However the remarks are not relevant to this project. cs G . . du i Cee? i= . : = y =a SF eh : ve — = ie . . : . . oO mie als - ae : : ' . - : ° ney < “ . : » | aa . ae : / Lo, cae cs ; ti . . awit oe : ‘ siete uM ‘ es : ' . : r os / ‘ : . ; . . . . ae eet . < 7 : - ‘ s 7 : . ® 7 z = s oy J amet . : . / . . te = . . ‘ ee aeseke . . ot 2 ‘ee a? s zi . ' oe 7 + > . : FROM: CH2M HILL-SEA TO: 927 561 8998 NOU 3@, 1995 1@:15AM H6@0 P.@2 REVIEW OF | THE DRAFT ~ Copper Valley Intertie | | FEASIBILITY STUDY Dated: January 19, 1994 I : Prepared by: Mark A, Foster, PE. Subniitted to: Alaska Center for the Environment February 25, 1994 - /RP-94-02 ee ee oe oe oe: oe +S = ao leSlCelU CU FROM? CH2M HILL-SEA TO: 907 561 8998 NAL! 3Q@, 1995 1@:16AM #620 P.@5 avers oe Meanwhile, actual prices paid by Copper Valley for deliveries in December 1993 were®: Valdez $0.6123 /gallon Glennallen $0.6423 /gallon Again, this highlights that the DPS may have established a false starting price for comparisons. c. The Draft Feasibility Study assumes the real price of diesel for CVEA will escalate at approximately: 1) Low 0.03% per year . 2) Medium = 1.73% per year 3) High 2.45% per year Meanwhile, Jong term price trends in the real cost of crude oil suggest that the so-called "low" fuel projections are more reflective of the actual historic data looking back over similarly long time horizonsé. Furthermore, there is evidence to suggest that the trend for the past forty years has been a decline in the inflation adjusted price for refined products’. This review will include the DFS low a medium fuel escalation cases recast as the medium and high fuel escalation cases. * In addition, this review will use the December 1993 prices paid for diesel fuel asa starting point for fuel costs. 3. Discount Rate a. The DFS uses a 5% real discount rate. The proper discount rate is one that reflects the investment cost to Alaskans of the money sunk into the project. One reasonableness measure for Alaskans would be to compare whether or not the return on the investment was equal to or greater than an equivalent investment in the Permanent Fund. Given the Permanent Fund's average real return of 5% over the past several years and a 5From Copper Valley Electric Association tariff filings with the Alaska Public Utilities fe onsanipe in 1994. See for example “An OPEC Obituary”, by Arlon R. Tussing, in The Public Interest, Number 70, Winter 1983, at page 21: History offers some empirical support for the viability of a long term world oil price in the $10-to-$18 range [1982 dollars]. Over the past 110 years, the average price in 1982 dollars has been almost exactly $13 per barrel and, despite an average consiant-dollar prime fluctuation of more than 20 percent per year, no long-term trend can be detected. (The aerage 1982-dollar price between 1871 and 1925 was $12.96 per barrel, and the average price between 1926 and 1980 was $13.04 per barrel.) 7See “Energy Security and Policy: Analysis of the Pricing of Crude Oil and Petroleum Products", GAO/RCED-93-17, March 1993, Figure 1.6: Retail Gasoline Prices, adjusted for inflation, 1950-90, which shows retail gasoline prices have declined by over 20% in real terms from 1950 to 1990. “*DRAFT™* page 6 , February 25, 1994 Gg oe a soe ce center cree cm FROM: CH2M HILL-SEA To: 9@7 561 8998 MAKA sil RP-94-02 2) presumption that it will continue, an initial estimate of 5% appears reasonable. Nonetheless, given the Permanent Fund Corporations recent projections for a real return of between 4.5% and 3%, a sensitivity analysis would be appropriate to check the robustness of the "least-cost" alternative to a slightly lower discount rate. C Valley Intertic Alternat Capital Cost CVEA has expressed concern to the feasibility study team that the capital costs were too high. CVEA "implied that they would consider unreasonable any design selections which are a matter of philosophical differences and which cost more but buy nothing, e.g., longevity, lower maintenance costs, reliability."8 Unfortunately, CVEA's views, if accurately reflected in the summary, reveal what might be characterized generously as a misunderstanding of the underlying purpose of a feasibility study. The purpose of a feasibility study is to identify a least cost alternative with a consistent basis of comparison between the alternatives. CVEA appears to believe that the intertie is their best alternative and the feasibility study should be manipulated (by lowering capital costs and ignoring the operating and maintenance implications) to reach this result. Consequently, any assumptions that CVEA has supplied for the purposes of determining Intertie feasibility must be reviewed in light of this bias. It appears that the feasibility study team has ceded to CVEA's desire to lower the capital cost in several intertie design decisions which should result in higher operations and maintenance costs for the intertie alternative compared to industry standards. The impact of these design decisions does not appear to be reflected in an appropriate upward adjustment in the O&M allowances in the economic analysis. Ice and snow design loading conditions have been reduced from the original recommendation without adequate empirical evidence. It appears to be a “compromise” between more conservative margins of safety and a desire to keep costs down?. In addition, Power Engineers Inc. suggest that maintenance is a factor to consider in deciding whether to accept lower loading criteria and reliability. This See DFS, Appendix E: Technical Review Meeting Summary, page 1. 9See DFS, Appendix E, Technical Review Meeting Summary, pages 2 and 3 regarding extreme loading criterion. **DRAFI™ page 7 February 25, 1994 ninit 3Q@, 1995 18:16AM #62@ P.24 em fF { we Hr Tr 11-30-1995 17:36 9072585842 Locher Interests LTD. P.017014 Post-It” brand fax transmittal memo 7671 LOCHER INTERESTS L' 406 WEST FIREWEED LANE, SUITE 101 ANCHOR MEMORANDUM 9425-0081 TO: Dennis McChrohan FROM: Jim Thrall DATE: November 30, 1995 REF: Status of Alllson Lake and Silver Lake Projects Pursuant to your request, | checked the current status of the two referenced projects. The Alaska Business and Industrial Development Corporation (AK BIDCORP) was granted a preliminary permit for the Allison Lake Project on May 1, 1985. The preliminary permit is good for a period of 36 months, If no application Is filed at that time the permit will expire (although FERC often will grant one sequest for an extension), The Alaska Energy Authority filed a motion to intervene in the project. The motion was granted, AK BIDCORP filed its first Progress Report on the preliminary permit application on November 1, 1985. The report listed a number of Individuals/entities with whom they had consulted including: USGS ADF&G USFWS NMFS s Tim Towarak and Tom Moyer, Alaska Governors Office Randy Simmons AEIDA CH2MHill Clayton Hurless and Robert Wilkinson, CVEA David Carter, Mark Stubbert and Brian Robin of Conwest Exploration No actual work has been done yet, or at feast Is not reported in the Progress Report. Whitewater Engineering has filed for a preliminary permit on the Silver Lake Project. Apparently there has been a problem with FERC's distribution of the notice as a nether AEA nor at least some of the resource agencies ever saw the notice of application. However, my source reports that it Is his understanding that a preliminary permit has, or Shortly will be granted. Apparently Whitewater feels that they can develop the project at about half the $65X10° cost estimate that APA had developed, | will try to contact the FERG project person responsible for this permit (Mr. Mike Spencer) and determine if the permit has In fact been Issued, and, if possible, why thera was no preliminary notification of the application. + oh w oQ) \nan JHT:cjp We aan) RO “ “yon + Pmaawu VA Wotan, wi &re no copy: File ‘ r\s f ae aR, | a AN ne gta Reva a “Rouwts December 3, 1995 TO: Riley and Randy FROM: Dennis McCrohan SUBJECT: Observations on Glenallen and Valdez Public Meetings Sutton Glenallen Intertie My observations were: December 1, 1995 Valdez 1. The meeting attendance was about 40 to 50 people. 2. There were minor technical questions. 3. All parties who spoke with one exception were supportive of the Intertie and/or lower electric rates. 4. A representative for a wilderness group spoke that her group was not opposed to the Intertie but rather supportive of adequate mitigation of its impact. 5. Whitewater Engineering spoke stating that they supported the Intertie, the Silver Lake project, and open access to the transmission grid by independent power producers. 6. Tom Stodalmeir spoke in favor of the Intertie but primarily in favor of his signature drive for a referendum to combine the Alaska utilities. December 2, 1 nallen 1. The meeting was attended by about 60 to 70 people. 2. There were considerable technical questions mainly regarding rate impacts to CVEA, the sharing of risks and benefits between CEA and CVEA, and some alternative energy comments. 3. Three ratepayers in the CVEA district spoke against the Intertie based primarily on their residences being along one of the proposed corridors and environmental factors. One of these 3 ratepayers spoke against the Intertie based on the fear that the costs of defense against any litigation filed by the environmental groups would fall on the CVEA ratepayer. Her husband spoke for the Intertie. 4. One party from Sutton spoke against the Intertie quoting Mark Foster's assertions as being from the CH2M Hill report. 5. An Aahtna native group spoke for the Intertie. 6. As in Valdez, most spoke for the Intertie primarily based on desperation for lower rates. Several indicated that the Intertie had been studied to death and urged the Commissioner to make a final decision to proceed or halt and stop wasting public and community money on studies for people who have already made up their minds. 7. Several speakers remarked on the unfairness of Anchorage, Palmer, and Sutton residents benefiting from intertie grants but objecting to the Intertie loan for Glenallen and Valdez. These speakers pointed out that the transmission line currently providing energy to Sutton obstructs many views and impacts many more citizens than the proposed CVEA Intertie. 8. Several residents spoke against the local diesel options based on ice fog, noise, and unreliability, and high cost. 9. The fire department spoke for the Intertie based on recent fires at Glenallen due to the diesels and also the problems of residents, in their efforts to avoid high electric rates, self generating increasing fire hazards and air pollution and oil spills. 10. A CVEA ratepayer questioned the Administration’s legal right not to proceed with the 1994 finding and questioned the paternalistic attitude of government and in this instance unwillingness to trust the work of predecessors, effected parties, and the communities. In addition he raised a concern that the separation between the “haves” in Anchorage, whose wealth is generated by the resources of the rural areas, and the “have nots” will only get worse unless infrastructure such as interties are extended to the rural areas. December 3, 1995 CONFIDENTIAL Ryley tarde 12: Peyana Randy Secon wv out A 7 | FROM: Dennis W2rm WS SUBJECT: Allison Lake Fifty percent of the Allison Lake project generation results from water flowing through Solomon Gulch and the resulting energy is assumed part of the economic justification for the Allison Lake project. It is a complex issue. Keith Laufer is on vacation. The attached letter was provided by Ron Saxton at our request. | will discuss further with Ron Saxton. The technical issue is the quantity of energy generated in Solomon Gulch and the applicable rate to be used in the Feasibility Update of the Sutton Glenallen Intertie for Allison Lake water producing energy at Solomon Gulch. The contractual issue is complex too. The following items are critical: 1. It will be very difficult to quantify the amount of water. The majority of the Allison Lake water will be available during periods where Solomon Gulch historically has spilled and would have no value. In addition the contractual rights to the Allison lake water is unclear. You should note that Ron Saxton has asserted that the water is within the Solomon Lake water shed under the current AEA FERC permit. AEA has previously filed to intervene in the Allison lake FERC proceedings based upon more general considerations. Any intervention by AEA must consider the Four Dam Pool participating utility rights too. Allison Lake has a FERC preliminary permit only. Also Alyeska holds water rights and has made application for additional water rights from Allison Lake. 2. To generate cost benefits by allowing Allison Lake water to flow through Solomon Gulch will require that any incremental generation revenues must exceed costs. First as a minimum variable operation and maintenance costs of the Four Dam Pool operators must be offset. Second any additional Owner’s(AEA) risk due to major maintenance, shortening of the useful life of the Solomon Gulch equipment, and Insurance and R&R fund increases must be offset. 3. Ron Saxton’s letter asserts that the additional water flowing into Solomon Gulch is considered part of the Initial Project. Therefore the PSA rate, including O&M budget process, determination procedures are applicable. Any change to the PSA would require a unanimous agreement of the participants in the Four Dam Pool. 4. Any departure from the PSA for Allison Lake will set a precedent outside the PSA which may create inequities among the utilities and expose the PSA to special deals in each participating service area. In addition the Four Dam Pool may be concerned about APUC involvement in Four Dam Pool matters resulting from the Allison Lake project. We should note that the Allison Lake developer appears to have recognized some of these problems since he has stated that he is looking at an alternative bypassing Solomon Gulch. Riley Snell or From: Randy Simmons To: Dennis McCrohan; Riley Snell Subject: Sutton Glennallen Intertie Loan Date: Monday, December 04, 1995 2:24PM Per the Division of Energy, the following steps would have to take place prior to issuing loan to CVEA: 1. Mike makes a finding of feasibility. 2. Plan of Finance must be revised. 3. Negotiations with CVEA. 4. Comply with reqirements of Power Project Loan Regs--paperwork. According to Energy staff, once Mike makes the call no other public process takes place. They say total time from start to finish could be anywhere from 2-12 months with likelyhood the latter. Page 1 TO:( Riléy and Randy FROM: Dennis McCrohan SUBJECT: Anchorage Public Meeting Sutton Glenallen Intertie The preponderance of testimony was against the Intertie. This may be a bit misleading since most of the pro Intertie people gave up and left. The opposition to the Intertie was well organized and well spoken and had planned the meeting and their participation. Key points relative to the analysis were: 1. There were several questions regarding lack of information and particularly about alignment of the line. 2. There were many legal questions regarding the process of determining feasibility. 3. Many speakers were critical that the meeting was not a public hearing. 4. Speakers quoted a letter from the Governor which promised a “scientific investigation” of the Intertie project. 5. Speakers quoted the Governor as saying in his election campaign that he was opposed to the Intertie and promised to block the Intertie. 6. Speakers asserted that the IBEW has bought the Administration support. . 7. Regardless of the legislation or the process, speakers requested that social environmental factors be considered in the feasibility determination. 8. Several speakers stated that they supported subsidy to Glenallen and Valdez to reduce electric costs but not with the Intertie project. 9. The CEA Board Chairman stated that CEA’s participation would be based upon long term economics and business considerations. ECEIVE]] _ Engineers DEC 141995 Planners fore Economists Alaska Indusirigl Development BE scientists and Export Authority December 12, 1995 117526.C0.ZZ Mr. Dennis McCrohan Deputy Director-Energy Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage, Alaska 99501 Dear Dennis: On the basis of our discussions and our meetings with concerned citizens earlier this month, I am providing herein my thoughts relative to the Copper Valley Intertie feasibility analysis. First, let me say that the process has provided a lot of good information and I have a better appreciation for the full range of issues and concerns associated with the Intertie. As you and I have discussed, the State may decide to employ a broader interpretation of the feasibility analysis needed for the Intertie loan and develop more information upon which to base a decision. I would welcome the opportunity to contribute additional analysis that may be needed for the decisionmaking process. With regard to analytical support for the decisionmaking process, I disagree with many of the technical points raised in Mark Foster’s December 4 critique of the 1994 Copper Valley Intertie Feasibility Study and our November 1995 update to that study. A review of economic issues included in Mr. Foster’s paper (“The Sutton-Glennallen Intertie, A Case Study in Circular Reasoning, Mistaken Assumptions, and Poor Use of Scarce Public Resources”) is attached. However, rather than focusing on our differences, there is opportunity to focus on common ground. Areas where we agree include: ° The economic analysis currently focuses on direct costs associated with energy from adding consideration of indirect costs and expanding the analysis of project risks. Indirect costs could include environmental, socioeconomic, and neal resource alternatives for the CVEA service area. This analysis could benefit iG 5 Ril R \ Ker aesthetic impacts. Evaluation of these costs would need to employ objective, generally accepted techniques in order to be credible. I do not believe that Seattle Office 777 108th Avenue NE, Bellevue, WA 98004-5118 206 453-5000 P.O. Box 91500, Bellevue, WA 98009-2050 Fax No, 206 462-5957 Mr. Dennis McCrohan December 12, 1995 Page 2 time and energy should be devoted to an attempt to “monetize” or attach dollar and cent estimates to the various indirect impacts. Such attempts still require highly subjective processes for which generally accepted techniques are not developed; energies could easily be diverted to study methodology rather than focusing on a practical basis for the State’s decision. However, I do agree that impacts can be quantified in relative terms and included in a comprehensive review of direct and indirect costs for each alternative. Also, to the extent that any alternative has benefits that are distinct from others, they should be identified and added to the comprehensive review. ° Important risks should be considered. These could be identified as part of a problem framing exercise described in earlier correspondence. ° Project costs should be reviewed for consistency. While I believe that Beck did a professional job estimating the cost of the Intertie, some legitimate questions remain about the cost of the various alternatives. The risk of exceeding capital cost estimates of the Intertie and other alternatives could also be evaluated at various potential levels of cost variances. ° There is risk that Petro Star would be the only customer to derive significant savings from state assistance with intertie development. This would result if CVEA provides Petro Star with a significant rate reduction as incentive to remain a customer of the utility rather than leave the system to cogenerate. The irony not considered by Mr. Foster is that if CVEA loses Petro Star as a customer, its other customers will very likely see a rate increase to make up for the portion of fixed overhead that had been covered by Petro Star. The risk of impacts on CVEA’s residential and other commercial ratepayers should be considered with and without the Intertie and with and without Petro Star. Loss of Petro Star from the CVEA system will very likely have a negative impact on rates regardless of whether the Intertie is built. If you would like, I will provide information on decision analysis and on environmental evaluation approaches that would be germane to the Intertie decision. Part of a decision analysis approach would be to build on the areas of common beliefs (like those noted above), and develop better understanding among stakeholders regarding one another’s beliefs and needs. Environmental analysis included in EISs are disclosure oriented. As a basis for decisionmaking, care would need to be taken to focus on the “bottom-line” associated with significant impacts that could not be mitigated. As a second attachment to this letter, I am providing a memorandum to me from James Irish, a landscape architect in our Seattle office. In this memorandum, James provides information on approaches to evaluating “viewshed” impacts of the Intertie. It reviews alternative methodologies, provides examples, and indicates the kind of information that can be developed in evaluating viewshed impacts. Mr. Dennis McCrohan December 12, 1995 Page 3 Thank you for your hospitality during my stay earlier this month. I look forward to being of continued assistance to you and the State of Alaska. Best regards for this holiday season. Si ly, Q_ David A. Gray Review of Mark Foster (MAFA) Paper, “The Sutton-Glennallen Intertie, A Case Study in Circular Reasoning, Mistaken Assumptions, and Poor Use of Scarce Public Resources” The following is CH2M HILL’s response to critical comments made by MAFA regarding economic analysis included in the Copper Valley Intertie Feasibility Study Update, November, 1995. (the Copper Valley Intertie is the same as the Sutton-Glennallen Intertie.) For areas of agreement between MAFA and CH2M HILL, see December 12, 1995, letter from CH2M HILL to Mr. Dennis McCrohan, Deputy Director of Alaska Industrial Development and Export Authority. Capital Cost of Intertie. The MAFA report states that the capital cost estimates prepared by R.W. Beck underestimates the cost of the Sutton-Glennallen Intertie (the “Intertie’’). Beck estimated the cost of the Intertie using standard cost-estimating techniques. The firm then reviewed costs associated with other transmission projects in Alaska and calibrated these other data against its own independent cost estimates. Beck concluded that its own estimates were “in line with historical costs (adjusted for inflation) and recent project costs for similar construction circumstances.” MAFA simply averaged the range of costs experienced for other projects without reference to construction circumstances such as terrain and accessibility. Between these two approaches, the Beck methodology is more credible. Capital Cost of Hydroelectric Alternatives. MAFA states that the Beck estimates for hydroelectric alternatives are “old” and “overestimated”. The estimates were professionally developed for the State of Alaska and Beck adjusted them for inflation. They would probably not change by a significant amount if reestimated today and should not be considered to be overestimated. What is different is Whitewater Engineers new design and associated cost estimate for the Silver Lake alternative. As you know, Whitewater indicated that it had neither a preliminary permit nor new information on the Silver Lake alternative when a firm representative was interviewed about the project last summer. It submitted the new design and cost estimate just as Intertie Feasibility Study Update was being completed. Whitewater’s design and cost estimates should be independently reviewed. If they are realistic, this Silver Lake alternative would be a real alternative to be considered for development. Capital Cost of Diesel Generation. MAFA asserts that diesel generation cost estimates used in the Intertie Feasibility Study and the Intertie Feasibility Study Update overstate the capital cost of diesel generation. This assertion appears to be simply based on MAFA selecting the low-end cost estimate as its favorite and therefore concluding that the others used in our base analysis were overestimates. Projected Load Growth. MAFA refers to the load growth projections included in the Intertie Feasibility Study as “optimistic”. From actual 1994 load levels, the medium-low and medium-high load forecast is for an average rate of increase of 1.5 percent per year. This compares to average growth rates of 2.5 percent between 1980 and 1992 and 3.5 percent between 1980 and 1994. While these historic growth rates reflect economic growth associated with the oil business in the 1980’s and start-up of Petro Star operations in 1993, they do indicate that an average growth rate of 1.5 percent is within reason from a historical context. It is also worth noting that during Valdez and Glennallen public meetings, the Intertie Feasibility Study and the update were criticized as relying on load forecasts that were too low. MAFA appears to believe that it is unreasonable to forecast that the Trans Alaska Pipeline will continue operation past about 2010. When the pipeline terminates operation, the overall Valdez economy will see a downturn and Petro Star may well cease operation. However, the most recent forecasts for the Alaska economy from the Institute of Social and Economic Research (ISER) forecasts sustained oil production on the North Slope with operation of the pipeline through its entire forecast period (2025) without mention of termination of these activities. ISER notes changes in royalty rates on marginal fields, continuing discovery of new fields, and technology improvements as bases for its forecasts of activity at the North Slope. Therefore, the MAFA characteristic of the base load forecasts as “optimistic” is not well founded. (As noted in the Intertie Feasibility Study Update, Petro Star could cease taking power from CVEA. Under these circumstances, the Intertie is clearly not feasible assuming the base forecast.) MAFA also fails to consider the other upside economic developments that could occur over the next 20 years. These were pointed out to us repeatedly in Glennallen and Valdez. Such developments could cause loads to grow at rates more consistent with historic rates or replace Petro Star loads should they leave the system. CEA Ratepayer Impacts. MAFA asserts that CEA customers will automatically pay more if CEA financially participates in the Intertie. This is not true. While it may well be that there would be some initial investment by CEA in the line in terms of a negative cash flow for a few years, CEA expects a return on its investment in terms of a positive cash flow over the long term. CEA would not be subsidizing the line; it would be investing in development of a new market. Risk Associated with More than One Utility Participation in the Intertie. In the Intertie Feasibility Update, the statement is made that 80 percent participation in the line reduces the ownership risk to CVEA and its customers. MAFA acknowledges this point but asserts that the risk does not go away; another participant, like CEA, would absorb the remainder of the risk, so the total risk is the same. That is also true. The primary point here is that with diversification of the risk, it is not disproportionately borne by one small “investor”, CVEA. It is borne by a greater number of the potential beneficiaries from the line--sellers and buyers. Allison Lake: Payments to the 4-Dam Pool. As discussed in the Intertie Feasibility Study Update, Allison Lake is attractive from a “resource cost standpoint”. However, half of the output resulting from this project is actually generated at Solomon Gulch and is therefore subject to requirements of the 4-Dam Pool contract. This contract requires a charge that is currently 6.4 cents per kWh for all energy generated at his facility!. MAFA argues that a lower rate could be negotiated since parties to the 4-Dam Pool agreement would benefit from revenues derived from the extra generation. While these parties would benefit, they would do so from additional payments made for generation associated with the Allison Lake project. Any negotiated payment would increase CVEA’s overall cost of power from the Allison Lake alternative. For example, if instead of a 6.4 cent payment, a 3.5 cent rate were negotiated, the average cost of Allison Lake generation would be increased by 1.75 cents per kWh. Discount Rate. A real discount rate of 4.5 percent was used in the resource cost analysis of all alternatives in the original Intertie Feasibility Study and in the Update. This discount rate reflected the real rates projected to be paid for (taxable) A-rated utility bonds. (The projected nominal rate was in the range of 7.5 to 8.0 percent.) MAFA suggests that this rate does not cover risk and that “discount rates should take into account the opportunity cost of displaced private spending.” The 4.5 discount rate does in fact cover risks that financial markets determine are associated with loaning funds to AIDEA and the State of Alaska. Since the free market is willing to make these investments with private funds, it is not displacing private spending. MAFA suggests that individual projects should have higher thresholds for rate of return like in the private sector. This is really a separate issue having to do with actual realization of private investment return; the intertie analysis is based on determination of a least-cost direction for public investment. MAFA states that cost analysis of each alternative project should be treated to account for all risks associated with each by using a different discount rate for each. I would not suggest that this be accomplished by adjusting the discount rate for each alternative. Rather, if needed, discrete factors can be developed to assess specific risks through uncertainty analysis. MAFA criticizes the sensitivity analysis conducted with 3 percent and 0 percent discount rates. These were developed in response to questions raised during the analysis. For example, MAFA suggested sensitivity analysis with lower discount rates in its response to the draft report to the original Intertie Feasibility Study. MAFA appears to criticize use of the discount rate “because of the exemption of interest on the debt from federal income taxes.” According to MAFA, this inadequately recognizes the opportunity cost of borrowing. The 4.5 percent discount rate is based on a taxable borrowing as noted above, so this point is mute as it relates to the discount rate. For the cost of power analysis, the interest rate on the “supplemental loan” (that needed above the $35 million state loan) is assumed to be 5.0 percent. This assumes that a Federally subsidized RUS loan would be used for this supplemental financing. This subsidy (as well as that associated with the $35 million loan) represents the implementation of public policy 1 the attorney for the 4-Dam Pool has clarified that water “diverted into Solomon Lake and used to generate power is Initial Project power” and is therefore subject to all terms of the 4-Dam Pool contract. designed to build infrastructure and lower electric rates in rural, low population density areas. Finally, higher discount rates, like those used by private industry, lead to more short-term oriented capital decisions. In making decisions regarding infrastructure, the State of Alaska has had more of a long-term focus. Use of discount rates for economic:analysis in the public sector ultimately is a matter of policy. Enabling legislation for the Intertie required that resource cost analysis be conducted “using a discount rate representing the estimated long- term real cost of money.” Riley Snell ES Re ce From: Dennis McCrohan To: Randy Simmons; Riley Snell Subject: Sutton and Glenallen Status Date: Friday, January 05, 1996 10:40AM Called Dave Gray for a status report. He is meeting Monday with the HDR engineer who did all the original analysis of construction costs and also with Beck. | suggested that CH2M Hill fax a letter to each h developer asking if they had any supplementary cost information which they wished to submit. We would put a deadline of January 12. He will send a draft to me today. The letter would go to CVEA for the T- line and the diesels, Whitewater for Silver Lake, Fred Brown for Allison Lake, and ASC for the coal plant. He will send a revised cost proposal for the construction cost update and associated risk analysis and the qualitative summary of the environmental impacts. He anticipates all work being complete by January 19. We intend this to be a supplement to the Feasibility Update. We need to consider how to "present" the $35M applied to all alternatives. | suggest this be done in letter from Ch2M Hill, separate from the Supplement to the Feasibility Update.. Dennis Page 1 y ALASKA INDUSTRIAL DEVELOPMENT =_ AND EXPORT AUTHORITY = ALASKA @ =ENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 561-8050 FAX 907 /561-8998 MEMORANDUM / TO: Riley Snell ” Executive Director Randy Simmons Development and Finance Manager \ FROM: Dennis McCrohan pawn Deputy Director - Enetgy DATE: December 20, 1995 SUBJECT: | Supplemental Feasibility Analysis Sutton-Glennallen Intertie As we discussed, there appears to be 3 fundamental issues raised in the public meetings which may require further analysis by CH2M Hill to improve the Feasibility Update. These relate to the construction cost accuracy and associated cost overrun risk of the alternatives, the reliability risk associated with the Thompson Pass existing transmission line, and the environmental and social impacts of the alternatives. CH2M Hill has summarized the approach and status of the previous work and a proposed methodology for further analysis. The summary is attached. It should be noted that the environmental and social impact analysis, as outlined by CH2M Hill, is outside of the original scope. Key points are: 1. There is more detail in the Intertie construction cost estimates than the other alternatives. However, additional cost development including an overrun cost risk analysis can be undertaken to make all alternatives equivalent. It should be done for all alternatives. It will require about two weeks to complete. 2 The risks associated with Thompson Pass have been incorporated adequately in the Feasibility Update. A brief explanation may be prepared but no new work is required. Memorandum December 20, 1995 Page 2 3. The social and environmental analysis is difficult to accomplish and will certainly be contentious. There are no accepted methodologies for this analysis. CH2M Hill is recommending an approach similar to that used by lower 48 PUC’s for integrated resource plans. The analysis will provide some indirect costs for environment_and_ social impacts but these will be highly subjective. This analysis will require at least 4 weeks. In addition, CH2M Hill has provided some thoughts regarding the duration of the Petro Star/CEA/CVEA agreement. Please let me know if any additional information is needed. Attachment From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:30:18 Page 2 of 10 Copper Valley Intertie Feasibility Issue: Environmental and Social | mpacts This paper briefly reviews the work done to date to assess the environmental and social impacts of the Copper Valley Intertie project (the “Intertie’’) and its alternatives. It identities topics likely to be addressed in a broadly defined feasibility study (that includes both direct and indirect costs), based on existing information and assessment of other key areas of stakeholder concern. Finally, it presents some possible options for conducting such an evaluation, based on similar types of work CH2M HILL has undertaken in other states. Work to Date and Potential Key Issues To date, work regarding environmental and social impacts of the Intertie was presented in the Copper Valley Intertie Feasibility Study published in 1994. In addition to an economic evaluation of alternatives, the study contained a preliminary analysis of environmental issues and public concerns, as well as an overview of several analytical techniques that could be used to weigh the relative environmental and social costs of the alternatives. The feasibility study documented in some detail a number of concerms related to natural resources. Tssues identified for the Intertie included its potential to affect wildlife populations, water quality (including anadromous fish habitat), wetlands, and recreation/visual quality. However, the study addressed only briefly many of the potential social, cultural, and economic impacts of the Iniertie. Impacts identified but not discussed in depth include the effects of increased access to game on subsistence hunting in the Matanuska Valley; the proximity of the apparent preferred route to the Nelchina Trail, a native migration route, and the consequent potential for cultural resource disturbance; and the economic effects of the project on businesses along the transmission line route that support the area’s tourism-based economy. An additional area not discussed in the analysis concerns the project’s “‘second-level”’ impacts--those not associated immediately with the construction and operation of a transmission line or generating facility, but arising as an indirect result of the facility's presence. For example. the economic development induced by the availability of a larger power supply has potential impacts of its own, including growth of Copper Valley communities, increased use of natural resources, and development along the Glenn Highway. Impacts associated with alternatives to the project have «also been quantified to some extent in the existing analysis. Perhaps the most important for the diesel- and coal-fired alternatives are the impacts related to air emissions. While assumptions about air pollution control technology can be factored into direct project costs, impacts may occur even with the most sophisticated technology available. Por example, the 1994 Intertie Feasibility study notes that, even with the use of advanced fluidized-bed combustion techniques, the emission plume from a coal-fired facility could have adverse effects on nearby Class I airsheds. Water consumption, waste streams, and the effects of resource extraction are other issues that would require consideration in a weighting of relative From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:31:37 Page 3 of 10 impacts. Detail provided on alternatives to the Intertie in Appendix M of the feasibility study is not extensive, and would likely need to be expanded to support a credible comparative analysis. Given that CVEA has indicated that it will not invest in additional diesel facilities until it must in order to meet load requirements, it would be logical to add consider continuation of its existing diesel operation as a baseline alternative. As noted above, the 1994 Intertie Feasibility Study also included brief descriptions of several potential techniques for evaluating the relative environmental and social costs of the Intertie and its alternatives. The specific applicability or relevance of these techniques to the project was not discussed in the report. The assessment of indirect costs is a rapidly changing field, with frequent updates and refinements both in technical analysis methods and in regulatory development; as a result, the appropriateness of the analytical techniques summarized in the 1994 work would need to be revisited in light of current practice in the field. Approaches to an Integrated Feasibility Analysis If the scope of the feasibility study is to be widened, additional work will be necessary to identify specific areas of the existing report that require supplementation and to provide the data necessary for analysis and decisionmaking. Equally important will be the development of a method of valuing and ranking dissimilar alternatives and issues. The data gathered to date represent the objective disclosure of potential environmental impacts, as required by NEPA and other environmental legislation; however, within the broad social, economic, and environmental context of the project, identified impacts may be seen as either adverse or beneficial, depending upon the values of project stakeholders. To establish this context--and provide the parameters within which debate on the project will take place--requires an analytical framework for weighing the relative costs of the impacts. An integrated evaluation of both direct and indirect costs for environmental, cultural, and economic issues associated with the Intertie and the other alternatives under consideration will facilitate a decision on the feasibility of the intertie as a least-cost alternative. Such an evaluation would incorporate the principles of integrated resource planning (IRP), a process intended to help utilities and state regulatory commissions consistently assess a broad range of demand and supply resources to meet customer energy service needs cost-effectively. Approximately 34 states engage in some form of IRP activity, often associated with the preparation of least-cost electric generation resource plans under the requirements of state public utility commissions. Besides explicit consideration of demand- and supply-side options, key characteristics of the IRP approach include evaluation of the environmental and social costs of providing energy services and analysis of uncertainties associated with different external factors and resource options. The typical study approach for evaluations of this nature assumes that all economically viable options to meeting the power supply needs of the region will be considered on an From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:32:55 Page 4 of 10 equal basis!. Required regulatory compliance equipment and programs are calculated for cach option and added to direct project costs. Next, indirect impacts related to the environmental and social characteristics of the study area are identified. Typically, these indirect costs are evaluated through sophisticated decision science methods and qualitatively valued. Ranking and weighting of impacts are developed on the basis of state and local priorities to allow the comparison of indirect costs among the options. Finally, all options are compared and ranked in a manner that weights direct and indirect costs to reflect these priorities. CH2M HILL’s experience in integrating indirect impacts into least-cost planning has identified approximately 135 potential areas of study that may affect the outcome of planning decisions to some degree. In practice, however, most evaluations limit the total number of issues to the most significant six or cight concerns, which then act as a surrogate for issues not specifically addressed in the analysis. An evaluation conducted for the Copper Valley Intertie would be likely to generally follow this typical approach. An integrated process of economic evaluation of the direct resource cost for all options (as done for the November 1995 Feasibility Study Update) would be coupled with an evaluation of direct and indirect costs related to environmental, cultural, and economic impacts in the study area. Indirect costs would most likely be treated in a qualitative integration scheme rather than ‘“‘monetized,”’ since the disparate factors being weighed and the wide range of views among stakeholders would detract from the reliability of an approach that attempted to quantify costs in monetary terms. Identifying the indirect impacts to be analyzed and their relative weights would be a critical aspect of the evaluation. To reach conse:sus on the Intertie’s feasibility would require that the spectrum of stakeholder viewpo.. ‘s be represented in the process. For example, if both environmental and business rep. sentatives participated in the selection and weighting of indirect cost considerations for | ie analysis, impacts on wildlife and impacts on tourism could be supportably compa: i on a common basis. The same approach might be taken for the assignment of re itive weights between direct costs of power supply and the direct and indirect costs oi environmental and social protection and/or mitigation. A benefit of this approach--as demonstrated by favorable public reaction to the incorporation of direct and indirect costs in electric generation and transmission line planning--is that decisions arrived at by the consensus of an array of interests are far more defensible both in subseqii-nt environmental analysis and in legal challenges. 1 This can begin with a screening step in which alternatives with relatively high direct costs that are also judged to have significant indirect costs are screened out from future consideration. From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:34:08 Page 5 of 10 Copper Valley Intertie Feasibility Issue: Resource Alternative Capital Cost Estimates and Risk Factors The 1995 Update to the Copper Valley Intertie Feasibility Study included cost estimates for power supply resource alternatives (the Intertie and alternatives to the Intertie) taken from the original study. ‘lhese cost estimates came from a number of different sources. Concern has been raised that these cost data are inconsistent and therefore can lead the State of Alaska to an incorrect decision regarding the feasibility of the Intertie. Additionally, concern has been raised about the relative risk of the various projects exceeding their estimated cost. Each of these issues are addressed below in terms of the bases for each cost estimate and approaches to develop additional information to address the concerns. Capital Cost Estimates The American Association of Cost Engineers has defined three levels of cost estimates. They are; order of magnitude (+50% -30% accuracy range), budget (+30% -15% accuracy range) and definitive (+15% -5% accuracy range). The order of magnitude estimate is made without engineering data by using cost curves or scale up/down factors. The budget level requires some level of design data. The definitive level is developed from very complete engineering drawings and specifications. Most cost estimates included in the Copper Valley Intertie Feasibility Study were order of magnitude estimates. There are inconsistencies among the numbers in that they were developed from different levels of effort and information. Implicitly, it was believed that this level of cost estimate accuracy was sufficient to assess the feasibility of the Intertie. The estimate for the Interlie is quite complete and includes more detail than usual for this level of design. It appears to be of a greater level of accuracy than the other estimates. The Intertie estimate used the input of local contractors on crew size and make-up and productivity. Design alternatives were cvaluated to determine the least expensive design options. The All-Diesel alternatives were based on planning estimates with some input from vendors. Significant differences exist between 1994 and 1995 cost estimates and the bases for these estimates. Confusion generated from these differences could be cleared up through an independent review of capital and operating costs for the All Diesel alternative. ‘lhe estimates for the All-Diesel and hydro alternatives do not seem to share the same level of detail as the Intertie estimate. The Allison Lake cost estimate is based on a State of Alaska reconnaissance feasibility conducted by HDR in 1992. The level of detail to this study is perceived to be good but less than that developed for the Intertie alternative. The Intertie feasibility report does state that some issues would require further study and that these issues may affect the total cost of the project. From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:35:22 Page 6 of 10 Silver Lake design and cost estimates were developed by IIDR as part of the Allison Lake reconnaissance study. For these cost estimates, HDR relicd on work done by Stone and Webster in 1982 and 1983. The Silver Lake estimate by HDR/Stone & Webster shows a 20% contingency on equipment and a 30% contingency on the remainder. This is acommon amount of contingency for this level of estimate. Given the age of these estimates, they are not likely to be as accurate as the Allison Lake or Intertie cost estimates. The Silver Lake estimates provided by Whitewater Engineering in November 1995 are based in part on the HDR estimates with significant cost reductions identified for some design changes. No documentation was provided; cost estimates by a disinterested party would be needed for a realistic evaluation of this proposal for the Silver Lake option. Whitewater used a 15% contingency in its estimate. This is unusually low for this level of cost estimate. The Valdez Coal capital cost estimate was originally provided by Ilobbs Industries, Inc., the developer associated with this project. In its limited review of this capital cost for the Intertie Feasibility Study, R.W. Beck increased the estimate from $27 to $37 million. During the update, Hobbs Industries indicated that they disagreed with Beck’s treatment of their estimates. Accordingly, CH2M HILL reviewed the two estimates and concluded that the Beck estimate was more realistic. ‘he Valdez Coal capital cost estimate has an uncertain level of accuracy. However, it would be reasonable to assume that it would not be any lower than the estimate provided by Hobbs Industries. Even with this concession, the overall resource cost associated with this alternative is significantly higher than existing cost estimates the Intertie and All Diesel alternatives. The capital costs for the various power supplies could be put on a more comparable basis through various different approaches. The approach depends on the level of accuracy and comparability required. A limited approach would be to review detailed plans for each alternative and independently make cost adjustnients where it appears to be appropriate. A more accurate approach would be to independently review, revise, and augment as necessary detailed plans for each alternative as a basis for developing cost estimates on a line by line basis. This would require site work and possibly additional conceptual design. Risk of Exceeding Estimated Capital Costs The risk of exceeding capital (and O&M) cost estin ates can be evaluated and used as a basis for calculating ‘“‘risk-adjusted capital costs.” °. risk-adjusted capital cost results from the application of data on the probability of th. estimated cost being over- or under-estimated to the single, ‘“‘most likely” cost es'imate. The result is an estimated cost range with probabilities estimated for points w: hin the range estimate. The approach to calculating risk-adjusted capital costs begins by identifying all risks associated with a project alternative and determining how these risks might effect project cost estimates. After risks are identified, they are categorized as potentially high, medium, or low risks. Those identified as hig or medium may require special From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:36:41 Page 7 of 10 study to determine the potential magnitude and characteristics of each risk. On the basis of expert judgment, these data are translated into a range of potential deviations from a specific cost component included in the base cost estimate. Probabilities are assigned to these potential deviations based primarily on judgment from one or more experts. On the basis of these risk assessments and adjusted ranges for cost components, Monte Carlo simulations are run to determine the range of probable costs for the overall project and probabilities of costs actually occurring at given cost levels. This in turn can be translated into risk profiles, or estimates of the probability of overall project costs being at or below certain levels. Risk profiles allow decisionmakers to understand the range of probable costs and level of risk associated with selection of one alternative vs. another. An example of this kind of capital cost risk analysis is shown in the attached study of excerpt from the DeLong Mountains Transportation System study conducted by CH2M HILL for AIDEA. From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:37:25 Page 8 of 10 Copper Valley Intertie Feasibility Issue: System Reliability Impact of Thompson Pass Outages-- Intertie Vs Other Power Supply Alternatives As shown on page IX-5 of the Copper Valley Intertie Feasibility Study, the generation reserve plan for CVEA is as follows: Generation Reserve Criteria (Local Generation Required) Load District With Intertic Without Intertic Valdez Peak Load plus Largest Generating Unit Peak Load plus Largest Generating Unit Glennallen Peak Load Peak Load plus Largest Generating Unit CVEA’s reserve plan? provides about the same level of reliability to CVEA customers whether or not the Intertie is built. An outage at Thompson Pass would cut off CVEA’s ability to send power between Valdez and Glennallen. This simply means that cach community would need to operate on its own with its own resources except in the “With Intertie”’ case. In that case, Glennallen could continue to rely on power supply from the Railbelt and that supply source would provide additional reserves. Without the Intertie, each community would need to operate on its own exclusively with its own resources. Additional reserves would be available up to an amount equal to CVEA’s largest single local unit. So the only difference is that with the Intertie, Glennallen reserves would be available up to 15 MW (Intertie’s initial capacity) and without the Intertie, reserves would be available up to 2.2 MW (largest single operating unit in Glennallen). In the winter, the Copper Valley Intertie (Sutton-Glennallen) would provide power that would flow to Glennallen and to Valdez. An outage at Thompson Pass would cut off the Valdez supply, but Solomon Gulch would be available to immediately cover the loss. If the Thompson Pass outage were for a sustained period during the winter, Valdez would need to generate with its standby diesel units. In the summer, power flows north from Solomon Gulch (Valdez) to Glennallen. The Intertie would provide “‘spinning reserve” to Glennallen that it would not otherwise enjoy. Loss of the Valdez-Glennallen Intertie would be immediately replaced by Railbelt power over the Copper Valley Intertie. > This plan was included in the resource and cost of power models used in the Copper Valley Intertie Feasibility Study and the Updated Feasibility Study. From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:38:29 Page 9 of 10 If a new power supply resource other than the Intertie or Diesel alternatives were built (Allison Lake, Silver Lake, or Valdez Coal), it would be at the Valdez end of the Valdez-Glennallen Intertie. In this case power on the Valdez-Glennallen Intertie would flow almost exclusively to the north to supply relatively low-cost power to Glennallen. Under these circumstances, Glennallen would need to maintain generation reserves equal to the size of its peak load plus largest generating unit. From a cost standpoint, loss of the Valdez-Glennallen Intertie would be costly to CVEA during the winter when the Copper Valley Intertie would otherwise be providing low- cost Railbelt energy to Valdez. Assuming Allison Lake, Silver Lake, or Valdez Coal were built instead of the Copper Valley Intertie, loss of the Valdez-Glennallen Intertie would also be costly to CVEA any time of year, given that all low-cost power on the system would be generated at the southern end of this intertie. In the computer model used for the feasibility study and update, the Valdez-Glennallen line is assumed to be out of operation an annual average of 2 percent. From: Dave Gray To: Dennis McCrohan Date: 12/20/95 Time: 12:39:15 Page 10 of 10 Copper Valley Intertie Feasibility Issue: Length of Take or Pay Requirement for Petro Star In order to assure that adequate loads remain on its system and thereby qualify the utility for the $35 million interest-free state loan, CVEA is negotiating a lower rate for its largest customer, Petro Star. In return, CVEA would receive a 10-year credit enhanced take-or-pay commitment from Petro Star to purchase all of its electric requirements from CVEA. (This provision needs to be strengthened to include a minimum annual requirement. About 22.5 million kWh were assumed to be required when the Intertie operations begin.) This negotiation has been criticized for being short sighted in that CVEA needs Petro Star loads (or a replacement customer with similar or greater loads) through 2018 in order to enhance the likelihood that the Intertie will be the least cost resource choice for CVEA and for the state. Assuming 1999 as the first year of Intertie operation, a take-or- pay through 2018 would be a 20-year take or pay requirement. Critics of the arrangement with Petro Star argue that the 20-year take or pay should be mandatory. A 20-year take or pay obligation would provide the assurance critics are suggesting is needed. It is simply a matter of negotiation. In order to obtain a 20-year take or pay, CVEA would need to commit to a power sales rate that is lower than that needed to secure a 10-year take or pay commitment. The underlying issue is risk management. If a 20-year arrangement is needed to significantly reduce risk (or perceived risk), then less of the “‘rewards” from the Intertie will remain with CVEA (and its other customers) because a lower rate that would be needed to entice Petro Star to make such a commitment. If CVEA and its customers can live with a higher level of risk, a greater reward is potentially achievable by CVEA. A 20-year take or pay provision may be an unreasonable commitment from Petro Star's standpoint. While the medium-low forecast assumes that Petro Star will remain as a customer of CVEA through 2018 (23 years from now), this in not a guarantee. It is likely that Petro Star would consider such a commitment to be too risky for a full take or pay commitment. An altcrnative to a take or pay commitment may help reduce risk for both Petro Star and CVEA. CVEA (and the State of Alaska) are seeking assurance that the investment in the Intertie would be covered. Currently, “‘stranded investment” is a common concern among utilities. Rather than attempting to cover Intertie investment costs with take or pay provisions that also cover variable costs not actually incurred if Petro Star leaves the CVEA system, CVEA could require payment of a fixed customer charge that covers Petro Stars prorata share of the Intertie costs. (Energy and demand charges to Petro Star would be reduced proportionately.) Under these conditions, Petro Star would need only commit to a 20-year take or pay for the customer charge. Such a commitment could be reduced if other loads in the CVLA service area grow at rates higher than projected and thereby cover CVEA’s implicit investment in the Intertic. Such an arrangement may be more attractive to both Petro Star and CVEA. 25, 1995 TO: Riley, Randy, Keith, and John Rubini : Dennis MeCrohan-s" Ww SUBJECT: Study Basis and Assumptions Sutton Glenallen Intertie This memo summarizes the changes made to the working draft of the findings as a result of our September 18, 1995 meeting with CEA and CVEA regarding the assumptions used for the analysis. The issues of contention identified in the September 18 meeting include the CEA rates and fuel adjustment parameters for these rates, the feasibility of the enhanced 1995 diesel alternative, and the discount rate. All other parameters were agreed or deemed to have insignificant impact. Attached is a redraft, dated September 25, of the findings incorporating the corrections and changes described below. 1. As noted in my September 19 memo, corrections have been made to use the 1995 CEA rates and the same fuel price and escalation formula to adjust the CEA rates as for the other alternatives. 2. CVEA’s letter of September 22 on the 1995 enhanced diesel case does not provide any specific opinion as to what an appropriate diesel case might be in lieu of the 1995 enhanced case which is described by CVEA to be a very optimistic non- conservative case. For the purposes of sensitivity analyses, we have assumed a “no labor improvement” scenario for the enhanced diesel alternative as a sensitivity case and provided the results in the findings. We have also noted that the intertie is based on a conservative design and optimum configurations have not been considered such as for the 1995 diesel alternative. 3. CVEA’s letter of September 22 on intertie benefits provides arguments regarding a 20 year life for the enhanced diesel versus 50 year life for the intertie, discusses the applicability of imputed interest and the 4.5% discount rate, and provides arguments for a broader perspective evaluation of the intertie. CH2M Hill has already incorporated the 20 versus 50 year life difference into the analysis. Beck understands this methodology and will discuss with CVEA. The discount rate is a very significant parameter. However given the scope of our brief, we have not changed the base case rate. We have however provided sensitivity results on discount rate in the findings. The broader perspective issues were not part of the brief for our analysis and have not been discussed. I have put a “hold” on any further analysis until we reach concurrence on the attached. Please let me know you comments. Executive Summary Background In 1993, the Alaska State Legislature appropriated $35 million for a zero-interest, 50-year loan for construction of a power transmission line (referred to as the “Intertie”) linking Alaska’s Railbelt region to the service area of the Copper Valley Electric Association (CVEA). The Intertie is intended to create a power supply infrastructure that would allow power suppliers in the Railbelt region to offer long-term, relatively low-cost power to CVEA. The state loan for the Intertie was contingent upon the results of a feasibility study “satisfactory to the State of Alaska Department of Community and Regional Affairs (DCRA) as set out in former AS 44.83.181.” Regulations associated with this statute required that all reasonable alternatives to construction of the proposed project be evaluated in terms of their long-term resource cost and the cost of power. Both of these cost perspectives are discussed below. The required study was completed in April 1994 and results were presented in the Copper Valley Intertie Feasibility Study (referred to as the 1994 Intertie Study). The resource cost analysis compared power supply alternatives based on the natural, human, and capital resources needed to develop and operate the facilities. This includes all direct resource costs including those that may be paid by the state. The cost of power analysis compared the “wholesale cost per kWh to CVEA of generating and/or purchasing power delivered to the CVEA distribution system . . . excluding costs that are common” to all power supply alternatives. Since the state loan would reduce the cost of power to CVEA, it was considered in the cost of power analysis. This report updates the 1994 Intertie Study on the basis of significant, documented changes that have occurred since the report was completed. It includes evaluation of resource costs associated with power supply alternatives and analysis of the cost of power associated with those alternatives that are feasible from the perspective of the resource cost analysis. Unlike the 1994 Intertie Study, this update includes generation and purchased power costs that are common to all power supply alternatives in the cost of power analysis. By doing so, differences among alternatives and among scenarios can be directly translated into resulting differences in CVEA rates. 9/25/95 1 REPORT6A.DOC $00/200B X¥d -L2: FT £6/S2/60 Findings Following are the findings from this update to the 1994 Intertie Study including the resource cost analysis and the cost of power analysis. Resource Costs 1. The Intertie and All Diesel alternatives are both viable from a resource cost standpoint assuming medium-range load growth and the system designs specified in the 1994 Intertic Study. Under these conditions, either the Intertie, All Diesel, or Allison Lake alternative has the highest benefit-cost ratio of all alternatives depending on the specific assumptions. However, because the Allison Lake alternative would have a prohibitive cost of power to CVEA, as described below, its resource cost is not further considered in this summary. 2. If CVEA were able to reconfigure and operate the All Diesel alternative, as outlined in its 1995 Power Supply Study’, it would be the least-cost alternative by a rd significant margin unless CVEA were to add significant new load. (Howevery CVEA’s 1995 All Diesel configuration was:developed as an optimum equipment and labor Dor plan, which may not be achievable. CVEA conducted this analysis to verify that, even under the most optimistic configuration for the All Diesel alternative, a power supply through the Intertie could provide the lowest cost of power to the utility (see Point 4 under the discussion of Cost of Power, below), Givemthis:basis for the CVEA All Diese! configuration, its cost estimate is not directly comparable to those for the Intertie and other alternatives since these alternatives have not been evaluated for configurations that would have lower costs but would not necessarily be able to be implemented. 3. If CVEA were able to reconfigure the All Diesel alternative but not able to reduce its labor force, as outlined in the its 1995 Power Supply Study, its benefit-cost ratio would exceed that for the Int wth and be exceeded by that for the Intertie with relatively high growth. As discussed in Point 2, above, CVEA’s 1995 All Diesel alternative assumes an optimum equipment and labor configuration that may not be achievable. The aspect to the CVEA configuration that is least likely to be achievable is the plan to reduce operation and maintenance staff by five employees. 4. The economics of the Intertie are dependent upon continued load growth. If loads were to remain at 1994 levels or CVEA’s largest customer, the Petro Star refinery in Valdez, were to cease buying power from CVEA, the Intertie’s benefit-cost ratio would be significantly lower than the All Diesel alternative defined in the 1994 Intertie Study. Under these conditions, the Intertie’s benefit-cost ratio would be even lower when compared to the All Diesel alternative defined in CVEA’s 1995 Power Supply Study. ! Interim Final Report, Evaluation of Power Supply Alternatives, R.W, Beck, June 1995. 9/25/95 Z REPORT6A.DOC so0/co0® X¥d L0:FT 6/2/60 5. With substantial load growth, the Intertie is the least-cost alternative. For example, cven with the loss of Petro Star, if Alyeska’s Marine Terminal in Valdez were to purchase power from CVEA rather than self-generate, the benefit-cost ratio of the Intertie would be substantially higher than the All Diesel alternative regardless of the assumed configuration. KOK. The discount rate used in the analysis has a significant impact on these findings. Alaska Administrative Code required that the 1994 Intertie Study compare power supply alternatives on the basis of the present value of future costs for each alternative with “a discount rate representing the estimated long-term real cost of money.” This update used the same4:5 percent real discount rate that was adopted for the 1994 Intertic Study. Ifa lower discount rate were used, the benefits of the Intertie would be substantially higher relative to those for the All Diesel alternatives. For example, if a3 percent discount rate were used in this update, the Intertie alternative would have clear benefits compared to the All Diesel alternative as defined in the 1994 Intertie Study and be comparable to the All Diesel alternative as defined in C : wer Supply Study. 7. The economics of Alyeska or Petro Star generating power for sale to CVEA diminish substantially once the Intertie is constructed. Prior to Intertie construction, the market price for generation from these potential sources would be 7 cents or more. After construction of the line, the market price would be less than 4 cents per kWh. Currently, neither Alyeska or Petro Star are seriously considering generating power for sale. 8. Since completion of the 1994 Intertie Study, there is no change in forecasts for the Trans-Alaska Pipeline or the Trans-Alaska Gas System (TAGS) that affect the outlook for CVEA loads. The economics of the Intertie relative to the All Diesel alternative would improve if TAGS were to be constructed as planned. 9. Silver Lake and Valdez Coal alternatives are more costly than the Intertie under all scenarios tested. As a result they are not considered further in this summary. Cost of Power 1. Primarily because of the $35 million loan for the Intertie, CVEA’s cost of power would be lowest with the Intertie alternative assuming load growth and system designs used in the 1994 Intertie Study. During the first 20 years, CVEA rates with the Intertie would be/1.2 to 2.1 cents per kWh léssexpensivé than with the All Diesel alternative. 2. CVEA’s cost of power would be only somewhat less expensive with the Intertie if it were able to reconfigure the All-Diesel alternative as outlined in its 1995 Power Supply Study. During the first 20 years, CVEAvrates would be 0 to 0.9 cents per kWh less expensive with the Intertie assuming medium-low to medium-high load growth. However, if CVEA were notable to reduce its labor force as outlined in the 1995 Power Supply Study, CVEA’s cost of power would be significantly less with the Intertie! 9/25/95 8 REPORT6A.DOC so00/rooR Xvd 82:FT = $6 2/60 2 . CVEA’s cost of power with the Intertie increases if CVEA loads decrease and decreases if CVEA loads increase. For example, if CVEA were to lose Petro Star loads, its rates in the first year of the Intertie would be 1.8 cents per kWh more expensive than the All-Diesel alternative as defined in the 1994 Intertie Study. On the other hand, if Alyeska were to replace Petro Star as a customer of CVEA, CVEA rates with the Intertie would be 2 cents per kWh less expensive than with the All Diesel alternative as defined in the 1994 Intertie Study. 4. If Chugach Electric Association (CEA) and CVEA reach an power sales agreement whereby the cost of the Intertie is integrated into CEA’s overall system costs, CVEA is assured of lower rates than with the All Diesel alternative regardless of the configuration. Based on CEA’s published proposal to CVEA?, OVEA rates would be an average of 2.1 to 2.4 cents less expensive than with the 1994 Intertie Study All-Diesel alternative during the 20-year period 1995-2014, assuming medium-low to medium-high load growth. Compared to CVEA’s 1995 All Diesel configuration; CVEA’s rates would be 0.8 to 1.2 cents lower with a CEA-integrated power supply across the Intertie. 5. Assuming that the Intertie is built, the risk of a CVEA rate increase resulting from the loss of Petro Star as a customer of CVEA is eliminated with Intertie costs being integrated into CEA’s overall system costs. The cost of the Intertie is spread over a much larger customer base with CEA rather than CVEA bearing the cost burden. In return for assured lower rates associated with CEA’s financial participation, CVEA would give up the opportunity for even lower rates associated with some scenarios. It is uncertain whether the integrated sales agreement would receive the approval of the Alaska Public Utilities Commission. 6. Because of a large generation charge associated with the Allison Lake alternative, the cost of power associated with this alternative is significantly higher than that for the Intertie or All Diesel alternatives. 2 Published in the Interim Final Report. Op. cit. 9/2595 4 REPORT6A.DOC soo/sooW X¥d 82:FT 86/92/60 P.06 23:06 Sep 21 '95 Fax:206-391-3777 1] & Associates Bosui Summary Table Copper Valley Intertie Feasibility Study Present Value and Benefit-Cost Ratio for Cost-Estimated Resource Alternatives ‘ Low Fuel Cost Escalation High Fuel Cost Escalation With Petro Star Without Petro Star With Petro Star Without Petro Star ee ed a ae aamaadt naga 1 “i Med. High Med.Low M-H/M-L° M-H/M-L’ Fet. Med. High Med.Low M-H/M-L' M-HIM-L!' Fet. Alternatives Load Fct, Load Fct. LoadFet. w/iAlyeska LoadFct. LoadFet. LoadFct. wiAlyeska Present Value of Costs ($000): All Diesel—94 Intertie Study 60,483 §5,958 35,936 81,263 67 632 61,732 40,346 92,414 All Diesel—95 Power Supply Study (PSS) 48,426 41,064 27,178 67,243 56,527 47,365 31,845 79,325 All Diesel--"95 PSS Config. w/ No Layoffs 56,955 49,592 35,706 75,772 65,054 55,893 40,373 87,853 Intertie—No New Gen. Capacity Needed 56,088 57,994 47,685 59,740 59,104 61,415 49,296 64,293 Intertie—Gen. Capacity Needed in 2005 60,235 61,195 49,910 66,281 63,247 64,617 51,521 70,833 Savings Compared to Diesel ($000): All Diese!—'94 Intertie Study Q 0 Oo 0 Qa 0 0 0 All Diesel—'95 Power Supply Study (PSS) 12,057 14,894 8,758 14,020 11,105 14,367 8,501 13,089 All Diesel—'95 PSS Config. w/ No Layoffs 3,528 6,366 230 5,491 2,578 5,839 -27 4,561 Intertie—No New Gen. Capacity Needed 4,395 -2,036 -11,749 21,523 8,531 317 -8,950 28,121 Intertie—Gen. Capacity Needed in 2005 248 ~5,237 -13,974 14,982 4,385 -2,885 -11,175 21,581 Benefit/Cost Ratio: All Diesel--'94 Intertie Study 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 All Diesel—'95 Power Supply Study 1.25 1.36 1.32 1.21 1.20 1.30 127 1.17 All Diesel—'95 PSS Config. w/ No Layoffs 1.06 1.13 1.01 1.07 1.04 1.10 1.00 1.05 Intertie—No New Gen. Capacity Needed 1.08 0.96 0.75 1.36 1.14 1.01 0.82 1.44 Intertie—Gen. Capacity Needed in 2005 4.00 0.91 0.72 1.23 1.07 0.96 0.78 1.30 1 M-H/M-L = Medium-High/Medium Low. Since the difference between the medium high and medium low forecasts is only the length of time Petro Star's Valdez refinery is in operation, these forecasts are identical if Petro Star is assumed to leave the CVEA system. 2 1993 dollars based on a 4.5 percent discount rate 5:46 PM SUM-TABU.XLSBase Resource Costs of CVEA Power Supply Alternatives {Low Fuel Cost Forecast) 100,000 20°d 90:82 $6, Iz das > w o D> wo > | az og Be R| 13 io iev 3 § § cl SH oA oes = £2, ,2> a na nog i 3s ,BzzI o2 95, 2OR 8 523258 as ofc Ont FreSF5eas =z =52 sHQ ZHETG ZINN <= aan «022 EZO00 E002 a a 8 8 a g g # ($eg6h) enjen weseig 2222-T6E-902: Xe 4 Without Petco Star--With Alyeska 3 o g oS ia = o é = “ s = € a £ = q a 8 td S “ en a 3 Ss 9 e oo u x = - = 8 8 ° & . w & 2S 2 w x8 N a? S3}2TIOSSy B [[emMsog Resource Costs of CVEA Power Supply Alternatives (High Fuel Cost Forecast) > il | m ls > > wo zZ 3 Pa P :o | 13 i 12 oc c2 | is is 422 25, <a on $ Sie 1sz | fe 85, 888 S83 2538 os OFF Ov SEs FESR, == = 5 = = = =& oH <a2 E0O E0OE a a g o a | Without Petro Star--With Alyeska 5 a 2 3 a 3S o é = e 2 2 a c £ ve a < @ E ° uw 2 = % i °o uw + = 100,000 90,000 000 000 000 000 000 30,000 20,000 o 10, ($eeeL) anjea waseig 80'd 80:82 6, Iz das 2228-T6S-90Z:Xe4 SazeTIOssy B [TeMsog *Base Chart 2 9/21/95 2ith-- i Ul afo. pveviously sent to Di d Gray attached FYI. Dicl. _aid that iscount rates are always used when studies are done under the tatutes applicable to this project. Attached memo explains egulations require a discount rate when a feasibilty study ie one, ~-procedure for highway projects and-other infrastructure rojects not built under these statutes is not on point. Dick’s amo (attached) recommends/explains a 5% discount rate. This rate as used in the draft R.W.Beck study put out in January 1994. In 2sponse to comment, Dick went back and reviewed interest rate and nflation rate forecasts and lowered the discount rate to 4.5%. He ainks its defensible. He has more info. if you want. a general ~--with a higher discount rate, future savings are zighted less, therefore projects with high front end costs dont 20k as good under a higher discount rate. When comparing a hydro coject to an intertie the discount rate decsnt matter as much 2cause both of those projects are capital intensive up front. awever, when comparing increased diesel generation with building new transmission line--parties who want the tranemiesion line ill argue that a lower discount rate be used in the analysis 2cause the intertie has higher up front costs. ick is available at 269-4644. :\GILSONM\KEITHI Doc 1 Pg 1 Ln 4.67" P WS alae 9 [22/@~ uti [Elemnadion Te - Prod fos Ken ham - 4 Yo. WRS aes a SENT BY:DCRA. DOE > 6-16-95 : 12:12 = DURA UIY ur oycRuI- 2UU #ue suulew o | Alaska Energy Authority December 21, 1992 | To: Ronald A. Garzini Executive Director - _ | i I j Senior Economist From: — Richard Emenman f. a 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 al range of discount rates will be established each year by the authority. not later than July 1 after consulting with federal and state energy and budget agencies but may be changed from time to time as economic and financial conditions change or as the authority considers prudent; ; | Background 2 ' ' 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 outlaok for real interest rates has remained relatively stable, and because other issues have taken priority. ' The discount rate assumptions adopted in 1989 are as follows: 1) 3.0% for projects that qualify for tax-exempt financing. 2) 4.5% for projects that do not qualify for tax-exempt financing. These are "rea!" discount rates, representing real interest rates after netting out inflation. \ There are several theories for developing a discount rate for public sector project evaluation. However, the language of the regulations effectively narrows the field down to two alternatives: | i oTO/c00R V¥T f0:R8n eR OZ/RO SENT BY:DCRA. DOE P OrLOTUD © 12-10) UA i ue oa eu zue seers 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); ' 2) the estimated long-term real cost of money assuming that projects are! financed with State general fund grants or loans (ie. the real rate of return, that the State would realize from alternative use of its funds). The problem with the second approach is that a consensus does not exist on the rate of return from alternative use of State funds (i.e. the “opportunity rate of return”). The rate of retum on Permanent Fund investments could be estimated, but) investment in the Permanent Fund is not the likely alternative use of funds. The likely alternative use is expenditure for other purposes in the operating or capital budget, but the opportunity rate of return from such expenditure is unknown and, for: all practical purposes, unknowable. As a result, the Energy Authority policy has been to base the discount rate exclusively on the cost of borrowed funds, regardless of the financing approach under consideration for a particular project. It is suggested that if a power project can’ demonstrate a rate of return in excess of the cost of funds for 100% market financing, then it will have passed a reasonable test of economic feasibility. Methodology To estimate "rea}” (i.e. inflation adjusted) interest rates, it is necessary to know the nominal interest rate at the time of project financing and also the inflation rate throughout the term of the Joan. While this is necessarily speculative, our approach has been to base the estimates of future interest and inflation rates on a broad sampling of professional judgment provided in the publication "Blue Chip Financial Forecasts." The relevant excerpt from the October 1992 issue is attached and includes (on the last page) the following: 1d) 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 OTO/ To/Fo0h Y¥I FNIRM eRYATZ-RO SENT BY:DCRA. DOE + 6-16-95 + 12:15 + DCRA DIV OF ENERGY- ZUb 202 DDD/-F OToscnn0m Ronald A. Garzini December 21, 1992 Page 3 Energy Authority for taxable revenue bond financing. This will result in a somewhat higher real discount rate for projects that do not qualify for tax exempt financing. To represent tax exempt interest rates for Energy Authority project financing, the 1989 analysis generated a forecast of bond yields for the Bond Buyer 20-Bond Index, which represents bond yields for highly rated municipal general obligation bonds. Again, further review suggests that the 20-Bond Index represents a higher bond. rating and a lower interest rate than the Energy Authority is likely to obtain for tax exempt revenue bond financing. As a result, the forecast of bond yields for the Bond Buyer Revenue Bond Index is now recommended as the appropriate series. Analysis Shown in Figure 1 is the "consensus" forecast for the consumer price index as reported through 2002, with the following two modifications: 1) the history of the CPI 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. veT FN*On eCearntee 2 SENT BY:DCRA, DOE ; O-L0-Ya + iz-10 + URNA WiY Ut Livan Ronald A. Garzini December 21, 1992 Page 4 FIGURE 1 CONSUMER PRICE INDEX Percent Cnange 14% e+ History Forecast ne] BSF 6% 4% 1960 1970 1980 1990 2000 2010 Year FIGURE 2 COMPARATIVE BOND YIELDS HISTORY AND FORECAST Yield 12% OSS 1) see nee rns, Bs 6S 2% Se ee Forecast 2% O% ; 1988 1989 1990 1991 1992 1999 1994 1995 1996 1997 Year —— °A* Taxable Util. + 30 Yr. Treasury —m— Tax Exempt Rev. Bond OTO/9008 Y¥I cone Ro ek 07-80 ayy zVe wees SENT BY:DCRA. DOE + 6-16-95: 1Z:1b + DURA UIY ur cycRuin 2yu TUS seer 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 fashion at 5.0%. Average real rates for long-term tax exempt debt issued between 1993 and 1997 are estimated at 3.1%. FIGURE 3 REAL INTEREST RATE FORECASTS TAXABLE AND TAX EXEMPT REVENUE BONDS re, 10 tome em ernes oem a ee 9 en ce ee 1993 1994 1995 1996 1997 GMM Texacis) GMM tax Exempr fF y.ed 6 ctthty *A* & Bond Buyer Inoax 0T0/L00B X¥d $0:80 ¢6/0z/60 SENT BY:DCRA, DOE + 6-16-95 : 12:16 : DCRA DIV OF ENtRKUT— ZUD 402 DIDI ¢ 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% t 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 qualify 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 OTOs00R Y¥T an:en eR-OZ/RO SENT B%:DCRA. DOE > 6-16-95 : FORECASTS Vol, 11, No. 10 12: 17 +) UCRA UIY Ut CVoRNuin 6uu twee suvier cap FINANCIAL, what top analysts are saying about interest rates and monetary policy October 1, 1992 Polltical And Economic Uncertainty Have Credit Markets Nervous Summary -- Continved economic lethargy is 1 to keep short-term interest rates low throagh the end of this ear, according to the consensus results of our Sepiember 25 survey, About a third of the panel members foresee another imminent easing of policy by the Federal Reserve. However, the maj way of panel members expect the Fed to stand par. in 1993.5 -lerm rales ard expected lo ris about 100 basis points as the of economic growth gains momentum, bringing with it a modest revival in private-sector borrowing. Long-term yields, too, ae expected to edge higher next year, but by Jess than half the rise in short-term rates. The consensus expects inflationary Pressures w remain relatively subdued. The U5. dollar should begin to appreciats in value next year as overseas interest raits fall in the face of weak economic growth (see Page 2 fora summary of all consensus neioue Interest Rate Outlook -- Unexpected weakness in ‘ofarm apts Prompted the Fed to cut its funds rate get wo 5 on September 4. And a lot of bond traders are tling that history will repear itself on October 2 when the September employment data is released. Third quarter Real GDP will be weaker than earlier thought -« perhaps even failing to maich the anemic 1.5% mais of gore registered in the 2nd quarter. Whils the September jobs data will be skewed by the end of the overiment's summer jobs program and the éffects of Fiuvricane Andrew, the repart may nonediclesa prompt anotber easing by the Fed, predict about a third of the panel members, With both the funds rate and the discount rare at 3%, each would have to drop, though not necessarily by the same amount, if the Fed chooses to case, Lf the Fed docs case, commercial banks Will likely cut the prime rate. Those who think there will nos be additional easing believe the Fed won't to the Sepiember data since the staustically-dampening effecis of the hurricanc will uluimately be transitory. funire monihs, es thes effects are reversed out of the data. the pace of economic activiry is likely lo become tem ily overstated, Ted causing an unjustified rise in-band yields that could te compounded if the Fed were to push shart rates even lower, they wam. Also oy against additional Fed easing is the eroding value of the dollar, say some panel members. During the recent turmoil in Europe’s currency markets, the dollar enjoyed a bricf reprise of its role as a safe 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 easing would likely result in further losses in the dollar's value, hurting U.S. bond and equity prices in the process. Blue Crip Fertancial Forecasis ISSN. 9741-8345) Puoirsned Oy Capuol Pyoucanens, Inc 101 King St, PG. Box 1454, Aleaandna. v4 229" e054 1800) 327-7252 Eduonal (763) 66}-4100; Burwians & Circulanen: 103) 730-6<44 Bybiener Helen Hears Executive Adilot Ranoen Moore, Marcenng Oreersr Lisa ACuOlPUDICAERSIAC, —drimeny CUSTOMER SERVICE MANAGER’ LIZ SOPEA 0T0/600R Maastricht is dead — not because of the close vor 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. Ir's because the fiscal and monetary circumstances of the member nations are 100 different Trade barriers will candnne to fall in Europe, but political union and a single currency are many years sway. In the meantime, song moncy supply powih may keep the Bundesbank from easing soon or by a lot, bur European interest rates have peaked and will fall in fits and starts in 1993. This will gradually alleviate one source of on U.S. credit markess and evenmually produce a rebound in the dollar's valuc, The ibility of ive economic satistics and a weak dollar are not the only problems the credis markets, will face over the next several months, There's also that’ maner of who will be the next president of the U.S. Lf Bil Clinton wins — an increasing ibiliry — byl ding is going to begin thinking ly about the implications for the budget deficit of § Democruically-congollod Wize House and Congress and a public clamoring for government action to stimulate the economy. Aficr hammering George Bush on the need to 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 6 be pared. It's now generally assumed that Real GDP th in the 3rd. will be no beer than the palory 2nd quarter pace of 1.5%. The consensus forecast of Real GDP growth in the 4th quarter of this year fell two-tenths of a tage point to 2.4%. The comsensus 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 forecastiof the annual rare of increase in consumer prices during the 4th quarter was dimmed by 4 Dit, but far the most part, there was litle change fram last month in the consensus euvook for inflation, ite the dollar's recent volatility, it remains the consensus view that the gretnback will experience a modest rise in value on a tade-weighted basis during the bulk of next year (see top of page 2). pecial Questions -- See page 10 for the results of our semiannual survey of the panel's long-range auvook. Contributor's Corner — This monut's interview is with Aubrey Zaffuto, Chief Economist, AZ Advisory, Inc. in Far Hills, New Jersey (see pages 8-9). Please socretes euilonal fauitras to EXECUTIVE EDITOR: RANDELL MOORE Cano! Puone sens Inc "101 King Seer BO Gox 1454 Alowdnaria. Va 22717 2083 18001 32 wnlormabsr SUMIIMES in IIs SYSWEALION Is (NOYGr te 3 FoNacle Di! Copyright 1992 by Cepitol Pudiicarions, inc. Raprgauciion in any YY 90°80 £8 /07/60 SENT BY¥:DCRA. DOE > 6-16-95 > 1z-lo +) URA Uy wn Livanue BUS som) eee» BLUE CHIP LONG-RANGE ESTIMATES!: The uble below contains CONSENSUS eatimates for she FINANCIAL FORECASTERS 1993 through 1997 and the five-yeat peritd, 1998-2002. For comparison wa have | tretuded the shane tecemu long-range ms cona from the Congrestienal Budget Office (CBO)? Sope meseey U(irrew Hetiors CT) and ths Bush Adminisealon? APPLY ALL THESE PROJECTIONS CAUTIOUSLY. Aw Ine. Fas Mie, NJ (8) sen won $ Ca, Ina, HY. NY (0) sesAVerape for the Year------- -Averayc- q ieor Jose 190§ 1986 1997 joomahs art g Nora Kana Toromo, Canaan ep Consengus 62 70 ‘14 7S TS id Sewanee Joan Top lO Avg, 68 80 9.0 92 95 87 eye? 2, LIBOR, 3M aor ee eH 7 NAO. nsensus .! 5 5 2s. cere ta care re eM ToploAvg, 45 58 70 74 76 70 ay hig Bot. 10 Avg. #3 24 35 eee Freie cee HH a eH t ‘op vg. 5 : 6. ) Edwmvd §. Y orctent . a Bot 10 Avg. Fa 4A a6 # 34 34 Capt Petite he. aletarive. VA. 4. Commervial Paper, 1-Mo. Consensus 5 47 $2 34 54 1 =e moat 2 RRB & or NYT By 5. T-Buls Yields, 3-Mo Co 3 4 49 38 50 48 fe ete LL . > 1. SENSIS s af le H — » Sark, Detrat [OC ToploAvg, 42 54 66 68 7.0 6.4 ws Franay Corp. Phimpahin. PA (2) BO heeds 33 a3 33 35 35 a c . A i 4. Ns iy TA onstage VA) Administration 47 $3 as 32 La isn be Gayle 6. T-BU Yields, 6-Mo. Consatsus 7 46 «6ST 632 S258 errr eet Senurtion, i, DO Top 10 Ave. + 5.6 es e u = Gdan K. ot Vg. B Crppetina Goppareden, San Okage, CA [77] 7. T-Bil Yields, 1-Yr. Consensus 40 # 53 54 5.4 52 OwPrres & Apscownan, MasArambueo. TN (A) Top lOAvg, 46 58 70 72 «7.4 6.8 Marpeys Asan. Waubrrgen, OC (58) Bo lave 23 38 22 38 35 Lt Ex. Oui W, Boras 8. T-Note Yields, 2-Yr. Consensus 4. 5.4 Z $8 $8 5.5 Gere Cra, 5 FI Top i 9 Av. 54 64 5 8 76 74 ™ 10 Avg. 4 & Fig lary Sacorp Pca. PAF) The teins amu’ #8 € HHH Fe aes Rack 00 Aewralee, CA FC] Pe 18 Avg. $3 Bt 8.1 &3 a u A jot 10 Avg. 4 4 . rata Ce 10. T-Now Yields. 7-¥r, Consensus #eH#HeHee SS 4 Fa Fare Grauo, Provoance. Alf i 10 Avg, 7.0 uu iS EE HY n verytan Nanionat Barth, Colsntua, OH [OO] te 10 Avg. B if laren W. Coan 11, T-Bond Yields, 10-Yr. Consensus rs] 72 8 74 73 70 Cretan wet By ToplOAvg. 75 81 86 B9 90 83 ate petanal Rank. Chicman, 8 (AA Bo lOavg 63 62 62 60 5,7 $4 Marta Laren, WY, KY (DOT CBO Forecast §s e 70 AH rE nae Cova) Quaaabwien, Administration 71 ; ne Sete et 12, T-Bond Yields, 30-Yr. Comensux 4 16 i 78 77 74 Mocgage Raricen Aaseonson, Wann, OC 17) Top 19 Ave, 8.0 a4 B9 9.1 93 87 hdcrabecoert Canc at We ft ¥ Berd omer STN Pd 13. Carp. Aan Bond Yielts chommus'® $3 &2 S$ 4 GL ES eee tataeemorsa seat 8 i ee og jou. vg. o bara Ecre, tne, CA F304 14, A Utility Hoad Yields © Consensus 83 # # Be 88 8.4 o. Foner Top 10 Avg, 9.0 94 10.0 102 104 9.6 Eee eee EM Bot 10 Avg 7 i 22 74 22 63 Norra Sa International. ha. NY. NY |v] 15. Homa Mortgage Rates Consensus 8.1 8, 87 87 8G 33 Bear Top 10 Avg, 88 92 99 101 103 5.7 PNE Penal Oona P Ba loa. 78 76 78 73 | ‘a Se sent ete ere c & : ; : s § Prucendal rmurance Ca. of Arron, Nemaert. BL Dr, Micheal WW. Karan PS 6. —--—Average the Year-— = -Average- ' Issn 1994" 1998 199¢° 1907 995.2007 A. Trads-Weighiad Dollar Consensus 873 899 918 91.2 OS ~ [927 Top 10 Avg. 93.6 986 1015 1005 101.2 104.0 Bol 10 Avg. 815 823 83.6 822 829 :82.6 —-Yeur-over-Year, % Changer -Average- B. Real GDP Consensus 28 28° #27 #25 23 * 24 Top 10 Avg. 3.4 34°37 3.5 3.5 3.0 Bot 10 avg 20 22 1S 14 «11 ia CBO Formas: = 3.1 28 i 24° «22 na. Administration Ra C, GDP Implicit Deflator Consensus # 4 33 ry Ey ag Top 10Avg. 3.4 4.1 43 46 47 42 Bot lOAvg, 20 23 23 24 24 23 CHO Forecst = (3.0 o 30 3.0 3b . Ta Administration 3. D. Consumer Price Index Consensus 3 340 3.4 #8 3.6 a Top l0Avg. 3.7 4.1 44 48 5.0 44 Bot 10 Avy, 28 26 2.5 2.6 27 Za CBO Forecast 34 34 34 34 34 na, raion 3.2 32 32 32 32 na. "Bead on erties Grove 38 member, 2Tes Economic and Bui yt Cuileak.” CBO. Angun 1992, Beak + Midesnon Raviow of Ue Bud pt.” OMB, July 28. 1992. p. 6 “Soop. 9 for dadinitions of variables end sources af duit. “Average mc af mow ismi One Gacouru bars. OTO/0TOR Y¥4I m:en eCRYNZ ERO September 19, 1995 TO: Randy Simmons, Riley Snell,yJand John Rubini FROM: Dennis McCrohan SUBJECT: CVEA/CEA Meetings and ?Executive Summary On September 18 Dave Gray and I met with CVEA and CEA. The purpose of the meeting was to discuss the assumptions which were used in the 1994 Beck Intertie study, the 1995 Beck Power Supply study, and the update by CH2M Hill to the 1994 study. CEA indicated some dissatisfaction that we were limiting the discussions to the assumptions. CEA wanted to know the impact of the assumptions on the results. The attached comparison of input assumptions served as the agenda for the meeting. All parameters were reviewed. While there was considerable discussions on each item, CH2M Hill assumptions were agreed by all parties to be reasonable excluding the following: 1. A discount rate of 4.5% was used in the resource analysis of both Beck and CH2M Hill. Both CVEA and CEA strongly disagreed. Their argument was that the State’s investments should not be discounted since this was not done on other infrastructure projects such as highways, etc. The legislature by its actions had verified the worthiness of the investment. We stated that we w esearch the requi te in this t nalysis. W. agreed to make some sensitivi varyi iscount ates but not necessari change an e 2. We discussed the firm and integrated railbelt energy values used by CH2M Hill. It was agreed that the 1994 rates had been used in the rate payer analysis and that 1995 published CEA rates should be used. This correction will be made by CH2M Hill. 3. We discussed the integrated or enhanced diesel cases extensively. CVEA maintained that the integrated diesel scenario was developed exclusively for the 1995 Power Supply Study and while perhaps achievable under some circumstances, may not be practical nor was it ever adopted by its Board. The integrated diesel case was developed by CVEA with Beck assistance as the most optimum diesel arrangement and compared to the RFP responses by CEA and M&LP and the joint participation of CEA and CVEA in the Intertie. The conclusion of the 1995 Power Supply Study was that the joint Intertie was a better choice for CVEA. CVEA maintained that if the Intertie were not approved, CVEA would not proceed with the integrated diesel case but would rather rework their entire resource plans. We agreed that CVEA would submit a letter this week explaining their approach to the integrated diesel case. We made no commitments as to whether we would change our assumptions regarding this case. CEA questioned the rationale for proceeding with isolated oil dependent energy projects as opposed to an integrated Railbelt approach. CEA also questioned the validity of the integrated diesel capital and O&M costs. Both CEA and CVEA wanted to know what consideration the analysis gave to air quality impacts, disruptions to oil supplies and oil price shocks, impacts on Power Cost Equalization, and future growth which might be enhanced by lower cost energy in the CVEA area. Our response was that only future load growth was considered but not from a price/demand elastic standpoint. The other factors were not considered in the analysis. Both CEA and CVEA wanted to know if the Committee would participate in the stakeholder meetings. I said this was undecided. Attached is also a revised draft of part of the Executive Summary showing the revised findings as we discussed in our September 12 meeting with CH2M Hill. We will continue to work on the summary and incorporate Item 2. above. Regarding Items 1 and 3, we will review CVEA’s forthcoming letter and also the requirements for the discount rate selection. Item } involves legal and legislative considerations. We must then decide how to proceed with the draft report. CVEA Intertie Feasibility Update : Comi of Input Assumptions for Intertie Vs. Diesel Alternati Resource Cost Analysis 1994 Intertie] 1995 Power | Update to | 1994 Intertie pececatar Study | Supply Study | 1994 Study || Study Project Costs [All Diesel ‘94 Study (1993$/kW) 820 820 All Diesel ‘95 (1993S/kW) r 500] 500) Intertie (Resource costs: 10°x1993S; cost of power. 10°x1995S) [s 47.6 $ 47.6|$ 53.8 |$ 53.8|$ Discount Rate/Interest Rate ff EAN Real 4.5% [4.5%|/ 5%] Nominal 4 7.5%| 5.0% / 8.5%} 5.0% | ‘ I Inflation 0 0.0% 3.5% 3.5% 3.5%! | Fuel Oil Price (1993$,1995S,1995$) | Valdez [s 0.70 [s 0.63 0.70[$ 0631S 063 Glennalien $ 0.75 $ 0.65 0.75|$ 065{S 0.85 ] l Fuel Oil Escalation Rate (2/3 World Crude Fct by DOR) | | ! Low 0.44% 1.18% 0.44% =1.00%i _-1.18% High 1.73% 0.45% 1.73% 1.33%! 0.45% ale ailbelt Energy Value | Economy (1993$,1995$,1995$) $ 0.0241 $ 0.0167 0.0241+ |$ 0.025 Ry Firm (Resource cost in 1993$,1995$; cost of power in 1998$) $ 0.0241 $ 0.0237 0.0241+| $ 0.0401 | $ 0.0401 2D a - Integrated (Resource cost in 1993$, 1995$; cost of power in 1998S) $ 0.0237 $ 0.0624 | $\_0.0624 c a i : Load forecast (See Attachment) —_/ ) UM-U.M-H,H M-H &M-L_[L.M-L.M-H.H MH| MH@Mil - a \ yi MAeV Change in No-®f Dieséf Operations and Maintenance Employees | 4 4 Ss glen configuration +3 +3 +3 | +3) 95 Power Supply configuration | =f -5] -5 ] mployee Labor Cost (1993$,1995$/FTE/Year) $97,000 $ 97,000} $ 101,000 | $ 101,000 | $ 101,000 1 : Diesel Configuration (See Attachment) ] Petro Star MWh Included in Medium Forecasts (1997 and Beyond) T 22,500 22,500 22,500 22,500 | __22,500 Alyeska Loads (MWh) 50,000 50,000 50,000 Life of projects (years) Intertie 50) 50 50 50) 50| Diesel Units 20 20) 20 20] 20) | Transmission Losses on Intertie 9.7% 9.7% 5% 5%| 5%! I Heat rate for Diesels (kWh per Gallon of Diesel) | New units T 15.0 15.0 15.0 15.0| 15.0 Old units 13.5) 13.5) 13.5 13.5] 13.5 I Variable O&M for Diesel Units (1993S/KWh) New units $ 0,01 $ 0.01 | $ 0.01 [$ 0.0125/$ 0.01 Old units $ 0.03 $ 0.03 | $ 0.03 [$ 0.0125/$ 0.03 Fixed Diesel O&M Cost per KW on New Units (1993$/KW) $12.00 S$ 1200[$ 12.00 os 20 9/18/95ASSUMPT.XLS Drath _ Executive Summary Background In 1993, the Alaska State Legislature appropriated $35 million for a zero-interest, 50-year loan for construction of a power transmission line (referred to as the “Intertie”) linking Alaska’s Railbelt region to the service area of the Copper Valley Electric Association (CVEA). The Intertie is intended to create a power supply infrastructure that would allow power suppliers in the Railbelt region to offer long-term, relatively low-cost power to CVEA. The legislature’s hope for the Intertie is that reduced power bills will promote economic de- velopment in the Copper Valley and Valdez areas. The state loan for the Intertie was contingent upon the results of a feasibility study “satisfactory to the State of Alaska Department of Community and Regional Affairs (DCRA) as set out in former AS 44.83.181.” Regulations associated with this statute required that “all reasonable options to construction of the proposed project” be evaluated in terms of their long term resource cost and the “cost of power”. Both of these cost perspectives are discussed below. The required study was completed and published as the Copper Valley Intertie Feasibility Study by in April 1994 (referred to as the 1994 Intertie Study). The resource cost analysis compared power supply alternatives based on the natural, human, and capital resources needed to develop and operate the facilities. This includes all direct resource costs including those that may be paid by the state. The cost of power analysis compared the “wholesale cost per kWh to CVEA of generating and/or purchasing power delivered to the CVEA distribution system . . . excluding costs that are common” to all power supply alternatives. Since the state loan would reduce the cost of power to CVEA it was considered in the cost of power analysis. This report updates the 1994 Intertie Study on the basis of significant, documented changes that have occurred since the report was completed. It includes evaluation of reource costs associated with power supply alternatives and analysis of the cost of power associated with those alternatives that are feasible from the perspective of the resource cost analysis. Unlike the 1994 Intertie Study, this update includes generation and purchased power costs that are common to all power supply alternatives. By doing so, differences among altrnatives and among analytical scenarios can be directly translated into resulting differences in CVEA rates. 9/18/95 1 REPORT6A.DOC Findings Following are findings from this update to the 1994 Intertie Study. Resource Costs I. The Intertie and All-Diesel aternatives are both feasible assuming load growth and system designs used in the 1994 Intertie Study. Under these conditions, either the Intertie or the All-Diesel alternative have the highest benefit-cost ratios of all alternatives depending on the specific assumptions. If CVEA is able to be able to reconfigure the All-Diesel alternative as outlined in its 1995 Power Supply Study!, it would be the least-cost alternative by a significant margin unless CVEA were to add significant new load. Assuming medium-low to medium-high growth forecast for CVEA loads, CVEA’s All-Diesel configuration would have a benefit-cost ratio that exceeds that for the Intertie by 6 to 45 percentage points. . The feasibility of the Intertie is dependent upon continued load growth. If loads were to remain at 1994 levels or CVEA’s largest customer, the Petro Star refinery in Valdez, were to cease taking power from CVEA, the Intertie’s benefit-cost ratio would be 17 to 28 percentage points lower than the All-Diesel alternative defined in the 1994 Intertie Study. Under these conditions the Intertie’s benefit-cost ratio would be even lower when compared to the All-Diesel alternative defined in CVEA’s 1995 Powe Supply Study. : With substantial load growth, the Intertie is the least-cost alternative. For example, even with the loss of Petro Star, if Alyeska’s Marine Terminal in Valdez were to purchase power from CVEA rather than self-generate, the benefit-cost ratio of the Intertie would be 23 to 44 percentage points higher than the All-Diesel alternative as defined in the 1994 Intertie Study and 6 to 31 percentage points higher than the All-Diesel alternative as defined in CVEA’s 1995 Power Supply Study. The feasibility of Alyeska or Petro Star generating power for sale to CVEA diminishes substantially once the Intertie is constructed. Prior to Intertie construction, the market price for generation from these potential sources would be seven cents or more. After construction of the line, the market price would be less than 4 cents per kWh. Currently, neither Alyeska or Petro Star are seriously considering generating power for sale. Since completion of the 1994 Intertie Study, there is no change in forecasts for the Trans-Alaska Pipeline or the Trans-Alaska Gas System that would affect the outlook for CVEA loads. 1 Interim Final Report, Evaluation of Power Supply Alternatives, R.W. Beck, June 1995. 9/18/95 2 REPORT6A.DOC 7. Allison Lake, Silver Lake, and Valdez Coal alternatives are more costly than the Intertie under all scenarios tested either on the basis of resource costs or the cost of power to CVEA. Asa result they are not considered further in this summary. Cost of Power 1. Primarily because of the $35 million loan for the Intertie, the cost of power to CVEA is lowest with the Intertie alternative assuming load growth and system designs used in the 1994 Intertie Study. During the first 20 years, CVEA rates with the Intertie would be 1.2 to 2.1 cents per kWh less expensive than with the All-Diesel alternative. 2. If CVEA is able to be able to reconfigure the All-Diesel alternative as outlined in its 1995 Power Supply Study, the cost of power to CVEA would be only somewhat less expensive with the Intertie. During the first 20 years, CVEA rates would be 0 to 0.9 cents per kWh less expensive with the Intertie assuming medium-low to medium high load growth. 3. CVEA’s cost of power with the Intertie increases if CVEA loads decrease and decreases if CVEA loads increase. For example, if CVEA were to lose Petro Star loads, its rates in the first year of the Intertie would be 1.8 cents per kWh more expensive than the All-Diesel alternative as defined in the 1994 Intertie Study. On the other hand if Alyeska were to replace Petro Star as a customer of CVEA, CVEA rates with the Intertie would be 2 cents per kWh less expensive than the All-Diesel alternative as defined in the 1994 Intertie Study. 4. If Cugach Electric Association (CEA) and CVEA reach an agreement whereby the cost of the Intertie is integrated into CEA’s overall system costs as part of a power sales agreement, CVEA is assured of lower rates than with the All-Diesel alternative. Based on CEA’s published proposal to CVEA?, CVEA rates would be an average of 1.4 to 1.8 cents less expensive than the All-Diesel alternative during the 20-year period 1995- 2014, assuming medium-low to medium-high load growth. In return for assured lower rates associated with the agreement, CVEA would give up the opportunity for even lower rates associated with some scenarios. It is uncertain whether the integrated sales agreement would receive the approval of the Alaska Public Utilities Commission. 2 Published in the Interim Final Report, Op. cit. 9/8/95 3 REPORT6A.DOC Alternatives All Diesel--'94 Intertie Study All Diesel--'95 Power Supply Study Intertie--No New Gen. Capacity Needed Intertie--Gen. Capacity Needed in 2005 All Diesel--'94 Intertie Study All Diesel--'95 Power Supply Study Intertie--No New Gen. Capacity Needed Intertie--Gen. Capacity Needed in 2005 All Diesel--'94 Intertie Study All Diesel--'95 Power Supply Study Intertie--No New Gen. Capacity Needed Intertie--Gen. Capacity Needed in 2005 Summary Table Copper Valley Intertie Feasibility Study Present Value and Benefit-Cost Ratio for Cost-Estimated Resource Alternatives ‘ Low Fuel Cost Escalation Without Petro Star With Petro Star Med. High Med.Low M-H/M-L' Load Fet. Load Fct. Load Fet. 60,483 48,426 56,088 60,235 12,057 4,395 248 1.00 1.25 1.08 1.00 55,958 41,064 57,994 61,195 14,894 -2,036 -5,237 1.00 1.36 0.96 0.91 35,936 29,528 47,685 49,910 High Fuel Cost Escalation With Petro Star_ Med. High Med.Low M-H/M-L' Load Fet. _Load Fet. 61,732 47,365 61,415 M-H/M-L' Fct. wi Alyeska Load Fct. Present Value of Costs ($000)’: 81,263 67,632 69,594 56,527 59,740 59,101 66,281 63,247 64,617 Savings Compared to Diesel ($000): 0 6,408 -11,749 -13,974 1.00 1.22 0.75 0.72 0 11,669 21,523 14,982 0 11,105 8,531 4,385 Benefit/Cost Ratio: 1.00 1.17 1.36 1.23 1.00 1.20 1.14 1.07 1 M-H/M-L = Medium-High/Medium Low. Since the difference between the medium high and medium low forecasts is only the length of time Petro Star's Valdez refinery is in operation, these forecasts are identical if Petro Star is assumed to leave the CVEA system. 2 1993 dollars based on a 4.5 percent discount rate 5:00 PM SUM-TABT.XLSBase 0 14,367 317 -2,885 1.00 1.30 1.01 0.96 Without Petro Star 40,346 34,196 49,296 51,521 6,150 -8,950 “11,175 1.00 1.18 0.82 0.78 M-H/M-L' Fet. wi Alyeska 92,414 81,615 64,293 70,833 10,799 28,121 21,581 1.00 1.13 1.44 1.30 Cost of Power Supply Alternatives (Low Fuel Cost Forecast) 100,000 90,000 80,000 | |BAll Diesel-- ‘94 Intertie 70,000 Study | @ 60,000 BAI! Diesel-- 8 " s 95 Power © Supply = 50,000 | Study > 2 F $ Olntertie--No £ N & 40,000 | ew Generation Capacity 30,000 Needed Glntertie- Generation Capacity ane a | Needed in |__2005 10,000 04 Medium-High Fct. Medium-Low Fct. Alternatives Without Petro Star Without Petro Star--With Alyeska 9/18/95 Base Chart 1Base Chart 1 Cost of Power Supply Alternatives (High Fuel Cost Forecast) 100,000 90,000 80,000 70,000 60,000 50,000 + Present Value (1993$) 40,000 30,000 + 20,000 10,000 Medium-High Ft. Medium-Low Fet Without Petro Star Without P.S.--With Alyeska Alternatives 9/18/95 Base Chart 2Base Chart 2 BAIl Diesel-- ‘94 Intertie Study BAIl Diesel-- ‘95 Power Supply Study Olntertie--No New Generation Capacity Needed Dintertie-- Generation . Capacity Needed in 2005 FRUM:? CH2M HILL-SEA TO: 987 561 8998 SEP 7, 1995 5:48PM #282 P.@1 ‘ ee Engineers YC Planners Economists MMM scientisis September 1, 1995 117526.C0.ZZ Mr. Dennis McCrohan Deputy Director-Energy Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage, Alaska 99501 Dear Dennis: As we have discussed, the scope of CH2M HILL services to update the Copper Valley Intertic Feasibility Study for AIDEA has evolved since our work began in June. The purpose of this Jetter is to document these changes, list additional tasks needed to complete the work process you outlined earlier this week, and request an increase in our fee to cover these extra activitics, Scope of Work Completed To Date In addition to work identified in our June 12, 1995, letter to Riley Snell, we have performed the following tasks: ° Evaluation of alternative bases for power supply from the Railbelt including economy energy, firm energy, and firm energy with the cost of the Intertie integrated into the rate base of Chugach Electric Association (CEA). ° Evaluation of two configurations for Copper Valley Electric Association’s (CVEA) all-diesel alternative . Evaluation of CVEA’s power supply plan e Review of future electric load possibilities associated with the Trans-Alaska Gas System an the High Altitude Auroral Research Project ° Critical review of R.W. Beck’s resource cost model Seattle Office 777 108th Avenue NE, Bellevue, WA 98004-5118 206 453-5000 P.O. Box 91500, Bellevue, WA 98009-2050 Fax No, 206 462-5957 FROM? CH2M HILL-SEA TO: 987 561 8998 SEP 7, 1995 5:49PM H282 P.@2 Mr, Dennis McCrohan Page 2 September 1, 1995 J)7526.C0,ZZ Evaluation of potential electric supply development at Silver Lake and at Alyeska In addition to documentation of our technical analysis, development of a detailed report for both technical and nontechnical audiences including preparation of several draft reports Several planning and briefing trips between Seattle and Anchorage Upcoming Tasks I understand that you would like for us to continue to support AIDEA on this project in the following ways: ° oJ Conduct additional analysis as outlined in our August 29 meeting (the scope of these changes were faxed to you on August 30) and prepare a new draft report. Direct and cvaluatc computer analyses for 36 different rate impact scenarios (these computer analyses were outlined in a August 30 fax to you) Critically review R.W. Beck’s rate impact model Continue to edit the draft report for understanding by nontechnical audiences Participate in meetings with project stakeholders including: CVEA, Petro Star, CEA, Alyeska, the Trustees for Alaska, Sutton community representatives, Glennallen community representatives, and Valdez community representatives Brief the Copper Valley Intertie review committee on study findings and answer questions Prepare three additional iterations of the project report Present study findings at a formal public meeting Of course we will also be available to continue to meet other AIDEA needs that may develop as the evaluation process continues, Cost Estimate The estimated cost to complete this work for AIDEA is $30,800. As shown in the attached tabulation, this includes a 20 percent contingency for tasks that may develop between now and FROM: CH2M HILL-SEA TO: 97 S61 8998 SEP 7, 1995 5:49PM #282 P.@3 Mr. Dennis McCrohan Page 3 September 1, 1995 117526.C0.ZZ completion of the project. If the need for these contingencies do not develop, the estimated cost is $26,500, We Jook forward to continuing to be of service to AIDEA and the review committee as the States deliberation on the Intertic continues. As always, please do not hesitate to call me with any questions or concerns you may have about our services to you. Sincerely, ane David A Gray / Project Manager FROM: CH2M HILL-SEA TO: 987 S61 8998 SEP 7: 1995 S:S5@PM H282 P.ad « Copper Valley Intertie Feasibility Study Update Workplan for Project Completion Labor Task Description Days 1 Analysis outlined in August 30 fax; prepare new draft report 5 2 Direct and evaluate 36 rate analyses 3 Critically review R.W. Beck rate model and analysis N 4 Edit for nontechnical audience (up to 2 additional draft reports) 5 Participate in stakeholder meetings 6 Brief Governor's review committee 7 Prepare up to 3 additional iterations of project report - AW lw 8 Present study findings at a formal public meeting Total 25 Copper Valley Intertie Feasibility Study Update Budget for Project Completion Labor $21,200 Support and Expenses 5,300 Contingency 4,300 Total $30,800 rn ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY {= ALASKA @E— ENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 561-8050 FAX 907 /561-8998 MEMORANDUM TO: Riley <BihkuD FROM: je Dennis DATE: August 31, 1995 SUBJECT: |Comments on CEA/CVEA Proposed Agreement The Agreement simply states some general terms for a Power Sales Agreement between CVEA and CEA. It also defines similar terms which both CEA and CVEA agree for a Power Sales Agreement between CVEA and Petro Star. It provides several critical agreements as follows: e defines the 80/20 sharing of supplemental costs between CEA and CVEA. e defines a deferral payment scheme to Petro Star which provides incentive for Petro Star to remain on the system during the interim until the Intertie is complete. e integrates CVEA, excluding Solomon Gulch, into the Railbelt rate structure and allows for a future option to include Solomon Gulch. Specific comments are provided below. The items numbered refer to notes on the attachment. Contract Proposal 1. Rates. This clause allows CVEA to participate in the overall Railbelt rate structure, excluding Solomon Gulch, which is covered by the Four Dam Pool structure. It gives CVEA standing in the Railbelt. 2. Net Requirements. This clause sets out the CEA obligation to provide energy to the CVEA, excluding what energy is provided by Solomon Gulch. 3. All Requirements(Option). This option appears to allow Solomon Gulch to be included in the overall Railbelt rate structure at the option of CVEA. This would be beneficial if energy were to be flowing to the Railbelt from Solomon Gulch. 4. Wheeling. I do not understand this clause which states CVEA will provide power to CEA. I would anticipate that CEA would provide energy to CVEA at Glennallen. If this is the intent, it appears that wheeling losses are to CEA’s account which makes sense, particularly if CEA is to Operate and Maintain the line. 5. Point of Delivery. Delivery at Glennallen makes most sense if CEA is the O&M contractor for the line. Is this their intent? Letter of Understanding 1. Page 2. Paragraph 3. The letter names 8 cents per KWH as the trigger point. 2. Page 3. Paragraph 3. The letter provides for Petro Star to sell power which is certain to be uneconomic at the avoided cost levels if the Intertie is built. 3. Page 3. Paragraph. 4. This paragraph memorializes that Petro Star will receive the benefits of the Railbelt rates if the Intertie is built. 4. Page 3. Paragraph 5. This is the “bone to Petro Star”. It says that a deferral ~ payment will be agreed, presumably based on Petro Star cogeneration plant costs, which will be provided to Petro Star during the interim between January 1, 1998 and when the Intertie is complete. Petro Star will want an earlier date since their generation could be on line by the end of 1996. Second, Petro Star may not agree to the basis for calculation of the deferral payment. h:\all\dennis\aidea\cveal @ CHUGACH@LECTRIC ASSOCIATION, INC. Cun heetrie August 30, 1995 EUGENE N. BJORNSTAD, P.E. General Manager Mr. Dennis McCrohan AIDEA 480 West Tudor Anchorage, Alaska 99503 Dear Mr. McCrohan: Chugach and Copper Valley Electric Association (CVEA), have been discussing and negotiating a possible powers sales agreement. Critical to this power sales agreement is the proposed Sutton to Glennallen Intertie. It is our understanding that a report will be completed in the very near future and transmitted to the committee composed of officials from Department of Community and Regional Affairs (DCRA), Department of Natural Resources (DNR) and Alaska Industrial Development and Export Authority (AIDEA). The report will contain a recommendation and new review of the feasibility of the intertie. Chugach and CVEA have also been discussing the future power supply options for Petro Star’s refinery in Valdez. We believe there can be significant progress in the discussions between our utilities and Petro Star, which will strengthen the rationale and need for the intertie. To demonstrate the seriousness of our respective utilities’ interest in entering into a contractual agreement, the outline of principles of a contract and a memorandum of understanding between Chugach and CVEA regarding service to Petro Star and the utilities, are attached for your review and consideration. It is our intent to incorporate more details into a draft agreement which would be submitted to our respective Boards of Directors for approval and then to the Alaska Public Utilities Commission. We respectfully urge consideration of the progress we have made and recommend that the report being finalized support the intertie connection between the consumers of Copper Valley Electric Association and the Anchorage utility grid. Sincerely, Eugene S Bjornstad Clayton Hurless General Manager General Manager Chugach Electric Association, Inc. Copper Valley Electric Association, Inc. 5601 Minnesota Drive ¢ P.O. Box 196300 * Anchorage, Alaska 99519-6300 Phone 907-563-7494 « FAX 907-562-0027 CONTRACT PROPOSAL between CHUGACH ELECTRIC ASSOCIATION, INC. and the COPPER VALLEY ELECTRIC ASSOCIATION, INC. Parties: Copper Valley Electric Association, Inc. and Chugach Electric Association, Inc. Recitals: © History and Contract Form. @ Intertie Agreements. Agreement: @ Sale and Purchase of Electric Power. e@ System Sale (non-designated sources). @ Net Requirements (net of Solomon Gulch, not demand limited). e Net Billing of up to 80% of costs of Sutton-Glennalien Intertie. Term: e@ Twenty years, effective upon completion of Sutton-Glennallen Intertie. Rates: @ CVEA subject to demand and energy allocation of costs determined on a "pooled" G&T resource basis. Wholesale power rates as authorized by APUC or successor. POWER SUPPLY PROVISIONS Net Requirements: @ Chugach supplies requirements of CVEA service area (at Glennallen terminus of Sutton-Glennalien line) net of Solomon Gulch generation up to capacity of transmission system east from Sutton. (All Requirements Option): @ CVEA has the option to transition to all requirements and poo! Solomon Gulch with all other Chugach G&T resources after the average costs of Chugach resources is within a negotiated range of the cost of Solomon Gulch power. CVEA Generation: e CVEA provides power to Chugach, under terms of cooperative agreement exhibit, for emergencies, maintenance or other requirements, from generating resources of CVEA at costs to be determined and delineated by schedule provided to dispatch center. Non-Exclusivity: @ CVEA may schedule Solomon Gulch as necessary to meet CVEA loads. All Solomon Gulch output is anticipated to go to CVEA. @ CVEA may generate from own resources during transmission line outages, or if Chugach generation otherwise unavailable. Resale: @ CVEA shall use Chugach-supplied power to serve retail load as ultimate consumers and end-users, and may not resell capacity or energy to others. RATEMAKING PROVISIONS G&T Cost Basis: @ Rates to be based on cost of all G&T resources available to deliver capacity and energy from Chugach G&T system. Up to 80% of the costs of the Sutton-Glennallen Intertie will be pooled and considered a part of the Chugach G&T system. Revenue requirement as determined by APUC or other regulatory authority. Cost of Service: e@ Capacity and Energy rates as determined by traditional or non-traditional methods, including fixed/variable, embedded or marginal cost, subject to approval of APUC or other regulatory authority as may exist. Allocated Demand: e Anallocated demand shall be used in the cost of service to determine CVEA's share of capacity costs and will equal to the greater of 1) CVEA's non-coincident peak demand reduced by 70% of the then-current capacity of Solomon Gulch or 2) CVEA's coincident peak demand placed on the Chugach system. Fuel, Purchase Surcharges:¢ Applies per regulatory actions. Wheeling: ¢ CVEA provides power to Chugach at Glennallen (e.g. net of losses). For Chugach resources or generation provided by third party to CVEA for the Chugach system (e.g., cogenerated power sold to Chugach or sold to CVEA for assignment to Chugach) requiring wheeling services for ultimate disposition, wheeling terms, conditions and rates to be based on principles, practices and agreements as approved by APUC or other regulatory authority, if any. Capital Credits: © CVEA eligible for capital credits resulting from purchases on patronage and cost-of-service basis, on an equal basis with other wholesale customers. Regulation: @¢ By the APUC or other regulatory authority, if any. In the absence of regulatory authority, per the negotiated contract provisions subject to dispute resolution by binding arbitration. BILLING AND PAYMENT Monthly Bills: @ Rendered on or before 10th of month for preceding month usage; delay acceptable when notice given. Payment: @ Payment by no later than 25th of the month the bill was rendered, unless delayed, but no later than 15 days following receipt of bill. Late payments subject to interest charges. Billing Disputes: ¢ Disputed amounts paid, with notice of dispute. Dispute resolution to be specified. POWER PLANNING Joint Planning: @ Annually, CVEA and Chugach shall meet to discuss power supply issues, contract modifications, operation and maintenance issues, and other issues at request of either party. Agree to exchange information on matters of power sale and purchase agreement at all times. Points of Delivery: @ Delivery at Glennallen e Add or remove delivery points upon mutual agreement of parties. PROVISIONS RELATING TO ELECTRICAL SERVICE Continuity: @ Chugach agrees to make capacity and energy continuously available, subject to Uncontrollable Forces, in the amount required at all current or future delivery points net of generation from Solomon Gulch. Restoration of Service: @ Chugach agrees to restore service with reasonable best efforts, and provide notice of determination of continuing problems and estimated time to repair. Third Parties: @ Standard “no third-party beneficiary” clause. Facilities and Equipment: e Both parties agree to maintain facilities in accordance with Prudent Utility Practices to prevent or minimize failures and provide for prompt tepair and return to service. Load Characteristics: @ Standard utility and interconnected system terms, including power quality, phase balance limitations, power factor correction, load shedding relay equipment and participation in interconnected system loadshedding schedules. Metering: © Each party responsible for tests, calibration, restoration of commercial accuracy of metering equipment necessary to meet the contract terms. Normal accuracy 1%, adjustments to billing amounts for errors determined in metering since prior test. Legal Matters: (to be delineated) Good Faith Performance Force Majeure (Uncontrollable Forces) Responsibilities of Parties - Emergency and Otherwise Indemnification Arbitration and Legal Proceedings Insurance Provisions Approval Requirements Non-severability Successors and Assigns Assignments to Secured Lenders Rights of Access and Removal Notifications Access to Records and Information Mutual Covenants and Warranties Other Legal Provisions, as required Exhibits: 1) Definitions 2) Points of Delivery 3) Incorporation of Solomon Gulch and transition to All Requirements (CVEA option after certain trigger) 4) Cooperative Agreement - Power Resources 5) Coordination of Operations 7) Opinions of Counsel LETTER OF UNDERSTANDING August 30, 1995 PURPOSE This Letter of Understanding (LOU) is to memorialize the understanding between Chugach Electric Association, Inc. (Chugach) and Copper Valley Electric Association, Inc. (CVEA) relative to the purchase by Petro Star and the sale by CVEA of the electric power requirement of Petro Star’s Valdez oil refinery. PARTIES PETRO STAR Petro Star owns and operates a 30,000 barrel per day oil refinery located on Dayville Road near Valdez, Alaska. Petro Star is owned by Arctic Slope Regional Corporation and Harbor Enterprises, a.k.a. Petro Marine Services. CVEA CVEA is a member-owned electric cooperative that provides central station electric service to the Valdez and Copper Basin areas of the state of Alaska. CVEA is the power supplier for all of Petro Star’s requirements in accordance with a five-year power sales agreement executed May 2, 1992. The effective date of the five year term began on January 1, 1993, and will expire December 31, 1997. CHUGACH Chugach is a member-owned electric cooperative headquartered in Anchorage, Alaska. Chugach is Alaska’s largest Generation, Transmission (G&T), and Distribution utility. Chugach is the prospective future power supplier to CVEA subsequent to the construction of the proposed Sutton to Glennallen 138 kv Transmission Line (SGL) which will interconnect CVEA’s isolated system to the integrated Railbelt G&T system. HISTORICAL SUMMARY CVEA is proposing to construct a 138 kv transmission line from Sutton to Glennallen to provide for its supplementary power requirement to the Solomon Gulch Hydroelectric project. The Alaska Legislature, 1993, authorized and appropriated, subject to an independent feasibility study to be conducted by the State’s Energy Authority, $35 million from the Railbelt energy reserve fund to be used as a 50 year, zero interest loan to CVEA as partial funding for the project. Letter of Understanding August 30, 1995 Page 2 The Legislature also authorized the Alaska Industrial Development and Export Authority (AIDEA) to issue up to $25 million of bonds to provide for the balance of the funding. The Department of Community and Regional Affairs’ (DCRA) Division of Energy (DOE), successor to the Alaska Energy Authority, completed the feasibility study in April of 1994. In July 1994 the Commissioner of DCRA found the project could be financed and was economically feasible. Petro Star and CVEA entered into a power sales/purchase agreement on May 2, 1992, that provides Petro Star will purchase all of its electric power requirements from CVEA for a period of five years. The five-year period would begin on the date of full-time refinery operation. To date, Petro Star’s monthly peak demand has varied from 1600 kw to 1920 kw. Petro Star is currently planning an expansion to approximately 50,000 barrels per day. The schedule for the expansion is uncertain at this time. Subsequent to the expansion Petro Star’s peak demand is expected to be at least 2500 kw. In November of 1994 Petro Star notified CVEA that is was considering the installation of one and possibly two 3.9 mw combustion turbines to generate its own power and wanted to discuss the possibility of selling the excess to CVEA to displace its existing diesel generation. By utilizing the exhaust gas in the crude heater, Petro Star believes it could substantially reduce the Refinery’s cost of power. Petro Star has essentially completed the necessary engineering studies for the project but has delayed the final decision, pending further internal review and the results of discussions between Petro Star and CVEA relative to an effort to identify a method to reduce Petro Star’s rates in the interim period until the transmission line is completed. If a method can be identified and implemented to lower Petro Star’s rate to approximately 8 cents kwh, it would displace Petro Star’s need to install the turbine or turbines. In May of 1995 Governor Tony Knowles appointed an Interagency Review Panel (IRP) to review the SGL feasibility study. The panel is chaired by and consists of the Commissioner of DCRA, the Executive Director of AIDEA, and the Commissioner of the Department of Natural Resources (DNR). The IRP retained CH2M Hill to perform the review to assist in making their determination whether or not the project is still feasible. The review process is in the final stage of completion. There has been considerable discussion between the parties relative to the significance of Petro Star’s final decision and whether or not their load would remain on CVEA’s system. Since late 1993 Chugach and CVEA have had ongoing discussions of a participatory agreement embodied in a power sales/purchase agreement that would involve Chugach in the ownership and operation of the SGL. Such an agreement would include Chugach delivering power to CVEA’s Pump Station 11 substation at or near the same price for capacity and energy that Chugach charges its other wholesale customers. Those discussions have resulted in the July 1995 decisions of both the Chugach and CVEA Boards of Directors to pass strong companion resolutions authorizing their management staffs to enter into substantive negotiations. Chugach Letter of Understanding August 30, 1995 Page 3 and CVEA are currently negotiating the terms and conditions of a contemplated power sales/purchase agreement that would initially provide for all of CVEA’s power requirements supplemental to the production capability of the State-owned Solomon Gulch Hydroelectric project. Chugach has recently proposed an outline to establish basic principles and provisions of a contractual agreement under which 80% of the net cost to the utility of owning and operating the SGL would be included in Chugach’s overall G&T system costs. Chugach’s other wholesale customers would have the choice of opting in or opting out of their share of the benefits and burdens of the CVEA sale. CVEA would be responsible for the 20% balance of the costs. Preliminary calculations indicate such an arrangement could deliver benefits to both CVEA and Chugach over a period of years. Petro Star’s final decision could impact this conceptual arrangement. UNDERSTANDING CVEA and Petro Star currently have a contract under which CVEA is obligated to sell and Petro Star is obligated to buy, power to meet Petro Star’s electric power load requirements. That contract expires in 1997. Petro Star is investigating whether to install its own generation equipment to meet its load requirements, and potentially to produce excess power for sale to others, after that date. Under proposals that CVEA and Chugach have recently made to Petro Star, however, if the SGL is built it might be less expensive for Petro Star to purchase from CVEA electric power generated by Chugach and transmitted to Petro star’s facilities over the SGL and CVEA’s system. Alternatively, if Petro Star ultimately decided to install its own generation, construction of the SGL could still potentially benefit Petro Star by allowing Petro Star to have access to the entire Railbelt energy market for purposes of selling any excess power. Because construction of the SGL may produce these potential power purchase and power sales benefits, Petro Star may conclude that, so long as construction of the SGL remains viable, Petro Star should defer making any irrevocable commitment to install its own generation. In return for assurance that Petro Star would defer such a commitment, Chugach and CVEA have stated their willingness to make rates for power delivered to Petro Star over the SGL, in accordance with the alternatives that Chugach and CVEA have presented to Petro Star (or other mutually acceptable alternatives that reduce Petro Star’s power costs). CVEA and Chugach have also agreed that if the SGL is under construction but not completed by January 1, 1998, and if Petro Star has not committed itself to install its own generation by that time, then, in return for Petro Star’s continuing to await completion of the SGL rather than installing its own generation, the two utilities and Petro Star will negotiate in good faith in an effort to agree upon reasonable “co-generation deferral” payments by one or both of the utilities to Petro Star to help cover any net excess of Petro Star’s power costs over the co-generation Letter of Understanding August 30, 1995 Page 4 alternative during the period between January 1, 1998, and the date of completion of the SGL. COST ACCOUNTING To ensure a fair and equitable comparison of costs to effect the project’s generation termination when power is available from CVEA via the intertie that is competitive with the project’s cost, it would be imperative that the accounting methods used by Petro Star for the calculation of the cost of generation for the cogeneration project be compatible with standard utility accounting procedures in order to assure that such an equitable comparison can be achieved, the parties will agree, prior to the construction of the Petro Star cogeneration project, to the accounting method or system to be applied. AGREEMENT It is agreed by the parties that by signing this letter, there is an agreement that an understanding is established as set out in the preceding paragraphs. If CVEA decides not to construct the SGL, Petro Star would be notified at the earliest practical date and would be released from the provisions of the agreement. COPPER VALLEY ELECTRIC ASSOCIATION, INC. BY I CHUGACH ELECTRIC ASSOCIATION, INC. KM. COPPER VALLEY ELECTRIC ASSOCIATION, INC. P.O. BOX 45 GLENNALLEN, ALASKA 99588-0045 Glennallen (907) 822-3211 Valdez (907) 835-4301 Telefax # (907) 822-5586 CONFIDENTIAL MEMORANDUM August 22, 1994 TO: Jim Woodcock - Acting General Manager Matanuska Electric Association, Inc. FROM: Clayton es Ae fl Hla’ SUBJECT: Sutton to Glennallen Intertie This memorandum is to follow up on our conversation this morning about the possibility of putting the proposed 138 kv line on the same right-of-way as Matanuska Electric Association’s (MEA's) O'Neill to Lionhead distribution line. On several occasions over the past few months as I have been returning from Anchorage, I have looked carefully at the existing distribution line route. I have been surprised at the small amount of the line that is visible from the highway, even in the early spring without the added screening that occurs when the trees leaf out. The information contained in this memorandum is highly sensitive as it will begin an official discussion of a concept that has been the subject of rather casual conversations over the past several months. If the information gets to the wrong people, or the right people, depending on your point of view, the concept could be killed without receiving a complete or fair hearing. I have discussed the idea with Eric Yould of EBASCO Environmental in some detail and asked his objective opinion whether the concept has sufficient merit to warrant further study and investigation. Eric is of the opinion that it is sufficiently meritorious to justify some additional investigation because on the surface it appears it could be a win-win situation for everyone concerned. The Concept The concept is to conduct an investigation into the possibility of incorporating the transmission line right-of-way with MEA’s existing distribution line through most of the Matanuska Valley, probably as far as Hicks Creek or Pinochle Creek. SERVING MEMBER-OWNERS IN THE COPPER RIVER BASIN AND VALDEZ Sutton to Glennallen Intertie August 22, 1994 Page 2 History The Northeast Intertie Study conducted in 1988 and 1989 proposed to construct a large capacity 230 kv line from Sutton to Delta Junction via Glennallen. If constructed, the line would have provided essentially unlimited transfer of power from the Railbelt System to CVEA and a loop transmission feed for the Fairbanks area. The Alaska Legislature was heavily lobbied in 1990, 1991, and 1992 to fund the first segment of the line from Delta Junction to Glennallen. The only reason given for proposing construction of this section of the line first was the hope of obtaining some federal help based on improved service to the presently served military bases and to provide service to the Black Rapids cold weather training site, which is not currently served with central station service. During the public meetings held to receive public input on the proposal, strong opinions were voiced by residents along the proposed route in opposition to building the line along the Glenn Highway. Some measure of acceptance of the line was indicated by a group known as the Northeast Intertie Concerned Residents if the line was constructed away from the highway and avoided private property to the extent possible. At the conclusion of the 1992 legislative session, key legislators told CVEA and others that we were wasting their time and ours on the project because of the pessimistic outlook for Alaska oil revenues. Two key legislators told CVEA they might look favorably on an alternative proposal if one could be identified that would serve the utility’s power requirements and be constructed more economically. Tom Stahr, General Manager of ML&P, suggested that a smaller capacity transmission line might be a viable alternative and constructable within achievable funding limits. CVEA’s staff discussed the suggestion with the Board of Directors and retained POWER Engineers (PEI) to do the initial screening study of a 138 kv line. That study was the impetus of development through a number of subsequent Board decisions into the full blown feasibility analysis (Beck Study). During the first round of public meetings held in conjunction with the Beck Study, it became clear the line would face stiff opposition if constructed along the road on the initial preferred route suggested by the 1989 Northeast Intertie Study. In an attempt to gain some measure of public acceptance, CVEA pledged to abandon that route and move the line route further away from the road (the back country route) and to make a serious effort-to avoid private property. It became very apparent during the second round of public hearings in the fall of 1993 that this commitment had done nothing to cause any measurable change in the strong opposition to the project. Sutton to Glennallen Intertie August 22, 1994 Page 3 CVEA has continued to communicate and work with the Glacier View Community Council and others to find an acceptable, mutually agreeable compromise. It is our intuitive feeling that we have not been as successful in that endeavor as we would like to have been, although a line route up Boulder Creek might pass muster with the Glacier View group. The community councils in Chickaloon and Sutton have voiced strong opposition to the line regardless of its location. The major points of opposition are as follows: I: Cutting a 100 to 150 foot right-of-way through the Matanuska Valley would open up the back country to additional people and be damaging to the moose population. (A Fish and Game biologist has recently been quoted as saying that cutting a right-of way would open additional area that would grow back with young tender bushes that would be beneficial for the moose). The line would be detrimental to the aesthetics along the Glenn Highway and the area’s trail systems and would cause an adverse impact on tourism. Concern relative to the occasional exposure to Electromagnetic Fields (EMFs) when walking or riding under the power line. The Bonneville Power Administration, in a study of EMFs, determined that double circuit lines, in some instances, reduce the total EMFs through a cancellation process. This is further verified in my discussions with PEI who has recently completed a study for San Diego Gas and Electric in analyzing methods to reduce EMFs. As you well know, this issue is more emotionally charged than it is factually based as none of the many studies throughout the world have developed conclusive evidence that there is any link between EMFs and cancer. Notwithstanding the lack of known facts relative to EMFs, it will be difficult to convince people that EMFs do not necessarily cause degradation of human health. Voiced a rather indignant objection to the project because they would not receive any benefit from the project. Objected to the proposed project because CVEA had not, in their opinion, analyzed other available alternatives, i.e., developing the “known” natural gas field in the Copper Basin, interconnection with Alyeska, other hydro projects, conservation, etc. In the minds of some of the opposition, even if the above objections could be satisfactorily resolved, the line would cause damage to their quality of life beyond description and tolerance. Sutton to Glennallen Intertie August 22, 1994 Page 4 The third round of public meetings seemed to indicate no change in the opposition to the project. In my judgment, this fact would negate my commitment to move the line back from the road that was offered as an incentive for at least nonopposition to the project, which obviously has not occurred. I believe this discussion points out that it will be very difficult to achieve any voluntary support from those against the project unless it can be credibly proven there is an alternative that could meet at least some of their objections. The first and most important aspect of gaining acceptance of the new alternative is to be able to convince the Sutton and Chickaloon residents that further discussion as to whether or not line will be constructed is moot and a waste of time. CVEA will need to convince a majority of the opponents it is serious about proceeding with the project and will commit the necessary resources to achieve the stated objective. CVEA also needs to communicate its willingness to discuss reasonable alternatives in routing, etc., that would not have a significant adverse impact on cost which could be mutually beneficial. What are the benefits of using the existing right of way? 1 It would avoid the cutting of an additional right-of-way through the Matanuska Valley which has been one of the loudest objections. Ds There would be very little additional impact from the line as the majority of the impact exists with the distribution line. It may be possible with some re-routing to actually improve the aesthetics of the existing facilities. 3: MEA retained Dryden & LaRue to conduct a study of the line from O’Neill substation to Lionhead to determine the best approach to upgrading the reliability and capacity of the line. While I have not read the study, it is my understanding the recommendation is to upgrade the existing line instead of installing a new substation near Index Lake. It is also my understanding that most, if not all, of the poles will need to be replaced. It is obvious that if the transmission line was constructed using ruling spans that would accommodate a distribution underbuild, it would result in a significant savings to MEA in future years by not having to replace the poles as they upgrade the facility. . 4. The overbuild/underbuild construction scheme would not extend the full length of the existing distribution line. As mentioned above, we would probably have to route up Hicks Creek or Pinochle Creek in order to avoid the Matanuska Glacier and Sheep Mountain areas. Sutton to Glennallen Intertie August 22, 1994 Page 5 5: Routing the transmission line in the existing right-of-way should take a great deal of the speculation and conjecture out of the environmental discussion as the impacts of the existing line, if any, could be identified and ameliorated. 6. The pole height could be reduced for the shorter spans and still maintain necessary clearances. This should mitigate to some extent the objection to the 80-foot towers Emerman used in his presentations. When I discussed this concept with John McGrew of PEI, he expressed concern that the shorter spans and greater number of structures might negate any savings attained from the reduced right-of-way cost. He made it clear it was only his gut feeling and a fairly detailed study would be needed to arrive at a credible estimate. CVEA would prefer the concept produce a cost savings but that may not be as important as developing a plan which will satisfy prudent environmental standards. The ultimate goal would be to convince those who will eventually make the final decision that the alternative is the best approach available to reduce the environmental impact to the lowest degree possible. Jim, obviously this is a sketchy conceptual proposal, but it does give you an idea of an alternative that could yield mutual benefits. Please give it your consideration, and let me know what you think. d:\word\cdh\95-153cf SENT BY: 8- 2-95 ; 8:53AM ; CHUGACH ELECTRIC- 907 561 8998;# 1/ 4 cc Dew Vea J } ASSOCIATION, INC. [ok 0.0 kectric Tm associanion, IMC. EUGENE N. BJORNSTAD, P.E. General Manager August I, 1995 Mr. William R. Snell, Executive Director FAX: 561-8998 AIDEA Hard Copy to Follow 480 W. Tudor Road Anchorage, AK 99503 Subject: Copper Valley Intertie Dear Mr, Snell: Chugach Electric Association (Chugach) and the Cooper Valley Electric Association (CVEA) are steadfast in our support of the Copper Vallcy Intertic. We believe that the Intertie is a viable and appropriate project that will assist in reducing electric power costs for the residents and businesses of the Copper Valley and Valdez and contribute to the economic development of Alaska. We have affirmed our joint intcrests in seeing this project move forward, The Board of Directors of both Chugach and CVEA have recently adopted the attached resolutions that direct each utility to commence negotiation of a firm power agreement. A firm power agreement will assure that a supply of low-cost energy will be continuously available to the electric customers of CVEA when the Intertie is complete. The negotiations will explicitly consider possible ways Chugach could participate in Intertie construction, operation and maintenance. We are committed to working together on a long-term power supply arrangement for CVEA, and urge you and the other members of the Review Committee to assist us in this beneficial undertaking. The Intertie will provide significant benetits to all Alaskans by enhancing the economic potential of a vital region of the state. A favorable review by the committee will help us obtain those benefits and lower costs to users of electricity. Thank you for your consideration. Sincerely, ene bee EugenéN. Bjornstad © General Manager ENR: TL:cah:95026gb.U Attachment ce: J. Shively, Department of Natural Resources M. Irvwin, Department of Community and Regional Affairs T. Knowles, Governor, State of Alaska C. Uurless, Copper Valley Electric Association, Ine 5601 Minnesota Drive * P.O. Box 196300 « Anchorage, Alaska 99519-6300 Phone 907-563-7494 = FAX 907-562-0027 8- 2-85 ; 8:53AM ; CHUGACH ELECTRIC- 907 561 8998;# 2/ 4 SENT BY: 95 07 01 ELECTRIC ASSOCIATION. INC. Anchorage. Alaska RESOLUTION WHEREAS, providing electric power by Chugach Electric Association, Inc. (Chugach) to Copper Valley Electric Association, Inc. (CVEA) has the potential to reduce the costs of service to Chugach members by spreading fixed costs over a larger customer base; WHEREAS, CVEA can substantially reduce its power supply costs through purchases from Chugach; WHEREAS, The Copper Valley Intertie (Intertie) may provide mutual savings to both Chugach and CVEA members; WHEREAS, Chugach supports environmentally sound construction of basic infrastructure which facilitates economic development; WHEREAS, electrical interconnection of the Railbelt with Valdez and Copper Valley offers the potential for long term system growth; and WHEREAS, Chugach’s participation in construction, ownership or maintenance of the Intertie may facilitate interconnection of the Valdez and Copper Valley regions with the Railbelt; WHEREAS, Chugach’s wholesale customers will have the option to include or exclude the costs and benefits of the transaction in their rates; NOW, THEREFORE RE IT RESOLVED that Chugach supports the construction of the Intertie and urges the State of Alaska to facilitate and expedite development of the Intertie; IT IS FURTHER RESOLVED that the General Manager is directed to commence negotiation of a power sale arrangement with CVEA for a sale of firm power net of Solomon Gulch output which ensures that benefits accrue to all Chugach members and which may include: > Pooling the costs of the Copper Valley Intertie with other Generation and Transmission expenses on the Chugach system; . Participation in construction, ownership or maintenance of the Intertie: . Other services or assistance to CVEA in aid of either interconnection or provision of power to CVEA. CERTIFICATION t—_Patricia B. Jasper do hereby certify that {an sansa. Seerevary of Chugach Electric Association. Inc., an electric non-profit cooperauve membership corporation orqanited and existing under the laws of the Siete of Alaska: that the foregoing is a complate and correct copy of a resolution adopted at a meeting of the Board of 19th Jul 95, Directors of this corporation, duly and properly called and held on the... day of UY. 1a, thet a quorum was present at the meeting; thet the resolution is set forth in the minutes of the meeting and bas not been rescinded “— 19th IN WITNESS WHEREOF, I bave hereunto subsetibed my name and aiiixed the seal of this cotperatioa this...) Itt ea day of Jul —. 1f2.. (Seal) SENT BY: 8- 2-95 + 8:54AM 5 CHUGACH ELECTRIC= 907 561 6888;# 3/ 4 COPPER VALLEY ELECTRIC ASSOCIATION, INC. GLENNALLEN, ALASKA RESOLUTION 95-15 POWER SUPPLY NEGOTIATIONS WITH CHUGACH ELECTRIC ASSOCIATION WHEREAS, Copper Valley Electric Association, Inc. iz a rural electric cooperative serving the resideats of the Copper River basin and the City of Valdez; and WHEREAS, CVEA's members pay among the highest unsubsidized clectic rates in the state of Alaska, and WHEREAS, CVEA's Board of Directors have been striving to find the most cost effective power supply alternative for itt members, and WHEREAS, it appears CVEA can substmtially reduce its power supply costs through purchases from Chugach; and WHEREAS, the Sutton to Giennailen intertie may provide monial savings to both CVEA and Chugach members; and WHEREAS, an electrical intercoomection of the Railbek with Valdez and Copper Valley offers the potential for long-term system growth; and WHEREAS, Chugach’s participation im construction. ownership or maintenance of the intertie may facilitate interconnection of the Valdez and Copper Valky ‘regions with the Railbelt; now therefore BE IT RESOLVED, the Copper Valley Electric Board of Directos supports the construction of the Sutton to Giennallen méertie and urges the State of Alasica to facilitate and expedite development of the inteztic; and 07/21/95 08:09 TX/RX NO.1472 P.002 SENT BY: 8- 2-95 + 8:54AM ; CHUGACH ELECTRIC= 907 561 8998;# 4/ 4 - Resolution 95-15 Page 2 BE [IT FURTHER RESOLVED, that the Copper Valley Electric Association Roard of Directors directs the General Manager to commence negotiations of a power sale arrangement with Chugach Electric Association for the purchase of fim power net of Solomon Gulch output which cnsures that benefits accrue to all Copper Valley Electric members and which may include: * Pooling of costs of the Copper Valley Intertie with other Generation and Transmission expenses on the Chugach system; « Participation in construction, ownership or maintenance of the Intertie; ¢ Other services or assistance to CVEA in aid of ejther interconnection or provisions of power to CVBA. Approved and signed this 20th day of July, 1995, in Valdez, Alaska. Paul S. Holland, President (seal) 07/21/95 08:09 TX/RX NO.1472 P.003 8 - COPPER VALLEY ELECTRIC ASSOCIATION, INC. P.O. Box 45, GLENNALLEN, ALASKA 99588 (907) 822-3211 FAX 822-5586 VALDEZ (907) 835-4301 FAX 835-4328 July 12, 1995 Mr. David A. Gray, Division Manager Environmental Planning and Management CH2M Hill 777-108th Ave. N. E. Bellevue, Washington 98009-2050 Dear Dave: In a recent conversation with Tom Stahr, he told me of your call and his suggestion to you that the proposed Sutton to Glennallen Line (SGL) was over designed and as a result of the over design, the estimated cost is higher than necessary. Tom apparently indicated to you that he believed a single pole line could be constructed on or near the existing right-of-way that would serve CVEA's needs adequately and be much less costly to construct. Bob LeResche called on Monday, July 10, and reported he had had a telephone conversation with you and that among other things, you discussed the size of the SGL. Bob indicated you suggested if a smaller line could be constructed at less cost, it would have a significant, positive impact on the results of your analysis. Dave, there is a significant amount of history you have had no way of knowing about that supports your observation. I will attempt to summarize that history for you as briefly as possible. In 1988 the Alaska Energy Authority (AEA) retained POWER Engineers, Inc. (PEI) to conduct a reconnaissance study of the Northeast Intertie Project (NIP), a 230 kv transmission line that would begin at Palmer and extend to Delta Junction via Glennallen. The primary purpose of the project was to provide a loop feed to the Fairbanks area. Secondary benefits were to serve the supplemental needs of CVEA and to potentially provide service to military installations along the Richardson Highway that were not served by central station service. An aggressive but unsuccessful lobbying effort to obtain funding for the project was sustained in the 1990, 1991, and 1992 legislative sessions. The reason the effort was not successful was not that the majority of legislators did not support and recognize the need for the line but because the decline of oil production was beginning. The coincident reduction of revenue to the State caused them to be reluctant to obligate for such a large project ($156 million in 1989 dollars). Serving the Copper River Basin and Valdez Mr. David A. Gray July 12, 1995 Page 2 At the conclusion of the 1992 legislative session, four or five of the key legislators who supported CVEA's effort to become interconnected to the Railbelt System suggested that CVEA investigate alternatives to see if a more economical solution could be identified. This group believed that a less expensive alternative would be successful in obtaining some State financial assistance because the utilities’ lobbying effort had made the legislators all very much aware of the need for interconnection of CVEA's system to the Railbelt. During a post legislative session discussion of state wide utility managers at an Alaska Rural Electric Cooperatives Association, Inc. (ARECA) meeting, Tom Stahr suggested that CVEA conduct a preliminary study to determine the financial and technical feasibility of a smaller capacity line. In June of 1992 CVEA's Board of Directors approved a preliminary screening study for a 115 ky or 138 kv line from Sutton to Glennallen. PEI was retained to conduct the study, and in August 1992 the first draft was submitted to CVEA for consideration. The results were very encouraging, indicating the line could be constructed at a cost of $27 million to $33.5 million. In September 1992 CVEA's Board authorized the study to be extended to test the assumptions and verify the findings of the draft. CVEA requested that PEI submit the draft study to a number of Alaska electric utility engineers and contractors who had extensive Alaskan experience with transmission line design and construction for their review and critique. CVEA then invited all of the Railbelt utilities to have their engineers attend a review of PEI's draft study to exchange viewpoints and provide an opportunity for PEI to test their assumptions and conclusions. To facilitate the review, CVEA provided all of the utilities with a copy of the draft study, well in advance. Seventeen engineers and participants from Chugach Electric Association, Matanuska Electric Association (MEA), AEA, PEI, and CVEA met on October 15, 1992, and dissected the first draft of PEI's study, making numerous suggestions for improving the document. A copy of the notes of that meeting are included as Appendix F of the final study report. Mike Gearhart, General Manager of Newberry Alaska, and Aaron Downing, an independent contractor located at Palmer, also provided a number of helpful comments. PEI submitted the second draft of the study in December 1992 and the final report in January 1993. Using a combination of steel single pole and H-frame construction, PEI estimated the line cost at $40.4 million in 1992 dollars. A copy of the first draft and final report are being transmitted to you under separate cover. Prior to the time AEA was disbanded by legislative action in 1993, State law required a detailed feasibility study be conducted for any project requiring or requesting significant State financial assistance. AEA had traditionally conducted the studies required for power transmission line projects. The studies were funded through their normal budget process. In late 1992 AEA was in the middle of the FY93 budget year and wouldn't have been able to start the study until after the beginning of FY94 budget year, assuming the Legislature and Governor would approve a budget that included funds for the study. Mr. David A. Gray July 12, 1995 Page 3 In January 1993 AEA and CVEA executed a Memorandum of Agreement that stipulated CVEA would provide the funding for Phase One of the study which would occur prior to the beginning of the new fiscal year on July 1, 1993. AEA agreed to request $500,000 in their FY94 budget to reimburse CVEA and fund Phase Two to the completion of the study. The study was to be managed by AEA. Dick Emerman, an AEA economist, was appointed project manager. The project manager was granted full authority to select the consulting firm to conduct the "independent study." One of the first decisions of the project manager was that all prior documents and studies prepared for or by CVEA were to be disregarded by the study contractor including the PEI screening study, CVEA Power Requirements Study, and Financial Forecast. The contractor could have access to those documents but was instructed that the Feasibility Study was to be completely "independent" from any previous study. The first major point of contention between CVEA and AEA was the choice of traditional Alaska steel X-frame construction design for the line. It was obvious that if the line were constructed to traditional specifications, traditional cost would result. As a result of a number of intense discussions, some modifications to the original design were agreed to but had an inconsequential effect on the estimated cost of the project. CVEA's request to have some consideration for single pole construction in the study was ignored. R. W. Beck (Beck) estimated the cost of the line at $47.6 million in 1993 dollars. Beck also estimated that inflation, financing cost, and interest during construction would increase the total cost of the line to $56.2 million in 1998 dollars. At the outset of the Feasibility Study, MEA had indicated a desire to participate in the line, at least in that portion located in their service territory. MEA operates a 25 kv distribution line from Sutton to near Caribou Creek, a distance of approximately 45 miles. The line is nearing its capacity, and MEA was giving some thought to constructing a substation which would tap the SGL in the area of Index Lake to upgrade and expand their service to the area. A small but very vocal group of MEA's members in the Sutton-Chickaloon area are intensely opposed to the SGL, and at a series of public meetings conducted by AEA, they spoke strongly against any involvement by MEA. The opposition prompted MEA to retain Dryden & LaRue to conduct a study to identify the best and most economical way to upgrade service to the area. The Dryden & LaRue study concluded that because the existing distribution line was nearing its life expectancy and entering a period of high maintenance costs, MEA would be well advised to replace the distribution line before considering a substation. In subsequent conversations with MEA's General Manager, the idea was spawned to look at constructing the transmission line with a single pole design a 400 to 450 foot ruling span on or near the existing right-of-way which Mr. David A. Gray July 12, 1995 Page 4 would allow MEA to underbuild their distribution line. The present and future savings of using this approach could be substantial and significant, both to MEA and CVEA. I have enclosed a copy of a memo that I wrote to MEA’s Acting General Manager in August of 1994 on this subject. It was decided not to attempt to interject this concept into the Feasibility Study process because we believed it would be summarily dismissed by AEA's project manager. Strategically, we believed it was better to wait until the study was finished and the financing secured before taking the idea public. The reason behind this strategy was that we needed to obtain financing for the most expensive design concept in the event we were forced by the "powers that be" to construct to their specification. The idea of a single pole, double circuit line on or adjacent to the existing right-of-way is still very much alive in CVEA’s planning and would be aggressively evaluated prior to beginning construction of the project. CVEA has a situation very similar to MEA's relative to its distribution line from Glennallen to Eureka Lodge, a distance of approximately 60 miles. The line has been in service nearly 30 years and will be in need of replacement within 10 to 15 years. We hold the preliminary view that it makes just as much sense for us to use the same concept as would be used in the MEA service area to take advantage of the future savings that would occur by not having to replace the poles for the distribution line. Bob LeResche mentioned that you referred to the possibility of constructing a 10 mw line in lieu of the proposed 40 mw line. 138 kv lines that have the transfer capacity of 40 mw, such as the proposed SGL, have been successfully constructed in a single pole, double circuit configuration for many years. It was Bob's impression that you might be suggesting taking a look at a heavy distribution line, but my experience with long 25 kv lines has proven conclusively to me that that kind of facility would not provide a viable answer to CVEA’s future power supply. I believe that if you will check again with Tom Stahr, you will find that he was referring to constructing the line to a different design specification at 138 kv and not to reducing the overall capacity of the line. As I mentioned previously, I have mailed the referenced PEI screening study draft and final report to you under separate cover. I believe a quick review of the Executive Summaries of both reports and Appendix F of the final report will provide a fundamental understanding of our thinking as outlined in this letter. Mr. David A. Gray July 12, 1995 Page 5 Dave, if you have any questions or comments, please feel free to call me. If necessary, I will be available to meet with after your return to Bellevue to discuss any issues relative to this vitally important project. Yours truly, Lifton Clayton Hurless General Manager Enclosure w:\word\cdh\95-116jw.doc ae COPY " ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY fe ALASKA @m_ ENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 561-8050 FAX 907 /561-8998 MEMORANDUM LO: Mike Irwin, Commissioner Department of Community and Regional Affairs John Shively, Commissioner Department of Natural Resources mom: wid Rr mee doy Executive Director DATE: June 6, 1995 RE: Sutton-Glennallen Intertie Attached is a draft scope of work, schedule and project estimate for reassessing the feasibility of the Copper Valley Intertie. We took the liberty of asking CH2M HILL to provide this to us since we have them on contract. Hopefully, this will be a good starting point for our discussions and gives us another option from what was discussed earlier. You’ll notice that the initial phase cannot be accomplished until early August, which is outside the timeline the Governor gave us. I’ll be out of the state through June 8. I would be available to discuss this with you, either in person or by teleconference, on or after June 9. Attachment MM nginces FAX ME Ponners fo 7ulalN Economists — Seatte Offos Scientists TEL: (206) 453-5008, ext5246, FAX: (206) 462-5957 NE Lol. 99 LF Fax #: (#7) 56/- 8998 Verification #: Total Pages: Z4 To: Riley Snell From: Dauge Grew Company: Alaska Ind. Dew + Eypevt Auth. Date: (| 5195 Message: i ion in thi i i is i individual or entity named on the cover sheet. The information in this fax is confidential and proprietary and is intended only for the individual! ' ty r If you are nat the intended recipient, disclosure, copying, distribution or use of this information is ships el dag do not receive ail of the pages or have received this fax in error, please notify us immediately at the above telephone number. T8°'d 2TH WYST:6 S66T ‘S NO 8668 T9S 206 701 ¥aS-TIIH WEHD :WOdS Mi Engineers z= Planners A Economists Scientists June 2, 1995 Mr. Riley Snell Executive Director Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage, Alaska 99503 Dear Rilcy: Thank you for the opportunity to come to Anchorage to plan additional feasibility analysis of the Copper Valley Intertie, I enjoyed meeting you and Randy Simmons, Based on our discussions, I understand that Govermor Knowles has tasked a blue ribbon committee comprised of you, Mike Irwin, and John Shively to reassess the feasibility of the Copper Valley Intertie and recommend a course of action relative to the $35 million loan appropriated by the state legislature. You have asked CH2M HILL to provide feasibility analysis to support the committee’s efforts. i I have prepared a two-phase approach for our work. Phase | is designed to directly address the two new developments that are fundamental to the feasibility of the Copper Valley Intertie; 1.) Petro Star’s announced plan to Icave the Copper Valley Electric Association (CVEA) system and possibly sell power to CVEA under the terms of PURPA, and 2.) Alyeska’s interest in possibly connecting its relatively large load to the CVEA system. On the basis of our findings in Phase 1, the committee may decide that it has cnough information to formulate its recommendation to the governor and therefore not proceed with a second phase, or it may choose to proceed with additional analysis in Phase 2. As currently envisioned, Phase 2 would include more detailed sensitivity analysis and formal decision analysis. Decision analysis and associated documentation may be particularly uscful if significant involvement of project stakeholders is contemplated. Phase 2 would culminate with a comprehensive report on the feasibility of (he Intertie. If the committee chooses to proceed with Phase 2, its scope would likely be revised on the basis of information devcloped in Phase I, Drafts of the scope of work and workplan for this project are attached for your review as Attachments 1 and 2, respectively, The sample decision analysis concept we discussed on Thursday is also attached (Attachment 3) for your easy reference. Please note that the last page of this attachment is not in context of the Intertic. [t is simply a sample of a risk Seattle Office 777 108th Avenue NE, Bellevue, WA 98004-5118 206 453-5000 OQ) P.O. Box 91500, Bollovue, WA 98009-2050 Tax No, 206 462 $987 y 7A°d Td We2Tt:6 S66T ‘S NO 8668 TSS 286 :0L ¥SS-TIIH W2H3 :WOdS profile that would be developed for the intertie decision or for associated documentation. we As shown in Attachment 4, the cost estimate for Phasc | of this work is $45,200. An order of magnitude estimate for Phase 2 costs is $44,300. A better estimate of Phasc 2 costs can be devcloped once information from Phase | is available. These estimates are based on the assumption that our analysis can overlay the existing Beck and Bradford analyses using the Beck model without compatibility problems. I will manage the project, assisted by Bob Brooks, Dan Pitzler, Mark Veliccr, and Jeff Haight. Mr. Brooks will be responsible for project modelling and interface with R.W. Beck. Mr. Pitzler will be responsible for assisting Mr. Brooks with model runs and data management. Mr Velicer will be responsible for leading the decision analysis activities in Phase 2, Mr. Velicer will be assisted by Mr. Haight. Resumes for team members arc provided in Attachment 5. We expect that the draft technical memorandum for Phase | can be completed by August 9. With a one-week period for review and comments, we will complete the final product by August 21. This assumes that we are able to meet with project stakcholders to complete Task 2 during the week of June 12. As I mentioned to you, other commitments will prevent me from mecting in Anchorage between June 19 and July 14. Assuming that by the first or second week of August the committee would know whether Phase 2 is necessary and be able to approve a workplan, we could present initial results by September 5, a Phase 2 draft report by September 27, and, assuming a one-week period for teview and comments, a final comprehensive report during the sccond week of October. { look forward to working with you and Randy on this project and will call you next week to discuss our plan for project execution, In the meantime, if you have any questions or comments, please call me. Sincerely, David A. Gray 7 Project Manager EB'd 2TAH WHLT:6 S66ET ‘S NOC 8668 TSS 2406 701 USS-TIIH WEHD :WONS Attachment | Copper Valley Intertie Feasibility Update Draft Scope of Work The scope of this project will be to reassess the feasibility of the Sutton to Glennallen 138kV transmission line (Copper Valley Intertic) based on certain conditions that have changed since original feasibility studies on this project were completed. To the extent practical, assumptions and analysis used in the R.W. Beck feasibility study (Veasibility Study--Copper Valley Intertie, January, 1994), the Copper Valley Intertie Plan of finance by J. C. Bradford (May 3, 1994), and Robert Wilkinson testimony on CVEA avoided cost will be used with changes made only as neccssary to reflect changed conditions, The project will be conducted in two phases. Phase 1--Update of Summary Analysis In Phase 1, the cxisting Copper Vallcy Intertic feasibility analysis will be updated with data to reflect two new conditions: 1.) Petro Star’s announced plan to leave the Copper Valley Electric Association (CVEA) system and possibly sell power to CVEA under the terms of the Public Utility Regulatory Policics Act of 1978 (PURPA), and 2.) Alyeska’s interest in possibly connecting its relatively large load to the CVEA system. The product of Phase 1 will be updates of table I-5 of the R.W. Beck feasibility study and Tables I though IV of the Bradford plan of finance. These will be presented as part of a = technical.memorandum at the conclusion of Phase 1. This work will include conducting sensitivity analysis for: ° Load growth ° Oil prices ° {Interest rate on loans associated with the project . 4-Dam Pool charge rate for output from Allison Lake . Long-term power supply costs for power from the Railbelt The load forecasts scnsitivitics will be limited to a medium load forecast (the medium-low or the medium-high scenario) from the R.W. Beck study (for reference) and consideration of the following load developments: ° Loss of Petro Star as a customer of CVFA @ ? vO"'d dtd WYST:6 S66T ‘S NN 8668 19S 406 701 YAS-TIIH WHO :WOsS . Addition of Alyeska as a customer of CVLA assuming the existence of a Copper Valley intertie (This will include the addition of Alyeska’s existing requirements (approximately 8 MW); also uncertainty surrounding the term of the power supply to Alyeska will be addressed) The load forccast scenarios will likely consist of the following: . Low: Medium forecast less Petro Star Load ° Medium: We will select either Beck’s medium-low or medium-high forecast ® High: Medium forecast plus Alyeska load Input values for oil price forecasts will be reassessed and agreed to with AIDFA before proceeding with the analysis. Analysis of power supply options for CVEA will be limited to the following five development scenarios: . All diesel . Copper Valley intertie . Allison Lake ss . lfobbs coal-fired generation at Valdez e Petro Star supply CH2M HILL will work with R.W. Beck to arrange running the updated analyscs on the financial model R.W, Beck used in its 1993-94 analysis of the Copper Valley Intertie, Analysis will include evaluation of 1.) least cost power supply in terms of present valuc (consistent with the Beck report) and 2.) first year nominal supply costs (consistent with the Bradford report) assuming: . No state assistance e Minimum state assistance, ic. amount necessary only to set first-year rate equal to the base case. ’ A $35 million loan from the State of Alaska at zero interest Phase 1 will be conducted with input from the various stakeholders (CVEA, CEA, ML&P, MLA, Hobbs, Petro Star, and Alyeska) and with close coordination with AIDEA. © SA°'d 2TéH WY8T:G6 S66T ‘S NN 8668 19S 286 sO0L ¥SS-TIIH W2HD :WOsS Phase 2--More Detailed Study and Decision Analysis If, at conclusion of Phase 1, a clear course of action is not apparent, Phasé 2 will provide the additional analysis needed to make a decision regarding the feasibility of the Copper Valley Intertie. In Phase 2, any important residual issues not considered through the Beck model will be evaluated, and formal decision analysis will be performed to more directly address future uncertainties. Among the issues that may require quantification through more detailed analysis in Phase 2 are reliability differences among the various power supply options, This analysis would consider the costs to put reliability associated with each supply option on a comparable basis with the Intertie option. As part of this analysis, costs to firm-up the Allison Lake resource option will be directly assessed. A separate analysis could also be conducted of the likely schedule for the Copper Valley Intertie with realistic consideration given to the time requircments for environmental permitting and line construction. Phase 2 will also include formal decision analysis, The primary benefits of this project component will be 1.) to provide an avenue for stakeholder’s to have formal input on probabilities associated with uncertainties associated with the project, 2.) to explicitly quantify uncertainty associated with the project, 3.) determine the expected valuc of costs associated with cach supply alternative and the risk profile associated with cach. Most of the cost and utility system data for the decision analysis will have been developed in Phase |, In Phase 2, uncertainties will be rechecked through an influence diagram, probabilitics associated with uncertainties will be estimated, and a decision tree constructed, From the decision tree model, the expected value of costs and risk profiles a mentioned above will be derived. The influence diagram and probability assessments will be developed though a workshop and individual intervicws with key [ntertic project stakeholders. Upon completion of Phase 2, a formal report will be prepared. This report will summarize the findings of the study and document the process used to cvaluate the Intertie and other CVEA resource options. © 9G'd dTtdH WYET:6 S66T ‘S NO 8668 T9S 2486 201 ¥SS-TNIH WeHD :WOuS Attachment 2 Copper Valley Intertie Feasibility Update Draft Workplan (Labor days and schedule for cach task shown in parentheses) Phase 1 1. Review project background and develop scope and workplan with AIDEA. (3 days; May 31-June 8) e. Meet with key stakcholders to get input regarding key issues and probabilities associated with related uncertainties: ° CVEA « . Petro Star ° Alyeska ° CEA . MEA . ML&P e Hobbs (4 days; June 12-16) as Meet with R.W. Beck to review financial model. Mect with J.C. Bradford & Co. to get input re financial plan approach. Obtain Beck model and/or arrange for Z custom runs for feasibility update. Do not recheck existing numbers or assumptions in existing Beck model. Continue to usc 1993 dollars as base price levels. (3 days; June 12-16) 4. Reassess analytical needs with AIDRA given findings in Tasks 2 and 3; revise workplan as necessary. (0,5 days; June 28) oe Obtain additional data needed for update of Beck and Bradford analysis. (6 days; July 3-24) } 6. Conduct analysis using R.W. Beck model (15 days--This docs not include time for R.W. Beck assistance; July 17-31) 4 Prepare a technical memorandum on analytical results, Reccive comments. (5 days; July 31-August 9) 8. Prepare final technical memorandum. (2.5 days; August 17-21) 240°d dTé# WY6T:6 S66T ‘S NNO 8668 T9S 486 701 ¥SS-TIIH WHO :WOeS Phase 2 ip Review scope and workplan in light of findings/necds from Phase 1. (1 day; August 4) 2: Obtain additional cost and systems data needed for analysis. (4 days; August 7-18) Sh Workshop with key stakeholders to develop influence diagram, outline decision tree and preliminarily assess probabilities associated with certain uncertainties. (3 days; August 14-18) 4. Conduct interview regarding probabilities. (3 days; August 14-18) Ss Link Beck model output to decision analysis model. (2 days; August 14-18) 6. Conduct decision tree and risk profile analysis. (10 days; August 21-September !) is Present results of first-cut to AIDEA, Obtain critical review and dircction. (2 days; Scptember 5-8) 8. Revise analysis in response to critical review in Task 7, (3 days; September 15-22) 9. Present revised results in draft comprehensive report for Phases | and 2. (6 days; September 20-27) 10, Obtain feedback in workshop with AIDIIA and other stakeholders, (2 days; o October 2-4) ll, Prepare final report. (5 days; October 4-13) @ BO'd 2TLH Wuae:6 S66T ‘S NN 8668 T9S 206 :0L ¥SS-TIIH WeHD :WOss 1995 9:2@AM H717 P.@9 JUN 5; 987 561 8998 To: FROM: CH2M HILL-SEA Sutton to Glennallen Transmission Line Decision Analysis Conceptual Approach CH2M HILL 5/31/95 € Juewyorjzqy JUN 5S,» 1995 9:20AM #717 P.18 927 561 8998 TO: FROM: CH2M HILL-SEA | Sutton to Glennallen Transmission Line | , Influence Diagram | ! = 5/31/95 | | Economic [ Development / } Load Growth Petro Star Reliability : ‘ Load / Resource | Decision to | uild Transmission | Line ——s ~ Alyeska i , Load / Resource | i Avalanches | Prices. va aD) JUN 5,» 1995 9:21AM #8717 P.11 907 561 8998 TO: FROM: CH2M HILL-SEA @ Decision Tree | Sutton to Glennallen Transmission Line | | 5/31/95 Economic a Development / Petro Star Decision to ~SYeopments argent Build Transmission®2¢ Growth =» Load / Resource aivaska Railbelt Line Load/ Resource Avalanches Prices low Zero MW Build f i Low Frequent _ Low | res Med -<__ Four MW/~“ 7X Reliability -~< Rates \ Do Not Buil 4 A. High \A_ Infrequent High \_High \ Eight MM Reliability Rates JUN 5S, 1995 9:21AM #717 P.12 987 561 8998 TO: FROM: CH2M HILL-SEA Risk profiles can be used to compare the risks of different policies Which policy is riskier? Which has a greater chance of making money (positive profits)? Cumulative Probability Go/Continue $+} -2000 -1000 0 1000 2000 3000 4000 5000 6000 Profits ~ ® 6-9 Evaluating Alternatives Attachment 4 Copper Valley Intertie Feasibility Update Estimated Budget Phase 1 Labor (39 professional labor days at average rate of $800) $31,200 Support and expenses (25 percent of labor) 7,800 Contingency (20 percent of labor) 6,200 Total | $45,200 Phase 2 Labor (41 professional labor days at average rate of $800) $32,800 Support and expenses (25 percent of labor) 8,200 Contingency (10 percent of labor) 3,300 Total ; $44,300 Total $89,500 @ ET'd 2TaH WYTZ:6 S6E6T ‘S NO 8668 T9S 4a6 201 Y3S-TIIH WHS :WOHS Attachment 5 Resumes : — WEHD :WOuS vI'd dTéH WHee:6 S66T ‘S NNO 8668 T9S 206 201 Y3S-TIIH Wz! DAVID A. GRAY Senior Energy Economist Education B.A., Economics and Mathematics, Western Washington University Graduate Studics, Economics and Business Administration, University of Washington and Western Washington University Experience Mr, Gray is an economic and financial consultant who scrves as a project manager and advisor on energy, regional, and business economics studies. His expertise also includes financial, utility, transportation, and impact analysis. He devclops and presents cxpert witness testimony before regulatory bodies. Mr. Gray advises clients on a wide range of energy and utility matters. He conducts utility cost-of-service and rate design studics, load research studies, load forecasts, feasibility analyses, demand-side management and integrated resource planning studies, and contract analyses for a vatiety of clients. Mr Gray has cvaluated the economic feasibility of numcrous energy projects in Alaska. for Golden Vallcy Electric Association (GVEA), he evaluated the economic feasibility of participation in the Bradley Lake Hydroclectric Project by Golden Valley Electric Association and supervised the production of an integrated resource plan that supported the 1 utility’s decision regarding the feasibility of the Healy Clean Coal Project. He has also studied the feasibility of energy conservation resource development for GVEA and for Alaska Electric Light and Power Company (AELP). Mr. Gray also conducted the feasibility studies leading to the installation of AELP’s load management program. He has also conducted reconnaissance-level feasibility studies of a number of small hydroelectric projects in Alaska. His electric ratemaking experience includes testimony on cost-of-service and rate design before the Alaska Public Utilities Commission. He has prepared cost-of-scrvice and ratc studies for Scattle City Light, Modesto Irrigation District, AELP, Glacier Uighway Electric Association, and Ketchikan Public Utilities. He managed the environmental impact analysis of rate design changes to the Bonneville Power Administration, Mr. Gray has performed load forecasts for GVEA, AEL&P, Central Electric Cooperative, Inc., in Oregon; the City of Richland, Washington; the Southwest Gas Corporation in Nevada; the Intermountain Gas Company in Idaho; and a number of small towns in southeast Alaska, He has also advised Anchorage Municipal Light and Power, Snohomish County PUD in Washington, and Grant County PUD in Washington on load forecasting as part of a critical revicw of these utility’s load forecasting techniques, Mr. Gray has St'd dtd WHee:6 S66T ‘S NN 8668 T9S 2486 701 WAS-TIIH WHO :WOsS DAVID A. GRAY represented the Direct Service Industrial Customers of the Bonneville Power Administration in the preparation of regional load forecasts for the Pacific Northwest. For AELP, Mr. Gray designed the innovative rates to help implement the utility’s conservation and load management programs. These rates included a dual-fuel rate for customers who could have electric heating service interrupted by shifting to an alternate heating source, a water heating control rate, a clean air rate for customers who could use surplus hydroelectric power to displace wood heat, and a heat storage rate, IIe has also advised AEI.&P on its strategy to market temporary electric service during periods of hydroelectric surplus to promote conservation during periods of hydroelectric deficits. For GVEA, Mr. Gray has prepared four successive power requirement studies (1985, 1987, 1990, and 1993), conducted an innovative load research project, and prepared the utility’s demand-side management and conservation plans. The conservation plan received the National Energy Award from the U.S. Department of Energy in 1994 for utility technology. He managed an intensive study of energy markets and balances in the state of Kansas to establish a policy for curtailing natural gas during periods of short supply. Mr. Gray testified on the study findings before the State Corporation Commission of Kansas, He also planned this commission's major investigation into electric utility load management, rate design, and conservation. Mr. Gray performs market feasibility studies for public and private projects including port projects, energy facilities, and real estate development. For example, he recently conducted a market study that supported a $95 million bond issue for a wood-waste cogeneration facility. His real estate economics background includes warchouse siting analysis and market and financial feasibility analysis of office park development. He also routinely provides least-cost and financial analyses for major public works projects. Mr. Gray has performed a number of transportation development studics, For the Port of Tacoma, Washington, he managed the feasibility study for a successful $60 million bond issuc. He has performed economic analyses for a number of other port developments including developments at the Port of Portland, Oregon; the City of Saxman, Alaska; and the Alaska Marine Highway system in Ketchikan, Alaska. For Seattle Metro he prepared an analysis of the potential economic impact of a bus strike. He advised in the preparation of a major trade forecast by the Chicago, Milwaukee, St. Paul, and Pacific Railroad to assist in zoning changes for switchyard development near ‘Tacoma, Washington, Ife also prepared a report documenting the potential economic impact of Rock Island Railroad abandonment in northwest Kansas. This report was submitted in evidence before the U.S. District Court for the Northern Division of Ulinois. @ ST°'d 2tdH WHee:6 S66T ‘S NN 8668 T9S 226 :0L ¥SS-TIIH W2HD :WOus DAVID A. GRAY Mr. Gray has performed numerous economic base and development studies including analyses of cconomic impact resulting from both major construction of new facilities and closure of existing facilities. Mr. Gray regularly performs feasibility studies for public and private projects. Papers and Publications Practical, Low-Cost Load Research for Electric Utilities. Public Utilities Fortnightly. August 1, 1994. Load Forecasting for Small Utilities; Credibility Without a Black Box. Presented at NWPPA Consultants Workshop and Ratcs Symposium, Seattle, Washington. 1985. "The Economics of a Regional Approach to Load Research." Public Utilities Fortnightly. January 1, 1981, Fully Allocated Average Cost of Service Based on Forccast Loads and Revenue Requirc- ments. Presented at NWPPA Rate Symposium, Seattle, Washington. 1978. aT’d 2&Tdé4H WYEC:6 S66T ‘S NN 8668 T9S 2486 :0L ¥SS-TIIH WEHO :WOdS ROBERT G, BROOKS Senior Economist Education Graduate Studies in Business Administration, Suffolk University B.A,, Economics, University of Colorado Experience Mr. Brooks specializes in utility planning and analytical studies, including integrated resource planning, financial forecasting, cost of service, and rate design studies for electric, gas, water, sewer, and solid waste utilities. [lis background includes the design and development of software for both mainframe and microcomputers. Mr. Brooks recently testified on an integrated resource planning study for the Golden Valley Electric Association. Ife developed a dispatch simulation model to evaluate supply- and demand-side resources and presented expert witness testimony before the Alaska Public Utilities Commission. He also served as the lead economist on an integrated resource planning study for the Juneau Alaska area. Earlicr, Mr. Brooks performed power supply planning studics for Ketchikan Public Utilities. Lake Worth Utilities Authority, and Anchorage Municipal Light and Power Company.. Ile has assisted the Omaha Public Power District in evaluating their demand-side management programs, and performed a study of solar power and conservation technologies for the Gas in Company of New Mexico (now part of Public Service Company of New Mexico). Mr. Brooks was the project manager responsible for the development of MICROCOS™, CH2M HILL’s microcomputer-based cost of service program. He also designed and developed the firm’s detailed financial forecasting program for utilities (VINCAST). Mr. Brooks routincly manages and executes cost of service and rate design studies for clients including the Modesto Irrigation District, Alaska Electric Light and Power Company, Ketchikan Public Utilities, and the Public Utility District No. | of Grays Harbor County (electric); the City of Aurora, Colorado, and the Salt Lake County Water Conservancy District (water); the City of Alexander City, Alabama (sewer); and the City of Centralia, Washington, Kitsap County, Washington, and the Matanuska-Susitna Borough, Alaska (solid waste); and the cities of Decatur, Illinois and Corpus Christi, Texas (gas). As lead economist on a cost of service and regulatory intervention on behalf of the City of Saskatoon, Saskatchewan, his responsibilities included the analysis and critique of the wholesale supplier’s cost of service and rate design study, and assistance in the preparation of expert witness testimony for presentation before the provincial Public Utilities Review Commission, 8t'd <dTd4H WHEe:G6 SE6t ‘S NIL 8668 TSS 286 :0L ¥SS-TIIH WEHD :WOdS ROBERT G. BROOKS Page 2 Prior to joining CHI2M HILL, Mr, Brooks worked for a large consulting firm where he was involved -in financial forecasting and load research for electric utilities. For the Kingdom of Saudi Arabia, he conducted field surveys of electric utilitics and assisted in the design of a large-scale computer-based financial modeling system. This scries of computer programs integrated load forecast and system plan data with financial and operating statistics and projected the Kingdom’s electrical requirements for 25 years. As an analyst on load management research, Mr. Brooks developed specialized computer programs to analyze the cost-effectiveness of various load management techniques for South Carolina Public Service Authority, As Programming Consultant to the Economic Council of Canada, he designed and developed a computerized load dispatch simulation model and presented results cost summaries by province for cach year of a 5-year planning period. The model performed generation scheduling to minimize opcrational costs, subject to user-selected constraints. As Project Administrator on a 345-kV transmission interconnection project for the New York Power Authority, Mr. Brooks was responsible for progress monitoring and reporting; devel- opment and implementation of project procedures; coordination of specifications, drawings, and contract documents; and accounting and cost control, Membership in Professional Organizations National Association of Business Economists a AREE/Demand-Side Management Society @ 6T'd 2TéH Wepe:6 SEEt ‘S NOL 8668 T9S 2426 :OL ¥SS-TIIH WeHD :WOeS MARK A, VELICER Management Systems Analyst Education M.S. Engineering Management and Environmental Systems, Cornell University B.S. Civil-Environmental Engineering and International Studies, Univ. of Llinois Summary Mr. Velicer specializes in environmental systems management for CII2M UILL’s Bellevue office. His expertise lies in the areas of integrated management planning and implementation, quantitative management methods, organizational analysis, economic feasibility analysis, and management information systems, He has formal training and project experience in environmental systems modeling, decision analysis, uncertainty analysis, and other computerized decision aids. Experience Mr. Velicer was the lead management systems analyst for a Fortune 200 manufacturing firm’s management assessment of company-wide remediation systems. This review included assessment of corporate remediation costs, risks, and liabilities, cvaluation of corporate environmental strategics to reduce risk and liability, internal communication processes, an organizational assessment, and staffing analysis relative to risk at various plant sites. u Mr. Velicer was recently task leader for the decision and uncertainty analysis for a Fortune 500 energy firm, This project involved realistic assessment of the risks and uncertainties associated with managing over 300 of the companies hazardous waste sites. Mr. Veliccr guided a team of engineers to perform approriate cost estimates, conducted a decision and uncertainty analysis, and communicated the results in a clear and understandable format to upper management. The results of this analysis were uscd in successful insurance cost recovery negotiations. Mr. Velicer is currently performing a decision analysis to assist a Fortune 500 oil and gas production firm in its decision to relocate a local municipalities water supply well system, ‘This analysis involves a comprehensive analysis of the financial and public image risks faced by the company, and employs a multi-attribute decision technique to combine both quantitative and non-quantitative risk considerations. Mr. Velicer recently managed a strategic, risk-based biomedical waste management plan for Swedish Medical Center (SMC), the largest medical facility in Seattle. ‘This comprchensive assessment is driven by simultaneously changing organizational, technological, regulatory, and economic influences affecting SMC. This project includes an audit of staffing levels and budgets for current waste management practices. Recommendations for reduced costs and improved operations are based on waste stream CA the 7 Q2'd dTdH Wepe:6 S66Et ‘S NN 8668 T9S 2486 :0L BAS-TIIH WZHD :WOuS projections, a treatment and disposal technology review, cconomic analysis, and regulatory strategy, Mr. Velicer is currently performing an effectivencss and organizational evaluation of hazardous and moderate risk waste management programs implemented by four agencies in King County, WA, in conjunction with SERA, Inc, ‘This evaluation is designed to assess how existing program activities are meeting stated objectives and budgets, and design new evaluation procedures to measure program performance in the future. Evaluation methods and success indicators will be designed and implemented for all programs, including recommendations regarding methods of data collection, compilation, presentation, and analysis. Mr. Velicer is currently assistant project manager for the Regional Needs Assessment in King County, Washington. This project is a consensus based decision process to implement a new watershed/ecosystem approach to surface water management in the tegion. This project involves establishment of existing environmental conditions and modeling of future water resource conditions; consensus building decision approaches for stakeholders, surface water managers, and elccted officials; evaluation of the economic implications of surface water regulations; evaluation of institutional alternatives; and implementation of a preferred regional arrangement for storm and surface water management. Mr. Velicer is currently structuring a consensus based alternatives analysis and decision process for the Washington State Ferry system, using the Nominal Group Technique. This ferry terminal master planning process will formall develop siting and development criteria for both technical and community concerns, develop value tradeofts and criteria weights a through an interactive and community based process, and sclect a development alternative for recommendation to policy makers. Mr. Velicer was assistant project manager for the (ull development process for the Lewis County transfer station, This process included comprehensive system planning, cconomic feasibility analysis, siting, and conceptual through full design. The siting process was structured to allow full Solid Waste Advisory Committee (SWAC) involvement in criteria setting, scoring, and evaluating for a broad screening process to narrow the number of feasible sites to three before detailed enginecring investigations took place, Mr. Velicer assisted the County in a bid procurement for waste export services, and was responsible for export and transfer system compatibility issues. ‘This process included bid options for other Counties in the region to participate in a shared export arrangement. Mr. Velicer was project manager for conceptual design and siting of the Kitsap County moderate risk waste management facility. This facility will accept houschold hazardous and small quantity business wastes from all County residents. For four western Washington counties, Mr. Velicer has developed comprehensive solid waste management plans, including administrative and financial strategies. In each case he lead the devclopment of system cost assessments detailing the funding and financing Gs) Te'd dtdH WeSe:6 S66t ‘S NL 8668 T9S 286 :0L ¥AS-TIIH WHO :WOuS mechanisms for all operating and capital costs components over a detailed 6-year implementation horizon. I{¢ also contributed to a regional plan for system of 8 counties .-- in southwestern Washington. - Mr. Velicer has worked several western Washington jutisdictions regarding the procurement of contracted private services for construction and operation of solid waste management programs and facilities. His negotiating and procurcment expericnce includes the joint Lewis/Grays Tarbor waste export contract awarded for a value of $38 million over a 20 year period, and the Grays Harbor transfer station construction and operation services contract worth $21 million. Mr, Veliccr has developed several customized computer decision aids for use in environmental systems management planning. He worked with the Tellus and Cornell Waste Management Institutes to develop the WastcPlan (c) cost model and develop in- house municipal and County staff expertise in New York State, and currently is responsble for training CH2M HILL staff in all offices in the use of WastcPlan. Mr. Velicer has customized the EXTEND graphic simulation model for use in water resources and solid waste system-wide planning and analysis, and has also applied the model to specific technical problems such as pollutant loading analysis. Mr. Velicer has practical experience in the application of simulation packages Stella and Ithink, the VP-Expert expert system shell, multi-objective decision tools BestChoice and Multi-Objective Reasoning Environment (MORE), uncertainty and risk analysis tools including At-Risk and Crystal Ball, and decision tree analysis for risk management using DPL. Prior to joining CII2M HILL, Mr, Velicer developed diverse environmental systems experience, including solid waste system software development and implementation for - Cornell’s Waste Management Institute, hydropower and environmental modeling for Pacific Gas and Electric, international training in water rcsources engineering, and instream flow methodology work for the Illinois Natural Llistory Survey. Affiliations ~ Association of Northwest Environmental Professionals Governmental Refuse Collection and Disposal Association Association of Hospital Engineers King County Municipal League Alki Foundation Publications Choosing a Medical Waste Treatment Technology. With Terrill Chang, P.C. Air and Waste Management Pacific Northwest International Section, November, 1993. Managing Integration: A Local Government Guide to Cost-Lfficient Program Implementation, or, “What Wasn’t Written in Your Solid Waste Management Plan." Biocycle Conterence Presentation, March 1993 and Biocvycle Magazine, April 1993. > Qe 9 @2*'d dTéH WeSe:6 SE6ET ‘S NN 8668 T9S 486 201 WAS-TIIH WZHD :WOes Avoided Costs of Waste Reduction and Recycling in New York State. With Dr, Daryl Ditz, Cornell University Waste Management Institute. Vebruary 1991, Avoided Costs From Recycling Investment. Corncll University Waste Management Institute. July 1990, The Tompkins County WastePlan (c) Report. Engineering Management Project Report. Cornell University. May 1990. Guidelines for Minimizing Environmental Impacts From River Diversions. With E.E. Herricks, University of Illinois, For Illinois Department of Transportation. August 1987. , @2) £2*d 2TdH WeSe:6 S66T ‘S NN 8668 TSS 226 201 WSS-TNIH WEHD :WOsS JEFF A. HAIGIUT Solid Waste Engincer - Education M.S,, Engincering Management, Cornel! University B,S., Environmental Engineering, Cornell University Experience Mr. Haight is a member of the solid waste department in CII2M [ILL’s Scattle regional office. His responsibilities include system planning, cost modeling, facility design, and recycling plan development. For the city of Istanbul, Turkey he assisted with the evaluation of specific multi-family recycling options for Istanbul's recycling initiative. For BC Uydro, Vancouver, Canada, Mr. Haight assisted in the final solid waste management plan, including incorporation of detailed cosVbencfit information. In addition, Mr. Haight has assisted with the planning and design of a landfill gas drainage system for the closure of the Kent [Highlands Landfill in Kent, Washington, Currently, Mr, Ifaight is working with Lewis County, Washington, in the preliminary design of a new solid waste transfer station. [lis responsibilities include assistance in cost estimation and operational impacts on design. Prior to joining CH2M HILL, Mr. Haight acquired diverse environmental planning experience. As a maritime development advisor, he prepared cost and_ feasibility assessments for maritime development projects in the Washington D.C. area. — While working for the Center for Environmental Research at Cornell University, Mr, [aight developed water-level management plans for Skaneatcles Lake in New York. These plans outlined annual dam operation schedules in order to satisty environmental, flood, and re- creational needs. For both assignments, his recommendations involved striking delicate balances between political, economic, and environmental considerations. As a graduate student at Cornell University, Mr. Haight ercated a decision model for the utilization and disposal of waste ash for Monroe County, New York. ‘The first part of this model involved comprehensive economic and feasibility studies for the uses of ash generated from the incineration of the County’s waste treatment sludge. The second part formulated alternatives through joint linear and integer programming. All the recommendations were then examined in an extensive sensitivity analysis before presentation to the County. Membership in Professional Organizations Government Refuse Collection and Disposal Association a! 0 seal2220.wpi/1 C 11/19/92 ped LTdH We2e:6 S6E6T ‘S NNL e668 19S 426 :0L YSS-TIIH WHO :WOus DANIEL R. PITZLER Economist Distinguishing Qualifications ° Experienced leader of feasibility studies for many types of projects e Conducted over 20 cost of service and rate design studies Related Experience Mr. Pitzler provides strategic planning and technical assistance to public- and private-sector clients on a wide range of cnergy and waste management issues. is arcas of expertise include feasibility analysis, cost of service and rate design, computer modcling, financial management and analysis, procurement, and forecasting, Representative Projects . Lead technical analyst for a demand side management plan, multi-quarter load rescarch program, and rate analysis for Alaska Electric Light and Power, . ‘Technical analyst and lead computer modeler for power supply planning and cost of service studics for Ketchikan Public Utilities. . ‘Task leader for a cost of service study and rate analysis for Glacier Highway Electric Association. - ° Task leader for marginal cost rate analysis and yarious other rate issues for Omaha Public Power District (NL). « cad computer modeler and technical analyst for a cost of service and retail rate study for Central Electric Power Coop. (SC). ° Technical analyst for a cost of service analysis for the City of Saskatoon, Saskatchewan. e ‘Technical analyst for a rate analysis for revenue bond issue, Grant Co, PUD, (WA). ° Task leader for a cost of service study for Midstate Electric Cooperative (OR). ° Technical analyst for a cost of service study for Modesto Irrigation District (CA), ° Task leader for an analysis of solid waste rite structure altcrnatives for the Matanuska-Susitna Borough. 12 S@'d dTAH WeLe:6 S66T ‘S NO 8668 T9S 2486 :OL YAS-TIIH WEHO :WOsS perenne es . Project manager for a solid waste rate study and two updates to that study for the City of Unalaska. . Lead economist for a 20-month series of housing market studies conducted for US army bases in Germany. e Task leader for an analysis of waste management funding alternatives for Citrus County (FL). . Project manager of a solid waste rate study for Kitsap County (WA). . Task leader for an econometric waste stream forecast for Snohomish County (WA) as part of an engineer's report for a revenue bond issue. ° Task leader for evaluation of proposals submitted to B.C. Hydro (B.C.) by private vendors for construction and operation of a relrigerator recycling and buyback program. ® Project manager of a feasibility study of installing pre-load compaction equipment in five transfer stations for the King County Solid Waste Division (WA). e Task leader for an economic analyses of disposal alternatives for the City of Unalaska. e Task leader for an economic analysis of disposal alternatives for the Kenai Peninsula Borough. . ‘Task leader for development of CH2M HIL1.'s methodology and computer template for conducting cost assessments that are coviewed by the Washington Utilities and Transportation Commission as part of the approval process for completing Comprehensive Solid Waste Management Plans in Washington State. e Task leader for development of a computer model that simulates countywide solid waste system operations using a transportation network analysis, an econ- ometric forecast, and information from regional planning agencies as part of a system operating plan for King County (WA). Education M.A., Economics, University of Washington B.A., Economics, Westem Washington University Membership in Professional Organizations ° Scattle Economists Club e Solid Waste Association of North America 92°d 2TdH WY82:6 SE6T ‘S NN 8668 T9S 206 :OL YAS-TIIH WEHD :WOuS MEMORANDUM STATE OF ALASKA Community and Regional Affairs TO: Tony Knowles DATE: April 5, 1995 Governor FILE: Thru Jim Ayers Chief of Staff z PHONE NO: 465-4700 FROM: Mike a Jiales poe SUBJECT: Sutton-Glennallen Intertie Commissioner Dept. of Community and Regional Affairs As you know, the 1993 legislature appropriated $35 million to be used as a zero-interest loan for the Sutton-Glennallen intertie but made the appropriation contingent on completion of a feasibility study and plan of finance “satisfactory” to this department. My predecessor issued a finding in July 1994 that the required studies were satisfactory in his judgment, and directed the Division of Energy to move forward with issuance of the loan. To date, however, agreement has not been reached on the terms of the loan and none of the appropriation has yet been spent. Based on our March 17 briefing with you and subsequent discussions with other members of our administration about this project, we have concluded that additional information is needed before a well informed decision about proceeding is possible. What follows are a list of issues about which further information is needed. The issues will be reviewed in the context of: 1. What approach best protects the long term interest of the consumers; 2. The statutory terms of the proposed loan; 3. The continued financial feasibility of the project; and 4. Sound management practices. E PETRO STAR VALDEZ REFINERY -- POWER DEMAND AND COGENERATION Recommended Action: Top management at Petro Star should be contacted to gain insight into the company’s long-term plans with respect to power supply, although Petro Star may not have developed clear long-term plans at this point. Two basic issues that require review and analysis are: A. Will Petro Star generate power for its own use and for sale into the utility grid? B. Will Petro Star purchase power from the utility over the long term, and sign a power purchase agreement locking in substantial minimum purchases? Tony Knowles, Governor April 5, 1995 Page 2 iL Til. IV. LONG-TERM FUTURE OF TRANS-ALASKA PIPELINE Recommended Action: The uncertainty associated with predictions of pipeline shut down should be addressed by soliciting views directly from top management of the major oil companies operating on the North Slope. Discussion: If the pipeline and marine terminal are shut down by 2020, very possibly taking the Petro Star refinery with it, the intertie would not be viable over the long term unless other economic growth in the region is sufficient to compensate for the loss. In the feasibility study, only the “Low” case incorporates a shut down of the pipeline without compensating economic growth. TRANS-ALASKA GAS SYSTEM (TAGS) Recommended Action: For gaining insight into the likehood of TAGS construction 10 years from now, the State should contact not only Yukon Pacific but perhaps a skeptical observer as well, such as Arlon Tussing. There are two main questions that should addressed: A. Is TAGS likely to be built in the time frame identified in the intertie feasibility study? B. If TAGS is built, will the effect on the CVEA electric utility be primarily to increase the demand for utility power or to provide a local, low-cost supply of power from the TAGS terminal operation? If the primary effect is to increase demand, intertie viability is enhanced. If the primary effect is to introduce a new local power supply, the intertie may become unnecessary for purposes of supplying CVEA customers. In this event, perhaps power from the TAGS terminal could be sent over the intertie in the other direction for sale in the Railbelt. The amount that can be transmitted, however, is very small in relation to Railbelt power requirements. ALYESKA MARINE TERMINAL -- COGENERATION OR POWER PURCHASE Recommended Action: For gaining insight into the future prospects of Alyeska either ‘ purchasing power from the utility grid for its marine terminal operations, or selling power into the utility grid, the State should contact top management at Alyeska. Although the subject has been reviewed and negotiated on numerous occasions in the past, Alyeska has always decided in the end to remain isolated electrically. One reason commonly cited for Alyeska’s historical reluctance to sell power into the utility grid is the company’s unwillingness to subject itself to APUC regulation with regard to such power sales. A. Will Alyeska generate power for its own use and for sale into the utility grid? Tony Knowles, Governor April 5, 1995 Page 3 B. Will Alyeska purchase power from the utility over the long term, and sign a power purchase agreement locking in substantial minimum purchases? Vi PROVISIONS OF PROPOSED LOAN AGREEMENT. The proposed loan agreement limits disbursement of State funds to $7.3 million for pre- construction only before certain key milestones are achieved. To go beyond this into project construction, supplemental financing must be in place. For this to occur, there will have to be sufficient confidence on the part of one or more additional lenders with respect to future loads to secure the financing. We need a measure of confidence now to authorize proceeding with Phase 1, but greater confidence in the long-term financial viability of the intertie will be needed to get to Phase 2. It should be noted that the Administration does not have the statutory authority to forgive repayment of the loan, even if the project is abandoned after completion of Phase 1. SUMMARY COMMENT We recommend that top State officials undertake the recommended discussions with industry management, with relevant department Commissioners, and with other sources as needed to gain insight into the probabilities surrounding certain key long-term developments that bear on the intertie’s viability. The Department of Community and Regional Affairs is of course ready to assist in any way you deem appropriate. ALASKA INDUSTRIAL DEVELOPMENT > ¢ AND EXPORT AUTHORITY {= ALASKA @@E— ENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE, ALASKA 99503 907 / 561-8050 FAX 907 /561-8998 October 5, 1994 Mr. Clayton Hurless General Manager Copper Valley Electric Association, Inc. P.O. Box 45 Glennallen, Alaska 99588-0045 Subject: Sutton to Glennallen Intertie Supplemental Financing Dear Clayton: The Authority staff has completed its initial review of the information provided regarding the Sutton to Glennallen Intertie. Prior to involving our investment bankers, legal counsel, and others | would like to schedule a small working group meeting to discuss general issues and concepts which need to be clarified. Resolving or at least understanding these topics and issues will assist the Authority in providing explicit instructions to our financing team members and in arriving at the optimum financing structure for the project participants. In particular we require discussions on the following topics: 1 We assume that Copper Valley Electric Association (CVEA) is anticipating a project revenue debt financing structure that uses a moral obligation pledge from the State of Alaska or the Authority to improve marketability. While such a structure appears to meet the general intent of the adopted legislation (SLA 1993, CH 18, § 32, line 20-24, pg 36) there remain many unresolved financial variables which preclude us from determining the feasibility of such an approach. Does CVEA intend to adopt the J.C. Bradford May 3, 1994, report as its plan of finance or is a new plan of finance in development? Based on current engineer’s estimates, what is the amount of debt financing required above and beyond the state’s loan amount? Mr. Clayton Hurless October 5, 1994 Page Two What other assumptions have been made in your analysis regarding debt service parameters? Does your financing analysis demonstrate a marketable debt offering prior to a pledge of the state’s or Authority’s “moral obligation?” 2. Based on the information provided and our discussions you have indicated both the integrated and non-integrated approaches are being evaluated What is the timeline for CVEA’s decision regarding these two approaches? Obviously there are numerous economic and financial differences regarding the option that would influence any project financing debt structure. If the integrated approach is adopted, who will be the Owner and Operator and what is the form of ownership if the railbelt utilities are involved? 3. What is your current development schedule regarding: ° Completion of environmental permits, acquisition of property and rights of ways, release of state monies to fund development activities? ° Completed evaluations of proposals responding to power supply RFP, selection of suppliers and fabrication schedule of long lead time items; finalization of power sales agreement. . Conclusion to the Alyeska issues. . Project cash flow projections. ° Scope, actions required, and schedule for the APUC or other agencies requiring reviews and approvals. Additional information would include an overall implementation plan showing the relationship between major activities and a description of your project management organization. Please contact me at your earliest convenience so the necessary scheduling arrangements can be made. If you have any questions, please do not hesitate to call me. Sincerely, iIiam R. Snell Executive director WRS:bjf hiall\bjfisutgleni bee: Dennis V. McCrohan, Deputy Director (Energy) Daniel W. Beardsley, Contracts Manager oer’ : eopy tt ba? w od WALTER J. HICKEL, RO VERNOR DEPARTMENT OF COMMUNITY AND 929 WEST FOURTH AVE., SUITE 220 01-2341 REGIONAL AFFAIRS eee ni aeeeeamee DIRECTOR'S FAX: (907) 269-4645 DIVISION OF ENERGY ENGINEERING FAX: (907) 269-4685 RECEIVED May 4, 1994 Department of Lav Foes MAY 06 1994 To: Distribution , Office of the Attorney General From: Herv Hensley, Director’ Anchorage Branch Division of Energy Anchorage, Alaska Subject: Copper Valley Intertie Plan of Finance Enclosed is the Copper Valley Intertie Plan of Finance, prepared for the Division of Energy by our financial advisor J.C. Bradford & Co. and its subcontractor in this effort, R.W. Beck. This finance plan and the recently completed feasibility study have been conducted in accordance with the requirements of Chapter 19, Section 4, SLA 1993, which appropriated $35 million to this Department for a 50-year, zero interest loan for design and construction of the intertie. According to Section 4(d) of this legislation, the appropriation "is contingent upon the completion of a feasibility study and finance plan satisfactory to the Department of Community and Regional Affairs as set out in former AS 44.83.181." ) DY) Z hyod : 3) (eb fb BW Copper Valley Intertie Plan of Finance State of Alaska Department of Community and Regional Affairs Division of Energy Submitted by J.C. Bradford & Co. - Financial Advisors to the Division of Energy May 3, 1994 Tables Copper Valley Intertie Plan of Finance Table of Contents Introduction Financing Issues Cost of Power Discussion Appropriation for State Loan Cases to be Examined Four-Dam Pool Power Sales Agreement and Impact on Allison Lake Alternative Bond Financing Not Eligible for Tax-Exemption Availability of Financing for Thirty-Year Term Financing Assumptions Hypothetical Financing Conditions Scenario Without State Assistance Scenarios Minimum State Assistance Scenarios Estimated Interest Rate Assumed, All Scenarios Consideration of Possible Funding Sources 1. Issuance of Revenue Bonds Considerations for Utilizing the AEA or AIDEA as Issuer of the Bonds The Capital Reserve Fund Feature General Obligation Bonds or Bonds Guaranteed by the State of Alaska Appropriation from the General Fund Loan from the General Fund Financing Arrangements with Other Entities Assistance from any Federal Agency Loan from Power Project Fund Any Combination of Sources Lo STAN Conclusion REA Most Cost Effective Market Alternative No Financial Feasibility Without State Loan sanNnNN ~ nn > \o 10 11 11 11 11 12 12 13 13 13 4) 1" Copper Valley Intertie Plan of Finance State of Alaska Department of Community and Regional Affairs Division of Energy Submitted May 3, 1994 by J.C. Bradford & Co. - Financial Advisors to the Division of Energy Introduction The State of Alaska Legislature in 1993 appropriated $35 million to the Power Project Fund to provide for a contemplated 50-year zero-interest loan for the proposed Copper Valley Intertie, “contingent upon the completion of a feasibility study and a plan of finance satisfactory to the Department of Community and Regional Affairs as set out in former AS 44.83.181." The Power Project Fund is now administered by the Division of Energy of the Department of Community and Regional Affairs of the State of Alaska (the "Division" or the "Division of Energy"). This Plan of Finance has been prepared in response to the requirement that a finance plan satisfactory to the Department of Community and Regional Affairs ("DCRA") be completed. According to former AS 44.83.181, a plan of finance must include recommendations of the most appropriate means to finance a project, after consideration of the following possible funding sources: (1) issuance of revenue bonds of the authority, (2) issuance of general obligation bonds of the state or revenue bonds of the authority that are guaranteed or partially guaranteed by the state, (3) an appropriation from the general fund, (4) a loan from the general fund, (5) financing arrangements with other entities using leveraged leases or other financing methods, (6) assistance from any federal agency such as the REA, (7) a loan from the power project fund under AS 44.83.170(a) or (8) any combination of financing arrangements listed above. Further directives in development of a plan of finance are found in 3 AAC 94.065 which states that a plan of finance should be prepared for any new power project identified in a feasibility study as the most feasible alternative for development. It further provides: "The purpose of the plan of finance is to present various alternatives available to finance the power project and to identify the most appropriate means to achieve the lowest cost electric power for consumers while minimizing the amount of state assistance required.” aie wy When state assistance is required to meet financial feasibility criteria, 3 AAC 94.065 provides that the proposed cost of power must be analyzed for the base case (diesel) and for the most feasible alternatives as follows: A. Projects are financed based on "hypothetical financing conditions;” B. Projects are financed based on the most advantageous market financing but without any State financial assistance; and Cc Projects are financed with a combination of the most advantageous market financing and the minimum level of State assistance needed to achieve financial feasibility. The required Feasibility Study has been prepared by R.W. Beck of Seattle. The two most feasible alternatives to diesel generation identified in the study are the proposed Copper Valley Intertie Project ("Intertie”) and the proposed Allison Lake Hydroelectric Project ("Allison Lake"). Under all but the low-load case, the Feasibility Study identified either the Intertie or Allison Lake as the most economical scenario over the long-run, in terms of cumulative present value of Comparable System Costs (see Table I-5 in the Feasibility Study). Therefore, the cost of power will be analyzed in this Plan of Finance for the diesel case, the Intertie case and the Allison Lake case. We have concluded in this Plan of Finance that a loan or guaranty from the Rural Electrification Administration (the "REA"'), even under its most expensive program, would be the least costly financing alternative for those funds required in excess of the state loan. All financing alternatives assume no tax- exemption will be possible under current law. The project will benefit primarily the Copper Valley Electric Association ("CVEA"), a rural electric cooperative which does not enjoy the ability to ” gor z finance its projects on a tax-exempt basis. Even the two-county rule, a federal exemption for certain projects, is unavailable because of the various public entities within the service territory of CVEA (the City of Valdez, the Matanuska-Susitna Borough and the unincorporated areas). For purposes of this Plan of Finance, an interest rate of 7'2% is assumed for all funds required above those provided by the proceeds of any State loan. This rate is the projected rate (including guaranty fee) for a loan from the Federal Financing Bank ("FFB") which would be guaranteed by the Rural Electrification Administration . Of all financing alternatives available, this one is considered to be the least costly, other than of course the State Loan. The actual rate of the FFB loan will be determined when loan advances are made and will correspond directly with the long U.S. Treasury bond market at the time of each advance. Copper Valley Intertie Plan of Finance May 3, 1994 Page 2 Y Financing Issues Cost of Power Discussion In the Feasibility Study, "cost of power" was defined as the nominal cost per kWh to CVEA of generating and/or purchasing power supplemental to the production from Solomon Gulch, excluding costs that are common to all scenarios such as certain depreciation and labor costs as well as purchase costs for Solomon Gulch energy. For example, in the Feasibility Study, the “cost of power" for the diesel case was calculated by dividing the estimated amount of diesel energy into the estimated incremental costs of diesel generation. For this Plan of Finance, the definition of “cost of power” has been changed in one respect: the cost of purchasing power from the Solomon Gulch project as presently configured is blended into the "cost of power" estimates in each case. Using the diesel example once again, the "cost of power" in the diesel case is calculated by dividing the total energy requirement for the CVEA system into the sum of incremental diesel costs and Solomon Gulch purchase costs. This produces a number that more closely approximates the blended power production cost for each scenario and that provides for a more useful comparison among cases. A specified difference in the cents per kWh outcome between two cases shown in this Plan of Finance also represents the estimated absolute difference in retail rate requirements between the two cases. For the Intertie and Allison Lake cases, it will be assumed that financial feasibility is achieved if the cost of power, as defined above, expressed in nominal cents per kWh, is equal to the cost of power in the base case (diesel) in the first full year of project operation. In other words, each project is assumed to be financially feasible in this analysis if no rate increase relative to the base case (diesel) is required in the initial year of operation (assumed to be the year 2000 for uniformity). " rd The first step in the analysis required by this section of the regulations will be to estimate the cost of power for the base case (diesel), the Intertie case and the Allison Lake case for the initial full year of project operation assuming no State financial assistance. This conforms with item "B" above. For information purposes, cost of power will also be estimated for the year 2010 to show the expected long-term cost trend for each scenario. The next step will be to estimate the levels of State assistance needed for the Intertie case and for the Allison Lake case such that the cost of power in the initial project year is equal to the estimated cost of power in the base case (diesel) for the same year, assuming no State financial assistance for the diesel alternative. Stated another way, how much State assistance would be needed for the Intertie case and, alternatively, for the Allison Lake case for each project to come on line without causing rates to exceed what they would have been in an unassisted diesel case. This conforms with item "C" above. Finally, in accordance with item "A" above, the cost of power for the Intertie case, the Allison Lake case, and the diesel base case must be analyzed under "hypothetical financing conditions." There is no guidance in the regulations to help define what these hypothetical financing conditions are intended to be. The approach taken here is to define the hypothetical financing conditions as follows: 1. For both the Intertie and Allison Lake, a $35 million, zero-interest, 50-year loan is applied to the capital cost, supplemented by the most advantageous market financing as necessary. 2. For the base case (diesel), zero-interest 20- year loans are used to finance new diesel capacity as needed through the year 2010. Twenty-year maturities are used to conform with the expected life of the diesel generators. The total amount of diesel capacity loans over the period would be less than $35 million. Copper Valley Intertie Plan of Finance May 3, 1994 Page 3 ” Appropriation for State Loan As noted earlier, the 1993 Alaska legislature appropriated $35 million for a zero-interest, 50-year loan to participating utilities for the design and construction of the proposed Copper Valley Intertie. The appropriation is contingent upon completion of a feasibility study and plan of finance satisfactory to the Department of Community and Regional Affairs. Intertie advocates have suggested that illustrating the effect of applying the $35 million loan to Allison Lake should not be included in the “hypothetical financing" cases because, according to the language of the appropriation, such application is not possible. While the object of the appropriation is clearly specified as the Intertie project, re- appropriation is legally possible at the discretion of the Legislature and the Governor, and there is considerable precedent in recent Alaska history for re- appropriating capital funds to other projects and purposes. The only basis for excluding the possibility of re-appropriation would be a political judgment about possible outcomes in the Alaska political process. Whatever the current political realities or future political possibilities might be, such judgments are outside the proper scope of this analysis. While we realize such state loan may not be made available to alternatives other than the Intertie Project, we view our role as financial advisors to independently and objectively compare alternatives using “apples-to-apples" calculations whenever possible. Aside from avoiding political judgments, a goal of this analysis is to provide the maximum amount of information that would be useful in comparing the financial implications of the most feasible alternatives. This is consistent with the intent of the plan of finance regulations. Application of the $35 million zero-interest loan not only to Allison Lake but also to acquisition of new diesel capacity is therefore considered under "hypothetical financing 6, conditions." The reader should be cautioned, however, that such inclusion is meant to imply nothing about political probabilities. Cases to be Examined In summary, both the Intertie and Allison Lake cases are examined: As Without State assistance; 2 With State assistance in the form of a $35 million, zero-interest, 50-year loan; and 3. With the minimum level of State assistance needed to achieve financial feasibility. The minimum level of State assistance will be expressed as the required amount of State loan issued at zero interest with a repayment of principal spread evenly over 50 years. The base case (diesel) is examined: 1; Without State assistance; and Ds With State assistance in the form of zero- interest, 20-year loans as needed to replace diesel generating capacity. The Plan of Finance will also estimate the present value cost to the State of Alaska for the level of state assistance which is assumed in the Plan of Finance, all in accordance with 3 AAC 94.065. Copper Valley Intertie Plan of Finance May 3, 1994 Page 4 " Four-Dam Pool Power Sales Agreement and Impact on Allison Lake Alternative In the proposed Allison Lake Project alternative, a question arises in the interpretation of resulting power costs of electricity generated by Solomon Gulch Hydroelectric project and sold to Copper Valley Electric Association ("CVEA"): "What rate will CVEA pay under its power sales agreement with the State of Alaska (Alaska Energy Authority) for additional power generated by Solomon Gulch from water supplied through a tunnel from Allison Lake to the Solomon Gulch Reservoir?" The answer impacts the CVEA and the State of Alaska as well as the other participating utilities in the Four-Dam Pool (the Cities of Ketchikan, Petersburg, Wrangell and Kodiak Electric Association). The agreement does not provide for a situation such as Allison Lake whereby a participating utility does something to increase the generation potential of one of the projects. All the cost allocations were based on expected output of the projects in 1984 when the agreement was negotiated. If CVEA were to pay the Four-Dam Pool wholesale power rate for the additional power generated by Solomon Gulch from Allison Lake waterflow, it makes the projected cost of power under the Allison Lake scenario somewhat less than the proposed Copper Valley Intertie under certain scenarios (assuming the state loan is made available to Allison Lake). Without any payment for the power produced from the Allison Lake waterflow into Solomon Gulch, and assuming the same state loan, the cost of power under the Allison Lake scenario is projected to be substantially less than the cost of power under the Intertie scenario, except in the high load growth scenarios. ” At this early stage of consideration, there is insufficient basis to narrow the range of possibilities on this question. A compromise settlement might occur in the interest of all parties; i.e. a negotiated price somewhere between zero and 6.4 cents per kWh. There is precedent for the Four Dam Pool adopting negotiated rates in instances not dealt with explicitly in the initial agreement, such as rates for interruptible sales. For purposes of analysis, the Division of Energy has concurred that three power rates be analyzed for the power generated from the waterflow of Allison Lake into Solomon Gulch. These three rates are the full 6.4 cents per kWh presently being charged to the Four-Dam Pool members, zero cents and an assumed rate of 3.2 cents per kWh. In both cases where a rate is charged, the operation and maintenance component would be escalated for inflation. Bond Financing Not Eligible for Tax-Exemption The principal beneficiary of the contemplated financing, whether the Intertie or Allison Lake is the financed project, will be the Copper Valley Electric Association, a rural electric cooperative that serves the Glennallen and Valdez areas. Under current tax law, any project for the benefit of such a cooperative (as opposed to a municipally-owned utility) is not considered a public purpose project unless an exception is met. Specifically, the two-county rule is an exception which sometimes is possible for gaining tax-exempt status. The two-county rule provides when all the output of a project is used within what is defined as a “two-county area", the project may qualify for tax- exempt financing. For purposes of this rule, incorporated cities and counties within the service area of a project each constitute a "county." In the case of Alaska, a borough is considered a county as Copper Valley Intertie Plan of Finance May 3, 1994 Page 5 7 is the unorganized borough. In the case of the CVEA specifically, customers reside in Valdez, an incorporated city, the Matanuska-Susitna Borough and the unorganized borough. Thus, three “counties” are involved, even in the case of Allison Lake. In evaluating the Intertie, it is possible that even more "counties" would be involved, considering the profit margins in the sale of power that would benefit other utilities and any ancillary benefits to others from an enlarged power grid. Those familiar with the Bradley Lake Hydroelectric Project near Homer may recall the project was built by the AEA and the power is being sold to four electric cooperatives and two municipalities. This project was financed with tax- exempt revenue bonds because Bradley Lake received special legislative designation as a two-county rule project. In this instance, short of similar legislative assistance in the U.S. Congress, no tax-exemption will be possible. Because the chance of receiving such an exemption is remote, taxable financing rates have been assumed. Availability of Financing for Thirty-Year Term This Plan of Finance assumes the avail- ability of financing for a full thirty-year term from the start of commercial operation of either the Intertie or Allison Lake. The REA (or any lender of funds supplemental to the State loan) may consider the allowable term of the loan in light of the anticipated economic life of the Alyeska pipeline and associated facilities as well as the prospects for additional loads. tr RE A TE Copper Valley Intertie Plan of Finance May 3, 1994 Page 6 1) Financing Assumptions Hypothetical Financing Conditions Scenarios In addition to the assumption that the financing will not enjoy the benefits attributable to tax-exemption, the following assumptions have been made with respect to the hypothetical financing Scenarios: 5 The State of Alaska $35 million zero-interest loan is assumed to be available for any of the alternatives considered. It is recognized that the authorizing legislation for the state loan presently refers only to the Intertie as previously discussed. a The $35 million loan from the State of Alaska will be at zero-percent interest and will be repaid over the first fifty years of Operation of the project. Such repayment is assumed to be in fifty equal annual amounts of 2% per annum ($700,000 per annum). 3) The proceeds of the $35 million loan will be expended first, before the proceeds of any other financing, in an effort to minimize capitalized interest during construction. The State would release loan proceeds as needed, with the project receiving no interest earnings on the funds. 4. The issuance of any bonds or other financing instruments will be delayed as long as possible, consistent with complying with State law and good business practice (making sure adequate funding is on hand or assured before entering construction contracts). 5: The long-term interest rate is assumed to be 7%2% for bonds with a term of thirty years from the date of commercial operation. Debt service is assumed to be level as to total principal and interest each year. 6. Costs of issuance are assumed to equal one- half of one percent of the total par amount of bonds issued (minimum of $100,000). Without State Assistance Scenarios With respect to the without state assistance Scenarios, assumptions | through 4 above would not apply and assumptions 5 and 6 would apply. Minimum State Assistance Scenarios With regard to scenarios using the minimum State assistance required, all of the above six points would apply, but the loan from the State of Alaska would be reduced if possible. The loan would be computed to be that amount needed to reduce the cost of power from the project to a level competitive with diesel. For purposes of this calculation, it is assumed that from the first year of commercial operation there would be no increase in the retail cost of power over what the cost of the base case power would have been. Estimated Interest Rate Assumed, All Scenarios Under current market conditions, FFB loans are being made at approximately 74%. With the REA guaranty fee of %% added, the current cost to a REA borrower is approximately 7%%. The FFB rate is tied to the U.S. Government long bond (30-year) rate. The 72% rate used in this Plan of Finance is consistent with what seems to be a consensus view of interest rate forecasters that interest rates in the next few years will be at or near this level for the U.S. Government long-term borrowing. Copper Valley Intertie Plan of Finance May 3, 1994 Page 7 “7 & & There are many opposing views on interest rate forecasts, particularly in light of market volatility in recent weeks. No forecast can be guaranteed. For purposes of analysis of rate sensitivity, we will compare costs of power at 62% and 842%, which is 1% higher and 1% lower than the assumed rate, to gain perspective on the magnitude of interest rate sensitivities. On such capital intensive projects, interest rate fluctuations can dramatically impact the outcome when comparing to the diesel alternative, a very low-capital power source when viewed next to hydroelectric or long-line Intertie projects. LE Copper Valley Intertie Plan of Finance May 3, 1994 Page 8 ” Consideration of Possible Funding Sources The legislation appropriating $35 million to fund a loan for the Copper Valley Intertie requires compliance with former AS 44.83.181 in preparing the financing plan for the project. The statute lists eight categories of project financing for consideration: 1. Issuance of Revenue Bonds Considerations for Utilizing the AEA or AIDEA as Issuer of the Bonds There are notable advantages and disadvantages of issuing bonds through the Alaska Energy Authority ("AEA") as compared to the Alaska Industrial Development and Export Authority ("AIDEA"). Although the functions of the AEA have been greatly diminished by recent legislation, the AEA remains a legal entity with legal authority to finance projects under certain conditions and advantages may exist in so doing. The principal considerations in comparing AEA to AIDEA as issuer of the bonds are as follows: As Ability to secure the bonds with the state's capital reserve fund - both AEA and AIDEA have the ability to accomplish this on an Intertie project, but only AEA has the ability to accomplish it on Allison Lake. B. AIDEA can use its general obligation to give marketability to any feasible project, but in so doing, that project must show 1.50 times coverage of debt service to comply with AIDEA's bond resolution. This requirement exceeds market requirements for power " revenue bonds and would raise power rates unnecessarily. Cc. While APUC approval of use agreements would probably be required under either AIDEA or AEA financings, AIDEA financings would also require municipal approvals. AIDEA must secure approval from any municipality in which a project is located if the project cost exceeds $6 million. D. AEA may not be the owner of any project for which it issues bonds but it may be the issuer for conduit financings. It is apparent that the use of the capital reserve fund of the State of Alaska will help provide the lowest cost of power for any bond financing alternative. This would be accomplished by lowering debt service coverage requirements and by maximizing market acceptance of the bond issue. We have assumed the issuer which is chosen, if bond financing were utilized, will be one that is able to utilize the capital reserve fund as one of the security features of the bond issue. While this feature does not create a legal obligation on the State to make up shortfalls, the capital reserve fund is commonly referred to in the municipal bond industry as a "moral obligation” of a state. In the case of the proposed Copper Valley Intertie project, the capital reserve fund security feature could be provided by either AIDEA or AEA. However, in the case of the proposed Allison Lake project, only AEA could provide this benefit because AIDEA's legislation only permits the use of the capital reserve fund for Intertie projects. Copper Valley Intertie Plan of Finance May 3, 1994 Page 9 Y The Capital Reserve Fund Security Feature The Capital Reserve Fund feature refers to what is commonly known and thought of in the municipal bond industry as a “moral obligation” of the state in which the project is located. The language in the state legislation simply provides that if the capital reserve fund is drawn upon and therefore on January | of any year has a shortfall in its required balance, the Governor, the Speaker of the House and the President of the Senate will be notified of such shortfall. The State may, at its option, replenish the Shortfall. While this creates no legal liability for the State, the State of Alaska (and most issuers in the nation) have historically honored such obligations. The bond market, for the most part, as well as credit rating agencies and bond insurance companies, has confidence that "moral obligations" will be honored so that the issuers involved may protect their excellent credit reputations. The State of Alaska has a history of utilizing the "moral obligation" feature on many of its agencies’ debt and has on occasion been presented the opportunity to make good on these obligations and has done so. The rating agencies have taken the position that so long as the project appears feasible (and therefore the likelihood of calling on the "moral obligation" is low), that the bond issue should generally be rated no worse than a full letter grade below the state's general obligation bond rating. In the case of Alaska, this enables the "moral obligation" financing to obtain an "A" rating on its own merit and makes the financing attractive for bond insurance which allows the bonds to be marketed with a "AAA" rating. It is our opinion that the use of the Capital Reserve Fund feature is critical to assuring marketability for this financing if revenue bonds are utilized because of the relatively small size and ” ae remoteness of the Copper Valley Electric Association in terms of the municipal bond market. It not only assures marketability, but reduces debt service coverage requirements and lowers interest rates. This technique has been utilized by the Alaska Energy Authority on its interim and permanent financing for the Bradley Lake Hydroelectric Project as well as its interim financing for the Swan, Terror and Tyee Hydroelectric Projects. The Capital Reserve Fund has commonly been used by the Alaska Municipal Bond Bank Authority and the Alaska Housing Finance Corporation. In short, the market is familiar with and accepts the "moral obligation" of the State of Alaska as a meaningful credit enhancement for bonds of its agencies. Revenue bonds issued on a taxable basis in today's market would bear interest at a rate of approximately 842% and no significant change in rates is expected by many interest rate forecasters. We have therefore used the REA approach as the best hypothetical financing, assuming a 742% rate. If tax exempt financing were available for this project or any alternative, revenue bonds would be the least costly financing other than a financial hardship loan from REA, if available. 2. General Obligation Bonds or Bonds Guaranteed by the State of Alaska For over a decade, the State of Alaska has made every attempt to minimize its issuance of general obligation bonds or guarantees. The State has also been extremely cautious in extending maturities of any of its debt because of the declining oil revenues projected with the Prudhoe Oil Curve. This financing will be one of a very long term and one which can be accomplished without the general obligation support of the State of Alaska. It is however very important to note that the use of the Copper Valley Intertie Plan of Finance May 3, 1994 Page 10 Sy capital reserve fund, if revenue bonds are issued, accomplishes much of the same benefit for the project. As discussed earlier, this technique invokes the "moral obligation" of the State. 3. Appropriation from the General Fund We assume the Legislature has previously addressed this question in its decision to conditionally offer a zero-interest fifty-year loan in support of the Intertie Project. 4. Loan from the General Fund This source has in effect been considered in #7 below, inasmuch as the loan from the Power Project Fund would be made from appropriations from the Legislature. 5. Financing Arrangements with Other Entities No other financing source was identified which would offer a more cost-effective financing than financing available through the REA discussed immediately below. In our review of REA alternatives, we also discussed financing arrangements available through both the National Rural Utilities Cooperative Finance Corporation ("CFC") and the National Bank for Cooperatives ("CoBank"). Both expressed interest in either making a loan to CVEA (either project would be eligible if feasible in their judgment) or in participating in a REA loan on a concurrent basis. While there are differences in loan rates and conditions between the two organizations, the loan rate from either would reflect market rates on long U.S. Treasury obligations and would probably range 1%% to 13%4% above such Treasury rates in any given market. Both organizations are cooperatives and require membership. We understand CVEA presently belongs to CFC. 6. Assistance from any Federal Agency As a tural electric cooperative, CVEA is an eligible borrower from REA. As a cooperative qualifying for a financial hardship status (with per kWh retail rates exceeding 15 cents), CVEA would qualify for all three REA loan programs: A. 5% fixed rate for the entire project; or B. a concurrent financing with REA participating with CFC or Co-Bank on a 70/30 basis (or up to 90% by REA in certain case). REA interest rate is tied to 20-year municipals, currently about 64% and the other participant is currently about 8%4% for a blended rate of about 7%; or G a FFB loan (fixed at long U.S. Treasury rates) with a REA guaranty (%% guaranty fee), producing a total cost of approximately 7%% in today's market. As stated earlier, this is consistent with long-term rate forecasts (we are using 742% for analysis purposes). If CVEA were to not qualify at the time of the loan for financial hardship status, CVEA would only be able to access the FFB program because of the nature of the project. Only distribution or sub- transmission programs can qualify for the other less expensive programs. There is also concern that the lower cost programs will be the most in jeopardy in the Federal budgetary process. Because of these uncertainties, the FFB approach is utilized in this Plan of Finance, although in actual practice, any lower cost alternatives which may then be available will certainly be explored as the actual financing is undertaken. en RRR TES TR EN RN A RN NO EEL NE I TR RI A EA Copper Valley Intertie Plan of Finance May 3, 1994 Page 11 7. Loan from Power Project Fund This funding source has, of course, been considered, not only for the Intertie but also for Allison Lake and the base case (diesel), both of which would require additional legislation. We have considered not only a full $35 million zero-interest loan for fifty years, but also whether a smaller loan could still accomplish financial feasibility. 8. Any Combination of Sources The Plan of Finance scenarios listed above consider combinations of participation in REA programs by CVEA and loans from the Power Project Fund which would be made possible by appropriations from the General Fund. Ce en ENED NIEEEn REISS EREIIRNIERIEN IIE RREEEEEEEERRRRE Enea Copper Valley Intertie Plan of Finance May 3, 1994 Page 12 ” Conclusions REA Most Cost Effective Market Alternative Of all the alternatives available for borrowings in excess of available state loans, the REA is clearly the least costly. As explained earlier, there are three possible programs within REA, depending on the nature of the loan and the status of the borrower. Even if the most expensive program must be utilized (a FFB loan guaranteed by REA), the cost of funds would still be attractive under current market conditions. CVEA would be allowed to borrow at a rate only marginally higher than the long-term rate at which the Federal government borrows. The recommended financing alternative for the financing of the proposed Copper Valley Intertie Project is a REA loan to CVEA or guaranty. Even in the highest cost program of REA, that of a FFB loan which is guaranteed by REA, the cost under current market conditions is less than 742% per annum for a loan amortized over the first thirty years of the life of a project. In the event the Allison Lake Project is selected (provided a state loan were made available), REA would also be the preferred alternative for financing in our opinion. In addition, if for any reason the REA programs were not available, the revenue bond approach is likely to be a viable alternative, although a considerably higher interest rate (about 1% higher) would result. This approach would require the moral obligation of the State of Alaska as previously discussed. Use of CFC or CoBank as a lender might also be attractive in such event, since CVEA would be the borrower and no moral obligation of the State of Alaska would be involved. No Financial Feasibility Without State Loan No project reviewed has financial feasibility without a state loan. This is based on the definition of financial feasibility stated previously: No rate increase relative to the base case (diesel) in the year 2000, the assumed first year of operation, is allowed. Further, depending on the scenario being depicted, both the Copper Valley Intertie Project and the Allison Lake Hydroelectric Project could be placed into commercial operation at power rates competitive with the diesel base case. This would be possible even with fifty-year zero interest state loans of less than $35 million as shown on the tables which follow. rc RR Copper Valley Intertie Plan of Finance May 3, 1994 Page 13 p Copper Valley Intertie Plan of Finance Projected Cost of Power Tables (Nominal Cents / kWh) Table I Medium-High Scenario Medium Load Growth / High Fuel Cost Escalation Table II Medium-Low Scenario Medium Load Growth / Low Fuel Cost Escalation Table II High Scenario High Load Growth / High Fuel Cost Escalation Table IV Low Scenario Low Load Growth / Low Fuel Cost Escalation Tables I through IV follow. Each was prepared by R.W. Beck, at the direction of J.C. Bradford & Co., utilizing the data base compiled as part of their Feasibility Study. However, such Tables reflect the assumptions provided R.W. Beck by J.C. Bradford & Co. which are detailed in this Plan of Finance. Case 1 - No State Assistance 7.5% Interest Rate 6.5% Interest Rate 8.5% Interest Rate Case 2 - Minimum State Assistance ($000)(5) 7.5% Interest Rate Net PV of State Loan (6) 6.5% Interest Rate Net PV of State Loan (6) 8.5% Interest Rate Net PV of State Loan (6) Case 3 - Hypothetical Financing(7) 7.5% Interest Rate 6.5% Interest Rate 8.5% Interest Rate Net PV of State Loan (6) (1) Medium-high scenario assumes medium load growth and high fuel cost escalation through 2010. Includes assumed inflation at 3.5% per year. Copper Valley Intertie Plan of Finance Table 1 Cost of Power Analysis Projected Cost of Power (Nominal Cents/kWh) (Medium-High Scenario)(1) 2000 2010 Allison Allison Allison Allison Allison Diesel Intertie Lake(2) Lake(3) Lake (4) Diesel Intertie Lake(2) Lake(3) 94 11.8 11.6 11.1 10.6 12.7 13.1 13.3 12:7 9.3 11.1 11.1 10.5 10.0 12.6 12.5 12.8 12.2 9.6 12.6 12.3 11.7 11.2 12.8 13.8 13.9 13.3 94 $25,000 $22,000 $16,500 $11,000 - $21,200 $18,600 $14,000 $9,300 9.3 $22,000 $20,000 $13,500 $7,000 $18,600 $16,900 $11,400 $5,900 9.6 $27,000 $23,000 $17,500 $13,000 $22,800 $19,500 $14,800 $11,000 8.8 8.5 8.3 78 13 12.0 10.1 10.3 97 8.8 8.3 8.3 Td 7.2 12.0 9.9 10.2 9.6 88 8.8 8.4 79 74 12.0 10.3 10.3 98 : $29,600 $29,600 $29,600 $29,600 - - - - n Allison Lake (4) a 11.6 12.7 9.1 9.0 9.2 (2) Assumes all additional generation at Solomon Gulch priced at 7.1 cents/kWh in 2000 and 8.3 cents/kWh in 2010, both in nominal dollars. Includes inflation on O&M component of cost. (3) Assumes all additional generation at Solomon Gulch priced at one-half the rate assumed in the previous case, i.e. 3.55 cents/kWh in 2000. (4) Assumes additional generation at Solomon Gulch has no charge. (5) Estimated state loan required to provide first year cost of power the same as for diesel case in that year. (6) State loan amount less present value of loan payments. Assumes 8.5% discount rate. (7) Assumes $35,000,000, zero interest, 50-year, state loan available for Intertie and Allison Lake. In the Diesel Case, zero interest, 20-year, state loans are assumed to be available to fund diesel capacity additions. Prepared by R.W. Beck 5/3/94 Table 2 Copper Valley Intertie Plan of Finance Cost of Power Analysis Projected Cost of Power (Nominal Cents/kWh) (Medium-Low Scenario)(1) Allison Allison Allison Allison Allison Allison Diesel Intertie Lake(2) Lake(3) Lake (4) Diesel Intertie Lake(2) Lake(3) Lake (4) Case 1 - No State Assistance 7.5% Interest Rate 92 11.7 11.6 11.0 10.5 117 12.6 12.9 12.3 11.7 6.5% Interest Rate 9.1 11.0 11.0 10.4 99 11.6 11.9 12.3 118 112 8.5% Interest Rate 23 12.5 122 11.6 11 11.8 133) 13.5 12.9 123 Case 2 - Minimum State Assistance ($000)(5) 7.5% Interest Rate 92 $26,000 $24,000 $18,000 $10,000 Net PV of State Loan (6) - $22,000 $20,300 $15,200 $8,500 6.5% Interest Rate 9.1 $23,000 $22,000 $15,500 $9,000 Net PV of State Loan (6) - $19,500 $18,600 $13,100 $7,600 8.5% Interest Rate 93) $28,000 $25,000 $20,000 $15,000 Net PV of State Loan (6) $23,700 $21,200 $16,900 $12,700 Case 3 - Hypothetical Financing(7) 7.5% Interest Rate 8.5 8.4 8.3 77 Tee 11.0 95 98 9.2 8.7 6.5% Interest Rate 8.5 8.2 8.2 aed TA 11.0 93 97 92 8.6 8.5% Interest Rate 8.5 8.6 8.4 78 73) 11.0 S77 99 OF 8.8 Net PV of State Loan (6) - $29,600 $29,600 $29,600 $29,600 - - - - - (1) Medium-low scenario assumes medium load growth and low fuel cost escalation through 2010. Includes assumed inflation at 3.5% per year. (2) Assumes all additional generation at Solomon Gulch priced at 7.1 cents/kWh in 2000 and 8.3 cents/kWh in 2010, both in nominal dollars. Includes inflation on O&M component of cost. (3) Assumes all additional generation at Solomon Gulch priced at one-half the rate assumed in the previous case, i.e. 3.55 cents/kWh in 2000. (4) Assumes additional generation at Solomon Gulch has no charge. (5) Estimated state loan required to provide first year cost of power the same as for diesel case in that year. (6) State loan amount less present value of loan payments. Assumes 8.5% discount rate. (7) Assumes $35,000,000, zero interest, 50-year, state loan available for Intertie and Allison Lake. In the Diesel Case, zero interest, 20-year, state loans are assumed to be available to fund diesel capacity additions. Prepared by R.W. Beck 5/3/94 Case | - No State Assistance 7.8% Interest Rate 6.5% Interest Rate 8.5% Interest Rate Case 2 - Minimum State Assistance ($000)(5) 7.5% Interest Rate Net PV of State Loan (6) 6.5% Interest Rate Net PV of State Loan (6) 8.5% Interest Rate Net PV of State Loan (6) Case 3 - Hypothetical Financing(7) 7.$% interest Rate 6.5% Interest Rate 8.5% Interest Rate Net PV of State Loan (6) (1) High scenaric assumes high load growth and high fuel cost escalation through 2010. Includes assumed inflation at 3.5% per year. Table 3 Copper Valley Intertie Plan of Finance Cost of Power Analysis Projected Cost of Power (Nominal Cents/k Wh) (High Scenario)(1) 2000 Allison Alfison Allison —Dieset__ _Intertie_ _Lake(2)_ _Lake(3)__ Lake (4) _ 93 112 NS 11.0 105 92 10.6 109 10.5 100 9.4 119 12.0 us Il 93 $21,000 $24,000 = $18,000-~— «$12,000 - $17,800 = $20,300 $15.200 = $10.200 9.2 $18,000 = $23,000 $16,000 «= $10,000 - $15,200 $19,500 $13,500 $8,500 94 $24,000 = $25,000 = $20,000 $45,000 - $20,300 = $21,200» $16,900 $12,700 87 822 8.5 8.0 1.6 8.7 8.0 84 19 75 8.7 8.4 8.6 Bl 7.6 - $29,600 $29,600 $29,600 $29,600 2010 Allison Allison Allison —Diesel__Inmtertle __Lake(2)_ _Lake(3)__Lake (4) _ 13.3 123 138 13.3 129 13.2 118 134 129 12.4 13.4 129 143 13.8 13.3 126 99 113 109 10.4 126 92 11.3 108 10.3 126 10.0 11.4 11.0 105 @) Assumes all additional generation at Solomon Gulch priced at 7.1 cents/kWh in 2000 and 8.3 cenis/kWh in 2010, both in nominal dollars. Includes inflation on O&M component of cost. (3) Assumes all additional generation at Solomon Gulch priced at one-half the rate assumed in the previous case, ic. 3.55 cents/k Wh in 2000. (4) Assumes additional generation at Solomon Gulch has no charge. (5) Estimated state loan required to provide first year cost of power the same as for diesel case in that year. (6) State loan amount less present value of loan payments. Assumes 8.5% discount rate. (7) Assumes $35,000,000, zero interest, 50-year, state loan available for Intertie and Allison Lake, in te Diese! Case, zero interest, 20-year, state loans are assumed to be available to fund diesel capecity additions. Prepared by R.W. Beck 5/3/94 Sod Veo: Ad LNAS : $6-TT-S : : 60:8 -ADMINA JO AIG Vad & /@ #:8668 T9S L06 Case 1 - No State Assistance 7.5% Interest Rate 6.5% Interest Rate 8.5% Interest Rate Case 2 - Minimum State Assistance ($000)(5) 7.5% Interest Rate Net PV of State Loan (6) 6.5% Interest Rate Net PV of State Loan (6) 8.5% Interest Rate Net PV of State Loan (6) Case 3 - Hypothetical Financing(7) 7.5% Interest Rate 6.5% Interest Rate 8.5% Interest Rate Net PV of State Loan (6) Copper Valley Intertie Plan of Finance Table 4 Cost of Power Analysis Projected Cost of Power (Nominal Cents/kWh) (Low Scenario)(1) 2000 Allison Allison Diesel Intertle Luake(2) Lake(3) 8.4 12.7 11.7 11.1 8.3 11.9 11.1 10.5 8.5 13.6 12.4 11.8 8.4 $40,000 $29,000 $23,000 - $33,800 $24,500 $19,500 8.3 $39,000 $29,000 $22,000 - $33,000 $24,500 $18,600 8.5 $40,500 $30,000 $24,500 2 $34,300 $25,400 $20,700 79 8.9 79 73 79 8.6 78 72 79 9.1 19 73 - $29,600 $29,600 $29,600 Allison Lake (4) 10.5 98 11.1 $17,000 $14,400 $15,000 $12,700 $19,000 $16,100 6.6 6.6 6.7 $29,600 Diesel 10.7 10.6 10.7 10.1 10.1 10.1 (1) Low scenario assumes medium load growth and low fuel cost escalation through 2010. Includes assumed inflation at 3.5% per year. (2) Assumes all additional generation at Solomon Gulch priced at 7.1 cents/kWh in 2000 and 8.3 cents/kWh in 2010, both in nominal dollars. Includes inflation on O&M component of cost. (3) Assumes all additional generation at Solomon Gulch priced at one-half the rate assumed in the previous case, i.e. 3.55 cents/kWh in 2000. (4) Assumes additional generation at Solomon Gulch has no charge. (5) Estimated state loan required to provide first year cost of power the same as for diesel case in that year. (6) State loan amount less present value of loan payments. Assumes 8.5% discount rate. 2010 Allison Allison Allison Intertie Lake(2) Lake(3) Lake (4) 14.2 13.0 12.3 115 13.3 12.4 11.6 10.9 15.1 13.7 13.0 12.2 10.2 91 8.4 76 10.0 9.0 8.3 715 10.5 9.2 84 17 (7) Assumes $35,000,000, zero interest, 50-year, state loan available for Intertie and Allison Lake. In the Diesel Case, zero interest, 20-year, state loans are assumed to be available to fund diesel capacity additions. Prepared by R.W. Beck 5/3/94 W- e goad UNIVERSITY OF ALASKA nines 3) Maat 3211 Providence Drive a Anchorage, Alaska 99508 a SCHOOL OF PUBLIC AFFAIRS ECONO "19 naseute Feo iii \ May 191995 Alaska Industrial Development and Export Authority 17 May 1995 Mr. Riley Snell Executive Director Alaska Industrial Development and Export Authority 480 W. Tudor Road Anchorage, AK 99503 Dear Mr. Snell, I am a professor of economics at the University of Alaska Anchorage. In my capacity there I teach a course in public fiance which deals with government taxation and spending policy. The activities of the public sector is one of my areas of specialty, in which I have spent a great deal of time and study. I am writing you as a professional economist. I strongly urge you to reject the participation of the State of Alaska in the Sutton-Glenallen intertie. I realize that state government has been heavily involved in electrical public utility projects in the past; the four-dam pool, Bradley Lake, Terror Lake, and the Railbelt Intertie. However, past involvement is no reason for continued involvement. It strikes me that this proposal is dubious from two standpoints. First, it appears doubtful that the proposal has economic feasibility. The growth scenarios are overly optimistic, and it is highly likely that the costs are understated. The analysis is not robust, in that any changes in assumptions or basic conditions are fatal. There is a confusion in what are considered costs and benefits in the analysis. The economic feasibility of this project has become even more disputable now that Petro Star is planning on generating its own electricity, and will be able to feed its excess capacity back into the CVEA grid. Secondly, and this is the most important reason, the production of electricity (and all private goods) is best left to the private market. Governments have been involved in the past, and there are still instances in which they are currently, but their record is not good. Think of the debacle that took place with the WPPSS, and recall the initial projections for power demand that led to the early feasibility studies of the Susitna project (That $250 million A DIVISION OF THE UNIVERSITY OF ALASKA STATEWIDE SYSTEM OF HIGHER EDUCATION dollars could have been very useful in many other endeavors---thank God we did not build that $10 billion dollar project). The reason that private goods end up the responsibility of governments is because these projects are incapable of withstanding the scrutiny of the private sector; they are not economically feasible. Alaska is facing an uncertain financial future. The Fiscal Gap is real, and on our doorstep. The time has come to start eliminating weak claims on the public purse. Goods that can be efficiently produced by the private sector should be the first candidates for elimination. Please ignore the power company lobbies and the construction lobbies. Their voice has been heard all too often in the halls in Juneau. The opportunity cost of this project is essentially the foregone interest on the 50 year $35 million interest free loan. The present value of that foregone interest is virtually $35 million dollars. This is an expenditure that the people of Alaska can ill afford. A $35 million dollar expenditure for the 3000 customers of the CVEA buys them very little. It certainly does not buy them a guarantee of uninterrupted power. If the State of Alaska wants to buy them a guarantee, go to CostCo in Anchorage and buy three thousand 5000 watt generators---the cost of such a purchase is only $1.5 million. Please, I urge you to reject this expenditure. Please take the State of Alaska out of the public utility business. In the current budget round a $600 million deficit is forecast. Although $35 million dollars doesn't fill that gap, it is a start in the right direction. Please reject this project. I thank you very much for your time and consideration. Sincerely yours, a a Pershing J. Hill, Ph.D. Associate Professor of Economics TONY KNOWLES P.O. Box 110001 GOVERNOR Juneau, Alaska 99811-0001 (907) 465-3500 Fax (907) 465-3532 STATE OF ALASKA OFFICE OF THE GOVERNOR JUNEAU MEMORANDUM TO: Commissioner Mike Irwin Department of Community and Regional Affairs Commissioner John Shively Department of Natural Resources Reilly Snell, Director Alaska Industrial Development and Expprt Authority FROM: Governor Tony Knowles : / LL DATE: April 6, 1995 RE: Sutton-Glennallen intertie Upon review of your April 5 memo regarding the Sutton-Glennallen intertie, | am directing you to lead an interagency review of key issues in connection with the project. Those issues include: 1. Long-term future of the trans-Alaska pipeline. 2. Power demand and cogeneration options for the Petro Star Valdez Refinery. 3. Future options for the trans-Alaska Gas System. 4. Cogeneration and possible power purchase options for the Alyeska Marine Terminal. 5. Loan agreement options. The other team members are the Alaska Department of Natural Resources and the Alaska Industrial Development and Export Authority. This review should include obtaining the most current data upon which a decision can be made regarding the intertie project. The review should be completed no later than July 1, 1995. Dayatllllisaeminin Alaska 2) Eiely wee , Rural 3) (gefO an pI Electric => = =— 70 . budor ey 2 4 oa pe Laren Cooperative ee Oe ee Association, Inc FAX (907) 561-5547 > . Electric Service for 357,000 Alaskans June 8, 1995 EGEIVE JUN 1 3 1995 Alaska Industria! Development and Export Authority Mr. Riley Snell, Executive Director Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage, Alaska 99503 Dear Riley: The Sutton to Glennallen intertie will probably occupy more of your time over the next couple of months than you would like, but I hope the cabinet level task force on that subject and Governor Knowles will ultimately come to the conclusion that this is a worthwhile piece of infrastructure and it should be built. The formal feasibility study followed the rather narrow and strict directives which used to be required by statute for projects of the Alaska Energy Authority. Even when measured by that procedure, this intertie came out looking pretty good. To my members in the utility industry, this old AEA feasibility study process always looked artificial and quite distant from reality. As we frequently told legislative committees through the years, if the feasibility of other infrastructure projects had to be determined under the same rules, the Parks Highway never would have been built. There are any number of development projects which may occur if the line is built, but under the rules, they were not considered in the feasibility study. For example, there are known mineral deposits along the route of the proposed intertie. The ability to put a substation on the line to serve a mine load may well be a very significant factor in deciding to develop a potential mining operation. Railbelt utilities may negotiate an agreement to supply power to the Alyeska terminal in Valdez. This would result in a very large bloc of power being transmitted over the line. When the time comes that the Yukon Pacific Corporation is able to build its pipeline to Valdez, they will need a liquefaction plant which will exhaust waste heat equivalent to 50 to 100 MW of power. If the Sutton to Glennallen line were in place, YPC could put in a cogeneration plant and sell its surplus power in the Railbelt grid. The timing for that very likely could work out to match the need for the next increment of power in the Railbelt DEMOCRACY IN ACTION I wish I could tell you that these things will happen if the Sutton to Glennallen line is built, but I can't. No one can know with any certainty which, if any, of these things will happen. What I can tell you, though, is that without the Sutton to Glennallen Intertie, it is a certainty that none of these things will happen. The low load growth projected by opponents of the intertie will become a self-fulfiling prophecy if they are used to prevent construction of the line. This project makes so much sense to professionals in the utility industry, that we have a hard time understanding how opposition to this line can be taken very seriously. We have heard that you are contracting with CH2M Hill to review the feasibility of this project. We certainly hope this review will be a "real world" look at its feasibility rather than being constrained by the now repealed statute. We wish you success in your review of this project, and we hope you are able to provide Governor Knowles with a firm recommendation that it should be built. Sincerely, ye David Hutchens Executive Director COPPER VALLEY ELECTRIC ASSOCIATION, INC. P.O. BOx 45, GLENNALLEN, ALASKA 99588 - (907) 822-3211 FAX 822-5586 VALDEZ (907) 835-4301 FAX 835-4328 Qe. Cae Grog Dv~ 1 4t Hala June 16, 1995 EGEIVE JuN 1.9 1995 Mr. Riley Snell, Executive Director Alaska Industrial Development Alaska Industrial Development and Export Authority and Export Authority 480 West Tudor Road Anchorage, Alaska 99503 Subject: Document on Sutton to Glennallen Intertie Dear Riley: The narrative portion to the R.W. Beck Revised Economic Analysis was inadvertently left out of the document we prepared for your review which we sent to you previously. Please insert the enclosed narrative in the front of Attachment E. We are sorry for any inconvenience this may have caused you. Yours truly, a perw Lo teay) goer Clayton Hurless General Manager Enclosure w:\word\cdh\95-097jw.doc Serving the Copper River Basin and Valdez July 20, 1994 Mr. Robert A. Wilkinson Manager, Administration and Finance Copper Valley Electric Association P.O. Box 45 Glennallen, Alaska 99588 Dear Robert: Subject: Transmittal of Revised Economic Analysis Results Sutton - Glennallen Intertie We have completed the revised economic analysis regarding the Sutton to Glennallen Intertie. This letter provides a brief explanation of the methodology employed in the revised analysis, identifies the principal assumptions and presents the results. Most of the assumptions included in this letter were forwarded to you in my letter of July 17, 1994 with some minor adjustments and clarifications as we discussed in our telephone conversation yesterday. The revised economic analysis was performed, for the most part, using the assumptions and methodology established for the economic analysis included in the Intertie feasibility study. A primary difference is that the revised economic analysis was performed from the perspective of CVEA and not from the perspective of the State. Certain costs that were not included in the feasibility study economic analysis because they represented costs paid by Alaskans to Alaskans are included in the revised analysis since these costs are obligations of CVEA. An example of a previously excluded cost is the payment to the State by CVEA for power generated at the Solomon Gulch project using water from Allison Lake. Assumptions The following list provides the basic assumptions of the revised economic analysis. Unless indicated, the assumptions used in the feasibility study (as shown in Section X.C., page X-3 of the feasibility study report) remain the same for the revised analysis. Some of the assumptions included in the following list are the same as those used in the feasibility study and are included here simply for restatement. 1. Future CVEA power requirements correspond to the medium-high load forecast scenario. 2. Real, inflation-free escalation in fuel costs will be at the low fuel cost escalation rate of 0.44% per year. This is the same fuel cost escalation rate used for the low case in the feasibility study economic analysis. (Note that Item 7, page X-4 of 2101 Fourth Avenue, Suite 600 Seattle, WA 98121-2375 Phone (206) 441-7500 Fax (206) 441-4964 ® Mr. Robert A. Wilkinson July 20, 1994 Page 2 10. 11. the feasibility study report indicates the low fuel escalation rate to be 0.66%. The correct escalation rate is 0.44%). Estimated future annual costs are discounted to year end 1993 using an inflation free discount rate of 4.5%, the same discount rate as used in the feasibility study economic analysis. General inflation is 3.5% annually, the same inflation rate as used in the feasibility study economic analysis. The Intertie will become operational in 1999, the same on-line year as developed in the feasibility study. The Intertie will be financed with a 50-year $35,000,000, zero interest State loan and a $12,604,000 35-year, 5.0% interest rate loan from REA. The 5.0% interest rate is in nominal terms including inflation. In an inflation-free analysis assuming 3.5% annual inflation, the annual interest rate of the REA loan becomes 1.45%. State loan principal payments of $700,000 annually are discounted by the assumed annual inflation rate to adjust these nominal dollar payments to 1993 cost levels for the economic analysis. For the Allison Lake Case, power generated at the Solomon Gulch Project from Allison Lake water is priced at 6.4 cents per KWh in 1993 dollars. The debt service component of this rate, 4.0 cents per KWh in nominal dollars, is discounted annually at the assumed rate of general inflation. For the Intertie Case, the cost of wheeling power over CEA and MEA transmission lines is estimated to be 0.2 cents per KWh in 1993 dollars. The cost of power purchased from the Anchorage area utilities for transmission to CVEA is priced at the economy energy rates as shown in Table IX-5, page IX- 10 of the feasibility study report, plus an additional 1.0 cents per KWh margin. In accordance with these estimated costs, the total purchased power rate for 1999, the first year of Intertie operation is estimated to be 3.59 cents per KWh in 1993 dollars. The estimated capital costs of the resource alternatives other than the Intertie are to be financed with 5% REA loans. As previously mentioned, this relates to a 1.45% annual interest rate in an inflation-free analysis. Mr. Robert A. Wilkinson July 20, 1994 Page 3 Results The economic analysis calculates the cumulative net present value of the comparable annual costs over the economic lifetime of the Intertie (50 years) for each of the resource scenarios. The cumulative net present value is provided in 1993 dollars. The difference between the cumulative net present value for each of the resource scenarios when compared to the All Diesel (Base) Case represents the relative savings (or costs) provided by the particular resource scenario. Although this analysis may seem to be an academic exercise, the results can be described in terms that should be easier to understand. The savings, as shown in the following table, represent the amount that CVEA is estimated to save, expressed in constant 1993 dollars, over the 50 year analysis period by implementing a particular resource scenario. For example, if the Intertie were to be constructed and loads were to grow as forecasted, it is estimated that CVEA would save $18,554,000 in 1993 dollars over the next 50 years when compared to the costs of continued diesel generation. Presenting the results in 1993 dollars simply removes the uncertainty of inflation from the analysis and presents the results in terms of today’s purchasing power of the dollar. The results of the revised economic analysis for the medium-high load growth scenario are presented in the following table. Table 1 Revised Economic Analysis Results Medium-High Load Growth Scenario and Low Fuel Cost Escalation Cumulative Savings Over NPV (1) Base Case (2) _ Benefit/Cost Resource Scenario ($000) ($000) Ratio (3) All Diesel Case $ = 71,233 - 1.00 Intertie Case 52,679 $ = 18,554 1.35 Allison Lake 67,576 3,657 1.05 Silver Lake - Option A 60,694 10,539 1.17 Valdez Coal Project 69,719 | 1514 1.02 (1) Cumulative net present value (NPV) of comparable annual costs over the 50-year economic lifetime of the Intertie expressed in 1993 dollars. (2) Cumulative NPV of the particular resource scenario subtracted from the cumulative NPV of the All Diesel Case. (3) Cumulative NPV of the All Diesel Case divided by the cumulative NPV of the particular resource scenario. Mr. Robert A. Wilkinson July 20, 1994 Page 4 As indicated in Assumption 8., above, the cost of power generated at the Solomon Gulch project using Allison Lake water is 6.4’ cents per KWh. If there were no cost to the additional generation at Solomon Gulch resulting from the development of the Allison Lake project, the cumulative NPV of the Allison Lake scenario would be $58,567,000 which is still significantly higher than the Intertie scenario. Although it is not reasonable to assume that there would be no cost to this additional generation, the case was run to provide an understanding as to how much of the total cost of the Allison Lake scenario is represented by the Solomon Gulch cost. An additional sensitivity case was run using the low load forecast while maintaining all of the other assumptions as defined for the revised economic analysis. The results of this low load growth case are shown in the following table. Table 2 Revised Economic Analysis Results | Low Load Growth Scenario and — Low Fuel Cost Escalation Cumulative Savings Over NPV (1) Base Case (2) _ Benefit/Cost Resource Scenario ($000) ($000) Ratio (3) All Diesel Case $ 37,288 - 1.00 Intertie Case 28,773 $ 8515 1.30 Allison Lake 46,169 (8,881) 0.81 q) Cumulative net present value (NPV) of comparable annual costs over the 50-year economic lifetime of the Intertie expressed in 1993 dollars. (2) Cumulative NPV of the particular resource scenario subtracted from the cumulative NPV of the All Diesel Case. (3) Cumulative NPV of the All Diesel Case divided by the cumulative NPV of the particular resource scenario. The economic analysis does not address the affects of any particular resource scenario on the cost of power to CVEA’s member-customers. Although savings are actually calculated on an annual basis, the potential reduction in rates charged for electric service has not been estimated. The economic analysis is used to evaluate long-term costs and benefits that may be realized with a particular resource scenario. A cost of power and revenue requirement analysis would be needed to determine what impact the resource scenario could have on electric rates. Mr. Robert A. Wilkinson July 20, 1994 Page 5 I appreciate the opportunity to have assisted you and CVEA in its further evaluation of the Intertie. If you have any questions or comments concerning this analysis or we can be of further assistance please call me at 206-727-4418. Sincerely, R.W. BECK he hie L. Heberling Executive Engineer JLH: CG WS-3945-AA1-AX 4831 Eagle Street Anchorage, Alaska 99503-7497 (907) 561-1818 (907) 561-2388 FAX Alaska Village Electric Cooperative, Inc. July 3, 1995 Alaska Industris! Davelooment and Export Authority cc: ; Mr. Mike Irwin, Commissioner fe ym Department of Community and Regional Affairs < eb P.O. Box 112100 Juneau, Alaska 99811-2100 Be yee) Mr. John Shively, Commissioner a oy nets Department of Natural Resources 400 Willoughby Avenue Juneau, Alaska 99801-1796 Mr. Riley Snell, Executive Director Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage, Alaska 99503 Gentlemen: This letter is written in support of the Sutton to Glennallen 138 kV transmission line project. This project has been studied in depth and submitted to public review. In our opinion, it is clearly in the best interests of all Alaskans that this important piece of our economic infrastructure be put in place. With the Sutton to Glennallen “energy highway" in place, we will have the capability to maximize the efficient utilization of our energy resources. Under any scenario of future events our economy is strengthened by this project for the ultimate benefit of all Alaskans. We and our fifty villages join with the Copper Valley Electric Association in respectfully requesting your favorable consideration and decision on this important project. Sincerely, Charles Y. Walls General Manager Y) ee. Dues - en ep COPPER VALLEY ECONOMIC DEVELOPMENT COUNCIL, Re P.O. Box 9 Z) Pinay b Sel Glennallen, Alaska 99588 EALIVE in) DECEIY = N) September 19, 1995 \\\ SS |) Mr. Riley Snell Alaska Industrial Development and Export Authority 480 W. Tudor Rd Anchorage, AK 99503 Dear Mr. Snell, Mr. Shively, Mr. Irwin and Kurt Parkin: Delays in making the decision on the Sutton to Glennallen Intertie, allow us once again the opportunity to state that importance to both the Copper Valley Region and Valdez the importance this line plays in the economic development efforts going on in each of our regions. Historically, the Kenai Peninsula is a solid example of what can occur when adequate, low cost power is available. Numerous projects, creating non oil related jobs are now on line, with many more in the development process. We strongly urge you to look at this project from the viewpoint of current and future consumers of this power. When we quote power rates to a potential investor in our region, they laugh and walk away!! We fall several percentage points below the national average ~ in profitability of existing business, due to the cost of power. Banks won’t finance, when a business cannot even predict what the cost of power will be in the future. Several major entities have decided against our regions for job producing projects, due to electric rates. In a time when the Governor is emphasizing his Marketing Alaska Initiative, these infrastructure projects cannot be halted or none of the initiatives currently being . discussed will work. The tools needed for economic development need to be put in place, not taken away. The Copper Valley region had an opportunity for a fiberglass plant to be located in the region. We met the airport requirements, were able to locate land near the airport, communications were excellent, no property taxes made us a favorable location and then we discussed energy costs. We quickly disappeared from the list and with it 50 year round -ARDOR i SHAPING ALASKA'S FUTURE Ph. (907) 822-5001 - Fax (907) 822-5009 jobs. Tourism, the fastest growing segment of our region, cannot develop without additional infrastructure, namely hotels. When operating costs are discussed, we once again lose. Affordable power would make both the Copper Valley and Prince William Sound regions of the state more favorable to industrial development and value added processing with the construction of the line. It is beyond our comprehension how these factors continually escape assessment in the dozens of studies which have been completed for this project. We are not talking about a grant, it is a loan!! When other infrastructure issues are so difficult to overcome in our Alaskan landscape, how can we not take care of one that is so simple? The few who are objecting to the intertie, have low cost power and wish a majority to continue to pay outrageous bills and bring two major regions of the state to a standstill. The studies have shown Allison Lake will provide for only todays needs, nothing into the future. Diesel generation has huge long term costs involved, and no lower rates for diesel fuel are projected to appear again. We have repeatedly brought to the attention of all of the firms who have studied the project that we have been designated as having the number one tourism development potential in the state. Ahtna Inc. has a major timber operation in the region, one has to ask why they are not processing any of the timber in the region. These issues are never addressed in the studies. Only the usage by current business. The bottom line is to build an intertie and let Alaska’s future happen. Don’t play politics with our lives. Let us develop and become a viable piece of Alaska’s economy. The _alternatives being considered are viable only in the short term, not the long term. If Alaska had been looking at long term, this would not even be an issue today. In summary: © Economic development opportunities in Prince William Sound and the Copper Valley are being lost due to high energy costs. © Economic Development needs infrastructure to occur; energy being the primary concern. . © Every effort to address the concerns of environmentalists have been made, which has resulted in design changes and intertie realignment. © Studies have never indicated what could occur with the construction of the line or addressed other potential projects and their power. requirements. © Need to look at the project in the long term with benefits to all of Alaska © Never addressed the possibility of business currently generating their own power, switching to commercial power. © Look at REA records and gain a historical perspective of what happens to development when energy needs are met. © Consumer viewpoint must be considered. How much more can any business pay and still remain profitable? © Alternatives presented do not reduce the cost of power and will not promote any type of development. Years of investigating alternatives for cost effective energy and the politics involved, have beaten us down. We ask for so little in these two regions and when we do we are strongly in need to provide a level of self sufficiency within our regions. We trust you will make the right decision for the majority, based on long term economic return to our regions and the State of Alaska. Sincerely, Donna Tollman Executive Director cc: Governor Knowles Lt. Governor Fran Ulmer Fy IN, Cz * i DONALD W. EDWARDS General Counsel Phone (907) 762-4790 ¢ FAX (907)762-4688 © 563-7494, Ext. 4790 5601 Minnesota Dr. * P.O. Box 196300 » Anchorage, Alaska 99519-6300 — CHUGACH LLECTRIC ASSOCIATION, INC. Cun kectric September 13, 1995 Mr. William R. Snell, Executive Director Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage, Alaska 99503-6690 Subject: Benefits of the Sutton-Glennallen Intertie Dear Riley: During our telephone discussion of September 11, 1995, you mentioned that there is some thought in government that the diesel option is a contender with the Chugach proposal. Clearly this is not the case in our analysis or the June 1995 R.W. Beck evaluation. The June 1995, R. W. Beck Interim Final Report entitled, Evaluation of Power Supply Alternatives evaluated the proposals CVEA received from ML&P and Chugach in response to its RFP. A second component of the study was to estimate the total cost of power that would be incurred by CVEA over a 20-year period for alternative power supply development options. The following paragraph from page 4-2 of the Summary and Further Considerations section of the report clearly indicated that the intertie would be economically beneficial to CVEA. "Another case evaluated in the study was the CEA integration case whereby it was assumed that CEA would construct the SGTL and include the costs of the SGTL as a CEA system cost. The SGTL costs would then be borne by all CEA customers. CEA would sell power to CVEA over the SGTL on a similar basis to power sales CEA makes to its other wholesale customers. For the CEA integration case it is estimated that CVEA would realize present value savings of $6.9 million in its total power supply costs over the 20-year study period when compared to diesel generation. The impact to CVEA of the loss of the PetroStar load would be much less for the CEA integration case than it is estimated to be for the base SGTL case. It is estimated that CVEA would still realize present value savings of $5.7 million for the CEA integration case when compared to diesel generation if the PetroStar load were not served by CVEA." Please consider this as additional evidence supporting construction of the Sutton-Glennallen Intertie. Chugach and CVEA are in the process of negotiating a power sales arrangement based on our previously submitted formal power supply proposal and sharing of transmission expenses similar to that assumed by R.W. Beck in their analysis. 5601 Minnesota Drive ¢ P.O. Box 196300 ¢ Anchorage, Alaska 99519-6300 Phone 907-563-7494 © FAX 907-562-0027 Mr. William R. Snell September 11, 1995 Benefits of the Sutton-Glennallen Intertie 2 Sincerely, Eugene l= om ih General Idacver ENB/JSC RWB_CVEA.WPD ce: Clayton Hurless, CVEA bee: J. Cooley D. Edwards J. Griffith L. Thibert COPPER VALLEY ELECTRIC ASSOCIATION POWER COST ANALYSIS FINAL REPORT DCRA/BECK MED LOAD YEAR DIESEL (NOTE A) 1996 9.5 1997 93 1998 9.2 1999 12 2000 12.0 2001 12.3 2002 2003 2004 2010 15.5 NOTE A NOTEB 9/12/95 COST PER KWH INTERIM FINAL REPORT (NOTE B) CVEA/BECK CVEA/BECK CVEA/BECK CVEA/BECK MED LOAD MED LOAD MED LOAD LOW LOAD DIESEL BASE SGL SGL-INTEG SGL-INTEG 8.9 8.7 8.7 9.4 8.7 8.9 8.9 9.5 8.8 9.1 9.1 9.7 9.0 9.5 8.1 8.5 9.1 9.6 8.3 8.6 9.3 9.7 8.5 8.8 9.6 9.7 8.7 8.9 9.8 9.7 8.8 9.1 10.0 9.7 8.9 9.2 COST REPORTED IS COST PER KWH OF THE DIESEL REQUIREMENT ONLY COST REPORTED IS BLENDED COST PER KWH FOR ALL GENERATION SOURCES