HomeMy WebLinkAboutAPA1397-
ALASKA PDWE~ AUTHORITY
SUSITNA
HYDROELECTRIC
PRD.JECT
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PLAN OF STUDY -REVISION I
SEPTEMBER 1980
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ARLIS
Alaska Resources
Library & Information Services
Anchorage, Alaska
ALASKA POWER AUTHORITY
SUSITNA HYDROELECTRIC PROJECT
PLAN OF STUDY -REVISION I
SEPTEMBER 1980
by
ACRES AMERICAN INCORPORATED
Liberty Bank Building, Main at Court
Buffalo, New York 14202
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September 29, 1980
AN OPEN LETTER TO THE PUBLIC AT LARGE AND TO ALL INTERESTED AGENCIES AND
ORGANIZATIONS
On February 4, 1980, I introduced you to the detailed Plan of Study for
the Susitna Hydroelectric Project. I noted at the time that the plan did
not permanently fix the manner in which the proposed work would be accomplished
and expressed my desire that your assistance would contribute to its steady
improvement.
The Project Team, composed of the Power Authority, Acres American and
numerous subcontractors, has been heavily engaged during the past nine
months in accomplishing the many tasks and subtasks which together will
ultimately lead to the basis upon which the State of Alaska can make an
informed decision as to whether it can or should proceed with the Susitna
Hydroelectric Project. Construction of a camp was completed in April 1980
near the Watana dam site. Field crews have operated since then from the
Watana Camp and from a number of other locations. Important information has
been and continues to be collected. We know much more now about the geology,
hydrology, seismology, environment, and especially about the concerns and
interests of the public.
Even while the work has progressed, my hope for program improvement has
been realized. A number of important changes have been made to the plan.
This volume documents the revisions and briefly describes their genesis.
Once again, your careful review and comments would be very much appreciated.
I sincerely hope you will take the time to address them to:
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Ms. Nancy Blunck
Public Participation Officer
Alaska Power Authority
333 West 4th Avenue, Suite 31
Anchorage, Alaska 99501
On behalf of the entire Project Team, I want to express my appreciation
for the strong interest you have expressed to date. With your assistance,
the revised plan will continue to be a dynamic document.
Sincerely,
~ ·P. y~~ y J-J-
Executive Director
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TABLE OF CONTENTS
Page
R.1-INTRODUCTION----------------------------------------------1
R.2 -REVISIONS TO DETAILED ACTIVITY DESCRIPTIONS OF TASKS------2
R.2.1-Task 1 -Power Studies -Revisions----------------3
R.2.2 -Task 6 -Design Development-----------------------6
R.2.3 -Task 11 -Marketing and Financing ~ Revisions-----27
R.3 -REVISIONS TO PROJECT SCHEDULES----------------------------56
R.4 -REVISIONS TO PROJECT BUDGETS--------------------------,----58
ATTACHMENT A: Plan for Financing the Susitna Project
Task 11 -Marketing and Financing
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R.1 -INTRODUCTION
Since the issue of the February 1980 POS, several events have taken place which
have required that revisions be made to the POS, in regard to consideration of
power alternatives and studies of alternatives within the Susitna Basin.
(a)
(b)
Public meetings and workshop sessions held in
Alaska between April and July 1980
During these sessions it became apparent that it would be desirable to
increase the level of effort devoted to studying alternative generating
facilities to Susitna and also to alternative developments within the
Susitna basin. By expanding the scope associated with these aspects it
would be possible to address the concerns expressed by a large group of
people that the scope of work as outlined in the February 1980 POS unduly
favored the Susitna Project. This increased level of detail is required to
upgrade the degree of accuracy associated with all possible alternatives to
the currently proposed U.S. Corps of Engineers scheme, thereby facilitating
more accurate comparisons of costs and environmental and other intangible
aspects .
Report to the Alaska State Legislature on Electric Power Supply
Planning issued in May 1980, by Arlon R. Tussing and Associates, Inc.
This report reemphasized the aspects discussed above and gave further
impetus to increasing the level of detail associated with studying
alternatives to development of the Susitna Basin. APA instructed Acres on
April 23, 1980 to proceed to develop expansions to the studies in Tasks 1,
6 and 11 in order to address the concerns discussed above.
~ (c) The Alaska State Legislature Act "Relating to power projects of the
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Alaska Power Authority and the Susitna River hydroelectric project ..
This was passed by the Alaska Legislature in June 1980 and as of June 6
effectively debarred Acres from participating any further with the
alternatives studies outlined in Task 1 and the risk studies associated
with the alternatives to Susitna under Task 11.
(d) The June 1980 ISER Report "Electric Power Consumption
for the Railbelt; A Projection of Requirements"
This report indicated a much lower load growth than that used for the
previous U.S. Corps of Engineers studies. This meant that the current
Susitna development scheme proposed by the Corps should be carefully
reassessed and a more detailed study of alternative lower levels of
development be considered.
As a result of the above developments, APA instructed Acres June 13, 1980
and June 30, 1980 to make the following revisions to the POS.
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TASK 1: Complete work on Subtasks 1.01 and 1.02 as originally proposed in the
February 1980 POS and terminate all work on Subtasks 1.03 to 1.07.
Prepare a completion report which includes discussion of the proposed
expansion of work in this Task as developed by Acres with a view to
increasing the level of detail devoted to the study of alternatives.
TASK 6: Revise the work plan to incorporate more detailed study of alternative
Susitna Basin developments and to allow Acres to proceed with planning
the Susitna Basin development, as part of the Railbelt system,
complying as closely as possible with the February POS study schedule.
The revised work plan should include preparation of appropriate inputs
to the ''Preliminary Reports" to be submitted by APA to the State
legislature by March 30, 1981, and April 30, 1982, recommending
whether work should continue on the Susitna Project.
q TASK 11: Revise the scope of work by eliminating the risk studies associated
with the "assessment of power alternatives".
The following sections outline in detail the study scope and budget revisions.
R.2 -REVISIONS TO DETAILED ACTIVITY DESCRIPTIONS OF TASKS
Revisions to detailed activity descriptions of Tasks as originally proposed in
the February 1980 POS are presented by Task in the following pages.
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R.2.1 -TASK 1 -POWER STUDIES·-REVISIONS
( i) Introduction
In response to the May 1980 Tussing Report and other public comment
during the period April-June 1980, proposed revisions to the scope of
Task 1 studies were developed and forwarded to the Power Authority
May 7, 1980, for review and approval. These revisions involved
significant expansion of scope of all subtasks and the addition of
Subtask 1.07, Power Study Review Panel. Pending formal approval of
this expanded scope, work continued on Subtasks 1.01 through 1.04.
As of June 6, following changes in State legislation, the Power
Authority directed Acres to terminate work on Subtasks 1.03 through
1.07 and to complete Subtasks 1.01 -Review of the ISER Work Plan and
Methodologies, and 1.02-Forecasting Peak Load Demand, as originally
proposed in the February 1980 POS. Acres was also requested to make
formal recommendations to the Power Authority on the interfacing
requirements with the independent consultant to be appointed to
undertake Power Alternatives studies following termination of Acres'
Subtasks 1.03 through 1.07. These requirements were such that Task 6
-Design Development, and Task 11 -Marketing and Financing Studies,
could be continued without delay to the scheduled submission by APA
of the required "Preliminary Reports" to the Alaska State Legislature
in March 1981 and April 1982. The Power Authority also directed
Acres to prepare an appropriate termination report for Task 1
activities.
(ii) Revised Scope of Work (Subtasks 1.03 to 1.08)
Subtasks 1.01 and 1.02 remain as in the February 1980 POS. Subtasks
1.03 to 1.07 are eliminated. A new Subtask 1.08-Termination
Activities, has been established for this work. The detailed scope
of work for Subtask 1.08 and revisions to schedules for Subtasks 1.01
and 1.02 resulting from the events discussed above, are presented in
the following pages.
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Subtask 1.08 -Termination Activities
(a) Objective
Perform all activities necessary to terminate Subtasks 1.03 to 1.07
and ~repare a Task 1 Termination Report.
(b) Approach
This subtask incorporates all Task 1 work performed at the request of
APA, other than on Subtasks 1.01 and 1.02, following the termination
of work on Subtasks 1.03 to 1.07 June 6, 1980. This work includes:
-preparation and presentation to representatives of Governor's
Office of proposals for options available for continuation of
objective power alternatives studies;
assessment of impacts of State Legislature actions on Tasks 6 and
11 Studies i
-determination of interfacing requirements between independent
power alternatives studies and Acres Tasks 6 and 11 studies;
preparation of the Task 1 Termination Report;
associated administrative costs, including preparation of the
final termination cost statement.
The Termination Report will address:
-electric energy demand (a summary of completed work under Subtask
1.01);
-forecasting peak load demand (a summary of work completed to date
under Subtask 1.02 and plans for completion of this activity);
-All other Task 1 activities which had been completed or were in
progress as of the time the termination notice was received,
including detailed work plans which had been under preparation for
expanding the scope of work under Subtasks 1.02 through 1.07
listing of reports gathered;
-notes/minutes of all important contacts made.
(c) Discussion
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The Termination Report will provide a permanent record of activities ~
undertaken during the conduct of Task 1, as well as a starting point
for activities to be conducted by the independent firm to be selected
for analysis of alternatives.
The termination cost statement will itemize all costs resulting from
termination of work on Subtasks 1.03 to 1.07.
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(d) Schedule
The originally proposed schedule for completion of Subtask 1.01 has
been delayed by late issue of the ISER report. In addition, because
of the complications caused by the proposed expansion to and
subsequent termination of Task 1 activities, completion of Subtask
1.02 has been delayed until the end of September 1980. The currently
proposed schedule is as follows:
Subtask 1.01 -Weeks 1 through 33
Subtask 1.02 -Weeks 15 through 39
Subtask 1.08 -Termination Activities, Weeks 23 through 33.
The issuance of the termination cost statement will follow receipt of
all details of all incurred costs, currently anticipated by December
31, 1980.
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R.2.2 -TASK 6 -DESIGN DEVELOPMENT -REVISIONS
(i) Introduction
The original scope of Task 6 Studies performed in the February 1980
POS placed heavy reliance on the results of system generation
planning studies undertaken under Task 1.
In order to continue technical work in determining the most viable
project arrangements for development of the Susitna River at and
upstream of Devil Canyon, it is necessary to develop (or simulate)
as best as practical the condition which will exist in the Railbelt
electrical system within the timeframe of project implementation.
This definition of system conditions will:
-determine the basic generation resources, characteristics of
future generating resources, future growth in demand for electric
power and energy, load characteristics and system costs of the
regional electrical system;
-determine a realistic timeframe and economical capacity size
increments for commissioning the proposed Susitna development;
-allow evaluation of feasibility of incremental Susitna
developments from a cost and system reliability aspect;
-provide electrical data needed for preparation of the FERC
license application Exhibit U and portions of Exhibits H, I and w.
The primary objective is to determine the optimum plan for adding
Susitna to the Railbelt electrical system. At the same time further
assurances of the viability of the project will be tested by
changing system variables to determine the sensitivity of the
project to potential future conditions outside the anticipated
range of assumptions. Such conditions will include:
-the impact of low" and high electrical load growth;
-the effect of various future trends of fuel costs and
availability on the economic justification of Susitna;
-the impact of possible nonstructural measures in conservation and
load management on system benefits of the Susitna Project.
Consequently, the benefits of the system studywill"be two-fold.
First, it will allow evaluation of the Susitna development which
best meets anticipated Railbelt electrical system needs. Secondly,
it will determine the variability of Susitna benefits under
different economic or growth conditions. The latter results will
provide an important input to the finanical viability of the
project as further developed in Task 11. The system study will
also provide the planning data necessary to determine an
adequately reliable system within the proposed timeframe of the
Susitna Project implementation.
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This work will be unclerta'ken under Task 6 by means of seven
additional subtasks:
Subtask 6.32 -Thermal Generating Resources
Subtask 6.33 -Hydro Generating Resources
Subtask 6.34 -Environmental Analysis
Subtask 6.35 -Load Management and Conservation
Subtask 6.36 -Generation Planning
Subtask 6.37 -Update Generation Plan
Subtask 6.38-Liaison with Power Alternatives Consultant
The work approach is shown in schedule form in Section R3. The
study first involves the development of characteristics of the
anticipated available generating resources of various types, the
transmission system and system loads. Also considered are
variations in system load characteristics which might be caused by
future trends toward conservation and load management within the
various sectors of demand. For the purposes of this phase of
study, all system planning will be based on the assumption that the
Fairbanks-Anchorage intertie will be in place and capable of
transmitting full Susitna capacity as and when required.
The developed data will be utilized to analyze the Railbelt
electrical system via a production cost mode1. The model proposed
for the simulation is the OGP-5 program, developed by the General
Electric Company. This program is one of only a few comprehensive
production cost models available to and used by the electric
utilities and associated industries for system generation expansion
planning purposes. Several production cost optimization runs will
be undertaken to develop the results needed to determine the most
advantageous Susitna development plan and the impact of Susitna on
the electrical system costs and reliability.
The output of the work on system generation expansion planning,
Subtasks 6.32 through 6.38, will be incorporated into the
Development Selection Report (Subtask 6.05}. An earlier Planning
Status Report will also be provided to the Power Authority for use
by the independent consultant selected for evaluating energy
alternatives in the Railbelt Region.
System planning activities proposed prior to license submittal also
involve review of the findings of independent energy alternatives
studies. Documentation of the potential impact of, and discrepan-
cies between the independent studies and the results of this Task
will also be necessary. An appropriate activity, Subtask 6.38, is
also included for liaison with the selected Power Alternatives
Study consultant.
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(ii) Revised Scope of Work
(Subtasks 6.01 to 6.07, 6.32 to 6.38)
Subtasks 6.01 -Review of Previous Studies, and 6.04 -Devil Canyon
Arch Dam Evaluation, remain as in the February 1980 POS. Subtasks
6.02 Investigate Tunnel Alternative, 6.03 -Evaluation of Alterna-
tive Susitna Developments and 6.06 -Watana/Devil Canyon Staged
Development Alternatives, have been expanded to incorporate more
studies cf alternative Susitna Basin developments and more detailed
work on staging concepts. Subtasks 6.07 and 6.08, Preliminary
Watana Dam and Devil Canyon Dam Alternatives respectively, have
also been adjusted to allow for the development of conceptual
designs of a Watana-Devil Canyon Susitna Basin development scheme
significantly different from the currently proposed US Corps of
Engineers scheme. Subtasks 6.32 to 6.38, Thermal Generation
Resources, Hydro Generation Resources, Environmental Analysis, Load
Management and Conservation, Generation Planning, Update Generation
Plan, and Liaison with Power Alternatives Consultant respectively,
have been added to provide the information necessary to complete
the Susitna Basin planning studies on schedule. Subtask 6.05 -
Development Selection Report has been expanded to incorporate the
results of Subtasks 6.06 and 6.32 to 6.38.
These revisions are necessary to ensure that Susitna Basin planning
studies may proceed independently of power alternatives studies for
the Railbelt Region being undertaken by others. Detailed scopes of
work for these additions are presented in the following pages.
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Subtask 6.02 -Investigate Tunnel Alternatives -Additional Studies
(a) Objective
The studies outlined in the original Subtask 6.02 are aimed at
developing a conceptual scheme or schemes having an installed
capacity approximately equal to that of the current Devil
Canyon/Watana scheme. The objective of this addition is to
develop a tunnel scheme of smaller capacity and assess the
potential for staging the tunnel scheme development.
(b) Approach
(c)
Using the layouts for the larger scheme as a basis, conceptual
layouts for a smaller scheme will be developed. Consideration
will be given to shortening the tunnel and/or reducing its
diameter. The installed capacity of the scheme to be developed
will be obtained after preliminary results from the generation
planning studies (Subtask 6.36) are available. Cost estimates
and construction schedules will be developed and the power and
energy values assessed.
A brief environmental impact assessment of the scheme will be
undertaken. Of prime concern will be the required compensation
flows for the reach between the Watana damsite and the tunnel
outlet point.
Discussion
Depending on the outcome of the early work in Subtask 6.02 it
may be appropriate to divert this study effort to assessing the
potential for a tunnel development at an alternative damsite.
(d) Schedule
Weeks 22 through 50 (start 8 weeks ahead of February POS
schedule).
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Subtask 6.03 -Evaluate Alternative Susitna Developments -
Additional Studies
(a) Objective
To expand the work outlined in the original Subtask 6.03 by
incorporating more detailed studies of the development of smaller
hydroelectric facilities at the Watana and Devil Canyon sites and
developments at other previously unidentified sites.
(b) Approach
Based on the output derived from the ranking of sites in the Susitna
Basin carried out as part of the original Subtask, several
alternative schemes to the current Devil Canyon/Watana development
will be selected and conceptual layouts, cost estimates and
construction schedules prepared. It is anticipated that this will
involve up to 4 different sites with up to 2 or 3 levels of
development at each.
To assist in the economic evaluation of these additional schemes, a
computer planning model will be applied. Input data to this model
will include seasonal streamflow, the costs and energy output
associated with various levels of development at the sites and the
load projection and associated load factor. The model will then be
used to select the optimum schemes and the approximate schedule of
development which minimizes total energy costs. This model will also
be used to provide an estimate of the required seasonal reservoir
drawdown. Certain environmental constraints will be incorporated
directly in the planning model. These include limitations to
reservoir level and downstream discharge fluctuations.
The model will be applied for several different load forecasts and
used to assess the optimum Susitna development schemes for each.
These results will be reviewed and used to assess the best possible
development scheme or schemes which would be economically most
suitable for a range of future load demands.
The results of planning model studies will be refined for those
schemes selected as "best" in Subtask 6.36 using the multi-reservoir
monthly simulation model discussed in Subtask 3.04. this model will
incorporate load stacking on a monthly basis and will be used to
refine the operational rules for the Susitna development and to
assess the hydrologic risks of Susitna not meeting its expected power
output.
(c) Discussion
The work undertaken in this Subtask will be continually coordinated
with the system generation planning work to be undertaken in Subtask
6.36 -Generation Planning, to ensure that the correct system
characteristics are incorporated (i.e.,the load factor used in the
planning model and the load stacking incorporated in the simulation
model.) It is anticipated that several interactive runs with both the
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(d)
planning model and the generation planning model in Subtask 6.36 will
be required to finalize the appropriate scheme or schemes.
The activities in this subtask will also be closely coordinated with
those in Subtask 6.33-Hydro Generating Resources, to ensure
uniformity of the capital cost estimates and the methods of
evaluating power and energy.
Schedule
Weeks 16 through 63. (Start advanced 14 weeks, completion delayed by
3 weeks) .
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Subtask 6.05 -Development Selection Report -
Additional Studies
(a) Objective
To provide additional information in the report sufficient to meet
the needs of the Power Authority in preparing its "Preliminary
Report" to the Alaska State Legislature in March 1981.
(b) Approach
The scope of the report will be expanded to incorporate the
additional studies outlined in Subtasks 6.02 -Investigate Tunnel
Alternative, and 6.03 -Evaluate Alternative Susitna Developments.
Also included will be the staging studies included in Subtask 6.06 -
Watana/Devil Canyon Staged Development Alternatives, and the
generation and planning studies in Subtasks 6.32 to 6.38.
A Planning Status Report will be issued prior to completion of the
Development Selection Report. We anticipate at this stage that most
of the planning work will have been completed 1 and one or more
appropriate Susitna development schemes will have been identified and
the associated economic parameters evaluated. The Planning Status
Report will contain a summary of the results of the studies to date.
It will include a description of the alternative schemes studied and
discuss the economics of the Susitna development options. The
Planning Status Report will contain the information needed by the
Consultant undertaking the Railbelt Electrical Power Alternatives
Study. However, much of the detailed backup information which will
be submitted with the Development Selection Report will not be
included in the Planning Status Report.
(c) Schedule
Development Selection Report (final draft) -Weeks 48 through 65.
Planning Status Report -Weeks 48 through 57.
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Subtask 6.06 -Watana and Devil Canyon Staged
Development -Additional Studies
(a) Objective
As originally planned, Subtask 6.06 evaluated the potential for
staging the selected Susitna development. The objective of this
addition is to broaden this scope to include study of staging of
alternative sites within the Susitna Basin and to include a more
detailed study of the mechanical and electrical equipment
requirements for staged development.
(b) Approach
For the alternative sites studied, the potential for staging will be
assessed. Where feasible and appropriate, conceptual staging schemes
will be developed along the lines outlined in the February POS. To
facilitate planning of a potentially large number of possible staged
developments, the information developed in this subtask will be fed
into the Susitna Basin planning model described in Subtask 6.03.
In addition to the above studies, a review of current experience with
mechanical and electrical equipment for staged development will be
carried out. Further study will be undertaken to identify equipment
types and procedures necessary for staged development within the
Susitna Basin. The types of procedures a~ailable for dealing with
these problems include provision for replacing turbine runners,
operating units outside their maximum efficiency range for extended
periods, and changing generator operating speeds (by rewinding,
installation of two-speed generators, etc.).
(c) Discussion
The studies outlined in the February POS for Subtask 6.06 will be
advanced and run in parallel with the studies in Subtask 6.03. This
has become necessary because of the lower ISER 1980 load forecasts.
To meet these lower demands in the most economic way may require a
staged development.
(d) Schedule
Weeks 30 through 63. (Completion date 12 weeks advanced on February
POS.)
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Subtask.s 6.07 and 6.08 -Pr.el-imi nary Watana and
Devil Canyon Dam Alternatives -Additional Studies
It may be necessary to consider a lower level of development at these sites
than is currently envisaged in the U.S. Corps of Engineers report. The
basic Corps schemes may therefore not be suitable starting points for these
studies. While these two subtask.s remain essentially the same, a slight
budget adjustment has been made to allow for additional project layout work
to be undertaken.
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Subtask 6.32 -Thermal Generating Resources
(a) Objective
To provide cost information and characteristics of the most likely fossil
fueled generating resources potentially available to the Railbelt
electrical system within the timeframe of Susitna commercial service
dates.
(b) Approach
Information will be prepared for coal, gas and diesel-fired power
generation resources only. Preparation of the required input data is
separated into two activities: preparation of generating plant costs and
characteristics and development of potential fuel price scenarios.
Thermal plant types to be examined are:
-mine mouth coal fired steam
-combustion turbine -gas fired
-combined cycle-gas fired
-conventional diesel
In addition to the above, the potential for cogeneration will be assessed.
If it is considered to be significant, approximate capacities and costs
will be evaluated.
For each type, estimated capital and operating costs will be developed for
arctic operating conditions. Capital costs will be based upon generic
plant designs (and costs associated with them) such as have been developed
for the Electric Power Research Institute (EPRI). The costs of
construction will be modifed to reflect Alaska labor rates and material
prices and will include items required for cold region operation. The coal
fired plant cost will include the cost of all services and facilities
required to establish and operate such a project in a presently undeveloped
region.
Plant sizes will be consistent with available data and the generation
system needs. As a general guideline, the following unit capacities will
be used as the basis of the study:
Coal fired steam
Gas turbine
Combined cycle
Diesel
500 MW
75 MW
250 MW
approx. 10 MW
Coal-fired plant costs will be divided into generating plant, transmission,
transportation facilities and community development, such that the cost of
either a plant at Beluga or plant extensions at Healy can be identified.
Operating costs, plant performance and operating requirements will be
determined based upon EPRI standard plant designs wherever possible.
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~ Construction schedules will be developed based upon Alaskan weather
conditions and site accessibility. Detailed development analysis will not
be performed; allowances will be made based upon general categories of
construction tasks.
Small diesel generating plants will be casted for comparative purposes and
to cover application where small isolated systems are considered or to
facilitate increased system reliability where long interconnections are
involved.
Fuel cost scenarios, fuel availability and emission factors will be
developed for coal, gas and oil. Estimates of coal cost at the mine mouth
will be developed based upon continuous operation, reflecting fixed charges
on the mining facilities, labor and maintenance. Coal quality will be
investigated to identify boiler operating conditions, fuel handling needs
and emissions control equipment requirements.
Estimates of gas value will be developed for the cases of:
-LNG plant installations
-pipeline construction
-existing market conditions
The impact of the Fuel Use Act on the availability of natural gas as power
plant fuel will also be examined.
(c) Discussion
Fuel supplies available in the Railbelt region for future electric
generation plants are primarily untapped coal and natural gas resources.~
Petroleum products are available but relatively high prices and regulatory
constraints make it unlikely that they will be used as the primary fuel for
additions to the generation system in the Railbelt.
At present, ,gas production capability in the region of the Kenai peninsula
far exceeds demand, as no transportation system exists to export markets.
Consequently, the price of natural gas in the region is far below free
market prices. Construction of a natural gas liquefaction facility or a
pipeline spur with the proposed Alaskan Gas Pipeline could dramatically
alter the value of this resource.
Coal resources exist within a few hundred miles of Anchorage in the Beluga
area, and near Healy, where a 100 MW plant is in operation. Development of
the Beluga coal reserves would require establishment of a mining operation,
transportation system, and supporting community where none exists at
present. Construction of a mine mouth plant would further require
installation and/or upgrading of a transmission connection to the Railbelt
corridor.
Of the study items, the price and availability of natural gas will be given
most careful study. Generation with gas fired combustion turbines at
present prices will probably produce power at very attractive costs.
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Whether these present generation cost~ can be expected to continue depends
upon development of a transportation mode to markets overseas or on the
U.S. mainland, or whether use of gas for generating electricity is halted
by the Fuel Use Act.
Standard plant characteristics and costs have been developed by EPRI for
the types of generating plants selected. As the estimates have been
developed for Lower 48 application, some modifications will be required for
application to Alaska. Background data for these estimates which is
presently in hand will be updated and all costs will be brought to 1980
levels using the available information.
Large oil fired, nuclear, geothermal and other types of thermal generation
plants will not be examined. Oil-fired power plants are not likely to be
economically competitive in the time frame under consideration. Nuclear
plant costs are at present little different than those for coal fired
plants in the Lower 48 states, where an experienced nuclear construction
labor pool, a good transportation system, and manufacturing facilities
exist. Such conditions do not exist in Alaska. Nuclear plants in Alaska
are likely to exhibit an even greater cost escalation over Lower 48 costs
than that expected for coal fired plants and economic feasibility is
therefore doubtful. There are also severe institutional constraints to
nuclear development in Alaska.
Geothermal resources have been identified east of the Railbelt region, but
are as yet undeveloped. As these sites are a substantial distance from the
existing transmission system, plant costs will be high and probably
uneconomic. Geothermal is expected to be examined in the independent
Power Alternatives Study, and will not be studied in Task 6.
Municipal solid waste, wood-fired, peat-fired, biomass and other more
exotic forms of power generation under consideration in Alaska are not
likely to be economically competitive to any significant extent in the time
frame under consideration. However, such sources are potential components
of a decentralized system to serve isolated load centers, and will be
assessed on this basis.
Schedule
Weeks 30 through 44 inclusive
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Subtask 6.33 -Hydroelectric Generation Sources
(a) Objective
To provide cost information and characteristics of hydroelectric
resources that could be expected to be included in the Railbelt
electric system within the timeframe of the Susitna commercial service
dates.
(b) Approach
Hydroelectric facilities which might be a part of the Railbelt
generating resources will be identified and classified as follows:
-projects currently under active implementation planning
-projects competitive with Susitna.(i.e.9 projects of a similar size)
-non-competitive projects (i.e., smaller scale developments)
The basic source of data will be the approximately 120 sites
inventoried by FERC, the Corps, and DOE which include developed and
undeveloped hydroelectric sites in the Railbelt region. An initia.l
rough screening process will be used to eliminate sites which are
clearly not cost effective in the framework of any type of generating
scenario or which have severe environmental impacts.
It is not considered likely that decentralized development of small-
scale hydro resources will be economically competitive in the timeframe
considered. However, consideration will be given to such a scenario to
properly evaluate its potential possibly in conjunction with small gas-
or oil-fired plants for reserve and backup capability.
A second more refined screening approval will then be applied (see
Subtask 6.34). This will take into account revised physical
characteristics of the sites successfully passing the initial rough
screen. In order to be considered for future development, a project
will have to be competitive with Susitna on the basis of the following
criteria:
-It must have a similar projected power cost either based upon $/kW of
installed capacity or $/MWH energy cost (whichever is more
competitive)
-It must be developable within the timeframe considered and cannot be
currently prohibited from development by law (i.e.9 Wild and Scenic
Rivers Act).
The first cost criteria will compare the site to the highest cost
Susitna alternative passing selection from Subtasks 6.03 and 6.06.
This will ensure that sites having higher costs, but more effective
system benefits due to timing or phased construction impacts, will not
be prematurely screened. Those sites passing the second screening will
be incorporated into the generation planning evaluation of Subtask
6.36.
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Consideration will also be given to the proposed Cook Inlet tidal
hydropower projects as a potential future resource. Available reports
and material will be reviewed to determine costs and energy and
capacity generation capability of the schemes studied.
(c) Discussion
It is likely that the future generating resources of the Railbelt
electrical system will ultimately include a major component of hydro
capacity due to the abundant number of sites available for development.
The primary concern to be identified in this subtask is whether there
are sites which would better fill the needs of the system than Susitna
and the resultant impact of such projects on implementation of Susitna.
Based upon past studies of regional hydro potentials, in particular the
1976 Alaska Power Survey (FPC), it is not anticipated that there will
be any environmentally acceptable hydro projects with a 1 ower
incremental capital cost than Susitna. However, the 1976 survey
indicated several sites which could potentially be more viable short-
term alternatives to Susitna. This is due to the large total capacity
of the Susitna developments and likelihood of a more costly phased
construction.
There will be a limitation to the accuracy of the study results due to
the relatively small amount of site information available. There is an
important need to maintain a consistent approach with the studies in
Subtasks 6.03 and 6.06 so that all cost, hydrological and environmental
characteristics are considered on a uniform basis.
(d) Schedule
Weeks 30 through 40
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Subtask 6.34 -Environmental Analysis
(a) Objective
To provide environmental screening of proposed thermal, hydro and tidal
generating facilities in order to eliminate obvious environmentally
unsound developments, ·and to evaluate the general environmental impacts
associated with and without a Susitna development generating scenario
for the Railbelt.
(b) Approach
Based on available information, quantitative and non-quantitative
environmental parameters associated with the proposed generating
facilities will be developed. A significant portion of this
information will be based on generic type impacts; i.e.,those
applicable to particular types of generating facilities. However,
where appropriate and feasible, site specific impacts for both thermal
and hydro facilities will also be assessed. The parameters will
encompass ecologic (i.e., effect on wildlife and wildlife habitat,
fisheries, etc.), socioeconomic, institutional and legal aspects.
Environmental screening criteria will be developed and applied in
conjunction with the economic criteria to screen out those facilities
which need not be considered further in the planning studies. These
criteria will involve both quantitative (i.e., cost of energy, land
acquisition required, area of land inundated) and non-quantitative
(e.g., minor or major impact on fisheries and wildlife) parameters.
The screened list of generating facilities will be incorporated in the
generation planning studies (Subtasks 6.36 and 6.37).
As the generation scenarios are developed, the environmental parameters
evaluated for the specific facilities will be used to evaluate the
overall impact of the scenarios. These impacts, which incorporate
quantitative and non-quantitative parameters, will be used to assist in
the selection of the most suitable generation scenarios and will also
be used to determine the differential environmental impact for the
with-and without-Susitna development alternatives.
(c) Discussion
The work described above will be based on available information. No
new investigatory work will be undertaken.
(d) Schedule
Weeks 30 through 65
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Subtask 6.35 -Load Management ~nd Cons~fvation
(a)
(b)
(c)
Objective
To determine the effects of load management and conservation on the
alternatives for development of the Susitna project.
Approach
The basis for the selection of the alternatives for development of the
Susitna project will be the energy forecast developed by the ISER and
system load characteristics developed by WCC in Subtask 1.02. The
primary efforts under this subtask will consequently be concerned with
reviewing portions of that work. The output will be an analysis of the
impacts of various levels of load management and conservation and the
resultant modified load forecasts to be used in the Subtask 6.36
analyses. Consideration of conservation as a nonstructural pseudo-
generation source will not be undertaken since this would more
appropriately be included in the scope of the independent alternatives
study.
The degree of success of future modification to load shapes and
patterns as identified by ISER and included in their forecast will be
identified. A critical analysis of this portion of the ISER
forecasting methodology will be performed. This work will essentially
follow up on the various reviews of the May, 1980 ISER report and the
results of WCC studies in Subtasks 1.01 and 1.02.
The possible effect on the future power demand of potential
conservation and load management measures not considered in Subtasks
1.01 and 1.02 or considered and rejected in those studies will be
reconsidered. The general likelihood of these measures and their
social and economic costs will be assessed. From the foregoing
reviews, conceptual plans for additional load management and
conservation will be developed with the objective of evaluating the
sensitivity of the load forecast to additional measures to modify load
shapes and patterns. The conceptual plan will be based on judgments of
the applicability of the additional measure, using the most up-to-date
published data from related conservation and load management research
programs. A determination will be made of the impact of the conceptual
plan on the total capacity and energy as well as the shape of
the forecast load duration curve.
Discussion
The output of this Subtask will include documentation of the load
forecast projections outside the ISER-WCC forecast envelope. The
reasons for such deviations include load management or conservation
programs or consumer responses more radical than previously predicted.
An assessment will be made of the probability of these forecasts
happening, together with an estimate of the social and/or economic
-21-
costs of achieving these scenarios. These revised forecasts will only
be used to determine the sensitivity of the planned Susitna development
to such measures (Subtask 6.36) and not as defensible projected
futures. Thus, some of the aspects associated with load management and
conservation will necessarily be based on subjective judgment and
results of other studies.
(d) Schedule
Weeks 30 through 48
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Subtask 6.36 -Generation Planning
(a) Objective
To determine the most suitable size of development and scheduling for
the Susitna Basin hydro schemes, and to evaluate the sensitivity of
these schemes to changes in certain key parameters such as projected
load growth and fuel cost escalation and availability.
(b) Approach
A major tool to be used in this analysis will be a power generation
planning model. At this stage we propose to use the General Electric
OGP5 program. However, an initial review of other production cost
models available for immediate use will be undertaken. This review
will assess the generation planning options available, determine
which program appears most appropriate for meeting the subtask
objective and evaluate whether there are additional costs or time
constraints associated with its use. Key program features to be
considered will be the handling of hydro generating stations, system
reliability criteria, production cost methodology, optimization
capability, the potential for handling load forecast uncertainty, and
the analysis of overbuilding and underbuilding impacts.
An important aspect early in the study will be the identification of
assumed values for key generation planning parameters such as the
fuel costs and availability, interest rates, escalation rates, target
system reliability criteria, interconnection capabilities and the
criteria on which optimum generation expansion scenarios will be
evaluated. A design transmittal will be prepared documenting this
information for review and approval by APA and coordination with Task
11 Studies prior to use.
Data on the existing Railbelt power supply system will be obtained.
This will include a list of all the major generating facilities,
their costs, reliability and planned retirement dates (if known). A
general assessment of their efficiency and mechanical condition will
also be made.· The data on the existing system, the ISER forecasts
and the thermal and hydroelectric resources data established under
Subtasks 6.32 and 6.33 will be fed into the selected generation
planning model. The model will then be operated using these
potential generation resources to establish an initial optimum
generation mix scenario. This scenario will be developed using the
selected "most probable" forecast.
Building upon the initial scenario, Susitna alternatives will be
introduced and the costs and other system impacts compared. The
initial analyses will be performed using the most probable forecast,
and the optimum Susitna deve1opments from Subtasks 6.03 and 6.06.
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Several runs will also be undertaken with the high and low load
growth projections to determine the flexibility of the generation
plan to cope with load growth uncertainties. The system performance
with alternative Susitna developments in terms of cost, reliability,
environmental impact (Subtask 6.34), and financibility and risk (Task
11) will be compared to determine the most suitable development
plan.
Sensitivity analyses will be undertaken for the selected
developmental plan. These analyses will entail the comparison of
production costs of the alternative generating scenarios for load
forecasts incorporating conservation and load management, different
rates of fuel cost escalation and several interest rates. This
information will be evaluated in an iterative process, to determine
whether any rejected Susitna alternatives should be reevaluated or
other further sensitivity analyses are required.
(c) Discussion
Important results of the above analyses will be the determination of
the values of certain key parameters such as the rates of load
growth, fuel cost es~alation, and interest rates which define the
limits of economic Susitna basin development.
Of primary concern in these studies will be to determine whether the
Susitna Basin should be part of the selected generating scenario, and
what level of Susitna Basin development is appropriate. Should the
above analyses reveal that either of these decisions is sensitive to
load growth projections then a more formalized approach to the
question of load growth uncertainty will be adopted. This approach
will involve a simplified decision tree model in which the effects on
system economics and reliability due to differences in projected and
actual load growths are systematically explored. We propose to use
this information to assist in a judgmental approach to planning. In
this approach, careful reviews will be made of the consequences of
the sequential decision-making process rather than utilizing the
model output to select the optimum development scheme based on a
single composite index (i.e., minimum expected generating costs).
These activities will be closely coordinated with the Susitna Base
Plan Initial Risk Analysis (Subtask 11.03).
(d) Schedule
Weeks 37 through 65
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Subtask 6.37 -Update Generation Plan
(a) Objective
(b)
To update the results of the generation planning studies prior to
FERC license application finalization.
Approach
Updated information for the selected Susitna Project (Subtasks 6.26
and 6.27) and necessary modifications to the generation plan will be
developed. This information will be based upon the result of the
independent Power Alternatives Study and will be incorporated into an
updated generation plan. The system benefits of the project will
subsequently be re-evaluated using the production cost model.
Utilizing this information plus the results of the independent Power
Alternatives Study, reports for inclusion in the FERC application
Exhibit I (describe load and market), Exhibit U (power utilization
statement) and Exhibit W (alternatives to proposed action) will be
assembled. The Exhibit W will essentially comprise the report
prepared by the independent Power Alternatives Study consultant •
(c) Discussion
Further data supporting cost and performance characteristics of the
selected Susitna development scheme will be available in March 1982.
The independent generation alternatives study for the Railbelt Region
will also be completed at this stage and will require review and
analysis to determine the sources and reasons for any discrepancies
which may occur between the results of that study and those conducted
in Subtask 6.36. It is important that the most current data be
provided in the license application and that any differences in
opinion on the subject of need for the project and alternatives be
resolved.
(d) Schedule
Weeks 112 through 120
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Subtask 6.38-liaison with Power Alternatives Consultant
(a) Objective
Provide for liaison, coordination and information exchange with the
independent consultant selected for study of power alternatives.
(b) Approach
As soon as a consulting firm has been selected, Acres will provide a
briefing on activities conducted to date as well as a discussion of
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plans for future work. A basis will be established for proper ~
information flow and critical milestones will be identified to ensure
that the schedules of both parties can be maintained. From time to
time, coordination meetings will be scheduled. Frequent contact by
phone and exchange of correspondence will occur.
(c) Discussion
Until a consulting firm has been selected, it is not possible to
predict precisely what total liaison requirements will be necessary.
In that regard, for example, the location of the selected firm as
well as the plan to be drawn up for study of alternatives will
directly influence costs and frequency of coordination meetings.
Even so, it is clear that liaison must occur. To the extent that
early agreement can be reached on fundamental data {e.g., interest
rates, assumed escalation,costs of individual potential generation
alternatives, possible power-on-line dates), the effectiveness of
both parties will be enhanced. It is equally important to ensure
that evolving Susitna Basin Power Alternatives developed by Acres
should be compatible with the information needs of the selected
consulting firm. As the work progresses, it will also be necessary
to ensure'that those portions of the FERC license application dealing
with alternatives will be prepared in proper format and sufficient
depth to meet submission requirements.
The budget established for this Subtask will be modified if necessary
after mutual coordination needs have been established with the
selected firm.
(d) Schedule
From time of selection of Power Alternatives Consultant throughout
remainder of project period.
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R.2.3 -TASK 11: MARKETING AND FINANCING -REVISIONS
( i ) I nt reduction
In response to the May 1980 Tussing Report and other public comment
during the period April-June 1980, and also as a-result of
discussions with the Power Authority concerning the proposed
marketing and financing studies, and finally the recent changes in
Alaska State Legislation, the scope and scheduling of the Task 11
activities originally proposed in the February 1980 POS have been
modified.
Essentially, the major modifications include:
-Advancement of schedule and increase in level of effort for the
initial project overview and internal report documents
-Elimination of Alternative Power Source Risk Analysis from the
Acres POS
-Advancement of schedule and increase in level of effort for the
Susitna Basin Plan Risk Analysis
-Delay of schedule and reduction in level of effort for identifica-
tion of Parties in Interest
Indefinite delay of commencement of work in Resolution of the Tax-
Exempt Bond Issue
-Advancement of schedule and increases in level of effort for
Susitna Financing Risk Analysis
-Subtasks have been appropriately renumbered.
(ii) Revised Scope of Work (Task 11)
At the request of the Alaska Power Authority, the scope of work for
Task 11 as proposed in the Acres' Plan of Study dated February 1980
has been amended to exclude the Alternative Power Source Risk
Analysis (originally Subtask 11.03), and to defer until further
notice the Resolution of the Tax-Exempt Bond Issue (originally
Subtask 11.07). The originally proposed Subtasks 11.10, Liaison with
APA Bond Underwriting Managers and 11.11, Draft Documentation for
Bond Offering support have also been deferred. Subtask 11.12,
Preliminary Financial and Marketing Study, subsequently proposed as a
result of the Arlen Tussing Report, has also now been eliminated.
Subtask numbering has been appropriately revised.
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TASK 11: MARKETING AND FINANCING
(i) Task Objectives
To carry out a comprehensive economic evaluation of the Susitna ~
Hydroelectric Project and to perform those economic, financial and
marketing analyses of possible generation sequences capable of
meeting the needs of the Railbelt to allow Susitna to be presented in
proper perspective.
To establish the feasibility of financing the project and to develop
an approach which provides optimum financing cost to Alaska Power
Authority and the best overall benefit to the State of Alaska. An
essential element of this task will be to build confidence in the
project if it is shown to be the most appropriate for future
deve 1 opment.
(ii) Task Output
At the request of the Alaska Power Authority, the scope of work for
Task 11 as proposed in the Acres• Plan of Study dated February 1980
has been amended to exclude the Alternative Power Source Risk
Analysis (originally Subtask 11.03), and to defer until further
notice the Resolution of the Tax-Exempt Bond Issue (originally
Subtask 11.07). The originally proposed Subtasks 11.10, Liaison with
APA Bond Underwriting Managers and 11.11, Draft Documentation for
Bond Offering support have also been deferred. Subtask 11.12,
Preliminary Financial and Marketing Study, subsequently proposed as a
result of the Arlen Tussing Report, has also now been eliminated.
Subtask numbering has been appropriately revised.
The principal output of this task will be the Project Overview, which
will incorporate comprehensive, but readily understood,documentation
of major issues affecting the financing of the Project. This
document will first be issued prior to the first decision point on
whether or not Susitna studies should continue, currently scheduled
for March, 1981. Two subsequent updates of the report will also be
prepared through March, 1982. A series of internal management
reports will also be prepared. Notable outputs unique to the
marketing and financing issue include a series of risk analyses and
procedures for risk control and minimization, as well as a taxation
report addressing the important question of eligibility for
tax-exempt bond issuance.
The main topics to be dealt with in the Project Overview and Internal
Reports will include:
(a) Project Overview: -General Description of Susitna Hydro-
electric Project
-Review of Design and Construction
Concepts and Methodology
-Review of Cost Estimates and Schedule
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(a) Project Overview
(Cont'd)
(b) Internal Reports
For Management/
Financial Consider-
ation (Provisional
Listing):
-.Economic Evaluation of Project and Its
Limits
-Major Risks and Responses
-Overrun Possibilities and the Security of
the Project Capital Structure
-Review of Environmental Constraints and
Mitigation Plans
-Development of the Organization for
Management and Operation of Project
-Preliminary Assessment of the Financial
Plan and Requirements for Bond Offering
Documentation
-Economic Feasibility Study and Determina-
tion of Probable Economic Limits for the
Project
-General Economic Review
-Review of Global Energy Economics
-Economic Impact on the State of Alaska
-Assessment of Capital Costs, Schedules
and Program of Expenditures
-Assessment of Project Operating Costi,
and Maintenance/Replacement Expenditures
-Assessment of Critical Engineering Tasks
and Associated Risk Analyses
-Project Contingencies, Risk Analysis,
Policies and Planning for Mitigation of
Risks
-Escalation Assessment and Analysis of
Capital Cost Overrun Possibilities
-Security of Project Capital Structure
-Financing Requirements of all Parties and
for the Completion Guarantee
-Evaluation of Alternative Markets Avail-
able for Susitna Output
-29-
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(b) Internal Reports
for Management/
Financial Consider-
ation (Provisional
Listing) (Cont'd)
-Evaluation of Alternative Options for
Meeting Railbelt Power Needs (by others)
-Assessment of Socio-economic Aspects
-Review of Construction Contract Perfor-
mance History in Alaska Relating to Cost
and Schedule
The Internal Reports and the Project Overview will form the basis for
any Bond Offering Memorandum (BOM) Support Documentation that may
ultimately be required. Preparation of BOM documentation would
normally begin after completion of the Susitna Feasibility Studies
and submission of an Application for Licensing to the FERC.
The subject matter of Internal Reports and the Project Overview will
also be such as to address the requirements of the BOM documentation,
which provisionally will include:
-Primary Volumes:
-Support Volumes:
-Power Contracts
-Engineering Report
-Statutory Agreements, Legal Approvals and
Land Claims
-Summary of Corporate Documents
-Technical Abstract and Engineer's
Certificate
-Construction Cost Estimate Summary
-Construction Schedule and Project
Expenditure Program
-Insurance
-Financing Summary
-Overall Project Organization
-Engineering Reports (Construction)
--Access and Site Preservation
--Environmental Standards, Monitoring
and Control ·
Quality Assurance and Testing Programs
--Support Facilities and Logistics
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-Support Volumes:
(Cont•d)
{iii) List of Subtasks {revised)
-Engineering Reports (Operations)
--Operating and Replacement Expenditures
--Chargeable Corporate Expenditures
-Labor Agreements
-Plan for Alaska Manpower and Procurement
Content
-Risk Management and Minimization
--Risk Analysis and Control
--Risk Minimization
-Taxation Report
-Leg a 1 Report
-Review of Giant Projects
--Financing
--Construction and Engineering
-Alternative Energy Sources
Subtask 11.01 -Project Overview Preparation and Update
Subtask 11.02 -Internal Report Preparation
Subtask 11.03 -Susitna Base Plan Initial Risk Analysis
Subtask 11.04 -Susitna Base Plan Extension and Revision
Subtask 11.05 -Susitna Financing Risk Analysis
Subtask 11.06 -Resolution of Tax Exempt Bond Issue
Subtask 11.07 -Identify Parties in Interest
Subtask 11.08 -Revenue Assurance Procedures
Subtask 11.09-Liaison with APA Bond Underwriting Managers
Subtask 11.10 - Draft Documentation for Bond Offering Support
Note that Subtasks 11.03 through 11.10 are renumbered following
amendments to scope of work, and 11.06, 11.09 and 11.10 activities
are currently deferred.
(iv) Subtask Scope Statements
It is recognized that if the Susitna Project is selected as an
appropriate element in the growth of generating capacity in the
Railbelt Region, it is most likely to proceed on the basis of a
project financing. Essential to this will be an accurate
determination of revenues and properly established energy sales
agreements. Furthermore, all project risks must be identified, their
potential impact assessed, and appropriate contingency plans and
provisions made.
-31-
In the approach recommended, a close working arrangement will be
established from the outset of the study between technical, economic
and financial advisory groups. The interaction between these
interests will be developed through a series of specific tasks which
provide the Authority with successively more comprehensive outlines
and definition of a financing plan.
As the study proceeds, the specific requirements for supporting
material essential for financing will be identified and its prepara-
tion undertaken in close collaboration with the selected bond under-
writers. Work undertaken prior to license application will provide
the foundation upon which bond offering support documentation can
later be prepared. The completeness and excellence of bond offering
support documentation is judged to be of crucial importance to a
successful project. The work involves numerous, complex and
interlinked tasks; and only comprehensive pre-planning can achieve
the desired result.
In order to present the project in proper perspective to the many
parties involved--Federal, State and local agencies, regulatory
authorities, power purchasers, potential lenders, institutions,
political groups and public--a comprehensive overview will be
prepared. This will initially be in general terms, but will endeavor
to cover all the interrelated elements of the project. As work
proceeds, successive editions of the overview report become more
explicit and complete. In the event that a Susitna development is
shown to be feasible and most appropriate for satisfaction of
electrical energy needs in the Railbelt, studies and explanations
which may seem unnecessary to the sponsoring group may well be needed
to convince third parties and engender their enthusiasm.
It is furthermore vitally important to disperse the knowledge among
those employed on the project that all potential problems have been
thoroughly examined and solved. If, on the other hand, no Susitna
development is found to be warranted, careful and reasoned analysis
of the appropriate alternative will be necessary to ensure that the
State's decision to proceed with some other project (or projects) is
based upon thorough studies which establish technical, economic and
financial feasibility as well as environmental acceptability.
The work of the interdisciplinary group incorporating technical,
economic, financial, and other skills would, furthermore, demonstrate
clearly for management consideration the clear economic limits to the
Susitna project or some other alternative (e.g.,its maximum
acceptable cost) and the time period in which its accomplishment must
be regarded as a certainty before other measures to meet Alaska's
power needs would have to be adopted. While examination of the
negative 1 imits of the project could be regarded as an expression of
pessimism or recognized to be even, in the ultimate, capable of
cancelling the project, we consider such analysis vital. It should
serve to establish the general robustness of the project and to
demonstrate beyond doubt to the various governments, investors,
lenders, completion guarantors, concerned interests and others the
viability and acceptability of any recommended scheme for
develo!Jilent.
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The approach to be adOpted wou'l d derive full benefit from previous
financing efforts for major capital projects requiring capital
funding of $1 billion or more. Experience has demonstrated the need
for close and effective interaction between the owner of such
projects and the various elements of his advisory team with the wide
range of interests involved.
(v) Risk Assessments
As the various elements of the project study reach the appropriate
level of completion, it is planned to apply a rigorous analysis of
risk and to recommend contingency provisions. The approaches to be
used would involve modern techniques of analysis and probability
assessment and deal with cost, schedule, technical and other
controlling elements of the project.
Risks to be assessed include those associated with the planning,
design and construction of the project as well as the financing of
it. There are a number of basic project financing risks which must
be addressed. The analysis, assessment, and, where appropriate,
quantification of these risks will be accomplished under Subtasks
11.03 through 11.05. Financing risks include:
Cost overruns prior to completion
Late completion and non-completion
Partial or total post-completion outages
Customer failure to provide anticipated cash flows
Regulatory risks, particularly insofar as new regulations affect
the operation (and, therefore, of course, the profitability and/or
consumer costs)
--Technological risks, particularly insofar as the extent to which
new or relatively unproven technology may increase financing
difficulties
(vi) Logic Diagram
A logic diagram is shown in Plate T11.1 to illustrate the manner in
which various documents are prepared, interrelated, and assembled.
(vii) Investment Banker Inputs
In the February 1980 POS, it was proposed that Salomon Brothers, an
investment banking firm whose knowledge and experience of financing
large undertakings is unchallenged, would be retained as financial
advisors to Acres. Although the advice of Salomon Brothers and of
the First South West Bank, financial advisors to the Power Authority
will be sought from time to time on financial matters, no formal
arrangement for participation of Salomon Brothers in the Susitna
studies is contemplated at this time.
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~--] _____ ] ~--] --1 --J 1 l --l -)
-----! I
ITECiiNJCALI I MA!lKETING [INSUIIANCE] LABOR I I LEGAL I
I INPUTS FROM STUDY I TEAM AND OTHER
I AUTHORITIES I ENVI'lONM£NlAL I EcONOMIC I L FINANCIAL J TRANSPORTATION I lAX 'I PQLiliCAL I
I I
----I
\
P.O.S. REVIEWED BY DECISIONS PREPARE TOPICAL REPORTS
AP.A. AND FINANCIAL REACHED ON
ADVISORS OVERVIEW CONTENT FOR MANAGEMENT I FINANCIAL CONSIDERATION
JAN BO JUN"BO TO MAR B2 AND CONTINUING
INPUTS FROM '
TECHNICAL FIRST ~------------------
I
~
ENVIRONMENTAL START PROJECT OVERVIEW I'IEVIEW AND DECIDE BOND UNDERWRITERS, MANAGER, 1----CONTENT BONO OFFERING 1---ECONOMIC PROJECT OVERVIEW AVAILABLE FOI'I DOCUMENTS PREPARE FOR ISSUE MARKETING COMMENT
JUN'80 FEB'81 \
L._ ------------------FINANCIAL
INSURANCE -------
TRANSPORTATION DRAFT SUPPORT DOCUMENTATION
LA I! OR FOR BOND OFFERING SUPPORT
TAX SECOND ------MAR 82 AND CONTINUING (TENTATIVE)
lEGAL PROJECT OVERVIEW
POLITICAL AVAILABLE FOR
COMMENT
AUG.BI \ SUBSEQUENT FINAL DOCUMENTATION FOR
PROJECT OVERVIEW LICENSE APPLICATION IS
REPORTS ISSUED ASSEMBLED AND APPLICATION
AT APPROXIMATELY THIRD IS FILED WITH FERC
SIX MONTH INTERVALS PROJECT OVERVIEW
AVAILABLE FOR JUN '82
COMMENT
MAR'82 \ •1 ALAS!< A PO"'[" AUlHORilY
StJSilNA HV!JilO[L[ClRIC PROJECT
FOURTH
" ___ , ____
PLA" OF STUOY
PROJECT OVERVIEW
AVAILABLE FOR LOGIC DIAGRAM
COMMENT
SEP'B2 (TENTATIVE) PROJECT FINANCING
.J P~OJ[Cl·
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Subtask 11.01 -Project Overview Preparation and Update
(a)
(b)
Objective
To provide a key project document which reviews all major aspects of
the project and its objectives, determining in principle whether these
can be successfully met; provide through successive updating a
continuing reassessment of the project's overall viability and
financibility as various milestones are reached; and allow
multidisciplinary inputs from many sources to be properly coordinated
into a cohesive and well-balanced definition of the project.
Approach
This Subtask will be performed by a small team who will receive inputs
from many multidisciplinary sectors involved in the study. The team
will be directed by experienced senior staff familiar with the approach
essential to projects of such magnitude and the complex financing
arrangements that these involve.
Initially the Project Overview will concentrate on descriptive outlines
of the project objectives, the site for development and the project
facilities. Capital costs and schedules will be at the outset
preliminary only, but nonetheless considered adequate to determine
initial overall viability. The Project Overview will identify the
sensitivity to various risks and outline methods of mitigating these
and possibly removing some from further consideration. The initial
Project Overview Report will be scheduled to be available for review by
all parties concerned prior to the March 1981 decision point on whether
or not to continue the Susitna Feasibility Study. It will also be
available for review prior to the public meeting scheduled in the
spring of 1981, and it will incorporate as comprehensive a review of
issues involved in judging Susitna as can be assembled at that time.
The Project Overview and its subsequent revisions in updated form at
intervals throughout the study will be presented from the "owner's
viewpoint" and will consider all important aspects which affect the
viability, acceptance, financibility and the undertaking of
construction of the hydroelectric facilities. The first update will be
completed approximately nineteen weeks after the Susitna Development
Report is prepared under Subtask 6.05.
In achieving its goal of preparation of a comprehensive, clearly
understandable, concise and accurate overview of the project, the
Project Overview Task Force will call on specific inputs from many
sources, including:
-Technical
-Environmental
-Economic
-Marketing
-Financial
-Insurance
-Transportation
-Labor
-Tax
-Legal
-Political
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·~. Typical elements of the Project Overview are listed in Subparagraph
(ii)(a) of Task Output above.
The final issue of the Project Overview during the study phase will
provide a valuable summary document to bridge into subsequent licensing
and preliminary design phases of the work. It will be available prior
to the March 1982 decision point on whether or not to proceed with a
FERC license application for the Susitna Project. Eventually its
content will have significant value for the Bond Offering Support
Document and a variety of other applications, including preparation of
project brochures as part of the public participation program.
(c) Discussion
The concept of the continuously updated ••Project Overview" is of
relatively recent origin and has developed from the special needs of
large complex projects. It is necessary to address the complexity with
a well planned compilation of material which places all the technical,
commercial, economic, financial, contractual, environmental and other
aspects in proper perspective and demonstrates that all vital problems
are being sensibly addressed. The overview is planned to provide a
consistent thread of documentation through the whole study process and,
if construction should proceed, to provide a datum baseline for judging
actual performance of the many elements in relation to the plans.
As the documents will have to serve many varied and non-technical
interests, the language must be appropriately chosen ~nd carefully
edited for clarity and ease of understanding. Extensive use will be
made of graphics, drawings, maps and pictorial illustrations. Produc-
tion and binding will reflect the level of economy appropriate to draft
and eventually final documentation.
(d) Schedule
First Project Overview ••••••••••••••••••••• Weeks 22 through 63
First Update ••••••••••••••••••••••••••••••• Weeks 64 through 85
Second Update •••••••••••••••••••••••••••••• Weeks 86 through 117
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Subtask 11.02 -Internal Report Preparation
(a) Objective
(b)
To prepare topical reports, for management consideration, on those
aspects of the project which have a strong bearing on the economic
analysis and financibility of the Susitna project; present material
derived from the overall study in form suitable for easy assimilation
by non-engineering participants in the overall task; and present the
risks to which the project is exposed in the proper perspective.
Approach
The team provided to assess the overall financibility of the project
will be responsible for drawing together from many sources data,
viewpoints, reports, assessments, impact statements, documents and a
variety of other supporting material. In carrying out this task, the
multidisciplinary specialists who will be supporting the team will
assemble and edit topical internal reports for consideration by
managerial staff of the Authority, their financial advisors/under-
writing managers and others guiding the project through its study phase
to implementation or abandonment. The internal reports may ultimately
form a substantial proportion of documents to be subsequently produced
in direct support of the ffnancing or for a variety of other purposes.
Every effort will be made to foresee all future possible uses of the
material and its presentation will be appropriately arranged.
One element of the internal reports which will receive special consi-
deration is risk assessment, which will be applied to several aspects
of the project such as technical, financial overrun, schedule delay,
operating reliability, etc. Means of mitigating project risks will be
dealt with in a comprehensive manner as will be the contribution from
insurance sources in dealing with residual exposures. The important
detailed risk analysis itself is covered under Subtasks 11.03 through
11.05 below. Related internal reports prepared as a a part of this
subtask wi 11 present the results of those detai 1 ed professional studies
in a manner which can be easily understood by decision makers whose
ultimate agreement is essential to eventual construction.
Subparagraph (ii}(b} of the Task Output sets out a listing of typical
documents which may be required. This listing would be finalized in
conjunction with the Authority and their advisors. Control sheets
outlining responsibilities for specific input, index of contacts, and
required schedule will be prepared in this planning stage.
The internal reports provide, on a selective basis, much of the
material for the various editions of the Project Overview and the
production of both series will be closely coordinated.
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A consistent and cohesive series of reports will be prepared which will
clearly address all the vital issues which in due course would be
necessary prior to releasing the project for construction.
{c) Discussion
While documents of the type envisaged are the inevitable products of a
comprehensive study, the benefit of a specific source of consistent
internal reports is that the Authority will receive objective, well
balanced, professional arguments on key issues to allow properly
informed decisions. It is important to note that this approach is
responsive to the APA plan to remain a lean, efficient organization.
In a bigger and more highly staffed organization undertaking a major
project of the scale of Susitna, the internal reports would be
produced, no doubt, by individual specialist departments for the
owners' project team responsible for final decision.
The proposed approach permits APA to avoid overstaffing for relatively
short study or project management periods. An opportunity is offered
for the special project task force to perform these functions under the
control and direction of the Executive Director and the Board.
The team will be closely linked to the overall project study
organization and perform functions which will be an essential part of
the study task. It will serve, however, the owners' control group
directly in providing the basis for assessment and decision on many
issues having an impact on the project.
Preparation of internal management reports would not normally cease
with submission of the FERC license application. Similar reports would
be undertaken as appropriate during the post-application phases of the
project.
{d) Schedule
Weeks 22 through 117
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Subtask 11.03 -Susitna BasePlan tnitjal Ris.k Analysis
(a) Objective
(b)
To identify all relevant risks in tenns of specific problems associated
with specific major components of the project; to identify all relevant
preventative and responsive measures associated with these risks; to
identify which risks are minor given effective responses, and which
need further attention; make a preliminary quantitative assessment of
some key construction time risks, and their relationships with other
key project cost risks, flagging risks which are important but best
treated as conditions with respect to the current quantitative
analysis; to stimulate information flow between planning groups with
respect to likely departures from the base plan; and stimulate
documentation of problems and solutions to those problems underlying
the base plan.
Approach
The Acres marketing and financing task force will coordinate this
assessment. Input will be obtained fron project personnel responsible
for each component. Procedures already developed by Acres will be used
to assess construction time risk as follows:
-Risk lists will be produced, labelling and describing all the
relevant risks all those involved can identify.
-Response lists will be produced, labelling and describing all
relevant responses associated with each risk.
-Secondary risk and response lists will be produced, considering risks
associated with responses.
-Rough quantitative asses~ment of risk/response sequences will allow
some risks to be identified as minor, and not worth further analysis
at present.
-Still using risk/response lists, responses will be partially
structured. Responses common to more than one risk will be
identified. Responses will be preference ordered. Where possible,
decision rules defining when responses would be used will be
identified. ,
-Special diagrams will be constructed to summarize the above analysis
in a simple form.
-Key base plan assumptions and key assumptions concerning responses to
potential problems will be identified.
Probabilities necessary to assess key assumptions will be estimated.
Most will be very specific conditional probabilities: for example,
what is the probability of X working days for a particular activity in
a particular month?
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The implications of key assumptions will be examined, first in the
context of specific risks for specific activities, gradually at a
broader and broader level. For example, we will assess the chance of
achieving the planned work on a specific activity in a specific season
in relation to one or two key risks first, then look at other risks and
other seasons. We will not relate different activities until we are
satisfied with assumptions key to the activity itself. A variety of
output forms will be used, depending on the questions being asked of
the analysis. Most will be comparative probability distribution
representations: for example, the probability of finishing activity Y
by month X given a start in May, June, July, etc.
Construction time risk will be summarized and converted to construction
cost risk. Other sources of construction cost risk will be considered
in a similar manner and linked to produce overall construction cost
probability representations for confidence limit assessment purposes.
Appropriate confidence limit assessment will be based on a comparison
of quantified risks and nonquantified risks which must be treated as
conditions.
Construction cost risk analysis will take place in a fixed time frame
structure, unlike the PERT based analysis usually employed. That is,
we will consider uncertainty in terms of 11 how much work can we achieve
in a given time 11
, instead of 11 how long will it take to achieve a given
amount of work 11
• This approach makes it much easier to assess probabi-
lities, always a difficult task. It facilitates the consideration of
weather windows and other seasonal dependencies. It also facilitates
integrating construction cost risk with inflation and escalation
studies at this point.
Other sources of project risk will be considered qualitatively in a
similar manner, structuring risks and responses via listing procedures
. and simple summary diagrams.
Computation procedures are based on numerical integration techniques in
a semi-Markov process framework. Another key advantage of the fixed
time frame is the efficiency and precision of this approach relative to
the more usual simulation or moment integration analytical procedures.
A preliminary risk analysis will be conducted in time for consideration
prior to ranking and selecting Susitna Basin development alternatives
under Task 6. If Susitna studies are continued beyond March 1982,
further, more detailed risk studies will be carried out as the study of
the proposed Susitna development is consolidated.
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(c) Discussion
All aspects of the Acres approach to risk analysis have been widely
used in the context of fault-tree and event-tree analysis, reliability
analysis, generalized PERT, Markov process and decision-tree analysis.
However, the way we have integrated these aspects into a procedure
tested in a variety of application areas is unique. Areas of
application of the integrated procedure include hydro projects, thermal
power projects, arctic gas pipelines, offshore North Sea oil pipelines
and platforms and underground energy storage projects.
The effort to be expended on risk analysis has been increased from the
level originally planned to ensure that all viable Susitna alternatives
are fully treated. However, the effort must be expended in a
systematic manner, and experience suggests that at this stage in a
project's life a relatively simple quantitative analysis will suffice
provided risks and associated preventative and responsive measures are
carefully identified. If they are not, quantification of risks is
rather meaningless because it is not clear what has and has not been
included.
(d) Schedule
Weeks 22 through 77: Develop preliminary risk analysis for alterna-
tive developments within the Susitna Basin,
including quantitative analysis to test key base
plan assumptions
Weeks 77 through 107: Conduct risk analysis on expansion sequences
which include the selected most favorable
Susitna Basin alternative(s) .
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Subtask 11.04 -Susitna Base Plan Extension and Revision
(a) Objectives
To revise the·base plan initial risk assessment periodically as the
base plan develops; explore key risk areas identified earlier; assist
with base plan development as and when necessary; and respond to FERC -
requests for further analysis.
(b) Approach
Within the basic framework established in Subtask 11.03, undertake
further specific extensions and revisions of risk analyses of the
proposed Susitna development.
(c) Discussion
Experience suggests risk analysis can be extremely useful at this stage
in a project's development, but it is difficult to predict what sort of
issues will benefit from further analysis until preliminary risk
analysis results are available.
The level of effort proposed for this Subtask is estimated to be
adequate at this time to allow updating as necessary, response to a
reasonable number of risk areas uncovered earlier and assessment of key
changes proposed for the base plan.
Similar assessments would also normally be undertaken during the post-
application phases of the project.
(d) Schedule
Weeks 109 through 113: Extension and rev1s1ons to the Susitna Basin
alternatives risk analyses during the conduct
of sensitivity analyses under Task 6.
Weeks 113 through 130: Continued work as and when necessary to ensure
proper support of the decision on whether or
not to proceed with FERC licensing of the
Project r
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Subtask 11.05 -Susitna Financing Risk Analysis
{a) Objective
(b)
(c)
{d)
To build on earlier risk analysis consideration of financial issues not
yet developed, including assessment of contract and insurance
arrangements, and an appropriate level of direct and indirect
11 insurance 11
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Approach
Within the basic framework established in Subtask 11.04, undertake
specific extensions and revisions, in terms of both quantitative and
qualitative analysis of the proposed financing of the Susitna Project.
Discussion
Earlier listing and structuring of risks and responses is of great
value at this stage. Each proposed contract can be assessed against
appropriate checklists of potential problems, and contract arrangements
or insurances which cover a number of different sources of risk can be
developed into an effective overall risk management pattern.
This subtask will be performed after selected expansion scenarios with
and without Susitna have been developed by others during the power
alternatives studies. It may be expected that similar assessments will
continue after license application, should the decision be taken to
proceed with such application.
Schedule
Weeks 77 through 111 and intermittently thereafter as necessary.
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Subtask 11.06 -Resolution of Tax Exempt Bond Issue
j (a) Introduction
This task has not been authorized to proceed at this time and will
probably be handled by Bond Offering Managing Underwriters yet to be
appointed by the Alaska Power Authority. Nevertheless it is important
to discuss the issues which this activity should address.
Studies under Task 11, Marketing and Financing, will proceed bearing in
mind the vital importance of this issue and advice on the matter will
be sought as appropriate to allow other subtasks to proceed. A
preliminary plan for detailed examination of the Tax Exempt Bond Issue
is presented herein for further guidance.
(b) Objective
Explore all legal means to secure tax-exempt financing for the Susitna
Project and identify and describe those measures which must be taken in
each case to secure that end.
Rank in order preferred approaches in the event more than one legal
means is identified. Prepare a report summarizing reasons tax-exempt
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(c)
........
identified.
Approach
A memorandum on financing considerations prepared by Salomon Brothers
is included as Attachment A to this scope statement. As noted therein,
a number of possible alternatives under the IRS Code can be explored.
The special rules provided under Section 103 of Treasury Regulations
for applying trade or business test and security interest test to bonds
issued to finance an electric generating facility owned and operated by
an exempt person (in this case, the State of Alaska or a public power
authority) will be considered in a series of sequential steps
summarized as follows:
(1) Classify the anticipated purchasers of power from the Susitna
project into exempt and nonexempt persons. For example, munici-
palities such as Anchorage and Fairbanks will be exempt persons,
whereas private electrical co-ops will be nonexempt.
(2) Determine whether any one nonexempt person will contract to take,
or take or pay for, more than 2 5 percent of the project output of
the Susitna project. If there is such a person, then the trade or
business test is met.
(3) If there is no such person, identify the nonexempt persons who
will each pay annual guaranteed minimum payments exceeding 3
percent of the average debt service on the Susitna bonds. The
trade or business test is satisfied if the aggregate amount of
power which these persons contract to take, or take or pay for,
exceeds 25 percent of the project output of the Susitna project.
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(d)
(4} If the trade or business test is met, total the payments that will
be both pledged or used to pay debt service on the Susitna bonds
and made pursuant to the contracts referred to in either paragraph
2 or 3 above. The security interest test is met if this aggregate
amount exceeds 25 percent of the total debt service on the Susitna
bonds.
If it appears that the Susitna bonds may be industrial development
bonds because of the commitments by nonexempt persons to purchase
power, consideration may be given to altering the makeup of the group
of purchasers to avoid the trade or business test or security interest
test. Assuming that one or more approaches are found to be possible,
each will be evaluated in terms of the associated difficulties and
probabilities of successful defense against challenge by or on behalf
of regulatory authorities. All reasonable approaches will be rank
ordered and the apparent best will be developed into a series of
explicit measures to be taken by the State (including recommendations
for legislation to be passed}, the Alaska Power Authority, and others.
In the event that tax exempt financing is found to be impossible, a
report will be prepared detailing the reasons that no reasonable
approach could be found.
Results of this effort will provide important input to the financing
risk analysis to be conducted under Subtask 11.05.
Discussion
The question of tax-exemption on interest to be paid on bonds issued to
finance the project is of extreme importance, for the overall cost of
the project power and the type of financing plan to be developed hinge
upon its resolution. So important, in fact, is this issue that even a
negative report should not necessarily be regarded as a final and
irrevocable ruling on the matter. Indeed, given the importance which
the federal government has now attached to domestic energy production
(especially from renewable resources) it is not inconceivable that
federal regulatory or statutory changes can be achieved.
In the event, however, that negative findings on the tax-exempt
question are produced and cannot be reversed, the financibility of the
project will not then necessarily become doubtful. The best
alternative to tax-exempt bonds will be recommended by an experienced
professional investment banking firm whose successful historical
participation in large project financing is well documented.
Legislation now pending could serve to resolve this issue in favor of
tax-exemption for bonds associated with hydroelectric development. In
the event that this legislation passes, the level of effort will be
reduced to that amount necessary to ensure compliance with new laws.
(e) Schedule
Weeks 52 through 77. Intermittent updates thereafter.
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Subtask 11.07 -Identify Parties in Interest
(a) Objective
To identify potential candidates to share some of the direct and
indirect project risks and describe their possible involvements.
(b) Approach
A survey of all organizations and entities with any possible direct or
indirect risk sharing involvement will be accomplished. These parties
might include, for example, municipal electric systems, rural electric
cooperatives, investor-owned utilities, the Alaska Power Administra-
tion, and others. A profile wi 11 be drawn up for each and an assess-
ment wi 11 be made as to how much of the total risk each may be expected
to share under appropriate alternative scenarios and as to how such
sharing can reasonably be accomplished.
(c) Discussion
A number of technological and financing risks will be addressed under
Subtasks 11.03 through 11.05. Given these risks and reasonably
detailed profiles of potential risk sharing parties, it is possible to
consider a number of alternative participation scenarios. As
successive iterations of the risk analysis efforts occur, the possible
involvements of parties-in-interest are correspondingly clarified. An
essential first step in this process, however, is the task of
identifying and profiling potential candidates. Thus, this subtask
provides an explicit recognition of that need.
(d) Schedule
Weeks 31 through 53: Initial ;dentification of parties in interest.
Weeks 77 through 111: Reconsideration of parties in interest to be
associated with selected expansion sequences.
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Subtask 11.08-Revenue Assurance Procedures
(a) Objective
(b)
(c)
To explore alternative means to provide adequate revenue assurance to
protect investors against the risk of default; develop a strategy for
success.
Approach
For large energy projects, the necessary revenue assurance may be
derived from a demonstration of demand for the project output and
adequate customer and regulatory support of the price for the power.
Demonstration of demand can be satisfied by power sales contracts
between APA and the immediate customers (e.g., municipalities,
cooperatives, military bases, industrial plants, etc.). We intend to
consider a number of alternative types of commitments and match them
against immediate customers identified earlier in the group of
parties-in-interest (see Subtask 11.07). These include take-or-pay
obligations, take-and-pay obligations, minimum payment obligations, and
step-up provisions.
Since price regulation and other regulatory constraints would neces-
sarily affect the project, it is important to include discussions with
all governmental and regulatory agencies in this exploration of revenue
assurance.
In addition to project-related power sales contracts, guaranties by the
State or Federal government or others would provide further assurances.
Guarantee possibilities will be identified and a preliminary assessment
will be made of the probability of acquiring them.
A number of funds will be required (including, for example, 11 Reserve
and Contingency Fund .. or Operating Fund 11
) to ensure protection against
unexpected shortfalls. Each such requirement will be identified along
with its source.
As a final step in the development of revenue assurance procedures, the
apparent best strategy for successfully achieving the desired degree of
revenue assurance will be described in a report to be prepared as a
part of this subtask.
Discussion
The basic credit risk against which investors attempt to protect
themselves is the risk of default. The risk of default lies in the
borrower•s inability to meet interest and principal payments on his
debt obligations in a timely fashion. Adequate revenue assurance
protects the investor against the risk.
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It will not be sufficient·,to conduct a one-time study of the revenue
assurance issue and then assume the results will continue to remain
valid throughout the course of the financing effort. Rather, a
relatively continuous updating process is essential. In this regard,
the provision of investment banker's services by a finn experienced in
providing financial services for large projects is particularly
important.
These types of studies will be continued during the post-license-
application phase of the work. The level of effort shown in cost
summary tables includes only pre-application costs. The primary effort
will be expended after selected expansion sequences have been
identified, including those containing alternative Susitna Basi~
deve 1 opments. ·
(d) Schedule
Weeks 77 through 111 with updates thereafter as necessary.
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Subtask 11.09-Liaison with APA Bond Underwriting Managers
(a) Objective
To provide a continuing input as appropriate from study tasks of
information and data which may have an impact on financing; provide
engineering advice to the financing management group; and report to the
Project Manager on any issues where financing considerations have an
impact on the evolution of the project.
(b) Approach
Financing of a major project such as Susitna will call for a level of
effort and ingenuity well beyond that normally involved in public works
undertakings. Experience (particularly from the $1 billion Churchill
Falls Project) has established the benefit in a particularly close
relationship between technically oriented senior staff closely
associated with the engineering related development of the project and
the financial, legal, insurance. economic and other professional
advisors assembled by the owner. The leader of the task force carrying
the responsibilities under Subtasks 11.01 and 11.02 will be eminently
suited and placed to provide this liaison function as an essential part
of his other duties.
(c) Discussion
(e)
In major projects, there must be continual emphasis on multidisciplin-
ary approaches to most of the important issues that have to be
resolved. When capital investment is more modest and where many prece-
dent cases are available for guiding decisions, the degree of liaison
and interlinking of interests contemplated here might be viewed as
extravagant. However, it may be suggested that the exigencies of even
less ambitious capital works exposed to excessive cost escalation and
the many risks imposed by current public and political attitudes call
for closeknit coordination of all project interests throughout the
undertaking from concept to completion.
The target is completion in the most efficient and cost-effective way
possible and the strictest level of adherence to schedule and budget
throughout the project. The aim can be most effectively taken by close
cooperation between all interests from the outset.
Schedule
Continuous through the full period of study •
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Subtask 11.10 -Draft Documentation for Bond Offering Support
(a} Introduction
Work on this subtask will not normally commence until after a decision
to submit the FERC license application for the Susitna Project.
However, a preliminary plan for the required effort is presented herein
to provide a complete description of the ultimate purpose of this
financing task.
(b) Objective
To review with the Authority•s Bond Underwriting Manager the
requirements for support documents; prepare and issue outline index and
content specifications and allocated responsibility for input; prepare,
edit and produce successive draft documents in parallel with other
findings, reports. et~, being produced in the later phases of the
overall study, and prepare 11 Engineers' Opinions .. to support
certification of the project.
(c) Approach
Throughout the financing support task, attention will be continually
focused on the ultimate objective of a successful bond issue. Very
large projects requiring financing at levels of $1 billion or more call
for a particularly high standard of support documentation to build a
sufficient level of confidence in the investment potential. Managers
in their approach, particularly to major projects, and owners and
underwriting managers must respond to their more exacting
requirements.
We see the vital importance of preparing inputs to the bond offering
support documents as the study proceeds. It is planned that draft
documents will be available by the conclusion of the study and will be
available for further refinement as the project proceeds through
licensing to its release date.
The specific approach to be adopted could well parallel the successful
precedent of Churchill Falls Hydroelectric Power Development which led
in 1968 to the marketing of $550 million in First Mortgage Bonds.
While in this case work was heavily concentrated in a 3-month period in
1967 and continued at a lesser level for 15 months, the support
materials for Susitna should be methodically assembled throughout the
period following submission of the FERC license application and
prepared in draft form well in anticipation of any off~ring. A
provisional listing of Bond Offering Documentation is set out in
subparagraph (ii) of Task 11 above, and a summary of the objectives of
each of the proposed documents is shown in Table T11.1.
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(d) Discussion
(e)
It will be apparent from the provisional listing of documents that a
wide range of interrelated topics must be addressed. This calls for
input from a multidisiplinary group of specialists and sensitive
coordination of all material into a cohesive, balanced and interrelated
series of documents. These serve to demonstrate that all important
questions have, in fact, been properly addressed and that the project
has a high level of overall security as a result.
In view of the legal significance of these documents, the process of
editing, approval and publication will require close working
arrangement with the Authority's counsel, the underwriting managers,
legislative interests in the State of Alaska, and the owners• manage-
ment team. The effort requires a painstaking level of careful process-
ing of very large amounts of data and material and justifies its
assignment to our selected team which has appropriate prior exposure to
this function.
A list of bond offering support documentation as displayed in Table
Tll.l reveals that there are great similarities to documentation
required as exhibits to the FERC license application (see Task 10).
Thus, in many cases it may be possible to use the same documentation
both as an exhibit and as bond-offering support documentation. In
others, it will be necessary to reformat exhibit data to meet financing
needs. To the extent possible, however, bond offering support
documentation will be delayed until after license exhibits have
otherwise been prepared.
Schedule
Commence after license application and to be presented in a form for
continuing effort into subsequent phases of the project .
-51-
TABLE Tll.l
ALASKA POWER AUTHORITY
SUSITNA HYDROELECTRIC POWER PROJECT
PROVISIONAL LIST OF BOND OFFERING SUPPORT DOCUMENTS
A -PRIMARY DOCUMENTS
1. Power Contracts
2. Engineering Report
3. Statutory Agreements, Legal
Approvals/Land Claims
4. Summary of Corporate
Documents
5. Technical Abstract and
Engineer•s Certificate
6. Construction Cost Estimate
7. Construction Schedule and
Project Expenditure Program
OBJECTIVES
To outline the terms and conditions of
sale of the power and energy output from
the Susitna Project.
To provide a comprehensive statement, in
simple language, regarding the physical
nature of the site, the basis of
development, the determination of energy
output, and a description of all
facilities.
To provide a comprehensive assembly of
all relevant agreements as far as
possible in their original layout and
form.
To provide a comprehensive assembly of
documents relating to the Alaska Power
Authority and any other participants in
the project.
To summarize the engineering report,
construction cost estimates, schedule,
operating and replacement expenditure
estimates, and other documents leading
to firm conclusions supported by an
Engineer•s Certificate of Opinion
relating to operation, cost and
schedule.
To set out the basis of the construction
cost estimate, including contingency
provisions and to provide the necessary
detail to establish an adequate level of
completeness and confidence.
To provide a concise, but detailed,
description of the construction
schedule and project expenditure program
of all facilities and critical path net-
works of all supporting activities in
the overall construction plan.
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TABLE T11.1 (Cont'd)
ALASKA POWER AUTHORITY
SUSITNA HYDROELECTRIC POWER PROJECT
PROVISIONAL LIST OF BOND OFFERING SUPPORT DOCUMENTS
A -PRIMARY DOCUMENTS
8. Insurance
9. Financing Summary
B -SUPPORT DOCUMENTS
1. Overall Project Organization
2. Engineering Reports
{Construction)
2.1 -Access and Site
Preservation
2.2 -Environmental Standards,
Monitoring and Control
2.3-Quality Assurance and
Testing Programs
OBJECTIVES
To set out a concise statement of risks
during construction and operation with
an evaluation of the maximum foreseeable
1 ass.
To provide a summary of equity, debt and
completion guarantee standby financing
requirements with a schedule of draw-
downs to meet construction plans.
To provide a summary of relationships
of all companies involved in the project
with details of origins, responsibili-
ties and corporate structures, supple-
mented with organization charts showing
lines of reporting and authority.
To provide a detailed description of the
arrangements made for access and heavy
transportation to the project site with
a full statement of measures taken for
site preservation and avoidance of delay
arising from environmental concern.
To provide a comprehensive summary of
all applicable requirements, responses
and reports concerning environmental
aspects of the project construction and
operation.
To set out quality assurance directives
established by the Authority and
detailed evidence to demonstrate the
methods by which these will be achieved.
-53-
TABLE T11.1 (Cont•d)
ALASKA POWER AUTHORITY
SUSITNA HYDROELECTRIC POWER PROJECT
PROVISIONAL LIST OF BOND OFFERING SUPPORT DOCUMENTS
B -SUPPORT DOCUMENTS
2.4 -Support Facilities
3. Engineering Report
(Operations)
3.1 -Operating and Replace-
ment Expenditures
3.2 -Chargeable Corporate
Expenditures
4. Labor Agreements
5. Plan for Alaskan Manpower
and Procurement Content
6. Risk Management
6.1 -Risk Analysis and
Control
OBJECTIVES
To provide a comprehensive description
of all construction and operational
support facilities with demonstration of
the adequacy of these to meet project
requirements, including contingencies.
To provide details of the basis of
estimate for manning and operating of
the power project and for the continuing
maintenance plans.
To set out the estimates of corporate
expenditures incurred by the Authority
which can be legitimately charged to
operations.
To review the labor situation on both
the national and state level, together
with the legislative framework under
which special labor agreements may be
formed. To provide precedent data on
experience with master project labor
agreements. To include a statement of
intent for such agreements to apply to
the project, and to demonstrate the
impact of these on project risk
exposure.
To present sufficient evidence to demon-
strate that the desired portion of
Alaskan content wi.ll be incorporated in
the overall project. ·
This section will describe in detail the
optimal responses to a risk minimization
study, the organization of a formal risk
management team, its policies and method
of operation. It will also describe
review policies and reporting systems
designed to ensure continuous updating
of both risk identification and
response.
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TABLE Tll.l (Cont'd).
ALASKA POWER AUTHORITY
SUSITNA HYDROELECTRIC POWER PROJECT
PROVISIONAL LIST OF BOND OFFERING SUPPORT DOCUMENTS
B -SUPPORT DOCUMENTS
6.2 -Risk Minimization
7. Taxation Report
8. Legal Report
OBJECTIVES
To identify all risks to which the
project may be subjected and plan
responses to them which demonstrably
reduce those risks collectively and
individually to a minimum.
The residual risk figure thus determined
is an important factor in demonstrating
the reliability and confidence level of
the project.
To deal with the impact of all aspects
of federal, state and local taxation
pertinent to the project.
To deal with all aspects of legislation
and legal requirements under which the
project will be constructed.
To identify and describe other relevant
project financing to demonstrate the
adequacy and logic of the project
approach.
To summarize the experience accumulated
from major North American capital pro-
jects in relation to achievement of
engineering cost estimates and schedules.
To provide a comprehensive review of
alternative energy generation modes
applicable to Alaska~ with estimates
of delivered energy cost and long-term
reliability of supply.
-55-
R.3 -REVISIONS TO PROJECT ·scHEDULES
Schedule revisions for Subtasks 1.01, 1\02, 1.08, 6.01 through 6.06 and
6.32 through 6.38, and 11.01 through 11.09 are illustrated in the attached
Bar Chart.
-56-
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SUSITNA HYtl .. OlUC'TftiC ~
PLAN OF STUDY
MAST£A SCHEDUL£ REVISION I ~ IMO
•
R.4 -REVISIONS TO PROJECT BUDGETS
R4.1 -INTRODUCTION
A set of eight worksheets is attached. Costs entered thereon represent a
proposed distribution of budgets associated with scope changes in Tasks 1,
6, and 11. (Upon approval by the Alaska Power Authority, these worksheets
will form the basis for entering changes into the official project
budget).
R4.2 -SUMMARY OF CHANGES
Changes covered by the worksheets are summarized as follows:
1979 $ Reserve for Total
Reason for Change Value Escalation Change
a. Termination of portions of
Task 1; Responses to Tussing
report for modifying Task 1
prior to Termination action $(215,193) $(14,267) $(229,460) •
b. Changes to Task 6 to account
for requirement to conduct
early generation planning 179,290 17,929 197,219
c. Changes to Task 6 to account
for post-Tussing additions 181,818 18,182 200,000
d. Changes to Task 6 for liaison
with Power Alternatives
Consultant 20,710 2,071 22,781
e. Changes to Task 11 to account
for post-Tussing additions
and for deletion of original
Subtasks 11.03 and 11.12 751000 71500 821500
TOTAL CHANGES $241,625 $ 31,415 $ 273,040
R4.3 -FIXED FEE ADJUSTMENTS
The proposed changes include increased Acres' 1 abor costs :amounting to
$382,796 including payroll cost of services and overhead. Based on this
value, a change in fixed fee in 1979 dollars is requested in the amount of
$38,280. Including an allowance for escalation, the total increase in
fixed fee is $42,064. It should be noted that percentage escalation on
fixed fee for these changes is less than was used in the original
agreement since seven months of the original escalation period have
elapsed.
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R4.4 -OTHER CHANGES
A number of changes to the Project budget are pending (e.g., new R&M
contract value, in-stream flow studies). To avoid confusion, changes
reflected in the attached worksheets are based on the existing budget as
currently printed. Approved budgets associated with other changes will be
entered in the project budget as soon as the new budget control system has
been validated.
R4.5 -WORKSHEETS
The follow·ing worksheets are attached:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Summary of Proposed Budget Changes
T1-1. Task 1 -Changes
T6-1. Task 6 -Changes Resulting from Tussing Report
T6-2. Task 6 -Changes Resulting from Early Generation Planning
T6-3. Task 6 -Changes Resulting from Liaison with Power
Alternatives Consultant
Tll-1. Task 11 -Changes
T11-2. Reconciliation of Task 11 with Earlier Approval by APA
General Notes
R4.6 -TERMINATION CLAIM
The attached worksheets do not include administrative costs which will be
incurred in connection with the termination action. A termination claim
wi 11 be submitted in accordance with the terms of the Agreement between
Acres and APA within the allowed ten-month period. It will include costs
associated wtih renegotiation of certain subcontracts, inefficiencies
associated with abrupt curtailment of dedicated staff involvement,
relocation of J. Landman and the like. This claim will be submitted not
1 ater than December 31, 1980.
-59-
IIORkSHEET Tl-1
CHANGES RESULTING FROM PARTIAL TERMINATION OF TASK 1 (EXCLUSIVE OF TERMINATION CLAIM)
Subtask 1.08 Total Disburse-
Ortgtnal Budget Budget Expended Term ina-Prep for Task 1 Disburse-ments to Task Total ltet Ctlange
Task 1 Sub task Subtask thru June tion Term ina-Manpower ntents thru complete Wide Task 1 from
Bu!!Jiet(Z) 1.01 (2) 1.02 1.03-1.06 Re!!!!rt tion Bud9ets June 6 1.02 Costs Bud9et Ori!lfnal
kres
Manhours 3,350 190 510
Project Cost of Se"h:e 55,268 11,738 14,000 12,463 3,771 10,72g 52,701
Owerhead 41,453 B,804 10,500 9,347 2,828 8,048 39,527
Handlin Fee 6 397 728 728
Otsburs-ts
goo Mise 3,000 200
901 Travel 9,600 200 200 200
go2 Telephone/Telex/etc. 4,200 100 100 200
903 Reproductions 4,100 100 100
915 Publications 4,500
916 Photography 900
921 Co~uter &aOOO __ (2)
Subtotal Disburse.ent 32,300 400 400 17,689 600 l9,089 l9,08g (i3,2ll)
• Fee on Se"tces 11 1 586 111048(3) 11 1048 ~ TOTAL ACRES m oo4
!ICC
Manhours 3,900 600 800
Manhour costs 212,600 29,400 40,900
Disbursements 17.600 21 800 21Boo
TOTAL WCC 230.200 32.200 43.700 17.032 92.932 92.932 ~137.2681
TES
Manhours 1,750
Manhour Costs 51,500
Disburse~nents 51830
TOTAL TES 57,330 11768 11 768 1.768 (55.562)
SUBTOTAL 434,534 7,000 19,171 219,341 (215,1g3)
ESCALATIOII
(1)
28,810 14,543 (14,267)
GRANO TOTAL 453 1 344 233.884 {229 146Dl
Notes:
(1) Allocated portion of total contract escalation after removing fee escalation from total contract escalation.
(2) Budget to c~lete ts ~reater than original budgeted for these subtasks due to: a) effort expended in May on
Tussing changes, b) la e completion by JSER on energy forecast and extraordinary monitoring requirements.
(3) Prorated in same ratio as in Coluan 1 for fee to labor cost.
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WORKSHEET -SUMMARY Of PROPOSED BUDGET CHANGES -TASKS 1, 6 and 11
Task 6 Task 6
Original Task 1 Task 6 Additions Additions Task 11 Proposed
Project Termination Tussing ror Gen. for Scope Total Project
Budget Chan!!!s Changes Plsnni!!!J Liaison Changes Chan9! Budget
Acres
Project Coat of Service 2,108,J08 (2,567) 8J,OOJ 7J,185 5,67J 59,875 219,169 2,l27,A77
Overhead 1,5BJ,362 (1,926) 62,254 54,889 4,255 44,155 163,627 1,746,989
Handling rea 425,036 (4,121) 403 728 190 (794) 0,594) 421,442
DisburaBIIBnta 1 '173,510 (U,211) 20,180 36,400 9,500 n7,4oo 190,269 1 ,363, 779
rea on Services 4J0 1 000 (538) 15 1 978) 14 1088 1!092 11 1444 42 1 064 472 1064
TOTAL ACRES 51721J.21l'i {22 1 Jl'iJJ 181.010 179 1 290 21l 1 7m 252 1 1JBIJ r;n z535 1';1 H1 1 751
Direct Coats 3,850,800 3,850,800
M:C 1,319,400 (1l7,268) < 1 ,ooo) (1l8,268) 1, 181, n2
TES 3,117,470 (55, 562) (55,562) 3,061,908
RaM 4, 178,100 4, 178,100
CIRI/HAN 4,445,901 4,445,901
I
0\ rMA 2J0,800 230,800 ......
I
SAL(M)N 179,200 (176,080) (176,080) J,120
TOTAL PROJECT 25,798,487 (215, 193) 181,818 179,290 20,710 75,000 241,625 26,040,112
ESCALATION J54,720 (14,267) 18,182 17,929 2,071 7,500 31,415 l86,1l5
GRAN> TOTAL 26,151,207 (229,460) 200,000 197,219 22,781 82,500 27J,040 26,426,247
(1) Escalation per POS leas $80,000 fixed fee escalation.
I ...
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Original
Task 6
Bud~t
Acres
!!enhours 39,235
Project Cost of Serwtce 495,495
OYerhead 371,624
Hand11ng Fee 2,180
Dtsbvrs..ents
900 Mise 600
901 Trnel 30,600
902 Telephone/Telex/etc. 7,800
903 Reproductions 22,500
915 Publications 1,000
916 Photography 500
921 eo...,uter 411000
Subtotal DisburseMent l04,000
Fee on Serwlces 103.879
TOTAL ACRES 1 077 178
R&M Oonsult111ts
M111hours 130
!!enhours Cost 4,500
Dlsb;;rs..,;;ents 500
TOTAL R.M 5000
TOTAL TASK 1,082,178
ESCALATIOII 71, 748(1)
TOTAL IIITH ESCAI.ATIOII 1.153,926
llotes:
Additions
to Subtask
6.02
450
8,033
6,025
WRKSHEET T6·1
CHANGES TO TASK 6 RESULTING FROM TUSSING REPORT
Additions
to Subtask
6.03
2,000
35,700
26,775
Additions
to Subtask
6.05
200
3,570
2,678
Additions
to Subtask
6.06
1,600
28,560
21,1120
Additions
to Subtask
6.07
200
3,570
2,678
(1) Total escalation on total cont~ct was 8.151 (See Teble A3.15, p 3·16 In POS). Original Acres amount
(unescaleted) was S5,353,700 plus 8.15X (S434,720). After removing escalated portion of fiKed fee
(• $80,000), the remaining escalation Is 6.63X.
(2) The Tussing addttton wust Include all escalation, Including any which exceeds original estimates.· lie
have used lOX as more likely then lfie average original estimate of 6.63X for all additions to the work.
llote that escalation on fixed fee Is already Included In line 15 so that total esc~latlon Including that
for fixed fee Is more than 111 for remaining 23 months.
(3) Escalated fixed fee taken at 11X vs 12.281 on original contract since seven months 9f highest assumed
escalation have passed.
Additions
to Subtask
6.08
200
3,570
2,678
Task
Ill de
Changes
Thh Sheet
403
lBO
4,900
1,200
3,600
200
100
10 1ooo
20,180
151978(3)
L_j
Total
Scope
Changes
This Sheet
4,650
83,003
62,2511
1103
180
4,900
1,200
3,600
200
100
10 1ooo
20,180
151978
181 818
181,818
18,182(2)
2001000
.,,J
Subtotal
New
Task 6
Bud~t
43,885
578,1198
433,878
2,583
780
35,500
9,000
26,100
1,200
600
51 1ooo
124,180
119.857
1 258 996
130
4,500
500
5 000
1,263,996
89,930
113531926
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WORKSHEET T6-2
CHANGES TO TASK 6 RESULTING FROM EARLY GENERATION PLANNING ADDEO TO TASK 6
Task Subtotal
Subtotal New New New New New New Wide Total Proposed
from Subtask Subtask Subtask Subtask Subtask Subtask Changes Changes New Task
T6-1 6.32 6.33 6.34 6.35 6.36 6.37 This St.eet Tt.is st.eet 6 Bud!!et
Acres
ltanhours 43,885 800 700 1,000 300 900 400 4,100 47,985
Project COst of Service 578,498 14,280 12,495 17,850 5,355 16,065 7,140 73,185 651,683
!Wer"'ad 433,878 10,710 9,371 13,388 4,016 12,049 5,355 54,889 488,767
Hand ling Fee 22583 728 728 32311
Olsbursl!llll!nts
900 Mise 780 200 200 380
901 Trnel 35,500 7,000 7,000 42,500
902 Telephone/Tele~/etc. 9,000 900 900 9,900
903 Reproductions 26,100 2,700 2,700 28,800
915 Publications 1,200 500 500 1,700
916 Photography 600 100 100 700
921 Co1111uter 51 1 000 25!000 25.000 76.000
Subtotal Oisbursl!llll!nt l24,l80 36,400 36,400 160,580
Fee on Services 119,857 14 2088{3) 1332945
I TOTAl ACRES I 258 996 1 438 286
eft
't' R&M Consultants
Manhours 130 130
Manhours Cost 4,500 4,500
Disbursements 500 500
TOTAL R&M 5 000 5 000
TOTAL TASK 1,263,996 179,290 1,443,286
ESCALATION 89,930 17,923(2) 107,859
TOTAL WITH ESCALATION 1 353 926
See Notes on II.S. T6-1
WORKSHEET T6-3
CHANGES TO TASk 6 RESULTING FROM LIAISON WITH POWER ALTERNATIVES CONSULTANT
Task Proposed
Subtotal New Wide Total New
from Subtaak Changes Change Task 6
T6-2 6.38 This Sheet This Sheet Bud!J!t
Acree
Manhoure 47,885 320 320 48,305
Project Coat of Service 651,683 5,673 5,673 657,356
Overhead 488,767 4,255 4,255 494,440
Handli!!!J rae 31311 190 190 31501
Diaburset~~ente
900 Mise 980 600 600 1,580
901 Travel 42,500 8,ooo 8,000 50,500
902 Telephone/Telex/etc. 9,900 500 500 10,400
903 Reproductions 28,800 400 400 29,200
915 Publications 1,700 1,700
916 Photography 700 700
921 Conputer 761000 761000
Subtotal Oiaburee.ant 160,580 9,500 (3) 9,500 170,080
I rae on Services 133 1945 11092 11092 1351037
0\ TOTAl ACRES 11438,286 201710 11458,996
~
I R6M Consul t.-.ta
Hanhoura 1JO 1JO
Manhoura Coat 4,500 4,500
Diaburaet~~enta 500 500
TOTAl RaM 5,000 5,000
TOTAl TASk 1,1443,286 20,710 1,463,996
ESCAlATION 107,589 2,071(2) 109,660
TOTAL WITH ESCAlATION 1,551,145 22,781 1,573,926
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Ortglnal New
Tnk 11 Subtask
Bud~t 11.01
Acres
Man hours 3,140 2,200
Project Cost of 5er¥1ce 61,400 43,707
OYerheld 46,802 32,780
Handl1n9 Fee 41144 428
Dtsburs-nts
900 Mlsc 5,500
901 Travel 3,300
902 Telephone/Telex/etc. 2,500
903 Reproductions 2,800
912 Outside Consultants 6,200 21,400
915 Pub llcat tons
921 Co""uter
20,100 Subtotal Otsburse~tnt
Fee on Services 12.872
TOTAL ACRES 145 JIB
wee
fllanflours 20
Manhour Costs 11000
TOTAL WCC
FMA
Millihours 80
Manhour Costs 5,380
Dlsbursl!llll!nts 115oo
TOTAL FMA 6 sao
SALOMON BROTHERS (or others) 179,200
TOTAl TASK 332,398
ESCALATION 22,D38
TOTAL WITH ESCALATION 354,436
. __ ] 1 --J
WORKSHEET Tl1-1
PROPOSED NEW TASK 11 RESULTING FROM TUSSING ADDITIONS AND APPROVAL BY APA OF
EARLIER RECOMMENDATIONS BY ACRES
New 11.03 New 11.04 New ll.OS New 11.07 New 1l.D8 New
Subtask Subtask Subtask Subtask Subtask Subtask
11.02 !Old 11.04l !Old ll.D5l !Old 11 .06) !Old 11.D8) !Old 11.09)
2,D25 95D 14D 205 180 26D
4D,230 18,874 2, 781 4,072 3,576 5,165
30,173 14,156 2,086 3,054 2,682 3,874
1.216 338 356
60,800 10,000 17,800
80
5,380
6,880
6 880
(1) These values to be transferred to Task 00 to account for Increased secretarial costs stemming from added reporting.
1
Total Change
Task New fr0111
Wide Task 11 original
Chan9e Budget Bud9et
(1)
350 6,310 3,170
2,870(1) 121,275 59,875
2,152(1) 90,957 44,155
11012 3135D !794)
5,500 5,500
9,000 9,00D 5,700
5,000 5,000 25,000
10,000 10,000 7,2DO
llO,OOD 1D4,000
3,000 3,000 3,00D
15 1ooo 15 1ooo 15 100D
47,500 l57,500 137,400
24.316 24,316 111444
397 398 252 080
(2D)
!1.000!
80
5,380
6 1BBo
6 880
3,120 3,120 (176,080)
407,398 75,000
29,538 7,500
436,936 82,500
WORKSHEET T11-2
RECONCILIATION OF EARLIER APPROVALS BY APA WITH OTHER TASK 11 CHANGES
Transfer
Approved to Task 00 APA
by APA & other Approval Proposed Difference
Hay9 Reconcili-in Budget New Task Col1.11111
POS Based ation Format 11 Budget 4-J
11.01 1J1,500 (28, 194) 10J,J06 124,J06 21 ,ooo
11.02 1J7,JOO (9,898) 127,042 148,902 21,500
11.0J 25,000 (5, 107) 19,89J (19,89J)
11.04 (New 11.0J) 24,500 (1, 770) 22,7JO 65,2JO 42,500
11.05 (New 11.04) 10,000 (594) 9,406 9,406
11.06 (New 11.05) 10,000 10,000 10,000
11.07 (New 11.06)
I
0\ 11.08 (New 11.07) 14,000 (4, 54J) 9,457 9,457 01
I
11.09 (New 11.08) J0,800 (596) J0,204 J0,204
11.10 (New 11.09)
11.11 (New 11.10)
11.12 (New11.11)
Additions to Task 00 and
other Reconciliation 50,702 9,898 9,898
TOTAL J8J, 100 JJZ,J98 407,J98 75,005
ESCALATION ON CHANGES 7,500
TOTAL.WITH ESCALATION 82,500
(1) This value accounts for increased secretarial and associated costa to account for greater
report frequency and volume in 11.01, 11.02, 11.04 •
I J _J I .. J ····-~-j I _, __ Ac~ .J
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GENERAL NOTES TO ACCOWAN"l' SPREAD WORK SHEETS
A. To provide some lndlc8tlon of escalation changes, the original contract esc81atlon W8S considered to apply to e8ch task In
proportion to the value of the task. More precise escalation assessments will be generated when approval of cost end
schedule Is granted for new scopes.
B. Note that the original contract escalation was reduced by the escalated portion of Acres' fixed fee prior to 81 location by
task since the budget Includes escalated fixed fee above the "Total proJect" I lne.
c. Fixed fee essocl8ted with new work was calculated at a lower value than In original contract. (Original escalated percent8ge
= 12.28%. Value used for 8ddltlons In three worksheets= 11%).
D. Esc8l8tlon 8llowed for new work was taken as a total of 10% of the added work. This exceeds the 6.63% associated with orlgln81
contract value after note B was applied. This greater value Is assumed to be more likely to occur than had been estlm8ted with
December 1979.
E. All work sheets 8re b8sed on the Project budget. A number of changes to the this budget 8re pending (e.g., new R&M oontr8ct
v8lues, In-stream flow etc.), but It was considered least confusing to compare changes to the current printed budget.
F. Subtasks 1.01 end 1.02 reflect expenditures In excess of orlgln8l budget due to: 1) Work expended In connection with Tussing
changes and; 2> Delays and extended monitoring In connection with late ISER results.
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TASK 11 -MARKETING & FINANCING
ATTACHMENT A: PLAN FOR FINANCING
THE SUSITNA PROJECT
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TABLE OF CONTENTS
I. INTRODUCTION
Familiarity with ~~e Susitna Project
Scope of the Report
II. TAX-EXEMPT FINANCING FOR THE
SUSI'INA PROJEcr
A. Internal Revenue Code -Section 103
B. Use of Susitna Project Revenues as Security
C. Alternative Sources of Security
D. Local Furnishing Exemption
III. ELEMENTS OF A SUCCESSFUL PROJECT FINANCING
A. Determining the Market
B. Project Risks
C. Identifying the Parties-in-Interest
D. Creditor Protection: Revenue Assurance
IV. ACCESS TO THE FINANCIAL MARKETS
A. Investment Banker's Service
B. Types of Securities
EXHIBIT 1
Salomon Brothers' Memorandum of December 16, 1976
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. I. Th"TRODUCTION
This memorandum is submitted in response to a request from
Acres American Incoi"FOrated ("Acres"). We understand that
Acres and two other engineering firms have been selected to
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r ga rding the proposed Susi tna Hydroelectric Project. We further
understand that Mr. Eric Yould, General Manager of APA, speci-
fically requested that Acres include in their presentation
some views regarding certain issues which may affect the fi-
nancing of the Susitna Project. Saloroon Brothers has been
asked by Acres to prepare a discussion of such issues for
inclusion in their presentation.
Before addressing these questions, we would like to express
thanks to Acres for giving us this opportunity to offer our
analysis of the financing considerations for the Susitna Project
and our sincere hope that the Board of Directors and Staff of
APA find this information helpful in developing the plan of
financing for this Project.
Familiarity with the Susitna Project
We have been involved and have kept abreast of the Susi tna
Project since 1976. OJr first involvement came at the request
of former Corrmerce ComTiissioner Langhorne A. Motley in the -Fall of 1976.
At that time, we met with the u.s. Army Corps of Engineers in
Anchorage for a briefing on t..l-)e Project, and reviewed the feasi-
bility report prepared by the Corps. Later that month, we met
with u.s. Senator Mike Gravel, Conmissioner Motley, Mr. Eric
Wohlforth of Wohlforth & Flint, and Corps representatives in
Washington, D.C. to discuss the Project and the financing alterna-
tives. That meeting resulted in several proposed amendments
to the federal Alaska Hydroelectric Power Developnent Act, based
on suggestions made by Mr. Wohlfarth and ourselves. Subsequently,
we held telephone conversations with Mr. \\bhlforth to discuss
the amendments as he had drafted them.
Early in December 1976, Salomon Brothers prepared a memorandum
to ~A on the Project, which has been attached as Exhibit 1
for your reference. It outlines certain problems involved in
financing the Project, based on some type of federal involvement.
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Scope of the Report
This memorandum addresses the key issues that ~A will face if
it undertakes the Susitna Project on an independent basis. In
that case, it is likely that t..'"le funds borrowed to finance the
Project would ultimately be repaid from revenues generated by
it, an approach known as a project financing.
Whether APA securities issued to finance this Project will be
tax-exempt will have a significant influence on the planning
for it. For this reason, we have addressed in Section II the
factors determining tax-exemption: namely, Section 103 of the
Internal Revenue Code and the taxability if the bonds are
industrial developnent bonds. Section III discusses the elements
of a successful project financing, and notes that many con-
siderations will be relevant whether the Project is done on a
taxable or tax-exempt basis. After the financing plan has
been developed and security agreements are in place, 'AJ'A securi-
ties can be issued. Section IV offers a brief overview of
the general types of securities that may be used to enter
the financial markets. k5 an appendix, we have included a
discussion of Salomon Brothers and our experience in public
power area.
It should be noted that this memorandum has not proposed al-
ternatives dependent on either state or federal government
involvement. Such possibilities· have received considerable
attention in the past, and involve complicated political issues,
but as yet no commitments beyond the study stage have been
made. Naturally, if state or federal government support is
forthcoming, certain avenues not discussed will be possible.
In our role as financial consultants for the Acres report,
however, we have focused on the present situation and addressed
the issues facing 'AJ?A if it undertakes the Susitna. project
on an independent basis.
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II. ~X-EXEMPT FINANCING FOR THE SUSITNA PROJECT
A fundamental question is whether or not the interest paid
on bonds issued to finance the Project \<wOuld be tax~xempt
income to the holders of the bonds. This point will affect
the overall cost of the Project power and the type of fi-
nancing plan which is developed. Hence, at the outset of
this memorandum an examination of the factors determining
the tax-exemption question would be helpful.
A. INTERNAL REV'ENUE CODE -SECTION 103
Section 103 of the Internal Revenue Code exenpts from federal
income tax interest on obligations issued by states and their
political subdivisions, including state public authorities.
The exemption does not apply, however, to interest on "in-
dustrial develo:pnent bonds" unless the bonds are used to
provide one of the types of exempt facilities. Such include
p:lrt facilities, sports facilities, pollution control facili-
ties1 airports and facilities for the local furnishing of
electrical power, but not public power projects with a broad
service area.
APA bonds issued to finance the Susitna Project would be
industrial development bonds, and therefore taxable, if
(i) mne than 25 percent of their proceeds are used in
a trade or business carried on by a "nonexentJt person"
{the "trade or business test"), and (il) the payment of
more than 25 percent of the principal or interest on the
bonds is secured by property used in a trade or business,
or payments in respect of such property (the "security interest
test"). Both the trade or business test and the security
interest test must be satisfied in order for obligations to
be industrial development bonds. An exempt person is a state
or local governmental unit or an organization exerrpt from tax
under sections 501 {a) and SOl (c) (3) of the Internal Revenue
Code (relating to nonprofit, charitable organizations). NOn-
public, profi tmaking enterprises, as well as the federal govern-
ment and its agencies and instrumentalities, are thus nonexempt
persons.
Since public power projects with broad service areas are not
exempt facilities, the foregoing provisions of section 103would
permit the issuance of tax-exempt bonds to finance the Susi tna
Project, only if the Susitna bonds are not industrial develop-
ment bonds.
Section B, which follows below, describes the special rules
for the trade or business £est and security interest test in
trore detail, and suggests several strategies that may prevent
Susitna bonds from being classified as industrial development
bonds. Section C discusses how other sources of security may
be used to prevent the security interest test from being
satisfied if this cannot be accorrplished where Susi tna Project
revenues are used as security for the bonds. Section D describes
the tax exemption for interest on industrial developnent bonds
used to Pt:ovide "facilities for the local furnishing of electric
energy".
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B. USE OF SUSITNA PRCUEcr REVrnUES AS SECURITY
1. Special Rules for Trade or Business
and Security Interest Tests
Treasury regulations under section 103 provide special rules
for applying the trade or business test ana security interest
test to bonds issued to finance an electric generating facility
owned and operated by an exempt person (such as a state,
rrunicipali ty or public power authority). These rules take
the approach that the benefits of ownership of such a facility,
and the burden of paying debt service on bonds used to finance
it, will be transferred to nonexempt persons under power pur-
chase contracts meeting certain conditions, with the result
that such bonds would be industrial developnent bonds and,
therefore, taxable. The trade or business test is satisfied
with respect to bonds issued to finance a power project if
either (i) one nonexempt person contracts to take, or to
take or pay for, more than 25 percent of the output of the
project over the period beginning on the date that output
is first taken by a nonexempt person and ending on the last
maturity date of the bonds ("project output"), or (ii) two
or more nonexempt persons, each paying annually a guaranteed
minimum payment exceeding 3 percent of the average annual
debt service on the bonds, contract in the aggregate to take 1
or to take or pay for 1 more than 25 percent of the project
output.
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The security interest test is satisfied if all of the payments
to be made with respect to the contract or contracts taken
into account in applying the trade or business test exceed
25 percent of the total debt service on the bonds.
2. Special Rules Applied to Susitna Project
'Ihe special rules described above may be applied in steps to
the Susitna Project to determine whether the Susitna bonds may
be industrial development bonds:
a. Classify the anticipated purchasers of power from
the Susitna project into exe~t and nonexeq>t persons. For
example, municipalities such as Anchorage and Fairbanks will
be exempt persons, whereas private electrical co-ops will be
nonexempt.
b. Determine whether any one nonexempt person will
contract to take, or take or pay for, more than 25 percent
of the project output of the Susi tna project. If t_l-}ere is such
a person, then the trade or business test is met.
c. If there is no such person, identify the nonexempt
persons who will each pay annual guaranteed minimum payrrents
exceeding 3 percent of the average debt service on the Susitna
bonds. 'Ihe trade or business test is satisfied if the aggregate
amount of power which these persons contract to take, or take
or pay for,_ exceeds 25 percent· of the project output of the
Susitna project.
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d. If the trade or business test is met, total the
payments that will be both pledged or used to pay debt service
on the Susitna bonds and made pursuant to the contracts referred
to in either paragraph 2 or 3 above. The security interest test
is met if this aggregate amount exceeds 25 percent of the total
debt service on the Susitna bonds.
3. Possible Alternatives Under the IRS Code
If it appears t..ljat the Susi tna bonds may be industrial developnent
bonds because of the commitments by nonexempt persons to purchase
power, consideration may be given to altering the makeup of
the group of purchasers to avoid the trade or business test
or security interest test.
a. Trade or Business Test
One approach could be implemented by channeling power from
existing plants to nonexempt users and using a correspondingly
greater portion of the power from the Susitna Project to supply
municipalities and other exempt persons. Alternatively, con-
sideration should be givento using existing power authorities,
or newly formed authorities, qualifying as exempt persons, to
buy power from the Susitna project and supply nonexerrpt persons.
Any such authority would have to be more than a conduit (i.e.,
it would have to enter into contracts to purchase power from
the Susi tna Project that were not rratched term for term by
contracts with its customers) in order for it (and not the
customers) to be treated as the purchaser of power from the
Susitna project.
b. Security Interest Test
Another approach could be used if the Susi tna bonds are industrial
development bonds because of the number of ronexempt persons
that both are committed to make annual guaranteed payments exce-
eding 3 percent of average annual debt service and purchase
power on behalf of others (through a cooperative arrangerrent
orotherwise). In this situation, itmay be possible to avoid
the 3 percent test (and thereby reduce the number of nonexerrpt
persons whose purchases of power ~uld be counted toward the
25 percent limits) by bypassing the intermediary and selling
directly to the ultimate customer. The intermediate purchaser
could still be used to service accounts and transmit power for
a fee, but it would not be obligated to purchase power from
the Susitna Project.
C. ALTERNATIVE SOORCES OF SECURITY
On the other hand, if the use of Susitna Project revenues ·.to
secure the Susi tna bonds would cause the bonds to be industrial
development bonds, consideration should be given to the availa-
bility for this purpose of alternative funds that are independent
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of the Susi tna project and not otherwise derived from a
trade or business carried on by a nonexempt person, such
as general revenues of the State of Alaska or an allocation
of funds from the Alaska Permanent Fund.
It would not be necessary to substitute different security
for all of the Susitna Project revenues, but only for an
amount sufficient to avoid the security interest test.
It should be noted that the existence of a full faith and
credit guarantee of payment of the Susitna bonds by the
State of Alaska would not avoid the security interest test
if the bonds were still secured by, or were expected to
be repaid with, Susi tna Project revenues meeting the require-
ments of the security interest test.
D. LOCAL FURNISH:n.K; EXD1PTICN
If the Susitna bonds are industrial developnent bonds, then
they will be taxable unless the bonds are used to provide
an exempt facility. '!he onlyexemption thatcouldpossibly
apply to the Susi tna Project is that for •facilities for
the local furnishing of electric energy". While it is unlikely
that this exerrption will apply, it is considered here for
the sake of completeness.
Facilities entitled to the exemption are those used to
produce, collect, generate, store, .distribute, or convey
electric energy that are part of a system providing service
to the general populace of one or more comnunities or runi-
cipali ties in not more than two contiguous counties (or a
policital equivalent) or a city and one contiguous county.
For this purpose, a city that is not within, or does not
consist of, one or more counties (or a political equivalent)
is treated as a county (or a political equivalent). An other-
wise qualifying facility is not disqualified because it is
connected to a system for interconnection with other public
utility systems for the emergency transfer of electric energy.
The facilities need not be located in the area served by
them.
In addition to the foregoing tests, facilities for the local
furnishing of electric power must be available for use by
the general public. 'Ihis test is met if the owner or operator
of a facility is obligated by law to furnish electric energy
to all persons who desire it and are within the service
area of such owner or operator, and it is reasonably expected
that such facility will serve or be available to a large
segment of the general public in such service area.
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This discussion has addressed the regulatioP.s that will determine
whether or not Susitna bonds would qualify for tax exercption.
Considerably more attention will have to be focused on these rules,
and various alternatives • explored, so that the financing plan
ultimately developed will be the best possible for APA.
III. ELD1ENTS OF A SUCCESSFUL PROJECT FINANCING
Assuming that the federal or state goverrunents do not offer
unlimited funding or guaranties for the project, it is likely
that the funds for it will be raised by a project financing.
This means that the funds borrowed to finance the construction
of the Project will ultimately be repaid from revenues generated
by it.
Naturally, it would be desirable if the tax-exemption ques-
tions raised in the preceding sectionwereresolved in APA's
favor; but, whether done on a taxable or tax-exempt basis
the basic elements of a successful project financing are es-
sentially the same. Hence, the concepts developed in this
section will be relevant regardless of the outcome of the
tax-exemption questions.
The roost important characteristic of any project financing
is its economic viability. Prospective lenders will support
a project of this magnitude only after they are convinced
that it will become self-supporting from an economdc stand-
point. (OUr present understanding is that the Project will
produce a total of 1,60lnw from two sites, with an estimated
cost of $2.5 billion.) Thus, a thorough assessment of pro-
jected power supply and demand within the potential service
area is needed to support the economic viability of the Project.
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A. DETERMININS THE MA.RKET
~A must obtain informed judgments on two critical matters:
that a market will exist for the power which the Susitna
Project has the potential to produce, and that the Project
offers the best means, from an overall cost stanapoint, to
meet that future market. '/>.FA must define this market and specify
the conditions under which it can reasonably expect to rraintain
the projected customer load. Additionally, 'APA should establish
the extent to which the market will result from displacement,
growth, or a combination of the two. Furthermore, it should
be determined whether such growth or displacement will come
from new or existing customers and when these various elements
of market demand will materialize. It should be noted that
the ability to forecast energy demand is important not only in
determining the aggregate construction and financing require-
ments but also in derronstrating the quantitative ability to
interpret market requirements accurately.
Identifying the market should also involve an assessment of
the costs and benefits to each potential project participant.
A directed effort then can be made to evaluate each of those
parties, their priori ties and creditworthiness in order to
combine effectively into one project approach the interests
of those most vitally concerned.
B. PROJEcr RISKS
In addition to the satisfactory evaluation of the market for
the power and the type of project to serve that market, there are
certain risks inherent in any project financing, which rust be
defined, isolated and overcome before the financing can be
assured. The basic project financing risks which must be ad-
dressed include:
1. Cbst Overruns Prior to Completion
With most extended construction periods, there is
a reasonable probability that cost overruns will
result from delays, changes in Project design, and
inflation. 'Jl\PA must be able to price its power
sufficiently to cover cost overruns, including the
cost of additional capital, while still remaining
competitive with other energy sources.
2. Late Completion and Non-completion
J:Jelays due to technological or other reasons, in
addition to causing cost overruns, may affect the
timely completion of the Project. Under extreme
circumstances, a project may be abandoned prior to
completion or so substantially altered as not to
meet anticipated output. Investors looking to the
future ·revenue streams will demand assurance that
such· revenue streams materialize.
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3. Partial or '!btal Post-completion Q.ltages
Once the Project is complete, there exists the risk
that the Project's operation will be suspended for
a period of time, either partially or totally, and
therefore not generate revenues sufficient to service
outstanding debt. Although this risk is reroote,
consideration must be given to its possible occur-
renee. Since the Project will consist of generation,
transmission and inter-tie facilities, some part of
the Project may suffer an outage which would com-
promise the entire operation.
4. Customer Failure to Provide Anticipated Cash Flows
The Project customers may provide less than antici-
pated cash flows notwithstanding timely completion
and full operability of the Project. This can result
from demand shortages, competitive power supply pres-
sures or regulatory factors. To provide comfort to
investors with regard to this risk, !U'A must be able
to demonstrate its ability to service Project debt
while operating at less than anticipated levels or
by selling power at lower than anticipated prices.
5. RegUlatory Risk
Regulatory risks generally exist both before and after
the Project is completed. Fundamentally, any action
which may be taken by a governmental or quasi~overn-
mental agency which may adversely affect the Project •s
revenues or its ability to effect power interchanges
with other bodies constitutes a regulatory risk. To
the extent possible, the ability of any regulatory
body to affect these two areas should be determined
beforehand and coordinated with the developnent of
the Project financing plan.
6. Technological Risk
Traditionally, lenders to project financings have
been reluctant to extend credit to projects which
embrace unproven technology. Because of the many
financial and operating ~isks associated with pro-
jects, the addition of a technology risk with its
attendant uncertainties may prove unacceptable. To
the extent that the construction techniques or gener-
ation, transmission, or distribution facilities
consist of new or unproven technology, the Project
will be more difficult to finance.
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The above risks have been confronted and overcome
in all successful projects in a variety of ways.
c. ID~~IFYING THE PARTIES-IN-INTEREST
On a preliminary basis, !;FA and its investment bankers rrust
identifythe entities which are potential candidatesto share
some of the risks, either directly or indirectly, associated
with the development of the Susitna Project. In some cases, one
or more of these various parties-in-interest would be direct
participants in the Project, while in others they ""'uld provide
direct or indirect credit support through guaranties or other
contractual undertakings. These parties might include municipal
electric systems, rural electric cooperatives, investor-owned
utilities, and the state and federal governments.
Having identified the parties-in-interest, APAand its invest-
ment bankers would develop a financing structure which would
address the basic requirement for investors in a project fi-
nancing: creditor protection •
D. CREDITOR PROTECTION: REVENUE ASSURANCE
The basic credit risk against which investors attempt to protect
themselves is the risk of default. The risk of default lies in
the borrower's inability to meet interest and principal payments
on his debt obligations in a timely fashion. Adequate revenue
assurance protects the investor against this risk.
For large energy projects, the necessary revenue assurance may
be derived from a demonstration of demand for the project out-
put and adequate customer and regulatory support of the price
for the power.
1. J:Ower Sales Contracts
The demand for Project output may be formalized with
power sales contracts between APA and the immediate
customers for the Project •s power. SUch contracts
may be with nunicipa.lities, cooperatives, industrial
corporations and federal government installations
and would serve as a source of .credit support for
the Project.
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The types of corrnni tments under such contracts vary considerably
among different issuers. Such types of provisions which APA
may wish to consider are:
a. Take~r-pay Cbligations-These require users of project out-
put to commit a defined payment for the life of the contract,
regardless of the level of project output or a user's need
for power. It effectively obligates the users to provide funds
that can be used for debt service.
b. Take-and-pay Obligatiors -This requires users to pay only
for the project output which is available to them. It does
not ensure that funds would be available for debt service if
the project suffers anextended outage.
c. Minimum Payment Obligations -The user is contractually obli-
gated to make only a minimum payment in the event it is unable
or unwilling to receive all of the contracted for output. '!he
minimum payment obligation provides for debt service in the event
of project outage, while reducing the burden of project credit
support on the various obligors to an amount less than that
which ~uld be payable with the project fully operable. The
unconditional nature of the minimum payment obligation, combined
with the credit strength of project customers, comprise the
ultimate source for project creditworthiness in the eyes of
lenders.
d. Step-up Provisions -Most projects having sponsoring
customers whose creditworthiness is somewhat disparate include
some measure of protection against the risk of individual customer
default in their power sales contracts. 'Ihis protection takes
the form of a specified percentage step-up for the non-defaulting
customers. In such cases, upon the failure of any customer
to make any payment, the share of all other customers not in
default under the contractual support agreement is subject to
an automatic increase.
Since the Project output at some point may become subject to
price regulation or other regulatory constraints, it is in-
cumbent upon ~A to include in discussions all governmental
and regulatory agencies which can possibly affect the price
of the Project output. Revenue assurance w::>uld be achieved
through ~A's ability to set rates at levels sufficient to
discharge its debt obligations without regulatory interference.
2. Guaranties or Other Sources of Payment -Guaranties by a
credit ~rthy party, such as the State, w::>uld provide further
assurance to investors that monies needed to meet debt service
will be. paid from power sales contracts or the guarantor. As
previously mentioned in Section II, such a guaranty of the bonds
will not necessarily solve the tax-exemption question, since it
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would be contemplated that the bonds would be paid from the
power sales contracts. However, if another source of payment,
such as monies from the Alaska Pennanent Fund, were used to pay
.all or a portion of the bonds, it may enable the bonds to
qualify for tax-exemption.
3. Funds
In such projects, additional protection for meeting annual debt
service requirements is supplied through the use of "Funds"
of various types.. 'Ihe purpose of these funds is to provide
protection against any unexpected shortfalls in revenues, and
provide for unanticipated expenses. 'Ihe Funds are established
at the outset of the project financing and are subsequently
maintained by a primary allocation of project revenues on
a gross or net basis. 'Ihe Funds are labeled to describe either
their source, use, or the type of risk they are intended
to cover. "Revenue Fund", Construction FUnd", "Reserve and
Contingency Fund", "Operating Fund", "Bond Fund" and "Bond
Reserve Fund" are some common examples.
Typically, the Funds are interlocking and spill-over into
one another • 'Ihus, a Revenue F\md would be sourced from
all of the revenues of the project and spill-over into the
Cperating Fund which would be used to pay all operating expenses.
The Bond Fund, the second level spill-over from the Revenue
Fund, would receive payments necessary to meet all project
interest, ·principal and bond retirements. The Bond Reserve
Fund would be used to make up any deficiency in the Bond
Fund in order to keep payments of interest and principal current
if project cash flows were temporarily insufficient. The
Reserve and Contingency FUnd would be available to meet any
deficiencies in paying operating and maintenance expenses and
would also be available to replenish the Bond Reserve Fund
or Bond Fund.
To establish the creditworthiness of the Project at the start
of construction, the various Funds may be established through
borrowing or sponsors' contributions and subsequently main-
tained by mandatory allocations of Project revenues. While
this would increase APA 's financing requirements, it would
provide a form of quasi-equity which enhances Project credit-
worthiness during the lengthy construction period.
We have examined the key elements of a successful project
financing, namely: defining the market for the power, ascer-
taining the Project's suitability to serve that market, ad-
dressing the project's risks, and providing adequate repayment
security to the investors. Each will provide challenges for
APA on the SUsitna Project but, with creative approaches and
experienced professional advisors, a successful outcome will
be achieved.
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IV. ACCESS TO THE FINANCIAL MARKETS
After the tax-exemption questions have been resolved and the
financing plan and security provisions structured, it will
be possible to raise funds for the Project through the issuance
of securities. 'Ihis section will address the investment
banker's role in this process, and the types of securities
which might eventually be issued.
A. INVESTMENT BANKER'S SERVICES
In financing a new project, the role of the investment banker
is far more difficult and far oore irrportant than in the
financing of an established, market-tested credit. 'Ihe essence
of the investment banker's role in such a financing is to esta-
blish the credi t~rthiness of an entity where none has pre-
viously existed and to introduce this new borrowing entity
to the rrarketplace.
The services provided by APA 's investment banker should cor res-
pond with the various stages of the Project development plan.
We envision these stages as follows: (1) the preliminary study
phase; {2) the consulting and negotiating phase; and (3) the
execution phase.
Much of the work which will occur during the first two steps
has been discussed in the preceding sections of this report.
In particular, APA's investment banker will work closely with
APA and its other professional advisors to determine the optimal
structure for undertaking the Project. After the Project struc-
ture, participants and various contractual agreements have
been determined, the investment banker's attention will focus
on financing strategies, for both the short and long term
financial needs of the Project.
Before the actual funding of the Project could be undertaken,
the investment banker would assist in the preparation of a
presentation to the potential investors and rating agencies
and the description of the Project to be included in the of-
ficial statement. Because of the generally complex nature of
public power financings, the investor and rating agency presen-
< · tations and disclosure material are especially important. 'lhe
necessity of explaining the intricacies of the Project in
a sufficiently comprehensive manner so as to obtain the optimtDD
credit rating and develop investor acceptance requires an
investment banker well versed in public power financing.
B. TYPES OF SECURITIES
'lhe final stage of the Project, the execution phase, would
involve the actual funding of the Project through the sale
of APA securities. Several types of securities could be of-
fered, some examples of which are described below:
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1. Interim Financiro -Prior to the construction
· phase 'APA will incur a number of expenses, so
that at some point access to funds ""'uld be desi r-
able. In general, such funds would be provided
from a short-term loan which \IA:)Uld eventually
be repaid from the proceeds of a long term bond
financing. The most corrnnon sources for such funds
are bank loans, the sale of notes, private place-
ments and in t.~e very early stages, advances from
the State.
2. Tax-Exempt Commercial Paper -Another p::>ssible
source of short-term funds presently being
developed is tax-exempt corrmercial paper. Pre-
sently there is no such market, but it is possible
that some of the large well-established public
power credits may soon start issuing these securi-
ties.
3. Long-Term Bond Financing -'lhe actual construction
of the Project will be financed from the sale of
long-term bonds. As was discussed in the earlier
sections, these would be repaid over a number of
years from revenues generated by the project and
secured by various contractual agreements. As-
suming the tax considerations already discussed
can be satisfactorily addressed, the interest on
these bonds would be tax-exempt.
Considering the large capital needs of the Susitna Project, and
the economical energy it is expected to produce, it is likely
that the various 'APA securities ~uld be attractive to major
institutional investors. An aggressive marketing program by
APA's investment banker can develop that interest; with such
support, APA's securities will enjoy an active market and be
well received by investors in the years to come.
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-.;;_-.;,__..--=saiomon Brothers
Dece~be::::-16, 19i6
Financ:ng Consicerations
Alaska ?ower Authority
The Alaska Po• .... ·e:::: .~.1.:.t!1or i ty (the ";..l.:::chor i ty") proposes
to finance the cost of const::::uction of the Susitna Rive:::-
Project consisting of two ~a~s, Devil Ca~yon and Watana,
a~d t!1e t::::ans~ission facilities necessa::::y to deliver the
outpl.!t to the Fairbanks ana A.."1cho::::age a::::-aa (the "Project,)
The Project will be constructed by the U.S. Army Corps of
Engineers {the "Corps") under a "tu::::-nkey" a::::-rangernent wi~h
the Authority whe::::ein the Corps will complete the Project
or reimburse the Authority for all costs incurred by the
.Authority. The output o= the Project will ~e used to meet
the projected power needs of the Fairbanks -Ancho;age
a::::-ea and sold to certain Powe:::: Purchasers (i.e., municipal
electric utilities, industry, and federal government
installations) pu::::suant to long-term power supply contracts.
The business risks associated with the proposed financing
can be separated into: (1) those risks associated with the
failure of the Project to provide electric power and energy
at reasonable cost, and; (2) those risks associated with the
ability of the Powe= Purchasers to fully utilize and pay
for the power suppliec.
PROJECT RISKS
The risks associatec with the failure of the Project to
_provide powe= and energy at the initial projected costs may
be divided int~:
A. Prior· to Co~~ercial Operation
(1) Non-completion due to any reason
(2) Construction cost overrun due to
(a) Inadequate initial design
(b) General inflation and/or cost escalation
and/or cost increasesdue ~o required
Project additions.
B. After Commercial Operation
(1) Lo~g Project outage due to design
(2) Long Project outage due to physical damage
(3) Low water operation
Prior to Co~~ercial Operation
Non-completion. The risks associated with non-completion
of the Project are assumed by the Corps under the turnkey
contract wherein the Corps would guarantee commercial operation
of the Project. Commercial operation would be established
by certain objective tests or o~ certain performance guarantees
(e.g., one yea::-of full powe::-operation). Non-completion,
the failure to meet the obj.ective tests for conunercial
operation, would require the Corps to reimburse the Authority,
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t~rough a Federal funding process, for all costs, including
interest charges incurred. This reimbursement procedure
·would be operative prior to the commencement of the Authority's
financing program and be established such that the bonds issued
.-by the Authority could be called or paid as they mature, at the
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option of the bondholder. Essentially, if the Project is net
completed, the bondholder will be paid by the Federal
government.
Construction Cost Overruns. If, in order to complete
r the Project, funds in addition to those originally planned
are needed, then, if the cause of the cost overrun is due
to design, the Corps would have responsibility to provide
the funds necessary to bring the Project to commercial
operation as provided for in the turnkey arrangement. To -the extent the overrun is due to general cost increases, the
-Authority would ass~~me the responsibility of supplying the
additional funds. The overall responsibility of the Authority
'WOuld be limited to a dollar amount established prior to
·the com.TTtencement of the Authority's financing program. This
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amount ("Feasible Project Costs 11
} would be determined through
r :negotiation with the Corps and be above the initial estimated.
Project cost but below the cost which would make the Project
r not economically feasible.
In order to insure the completion of the Project another
source (e.g., ~he Corps or the State) would be obligated to
provide funds needed above this amount.
After Co~~ercial Operation
Long Project Outage Due to Design. The costs associated
with the failure of operation due to design would be assumed
by the Corps wherein the Corps would provide funds necessary
to restore the Project to operation and meet the Authority's
costs not provided for out of various reserve funds.
Project Outage due to Physical Damage. The costs
associated with returning the Project to commercial operation
would· be assumed by the Authority to the extent the funds
needed do not exceed Feasible Project Cost. Costs above
that amount would be provided by another source (i.e.,
the Corps, the State, insurance). This arrangment would be
.established prior to the Authority's first financing.
Low Water Ooeration. The higher cost associated with
low water would be assumed by the Authority.
Power Purchaser Risks
The risks associated with th~ ability of power purchasers
to utilize and to pay for the power supplied are:
(1) That the growth in demand for power and energy, as
projected by an independent consulting engineer,
does not develop.
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(2} That the rates necessary to pay the costs
associated with the Project are excessive,
for reasons other than inadequate demand
growth, when compared with the income levels
of the populatio~ being served or when compared
with power available from other power supply
resources.
Both of these risks relate to the cost of power and
are ass\!l':'l.ed by the Power Purchasers under the power supply
contracts which will provide that payments will be made by
the Power Purchasers sufficient to cover all the Authority's
costs incurred in the operation and maintenance of the
Project.
Further Considerations
/he risk that the Power Purchasers will not be able
to make payments as required by the Power Supply Contracts
usually has been addressed in an independent consulting
engineer's financial feasibility report which, among other
things, concludes that:
(a) The Project is technically and economically feasible
and the estimated cost of construction is reasonable.
(b) At the estimated date of commercial operation the
power purchasers will have the need and the ability
to pay for the output from the Project.
(c) Of the projected available power resources, the
Project, when integrated into existing resources,
will best fulfill the future power supply require-
ments of the _power' purchasers.
(d) The revenues derived from the sale of power will
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be sufficient to meet the power purchasers'
obligations.
In the proposed Alaska Power Authority financing,
·however, two differences exist. First is that thereis usually -~
a projected general market demand for Project power besides
the demand from those Power Purchasers who have specifically
contracted to receive such power. The power from the Project -
has a limited market area and no such assurances as to the
general market demand will be available. The second is
that the Project is in Alaska which involves investor concern
over environmental difficulties, natural catastrophes (e.g.,
earthquakes) and other problems. Because of these differences
additional security may be needed to assure investors of
the strength and adequacy of the revenue flow.
·To determine ·Project feasibility the Authority would
issue short-term bonds the proceeds of which would be
used by the Corps for feasibility studies. The ultimate
determination of Project feasibility would be the initial
issuance of a significant amount of Bonds by the Authority
(e.g., $100 million) a portion of the proceeds of which would
be used to pay the maturing short-term bonds. If ·the Project
is not feasible, the Corps would reimburse the Authority for
all costs incurred, includ~ng interest expense.
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