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DEPARTMENT OF COMMUNITY AND
REGIONAL AFFAIRS
DISSOLUTION OF THE ALASKA
ENERGY AUTHORITY AND
TRANSFER OF PROGRAMS
May 27, 1994
Audit Control Number:
21-4488-94
Division of Legislative Audit
P.O. Box 113300, Juneau, Alaska 99811-3300
LEGISLATIVE BUDGET AND AUDIT COMMITTEE
DIVISION OF LEGISLATIVE AUDIT
The Legislative Budget and Audit Committee is a
permanent interim committee of the Alaska
Legislature. The committee is made up of five
senators and five representatives, with one alternate
from each legislative chamber. The chairmanship of
the committee alternates between the two chambers
every legislature.
The committee is responsible for providing the
legislature with audits of state government agencies.
The programs and activities of state government now
cost more than $5 billion a year. As legislators and
administrators try increasingly to allocate state
revenues effectively and make government work more
efficiently, they need information to evaluate the work
of governmental agencies. The audit work performed
by the Division of Legislative Audit helps provide
that information .
As a guide to all their work, the Division of
Legislative Audit complies with generally accepted
auditing standards established by the American
Institute of Certified Public Accountants and with
government auditing standards established by the U.S.
General Accounting Office.
Audits are performed at the direction of the
Legislative Budget and Audit Committee. Individual
legislators or committees can submit requests for
audits of specific programs or agencies to the
committee for consideration. Copies of all co mp leted
audits are available from the Division of Legislative
Audit's offices in either Anchorage or Juneau.
BUDGET AND AUDIT COMMITTEE
Senator Randy Phillips, Chairman
Senator AI Adams
Senator Steve Frank
Senator Steve Rieger
Senator Bert Sharp
Senator Jay Kerttula (alternate)
Representative Terry Martin, Vice Chair
Representative John Davies
Representative Mark Hanley
Representative Ron Larson
Representative Eileen MacLean
Representative Sean Parnell (alternate)
DIVISION OF LEGISLATIVE AUDIT
Randy S. Welker, CPA
Legislative Auditor
Merle R. Jenson, CPA
Deputy Legislative Auditor
P.O. Box 113300
Juneau, Alaska 99811-3300
(907) 465-3830, Juneau
(907) 561-1445, Anchorage
(907) 465-2347, Juneau FAX
ALASKA STA1CE LEGKSJLATURE
I,
LEGISLATIVE BUDGET AND AUDIT COMMITTEE
Division of Legislative Audit
Members of the Legislative Budget
and Audit Committee:
May 27, 1994
P. 0. Box 113300
Juneau, AK 99811-3300
(907) 465-3830
FAX (907) 465-2347
In accordance with the provisions of Title 24 of the Alaska Statutes, the attached report is
submitted for your review.""
DEPARTMENT OF COMMUNITY AND REGIONAL AFFAIRS
DISSOLUTION OF THE ALASKA ENERGY AUTHORITY
AND TRANSFER OF PROGRAMS
May 27, 1994
Audit Control Number
21-4488-94
The audit addresses the sequence of events and legislation surrounding the dissolution of the
Alaska Energy Authority, the identification of the programs and energy assets transferred to
the Alaska Industrial Development and Export Authority and the newly created Division of
Energy, and the impact the dissolution and program ttansfer had on the delivery of services.
The audit was conducted in accordance with generally accepted government auditing
standards. Fieldwork procedures utilized in the course of developing the findings and
discussion presented in this report are discussed in the Objectives, Scope, and Methodology
section on page one.
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Randy S. e lker, CPA-~
Legislat · ve Auditor
TABLE OF CONTENTS
Objectives, Scope, and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Organization and Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Background Information ....................................... .
Report Conclusions and Recommendations
Agency Response:
Department of Community and Regional Affairs
Page
1
5
11
17
25
Legislative Audit's Additional Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
OBJECTIVES, SCOPE, AND METHODOLOGY
In accordance with Title 24 of the Alaska Statutes and a special request by the Legislative
Budget and Audit Committee, we conducted a review of the transfer of energy related
programs from the Alaska Energy Authority (AEA) to other state agencies. The program
transfers were a result of legislation (Chapters 18 and 19, SLA 1993) which affected the
following Alaska Statutes:
Title 37.05.520
Title 42.05
Title 42.45 (new chapter)
Title 44.47.050
Title 44.83
Title 44.88
Railbelt Energy fund
Alaska Public Utilities Commission Act
Rural and Statewide Energy Programs
General powers and duties of DCRA
Alaska Energy Authority
Alaska Industrial Development and Export
Authority
The legislation dismantled ABA, reducing both its responsibilities and duties while also
transferring rural and urban energy projects and programs to two different departments.
Rural programs are now administered through the new Division of Energy (DOE) within the
Department of Community and Regional Affairs (DCRA). Other energy assets were
transferred to the Alaska Industrial Development and Export Authority (AIDEA) within the
Department of Commerce and Economic Development. The legislation also contained a
provision directing agencies to contract with the private sector for service delivery to the
maximum extent feasible.
Objectives
The primary objective of the review was to gain an understanding of the impact the new
legislation had on the delivery of rural energy program services. A secondary objective was
to review the process transferring energy programs from ABA to DCRA.
Specific objectives of the review were to:
1. Review the process leading to the dissolution of AEA.
2. Review the transition process from AEA to the new DOE within DCRA.
3. Determine the impact of the transition from AEA to DOE on the delivery of rural
energy program services.
4. Review and report on the status of the Circuit Rider Maintenance Program.
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ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
Scope
We focused our review primarily on the management of the former AEA and DCRA relating
to the transfer of rural energy programs and the organization of the new Division of Energy.
Additionally, we reviewed the transition of other AEA programs that transferred to AIDEA.
Methodology
Our evaluation of the program transfers and the associated impact involved review and
analysis of the following documents, interviews, and issues:
1. "Dissolution" legislation and bill history.
2. Pertinent legislative committee minutes.
3. Multiple transitional organizational plans.
4. AEA and AIDEA annual reports.
5. AEA financial statements and management letters.
6. Reading files of, but not limited to:
DCRA commissioner
DCRA deputy commissioner
DCRA/Division of Administrative Services director
Former AEA Executive directors
DCRA/DOE directors
Key energy program staff
7. Personnel files.
8 . Accounting issues involved in the transition.
9. AIDEA bond counsel committee minutes.
10. AIDEA board minutes and the development of Joint Action Agencies (JAA).
11 . Various AEA sponsored studies regarding strategic energy planning and bulk fuel
ISSUeS.
12. AEAIDOE project files pertaining to rural projects.
13. Pertinent Department of Law legal opinions.
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AlASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
14. Meetings and discussions with:
Past AEA executive directors, key program managers, and employees
Executive director and key program managers of AIDEA
Bond counsel for the four dam pool committee and the Bradley Power
Management Commission (BPMC)
Former and current Division of Energy directors
Current DOE staff, including program managers and engineering personnel
Staff to the Alaska Public Utilities Commission
Contractors administering the privatized Circuit Rider Maintenance Program
Members of the Rural Alaska Power Association
Officials of the Alaska Village Electric Cooperative, Inc.
Private sector power developer
Various other rural Alaska power providers
Various DCRA officials
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ALASKA STATE LEGISLATURE
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DIVISION OF LEGISLATIVE AUDIT
ORGANIZATION AND FUNCTION
Prior to enactment of Chapter 18, SLA 1993 (SB 106), both the Alaska Industrial
Development and Export Authority (AIDEA) and the Alaska Energy Authority (AEA) were
fully structured public corporations. They had the powers of a private corporation and each
had its own Board of Directors, yet were agencies which were created to carry out tasks on
behalf of the State.
ALASKA ENERGY AUTHORITY
Created in 1976, the original stated purpose of AEA was:
... to promote, develop, and advance the general prosperity and economic
welfare of the people of the state by providing a means of constructing,
acquiring, financing and operating power projects and facilities that recover
and use waste energy.
To meet this objective AEA evaluated, constructed, and operated numerous power projects
in addition to providing technical assistance programs, grants, loans, and bond financing.
AEA has helped provide electricity to more than 200 communities. AEA owned and
operated six hydroelectric dams and more than 420 miles of transmission lines; its assets
exceeded $1 billion.
Upon enactment of the new legislation, the corporate structure of AEA was retained to
maintain the integrity of its bonds, however its role in the construction and acquisition of
energy projects was repealed. AEA's operating assets and financing abilities were transferred
to AIDEA. The legislation also transferred AEA's other programs to the newly established
Division of Energy (DOE) within the Department of Community and Regional Affairs
(DCRA).
DIVI SION OF ENERG Y
Located within DCRA, DOE's stated mission is:
... to assist in the development of safe, reliable, and efficient energy systems
throughout Alaska, that are financially viable and environmentally sound.
To achieve its mission, DOE has established an energy strategy that emphasizes the
following three goals and corresponding objectives:
1. Afforda bl e, safe , re li abl e, an d efficient e ner gy for all Al a k ans
DOE's objectives for this goal include addressing issues surrounding the purchase and
storage of bulk fuel, developing demonstration projects which use local fuels as an
alternative to diesel, development of hydroelectric resources, assessing the feasibility
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ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
of incorporating water and waste water system ma1i:itenance and operation into the
services provided by rural electrical utilities, workingwith the legislature and Alaska
Public Utilities Commission to provide incentives under the Power Cost Equalization
program for utilities to invest in energy efficiency and operational cost reductions, and
placing emphasis on developing electrical interties.
2. Self-reliant electric utilities
Measures to address this goal include encouraging private investment in rural utilities,
developing the skills in rural Alaska to achieve self-sufficiency through operator
training and development of utility business strengths, promoting professional utility
management, assisting utilities in developing business plans to independently finance
and develop generation and transmission systems, performing management audits to
ensure rates cover all costs of utility operation, encouraging voluntary consolidation
of utilities, and developing an investment plan that qualifies utilities for various levels
of state investment.
"' 3. An effective energy policy
Means to achieve this goal include assessment of rural electric utility capabilities and
needs; continual examination of trends in energy resources, technologies, distribution
systems, energy demand, and state revenue and population forecasts; provide utility
management as7istance to encourage economies of scale; implementation of Bulk Fuel
Task Force r;~commendations; coordination of energy system investments with
housing and sanitation projects; provide statistical information on utility operations;
and, review existing state energy programs with attention to coordinating the efforts
of other agencies and programs.
With this new mission statement and energy strategy goals and objectives, DOE is placing
emphasis on lowering the costs and increasing the safety and reliability of rural power
systems. These areas are being addressed by continuing and modifying, as needed, those
programs that have been transferred from ABA. However, those programs remain similar in
type, nature, and title. Specifically, DOE rural programs include:
OPERATION, TECHNICAL AND EMERGENCY ASSISTANCE (OTE) An "umbrella"
program designed to provide a wide range of energy systems assistance to rural communities
and utilities. Components of this program are:
• Emergency Prevention (EP): Designed to prevent a potential emergency
situation before disasters occur, including standby equipment, procurement of
materials, and servicing through the Circuit Rider Maintenance Program.
• Rural T echnical Ass i stance (RTA): Providing technical assistance for rural
utiliti es to aid in th e evaluation of the needs and ~eficiencies of energy
systems and facilities within a community.
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ALASKA STATE LEGISLATIIRE DIVISION OF LEGISLATIVE AUDIT
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•
Rural Utility Training (RUT): Facilitates formal technical training of rural
utility operators.
Meter Installation and Data Acquisition: Provides for adequate metering of
rural utilities and installation of monitoring devises for recording and
transmission of time-coded data. This component also facilitates the training
of operators to accurately read and record meter data, which provides
necessary information for planning purposes.
ELECTRIC SYSTEM LIFE, HEALTH, AND SAFETY IMPROVEMENTS (LHS)
Developed to provide funding for correction and prevention of hazards which may exist or
may pose a potential threat to life, health, and safety in rural communities. Whenever
possible, funds are leveraged against local matching funds.
RURAL POWER SYSTEMS UPGRADES (RPSU) Provides funds for system upgrades
that have been identified through Rural Technical Assistance, the Circuit Rider Maintenance
Program, the local community or the legislature. Projects may include efficiency
improvements, line assessments, lines to new customers, and other repairs to generation and
distribution systems.
RURAL UTILITY REGIONALIZATION, CONSOLIDATION, and BUSINESS
MANAGEMENT Promotes achieving the establishment of self-supporting rural utilities
without continuous state assistance. This is to be achieved through (1) development of
partnerships between utilities, (2) consolidation of small and independent utilities into a
regional utility entity, and (3) training of utility business managers and operators.
EMERGENCY BULK FUEL REPAIRS and SPILL PREVENTION Creates incentives
and mechanisms to repair bulk fuel systems before a crisis. The program provides for
emergency repairs to bulk fuel storage and handling systems in rural communities. Priority
is given to those communities where fuel vendors or regulating agencies have threatened to
stop delivery of fuel; where conditions have become a life, health, or safety matter; or the
environment is threatened.
BULK FUEL SYSTEM UPGRADES Assists private owners in recognizing the need for
improving their systems to meet minimum standards. The program funds the design and
upgrade of bulk fuel storage and handling facilities in rural communities that are dependent
upon seasonal fuel delivery which requires large storage capacity.
ELECTRICAL SERVICE EXTENSION FUND Matching grant program that provides
up to 60% of the cost of site preparation and construction for extending electrical service to
private residences and small businesses not currently served by an electrical utility and, as
a second priority, for making improvements to existing utilities.
STATEWIDE ELECTRIC and POWER PROJECT DEVELOPMENT Provides for the
engineering, environmental, and economic analysis of power projects throughout the State.
A primary objective is to respond in a timely manner to requests from legislators, utilities,
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ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
and communities on power project proposals, and develop a multi-year plan for
implementation.
ALTERNATIVE and APPLIED ENERGY TECHNOLOGY DEVELOPMENT Funds
provided for development, design, construction, demonstration, and/or operational testing of
technological enhancements to energy systems. Such enhancements include coordinating the
efforts of energy research groups.
CIRCUIT RIDER/EMERGENCY RESPONSE SERVICES Provides for a preventative
maintenance assessment and response service for emergency work required on rural electrical
systems. The program is intended to be an "interim fix" until long-term planning can
address the problems.
In addition to the operational programs listed above, DOE administers the following loan
programs:
POWER PROJECT FUND Provides loans to local utilities and eligible governmental
entities for the development of new small-scale power production facilities, and facilities for
conservation, bulk fuel storage, transmission and distribution, or potable water supply
projects. The amount is based on the borrower's need, its ability to repay the loan, and the
balance available in the fund. Loans have a maximum term of 50 years.
RURAL ELECTRIFICATION REVOLVING LOAN FUND At present, this fund
services outstanding loans only. The fund was originally established to provide assistance to
local utilities for extending electrical service into previously unserved areas.
BULK FUEL REVOLVING LOAN FUND Provides loans in amounts up to $100,000 to
rural communities with populations of under 2,000 for the bulk purchase of petroleum fuels.
Loans are to be repaid in one year or less, communities must show a history of loan
repayment and credit worthiness, and loans must be repaid in full before another loan is
approved.
SOUTHEAST ENERGY FUND A grant fund established by the legislature in 1993.
Provides grants to utilities participating in the power transmission intertie between Swan
Lake and Tyee Lake hydroelectric projects.
POWER COST EQUALIZATION (PCE) and RURAL ELECTRIFICATION AND
CAPITALIZATION FUND This program/fund was established to reduce electric rates by
consumers in rural communities where diesel-fired generators provide most of the local
electrical needs. The program aims to equalize the power cost per kilowatt hour statewide,
at a cost close to the average cost per kilowatt hour in Anchorage, Fairbanks, and Juneau.
The fund also makes grants to utilities to improve performance of the utility.
The Division of Administrative Services (DAS) within DCRA provides support for the
various functions utilized by other divisions. DOE utilizes support services to handle such
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ALASKA STATE LEGISlATURE DIVISION OF LEGISlATIVE AUDIT
functions as payroll, personnel actions and other persolli\_el matters, contract accounting,
procurement, internal auditing, and financial accounting. ':: ~
With the transfer of AEA programs and employees, DAS received additional positions.
These positions will supplement the administrative support already received from DAS by
providing specialized services unique to DOE operations. Some of these duties are:
• Administration of PCE program
• Administration of the bulk fuel and other loan and grant programs
• Energy systems specialized capital project accounting
• Procurement services for selection of contractors and for privatization of
program services
• Personnel to aid in the process of classification of formerly exempt employees
• Transfer and archiving of all records and property from AEA to DOE
ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY (AIDEA)
Established as a public corporation in 1967, AIDEA's primary mission has been the
financing, promotion, and development of various commercial projects. This mission is
accomplished by providing and facilitating various means of financing of industrial,
manufacturing, export, and business enterprises and facilities within the State. AIDEA's
stated purpose is to: . ._
. . . promote,~. develop, . and advance the general prosperity and economic
welfare of the people of Alaska, to relieve problems of unemployment, and to
create additional employment.
AIDEA addresses its mission and purpose by:
1. Providing various means of financing of industrial, manufacturing, export, small
business and business enterprises, and other facilities in the State;
2. Owning and operating enterprises and other facilities;
3. Fostering expansion of exports of Alaska goods, services, and raw materials;
4. Promotion and advancement of export trade activities in the State;
5. Establishing funding credit guarantees and insurance to support export development;
and,
6. Providing and/or participating in financial assistance in support of export transactions.
With the dissolution of AEA and the transfer of rural energy programs to DCRA, the
remaining energy assets and operating power projects were transferred to AIDEA. To ensure
the integrity of AEA bonds, the Energy Authority continues to exist as a public corporation,
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ALASKA STATE LEGISlATURE DIVISION OF LEGISlATIVE AUDIT
however, it no longer has the authority to acquire and const:plct projects. The AIDEA board
of directors and executive director serve in the same capa9.ty' for the Energy Authority.
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AlASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
BACKGROUND INFORMATION
The original purpose of the Alaska Energy Authority (AEA) was to evaluate and, where
feasible, construct hydroelectric projects to provide power to the urban areas of the State.
In the early 1980s AEA's purpose was expanded to include providing for the energy needs
of rural Alaska.
With the large projects nearing completion, AEA increased its attention to rural communities.
Many programs were created to aid in various areas of concern which affected rural Alaska.
The coordination of these programs, along with the development of alternative and applied
technologies, represented a fundamental shift in direction for AEA.
As Bradley Lake, the last of AEA's major hydroelectric projects, neared completion, state
policy-makers began to reconsider and reevaluate the role of the agency.
Strategic energy plan proposed a different role and gos ible dis solution of AEA
In January 1993, a consultant, R.W. Beck and Associates, completed a long-term strategic
plan for AEA. The Beck plan noted that AEA performed distinct and different roles in the
service it provided to urban areas of the State compared to that of rural Alaska. For urban
areas of the State, AEA owned and operated hydroelectric projects and sold energy to
various utilities. This power was carried over transmission lines, many of which were also
constructed and owned by AEA. In rural Alaska, AEA was responsible for building and
maintaining independent power generation facilities. AEA had a major presence in rural
Alaska, assisting local communities in acquiring generators, constructing the necessary
transmission lines, and training local resident operators.
Anticipating a substantial reduction in future state oil revenues, the Beck strategic plan
proposed a shift in responsibility for the future development and maintenance of both rural
and urban energy systems. The Beck report presented nine "organizational options" to
address Alaska's energy needs. Briefly, those nine options were:
1. Complete dissolution of AEA, with utilities and local communities meeting their own
electrical needs without financial or other assistance.
2. AEA becomes a division of the Alaska Industrial Development and Export Authority.
3. Replace AEA with a Joint Action Agency (see following discussion).
4. AEA remains unchanged -maintaining the status quo.
5. AEA organization remains unchanged with expanded board of directors.
6. AEA becomes a member of an Alaskan Joint Action Agency (basic organization of
AEA remains unchanged).
7. Move AEA to the Department of Community and Regional Affairs (DCRA).
8. Reduce size and responsibilities for AEA.
9. Separate urban from rural programs.
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ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
\:.. .
For rural systems the plan also presented the concept of "regionalization," to address the lack
of economies of scale. The Beck strategic plan discussed: the need for regionalization as
follows:
One of the most difficult issues facing the provisioning of services in [rural]
Alaska is economy of scale. The perpetuation of direct State funded grant and
subsidy programs do not provide long term solutions to the problem. An
integral part of the new strategic direction should be to use the very subsidy
programs that have not encouraged the small systems to be economical as
inducements to improve the efficiency of operations1 in [rural Alaska].
This plan endorses a strategy that would work toward providing [rural
Alaska] electric system funding only through regional or local utilities that
meet a prescribed standard of peiformance. [These utilities would be] ...
motivated to reduce future costs by gaining increasing economies of scale.
Such regional utilities would add communities to their service areas and be
entirely responsibleJor the operation of the local system.
The strategic plan suggested that a move towards "regionalization" of energy systems can
be managed by an agency other than AEA. The Beck strategic plan also suggested that
DCRA would be better suited to do so since the department is most concerned with local
infrastructure.
The plan proposed shifting management of larger power systems to a group of user utilities
The strategic plan also proposed ownership responsibility for the major hydroelectric projects
and transmission lines be conveyed to what are termed "joint action agencies" (JAAs).
Under the plan JAAs would be made up of two or more entities participating in construction
and operation of generating or transmission facilities as tenants in common. A JAA would
be mutually responsible for the operation and maintenance of a given facility or project.
Such JAAs would operate under agreed upon provisions for administering their joint
responsibilities.
According to the strategic plan, JAAs would be responsible for coordinating and financing
the construction of any new facilities. However, the plan recognized that there may be some
resistance to the formation of JAAs by the State's utilities. It was asserted in the plan:
There will be those that will want to perpetuate the status quo for as long as
possible -because they may think that their self interests are best served by
taking what they can get while they can get it, or because change always
entails risk. However, when looking at what would be best for the State and
also serve the utility industry, the JAA is the best solution.
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1The Beck strategic plan further suggested the State's Power Cost Equalization (PCE) program should be
modified to recognize and reward efficient operating systems.
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ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
Under the Beck strategic plan, AEA's functions would be absorbed either by existing state
agencies or by a new JAA consisting of various utilities that served the State's urban areas.
The plan felt it was crucial that AEA functions transferred to state agencies complimented
the functions and responsibilities of the agency involved, encouraging the reorganization to
be accomplished quickly. The estimate of the plan indicated a narrow window of
opportunity existed, between 1992 and 1994, for putting all the elements together for
implementation.
L egi slation directed that AEA be res tructured , similar to propo sal s mad e in th e s trat egic plan
In 1993, legislation was enacted that resulted in the dismantling of AEA. The legislation
reflected some of the tenets discussed in the Beck strategic plan. The legislation included
three significant strategic plan concepts:
1. Greater reliance on the private sector -the strategic plan suggested that the State
should withdraw from its far-reaching involvement with energy development and
production. The legislation directed that DCRA, which was now responsible for
AEA's rural energy programs, utilize the private sector. Specifically, the legislation
established AS 42.45.410 which requires that "the department shall, to the maximum
extent feasible, carry out its powers and duties by entering into contracts with
appropriate entities in the private sector. "
2. Th e JAA conce pt and an accomp any ing shift of res ponsibility to urb an utiliti es
the legislation established AS 42.45.300 which states in part:
two or more public utilities may form a joint action agency for
the purpose of participation in the design, construction,
operation, and maintenance of a generating or transmission
facility ...
The legislation directed that AEA's responsibilities for operating and maintaining
various hydroelectric projects and transmission facilities be transferred to AIDEA.
In tum, it was AIDEA's objective to utilize the newly recognized JAA entities to
carry out AEA's operational responsibilities. AIDEA management felt this approach
was consistent with both the overall intent of the legislature2 and the proposals set
out in the Beck strategic plan.
2In a letter that accompanied the 1993 legislation that dismantled AEA, the legislature stated it was their intent
that AEA (which became a much smaller entity under the auspices of AIDEA):
... expeditiously implement a plan to reduce the agency's role in providing direct services with
state employees, and instead provide those serv_ices by contra cting with the private sector,
regional utilities, or other state agencies. ·
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ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
3. Emphasis on regionalization of small, rural electrical generating facilities -the Beck
strategic plan observed that:
Alaska . . . has a large number of isolated communities not
connected by electric transmission systems. . . . In rural areas,
electric generation and distribution are frequently antiquated
and hazardous. . . . There continues to be a need for the
development of the basic infrastructure, including electricity.
In order to address these concerns, the legislation's preamble of intent states that the
direct participation by the State is necessary to assist in the development of a regional
electric transmission infrastructure. Additionally, the legislation permits the
department to promote cooperative solutions to problems affecting more than one
community or region, including joint service agreements, regional compacts, and other
forms of cooperation.
Since these concepts were an integral part of the transition legislation, they had a large
impact on the way various AEA programs and responsibilities were transferred or
"transitioned." The way in which the Circuit Rider Maintenance Program (CRMP) was
"transitioned" best exemplified how these strategic concepts were implemented.
AEA designated the CRMP as a program that could be contracted out to the private sector
AEA's circuit rider program was designed to assist village electric utilities in the routine
operation and maintenance of their electrical systems. Prior to transition, the program was
staffed with AEA technicians and engineers. AEA staff visited various rural communities
as necessary to inspect the condition and operation of powerhouse plants and transmission
facilities. These inspections and repairs, termed technical assistance, were provided to
various local utilities in addition to allowing AEA staff to train local residents in the
operation of their facility.
The strategic plan specifically targeted this activity as being one that should be transferred
out of AEA. The Beck plan suggested that the circuit rider program be transferred to
designated regional or local utilities. The legislation dismantling AEA offers more direction,
but emphasizes the use of the private sector. Under the statute setting terms for assistance
to rural utilities, the legislation under AS 42.45.400 (b), states: "in providing rural utilities
with technical assistance and training, the department shall give priority to contracting with
the private sector for these services."
AEA attempted to structure the CRMP contract to promote regionalization
Since it was statutorily mandated to privatize to the maximum extent feasible, AEA
administration developed an invitation to bid (ITB) to solicit contractors to perform the
CRMP. However, AEA was also interested in the promotion of the concept of
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ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
regionalization. Accordingly, as a means to achieve the ~~gionalization of utilities, ABA
attempted to structure the ITB to restrict bidding to regionttl utilities only.
By this limitation of bidders, ABA intended to promote a working relationship between
larger regional utilities in rural Alaska and small isolated community utilities. Such a
strategy was consistent with the concept put forth in the Beck strategic plan. However, the
Attorney General advised that insufficient justification had been presented to conclude a
restriction of bidders was allowable under state procurement laws. The ITB was then widely
distributed and three contractors were selected to perform circuit rider services.
During the period the ITB for Circuit Rider services was developed and distributed, the
DCRA was wrestling with assimilating the many former ABA rural programs into the
department. The approach to organizing the programs into the new Division of Energy was
disjointed and, at least in the short term, impacted the delivery of rural energy program
services.
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ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
REPORT CONCLUSIONS and RECOMMENDATIONS
Management of the transition of rural energy programs was , at times, haphazard
The legislation requiring the dissolution of the Alaska Energy Authority (AEA) and the
transfer of rural programs set a deadline for completion of the transition. In addition, the
legislation required that the transition be carried out in an orderly fashion. Specifically,
Section 38 of Chapter 18, SLA 1993 required:
... the governor, the Department of Community and Regional Affairs, the
Alaska Energy Authority, and the office of management and budget shall
implement this Act in an orderly fashion. The transfer of rural programs
operated by the Alaska Energy Authority to the Department of Community and
Regional Affairs must be completed no later than December 31, 1993 ...
[emphasis added]
In implementing the transition, the upper management of the Department of Community and
Regional Affairs (DCRA) focused on, as its primary goal, meeting the legislatively mandated
deadline. However, in our view, DCRA's emphasis on the deadline contributed to the
department not meeting the other mandate of this section -to implement the transition in
an orderly fashion.
DCRA did not adopt and consistently follow a logical, methodical approach to managing the
transition of AEA's rural energy programs. For a period of four to five months DCRA took
two different approaches to the reorganization and staffing of AEA's rural energy programs.
These two organizational focuses were not well coordinated , often appeared to be developed
at cross purposes, and were not consistently communicated between DCRA 's upper
management and the division directors that were also charged with reorganization. These
two focuses collided in October 1993 with the resignation of the Division of Energy (DOE)
director and again in February 1994 with the resignation of DOE's third director?
One organizational plan was under development by the first DOE director. Under the DOE
director's approach, interviews were conducted with key program staff and a listing of likely
candidates for various positions was developed based upon experience and abilities. In
August 1993, the then-DOE director testified to the House Finance Committee regarding
desired staffing levels. Based upon his analysis, the minimum number of positions required
to continue the mandated energy programs was approximately twenty-five positions within
the energy division -provided that all accounting functions were transferred to DCRA.
At the same time, not entirely known by the DOE director, the DCRA commissioner's office
was also developing a number of possible organization scenarios. The commissioner's office
initial approach to staffing the new division appears to have been based less on an
3There have been four (permanent and acting) directors since July l, 1993 .
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AlASKA STAlE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
assessment of individual qualifications and skills, but rather on an arbitrary "maximum"
number of positions -notwithstanding the statutory program requirements and the amount
of funding available for personal services. Also, at an August 1993 meeting of DOE and
commissioner's office representatives, the DOE director was provided a list of names (which
was rejected by the director) who would not be retained in the new division -an action
which further demonstrates the subjective manner in which the commissioner's office was
proposing the new organization. 4
Despite the DOE director's efforts at establishing an organization and ensuring as smooth
as possible transition, in October 1993 the DCRA commissioner's office unilaterally
developed an organization plan - a plan which did not have the director's input and one
which eliminated the director's personally appointed special assistant. This plan was
presented to the director by the DCRA deputy commissioner. After unsuccessfully objecting
to the proposed organization, the director resigned effective October 19, 1993.5 An acting
director was appointed during the interim. On November 19 and 29, 1993, a new DOE
director and deputy director, respectively, were appointed.
In our view, the commissioner's office involvement in the structuring of the organization was
motivated more by the removal of select individuals, rather than having been based on any
objective assessment of programmatic needs or individual qualifications.
The new director and deputy director assessed and evaluated professional and technical
staffing requirements necessary to complete the developing backlog of rural energy projects.
The director determined that additional positions were necessary to perform the division's
duties. On February 4, 1994 a budgetary presentation, detailing the need for additional
positions, was made in the commissioner's office by the director. On February 7, for yet
unclear reasons, the commissioner dismissed the director and as a result the deputy director
resigned in protest.
4Corroborating testimonial evidence supports this conclusion, including our discussions with the
DCRA deputy commissioner. The deputy commissioner stated, during a lengthy interview, that staffing
decisions were based on "people" rather than "positions". The deputy commissioner stated that many
names were discussed who did not follow the commissioner's philosophy; that the commissioner and
deputy commissioner "selected ... the people to go;" that if "they didn't buy into the commissioner's
objectives they were notified to me and they were added to a list" ... ; and, "the commissioner didn't
want certain people -the list was made; we did go that deep [within the organization] right down to the
clerks. The commissioner only wanted people who agreed with his philosophy."
5 According to the deputy commissioner, he presented his organizational plan to DOE staff members
left on the organization chart over "working lunches." The deputy commissioner stated that those staff
advised of the plan "agreed with it except for the engineering portion of it." On October 15, the deputy
commissioner instructed the director to implement the organizational structure as proposed by the
commissioner's office. On October 16, the director verbally gave notice of his resignation effective
October 19.
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ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
We do not take exception to a commissioner level of inyolvement in the operation and
organization of lower levels within a department. We als'o agree that the mandated time-
frame for accomplishing the transition was very aggressive.· However, having meeting the
deadline as the primary goal was not well advised. Additionally, the disjointed approach to
organizing the Division of Energy-with what appears to have been based upon arbitrarily
selected or mandated criteria regardless of program requirements -and the commissioner's
office finalizing the organizational plan without the involvement of the division director
contributed to poor morale, intensified an already difficult personnel situation, and did not
provide for the transition in an orderly fashion.
Method of transition impacted delivery of rural energy program services
Apart from the impact the DOE organization process had on human resources -both
personnel reductions and employee morale -equally significant was the apparent impact
on both the planning and delivery of rural energy related program services.
·"' Interviews with numerous individuals -including former directors, engineers, program
managers, finance/budgetary personnel, former AEA/DOE employees now in public and
private power related service industries in Alaska, and various rural utility operators -
shows that there has been an adverse impact on the delivery of rural services. As a result
of the transition, the manner in wh~ch it was implemented and the resulting reduction in staff,
the delivery of rural energy program services -including life, health, safety issues; metering
and data acquisition; .technical assistance; bulk fuel repair and upgrade; rural utility training;
emergency prevention; and capital project planning -have diminished.
However, degree of impact on nual energy programs in general uncertain
At this point in the evolution of DOE the magnitude of the program delivery impact due to
the transfer of programs from the former AEA is indeterminate.
DOE is entering its first construction season. The confusion and ensuing "down time"
resulting from successive changes in management over a· very short period of time
temporarily stymied DOE planning and program activity. During this time of minimal
management direction and decision making, energy program planning and implementation
was, at times, on hold. The impact on two of the more significant programs -Circuit Rider
Maintenance (CRMP) and Bulk Fuel Repair/Upgrade -has been estimated at a loss of
community contact and program delivery of two months. The effect of this in the immediate
and future construction seasons has yet to manifest itself.
Long-term impact of the transition on CRMP al so indeterminate
With the exception of the bulk fuel repair/upgrade program (which addresses the significant
policy and environmental issues of rural bulk fuel delivery and storage), we believe CRMP
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ALASKA STATE LEGJSU.TURE DIVISION OF LEGISU.TIVE AUDIT
is essential as it best protects the State's sizeable investment in rural energy production
facilities.
In addition to providing operator training and routine preventative maintenance on rural
power generation facilities, CRMP acts as the "eyes" of DOE for identifying life, health, and
safety issues and emergency conditions which may interrupt power production.
Significant questions have been raised regarding the CRMP and its service delivery. We
believe that the transition process and the privatization of CRMP did impede service delivery
in the short term. However, whether CRMP services have been impacted in the long-term
is uncertain at this time.
The "new privatized" CRMP is presently only in the third quarter of a one-year contract
(with a possible one-year renewal, subject to appropriation). It is premature to determine
whether a privatized circuit rider program is cost effective (see discussion of related issues
that follow). However, we do have the following concerns about the CRMP:
• DOE should establish standardized CRMP site visit reports, requiring contractors to
separately identify life. health, and safety (LHS) and emergency prevention (EP)
.issues apart from basic technical information. In addition, DOE should e tabli. h
criteria for prompt submission by contractors of LHS and EP issues.
DOE receives quarterly reports from contractors through the CRMP program. These
CRMP reports, which vary in format between contractors, report areas reviewed,
training provided, problem areas encountered, describes conditions that the contractor
observed, and maintenance services provided.
However, the notification of DOE staff of LHS and EP issues has been hampered by
non-standardized reporting formats and because reporting by all contractors for all
regions occurs simultaneously, at quarter end. We reviewed a sample of CRMP
reports which showed that there was an inconsistency in the classification (LHS/EP
versus routine) of conditions found. A LHS/EP situation had been reported at one
utility where a similar situation had been determined routine on another. Discussions
with DOE staff pointed out that this has been a problem since contracting of circuit
rider maintenance services.
To facilitate DOE's review of contractors' site reports and to highlight significant
LHS/EP conditions, these issues should be addressed separately and promptly
communicated to DOE staff apart from other standard report information.
Also, we have been informed that direct community contact with DOE staff has been
curtailed substantially since contractors now represent DOE through CRMP visits.
Decreased communication with the rural communities has eliminated a valuable
source of information available to DOE with respect to present conditions and overall
awareness of the communities needs and prospective plans . . ,
-20-
ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
With the privatization of CRMP, we have been infol:ffied that these direct community
contacts have been reduced to a "trickle" of what they -once were. Furthermore, with
the transfer of programs to DOE and privatization of CRMP, many communities do
not know whom to contact at the agency when assistance is needed.
We believe that DOE should make every effort to re-establish these crucial contacts
with rural communities. The additional information provided by the utilities
themselves could help in avoiding potential problems between regular CRMP visits.
• DOE should assess rural power facilities needs and establish a circuit rider visitation
schedule based on that assessment.
When rural energy programs were under AEA, the circuit rider program was
essentially "needs based." Circuit rider visits were scheduled based upon the program
manager's knowledge of a utility. If the utility in general, and the powerhouse in
particular, were well managed and maintained by a reliable utility operator, oftentimes
fewer visits were ~quired to ensure its continued operation. Conversely, some
utilities may have required more visits because of historical operating performance
problems.
Under the current CRMP all rural utilities requesting participation in the circuit rider
program recei~ four visits annually, regardless of the condition of the utility or
historical performance of its operators. The requirement for scheduled quarterly visits
was part of thl! Invitation to Bid (ITB) for circuit rider services and was incorporated
into the successful bidders contracts. We were unable to ascertain why the pre-
determined number of visits was required, and why engineers and program managers
were not consulted prior to the development of the ITB.
Under AEA, at any given point in time, the number of communities served by the
CRMP ranged between twenty and thirty. Beginning in October 1993, more than
65 communities were served by contractors on a quarterly basis. The contract has
been in place for approximately eight months, and is therefore only two-thirds through
the first year of completion.
The CRMP under DOE's privatized mandate for FY 94 is budgeted (subject to
amendment) in excess of $550,000. Under AEA the cost of circuit rider services for
the three previous fiscal years has been identified as:
Fiscal Year
1991
1992
1993
Cost (unaudited)6
$362,810
355,023
130,180
6Fiscal years 1991 through 1993 circuit rider expenditures were provided by the DOE manager of
Accounting and Administration and are unaudited.
-21-
ALASKA STATE LEGISlATURE DIVISION OF LEGISlATIVE AUDIT
•
. \
We believe circuit rider services should be \provided where needed. Those
utilities that have achieved a satisfactory level'.~f operation and operator ability
should not receive state financed maintenance services based upon an
arbitrarily determined number of visits. CRMP expenditures should be based
upon an assessment of the needs of the rural utility.
DOE should adopt a formal policy prohibiting CRMP contractors in particular,
and agency contractor s in gen eral, from marketing good s and serv ices whil e
performing under DOE contracts.
Concern has been expressed regarding the selling of goods and services in
rural areas by DOE contractors while performing services under DOE
contracts. Transportation to rural Alaska is a significant expense for both
individuals and businesses. Those businesses conducting state-financed
services in rural Alaska -in which the State paid the contractor's
transportation expenses -have an unfair advantage over others should they
wish to market additional goods or services beyond that specified in their
contract.
We believe that DOE should formally adopt a policy, incorporated as a
contract condition with penalty provisions, that prohibits contractors from
pursuing. additionat.business ventures while "on state time." Such a policy
would ensure that DOE does not endorse providing existing contractors with
an unfair competitive advantage when considering future potential contracts
and contractors.
What is DOE's mandate for privatization?
Chapter 18, SLA 1993 drastically revamped the State's energy programs, basically dissolving
AEA and creating DOE. The legislation also contained language regarding dealings with the
private sector. Specifically, the legislation stated:
and,
Sec. 42.45.400(b) In providing rum.! utilities with technical
assistance and training, the department shall give priority to
contracting with the private sector for these services.
Sec. 42.45.410 The department shall, to the maximum extent
feasible, carry out its powers and duties under this chapter by
entering into contracts with appropriate entities in the private
sector.
In response to this legislation, the former AEA initiated (and DCRA pursued) the
privatization of circuit rider maintenance services. Some have characterized the speedy
transfer of providing circuit rider services to the private sector as hasty. We also believe that
implementing the privatization concept was hasty, but perhaps for different reasons. It is
-22-
ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
unclear what DOE's "privatization" mandate is. It is likewise unclear as to the meaning of
"maximum extent feasible."
We believe that before the privatization of state sponsored programs, the State should
perform formal feasibility studies to determine the potential costs and benefits that would
result from privatization. The study should also determine the costs and benefits of the work
if performed by state employees. The decision to privatize should be based on the ultimate
costs and benefits. In determining whether to perform or contract out services, the State
should consider the costs and what is in the best interest of the State and the people the
programs are intended to serve. Such an analysis was not performed in the decision to
contract out circuit rider services. It is not known whether privatization of those programs
serves the best interest of the State and program recipients.
We recommend that DOE define its responsibilities under the legislation and establish criteria
or guidelines in defining "maximum extent feasible." We also recommend that in following
the "privatization" mandate that DCRA and DOE conduct the necessary analyses to
determine whether the contracting of any services is in the best interest of Alaskans.
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ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
(Intentionally left blank)
-24-
ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
21·P2LH
. ·,
DEPARTMENT OF COMMUNITY AND .·.
REGIONAL AFFAIRS·
DIVISION OF ADMINISTRATIVE SERVICES
Mr. Randy Welker
Legislative Auditor
Division of Legislative Audit
P.O. Box 113300
Juneau, AK 99811-3300
Dear Mr. Welker:
RE: Preliminary Report ""
July 19, 1994
Department of Community and Regional Affairs
Division of Energy -Transfer of ABA energy programs
WALTER J. HICKEL, GOVERNOR
181 P.O. BOX 112100
JUNEAU, ALASKA 99811-2100
PHONE: (907) 465-4708
FAX: (907) 465-2948
0 333 W. 4TH AVENUE, SUITE 220
ANCHORAGE, ALASKA 99501-2341
PHONE : (907) 269-4500
FAX: (907) 269-4520
p)~(C~RWJ~~ I
1\\\: JUL 191994 HV
LEG ISLA riVt AUDIT
The Department of Community and Regional Affairs appreciates the opportunity to provide
our written comments_~oncerning the matters discussed in the above referenced preliminary
audit report. The Department vigorously disagrees with the content and tone of the
preliminary report af\9 would like to use this opportunity to set forth the facts involved in
this matter.
The Department of Community and Regional Affairs (DCRA) understands and appreciates
the benefits and constructive results which an independent review of the Department's
programs and activities can provide. However, we must question the independence and
motivation of the Division of Legislative Audit in conducting the review, because the
majority of the conclusions and comments identified in your preliminary report are based
upon inaccurate and subjective information, and, as a result, are inappropriate.
The major conclusion of the preliminary report is that the Department's .,Management of the
transition of rural energy programs was, at times, haphazard . ., Based upon the information
provided in the report, the Department believes your conclusions are unsupported,
unwarranted and patently biased.
As noted on page 17 of the report, the Department did have the goal guiding its actions of
meeting the legislative mandate that the transition be accomplished by December 31, 1993.
This mandate was the primary focus to actions taken by the Department and, as a result, the
transition was completed by the deadline.
-25-
Mr. Welker
RE: PRELIMINARY REPORT RESPONSE
July 19, 1994
Page 2
\ .. t·.
As I am sure you can appreciate, the deadline of December 31, 1993 was very short for
accomplishing the many tasks required for the completion of the transition. This is probably
the shortest period of time ever provided in which to transfer programs and operation
responsibilities from one state agency to another. For example, the transfer of DCRA's
housing programs to the Alaska Housing Finance Corporation took between one and one-half
to two years to complete.
There were a great number of issues to be dealt with during the transition phase. In
addition, the process involved at least six different agencies, each of which had their own
priorities and concerns. AQditional problems were encountered through unclear and
sometimes contradictory transition legislation.
The third paragraph on page 17 of the report states: "For a period of four to five months
DCRA took two different approaches to the reorganization and staffing of ABA' s rural
energy programs." rrus is factualJy incorrect, as there never were two transition or
organizational efforts. ·
Only the Director of DOE led the transition and organization effort. However, that effort
was subject to my approval. This means that each draft organizational plan and each major
detail of the transition was to receive my approval. I required and received periodic
briefings on the transition and tracked progress towards meeting the goals of the transition.
You should be aware that in situations like this, I have the authority to assess various issues
and concerns, and if in my judgement, they are not adequately addressed or are going in a
direction contrary to my approval,"! can make decisions based upon the information at hand.
In some cases, these decisions may be contrary to the desires of a director.
The last paragraph on page 17, continuing on page 18', implies that the DCRA
Commissioner's Office was developing possible organization scenarios and that these were
based on "an arbitrary 'maximum' number of positions." Again, this is an incorrect
statement. The only organizational structures proposed were those made by the DOE
Director and those proposed were for the transition. The DOE Director did not propose a
structure for the FY 95 budget. The Commissioner's Office was not concurrently creating
any separate organizational structures; however, there were on~going discussions with the
DOE Director concerning the structures. It is clearly within the authority of the
Commissioner to establish such plans when setting up a new division.
-26-
Mr. Welker
RE: PRELIMINARY REPORT RESPONSE
July 19, 1994
Page 3
The above referenced paragraph indicates that the DOE director was provided by the
Commissioner's Office with "a list of names ... who would not be retained in the new
division --an action which further demonstrates the subjective manner in which the
commissioner's office was proposing the new organization." This was not the case and there
was never such a directive. There were discussions between the Commissioner's Office and
the DOE Director regarding the retention of certain positions, however, this was without
regard to the person filling the position.
In support of your conclusion in the previous paragraph, the Division of Legislative Audit
has included as a footnote on page 18 several quotes purported to have been made by the
Deputy Commissioner during discussions with DLA staff. The following addresses these
purported quotations.
"The deputy commissioner stated, during a lengthy interview, that staffing decisions were
based on 'people' rather than 'positions'." This is a false statement as the Deputy
Commissioner never stated this and would not attest to something that was not part of the
process.
"The deputy commissioner stated that many names were discussed who did not follow the
commissioner's philosophy." This is another false statement and never occurred.
" ... that the commissioner and deputy commissioner 'selected ... the people to go'." This is
also a false statement. "People" never entered our consideration of the class and number of
positions necessary to fulfill the statutory tasks.
"[T]hat if 'they didn't buy into the commissioner's objectives they were notified to me and
they were added to a list' ... " This is out of context and is an inaccurate reconstruction.
What the Deputy Commissioner had said was there were third parties who believed certain
employees of AEA did not (and in some cases did) agree with the commissioner's objectives
and that these third parties expressed their beliefs to the Deputy Commissioner. That the
Deputy Commissioner took note of these third party viewpoints and passed them on to the
director of the division, does not imply there was a significant "list" of any nature used as a
basis for the organizational structure of the energy division.
"[A]nd, 'the commissioner didn't want certain people -the list was made'." This is a false
statement. I never generated any "list" nor did the Deputy Commissioner or I make a
statement in this context regarding any AEA employee.
-27-
Mr. Welker
RE: PRELIMINARY REPORT RESPONSE
July 19, 1994
Page 4
"[W]e did go that deep [with the organization] right down to the clerks." This is a true
statement, but is stated in a context meant to mislead and convey meaning that is contrary to
the truth, and, therefore, is false. "We" means the Deputy Commissioner, the Director and
the Director's Deputies, who examined staff requirements at every level, and conveyed this
information to me on a regular basis.
"The Commissioner only wanted people who agreed with his philosophy." Again, the
Deputy Commissioner has indicated he did not make such a statement. The audit interview
with the Deputy Commissioner dealt primarily with hypothetical situations, because the
interviewers admitted they had never before done an audit of this nature, and they asked
what the Deputy Commissioner thought the likelihood of similar audits being necessary in the
future. In this context, the Deputy Commissioner did make comments relating to "a
commissioner's" fundamental right to hire individuals into exempt positions, who hold
similar management or government philosophies as he or she.
The second paragraph on page 18 states "the DCRA commissioner's office unilaterally
developed an organization plan --a plan which did not have the director's input and which
eliminated the director's personally appointed special assistant." The DOE director did not
propose a structure for the FY 95 budget. The Commissioner's Office did make a decision
on the FY 95 organizational structure when it became apparent the Director was either
unable to do so or did not ever intend to meet the December 31, 1993 deadline.
Furthermore, it was apparent the director was not going to meet the Office of Management
and Budget October 25, 1993 deadline for draft operating budget submissions, necessary to
meet the December 15, 1993 deadline for submission to the Legislature.
The organizational structure proposed by the Deputy Commissioner, which I approved, was
based on information from the director, his deputies, staff of the Energy Division, and
information provided by the previous Executive Director of AEA. This information was
provided to the Commissioner's Office beginning in May 1993.
Prior to my approval, I required the Deputy Commissioner to review the proposal with the
Division Director. We then discussed the proposal with energy program managers in the
presence of the Director. The product of these meetings was a collective understanding that
the organizational structure would work. This allowed budgets to be prepared, work plans
constructed, space requirements finalized, and many other details could be brought to closure
within the legislative deadline of December 31, 1993. Therefore, your statement that this
was "a plan which did not have the director's input" is not correct.
-28-
Mr. Welker
RE: PRELIMINARY REPORT RESPONSE
July 19, 1994
Page 5
, .... . . '.
On page 18, several comments attributed to the Deputy Commissioner are included in the
second footnote. These are also discussed in the following.
The footnote states: "According to the deputy commissioner, he presented his organizational
plan to DOE staff members left on the organization chart over 'working lunches'." This is
an inaccurate reconstruction of fact. The Deputy Commissioner, the Director of the division,
and I, met with DOE program managers regarding the organizational plan proposed by the
Deputy Commissioner and that had previously been discussed with the Director. These
meetings were during what was termed a "working lunch," even though no one was eating,
because they took place during the lunch hour. We did not meet with all "DOE staff
members left on the organization chart. " The purpose of the meetings was to get an honest
assessment from the program managers if they could do their job given the resources we
were proposing.
The footnote continue§,;_ "The deppty commissioner stated that those staff advised of the plan
agreed with it except for the engineering portion of it." Again, this is inaccurate. The
engineering section vgiced the only concern, and it was not with the structure of the section,
the number of engineers, or the number of support staff. They expressed concern that they
not become "rubber stamp engineers, basically approving contract engineers work."
"On October 15, the deputy commissioner instructed the director to implement the
organizational structure as proposed by the commissioner's office." This is correct.
"On October 16, the director verb_ally gave notice of his resignation effective October 19."
This is incorrect. On October 16, the Director verbally resigned. I accepted the Director's
resignation at that time and stated I wanted a letter to that effect. The Director asked if
Tuesday morning would be sufficient for receiving the letter, as October 16 was a Saturday
and the following Monday was a state holiday. As there would be no staff to type the
resignation letter until Tuesday, October 19, I agreed. The Director resigned effective
immediately on October 16 at approximately 6:00p.m.
In the second complete paragraph on page 18, your report states: "the commissioner's office
involvement in the structuring of the organization was motivated more by the removal of
select individuals, rather than having been based on any objective assessment of
programmatic needs or qualifications." As we have indicated throughout this letter, this
conclusion is incorrect and, apparently, primarily based upon incorrect and [alse statements
attributed to the Deputy Commissioner.
-29-
Mr. Welker
RE: PRELIMINARY REPORT RESPONSE
July 19, 1994
Page 6
...
'·. ;, , ... ; •.
The third complete paragraph on page 18 states, in part, that on February 4, 1994, the
director made a budgetary presentation detailing the need for additional positions and on
February 7, "for yet unclear reasons" the Director was dismissed and the Deputy Director
resigned in protest. The meeting with the Director on February 4 did take place, however
the Director never provided any detailed documentation. In fact, the Director provided no
written materials to the Commissioner or Deputy Commissioner, nor to any others in
attendance at the meeting. During this meeting, the Director either could not answer or
refused to answer direct questions of the Deputy Commissioner related to the Director's
investigation, or assessment of alternatives to additional staff.
During the February 4 meeting, I asked the Director whether or not he had discussed any of
his ideas regarding staff with the other Division Directors to take advantage of their
experience managing government organizations. The Director indicated that he had not done
this, nor had his Deputy Directors. I then expressed my concern regarding the impacts to
the other divisions of!!!e departm~nt should I approve energy staff increases at that particular
time. ·
During the entrance conference to the review, I clearly told your auditors the reasons why I
had requested the Director's resignation. Therefore, your statement that this was for
"unclear reasons" is misleading and is also inappropriate.
On page 19, the first paragraph states, in part: "We do not take exception to a commissioner
level of involvement in the operation and organization of lower levels within a department."
In our view, the preceding pages of the report have done just that ---take exception to a
commissioner level of involvement.
You continue in that paragraph: "However, having meeting the deadline as the primary goal
was not well advised." The Department does not agree with this conclusion by the Division
of Legislative Audit. Yes, the Department did have a legislative mandate to make the
transition in as orderly of a manner as possible. The word "orderly" is much more
subjective than the very real and mandated deadline of December 31, 1993. Consequently,
the Department focused upon meeting the December 31, 1993 deadline and conducted the
transition towards that end in as orderly of a manner as possible.
-30-
Mr. Welker
RE: PRELIMINARY REPORT RESPONSE
July 19, 1994
Page 7
The paragraph continues: "Additionally, the disjointed approach to organizing the Division
of Energy --with what appears to have been based upon arbitrarily selected or mandated
criteria regardless of program requirements --and the commissioner's office finalizing the
organizational plan without the involvement of the division director contributed to poor
morale, intensified an already difficult personnel situation, and did not provide for the
transition in an orderly fashion."
In response to this, several comments are in order. First, the Department's approach was
focused and aggressive, and that may have bothered some individuals. But, we saw no other
way to accomplish the transition between August 19 and December 31.
Second, the criteria I selected was based upon program needs, rural resident needs,
community needs, and the necessity of planning a budget. Please don't forget that I sat on
the ABA Board of Directors for three years.
Third, as previously stated, Commissioner's Office did not develop the organizational plan
without the involvement of the Division Director. The plan that was subsequently adopted
was based, in part, on information provided by the Director and was discussed with the
Director and other DOE staff prior to implementation.
Fourth, the morale at AEA was extremely poor after passage of SB 106 and SB 126. We
made every effort to raise that morale, without raising individual employee job expectations,
while attempting to accomplish a major legislative shift in policy and provide rural energy
services with minimal impact. The personnel situation was made difficult by the legislation
that transferred the programs. It is obvious that any reorganization is going to impact upon
the individuals involved and this problem was compounded by the short December 31, 1993
deadline. Had more time been available, it is likely that the impact upon the human
resources involved might have been eased.
The preliminary report starting with the second paragraph on page 19 indicates that there
have been impacts upon the planning and delivery of rural energy program services and the
remainder of the report attempts to describe those impacts. However, we believe the report
falls far short of offering definitive evidence to support the conclusion that the program
services have been impacted.
-31-
Mr. Welker
RE: PRELIMINARY REPORT RESPONSE
July 19, 1994
Page 8
The fact is program delivery was not curtailed. Delivery of services continued to be carried
out despite any perception that services and programs were in danger. At no time were life,
health, safety issues; metering and data acquisition; technical assistance; bulk fuel repair and
upgrade; rural utility training; emergency prevention; and capital project planning ever
diminished. In fact, at the request of Governor Walter J. Hickel, a number of bulk fuel
storage repair projects were speeded up.
With respect to this, we admit there is always some confusion during a transfer of programs.
For a time there was confusion, but it did not affect the delivery of programs. Nothing was
put "on hold." We agree that the effect, if any, of the transition in the immediate and future
construction seasons has yet to manifest itself. However, given the planning taking place
within the Division, the Department is more than comfortable stating that programs and
assistance will continue to be provided to the constituents of the division in a timely and
professional manner.
The management letter next turns to the Circuit Rider Maintenance Program (CRMP). With
respect to the discussion concerning privatization of a portion of the program, it should be
stated that privatization was planned before the transfer legislation was adopted. Any time a
new program is initiated, there is a period of time necessary to make changes in order to
carry out the program objectives. The new privatization of CRMP has had some difficulties,
but they are being worked out within the Division.
CRMP site visits reports are being developed. Indeed, they were developed in response to
the transfer legislation prior to the management letter. The same is true of the format of the
quarterly reports.
The last paragraph on page 20 refers to what is called decreased communication with rural
communities. Any time a service previously provided by a state agency is contracted out to
a private party, it will necessarily result in the reduction of division staff visiting affected
communities. There may well be a decreased visibility on the part of division personnel;
however, it should be noted we continue to be in constant contact with every participating
community in the CRMP in order to monitor the work of the various contractors. We have
not withdrawn from the communities that we serve.
We must take exception to the first full paragraph on page 21, which asserts many
communities do not know whom to contact at the agency when assistance is needed. The
communities are aware of division personnel who have assisted them in the past and continue
to do so in the present.
-32-
Mr. Welker
RE: PRELIMINARY REPORT RESPONSE
July 19, 1994
Page 9
The third paragraph on page 21 refers to the number of visits made to rural utilities under
the CRMP. We have begun to assess the number of visits made to each community and will
initiate procedures that will cover the needs of those communities.
On page 22, you recommend the Division adopt a formal policy on contractors marketing
goods and services while performing DOE contracts. It should be noted that there was
legislative intent language adopted during the last session that will cover this area of concern
for all CRMP contractors.
On pages 22 and 23, the report contends DOE's mandate for privatization is unclear. Again,
it should be stated that the Division has only recently been organized and programs placed
within DCRA. We will continue to look at the manner in which we provide programs within
the Division of Energy. Our concerns have been echoed by recent legislative action which
provided intent language to provide one year CRMP contracts, and that contracts be awarded
to a greater number ot.contractors~ The State Legislature also this year provided funding as
well as travel money within the Division's budget to hire additional personnel to provide
CRMP services.
The management letter asked a question concerning the Division's mandate for privatization.
Section 42.45.400(b) and Section 42.45.410 are quite clear in the direction given the division
in order to carry out its programs. Your recommendation that the Division define its
responsibilities under the legislation and establish criteria or guidelines in defining
"maximum extent possible" is inappropriate. There is no possible way to develop such
criteria. This is, and rightfully so, a matter to be determined by the department and the
Division of Energy. ·
Your recommendation to conduct analyses to determine whether the contracting of any
services is in the best interest of Alaskans flies in the ''face of Sections 42.45.400(b) and
42.45.410 cited earlier.
On the basis of this discussion, the Department concludes that the preliminary report is based
upon inaccurate and misleading information and does not reflect all of the information
available to you. The Department is concerned that the Division of Legislative Audit has not
considered the comments provided in response to the Management Letter in preparing this
Preliminary Report. We cannot help but conclude that the review was not conducted in the
fully independent manner required by professional audit standards.
-33-
,·, Mr. Welker· ·~
RE: PRELTh1INARY REPORT RESPONSE
July 19, 1994
Page 10
If we can provide you with any additional facts regarding the transition of the rural energy
programs to DCRA, please let me know.
~ -.
Sincerely,
~-\\p_,r "4J
Edgar Blatchford
Commissioner
-34-
(ffi !~ WALTER J. HICKEL, GOVERNOR
0 P.O. BOX 112100
(' \; / ; : JUNEAU,ALASKA 99811-2100
PHONE: {907) 465-4700
FAX: (907) 465-2948
DEPARTMENT OF COMMUNITY AND
REGIONAL AFFAIRS 0 333 W. 4TH AVENUE, SUITE 220
ANCHORAGE, ALASKA 99501-2341
PHONE: (907) 269-4500
OFFICE OF THE COMMISSIONER FAX: (907) 269-4520
Randy S. Welker
Legislative Auditor
Legislative Budget and Audit Committee
P.O. Box 113300
Juneau, AK 99811-3300
Dear Mr. Welker:
July 6, 1994
Please include this letter as a part of the Department's response to the
preliminary audit report on: Department of Community and Regional
Affairs, Dissolution of the Alaska Energy Authority and Transfer of
Programs, May 27, 1994.
This letter does not constitute the departments response to the
, .
preliminary report. You will be receiving that response for inclusion in the
final report and transmittal to the Committee by your deadline of July 19,
1994.
The purpose of this letter is to point out my disappointment and surpnse
that comments attributed to me are contained in the footnotes on page 18.
I'm disappointed from the stand point that I expect a higher standard of
professionalism from the staff of the Legislative Budget and Audit
Committee. It is inconsequential at this point that the quotes attributed to
me are in part statements I never made, are as a whole inaccurate
reconstructions and are taken entirely out of the context of the interview I
had with two of your audit team. The consequential aspect of this method
of justifying your report conclusion, is that it calls into question the
credibility of all the reports conclusions and recommendations.
-35-
21-P1LH
' ! '
Mr. Randy S. Welker
July 6, 1994
Page 2
One can argue that the workmanship exhibited in the last seven pages of
the preliminary report is more characteristic of tabloid journalism rather
than what is expect in an objective audit.
I seriously recommend you consider the departments response to the
management letter and to the preliminary report, which will follow this
letter.
Sincerely,
~K
Bruce R. Geraghty
Deputy Commissioner
~36-
. '\
ALA\SKA stATE LEGiSLATURE
LEGISLATIVE BUDGET ANP AUDIT COMMITTEE
Division of Legislative Finance
July 27, 1994
P.O. Box 113200
Juneau, AK 99811-3200
(907) 465-3795
FAX (907) 463-4885
Members of the Legislative Budget
and Audit Committee:
We have reviewed the responses from the Commissioner and Deputy Commissioner of the
Department of Community and Regional Affairs (DCRA), and have the following comments.
,..
On page 1 of DCRA's response the commissioner wrote:
and,
. . . we must question the independence and motivation of the Division of
Legislative Audit in conducting the review, because the majority of the
conclusions afHi comment~ identified in your preliminary report are based
upon inaccurate and subjective information . . .
Based upon the information provided in the report, the Department believes
your conclusions are unsupported, unwarranted and patently biased,
and on page 9,
We cannot help but conclude that the review was not conducted in the fully
independent manner required by professional audit standards.
~.
The department takes exception to the use of interviews as a basis for determining past
events and making judgement on issues. The use of interviews (testimonial evidence) as a
basis for development of audit conclusions is an important element in the accumulation of
audit evidence. Testimonial evidence must be complete and consistent. Corroborating
testimonial evidence is central to a review. A number of interviews were held with
individuals who could speak freely, without fear of retribution, and these statements were
corroborated by those who had to temper their comments because of that fear.
Interviewing is a widely used and accepted evidence gathering technique. ·-competency of
evidence refers to the degree to which evidence is considered believable or trustworthy. If
evidence is competent, it is persuasive. We believe the testimonial evidence obtained during
the course of this review (from no fewer than thirty individuals both within and outside the
-37-
Members of the Legislative Budget
and Audit Committee
-2-•·. July 27, 1994
agency), to the extent it was corroborated by other documentation and evidence, is competent
and sufficient.
In regard to specific responses made by DCRA, we offer the following:
On page 1 of the response the commissioner noted:
... the Department did have the goal guiding its actions of meeting the
legislative mandate that the transition be accomplished by December 31, 1993.
This mandate was the primary focus to actions taken by the Department and,
as a result, the transition was completed by the deadline.
We take exception to the department's assertion that the transition was completed by the
deadline cited in statute. Many significant issues remained outstanding to effect the
transition, most notably as)ate as Spring 1994:
• the department was continuing to wrestle with which appropriations, and how
much of each, could be expended for transition and operating purposes;
. • AKSAS"'"accounting' system journal entries had not been processed to record
the allocation of transition expenses;
• significant procurement issues concerning authority and the procedures to be
followed remained outstanding;
• former Alaska Energy Authority warehouse inventories had not been
performed; and,
• accounting and project manager information needs and reporting systems had
not been resolved.
The fact that the transition was not effected by December 31, 1993 notwithstanding, it
remains our opinion that having that date as the department's ''primary focus" was ill advised
as evidenced by the resulting turmoil and impact on delivery of program services.
In regard to the organization of the new Division of Energy (DOE), it remains clear to us
that while the first DOE director was attempting to forge an organization and staffing level
based on program requirements and individuals' experience and abilities, the commissioner's
office did in fact develop an organizational structure quite apart from that of the director's.
On page 5 of the department's response the commissioner noted our statement regarding the
resignation of the director effective October 19, 1993 was incorrect arid stated "The Director
resigned effective immediately on October 16 at approximately 6:00p.m." As noted in our
report, the director, as a result of the imposition of an organizational plan apart from the
-38-
ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
Members of the Legislative Budget
and Audit Committee
-3-July 27, 1994
structured approach undertaken by the director, did in fact resign on October 16, 1993
effective October 19, 1993. This is further evidenced by the director's resignation letter
dated October 19, 1993 effective 4:30pm that day and an Attorney General's memorandum
citing the fact that the director was performing the duties of the director's position on
October 19, and that he had "color of authority" to perform those duties. One of the issues
discussed in this memorandum dealt with whether DCRA was bound by severance
agreements offered by the outgoing director. DCRA' s honoring of those agreements testifies
to the authority of the director through day's-end on October 19, 1993.
On pages 3 -5 of the department's response the commissioner and deputy commissioner take
exception to comments in our report attributed to the deputy commissioner. The Division
of Legislative Audit follows the highest of professional standards, and enjoys a well received
reputation in that regard. This agency does not manufacture evidence nor report "purported
quotations." The comments attributed to the deputy commissioner were made during the
course of an interview by members of our staff and were reported as stated and in the proper
context. In regard to this, the commissioner has stated that the auditors conducting the
interview were speaking in terms of hypothetical situations and " ... admitted they had never
before done an audit of this nature." The auditors were not discussing the real-life events
surrounding the dissolution of the Alaska Energy Authority in hypothetical terms, nor was
this the first audit of this nature ever undertaken by the staff in question. The two team
leaders on this review have combined experience in excess of 30 years in this type of
auditing and program review. Both team leaders are Certified Public Accountants and one
a Certified Fraud Examiner. As such, these individuals are bound by the standards adopted
by the American Institute of Certified Public Accountants, the Association of Certified Fraud
Examiners, governmental auditing standards, and internal procedures regarding the
documentation of evidence, its extent, and credibility.
On page 4 of the response in regard to the statement made by the deputy commissioner that
"we did go that deep [within the organization] right down to the clerks", the commissioner
responded:
This is a true statement, but is stated in a context meant to mislead and
convey meaning that is contrary to the truth, and, therefore, is false. "We"
means the Deputy Commissioner, the Director and the Director's Deputies,
who examined staff requirements at every level, and conveyed this information
to me on a regular basis.
Once again, our reporting of this discussion is accurately presented and not in a fashion to
mislead or convey an untruth. The context of this discussion was in regard to a list of AEA
employees that was presented to the first DOE director at an August 1993 meeting with the
commissioner's office representatives. At this meeting the director was informed people on
that list would not be retained in the new Division of Energy. The director rejected that list.
It was in this context the deputy commissioner commented how "deep" within the
organization the "list" went.
-39-
ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
Members of the Legislative Budget
and Audit Committee
-4-July 27, 1994
On page 5 of the response, the commissioner states "As we have indicated throughout this
letter, this conclusion is incorrect and, apparently, primarily based upon incorrect and false
statements attributed to the Deputy Commissioner." Our observations and conclusions are
not based primarily on any one source -but rather based on a variety of sources and pieces
of corroborating evidence.
On page 8 the commissioner responded:
The fact is program delivery was not curtailed. Delivery of services continued
to be carried out despite any perception that services and programs were in
danger. In fact, at the request of Governor Walter J. Hickel, a number of bulk
fuel storage repair projects were speeded up.
Based upon numerous discussions with engineers, fiscal and budgetary personnel, and our
observations, it is clear that the transfer of programs to DCRA in a very short time frame
coupled with successive changes in management (four directors in seven months) did impact
the planning and delivery of services. It has been estimated that the transition and rapidity
in changes of management caused six to ten fewer bulk fuel repair/upgrade projects in that
program alone to be addressed in the immediate construction season.
Finally, on page 9 of the response in regard to our recommendation that the department
define its responsibilities under its statutory guidance to privatize to the maximum extent
feasible and determine whether privatization is in the best interest of Alaskans, the
commissioner responded "Your recommendation to conduct analyses to determine whether
the contracting of any services is in the best interest of Alaskans flies in the face of Sections
42.45.400(b) and 42.45.410 ... "
As cited on page 22 of the report, Alaska Statute states that the department shall give priority
to contracting with the private sector and to the maximum extent feasible enter into contracts
with the private sector. We recommended that prior to blanket privatization the department
determine whether privatization is in the best interest of Alaskans. We do not believe it is
in the best interests of Alaskans when there may be decreased program services at a much
higher cost to Alaskans. Only a proper analysis will tell.
The department asserts it must follow the privatization guidance in statute regardless of cost.
We do not believe it "flies in the face" of statute to determine how to achieve program
delivery at the least cost.
In 1989, the Department of Administration dealt with similar legislation governing its
procurement of telecommunications services . Alaska Statute 44.21.31 0( a)( 6) stated that the
department shall "whenever feasible" procure telecommunication services from private
enterprise. In an opinion from the Department of Law, the Attorney General's office stated
that the section of statute encouraging privatization whenever feasible was " ... little more
than a hard-to-read, vague, general policy directive that adds little regarding actual
-40-
ALASKA STATE LEGISLATURE DIVISION OF LEGISLATIVE AUDIT
Members of the Legislative Budget
and Audit Committee
-5-July 27, 1994
\-:. ..
telecommunications procurement procedures beyond the procedural requirements of AS 36.30
that apply to nearly all state procurements."
We believe that DCRA should, while considering the guidance of AS 42.45.400(b) and
AS 42.45.410, also consider the cost of following that guidance compared to alternative
means of program delivery.
-.
ALASKA STATE LEGISLATURE
Sincerely,
d4~u~ Rand~ Welker, CPA
Legislative Auditor
-41-
DIVISION OF LEGISLATIVE AUDIT