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HomeMy WebLinkAboutAEA Board Meeting March 19 2007@>ENERGY AUTHORITY/=ALASKA Alaska Industrial Development and Export Authority AGENDA Alaska Energy Authority Board of Directors March 19,2007 Anchorage,Alaska Following AIDEA Board Meeting 1.CALL TO ORDER 2.BOARD OF DIRECTORS ROLL CALL 3.PUBLIC ROLL CALL 4.PUBLIC COMMENTS 5.PRIOR MINUTES -January 25,2007 6.OLD BUSINESS 7.NEW BUSINESS A.Railbelt Energy Issues Update 8.DIRECTOR COMMENTS A.Director's Status Report of AEA Programs and Projects B.Next meeting date 9.BOARD COMMENTS 10.ADJOURNMENT 813 West Northern Lights Boulevard *Anchorage,Alaska 99503-2495 www.aidea.org *907/269-3000 *FAX 907/269-3044 ®Toll Free (Alaska Only)888/300-8534 ©www.akenergyauthority.org co)ENERGY AUTHORITYSALE'-N =,ALASKA Alaska Industrial DevelopmentWeAlaExportAuthority ALASKA ENERGY AUTHORITY BOARD OF DIRECTORS March 19,2007 11:58 am Anchorage,Alaska MEETING MINUTES 1.CALL TO ORDER Chairman Barry called the meeting of the Alaska Energy Authority to order on March 19,2007, at 11:58 am.A quorum was established. 2.BOARD OF DIRECTORS ROLL CALL Directors present in Anchorage:Mr.Mike Barry (Chairman/Public Member),Deputy Commissioner Brian Andrews (Designee for Department of Revenue);Commissioner Emil Notti (Department of Commerce,Community &Economic Development);Commissioner Leo von Scheben (Department of Transportation &Public Facilities);Mr.John Winther (Public Member). 3.PUBLIC ROLL CALL Staff present in Anchorage:Ron Miller (Executive Director);Chris Anderson (Deputy Director - Credit &Business Development);Bruce Chertkow (Loan Officer);Sara Fisher-Goad (Deputy Director -Operations);Brenda J.M.Fuglestad (Admin Manager);Mike Harper (Deputy Director - Rural Energy);Karl Reiche (Projects Development Manager);Karsten Rodvik (Project Manager); Mark Schimsheimer (Project Manager);Jim Strandberg (Project Manager);Valorie Walker (Deputy Director -Finance);and John Wood (Technical Engineer). Others attending:Lou Agi (ML&P);Steve Agni (O'Malley Gardens LLC);Brian Bjorkquist (Department of Law);Tuckerman Babcock (MEA);Tim Bradner (Journal of Commerce);Henri Dale (GVEA);Ted Leonard (TCC&D);Malcolm Menzies (DOT/PF-SER);Jean McKnight (FNBA);Mike Mitchell (Department of Law);Bob Reagan (ML&P);Ken Vassar (Birch,Horton, Bittner &Cherot);Jim Walker (MEA);and Theresa Obermeyer (Self). 4.PUBLIC COMMENTS Theresa Obermeyer spoke to the group and discussed information available on several websites: The Alaska State Court System;the Alaska Permanent Fund Board Confirmation Committee;and her own personal website -www.tobermeyer.info.[Verbatim transcript available upon request.] Verbatim Mr.Babcock,Matanuska Electric Association:|want to congratulate the board on holding a hearing on the public interest associated with potentially selling the Alaska Intertie.The MEA offer last December was genuine.It is an offer that we have discussed in the past.Basically the premise is the book value of the asset,MEA would be willing to discuss in confidential terms the details of what that offer would look like.|think the details of the offer are a confidential 813 West Northern Lights Boulevard *Anchorage,Alaska 99503-2495www.aidea.org *907/269-3000 *FAX 907/269-3044 ®Toll Free (Alaska Only)888/300-8534 ©www.akenergyauthority.org AEA Board Meeting March 19,2007 Meeting Minutes Page 2 discussion.This is not something the board has shied away with respect to discussions with GVEA on the disposition of the Healy Clean Coal Plant or Homer Electric,the confidential discussions over that particular PSA and eventual offer to purchase.Obviously,once an agreement is reached the terms would not be confidential.The reasons that MEA believes this is in the public interest include at the current state of affairs,the transmission system in the railbelt is completely regulated by the Regulatory Commission of Alaska with the exception of the Alaska Intertie.The Alaska Intertie is regulated by the Alaska Energy Authority directly and by the Agreement that is currently slated to expire between the various utilities that are part of the Alaska Intertie Agreement.The Intertie runs almost entirely through the MEA service territory.The difficulties with the Intertie especially revolved around the failure of the utilities that are part of the Intertie Agreement to come up with an actual mechanism for funding these repairs. At this time Chairman Barry asked Mr.Babcock to give his testimony later in the meeting under agenda item 7A. 5.PRIOR MINUTES --January 25,2007 The January 25,2007 minutes were approved as presented. 6.OLD BUSINESS No old business was presented. 7.NEW BUSINESS TA.Railbelt Energy Issues Update Jim Strandberg,Project Manager,provided an update on Railbelt Energy Issues.Included in the board packet is a document entitled Status of AEA Projects March 2007 and a copy of minutes from the last meeting which includes a summary discussion of the five projects being discussed today. At the last meeting,four projects in the Alaska Railbelt and one project for southern Southeast Alaska were discussed.The four projects in the Railbelt include the Alaska Intertie Project,the Unified System Operator Project,the MEA Bypass Transmission Line Project,and the Eklutna Transmission Line Upgrade Project which are defined in the summary. Unified System Operator Project is funded by a legislative appropriation of $800,000 to study the railbelt grid authority concept.That concept envisions a unified system dispatch of generation and power flows and at the finance level,a collective process for planning and procuring new generation over the next 20 years.Under the direction that AEA received from the legislature,AEA will analyze the concept and establish whether it is of benefit to the railbelt rate payer.A draft RFP for a consultant or contractor selection is approximately 90%complete. An advisory group comprised of the Railbelt general managers held their initial meeting;the minutes of which are available on the AEA website.Since the initial meeting,Homer Electric Association has indicated an interest in participating.The planned schedule is to advertise and bring a contractor on board by late April.In addition,a technical conference that would provide education on electrical network interconnectivity for stakeholders in the railbelt has been AEA Board Meeting March 19,2007 Meeting Minutes Page 3 proposed and is in the planning stages.We propose that public hearings be held on the disposition of public owned assets that are part of the railbelt,which includes MEA's offer to purchase the Anchorage Fairbanks Intertie. MEA Bypass Project.In 2002,the legislature appropriated $20.3 million dollars to the Alaska Energy Authority to upgrade and extend the Anchorage to Fairbanks power transmission intertie.The intertie stretches from Willow to the Healy River;adjacent to Healy Unit One and Healy Clean Coal Project.This will upgrade and extend the line from the Teeland substation on Knik Road to the Douglas substation.The construction of this bypass line will parallel the existing MEA owned line currently being used to transmit power to the north.The project has been approved by the Intertie Operating Committee.Project development contract negotiations with Municipal Light &Power are complete.ML&P has that contract and will present it to their assembly.Mr.Agi informs me that at this time we do not have an assembly date for consideration of this contract.Having this work done by ML&P was the result of a collaborative effort between AEA and the intertie participant utilities who decided this was the most efficient way to get this line constructed. Eklutna Project Transmission Line Upgrade.The legislature approved $19.3 million dollars as a grant to the Municipality of Anchorage and AEA was named as the grant administrator.This project consists of rebuilding the existing 115kv wood pole electric transmission line from Eklutna to the point where the Beluga 230kv electric transmission line intersects the line near Fossil Creek Bridge Tap.This line is approximately 22.5 miles long.This project is approximately 90%complete. In response to the Board,Mr.Strandberg reported that ML&P has not reported any cost overruns associated with this project. Southeast Alaska and the Alaska BC Intertie Project.The legislature appropriated $3.2 million dollars to the Alaska Energy Authority to analyze and confirm the feasibility of a transmission line to complete the Swan Lake-Tyee Intertie (between Swan Lake Power Plant and Tyee Lake Power Plant)and to construct a transmission line from the Tyee power plant to the Canadian border.The concept behind this is that the excess water energy being wasted at Tyee could be transferred to Ketchikan to offset increasing demands. The other major direction for the project is that a series of three storage hydro projects in the Petersburg area would be developed to produce 100 megawatts of power.This power would first be used to satisfy Alaska's needs and the rest would be available for export through Canada into the British Columbia power market or even further south to compete in the green power markets. The consultant has provided a positive interim report about the completion of Swan Tyee Intertie,but has not addressed the issue of exporting power:we expect a draft final report in late March.At the request of the Southeast Conference,the consultant will present the draft final report at the annual Southeast Conference during the Intertie meeting.The advisory group is comprised of stakeholders from the Southeast economic and local government communities. We expect the best assessment available on whether or not this project is economically viable and would be of benefit to the people of the State of Alaska. In response to the Board,Mr.Strandberg reported that the Swan-Tyee Intertie is approximately 50%complete.The Intertie project will connect Ketchikan with Wrangell and Petersburg upon AEA Board Meeting March 19,2007 Meeting Minutes Page 4 completion.From Tyee it is approximately 30 miles to the Canadian Border.The group has established some very good relationships with BCTC,the Crown Corporation organization that owns all of the major transmission lines in British Columbia,and they have attended the last several work group meetings. Mr.Barry added that although there is approximately 8 to 10 megawatts of excess power from Tyee,it is not enough to amortize a transmission line.There is a lot of small hydro potential in that region and although it is only 30 miles to the border on the Alaska side,there are approximately 60 miles on the Canadian side to be able to connect. In response to the Board,Mr.Strandberg reported that Dorothy Lake is a project under construction for AEL&P near Juneau.Presently,Southeast Alaska is segmented as the Southeast Alaskan Northern part which is Juneau and the Upper Lynn Canal and the Southern part which is Ketchikan,Petersburg and Wrangell.A long-term plan to connect the entire Southeast is constrained by money for completion of the intertie between Dorothy Lake and Ketchikan. Mr.Miller pointed out that Dorothy Lake is a project where conduit revenue bonds were issued for AEL&P and Chairman Barry stated that the transmission to the market that they serve is already funded.Discussion on the Southeastern Intertie revolved around where the grant money will come from to connect either Swan-Tyee or the AK-BC project.Mr.Strandberg stated that when the $3.2 million feasibility project was conceived,there was equal emphasis on the Intertie in Southeast and going into Canada.In order to make the economics of the Swan- Tyee better,that particular project could be subsumed into a larger regional energy development. Mr.Strandberg stated that there is not enough money to complete the Swan Lake-Tyee project, but they have about 50%of what is needed to complete the project and that has been put in the budget.There has been discussion regarding phasing the construction.There is a desire to tie in Snettisham going south,but it would be an expensive link. The Anchorage-Fairbanks Intertie is governed by the Alaska Intertie Agreement negotiated between the Alaska Power Authority,the predecessor of AEA,and five utility participants.The Agreement was signed in 1985 and amended in 1991 to include insurance provisions. Functional operation of this line as well as arrangements for collection and expenditure of annual operations and maintenance funds are part of the Agreement.Presently,the Agreement specifies through interconnection terms and conditions how utilities are allowed to access the Intertie.Recently,AEA gave the participating utilities a 48-month advance written notice of terminating the Agreement.There is a considerable amount of history and facts surrounding that termination.A copy of the termination letter as well as the board resolution that was predecessor to that termination is included in the board packet. AEA is a member of the Intertie Operating Committee:a technical level group that focuses on maintenance and operations.There are a number of subcommittees of the Intertie Operating Committee,some dealing with specific levels of technical operation of the Intertie.There is no debt being serviced by any of the charges for use of the Intertie.The project was built for $124 million dollars and there are no bonds outstanding.The major expenses,aside from the accruing long-term repair and replacement work,are maintenance and operations.Under the terms of this Agreement,AEA serves as a financial pool and provides basic accounting services to establish a cost-based wheeling rate.If one of the utilities wishes to transfer or sell power AEA Board Meeting March 19,2007 Meeting Minutes Page 5 under an economy energy market,the wheeling rate is assessed on the basis of cost without return on any investment.The Intertie Operating Committee Budget Committee establishes a budget each year for annual charges.The utilities project how much energy they plan to send up the Intertie and AEA calculates what the wheeling rate should be over the year.At the end of the year there is a true-up so that if more money is collected on the wheeling rate than actual charges accrued over the year,a check is written to the utilities. Staff was directed to begin negotiations regarding the Agreement Notice of Termination,which has not yet begun.We are working on the Unified System Operator contract and everything appears to be connected in one way or another.The disposition of this State asset is being discussed at a planning level as directed by the Legislature. At the request of the Board,a public hearing was held on an offer from Matanuska Electric Association to purchase the Intertie for approximately $50 million dollars.The record of that hearing consists of two sets of pre-filed comments,a verbatim hearing transcript and two post- hearing written letters.A request from MEA for more information about the Intertie was also entered into the record.MEA,Municipal Light &Power,Chugach,and Golden Vailey Electric Association addressed this issue in joint letters submitted to AEA.At the direction of the Board, we will hold additional public hearings on this matter.Under the USO Project,public meetings and hearings to address the disposition of all Railbelt assets will be scheduled. Chairman Barry clarified that the Board's direction to staff was that a public hearing be held to receive testimony about what elements should be considered in any disposition of the asset,not to hold a public hearing specifically about a specific offer for purchase of the asset.The Board wanted feedback from all of the affected utilities on what potential elements should be considered in any disposition of the asset.There was a lot of testimony about what elements should be considered and during a future public hearing only general generic elements should be considered in any kind of a disposition. Chairman Barry stated that there was a comment made by Mr.Edwards from Chugach Electric that was troubling.He read from the minutes of the public hearing: "And then the third point |want to make,just briefly,it has come up,the subject of the AEA Notice of Termination of the Alaska Intertie Agreement.Certainly,speaking on behalf of Chugach and |think also if this is true,of ML&P and Golden Valley,although they can speak for themselves,Chugach does not accept AEA's Notice of Termination as effective.” Chairman Barry asked Mr.Bjorkquist to contact Chugach and clarify what was meant by this statement and report back to the board. In response to the Board,Mr.Strandberg reported that 20 people attended the public hearing and those names are recorded in the verbatim minutes. Mr.Babcock stated his appreciation that there was a hearing and said MEA approached it along the lines of what would be in the public interest in issuing a public call for offers for the Intertie and that was how they tried to address their comments. Verbatim AEA Board Meeting March 19,2007 Meeting Minutes Page 6 Mr.Babcock:|think the main observation |would like to share with the board,based on what else is going on with the projects within the Railbelt,is that the grant from the Legislature from last year was in effect and had been approved at the same time the Alaska Energy Authority,or AIDEA,proceeded along with negotiations with Homer to resolve the disposition of the Healy Clean Coal Project.Nothing was seen as contradictory in moving forward with the disposition of that State asset and the study of what might be a Unified System Operation for the Railbelt,nor was there any reason that proceeding with the disposition of the Alaska Intertie would undermine or cripple the Unified System Operation review.In fact,the ultimate disposition would be a Unified System Operator that would deal with the transmission and generation throughout the Railbelt to some degree,to some level or another and the transmission lines owned by Golden Valley between Healy and Fairbanks and by Chugach from Anchorage down to the Kenai would also be subject to whatever the disposition was under a Unified System Operation as would MEA's transmission and potentially the Alaska Intertie if owned by MEA. The real public benefit in moving forward with a public offering,and we would hope that's the direction you would take,regarding the Intertie (certainly all the other utilities should come forward with what they think is in the State's interest for the disposition of that intertie or transmission line)is that it really should be regulated.The access to it and the tariffs should be regulated by the Regulatory Commission of Alaska (RCA)just as every other transmission line in the Railbelt is.It's very awkward to have this black hole in the transmission system which is regulated solely by a contract which has now been given notice of cancellation as opposed to by the Regulatory Commission of Alaska. There is at least $10 million dollars or more in a backlog of work that needs to be done on the Intertie and the current arrangement does not provide for the current utilities to step forward and do that.In addition,none of the proposals or reactions from the utilities has given an answer to the Alaska Energy Authority's inquiry as to liability.At this point in time,the entire liability for the operation,any harm that comes from the operation of that Intertie is the State's.This should be passed along to an owner,either a group of utilities or MEA,whoever made an offer that you found most acceptable and most in the public interest. So those are the three main points:that it should be regulated by the RCA;that the repairs and liability should be clearly the responsibility of the utilities;and that selling or transferring the Alaska Intertie would not interfere with your Unified System Operation,just as signing the contract last November with Homer did not interfere with that operation.Thank you very much. End Verbatim Chairman Barry stated that AEA does not accept any liability from the operation of the transmission line which is why there is an Intertie Operating Committee.AEA is one of the participants on that committee and ail of the utilities are represented on that committee.The operation of the Intertie has been unsatisfactory.The reason for the termination of the Agreement was because it was deemed to be ineffective in its operating for repairs and maintenance.There is a difference between a single generating facility that is operated by one entity and providing power to the Railbelt and an Intertie that is supposedly capable of moving many utilities power up and down it and perhaps even in more than one direction at the same time. The minutes of the public hearing reflected an insinuation by several different people who gave testimony that there was some sort of conspiracy between AEA and MEA on this offer. AEA Board Meeting March 19,2007 Meeting Minutes Page 7 Chairman Barry asked Mr.Babcock if he was aware of anyone on the staff or the board of AEA that solicited any kind of an offer from MEA. Mr.Babcock stated no offer was solicited.He indicated in the minutes that he spoke about that "alleged conspiracy.”The cancellation notice did not somehow open the door for discussion about MEA acquiring the line.MEA has been interested in discussing a purchase of the Alaska Intertie for five or six years always under the premise of starting at the book value.The other utilities have also made steps toward acquiring the Alaska Intertie,although not by approaching the Alaska Energy Authority,but by forming a Joint Action Agency and supporting legislation to force a transfer from the State to those three utilities. Chairman Barry said we will have continuing opportunity for testimony on the subject of disposition of this particular asset along with some comments on a Unified System Operation. This is a significant issue for all Railbelt utilities and we appreciate your involvement in guiding your State as we go forward. Hearing no objection,Chairman Barry closed the public comment period. 8.DIRECTOR COMMENTS A.Director's Status Report of AEA Programs and Projects Mr.Miller stated that the board would receive a full briefing on AEA programs and discuss AEA owned energy assets at a later date. B.Next meeting date The board will be polled for the next meeting date. 9.BOARD COMMENTS There were no additional comments offered. 10.ADJOURNMENT There being no objection and no further business of the Board,the meeting was adjourned at 12:55 p.m. //,f Le i SKARénMiller,Secretary Alaska Energy Authority .ENERGY AUTHORITY BOARD OF DIRECTORS January 25,2007 12:55pm Anchorage and Juneau,Alaska Teleconference 1.CALL TO ORDER Chairman Barry called the meeting of the Alaska Energy Authority to order on January 25,2007 at 12:55pm.A quorum was established. 2.BOARD OF DIRECTORS ROLL CALL Directors present in Anchorage:Mr.Mike Barry (Chairman/Public Member),Mr.Mark Davis (Designee for Department of Commerce,Community &Economic Development),Mr.Deven Mitchell (Designee for Department of Revenue);and Mr.John Winther (Public Member). (Deputy Commissioner John MacKinnon,Department of Transportation and Public Facilities, absent) 3.PUBLIC ROLL CALL Staff present in Anchorage:Ron Miller (Executive Director),Chris Anderson (Deputy Director - Credit &Business Development),Bruce Chertkow (Loan Officer),Becky Gay (Project Manager), Sara Fisher-Goad (Deputy Director -Operations),Brenda J.M.Fuglestad (Admin Manager),Mike Harper (Deputy Director -Rural Energy),Karl Reiche (Projects Development Manger),Mark Schimsheimer (Project Manager),Jim Strandberg (Project Manager),Valorie Walker (Deputy Director -Finance),and John Wood (Technical Engineer). Telephone:Pat Clancy (Western Financial Group),Tim Oswald (Piper Jaffrey),Bob Shea (Boys & Girls Home Family Services),Michael Huser (Boys &Girls Home Family Services),Bond Stewart (Wells Fargo),and Ken Dole (Resort Associates,Waterfall Resort). Others attending:Brian Bjorkquist (Dept of Law),Betty Gonzales (PenAir Realty),Danny Seybert(PenAir Realty),Orin Seybert (PenAir &PenAir Realty)Jay Page (1°National Bank),Steve Brown (FNBA),Paul Bloom (Merrill Lynch),Judith Hassinger (NWAB),Mayor Siikauraq Whiting (NWAB), Walter G.Sampson (NWAB),Marshall T.White (Dorsey &Whitney),Shelley Ebenall (BHBC),Ken Vassar (BHBC),Craig Smith (Northcrown Properties,Inc.),Dianne Blacksmith (Northcrown Properties,Inc.),Jason Criqut (FNBA),Bernard Zak (Sandia National Labs),and Theresa Obermeyer (Self). 4.PUBLIC COMMENTS Theresa Obermeyer spoke to the group and discussed information available on several websites: The Alaska State Court System;the Alaska Permanent Fund Board Confirmation Committee;and her own personal website -www.tobermeyer.info. AEA Board Meeting January 25,2007 Meeting Minutes Page 2 Chairman Barry told Ms.Obermeyer to email the Board with the website she wished for them to visit. 5.PRIOR MINUTES -December 1,2006 The December 1,2006 minutes were approved as presented. 6.OLD BUSINESS There was no old business. 7.NEW BUSINESS There was no new business. 8A.Director's Status Report of AIDEA Programs and Projects Mr.Miller discussed a Memorandum of Understanding between Sandia Corporation and AEA that formalizes a working relationship between Sandia and AEA to pursue development in the energy field and energy technology. Mr.Strandberg provided an overview of four projects.Three are associated with the Alaska Intertie project,an Alaska Energy Authority asset.The Alaska Intertie is a 170 mile long transmission line that stretches from Willow to Healy River and is used to convey energy that is purchased by GVEA from ML&P and Chugach under the Economy Energy Market established by an RCA order. The line,owned by AEA,has no debt associated with it and was constructed in the mid-1980's with State of Alaska appropriations totaling $124 million.AEA is currently operating the line through an Intertie Operating Committee.The current agreement was negotiated with the participating utilities in the 1980's and the Authority collects charges for conveying power and uses that to offset the cost of maintenance and operations.Although we own the facility,the utilities have operational control of the asset.No AEA money flows into operation of the asset. In participation with the Intertie Operating Committee,AEA monitors the operation and maintenance of the line and makes sure the asset is being properly tended to by the utilities that are actually making use of the line. AEA Board Meeting January 25,2007 Meeting Minutes Page 3 Since 2003,the AEA Board has worked extensively with the utility in an attempt to change the current operating agreement.A number of defects have been identified in that agreement and we have worked closely with our Assistant AG,Mr.Bjorkquist.Following a Board directive,our Executive Director terminated this agreement on October 16,2006.Under the terms of the Intertie Agreement we have begun a four-year process and at end of that time we should have another agreement in place. Recently Matanuska Electric Association offered to purchase this asset.Staff was asked at the last Board meeting to schedule public hearings which will allow the other utilities and the public a chance to voice their thoughts and opinions about the possibility of selling this asset.It was suggested the public hearing be held in conjunction with the Unified System Operator project. The Unified System Operator Project (USO)is a result of an $800,000 legislative appropriation awarded to AEA to study the railbelt energy grid authority.Staff has developed a project to study and consider whether we can economically dispatch power more effectively in the railbelt and ways that the railbelt can collectively plan and acquire new generation and transmission infrastructure. This second part is particularly important for the State because the major generation on the South end of the system is aging and will need to be replaced.There are documented estimates showing 'we will need to invest as much as one billion dollars over the next ten years to replace this generation.The existing utility structure could be looked at from the standpoint of efficiency over the next ten years.We would like to structure the USO project and plan a technical conference with the public and with the utilities.A conference given by experts could educate us on how to restructure the railbelt over the next ten years and efficiently replace this generation. We should consider the disposition of the AEA owned asset as a part of a technical conference where people are allowed to express their opinions and we should listen carefully about where they think we ought to go.As part of the USO project an experienced consultant could advise us on the best way to restructure our power system.The USO should review the way we are currently Operating this Intertie and the renegotiation of the agreement as there may be some synergies between those two projects. With a legislative appropriation of $20.3 million dollars,the third railbelt project is the MEA Bypass Project,designed to upgrade a southern segment of the line connecting with the southern part of the Intertie.We currently convey Intertie energy,by agreement,over an MEA-owned line.This appropriation is designed to install a parallel line which would be dedicated to Intertie energy flow. That contract is set to go before the Municipal Assembly for approval as we have contracted the project with Municipal Light and Power.ML&P provides its spin energy over this line and therefore has interest in the operation of the Intertie. We are peripherally involved in the Eklutna Project Transmission Line Upgrade that was designed to replace the 50-year old line from the ML&P plant to the Eklutna Power Station.This is a grant that was given to ML&P and AEA is the Grant Administrator.ML&P is constructing this project and it is 80%complete. AEA Board Meeting January 25,2007 Meeting Minutes Page 4 Mr.Strandberg stated that it is written in the contract with ML&P that AEA is not responsible for cost overruns and this was entered into the minutes at the last Intertie Operating Committee meeting. Mr.Bjorkquist stated that after feasibility studies and design are completed,but before construction begins,ML&P will be obligated to commit to completing the project with the available funds.ML&P has stated they will work with the other utilities for joint funding.It was stated that this should not take place without this Board's approval and Mr.Bjorkquist said there are approval processes withrespecttoqualityandconstruction. In response to questions from the Board,Mr.Strandberg explained that the $20.3 million was to add a new parallel line to the MEA line which stretches from Teeland Substation to Willow. Mr.Bjorkquist said that when the Alaska Intertie Agreement was put together there was a provision that AEA is to contract with MEA for the use of that line,but MEA has terminated that contractual provision.Certain utilities are using that MEA line under an RCA order which ordered joint use and interconnection.Only certain utilities have the right to use 19 miles of what historically has been considered the Alaska Intertie.The bypass will make the Alaska Intertie complete from Willow up to Healy. Mr.Strandberg explained that the Alaska Power Authority built the Eklutna transmission line 50 years ago to bring Eklutna Power to Anchorage.Constructed of wood poles,it is very old and needs to be upgraded.MEA,Chugach and ML&P co-own the 40 megawatt capacity which is Golden Storage Hydro.ML&P was successful in getting a grant which is being administered through AEA. Chairman Barry suggested that the consultant for the USO project work on the various agreements it would take to transmit and dispatch power as efficiently as possible and that public hearings be scheduled quickly to gather public comments in time to respond to any legislative hearings that might take place. Mr.Strandberg provided an overview of the Southeast Intertie Projects.The Alaska Energy Authority received $3.2 million dollars to establish or review the feasibility of a transmission line project in Southeast Alaska Ketchikan area.The first part of the project is completion of the Swan- Tyee Intertie,a 69 mile transmission line from the Swan Lake Power Plant serving Ketchikan,north through the Tongass Forest to the Lake Tyee Power Plant,serving Wrangell and Petersburg. The second part of the project is a 30+mile transmission line from the Lake Tyee Power Plant to the Canadian Border.The concept is to connect potential large-scale hydro storage projects in Thomas Bay with projects in the Ketchikan area,take that energy and sell it to the Canadian grid. The previous administration embarked on an initiative to combine the two projects and through synergy improve the feasibility of completion of the Swan-Tyee Intertie and create an economic development project for Southeast Alaska. AEA Board Meeting January 25,2007 Meeting Minutes Page 5 A consultant was hired and an advisory body was established.A steering committee comprised of local government elected officials in southern Southeast Alaska was formed.The consultant, Hatch Energy,recently produced an interim report with preliminary indications of feasibility.The final report is due on March 31,2007.There is a lot of effort by various groups to get the funding for the Swan-Tyee Project.Right now we're focused on getting this consultant to give us a straight- shot analysis of the project. Chairman Barry asked if anybody looked at the option of giving the priority to hooking up the Canadian grid and then perhaps later completing the Swan-Tyee Intertie. Mr.Strandberg reported that the consultant was asked to come up with all of the viable development scenarios.As to whether or not we should develop the Thomas Bay Project first,the thing that is coming down is that the 100 megawatts of potential capacity in Thomas Bay,but as a large scale hydro storage in a scenic area,it is likely that it would take battles,a lot of money,and 10-12 years to develop those projects.The Swann-Tyee has alignment cleared and permits and there is no impediment to completing it. A discussion ensued about which project might take priority,the Swan-Tyee Intertie or the BC Transmission and the pros and cons of combining the projects.Mr.Strandberg informed the Board that the interim report by Hatch Energy including an estimate for the transmission line and an abstract outlining the project is posted on their website and invited Board Members to review the information. 8B.NEXT MEETING DATE The next Board Meeting will be Monday,March 19,2007. There being no objection and no further business of the Board,the meeting was adjourned at 1:45 p.m. Ron Miller,Secretary Alaska Energy Authority Status of AEA Projects -March 2007 Alaska Railbelt Energy System Alaska Intertie Project The Alaska Intertie transmission line is a 170 mile long,345 kv transmission line between Willow and Healy that is owned by the Alaska Energy Authority (AEA).The intertie was built in the mid 1980's with State of Alaska appropriations totaling $124 million.There is no debt associated with this asset. Alaska Intertie Agreement The operation of the Intertie is governed by the "Alaska Intertie Agreement”that was negotiated between the Alaska Power Authority (the predecessor of AEA)and five utility participants.This agreement was signed in December of 1985 and amended in 1991 to include insurance provisions. Chugach Electric Association (CEA),Municipal Light and Power (ML&P),Alaska Electrical Generation and Transmission (AEG&T)!,and Golden Valley Electric Association (GVEA)are interconnected to the intertie and can move power on the Intertie under the terms of the Alaska Intertie Agreement (Agreement).The interconnected system of utilities,tied together with the Intertie is collectively termed the "Railbelt Energy System.” Both functional operation of the transmission line as well as arrangements for the collection of and expenditure of Annual Operations and Maintenance funds are a part of the Agreement.The Agreement assigns operational responsibility and specifies a governance structure that consists of representatives of participating utilities and AEA.There are a number of other agreements that assign maintenance responsibility. The Agreement specifies,through interconnection terms and conditions,how utilities are allowed access to the Intertie.Each utility is required to maintain a certain level of spinning reserve to preserve the reliability of electrical supply throughout the network and to cooperatively manage the power flows on the transmission line. AEA recently gave the participating utilities 48 month advanced written notice of terminating the Agreement. 'AEG&T is comprised of Matanuska Electric Association (MEA)and Homer Electric Association (HEA). Attempts to Cure Alaska Intertie Agreement Defects-A Short History AEA staff first presented a report on the intertie at a meeting on June 30,2003, pointing out problems with the Alaska Intertie Agreement (Agreement).AEA engaged in extensive cooperative interaction with the Utility Participants to seek solutions to the deficiencies in the Agreement in the intervening time period.When participants failed to agree to any amendments to cure defects,2 and determining that the defects were serious,on October 16,2006 AEA Executive Director Ron Miller gave notice of terminating the Agreement in accordance with a board resolution,which is appended. In the notice of termination letter,which is appended herein,the Executive Director pointed out that the AEA list of defects does not deal with interconnection issues, and that AEA seeks to clarify the business relationship for the management and maintenance of the line. Current AEA Project Activity e Ongoing owner activities,including monitoring of operation,and financial management of operations and maintenance activities through participation in the Intertie Operating Committee e AEA serves as a financial pool,providing basic accounting services to establish a cost based wheeling rate that is trued up each year.AFA staff collects payments from intertie users and pays out expense reimbursement for costs accrued by the two operators of the line,ML&P and GVEA,and the three maintenance contrators,MEA,CEA and GVEA.At the end of each year AEA trues up the pool account and either sends out refunds or rolls over end of year shortages into the next year budget,so that users of the line pay only for the actual cost each year of intertie operation.There is limited ability to recover debt service that is spread over a time period greater than one year; therefore,debt financing has not been used to date. e Renegotiation of the agreement -Staff is ready to begin renegotiation of agreement.Initial renegotiation meetings with Utility General Managers are on hold,pending the establishment of the schedule for and the hiring of the Unified System Operations Contractor. 2 Some difficulty arose because the agreement requires a unanimous vote of participants to implement any amendment.To avoid this difficulty,AEA proposed a two-step process to cure defects without unanimous agreement of participants.First,appropriate amendments to cure defects would be negotiated with participants,and would have to be agreed by AEA and one or more participants. Second,AEA would give notice of terminating the agreement,so that the previously agreed amendments could take effect no later than 48 months later (earlier if participants unanimously agreed). H:\AEA Projects\Status of AEA Projects March 2007.doc Page 2 of 6 Unified System Operation Description:This project is funded by a legislative appropriation of $800,000 to study the Railbelt Grid Authority Concept.3 The Grid Authority concept envisions a unified system dispatch of generation and power flows,and at the finance level,a collective process for planning and procuring new generation over the next 20 years.AEA will analyze this concept and establish whether it is of benefit for the Railbelt ratepayer. AEA's proposed project scope includes elements of public hearings,educational conferences,and a consultant study to develop how Alaska can share resources to unify operation of the Railbelt Electrical Grid. AEA will conduct a technical conference to provide education on electrical network interconnectivity and terminology.AEA will also hire a consultant to define the types of network build-out available and consider the current regulatory regime of the Railbelt and business structures currently in place.The consultant will define different pathways that will achieve the most efficient collective build-out of the network. For the range of Grid Authority concepts considered feasible,AEA will require the Consultant to provide an implementation plan that describes the utilities',RCA's and AEA's required actions,as well as any potential legislative action estimate budget requirements,and provide a schedule and critical path analysis.Key to the analysis will be consideration of the regulatory structure and the range of business structures that could be employed to unify system operations. AEA has invited the Railbelt utility general managers to serve on an advisory group to assist in accomplishing the study.This panel includes the general managers of Railbelt Electric Utilities that have defined service areas.Presently,the panel does not include Aurora Energy (AE)which generates electricity in Fairbanks but has no defined service area,or other potential interconnected generators in the region. There is additional work to determine the right makeup of the advisory group. Status:Project RFP in formulation.Initial advisory group meeting has been held and minutes for the meeting are on the AEA web page at http://www.akenergyauthority.org/USOHomePage.html.AEA project manager will complete the request for proposal with internal input,and present to Advisory group for their review in the next three weeks. Current schedule is to conduct contractor selection in April,and hire Contractor in May.Technical conference is to be held as soon as possible,so it can be used both as an educational forum and a means to efficiently amass the business structure, regulatory,physical and operating data that the Contractor needs to develop approaches for unification. 3 The legislation reads as follows: (i)Any balance remaining in the Railbelt energy fund (AS 37.05.520)and interest earnings of the fund,after the appropriations made in (a)-(h)of this section and not to exceed $800,000,is appropriated to the Department of Commerce, Community,and Economic Development,Alaska Energy Authority,for the study of the Railbelt Electrical Grid Authority,an independent system operator,to manage and dispatch electric power on the Railbelt grid. H:\AEA Projects\Status of AEA Projects March 2007.doc Page 3 of 6 MEA TLS Bypass Project Description:The legislature appropriated $20.3M to AEA in 2002,to upgrade and extend the Anchorage to Fairbanks power transmission intertie ("Alaska Intertie”)to the Teeland substation on Knik Goose Bay Road in the Matanuska-Susitna Borough.The project is an integral part of the Alaska Intertie and will replace approximately 25 miles of an existing transmission line operated at 138 KV,owned by MEA+*. Construction of this bypass line will parallel the existing MEA owned line,and allow the present MEA owned intertie link,20 miles of which is insulated at 115 KV and operated at 138 KV,to return to MEA control and service.Continued use of this 20 mile portion of the 25 mile MEA asset by certain Railbelt utilities until January 1, 2014 has been provided for through an RCA order. Status:The project has been approved by the Intertie Operating Committee. Negotiations of a project development contract with Municipal Light and Power were completed in August 2006,but cannot be executed without approval by the Anchorage Municipal Assembly and Municipal Administration.When approved, AEA anticipates it and ML&P will execute the contract and begin development.Theprojectisexpectedtotake3yearstocomplete. Eklutna Project Transmission Line Upgrade The legislature appropriated $19.3M as a grant to the Municipality of Anchorage, Municipal Light and Power for an Eklutna project transmission line upgrade.AEA was named as grant administrator. The project consists of rebuilding the existing 115 KV wood-pole electric transmission line from the Eklutna Hydroelectric Plant to the point where the Beluga 230 KV electric transmission line intersects the line (near Briggs Tap/Fossil Creek),spanning a distance of 22.5 miles.The project is being constructed in the same alignment,and will upgrade the existing single circuit line to a double circuit line.The existing line has been in existence for 50 years. Status:Project is at 90%completion,and is expected to be completed this year. 4MEA has terminated a use agreement with AEA that previously allowed use of 20 miles of the existing line in conjunction with the Alaska Intertie.Certain Railbelt utilities are authorized to continue to use this 20 miles through January 1,2014,solely under an RCA order.An agreement between MEA and AEA authorizes perpetual use of the remaining 5 miles of existing line,until it is no longer needed as part of the Alaska Intertie. H:\AEA Projects\Status of AEA Projects March 2007.doc Page 4o0f6 South East Alaska Intertie Projects AKBEC Intertie Project Description:The legislature appropriated $3.2 Million to AEA to analyze and confirm the feasibility of a transmission line project that would: e Through construction of a 67 mile electrical transmission intertie,connect two parts of the 4 Dam Pool service area,and the two major Southeast hydro electric power plants in the Ketchikan-Wrangell-Petersburg region.The completion of this intertie would allow Lake Tyee unused capacity to power Ketchikan,which is presently short of power. e Connect the 4 Dam Pool transmission system into the Canadian grid,and thus gain access to power markets either in Canada or US Pacific Northwest. As a part of the project concept,the construction of a transmission backbone would entice private or local government entities to develop a number of hydro power projects that could produce as much as 100 MW of power for use in southern SE Alaska or be exported.The bulk of the projects appear to be in the Thomas Bay area near Petersburg. AEA hired Hatch Energy to determine project feasibility and the company is approximately 60%through its scheduled work scope,and is set to deliver a final report on March 28th.They are on schedule,and there have been no change orders to the contract.Of the $3.2M funding,AEA will have expended approximately $450,000 by the end of March.The Hatch Energy study is expected to provide some basis for deciding whether to continue into a project development phase,however,it likely will not be a hard thumbs up or thumbs down feasibility determination,given the complex interplay of political,demographic and development futures that the project faces. This project has an advisory committee and steering committee to assist AEA in proper administration of funds.5 The committees have participated actively in the formulation of the consultant scope of work,selection of the consultant.The work of the consultant and the recently released interim feasibility report have been reviewed by the work group and approved by them. All advisory meetings have been advertised as public meetings and have been well attended by all work group members as well as interested members of the public and legislative staff people.Detailed meeting minutes are published and are available on the AEA web page dedicated to this project. The project manager has coordinated with Canadian power companies to ensure that the Alaska consultant secures accurate information about Canadian markets for power as well as the details of their transmission system rules. 5 Membership of the committees are on the AEA AKBC Intertie project web page under "participants.” The Committees consist of a mix of utility representatives and local government representatives designed to reflect a cross section of stakeholders. H:\AEA Projects\Status of AEA Projects March 2007.doc Page 5 of 6 Status:The draft final report is scheduled for release on March 28%,At the request of the Southeast Conference and the Advisory work group,the Consultant will present the report during an energy session of the Conference's Mid-Winter Summit in Juneau March 28-30.Work group meetings will be held during the conference, and work group input to AEA will be solicited.This report will be reviewed by AEA with input from the work group.A final report is expected to be issued approximately 30 days later. H:\AEA Projects\Status of AEA Projects March 2007.doc Page 6 of 6 ALASKA ENERGY AUTHORITY RESOLUTION NO.2006-04 RESOLUTION OF THE ALASKA ENERGY AUTHORITY RELATING TO THE ALASKA INTERTIE;NOTICE OF TERMINATION OF THE ALASKA INTERTIE AGREEEMENT;AND RELATED MATTERS WHEREAS,the Alaska Energy Authority (the "Authority”)owns the Alaska Intertie; WHEREAS,the Alaska Intertie Agreement is an agreement related to the Alaska Intertie among the Authority and the Municipality of Anchorage d/b/a Municipal Light and Power, Chugach Electric Association,Inc.;Golden Vailey Electric Association,Inc.;and Alaska Electric Generation and Transmission Cooperative,Inc.(collectively the "IOC Utilities); WHEREAS,the Authority and IOC Utilities have certain rights and responsibilities under the Alaska Intertie Agreement for the use,operation and maintenance of the Alaska Intertie, with many duties addressed collectively by the Authority and IOC Utilities within the Intertie Operating Commitiee ("lOC"); WHEREAS,the Alaska Intertie is an integral component of the Railbelt energy transmission grid,and is essential for the transmission of electric energy between Fairbanks and Anchorage,enables the systems of various 1OC Utilities to provide economical electric energy to Railbelt customer ratepayers,and enables the systems of various {OC Utilities to sell economy energy to other Railbelt and !OC Utilities for their systems to provide economical electric energy to Railbelt customer ratepayers; WHEREAS,the Authority,IOC Utilities,and IOC have individually and collectively identified defects in the Alaska Intertie Agreement that,if not cured,are likely to eventually disrupt the safe,reliable and efficient operation of the Alaska Intertie and the transmission of economical electric energy for the benefit of various Railbelt and |OC Utility systems and their customer ratepayers; WHEREAS,the Authority,IOC Utilities,and 10C have individually and collectively undertaken considerable efforts attempting,without success,to negotiate and implement cures to the identified defects in the Alaska Intertie Agreement that,if not cured,are likely to eventually disrupt the safe,reliable and efficient operation of the Alaska Intertie and the transmission of economical electric energy for the benefit of various Railbelt and IOC Utility systems and their customer ratepayers; WHEREAS,Section 2.2.2 of the Alaska Intertie Agreement provides,in part,that "[the Authority)may terminate [the Alaska Intertie Agreement]by giving at least 48 months advance written notice when [the Authority]determines such action to be required to improve Power systems serving the Alaska Railbelt Utilities;” WHEREAS,certain |OC Utilities have informed the Authority that the IOC Utilities are making significant progress towards developing amendments to the Alaska Intertie Agreement and,if necessary,additional "side agreements,”which collectively will address the defects in the current Alaska Intertie Agreement,and have requested additional time to complete that process and negotiate amendments and,if necessary,additional side agreements with the Authority; and WHEREAS,matters related to this Resolution 2006-04 are more fully described and documented in further detail in the Memorandum with Attachments accompanying this Resolution 2006-04. NOW,THEREFORE,BE IT RESOLVED BY THE ALASKA ENERGY AUTHORITY AS FOLLOWS: Section 1.The Authority finds and determines that,for the reasons more fully described and documented and in the Memorandum with Attachments accompanying this Resolution 2006-04,all of which is incorporated herein by reference,that the Authority giving 48 months advance written notice of terminating the Alaska Intertie Agreement is "required to improve Power systems serving the Alaska Railbelt Utilities”as that phrase is used in Section 2.2.2 of the Alaska Intertie Agreement. Section 2.The Authority finds that,based upon representations by certain IOC Utilities that the IOC Utilities are making significant progress towards developing amendments to the Alaska Intertie Agreement and,if necessary,additional "side agreemenis,”which collectively will address the defects in the current Alaska Intertie Agreement,and have requested additional time to complete that process and negotiate amendments and,if necessary,additional side agreements with the Authority,that additional time should be provided to IOC Utilities,and that notice of termination should not be given until September 1, 2006; Alaska Intertie Agreement Resolution No,2006-04 Page 2 Section 3.The Executive Director of the Authority is authorized,directed,and empowered to implement this Resolution by giving 48 months advance written notice of terminating the Alaska Intertie Agreement pursuant fo Section 2.2.2 of the Alaska Intertie Agreement if the IOC Utilities fail by September 1,2006,to negotiate and execute final amendments to the Alaska Intertie Agreement and,if necessary,additional "side agreements,” acceptable to the Authority,which collectively will address the defects in the current Alaska intertie Agreement. Section 4.The Executive Director of the Authority is authorized and empowered to take any and all actions appropriate and consistent with this resolution. Section 5.This Resolution shall become effective immediately upon its passage and approval. DATED at Anchorage,Alaska,this 10th day of July 2006. Wh ArdeATTESTChair [SEAL] Secrefary Alaska Intertle Agreement Resolution No.2006-04 Page 3 aid ty Alaska (ndustrial DevelopmentandExportAuthority iN [Es tidiinmvs:)ENERGY AUTHORITY October 16,2006 Mr.Bradley P.Janorschke Mr.Steve Haagenson General Manager President &Chief Executive Officer Homer Electric Association,Inc.Golden Valley Electric Association,Inc. 3977 Lake Street P.O.Box 71249 Homer,Alaska 99603 Fairbanks,Alaska 99707-1249 Fax:(907)235-3313 Fax:(907)458-5951 Mr.Jim Posey Mr,Bill Stewart General Manager Chief Executive Officer Anchorage Municipal Light &Power Chugach Electric Association,Inc. 1200 East First Avenue P.O.Box 196300 Anchorage,Alaska 99501 Anchorage,Alaska 99519-6300 Fax:(907)263-5204 Fax:(907)562-0027 Mr.Wayne Carmony General Manager Matanuska Electric Association,Inc.and Alaska Electric Generation and Transmission Cooperative,Inc. P.O.Box 2929 Palmer,Alaska 99645 Fax:(907)761-9349 RE:Alaska Intertie Agreement Gentlemen: This fetter provides notice of termination under Section 2.2.2 of the Alaska Intertie Agreement dated December 23,1985 ("Agreement").The Agreement will terminate 48 months from today's date. The Alaska Intertie ("Intertie')is a 170-mile,345kV transmission line between Willow and Healy owned by the Alaska Energy Authority ("AEA”).The Intertie was built in the mid-80's with state of Alaska appropriations totaling $124 million and allows Golden Valley Electric Association ("GVEA”)in Fairbanks to purchase electricity from Chugach Electric Association ("CEA"), Anchorage Municipal Light &Power ("ML&P”)and the Bradley Lake Hydroelectric Project. The Intertie is governed by the Agreement by and between the Alaska Power Authority (now the Alaska Energy Authority),ML&P,CEA,GVEA and Alaska Electric Generation &Transmission Cooperative ['AEG&T”comprised of Matanuska Electric Association ("MEA")and Homer Electric Association}.The Intertie's operation and maintenance are overseen by the Intertie Operating Committee (IOC)that includes representatives of all signatories to the Agreement. The utility signatories are defined in the Agreement as "Utility Participants.”Intertie operatingandmaintenancecostsarethesoleresponsibilityoftheUtilityParticipants,not AEA.Neither thestateofAlaskanorAEAreceivesanyrentoruserfeesfromtheutilitiesthatusetheIntertie. 813 West Northern Lights Boulevard *Anchorage,Alaska 99503-2495 www.aidea.org ¢907/269-3000 *FAX 907/269-3044 *Toll Free (Alaska Only)888/300-8534 ¢www.akenergyauthority.org October 16,2006 Page 2 The current AEA Board held its first Board meeting on January 30,2003.At the next AEA Board meeting (June 30,2003),AEA staff presented the Directors a report on the Intertie that pointed out problems with the Agreement.Of particular interest to the Board was mention of the fact that the Agreement has no mechanism to fund capital improvements and that a number of needed repairs identified by the IOC in October 2002 in their "Alaska Intertie Upgrade Report” were not being addressed.These problems included needed repairs to Static Var Compensators ("SVC'"),repairs to tower foundations and Intertie snow loading concerns.AEA staff also advised the Board that under Section 2.2.2 of the Agreement,AEA may terminate the Agreement,"by giving at least 48 months advance written notice when (AEA)determines such action to be required to improve Power systems serving Alaska Railbelt Utilities.”At the June 30,2003 meeting,the Board directed staff to review the Agreement and report to the Board. On December 29,2003 the General Managers of CEA,GVEA and ML&P,and Ron Saxton (attorney for GVEA)met with AEA staff and Assistant Attorney General Brian Bjorkquist at AIDEA to discuss methods of financing needed repairs to the Intertie.At the end of that meeting,the utility representatives committed to seeking financing for the repairs through AEA- issued bonds with the utilities as the borrowers/guarantors. AEA staff continued working through the [OC to address the repairs and problems with the Agreement throughout 2004 and the first half of 2005.Progress was made addressing concerns with snow-load issues but no mechanism was developed to finance work on the tower foundations or SVC''s. On June 24,2005 the Utility Participants were advised in writing by AEA staff that the AEA Board would meet on July 25,2005 and discuss,among cther issues,the following problems with the Agreement: 1.No R&R fund (repair &replacement fund)or other capital fund to finance major maintenance or upgrades; 2.Deferment of needed repairs; 3.Lack of compliance with the Agreement's terms and conditions. The June 24,2005 letter also notes that the AEA Board: *,..has concerns regarding continuing operations of the Alaska intertie under the current Agreement.The inability of the Intertie Operating Committee to timely address tower foundation repairs,SVC upgrades and other necessary deferred maintenance evidences fundamental deficiencies in the Agreement.Even if those specific problems were soon addressed,the Agreement would still lack adequate provisions to maintain the Intertie and prevent future serious degradation of the line's ability to transmit power. These fundamental deficiencies in the Agreement must be rectified.We understand that the conventional wisdom of the Utilities in the past has been that the Agreement cannot be amended to cure these deficiencies.However,if no other realistic solution is forthcoming,the AEA Board may be compelled to exercise its option to terminate the Agreement..." The response to this letter by some of the utilities letter was to lobby the Governor's Office to convince the AEA Board and staff to remove this item form the July 25,2005 meeting agenda October 16,2006 Page 3 and to meet informally with the utilities instead.As a compromise,the Board agenda was kept as originally proposed and a work session was held on July 22,2005 with two AEA Board members,AEA staff and utility representatives to discuss the issues raised in the letter. At the July 22,2005 work session,the representatives of CEA,GVEA and ML&P committed to working together to fix problems with the Agreement and to finance needed Intertie repairs.AEA staff was asked to prepare revenue bond and loan financing scenarios for $3 million,$5 million and $7 million over,7-year,15-year and 20-year terms.At the end of the work session,AEA Chairman Mike Barry advised the utilities,"We're trying to look at a constructive way to make the Intertie work better for everybody.But when we look at financing for example,it's difficult for us in good faith to sponsor financing when we're being told by the 1OC that the agreements (sic) don't work.As a Board,the only way we can force the agreements (sic)to work is to terminate them and start over again.If you guys collectively come to an agreement to change it that's the best solution for everybody,but I think it needs to be addressed before somebody talks about financing or we can limit the financing term (to)less that four years.” At the July 25,2005 meeting,the AEA Board was briefed on the July 22,2005 work session.AEA Chairman Mike Barry noted that deferred maintenance items identified by the IOC in October 2002 still had not been addressed.He further advised the Board that staff would report on the status of the utilities'efforts to amend the Agreement and finance the repairs at every Board meeting until there is a resolution. On August 17,2005,financial analyses by AEA staff were provided to the Participating Utilities based on the scenarios discussed above.No responses from the utilities to these analyses were ever received. At its December 5,2005 meeting the AEA Board was briefed on IOC actions since the July 25" Board meeting.There had been discussions regarding possible amendments to the Agreement and possible ways to finance deferred maintenance..AEA's Chairman stated that the utilities needed to address Intertie issues raised since June 2003 and that meant,"these issues get resolved and not just talked about.” Subsequent to the December 5,2005 AEA Board meeting,the utilities admitted that the Agreement could not be amended,since amendments require unanimous consent and the utilities could not unanimously agree to any amendments.Some utilities proposed "side agreements”to address problem areas in the Agreement.Also,some utilities contended the Agreement was not a problem since the utilities simply chose to ignore problem areas and would work by consensus regarding desired actions regardless of the provisions of the Agreement. On March 17,2006,the General Managers of the Participating Utilities were sent a letter by AEA staff reiterating AEA's concerns regarding defects in the Agreement.The letter imposed a June 15,2006 deadline for the parties to craft cures to those defects and for AEA to give notice of termination of the Agreement.The letter also invited the utilities to meet and continue working with AEA staff. On April 21,2006,AEA and the utilities'General Managers met.The June 15,2006 deadline and notice of termination was modified to require the utilities to demonstrate real progress in curing defects in the Agreement October 16,2006 Page 4 In May 2006,AEA and utility attorneys met to discuss possible resolutions to the problems with the Agreement.At the June 21,2006 AEA Board meeting,the CEA,GVEA and ML&P reported that they were making progress on addressing the problems the AEA Board had been pointing out since 2003.The AEA Board expressed frustration that there was still not concrete evidence of any progress in solving the Intertie problems and urged the utilities to redouble their efforts in this regard. On July 10,2006 the AEA Board met and,after hearing from AEA staff and utility representatives discussed the fact that no real progress had been made in curing defects with the Agreement or financing the deferred maintenance.The Board passed Resolution No.2006- 04 with attachments finding that giving 48 months advance written notice of terminating the Agreement is required to improve Power systems serving the Alaska Railbelt Utilities.The Resolution also noted that the utilities appeared to be making progress toward developing amendments and "side agreements”to the Agreement,and concluded that the utilities should be given additional time to finalize the amendments and side agreements and that notice of termination should not be given until September 1,2006.The Resolution directed AEA's Executive Director to give the written notice of termination if the utilities failed by September 1, 2006 to negotiate and execute final amendments to the Agreement and any side agreements needed. The IOC met on August 8,2006 and passed a resolution supporting tower foundation repairs and SVC upgrades,proposing the Utility Participants share in the costs of these repairs and recommending the utilities'General Managers meet with AEA to develop a financing plan for therepairs.On August 9"utility representatives and attorneys met with AEA staff and proposed that a finance subcommittee of the IOC be created to address financing deferred maintenance. On August 15,2006 utility General Managers and their attorneys met with AEA staff and assistant attorney general.The utilities approved the concept of an ad hoc finance subcommittee since AEG&T did not agree to create a standing finance subcommittee.At theAugust15"meeting,the utilities were advised to submit to AEA by the close of business on September 1,2006 executed final amendments to the Agreement and any executed side agreements. On August 31,2006 AEA received an email from legal counsel on behalf of CEA,GVEA andML&P advising of work subsequent to the August 15"meeting and forwarding an unsigned proposed Amendment 2 to the Agreement.On September 1,2006 AEA received a letter from MEA on behalf of AEG&T disagreeing with the proposed Amendment 2. The proposed Amendment 2 provided some amendments to the budget process,but was not comprehensive and did not address other defects in the Agreement,and,as pointed out above, is unsigned.The Board's direction in Resolution No.2006-04 was that the utilities had to submit "executed”amendments by September 1,2006. lf AEA gives notice of termination,there should be no significant,immediate impact.Under the Agreement,notice of termination could not result in actual contract termination for 48 months. The status quo would continue meaning,in part,that the existing contract language,including all of its defects,would remain in place -however,only for an additional 48 months rather than indefinitely. The utility General Managers at the April 21,2006 meeting suggested that notice of termination would create "chaos.”The apparent concern was that the Agreement is both an interconnection agreement and a management,maintenance and operations agreement for interconnected October 16,2006 Page 5 utilities.These terms and conditions for interconnection were apparently very difficult to negotiate originally,and likely would be very difficult to re-negotiate. At the June 21,2006 Board meeting,in reaction to questions from the Chairman,utility representatives suggested that the problem with AEA giving notice of termination is that it would require parties to abandon the entirety of the existing Agreement and renegotiate every term and condition,even though they believe relatively few sections actually require modification to cure the defects in the Agreement. |have carefully considered these utility concerns.It appears that these two expressions are each premised on an assumption that AEA giving notice of termination would result in the complete abandonment of the existing contract.That assumption does not appear valid. The utilities appear to fear suffering from self-inflicted wounds during the renegotiation process. AEA has consistently attempted to narrowly focus upon curing specific,limited defects in the existing Agreement.The utilities,however,individually appear to have a broader range of concerns with the Agreement.It appears that the only reason that "chaos”might result from completely abandoning the existing Agreement is if the utilities insist upon that outcome. Giving notice of termination may lessen,not exacerbate,the utilities'fears.Making even limited changes to the Agreement has not occurred because utilities could not agree unanimously on amendments.At least one utility has objected to any proposed amendment until other concerns the utility has with the Agreement are addressed.The AEA-sponsored cures to agreementdefectsarethusheldhostagebydisagreementamongparticipants-a circumstance that will likely continue as long as the existing Agreement remains in place. After notice of termination,AEA can freely negotiate modifications to the Agreement with less than all the 1OC Utilities.Nothing would preclude AEA from executing an amendment to incorporate the modifications as part of what would become the subsequent Agreement, regardless of whether those modifications may take effect immediately or only after the 48 month notice period.Providing notice of termination will signal that the Authority will no longer be an enabler for any one or more utilities to indefinitely thwart cures to Agreement.Rather than creating "chaos,”arguably the Authority is more likely to help instill order by giving notice of fermination. AEA's position is that certain modifications to the Agreement are necessary to insure the continued safe,reliable and efficient operation of the Alaska Intertie.The failure to implement these modifications could disrupt Intertie operations,and direct harm to the IOC Utilities that relyontheIntertieforenergytransferstoserveRailbeltratepayers'.Ensuring that these necessary modifications be made to the Agreement is an effort "required to improve Power systems serving the Alaska Railbelt Utilities”as that phrase is used in Section 2.2.2 of the Agreement related to Authority termination of the Agreement,in a reasonable and timely manner. 'Failure to adequately address the deferred maintenance on the Intertie could place all Railbelt ratepayers in peril.The wide-spread electrical outage in the Railbelt in June of this year points to the how susceptible to service interruptions the Railbelt power grid is.While the cause is still under investigation by the IOC reliability committee,initial indications are that an insulator failed just north of Anchorage for unknown cause.Other operational issues made the outage more widespread,and of longer duration. October 16,2006 Page 6 We therefore conclude it is necessary to terminate the agreement.to effect necessary modifications to the Agreement.We base this decision in part on the following points. «Amending the Agreement requires unanimous consent,and at least one Participating Utility has refused to agree to necessary modifications. e There is no factual basis upon which to conclude that unanimous consent is likely to occur at any time in the near future. e Absent unanimity between utilities,no modification to the Agreement could be implemented without AEA providing notice of termination. e While AEA could postpone giving notice of termination until after one or more replacement or side agreement(s)are negotiated,that course would delay the time at which cures to the defects in the Agreement become effective. e There is no factual basis upon which to conclude that one or more replacement or side agreement(s)can be timely negotiated.Further,one utility has suggested it would legally challenge that approach if implemented. e Giving notice of termination is the only mechanism that would ensure that necessary modifications will in fact be implemented in the most expeditious manner. We do not take this action lightly.Over the past 3 years AEA has pursued cures for agreement defects with the Participant Utilities at several levels,to no avail.Since June 2003 AEA's Board has discussed the terminating the Agreement.They advised the Participating Utilities on several occasions that action was required to address deferred maintenance and needed amendments to the Agreement.Some of the utilities have stated their intent,since late 2003,to finance the needed repairs but no concrete action has taken place. By providing this notice of intent to terminate the Alaska Intertie Agreement 48 months from today's date AEA is taking a major step to improving the power systems along that grid.AEA staff is ready to work with the utilities to resolve defects in the Agreement before the end of this notice period. Siltcerely on Miller Executive Director Alaska Energy Authority cc:AEA Board of Directors Governor Frank Murkowski