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Home My WebLink AboutUnalaska APA Findings & Recommendaitons 2 1985$s .97-0¢ APPROVAL OF CONTRACT AWARD FOR THE UNALASKA GEOTHERMAL FEASIBILITY STUDY A.Action Item Consideration of staff recommendation for award of a contract for the Unalaska Geothermal Feasibility Study. B.Background 1.The Power Authority successfully completed an extensive geothermal exploration and drilling program on Unalaska Island in 1985.Flow tests and reservoir analyses confirmed a water-dominated,382°F geothermal reservoir at a depth of 1,950 feet,capable of meeting the electricity needs of the Unalaska/Dutch Harbor community for several hundred years. 2.The Board approved Reconnaissance Study Findings and Recommendations for Unalaska/Dutch Harbor on May 3,1985, recommending initiation of a feasibility study for a geothermal power system on Unalaska Island.However,the Board directed staff to obtain signed agreements for access,use of lands,and a long term lease for the project prior to commencing the feasibility study. 3.Power Authority staff negotiated agreements with the Aleut Corporation and the Ounalashka Corporation and presented those agreements to the Board for ratification on June 16,1986.The agreements were ratified by the Board and were signed by the Executive Director and officers of the respective corporations on June 17,1986. 4.Power Authority staff has negotiated or is in the process of negotiating Reimbursable Services Agreements with the Departments of Natural Resources and Fish and Game to perform field work and complete geologic,hydrologic, archaeologic,and habitat studies for the project.The Power Authority has also initiated a limited solicitation for a load forecast and power market analysis for Unalaska to be incorporated into the feasibility study and has received five proposals for this analysis. 5.An RFP for the Unalaska Geothermal Feasibility Study was issued on June 25,1986,with a due date of July 28, 1986.The Power Authority received thirteen proposals for the feasibility study.The proposals were reviewed by a committee made up of Power Authority staff,and asingleproposalhasbeenselectedbythecommitteefor recommendation to the Board for award of a contract. 'That recommendation will be made in an oral presentation to the Board. 5588/616 C.Issues 1.The City of Unalaska is extremely interested in seeingthisfeasibilitystudycompletedandhasexpressedthat interest in two city council resolutions (enclosed). City staff have been involved in the negotiations with Native corporations and have served in an advisory capacity to the Power Authority's feasibility study review committee. 2.The Power Authority's agreement with the Aleut Corporation requires that we conduct a feasibility study on a specified schedule.However,upon completion of thefeasibilitystudy,if the Aleut Corporation elects to finance and develop the project,it will reimburse the Power Authority for expenses incurred during thefeasibilityprogram. 3.Funding for this feasibility study is not an FY87 capital budget item.It is funded solely from prior-year appropriations. D.Options 1.Approve the staff recommendation and award of contract for the Unalaska Geothermal Feasibility Study. 2. Disapprove the recommendation and award and remit to staff for further review. 3.Cancel the feasibility study contract award. 4.Hold all action in abeyance. E,Recommendation Option 1:Approve the staff recommendation and award of contract for the Unalaska Geothermal Feasibility Study. 5588/616 etna Waele romney Sem ae 2.3 ALgoa Re eS ek:tad - s oe ee hoyis i ts - > > aby : Tne . ; . \A\ ts : x cn 6S a fone . : ' .a; ra . ft ® - ia ronson ane) . - . a ee rnoe an " . . t-4 itty at ° rey es | 4a} id .i Con a 732 a oe) aat ayRB4 : af fieoO ad oa : >. fis, . omm4 3 U pus TM Be F4 scr &#& ; r oe = ntces mo a wo Gerd fs coh hat . va : a Cc Ug eo . : a Cc *? t2G5T > ' Lee, i flags ¢: © . oa mmts3 ac 20 : Fae] fyFSset ea . _ {™ "aon 'G u fet * wo a4 ra af. wo Lops mrnadost woc , at ns tte ; Pad e> Quon taft+ oe OQ m4 We OD ne ee ae Htas, iu ms Esk a: : rg be parg a?c 2 ry mir eet ts : : J vid it ie OR : tJ hae] ot) oOve wy CEA Mert OF tim G3 doohate ai0 i” Fae] fae (4b oS coat 4. . Q 909 aQoiuet ata4 Ls {- Ret © Mw Ue fan roa) 4s 437 . if3 ' 2 co bie Tle4 CF : any thyorynm Platsc 7ofz af v. oP tsp kdNOOO % ie Pa it . ro watl ' mwa 08 var A ' o> quia UR re au i? asc. Gs . - La . at $4gd ro) se 0) ae wy tle? us moor . - cy i Dot ; an - *et . an . : . «ft issOPet fe ' . ws ytgd . re . syaeot . rs CITY OF UNALASKA 3 LOT OK |UNALAS XA,ALAS ZA RESCLUTION 86-33 A RESCLUTION IN SUPPORT OF THE MAKUSZIN ECONGUIC PEASTSILIT Y STUDY WHEREAS:the City of Unalaska has longs been on record as supsortin'ehe construction or an electric ceneracion facility wnicn would utilize the ceotnermal resource of Makushin;anc WHEREAS:tne Alaska Power Authority has determined that the economic feasibility study for the project cannot go forward without acreemen or _tne Ounalasnka and Aleut Corporations and the City of Unalaska;and ALASK PECEIVE 3 By WHEREAS:the City of Unalaska has participated in discussions °°° regarding the terms and concitions of sucha 2S REG Gag themacceptableintheirpresentform.; '10.3- NOW THEREFORE BE IT RESCLVED THAT the Unalaskxa City Council supportstheMakushinGeothermalProjectandurcestheAlaskaPowerAuthoritytogoforwardwiththeeconomicfeasibilitystudyforit,because.theneededacreementshavebeenarrivedat. PASSED AND APERCVED THIS ,/ot pay oF Agen _,1986 BY THE CITY CCUNCIL OF TEE CITY OF UNALASXA,ALAS XA.a : ? Ae es ot ee ne ',ChathGleda"HArein urrier City Clerk " COPY FoR ypINFORMATION * oo tere2 8 a om why POP Le e.o7. CITY OF UNALASKA UNALASKA,ALASKA RESOLUTION 86-08 MAKUSHIN GEOTHERMAL SUPPORT WHEREAS:The City of Unalaska has reviewed preliminary data regarding the cost of power from geothermal power plant on Mt. Makushin,and WHEREAS:These data consider the different variables in costs between a geothermal power source and diesel power source including debt service,diesel fuel costs,operating and maintenance costs,variable fuel prices,and variable load forecasts;but not including rents,royalties and other payments to the land and resources owners,and WHEREAS:These analyses show that with a geothermal plant fully financed with tax exempt revenue bonds that the price of electricity may take 5 to 9 years to drop below the costs of diesel generated electricity,and WHEREAS:These costs appear to vary from 6-8¢/KWH above the cost of diesel generated electricity initially then to drop below Giesel after 5 to 9 years;eventually making a cost differential between 2 and 5¢/KWH,and WHEREAS:The City is aware that methods exist to construct debt service payments to avoid large early year payments and rate increases and that the City also can affect electricity sales volume through its rate structure and sales policies and that each of these processes could more favorably affect early year rates from a geothermal power plant,and WHEREAS:The City of Unalaska recognizes the potential economic benefits of providing a long term stable source of electrical energy to its customers, NOW THEREFORE BE IT RESOLVED that the City of Unalaska recognizes that several uncertainties remain to be resolved before binding power sales agreements can be executed on any geothermal project, AND BE IT FURTHER RESOLVED that the preliminary costs of geothermal power projected by the Alaska Power Authority are within a range that the City of Unalaska would be interested in purchasing;given the load and fuel assumptions that are known 'today;given possiblities for constructing debt service payments, enhancing sales,and favorably resolving rents and royalty payments and resource owners'land, AND BE IT FURTHER RESOLVED that the City of Unalaska supports the resolution of additional key issues affecting the cost of power such as royalties,rents and access agreements with the land and resource owners,and has participated,and intends to continue to participate as a party to such negotiations since the City, through its electric utility,would provide any purchased power to its customers, AND BE IT FURTHER RESOLVED that the City of Unalaska authorizes and directs its Mayor and/or City Manager to pursue such negotiations and urges the expeditious but reasonable conclusion of agreements so that necessary technical and financial feasibility studies may be completed and detailed power sales negotiations begin. 44PASSEDANDAPPROVEDTHIS/3,,DAY OF Zebiuat "1986 BY THE CITY COUNCIL OF THE CITY OF UNALASKA,,ALASKA. lat we TES ae aa Ha te i tdPyYulFuhs MAy or City Clerk wag hee - "4 3h US Ase tee:PatyMTSTERereoT HARRISON: NUNN: HARRISON: ALLISON: NUNN: 2263/523 er pitt [nee Oe =ove HARRISON: 0.k.,.the motion is to direct the Executive Director . of the Alaska Power Authorityto renegotiate with the Aleut Corporation over contract terms regarding geothermal royalties for the Unalaska Project.Un- der the following general guidelines from the Board; -(1)that he is to seek a contractual royalty agree- ment before the feasibility study is initiated,(2) he is to seek royalty provisions that reflect indus- try practice and national and state standards as we expressed in various statutes and policy statements, (3)he may include if necessary a formula for ad- justment of a based royalty,up or down,depending .upon the outcome of the feasibility study,(4)he is to consult with City officials of Unalaska during the negotiations with the Aleut Corp. Expeditiously. Expeditiously. In each paragraph. Questions,COMMISSIONER KNAPP. -100 - fap metgompieses gS NUNN: HEATH: cope wee nie ret and(yes),MR.ALLISON (yes),COMMISSIONER KNAPP (yes), NUNN: HUFMAN: NUNN: ARNOLD: 2263/5233 MR.HEATH. MRE ARNOLD(yes),MR.HARRISON.yes),MR.HUFMANeSosAnPyBXgw?a SUT tote ER OCT SREEEN EE MR.CHAIRMAN (yes). This concludes the Old Business before the Board. We have one Information Item,the Susitna Hydro Up- date and one item of New Business being Consid- eration of Middle Kuskokwim Electric Coop Power Project Loan Fund.Is it the pleasure of the Board to dispense with these two items prior to adjourning and adjourn for the day or do you prefer to come back after lunch. MR.CHAIRMAN,I would prefer to continue,hopefully we can continue the order of business in front of us here in maybe another 45 minutes. If we can do it in another 15 minutes,I would think we probably could proceed.MR.ARNOLD. MR.CHAIRMAN,I understand the logic of MR.HUFMAN -"101 - "SeeQO 1.OMLFeomAlnoKARawkRUWHIRITYEaAKDMEETINGTROUSCEIT,Dene mbece jd,9057 ALLISON: ARNOLD: NUNN: HEATH: NUNN: HARRISON: 2263/523 We have...a motion has been made and seconded currently on the floor. I second it. Motion carried.Any further discussion?Question MR.HEATH. MR.ARNOLD (inaudible),MR.HARRISON (yes),MR. HUFMAN (yes),MR.ALLISON (yes),COMMISSIONER KNAPP (yes),MR.CHAIRMAN (yes). Last item under Old Business is the Unalaska Geothermal Project.MR.HARRISON. MR.CHAIRMAN,this is a tough one and I will take a crack at it.Why don't I try to describe the issue in a situation and then to an extent that I don't do it accurately,we can hear from staff on this on the APA side and in the audience are representatives from the area,both the Aleut Corp.and the City of Unalaska.The issue concerns negotiations over a royalty provision for the Geothermal Resource,I guess the steam in the ground in this case which is owned by the Aleut Corporation.Further,whether or not a royalty provision should be negotiated in some -74- 2263/523 sort of a final or fixed form prior to the ini- tiation of the feasibility study.When this pro- posal to initiate the feasibility study came before the Board,we authorized that with the advise that the staff secure rights-of-way over the land to give access to the contractor of the Power Authority in dealing with this prospect,geothermal prospect.I guess in those negotiations,it was the Aleut Corp. that also brought up and included the royalty ques- tion.Whether it should be resolved.As I under- stand in reading the background information prepared by the Power Authority,it was at their request that that be part of.the negotiations.As those pro- ceeded,the Aleut Corp.came to the position and has come to the Board in requesting that we not fix any royalty provision prior to the conclusion of the feasibility study.Now,the position of the Aleut Corp.is that a contract terms or a royalty pro- vision really cannot be negotiated ........how should I say it .......entirely fairly for all parties involved until the economic dimensions of the project are understood.That is to say,is the royalty fair and reasonable,is it too high or is it too low.That only after you examine the cost of the wholesale cost of this power delivered to the load and knowing what the alternative,the avoided -75- 2263/523 cost is,only then can you begin to negotiate ina fair royalty.To negotiate it now puts them in a situation of potentially leaving too money on the table.That is to say that if the royalty that is agreed upon in advance is too high,clearly the project won't go ahead and there would be pressure then for them to adjust the royalties downward. However,if the agreement that is reached is one that is lower than might have been negotiated other- wise,the ........there is not going to be any in- centive for the Power Authority or anybody else to negotiate with them to raise it so they are in the position of potentially at risk whereas no one else is in fixing the royalty prior to the feasibility study.The position of the Power Authority has been that there is an accepted standard by and large for geothermal royalty provisions and that the Aleut Corp.is a profit corporation and that the interest of the people of the City of Unalaska are at stake insofar as the royalty is going to directly effect the price of the electricity that is delivered. Furthermore,we have an unfortunate history in the Four Dam Pool is the best example where agreements become very,very difficult to get after the state has expended its money and the dimensions of the deal are known.That is to say,if we were to -76 - 2263/523 proceed without a fixed royalty agreement and that the feasibility shows that this is really a gold mine that this project is very economic in that the delivered cost of power is way below what the alter- native in Unalaska,then it is very,very difficult to negotiate an agreement that conforms to say in- dustry standards or prior practice in these matters that would be lower than would otherwise be negoti- ated.It is a very complicated way of saying that, I guess,that this is a very difficult for me to ar- rive at and I have gone back and forth on it.I think on the one hand we are a public agency and that we do need to consider the public interest broadly including the interest of the Aleut Corp. and their shareholders and in the face of it,I don't think the public body wants to be in a posi- tion of advancing the position that is unfair and unreasonable to one of the parties.On the other hand,I think that the State may end up and the ratepayers of Unalaska may end up holding the short end of the stick once again if the state spends not only the $600,000 that we are proposing to spend but we have already spent $5 million and suddenly we have a very difficult set of negotiations ahead of us after all of this money has been spent and ba- Sically a weaker position.]guess my -77 - 2263/523 recommendation would be,or is,that at this point the Board directs the Executive Director to become directly involved in these negotiations.And,that we provide the Executive Director with some guid- ance.I don't think that this Board is the place to negotiate these kinds of things,they are too com- plicated.I do think that if'we provide them with some broad guidelines,it could be very helpful and I think those should include the following:(1)is that we do direct him to seek a contractual royalty agreement prior to the initiation of the feasibility study and that further we direct him to seek royalty provisions that reflect standard industry practice and national and state standards,however,these may be expressed in statutes and policy statements and so on.And that he include,if necessary,a formula for adjustment of a base royalty up or down depend- ing on the outcome of the feasibility study.Fur- ther that he consult with the City Officials at Unalaska during the negotiations during this royalty provision.What I am saying is that we do need to try to tie something down before we get into this any further.On the other hand,we recognize the interest,the legitimate interest of the Aleut Corp. in its judiciary responsibility to its shareholders to get a reasonable value for its resource and that -78- NUNN: HARRISON: NUNN: ARNOLD: NUNN: 2263/523 we try to seek an agreement about how much that roy- alty provision could be adjusted in the event of certain outcomes of the feasibility study and that we recognize the interest of the City Officials of Unalaska in this whole matter since they are going to be ....they represent the ratepayers there that are going to be paying the bill.So I guess this is my way out of this and hoping that the Executive Di- rector could reach an agreement quickly on these principles. MR.HARRISON,do you wish to make a motion to that effect that the Executive Director be directed then to enter into negotiations seeking a contractual royalty provision like in standard industry practice and with provision for upward or downward adjust- ments aS appropriate? Yes,I will so move. Is there a second? I wilt second. Motion has been made and seconded,further discussion?MR.ALLISON. -79 - ALLISON: 2263/523 MR.CHAIRMAN,I,myself,......in a difficult position here ......it was my motion that generated this situation several meetings ago.The reason for the motion was that some projects that should have been progressing in a timely manner were being held up because we did not obtain right-of-way and other clearances prior to initiating our feasibility and development work.Now,I think we have gone a lit- tle bit beyond the original motion that was prepared and adopted at that time.At that time all we were going to do was to not proceed with the feasibility study until we had clearly obtained the rights to enter onto and use that land.That was really the goal ....to avoid the situation we had run into with the prior appropriation.That was done expedi- tiousty so we were able to proceed.Somehow the APA got caught up in holding a feasibility study hostage to these royalty agreements.Actually I don't find that a bad policy.On the other hand,the State of Alaska...the APA has already paid for the feasibil- ity studies without much question passed and only really got into the negotiations on these specific issues of payments after the feasibility study was conducted.I don't see any projects where we ac- tually insisted on a power sales agreement,which is really what we are dealing with here is the -80 - 2263/523 equivalent of a power sales agreement,prior to proceding with a feasibility study.So I guess that in support of the policy change that we are evident- ly moving toward here,I would endorse the motion that was made but in order to avoid the disruption in a project that I think is really important and beginning to apply a new standard to a rural village that we really haven't applied to any of the urban sectors that we proceed and instruct our staff to procede with the feasibility study,not holding it hostage,still instructing the Executive Director to get involved immediately and directly in the nego- tiation process to attempt to help the parties re- solve this question about royalty.They do seem very close MR.CHAIRMAN.In yesterday's hearing there were accommodations occurring on both sides.I think that that can be reached but in case there is a hold up.I don't believe that we should hold up a different standard here than we have in the past.I think we should proceed with a feasibility study. One of the reasons that I say that,MR.CHAIRMAN,as you know I missed the last meeting of the APA Board. At that time I was in Japan and among the things that were being discussed at that time were the ne- gotiations on Surimi plants in Alaska.There are two of those that are going to be going into the -81 - NUNN: HUFMAN: 2263/523 Unalaska-Dutch Harbor area.There is going to be a tremendous demand for electricity there and is usually the case with industry,they are looking now to make arrangements for how that energy is going to be sold and distributed.I think that it is impor- tant that we have this feasibility study underway, MR.CHAIRMAN,so that we can avoid the possibility that those new plants might begin installing their own diesel capacity which has been the tradition in the past for small plants.They will be high con- sumers Of energy.I would like to proceed with the feasibility study and continue with the negotiations in parallel if the originator and secondary of the motion accept that. MR.HUFMAN and then MR.ARNOLD. As it was pointed out previously,we have expended some $5 million on this project and it appears to me that a large part of the full feasibility has been determined because we do know what the resource is there and I look upon this not as holding just as written,not as holding feasibility study particu- larly hostage in this case because we have come a longs ways already and expended that $5 million. However,7t 1S encumbant upon this Board to make the -82 - NUNN: ARNOLD: 2263/523 best deal that we can for the communities involved and I think that the motion,as made,is appropriate in this case.All things taken into consideration. MR.ARNOLD Yes,MR.CHAIRMAN,I understand the points that MR. ALLISON is making and recall the action that we took at an earlier time.Though I was at the meeting yesterday,I have had the benefit of looking at this document and it seems to me that we are not really comparing it.That it should not be compared with power sales agreements but as essential components that a feasibility study would be conducted.For otherwise the feasibility study,it seems to me, would of necessity hypothesize a whole range of com- binations when we are talking about oi]produced power,we Can ........we may have to have a little bit of range of cost there.But we have a product whose value is fixed within a range and geothermal, I guess there are some standards which are referred to at this time.For these reasons,it seems to me that GORDON HARRISON's motion is a very responsible approach to take with regard to the study.Finally, I (inaudible)to hear MR.ALLISON say that real pro- gress has been made in the negotiations with perhaps -83 - NUNN: HEATH: Allison: NUNN: ALLISON: 2263/523 the Executive Directors involvement that can all come to a ready conclusion. Thank you MR.ARNOLD.I was,if no one else had suggested,was going to propose that we include a provision for reopening it if it exceeded some per- centage of what was actually agreed to before hand so I think that we are fairly close to the mark. Any further questions,comments?MR.HEATH,call questions. I think procedurally I have called the question. HR.ALLISON. (inaudible).............if the chair does not want to hear from the public on this issue,then I pro- pose that because we....that is one of the comments that was made yesterday......(inaudible) MR.ALLISON,your arguments are just overwhelming. I will go ahead and hear your comments. MR.CHAIRMAN,also,I would like to restate key provisions on this motion so we are clear what... for the record what it is that we are voting on. -84 - NUNN: ALLISON: NUNN: ALLISON: NUNN: 2263/523 Very well.MR.ALLISON and MR.HARRISON. Well,I was just going to say that (1)the motion is that we do seek a contractual agreement before the feasibility study is initiated and that they ....that this agreement reflects some industry practice and that there is a formula,if necessary, for adjustments based on the outcome of information in that study and that finally that we do consult with the City Officials and consider their views in these negotiations.It was the last point that I wanted to make sure was in the record. I understood that MR.HEATH is going to enter into these negotiations.Is consultation with the City Officials something in addition to that? That MR.HEATH is to negotiation with the Aleut Corporation but he is to consult with them in the course of the negotiations.That is to say that their views ....he should be mindful of their views in his negotiations. Further comments?Is it the consensus of the Board -85 - Mayor(?): 2263/523 that we want to open this part of meeting for public comment on this subject?Very well,if you would like to come forward MR.MAYOR. Thank you for taking this up and putting it up on your agenda.It is real important issue to us,es- pecially if an economic development of our community and if we can pull this thing off and do it and end up with a good stable energy source,at a cheaper rate than we are paying now,it is going to fit in with State policy on shore based bottom fish devel- opment.We have spoken with the Governor's Office and the Department of Commerce and Economic Develop- ment and they really want to see this happen and | see this electrical power as a key element in providing incentives to bring this processing on shore where it will do something for our communities and eventually build a base that can help pay for State government when the oil money dries up.So we are in support of this thing going through.At the same time we understand and appreciate what the staff has done to look out for our interest in try- ing to get some kind of an agreement before the fea- sibility study goes through.At the same token,we don't want to end up in an endless "catch 22"so that nothing ever happens on the project.We kind -86 - 2263/523 of like the idea -just formula,if we can come up with something.Otherwise the Aleut Corp.can come up and say,"o.k.here is our royalty",maybe make it intentionally high,then we go through the fea- sibility study and say "no,I won't support that" and we go back and negotiate something reasonable. I mean,....if we got some kind of a formula and what the Aleut Corp.has mentioned is something where the feasibility study would show the low end of what it would cost.We know what diesel costs and we will split the difference.We end up with cheaper power,we end up with stable power prices that we can go to industry with and say this is what you would be paying for power if you come to our community.Even conservative estimates of this field show that it will produce power in a range of 500 years.That is a conservative estimate.So, my concern of MR.HARRISON's motion is that I didn't hear him say "do the study as soon as you get an agreement".All I heard your motion saying is try to get an agreement and then I guess we would have to come back to the Board and bring it to you again to o.k.the study going through.So if it is the sense of the Board to go with MR.HARRISON's mo- tion,we would like to have it state that the study will commence upon getting an agreement. -87 - oNHARRISON: Mayor (?): NUNN: KNAPP: 2263/523 To respond to that,I think that the Board is on record of proving the study and I think it is to be initiated as soon as these agreements can be in place,so I really don't think that is necessary.| think the consensus of the Board is to get on with it as quickly as possible. And just another thing,is that I can guarantee you that we will be participating in this as far as get- ting our view point across because we can't have the State come to us and say "this is what we negoti- ated for you,how do you like it?By the way you can't change it,because this is what we already agreed to".So we will be participating and we will be taking the initiative on that.I did attend the last negotiating session between the staff and the Aleut Corp.and we intend to do that in the future. COMMISSIONER KNAPP. Just a question,probably of GORDON or staff.It would seem to me that implicit in any feasibility study are going to be the economics of the adventure and if that is solved,why wouldn't all of this structure on royalties and so forth be considered right within the study and be an implicit part of -88 - HARRISON: 2263/523 the study working along the lines to say,now look, here it is technologically feasible to do this,the economics of it range somewhere between here and here.If we have to pay out this kind of royalty, the power rates are going to be this much,which means you don't really get anything.So,why couldn't this particular exercise be a significant and material part of the feasibility study.Just throw that on the table for discussion MR.CHAIRMAN. Well,you could easily do a feasibility study without knowing for sure what the royalty is going to be and you could structure the analysis to test the outcome against various royalty provision,That would be very simple,straight forward.But the problem is,do you agree on something before you do the analysis.The point is,it is not important to set a royalty provision for the sake of getting a good analysis because you can do an analysis without one because you can just make an assumption.The question is,do we want to get something in writing and in solid before we do the feasibility study be- cause the feasibility study then could make it very difficult to reach agreenent later on and delay the project at that stage.The State has already spent -89 - NUNN: ALLISON: Mayor (?): 2263/523 its now $5.5 million and so on,so I think yes,you could do it.The question is,do we want to. MR.ALLISON. Just a direct question.It is my understanding that the city is prepared to go ahead with MR.....and operate with MR.HARRISON's resolution and with the understanding that (1)it is the intention of the Board that this proceed immediately upon the agree- ment being reached and (2)that the Board under- Stands that the City will be participating in nego- tiations. Right,and I don't feel that we are that far off and one difference,even if the study did go through like COMMISSIONER KNAPP is saying,and we made that part of it,I still feel fairly comfortable with the outcome of the negotiations because it is not like the other one where you completely build a huge project and then you just need a right-of-way to get there.It is only the feasibility study and if we don't agree to a power use agreement,that steam can sit there for the next million years.It is in their interest to come our way also or they will -90 - Mayor (?): NUNN: SUTCLIFF: 2263/523 receive no revenue from the resource for which they Own. And that is the City's position,so we can go ahead with this as far as the City is concerned. We want the feasibility study to go ahead. Thank you MR.MAYOR.Is there anyone else wishing to make public comment?State your name and who you represent. Yes,my name is ERIC SUTCLIFF,and I was the Legislator that represented the Aleutians when this appropriation was made.At that time,the $5 million to build or to explore for the resource was assumed,we all knew at that time that the Aleut Corp.would own the resource so there was never any speculation that there would be any other landholder other than the Aleut Corp.The legislature as well as the Power Authority was fully aware of this at that time.Not written into it but totally assumed since the feasibility study automatically follows the exploration study was,if there was money left over in the project fund of the $5 million,that money would be spent for the feasibility study and -91 - 2263/523 at that time the Power Authority was suggesting this to as a way to insure that the money did not lapse back into the General Fund.That knowing that the resource there is ...does virtually no good unless you know of the economic feasibility of it.There is many islands in the Aleutians that have the po- tential but if there is just nobody there,the eco- nomics are not there to do it.So you have to know that so it was assumed from the very beginning that the Aleut Corp.would own the resource and that there would be a feasibility study done.I can't stress enough that at that time I was fully cogni- zant of the idea that the Aleut Corp would want to maximize their profits on this resource.But I was also very confident that the Alaska Public Utilities Commission and the City of Unalaska would not cut a deal with the Aleut Corp.unless it made economic sense unless the cost of geothermal power was sub- stantially less than diesel and I maintain that that is still the case and that if when the feasibility study is done and everybody starts really writing down firm figures which they know to be true.Today it just seems like a quess.The State has never done a geothermal project before.We are all new to this thing and until those figures are set and we know the approximate or actual cost of the project, -92 - 2263/523 it is all a guess.Once those are made,I would ex- pect that the Aleut Corp.would want to maximize their profits and bring it right up to a level that equals what the city is willing to pay.The city will only be willing to pay that amount if it is substantially less and makes sense to do something as an alternative project.So,I would hope ....it was certainly my intent and I would love to see the project go through,I initiated it,and I feel a slight ownership of the project and I want it to go through because basically we have nothing now.We knew that there was energy over there.We can see the steam from town so we have nothing yet and I hope the Aleut Corp.does maximize their profits but I also know that they are not going to get anything more than the City and the Alaska Public Utilities Commission will give them.It is as simple as that. That is your safeguard right there.The project won't go unless it makes sense to those that are go- ing to use the power.I can guarantee you that those people that are putting in those Surimi plants out there,if you think the city is not cognizant of the cost and what it costs to do business,they sure will be putting in their two-cents as to what the city can afford to pay,that they will buy it -93 - NUNN: AKSELL: 2263/523 because right now,they produce their own electric- ity.They don't buy it from the city. Thank you.Any questions,further public comment on this topic?Yes,please state your name and who you represent. I am Alan Aksell of the Aleut Corp.and just to start it off,I would like to reply to something MR. HARRISON said earlier.The royalty question was raised by APA,by the staff,when we originally en- tered into these negotiations we thought it was strictly for right-of-way to start feasibility study underway and that we would be negotiating throughout feasibility and after feasibility.So the royalty question was raised by the staff,that is how they took,as I understand it ....{inaudible)...from the Board.Second point is you just had a motion that we negotiate within a range or within a worldly' range that is standard for industry.We have accom- plished that already at the current state of nego- tiations.We have agreed in principal that the 10-15%that the U.S.Act in 1974 would accommodate for geothermal resources is adequate at this time and we are willing to sign to that and move forward with the feasibility study.There are some -94- 2263/523 technical things that need to be worked out in the agreement but the royalty question,as far as we are concerned,is adequate at that range.There is one conceptual problem that we are still pretty far apart,is that the Aleut Corp.views this feasibil- ity study as looking at the economic liability of a certain size of plant which is yet undetermined. That is in your hands and we would prefer that the project and this royalty apply only to that first unit that is developed because once you have devel- oped that infra-structure in a remote region,the economics of upgrades,doubling that output of that plant or whatever increase in megawattage at the output would be ...the economics of those increases are far different that the initial feasibility study would determine for the first phase of the project and we wish to retain flexibility to renegotiate un- der the terms of those new economics for upgrades. So we are willing to go forward with 10-15%based on what you feel is feasible to design and build in Unalaska within the next five years and for the forseeable growth that you can sign a power Sales agreement to and agree to sell to the City and they wiil agree to purchase.We wish to establish flexibility to renegotiate ...........cc eee ewes -95 - END OF SIDE THREE.......cc cece cece nec ccccncecee BEGINNING OF SIDE AKSELL: NUNN: HARRISON: 2263/523 ccc ce eee upgrades to that generation capacity based on the economics of those upgrades.Since those up- grades are totally hypothetical,totally speculative projections in growth,the Surimi Plants were not known a year ago when you did your load growth anal- yses.Things happen quickly out there.There can be a big impact ......load and that has a substan- tial impact on the economics of the upgrades.So we would like to see feasibility get rolling now.We have adopted 10-15%in principal in our negotiations and we think that is adequate for both parties and we would like to have the right to renegotiate after this first phase.Conceptually,it is a definition of the first phase as far as the Aleut Corp.is con- cerned. Question MR.ALLISON .....MR.HARRISON? I]stand corrected on who initiated this,I was just going by some written material that I had in front of me.|think that this issue of first phase,sec- ond phase and there are other issues as I understand about standing the length of the agreement and so on -96- NUNN: MYERS: 2263/523 and so forth.Our issues that this Board is really not equipped to deal with and I think that what we are trying to do is to turn this over to the Execu- tive Director to try to finalize some agreements.I am hoping that we are not very far apart.It sounds like we are not,however,I think that for their to be incentive all around to complete these nego- tiations that we do need to delay the start of the study until we have something and I would assume that the final agreement does reflect your interest and I think it is important and we do understand what your interest and your position is in these things.I think that we are not the ones to try to wrestle with the question of whether this should be......this agreement should be limited to the initial project or to subsequent phases of it. Thank you.Any other questions from the Board,any other public comment?This is on the same topic? State your name and who you represent. For the record,my name is ERIC MYERS,I am an administrative assistant to Representative Adelide Herman who represents House District 26,and I would just like to add......... NUNN: MYERS: NUNN: 2263/523 Are you speaking on behalf of the representative? I am representing the representative,yes.I would like to contribute a perspective on this and the concern here basically is moving forward as quickly as possible with the feasibility study in light of the experience that occurred last year as to the Ex- ecutive Director of the Alaska Power Authority wel] knows,the Alaska Power Authority came within a rat's eyebrow of loosing the feasibility study money last year and in that concern is .....still re- mains.I am not aware of any particular move in that direction this year,but we all know that there is an extreme interest in the revenue picture and the extent to which there are delays in the encum- brance of these funds,anything is possible.So without stating a particular preference in regards to the question of the City's interest or the Corpo- ration's interest,Representative Herman's concern that the Alaska Power Authority move forward as quickly as possible with the commitment to the fea- sibility study.Thank you. Thank you.Further public comment on this topic? Further comments,questions from the Board?MR. ALLISON. -98 - ALLISON: NUNN: ALLISON: NUNN: KNAPP: NUNN: 2263/523 It sounds to me like we have the range free to proceed forward,parties have all agreed to that, that they have not agreed to a specific number with- in that range.I don't know that that is our job to force the parties to come to a number prior to a feasibility,again it seems that if we move immedi- ately,we should be able to get an agreement in principals sufficient to proceed with the feasibil- ity study by this weekend,while everybody is still in town.I would just hope that that is the ap- proach that would be taken by staff to get it done. It doesn't seem like they are that far apart.With that understanding,I ......... Do you want to insert the word "expeditiously"to your motion? I will insert the word "expeditiously"in every paragraph, Very well,further comments?COMMISSIONER KNAPP. MR.CHAIRMAN,I would like to hear the motion again please. You would like to hear the motion again.MR. -99 - HARRISON: NUNN: HARRISON: ALLISON: NUNN: 2263/523 HARRISON. O.k.,the motion is to direct the Executive Director of the Alaska Power Authority to renegotiate with the Aleut Corporation over contract terms regarding geothermal royalties for the Unalaska Project.Un- der the following general guidelines from the Board; (1)that he is to seek a contractual royalty agree- ment before the feasibility study is initiated,(2) he is to seek royalty provisions that reflect indus- try practice and national and state standards as we expressed in various statutes and policy statements, (3)he may include if necessary a formula for ad- justment of a based royalty,up or down,depending upon the outcome of the feasibility study,(4)he is to consult with City officials of Unalaska during the negotiations with the Aleut Corp. Expeditiously. Expeditiously. In each paragraph. Questions,COMMISSIONER KNAPP. -100 - KNAPP: NUNN: HEATH: NUNN: HUFMAN: NUNN: ARNOLD: 2263/523 No. MR.HEATH. MR.ARNOLD (yes),MR.HARRISON (yes),MR.HUFMAN (yes),MR.ALLISON (yes),COMMISSIONER KNAPP (yes), MR.CHAIRMAN (yes). This concludes the Old Business before the Board. We have one Information Item,the Susitna Hydro Up- date and one item of New Business being Consid- eration of Middle Kuskokwim Electric Coop Power Project Loan Fund.Is it the pleasure of the Board to dispense with these two items prior to adjourning and adjourn for the day or do you prefer to come back after lunch. MR.CHAIRMAN,I would prefer to continue,hopefully we can continue the order of business in front of us here in maybe another 45 minutes. If we can do it in another 15 minutes,I would think we probably could proceed.MR.ARNOLD. MR.CHAIRMAN,I understand the logic of MR.HUFMAN -101 - Gear ALLISON: ARNOLD: NUNN: HEATH: NUNN: HARRISON: 2263/523 <4 POWER RVTH ORI TY "ED MEET:NG TRADSCE}PT Veter Bee 12,(9&Ss /Sw.OT7,OY We have...a motion has been made and seconded currently on the floor. I second it. Motion carried.Any further discussion?Question MR.HEATH. MR.ARNOLD (inaudible),MR.HARRISON (yes),MR. HUFMAN (yes),MR.ALLISON (yes),COMMISSIONER KNAPP (yes),MR.CHAIRMAN (yes). Last item under Old Business is the Unalaska Geothermal Project.MR.HARRISON. MR.CHAIRMAN,this is a tough one and I will take a crack at it.Why don't I try to describe the issue in a situation and then to an extent that I don't do it accurately,we can hear from staff on this on the APA side and in the audience are representatives from the area,both the Aleut Corp.and the City of Unalaska.The issue concerns negotiations over a royalty provision for the Geothermal Resource,I guess the steam in the ground in this case which is owned by the Aleut Corporation.Further,whether or not a royalty provision should be negotiated in some -74 - 2263/523 sort of a final or fixed form prior to the ini- tiation of the feasibility study.When this pro- posal to initiate the feasibility study came before the Board,we authorized that with the advise that the staff secure rights-of-way over the land to give access to the contractor of the Power Authority in dealing with this prospect,geothermal prospect.I guess in those negotiations,it was the Aleut Corp. that also brought up and included the royalty ques- tion.Whether it should be resolved.As I under- stand in reading the background information prepared by the Power Authority,it was at their request that that be part of the negotiations.As those pro- ceeded,the Aleut Corp.came to the position and has come to the Board in requesting that we not fix any royalty provision prior to the conclusion of the feasibility study.Now,the position of the Aleut Corp.is that a contract terms or a royalty pro- vision really cannot be negotiated ........how should I say it .......entirely fairly for all parties involved until the economic dimensions of the project are understood.That is to say,is the royalty fair and reasonable,is it too high or is it too low.That only after you examine the cost of the wholesale cost of this power delivered to the load and knowing what the alternative,the avoided -75 - 2263/523 cost is,only then can you begin to negotiate in a fair royalty.To negotiate it now puts them in a situation of potentially leaving too money on the table.That is to say that if the royalty that is agreed upon in advance is too high,clearly the project won't go ahead and there would be pressure then for them to adjust the royalties downward. However,if the agreement that is reached is one that is lower than might have been negotiated other- wise,the ........there is not going to be any in- centive for the Power Authority or anybody else to negotiate with them to raise it so they are in the position of potentially at risk whereas no one else is in fixing the royalty prior to the feasibility study.The position of the Power Authority has been that there is an accepted standard by and large for geothermal royalty provisions and that the Aleut Corp.1s a profit corporation and that the interest of the people of the City of Unalaska are at stake insofar as the royalty is going to directly effect the price of the electricity that is delivered. Furthermore,we have an unfortunate history in the Four Dam Pool is the best example where agreements become very,very difficult to get after the state has expended its money and the dimensions of the deal are known.That is to say,if we were to -76- 2263/523 proceed without a fixed royalty agreement and that the feasibility shows that this is really a gold mine that this project is very economic in that the delivered cost of power is way below what the alter- native in Unalaska,then it is very,very difficult to negotiate an agreement that conforms to say in- dustry standards or prior practice in these matters that would be lower than would otherwise be negoti- ated.It is a very complicated way of saying that, I guess,that this is a very difficult for me to ar- rive at and [I have gone back and forth on it.I think on the one hand we are a public agency and that we do need to consider the public interest broadly including the interest of the Aleut Corp. and their shareholders and in the face of it,I don't think the public body wants to be in a posi- tion of advancing the position that is unfair and unreasonable to one of the parties.On the other hand,I think that the State may end up and the ratepayers of Unalaska may end up holding the short end of the stick once again if the state spends not only the $600,000 that we are proposing to spend but we have already spent $5 million and suddenly we have a very difficult set of negotiations ahead of us after all of this money has been spent and ba- sically a weaker position.I guess my -77 - 2263/523 recommendation would be,or is,that at this point the Board directs the Executive Director to become directly involved in these negotiations.And,that we provide the Executive Director with some guid- ance.I don't think that this Board is the place to negotiate these kinds of things,they are too com- plicated.I do think that if we provide them with some broad guidelines,it could be very helpful and I think those should include the following:(1)is that we do direct him to seek a contractual royalty agreement prior to the initiation of the feasibility Study and that further we direct him to seek royalty provisions that reflect standard industry practice and national and state standards,however,these may be expressed in statutes and policy statements and so on.And that he include,if necessary,a formula for adjustment of a base royalty up or down depend- ing on the outcome of the feasibility study.Fur- ther that he consult with the City Officials at Unalaska during the negotiations during this royalty provision.What I am saying is that we do need to try to tie something down before we get into this any further.On the other hand,we recognize the interest,the legitimate interest of the Aleut Corp. in its judiciary responsibility to its shareholders to get a reasonable value for its resource and that -78 - NUNN: HARRISON: NUNN: ARNOLD: NUNN: 2263/523 we try to seek an agreement about how much that roy- alty provision could be adjusted in the event of certain outcomes of the feasibility study and that we recognize the interest of the City Officials of Unalaska in this whole matter since they are going to be ....they represent the ratepayers there that are going to be paying the bill.So I guess this is my way out of this and hoping that the Executive Di- rector could reach an agreement quickly on these principles. MR.HARRISON,do you wish to make a motion to that effect that the Executive Director be directed then to enter into negotiations seeking a contractual royalty provision like in standard industry practice and with provision for upward or downward adjust- ments aS appropriate? Yes,I will so move. Is there a second? I will second. Motion has been made and seconded,further discussion?MR.ALLISON. -79 - ALLISON: 2263/523 MR.CHAIRMAN,I,myself,......in a difficult position here ......it was my motion that generated this situation several meetings ago.The reason for the motion was that some projects that should have = been progressing in a timely manner were being held _ up because we did not obtain right-of-way and other clearances prior to initiating our feasibility and development work.Now,I think we have gone a lit- tle bit beyond the original motion that was prepared and adopted at that time.At that time all we were going to do was to not proceed with the feasibility study until we had clearly obtained the rights to enter onto and use that land.That was really the goal ....to avoid the situation we had run into with the prior appropriation.That was done expedi- tiously so we were able to proceed.Somehow the APA got caught up in holding a feasibility study hostage to these royalty agreements.Actually I don't find that a bad policy.On the other hand,the State of Alaska...the APA has already paid for the feasibil- ity studies without much question passed and only really got into the negotiations on these specific issues of payments after the feasibility study was conducted.[don't see any projects where we ac- tually insisted on a power sales agreement,which is really what we are dealing with here is the -80 - 2263/523 equivalent of a power sales agreement,prior to proceding with a feasibility study.So I guess that in support of the policy change that we are evident- ly moving toward here,I would endorse the motion that was made but in order to avoid the disruption in a project that I think is really important and beginning to apply a new standard to a rural village that we really haven't applied to any of the urban sectors that we proceed and instruct our staff to procede with the feasibility study,not holding it hostage,still instructing the Executive Director to get involved immediately and directly in the nego- tiation process to attempt to help the parties re- solve this question about royalty.They do seem very close MR.CHAIRMAN.In yesterday's hearing there were accommodations occurring on both sides.I think that that can be reached but in case there is a hold up.I don't believe that we should hold up a different standard here than we have in the past.I think we should proceed with a feasibility study. One of the reasons that I say that,MR.CHAIRMAN,as you know I missed the last meeting of the APA Board. At that time I was in Japan and among the things that were being discussed at that time were the ne- gotiations on Surimi plants in Alaska.There are two of those that are going to be going into the -81 - NUNN: HUFMAN: 2263/523 Unalaska-Dutch Harbor area.There is going to be a tremendous demand for electricity there and is usually the case with industry,they are looking now to make arrangements for how that energy is going to be sold and distributed.I think that it is impor- tant that we have this feasibility study underway, MR.CHAIRMAN,so that we can avoid the possibility that those new plants might begin installing their own diesel capacity which has been the tradition in the past for small plants.They will be high con- sumers of energy.I would like to proceed with the feasibility study and continue with the negotiations in parallel if the originator and secondary of the motion accept that. MR.HUFMAN and then MR.ARNOLD. As it was pointed out previously,we have expended some $5 million on this project and it appears to me that a large part of the full feasibility has been determined because we do know what the resource is there and I look upon this not as holding just as written,not as holding feasibility study particu- larly hostage in this case because we have come a longs ways already and expended that $5 million. However,it is encumbant upon this Board to make the -82 - NUNN: ARNOLD: 2263/523 best deal that we can for the communities involved and I think that the motion,as made,is appropriate in this case.All things taken into consideration. MR.ARNOLD Yes,MR.CHAIRMAN,I understand the points that MR. ALLISON is making and recall the action that we took at an earlier time.Though I was at the meeting yesterday,I have had the benefit of looking at this document and it seems to me that we are not really comparing it.That it should not be compared with power sales agreements but as essential components that a feasibility study would be conducted.For otherwise the feasibility study,it seems to me, would of necessity hypothesize a whole range of com- binations when we are talking about oil produced power,we Can ........we may have to have a little bit of range of cost there.But we have a product whose value is fixed within a range and geothermal, I quess there are some standards which are referred to at this time.For these reasons,it seems to me that GORDON HARRISON's motion is a very responsible approach to take with regard to the study.Finally, I (inaudible)to hear MR.ALLISON say that real pro- gress has been made in the negotiations with perhaps -83 - NUNN: HEATH: Allison: NUNN: ALLISON: 2263/523 the Executive Directors involvement that can all come to a ready conclusion. Thank you MR.ARNOLD.I was,if no one else had suggested,was going to propose that we include a provision for reopening it if it exceeded some per- centage of what was actually agreed to before hand so I think that we are fairly close to the mark. Any further questions,comments?MR.HEATH,call questions. I think procedurally I have called the question. MR.ALLISON. (inaudible).............if the chair does not want to hear from the public on this issue,then I pro- pose that because we....that is one of the comments that was made yesterday.....'.(inaudible) MR.ALLISON,your arguments are just overwhelming. I will go ahead and hear your comments. MR.CHAIRMAN,also,I would like to restate key provisions on this motion so we are clear what... for the record what it is that we are voting on. -84 - NUNN: ALLISON: NUNN: ALLISON: NUNN: 2263/523 Very well.MR.ALLISON and MR.HARRISON. Well,I was just going to say that (1)the motion is that we do seek a contractual agreement before the feasibility study is initiated and that they ....that this agreement reflects some industry practice and that there is a formula,if necessary, for adjustments based on the outcome of information in that study and that finally that we do consult with the City Officials and consider their views in these negotiations.It was the last point that I wanted to make sure was in the record. I understood that MR.HEATH is going to enter into these negotiations.Is consultation with the City Officials something in addition to that? That MR.HEATH is to negotiation with the Aleut Corporation but he is to consult with them in the course of the negotiations.That is to say that their views ....he should be mindful of their views in his negotiations. Further comments?Is it the consensus of the Board -85 - Mayor(?): 2263/523 that we want to open this part of meeting for public comment on this subject?Very well,if you would like to come forward MR.MAYOR. Thank you for taking this up and putting it up on your agenda.It is real important issue to us,es- pecially if an economic development of our community and if we can pull this thing off and do it and end up with a good stable energy source,at a cheaper rate than we are paying now,it is going to fit in with State policy on shore based bottom fish devel- opment.We have spoken with the Governor's Office and the Department of Commerce and Economic Develop- ment and they really want to see this happen and I see this electrical power as a key element in providing incentives to bring this processing on shore where it will do something for our communities and eventually build a base that can help pay for State government when the oi]money dries up.So we are in support of this thing going through.At the same time we understand and appreciate what the staff has done to look out for our interest in try- ing to get some kind of an agreement before the fea- sibility study goes through.At the same token,we don't want to end up in an endless "catch 22"so that nothing ever happens on the project.We kind -86 - 2263/523 of like the idea -just formula,if we can come up with something.Otherwise the Aleut Corp.can come up and say,"o.k.here is our royalty",maybe make it intentionally high,then we go through the fea- sibility study and say "no,I won't support that" and we go back and negotiate something reasonable. I mean,....if we got some kind of a formula and what the Aleut Corp.has mentioned is something where the feasibility study would show the low end of what it would cost.We know what diesel costs and we will split the difference.We end up with cheaper power,we end up with stable power prices that we can go to industry with and say this is what you would be paying for power if you come to our community.Even conservative estimates of this field show that it will produce power in a range of 500 years.That is a conservative estimate.So, my concern of MR.HARRISON's motion is that I didn't hear him say "do the study as soon as you get an agreement".All I heard your motion saying is try to get an agreement and then IT guess we would have to come back to the Board and bring it to you again to o.k.the study going through.So if it is the sense of the Board to go with MR.HARRISON's mo- tion,we would like to have it state that the study will commence upon getting an agreement. -87 - HARRISON: Mayor (?): NUNN: KNAPP: 2263/523 To respond to that,I think that the Board is on record of proving the study and I think it is to be initiated as soon as these agreements can be in place,so I really don't think that is necessary.I think the consensus of the Board is to get on with it as quickly as possible. And just another thing,is that I can guarantee you that we will be participating in this as far as get- ting our view point across because we can't have the State come to us and say "this is what we negoti- ated for you,how do you like it?By the way you can't change it,because this is what we already agreed to".So we will be participating and we will be taking the initiative on that.I did attend the last negotiating session between the staff and the Aleut Corp.and we intend to do that in the future. COMMISSIONER KNAPP. Just a question,probably of GORDON or staff.It would seem to me that implicit in any feasibility study are going to be the economics of the adventure and if that is solved,why wouldn't allt of this structure on royalties and so forth be considered right within the study and be an implicit part of -88 - HARRISON: 2263/523 the study working along the lines to say,now look, here it is technologically feasible to do this,the economics of it range somewhere between here and here.If we have to pay out this kind of royalty, the power rates are going to be this much,which means you don't really get anything.So,why couldn't this particular exercise be a significant and material part of the feasibility study.Just throw that on the table for discussion MR.CHAIRMAN. Well,you could easily do a feasibility study without knowing for sure what the royalty is going to be and you could structure the analysis to test the outcome against various royalty provision.That would be very simple,straight forward.But the problem is,do you agree on something before you do the analysis.The point is,it is not important to set a royalty provision for the sake of getting a good analysis because you can do an analysis without one because you can just make an assumption.The question is,do we want to get something in writing and in solid before we do the feasibility study be- cause the feasibility study then could make it very difficult to reach agreement later on and delay the project at that stage.The State has already spent -89 - NUNN: ALLISON: Mayor (?): 2263/523 its now $5.5 million and so on,so I think yes,you could do it.The question is,do we want to. MR.ALLISON. Just a direct question,It is my understanding that the city is prepared to go ahead with MR.....and operate with MR.HARRISON's resolution and with the understanding that (1)it is the intention of the Board that this proceed immediately upon the agree- ment being reached and (2)that the Board under- stands that the City will be participating in nego- tiations. Right,and I don't feel that we are that far off and one difference,even if the study did go through like COMMISSIONER KNAPP is saying,and we made that part of it,I still feel fairly comfortable with the outcome of the negotiations because it is not like the other one where you completely build a huge project and then you just need a right-of-way to get there.It is only the feasibility study and if we don't agree to a power use agreement,that steam can sit there for the next million years.It is in their interest to come our way also or they will -90 - Mayor (?): NUNN: SUTCLIFF: 2263/523 receive no revenue from the resource for which they own. And that is the City's position,so we can go ahead with this as far as the City is concerned. We want the feasibility study to go ahead. Thank you MR.MAYOR.Is there anyone else wishing to make public comment?State your name and who you represent. Yes,my name is ERIC SUTCLIFF,and I was the Legislator that represented the Aleutians when this appropriation was made.At that time,the $5 million to build or to explore for the resource was assumed,we all knew at that time that the Aleut Corp.would own the resource so there was never any speculation that there would be any other landholder other than the Aleut Corp.The legislature as well as the Power Authority was fully aware of this at that time.Not written into it but totally assumed since the feasibility study automatically follows the exploration study was,if there was money left over in the project fund of the $5 million,that money would be spent for the feasibility study and -9]- 2263/523 at that time the Power Authority was suggesting this to aS a way to insure that the money did not lapse back into the General Fund.That knowing that the resource there is ...does virtually no good unless you know of the economic feasibility of it.There is many islands in the Aleutians that have the po- tential but if there is just nobody there,the eco- nomics are not there to do it.So you have to know that so it was assumed from the very beginning that the Aleut Corp.would own the resource and that there would be a feasibility study done.I can't stress enough that at that time I was fully cogni- zant of the idea that the Aleut Corp would want to maximize their profits on this resource.But I was also very confident that the Alaska Public Utilities Commission and the City of Unalaska would not cut a deal with the Aleut Corp.unless it made economic sense unless the cost of geothermal power was sub- Stantially less than diesel and I maintain that that is still the case and that if when the feasibility study is done and everybody starts really writing down firm figures which they know to be true.Today it just seems like a guess.The State has never done a geothermal project before.We are all new to this thing and until those figures are set and we know the approximate or actual cost of the project, -92 - 2263/523 it is all a guess.Once those are made,I would ex- pect that the Aleut Corp.would want to maximize their profits and bring it right up to a level that equals what the city is willing to pay.The city will only be willing to pay that amount if it is substantially less and makes sense to do something as an alternative project.So,I would hope ....it was certainly my intent and I would love to see the project go through,I initiated it,and I feel a slight ownership of the project and I want it to go through because basically we have nothing now.We knew that there was energy over there.We can see the steam from town so we have nothing yet and | hope the Aleut Corp.does maximize their profits but I also know that they are not going to get anything more than the City and the Alaska Public Utilities Commission will give them.It is as simple as that. That is your safeguard right there.The project won't go unless it makes sense to those that are go- ing to use the power.I can guarantee you that those people that are putting in those Surimi plants out there,if you think the city is not cognizant of the cost and what it costs to do business,they sure will be putting in their two-cents as to what the city can afford to pay,that they will buy it -93 - NUNN: AKSELL: 2263/523 because right now,they produce their own electric- ity.They don't buy it from the city. Thank you.Any questions,further public comment on this topic?Yes,please state your name and who you represent. I am Alan Aksell of the Aleut Corp.and just to start it off,I would like to reply to something MR. HARRISON said earlier.The royalty question was raised by APA,by the staff,when we originally en- tered into these negotiations we thought it was strictly for right-of-way to start feasibility study underway and that we would be negotiating throughout feasibility and after feasibility.So the royalty question was raised by the staff,that is how they took,as I understand it ....(inaudible)...from the Board.Second point is you just had a motion that we negotiate within a range or within a worldly range that is standard for industry.We have accom- plished that already at the current state of nego- tiations.We have agreed in principal that the 10-15%that the U.S.Act in 1974 would accommodate for geothermal resources is adequate at this time and we are willing to sign to that and move forward with the feasibility study.There are some -94 - 2263/523 technical things that need to be worked out in the agreement but the royalty question,as far as we are concerned,is adequate at that range.There is one conceptual problem that we are still pretty far apart,is that the Aleut Corp.views this feasibil- ity study as looking at the economic liability of a certain size of plant which is yet undetermined. That is in your hands and we would prefer that the project and this royalty apply only to that first unit that is developed because once you have devel- oped that infra-structure in a remote region,the economics of upgrades,doubling that output of that plant or whatever increase in megawattage at the output would be ...the economics of those increases are far different that the initial feasibility study would determine for the first phase of the project and we wish to retain flexibility to renegotiate un- der the terms of those new economics for upgrades. So we are willing to go forward with 10-15%based on what you feel is feasible to design and build in Unalaska within the next five years and for the forseeable growth that you can sign a power sales agreement to and agree to sell to the City and they will agree to purchase.We wish to establish flexibility to renegotiate .............cc eee ee -95 - END OF SIDE THREE.....cece eee cece cc cccercecece BEGINNING OF SIDE AKSELL: NUNN: HARRISON: 2263/523 eee eeceee upgrades to that generation capacity based on the economics of those upgrades.Since those up- grades are totally hypothetical,totally speculative projections in growth,the Surimi Plants were not known a year ago when you did your load growth anal- yses.Things happen quickly out there.There can be a big impact ......load and that has a substan- tial impact on the economics of the upgrades.So we would like to see feasibility get rolling now.We have adopted 10-15%in principal in our negotiations and we think that is adequate for both parties and we would like to have the right to renegotiate after this first phase.Conceptually,it is a definition of the first phase as far as the Aleut Corp.is con- cerned. Question MR.ALLISON .....MR.HARRISON? I stand corrected on who initiated this,I was just going by some written material that I had in front of me.I think that this issue of first phase,sec- ond phase and there are other issues as I understand about standing the length of the agreement and so on -96 - NUNN: MYERS: 2263/523 and so forth.Our issues that this Board is really not equipped to deal with and I think that what we are trying to do is to turn this over to the Execu- tive Director to try to finalize some agreements.I am hoping that we are not very far apart.It sounds like we are not,however,I think that for their to be incentive all around to complete these nego- tiations that we do need to delay the start of the study until we have something and I would assume that the final agreement does reflect your interest and I think it is important and we do understand what your interest and your position is in these things.I think that we are not the ones to try to wrestle with the question of whether this should be......this agreement should be limited to the initial project or to subsequent phases of it. Thank you.Any other questions from the Board,any other public comment?This is on the same topic? State your name and who you represent. For the record,my name is ERIC MYERS,I am an administrative assistant to Representative Adelide Herman who represents House District 26,and I would just like to add......... -97 - NUNN: MYERS: NUNN: 2263/523 Are you speaking on behalf of the representative? I am representing the representative,yes.I would like to contribute a perspective on this and the concern here basically is moving forward as quickly as possible with the feasibility study in light of the experience that occurred last year as to the Ex- ecutive Director of the Alaska Power Authority well knows,the Alaska Power Authority came within a rat's eyebrow of loosing the feasibility study money last year and in that concern is .....still re- mains.I am not aware of any particular move in that direction this year,but we all know that there is an extreme interest in the revenue picture and the extent to which there are delays in the encum- brance of these funds,anything is possible.So without stating a particular preference in regards to the question of the City's interest or the Corpo- ration's interest,Representative Herman's concern that the Alaska Power Authority move forward as quickly as possible with the commitment to the fea- sibility study.Thank you. Thank you.Further public comment on this topic? Further comments,questions from the Board?MR. ALLISON. -98 - ALLISON: NUNN: ALLISON: NUNN: KNAPP: NUNN: 2263/523 It sounds to me like we have the range free to proceed forward,parties have all agreed to that, that they have not agreed to a specific number with- in that range.I don't know that that is our job to force the parties to come to a number prior to a feasibility,again it seems that if we move immedi- ately,we should be able to get an agreement in principals sufficient to proceed with the feasibil- ity study by this weekend,while everybody is still in town.I would just hope that that is the ap- proach that would be taken by staff to get it done. It doesn't seem like they are that far apart.With that understanding,I ......... Do you want to insert the word "expeditiously"to your motion? I will insert the word "expeditiously"in every paragraph. Very well,further comments?COMMISSIONER KNAPP. MR.CHAIRMAN,I would like to hear the motion again please. You would like to hear the motion again.MR. -99 - HARRISON: NUNN: HARRISON: ALLISON: NUNN: 2263/523 HARRISON. 0.k.,the motion is to direct the Executive Director of the Alaska Power Authority to renegotiate with the Aleut Corporation over contract terms regarding geothermal royalties for the Unalaska Project.Un- der the following general guidelines from the Board; (1)that he is to seek a contractual royalty agree- ment before the feasibility study is initiated,(2) he is to seek royalty provisions that reflect indus- try practice and national and state standards as we expressed in various statutes and policy statements, (3)he may include if necessary a formula for ad- justment of a based royalty,up or down,depending upon the outcome of the feasibility study,(4)he is to consult with City officials of Unalaska during the negotiations with the Aleut Corp. Expeditiously. Expeditiously. In each paragraph. Questions,COMMISSIONER KNAPP. -100 - KNAPP: NUNN: HEATH: NUNN: HUFMAN: NUNN: ARNOLD: 2263/523 No. MR.HEATH. MR.ARNOLD (yes),MR.HARRISON (yes),MR.HUFMAN (yes),MR.ALLISON (yes),COMMISSIONER KNAPP (yes), MR.CHAIRMAN (yes). This concludes the Old Business before the Board. We have one Information Item,the Susitna Hydro Up- date and one item of New Business being Consid- eration of Middle Kuskokwim Electric Coop Power Project Loan Fund.Is it the pleasure of the Board to dispense with these two items prior to adjourning and adjourn for the day or do you prefer to come back after lunch. MR.CHAIRMAN,I would prefer to continue,hopefully we can continue the order of business in front of us here in maybe another 45 minutes. If we can do it in another 15 minutes,I would think we probably could proceed.MR.ARNOLD. MR.CHAIRMAN,I understand the logic of MR.HUFMAN -101 - Dowd LUAKECAL™,>S-wre Ot. A laska Dweik,Pummariry fore Meer)WeTOAWSCRIPTdFDee.JZ,(975 ALLISON: ARNOLD: NUNN: HEATH: NUNN: HARRISON: 2263/523/11 We have...a motion has been made and seconded currently on the floor. I second it. Motion carried.Any further discussion?Question MR.HEATH. MR.ARNOLD (inaudible),MR.HARRISON (yes),MR. HUFMAN (yes),MR.ALLISON (yes),COMMISSIONER KNAPP (yes),MR.CHAIRMAN (yes). Last item under Old Business is the Unalaska Geothermal Project.MR.HARRISON. MR.CHAIRMAN,this is a tough one and I will take a crack at it.Why don't I try to describe the issue in a situation and then to an extent that I don't do it accurately,we can hear from staff on this on the APA side and in the audience are representatives from the area,both the Aleut Corp.and the City of Unalaska.The issue concerns negotiations over a royalty provision for the Geothermal Resource,I guess the steam in the ground in this case which is owned by the Aleut Corporation.Further,whether or not a royalty provision should be negotiated in some 2263/523/12 sort of a final or fixed form prior to the ini- tiation of the feasibility study.When this pro- posal to initiate the feasibility study came before the Board,we authorized that with the advise that the staff secure rights-of-way over the land to give access .to the contractor of the Power Authority in dealing with this prospect,geothermal prospect.I guess in those negotiations,it was the Aleut Corp. that also brought up and included the royalty ques- tion.Whether it should be resolved.As I under- stand in reading the background information prepared by the Power Authority,it was at their request that that be part of the negotiations.As those pro- ceeded,the Aleut Corp.came to the position and has come to the Board in requesting that we not fix any royalty provision prior to the conclusion of the feasibility study.Now,the position of the Aleut Corp.is that a contract terms or a royalty pro- vision really cannot be negotiated ........how should I say it .......entirely fairly for all parties involved until the economic dimensions of the project are understood.That is to say,is the royalty fair and reasonable,is it too high or is it too low.That only after you examine the cost of the wholesale cost of this power delivered to the load and knowing what the alternative,the avoided 2263/523/13 cost is,only then can you begin to negotiate in a fair royalty.To negotiate it now puts them in a situation of potentially leaving too money on the table.That is to say that if the royalty that is agreed upon in advance is too high,clearly the project won't go ahead and there would be pressure then for them to adjust the royalties downward. However,if the agreement that is reached is one that is lower than might have been negotiated other- wise,the ........there is not going to be any in- centive for the Power Authority or anybody else to negotiate with them to raise it so they are in the position of potentially at risk whereas no one else is in fixing the royalty prior to the feasibility study.The position of the Power Authority has been that there is an accepted standard by and large for geothermal royalty provisions and that the Aleut Corp.is a profit corporation and that the interest of the people of the City of Unalaska are at stake insofar as the royalty is going to directly effect the price of the electricity that is delivered. Furthermore,we have an unfortunate history in the Four Dam Pool is the best example where agreements become very,very difficult to get after the state has expended its money and the dimensions of the deal are known.That is to say,if we were to 2263/523/14 proceed without a fixed royalty agreement and that the feasibility shows that this is really a gold mine that this project is very economic in that the delivered cost of power is way below what the alter- native in Unalaska,then it is very,very difficult to negotiate an agreement that conforms to say in- dustry standards or prior practice in these matters that would be lower than would otherwise be negoti- ated.It is a very complicated way of saying that, I guess,that this is a very difficult for me to ar- rive at and I have gone back and forth on it.I think on the one hand we are a public agency and that we do need to consider the public interest broadly including the interest of the Aleut Corp. and their shareholders and in the face of it,I don't think the public body wants to be in a posi- tion of advancing the position that is unfair and unreasonable to one of the parties.On the other hand,I think that the State may end up and the ratepayers of Unalaska may end up holding the short end of the stick once again if the state spends not only the $600,000 that we are proposing to spend but we have already spent $5 million and suddenly we have a very difficult set of negotiations ahead of us after all of this money has been spent and ba- sically a weaker position.I guess =my ” 2263/523/15 recommendation would be,or is,that at this point the Board directs the Executive Director to become directly involved in these negotiations.And,that we provide the Executive Director with some guid- ance.I don't think that this Board is the place to negotiate these kinds of things,they are too com- plicated.I do think that if we provide them with some broad guidelines,it could be very helpful and I think those should include the following:(1)is that we do direct him to seek a contractual royalty agreement prior to the initiation of the feasibility study and that further we direct him to seek royalty provisions that reflect standard industry practice and national and state standards,however,these may be expressed in statutes and policy statements and -so on.And that he include,if necessary,a formula for adjustment of a base royalty up or down depend- ing on the outcome of the feasibility study.Fur- ther that he consult with the City Officials at Unalaska during the negotiations during this royalty provision.What I am saying is that we do need to try to tie something down before we get into this any further.On the other hand,we recognize the interest,the legitimate interest of the Aleut Corp. in its judiciary responsibility to its shareholders to get a reasonable value for its resource and that NUNN: HARRISON: NUNN: ARNOLD: NUNN: 2263/523/16 we try to seek an agreement about how much that roy- alty provision could be adjusted in the event of certain outcomes of the feasibility study and that we recognize the interest of the City Officials of Unalaska in this whole matter since they are going to be ....they represent the ratepayers there that are going to be paying the bill.So I guess this is my way out of this and hoping that the Executive Di- rector could reach an agreement quickly on these principles. MR.HARRISON,do you wish to make a motion to that effect that the Executive Director be directed then to enter into negotiations seeking a contractual royalty provision like in standard industry practice and with provision for upward or downward adjust- ments as appropriate? 'Yes,I will so move. Is there a second? I will second. Motion has been made and seconded,further discussion?MR.ALLISON. ALLISON: 2263/523/17 MR.CHAIRMAN,I,myself,......in a difficult position here ......it was my motion that generated this situation several meetings ago.The reason for the motion was that some projects that should have been progressing in a timely manner were being held up because we did not obtain right-of-way and other clearances prior to initiating our feasibility and development work.Now,I think we have gone a lit- tle bit beyond the original motion that was prepared and adopted at that time.At that time all we were going to do was to not proceed with the feasibility study until we had clearly obtained the rights to enter onto and use that land.That was really the goal ....to avoid the situation we had run into with the prior appropriation.That was done expedi- tiously so we were able to proceed.Somehow the APA got caught up in holding a feasibility study hostage to these royalty agreements.Actually I don't find that a bad policy.On the other hand,the State of Alaska...the APA has already paid for the feasibil- ity studies without much question passed and only really got into the negotiations on these specific issues of payments after the feasibility study was conducted.I don't see any projects where we ac- tually insisted on a power sales agreement,which is really what we are dealing with here "is the 2263/523/18 equivalent of a power sales agreement,prior to proceding with a feasibility study.So I guess that in support of the policy change that we are evident- ly moving toward here,I would endorse the motion that was made but in order to avoid the disruption in a project that I think is really important and beginning to apply a new standard to a rural village that we really haven't applied to any of the urban sectors that we proceed and instruct our staff to procede with the feasibility study,not holding it hostage,still instructing the Executive Director to get involved immediately and directly in the nego- tiation process to attempt to help the parties re- solve this question about royalty.They do seem very close MR.CHAIRMAN.In yesterday's hearing there were accommodations occurring on both sides.I think that that can be reached but in case there is a hold up.I don't believe that we should hold up a different standard here than we have in the past.I think we should proceed with a feasibility study. One of the reasons that I say that,MR.CHAIRMAN,as you know I missed the last meeting of the APA Board. At that time I was in Japan and among the things that were being discussed at that time were the ne- gotiations on Surimi plants in Alaska.There are two of those that are going to be going into the NUNN: HUFMAN: 2263/523/19 Unalaska-Dutch Harbor area.There is going to be a tremendous demand for electricity there and is usually the case with industry,they are looking now to make arrangements for how that energy is going to be sold and distributed.I think that it is impor- tant that we have this feasibility study underway, MR.CHAIRMAN,so that we can avoid the possibility that those new plants might begin installing their own diesel capacity which has been the tradition in the past for small plants.They will be high con- sumers of energy.I would like to proceed with the feasibility study and continue with the negotiations in parallel if the originator and secondary of the motion accept that. MR.HUFMAN and then MR.ARNOLD. As it was pointed out previously,we have expended some $5 million on this project and it appears to me that a large part of the full feasibility has been determined because we do know what the resource is there and I look upon this not as holding just as written,not as holding feasibility study particu- larly hostage in this case because we have come a longs ways already and expended that $5 million. However,it is incombent upon this Board to make the NUNN: ARNOLD: 2263/523/20 best deal that we can for the communities involved and I think that the motion,as made,is appropriate in this case.All things taken into consideration. MR.ARNOLD Yes,MR.CHAIRMAN,I understand the points that MR. ALLISON is making and recall the action ,that we took at an earlier time.Though I was nat the meeting yesterday,I have had the benefit of looking at this document and it seems to me that we are not really comparing it.That it should not be compared with power sales agreements but as essential components that a feasibility study would be conducted.For otherwise the feasibility study,it seems to me, would of necessity hypothesize a whole range of com- binations when we are talking about oil produced power,we Can ........we may have to have a little bit of range of cost there.But we have a product whose value is fixed within a range and geothermal, I guess there are some standards which are referred to at this time.For these reasons,it seems to me that GORDON HARRISON's motion is a very responsible approach to take with regard to the study.Finally, I (inaudible)to hear MR.ALLISON say that real pro- gress has been made in the negotiations with perhaps NUNN: AL eiSd ht Aui/N HEATH: Allison: NUNN: ALLISON: 2263/523/21 the Executive Directors involvement that can atl come to a ready conclusion. Thank you MR.ARNOLD.I was,if no one else had suggested,was going to propose that we include a provision for reopening it if it exceeded some per- centage of what was actually agreed to before hand so I think that we are fairly close to the mark. Any further questions,comments?MR.HEATH,call questions.(B. snac ble) I think procedurally I have called the question. MR.ALLISON. (inaudible).............if the chair does not want to hear from the public on this issue,then I pro- pose that because we....that is one of the comments that was made yesterday......(inaudible) MR.ALLISON,your arguments are just overwhelming. I will go ahead and hear your comments. MR.CHAIRMAN,also,I would like to restate key provisions on this motion so we are clear what... for the record what it is that we are voting on. *NUNN: ») untrguMACETSON: NUNN: ALLISON: NUNN: 2263/523/22 Very well.MR.ALLISON and MR.HARRISON. Well,I was just going to say that (1)the motion is that we do seek a contractual royal Ho.agreement before the feasibility study is initiated and that they ....that this agreement reflects some industry practice and that there is a formula,if necessary, for adjustments based on the outcome of information in that study and that finally that we do consult with the City Officials and consider their views in: these negotiations.It was the last point that I wanted to make sure was in the record. I understood that MR.HEATH is going to enter into these negotiations.Is consultation with the City Officials something in addition to that? That MR.HEATH is to negotiation with the Aleut Corporation but he is to consult with them in the course of the negotiations.That is to say that their views ....he should be mindful of their views in his negotiations. Further comments?Is it the consensus of the Board Mayor(?): 2263/523/23 that we want to open this part of meeting for public comment on this subject?Very well,if you would like to come forward MR.MAYOR. Thank you for taking this up and putting it up on your agenda.It is real important issue to us,es- pecially if an economic development of our community and if we can pull this thing off and do it and end up with a good stable energy source,at a cheaper rate than we are paying now,it is going to fit in with State policy on shore based bottom fish devel- opment.We have spoken with the Governor's Office and the Department of Commerce and Economic Develop- ment and they really want to see this happen and I see this electrical power as a key element in providing incentives to bring this processing on shore where it will do something for our communities and eventually build a base that can help pay for State government when the oil]money dries up.So we are in support of this thing going through.At the same time we understand and appreciate what the staff has done to look out for our interest in try- ing to get some kind of an agreement before the fea- sibility study goes through.At the same token,we don't want to end up in an endless "catch 22"so that nothing ever happens on the project."We kind 2263/523/24 of like the idea -just formula,if we can come up with something.Otherwise the Aleut Corp.can come up and say,"o.k.here is our royalty",maybe make it intentionally high,then we go through the fea- sibility study and say "no,I won't support that" and we go back and negotiate something reasonable. I mean,....if we got some kind of a formula and what the Aleut Corp.has mentioned is something where the feasibility study would show the low end of what it would cost.We know what diesel costs and we will split the difference.We end up with cheaper power,we end up with stable power prices that we can go to industry with and say this is what you would be paying for power if you come to our community.Even conservative estimates of this field show that it will produce power in a range of 500 years.That is a conservative estimate.So, -»my concern of MR.HARRISON's motion is that I didn't hear him say "do the study as soon as you get an agreement".All I heard your motion saying is try to get an agreement and then I guess we would have to come back to the Board and bring it to you again to o.k.the study going through.So if it is the sense of the Board to go with MR.HARRISON's mo- tion,we would like to have it state that the study will commence upon getting an agreement. HARRISON: Mayor (?): NUNN: KNAPP: 2263/523/25 To respond to that,I think that the Board is on' record of proving the study and I think it is to be initiated as soon as these agreements can be in place,so I really don't think that is necessary.I think the consensus of the Board is to get on with it as quickly as possible. And just another thing,is that I can guarantee you that we will be participating in this as far as get- ting our view point across because we can't have the State come to us and say "this is what we negoti- ated for you,how do you like it?By the way you can't change it,because this is what we already agreed to".So we will be participating and we will be taking the initiative on that.I did attend the last negotiating session between the staff and the Aleut Corp.and we intend to do that in the future. COMMISSIONER KNAPP. Just a question,probably of GORDON or staff.It would seem to me that implicit in any feasibility study are going to be the economics of the adventure and if that is solved,why wouldn't all of this structure on royalties and so forth be considered right within the study and be an implicit part of HARRISON: 2263/523/26 the study working along the lines to say,now look, here it is technologically feasible to do this,the economics of it range somewhere between here and here.If we have to pay out this kind of royalty, the power rates are going to be this much,which means you don't really get anything.So,why couldn't this particular exercise be a significant and material part of the feasibility study.Just throw that on the table for discussion MR.CHAIRMAN. Well,you could easily do a feasibility study without knowing for sure what the royalty is going to be and you could structure the analysis to test the outcome against various royalty provision.That would be very simple,straight forward.But the problem is,do you agree on something before you do the analysis.The point is,it is not important to set a royalty provision for the sake of getting a good analysis because you can do an analysis without one because you can just make an assumption.The question is,do we want to get something in writing and in solid before we do the feasibility study be- cause the feasibility study then could make it very difficult to reach agreement later on and delay the project at that stage.The State has already spent NUNN: ALLISON: Mayor (?): 2263/523/27 its now $5.5 million and so on,so I think yes,you could do it.The question is,do we want to. MR.ALLISON. Just a direct question..It is my understanding that: the city is prepared to go ahead with MR.....and operate with MR.HARRISON's resolution and with the understanding that (1)it is the intention of the Board that this proceed immediately upon the agree- ment being reached and (2)that the Board under- stands that the City will be participating in nego- tiations. Right,-and I don't feel that we are that far off and one difference,even if the study did go through like COMMISSIONER KNAPP is saying,and we made that part of it,I still feel fairly comfortable with the outcome of the negotiations because it is not like the other one where you completely build a huge project and then you just need a right-of-way to get there.It is only the feasibility study and if we don't agree to a power uSe agreement,that steam can sit there for the next million years.It is in their interest to come our way also or they will Mayor (7): NUNN: SUTCLIFF: 2263/523/28 receive no revenue from the resource for which they own. And that is the City's position,so we can go ahead with this as far as the City is concerned. We want the feasibility study to go ahead. Thank you MR.MAYOR.Is there anyone else wishing to make public comment?State your name and who you represent. Yes,my name is ERIC SUTCLIFF,and I was the Legislator that represented the Aleutians when this appropriation was made.At that time,the $5 million to build or to explore for the resource was assumed,we all knew at that time that the Aleut Corp.would own the resource so there was never any speculation that there would be any other landholder other than the Aleut Corp.The legislature as well as the Power Authority was fully aware of this at that time.Not written into it but totally assumed since the feasibility study automatically follows the exploration study was,if there was money left over in the project fund of the $5 million,that money would be spent for the feasibility study and 2263/523/29 at that time the Power Authority was suggesting this to as a way to insure that the money did not lapse back into the General Fund.That knowing that the resource there is ...does virtually no good unless you know of the economic feasibility of it.There is many islands in the Aleutians that have the po- tential but if there is just nobody there,the eco- nomics are not there to do it.So you have to know that so it was assumed from the very beginning that the Aleut Corp.would own the resource and that there would be a feasibility study done.I can't stress enough that at that time I was fully cogni- zant of the idea that the Aleut Corp would want to maximize their profits on this resource.But I was also very confident that the Alaska Public Utilities Commission and the City of Unalaska would not cut a deal with the Aleut Corp.unless it made economic sense unless the cost of geothermal power was sub- stantially less than diesel and I maintain that that is stil?the case and that if when the feasibility study is done and everybody starts really writing down firm figures which they know to be true.Today it just seems like a guess.The State has never done a geothermal project before.We are all new to this thing and until those figures are set and we know the approximate or actual cost of the project, 2263/523/30 it is all a guess.Once those are made,I would ex- pect that the Aleut Corp.would want to maximize their profits and bring it right up to a level that equals what the city is willing to pay.The city will only be willing to pay that amount if it is substantially less and makes sense to do something as an alternative project.So,I would hope ....it was certainly my intent and I would love to see the project go through,I initiated it,and I feel a slight ownership of the project and I want it to go through because basically we have nothing now.We knew that there was energy over there.We can see the steam from town so we have nothing yet and I hope the Aleut Corp.does maximize their profits but I also know that they are not going to get anything more than the City and the Alaska Public Utilities Commission will give them.It is as simple as that. That is your safeguard right there.The project won't go unless it makes sense to those that are go- ing to use the power.I can guarantee you that those people that are putting in those Surimi plants out there,if you think the city is not cognizant of the cost and what it costs to do business,they sure will be putting in their two-cents as to what the city can afford to pay,that they will buy it NUNN: AKSELL: 2263/523/31 because right now,they produce their own electric- ity.They don't buy it from the city. Thank you.Any questions,further public comment on this topic?Yes,please state your name and who you represent. I am Alan Aksell of the Aleut Corp.and just to start it off,I would like to reply to something MR. HARRISON said earlier.The royalty question was raised by APA,by the staff,when we originally en- tered into these negotiations we thought it was strictly for right-of-way to start feasibility study underway and that we would be negotiating throughout feasibility and after feasibility.So the royalty question was raised by the staff,that is how they took,as I understand it ....(inaudible)...from the Board.Second point is you just had a motion that we negotiate within a range or within a worldly range that is standard for industry.We have accom- plished that already at the current state of nego- tiations.«We have agreed in principal that the 10-15%that the U.S.Act in 1974 would accommodate for geothermal resources is adequate at this time and we are willing to sign to that and move forward with the feasibility study.There are some 2263/523/32 technical things that need to be worked out in the agreement but the royalty question,as far as we are concerned,is adequate at that range.There is one conceptual problem that we are still pretty far apart,is that the Aleut Corp.views this feasibil- ity study as looking at the economic liability of a certain size of plant which is yet undetermined. That is in your hands and we would prefer that the project and this royalty apply only to that first unit that is developed because once you have devel- oped that infra-structure in a remote region,the economics of upgrades,doubling that output of that plant or whatever increase in megawattage at the output would be ...the economics of those increases are far different that the initial feasibility study would determine for the first phase of the project and we wish to retain flexibility to renegotiate un- der the terms of those new economics for upgrades. So we are willing to go forward with 10-15%based on what you feel is feasible to design and build in Unalaska within the next five years and for the. forseeable growth that you can sign a power sales agreement to and agree to sell to the City and they will agree to purchase.We wish to establish flexibility to renegotiate .........ce ecw eens END OF SIDE THREE.ccc cc ccc cece eee ccccccsccce es eBEGINNING OF SIDE FOUR...cee eccereeee AKSELL: NUNN: HARRISON: 2263/523 veceeceseupgrades to that generation capacity based _ on the economics of those upgrades.Since those up- grades are totally hypothetical,totally speculative projections in growth,the Surimi Plants were not known a year ago when you did your load growth anal- yses.Things happen quickly out there.There can be a big impact ......load and that has a substan- tial impact on the economics of the upgrades.So we would like to see feasibility get rolling now.We have adopted 10-15%in principal in our negotiations and we think that is adequate for both parties and we would like to have the right to renegotiate after this first phase.Conceptually,it is a definition of the first phase as far as the Aleut Corp.is con- cerned. Question MR.ALLISON .....MR.HARRISON? ]stand corrected on who initiated this,I was just going by some written material that I had in front of me..I think that this issue of first phase,sec- ond phase and there are other issues as |understand about standing the length of the agreement and so on -9%- tad peice a tLatimetoe NUNN: MYERS: 2263/523 and so forth.Our issues that this Board is really not equipped to deal with and I think that what we are trying to do is to turn this over to the Execu- tive Director to try to finalize some agreements.I. am hoping that we are not very far apart.It sounds like we are not,however,I think that for their to be incentive all around to complete these nego- tiations that we do need to delay the start of the study until we have something and I would assume that the final agreement does reflect your interest and I think it is important and we do understand what your interest and your position is in these things.I think that we are not the ones to try to wrestle with the question of whether this should -be......this agreement should be limited to the .initial project or to subsequent phases of it. Thank you.Any other questions from the Board,any other public comment?This is on the same topic? State your name and who you represent. For the record,my name is ERIC MYERS,I am an administrative assistant to Representative Adelide Herman who represents House District 26,and |would just like to add......... 2ae1FeOESttnetRCSS NUNN: MYERS: NUNN: 2263/523 ee LR Te "Det UST Are you speaking on behalf of the representative? I am representing the representative,yes.I would é "Tike to contribute a perspective on this and the .concern here basically is moving forward as quickly as possible with the feasibility study in light of the experience that occurred last year as to the Ex- ecutive Director of the Alaska Power Authority well knows,the Alaska Power Authority came within a rat's eyebrow of loosing the feasibility study money last year and in that concern is .....still re- mains.I am not aware of any particular move in that direction this year,but we all know that there is an extreme interest in the revenue picture and the extent to which there are delays in the encum- brance of these funds,anything is possible.So without stating a particular preference in regards to the question of the City's interest or the Corpo- ration's interest,Representative Herman's concern that the Alaska Power Authority move forward as quickly as possible with the commitment to the fea- sibility study.Thank you. Thank you.Further public comment on this topic? Further comments,questions from the Board?MR. ALLISON. -98 - singe 08 pal cen etapaeee oiSomgmatNotemaepc Srey Sages stemmingTN ALLISON: NUNN: ALLISON: NUNN: KNAPP: NUNN: 2263/523. It sounds to me like we have the range free to i proceed forward,parties have all agreed to that, _that they have not agreed to a Specific number with-oe .4 : aes is en ieginee >ade re SP IEARBE faite gree"tn that)range."Tdon't”know "that"that.'is 'our job to force the parties to come to a number prior toafeasibility,again it seems that if we move immedi- ately,we should be able to get an agreement in principals sufficient to proceed with the feasibil- ity study by this weekend,while everybody is still in town.I would just hope that that is the ap- proach that would be taken by staff to get it done. It doesn't seem like they are that far apart.With that understanding,I ......... Do you want to insert the word "expeditiously"to your motion? I will insert the word "expeditiously”in every paragraph. Very well,further comments?COMMISSIONER KNAPP. MR.CHAIRMAN,I would like to hear the motion again please. You would like to hear the motion again.MR. -99 - The Aleut Corporation es @ ONE ALEUT PLAZA Akutan Atte 4000 Old Seward Highway,Suite 300,Anchorage,Alaska 99503£o Telephone (907)561-4300 "2 C0voe”)6,ese rs&°oe Bosse Ata Sup &Nokolshs STATEMENT MADE TO ALASKA POWER AUTHORITY BOARD OF DIRECTORS MEETING November 6,1985 My name is Allan Aksell and I am the Director of Lands and Minerals for The Aleut Corporation. I wish to address the Feasibility Study for the Unalaska Geothermal Project. As you know,The Aleut Corporation has fee title to the land and resource at the Project site. The Aleut Corporation respectfully requests that the Board reconsider,in part,its decision of May 3rd,1985.That decision stipulated that a Feasibility Study be initiated only after agreements have been negotiated with landowners for the use of the land and resource during the feasibility,development and operating phases of the Project. I am here to assure the Board that we share the same purpose:to promote and advance the general prosperity and economic welfare of the people in this region of Alaska.The Aleut Corporation has a vested interest in producing electric power from this resource.If this long-term source of power at reasonable cost Stimulates Unalaska's economy and contributes to a healthy bottomfishing industry which utilizes shore-based fish processors,the resulting economic growth will produce support businesses and more jobs.Our Ship repair facility and wholly-owned subsidiary,Panama Marine,Ltd.,is located in Unalaska and would benefit from the economic growth by having a steady stream of customers.Greater economic activity would -also heighten demand for the Corporation's sand and gravel resources. We recognize that geothermal power will only be developed if it is the least costly alternative;however,if development of the geothermal resource proves too costly,the resource will lie dormant (which will be to no one's benefit). STATEMENT TO-ALASKA POWER AUTHORITY BOARD OF DIRECTORS MEETING November 6,1985 Page 2 A Feasibility Study,therefore,is the only viable means to assess and project the cost for power generated from the geothermal resource. For the last six months The Aleut Corporation and the staff of the Alaska Power Authority have been asked to negotiate an agreement without the benefit of a Feasibility Study.Both sides are being asked to use highly variable development and operating cost estimates and to inject a prematurely negotiated fixed royalty to ensure the Project's viability.The Aleut Corporation feels it cannot bear,alone,the burden of absorbing the risks inherent in these cost estimates. I remind the Board that there is no direct precedent in Alaska for the economics of a developed geothermal resource. Furthermore,analogies drawn from the Lower 48 require far more study and refinement than the preliminary cost estimates on which we have been forced to base our negotiations.I appeal to your personal experiences and ask if you would be willing to lease one of your most valuable assets without knowing its true value. Although the intentions of the Power Authority and The Aleut Corporation are alike,that is,to promote the economic welfare of this region,each of us is forced into overly protective positions.In lieu of the more reliable information which would be developed by the Feasibility Study,the Power Authority is forced to seek the lowest possible cost for access to and use of the resource while The Aleut Corporation is forced to seek the highest value for such access and use. We believe that a Feasibility Study will promote an agreement which arrives at the most reasonable cost for a viable Project. We believe further that neither party can responsibly negotiate without the vital information which needs to be generated by the Feasibility Study.Once again,rest assured that The Aleut Corporation will fulfill its responsibility to utilize the Corporation's assets in the best interests of its shareholders and in the best interests of its Region. For these reasons The Aleut Corporation would greatly appreciate reconsideration of your past decision and your direction at this time to move forward with the Feasibility Study. We will be available to participate through any means to address this issue further. Thank you for your time. Crom teansemrerOF APA (AkD ME.Ve ALLEN AKSELL: 1874/496 ( 33.07,04 MR.CHAIRMAN,Member of the Board,I am ALLEN AKSELL.I am the Director of Lands and Miner- als for the Aleut Corporation and I would like to address the Board on the feasibility study for the Unalaska Geothermal project.As you are aware,the Aleut Corporation has free title to the land and the resource of the project site.Aleut Corporation would like to ask the Board to reconsider,in part,it's decision of May 3,1985.That decision stipulated that a feasibility study be initiated only after agreements have been negotiated with land own- ers for the use of the land and the resource during the feasibility,the development and the operating phase of the project.I am here to assure the Board that we share the same con- cerns and the same purpose and that being to promote and advance the general prosperity and economic welfare with the region.The Aleut Corporation has a vested interest in producing electric power from this resource.If this long-term source of power can be developed at a reasonable cost,it will stimulate the local economy and encourage bottom fishing industry which we use shore-base processors resulting in economic growth to produce 'fort businesses and -131 - Nol,b,14 eo more jobs out there.The Aleut Corporation in fact has a holding on subsidiary Panama Marine which is located out there and would benefit from this resource also.The greater economic activity will also heighten demand _for hie (61 pings no sand and gravel resources.We recognize that the geothermal power will only be developed if it is the least costly alterna- tive.However,if that development of the re- source proves too costly the resource will lie dormant and that will be to no one's benefit. A feasibility study,therefore,if the only vi- able means to assess and project the cost of power generated from this resource.For the last six months the Aleut Corporation and the staff of APA have been asked to negotiate an agreement without the benefit of the feasibil- ity study.Both sides are being asked to used highly variable development costs and operating costs estimates and to inject a ie ae.nmnafeildnafffe anggotiatedfixedroyaltyto'insurenth,btprojects variability...or viability.The Aleut Corpo- ration feels it cannot bear alone the burden of WAGpa'ao absorbing the risk¢.inherent in these cost es- timates.I would like to remind the Board that there is no direct precident in Alaska for the 1874/496 -132 - 1874/496 lecerw o\ economics for the developed geothermal re- source.Furthermore analogies which have been drawn from the lower 48 require far more study and refinement than a preliminary cost estimate on which we have been forced to base our nego- tiations.I would like to appeal to your per- sonal experiences and ask if you would be will- ing to lease your most valuable asset without knowing its true value.Although the in- tentions of the Power Authority and the Aleut Corporation are alike,and that being to pro- mote the economic welfare of this region.Each of us is forced into overly protective po- sitions in lieu of the more reliable informa- tion which would be generated by the feasibil- ity study.The Power Authority is forced to seek the lowest cost for access to and use of the resource which the Aleut Corporation in turn is being forced to seek the highest value for such resource.I remind you,these protec- tive measures that we are basing on very prema- (}'ture cost estimates.We believe that a fea- sibility study will promote an agreement which arrives at a reasonable cost for viable proj- ect.We further believe that neither party can responsibly negotiate without the vital -133 - information which needs to be generated by the feasibility study.Once again,rest assured that the Aleut Corporation will fulfill its re- sponsibilities to utilize the corporation's as- sets in the best of its shareholders and the best interests of the regions.For these rea- \sons,Aleut Corporation will greatly appreciate your reconsideration of the past decision andry,your direction at this time to move forwardBOSwithafeasibilitystudy.We would be avail-ot 4 able to participate in any meetings,a planningsubcommitteeorwhateverwaymaybepossibleto surmount this impasse over a fixed r . ie Na : NUNN:Questions by the Board?COMMISSIONER KNAPP. KNAPP:In the negotiations,have you been talking any kind of numbers at all on a royalties to staff? MORRIS:We have been trying to approach it from the standpoint of a royalty payment and percentage basis to ...for the amounts of geothermal flu- ids that would be used and we have been tryingowetobasethatagainstsomemeasuresthatwouldnyahan:then determine a price.It is basically look Us K corn ing at the net use of that resource to generate 1874/496 -134 - KNAPP: MORRIS: NUNN: HARRISON: 1874/496 electricity to then sell to the communities of Dutch Harbor and Unalaska and consequently,we have been struggling over a period of time working with Aleut Corporation trying to get to a reasonable measure of that cost. Would that be binding?Lets say you came up with an agreement with the Aleut Corporation and then went on to a feasibility study.Would the initial agreement be binding prior to any kind of development? Acting on the action that the Board took on May 3rd in Juneau,we have been trying to drive to a binding agreement that would contractually set out the terms and conditions for the use for the geothermal fluids as well as the use of the land and access and rights-of-way for the entire project.Yes,it would be a binding agreement as we have been trying to negotiate with them. MR.HARRISON. If the....I am sorry,my mind is not clear on -135 - MORRIS: AKSELL: 1874/496 the details of this,but if we were to go ahead with a project out there,a geothermal project, who would own it?Would we make a grant in ef- fect to the utility like when we are electrify- ing Elfin Cove and some.....what is the deal? O.k.We have two stages to go through.The first one is the economic feasibility on the project.The next one would be.the financial feasibility of the project.As far as part of what we have been proposing in the contract so far is the Aleut Corporation has requested the right to develop the project on their own.If after completion of the economic stage that the project is feasible and they wish to exercise that right.If they do not exercise that right,we would proceed into the financial fea- sibility aspect and have to determine then how the project itself could be financed. Can I comment on that?One of our requests in that regard is that we would like to have the option to seek development of the resource as a private entity along with other private part- ners if we could demonstrate that we could do it responsibly and efficiently to where power -136 - ARNOLD: HEATH: 1874/496 would be produced at equal or better than APA's projections.Not that we have a carte blanche to take back the project and develop it.It was strictly on an equal or better basis be- cause we realize that there is a_potential partnership here where the state brings certain things to a project like this that are very beneficial but they may also bring Davis Bacon wages which we would not bring and so there are various aspects of private versus public devel- opment. MR.CHAIRMAN,a question for MR.MORRIS.You are seeking this negotiated firm price for the value of the resource because you construe the Board's decision of May to require that or be- cause it is fundamental to economic feasibility study which you are doing. Well MR.ARNOLD,I think it is partially true that until you know the cost of the resource it is very difficult to develop feasibility.And the surrounding grounds and right-of-ways and all the rest of it.You couldn't just enter into just a part of the feasibility study. -137 - ARNOLD: HARRISON: I know we had this similar problem with North Slope Gas....what is it worth.(inaudible)a range of values and learn what the impact is on the respective feasibility of the installation. I didn't realize that this involved actual royalties and so on which implies some value of the resources.I thought that what we were do- ing or my recollection of what -we were doing was not getting into a situation where we were off and running spending money and then finding out that we were being held up even to get to ceeee Beginning of Si HARRISON: 1874/496 the project.That we were being told that,you know,sort of in an AHTNA situation where de V...."sun at soe We money.Could we...maybe it is a good idea to refer this to the Planning Committee and then we can all have a chance to talk about it some more. -138 - HUFMAN: MORRIS: HUFMAN: MORRIS: NUNN: 1874/496 Yes,I would agree with that.Who has the subsurface rights on that property? That is the Aleut Corporation. O.k.,they have the surface and subsurface? Yes. It occurs to me that what we set out to do,as MR.HARRISON points out,was to try to secure as does the federal agencies and other people that are preparing to do work,access and pro- tection of the investment that is there and it may be that the May 3rd agreement is incor- ea -_---a porated a bit too much but I would support the recommendation be referred to the Planning Com- mittee for some more (inaudible)....and see how it conforms to the initial intent.Perhaps we should treat these projects somewhat differ- ae ently then we do the others but I think the ba-<<ne sic intent should be protected.The Planning Committee can come back to us with further de- tail.Any further questions of MR.AKSELL or MR.MORRIS?MR.HEATH,any comment?0.k., -139 - slik aad C2 AKSELL: 1874/496 well we will refer this then to the Planning Committee as an action item for them. Can I pose a question of the Board?I would like to know just clarification,is the staff under an obligation to...at this preliminary stage,bring what appears to be a clearly via- ble project because we sense that there was an obligation possibly or a feelingon the staff's ee part that the project had to appear viable even at this early stage.We are willing to consid- a er a range of royalties.We had a problem with a hard and fast royalty,we don't know if we are selling it for too little and we don't know if we are charging the project too much.The staff's preliminary cost projections include a 30%contingency factor based on analogies drawn from the lower 48 from a contractor that had not successfully built a project so we serious- ly question the data and a range of royalties might be appropriate but it may not be a clear cut viable project until we get into feasibil- ity.I would just like to ask for clarifica- tion of what the staff is working under so we will understand it. -140- NUNN: NUNN: 1874/496 I think it may be the chicken and the egg type problem,you are not going to get feasibility level of information before the Power Authority gets access to the resource to do that work and...but perhaps the initial stage should be to negotiate access and for the purpose of ob- taining additional information and if that is clearly all that we need,perhaps the staff is taking it through to project completion and perhaps this royalty determination would be more...@ power sales agreement for a project that is further along in feasibility and de- sign.I think we will let our Planning Commit- tee address that in more detail.I appreciate your perspective and your people coming for (inaudible)we will work with you on this. Now,is there any other public comment?Seeing none,I will entertain the motion to adjourn. Moved again. Moved again,seconded.Without objection,we will stand adjourned.Call adjournment. -141-