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HomeMy WebLinkAboutSE Intertie conference 2003*: +. ma :-__Southeast Conference ponyP.O,Box 21989 Juneau Alaska 99802-1989 -Tel.(907)463-3445 Fax (907)463-5670 Mid-Winter Summit Committee Meetings and -*Teleconferences March 18,2003 9:00 am to 5:30 pm Environment Committee Meeting Bruce Jones -Chair Federation of Municipalities for Solid Waste Management -DEC,Dan Easton e Easton explained the use of a Federated form of regional government to tackle 'regional problems,and thought that this may have good applicability for dealing with solid waste issues in Southeast Alaska.He noted that there are 25 municipal landfills in Southeast Alaska (264 in all of Alaska)while there are only 21 in the entire 'State of Washington.He also noted that Southeast spends $2 million each year to ship waste out of Southeast Alaska.The Federation concept requires that all communities involved "subordinate and relinquish”their power to the greater Federation.He noted an example of this working in Washington State. e President J.C.Conley noted that many communities have already invested in infrastructure like balers to make shipping waste more efficient -and may have some expenses associated with switching technology if the waste is to be processed within Southeast. e Jones noted that the committee will discuss and work on the Federation concept, and bring a proposal before the full board and membership at the Annual Meeting. Additional Solid Waste Issues -Bruce Jones - e Carol Rushmore noted that Wrangell is looking at using a plasma incinerator for dealing with waste there.The concept is currently under study,and she will give a presentation at the annual meeting on the findings. e Robert Venables noted that Haines is currently using new composting techniques, and will also give a presentation at the annual meeting. Household Hazardous Waste Update -Steve Haavig,Carson Dom e The Governor's FY04 budget does not have funding for the compliance assistance group of the Statewide Public Service Division.It is likely that the division will nolongerexistafterJune30".However,there is funding for the event and plans to continue work for the remainder of this fiscal year.After June 30th,the project will have to move into solid waste.SPS will continue to operate under the most recent Memorandum of Agreement (MOA),but Southeast Conference needs to negotiate the next agreement with the solid waste program. ¢Southeast Conference worked with Carson Dorn Inc.to reduce the total program fee for Southeast Alaska communities by 14%.For a minimal amount of funding- approximately $14,000 per year-along with local support,the State/Conference cooperative project collects more than 13,000 gallons of hazardous waste each year. The program has three benefits:It prolongs the life of community landfills;reduces the spill potential of harmful wastes into the environment;and encourages households to safely dispose of hazardous,and potentially dangerous,chemicalswhichchildrenmayhaveaccessto.2002 was the 10"year of the program. Fisheries Committee Meeting |gee Carol Rushmore Chair;Dennis Watson -Co-Chair Resolution:Fish farming in the EEZ zone-Kathy Hansen,SEAFA Hansen introduced this resolution.Dennis Watson made a motion to accept this resolution and move it on to the Board for consideration.Jim Becker seconded the motion. Arial Herbicide Spraying-kKristin Ryan,DEC Kristin Ryan of DEC was asked to speak on the impacts of spraying a "Round-Up” like herbicide on Long Island.Ryan informed the group that currently,spraying of herbicides from the ground does not even require a permit.DEC is introducing regulations next week for comment to define pesticide management and to ensure that there are enough restrictions in place to protect the environment.Ryan did not have any specific information on the environmental impacts of the chemical, however,she did note that the burden is on the permit applicant to show safety. Legislative Salmon Task Force Issues-Carol Sutton Sutton spoke on the task force recommendations and detailed where they are now in the State legislative process.The recommendation encountering the most difficulty is mandatory chilling.While people believe that chilling is essential,the question of how to do it remains.Implementation would require a huge fiscal note,as some regions do not even have access to ice,and many boats still have dry holds. Moreover,even if chilling is required,there is no control over the product once it has left the fishing boats.The consensus seems to be that,although mandatory chilling is a good idea,the Legislature requires more information regarding the hows and whats before it will get passed. Sutton noted that currently ASMI is slated to get $2m in the FY04 budget. Fish Farming in Chile-Dave Kensinger Kensinger reported from his recent trip to Chile on the advances the Chileans have made regarding fish farming.Although his report painted a grim reality for the level of competition Alaska fisherman are going to have to deal with in the future, Kensinger also highlighted the key to successfully competing with fish farms:"If we can guarantee consistent quality assurance,we will be hard to beat.”He reminded the committee that non-dyed farmed salmon is gray,and that the dye used in salmon has become a serious health concern.He also noted that although Chileans still need to catch fish to feed their farmed fish,they are looking at plant based feed subsitutes. Economic Development Committee Meeting .Heme os Robert Venables -Co-Chair;Carol Rushmore -Co-Chair Mining Support Resolution-Lance Miller Linda Snow moved to accept the resolution,and forward it onto the Board for consideration.Steve Brink seconded the motion.There were no objections. Legislative Issues Effecting Business and Community:Infrastructure Projects in Southeast Alaska:Fisheries Impacted Communities Funding-Commissioner of DCED, Edgar Blatchford Commissioner Blatchford spoke to the committee on the status of economic development in Southeast Alaska.Blatchford noted that we have lost 11,000 people in the region since 1990.He commented that the first 100 days of the Administration were just completed,and the vision of the Governor is to strengthen local communities and seize opportunities for Alaskans.DCED will be the lead agency for inspiring rural economic development and Blatchford stressed that he would be looking to Southeast Conference for direction:"We seek to have input from Southeast Conference.”Blatchford commented that it will 100 years before the stars are lined up for Alaska like they are now,in terms of having seniority in DC in the same party of the State House,Senate,and Governor.Finally,he spoke on funding for fisheries impacted communities,and once again noted that he was looking to Southeast Conference for advice and input on how the money should be spent. Rural Community Strategic Planning Team (RCSPT)Concept-Lance Miller,JEDC Miller presented this concept to hire a small team of planners over a period of five years to assist communities with comprehensive economic development strategies. As Miller put it,the team will teach communities how to "treat community development like a business.”The concept got a nod of approval from the committee to continue work on. CEDS/Funding Summit Update-Eric Decker,RC&D;Carrie Sykes,Central Council Decker and Sykes announced the kick off of the 2003 CEDS update,and provided Commissioner Blatchford with a copy of the regional planning document. Intertie Committee Meeting .ees J.C.Conley -Chair Southeast Conference Intertie Study Progress Report e -Intertie Coordinator,Dave Carlson,reported that the work being done by D.Hittle & Associates has been progressing and the study is coming together.The completion date for Phase |is now scheduled for March 29,2003 which is one week later than originally planned.Some of the information requested by John Heberling,projectmanagerforD.Hittle &Associates,has beena little slow in coming and Heberlingalsoneedsalittlemoretimetocoordinatetheworkbeingperformedbythesub- consultants.Carlson reported that preliminary study results indicate that both Intertie segments (Juneau/Hoonah &Petersburg/Kake)are both technically and economically feasible. Report on meeting of the City Councils of Petersburg andKake e Carlson reported that the City Council from Petersburg traveled to Kake to meet with their City Council and community members.The purpose of the meeting was not only to discuss the Intertie but also a potential road link between the two cities. Everyone was supportive of the Intertie project but several community members in Kake expressed some concern about a potential road link between the two towns. Mayor Ted Smith from Petersburg commented that it was an excellent meeting and a good beginning of dialogue between the two cities. Federal Appropriation Request for FY04 e Carlson reported that a formal appropriation request was submitted to Alaska's congressional delegation for funding of the two Intertie projects.Copies of the request and supporting documentation were passed out to Committee members. The submittal includes a request in FY04 of $15 million for the Juneau/Hoonah segment and $500,000 for the Petersburg/Kake segment.Dave commented that the Juneau/Hoonah project is much farther along with planning &design and closer to being 'construction-ready'which is the primary reason for the difference in the dollar amounts requested. e Chairman Conley commented on the upcoming Washington,DC trip which is scheduled for April 9 &10.A discussion took place between the members who are planning to attend and the schedule for the meetings.Carlson went over the list of those who have indicated an interest in attending and reported that he will be contacting everyone in the near future with appointment schedules,etc.Specific meeting times with the delegation and staff have not been firmed up at this point. e Dave Carlson briefed the Committee on the status of resolutions of support that have been received to date and urged communities or organizations that have not yet responded to take action before the trip to Washington,DC. State Legislative ActivitieseCarlsonreportedthathe was in Juneau the week of February 17"and met with every legislator from Southeast Alaska as well with the Governor's staff and explained the Intertie project and the status of the segments that have been prioritized by the Committee.Dave said the response was very supportive and positive. e Conley updated the Committee on the status of funding for the continued work on the project by Southeast Conference.He reported that Governor Murkowski has included $160,000 in his proposed FY04 budget that was submitted to the legislature.Conley urged all members to contact their legislators urging them to do whatever they can to see that this remains in the budget. Formation of Ownership/Operating entity for Interties Intertie Coordinator,Dave Carlson,passed out to all committee members an 'Overview'of the work that has been completed in the past on the formation of this entity.Conley recommended that,now that segments have been prioritized,the engineering/economic study is underway and appropriation requests have been submitted to Washington,DC for funding,it is time to again address the formation issues.He recommended a subcommittee be appointed to provide recommendations to the full Committee.Conley then recommended the appointment of the following representatives to the subcommittee: Corry Hildenbrand -AEL&P (Investor-owned utility and utility selling power) Vern Rauscher -THREA (soon-to be cooperative and retailer) Dick Olson -Thomas Bay Power Authority (governmental entity) Gordon Jackson (CCTH -representing the local communities that will receive power over the interties)RON>Transportation Committee Meeting Rob Allen -Chair Intermodal Report This report has been widely disseminated.Murray Walsh noted that we should build support for the program at a local level,and then re-examine the concept at the annual meeting.President Conley said that we should ask DOT to hold public hearings on the projects in the document.Dave Kensinger made a motion that the Hoonah/Juneau and Kake/Petersburg road projects be looked at with intertie routes in mind.Linda Snow seconded the motion.Walsh amended the motion to ask that Southeast Conference specifically work with DOT on these two projects.There were no objections.Meilani Schijvens said that she would put the intermodal report on the Southeast Conference website. AMHS Sub-committee report:Goals discussion for new board -Rosemary Hagevig Hagevig noted that there would be an in depth discussion on this issue on the following day.(Notes from that discussion are located further on in this document). STIP Leo Luczak briefed the group on his experiences tracking the STIP over the years, and expressed frustrations at the difficultieshe encountered.He noted that he would like to see notifications of amendments to the STIP so that comments can be returned within the comment period.He currently has to read through voluminous material to discern if changes have indeed been made.It was noted that a January10"letter was sent from Southeast Conference to DOT on this issue.Luczak noted that he is interested in volunteering his efforts on a Southeast Conference STIP sub- committee. Luczak moved that Southeast Conference ask DOT to find a better way to notify the public of STIP changes.Snow seconded the motion.Walsh amended the motion to request the board work on the STIP process to better inform the public on amendments and that public process should be improved.There were no objections.Schijvens was asked to notify DOT that they may get questioned on the STIP during their presentation the following day. SATP Process -Timeline it was noted that Southeast Conference has already sent a letter to DOT asking that the SATP be re-opened.Walsh commented that he had heard that DOT is talking about a major revision to the SATP,and Walsh stressed that the revision we are looking for is not a major one."Can't wejust sit down like a bunch of guys and knock the thing out?”Kensinger commented that the end result of the SATP changes should be a cheaper plan that will not be outdated in 10 years. Walsh made a motion that we send another letter to DOT with specific directions on how the SATP needs to be re-done -noting that the letter will first be reviewed by committee.Jim Scholz seconded the motion.There were no objections.SteveBrinkaddedthatweneedtohavethistoDOTbyApril7”. Gustavus issues with AMHS Pedr Turner of Gustavus asked Southeast Conference for help with local dock issues.The current dock that Gustavus uses is badly in need of repair.However, the current dock site has no natural harbor or constructed protection.The community of Gustavus would like upgrade the dock to a level which would allow AMHS service,or other "roll on roll off”traffic.DOT is only willing to do such an upgrade in Bartlett Cove,some distance from town.The people of Gustavus understand that this option would be cheaper and more feasible in terms of construction,and would be satisfied with this option.The problem,however,is that: Bartlett is located within National Parks boundaries,and the Park apparently will not let ferries in,nor will it allow local access for fishing and whale watching charters. The Park has suggested that it needs "an act of Congress”for this to happen. Turner was asked if there were locals opposed to upgrading the dock for ferry service,and replied that there is a minority opposition of 34.Turner also noted that since the population of Gustavus is 400 in the winter and up to 1,000 in the summer, transportation is a serious concern. Dave Kensinger made a motion that Southeast Conference go on record supporting Gustavus and ask Gustavus for a resolution outlining the specifics.Walsh seconded the motion.There were no objections. Tourism Committee Meeting Rob Allen -Chair Update on Sea-Trails-Odin Brudie e Brudie gave a report on SEATrails.He explained that the program was up and running and they were currently working with the Forest Service.The goals for the program include a well developed website,regional identification,and a connecting web of trails from Metlakatla to Yakutat. Scenic-Byways/AMHS Marketing update-Sharon Gaiptman e Gaiptman noted that AMHS delivers $10 million a year to Anchorage and surrounding areas.She stressed the need for marketing,and spoke optomisticlly regarding what we can do to improved AMHS ridership in the future. Dept.of Community and Economic Development Tourism update-Carly McConkie e McConkie provided an update regarding what the role of DCED is regarding tourism, and highlighted which staff members should be contacted for assistance.She discussed current research and information available. Alaska Onboard discussion e It was noted that the Alaska Onboard discussion will be delayed until next fall for a variety of reasons. SATC . e SATC has a tentative agreement to work with Southeast Conference.More action will be reported at next month's meeting. ATIA and Wildlife viewing license and other tax issues e Barry Bracken noted that his key concem regarding a wildlife viewing tax was that there are no dedicated funds,and questioned if this is really just a head tax.Linda Snow noted that hunters have been paying this tax for years now,and it doesn't seem fair that they should be the only group required to pay.Carol Rushmore asked how the fee would be collected,and noted that we presently do not have enough information to make a stand on this issue. . e Patty Mackey noted that we should continue to track this issue. Other Business e Bracken made a motion to endorse a graduated increase in business license fees rather than the across the board $200 fee currently proposed.Snow seconded the motion.There were no objections and the motion was forwarded to the board for further review. Jo "Southeast Conference - P.O.Box 21989 Juneau Alaska 99802-1989 Tel.(907)463-3445 Fax (907)463-5670 -*Intertie Committee Meeting Wednesday,January 22,2003 1.Call to Order 2.Introduction of Committee Members: in Board Room:J.C.Conley,Chair,Vern Rauscher,Paul Reese,Ted Smith, Corry Hildenbrand,Jodi Mitchell,Duff Mitchell,Dave Carison,Jim Voetberg,DickOlson,and Liv Gray Via Teleconference:Arne Sather and Keith Perkins SEC Staff:Loren Gerhard,Meilani Schijvens and Judy Kennedy 3.Introduction of Guests: Bill Allen,Keith Bettridge,Allan Yost,Bob Loescher,Gordon Jackson Henrich Kadake,Wayne Mahoney,Dewey Duvall,Tom Briggs,Tom Lovas,John Heberling,Don Bremner,Gary Williams,Roy Aceveda,Paul Paresky,Larry Dunham,Paul Mclntosh,Larry Markley,and Tim McLeod 4,Report on RFP &Selection Processa/b/c.Carlson reported that a Request for Proposals (RFP)was issued on December 9,2002.Advertisements were placedin 3 newspapers;the Juneau Empire,Anchorage Daily News and the Seattle Journal of Daily Commerce. Proposals were due by January 6,2003.There were 8 responses.A Selection Committee met via teleconference on January 15,2003.By unanimous vote, DHittle &Associates,Inc.was selected.Chairman Conley asked if there were any objections to this selection.There were no objections and the recommendation to retain DHittle &Associates was forwarded to the SEC Board of Directors for final approval. d.John Heberling,Program Manager,was introduced and provided abasicbackgroundofhisworkexperienceandthatofDHittle&Associates. Heberling expects the Task |deliverable,a report on the Juneau/Hoonah and thePetersburg/Kake Intertie segments,to be completed by March 22"!Task Il,a larger study encompassing the entire SE Alaska Intertie Project,will becompletedbyMay22", e.Bill Allen,State Director for USDA -Rural Development presented the Intertie Committee with a check for $100,000 for the funding for this study.Allen also thanked Keith Perkins,from the Sitka office of Rural Development,for all his hard work on this project. C:\Documents and Settings\Administrator\My Documents\Southeast Conference Intertie Coordinator\Meeting Notes\2003 January 22 FINAL Intertie Committee meeting notes.doc Page 1 of 3 5.RUS Grant a.Carlson told the Committee that a decision had been made not to apply for this grant.The RUS grant was primarily focused towards projects that are 'construction-ready'and it was determined through conversations with RUSpersonnelthatourprojectswouldnotmeetthiscriteria.Dave noted that thisis anannualgrantandweshouldbeinabetterpositiontoapplyforitnextyear. 6.Swan/Tyee Update a.Tom Lovas,CEO of the Four Dam Poo!Power Agency,informed the Committee that the Agency and the City of Ketchikan are in the process of resolving issues pertaining to the transfer of ownership of the Tyee-Swan Intertie project from Ketchikan to the Agency.A resolution was passed by the Agency supporting assignment following completion of reviews of design, permits and contracts.A technical committee will be formed to finalize interconnection designs and operating agreements.The construction contract to complete the remaining clearing and installation of towers and conductor has been advertised for bids,and the project is expected to be completed and on-line in 2005.; Bob Loescher asked Lovas if House Bill 528,which provides $20 million in debt reimbursement for the project,has been implemented yet and what the projected cost of the intertie would be.Lovas stated that no borrowings under HB528 have been made as of yet,and that the cost of the Intertieisexpectedtobeapproximately$77 million. 7.Lobbying Efforts a.Conley reported that the Intertie Committee would not be hiring a lobbyist at the present time.The time frame for the trip to Washington DC would probably be late March and/or early April.He suggested that a close watch be kept on discounted seats through Alaska Airlines.This would be the key factor for that meeting.Also,the Task |report from DHittle &Associates will be completed and in-hand by the time we go back to DC. b.Attendees should be representatives of the region. c.Conley said that the Legislature would be asked for a grant of at least $150,000 to pay for the continuation of the Southeast Conference Intertie program and will focus on House Committee members d.Resolution requesting support of Southeast Conference will be put on the web site.This will aid communities,utilities and organization in making sure they have all information necessary to support this project through written communication. 8.Legislative Activitiesa.Conley stated we need to make our requests known to "staff on the hill' as it would be to our advantage.Some staff were not aware of Intertie's efforts afd progress.Carlson will develop a bulleted list of talking points for legislative visits.: 9.Next Meeting Date a.The next Intertie Committee meeting will be held at the Mid-WinterSummit,March 18""-20th,2003.A specific time or date has not been determined. 10.Other Business/Comments Jackson asked what kind/type of organization will eventually be owning/operating the Intertie.Carlson stated that we shouldn't try to 're-invent the wheel if other areas of the state or country already have working models in place.Carlson added that continued evaluation of the legal organization/entity will take place and,additionally,the engineering study that will start shortly will provide some research into this issue.: At a meeting scheduled for January 23”with the Forest Service,Carlson noted that the projects will be "laid out on the table”so the Forest Service has a good understanding of what we are trying to accomplish. Jackson invited everyone to attend the "Salmon for Success”conferencetobeheldinJuneauonFebruary10":11",&12"at the ANB Hall. The meeting was adjourned. Jo "Southeast Conference teP.O.Box 21989 Juneau Alaska 99802-1989 Tel.(907)463-3445 Fax (907)463-5670 -Intertie Committee Meeting Wednesday,January 22,2003 1.Call to Order 2.Introduction of Committee Members: In Board Room:J.C.Conley,Chair,Vern Rauscher,Paul Reese,Ted Smith, Corry Hildenbrand,Jodi Mitchell,Duff Mitchell,Dave Carlson,Jim Voetberg,Dick Olson,and Liv Gray Via Teleconference:Arne Sather and Keith Perkins SEC Staff:Loren Gerhard,Meilani Schijvens and Judy Kennedy 3.Introduction of Guests:Bill Allen,Keith Bettridge,Allan Yost,Bob Loescher,Gordon Jackson Henrich Kadake,Wayne Mahoney,Dewey Duvall,Tom Briggs,Tom Lovas,John Heberling,Don Bremner,Gary Williams,Roy Aceveda,Paul Paresky,Larry Dunham,Paul Mcintosh,Larry Markley,and Tim McLeod 4.Report on RFP &Selection Processa/b/c.Carlson reported that a Request for Proposals (RFP)was issued on December 9,2002.Advertisements were placedin 3 newspapers;the Juneau Empire,Anchorage Daily News and the Seattle Journal of Daily Commerce. Proposals were due by January 6,2003.There were 8 responses.A Selection Committee met via teleconference on January 15,2003.By unanimous vote, DHittle &Associates,Inc.was selected.Chairman Conley asked if there were any objections to this selection.There were no objections and the recommendation to retain DHittle &Associates was forwarded to the SEC Board of Directors for final approval. d.John Heberling,Program Manager,was introduced and provided a basic background of his work experience and that of DHittle &Associates..Heberling expects the Task I deliverable,a report on the Juneau/Hoonah and thePetersburg/Kake Intertie segments,to be completed by March 22")Task II,a larger study encompassing the entire SE Alaska Intertie Project,will becompletedbyMay22”, 'e.Bill Allen,State Director for USDA -Rural Development presented the Intertie Committee with a check for $100,000 for the funding for this study.Allen also thanked Keith Perkins,from the Sitka office of Rural Development,for all his hard work on this project. C:\Documents and Settings\Administrator\My Documents\Southeast Conference Intertie Coordinator\Meeting Notes\2003 January 22 FINAL Intertie Committee meeting notes.doc Page 1 of 3 5.RUS Grant a.Carlson told the Committee that a decision had been made not to apply for this grant.The RUS grant was primarily focused towards projects that are 'construction-ready'and it was determined through conversations with RUS personnel that our projects would not meet this criteria.Dave noted that this is an annual grant and we should be in a better position to apply for it next year. 6.Swan/Tyee Update a.Tom Lovas,CEO of the Four Dam Pool Power Agency,informed the Committee that the Agency and the City of Ketchikan are in the process of resolving issues pertaining to the transfer of ownership of the Tyee-Swan Intertie project from Ketchikan to the Agency.A resolution was passed by the Agency supporting assignment following completion of reviews of design, permits and contracts.A technical committee will be formed to finalize interconnection designs and operating agreements.The construction contract to complete the remaining clearing and installation of towers and conductor has been advertised for bids,and the project is expected to be completed and on-line in 2005. Bob Loescher asked Lovas if House Bill 528,which provides $20 million in debt reimbursement for the project,has been implemented yet and what the projected cost of the intertie would be.Lovas stated that no borrowings under HB528 have been made as of yet,and that the cost of the Intertie is expected to be approximately $77 million._ 7.Lobbying Efforts a.Conley reported that the Intertie Committee would not be hiring a lobbyist at the present time.The time frame for the trip to Washington DC would probably be late March and/or early April.He suggested that a close watch be kept on discounted seats through Alaska Airlines.This would be the key factor for that meeting.Also,the Task !report from DHittle &Associates will be completed and in-hand by the time we go back to DC. b.Attendees should be representatives of the region. c.Conley said that the Legislature would be asked for a grant of at least $150,000 to pay for the continuation of the Southeast Conference Intertie program and will focus on House Committee members d.Resolution requesting support of Southeast Conference will be put on the web site.This will aid communities,utilities and organization in making sure they have all information necessary to support this project through written _communication. : 8.Legislative Activities a.Conley stated we need to make our requests known to "staff on the hill' as it would be to our advantage.Some staff were not aware of Intertie's efforts and progress.Carlson will develop a bulleted list of talking points for legislative visits. 9.Next Meeting Datea.The next Intertie Committee meeting will be held at the Mid-WinterSummit,March 18"-20th,2003.A specific time or date has not been determined. 10.Other Business/Comments Jackson asked what kind/type of organization will eventually be owning/operating the Intertie.Carlson stated that we shouldn't try to 're-invent the wheel if other areas of the state or country already have working models in place.Carlson added that continued evaluation of the legal organization/entity will take place and,additionally,the engineering study that will start shortly will provide some research into this issue.At a meeting scheduled for January 23”with the Forest Service,Carlson noted that the projects will be "laid out on the table”so the Forest Service has a good understanding of what we are trying to accomplish. Jackson invited everyone to attend the "Salmon for Success”conferencetobeheldinJuneauonFebruary10":11",&12"at the ANB Hall. The meeting was adjourned. -"Southeast Conference.aneP.O.Box 21989 Juneau Alaska 99802-1989 Tel.(907)463-3445 Fax (907)463-5670 -*Intertie Committee Meeting Wednesday,January 22,2003 1.Call to Order 2.Introduction of Committee Members: In Board Room:J.C.Conley,Chair,Vern Rauscher,Paul Reese,Ted Smith, Corry Hildenbrand,Jodi Mitchell,Duff Mitchell,Dave Carlson,Jim Voetberg,Dick Olson,and Liv Gray Via Teleconference:Ame Sather and Keith Perkins SEC Staff:Loren Gerhard,Meilani Schijvens and Judy Kennedy 3.Introduction of Guests: Bill Allen,Keith Bettridge,Allan Yost,Bob Loescher,Gordon Jackson Henrich Kadake,Wayne Mahoney,Dewey Duvall,Tom Briggs,Tom Lovas,John Heberling,Don Bremner,Gary Williams,Roy Aceveda,Paul Paresky,Larry Dunham,Paul McIntosh,Larry Markley,and Tim McLeod 4.Report on RFP &Selection Processa/b/c.Carlson reported that a Request for Proposals (RFP)was issued on December 9,2002.Advertisements were placedin 3 newspapers;the Juneau Empire,Anchorage Daily News and the Seattle Journal of Daily Commerce. Proposals were due by January 6,2003.There were 8 responses.A Selection Committee met via teleconference on January 15,2003.By unanimous vote, DHittle &Associates,Inc.was selected.Chairman Conley asked if there were any objections to this selection.There were no objections andthe |._ recommendation to retain DHittle &Associates was forwarded to the SEC Board of Directors for final approval.d.John Heberling,Program Manager,was introduced and provided abasicbackgroundofhisworkexperienceandthatofDHittle&Associates. Heberling expects the Task |deliverable,a report on the Juneau/Hoonah and thePetersburg/Kake Intertie segments,to be completed by March 22™Task Il,a larger study encompassing the entire SE Alaska Intertie Project,will becompletedbyMay2277, e.Bill Allen,State Director for USDA -Rural Development presented the Intertie Committee with a check for $100,000 for the funding for this study.Allen also thanked Keith Perkins,from the Sitka office of Rural Development,for all his hard work on this project. C:\Documents and Settings\Administrator\My Documents\Southeast Conference Intertie Coordinator\Meeting Notes\2003 January 22 FINAL Intertie Committee meeting notes.doc Page I of 3 5.RUS Grant a.Carlson told the Committee that a decision had been made not to apply for this grant.The RUS grant was primarily focused towards projects that are'construction-ready'and it was determined through conversations with RUS personnel that our projects would not meet this criteria.Dave noted that this is an annual grant and we should be in a better position to apply for it next year. 6.Swan/Tyee Update a.Tom Lovas,CEO of the Four Dam Pool Power Agency,informed the Committee that the Agency and the City of Ketchikan are in the process of resolving issues pertaining to the transfer of ownership of the Tyee-Swan Intertie project from Ketchikan to the Agency.A resolution was passed by the Agency supporting assignment following completion of reviews of design, permits and contracts.A technical committee will be formed to finalize interconnection designs and operating agreements.The construction contract to complete the remaining clearing and installation of towers and conductor has been advertised for bids,and the project is expected to be completed and on-line in 2005., Bob Loescher asked Lovas if House Bill 528,which provides $20 million in debt reimbursement for the project,has been implemented yet and what theprojectedcostoftheintertiewouldbe.Lovas stated that no borrowings under HB528 have been made as of yet,and that the cost of the Intertieisexpectedtobeapproximately$77 million.z 7.Lobbying Efforts a.Conley reported that the Intertie Committee would not be hiring a lobbyist at the present time.The time frame for the trip to Washington DC would probably be late March and/or early April.He suggested that a close watch be kept on discounted seats through Alaska Airlines.This would be the key factor for that meeting.Also,the Task |report from DHittle &Associates will be completed and in-hand by the time we go back to DC. b.Attendees should be representatives of the region. c.Conley said that the Legislature would be asked for a grant of at least $150,000 to pay for the continuation of the Southeast Conference Intertie program and will focus on House Committee members d.Resolution requesting support of Southeast Conference will be put on the web site.This will aid communities,utilities and organization in making sure they have all information necessary to support this project through writtencommunication. - ™...fe.eG 8.Legislative Activities a.Conley stated we need to make our requests known to "staff on the hill'as it would be to our advantage.Some staff were not aware of Intertie's effortsafdprogress.Carlson will develop a bulleted list of talking points for legislative visits. 9.Next Meeting Date a.The next Intertie Committee meeting will be held at the Mid-WinterSummit,March 18"-20th,2003.A specific time or date has not been determined. 10.Other Business/Comments Jackson asked what kind/type of organization will eventually be owning/operating the Intertie.Carlson stated that we shouldn't try to 're-invent the wheel'if other areas of the state or country already have working models in place.Carlson added that continued evaluation of the legal organization/entity will take place and,additionally,the engineering study that will start shortly will provide some research into this issue.At a meeting scheduled for January 23"with the Forest Service,Carlson noted that the projects will be "laid out on the table”so the Forest Service has a good understanding of what we are trying to accomplish. Jackson invited everyone to attend the "Salmon for Success”conferencetobeheldinJuneauonFebruary10"11",&12"at the ANB Hall. The meeting was adjourned. ®, :-- .Southeast Conference pan,....P.O.Box 21989 Juneau Alaska 99802-1989 -Tel.(907)463-3445 Fax (907)463-5670 March 3,2003 Senator Ted Stevens .522 Hart Building Washington,DC 20510-0201 Senator Lisa Murkowski 322 Hart Building Washington,DC 20510-0201 Congressman Don Young 2111 Rayburn Building Washington,DC 20515-0201 Subject:Appropriation Requests for Southeast Alaska Intertie Project Dear Senator Stevens,Senator Murkowski and Congressman Young, As you are aware,Southeast Conference has been working with its member communities,utilities and other organizations in Southeast Alaska on a project to construct an electrical Intertie system in Southeast Alaska.This vital project will eventually enable most of the communities in the region to share the hydroelectric generation resources that are widely available throughout our region of the State. Attached to this letter are specific requests for project funding for the Juneau-Green's Creek- Hoonah and the Petersburg-Kake Intertie segments.Both of these projects received unanimous prioritization from the Southeast Conference Intertie Committee membership at a meeting heldin.November,2002.Alaska Electric Light &Power (AEL&P)has been working diligently on theJuneau-Green's Creek-Hoonah Intertie for several years and Southeast Conference endorsesandsupportstheirefforts. Also attached is a Background Paper describing the work of Southeast Conference on this important project for Southeast Alaska over the past several years. Please feel free to contact me anytime at your convenience if you have questions or comments. Respectfully, nor Dave Carlson Southeast Conference Intertie Coordinator 907-772-4269 dcarlson@alaska.net cc.Lisa Sutherland,Deputy Chief of Staff,Appropriations Committee,Senator Ted Stevens Anne Gibson,Legislative Director,Congressman Don Young Justin Stiefel,Chief of Staff,Senator Lisa Murkowski George Lowe,Legislative Director,Senator Ted Stevens Karina Waller,Senator Ted Stevens . SENATOR TED STEVENS -FISCAL YEAR 2004 PROJECT REQUEST FORM._[PLEASE FILL OUT ONE REQUEST FORM,BOTH PAGES,FOR EACH REQUEST} REQUESTS ARE DUE BY MARCH 1,2003 Date-Request Submitted:3/6/03 Priority:1 of 1 Name of entity/group requesting item:Southeast Conference Contact Information in Alaska: Name:Dave Carlson,Southeast Conference Intertie Coordinator Address:P.O.Box 329,Petersburg,AK 99833 Work Number:(907)772-4269 Cell Number:(907)254-0555 _E-mail Address:dcarlson@alaska.net } Contact Information in Washington,D.C.(if any): Name: Address: Work Number:Cell Number:Fax No: E-mail Address: Project Name/Description: 1)Juneau/Green's Creek/Hoonah Intertie Project:63.5 miles/$41 million dollars. 2)Petersburg /Kake Intertie Project:47 -60 miles/$16 -$35 million dollars depending on route and configuration. (Please see attached project descriptions for explanation of both projects) The Intertie Committee of Southeast Conference unanimously endorsed both projects as the next Intertie segments to be added to the SE Alaska Intertie system.The Juneau/Greens Creek/Hoonah project will need the substantial portion of the requested funding in order to proceed.Much of the design work has been completed and is closer to being 'construction-ready'than the .Petersburg/Kake Intertie.However,the Petersburg/Kake project will require a small level of funding for to begin design,planning and permitting activities. 'Amount of federal funding requested for FY 2004:- Juneau/Greens Creek/Hoonah Intertie Project:$15,000,000 . =* Petersburg/Kake Intertie Project:$500,000 Amount of total federal funding needed for the program/project:$51 -70 Million Number of years to fund this project:The Juneau/Green's Creek/Hoonah will require funding as quickly as possible.The Petersburg/Kake project will most likely not be 'construction-ready'for a couple years until design,planning,and permitting activities have been completed. Matching funds (State,local,private or other):The Juneau/Green's Creek/Hoonah and the Petersburg/Kake Intertie segments are a portion of the overall Southeast Alaska Infertie Project.The funding package for the Swan/Tyee Intertie segment includes significant non-federal sources.Alaska Electric Light &Power has,to date,expended 3 million dollars of private funding for the first 11 miles of the Juneau/Greens Creek/Hoonah segment.The State of Alaska Legislature also appropriated $150,000 to Southeast Conference in FY2003 to continue progress on the Southeast Alaska Intertie project.In addition, Governor Murkowski has included a $160,000 appropriation in the FY04 State of Alaska budget for continued work by Southeast Conference on the Intertie Project. What appropriations bill are you seeking an item?(if known)Energy and Water Department:Department of Energy Bureau:National Energy Lab (if known)Idaho Account:Hydropower Sub-account: (if known)(if known) Was it in a previous appropriations bill?No If so,how much? What bill(s)?What fiscal year? Department:Dept.of Energy Bureau:National Energy Lab- Idaho Account:Hydropower--DOE Sub-account: ls it in President Bush's Budget for FY 2004?No If so,how much? What is the authorization for the funding for this project (P.L.cite)--PL 106-511 aayOther groups supporting/opposing:Supporting:Southeast Conference and the entire membership of the Southeast Conference Intertie Committee.We have numerous Resolutions and letters from communities,utilities and organizations in Southeast Alaska supporting these two projects.These will be forwarded to your office within the next month. Opposition:None Interest Groups?Agriculture ___:/Communications ___/Community Facility X Defense __/Education__/Energy X /Environment ___/Fishing __Health _/Housing __/Judiciary__/Natives__/Postal___/Timber__- Small Business__/Transportation __-/Veterans___-s/Women __ Language need?Yes Xx.No,If yes,Report X_or BillIfneeded,attach the language and a brief explanation of the relevant issue. This form should be mailed to following or faxed to (202)224-7965: Senator Ted Stevens Senate Committee on Appropriations,$-128 The Capitol Building Washington D.C.20510 ed Southeast Alaska Intertie Project .Soe Background March,2003 The concept of interconnecting the communities of Southeast Alaska has been discussed for decades.Southeast Alaska has tremendous hydroelectric potential with many projects currently on-line serving the major population centers in the region. However,because of the lack of an interconnected grid in Southeast Alaska,there are still many communities that are still 100 percent reliant on fossil fuel generation to meet their power requirements. in 1997,the Southeast Conference Intertie Committee was formed including representation from a broad range of utilities,municipalities and organizations from all over Southeast Alaska.A study was commissioned by Southeast Conference and completed by Acres International to evaluate the technical feasibility of an interconnected Intertie system throughout Southeast Alaska.The results of the study served as the basis upon which S-964 was passed and signed into law in 2000.This bill authorizes the Southeast Alaska Intertie Project with 80%federal participation on a projected cost of $480 million. Southeast Conference then began an initial study on the formation of the legal entity that will own and/or operate the Intertie system.This organization will likely be comprised of members from the local utilities,municipalities and other organizations with an interest in the system.In 2002,Southeast Conference received a $150,000 grant from the Alaska State Legislature to continue work on the Southeast Alaska Intertie Project.Dave Carlson,who previously worked for the Four Dam Pool as the Divestiture Project Coordinator was hired on November 1,2002 by the Conference to coordinate and head up efforts on this vital project for Southeast Alaska.Governor Murkowski has included a $160,000 appropriation in the FY04 State of Alaska budget for continued work by Southeast Conference on the Intertie project., The Swan-Tyee Intertie was identified as the first leg of the entire system,and was well on its way at the time.of the Authorization legislation.It is currently under construction and the project is close to fully funded.When completed in 2005,a transmission line will extend from Ketchikan to Petersburg tying in the multiple generation resources along the approximate 170 miles of Intertie. The Southeast Conference Intertie Committee met on November 22,2002 and unanimously prioritized the following two projects as the next Intertie segments to be added into the Southeast Alaska Intertie System: 1.Juneau/Green's Creek/Hoonah Intertie (63.5 miles/$41 Million dollars) 2.Petersburg/Kake Intertie (47 -60 miles/$16 -$35 Million dollars depending on route and configuration) -:Mm elee Both of these projects will serve communities that are 100%dependent upon diesel generation to meet their power requirements.This transmission line from Juneau will also make available hydroelectric power for the Green's Creek mine that could displace approximately 5 million gallons of diesel fuel annually.Over 400,000 gallons of diesel fuel would be displaced annually by the interconnection to Hoonah and the Intertie to Kake would displace over 300,000 gallons of diesel fuel annually.Project descriptions for these two projects are attached providing specific details and information for each of these Intertie segments. At that same meeting,the Intertie Committee agreed to conduct an engineering/economic analysis of these two segments as well as for the entire Southeast Alaska Intertie System as proposed by the Acres International study conducted in 1997.This $100,000 study is being funded by USDA,Rural development. An engineering firm to conduct the study has been selected and the work is presently in progress.A report on the Juneau/Hoonah Intertie and Kake/Petersburg Intertie is due from the contractor by the end of March,2003 and the second phase report covering the entire Southeast Alaska Intertie Project will be delivered at the end of May,2003. CIN:Southeast Conference Intertie Committee Intertie Committee meeting on January 22,2003 Membership: Alaska Electric Light &Power | City of Kake Tlingit Haida Regional Electric Authority Alaska Power &Telephone Thomas Bay Power Authority Kake Tribal Corp City of Ketchikan City of Craig - City of Petersburg City of Sitka Tlingit-Haida Central Council Organized Village of Kake Juneau Area Power Supply System March 2003 - The Juneau Area Power Supply System is a $76 million plan to provide a long term, reliable and,to the extent possible,renewable energy supply for Juneau and the surrounding area of Southeast Alaska.There are two main elements of the plan:The $35 million,15-megwatt Lake Dorothy Hydroelectric Project and the $41 million,63.5-mile Juneau-Greens Creck-Hoonah intertie. The Juneau-Greens Creek-Hoonah intertie is one Ieg of the overall Southeast Alaska Intertie System,which has been authorized by Congress.Hydroelectric energy delivered across this Intertie will completely replace diesel-generated energy in Hoonah and at Greens Creek.In Hoonah,the intertie will displace over 400,000 gallons of diesel fuel annually,supplying hydroelectric energy to 860 residents and 435 homes.In addition,the Intertie will displace over 5 million gallons ofdiesel fuel used annually to generate electrical energy at Greens Creek.The Juneau-Greens Creek-Hoonah intertie can eventually be extended beyond Hoonah to serve Tenakee,Angoon,Sitka and Kake,and connect with other intertie legs south and north of Juncau. Alaska Electric Light &Power Company (AEL&P),the electric utility serving the City & Borough of Juneau,and other private sources will finance the Lake Dorothy project and about $6 million of the Juneau-Greens Creek-Hoonah intertie.In fact,AEL&P has already constructed the first 11 miles of the intertie.This 11-mile,Phase 1 segment extends from the Douglas Bridge to the north end of Douglas Island.Extension ofthe intertie to Greens Creek and Hoonah will allow the Lake Dorothy project to proceed. Federal matching assistance of $35 million is requested to complete the remaining 52.5 miles of the Juneau-Greens Creek-Hoonah intertie.Phase 2 of the intertie will cost $15 million and extend from north Douglas Island to Greens Creek on Admiralty Island. Phase 3,the final phase.will cost $20 million and go from Greens Creek on Admiralty Island to Hoonah.If matching funding is provided,both Phases 2 and 3 could be built in 2004-2005.When complete,the intertie will consist of 34 miles of submarine cable and 29.5 miles of overhead line. Hoonah and the Greens Creek Mine currently are dependent on stand-alone diese! gencration.The intertie will allow diesel-fucled power generation to be replaced with clean,renewable hydropower and displace over 5.4 million gallons of diesel fuelannually.The intertie will substantially increase economic development opportunities iv Hoonah.where electric rates are currently in excess of 32 cents per kilowatt-hour.In addition.stable low cost hydroelectric energy to the Greens Creek Mine will help to assure its economic viability and preservation ofthe current 275 full-time jobs.The same benefits would accrue to other communities that could be connected later.Tlingit-Haida Regional Electrical Authority,the electric utility serving Hoonah,and the Greens Creek Mine actively support construction of the Juncau-Greens Creek-Hoonah intertie. JUNEAUGREENS CREEK-]__,{|_|OONAH INTERTIE (JGCH U PHASEI(COMPLETE) xi JGCH PHASE II JGCH PHASE Il -- CHICHAGOF ISLAND ADMIRALTY 'ISLAND SCALE 10 MILES JGCH INTERTIE -COMPLETE -----JGCH INTERTIE -TO BE CONSTRUCTED EXISING OVERHEAD T-LINE & SUBMARINE CABLE ----PROPOSED OVERHEAD T-LINE LAKE DOROTHY @ PROPOSED LAKE DOROTHY POWERPLANT +START POINT OF JGCH INTERTIE agy”ae ae LAKE DOROTHYPOWERPLANT XK -Fane' tx v349wr SNETTISHAM\POWERPLANT 7)oy asCRATERLAKE'GA p L a Y ;c .Petersburg to Kake Intertie Project Requested FY04 Appropriation:$500,000 The Petersburg to Kake Intertie is one of two projects that were prioritized by the Intertie Committee of Southeast Conference in November,2002 as segments that should next be added to the Southeast Alaska Intertie System.This project would involve the construction of between 46 and 59 miles of transmission line (depending on the route selected)interconnecting the communities of Petersburg and Kake.The potential long- term benefits of the Intertie would be to use surplus generation from the Lake Tyee hydroelectric project to offset diesel generation in Kake. Kake is a community with a population of approximately 710 people located on the northwestern tip of Kupreanof Island in Southeast Alaska.Electricity is presently supplied to the community by the Tlingit-Haida Regional Electrical Authority (THREA) using diesel generators.THREA's electric system in Kake is isolated and is not interconnected with any other communities.In 2000,the peak demand of the Kake system was 1,016 kilowatts (kW)and the total energy generation was 4,219 megawaitt- hours (MWh). The 20,000 kW Lake Tyee project,which is interconnected to Wrangell and Petersburg via an existing 69/138 kV transmission line,delivers power to those two communities and has an annual surplus of approximately 80,000 MWh.The delivery of this surplus power from the Lake Tyee project would displace around 310,000 gallons of fuel annually used to generate electricity in Kake.The Intertie will substantially increase economic development opportunities in Kake where electric rates are currently in excess of 37 cents per kilowatt-hour. The estimated cost of this project,based on a report completed by R.W.Beck in 1996,is between $16 and $35 million dollars based on route alignment and transmission line configuration.This mostly over-land transmission line would parallel existing Forest Service roads over the majority of the distance between Petersburg and Kake.One,and perhaps two,short submarine cable crossings would be required depending on the final route selected.The cost estimate is currently in the process of being updated by D. Hittle &Associates in a study commissioned by Southeast Conference.A preliminary report is due by the end of March,2003.The transmission line will be designed and configured for future interconnections to Sitka and north to the planned Juneau/Hoonah Intertie. Southeast Conference is requesting a $500,000 appropriation to begin design and permitting activities including route selection for this Intertie segment. tesa ;yo)\/\/TranamissionLineCorridor.shp:i . pP .Q "AZ Tongass8horeine*Towns.shp Roade.shpNon-National Forest Land.shp Southeast Intertie Direct Current Transmission Concept Recent advances in high voltage direct current transmission (HVDC)technology by ABB Power Systems may have some application in the potential development of the Southeast Intertie.As the name implies, direct current intertie systems transmit electrical power in a direct current rather than in a conventional alternating current (AC).In order to convert the direct current to conventional useable alternating current, interface converters are installed at the end of direct current transmission lines.Historically,the high cost of the converters has rendered HVDC less economic than conventional AC systems.New technology developed by ABB Power Systems,one of the world's largest electrical equipment manufacturing companies,has reportedly resulted in lower cost interface converters.Although this technology has been commercially demonstrated in one application,it still should be viewed as in its evolutionary stage of development. According to the literature,application of HVDC systems offer some capabilities that appear to be well suited to use in small power level,widely separated systems,similar to what now exists in Southeast Alaska.The key advantages claimed for the system are lower equipment cost (particularly with long distance lines),lower installation costs and fewer impacts to the environment than for equivalent AC lines. Furthermore,it is suggested that due to a lighter line weight and the requirement for two conductors versus three for an AC line that a submarine line could be installed for at a lower cost than a conventional AC system.ABB indicates that "low impact”overhead designs could be used in lieu of high tension,tall tower designs required for AC systems thus minimizing both visual and environmental impacts.From an operations standpoint,HVDC offers significant advantages because it allows for isolation of generation systems thus eliminating AC system concerns of voltage and frequency control.This advantage could represent significant savings,especially in the context of an electrical interconnection of all Southeast Alaska. Based on a limited literature review,the primary concern related to development of HVDC system stems from lack of operating history and experience.Due to ABB's aggressive marketing efforts coupled with the numerous benefits associated with this technology,there are,in addition to the initial commercial demonstration project,two projects (one now under construction)that will employ HVDC technology in the next two years.The rate of development and incorporation of this technology to proposed transmission projects will likely be significantly influenced by manufacturer warranties. With regards to use of HVDC technology for the Southeast Intertie,AP&T's proposal includes a new routing alignment for the proposed intertie that would include lengthy underwater sections versus high-tension overhead lines.If this technology,as proposed,is selected the following is a listing of both the benefits and concerns: Benefits: e Minimize environmental impacts e Less visual impact e Narrower right-of-way e If applicable,greater portions of the line could be located offshore e Lower cost (dependent upon line distance) e Reduces operational problems associated with connecting isolated generating sources Concerns: e New,commercially unproven technology e Lack of operating history e Increase risks with submarine crossings e Additional maintenance complexities e Increase in repair cost e Increase in the duration of down time/outages,if any ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY {=ALASKAme)=SENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE,ALASKA 99503 907 /269-3000 FAX 907 /269-3044 Facsimile Transmittal To:Par CLANCY COMPANY: Fax #:(503 )_298-3972 FROM:Kerry LavecrDATE:1-11-99TIME:$235 9M Number of pages including cover page:ZO Transmittal Contents:far,Gitechsp om Ae Fotlywing QO Prien Erenmad' Fiksr YVearr or A feeps6o Seope FoR oon Review.XZ Yyavenr Yer Rtvieweo Ts Bor Tees ter-Er-wseute G2 fac fo2n You T0 loon Ar Zr SiveeDickJNPrcaresOnHisCoviatingTearirP20e9eGcy Covéns Your FssvuEs A5 WELL Comments: @ KPU Answers 13 Quests we 30 BEGANDIAG THE Pacyecr,Fret ANntimMe Ana (DENCE rt$ @ Some pisos From Keo Ktcanowm,THe Lurene,TheseAZETHEDocuntatsREFERREDTOAy"Arracwvenr GP se"A”yas THE Q ve6 77 ON RAD ANS Aen Pocunt EWTNotice:This facsimile may contain confidential information that is being transmitted to and is intended only for the use of the recipient named above.Reading,disclosure,discussion, dissemination,distribution,or copying of this information by anyone other than the named recipient or his or her employees or agents is strictly prohibited.If you have received this facsimile in error,please immediately destroy it and notify us by telephone,(907)269-3000. PAT,THEnE 16 Mor more Tro you,wee NEED HoroonweeGWEYouSeaewuaTOFAvTdenABooyH:\ALL\TAMMY Facsimile Transmittal Cover Page.docWHATdmTACK FB 0dT He ®Kreimkons Kunwle9 peut Olex2503-288 -39 72 R907 269 4645 KE/Div OF ENERGY O1/08/99 10:32 P.002/008 January 8,1999 To:Dave Gray CH2M Hill Dennis McCrohan AIDEA Keith Laufer AIDEAFrom:Dick Emerman veDivisionofEnergy Attached is my first cut to define a scope of work for the Swan-Tyee Intertie .economic and financial review.Please note: 1.Keith -I think the "Financial Review -Scope of Work"beginning on page 4 probably overlaps with the work you had in mind for AIDEA's financial advisor.Please take a look.Maybe we need only one financial review, not two separate ones as we discussed the other day,and maybe the financial advisor should take the lead with CH2M Hill providing any needed support. 2.Dave -My understanding is that Dennis will be back in the office on Monday or Tuesday and that we'll call you at that time to discuss further.| haven't gone over this with anyone yet and there could be significantchanges,but this should be enough for a start. cc:Percy Frisby Division of Energy -BN07 89 add ORAADIT OF ENERGY O1/08/99 [0:32 P.003/008 Swan-Tyee Intertie Evaluation January 8,1999 A.Background and Purpose of Study Construction of a transmission line linking the Swan Lake and Tyee Lake hydro projects in southeast Alaska has been the subject of several studies since the mid-1980s.Most recently,the feasibility of the proposed Swan- Tyee Intertie was evaluated in the following two documents: °Power Supply Planning Study (Initial Draft),prepared by R.W.Beck for Ketchikan Public Utilities,December 1996., °Power Supply Planning Study (1998 Update),prepared by R.W. Beck for Ketchikan Public Utilities,February 23,1998. According to the 1998 Update,the estimated capital cost of the Intertie is $73.2 million in 1998 dollars.State and federal grant funds totalling approximately $25 million have either been approved or are currently available for the project.Ketchikan Public Utilities ("KPU”)has asked the Alaska Industrial Development and Export Authority (the "Authority")to consider issuing $40 million in State bonds to finance most of the remaining project costs. To consider this financing proposal,the Authority needs to obtain an independent review of the economic and financial feasibility of the project 1.The economic review is needed to compare the underlying life- cycle costs of the Intertie scenario and Its primary altematives.Its purpose is to focus on basic economic logic;specifically,to determine which scenario meets the estimated long-term power requirement in the Ketchikan area with the lowest present value of resource costs across a broad range of plausible assumptions. 2.The financial review Is needed to determine: a.the minimum revenue and security commitments needed for the Authority to issue $40 million in investment grade bonds for the project; b.the minimum and maximum rates that could be charged to KPU for power delivered over the Intertie in view of these commitments,in the context of the Four Dam Pool power sales agreement and KPU avoided costs;and C the possible allocation of financial benefits to KPU ratepayers,the State,and the other Four Dam Pool participants. O90%G69 4645 DCRA/DIV OF ENERGY O1/08/99 10:33 P.00d/008 Swan-Tyee Intertie Evaluation January 8,1999 Page 2 B.Economic Review -Scope of Work The intent of this assignment is to review and,as necessary,to build upon the work that has already been completed for KPU.This implies the following: 1.The contractor is expected to subcontract with R.W.Beck for the use and operation of Beck's Swan-Tyee economic model.The idea is to use the same approach that was successful in the Sutton- Glennallen intertie review:to evaluate the model and,if necessary, provide Beck with model revisions needed for the present analysis; and to direct Beck to run the model with sets of assumptions provided by the contractor. 2.The contractor will use the estimated capital and O&M costs for the Intertie and for other resource altematives as they appear in the 1998 Update prepared by Beck unless more recent estimates are available and are judged by the contractor to be suitable for planning purposes.The Mahoney Lake hydro project is one case where the contractor must consider the magnitude and reliability of more recent cost estimates.Intertie O&M costs must also be determined to include whatever annual contributions are necessary to fund an adequate renewal and replacement fund. 3.Load forecast scenarios will be based on the following two reports: a.Electric Load Forecast for Ketchikan,Metlakatla,Petersburg, and Wrangell,Alaska:1990-2010,prepared by ISER for the Alaska Energy Authority,June 25,1990. b.Ketchikan Public Utilities Electric Load Growth Study, prepared by ISER for KPU,June 5,1998. KPU indicates that the latter study underestimated 1998 generation by a considerable amount,which suggests that future years may be similarly underestimated.The contractor will need to determine the reason for such variance In the initial year of the most recent forecast and determine whether further adjustments are warranted in future years, Task 1 Review load forecasts cited above and consult with ISER and KPU. Establish high,medium,and low forecasts of energy and peak demand over the first 20-years of the economic analysis period. Bai 269 4645 MCKA'DLT OF ENERGY O17 08/99 10:33 P.005/008 Swan-Tyee Intertie Evaluation January 8,1999 Page 3 Task 2 .Review Power Supply Planning Study,including the 1996 Initial Draft and the 1998 Update cited above.Review the R.W.Beck economic model and the economic analysis methodology used in the two studies. In both studies,the annual cost of power delivered over the Intertie was assumed to be equal to the actual export volume of energy times the Four Dam Pool wholesale power rate.Both the capital and O&M costs of the Intertie were assumed to be zero.These assumptions must be reversed for purposes of this economic review.There is zero resource cost attached to the production of surplus power from the Tyee Lake hydro project.However,the full capital and O&M costs of the Intertie must be accounted for in estimating the life-cycle cost of the Intertie scenario. Provide Beck with any model revisions determined to be necessary, including those described immediately above. Unless the contractor determines them to be inappropriate,elements of the economic analysis that can be carried forward without change include (but are not necessarily limited to): a.Zero inflation. b.A 20-year projection period,during which loads,real prices, resource additions,and other costs are allowed to vary. c.A 50-year analysis period,with all costs,loads,and other assumptions held constant for the final 30 years. d.Definition of reserve requirement. e.High,medium,and low fuel prices. f.3.0%rea!discount rate. g.Expected loads for Wrangell and Petersburg. h.Diesel generation efficiency and estimated line losses. In consultation with KPU,R.W.Beck,and the Authority,determine whether there are any significant uncertainties or weak points in previous analyses that need further attention.For example,the contractor should determine whether there are any issues related to water availability at -B907 268 Abd AiDiT OF ENERGY O17 08/99 10:33 P.006/008 Swan-Tyee Intertie Evaluation January 8,1999 Page 4 Tyee Lake that could further constrain the volume of surplus power available for export over the Intertie. Task 3 Define a limited set of primary alternatives to the Intertie consisting of those which previous studies have found to be most competitive.Define and characterize the reliability of capital and O&M cost estimates for each alternative.Include as one additional alternative the construction of both the Intertie and the Mahoney Lake hydro project. Although the Intertie capital cost presented in the 1998 Update will be used in the present analysis,the Authority also requires that the contractor conduct an assessment of the Intertie cost overrun risk in terms of probability and amount. Task 4 Define the set of base case assumptions and a sufficient range ofsensitivitycasestoevaluateabroadrangeofplausibleassumptions. Provide these cases for R.W.Beck to input to the economic model. Deliverables Twenty copies (and one camera-ready copy)of a draft report must be provided to the Authority no later than March 15,1999.The draft reportwillfullydescribetheanalysisundertakenbythecontractoranditsresults.An executive summary must be included. Following receipt of comments on the draft from the Authority,the contractor will make any necessary changes to the analysis and produce a final report.Fifty copies (and one camera-ready copy)of the final report, including an executive summary,must be provided to the Authority within two weeks of the receipt of comments,unless additional time is approved by the Authority to account for any substantial additional work that needs to be completed. C.Financial Review -Scope of Work Task 1 The Authority has determined that interest on bonds for the Intertie would be taxable.In consultation with the Authority and with KPU,estimate the likely range of interest rates and annual debt service on investment grade, taxable bonds that would provide $40 million in proceeds for Intertie development. @907 269 4645 _RASDIV OF EMERGY O1/08/99 10:34 P.007/008 Swan-Tyee Intertie Evaluation January 8,1999 Page 5 Task 2 Background: Construction of the Four Dam Pool was financed in part by a loan from the State.The Four Dam Pool power sales agreement provides that the participating utilities will pay annual debt service to the State in repayment of that loan over the term of the agreement,which expires in 2030. Presently,the amount of annual debt service Is defined as 4.0 cents per kWh times the number of kWhs delivered from the projects to the utilities each year -approximately $11 million at this time.Legislation enacted in 1993 allocates 40%of this annual debt service to a "Southeast Energy Fund,”which is intended to help finance the Swan-Tyee Intertie.This 40% share is not a dedicated source of revenue,however,and can be appropriated by the legislature for any purpose at any time. The Four Dam Pool power sales agreement provides that the participating utilities can withhold debt service that would otherwise be due the State if the funds are needed to repair certain project deficiencies.This is referred to as the agreement's "self-help”provision.This adds significant uncertainty to the flow of funds into the Southeast Energy Fund in any future year.For example,self-help withholding is expected to reduce Four Dam Pool debt service by $1.6 million next year. KPU has proposed that the annual flow of funds into the Southeast Energy Fund be used to pay the debt service on the $40 million AIDEA bond issue for the Intertie.Additional security will be needed for the bond issue to earn an investment grade rating. Assignment: In consultation with the Authority and KPU,describe and evaluate all viable options to provide the necessary debt service revenue and repayment security.Assume that no other debt will be required to finance intertie construction -i.e.that additional grant funding will be obtained for remaining capital costs. Task 3 Based on analysis of avoided cost,determine the maximum rate per kWh that KPU could pay for energy delivered over the Intertie without incurring a net increase tn Its overall costs. Assuming Intertie O&M costs are recovered from rates for delivered energy,determine the O&M component of Intertie energy rates for the B90?269 4645 RA/DIT OF ENERGY D1 /CEF99 103d P0087 008 Swan-Tyee Intertie Evaluation January 8,1999 Page 6 high,medium,and low load forecasts.The difference between the maximum rate and the O&M component is the amount that is available either to help pay debt service or to allocate as a financial benefit to KPU, the State,and the Four Dam Pool. Task 4 Describe and analyze the Tyee Lake power sale terms that have been proposed by KPU and by the Four Dam Pool,and determine the extent to which these proposals are compatible with the revenue and security requirements that would be needed for the $40 million bond issue and with the rate constraints identified in Task 3. Task 5 Present no more than three scenarios under which the Authority could issue investment grade bonds to raise $40 million for Intertie development, with each scenario consisting of a set of commitments,rates,and terms from KPU,the Four Dam Pool,and the State sufficient to provide the necessary revenue stream and security. Deliverables Twenty copies (and one camera-ready copy)of a draft report must be provided to the Authority no later than March 31,1999.The draft report will fully describe the analysis undertaken by the contractor and its results. An executive summary must be included. Following recelpt of comments on the draft from the Authority,the contractor will make any necessary changes to the analysis and produce a final report.Fifty copies (and one camera-ready copy)of the final report, including an executive summary,must be provided to the Authority within two weeks of the receipt of comments,unless additional time is approved by the Authority to account for any substantial additional work that needs to be completed. enKPU ANSWERS To Questavy Pose)27 REA Statewide Questions 1.What is the long-term benefit to the State of the SE Intertie? The long-term benefits to the State of Alaska are: A)Additional revenue to the State through sales of additional energy from the State's Tyeeproject,and; 7 B)Improved infrastructure directly supporting the viability of Southeast Alaska,a region geographically and economically vital to the State. 2 What are the benefits of distributed vs.inter-connected generation for the Southeast? We believe the benefits of the Southeast Alaska Intertie can best be summarized by the followingtwoquotations: Swan-Tyee Intertie Final EIS "The underlying purpose and need to which this project responds is for KPU to 1) provide a reliable and efficient source of power for the City of Ketchikan's intermediate and long-range needs at reasonable rates while 2)establishing an important link in the long-proposed electrical network for southern Southeast Alaska so the 3).more communities would have access to more power sources or more power customers.”[pg. 1-6]_ Southeast Alaska Electrical Intertie System-White Paper | (developed by Southeast Alaska communities December 1997) "At present,most every community in Southeast Alaska generates its own power in a largely isolated electrical environment.In an area with rich hydroelectric potential,most smaller communities remain entirely diesel dependent.Even in larger communities such as Juneau,Ketchikan and Sitka which currently have hydroelectric power,those facilities are reaching the limit of their capacity and supplemental diesel power is being pursued or contemplated.This,despite the fact there is adequate hydroelectric potential to serve all of Southeast for decades to come if an intertie system existed to transport power to the load centers.The communities of Southeast Alaska therefore support the concept of a southeast electric grid as a means of reducing or avoiding diesel dependence,encouraging economic development and stabilizing and equalizing power rates.” 3.What is the currentfinancing plan including specifics? KPU invested significant time and energy into a financing plan whereby the City of Ketchikan would accept the $20 million loan authorized by the state in 1993.We proposed in return that the State of Alaska offset power rates such that KPU could cover debt service and O&M costs. Although this plan seemed to offer the best compromise,it was ultimately not acceptable to either the State or the City.The State was concerned that rate reduction was excessive,and our analysis demonstrated that the financial burden to the City was unacceptable. KPU has recently proposed that a mutually satisfactory solution might be to devote the cash flow set aside in the 1993 legislation for the Southeast Intertie (40%of the Four Dam Pool payment to the State)to a bond issued by the State for the project.This would provide sufficient capital to cover most of the current shortfall.KPU would propose that the $20 million currently set aside by the State for the $20 million loan would be released for other purposes. This proposal is provided as attachment (A).KPU stands ready to negotiate the specific details of the plan. 4.What are the economic benefits of the Southeast transmission corridor for multiple uses such as fiber optics,communications,etc,? Although the current design for the Swan-Tyee Intertie does not include provisions for fiber optics,that can be modified if that appears to be economically justified or desirable.In fact, KPU has been in contact with Alaska Fiber Star regarding a fiber spur between Juneau and Ketchikan via Petersburg and Wrangell.If the inclusion of fiber optics in the design is an option AIDEA or others wish to pursue,KPU is prepared to negotiate the terms and revise the design.. With respect to other multiple uses,the Final EIS offers our best and most comprehensive review of this matter.In particular,the corridor was specifically routed along a logical road corridor to minimize environmental impact of that future development. J.What municipal actions are necessary to implement the financing plan? The City of Ketchikan has approved the concept as presented in attachment (A).The City can continue to act as the project manager and would take such action as we have in the past to authorize and oversee project activities.City Council approval would be needed to ratify a power sales agreement with the Four Dam Pool and if needed a financing agreement with the State of Alaska. Regional Questions 1.What are the current SE Intertie project costs assumed for Four Dam Pool debt service, R&R,and Four Dam Pool O&M costs? As an interruptible power sales agreement has not been executed with the State and the Four Dam Pool,these issues are all subject to negotiation.Generally KPU assumes that construction of the Intertie would be state owned,that energy would be sold to KPU at or near current Four Dam Pool rates but is dependent on KPU's continuing risk and responsibility for the project. These are issues KPU assumes are subject to negotiation and we stand ready to.begin that process with the State and the Four Dam Pool. 2.What is the cost ofpower sensitivity in Petersburg,Wrangell,and Ketchikan to extended transmission line outages,e.g.60 days,between Ketchikan and Swan Lake and between Tyee Lake and Swan Lake? Our view of the Swan-Tyee Intertie is that it allows the additional sale of available Four Dam Pool power,economically benefiting the State and the Four Dam Pool communities through revenue from an interruptible sales agreement.An outage today between Swan Lake and -Ketchikan would not have a defined cost of power sensitivity,the sale would simply resume at the wholesale rate when service was restored.Lost revenue from that outage would ultimately be taken into account in setting the Four Dam Pool rate for the next year.We have a similar view of. an outage that would affect a Four Dam Pool interruptible sale to Ketchikan over the Intertie. The thrust of this question may be to suggest terms in an interruptible power sales agreement that would define costs,risks and responsibilities for outages.KPU stands ready to negotiate those terms. 3.What is the cost ofpower impacts of extreme high and low water scenarios of Tyee and Swan Lake occurring together or in opposition? Raytheon Infrastructure Services conducted an intertie operations study in April,1995 to evaluate the combined operation of Tyee and Swan Lake provided as attachment (B).This study includes consideration of historical water availability,but it does not draw conclusions regarding the rate impact of extreme conditions.Our view is that analysis of cost of power impacts for abnormal conditions at any of the Four Dam Pool projects cannot be considered in isolation, because the costs and revenues are ultimately pooled.For example,in a given year low water conditions at Terror Lake may be balanced by high water conditions in the Swan-Tyee system, resulting in no impact to the Four Dam Pool cost of power.We assume however that the impact of extreme low water conditions in the Swan-Tyee system would result in a reduction of interruptible Tyee sales to Ketchikan as Petersburg and Wrangell have first right to that power. 4.How do you see the revenues,costs,and risks being shared among the State,Four Dam Pool,Petersburg and Wrangell,and Ketchikan? Our view is that the sale of Tyee power to Ketchikan would be defined under an interruptible sales agreement.Ultimately,all these terms are subject to negotiation.We see a negotiated allocation of revenue to the State and the Four Dam Pool communities for the additional sales. Previously,there has been reluctance by the State and Four Dam Pool to accept either costs or risks associated with the project.Therefore,KPU has been prepared to negotiate an assumption of various costs and risks,provided the City has reasonable compensation for those costs and risks.On the other hand,we are prepared to negotiate a division of those risks,costs and compensation with the State and Four Dam Pool.Further,we have always viewed this project as an improvement to the Four Dam Pool facilities and are open to negotiating the addition of this project to those facilities. J.What are the reductions in generation reserves for Petersburg,Wrangell,and Ketchikan resulting from the Intertie and how do these reductions impact cost of power for each city? Please note our response to question 3 above.The Raytheon study utilizes a certain operational model based on assumed monthly loads and average reservoir inflows.The generation reserve, or combined storage depicted in this model varies by month and year.An example is shown for 'the year 2013 in figure 5.However,Petersburg and Wrangell have a first right to Tyee powerandweassumethiswouldhavetobeprotectedthroughresponsiblereservoirmanagement,justaswemanageourreservoirlevelstodaytoavoidextremeconditions. 6.Are there opportunities for British Columbia sales or generation purchase which are enhanced by the SE Intertie? An electrical intertie with British Columbia has been considered by various studies and at various locations.Our view is that the development of a grid in Southeast Alaska creates a greater pool of both resources and loads creating more potential for either future sales or generation purchase with the North American grid through BC Hydro. Ketchikan Questions 1.How has the actual capital and O&M cost.of the new KPU diesel generation impacted the cost ofpower?; R.W.Beck has recently calculated our avoided cost of electrical generation.That document is provided as attachment (C).We refer you to tables 6 -8 for detail of diesel costs.KPU rates have not been adjusted as a result of the addition of the new diesel engine.The City Council has largely concluded a review of KPU's budget and has eliminated a 5%rate increase from KPU's 1999 budget request. 2.How do you see the SE Intertie affecting the Mahoney Lake project and vice versa? Our view of the interrelationship of the Intertie and various small hydro projects,including Mahoney Lake,is best detailed in attachment (F). 3.What is the wholesale cost ofpower,escalation indices,reliability factors,and term of Mahoney Lake and 4 Dam Pool proposals for the power sales agreements? KPU has not received any detailed proposals for the purchase of Mahoney Lake power.We have _a general proposal from AP&T to purchase power at the Four Dam Pool wholesale rate or our avoided cost,whichever is greater. KPU had provided a draft interruptible power sales agreement to the Four Dam Pool under ourpreviousfinancingplan,which ultimately was not acceptable to either party.We are prepared to enter into negotiations for a revised interruptible power sales agreement Intertie power.We would expect to negotiate these issues in that process. 4.How do ISER load growth predictions for 1998 compare to actuals?.What new industries have been included in ISER projections?What new industries may occur or be _attracted to Ketchikan and what is the impact cost ofpower (e.g.10 MW industrial load _in 2005)?What is the impact (e.g.a 10 MW hydro plant)independent power producer -"on-line in 2005 on the cost ofpower? ISER projections for 1998 compared to our estimated actual for 1998 are: ISER base case:146,117 MWH ISER high case:.147,607 MWH ISER low case:145,794 MWH Estimated actual 1998 gross generation:164,000 MWH The summary of the ISER study is provided as attachment (H).ISER notes that they make conservative assumptions for the base case.Further,they note that they do not include new large scale commercial or industrial load in their projections.For example,they exclude the KPC sawmill because of the future uncertain of the timber industry even though KPU currently serves this load.The cost impacts of additional load and/or additional generation (independent or otherwise)are best detailed in attachment (C). J.What is the impact of the transmission right-of-way maximum timber sales or no sales, storage,and disposal on the cost ofpower? Attachment (E)considers various approaches to construction sequencing and timber handling.It also includes a comparison of capital costs for different timber sales assumptions.Generally KPU assumes that construction of the Intertie would be state owned,that energy would be sold to KPU at or near the wholesale rate depending on KPU's continuing risk and responsibility for the project.We view the cost of power as being a negotiated rate in an interruptible power sales agreement.We stand ready to enter into those negotiations with the State and the Four Dam Pool. 6.What is the cost ofpower impact offailure to receive the $4M appropriation (e.g.for 2 years). Failure to receive state and federal grant funding in general will result in delayed construction and completion,whether that is one year or ten years.The City of Ketchikan has proposed a financing scheme in attachment (A)that does rely on the 40%Four Dam Pool debt service allocation set up by the State in 1993,but also releases $20 million for other uses.Additionally, the existing federal funding of $10 million will lapse if not used by end of the federal fiscal year2000.See also our response to question 10 below. 7.What is the impact of Intertie 25%capital cost overrun and/or 25%O&M cost overrun on cost ofpower? -We assume that these impacts would be defined in a negotiated interruptible power sales agreement.Generally KPU assumes that the Intertie would be state owned,but we are prepared to negotiate an assumption or division of risk and reward,including those associated with the capital cost of the project.We stand ready to begin that process with the State and the Four Dam Pool. 8 What are the costs of power impacts of necessary coordinated and limited scheduled outages on Tyee Lake and Swan Lake on the communities? Please see our response to Regional Question 2. 9.What is the term ofthe current EIS/ROD? The EIS and Record of Decision do not have a defined term.We are advised by our consultant and the USFS that the more time that passes before construction begins,the greater risk we have that a successful argument will be made that conditions have changed enough over time to warrant a supplemental EIS. 10.What are the KPU action plans if they fail to receive any additional Federal grants? Failure to receive additional federal funding in general reduces the state's incentive to pursue bonding of the project.KPU plans in the absence of sufficient federal/state funding for the Swan-Tyee Intertie are best described in Attachment (F).See also response to Ketchikan question 6 above. 11.What is the impact on the cost of power of Tyee energy (e.g.6.8 cents/KWH or interruptible rate,say 4.0 cents/KWH)? Our view of the Swan-Tyee Intertie is that it allows the additional sale of available Four Dam Pool power,economically benefiting the State and the Four Dam Pool communities through revenue from an interruptible sales agreement.The interruptible rate is subject to negotiation. The additional revenue received from those interruptible sales would be allocated to the State and Four Dam Pool.The resulting benefit to the communities and projects could be calculated for a variety of rate scenarios.We stand ready to negotiate the terms of an interruptible sales agreement,and perform associated calculations estimating the beneficial impact of those sales totheStateandFourDamPoolcommunities. 12.Will compensation (SVC)be requiredfor the Intertie.What is the cost ofpower impact? The addition of a static var compensator (SVC)to the design has been discussed,but is not currently included in either the design or the cost estimate. 13.What is the Intertie cost ofpower difference between the second best alternative and the SE Intertie for low,medium,and high growth scenarios and what amount of investment does the reduction justify? sameteGenerally KPU assumes that construction of the Intertie would be state owned,that energy would be sold to KPU at or near the wholesale rate depending on KPU's continuing risk and responsibility for the project.The avoided cost calculation is provided as attachment (C).That calculation assumes the Intertie is not constructed and that KPU proceeds with the small hydro alternative detailed in attachment (F).To compare the costs of our preferred alternative (the Intertie)with our second best alternative (small hydro),one is comparing our negotiated interruptible rate to the avoided costs detailed in attachment (C). The thrust of this question may to be establish the economic value to KPU of pursuing the Intertie over the alternative.Since the interruptible rate is not yet negotiated,we would propose that economic value be established through the negotiation process. 14.What is the impact on the cost ofpower of actual capital cost,shorter life,higher fuel cost,and higher O&M cost for the new diesel? All of these variables could be modified in the models presented in attachment (C).Also see our response to Ketchikan question 1 above. 15.What are the impacts of current and future air quality regulations and diesel emissions _on cost ofpower and Ketchikan future growth? Our construction permit is provided as attachment (D).The operating limitations are detailed on page 8/19,section IV.A.5.At this point,the hourly limitations are set significantly higher than we have required in the past.We do not expect to exceed these.limitations for some years,at which point we hope to have augmented our hydroelectric supply decreasing our reliance on diesel generation.This could change if the Intertie was not to be built and for one reason or another Whitman and Connell Lakes were not deemed to be economically developable as a result of FERC or other agency requirements. 16.What is the cost ofpower impact of 1%vs.3%line losses? We assume that establishing the point of metering and sale of interruptible power would be established in negotiations.The cost of interruptible power established in negotiation would be influenced by those decisions,as well as our mutual assumptions for line loss.We stand ready to negotiate these issues. 17.What limits does the Ketchikan financing plan place on Ketchikan's current loans and future borrowings? KPU has attempted to seek a compromise financing plan whereby the City of Ketchikan would accept the $20 million loan authorized by the state in 1993.We proposed in return that the StateofAlaskaoffsetpowerratessuchthatKPUcouldcoverdebtserviceandO&M costs.Under thisplan,Ketchikan's future borrowing ability would have been severely impacted.An analysis demonstrating this was prepared recently by Alan Dashen and is provided as attachment (G). This funding plan has since been abandoned by the City. KPU has recently proposed that a mutually satisfactory solution might be to devote the cash flow set aside in the 1993 legislation for the Southeast Intertie (40%of the Four Dam Pool payment to the State)to a bond issued by the State for the project.This would provide sufficient capital to cover most of the current shortfall.KPU would propose that the $20 million currently set aside by the State for the $20 million loan would be released for other purposes.This proposal is provided as attachment (A).KPU stands ready to negotiate the specific details of the plan.As an alternative,the $20 million could be used for Intertie construction thus requiring reduced - bonding by the state for the remaining shortfall. 18.How will project insurance be provided and has the cost been included in the cost of power? We assume the mechanism,cost and responsibility for project insurance would be subject to negotiation.Through that process we can evaluate the impact of insurance,and other factors,on the negotiated cost of interruptible power. 19.What is the securityforfailure to make bond payments? We have proposed that AIDEA issue a bond with payments guaranteed by the State of Alaska through allocation of 40%of the Four Dam Pool debt service payments.This proposal presents a variety of issues to be considered and negotiated.We stand ready to work with AIDEA to define the security for the bond,and resolve other issues associated with this proposal. oa soreMUNICIPALLY OWNED ELECTRIC TELEPHONE WATER f - , .a KETCHIKAN PUBLIC UTILITIES October 2,1998 Randy Simmons,Executive Director | Alaska Industrial Development and Export Authority 480 West Tudor Road Anchorage,AK 99503 Dear Randy, Last evening Ketchikan City Council unanimously approved my recommendation to seek funding for the Swan-Tyee Intertie from the state as described in the attached memorandum -I had provided Caitlin a draft copy at Southeast Conference last week.I want to make sure this -information is in your hands and (through you)Governor Knowles'just as soon as possible, since he is scheduled to be in Ketchikan next week, On the related issue of federal funding,we are still hopeful that the FY99 Energy &Water Development appropriations bill will include additional funding for the intertie.Per Dennis McCrohan's suggestion,we look forward to discussing intertie funding with you once the _appropriations bill has cleared congress. We do appreciate your interest in finding a way to make this project move forward.It is also heartening to be able to identify all Southeast Alaska utilities,Southeast Conference and Ketchikan Electric Company (AP&T)as supporters of this approach. Thanks,again! Sincerely, ohn A.Magyar General Manager JAM:klo Attachment 2930 TONGASS AVENUE KETCHIKAN,ALASKA 99901 . *TELEPHONE 907-225-1000 FAX 907-225-1888 7 C- JSETCHIKAN PUBLIC UTILITIES Memorandum To:The Honorable Bob Weinstein &C{ouncil From:John A.Magyar,KPU General Manag: Date:September 25,1998 Subject:SE Alaska Intertie (Swan-Tyee)Funding Request This is to request City Council authorization to seek funding from the State of Alaska generally as set forthintheattachedCommunityofKetchikanLegislativeLiaisonprojectdocumentandtoseeksupportforthisfundingapproachfromotherinrerestedpartiesinsoutheastandthroughoutthestateofAlaska. In answer to some questions you may have: ¢Why would the Four Dam Pool communities/operating utilities support this?Because construction of the intertie will permit full utilization of the Tyee Project and reduce per kWhoperatingcoststotheseutilitiesandtheirratepayers.Four Dam Pool support for the intertie isreaterthanithaseverbeenand,I believe this funding approach and the possibility of speeding uptheprojecthasgreatsupportbythetheFourDamPoolcommunities. e Why would the state consider bonding for the intertie?Because construction of the intertie will:(I)improve efficiency and future revenue generation of theFourDamPoolprojectswhichisstronglysupportedbythevotersintheFourDamPoolcommunitiesandtheoperatingwilities;(2)begin construction of a SE Alaska electrical grid that is untversallysupportedbycommunitiesandutilitiesthroughoutSEAlaska(including Cape Fox Corporation andAlaskaPowerandTelephone);(3)allow construction of the intertie to go forward with just a littlemorefundinghelpfromstate/federal sources;and,(4)allow $20 million to be freed up for PCE,railbeltutilitiesorotherstateuses. ¢Why would such entities as Cape Fox Corporation and Alaska Power and Telephone support theintertie? Because the intertie will serve as a highway for electrical generation from the Lake Mahoney Project.It creates other generating and marketing possibilities and it opens the door for AP&T to participateinconstructionofthisline. It is my intent to seek a resolution from City Council supporting this funding plan after further discussions withthePMC,Southeast Conference,etc. Recommended Motion: I move that the City Council direct the KPU General Manager to seek funding from the State of Alaska generallyassetforthintheattachedLegislativeLiaisonprojectdocument. JAM:kio Adachment G:AUSER\KORRYO\WINWORDICOLINGT!'907.4 2M RAC CummuNntt 1 OF KETCHIKAN SOUTHEAST ALASKA -ELECTRIC INTERTIE Funding Sources Requested $4,400,000 Matching/Local Total -Annual $4,400,000 PROJECT SUMMARY: The SE Alaska Intertie is a proposed 57 mile transmission line connecting the Four Dam Pool hydroelectric projects at Swan Lake on the Upper Carroil Inlet and Lake Tyee on the Bradfield Canal. STATEMENT OF NEED AND SUPPORT: The SE Intertie has been rated the number one regional priority by the community of Ketchikan since the late 1980s.The electrical power so badly needed by Ketchikan is readily available as surplus at Lake Tyee. Surplus energy sold at Lake Tyee will directly benefit utility rate payers in the Four Dam Pool communities of Kodiak,Copper Valley,Petersburg,Wrangell and Ketchikan. It will help reduce dependence on back-up diesel generation and the attendant air emissions. It is universally supported by southeast Alaska operating utilities and communities,by the .Southeast Conference,by the Four Dam Pooi operating utilities and communities,by Ketchikan Electric Company which is the co-venture firm of Cape Fox Corporation and Alaska Power & Telephone. It is the first leg in a regional electrical grid that will provide efficient and reliable electrical power to the residents of southeast Alaska from Juneau,to Sitka,Petersburg,Kake,Wrangell,Ketchikan, Metlakatla,and eventually Prince of Wales Island communities. PROJECT STATUS: The EIS for the SE Intertie is complete and the US Forest Service has issued its Record of Decision which has withstood appeal.Design work is complete.Other permits from the Corps of Engineers, Coastal Zone Management and other regulatory agencies are in the final stages.The two-year construction phase can begin as soon as a complete funding program is im place -as early as the summer of 1999., FUNDING STATUS: Estimated Intertie Cost with Domestic Timber Credit $73,200.000 State Grants Authorized/Received $11,200,000 Federal Grants Authorized/Received 9,900,000 State Loan Authorized (has not been accepted by voters)20,000,000* Federal Grant Anticipated in FY99 Budget 7,500,000 Total Funding Available/Anticipated 48.600.000 Funding Needed $24,600,000 *Funding Needed (If $20 million loan declined by Ketchikan)_$44,600,000 PROPOSED FUNDING SOLUTION:| e Only the funding shortfall is standing in the way of SE Intertie construction.Ketchikan is asking the state to bond for the $45 million to build the intertie and to utilize 40%of the Four Dam Pool debt service payment (approximately $4.4 million per year)to create a revenue stream for payment of this bond.(This is not new funding.In 1993 the Alaska State Legislature passed.and the governor signed into law legislation allocating 40%of the Four Dam Pool debt service payments to fund the SE Intertie). e -The state has set aside $20 million as a low interest loan for the construction of the SE Intertie. .Ketchikan will not need or accept this loan if the state assumes bonding responsibility for the SE Intertie;and,the $20 million can be put to other state efforts. .JUN-03-99 THU 03:54 PH FAX NO.P,Ot Dia 2. DRAFT DRAFT DRAFT DRAFT ORAFT DRAFT Four Dam Pool Response toAIDEA's Southenat intertie Review Introduction AIDEA recently released thelr report entitted "Sputheaet Intartie Review"dated April 42,1999 analyzing the feasibility of lesuing bonds to finance the Swen-Tyse Inlerlie,andcomparingtheIntertietoctherpropesedKetehikunareaenergyprojects.While theProjectMenagamentCommittse('FMC')of the Four Dam Poo!epproctates AIDEA's reviaw of the interile,the PMC batleves the report focuass on the short-term economicsoftheprojectInateadoftheoveralllong-term boriaitte 16 Ketchikan,8.£.Alaska,and thecommunitiesintheFourDamPeol. Contrary to the cencivalone drawn In AIDEA's report,the Ibllowing facts support bulldingthaIntertie; »The intertie wid benef (he communities of Kalchiken,Kaciak, Palarsbury,Wrangell,Valdez,Glenalen,Kake,Mettakatla,Cralg,Hydaburg and Skxa (7); »The project is aol auiicient;wih aniicigaled federal grants,incraasedsalesofTyeepowercenfinancetheramalhingdebi; »The intertie wit Uviize power af Tyee that is currently being wasted esWalerspatingoverlhedam,therefore,taking advanlage of,andmauknizingretumon,an exlating Stale (nveatinent; .Tne Environmenie!Impect Study fs completa and ad permits have beanasued. Nconomicsa The Four Dam Pool purchasing utiles have consistently stated that justificalion forproosedingwiththeInterileextendsbeyondshorltenneconomics,Furthermore,Katchikars Publle Utities (MPU)and tho PMC have long acknowisdged thal at full costtheIntertlaisnotthemoulcosteffectiveenergyresourceforKPU(an the primaryrecipientofpowerevertheInertia)mi least in the near tearm,However,few major publicworksprojectspenelloutintiallyunieseintangiblebenefitsareIncludedIntheeconamleanalysis, Ile no surprise thal the economic anslyala showa that clher resources are mora costoffactWe,given the reviews primary assumptions of continued low diesel prices and noadditionalgrantmoneyforconatruction,However,sesuming the reeqipt of additionalfeceralgrants(which at thia point Is @ very real poselbillty)and a more reallatls forecast 1 9070/4 04M0/0629 84-0909 CAL ave . Post-It!Fax Note 7671 Dale/,-2 HG |pagea uf+"IN QUIAG From BolContaCo Phyona &Phono? PANT Fax JUN*03-99 THU 03:54 PM FAX NO,P,Q2 of future clase!prices baeed on current trends,Ihe Interile is the most economicallyviablepoweraupplyforKPU.! The atonemc analyels 9 the AEA review assumes thal the interts fa funded from thefollowingsourcas: Funding Avaliable: State Grants Authorized/Recalved $11,200,000 Federal Grenis Authorized/Received 9,800,000 Timber Sele Credk 4.909.000$26,100,000 Addilional Funding Proposed:Addkional Proposed Federal Granty $7,800,000 Proposed Blste Bend Proceeds -44.800,000 $77,200,000 However,the AIDEA review neglects one additional grant fund and underetales ancther,KPU snd the other Four Darn Pool paricipanis have requesied §20 milion In addtionalfaderalgrants,not $7.5 milion ae atated In thelr report,In addition,KPU will receive anedaltional$4.4 milion thls year from the Southeast!Energy Fund,These two grantvourcesdecreasetherequiredbondproceeds{o $27,700,000.Using assumptionsulmitartothoseusedbyAIDEA,nel debt service on bonds wilh thie amount of precesdewouldbeapproximately$2.8 milion annually,compared (o (rest lost on fax from Alan Dandhelsdoingadditionalanalyiels).In addition to ravenue dartved from sales of energyovertheInterlle,KPU ls expected to receive additional payments #ach year from theSoutheaatEnergyFund.These reverwe sources should total over $8 millon annuallyundbesufficientteamortizethebondsIn8timelymanner, Beneiits to Kaichikan Tha Intactia has substantial benefits over other generation sources thal KPU hasconaldered,Although some may ba cheaper in the short-lerm,thay are all inadequatetomestcurrerd,not to mantien forecast,loads arid will have to be augmented by diesslgenerationInthenearerm.The leegeat allernaths energy source being considered is the Mahonay Leke project that has a theorelical capactly of approximately 30 millionkwH.This,however,pals in comparison to the surplua avaliable al Tyee which learound@3mifonkw.AIDBA's reperl pointe cul thet as the populations in PetersburgandWrangellgrow,{eas power wil be avaliable to KPU.However,the population inPutersburgandWrangoilhave,at beal,slagnatad in the past couple years und haveprobablydeclined, 'AIDBA'2 Mport ahauinus 96 9 bags euze dingel priona of BS conta per gallons In 1099 {0 64 canta In 2018fxpruveeditred?dodars,APU purcitised dlesal fuel eartias this month al a cost of 04 canta part gallon,andthaaveragedoa]af #2 digue!fuel iri the Slale of Alashe over the peut Wwenty years hae been sboul OB centspergale, 19630/1 MND $2394-0900 -"JUN 03-99 THU 03:54 PK FAX NO, Ancther raeaan te pureue the Interts Instead of an addilonal hydro project In theKeichikanarealstheconsiderationthatal/the proposed,a8 well as exiating,hydraprojectsarefowelevalionprojectsmainlyCepancentonregularreinfal/fo replenish thereservoira.Ad of these are in ihe same meteorological zone and when Xt doesn't main inone,it probably wan'l rain In eny of them,Tyee,onthe other hand,ia a high elevationprojactinwdistine!mateorological eres.it 6 sls s project thal Ia fed from a largeWatershedwihalargeenowpack.Tha Intartie wil allow optimization and coerdinationoftheseIndapendentwatersheds. Benefiia te Southeast Alasks Tha long-term banefts to Bautheast Alaska in sompleting the fire leg of the Southeas!Electical Intartis Syetem are significant.The project has the brosd suppert af almost every community in Bouthaasl Alaska an wall ss the Southeast Conferance.The Swan-Tyee Interiie wit interconnect the eammuniies of Ketchikan,Wrangell,and Petersburg,which wi Improve relisbiky and provide fav additional reserve potential fer thoee-communiias.The interte will ley the graundwerk for the cansiruetion of additional InkstosmallercommuntiieseuchesKakeandMetlekatisendovantuallytranemissionlinesconnectingGRkaandJuneau.Several small hydro generation sources have baehidentifiedintheproximityaftheIntertisandcouldbeinexpensivelybroughtonEne aetheeurplusframtheTyeediminishesovertime.. Affordable,rellabia power le the "lifabload"tet runs the economle engines in almost ailoftheSoutheastAlaskacommunittes.With the virtual demise of (he timber Industry in$.8.Alntka and the changes taking placa In ihe salmon fahing Industry,attracting hewbusinesswitinlargepartdaperdanthéavailablityofauffieiantpower,The Intertie wiltlgnificanttyavalelinthisendeavor, Batiafite to (he Four Dam Pool Conatruciion of the Swan-Tyee Intartia ty of Interest lo all he Four Dam Pool PurchasingVtitlgs,These uikiles serve consumers in Kodiak,Valder,Glanalien,Ketchikan, Petersburg,and Wrangell in addition to several ematier communitias.The Interile willlapthehugesurplus(end the only surplus avellabie among the 4 hydro projects thatmakeupthaFourDamPool)tharaby significanily lowering tie Wholesale Power Rateforpowerpurchasedbytheullties.AIDHA's report ideniiies this saving to be In exceasof.5 centa/kwH when the Tyee project le fully utilized,however,they fail to factor thissavingsintothelrecanamicanelysia.The total savings (o all the coneumers in the FourDamPoelwilamountloaround82mieneachyear#the Intertle le constructed and the Tyee surplus le lapped.in addition,because bath the Swan and Tyee projects are Four Oam Pool projects,the Interte wil enable the effective management ef watershedsinbothprojectstherebyoptimizingoutput. Summary It the intertle le ever to be bullt,thia le the time.KPU hes a demand for power and Tyaehesthesurplusavaliable.KPU's witingness to purchase power over the Intartie (BEI 1 MIMD OEZIB 0000 P,0 ”*JUN®03-99 THU 03:55 PM FAX NO.P,04 presents an opportunity for the Gtete to invest In the lang term econamic develogmant ofSauthesetAlaska.If KPU elects to pursue other atarnetives,the opportuntty to buildtheIntertelelostHfKPUchoosestoproosadwithethergenerationaptionsinKetchikan,the benefits lo Paterybury,Wrangall,tha twat of 6.B,Alaske,and the FourDamPoolretepayerewilbelest.The choice la eintple;KPU can proceed with loca!options and purchase power fer around 6.8 cents,For about the same price,KPUcanpurchasypowerevitheIntertiscanbebullttherebybenefittingsilefGouthenalAlaskaandtheFourOemPadi. Dennis Laws Chalrmnan Project Mancgement Committee Four Dam Pool 1VOSONMMDNTEZI94-0000 ALASKA INDUSTRIAL DEVELOPMENT .AND EXPORT AUTHORITY f=A@@E-ENERGY AUTHORITY 480 WEST TUDOR ANCHORAGE,ALASKA 99503 907 /269-3000 FAX 907 /269-3044 l.Introduction and Executive Summary The Alaska Industrial Development and Export Authority (AIDEA)was asked to perform a review of the proposal being advanced by Ketchikan Public Utilities (KPU)for funding and construction of the proposed Southeast Intertie (the "Intertie”)..The review has two primary aspects.The first provides an economic analysis and comparison of the Southeast Intertie (using the KPU proposal)to other alternative projects that could serve Ketchikan's needs.The second aspect examines the financing issues surrounding the KPU proposal. AIDEA engaged CH2M Hill to perform the economic analysis and comparison aspect of the review.CH2M Hill performed two analyses for this purpose.The Economic/ Resource Analysis compares the actual cost to build and operate the Intertie, irrespective of who pays for those costs,to costs for other alternatives such as the Mahoney Lake project,other small hydroelectric projects and additional diesel generation.The Rate Impact Analysis examines the rate impacts to the Ketchikan energy consumers of the various alternatives.CH2M Hill also performed sensitivity analyses with respect to various assumptions.These analyses include considering the impact of significantly increased diesel fuel costs. CH2M Hill's Economic/Resource Analysis indicates that,in almost all cases,the Intertie is not the best economic choice to meet Ketchikan's future load requirements.Under certain growth conditions,however,if high diesel fuel prices are assumed,the Intertie has a resource cost comparable to the other alternatives.From a rate impact perspective,CH2M Hill's analysis indicates that the Intertie would increase power rates in the Ketchikan area relative to the other power options available. AIDEA engaged its financial advisor,Pat Clancy of Clancy Gardiner and Pierce,to analyze the various financing issues related to KPU's proposal.Mr.Clancy's analysis indicates that the KPU financing proposal,as currently envisioned,would not provide a sufficient structure for the issuance of revenue bonds.If several structural changes are made,however,Mr.Clancy concludes that it may be possible to structure an investment grade bond issue.Among the required changes is the need for a credit- worthy entity to guarantee bond debt service. The economic and financial analyses performed by AIDEA's consultants do not completely resolve the question of whether the KPU proposal has merit.Instead,these analyses provide a framework for consideration of the various public policy issues surrounding the Intertie.There are a number of additional factors (both positive and negative)that must be considered from a policy perspective in making a determination if the Intertie should proceed.These include the Intertie's integration with the Southeast Alaska Electrical Intertie System Plan,currently available federal funding opportunities for the Intertie,watershed considerations,and policy considerations related to public versus private sector funding of energy projects. If a decision is made to proceed with the Intertie,AIDEA has identified certain basic elements that would be required.These include appropriate legislation,financial guarantees,and contractual agreements. ll.Background A.Southeast Intertie The proposed Southeast Intertie would connect the Tyee Hydroelectric Project (a part of the Four Dam Pool projects)with the Ketchikan area.Unused surplus power from the Tyee project (now serving only Petersburg and Wrangell)would be transmitted viatheIntertietoKetchikan.'Currently,Ketchikan's primary source of power is the Swan Lake Hydroelectric Project (also a part of the Four Dam Pool)and other local hydroelectric projects.These projects do not supply sufficient power to cover all of Ketchikan's needs and therefore KPU supplements these local hydroelectric resources with diesel generation. The following table depicts KPU's existing generation resources: Existing KPU Generation Resources Resource 1998 Actual (MWh)Average Annual!Capability (MWh) Swan Lake 71,078 80,700 Other KPU Hydro 66,251 64,600 Diesel 26,798 141,220 TOTAL 164,127 286,520 In 1998,KPU's average retail rate for power was approximately 9.2 cents per KWh. This rate compares favorably with energy rates in Southcentral Alaska and is below statewide averages. The proposed Intertie would allow for load growth in Ketchikan and reduce the need for diesel generation.The Southeast Intertie would,for the first time,link two of the Four |As energy loads grow in Petersburg and Wrangell less surplus energy would be available for transmission to Ketchikan over the Intertie.While the Tyee Project has the capability of adding an additional turbine,because of water constraints,an additional turbine would not increase the overall energy producing capability of the Tyee project. Southeast Intertie Review April 12,1999 Page 2 Dam Pool projects.Because operating costs for all of the Four Dam Pool projects are pooled,depending on the rate at which power was purchased,sale of power to Ketchikan from the Tyee project would somewhat lower the operating costs of the Four Dam Pool on a per kilowatt hour basis.This reduction would reduce power costs for all of the Four Dam Pool communities.Gross state revenues from the Four Dam Pool projects would also increase.In addition,the Intertie could open the possibility of future generation projects in proximity to the Intertie. The Southeast Intertie is part of the first phase of a proposed $436 million Southeast Alaska Electrical Intertie System Plan developed for the Southeast Conference.This System Plan was developed to integrate development of proposed intertie segments with new hydroelectric generation capacity for the region.To date,funding proposals for the remainder of the System Plan have not been developed. B.Alternatives In addition to the Southeast Intertie,other projects have been proposed which could serve Ketchikan's energy needs for the foreseeable future.The Mahoney Lake project is a 10 MW hydroelectric project being promoted by Ketchikan Electric Company (KEC).KEC holds a Federal Energy Regulatory Commission license for the project. KEC is a joint venture between Alaska Power and Telephone (APT)and the Cape Fox Corporation.Other proposed hydroelectric projects that could be developed by KPU include the 5.38 MW Whitman Lake project,the 1.9 MW Lake Connell project,and the 1.2 MW Carlanna Lake project. KPU currently uses diesel generation to supplement its Swan Lake power.Subject to air permitting requirements,KPU could add new diesel facilities to increase itsgenerationcapacity.'Even if the Intertie or other hydroelectric alternatives were chosen to meet Ketchikan's energy requirements,under certain scenarios,additional diesel backup reserve generation would nonetheless be required. The following table compares Ketchikan's various energy resource alternatives alongwiththeirestimatedcostandprojectedgeneratingcapability.° ?Under high energy growth conditions,increased diesel generation in Ketchikan could be limited by air emission tegulatory and permitting requirements. 3 RW.Beck's 1998 update to KPU's Power Planning Study indicates that approximately 10,200 MWh of hydroelectric energy and as much as 37,600 MWh of diesel energy might be available through an interconnection of Ketchikan with the Metlakatla Power &Light (MPL)system.In addition,the interconnection could also provide reserve capacity to KPU and additional hydroelectric power generation with upgrades to the MPL system. Assuming that KPU would pay for the interconnection and the upgrades,R.W.Beck found that,from a cost standpoint,the MPL interconnection was similar to KPU adding the small hydro projects to its system.CH2M Hill did not analyze the MPL interconnection alternative. Southeast Intertie Review April 12,1999 Page 3 Ketchikan Energy Resource Alternatives 1998 Estimated Project Cost ($millions)Capacity (MW)Energy Available (MWh) Intertie $77.2?20.0 °88,769 ° Mahoney Lake $17.5 °10.0 41,740 Whitman Lake $7.1 5.3 19,880 Lake Connell $5.4 1.9 12,200 .Carlanna Lake $4.2 1.2 6,665 New Diesel (low speed): Without power house $8.3 6.4 53,260 ° With power house $17.3 6.4 53,260 ° Notes to table: Represents full estimated construction cost before timber sale credit. Represents Tyee capability;actual availability will vary annually based on water conditions and Wrangell and Petersburg loads. Represents average Tyee capability reduced by FY1998 Wrangell and Petersburg loads actually serviced by Tyee.Actual availability will vary annually based on water conditions and actual Petersburg and Wrangell loads. Per KEC estimate.A 1998 R.W.Beck study used a capital cost of $28.8 million for Mahoney Lake. Assumes 95%availability. Hl.Original Financing Proposal In 1993,legislation was enacted that formed the basis for the original financing proposal for the Southeast Intertie.Under the legislation,KPU was to own the Intertie for the benefit of the utilities participating.The legislation created three potential funding sources.First,$20 million was appropriated to the Department of Community and Regional Affairs to be used as a loan to the participating utilities for the Intertie. This loan was to have a term of 15 years and bear interest at 3%.Second,subject to appropriation each year,the legislation allocated 40%of the State's Four Dam PoolrevenuestreamtotheSoutheastEnergyFund.*To date,$11.3 million in grants from "Under the Power Sales Agreement (PSA)for the Four Dam Pool,the Alaska Energy Authority (AEA)sells power from the projects to the five local utilities serving the Ketchikan,Wrangell,Petersburg,Kodiak,Glennallen,and Valdez areas.Power from the projects is sold to the utilities at a rate determined under the PSA.The rate has two components.The power cost production component covers the actual operation and maintenance costs for the projects.This component also includes a fixed $500,000 per year contribution to a project renewal and replacement fund to be used for renewals and replacements of project facilities and equipment.The debt service component provides for payments to the State based upon a schedule contained in the agreement.Under the PSA, the State is responsible for certain significant project liabilities.These include uninsured facility failures, substandard performance and deficiencies in the renewal and replacement fund.The PSA provides that the utilities may withhold the debt service component payments to the State if AEA is unable to otherwise obtain funds to meet its obligations under the PSA.This right is generally referred to as the utilities'self-help right.In FY 1999,the uniform Four Dam Pool rate is 6.8 cents per kWh. As part of legislation passed in 1993 that reorganized the AEA (see footnote 5),subject to annual appropriation, the Legislature pre-allocated the debt service component payments received by the State as follows:40%to the Power Cost Equalization and Rural Electric Capitalization Fund,40%to the Southeast Energy Fund,and 20%to Southeast Intertie Review April 12,1999 Page 4 the Southeast Energy Fund have been made or committed to KPU for Southeast Intertie related activities.Finally,the legislation authorized AIDEA to issue up to $40millioninrevenuebondstofinancetheIntertie.* In addition to the funding sources for the Intertie identified in the 1993 legislation,KPU has actively sought federal funding for the Intertie.To date,$9,900,000 in federal grants has been made available for the Intertie and additional federal funds have been requested. Based upon the various funding sources identified,KPU developed its original financing proposal.Recognizing that the cost of power from the Intertie would be unacceptable if KPU were required to pay the uniform Four Dam Pool rate for power, pay the operating costs for the Intertie and also make the debt service payments contemplated in the 1993 legislation,KPU proposed that it pay a reduced rate for the Tyee power.KPU proposed that the rate for Tyee power be at a level that when added to its other Intertie related costs (debt service,operation,maintenance,etc.),resulted in a total cost of power in Ketchikan equal to the uniform Four Dam Pool rate of 6.8 cents per kilowatt hour.Put another way,KPU proposed reducing the uniform Four Dam Pool rate by an amount sufficient to cover its entire Intertie related costs.KPU's analysis indicated that,initially,no payments could be made for the Tyee power. Moreover,to ensure no increase to the:Ketchikan ratepayers in the early years of operation,KPU indicated it might require access to a working capital loan.KPU proposed that it obtain such a loan from AIDEA for this purpose. After significant analysis and discussions with its financial advisor,KPU determined that it would not be prudent for the Ketchikan community to incur the level of debt required by the original financing plan.The KPU debt contemplated in the original proposal would have severely impacted Ketchikan's future borrowing ability. Accordingly,KPU abandoned the original financing proposal. the Power Project Fund.No portion of the debt service payment was allocated to AEA to fulfill any of its obligations under the PSA. *The 1993 legislation was part of an overall reorganization of AEA.Previously,AEA's primary mission was to construct,own and operate energy infrastructure projects for the benefit of local utilities and consumers.The 1993 legislation signaled a change in policy with respect to State ownership of energy projects.The legislation eliminated AEA's ability to acquire and construct new projects.Wherever possible,AEA was to contract with local utilities for the operation of the existing facilities.These policy changes are reflected in the legislative treatment of the Southeast Intertie.Despite the fact that the Southeast Intertie was to link two AEA owned Four Dam Pool facilities,the legislation called for KPU ownership of the Intertie.Moreover,the Intertie was to be financed by loans and bonds to be repaid directly from payments made by KPU and the other participating utilities. Southeast Intertie Review April 12,1999 Page 5 IV.Current KPU Proposal In the fall of 1998,KPU formulated a new financing plan for the Southeast Intertie. Under the KPU proposal the State would own the Intertie.©The State,presumably through AEA,would issue revenue bonds in an amount sufficient to provide proceeds to fund the remaining costs of the Intertie.Debt service for these bonds would be paid from the 40%share of the State's Four Dam Pool revenues currently allocated to the Southeast Energy Fund.Under KPU's proposal,the $20,000,000 DCRA loan contemplated in the 1993 legislation would not be utilized and could be immediately released for other purposes.KPU would enter into an interruptible power sales agreement for power received over the Intertie from the Tyee facility.While KPU has indicated that an acceptable interruptible power sales agreement will need to be negotiated,KPU has assumed that Tyee power would be sold to KPU at or near the current Four Dam Pool rate.The following table depicts the current KPU funding proposal. Funding Available: State Grants Authorized/Received $11,200,000" Fed.Grants Authorized/Received 9,900,000 Timber Sale Credit 4,000,000 25,100,000 Additional Funding Proposed: Additional Proposed Federal Grants 7,500,000° Proposed State Bond Proceeds 44,600,000°52,100,000 Total Estimated Intertie Cost (As of 9/98 in 1997 dollars)$77,200,000 V.Economic Analysis AIDEA engaged CH2M Hill to perform an economic analysis for the Southeast Intertie. CH2M Hill's report is attached as Exhibit "1”to this memorandum.CH2M Hill evaluated both the economics and rate impacts of the Intertie and the various power resource alternatives.The CH2M Hill report describes in detail the assumptions utilized and the §As the Southeast Intertie would connect two AEA owned Four Dam Pool projects,AEA is the logical choice for State ownership. 7 The Department of Community and Regional Affairs,Division of Energy,recently notified KPU that an additional $4.4 million in State grant funds are available for the Intertie from the Southeast Energy Fund. Disbursement of these funds is contingent,however,on a number of conditions including development and approval of a financing plan for the Intertie and the execution of appropriate agreements.Because KPU's proposal did not include these additional State grant funds,these funds have not been included in this analysis.Obviously, any additional State grant funds actually received would reduce the remaining funding required. 8 KPU is seeking more than the $7,500,000 in additional federal grants for the project.Any increase in federal grants would reduce the amount of State bond proceeds required.We understand that the Clinton Administration recently introduced energy legislation that includes authorization language to provide up to $20,000,000 for the Intertie.To date,however,no federal appropriation for the Intertie has been introduced. Southeast Intertie Review April 12,1999 Page 6 conclusions reached.CH2M Hill's assumptions were shared with KPU.CH2M Hill considered KPU's comments and modified certain assumptions.In addition,CH2M Hill performed sensitivity analyses with respect to various assumptions.The following sections briefly describe key elements of the report. A.Load Forecasts In performing its analysis,CH2M Hill was not tasked with developing new energy load forecasts for the Ketchikan area.Rather,CH2M Hill utilized the June 1998 load forecasts prepared for KPU by the Institute of Social and Economic Research (ISER). ISER had developed three load forecasts utilizing high,medium,and low growth assumptions for the Ketchikan area.CH2M Hill examined these forecasts and made adjustments based upon discussions with KPU staff.The result of these adjustments was to increase the ISER forecast loads in the medium and high growth scenarios. These adjusted load forecasts were then used by CH2M Hill in performing its analysis. B.Alternatives Reviewed Based on available information,in performing its economic analysis,CH2M Hill examined the following alternative cases: All Diesel -This case assumes that no other alternative is chosen and therefore Ketchikan's future energy demands are satisfied entirely by adding additional diesel generation.This case assumes fuel costs of 63 cents per gallon in 1998 and 58 cents per gallon in 1999 then escalating to 66 cents per gallon in 2018. CH2M Hill also performed a sensitivity analysis assuming fuel prices of 85 cents per gallon. Southeast Intertie -This case assumes construction of the Southeast Intertie.The option also assumes additional replacement (reserve)diesel generation will be required in the future.The timing of the diesel reserve requirement is dependent on the particular load forecast utilized. Mahoney Lake -This case assumes development of the Mahoney Lake project based upon proposals advanced by KEC.Depending on the load forecast utilized, replacement diesel reserve generation is also included.The high load forecast case assumes that the small hydro plants are developed instead of the addition of new diesel units. Mahoney Lake &Intertie -In the medium and high load growth scenarios,this case assumes that both the Mahoney Lake and Southeast Intertie projects are constructed.In the medium growth scenario the Mahoney Lake project is constructed first followed by the Intertie.In the high growth scenario both projects are constructed at the same time. Southeast Intertie Review April 12,1999 Page 7 Small Hydro -This case assumes development of the Whitman Lake hydroelectric project and,depending on the load forecast,subsequent development of theLakeConnellhydroelectricproject.?Replacement diesel reserve units are included in the high load forecast case. C.Economic/Resource Analysis 1.Purpose and Assumptions CH2M Hill's Economic/Resource Analysis compares the present value of the alternative energy projects based upon the various load forecasts.This analysis ignores the funding sources for the various projects and instead compares the total capital and operational costs of the projects over a 50-year period.This methodology had been used by AEA and continues to be used by the Division of Energy in examining proposed energy projects.The methodology is designed to examine the total societal cost of choosing one energy resource over another. The Economic Resource analysis requires consideration of the capital costs of the projects being compared.Because existing funds have already been devoted to the Intertie and a substantial amount of additional federal funding is proposed,CH2M Hill developed three cases for examination of the Southeast Intertie that modify the methodology that is normally used in this type of analysis: Incremental State Cost -This case utilizes as capital costs only those additional costs required to complete the project which are to be funded with State dollars.The analysis excludes both the funds expended to date (the "sunk costs”)and future costs to be funded with federal grant dollars.Accordingly,under this case the capital cost of the Intertie is reduced by the $17.4 million dollars in federal grant funds proposed by KPU and $8.1 in funds already expended for Intertie development. Incremental Cost -This case utilizes as capital costs only those additional costs required to complete the project.It excludes all sunk costs but does not make any adjustments for proposed federal funding.This case is the most helpful for comparing the Intertie versus the other alternatives without federal grant assumptions affecting the result.. Full Cost -This case utilizes the full capital cost of the Intertie including all costs expended to date (the sunk costs)and all additional costs required to complete the project. °KPU's analysis indicates that the Carlanna Lake project could be substituted for the Lake Connell project.CH2M Hill utilized the Lake Connell project in its analysis because a preliminary FERC license has been obtained for that project and that project is capable of displacing more high-cost diesel generation thereby reducing overall costs. Southeast Intertie Review April 12,1999 Page 8 Two separate construction cost estimates were utilized in examining the Mahoney Lake project.KEC estimates the cost of Mahoney at approximately $17.5 million.A 1998 R.W.Beck study prepared for KPU used a capital cost of $28.8 million for the Mahoney Lake project.CH2M developed two Mahoney cases,a high and low capital case, utilizing the differing construction cost estimates 2.Findings CH2M Hill draws several conclusions from the Economic Resource analysis.Among the most significant are: e In amedium growth scenario,the low capital cost Mahoney caseis the least costly,closely followed by the Small Hydro alternative.If the high capital cost Mahoney case is considered,under a medium growth scenario,the Small Hydro alternative is the least costly followed by Mahoney Lake. e Even when considered at the incremental state costs (excluding all federal grants and sunk costs),under a medium growth scenario,the Intertie is significantly more costly than the Mahoney Lake or Small Hydro alternatives. e In a high growth scenario,the low capital cost Mahoney Lake project augmented by development of Small Hydro is the least costly alternative closely followed by the Mahoney Lake &Intertie alternative. e Ina low growth scenario,the Small Hydro alternative is the least costly by a substantial margin followed by the All Diesel alternative. e Under medium growth conditions,if higher diesel prices are assumed,the Intertie (considered at incremental state (lowest)cost),Mahoney Lake,and Mahoney Lake augmented by future Intertie development all have comparable costs. e Under high growth conditions,if higher diesel prices are assumed,Mahoney Lake augmented with future Intertie development is the least costly alternative followed by the Intertie (considered at incremental state (lowest) cost)and Mahoney Lake/Smail Hydro alternatives. The CH2M Hill Economic Resource analysis demonstrates that,under most growth scenarios,the Intertie is substantially more costly than the other alternatives. Southeast Intertie Review April 12,1999 Page 9 D.Rate Impact Analysis 1.Purpose and Assumptions CH2M Hill performed a Rate Impact Analysis.The purpose of this analysis is to compare the actual power rate impact to the Ketchikan consumer of the Intertie and the other alternative power resources.The analysis uses as a base case the All Diesel alternative and compares the rate implications of undertaking each of the other alternatives. The assumptions utilized in the analysis are described in the CH2M Hill report.The following highlights a few of the more significant assumptions: All Diesel -As KPU would be the owner of the facilities,this case utilizes the projected capital financing and operation costs for the diesel facilities.This case assumes fuel costs of 63 cents per gallon in 1998 and 58 cents per gallon in 1999 then escalating to 66 cents per gallon in 2018. Southeast Intertie -This case assumes that KPU purchases power generated from the Tyee project at 6.8 cents per kWh,the current uniform Four Dam Pool rate plus a component for renewals and replacements.This is the same assumptionprovidedbyKPUintheinformationforwardedtoAIDEA.'°Any changes in the actual rate would require that the Rate Impact Analysis be adjusted to reflect that rate. Mahoney Lake -This case assumes that KPU would purchase power generated from the Mahoney Lake project at 6.5 cents per kWh and that the power would be subordinate to KPU's Swan Lake power.KEC has indicated its willingness to enter into a long-term power sales agreement for Mahoney power at this rate. KEC has indicated that this rate could be lowered if federal grant funding were made available for the Mahoney Lake project.Because no grant funds have been identified the analysis does not consider this possibility.Additionally,KEC has stated it will not pursue State grant funding for the project. Small Hydro -This case utilizes the project capital financing and operation costs for the Whitman Lake and Lake Connell projects assuming KPU ownership and tax exempt financing. 1 This assumption is also consistent with the notion that if the State is to provide a significant portion of the capital for the Intertie (through Southeast Energy Fund grants and use of State revenues to pay debt service)the State should reasonably require that KPU pay the full Four Dam Pool rate for Tyee power.Even at this rate, CH2M Hill's analysis indicates that the additional State revenues generated by the sale of Tyee power over the Intertie are not sufficient to pay the cost of the Intertie.Because utilization of the full Four Dam Pool rate would minimize the State subsidy for the project we believe the assumption is reasonable, Southeast Intertie Review April 12,1999 Page 10 2.Findings Among the most significant findings from the CH2M Hill Rate Impact Analysis are: e in all but the high growth scenario,the Southeast Intertie would increase KPU rates relative to the other alternatives examined including All Diesel. e In the high growth scenario,the Southeast Intertie would result in lower rates to the KPU ratepayers than the All Diesel case,but higher rates than for the other alternatives. e In all but the high growth scenario,the Small Hydro alternative would result in the lowest cost to KPU ratepayers. e Ina high growth scenario,Mahoney Lake augmented by Small Hydro would result in the lowest ratepayer cost. VI.Financing Issues KPU has proposed that the State issue bonds to finance the remaining costs of the Intertie.KPU has indicated that it expects to receive an additional $7,500,000 in federal funding for the Intertie.If KPU were successful in obtaining these funds,underKPU's proposal,bond proceeds of $44,600,000 would be required to fund the project." KPU has proposed that the debt service on these bonds be paid from the 40%share of the State's Four Dam Pool revenues currently allocated to the Southeast Energy Fund. AIDEA asked its financial advisor,Pat Clancy of Clancy Gardiner and Pierce to review KPU's financing proposal and analyze the various bond-financing issues.A copy of Mr. Clancy's report is attached as Exhibit "2.” In order to obtain $44.6 million in bond proceeds,Mr.Clancy estimates that approximately $51.3 million in bonds would need to be issued.This amount includes estimated issuance costs and the amount necessary to fund a debt service reserve fund.Mr.Clancy estimates the net annual debt service on the bonds would be approximately $4.13 million after taking into account earnings on the debt service reserve fund.This amount assumes a level 25-year amortization of the bonds at ataxablerateofapproximately7%." 1!KPU has indicated that it may actually be able to obtain federal funds substantially in excess of the projected $7,500,000.Any additional federal grant amounts received would reduce the amount of bond proceeds that would be required. '?It appears that under Internal Revenue Code rules,the Intertie would serve more than two contiguous "counties” and would therefore not qualify for tax exempt financing. Southeast Intertie Review April 12,1999 Page 11 In order to issue bonds,Mr.Clancy has indicated that a stable revenue stream earmarked for payment of the debt service must be identified.The Four Dam Pool revenue stream is currently subject to annual appropriation and accordingly,as currently structured,would not provide an earmarked source of payment sufficient to issue the bonds.Presumably,this problem could be remedied with appropriate statutory changes. More importantly,however,Mr.Clancy has indicated that the Four Dam Pool revenue stream is not sufficiently stable under the Power Sales Agreement (PSA)for the projects.Under the terms of the PSA,the revenues received by the State vary with production.Because the contract is not "take or pay,”a reduction or interruption in energy generation and sales from the Four Dam Pool projects reduces payments to the State.In addition,the purchasing utilities'"self-help”right can interrupt the State's revenue stream if funds are needed to fulfill State obligations under the PSA.Self-help has been utilized on several occasions over the last few years to cover major repairs to the projects. Mr.Clancy also notes that 40%of the State's revenue stream in the fiscal year 1999 would have been only $4.32 million,an amount marginally sufficient to cover estimated net debt service for the bonds of $4.13 million.Investment grade bonds typically require revenues significantly in excess of the required debt service requirement. While future growth projections indicate that the 40%revenue stream will likely grow, Mr.Clancy believes it is unlikely that 40%of Four Dam Pool revenue stream would be sufficient to provide the level of coverage necessary to support investment grade bonds. Mr.Clancy has identified a number of structural changes that could be made to address the issues identified.First,Mr.Clancy suggests that the entire debt service payment from the Four Dam Pool could first be pledged to the bond debt service.Any amounts not needed for debt service would then flow to the other allocated uses.This would provide sufficient coverage and alleviate concerns related to annual revenue changes from energy generation changes.This approach,however,would make the Intertie debt service the first priority and could limit the amount of funds available for the State to allocate for other uses such as power cost equalization. In order to eliminate the possibility that exercise of self-help could interrupt bond payments,Mr.Clancy suggests that the PSA could be amended to limit the utilities exercise of self-help.Even if such an amendment were possible,limitation of self-help might pose other problems.In recent years,self-help funds have been the only source of funds available to make major repairs to the Four Dam Pool projects.Restrictions on the availability of self-help funds could impede AEA's ability to fulfill its obligations, potentially jeopardizing the reliability of the projects and the State's Four Dam Pool revenues.More importantly,limitation of self-help in order to provide sufficient funds to make bond payments merely postpones self-help and ultimately reduces the State revenues available to allocate for other uses. Southeast Intertie Review April 12,1999 Page 12 Mr.Clancy has suggested another approach that does not require modifications to the Four Dam Pool PSA or pledging of the entire State Four Dam Pool revenue stream.Mr. Clancy suggests that the 40%revenue stream could be backed by a guarantee by some sufficiently credit-worthy entity or entities.It is unclear if KPU or the other Four Dam Pool utilities have the willingness or financial strength to provide such a guarantee. Finally,Mr.Clancy notes that,under whatever structure is utilized,a plan would need to be developed that ensures the bondholders that sufficient funds from some source are available to pay the projected operation,maintenance,repair and replacement costs of the Intertie. In summary,Mr.Clancy's analysis indicates that the KPU financing proposal,as currently envisioned,would not provide a sufficient structure for the issuance of revenue bonds.The following structural changes would be required to allow financing utilizing the 40%Four Dam Pool revenue stream: e Statutory changes necessary to pledge 40%of the State Four Dam Pool revenue stream toward debt service for the bonds. e Debt service guaranteed by a sufficiently creditworthy entity or entities. e Development of an acceptable funding plan for operation,maintenance, repair and replacement costs for the Intertie. Vil.Additional Factors The economic and financial analyses discussed above do not completely resolve the question of whether the KPU proposal has merit.Instead,these analyses provide a framework for consideration of the various public policy issues surrounding the Intertie. This section will highlight some additional factors that should be considered in making a determination whether or not to proceed. A.Factors favoring the Intertie The following are some factors favoring the Intertie that should be considered. e Assuming there is support for the Southeast Alaska Electrical Intertie System Plan,the Southeast Intertie is a part of the first phase of this comprehensive plan,which could ultimately provide benefits to a large portion of Southeast Alaska.However,the other major segments are distant prospects with respect to economic and financial feasibility at the present time. Southeast Intertie Review April 12,1999 Page 13 e The leadership positions of our congressional delegation provide an opportunity to receive federal funding for the Intertie now.It is unlikely that such an opportunity will arise again.Moreover,it is not clear that federal funding will be available for any of the other alternatives considered. e Tyee Lake and Swan Lake are supplied by independent watersheds. Therefore,the Intertie allows for optimization of water resources.On the other hand,Mahoney Lake and Swan Lake are in close proximity and utilize the same watershed.Therefore,under critical water conditions,the Intertie could provide greater flexibility. e For an additional capital cost,Tyee Lake has the capacity to create additional peak generation by adding another turbine.Because of water constraints,however,the total annual generating capability of the Tyee project would not increase. e The Intertie opens up the possibility of development of other generation sources in proximity to the Intertie route. e Under certain circumstances the Intertie could provide additional reliability and reserve potential in Petersburg and Wrangell by permitting the transfer of Swan Lake or other power generated in the Ketchikan area to be transmitted to those areas. B.Factors opposing the Intertie The following are some factors opposing the Intertie that should be considered. °The KPU proposal requires significant State investment (40%of State Four Dam Pool revenues for 25 years)to support a region that already has some of the lowest power rates in the State. e The Mahoney Lake project,a private sector project,requires no State funding or bonds yet results in lower energy rates than the Intertie under most scenarios. e The funding and federal license are already in place for the Mahoney Lake project.Following execution of a power sales agreement with KPU,KEC estimates Mahoney could be operational in 14 months.The Intertie requires additional federal funds,enactment of State legislation and the issuance of revenue bonds.In addition,the Intertie requires two constructions seasons to complete.Given these requirements,it will likely be several years before the Intertie could be operational. Southeast Intertie Review April 12,1999 Page 14 e The State retains substantial risks related to the Four Dam Pool.Moreover, the purchasing utilities have recently asserted that the State is responsible for certain outage and other indirect costs.In this environment,additional State ownership and financing for the Intertie may be unwise. e Divestiture of the Four Dam Pool projects has been pursued for the last few years.Issuance of revenue bonds tied to the Four Dam Pool Revenue stream creates complications that would make divestiture much more difficult. VIN.Conclusion The Economic Resource Analysis performed by CH2M Hill indicates that,in almost all cases,the Intertie is not the best economic choice to meet Ketchikan's future load requirements.Under certain growth conditions,however,if high diesel prices are assumed,the Intertie has a cost comparable to other alternatives.CH2M Hill's rate impact analysis indicates that the Intertie would increase power rates in the Ketchikan area relative to the other power options available.As noted above,however,there are a number of other factors that could be considered in addition to a strict economic analysis. If a decision were made to proceed with the Intertie,we believe the following basic elements would be required: e Legislation authorizing the project,AEA ownership and the issuance of AEA revenue bonds to finance the remaining construction costs and devoting 40% of the Four Dam Pool revenue stream to the payment of debt service for the bonds. e Cost overruns and debt service on the bonds would need to be guaranteed by some credit worthy entity or entities,presumably KPU and/or the other Four Dam Pool purchasing utilities. e Appropriate contractual arrangements would be required to ensure that the State has no financial responsibility for operation and maintenance,reserve and replacement,or other costs related to the Intertie. Additionally,we would recommend that appropriate contractual arrangements be in place to assure that KPU purchases all of its excess power needs from the Tyee project so long as power is available from the project.This will ensure the State obtains the maximum possible recovery of its Intertie investment. Southeast Intertie Review April 12,1999 Page 15 CH2M HILL 301 West Northern Lights Boulevard Suite 601 EXHIBIT 1 Anchorage,AK CH2y)Hi LL 99503-2648 Tel 907.278.2551 Fax 907.277.9736 April 16,1999 Mr.Dennis McCrohan Alaska Industrial Development and Export Authority 480 West Tudor Anchorage,Alaska 99503 Dear Dennis: At your request,we have evaluated the economics and potential rate impacts of power resource options for Ketchikan,Alaska.The study has particular focus on the Swan Lake- Tyee Intertie (the "Intertie”).Our analysis was conducted using KPU's power supply planning model,developed by R.W.Beck and used in KPU's Power Supply Planning Study (1996)and the 1998 Update. Our findings are summarized in the four attachments to this letter.Attachment A, Economic/Resource Analysis,provides economic analysis of the resource options; Attachment B,Rate Impact Analysis,provides projected rate impacts of the same options; Attachment C,Sensitivity Analysis,provides results from changes in key assumptions and projections;and Attachment D summarizes the sources of information used in the analysis. In performing this analysis,we relied on information and projections from various sources (see Attachment D)and did not conduct new,independent research as the basis for our assumptions and input data. Major findings of our study are as follow (tables supporting each finding are identified in brackets): 1.For the base-case analysis (medium load forecast)the lowest resource costs are for either Mahoney Lake or Small Hydro (Whitman and Connell Lakes)development. Even with $17.4 million in Federal funding,the Intertie is $27.3 to $28.8 million more expensive than the Small Hydro and Mahoney alternatives,respectively. [Table A-1] 2.Under high load forecast conditions,Mahoney Lake augmented with small hydro when needed,is the least-cost option.However,under these forecast conditions, construction of Mahoney Lake in conjunction with the Intertie,is almost as inexpensive.[Table A-1]} 3.The Mahoney Lake and Small Hydro alternatives present much less economic risk than does the Intertie.[Table A-1] Mr.Dennis McCrohan April 16,1999 Page 2 4.The Intertie would increase Ketchikan Public Utilities'rates relative to the All-Diesel alternative except under high load forecast conditions.Compared with other power supply alternatives,the Intertie would increase rates under all load forecast conditions evaluated.Under medium load forecast conditions,KPU rates with the Intertie would exceed those for Small Hydro and Mahoney Lake alternatives by 0.9 to 1.2 cents per kWh,respectively.[Table B-1] 5.Under all load forecast evaluations,net revenues to the State of Alaska from Tyee Lake sales over the Intertie would be negative.This is because the state would not make enough revenues from these sales to fully offset its annual debt service on the Intertie of $4.13 million.[Table C-3] Please call me if you have any questions about these findings or the attached materials. Sincerely, CH2M _ODavidA.V Director of Energy Economics ANCI/LKB544.doc/991060004 Attachment A Economic/Resource Analysis of Power Supply Resource Alternatives at Ketchikan,Alaska' 1.Under medium load forecast conditions: e The least cost alternative is Mahoney Lake,if it can be built for $17.5 million.The cost of the Small Hydro (Whitman and Connell Lakes)alternative is nearly as low. e Even with $17.4 million in Federal funding,the Intertie is $28.8 million more expensive than the Mahoney Lake estimate and $27.3 million more expensive than the Small Hydro alternative. e Even if it were to take $28.8 million to build Mahoney Lake,the Intertie would be $18.2 million more expensive. e The cost of the building Mahoney Lake and then the Intertie,when new generation is needed in 2011,is estimated to be $18.4 million higher than not adding new generation after Mahoney is complete. e The Intertie with Federal funding is $15.6 million less expensive than the All Diesel alternative. e One reason that the Mahoney Lake and Small Hydro alternatives are less expensive than the Intertie is that they do not require new diesel plants for reserve capacity.This is because they are not dependent upon the transmission line between Swan Lake and Ketchikan.The Intertie connects to this line at Swan Lake and as a result requires new diesel plants for reserve capacity. 2.Under the high load forecast,Mahoney Lake,augmented by small hydro when new resources are needed,is the least cost alternative.However,construction of Mahoney Lake followed by the Intertie is almost as inexpensive under this forecast. 3.Under the low load forecast,Small Hydro is the least cost alternative by a substantial margin. 4.Small Hydro provides staging opportunities that substantially reduce risk associated with uncertain future loads. 5.These conclusions are based on economic analysis of the resource costs associated with new generation for service to Ketchikan.They are supported by Table A-1 and Figures A-1 andA-2.These documents show the present value of new resources required'for each power supply alternative. 1 This economic/resource analysis is based on the cost of resources for 2001 through 2027. ?Exceptions to this are shown for the Swan Lake transmission line.The new resource cost is the optionentitled"Intertie (incremental)”.The Intertie (full cost)option includes costs that are already sunk in the project ($8.1 million).It therefore overstates new resource costs associated with the Intertie.The Intertie(incremental state cost)option is reduced by the amount of grant funds from the Federal government.As such,it considers resource costs only from the perspective of the State of Alaska. A-1 6.The medium,high,and low load forecasts that underlie this analysis are shown in Figure A-3 as the "Revised”forecasts.Also shown in this figure are load forecasts prepared by the Institute of Social and Economic Research (ISER)in 1998.The ISER forecasts serve as the foundation for the Revised forecasts. 7.Assumptions for this analysis are documented for the medium,high,and low load forecast cases in the pages that follow Table A-1 and Figures A-1 through A-3.High and low load forecast assumptions that vary from the medium forecast case assumptions are printed in bold. A-2 Assumptions (Medium Load Forecast) Load Forecast e Based on ISER base (medium)load forecast for KPU (1998). e Adjusted to include KPC sawmill load and marine layups (2 per year);adjustment adds 2.8 MW and 17,050 MWh/year. Resource Alternatives All Diesel:, e Assumes fuel cost of $.63/gal in 1998,$.58/gal in 1999,then increasing to $.66/gal in 2018. e Replacement diesel (reserve)unit required in 2005;includes new powerhouse ($9 million in $1998), Intertie (full cost,including sunk costs): e $73.2 million capital cost (total cost of $77.2 million less assumed revenue from timber sales of $4.0 million). e Replacement diesel (reserve)unit required in 2005;includes new powerhouse ($9 million in $1998)to meet reserve requirements for the Swan Lake transmission line. e Assumes Tyee energy availability equal to project capability of 134,400 MWh per year plus capability of Petersburg municipal hydro system (10,000 MWh per year),less projected energy requirements for Petersburg and Wrangell. e Zero incremental cost of Tyee output. Intertie (incremental cost): e $73.2 million capital cost less $8.1 million expended (versus $11.2 million that has been appropriated)=$65.1 million. e Replacement diesel (reserve)unit required in 2005;includes new powerhouse ($9 million in $1998)to meet reserve requirements for the Swan Lake transmission line. e Assumes Tyee energy availability equal to project capability of 134,400 MWh per year plus capability of Petersburg municipal hydro system (10,000 MWh per year),less projected energy requirements for Petersburg and Wrangell. e Zero incremental cost of Tyee output. Intertie (incremental state cost): e $65.1 million capital cost less $17.4 million federal grants =$47.7 million. e Replacement diesel (reserve)unit required in 2005;includes new powerhouse ($9 million in $1998)to meet reserve requirements for the Swan Lake transmission line. e Assumes Tyee energy availability equal to project capability of 134,400 MWh per year plus capability of Petersburg municipal hydro system (10,000 MWh per year),less projected energy requirements for Petersburg and Wrangell. e Zero incremental cost of Tyee output. A-3 ASSUMPTIONS -Medium Load Forecast (continued): Mahoney Lake: e $28.8 million (per 1998 Beck analysis)and $17.5 million (per KEC/HDR). e Capacity credit since connection is at Beaver Falls;no new diesel required. Mahoney Lake and Intertie: e Assumes Mahoney Lake constructed in 2001 and Intertie constructed in 2011. e Assumes $17.5 million capital cost.. Small Hydro: e Assumes Whitman Lake (added in 2002)and Lake Connell (added in 2012).[Analysis indicates that Carlanna Lake could be substituted for Lake Connell;however,Lake Connell was used because a preliminary FERC license has been obtained for this project. Also,Lake Connell is capable of producing more energy than Carlanna Lake,which results in the displacement of more high-cost diesel generation,thereby reducing the overall cost of this scenario.] e Scenario involves continued reliance on diesel generation for a significant portion of KPU energy needs. e No new diesel required. Real Discount Rate:3.0 percent Rate Impact Analysis e Capital financed at 5.5%over 30 years. e Mahoney Lake energy at proposed KEC rate of 6.5 cents/kWh;project would be subordinate to Swan Lake. e Existing KPU hydro and non-power supply costs escalate with inflation (3%per year). A-4 Assumptions (High Load Forecast) Load Forecast Based on ISER high load forecast for KPU (1998). Adjusted to include KPC sawmill and veneer plant loads plus marine layups (4 per year);adjustment adds 5.4 MW and 47,360 MWh/year. Resource Alternatives All Diesel: Assumes fuel cost of $.63/gal in 1998,$.58/gal in 1999,then increasing to $.66/gal in 2018. Replacement diesel (reserve)units required in 2002,2006,and 2015;includes new powerhouse ($9 million in $1998). Diesel generation air emission regulatory and permitting requirements would increase the costs of this alternative beyond the level shown.Additional costs associated with increasing permitted operations would include professional services,capital improvements,and emissions monitoring.Diesel generation exceeds permitted levels in 2002. Intertie (full cost,including sunk costs): $73.2 million capital cost (total cost of $77.2 million less assumed revenue from timber sales of $4.0 million). Assumes Tyee energy availability equal to project capability of 134,400 MWh per year plus capability of Petersburg municipal hydro system (10,000 MWh per year),less projected energy requirements for Petersburg and Wrangell. Zero incremental cost of Tyee output. Scenario involves continued reliance on diesel generation for a significant portion of KPU energy needs. Diesel generation air emission regulatory and permitting requirements would increase the costs of this alternative beyond the level shown.Additional costs associated with increasing permitted operations would include professional services,capital improvements,and emissions monitoring.Diesel generation exceeds permitted levels in 2017. Replacement diesel (reserve)units required in 2002,2006,and 2015;includes new powerhouse ($9 million in $1998)to meet reserve requirements for the Swan Lake transmission line. Intertie (incremental cost): $73.2 million capital cost less $8.1 million expended (versus $11.2 million that has been appropriated)=$65.1 million. Assumes Tyee energy availability equal to project capability of 134,400 MWh per year plus capability of Petersburg municipal hydro system (10,000 MWh per year),less projected energy requirements for Petersburg and Wrangell. Zero incremental cost of Tyee output. Scenario involves continued reliance on diesel generation for a significant portion of KPU energy needs. ASSUMPTIONS -High Load Forecast (continued): Diesel generation air emission regulatory and permitting requirements would increase the costs of this alternative beyond the level shown.Additional costs associated with increasing permitted operations would include professional services,capital improvements,and emissions monitoring.Diesel generation exceeds permitted levels in 2017. Replacement diesel (reserve)units required in 2002,2006,and 2015;includes new powerhouse ($9 million in $1998)to meet reserve requirements for the Swan Lake transmission line. Intertie (incremental state cost): $65.1 million capital cost less $17.4 million federal grants =$47.7 million. Assumes Tyee energy availability equal to project capability of 134,400 MWh per year plus capability of Petersburg municipal hydro system (10,000 MWh per year),less projected energy requirements for Petersburg and Wrangell. Zero incremental cost of Tyee output. Scenario involves continued reliance on diesel generation for a significant portion of KPU energy needs. Replacement diesel (reserve)units required in 2002,2006,and 2015;includes new powerhouse ($9 million in $1998)to meet reserve requirements for the Swan Lake transmission line. Diesel generation air emission regulatory and permitting requirements would increase the costs of this alternative beyond the level shown.Additional costs associated with increasing permitted operations would include professional services,capital improvements,and emissions monitoring.Diesel generation exceeds permitted levels in 2017. Mahoney Lake: $28.8 million (per 1998 Beck analysis)and $17.5 million (per KEC/HDR). Capacity credit since connection is at Beaver Falls. Scenario involves continued reliance on diesel generation for a significant portion of KPU energy needs. Assumes small hydro (Whitman Lake,added in 2005,and Lake Connell,added in 2006),which results in a lower total cost than if diesel units were added. Diesel generation air emission regulatory and permitting requirements would increase the costs of this alternative beyond the level shown.Additional costs associated with increasing permitted operations would include professional services,capital improvements,and emissions monitoring.Diesel generation exceeds permitted levels in 2016. Mahoney Lake and Intertie: Assumes both Mahoney Lake and Intertie constructed in 2001. Assumes $17.5 million capital cost. A-6 ASSUMPTIONS High Load Forecast (continued): Small Hydro: Assumes Whitman Lake (added in 2002)and Lake Connell (added in 2005).[Analysis indicates that Carlanna Lake could be substituted for Lake Connell;however,Lake Connell was used because a preliminary FERC license has been obtained for this project. Also,Lake Connell is capable of producing more energy than Carlanna Lake,which results in the displacement of more high-cost diesel generation,thereby reducing the overall cost of this scenario.] Scenario involves continued reliance on diesel generation for a significant portion of KPU energy needs. Replacement diesel (reserve)unit required in 2011;includes new power plant ($9 million in $1998). Diesel generation air emission regulatory and permitting requirements would increase the costs of this alternative beyond the level shown.Additional costs associated with increasing permitted operations would include professional services,capital improvements,and emissions monitoring.Diesel generation exceeds permitted levels in 2008. Real Discount Rate:3.0 percent Rate Impact Analysis Capital financed at 5.5%over 30 years. Mahoney Lake energy at proposed KEC rate of 6.5 cents/kWh;project would be subordinate to Swan Lake. Existing KPU hydro and non-power supply costs escalate with inflation (3%per year). Assumptions (Low Load Forecast) Load Forecast e Based on ISER low load forecast for KPU (1998);no adjustments. Resource Alternatives All Diesel: e Assumes fuel cost of $.63/gal in 1998,$.58/gal in 1999,then increasing to $.66/gal in 2018. e No replacement diesel (reserve)units required. Intertie (full cost,including sunk costs): e $73.2 million capital cost (total cost of $77.2 million less assumed revenue from timber sales of $4.0 million). e Assumes Tyee energy availability equal to project capability of 134,400 MWh per year plus capability of Petersburg municipal hydro system (10,000 MWh per year),less projected energy requirements for Petersburg and Wrangell. e Zero incremental cost of Tyee output. e No replacement diesel (reserve)units required. Intertie (incremental cost): e $73.2 million capital cost less $8.1 million expended (versus $11.2 million that has been appropriated)=$65.1 million. e Assumes Tyee energy availability equal to project capability of 134,400 MWh per year plus capability of Petersburg municipal hydro system (10,000 MWh per year),less projected energy requirements for Petersburg and Wrangell. e Zero incremental cost of Tyee output. e No replacement diesel (reserve)units required. Intertie (incremental state cost): e $65.1 million capital cost less $17.4 million federal grants =$47.7 million. e Assumes Tyee energy availability equal to project capability of 134,400 MWh per year plus capability of Petersburg municipal hydro system (10,000 MWh per year),less projected energy requirements for Petersburg and Wrangell. e Zero incremental cost of Tyee output. e Noreplacement diesel (reserve)units required. Mahoney Lake: e $28.8 million (per 1998 Beck analysis)and $17.5 million (per KEC/HDR). e Capacity credit since connection is at Beaver Falls. e No replacement diesel (reserve)units required. Small Hydro: e Assumes Whitman Lake (added in 2002). e No replacement diesel (reserve)units required. Real Discount Rate:3.0 percent A-8 ASSUMPTIONS -Low Load Forecast (continued): Rate Impact Analysis e Capital financed at 5.5%over 30 years. e Mahoney Lake energy at proposed KEC rate of 6.5 cents/kWh;project would be subordinate to Swan Lake. e Existing KPU hydro and non-power supply costs escalate with inflation (3%per year). Attachment B Rate Impact Analysis of Power Supply Resource Options At Ketchikan,Alaska Under medium load forecast conditions: e The Intertie would increase Ketchikan Public Utilities (KPU)rates relative to other new power supply alternatives,including diesel generation,Mahoney Lake,and Small Hydro (Whitman Lake and Lake Connell).[Rate impacts of the Intertie were adjusted to reflect reductions in the Four Dam Pool wholesale power rate due to increased sales from Tyee Lake (affects both purchases from Tyee Lake and Swan Lake).]} e The Small Hydro alternative would result in the lowest cost to KPU ratepayers. Under high load forecast conditions: e The Intertie would reduce KPU rates relative to diesel generation but increase rates relative to the Mahoney Lake and Small Hydro alternatives. e Mahoney Lake would result in the lowest cost to KPU ratepayers. Under low load forecast conditions: e The Intertie and Mahoney Lake alternatives would all increase rates relative to the All Diesel alternative. e The Small Hydro and All Diesel alternatives would result in about the same rates for KPU customers over the long term. These findings are based on the following key assumptions: e KPU would pay 6.8 cents per kWh (the Four Dam Pool wholesale power rate),plus full contributions to an Intertie R&R Fund ,for power delivered over the Intertie.O&M associated with the Intertie would be paid for through the Four Dam Pool wholesale power rate as an additional O&M budget item. e Mahoney Lake power to meet requirements beyond those met by Swan Lake and existing KPU hydro would be available to KPU for 6.5 cents per kWh. e Small hydro would be built with tax-exempt financing. Rate projections (in nominal,or current year,prices)are shown in Tables B-1 through B-3. These table are based on medium,high,and low load forecasts,respectively. B-1 Attachment C Sensitivity Analysis of Power Supply Resource Options At Ketchikan,Alaska 1.How would the results of the economic/resource and rate impact analyses changewithhigherdieselfuelcosts? A higher fuel price assumption benefits cases that do not rely on significant amounts - of diesel generation,such as the Intertie and Mahoney Lake resource scenarios.The analyses summarized in Attachments A and B are based on an initial diesel fuel price of 63 cents per gallon (the average fuel price paid by KPU over the past 3 years). Results of an analysis based on a fuel price of 85 cents per gallon are shown in Table C-1. Under medium load forecast conditions,with the high fuel price assumption,the Intertie,Mahoney Lake,and Mahoney Lake/Intertie alternatives are the lowest cost resource plans.Under high load forecast conditions,with the high fuel price assumption,the Mahoney Lake/Intertie case is clearly the least cost alternative, followed by the Intertie and Mahoney Lake alternatives.Under low load forecast conditions,with the high fuel price assumption,Small Hydro/Diesel remains the least cost resource plan,followed by the Mahoney Lake and Intertie cases. With the high fuel price assumption,results of the rate impact analysis would show an increased benefit (in terms of reduced KPU rates relative to the All Diesel scenario) for all alternatives examined.However,the relative differences in rate impacts among the alternatives (Intertie,Mahoney Lake,and Small Hydro)would be unchanged;i.e., each case would be reduced by approximately the same amount (0.3 to 0.5 cents per kWh under medium load forecast conditions). 2.What is the impact of the sale of Tyee power over the Intertie on the Four Dam Pool wholesale power rate? This analysis assumed that Tyee sales to KPU would be based on the existing debtservicecomponent(4 cents per kWh)of the Four Dam Pool wholesale power rate', 3 The Four Dam Pool Power Sales Agreement provides for a reduced debt service component (3 cents per kWh)on all sales above the contracted forecast amounts.For this analysis,however,the existing debt service component of 4 cents per kWh was used to allow the State to more fully recover debt service costs associated with the Intertie. C-1 With increased sales of Tyee power,however,the O&M component of the Four Dam Pool wholesale power rate would change.On the one hand,the overall O&M amount to be paid would increase with the added O&M cost for the Intertie*.On the other hand,this increase would be more than offset by the effect of increased sales of Tyee power over the Intertie.Total O&M costs (including those for the Intertie)would be divided by a greater number of kilowatt-hours than would be the case without the Intertie.This would result in a net decrease in the overall O&M rate for Four Dam Pool power as shown in Table C-2.This shows the change in the projected Four Dam Pool wholesale power rates under medium and high load forecast conditions.The first 10 years of Intertie operation would result in reductions of the Four Dam Pool rate ranging from 0.2 to 0.4 cents per kWh.These reductions were incorporated into the rate impact analysis shown in Tables B-1 through B-3. 3.What are the projected revenues to the State of Alaska for the Intertie and Mahoney Lake/Intertie cases? Gross revenues represent a payment of 4 cents per kWh on all Tyee Lake sales delivered over the Intertie (based on the assumption that Tyee sales to KPU would include the full debt service component of the current Four Dam Pool wholesale power rate).If the State builds the Intertie,net revenues would equal gross revenues minus debt service (assuming levelized $4.13 million in annual debt service costs). Results are shown for the Intertie and Mahoney Lake/Intertie cases in Tables C-3 and C-4,respectively. For the Intertie scenario,net revenues to the state would be negative for the 25 years during which the state is paying debt service on the Intertie.Similarly,for the Mahoney Lake/Intertie scenario,net revenues to the state would be negative for the 25 year repayment period.However,since less Tyee energy would be required under this scenario due to the availability of output from the Mahoney Lake project,the net loss to the state during the first 25 years would be higher than if only the Intertie were built. Under low load forecast conditions,all of KPU's energy requirements during the forecast period would be met by existing hydro,Swan Lake,and the Mahoney Lake project.Since no Tyee energy would be utilized,the Intertie would not be needed. 4.What if the Metlakatla Interconnection were constructed? Estimates contained in the 1998 update to KPU's Power Supply Planning Study (prepared by R.W.Beck)indicate that about 10,200 MWh of hydroelectric energy and as much as 37,600 MWh of diesel energy could be made available annually via interconnection with Metlakatla Power &Light (MP&L).MP&L's diesel units could *The analysis assumes that the incremental cost of Tyee Lake output is zero. C-2 also provide reserve capacity to KPU.An additional 3 MW of capacity (14,800 MWhperyear)could be installed at the Chester Lake hydro project'. The Beck analysis found that the Metlakatla interconnection was similar to that of the Small Hydro alternative,assuming that KPU would pay costs associated with the interconnection with MP&L and the upgrade to the Chester Lake powerhouse plus 2 cents per kWh for power purchased from MP&L's existing hydro resources.The MP&L interconnection would therefore be one of the lowest cost resource alternatives under all three load growth scenarios. 5 Other hydroelectric projects,such as Tamgas Lake and Triangle Lake,would increase the amount of energy available from MP&L.These projects were not considered in the 1998 update to the Power Supply Planning Study. C-3 Attachment D Sources of Information 1.Load Forecasts: KPU: Base Electric Load Growth Study (prepared for KPU by ISER,June 1998). Adjustments (see Per discussions and correspondence with KPU "Assumptions”)staff (R.Trimble). Other Four Dam Pool participants:Electric Load Forecast for Ketchikan, Metlakatla,Petersburg,and Wrangell,Alaska: 1990-2010 (prepared for AEA by ISER,June 1990). 2.Diesel Fuel Cost ($.63/gallon):KPU 1998 Avoided Cost Documentation (prepared by R.W.Beck,November 1998); represents average of Bailey fuel purchases (1997-1999)per KPU records. 3.Generation Resource Alternatives: Diesel unit costs and 1998 Update to the Power Supply Planning operating assumptions Study (prepared for KPU by R.W.Beck, February 1998). Small hydro unit costs and 1998 Update to the Power Supply Planning operating assumptions Study (prepared for KPU by R.W.Beck, February 1998). Mahoney Lake capital cost 1998 Update to the Power Supply Planning ($28.8 million),O&M,and Study (prepared for KPU by R.W.Beck, operating assumptions February 1998). Alternative Mahoney Lake Per KEC (attachment to memo from John project capital cost Magyar to the Ketchikan City Council,March 4, ($17.5 million)1998). 4.Intertie Cost and Operating Data: Total cost ($77.2 million) Net cost ($73.2 million) "Sunk”costs ($8.1 million) Federal funds ($17.4 million) Four Dam Pool wholesale power rate (before Tyee sales to KPU) Tyee capability (134,400 MWh) Petersburg municipal hydro capability (10,000 MWh) Projected Tyee sales to KPU Memo from Pat Clancy to AIDEA,March [1, 1999. Draft SE Intertie Review,March 23,1999, Memo from Rich Trimble (KPU)to AIDEA, September 18,1998. Memo from John Magyar (KPU)to Ketchikan City Council,September 25,1998. Historical data per KPU;projected data based on the methodology outlined in the Four Dam Pool Power Sales Agreement. 1998 Update to the Power Supply Planning Study (prepared for KPU by R.W.Beck, February 1998). 1998 Update to the Power Supply Planning Study (prepared for KPU by R.W.Beck, February 1998). Developed using R.W.Beck resource model. D-2 Table A-1 Swan/Tyee Intertie Analysis Summary of Results (incremental Analysis)1 Present Value of Costs ($millions) Medium High Low Forecast Forecast Forecast Resource: All Diesel 84.7 207.3 17.6 Intertie (full cost)91.1 176.8 67.8 Intertie (incremental cost)84.6 170.3 61.3 Intertie (incremental state cost)69.1 154.8 45.8 Mahoney Lake ($17.5 million)”40.3 116.9 29.1 Mahoney Lake ($28.8 million)50.9 129.2 39,7 Mahoney Lake ($17.5 million)and Intertie (state)®58.7 119.4 NA Small Hydro 41.8 170.4 9.7 Index (All Diesel =100) Medium High Low Forecast Forecast Forecast Resource: All Diesel 100 100 100 Intertie (full cost)108 85 385 Intertie (incremental cost)100 82 348 Intertie (incremental state cost)82 75 260 Mahoney Lake ($17.5 million)”48 56 166 Mahoney Lake ($28.8 million)60 62 225 Mahoney Lake ($17.5 million)and Intertie (state)69 58 NA Small Hydro 49 82 55 Notes: 1 Costs evaluated are for years 2001 through 2027.These costs exclude those associated with Swan Lake,existing diesel units,and existing KPU hydro. 2 For high forecast ONLY,includes small hydro (Whitman and Connell Lakes)instead of new diesel units when new resources are required. 3 Under medium load forecast,construction of the Intertie is delayed until 2011.Under the high forecast,both Mahoney lake and the Intertie are constructed in 2001.Under the low forecast,the Intertie is not needed. 180 160 )_SoOPresentValue($Millions40 20 Figure A-1 Mahoney Lake vs.Intertie 7 8 8 oereer =ee weeeweee o 6 oe 8 oe ew weeos8ee eo es e ee fT ee eo we oe ee ee we we ee eo wo ao8«ee -ee ee a ee ewe see ee 4eeeweeeeeee4 ee eeo0eo@oeeweesewewe ee e we wee eaoeweee4 ee eee Ffseoeee oe 8 «eo oe eo eeeeeee ee we eereereoeee 4 ee oe ee aeeewe ee e ee a ee we ee a7ee8oeoewe C)Mahoney Lake ($17.5 Million) Fa Intertie ($47.7 Million) Medium 180 160 )oma,rs©120 -©io)©oO60 PresentValue($Millions40 Figure A-2 Small Hydro vs.Intertie ee eeererereeeee eee we ee 2 ee =ee ee oe e +of ye we ee ee ee ye we ee ee eeoeeaee 4 ee we ee A eea8eowe>2 oe eeoe2ee a ee eeeeesee 4eeeeeeeeeeoe, eo ee ee 4eeeee oo a we ee eee oe ew oe ee oe ee ee es we>ee ee oe ©©oe ew ee ee e's! ee 2 we re eeoe@ee oe we eeeeeoee &oe we ee aoeewe oe ee aseeooeeeaee4oe«we 8o8eee eo #we s 2 ee 8 se ee re se ee se 4oeeoweeeeee4seeeeweeesee4 ee se eeo>eo weoeeweeeeeee oe se eeeeeee o 8 ee =e es >ee ew oeoeeoee eeeeoeoeieeeeweea [Small Hydro Fa Intertie ($47.7 Million) _Figure A-3 KPU Load Forecasts q t q Oo 2 o oO Ww io) WM te -_ YMAJO SUOTTTAL 300 250 + 200 + Revised-==Original Table B-1 Rate Impact Analysis Medium Load Forecast Average -Power Supply Retail Rate Cost Under Under Do-Nothing Do-Nothing Alternative Alternative Estimated Rate Impacts (cents/kWh)2 Year (cents/k Wh)!(cents/kWh)Intertie °Mahoney 4 Small Hydro 5 1998 9.2 4.7 --- 1999 9.4 4.8 - . -- 2000 9.6 4.8 --- 2001 9.8 4.9 0.1 0.1 - 2002 10.0 5.0 0.1 0.1 (0.2) 2003 10.2 5.0 0.1 0.1 (0.2) 2004 10.4 5.1 0.1 0.1 (0.2) 2005 11.6 6.1 0.1 (0.9)(1.2) 2006 11.8 6.2 0.1 (0.9)(1.2) 2007 12.0 6.2 0.1 (0.9)(1.2) 2008 12.3 6.3 0.1 (0.9)(1.2) 2009 12.5 6.3 0.2 (0.9)(1.2) 2010 12.7 6.4 0.2 (0.9)(1.2) 2011 13.0 6.4 0.2 (0.9)(1.2) 2012 13.2 6.5 0.2 (0.9)(1.2) 2017 14.6 6.8 0.3 (1.0)(1.2) 2022 15.9 6.8 (0.0)(1.2)(1.2) 2027 17.4 6.8 (0.0)(1.2)(1.2) Levelized 12.8 6.1 0.1 (0.8)(1.1) Notes: 1 Represents All-Diesel case;capital financed at 5.5%over 20 years. Assumes 3 percent general inflation rate. 2 Relative to All-Diesel case. 3 At Four Dam Pool rate plus renewals and replacements. 4 KEC proposal (6.5 cents/kWh),subordinate to Swan Lake. 5 Assumes capital cost financed at 5.5%over 30 years. Table B-2 Rate Impact Analysis High Load Forecast Average -Power Supply Retail Rate Cost Under Under Do-Nothing Do-Nothing Alternative Alternative Estimated Rate Impacts (cents/kWh) Year (cents/k Wh);(cents/kWh)Intertie ?Mahoney *Small Hydro 5 1998 9.2 4.7 --- 1999 9.4 4.8 --- 2000 9.6 4.9 --- 2001 9.8 49 (0.2)(0.0)- 2002 10.7 5.7 (0.4)(1.1)(1.0) 2003 10.9 5.7 (0.4)(1.1)(0.9) 2004 11.1 5.8 (0.2)(1.1)(0.9) 2005 11.3 5.8 (0.2)(1.1)(1.0) 2006 11.8 6.1 (0.3)(1.4)(1.3) 2007 12.0 6.2 (0.3)(1.4)(0.6) 2008 12.2 6.2 (0.2)(1.4)(0.6) 2009 12.4 6.2 (0.2)(1.4)(0.6) 2010 12.6 6.3 (0.2)(1.3)(0.6) 2011 12.8 6.3 (0.1)(1.3)(0.6) 2012 13.1 6.3 (0.1)(1.3)(0.6) 2017 14.5 6.7 (0.0)(1.5)(0.5) 2022 15.8 6.7 (0.3)(1.7)(0.5) 2027 17.3 6.7 (0.3)(1.7)(0.5) Levelized 13.0 6.1 (0.2)(1.4)(0.6) Notes: 1 Represents All-Diesel case;capital financed at 5.5%over 20 years. Assumes 3 percent general inflation rate. 2 Relative to All-Diesel case. 3 At Four Dam Pool rate plus renewals and replacements. 4 KEC proposal (6.5 cents/kWh),subordinate to Swan Lake,plus costs associated with small hydro. 5 Assumes capital cost financed at 5.5%over 30 years. Table B-3 Rate Impact Analysis Low Load Forecast Average Power Supply Retail Rate Cost Under Under Do-Nothing Do-Nothing Alternative Alternative Estimated Rate Impacts (cents/kWh)2 Year (cents/kWh):(cents/kWh)Intertie °Mahoney *small Hydro 5 1998 9.2 4.7 --- 1999 9.3 4.7 --- 2000 9.5 4.8 --- 2001 9.7 4.9 0.0 0.0 - 2002 10.0 4.9 0.0 0.0 0.3 2003 10.2 5.0 0.0 0.0 0.3 2004 10.4 5.1 0.1 0.0 0.3 2005 10.6 5.1 0.1 0.0 0.2 2006 10.9 5.2 0.1 0.0 0.2 2007 11.1 5.3 0.1 0.0 0.1 2008 11.4 5.4 0.1 0.0 0.1 2009 11.7 5.5 0.2 0.0 0.0 2010 11.9 5.6 0.2 0.0 0.0 2011 12.2 5.7 0.2 0.0 (0.0) 2012 12.5 5.8 0.2 0.0 (0.1) 2017 14.3 6.5 0.4 0.0 (0.2) 2022 15.6 6.6 0.3 (0.1)(0.3) 2027 17.1 6.6 0.3 (0.1)(0.3) Levelized 12.3 5.7 0.2 (0.0)(0.0) Notes: 1 Represents All-Diesel case;capital financed at 5.5%over 20 years. Assumes 3 percent general inflation rate. 2 Relative to All-Diesel case. 3 At Four Dam Pool rate plus renewals and replacements. 4 KEC proposal (6.5 cents/kWh),subordinate to Swan Lake,plus costs associated 5 Assumes capital cost financed at 5.5%over 30 years. Table C-1 Results of Fuel Price Sensitivity Analysis Present Value of Change in PV Revised Cost Assuming Due to Incremental Revised Load Base Fuel Prices Index High Fuel Costs Present Value Index Forecast Resource Scenario (Smillions)(All-Diesel=100) ($millions)($millions)(All-Diesel=100) Medium: Base (All-Diesel)84.7 100 179.3 264.0 100 Intertie '69.1 82 12.2 81.3 31 Mahoney Lake ”40.3 48 40.5 80.8 31 Small Hydro 3 418 49 95.8 137.6 52 Mahoney +Intertie 58.7 69 12.2 70.9 27 High: Base (All-Diesel)207.3 100 463.2 670.5 100 Intertie |154.8 75 189.0 343.8 51 Mahoney Lake *116.9 56 233.4 350.3 52 Small Hydro 3 170.4 82 373.9 544.3 81 Mahoney +Intertie 119.4 58 89.4 208.8 31 Low: Base (All-Diesel)17.6 100 53.9 71.5 100 Intertie '45.8 260 5.4 51.2 72 Mahoney Lake ”29.1 166 5.4 34.5 48 Small Hydro °9.7 55 6.1 15.8 22 Notes: 1 Incremental state cost. 2 $17.5 million capital cost. Whitman and Connell Lake projects. 4 Mahoney Lake augmented by small hydro when needed. Whitman Lake project. 3 5 Table C-2 Change in Four Dam Pool Rate Due to Tyee Lake Sales Over Intertie Reduction in O&M Component of Wholesale Power Rate (cents/kWh) Medium Load Forecast High Load Forecast Due to Add:»Due to Add: Increased Intertie Net Increased Intertie Net Tyee Sales'O&M?Change Tyee Sales'O&M?”Change 1998 ------ 1999 ------ 2000 ------ 2001 -0.21 0.04 -0.17 -0.36 0.03 -0.32 2002 -0.24 0.04 -0.19 -0.38 0.03 -0.35 2003 -0.26 0.05 -0.21 -0.40 0.03 -0.37 2004 -0.27 0.05 -0.23 -0.43 0.03 -0,39 2005 -0.29 0.05 -0.25 -0.44 0.03 -0.40 2006 -0.31 0.05 -0.27 -0.44 0.03 -0.41 2007 -0.33 0.05 -0.28 -0.44 0.04 -0.41 2008 -0.36 0.05 -0.31 -0.44 0.04 -0.41 2009 -0.38 0.05 -0.33 -0.45 0.04 -0.41 2010 -0.40 0.05 -0.35 -0.45 0.04 -0.41 2011 -0.42 0.05 -0.37 -0.45 0.04 -0.41 2012 -0.45 0.05 -0.39 -0.45 0.04 -0.41 2013 -0.48 0.05 -0.42 -0.44 0.04 -0.40 2014 -0.50 0.06 -0.45 -0.44 0.04 -0.40 2015 -0.53 0.06 -0.48 -0.43 0.04 -0.39 2016 -0.56 0.06 -0.51 -0.43 0.04 -0.39 2017 -0.60 0.06 -0.54 -0.42 0.04 -0.38 2022 -0.63 0.07 -0.56 -0.42 0.05 -0,37 2027 -0.63 0.08 -0.55 -0.42 0.06 -0.36 Notes: 1 Four Dam Pool O&M cost assumed to be constant in real terms. Reduction in unit cost results from dividing by larger number of kWh. 2 O&M for the Intertie is estimated to be $126,000 ($1998).Cost is spread over all Four Dam Pool sales,including sales of Tyee power to KPU. Table C-3 Revenues to the State of Alaska From Tyee Sales to KPU (via the Intertie) .1(Intertie Scenario) Thousands of Dollars Gross Revenues ”Net Revenues ° Low Medium High Low Medium High Forecast Forecast Forecast Forecast Forecast Forecast 1998 ------ 1999 --- , --- 2000 ------ 2001 179 1,029 2,578 (3,951)(3,101)(1,552) 2002 190 1,118 2,770 (3,940)(3,012)(1,360) 2003 207 1,180 2,952 (3,923)(2,950)(1,178) 2004 245 1,244 3,125 (3,885)(2,886)(1,005) 2005 282 1,304 3,298 (3,848)(2,826)(832) 2006 324 1,369 3,419 (3,806)(2,761)(711) 2007 374 1,431 3,376 (3,756)(2,699)(754) 2008 405 1,498 3,330 (3,725)(2,632)(800) 2009 433 1,562 3,285 (3,697)(2,568)(845) 2010 464 1,631 3,243 (3,666)(2,499)(887) 2011 496 1,697 3,204 (3,634)(2,433)(926) 2012 527 1,763 3,165 (3,603)(2,367)(965) 2013 556 1,839 3,124 (3,574)(2,291)(1,006) 2014 588 1,920 3,080 (3,542)(2,210)(1,050) 2015 620 2,001 3,035 (3,510)(2,129)(1,095) 2016 653 2,084 -2,989 (3,477)(2,046)(1,141) 2017 682 2,168 2,942 (3,448)(1,962)(1,188) 2022 715 2,252 2,894 (3,415)(1,878)(1,236) 2027 715 2,252 2,894 715 2,252 2,894 1998 Present Value:(37,472)(25,132)(10,047) Notes: 1 Assumes Intertie constructed in 2001. 2 Assumes KPU payment to the state of 4 cents per kWh on all purchases from the Tyee Lake project. 3 Gross revenues less levelized debt service cost to the state (assumed to be $4.13 million per year).Represents unrecovered debt service payments. Table C-4 Revenues to the State of Alaska From Tyee Sales to KPU (via the Intertie) (Mahoney Lake/Intertie Scenario) Thousands of Dollars Gross Revenues *Net Revenues” Medium High Medium High Forecast Forecast *Forecast °Forecast * 1998 ---- 1999 ---- 2000 ---- 2001 -925 -(3,205) 2002 -1,117 -(3,013) 2003 -1,299 -(2,831) 2004 -1,472 -(2,658) 2005 -1,645 -(2,485) 2006 -1,822 -(2,308) 2007 -2,004 -(2,126) 2008 -2,191 -(1,939) 2009 -2,382 -(1,748) 2010 -2,579 -(1,551) 2011 44 2,781 (4,086)(1,349) 2012 110 2,988 (4,020)(1,142) 2013 186 3,124 (3,944)(1,006) 2014 267 3,080 (3,863)(1,050) 2015 348 3,035 (3,782)(1,095) 2016 431 2,989 (3,699)(1,141) 2017 515 2,942 (G,615)(1,188) 2022 599 2,894 (3,531)(1,236) 2027 599 2,894 (36,571)°2,894 1998 Present Value:(20,785)(19,191) Notes: 1 Assumes KPU payment to the state of 4 cents per kWh on all purchases from the Tyee Lake project. 2 Gross revenues less levelized debt service cost to the state (assumed to be $4.13 million per year).Represents unrecovered debt service payments. 3 Assumes construction of Mahoney Lake in 2001 and the Intertie in 2011. Assumes both Mahoney Lake and the Intertie constructed in 2001. 5 Assumes balloon payment made in 2027 for remaining debt service costs (under medium load forecast only).Bs EXHIBIT 2 Financial Counsel to Governments, Non-Profits &Public Private Ventures &PIERCE 1c March 31,1999 Keith Laufer , Alaska Industrial Development and Export Authority . 480 West Tudor Anchorage,Alaska 99503 Dear Keith: Pursuant to your request,we have analyzed the various financingissues surrounding a -proposal being advanced by Ketchikan Public Utilities (KPU)for the Southeast Intertie (the."Intertie”).KPU has asked the State to considerissuing revenue bonds to fundapproximately$45 million of costs relating to construction of the Intertie.KPU's proposalistouse40%of the State's Four Dam Poolincome stream to provide a revenue stream withwhichtopaydebtserviceonthebonds.; 'The Southeast Intertie has been the subject of considerable study and discussion over thepastdecade.The Intertie would link the Tyee hydroelectric project (a part of the Four Dam Pool)to the Ketchikan area.The proposed funding package is as follows:. Funding Available: State Grants Authorized/Received 11,200,000 Fed.Grants Authorized/Received 9,900,000 Timber Sale Credit 4,000,000 :25,100,000 Additional Funding Proposed: Additional Proposed Federal Grants 7,500,000 Proposed State Bond Proceeds 44,600,000 52,100,000 Total Estimated Intertie Cost(As of 9/98in1997 dollars)$77,200,000 In order to have approximately $44,600,000 in bond proceeds available for Intertie construction costs,we estimate that approximately $51,300,000 in revenue bonds would need to be issued.The increased bond size is needed to provide proceeds for bond issuancecostsandtofundadebtservicereservefund.Although the amounts could vary,for this purpose we have assumed that issuance costs will amount to approximately 3%of the principal of the bonds and that a debt service reserve fund equal to approximately 10%of the bond principal would be required.Since,under KPU's proposal,completion of construction is not required to produce the revenue stream required for payment of the bonds,we have assumed that no provision for capitalized interest would be required. 115 NW First Avenue,Suite 401 Portland,Oregon 97209 Phone:503.221.1126 Fax:503.221.1560 SE Intertie Financing Page 2 As you know we believe the State should ordinarily not issue bonds unless those bonds are "investment grade.”If the Intertie bonds could be structured to be investment grade,we assume the interest rates on the bonds would be approximately 7%.These rates assume that the project would not qualify for tax exempt financing.We have also assumed the bonds would be amortized over a 25-year term.Based upon these assumptions,we estimate that the annual debt service on the bonds would be approximately $4.38 million.After taking into account the projected earnings on the debt service reserve fund,we estimate the annual net debt service for the bonds would be approximately $4.13 million. Investment grade revenue bond financing requires a predictable stream of revenue to repay the bonds over time.However,there is currently no revenue stream that has been earmarkedtopaydebtserviceonsuchbondsandtheIntertiewillnotgeneratesignificantnewrevenue.Therefore the first task towardissuing bonds would be to identify a viable revenue stream fordebtservicepayments. The State receives "debt service”payments from the Four Dam Pool participants.Subject to annual appropriation,these State payments are currently allocated:40%to the Power Cost Equalization and Rural Electric Capitalization Fund,40%to the Southeast Energy Fund and 20%to the Power Project Fund.KPU has proposed that the 40%of these funds currently being allocated to the Southeast Energy Fund be utilized to pay for the debt service on the proposed bonds.Because the State's Four Dam Pool revenue stream is subject to annual - appropriation,that revenue stream would not be sufficiently predictable and stable for the issuance of bonds.Presumably statutory changes could be made to remedy this deficiency. The total State "debt service payment”(before self help)for fiscal year 1999 was $10.8 million.A diversion of 40%of the current "debt service”payment would result in $4,320,000 per year potentially available for repayment of the proposed bonds.This would provide a baseline payment source for the bonds of 1.05 times the projected bond payments. While the State's revenue stream is projected to grow over time and potentially increase debt service coverage,this level of base line coverage would probably be insufficient to support investment grade bonds. Additionally,the State's debt service payments are subject to significant fluctuation based on Four Dam Pool energy production and sales and the payments are subject to interruption under certain conditions described in the Four Dam Pool power sales agreement (commonlyreferredtoas"self help”).Each of these conditions make it more unlikely that the coverage provided by a pledge of 40%of the State's payment would be sufficient to structure a viable investment grade bond issue.These two difficulties could be remedied by making structural changes to ensure State payments sufficient to pay debt service regardless of energy production and revenue interruptions created by the exercise of self-help. One option for addressing the revenue fluctuation and coverage problems would be to pledge the State's entire Four Dam Pool revenue stream toward the bonds.Once the bond payment was made the remainder of the State revenues could be released for other purposes.This approach would create the potential of reducing the amount of Four Dam Pool revenuesavailablefortheotherallocateduses.Using the State's fiscal year 1999 revenues (before self-help)of $10.8 million would resultin bond debt service coverage in excess of 2.6 times.This level of coverage,in normal circumstances and with normal reserves,should lead to an investment grade bondissue.However,the potential of self-help creates a second hurdle. SE Intertie Financing Page 3 Self-help is a unique ability of the Four Dam Pool purchasing utilities to interrupt the State debt service payments to obtain funds for certain State obligations for costs associated with the projects.Over the last several years self-help has been utilized to meet the State's 'obligations for major repair of the project.In fiscal year 1999 alone,the State's $10.8 million debt service payment was reduced by $5.5 million for self-help resulting in a net payment to the State of only $5.3 million.To avoid the possibility of self-help interrupting bond payments,it might be possible to amend the Four Dam Pool power sales agreement to limit the utilities'ability to invoke self-help.In the last several years,however,self-help funds have been the only source of funds available to make major repairs to the Four Dam Pool projects.Restrictions on the availability of self-help funds could impede AEA's ability to fulfill its obligations and the State would have to meet those obligations using other unidentified funds. Both of the structural changes described above would need to be designed to contractually guarantee sufficient revenues to the State so that debt service payments could be made. Assuming such changes were made,the State could contractually commit those payments to debt service on the bonds. Another approach to the financing would be to divert only 40%of the revenue streamtowardthebondswithoutmodifyingthepowersalesagreementorpledgingtheentire revenue stream.In this case,any deficiency in the revenues available to pay debt service would need to be guaranteed by a sufficiently creditworthy entity.Ketchikan Public Utilitiesmightbeconsideredthemostappropriateentitybutmaylackthefinancialstrengthtomake a guarantee on $51.3 million meaningful.Another option might be to back the debt service payments by a "general obligation”pledge of all of the Four Dam Pool participants.The value of any guarantee is dependent on the guarantotr's ability to make good on the guarantee in the event that the revenue stream failed to materialize. In summary,a reliable revenue stream for repayment of the financing needs to be developed.Forty percent of the current debt service paid by the Four Dam Pool is not sufficient to structure an investment grade bond issue.While it might be possible to modify the existing structure to create a sufficient revenue stream by pledging all the debt service payment and limiting self-help provisions,this solution seems unlikely and presents other problems.In the absence of changes to the existing structure the bond debt service would need to be guaranteed by a creditworthy entity.Finally,beforeissuing bonds,a plan would need to bedevelopedtosecurelyfundtheoperating,maintenance,and renewal and replacement costsfortheIntertie,and to cover any other known Intertie risks. Please feel free to contact me if you have any questions regarding this analysis. ,Gardiner &Pierce,LLC ownPatrickH.Clancy