02/16/2012 01:30 PM Senate LABOR & COMMERCE

            SB  25-AIDEA SUSTAINABLE ENERGY PROGRAM                                                                         
                                                                                                                                
2:29:44 PM                                                                                                                    
CHAIR EGAN announced  SB 25 to be up for  consideration [SSSB 25,                                                               
labeled 27-LS0290\D was before the committee].                                                                                  
                                                                                                                                
SENATOR  MCGUIRE,   sponsor  of   SB  25,  said   they  initially                                                               
envisioned this  as being part  of their Senate's  energy package                                                               
that it passed; it's a missing link.                                                                                            
                                                                                                                                
She said  they created the  wildly successful  weatherization and                                                               
home energy  rebate program that  focuses on  individual Alaskans                                                               
and  their  residences;  the feedback  has  been  wonderful  from                                                               
Alaskans  who have  become  educated  about energy  conservation.                                                               
They  have  also  created  a renewable  energy  grant  fund  that                                                               
started  helping particularly  smaller communities  transition to                                                               
cleaner sustainable energy that  is non-diesel and hopefully will                                                               
help  them survive  into the  next 100  or 200  years. They  also                                                               
passed an  energy omnibus  bill that  created an  emerging energy                                                               
technology  fund and  a suite  of  programs that  are now  really                                                               
starting to take effect.                                                                                                        
                                                                                                                                
When they  went over the  energy package, she  came at it  from a                                                               
few angles:  direct grants as  in the emerging  energy technology                                                               
fund, direct  partnerships as in the  weatherization program, and                                                               
a loan component with commercial loans  in other areas. But SB 25                                                               
is  really  the  missing  piece  in  order  to  get  more  energy                                                               
infrastructure and projects going in the state.                                                                                 
                                                                                                                                
SENATOR MCGUIRE  said they  had also  rejuvenated the  Cook Inlet                                                               
with  new tax  incentives and  started  work on  an in-state  gas                                                               
pipeline  and  the Susitna  dam.  But  Alaskans know  the  energy                                                               
challenges are  still as dire as  ever and this year  the average                                                               
price of  oil is the  highest it has  been since 1860.  While the                                                               
state enjoys its surpluses, Alaskans  continue to be strangled by                                                               
these energy costs.                                                                                                             
                                                                                                                                
She said she  introduced SB 25 because she believes  they have an                                                               
opportunity to put some of the  state's savings to work in Alaska                                                               
by making capital available for  energy projects. Today utilities                                                               
and developers borrow  money from out of state when  they can get                                                               
the  credit to  build  projects  and they  must  pay interest  to                                                               
investors  which everyone  ultimately pays  in their  rates. Then                                                               
they leave  Alaska. SB 25 is  not just about getting  more energy                                                               
projects  in Alaska,  but  it's also  about  getting Alaskans  to                                                               
invest  in Alaska.  Currently those  loan  interest payments  are                                                               
paid to  out of state corporations,  but why not leave  them here                                                               
at home inside AIDEA which pays  back dividends to the state that                                                               
go into the general fund?                                                                                                       
                                                                                                                                
SENATOR MCGUIRE said the state  invests its surpluses and savings                                                               
in stocks, bonds,  real estate and infrastructure  outside of the                                                               
state in  the Permanent Fund.  Alaska is  a big facilitator  of a                                                               
lot of  energy projects  throughout the U.S.  and the  world, but                                                               
not  right here  in our  own  state. She  noted that  Territorial                                                               
Governor  Ernest  Gruening  recognized this  fundamental  problem                                                               
with Alaska's  economy when he said,  "Too much is going  out and                                                               
not enough is staying here in Alaska."                                                                                          
                                                                                                                                
She said she introduced SB  25, Alaska's Sustainable Strategy for                                                               
Energy Transmission and  Supply (ASSETS), to try to  chip away at                                                               
this  colonial model  Alaska is  still  stuck in  52 years  after                                                               
statehood. She said to her AIDEA  has been the most successful of                                                               
all the state's  investment programs. It has  returned almost the                                                               
entire principle  of $390  million. Last  year alone  it returned                                                               
almost $28 million. So she decided  to put this energy program to                                                               
work under  that rubric as opposed  to AEA or some  other agency,                                                               
because it has a credit worthy sustainable model.                                                                               
                                                                                                                                
2:35:04 PM                                                                                                                    
MICHAEL PAWLOWSKI,  staff to Senator  McGuire, said he  would hit                                                               
the highlights of his power point  presentation on SB 25 that was                                                               
also  available in  members' packets.  He said  the reports  they                                                               
gave the  committee are  largely energy  reports that  identify a                                                               
lot of  projects, but this  bill does not endorse  any particular                                                               
project. It is  about how to finance all and  any projects and to                                                               
let the best ones move forward.                                                                                                 
                                                                                                                                
He said the basic  challenge is that a lot of  money will have to                                                               
be spent in the  next 10 years on energy in  the state of Alaska.                                                               
The pathway document  was prepared in 2010  and identified almost                                                               
$2 billion in capital spending in  the next 10 years. The Greater                                                               
Railbelt  Integrated  Resource  Plan (GRETC)  identified  between                                                               
$13.6  and  $21  billion  in  spending  over  the  term  of  that                                                               
document.  The recently  released  Southeast Integrated  Resource                                                               
Plan  identified  up  to  $1.4  billion  in  relative  near  term                                                               
spending that  has to happen.  The point  of these reports  is to                                                               
point  out that  a lot  of  investment will  need to  be made  in                                                               
energy infrastructure,  and the  question before  the legislature                                                               
is  whether,  given  declining   oil  production,  the  available                                                               
revenue is enough to help these projects go forward.                                                                            
                                                                                                                                
MR. PAWLOWSKI said  this became a larger issue  because last year                                                               
this  body   included  language   in  the  capital   budget  that                                                               
explicitly expressed legislative intent  that the state's capital                                                               
investment in  energy generation  projects not exceed  50 percent                                                               
of  the  total  investment  required   to  fully  complete  those                                                               
projects. That  means 50 percent of  the project will have  to be                                                               
borrowed  and  financing  has  been  identified  as  one  of  the                                                               
greatest challenges facing the energy system in the state.                                                                      
                                                                                                                                
There  is a  huge gap  between  what is  needed and  what can  be                                                               
financed,  the point  being that  with the  small population  and                                                               
with a  limited rate base,  the capital expenditures  will exceed                                                               
the Railbelt's debt  capacity. Financing is an  important part of                                                               
the revenue stream in any  energy project. For instance, the debt                                                               
service on  a 100 percent  debt financed  Southeast hydro-project                                                               
is 78.1 percent of the revenues.  All the rates the consumers pay                                                               
go  to paying  debt  service  and that  money  leaves the  state.                                                               
ASSETS says  this is a big  problem and the legislature  has said                                                               
tackle it and provide an upper limit on grants and go forward.                                                                  
                                                                                                                                
MR.  PAWLOWSKI said  the governor  and the  legislature tried  to                                                               
deal with this  a few times but were unsuccessful  in a couple of                                                               
bills. SB 143  tried to get the Railbelt together  and offer some                                                               
financing, but  failed to  pass in  2009/2010. The  governor then                                                               
brought  in  SB  42  last   year  that  had  increased  financing                                                               
authorities  for AEA,  but those  were  taken out  in the  Senate                                                               
Resources   Committee  and   the  bill   ultimately  passed   the                                                               
legislature but  was limited to  a Susitna dam power  project. SB
 was  introduced at the  same time SB  42 was but  was deferred                                                               
until SB 42 worked its way through the legislature.                                                                             
                                                                                                                                
Now  that the  financing  gap  still exists,  he  said a  sponsor                                                               
substitute  for SB  25 was  introduced and  brought forward.  The                                                               
back three sections are probably the  most important - 10, 11 and                                                               
12 - but the earlier sections are a lot of conforming language.                                                                 
                                                                                                                                
First, Mr. Pawlowski  said, SB 25 creates  the Sustainable Energy                                                               
Transmission  and  Supply  Development Program  and  Fund  (SETS)                                                               
within  the Alaska  Industrial Development  and Export  Authority                                                               
(AIDEA) (Sections  10 and  11). The bill  proposes that  the SETS                                                               
fund  be  capitalized with  $250  million  (in section  2).  This                                                               
becomes the  core capital that  becomes the money that  AIDEA can                                                               
borrow against  or lend out  to energy projects. Then  the larger                                                               
portion of  the bill in  section 3 is conforming  language adding                                                               
the  word "energy"  into AIDEA's  enabling  statutes about  their                                                               
mission to clarify  that the legislature is asking  AIDEA to take                                                               
an active role in energy as an economic development tool.                                                                       
                                                                                                                                
Section 6  makes changes  to the  loan participation  program and                                                               
this section  is intended to  make sure  that sections 10  and 11                                                               
don't unfairly  compete with the private  sector. AIDEA currently                                                               
offers a program where commercial  lending institutions work with                                                               
the private sector but AIDEA  comes behind them to participate in                                                               
the  loans.  The  purpose of  broadening  "transmission"  to  "an                                                               
energy project" is to make sure  if someone did want to work with                                                               
a commercial lending  institution to develop a  project that it's                                                               
not unfairly being competed with by the SETS program.                                                                           
                                                                                                                                
2:41:00 PM                                                                                                                    
MR. PAWLOWSKI  said another important  point within  that section                                                               
is  the inclusion  of AIDEA's  ability to  participate in  a loan                                                               
participation program to  finance energy efficiency improvements.                                                               
Typically, AIDEA can  buy up to 90 percent of  a loan and section                                                               
6 proposes  up to 100  percent for an energy  efficiency project.                                                               
That is  to try and  get out of  the problem the  legislature has                                                               
poked at for  three years: primarily that  we have weatherization                                                               
for homes, the  energy efficiency revolving loan  fund for public                                                               
facilities, but  we have very  little for the  commercial sector.                                                               
So if a  local business wants to make their  business more energy                                                               
efficient they could work with  their local banks and AIDEA could                                                               
step in to help the banks reduce the risk of that loan.                                                                         
                                                                                                                                
2:41:48 PM                                                                                                                    
Finally  renewable energy  projects  were added  to the  existing                                                               
incentive interest rate  program that AIDEA has  for its programs                                                               
that  apply only  to economic  or rural  development projects  in                                                               
section 9.                                                                                                                      
                                                                                                                                
MR. PAWLOWSKI said important powers  were added in section 10, on                                                               
page  8,  lines  3-28.  Unlike   AIDEA's  existing  program,  the                                                               
separate fund has  the power to finance  projects, ensure project                                                               
obligation, guarantee  loans or bonds or  establish reserves, but                                                               
also  to  defer  principal  payments or  capitalize  interest  on                                                               
project financing  to finance projects of  a term up to  30 or 50                                                               
years for  hydroelectric or transmission. AIDEA  can currently do                                                               
50  years  on transmission,  but  hydro  projects are  long  term                                                               
projects with long  term payouts, and the longer  you can stretch                                                               
the term out the better rates the customers ultimately will pay.                                                                
                                                                                                                                
Senator  McGuire  wanted to  be  sure  there was  an  appropriate                                                               
legislative  role  in  the  decisions  to  finance  projects,  so                                                               
limitations were placed on the power  of AIDEA to engage in these                                                               
projects. If  AIDEA wants to  finance more than one-third  of the                                                               
capital  cost of  an  energy  project or  guarantee  a loan  that                                                               
exceeds  $20  million  that  would  have  to  come  back  to  for                                                               
legislative approval. The $20 million  is a number that exists in                                                               
current AIDEA  programs; the one-third  number is  really because                                                               
50 percent  would be  50 percent grant/50  percent loans  and the                                                               
point was to insure that  there was some other financing involved                                                               
in the  decision process. So  another third party group  is doing                                                               
some due diligence here.                                                                                                        
                                                                                                                                
2:43:43 PM                                                                                                                    
MR. PAWLOWSKI  reiterated that the  reason the bill was  put into                                                               
AIDEA was  that unlike typical  revolving loan funds,  in theory,                                                               
the  bill should  actually  generate revenues  for  the state  as                                                               
AIDEA's  earnings  increase.  That  would  return  money  to  the                                                               
treasury  that  the  legislature   could  decide  to  fund  other                                                               
programs  with. Since  it has  been capitalized,  AIDEA has  paid                                                               
$324,500,000 in dividends and in 2011 it was almost $20 million.                                                                
                                                                                                                                
MR. PAWLOWSKI explained  how SETS would work  within AIDEA. First                                                               
the legislature would  capitalize the SETS fund;  AIDEA would use                                                               
the SETS  fund to  facilitate the  financing of  energy projects;                                                               
those projects  through the  rates would repay  the loans  or the                                                               
investments  from AIDEA;  AIDEA would  then have  the ability  to                                                               
also reach  out to the  capital markets  to backfill the  fund by                                                               
using  the  loans  as  an   asset.  It's  really  setting  up  an                                                               
investment vehicle that  can perpetuate itself and  grow, so that                                                               
20  or 30  years from  now the  funding will  exist to  build the                                                               
infrastructure  to replace  the  infrastructure  built with  this                                                               
fund.                                                                                                                           
                                                                                                                                
He said it's  important to note that  SB 25 is not  the answer to                                                               
Alaska's energy challenges.  There will always be a  role for the                                                               
legislature simply because  of the small population,  but it does                                                               
provide a tool that is missing  from all the work the legislature                                                               
has done.                                                                                                                       
                                                                                                                                
SENATOR DAVIS  moved to  the adopt  CS, version  D [SSSB  25, 27-                                                               
LS0290\D].                                                                                                                      
                                                                                                                                
CHAIR EGAN objected for discussion.                                                                                             
                                                                                                                                
2:46:11 PM                                                                                                                    
JOE  GRIFFITH, General  Manager,  Matanuska Electric  Association                                                               
(MEA) and  President of  Arctec Alaska,  Inc., Palmer,  said they                                                               
supported SB  25. He said  Mr. Pawlowski  was right on  point and                                                               
this is a step that will  contribute to a more sustainable energy                                                               
future for the state. He said  the energy industry is the world's                                                               
biggest industry  and the most  capital intensive. In spite  of a                                                               
lot of heroic  efforts by a small number of  people that run this                                                               
industry  in   the  state,  they   do  achieve  high   levels  of                                                               
reliability, but  the system is  old and  needs a lot  of "tender                                                               
loving  care." It  never was  completed properly  because of  the                                                               
lack  of capital.  It is  only  through astute  balancing of  the                                                               
costs of  doing business that  they are  able to keep  working as                                                               
well  as  they  do.  Electrical  energy is  the  grease  for  the                                                               
economy, and SB 25 would  help the state leverage several billion                                                               
dollars.  The  numbers  are  staggering,  and  utilities  working                                                               
together  do  not  have  the   fiscal  strength  to  do  what  is                                                               
necessary.                                                                                                                      
                                                                                                                                
2:48:49 PM                                                                                                                    
BOB  GRIMM,   CEO,  Alaska  Power  and   Telephone  (AP&T),  Port                                                               
Townsend, WA,  said SB 25  is a good  tool to assist  getting the                                                               
stranded energy  resources of  Alaska to market  and put  them to                                                               
work for  Alaskans. He asked  that consideration be given  to the                                                               
projects in the  rural areas and wanted the  amount to capitalize                                                               
the  fund  increased from  what  is  being proposed.  Further  he                                                               
advised  the sponsor  to investigate  the program  to ensure  the                                                               
AIDEA can  cooperate with other  federal loan  guarantee programs                                                               
like the BIA to reduce the state's risk.                                                                                        
                                                                                                                                
2:49:57 PM                                                                                                                    
MARK DAVIS, Economic Development  Officer, AIDEA, supported SB 25                                                               
but  said the  administration has  no position  on it.  It's much                                                               
better  than  the  earlier  draft,   because  it  creates  a  new                                                               
financing program.  That is important  to ADIEA, because  the new                                                               
program  would separate  these potential  loans from  the current                                                               
revolving loan  fund and preserve its  current financial ratings.                                                               
A technical issue is that the interest  rate on a loan is not set                                                               
and there  is no explicit  authority to  make a loan;  neither is                                                               
there  explicit  authority  to  issue  a bond  and  there  is  no                                                               
reference to  revenue bonds. So  a little  more work needs  to be                                                               
done to make it better.                                                                                                         
                                                                                                                                
SENATOR GIESSEL asked if he  will be offering those amendments or                                                               
working with the sponsor.                                                                                                       
                                                                                                                                
MR. DAVIS replied  that he has been authorized  to make technical                                                               
assistance,  but  the  administration  has no  position  on  this                                                               
measure.                                                                                                                        
                                                                                                                                
2:51:11 PM                                                                                                                    
DUFF  MITCHEL,  Executive   Director,  Alaska  Independent  Power                                                               
Producers  Association,  supported  SB  25. He  added  that  this                                                               
allows private  entrepreneurs to  create jobs and  a lot  of them                                                               
would occur  where the  energy is  created, which  would be  in a                                                               
rural area.                                                                                                                     
                                                                                                                                
2:52:21 PM                                                                                                                    
PETER  NAOROZ,  President/General   Manager,  Kootznoowoo,  Inc.,                                                               
supported SB  25. However, he said  he wanted to see  the initial                                                               
capitalization number higher.  But for now $250 million  can go a                                                               
long way.  The point is to  leverage state assets not  only to do                                                               
good work  but to bring  private capital into the  state, because                                                               
it can't fund everything it  needs itself. He said Kootznoowoo is                                                               
the  village corporation  for  Angoon and  the  recipient of  the                                                               
state's  largesse,  and  they really  appreciate  that,  but  big                                                               
projects in their area need to  get done. Those are the ones that                                                               
will  finally  make  the  state  mature. SB  25  will  allow  for                                                               
Kootznoowoo to invest  in the state, as well  as mining interests                                                               
in projects that aren't feasible right now and timber.                                                                          
                                                                                                                                
2:54:27 PM                                                                                                                    
BOB  LOESHER, Alaska  Technology Development  Group, said  he has                                                               
been  involved  in  infrastructure  development  in  Southeastern                                                               
Alaska  for many  years. He  supported SB  25. He  served on  the                                                               
AIDEA board for six years and  is familiar with the protocols and                                                               
even-handedness of investment decisions  AIDEA makes. Adding this                                                               
fund  would stimulate  investment  in energy  and other  economic                                                               
development that  will create  jobs. Adding  this to  ADIEA would                                                               
also strength its  portfolio and make investment  from the Alaska                                                               
participation greater;  it is the  best instrument  to facilitate                                                               
this kind of investment.                                                                                                        
                                                                                                                                
CHAIR EGAN said that completed  public testimony. [SB 25 was held                                                               
in committee.]