Legislature(2003 - 2004)

04/01/2004 09:07 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                                
     CS FOR SENATE BILL NO. 350(L&C)                                                                                            
     "An  Act allowing a  joint action agency  to encumber  property                                                            
     interests  for  security  purposes;   declaring  certain  joint                                                            
     action  agencies  to  be  political  subdivisions  for  certain                                                            
     purposes; restricting  the sale of property of the joint action                                                            
     agency; allowing  the joint action agency to  transfer property                                                            
     to security  interest holders  under a security interest  or to                                                            
     other parties  without legislative approval;  and providing for                                                            
     an effective date."                                                                                                        
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair Wilken  stated that this legislation would  enable the Four                                                            
Dam  Pool  Power  Agency  (FDPPA)  to refinance   approximately  $73                                                            
million  in a  loan  owed to  the Alaska  Industrial  Development  &                                                            
Export Authority (AIDEA).                                                                                                       
                                                                                                                                
SENATOR  GARY  STEVENS,   the  bill's  sponsor,  characterized   the                                                            
legislation  as "a highly  technical bill"  in that, in addition  to                                                            
providing FDPPA  the ability to refinance  a $73 million  AIDEA loan                                                            
and thereby  to return that money  to AIDEA for use in other  areas,                                                            
the refinancing  would assist  FDPPA in providing  consumers  in the                                                            
communities of  Ketchikan, Petersburg, Wrangell, and  the Kodiak and                                                            
Valdez-Glennallen   areas  by  lowering  interest,  arbitrage,   and                                                            
administration  costs associated  with  that loan.  In addition,  it                                                            
would "enhance the options  that are available to the FDPPA" and the                                                            
aforementioned   communities   "regarding   inter-ties   and   other                                                            
activities."                                                                                                                    
                                                                                                                                
TOM LOVIS,  Chief  Executive Officer,  Four Dam  Pool Power  Agency,                                                            
stated  that  the  Agency represents   five communities   throughout                                                            
Alaska  and consequently,  a  large  number of  electric  consumers.                                                            
These  members   were  "the  fortunate   participants"  in   FDPPA's                                                            
acquisition  of  four  hydroelectric  projects  from  the  State  in                                                            
January 2002 that was funded  by a $77 million loan from AIDEA via a                                                            
Memorandum  of Understanding  (MOU)  with AIDEA at  a specified  6.5                                                            
percent  interest  rate. Now  that  FDPPA  is a  "fully operational                                                             
organization"  it  is  now  able to  secure  funding  that  was  not                                                            
previously  available to it. This  alternative would allow  FDPPA to                                                            
refinance its  AIDEA debt by means  "of the bond market,  using tax-                                                            
exempt debt." Lowering  the interest rate would result in savings of                                                            
between  $600,000 and  $1.5 million  a year on  what is currently  a                                                            
$6.3  million  debt  service.  FDPPA  members   would  benefit  from                                                            
experiencing this ten to  twenty percent debt savings on the current                                                            
debt  service.  He  noted  that  FDPPA  members   and  its  electric                                                            
consumers support this proposal.                                                                                                
                                                                                                                                
Mr. Lovis  reiterated  that AIDEA  would receive  approximately  $73                                                            
million  that  it could  utilize  to support  other  endeavors.  The                                                            
technical corrections included  in the bill might appear complicated                                                            
but "are relatively  straightforward"  as they would allow  FDPPA to                                                            
mortgage the  properties, use the  properties as security  in a note                                                            
with  the private  market,  clarify  FDPPA's  ability  to issue  tax                                                            
exempt debt for  the acquisition of projects, retain  the ability of                                                            
the projects  to continue to service  member communities,  and would                                                            
allow FDPPA  to lower costs  to its consumers  due to the  resulting                                                            
savings incurred by the refinancing.                                                                                            
                                                                                                                                
Co-Chair Wilken  asked how much consumer rates might  lower, in, for                                                            
instance, the  City of Petersburg,  were this legislation  approved.                                                            
                                                                                                                                
Mr. Lovis responded that  wholesale power expenses might decrease by                                                            
four  or five  percent.  This  might translate  to  a three-percent                                                             
reduction for the consumer.                                                                                                     
                                                                                                                                
Senator  Dyson   understood  that,   as  reflected  in  Section   2,                                                            
subsection  (h) on page  two, line  23, in order  to accomplish  the                                                            
goal  of  the  legislation,  the  FDPPA  must  be  recognized  as  a                                                            
political subdivision, similar to that of being a city.                                                                         
                                                                                                                                
Mr. Lovis  responded  that in  order to  further  the original  loan                                                            
between AIDEA  and FDPPA, it was required  that FDPPA be  identified                                                            
as a political  subdivision in order  to transfer State property  to                                                            
it. The intent of the definition  language is to continue the use of                                                            
that definition in order  to provide security for the project and to                                                            
allow for the issuance  of the tax-exempt debt. The definition would                                                            
be limited to the terms  of the original Memorandum of Understanding                                                            
(MOU) regarding  those specific projects.  Furthermore, continuance                                                             
of the language  would be a vehicle through which  FDPPA could avoid                                                            
registration and other  expenses that might otherwise be required by                                                            
the Securities and Exchange Commission.                                                                                         
                                                                                                                                
Senator Dyson  understood therefore that this is a  continuance of a                                                            
definition  that  has  been  in  practice   rather  than  being  new                                                            
language.                                                                                                                       
                                                                                                                                
Mr.  Lovis   affirmed.   For  further  clarification,   Section   2,                                                            
subsection  (h) includes  language that  limits how  FDPPA would  be                                                            
recognized   as  a  political  subdivision   by  incorporating   the                                                            
language, "Except as provided  in this subsection, the agency is not                                                            
a political subdivision of the state."                                                                                          
                                                                                                                                
Senator Dyson  asked how  this legislation  might benefit the  power                                                            
intertie project.                                                                                                               
                                                                                                                                
Mr.  Lovis responded  that  the  intertie  project and  other  FDPPA                                                            
projects  would benefit  from being provided  alternative  financing                                                            
options.                                                                                                                        
                                                                                                                                
Co-Chair  Wilken  asked  regarding  FDPPA'a ability  to  use  leased                                                            
assets as security for  such things as bonds as specified in Section                                                            
1, subsection  (c) (6) on page two, line 17, as this  is contrary to                                                            
the ability of other authorities.                                                                                               
                                                                                                                                
     (6)  to use  facilities, projects,  and  related assets  owned,                                                            
     leased,  operated by  the joint action  agency as security  for                                                            
     bonds,   notes,  mortgages,   enhancement  devices,   or  other                                                            
     obligations.                                                                                                               
                                                                                                                                
Mr. Lovis  responded  that, "there  are such  things as capitalized                                                             
leases  and other  such arrangements  … that  can be  used as  fixed                                                            
assets in the course of  an operation." Long-term leases for certain                                                            
maintenance  equipment and  other equipment  would be recognized  as                                                            
collateral.                                                                                                                     
                                                                                                                                
Co-Chair  Green   countered  that  "a  long-term  lease   should  be                                                            
recognized as a debt."                                                                                                          
                                                                                                                                
Mr. Lovis  expressed  that while there  would be  a debt  obligation                                                            
attached to  it; a piece of leased  equipment on the premises  would                                                            
be recognized as security.                                                                                                      
                                                                                                                                
Co-Chair Green  asked for further  clarification as to how  the term                                                            
"or operated"  as specified  in subsection  (c)(6) would qualify  as                                                            
security.                                                                                                                       
                                                                                                                                
Mr. Lovis exampled  that facilities  utilized by the agency  "in the                                                            
course  of an operation  that might  be provided  by members  of the                                                            
agency or participants  in the power sales agreement"  would qualify                                                            
as security.                                                                                                                    
                                                                                                                                
Co-Chair Green asked that an example be provided.                                                                               
                                                                                                                                
BOB  LERESCHE,  Financial  Adviser,  Four  Dam  Pool  Power  Agency,                                                            
testified via  teleconference from  an offnet site, and stated  that                                                            
this is standard  language written  by underwriters that  appears in                                                            
most mortgages.  An example would be a dispatch center  that belongs                                                            
to a  local utility  but which  is operated  by the  FDPPA. Were  an                                                            
entity to replace  the FDPPA, they  would have the right  to operate                                                            
that center in order to operate the dam.                                                                                        
                                                                                                                                
Co-Chair Green  asked for verification that operated  property could                                                            
act as security.                                                                                                                
                                                                                                                                
Mr.  LeResche  confirmed  that  the right  to  operate  that  leased                                                            
facility  would be recognized  as an  asset as it  has value  to the                                                            
operation.                                                                                                                      
                                                                                                                                
Senator B. Stevens posed  a hypothetical situation in regards to the                                                            
leased  asset question  as  follows: a  power grid  transmission  is                                                            
owned by an association,  but leases capacity on that  power grid to                                                            
an energy  trading company.  The energy  trading company  recognizes                                                            
that leased power capacity  as an asset and uses it as security with                                                            
which to borrow money.  He asked how that leased capacity on a power                                                            
line could be considered an asset.                                                                                              
                                                                                                                                
                                                                                                                                
SFC 04 # 66, Side A 10:42 AM                                                                                                    
                                                                                                                                
                                                                                                                                
Mr.LeResche  responded that  the rights that  accompany that  lease,                                                            
whether it  is a capitalized lease  or an operating lease,  would be                                                            
recognized  as an asset  and could  be used a  collateral as  "it is                                                            
something of value that the organization is paying for."                                                                        
                                                                                                                                
Senator  B. Stevens  understood  therefore  that in  a situation  in                                                            
which  a Joint  Action  Agency, such  as  the FDPPA,  leased  twenty                                                            
percent  of a  power  transmission  grid that  had a  line  capacity                                                            
valued at  $100 million  dollars, the joint  action committee  could                                                            
acquire a $20 million line of credit.                                                                                           
                                                                                                                                
Mr. LeResche  responded that were  he a banker he would not  issue a                                                            
$20 million line of credit in that situation.                                                                                   
                                                                                                                                
Senator B.  Stevens argued  that that is how  the language  could be                                                            
interpreted.                                                                                                                    
                                                                                                                                
Mr. LeResche countered  that the right to transmit twenty percent of                                                            
the power available on  that line for a certain amount of time would                                                            
be recognized as an asset as it is worth something.                                                                             
                                                                                                                                
Mr. Lovis  interjected that  in this instance,  "the ability  of the                                                            
asset  to  continue  to provide  the  services  expected  under  the                                                            
operation of the agency"  does have value. "The use of the line, the                                                            
ability to  secure for the purposes  of a mortgage, and the  ability                                                            
to continue  to provide  the services associated  with the  projects                                                            
through equipment  that may be leased" in order "to  continue to use                                                            
the  power   productive  capabilities   of  the  agency"   could  be                                                            
recognized  as  security  for a  note. This  is  the intent  of  the                                                            
language.                                                                                                                       
                                                                                                                                
Senator B. Stevens voiced  being uncomfortable in recognizing leased                                                            
assets as security as "the  assumption is being made that the rights                                                            
of the lease could be transferable."                                                                                            
                                                                                                                                
Mr. LeResche  responded that "the  lease hold interest" rather  than                                                            
the leased asset, is what  would be identified as the collateral. He                                                            
stressed that  "this legislation does not provide  any new rights to                                                            
the  lessee"  and  that  this  kind  of collateralization   must  be                                                            
specified in the lease.  Many leases include language that specifies                                                            
that the lease  could be reassigned  upon permission of the  leaser.                                                            
                                                                                                                                
Senator Bunde  accepted that  there would be  value in a lease  that                                                            
involved  transmission. Furthermore,  he noted  that stranded  power                                                            
and stranded gas  are undervalued because no transportation  of that                                                            
energy is currently available.  Therefore, were a lease written with                                                            
agreement that  the lessee's rights could be transferred  would have                                                            
financial value.                                                                                                                
                                                                                                                                
Co-Chair Wilken  furthered that a  lease "would provide the  ability                                                            
to realize a revenue stream that supports the bond."                                                                            
                                                                                                                                
Mr. Lovis concurred  that it is "a  vehicle to ensure the  continued                                                            
capability and  operability of the other assets associated  with the                                                            
hydroelectric project."                                                                                                         
                                                                                                                                
Co-Chair Wilken stated that "therein is the value."                                                                             
                                                                                                                                
Senator B. Stevens  continued to voice concern that  an entity could                                                            
specify that a  leased asset could provide collateral  for borrowing                                                            
more money. He  suggested that the word "leased" be  eliminated from                                                            
the legislation.                                                                                                                
                                                                                                                                
Co-Chair Wilken stated  that further discussion in this regard would                                                            
transpire before Committee action on the bill occurs.                                                                           
                                                                                                                                
Co-Chair Green  requested that further clarification  be provided in                                                            
regard to new language in Section 3, subsections (J) and (K).                                                                   
                                                                                                                                
Co-Chair Wilken  stated that the bill would be HELD  in Committee in                                                            
order to address these concerns.                                                                                                
                                                                                                                                

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