Legislature(2005 - 2006)SENATE FINANCE 532

02/13/2006 09:00 AM Senate FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 188 BULK FUEL REVOLVING LOAN FUND CAP TELECONFERENCED
Heard & Held
+= HB 243 SWAN LAKE-TYEE LAKE INTERTIE TELECONFERENCED
Heard & Held
+ SB 207 AK AEROSPACE DEVEL. CORP BD MEMBERSHIP TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                                                                                                                                
     CS FOR SENATE BILL NO. 188(CRA)                                                                                            
     "An Act increasing the maximum amount of loans from the bulk                                                               
     fuel revolving loan fund to one borrower."                                                                                 
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Senator Donny Olson, the  bill's sponsor, stated that the Governor's                                                            
Rural Energy Action Council's  (GREAC) recommendations regarding how                                                            
to  improve  the Bulk  Fuel  Revolving  Loan  Fund  (BFRLF)  program                                                            
prompted him  to introduce this bill.  The BFRLF was established  in                                                            
1980 to aid communities  experiencing financial difficulties  due to                                                            
expenses associated  with annual or biannual shipments  of petroleum                                                            
products. Over  time the original  $50,000 loan limit was  raised to                                                            
$300,000 to address price  "escalations" and increasing consumption.                                                            
GREAC also  developed incentives  to encourage  "larger cooperative                                                             
organizations"  to combine  their purchases  in order to earn  price                                                            
concessions.                                                                                                                    
                                                                                                                                
Senator Olson  stated that  in order to further  the success  of the                                                            
BFRLF  program,  this  bill  would  increase  the  loan  limit  from                                                            
$300,000  to $400,000.  It  would  also expand  that  limit were  an                                                            
entity developed  to purchase fuel  for more than one community.  In                                                            
that  case, the  loan limit  would be  the lesser  of $1,500,000  or                                                            
$400,000 multiplied  by the number  of communities participating  in                                                            
the cooperative effort.  "This would encourage larger fuel purchases                                                            
by those organizations to obtain the economy of scale."                                                                         
                                                                                                                                
Senator Olson  noted that two amendments, developed  by GREAC, would                                                            
be forthcoming.                                                                                                                 
                                                                                                                                
9:09:53 AM                                                                                                                    
                                                                                                                                
Senator  Olson  moved to  adopt  committee  substitute  Version  24-                                                            
LS0952\S as the working document.                                                                                               
                                                                                                                                
Co-Chair Green objected for discussion.                                                                                         
                                                                                                                                
In  response to  a  question  from Co-Chair  Wilken,  Senator  Olson                                                            
clarified  that Version  "S"  contained two  changes:  one being  to                                                            
increase  the individual loan  limit from  $300,000 to $400,000  and                                                            
the other to allow a single  entity to coordinate a cooperative loan                                                            
amounting  to the lesser  of $400,000  multiplied  by the number  of                                                            
communities involved in that cooperative effort or $1,500,000.                                                                  
                                                                                                                                
9:11:43 AM                                                                                                                    
                                                                                                                                
Co-Chair  Wilken  asked  whether   the language   pertaining  to  "a                                                            
cooperative  corporation"  as depicted  in  Section  1(e)(1) page  1                                                            
lines 7 and 8 was new.                                                                                                          
                                                                                                                                
Senator  Olson affirmed  that while  there "have  been attempts  to"                                                            
organize  cooperative organizations,  no provisions  in that  regard                                                            
have ever been incorporated into the Bulk Fuel program.                                                                         
                                                                                                                                
9:12:22 AM                                                                                                                    
                                                                                                                                
Co-Chair  Wilken asked  whether those  were the  lone changes  being                                                            
proposed.                                                                                                                       
                                                                                                                                
9:12:46 AM                                                                                                                    
                                                                                                                                
Senator Olson confirmed those as being the only changes.                                                                        
                                                                                                                                
Co-Chair Green  informed the Committee that further  information has                                                            
been provided  in the "Blue Book"  titled "Bulk Fuel Revolving  Loan                                                            
Fund History, Status, Projections"  [copy on file], dated August 25,                                                            
2005. To that  point, she read the following section  as depicted on                                                            
page 3.                                                                                                                         
                                                                                                                                
     Current  law  allows  individual  loans  to finance  bulk  fuel                                                            
     acquisition for use  in multiple communities, provided that the                                                            
     governing   body   of  each   community  issues   its   written                                                            
     endorsement.   For  example,   an  electric  cooperative   with                                                            
     membership  extending to more  than one community can  obtain a                                                            
     single BFRLF loan  to finance its bulk fuel purchase as long as                                                            
     each  participating community  has less  than 2,000  population                                                            
     and  provides AEA [Alaska  Energy Authority]  with its  written                                                            
     endorsement.  Under current  law, however,  the cooperative  in                                                            
     this  example can  borrow  no more  than $300,000  in a  single                                                            
     fiscal year - the same as any other borrower.                                                                              
                                                                                                                                
Co-Chair Green  stated that the proposed language  in the bill would                                                            
allow  the amount  that  could  be borrowed  in  this  manner to  be                                                            
$400,000  multiplied by the  number of participants  "not to  exceed                                                            
$1,500,000".  "The  pooling" allowed  in this  manner  is "the  most                                                            
substantial" change.                                                                                                            
                                                                                                                                
9:13:31 AM                                                                                                                    
                                                                                                                                
Senator  Dyson   asked  whether  an   estimate  of  the   number  of                                                            
cooperative agreements that might be formed has been determined.                                                                
                                                                                                                                
Senator Olson  deferred to  the Alaska Energy  Authority (AEA).  His                                                            
"general  sense" was that  the inclusion of  this language  would be                                                            
important, as  it would allow for such cooperative  agreements to be                                                            
explored. While  the Yukon-Kuskokwim  (YK) area had considered  this                                                            
approach,  action was  curtailed,  as it  was not  authorized  under                                                            
Statute.                                                                                                                        
                                                                                                                                
Senator Dyson  asked whether  data on the  history of loan  defaults                                                            
was available.                                                                                                                  
                                                                                                                                
Senator Olson affirmed that data was available.                                                                                 
                                                                                                                                
Senator Dyson stated that the information would be appreciated.                                                                 
                                                                                                                                
9:15:04 AM                                                                                                                    
                                                                                                                                
Senator Olson  clarified that  the data focused  on loans that  were                                                            
delinquent rather that loans that were in default.                                                                              
                                                                                                                                
JIM   MCMILLAN,   Deputy   Director,   Credit,   Alaska   Industrial                                                            
Development  &  Export   Authority  and  Alaska  Energy   Authority,                                                            
testified  via  teleconference   from  Anchorage  and  informed  the                                                            
Committee  that "over the  past few years,  the delinquency  rate on                                                            
the Bulk Fuel  Revolving Loan Fund  has been averaging between  five                                                            
and ten percent. Delinquency  is defined as any loan where a payment                                                            
is 90 days or more past due."                                                                                                   
                                                                                                                                
Senator Dyson asked the total amount in delinquency status.                                                                     
                                                                                                                                
Mr. McMillan stated that  as of December 31, 2005, $297,000 out of a                                                            
total $4.3  million loan balance was  delinquent. This would  equate                                                            
to 6.91 percent of the outstanding loan balance total.                                                                          
                                                                                                                                
9:16:53 AM                                                                                                                    
                                                                                                                                
Co-Chair Wilken  asked whether a cooperative  or a community  with a                                                            
delinquent standing would be able to acquire another loan.                                                                      
                                                                                                                                
Senator Olson understood that delinquent entities could not re-                                                                 
apply for another  loan. However, other programs would  be available                                                            
through which an entity could address its outstanding balance.                                                                  
                                                                                                                                
9:17:31 AM                                                                                                                    
                                                                                                                                
Mr. McMillan  stated that  in order  for a loan  to be approved,  an                                                            
applicant must  meet "certain credit standards" which  would include                                                            
their credit history.  Thus, delinquency on an existing  loan "would                                                            
be adverse issue". In addition,  State Statutes also limit an entity                                                            
to receive  one loan per fiscal year.  Therefore, an entity  with an                                                            
outstanding loan would not qualify to receive another loan.                                                                     
                                                                                                                                
Co-Chair Wilken  asked whether the $200,000 depicted  in the "Write-                                                            
Downs and  Recoveries"  column of  Table 1, Section  1 "History  and                                                            
Status of the  Bulk Fuel Revolving Loan Fund" on page  4 of the Blue                                                            
Book was the delinquent amount Mr. McMillan had referred to.                                                                    
                                                                                                                                
Mr.  McMillan  responded  that it  was  not.  While AEA  does  track                                                            
delinquencies,  the information in the Blue Book does  not reference                                                            
that. There is  a difference between delinquencies  and Write-Downs.                                                            
                                                                                                                                
Co-Chair Wilken  asked for further  information about the  effect of                                                            
incorporating  the language "cooperative  corporation" as  specified                                                            
in Section 1(e)(1) page 1 lines 7 and 8.                                                                                        
                                                                                                                                
9:19:46 AM                                                                                                                    
                                                                                                                                
Mr. McMillan  explained that under  current Statutes, a cooperative                                                             
of five communities,  for example,  that endeavored to combine  fuel                                                            
purchases  to  maximize  price  breaks  could borrow  a  maximum  of                                                            
$300,000. This  proposed language would expand the  cooperative loan                                                            
capacity  to the lesser of  $1.5 million  or $400,000 multiplied  by                                                            
the  number of  communities  in the  cooperative.  The $1.5  million                                                            
amount  was specified  in  order to  prevent  the BFRLF  from  being                                                            
depleted.                                                                                                                       
                                                                                                                                
Co-Chair Wilken acknowledged.                                                                                                   
                                                                                                                                
Co-Chair  Green desired that  representatives  of AEA provide  their                                                            
testimony  prior  to  Senator  Olson  offering  the  aforementioned                                                             
amendments.                                                                                                                     
                                                                                                                                
9:21:19 AM                                                                                                                    
                                                                                                                                
Mr. McMillan stated that  the BFRLF was established to provide funds                                                            
to communities with populations  smaller that 2,000 that annually or                                                            
semiannually   purchased   bulk   fuel.   "Typical   borrowers   are                                                            
communities,  utilities  that provide  power in  the community,  and                                                            
fuel retailers in the community.  The fund would provide money up to                                                            
90 percent  of the wholesale price  landed of bulk fuel purchased".                                                             
The current loan limit is $300,000.                                                                                             
                                                                                                                                
Mr. McMillan  stated that  the changes proposed  in this bill  would                                                            
increase  the individual loan  limit from  $300,000 to $400,000.  In                                                            
addition, it would  allow a cooperative organization  or an electric                                                            
cooperative  "to borrow  the lesser  of $400,000  multiplied by  the                                                            
number of communities or $1,500,000."                                                                                           
                                                                                                                                
Mr. McMillan stated  that the Middle Kuskokwim Electric  Cooperative                                                            
is a cooperative  of five communities  that currently borrows  money                                                            
in this fashion.                                                                                                                
                                                                                                                                
Mr. McMillan  stated  that the  legislation would  also expand  "the                                                            
definition  of eligible borrower to  a person maintaining  community                                                            
facilities  for  infrastructure".  In  addition,  AEA  could  "adopt                                                            
regulations to establish  standards for the allocation of loan funds                                                            
to eligible borrowers."                                                                                                         
                                                                                                                                
Co-Chair   Green  as  whether   Mr.  McMillan's   remarks   included                                                            
references to language in the forthcoming amendments.                                                                           
                                                                                                                                
Mr. McMillan  affirmed. Continuing,  he informed the Committee  that                                                            
the changes  being proposed to current  regulations were  the result                                                            
of the fact that,  in recent years, AEA has experienced  an increase                                                            
in the  number  of borrowers  as well  as  an increase  in the  loan                                                            
amounts being  requested.  The increases are  the result of  "higher                                                            
prices  for delivered  bulk fuel,  a decline in  vendors wanting  to                                                            
finance  the  purchase  of  bulk fuel,  and  to  a  certain  extent,                                                            
increased  volumes of  bulk fuel  as a  result of  AEA's efforts  to                                                            
upgrade bulk fuel tank farms in Rural Alaska."                                                                                  
                                                                                                                                
Mr.  McMillan  shared   that  increased  fuel  prices   have  forced                                                            
communities   once  able   to  finance  their   purchases   to  seek                                                            
assistance.  In  FY  2003,  39  loans  totaling  $3.4  million  were                                                            
requested.  Six of those  requested the maximum  loan limit  at that                                                            
time, which was  $200,000. In FY 04, 53 borrowers  requested a total                                                            
of $4.9 million.  The maximum loan limit that year  was $300,000. In                                                            
FY 05,  54 borrowers requested  loans amounting  to a total  of $6.7                                                            
million. 27 borrowers  have requested $4.2 million  though the first                                                            
half of FY  06.  The average loan  amount increased 53 percent  from                                                            
FY 03 through FY 05.                                                                                                            
                                                                                                                                
Mr. McMillan  informed the  Committee that  GREAC has endeavored  to                                                            
further the creation of  fuel cooperatives in hopes that such volume                                                            
ordering  might  generate  "price  breaks"  for  Rural  Alaska.  The                                                            
existing single loan limit  "might defeat" that effort. The proposal                                                            
to  base a  cooperative's  loan  limit  on the  lesser  of  $400,000                                                            
multiplied  by  the  number  of  entities   in  the  cooperative  or                                                            
$1,500,0000  "to  preclude depleting  the  fund" would  assist  this                                                            
endeavor.                                                                                                                       
                                                                                                                                
9:26:55 AM                                                                                                                    
                                                                                                                                
Mr. McMillan  stated that AEA recently  received a request  "to lend                                                            
bulk fuel  money to the  Rural Utilities Services  (RUS), an  arm of                                                            
the  Yukon-Kuskokwim  Health  Corporation  who  had entered  into  a                                                            
written  agreement with  the City  of Chevak to  manage and  operate                                                            
their  sewer and  water system  which  included purchasing  fuel  to                                                            
operate the system".  Current Statutes designate eligible  borrowers                                                            
to  include  the  community,  the  utility   providing  power  in  a                                                            
community, and  fuel retailers in the community. Thus  lending funds                                                            
to a third party, such  as RUS, that a community had contracted with                                                            
to oversee the operation of its utilities is prohibited.                                                                        
                                                                                                                                
Mr. McMillan specified  that one of the forthcoming amendments would                                                            
allow AEA to adopt regulations  pertaining to the program and to set                                                            
standards  for  the  allocation  of  the  Fund  money  "to  eligible                                                            
borrowers when  the demand on the  fund exceeds the amount  of money                                                            
available to lend".  While this has not been an issue  since FY 2002                                                            
when additional capitalization  of five million dollars was received                                                            
in the  form of  a United  States  Department of  Agriculture  Rural                                                            
Utilities  Service  (USDA RUS)  grant,  the action  being  requested                                                            
would allow AEA  to take action in the future were  there increasing                                                            
demand on the Fund and an absence of additional capitalization.                                                                 
                                                                                                                                
Co-Chair Green reminded  the Committee that Mr. McMillan's testimony                                                            
included  explanations  of both  the bill  and the  two forthcoming                                                             
amendments.                                                                                                                     
                                                                                                                                
9:28:54 AM                                                                                                                    
                                                                                                                                
Senator Stedman asked regarding  the proposal to increase the amount                                                            
of  money  that could  be  lent  to  cooperatives,  specifically  in                                                            
regards to the  language on page "v" of the Blue Book  that reads as                                                            
follows.                                                                                                                        
                                                                                                                                
     For these organizations, the current language of the bill                                                                  
     would  raise the annual  limit to "$300,000  multiplied  by the                                                            
     number  of communities on whose  behalf the bulk fuel  is to be                                                            
     purchased,  or $1,000,000 whichever is greater."  This language                                                            
     means  that, for  an  electric cooperative  such  as AVED  that                                                            
     serves 50 communities,  the annual borrowing limit would be $15                                                            
     million.  However,   if  the  intent  was  to  set  the  annual                                                            
     borrowing limit at  "whichever is less" of the two alternative,                                                            
     then AVEC's  borrowing limit  under an amended bill  would $1.0                                                            
     million rather than $15 million.                                                                                           
                                                                                                                                
     Only  5 existing organizations  were  identified that  would be                                                            
     directly  affected by the proposed  legislation. None  of these                                                            
     are currently  BFRLF borrowers and none expect  to become BFRLF                                                            
     borrowers  in  the  foreseeable   future  whether  or  not  the                                                            
     legislation  is enacted.  However, it  is possible that  one or                                                            
     more may  access the BFRLF regardless of current  expectations.                                                            
     Naknek   Electric   Association   reported   that   it   needed                                                            
     supplemental  financing  this past  year from  the Cooperative                                                             
     Finance  Corporation (CFC) in  an amount exceeding $300,000  to                                                            
     help finance  its bulk fuel acquisition  because the  utility's                                                            
     cash reserves  were inadequate  to pay the entire bill.  Should                                                            
     this happen again  and if the BFRLF borrower limit were raised,                                                            
     Naknek   Electric   could   find  it   preferable   to   obtain                                                            
      supplemental financing from the BFRLF rather than CFC.                                                                    
                                                                                                                                
Senator Stedman  noted that  the maximum  cooperative loan  limit in                                                            
this language  differs from  the $1.5 million  specified in  Version                                                            
"S". In addition,  the statement on  page "v" that none of  the five                                                            
identified  organizations would utilize  the funds differs  from the                                                            
argument in support of cooperative borrowing.                                                                                   
                                                                                                                                
9:30:10 AM                                                                                                                    
                                                                                                                                
Mr. McMillan  responded  that the amendment  regarding cooperatives                                                             
and  the amount  that  they  could borrow  from  the Fund  could  be                                                            
characterized  as a "proactive measure."  The desire of REAC  is "to                                                            
encourage  the  formation  of  bulk  fuel  cooperatives".   Electric                                                            
cooperatives such as the  Alaska Village Electric Cooperative (AVEC)                                                            
that is comprised  of approximately 50 communities  currently exist.                                                            
Due to  its size, AVEC  has been able to  negotiate reasonable  fuel                                                            
prices  with   vendors,  without   the  assistance  of  the   BFRLF.                                                            
Furthermore, were  AVEC to require BFRLF assistance,  it could "bust                                                            
the fund."                                                                                                                      
                                                                                                                                
Mr. McMillan  reiterated that the  purpose of the proposal  would be                                                            
to encourage the formation of additional bulk fuel cooperatives.                                                                
                                                                                                                                
9:31:33 AM                                                                                                                    
                                                                                                                                
Senator Stedman  interpreted this answer to indicate  that there "is                                                            
there is no current demand"  from cooperatives. While AEA appears to                                                            
anticipate  that there  could be demand  in the  future, the  report                                                            
would appear to indicate that there would not be.                                                                               
                                                                                                                                
Senator Stedman also asked  about Section V as depicted on page "iv"                                                            
of the Blue  Book, specifically as  he understood it to "insinuate"                                                             
that there  might be other  avenues through  which to achieve  lower                                                            
fuel prices.                                                                                                                    
                                                                                                                                
     V.  There is  an extensive  history of  efforts to consolidate                                                             
     bulk  fuel  purchasing   in  rural  Alaska  with  the  goal  of                                                            
     achieving  price  savings.  Attempts  to  create  and  maintain                                                            
     formal   bulk   fuel   purchasing   cooperatives    have   been                                                            
     unsuccessful  although some efforts  at informal consolidation                                                             
     have  worked  out and  have been  sustained  over  a period  of                                                            
     years.  Interviews suggest that,  while volume discounts  might                                                            
     be achieved  for consolidated purchasers within  a certain size                                                            
     range,  more  significant  savings are  likely  to be  achieved                                                            
     through  strategies that assure  fuel distributors of  full and                                                            
     timely payment.                                                                                                            
                                                                                                                                
9:32:30 AM                                                                                                                    
                                                                                                                                
Mr. McMillan  communicated that the  review of previous attempts  to                                                            
establish   bulk  fuel   cooperatives   would   indicate  that   the                                                            
cooperatives  have failed  to achieve the  primary goal of  reducing                                                            
fuel costs  "through large volume  purchases". Numerous factors  may                                                            
have contributed  to that failure including the member's  obligation                                                            
to fund the cooperative's  overhead and the issue  of the fuel being                                                            
delivered   to  multiple   locations.  Vendors   have  stated   that                                                            
delivering fuel to multiple  locations is a primary driver of costs.                                                            
This  issue could  be diminished  were  there one  central  delivery                                                            
location.  Senator Stedman  is correct that  history would  indicate                                                            
that there has been little success with bulk fuel cooperatives.                                                                 
                                                                                                                                
9:34:07 AM                                                                                                                    
                                                                                                                                
Senator Olson referred  the Committee to the chart on page 20 of the                                                            
Blue Book.  He asked for  verification that  the community  of Aniak                                                            
with a population  of 539 paid $1.80 per gallon of  fuel whereas the                                                            
community  of Tuluksak  with  a population  of  461  paid $3.27  per                                                            
gallon.                                                                                                                         
                                                                                                                                
9:34:39 AM                                                                                                                    
                                                                                                                                
Mr.  McMillan stated  that  AEA contracted  with  a  third party  to                                                            
conduct the study  and gather the information presented  in the Blue                                                            
Book. Therefore, he could only accept the information as stated.                                                                
                                                                                                                                
9:35:02 AM                                                                                                                    
                                                                                                                                
Senator  Olson asked  how  the loan  defaults being  experienced  by                                                            
BFRLF  would   compare  to  other   commercial  default/delinquency                                                             
percentages.                                                                                                                    
                                                                                                                                
Mr. McMillan,  drawing  on his 25  years as a  commercial banker  in                                                            
Alaska, stated that bankers  would view a delinquency rate exceeding                                                            
two  percent of  their  portfolio, as  being  excessive.  Continuing                                                            
however, he characterized  these loans as "higher risk loans" due to                                                            
the nature of the borrowers.  In 2001 and 2002, AEA was experiencing                                                            
delinquency   rates  as  high   as  25  to   30  percent.   "Prudent                                                            
underwriting   and  strong  follow-up  on  collections"   have  been                                                            
successful in reducing the delinquency rates.                                                                                   
                                                                                                                                
9:36:24 AM                                                                                                                    
                                                                                                                                
Senator Stedman declared  that as this discussion has continued, the                                                            
issue has become  more confusing.  While the financing component  of                                                            
the program  might have  been successful,  the "report infers"  that                                                            
the effort to  reduce fuel prices has been unsuccessful.  The report                                                            
also  indicates that  many communities  have  opted not  to use  the                                                            
program. To  that point, he pondered  whether that might  be because                                                            
there are State  energy assistance programs. The programs  should be                                                            
reviewed;  some  might not  be  required  and perhaps  others  could                                                            
either be consolidated or changed.                                                                                              
                                                                                                                                
9:37:26 AM                                                                                                                    
                                                                                                                                
Senator   Stedman   reiterated   the   fact   that   five   existing                                                            
organizations  would not be anticipated  to use the BFRLF.  Thus the                                                            
question  is  to how  this  program  would mesh  with  other  energy                                                            
assistance programs that are available.                                                                                         
                                                                                                                                
9:38:06 AM                                                                                                                    
                                                                                                                                
Mr. McMillan  clarified  that  rather than  "to lower  the price  of                                                            
fuel", the  BFRLF was established  to enable communities  to finance                                                            
large annual or  semi-annual purchases of fuel. There  are a limited                                                            
number  of lenders  that would  allow communities  to  pay for  such                                                            
"purchases up  front and pay back the loan over a  seasonal period".                                                            
                                                                                                                                
Mr. McMillan continued  that the experience is that  as the price of                                                            
fuel has increased,  more communities  have been borrowing  from the                                                            
Fund. It  should be noted  that there is a  movement to create  bulk                                                            
fuel  cooperatives.  He  communicated   that  the  Northwest  Arctic                                                            
Borough  has been experimenting  with a  semi-cooperative model  for                                                            
approximately  one year. However,  he was unaware of the  results of                                                            
that endeavor.  Nonetheless,  the high  price of  fuel has  prompted                                                            
more  people  to further  efforts  to  achieve  lower  fuel  prices.                                                            
Cooperatives might be one of numerous efforts in that respect.                                                                  
                                                                                                                                
9:40:14 AM                                                                                                                    
                                                                                                                                
Senator Stedman  understood that a  first time BFRLF borrower  would                                                            
be issued  a zero  interest rate.  A second time  borrower would  be                                                            
issued  a five  percent interest  rate,  and a third  time  borrower                                                            
would be issued  a rate tied to long-term  municipal revenue  bonds.                                                            
He asked  that the  interest rate  determinations  be elaborated  to                                                            
include  how  the  BFRLF  interest  rates compared   to those  of  a                                                            
commercial lender.                                                                                                              
                                                                                                                                
9:41:09 AM                                                                                                                    
                                                                                                                                
Mr.  McMillan  responded  that  Senator   Stedman  is  correct:  the                                                            
interest rate  for the first loan  is zero; the second loan  rate is                                                            
five percent; and the third  loan would be "an average of some index                                                            
of municipal bonds".                                                                                                            
                                                                                                                                
Mr. McMillan expressed  that commercial lenders' rates would vary as                                                            
they would  be based on the  lender's cost  of funds as well  as the                                                            
risk associated  with the loan. Based  on the fact that the  current                                                            
prime rate is  7.25 percent and Treasury Bonds are  at five percent,                                                            
he would anticipate  the rate being  charged by a commercial  lender                                                            
to be 8.5 percent. Therefore  there would be "a savings to borrowers                                                            
who utilize the BFRLF".                                                                                                         
                                                                                                                                
9:42:33 AM                                                                                                                    
                                                                                                                                
Co-Chair Wilken  asked whether the BFRLF program was  similar to the                                                            
Denali Commission's bulk fuel program.                                                                                          
                                                                                                                                
9:42:54 AM                                                                                                                    
                                                                                                                                
Mr.  McMillan stated  that  the BFRLF  would refer  applicants  that                                                            
might not qualify for its  program to the Denali Commissions' Bridge                                                            
Bulk  Fuel  Loan   Fund.  The  intent  of  that  program   could  be                                                            
characterized  as "a  temporary  measure until  such  time that  the                                                            
community would qualify for the BFRLF".                                                                                         
                                                                                                                                
9:43:45 AM                                                                                                                    
                                                                                                                                
SARA FISHER-GOUD,  Alaska Industrial Development &  Export Authority                                                            
and Alaska  Energy  Authority and  RON MILLER,  Executive  Director,                                                            
Alaska Industrial  Development & Export Authority  and Alaska Energy                                                            
Authority testified  via teleconference from Anchorage  and informed                                                            
the Committee that they were available to answer questions.                                                                     
                                                                                                                                
9:44:00 AM                                                                                                                    
                                                                                                                                
Co-Chair Green removed her objection to adopting Version "S".                                                                   
                                                                                                                                
There  being   no  other  objection,   the  Version  "S"   committee                                                            
substitute was ADOPTED as the working document.                                                                                 
                                                                                                                                
Amendment #1: This amendment  inserts "; and authorizing regulations                                                            
to establish standards  for the allocation of money  in that fund to                                                            
eligible  borrowers."  into  the bill's  title  following  the  word                                                            
"year" on page 1 line 2.                                                                                                        
                                                                                                                                
In addition,  the amendment inserts  a new section into the  bill on                                                            
page two, following line one as follows.                                                                                        
                                                                                                                                
     Sec. 2. AS 42.45.250(j) is amended to read:                                                                                
                (j) The authority may adopt regulations necessary                                                               
          to carry out the provisions of this section, including                                                                
          regulations to establish                                                                                              
                     (1) reasonable fees for services provided and                                                            
          charges for collecting the fees; and                                                                                
                     (2) standards for the allocation of bulk fuel                                                            
          revolving loan fund money to eligible borrowers."                                                                   
                                                                                                                                
          New Text Underlined                                                                                                 
                                                                                                                                
Senator Olson moved for the adoption of Amendment #1.                                                                           
                                                                                                                                
Co-Chair Green objected.                                                                                                        
                                                                                                                                
9:44:48 AM                                                                                                                    
                                                                                                                                
Senator   Olson  explained   that  the   State's  Attorney   General                                                            
recommended  this amendment. The purpose  of the Amendment  would be                                                            
to  provide  a process  through  which  the BFRLF  could  limit  its                                                            
allocations  to eligible borrowers  to prevent the money  that is in                                                            
the  Fund  from  being  depleted.  He  noted   that  Mr.  McMillan's                                                            
testimony had addressed this amendment.                                                                                         
                                                                                                                                
Co-Chair Green asked whether  the amendment is being offered because                                                            
no language currently exists through which to protect the Fund.                                                                 
                                                                                                                                
Senator Olson  deferred to  Mr. McMillan.  It was his understanding                                                             
that the language  would be required  in order to prevent  the funds                                                            
from being depleted.                                                                                                            
                                                                                                                                
9:46:08 AM                                                                                                                    
                                                                                                                                
Mr. McMillan  stated that  prior to a five  million dollar  USDA RUS                                                            
grant received  in 2002, the BFRLF experienced cycles,  typically at                                                            
the times  of Fall or Spring  fuel delivery,  during which  the Fund                                                            
received more  applications for dollar amounts than  there was money                                                            
in the  Fund.  While no  process is  specified in  regulations,  the                                                            
BFRLF  established a  system  that awarded  funds on  "a first  come                                                            
first serve basis". Due  to the fact that "the payback period on the                                                            
loans is nine  months", there is "a  constant cycle of cash  running                                                            
through" the Fund,  and, as payments were made, funds  were provided                                                            
to the applicants  waitlisted. While there has not  been a cash flow                                                            
issue since the  USDA RUS grant was received, this  past year at the                                                            
peak of the  application request period,  the Fund had a  balance of                                                            
approximately $1.5 million.  This amendment would allow the BFRLF to                                                            
adopt the  first come first  serve system  or another standard.  The                                                            
amendment would  provide the Fund the ability "to  adopt regulations                                                            
to set standards".                                                                                                              
                                                                                                                                
Co-Chair  Green  asked for  confirmation  that  the Fund  could  not                                                            
establish such standards without this language.                                                                                 
                                                                                                                                
9:47:49 AM                                                                                                                    
                                                                                                                                
Mr. McMillan deferred to the Department of Law.                                                                                 
                                                                                                                                
9:48:46 AM                                                                                                                    
                                                                                                                                
BRIAN  BJORKQUIST,  Senior  Assistant Attorney  General,  Labor  and                                                            
State Affairs  Section,  Civil Division  (Anchorage), Department  of                                                            
Law testified  via  teleconference  from Anchorage  and stated  that                                                            
while  the adoption  of  this  amendment  "might not  be  absolutely                                                            
necessary, having this  type of language authorizing the adoption of                                                            
regulations  is useful  and recommended  because  it will avoid  the                                                            
risk of litigation"  were a system  other than the first  come first                                                            
serve process adopted in the future.                                                                                            
                                                                                                                                
9:48:57 AM                                                                                                                    
                                                                                                                                
Co-Chair  Green  asked  therefore,   whether  the  language  in  the                                                            
amendment  would be  sufficient or  whether more  detailed  language                                                            
would be required.                                                                                                              
                                                                                                                                
9:49:07 AM                                                                                                                    
                                                                                                                                
Mr. McMillan responded  that, other than the first  come first serve                                                            
process  that has  been  utilized,  no standards  have  of yet  been                                                            
established. This language  would be required in the event where the                                                            
Fund to  determine that  standards should  be implemented.  It would                                                            
provide a process  through which public hearings could  be conducted                                                            
and regulations  could  be established  to the  benefit of  eligible                                                            
borrowers. This amendment would provide for that process.                                                                       
                                                                                                                                
Mr. Bjorkquist added that,  "this language is broad enough" to allow                                                            
the agency  the "discretion to adopt  the allocation system  that it                                                            
would  believe  to  be  best  suited  for   the  program  under  the                                                            
circumstances as they would arise in the future."                                                                               
                                                                                                                                
9:50:15 AM                                                                                                                    
                                                                                                                                
Senator  Stedman, observing  that the BFRLF  received $9,000,000  in                                                            
loan requests and disbursed  $5,300,000 in FY 2005, asked the reason                                                            
that only 60 percent of  the requests were granted. This information                                                            
is depicted on page "i" of the Blue Book.                                                                                       
                                                                                                                                
9:50:47 AM                                                                                                                    
                                                                                                                                
Mr. McMillan  responded that there  is some confusion in  regards to                                                            
the  figures  presented  in  the  report.   He  explained  that  the                                                            
commitment  date is the date  that the BFRLF  actually approved  the                                                            
loan. While  requests are  oftentimes submitted  up to two  or three                                                            
months  before  a  barge  order  is due,  the  funds  might  not  be                                                            
disbursed until  up to four months  after that commitment.  "It is a                                                            
timing  issue" …  and the  funds "might  cross fiscal  years."  This                                                            
could be confusing.                                                                                                             
                                                                                                                                
There being  no further  discussion, Co-Chair  Green noted  that she                                                            
would  maintain  her objection  to  the adoption  of  Amendment  #1.                                                            
Continuing,  she stated  that the  bill would be  held in  Committee                                                            
and, were the  amendment to fail,  "more acceptable" language  could                                                            
be developed for reconsideration.                                                                                               
                                                                                                                                
Senator Olson  asked whether the failure of such an  amendment would                                                            
affect the Fund.                                                                                                                
                                                                                                                                
9:52:10 AM                                                                                                                    
                                                                                                                                
Mr. McMillan  responded that  based on recent  experience,  the non-                                                            
adoption  of the  amendment would  not pose  a problem  in the  near                                                            
future.  He reiterated  that  at the  most  recent "peak"  the  fund                                                            
maintained  a level  of approximately  $1.5 million.  However,  were                                                            
both the price  of fuel to continue  to increase and the  loan limit                                                            
to increase, further  pressure might be experienced.  "It is hard to                                                            
look in  a crystal  ball" and determine  "at what  point this  might                                                            
become an issue".                                                                                                               
                                                                                                                                
A roll call was taken on the motion.                                                                                            
                                                                                                                                
IN FAVOR: Senator Hoffman, Senator Olson, and Senator Dyson                                                                     
                                                                                                                                
OPPOSED: Senator Stedman, Co-Chair Wilken, and Co-Chair Green                                                                   
                                                                                                                                
ABSENT: Senator Bunde                                                                                                           
                                                                                                                                
The motion FAILED (3-3-1)                                                                                                       
                                                                                                                                
Amendment #1 FAILED to be ADOPTED.                                                                                              
                                                                                                                                
Senator Stedman requested  that additional information regarding the                                                            
loan request and  loan disbursement table depicted  in the Executive                                                            
Summary on  page "i" be  provided, as the  information presented  is                                                            
"distorted".                                                                                                                    
                                                                                                                                
Co-Chair  Green suggested  that Senator Stedman  confer with  AEA in                                                            
this regard.                                                                                                                    
                                                                                                                                
Amendment #2:  This Amendment inserts  "relating to the purposes  of                                                            
and eligibility  for loans from the  bulk fuel revolving  loan fund;                                                            
and" following "An Act" in the bill's title on page 1 line 1.                                                                   
                                                                                                                                
In addition,  a new  bill section  is inserted  on page 1  following                                                            
line 3 as follows.                                                                                                              
                                                                                                                                
     Section 1. AS 42.45.250(a) is amended to read:                                                                             
          (a) The bulk fuel revolving loan fund is established in                                                               
     the authority to assist  communities, utilities providing power                                                            
     in   communities,  and   fuel  retailers   in  communities   in                                                            
     purchasing  bulk fuel  to maintain community  facilities  or to                                                          
     generate  power  or supply  the  public with  fuel  for use  in                                                            
     communities.  A  community,  or a  person generating  power  or                                                            
     selling  fuel  in  a  community  or  maintaining   a  community                                                          
     facility  who has written endorsement  from the governing  body                                                          
     of each community  for which a loan from the fund is sought, is                                                            
     eligible for a loan  from the bulk fuel revolving loan fund for                                                            
     a purchase  of an emergency  supply or  a semiannual or  annual                                                            
     supply of bulk fuel to be used in the community."                                                                          
                                                                                                                                
     New Text Underlined.                                                                                                     
                                                                                                                                
This amendment also inserts a new bill section on page 2,                                                                       
following line 1 as follows.                                                                                                    
                                                                                                                                
     Sec. 3.  AS 42.45.250(l) is amended  by adding a new  paragraph                                                          
     to read:                                                                                                                   
        (3) "community facility" means a public building or                                                                     
     public work open to, or used by or for the benefit of, the                                                                 
     public and owned by a community, a governmental entity, or a                                                               
     nonprofit organization; in this paragraph, "public building                                                                
     or public work" includes educational and health facilities,                                                                
     water and sewer facilities, roads, and docks.                                                                              
                                                                                                                                
Senator Olson moved to adopt Amendment #2.                                                                                      
                                                                                                                                
Co-Chair Green objected.                                                                                                        
                                                                                                                                
9:54:25 AM                                                                                                                    
                                                                                                                                
Senator  Olson  explained  that  this  amendment  would  expand  the                                                            
entities to  which BFRLF loans could  be provided.  Currently  BFRLF                                                            
loans  are  limited  to  communities,  utility  operators  and  fuel                                                            
retailers. He noted that  due to the current restriction, RUS, which                                                            
is a subsidiary  of the  YK Health Corporation,  has been unable  to                                                            
acquire BFRLF loans. This amendment was requested by the GREAC.                                                                 
                                                                                                                                
Co-Chair Green stated that the language is very broad.                                                                          
                                                                                                                                
9:55:45 AM                                                                                                                    
                                                                                                                                
Co-Chair Wilken  agreed with Co-Chair  Green. He recalled  that when                                                            
community  facilities  were added  to  the Power  Cost Equalization                                                             
program,  the community  facilities  line item  increased more  than                                                            
five times  the rate depicted on the  personal facilities  line. The                                                            
community facilities portion  might surpass the residential portion.                                                            
The purpose  of the  BFLRF is to  purchase fuel  at a lower  rate in                                                            
order to  assist residents.  "This may squeeze  out the residential                                                             
benefit  to   the  benefit  of  community   facilities."   Community                                                            
facilities  have the  option to borrow  at the  eight percent  level                                                            
instead of the seven percent level.                                                                                             
                                                                                                                                
9:56:42 AM                                                                                                                    
                                                                                                                                
Senator  Olson  suggested  that  rather  than community   facilities                                                            
surpassing  the residential  usage, the perspective  should  be that                                                            
community facilities  are finally  catching up the community  needs.                                                            
In other words,  "what started out  as a deficit is now catching  up                                                            
with the community's needs".                                                                                                    
                                                                                                                                
Senator Olson asked Mr. McMillan to speak to the amendment.                                                                     
                                                                                                                                
9:57:13 AM                                                                                                                    
                                                                                                                                
Mr. McMillan noted  that it would be important for  the Committee to                                                            
understand that this amendment  would pertain to a third party that,                                                            
by agreement,  "would be  taking over … the  affairs of community."                                                             
Currently a  community could borrow  from the BFRLF. That  bulk fuel                                                            
could  be used for  multiple  purposes including  heating  community                                                            
owned facilities. That  usage would not be new. This amendment would                                                            
expand  who  could  borrow  the  funds  rather  than  how  the  fuel                                                            
purchased by the funds could be used.                                                                                           
                                                                                                                                
Mr. McMillan  continued  that  a third  party on  contract with  the                                                            
community might, as part  of the contract, be authorized to purchase                                                            
fuel, to receive  revenues, or to bill and collect  on the behalf of                                                            
the community.  This amendment  would allow  that third party,  with                                                            
consent of the  community, "to be the borrower under  the Statutes".                                                            
                                                                                                                                
9:59:09 AM                                                                                                                    
                                                                                                                                
Senator Hoffman  stated that an example of this situation  would the                                                            
YK  Health  Corporation,   which  is  an  organization   with  sound                                                            
financial  management.   That  corporation  could   assist  a  small                                                            
community  experiencing  financial  difficulty,  such  as the  small                                                            
community of  Chevak. This amendment  would allow an entity  such as                                                            
the YK Health  Corporation to "accept  the BFRLF bulk fuel  loan and                                                            
be more responsible  to make sure  that it will pay back  the loan."                                                            
Chevak for instance, has  had a very bad track record in the regard.                                                            
The program would  be more solvent in this case, were  the YK Health                                                            
Corporation to be responsible for the loan.                                                                                     
                                                                                                                                
10:00:20 AM                                                                                                                   
                                                                                                                                
Senator Dyson  appreciated Co-Chair Green's comment.  While its been                                                            
several years  since he had visited Western Alaska,  he recalled one                                                            
community that had three  separate government entity buildings, each                                                            
having "contempt"  for both  of the other  buildings and the  people                                                            
working  there.  The three  levels  of  government  "bothered"  him;                                                            
therefore, he would be  more comfortable with this amendment were it                                                            
to  discourage  overlapping  governments.  Continuing,  he  recalled                                                            
that, in a separate  situation, one village split  into two villages                                                            
with separate  power plants because of an internal  disagreement. To                                                            
that point,  he would  discourage  the imposition  of any  incentive                                                            
that might promote further inefficiencies.                                                                                      
                                                                                                                                
Senator  Stedman supported  Senator Hoffman's  comments that  having                                                            
well-managed  entities  involved  in this  program  would assist  in                                                            
lowering   default  rates.   "That  would   better  serve   all  the                                                            
participants  in the BFRLF" and the  State, in general. However,  he                                                            
voiced  being  uncomfortable  with  the language  as  presented.  He                                                            
suggested that the language be reworked.                                                                                        
                                                                                                                                
10:04:09 AM                                                                                                                   
                                                                                                                                
Mr. McMillan  stated  "this amendment  is  really a  tool to  assist                                                            
communities  in  maintaining  their  infrastructure."  A  tremendous                                                            
amount of capital  has been invested in the infrastructure  in these                                                            
communities.  Unfortunately, some  communities are "dysfunctional".                                                             
This amendment would allow  for an entity, "other than those parties                                                            
already  in  the   community  that  are  not  functioning,"   to  be                                                            
responsible  for   that  infrastructure.  "It   is  not  a  case  of                                                            
overlapping  government; this  comes about when  there is a  lack of                                                            
government."                                                                                                                    
                                                                                                                                
Co-Chair  Green, noting  that she  would maintain  her objection  to                                                            
Amendment  #2,  communicated  that  she  might be  able  to  suggest                                                            
alternate language through which to address the concern.                                                                        
                                                                                                                                
Senator  Olson  responded  to  Senator  Dyson's  "contempt"  of  the                                                            
overlapping governments  by stating that governmental  agencies have                                                            
different  functions  in communities.  To  that point,  however,  he                                                            
noted that  efforts to  consolidate such  entities have occurred  in                                                            
order to improve efficiency.                                                                                                    
                                                                                                                                
Senator Olson  offered to withdraw Amendment #2 in  order to develop                                                            
more acceptable language.                                                                                                       
                                                                                                                                
There being no objection, Amendment #2 was WITHDRAWN.                                                                           
                                                                                                                                
Senator Dyson  clarified that rather  than himself feeling  contempt                                                            
for the overlapping  governmental  situation, he was simply  sharing                                                            
an observation  of the community's feelings in that  regard. To that                                                            
point,  he  voiced appreciation  for  the  fact  that consolidation                                                             
efforts have  been undertaken in order  to promote more cooperation                                                             
and efficiency.                                                                                                                 
                                                                                                                                
Senator Olson acknowledged.                                                                                                     
                                                                                                                                
Co-Chair Green ordered  the bill HELD in Committee for further work.                                                            
                                                                                                                                

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