Legislature(1993 - 1994)
04/05/1993 08:10 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
MINUTES SENATE FINANCE COMMITTEE April 5, 1993 8:10 a.m. TAPES SFC-93, #47, Side 1 (000-end) SFC-93, #47, Side 2 (000-end) SFC-93, #49, Side 1 (000-end) CALL TO ORDER Senator Drue Pearce, Co-chair, convened the meeting at approximately 8:10 a.m. PRESENT In addition to Co-chairs Pearce and Frank, Senators Kelly and Sharp were present. Senators Jacko and Kerttula arrived soon after the meeting began. Senator Rieger arrived as it was in progress. ALSO ATTENDING: Senator Duncan; Senator Ellis; Don Moore, Manager, Matanuska-Susitna Borough; Jim Ayers, System Director, Alaska Marine Highway System, Dept. of Transportation and Public Facilities; Harold Moeser, Construction Engineer, Alaska Marine Highway System, Dept. of Transportation and Public Facilities; Richard Ploss, M. Rosenblatt & Sons, Inc.; Riley Snell, Executive Director, Alaska Industrial Development and Export Authority; John Olson, Deputy Director, Development, AIDEA; Greg Branning, Marketing Specialist, Midrex Direct Reduction Corporation; Harold M. Benedict, President, Alaska Seafood Center (ASC); D.S. Moon, Public Affairs Manager, MAPCO; Bonnie J. Garner, Aviation Fuel Sales Manager, MAPCO; Fred Ketzeback, Director, Fuel Administration, Alaska Airlines, and Chairman, Alaska Fuel Service Center (AFSC); Thomas J. Mushovic, Partner, Signature Flight Support; Bert Wagnon, Director of Projects and Finance, MarkAir; Judy Knight, Director, Administrative Services Division, Dept. of Labor; Sally Saddler, Employment Services Program Manager, Administrative Services, Dept. of Labor; Bruce Geraghty, Deputy Commissioner, Dept. of Community and Regional Affairs; Mark Mickelson, JTPA/SDA Program Manager, Dept. of Community and Regional Affairs; aides to committee members; and aides to other members of the legislature. SUMMARY INFORMATION SB 16 - Act relating to the financing authority of the Alaska Industrial Development and Export Authority and giving approval of the issuance of bonds for an Anchorage airport seafood facility; and providing for an effective date. Testimony was provided by Senator Ellis, Riley Snell, and Mr. Howard Benedict. The bill was subsequently HELD in committee for further discussion. SB 50 - Act making appropriations for capital projects; and providing for an effective date. Discussion was had with Jim Ayers, Harold Moeser, and Richard Ploss regarding ALASKA MARINE HIGHWAY SYSTEM capital projects and the proposed replacement vessel. SB 57 - Act relating to employment contributions and to extending the pilot project for the state training and employment program; and providing for an effective date. Teleconferenced discussion of the bill was rescheduled to April 6, 1993, from 8:30 to 9:30 a.m. SB 58 - Act relating to the longevity bonus program. The bill was HELD for arrival of HB 81. SB 102 - Act relating to municipal property tax exemptions for certain residences and to property tax equivalency payments for certain residents; and providing for an effective date. The bill was HELD for arrival of HB 66. SB 171 - Act relating to the contracting and financing authority of the Alaska Industrial Development and Export Authority, giving approval of the issuance of the authority's revenue bonds, and delaying the termination date of the authority's business assistance program; and providing for an effective date. Testimony was presented by Riley Snell, John Olson, Tom Mushovic, Fred Ketzeback, and Don Moore. Revised Amendment No. 1 and Amendment No. 2 were distributed and discussed. The bill was subsequently HELD in committee for further review. SENATE BILL NO. 102 An Act relating to municipal property tax exemptions for certain residences and to property tax equivalency payments for certain residents; and providing for an effective date. Upon calling the meeting to order, Co-chair Pearce announced that SB 102 would be HELD in committee for the arrival of HB 66 since the House version of the legislation has been transmitted for Senate consideration. SENATE BILL NO. 58 An Act relating to the longevity bonus program. Co-chair Pearce made a similar announcement regarding SB 58, advising that HB 81 would soon be arriving in the Senate. She then directed that SB 58 be HELD for that arrival. SENATE BILL NO. 57 An Act relating to employment contributions and to extending the pilot project for the state training and employment program; and providing for an effective date. Later in the meeting, Co-chair Pearce announced that teleconference testimony on SB 57 would be taken between 8:30 and 9:30 a.m., April 6, 1993. SENATE BILL NO. 50 An Act making appropriations for capital projects; and providing for an effective date. Cross-reference to HCS CSSB 183 (Finance), the 1994 capital budget. Co-chair Pearce next directed that the committee proceed to discussion of the proposed new ferry for the ALASKA MARINE HIGHWAY SYSTEM as well as financing proposals to cover the cost of construction. JIM AYERS, System Manager, Alaska Marine Highway System, Dept. of Transportation and Public Facilities, came before committee. As background information, he advised that the department conducted both an economic impact analysis and a "condition survey of the entire fleet" to determine the condition of all vessels and what would be necessary to maintain the fleet into the next century. Approximately 25 hearing were had regarding the Alaska Marine Highway System and its importance to the state economy and the economic and social stability of communities. From that information, the department developed a master plan to refurbish all vessels but the MALASPINA. Since that vessel is 30 years old, and no work had been done on it aside from the stretching in the mid 1970s, the estimated cost for repowering and refurbishing was $50 to $62 million. A comparative analysis determined it was more viable to build a new vessel. The state has, on several occasions (most recently for the EXXON VALDEZ oil spill), used the ferries in emergency situations. Emergency response plans for fire, earthquake, tsunami, etc. involve and include use of one of the marine highway system vessels. It was thus clear that the new vessel needed to be ocean-going and have both command capability and ability to provide assistance to a smaller fleet of vessels (fishing vessels). A design contract was let through the RFP process to Glosten Associates in Seattle. Mr. Ayers noted the presence of Mr. Van Slyke, an engineer with Glosten. Mr. Ayers further spoke to the advisability of having a project manager follow the project through construction and manage both shipyard activity as well as design. The system contracted with M. Rosenblatt & Sons, Inc. for that service. Mr. Ayers next introduced Mr. Richard Ploss, an engineer with Rosenblatt & Sons. The conceptual design stage has now been completed. Mr. Ayers referenced a video outlining the proposed new vessel and asked that Mr. Ploss provide a narrative. Prior to commencing the video, Mr. Ayers explained that the vessel would serve southeast. Since it would be ocean going, it could also fill in for the TUSTUMENA, allowing the system to provide service to Kodiak and the Aleutian Chain through fall and early winter. (Senator Kerttula arrived at the meeting at this time.) RICHARD PLOSS, Project Manager, M. Rosenblatt and Sons, Inc., came before committee and directed attention to a video utilizing virtual imaging to characterize the proposed vessel. The new ferry would be 85 feet wide and 380 feet long. It would have a helicopter pad, and a car elevator for southwest operation. Vehicle capacity would be approximately 120 cars. There would be 98 to 104 cabins for passengers. The vessel would include extensive electronic communication capability via satellite, ability to convert to necessary work stations to monitor an oil spill, and a modular float. Brief discussion followed between Mr. Ayers and Senator Kelly regarding lack of establishment of depots by the oil spill response advisory team and the coast guard. Boom needed to contain a spill is to be located at depots. The vessel would have loading capability. DEC modulars with needed equipment (diving equipment, computers, refrigeration facilities ) would also be located at specific sites. The new vessel would be pre-wired for plug in of this equipment when needed. Discussion followed between Co-chair Pearce, Senator Kelly, and Mr. Ayers pertaining to the cost of DEC equipment. Further comments followed by Mr. Ploss regarding refrigeration capabilities and the number of cars carried when the ferry is in use in southwest rather than southeast Alaska. In response to a question from Co-chair Pearce, Mr. Ploss advised that the new ferry would have an ice-strengthened bow but no ice breaking hull. It will not be able to serve as an ice breaker. In response to a further question from the Co-chair, Mr. Ploss said that the new ferry would be able to come into Cook Inlet during the winter. Co-chair Pearce inquired concerning the most recent cost estimate. Mr. Ayers said that at conceptual design stage the estimate is $85 million. Co-chair Frank asked when a fixed dollar contract would issue. Mr. Ayers said the state has been working with the federal government to avoid need to solicit a low-cost bid which allows a shipyard, through changes orders, to drive up the price. The preliminary design will be completed with as much detail as possible. Bids will be sought from three qualified shipyards. The project will then be managed so that it is neither low-cost bid nor cost plus. Those two items cause shipyard prices to vary radically. In response to a question from Co-chair Frank, Mr. Ayers explained that the project would require use of federal highway dollars. The federal highway regulations bidding process thus governs. Further discussion followed regarding pre-qualification of shipyards and evaluation of proposals. Co-chair Pearce raised concern regarding the financial capability of shipyards. Mr. Ploss advised that approximately 17 yards are interested in the project. He stressed that the pre-qualification procedure is designed to ensure financial qualification. Mr. Ploss advised of his belief that 10 to 12 yards could handle a project of this size. Senator Sharp raised a question concerning federal participation in cost overruns. HAROLD MOESER, Construction Engineer, Alaska Marine Highway System, Dept. of Transportation and Public Facilities, came before committee. He said that once the federal government agrees to participate in a project with the state, it also agrees to participate in change orders. The only exception is a gross blunder or negligence. Discussion followed between Senator Sharp and Mr. Ploss regarding normal bid and construction procedures versus the innovative process proposed for the new ferry. Mr. Ploss said that the federal government is most interested in the project because it has not previously found an organization interested in pursuing this type of detail ahead of time. These procedures are utilized by European and Oriental yards to bring in quality vessels at cost. The procedure has twice been used successfully in the United States. In response to a question from Co-chair Pearce, Mr. Ayers explained that the governor's budget contains a request for "$60 million of authorization." Obligation of federal dollars would be over a two-year period. Authorization is sought this year so that the project may go to bid. Senator Kelly voiced his understanding that the total represents "all the discretionary funding in ISTEA." Mr. Ayers responded negatively. Mr. Moeser advised that ISTEA allows approximately $70 million a year in discretionary moneys for ferry transportation. That competition is nationwide. The department has dedicated approximately $100 million in ISTEA moneys for port programs. The $30 million over two years would be set aside out of ISTEA for system expansion. Senator Kelly voiced his understanding that under percentage distribution of ISTEA funding for core roads (50%), boroughs (35%), and discretionary projects (15%), the new ferry would utilize all state discretionary moneys for two years. He further voiced his belief that $85 million sounds soft in terms of total construction cost. Discussion of state and federal fiscal years and obligation of funds over a three-year rather than two-year period followed between Senator Frank and Mr. Moeser. End, SFC-93, #47, Side 1 Begin, SFC-93, #47, Side 2 In response to a question from Senator Kelly concerning how the department intends to fund construction of the new ferry, Mr. Ayers explained that a combination of state and federal funds would be used. The system has been working with the state's Washington, D.C., office as well as attempting to work with the legislature. The department hopes to obtain additional funds from Congress for the ferry as a demonstration project. Co-chair Pearce inquired concerning the actual number for the federal match in the governor's budget. She noted funding of $54.6 million in one document and $60 million in another. Mr. Ayers voiced his understanding that the governor's budget requests $60 million in federal authorization. Backup speaks to $27.3 million for two years--FY 94 and 95. There is a general pool match of $23 million for the approximate $200 million in federal dollars. The system would get a proportion of that required match, approximately $6 million. Mr. Ayers further advised of $15 million in transfers. These are not general fund moneys. A portion of the $15 (approximately $8.5) derives from a previous transfer, and $7 million is set forth in the front section of the operating budget. Senator Kelly inquired concerning the governor's commitment to the new ferry versus other projects throughout the state. Mr. Ayers advised that he could not respond. Co-chair Pearce inquired regarding the $6.4 million in funding from the vessel replacement fund set forth in the governor's capital budget. Mr. Ayers explained that it relates to the $15 million in transfers. Co-chair Pearce further pointed to information listing $54.6 million in federal moneys as the cost of the multi-purpose replacement vessel. Information further shows funding at $27.3 million in FY 94 and a like amount in 95 rather than $30 and $30. Mr. Ayers voiced his understanding that the listed figure are "as much as we were prepared to commit as coming out of the ISTEA funds for those two years." The system hopes to get authorization for those amount and then "hopefully we would get the additional federal money somehow or we'd take it into 96." Co-chair Pearce voiced her understanding that under the scenario described by Mr. Ayers, the project would still be short federal obligation. Mr. Ayers pointed to authorization to utilize other moneys, possible need to extend the project to FY 96, or receipt of additional discretionary funds from Washington, D. C. In response to a request from Co-chair Pearce, Mr. Ayers advised that the balance of the vessel replacement fund is approximately $4.5 million. The legislature has not authorized expenditure of those funds. The system has not requested an appropriation from the fund in the upcoming budget. Senator Kelly inquired concerning the amount appropriated for the replacement vessel up to this time, noting the $500.0 and the $7.5 million in general funds. Mr. Ayers concurred in the amounts and advised that they represent appropriations from the 470 fund. Senator Kelly then asked how much of the $8 million had been spent. Mr. Ayers answered approximately $850.0. He further explained that while the department has authorization to proceed, the system told the legislature it would return with a conceptual design prior to proceeding. The Senator next asked how far the project could proceed without additional appropriations. Mr. Ayers that he had personally made a decision to stop the project until "Everyone is comfortable that we know what it costs and where we're going." The design phase has been stopped until the legislature indicates it wishes to proceed. Further discussion followed between Co-chair Pearce and Mr. Ayers regarding the $5 to $5.5 million general fund match. Co-chair Pearce voiced her understanding that the $5 million designated as "other money" is presently in EXXON VALDEZ settlement legislation introduced in both the House and Senate. The $5 million is general fund money returning to the state as reimbursement rather than mitigation moneys for expenditures made by the state after the spill. Mr. Ayers answered, "As far as I know, Madam Chair." Co-chair Pearce then noted that of the $15 million transfer, the system has already received $8 million. There is thus a $7 million gap. Mr. Ayers concurred. Senator Kelly advised that he was sold on the ship but questioned the financing plan. He voiced concern regarding utilization of all ISTEA discretionary funding for two years and possible need from the mitigation account. The Senator also advised of need for an indication from the administration that the proposed replacement vessel is a priority in terms of general funds. Senator Kerttula concurred in need for endorsement from the Governor. SENATE BILL NO. 16 An Act relating to the financing authority of the Alaska Industrial Development and Export Authority and giving approval of the issuance of bonds for an Anchorage airport seafood facility; and providing for an effective date. Co-chair Pearce directed that SB 16 be brought on for discussion. SENATOR JOHNNY ELLIS and RILEY SNELL, Executive Director, AIDEA (Alaska Industrial Development Authority), Dept. of Commerce and Economic Development, came before committee. Senator Ellis voiced need to foster private sector economic development meeting three tests: 1. Create jobs for resident Alaskans 2. Leveridge significant private sector investment by drawing outside dollars into the state. 3. Add value to state resources prior to export. Alaska's export of raw resources also means that refining jobs are exported. The proposed Alaska Seafood Center meets the above tests. The project is not new. It was included in last year's AIDEA bond bill but was dropped during special session when it was determined that a stripped down bill had a better chance of passage. Necessary plans and financing were not in place at that time, and the decision was made to delay until this year. The Center would provide 450 year-round jobs and 750 indirect jobs outside of Anchorage. Approximately 200 jobs in the construction phase would be created in the near future, once authorization is provided. Between $100 and $115 million in new, outside, private investment would flow to Alaska for the Center. The Alaska Seafood Center will not compete with existing primary processors or contract any of its own fishing. The Center would make major, year-round product purchases from Alaska's primary processors for use in secondary, value-added processing. Following the secondary processing, the product will be shipped to domestic and international markets. The Center will make 45 million pounds of cold storage available to Alaska processors and other Alaskan businesses. That has been a great need in Alaska for some time. The Center will also provide reliable and economical transportation services to primary processors. The volume involved will be of great benefit. Money will flow through Alaska rather than directly to Seattle. Anchorage will provide the transportation link for product coming to and leaving from a central point. Senator Ellis said that the ultimate test of the project lies in the $15 million in revenue bonds. If the economics of the project are not favorable, it will not proceed. Financiers would match the bonds with $100 to $115 million. Further, the project is ready to proceed in that it is not tied up in mental health issues nor are there protests from interest groups. Local government is extremely supportive. Co-chair Pearce referenced accompanying zero fiscal notes from AIDEA and the Dept. of Transportation and Public Facilities as well as a supportive position paper from the Dept. of Commerce and Economic Development. A position paper from the Dept. of Transportation and Public Facilities states support but also raises concern regarding location of the facility near the airport because of a possible increase in the number of birds in the vicinity. Senator Ellis explained that the Center would not be located on airport property. The airport intends to reserve that for other uses. There are suitable locations for the Center in close proximity to the airport. The processing undertaken by the Center is not the type that would produce fish waste and attract birds that might interfere with aircraft. Riley Snell briefly spoke before committee, advising of AIDEA belief that significant advancements have been made in both the financing plan and marketing since last session. HOWARD M. BENEDICT, President ASC, next came before committee. He explained that he first came to Alaska in 1976 and moved to the state in 1981. Prior to applying to AIDEA, Mr. Benedict said that he and his family invested $ 6 million in the project. Feasibility and marketability have been determined. Additional marketing since the last session has produced significant results. A market for all of the Center's product appears to be available. The Center will be the first, value-added facility. The high technology operation will bring new infrastructure to Alaska. There is presently no substantial secondary processing occurring in the state. Speaking to human resources, Mr. Benedict advised that the center intends to provide profit sharing to all employees as well as child care. Last Week, lenders in New York indicated they could increase the amount of cash available and decrease the amount of the mortgage. Mr. Benedict reiterated that the project would bring $100 to $115 million in outside money into Alaska. No subsidy is being sought. The Center will repay AIDEA as it does commercial lenders. Senator Sharp referred to the position paper from the Dept. of Commerce and Economic Development and inquired regarding contracts with primary processors as well as contracts for sale of the product. Discussion followed between Senator Sharp and Mr. Snell regarding the type of analysis conducted by AIDEA prior to commencement of a project. Co-chair Pearce advised of concern by Senator Jacko relating to location of the facility in Anchorage rather than Dillingham or Dutch Harbor. Mr. Benedict said that location had been studied in great detail. The facility would experience a $2.5 million disadvantage per year per 100 million pounds of production for being located in Alaska. That disadvantage is caused by the fact that product will be brought to Anchorage at 2.1 cent a pound and taken to Seattle for approximately 8 cents. That is a 2.5 cent disadvantage. Practical methods of overcoming that have been developed. Construction elsewhere would lose the transportation advantage provided by the Anchorage Airport. Power is another factor. The facility must compete with Seattle's power costs. The proposed facility will be the "largest, single, private power user in the city"--a 4 megawatt power consumer. A location other than Anchorage would put the cost of electricity totally out of the economic picture. Seattle power currently costs 3.81 cents per kilowatt hour. The agreement with the City of Anchorage for an interrupted demand rate is 2.76 cents. That is 38% below the Seattle cost. End, SFC-93, #47, Side 2 Begin, SFC-93, #49, Side 1 In response to an inquiry from Co-chair Frank, Mr. Benedict said he had hired "one of the finest secondary processing people." He has resided in Anchorage for the past two years. He previously built a plant the same size as the one proposed for Anchorage and brought it in on time and under budget. Mr. Benedict said that the hire effectively eliminated financial institution concern that the project was starting something that had not been done in Alaska before. Mr. Benedict explained that secondary processing involves taking frozen blocks of seafood, cutting them into serving pieces, and breading, or battering, or topping with sauce. This work is now being done in Seattle or on the East Coast. Frozen fish does not have much odor. The concern regarding additional birds at the airport is not a great one since the plant will "only do 15 or 20% primary." Mr. Benedict advised that only top management positions-- four or five individuals--that must possess necessary background and knowledge of this type of processing would not be local hire. The intent is to hire Alaskans. In response to a further inquiry from Co-chair Frank, Mr. Benedict said the end product will not have a brand. It will be produced for other companies. He further advised of his intent that the quality of the product would be higher than currently available. Responding to a further question regarding financial arrangements aside from AIDEA, Mr. Benedict said "In the overall picture, our project is $165 million." Between $35 and $50 million will be cash, equity in the project-- provided by an investment banking firm in New York. In addition, there will be approximately $80 million in bank financing as a first mortgage. The foregoing is in addition to the $50 million request to AIDEA. Co-chair Frank sought assurance that AIDEA funds would be the last dollars rather than the first committed to the project. Both Mr. Benedict and Mr. Snell assured that all other commitments would have to be made prior to commitment from AIDEA. Mr. Snell said that he had been in contact with the New York investment banking firm and the bank that would raise the balance of the funds. Everything is now in the working stage. Nothing is yet firm. Mr. Benedict noted that part of the reason the project remains in the working stage is that it "lost a great deal of credibility" when legislation for the project did not pass last year. As soon as there is a commitment from the state, the other arrangements will be finalized. Mr. Benedict advised that his investment banking firm raised over $1.5 billion for internal projects over the last six weeks. The proposed $35 million request is small by comparison. Discussion followed between Co-chair Frank and Mr. Benedict regarding the means utilized to overcome cost differentials between Anchorage and Seattle. Mr. Benedict cited decreased electrical costs, an adequate labor supply, and manufacture of "extremely efficient" equipment. Many existing East Coast manufacturers have not upgraded their equipment. They thus do far too much hand labor. A total of nine different elements not only overcome the differential but overcome it substantially. Mr. Benedict voiced his assumption that once the proposed plant is operational and successful, others will follow. Someone must break ground first. In response to a question from Senator Kerttula, Mr. Benedict said that eighty percent of production will be committed to the "Lower Forty-eight." The remaining 20% will either be sold within the United States or overseas, which ever is best in terms of the strength of the dollar and other financial considerations. Mr. Benedict noted that Americans eat little seafood compared to the rest of the world. The average in the U.S. is 14.9 pounds per person. Europeans average 50 to 60 pounds, and the Japanese average 150 pounds. Responding to questions from Senator Kelly, Mr. Benedict noted that fish sticks will comprise the low end of the product line. Packaging will include family packs in addition to single dinners. The Center will also work directly with the food service industry to serve restaurants and cruise ships. Both have expressed need for a high quality product that is not now available. In reply to a further question from Co-chair Frank, Mr. Benedict indicated that interest rates are presently so low that AIDEA's interest component will not be of great assistance. The project needs a strong demonstration of state support. During further discussion, Mr. Benedict spoke to outside perception that Alaska has more money than it knows what to do with. Investment banking firms seek to utilize funding in areas evidencing demonstrated need and strong local support. SENATE BILL NO. 171 An Act relating to the contracting and financing authority of the Alaska Industrial Development and Export Authority, giving approval of the issuance of the authority's revenue bonds, and delaying the termination date of the authority's business assistance program; and providing for an effective date. Co-chair Pearce directed attention to SB 171 which she explained contains AIDEA authorization for an Anchorage International Airport fueling facility and reauthorization and delay of sunset for the business assistance program. She then directed attention to revised amendment no. 1, advising that it would add the Mat-Su, Port MacKenzie, Midrex project. The Co-chair further referenced amendment no. 2 to delete the word "revenue" from authorization for the fueling facility. Senator Kerttula requested a brief recess. RECESS - 9:50 a.m. RECONVENE - 10:05 a.m. RILEY SNELL, Executive Director, AIDEA, Dept. of Commerce and Economic Development, came before committee. Co-chair Pearce observed that she had spoken to both amendments 1 and 2 while the bill was in Senate Labor and Commerce, but no changes were made in the legislation at that time. Mr. Snell explained that the first provision of the bill relates to the Anchorage Fueling and Service Company--a consortium of airlines operating the fueling system at the Anchorage Airport. He noted that a large contingent of airline officials and a representative of MAPCO were present to speak to the project. He then introduced members of that contingent. JOHN OLSON, Deputy Director, Development, AIDEA, Dept. of Commerce and Economic Development, came before committee. He explained that the consortium contains a "wide cross- section of principal users of Anchorage International Airport, including foreign flag carriers, domestic and . . . even some air taxi operators . . . ." In response to a question from Co-chair Pearce regarding international carriers that have pulled out of Anchorage, Mr. Snell explained that "they are still obligated financially to meet some of the debt of the company." The existing agreement also contains a step-up requirement. Should a carrier fail or cease to operate in Anchorage, the carrier would be obligated by two or three times its commitment to satisfy financial requirements. AIDEA would negotiate that type of arrangement in the new financing as well. Mr. Olson directed attention to charts and packets containing background information and letters of support. He then asked that TOM MUSHOVIC, Partner, Signature Flight Support, explain the various components. Mr. Mushovic pointed out that fuel presently flows to Anchorage via one of three methods: 1. Rail car from North Pole--MAPCO fuel coming to the Anchorage area. 2. The Nikiski pipeline containing Chevron and TESORO products. 3. Marine shipment via barge or tanker from anywhere in the world. All commercial jet aviation fuel reaching Anchorage comes via one of the above means. Within the city, fuel flow to the airport is by one of two methods: 1. The Alaska Railroad from the downtown core. 2. The AFSC cross-town pipeline from the Port of Anchorage. One of the benefits of the proposed project is that, once constructed, the new terminal will allow interception of product from the Nikiski line. That will free up capacity on the cross-town line and allow for a more equitable supply of fuel to the airport. There are times when rail car and cross-town delivery barely meets needs. The new terminal and interception from the Nikiski pipeline will allow the cross-town pipeline to satisfy demand. Need for rail cars from the Port of Anchorage to the airport will be diminished. The present airport facility is a combination of three old tank farms. The site now occupied by AFSC will be demobilized and a new operation and maintenance station located thereon. That is the second phase of the proposed project. The primary phase consists of construction of a new tank farm, consisting of three, 100,000 barrel tanks. That effectively increases supply from two to twelve days of fuel. Other components (control building, pump house, filter building etc.) would also be part of the project. Co-chair Pearce asked if the project includes reconstruction of the existing cross-town pipeline. Mr. Mushovic answered that the only pipeline cost included in the request is extension of the six-inch line to the new facility. The cost of the tie in from the Nikiski line will be borne by TESORO. Senator Sharp commented that while the cost to be borne by TESORO might be a minor part of the project, it could give a competitive advantage to one refiner over another. Mr. Mushovic assured that the project does not provide a competitive advantage to anyone. It "opens up the supply of fuel to the airport." At the present time, all fuel is passed through the Port of Anchorage and subsequently turned around and brought out to the airport. Interception of product from the Nikiski line will not give a competitive advantage to either TESORO or Chevron. That interception merely opens up the cross-town pipeline, allowing MAPCO to more freely increase delivery. Co-chair Pearce asked if TESORO provided a letter of support for the project. Mr. Snell explained that he had talked with TESORO representatives who indicated support. A letter will be forthcoming. Senator Sharp recalled testimony in previous years indicating that the cross-town pipeline is in disrepair. He then inquired concerning the remaining life of the line. Mr. Mushovic said that the line from the Port of Anchorage to the airport is in excellent condition and is expected to last 25 to 30 years. It was constructed in the early 1960s. Co-chair Pearce echoed statements by Senator Sharp, advising that current testimony on the pipeline is a departure from that of the past. Prior testimony from the municipality indicated that the pipeline had environmental problems. Mr. Mushovic acknowledged a situation in 1988-89 when the line developed a leak near Chester Creek. The leak was caused when construction on C Street relocated the line and damaged it with construction equipment. That is the only situation that has caused concern. In response to a question from Senator Rieger asking who would manage the tank farm, Mr. Mushovic said that if AFSC remains the operator, it would also manage the facility. Senator Rieger next asked what arrangements would be made to protect the state investment. Mr. Snell explained that while design and construction oversight, operation, maintenance, and liability are vested in AFSC, AIDEA will conduct annual maintenance and operating budget review. AIDEA also reserves the right to conduct periodic inspections to ensure that the facility is kept up to standard. Senator Rieger asked if all partners in the consortium would jointly and severally guarantee the debt. Mr. Snell responded negatively. He then reiterated earlier comments regarding step-up provisions, requiring that a member of the consortium assume two or three times the ratio of the member's investment should the member airline fail or leave the area. In response to an additional question from Senator Rieger, Mr. Snell indicated that AIDEA's operating budget would cover the cost of staff assigned to oversee the project. Any third-party costs for independent analysis would be borne by the developer. Co-chairman Frank asked why AIDEA would be the owner on the proposed projects rather than merely the financier. Mr. Snell explained that the principal reason is to take advantage of IRS tax-exempt bond issues for governmental entities that provide infrastructure development for ports, harbors, or airports. In order to obtain that benefit, ownership must be vested in the governmental entity. Senator Sharp asked who would be responsible for clean up of the old tank farm. Mr. Snell said that AIDEA would not be responsible. AIDEA will seek indemnification from prior existing conditions. Senator Rieger then asked who would be responsible for environmental issues relating to the three new tanks. Mr. Snell said that responsibility would inure to the fueling consortium through contract provisions. Senator Rieger suggested that strict liability law may prohibit that. Mr. Snell acknowledged the concern. He explained that for that reason the consortium is responsible for design, construction, maintenance, and operation. There will thus be only one party liable over the course of the project. Contract provisions will fix responsibility for spills, cleanup, etc. with the consortium. The airport, as the land owner, would also come into play should the consortium have difficulty in meeting its obligation. Senator Rieger asked if harm would be done to the legislation if indemnification from environmental issues was added. Mr. Snell reiterated that responsibility would be fixed in contract. If AIDEA does not receive that assurance, it will not proceed with the project. Discussion followed between Co-chair Pearce and Mr. Snell regarding possible environmental problems at the existing facility. Mr. Snell stressed that the proposed project would be located on new land which would be base-line studied to determine that there is no existing contamination. Ongoing monitoring programs would ensure that no contamination occurs. Further discussion followed regarding demobilization efforts at the existing facility. Senator Kerttula commented on past efforts relating to the right-of-way leasing act. Experts testified that well- written contracts are more powerful instruments in terms of giving direction than are state statutes. Discussion followed regarding planned demolition of existing facilities and use of the land thereafter. Co-chair Pearce next directed attention to amendment no. 2 which she explained was requested by AIDEA. The amendment would delete the word "revenue" on page 1, line 12. Mr. Snell explained that use of the word "revenue" limits the ability of the authority to use its general obligation powers to finance projects. Revenue financing is based strictly upon the credit of the participants in the project. AIDEA seeks the flexibility to deliver "the cheapest capital cost to the project." Providing that AIDEA gets the type of security it seeks from developers, the authority wants the ability to use its general obligation powers. Under that arrangement, the faith and credit of the authority is obligated by issuance of the bonds. Senator Kelly expressed a preference for issuance of revenue bonds over general obligation bonds. Senator Rieger voiced his discomfort as well, advising that a $40 million obligation represents a substantial portion of AIDEA's net worth. Senator Kelly asked if AFSC could finance a $40 million project without AIDEA backing. End, SFC-93, #49, Side 1 Begin, SFC-93, #49, Side 2 Mr. Snell advised that while it could be done, it would require a joint and severable relationship with the airlines to obtain financing. FRED KETZEBACK, Director, Fuel Administration, Alaska Airlines, and Chairman, AFSC, came before committee. He explained that the consortium could obtain financing but it would not be as favorable as the tax-exempt arrangement through AIDEA. Increased financing charges would be passed along to the airlines in fuel costs, etc. Mr. Snell observed that since revenue bonds are based on the credit of the developer, they entail greater financing costs than do general obligation bonds. The difference between the two depends upon weekly market conditions, but it could range 25 to 50 basis points in interest rates (a quarter to one-half percent). Senator Frank voiced his understanding that in issuing general obligation bonds, AIDEA was, in effect, taking a greater risk and passing the benefit on to the borrower. Mr. Snell observed that AIDEA would charge the developer a higher rate for use of general obligation bond authority. While a higher fee would be paid, the developer would get the overall benefit of cheaper money. Senator Frank voiced concern regarding the additional risk. He then asked if the authority had proceeded in this manner on other projects. Mr. Snell told members that general obligation powers were used at Unalaska and the Skagway Ore Terminal. The Red Dog Mine at Kotzebue was a revenue bond issue. Senator Frank questioned whether such use of general obligation bond authority was good policy. Co-chair Pearce asked why the international airport system did not seek to utilize federal funds for the project, retaining ownership within the airport while allowing the consortium to operate it. Mr. Snell said that he was not aware that the project would be eligible for such funding. Discussion followed between Senator Rieger and Mr. Snell concerning AIDEA charges on general obligation versus revenue bonds. Mr. Snell said that costs are usually negotiated. For issuance of general obligation bonds for Federal Express, AIDEA charged 85 basis points beyond the cost of money. Ownership was also retained by the authority. Senator Kelly asked if the original recommendation from AIDEA was for issuance of general obligation bonds. Mr. Snell concurred. He suggested that use of the word "revenue" was most likely a drafting error. In response to a question from Senator Rieger, Mr. Snell explained that under a revenue bond issue AIDEA would have to retain ownership to keep tax-exempt financing in place. Senator Frank voiced his understanding that regardless of whether the project proceeds as a revenue or general obligation bond issue, should default occur, AIDEA would assume financial responsibility. Mr. Snell concurred, advising that if the authority did not do so its reputation in the marketplace would be severely damaged. He added that because the proposed project involves both foreign and domestic carriers as well as Federal Express and UPS, it collectively has good credit. Co-chair Pearce next directed attention to bill provisions relating to extension of the business assistance program. Mr. Snell explained that the provision extends the sunset date to 1996. Material changes in the program were made last session at the request of banking institutions and the authority to make the program more usable and to fulfill a need for small loans in rural Alaska. Mr. Snell urged that the sunset extension be approved. Co-chair Pearce directed attention to revised amendment no. 1. She explained that the amendment would place both the amount of aircraft fueling facility bonds and the proposed Midrex bonds in the title. It would further authorize a facility for use by Midrex Corporation. DON MOORE, Borough Manager, Matanuska-Susitna Borough, came before committee. He explained that the Midrex project would be located in upper Cook Inlet at Point MacKenzie. Midrex Corporation is an American corporation and a wholly owned subsidiary of Japan's Kobe Steel. Midrex utilizes a process by which iron ore is directly reduced into a metallized product for steel making and foundry applications. The process uses large amounts of natural gas. Approximately 92% of the natural gas is used for chemical feedstock. Only 8% is used as combustible fuel. That is important in light of the pending federal BTU tax. Senator Kelly asked if the plant could be operated by another energy source. Mr. Moore said that while another energy source could be used to operate the system, the process requires the carbon and hydrogen in natural gas as the chemical reductant. The resulting product is marketed in the Pacific Rim. Although there are 42 similar plants throughout the world, there are none "on the west coast of either of the Americas." As the third world electrifies, the Pacific Rim market will grow larger. The Midrex process creates feed stock for electric arc furnaces and will be shipped to other parts of the world. The product does not compete with scrap metal. It assists the scrap industry. With increasing metal standards for steel, reprocessed scrap metal is not of sufficient quality for modern construction. Feed stock is thus added to the scrap to bring it to standard. The capital investment for the proposed plant is approximately $200 million. The facility would employ 120 full-time employees. During construction, employment would be considerably higher than that. The stability of the United States and the Alaskan labor market are attractive features for investment. There are currently only three such plants located in North America. The borough has 5,000 acres of land at the site and has made a commitment of that land. The product is compatible with coal. Coal from the Wish Bone Hill project, should it commence operation, could be loaded and transported from the same site. Mr. Moore described the effort as "authentically a free- trade-zone project." Iron ore from outside the state (the West Coast and South America) would be processed for shipment to Japan. Co-chair Pearce voiced her understanding that the Municipality of Anchorage refused the Mat-Su Borough request to be part of the proposed Anchorage free- trade zone. She then asked if Mat-Su had submitted a federal application for a separate zone. Mr. Moore said that Mat-Su has not yet applied for free-trade-zone status. In response to comments by the Co-chair indicating that establishment of such zones takes considerable time, Mr. Moore said that the zone was not "absolutely necessary" to the project. Mr. Snell added that time needed to bring the proposed plant into service would be sufficient for processing a free-trade-zone application. Mr. Moore stressed the advantage of locating at Point MacKenzie: 1. A close supply of natural gas. 2. Available low-cost industrial land. 3. Deep-water port site with a Corps of Engineers 404 permit. 4. Strategically positioned for emerging Pacific Rim markets. 5. Stable politics and labor force. He next directed attention to the proposed budget for the $50 million project. In response to a question from Co- chair Pearce, Mr. Moore explained that the $50 million represents only the "public loan portion of the infrastructure." The Midrex plant would involve private enterprise investment. AIDEA backed bonds would provide for the dock and conveying system. Senator Kelly asked if the bonds would cover a boat loading facility or a dock that could be expanded for other uses such as the Alaska State Ferry, passenger ships, etc. Mr. Snell explained that the concept at this time is to design something for the client. Funding above and beyond Midrex debt service would require a clear demonstration that there were other sources of funds to cover that portion. Responding to an additional question from Senator Kelly regarding land arrangements, Mr. Moore explained that the arrangement would not be entirely cost free. A lease, which is yet to be negotiated, would be involved. Senator Kelly voiced reluctance to approve financing for the project without a firm lease in place. Mr. Snell observed, "This is a positioning effort . . . to demonstrate to private sector participants that we are prepared to participate in infrastructure development." The authority would only commit funds after review of a financing plan that identifies all costs and all sources of funds. That would include land use and the lease with the borough. When questioned further by Senator Kelly, asking if the proposed legislation represents a commitment, Mr. Snell answered: I look at it, Senator, certainly, as legislative authorization to proceed with the project. But, certainly, it's not an indication that there's a done deal. AIDEA will examine the financial feasibility of the project, the economics, the risk, etc., and assure that Midrex has the ability to repay the debt prior to commitment. Senator Rieger asked if the remaining $150 million investment would be made before or after dock construction. Mr. Snell said that there would probably be parallel construction efforts. Site development is likely to be ongoing as port development commences. Senator Rieger next inquired concerning the extent of the guarantee from Kobe Steel. Mr. Snell acknowledged that that had not yet been negotiated. Discussion followed concerning the triangular shipping route for raw and processed materials. Co-chair Pearce inquired regarding a resolution from Midrex Corporation. Mr. Snell advised of a board of directors' resolution authorizing development of the project with the Mat-Su Borough and Midrex. In response to a question from Senator Rieger concerning ownership of the dock and loading facility, Mr. Snell noted IRS code advantages for tax-exempt financing under public ownership. Public ownership also makes sense in terms of possible multiple users. Further discussion followed regarding 1986 changes in the Internal Revenue Service Code. Mr. Snell observed, "About the only thing that remains for tax-exempt financing anymore are ports and harbors and airports." Additional comments followed by Mr. Snell concerning possible share costs under a multiple use arrangement. Co-chair Pearce voiced her intention to move both SB 16 and SB 171 from committee at the same time. She then directed attention to SB 171 and inquired regarding disposition of revised amendment no. 1, relating to Midrex. Senator Kelly inquired concerning the tax status of the proposed airport fueling facility. Mr. Snell explained that if the project is owned by AIDEA, it would be exempt from municipal taxation. If owned by Anchorage Fueling and Service Company, it would be subject to taxation. Senator Kelly expressed a preference for adoption of revised amendment no. 1 but not amendment no. 2--pertaining to deletion of language concerning "revenue bonds." He then formally MOVED for adoption of revised amendment no. 1 relating to Midrex. Senator Rieger OBJECTED. He voiced support for the concept of the project, but noted lack of supporting information, questioning whether it was ready to proceed. Senator Kerttula said that if the project does not meet all criteria, it will not proceed under AIDEA. He expressed concern that delay of authority might mean loss of "this year" in terms of timing as well as ultimate loss of the opportunity. Mr. Snell concurred in comments by Senator Kerttula. The legislation represents a positioning effort whereby Alaska may compete for the project and demonstrate AIDEA's willingness to participate in infrastructure development. That development poses a major cost component to the developer. Senator Rieger reiterated support for the project, but again suggested that authorization appears to be premature. He voiced reluctance to vote on a $50 million issue based on little information. Co-chair Frank indicated need to review terms and conditions that would have to be met before AIDEA would proceed. Co-chair Pearce pointed to the fact sheet from AIDEA and limitations built into AIDEA statutes. Senator Kelly raised concern regarding lack of information on Mat-Su Borough involvement. He asked what the borough would be devoting to the project. Mr. Moore explained that borough ordinances establish set rates and maximums for lease of borough land. The borough could both forgive lease payments and levy a property tax on the development. It seeks the development on behalf of the state and the jobs for the local economy. Co-chair Pearce requested that Senator Kelly withdraw his motion for adoption of revised amendment no. 1 and asked that Mr. Snell obtain a copy of the resolution passed by AIDEA as well as additional information concerning action intended to be taken by the board once authorization is provided. Co-chair Frank voiced his understanding that bonds issued by AIDEA would be repaid by revenue from the Midrex operation. Aside from the tax-exempt benefit of the bonds for port construction, no subsidy would be involved. He then registered his support for the project, saying that such capital development should be encouraged. Senator Kelly WITHDREW his motion for adoption of revised amendment no. 1 and reiterated need for further information on Mat-Su Borough involvement. ADJOURNMENT The meeting was adjourned at approximately 11:25 a.m.