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