MINUTES SENATE FINANCE COMMITTEE February 9, 1994 9:00 a.m. TAPES SFC-94, #21, Side 1 (000-end) SFC-94, #21, Side 2 (end-000) SFC-94, #23, Side 1 (000-220) CALL TO ORDER Senator Drue Pearce, Co-chair, convened the meeting at approximately 9:12 a.m. PRESENT In addition to Co-chairs Pearce and Frank, Senators Kelly, Rieger, Jacko, Sharp, and Kerttula were present. ALSO ATTENDING: Senator Randy Phillips; Senator Mike Miller; Senator Jim Duncan; Senator Robin Taylor; Representative John Davies; Representative Harley Olberg; Thomas C. Williams, Director, Permanent Fund Dividend Division, Department of Revenue; Paul Fuhs, Commissioner, Department of Community & Regional Affairs; Robert Harris, former Director, Linda Thomas, former Deputy Director, Chris Lethin, Associate Deputy Director, Energy Division, Department of Community & Regional Affairs; William R. (Riley) Snell, Executive Director, Dan Beardsley, Contract Manager, Alaska Industrial Development & Export Authority, Alaska Energy Authority; Jetta Whittaker, fiscal analyst, and Mike Greany, Director, Legislative Finance Division; aides to committee members and other members of the legislature. SUMMARY INFORMATION SB 253: An Act relating to reapplication for the 1993 permanent fund dividend when the United States Postal Service documents the loss of mail during the 1993 application period; and providing for an effective date. Senator Mike Miller, sponsor of SB 253, testified in support of the bill. Thomas C. Williams, Director, Permanent Fund Dividend Division, Department of Revenue, testified as to the department's neutral position on the bill. The committee questioned whether SB 253 was a "temporary" law. Satisfied that it was by Legislative Legal Services, the bill was REPORTED OUT of committee with a "do pass" and a zero fiscal note from the Department of Revenue. SB 243: An Act relating to the four dam pool transfer fund. Robert Harris, former Director, Linda Thomas, former Deputy Director, and Chris Lethin, Associate Deputy Director, Energy Division, Department of Community & Regional Affairs, testified before committee regarding the resignation of Mr. Harris and Ms. Thomas. Discussion was held regarding the particulars of the circumstances leading to the resignations. William R. (Riley) Snell, Executive Director, and Dan Beardsley, Contract Manager, Alaska Industrial Development & Export Authority, Alaska Energy Authority, presented the AIDEA/AEA transition plan. Discussion was held regarding that plan and specific projects. SB 243 was HELD in committee. SENATE BILL NO. 253: An Act relating to reapplication for the 1993 permanent fund dividend when the United States Postal Service documents the loss of mail during the 1993 application period; and providing for an effective date. CO-CHAIR PEARCE announced that SB 253 was before committee and invited Senator Miller, sponsor of the bill, to join the committee at the table. SENATOR MILLER testified in support of SB 253. He explained that on January 8th, 9th, and 11th the mail from the North Pole post office had been lost. This bill would allow people that mailed their PFD applications on those days to reapply. Sworn statements and documentation from the postal service would be required with the reapplications. Senator Miller confirmed the loss of mail on those days because of a personal piece of mail that he was missing. SENATOR KERTTULA asked Senator Miller what document would be required from the post office. Senator Miller said that the post office has supplied a document for use by residents for creditors that did not receive payments, etc. In answer to Co-chair Pearce, Senator Miller confirmed that SB 253 was temporary law. Co-chair Pearce invited Thomas C. Williams, Director, Permanent Fund Dividend Division, Department of Revenue to join the committee at the table. THOMAS C. WILLIAMS testified that the department in general opposes general reopenings but because of the narrow construction of the bill and because it is a temporary measure, their position is neutral. He believed that it would not have a large impact on the division and the number of people affected would be forty to fifty. Those could be processed without an impact on the operation. SENATOR RIEGER MOVED for passage of SB 253 from committee with individual recommendations after clarification from legal that the legislation is clearly temporary law. No objections being raised, SB 253 was REPORTED OUT of committee with a zero fiscal note for the Department of Revenue. Co-chairs Pearce and Frank, Senators Rieger, Kelly, Rieger, Kerttula, and Sharp signed the committee report with a "do pass" recommendation. (Immediately following the meeting, clarification was received from Legislative Legal Services that SB 253, as worded, was temporary law.) SENATE BILL NO. 243: An Act relating to the four dam pool transfer fund. Co-chair Pearce announced that SB 243 was again before committee and that a companion bill would be read across the House floor today. She reminded the committee that Mike Greany, Director, Legislative Finance Division, had been in the midst of a presentation at the last meeting of Senate Finance. However, because of a new development, she invited Robert Harris, former Director, Linda Thomas, former Deputy Director, and Chris Lethin, Associate Deputy Director, Energy Division, Department of Community & Regional Affairs to join the committee at the table for statements and discussion. CHRIS LETHIN stated that he was present at the table at the request of Senator Jacko. (The following testimony is verbatim.) The following statement was made by ROBERT HARRIS, former Director, Energy Division, Department of Community & Regional Affairs. As you know, I was asked to submit my resignation on Monday morning (February 7, 1994). This came about, in part, because of a difference of opinion about the programs and the implications of those programs. The termination, as I saw it, was unjustified. I thought we were in part of a process of me presenting my ideas. The late afternoon Friday, when I was here last, I think it was (February) 4th, I presented my ideas why I needed additional staff, I think in large part, to cover some of the concerns that have been brought before this committee about the ability of the division to handle its programs. I know that there are competing philosophies whether the division should contract out everything or, as legislation says, contract out to the maximum extent feasible. So, I had presented my ideas why I thought I needed more worker-bee engineers and those ideas were not well received. But I think part of the process is, you present an idea, somebody presents a counter idea. It is a compromise-negotiated position. And certainly, in my case, I had been on the job for only two and half months and prior to this, I had no political experience. I have done quite well being anonymous and I like being anonymous. My background, as you know, I have two degrees from the Massachusetts Institute of Technology, a bachelor's in economics, a bachelor's in electrical engineering, and a master's in electrical engineering and electrical power systems. I have spent my entire professional life in Alaska working in economic development, audited management, and electrical engineering. These are not things that are new or unfamiliar to me. I have seen systems that work, I have seen systems that do not work, and it seemed to me that the notion that the Division of Energy would want to contract out everything was a notion that would not work, and particularly, during a period of transition. During a period of transition, one of my first goals was to make sure that the organization got back on its feet, that it was headed in the right direction, that we knew we had a common direction and we could work towards that. There were certain programs we had that mandated the things we did. Being from the private sector, I am very much committed to the notion of privatizing the things that the Division of Energy does to the maximum extent feasible. I think the difference then was what ultimately we define as feasible. To me it seems that feasible means that if we can do some of the work for less money and it comes out better, then that is what we should do. And if feasible means that if somebody else can do it outside, and it costs less money, than we should contract it out. That is not necessarily to say that a job for $2,000 or $10,000, we would contract out. There is a matter of using judgement on a case by case analysis of when it makes sense to try to contract something out, when it makes sense to keep something...particular elements of it, whether it is the design or whether it is project oversight or project engineering. My experience tells me when a particular client does not know what they want, a contractor can come in and maybe they will get what they want. If you do not have project oversight, particularly when you are involved in complex systems, the results usually (are) a more expensive end product that may or may not work. Given that I had nine or ten months on this job, depending upon what the Governor decide(d) to do, I viewed it as key in my role that I was going to get the organization back on its feet, getting us moving in a common direction, as quickly as I could. I was not particularly interested in trying a new theory or new approach. I would prefer to use the tried and true, given the time frame I had. But I think it would be fair to say that my approach (was) that if I had additional staff, I could move more projects out on the street. I could put us out of business sooner. I could accomplish the mission, the goals, that the organization has, principally, being able to have utilities in rural Alaska be self-sufficient, independent of the state's subsidies that they now have, that they could be affiliated if it made sense, or they could remain independent if it made sense. But they could work with an entity whether it was a private contractor, whether it was a private utility, or a public utility. They could have the opportunity to have access to the services and capabilities that the former AEA, and now the Division of Energy, is in the position of having to provide. Most utilities, and I think there are some people from the utility industry in the room today, have their own engineering staff. They do some work in house. The work they do in house is the small messy jobs and they do project oversight. They do that to make sure their systems continue to work. As I say, my experience has told me when you do not have project oversight, when you do not have project engineers on particularly complex programs and projects, that the result is usually disastrous. You can get the job done, it just costs you more. So, working from my experience, I presented a proposal to my management about why I needed additional staff. I thought it was a sound proposal based upon discussions with my staff about the workloads they had. I had indicated in Friday's meeting that I think the question had been raised, well, just what are these workloads? And I said that I had to talk with my management about it first. I did that afternoon, and now I feel free to discuss those things and, certainly, given the fact that I am no longer employed by the division, I certainly feel more free about it. I would like to say though that I would like the opportunity to have the job back. It is something that I feel is well suited to my talents and capabilities. It is something that I am very interested in but I think that right now since there is essentially a revolving door on the Director's office, that it is going to be very difficult either for the next person to go back in, or if I went back in, without perhaps some modifications to the process about how decisions are made within the department. I think it is going to be very difficult for these programs to succeed. First of all, there are about 28 people at the Division of Energy. Those people have skills and capabilities that are very well regarded by the private sector. The problem I was facing was that I had no depth in terms of my engineering staff. If one of my staff decided they wanted to leave, they could and I would lose the capability to do a bulk fuel repair or remediation program. One individual has turned in his resignation. His name is Brian Gray. This was done actually prior to my termination on Monday. Without the depth, without someone to back you up, when one person walks, the whole program stops. The engineers that are in the division now, as well as some of the other personnel in the division, are seriously looking at getting off this roller coaster. Transition is difficult at best if it is well managed. A poorly managed transition is even worse. I think then that depending upon what happens over the next few days, that it is very likely to see over the course of the next couple of months, most of the technical staff, formerly AEA and now the Division of Energy, leaving. That will be a serious blow to the energy programs, to the state. Certainly, they will be out there and we can contract with them. We can certainly privatize their functions, but for those of you that have been in the consulting field, you know that for somebody that is an engineer, the typical charge is $85 to $105 to $120 an hour depending upon the particular technical level of the person. I think we are going to end up spending more money to get the same thing we have now. The problem I have with the privatization notion that everything gets contracted out is that a small $5 or $6 or $7,000 job, we will spend $2,000 just contracting it, just the administrative cost of doing contracts. Anyway, I was going to discuss briefly what my information had been with regards to the workloads. I have an electrical engineer who has experience in small utility systems, small power houses, the transmission, the distribution systems within villages. He has almost 6,000 hours of work in front of him that translates into about 3 years worth of work. My solution then would be to add a couple of engineers to work with him to try to take care of that workload, to get more work out on the street. I have one mechanical engineer, a bulk fuel expert, who is planning to leave. I would have wanted someone to support his efforts since he has mechanical engineering areas that Division of Energy works with...bulk fuel repairs, waste heat systems. No one on staff right now is looking exclusively at waste heat systems and I think that would, given that we have some waste heat systems out there, that we are trying to turn back over to the private sector, that would be important to keep as a function. (Questions were raised about the circuit rider program.) As I stated on last Friday, to the best of my knowledge, the circuit rider contracts were let in accordance with state procedures. But, within the Division of Energy, the scope of work that is required and the ability to respond quickly and to monitor and to provide project oversight indicated to me that I needed another person (that right now is temporary person) to move that position to permanent. I am not unaware of the budget problems that we have this year. I had, with Linda Thomas, developed, actually Linda had, I won't take credit for it, had developed a proposal to pay for the additional positions I wanted from the division without coming back and asking for an increase in general fund moneys. That was done by charging some of the staff we had to some of the loan programs we administer. I think that is a fair thing to do and the federal government was going to pay for one position and simply reorienting parts of the operating budget to cover the costs. I think it is important to state that since I came on in mid-November, the operating budget was submitted prior to my arrival, and, had I been here prior to the time the operating budget was submitted and had a few months to get up to speed, I would have changed the operating budget submission under any circumstances. That is just a fair statement to make. There were some other problems that I have noticed within the division and I do not want to close on a down note but in moving the former AEA into DC&RA there have been some difficulties in how the entire system works. I know in respect to the Governor's efficiency report that came out in '92 there were statements made that things are more efficient if a particular program or director has the responsibility for all the functions that are required to do the job. And part of that is certainly the administration portion, keeping track of the money, when bills come in, when they get paid. For example, I was asked by the general manager of Alaska Village Electric Coop (AVEC), why I was late paying him. That was about two or three weeks ago. Well, I said, Charlie, I don't know. I cannot tell you why I am late, in fact, I cannot tell you who else I am late on, I cannot tell you ... I have no information. Getting that information was very difficult, in this particular instance, it was a bill for $600,000 that is now 90 days past due. Now, if we are talking about privatizing, I can tell you from my experience in the private sector that $5,000 90 days late can close doors on a business and I think that is something that we should look at in terms of how this division functions in order to be able to turn around and do projects in a very short time frame. That if we have eight weeks from when the project is conceived to when it is completed, that kind of thing typically requires the ability to have some flexibility to move fast and I think the efficiency report from the Governor's office was right on target in saying if the director of the Division of Energy is going to be responsible for those programs, then they ought to have responsibility for the people they are working (with) in all aspects of it. I would say this, if I was in the private sector, as I am now, or would have said it last Friday when I was a state employee. Hopefully, those issues will be taken care of. There were some things that I simply wrote off to the fact that it was a transition period, and it was not going to be a smooth ride but we could work it out. One thing I want to address is that I was asked about putting together a strategic energy plan for the state of Alaska and had been working on that. I know that the Governor's directive as communicated to me by the Commissioner (Blatchford) was that nothing would be done that would hurt rural Alaska and I believe the Governor is firmly committed to that. I believe that the Commissioner is firmly committed to that in terms of putting together a strategic energy plan that was implementable, namely that was not "pie in the sky" as some of the former energy plans had been when they were called out by statute. I wanted something that would be a workable document, a working document, something that when we walked in the morning we could see a little placard on the wall that told us why we were there and what we were going to do and how we were going to accomplish it. I know I had certain staff needs about one particular individual, Dennis Miners, here in Juneau, who had been involved in the organization from early July of last year. I would have wanted to (have him) help me with that and I know that the folks in the Commissioner's office were sensitive to the issue of cost of travel and so forth. From my private sector experience, particularly in construction, my attitude in private experience, was do what you had to do get the job done. If it is a particular important document that is being produced, in my case, a $2,000 strategic energy plan, as opposed to a $200,000 strategic energy plan, then, if you have to move fast, you work quickly to get done what you need to have done and certainly I felt a little hampered in terms of not being able to call upon people who I was paying for (I was paying for this particular individual) to come up and assist me or work with me. And I think that in talking about that strategic energy plan it addresses a basic problem and that is that with respect to how the department has approached it, I was told to do what I thought was best. That is OK, I can do that. I like those particular sorts of challenges and so I looked at the programs we had, the money we had, and tried to make reasonable assessments and presented that to my management. But I think that one question that ought to come up is how particular projects are selected and I would advocate the best way to select a project is to select what makes sense to the overall mission of the organization and the strategic energy plan. I am disappointed that I will not be further involved in that. That, at least, it is not going to be done, it is not going to be done by me or at least with my input in it. One thing, let me close with this in terms of things I want to say. I had developed a mission statement based upon what I saw the organization needs doing and I think I discussed this in an overview some time ago with a similar committee. The mission of the Division of Energy is to assist in the development of safe, reliable, and efficient energy systems throughout Alaska that promote economic development, are financial viable and independent of state subsidies, and are environmentally sound. And based on my discussions from last week, I wanted to add one last thing and that is that the Division of Energy will accomplish its mission within 5 years. I think that is doable. I do not think the state should be in the energy business forever. Let's pick out the job we want to do, do it and have these utilities in rural Alaska, the 80 small utilities that serve less 200 customers, let's have them be able to stand on their feet within 5 years. I think that is an attainable goal. That is certainly what I was working for. I appreciate the opportunity to speak today and, madam chair, answer any questions. Co-chair Pearce invited Linda Thomas, former Deputy Director, Energy Division, Department of Community & Regional Affairs to make a statement. (The following testimony is also verbatim.) (The following statement was made by LINDA THOMAS, former Deputy Director, Energy Division, Department of Community & Regional Affairs.) I was hired as the Deputy Director on November 29, (1994), and I submitted my letter of resignation at 5:00 p.m. February 7, (1994). My background is that I am a certified public accountant. I was an audit manager for Deloitte and Touche since 1987 prior to coming to this position. I have spent a number of years in private industry prior to that as a supervisor of electrical trust funds. I only wanted to speak to one issue and that was regarding my resignation. I fully support Robert (Harris), and he is definitely technically competent. He has a high sense of integrity, he was objective and as I said in my letter of resignation to Commissioner Blatchford, I was uncomfortable with the process that led to the resignation of Robert. As far as I knew, there was no process. We had a meeting on Friday (February 4) and we were discussing our work plans and we were told by Commissioner Blatchford that we would continue the meeting on Monday (February 7). Monday morning Robert was called down to Commissioner Blatchford's office and according to Robert, was asked to resign. I was called down immediately afterwards, and asked to continue on, and was told that it was in no way a reflection on me. That there was just a personality difference, and that was it. I felt very uncomfortable with that and that is essentially what I have to say. (This following continues to be verbatim) SENATOR SHARP asked Mr. Harris if he had experienced a hands-on distribution operations engineer that was familiar with rural systems who could go out with the contractor and familiarize the contractor with the individual systems and how to safely operate the systems and work it through gradually. Mr. Harris replied that, yes, there were people who have feet on the ground, dirt under their fingernails, grease in their hair, type people. They know how to walk in with their eyes closed and could rebuild a powerhouse. You just don't throw that kind of capability away. I have work experience. I worked on the north slope. Like I said, have experience both as a electrical contractor (and) in the engineering area. Certainly, in the job I had, I didn't have the opportunity to do those things but I know that the engineering staff we had and the technician staff we had, could do that. It brings a point up where by having that kind of capability on-site saying I want you to do exactly this, this and this, and not mess with these other things, and don't come to me with any of those code questions because I don't want you to work on those things. I just want you to work on this. And if there is a code question, it can be answered. It saves time and it saves money. The question I posed was - do we want to spend $40,000 or $400,000 to fix a problem? Every powerhouse can look the same, and it would cost us multi-millions. For the amount of money I've got, that the division had, it makes more sense to replace, to take care of the problems, and bring the systems up to at least the minimum standards and more, is obviously better. That is just cheaper and easier to do if you have the people on staff that we do now and, as I was advocating, have a few more. That can provide quick answers (having) knowledgeable personnel about electrical systems, which are some of the most complex systems that we run into in our daily life. When they don't work, it is a real problem. I know on my flight back from Juneau on Saturday, I sat next to a woman from Kotlik. I started talking to her and told her I was the Director of the Division of Energy. She said that was great. She said, you know when we start cooking at six in the evening, something that (should) take us 20 minutes to cook, takes us an hour because everyone is trying to cook at the same time. All of us face hardships in our daily life and some of them we get through. Electricity is a part of our modern life. It is a shame to see the systems in rural Alaska be third world systems. I would like to see that changed. Senator Rieger referred to Mr. Harris' comment about the $40,000 and the $400,000. He asked if in the dispute in how to approach the field work, was it an issue of whether to do it in-house or whether to contract it, or was it an issue of management of the contracts or whether the Energy Division has the in-house expertise to supervise the contracts versus having to contract that out as well. Mr. Harris looked at that as an integrated question. There comes an economic cutoff point at which contracting everything out is just no longer economically feasible. Spend more money to contract out a $5,000 job than if we just had the capabilities to do it in-house. By virtue of the fact that we have to have the capability in-house to be able to tell a contractor what to do, then it makes sense to supplement that so that we have the capability to handle the small projects where it makes sense and farm out the big projects where we can just turn over a set of specs with precisely what we want and where the specs don't call out for what we want then there is a person on staff that can answer that particular question in a timely fashion. There were really two issues at hand. The idea that we would contract everything, I think, runs into the problem that the legislation specifies that we will contract out to the maximum extent feasible. And as I would define feasible, if we can do it in-house more cheaply, great, let's do it. The object is not to spend money, the object is to get the job done. Senator Kerttula stated that a man of great integrity preceded Mr. Harris, maybe a director or two before. This former director had R.W. Beck & Associates, well known and well thought of industrial consultant, set up a staffing pattern based on their interpretation of the legislative mandate. This report confirmed the need for "x" number of people to properly monitor contracts, properly design them, and to insure the public interest was at all times a matter of record. Senator Kerttula asked Mr. Harris if he had any comment about why the Beck report was completely ignored. (The following testimony is verbatim.) I (Mr. Harris) had enough problems on my hands just getting the organization up and running from when I took over. I did not have a whole lot of time to go back and look at histories. I was familiar, I took the time to become familiar with the R.W. Beck study that was released in September of 1993 and was familiar with its recommendations. Senator Kerttula asked if the recommendation seemed logical. I (Mr. Harris) think that there were sound recommendations in that report. I took a slightly different approach. I went through and talked to my engineers about their workloads, and what kinds of things they were working on. I was concerned that I did not have depth in terms of my engineers if one walked tomorrow. I did not like the idea that I would be left high and dry and so I took a completely different approach than the R.W. Beck study did which was formulated based upon an interpretation of the legislative statutes and then what kind of staffing patterns someone thought. I went in and talked to my people and I came up with a number that would have represented approximately 50 people as opposed to the R.W. Beck study which said 55. I thought that was being fiscally conservative but the point is that I used a method and they used a different method and we came to roughly the same number. Senator Kerttula said that he had other questions for Mr. Harris. Senator Kerttula said it was his understanding that the Commissioner's office was not acting alone when there were decisions made concerning Mr. Harris's position, concerning allocation of certain employees and so on. Senator Kerttula asked Mr. Harris if he had knowledge of undue contractor influence or certainly contractors' making strong (the next word is not understandable on the tape because of outside noise). (The following testimony is verbatim.) I (Mr. Harris) know that there were people who were very concerned about it who depending upon how the pendulum swings, do quite well, financially. I don't personally know, maybe, Linda, you would like to respond. Senator Kerttula said that he had a series of questions for Linda Thomas. He asked Ms. Thomas how many contacts she had with contractors since she worked with the Division of Energy and what were the subjects discussed during these contacts. Ms. Thomas said that she had only two contacts with private contractors while at the Division of Energy and that was with Scott Thompson of Alaska Power Systems. She said the first one was a phone contact where he had introduced himself and the second one was on the date when Robert had been asked for his resignation. (The following testimony is verbatim.) Scott Thompson and Louisa Quinlin came in and visited Robert, Chris Lethin and I. Senator Kerttula inquired as to the nature of that subsequent contact. Ms. Thomas said the first telephone contact was made right before Christmas and Mr. Thompson was introducing himself and informing me about the status of the circuit rider contracts. He had responded to an emergency situation in Venetie and he was informing me that he was helping the state out on that. Ms. Thomas said she didn't really understand what that meant so I asked our engineers what he meant by helping the state out. He also talked about...I don't remember everything, but I did write it down in my notes. I asked him as far as the Venetie contract, wasn't that part of their contract to respond to emergency services. Mr. Thompson said yes, but they wanted to get the community away from state funds and he went on about the hydro plants he has worked on and how they have benefited the communities and we closed the conversation by his saying he wanted to get together with us and I said well, I was hired by Commissioner Blatchford to supposedly bring a sense of ethics and financially accountability to the organization. I told Scott that we were attempting to depoliticize the agency but he said that I either need to play ball or get creamed. That was my first contact with Scott Thompson. My second contact was on Monday (February 7, 1994). He was invited to our office and at about 11:30 a.m. Robert, Clarice, Chris and I were in the office and Mr. Thompson went on about how his impression that the Energy Authority, he had problems with the Energy Authority and working together with us in the past. He had mentioned some specific projects that he had straightened out in different villages, Atmautluak and Chalkyitsik. The conversation went on for about 10 or 15 minutes. Robert got a phone call and left the office. Chris Lethin, Clarice and I were in there, and Scott started going off by saying, you guys don't need more staff. I don't understand why you need more engineers. You have plenty, you have good engineers here now. Mr. Thompson said then that Bruce Geraghty (Deputy Commissioner, DC&RA) and he had sat down and handwritten the organizational chart together leaving the staff that is here today. Someone said that wipes out middle management and Mr. Thompson said, so, we don't need them. Ms. Thomas said she was just stunned and said, Scott, you should not be telling me this. Mr. Thompson said, he did not care, it does not matter, everyone knows anyway. Those have been my two contacts with Scott Thompson, Alaska Power Systems. Senator Kerttula asked Ms. Thomas if she suspected or did she know if Mr. Thompson was instrumental in having people fired or directing any type of contract awards with individual companies. Ms. Thomas answered that she was not aware of that directly. Senator Kerttula asked what Ms. Thomas knew about the procedures used to award the circuit rider contracts. Senator Kerttula understood that it was a low bid. Ms. Thomas said she had spoken to their grants contract administrator about that and the person that works very closely with the circuit rider contract and they are very comfortable in the procedures that were used to award that contract. Senator Kerttula asked Ms. Thomas why she decided to resign. (The following testimony is verbatim.) Ms. Thomas said that she decided to resign because Robert had been asked for his resignation and the process, well, there was no process for it. We were in a meeting for one to two hours on Friday afternoon. We were told by Commissioner Blatchford we were going to continue the meeting on Monday and make some decisions because our budget amendments were due on Tuesday. We left the meeting with the understanding that, and I think it was also brought up here, that we were supposed to have a division director's meeting on procurement issues Monday morning. Robert showed up to the meeting and was asked to resign. I was not aware that there were any conflicts during our Friday meeting. I thought it was just a discussion. I would like to say that there was no arguing to any extent. I just thought it was a normal, we're trying to talk to management about what we think we need and trying to get some input into what they were looking for a strategic plan for our work plans for the next year. Senator Kerttula said that he had some questions for Bruce Geraghty. Senator Jacko said that he had understood that recently Scott Thompson had sent some sort of letter with regards to requesting change orders on contracts that he had and Mr. Harris had denied those change orders. Senator Jacko asked Mr. Harris if there was a letter to that effect. (The following testimony is verbatim.) I (Mr. Harris) thought I had indicated here on Friday that there was some. With any normal contracting procedure, they have their view of what the contract says and we have ours. Within that, I read the contract and it said that this particular group, Alaska Power Systems would go out for their 8 hours to a particular community under a work order. They would go through a list of forms that have been passed out with the RFP. That they would go through, fill those forms out, do everything that is required, fill out the paperwork and send it back to us. The contract language was pretty clear. I wrote him (Mr. Thompson) and said, you will do that. My first and, actually only, meeting with Mr. Thompson and Ms. Quinlen, it was the first week I was there. I brought up the issue that because Mr. Thompson operates a vertical integrated company, he also sells and services particular lines of equipment, that I wanted to make it very clear to him that when he was out on the state's dollar, I did not want his people selling their equipment. That is not the purpose. I want him to go out and do the work, straight up, heads up, by the book, let's just go by the numbers. He had some real problems with that. I think he misinterpreted what I was saying in saying that he couldn't be in business to sell equipment or this or that. I tried to make it very clear, that no, my intent was that if the state was paying his way out to these communities to do the work, that it's just that. Just go out, do the work, and come on back. I don't want to hear reports from communities that his techs had been trying to sell equipment. I think that was pretty fairly understood after about 20 minutes of intense conversation. So, in this letter that you are referring to Senator Jacko, the other issue that was raised was, if I can't coordinate with these communities to do repair work that we see as obviously needs to be done, how am I going to make sure this works gets done. The contract language was pretty specific. It said that the contractor would provide coordination with the community and make sure the equipment was on site, parts and supplies were on site, that needed to be there so that when they got there they got the job done. I wrote him (Mr. Thompson) and I said that is what the contract says and if you don't do that I won't pay you. And maybe that is a hard line for a state official to take but from my experience in the private sector, if you don't perform, you don't get paid. I don't have a problem with that. So, I think he may have misinterpreted my earlier comments about what I considered sales activity versus the activity of coordinating to making sure the job got done. I thought I made it very clear both in my conversations and in my letter to him how I interpreted the contract. End SFC-93 #21, Side 1 Begin SFC-93 #21, Side 2 Senator Jacko pointed out that Mr. Harris had some experience in this area and asked him if Scott Thompson maybe "low-balled" these contracts. Senator Jacko asked Mr. Harris for his impression. (The following testimony is verbatim.) I (Mr. Harris) thought that he very competitively bid these contracts, yes, and I think in a process like that, knowing from the private sector, a lot of times the scenario is, you bid the job, you get your foot in the door, and then, if perhaps the contract documents don't precisely spell out what needs to be done, then you say, oh, I have got to have a change order. Which is one of things, he (Mr. Thompson) was doing, saying, no, the eight hour work order did not include him (Mr. Thompson) filling out paperwork. I need you to pay me a couple of more hours for every village I go to so I can get this done. Senator Jacko stated that if that worked out and he got his change order, he could have got his profit margin out of the change orders. Mr. Harris agreed that was a reasonable strategy. Senator Jacko said he did not know how much Mr. Harris knew about Scott Thompson's operation but Senator Jacko was concerned about it because that is apparently how the services are going to be provided into the communities out there. It was Senator Jacko's understanding that Scott Thompson apparently owns, in the Unalaska and Akutan situation, a portion of the utility out there now. Senator Jacko asked Mr. Harris if he knew that to be true. Mr. Harris said that he had heard that but had seen no documentation to that effect. It was his understanding but felt there were people in the audience that could give more information on that. (The following testimony is verbatim.) That was a project that was a combined hydro-diesel project partially funded through ASTF. It apparently had some merit, and I believe that what I heard is that Mr. Thompson is 50 percent owner in that. He did not want to speculate. Senator Jacko said that would be a pretty good deal if he went and got 50 percent of the utility and then got money from the Science & Technology Foundation funded from the Division of Energy to upgrade the utility, his equity position would be in a much better situation, wouldn't it. If he did that with all the villages out there he would have a pretty good deal going. Mr. Harris agreed that it would be a great deal. Mr. Harris said that in respect to Mr. Thompson, I have treated Mr. Thompson as I would treat any other potential contractor. I believe I have treated him fairly, openly, and honestly. You know, if someone from Mars came in and said I have a great plan for taking care of utilities in rural Alaska and they showed me they had the depth and credibility and capabilities to do that, I would say, boy, this is great. Let's have more Martians. So, whether it is a particular individual or a public utility, that's not a matter, not a concern to me. Just that the job gets done and the people in rural Alaska are well served with their electric utility interests. Senator Jacko asked Chris Lethin to confirm that he was in the meeting Ms. Thomas's story referenced. CHRIS LETHIN answered affirmatively. Senator Jacko said his basic concern with regards to the Division of Energy is that services continue to be provided in rural Alaska without interruption and voiced more concern now that Robert Harris had been fired. Senator Jacko said he was worried because he had read an article in the Tundra Times on Friday researched by Jeff Richardson. One of the things pointed out in the article is that Don Harris resigned because he had a mission to continue to provide rural energy services but could not carry through with that mission because of interruption from management, and the organization he agreed to work with changed as the Division was going through the process. The article also said Don Harris was basically receiving a lot of pressure to lay off too many people to the extent that he would not be able to carry out his mission. Senator Jacko felt that Robert Harris was under a similar situation, and if that is the case, there are never going to be enough people to actually do the job. He asked Mr. Harris to confirm his concerns. Mr. Harris answered affirmatively. (The following testimony is verbatim.) My predecessor, no relation to myself, was on the end where he was trying to shrink down an organization. Now that is a tough task and I would have approached it by looking at the mission, goals, programs and the amount of money and said how many people do I need. I had gone and done the similar process and said I need some more. It would have brought us back to about the same level that the former Director, Mr. Harris had indicated. Just to relate a professional experience within the Division of Energy, we, Linda Thomas and myself, were trying to get a project accountant on board. We called everybody we knew to try to get somebody, so when invoices came in we (could keep) track of them and made sure our people were paid and not 90 days late for $600,000. Mr. Thomas and I had trouble recruiting people. They would say DC&RA and kind of laugh and we'd say we're a solid team, we're going to be here for a long time. I think now with what's happened that when the bulk fuel expert leaves, good luck getting anybody to come back in. When the other engineers leave, good luck finding anybody who will walk back in this place. This is, to paraphrase a remark I heard yesterday, this is like jumping into the biggest fire you can find. Senator Jacko said that last week he had asked some questions of Mr. Harris with regards to being sure that there were proper oversight of the contractors and apparently Mr. Harris since last Friday had attempted to secure some more engineers to provide that oversight. Senator Jacko asked Mr. Harris if he felt that there was some interference from the contractor involved that possibly did not want this oversight, if that might have had something to do with him being fired. Mr. Harris said that he did not know if there was interference. (The following testimony is verbatim.) I had heard from one of my staff that a particular contractor, namely the Alaska Power Systems, knew I was going to be fired before I knew it. Now that doesn't mean that they interfered. It simply means that they get information before I do. Senator Jacko asked Mr. Harris if he felt the contractors deliver the same level of trusting responsibility as provided by the civil servants that were there under the previous system. Mr. Harris felt that was a question of whether it was the car or the driver. (The following testimony is verbatim.) I think we could all point out examples where the vehicle does not work and point examples where it is a great vehicle and the driver is not working. I think some of my perception of some of the problems with the former AEA was that the response was not what people thought it ought to be and some changes were required. I know from the people I have talked with that they are one of the finest group of people that I have ever worked with. They are dedicated, they care deeply about the mission of providing services to rural Alaska and, I think, whether it is for a public utility or the state, typically people that make it their life choice to work in public service do it for reasons other than simply money. I think the people sitting at this table would agree to that, obviously. Senator Jacko asked, in reference to the circuit rider program contracts, if those contracts provide for oversight of the distribution systems as well as the power plants. Mr. Harris answered negatively. He said that he believed it was simply the power houses, operations and maintenance of the power houses. (The following testimony is verbatim.) I believe there were provisions that if the contractor recognized an emergency situation exists, they communicate that information back to us, and we make some sort of determination about the next thing to do. Senator Jacko referred to Mr. Harris' remark about feasibility. He asked if there were any decisions made in management about what would determine feasibility. Was there a threshold level, was it $5,000, $2,000? Did someone tell you, or who was to decide that? Mr. Harris said that he was told to do what he thought was best, handle it, essentially. (The following testimony is verbatim.) So I came up with a common sense definition that if we could do it for less in-house, than sending it out of house was not feasible. If it was something that was nice and clean and we could send it out and hand it to a design/construction management firm, they would do the design, oversee the project, and everybody is happy. I would be happy. I used to work in firms like that. Senator Jacko asked if the plan by management was to retain some contracting ability within the division or was it going... Mr. Harris said his understanding of their plan was that we would contract out everything, period. Senator Jacko clarified Mr. Harris' remark by saying, whether or not it was feasible, it would all be contracted out. Mr. Harris said that was how he would describe it. (The following testimony is verbatim.) It was, put the blinders on, and the mission was not contracting out to the maximum to the extent feasible, the mission was contract out everything. That is, at least, what I heard what they were telling me. I imagine they have a different story about what they were telling me. It may be very likely that what I heard them say is not what they thought they said. So, but their intent, if possible, was to contract out everything and for us not to have contracting authority, not for us to have procurement capabilities. Where on a construction job that takes eight weeks from start to finish, including the design, getting parts, getting on the job, and getting the thing built and done, without some way of either having trustee accounts so that we could have some project oversight or the ability to have some level of procurement. Fast turnaround is a very significant problem and on a job that involves people out in the field, I think as you are aware, the cost is not the part, the cost is having people tied up and waiting for a part to arrive. Senator Jacko asked Mr. Harris if under the present system, with the number of people employed, are there disasters out there in rural Alaska waiting to happen in some of these utility systems. Senator Jacko pointed out back in the 70s, when utilities were started, there were a lot of fires and emergencies and that was why the present systems have been developed. Mr. Harris said he thought it was safe to say that there is a skeleton crew in place that could respond to emergency problems. (The following testimony is verbatim.) It is a question of how many firemen do you want in your community. If you only have one fire you don't need a lot of firemen. But that doesn't give you any backup or any capability in case people walk. I think I would characterize it that we have very limited capabilities to deal with emergency problems and I am not convinced from only being on the job for two and half months that there aren't emergencies out there that could happen. I think if we go with the scheme of contracting out everything, and simply have a bunch of contract administrators, then you are going to see more power systems burn down. To your earlier question about whether someone is in the private sector or public service, one thing's for certain. If as a private contractor, I don't do my job, you can sue me. That will take six to eight months, thousands of dollars. If I am in the public sector and you don't like what I do, I am sure that by 5:00 that afternoon I will hear about it from the person that is representing those interests. Senator Jacko asked Mr. Harris to confirm that Bruce Geraghty was his primary supervisor. Mr. Harris answered affirmatively. Senator Jacko asked who did most of the interacting with the contractor, who made most of the decisions. Mr. Harris confirmed that Senator Jacko had referred to the Division of Energy, and then he answered Linda Thomas, and contracts grants administrator would make negotiate the contracts. Senator Jacko referred to Ms. Thomas comment regarding Scott and Bruce writing the organizational chart together. Mr. Harris said he was not aware of any of those meetings. Ms. Thomas said that she was not aware of any of those meetings either, except what she was told by Scott Thompson. Senator Kerttula stated that it was his understanding from Don Harris that the commissioner hired him to put together the organization, make it effective, and as cost effective as possible and keep the public purpose. He referred again to the Beck study. Senator Kerttula said that he believed that was what the commissioner wanted, and he believed the commissioner has been pressured by either the Governor's office or someone else to perform differently than that. He asked Mr. Harris if he was hired in a similar circumstance, that is you were to put together an organization, to be quasi-independent just as long as you run it effectively and efficiently. Mr. Harris answered that by the time he came on board, he thought the philosophy was that this was an integrated part of DC&RA. (The following testimony is verbatim.) When I signed on it made a lot of sense. DC&RA has many elements and programs in place that deal with the issues of rural Alaska. But as far as the direction I was given, I was told to do what was best. So that was exactly what I did. Senator Kerttula commented that the Commissioner must be under some immense pressure because he has always been very much attuned to rural Alaska needs. He felt there was some problem that was on and that it might take an audit to understand. Co-chair Pearce spoke to Mr. Harris' concern in terms of having enough engineers and his five-year goal of working with all the energy problems throughout the state and trying to take care of them. She asked what the present system is and as far as he knew, what past practices were in terms of how projects in rural Alaska have been prioritized. She was aware that there are a lot of needs there. She asked how had the authority previously, and how had Mr. Harris, set up the division to decide which ones were being attacked this year versus what might happen next year or the fifth year. Mr. Harris felt that was a good question. (The following testimony is verbatim.) When I arrived there was no procedure. There were within particular grant programs or loan programs, guidelines if a community had to participate with 25 percent, or 75 or 60 percent of the money, but there was no clear structure. That was one of the first things I was working on. It would have been something I was incorporating in a strategic plan or work plan about how the programs that we are dealing with make sense so that we can take care of these problems and we are out of the business. But, no, to answer your question, it was first come, first serve. The squeaky wheel gets the grease, I think might have been a good characterization of it. One of the first things I told my staff was if I'm going to be able to depoliticize this organization so that we look at these needs on the basis of where the greatest need is, address those first, and do it within the context of some attainable goal, we have to establish those priorities, a priority ranking system so we can tell what we have to work on first. From my experience in rural Alaska, and my own experience as an engineer, above all the other things prioritizing, reducing line losses, making more efficient generators, above all that, the first and foremost responsibility is that we make sure we have safe electrical systems out there. I would feel very, very badly if I woke up one morning and heard about a child being electrocuted or a particular person in a village being electrocuted. That would be, I think, a very difficult day. Those safety issues, I think, they are our first priority. For folks that have been in rural Alaska and seen those systems, some of them are nothing more than electrical lines strung up on broom handles, or whatever is out there, trees. You know, it is just a rich great state and the people that live here deserve the basic necessities of a modern world. Co-chair Pearce asked Mr. Harris if, to his knowledge, there was somewhere within the division, department, or in the files, any sort of breakout over the past few years where completed projects are located in the state so we can see if there is a regional equitability. (The following testimony is verbatim.) I (Mr. Harris) had been asked last week to put together a summary of how much money has been spent in the urban areas, in the railbelt if you will, or urban areas and rural areas. I think there is a list and it would be worthwhile to put that together to tell where the money has gone. I know I was faced with a situation in the two and half months that I had the job where a particular village, we had given them a generator. They had neglected to take care of it, it had failed, and they wanted another one. I said, this does not sound good, I don't want to give these folks another one. We gave them one two years ago. I would need to do more research. Since then I have heard conflicting stories about what exactly we gave them. But I would need, I think, if we had an understanding somewhere, where this information is available to us, give us an understanding of what we have done in the past and what ought to be done in the future. Frankly though, if I or the Division of Energy or the former Alaska Energy Authority had sent out a generator a couple years ago and it failed because of lack of maintenance, due to lack of maintenance on the part of the people who got it, I would be real hesitant to give them another one. I have got other communities that would be able to take care of it. I think that would have been one of my prioritization schemes. If the community could take care of what is there, great, if they can't, have them work with an affiliate, with a public utility or private entity, whatever. I hope that answered your question. Senator Jacko asked Mr. Harris what his understanding was of the timeline for accomplishing this transition. He asked if the goal was a year, and did it happen a lot faster, and if so, why? Mr. Harris said that he was hired in mid-November, and understood that certain elements were to be done by the end of December. He wanted to get the organization back on its feet, bring morale back, have people feel there was a sense of purpose and a mission to what they were doing. He was willing to wait to handle some things, like whether or not a project accountant was needed. There were some things he was willing to admit would take a year to resolve. Other things though, he felt, needed to be done right away. Senator Jacko asked Mr. Harris what it took to get rid of a contractor, what sort of termination clause he had. Mr. Harris said that if Senator Jacko was referring to the circuit rider contract, it had one of the best termination clauses in that contract he had ever seen. (The following testimony is verbatim.) We could fire him because...anyway, it is a great termination clause. Generally the things that you are safe in terminating somebody are non-performance, or those sorts of things. An attorney would be better at answering that. Senator Jacko asked who would do that. Mr. Harris said that initially he would have answered that it would be the Division Director based upon recommendations from staff, or clear evidence that something is not being done properly. As of how that department would have seen that decision-making process going on, he could not answer that. Senator Jacko said that Mr. Harris did not seem to have any oversight and that he was not really sure how he would get rid of a contractor and asked if he agreed. Mr. Harris said that at the present time, there was oversight. The proposal that he had heard, and the way he interpreted it, was that most of this contracting would be done in such a fashion that there would be no oversight. Senator Sharp stated that he had been paid a courtesy call by Mr. Harris' predecessor, Don Harris. While on a trip down south, Senator Sharp heard that Robert Harris was going to replace him, and voiced his concern about how the Division was going at that time (December). Senator Sharp asked Mr. Harris how he had come to be considered for the job. Mr. Harris said he had heard about the job through a friend, Mr. Heinze, who works at the division. Prior to that he did not know anybody at the division. He was surprised that Mr. Heinze was back at the division. Mr. Heinze had told him that this job was open and that he would be great for it. Mr. Harris said that it sounded like something he would like to do. At the time he had his own consulting firm and was doing some subcontract work in electrical engineering and economic development, so it seemed like a good fit. His contracts were winding up, so he called the Commissioner, sent him a copy of his resume. He said he had never met the Commissioner prior to sending him his resume. He thought one of the telling questions that stuck in his mind in the interview process was he was asked who did he know politically. He said nobody and made a good living through the years by being apolitical and being anonymous. He liked that. Senator Sharp said his concern was if any legislators had contacted any of the prospective candidates. Mr. Harris said he had not been contacted. Co-chair Pearce indicated that Senate Finance had paid to fly Mr. Harris and Ms. Thomas to Juneau. She said that it would preferable to ask any questions of them while they were here. Co-chair Pearce invited William R. (Riley) Snell, Executive Director, and Dan Beardsley, Contract Manager, Alaska Industrial Development & Export Authority (AIDEA), Alaska Energy Authority to join the committee at the table. She stated legislation (SB 106 and SB 126) passed last year moved part of the energy authority's responsibilities to AIDEA. She said that the committee was attempting to figure out what the legislation did and would appreciate an overview about how the transition was going. WILLIAM R. (RILEY) SNELL said that he had provided a copy of the AIDEA January newsletter (copy on file) that was intended to help customers and constituency understand the split, and the roles and responsibilities under the new legislation. In addition, a handout was provided that covered the overall transition of AIDEA's portion of the spinoff (copy on file). He noted as a highlight in the transition, in the presentation of this year's budget, there had been a reduction in staffing of about 67 percent. These employees had been responsible for performing maintenance and operating responsibilities in general services to those projects and responsibilities that are now under the oversight of AIDEA. That translates from 18 direct, full time permanent positions into 6 permanent full time positions. In dollars, that would equate to a savings of approximately $400-500,000. However, some of the escalating costs, including higher insurance premiums, and higher costs in some of the contractual services offset those dollars. As of the 14 of February, all operating and maintenance responsibilities will be transferred to Homer Electric to manage the Bradley Lake project. That will be a further reduction in the number of employees that we are required to have as AEA or AIDEA. Most of remaining responsibility that the Authority has at Bradley Lake will be fiduciary responsibilities as related to the bond requirements as well as ownership type requirements based on legal review that would be inappropriate to transfer to the utilities. We continue to look at those opportunities where further delegation of responsibilities can be transferred. On the four dam pool, negotiations have been entered and further transfer of responsibilities to those utilities are scheduled to be completed by March or April (1994). Negotiations are ongoing with the intertie group between Anchorage and Fairbanks for further transfer of responsibilities with those utilities as well. We have also had discussions with Larsen Bay (a project transferred to the Authority under the new legislation) on how to give them more responsibilities. Those negotiations are on-going as well. Although it is the responsibility of AIDEA, negotiations have been successful during the interim period on the state's behalf for a transfer of the new intertie money to the utilities that will be participating in both the northern and southern intertie. Organizationally, all services have been pulled, program responsibilities, and managerial responsibilities that were involved in the transfer, and now are fully incorporated into the AIDEA organization, including the accounting systems. Revised regulations are now being published as required by law regarding the changes in some of the programs that were inherited from the old AEA. We have also sought the assistance of Commissioner Fuhs's administrative staff in the closeout of existing capital improvement projects. The Bradley Lake project has recently returned $11.5M in surplus funds back to the state general fund. This concluded his overview. He added, that due to a great commitment of staff, much had been achieved in what had been envisioned by the legislation, that is that the AIDEA programs to be put out to the maximum possible to the utilities to provide services for maintenance and operations. We felt it had been accomplished post-haste and felt that good progress and cooperation had been experienced. In answer to Senator Jacko, Mr. Williams said that Unalaska's geothermal project was inherited from the old AEA, and feasibility numbers were available. Currently, requirements contract with the local fish processors are in progress. My understanding is that the city and two fish processors have executed their portion of an intent to enter into a requirements contract. We are waiting for the third fish processor to indicate its intentions. Once we have that, we will be in a position to determine whether the economics of that project would warrant us to proceed with the requested legislation for the project. Again, in answer to Senator Jacko, regarding his confidence in the project, Mr. Williams said that there are conditions out there that still need to be looked at. The biggest risk from a development standpoint is the field itself and who takes the risk to develop that field. Once the field is developed, then normal routine construction risks would be at stake at that point in time. He said he is impressed that progress has been made to the extent that it has since becoming involved in it. Mr. Williams said it would provide 10-12 megawatts of geothermal power. In answer to Senator Jacko, he said it would not be enough to supply the whole community, but in light of the fact that they have significant psd problems with all the independent generating sources, it goes a long way in reducing some of their regulatory problems with the independent power producers. It also maintains a stable power base for new developments like the Carrs store which is going into the community and must provide its own power source. In answer to Senator Rieger, Mr. Williams said he could provide the committee with the amount of assets in the enterprise development account from the annual report. Even in rough numbers, he was not able to estimate but it was over $100M. He said he would provide information that afternoon to Senator Rieger's office. In answer to Senator Kerttula Mr. Williams confirmed that the state retained ownership in the hydro projects. Senator Kerttula asked Mr. Williams if it was a fair characterization that the state has again socialized the losses and potential losses, and privatized the profits. Mr. Williams said he was not comfortable in agreeing with that characterization. If that in fact is what has happened, it happened at the front end of the development of the project. What we are doing is taking the operating cost of these projects and moving them out of the state general fund budget and putting them directly onto the utilities to perform. Under Bradley Lake, the utilities are responsible for paying for those costs themselves. On that particular project, I think it is not a proper characterization. Senator Kerttula asked him to make the same comment on the four dam pool. Mr. Williams said as he understood it, the projects were operated on behalf of the state and removed their operating costs as part of the expenses before they remit what is required in their contracts to the state. He did not see that there was any change in profits or the overall revenue stream coming into the state as per the original contracts. In answer to Senator Sharp, Mr. Williams explained that the Project Management Committee (PMC) was created by the utilities to help oversee the operations of the projects. Mr. Williams listed the four dam pool, Bradley Lake, Larsen Bay...as a few that had been transferred to his responsibility. He confirmed that Larsen Bay was Kodiak and not Terror Lake. Senator Rieger asked if there were any plans to use a capital reserve fund for any intertie project. Mr. Williams said no project was far enough along to know what debt if any would be required for the new interties. He believed that the legislation adopted last session does give AIDEA the ability, the moral pledge of the state, should it have a debt financing component. As of yet, the feasibility on those projects and their costs are not sufficiently along to know whether or not one would be required or what shape the actual financing would take. In answer to Senator Rieger, Mr. Williams agreed that during a feasibility study, grants or subsidized loans from the state were ignored, and only original capital costs were regarded. Senator Kerttula referred to the transmission line that seems the most controversial, the one from Sutton to Glennallen. He asked if anyone had suggested power production or looked at the potential of gas production, gas-fired generation rather than building the line. Mr. Williams said that under legislation, the feasibility analysis for that project remained with the Department of Community & Regional Affairs, Division of Energy. He said they had been given a debt component and were awaiting the feasibility analysis before it would be reviewed for financial feasibility for any debt issuance. No discussions have been held as to alternates viewed in the feasibility study. Co-chair Pearce asked the status of each of the major intertie projects that were included in SB 126, the appropriation bill, in terms of signed contracts and actual expenditure of the appropriated funds. Mr. Williams said the only funds that they had direct involvement to date were the new interties for the northern/southern railbelt. They were asked to lead in the negotiations of putting the grant for the state funds in place with the utilities. That has been done. Contracts have been signed with the utilities and grant administration agreements allowed the utilities to go forward and start selecting contracts for purposes of design, permitting, etc. With the new interties, monies are obligated under the grant agreement and that work has commenced as far as the reconnaissance design and permitting activities. In the northern route, contracts have already been awarded, and in the southern route, scoping documents are now necessary to go forward with retaining a&e type services. He agreed that the appropriation was in the grant administrator's fund. Mr. Williams said that it was an important point that under the legislation and again on legal review, while using AIDEA staff and the AIDEA board of directors, for legal and financial purposes, they be treated totally as separate corporations. It is important to maintain that segregation based upon legal advice and not to commingle the responsibilities. Mr. Williams agreed with Senator Sharp that there was another little transmission line around Seward. Mr. Williams added that several had been listed but he reminded the committee that if there is a debt component, because the Division of Energy cannot issue debt, a project feasibility analysis needs to be completed, before they have a feasible project. At this point, they will get involved looking at the potential of the project to meet its debt service and make a determination as to whether it can be debt financed. Senator Sharp stated that it was the full amount needed to de-bottle neck something and Mr. Williams concurred. Senator Kerttula asked if some of the projects become "fringy", would it lessen the ability to supply the needed capital for other worthy programs. Mr. Williams confirmed the need to make sure that there are two separate corporations and to insure debt is not commingled, but as currently structured, the answer is negative. Senator Kerttula stated that Mr. Williams had great integrity and had done very well at his job. He hoped that Mr. Williams would boilerplate for the future each and every step so that to the maximum extent, the state is safeguarded against people that may follow him that are inadequate at the task. Co-chair Pearce asked Mr. Williams if AIDEA was going to need any bonding authorization from the legislature. He answered that for AEA there was a question whether there was a need to modify who the receiving agency is for the state on the Snettisham project. He felt it might be satisfied under federal legislation and would not need state legislation. There also may be a small technical issue with AEA legislation in relation to feasibility studies. The past legislation said that they had lost the ability to do project feasibilities. He was concerned that AEA would also lose the ability to do financial feasibilities which were needed to arrive at conclusions regarding debt financing. He said the Attorney General's office was addressing this concern for this legislative session. As far as the AIDEA program goes, he suspected that legislation would be needed for the Sitka pulp mill pending the outcome of the feasibility analysis to convert the plant to medium density fiberboard. He thought other projects, such as Unalaska, will progress to where legislation will need to be introduced. In answer to Senator Kelly, Mr. Williams said that the Sitka pulp mill would retain ownership by the Alaska Pulp Corporation. He said that AIDEA and the state were participating in a feasibility analysis regarding the conversion of the plant. Ownership would remain the same due to environmental concerns. He explained that AIDEA would look at participating in a loan between $40-60 million, the dollar amount still to be determined, to convert the machinery part of the plant. He said it would be an interest bearing account, at today's market between 8 and 9.5 percent, since it would not qualify as a tax exempt loan. The state would not participate in the total amount, only equity participation of at least 20 percent. In answer to Senator Jacko, Mr. Williams said that he believed the total number of the geothermal projects was $100M. Again, in answer to Senator Jacko, Mr. Williams said that the details would have to be worked out, as to where additional equity, or contributions would come from to get the project into the financial feasibility range of doability. In answer to Co-chair Pearce, Mr. Williams said that the structural steel for the maintenance facility airport project came out of the fabricator's shop in Iowa with an approximate 60 percent defects in the welds. AIDEA inspectors found the defects, the contractor had the control of quality control and assurance, and failed miserably at the responsibility. An attempt was made to repair the welds in the field and was determined that it was not financial feasible. New materials are in the process of being secured from a new fabricator. The project will come on line approximately 3-4 months late. The budget, the way the contract with Federal Express works is, whatever the cost of the project, the responsibilities is with Federal Express. It is passed directly to them, they in return pay the Authority through their 20-year lease for the rights and privileges of using the facility. AIDEA is advancing the funds for the additional costs, however, Federal Express is on the hook for reimbursement of costs. In answer to Senator Kelly, Mr. Williams said the original subcontractor who made the steel is out of the project. It is the responsibility of the fabricator to dispose of the steel. The subcontractor received a partial payment on shipment, about 30-40 percent for materials. He said that there is recourse for recovering that money through performance and payment bonds that were required to be in place in the contract. It was probably a month into construction before the project was halted because of the bad welds. ADJOURNMENT The meeting was adjourned at approximately 11:00 a.m