Legislature(1999 - 2000)
04/17/2000 09:30 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 446(FIN) am
"An Act establishing and relating to the power cost
equalization endowment fund; relating to the power
cost equalization and rural electric capitalization
fund; relating to the Railbelt energy fund;
authorizing and relating to the sale of the four dam
pool hydroelectric project; establishing and relating
to joint action agencies created to purchase power
projects; and providing for an effective date."
CS FOR HOUSE BILL NO. 447(FIN) am
"An Act making appropriations relating to power cost
equalization and the sale of the four dam pool
hydroelectric project and to capitalize funds; making
appropriations under art. IX, sec. 17©, Constitution
of the State of Alaska, from the constitutional budget
reserve fund; and providing for an effective date."
Keith Lauffer, (Testified via Teleconference), Financial &
Legal Affairs Manager, Alaska Industrial Development &
Export Authority (AIDEA), Department of Community &
Economic Development, provided an overview of the bill. He
stated that the bill would do three things:
· Authorize the sale of the Four Dam Pool
facilities to an entity to be formed by
purchasing utilities;
· Establish a power cost equalization (PCE)
endowment and utilitize the sales proceeds to
capitalize the endowment, while allows for other
contributions of the endowment from federal funds
or other sources; and
· Uses the endowment and other funds to provide for
a mechanism for the annual financing of the PCE
program at a $15.7 million dollar level.
Mr. Laufer addressed the perimeters of the sale transaction
of the Four Dam Pool. The negotiations for the sale of
those facilities has been in the making for about 5 years.
The negotiations have been long and difficult and the final
agreement was just made. He added that there were three
goals in approaching the final negotiations.
· The State needed to receive fair value for the
project and be relieved of all liability related
to the project.
· The sale needed to benefit the local communities
by providing them with local control of their
generation resources and stabilize long-term
power rates.
· It was important that any sale transaction would
help to solve the problem of long term funding
for PCE.
Mr. Laufer was pleased to report that the bill met all the
criteria.
He explained the perimeters of the sale. The sale price
for the project was $73 million dollars. That price falls
within the range of reasonable value that AIDEA determined
was a fair value for the projects. The manner in which the
internal fair value was determined was to recognize that
the projects are only worth what revenues the State could
generate over the long term. Recognizing that, a
calculation was based on the present value of the State's
revenue and those were used as the terms for the power
sales agreement. That amount was then reduced by the
present value of the State's risk. He reiterated that the
sales price was well within the range that AIDEA found
reasonable, utilizing the long-term assumptions.
Mr. Laufer expounded that there were other elements
involved in the sale. The reason that the sale will not be
consummated immediately is that there are federal
regulatory commission licenses that needs to be transferred
and land interests which make it more complex.
Mr. Laufer commented that AIDEA believes a reasonable time
frame for closing the sale would be December 2001. In the
interim, the utilities will be required to continue to make
their power sales agreement payments. Under the terms of
the Memorandum of Understanding (MOU) with the State and
the utilities, the utilities will be responsible for all
repairs and the payments will be 100% available for the PCE
program. The utilities do have a termination right in the
event that significant losses occur in the interim period.
Mr. Laufer noted that the next element of the transaction
involves the State insurance fund. The State currently
holds a $13 million dollar insurance fund for the projects.
That fund is used by the State to cover uninsured risks and
the deductibles. The State has a $10 million dollar
deductible on the insurance procured on these projects.
That fund is projected at about $13 million dollars. Those
monies would be freed up as of the sale date.
Mr. Laufer continued, the next monies involved in the sale
are the monies set aside for a 3% low interest loan from
the State to the utilities participating in the Southeast
intertie. Those funds were appropriated in 1993. The fund
consists of $20 million dollars. In the transaction, it
was recognized that the $20 million dollars loan funds had
a significant subsidy element. The subsidy value of that
loan was in excess of $5 to $6 million dollars. In
recognition of that, the utilities were provided a $5
million dollar credit as of the close against the purchase
price.
Mr. Laufer stated that there were two other elements of the
sale that should be addressed. He noted that the sale
completely relieved the State of all ongoing future
liabilities as an owner of the projects. He noted that was
a crucial element for AIDEA. The MOU authorized AIDEA to
finance the sale but it would be subject to AIDEA's Board
approval at an interest rate of 6.5% under commercial
terms, and would be available if they were publicly
financed. Importantly, the purchasing utilities were
required to subordinate all their rights under the power
sales agreement. If the loan was to default to the
utilities, the State should not be in a position in which
it could again receive ownership of the projects, subject
to the existing owner's power sales agreement. The
utilities will be subordinating their rights and power in
the sales agreement to the AIDEA lien.
Co-Chair Torgerson asked if that agreement would need to be
ratified by the voters.
Mr. Laufer understood that the agreement would not have to
be ratified by the individual owners. A new entity will be
created so that the power sales agreement, other than the
subordination agreement would not be altered. No
individual utility would be incurring the debt.
Mr. Laufer continued, the MOU recognizes that there are a
number of conditions, which will need to be satisfied. It
will be necessary for the governing body of each utility to
approve the transaction as well as the Legislative Body.
He added that there are a number of other detailed issues,
which will need to be completed before the transfer can be
consummated.
The second part of the bill addresses the establishment of
the PCE endowment. That is where the money goes. The
payment made in August 2000 will be deposited into the PCE
Rural Capitalization Fund. The other funds identified for
payment are for power sales, which would be deposited into
the PCE Endowment Fund. The net sale proceeds in the
insurance fund would also be deposited into the PCE
Endowment Fund. The bill provides for a transfer out of
the Constitutional Budget Reserve (CBR) into the PCE
Endowment Fund.
Mr. Laufer continued, annual PCE funding over the long-term
will come from the amounts made available from the
endowment. Under the bill, 7% of the average market value
of the previous fiscal year would be made available for PCE
funding. In the interim, the PCE Endowment Fund will not
be full until the sales proceeds come in. The earning for
the endowment of approximately $13.6 million dollars would
be made available for PCE, then interest on the PCE and the
Rural Capitalization Fund would be available and other
funds including the AIDEA dividend would be made available.
st
The bill provides that on July 1, 2004, use of the AIDEA
dividend would be deleted.
Mr. Laufer mentioned that the appropriation bill stipulates
that the $20 million dollars Southeast Intertie loan would
lapse back into the Railbelt Energy Fund from whence it
came. In addition, amounts made available for the Sutton-
Glennallen Intertie would lapse back to the Railbelt Energy
Fund. An appropriation will be made for the sales
transaction costs. Any remaining costs would lapse through
the PCE Endowment Fund.
Mr. Lauffer referenced the handouts he distributed.
[Copies not on File].
In response to Senator Phillips, Mr. Laufer explained that
AIDEA financing would be paid off over 20-25 years at a
6.5% interest. The terms of that financing would be
commercial and would require the normal security that AIDEA
demands.
Senator Phillips thought that there could be a risk to the
future.
Mr. Laufer advised that was the intent for the
subordination of the power sales agreement.
Senator Phillips understood that following the sale, the
State would then be done with this concern. He questioned
the money drawn from the CBR.
Mr. Laufer explained that the proceeds and money made
available from the sale are not sufficient to cover the
$50.7 million dollar annual PCE payment. Under the bill
that the House approved, depositing additional funds into
the Endowment Fund sufficient to produce revenues that are
close to the amount necessary on an annual basis to provide
for full funding would fill the gap.
Senator Phillips acknowledged that he had a problem with
that.
Senator P. Kelly asked the amount of the current AIDEA
dividend.
Mr. Laufer replied that the AIDEA dividend depends on
revenues and that it can be anywhere from $18-$20 million
dollars annually.
In response to Senator P. Kelly, Mr. Laufer stated that
under the proposed scenario, it would be approximately $1.4
million dollars annually.
Senator P. Kelly asked the amount of the CPR draw.
Mr. Laufer advised that the previous amount coming from the
CBR was $20 million dollars. The AIDEA dividend draw was
between $7-$8 million dollars.
Senator P. Kelly inquired the counter offer.
Mr. Laufer explained that the current offer has been in
negotiation for over a five-year period. The most recent
utility offer that was in writing was made in January for
the amount of $60 million dollars.
Senator Adams acknowledged that the CBR draw eliminated the
long-term draw from AIDEA.
Senator Leman commented that last year's settlement of
$15.7 million dollars was a compromise with the assurance
from Senator Adams that there would be money coming from
National Petroleum Reserve-Alaska (NPRA). Had that
assurance not been there, Senator Leman was confident that
the Senate Finance Committee would have pushed for other
changes in the PCE, establishing the level at somewhat
less. He suggested revisiting some of the previous
Committee actions.
Senator Leman asked why the sale was not put out to
competitive bid and if the State would have done "better"
having done that.
Senator Adams responded to the first concern voiced by
Senator Leman. He pointed out that the $12 million CBR
dollars had been included. The impact of the issues
returned those funds. Out of the $12 million dollars, $3
million was placed into the Permanent Fund. The balance
goes into the School Public Trust. Future NPRA money goes
to the impacted communities.
Mr. Laufer addressed the other concern voiced by Senator
Leman. He agreed that it was not known what the price
could have been received with a bid. However, it is clear
that only the purchasing utilities have the legal ability
to relieve the State of its risks. AIDEA is comfortable
that the price committed to is within a reasonable range
that the State could get from any third party buyer.
Mr. Laufer highlighted the distributed charts. [Not in
File].
Co-Chair Torgerson questioned if it could be balanced
without an AIDEA dividend.
Mr. Laufer advised that it is anticipated that there will
be federal funds coming available for the endowment itself,
to grow the amount in order to cover the AIDEA dividend.
Co-Chair Torgerson inquired what would happen if the fund
were to under or over perform.
Mr. Laufer suggested that there would be a 7% nominal
return long-term basis. Over or under performing funds
would remain in the endowment. The provision of the bill
provides that 7% of the market value of the endowment is
the amount transferred on an annual basis. Over the long-
term, the endowment should be able to maintain.
Co-Chair Torgerson stated that HB 446 & HB 447 would be
HELD in Committee for further consideration.
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