Legislature(1995 - 1996)
04/23/1996 08:45 AM Senate FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
SENATE BILL NO. 284
An Act relating to the four dam pool transfer fund and
the power development fund.
Co-chairman Frank directed that SB 284 be brought on for
discussion. RANDY SIMMONS came before committee on behalf
of the Alaska Industrial Development and Export Authority
and was accompanied by KEITH LAUFER, Assistant Attorney
General, Governmental Affairs Section, Dept. of Law. Mr.
Simmons explained that the proposed bill would allow AIDEA
or AEA to issue bonds to make repairs to two of the four
projects which comprise the four dam pool. Repairs would be
made to the Tyee Lake project (which serves Wrangell and
Petersburg) and the Terror Lake project (which serves
Kodiak). Five utilities presently operate the four projects
(owned by AEA) through a long-term power sales agreement
with AEA. Under that power sales agreement, the state has
certain obligations which include making major repairs per
the proposed bill. The utilities have an obligation to:
1. Make payments that cover debt services on the
projects.
(Payments range between $8 and $11 million per
year.)
2. Cover day-to-day operational costs of the
projects.
Under 1993 legislation (AS 42.45.050), amounts paid by
utilities on debt service are pre-appropriated:
40% to PCE
40% to the Southeast Intertie
20% to the power development fund within the Dept. of
Community and Regional Affairs for small projects
and
grants.
The proposed bill addresses approximately $17 million of
repairs to the Tyee Lake Intertie. Over the last several
years, that intertie has been out of service on three
different occasions, cutting off power from the dam to
communities. The $3.5 million relates to the Terror Lake
tunnel. To meet contractual obligations, AEA can make the
repairs in one of three ways:
1. A capital appropriation
2. Through the issue of bonds
3. Allow utilities to use "self-help" rights under
the power sales agreement.
The third option allows utilities to withhold debt service
payments if the state does not meet its obligations. Last
year, the state started repairs. Utilities withheld $4
million "to get the engineering done." A limited "self-
help" arrangement was thus in effect last year.
Two things must occur before AEA may issue the needed bonds:
1. Utilities must agree to limit their "self-help"
rights for the amount of bond payments. Mr. Simmons
cited an example of how the agreement would
work. He said that if bond repayment costs
total $5 million of the debt service now paid
by utilities, the utilities have agreed not
to exercise "self-help" withholdings against
that $ 5 million. It is necessary to
guarantee a stream of repayment on the bonds
in order to sell them in the market.
2. A guaranteed revenue stream must be available.
Since present debt service payments are pre-
appropriated by statute, AEA must ensure that
it receives a portion of that for bond
payments.
The propose bill changes the 40/40/20 allocation to allow
AEA first priority on debt service payments. Remaining
amounts will then be allocated per the 40/40/20 arrangement.
The bill also says that AEA cannot issue the bonds for
longer than eight years. That ensures a rough estimate of
bond payments of $4.3 to $4.6 million a year. The total
cost of the bond issue is approximately $35 million.
Under the foregoing change, PCE and the Southeast Intertie
will not receive $1.8 million a year, each, and the power
development fund will not receive $900.0, annually, for the
term of the eight-year bonds. Per current allocations, if
$11 million in debt service is paid, PCE and the Southeast
Interties receive $4.4 million and the power development
fund receives $2.2 million. Mr. Simmons reiterated that
annual debt service payments range from $8 million to $11
million, depending upon the amount of power purchased. Last
year payments totaled $10.5 million.
If the proposed bill does not pass, utilities are expected
to utilize their "self-help" rights. Discussions with
utilities are ongoing regarding how repairs would be made if
they proceed per "self-help" rights. AEA believes it could
make the repairs within two years. If the utilities use
"self help" for two years, no moneys would flow to PCE, the
Southeast Intertie, or power development. Mr. Simmons
further advised that at the time the bonding approach was
undertaken, the state was in negotiations with utilities to
buy the dams. AEA hoped to return to the legislature next
year with a long-term solution, divesting the projects to
utilities or other parties. While bonding would cost the
state an additional $13 million for financing, no payments
would be made for a year or two, and it would allow AEA to
come back to the legislature with a long-term solution.
Negotiations broke down soon after SB 284 was introduced.
AEA no longer has high hopes a long-term solution will be
forthcoming next year, but it will continue to pursue
divesting to the utilities or other parties. The intent was
to maintain the revenue stream for a two-year period until
another solution could be found.
Senator Rieger suggested that the proper thing to do is
allow the utilities to invoke their "self-help" rights. A
transfer of all projects to the utilities is in process.
The capital budget contains a request for funding to
facilitate the transfer. An additional bond issue will only
complicate the situation.
In response to additional comments by Senator Rieger, Mr.
Simmons advised that AEA will make the repairs under either
the "self-help" or bond scenario. Utilities will withhold
the payments and transfer the moneys to AEA. The state owns
the projects, and it is the state's responsibility to
oversee repairs.
As further support for bonding over "self-help," Mr. Simmons
expressed a reluctance to "tie up these other entities such
as PCE, the Southeast Intertie, and all the small projects
that are being done by DCRA."
Mr. Simmons referenced recent correspondence from utilities
inquiring about the possibility of resuming negotiations.
AEA replied that it would be "happy to go back to the table
but both sides are going to have to move somewhat because
we're so far apart on the purchase price . . . ." AEA is,
at the present time, "getting ready for full self-help."
In response to a question from Senator Sharp, Mr. Simmons
explained that the proposed bill would not exclude any
option. It does set AEA on a course where it would most
likely "do the bonding." It would be better to make a
decision at this time whether to utilize bonding or full
"self-help."
Senator Sharp voiced his belief that it appears cheaper to
utilize the "self-help" approach. He acknowledged that PCE,
the Southeast Intertie, and power development would be
severely impacted the first two years, but that approach
might be preferable to eight-year bonds.
Responding to a further question from Senator Sharp, Mr.
Simmons advised that while in negations with utilities, it
was anticipated that divesture could be worked out so that
utilities could assume the bonds if they chose to do so, or,
in the alternative, not take on the bonds. Further
discussion of divesture negotiations followed. Mr. Simmons
advised that PCE and Southeast Intertie funding were not
part of the negotiations.
Additional discussion followed concerning existing statutory
authority for repairs and yearly maintenance.
Senator Zharoff inquired concerning potential litigation
from four dam pool members. Mr. Simmons attested to a past
agreement with utilities to limit "self-help" to $2 million
to commence the engineering process. That agreement fell
through, and the utilities filed suit and employed full
"self-help" rights, withholding all moneys last year. AEA
achieved an agreement with the utilities for a withholding
of $4 million from last year's payment to start engineering,
with the understanding that the state would work with them
toward divesture and accomplishment of repairs. That is how
the proposed bill developed. If the bill does not pass,
full "self help" will be implemented.
Senator Sharp inquired regarding the remaining balance owed
on the projects. Mr. Simmons said that, depending upon the
discount value used, the present value of debt service today
is "roughly $165 to $170 million." The actual principal is
$180 million. That amount was part of the negotiations on
the sale price. Liabilities associated with the projects
are subtracted from the present value of the debt service
payment.
In the course of further discussions, Mr. Simmons said that
the problem with the agreement signed by the state is that
the amount of money set aside yearly to provide repairs is
wholly inadequate. Utilities put aside approximately $500.0
a year. That does not come close to meeting repair costs.
[Co-chairman Halford assumed the chair at this point in the
meeting.]
Senator Sharp MOVED that CSSB 284 (Res) pass from committee
with individual recommendations. Senator Rieger said he did
not believe that bill was moving in the right directions.
He advised that he would not object to movement from
committee, but he would sign "do not pass" on the committee
report. Co-chairman Halford called for a show of hands.
The motion CARRIED on a vote of 5 to 2, and CSSB 284 (Res)
was REPORTED OUT of committee with zero fiscal notes from
the Dept. of Community and Regional Affairs and Dept. of
Commerce and Economic Development. Senator Zharoff signed
the committee report with a "do pass" recommendation. Co-
chairmen Halford and Frank and Senators Donley, Phillips,
and Sharp signed "no recommendation." Senator Rieger signed
"do not pass."
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