Legislature(1997 - 1998)
04/22/1997 01:48 PM House FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE CONCURRENT RESOLUTION NO. 16 Proposing recommendations concerning the sale of the Four Dam Pool hydroelectric facilities. Co-Chair Therriault provided members with a proposed committee substitute, work draft #O-LS0755\B, dated 4/18/97 (copy on file). He explained that the committee substitute instructs the Alaska Industrial Development and Export Authority (AIDEA) to conclude negotiations with the utilities by July 31, 1997. If at that time, AIDEA does not receive an acceptable proposal from the utilities they would immediately go to an open RFP. He noted that the RFP would be open to any qualified bidder to assure that the State receives fair market value, protect the electric power rates to the communities, provide for adequate power for the communities, and allow adequate reserves to ensure that power projects are adequately maintained. He noted that any proposals would be subject to legislative approval. Co-Chair Therriault noted that the Power Sales Agreement is a stand alone contract. If the utilities put together a purchase they could modify the Power Sales Agreement. An outside purchaser could also negotiate with the utilities to modify the Power Sales Agreement. Representative Grussendorf observed that the negotiations with the utilities included a provision to honor the Power Sales Agreement. In response to a question by Representative Grussendorf, Co-Chair Therriault acknowledged that the utilities are key players in any negotiations. Representative Grussendorf asked if AIDEA should be allowed to determine if it is in the best interest of the State to issue a RFP. Co-Chair Therriault stated that he is interested in finding out what is possible in the private sector. Representative Mulder referred to page 2, lines 27 & 28. Co-Chair Therriault explained that the intent is that any proposal include provisions to maintain the facilities. Representative Davies expressed concern with placing a value of $84 million dollars on the projects. He suggested that the language on page 2, lines 2 and 3 be withdrawn. He pointed out that the testimony by Mr. Simmons included 3 several assumptions. Representative Mulder noted that $84 million dollars was the lower number in Mr. Simmons' estimation of value. ED KOZAK, GENERAL MANAGER, KODIAK ELECTRIC ASSOCIATION (KEA) testified via the teleconference network. He observed that KEA's average annual line loss for the past three years was 3.23 percent. This is significantly lower than the national standard of 8 percent. The average annual outage time for each member was 3.8 hours. The national average is 5 percent. Rates were reduced by 1.85 percent in December 1996. He emphasized that KEA has returned more than $1.6 million dollars of margins back to members of the cooperative. Mr. Kozak noted that a 1995, Department of Community and Regional Affairs study showed that there are 126 utilities in the state that have average rates higher than KEA's. There are 21 utilities that have rates lower than KEA. He stressed that KEA's rates are currently lower than they were in 1986. He asked for a chance to do more for the community and the State. Mr. Kozak stated that long-term economic strength will be achieved with reasonably priced and reliable electric energy. He noted that without the Terror Lake project, that retail rates would be higher in Kodiak and Port Lions. He asserted that the Terror Lake project has stabilized retail rates. He observed that the reduction of retail rates is a corporate goal. He maintained that the sale of the projects to the utilities will provide a stable economic base in those communities. He asserted that retail rates will increase if private ownership occurs. He observed that at the end of the contract (approximately 30 years) the debt is paid off. If the State owns the Four Dam Pool, the retail rate will be reduced when the debt is paid. He maintained that if the utilities own the Four Dam Pool, the retail rate will also be reduced when the debt is paid. He asserted that it is unlikely that a "for profit" firm would reduce the retail rate after the debt is paid. Mr. Kozak reiterated that KEA, Kodiak Island Borough, Kodiak Chamber of Commerce and the City of Port Lions support local ownership. He asserted that local ownership means that 100 percent of all savings will stay within the State of Alaska. WAYNE STEVENS, EXECUTIVE DIRECTOR, KODIAK CHAMBER OF COMMERCE testified via the teleconference network. He spoke in support of the purchase by the utilities. He urged continuation of negotiations. JACK SHAY, MAYOR, CITY OF KETCHIKAN testified via the 4 teleconference network. He stressed that it is unproductive to try to address all the past grievances. He recommended that discussions with the utilities be extended to January 1, 1998. He recommended that language be added on line 22 or 23 of page 2 to clarify that the Power Sales Agreement remains in effect. Co-Chair Hanley recounted that the AIDEA Board gave Mr. Simmons until July 31, 1997 to conclude negotiations. RICHARD LEARY, KETCHIKAN PULP COMPANY testified via the teleconference network. He stated that the negotiations have been conducted in good faith and should be allowed to continue to conclusion. ALLEN HAYES, OPERATIONS MANAGER, KETCHIKAN PULP COMPANY testified via the teleconference network. He echoed remarks by Mr. Kozak and Mr. Leary. He expressed concern with the date of July 31, 1997. He recommended the date be changed to the next legislative session or the conclusion of discussions. He expressed concern with the use of the word "unwarranted" on line 23, page 2. JOHN MAGYAR, KETCHIKAN PUBLIC UTILITIES testified via the teleconference network. He asserted that communities will not be in a good position if a "for profit" firm owns the operation. He suggested that a linkage to the Power Sales Agreement be contained on line 23, page 2. BEN WILLIAMS, KETCHIKAN testified via the teleconference network. He stated that a high electrical rate is a constraint on business development. He urged an extension on the time line. (The teleconference network was temporally lost due to a power outage.) WALTER SAPP, PRESIDENT, KODIAK ELECTRIC ASSOCIATION BOARD OF DIRECTORS testified in opposition to HCR 16. He noted that over a thousand letters have been mailed or faxed to the Legislature in opposition to the resolution. He maintained that a stable, reliable, low cost, source of energy is essential to the economic well being of their community. He asserted that the best option for rate stabilization in Kodiak is for the divestiture negotiations between the utilities and communities, and the Alaska Energy Authority to continue. Mr. Sapp observed that communities that receive energy from the Four Dam Pools have paid almost $100 million dollars in debt service. He added that over $46 million dollars in operations and maintenance have been paid. He spoke against 5 ownership by out-of-state investors. Mr. Sapp pointed out that the Power Sales Agreement ensures that the wholesale power rate will be established by the Committee. He noted that the rate has been basically flat since 1985. He noted that the debt service payment on the Power Sales Agreement ends in the year 2030. He emphasized that the power rate could be reduced by $.04 cents when the debt service ends. He did not think a private investor would pass on the savings. He stressed that ownership should remain in Alaskan hands. He urged the defeat of HCR 16. ROBERT WILKINSON, GENERAL MANAGER, COPPER VALLEY ELECTRIC ASSOCIATION testified via the teleconference network. He spoke in opposition to HCR 16. He noted that he has been involved in the Four Dam Pool divestiture negotiations with AIDEA. He stressed that utilities and the State have worked hard and spent a considerable amount of time and resources during the negotiation. He stated that the parties have made significant progress. He asserted that the negotiations should be allowed to be concluded. He maintained that the only transfer that satisfies the terms, outlined on page 2, is the transfer to the utilities. He observed that the Four Dam Pool is unique and complex. He did not think any owner other than the utilities would be in the best interest of the utility rate payers. He maintained that an investor owned company would be unlikely to share the primary goal of providing safe, reliable, and affordable service to members. He thought a private sale would be difficult due to the Power Sales Agreement. He urged that the resolution be held. Mr. Wilkinson responded to comments concerning the Power Sales Agreement remaining in effect until after the transfer. He stressed that a level playing field needs to be developed. He stated that if there is a possibility that the Power Sales Agreement can be changed in a deal structure between the State and the utilities, then they should be given the opportunity. He noted that according to a letter by Mr. Jim Ayers, dated June 29, 1995, the Power Sales Agreement must stay in effect until after the ownership transfer. He agreed that it might be appropriate for AIDEA to decide if a formal RFP should go forward. He suggested that language identifying the value at $84 million dollars be deleted. He emphasized that there are a number of significant assumptions involved in the selling price. He noted that assumptions about future load growth, the loss of customers, inflation, increased competition, discounted rate and regulatory risk, and reform impact the determination of the present value. 6 JOHN DOWNS, GLENNALLEN testified via the teleconference network. He spoke against the purchase of the Four Dam Pools by an outside entity. He stressed that the current negotiations should be completed before others begin. TERRY NIKODYM, CITY COUNCIL, CITY OF WRANGELL, AND REPRESENTATIVE, PROJECT MANAGEMENT COMMITTEE, FOUR DAM POOL testified via the teleconference network. He pointed out that when the projects were first conceived, Wrangell chose the dam development as their top capital projects priority. He observed that local communities placed $390 million dollars of their grant funds into the projects. He urged that HCR 16 be set aside until negotiations are complete. WALTER WOODS, VALDEZ testified via the teleconference network. He stated that the divestiture negotiations should be allowed to come to completion. DAN BILLMAN, PRESIDENT, GREAT COPPER VALLEY CHAMBER OF COMMERCE, LAKE LOUISE testified via the teleconference network. He stressed that safe, reliable, economical electrical power is the basis of economic development in the State. He stressed the need to assure that the resource is at the benefit of Alaskans. He urged that the resolution be held until negotiations are exhausted. MIKE GRAVEL, FORMER SENATOR, PRESIDENT, ENERGY GROUP, CITIZENS POWER OF ALASKA testified via the teleconference network in support of the resolution. He maintained that the resolution only addresses the issue of using a sole source process for the divestiture of a valuable asset. He maintained that a person in Nome owns as much of the Four Dam Pool as a person in the Copper Valley or Ketchikan. He emphasized that it is important to all Alaskans to have a competitive sale. He stressed that the Energy Group is made up of Alaskans and outside investors. He maintained that half of the owners would be individual consumers who would own shares in the Corporation. He concluded that more than half of the company would be Alaskan owned. He asserted that the private sector can produce electricity cheaper than the municipalities or associations. He stated that there would be no rate increase for 30 years. He stressed that there would be immediate profits occurring to the consumers and investors. (Tape Change, HFC 97-110, Side 2) Mr. Gravel stated that the operation costs of the dams is $.02 cents per kilowatt hour. He emphasized that this is above the national average. He maintained that the dams can be more efficiently operated. He asserted that the intent was to give the municipalities the dams for nothing at the 7 expense of the rest of Alaskans. He summarized that rates will not increase, the dams will be more efficiently operated and more than 50 percent of the dams will be owned by Alaskans. Representative Grussendorf maintained that Mr. Gravel sought a sole source contract for the dams. Mr. Gravel denied that he sought a sole source contract. He observed that the Energy Group met with the utilities to determine if they would support their effort. He alleged that the utilities traveled to Washington State at the expense of their consumers. He observed that the Energy Group's proposal stipulated that they would not raise rates for 30 years except for a CPI factored increase for the cost of operation. The utilities declined their offer. He stressed that the proposal represents investment in Alaska from outside investors. He concluded that a RFP was their only alternative. He emphasized that there should be a competitive bid. Representative Davies observed that, while he agrees in general that sole source distributions should not be done, since municipalities are an extension of the State and the projects included local funds, that it is appropriate that municipalities have first right of refusal. He disagreed that the projects were at the expense of other areas of the State. He observed that state funds were spent in other areas of the State at the same time that these projects were constructed. Mr. Gravel denied that the cooperatives are an extension of the state. He added that the municipalities are governments. He maintained that it is better for consumers to have the activity operated by the private sector. Representative Kelly did not think that the City of Fairbanks would have elected to sell their power to an outside entity. CLIFF DAVIDSON, FORMER REPRESENTATIVE, KODIAK testified via the teleconference network. He observed that power rate equity will be an issue for many years. He noted that negotiations between public agencies are very complex. He pointed out that it is difficult to compare Alaska to the rest of the nation. He questioned if rural Alaskans will buy stock in a company that they already own as part of a cooperative. He noted that it is difficult to foresee the effect of the CPI in thirty years. He urged that negotiations be allowed sufficient time to continue. ERIC YOULL, EXECUTIVE DIRECTOR, ALASKA RURAL ELECTRIC COOPERATIVE ASSOCIATION noted that the cooperatives in the Association produce approximately 95 percent of the power in 8 Alaska. He concurred that there should be reference to the Power Sales Agreement. He stressed that Power Sales Agreement was made in good faith between the communities and the State of Alaska. He suggested that communities be given the first right of refusal to buy the projects for whatever the highest bid is, if the projects are put out to an RFP. He observed that an investor owned utility would have to negotiate with each of the five communities subject to benefits from the projects. An investor owned utility would have to bid a rate that would take into account taxes, the high cost of management, a 12 - 15 percent return in investment, debt financing of 8 - 10 percent, and profits to the 50 percent owned by individual Alaskans. He maintained that the resulting proposal would be significantly less than $84 million dollars. He questioned why a private entity should get the windfall at the end of 30 years when the debt is paid off. He suggested that the windfall should go to strengthening the communities. He pointed out that other hydro power projects in Alaska have lasted between 50 and 100 years. Mr. Youll pointed out that investor owned entities go where they can make a profit. He observed that private owned utilities have gravitated to urban areas. They did not go into rural areas. The federal government recognized that the only way to electrify rural areas was with the Rural Electrification Administration (REA). He noted that REA's are the predominate entities in the State of Alaska. He acknowledged that the REA rates are approximately 20 percent higher. He maintained that the difference is due to low population density not management. He concluded that if negotiations are not successful that AIEDA should be tasked to come up with a responsible recommendation to the Legislation. Representative Grussendorf observed that Mr. Youll was the first Executive Director of the Alaska Power Authority. In response to a question by Representative Grussendorf, Mr. Youll noted that the flat rate, offered by the Energy Group, would be based on nominal dollars rather than real dollars. He noted that this is more than what the utilities have negotiated. He maintained that rates would increase under the Energy Group. He stressed that under the Power Sales Agreement the rate would remain flat. TOM FRIESEN, CITY COUNCIL, KETCHIKAN clarified erroneous comments made in previous meetings. He observed that the loan that Representative Barnes stated was not paid back, was a $20 million dollar loan to Ketchikan. He stressed that the loan was not taken out. The loan sits in the Department of Community and Regional Affairs. The loan will be taken out if the line is energized to the Tyee 9 Hydroelectric Project. He disputed comments that people in areas outside of the Four Dam Pools communities have an equal interest in the dams. He noted that the meeting that Mr. Gravel referred to, in which utilities sent representatives to Washington, was a regularly scheduled meeting of the Project Management Committee that met in Seattle due to the flight difficulties in Juneau and Anchorage. He noted that the meeting was not a special meeting, paid by rate payers, to hear Mr. Gravel's proposal. He observed that the cost of power in Ketchikan is $.024 cents for operation and maintenance. He estimated that if the utility owned the project that they could reduce their rate by half of a cent. He observed that 35 percent of their operation costs go to the State for administration. He asserted that the projects belong to the communities. He maintained that the Project Management Committee will make a present day value offer to the State. He spoke against the resolution. He stressed that July 31, 1997 should not be a completion date. He noted that the Committee was given July 31, 1997 as a target date for a legitimate offer. In response to a question by Representative Kelly, Mr. Friesen reiterated that ownership by the utilities could result in an immediate reduction of four-tenths of a cent or one-half of a cent. Representative Martin clarified that the City of Ketchikan spent their 1982 capital funding on the purchase of a sawmill site in Ketchikan. Co-Chair Therriault MOVED to adopt work draft #O-LS0755\B, dated 4/18/97. There being NO OBJECTION, it was so ordered. HCR 16 was HELD in Committee for further consideration.