Legislature(2003 - 2004)
03/22/2004 03:30 PM House L&C
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* first hearing in first committee of referral
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HB 449-AIDEA BONDS FOR GAS PUBLIC UTILITIES CHAIR ANDERSON announced that the next order of business would be HOUSE BILL NO. 449, "An Act relating to the contracting and financing authority of the Alaska Industrial Development and Export Authority; authorizing the authority to issue bonds in a principal amount not to exceed $76,000,000 to finance the acquisition, design, construction, inventory, and operation of natural gas, propane air, or manufactured gas public utility facilities; and providing for an effective date." [Before the committee was CSHB 449(EDT).] Number 2074 PETER FELLMAN, Staff to Representative John Harris, Alaska State Legislature, introduced HB 449, which was sponsored by Representative Harris by request of the Alaska Intrastate Gas Company (AIGC). He noted that the bill's presentation would be made by a representative from that company. Number 2100 PAUL RUSANOWSKI, Senior Vice President for Operations, Alaska Intrastate Gas Company, presented HB 449 as follows: The bill addresses a requirement under AS 44.88.095(g) in which the legislature must approve a project over $10 million in costs before AIDEA [Alaska Industrial Development and Export Authority] can consider the program under the development finance program. This project in its entirety encompasses 17 communities and would cost in excess of $100 million. AIDEA considered each of the communities as part of the total project. So whether the cost for a community is less than $10 million or not, the project itself dictates their ability to consider the community under the development finance program. What we seek with this legislation is an opportunity to broaden the financial opportunities for communities so that, individually, they might be able to work with both Alaska Intrastate Gas Company and AIDEA to be considered under the development finance program for financing utility infrastructure in that community, if that represents the most favorable approach to developing utility services in that community. At the present time, Alaska Intrastate Gas Company has reached agreement with AIDEA to proceed with conduit financing for initiating the project. So this is not a program that would be considered by Alaska Intrastate Gas Company right now. And we are presently working with a financial institution to seek a bond placement this summer to initiate the project. The bill also provides a sunset date for the bonding authority so that it would not continue in perpetuity, but it would terminate within a few years after passage. The project itself would result in employment of excess of 200 people throughout Southeast Alaska, [and] generate more than 50 permanent jobs in these communities. Number 2202 REPRESENTATIVE ROKEBERG asked for clarification on the agreement between AIGC and AIDEA regarding conduit revenue bonds. MR. RUSANOWSKI replied that it is a verbal agreement; they are working on a bond placement that would utilize conduit financing. REPRESENTATIVE ROKEBERG referred to a letter dated February 18, 2004, sent to Representative Harris from Ron Miller, executive director of AIDEA, noting that the letter says legislative authorization is not necessary in order to use the conduit revenue bond program. He asked for clarification on the purpose of the bill. MR. RUSANOWSKI explained that this was correct, but said his company wasn't seeking authorization for itself at this time for this program. The purpose of this bill is to provide for the availability of the conduit revenue bond program to communities as development occurs. If communities choose to access natural gas, they could be considered by AIDEA to secure future financing for the project. He said the initial conduit financing will cover Juneau, Ketchikan, and Sitka. In the future, he thought there might be better financial opportunities for communities to consider. He said these communities, because they'd be part of a larger project, wouldn't be able to participate in the development finance program for any potential financing. Number 2279 REPRESENTATIVE ROKEBERG asked if those communities could then use the conduit taxable bond program through AIDEA and if HB 449 was authorizing them to do so. MR. RUSANOWSKI replied: What you'd be authorizing is for this project to be considered under the development finance program if it meets the investment criteria and feasibility, et cetera, that AIDEA would require. However, the project will be initiated without the use of this program, or consideration from this program, through conduit financing. ... If [communities] chose that they would like to proceed this way, where the financing mechanism through this program was more favorable than what we could provide outside of this program, then it might be of interest to the community to utilize it in conjunction with ourselves. Number 2319 CHAIR ANDERSON reversed the question, asking, "If the bill doesn't pass, what can't these communities receive?" MR. RUSANOWSKI responded that the adverse effect is the elimination of one potential mechanism for financing infrastructure within the community that might be more favorable to the community in reducing the cost of the service. Number 2353 DON ETHERIDGE, Lobbyist for Alaska State AFL-CIO [American Federation of Labor and Congress of Industrial Organizations] and local laborers, testified that the local laborers hope to be part of this project and support HB 449, since it will help outlying communities join the project because the bill provides "a more expedient and cheaper way of doing things." TAPE 04-31, SIDE B Number 2350 MR. ETHERIDGE concluded by explaining that the AFL-CIO is in support of the jobs this project will create, both temporary and permanent. Number 2333 BOB LOESCHER, Member, Tlingit & Haida Community Council, noted that he was formerly with the AIDEA board of directors and was former chief executive officer for Sealaska Corporation. He said he currently represents a number of entities in coastal communities that are interested in this project. Speaking to the need for the project, he explained about the rising cost of diesel fuel, which powers electrical generators in Southeast communities at a cost of about 33 cents a kilowatt-hour. He said although the bill is constructed with a focus on Ketchikan, Sitka, and Juneau, a number of communities - Hoonah, in particular - could then apply for pipelines. He stated: We could reduce the cost of ... fuels 50 percent from diesel fuel, and that would help our economic development tremendously and also help the people who reside in this community ... because they are paying anywhere from $1.40 to $1.80 a gallon for diesel fuel right now. ... It could go to $2 or $3 dollars this summer just for gasoline; parallel price for diesel fuel goes up similarly, so we could be looking at anywhere from $2 to $3.50 per gallon in coastal communities for diesel fuel. ... This project for Southeast Alaska would access Canadian propane-air right now, and as Alaska gas line sources develop over the next 20 years, we could access Alaska gas and bring it to our region. So ... the people I represent strongly endorse this bill. MR. LOESCHER said he thought there might be further amendments on HB 449. He related that when he was on the AIDEA board, any project that exceeded $10 million required legislative oversight because large projects affect the amount of bonds sold and other bond capacity in the state. He said he approved of this legislative oversight. Number 2191 REPRESENTATIVE GUTTENBERG asked where the number $76 million came from on page 2 of the bill. MR. LOESCHER replied that he wasn't familiar with current details of the project, but in the past there was a $70-million estimate for the Sitka, Ketchikan, and Juneau portion of the project. He added that he thought the number could have increased because of additional communities being added on to the project list. Number 2162 JAMES A. McMILLAN, Deputy Director of Credit, Alaska Industrial Development and Export Authority, said he wasn't going to testify for or against the AIGC project; rather, he wanted to testify to his belief that HB 449 isn't necessary. It authorizes AIDEA to issue bonds not to exceed $76 million for financing this project under the authority's development finance program, which he said is commonly referred to as its "own and operate" program. MR. McMILLAN cited the Red Dog project as an example of a project that received financial assistance under the development finance program, where the authority actually owns the road and operates it through a third-party agreement with Teck Cominco [Limited]. The Federal Express maintenance hangar in Anchorage is another example where the authority owns the project and operates it through a third-party agreement with FedEx. MR. McMILLAN explained that normally AIDEA looks at the development finance program for financial assistance for those projects where ownership of the assets will bring a benefit to the project. This most commonly occurs when government ownership is required in order to qualify for tax-exempt bonds that lower the cost of financing. He said AIDEA has been acquainted with this project for about five years, and had indicated to AIGC on many occasions - at least twice in writing - that this project doesn't fit within the development finance program. He said AIDEA's ownership of the assets under that program brings no additional benefit to the project and, in fact, may bring additional hurdles of time and costs to go through the required approval process. MR. McMILLAN explained that AIDEA also determined this project doesn't qualify for tax-exempt financing; therefore, there is no necessity for [AIDEA], a public corporation, to own the asset. Mr. McMillan disagreed with Mr. Rusanowski's testimony, which he interpreted to be that this authorization is needed not necessarily because of Juneau, Sitka, and Ketchikan, but because of the additional communities, and that the authority would look at this as the total cost of the project and not the financing for one of the smaller communities. Mr. McMillan said the statute requires approval of issuance of bonds under the development finance program if the face amount of the issuance of the bonds issued by the authority exceeds $10 million. He said it really has no relationship to the total project cost. Number 2011 MR. McMILLAN responded to Mr. Rusanowski's statement that there is an agreement with AIDEA to issue conduit bonds for the initial portion of this project as follows: I want to clarify that we have indicated to [AIGC] that the conduit revenue bond program, issuance of taxable bond, appears to be the program that fits best for the type of financing of the project that they are undertaking. But that requires, first of all, an underwriter or someone to purchase the bond, and due diligence and an underwriting analysis. We really haven't concluded any of ... those points to move forward and have an agreement on issuance of conduit bond. REPRESENTATIVE ROKEBERG posed a situation in which AIGC found an underwriter, did due diligence, and was prepared to provide financing. In such a situation would it only have to apply to AIDEA for the conduit financing, he asked. MR. McMILLAN replied that if AIGC could find an underwriter and someone to purchase the bonds, then AIDEA would give consideration to financial assistance under the conduit revenue bonds. He clarified that conduit revenue bonds, when issued by the authority, put the authority at risk; potentially, its name and ability are identified with these bonds. Its ability to enter into the market again could be adversely affected if there were a default on those bonds. While finding someone to purchase the bonds is an important first step, AIDEA also wants to do its own due diligence and analysis to make sure there is a reasonable expectation of success for the payment of these bonds. Number 1909 REPRESENTATIVE ROKEBERG asked what kind of savings and how many basis points AIGC could expect to save in financing because of AIDEA's conduit revenue bond program. MR. McMILLAN explained that this is a taxable-bond issue. The rule of thumb is that if the project qualifies as tax-exempt and if AIDEA issues tax-exempt bonds, then the savings could be up to 200 basis points or 2 percent. If the project is financed with taxable bonds, the only thing AIDEA brings to the table is its periodic entrance into the market, which would give the project increased exposure to potential investors. He said in the case of taxable bonds, there is no benefit from AIDEA in terms of savings on the coupon on the bonds. REPRESENTATIVE ROKEBERG offered his understanding that Mr. McMillan was saying AIDEA might take on additional risk, with a potential default, and not be able to save any money in terms of the marketability of the bonds themselves. MR. McMILLAN clarified that the ability to actually market those bonds is an enhancement that AIDEA brings to the table, since people are familiar with AIDEA and the projects it supports and sponsors. In terms of savings on the interest rate, he said bondholders can only look to the revenues generated from the project and cannot look to AIDEA. REPRESENTATIVE ROKEBERG asked if there was a way, under the Internal Revenue Service (IRS) taxing authority and Industrial Development Bonds (IDB), for AIDEA to issue financing for some of AIGC's project on a tax-exempt basis to help the project proceed. MR. McMILLAN responded that the rule of thumb for issuance of utility bonds is that the borrower must be the utility in the community, and must have been the utility in the community, providing that specific service, as of January 1, 1997. The conditional certificate issued by the Regulatory Commission of Alaska (RCA) is, in fact, to AIGC and not the communities. He said it is apparent that AIGC was not in business as of January 1, 1997, providing the service to these communities. REPRESENTATIVE ROKEBERG asked if Alaska still has some IDB bonding authority that is limited by the U.S. Code. Number 1727 MR. McMILLAN explained that Mr. Loescher had made reference to that issue, called volume cap, which dictates the amount of tax- exempt bonds a state may issue. He said AIDEA is one of the issuers of tax-exempt bonds. He believes the limit for Alaska this year is $250 million. "They" vie for this volume cap on tax-exempt bonds along with other organizations such as Alaska Housing [Finance Corporation], the [Alaska] Student Loan Corporation, and others. Number 1677 PHILIP SHEALY, City Manager, City of Seward, testified that he is in support of HB 449, and that Representative Kohring had added Seward as the 18th certificated community. Mr. Shealy said Seward had previously worked with ENSTAR [Natural Gas Company] to provide gas service to the community. However, ENSTAR's certificate was revoked and consequently the service ended. [Breakup occurred in audio transmission.] CHAIR ANDERSON, upon determining no one else wished to testify, closed public testimony. Number 1561 REPRESENTATIVE GATTO moved to report CSHB 449(EDT) out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 449(EDT) was reported from the House Labor and Commerce Standing Committee.
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