Legislature(1993 - 1994)
04/05/1993 08:10 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
MINUTES
SENATE FINANCE COMMITTEE
April 5, 1993
8:10 a.m.
TAPES
SFC-93, #47, Side 1 (000-end)
SFC-93, #47, Side 2 (000-end)
SFC-93, #49, Side 1 (000-end)
CALL TO ORDER
Senator Drue Pearce, Co-chair, convened the meeting at
approximately 8:10 a.m.
PRESENT
In addition to Co-chairs Pearce and Frank, Senators Kelly
and Sharp were present. Senators Jacko and Kerttula arrived
soon after the meeting began. Senator Rieger arrived as it
was in progress.
ALSO ATTENDING: Senator Duncan; Senator Ellis; Don Moore,
Manager, Matanuska-Susitna Borough; Jim Ayers, System
Director, Alaska Marine Highway System, Dept. of
Transportation and Public Facilities; Harold Moeser,
Construction Engineer, Alaska Marine Highway System, Dept.
of Transportation and Public Facilities; Richard Ploss, M.
Rosenblatt & Sons, Inc.; Riley Snell, Executive Director,
Alaska Industrial Development and Export Authority; John
Olson, Deputy Director, Development, AIDEA; Greg Branning,
Marketing Specialist, Midrex Direct Reduction Corporation;
Harold M. Benedict, President, Alaska Seafood Center (ASC);
D.S. Moon, Public Affairs Manager, MAPCO; Bonnie J. Garner,
Aviation Fuel Sales Manager, MAPCO; Fred Ketzeback,
Director, Fuel Administration, Alaska Airlines, and
Chairman, Alaska Fuel Service Center (AFSC); Thomas J.
Mushovic, Partner, Signature Flight Support; Bert Wagnon,
Director of Projects and Finance, MarkAir; Judy Knight,
Director, Administrative Services Division, Dept. of Labor;
Sally Saddler, Employment Services Program Manager,
Administrative Services, Dept. of Labor; Bruce Geraghty,
Deputy Commissioner, Dept. of Community and Regional
Affairs; Mark Mickelson, JTPA/SDA Program Manager, Dept. of
Community and Regional Affairs; aides to committee members;
and aides to other members of the legislature.
SUMMARY INFORMATION
SB 16 - Act relating to the financing authority of
the Alaska Industrial Development and Export
Authority and giving approval of the issuance
of bonds for an Anchorage airport seafood
facility; and providing for an effective
date.
Testimony was provided by Senator Ellis,
Riley Snell, and Mr. Howard Benedict. The
bill was subsequently HELD in committee for
further discussion.
SB 50 - Act making appropriations for capital
projects; and providing for an effective date.
Discussion was had with Jim Ayers, Harold
Moeser, and Richard Ploss regarding ALASKA
MARINE HIGHWAY SYSTEM capital projects and
the proposed replacement vessel.
SB 57 - Act relating to employment contributions and
to extending the pilot project for the state
training and employment program; and
providing for an effective date.
Teleconferenced discussion of the bill was
rescheduled to April 6, 1993, from 8:30 to
9:30 a.m.
SB 58 - Act relating to the longevity bonus program.
The bill was HELD for arrival of HB 81.
SB 102 - Act relating to municipal property tax
exemptions for certain residences and to
property tax equivalency payments
for certain residents; and
providing for an effective date.
The bill was HELD for arrival of HB 66.
SB 171 - Act relating to the contracting and financing
authority of the Alaska Industrial
Development and Export Authority, giving
approval of the issuance of the authority's
revenue bonds, and delaying the termination
date of the authority's business assistance
program; and providing for an effective date.
Testimony was presented by Riley Snell, John
Olson, Tom Mushovic, Fred Ketzeback, and Don
Moore. Revised Amendment No. 1 and Amendment
No. 2 were distributed and discussed. The
bill was subsequently HELD in committee for
further review.
SENATE BILL NO. 102
An Act relating to municipal property tax exemptions
for certain residences and to property tax equivalency
payments for certain residents; and providing for an
effective date.
Upon calling the meeting to order, Co-chair Pearce announced
that SB 102 would be HELD in committee for the arrival of HB
66 since the House version of the legislation has been
transmitted for Senate consideration.
SENATE BILL NO. 58
An Act relating to the longevity bonus program.
Co-chair Pearce made a similar announcement regarding SB 58,
advising that HB 81 would soon be arriving in the Senate.
She then directed that SB 58 be HELD for that arrival.
SENATE BILL NO. 57
An Act relating to employment contributions and to
extending the pilot project for the state training and
employment program; and providing for an effective
date.
Later in the meeting, Co-chair Pearce announced that
teleconference testimony on SB 57 would be taken between
8:30 and 9:30 a.m., April 6, 1993.
SENATE BILL NO. 50
An Act making appropriations for capital projects; and
providing for an effective date.
Cross-reference to HCS CSSB 183 (Finance), the 1994 capital
budget.
Co-chair Pearce next directed that the committee proceed to
discussion of the proposed new ferry for the ALASKA MARINE
HIGHWAY SYSTEM as well as financing proposals to cover the
cost of construction.
JIM AYERS, System Manager, Alaska Marine Highway System,
Dept. of Transportation and Public Facilities, came before
committee. As background information, he advised that the
department conducted both an economic impact analysis and a
"condition survey of the entire fleet" to determine the
condition of all vessels and what would be necessary to
maintain the fleet into the next century. Approximately 25
hearing were had regarding the Alaska Marine Highway System
and its importance to the state economy and the economic and
social stability of communities. From that information, the
department developed a master plan to refurbish all vessels
but the MALASPINA. Since that vessel is 30 years old, and
no work had been done on it aside from the stretching in the
mid 1970s, the estimated cost for repowering and
refurbishing was $50 to $62 million. A comparative analysis
determined it was more viable to build a new vessel.
The state has, on several occasions (most recently for the
EXXON VALDEZ oil spill), used the ferries in emergency
situations. Emergency response plans for fire, earthquake,
tsunami, etc. involve and include use of one of the marine
highway system vessels. It was thus clear that the new
vessel needed to be ocean-going and have both command
capability and ability to provide assistance to a smaller
fleet of vessels (fishing vessels).
A design contract was let through the RFP process to Glosten
Associates in Seattle. Mr. Ayers noted the presence of Mr.
Van Slyke, an engineer with Glosten. Mr. Ayers further
spoke to the advisability of having a project manager follow
the project through construction and manage both shipyard
activity as well as design. The system contracted with M.
Rosenblatt & Sons, Inc. for that service. Mr. Ayers next
introduced Mr. Richard Ploss, an engineer with Rosenblatt &
Sons.
The conceptual design stage has now been completed. Mr.
Ayers referenced a video outlining the proposed new vessel
and asked that Mr. Ploss provide a narrative. Prior to
commencing the video, Mr. Ayers explained that the vessel
would serve southeast. Since it would be ocean going, it
could also fill in for the TUSTUMENA, allowing the system to
provide service to Kodiak and the Aleutian Chain through
fall and early winter.
(Senator Kerttula arrived at the meeting at this time.)
RICHARD PLOSS, Project Manager, M. Rosenblatt and Sons,
Inc., came before committee and directed attention to a
video utilizing virtual imaging to characterize the proposed
vessel. The new ferry would be 85 feet wide and 380 feet
long. It would have a helicopter pad, and a car elevator
for southwest operation. Vehicle capacity would be
approximately 120 cars. There would be 98 to 104 cabins for
passengers. The vessel would include extensive electronic
communication capability via satellite, ability to convert
to necessary work stations to monitor an oil spill, and a
modular float.
Brief discussion followed between Mr. Ayers and Senator
Kelly regarding lack of establishment of depots by the oil
spill response advisory team and the coast guard. Boom
needed to contain a spill is to be located at depots. The
vessel would have loading capability. DEC modulars with
needed equipment (diving equipment, computers, refrigeration
facilities ) would also be located at specific sites. The
new vessel would be pre-wired for plug in of this equipment
when needed.
Discussion followed between Co-chair Pearce, Senator Kelly,
and Mr. Ayers pertaining to the cost of DEC equipment.
Further comments followed by Mr. Ploss regarding
refrigeration capabilities and the number of cars carried
when the ferry is in use in southwest rather than southeast
Alaska.
In response to a question from Co-chair Pearce, Mr. Ploss
advised that the new ferry would have an ice-strengthened
bow but no ice breaking hull. It will not be able to serve
as an ice breaker. In response to a further question from
the Co-chair, Mr. Ploss said that the new ferry would be
able to come into Cook Inlet during the winter.
Co-chair Pearce inquired concerning the most recent cost
estimate. Mr. Ayers said that at conceptual design stage
the estimate is $85 million. Co-chair Frank asked when a
fixed dollar contract would issue. Mr. Ayers said the state
has been working with the federal government to avoid need
to solicit a low-cost bid which allows a shipyard, through
changes orders, to drive up the price. The preliminary
design will be completed with as much detail as possible.
Bids will be sought from three qualified shipyards. The
project will then be managed so that it is neither low-cost
bid nor cost plus. Those two items cause shipyard prices to
vary radically.
In response to a question from Co-chair Frank, Mr. Ayers
explained that the project would require use of federal
highway dollars. The federal highway regulations bidding
process thus governs. Further discussion followed regarding
pre-qualification of shipyards and evaluation of proposals.
Co-chair Pearce raised concern regarding the financial
capability of shipyards. Mr. Ploss advised that
approximately 17 yards are interested in the project. He
stressed that the pre-qualification procedure is designed to
ensure financial qualification. Mr. Ploss advised of his
belief that 10 to 12 yards could handle a project of this
size.
Senator Sharp raised a question concerning federal
participation in cost overruns. HAROLD MOESER, Construction
Engineer, Alaska Marine Highway System, Dept. of
Transportation and Public Facilities, came before committee.
He said that once the federal government agrees to
participate in a project with the state, it also agrees to
participate in change orders. The only exception is a gross
blunder or negligence.
Discussion followed between Senator Sharp and Mr. Ploss
regarding normal bid and construction procedures versus the
innovative process proposed for the new ferry. Mr. Ploss
said that the federal government is most interested in the
project because it has not previously found an organization
interested in pursuing this type of detail ahead of time.
These procedures are utilized by European and Oriental yards
to bring in quality vessels at cost. The procedure has
twice been used successfully in the United States.
In response to a question from Co-chair Pearce, Mr. Ayers
explained that the governor's budget contains a request for
"$60 million of authorization." Obligation of federal
dollars would be over a two-year period. Authorization is
sought this year so that the project may go to bid. Senator
Kelly voiced his understanding that the total represents
"all the discretionary funding in ISTEA." Mr. Ayers
responded negatively. Mr. Moeser advised that ISTEA allows
approximately $70 million a year in discretionary moneys for
ferry transportation. That competition is nationwide. The
department has dedicated approximately $100 million in ISTEA
moneys for port programs. The $30 million over two years
would be set aside out of ISTEA for system expansion.
Senator Kelly voiced his understanding that under percentage
distribution of ISTEA funding for core roads (50%), boroughs
(35%), and discretionary projects (15%), the new ferry would
utilize all state discretionary moneys for two years. He
further voiced his belief that $85 million sounds soft in
terms of total construction cost.
Discussion of state and federal fiscal years and obligation
of funds over a three-year rather than two-year period
followed between Senator Frank and Mr. Moeser.
End, SFC-93, #47, Side 1
Begin, SFC-93, #47, Side 2
In response to a question from Senator Kelly concerning how
the department intends to fund construction of the new
ferry, Mr. Ayers explained that a combination of state and
federal funds would be used. The system has been working
with the state's Washington, D.C., office as well as
attempting to work with the legislature. The department
hopes to obtain additional funds from Congress for the ferry
as a demonstration project.
Co-chair Pearce inquired concerning the actual number for
the federal match in the governor's budget. She noted
funding of $54.6 million in one document and $60 million in
another. Mr. Ayers voiced his understanding that the
governor's budget requests $60 million in federal
authorization. Backup speaks to $27.3 million for two
years--FY 94 and 95. There is a general pool match of $23
million for the approximate $200 million in federal dollars.
The system would get a proportion of that required match,
approximately $6 million. Mr. Ayers further advised of $15
million in transfers. These are not general fund moneys. A
portion of the $15 (approximately $8.5) derives from a
previous transfer, and $7 million is set forth in the front
section of the operating budget.
Senator Kelly inquired concerning the governor's commitment
to the new ferry versus other projects throughout the state.
Mr. Ayers advised that he could not respond.
Co-chair Pearce inquired regarding the $6.4 million in
funding from the vessel replacement fund set forth in the
governor's capital budget. Mr. Ayers explained that it
relates to the $15 million in transfers. Co-chair Pearce
further pointed to information listing $54.6 million in
federal moneys as the cost of the multi-purpose replacement
vessel. Information further shows funding at $27.3 million
in FY 94 and a like amount in 95 rather than $30 and $30.
Mr. Ayers voiced his understanding that the listed figure
are "as much as we were prepared to commit as coming out of
the ISTEA funds for those two years." The system hopes to
get authorization for those amount and then "hopefully we
would get the additional federal money somehow or we'd take
it into 96." Co-chair Pearce voiced her understanding that
under the scenario described by Mr. Ayers, the project would
still be short federal obligation. Mr. Ayers pointed to
authorization to utilize other moneys, possible need to
extend the project to FY 96, or receipt of additional
discretionary funds from Washington, D. C.
In response to a request from Co-chair Pearce, Mr. Ayers
advised that the balance of the vessel replacement fund is
approximately $4.5 million. The legislature has not
authorized expenditure of those funds. The system has not
requested an appropriation from the fund in the upcoming
budget.
Senator Kelly inquired concerning the amount appropriated
for the replacement vessel up to this time, noting the
$500.0 and the $7.5 million in general funds. Mr. Ayers
concurred in the amounts and advised that they represent
appropriations from the 470 fund. Senator Kelly then asked
how much of the $8 million had been spent. Mr. Ayers
answered approximately $850.0. He further explained that
while the department has authorization to proceed, the
system told the legislature it would return with a
conceptual design prior to proceeding. The Senator next
asked how far the project could proceed without additional
appropriations. Mr. Ayers that he had personally made a
decision to stop the project until "Everyone is comfortable
that we know what it costs and where we're going." The
design phase has been stopped until the legislature
indicates it wishes to proceed.
Further discussion followed between Co-chair Pearce and Mr.
Ayers regarding the $5 to $5.5 million general fund match.
Co-chair Pearce voiced her understanding that the $5 million
designated as "other money" is presently in EXXON VALDEZ
settlement legislation introduced in both the House and
Senate. The $5 million is general fund money returning to
the state as reimbursement rather than mitigation moneys for
expenditures made by the state after the spill. Mr. Ayers
answered, "As far as I know, Madam Chair." Co-chair Pearce
then noted that of the $15 million transfer, the system has
already received $8 million. There is thus a $7 million
gap. Mr. Ayers concurred.
Senator Kelly advised that he was sold on the ship but
questioned the financing plan. He voiced concern regarding
utilization of all ISTEA discretionary funding for two years
and possible need from the mitigation account. The Senator
also advised of need for an indication from the
administration that the proposed replacement vessel is a
priority in terms of general funds. Senator Kerttula
concurred in need for endorsement from the Governor.
SENATE BILL NO. 16
An Act relating to the financing authority of the
Alaska Industrial Development and Export Authority and
giving approval of the issuance of bonds for an
Anchorage airport seafood facility; and providing for
an effective date.
Co-chair Pearce directed that SB 16 be brought on for
discussion.
SENATOR JOHNNY ELLIS and RILEY SNELL, Executive Director,
AIDEA (Alaska Industrial Development Authority), Dept. of
Commerce and Economic Development, came before committee.
Senator Ellis voiced need to foster private sector economic
development meeting three tests:
1. Create jobs for resident Alaskans
2. Leveridge significant private sector investment by
drawing outside dollars into the state.
3. Add value to state resources prior to export.
Alaska's export of raw resources also means that refining
jobs are exported.
The proposed Alaska Seafood Center meets the above tests.
The project is not new. It was included in last year's
AIDEA bond bill but was dropped during special session when
it was determined that a stripped down bill had a better
chance of passage. Necessary plans and financing were not
in place at that time, and the decision was made to delay
until this year.
The Center would provide 450 year-round jobs and 750
indirect jobs outside of Anchorage. Approximately 200 jobs
in the construction phase would be created in the near
future, once authorization is provided. Between $100 and
$115 million in new, outside, private investment would flow
to Alaska for the Center. The Alaska Seafood Center will
not compete with existing primary processors or contract any
of its own fishing. The Center would make major, year-round
product purchases from Alaska's primary processors for use
in secondary, value-added processing. Following the
secondary processing, the product will be shipped to
domestic and international markets. The Center will make 45
million pounds of cold storage available to Alaska
processors and other Alaskan businesses. That has been a
great need in Alaska for some time. The Center will also
provide reliable and economical transportation services to
primary processors. The volume involved will be of great
benefit. Money will flow through Alaska rather than
directly to Seattle.
Anchorage will provide the transportation link for product
coming to and leaving from a central point.
Senator Ellis said that the ultimate test of the project
lies in the $15 million in revenue bonds. If the economics
of the project are not favorable, it will not proceed.
Financiers would match the bonds with $100 to $115 million.
Further, the project is ready to proceed in that it is not
tied up in mental health issues nor are there protests from
interest groups. Local government is extremely supportive.
Co-chair Pearce referenced accompanying zero fiscal notes
from AIDEA and the Dept. of Transportation and Public
Facilities as well as a supportive position paper from the
Dept. of Commerce and Economic Development. A position
paper from the Dept. of Transportation and Public Facilities
states support but also raises concern regarding location of
the facility near the airport because of a possible increase
in the number of birds in the vicinity. Senator Ellis
explained that the Center would not be located on airport
property. The airport intends to reserve that for other
uses. There are suitable locations for the Center in close
proximity to the airport. The processing undertaken by the
Center is not the type that would produce fish waste and
attract birds that might interfere with aircraft.
Riley Snell briefly spoke before committee, advising of
AIDEA belief that significant advancements have been made in
both the financing plan and marketing since last session.
HOWARD M. BENEDICT, President ASC, next came before
committee. He explained that he first came to Alaska in
1976 and moved to the state in 1981. Prior to applying to
AIDEA, Mr. Benedict said that he and his family invested $ 6
million in the project. Feasibility and marketability have
been determined. Additional marketing since the last
session has produced significant results. A market for all
of the Center's product appears to be available.
The Center will be the first, value-added facility. The
high technology operation will bring new infrastructure to
Alaska. There is presently no substantial secondary
processing occurring in the state.
Speaking to human resources, Mr. Benedict advised that the
center intends to provide profit sharing to all employees as
well as child care.
Last Week, lenders in New York indicated they could increase
the amount of cash available and decrease the amount of the
mortgage. Mr. Benedict reiterated that the project would
bring $100 to $115 million in outside money into Alaska. No
subsidy is being sought. The Center will repay AIDEA as it
does commercial lenders.
Senator Sharp referred to the position paper from the Dept.
of Commerce and Economic Development and inquired regarding
contracts with primary processors as well as contracts for
sale of the product. Discussion followed between Senator
Sharp and Mr. Snell regarding the type of analysis conducted
by AIDEA prior to commencement of a project.
Co-chair Pearce advised of concern by Senator Jacko relating
to location of the facility in Anchorage rather than
Dillingham or Dutch Harbor. Mr. Benedict said that location
had been studied in great detail. The facility would
experience a $2.5 million disadvantage per year per 100
million pounds of production for being located in Alaska.
That disadvantage is caused by the fact that product will be
brought to Anchorage at 2.1 cent a pound and taken to
Seattle for approximately 8 cents. That is a 2.5 cent
disadvantage. Practical methods of overcoming that have
been developed. Construction elsewhere would lose the
transportation advantage provided by the Anchorage Airport.
Power is another factor. The facility must compete with
Seattle's power costs. The proposed facility will be the
"largest, single, private power user in the city"--a 4
megawatt power consumer. A location other than Anchorage
would put the cost of electricity totally out of the
economic picture. Seattle power currently costs 3.81 cents
per kilowatt hour. The agreement with the City of Anchorage
for an interrupted demand rate is 2.76 cents. That is 38%
below the Seattle cost.
End, SFC-93, #47, Side 2
Begin, SFC-93, #49, Side 1
In response to an inquiry from Co-chair Frank, Mr. Benedict
said he had hired "one of the finest secondary processing
people." He has resided in Anchorage for the past two
years. He previously built a plant the same size as the one
proposed for Anchorage and brought it in on time and under
budget. Mr. Benedict said that the hire effectively
eliminated financial institution concern that the project
was starting something that had not been done in Alaska
before.
Mr. Benedict explained that secondary processing involves
taking frozen blocks of seafood, cutting them into serving
pieces, and breading, or battering, or topping with sauce.
This work is now being done in Seattle or on the East Coast.
Frozen fish does not have much odor. The concern regarding
additional birds at the airport is not a great one since the
plant will "only do 15 or 20% primary."
Mr. Benedict advised that only top management positions--
four or five individuals--that must possess necessary
background and knowledge of this type of processing would
not be local hire. The intent is to hire Alaskans.
In response to a further inquiry from Co-chair Frank, Mr.
Benedict said the end product will not have a brand. It
will be produced for other companies. He further advised of
his intent that the quality of the product would be higher
than currently available.
Responding to a further question regarding financial
arrangements aside from AIDEA, Mr. Benedict said "In the
overall picture, our project is $165 million." Between $35
and $50 million will be cash, equity in the project--
provided by an investment banking firm in New York. In
addition, there will be approximately $80 million in bank
financing as a first mortgage. The foregoing is in addition
to the $50 million request to AIDEA.
Co-chair Frank sought assurance that AIDEA funds would be
the last dollars rather than the first committed to the
project. Both Mr. Benedict and Mr. Snell assured that all
other commitments would have to be made prior to commitment
from AIDEA. Mr. Snell said that he had been in contact with
the New York investment banking firm and the bank that would
raise the balance of the funds. Everything is now in the
working stage. Nothing is yet firm. Mr. Benedict noted
that part of the reason the project remains in the working
stage is that it "lost a great deal of credibility" when
legislation for the project did not pass last year. As soon
as there is a commitment from the state, the other
arrangements will be finalized. Mr. Benedict advised that
his investment banking firm raised over $1.5 billion for
internal projects over the last six weeks. The proposed $35
million request is small by comparison.
Discussion followed between Co-chair Frank and Mr. Benedict
regarding the means utilized to overcome cost differentials
between Anchorage and Seattle. Mr. Benedict cited decreased
electrical costs, an adequate labor supply, and manufacture
of "extremely efficient" equipment. Many existing East
Coast manufacturers have not upgraded their equipment. They
thus do far too much hand labor. A total of nine different
elements not only overcome the differential but overcome it
substantially. Mr. Benedict voiced his assumption that once
the proposed plant is operational and successful, others
will follow. Someone must break ground first.
In response to a question from Senator Kerttula, Mr.
Benedict said that eighty percent of production will be
committed to the "Lower Forty-eight." The remaining 20%
will either be sold within the United States or overseas,
which ever is best in terms of the strength of the dollar
and other financial considerations. Mr. Benedict noted that
Americans eat little seafood compared to the rest of the
world. The average in the U.S. is 14.9 pounds per person.
Europeans average 50 to 60 pounds, and the Japanese average
150 pounds.
Responding to questions from Senator Kelly, Mr. Benedict
noted that fish sticks will comprise the low end of the
product line. Packaging will include family packs in
addition to single dinners. The Center will also work
directly with the food service industry to serve restaurants
and cruise ships. Both have expressed need for a high
quality product that is not now available.
In reply to a further question from Co-chair Frank, Mr.
Benedict indicated that interest rates are presently so low
that AIDEA's interest component will not be of great
assistance. The project needs a strong demonstration of
state support. During further discussion, Mr. Benedict
spoke to outside perception that Alaska has more money than
it knows what to do with. Investment banking firms seek to
utilize funding in areas evidencing demonstrated need and
strong local support.
SENATE BILL NO. 171
An Act relating to the contracting and financing
authority of the Alaska Industrial Development and
Export Authority, giving approval of the issuance of
the authority's revenue bonds, and delaying the
termination date of the authority's business assistance
program; and providing for an effective date.
Co-chair Pearce directed attention to SB 171 which she
explained contains AIDEA authorization for an Anchorage
International Airport fueling facility and reauthorization
and delay of sunset for the business assistance program.
She then directed attention to revised amendment no. 1,
advising that it would add the Mat-Su, Port MacKenzie,
Midrex project. The Co-chair further referenced amendment
no. 2 to delete the word "revenue" from authorization for
the fueling facility.
Senator Kerttula requested a brief recess.
RECESS - 9:50 a.m.
RECONVENE - 10:05 a.m.
RILEY SNELL, Executive Director, AIDEA, Dept. of Commerce
and Economic Development, came before committee. Co-chair
Pearce observed that she had spoken to both amendments 1 and
2 while the bill was in Senate Labor and Commerce, but no
changes were made in the legislation at that time.
Mr. Snell explained that the first provision of the bill
relates to the Anchorage Fueling and Service Company--a
consortium of airlines operating the fueling system at the
Anchorage Airport. He noted that a large contingent of
airline officials and a representative of MAPCO were present
to speak to the project.
He then introduced members of that contingent.
JOHN OLSON, Deputy Director, Development, AIDEA, Dept. of
Commerce and Economic Development, came before committee.
He explained that the consortium contains a "wide cross-
section of principal users of Anchorage International
Airport, including foreign flag carriers, domestic and . . .
even some air taxi operators . . . ."
In response to a question from Co-chair Pearce regarding
international carriers that have pulled out of Anchorage,
Mr. Snell explained that "they are still obligated
financially to meet some of the debt of the company." The
existing agreement also contains a step-up requirement.
Should a carrier fail or cease to operate in Anchorage, the
carrier would be obligated by two or three times its
commitment to satisfy financial requirements. AIDEA would
negotiate that type of arrangement in the new financing as
well.
Mr. Olson directed attention to charts and packets
containing background information and letters of support.
He then asked that TOM MUSHOVIC, Partner, Signature Flight
Support, explain the various components. Mr. Mushovic
pointed out that fuel presently flows to Anchorage via one
of three methods:
1. Rail car from North Pole--MAPCO
fuel coming to the Anchorage area.
2. The Nikiski pipeline containing Chevron and
TESORO products.
3. Marine shipment via barge or tanker from
anywhere in the world.
All commercial jet aviation fuel reaching Anchorage comes
via one of the above means. Within the city, fuel flow to
the airport is by one of two methods:
1. The Alaska Railroad from the downtown core.
2. The AFSC cross-town pipeline from the Port of
Anchorage.
One of the benefits of the proposed project is that, once
constructed, the new terminal will allow interception of
product from the Nikiski line. That will free up capacity
on the cross-town line and allow for a more equitable supply
of fuel to the airport. There are times when rail car and
cross-town delivery barely meets needs. The new terminal
and interception from the Nikiski pipeline will allow the
cross-town pipeline to satisfy demand. Need for rail cars
from the Port of Anchorage to the airport will be
diminished.
The present airport facility is a combination of three old
tank farms. The site now occupied by AFSC will be
demobilized and a new operation and maintenance station
located thereon. That is the second phase of the proposed
project. The primary phase consists of construction of a
new tank farm, consisting of three, 100,000 barrel tanks.
That effectively increases supply from two to twelve days of
fuel. Other components (control building, pump house,
filter building etc.) would also be part of the project.
Co-chair Pearce asked if the project includes reconstruction
of the existing cross-town pipeline. Mr. Mushovic answered
that the only pipeline cost included in the request is
extension of the six-inch line to the new facility. The
cost of the tie in from the Nikiski line will be borne by
TESORO.
Senator Sharp commented that while the cost to be borne by
TESORO might be a minor part of the project, it could give a
competitive advantage to one refiner over another. Mr.
Mushovic assured that the project does not provide a
competitive advantage to anyone. It "opens up the supply of
fuel to the airport." At the present time, all fuel is
passed through the Port of Anchorage and subsequently turned
around and brought out to the airport. Interception of
product from the Nikiski line will not give a competitive
advantage to either TESORO or Chevron. That interception
merely opens up the cross-town pipeline, allowing MAPCO to
more freely increase delivery.
Co-chair Pearce asked if TESORO provided a letter of support
for the project. Mr. Snell explained that he had talked
with TESORO representatives who indicated support. A letter
will be forthcoming.
Senator Sharp recalled testimony in previous years
indicating that the cross-town pipeline is in disrepair. He
then inquired concerning the remaining life of the line.
Mr. Mushovic said that the line from the Port of Anchorage
to the airport is in excellent condition and is expected to
last 25 to 30 years. It was constructed in the early 1960s.
Co-chair Pearce echoed statements by Senator Sharp, advising
that current testimony on the pipeline is a departure from
that of the past. Prior testimony from the municipality
indicated that the pipeline had environmental problems. Mr.
Mushovic acknowledged a situation in 1988-89 when the line
developed a leak near Chester Creek. The leak was caused
when construction on C Street relocated the line and damaged
it with construction equipment. That is the only situation
that has caused concern.
In response to a question from Senator Rieger asking who
would manage the tank farm, Mr. Mushovic said that if AFSC
remains the operator, it would also manage the facility.
Senator Rieger next asked what arrangements would be made to
protect the state investment. Mr. Snell explained that
while design and construction oversight, operation,
maintenance, and liability are vested in AFSC, AIDEA will
conduct annual maintenance and operating budget review.
AIDEA also reserves the right to conduct periodic
inspections to ensure that the facility is kept up to
standard.
Senator Rieger asked if all partners in the consortium would
jointly and severally guarantee the debt. Mr. Snell
responded negatively. He then reiterated earlier comments
regarding step-up provisions, requiring that a member of the
consortium assume two or three times the ratio of the
member's investment should the member airline fail or leave
the area.
In response to an additional question from Senator Rieger,
Mr. Snell indicated that AIDEA's operating budget would
cover the cost of staff assigned to oversee the project.
Any third-party costs for independent analysis would be
borne by the developer.
Co-chairman Frank asked why AIDEA would be the owner on the
proposed projects rather than merely the financier. Mr.
Snell explained that the principal reason is to take
advantage of IRS tax-exempt bond issues for governmental
entities that provide infrastructure development for ports,
harbors, or airports. In order to obtain that benefit,
ownership must be vested in the governmental entity.
Senator Sharp asked who would be responsible for clean up of
the old tank farm. Mr. Snell said that AIDEA would not be
responsible. AIDEA will seek indemnification from prior
existing conditions. Senator Rieger then asked who would be
responsible for environmental issues relating to the three
new tanks. Mr. Snell said that responsibility would inure
to the fueling consortium through contract provisions.
Senator Rieger suggested that strict liability law may
prohibit that. Mr. Snell acknowledged the concern. He
explained that for that reason the consortium is responsible
for design, construction, maintenance, and operation. There
will thus be only one party liable over the course of the
project. Contract provisions will fix responsibility for
spills, cleanup, etc. with the consortium. The airport, as
the land owner, would also come into play should the
consortium have difficulty in meeting its obligation.
Senator Rieger asked if harm would be done to the
legislation if indemnification from environmental issues was
added. Mr. Snell reiterated that responsibility would be
fixed in contract. If AIDEA does not receive that
assurance, it will not proceed with the project.
Discussion followed between Co-chair Pearce and Mr. Snell
regarding possible environmental problems at the existing
facility. Mr. Snell stressed that the proposed project
would be located on new land which would be base-line
studied to determine that there is no existing
contamination. Ongoing monitoring programs would ensure
that no contamination occurs. Further discussion followed
regarding demobilization efforts at the existing facility.
Senator Kerttula commented on past efforts relating to the
right-of-way leasing act. Experts testified that well-
written contracts are more powerful instruments in terms of
giving direction than are state statutes.
Discussion followed regarding planned demolition of existing
facilities and use of the land thereafter.
Co-chair Pearce next directed attention to amendment no. 2
which she explained was requested by AIDEA. The amendment
would delete the word "revenue" on page 1, line 12. Mr.
Snell explained that use of the word "revenue" limits the
ability of the authority to use its general obligation
powers to finance projects. Revenue financing is based
strictly upon the credit of the participants in the project.
AIDEA seeks the flexibility to deliver "the cheapest capital
cost to the project." Providing that AIDEA gets the type of
security it seeks from developers, the authority wants the
ability to use its general obligation powers. Under that
arrangement, the faith and credit of the authority is
obligated by issuance of the bonds. Senator Kelly expressed
a preference for issuance of revenue bonds over general
obligation bonds. Senator Rieger voiced his discomfort as
well, advising that a $40 million obligation represents a
substantial portion of AIDEA's net worth.
Senator Kelly asked if AFSC could finance a $40 million
project without AIDEA backing.
End, SFC-93, #49, Side 1
Begin, SFC-93, #49, Side 2
Mr. Snell advised that while it could be done, it would
require a joint and severable relationship with the airlines
to obtain financing. FRED KETZEBACK, Director, Fuel
Administration, Alaska Airlines, and Chairman, AFSC, came
before committee. He explained that the consortium could
obtain financing but it would not be as favorable as the
tax-exempt arrangement through AIDEA. Increased financing
charges would be passed along to the airlines in fuel costs,
etc. Mr. Snell observed that since revenue bonds are based
on the credit of the developer, they entail greater
financing costs than do general obligation bonds. The
difference between the two depends upon weekly market
conditions, but it could range 25 to 50 basis points in
interest rates (a quarter to one-half percent). Senator
Frank voiced his understanding that in issuing general
obligation bonds, AIDEA was, in effect, taking a greater
risk and passing the benefit on to the borrower. Mr. Snell
observed that AIDEA would charge the developer a higher rate
for use of general obligation bond authority. While a
higher fee would be paid, the developer would get the
overall benefit of cheaper money. Senator Frank voiced
concern regarding the additional risk. He then asked if the
authority had proceeded in this manner on other projects.
Mr. Snell told members that general obligation powers were
used at Unalaska and the Skagway Ore Terminal. The Red Dog
Mine at Kotzebue was a revenue bond issue. Senator Frank
questioned whether such use of general obligation bond
authority was good policy.
Co-chair Pearce asked why the international airport system
did not seek to utilize federal funds for the project,
retaining ownership within the airport while allowing the
consortium to operate it. Mr. Snell said that he was not
aware that the project would be eligible for such funding.
Discussion followed between Senator Rieger and Mr. Snell
concerning AIDEA charges on general obligation versus
revenue bonds. Mr. Snell said that costs are usually
negotiated. For issuance of general obligation bonds for
Federal Express, AIDEA charged 85 basis points beyond the
cost of money. Ownership was also retained by the
authority. Senator Kelly asked if the original
recommendation from AIDEA was for issuance of general
obligation bonds. Mr. Snell concurred. He suggested that
use of the word "revenue" was most likely a drafting error.
In response to a question from Senator Rieger, Mr. Snell
explained that under a revenue bond issue AIDEA would have
to retain ownership to keep tax-exempt financing in place.
Senator Frank voiced his understanding that regardless of
whether the project proceeds as a revenue or general
obligation bond issue, should default occur, AIDEA would
assume financial responsibility. Mr. Snell concurred,
advising that if the authority did not do so its reputation
in the marketplace would be severely damaged. He added that
because the proposed project involves both foreign and
domestic carriers as well as Federal Express and UPS, it
collectively has good credit.
Co-chair Pearce next directed attention to bill provisions
relating to extension of the business assistance program.
Mr. Snell explained that the provision extends the sunset
date to 1996. Material changes in the program were made
last session at the request of banking institutions and the
authority to make the program more usable and to fulfill a
need for small loans in rural Alaska. Mr. Snell urged that
the sunset extension be approved.
Co-chair Pearce directed attention to revised amendment no.
1. She explained that the amendment would place both the
amount of aircraft fueling facility bonds and the proposed
Midrex bonds in the title. It would further authorize a
facility for use by Midrex Corporation.
DON MOORE, Borough Manager, Matanuska-Susitna Borough, came
before committee. He explained that the Midrex project
would be located in upper Cook Inlet at Point MacKenzie.
Midrex Corporation is an American corporation and a wholly
owned subsidiary of Japan's Kobe Steel. Midrex utilizes a
process by which iron ore is directly reduced into a
metallized product for steel making and foundry
applications. The process uses large amounts of natural
gas. Approximately 92% of the natural gas is used for
chemical feedstock. Only 8% is used as combustible fuel.
That is important in light of the pending federal BTU tax.
Senator Kelly asked if the plant could be operated by
another energy source. Mr. Moore said that while another
energy source could be used to operate the system, the
process requires the carbon and hydrogen in natural gas as
the chemical reductant. The resulting product is marketed
in the Pacific Rim. Although there are 42 similar plants
throughout the world, there are none "on the west coast of
either of the Americas." As the third world electrifies,
the Pacific Rim market will grow larger. The Midrex process
creates feed stock for electric arc furnaces and will be
shipped to other parts of the world. The product does not
compete with scrap metal. It assists the scrap industry.
With increasing metal standards for steel, reprocessed scrap
metal is not of sufficient quality for modern construction.
Feed stock is thus added to the scrap to bring it to
standard.
The capital investment for the proposed plant is
approximately $200 million. The facility would employ 120
full-time employees. During construction, employment would
be considerably higher than that. The stability of the
United States and the Alaskan labor market are attractive
features for investment. There are currently only three
such plants located in North America.
The borough has 5,000 acres of land at the site and has made
a commitment of that land. The product is compatible with
coal. Coal from the Wish Bone Hill project, should it
commence operation, could be loaded and transported from the
same site.
Mr. Moore described the effort as "authentically a free-
trade-zone project." Iron ore from outside the state (the
West Coast and South America) would be processed for
shipment to Japan. Co-chair Pearce voiced her understanding
that the Municipality of Anchorage refused the Mat-Su
Borough request to be part of the proposed Anchorage free-
trade zone. She then asked if Mat-Su had submitted a
federal application for a separate zone. Mr. Moore said
that Mat-Su has not yet applied for free-trade-zone status.
In response to comments by the Co-chair indicating that
establishment of such zones takes considerable time, Mr.
Moore said that the zone was not "absolutely necessary" to
the project. Mr. Snell added that time needed to bring the
proposed plant into service would be sufficient for
processing a free-trade-zone application.
Mr. Moore stressed the advantage of locating at Point
MacKenzie:
1. A close supply of natural gas.
2. Available low-cost industrial land.
3. Deep-water port site with a Corps of Engineers
404 permit.
4. Strategically positioned for emerging Pacific Rim
markets.
5. Stable politics and labor force.
He next directed attention to the proposed budget for the
$50 million project. In response to a question from Co-
chair Pearce, Mr. Moore explained that the $50 million
represents only the "public loan portion of the
infrastructure." The Midrex plant would involve private
enterprise investment. AIDEA backed bonds would provide for
the dock and conveying system. Senator Kelly asked if the
bonds would cover a boat loading facility or a dock that
could be expanded for other uses such as the Alaska State
Ferry, passenger ships, etc. Mr. Snell explained that the
concept at this time is to design something for the client.
Funding above and beyond Midrex debt service would require a
clear demonstration that there were other sources of funds
to cover that portion.
Responding to an additional question from Senator Kelly
regarding land arrangements, Mr. Moore explained that the
arrangement would not be entirely cost free. A lease, which
is yet to be negotiated, would be involved. Senator Kelly
voiced reluctance to approve financing for the project
without a firm lease in place. Mr. Snell observed, "This is
a positioning effort . . . to demonstrate to private sector
participants that we are prepared to participate in
infrastructure development." The authority would only
commit funds after review of a financing plan that
identifies all costs and all sources of funds. That would
include land use and the lease with the borough.
When questioned further by Senator Kelly, asking if the
proposed legislation represents a commitment, Mr. Snell
answered:
I look at it, Senator, certainly, as legislative
authorization to proceed with the project. But,
certainly, it's not an indication that there's a
done deal.
AIDEA will examine the financial feasibility of the project,
the economics, the risk, etc., and assure that Midrex has
the ability to repay the debt prior to commitment.
Senator Rieger asked if the remaining $150 million
investment would be made before or after dock construction.
Mr. Snell said that there would probably be parallel
construction efforts. Site development is likely to be
ongoing as port development commences.
Senator Rieger next inquired concerning the extent of the
guarantee from Kobe Steel. Mr. Snell acknowledged that that
had not yet been negotiated.
Discussion followed concerning the triangular shipping route
for raw and processed materials.
Co-chair Pearce inquired regarding a resolution from Midrex
Corporation. Mr. Snell advised of a board of directors'
resolution authorizing development of the project with the
Mat-Su Borough and Midrex.
In response to a question from Senator Rieger concerning
ownership of the dock and loading facility, Mr. Snell noted
IRS code advantages for tax-exempt financing under public
ownership. Public ownership also makes sense in terms of
possible multiple users.
Further discussion followed regarding 1986 changes in the
Internal Revenue Service Code. Mr. Snell observed, "About
the only thing that remains for tax-exempt financing anymore
are ports and harbors and airports."
Additional comments followed by Mr. Snell concerning
possible share costs under a multiple use arrangement.
Co-chair Pearce voiced her intention to move both SB 16 and
SB 171 from committee at the same time. She then directed
attention to SB 171 and inquired regarding disposition of
revised amendment no. 1, relating to Midrex.
Senator Kelly inquired concerning the tax status of the
proposed airport fueling facility. Mr. Snell explained that
if the project is owned by AIDEA, it would be exempt from
municipal taxation. If owned by Anchorage Fueling and
Service Company, it would be subject to taxation. Senator
Kelly expressed a preference for adoption of revised
amendment no. 1 but not amendment no. 2--pertaining to
deletion of language concerning "revenue bonds." He then
formally MOVED for adoption of revised amendment no. 1
relating to Midrex. Senator Rieger OBJECTED. He voiced
support for the concept of the project, but noted lack of
supporting information, questioning whether it was ready to
proceed. Senator Kerttula said that if the project does not
meet all criteria, it will not proceed under AIDEA. He
expressed concern that delay of authority might mean loss of
"this year" in terms of timing as well as ultimate loss of
the opportunity. Mr. Snell concurred in comments by Senator
Kerttula. The legislation represents a positioning effort
whereby Alaska may compete for the project and demonstrate
AIDEA's willingness to participate in infrastructure
development. That development poses a major cost component
to the developer.
Senator Rieger reiterated support for the project, but again
suggested that authorization appears to be premature. He
voiced reluctance to vote on a $50 million issue based on
little information. Co-chair Frank indicated need to review
terms and conditions that would have to be met before AIDEA
would proceed. Co-chair Pearce pointed to the fact sheet
from AIDEA and limitations built into AIDEA statutes.
Senator Kelly raised concern regarding lack of information
on Mat-Su Borough involvement. He asked what the borough
would be devoting to the project. Mr. Moore explained that
borough ordinances establish set rates and maximums for
lease of borough land. The borough could both forgive lease
payments and levy a property tax on the development. It
seeks the development on behalf of the state and the jobs
for the local economy.
Co-chair Pearce requested that Senator Kelly withdraw his
motion for adoption of revised amendment no. 1 and asked
that Mr. Snell obtain a copy of the resolution passed by
AIDEA as well as additional information concerning action
intended to be taken by the board once authorization is
provided.
Co-chair Frank voiced his understanding that bonds issued by
AIDEA would be repaid by revenue from the Midrex operation.
Aside from the tax-exempt benefit of the bonds for port
construction, no subsidy would be involved. He then
registered his support for the project, saying that such
capital development should be encouraged.
Senator Kelly WITHDREW his motion for adoption of revised
amendment no. 1 and reiterated need for further information
on Mat-Su Borough involvement.
ADJOURNMENT
The meeting was adjourned at approximately 11:25 a.m.
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