SENATE BILL NO. 301 "An Act relating to the power project fund; authorizing the Alaska Energy Authority to charge and collect fees relating to the power project fund; authorizing the Alaska Energy Authority to sell and authorizing the Alaska Industrial Development and Export Authority to purchase loans of the power project fund; providing legislative approval for the sale and purchase of loans of the power project fund under the memorandum of understanding dated February 17, 2010; and providing for an effective date." 1:42:41 PM SARAH FISHER-GOAD, DEPUTY DIRECTOR OF OPERATIONS, ALASKA ENERGY AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, introduced the legislation. She explained that SB 201 is an act related to the power project fund that allows the Alaska Energy Authority (AEA) to sell loans from the power project fund to the Alaska Industrial Development and Export Authority, (AIDEA).It also authorizes AEA to charge and collect fees relating to the power project fund. Currently, AEA does not charge application or origination fees. AEA would like to establish an appropriate fee schedule through regulations and a public process. Ms. Fisher-Goad expounded that the power project fund is an AEA revolving fund that is primarily used by smaller utilities for energy projects. The fund has diminished recently because of increased demand to fund alternative energy projects. The AIDEA purchase of the power project fund loan portfolio would re-capitalize the power project fund with additional funds of approximately $21.6 million. Ms. Fisher-Goad concluded that the loan purchase is a way to re-capitalize the power project fund without the use of general funds. 1:45:53 PM Representative Doogan queried what the interest rate was on the loans. Ms. Fisher-Goad replied that the statutory rate was the municipal tax exempt rate that varies based on revenue bonds that are currently 5.23 percent. She noted that AEA has the statutory authority to make adjustments to the rate and decrease the interest rate lower that the revenue bond rate. Representative Austerman asked how much money is currently in the revolving loan fund. Ms. Fisher-Goad answered that the cash value was slightly above $5 million on February 28, 2010. Co-Chair Stoltze opened public testimony. Co-Chair Stoltze closed public testimony. Vice-Chair Thomas MOVED to ADOPT Amendment 1, (26- GS2974\A.1, Kane, 4/12/10): Page 1, line 6, following "2010;": Insert "providing legislative approval for a loan from the power project fund for the Reynolds Creek hydroelectric project;" Page 3, following line 11: Insert a new bill section to read: "*Sec. 6. The uncodified law of the State of Alaska is amended by adding a new section to read: LESISLATIVE APPROVAL OF LOAN FROM THE POWER PROJECT FUND. Provided the Alaska Energy Authority approves a loan for the Reynolds Creek hydroelectric project, the legislature authorizes the Alaska Energy Authority to loan $9,000,000 from the power project fund (AS 42.45.010) for the Reynolds Creek hydroelectric project. This section constitutes legislative approval under AS 42.45.010(j) for a loan from the fund that exceeds $5,000,000." Renumber the following bill sections accordingly. Co-Chair Stoltze OBJECTED. Ms. Fisher-Goad explained that amendment number one provides for project approval for the Reynolds Creek hydroelectric project. A loan exceeding $5,000,000 from the fund requires legislative approval. Representative Doogan asked if the $5 million approval was exclusively for loan funds or a combination of loan and grant funds. Ms. Fisher-Goad answered that whether the funding is comprised of all loans or a combination of loans and grants legislative approval is needed for a project if the funds exceed $5 million. 1:50:56 PM Representative Kelly asked if the approval for the Reynolds Creek Hydroelectric project interferes in any way with the credit approval process for the loan. Ms. Fisher-Goad replied that it does not. The project is pending AEA approval. Representative Kelly asked where the project is located. Vice-Chair Thomas answered that the project is located in Hydaburg on Prince of Wales Island. He noted that Alaska Power and Telephone and Haida Corporation has been working on the project together for several years. Representative Kelly wondered how close the project was to being ready or were other projects being displaced by this approval. Ms. Fisher-Goad replied that there is one other pending application located in St George. She believed that there will be enough money in the fund for these and other potential projects. Co-Chair Stoltze WITHDREW his OBJECTION. There being NO further OBJECTION, Amendment 1 was ADOPTED. 1:54:00 PM Representative Austerman asked for clarification of the approximately $20.6 million loan purchase by AIDEA for AEA's [outstanding] power project fund loans as described in the fiscal notes [FN3 CED, FN3 CED]. Ms. Fisher-Goad responded that the estimated $20.6 million represents a discounted amount based upon the future cash flow of the loan payments. The discount rate was established based upon AIDEA's investment rate [return on investments for a three year period ending September 30, 2009]. She noted that the list of loans is included with the "Memorandum of Understanding" ["Exhibit A"] (copies on file). Representative Austerman reiterated that the proceeds from the loan sale will replenish the power project revolving loan fund. Ms. Fisher-Goad affirmed. She added that AEA anticipates increased demand for the power project fund and might need additional loan funds in the future. Representative Austerman wondered what the value of the revolving loan is. Ms. Fisher-Goad responded that the value of the loan fund is approximately $34 million comprised of available cash and outstanding loans. Representative Austerman asked what the amount of the initial capitalization of the loan fund was. Ms. Fisher-Goad replied that she did not know. 1:57:07 PM Vice-Chair Thomas asked if there is a pre-payment penalty if the borrower has the ability to pay the loan off early. Ms. Fisher-Goad answered that no, there is not a pre- payment penalty. Representative Austerman asked if AIDEA previously bought down the loan to revitalize the revolving loan. Ms. Fisher- Goad negated. Representative Austerman wondered if the revolving loan fund would be able to continue to provide loans if AIDEA did not buy the loans. Ms. Fisher-Goad reported that there is a capital budget appropriation in the Senate version of SB 230 that provides for $10 million capitalization of the program that would provide funds if appropriated. That would allow the Reynolds Creek project and the project in St. George to proceed but would limit future requests. Representative Austerman questioned re-capitalizing a revolving loan fund. 2:00:42 PM Representative Salmon queried the size of the [Reynolds Creek] project and how many people would be served. STEVEN HAAGENSON, EXECUTIVE DIRECTOR, ALASKA ENERGY AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, explained that the Haida Energy Company will sell the power to the local utility, AP&T and will generate approximately 25 million kilowatt hours of energy and is a 10 megawatt project. It will provide power for the people of Hydaburg. Vice-Chair Thomas added that the project will intertie with two existing hydropower projects and provide power for the entire Prince of Wales Island population of approximately 3,000 and several mines. Representative Doogan asked what the effect of the legislation will have on AIDEA's finances. TED LEONARD, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, explained that the $20.6 million purchase price represents $24.7 million worth of the actual value of the loans at the discounted interest rate of 6.02 percent which is equivalent to the rate of return on AIDEA's investments for the last three years. He felt that this was a risk free investment. He believed it was consistent with AIDEA's mission and increases the opportunity to develop more alternative energy projects in the rural areas. Representative Doogan asked if AIDEA performed and independent assessment of the loan portfolio. Mr. Leonard replied that AIDEA assed the loans and the risks. 2:07:33 PM Representative Austerman asked what the default rate on the revolving loan was. Mr. Haagenson answered that only one loan was possibly in default. Representative Austerman queried the need for additional funding for a revolving loan fund. Mr. Haagenson responded that the funds are fully deployed because the program has been popular. AEA anticipates increased use of the program in the future. He stated that HB 306 [page 1, lines 12- 13],["An Act declaring a state energy policy."] [(4) The power project fund (AS 42.45.010) serve as the main source of state assistance for energy projects;] stipulates use of the energy fund as a vehicle to move energy projects forward. He stated that SB 301 is an effort to re- capitalize the fund in order to have more funds available. Representative Kelly asked whether construction of Reynolds Creek would affect the Power Cost Equalization (PCE) rate. Ms. Fisher-Goad responded that she was not sure if the PCE rate will be impacted. Vice-Chair Thomas interjected that Gustavus, a community in his district, lowered their energy costs when hydropower became available which lowered their PCE needs. Representative Kelly requested annual reports to track if hydropower is less expensive that diesel. 2:11:41 PM Representative Fairclough asked if AEA has other revolving loan funds. Ms. Fisher-Goad reported that the only other revolving loan fund is the bulk fuel revolving loan program. The program offers nine month loans for communities that must purchase their annual supply of fuel in bulk. Representative Fairclough asked if AEA adopted regulations, standards and procedures to make the loans. Ms. Fisher-Goad replied that yes, there are underwriting procedures for both loan programs. Representative Fairclough reiterated Representative Austerman's concerns about why a revolving loan fund requires more capitalization. She wondered if the loan and investment procedures were properly paced in order to recharge the fund. Mr. Haagenson restated that the requests for loans are outstripping the amount of revenue returning to the fund. Ms. Fisher-Goad added there are two types of assets in the power project fund; loans receivable and cash. There are presently more assets in loans receivable than cash. The plan is to sell the loans receivable to AIDEA to increase the cash assets to meet increased loan demand. Representative Fairclough questioned the management intent of the revolving loan funds. Ms. Fisher-Goad pointed out that the bulk fuel revolving loan fund was re-capitalized by the legislature during the special session in 2008. Representative Fairclough reiterated that she does not understand how a revolving loan fund can be spent down. She asked if AIDEA had regulations that would manage the fund so that the cash assets would not be depleted. 2:16:16 PM Mr. Haagenson replied the bulk fuel loan funds are based on short-term loans and easier to manage. The power project fund has much longer loan periods, up to 20 years. Representative Kelly asked if AEA is meeting the reserve requirements for the revolving loan funds. Ms. Fisher-Goad answered that currently there are no delinquencies. Representative Kelly acknowledged that the fund "has been overtaken by success". He questioned the overall health of the fund. Ms. Fisher-Goad believed the fund was healthy. Representative Fairclough believed that the fund was not healthy or managed properly since the fund is not revolving. She felt the management authority should have acted more proactively and requested more funding before the cash assets were drawn down. She asked if AIDEA will keep the loan fund revolving. Mr. Leonard answered that AIDEA is strictly buying the loan portfolio as an investment, and not taking over any role in management of the fund. 2:20:33 PM Representative Austerman wondered why AEA is willing to give up $4 million worth of loan portfolio instead of recapitalizing through the direct appropriation via the capital budget (SB 230). Mr. Haagenson shared that the current route seemed more available than obtaining that amount of general fund money. Co-Chair Hawker noted that all of the fiscal notes (FN1 (DOT), FN2 (REV), FN3 (CED), and FN4 (CED)) were zero. Vice-Chair Thomas MOVED to report SB 301 out of Committee with individual recommendations and the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. SB 301 was REPORTED out of Committee with a "do pass" recommendation with previously published fiscal notes: FN1 (DOT), FN2 (REV), FN3 (CED), FN4 (CED)