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