CS FOR HOUSE BILL NO. 446(FIN) am "An Act establishing and relating to the power cost equalization endowment fund; relating to the power cost equalization and rural electric capitalization fund; relating to the Railbelt energy fund; authorizing and relating to the sale of the four dam pool hydroelectric project; establishing and relating to joint action agencies created to purchase power projects; and providing for an effective date." CS FOR HOUSE BILL NO. 447(FIN) am "An Act making appropriations relating to power cost equalization and the sale of the four dam pool hydroelectric project and to capitalize funds; making appropriations under art. IX, sec. 17©, Constitution of the State of Alaska, from the constitutional budget reserve fund; and providing for an effective date." Keith Lauffer, (Testified via Teleconference), Financial & Legal Affairs Manager, Alaska Industrial Development & Export Authority (AIDEA), Department of Community & Economic Development, provided an overview of the bill. He stated that the bill would do three things: · Authorize the sale of the Four Dam Pool facilities to an entity to be formed by purchasing utilities; · Establish a power cost equalization (PCE) endowment and utilitize the sales proceeds to capitalize the endowment, while allows for other contributions of the endowment from federal funds or other sources; and · Uses the endowment and other funds to provide for a mechanism for the annual financing of the PCE program at a $15.7 million dollar level. Mr. Laufer addressed the perimeters of the sale transaction of the Four Dam Pool. The negotiations for the sale of those facilities has been in the making for about 5 years. The negotiations have been long and difficult and the final agreement was just made. He added that there were three goals in approaching the final negotiations. · The State needed to receive fair value for the project and be relieved of all liability related to the project. · The sale needed to benefit the local communities by providing them with local control of their generation resources and stabilize long-term power rates. · It was important that any sale transaction would help to solve the problem of long term funding for PCE. Mr. Laufer was pleased to report that the bill met all the criteria. He explained the perimeters of the sale. The sale price for the project was $73 million dollars. That price falls within the range of reasonable value that AIDEA determined was a fair value for the projects. The manner in which the internal fair value was determined was to recognize that the projects are only worth what revenues the State could generate over the long term. Recognizing that, a calculation was based on the present value of the State's revenue and those were used as the terms for the power sales agreement. That amount was then reduced by the present value of the State's risk. He reiterated that the sales price was well within the range that AIDEA found reasonable, utilizing the long-term assumptions. Mr. Laufer expounded that there were other elements involved in the sale. The reason that the sale will not be consummated immediately is that there are federal regulatory commission licenses that needs to be transferred and land interests which make it more complex. Mr. Laufer commented that AIDEA believes a reasonable time frame for closing the sale would be December 2001. In the interim, the utilities will be required to continue to make their power sales agreement payments. Under the terms of the Memorandum of Understanding (MOU) with the State and the utilities, the utilities will be responsible for all repairs and the payments will be 100% available for the PCE program. The utilities do have a termination right in the event that significant losses occur in the interim period. Mr. Laufer noted that the next element of the transaction involves the State insurance fund. The State currently holds a $13 million dollar insurance fund for the projects. That fund is used by the State to cover uninsured risks and the deductibles. The State has a $10 million dollar deductible on the insurance procured on these projects. That fund is projected at about $13 million dollars. Those monies would be freed up as of the sale date. Mr. Laufer continued, the next monies involved in the sale are the monies set aside for a 3% low interest loan from the State to the utilities participating in the Southeast intertie. Those funds were appropriated in 1993. The fund consists of $20 million dollars. In the transaction, it was recognized that the $20 million dollars loan funds had a significant subsidy element. The subsidy value of that loan was in excess of $5 to $6 million dollars. In recognition of that, the utilities were provided a $5 million dollar credit as of the close against the purchase price. Mr. Laufer stated that there were two other elements of the sale that should be addressed. He noted that the sale completely relieved the State of all ongoing future liabilities as an owner of the projects. He noted that was a crucial element for AIDEA. The MOU authorized AIDEA to finance the sale but it would be subject to AIDEA's Board approval at an interest rate of 6.5% under commercial terms, and would be available if they were publicly financed. Importantly, the purchasing utilities were required to subordinate all their rights under the power sales agreement. If the loan was to default to the utilities, the State should not be in a position in which it could again receive ownership of the projects, subject to the existing owner's power sales agreement. The utilities will be subordinating their rights and power in the sales agreement to the AIDEA lien. Co-Chair Torgerson asked if that agreement would need to be ratified by the voters. Mr. Laufer understood that the agreement would not have to be ratified by the individual owners. A new entity will be created so that the power sales agreement, other than the subordination agreement would not be altered. No individual utility would be incurring the debt. Mr. Laufer continued, the MOU recognizes that there are a number of conditions, which will need to be satisfied. It will be necessary for the governing body of each utility to approve the transaction as well as the Legislative Body. He added that there are a number of other detailed issues, which will need to be completed before the transfer can be consummated. The second part of the bill addresses the establishment of the PCE endowment. That is where the money goes. The payment made in August 2000 will be deposited into the PCE Rural Capitalization Fund. The other funds identified for payment are for power sales, which would be deposited into the PCE Endowment Fund. The net sale proceeds in the insurance fund would also be deposited into the PCE Endowment Fund. The bill provides for a transfer out of the Constitutional Budget Reserve (CBR) into the PCE Endowment Fund. Mr. Laufer continued, annual PCE funding over the long-term will come from the amounts made available from the endowment. Under the bill, 7% of the average market value of the previous fiscal year would be made available for PCE funding. In the interim, the PCE Endowment Fund will not be full until the sales proceeds come in. The earning for the endowment of approximately $13.6 million dollars would be made available for PCE, then interest on the PCE and the Rural Capitalization Fund would be available and other funds including the AIDEA dividend would be made available. st The bill provides that on July 1, 2004, use of the AIDEA dividend would be deleted. Mr. Laufer mentioned that the appropriation bill stipulates that the $20 million dollars Southeast Intertie loan would lapse back into the Railbelt Energy Fund from whence it came. In addition, amounts made available for the Sutton- Glennallen Intertie would lapse back to the Railbelt Energy Fund. An appropriation will be made for the sales transaction costs. Any remaining costs would lapse through the PCE Endowment Fund. Mr. Lauffer referenced the handouts he distributed. [Copies not on File]. In response to Senator Phillips, Mr. Laufer explained that AIDEA financing would be paid off over 20-25 years at a 6.5% interest. The terms of that financing would be commercial and would require the normal security that AIDEA demands. Senator Phillips thought that there could be a risk to the future. Mr. Laufer advised that was the intent for the subordination of the power sales agreement. Senator Phillips understood that following the sale, the State would then be done with this concern. He questioned the money drawn from the CBR. Mr. Laufer explained that the proceeds and money made available from the sale are not sufficient to cover the $50.7 million dollar annual PCE payment. Under the bill that the House approved, depositing additional funds into the Endowment Fund sufficient to produce revenues that are close to the amount necessary on an annual basis to provide for full funding would fill the gap. Senator Phillips acknowledged that he had a problem with that. Senator P. Kelly asked the amount of the current AIDEA dividend. Mr. Laufer replied that the AIDEA dividend depends on revenues and that it can be anywhere from $18-$20 million dollars annually. In response to Senator P. Kelly, Mr. Laufer stated that under the proposed scenario, it would be approximately $1.4 million dollars annually. Senator P. Kelly asked the amount of the CPR draw. Mr. Laufer advised that the previous amount coming from the CBR was $20 million dollars. The AIDEA dividend draw was between $7-$8 million dollars. Senator P. Kelly inquired the counter offer. Mr. Laufer explained that the current offer has been in negotiation for over a five-year period. The most recent utility offer that was in writing was made in January for the amount of $60 million dollars. Senator Adams acknowledged that the CBR draw eliminated the long-term draw from AIDEA. Senator Leman commented that last year's settlement of $15.7 million dollars was a compromise with the assurance from Senator Adams that there would be money coming from National Petroleum Reserve-Alaska (NPRA). Had that assurance not been there, Senator Leman was confident that the Senate Finance Committee would have pushed for other changes in the PCE, establishing the level at somewhat less. He suggested revisiting some of the previous Committee actions. Senator Leman asked why the sale was not put out to competitive bid and if the State would have done "better" having done that. Senator Adams responded to the first concern voiced by Senator Leman. He pointed out that the $12 million CBR dollars had been included. The impact of the issues returned those funds. Out of the $12 million dollars, $3 million was placed into the Permanent Fund. The balance goes into the School Public Trust. Future NPRA money goes to the impacted communities. Mr. Laufer addressed the other concern voiced by Senator Leman. He agreed that it was not known what the price could have been received with a bid. However, it is clear that only the purchasing utilities have the legal ability to relieve the State of its risks. AIDEA is comfortable that the price committed to is within a reasonable range that the State could get from any third party buyer. Mr. Laufer highlighted the distributed charts. [Not in File]. Co-Chair Torgerson questioned if it could be balanced without an AIDEA dividend. Mr. Laufer advised that it is anticipated that there will be federal funds coming available for the endowment itself, to grow the amount in order to cover the AIDEA dividend. Co-Chair Torgerson inquired what would happen if the fund were to under or over perform. Mr. Laufer suggested that there would be a 7% nominal return long-term basis. Over or under performing funds would remain in the endowment. The provision of the bill provides that 7% of the market value of the endowment is the amount transferred on an annual basis. Over the long- term, the endowment should be able to maintain. Co-Chair Torgerson stated that HB 446 & HB 447 would be HELD in Committee for further consideration.