HOUSE FINANCE COMMITTEE May 7, 1998 2:50 P.M. TAPE HFC 98 - 120, Side 1 TAPE HFC 98 - 120, Side 2 TAPE HFC 98 - 121, Side 1 CALL TO ORDER Co-Chair Gene Therriault called the House Finance Committee meeting to order at 2:50 p.m. PRESENT Co-Chair Hanley Representative Kelly Co-Chair Therriault Representative Kohring Representative Davies Representative Martin Representative Davis Representative Moses Representative Foster Representative Mulder Representative Grussendorf ALSO PRESENT Representative Cowdery; Peter Torkelson, Staff, Representative Cowdery; Robert Wilkinson, Chief Executive Officer, Copper Valley Electric Association, and Member, Four Damn Pool; Chris Hocker, Vice President, CHI Energy Stanford Connecticut; Brian Rogers, Financial Advisor, CHI Energy; TESTIFIED VIA TELECONFERENCE Gale Kincaid, Triad Sales, Anchorage; Walter, Sapp, President, Board of Directors, Kodiak Electrical Association and Treasure, Four Dam Pool Project Management Committee, Kodiak; Randy Simmons, Executive Director, Alaska Industrial Development and Export Authority; Keith Laufer, Manager, Finance and Legal Affairs, Alaska Industrial Development and Export Authority (AIDEA); Dave Carlson, Petersburg; Ed Kozak, General Manager, Kodiak Electrical Association. HB 167 "An Act relating to mobile home dealers." CSHB 167 (L&C) was REPORTED out of Committee with "no recommendation" and a zero fiscal note by the Department of Commerce and Economic Development dated 4/28/99. HCR 10 Proposing recommendations concerning the sale of the Four Dam Pool hydroelectric facilities. CSHCR 10 (FIN) was REPORTED out of Committee with a "do pass" recommendation and with a zero fiscal note by the House Special Committee on Utility Restructuring for the Department of Commerce and Economic Development dated 4/29/99. ALCOHOL BEVERAGE CONTROL BOARD Co-Chair Therriault pointed out that the House Finance Committee had received the resumes of the Alcohol Beverage Control Board candidates. He asked members to let him know if they would like a hearing scheduled on any of the nominees. No action was taken on the Alcohol Beverage Control Board candidates. HOUSE BILL NO. 167 "An Act relating to mobile home dealers." PETER TORKELSON, STAFF, REPRESENTATIVE COWDERY testified, on behalf of the sponsor, in support of HB 167. He maintained that as originally drafted, House Bill 167 would have merely relieved small used mobile home dealers of burdensome bonding and licensure requirements under existing law. He stressed that this made sense, since used dealers market mobile homes without warranty. Mr. Torkelson pointed out that the Labor and Commerce Committee heard considerable testimony on the bill and resolved that the entire licensure structure, while implemented with good intentions, really didn't serve a meaningful public process commensurate with its cost to private business. Mr. Torkelson observed that there have been no claims against a licensee or their bond under the existing law. "Indeed, it is difficult to find any compelling reason for regulating mobile home dealers at all." He acknowledged that there are third party stories of irresponsible sales agents, but emphasized that these aren't the ones who can afford a bond or are willing to comply with a licensing requirement. Mr. Torkelson emphasized that most mobile home dealers are relatively small operators. "To them, the costs, or perhaps unavailability, of bonding can mean the difference between staying in business or going out of business. It can mean the difference between operating a legitimate business, or one that merely exists on the margins." He maintained that protecting small businesses and promoting a vibrant community of competition is a worthy goal. Mr. Torkelson acknowledged that there is opposition to the measure. "They argue that protections are needed, that regulation is better for business. It seems that regulation is better for their business, but not all business. If the current statutes suppress competition with burdensome bonding fees then surely someone will be in favor of keeping the status quo." Mr. Torkelson asserted that HB 167 relieves business, at no ascertainable risk to consumer protection. GALE KINCAID, TRIAD SALES, ANCHORAGE, testified via teleconference in support of the legislation. He noted that he has owned and operated a mobile home business for the last 10 years. He maintained that the bond limits competition because most companies cannot afford the bond or qualify for financing on the bond. He asserted that businesses are forced to operate without a bond. REPRESENTATIVE COWDERY, SPONSOR, questioned if Mr. Kincaid had every had or heard of a complaint against a licensed or unlicensed dealer. Mr. Kincaid responded that he was not aware of any complaints. He pointed out that used sales are on an "as is" basis. He maintained that there is no liability. Mr. Torkelson reiterated that the original bill only addressed used home mobile home dealers. Testimony in the House Labor and Commerce Committee noted that there are only 14 licenses. If used mobile home dealers were removed there would only be four new home dealers left. This is too small of a group to support the licensing structure. The Division felt that it would be meaningless to retain the law. There were no consumers requesting protection. Co-Chair Mulder MOVED to report HB 167 out of Committee with the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CSHB 167 (L&C) was REPORTED out of Committee with "no recommendation" and a zero fiscal note by the Department of Commerce and Economic Development dated 4/28/99. HOUSE CONCURRENT RESOLUTION NO. 10 Proposing recommendations concerning the sale of the Four Dam Pool hydroelectric facilities. Co-Chair Therriault provided members with a proposed committee substitute for HCR 10, 1-LS0844\K, 5/7/99 (copy on file). Representative J. Davies MOVED to ADOPT a proposed committee substitute for HCR 10, 1-LS0844\K, 5/7/99. Representative Austerman OBJECTED. Co-Chair Therriault reviewed changes made by the committee substitute. He noted the following resolve was deleted from page 1, lines 9 - 12: "WHEREAS the Alaska Energy Authority retains, under the power sales agreement, significant liabilities relating to the power projects, including responsibility for uninsured facility failure, substandard performance, deficiencies in the reserve and replacement fund, and loss of power sales." Co-Chair Therriault noted that, "The power projects provide adequate power to the communities; and be it" on page 2, line 9 was replaced by "the authority gives due consideration to the prospective purchaser's commitment to Alaska hire, contracting, and Alaskan participation in the purchasing entity; and be it." He noted that a Further Resolve was also added: "BE IT RESOLVED that the Alaska State Legislature respectfully requests that the Alaska Energy Authority evaluate methods by which private sector interests with experience in acquisition, ownership, operation, and maintenance of hydroelectric facilities may propose to purchase the Four Dam Pool power projects in a manner that honors the existing power sales agreement and indemnifies the State of Alaska for its current ownership liabilities." Representative Austerman stated that he would like to address the issues raised by the committee substitute separately. Co-Chair Therriault stated that it would be his intention to adopt the proposed committee substitute and allow amendments. Representative Austerman WITHDREW his objection. There being NO OBJECTION, committee substitute for HCR 10, 1-LS0844\K, 5/7/99 was adopted. WALTER, SAPP, PRESIDENT, BOARD OF DIRECTORS, KODIAK ELECTRICAL ASSOCIATION and, TREASURE, FOUR DAM POOL PROJECT MANAGEMENT COMMITTEE, KODIAK testified via teleconference in support of HCR 10. He maintained that the projects would supply long-term economic stability to the communities they serve. He observed that electrical utilities served by the Four Dam Pool are cooperatives or municipal utilities. He emphasized that 100 percent of the savings would remain with the people of Alaska. Co-Chair Therriault asked if Mr. Sapp would object to language that was added regarding "due consideration to the prospective purchaser's commitment to Alaska hire." Mr. Sapp stated that he did not object to the change. Co-Chair Therriault added that the committee substitute asks the Alaska Industrial Development and Export Authority (AIDEA) to evaluate methods by which a private sector party could participate. Existing power sales agreements would have to be honored and the state of Alaska would have to be indemnified for its current ownership liabilities. He noted that the state would be faced with the issue of participation of private interests under a proposal. He maintained that the question needs to be resolved. Mr. Sapp spoke against private sector participation. He stressed that the projects were built to support communities that the projects serve. He expressed concern that profits would leave the state of Alaska under private ownership. Co-Chair Therriault pointed out that the resolve calling for a request for participation (RFP) to go out to the communities remains. The added resolve only asks for advice as to whether a private entity could potentially participate. The RFP would not be thrown wide open. Mr. Sapp reiterated concern that participation only be open to the communities served by the Four Dam Pool. Representative Austerman explained that the new resolve does not open it up to the private sector. He referred to language removed from the committee substitute on page 1, lines 12 - 15. Mr. Sapp questioned why it was necessary to remove the language. Co-Chair Therriault explained that the intent is to identify liabilities and if there is a way the state could be indemnified. Representative Austerman noted that the removed language was included in legislation offered in 1998. ROBERT WILKINSON, CHIEF EXECUTIVE OFFICER, COPPER VALLEY ELECTRIC ASSOCIATION, AND MEMBER, FOUR DAMN POOL provided information on the legislation. The Cooper Valley Electric Association operates a hydro-electrical project, which is part of the Four Dam Pool. He emphasized that times have changed. He maintained that the arrangement is not a good deal for the state of Alaska. The state has a huge financial risk from uninsured failures, substandard performance, shortfalls to the renew and replacement fund and operates with a fixed debt service. The risk of owning the projects is likely to increase and the revenue sharing is not likely to grow beyond the risk. He maintained that it is a good opportunity to revisit discussions with the state. He noted that there is an opportunity to purchase the projects, which would result in local ownership and control. Public power would benefit from the projects. Utilities have renewed interest. He stressed that the risk involved would reduce the purchase price. He observed that discussions with Randy Simmons have attempted to determine the price. He stressed that the utilities in the Four Dam Pool pay high rates. The average across the pool is 12.3 cents a kilowatt-hour. The statewide average is 10.4 cents a kilowatt-hour. He expressed support for the legislation. He testified against the amendment to research private a sale or a request for proposal. He pointed out that municipal utilities have to deal off the table in the public process. He stressed that the public process would be difficult for Wrangell, Petersburg and Ketchikan. Any proposed purchaser should have capital, credibility and commitment. He stressed that they have all. In response to a question by Representative J. Davies, Mr. Wilkinson reiterated that the state of Alaska retains significant liability, including uninsured facility failure, substandard performance and deficiencies in the reserve and replacement fund under the power sales agreement. In response to a question by Representative Austerman, Mr. Wilkinson questioned if any one would be interested in purchasing Four Dam Pool if they had to assume the obligations under the long-term power sales agreement. The long-term powers sales agreement retains all the risk of ownership without the benefits or awards. That is why the revenue stream off the debt service does not match the risk of ownership. He gave example of risk factors. Representative Austerman questioned if the power sales agreement could be broken or sold without agreement of the utilities. Mr. Wilkinson responded that the Four Dam Pool could be sold by the state and the agreement assigned. The obligations of the state of Alaska could not be eliminated by virtue of the fact that did enter into the agreement with the purchasing utility. The terms of the power sales agreement would have to be honored unless all of the five purchasing utilities and the state agreed to modify the agreement. In response to a question by Vice-Chair Bunde, Mr. Wilkinson stressed that the issue is a sale price that would allow economic benefits. He noted that the Cooper Valley and Kodiak Electric are member-owned cooperative organizations. Ketchikan Public Utilities, Wrangell Municipal Power and Light, and Petersburg Power and Light are all municipal facilities. Co-Chair Therriault questioned Mr. Wilkinson's concern with the open public process. Mr. Wilkinson explained that under the RFP process, the municipal utilities could not participate in a confidential and private manner. Co-Chair Therriault asked if they would have the same problem if the wording were changed from a RFP to "negotiate". Mr. Wilkinson stated that the utilities would like a negotiated sales price. The purchasing utilities could meet in closed session, but any purchase offer or sale would have to be approved by the public in the case of municipal utilities. In the case of the Cooperatives, their board of directors could approve the deal. Representative J. Davies thought that the RFP language was included for the possibility of different proposals within the community of cooperatives and municipal utilities. Representative Austerman explained that the language was included to allow proposals from different entities within the utilities. Co-Chair Therriault referred to the fiscal note. He noted that the RFP process could result in $120 thousand dollars for the Alaska Industrial Development and Export Authority (AIDEA). Representative Williams expressed concern with the language that required that the sale would ensure that the power projects provide adequate power to the communities. Co-Chair Therriault noted that it would be difficult for the state to ensure that the power projects provide adequate power in the future. Representative Austerman agreed that it would be up to the communities involved to make sure that adequate power is provided. Representative J. Davies emphasized that a credible proposal would provide assurance that there would be adequate power. Representative Austerman pointed out that AIDEA has a due diligence process. Co-Chair Therriault referred to the resolve on page 2, lines 8 - 13, which asks for an evaluation of whether a private entity could indemnify the state. Mr. Wilkinson felt that the projects should be sold to the public that they constructed to benefit. RANDY SIMMONS, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY provided information on the legislation via teleconference. He explained that it would cost $100 to $120 for an RFP. He further explained that if the RFP only went to the communities there would be zero fiscal note. A RFP to the communities could be handled with a one or two page letter with very little work. If it were open further there would be a formal RFP. Co-Chair Therriault clarified that the process would be a negotiation with the communities. Mr. Simmons agreed. Representative Austerman referred to the following language contained in the original version: "WHEREAS the Alaska Energy Authority retains, under the power sales agreement, significant liabilities relating to the power projects, including responsibility for uninsured facility failure, substandard performance, deficiencies in the reserve and replacement fund, and loss of power sales." He asked if the state has the liability because of the power sales agreement for uninsured facility failure, substandard performance and deficiency. Mr. Simmons replied that the state would have liability. KEITH LAUFER, MANAGER, FINANCE AND LEGAL AFFAIRS, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY (AIDEA) explained that under the power sales agreement the state would retain liability for a few specified categories. These categories include uninsured facility failure, design- related problems and deficiencies in the reserve and replacement fund. In response to a question by Representative J. Davies, Mr. Laufer observed that under the power sales agreement there would be no revenues if there were no production of power. The state would have liability based on production of power. Representative J. Davies asked if there are savings or advantages from the fact that AIDEA has had similar experience. Mr. Simmons acknowledged that AIDEA would not be starting from scratch. He observed that any proposal would be brought back to the legislature (Tape Change, HFC 99 - 120, Side 2) Representative Austerman questioned if the power sales agreement could be broken or sold without agreement of the utilities. Mr. Laufer responded that the projects could be sold and the state's interest assigned to a third party. The state would have secondary liability in the event that the buyer did not make payments. Co-Chair Therriault questioned if the buyer could be indemnified. Mr. Laufer that a letter of credit could be used. Mr. Simmons added that AIDEA would recommend that the third party be indemnified. Co-Chair Therriault noted that the resolution calls for the Alaska Energy Authority evaluate methods by which a private sector person could structure a deal that would assure that the power sales agreements are honored and how the state of Alaska or its entities could be indemnified. Mr. Simmons noted that AIDEA could evaluate a third party's ability to successfully bid and indemnify the state. DAVE CARLSON, PETERSBURG, testified via teleconference in support of the legislation. He noted that on page 1, line 8 "40" year power sales agreement should read "45" years. He observed that it would be difficult to respond to a RFP because of the open meeting law practice. He suggested that a negotiated settlement be reached. An agreement on a sales price would be approved in an open session. CHRIS HOCKER, VICE PRESIDENT, CHI ENERGY STANFORD CONNECTICUT stated that CHI Energy would like to have an opportunity to make a proposal for a cash purchase of the Four Dam Pool facilities. He explained that CHI Energy is an independent power producer with a portfolio of 79 hydro projects. He noted size range of CHI's projects. He stressed that CHI has dealt with a variety of risks. He noted that they are a portfolio owner. He emphasized CHI's experience and noted that CHI is familiar with ownership risks. Mr. Hocker stressed that CHI has reached the following conclusions: 1. They are prepared to pay at least $80 million dollars in cash for acquisition of the facilities, subject to a due diligence finding; 2. Transferring the facilities to private ownership need not have any impact on the existing power sales agreement or day-to-day operations for the facilities; 3. The acquisition could be down by conventional project financing in the private sector, without exposing the state of affected communities to any financial risk; 4. The acquisition could provide more certainty for wholesale power rates for the remaining 30 years, without the need for rate reopeners. Mr. Hocker stressed that they would intend to involve Alaskan based entities and local interest in any ownership or operation of the facilities. He asked for an opportunity to make a proposal to acquire the facilities. Representative Austerman questioned if it would be a straight cash outlay. Mr. Hocker stated that it would be a straight cash outlay. He stated that the value would be in the range of $80 million dollars. Representative Foster stated that the resolution would not allow a buyout by a private entity. Representative J. Davies maintained that even if a private purchase were feasible it would not be permissive under the resolution. Representative Williams suggested that the purchase by an outside entity not be discussed at this time. Co-Chair Therriault stated that he wanted to have discussion on the possibility of private entity involvement. Representative Grussendorf stated that the communities want to charge the lowest possible power rates. He agreed with Representative Williams that private entities should not be included in the current debate. Co-Chair Therriault stated that he is not likely to support any sale to the community without an evaluation of the mechanisms that should be considered. He maintained that there should be discussion about the private industry. Representative Williams stressed that the last proposal did not advance. He maintained that it did not work to involve the private sector. Representative Williams spoke in support of the original resolution. Co-Chair Therriault pointed out that the last resolution included a completely open RFP process. Representative Grussendorf stated that it is impossible for the Four Dam Pool communities to consolidate with outside entities competing for the projects. Co-Chair Therriault stressed that the resolve asks for details on how a package could be structured to take away the state's liability. Representative G. Davis spoke in support of the resolve. He questioned how proposals would be compared. BRIAN ROGERS, FINANCIAL ADVISOR, CHI ENERGY provided information. He noted that a transaction requires a willing buyer and a willing seller. He stressed that it is not worth the cost of a full due diligence finding if the state is not a willing seller. He acknowledged that the state cannot and should not walk away from the power cost agreement. He reiterated that CHI is open to working with public. He stated that CHI is looking for a signal. In response to a question by Representative Williams, Mr. Rogers stated that he was aware of previous offers. Co-Chair Therriault clarified that the intent of the resolve is to provide technical assistance. Representative Austerman stated that as the resolution is written the purchase is not open to the private sector. He asked if the information could be provided from AIDEA without inclusion in the resolution. He stated that the resolve did not prevent the resolution from accomplishing its intent. ED KOZAK, GENERAL MANAGER, KODIAK ELECTRICAL ASSOCIATION (KEA) testified via teleconference in support of HCR 10. He noted that KEA is a cooperative that has been in business for 57 years. He spoke in support of local ownership. He maintained that the local ownership provides what is best for the state and the communities. Local control would allow increased economic development opportunities. He pointed out that savings would stay within the communities. He observed that KEA has returned $3 million dollars back to its membership. He stressed that hydro-projects last 50 to 100 years if they are properly maintained. He estimated that communities would receive energy from the projects with zero debt service at the end of 45 years. He asserted that there would never be an end to debt service under private ownership. Vice-Chair Bunde questioned why there hasn't been a proposal from the communities. Representative Williams explained that discussions have been complicated by other factors. Vice- Chair Bunde pointed out that it has been two years. He questioned at what point the obstacles would be resolved. Representative Williams replied that he hoped that there would be a resolution by the end of next Co-Chair Therriault MOVED to ADOPT Amendment 1, change "40" to "45" on page 1, line 8. There being NO OBJECTION, it was so ordered. Co-Chair Therriault MOVED to ADOPT Amendment 2 as a conceptional amendment to replace "request for proposal" with "negotiations for" on page 1, line 15 and page 2, line 7. Representative Austerman emphasized that "open only to the electric utilities" should be retained. Co-Chair Therriault agreed. There being NO OBJECTION, it was so ordered. Representative Austerman MOVED to ADOPT Amendment 3, delete on page 2, lines 8 - 13. Co-Chair Therriault OBJECTED. Representative Austerman suggested that a request for information regarding a private sector acquisition could be given to ADIEA without additional language in the resolution. Representative Grussendorf spoke in support of Amendment 3. Representative G. Davis stressed that the language does not preclude a competitive effort. Co-Chair Therriault spoke in support of retaining the language. A roll call vote was taken on the motion. IN FAVOR: Grussendorf, Williams, Austerman, Davies OPPOSED: Kohring, Moses, Bunde, Davis, Therriault, Mulder The MOTION FAILED (4-7). Representative Austerman MOVED to ADOPT Amendment 4 (copy on file). He explained that the amendment would add language stating that "WHEREAS the Alaska Energy Authority retains, under the power sales agreement, significant liabilities relating to the power projects, including responsibility for uninsured facility failure, substandard performance, deficiencies in the reserve and replacement fund, and loss of power sales". Co-Chair Therriault OBJECTED. A roll call vote was taken on the motion. IN FAVOR: Moses, Williams, Austerman, J. Davies, G. Davis, Grussendorf OPPOSED: Kohring, Bunde, Foster, Mulder, Therriault The MOTION PASSED (6-5). (Tape Change, HFC 99 -121, Side 1) Co-Chair Mulder MOVED to report CSHCR 10 (FIN) out of Committee with the accompanying fiscal note. Vice-Chair Bunde OBJECTED. He stressed that the state should look at privatization. He maintained that the resolution encourages the communities to slow down their negotiations. Representative Austerman spoke in support of moving HCR 10 from Committee. He stressed that the state should get out of the liability of the Four Dam Pool. Representative Grussendorf spoke in support of the legislation. A roll call vote was taken on the motion. IN FAVOR: Moses, Williams, Austerman, J. Davis, Davis, Foster, Grussendorf, Kohring, Mulder, Therriault, OPPOSED: Bunde The MOTION PASSED (10-1). CSHCR 10 (FIN) was REPORTED out of Committee with a "do pass" recommendation and with a zero fiscal note by the House Special Committee on Utility Restructuring for the Department of Commerce and Economic Development dated 4/29/99. ADJOURNMENT The meeting adjourned at 4:30 p.m. House Finance Committee 12 5/7/99