Alaska Journal of Commerce

Halibut quota up 2.3 percent overall, dips for Central Gulf

The International Pacific Halibut Commission raised halibut quota for the second time in as many years, adding a glimmer of hope to a fishery troubled by stock declines and political squabbles. Overall, the commission raised the Pacific halibut catch limits in all except one region: the Central Gulf of Alaska, also known as Area 3A. In particular, it gave a much-welcomed boost to the Central Bering Sea – from where the commission’s newest member hails and holds commercial halibut quota. “We’re very excited about it in St. Paul,” said Simeon Swetzof, mayor of St. Paul in the Pribilof Islands, a Central Bering Sea island whose economy depends in large part on small boat halibut fisheries. “We want to continue to be excited later.” The commission, comprised of U.S. and Canadian commissioners, oversees the quota-setting process for U.S. and Canadian halibut fisheries in the Pacific from Northern California to the Bering Sea. The commission divides the overall halibut fishery into specific areas and allocates quota to each area. In total, the commission set the overall halibut harvest for the 2016 season at 29.89 million pounds, a 2.3 percent increase from 2015. This is also an increase from the catch limits recommended at the commission’s 2015 meeting, called the “blue line” limits. The 2016 limit exceeds the blue line by more than 3 million pounds. The increase looks good for communities represented by Jeff Kauffman, CEO of the Central Bering Sea Fishermen’s Association. Kauffman was recently appointed as one of the commission’s three U.S. commissioners, taking over for Don Lane of Homer. The Central Bering Sea Fishermen’s Association is a Community Development Quota group for St. Paul, a Central Bering Sea island whose economy depends in large part on small boat halibut fisheries. The Central Bering Sea, termed Area 4CDE by the commission, has been the one of the commission’s biggest focal points in 2014 and 2015. Halibut fishermen in the area have been faced with shrinking allocations, leading to several large-scale management decisions from the North Pacific Fishery Management Council. Officials including the Secretary of Commerce implored the commission to set quota at a bare minimum of 1.285 million pounds for the area, which it did in 2015. This year, the area’s quota rose. The Community Development Quota program gives 10 percent of federal fishing quota to 65 Alaska villages within 50 miles of the coast. Kauffman also sits on the Advisory Panel for the North Pacific Fishery Management Council, which sets halibut bycatch limits and management, as well as the split between sportfishing groups and commercial users. Kauffman has been a vocal proponent for cutting halibut bycatch caps for Bering Sea groundfish trawlers in 2015, during which the North Pacific cut bycatch caps for the groundfish fleet by a 25 percent. Swetzof said he recognizes that his area’s quota bump in part comes from a reduction in bycatch from Bering Sea groundfish trawlers, the majority of who are concentrated in the so-called Amendment 80 fleet based in Seattle. “The Amendment 80 guys, they put halibut on the table for us,” said Swetzof. “I really appreciated Amendment 80 doing what they did last year, and this year. They left 900,000 pounds on the table.” Each area either received an increase in quota or an equal amount to the 2015 season, except Area 3A, the Central Gulf of Alaska. The Southcentral Alaska charter halibut fishery has been saddled with steadily tightening restrictions, which charter industry stakeholders make Alaskans lose interest in the fishery. Guided halibut anglers in Area 3A can still keep two fish per day but can catch fewer per year. Anglers can only catch four per year instead of the five they were allowed in 2015, though the council kept the two-fish daily bag limit with a 28-inch size restriction on one fish. Weekly day closures, which the council first added last year, will be held on Wednesdays for Southcentral. Andy Mezirow, captain of Crackerjack Charters in Seward and a member of the North Pacific council, said the Southcentral charter fleet isn’t surprised by the quota reductions for his area given the still-shaky biomass for Pacific halibut. “It looks like the commissioners pretty much followed the science,” said Mezirow. “If there continues to be a downward trend, we’ll have to come up with some innovative solutions to keep it viable.” Mezirow said charter captains have not yet seen a precipitous drop in business. Southcentral restrictions may have a negative impact on Alaska resident charter clients, but overall the fishery is maintained by an increase in Alaska tourism despite quota drops, he said. To Mezirow, this is a mixed blessing. “To me, making up for a loss of access to residents with more tourism isn’t exactly healthy,” said Mezirow. Each area’s 2016 harvest exceeds the blue line harvest limit. Area 2A, Pacific Northwest coast: 1.14 million pounds, 200,000-pound increase from 2015. Area 2B, British Columbia: 7.3 million pounds, a 240,000-pound increase from 2015. Area 2C, Southeast Alaska: 4.95 million pounds, a 300,000-pound increase from 2015. Area 3A, Central Gulf of Alaska: 9.6 million pounds, a 500,000-pound decrease from 2015. Area 3B, Western Gulf of Alaska: 2.71 million pounds, a 60,000-pound increase from 2015. Area 4A, Central Aleutian Islands: 1.39 million pounds, the same as 2015. Area 4B, Western Aleutian Islands: 1.14 million pounds, the same as 2015. Area 4CDE: Central Bering Sea: 1.66 million, a 375,000-pound increase from 2015. Area 4C: 733,600 pounds, up from 559,000 in 2015. Area 4D: 733,600 pounds, up from 559,000 in 2015. Area 4E: 192,800 pounds, up from 92,000 pounds in 2015. DJ Summers can be reached at [email protected]  

Walker bills would shift tax credits to development loans

After more than six months of speculation, Alaska got its first look at Gov. Bill Walker’s solution for what he calls an “unsustainable” oil and gas industry incentive program Jan. 19 when Senate bills 129 and 130 were read for the first time on the Senate floor. Walker jumpstarted the oil and gas tax credit debate last June when he nixed $200 million in credit payments from state operating budget before signing it. What started as a $10 million per year tax credit program in 2003 has grown to a $700 million obligation this year and that payment could eventually hit $1.2 billion if left untouched, the governor contends. SB 130, if enacted, would significantly trim the current credit program and nearly immediately save the state an estimated $500 million at a time when oil prices below $30 per barrel have edged the state’s budget deficit ever closer to $4 billion. The bill would cut spending by eliminating the Qualified Capital Expenditure and Well Lease Expenditure refundable credits applicable to Cook Inlet basin work. When combined with closing a loophole that currently allows some North Slope companies producing “new oil” to claim a 20 percent Gross Value Reduction Credit on top of a net operating loss, repealing the credits would save about $200 million per year. The Qualified Capital Credit reimburses up to 20 percent of all capital development costs and the Well Lease Credit covers up to 40 percent of drilling expenses. Both of the Cook Inlet credits are transferrable. Another $200 million in savings would come by way of adding stipulations companies must meet before the state will directly repurchase tax credits from small producers, according to a fiscal analysis of the bill. Walker’s proposal would cap annual repurchases at $25 million per company and directly tie the refundable percentage of a credit certificate to a company’s — and its contractors’ — Alaska resident hire rate. The remaining credit amount not eligible for a refund based on Alaska hire limits could still be applied to a tax liability. Small producer credits would still be transferrable; however, companies not meeting the stricter guidelines would have to hold the credits until they accrue a tax liability with the state. Credits held for too long would expire after 10 years. Finally, SB 130 would “harden” and raise the minimum gross production tax for oil from North Slope fields not eligible for the Gross Value Reduction Credit. It would prevent several credits, including the Net Operating Loss, or NOL, Credit from being applied to take a production tax obligation below the minimum, often referred to as the tax “floor,” which is currently at 4 percent. That 4 percent minimum production tax would go up to 5 percent in the governor’s bill, a move that would generate about $100 million per year to the state in additional revenue. The increased floor would be applied to all North Slope fields, even new fields eligible for the 20 percent Gross Value Reduction. In its final report, the Senate Oil and Gas Tax Credit Working Group assembled over the summer by Resources chair Sen. Cathy Giessel also recommended hardening the tax floor to prevent large producers from paying no production tax, but the group did not weigh in on raising the minimum tax. Everything the working group proposed was with the future in mind, Giessel said in an interview Jan. 26, and Walker’s bill, as currently constructed, would make the tax floor change retroactive to Jan. 1, 2016. She also called raising the minimum tax to 5 percent a “blatant change” to the More Alaska Production Act, better known as Senate Bill 21, something Walker said he would not do after it was upheld by the voters in an August 2014 referendum. SB 129 Senate Bill 129 would form an Oil and Gas Infrastructure Development Program within the Alaska Industrial Development and Export Authority. A $200 million appropriation would be needed to jumpstart the fund, which would finance oil and gas infrastructure development projects on proven reserves for small and medium-sized companies in lieu of some credits. AIDEA, as the state’s financier, manages revolving loan funds aimed at economic development and holds business interests around the state. The authority typically invests with market returns in mind, but its goals can change with legislative direction. Revenue Commissioner Randy Hoffbeck said during a Jan. 22 press briefing that there is flexibility within the loan program, but AIDEA should be able to recover a competitive rate of return and still offer more attractive financing than private lenders. “What we’re trying to do is build a loan program that steps in where some of these companies are paying venture capital rates or private equity rates that run in the neighborhood of 18 to 20 percent on some of these projects,” Hoffbeck said. “We feel that we can step in and give (companies) a rate that’s a little more reflective of a project that’s a little further down the road because we see a little more certainty in what they’re doing than what they’re finding in the marketplace.” Smaller companies often use the cashable credits as collateral for loans to fully cover exploration costs. AIDEA board member and former Fairbanks-area state senator Gary Wilken said he is excited about the prospect about helping support Alaska’s premier industry and has no qualms about the authority’s ability to meet the challenge. “I think the seven people on the board, including myself, will have the talent to figure out how to execute this if we’re given the responsibility,” Wilken said in an interview. “I think we see the vision; I think we see the benefit and I just have to believe that we’ll reach out and get whatever it takes. If it’s beyond our resources we’ll go get the proper resources to do this right.” While under the auspice of the Commerce Department, AIDEA is a self-funded, for-profit entity that is not bound by the state’s current budget challenges and therefore could expand to manage an additional program. Giessel said the idea of running a loan program through AIDEA would put the state in competition with private lenders, a move that “makes no sense.” The authority on its own has partnered with small producers to finance development projects on the Slope and in Cook Inlet in recent years. It would also mean money already in Alaska would be recycled through the program, while the tax credits, as loan collateral, are bringing in new money from Outside lenders, she said. Impact of changes Walker’s remodel of the oil and gas tax credits is without question a substantial shift from the status quo, something the Oil and Gas Tax Credit working group report urged against — at least right away. His $200 million deferment from the 2016 fiscal year still left the state paying $500 million of what was a $700 million General Fund line item. The remaining $200 million from 2016 is included in a transition fund of nearly $1 billion to pay off credits expected to be earned before the legislation could be enacted. From there, the state’s obligation would shrink to about $200 million per year through 2022, a projection based on the remaining tax credits. Under the current system, the State of Alaska pays upwards of 65 percent of development costs on many projects and up to 85 percent of the cost of exploration because of the ability to “stack” credits, according to the Department of Revenue. A sea change is exactly what representatives from the industry and their supporters in the Legislature have said they don’t want. Walker said in an interview with the Journal that his administration met with each independent exploration and production company that has used the tax credit system to make sure none “fall through the cracks” during a shift away from the current credit structure. “We’re unique with the credit program across the country and (the companies) realize that,” Walker said. His critics on the issue largely agree with the governor that Alaska is unique; they contend the state has a uniquely high cost of doing business, and therefore the credits are essential to spurring development. Alaska Oil and Gas Association President Kara Moriarty said in an interview that she understands the fiscal pickle the state is in, but changing the tax credit system at a time when the companies are also cash-strapped brings about the ever-dreaded political uncertainty. “Policymakers cannot control the price of oil, so you want to have policies that attract investment even when the price of oil is low,” Moriarty said. A member of Giessel’s working group, she also questioned the equity of hardening the production tax floor and not allowing producers to claim a loss against future tax burdens that would take them below the minimum tax threshold. Moriarty said allowing oil and gas producers to claim NOLs, regardless of the minimum tax, is no different than companies in other industries deducting losses on future corporate tax liabilities. On raising the minimum tax, Moriarty was clear: “That will impact production, it just will.” A Revenue Department analysis of SB 130 states that — based on the department’s Fall 2015 Revenue Sources Book — Alaska North Slope crude prices should rebound by 2019 to a point where hardening and raising the production tax floor to 5 percent will no longer factor into tax payments for producers. Revenue is predicting an average ANS price of $68.95 per barrel in fiscal 2019. Now, early in 2016, the state has 12 credits available to explorers and producers across the state. Most are specific to the Slope and Cook Inlet basins, while two are for “Middle Earth” exploration and development credits for work outside of the developed areas, such as Doyon Ltd’s drilling in the Nenana basin near Fairbanks. Four of those credits will sunset by Jan. 1, 2017, if the program continues unchanged. The governor’s proposal to eliminate two of the Cook Inlet capital credits would leave six on the table at the start of next year: three nontransferable and one refundable Slope credit; a refundable Middle Earth exploration credit; and a lone 25 percent Carry Forward Annual Loss Credit for Cook Inlet. Sen. Bill Wielechowski, D-Anchorage, another working group member, has said the state has employed a “scattershot approach” to the credits without thoroughly vetting their benefit. Credit benefits A brief Department of Revenue report examining the fiscal pros and cons of the North Slope credits made public over the summer determined that the credits don’t represent a sound financial investment for the state. Hoffbeck said the seven-page report was incomplete and should not have been released because it limited the benefits to historical production and did not include assumed future production aided by the credits in its analysis. Definitively concluding whether the credits are a good investment for the state is “almost an unanswerable question,” Hoffbeck said in an interview. It’s unknowable whether certain projects would have moved forward or not without the state’s help. The department is more focused on figuring out what’s affordable for the future rather than analyzing historical credits, he said. Those wary of major changes to the credits at a time when North Slope producers are faced with production and transportation costs — in the $48 per barrel range, according to the Revenue Department — far exceeding oil prices that have slid to less than $30 per barrel, say the benefits of the subsidies go well beyond the state’s bottom line. Pat Galvin, chief operating officer for Great Bear Petroleum LLC and a former Alaska Revenue commissioner, recalled during a Jan. 8 discussion panel on the issue a conversation he had with a member of the Walker administration, who said the state will go from paying two-thirds of most exploration costs to about 30 percent under the governor’s plan, with the anticipation the companies themselves will be willing and able to cover the gap. Great Bear Petroleum, founded in 2010, conducted a $50 million exploration drilling last winter on its Slope prospects south of Prudhoe Bay. Galvin said just the exploration credits already set to expire July 1 with the start of the 2017 fiscal year would directly impact activity. “By taking on that exploration risk, the state is allowing for more exploration activity,” Galvin said. “Exploration leads to discoveries; those lead to development, which leads to production. If you don’t get enough projects in the hopper you don’t get enough exploration activity taking place you’re going to get less discovery, less development and less production at the end of the day.” Increasing exploration is the best way for the state to assure future production, he said. He added that if AIDEA is too risk averse and won’t lend to explorers, the loan program won’t accomplish much. Kenai Peninsula Borough oil and gas expert Larry Persily said during the Jan. 8 panel that the credits should be examined not only by their contribution to the state treasury, but what they do for local economies. A study commissioned by the Alaska Oil and Gas Association calculates each direct Alaska exploration and production job supports another nine private sector positions. While Cook Inlet oil carries no production tax and gas from the basin has a minimal tax, the production still contributes royalties, property and corporate income taxes to the state, Persily said. He also noted that incentivizing Cook Inlet gas production helped stave off the natural gas shortages that were feared in Southcentral just three years ago. “There’s no question that tax credits have been good for Cook Inlet, good for utilities, good for customers, good for production — certainly good for the local economy and jobs. Whether they’ve been a net plus, a net gain to the state General Fund is a separate question,” Persily said. Lease expenditures in Cook Inlet have increased fourfold since the state focused in incentivizing activity in the basin in 2010, according to Persily. Giessel concurred with him, saying even small producers not paying production tax bring back three to four times to state coffers what they receive in credits. “This oil tax credit program is a rebate. Folks do not get this money unless they spend money,” Giessel said. “It’s not a giveaway.” The Senate Resources Committee will take up the bills in a couple weeks and get plenty of illumination from the administration on the legislation’s finer points, she said. “I need more clarity as to how it increases production,” Giessel said. She added that she certainly has ideas on how to adjust the tax credit system and a separate bill could be on the way in several weeks as well. Transparency Giessel’s working group also encouraged opening the books, at least a little, so the public can see what the state’s oil and gas tax credit investments are returning. “Though it is not advocated for the names of the operators to be disclosed at this time, the public disclosure of investment amounts can better inform both the public and policymakers, on any other changes to make to the credit system,” the working group report concluded. “Alaskans deserve to know what the other side of the table is spending on a project if their money is investing in its success.” Walker would support more disclosure of the tax credit program, he said, but current statutes tightly restrict what data the state can release and his bills do not address the issue of transparency. He said if the state goes to a broad-based tax on residents while continuing to fund the credits it would definitely be more appropriate for Alaskans to understand what the state is investing in. Moriarty said she believes her member companies are forthright in explaining what the credits have done for them, but contended narrowing disclosures to specific projects “would really allow policymakers and the public to pick winners and losers” amongst the companies, a situation she is not comfortable with. “We’re open to ideas to be more transparent as long as that information is not used against us by other policymakers,” she said. In most years the governor’s 38 pages of oil and gas tax credit and loan program legislation would be enough to dominate the Legislature’s time, as oil industry policy has in the past. This year, however, even bigger budget issues, the Alaska LNG Project and criminal justice and Medicaid reform make oil and gas tax credits just another item on the Legislature’s daunting to-do list. Elwood Brehmer can be reached at [email protected]

S&P finds Alaska with ‘unique exposure’ to oil prices

Standard and Poor’s Rating Services took a look at what makes some oil states’ futures look bleaker than others. The hardest-hit states forecasted oil prices too optimistically, tied too much state income to oil revenues, or didn’t save enough from the good old days when prices were high and state coffers were fat. S&P analyzed eight states: Alaska, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Texas, and Wyoming. Of the eight, S&P rated Alaska, Louisiana, and New Mexico has having negative credit outlooks. Though S&P lowered Alaska’s credit rating from AAA to AA+ earlier this month, S&P analyst and report author Gabriel Petek said the state’s foresight to sock away oil money softens the blow. “To their credit, they recognized that they have this dependence on oil revenue, and that oil production is an important part of their economy,” said Petek. “They were very shrewd to drain the boom, put aside a lot of this revenue that came in, and it’s providing the cushion.” Alaska is singular among oil-producing states in its negative credit outlook from S&P. The other two states with negative outlooks, New Mexico and Louisiana, have to do with more factors than just oil price decline. Petek said New Mexico and Louisiana have a host of other fiscal issues unrelated to oil that make the credit pressure negative. “Alaska is uniquely exposed to this problem, and the pressures and more acute directly because of oil,” said Petek. “It’s telling in a way that Alaska’s credit rating is the first one to already take a hit. They’re the most reliant on oil-related revenue of all the states.” Most states with heavy oil revenue over-forecasted the price per barrel, but some, Alaska in particular, were particularly and damagingly upbeat about the assumption. “In short, the more aggressive a state was with regard to its assumptions and use of oil-related revenues during the oil boom, the more acute its fiscal pressure now, in the oil price bust,” the report reads. The Alaska budgeting process in the early 2010s put too much faith in the sky-high oil prices that sank in 2015. For fiscal year 2016, Alaska had based its budget on a price assumption of $67.49 per barrel, the highest of any major oil-producing state, and has since revised it downward to less than $50 per barrel for the current fiscal year. In fiscal year 2017, the assumption is $56.24, nearly the highest estimate from any oil-dependent state. Only North Dakota, a newcomer in the oil industry with a $45 per barrel price assumption for fiscal year 2017, comes close to what Standard & Poor’s believes realistic. “At this point, all of the states in our survey still have a higher price forecast for 2016 than does Standard & Poor’s ($40 per barrel),” the report reads. Overindulgence in general funds income from oil revenues is another key component to a negative credit outlook, lending credence to Gov. Bill Walker’s plan to funnel oil cash into the Permanent Fund rather than directly into unrestricted general funds. “(Alaska has) a current structural deficit that equals 2/3 the budget,” said Petek. “Most states, they have a 5 percent deficit. You have big reserves and a big deficit.” The Alaska government derived 79 percent of its state spending from oil-related revenues in fiscal year 2016, and 67 percent is estimated for 2017. No oil-producing state had anything approaching this level of oil-related revenues as a percentage of operating revenues; Wyoming drew 35.7 percent of operating revenue from oil, but no other states exceeded 13 percent for fiscal year 2016. In comparison to Alaska’s direct to general fund model, other oil-producing states have stopgaps and checks to cushion commodity price swings, capping the full amount of unrestricted general funds tied to oil. Montana’s general funds “are somewhat insulated” from oil and gas price bounces, as the state’s general fund only derives 3 percent of general funds from oil. North Dakota capped its oil-related general funds income at $300 million every two years, approximately 5 percent of the 2015-2017 general funds. Texas’ oil revenues only contribute 4 percent of the total spending, and natural gas another 2 percent. Alaska’s credit-saving grace comes from savings, the third factor in S&P’s credit considerations. “Some oil producing state have partially mitigated the effect of commodity market volatility on the their budgets by segregating the oil-related revenue, putting most of it in reserves or special funds,” reads the report. Petek said Alaska’s mammoth Permanent Fund has spared the state from a worse credit situation. Alaska used oil-related revenue the most, but also saved the most. The state’s available savings are 312 percent of general fund spending, greater even than North Dakota and Texas, which have each 91 percent of general fund spending available in savings. DJ Summers can be reached at [email protected]

Interior Energy Project decisions moved back again, to Feb.

The Alaska Industrial Development and Export Authority should have its new Interior Energy Project partner in place by the end of February, according to project leaders. A partner recommendation can be expected the second week of February, IEP manager Bob Shefchik said in an interview, with a special AIDEA board meeting to be held later in the month to take formal action on the staff recommendation. The time between the announcement and the board meeting will allow the AIDEA board and the public to scrutinize the IEP team’s recommendation, Shefchik said. AIDEA officials spent much of 2015 evaluating new proposals to get natural gas to Fairbanks-area consumers for the project’s stated goal of $15 per thousand cubic feet, or mcf, of gas. What started as 16 ideas in early August has been whittled to two: Spectrum LNG’s proposal to build a North Slope LNG plant and a plan by Salix Inc. to build a Cook Inlet-sourced LNG facility at Point MacKenzie. Oklahoma-based Spectrum LNG operates a small LNG plant in Arizona and helped develop Fairbanks Natural Gas’ supply chain in the late 1990s to feed the utility with LNG trucked from Southcentral. Salix is a subsidiary of Avista Corp., which owns electric and natural gas utilities in Idaho, Washington and Oregon. Avista also owns Alaska Electric Light and Power Co., the Juneau-area electric utility. Shefchik said that the project team is working to secure natural gas contract terms from both Cook Inlet and North Slope producers before making a final suggestion to the AIDEA board. “We want to make sure we have gas contracts underneath the North Slope and Cook Inlet so that as we’re making recommendations on $50 (million) to $80 million investment we’re not modeling what the gas costs, we know what it costs,” Shefchik said. Golden Valley Electric Association, the Interior’s main electric utility, has a 15-year gas supply agreement for North Slope natural gas with BP that the utility has made available to the Interior Energy Project as well. Shefchik said the group is evaluating all supply options. The omnipresent contrast between lower wholesale gas costs from the Slope against lower construction and transportation costs in Southcentral has made defining a clear-cut winner difficult. The desire to have a complete project for review is what led to pushing an initial, self-imposed early December deadline for a project recommendation back two months, he said. Spectrum’s plan is for an $85 million North Slope LNG plant that would need $30 million in equity and $50 million in low-interest loans from AIDEA. Spectrum would contribute $5 million in equity. Salix is hoping to build a $68 million Southcentral plant also with a $30 million equity investment by AIDEA and a $28 million loan, with Salix offering a $10 million investment. The new oil price reality Alaska’s lawmakers are dealing with is also straining the economics of the Interior Energy Project. “We’re challenged on the differential between the price of oil translating into fuel oil and the target price of gas, so we’re being pretty careful on having lowered our conversion expectations and then deciding how can we continue a project in a low price environment,” Shefchik said. Revised estimates on the demand for natural gas, once it becomes available in the Interior, have lowered the demand forecast by as much as a 30 percent since the project began. Natural gas at $15 per mcf is about half the energy equivalent cost of $4 per gallon fuel oil — roughly the price scenario facing Fairbanks when the Legislature funded the project in 2013. Since then, plummeting oil prices have pulled the price of fuel oil closer to $2 per gallon, which makes it less likely residents will spend potentially thousands of dollars to convert their home heating systems. Consequently, AIDEA is also working to consolidate state and federal energy rebate and loan programs to help offset conversion costs for residents and keep the Interior Energy Project financially viable. Elwood Brehmer can be reached at [email protected]

Legislature gets first update on pros, cons of AK LNG Project

Legislators got their first briefing of the session on the Alaska LNG Project on Jan. 25 direct from the project’s lead manager, ExxonMobil’s Steve Butt. In presentations to the House and Senate Resource committees, Butt implored legislators to view themselves as the board of directors for the state, as a 25 percent owner of the $45 billion to $65 billion prospective development. “We view ourselves as kind of a project organizer evaluating technical and economic viability of the AK LNG Project; does it make sense to the investors?” he said to House Resource members. In a time of a depressed global LNG market — spot prices have fallen by some 50 percent over the last three years — Butt outlined some of the simple but not-to-be understated benefits of Alaska’s project and how it compares to others around the world competing for market share. First, Alaska’s North Slope resource of 32 trillion cubic feet, or tcf, of natural gas is well defined and largely developed. The gas beneath Prudhoe Bay has been captured and re-injected many times to maximize oil production and the wells and other infrastructure needed to retrieve the gas from the reservoir are in place.  ExxonMobil and BP have spent roughly $4 billion developing Point Thomson to the east of Prudhoe Bay to supply about 25 percent of the gas for the AK LNG Project, but that work is also wrapping up as Point Thomson will begin producing about 10,000 barrels of natural gas liquids per day to go into the trans-Alaska Pipeline System this year. Further development will still be needed to equip Point Thomson for gas production and transport to the AK LNG Project, however. Butt said many other LNG projects worldwide have upstream development costs that Alaska does not. Additionally, the Federal Energy Regulatory Commission, as the federal overseer of the project, enjoys the knowledge of known resources and established infrastructure in its decision-making process, he said. Alaska’s relatively close location to Asian markets that will likely be the buyers of from the project is a benefit that has been well documented. Shipping LNG from Alaska to Japan, Korea and China is cheaper and faster than from export projects in the Gulf of Mexico or Australia where competing projects are likely to be. Alaska’s location in the northern hemisphere also allows the project to maximize production efficiency that matches swings in market demand, according to Butt. LNG is produced by chilling natural gas to minus-260 degrees Fahrenheit, which results in a condensed, easily transportable liquid product. Alaska’s cold, dry climate allows liquefaction plants here to produce 10 percent to 15 percent more LNG than comparably sized plants in the Middle East or other warm locales. “Buyers are in the northern hemisphere and they want more LNG in the winter — January and February — when the turbo machinery in Alaska is more efficiently generating LNG,” Butt said. A more efficient process means a more cost-effective project. Those advantages hopefully offset the AK LNG Project’s big but unavoidable disadvantages, he said, which are the North Slope gas treatment plant and the 800-mile pipeline needed to get the gas to an ice-free port. The natural gas coming out of Prudhoe Bay is about 12 percent carbon dioxide; a higher carbon dioxide concentration than the gas source for any currently producing LNG project in the world, he noted. When combined with the 4 percent carbon dioxide gas of Point Thomson, the project will have a blended gas of about 10 percent carbon dioxide makeup. That 10 percent carbon dioxide must be separated from the methane that is the usable natural gas and re-injected into the Prudhoe Bay reservoir. As a result, the project requires an upstream treatment plant pegged at roughly $15 billion. “That’s why there are no projects around the world handling this amount of (carbon dioxide) — it’s very expensive,” Butt said to the Senate Resources Committee. The $15 billion pipeline and associated infrastructure is the other major cost hurdle. LNG projects have been done with pipelines up to about 400 miles, he said, but Alaska’s would be double that. Therefore, minimizing cost by maximizing efficiencies in transportation, design and construction is paramount for a project with tremendous overhead in a highly competitive marketplace, Butt emphasized. Elwood Brehmer can be reached at [email protected]

Alaska Air does it again with record $842M profit in 2015

The State of Alaska might be rubbing pennies together, but its namesake airline is not. Alaska Airlines’ parent company, Alaska Air Group Inc., once again posted record fourth quarter and full-year earnings in 2015. Alaska Air Group executives reported a $186 million fourth quarter profit and a 2015 net income of $842 million in a Jan. 21 investor conference call. The quarterly profit is a 49 percent year-over-year improvement and the full-year return is 47 percent better than 2014. Many domestic carriers have seen profits grow as fuel costs have fallen over the last six quarters; however, Alaska Air Group’s strong performance, led by Alaska Airlines, has withstood high fuel prices as well. The company has now posted six consecutive years of record profitability. Seattle-based Alaska Air Group also owns Horizon Air, a regional carrier that serves Kodiak, Anchorage and Fairbanks. “While every airline has benefited from low fuel prices, Alaska led the industry in many of the underlying drivers of financial performance: areas like operation reliability, customer satisfaction, customer growth, and low fares-low cost,” Air Group CEO Brad Tilden said during the investor call. Alaska’s average fuel cost was $1.88 per gallon in 2015, down 39 percent from $3.08 per gallon a year prior. Tilden noted that markets constituting 95 percent of Alaska Air Group’s revenue would still be profitable at fuel prices of $3 per gallon. Fuel can account for up to a third of a major airline’s operating cost at higher prices. Flight capacity increased 10.6 percent for the year with the addition of 20 new markets in 2015, primarily on the back of 10.7 percent capacity growth by Alaska Airlines. That led to a 33 percent decrease in actual fuel cost. Consolidated yearly revenue was nearly $5.6 billion, up 4 percent from 2014, while total operating expenses fell 2 percent. At $1.3 billion, Air Group’s pretax income was up 35 percent. Air Group also used its strong year to buy back 5.5 percent of its outstanding stock. Since 2007, the company has repurchased 35 percent of its stock, according to Chief Financial Officer Brandon Pedersen. The $842 million full-year profit translated to adjusted earnings of $6.51 of per share, a 56 percent increase over 2014. Alaska Air Group stock sold on the New York Stock Exchange for $72.60 per share at the close of trading Jan. 21. The company also announced on Jan. 21 a 27.5-cent per share quarterly dividend that will be paid March 8. It paid a 20-cent per share dividend in the fourth quarter of 2014. Pedersen said non-fuel operating costs declined 1.3 percent in the fourth quarter and 0.8 percent for the year. “We recognize that low fuel prices will probably not last forever, so we remain focused on creating a permanent, sustainable advantage by lowering nonfuel unit costs and increasing the fuel efficiency of our fleet,” Pedersen said. Alaska Airlines is in the midst of phasing out older, Boeing 737-400s over several years and replacing them with newer, more efficient 737s. Air Group’s fuel burn improved 2 percent per available seat mile in 2015, Pedersen said. That led to an 8.3 percent increase in overall fuel consumption despite the 10.6 percent increase in capacity. Alaska Air Group continued to pay down debt in 2015. At the end of the year its debt-to-capitalization ratio stood at 27 percent, leaving the company in a $300 million net cash position with $686 million in outstanding long-term debt, according to Pedersen. The median debt-to-cap ratio for S&P 500 companies is 45 percent, he noted. “Alaska (Airlines) remains one of only two U.S. airlines to have an investment grade balance sheet,” Pedersen said. The other is Southwest Airlines. Tilden said Air Group’s return on invested capital, or ROIC, was 25.2 percent for the year, up from 13 percent in 2012. He added that the company’s 15,000 employees will share in the record year through $120 million in bonuses expected to be paid this year.

Gov’s foray into ‘fish war’ ill-fated as Maw faces felonies

Gov. Bill Walker’s early foray into the Cook Inlet fish conflict soon after taking office has turned out to be ill-fated as Roland Maw, his one-time nominee to the Board of Fisheries, was charged with residency fraud just a week after a meeting with Walker and the United Cook Inlet Drift Association. Walker met with UCIDA and Maw, the former executive director of the commercial fishing group, on Jan. 6. On Jan. 13, Maw was hit with 12 felony charges and five misdemeanors for claiming Alaska residency to obtain Permanent Fund Dividends and resident rates for hunting and fishing permits. Soon after Maw withdrew his name for consideration to the board last February, the State of Montana pressed similar charges against him a month later and he pled no contest in May 2015. Walker says advisors have told him to stay away from fisheries politics, but from his perspective there are still ideas to discuss and people to see. In a Jan. 26 interview, Walker said he’s been advised to steer clear of the so-called “fish wars” in Cook Inlet in particular, and to an extent he agrees, but said he still has two cents to throw into the Kenai River. “With all that’s going on I should probably stay away from this issue in some respects, all that’s going on in the state as far as the deficit and the budget stuff, but this is a big issue,” said Walker. “When I see this kind of angst among different groups, that’s a process I want to focus on.” Maw’s history with Walker predates his failed nomination to the Alaska Board of Fisheries in 2015 when Walker ousted board chair Karl Johnstone and named Maw as his replacement just days later on Jan. 20. Maw supported Walker in his election campaign, both in fundraising capacity and in direct contributions. He, along with UCIDA president Dave Martin and several UCIDA board members, donated to Walker’s campaign, and was present at a Walker fundraiser in Kenai two days before the Nov. 4, 2014, election. Between 2013 and 2014, Maw donated a total of $1,250 to Walker’s campaign. Walker’s campaign reimbursed Maw $150 on Sept. 29, 2014, for a pair of tickets to the United Fishermen of Alaska annual banquet and $100 for a non-monetary contribution of refreshments for a fundraiser on the Kenai Peninsula two days before Walker’s election according to public disclosures. Due to Maw’s pending charges, Walker’s office said he could not comment on him. “Because of the Department of Law’s charges against him, it would be inappropriate to discuss Roland Maw,” said Katie Marquette, Walker’s press secretary. Apart from meeting with the Walker, Maw was present for an editorial meeting between the board and the Journal in October 2015 at UCIDA’s office in Soldotna. The cover photo on UCIDA’s Facebook page is a photo of Walker and the UCIDA board along with Maw that was posted on Sept. 25, 2015, four months after Maw pled no contest to residency fraud in Montana. UCIDA said Maw has no relationship with the board. He no longer serves as executive director of the board or in any kind of consultant capacity to the board. UCDIA president Dave Martin said Maw only came “as a concerned fishermen” and holds no formal relationship with the organization. “I think everyone is forgetting that the law says innocent until proven guilty, and that’s how people should treat him,” Martin said. Walker said in a telephone interview he’s held dozens of meetings with fishing groups since entering office, as he wants to be equally accessible to all groups in order to facilitate discussion and solutions. “We’ve met with anybody who wants to meet with us on fishing,” Walker said. “I’ve never turned down a request for a meeting on fish issues. I’ve met a lot of people in different positions with different positions. It’s been an open door for me.” Board of Fisheries flap The governor’s public involvement with Maw goes back to a choppy Board of Fisheries appointment process in 2015 that eventually revealed Maw’s Montana licensing charges and exposed gaps both in the vetting process and Walker’s knowledge of fish politics nuance. The seven-member Board of Fisheries has a precarious balance; traditionally, three members represent the commercial fishing industry, three represent the sport fishing sector, and one represents the subsistence fishing community. Walker turned that balance on its head by replacing a sport representative, Johnstone, with a commercial representative in Maw. Cook Inlet fish battles continue to rage about the board’s balance and its political agenda. Commercial advocates allege that sportfishing interests hold too much sway in setting allocations and management. Sportfishing industry voices say it’s only a perception, because the sportfishing sector is the relative newcomer to the Alaska fishing scene previously dominated by commercial interests. Walker’s appointment of Maw in early 2015 split the political schism wide open. In a joint meeting Jan. 14, the Boards of Fisheries and Game voted 7-7 against moving Maw forward to an interview for Department of Fish and Game commissioner. The Board of Game voted unanimously that Maw was qualified to interview for the position, while the Board of Fisheries chaired by Johnstone voted unanimously that he was not qualified. Public outcry followed, alleging that anti-commercial fishing politics had swayed the board to deny a qualified candidate an interview for the top job at ADFG. Walker expressed outrage, drafting a letter to legislative leaders scorning the board’s failure to deem Maw qualified as a potential commissioner even though Walker had already made his preference known when he took office by naming Sam Cotten the interim ADFG commissioner. “Today, I spoke with Chair Karl Johnstone and expressed my sincere disappointment in the recent lack of process demonstrated by the Board of Fisheries,” wrote Walker in a letter to House Speaker Mike Chenault, R-Nikiski. “I expect the Board of Fisheries to hold a fair, transparent, and public process when selecting candidates... It is apparent to me that it is time for a change on the Board of Fisheries.” Walker told Johnstone he wouldn’t renew Johnstone’s appointment, which was set to expire June 30, 2015. Johnstone resigned instead of waiting for his term to end, and Walker quickly filled his absent position by appointing Maw to the seat, subject to Legislative confirmation. The appointment backfired. Maw mysteriously withdrew his name from consideration on the day he was scheduled for a confirmation hearing on Feb. 20, only a few days before it became public that Montana was investigating him for hunting and fishing license fraud. He pled no contest to the charges in May 2015, paid a grip of fines, and had his hunting and fishing privileges revoked in Montana. Montana is part of a network of Wildlife Violator Compact states, which honor such bans among them when implemented in another state. Alaska is a member of the compact. With Maw withdrawn, Walker had to take a second crack at filling the board seat. Walker nominated Robert Ruffner, a Kenai area conservationist and director of the Kenai Watershed Forum, a habitat restoration group. As with Maw, segments of the fishing world said the nomination disturbed the board’s balance of three commercial industry representatives, three sportfishing representatives, and one subsistence representative. Sportfishing interest groups campaigned to paint Ruffner as sympathetic to the commercial fishing industry. The campaign was a success. The Legislature voted against approving him by a 30-29 vote, again to public outcry over the contentious politics of the Board of Fisheries. On his third try, Walker’s office planned to make another board appointment the administration has not acknowledged. Days before the a board nomination was due, commercial fishing group United Fishermen of Alaska forwarded an email to members asking that they call Walker’s office to protest the pending nomination of Bobbi Quintavell. Quintavell is the former senior vice president and chief operating officer of Alaska Native regional corporation Doyon Ltd., and past president and CEO of Arctic Slope Regional Corp. Quintavell’s fishing involvement is limited to her appearance in a Kenai River Sportfishing Association promotional video advocating king salmon conservation entitled “Save Our Kings.” Walker’s office denied that it planned to nominate Quintavell to the position, but former Walker administration employees said the denial covers a hasty decision and an administration leak. Karen Gillis resigned as director of the governor’s Boards and Commissions office, insisting she did it specifically because Walker intended to nominate Quintavell to the board over Gillis’ objections she lacked fisheries experience.  On his fourth try, Walker nominated Bob Mumford, a former Board of Game member with no overt commercial or sportfishing fishing affiliations. Mumford has been serving on the Board of Fisheries ever since and is currently awaiting the approval of 2016 Legislature to continue the post. Board vetting Each governor, and each governor’s Boards and Commissions director, has a different method for vetting applicants. The process of digging into candidate part is largely case-by-case, according to several sources. Gillis served as Walker’s Boards and Commissions director when Maw was nominated to the Board of Fisheries. Gillis did not respond to Journal requests to verify her vetting process at the time. The current Boards and Commissions nomination process is largely subjective, according to Walker’s office, with no defined code or rubric for how appointees’ backgrounds are vetted. Walker’s Deputy Chief of Staff, John Hozey, who took the job in August 2015, months after the Board of Fisheries appointment fiasco, said the governor’s office usually checks a handful of open sources for boards and commissions appointments, including Courtview and social media. There is no concrete red flag that would prevent a nominee’s progress in moving forward; rather, staff judge each nominee individually.  “If someone were an axe murderer, I wouldn’t forward their name,” said Hozey. “It’s so subjective.” Hozey said the office looks for “ anything that might indicate a lack of judgment,” or indicate a position the governor wouldn’t agree with. “We don’t want anything coming up that’s going to embarrass the administration or the Legislature.” The office does not generally check board and commission applicants’ PFD histories or criminal backgrounds from previous states of residency. Walker’s fisheries involvement; Kluberton off the board Walker’s public interactions with Alaska’s fishing world have been limited. For fisheries knowledge, he leans in large part on Alaska Department of Fish and Game Commissioner Sam Cotten, whom Walker appointed in 2015, and Lt. Gov. Byron Mallot. At this point, he said he wants to be a facilitator for communication between user groups, particularly in Cook Inlet. Walker said he has no concrete plans for fisheries, but that he has interest in establishing some kind of informal multi-user group fisheries advisory group similar to the federal Tongass Advisory Committee. The committee advises the U.S. Department of Agriculture Forest Service in young forest management, “emphasizing the need for collaborative, creative and publicly owned solutions to forest management on the Tongass,” according to the USDA website. “I have a lot of faith in Alaskans being able to work things out amongst themselves,” said Walker. “Now is an appropriate time to look at these issues. If I can be a facilitator in some way, I think I’m willing to do that. I’m stepping into areas there’s a lot of passion.” Walker’s “open door” policy means he’s met with dozens of fishing groups, but he said he seems to have had more meeting requests from commercial fishermen than other user groups. “It would appear there’s been more interest as far as contacting me from some of the folks in the commercial groups, but they all have equal access to me.” Apart from the Board of Fisheries flap in early 2015, the only official action he’s taken has been to write a letter to the Board of Fisheries asking that it move the 2017 Upper Cook Inlet board meeting from Anchorage to the Kenai Peninsula. Since then, he said his insistence on the meeting’s location has shifted to “broader solutions.” Walker wrote a letter to the board Oct. 21, 2015, asking it to consider changing the location and promising to attend if it were held on the Peninsula. “There has been much attention given to the controversies surrounding the Cook Inlet fisheries, and I feel we should attempt to improve the communication and exchanges among the many interested parties,” wrote Walker. “Holding a meeting on the Peninsula, possibly Soldotna, may show a willingness to consider points of view from local residents who may not have been able to participate over the past five board cycles.” Walker promised during his election campaign he would not renominate any Board of Fisheries member who voted against moving the meeting to the Kenai Peninsula. When asked if he plans on following through, Walker didn’t renew his promise, but referred back to his removal of Johnstone as board chairman. “Certainly I removed an individual who was lobbying against moving the meeting to the Kenai Peninsula,” said Walker. He said he has since changed his mind about the geographical importance of the meeting; public process is more important. “What I have learned is where a particular meeting is held isn’t as important as people feel that the process is fair,” he said. Walker’s promise to deny reappointment to Board of Fisheries members will have no conclusion, as a board member says he is stepping down voluntarily. Tom Kluberton, a sportfishing representative and board chair, was among those who voted against moving the 2017 Upper Cook Inlet meeting to the Kenai Peninsula at a December 2015 board meeting. Along with commercial fisherman Fritz Johnson, who voted to move the meeting, Kluberton’s three-year term expires in June. Kluberton confirmed in an email that he would not be resubmitting his name for another appointment. The $10,000 per year stipend isn’t worth the “mild PTSD” that can come from a single board meeting packed with impassioned fishermen, he wrote in an email. With the marathon Upper Cook Inlet meeting coming next year for whoever Walker names to replace Kluberton, all stakeholder groups will be watching closely. “I am proud to have contributed to the task but cannot fit that much effort, for so little compensation, into my life without feeling the effects of the sacrifice on my family and myself,” wrote Kluberton. “My second term ends this spring. I feel I earned my little bit of money; I have never worked harder, or withstood more stressful situations for less. I’m done.” DJ Summers can be reached at [email protected]

North Pacific council keeps up work on Gulf bycatch plan

The North Pacific Fishery Management Council will meet in Portland, Ore., Feb. 1-9 to discuss changes to Gulf of Alaska bycatch management, Bering Sea yellowfin sole management, and halibut management framework. The council is one of eight regional fishery councils oversees federal fisheries within three to 200 miles from the coast. The council will only take final action on two items. The first will set overfishing limits and acceptable biological catches for the Norton Sound red king crab fishery. The second, more involved, will make changes to observer coverage requirements on Bering Sea and Aleutian Islands catcher vessel owners and operators in order to reduce their financial burden. The Bering Sea and Aleutian Islands limited entry trawl catcher vessel fleet has requirements to document halibut bycatch on an individual vessel level. Some vessels, however, are still in the partial coverage category, and even if selected for voluntary full coverage must pay both a partial observer fee and a full coverage fee. Observers employed by the National Marine Fisheries Service live onboard vessels and monitor the amount, size and species of bycatch taken. “Through this action, the council is seeking to provide relief to trawl catcher vessels owners who have voluntarily paid for full observer coverage in addition to the partial observer coverage fee in order to better manage bycatch while complying with existing Observer Program regulations,” reads the council’s report. In an ongoing method to streamline halibut management, the council will also review its Scientific and Statistical Committee’s report on halibut management framework. Halibut are co-managed by the council and the International Pacific Halibut Commission, or IPHC. The council regulates halibut bycatch and sets the harvest split as a percentage between commercial and charter fishermen in the Central Gulf of Alaska and Southeast. The IPHC sets the overall harvest level among regulatory areas from Northern California to the Bering Sea, which includes the directed harvest, bycatch, wastage and sport take by both charter and unguided anglers. The co-management has proven problematic, creating a situation in which more halibut are taken as bycatch than by the actual halibut fishermen in the face of a shrinking supply of legally harvestable fish. In an effort to reduce this bycatch and provide for halibut fishermen, the council is reviewing ways to better cooperate with the international commission. The halibut management framework looks to identify each governing body’s scientific methods, fill gaps between council and commission process where the methods are not consistent, and potentially create a loose collaborative process to improve communication channels. The council will also review a discussion paper for the Gulf of Alaska’s groundfish fisheries.  The discussion paper includes several alternatives to lower bycatch in the Gulf. Creating some kind of vessel and processor cooperative system in the Gulf is the council’s preferred alternative. Cooperatives are thought to share information about high bycatch areas than individual vessels, theoretically leading to lower overall bycatch rates. In the Bering Sea and Aleutian Islands fisheries, groundfish fishermen are encouraged to belong to a cooperative rather than fish alone; the council engineers the cooperatives to incentivize bycatch reduction by giving them more flexible management than individual vessels. Vessels that choose not to participate in an incentive plan agreement through cooperatives receive a smaller bycatch allocation than those who do. Other options would create a system of shoreside processor allocations based on fishery dependency, among other factors. Some would install safeguards against overconsolidation of groundfish and bycatch quota. Shoreside processors, the lifeblood of many Gulf of Alaska coastal communities, are concerned that bycatch management could limit the amount of groundfish they process by closing fisheries before the full harvest is taken. Preventing overconsolidation of the fishing fleets is of particular concern to Kodiak, which was particularly devastated by the rationalization of the Bering Sea and Aleutian Islands crab fishery. The fleet shrunk by two-thirds in the first season as quota was consolidated to fewer vessels and some 1,000 crew jobs were wiped out. The paper also includes options to allow trawlers to fish at slower speeds. Shorter seasons for certain groundfish lead trawlers to race to catch as much as possible, lowering the caution in regards to bycatch. In several of the options, the council would require 100 percent observer coverage for all Gulf of Alaska trawlers. In the case of catcher-processors, the council could require two observers per vessel as is in place for catcher-processors in the Bering Sea and Aleutian Islands fisheries. A discussion paper on the Bering Sea and Aleutian Islands yellowfin sole fishery will determine whether the fishery will be reserved for a predetermined group of historical participants. In the Bering Sea and Aleutian Islands, the yellowfin sole fishery stands as one of the last remaining fisheries without a comprehensive limited entry system. The paper examines the effects of creating a limited entry system for the offshore yellowfin sole fishery in this area. The closure of the area to new participants has both economic and environmental implications. In 2015, several yellowfin sole vessels told the council new entries to the fishery were downsizing their historical harvest rates and contributing to a greater halibut bycatch level. Yellowfin sole, a groundfish, has one of the highest rates of halibut bycatch in the North Pacific. DJ Summers can be reached at [email protected]

BP to cut Alaska workforce by 13%

BP is cutting 4,000 jobs worldwide and some of those reductions will be in Alaska. An intra-company email obtained by the Journal sent to BP Alaska employees Jan. 12 states that the company plans to reduce its total in state workforce by 13 percent. All employees should know their status by early spring and the majority of layoffs will be conducted by mid-year, according to the email. BP directly employs about 2,100 people and has another 6,000 contract workers in Alaska, based on the company’s 2015 Alaska Hire report. The 13 percent reduction will come from the company’s direct employees, or about 270 people. “Today, the cash we generate from our business is not sufficient, meaning we have to borrow from the BP Group to meet our Alaska investment,” the email reads. “Improving our cost base is critical to maintaining our activity level at Prudhoe Bay and the long-term viability of the region.” In a formal statement BP said it plans to further reduce employee numbers in its upstream division to less than 20,000 — the Gulf of Mexico, Lower 48 onshore and Alaska in the U.S. — to simplify its business, cut cost and improve efficiency. “To reach this level we will need to reduce our current workforce of BP employees and agency contractors by at least 4,000 additional people,” the company said. BP’s restructuring comes as the price for Alaska North Slope oil has fallen to near $31 per barrel. At the same time, North Slope crude production and transportation costs are estimated at $46 per barrel, according to the state’s Fall 2015 Revenue Sources Book. BP cut 475 Alaska positions in late 2014 when it sold North Slope assets to Hilcorp Energy. About 200 of those employees ultimately transitioned to work for Hilcorp, a Houston-based independent. ConocoPhillips announced a 10 percent cut to its 1,200-employee Alaska workforce last September in a cost-cutting move. BP has incurred pre-tax damages upwards of $55 billion related to the massive 2010 explosion and subsequent oil spill from its Deepwater Horizon drilling rig in the Gulf of Mexico, according to the company’s third quarter financial report. Overall oil and gas industry employment was down 900 jobs statewide in November from a year prior, based on preliminary Labor Department numbers. Elwood Brehmer can be reached at [email protected]

Real estate market forecast sees softening in Anchorage

Anchorage’s commercial and residential real estate market looks to be relatively stable this year, although some softening is expected. Local realtors and brokers gave their best estimates for different segments of the Anchorage bowl real estate market at the annual Building Owners and Manager’s Association forecast luncheon Dec. 8. The overall office vacancy rate for Class A office space is projected to rise, on average, from 6.8 percent in 2015 to about 7.6 percent in 2016, but Anchorage is still doing well compared with the national average office vacancy a rate of 13.4 percent average, Per Bjorn-Roli, with Reliant LLC, told those at the BOMA luncheon. Lease rates are expected to remain stable 2016, at an average of $2.95 per square foot for all types of properties, Bjorn-Roli said. “The market will be a little softer, however, and tenants will be well positioned to ask for concessions like free rent periods and property improvements,” he said. “This happened in 2011, too,” when the local market was coming out of a mild downturn. About 157,000 square feet of new office space was added in 2015 in the Anchorage area with much of that in the Cook Inlet Region Inc. and Kuukpik Corp. new buildings in Anchorage’s Midtown. However, 30,000 square feet of the 157,000 square feet of space added in 2015 was absorbed by market growth, he said. Class A office space Downtown is actually tighter now than a year ago, he said, with 2.7 percent of space vacant now compared with 2.9 percent a year ago. In Anchorage’s Midtown, however, the vacancy rate for Class A space is up to 10.3 percent from 6.3 percent a year ago, with this mainly due to the CIRI and Kuukpik building additions, Bjorn-Roli said. Meanwhile, no major new commercial office projects are planned for 2016 and that should basically keep the market steady, with normal growth gradually absorbing the vacant space available. However, if the Legislature really follows through with its threat to cancel the lease on the new Legislative Information Office building on 4th Avenue it would open up a large block of Downtown space. Legislators are interested in moving the Anchorage  legislative offices to the state-owned Atwood Building on 7th Avenue, but this issue is far from settled. Many features of the new LIO building were custom-ordered by legislators, and that could impose conversion costs if there are new tenants. Bjorn-Roli said the financial shortfalls affecting state government won’t have any immediate effects on the commercial office space market because the state has the cash reserves to buffer shortfalls, at least for the next two years. “We see a two-year window for cuts and adjustments,” he said. “However, there is a dramatic increase in the ‘concern’ index.” But there is time for the adjustments and any impacts will be spread out. “State spending is a major driving force in the office market,” Bjorn-Roli said, so the magnitude of budget cuts will be watched closely. What may also cause effects would be reductions in oil and gas industry activity, but it’s hard to forecast this. BP has announced a workforce reduction, for example, but BP owns its office building in Midtown, so the reduction wouldn’t immediately affect the office market, he said. “We see few effects in 2016 but in 2017 it may become an issue,” he said. “Our conclusion overall is that the Anchorage area office market it healthy and stable, with some softening expected,” Bjorn-Roli said. It’s a similar story for markets for retail space market, Brandon Spoerhase, with BSI Commercial Real Estate, told those at the BOMA luncheon. Retail space markets are holding steady with lease rates overall averaging $1.55 per square foot in older buildings and a $2.65 per square foot average rate for newly-built space, said Spoerhase. The fourth quarter 2015 vacancy rate estimated at 5.5 percent compares very favorably with the national average of 11.3 percent, he said. Retail profit margins continue to be healthy, as demonstrated by national clothing retailer H&M’s 2015 opening in Dimond Center, which was the second most successful in the company’s history, Spoerhase said. Two major retailers still looking at Anchorage include Whole Foods, the upscale grocery chain, and Victoria’s Secret, the womens’ apparel chain. New arrivals include three national food chains, Smash Burger; Sonic Drive-In, Dave & Busters. One open space being eyed by national retailers is 40,000 square feet available at the former Carrs’ grocery store space in the Mall at Sears in Anchorage’s Midtown, Spoerhase said. Meanwhile, major malls like the downtown 5th Avenue mall, Glenn Square and Tikahutnu Commons in northeast Anchorage, have little or no remaining space, Spoerhase said.  “Glenn Square still has a couple of ‘pads’ still available, but the hunt is on for a food retailer that won’t compete with the existing food retail tenants,” Spoerhase said. The Fifth Avenue Mall is essentially full, and new retail growth has spilled out into adjacent space along 5th and 6th Avenues, he said. Meanwhile, Pfeffer Development’s U-Med retail development on Alaska Pacific University lands in the Midtown university and medical district is still set for a 2016 or 2017 groundbreaking, Spoerhase said. This is a build-to-suit development project, he said. Overall, BSI sees no significant change in the retail market in the next 12 months, Spoerhase said. In commercial construction, a number of small to medium-sized private and institutional new buildings and school projects are planned for 2016, Jonathan Hornak, of Cornerstone General Contractors, told those at the BOMA luncheon. Hornak ticked off a number of medium-sized projects expected to be underway this year, such as a $17 million Anchorage Museum addition. No major new projects are pending, he said. Four projects in the “rumor” category, which Hornak left unidentified, at least at the BOMA luncheon, include a reported 9,000-square-foot building in Wasilla and three buildings in Anchorage, one 6,000-square-foot facility, a second at 50,000 square feet and a third reported at 60,000 square feet.  Residential real estate meanwhile remains tight, as it has for some time. Speaking to both rentals and homeowner properties, Tyler Robinson, of Cook Inlet Housing Authority, said the apartment vacancy rate in Anchorage remains below 5 percent, but things are looser in the more expensive categories. “We haven’t seen many effects yet overall,” from low oil prices and tightening state budgets, “but we are starting to see impacts at the higher end of the market,” Robinson told those at the BOMA luncheon. Rents have been increasing for several years, with the average in 2012 for a two-bedroom apartment at $1,300 a month, up from $800 a month in 2000, he said. As for single-family homes, the average sales prices today is about $370,000, up from $188,000 in 2000. The tight supply is mainly a factor of inadequate building of housing. “Studies have indicated we need to be building 900 housing units a year, in all segments of the market, to keep up with demand. We’re actually building about 300 a year, so there’s a shortfall,” that translates to a very tight market, Robinson said. The Municipality of Anchorage hasn’t been a real help in this because developers get wrapped up in red tape and delays. One major apartment developer has struggled to get permits for a 36-unit project. In contrast, in other states, developers and working with local governments and nonprofits on a wide variety of projects that are often linked to green space and urban amenities and retail. Robinson mentioned an Oklahoma City riverwalk project that matched urban recreation and greenspace with mixed urban and retail development in an attractive project. Accomplishing that took partnerships, he said. In Anchorage, many private developers, “don’t feel welcome,” Robinson said.

IG finds no bias in EPA Bristol Bay assessment

The Bristol Bay Watershed Assessment is on the up-and-up, at least according to the Environmental Protection Agency Office of Inspector General. Based on “obtainable records,” an Inspector General report issued Jan. 13 found no bias in how the EPA conducted its lengthy assessment of the potential impacts of mining within Bristol Bay watershed. The agency’s assessment process also met requirements for peer review and public involvement and followed appropriate procedures for verifying the quality of the information in the assessment before 1,000-plus page document was released to the public in early 2014, according to the report. While the report absolves the agency of misconduct regarding alleged bias, it notes that 25 months worth of missing government emails from the retired employee believed to be retired ecologist Phillip North could not be recovered and evaluated. Further, the IG notes that North used nongovernmental email to comment on a draft 404(c) petition submitted to the agency from tribes before it was officially submitted to the EPA. “We found this action was a possible misuse of position, and the EPA’s senior counsel for ethics agreed,” the report states. “Agency employees must remain impartial in dealings with outside parties, particularly those that are considering petitioning or have petitioned the agency to take action on a matter.” The 17-month IG review of the agency began in May 2014 and focused on the process used to develop the assessment. Its conclusion contrasts with a recent report authored by former Secretary of Defense William Cohen that was critical of the EPA’s process, finding the agency to be cozy with scientific and local Alaska Native groups that oppose Pebble Mine.  “EPA is pleased that the Inspector General’s independent, in-depth review confirms that our rigorous scientific study of the Bristol Bay watershed and our robust public process were entirely consistent with our laws, regulations, policies and procedures and were based on sound scientific analysis,” EPA Region 10 Administrator Dennis McLerran said in a formal statement. “We stand behind our study and our public process, and we are confident in our work to protect Bristol Bay.” The Bristol Bay Watershed Assessment ultimately determined that large-scale mining in the region would irreparably harm Bristol Bay’s world-class salmon fisheries that currently support much of the areas economy. Subsequently, the EPA used the assessment as its basis for using its Clean Water Act Section 404(c) authority to prohibit a large mine in the watershed, a proposal that would effectively kill the prospect of developing Pebble Limited Partnerships premier copper and gold deposits. The 404(c) action is on hold as a federal court tries to determine what the IG’s office and former Secretary Cohen could not agree on: whether the EPA conspired with Pebble opposition to reach the conclusion in the assessment. Pebble sought and received an injunction to halt the EPA’s work until the court case is resolved. Pebble CEO Tom Collier called the IG report an “embarrassing failure” and a “whitewash” in a formal statement. “Based on a limited number of documents received through (the Freedom of Information Act), we were able to place in front of the IG incontrovertible evidence that EPA had reached final decisions about Pebble before undertaking any scientific inquiry; that it had inappropriately colluded with environmental activists; that it had manipulated the scientific process and lied about its intentions and actions to both us and to U.S. Congress,” Collier said. “Just as importantly, our record shows that these abuses reach to the highest offices within the agency.” Officials from the EPA’s offices of the Administrator, Region 10, Water, Research and Development and a retired Region 10 ecologist, presumably Phil North, were interviewed for the IG report. Additionally, more than 8,300 emails sent or received by agency officials between January 2008 and mid-May 2012 were reviewed. North, who retired from the EPA in April 2013, has received national notoriety for his involvement in the Bristol Bay Watershed Assessment. Pebble supporters and general EPA critics have zeroed in on him as the likely link for the alleged collusion with mine opponents. Attempts by the IG to access North’s personal email through subpoena were unsuccessful, as his whereabouts are unknown, the report states. Because the IG could not find North, the office issued a subpoena to North’s lawyer, who refused to accept service on behalf of North. North also did not surface when subpoenaed for deposition last November in Pebble’s ongoing suit against the EPA in federal court. The IG recommended to the EPA that the agency incorporate examples of “misuse of position” in its ethics training as well as mandatory tribal training to define appropriate parameters for Tribal assistance by agency staff. Elwood Brehmer can be reached at [email protected]

Judge hits both sides in Anchorage LIO suit

A lawsuit challenging the legality of the Anchorage Legislative Information Office lease will continue, but neither side came out of a court ruling unscathed. Anchorage District Superior Court Judge Patrick McKay wrote in a Jan. 7 order denying a defendants’ motion for summary judgment that the filer of the suit, Anchorage attorney James Gottstein, waited an unreasonably long time to file the suit. At the same time, McKay found that the Anchorage LIO owners could in a roundabout way benefit from the building lease being voided. The building is owned by 716 LLC — the Downtown Anchorage LIO address — a real estate partnership in which longtime Anchorage developer Mark Pfeffer is a primary member. Gottstein filed the suit on March 31, 2015, claiming the 10-year, $281,638 per month lease the Legislative Affairs Agency agreed to is illegal because it is not 10 percent below market value, a requirement for state lease extensions that do not go through a competitive bidding process. Legislative Affairs and 716 West Fourth Avenue agreed to expand and renovate the old 23,600 square-foot Anchorage LIO in September 2013 and Gottstein became aware of the agreement a month later; however he did not file suit at that time despite expressing concerns over the legality of the agreement, according to court records. Construction commenced in December 2013 and the new 64,000 square-foot building was finished in January 2015. Gottstein contends on his office’s website that the lease, which he claims equates to $7.15 per square foot, is well beyond the market rate of about $3 per square foot for Downtown Anchorage office space. On a total square-foot basis, the monthly lease works out to about $4.40 per square-foot, while the usable square-foot lease rate is higher. Pfeffer told the Journal in a previous interview that the building was renovated specifically to meet the Legislature’s unique layout and on-site parking requirements and therefore has no equal in the market. The new Anchorage LIO has been appraised multiple times at $44 million by several banks who financed the construction and the long-term debt. Pfeffer, caught in the middle of what has become a political issue, has offered to sell the building to the Legislature for 716’s financial obligation on the building — about $37 million — or millions less than its appraised value. An appraisal of the LIO conducted by the Alaska Housing Finance Corp. estimated the value at $48.5 million. McKay’s order notes that Gottstein, president of the adjacent Alaska Building Inc., collected $25,000 in fees and rent from 716 and the contractor before filing the suit. “The court views Mr. Gottstein’s financial gains as acquiescence and, combined with the 17 months (he) waited to bring the lawsuit, this delay seems ‘unreasonable,’” the judge wrote. If the lease is found “illegal, null and void,” 716 and Legislative Affairs could renegotiate to a rate 10 percent below market value, which could force Pfeffer and his partners to refinance the building over a longer term and thus incur harm, the order reads. Additionally, the building’s unique characteristics may not find anyone to lease the full space on similar terms and incur harm that way. “On the other hand, in the event that the court declares the lease ‘illegal, null and void,’ and the parties are unable to reach a new agreement, 716 will be able to lease the building at a greater rate since it claims the current rate is 10 percent below the market value,” Judge McKay wrote. “Indeed, 716 may even benefit from a finding that the lease is ‘illegal, null and void.’” In its arguments, Legislative Affairs argued it could be harmed because of the $7.5 million the Legislature contributed to the building improvements. McKay wrote that if the lease is found null and void, “the Alaskan taxpayers will be saving potentially much more than the original $7.5 million. It remains a question of fact whether the LAA would ultimately forfeit the original $7.5 million it spent on improvements since the lease makes no specific mention of such a contingency.” Impact of LIO move The messy Anchorage LIO situation has become political, with Anchorage minority Democrats and legislators from outside the city saying the state should break its lease because it cannot afford the building when Alaska is facing a $3.5 billion annual budget deficit. During a Dec. 19 meeting at the Anchorage LIO, the Legislative Council, which directs the Legislative Affairs Agency, voted to move out of the building unless a lease rate equal to what the Legislature would pay in the state’s nearby Atwood Building can be negotiated. Breaking the lease would technically be legal because of a “subject to appropriation” clause that voids the lease if the Legislature votes to not fund it. Pfeffer, some legislators, and state financial experts have warned that walking away from a roughly $26 million remaining obligation would hurt the state’s credit rating at a time when Standard & Poor’s just downgraded Alaska’s debt rating because of its fiscal problems and current lack of a plan to address them. “716 has acknowledged that the State is in a different fiscal environment now than when the lease was legally signed in 2013. Mindful of this reality, 716 West Fourth Avenue, LLC has indicated its willingness to work with the Alaska Legislature to find a pathway to savings,” spokeswoman Amy Slinker said in a formal statement. Gabe Petek, Standard & Poor’s primary credit analyst for Alaska, told the Journal Jan. 8 that the state walking away from a subject-to-appropriation lease likely wouldn’t impact rating agencies’ view of Alaska because the action is a way to reduce spending in the larger budget picture. “In a perverse sort of way it can be a strengthening — (legislators) have the ability when push comes to shove to push things around a little bit. People on the other end of it may not like it, but from the standpoint of the investors and the bondholders it can actually be a protective attribute, I guess,” Petek said. “We’re primarily focused on (the state’s) ability to fund their debt payments in full and on time on their debt that’s out in the public debt markets.” Elwood Brehmer can be reached at [email protected]

Smaller budget means ADFG can’t fix faulty Susitna counts

The Alaska Department of Fish and Game cannot undo a set of Cook Inlet driftnet restrictions in place over the last 25 years. Cook Inlet driftnetters say restrictions unjustly keep them from millions of dollars of sockeye harvest based on faulty data. Protective measures for Susitna sockeye, a designated stock of concern, keep drifters in specific corridors in Cook Inlet from July 9 to 31. Fishermen say the decades have added up to thousands of available sockeye — and millions of dollars — they didn’t need to forgo.  The department, the fishermen believe, has no reason to continue the restrictions. ADFG managers say they have no money or resources to make the adjustments. “When they redid the sonar, they found out they were in effect, under harvesting those stocks and overescaping,” said Erik Huebsch, vice president of United Cook Inlet Drift Association, an industry group. “They knew they were managing way too conservatively based on that. Why didn’t they change the management to ratchet it up any more if they knew they were managing too conservatively?” The Alaska Department of Fish and Game, or ADFG, says the driftnetters’ concerns are well-founded. “They have a legitimate question and concern to have some restrictions removed when there’s going to be a surplus,” said Pat Shields, ADFG’s commercial manager for Upper Cook Inlet. However, apart from three lake-based escapement goals, though, Shields said there’s nothing on which to base new management. “Right now we don’t have a tool other than those three weirs. With the funding we’re looking at right now, we’re really challenged to find a new method.” The study A 2009 study presented to the Board of Fisheries discredited the basis for the drift fleet’s restrictions. In 1981, ADFG installed a Bendix sonar system at the mouth of the Yentna River, a Susitna River tributary. Susitna sockeye stock is particularly difficult to enumerate; the river is wide and murky, and a multitude of the other salmon species — pink, chum, coho, and chinook — fog the sonar numbers trying to pinpoint sockeye. To mitigate, ADFG based much of Susitna sockeye management on the Yentna River’s sockeye escapement, figuring the river accounted for roughly half the overall Susitna’s. Since the 1981 Yentna Bendix start date, the river’s measurements have always seemed off, frequently missing the sustainable escapement goal. During the 1989 Exxon Valdez oil spill, the Cook Inlet drift fleet was closed by emergency order, but the Yentna sockeye escapement remained largely unchanged from other years. By 2006, five of the last nine years had failed to make the sustainable escapement goal of 90,000 to 160,000 sockeye. Eventually, the department got curious enough about the chronic underperformance to question the method. Using extra funds from various sources including the Cook Inlet Aquaculture Association, the department stacked the Yentna with extra counting methods like fish weirs, DIDSON sonar, and mark-recapture studies, to compare the results to the Bendix sonar. The results punctured the decades of Yentna Bendix counts. “There is little confidence in the reliability of the Bendix sonar estimates,” the report reads. “Since 2006, when additional escapement studies began, Bendix sockeye salmon estimates have ranged from 56 percent to 76 percent of the DIDSON estimate, and just 31 percent and 32 percent of the Yentna River mark-recapture estimates in 2007 and 2008.” The board made a major change to the river’s management in 2008 by declaring Susitna sockeye a “stock of concern” just before the 2009 study came out. That year, the Bendix sonar counted 90,000 compared to more than 130,000 that both DIDSON sonar and weirs counted and well within the sustainable escapement goal. The stock of concern designation placed additional restrictions on the Cook Inlet drift fleet to protect the erroneously underestimated Susitna sockeye. After the report, ADFG changed the escapement goals from the Yentna River’s Bendix-based goal to a series of goals on nearby Chelatna, Judd, and Larson lakes. The stock of concern designation and its resulting drift restrictions, however, remained. “The department recommends Susitna River sockeye salmon remain classified as a stock of yield concern because: 1) five of the escapements (out of 15 total) have been below the minimum goal, and 2) harvests in Central and Northern districts from 2008 through 2013 were generally less than the long-term averages. Research studies are ongoing to better understand sockeye salmon abundance and distribution.” No change ADFG managers say they understand the frustration of the drift fleet, but that they have no workable solution to establishing a new management plan. Though the Bendix sonar has been discredited, they have no better system on which to base a new set of restrictions. “We just felt we couldn’t do it,” said Shields. “The Bendix sonar had a goal, and it became apparent that in some years those restrictions would not have been necessary because we were underestimating the escapement. We just didn’t have any way to come up with a correction factor.” The Bendix-challenging study was completed with extra-departmental funds, and ADFG’s budget is being reduced like many agencies in the fiscally embattled state. Without money for new DIDSON sonar or new weirs, the department doesn’t have any new information. Part of the issue is the lake-based escapement goals, derived from weirs on Chelatna, Judd, and Larson lakes. The lakes are far enough from the drift fleet — roughly two weeks, as the salmon swims — that day-to-day, adaptive management like the Kenai River’s would be impossible. Erik Huebsch, UCIDA’s vice president, said ADFG’s money problems offer a convenient scapegoat for apathy. It takes no money, he said, to delist Susitna sockeye as a stock of concern and remove Cook Inlet drifters from the consequent constraints. “The department gets stuck on these little tracks because they don’t want to do anything different,” Huebsch said. DJ Summers can be reached at [email protected]

ADFG insists studies were used despite going unpublished

Use it, then lose it, was the fate of a long-delayed Kenai River habitat study until the Alaska Department of Fish and Game finally published it last fall. A 14-year publication delay on a Kenai River habitat study has made ripples through ADFG and the Cook Inlet fishing sphere as officials have acknowledged that taking so long to finalize the report was a mistake but insist they still used the report’s recommendations in management plans. Some commercial fishing stakeholders have alleged the report’s delay was politically motivated because it found adverse impacts to habitat caused by shoreside angling, while ADFG maintains it was a simple lapse. “It’s not uncommon for reports to get stacked up,” said ADFG Commissioner Sam Cotten. “There’s no knowledge of holding back information or anything other than a tardy report.” Cotten also dismissed speculation that Gov. Bill Walker had learned of the report and ordered its publication. “He would have had to act through me to do that, and that certainly didn’t happen,” said Cotten, who had a briefing from ADFG division directors prior to an interview with the Journal. Walker’s office also denies he had anything to do with the report being published. The study was part of a series that produced five annual reports from 1997-2001. Those between 1997-99 were published within the usual one- to three-year range, but the 2000 and 2001 studies weren’t published until October 2015.  The series was born into a tense political situation around the Kenai River’s user groups — commercial, sport, and personal use. Throughout the 1990s, the Board of Fisheries had been slowly changing Kenai River management plans for the growing sport fishing sector, partly instate and partly tourist driven. At the 1996 Board of Fisheries meeting, the board boosted the sockeye salmon share and slackened bag and possession limits for the in-river sport fishery and personal use fishery at the Kenai River’s mouth. The department and board said they would rethink liberalizations if there were evidence sportfishing contributed to habitat damage. According to the study’s authors, Mary King and Patricia Hansen, the 1997, 1998, and 1999 studies were less precise than the unpublished 2000 and 2001 studies. The cleaner data showed linkages between shore-based angling and riparian habitat degradation. King and Hansen presented the information at the 2002 Board of Fisheries meeting, which Hansen said partially explains the length of the publication delay. Ironically, with the best data having been already presented to the board, publication took a backseat to management. “People felt that that data had been put our there,” Hansen said. “That’s why it took so much longer. We had been improving our methods all along. Our data was less noisy. It was just better data towards the end.” Hansen and other ADFG biologists said the report moved to the bottom of the pile and stayed there. Department staff moved around or retired, so the report didn’t receive continual pressure for publication. Knowledge of the report’s delay surfaced at the Board of Fisheries’ 2014 Upper Cook Inlet finfish meeting. Lisa Gabriel, administrative assistant for commercial fishing industry group Kenai Peninsula Fishermen’s Association, submitted a statement to the board asking why the board had not completed any further habitat studies. Gabriel’s insistence prompted the department to move the report forward for publication. “We did want to get this out of our hair,” said Hansen. “It shouldn’t have taken that long, it was a bad thing on our part.” Forrest Bowers, director of ADFG’s Commercial Fisheries Division, said he’s familiar with the King and Hansen study. Bowers’ feelings on the report’s 14-year publication delay are mixed. ADFG often shelves studies; however, he said that betrays an obligation the department has to the public. “If we undertake a report or a study, it’s our intention and our obligation to the public to publish it for peers,” Bowers said. “But sometimes the timelines do get drawn out. I’ve been involved with reports earlier in my career where it took several years to get those reports out for one reason or another.” While he recognizes the need for timely publication, also knows studies can impact policy without being formally published. “Just because a report hasn’t been published, doesn’t preclude us from acting on any of the findings,” he said. The department maintains that the 2000 and 2001 studies weren’t published because the concerns were already beginning to be addressed. ADFG biologists said the department regularly considers habitat, and that the delayed reports don’t represent the totality of effort put into protections. “Everyone is aware of habitat issues,” said Hansen, who still works as a statistician for ADFG. “That’s just something everybody works with in mind. No habitat, no fish.” ADFG chief fisheries scientist Jim Hasbrouck said he couldn’t remember specifically which programs the department began as a result of the study. Habitat restoration projects were ongoing at the time and hard to tie to one origin in particular. “I don’t know that walkways were in specific response,” said Hasbrouck, referring to structures along riverbanks that were constructed to preserve habitat. “I think some of that was just a recognition that things like bank restoration projects would be good for the environment. There were stream bank closures that were done prior to 2001. I don’t know that there are specifics in Mary’s report, but there is a relationship there. It did provide information to the board.” According to Robert Begich, ADFG’s Kenai River area sportfishing manager, the department had already begun implementing some of the report’s recommendations by the time it was presented to the Board of Fisheries in 2002. “There’s a whole bunch of studies that aren’t published,” said Begich, “but the information is still used. Some of the properties the project was working on were closed. River Mile 25 was in the study, it’s a habitat closure now.” Begich said other habitat-related studies in the area were similarly used without publication. A study on Slikok Creek riparian habitats in the early 2000s wasn’t published, but ADFG nevertheless installed a recommended culvert in 2006. Continual water quality and habitat studies prompted the department to ban two-stroke engines in the Kenai River Special Management Area in 2008 along with assorted horsepower and length restrictions for powerboats. “These reports are all still germane to how the river is managed today,” Begich said. Unpublished scientific papers, called “gray literature,” are a divisive issue within the academic community. Without peer review, some question whether the studies meet the strictest scholastic muster. Former ADFG biologist Ken Tarbox said the delayed publication is evidence of ADFG shaving become less transparent. “They’re missing the purpose of science,” Tarbox said. “Science is supposed to put your information out there reviewed by peer reviewers and other scientists.” Even if ADFG uses the information in gray literature, Tarbox said the department does a disservice by ignoring the rest of the scientific community. “There are errors of omission,” he said. “You’re assuming you know everything that needs to be done, which is very arrogant.” DJ Summers can be reached at [email protected]

MEA says economics of single transmission co. overstated

Matanuska Electric Association is questioning the benefits of transferring regional transmission infrastructure to a single utility. In a Dec. 29 letter to the Regulatory Commission of Alaska chair T.W. Patch, MEA General Manager Joe Griffith cited eight reasons why the Southcentral electric utility believes forming a Railbelt electric transmission company could be unnecessary and possibly add costs to participating utility ratepayers. Among the issues raised by MEA is the utility’s belief that a $903 million estimate for needed performance and reliability upgrades to the Railbelt electric system is a “grossly inflated number,” the letter states. The hefty sum is based on reliability standards that don’t return a justifiable value, according to Griffith. He said in an interview that all the Railbelt utilities — there are six — could reap significant benefits from as little as $50 million invested strategically. “The ($903 million) study was done properly for the boundaries and conditions they studied it under,” Griffith said. “It isn’t a bogus study; it’s probably right, but the first question you have to ask is, ‘Do we need it?’” The Alaska Energy Authority commissioned the 2013 study that came to the $903 million conclusion. It was based on a single-loss contingency standard, known in the industry as N-1, meaning the entire Railbelt electric transmission system, from Fairbanks to Homer, would be able to absorb the loss of a single transmission line or substation without consequence. The authority is currently updating that study to include double contingency and status quo costs; that study is expected in March. MEA uses an N-1 standard in its system, Griffith said, and his letter noted that while system-wide planning for a single contingency is prudent, the utilities have consistently determined the cost of reliability improvements is not justified. The 173-mile, state-owned transmission intertie is a single line between Willow and Healy, and a lone connection ties Anchorage to the Kenai Peninsula. Adding redundancy to the interties would allow for the cheapest power to flow freely and continuously, but because each utility has its own generating capacity, improved reliability is not imperative. The utilities are working to finalize a set of system-wide reliability standards that will go a long way towards determining what level of contingency planning will be used where, according to MEA representatives. Griffith concurred with other experts in the field when he said loosening access to Bradley Lake, the 120-megawatt state-owned hydro project near Homer, is the Railbelt’s most pressing need. A lone upgrade of the single-line intertie between Anchorage and the Kenai Peninsula from the decades-old 115-kilovolt line to a 230-kilovolt line would de-constrain Bradley Lake and add needed capacity to the transmission system, not unnecessary reliability, he said. Griffith ballparked a southern intertie upgrade cost at about $50 million. AEA has estimated that full investment to add capacity and reliability to the system could save Railbelt ratepayers between $80 million and $240 million per year simply by accessing the lowest cost power through economic dispatch. MEA contends those cost savings are unsubstantiated. The RCA demanded the Railbelt utilities move to establish a united electric system last June. In a letter to legislative leadership, the commission stated it would seek the authority to mandate the utilities to take action if they failed to heed the warning on their own. In December 2014, American Transmission Co., or ATC, a Milwaukee-area transmission-only utility, inquired about the possibility of developing a Railbelt transmission company to spur investment in the system. The utilities ultimately signed a memorandum of understanding with ATC to investigate the feasibility of a Railbelt transmission company, or TRANSCO. A TRANSCO would centralize management of the transmission system and allow participating utilities to invest in, and thus benefit from, projects across the system, not just those in their service area. ATC has experience with the TRANSCO model and would provide access to capital through its Lower 48 investors. The utilities expect to apply for a license to form a TRANSCO in the third quarter of this year, according to a Dec. 22 update report to the RCA. Griffith also noted that adding another utility with its own workforce and rate of return to the Railbelt could actually increase costs to ratepayers. The progress report to the RCA estimates the net cost of a TRANSCO would be about $7 million per year once it is fully up and running. Beyond operational costs, a for-profit TRANSCO would also require a rate of return — another cost to ratepayers, Griffith said. ATC spokesman Eric Lundberg said the company currently earns a 12.2 percent return on its Midwest business, but added that the Federal Energy Regulatory Commission regulates any return in the Lower 48. Similarly, the RCA would set profit parameters for an Alaska Railbelt TRANSCO, Lundberg noted. ATC operates like most utilities in that it seeks long-term business, understanding its return will ebb and flow with market conditions and regulations, he said. “We don’t look to flip investments; we look to be there,” Lundberg said. The “weak link” of a TRANSCO is the inherent incentive to invest in infrastructure because each investment makes a return, Griffith said. A major selling point of a TRANSCO has been the prospect of a single transmission tariff across the Railbelt — the elimination of “rate pancaking” for power producers needing to cross multiple utility service areas to get power to a buyer. Independent power producers have argued the stacked transmission tariffs are an economic barrier to developing low-cost renewable energy in the state’s most populated region. Griffith said a postage stamp tariff would simplify the cost, but is not likely to lower it for everyone because each utility has a different tariff rate. The transmission tariffs are set by the RCA to allow the utilities to service debt on their transmission infrastructure. “You’ve got to recognize the legacy investment each utility has made. If you don’t do that it’s a dead-bang loser,” he said. Turning over transmission infrastructure to a TRANSCO through a lease or direct change of ownership also provides a disincentive for local reliability investments, according to Griffith’s letter to the RCA. “MEA members could be faced with bearing the burden of both the total cost of their own future transmission improvements while subsidizing the system-wide legacy assets largely serving the retail loads of others,” the letter states. System operator benefits MEA’s concerns about forming a TRANSCO do not mean the utility is averse to changing the structure of the Railbelt electric network. Organizing an independent, or unified, system operator, often referred to as an ISO or USO, along with transmission capacity upgrades, would reap the greatest benefits of economic dispatch without adding unnecessary costs, according to MEA representatives.  “(A system operator) is where all the money is because that lets you maximize the efficiency of the (generating) machines as well as the gas contracts and that’s got to be folded into all this because that’s millions and millions of dollars annually,” Griffith said. Southcentral utilities relying on Cook Inlet natural gas as their generating fuel source sign contracts with producers that have a tiered pricing structure — typically base load, swing load and peak load. When demand peaks a utility can pay a 50 percent to 65 percent premium for natural gas. In theory, a system operator acting as a central power dispatcher would work to distribute as much base load power as possible, regardless of which utility owns the generation. MEA spokeswoman Julie Estey said the new, more efficient power plants coming online in the Railbelt — Municipal Light and Power and Chugach Electric Association’s joint Southcentral Power Plant and MEA’s Eklutna Generating Station — have already started this coordination between the utilities in an informal “loose pool.” For example, the 10 small generators that power the 171-megawatt Eklutna Generating Station can be powered up and down to meet fluctuating demand more efficiently than some of the larger gas turbine generators at other power plants in the region, Griffith said, so the utilities purchase power amongst themselves without a structured agreement. MEA’s vision of a system operator would have each participant represented on a board of directors, with board seats for independent power representatives as well. Alaska’s independent power producers often contend that the utilities control the Railbelt system and have pushed for a system operator to make dispatch decisions separate from the utilities. Estey, of MEA, said other issues the independent power producers raise with the utilities, such as who pays for interconnection fees to independent power sources, would likely be solved with a system operator. “It seems to me there has been more unified support (from the utilities) around a system operator, but ATC has been doing such a good job of driving the utilities around the TRANSCO model that that seems to be making more progress and has more legs, but that’s because more resources have been put into it,” Estey said. Elwood Brehmer can be reached at [email protected]

Walker announces hiring freeze as S&P downgrades Alaska

Standard & Poor’s officially downgraded the State of Alaska’s credit ratings Jan. 5, citing bottom-of-the-barrel oil prices that continue to balloon the state’s budget deficit. The downgrades drop the state’s general obligation debt rating from AAA to AA+; state appropriation-backed debt from AA+ to AA; and the rating on some moral obligation-backed bonds from the Alaska Energy Authority from AA to A+. S&P also attached a negative outlook to each rating. “The rating actions reflect our view of the state’s credit quality as oil prices have continued to slide, falling below forecasts from earlier this year, causing an already large structural gulf between unrestricted general fund revenues and expenditures to widen further,” said credit analyst Gabriel Petek in a release. S&P noted that in the state’s fall revenue forecast released Dec. 8 the anticipated average price for a barrel of oil this fiscal year was revised downward from $66.03 to $49.58 per barrel, translating to a downward revenue adjustment of about $600 million. “With just $1.6 billion in unrestricted revenue for the year, the state’s updated fiscal gap has ballooned to an estimated $3.55 billion,” S&P wrote. “More recent spot price trends have fallen even further, to below $40 per barrel as of mid-December, implying an even larger fiscal gap.” Alaska State Debt Manager and Municipal Bond Bank Authority head Deven Mitchell said in an interview that the state could generally see a 0.1 percent increase on interest rates when it tries to sell bonds as a result of the downgrades. Gov. Bill Walker in a press briefing characterized the impact as an extra $1,000 per year on every $1 million the state might borrow. “It’s not that it’s a major downgrade, but it shows a trend and I think that’s what my concern is,” Walker said. “We’re moving down a trail we don’t want to be moving down.” S&P downgraded Alaska’s credit outlook to negative in August, warning Walker and the Legislature to take action to resolve the state’s budget crisis or risk a credit downgrade. The downgrade came before the Legislature convened. Walker noted that while it doesn’t change the Alaska’s situation, the state’s credit rating is still better than about half of the other states across the country. Standard & Poor’s also said it expects Alaska’s credit ratings to continue to fall if the Alaska Legislature does not “enact significant fiscal reforms to reduce the state’s fiscal imbalance.” Walker said he initially thought the rating agency should have at least given the state’s leaders a chance to address the situation, but added he’s looking forward to the legislative session that starts Jan. 19 as an opportunity to prove S&P wrong and fix Alaska’s fiscal gap. “Doing nothing is unacceptable,” he said. Senate Finance Co-Chair Anna MacKinnon, R-Eagle River, said she was disappointed in the downgrade before the start to the session. “Their rationale then was that the legislature needed to take measures to stabilize our fiscal house — yet the legislature has not had a session since that revision to take action,” she said. “When we gavel into session on Jan. 19, the Senate Finance Committee will tackle these difficult issues and work towards balancing the budget.” Walker has introduced a plan involving a combination of higher industry taxes, a state income tax, reduction in oil tax credits and a conversion of the Permanent Fund Earnings Reserve into a funding stream for the annual budget as a means to close the fiscal gap. The downgrades will not immediately impact the state’s plan to sell bonds, Walker said. His administration has plans to build a $500 million, multi-year general obligation bond package to fund essential capital projects across the state during the session. The ratings shift could also have a “fairly significant” impact on the Alaska LNG Project, Walker said, which the state has a 25 percent stake in, if the downgrades continue and the state goes out to borrow money for the project. He noted that paying for full construction is still several years off, giving the state time to rectify the situation. Borrowing to pay for at least part the state’s share of AK LNG, currently pegged at $13 billion or more for the $45 billion-plus project, would seem to be a certainty. Another proposal from the Walker administration would use pension bonds to lower the state’s annual retirement obligation. Mitchell said the state had been looking at 3.25 percent to 3.5 percent interest rates on 20-year general obligation bonds prior to the downgrade. Hiring, travel freeze State of Alaska jobs are going to be a little harder to come by after Walker’s administration instituted a state hiring freeze and travel restrictions Jan. 5 for all executive branch departments. Walker said during a press briefing that measures mostly already in place to restrict hiring and travel for state department employees were made official during a Jan. 4 cabinet meeting in which about half of his cabinet staff teleconferenced between Juneau and Anchorage. “Each department’s sort of been doing their own thing on travel and hiring so it was time to formalize it so we had some consistency across the table,” the governor said. The hiring freeze applies to all of the roughly 15,000 executive branch employees, except those deemed “essential in protecting the life, health or safety of Alaska citizens,” according to a memo from Walker’s Chief of Staff Jim Whitaker to state commissioners. Those essential positions include Alaska State Troopers, corrections and probations officers and employees providing patient and resident care at 24-hour state health and education institutions. In keeping with all efforts to close the state’s $3.5 billion budget gap, revenue generating and collecting positions are also exempted, as are federally funded state positions and those funded with program revenue. Non-essential travel has been prohibited. The 125 state boards and commissions have been asked to limit in-person meetings to one a year and teleconference otherwise. Alaska has pushed through previous oil price dips that have restricted the state’s revenue stream without cutting its workforce, but Walker echoed petroleum industry analysts when he said this time is different. “In the past we’ve always seen what they call the oil price bounce. There’s no bouncing in this one,” he said. Hiring waivers for department positions deemed essential can be granted on a case-by-case basis Chief of Staff Whitaker. Similarly, travel exemptions can be sought from department commissioners and the state Boards and Commissions director, the memo states. “We have attempted with this policy to balance the need to be efficient while saving money,” Department of Administration Commissioner Sheldon Fisher said at the briefing. “We do not want to in a harmful way impact the ability for departments to deliver their core mission.” Walker said he asked leaders at the University of Alaska and other quasi-state agencies to consider implementing similar measures, though the governor has no jurisdiction over the outlying areas of government. He did not request that the legislative and judicial branches do the same, citing the separation of powers. The governor also said it is too early to tell exactly how much the state will save from the measures. Shortly after Walker announced the hiring freeze, a note clarifying the policy appeared on Workplace Alaska, the state’s job posting website. There were 129 general state positions and nine positions specifically for current state employees posted on the site late Jan. 5. Walker’s administration says it has cut more than 600 positions, primarily through attrition and retirement, from the 15,800 executive branch positions the state had at the end of the 2015 fiscal year. The state has directly laid off employees, but Walker indicated that is a last resort. “There are lots of folks that are impacted on a layoff, not just the individual working — also their families and we feel very badly about having to do that,” he said.

After flooding, work continues to re-bury TAPS

Flooding of the Dalton Highway last spring caught a lot of attention, mainly because the vital road link to the North Slope oil fields was cut off for days. Hundreds of trucks delivering supplies and equipment were backed up and delayed. What got very little, if any, attention was that washed-out areas nearby exposed buried parts of the Trans-Alaska Pipeline System to the open air and moving water. There was never any danger to the integrity of the pipeline, Alyeska spokeswoman Michelle Egan said. However, it was something Alyeska had to respond to right away. In places, the gravel overburden and pipe insulation were washed away along with a gravel workpad that runs nearby. “The waters started to recede in June, and our baseline (contractor) folks started work immediately on moving ice, repairing access roads and cleaning up debris,” said Shaune O’Neil, Alyeska’s manager on the project. “Before work could start in August, we had to have survey crews locate and identify and map the damaged areas, and do some engineering work to facilitate the more complex repairs.” After the initial steps, work was started on the long-term fix but that has turned out to be a big challenge for Alyeska and its contractors, and it still isn’t finished. Flood repair operations had to be shut down in early December because a continuing flow of water proved difficult to manage. Work is scheduled to resume in February when the winter freeze sets in, which should diminish the water flow, O’Neil said.   The problem area, which also affected the Dalton Highway, was in the areas south of Deadhorse, the industry-service center for Prudhoe Bay and other oilfields, and there were two separate flooding events. An earlier flooding, in March, pushed large ice sheets, six to twelve feet thick, out of the Sagavanirktok River onto the road and blocked traffic. The ice created dams for the water, which compounded the early spring flooding. The ice was cleared away but the normal spring “breakup” a few weeks later brought more flooding, closing the road again and covering about 600 square miles of tundra lands mainly south of Deadhorse, O’Neill said. In the second flooding, in May, five feet of ground cover over the pipeline was washed out, exposing the pipe in six locations, with the longest stretches exposing 23 feet and 40 feet of pipe. Alyeska had to respond quickly but also in a measured way, O’Neil said. “We can’t just throw gravel on top of the pipeline. We must do a careful assessment, checking to make sure the pipe coating and the pipe weren’t damaged, along with the pipeline’s cathodic protection,” she said. That meant excavating around sections of pipe to a level below the pipeline, with the longest section being 80 feet. “We had to go two feet below the pipeline and to build side slopes, and since the pipeline was buried at five feet below the surface at these points it meant we had to excavate a trench to the 11-foot level,” before the pipe inspections could be done, O’Neil said. Most of the work was scheduled to be done in the fall through September, October and November, but the continued rush of groundwater complicated and slowed the project even with the 24-hour operation of two 10-inch pumps that were dewatering the trench. “The conditions were very challenging,” O’Neil said. “We had to do the excavation, check the tape wrap (around the pipe) and if the pipe was exposed we had to sand-blast down to bare pipe, do an ultra-sound inspection to ensure the pipe integrity, and then recoat the pipe.” It wasn’t just the main pipeline, either. Work had to be done on the small fuel gas line that runs parallel to the oil pipeline from Prudhoe Bay to Galbraith Lake, in the southern foothills of the Slope. The origin of the water was only partly the river. There was also unexpectedly high groundwater seeping in. “There are a lot of small tundra lakes in this area and we believe that damage and surface erosion from the flooding changed the hydrology,” O’Neil said. If the excavations and inspections were challenging, cleaning up all the broken pieces of insulation left scattered across the tundra by the flood was a labor-intensive nuisance, but it had to be done. Gravel also had to be back-filled around three vertical support members, or VSMs, that hold nearby above-ground sections of pipeline, but there was no damage, O’Neil said. Alyeska mustered four contractors to deal with the problem, with Athna Construction, subsidiary of Ahtna Inc., an Alaska regional Native corporation, handling some of the most difficult work, O’Neil said. Other firms mobilized were Houston Contracting, which is owned by Arctic Slope Regional Corp.; Price Gregory and Hamilton Oilfield Services, she said. Ahtna Construction, Houston Contracting and Price Gregory are under long-term service contracts with Alyeska, and Hamilton was added to the mix. They also needed a lot of material (gravel and rock) so Brice Construction, which was also working for the state on the Dalton Highway repair, was able to open a new gravel pit for both gravel and sand, and also to bring larger rock from a source near Atigun Pass, in the mountains south of the Slope. Hamilton’s part of the project was in mining and moving gravel and rock. O’Neill said the project required extraordinary coordination and cooperation among contractors who are also competitors for work on TAPS. The companies do specialize, however. Ahtna has been doing main-line inspections and repairs for TAPS for several years and has a lot of experience in that area, O’Neill said, and Houston and Price Gregory also do pipeline integrity work but Price Gregory also had to take on civil work, which it ordinary does not do, O’Neil said. There easily could have been resentment within these companies because they may not have gotten as much of the work as desired, but there was none on this job, she said. “People really stepped up to the plate,” she said. Through early December Alyeska and its contractors expended 48,000 man-hours of work, moved about 50,000 cubic yards of gravel; 10,000 cubic yards of large rock and 350 cubic yards of sand. Ahtna mobilized Aug. 29 and demobilized Dec. 9. Price Gregory mobilized Aug. 26 and demobilized Oct. 30. Houston is under a continuing maintenance agreement for the pipeline, so its crews were already mobilized. However, it isn’t yet complete. Tim Bradner can be reached at [email protected]

Support for using investment earnings, taxes after cuts

The idea of using a potion of Permanent Fund earnings to narrow the huge state budget gap is gaining traction in the Legislature. Two Senate leaders, Senate President Kevin Meyer, R-Anchorage, and Resources Committee Chair Sen. Cathy Giessel, R-Anchorage, say some way of using investment earnings has to be part of the equation, although both say additional spending cuts should come first. The Standard & Poor’s downgrade of Alaska’s credit rating issued Jan. 5, which also affects ratings of Alaska municipalities, will add momentum in getting consensus on at least the first step in solving the fiscal issue, which is use of investment earnings. Earnings of the Permanent Fund have been increasing in recent years in sharp contrast to oil income, which has declining sharply with the drop in crude oil prices. The principal of the Permanent Fund, now about $53 billion, cannot be spent, but the earnings, typically about $3 billion a year, have always been available for appropriation. Meyer was earlier reported to be asking for a state sales tax bill to be drafted but he said he has no intention of introducing the idea. “I’m not thinking of introducing anything (like a sales tax), but it may get to a point, after budget reductions, that we have to consider new revenues,” Meyer said. “I don’t like any form of tax but if it comes to it we have to have all options on the table, because we’ve got to do something.” Giessel said, “Overall, I’m on board with using Permanent Fund earnings. That’s why we created the Fund. Using investment earnings won’t cover the entire $3 billion to $4 billion budget gap but it will provide a start.” Giessel said the revenue and budget situation has become “much more dramatic,” in recent months. “Something has to be done. I agree that cuts have to be made, and we need to do that first, but at the same time we can’t make decisions that will decimate the private sector,” she said. She cited the debate over petroleum industry development incentive tax credits as an example of where unwise cuts could have very adverse consequences. “If we eliminate these completely we’ll be paying the price in five or seven years when the oil that would have been produced by new projects won’t be there,” Giessel said. As Senate Resources chair Giessel is chairing a working group of legislators probing the tax credit issue. Meyer said, “I think we will still have to rely on savings to cover parts of the deficit this year but we should also go toward some use of Permanent Fund earnings, either the governor’s strategy (laid out in a plan issued recently) or Sen. (Lesil) McGuire’s plan,” introduced last session. “This would be a way of bringing in some substantial revenues, after spending cuts, and we should look at this (revenue option) first before we go to a tax.” Meyer described an email sent to other senators on the sales tax, and reported in the press, as “internal,” and more aimed at starting the discussion than an endorsement of the idea, although it quickly leaked. Meyer said the idea of tapping Permanent Fund earnings was seriously considered by the Senate Majority last year when the Legislature was stalled over budget negotiations with the House minority Independent Democrat caucus, who had balked at providing votes needed to tap the Constitutional Budget Reserve, the state’s main savings account. Meyer said members of the House Majority supported the idea, “but Speaker (Mike) Chenault wasn’t sure he had all the votes needed.” A dissident group of House Republicans had signaled they would oppose it, complicating things for Chenault. “They called themselves the ‘Musk Ox group,’ over those animals’ trait of gathering in a tight, protective circle when a threat loomed,” Meyer said. Gov. Bill Walker has put forth a package of measures that would largely close the fiscal gap if they were all adopted. It includes a modest $100 million reduction of state general fund spending, a “replumbing” of the way oil royalty income flows, diverting it to the Permanent Fund and the annual dividend, a package of tax increases on businesses including the oil industry, and a personal income tax. One indirect effect of Walker’s proposal on the dividend would be to reduce it by half, approximately, compared to what it would otherwise be in 2017. Rep. Andy Josephson, D-Anchorage, a member of the House minority, said there is some concern in his caucus because the governor’s income tax in that it is not progressive enough and would be if it meshed more closely to the federal income tax. Also, any reduction of the dividend would be felt disproportionately by low income Alaskans, he said. If broad-based taxes are considered, the revenue impacts of different options vary. A personal income tax like that introduced by Rep. Paul Seaton, R-Homer, last year, in House Bill 182, would generate about $655 million to the state treasury and the tax would be deductable from federal personal income taxes. Also, 20 percent of the tax receipts would come from nonresident Alaskans who are working in the state, according to a revenue options white paper put together by the Department of Revenue in mid-2015. The tax would have little impact on low-income Alaskans, the Revenue Department said. A 3 percent statewide sales tax would bring in about $418 million. If food is excluded from the tax, which is a typical exemption, revenues to the treasury would be reduced by about 15 percent, the analysis said. Part of the tax would be paid by nonresidents, such as tourists, but a sales tax would also disproportionately affect lower-income Alaskans. Other effects of a sales tax are that if it is imposed on top of a municipal sales tax, and many Alaska cities and boroughs already have sales taxes, it would result in a high combined tax that could encourage more purchases made out of state. On the other hand, two of Alaska’s largest cities, Anchorage and Fairbanks, do not currently have sales taxes. Two business groups, the Anchorage Chamber of Commerce and Fairbanks Economic Development Corp., have endorsed a sales tax over a personal income tax, and also favor some use of Permanent Fund earnings, the groups said in separate announcements. Tim Bradner can be reached at [email protected]

Board of Fisheries set to take up Yukon-Kuskokwim issues

Years of declining king salmon stocks will control the Alaska Board of Fisheries’ Arctic-Yukon-Kuskokwim meeting in Fairbanks set for Jan. 12-16. Since the last AYK meeting in 2013, the board and the Alaska Department of Fish and Game have put a tight leash on Yukon and Kuskokwim fisheries. Villagers along both rivers need ways to keep fed and keep paid, but simultaneously ask for even stricter controls on king salmon, especially on the Kuskokwim where middle and upper rivers users are seeing even less of the already-scarce fish. The major Kuskokwim proposals aim to tweak the king salmon management framework for fairer subsistence harvest. Bethel-area fishermen catch up to 80 percent of the river’s total, already below the amount needed for subsistence. Proposed fixes include installing a first-ever subsistence permit system, creating inriver goals for chinook, and tightening the trigger for commercial openings. Management during low abundance of kings hobbled the 2015 Kuskokwim season. The Kuskokwim River produced some surplus chinook for subsistence, but nowhere near the official amount needed for subsistence, or ANS. The ANS, a number set by the Board of Fisheries, is 67,200 to 109,800, and hasn’t been met in five years. The average subsistence harvest is 84,000. ADFG estimates the Kuskokwim River chinook salmon subsistence harvest in 2015 was between 17,000 and 25,000. The Bethel Test Fishery measures the run of king salmon as it comes in, but is not as accurate as a sonar counter, which the department likely cannot afford with budget cutbacks looming for state agencies. Several proposals want to use the test fishery to base restrictions that will allow upriver harvest. The Orutsaramiut Native Council proposed that no subsistence fishing be allowed in the river at all until 50 percent of the forecasted kings have passed the Bethel Test Fishery, reserving the other 50 percent for upriver users. Two proposals, submitted by the Kuskokwim Native Association and the Stony-Holitna Fish and Game Advisory Committee, ask that an in-river goal be set above the Bethel Test Fishery. An in-river goal, they theorize, will spread more salmon to the middle and upper river. By setting the in-river goal above the Bethel Test Fishery, they believe more salmon will work their way upriver rather than being caught in the comparatively population heavy Bethel area. The Stony-Holitna committee also requests that the board create a first-ever subsistence permit system to make the limited chinook more available to middle and upper river users. ADFG would be able to restrict licenses and dole them out evenly in times of low abundance, the committee believes. Yukon proposals, also impacted by chinook conservation measures, seek to stretch commercial fishing opportunities by allowing new gear types and even creating a fishery for new species. The weak 2015 outlook for Yukon chinook coincided with a below forecast chum salmon run. The 2015 summer chum salmon preseason estimate was 1.8 million to 2.4 million fish, leaving 800,000 to 1,400,000 for commercial harvest. Only 358,000 chum were harvested in 2015, alongside an escapement of 1.3 million. The trick is to catch the chum without killing kings. “The trend lately has been to find alternative gear types that allow for live chinook releases,” said John Linderman, a fish and game coordinator for ADFG’s Commercial Fisheries Division. The department has created several restrictions on the mesh size, depth, length, and allowable time for gillnets, which are the historical favorite for both subsistence and commercial Yukon fishermen. In their place, cleaner but less effective dipnets, beach seines, and fish wheels are used. One proposal would create a purse seine fishery for Yukon commercial fishermen, which would avoid the incidental chinook deaths gillnets tend to cause. Similar purse seine programs are used for hatchery chinook on the Columbia River but have no history on the Yukon or with wild chinook stock. The prospect could prove uneconomical for the delta residents. Conversion to purse seining operations would be expensive, and only allowed in times of low chinook abundance. The limited opportunity might not justify the cost. Kwik’pak Fisheries, owned by the Yukon Delta Fisheries Development Association, submitted a proposal to create a pink salmon fishery for the Yukon. Pink runs are fairly strong in the region — 513,599 pinks passed the Pilot Station sonar counter in 2014 — but also difficult to plan around chinook avoidance measures, as sizable runs come only every other year.

Walker: ‘We’re TransCanada now’

If 2015 was Alaska’s “year of the budget,” Gov. Bill Walker is looking forward to 2016 being the “year of the gasline.” Walker said he hopes his administration can present the Legislature with a virtually complete Alaska LNG Project fiscal package sometime in the second half of the upcoming legislative session, which begins Jan. 19. The portfolio of Alaska LNG documents the governor wants to take to Juneau includes the project’s fiscal terms, governance agreement and tax policy, and the associated constitutional amendment. The Department of Law has indicated an amendment will be needed to exempt the project from limitations the state Constitution puts on lawmakers preventing them from locking the state into long-term tax policy. The terms of the Alaska LNG Project gas production contracts, essentially gas tax contracts, will likely bind the state for up to 25 years and therefore need to be exempted from constitutional limitations. Walker said he is excited about being able to spend more time on the North Slope natural gas project — a cause the governor has championed in various forms for decades — and he has committed to attending each project sponsor meeting. “Now that we’ve sort of ripped all the Band-Aids off on all the different areas of the budget and all the other stuff now we can get down to the gasline,” he said in a Dec. 22 interview with the Journal. Having the tentative agreements in place as soon as possible should give the Legislature time to critique them during the regular 90-day session before another gasline-dedicated special section later in the spring. The special session is when the fiscal terms of the $45 billion-plus North Slope natural gas export pipeline project the state is in with BP, ConocoPhillips and ExxonMobil would be debated and voted on by the Legislature. Walker said he expects to hold the gasline session immediately following the regular session because legislators will want as much time as possible in late spring and summer to campaign in their districts, as 2016 is an election year. However, when the session is held will depend on what legislators want as well as when the regular session wraps up. Typically 90 days, Alaska’s annual winter-spring session can be extended up to 120 days if pressing issues — the state budgets, taxes and Medicaid expansion and reform this year among others — remain unresolved in late April. The Legislature took just 13 days to adjourn its most recent gasline special session that began Oct. 24; but that was for whether the state should buy out TransCanada Corp.’s share of the Alaska LNG Project. It amounted to an up or down vote. TransCanada, a pipeline company, previously held the state’s 25 percent interest in the North Slope gas treatment plant and the 800-mile gas pipeline. Now, the State of Alaska is a 25 percent partner in the entirety of the project with the three producer partners owning shares equivalent to their in-ground gas holdings devoted to the project. Prior to taking on TransCanada’s role of the project, the State of Alaska held a quarter-share of the LNG plant planned for the Nikiski area on the Kenai Peninsula — a $25 billion operation itself. The special session Walker is anticipating would have multiple, complex financial agreements that, if approved, could have tremendous impacts on the state for decades to come. Regardless of the other moving parts, the constitutional amendment needs to be approved by legislators and shipped off to the Division of Elections by June 24 for inclusion on the November general election ballot. If the late June deadline were missed, the project would likely be delayed two years until the next general election. Walker transformed the leadership of the Alaska Gasline Development Corp., or AGDC, in 2015 by appointing six new members to the seven-member state corporation board. He also asked for, and got, a new AGDC president when financier Dan Fauske resigned the position Nov. 20. The governor said at the time that AGDC needed executive leadership with pipeline expertise to reflect the state’s growing role in the project. He reiterated that sentiment to the Journal. “AGDC does look different now than a year ago,” Walker said Dec. 22. “But a year ago we weren’t in the pipeline business. A year ago we were looking at a portion of an LNG project and we’re looking at a pipeline, at the upstream conditioning. So now, we’re TransCanada; we need to look like TransCanada.” While the State of Alaska will not be expected to match the expertise of TransCanada or ExxonMobil, the project’s pipeline manager, the state will have to provide a “fair representation” of a pipeline company to make its contributions to the Alaska LNG Project, Walker said. Finally, getting gas supply commitments from at least two of the producers, BP and ConocoPhillips, was a significant hurdle cleared, according to the governor. Walker said one of his biggest concerns with Senate Bill 138, the legislation that maps out the project’s structure passed under former Gov. Sean Parnell, was the lack a provision to move forward if a partner withdrew. He noted that, as far as he knows, Alaska LNG is the only project the industry giants are collaborating on — a uniquely challenging aspect given each company has other plans for other investments around the globe. The proof of the challenge lies in the fact that Alaska’s North Slope gas is still in the ground, according to Walker. “The economics have always been in this (AK LNG) project, yet it has not been done to date,” he said. Elwood Brehmer can be reached at [email protected]

Pages

Subscribe to RSS - Alaska Journal of Commerce