Elwood Brehmer

DOT forced to cut road crew OT as result of budget cuts

Snow has fallen across much of Alaska, and winter tires could be more important than ever this season. Cuts to the state operating budget have forced the Alaska Department of Transportation and Public Facilities to eliminate 35 surface transportation maintenance positions and abolish overtime for winter road crews. DOT took a $34 million hit — a 12.5 percent reduction — to its fiscal 2016 general fund operating budget, most of which goes to running the Alaska Marine Highway System and maintaining the states roads, runways and other facilities. “We had cuts across the entire department. Those included the removal of positions and many of those positions were maintenance positions,” DOT spokesman Jeremy Woodrow said. The department’s unrestricted general fund budget is $247.9 million this fiscal year. Saving money through efficiencies and doing away with vacant positions were the first steps to avoid pink slips, but in the end, 85 positions either went unfilled or were cut through direct layoffs in DOT this fiscal year, Woodrow said. There were 556 equipment operators in DOT last fiscal year to clear the state’s roads and airports, according to the 2015 State of Alaska Workforce Profile report. The cuts to road crew man-hours were felt right away in Fairbanks when the city endured more than a foot of snow in late September. Woodrow said DOT received numerous complaints and inquiries regarding road conditions after the Sept. 25 and Sept. 29 storms. A repeat of last winter across much of Alaska could be helpful, to road crews anyway. “It’s one of those things, if it’s a real mild winter no one will have a clue; they won’t notice any change at all” in road maintenance, he said. A road prioritization scale has been made available so the public can know ahead of time which roads will get the first plows during major snow events. The five road priority levels are based on traffic volume, speed, connectivity between communities and other available routes within local transportation networks, according to a department release. They are defined by DOT as: Priority Level 1: high-volume, high-speed highways, expressways, minor highways, all safety corridors and other major urban and community routes. May take up to 24 hours to clear after a winter storm. Priority Level 2: routes of lesser priority based on traffic volume, speeds and uses. Typically, these are major highways and arterials connecting communities. May take up to 36 hours to clear after a winter storm. Priority Level 3: major local roads or collector roads located in larger urban communities. May take up to 48 hours to clear after a winter storm. Priority Level 4: minor local roads that provide residential or recreational access. May take up to 96 hours to clear after a winter storm. Priority Level 5: roadways that are designated as “No Winter Maintenance” routes, e.g. Denali Highway or Taylor Highway. Generally cleared only in spring to open road for summer traffic. Woodrow said the department has always had the winter road maintenance scale internally, but never felt the need to publicize it, as crews working extra hours made delegating resources less necessary. “We just don’t have the resources that we have had in the past,” he said. A map detailing which priority level Alaska’s roads fall under is available on the Department of Transportation and Public Facilities website at dot.alaska.gov/stwdmno/wintermap/index.shtml. Transportation maintenance fund DOT Commissioner Marc Luiken has proposed setting up a surface transportation maintenance fund to balance the ebbs and flows of funding to something as crucial to all Alaskans as road and airport upkeep. “This (fund) wouldn’t build capital, this is intended to take care of the system,” Luiken said. The fund would designate revenue from fuel and vehicle taxes and fees into general road maintenance expenses. He said it would “even the playing field” between some coastal Alaskans who feel the state ferry funding is unduly scrutinized by those on the road system. It could also be a starting point for beginning talks about raising the motor fuel tax or other vehicle fees to in-turn adequately supply the fund, he surmised. At 12.25 cents, Alaska’s total gasoline tax is the smallest in the nation. Pennsylvania and Washington have the highest state gas taxes at 55.3 cents and 44.5 cents, respectively, according to the American Petroleum Institute. The Alaska Aviation Advisory Board is recommending to raise aviation fuel taxes to help pay for airport maintenance and a stated goal of the Federal Aviation Administration found on its Alaskan Region website is to “Encourage (Alaska) to establish dedicated airport fund and pursue all aviation resources to adequately fund maintenance.” Some legislators he has talked to have been intrigued by the idea, Luiken said, but whether shifting dwindling state funds or raising taxes will ultimately be palatable is unclear. The funds are very common in other states — to the point where when his colleagues in transportation departments across the country hear Alaska does not have a transportation maintenance fund, “their jaws drop,” Luiken said. Elwood Brehmer can be reached at [email protected]

Bad for state budget, cheaper fuel helping local economies

Alaska’s economies appear to be unfazed more than a year after oil prices began to fall. In fact, Anchorage’s unemployment rate of 4.7 percent in September was the lowest in the city has seen for the month in 14 years, according to the Anchorage Economic Development Corp. Fairbanks was not far behind at 4.9 percent. Statewide, the seasonally adjusted unemployment rate, which accounts for seasonal swings in job availability, was 6.4 percent in September, down 0.4 percent from a year ago, the state Labor Department reports. AEDC President and CEO Bill Popp said state’s largest city has added about 2,000 jobs since last September, bringing total employment to 169,000 in a municipality with just more than 300,000 people. AEDC’s January forecast for flat employment in Anchorage this year was incorrect in a positive way, Popp noted. At that time, he emphasized that a steady number of jobs should be viewed as a good thing, given the uncertainty surrounding state spending and petroleum economics. “We’ve been seeing this starting to build up over the summer. We’ve been seeing a drop in unemployment rate and modest but continued growth in the job numbers and now we are feeling like if this trend continues, which we think it will, we’ll probably add 1,000 net jobs in Anchorage this year,” Popp said. He attributed the encouraging job numbers to a strong private sector. According to AEDC, nine of Anchorage’s 10 largest industries have seen job growth over the past year. The only industry to show a loss is the city’s small manufacturing sector, down a miniscule 11 positions from a year ago. Employment in the city’s oil and gas industry actually increased more than 150 positions over the past year; however, the loss of Shell’s Arctic business, announced Sept. 28, has not yet been accounted for. Statewide, oil and gas industry employment has continued near record highs in 2015, as have the number of construction jobs in the state, many of which are tied to oil and gas activity. Government employment in Anchorage has been flat in 2015. Business and professional services positions, which includes technical industries that benefit from public and private capital spending, are up 100 jobs from last September, according to AEDC’s monthly employment report. Popp said activity at Anchorage’s banks and credit unions is slower than would be ideal. He attributes that to the city’s ever-present housing issues. Single-family home inventories are the lowest they’ve been in five years — an average of 877 homes listed in September — which has continued to push the cost of buying a home in Anchorage up and price many prospective buyers out of the stalling market. With few houses being sold, lenders have little reason to hire, he said. Since oil prices and state revenue both began falling 16 months ago, state government employment — University of Alaska included — is down about 1,500 positions, Popp said, but only about 100 of those jobs have been lost in Anchorage. As an entire sector, government provides about 29,000 jobs in the city, and the decline in federal employment over the past few years appears to be slowing, he said. Anchorage has seen lower oil prices — more specifically lower fuel prices — benefitting some of its largest employers. Passenger traffic was up more than 8 percent during the summer months at Ted Stevens Anchorage International Airport. AEDC also expects landed cargo tonnage to increase about 10 percent this year and that growth to continue for several years. Anchorage Airport officials have said the bump in passenger traffic is likely due mainly to Lower 48 travelers spending energy savings on travel. Much the same can be said for the city’s hospitality industry. “One-in-5 jobs in Anchorage are benefiting from lower fuel prices,” Popp said. The airport and hospitality industries each support approximately 1-in-10 jobs in Anchorage, according to AEDC. Popp noted those estimates are conservative. “I think it shows us in a pretty good spot to start from as we face the headwinds of next year,” Popp said of Anchorage’s employment figures. Popp and Fairbanks Economic Development Corp. President and CEO Jim Dodson both noted that hidden in the low unemployment figures is the fact that Alaska’s population is unusually transient, and people unable to find work are more likely to leave the state rather than file for unemployment. Net migration in the state totaled a loss of about 7,500 people last year, many of whom were working-age adults, Popp said. Big swings in migration to and from Alaska are not uncommon, however. When the Lower 48 economy suffers people come to Alaska looking for work and when the U.S. economy as a whole improves, they tend to leave, according to state economists. How Anchorage and the state fare in 2016 and beyond will have a lot to do with what happens in Juneau and whether or not consumer confidence can hold on, he said. Anchorage consumers are generally content with the city’s economy and their current personal financial situations, according to AEDC’s latest quarterly consumer optimism survey. However, expectations for the economic future are exactly tepid, with consumers reporting uncertainty about what’s to come. “Right now, (consumer optimism) doesn’t seem to be manifesting itself into any kind of slowdown in the economy, but it’s something we need to pay really close attention to because if consumers lose optimism they’re going to stop spending,” Popp said. “It can have a pretty significant ripple effect if we are to lose that confidence.” Dodson and Popp also said further deep cuts to state government spending in the upcoming regular legislative session would do a great deal of harm to Alaska’s economy that relies heavily on government employment. State government employees make up 7.3 percent of Alaska’s current workforce, according to the state Labor Department. Further, local government — heavily reliant on state assistance — provides another almost 12 percent of jobs in the state. “There is some room for cuts in our view and not insignificant cuts (to state government), but they need to be well targeted and we need to be looking at revenue streams that can balance the books and put our fiscal house in order for the foreseeable future and then we start to address that uncertainty issue,” Popp said. Economies across the state are continuing along with business as usual in part because the impact of capital spending lags behind appropriations by a couple years, Dodson noted. The 2014 state fiscal year capital budget, with federal funding, was more than $1.9 billion. “I don’t think any of the communities are going to be exempt from the lack of state spending; that’s going to be something that affects all of us,” Dodson said. On the bright side, Interior Alaska has benefitted more directly from low oil prices. Heating, or fuel, oil, the region’s primary space heating energy source, has gone from about $4 per gallon less than two years ago to about $2.50 per gallon today. Historically, Fairbanks-area residents have allocated about 60 percent of their overall energy costs to heat, according to Dodson. At $4 per gallon, that equates to an average of $4,300 per year spent towards homes that rely on fuel oil. “There is a tremendous amount of spendable dollars left in our economy that were typically spent for heating our homes,” he said. Additionally, a resurgence in military spending in should help mitigate state cuts around Fairbanks. The pair of F-35 squadrons that are all but a certain to end up at Eielson Air Force Base are expected to bring hundreds of jobs and hundreds of millions of construction dollars to the Interior. At Fort Wainwright, a company of unmanned Gray Eagle aircraft will add nearly 130 base positions, while nearby Fort Greely and Clear Air Force Station are seeing an influx of money, too. The area’s economy has immense ties to its military bases; defense activity accounts for more than a third of Fairbanks’ economy, while state and federal civil spending total about 10 percent apiece, according to Dodson. “There’s no question about it; Fairbanks is a military town,” he said.

Utilities advancing transmission co., AEA refining cost estimates

Alaska’s Railbelt electric utilities are working with a Wisconsin company to form another utility to manage the region’s transmission lines while the Alaska Energy Authority updates a study outlining how much investment is needed in those same transmission lines. The six utilities, from Homer Electric Association to Golden Valley Electric Association in the Interior, signed a nonbinding memorandum of understanding with American Transmission Co., which led to the formation of a working group in December 2014 that has met monthly to examine the formation of a Railbelt transmission company, or TRANSCO. Those six utilities provide about 80 percent of Alaskans with power. The Regulatory Commission of Alaska added to the urgency of that work in June, when RCA chair Bob Pickett wrote in a letter to legislative leaders that the utilities need to form an institutional structure to finance the $903 million of upgrades the Railbelt transmission system needs. Lack of that structure is a weakness in the system Pickett described as “fragmented” and “balkanized.” In 2014, the Legislature appropriated $250,000 to the RCA to provide its input on how to improve the Railbelt system. Ownership of Railbelt transmission lines is divided amongst the utilities and their service areas; even the State of Alaska, through AEA, owns 173 miles of intertie between Willow and Healy. That split ownership structure has challenged investment in the system and economic dispatch of power — drawing power from the cheapest available source, regardless of who manages the generation. Without tangible action by the utilities to form a TRANSCO, Pickett warned the RCA would seek authority through the Legislature to mandate economic dispatch. That’s where American Transmission Co. comes in. The Milwaukee-area company is a transmission-only utility; it does not own power generation or distribution infrastructure. Formed in 2001 as the first multi-state transmission utility, American Transmission Co. prioritizes transmission investment for the owner utilities in its service area of eastern Wisconsin and Michigan’s Upper Peninsula. Transmission investments in Alaska’s Railbelt will not only improve reliability — some areas are linked with a single transmission line — but also save consumers money through economic dispatch, according to AEA. Bottlenecks in the system prevent adequate amounts of economic power from being shipped across the lines, forcing power to be purchased from more expensive sources. If the more than $900 million of transmission upgrades were completed at once, Railbelt consumers would immediately and collectively save between $80 million and $241 million each year, AEA Energy Policy Director Gene Therriault said at an Oct. 22 AEA meeting. “These (savings) are just accessing cheaper sources of power and delivering it to the consumer compared to the power that currently serves their needs,” he said. The value of the upgrades is modeled on financing at 5 percent interest over 30 years, according to Therriault. Upgrades to the Railbelt transmission system would also be imperative to realize the economic benefit of the proposed Susitna-Watana hydroelectric dam. A TRANSCO, possibly led by Amercian Transmission Co., would finance the substation and transmission projects that could lead to the free flow of economic power. American Transmission Co. Business Development Manager Eric Myers said in an interview that his company’s investment would be much more stable than the one-time state appropriations that have funded transmission improvements in the past. Those state grants are a part of Alaska’s history, but certainly not its near future. “What we’re hoping to bring to the challenge this time around is some experience assembling a transmission-only utility,” Myers said. “We think that’s what really made the difference in terms of providing a foundation for transmission investment in Wisconsin, and we also stand ready to be a capital partner.” Through a TRANSCO, Alaska’s utilities could voluntarily invest in upgrades alongside American Transmission Co. for a simple return, according to Myers. That investment would also include the ability to participate in the governance of the TRANSCO. American Transmission Co. has direct equity to put into the Railbelt system, he said. “Where we want to make sure we get the balance right is putting together the most efficient combination of debt and equity. The conversations we’ve had with the Railbelt utilities would also allow individual utilities to invest equity and that’s similar to the model we have in Wisconsin,” Myers said. Alaska Railbelt Cooperative Transmission and Electric Co., or ARCTEC, CEO David Gillespie said the utilities are interested in bringing new money into the region, but American Transmission Co.’s involvement is not a done deal; the parties are still working out the particulars of a TRANSCO structure. ARCTEC is a consortium of five Railbelt utilities. Homer Electric Association is not a member. Another Midwest electric utility, Minneapolis-based Xcel Energy, expressed interest in financing Railbelt transmission projects during a presentation to the Legislature earlier this year. Xcel offered a model that would form multiple project companies to finance individual projects, an option that could still be used for some work, Gillespie said. AEA, with its Anchorage-based consultant Electric Power Systems Inc., is revising the $903 million upgrade figure. That grand total was calculated in 2013 based on single backup in the system, known in the industry as N-1. The cost to the system with no additional redundancy and two contingencies, N-0 and N-2, respectively, as well as a finer N-1 cost should be finalized by the end of the year, AEA Energy Infrastructure Manager Kirk Warren said. “The project costs will probably increase to develop a system that will handle a loss of two contingencies, but we imagine the N-1 costs will probably go down because we’re going to allow the utilities to plan for a loss of load if there is a loss of transmission line between segmented areas,” Warren said. He also noted that he believes the utilities have taken the RCA recommendations seriously and are on their way to developing a TRANSCO. Losing, or shedding load is certainly not optimal, but Therriault said it could be a way the utilities can improve the system without adding too much cost. “Of course, in Fairbanks at -40 or -50 (degrees Fahrenheit) when they shed load and a community goes black some of the houses there have about a half-hour, 45 minutes before they start experiencing real problems; so shedding load is not something the utilities want to do but they’re just trying to balance the expense,” Therriault said. Elwood Brehmer can be reached at [email protected]

Former EPA biologist North’s whereabouts still unknown

Where in the world is Phillip North? The former Environmental Protection Agency biologist is scheduled to be deposed by Pebble Limited Partnership and EPA attorneys Nov. 12 in Anchorage; however his whereabouts are unknown to both sides. North is seen as a key witness in Pebble’s lawsuit against the EPA. In the lawsuit filed last year, Pebble contends the agency colluded with Alaska Native groups and other mine opponents while drafting the Bristol Bay Watershed Assessment. The assessment is the scientific basis for the EPA’s pending Clean Water Act Section 404(c) action, which would preemptively block large-scale mining in the Bristol Bay region. North, who retired from the EPA in 2013, worked extensively on drafting the 1,000-plus page assessment, which was finalized early in 2014. The EPA contends Pebble had the same access to agency officials as anyone else with interest in the Bristol Bay Assessment, and that any actions that potentially violated federal public meeting and objectivity laws were incidental. U.S. Alaska District Court Judge H. Russel Holland halted the EPA’s Section 404(c) proceedings with an injunction last November, until the suit is resolved. In his recent subpoena order, Holland ordered Pebble to offer up $2,400 to cover North’s travel expenses to Anchorage; Pebble attorneys suggested $1,500 in their motion to subpoena. He is believed to be New Zealand or Australia. Holland also wrote that he believes the EPA should be as vested as Pebble in hearing North’s testimony to resolve speculation about what went on during the assessment process. Responsive documents to Pebble’s Freedom of Information Act requests have made it clear North drafted documents on a private computer that were not forwarded to EPA systems and encrypted documents on a thumb drive that EPA has not been able to access, according to Holland. Pebble spokesman Mike Heatwole wrote in an email that the company does not know much about North’s location and as a result Pebble may seek to delay the Nov. 12 deposition. EPA Region 10 said in a formal statement that, “as with other previous EPA employees, the agency has no information or comment on his location.” In an interview with the Redoubt Reporter published July 17, 2013, North said he planned on sailing around the world with his family after his retirement. He is also quoted as supporting the EPA’s then imagined Section 404(c) action to protect Bristol Bay’s world-renowned salmon runs. Elwood Brehmer can be reached at [email protected]

Ambler road work resumes; state closes on utility purchase

Gov. Bill Walker’s administration has lifted a spending freeze on the controversial Ambler Mining District road, which will allow the Alaska Industrial Development and Export Authority to spend the $3.6 million it has for early work on the project. “As we wrestle with a $3.5 billion deficit, it’s important that we examine all spending,” Walker said in an Oct. 21 statement. “With the Ambler road project, the $3.6 million had already been appropriated, so this clarification allows the project to progress to a natural stopping point instead of (being) stalled mid-step.” AIDEA spokesman Karsten Rodvik said the money would allow the state development authority to complete the environmental impact statement, or EIS, scoping process, which could take up to a 18 months. The scoping process is used to determine the appropriate contents of the EIS. It involves gathering significant input from the stakeholders of prospective development. On Dec. 26, 2014, Gov. Walker halted state spending on six large state projects mostly in preconstruction phases of development to evaluate their merits as the state budget situation worsened. The Ambler road is the last project to be resolved. If constructed, the road to the Ambler Mining District would be a roughly 220-mile industrial use gravel road from the Dalton Highway west to the mining district located along the southern edge of the Brooks Range in Northwest Alaska. Financing construction of the road would likely be the responsibility of mine developers in the area, who have said the it must be built to make mining the multi-metal deposits financially viable. NovaCopper, a Vancouver-based company, has spent more than 10 years evaluating its claims in the Ambler Mining District and is currently conducting a feasibility study for a primarily copper mine. NovaCopper CEO Rick Van Nieuwenhuyse said in a formal statement he is happy with the administration’s decision to move into the EIS and that NovaCopper will work with the state to advance the permitting process. Chair of the Brooks Range Council, John Gaedeke, urged the AIDEA board to stop the project because it would benefit a Canadian mining company while area villages oppose it. How the mine would impact water quality in the Upper Kobuk drainage and how the road would affect the migration of caribou relied upon for subsistence have been among the concerns raised by locals. “To spend millions more on scoping now suggests that we wasted the last two years (of public meetings) or you’re not listening to the villages and their residents,” Gaedeke said during the public comment period of the Oct. 22 AIDEA board meeting. The Brooks Range Council was formed in 2012 by residents along the road corridor to oppose the project. To date, $26.25 million has been appropriated by the state to the project since the 2011 fiscal year. AIDEA is leading the state’s work on the proposed road, and the $3.6 million is from past appropriations, the remnants of which total about $8.1 million, according to an Oct. 15 memo to AIDEA from the Office of Management and Budget. AIDEA would still additional funding up to $6.8 million to complete the EIS beyond the scoping process. Interior Energy Project update AIDEA is officially the proud owner of Fairbanks Natural Gas. The state development authority took ownership of Pentex Alaska Natural Gas Co., which owned Fairbanks Natural Gas and other related companies Oct. 20 when the Regulatory Commission of Alaska formally approved the sale. A tentative deal between AIDEA and Pentex leadership was announced in January. The $54 million sale total includes the Titan LNG plant — a Pentex subsidiary — located on Point MacKenzie, which supplies Fairbanks Natural Gas. Attorney General Craig Richards denied an agreement earlier this year in which Pentex would have sold the Titan plant to Hilcorp Energy subsidiary Harvest Alaska. That deal also included a 10-year LNG supply contract, which Richards found could have limited the access of other producers to the Fairbanks market and potentially shut off access to cheaper gas for Fairbanks Natural Gas customers. Harvest is also one of five finalists to supply the Interior Energy Project with liquefied natural gas in the second phase of the project. Going from private ownership under Pentex to a public entity under AIDEA is expected to save FNG customers 13 percent on their gas bills, AIDEA officials have said. The AIDEA board will have Fairbanks Natural Gas rate adjustment proposals to consider in December, staff said at its Oct. 22 meeting. Now, AIDEA is preparing for a Nov. 4 Interior Energy Project public meeting at the Pioneer Park Civic Center in Fairbanks. Each of the five project finalist proposers will pitch their plans to get Cook Inlet, North Slope or imported natural gas to the Interior and answer questions in a town hall-style meeting, according to project leaders. A final plan will be recommended to the AIDEA board at its Dec. 3 meeting and a special meeting to select another Interior Energy Project partner is tentatively scheduled for Dec. 17. On Nov. 9 a 13,000-gallon LNG tanker trailer is scheduled to arrive at the Port of Anchorage. The tanker, built by Seattle-based trucking supplier Western Cascade could improve the economics of the Interior Energy Project if its test runs go well. Trucking LNG from Southcentral to Fairbanks costs FNG up to $3 per thousand cubic feet, or mcf, of gas, according to CEO Dan Britton. That expense is about 20 percent of the $15 per mcf target price for consumers of the Interior Energy Project. By increasing the carrying capacity of each tanker-truck over the 10,000-gallon tankers Fairbanks Natural Gas currently uses, LNG transportation costs could be directly cut by up to 30 percent. The Alaska Department of Transportation and Public Facilities has not yet approved the 13,000-gallon LNG trailer for commercial use in the state. AIDEA board member and former Fairbanks state senator Gary Wilken said the Interior Energy Project team needs to use the trailer as a “campaign sign” as further proof that more natural gas is coming to the region. “That trailer to me is an indication of progress; it’s an indication of the future of natural gas in Interior Alaska,” Wilken said at the Oct. 22 meeting. “We need to use that trailer as a tool to see that this thing is real. You don’t see pipe in the ground — you do see that trailer. It’s big, it’s impressive and it’s something that people can touch. They need to know that this is real. They need to know that something is happening in Fairbanks and they have to start thinking about conversions, which are so important,” to the feasibility of the project. Elwood Brehmer can be reached at [email protected]

Alaska Air Group Inc. reports another record third quarter

Alaska Air Group Inc. continued its impressive run in the third quarter, posting a record $277 million profit. The Seattle-based parent company to Alaska Airlines and regional carrier Horizon Air released its third quarter results Oct. 22. When combined with a record $230 million second quarter profit, Alaska Air Group took home more than $600 million this spring and summer. The company’s balance sheet for all of 2014 ended with a record net income of $571 million, meaning 2015 is a virtual lock to be Alaska Air Group’s sixth consecutive year of record profits. “We not only have strong profitability, but also excellent cash flow from operations, an extremely strong balance sheet and a commitment to shareholder-friendly stewardship and capital allocation that’s been demonstrated over many years now,” Air Group CEO Brad Tilden said during an earnings report call. The $277 million adjusted third quarter net income was a 39 percent year-over-year increase. Quarterly earnings totaled $2.16 per diluted share, up 47 percent from a year ago. Alaska Air Group stock traded for $77.96 at the close of trading Oct. 27, up more than 50 percent from a year ago. Company leadership has attributed strong returns in recent years to a business model focused on operational efficiencies and paying down debt. Alaska Air Group had a 27 percent debt-to-capitalization ratio at the end of the quarter. “We’re building a high-quality business,” Alaska Air Group CFO Brandon Pedersen said. However, the significant increase in profitability this year is thanks in large part to low fuel prices. Alaska Air’s third quarter operating revenue was up 3 percent and year-to-date revenue grew 4 percent over 2014. At the same time, fuel expense was down 38 percent for the quarter and 33 percent for the first nine months of 2015. The company’s airlines paid, on average, $1.82 per gallon for jet fuel in the third quarter, down 42 percent, according to Pedersen. Fuel is typically an airline’s single largest operating expense. Company growth and low-cost fuel have combined to make wages and benefits the single most expensive line item on Alaska Air Group’s balance sheet for the quarter and the year-to-date. Additionally, new planes have improved Alaska Airlines’ fuel burn. The mainline fleet of Boeing 737s was 2.9 percent more fuel efficient on an available seat mile per gallon basis, Pedersen said. “This will just continue to get better as we retire our 737-400 fleet over the next two years,” he said. Alaska Airlines is scheduled to take delivery of 34 new 737-900s by the end of 2017, but its fleet will only grow by nine aircraft as its older, smaller 737-400s are retired. Alaska Air will also get one of Boeing’s latest aircraft designs, a 737 MAX, in 2017. “The Boeing 737 is a fabulous airplane for our network; Boeing is a great company to work with and our partnership with them could not be stronger,” Pedersen said. He said previously in an interview with the Journal that Alaska Airlines’ decision to exclusively fly 737s leads to numerous operational efficiencies in terms of maintenance and employee training. Air Group’s 24.2 percent 12-month return on invested capital was a 7 percent improvement over the year that ended Sept. 30, 2014; its record 29.2 percent pretax margin for the quarter was more than a 7 percent increase over last year. Contributing to the per-share earnings growth was the repurchase of 1.6 million shares for $119 million in the third quarter. Alaska Air Group bought back 4.5 percent of its outstanding common stock for $381 million in the first nine months of this year, continuing its multi-year repurchase program. Alaska Air Group employees earned $90 million of incentive pay during the quarter as well, recognition of meeting customer service, safety, operational and financial goals, according to a company statement. Alaska Airlines continued its hold on the top spot for on-time performance among major domestic carriers for the 12 moths ending in August. Through the first three quarters of the year, 86.7 percent of Alaska Airlines flights were on time, off 0.3 percent from 2014. J.D. Power also named Alaska Airlines Highest in Customer Satisfaction Among Traditional Carriers for the eighth consecutive year, according to a company release. Elwood Brehmer can be reached at [email protected]

Ambler road study work resumes

Gov. Bill Walker’s administration has lifted a spending freeze on the controversial Ambler Mining District road, which will allow the Alaska Industrial Development and Export Authority to spend the $3.6 million it has for early work on the project. “As we wrestle with a $3.5 billion deficit, it’s important that we examine all spending,” Walker said in an Oct. 21 statement. “With the Ambler road project, the $3.6 million had already been appropriated, so this clarification allows the project to progress to a natural stopping point instead of (being) stalled mid-step.” AIDEA spokesman Karsten Rodvik said the money would allow the state development authority to complete the environmental impact statement scoping process, which could take up to a 18 months. The scoping process is used to determine the appropriate contents of the specific environmental impact statement, or EIS. It involves gathering significant input from the stakeholders of prospective development. On Dec. 26, 2014, Gov. Walker halted state spending on six large state projects mostly in preconstruction phases of development to evaluate their merits as the state budget situation worsened. The Ambler road is the last project to be resolved. If constructed, the road to the Ambler Mining District would be a roughly 220-mile industrial use gravel road from the Dalton Highway west to the mining district located along the southern edge of the Brooks Range in Northwest Alaska. Financing construction of the road would likely be the responsibility of mine developers in the area, who have said the it must be built to make mining the multi-metal deposits financially viable. NovaCopper, a Vancouver-based company, has spent more than 10 years evaluating its claims in the Ambler Mining District and is currently conducting a feasibility study for a primarily copper mine. NovaCopper CEO Rick Van Nieuwenhuyse said in a formal statement he is happy with the administration’s decision to move into the EIS and that NovaCopper will work with the state to advance the permitting process. Chair of the Brooks Range Council, John Gaedeke, urged the AIDEA board to stop the project because it would benefit a Canadian mining company while area villages oppose it. How the mine would impact water quality in the Upper Kobuk drainage and how the road would affect the migration of caribou relied upon for subsistence have been among the concerns raised by locals. “To spend millions more on scoping now suggests that we wasted the last two years (of public meetings) or you’re not listening to the villages and their residents,” Gaedeke said during the public comment period of the Oct. 22 AIDEA board meeting. The Brooks Range Council was formed in 2012 by residents along the road corridor to oppose the project. To date, $26.25 million has been appropriated by the state to the project since the 2011 fiscal year. AIDEA is leading the state’s work on the proposed road, and the $3.6 million is from past appropriations, the remnants of which total about $8.1 million, according to an Oct. 15 memo to AIDEA from the Office of Management and Budget. AIDEA would still additional funding up to $6.8 million to complete the EIS beyond the scoping process. Elwood Brehmer can be reached at [email protected]

Low gas prices boosted Alaska tourism in ‘15

Winter, spring, summer and fall, lots of people are coming to Alaska. Visitor numbers were steady or increased nearly everywhere across the state during the latest summer tourism season. In Anchorage, municipal hotel, or bed, tax revenue is on pace to set a fourth consecutive record, which would also be a seventh straight year of bed tax growth. “Definitely for leisure travel, I feel that we’ll be on target with banner hotel revenues,” Visit Anchorage CEO Julie Saupe said. Bed tax revenue was up nearly 5 percent year-over-year through the first half of 2015. Anchorage pulled in more than $25.2 million last year from its 12 percent tax on room rental transactions. Saupe said the city’s fall meeting season would be strong this year, but it remains to be seen if it will top 2014, which had a record number of convention-goers in October. While low oil prices strain much of Alaska’s economy and state budgets, cheaper prices at the pump in the Lower 48 correlate to more visitors in the Last Frontier. More discretionary income — money not spent on gas — provides an opportunity for Americans to scratch the travel itch, Saupe said. There is also a feeling that competitive airfares and less expensive travel once in Alaska encourages visitors as well. Indicators from Ted Stevens Anchorage International Airport support Saupe’s premise, too. Enplanements at the Anchorage airport were up each month this year versus 2014; they were up an average of nearly 8 percent during the summer months. Southcentral cruise traffic, primarily to the ports of Seward, Whittier and Anchorage, was also up this year. It is expected to hold steady in 2016. Anchorage will see nine ports of call from cruise ships again next year, Saupe said, but the ship will be slightly larger than the 1,200-berth Holland America Line Statendam that visited Anchorage this year. A pair of tourism industry meetings next year could bode well for the hospitality industry beyond the meeting attendees, according to Saupe. The Go West Summit, a gathering of international tour operators that sell vacations in the Western United States, will convene next February in Anchorage. In September, it will be the Adventure Travel World Summit put on by the Adventure Travel Trade Association. “For future business these folks will get a chance to take a close look at what Alaska has to offer in the adventure travel world and we hope develop itineraries and send future clients our way,” Saupe said. “It’s a great chance to show off our product to some big sellers of adventure travel.” The Anchorage Economic Development Corp. estimates about 10 percent of jobs in the city are tied to the tourism industry, meaning a strong travel business can help mitigate potential downturns in other areas of Anchorage’s economy. The industry relies on the Outside domestic and international travel, which are both on a growth curve, Saupe said. Fairbanks Bed tax revenue collected by the City of Fairbanks was up more than 4 percent through July year-over-year, while passenger traffic at the Fairbanks International Airport was steady through the summer compared to 2014. “We had a solid summer,” Explore Fairbanks CEO Deb Hickok said. Preliminary passenger figures from the Alaska Railroad Corp. were steady as well; 451,000 people road the rails the past two summers. The Alaska Railroad offers service between the Southcentral cruise ports and Fairbanks. Tourism growth in Fairbanks has come during the aurora season — late August through April — lately, and Hickok said this season is shaping up to be a “transition year” for historical markets. China Air announced in September it plans to fly three new charter flights direct from Taiwan to Fairbanks in December full of travelers hoping to see Alaska’s northern lights. “The aurora is really the big thing in Fairbanks,” Hickok said. At the same time, Japan Airlines is flying only two aurora charters this year, which Hickok said is largely a result of restructuring as the airline comes out of bankruptcy. “They acknowledge there is still market demand,” for aurora flights out of Japan, she said. The Alaska Railroad has also added midweek trains between Anchorage and Fairbanks in February and March to its schedule. Hickok said she is happy to see the railroad’s commitment to winter tourism beyond its normal winter weekend routes. Juneau Numbers of both cruise and independent travelers increased in Juneau this summer, too. Juneau Convention and Visitors Bureau CEO Liz Perry said more than 976,000 people visited the capital city via cruise ship this year, an increase of about 2 percent. That growth is expected to continue into next year with about 1 million cruise passengers expected in 2016. “The reduction in gas prices across the U.S. has allowed for some competitive airfares,” Perry said. “Even the little difference we’ve seen here in Alaska allows people to consider bringing cars in on the ferry and so forth to move around Southeast.” Another nearly 100,000 people booked hotel rooms in Juneau over the summer and campground occupancy was up as well, she noted. “We are seeing an increasing number of people who are calling here and seeking information about Juneau who have previously visited on a cruise and want to come into town and spend more time and really enjoy the place and explore it on a completely different level,” Perry said. Elwood Brehmer can be reached at [email protected]

Nonprofits cite economic impact as budgets tighten

Alaska’s nonprofit sector wants its voice heard when discussions about the state’s budget future are had. So, the Foraker Group is convening nonprofit leaders across the Alaska this fall to hear from a large, but often quiet, portion of the state’s economy before the budget battles intensify once again in Juneau. The first meeting was held Oct. 20 in Anchorage; subsequent meetings are scheduled for Bethel, Fairbanks and Juneau in November. The Foraker Group is Alaska’s state nonprofit association. State Office of Management and Budget Director Pat Pitney laid out Alaska’s $3 billion-plus budget shortfall with Alaska North Slope crude selling for less than $50 per barrel. Pitney was followed by Foraker President and CEO Laurie Wolf, who said nonprofits need to be taken seriously when considering the economic impacts of state budget cuts or revenue enhancements. “We are a big part of (Alaska’s) economy,” Wolf said. “We are the jobs in rural Alaska.” There are more than 5,000 registered nonprofits in Alaska that account for about $6.5 billion in direct expenditures to the state’s economy, according to an Institute for Social and Economic Research study commissioned by the Foraker Group. Of that, $4.4 billion is from traditional, 501(c)(3) charitable organizations. The sector also generates 63,000 jobs in the state, which collectively pay $2.5 billion in annual wages. By comparison, Alaska’s commercial fishing industry supports 78,000 jobs paying out about $1.6 billion in wages, Wolf noted. “We are driving this conversation both in terms of expenditures but also in terms of employees,” she said. Direct nonprofit employment accounts for 39,000 positions, about 12 percent of the state’s workforce. Nationwide, nonprofits are about 10 percent of the workforce, the ISER study states. Despite nearly half of all the nonprofit jobs being in Anchorage, more than a third of all employment opportunities in the Interior, Western and parts of Southeast Alaska are with nonprofits. More than 20 percent of the permanent jobs on the North Slope and in the Northwest Arctic Borough are nonprofit positions, according to the study. The rural nonprofits often provide health care and other essential functions including utility services, Wolf said. While Alaska’s overall workforce grew 5.2 percent from 2007 to 2013, the state’s nonprofit jobs increased 22 percent. Wolf said the sector felt the impact of budget negotiations simply being prolonged last spring. Because the Legislature finalized the operating budget in early June as opposed to the typical late April the state was late in letting usual contracts, forcing many nonprofits to dip into savings in the interim. Declining government funding is not something new to Alaska’s nonprofits. From 2009-2013, overall federal funding fell 40 percent, from $8.4 billion to $5 billion. The grant part of that was reduced by more than half, from $3.3 billion to $1.5 billion, according to the Foraker Group. Still, Alaska’s nonprofits fare better than the national average in terms of grant funding. While it has declined from 60 percent of the sector’s revenue portfolio in 2007 to about 40 percent today, both figures are above the 32 percent national average. Earned revenue is up to half of what Alaska nonprofits take in, which is “leaps and bounds better” than the 30 percent it was less than 10 years ago, Wolf said. The entire sector is figuring out how to diversify funding through monetizing intellectual capital and finding new customers among other ways, she said. If government funding, particularly on the state side, is going to keep sliding, it will be essential for nonprofit leaders to continue to partner with state and local governments, something Wolf said Alaska already does better than most states. She also noted the sector’s ability to maximize government funding. “A cut of a dollar in one place is not the same dollar in another place because we as nonprofits, we are leveraging other dollars. Every dollar they cut from us — there’s a multiplier effect,” Wolf said. Private contributions have held steady, averaging 9 percent of Alaska nonprofits’ revenue over the study years. Walsh said she doesn’t believe donations will fade if the state economy suffers. Rather, she said other states have seen donations increase. Corporate donations from the oil industry have understandably slipped some, she said, but smaller industries have stepped up giving in the months since the state’s economic situation has become tenuous. “I think Alaskans understand nonprofits are a valuable investment,” Wolf said. Foraker Public Policy Director Mike Walsh encouraged the assembled nonprofit staff and executives not just to advocate but also to lobby — within the law. “As we take our (budget) conversations to the next level it really is going to include the people who make the laws,” Walsh said. “As a sector we have standing in this conversation.” The Internal Revenue Service allows nonprofits to use an “insignificant amount” of their budgets for lobbying, up to 5 percent to 7 percent, according to Walsh. State law permits individuals to lobby up to 10 hours per month before registering as a lobbyist. First Alaskans Institute CEO Liz Medicine Crow said including nonprofits in state budget considerations is a “value proposition about inclusivity and equity.” Alaskans in need of support from nonprofits have been kept out of funding discussions because of the structure of the political system, she said. Investing in the state’s nonprofits is “a long-term investment in the social, cultural progress of the state of Alaska,” Medicine Crow said. “The vision that needs to drive the conversation at the state level around how to deal with the budget has to be created because there’s not one right now.” Elwood Brehmer can be reached at [email protected]

AK Railroad gets LNG approval; capacity may need revisiting

The Alaska Railroad Corp. has approval to be the first railroad in the country to transport liquefied natural gas. The Federal Railroad Administration granted the Alaska Railroad’s application to haul LNG in a letter dated Oct. 9 to the state-owned rail company. The Alaska Railroad submitted its request Nov. 14, 2014. Currently, LNG is not hauled by rail anywhere in the country and the Alaska Railroad is the first state to receive the approval, according to the Federal Railroad Administration. The letter could spell good news for Alaska Industrial Development and Export Authority’s Interior Energy Project, or IEP, which is searching for the least expensive way to get natural gas to Interior residents and businesses. LNG, like any other bulk commodity, could potentially be transported from Southcentral to the Interior by rail in a much more cost-effective manner than by truck, the other primary option. AIDEA officials recently selected plans to haul either imported or domestic LNG north by rail as finalists among others in the latest Interior Energy Project effort. Alaska Railroad spokesman Tim Sullivan said the railroad is “happy about this being a good first step” towards moving LNG on its tracks. If the Alaska Railroad begins hauling LNG it must report the activity to the Federal Railroad Administration each month. The railroad is also limited to two LNG trains per week carrying a maximum of eight, 11,000-gallon LNG containers. The Interior Energy Project proposals all call for producing at least 100,000 gallons of LNG per day to meet eventual projected demand — far exceeding the volume approved for transport. Fairbanks Natural Gas and its sister companies currently truck a small amount of LNG north from Southcentral to meet the utility’s demand. The Railroad Administration said in a statement the volume limit was based on the amount the Alaska Railroad requested. That limit may be reevaluated in the future based on demand and the administration’s confidence the LNG is being handled safely. IEP Manager Bob Shefchik said his team discussed the capacity restriction with the railroad and the next two years — before the approval expires — could be used to prove the safety and reliability of the system through test shipments before a greater volume is possibly requested. Proposals from Interior Energy Project finalists that include rail transport will be evaluated with that in mind, he said. First gas for the IEP is hoped for by mid-to-late 2017. Before Alaska LNG is moved by rail, the Matanuska-Susitna Borough’s 32-mile Port MacKenzie rail spur will likely have to be finished as well. Several companies have pegged Port MacKenzie — across Knik Arm from Anchorage — and the nearby real estate as a prime area for an LNG plant. However the unfinished rail line connecting the port to the rest of the Railbelt still needs about $120 million to complete it during a time of severe budget tightening for the state. The lone Interior Energy Project plan remaining to import LNG proposes offloading LNG from British Columbia in Seward, which is the southern tip of the Railbelt. Elwood Brehmer can be reached at [email protected]

Alaska Railroad gets LNG approval

The Alaska Railroad Corp. has approval to be the first railroad in the country to transport liquefied natural gas. The Federal Railroad Administration granted the Alaska Railroad’s application to haul LNG in a letter dated Oct. 9 to the state-owned rail company. The Alaska Railroad submitted its request Nov. 14, 2014. Currently, LNG is not hauled by rail anywhere in the country. The letter could spell good news for Alaska Industrial Development and Export Authority’s Interior Energy Project, which is searching for the least expensive way to get natural gas to Interior residents and businesses. LNG, like any other bulk commodity, could potentially be transported from Southcentral to the Interior by rail in a much more cost-effective manner than by truck, the other primary option. AIDEA officials recently selected plans to haul either imported or domestic LNG north by rail as finalists among others in the latest Interior Energy Project effort. If the Alaska Railroad begins hauling LNG it must report the activity to the Federal Railroad Administration each month. The railroad is also limited to two LNG trains per week carrying a maximum of eight, 11,000-gallon LNG containers. Alaska Railroad spokesman Tim Sullivan said the railroad is “happy about this being a good first step” towards moving LNG on its tracks. Before Alaska LNG is moved by rail, the Matanuska-Susitna Borough’s 32-mile Port MacKenzie rail spur will likely have to be finished as well. Several companies have pegged Port MacKenzie — across Knik Arm from Anchorage — and the nearby real estate as a prime area for an LNG plant. However the unfinished rail line connecting the port to the rest of the Railbelt still needs about $120 million to complete it during a time of severe budget tightening for the state. Elwood Brehmer can be reached at [email protected]

Ready or not, here comes the gasline special session

Hopefully the latest special legislative session will go smoother than the first two. Lawmakers will convene in Juneau Oct. 24 for the third time this year, with time-sensitive gasline issues on the agenda this go-round. Gov. Bill Walker called the session Sept. 24 with a short but crucial list of topics to debate, including whether the state should buy out current Alaska LNG Project partner TransCanada Corp.’s share of the project, instituting a natural gas reserves tax on the producers and funding the state’s ongoing gasline work. State law requires the governor give the Legislature 30 days notice before starting a special session, which will also be 30 days. Legislators in the majority adjourned a special session called by the governor immediately following the regular session in April to address unresolved budget and Medicaid issues. They reconvened their own special session on the budget in Anchorage several weeks later; one that included talk of a government shutdown during a majority versus minority battle over state spending. Walker has supported the idea of the state taking a larger role in the $45 billion to $65 billion liquefied natural gas export endeavor. Taking TransCanada’s stake in the pipeline and the North Slope gas treatment plant would give the state a better negotiating position and increase revenue over the life the project, the governor contends. Right now, the State of Alaska has a 25 percent share of the LNG plant proposed in Nikiski. TransCanada holds the state’s share of the 800-mile pipeline and the North Slope facility. BP, ConocoPhillips and ExxonMobil collectively hold the remaining 75 percent share of the project. TransCanada’s involvement is largely the result of the settlement of an agreement the state had with the company under the defunct Alaska Gasline Inducement Act. Buying out TransCanada, an Alberta-based pipeline company, before the end of the year will initially cost the state $108 million according to consultant estimates. The state — with a full 25 percent share of the project — would then also be on the hook for TransCanada’s development costs, roughly doubling Alaska’s contribution to $14 billion or more, depending on final construction costs. However, with TransCanada out of the picture the state would also see an additional $400 million in revenue per year for the duration of the 25-year project, along with a net present value increase of up to $1.2 billion, state consultant Black and Veatch predicts based on numbers from the state Revenue Department. State revenue from the Alaska LNG Project — pegged to start producing by 2025 — is currently estimated to be near $3 billion per year initially and increase to around $5 billion in later years. Republican majority leaders in the Legislature have not opposed buying out TransCanada but they have expressed concern about the state’s ability to finance an extra $7 billion or more with major budget deficits and credit agencies threatening to tweak Alaska’s sparkling “AAA” credit rating if budget challenges are not resolved soon. The prospect of a natural gas reserves tax came as a surprise to at least some in the Legislature. House Speaker Rep. Mike Chenault, R-Nikiski, said he was “shocked” by the reserves tax proposal in a release following the special session proclamation, as the governor did not hint at the possibility in meetings with legislators prior to the announcement. Walker argues a natural gas reserves tax is a way for the state to assure the Alaska LNG Project moves forward even if a producer partner pulls out. The tax on gas in the ground would be levied only in the event a producer decides to keep its share of North Slope out of the project. A reserves tax would not add to state revenue in the long-term if the project is fully completed. The state levied an oil reserves tax on producers as a way to generate revenue during construction of the Trans-Alaska Pipeline; however, the tax paid was then credited against producer obligations once oil was flowing. This time, the producers said a reserves tax would “complicate” and potentially “undermine” progress on the complicated mega project. The administration had not put forth bills for the special session as of early Oct. 14. Walker spokeswoman Katie Marquette said the governor will introduce legislation before the start of the session. The Legislature also needs to pass a constitutional amendment exempting the Alaska LNG Project from constraints in the state Constitution sometime before next August or the project could be delayed two years. State legal opinions have said an amendment would be required for the state to enter into long-term fiscal contracts with the producers. The Alaska Constitution forbids one Legislature from binding future Legislatures, which contracts for the 25-year project would do. An amendment must be passed by two-thirds of the House and Senate before being judged by voters during a general election. The Legislature needs to address the issue before mid-August to get it on the November 2016 ballot. Sen. Cathy Giessel, R-Anchorage, chair of Senate Resources said she has urged the governor to introduce an amendment in the special session to get the issue resolved. She was told fiscal contracts, which are being negotiated with the producers, need to be finalized before a constitutional amendment is offered, Giessel said. Elwood Brehmer can be reached at [email protected]

WOTUS suspended, Corps memos show dissention over final rule

Nobody outside of Alaska’s congressional delegation seems to agree about the Environmental Protection Agency’s Clean Water Rule. The 6th U.S. Circuit Court of Appeals in Ohio stayed implementation nationwide of the Clean Water Rule in a 2-1 decision Oct. 9. Judges Richard Allen Griffin and David McKeague found enough evidence to suspend it based on key parameters in the final rule that are not substantiated by adequate scientific conclusions and that the same parameters may not have been added to the Clean Water Rule in accordance with public comment regulations. The Clean Water Rule, also known as the waters of the U.S. rule, or WOTUS, took effect Aug. 28 in 37 states. Alaska and 12 other primarily western states challenged the regulation and received a preliminary injunction from a federal District Court in North Dakota, staving off implementation in those states, just one day before the rule took effect. Judge McKeague wrote in the stay order that the clarification the Clean Water Rule tries to achieve “is long overdue,” but how the EPA reached its conclusions needs review. The original Clean Water Act often relies up case-by-case analysis of water bodies to determine jurisdiction. The final rule deviated from draft versions by delineating some waters in and out of federal jurisdiction through “bright line” boundaries.” Under the final rule, waters adjacent to traditionally jurisdictional waters that are within the 100-year floodplain to a maximum of 1,500 feet are subject to the Clean Water Act and from the jurisdictional waters under federal authority. Isolated water bodies with a “significant nexus” to navigable waters, which are considered waters of the U.S. and fall under the Clean Water Act, must also be within a 100-foot floodplain of the navigable body and within 4,000 feet of the navigable, jurisdictional water to fall under federal authority based on the new rule, the EPA states. The demarcations were added to the Clean Water Rule after the public comment period, possibly violating the Administrative Procedure Act which requires that final rules must related to what is in the proposed rule. “(The EPA’s) argument that ‘bright line’ tests are a fact of ‘regulatory life’ and that they used ‘their technical expertise to promulgate a practical rule’ is undoubtedly true, but not sufficient,” McKeague wrote. Excluded from the final Clean Water Rule are ditches that flow intermittently, according to the EPA. It does not change municipal storm sewer regulations. Griffin and McKeague also concluded that “it is far from clear” whether the jurisdiction limitations in the new rule are in-step with a U.S. Supreme Court decision on the Clean Water Act. In 2008, the Supreme Court ruled that for a water body to be under federal jurisdiction it must either be a traditional navigable water or have a “significant nexus” to navigable waters. The wetland or water body in question must significantly affect the chemical, physical or biological makeup of any downstream navigable waters. That Supreme Court ruling in Rapanos v. EPA overturned a prior 6th Circuit decision that favored the agency. Alaska’s congressional delegation welcomed the Circuit Court’s decision. Sens. Dan Sullivan and Lisa Murkowski and Rep. Don Young have characterized the Clean Water Rule as expansion of EPA jurisdiction outside of the boundaries set in law under the Clean Water Act. “(The) decision to put a national hold on the controversial WOTUS rule is further good news for opponents of the EPA’s culture of overreach,” Murkowski said in a formal statement. “I’ve been fighting to reign in the EPA and the harmful impacts the WOTUS rule could have on almost every corner of Alaska. I will continue my efforts to do my part to ensure this rule will never be imposed on the state.” Murkowski, who chairs the Senate Interior Appropriations Subcommittee, added a provision to the 2016 EPA and Interior Department budget bill prohibiting the agency from funding implementation of the Clean Water Rule. Young said the rule could “create insurmountable hurdles for even the most basic activity” and significantly damage local economies in Alaska. Sullivan, who last year campaigned largely on pushing back against federal overreach, said in a release from his office that he is grateful for the court’s decision. “This rule is a prime example of this administration’s persistent disregard for the rule of law and yet another attempt to bypass Congress and the American people by granting the EPA vast new authority over lands across the country, particularly in Alaska, which is home to 60 percent of the nation’s jurisdictional waters,” Sullivan said. The EPA has contended since proposing the draft rule in April 2014 that it would clarify jurisdictional ambiguity that exists under the Clean Water Act for some wetlands and water bodies. Its economic analysis of implementing the rule, published in May, concludes fewer waters would be under federal authority. “Compared to the current regulations and historic practice of making jurisdictional determinations, the scope of jurisdictional waters will decrease, as would the costs and benefits of CWA (Clean Water Act) programs,” the analysis states. The agency also argued in court to maintain status quo — keep the rule in place — while it is challenged. While the states would not suffer immediate and irreparable harm if the rule was kept in place, the court found no indication the nation’s water bodies are in peril without it at least while the legalities are sorted out. “What is of greater concern to us, in balancing the harms, is the burden — potentially visited nationwide on governmental bodies, state and federal, as well as private parties — and the impact on the public in general, implicated by the rule’s effective redrawing of jurisdictional lines over certain of the nation’s waters,” the order states. Judge Damon Keith questioned the 6th Circuit’s subject-matter jurisdiction in his dissent and did not attempt to evaluate the merits of the case. Corps contradictions There also appears to be dissent among rank and file in the U.S. Army Corps of Engineers regarding the final Clean Water Rule. The Army Corps of Engineers manages Clean Water Act programs and permitting for the EPA. Corps Assistant Chief Counsel for Regulatory Programs Lance Wood wrote in an April 24 internal legal analysis of the final draft rule that the 4,000-foot jurisdictional limit on certain water body types would exclude important components of navigable waters that have been under federal authority since 1975. “The corps believes that the 4,000 feet limit on jurisdiction would cause significant adverse environmental effects as a result of the loss of jurisdiction over a substantial amount of jurisdictional ‘waters,’ based on the Corps’ experience in implementing the CWA Section 404 (wetlands) program and performing the majority of jurisdictional determinations under the CWA,” Wood wrote. EPA staff told the Corps during a March conference call that the agency planned on cutting off jurisdiction at 5,000 feet from traditional navigable waters. Then, according to Wood, the EPA changed its position three days later and decided on the 4,000-foot cutoff, thus demonstrating the “arbitrary nature” of the limit, he noted. Corps staff also presented 15 examples of the types of waters currently under jurisdiction that would be excluded under the draft final rule to Assistant Secretary of the Army for Civil Works Jo-Ellen Darcy as well as EPA decision-makers and technical staff, according to Wood. He claims the findings were not countered. “No one has presented any basis to refute or challenge the Corps’ determination that the draft final rule would cause significant adverse effects on the human environment and thus would require an (environmental impact statement) before the final rule could be promulgated in its current form,” Wood wrote. As the court noted, Wood states the 4,000-foot cutoff was first presented in the final draft rule after public comment ended, which likely violates the Administrative Procedures Act. Wood contends the final Clean Water Rule should address isolated water bodies — those subject to the 4,000-foot rule — as the proposed rule did, on a case-by-case basis. Finally, the arbitrary nature of whether isolated water bodies are included in jurisdiction could be seen as “regulatory over-reach” because it contradicts Supreme Court decisions, which undermines credibility of the rule, according to Wood. Another internal Corps memo from May 15 questions the legitimacy of the Economic Analysis of the EPA-Army Clean Water Rule published in May. Corps Regulatory Program Chief Jennifer Moyer wrote, “the document mixes terminology and disparate data sets” and also “makes certain assumptions that have no analytical basis.” The report “grossly overestimates” the amount of compensatory wetlands mitigation required under Section 404 of the Clean Water Act, according to Moyer. Section 404 wetlands permits are typically administered by the Army Corps of Engineers. She added that the EPA requested no quality checks on mitigation data. “EPA appears to have placed its own data into tables originally provided by the Corps. This results in a gross misrepresentation of the corps’ raw data,” Moyer wrote. She ended the memo by requesting that any reference to the Army Corps of Engineers’ participation in the analysis should be removed by the EPA. An Army Corps of Engineers spokesman said the Corps could not comment on the Clean Water Rule because of the ongoing litigation. Despite the concerns of Corps staff, Army Assistant Secretary Darcy testified Sept. 30 before the Senate Subcommittee on Fisheries, Water, and Wildlife, chaired by Sen. Sullivan, that the Army was an “active partner” in developing the Clean Water Rule with the EPA. “I am proud of the Army’s role in developing the rule,” Darcy said. “We should stand should to shoulder with our colleagues at EPA in support of the merits of the final rule and the process used to develop it.” President Barack Obama appointed Darcy to her post in 2009. Drafting of the final rule produced a lively and productive interagency process, between not only the corps and the EPA, but with other agencies as well, according to Darcy. She also said the varying interpretations of the rule are part of the vetting process. “The inevitable internal differences of opinions encountered along the way to this final rule were not unusual in the course of a rulemaking process,” Darcy said. The Army followed the EPA’s Administrative Records Guidance manual, she said, and the public record of the rulemaking was filed with the 6th Circuit Court of Appeals shortly before her testimony. Elwood Brehmer can be reached at [email protected]

Hospital CEOs: Prioritizing primary care over services a must

Reducing Alaska’s health care costs, or at least limiting cost escalation, will require philosophical shifts from both patients and providers, according to the leaders of three of the state’s hospitals. Central Peninsula Hospital CEO Rick Davis said the first step is getting providers on board with a wholesale change from the fee-for-service payment model that dominates Alaska to a payment-for-value structure. Davis, Alaska Regional Hospital CEO Julie Taylor and PeaceHealth Ketchikan Medical Center Chief Administrative Officer Ken Tonjes discussed care models Oct. 9 at the State of Reform health care conference in Anchorage. The fee-for-service model does not incentivize quality care; however, that’s not to say Alaska physicians are not providing good care. The value equation of care quality divided by cost simply is not emphasized, according to Davis. “We compete on who can do the most surgeries, who can do the most MRIs, because we get paid for doing that,” he said. “If the quality is there, that’s nice, but it doesn’t really matter to the provider because we’re still getting paid anyway.” If a procedure needs to be repeated, providers just get paid twice, he noted. Davis envisions what is beginning to happen in the Lower 48 coming to Alaska, he said in an interview. That is, the “value-based” purchasing components of the Affordable Care Act, or ACA, spreading to private payers. Under the ACA, some Medicare payments are being held back based on patient satisfaction and procedure quality scores. This year is the first year for provider penalties under the Medicare Physician Quality Reporting System set up by the ACA. Penalties result from performance two years prior, so physicians who did not report in 2013 or were found unsuccessful that year receive a 1.5 percent penalty on Medicare payments, according to the American Medical Association. The penalty increases to 2 percent in 2016. Lower 48 insurance companies are beginning to follow the ACA methodology, Davis said. Bundled payments for predictable procedures — hip and knee replacements and back surgeries among others — that include “the whole episode of care” down to physical therapy also emphasize value for payment, he said. Payers in Alaska have begun to ask for case rates and bundled payments. While no providers have agreed to those terms yet, Davis predicted they are not far off. The state’s small insurance market could slow the growth of bundled payments because insurers have less leverage, so it will likely start with the government structure and evolve into private plans. “Once the practice is in place it becomes sort of a natural progression” through the types of payers, Davis said. Davis, Taylor and Tonjes all agreed that hospitals need to take a back seat in the state’s care structure. “We all have to take a little bit of a leap of faith,” Tonjes said. He emphasized that patients aren’t the only ones who need to change their behavior; hospital administrators do too. Taylor outlined the reasoning behind Alaska Regional’s decision announced in January to open a community health clinic in Anchorage’s Mountain View neighborhood, an area currently lacking in primary care. However, a bus route takes patients directly from Mountain View to the Alaska Regional emergency room, she noted. “I’m paid very well for patients that come in with sniffles and sore throats and it’s not the right thing to do,” Taylor said. “Reimbursement does not encourage us to keep people out of the ER.” The Mountain View clinic is an effort to put proper, economical care where it is needed most, she said. Taylor has led Alaska Regional for nearly two years following hospital administration positions in Idaho and Denver. She said primary care physicians led the decision-making process of appropriate care at her previous hospitals, another Lower 48 lesson Alaskans could learn from. The idea of having one’s health care guided by a primary care doctor doesn’t always sit well in Alaska, when direct access to specialists is available, according to Taylor. The lack of care management that exists in the state is costing everyone a lot of money, she said, because preventative care and less-expensive treatment options often aren’t explored. Taylor used the example of a patient going under the knife for back pain who might have missed key care steps such as physical therapy because they went directly to a specialist before consulting a primary care physician. “This is not just the hospital reducing cost or physicians aligning; this is changing behavior and an expectation (by patients) that’s been set for many years,” she said. In small Alaska communities, hospitals will still be the umbrella organization for care, but patients will be directed to primary physicians under this coordinated care model. Davis said he is in the early stages of shifting the mentality among providers towards a coordinated care model at Central Peninsula Hospital. Population health management is an angle of coordinated care he feels could work well in Alaska. In the population health management structure, large payers — state Medicaid and large defined groups — and providers agree to a lump sum payment amount to cover groups of patients numbering into the thousands each year. “(Population health management) gives the payer a confidence that their costs aren’t going any higher and it incentivizes the system to put better coordination of care in place,” Davis said. Because group members can now go out of network and still charge the provider group, providers are encouraged to get the patient as healthy as possible as inexpensively as possible, according to Davis. Payment amounts are negotiated on available data and stop-loss insurance for providers is available to cover costs exceeding the payment, particularly for smaller groups where percentage cost variance risk increases. The group management system also pushes provider networks to invest in behavioral health and primary care as ways to avoid high-cost ER use and prevent long-term conditions as often as possible, Davis said. Alaska’s primary care and behavioral health provider shortage would not be a major issue under a coordinated care model, according to Davis. According to the Alaska’s Health Workforce Vacancy Study, about 20 percent of primary care positions are vacant in rural areas of the state. Rural behavioral health positions are 14 percent vacant, according the report released in August 2014. Statewide, there is a need for a 10 percent increase in behavioral health professionals, the report states. Coordinated care has helped increase wages for primary care physicians and slowed specialist pay increases in the Lower 48 where it has been implemented, he said. Higher wages in Alaska should encourage more primary care and behavioral health providers, he said. “The incentive is to shift the money over to those primary care providers who are going to be the captain of the ship,” Davis said. Elwood Brehmer can be reached at [email protected]

Changes to credits eyed as payments hit deficits

When Gov. Bill Walker vetoed $200 million of oil and gas tax credits from the state budget June 30, he said it was done to “start a discussion” about the incentive program. It worked. He called the current credit structure “unsustainable” given the state’s $3.5 billion deficit and low oil prices that are forecast to stay that way for several years. Agree with the veto or not, Sen. Cathy Giessel established an Oil and Gas Tax Credit Working Group that has met five times since early September to review the how the state’s current tax credit structure impacts the industry and state revenue. Walker’s veto did not eliminate any credit payments; rather the governor deferred $200 million of $700 million appropriated in the budget for the credits from fiscal year 2016. Thus, the $200 million will be added to anticipated credit demand in fiscal year 2017, which begins July 1, 2016. Tax Division Director Ken Alper said the administration has tried to work with industry and investors to resolve any liquidity issues arising from the lower state credit repurchase limits this fiscal year. Overall, more than 20 meetings have been had with industry, investors, oil and gas support companies and legislators to understand the importance of the credits and how the program could be revamped, Alper said. “What’s important is a plan of transition. We don’t want to pull the rug out from anybody,” he said. The Oct. 13 working group meeting focused on the lesser-known North Slope credits. Cook Inlet credits have been praised by industry and many in the Legislature for helping spur the resurgence in natural gas production in the basin. Since the 2007 fiscal year, Alaska has paid out $7.4 billion in oil and gas tax credits, with all but $1 billion of that going towards North Slope work. The former tax regime known as ACES was in place from fiscal year 2008 until Jan. 1, 2014, when the current tax structure under Senate Bill 21 took effect. However, 65 percent of the nearly $630 million of credits repurchased in fiscal year 2015 was for work south of the Slope in Cook Inlet and “Middle Earth” Alaska — everywhere else. So far this fiscal year about $425 million in credits has been repurchased of the $500 million available after the governor’s veto. Most of that money has gone to Cook Inlet and Interior work, according to the Tax Division. The State of Alaska offers four types of oil and gas tax credits that can either be directly repurchased by the state or used against a tax liability. They are: a credit for expenditures and operating losses; a credit to help cover exploration expenses; a per-barrel credit for small producers; and one used against corporate income tax. Alaska Oil and Gas Association CEO Kara Moriarty said the credits are the “core” reason many small independent companies are in the state. However, Alper said the state’s production tax revenue could go from about $300 million in fiscal 2015 to nearly zero if the major North Slope producers, BP, ConocoPhillips and ExxonMobil, post net operating losses in the state this calendar year. That’s because the companies could claim the 45 percent net operating loss credit against the 4 percent gross minimum production tax for legacy oil. “Tax credits, which are tied more to spending, have outstripped the production tax, which is tied more to the price of oil,” Alper said. He added that neither of the state’s recent oil tax regimes, ACES and SB 21, which have been the focus of intense political battles, were drafted with $50 per barrel oil in mind. The tax structures were meant to work with oil prices in the $80 to $120 per barrel range, Alper said. The state also receives royalty payments, corporate taxes and property taxes from the oil industry. Those totaled $1.8 billion fiscal year 2015 that ended June 30. The small producer per-barrel credit will sunset — the long Alaska summer type of sunset — in 2016. Producers pulling less than 100,000 barrels per day have been eligible to get the credit for up to $12 million. The credit total scales down towards zero as production increases from 50,000 barrels to 100,000 barrels per day. The small producer credit will close to new applicants next year, but companies can receive the credit for up to nine years. Alper said small Slope producers received $50 million from the credit in fiscal year 2015, all of which was taken against tax liability, as the credit is not refundable. Most exploration credits on the Slope expire along with the 2016 fiscal year, but most of those expenditures will continue to qualify for a 35 percent net operating loss credit, according to Alper. At the same time, the Department of Natural Resources will take a hit. Companies taking advantage of the exploration credits must provide their findings to the state. “The seismic and down-hole data is lost to the state when the exploration credits go,” he said. Potential changes to future credit programs could include an annual cap on state repurchases, Alper said; the current credits are unlimited, with the budget line items drawn from what the state predicts will be claimed in the coming fiscal year. He was quick to emphatically note that any alterations discussed at the meeting were purely ideas, not proposals from the Walker administration. A pre-approval process could tighten what work is eligible for tax credits. Eliminating “stackable” spending and loss credits is another of several options, Alper said. New programs could include direct state loans through the Alaska Industrial Development Authority to help smaller companies fund projects, the state taking a direct working interest in a project or a combination of both, according to Alper. AIDEA has helped finance Cook Inlet natural gas projects and Brooks Range Petroleum’s Mustang Field infrastructure on the North Slope. Sen. Peter Micciche, R-Soldotna, said the state needs to look at the “long game” and not be engrossed in immediate potential savings from cutting oil and gas tax credits. “Credit revisions affect the development side” of oil and gas projects, Micciche said. Challenging the development economics of the equation will likely kill future key production, he warned. Micciche manages the ConocoPhillips liquefied natural gas export facility in Nikiski. Anchorage Democrat Sen. Bill Wielechowski encouraged analyzing the current credit structure, but said cuts and improvements need to be made. “If we don’t make cuts here we’re going to have to start levying taxes on Alaskans and going after the Permanent Fund and that’s not something I’m going to support,” Wielechowski said. Elwood Brehmer can be reached at [email protected]

Buyout doubles cost, adds revenue

Gov. Bill Walker’s proposal to increase the state’s share in the Alaska LNG Project could put Alaska on the hook for more than $14 billion, but also generate about $400 million in additional annual revenue, according to a report from Department of Natural Resources consultants. The report released Sept. 30 performed by Black and Veatch, a consulting company that has evaluated the Alaska LNG Project in the past, firmed up an earlier estimate that the near-term cost for the state to buy out TransCanada Corp. would be $108 million. Alaska would then be on the hook, however, for TransCanada’s 25 percent portion of financing the North Slope gas treatment plant and the 800-mile pipeline south to Nikiski. The state’s share in construction costs would roughly double, from $6.5 billion to $13.1 billion without TransCanada’s involvement. The projections in the report assume a baseline $45 billion cost for the Alaska LNG Project and long-term oil prices in the $80 per barrel range, also in 2015 dollars. Buying out TransCanada is an agenda item for the special legislative session Walker called to start Oct. 24 in Juneau. “I appreciate this objective review of the consequences of the state purchasing or not purchasing TransCanada’s share of the (Alaska LNG Project),” Walker said in a statement. The $400 million in annual cash flow increase — in 2015 dollars — by terminating TransCanada’s role, would come from not paying the company’s tariffs on the state’s gas through the North Slope plant and the pipeline. Overall cash flow to the state over the first 20 years of operations would increase $7.4 billion, or about 6 percent, without TransCanada, according to the report. It estimates annual state revenues in the $3 billion to $5 billion range, totaling $76.7 billion over 20 years with TransCanada’s participation and $84.1 billion without the extra partner. Black and Veatch also concluded that the net present value to the state without TransCanada could be up to $1.2 billion because of the state’s ability to secure better financing for project infrastructure. Alaska’s midstream cost obligations would also drop from $8.20 per million British thermal unit, or mmbtu, with TransCanada to $7.30 per mmbtu without the company because the state should be able to secure lower cost financing, Black and Veatch estimates. That midstream cost alone — collectively the expense of the North Slope natural gas treatment plant, the pipeline and liquefying the gas — is roughly equal to what Asian markets are currently paying for delivered LNG, according to the Federal Energy Regulatory Commission. Landed LNG prices in Japan, the world’s largest LNG buyer, were $7.25 per mmbtu in September, a FERC chart states. Comparably, the landed price was nearly $15 per mmbtu across Asia in May of 2013 when the Alaska LNG Project structure began to take shape. House Resources Committee vice chair Rep. Mike Hawker, R-Anchorage, said in an interview that he was originally skeptical of the role TransCanada could play in the project when Senate Bill 138, the state’s guideline legislation for the project, was being debated. However, Hawker became convinced that “TransCanada brought a lot to the table and did not take a very big piece of the revenue pie,” he said. Hawker emphasized that the Black and Veatch report lacks critical information about its background assumptions. He also noted Black and Veatch declares that substantial portions of the report were provided by the Department of Revenue. “We need more than just a summary political document,” Hawker said. Senate Resources chair Sen. Cathy Giessel agreed that the report lacks important details. Giessel has said recently that she believes the Legislature would be open to buying out TransCanada if it makes fiscal sense for the state in the project. The latest report “causes pause because of the cash calls that are articulated in it,” she said. Black and Veatch cites state financial consultants First Southwest Co. and Lazard Ltd. that contend Alaska would likely have the ability to access bank debt and bond markets to replace TransCanada’s debt. Giessel said conclusions from the financial consultants haven’t been released yet. “That’s key information,” she said of the financing assumptions. “Clearly Black and Veatch thinks we can finance (the buyout). Really? Show me the money.” Currently, TransCanada, an Alberta-based pipeline company, has the state’s portion of the gas treatment plant and the pipeline and is responsible for financing a quarter of the engineering, design and construction of the infrastructure. The State of Alaska owns a 25 percent share of the liquefaction plant on the Kenai Peninsula, which is projected to be nearly half of the total project cost. The three major North Slope producers, ExxonMobil, ConocoPhillips and BP, make up the other 75 percent of the project, with shares equity shares equal to their ownership in their natural gas planned for export. The state has two buyout deadlines for TransCanada based on the current project agreements, Dec. 31, 2015, and Dec. 31, 2018, which would be just prior to construction. Buying out TransCanada late in 2018, after the front-end engineering and design, or FEED, stage would cost the state about $490 million. That would be roughly TransCanada’s development costs in the project, according to the study. Elwood Brehmer can be reached at [email protected]

Cohen Group questions EPA’s Pebble process

Former Maine Senator and Defense Secretary William Cohen agrees with Pebble Limited Partnership on at least one point: the Environmental Protection Agency’s Bristol Bay Watershed Assessment is not an adequate document to replace the federal environmental permitting process. Pebble contracted Cohen to review the procedure the EPA used to develop the assessment, which is the document the agency has based its Clean Water Act Section 404(c) proposed determination on. Section 404(c) of the Clean Water Act gives the EPA authority to prohibit any development project that it deems would have an “unacceptable adverse effect” on wildlife and nearby water supplies. Cohen asserts in the opening pages of the 364-page report that the work undertaken by him and his firm The Cohen Group was conducted as an independent review of the Section 404(c) action that began last year and the preceding events. He also notes that the report is not meant to take a stance on the project, rather it is to evaluate the process the EPA used in regards to Pebble. He further stated that Pebble had no control over the conclusions he reached and was not allowed to perform any edits on the report. More than 60 people were interviewed as part of the review process, including three former EPA administrators. The EPA did not allow current agency personnel to be interviewed for the report, according to Cohen. He claims that the EPA’s use of the 404(c) authority “compounded the shortcomings” of the assessment, that it used assumptions based on economic analyses done for Pebble to draw its conclusions instead of actual permit applications. Cohen states that EPA personnel had “inappropriately close relationships with anti-mine advocates” while compiling the assessment, raising questions as to whether the agency “orchestrated the process to reach a predetermined outcome.” A key argument in Pebble’s second lawsuit against EPA is that agency personnel and mine opponents formed de-facto advisory committees, which left Pebble out of the loop while researching the Bristol Bay Assessment, and violated public processes intended to be objective. Pebble is the first time the EPA has used its 404(c) authority to attempt to block a project before Clean Water Act permit applications have been submitted to the U.S. Army Corps of Engineers, which handles the permitting process for the agency. A U.S. District Court judge has stopped the 404(c) initiative at least temporarily while Pebble’s claims are heard in court. The EPA Inspector General is also examining the agency’s actions in regards to the Bristol Bay Watershed Assessment and Cohen calls for a Congressional Oversight Committee review. “This project is too important, for all stakeholders, to pilot a new, untested decision-making process,” Cohen wrote. “The fairest approach is to use the well-established permit/(National Environmental Policy Act) process, and I can find no valid reason why that process was not used.” He bases his conclusion at least partly on the EPA’s concession in comments to peer reviewers that gaps in the 1,100-page assessment that would be addressed in the NEPA process, which Pebble has not yet attempted to initiate. Sen. Lisa Murkowski criticized Pebble in 2013 for leaving Alaskans wondering if the controversial project would ever be built and called for the then-Northern Dynasty Minerals and Anglo American consortium to release more specifics about its plan. Pebble opponent groups were quick to criticize Cohen’s report after its release. Statements from Trout Unlimited Alaska, United Tribes of Bristol Bay and Commercial Fisherman for Bristol Bay all highlighted the fact that it was paid for by Pebble Limited Partnership. “The report wants Americans to believe that Pebble is the victim of an ‘unfair’ process. Let’s be clear, EPA’s process is one that is authorized by Congress under the Clean Water Act and is intended to be used in circumstances where mine activities will do insurmountable damage to the spawning rivers and habitat of this country’s last great sustainable wild resource: salmon,” a statement from United Tribes of Bristol Bay reads. Trout Unlimited Alaska Director Nelli Williams called the report “propaganda disguised as a credible document.” Pebble CEO Tom Collier said in a release that the EPA failed to take into account the potential economic benefits of a mine to an economy reliant upon a seasonal resource or the use of mitigation and control measures to reduce a mine’s impact on the environment, points noted by Cohen. “This report clearly makes the case about the criticality of a stable, objective and transparent permitting process for evaluating resource projects such as Pebble,” Collier said. “We did not ask The Cohen Group to evaluate a mine at Pebble as our view remains that this should be handled via the permitting and NEPA review process. The report validates the established regulatory and NEPA process is the fairest and most appropriate process for evaluating a complex issue such as ours.” The report also notes that Pebble participated in the assessment process with the EPA’s assurance that the final document would not be used to make a Section 404(c) decision. Since the release of the final Bristol Bay Watershed Assessment in January 2014, the EPA has acknowledged its conclusion that large-scale mining in Bristol Bay would significantly and irreparably damage the region’s salmon fisheries was drawn from the assessment as the primary evidence for working to ban the proposed mine. The official assessment process began in February 2011.

P3s offer financing options for cash-strapped governments

Public-private partnerships are gaining popularity across the country as governments with tighter budgets — see: Alaska — look for ways to fund critical public infrastructure. The potential benefits of the partnerships, best known as P3s, and the often-overlooked pitfalls were discussed Oct. 5 at the International Economic Development Council convention held in Anchorage. Generally, there are two categories of P3s, the international and American project models, each with its own merits. John Finke, a program manager for the National Development Council said the first and biggest difference between the project structures is how they are financed. The American model takes advantage of financing that is uniquely American: tax-exempt financing, typically through bonds. Tax-free debt can be sought through nonprofit public benefit corporations or by partnering with a more traditional 501(c)3 nonprofit. International model P3s, most common in Europe, Canada and Australia, bring private equity and private debt to public facilities, infrastructure and buildings, Finke said. It uses a long-term public concession for operations in buildings — up to 40 years in some cases. “It’s essentially control privately, ownership publicly,” Finke said of the standard concession agreement part of an international P3. American P3s typically use short-term building management contracts for operations and maintenance, along with a long-term lease from the nonprofit entity to the government for use of the building. Taxable financing is more expensive; “equity is the most costly source of money,” Finke noted, but it could open a project up to more partners. International P3s typically have higher debt-to-equity ratios and multiple lenders, compared to tax-exempt American model projects with a single lender. Finke has participated in 30 public-private partnerships across the U.S., including the $28 million expansion of the Wood Center dining hall on the University of Alaska Fairbanks Campus. The 46,000 square-foot addition to the Wood Center was done with no state funding. UAF will take back ownership of the facility when the debt, financed by the National Development Council, is paid off. The benefits of using the P3 process start with the simple principles behind the public and private sectors, according to Finke. “The whole gain in public-private partnerships tends to be getting out of the public works process,” he said. “The private sector is motivated by profit.” The public process has its place, but it does not have a motive for efficiency. However, private delivery of a project with performance incentives usually leads to lower cost, he said. Most public buildings, and infrastructure for that matter, are built using design-bid-build, or DBB, procurement. A P3 allows for nontraditional procurement methods that could save time and money. The goal of the American model is to take the delivery process out of the public sector, Finke said. He described each project as having three buckets: finance, construction and operations. “In those three areas the public’s goal ought to be to figure out how to pick the pieces out of the bucket that deliver the least costly project,” he said. “You cannot do that in a public works arena.” Finke and Arizona Department of Transportation Director of P3 Initiatives Gail Lewis both encouraged bringing a project team together earlier than would be normal in the public process. Finke said it provides an opportunity to “value engineer” a project as well as determine a feasible cost, which provides a baseline for bidding the project on a level playing field. That all helps the selection committee better understand the project and pick the best partner, he said. The quality cost estimate can also be used as a cap or limit for the project, above which the developer incurs any cost overruns. Finke also encouraged the private partner bid out as many aspects of the project as reasonable to drive down cost as well. When evaluating a highway project’s potential for being a P3, Lewis said she gets the engineering, finance, environmental and right-of-way teams together in one room. “At the end of the day you end up with a 70-80 percent confidence level that you can get a project done for somewhere in this cost range, somewhere in this time frame and that gives you the basis for your own knowledge of this project,” Lewis said. From there a project’s cost value is rendered, and determining whether or not partnering with the private sector can improve that value can follow. About half of the time it’s found that the public sector process is the way to go, she said, but that determination couldn’t be made without a meeting of the minds. Lewis also warned against claims — popular with politicians — that P3s don’t cost anything extra. “If there’s going to be private money involved you have to build the return, the amount of private capital that’s going to be returned and the interest that’s going to be repaid, into the model. And it’s often that you find the numbers just don’t work,” she said. “The next time someone tells you (that) you don’t have to raise the gas tax to pay for a project, just use a P3, it’s just not true.” Elwood Brehmer can be reached at [email protected]

Legislative committees get update on rural water projects

Despite major progress made in plumbing Alaska’s rural communities, the state is still more than a half a billion dollars behind in funding rural sanitation infrastructure. The actual need, according to the Department of Environmental Conservation, was more than $700 million in the 2014 fiscal year, while state and federal funding provided a total of $51.5 million in relief through the Village Safe Water and Wastewater Infrastructure program. That left a gap of $660 million. DEC has also received about $2.5 million per year over the past several years in federal assistance for subsidies and loans awarded through the Alaska Drinking Water Fund. Government funding for rural water systems has been mostly flat and even declined some since 2006, when DEC got nearly $79 million and the gap was $315 million, the department states. “A lot of the early systems we put in the (1970s), ‘80s and ‘90s are deteriorating; they’re aging and they need replacement,” DEC Facility Programs Manager Bill Griffith said during an Oct. 2 gathering of House and Senate committees. The joint meeting of the House Economic Development, Tourism and Arctic Policy and Senate Arctic committees was intended to update the bodies on work state agencies have done to implement the recommendations of the final state Arctic Policy Commission report. The report, published in January, directs state agencies — DEC in this case — to “foster the delivery of reliable and affordable in-home water, sewer and sanitation services in all rural Arctic communities.” The issue is related to un-served homes, but also many with drinking water systems already installed. Frequent regulatory changes to federal drinking water standards continually push rural water systems in place out of compliance and add to the fiscal need, Griffith said. For more than 50 years, DEC’s mission has been to eradicate the “honey bucket” from Alaska, and significant progress has been made in spite of the lack of money today. In 1985, fewer than a quarter of rural Alaska homes had running water and flush toilets; by 1996, the number of fully plumbed rural homes was up to 55 percent, according to DEC. Today, more than 90 percent of rural Alaska households have the necessities that are an afterthought elsewhere. A fairly large number of very small communities, 31 of them with about 3,500 homes, which comprise 17 percent of rural Alaska communities, remain un-served by water and sewer systems. Griffith said those villages are primarily in the Interior and on the Yukon-Kuskokwim delta. Adding to the need is that a lack of in-home water and sewer systems can lead to skin infections and respiratory illnesses for residents. Griffith said nearly all households in the state have access to clean water, but without plumbing they do not have access to enough clean water. He added that more information is needed to fully understand the exact relationship between the illnesses and the amount and uses for water in the home. Since about 1970, the state has focused on a “centralized” approach to water treatment, according to Griffith. That is, treating 100 percent of in-home water to full regulatory compliance, regardless of whether it is intended for drinking or flushing a toilet. Storing the necessary quantities of water, distributing that treated water, either via pipe or hauled by vehicle and collecting and storing household sewage are expensive propositions in rural communities particularly given the added cost of supplying the heat often needed to keep the system flowing. Installing the original system is expensive in itself, but maintaining it is another intense and expensive burden for cash- and expert-strapped communities, Griffith said. As a result, “the cost of operating a water and sewer system (in rural Alaska) is magnitudes greater than it is in urban areas or the Lower 48,” he said. Water and sewer user fees in some Western Alaska communities are more 6 percent of the areas’ median household income. The Environmental Protection Agency’s sustainability threshold for water and sewer fees is 5 percent. The average cost in the Lower 48 is just less than 2 percent of median income, while Juneau and Anchorage are cheaper yet. It’s clear a solution to these issues will not come from federal or state grants. This is where DEC’s Water and Sewer Challenge comes in. In 2013, the department began an international soliciting effort to grab the attention of engineers, social scientists, research institutions and manufacturers interested in solving Alaska’s rural sanitation challenges. This summer, six teams were narrowed to three finalists: one group led by the University of Alaska Anchorage and two private teams led by Tok-based Summit Consulting and Dowl Alaska, both engineering and consulting firms. Griffith said in an interview that contracts with the teams are being finalized. Part of the evaluation process includes the teams’ efforts to include input from the affected communities and their ability to draft an innovative design solution that will help close the $660 million funding gap. “This could be a place for innovation — a place for entrepreneurial opportunity,” Sen. Lesil McGuire said. Companies retain ownership of intellectual property used in the Alaska Water and Sewer Challenge to encourage private investment, Griffith said. Systems will be evaluated on 10 criteria and must provide 15 gallons of water per person per day, or 60 gallons per day for a four-person household. Those that can provide more potable water with less water delivery and wastewater removal will fare better in evaluation, according to DEC. Standard household service laid out by the challenge consists of kitchen and bathroom sinks, a toilet, a shower and washing machine hookups. Successful systems must also be usable within the confines of existing water systems in rural homes and require minimal additional floor space. Paramount for rural Alaska, systems must also have the capacity to be left unheated for multiple weeks and restart with minimal effort. The bottom line for the challenge is $135 per month; each system should meet performance goals without exceeding an operational cost of $135 per month, which is 5 percent or less of median household income in 75 percent of rural communities, DEC states. A full year of field tests will be done on the final systems, which will wrap up in 2017. A steering committee with then evaluate the results and systems demonstrating viable improvements over existing water supply and treatment methods will be deployed using funding sources available at the time. Griffith said DEC got $4 million for the challenge through an EPA appropriation and state match. “It’s a specific (EPA) appropriation for Alaska rural water and sewer,” he said in an interview. Whether or not $4 million will cover the entire program is unclear, given the cost to test the future systems is unknown, he noted. The state is also trying to take advantage of the U.S. chairmanship of the international, eight-member Arctic Council, Griffith said. DEC has proposed an international conference on water and sewer service in rural Arctic communities, to be held in Anchorage next fall. The premise of the conference has been supported by the State Department, Griffith said, but still needs “a couple hundred thousand dollars” to become reality. Elwood Brehmer can be reached at [email protected]

TransCanada buyout will cost $7B, but likely be worth it

Gov. Bill Walker’s proposal to increase the state’s share in the Alaska LNG Project could put Alaska on the hook for more than $14 billion, but also generate about $400 million in additional annual revenue, according to a report from Department of Natural Resources consultants. The report released Sept. 30 performed by Black and Veatch, a consulting company that has evaluated the Alaska LNG Project in the past, firmed up an earlier estimate that the near-term cost for the state to buy out TransCanada Corp. would be $108 million. Alaska would then be on the hook, however, for TransCanada’s 25 percent portion of financing the North Slope gas treatment plant and the 800-mile pipeline south to Nikiski. The state’s share in construction costs would roughly double, from $6.5 billion to $13.1 billion without TransCanada’s involvement. Buying out TransCanada is an agenda item for the special legislative session Walker called to start Oct. 24 in Juneau. The $400 million in annual cash flow increase — in 2015 dollars — by terminating TransCanada’s role, would come from not paying the company’s tariffs on the state’s gas through the North Slope plant and the pipeline. Overall cash flow to the state over the first 20 years of operations would increase $7.4 billion, or about 6 percent, without TransCanada, according to the report. It estimates annual state revenues in the $3 billion to $5 billion range, totaling $76.7 billion over 20 years with TransCanada’s participation and $84.1 billion without the extra partner. Black and Veatch also concluded that the net present value to the state without TransCanada could be up to $1.2 billion because of the state’s ability to secure better financing for project infrastructure. Estimates in the report assume a baseline $45 billion cost for the Alaska LNG Project and long-term oil prices in the $80 per barrel range, also in 2015 dollars. Currently, TransCanada, an Alberta-based pipeline company, has the state’s portion of the gas treatment plant and the pipeline and is responsible for financing a quarter of the engineering, design and construction of the infrastructure. The State of Alaska owns a 25 percent share of the liquefaction plant on the Kenai Peninsula, which is projected to be nearly half of the total project cost. The three major North Slope producers, ExxonMobil, ConocoPhillips and BP, make up the other 75 percent of the project, with shares equity shares equal to their ownership in their natural gas planned for export. The state has two buyout deadlines for TransCanada based on the current project agreements, Dec. 31, 2015, and Dec. 31, 2018, which would be just prior to construction. Buying out TransCanada late in 2018, after the front-end engineering and design, or FEED, stage would cost the state about $490 million. That would be roughly TransCanada’s development costs in the project, according to the study. Elwood Brehmer can be reached at [email protected] Look for updates to this story in an upcoming issue of the Journal.

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