Elwood Brehmer

Home sales decline around Alaska to end 2015

Home sales declined across much of Alaska in the fourth quarter of 2015, according to data provided by the Alaska Association of Realtors. Single-family transactions in Anchorage fell by 3.5 percent versus the last months of 2014, from 743 sales to 717. Condo sales fell by 9.6 percent in the state’s largest market, to 262 condos sold. Fourth quarter home sales fell by 4 percent in Fairbanks, 3.1 percent on the Kenai Peninsula and 2.6 percent in Southeast Alaska as well, compared to 2014. Average residential sale prices increased 2.4 percent to $358,400 in Anchorage and the average “days on market” also fell by 14.5 percent to 47 days, despite decreased sale activity. Condo prices in Anchorage fell by nearly 1 percent to $216,800. Single-family activity increased by 7.8 percent in the Matanuska-Susitna Borough and average sale price increased by 3.7 percent to $246,700. Along with that, the average number of days on the market for a single-family home in the valley fell from 73 at the end of 2014 to 63 in the fourth quarter of last year. Listing time in decreased by at least 14 percent for Southeast single-family homes and condos, as well as for Fairbanks, where the average single-family unit sold for $213,100 and spent just over two months on the market. Elwood Brehmer can be reached at [email protected]

Judge keeps subcontractors in port lawsuit

Subcontractors are still potentially liable for work done years ago on the disastrous Port of Anchorage expansion project, according to a federal court ruling. U.S. District Court of Alaska Judge Sharon Gleason ruled Jan. 13 that Quality Asphalt Paving Inc. and MKB Constructors, its working partner on the Anchorage port project in the late 2000s, are still subject to a lawsuit filed by the Municipality of Anchorage because the city never knowingly reconciled with the companies. Quality Asphalt Paving, or QAP, joined by MKB, filed a motion for summary judgment in the suit in August, claiming a September 2012 settlement for $11.1 million between the U.S. Maritime Administration, as the port project manager, and the subcontractors released them from liability. Gleason wrote in her Jan. 13 order denying the judgment motion that court records indicate the Maritime Administration, or MARAD, attempted to reassure the municipality shortly after the 2012 settlement that it did “not preclude (the municipality) from pursuing its own litigation.” An Oct. 19, 2012, letter from then Anchorage Mayor Dan Sullivan to MARAD Administrator David Matsuda supports the municipality’s contention that it was unaware of the settlement and further found the federal agency to be a weak negotiator, settling for $11.1 million when the agency found $11.5 million of a $17 million claim to be valid. Sullivan wrote that he was “surprised and disappointed” to learn MARAD settled a contract dispute with Integrated Concepts and Research Corp. on behalf its contractors QAP and MKB regarding the Port of Anchorage Intermodal Expansion Project. MARAD hired ICRC, a former subsidiary of the Kodiak-area Alaska Native corporation Koniag Inc., early in the project to act as its on-the-ground prime contractor. “When pressed whether ICRC (and subsequently its contractors) had been released from further claims, particularly claims that might be asserted by the Municipality of Anchorage, MARAD only made vague and general comments,” Sullivan wrote. “When further pressed as to whether funds of the municipality were used to settle the matter, MARAD pretended not to know the answer, although the clear implication was that the funds provided by the municipality were used without our knowledge or consent.” MARAD, a federal Transportation agency, was brought into the project in 2003 by the municipality to manage construction and be a vessel to acquire federal funding. Originally intended to update and expand the Port of Anchorage’s aging docks, the project was fraught with control and communication issues nearly from its outset. Those issues were manifested in construction problems and led to work being stopped partway through in 2010, which was never resumed. In all, the municipality spent roughly $302 million of state, federal and its money for virtually nothing. The Municipality of Anchorage originally filed suit in March 2013 against ICRC, dock designer PND Engineers Inc. and CH2M, which now owns a former project consultant. Anchorage filed a separate suit against MARAD in Federal Claims Court in February 2014 seeking to recover damages for the project. An August 2013 Inspector General report was deeply critical of MARAD for its handling of the Anchorage port project and other similar work in Hawaii and Guam. PND has long contended the construction problems associated with its patented Open Cell Sheet Pile dock were due to inexperienced contractors, not a faulty design, as the municipality and a study commissioned by the city conclude. PND filed a third-party suit against QAP and MKB, bringing the subcontractors into the tangled legal mess.   Elwood Brehmer can be reached at [email protected]  

Fairbanks wants bigger slice of $15.7B PILT pie

Emotions can run high when $15.7 billion is up for grabs. Decorum held Jan. 15 as mayors of the boroughs along the proposed Alaska LNG Project corridor debated the appropriate allocation of $15.7 billion the state and local governments could get in-lieu of traditional property tax revenue on the project’s infrastructure. However, the Municipal Advisory Gas Project Review Board meeting discussion certainly had an undercurrent of tension. Much of the back-and-forth centered on parsing out what is fair, particularly for the Fairbanks North Star Borough. While it’s widely assumed the Interior local government area will act as a hub for much of the project construction and operating activity, the current route of the 800-mile pipeline would cross only two miles of FNSB territory. That would leave the borough with a 0.2 percent allocation for the pipeline portion of the $15.7 billion payment in-lieu of property tax, or PILT, total. FNSB Mayor Karl Kassel has made it clear that he would not accept a scenario in which the borough received a PILT allocation based solely on infrastructure value within local government boundaries. Revenue Commissioner and board chair Randy Hoffbeck offered an allocation matrix at a December meeting that would split the PILT money based on infrastructure valuation, while leaving a small portion for distribution to local governments statewide based on population. Hoffbeck noted at the time that the model was intended to be a starting point for the discussion — a visual to outline the complex relationship between PILT takes by the State of Alaska, locales within the AK LNG Project corridor and the rest of Alaska. Kassel said in an interview that the Revenue Department’s draft is still the basis for discussion, but added that even as there is “somewhat of a general consensus” the final allocation will be something different, no one, including himself, has come up with an agreeable solution. The $15.7 billion PILT figure was negotiated by the state with the AK LNG Project partners as a sum to be paid over the initial 25-year life of the project. The yearly payments, starting about 2025, would be tied in part to the natural gas throughput of the project, with payments starting at $556 million and escalating to $706 million in year 25. If the project exceeds its initial life as expected and processes more gas, the final PILT sum could increase. Under the Revenue Department model — based heavily on allocating in-area asset valuation similar to a property tax — the Fairbanks North Star Borough would get just $75,600 per year for its two miles of pipeline. The Fairbanks North Star Borough will feel major impacts from the project despite holding only two miles of pipeline, Kassel emphasized. “We’re the supply depot; we’re the hub of the network,” he said in an interview. The Trans-Alaska Pipeline System, or TAPS, has given Fairbanks a very good idea as to what the community can expect with the gasline. Kassel said the borough’s payroll increased 75 percent during TAPS construction. He said he doesn’t expect growth on that scale given the state has matured greatly since the mid-1970s, but expecting growth up to 20 percent is not unreasonable, according to Kassel. He said at the meeting he expects everyone to fight for their communities, but Fairbanks “would rather not see the pipeline filled with the (Revenue Department’s) structure.” Regardless of the model, the State of Alaska will likely take a significant share of the PILT because 304 miles of the pipeline runs through unincorporated areas of the state north and west of Fairbanks and the state, as a 25 percent owner of the project, will presumably recoup its portion of the PILT. Without the state’s quarter share, about $11.8 billion would actually be split between the state and local governments. Matanuska-Susitna Borough Mayor Vern Halter proposed a model allocating 50 percent of the $15.7 billion PILT to the state, including the 25 percent state tax payback; 20 percent to areas with AK LNG Project infrastructure; and 30 percent to local governments statewide based on population each year. The 20 percent share for boroughs and the state with project assets would be weighted, with 70 percent as a ratio of asset value and 30 percent based on population. Kassel said the model has merit, but shouldn’t distribute facility asset values from the North Slope and the Kenai Peninsula boroughs because the gas treatment plant to the north and the massive LNG plant at the end of the pipe are wholly located within those areas. The ratio split should focus on the pipeline asset allocation to acknowledge impacts to Fairbanks, he said. Kassel suggested a 50-50 split of the pipeline portion of the PILT based on the location of assets and the population of the jurisdictions within the pipeline corridor. Hoffbeck noted that allocating based on population within the project corridor is “getting a long way from property tax,” but said it is up to the larger board to decide its recommendation. Halter said he doesn’t want the ultimate allocation “over-weighted to infrastructure,” which the Revenue model is, he contends. Kenai Peninsula Borough Mayor Mike Navarre said the idea that a PILT is not tied to property taxes simply isn’t accurate. The $25 billion LNG plant expected for Nikiski on the Peninsula is projected to bring in massive amounts of tax revenue for the Navarre’s borough even if it is taxed at a lower rate than current borough statute, as the negotiated PILT calls for. Navarre commented at the meeting and Kassel said in an interview that regardless of what the board recommends to Gov. Bill Walker, the Legislature makes the final decision. “I think it’s important for us to be involved and give it a best-faith effort to come up with the best recommendation we can,” Kassel said. “Where it goes from there — we know it goes into the sausage maker of the legislators and what comes out the other end — who knows?”    

Industry: Tongass timber forecast flawed

A U.S. Forest Service study projects growth in Tongass timber harvest over the next 15 years, but leaders of Alaska’s timber industry are saying the forecast is still too low. The draft Tongass National Forest Timber Demand report calls for a timber harvest increase from fiscal year 2014 of nearly 25 percent by 2030 on Tongass lands. Southeast mills took 39 million board feet of lumber from the national forest in 2014; the 2030 harvest is forecasted to be 51.8 million board feet. Alaska Forest Association Executive Director Owen Graham argues the demand analysis is based on a restricted timber supply, which artificially limits demand for Alaska forest products. “The analysis attributes the supply constraints to federal budgets and (National Environmental Policy Act) issues, but fails to acknowledge that its self-imposed standards and guidelines for its timber sale program have greatly increased the cost of harvesting timber sales,” Graham wrote in formal comments about the study. “These high costs are one of the primary reasons the agency has been unable to prepare economic timber sales.” Agriculture Secretary Tom Vilsack issued a memo in 2013 expressing an intent to transition to young-growth harvest in the Tongass National Forest within 15 years. That transition would be faster than was prescribed in the 2008 Tongass Forest Plan. Graham has said the industry needs to harvest at least some old-growth trees for about another 30 years to allow young, or second-growth, stands to fully mature, which takes about 90 years for most trees in Southeast Alaska. Young-growth stands are often more dense and thus hold more board feet of raw lumber. However, Alaska’s downsized timber industry in recent years has survived on high-value, “shop grade” lumber products from large spruce and hemlock trees harvested from the Tongass. Southeast sawmills will not be able to manufacture that high-value lumber from the 60-year-old, young-growth trees that would be available under an expedited shift away from old-growth harvesting, according to Graham. “The spruce custom-cut lumber that currently enjoys very high prices in the Pacific Rim markets will no longer be produced. Likewise, since shop grade hemlock lumber requires logs that are at least 16 inches in diameter, this high value lumber will also disappear,” he wrote. “What the (demand forecast) is missing is the most likely outcome of the transition strategy — the end of timber manufacturing in Southeast Alaska.” Allowing young-growth stands to mature another 30 years to age 90 would roughly double the harvestable volume per acre usable for Alaska mills, Graham said. Smaller logs can be exported to other markets, but that eliminates the value-added sawmill industry from the logging process, he said. The study forecasts the total Southeast timber harvest will increase from 120.6 million board feet in 2015 to 155.1 million by 2030. That includes timber sales from state land and Alaska Native corporation property, primarily the area Native regional corporation Sealaska Corp. Nearly all of the harvest increase will come from logs meant for export — 31 million board feet of the overall Southeast harvest increase of about 35 million board feet is in the form of export saw logs, based on the Forest Service projections. Sealaska, which gained 68,000 acres of formerly Tongass timberland in a conveyance from the federal government last year, exports nearly all of its timber as raw logs because it cannot process the logs in Alaska economically. Sealaska CEO Anthony Mallott has said the company wants to add timber processing and the new acreage will be an opportunity to study the economics of its entire timber business model. The study projects harvest from Southeast Alaska Native corporation lands will increase from 61.5 million board feet in 2015 to more than 80 million board feet 15 years later. Graham contends Sealaska is the only major private timberland owner in the region. According to Sealaska, it can now maintain an average harvest of 45 million board feet for the next 25 years, stretched from earlier projections of 45 million board feet 15 years. Sealaska is also interested in bidding on up to 20 million board feet per year of harvest from public lands. Further, Alaska’s Southeast State Forest has a maximum sustainable harvest of about 12 million board feet per year, according to state Forestry Director Chris Maisch. The study projects harvests from State of Alaska lands in the region to grow from 18.2 million board feet to 23.1 million board feet over the 15-year study period. The Alaska Mental Health Trust Land Office occasionally offers large timber sales upwards of 50 million to 60 million board feet from its Southeast properties. However, Trust Land Office Resource Manager Paul Slenkamp said the large sales are sporadic and none are expected for the next three to four years. Southeast Alaska’s timber industry is a shell of its former self. Average annual harvest from the Tongass ranged from about 280 million board feet to more than 400 million board feet during the late 1980s and early 1990s. The last year timber harvest from the 17 million-acre national forest exceeded 100 million board feet was 2000, which was the last full year before President Bill Clinton issued the Roadless Rule, restricting access to undeveloped tracts of national forests. At its peak, the industry supported more than 4,000 jobs in Southeast, today that number is down to about 300, according to Graham. Study co-author Jean Daniels, a federal research forester, said the demand forecast is a continuation of trends seen in related markets after the global recession in the late 2000s. The study was also kept independent from the Tongass Land and Resource Management Plan ongoing update process, Daniels said. “For the most part we tried to stay as separate from what was going on with the (Tongass environmental impact statement) process as possible to try to be as unbiased as possible with the results of the analysis,” she said. The Alaska Region of the Forest Service released a draft environmental impact statement for the Tongass Management Plan in November. The plan amendment calls for continuing the 15-year transition to young-growth harvest in the Tongass. Susan Alexander, a manager in the Forest Service’s Pacific Northwest Research Station, also helped pen the demand forecast study and said that Graham is looking at the forecast from the supply side, while the Forest Service attempted to figure out demand for all West Coast timber markets, with Alaska and the Tongass harvest subsets to the larger picture. “It’s a demand side analysis and I think that is sometimes confusing for people in Alaska who think that the supply equals demand, but it doesn’t, not from a theoretical standpoint,” Alexander said in an interview. Alexander and Daniels said they viewed Alaska as if timber supply was unconstrained and concluded that the cost of transportation has simply pushed Alaska out of the West Coast market. Demand is growing for lower value construction-grade lumber, but Alaska mills simply can’t compete with the rest of the Pacific Northwest. “Washington and Oregon have made all of the industry retooling necessary to be competitive in commodity markets and that’s a dimension lumber market where you’d be a price taker and Alaska has always been more competitive in the high-quality, shop-grade lumber,” Daniels said. Revamping Alaska sawmills to process dimension, or construction lumber from smaller young-growth trees would require hundreds of millions of dollars of investments and extremely high volumes of timber, Graham says. Additionally, those mills are highly mechanized, mostly eliminating the benefit of jobs in the industry, he argues. Alaska’s congressional delegation has criticized the Forest Service for pushing a quick transition to young-growth timber in the Tongass without helping Southeast mill operators transition their operations.   Elwood Brehmer can be reached at elwood.[email protected]

Nome graphite mine progress slowed, but ongoing

Development of the Graphite Creek mine near Nome has been delayed, but progress continues on the project that could become the country’s lone such mine. Executive chairman of Vancouver-based Graphite One Resources Doug Smith said his company is moving from exploration to the technical and economic evaluation phases of the project. At the same time, Graphite One is in the midst of another round of fundraising, “a never-ending requirement in the business of junior mining,” Smith noted. He said large drill samples are currently being technically evaluated and results that will feed into the mine’s preliminary economic assessment should be available in late February. The Graphite Creek prospect sits about 40 miles north of Nome on the northern slope of the Kigluaik Mountains on the Seward Peninsula. It is about 10 miles from spur-road access to that region’s Taylor Highway. Considered a high-grade, large flake graphite deposit, Graphite Creek would give the U.S. a stake in the graphite market that has been dominated by Chinese mines for decades. Flake graphite is a primary component of potent lithium-ion batteries — the power cells for electric cars and storage banks for some renewable energy projects. The average lithium-ion battery is 16 percent graphite by weight, according to the U.S. Department of Energy. Smith said Graphite One is continuing to collect environmental data in parallel with community outreach and preliminary economic assessment work that will hopefully lead to a favorable feasibility study in a couple years. “As soon as the water starts to flow then we have water samples to get and those types of things,” Smith said in an interview. Initial development is likely three years out if all goes according to planned and funding is available, according to Smith. Earlier company predictions had mine development starting as soon as 2017. Graphite One spent nearly $10 million exploring the deposit between 2012 and 2014. The current inferred resource is 154 million metric tons averaging 5.7 percent graphite; the indicated resource is 18 million tons with an average graphite content of 6.3 percent. The indicated resource is more than 1.1 million metric tons of in-situ graphite. Some of the highest concentrations are up to 10 percent graphite making for what is believed to be a very high-quality resource, according to Smith. No drilling was done in 2015. “Our focus has been on lab work,” Smith said. However, further infill drilling is still needed to determine the exact scope of the mine, he said — indicated resources stretch for 750 meters. Base assumptions are for a 50,000-ton per year mine with an initial 15- to 20-year life, with the understanding it could run much longer. “We have a significant amount of graphite there for many, many years given the size,” Smith said. “We’d look at a 50,000-ton per year operation that’s, as mines go, not a large operation, but as graphite mines go that’s good size.” He described the future mine as a large quarry without some of the requirements of other mines. That the main resource is on the surface, making it easier to access, is another big benefit to the project. “The graphite goes through a milling process and then it goes through a float-sink process, but it does not go through a leaching process like a metal mine would,” Smith said. Development costs should be in the $125 million to $150 million range, with further investment needed if upstream processing into concentrates optimal for shipping can be done on-site, he projected. The potential workforce at the mine is still unknown because whether it will be a year-round operation is also undecided, given the quarry-style and seasonal barge access at the Port of Nome could make for a seasonal mine. In that case, a more intensive summer mining operation could add to the workforce and lead to processing in the mining off-season, Smith surmised. Elwood Brehmer can be reached at [email protected]

BP to cut Alaska workforce by 13%

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

The Costs and Risks for Alaska LNG Project

“Cost is everything.” No longer a concept, nearly everything done on the Alaska LNG Project from here forward will be focused on moving the prospective project towards reality for the least cost, and risk, possible, ExxonMobil Senior Project Manager Steve Butt said Jan. 8. Butt recapped the progress made over the last year on the $45 billion to $65 billion behemoth of an endeavor at the Alaska Industry Support Alliance’s annual Meet Alaska conference held in Anchorage. Generally referred to as “the gasline,” he noted the project is much more than an 800-mile pipeline to transport liquefied natural gas from the North Slope to Cook Inlet. More than half of the project’s mid-range estimated cost would be tied up in a $25 billion LNG plant and marine terminals near Nikiski, while the North Slope gas treatment plant and the pipeline infrastructure would each need $15 billion. As currently designed, the project would export roughly 20 million tons of LNG per year and generate upwards of $3 billion per year to the State of Alaska. The state is a 25 percent owner in the Alaska LNG Project with BP, ConocoPhillips, and ExxonMobil collectively comprising the other three-quarters of ownership. The LNG export license for the project approved by the federal Department of Energy in 2014 and the Alaska Oil and Gas Conservation Commission’s approval to move North Slope natural gas last year were “huge milestones” for the project, Butt noted. Historically, the gas that would be sold through the project has been pulled out of the ground and re-injected to maximize oil production of North Slope fields. To date, the project has spent roughly $470 million, with $370 million of that coming since the pre front-end engineering and design stage, known as pre-FEED, began in June 2014, Butt said. He noted the scale of spending ramp-up if the project continues to move forward into the front-end engineering and design, or FEED, and ultimately construction, emphasizing the importance of driving costs down in a challenging market. “In concept, the project spent $30 million a year; that was our cost. In pre-FEED, we’re spending $30 million a month. In FEED, we will spend $30 million a week and in execution we will spend $30 million a day,” Butt said. In an earlier presentation, ConocoPhillips Technology and Projects Executive Vice President Al Hirshberg said the worldwide LNG market forecast is for about 200 million tons per annum of new demand in 10 years — when Alaska LNG would begin production. However, about 140 million tons per year has “already been spoken for” through other projects that are further along, he said. “We have to admit the current market does create some headwinds on the project; that’s just the fact on the ground,” Hirshberg said. Butt described the market a different way, noting the “gated” process of concept, pre-FEED, FEED, final investment decision and then construction helps increase dedicated resources as investment risk decreases. “It’s not Copper River salmon; nobody pays extra for LNG. So it’s all about cost of supply,” Butt said. Simply put, that cost of supply is about $50 billion to build the project divided by the 32 trillion cubic feet of natural gas it hopes to process, export and sell. By the end of the year, the Alaska LNG Project should have filed its environmental impact statement application with the Federal Energy Regulatory Commission, the lead federal agency for the project. As part of that process the project will complete the second draft of its 13 resource reports; Butt said the first draft was roughly 10,000 pages. On the technical side, hydraulic modeling for the pipeline is 98 percent complete, according to Butt. The last 2 percent, he said, is knowing where Alaska Gasline Development Corp., the state’s representatives, wants the “offtake” points for in-state gas consumption along with how much project gas the state will use. Stress testing on the 42-inch pipe originally planned for the project just wrapped up and went well, he said. The pipe was able to withstand 8 million foot-pounds in a compression test without failing, which is critical for a buried pipeline. “The ground will move in Fairbanks. It’ll get cold in the winter; it’ll get hot in the summer; it’ll move all over; it’ll exert its load but the pipe will be fine,” Butt said. Sections of 48-inch pipe were ordered in August and should arrive soon be tested similarly in February, he said. A pipeline size decision should come by early April, according to Butt. Gov. Bill Walker has said he wants a 48-inch pipeline to add capacity to the project, which could incentivize additional gas exploration and production on the Slope or elsewhere along the project corridor. Evaluating the feasibility of a 48-inch pipeline is pegged at $30 million, based on 2016 project budget documents. Walker has also said he hopes to have critical fiscal agreements between the partners and the state in place for the Legislature to review before the end of the legislative session in late April. Corralling an adequate workforce for the project will be another in the list of hurdles for the AK LNG Project. “The biggest challenge for us is going to be on craft labor,” Butt said. The project is estimating it will need upwards of 8,500 construction workers during the peak work period of 2021 and 2022.  “What we’re hoping is that as the market shifts we’ll be able to have a better opportunity to get labor and the materials,” he said. “We’ll see a softening in the prices of the things we need like steel and other skills that we’ll need to acquire.” Butt said there is still a lot of competition for that labor, particularly in the Gulf of Mexico, as LNG buyers ramp up work in a favorable market for them. “Marrying” Alaska-specific engineering and construction expertise with global LNG project experience will also be important, he noted, as the complexity and scale of the Alaska LNG Project are virtually unmatched and it will be done in a very unique environment. The project has contracted with over 100 geotechnical firms over the past year and it should have formal contracting strategy in place by the latter half of 2016 as work continues to ramp up, Butt added. Elwood Brehmer can be reached at [email protected]

IG finds no bias in EPA Bristol Bay assessment

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

Judge hits both sides in Anchorage LIO suit

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

BP will cut Alaska workforce by 13 percent

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

Credit downgrade timed on bond sales, continued oil decline

Standard & Poor’s Jan. 5 downgrade of Alaska’s credit ratings, which caught many state leaders by surprise, was triggered by upcoming bond sales, according to an analyst from the ratings agency. Gabe Petek, Standard & Poor’s primary Alaska analyst, said in an interview that the agency had a duty to revisit the state’s ratings because of general obligation bond sales scheduled for late January and February. “If you’re selling debt we can’t just sit back and let it go forward without updating our viewpoint,” of the state’s credit, Petek said. In August, Standard & Poor’s revised the State of Alaska’s credit rating outlook from “stable” to “negative,” citing the state’s budget deficit growing towards $3.5 billion annually as the main reason for the change. An associated report acknowledged the state’s significant existing savings — currently a sum of about $15 billion — but also said legislators must act quickly to address the pessimistic trend of the fiscal situation in what Standard & Poor’s at the time called a “contentious” state political climate. The agency officially downgraded Alaska’s formerly sterling “AAA” credit rating to “AA+” for general obligation, or GO, debt Jan. 5. Along with that came single-level downgrades to state appropriation-backed debt and Alaska Energy Authority bonds with a moral obligation pledge from the state to “AA” and “A+,” respectively. A collective negative outlook accompanied the ratings. At a press briefing immediately following the Standard & Poor’s downgrade Gov. Bill Walker said his initial reaction was “give us a chance” to address the state’s long-term budget issues during the regular legislative session that begins Jan. 19. He added at the time it was his understanding a bond sale pushed the issue. Walker put forth an aggressive plan to balance the state budget over several years in early December — a proposal to revamp how the state manages its money through the Permanent Fund, change how resident dividends are paid and increase personal and industry taxes. Whether it is done using the governor’s plan or another method, there is near unanimous consent among legislators that a major fiscal structure change is coming, and soon, for Alaska. Senate Finance Committee co-chair Anna MacKinnon, R-Eagle River, said in a Jan. 5 statement that she was disappointed by the decision to downgrade the state’s credit rating so soon after changing the credit outlook and before the session. The agency’s rationale, as MacKinnon put it, in August was that the Legislature needed to stabilize the budget situation. The specific GO bond sales scheduled for Jan. 20 that Petek said pressed Standard & Poor’s to revisit Alaska’s credit rating are for bond approvals dating back as far as 2005. Those bonds, totaling $38.5 million, are for projects in the Kenai Peninsula and Kodiak Island boroughs and the small Southeast Alaska city of Klawock approved as part of a 2005 bond resolution. Refinancing of a bond for the City of Seward is also included in the package. Fitch Ratings, on Dec. 23, announced a rating of “AA+” with a stable outlook for the GO bonds, which nearly aligns with Standard & Poor’s overall rating downgrade for general state bonds. Alaska Municipal Bond Bank Authority Executive Director Deven Mitchell said another state GO bond sale for statewide transportation projects is scheduled for the end of February. Voters approved those bonds in 2012 as part of a $460 million package. Public infrastructure projects are long-lived, Mitchell said, so the state bond bank regularly asks the Department of Transportation when it needs funds for various projects. Alaska’s credit rating downgrade also comes at a time when the Walker administration is proposing a $500 million multi-year GO bond package to fund essential and capital projects along with pension bonds to stabilize the state’s retirement payment obligation. Mitchell said the downgrade could result in interest rate hikes of about 0.1 percent on future bond sales. Walker equated that to roughly an additional $1,000 per year payment on each $1 million the state borrows. In several years the state could also look to bond for at least part of its share — at least $13 billion — of construction costs on the Alaska LNG Project. However, the state’s credit rating and fiscal situation will have ample time to change for better or worse before then. The state’s financial group made a pitch to Standard & Poor’s analysts in an early August meeting just prior to the negative ratings outlook report for a ratings adjustment after the upcoming legislative session to give Alaska’s leaders a chance to stabilize the state’s fiscal situation, according to Mitchell. “That’s been the state team’s discussion point with the analyst. If you look back 18 months to August of 2014, the price of oil was over $100 per barrel. The state was looking at a balance with a draw on the (Statutory Budget Reserve), but we were going to have growth in the net position of the state because of investment earnings that were going to float a savings in funds like the (Constitutional Budget Reserve), the Earnings Reserve of the Permanent Fund and so we went from that kind of very strong position to a year later trying to deal with a price of oil that had dropped below $50 per barrel and now obviously it’s below $40 per barrel,” Mitchell said. “And it just takes a long time, it’s kind of like you’re in a ship and you want to turn around you can’t just start going the other way; it takes a while to get turned around.” Petek said the timing of the ratings are not tied to the legislative cycles and that Standard & Poor’s does not try to persuade or pressure political leaders into any decisions. Its reports specific to Alaska simply lay out the state’s bind, he said. Since the August ratings outlook adjustment the state’s revenue forecast has declined along with oil prices, further exacerbating Alaska’s fiscal issues, Petek noted. “The problems have gotten larger; that’s one thing, and the state is going to sell debt into the market,” he said. “And we just have a very strong interest in making sure there’s no uncertainty as to what our views are when they’re going to go and sell debt so it kind of forced the issue in a way.” Petek added that Alaska, at “AA+” remains in a “really strong” position — equal to or better than about half of the other states around the country. It is a rating agency’s responsibility to assess based on a state’s immediate situation and not to predict what politicians will do, he said, and currently Alaska’s fiscal house is deteriorating.   Elwood Brehmer can be reached at [email protected]

MEA says economics of single transmission co. overstated

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

Feds decide against ESA listing for Alexander Archipelago wolves

A group of Southeast Alaska wolves will not be listed under the Endangered Species Act, according to a Jan. 5 U.S. Fish and Wildlife Service announcement. The Fish and Wildlife Service estimates the population of gray wolves, known as the Alexander Archipelago wolves, at between 850 and 2,700 animals. “Although the Alexander Archipelago wolf faces several stressors throughout its range related to wolf harvest, timber harvest, road development and climate-related events in Southeast Alaska and coastal British Columbia, the best available information indicates that populations of the wolf in most of its range are likely stable,” a Fish and Wildlife Service release states. Conservation groups have petitioned the service to list the wolves as endangered or threatened for more than 20 years. The latest determination comes after a yearlong review of the Alexander Archipelago wolf population in response to a petition filed by the Center for Biological Diversity. In March 2014, the Fish and Wildlife Service began a 90-day petition to list the wolves as threatened based on preliminary information at the time. The petition led to the 12-month finding. Had the wolves been listed, habitat protection measures would likely have further damaged Southeast Alaska’s struggling timber industry. Related efforts by conservationists to get Prince of Wales Island wolves recognized as a distinct population for the purpose of an Endangered Species listing have been unsuccessful as well. Sen. Lisa Murkowski commended the Fish and Wildlife decision, noting that Alaska has the largest population of gray wolves in the nation. “There is agreement that the gray wolf population in Southeast Alaska is healthy and stable in most places and growing in others,” Murkowski said in a release. “At a time when timber harvesting on Prince of Wales Island is barely a tenth of its levels of two decades ago, the attempt by some environmental groups to list the wolf seemed to be an effort solely to end the last of the remaining timber industry in Southeast Alaska. Fortunately, it did not work.” Gathering concrete data on wolf populations and genetics is particularly difficult in the dense Southeast rainforest because of the animals’ elusive nature.

No ESA listing for Alexander Archipelago wolves

A group of Southeast Alaska wolves will not be listed under the Endangered Species Act, according to a Jan. 5 U.S. Fish and Wildlife Service announcement. The Fish and Wildlife Service estimates the population of gray wolves, known as the Alexander Archipelago wolves, at between 850 and 2,700 animals. “Although the Alexander Archipelago wolf faces several stressors throughout its range related to wolf harvest, timber harvest, road development and climate-related events in Southeast Alaska and coastal British Columbia, the best available information indicates that populations of the wolf in most of its range are likely stable,” a Fish and Wildlife Service release states. Conservation groups have petitioned the service to list the wolves as endangered or threatened for more than 20 years. The latest determination comes after a yearlong review of the Alexander Archipelago wolf population in response to a petition filed by the Center for Biological Diversity. In March 2014, the Fish and Wildlife Service began a 90-day petition to list the wolves as threatened based on preliminary information at the time. The petition led to the 12-month finding. Had the wolves been listed, habitat protection measures would likely have further damaged Southeast Alaska’s struggling timber industry. Related efforts by conservationists to get Prince of Wales Island wolves recognized as a distinct population for the purpose of an Endangered Species listing have been unsuccessful as well. Sen. Lisa Murkowski commended the Fish and Wildlife decision, noting that Alaska has the largest population of gray wolves in the nation. “There is agreement that the gray wolf population in Southeast Alaska is healthy and stable in most places and growing in others,” Murkowski said in a release. “At a time when timber harvesting on Prince of Wales Island is barely a tenth of its levels of two decades ago, the attempt by some environmental groups to list the wolf seemed to be an effort solely to end the last of the remaining timber industry in Southeast Alaska. Fortunately, it did not work.” Gathering concrete data on wolf populations and genetics is particularly difficult in the dense Southeast rainforest because of the animals’ elusive nature. Elwood Brehmer can be reached at [email protected]

Walker: ‘We’re TransCanada now’

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

Utilities update RCA on Railbelt grid upgrades

Leaders of the state’s largest electric utilities submitted a draft plan to state regulators on Dec. 22 outlining how they will address more than $900 million of needed infrastructure upgrades. The early-stage business plan, developed in conjunction with Wisconsin-based American Transmission Co., is an update for the Regulatory Commission of Alaska on the utilities’ efforts to form the Alaska Railbelt Transmission Co. A Railbelt region electric transmission company, commonly referenced as a TRANSCO, would eliminate the disparate management of the region’s aging electric transmission system and bring it under one entity. In theory, operational savings drawn from sole control of the Railbelt’s transmission lines and substations would ultimately benefit ratepayers through lower electric rates. More important, perhaps, would be the ability to spur investment in and improve the reliability of Railbelt transmission infrastructure. 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. in December 2014 to examine the formation of a Railbelt TRANSCO. Those six utilities provide about 80 percent of Alaskans with power. The RCA released a report at the behest of the Legislature last June that was critical of the utilities’ collective lack of substantive action to form a TRANSCO, which is assumed to be the best path towards addressing the Railbelt’s electric transmission issues. If the utilities did not take meaningful steps to voluntarily form a TRANSCO, the RCA warned it would seek legislative authority to handle the situation itself. The latest progress report to on a Railbelt TRANSCO projects a certificate of public convenience and necessity application, essentially a utility’s business license, could be submitted to the RCA by fall 2016. That could have a TRANSCO up and running by the spring of 2017, based on the utilities’ timeline. The utilities expect to have the potential benefits of a TRANSCO validated and a fair cost-recovery structure for transmission assets settled by next spring. A detailed, formal TRANSCO business model would be developed at the same time. The utilities would then take the agreements to their governing bodies — director boards and local governments — sometime next fall. Which utilities participate in the TRANSCO will largely depend on the benefits that can be identified for their individual ratepayers, the report states. If all six regional electric utilities participate, the TRANSCO would be governed by representatives from each utility, American Transmission Co., five independent directors and its CEO on a large board of directors. Some independent power producers in the state have criticized the Railbelt utilities for allegedly attempting to retain control of the transmission system by limiting access to it, thus squashing competition. Utility leaders collectively claim they will gladly purchase power from the cheapest source, regardless of who provides it. The challenge in the current system is keeping power from nontraditional sources economic as it travels the Railbelt on lines with multiple owners, each with their own transmission tariff needed to pay for the infrastructure. This often leads to what is known as tariff, or rate, pancaking in the industry. American Transmission Co. Business Development Manager Eric Myers said a lot of progress has been made casting an outline for a Railbelt TRANSCO, but noted it’s hard for any utility to commit to the idea at this point. “We’re in the middle of a process of coming up with a workable business model that can serve as a basis for decisions by the companies, and consequently by the regulators, but we’ve got to get all the details down,” Myers said. A 2013 Alaska Energy Authority study estimated $903 million worth of transmission upgrades are needed in the Railbelt to bring the entire system up to single redundancy. AEA is working with a consultant to update that study. Transmission investments in Alaska’s Railbelt would not only improve reliability — some areas are linked with a single transmission line — but could also save consumers money through economic dispatch. AEA has estimated that maximum use of the Railbelt’s cheapest power sources could save ratepayers between $80 million and $240 million per year. 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 AEA’s identified savings are actually realized will likely depend on how infrastructure investments are financed through the inner workings of a Railbelt TRANSCO. Myers said the first priority would probably be de-constraining state-owned Bradley Lake hydropower near Homer. “(Bradley Lake) is really inexpensive power and the more you get that power to market at peak times when demand is high — there’s value in that,” he said. Myers noted that the biggest cost savings along the Railbelt is traditionally avoiding oil-generated power, primarily from Golden Valley Electric Association. Low oil prices, if they last long-term, could challenge the economics of some otherwise obvious line capacity improvements. Ownership of Railbelt transmission lines is divided amongst the utilities and their service areas. The Alaska Energy Authority also manages 173 miles of electric intertie owned by the state between Willow and Healy. Improving transmission is a financial challenge for the individual utilities because expansive service areas and small customer bases can make projects that might benefit consumers elsewhere in the region a large cost burden to bear. Selling or leasing existing transmission infrastructure to the TRANSCO would allow the utilities to pool money for capital projects and allow ATC to invest in transmission, either directly or by attracting third-party investment. Milwaukee-area American Transmission Co. was the first multi-state, transmission-only company when it formed in 2001 to prioritize investment for the owner utilities in its service area of eastern Wisconsin and Michigan’s Upper Peninsula. By 2021, the fourth year full year of operation for a Railbelt TRANSCO under the current proposal, the transmission utility’s gross annual cost is estimated at $11.6 million.  At the same time, it’s projected to save the utilities more than $4.3 million per year, making a TRANSCO’s net cost in 2021 about $7.3 million, a cost that equates to an additional 96 cents per month on an average consumer’s bill. The economic benefits of a TRANSCO would not likely be manifested directly in significant savings on ratepayers’ electric bills. Rather, a TRANSCO would slow or stall significant rate increases by providing the most economic power on a more reliable transmission system. Elwood Brehmer can be reached at [email protected]

Walker plans for better relations with Legislature

What a long, strange trip it’s been — and that was only year one. In his first year in office, Gov. Bill Walker faced unprecedented state budget deficits; an obstinate Legislature, which would eventually sue him; an historic presidential visit; and an oh so precarious state economy, all the while trying to put his mark on an immense natural gas pipeline project led by three of the largest companies that has for years been his overwhelming desire for Alaska. Despite those challenges and countless others, some self-inflicted, Walker still embraces the gubernatorial post. “There’s really no part of I haven’t enjoyed,” Walker told the Journal during a Dec. 22 interview. “It’s been tough — the budget, the financial stuff has been tough —but that’s not deterred me. Sometimes I’ll come home late at night and my wife (Donna) will ask me, ‘Are you still happy to be governor?’ and I say, ‘Yes, I’m still happy to be governor.’” As he noted, today’s Alaska is much different than the one Walker thought he would be leading when he announced his second run at the state’s high office in 2013. Then, the price for Alaska North Slope crude averaged more than $100 per barrel for the entirety of 2013, the only year that has happened. Now, we are all too aware of where that market has gone and what it has done to the state. Then, Walker thought he would be running as an Independent with an Independent running mate. Now, he has a Democratic lieutenant governor in Byron Mallott after the two combined their tickets. Then, the Alaska LNG Project was still a pipe dream. Now, maybe it still is, but the state has committed to spend at least $13 billion for its share if the pieces come together this time. However, the governor said he has the right team in place to match what faces the state’s 13th administration. It was that team that decided to lay out his ambitious state spending reform plan all at once Dec. 9, rather than to parse the tax, Permanent Fund Dividend, and revenue proposals, which would have been the politically expedient thing to do, Walker said. “It was a group decision around the cabinet table, realizing that’s not the politically correct way to do it necessarily,” the governor said. Since, Walker’s New Sustainable Alaska Plan has been picked apart by Republicans who say it doesn’t cut spending enough before resorting to a statewide income tax to help fund state government as the administration has proposed. Democrats have chided the governor’s plan to revamp how state dividend checks are paid to Alaskans, saying the governor’s plan, which would likely cut checks in half, at least in the near term, amounts to an unfair tax on low-income residents without amply taxing the oil industry. This most recent debate with the Legislature is far from his first, however. A series of kerfuffles over the state’s role in the $45 billion-plus Alaska LNG Project kept Walker at odds with the Republican majorities almost all year. In the midst of those, Walker kept a campaign promise and expanded Alaska’s Medicaid system administratively when Majority leadership in the Legislature held up Medicaid legislation. That led to the Republican-led Legislative Council filing suit against the governor in August on grounds that he overstepped his authority. While a last minute injunction to stop Medicaid expansion failed, the lawsuit is ongoing. Even where to hold a special legislative session became a contentious issue. The Majority outright ignored Walker in late April when it pushed to adjourn a special budget session Walker called for Juneau. The Legislature reconvened on its own a few weeks later in Anchorage. A partial, $200 million veto of $700 million in the state operating budget to pay for refundable oil and gas tax credits drew the ire of not only Republicans in the Legislature, but also some in the industry. Walker said he made the unexpected move after the tax credit sum was not addressed in the special budget session, as he predicted. It’s also one he stands behind because it got people talking about a credit program he considers unsustainable. “It started the discussion; it really did,” Walker recalled Dec. 22. “It was a heated discussion, but it started the discussion.” As the start of the next legislative session nears Jan. 19, the governor said he has made plans this year to meet with the leaders of the House and Senate Finance and Resources committees every two weeks, “because just about everything goes through Resources or Finance,” as a way to improve communication between executive and legislative branches, he said. Walker also surmised that the state’s budget deficit, nearing $3.5 billion, might actually improve relations with the Legislature. “I think that this session is going to be easier in some ways, as far as relationship-wise just because we’re all in this together,” he said. “The entire boat’s taking on water. I think we’re going to have a better working relationship.” On President Barack Obama’s three-day, late summer visit, Walker said the president “connected with Alaska” the impact of the visit on the state probably won’t be known until after Obama is out of office. “Some people said when he came back to the White House he was pretty much on fire about Alaska. Now, that could be interpreted two different ways,” Walker quipped. Interpretation one: Alaska is a great national park and must be kept as such. Interpretation two: Alaska needs to develop its resources to promote economic prosperity. Walker said he continues to push the White House for access to the resources on and under federal control his state. “I am not done with my outreach to this administration at all,” he said. He recalled a conversation he had with Obama in which the president was surprised by the fact that only a small portion of the Arctic National Wildlife Refuge would be needed to be opened to exploration in order for the state to access potentially billions of barrels of oil. “The 1002 (Coastal Plain) section is 8 percent of ANWR. We only need half of it; we only need the western half — 4 percent,” Walker said, attempting to put in perspective how a little of the revered wilderness could go a long way towards helping the state’s financial situation, which he said Obama is clearly aware of. Walker also noted that each time he’s raised the issue of ANWR with Obama, the president quickly changes the topic to the AK LNG Project. “Like I continue to tell Washington, we can self-heal if we are allowed access to the resources that we were promised,” the governor reiterated. Elwood Brehmer can be reached at [email protected]

Utilities update RCA on Railbelt transmission collaboration

Leaders of the state’s largest electric utilities submitted a draft plan to state regulators on Tuesday outlining how they will address more than $900 million of needed infrastructure upgrades. The early-stage business plan, developed in conjunction with Wisconsin-based American Transmission Co., is an update for the Regulatory Commission of Alaska on the utilities’ efforts to form the Alaska Railbelt Transmission Co. A Railbelt region electric transmission company, commonly referenced as a TRANSCO, would eliminate the disparate management of the region’s aging electric transmission system and bring it under one entity. In theory, operational savings drawn from sole control of the Railbelt’s transmission lines and substations would ultimately benefit ratepayers through lower electric rates. More important, perhaps, would be the ability to spur investment in and improve the reliability of Railbelt transmission infrastructure. 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. in December 2014 to examine the formation of a Railbelt TRANSCO. Those six utilities provide about 80 percent of Alaskans with power. The RCA released a report at the hest of the Legislature last June that was critical of the utilities’ collective lack of substantive action to form a TRANSCO, which is assumed to be the best path towards addressing the Railbelt’s electric transmission issues. If the utilities did not take meaningful steps to voluntarily form a TRANSCO the RCA warned it would seek legislative authority to handle the situation itself. The latest progress report to on a Railbelt TRANSCO projects a certificate of public convenience and necessity application, essentially a utility’s business license, could be submitted to the RCA by fall 2016. That could have a TRANSCO up and running by the spring of 2017, based on the utilities’ timeline. The utilities expect to have the potential benefits of a TRANSCO validated and a fair cost-recovery structure for transmission assets settled by next spring. A detailed, formal TRANSCO business model would be developed at the same time. The utilities would then take the agreements to their governing bodies — director boards and local governments — sometime next fall. Which utilities participate in the TRANSCO will largely depend on the benefits that can be identified for their individual ratepayers, the report states. A 2013 Alaska Energy Authority study estimated $903 million worth of transmission upgrades are needed in the Railbelt to bring the entire system up to single redundancy. AEA is working with a consultant to update that study. Transmission investments in Alaska’s Railbelt would not only improve reliability — some areas are linked with a single transmission line — but could also save consumers money through economic dispatch. AEA has estimated that maximum use of the Railbelt’s cheapest power sources could save ratepayers between $80 million and $240 million per year. 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 AEA’s identified savings are actually realized will likely depend on how infrastructure investments are financed through the inner workings of a Railbelt TRANSCO. Ownership of Railbelt transmission lines is divided amongst the utilities and their service areas. The Alaska Energy Authority also manages 173 miles of electric intertie owned by the state between Willow and Healy. Improving transmission is a financial challenge for the individual utilities because expansive service areas and small customer bases can make projects that might benefit consumers elsewhere in the region a large cost burden to bear. An Alaska Railbelt Transmission Co. would likely be led by ATC at the guidance of the utilities, which would sell or lease their transmission assets to the TRANSCO. That would allow the utilities to pool money for capital projects and allow ATC to invest in transmission, either directly or by attracting third-party investment. Milwaukee-area American Transmission Co., or ATC, was the first multi-state transmission-only when it formed in 2001 to prioritize investment for the owner utilities in its service are of eastern Wisconsin and Michigan’s Upper Peninsula. Look for an expanded version of this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

Leg. Council seeks help from AIDEA with Anchorage LIO

The Legislative Council is hoping the Alaska Industrial Development and Export Authority can help it out of an untenable situation, while keeping legislators in their Anchorage offices. Council members voted unanimously Dec. 19 to recommend the full Legislature not pay the $3.3 million per year lease it has for the Anchorage Legislative Information Office, or LIO. At the same time, they voted to request help from state agencies in brokering a deal between the Legislature and the building owner that is equal to the cost savings that would come from moving legislative offices into the Atwood Building in Downtown Anchorage, which houses executive branch agencies. The cost of the lease has been heavily criticized by legislators and the public both in and out of Anchorage while the state faces annual deficits nearing $3.5 billion, although when signed a year ago it met state law that requires long-term state lease extensions to be at least 10 percent below market value. That is one of the points of contention in a separate lawsuit filed by Jim Gottstein challenging the lease as illegal as neither an extension nor 10 percent below market value. Sen. Peter Micciche, R-Soldotna, made the advisory motion, noting that it is the Legislature’s duty to operate government as cost-effectively as possible. The state agency to help the council would very likely be the Alaska Industrial Development and Export Authority, or AIDEA. A quasi-government finance entity, AIDEA manages unique business transactions throughout Alaska, some of which are done at the request of government’s political bodies. If a deal isn’t reached after 45 days, the council’s motion would recommend not funding — or breaking — the 10-year lease with building owner 716 West Fourth Avenue LLC, co-owned by Anchorage developer Mark Pfeffer and Bob Acree. The leaseholder company name is the Downtown Anchorage address of the LIO. Pfeffer has indicated he is willing to sell the 64,000 square-foot building for $36 million, which cost $44.5 million in 2014. The Legislative Council decided to rebuild on the old LIO building site in 2013 after numerous attempts to find existing suitable space that meets the unique needs of a public government body in Anchorage failed. The Legislature contributed $7.5 million towards the construction cost, so Pfeffer and his company ultimately funded $37 million, about $28 million of which is long-term debt and $9 million is Pfeffer’s cash equity position in the property. A year of the lease has already been paid for at $3.3 million, which mean Pfeffer’s property company would walk away with $39.9 million over two years at his sale price. The lease is paid through May 31, 2016. The Legislature could terminate the lease seemingly without legal ramification because of a clause in nearly all government contracts stating fulfillment of the agreement is “subject to appropriation,” in this case, by the Legislature. If the Legislature doesn’t fund it, for any reason, the lease or contract falls apart. The “out” clause is virtually never used, though, and ascribing it to the Anchorage LIO lease situation could call the State of Alaska’s credit worthiness into question. While breaking the lease may not directly lead to a credit downgrade for the state, it would not look good after credit rating agencies have warned that the consequence of not addressing the budget deficit will be a downgrade from the state’s AAA credit rating. A consequence of moving out of the LIO to the Atwood Building could be slightly higher bond rates and generally a poorer perception of the state’s trustworthiness. Before a break in the hours-long meeting resulted in Micciche’s motion when the meeting came back to order, Legislative Council members urged against taking action until all options are fully vetted, as the idea of employing AIDEA, nor the consequences of moving had not been fully vetted. Rep. Liz Vasquez, R-Anchorage, a former attorney, vehemently warned against taking a politically expedient way out in testimony to the committee. “It appears to me we have not done our due diligence and we’re going to pay for it in litigation,” Vasquez said. Sen. John Coghill, R-North Pole, characterized the appropriation clause less as an option for the Legislature and more of a “last resort.” If an agreement is not reached that keeps the Legislature in the Anchorage LIO for cost on par with the Atwood Building, the issue is sure to be a big part of a session already ripe with budget conundrums. 716 West Fourth Avenue spokeswoman Amy Slinker said in a formal statement the firm is happy the Legislative Council is gathering more information before making a decision. “We believe there are several options that save the state money without taking the drastic step of breaking the lease and risking what others have said would be serious negative credit implications,” Slinker said. Moving to the Atwood Building, with 30,000 square feet of usable space, would cost $10.1 million over 10 years, which would include a $3.5 million initial refurbishment. The Anchorage LIO is 64,000 square feet; however, it has about 45,000 square feet of usable space, which omits restrooms and other common areas. Pfeffer said he would sue the Legislature for terminating the lease, which could cost the state anywhere from $1 million to $2 million in legal fees, regardless of the outcome, according to an attorney for the Legislative Council. In a Dec. 14 interview with the Journal, Pfeffer also noted that he entered the agreement with the Legislature — the state appropriator in charge of funding the lease it signed — and not a state agency with less control over what is funded. AIDEA’s ability to finance, sometimes at lower than market rates, for special projects, combined with the state’s positive investment returns, could make an authority purchase of the LIO building the best option, AIDEA Chief Investment Officer Mark Davis testified to the council. First, the Legislature would remain in the LIO. Second, AIDEA’s purchase would be preferable over an outright purchase by the Legislature because the authority can borrow money at a rate lower than state savings and investment returns. The Legislature would then lease the building from AIDEA, which would pay a portion of its return on the building back to the state in the form of its annual dividend to state coffers. Elwood Brehmer can be reached at [email protected]

New year will reveal impacts to economy from budget cuts

There is a strong sense of uncertainty regarding Alaska’s near term economic future in state industry circles, while basic indicators continue to show growth. The state’s unemployment rate was 6.4 percent in November, steady from October and down very slightly from a year ago. A 6.4 percent unemployment rate is significant for Alaska, as it hasn’t been less than 6.3 percent in the nearly 40 years the state Labor Department has tracked the metric. Unemployment is less than 6 percent in the state’s urban hubs. The average number of working Alaskans is up more than 2,700 over 2014, according to the department. Historically strong commercial salmon harvests and a strong-as-ever tourism industry — more than 1.9 million visitors in 2015 spending on average more than $900 apiece — have pushed employers to add positions the last few summers. Low oil prices wreak havoc on the state budget, but they encourage Lower 48’ers spending less on energy to travel and spend that cash in Alaska. Disposable income has been freed up in Alaska as well, particularly for residents who heat their homes with heating oil. Behind those metrics, however, are less optimistic numbers. Alaska’s population growth has flattened, which could distort unemployment figures. The state had a net outmigration of about 7,500 people in fiscal year 2014, most of whom were likely working-age adults, economic experts have said. That was offset by in-state births that kept Alaska’s population nearly perfectly flat at 735,600 from 2013 to 2014, according to the most recent data available from the state Labor Department. A naturally transient population, combined with a healthy Lower 48 economy, can cause out-of-work Alaskans to leave the state rather than file for unemployment. Oil and gas industry employment was down 900 jobs statewide in November from a year prior, based on preliminary Labor numbers. In a state heavily reliant on government spending, a lot rests on what legislators and Gov. Bill Walker do to address the state’s budget deficit, growing towards $3.5 billion as oil falls to less than $35 per barrel for the first time in more than a decade. The governor’s aggressive proposal — and similar ideas floated in the Legislature — to revamp how the state manages its revenue would provide a foundation to fund government long-term and set a clearer economic picture. However, his plan includes industry and income taxes and likely smaller dividends that would certainly impact private spending at least a little. And while minimal capital spending from the state will probably be the norm for at least the next few years, the producer partners and the State of Alaska will continue pumping several hundred million new dollars into the economy each year they design and ponder the Alaska LNG Project. Oil prices have been down from a $110 per barrel peak for more 18 months; at the same time, the 30-year average price for a barrel of Alaska oil is about $50 when adjusted for inflation, which makes current prices low, but not a historical anomaly. Alaska’s economy is slowly diversifying and the next year or two will speak volumes as to whether it has diversified enough to make the state viable without the security blanket of dominating petroleum revenue.  Elwood Brehmer can be reached at [email protected]

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