Elwood Brehmer

State bonds, federal money could help transportation infrastructure in ‘16

Alaska’s dependence on reliable transportation networks stands out when compared to other states. In most other places, small airports, ferries and new roads and bridges are an afterthought; here they are the subject of intense scrutiny and play a major role in many aspects of life. The five-year Fixing America’s Surface Transportation Act, signed by President Barack Obama in early December, gives the state certainty for federal ferry and road infrastructure funding through 2020. In all, Alaska is scheduled to reap about $2.6 billion from the legislation, with an initial 5 percent bump in spending in the 2016 federal fiscal year. Much of that money is for federal highway project grants that require a small state match. In late September, Congress decided to quietly extend the Federal Aviation Administration’s funding at status quo through March 31, 2016. That will keep the agency’s Airport Improvement Program, which funds capital projects at airports across the state, in limbo. A long-term FAA reauthorization bill doesn’t seem likely anytime soon, but never bet on Congress. Commercial use of unmanned aircraft systems, or UAS, will continue to grow over the coming year. The FAA went live with its first UAS registration system Dec. 21. The web-based system for small UAS requires everyone flying unmanned craft, including recreational users, to register their machines for a $5 fee by Feb. 19, 2016. General registration is part of the FAA’s intense effort to standardize regulations for commercial and private UAS use as technology spurring the use of unmanned aircraft grows. Draft commercial UAS regulations were released last February, and final guidelines should be looked for in 2016. There might be a glimmer of state transportation spending on the horizon, despite bare-bones capital budgets this fiscal year and likely next. Members of Gov. Bill Walker’s administration have said the governor wants to — in conjunction with the Legislature — draft a $500 million general obligation bond package to fund critical infrastructure projects. It would fund $250 million of projects each of the next two years, but voters would have to pass the bonds in the November elections. Two incomplete projects in serious need of cash are the Matanuska-Susitna Borough’s Port MacKenzie rail extension and the Anchorage Port Modernization Project. Anchorage Mayor Ethan Berkowitz has already said he plans to push the state for bond help to fund the $360 million or so the city needs to rehabilitate its 54-year-old port. Some money could come from one or both of the lawsuits the city has pending against private firms and the U.S. Maritime Administration for the first failed port construction project that began way back in 2003. The suit against the companies involved in the expansion project is set to go to trial in October 2016. Funding delays have already added about $20 million to the final cost of the 32-mile Port MacKenzie rail extension, a spur line from Houston to the industrial port. Mat-Su Borough officials estimate finishing the project, now pegged at more than $300 million, will take another $120 million. The local governments in charge of both projects have insisted they should not bear the funding burden for the work because the projects benefit the entire state. A record of decision is expected soon on the Juneau road extension project from the Federal Highway Administration; however, what that decision is likely to be is anyone’s guess. Progress on the Knik Arm bridge project will depend on approval of a federal loan for the project and other pending federal permits.   Elwood Brehmer can be reached at [email protected]  

State, local leaders discuss PILT split from AK LNG Project

Who should get what portion of $16.5 billion from the Alaska LNG Project? That’s the question the Municipal Advisory Gas Project Review Board is beginning to try to answer. The huge sum of money in question is what would go to local governments and the State of Alaska in the form of municipal impact payments and payments in-lieu of taxes, or PILT, if the Alaska LNG Project is realized.  Of the $16.5 billion total, $800 million would be for municipal impact payments during construction — funds to offset strains on local services, such as police and fire, while the project is being built. The remaining $15.7 billion would cover PILT for the planned 25-year life of the Alaska LNG Project. The PILT is a substitution for property tax payments to local governments and the state.  Because the board is an advisory body made up primarily of municipal mayors along the project corridor and some statewide representatives, it will make recommendations, but the final allocations will be made by the Legislature. The amounts were negotiated by the producers and the State of Alaska and were first made public at the Municipal Advisory Gas Project Review Board meeting in late September. At that time, little was known about the details behind the impressive $16.5 billion figure, or what the then-proposed buyout of TransCanada’s share of the project by the state might mean. Settling on PILT and impact payment amounts early in the process was significant for BP, ConocoPhillips and ExxonMobil, the state’s producer partners in the $45 billion to $65 billion North Slope LNG export plan, because it helps provide the elusive fiscal certainty the companies are looking for from the state to help model the project’s finances, according to Revenue Commissioner Randy Hoffbeck, who chairs the board. The $15.7 billion PILT amount is based on a 13.75-mill rate — an average of the state’s 20-mill rate for the North gas treatment plant and pipeline combined with a negotiated 7.5-mill rate for the LNG plant and terminals in Nikiski and a mid-range $55 billion project cost, or value. “The $15.7 (billion) was not a target we were originally shooting for. It was the result of the formula,” Hoffbeck said. Adding tax burden if the project goes forward with a capital cost greater than $55 billion could stress the economics of the Alaska LNG Project, which is expected to have relatively thin margins. “This pipeline doesn’t have the economics that (the Trans-Alaska Pipeline) had,” Hoffbeck said. Natural Resources Commissioner Mark Myers commented that the value of the pipeline, projected to cost $15 billion with eight gas compressor stations, is its ability to help get North Slope natural gas to market, and less its appraised value as far as the project goes. Applying a mill rate, or a percent of value tax, is how property taxes are typically collected. A 15-mill rate, for example, is a 1.5 percent tax on property value. Starting from a base amount to assure money is distributed in the early years, payments would follow a five-year rolling average for natural gas throughput, a “pennies per mcf” surcharge on the gas, as Hoffbeck described it. Mcf is an industry abbreviation for one thousand cubic feet of natural gas, which a base measurement of gas volume. Thus, payment amounts would follow the projected ramp up over the first few years of the project and include a 1 percent escalator — factoring inflation and depreciation — each year. The first PILT would be distributed in 2024 or 2025 based on the current project timeline and is estimated at $556 million, with a final payment of $706 million in year 25. Since the state has now bought out TransCanada and owns a 25 percent share of the Alaska LNG Project — the producers collectively hold the other 75 percent — examining how the money could be split is slightly less complex and was what the board addressed at its Dec. 16 meeting in Anchorage. Hoffbeck outlined a hypothetical scenario to detail how the $596 million PILT in year eight of operation, which is expected to be the first year at full capacity, would be divided up amongst local governments and the State of Alaska. The actual allocations will be decided by the Legislature. PILT split The PILT must be split three ways: between municipalities with project assets; between all areas of the state, recognizing the statewide impact of the project; and the State of Alaska. In Hoffbeck’s hypothetical scenario, the state and the municipalities each receive 50 percent of the $596 million payment. However, because they are “4/4ths” payments, meaning paid by all four project partners, the state would take $149 million first, to cover its 25 percent of the $596 million, according to Natural Resources Commissioner Myers, also a board member. The state, as an owner in the Alaska LNG Project, would essentially tax itself with the PILT, Myers described. That would make the actual PILT ratios — if first split evenly — 27 percent for municipalities and 73 percent for the state. Regardless of how the PILT is allocated, it seems clear the state plans on recouping the tax it pays out as a partner in the project. Taking a quarter of the $15.7 billion off the top would leave about $11.8 billion to be split between the state and local governments. Another chunk would be taken from the $596 million to spread project revenues statewide. If that amount were $100 per resident, as Hoffbeck hypothesized, and distributed to local governments based on population, the statewide payment would be another $75 million, if a population of 750,000 Alaskans is assumed. The state currently has about 735,000 residents.  Because the pipeline would run through significant unincorporated areas, particularly north of Fairbanks, the State of Alaska would receive a 20-mill rate tax on 304 miles of pipeline. The State of Alaska’s initial take would leave about $220 million for the seven municipalities along the project corridor. How that chunk is divided will undoubtedly be the center of much debate as well.  The Fairbanks North Star Borough, for example, would get just 0.2 percent of the PILT for the pipeline, because only two miles of the proposed route is in the borough.  However, the Fairbanks area would certainly feel a much larger share of project impacts than its ratio-based PILT allocation as a staging area for construction and then operation for much of the project. Kenai Peninsula Borough Mayor Mike Navarre, a board member, predicted the annual PILT would be viewed by the Legislature as additional funds available for allocation, adding political pressure and power plays between regional delegations of legislators to the mix. Fairbanks North Star Borough Mayor Karl Kassel called it “disingenuous” to say his jurisdiction will see impacts equal to the tax on two miles of pipeline corridor. Local governments on either end of the project are likely to fair much better. The North Slope Borough would receive the entire municipal share — whatever the Legislature decides that would be — on the $15 billion gas treatment plant and all feeder lines to the project. Hoffbeck eased concerns of North Slope Mayor Charlotte Brower, an advisory board member, by confirming that current Point Thomson infrastructure would not fall under the negotiated PILT amount; it could still be taxed by the borough despite Point Thomson’s major role as a gas source for the Alaska LNG Project.  The PILT would apply only to new pipeline connections from Point Thomson to the gas treatment plant. ExxonMobil’s $4 billion Point Thomson gas development is a lynchpin to the larger project. It is connected to TAPS with a pipeline meant to carry natural gas liquids, an operation planned to commence in 2016. The Kenai Peninsula Borough would get the entirety of local government take on the $25 billion Nikiski LNG plant and marine terminals. The Alaska LNG Project infrastructure would quadruple the borough’s taxable property value, Navarre estimated. Under Hoffbeck’s hypothetical 50-50 split, that would be nearly $80 million per year — roughly equal to the Kenai Borough’s annual general fund budget. Under current oil and gas property tax statute, the Kenai Borough would get closer to $220 million per year, Navarre said. Navarre said taxing the LNG plant at the statutory maximum 20-mill rate is not feasible. He indicated the borough simply couldn’t spend $220 million more per year. “The state, regardless of where the infrastructure is sited, should be the biggest beneficiary (of AK LNG),” Navarre said. Not a grant impact payment program Legislators will also have to decide how to pay $800 million to local governments impacted by construction of the Alaska LNG Project — before PILT funds and gas start flowing. The Municipal Advisory Gas Project Review Board is recommending a grant-style program be established through the state Commerce Department to distribute the municipal impact payment funds. The board chose Commerce because it has significant experience administering state and pass-through grant programs. Revenue Commissioner Hoffbeck urged against referring to the proposal as grant program at the Dec. 16 meeting because the $800 million would not be available to everyone and it would not be new money for those that do get a portion of it. Rather, the disbursements would be made only to offset the added burden on public services from construction activity and an influx of construction workers. An outline of the program, drafted first by the Kenai Peninsula Borough as an idea to work from, lists fund-eligible impacts as increased public safety and emergency medical services costs along with added waste disposal and water distribution systems and health facilities. Several thousand construction workers are expected to descend on the Kenai Peninsula to build the LNG plant and marine terminals near Nikiski. Roads and bridges would not be covered by the impact payments. The Kenai Spur Highway will most likely be rerouted between Kenai and Nikiski if the Alaska LNG Project materializes. Hoffbeck said the goal is to keep the application process simple and not force local governments to spend time and money drafting complex grant-like impact payment applications. An arm of the Commerce Department would then go through a review or audit process to make sure the money is used appropriately. North Slope Mayor Brower likened the idea somewhat to a federal program in place for villages affected by oil development in the National Petroleum Reserve-Alaska.  The board is also recommending anticipatory payments. “We don’t want it to be reimbursable. We don’t want you to have to front the money first,” Hoffbeck said when describing the proposal to the board of municipal leaders. Correctly anticipating direct project impacts to areas of construction or indirect impacts to other areas of the state could be done by using socioeconomic impact data collected for other reasons, such as the project’s environmental impact statement, which will be led by the Federal Regulatory Energy Commission.

AGDC board taps former VP as interim president

The Alaska Gasline Development Corp. began formally regrouping Dec. 18 when Fritz Krusen was named interim president and other board of directors positions were settled. Krusen previously held a vice president position with AGDC focusing on the Alaska LNG Project. He replaces Dan Fauske, who resigned his post as AGDC president Nov. 20, after Gov. Bill Walker indicated he wanted a different skill set in the leadership position for the state group tasked with developing a large gasline project. The day prior, Walker had removed two other members of the board including former chair John Burns. Fauske’s expertise is in finance; he was the longtime CEO of the Alaska Housing Finance Corp. before moving to AGDC. Krusen spent most of his professional career with ConocoPhillips — one of the state’s partners in the $45 billion-plus Alaska LNG Project — on LNG projects, including time at the company’s Nikiski LNG export facility. “We will not skip a beat with (Krusen) as president,” AGDC board chair Dave Cruz said after the Dec. 18 board meeting. Cruz, who had been acting AGDC president and interim board chair, also officially took over the chair position. He is the only remaining member appointed by former Gov. Sean Parnell on the seven-member board. Cruz’s background is in the heavy construction industry; he owns Palmer-based Cruz Construction Inc., a consortium of firms specializing in oil and gas-related work. Hugh Short, CEO of the Arctic investment firm Pt Capital, was elected to the role of AGDC board vice-chair. While Krusen is now the interim AGDC president, the state corporation has also contracted with B and R Partners Inc., a Houston-based executive search firm specializing in the oil and gas industry, to find a permanent replacement for Fauske. Cruz said it is too early in the process to say whether Krusen will be a candidate for the position, but added the board’s goal is to have a permanent president in place within six months. The contract with B+R Partners is for up to $170,000 and runs through June 30, according to AGDC spokesman Miles Baker.  

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 Saturday afternoon 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]

AGDC board taps former VP as interim president

The Alaska Gasline Development Corp. began formally regrouping Dec. 18 when Fritz Krusen was named interim president and other board of directors positions were settled. Krusen previously held a vice president position with AGDC focusing on the Alaska LNG Project. He replaces Dan Fauske, who resigned his post as AGDC president Nov. 20, after Gov. Bill Walker indicated he wanted a different skill set in the leadership position for the state group tasked with developing a large gasline project. The day prior, Walker had removed two other members of the board including former chair John Burns. Fauske’s expertise is in finance; he was the longtime CEO of the Alaska Housing Finance Corp. before moving to AGDC. Krusen spent most of his professional career with ConocoPhillips — one of the state’s partners in the $45 billion-plus Alaska LNG Project — on LNG projects, including time at the company’s Nikiski LNG export facility. “We will not skip a beat with (Krusen) as president,” AGDC board chair Dave Cruz said after the Dec. 18 board meeting. Cruz, who had been acting AGDC president and interim board chair, also officially took over the chair position. He is the only remaining member appointed by former Gov. Sean Parnell on the seven-member board. Cruz’s background is in the heavy construction industry; he owns Palmer-based Cruz Construction Inc., a consortium of firms specializing in oil and gas-related work. Hugh Short, CEO of the Arctic investment firm Pt Capital, was elected to the role of AGDC board vice-chair. While Krusen is now the interim AGDC president, the state corporation has also contracted with B and R Partners Inc., a Houston-based executive search firm specializing in the oil and gas industry, to find a permanent replacement for Fauske. Cruz said it is too early in the process to say whether Krusen will be a candidate for the position, but added the board’s goal is to have a permanent president in place within six months.   Elwood Brehmer can be reached at [email protected]

Gov’s budget plan scrutinized by legislators on both sides

Both Republicans and Democrats in the Legislature are beginning to pick apart Gov. Bill Walker’s fiscal plan as details come to the surface after its unveiling Dec. 9. Senate President Sen. Kevin Meyer, R-Anchorage, said Dec. 11 that the Senate Majority would not support a broad-based tax on Alaskans without spending cuts beyond what Walker is proposing in his 2017 fiscal year budget. The fiscal year begins next July 1. Most legislators agree that revamping how the Permanent Fund is used — it was established with foresight to fund the State of Alaska when oil ran out — is a necessity to start closing the state’s deficit that is approaching $3.5 billion as oil prices keep falling. The fine points of the change will be the focus of continued debate in the fast-approaching session. For starters, Walker’s New Sustainable Alaska Plan would filter most state oil and gas revenue through the Permanent Fund, allowing it to earn an investment return, rather than putting the revenue directly into the general fund, as has been the case throughout the state’s history. The investment return earned from future revenue, on top of the $51.3 billion already in the Permanent Fund, as of Sept. 30, that is already earning a return each year, should stabilize the state’s revenue stream and allow it to draw about $3.2 billion each year from the Permanent Fund Earnings Reserve account. The Legislature currently has access to money in the earnings account, but has shied away from spending it. Historically, a portion of annual earnings has gone to pay Permanent Fund Dividends, while some of the money has been left in the Earnings Reserve account and some has been used to grow the Permanent Fund. Walker’s budget proposal calls for about $100 million in overall operating budget cuts in fiscal 2017, a statewide income tax, industry tax hikes and further budget cuts that, with the revenue rearrangement, would theoretically balance the state budget by 2019. The income tax would generate about $200 million per year that would go directly towards paying down the remainder of the deficit. However, Meyer said more cuts need to come first. “I think we’re ok with having a little (budget) gap every year,” he said. The state’s primary remaining savings account, the Constitutional Budget Reserve, or CBR, fund, has about $9.1 billion in it. While minority Democrats in the House and Senate don’t have the votes to directly overrule the Republican-led majorities, the 12-member House Independent Democratic Coalition does have enough votes to derail a vote to draw from the CBR, which requires a three-quarters vote from each chamber. The Independent Democratic Coalition used its CBR leverage to get education funding restored in the current fiscal year budget, and could seemingly do something similar in the upcoming session if its members feel the need to push back against budget cuts pushed by Republicans. Cutting government spending beyond Walker’s proposed 3.4 percent cut to agency operations will not be easy, Meyer noted, but he said instituting taxes to balance the budget disincentives the Legislature and the administration from seizing an “opportunity to right-size government,” he said. Meyer said he would like to see 5 percent to 10 percent cut from the unrestricted general fund spending portion of the current $5.1 billion operating budget shortly after the governor announced his plan Dec. 9. “We like the $100 million reduction; we want more. We like (Walker’s) concept,” he said. Cuts to the 2017 budget would come on top of about $400 million in agency cuts to the current budget. From fiscal years 2015 to 2017, Walker’s plan would cut agency spending by 27 percent overall, Office of Management and Budget Director Pat Pitney said. The University of Alaska System would face a $15 million cut in the governor’s budget, bringing its two-year cut to $35 million, or about 10 percent of the university’s 2015 unrestricted state budget. The governor also indicated he will work to cut agency spending by about $50 million in both 2018 and 2019, if the Legislature agrees. From the Legislature, spending and associated cuts will be examined closely by Finance Subcommittees tasked with reviewing each agency budget to ensure there are no “bureaucrats playing games,” Meyer said. The Department of Transportation and Public Facilities announced this fall that it might not be able to maintain winter road conditions enjoyed in the past because this year’s budget cuts forced the department to lay off some equipment operators and end their overtime. “We think DOT has plenty of money,” Meyer said succinctly. If, after several years, spending cuts and a revamped Permanent Fund-revenue system do not balance the budget, a statewide sales tax would likely be more palatable to Republicans, according to Meyer. Despite almost certain opposition from rural Alaska, a sales tax would capture cash from the nearly 2 million tourists that come to the state each year, a group Meyer said the state needs to do a better job of maximizing revenue from. His caucus would generally prefer to cut state assistance to local governments and let taxes be implemented at the local level to recoup the difference, Meyer added. Walker said he opted against a sales tax because it would unfairly shift the tax burden to rural Alaska, where higher cost goods means higher taxes — the tax levied as a percentage of an item’s cost. An income tax would capture revenue from nonresident workers in the state, he noted, who make up about 20 percent of the Alaska’s workforce. PFD change equals tax Minority Democrats in the House and Senate have pushed back against the governor’s plan to shift how dividends are paid and base them on half of the resource royalty revenue the state takes in each year, rather than on Permanent Fund earnings, which is largely decoupled from the state’s budget situation. Walker’s royalty dividend would start at about $1,000 per Alaskan, or about half of this year’s PFD. Rep. Scott Kawasaki, D-Fairbanks, said Walker should be complimented for pushing a comprehensive budget plan, which the governor has said he is open to amending, but that it puts too much of the burden to fill the state deficit on low-income Alaskans. The PFD change is in essence a flat tax that would disproportionately hurt rural Alaska, Kawasaki said. Focusing on government spending cuts and picking apart the governor’s plan “misses out on the bigger picture,” he said. “We should’ve looked to oil taxes and we should’ve looked to the industry that’s making a huge profit in the state before we looked to individual Alaskans,” Kawasaki said. The House Independent Democratic Coalition has in years past proposed raising the 4 percent minimum production tax floor on the state’s largest oil producers to 10 percent, a change that would bring in more than $600 million per year at today’s prices, according to Kawasaki. Oil and gas production taxes are expected to generate just $172 million in fiscal 2016, according to the latest Revenue Department forecast. The cost to extract and export a North Slope barrel of oil is just more than $36, according to the Department of Revenue, meaning Slope producers are basically breaking even at current market prices in the $35-$40 per barrel range. The average Alaska North Slope price for fiscal 2016 so far is $49 per barrel. Walker proposed raising the minimum production tax to a 5 percent floor and preventing companies from deducting operating losses to take their tax liability below the tax floor. He has said he will not accept a wholesale oil production tax change, which minority Democrats continue to push for. Capital budget Walker’s 2017 capital budget looks a lot like this year’s: bare. It would spend $195 million in unrestricted state money to match $957 million of federal funds and make small contributions to some traditional state assistance programs. Members of the administration have said the hope is to build a $500 million general obligation, or GO, bond package in conjunction with the Legislature to fund maintenance and unfinished projects the state would otherwise have to pay cash for. The GO bond package would need to be approved by voters in the November general election and would fund projects over two years, until the next general election. Revenue Commissioner Randy Hoffbeck said bonding for capital projects that don’t need to be addressed immediately makes fiscal sense because the state can earn more interest keeping its money in the bank than it will pay out for the bonds over the long run. The Alaska Energy Authority’s popular Renewable Energy Fund gets $5 million small projects across the state, down from $11.5 million this year. The Alaska Housing Finance Corp.’s home Weatherization Program, another popular one, would get $1.5 million in federal funds and no state assistance. This year, the Weatherization Program received $5.6 million from the state general fund in addition to the federal appropriation. Kawasaki said the proposed cuts to the energy assistance programs “don’t make a lot of sense” given Alaska’s climate and rural energy situations. The governor’s capital request also includes funding for badly needed school upgrades, he said. Tops among school fixes is replacing the K-12 Kachemak Selo School near Homer, a $10.8 million unrestricted general fund line item. Fully-funding the Kivalina School replacement obligation will cost another $7.2 million in the capital budget. It was a late $43 million addition in this year’s budget. Finally, repairing the Bethel Regional High School’s kitchen, badly damaged by fire earlier this fall, added $7.2 million to the capital budget. Elwood Brehmer can be reached at [email protected]

YEAR IN REVIEW: Five-year transportation bill provides stable funding to Alaska

President Barack Obama signed the $305 billion Fixing America’s Surface Transportation Act Dec. 4, approving the nation’s first long-term transportation funding legislation in more than a decade. Known as the FAST Act, the bill provides five years of funding aimed at improving rail, road and marine infrastructure. It passed both the House and Senate by wide margins the day prior to being signed by the president. All three members of Alaska’s congressional delegation supported the legislation. Alaska is poised to receive more than $2.6 billion over the life of the FAST Act, with yearly allotment increases. The state took $483.9 million from the federal government for surface transportation programs in federal fiscal year 2015, which ended Sept. 30. In 2016, that figure jumps to $508.6 million; by the end of the FAST Act in 2020 it is $555.3 million, according to a release from Sen. Dan Sullivan’s office. The FAST Act also corrects a formula error in the 2012 MAP-21 transportation bill that cost the Alaska Railroad Corp. about $3 million per year in formula funding. The railroad should get $5 million more per year under the new law. Railroads across the country will also have the opportunity to compete for $199 million in federal grants to aid implementation of the federally mandated Positive Train Control safety system, which is expected to cost the Alaska Railroad nearly $160 million by the time it is fully in place in 2018. The previous year-end deadline for railroads to have Positive Train Control in place was pushed back to 2018 in a separate piece of legislation passed earlier this fall. The Tribal Transportation Program — $450 million per year under the MAP-21 extensions — will get an additional $15 million in 2016 and $10 million more in the following four years. A new federal freight program designed to fund freight-related highway improvements will send $80 million Alaska’s way over the duration of the legislation as well. 2. Ferry system cuts, new ships on way It was a year in limbo for the Alaska Marine Highway System. Early in the year, the Transportation Department, which manages the state ferries, increased fares by 4.5 percent on all but the system’s most expensive routes in an attempt to increase revenue and equalize its jumbled fare structure, which had not been changed since 2007. Ferry funding was again a hot topic in the Legislature as proposed budget cuts could have forced the Alaska Marine Highway System, or AMHS, to cancel summer sailings for which thousands of tickets had already been sold. In the end, lower oil prices — the cause of the budget crunch — left $5.5 million of fuel money unspent, which was reallocated to fund summer service. This fall, the AMHS and some legislators began holding meetings in coastal communities to discuss how to prioritize service during future lean budget years. The system is prepping for a 15 percent cut in fiscal year 2017 when compared to 2014 — the last year before its budget started falling. That cut could also deepen depending on what the Legislature allocates in its upcoming session. In fiscal year 2014, the Marine Highway System was appropriated $162.6 million by the Legislature. It will have a budget of about $137 million in the 2017 fiscal year, which begins next July 1, if the administration’s projection holds true. While dealing with funding struggles, the AMHS has been installing a new reservation system, which system leaders say should provide data to better inform future fare and schedule plans. On the positive, construction of the twin, Alaska class “day boat” ferries bound for service in Lynn Canal continued on schedule at Vigor Industrial’s shipyard in Ketchikan. The 280-foot ferries should be ready for water in October 2018. A final design for the M/V Tustumena replacement vessel is expected in January from Glosten, a Seattle-based marine engineering firm. 3. Corps selects Nome, then suspends Arctic port work It was a promising start to the year when the U.S. Army Corps of Engineers released a report in February outlining its idea for a reasonable deepwater port expansion for Nome. The $210 million plan would have dredged Nome’s expanded outer harbor to nearly 30 feet and added a large vessel dock. The plan was based on the perceived long-term need for more marine infrastructure in the region as Shell prepared to resume its offshore Arctic drilling program over the summer. Nome would have been home to smaller safety and support vessels for shipping through the Bering Strait and promising oil development in U.S. Arctic waters. That all came to an end in September when Shell announced the end of its offshore exploration in the Chukchi Sea — a $7 billion expenditure brought down by poor drilling results and onerous federal regulations, the company said. The fallout from Shell’s decision hit Nome in late October when the Corps suspended its work to expand the city’s port — no Shell, no drilling, no need for more infrastructure was the rationale. The Corps had been studying the prospect of a major Arctic port in Western Alaska since late 2011 through a cost-sharing agreement with the State of Alaska. 4. Matson closes Horizon deal, invests in Alaska Pacific shipper Matson Inc. wrapped up a $469 million deal to buy Horizon Lines Alaska business in late May and immediately began investing in its new business. In late July, Matson announced plans to purchase 2,000 new general purpose containers, 430 winter-insulated containers, a 65-ton gantry crane for its Kodiak terminal and two new tractors for container movement at the Port of Anchorage, altogether a $30 million investment. Three containerships operating in Alaska are also getting exhaust scrubber systems to comply with international treaty emission control regulations as part of Matson’s investment. The exhaust systems will eliminate nearly all sulfur dioxide and particulate emissions, according to the company. Kodiak’s new crane arrived Aug. 13. The ship renovations should be done in about a year. Matson provides twice-weekly containership service to Anchorage and Kodiak and weekly service to Dutch Harbor from Tacoma, Wash.

New and bigger taxes, reduced PFD in gov’s plan

(Editor's note: This story has been updated to include remarks from legislators as they become available.)   Ready or not Alaskans, here comes reality: higher taxes, more of them and a smaller dividend. Gov. Bill Walker unveiled his long-range fiscal plan for the state Dec. 9, which includes a personal income tax as well raising nearly every state industry tax in the face of yearly budget deficits approaching $3.5 billion. The Legislature will have its say when it convenes in January, but under the Walker administration’s proposal, the State of Alaska would adopt federal code for its income tax and levy the tax at 6 percent of ones federal liability. That equates to about 1.5 percent of an individual’s annual income. An income tax allows the state to capture revenue from nonresident workers — about 20 percent of Alaska’s workforce, according to the state Labor Department — as well as profits from S-corporations and partnership businesses. The relatively small income tax would generate an estimated $200 million for the state every year. Withholdings would begin in January 2017. Alaska has not had an income tax since 1980, and three attempts to reinstate a tax during the fiscal disaster of the late-1980s all failed. Along with the income tax, Walker formally proposed shifting how the state manages its money towards a “sovereign wealth fund” model, an idea first floated by the administration in late October during a presentation to the Legislature by Attorney General Craig Richards. The concept would stabilize state revenue by filtering it through the Permanent Fund, thus allowing the money to make an investment return, before lawmakers could spend it. More specifically, the Walker administration’s plan would put half of the state’s resource royalty revenue and all of its oil and gas production tax income into the Permanent Fund each year. The earnings, or investment return, made by the fund would then be allotted to the Permanent Fund Earnings Reserve account and spent to run state government. The state could sustainably draw $3.2 billion from the Earnings Reserve each year under the plan. That projection holds up under 97 percent of scenarios and is based on roughly $50 per barrel oil, according to the administration. Permanent Fund Dividend checks, which have historically come from the Earnings Reserve, would then come from the remaining 50 percent of annual resource royalties. Alaskans would no longer get a Permanent Fund Dividend; rather they would get a resource royalty dividend, pegged to be about $1,000 in the coming years. A $3 billion infusion from the Constitutional Budget Reserve, or CBR, account into the Earnings Reserve would be needed to jumpstart the plan, according to the administration. The CBR currently holds about $9.1 billion, while the Earnings Reserve will hold about $6.5 billion at the end of fiscal 2016, according to Alaska Permanent Fund Corp. projections. The Permanent Fund held $51.3 billion in total assets at the end of the third quarter. That money cannot be accessed by the Legislature without a constitutional amendment. The Earnings Reserve can be spent with a simple majority vote. The whole plan is based on continuing status quo unrestricted state spending in the $5 billion range. The fiscal plan “keeps the Permanent Fund permanent,” Walker said while unveiling his proposal. Combining a small, progressive income tax with a smaller dividend, which is an impact to all Alaskans, is an imperfect way to spread the burden of now directly paying for government services across all residents, while minimizing the impact on low-income Alaskans, the administration says. Walker’s proposed taxes and fiscal plan will all be vetted, dissected and reflected upon during the upcoming legislative session. Any action will have to be approved by the Legislature. “This is a work-in-progress; this isn’t an edict or a mandate,” Walker said. “The main message is that we have to fix the problem.” Doing nothing — not really an option — would require the state to draw $33 billion from savings, money the state does not have, over the coming years while dividend checks would disappear in about 2020, the administration says. A large natural gas pipeline, which would generate billions in revenue annually, cannot itself save the state’s finances and is still far from a certainty. How quickly things change. Less than a year-and-a-half ago Alaska North Slope crude was selling for $101 per barrel. On Dec. 7, the price for Alaska oil fell below $40 per barrel for the first time since February 2009. The second half of this year is the first time oil prices have consistently held below $50 per barrel since the end of 2004. Alaska’s state revenue history looks much the same. The Department of Revenue’s annual fall revenue forecast released Dec. 8 projects Alaska will take in just less than $1.6 billion in unrestricted general fund revenue in the current 2016 fiscal year. That would be the lowest income level for unrestricted funds the state has seen since oil was below $20 per barrel in 1999. Just a few years ago in 2013 the state took in nearly $7 billion of discretionary income; a year prior that number was $9.5 billion. The problem this time is declining North Slope oil production will not allow the state to refill its coffers once oil prices rebound, whenever that may be. As a result, the state must wholly shift its financial structure. Further government spending cuts totaling $100 million are proposed in the governor’s operating budget, Office of Management and Budget Director Pat Pitney said at a press briefing Dec. 9. Unrestricted government spending has fallen by nearly $1 billion over the last couple years. Additionally, about 600 state employees have been laid off as a result of those budget cuts. Senate President Sen. Kevin Meyer, R-Anchorage, said he has not had a chance to fully review the administration’s proposal, but his initial reaction is that the spending cuts do not go far enough. “A $100 million reduction (proposed by the governor) is not acceptable to our Senate Majority if we’re asking for $400 million in new taxes on Alaskans,” Meyer said. The majority caucus will be meeting soon to iron out priorities, but Meyer said a likely target for Senate Republicans is a 5 percent to 10 percent reduction. House Speaker Rep. Mike Chenault, R-Nikiski, said he disagrees with the governor over not proposing a state sales tax. There are problems with how it would relate with municipal sales taxes, even in his own Kenai Peninsula Borough, the Speaker said, “but I still think a sales tax is a fair tax across the state, although it won’t be liked in rural Alaska.” Chenault added that he is concerned about the administrative costs associated with implementing new taxes. Walker said a sales tax was considered but not chosen based on the disproportionate impact on rural Alaska, where higher costs of goods would generate a higher sales tax. House and Senate Democrats commended Walker for not ignoring the state's fiscal bind in formal statements, but said the governor's plan pushes the burden of paying for government onto low-income Alaskans. "The oil companies, and the wealthiest Alaskans will be thrilled with this proposal because three-fourths of what the government takes will come from hard-working Alaskans, many of whom rely on their Permanent Fund checks to cover the basics," Anchorage Democrat Sen. Bill Wielechowski said. "The whole plan is skewed to have the least impact on the rich and powerful, while dumping the burden on those who can least afford it. This is a reverse Robin Hood plan that robs from those wo need, and spares the rich." Oil and gas tax credits — brought into the limelight by Walker’s partial deferment of $200 million of the the state’s $700 million refundable credit obligation in the current year’s operating budget — would be transformed into a loan program, with interest rates tied at least partially to what percentage of a project’s workforce is Alaskan. That would be a drastic shift away from the current refundable credit system, which pays, particularly small producers, dollar-for-dollar on many exploration and development capital expenses. Industry representatives have pushed back on major changes to the state’s oil and gas tax credit program, and a report released Dec. 1 by the Senate Majority urged against wholesale changes to the program, fearing a sudden retraction from the industry in the state when low oil prices are already challenging bottom lines. The Alaska Oil and Gas Association panned Walker’s plan to change the tax credit program. “At a time of low oil prices, now is not the time for the state to increase taxes or reduce incentives to the oil and gas industry in Alaska,” said AOGA President Kara Moriarty in a statement. “Unfortunately, Governor Walker is proposing to do both. We support the governor’s goal to put more oil into TAPS. However, increasing taxes and removing important incentives will not lead to more production.” Moriarty noted that prices have now slid to less than $40 per barrel and cited fiscal year 2014 figures of $46.42 per barrel for transportation, operating and capital costs. The administration’s tax plan would also harden the oil production tax floor for legacy oil from large producers to prevent operating losses from eliminating a company’s tax obligation, a recommendation made by the Senate Oil and Gas Tax Credit Working Group report, but also bump the floor up from 4 percent to 5 percent. The oil and gas tax credit changes would not necessarily generate much revenue, but rather would save the state upwards of $500 million per year that it is currently spending. “There’s no one that won’t be impacted in some way by what we’re going to propose,” Walker said. “I guarantee, everybody in Alaska will find something about this plan they don’t care for.” State motor vehicle fuel taxes —the lowest in the nation at 8 cents per gallon— would be doubled to 16 cents; the marine fuel tax would also double to 10 cents per gallon; and the 3.2 cents per gallon aviation fuel tax would go to 10 cents. Those increases would raise $45 million, according to Walker administration projections. Most other major industry taxes would be raised between 1 percent and 2 percent to generate another $12-$20 million annually from the tourism, fishing and mining industries, the administration says. A change to tourism taxes would eliminate a deduction that has allowed cruise companies to deduct local head tax payments from their state obligations, primarily in Juneau and Ketchikan. Additional sin taxes would include a 10 cents per drink alcohol tax to collect $40 million and a $1 per pack increase to tobacco products and e-cigarettes. The regulated marijuana trade — new in fiscal 2017 — should generate about $12 million in its first year, according to the Revenue Department. Elwood Brehmer can be reached at [email protected]

Donlin environmental impact statement released

Twenty years in the making, the first draft of an environmental impact statement for the Donlin Gold mine proposed for Western Alaska was released Nov. 30. “It’s still a long path ahead of us, a lot of challenges ahead of us, but (the EIS) is a significant milestone,” Donlin Gold General Manager Stan Foo told the Resource Development Council of Alaska Dec. 3. Early resource definition work at the site began in 1995. A true mega-project, Donlin Gold’s $6.7 billion plan calls for a conventional open-pit mine 1.5 miles across and up to 1,200 feet deep about 10 miles north of the village of Crooked Creek in the Upper Kuskokwim River drainage. A tailings facility, large power plant, workers’ camp and 5,000-foot airstrip would accompany the mine. Also supporting the mine operation would be 315-mile, 14-inch diameter natural gas pipeline originating on the west side of Cook Inlet that is needed to fuel the 227 megawatt capacity power plant. To the south and east, a 30-mile road would connect the mine to a new barge port on the Kuskokwim. Further down the Kuskokwim, port cargo landing facilities would be expanded in Bethel, and new diesel storage tanks would be needed Dutch Harbor. In all, the direct supply chain in Donlin’s proposal from Cook Inlet to Dutch Harbor would cover approximately 1,050 miles. Donlin Gold is a joint venture between Barrick Gold Corp. and NovaGold Resources Inc. The natural gas pipeline would initially be only about half full as the average load of the power plant will be about 150 megawatts, according to Foo, leaving potential capacity for natural gas that could be used by local communities to offset high-cost, diesel-sourced heat and power. Assuming the cost of using Donlin’s pipeline and developing natural gas infrastructure in the region would be the responsibility of a third-party developer, Foo said. He said the scope of the Donlin project meant compiling a stock of information rarely matched in scale, much like the project proposal. The draft EIS, which is primarily shared in electronic form, would surpass 7,000 printed pages, he surmised. The mine itself would produce more than 33 million ounces of gold from about 500 million tons of ore over an initial 27-year operating life, or more than 1 million ounces per year. It would process 59,000 tons of ore per day, according to the draft EIS prepared by the U.S. Army Corps of Engineers. “Very few mines in the world produce more than 1 million ounces of gold each year,” Foo said. However, gold prices will need to improve between now and the time Donlin decides whether or not it plans to move forward with construction. Foo said the mine would not be feasible at today’s gold prices of less than $1,100 per ounce. The tailings storage facility, which would be the first full-lined facility in Alaska, he said, would cover approximately 2,300 acres. During three to four years of construction, the mine would employ about 3,000 workers; once in operation the workforce would average about 800 employees. Calista Corp., the regional Alaska Native corporation, holds subsurface mineral rights for the mine. The Kuskokwim Corp., the area village corporation, holds surface rights. Both have been “very supportive of the project,” Foo said. Donlin Gold submitted its EIS application to the Corps in July 2012. A final EIS and subsequent record of decision are expected in mid- to late 2017. The draft EIS examines five project alternatives beyond Donlin Gold’s preferred alternative and the requisite no-action alternative. Of those, three would change the project in an effort to reduce barge traffic — specifically diesel barges — on the Kuskokwim River, which area residents rely heavily on for travel and subsistence salmon harvests. The reduced barging options include using liquefied natural gas-powered equipment at the mine, thus reducing the need for diesel fuel; constructing an 18-inch diesel pipeline from Cook Inlet to the mine, which would replace the natural gas line; and moving the port site from Jungjuk Creek 69 miles downstream to Birch Tree Crossing to reduce the distance freight and diesel would travel on the Kuskokwim. An alternative that would use a dry stack method of tailings storage instead of the tailings pond and dam proposed by Donlin would avoid the risk of a tailings dam failure. The tailings under this option would be dewatered in a filter plant and saturated into a compactable cake material, according to the draft EIS. That material would then be spread into thin layers with bulldozers in a dry stack tailings area. The last alternative would shift the natural gas pipeline route slightly through the South Fork Kuskokwim valley. Comments on the draft EIS can be submitted to the Corps through April 30.

$305B transportation bill grows annual outlays for Alaska

President Barack Obama signed into law the nation’s first long-term transportation funding bill in more than a decade on Dec. 4. The $305 billion Fixing America’s Surface Transportation, or FAST, Act provides five years of funding aimed at improving rail, road and marine infrastructure. It passed both the House and Senate by wide margins the day prior to being signed by the president. All three members of Alaska’s congressional delegation supported the legislation. Alaska is poised to receive more than $2.6 billion over the life of the FAST Act, with yearly allotment increases. The state took $483.9 million from the federal government for surface transportation programs in federal fiscal year 2015, which ended Sept. 30. In 2016, that figure jumps to $508.6 million; by the end of the FAST Act in 2020 it is $555.3 million, according to a release from Sen. Dan Sullivan’s office. Passage of the five-year bill gives funding certainty needed to make infrastructure investments in Alaska, Sullivan said. “The bill also includes reforms to our permitting system, which will help cut through project-killing red tape and streamline regulatory burdens,” he said in a formal statement. “This bill amounts to a big win for Alaska as it will allow us to not only address our infrastructure needs, but also promote and sustain economic growth throughout the state.” The legislation establishes a council of relevant federal permitting agencies tasked with determining best practices and modeling timelines for evaluation of major transportation projects in an effort to speed up federal regulatory approval, according to a conference committee summary. A pilot program will also allow up to five states to substitute their own environmental regulations in place of the National Environmental Policy Act, or NEPA, given the states’ laws and regulations are at least as stringent as those in NEPA. The FAST Act is a win for Alaska, as Sullivan noted, at least when it comes to dollars per Alaskan. A large, young state with limited transportation infrastructure, the $2.6 billion equates to more than $3,500 per Alaskan, while the rest of the country averages $956 per citizen. “We all recognize that Alaska is in the midst of a budget crisis, so being able to rely on federal funding for critical infrastructure projects, whether it be on roads, bridges, or ferries, is key to our state,” Sen. Lisa Murkowski said in a release. Murkowski served on the conference committee that resolved the final transportation bill. Rep. Don Young noted in a statement from his office that the last long-term surface transportation bill, SAFETEA-LU, was legislation he authored as chair of the House Transportation and Infrastructure Committee in 2005. He said the FAST Act is “far from perfect,” but, like Sullivan, added it makes several important reforms to streamline federal permitting. “The success of any state’s economy directly depends on their ability to move people and products safely and efficiently,” Young said. “That is especially true in a developing and geographically unique state like ours, which is why I worked so hard to secure numerous provision specifically beneficial to Alaskans — including $31 million annually for the Alaska Railroad, ample funding for our ferry program, and significant increases for the Tribal Transportation Program.” An error in the funding formula in the 2012 MAP-21 transportation bill that cost the Alaska Railroad Corp. $3 million per year is corrected in the FAST Act, which also grew the pool of passenger railroad formula funding. In all, the Alaska Railroad will get a $5 million increase in federal funding annually, according to a railroad spokesman. Railroads across the country will also have the opportunity to compete for $199 million in federal grants to aid implementation of the federally mandated Positive Train Control safety system, which is expected to cost the Alaska Railroad nearly $160 million by the time it is fully in place in 2018. The state-owned Alaska Railroad has spent more than $70 million to install Positive Train Control over several years and the Legislature authorized it to sell bonds earlier this year to further the work. Railroad spokesman Tim Sullivan said the railroad will likely apply for federal assistance, but added how that would play into the current PTC funding plan is still unclear. The previous year-end deadline for railroads to have Positive Train Control in place was pushed back to 2018 in a separate piece of legislation passed earlier this fall. The Alaska Marine Highway System, hit hard by state operating budget cuts, gets a little more for its capital improvement program. The state ferry system will receive $18.6 million annually for major work on its vessels, which equates to a $2.4 million increase over the five years of the FAST Act. Earlier versions of surface transportation legislation changed the funding formula for state ferry programs, which could have lessened Alaska’s take and caused concern in the Alaska Department of Transportation. The Tribal Transportation Program — $450 million per year under the MAP-21 extensions — will get an additional $15 million in 2016 and $10 million more in the following four years. A new federal freight program designed to fund freight-related highway improvements will send $80 million Alaska’s way over the duration of the legislation as well. As Alaska and other states legalize the sale of marijuana for recreational use, the FAST Act requires a feasibility study be done to investigate impairment standards for drivers under the influence of marijuana, according to a House Transportation briefing.

Interior gas project finalists narrowed to two

Interior residents will have to wait a little longer to hear who their new supplier of natural gas will be, but the Alaska Industrial Development and Export Authority has narrowed its project partner options to two: Spectrum LNG and Salix Inc. AIDEA Interior Energy Project manager Bob Shefchik said during the authority’s Dec. 3 board meeting — when a private Interior Energy Project partner recommendation was expected — that pushing the decision back about six weeks to late January would allow the project evaluation team to more thoroughly vet the best and final offers from Salix and Spectrum. The final offers by five project finalists were submitted in late October and Salix and Spectrum quickly separated themselves from the other proposals, Shefchik said. AIDEA’s project evaluation team then reached a consensus that more time was needed to fully vet the finalists’ cost projections to make sure the best plan is chosen. Specifically, he said the evaluation team will further review commercial and financial terms of the plans Salix and Spectrum have put together, as well as fully cross-examining the capital and operating cost projections that will weigh heavily on the success of the project. “To some extent this is work that would have gone on had even one been selected,” Shefchik said. “We doubled our workload to make sure we’re doing it with two to bring (the AIDEA board) the best project with the best information.” The delay should not have much impact on the timeline of the project. Spectrum has touted an ability to get natural gas to Fairbanks early in 2017, while Salix has said it could be ready for production by January 2018. While the race to supply Interior Alaska with liquefied natural gas is too close to call, the leading companies have plans coming from opposite ends of Alaska. Salix Inc., a subsidiary of the Pacific Northwest utility company Avista Corp., is proposing a Southcentral LNG plant with an initial liquefaction tolling fee of $2.87 per thousand cubic feet, or mcf, of natural gas. Costs for wholesale gas, trucking to Fairbanks, regasification of the LNG and final distribution to customers would still have to be added to the tolling fee. The goal of the Interior Energy Project is to supply Fairbanks residents with natural gas at a final, burner tip price of roughly $15 per mcf, which is the energy equivalent of fuel oil at about $2 per gallon. Salix would finance its Southcentral plant, pegged at $68 million, with a $30 million appropriation from AIDEA, a $28 million low-interest loan from the authority and $10 million of its own equity. Spectrum LNG vied to participate in the first go-round of the project early in 2014, but with a different financing plan for its North Slope LNG plant. This time, the Tulsa, Okla.-based company is proposing a North Slope LNG plant that would produce LNG — wholesale gas cost included — for $5.06 per mcf, leaving a $10 gap available for trucking and distribution costs to still meet project goals. Spectrum CEO Ray Latchem estimated trucking costs from the North Slope at about $5 per mcf during a Nov. 4 town hall meeting in Fairbanks. AIDEA has said regasification of the LNG and distribution to customers should cost between $4 and $5 per mcf. Spectrum would pay for its plant, estimated to cost about $85 million, also through a $30 million grant from AIDEA, a $50 million low-interest loan and a $5 million equity investment. The loans and grants proposed to finance LNG plant construction in each plan would come from the $332.5 million state grant-loan-bond package approved by the Legislature in 2013 for the Interior Energy Project. Shefchik said the expectations for capital costs on the Slope are more positive than the first attempt of the project, which was doomed by high plant construction costs. Wholesale natural gas on the North Slope costs roughly half to one-third of what it does currently from Cook Inlet; however, working on the Slope also includes higher capital, operating and trucking costs, which keep Cook Inlet options competitive. Spectrum leadership helped develop Fairbanks Natural Gas’ LNG supply chain in the late 1990s. The company currently operates a small LNG plant in Arizona that supplies LNG for vehicle use. By going with Salix or Spectrum — LNG plants only — AIDEA steered away from more complex plans by others in the group of five project finalists that wrapped gas supply, liquefaction and delivery to the Interior in an “all-in-one” price. Phoenix Clean Fuels, a consortium of seven companies including Crowley LNG, General Electric Oil and Gas and Alaska utility company TDX Power, had proposed delivering North Slope-sourced LNG to the Interior at $10.60 once the project was up and running for several years. Phoenix Clean Fuels reached its price estimate partially on the back of a trucking cost of $3.86 per mcf, significantly less expensive than other projections to get LNG down the Dalton Highway. Irvine, Calif.-based WesPac Midstream LLC claimed it could deliver Cook Inlet-sourced LNG to Fairbanks for $12.25 in its plan summary released in September. That price, which would strain the project once distribution costs were added, was based on an assumption that feedstock, or wholesale, gas would be about $1.20 per mcf lower than the forecasted market in 2018. WesPac owns the working interest in natural gas from the small Cook Inlet Cosmopolitan field being developed by BlueCrest Energy Inc. and has said it will continue to pursue a Southcentral LNG plant whether it partners with AIDEA on the Interior Energy Project or not. Hilcorp Energy, which owns most of the Cook Inlet gas supply, had proposed three options through its LNG subsidiary Harvest Alaska LLC: an LNG plant, a gas supply and plant and its own bundled, delivered option. Harvests privately financed options forecasted the most expensive LNG prices of all the Interior Energy Project finalists. Elwood Brehmer can be reached at [email protected]

Interior gas project finalists narrowed to two: one from Slope, one from Inlet

Interior residents will have to wait a little longer to hear who their new supplier of natural gas will be, but the Alaska Industrial Development and Export Authority has narrowed its project partner options to two: Spectrum LNG and Salix Inc. AIDEA Interior Energy Project manager Bob Shefchik said during the authority’s Dec. 3 board meeting — when a private Interior Energy Project partner recommendation was expected — that pushing the decision back about six weeks to late January would allow the project evaluation team to more thoroughly vet the best and final offers from Salix and Spectrum. The final offers by five project finalists were submitted in late October and Salix and Spectrum quickly separated themselves from the other proposals, Shefchik said. AIDEA’s project evaluation team then reached a consensus that more time was needed to fully vet the finalists’ cost projections to make sure the best plan is chosen. The delay should not have much impact on the timeline of the project. Spectrum has touted an ability to get natural gas to Fairbanks early in 2017, while Salix has said it could be ready for production by January 2018. While the race to supply Interior Alaska with liquefied natural gas is too close to call, the leading companies have plans coming from opposite ends of Alaska. Salix Inc., a subsidiary of the Pacific Northwest utility company Avista Corp., is proposing a Southcentral LNG plant with an initial liquefaction tolling fee of $2.87 per thousand cubic feet, or mcf, of natural gas. Costs for wholesale gas, trucking to Fairbanks, regasification of the LNG and final distribution to customers would still have to be added to the tolling fee. The goal of the Interior Energy Project is to supply Fairbanks residents with natural gas at a final, burner tip price of roughly $15 per mcf, which is the energy equivalent of fuel oil at about $2 per gallon. Spectrum LNG vied to participate in the first go-round of the project early in 2014, but with a different financing plan for its North Slope LNG plant. This time, the Tulsa, Okla.-based company is proposing a North Slope LNG plant that would produce LNG — wholesale gas cost included — for $5.06 per mcf, leaving a $10 gap available for trucking and distribution costs to still meet project goals. Shefchick said the expectations for costs on the Slope are much better than the first attempt of the project, which was doomed by high plant construction costs. Wholesale natural gas on the North Slope costs roughly a third of what it does from Cook Inlet: however, working on the Slope also includes higher capital, operating and trucking costs, which keep Cook Inlet options competitive. Spectrum leadership helped develop Fairbanks Natural Gas’ LNG supply chain in the late 1990s. The company currently operates a small LNG plant in Arizona that supplies LNG for vehicle use.

Senate group recommends prudence on tax credits

The state Senate Majority is urging caution when examining changes to Alaska’s oil and gas tax credits in a report released Dec. 1. The overarching theme of the 37-page report is that low oil prices and historically waning North Slope production have put the state’s economy in a precarious situation, and drastically cutting the tax credits to directly save money — yearly refundable credit obligations upwards of $700 million — could cause additional retraction of private investment in Alaska’s basins. It was born from six meetings of the Senate Oil and Gas Tax Credit Working Group, assembled and led by Resources Committee chair Sen. Cathy Giessel, R-Anchorage. The group included five other members of the Senate Majority and minority member Sen. Bill Wielechowski, D-Anchorage, along with industry and Alaska Native corporation representatives. “The credit system has brought natural gas stability in the Cook Inlet, as well as more competition to the North Slope,” Giessel said in a formal statement. “We must make the system more sustainable, but also respect the tremendous investments coming into our state.” In June, Gov. Bill Walker caused a stir in the oil and gas industry when he vetoed $200 million of state refundable tax credits from a $700 million line item for the credits in the state operating budget. At the time the governor said the partial veto was intended to spark discussion about ways to change the layered tax credit system he has called unsustainable given the state has a $3.5 billion budget gap. The first of six recommendations made in the report suggests the State of Alaska should implement any changes to the oil and gas tax credits gradually as to not impact ongoing work relying on current credits. “A massive change that takes effect even in the next 12 months could be considered retroactive since many projects have gained and expended funds on exploration and development,” the report states. It further notes that almost immediately after the $200 million veto, members of the Walker administration had to reiterate to independent producers and their lenders it did not mean the state would dodge its obligation to pay the credits; rather the payments would just be delayed but still be made in time to meet statutory requirements. The report states the credit freeze for explorers loosened after the state’s reassurances. Wielechowski said that a recommendation to ensure the 4 percent production “tax floor” for legacy producers under Senate Bill 21 is protected is the only significant proposal in the report. The 4 percent floor was installed as a way to prevent legacy North Slope producers from using deductible tax credits to lower their tax liability to zero or less, which, given low oil prices and production value, could happen. Tax Division representatives said at a working group meeting that neither SB 21, nor its oil production tax system predecessor known as ACES, were designed to effectively tax oil production at market prices less than $50 per barrel, as they are today. While Wielechowski doesn’t object to the ideas outlined in the report, he said it lacks substantive suggestions on how to better invest dwindling public money in the state’s dominant industry. “We’ve taken more of a scattershot approach, where we just provide (oil and gas) tax credits and deductions and we aren’t really taking a deep enough look into whether companies really need these to make their fields and projects profitable,” Wielechowski said in an interview. The ACES progressive production tax, with a tax rate directly tied to the price of oil, attempted to maximize production revenue to the state in exchange for significant tax credits and deductions, he said. While ACES progressivity is gone, the tax breaks are not. In a Nov. 27 letter to Giessel, Wielechowski thanked her for the opportunity to participate in the working group, but also noted what he felt was a missed opportunity by not delving into per-barrel production tax deductions. He wrote that the Revenue Department projects oil and gas credits deductible against tax liability will be more than $1.2 billion in each of the next two fiscal years and decline to $999 million in fiscal year 2019. Wielechowski also said the working group did not hear from BP, ConocoPhillips, or ExxonMobil, the three companies that benefit the most from the deductible credits. “How do you have any discussion of oil taxes in the state of Alaska without hearing from the three largest producers in the state?” he told the Journal. Presentations and discussions during the working group meetings focused primarily on the refundable credits, or “rebates,” eligible to smaller, independent companies producing less than 50,000 barrels per day. Unlike the deductions, which are applied to reduce tax liabilities, the state purchases the refundable credits from the companies because they have no tax liability until a project reaches production. Further considerations outlined by the report include ensuring Alaska support companies “be made whole” in the event an explorer or producer receiving state credits goes bankrupt — as Buccaneer Energy did last year following its Cook Inlet natural gas work. It suggests allowing Frontier Basin credits, those eligible to companies working outside of the North Slope and Cook Inlet, to expire because most Frontier Basin operators utilize credits designed for Cook Inlet. That is a result of Cook Inlet credits being rebated quicker. If the refundable Cook Inlet exploration and production are changed, Frontier work could be exempted. Incentivizing work such as Doyon Ltd.’s exploration in the Nenana Basin near Fairbanks is a relatively small expense when put against the potential benefits of oil and gas discoveries in non-traditional producing regions of the state, according to the report. Finally, it requests making more information, but not the names of operators using credits, public. “Without compromising the confidentiality and proprietary data of an operator, it would be a service to the public to know what the investment and spend amounts on a project applying for credits are,” the report states. Elwood Brehmer can be reached at [email protected]

Interior aurora tourism continues to grow in new markets

(Editor's note: This story was updated to reflect an accurate number of Japan Airlines charter flights for this aurora season — from two to three —  after a scheduling change by the airline.)   Don’t say “winter” to Deb Hickok. The Explore Fairbanks CEO is not in denial of the chilling temperatures and dark mornings yet to come. Rather, in the style of any good marketer, she will tell you the Golden Heart City has two seasons: summer and aurora. “The aurora is really the big thing in Fairbanks,” Hickok said. It’s hard to argue with her stance. About a 30-minute drive north of Fairbanks just off the Steese Highway is Aurora Borealis Lodge, one of a select few accommodations in Alaska that is closed during summer. Aurora Borealis Lodge opens Aug. 16 each year and shutters — for the summer — April 12. “Basically, we designed our season around when we have darkness,” lodge co-owner Mok Kumagai said. Kumagai’s foray into aurora-centric tourism began in 2003 as a tour operator out of Fairbanks. That year he was open for two months and served about 100 customers, he said. By 2008, demand had grown enough for Kumagai and his business partner Logan Ricketts to open the lodge, which can host up to 35 guests. “All of a sudden there was an increased demand for places that could hold 30 or so people at a time,” Kumagai said. That roughly coincides with Japan Airlines’ first winter, err, aurora, charter flights direct from the island country. The first three aurora charters from Japan flew in 2004. By 2007, Japan Airlines had dedicated 16 flights to Fairbanks for aurora spotters. The non-summer charters peaked in 2011 with 19 flights. Most charter itineraries include at least five nights in Fairbanks, giving guests a fair shot to find clear skies. Those guests are spending money, too. The average Outside traveler to Alaska spends about $950 once in the state; international travelers shell out more than $1,600; and Japanese travelers eclipse $2,000, according to the state Commerce Department. In recent years, Kumagai has had upwards of 5,000 aurora tour customers in addition to a full lodge most of the season. This aurora season Japan Airlines has only three charters scheduled —a consequence of reorganization within the airline after it filed for bankruptcy — not for lack of demand, Hickok said. Those travelers that would have taken the charter will simply have to find another way to Alaska. Explore Fairbanks lists 15 lodges and tour companies offering customers a chance to see Alaska’s renowned northern lights. Many of those businesses have opened — or decided to stay open in winter — within the last 10 years. In the first few years of the business virtually all of Kumagai’s customers were Japanese. Being a native of Japan himself, he has a theory as to why aurora viewing is such a popular vacation theme amongst his brethren, and it’s not a popular myth about the mystical powers of the aurora. “You may have heard that it brings good luck to conceive a child under the northern lights; that’s completely wrong by the way,” Kumagai clarified. “It’s really a fascination with nature (among Japanese tourists). It’s similar to wanting to go see Old Faithful geyser in Yellowstone or Machu Picchu in Peru — this fascination with the wonders of the world, the aurora being one of them.” Rather than sitcoms or dramas, Kumagai said travel shows were the primetime must-watch television in Japan when he was growing up, which exemplifies the urge to see the world in the country. Ralf Dobrovolny opened 1st Alaska Outdoor School in Fairbanks in 2003. A year-round excursion provider, 1st Alaska offers Denali and Arctic adventures in the summer and mushing and aurora viewing the rest of the year. Once a niche to go along with summer business, Dobrovolny said the aurora season now makes up about 70 percent of his annual business activity. Northern Alaska Tour Co. has offered a suite of Arctic trips for 25 years. Co-owner Matt Atkinson said Northern Alaska began its aurora tours 10 years ago and “the last five to six years it’s just been gaining momentum.” The aurora’s popularity is evidenced by the distinct terms that have been generated to describe it. At Northern Alaska Tour Co. there are aurora viewers, those that are actively taking the northern lights. Aurora watchers are on guard for the slightest light activity and aurora hunters or chasers are those traversing Alaska to find a break in the nighttime clouds. While the Japanese may have been the first on the Alaska aurora bandwagon, they aren’t the only group on it anymore. The first China Airlines aurora charter, direct from Taiwan, was scheduled to land in Fairbanks Dec. 4. It is the first of three charters the carrier has planned to Fairbanks before the end of the year, and they all sold out, Hickok said. Chinese students going to college in the U.S. are a subsection of the aurora visitor market Atkinson said has caught him by surprise over the last couple years. “These kids are wired; they’re going on Weibo, which is basically Chinese Twitter. Then there’s Trip Advisor and these things so they’re very connected,” Atkinson said. That technological connectivity will hopefully help cultivate the concept aurora viewing in Alaska across China through good old word of mouth, he hopes. Dobrovolny agrees. “I am convinced that in the next few years we will see a huge impact on our winter business — on winter tourism — from the Chinese market,” Dobrovolny said. The European market is also starting to catch on, Dobrovolny added. He just better not let Hickok hear him using the “W” word.

Tongass EIS proposes transition to young-growth harvest

The future of timber management in the Tongass National Forest in Southeast Alaska is beginning to take shape. On Nov. 20, the U.S. Forest Service released the first draft of an environmental impact statement, or EIS, needed to amend the Tongass Land and Resource Management Plan with five alternatives for managing the federal forest that dominates the region. At nearly 17 million acres, the Tongass is the nation’s largest national forest and encompasses about 90 percent of Southeast Alaska. An emphasis to shift away from harvest of the forest’s old growth hemlock, spruce and cedar is evident in the Forest Service’s preferred EIS option. Alternative 5 would phase out old-growth timber harvest over 15 years and would not allow any harvest — young- or old-growth — in roadless areas defined by the 2001 Roadless Rule. Old-growth harvest that would be allowed in previously designated areas would be limited to commercial thinning or 10-acre openings, with removal of no more than 35 percent of available timber. A 200-foot “no-cut buffer” from the shoreline inland would be instituted along beach and estuary areas open to harvest. The preferred alternative was a unanimous recommendation from the Tongass Advisory Committee, according to a release from the Tongass office of the Forest Service. The 15-member Tongass Advisory Committee was formed in early 2014 to steer the direction of the latest management plan. It is comprised of three members each from five stakeholder groups: Alaska Native tribes and corporations, conservation organizations, government, the timber industry and other commercial users. In July 2013, U.S. Department of Agriculture Secretary Tom Vilsack issued a memo directing Tongass management to be more ecologically, socially and economically sustainable, while accelerating the transition to predominantly young-growth timber harvest by the region’s remaining timber industry. Other alternatives would allow harvest of any-age timber in inventoried roadless areas that were developed before the Roadless Rule took effect in 2001 and during the period that the Tongass received an exemption from the executive order. Additional options would limit young-growth harvest as well. According to the Forest Service, less than 10 percent of old-growth habitat in the Tongass has been converted to young-growth; however that percentage is much higher for some types of old-growth habitat, such as lowland and large tree areas. The Alaska Forest Association, which represents the state’s timber and sawmill industry, is quick to point out that under the current management plan, for each acre scheduled for future timber harvest there are 24 acres managed for uses other than logging in the Tongass. Timber harvest in the forest has declined by more than 90 percent since enactment of the Roadless Rule in 2001 — prohibiting further development of many National Forest lands. At its peak in the 1980s the timber industry supported nearly 4,000 jobs in Southeast. Today, there are about 300 timber-related jobs in the region, according to the state Labor Department. Emily Ferry, deputy director for the Southeast Alaska Conservation Council said the Forest Service’s preferred alternative steers away from logging in the “salmon strongholds” the organization has sought to protect. “It has been a long-term goal of ours to make sure those salmon strongholds aren’t cut and at first blush (the Forest Service) isn’t planning to log those areas,” Ferry said. She noted at the same time a worry about continuing to harvest old-growth timber, which just perpetuates the classic controversy surrounding the timber industry in the Tongass, Ferry said. Alaska Forest Association Executive Director Owen Graham said current young-growth stands in the Tongass simply aren’t mature enough to be useful to the region’s sawmills designed to cut larger trees. “We always planned to transition (to young-growth harvest) but we wanted to do it so sawmills could start cutting the products they do now out of the larger logs,” Graham said. “By continuing the old-growth harvesting now we would build more acres of young-growth so that once the mills transition into the young-growth they can sustain it.” By allowing young-growth stands to mature another 30 years, the board feet available per acre would double, he said, which would also reduce the footprint made by harvesting a given amount of timber. Most young-growth trees in the Tongass today are suitable only for low-grade construction lumber and the distance from the Lower 48 market puts Alaska mills at a competitive disadvantage, Graham said. The market for exporting raw logs to Asia has grown, but that means the value-added manufacturing opportunity drawn from lumber is lost, a concern shared by Ferry and Graham. “We are not making the most of each board foot when we cut a round log, an unprocessed log, and send it to Asia,” Ferry said. Finding a way to quickly transition to young-growth timber harvest and still maximize the value of the lumber is imperative, she said, because no one in Alaska is benefiting from the current Tongass timber situation. Elwood Brehmer can be reached at [email protected]

Fauske resigns as AGDC president

The melodrama that has become the Alaska Gasline Development Corp. continued Nov. 21 with the sudden resignation of president Dan Fauske. Fauske stepped down one day after Gov. Bill Walker removed John Burns and Commerce Commissioner Chris Hladick from the Alaska Gasline Development Corp., or AGDC, board. Burns, who served as board chair, is a former Alaska attorney general. AGDC is the state entity tasked with representing the State of Alaska in the $45 billion-plus Alaska LNG Project — the large North Slope natural gas export effort with BP, ConocoPhillips and ExxonMobil. Walker appointed former Fairbanks North Star Borough Mayor Luke Hopkins and Transportation Commissioner Marc Luiken to replace Burns and Hladick. Fauske tendered his resignation in a letter dated Nov. 20 that was made public just prior to a special AGDC board meeting the morning of Nov. 21. He wrote that he is proud of his time as president of the corporation, but did not expand on specific reasons for his departure. “As an (Alaskan) for many years, I strongly desire that a natural gas pipeline project will come to pass,” Fauske wrote. “In that pursuit, I wish the governor and this board of directors success. I believe that a successful project will benefit Alaskans for many years into the future and will be a source of economic prosperity for the state.” His resignation will officially take effect Jan. 1, however, Fauske indicated he will take accrued personal leave until then. During a press briefing following the board meeting Walker commended Fauske for his work with AGDC in bringing the Alaska LNG Project to its current point and said Fauske offered to help move the project along in any way he could during a conversation the two had Friday. The governor said changes to the state’s gasline team are meant to bring “alignment” to the group. He also said that while he didn’t directly ask for Fauske’s resignation, he expressed his wish to the corporation that a change in leadership be made. “We need a person in that (AGDC president) position that has done many, many pipeline projects,” Walker said. Prior to leading AGDC, Fauske headed the Alaska Housing Finance Corp., or AHFC, for many years. AHFC first worked on the state-led Alaska Stand Alone Pipeline project known as ASAP, a contingency project to get North Slope natural gas to Alaskans if a commercial project with the producers doesn’t materialize. Fauske transitioned to AGDC when it was formed in 2013 to focus on natural gas projects. Fauske said in a recent interview with the Journal that he was displeased with proposed AGDC confidentiality regulations — drafted by the Attorney General’s office and strongly opposed by the producers — because they would make contracts the corporation entered into public and could compromise the state’s bargaining position and ability to work with third party vendors, according to Fauske. The governor also said he met with the leaders of the House and Senate Resources committees earlier in the week to discuss how the administration and the Legislature can work more collaboratively to bring the project along. The coming year will be a big test for the project, as all four parties will need to decide if they want to make significant investments in front-end engineering and design, or FEED, for the project, a multi-year commitment to bring it to a final investment decision. Alaskans will also likely have to decide if they are willing to amend the state Constitution to allow long-term contracts to be signed with the producers. Senate Resources Committee chair Sen. Cathy Giessel, R-Anchorage, said in an interview following Fauske’s announcement his departure is a “significant loss” for the state because of his experience in finance and that she is concerned with the recent loss of experience in positions of leadership for a project crucial to the economic future of Alaska. What, if anything, the shakeup at AGDC means for the direction of the Alaska LNG Project remains to be seen. “Continuity, consistency, stability, predictability, those are the key words these companies (BP, ConocoPhillips and ExxonMobil) look for, not only in tax policy but also in personnel,” from the State of Alaska, Giessel said. She added that Burns provided consistency on the board through its changes and offered “exemplary” service to the state. The AGDC board unanimously approved acting board chair Dave Cruz to also act as corporation president until an interim AGDC president is named. That topic will be addressed at the next board meeting scheduled for Dec. 3. Cruz said in a formal statement that Fauske did an “incredible job” building the state organization from its infancy. “Under (Fauske’s) leadership, Alaska has made more progress on a natural gas pipeline than every before,” Cruz said. “I want to personally thank him for his dedication to this incredibly important project and for his years of service to the State of Alaska. He will be missed.” Since taking office nearly a year ago, Walker has now replaced six of the seven AGDC board positions. In January, he began reshaping the board by removing three members appointed by former Gov. Sean Parnell, citing transparency issues. At the time he ordered the new board members not to sign confidentiality agreements that, prior to the Walker administration, all AGDC board members and employees were required to sign. Cruz, owner of Cruz Construction Inc., an oilfield contracter, is the only board remaining board member to have signed AGDC’s confidentiality agreement. Walker called the resolving the issue of what’s confidential a “fine line” and said he is assessing the concerns of all parties on the issue, but added that Alaskans need to be kept abreast of the agreements the state is entering into if they are going to be asked to change the state’s Constitution. “We don’t want to hinder the project in any way,” the governor said. “We’ll find that line.” As for former AGDC chair Burns, Walker said he holds Burns in the highest regard and removing him from the board does not in any way reflect the relationship the two have. “I don’t think we’ve seen the last of John Burns in this project,” he said. He also noted that Commerce Commissioner Hladick already serves on more than 20 different boards and DOT, the state’s infrastructure agency, will have a large role in the project moving forward. Not to be lost in the buzz surrounding the latest AGDC leadership changes is the fact that the state now officially owns TransCanda Corp.’s share of the Alaska LNG Project. The AGDC board passed a resolution to authorize a $64.6 million payment to TransCanada and accept the company’s share of the midstream portion of the project. That follows the Legislature’s approval of the state’s purchase TransCanada’s 25 percent share of the North Slope gas treatment plant and the 800-mile pipeline in the special session completed earlier this month. Approval of AGDC’s fiscal year 2017 work plan and budget was delayed until the Dec. 3 meeting, apparently at the request of Walker. He said at the briefing it was premature for the state to commit funding work before getting formal commitment from the producers that gas will be made available to the project if one or more of them pulls out. The governor and the producers settled on a Dec. 4 date for withdrawal agreements in late October. Elwood Brehmer can be reached at [email protected]

Anchorage port contractor claims no liability in failed project

A key subcontractor in Anchorage’s failed port expansion project wants out of a lawsuit first filed by the Municipality of Anchorage because it claims the city has no jurisdiction to recover lost money. Attorneys for Quality Asphalt and Paving, the contractor that led construction work at the Port of Anchorage in the late 2000s, argued in U.S. District Court of Alaska Nov. 20 that QAP already settled claims related to the project with Integrated Concepts and Research Corp., or ICRC. ICRC managed the project to update and expand dock and shore side facilities at Anchorage’s aging port on behalf of the U.S. Maritime Administration, or MARAD, a federal Department of Transportation agency commissioned by the municipality to oversee the project. The Port of Anchorage Intermodal Expansion Project began in 2003 as a $210 million endeavor, but problems installing the patented open cell sheet pile system chosen to build the docks exploded project costs over time.  Construction work at the port ceased in 2010. Ultimately MARAD spent $302 million of the money Anchorage, the State of Alaska and the federal government contributed to the project.  The city has about $130 million remaining from $439 million appropriated for the work and has begun a scaled back plan known as the Anchorage Port Modernization Project. QAP attorney Michael Geraghty said during the Nov. 20 hearing that a 2012 settlement in which MARAD paid ICRC $11.3 million for QAP’s and MKB’s work released the contractors’ claims and effectively ended their ties to the project. The municipality has said it was not party to the settlement and was even unaware of it at the time it was reached. Attorneys for the municipality have said Anchorage is looking to recoup more than $300 million in two outstanding lawsuits, one initially filed in 2013 against ICRC, project designer PND Engineers Inc. and CH2M, which purchased project consultant VECO Alaska, and another suit filed last year against MARAD in Federal Claims Court. By partnering with MARAD to execute the project on behalf of Anchorage, the municipality subjected itself to federal contracting guidelines that place responsibility for delivery with MARAD, Geraghty argued.  “You’re letting someone else decide if that work is acceptable for your benefit,” in the federal contracting process, he said. Geraghty also noted it should not be lost that the municipality has not submitted claims against QAP; rather, PND filed a third-party suit against the subcontractors. PND has long claimed the problems with the disastrous project come down to shoddy installation of its proprietary sheet pile design, not its suitability for the site. QAP and MKB are still waiting for PND to clarify its case against the contractors. The subcontractors contend the problems were issues of engineering and constructability and those responsibilities fall on the owner of the project, the municipality. QAP filed a motion for summary judgment in the case in August — the motion argued Nov. 20. Geraghty furthered his point by noting what he considers a simple conflict in the municipality’s stance; Anchorage is attempting to recover the same damages through its separate lawsuits against MARAD and the private project participants. Municipal counsel Donald Featherstun said that there are many material facts in dispute yet in this case; summary judgment can only be rendered when the facts are not in dispute and the only questions are interpretations of the laws at issue.  “The arena of government contracts is enormously complicated,” Featherstun said. He also contended that if QAP is allowed to walk away as a subcontractor without potential liability, the viability municipality’s case against the rest of the defendants goes too. Featherstun emphasized the point that the municipality was kept in the dark regarding 2012 settlement between MARAD and ICRC. “In effect, they were all hiding from (the municipality),” he said. Geraghty rebutted by asking why the municipality would sue MARAD and at the same time claim that MARAD released itself from claims through the settlement. Claiming a need to sort out federal contracting complexities as a reason for QAP to continue in the case is “a deliberate attempt to sandbag the court,” Geraghty said. A trial in the suit first against ICRC, PND and CH2M was once set for October of this year, but is now scheduled for September 2016. Elwood Brehmer can be reached at [email protected]

Independent power producers cheer RCA rules revisions

Alaska’s independent power producers are claiming victory over regulatory changes that they say will encourage investment in renewable energy projects. The Regulatory Commission of Alaska on Nov. 20 finalized revisions to state regulations pertaining to how electric utilities calculate their cost of power and mandating them to purchase power from economically viable third-party sources. Alaska Independent Power Producers Association Director Duff Mitchell said the changes simply bring Alaska’s scheme in line with Federal Energy Regulatory Commission, or FERC, regulations followed in the Lower 48. “What this does is it allows independent power producers and qualifying facilities to sit at the table. The elements of a fair playing field is what this creates,” Mitchell said. The state framework governing power purchases had not been updated since 1982. Sponsors of several renewable energy projects across Alaska felt those regulations allowed utilities to discriminately purchase power from their own generation sources regardless of potential cost savings — a power grab to retain control of the state’s electric market, the independent producers claim. The revisions require utilities to use an incremental avoided cost methodology to determine their cost of power, which mirrors FERC requirements, versus the historical option to choose an average avoided cost model. The Nov. 20 final order was the culmination of a public rulemaking process that took more than two years to complete. FERC regulates Lower 48 utilities because the electric grid crosses borders and connects states. Alaska Railbelt electric network and many smaller grids are cut off from the rest of the country, which removes FERC’s jurisdiction on the matters in the state. Given an option, electric utilities will almost always draw power from several generation sources at once as a result of need or preference, usually both. Multiple sources of power are often a necessity for larger utilities that can’t get ample supply from a sole generation plant. Multiple sources also provide redundancy in the system, which helps a utility keep the lights on if one source should drop offline for any reason. In an incremental avoided cost model, a utility calculates the cost of each power source individually and tries to limit the amount of power purchased from its most expensive source. If a less expensive source becomes available, the most expensive power is turned off, or at least throttled back. An average avoided cost model allows utilities to average the cost of all its power generation and purchase power from another source only if it is less expensive than the averaged cost. Mike Craft, owner of Alaska Environmental Power, a small wind farm near Delta Junction, has long said he would build more turbines to his two-windmill operation if Alaska utilities would relax their hold on the market. “Alaska’s outdated regulations were a big factor holding up the expansion of our wind generation facility in Delta Junction,” Craft said in a release. “This ruling will help us move forward and benefit the community by displacing even more expensive diesel fuel, reducing air pollution, and improving energy security in Interior Alaska.” Cook Inlet Region Inc. wind power manager Suzanne Gibson said the decision should help larger projects, such as CIRI’s Fire Island Wind farm, which has had difficulty obtaining a power purchase agreement with utilities needed to continue with planned expansions. The state’s few larger electric utilities — some of the only ones with power generation options — have said they are always looking for less expensive power, but the average avoided cost model allows them to better calculate the true costs of variable renewable sources, particularly wind power in Alaska. Managing other power generation to match the clean and cheap but fickle nature of wind power adds hidden costs that also vary, so averaging those costs assures a utility it is buying a balance of cheap and stable power, utility leaders have said. Alaska Power Association Executive Director Crystal Enkvist said some of her members disagree with aspects of the regulations and didn’t think the power-cost revisions were necessary, but added that regulatory clarity is always beneficial. “We can understand the commission’s desire to directly align the RCA regulations with the language of the FERC regulations,” Enkvist said. The Alaska Power Association represents 21 electric utilities across the state that are active members in the organization. Its members include four of the large Railbelt utilities. The new regime further mirrors FERC standards by eliminating a distinction between firm and non-firm power — the difference in controlled generation such as natural gas- and oil-fired power plants or large hydropower and variable, often renewable power sources. Mitchell said bluntly that implementing variable power sources into generation is the responsibility of the utilities that must simply follow the law. “Utilities don’t get special treatment down south so why are ours?” he said. The biggest positive for Alaska could come from not what the regulations require, but what they encourage, according to Mitchell. Aligning Alaska’s electric purchase requirements with the rest of the country removes regulatory uncertainty for investors interested in the potential for expanded renewable power in the state, he said. By mandating utilities to purchase power on an incremental cost basis, investors will be assured that power from financially feasible projects will be purchased, he added. CIRI’s Gibson agreed in a formal statement. “The RCA’s decision helps remove impediments for renewable energy development projects, and it will make it more feasible for Native corporations and other independent power producers to invest millions of dollars of private capital to help stabilize rates and develop a clean and reliable energy system for Alaska,” she said. Mitchell said further revisions are needed to relax regulations on small windmills and other power generation for private use, but the Nov. 20 order was a major step forward. “We don’t like federal overreach. This eliminates some of our state overreach,” he said. Elwood Brehmer can be reached at [email protected]

Fauske resigns as AGDC president

(Editor’s note: This story was updated to include comments from Gov. Bill Walker.)   The melodrama that has become the Alaska Gasline Development Corp. continued Saturday morning with the sudden resignation of president Dan Fauske. Fauske stepped down one day after Gov. Bill Walker removed John Burns and Commerce Commissioner Chris Hladick from the Alaska Gasline Development Corp., or AGDC, board. Burns, who served as board chair, is a former Alaska attorney general. AGDC is the state entity tasked with representing the State of Alaska in the $45 billion-plus Alaska LNG Project — the large North Slope natural gas export effort with BP, ConocoPhillips and ExxonMobil. Walker appointed former Fairbanks North Star Borough Mayor Luke Hopkins and Transportation Commissioner Marc Luiken to replace Burns and Hladick. Fauske tendered his resignation in a letter dated Nov. 20 that was made public just prior to a special AGDC board meeting Saturday morning. He wrote he is proud of his time as president of the corporation, but did not expand on specific reasons for his departure. “As an (Alaskan) for many years, I strongly desire that a natural gas pipeline project will come to pass,” Fauske wrote. “In that pursuit, I wish the governor and this board of directors success. I believe that a successful project will benefit Alaskans for many years into the future and will be a source of economic prosperity for the state.” During a press briefing following the board meeting Walker commended Fauske for his work with AGDC in bringing the Alaska LNG Project to its current point and said Fauske offered to help move the project along in any way he could during a conversation the two had Friday. The governor said changes to the state’s gasline team are meant to bring “alignment” to the group. He also said that while he didn’t directly ask for Fauske’s resignation, he expressed his wish to the corporation that a change in leadership be made. “We need a person in that (AGDC president) position that has done many, many pipeline projects,” Walker said. Prior to leading AGDC, Fauske headed the Alaska Housing Finance Corp., or AHFC, for many years. AHFC first worked on the state-led Alaska Stand Alone Pipeline project known as ASAP, a contingency project to get North Slope natural gas to Alaskans if a commercial project with the producers doesn’t materialize. Fauske transitioned to AGDC when it was formed in 2013 to focus on natural gas projects. Fauske said in a recent interview with the Journal that he was displeased with proposed AGDC confidentiality regulations — drafted by the Attorney General’s office and strongly opposed by the producers — because they would make contracts the corporation entered into public and could compromise the state’s bargaining position and ability to work with third party vendors, according to Fauske. The governor also said he met with the leaders of the House and Senate Resources committees earlier in the week to discuss how the administration and the Legislature can work more collaboratively to bring the project along. The coming year will be a big test for the project, as all four parties will need to decide if they want to make significant investments in front-end engineering and design, or FEED, for the project, a multi-year commitment to bring it to a final investment decision. Alaskans will also likely have to decide if they are willing to amend the state Constitution to allow long-term contracts to be signed with the producers. Senate Resources Committee chair Sen. Cathy Giessel, R-Anchorage, said in an interview following Fauske’s announcement his departure is a “significant loss” for the state because of his experience in finance and that she is concerned with the recent loss of experience in positions of leadership for a project crucial to the economic future of Alaska. What, if anything, the shakeup at AGDC means for the direction of the Alaska LNG Project remains to be seen. “Continuity, consistency, stability, predictability, those are the key words these companies (BP, ConocoPhillips and ExxonMobil) look for, not only in tax policy but also in personnel,” from the State of Alaska, Giessel said. She added that Burns provided consistency on the board through its changes and offered “exemplary” service to the state. The AGDC board unanimously approved acting board chair Dave Cruz to also act as corporation president until an interim AGDC president is named. That topic will be addressed at the next board meeting scheduled for Dec. 3. Since taking office nearly a year ago, Walker has now replaced six of the seven AGDC board positions. In January, he began reshaping the board by removing three members appointed by former Gov. Sean Parnell, citing transparency issues. At the time he ordered the new board members not to sign confidentiality agreements that, prior to the Walker administration, all AGDC board members and employees were required to sign. Cruz, owner of Cruz Construction Inc., an oilfield contracter, is the only board remaining board member to have signed AGDC’s confidentiality agreement. Walker called the resolving the issue of what’s confidential a “fine line” and said he is assessing the concerns of all parties on the issue, but added that Alaskans need to be kept abreast of the agreements the state is entering into if they are going to be asked to change the state’s Constitution. “We don’t want to hinder the project in any way,” the governor said. “We’ll find that line.” As for former AGDC chair Burns, Walker said he holds Burns in the highest regard and removing him from the board does not in any way reflect the relationship the two have. “I don’t think we’ve seen the last of John Burns in this project,” he said. He also noted that Commerce Commissioner Hladick already serves on more than 20 different boards and DOT, the state’s infrastructure agency, will have a large role in the project moving forward. Not to be lost in the buzz surrounding the latest AGDC leadership changes is the fact that the state now officially owns TransCanda Corp.’s share of the Alaska LNG Project. The AGDC board passed a resolution to accept TransCanada’s midstream portion of the project. That follows the Legislature’s approval of the state’s purchase TransCanada’s 25 percent share of the North Slope gas treatment plant and the 800-mile pipeline in the special session completed earlier this month. Approval of AGDC’s fiscal year 2017 work plan and budget was delayed until the Dec. 3 meeting, apparently at the request of Walker. He said at the briefing it was premature for the state to commit funding work before getting formal commitment from the producers that gas will be made available to the project if one or more of them pulls out. The governor and the producers settled on a Dec. 4 date for withdrawal agreements in late October.   Elwood Brehmer can be reached at [email protected]

Confidentiality regs get pushback from producers, AGDC

Who can see, and say, what has become a contentious issue as the Alaska LNG Project moves toward some key milestones. The state’s partners in the $45 billion-plus North Slope liquefied natural gas pipeline project, the Alaska Support Industry Alliance and Alaska Gasline Development Corp. leaders have all taken positions against draft regulations that would make public the contracts the state enters related to the project. The Alliance is a trade association that represents about 500 businesses that work in the state’s oil and gas and mining industries. The proposed confidentiality regulations, first presented at AGDC’s Aug. 13 board meeting, would keep financial reports, business plans and other proprietary information of partner companies private. However, contracts AGDC could enter into would be made public at least 10 days prior to the board meeting at which they would be considered. AGDC President Dan Fauske said in an interview that he takes issue with making contract terms public because the producer partners — BP, ConocoPhillips and ExxonMobil — do. The regulations are a “speed bump” that the project won’t be able to get over as they are currently written, Fauske said. “I just want agreements that enhance the development of this project — that the state’s happy and the producers are happy (with),” he said. The regulations were drafted primarily by the Attorney General’s office, in coordination with AGDC legal counsel, according to corporation spokesman Miles Baker. They are very similar to the confidentiality rules followed by the Alaska Industrial Development and Export Authority, which makes its contracts public. AIDEA typically acts as a state lender to private business, but has delved directly into smaller oil and gas business deals in recent years in Cook Inlet and on the North Slope. However, AIDEA often holds much of the leverage in its partnerships with smaller companies as the primary financer of a project, as opposed to AGDC through the State of Alaska, which just acquired 25 percent of the immense project. There is no timeline for the AGDC regulations to be adopted. AGDC board chair John Burns said at a Nov. 12 meeting that a committee consisting of board members Rick Halford, Dave Cruz, Joey Merrick and corporation attorney Ken Vassar would take up the regulations. “We are very cognizant of the (regulations) issue,” Burns said. All three producers submitted questions and comments expressing concern over how the draft confidentiality regulations would affect the progress of the Alaska LNG Project during a public comment period that closed Oct. 21. ExxonMobil Commercial Advisor Bill McMahon submitted a letter that states the producer is troubled by the proposed confidentiality guidelines and it believes they would prohibit AGDC from continuing in the project if they are adopted. “Disclosure of the commercial terms relating to the AK LNG Project would not only be to the competitive detriment of the AK LNG Project, but also would put the AK LNG participants at a significant disadvantage in commercial negotiations with potential LNG buyers, potential contractors, suppliers and vendors to the project and potential lenders,” McMahon stated. He added that the Legislature has already given AGDC authority to enter confidentiality agreements necessary for the project under House Bill 4 and Senate Bill 138, the legislation that formed AGDC and outlined the project process, respectively. ConocoPhillips Senior Lead Negotiator Patrick Flood noted in eight pages of formal comments that state participation in a competitive gas project is unique in the United States and echoed that the Legislature provided AGDC with broad powers to participate in the project. BP contends the proposed regulations would allow for information previously considered confidential to be released to the public without consent. The company signed a confidentiality agreement with AGDC May 9, 2014, according to its comments. “Public disclosure of this information could jeopardize the competitiveness of the Alaska LNG Project,” BP stated. “It would also deter third parties form disclosing their confidential information to all the Alaska LNG Project participants and impair the ability of the project participants to share technical and commercially sensitive information with each other.” Fauske, the former head of the Alaska Housing Finance Corp., and AGDC Vice President of Commercial Operations Joe Dubler, who served as AHFC’s chief financial officer before moving to the gasline project, both likened making AGDC’s contracts public with making public the mortgage term sheets AHFC has agreed to with thousands of Alaskans. Under AHFC regulations that information is kept private. “I think what’s being missed here in this whole thing is in a lot of cases it’s in the state’s best interest not to disclose that (confidential) information,” Dubler said. “When you’re talking about information your customers can use to determine what it cost you to produce the gas — when you sit down and negotiate with them — if they know what it cost to produce the gas, guess what they’re going to offer your for that gas: it’s not going to be a whole lot more than what it’s costing you.” According to a description of the draft regulations provided by AGDC, the corporation would continue to honor all third-party confidential agreements made prior to April 1, 2015. The regulations state that no contract the corporation enters after Dec. 1 to protect the confidentiality of information shall itself be treated as confidential. The confidentiality issue is festering as the state looks to secure financial agreements with the producers that will need to be in place before a constitutional amendment needed for the project can be approved by the Legislature. The Legislature needs to have the amendment wrapped up and ready for the fall election ballot by June 24 to meet statutory requirements or the whole timeline could be delayed two years. At the same time, the project is moving towards the end of the pre-front end engineering and design, or pre-FEED, stage later next year — the end of which will require significant decisions by all parties as to whether or not the project should continue. Fauske said the challenge with not signing strong confidentiality agreements is that what is deemed confidential by one party could be debated by another, slowing the whole process down. Currently, two AGDC board members, board chair Burns and Cruz, have signed confidentiality agreements. They signed the agreement that all corporation employees and board members signed prior to Gov. Bill Walker’s administration, according to AGDC’s Baker. That agreement binds those who have signed it to any confidentiality agreement the corporation enters into with third parties. In January, Walker fired three AGDC board members and ordered new board members not to sign the confidentiality agreement. Around the same time, Attorney General Craig Richards said in an interview with the Journal that the current requirement, which is still in place, keeps too much information from the public and that a new policy could be expected that would allow more open discussion of Alaska LNG Project issues while protecting certain private information. Walker has not signed a confidentiality agreement relating to the Alaska LNG Project, however he can review the same information that is available to the CEOs of the three producers, according to his spokeswoman Katie Marquette. Fauske said the Legislature appropriates all the money AGDC spends and what it will be spent on is vetted in committee hearings. “You trust the system that you have in place to work,” he said. “We’ve got to start acting more like business partners instead of regulators.” Elwood Brehmer can be reached at [email protected]

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