Elwood Brehmer

Midwest utility offers proposal to shore up Railbelt grid

A Midwest utility company hopes to help Alaska fix its strained Railbelt electric transmission system. Xcel Energy Inc. representatives presented to the House and Senate Energy committees on Feb. 19 about ways the company could facilitate private investment in new power lines for the region. Studies commissioned by groups including the Alaska Energy Authority have estimated $900 million to $1 billion worth of upgrades to Railbelt transmission lines is needed in the coming years to increase capacity and improve reliability. Utility leaders often point out that in some places only a single line connects the Railbelt intertie. Major transmission infrastructure upgrades in the past have been paid for at least partially with state funds. “There are two kinds of transmission problems and (the Railbelt) has both of them,” Alaska Railbelt Utility Cooperative Transmission and Electric Co. Executive Director David Gillespie said in an interview. ARCTEC, as it is commonly known, is a utility consortium made of Chugach Electric Association, Matanuska Electric Association, Seward Electric System and Golden Valley Electric Association. First among the problems, Gillespie said, is the aforementioned lack of transmission infrastructure; and second is how existing infrastructure is managed. The six area utilities each own portions of the overall system and add a tariff to power sent through their section of lines. This leads to what is known as “rate pancaking,” when electricity sent through multiple line sections is hit with multiple tariffs. While it is done for the right reasons — each utility is simply charging for use of its property — it can inhibit what otherwise could be an economic endeavor, Gillespie said. Such rate pancaking is a large reason why Cook Inlet Region Corp. could not make Phase 2 of its Fire Island Wind project viable, according to company representatives. The added tariffs did not make purchasing Fire Island Wind power feasible for Golden Valley Electric Association in the Interior, where electric generation is typically more expensive than in Southcentral. CIRI recently announced it has suspended plans to double the size of its 11-turbine wind farm off of Anchorage. Xcel’s plan would have the Minneapolis-based utility invest as a primary transmission company, or TRANSCO, in a Railbelt upgrade. The area utilities could then invest as much as they wanted and take an equivalent percentage ownership in the infrastructure, Xcel Vice President of Transmission Teresa Mogensen said. “We would propose that we could facilitate and lead that collaborative transmission ownership approach, but everybody maintains ownership of their own assets,” Mogensen said to the House Energy Committee. It’s a structure the company is currently implementing with utilities in the Dakotas, Minnesota and Wisconsin as part of a long-term transmission upgrade process. She said Xcel is willing to invest “to the extent that additional investment is desired.” Xcel could use its experience in pulling together multiple utilities run as public, cooperative, and private entities to expedite buildout, Mogensen said. A report on what this type of TRANSCO structure could mean for Railbelt is due to the Regulatory Commission of Alaska in late June. Cheryl Bredenbeck, a transmission investment director for Xcel, said alignment between policymakers, utilities and regulators was essential to the company’s similar projects Lower 48. Consensus between the three groups seems to be forming in Alaska as transmission reliability concerns continue to grow. Bredenbeck noted that in 2005 the Minnesota Legislature provided tax incentives to utilities that invested in transmission upgrades. Mogensen suggested Xcel would be a particularly good partner for a TRANSCO because it is a one-stop-shop for nearly every aspect of the extensive project. “We have in-house capability that is somewhat unique for electric utilities to carry our all aspects of the transmission investment — engineering, design, construction, planning — the whole array,” she said. Wisconsin-based American Transmission Co. has also expressed interest in developing a Railbelt TRANSCO. Mogensen said her company also has experience managing power from multiple generation sources, which could also be beneficial in unifying the Railbelt grid. Southcentral power is generated primarily from natural gas, but hydro, coal, oil and wind are used throughout the Railbelt. Each source has its own set of characteristics that must be melded into the grid. “We badly need additional transmission infrastructure,” Gillespie said. “We recognize that the state’s ability to fund that infrastructure surely isn’t what it used to be and that we’re going to be needing to look for new and more creative ways to finance that infrastructure. The introduction of entities like Xcel and (American Transmission Co.) are things we need to be taking a serious look at.” Each utility owning a percentage of the overall transmission infrastructure, rather than a defined segment, would likely require a governing body known as a unified system operator, or a USO. It would be made up of a board of industry experts. As Mogensen described: The Legislature sets energy policy and the RCA implements that policy. The function of the USO is to have independent system control that makes the most sense for the system as a whole without the influence of dominating special interests. The USO would dispatch the most economically viable power at any time to the extent possible. Such a system allows independent producers and utilities to live side-by-side, she said. Independent power producers in the state have contended some utilities have refused to buy economically viable power in order to keep control of the overall system. The utilities claim integrating small amounts of seemingly cheap power can be more expensive than the producers claim, particularly if the generation source is highly variable, such as wind. The RCA is handling a docket that proposes to change power purchase requirements for utilities and House Bill 78, currently in the House Energy Committee, would outline more a favorable regulatory framework for independent power producers. With distinct transmission ownership boundaries gone, the USO would set a single flat tariff and the money generated would be paid proportionally to the invested utilities. Gillespie said ARCTEC supports a unified system operator because it would eliminate rate pancaking and probably be required to successfully manage a TRANSCO. “Even without additional infrastructure (a USO) will allow improved economics within the system,” Gillespie said. However, keeping the board completely independent might be difficult in Alaska. “We believe that in a perfect world that all of the (USO) board members are independent because it is the clearest and most transparent way to do things,” Gillespie said. In the Lower 48, unified system operator boards are usually comprised of retired industry representatives from other states that have no vested interest in the participating utilities or power producers, according to Gillespie. He questioned how many such individuals are available in Alaska. At least initially, Gillespie said, he foresees a Railbelt USO board made up of equal parts utility, independent producers, consumer and other interests to keep a level playing field. Elwood Brehmer can be reached at [email protected]

Corps has $210 million plan for Nome port expansion

An expansion plan for the Port of Nome is starting to take shape. The U.S. Army Corps of Engineers Alaska District released a draft feasibility report Feb. 20 that outlines what it sees as a reasonable Arctic deep-draft port. For an estimated $210 million, the Corps’ tentatively selected plan would dredge Nome’s outer harbor to a mean depth of 28 feet. It also calls for demolishing a small breakwater at the end of the existing causeway and extending the causeway 2,150 feet. A 450-foot large vessel dock would then be constructed at the end of the causeway in the newly protected area. The large eastern breakwater would remain in place and the extended causeway would wrap around the end of it to expand the harbor. The harbor currently has a maximum depth of about 22 feet. “It’s a good day for everybody — for the city, for the state,” Nome Mayor Denise Michels said when the report was released. The general proposal is similar to one the city drafted in the 1980s, she said, and much of what went into the current iteration came from Nome Port staff. Sen. Lisa Murkowski commended the Corps for their work on the project in a release from her office and said a larger Arctic port could mean job growth for the Seward Peninsula. “Though this is just one step, it is what I am looking for out of this administration to leverage our role and responsibility as an Arctic nation, and invest accordingly,” Murkowski said. “We know other countries are making plans to seize the opportunities presented in the Arctic, and we must do the same.” While Nome is not north of the Arctic Circle, a Western Alaska port would likely be a hub for research, oil and gas support and emergency response vessels working in the Arctic. The cost of the project would be shared, with the federal government picking up $97 million of the work that could have national economic development benefits. Local or state interests would fund the remaining $113 million. Michels said the city would probably look to private partners to help fund construction. The latest report further narrows the focus of a study the Corps and state Transportation Department released almost exactly two years ago that chose Nome and nearby Port Clarence as the two best port locations of 14 sites Western Alaska sites reviewed. Corps of Engineers Alaska Chief of the Civil Works Division Bruce Sexauer said in an interview that Nome was selected because Port Clarence, despite having naturally deep water, has no shore-side infrastructure. He said ships already seek shelter from storms in Port Clarence and lay up there to wait for ice to change, for instance; it serves its purpose. Michels said the City of Nome would request the Corps further investigate dredging the harbor to 35 feet for larger vessels in the comments it will submit on the draft plan. A 30-day public comment period is open through March 23 and Sexauer said the Corps is interested in getting as much feedback on the proposal as possible. He said the Corps determined 28 feet to be sufficient for the vast majority of the industry support and response vessels are expected to call on Nome in the future. Additionally, it would be deep enough to get larger fuel and supply shipments into the Nome that could help curb shipping costs on goods in the city. “There’s a certain break point — if you go down to a certain depth you’ll be able to accommodate a certain number of vessels, and if you go to the next depth you’ll be able to accommodate more vessels,” Sexauer said. “At some point if you go deeper there are not going to be very many more vessels that are going to need to be accommodated.” Sexauer also noted that the inner harbor would also be deepened to 22 feet. Dredging deeper also changes who pays for it. The feds typically pay 90 percent of the cost for deepening navigation features up to 20 feet. That match shifts to a 75 percent federal, 25 percent non-federal for 20 to 45 feet. Under the current plan for Nome, the non-federal sponsor would pay $1.5 million of the estimated $8.3 million dredging cost, according to the report. Because it is an expansion plan of existing infrastructure, Sexauer said the environmental assessment work already done should satisfy National Environmental Policy Act requirements and a full-fledged environmental impact statement likely won’t be needed. From here, the plan needs approval from Corps of Engineers leadership and funding authorization from Congress — how long that could take is unknown. Michels said increased ship traffic through the Bering Strait in recent years has upped the need for more maritime infrastructure. “The need is now, so the sooner the better we can do this the more the global shipping community can benefit from it,” she said. Elwood Brehmer can be reached at [email protected]

AGDC board nominees include former lobbyist

Gov. Bill Walker made three Alaska Gasline Development Corp. board appointments Feb. 19. Walker selected Rick Halford of Dillingham, Joe Paskvan of Fairbanks and Hugh Short of Anchorage to serve on the AGDC Board of Directors. At the same time, the governor said he would seek to expand a state-backed pipeline plan developed by AGDC as a backstop in case a large gas pipeline and liquefied natural gas project fails to proceed. AGDC is also involved in the large gas project in a partnership with North Slope producing companies. Halford spent 24 years in both chambers of the state Legislature and retired as Senate president in 2003. He was co-chair of Walker’s transition team and he is also a former lobbyist for the Alaska Gasline Port Authority, the gas pipeline proponent group Walker’s law firm represented in its effort to bring North Slope gas to a port in Valdez. Halford was paid $100,000 by the port authority in 2005 for work during the legislative session. Short is well known in Alaska financial circles and is a former chair of the Alaska Industrial Development Authority board and a former mayor of Bethel. He is the chair and CEO of Pt Capital, an Anchorage-based Arctic investment firm. Paskvan is an attorney and former Democrat state senator, who served from 2009-2012. AGDC is the state corporation tasked with developing Alaska’s natural gas resources through a North Slope pipeline project. “I am pleased to welcome these three talented Alaskans to our team. Bringing our natural gas to Alaskans and the world market is one of my top priorities as governor,” Walker said in a formal statement. “I am confident that with these additional members, the AGDC board is on track to make that happen.” In January, the governor dismissed former state legislator Drue Pearce, Al Bolea, a retired BP manager, and Richard Ranibow, a former ExxonMobil pipeline project manager, from the board. At the time Walker said he wanted a transparent board and ordered new members from his administration — Department of Labor Commissioner Heidi Drygas, and Acting Commerce Commissioner Fred Parady — not to sign confidentiality agreements. He retained public members Dave Cruz, owner of Cruz Construction Inc., and attorney John Burns. Walker said he is not concerned that his appointees do not have experience specifically in the oil and gas industry. He said he wanted longtime Alaskans that understand the needs of the state. “Our expertise is not going to be board driven,” he said. “Our expertise is going to be administration driven — from the administration of AGDC.” Leaders of the state House of Representatives who were the architects of the Alaska Gasline Development Corp. reacted with caution to Walker’s appointments. “As with any appointments subject to legislative confirmation, we’ll conduct a thorough examination of these new appointees, their experience, and their qualifications,” House Speaker Mike Chenault, R-Nikiski, said in a statement. “We went to great lengths in the legislature to ensure that AGDC would be as far removed from politics as possible, having learned from past projects that real success is built not on hopes and dreams, but on technical, commercial, and financial know- how, with decisions driven by economic realities and not by politics.” Rep. Mike Hawker, R-Anchorage, said, “It is a daunting task to replace the unparalleled expertise the original board members brought to AGDC. I look forward to hearing from the administration the nature of its process used in these appointments, and better understanding the source of each candidate’s qualifications.” Senate Resources Chair Cathy Giessel, R-Anchorage, noted in a press release that, by law, the individuals are selected for their experience in disciplines critical to the corporation’s success, including finance, pipeline construction, operations and marketing, and large project construction management. “I look forward to conducting our usual objective interviewing of the new AGDC Board appointees,” Giessel said in the release. “As with all gubernatorial appointees, my committee and I will focus on the statutes that define the expertise and experience needed for the position. We will evaluate the capacity of the person to conduct the work of the AGDC board.” Elwood Brehmer can be reached at [email protected] Journal reporter Tim Bradner contributed to this report.

Walker appointments to AGDC board include former Alaska Gasline Port Authority lobbyist

Gov. Bill Walker made three Alaska Gasline Development Corp. board appointments Feb. 19. Walker selected Rick Halford of Dillingham, Joe Paskvan of Fairbanks and Hugh Short of Anchorage to serve on the AGDC Board of Directors. At the same time, the governor said he would seek to expand a state-backed pipeline plan developed by AGDC as a backstop in case a large gas pipeline and liquefied natural gas project fails to proceed. AGDC is also involved in the large gas project in a partnership with North Slope producing companies. Halford spent 24 years in both chambers of the state Legislature and retired as Senate president in 2003. He was co-chair of Walker’s transition team and he is also a former lobbyist for the Alaska Gasline Port Authority, the gas pipeline proponent group Walker’s law firm represented in its effort to bring North Slope gas to a port in Valdez. Halford was paid $100,000 by the port authority in 2005 for work during the legislative session. Short is well known in Alaska financial circles and is a former chair of the Alaska Industrial Development Authority board and a former mayor of Bethel. He is the chair and CEO of Pt Capital, an Anchorage-based Arctic investment firm. Paskvan is an attorney and former Democrat state senator, who served from 2009-2012. AGDC is the state corporation tasked with developing Alaska’s natural gas resources through a North Slope pipeline project. “I am pleased to welcome these three talented Alaskans to our team. Bringing our natural gas to Alaskans and the world market is one of my top priorities as governor,” Walker said in a formal statement. “I am confident that with these additional members, the AGDC board is on track to make that happen.” In January, the governor dismissed former state legislator Drue Pearce, Al Bolea, a retired BP manager, and Richard Ranibow, a former ExxonMobil pipeline project manager, from the board. At the time Walker said he wanted a transparent board and ordered new members from his administration — Department of Labor Commissioner Heidi Drygas, and Acting Commerce Commissioner Fred Parady — not to sign confidentiality agreements. He retained public members Dave Cruz, owner of Cruz Construction Inc., and attorney John Burns. Walker said he is not concerned that his appointees do not have experience specifically in the oil and gas industry. He said he wanted longtime Alaskans that understand the needs of the state. “Our expertise is not going to be board driven,” he said. “Our expertise is going to be administration driven — from the administration of AGDC.” Leaders of the state House of Representatives who were the architects of the Alaska Gasline Development Corp. reacted with caution to Walker’s appointments. “As with any appointments subject to legislative confirmation, we’ll conduct a thorough examination of these new appointees, their experience, and their qualifications,” House Speaker Mike Chenault, R-Nikiski, said in a statement. “We went to great lengths in the legislature to ensure that AGDC would be as far removed from politics as possible, having learned from past projects that real success is built not on hopes and dreams, but on technical, commercial, and financial know- how, with decisions driven by economic realities and not by politics.” Rep. Mike Hawker, R-Anchorage, said, “It is a daunting task to replace the unparalleled expertise the original board members brought to AGDC. “I look forward to hearing from the administration the nature of its process used in these appointments, and better understanding the source of each candidate’s qualifications,” Hawker said. Elwood Brehmer can be reached at [email protected] Journal reporter Tim Bradner contributed to this story.    

Issues unresolved after meeting with Jewell

KOTZEBUE — Alaska legislators left Kotzebue unsatisfied after a Feb. 16 meeting with Interior Secretary Sally Jewell. Attempts by the Obama administration to limit North Slope oil and gas development were the focus of the roughly hour-long meeting. Members of the bipartisan — though mostly Republican — group said they repeatedly expressed their frustration to Jewell about the Interior Department push to permanently lock up the Arctic National Wildlife Refuge’s coastal plain from oil and gas development. Rep. Charisse Millett, R-Anchorage, said she thought Jewell was defensive in the meeting and that the president’s recommendation through the Interior Department to designate the coastal plain as wilderness “misses the mark” because the state has pushed for decades to develop, or just explore the area. The wilderness designation would prevent all development activity and restrict motorized transportation in that portion of the refuge. Alaska cannot survive financially without being able to access its resources, said Sen. Mike Dunleavy, R-Wasilla. “The very concept of the state is predicated on the development of natural resources,” Dunleavy said in a press conference with other legislators. “We barely became a state because there were those in (Washington, D.C., before statehood) that didn’t think we could make it on our own.” Bethel Democrat Sen. Lyman Hoffman said he told Jewell that developing the state’s resources would help provide funding to improve living standards and social ills in rural Alaska. The Interior Secretary traveled to Northwest Alaska for two days and met with state legislators, Gov. Bill Walker and the Alaska congressional delegation. The impetus for the trip was a private Feb. 17 meeting with the Alaska Federation of Natives board of directors. For her part, Jewell said to reporters prior to her meeting with the legislators that Congress had the opportunity to approve oil and gas exploration in the late 1980s but declined to do so. President Obama and the Interior Department have made the wilderness recommendation and now it’s up to a Republican Congress, which is at odds with the president over his resistance to approve the Keystone XL pipeline in the Lower 48, to decide what it wants to do with ANWR’s coastal plain. Jewell said she believes she is an easy target, but that there is “a lot of pain being felt in Alaska” right now because of the impact falling oil prices have had on the state’s budget and savings. Recent Outer Continental Shelf oil and gas lease sales and the approval of ConocoPhillips’ Greater Moose’s Tooth-1 construction plan in the National Petroleum Reserve-Alaska as proof of the administration’s support for “responsible and safe oil and gas development,” she said. Oil prices are likely to rebound and ease the state’s budget problems, according to Jewell. “The Arctic National Wildlife Refuge is not going to solve the dependency of the state on a commodity,” she said. The administration has no plans to use the Antiquities Act, a law that protects archeological sites as public resources, as a means of protecting the ANWR coastal plain. Senate President Kevin Meyer, R-Anchorage, said the state has a long-term production problem, not just an immediate oil price problem. North Slope Borough Mayor Charlotte Brower joined the nine-member delegation state legislators in their meeting with Jewell. Brower said she is unhappy with attempts by the administration to lock up portions of NPR-A originally designated for development. She said the Secretary needs to spend a week in each region of the state to understand Alaska and along with the legislators, invited President Obama for an extended visit. Along with Brower, Millett criticized the federal governments reluctance to spend money to clean up leaking legacy oil wells left on the Slope after exploratory drilling done in the 1940s. Millett went as far as to say it’s “hypocrisy” for Jewell to limit development other places while refusing to solve an ongoing pollution problem cause by the feds years ago. “Frankly, if she cares about the environment she’d clean up the legacy wells,” Millett said. The legislators said the next step is to strengthen their relationship with Sens. Lisa Murkowski and Dan Sullivan and Rep. Don Young  — to see what each group could do to make the state’s voice louder. Elwood Brehmer can be reached at [email protected]

FAA releases draft unmanned aircraft rules

Unmanned aircraft operators were given an outline for flight standards Feb. 15 when the Federal Aviation Administration released its proposed rules for drone flights. The draft regulations are a major step towards integrating widespread commercial use of unmanned aircraft in the national airspace. Also known as UAS, unmanned aircraft system flights have been approved by the agency for several years on a case-by-case basis. The Small UAS Notice of Proposed Rulemaking expands on the commonalities of approved flights. Currently, UAS flights are allowed only for nonprofit ventures for research and educational purposes and a very select group of commercial entities, primarily film companies. “Technology is advancing at an unprecedented pace and this milestone allows federal regulations and the use of our national airspace to evolve to safely accommodate innovation,” Transportation Secretary Anthony Foxx said in a formal statement. Common UAS would be limited to craft less than 55 pounds with flights restricted to line-of-sight operations, constraints found in most certificates of authorization, or COAs, issued by the FAA for flights today. ConocoPhillips obtained the first commercial COA in 2013 for research in the Chukchi Sea and BP got the first overland commercial authorization from the FAA in May 2014 for North Slope surveillance. “We have tried to be flexible in writing these rules. We want to maintain today’s outstanding level of aviation safety without placing undue regulatory burden on an emerging industry,” FAA Administrator Michael Huerta said in a release. Congress mandated the FAA to draft regulations for commercial UAS flights by the end of this year when it passed the FAA Modernization and Reform Act in 2012. UAS pilots, referred to as operators by the FAA, would have to pass an agency aeronautical knowledge test and be at least 17 years of age. Subsequent recurring operator tests would be required every two years. After vetting by the Transportation Security Administration, operators would receive a permanent certificate with a “small UAS rating,” much the same as the existing certifications pilots receive, according to the proposed rule. While many UAS guidelines such as size and flight distance regulations were predictable based on standards found in most COAs, requirements for operators were a big unknown in the industry. Airworthiness certification would not be required under the proposed rule, a departure from most COAs. However, UAS will likely need to be registered by the FAA similar to general aviation aircraft. Elwood Brehmer can be reached at [email protected]

Walker unveils Medicaid expansion plan

Increasing Medicaid access to 41,000 more Alaskans will save the state several million dollars per year according to Gov. Bill Walker’s administration. In the first year of expansion, fiscal year 2016, the State of Alaska will save $6.1 million based on figures in a Department of Health and Social Services report. “Medicaid expansion helps Alaskans and healthy Alaskans is a healthy economy,” Walker said during a Feb. 6 press conference. “It’s not about just bringing revenue and jobs; it’s about doing what’s the right thing to do.” The savings are expected to come from shifting health care costs the state currently pays that could be covered by federal Medicaid dollars. For instance, the Alaska Department of Corrections should save $4.1 million next fiscal year by having federal Medicaid funds pay for inpatient treatment of inmates done outside of a correctional institution. Those services are covered if the inmate is otherwise eligible for Medicaid, according to the DHSS report, “The Healthy Alaska Plan: A Catalyst for Reform.” Walker said he hopes to launch the plan sometime in July; the state fiscal year begins July 1. More than 20,000 new enrollees are expected in the 2016 fiscal year and the number should plateau at about 26,500 by 2018. The Alaska Mental Health Trust Authority will “graciously” cover about $1.3 million in administrative costs, including staff to cover enrollment and expanded payments, in the first year, Health and Social Services Commissioner Valerie Davidson said. That will allow the DHSS to develop a plan to either take on the work internally or contract it out. “Thanks to the Mental Health Trust Authority; they have funded the opportunity for us to engage stakeholders and look at what other states are doing so we can develop an Alaska plan,” she said. The federal government will cover all of the expansion cost projected at $145.4 million in fiscal year 2016 other than administrative expenses. In 2017, a $3.8 million state match will be required to get $170.6 million from the federal government. By fiscal year 2021 the match approaches 10 percent; the state will contribute $19.5 million of the overall cost estimated at $224.5 million, the report states — if the Legislature signs off. As the state’s appropriators, legislators must approve the receipt and expenditure of all funds, regardless of their source. Some legislators hesitant about expansion are also eager to reform the current state system and the two “go hand-in-hand,” Davidson said. Technical changes are needed to state statutes to keep Medicaid in line with the Affordable Care Act, she said, providing an opportunity for larger changes once the expansion is in place. Medicaid expansion will increase access to health insurance for an estimated 41,910 low-income Alaskans. These are adults from 19 to 64 years of age who are currently not eligible for Medicaid — those not caring for dependent children, not disabled or pregnant, and who earn at or below 138 percent of the Federal Poverty Level, or FPL, for Alaska. The Alaskans who will be eligible for Medicaid through the expansion live in all areas of the state. Expansion will benefit single Alaskans without dependent children earning up to $20,314 a year, and married couples without dependent children earning up to $27,490 per year. Once these Medicaid recipients in the expansion population achieve a higher income they will be able to transition to the Health Insurance Marketplace and receive a subsidy to help afford coverage until their income reaches 400 percent of the FPL. Davidson said she has been told most legislators could be on board if the administration can show that expanding Medicaid would be net revenue neutral to the state general fund; the plan laid out Feb. 6 indicates there will be savings. A statement from the Alaska Chamber said the business group conditionally supports the plan, and Medicaid expansion must be tied to reform. The state’s current system covered $481 million of services in 2013 not required by the federal government, according to the Alaska Chamber. “Alaska businesses will pay for uninsured Alaskans through the proposed Medicaid expansion or through increased health care costs. The Alaska Chamber supports Medicaid expansion for this reason,” the statement read. “The Chamber’s support for Medicaid expansion ends when the federal funding ends or falls below its initial promise. Our support also ends if expansion exacerbates the state’s fiscal situation.” A push for Medicaid expansion during his campaign was a key contrast between Walker, a Republican turned independent, and former Republican Gov. Sean Parnell, who rejected expansion. Even in 2021, when the state could be paying $19.5 million in match funds and covering staffing and paperwork fees, The Healthy Alaska Plan report projects nearly $3.3 million in overall savings because of increased federal grant opportunities and savings in the Department of Corrections alone growing to $7 million annually. Expansion will come as the state’s current Medicaid payment system is in shambles. The state is under contract with Xerox Corp. to process roughly $1.3 billion of Medicaid payments through its Medicaid Management Information System, but problems in the system have delayed payment and forced the state to advance payment to some health care providers, although this most likely to ultimately paid by the federal government so that the state’s outlay is refunded. According to Department of Law, Xerox has failed to solve the Medicaid information system problems and as of August the State of Alaska had paid more than $154 million to doctors and other health care providers in need of payment for their services. Walker said he thought about changing Medicaid payment provider but determined enough improvements are being made to keep Xerox in place. The governor gets updates on the situation through weekly reports, he said. “Every indication I’ve received is that we’re on the improvement side of the problems,” Walker said. “We are very focused on, and we have zero tolerance for any unnecessary delays.” Davidson said the belief is the payment delays and other application backlogs should be resolved by the July rollout. Elwood Brehmer can be reached at [email protected]

Railroad cuts PTC ask, aims to finance remaining need

The Alaska Railroad Corp. is using some strategic financing to cut its fiscal year 2016 capital request to $18 million as it looks for ways to finance Positive Train Control. Before the legislative session, the railroad was preparing to ask the Legislature for $53.5 million over three years, with a $21.8 million request for the 2016 fiscal year. Refinancing debt accrued in 2006-07 should allow the railroad to bond for $37 million if it gets $18 million this session, Alaska Railroad President and CEO Bill O’Leary told the Joint Transportation Committee Feb. 3. Refinancing the debt and pushing its bond maturity out from 2021 to 2025 would give the railroad enough financial headroom to make the deal work if the Legislature funds the plan, O’Leary said. All $18 million is needed this session so the entire financing package can be taken to the bond markets, he said. Gov. Bill Walker’s initial capital budget did not include funding for Positive Train Control. The Legislature appropriated $34.1 million over the last two years to what O’Leary calls, “the mother of all unfunded mandates.” To date, the railroad has spent nearly $70 million on what is expected to be a $160 million endeavor. Positive Train Control is a safety system designed to eliminate human error accidents on railroads. The Federal Railway Administration currently has a December 2015 deadline for implementation, but Alaska Railroad officials have long said they expect a multi-year extension to the deadline; it’s likely no railroad in the country will meet the current timeline, O’Leary said. Not complying with the requirement really isn’t an option. Railroad leadership could face heavy corporate and even personal fines and the Alaska Railroad could ultimately lose its right to operate passenger service without Positive Train Control. The mandate came down in 2008 after several serious accidents involving passenger trains in the Lower 48. Passenger service produces more than $25 million per year for the railroad, but the statewide impact is much greater, according to a McDowell Group study. It’s estimated passenger service generates about 2,000 jobs and $50 million of direct and indirect wages annually in the state. Additionally, spending from non-resident railroad passengers tops $20 million per year. Approximately 3,700 motor coach trips would be added to Railbelt highways each year in order to keep comparable service volumes without rail passenger service, O’Leary noted. The railroad will be safer with Positive Train Control, but spending money on the system will pull funds away from infrastructure upkeep, he said. If he had his way the $160 million would go into rails, ties, ballast and bridges, he said. “The cost-to-benefit ratio on (Positive Train Control) doesn’t provide a classic return on investment,” O’Leary said. The system will likely cost between per year $5 million and $7 million to maintain, he said, a cost the railroad will work to absorb. Over the past several years the Alaska Railroad’s net income has been in the $15 million range. Elwood Brehmer can be reached at [email protected]

Shefchik takes lead on IEP; $37.7M AIDEA loan in place

Former Interior Gas Utility chair Bob Shefchik has taken the reins of the Interior Energy Project. Shefchik notified IGU leadership and the Legislature Feb. 9 that he would be resigning from his post as the head of the utility board Feb. 10. With Shefchik as the project leader, Alaska Industrial Development and Export Authority Energy Infrastructure Development Officer Nick Szymoniak, Alaska Energy Authority Energy Policy and Outreach Director Gene Therriault and AEA Railbelt Energy Infrastructure Engineer Kirk Warren will join Shefchik’s team. All three have worked extensively on the Interior Energy Project behind the scenes, Shefchik said. Authority spokesman Karsten Rodvik wrote in a statement that the reorganized team is designed to move quickly with Shefchik at the helm. “We believe that Bob’s experience combined with his roots in Fairbanks will be an asset to the team, and will help move the project forward,” Rodvik wrote. AIDEA Executive Director Ted Leonard was originally set to retire at the end of January but has stayed on with the authority to assure the project progresses. On Feb. 5 the Interior Gas Utility got approval for a $37.7 million construction loan from the AIDEA board at a special Feb. 5 meeting. With several members attending via teleconference, the board unanimously approved the loan for development of the utility’s natural gas distribution system. AIDEA will fund the loan from the $332.5 million Senate Bill 23 Interior Energy Project financing package it was authorized to use towards getting natural gas to the region. The Sustainable Energy Transmission and Supply Fund loan package is an expansion of an $8.1 million loan AIDEA approved to get IGU’s distribution system work started last April. It will cover the cost of initial distribution construction in North Pole and installation of temporary gas storage. Engineering of subsequent build out phases beyond Downtown North Pole is also included. The Fairbanks North Star Borough formed IGU in November 2012 to spur additional natural gas use in the borough. With little cash or collateral to back it and favorable terms — 1 percent interest and a 48-year payback — the loan to the utility is outside of AIDEA’s normal lending practices because it is SB 23 money. “(SB 23) pretty much says, do what you need to do to meet the Legislature’s intent,” Leonard said. Originally, the $8.1 million was approved in April as a 20-month fixed line of credit intended to convert to a term loan in conjunction with AIDEA’s financing of the utility’s 2015 build out, which has now happened. With approval of the $29.6 million to fund construction and further engineering, the entire $37.7 million will be loaned as a 24-month line of credit. After two years, interest will capitalize at 1 percent over an eight-year deferment period, when up to 40 years of repayments would begin. AIDEA staff said authority approval would be required for IGU to make draws on the line of credit. AIDEA’s proposed purchase of Fairbanks Natural Gas, the other gas utility in the area, and its parent company, has put the Interior Energy Project back on a late-2016 timeline for first gas, according to those familiar with the project. As IGU board chair, Shefchik said getting natural gas to the utility by the fall of 2016 will give it a customer base and subsequent revenues with which it can pay off the loan. Shefchik said in an interview he felt his utility could secure such favorable terms after reviewing the now-expired concession agreement the authority signed with its former private project partner MWH Global Inc. “If we would have presented (those terms) earlier in the year we probably would’ve been confronted with a different response,” he said. Temporary storage capacity equivalent to three days of peak demand for both IGU and Golden Valley Electric Association — numerous LNG tanks of about 50,000 gallons — is planned for a lot adjacent to Golden Valley’s North Pole power plant. To make sure demand grows, Shefchik said a natural gas conversion working group is in discussions with area banks to investigate ways to finance home conversions from oil to natural gas heating systems. Converting to natural gas could cost homeowners anywhere from $1,500 to $10,000 or more depending on their current oil or wood-burning systems. That conversion cost is seen as an impediment to signing up new gas customers, a lynchpin to success for the overall project. He said he is hopeful for a program where the gas utility’s provide a “backstop for defaults” on home conversion loans. The banks would treat the conversion loans as they would any other, but not bear the entire burden of non-payment. With the utilities taking on a portion of the loan risk Shefchik said he foresees terms in the 10-year range at 3 percent to 4 percent interest. “Because banks have a lot of money right now and they’re sitting on that is really drawing very little, the attractiveness of low-risk investment that’s going to help the community — we’ve had three or four banks step up and talk about participating in this,” Shefchik told the board. Senate hears about utility purchase Soldotna Republican Sen. Peter Micciche continued to offer skepticism over AIDEA’s proposed purchase of Pentex Alaska Natural Gas Co., the consortium of entities that make up Fairbanks Natural Gas and its LNG supply chain, during a Feb. 5 Senate Energy Committee hearing. He shares the authority’s goal of getting affordable energy to the Interior, Micciche said multiple times. He also repeatedly questioned AIDEA’s plan to buy Titan Alaska LNG, the operating company for Pentex’s LNG plant at Point MacKenzie, when Hilcorp already agreed to purchase the plant under its subsidiary Harvest Alaska LLC. “I’m still trying to understand the value of purchasing the liquefaction,” Micciche said. Each time, AIDEA Executive Director Leonard said the authority had no plans of impeding the sale that is pending approval by the Regulatory Commission of Alaska and Attorney General Craig Richards. He said AIDEA is focused on the assets Pentex holds as Fairbanks Natural Gas and that company ownership wished to sell its holdings in one lot. The authority announced its intent to purchase Pextex for $52.5 million Jan. 28. “AIDEA is not making this investment to directly operate a utility. AIDEA would be taking this (ownership) role in essence as the investor in Pentex that would still, in our belief, utilize FNG to operate this company,” Leonard told the committee. “In our view it would allow us to change the structure from just profit to ensure that we have coordination with the utilities to bring the best distribution system to the Fairbanks area.” Micciche also said he sees value in integrating Fairbanks Natural Gas and IGU. At the same time, he wondered philosophically whether state intervention through AIDEA has deterred a private solution to the Interior’s energy and clean air crisis. “Fairbanks is a lucrative market; how much government interference has kept the typical providers out of the market?” Micciche wondered. “I can’t believe that if we (the state) just got out of the way something wouldn’t have happened sooner.” Further, he noted that Hilcorp subsidiary Harvest Alaska has agreed to supply LNG to Fairbanks on a 10-year contract at the equivalent of $15 per thousand cubic feet, or mcf, of natural gas. With added regasification, storage and distribution costs quoted extensively by local utility leadership the final “burner tip” cost of that gas would be in the $20 per mcf range, similar to what was projected the North Slope-focused version of the Interior Energy Project could deliver. The stated goal of the project is get gas to residential consumers at a price near $15 per mcf, about half the energy equivalent cost of fuel oil at $4 per gallon. Fairbanks Natural Gas currently sells to its customers at about $23 per mcf as an unregulated utility. Tariff proceedings for the utility are ongoing in the RCA. Leonard said he agrees that the state should stay out of the way of private enterprise to the extent possible, but also noted that Fairbanks Natural Gas has served about 1,100 commercial and residential customers since the late 1990s without significant expansion. Fairbanks Natural Gas President and CEO Dan Britton has long said the small utility could not secure the long-term gas supply contract it would need to expand. Its agreement with Harvest Alaska is to supply its existing customer base. Elwood Brehmer can be reached at [email protected]

Logistics program breathes life into state transportation

Transportation in Alaska is a lot more than just planes, trains and automobiles. Add cargo ships, pipelines, ferries and any number of other modes of movement and you’ve got a complex network — a logistical nightmare to some. To University of Alaska Anchorage Professor Darren Prokop, it’s a network where challenge meets opportunity. “The state of Alaska either thrives or declines on the basis of how it handles its logistics and supply chain management,” he likes to say. Prokop is the face of UAA’s Logistics Department. He has been with the department nearly since its inception in 1999. The department has grown into a suite of programs offering everything from undergraduate certificates to a master’s degree in global supply chain management. It is the only initiative at the university to offer classes from the high school to the graduate level, Prokop said. Alaska’s unique challenges of distance — from the Lower 48 and across the state — sparse population, environment, and climate fit into his definition of logistics and what the program emphasizes. Logistics is “the art and science of dealing with time, space and location,” he often says. He likens supply chain management to a body’s skeleton, the base of the operation, while logistics is the blood and oxygen that give it life. It’s a science field because data can be measured and analyzed, and an art because it’s constantly improved in previously unforeseen ways, he said. No matter what specific field of business someone is in, logistics and supply chain management is a discipline they should be familiar with, Prokop emphasizes, because it affects every aspect of business. UAA Global Logistics Association President Taylor Mitchell agrees. “It’s a lot more than just getting 50 widgets to somewhere,” Mitchell said. “It’s really a wide open field.” The courses reflect that. Upper class undergraduate students take courses in purchasing, materials management, marketing and international logistics. They are also required to work a 225-hour paid internship. “It gives us the feedback to see whether or not their classroom tools make sense on the job,” Prokop said. The individual classes are small, typically about 20 students. At any time there are only about 50 students in the overall program, he said. The state’s complex of supply chains and transportation affords students the opportunity to see first hand how the shipping web works. Students touring the Port of Anchorage witness first-hand the intricacies of managing a shipment of construction materials headed for a North Slope construction site that came on a Horizon Lines containership and are hauled to Fairbanks by the Alaska Railroad. From there the goods are sent up the Dalton Highway behind a semi-truck and reach their final well pad destination via ice road. Members of the student club also get more chances to absorb problem-solving outside the classroom. Mitchell said the club tries to plan at least one field tour a month. “You get the academic exposure in class and the club provides how-to logistics in the real world,” she said. Mitchell, a Lynden International employee, has her bachelor’s in global logistics and supply chain management and is working on a global supply chain management master’s. She said the tours also serve to expose students to the job opportunities available to them. Club vice president Andy Watts, working on an associate’s degree, said it helps students immensely just to get out and “get our faces recognized” in the industry. The club is holding a public panel discussion March 6 on campus featuring leaders from the Port of Anchorage, Alaska Railroad and Ted Stevens Anchorage International Airport. It’s the first such event the club has put on and Watts said the goal is to fill every one of the 130 seats available in the lecture all. “It’s a really big deal for us as a club,” Mitchell said. Further, Prokop’s students regularly have the opportunity to hear from and question industry leaders who could well be a boss of theirs someday soon. A glance at a syllabus from one of his senior level last fall semester shows nine guest lecturers from the likes of ConocoPhillips, FedEx, Naniq Global Logistics and Alaska Communications. Linda Leary, one Prokop’s guests, is a past vice president of sales at Alaska Communications, a founding member and former president of Carlile Transportation Systems and one of his former students. Leary graduated from UAA in 2004 with a global supply chain management master’s from a program Prokop is particularly proud of. “It’s designed for those with upper management and executive aspirations,” he said. When she enrolled Leary had been in the transportation business for 20 years, but wanted to expand her knowledge base outside of business in Alaska, she said. “(Prokop) tries to bring in a broader, more global perspective to everything, which is really good for Alaskans to have,” Leary said. It’s hard to talk to him for more than a few minutes without hearing about the state’s global position — less than 10 hours from 90 percent of the industrialized world — and the business opportunities the location provides. A big positive of the master’s program for Leary was that she was able to take courses at UAA while living in Seattle, and not remotely. Classes meet one weekend a month for 20 months, 12 hours on Saturdays and eight hours on Sundays, with lunch and dinner catered. Leary was able to fly to Anchorage once a month for school, as a few other students have done, and not have it affect her work schedule. Prokop’s fervor for the field is undeniable, and helpful when pushing through a three-hour class, Mitchell said. “He’s very infectious and the way he’s always so excited makes it enjoyable to go to class,” she said. Leary added, “He’s very smart and very enthusiastic and very curious, which makes it fun.” To Prokop, Alaska is an ideal lab for his field of research and he’s always looking for businesses with problems for his students to solve. “We are a very interesting mix of both domestic and international trade flows that present very interesting opportunities and challenges in logistics,” he said. “For all those reasons it makes sense to do these courses here. This is an area that’s ripe for academic research.” He’s not likely to stop. Elwood Brehmer can be reached at [email protected]

AIDEA approves $37.7M Interior Gas Utility loan

The Interior Gas Utility got approval for a $37.7 million construction loan from the Alaska Industrial Development and Export Authority board at a special Feb. 5 meeting. With several members attending via teleconference, the board unanimously approved the loan for development of the utility’s natural gas distribution system. AIDEA will fund the loan from the $332.5 million Senate Bill 23 Interior Energy Project financing package it was authorized to use towards getting natural gas to the region. The Sustainable Energy Transmission and Supply Fund loan package is an expansion of an $8.1 million loan AIDEA approved to get IGU’s distribution system work started last spring. It will cover the cost of initial distribution construction in North Pole and installation of temporary gas storage. IGU was formed by the Fairbanks North Star Borough in November 2012 to spur additional natural gas use in the borough. With little cash or collateral to back it and favorable terms — 1 percent interest and a 48-year payback — the loan to the utility is outside of AIDEA’s normal lending practices because it is SB 23 money. “(SB 23) pretty much says, do what you need to do to meet the Legislature’s intent,” AIDEA Executive Director Ted Leonard said. AIDEA’s proposed purchase of Fairbanks Natural Gas, the other gas utility in the area, and its parent company, has put the Interior Energy Project back on a late-2016 timeline for first gas, according to those familiar with the project. IGU board chair Bob Shefchik said getting natural gas to the utility by the fall of 2016 will give it a customer base and subsequent revenues with which it can pay off the loan. Elwood Brehmer can be reached at [email protected]

Walker cuts $170M, 300 positions in budget

Gov. Bill Walker released a proposed fiscal year 2016 operating budget with $5.2 billion in general fund spending. The governor’s budget plan released Feb. 5 also eliminates 300 state positions next fiscal year that begins July 1. The unrestricted general fund amount is $4.6 billion, about $170 million less than the current fiscal year 2015 unrestricted spend, a 3.6 percent cut. Walker said state employee layoffs would be minimized to the extent possible through eliminating vacant positions and not filling others as they open up. “There are cuts in here, and some will be painful. Our state right now has a $3.6 billion budget deficit, leading us to draw about $10 million every single day from savings,” Walker said in a release. “I want to be up-front with Alaskans throughout this process.” His overall proposed operating budget is just more than $12.1 billion, a 1.9 percent increase over fiscal year 2015, primarily because of a 7.7 percent increase in federal funding. The general fund cuts are not a surprise; Walker talked continually about cutting state spend in his campaign and during his first two months in office. However, they are not as significant as had been speculated. The governor asked state commissioners to review how 5 to 8 percent budget cuts to each department would impact operations. He floated the possibility of cutting state government by 25 percent over four years in his State of the Budget address to the Legislature Jan. 22. Office of Management and Budget Director Pat Pitney said agencies will combine services wherever possible to maximize efficiency and minimize the impact of cuts. “I cut 11 percent of my executive office (budget) through leaner staffing and operations,” Walker said. On Jan. 22 he released a $1.4 billion proposed capital budget, which cut the state unrestricted general fund portion by 91 percent from the fiscal year 2013 level. Now it’s the legislators’ turn — the state appropriators — to meld a final budget over the remaining 10 weeks of the legislative session. Elwood Brehmer can be reached at [email protected]

CIRI settles long-running dispute over Kenai Loop gas fees

The fight over Kenai Loop natural gas appears to be over. Attorneys for all four parties currently involved in the dispute — Cook Inlet Region Inc., the Alaska Mental Health Land Trust Authority, the Department of Natural Resources, and AIX Energy LLC — signed a joint request for dismissal Jan. 23 of the ongoing hearing in the Alaska Oil and Gas Conservation Commission related to the case. CIRI Vice President of Land and Energy Development Ethan Schutt said the Southcentral Native corporation had an agreement in place with AIX for a couple weeks. “We’ve been waiting for a resolution between AIX and the other parties,” Schutt said Jan. 23. AIX won an October auction to purchase assets of the bankrupt Buccaneer Energy Ltd., which developed the Kenai Loop pad on Mental Health Land Trust property.  Of four wells on the pad, two began producing natural gas in early 2012. Since, CIRI, which owns an adjacent parcel, filed suit against Buccaneer in state court and sought relief through the state commission for gas royalties it was owed for gas drained from its part of the reservoir. Schutt has said CIRI owns 20 percent of gas produced from the wells and that Buccaneer’s contract was for approximately $7 per thousand cubic feet, or mcf, of gas. Based on AOGCC production records, the gross value of gas owed to CIRI could be in the neighborhood of $10 million or more. Mental Health Trust Land Office Executive Director Marcie Menefee wrote in a Jan. 28 email to the Journal that her office is still in the process of finalizing lease terms with AIX. However, she wrote that the Mental Health Trust Land Office’s agreement with AIX is independent of DNR and CIRI. DNR represents the State of Alaska’s interest in the case as the primary owner of the resource. The department also often represents the Mental Health Land Trust. When Australia-based Buccaneer filed for bankruptcy May 31, 2014, it owed DNR about $605,000 for a combination of Cook Inlet oil and gas lease payments and production royalty payments. Overall, the company owed more than $2.1 million to unsecured creditors in Alaska. The bankruptcy proceedings are continuing in U.S. Bankruptcy Court for the Southern District of Texas, located in Houston. South Texas Bankruptcy Court Judge Marvin Isgur approved a settlement order between CIRI and Buccaneer Jan. 27. The settlement released the two from potential liabilities and evaporates CIRI’s $5.75 million proofs of claim filed against Buccaneer in September. The proposed court settlement was filed Jan. 8. Schutt declined to go into detail about the agreement with AIX, but said CIRI would be in a “more traditional role as a lessor” to AIX. He said where the money comes from is less important to CIRI than whether or not the company is paid what it is owed. Previously, he had said CIRI could seek payment from the Mental Health Land Trust for royalties it received from CIRI’s gas. Representatives from AIX would not discuss the deal and said it is confidential. AIX is a shell subsidiary of Meridian Capital International Fund, which financed some of Buccaneer’s Cook Inlet work. Last April AIX purchased much of Buccaneer’s debt. In late May, the AOGCC ordered Buccaneer to open an escrow account at an Alaska financial institution and to segregate its Kenai Loop production revenue into the account monthly. That money would be held until either a settlement was reached outside of the commission or an order was handed down by the commission doling out appropriate allocations. While Buccaneer delayed in setting up the account, by November it had transferred about $8 million into the escrow account, according to court filings. It put $399,639 into the account for December. The dismissal petition requests the escrow funds be dispersed to AIX in accordance with the multiple settlements between the parties. Elwood Brehmer can be reached at [email protected]

Construction forecast positive in short term with 3% dip

The state budget may be grim but Alaska’s construction industry as a whole should have another good year, according to a University of Alaska Anchorage Institute of Social and Economic Research forecast. The 2015 construction outlook predicts a total spend of more than $8.5 billion statewide. That would be a 3 percent decline from the revised 2014 projection of $8.8 billion worth of construction activity in Alaska. “Our short-term outlook is positive,” Associated General Contractors of Alaska Executive Director John MacKinnon said in a formal statement. “We’ve seen dips in the price of oil and dips in the economy before, and they both come back up. At this point in the cycle we don’t know what the bottom will be or how long before it trends up; it will go back up.” MacKinnon also noted that there is typically a lag between when public money is appropriated and when it actually “hits the street” in the form concrete being poured or buildings going up, so prior year bonds and capital spends will undoubtedly have an impact in 2015. ISER prepares the forecast for AGC of Alaska every year. Employment in the industry is expected to dip slightly from the 17,600 jobs last year, which was a 6 percent increase over 2013. Those projections do not include self-employed contractors in Alaska, estimated to number 9,000 in 2011. “Our annual forecast underscores the importance of the construction industry in Alaska. It’s not just about the jobs and the economic value of the current construction projects — the one-time expenditures,” MacKinnon said. “It’s really about how what we build becomes a part of the ongoing economy of Alaska for years and often, generations.” Private spending is expected to be more than $5.5 billion of the total and down about 6 percent. Leading the way per usual will be the oil and gas industry with about $3.8 billion of work, a slight decline from 2014. ConocoPhillips has several large oil projects on the Western North Slope and ExxonMobil is continuing work on its large Point Thomson gas development. Forecast authors Scott Goldsmith and Pamela Cravez wrote that low oil prices have a greater impact on how much producers have in the bank than what they want to do because projects are planned based on conservative price models. “Some of the largest operators in Alaska are quite strong financially, and others have funding sources not tied to the oil price. Furthermore, in Cook Inlet, activity is more sensitive to the price of natural gas than of oil, and the state, through its tax credit programs, has also provided a funding source not directly tied to the price of oil,” they wrote. “Finally, the industry is under political pressure to show that the new state production tax, SB 21, has stimulated new investment.” At $210 million, mining work is projected to be up 19 percent despite some lower metal prices. The state’s six major producing mines have larger capital expenditures planned for the year, according to the report. A subcategory that could go under public and private spending, utilities should spend about $680 million this year, down 20 percent. That is due mainly to the completion of Matanuska Electric Association’s Eklutna plant. The largest project left is Anchorage’s Municipal Light and Power $275 million replacement plant scheduled for completion in mid-2016. Health care spending will be pretty steady, at $240 million in the coming year, based on federally supported projects by Alaska Native health organizations. The Alaska Native Medical Center in Anchorage is building a 200-room patient housing facility. Public sector spending should be about flat, at more than $2.9 billion, according to Goldsmith and Cravez. Residential construction is pegged to be down 14 percent at $415 million. The activity continues to center on the Matanuska-Susitna Borough; however, land shortages in Anchorage, high heating costs in Fairbanks and overall stagnant economic and population growth will likely slow the construction segment. Public sector spending should be about flat, at more than $2.9 billion. Work on transportation infrastructure — highways, airports, ports, and railroad — should be up slightly and total more than $1.2 billion. Defense spending, which includes U.S. Army Corps of Engineers environmental work along with military construction, should be $435 million, up about 10 percent. Fort Greely is expected to get $50 million for its missile defense program, a recent addition to the federal budget, the authors wrote. Other federal spending, done largely by the Interior Department in Alaska, is expected to be off 15 percent to $255 million. Elwood Brehmer can be reached at [email protected]

Alaska Air Group has 5th straight record year, profit up 49%

Quarterly or yearly, record-breaking profits are officially old hat at Alaska Air Group Inc. During a Jan. 22 call with investors, executives of the parent to Alaska Airlines and Horizon Air reported a record full-year profit of $571 million in 2014 and a fourth quarter record profit of $125 million. The net income figures exclude special items. It is the fifth consecutive record-breaking year for Alaska Air Group and the 10th record quarter in the last 11. It is also the 23rd consecutive profitable quarter for the company. Per share, the profits break down to 94 cents for the quarter and $4.18 for the full-year. The yearly net income is a 49 percent increase over a record $383 million in 2013 and a 62 percent year-over-year improvement on a previous fourth quarter record. The pretax margins are even better. Pretax profit for the quarter was $206 million, a 67 percent improvement over 2013; and full-year pretax profit was up 50 percent at $922 million. “We had a record year on almost every front, even as we approach the end of the second year with much more competition in Seattle,” Alaska Air Group President and CEO Brad Tilden said on the call. Tumbling fuel prices during the second half of 2014 helped many major carriers have strong years, but Tilden said Air Group’s full-year margins grew 3 percent even when lower-cost fuel is excluded. Jet fuel averaged $1.57 per gallon for domestic carriers on Jan. 9, down nearly 50 percent from a year ago, according to the International Air Transport Association. Air Group Chief Financial Officer Brandon Pederson said the company saved $42 million on fuel in the fourth quarter because of lower prices. Alaska Air Group purchases fuel call options that act as an “insurance policy” and hedge against sudden price spikes but allow it to take advantage of price declines, he said. “Our monthly profit when compared to the same month in 2013 was higher in every single month,” Tilden said. “These results affirm that we’ve built a business that performs when challenged and that works well throughout the cycle.” Alaska Airlines’ competition at its home hub of Seattle has come primarily from Delta Air Lines, a mileage plan partner, which has pushed more into the Pacific Northwest market over the last couple years. Alaska Air Group’s total operating revenue was up 4 percent for the year at $5.3 billion; for the quarter it was up 8 percent at $1.3 billion. Overall 2014 passenger revenue grew 7.3 percent on a 7.1 percent growth in capacity. A drastic improvement was also seen in the company’s return on invested capital, or ROIC. Air Group had an ROIC of 18.6 percent in 2014, up a full 5 percent. Alaska Air Group leadership has expressed a desire to hold a debt-to-capital ratio of less than 40 percent, based on research done of other companies within the S&P 500. It ended 2014 with a debt-to-capital ration of 31 percent, down 4 percent for the year. Some investors asked if it would be prudent to borrow against its capital given the low interest rates afforded it based on the company’s position. Pederson said using debt to leverage returns to shareholders could be of interest, but the company has worked hard to put itself in the position it is today. At the end of 2011 Air Group held debt equal to 62 percent of its capital. “We do a lot of things to emulate high-quality industrials, including where we set our capitalization level in the mix between debt and equity,” Pederson said. Alaska Air Group stock traded for $68.65 per share on the New York Stock Exchange at the end of trading Jan. 23. The stock price has risen about 45 percent since a June two-for-one stock split. Just before the split it traded in the $95 range. During the call, Tilden announced Alaska Air Group would increase its quarterly dividend payment to shareholders by 60 percent per share. The dividend began in the third quarter of 2013 at 20 cents per share. It is back to 20 cents per share after the stock split. Alaska Airlines’ new Boeing 737s — the only aircraft the company flies — and their increased fuel efficiency has helped the company invest in long-term cost savings. Pederson said fuel burned per mile has improved 22 percent over the past 10 years. Alaska Airlines took delivery of 10 Boeing 737-900ER, or extended range, aircraft in 2014 and will get another 11 this year. It had a fleet of 137 aircraft at the end of the year and expects to have 147 by 2017. Alaska Air Group owns 77 percent of its fleet. “For Alaska, these great results come amidst unprecedented competition in our markets, and the folks throughout our company are rising to the occasion to make us a great airline every day for our customers,” Tilden said. The roughly 13,000 Air Group employees earned $116 million in incentive pay last year, according to Pederson. With a new five-year agreement with Alaska flight attendants approved in December, Air Group has average agreements in place with all its employees nearly four years out, Tilden said. Continuing into 2015 Alaska Airlines capacity will likely grow 11 percent in the first quarter and about 8 percent for the year, Air Group Vice President of Revenue Management Andrew Harrison said. Comparably, other airline capacity is expected to be up 15 percent early in 2015. Harrison said lower fuel prices would not lead to lower ticket prices on Alaska Airlines. “When pricing tickets, we look at the supply and demand in each of our markets and adjust prices to balance the two,” he said. “Approximately 90 percent of our flying is in the United States domestic market, and the U.S. economy continues to be strong.” Elwood Brehmer can be reached at [email protected]

State funds in slashed capital budget down 91% from 2013

Gov. Bill Walker’s capital budget is short, but not very sweet. The total proposed capital spend would be $1.4 billion under the governor’s proposal; of that, $150 million would be unrestricted state general funds. While federal dollars always make up a large share of the state capital budget, general fund spending is the real indicator of the state’s situation. The $150 million in Walker’s initial budget is a 71 percent decrease from the current 2015 fiscal year unrestricted capital spend of $510 million. Just a few years ago in fiscal 2013, the unrestricted general fund spend was about $1.7 billion. Plunging oil prices have put the state upwards of $3.5 billion in debt for fiscal year 2016, according to the Revenue Department. Walker released his budget shortly after his State of the Budget address Jan. 22. He said in a press conference the following day that the special speech detailing the state’s fiscal situation was a critical and tough one to relay. “Alaskans just need to know where we are,” Walker said. More than a third of the general fund spend in his current budget — $62.9 million — will be used to match federal Transportation Department program funding. Federal funds comprise more than $1.2 billion, about 84 percent, of the entire capital budget. Walker said the state needs to cut its overall annual general fund spend between the operating and capital budgets by 25 percent in the coming years. Such a prospect assuredly means minimal capital budgets in years to come. In his speech he said proven programs such as the Alaska Housing Finance Corp.’s. Weatherization and Home Energy Rebate programs would be funded in the future. The energy efficiency enablers received a combined $9.6 million from Walker, with a $1.5 million federal match. An $8 million allocation to the University of Alaska Fairbanks for construction of its engineering building made its way into the governor’s budget. In November, the University of Alaska Board of Regents asked for $31.3 million from the state to complete the $111 million project as part of its fiscal 2016 capital request. The regents also requested $50 million for deferred maintenance and repair work and got another $8 million in Walker’s budget. The Alaska Energy Authority’s Susitna-Watana Hydro project; the Alaska Industrial Development and Export Authority’s work towards an environmental impact statement for an industrial-use Ambler Mining District road; Department of Environmental Conservation wetlands permitting revision; Fish and Game’s Chinook Salmon Research Initiative; and a new Blood Bank of Alaska building in Anchorage are notable exclusions from the capital plan. Former Gov. Sean Parnell had a total of $39.8 million in his partially completed capital budget for the five projects. The Alaska Railroad Corp. is also requesting $21.8 million to keep its Positive Train Control development on track. Combined with prior appropriations, the federally mandated and unfunded safety system for passenger railroads will ultimately cost the state and the railroad about $156 million to implement through fiscal year 2018. In his Jan. 22 speech, Walker said he wants the state to invest more in resource development infrastructure through financing as it did with the Red Dog Mine road in Northwest Alaska more than 25 years ago. While a contentious issue among area residents and environmental groups, the roughly 200-mile Ambler road proposal would be a very similar project, and would provide access to copper deposits that could possibly support one or several mines just south of the Brooks Range. AIDEA needs $6.8 million to complete an EIS for the road, according to an authority report. Walker said in a press conference the road would be looked at along with the other large state projects he put on hold to see which made sense to pursue. The key, he said, is making sure a company can commit to a mine before spending more money. “Are there companies that are ready to step up today and say they are ready to pay and step up today and be a participant financially?” he said. “That’s what we’re looking for to take it to another stage of permitting; is there a company that wants to come in and take that process over? That’s the kind of discussion we will have.” The most likely participant is NovaCopper, which has been exploring the Ambler Mining District for years. Company CEO Rick Van Nieuwenhuyse said NovaCopper has spent nearly $85 million acquiring and exploring the Arctic and Bornite deposits in the region and is hoping to have a feasibility study on Arctic done by in 2017. “We’ve got skin in the game,” he said. Van Nieuwenhuyse said he understands the state’s fiscal situation, but noted that no general funds would be used for road construction. State investment in permitting the road would encourage other deposits in the 75-mile long district to be developed by other companies, he said. Whether the road construction is financed by AIDEA loans or bonds or paid for directly by private money is still up for discussion. He said NovaCopper financing the EIS is something the company would consider, but not before its feasibility study is complete. Elwood Brehmer can be reached at [email protected]

AIDEA begins broadening Interior gas search

The transformation of the Interior Energy Project has begun. This time, a Cook Inlet gas source is a real possibility. With the Alaska Industrial Development and Export Authority back on its own in the endeavor to get natural gas to the Fairbanks area, the AIDEA board passed a resolution Jan. 14 authorizing staff to spend $700,000 to investigate a new path forward for what was, and still could be, a plan to truck liquefied North Slope natural gas south. AIDEA formally terminated its agreement with project consultant MWH Inc. Jan 5. MWH was hired to pull together the web of stakeholders and private financing needed to bring the public-private partnership version of the project to fruition. Time ran out on the concession agreement between the authority and MWH at the end of the year and the parties declined an extension. The resolution authorized $500,000 of Sustainable Energy Transmission and Supply Fund money available to AIDEA be spent to further investigate Interior Energy Project solutions. Another $200,000 would come from the AIDEA’s Economic Development Fund, “to pay for the cost of the authority’s own personnel and facilities in evaluating means of supplying energy to Interior Alaska,” the resolution states. Using its own money also allows AIDEA to look at gas sourcing options other than the North Slope. Senate Bill 23, which gave AIDEA $332.5 million in loans, bonds and grants, required the financing be used to develop a North Slope supply. As of Jan. 5 AIDEA had spent $15.3 million of the $57.5 million direct appropriation in SB 23, leaving $42.2 million available for future work. An $8.1 million loan to the Interior Gas Utility for distribution work from the $125 million in SETS funds left $116.9 million in project loans available. The remaining $150 million bond authorization has not been touched, according to AIDEA’s financial records. Board member and former state senator from Fairbanks Gary Wilken said in an interview that he hopes the Legislature will give AIDEA more tools to draft a financially viable gas plan. “The thing at hand right now is to determine what changes we need in SB 23 to move forward. Now we need to look south and explore elsewhere, and that will require a change in the law,” Wilken said. He said he has discussed the project with several members of the Fairbanks delegation. One legislator Wilken has not talked to is Rep. David Guttenberg, who has criticized the authority’s handling of the Interior Energy Project. Guttenberg told the Journal in early January that AIDEA should stick to its role as a finance agency and not manage the Interior Energy Project. The public-private partnership, or P3, plan drafted by former Gov. Sean Parnell and passed without opposition by the Legislature was “doomed from the start,” Guttenberg said. According to Wilken, Guttenberg, who was excused from the House vote on SB 23, has not offered any suggestions to him on how to improve the project. Despite a failure to finalize financial terms to build and operate a North Slope-sourced gas truck operation, Wilken said the AIDEA-MWH team made great strides during 2014. Coincidentally, the Jan. 14 board meeting where discussion was had on how to continue without MWH was one year to the day after the board chose MWH to be its project partner. “I think everyone from the beginning knew it was a challenging project,” Wilken said. “I don’t think it was time wasted nor money wasted. We have a yardstick by which to measure every other project.” MWH developed an intricate modeling program that could take in detailed cost variables — construction, operation, financing — and compute out a final gas price. The work also narrowed down what it would cost to build a 6 billion cubic feet, or bcf, per year LNG plant on the North Slope. In its early proposal, MWH estimated the cost for a 9 bcf plant to be $180 million to $220 million. Those ballpark figures turned out to be optimistic, as the last refined estimate company representatives gave was $228 million for a plant with 6 bcf annual processing capacity. “If we made a mistake we probably didn’t give (MWH) enough time,” Wilken said. He added that he admired their willingness to tackle the multi-faceted task. Wilken noted that the energy “landscape” of the state has changed significantly since SB 23 was passed early in 2013. The price of oil is less than half of what it was during all of 2013 and much of 2014, shrinking the project’s feasibility margin; and a renaissance in Cook Inlet gas production has secured a once-tenuous market. Fairbanks Natural Gas now has a 10-year supply agreement with Hilcorp to feed its existing customer base in the heart of Fairbanks. Such a contract would have been unthinkable just a couple years ago. As the Legislature and Gov. Bill Walker’s administration move further the Interior Energy Project, Wilken said he sees AIDEA continuing to play a significant role. The authority is open to partner with any party that brings forth a well-developed plan to add cleaner and cheaper options to Interior’s energy portfolio, he said. Layered agreement strained IEP Reflecting on the year of Interior Energy Project work at the Jan. 14 board meeting, AIDEA Chief Infrastructure Development Officer Mark Davis said a long-term energy solution for the Interior ultimately led to the project’s demise as it was structured. The gas trucking project, always intended to be an interim solution, required LNG plant financing be spread over a 30-year plant life to make it viable. “When the project started we thought a joint development agreement would be used — AIDEA acting as a finance arm of it,” Davis said. The plant would be owned by MWH and its investor, Toronto-based Northleaf Capital Partners, the two would also operate it. The prospect of a gas pipeline created a financial risk “sticking point,” he said. If a pipeline was built within the 30-year plant lifetime, the investor would need loan forgiveness if it was to accept the alternative supply risk. However, Davis said AIDEA’s forgiving of the SETS loans would then create an unacceptable tax liability. Thus, the concession agreement formula was adopted. That model had AIDEA forming a limited-liability company with MWH — Northern Lights Energy LLC — which was then bound to a series of conditions and precedents that had to be met before financial close of the whole project, Davis said. AIDEA would own the plant and MWH would operate it for 30 years, after which it would revert back to AIDEA. Those conditions included an overall target gas price and an engineering, procurement and construction plant price. When those prices, which AIDEA had no control over, didn’t come in low enough it all fell apart. “We think the focus going forward needs to be on the product that’s going to be delivered,” Davis said. “Instead, the concession agreement focused on a complex relationship between AIDEA and MWH, or Northleaf, that really didn’t have complete buy-in from the customers and that proved to be a problem.” Elwood Brehmer can be reached at [email protected]

Anchorage office market hesitant, retail future bright

Commercial realtors, like many folks in Alaska, are waiting to see how slumping oil prices will affect their industry in the coming year. “Everyone’s anxious; there’s a lot of nervousness. But, the truth is, you don’t just close your business down because oil prices slip,” Reliant LLC manager Ted Jensen told members of the Building Owners and Managers Association Anchorage Jan. 9. He noted that while the current price drop does not bode well for an economy as heavily dependent on the petroleum industry as Alaska, the duration of the drop is much more important than its severity at any one point. Building owners with long-term leases in place likely have little to worry about, he said. However, those with short-term tenants or leases set to expire could have a harder time keeping space occupied. “Six months from now, I think we’ll be in a better position to see,” Jensen said. “We still won’t know how long (low oil prices) are going to last and how low they’re going to go, but the market will have had a chance to respond.” A big positive is that even if the commercial real estate market takes a hit over the coming year or two, it is in a strong position right now. In Anchorage, Class A office vacancy increased, but only slightly, over 2014 from 4.3 percent to 4.6 percent today. Class B space increased a little more from 5.7 percent to 6.5 percent. Jensen said the “very healthy” office market should be able to soften with minimal impact. “We’ve got a lot head room which is good.” Recent construction of office space has contributed to the modest increase in vacancy rates. New Class A vacancy jumped from about 4 percent to 6.4 percent over 2014, according to Jensen, while only 3.8 percent of existing space is open. As recently as 2011, new Class A vacancy was as high as 15 percent, he said. Overall office vacancy in Anchorage is currently at 5 percent. Industrial vacancy stayed at about 2 percent in 2014, after being as high as 6 percent in 2010, according to Pacific Tower Properties broker Brandon Walker. JL Properties’ new office building at International Airport Road and C Street has Calista Corp. as its main tenant, but also has about 25,000 square feet remaining to be leased. Midtown’s 188 West Northern Lights office complex also has about 40,000 square feet available, Jensen said. Rent for both office classes held steady over last year, with average Class A staying at about $2.60 per square-foot and Class B going for $1.95 per square-foot. Jensen said he expects rents decrease slightly in 2015 if they change at all. State Economist Neal Fried is predicting an overall job loss in Anchorage of about 800 positions in 2015 after losing about 400 jobs last year. He emphasized that the numbers are small — a 0.5 percent loss for 2015 on an average employment base of 156,300. The losses in 2015, as they were last year, will be attributable primarily to government contraction with a net loss of 500 government jobs. While almost all of those positions require office space, Jensen said the effect on the office market would be minimal. “If you’ve got the federal building and you lose someone through attrition or retirement and you don’t rehire, there may be an empty desk. That doesn’t mean you squish everyone over and try to lease out 500 square feet to the private sector,” he said. Even with high oil prices it would be hard for the Anchorage economy to grow at this point. The Anchorage and Matanuska-Susitna region’s population grew less than 0.5 percent over the past year, according to the state Labor Department. When that is combined with an unemployment rate of about 5 percent — considered full employment — there is little room to expand. Fried said the stagnant population growth is due largely to a burgeoning economy in the Lower 48, meaning less people are coming north looking for work. Retail remains strong What’s happening to the south will also impact the state’s retail market, Commercial Real Estate Alaska Vice President Lottie Michael said. What large chain retailers do nationwide is often reflected in what happens to their stores in Alaska, despite how the Alaska market is faring. “Nationally, the big boys, the big retailers, are anticipating 2015 and 2016 to be years of expansion,” Michael said. “Because they’re driving our car I think we’re going to have a really big year in the retail market.” She said no big stores are anticipated to leave; several chains are investigating Anchorage; and others have made commitments for 2015. Men’s Warehouse, Pier 1, and cosmetic-salon chain ULTA Beauty are all moving into Tikahtnu Commons in Northeast Anchorage this year. Michael said ULTA Beauty is the only national chain she’s aware of that has ever opened in Fairbanks — just recently — before Anchorage. “What we are seeing now is what we will continue to see: repositioning of tenants, restacking of tenants, and resizing of tenants,” she said. Overall retail vacancy in Anchorage was at 2 percent last year with about 500,000 square feet of space available. She said the five-year vacancy average is about 3 percent. Average retail space is going for about $1.65 per square-foot triple net; new space costs $2.25 or more. Michael will be watching what happens with JL Properties’ 200,000 square-foot outlet mall development on C Street in South Anchorage, as well as Dimond Center’s The Outlets of Alaska, she said. New space will also become available as Sears and Home Depot resize their stores as part of national plans. Home Depot usually occupies about 30,000 square feet and will be cutting its stores in half. Alaska locations are looking for tenants to lease the new space, she said. A remodel in the Midtown Mall at Sears is allowing Nordstrom Rack to move in as Sears downsizes. Michael said marijuana legalization will almost undoubtedly be felt in the state’s retail markets based on what’s happened in other states that now allow recreational use of the drug. “Regardless of your view, the marijuana industry is going to affect us. It’s going to affect all of retail,” she said. “Look at Colorado and Washington space in retail centers, especially the older retail centers; those prices just shot up and demand just outpaced available space. I think we can see that.” She said where dispensaries locate will depend greatly on whether lease conditions permit such a business and the attitudes of neighboring tenants. Elwood Brehmer can be reached at [email protected]

Walker fires DOT commish after road report

Gov. Bill Walker fired Alaska Transportation Commissioner Pat Kemp Jan. 12 after he urged Walker to move forward with the Knik Arm bridge and the Juneau access road projects, or face repaying up to $98.6 million to the federal government. Walker spokeswoman Grace Jang wrote in a statement to the Juneau Empire that the governor wants department commissioners aligned with his priorities. Status reports on three of the state’s biggest and controversial road projects were released Jan. 9 by Walker’s office. Kemp was appointed by former Gov. Sean Parnell and had been with the department since 1971. The Empire reported that Kemp planned to retire at the end of November, but Walker asked him to remain on month-by-month basis. The former state commissioner told the Empire that he was surprised to learn the projects weren’t in line with Walker’s priorities. “That memo I sent out was just a factual memo, there wasn’t any editorial stuff in there. We just gave facts, so that was a little surprising,” he said to the Empire. “(The Juneau road) project’s been around for a while and all the previous governors supported it and this one apparently doesn’t and that’s just what happens when someone takes over.” DOT Deputy Commissioner Reuben Yost was also asked to step down. Deputy Commissioner John Binder, who oversees the state airport system, will replace Kemp on an interim basis. Jang said the governor plans to name a permanent DOT commissioner by the end of January. Walker suspended spending on six large state projects, all in the pre-construction phase, with a Dec. 27 administrative order. The governor plans to investigate which, if any, of the projects should be continued as the state faces an ever-widening budget deficit currently topping $3.5 billion. He has long said the state needs to prioritize its infrastructure spending. Walker requested the agencies leading the projects submit the reports to him by Jan. 5. “Perhaps the most significant issue is that each project must be evaluated in total, as the many specific contracts and reimbursable service agreements with other agencies are intended to advance the project,” Kemp wrote in the report to Office of Management and Budget Director Pat Pitney, who is overseeing the reviews for the governor. “Halting or even suspending any one of these activities is essentially delaying the overall project, and as such would likely trigger a financial penalty.” The State of Alaska would not save money on the federal funds allocated to these projects if they are stopped because the required state match amounts would simply be shifted to other projects along with the Federal Highway Administration dollars, according to Kemp. Transportation projects that receive federal funding must be matched by state or local sources. Federal Highway Administration, or FHWA, allocations typically require an overall project match of 10 percent to 20 percent. The state would likely have to repay $72.9 million spent on the Knik Arm bridge and $25.7 million spent on the Juneau road — a 48-mile extension of the Glacier Highway north of the capital — if the projects are killed for what are deemed political reasons, according to Kemp’s report. To date, $74.3 million of federal money has been spent on the Knik Arm Crossing by the Knik Arm Bridge and Toll Authority and state DOT, and $28.9 million on the Juneau project. The expected repayment amounts are slightly less than the federal project expenditures due to an FHWA formula used to calculate what needs to be paid back, state DOT spokesman Jeremy Woodrow said. “The Federal Highway Administration wants to know what the direction of the department is. They want to know whether we are moving forward or stopping the projects,” Woodrow said. Further, quickly reallocating the “use it or lose it” federal dollars would be a challenge because transportation projects are planned years in advance, he said. KABATA was allocated $55 million for its work and DOT got $35 million for the Juneau road in the fiscal 2015 capital budget. Both allocations included $5 million state matches. The Knik Arm bridge construction responsibility has since been shifted to DOT, and project lead Judy Dougherty has said the $55 million would get the state to the early construction phase scheduled for late 2016. Additional state match funds would be included in the overall $300 million needed from the state and FHWA for the project’s three-pronged, $900 million financing plan. The $574 million Juneau access road would be paid for state-matched federal allocations. Putting the Juneau project on hold would be easier once it has a record of decision, or ROD, according to the status report. “Delaying the project prior to issuance of the ROD for more than a year or two would result in the requirement to later restart the process with agency and public scoping, and revising or replacing the draft (environmental impact statement) as appropriate,” the report states. A supplemental draft EIS was released for the project in September. In 2006 the FWHA issued a ROD in support of the road. However, a 2011 federal Appeals Court ruling required additional alternatives to the road be investigated. Arctic director for The Wilderness Society Lois Epstein called the reports “confusing and misleading” in a formal statement released Jan. 9. “Alaska’s now-limited revenues should go not to controversial mega-projects with known community harms, but to higher priority needs such as upgrading bridges and maintaining existing state infrastructure,” Epstein said. Public debate over the Juneau access road project has been renewed after the release of the latest draft EIS. On the Knik bridge, the report states that as long as DOT is making progress on a project: “Reasonable requests for time extensions are allowed. Due to the total cost of the project exceeding $500 million, FHWA requires that a financial plan be approved by the administration’s Major Projects Office. The financial plan must provide reasonable assurance that sufficient funds will be available to meet the proposed construction schedule.” The Alaska Industrial Development and Export Authority’s look into a 220-mile industrial road off the Dalton Highway to the Ambler Mining District is the third proposed thoroughfare on the governor’s chopping block. Walker cut an $8 million appropriation to the project from Parnell’s proposed capital budget in early December. AIDEA has $9.7 million from prior appropriations to continue work on the project’s EIS and would need another $6.8 million in the next two fiscal years to complete the work. The state has spent more than $52 million $26 million on the project since fiscal year 2011. AIDEA had hoped to submit an EIS application by the end of 2014, prior to Walker’s order to stop work, according to spokesman Karsten Rodvik. Construction of the industrial gravel route would be privately financed through the authority. NovaCopper, the primary explorer of the copper deposits in the large area of Northwest Alaska has said it needs the road to make final exploration and construction of one or more mines feasible. Villages along the route have expressed great concern over how it could impact migrating caribou relied upon for subsistence hunting. Epstein said a claim by AIDEA that “No appropriated funds would be used for the construction or maintenance of the road” cannot be substantiated. Giving AIDEA the opportunity to move forward with the EIS would better allow the agency to gauge public sentiment and address concerns. It would also validate to industry that the state is willing to develop infrastructure for resource development that brings value to the state, according to the authority. Elwood Brehmer can be reached at [email protected]

State shifts from 404 primacy to wetlands mitigation options

State agencies are collaborating on ways to improve wetlands permitting despite funding cuts. What was once an investigation into whether or not the State of Alaska should try to assume primacy over Clean Water Act Section 404 wetlands permit reviews has morphed into a look at developing a broader “404” program. During the 2013 legislative session state lawmakers approved spending that allowed the state to explore the possibility of applying to take on 404 wetlands permitting. Those permits are now issued by the U.S. Army Corps of Engineers for the Environmental Protection Agency. Section 404 of the Clean Water Act limits the impact development projects can have on wetlands. Senate Bill 27 provided $1.5 million per year for fiscal years 2014 to 2016 to the Department of Natural Resources and the Department of Environmental Conservation for pre-primacy application work. The bill also allowed for seven new positions between the departments to focus on the initiative, DEC Program Manager Ben White said. Michigan and New Jersey are the only states to have assumed primacy over wetlands permits within their borders. States that do have to adhere to federal standards and the EPA still holds veto power over any 404 applications. In 2014, the Legislature decided to cut the funding, essentially suspending the work. White said some contracts were already in place through the end of 2014 when the funding was cut. “Unfortunately the plug was kind of pulled a little early and we weren’t able to get as far into exploration as we’d hoped,” White said. Exactly what it would take for the State of Alaska to assume the responsibility of 404 permitting is still unclear, he said. The timeline of the work called for a decision on whether or not to apply for primacy to the EPA sometime in fiscal year 2016. “At this point we’re finishing up what work we can and trying to figure out what our next steps are,” White said. “We’re also working. We’ve kind of shifted our focus from 404 assumption to areas where we as a state could improve the process, the 404 permitting process.” That shift in focus has led the state’s 404 program development team to look at options for new general development permits and ways to expedite current ones. White said the state is currently partnering with the Corps to possibly revamp general placer mine permit renewals. A complete 404 permit also requires a Section 401 water quality permit from DEC. The state was starting to explore ways to combine the two into what could be a DNR permit, making “sort of a one-stop shop for permits so an applicant can come in and talk to one group and process it,” he said. The engineering and consulting firm HDR Inc. recently issued a report to DNR and DEC that investigates options for the state when it comes to wetlands mitigation banking, which is growing in popularity nationwide. It was one of the last pieces of work done under SB 27. “At some point I think the state’s going to have to explore being involved in mitigation banking as far as assisting in the setup of banking,” White said. The EPA and Corps of Engineers issued new standards in 2008 that “promote no net loss of wetlands by improving wetland restoration and protection policies,” according to the EPA. The rules increased the use of mitigation banking, which allows a project developer to improve off-site wetlands as a compromise for possible damage that could occur as a result of the project. Mitigation banking is only allowed after avoidance and minimization of on-site wetlands damage has been exhausted. Sharmon Stambaugh, a large project coordinator for DNR said the department took the lead on compensatory wetlands mitigation efforts. She has been looking at whether state lands could provide an opportunity for mitigation. The state could potentially save, and even make money if it started a compensatory wetlands mitigation bank program or became what is known as an in-lieu fee sponsor, Stambaugh said. State transportation departments are some of the biggest customers of mitigation banks. Since 2009, Alaska DOT has spent about $8 million to meet 404 requirements and offset damage its projects have done to wetlands across the state. Nationwide, 31 states have some wetlands mitigation banking options. With roughly 65 percent of the nation’s wetlands in Alaska it only makes sense for the state to have such a program, White said. Former Fish and Game commissioner Frank Rue is currently the executive director of the Southeast Alaska Land Trust in Juneau, one such in-lieu fee sponsor. An in-lieu fee sponsor organization is certified by the Corps of Engineers to take on the responsibility of finding wetlands to preserve that will offset those damaged by a development project. “A landowner can come to us and say, ‘This is what the Corps has told me my obligation is for the wetlands impact I’m causing,’” Rue said. “They ask us, ‘What would it cost me to just pay you a fee to take on this obligation?’” The impact to wetlands is measured in terms of acres and wetland type. Once a conversation is had about the project and a price is hammered out the landowner or developer sends the trust a check and the trust in-turn sends the Corps a letter stating the obligation has been transferred. The whole process is overseen and approved by the Corps of Engineers. “Once we send that letter to the Corps, the Corps gives the green light to the project and the project doesn’t have to worry anymore about meeting their obligation for wetlands mitigation. We have to do that,” Rue said. From there, the Southeast Alaska Land Trust begins the hunt for a similar size piece of property with similar wetlands — as rated by the Corps — to purchase from a private landowner. The property will be as close to the impacted site as possible, he said. Often the parcels are virtually undevelopable, Rue said, which makes finding someone willing to sell them easier. If the situation allows, the trust will donate the property to a local government or to the state while keeping an easement that prevents development. When a landowner wants to keep the parcel private the trust can purchase an easement — essentially development rights — to keep the wetlands intact. The trust currently holds easements on 3,400 acres in Southeast. Final cost of using a mitigation bank or in-lieu fee sponsor varies greatly, Rue said, because it all depends on the value of the property. He said the state could become an effective in-lieu fee sponsor, particularly because nearly all shoreline areas are state-owned. “If you’re trying to replace or protect something equivalent to what was lost the state really has all the cards. I think they could play a big role for inter-tidal fill,” he said. Stambaugh suggested the state look south to what is being done in the rest of the country in terms of wetlands restoration being used for banking instead of strict preservation. “There are different ways that you can provide compensatory mitigation. Preservation is not used in the Lower 48 very much because there isn’t much left to preserve in many states, but here it’s the primary way,” she said. “You can avoid and minimize the impacts but then you have to compensate. Preservation is not the preferred method. Restoration of wetlands and bringing marginal wetlands into productive ecological value, that’s considered a higher priority.” She said the state has “tons of land” where compensatory mitigation and restoration could be done. Elwood Brehmer can be reached at [email protected]

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