Elwood Brehmer

Ferry system braces for cuts; state funds down 15% since ‘14

“There is no money, so our approach should not be ‘How do we get more money?’” Marine Transportation Advisory Board chair Robert Venables said. “While there may not be money, there are solutions.” Venables’ remark, which opened the Nov. 16 Marine Transportation Advisory Board, or MTAB, meeting, was specific to the Alaska Marine Highway System but could have been directed to countless state functions. As references to the state budget deficit grow from $3 billion, to $3.5 billion to more, the state ferry system and the public board are working on ways to optimize ferry service and revenue. The Alaska Marine Highway System, which operates 11 ferries for 35 ports from Dutch Harbor to Bellingham, Wash., is projecting a $25.5 million budget cut in the 2017 fiscal year compared to 2014, according to Deputy Transportation Commissioner Mike Neussl. “That’s a huge hit,” he said. In fiscal year 2014, the Marine Highway System was appropriated $162.6 million by the Legislature. It will have a budget of about $137 million in the 2017 fiscal year, which begins next July 1, if the administration’s projection holds true. The current fiscal year 2016 system operating budget is $14.6 million less than the 2015 fiscal year, which ended June 30.  “Extra” amenities, such as gift shops and bars on the vessels that have them, have been closed to save money over the past couple years. This year, 45 positions were eliminated and significant service cuts are starting. The Marine Highway System measures its service level by the sum of the weeks its 11 ships are sailing. From 2011-2013, the state ferries provided more than 400 combined weeks of service; the last two years service declined to about 378 weeks as several vessels returned to work late after winter overhauls. Most notably was the M/V Tustumena in the spring of 2014. This fiscal year’s operating plan calls for 350 weeks of service as vessels are laid up to save money. The fast ferries Fairweather and Chenega are scheduled to enter layup May 1 after coming out of federally-funded winter capital improvement programs. The M/V Taku will be in layup for the entirety of fiscal 2016 because a pot of state capital money used for repairs to assure the ferries pass annual U.S. Coast Guard inspections shrank from $12 million to $10 million this year, which left the Taku tied to a dock, according to Neussl. “We’re starting with less (money) than we normally do with vessels that are older and need more work than years ago,” Neussl said. Nearly every vessel had “discovery work,” or additional repairs that were found when the inspections began, straining that budget item even more, he added. Further harm could come from the federal government, if ferry formula funding for capital projects is cut for Alaska, as proposed in the Senate version of the long-term transportation funding bill, according to Neussl. Taking vessels out of service to save money isn’t free, either. Laid-up ferries must be manned with minimal crews while dockside. The 352-foot Taku, a mid-sized Alaska ferry, will cost the system $3.6 million to sit idle this year, Neussl said. The proposed 2016 summer schedule reflects the anticipated 2017 fiscal year funding hit that will take effect July 1. Most notably, Sitka’s service is reduced from near daily fast ferry service last summer to twice-weekly visits from mainline vessels next summer. Also, Prince William Sound ports will not have service for six weeks beginning in mid-September under the draft schedule. Neussl said he was pleased to see the public focus on the tangible impacts of reduced service in public comments on the proposed 2016 summer schedule, which he called “bleak.” Solutions to managing Alaska’s ferry fleet on a shrinking budget need to be locally based with an emphasis on providing basic transportation for Alaskans, while working to at least narrow the system’s internal budget challenges, Venables said. The Alaska Marine Highway System never has been and never will be a profitable venture for the state. Making money was never its intent. Since the current 11-vessel fleet took shape in 2006, the system’s “fare box recovery rate” has been between 30 percent to 35 percent of its overall budget. Getting back to the 50 percent recovery range achieved in the early 2000s would be a success, system officials have said. That likely means reducing the fleet size and compressing traffic onto fewer sailings, according to Neussl. At the same time, providing some level of service to all 35 port communities is the Alaska Marine Highway System’s first goal, he said. From there, providing tourism and commercial opportunities, while maximizing revenue, becomes a challenging mix. While ferry ridership remained fairly steady, the number of sailings continued to increase when the state was flush with cash in the mid- to late-2000s. Southeast Conference Executive Director Shelly Wright also said at the Nov. 16 meeting that striking a balance between service and budgets starts at the local level. The Southeast Conference, a regional development organization, is organizing a series of community meetings with DOT to discuss the importance of the system directly with the public. Senate Transportation Committee chair Sen. Peter Micciche of Soldotna held an Alaska Marine Highway System listening session in Sitka Oct. 23 and said during the MTAB meeting that he hoped hold additional meetings to hear from other coastal Alaska communities. Legislators from areas not served by the ferry system have been blamed for dismissing the transportation service and quickly looking to it when state budgets need to be tightened. “I believe (legislators) are ready for a change; they’re ready to listen to something new; they’re ready to support the Marine Highways as long as they know that it’s not going to be just business as usual — ‘please give us more money and we’ll figure it out,’” Wright said. She added that legislators need to know about the social and cultural importance of the system beyond the bottom line “because we all know the bottom line is never going to be a black one.” AMHS General Manager Capt. John Falvey said the system commissioned a study to examine the economic impact the system has on the entire state, not just the regions it serves. The last such study was done in 1995. The final report should be done in time for the upcoming legislative session that begins in late January, he said. It’s widely understood that communities along the Marine Highway rely on the ferries to bring tourists and serve as a freight carrier to communities without barge service, but the actual benefits have been anecdotal. A new online reservation system, set to go live in May, should also help the system collect data on its riders and eventually develop a fare formula, both of which will help optimize revenue, Falvey said. Historically, fares have been set at the discretion of the DOT commissioner and that has led to a disjointed structure of more than 20,000 fare combinations. Falvey and Neussl admitted there is no rhyme or reason to the fare structure and the new reservation system should be a good starting point to overhaul fares and get to a system-wide fee-per-mile structure. Fares on a majority of routes were increased 4.5 percent earlier this year to bring them more in line with the most expensive ferry trips, but the fares are so disjointed that much more work is needed. New ferries A bright spot for the beleaguered Marine Highway System, construction of its Alaska class ferries, or day boats, at Vigor Alaska’s shipyard in Ketchikan is on schedule and going well, Neussl said. The pair of $60 million, 280-foot ferries is destined to serve Haines, Skagway and Juneau in Lynn Canal. The first of the twin vessels is scheduled for completion in October 2018, with the second coming shortly thereafter. Replacing the 51-year old Tustumena, the only ship that can adequately serve the Homer, Kodiak and Aleutian ports, is off to a good start, too. Falvey said the final design of the 330-foot vessel is coming in at about $6 million, less than the $10 million set aside for it in the state’s Vessel Replacement Fund. Overall replacement of the Tustumena has been pegged between $211 million and $237 million. The final design is expected in January from Glosten, a Seattle-based marine engineering firm. Elwood Brehmer can be reached at [email protected]

Current LNG buyers’ market not dooming AK LNG Project

It is a good time to be an LNG buyer on the global market. Long-term contracts with Asian buyers — the prospective market for the Alaska LNG Project — are almost exclusively tied to the price of oil through an energy equivalent formula. While a flooded oil market has helped liquefied natural gas buyers dependant on its price, there is simply a lot of LNG right now, too. “Today’s global LNG market is dreadful,” Kenai Peninsula Borough Oil and Gas Special Assistant Larry Persily said in an interview. “It’s just like oil; it’s way oversupplied.” Persily served as the federal pipeline coordinator for Alaska natural gas projects before joining the borough. In just a few years, delivered LNG prices in Asian markets has gone from nearly $20 per million British thermal units, or mmbtu, to less than half that. Japanese and Korean LNG buyers were paying $14.95 per mmbtu in May 2013; by last June, those prices were down to $7.25, according to the Federal Energy Regulatory Commission. In China, it was a little cheaper, at $7.10 per mmbtu on average. The cause for the current bloated market is fairly simple: high demand for natural gas several years ago pushed producers worldwide to develop LNG projects. The 2011 Japan earthquake and subsequent Fukushima nuclear disaster drove the country to shut down its nuclear energy program, forcing utilities to buy LNG for electricity production, further straining the market and driving prices up. Domestically, shale gas production exploded at roughly the same time and turned some Gulf Coast LNG import terminals into export facilities. Most analysts expect it to remain an LNG buyers’ market for several years, along the same lines as oil, Persily said, but the value of those projections are always up for debate. Eiji Hashio, a Tokyo-based vice president of Resources Energy Inc., said Japan is now buying about 90 million tons of LNG per year and about a quarter of that is on the spot market rather than long-term contracts. Japan is viewed as a primary market in Asia for Alaska LNG. The country accounts for about 35 percent of the global LNG market, which stood at more than 240 million tons in 2014, according to the International Gas Union. Worldwide demand grew about 2 percent last year. Combined, Japan and South Korea demand almost exactly half the world LNG market. Resources Energy Inc. is an Alaskan-Japanese consortium looking to develop a smaller Cook Inlet LNG export project. In July, the Japan Economy, Trade and Industry Ministry set a goal to resume nuclear power generation and increase renewable energy use — to the point where nuclear power meets 20 percent of the country’s electric demand by 2030 and renewable energy supplies another 20 percent. Eiji said “industry is very suspect of those targets,” because the nuclear target would require restart of more than 30 of the country’s 43 reactors, many of which are aging facilities. Japan produced no nuclear power in 2014. Still, he said the spot LNG market in Japan would likely diminish by 2020 as some nuclear power is brought back online. Today about 35 percent of LNG is traded on the spot market, according to Damian Bilbao, BP’s business development director for the Alaska LNG Project, the $45 billion-plus North Slope LNG export proposal that partners the State of Alaska with BP, ConocoPhillips and ExxonMobil, the gas suppliers for the project. Also in about 2020, many legacy contracts Japanese utilities have with gas suppliers will be expiring and a push towards decoupling LNG prices from oil will be emphasized, as will efforts to mirror the Henry Hub gas market of North America, Persily and Eiji said. Doing so would hopefully relieve LNG buyers from the volatility of the markets, according to Eiji. “The days of, ‘I’ll pay you whatever oil is with an energy equivalent factor; just send me the bill;’ those days are over,” Persily said. Linking to Henry Hub — at least these days — would also mean very low LNG prices. Henry Hub natural gas was up 13 cents from the day prior Nov. 16, at $2.14 per mmbtu. The prime advantage for Alaska LNG over Gulf of Mexico produced LNG is shipping. Tankers heading out of the Gulf must first go south through the Panama Canal and then traverse the entirety of the Pacific, adding days and “a couple bucks” per mmbtu to the final price of Henry Hub-linked Gulf LNG, Persily said. Eiji also noted that not all contracts will be structured the same, even amongst a single portfolio. Buyers want a blend of LNG sources, which leads to a blend of pricing. “What we would like to do is just cost-plus reasonable margin for the producers and developers,” he said simply. More LNG supply is also being developed in Australia. Persily said three export projects began production within the last year and another three are in construction. In total, the new LNG projects down under should add about 10 billion cubic feet, or bcf, of natural gas to the market per day, he said. Pegged at 20 million tons of LNG per annum, the Alaska LNG Project would add about 3 bcf per day to the world market over its 25-year initial design life. At 90 million tons per year, Japan’s LNG demand roughly equates to 13.5 bcf of natural gas per day. Worldwide capacity is expected to increase by about 50 percent over the next three years, Bilbao said. Where does all that leave the Alaska LNG Project, hoping to move first gas around 2025? Persily called today’s LNG market a “war of attrition” for export projects, which has likely helped Alaska with less feasible projects in British Columbia, Africa and other places falling out of sight. The work going on in Australia is not in competition with Alaska because those projects are further along and already have sale and purchase agreements in place, Persily noted. “After the dust settles later this decade, when hopefully the market begins to recover, the stronger projects will still be in the running. That’s the hope,” he said. A report from the Department of Natural Resources consultant firm Black and Veatch estimated the AK LNG midstream costs alone at $7.30 per mmbtu. Today’s global LNG prices simply aren’t workable for the Alaska LNG Project, but they don’t have to be, Black and Veatch consulting director Deepa Poduval said. On its current schedule, the Alaska LNG Project won’t be in production for another 10 years and hopes are to keep the pipeline full of gas for another 25 years at minimum after that. “You’re looking at a 50-year time horizon and you can’t make that decision based on a five-year forecast in prices,” Poduval said. Realistically, there isn’t a specific price that makes the project feasible from the state’s perspective, according to Poduval. The state’s benefit will not only come from the sale of its gas, but also from corporate income taxes and property tax revenue, among other sources. The Revenue Department announced in September that the producers had agreed to pay $15.7 billion to the state and local governments in PILT, or payments in-lieu of taxes, relating to the Alaska LNG Project. Those payments would be made over the operating life of the project. As a result, the state’s requirement for gas revenue is almost certainly well below what the producers will need, Poduval said. And among the three, varying financial positions will undoubtedly leave them with different perspectives as to what is a favorable project and LNG market. Among the biggest variables is the capital cost of the project. Current cost projections between $45 billion and $65 billion leave a capital swing of more than 40 percent. Next comes project financing. “What you probably need is (an LNG) price basis that works for the least common denominator. In effect it represents a level where everyone is basically happy — some are fairly happy, others are quite happy, but at that point where everyone believes uniformly that the project can be economical,” Poduval said. Even with a push in Japan and other markets to separate natural gas prices from oil, the fortunes of the Alaska LNG Project will still lie somewhat in the value of crude. Higher oil prices will improve the health of the producers’ financials, if nothing else. “I would think somewhere in the $70 (per barrel of oil) threshold would be important for our project,” Poduval said. “It probably needs to be higher than that to be confident for everyone and it will depend on the different pieces coming together.” The producers will not be too worried with the LNG market and how it impacts the Alaska LNG Project for several years, according to statements from ExxonMobil and ConocoPhillips. Purchase and sales agreements will be negotiated during the front-end engineering and design, or FEED, process, which should begin late next year and continue for several years, based on the current project timeline. ExxonMobil spokeswoman Kim Jordan wrote in a statement that the company expects LNG imports to Asia Pacific countries to grow by 60 percent by 2025, which could well position the Alaska LNG Project. BP’s Bilbao said China, which hasn’t historically been an LNG player, will continue to grow its demand. He also said that the current market gives the Alaska project partners an opportunity to drive down capital costs and continue to improve the project’s financials. The fact that three of the world’s largest, reliable oil and gas producers are partnering with the State of Alaska is a major benefit to the project and can’t be ignored by potential customers looking for national energy security through LNG contracts, according to Bilbao. When looking for buyers, LNG marketers want to “brand” their projects, he said, and Alaska LNG has credibility through its participants. “You want buyers in the market looking to transact with your project,” Bilbao said. Elwood Brehmer can be reached at [email protected]

Pebble conflict moves to Capitol Hill following latest report

The fight over the proposed Pebble mine at times makes politics look tame. That impassioned battle resumed on Capitol Hill Nov. 5 when the House Committee on Science, Space and Technology heard from those on the front lines of both sides. The committee also received testimony from former Maine senator and Defense Secretary William Cohen, whose recently published report about the Environmental Protection Agency’s involvement in the matter has once again made Pebble a topic of national debate. Published Oct. 6, “The Cohen Report,” as it is known, questions the objectivity and scientific process of the EPA’s Bristol Bay Watershed Assessment. The assessment is the baseline document used by the EPA to justify its attempt to block Pebble development through its Clean Water Act Section 404(c) authority, which gives the agency the power to prohibit projects that would have an “unacceptable adverse effect” on fish, wildlife or wetlands habitat. The title of the hearing, Examining EPA’s Predetermined Efforts to Block the Pebble Mine, leaves little wonder about the sentiment of committee chair Rep. Lamar Smith, a Texas Republican. “Secretary Cohen’s report lays out evidence that shows collusion and a cozy relationship between the EPA and groups actively opposed to the Pebble mine,” Smith said in a statement to open the hearing. In its ongoing lawsuit against the EPA in U.S. District Court of Alaska, Pebble contends the agency violated the Federal Advisory Committee Act by working with anti-mine groups to develop the Bristol Bay Watershed Assessment and shunning Pebble from the process. Additionally, the mine developers claim the agency had already determined it would use its 404(c) authority to prohibit a large mine on Pebble’s copper and gold claims before the multi-year assessment process officially began in 2011. The judge in that case, Judge H. Russel Holland, granted Pebble an injunction about a year ago, halting the 404(c) process until the suit is resolved. The EPA argues it met with Pebble representatives 30 times while drafting the assessment and that Pebble had additional opportunities to have its voice heard. The Federal Advisory Committee Act, or FACA, requires government agencies remain impartial and hold open meetings — published in the Federal Register — with both sides of contentious issues represented. Pebble Limited Partnership board of directors chair John Shively, a former Alaska Department of Natural Resources commissioner, said Nov. 5 at the Alaska Miners Association annual meeting in Anchorage that EPA Region 10 Administrator Dennis McLerran lied to him in a letter sent when the assessment began by claiming it was not aimed at stopping Pebble. Shively also asserted that the EPA lied to the public about how the movement to stop Pebble began. “I spent a fair amount of time in rural Alaska and I never believed that Tribal governments out in Southwest Alaska had any idea what Section 404(c) of the Clean Water Act was,” Shively said. Pebble insists it has evidence obtained through Freedom of Information Act Requests that prove the EPA helped draft the petition submitted by six Bristol Bay-area Tribes that urged the agency to invoke its 404(c) power and spurred it to begin the assessment. “Unfortunately, it appears that the Pebble mine project is another victim of this EPA’s extreme agenda,” Smith stated. “In fact, one of the former EPA employees who this committee found to have colluded with environmental groups to stop the Pebble mine project fled the country when Congress attempted to interview him.” The employee Smith referenced is former Kenai-based EPA biologist Phillip North, who was scheduled to be deposed in Anchorage Nov. 12 by Pebble and EPA attorneys. Pebble has said it believes North is in Australia, but his exact whereabouts are unknown. In an interview with the Redoubt Reporter published July 17, 2013, North said he planned on sailing around the world with his family after his retirement from the agency. The 364-page Cohen report supports Pebble’s claims. At the same time, groups opposed to the mine have hammered Cohen’s assertion that it is an independent document because Pebble Limited Partnership commissioned it. Former Republican Alaska Senate President Rick Halford testified to the House committee that before learning of Pebble he had never opposed a mine project. However, the size and location of the proposal by Pebble Limited Partnership forced him to take a stand against its development. “The size of the Pebble deposit is beyond imagination,” Halford said. “The pit would be well over a mile deep in places, and the footprint would cause the direct loss of between 24 and 94 miles of stream; 1,200 to 4,900 acres of wetlands; and 100 to 450 acres of ponds and lakes. The waste would be stored on site in perpetuity.” While not directly responding to Halford, Shively said Nov. 5 back in Anchorage that the impact of the mine has been vastly overblown. “The idea that you could build something (on) several thousand acres, with the kind of grade that we have — over 99 percent of what we take out of the ground is basically just dirt — how we could devastate a fishery is beyond me, but that’s what people have been told,” Shively said. He described the mines the EPA drafted as “fantasy mine plans.” Shively added that the EPA’s requirements for an acceptable mine in Bristol Bay are for a project that is uneconomically small. “(The EPA) designs mines that fail; we’re going to design a mine that succeeds,” he said. Halford also cited more than a dozen claims by Pebble that it would begin the federal permitting process, the first of which came in 2004. He called those claims “empty promises” to start the public review process which would bring resolution to the issue for area residents. Cohen’s report omits the fact that Pebble itself has been the only thing stopping the project from entering the National Environmental Policy Act review process, Halford said. Sen. Lisa Murkowski, who has been a harsh critic of the EPA under President Obama, also criticized Pebble back in 2013 for not releasing a formal mine plan that could be reviewed. Shively insisted Pebble Limited Partnership will enter the review process on its own timeframe, not the opposition’s timeframe. Halford added that the EPA’s involvement in evaluating what would be the largest open-pit mine in the country that would lead to obvious environmental impacts should not be a surprise. “As a resident of Bristol Bay, I can tell you that nothing seems predetermined to me in EPA’s actions,” Halford testified. “EPA collected information and data, met with and listened to both sides, and engaged in extensive outreach to all the stakeholders. I do not believe that EPA’s engagement itself was out of the ordinary as it is common for developers and the public to seek EPA’s perspective in advance of formal project initiation.” Elwood Brehmer can be reached at [email protected]

Final Interior gas decision by AIDEA approaches

FAIRBANKS — Interior Energy Project pitches were made to the Fairbanks public Nov. 4; now it’s up to the Alaska Industrial Development and Export Authority to pick the right project partner. IEP manager Bob Shefchik said he feels both goals of the meeting were accomplished: sharing the proposals from the project finalists with the community they hope to serve with natural gas, and verifying with the community that the process to select a viable private partner is moving forward. While the Interior Energy Project revolves around its namesake region, AIDEA’s public board meetings are held at the authority’s headquarters in Anchorage. Open seats at were hard to come by at Fairbanks’ Pioneer Park Civic Center when the three-hour open house started. Presentations were heard from four of the five IEP finalist teams. “We figure there were 150 people that showed up on a Wednesday night to listen to five PowerPoints, so that’s a good turnout,” Shefchik said in an interview. Hilcorp Energy’s LNG subsidiary Harvest Alaska was a last-minute scratch from the agenda. A Hilcorp spokeswoman declined to comment as to why the independent producer and IEP finalist was not represented at the Fairbanks meeting. Harvest Alaska’s proposal includes options to simply liquefy natural gas at a Southcentral plant for a tolling fee of $4.95 per thousand cubic feet, or mcf, of natural gas; provide a Cook Inlet gas supply and liquefaction for $12.25 per mcf; or deliver LNG to the Fairbanks “city gate” at $15 per mcf equivalent. Harvest wrote in its Sept. 3 proposal summary that the project could deliver either 3 billion cubic feet, or bcf, of gas per year or 6 bcf, and is planned with private financing, but using AIDEA’s IEP-dedicated grant-loan-bond package could lower those costs. The gas supply and all-in proposals include a 10-year contract with utilities. AIDEA’s IEP team plans to recommend a project partner to the authority board at its Dec. 3 meeting. Shefchik reminded those attending the Nov. 4 meeting that the goal is not only to lower energy costs in the Interior, but also to improve winter air quality, which is dangerously poor at times due to large numbers of Fairbanks and North Pole residents who heat their homes with wood, a cheaper option to fuel oil. The IEP will also provide a ready market if the Alaska LNG Project, or another large North Slope gasline project comes to fruition. Before either happens, he noted, AIDEA’s purchase of Fairbanks Natural Gas will lower natural gas prices by about 13 percent for the small group of area residents and businesses that are the utility’s customers by removing tax and profit obligations associated with the formerly private business. From there, the IEP will bring natural gas to more residents cheaper yet, if it ultimately meets the $15 per mcf “burner tip” price. “The goal with every step is to drop the price of gas incrementally until we can” get energy prices competitive with Anchorage, Shefchik, an Interior resident, said. The last step to get the Interior on par with Anchorage would be a large gasline. Phoenix Phoenix Clean Fuels LLC Chief Operating Officer Chris DeBerry was first to pitch his company’s plan. Phoenix Clean Fuels is a consortium of five companies: General Electric Oil and Gas, a LNG plant manufacturer; Alaska Industrial, a North Pole-based trucking company; TDX Power, which operates a North Slope electric utility; and Scimation and SLR, project management and engineering firms. “We’ve tried to pull together a team that can execute this project, not just the liquefaction, but from start to finish — get (LNG) to the city gate just to make AIDEA’s job easier and provide a clearer picture to customers of how the project works,” DeBerry said. All told, Phoenix is projecting a delivered LNG price of $9.65 per mcf equivalent from the North Slope, at least 25 percent cheaper than AIDEA’s first attempt at a North Slope gas trucking operation could achieve with MWH Global Inc. as it private partner. That price would allow for $4 to $5 to be added to the gas price for storage, regasification and distribution and still meet the $15 per mcf customer price goal. Phoenix plans to control transport costs through buying the LNG trailers outright, DeBerry said. GE’s liquefaction plant design is being used at 30 other places worldwide, he noted. “Everybody knows GE; it’s a household name,” DeBerry said. “GE has a modular plug-and-play solution that lends itself to a quick and easy installation in the harsh environment of the North Slope.” LNG plant capital costs were a major impediment to the first Interior Energy Project attempt, which began to fizzle out about a year ago. The GE plant would be assembled, broken down and shipped on 35 skids from a production facility in Texas. That mobility would allow Phoenix to use the plant other places on the Slope or around the world. There is little risk of it being a stranded asset if the state’s gasline wishes come true, according to DeBerry. Phoenix, and the other North Slope proponent Spectrum LNG, modeled prices with a gas feedstock price of $2.10 per mcf. That is the current price of natural gas — tied to oil prices — in an unused contract Golden Valley Electric Association has with BP for North Slope gas, according to Spectrum LNG CEO Ray Latchem. Indentifying the cheapest source of gas was Phoenix’s first task in developing its proposal, DeBerry said, and the roughly $4 per mcf premium for a Cook Inlet supply over the North Slope made the decision simple. The Phoenix operation could be up and running by September 2017 on the current IEP timeline, according to DeBerry. Salix Salix Inc., a subsidiary of Pacific Northwest utility company Avista Corp., is proposing a Cook Inlet liquefaction plant with a “cost of service” tolling fee, versus a firm price contract, Salix President Bob Lafferty said. “Our part is just the liquefaction part,” he said. A cost of service fee includes a utilities energy supply or generation cost, operation and maintenance expenses and a rate of return. Lafferty said the cost of service route provides transparency for customers. Salix projected an initial liquefaction cost of $2.87 per mcf in its proposal summary. The company also said it expects to enter into 20-year tolling service agreements with Interior utilities. Salix estimates first commercial projection in early 2018. Spectrum Spectrum LNG’s Latchem highlighted his company’s experience in the LNG arena. “We’re the only finalist that has produced LNG,” he said. Spectrum developed Fairbanks Natural Gas’ LNG supply chain in the late 1990s before selling the company and currently produces LNG for vehicle use in Arizona. Latchem said his company could produce North Slope LNG for $5.06 per mcf equivalent, leaving $10 available for trucking and distribution costs, while still meeting the project goals. He added that Spectrum would postpone its management fee for the first year of operation to keep retail costs down while a customer base is built. “Our commercial agreement with AIDEA would be a revenue requirement divided by how much the plant produces, so if we sell more LNG it doesn’t make our company any more money — what it does is it drops the unit price to the end users,” Latchem described. “It’s a simple enough deal; we just need to sell as much LNG as possible.” He added that Spectrum has negotiated a feedstock price of about $2.10 per mcf with ConocoPhillips as well, and he feels that price could ultimately drop lower yet. Spectrum could be ready to supply the Interior fairly quickly — in January 2017 — according to its proposal. WesPac WesPac Midstream LLC’s proposal would start with either a new LNG plant at Port MacKenzie, a project the company has been investigating for more than a year, or expansion of the Southcentral Titan LNG plant owned by AIDEA as part of the Fairbanks Natural Gas sale. WesPac is building LNG plants in Tacoma, Wash., and Jacksonville, Fla., to supply Totem Ocean Trailer Express, or TOTE, vessels with fuel. TOTE is in the midst of revamping its cargo ships that serve Anchorage and Puerto Rico to run on LNG. Both of WesPac’s Interior Energy Project LNG plant proposals include 500,000 gallons of on-site LNG storage, which could reduce the need for storage in Fairbanks or North Pole. Anchorage-based oil and gas attorney Jon Katchen, who represented WesPac at the public meeting, said the company chose a Cook Inlet gas source primarily because of the location, despite a higher feedstock price. WesPac also has a 100 percent working interest in a Cook Inlet gas reserve. “Perhaps the biggest advantage Cook Inlet provides is access to additional markets in the event demand doesn’t show up in Fairbanks,” Katchen said. WesPac has expressed interest to serve coastal Alaska communities with LNG, and demand there could help mitigate costs to Interior residents. WesPac pegged its final, delivered LNG price at $12.25 per mcf equivalent in its proposal summary and it could be operating by January 2018. More LNG capacity for Alaska Railroad The Alaska Railroad Corp. now has approval from the Federal Railway Administration to haul enough LNG to meet projected Interior Energy Project demand. In a Nov. 2 letter, the Railway Administration, or FRA, wrote that the Alaska Railroad’s expanded LNG transport authorization is for up to 12 portable tanks of LNG per train on up to three round-trip trains per week from Jan. 1, 2016, through the end of 2017. Beginning in 2018 and through 2020 the railroad can haul up to 60 tanks on one train every four days. The letter came less than a month after the FRA approved the Alaska Railroad for hauling eight, 11,000-gallon LNG tankers on up to two trains per week through two years. This first authorization would have allowed the railroad to prove its ability to transport LNG for the Interior Energy Project, but would not have met projected capacity needs once the project is up and running. The Alaska Railroad is the only railroad in the country approved to transport LNG. Alaska Railroad CEO Bill O’Leary said in an interview that the railroad went back to FRA and explained the situation after the first approval. The subsequent approval would allow the railroad to meet that need. “The governor (Bill Walker) was extremely helpful, as was our congressional delegation in emphasizing the importance of this” capacity increase to the FRA, O’Leary said. Moving LNG from Southcentral to the Interior by rail could potentially cut transportation costs for the IEP by more than 50 percent over the cost of trucking the fuel, according to railroad estimates. However, LNG by rail would add complexities to what is already a challenging logistical project.

New state English, math results show room to improve

Most Alaska students do not meet new state math and English proficiency standards, but that does not come as a surprise to the Department of Education and Early Development. Education Commissioner Mike Hanley said the results of the Alaska Measures of Progress, or AMP, standardized test released Nov. 9 show students and teachers are still adjusting to new, more stringent achievement levels. The first AMP tests were given to students in grades three through 10 late last March. Statewide and across all grade levels, 44 percent of the nearly 73,000 students tested met AMP standards for English language arts, while 31 percent of students met math standards. Achievement levels generally decreased for both subjects as grade levels increased. Less than 29 percent of 10th graders met English standards, and 20 percent met the math goals. At the other end of the spectrum, 53 percent of 10th graders tested at the lowest level — meaning significant gaps in knowledge and skill could exist, according to a description of the four-level evaluation released by the state — and a quarter were also in the lowest level for English. “I did have the full expectation that the number of students meeting standards would be much lower,” than other standardized tests, Hanley said. “If they weren’t I would question, did we really raise the bar? Have we really done what we thought we were going to do?” Hanley made his remarks at a Nov. 9 press briefing following the release of the test results. He said it would likely take time for students to catch up to more stringent academic standards. For example, Alaska students long prepared to take basic algebra courses in ninth and 10th grade. Now, those courses start in eighth grade, steepening the curve and likely impacting the first AMP results, Hanley described. “We’re new in this process and I think we’re going to see a leveling of that (decreasing performance) trend,” he said. The AMP tests replace the state’s Standards Based Assessment, which left students ill-equipped for life after secondary school, state education leaders decided in 2010. Upwards of 80 percent of students were deemed proficient in English, math and science under Standards Based Assessment, or SBA, curriculums. However, only about 35 percent of those same students were proficient based on National Assessment of Education Progress guidelines, according to Hanley. Additionally, the University of Alaska System informed secondary education officials that half of its students take remedial English and math courses, which don’t count for college credit, Hanley said. Bottom line, a public education in Alaska was not preparing students for higher education or the workforce. Therefore, in 2012, the state adopted the AMP standards, which were vetted both by the University of Alaska and 200 state educators. More than 900 educators reviewed the AMP questions to make sure they matched the standards the test attempts to measure, according to an Education Department release. The AMP is a “new trajectory of learning,” not another test on the pile, Hanley said. In recent years, the State of Alaska has done away with the fifth and seventh grade TerraNova reference test, as well as the high school qualifying exam. The time since the AMP measures were adopted has been spent training teachers and school administrators on how to develop lesson plans to help students meet the new standards. Hanley said the AMP standards were encouraged by the National Assessment of Education Progress guidelines, but not meant to align with them. More money is not the answer for schools and districts that don’t show expected improvement in AMP results over the coming years, he said, but those not meeting goals will get the resources the state does have, AMP coaches.  “Our state system of support really targets our lowest performing schools,” Hanley said. “What we do is provide coaches — people who are educators, people who are in this field.” “I have too much respect for our local districts and the experts at the local level to come in and say I can do better from Juneau, so we wan to come alongside districts and provide the resources that are necessary.” The state has 12 such AMP coaches. Optimally, there would be two or three times that many coaches to help struggling districts, he said. At nearly $18,200 per pupil, Alaska spends more than any state other than New York on secondary education, according to the U.S. Census Bureau. Eventually, science will be added to the AMP, as will performance tasks, which are longer, more detailed problems that require a student to show how they reached their conclusion, according to Hanley. Teachers will also have what he called “testlets” that can be used as quizzes to evaluate how students are absorbing individual instruction units throughout the year. “The goal is not simply to get our kids across the stage to graduation, but to prepare them for what comes next — prepare them for college, prepare them for training, prepare them for the workforce,” Hanley said.   Elwood Brehmer can be reached at [email protected]

Transportation Secretary Foxx talks Native issues in Anchorage

U.S. Department of Transportation Secretary Anthony Foxx met with Alaska Natives Nov. 6 in Anchorage to discuss getting around a state with dynamic weather and limited infrastructure as transportation bills move through Congress. The hour-long meeting, held at the First Alaskans Institute, centered on the high cost of transportation in rural Alaska and the funding programs the federal DOT has in place to help tribes develop surface transportation in their communities. “I think the most important point is that whether folks are traveling by snowmobile or whether they’re trying to use ice highways or inland waterways or what have you, we need to pay attention to the unique transportation challenges of Alaska because they are unique and our programs need to be flexible enough to help,” Foxx said during a media briefing following the meeting. Foxx stopped in Alaska on his way to Japan. A day before the meeting on Native transportation issues, the House of Representatives passed the Surface Transportation Reauthorization and Reform Act. “I have consistently worked to provide Alaskans with robust investments to develop our much-needed infrastructure and transportation systems,” Rep. Don Young said in a release from his office. “The success of our state’s economy is directly reliant on our ability to safely and efficiently move our products and people, which is why I worked to secure numerous Alaskan-focused provisions — including $31 million annually for the Alaska Railroad, funds for the Alaska Marine Highway System and critical Tribal Transportation (Program) dollars — within the Surface Transportation Reauthorization and Reform Act.” The Senate passed its $277 billion version of a transportation bill, known as the DRIVE Act, in late July. Both pieces of legislation provide six years of federal surface transportation funding, which has been funded largely through patchwork extensions since The Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005, which was led at the time by Young as the chairman of the House Transportation Committee. The transportation funding law known as MAP-21 passed in 2012 funded DOT for two years and expired at the end of the 2014 federal fiscal year. The current bills are headed for conference committee markups. Foxx said the at times prohibitive cost of transportation in Alaska — a major barrier to economic development in rural parts of the state — exemplifies the need for a “strong robust surface transportation bill.” Sen. Dan Sullivan, who attended the meeting with Foxx, said the Senate’s DRIVE Act would take Alaska’s yearly highway funding appropriation from $483 million now to $585 million by 2021. It would also boost Tribal Transportation Program funding by $10 million per year over the life of the bill, from $450 million in 2015 to $510 million in 2021. The House bill would add $210 million over six years to the Tribal Transportation Program — on par with the Senate, according to a release from Young’s office. The Tribal Transportation Program funds surface transportation projects on Indian reservations, lands and in Alaska Native villages. Sullivan addressed concerns about Alaska’s share of the Tribal Transportation Program at the Nov. 6 meeting. He said the funding formula was changed under MAP-21 to favor larger Tribes, while some of the very small 229 federally recognized Tribes in Alaska took a hit. An amendment by Sullivan to provide a minimum of $75,000 to every Tribe under the program didn’t make the Senate bill, but he said another try would be had during conference committee changes. About 140 Tribes in Alaska get less than his proposed $75,000 floor from the Tribal Transportation Program, Sullivan said. Foxx said improving on MAP-21 in Tribal funding areas is an important issue. “A lot of feedback I heard today (Nov. 6) was that MAP-21 caused some damage when it came to Tribal communities, stripping out some of the programs that folks had relied upon,” Foxx said. The $31 million of formula funds for the Alaska Railroad Corp. in the House bill highlighted by Young is a $3 million annual increase over the current level, but is still down from the $36 million per year the Alaska Railroad received before MAP-21 for providing passenger service. The House bill would also make the federal Surface Transportation Program block grant funding to allow states and local governments more flexibility in how the money is spent. The State of Alaska received $921 million in Surface Transportation funding for more than 60 programs and projects this fiscal year. Elwood Brehmer can be reached at [email protected]

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

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

Bad for state budget, cheaper fuel helping local economies

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

Utilities advancing transmission co., AEA refining cost estimates

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

Former EPA biologist North’s whereabouts still unknown

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

Ambler road work resumes; state closes on utility purchase

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

Alaska Air Group Inc. reports another record third quarter

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

Ambler road study work resumes

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

Low gas prices boosted Alaska tourism in ‘15

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

Nonprofits cite economic impact as budgets tighten

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

AK Railroad gets LNG approval; capacity may need revisiting

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

Alaska Railroad gets LNG approval

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

Ready or not, here comes the gasline special session

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

WOTUS suspended, Corps memos show dissention over final rule

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

Hospital CEOs: Prioritizing primary care over services a must

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

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