Elwood Brehmer

Refinery closing will likely cost railroad $11M per year

The impending closure of the Flint Hills Resources North Pole refinery could cut $11 million in annual revenue to the Alaska Railroad, adding to the “unholy trinity” of challenges facing the state railroad, its president and CEO Bill O’Leary said. O’Leary made his remarks Feb. 20 to the Resource Development Council for Alaska. The Flint Hills closure will also put the railroad’s recent announcement of proposed commuter service between Wasilla and Anchorage on hold. O’Leary said the service, which railroad officials said could start this fall on a trial basis, wouldn’t generate substantial revenue early on and isn’t feasible given the added financial strain caused by reduced freight service demand. Railroad leaders predict bulk fuel transports in 2015 to be roughly 20 percent of peak volumes in 2003 that were primarily jet fuel shipments from the Flint Hills refinery to the Port of Anchorage. When it’s purchased by airlines, fuel from the port is piped to Ted Stevens Anchorage International Airport. O’Leary said the $11 million loss in freight business is expected despite a likely increase of northbound fuel trains to meet Interior demand for multiple fuels now provided by Flint Hills. The overall freight business for the railroad totaled 5.1 million tons of goods moved in 2013, off 23 percent from 6.6 million tons in 2008, O’Leary said. Gravel and export coal hauls have fluctuated during the time period, but the decline in service is largely attributable to decreased production from Flint Hills. The railroad hauled nearly 2 million tons of petroleum in 2008, while the sum of 2013 fuel shipments was less than 1 million tons, according to railroad data. To compensate, the Alaska Railroad has cut what was once daily freight service between Anchorage and Fairbanks to five days per week. “Freight is far and away our largest in the series of business lines,” O’Leary said. Freight transport accounted for 67 percent of the railroad’s $143.7 million in revenue for 2013. Passenger service made up 18 percent of generated revenue and the railroad’s real estate holdings accounted for 13 percent, according to figures provided by the railroad. The remaining two percent resulted from miscellaneous revenue streams. The railroad reported $14.2 million in net income last year and is estimating $8.3 million in profits in 2014. In 2011, the railroad generated $13.4 million of income on $187 million of revenue. Although it is a state-owned corporation, the railroad operates on a calendar year, not the state fiscal year that begins every July 1. The faint good news in the Flint Hills announcement is that it was made early, he said. The refinery isn’t expected to shut down until June, giving the railroad time to try and soften the blow, he said. Anchorage Mayor Dan Sullivan told the Legislature’s Joint Transportation Committee Jan. 18 that the Port of Anchorage would likely see “net neutral” business with the loss of Flint Hills jet fuel shipments and the addition of Delta Western’s fuel storage. Last April, Delta Western, which supplies petroleum products to Western Alaska communities, announced plans to build 11.3 million gallons of fuel storage at the port by late this year. The second challenge facing what O’Leary said is believed to be the last full-service railroad in the nation — offering both freight and passenger service — is “the mother of all unfunded mandates, Positive Train Control,” he said. Positive Train Control, or PTC, is a national mandate by the Federal Railway Administration to install tracking and control systems that can override human error if a train is going too fast or is in the wrong place, O’Leary said. First unveiled in 1997 and mandated in 2008 after a series of accidents in the Lower 48, the Alaska Railroad estimates full PTC implementation will cost it about $155 million. Failure to install the system could result in fines of up to $25,000 per day and loss of passenger service. O’Leary said the current December 2015 deadline to complete PTC is unattainable for nearly all the nation’s railroads, so he said he expects an extension of several years. To date, the railroad has spent $63.8 million on the capital project. That money, along with the $19.1 million in state funding the railroad received in the fiscal year 2014 budget leaves about $70 million of work unfunded. The railroad has requested an additional $40.8 million from the Legislature over the next two years, O’Leary said. A change to the federal funding formula for passenger railroads completes O’Leary’s hard-times trinity. The transportation funding package passed in October 2012 known as MAP-21 cut the Alaska Railroad’s allotted funding from $36 million to $28 million despite efforts to stop the cut by the congressional delegation, O’Leary said. The Alaska Railroad “came under attack” by lawmakers from other states that didn’t think it warranted the same funding provided other passenger lines, even though it meets the requirements, he said. “We don’t look like the Chicago Transit Administration; we don’t look like Dallas Area Rapid Transit,” O’Leary said. When an increase to the railroad’s match requirement is added to the federal funding reduction, the hit totals $12 million per year, he said. That money would have gone towards upkeep of railroad’s capital-intensive infrastructure, according to O’Leary. Surface transportation funding will come up again later this year, and he said the fight over money for the railroad could resume. Going forward, the focus is going to be more on revenue generation and business expansion to solve the railroad’s financial bind and less on cost reduction, O’Leary said. Last March, prior to O’Leary taking the helm, 54 positions were cut at the railroad in a cost-saving measure.  More than 800 full-time employees worked for the Alaska Railroad in 2008, a workforce that has shrunk to about 580 now as business has dwindled. Nearly all of the large proposed infrastructure projects in the state would boost business for the railroad, O’Leary said. In the interim, railroad officials have discussed with the Alaska Industrial Development and Export Authority board the possibility of transporting liquefied natural gas from Cook Inlet north to Fairbanks by rail. Moving the LNG, that would mainly be used for heat, by rail would be much cheaper than by truck and could provide an alternative fuel source for the Interior if the state’s project to ship North Slope gas to the region — the Interior Energy Project — is delayed or falls through. Since the railroad’s presentation to AIDEA about the feasibility of shipping LNG by rail in December, O’Leary said in an interview that “there has been a lot of interest in the marketplace,” but there have been no further meetings between the railroad and the authority on the option. O’Leary said further developing the railroads nearly 18,000 acres of real estate available for lease across the state could provide an opportunity for increased and stable revenue. He said real estate holdings amounted for 76 percent of the railroad’s net income in 2013. “Real estate has long been a tremendous buffer for us over the years as we fight the business cycles in both freight and or passenger service,” he said. There are no plans for general passenger fare increases as a way to mitigate the financial burdens, O’Leary said. “We’re going to continue to focus on good customer service,” he said. Passengers are coming back to the Alaska Railroad, but numbers are still down from pre-recession highs when more than 542,000 passengers boarded the state’s trains in 2008. Recent ridership bottomed out in 2010 at 405,000 passengers as traffic on cruise line-owned railcars pulled by the Alaska Railroad fell. More than 1 million cruisers toured the state in 2013 for the first time since 2009 and the railroad carried more passengers, up to nearly 490,000 last year. Elwood Brehmer can be reached at [email protected]

Assembly approves CH2M Hill for Anchorage port mgmt.

After delaying it twice and holding a special meeting the Anchorage Assembly voted Feb. 25 to approve CH2M Hill’s bid for construction management services at the Port of Anchorage. Passage of the initial five-year, $30 million contract came nearly two months after Mayor Dan Sullivan announced the international engineering and management firm had been chosen among a group of companies to manage future work on the port’s stalled construction project. Additional two-year options could take the contract out to a nine-year, $54 million working agreement. Despite being approved by an 11-1 vote, Assembly members voiced concerns over the length of the contract and the fact that CH2M Hill is in litigation with the city over consulting work VECO, a company now owned by CH2M Hill, did on the original port design in 2007. Assemblyman Bill Starr from Eagle River was the lone dissenting vote, and Assemblyman Patrick Flynn, who represents Downtown Anchorage, abstained from the vote. On Jan. 23 the municipality’s Bidding Review Board found unanimously no conflict of interest between CH2M Hill’s involvement in a lawsuit with the municipality and entering into the management contract. Starr said he wanted a contract that set more performance benchmarks and could hold CH2M Hill accountable if anything goes wrong. “The master agreement doesn’t look much different than the one that started the problem before,” he said before the vote, referring to the earlier agreement the municipality had with the U.S. Maritime Administration to manage the project. Questions have been raised about the suitability of dock design and construction techniques during MARAD’s oversight period. “The oversight measures are lacking on the master contract,” Flynn added. Stacey Jones, a vice president for CH2M Hill on its West Coast port projects said the contract includes language that would allow the municipality to drop the company at any time without recourse. It is a task order-based contract, she said. CH2M Hill gets paid only when a negotiated task order for work is approved, according to Jones. CH2M Hill also conducted a study released in early 2013 on the Open Cell Sheet Pile design first used at the port and found it unsuitable for seismic stability at the site. Sheet pile designer PND Engineers has said repeatedly construction issues are to blame. Further, CH2M Hill presented concept designs to the municipality about a year ago that have been used as an outline for further work. Sullivan said in an interview shortly before the vote that his administration has spent more than four years trying to determine who is responsible for the challenges the port project has faced and now it is time to change direction he said. “I’m tired of looking backwards, from now on we’re looking forward 100 percent,” Sullivan said. Work would begin almost immediately to re-permit the project, and while he may be ambitious, pre-construction work could begin as early as the spring of 2015, he said. In a Feb. 18 presentation to the Legislature’s Joint Transportation Committee Sullivan told legislators that work on a new north dock at the port would be stopped to save nearly $280 million on the project. Rather, he said, work would be done to replace the existing dock face with a traditional pile supported structure, much like what is in place now. The scaled back plan would require $250 million to $300 million in addition to the roughly $130 million the municipality has in its coffers for the project. Elwood Brehmer can be reached at [email protected]

IRS audits over disputed excise tax weigh on air carriers

Ambiguity in the federal tax code is costing some owners of Alaska flight services their businesses, according to members of the Alaska Air Carriers Association. Joy Journeay, executive director of the association, said that the Internal Revenue Service has audited six air carriers in the state since 2010 for their application of excise taxes imposed on regular service. Of those audited, three businesses have been sold or gone out of business, she said, and two more are currently being investigated by the IRS. Why the audits started suddenly is unclear, she said, as many of the businesses had been operating under similar procedures for decades. Some of the tax “bills” handed down by the IRS for failure to properly apply the excise tax have approached $2 million dollars, Journeay said in an interview. She declined to comment on how many carriers reached settlements or were issued court orders to pay. The husband and wife team of Todd and Suzanne Rust are waiting to hear from the IRS after being audited. Along with Colin Rust, the couple owns Rust’s Flying Service in Anchorage and K2 Aviation, which operates flightseeing tours of the Alaska Range out of Talkeetna. Combined, they fly 20 single-engine aircraft and employ about 75 people. They told their story during a Feb. 19 panel discussion at the Air Carriers convention — something other operators have been hesitant to do for fear of drawing attention to themselves. Todd Rust said he wasn’t willing to share what the Rusts expected their tax liability would be, but he did say in an interview that charges totaling several hundred thousand dollars have been common. Scott Harris, owner of Harris Aircraft Services in Sitka, told the Journal that a 2011 audit ultimately cost his business $250,000. At the time of the audit, Harris Air flew four aircraft offering service to area lodges as well as supporting Interior Department operations, he said. After laying out his situation to his bank, Harris said he was able to get an unsecured loan to cover his tax liability. Typically, a $4 excise segment tax is applied for each leg of a flight, along with a 7.5 percent tax on the charged fare on a scheduled flight. An IRS instructional document for tax Form 720, which must be submitted quarterly for excise and fuel taxes, provides an example of excise tax application: “In January 2014, Frank Jones pays $266 to a commercial airline for a flight in January from Washington to Chicago with a stopover in Cleveland. The flight has two segments. The price includes the $240 fare and the $26 excise tax for which Frank is liable. The airline collects the tax from Frank and submits it to the government.” It further states that if a segment is to or from a rural airport, the segment tax does not apply. Confusion has arisen among flight service operators about how the tax applies to flightseeing tours, bear viewing flights and flights chartered for hunting and fishing trips. An internal IRS memo from July 2012 directed to Excise Tax Program Chief Holly L. McCann attempt to describe six Alaska-specific scenarios exempt from excise taxes. A “bear viewing platform day tour” to which the tax does not apply is described as, “After landing, the customer deplanes and walks a short distance to a platform where the customer views wild bears. While on the ground, the customer may have a box lunch, but does not engage in any other activities (such as fishing or kayaking). After a few hours, the customer re-boards the aircraft (which may or may not wait on site) and returns to (the operator’s) home base. The bear viewing platform day tour begins and ends on the same calendar day.” Another memo to McCann dated October 2012 states that seaplane operations are exempt from excise taxes if the areas at which takeoff and landing occur have not received funds from the Federal Aviation Administration’s Airport and Airways Trust Fund. Both memos state, however, that, “This advice may not be used or cited as precedent.” Journeay told the gathered AACA members that the disclaimers on the memos exemplify the variance with which IRS employees apply the tax. Harris said that while “ignorance is no excuse” when it comes tax law, the nature with which rules regarding regular and scheduled flight lines were applied, are particularly troubling to him. Because regular service is taxable, it is up to the auditors to determine if — by looking at historical records — shuttle flights to lodges and similar frequent but not formally scheduled service should be taxed, he said. “Running float planes to a lodge somewhere — I don’t think that was the spirit” of the tax code, Harris said. Further, he said he is hesitant to apply the tax to all flights to protect his business from liability because the added charge could be a competitive disadvantage against other flight services not adding the tax to their rates. Requests for comments to questions submitted by the Journal to the regional IRS office in Seattle were not returned in time for inclusion in this story. “When we talked to the IRS lawyer about (how the tax is applied) he said, ‘It’s semantics,” Journeay said. “’If a person uses certain words when describing what they’re doing they’re going to be liable for the law and if someone else uses different language they won’t be.’” She added that if the IRS cannot decide how to apply the tax, the operators should not be penalized. Flights conducted with small aircraft — designated by the IRS as those less than 6,000 pounds gross weight — are also exempt from the excise tax. That varies from the FAA, which defines a small airplane as less than 12,500 pounds maximum gross weight. Flights deemed exempt from excise taxes are subject to a 19-cent per gallon tax on fuel burned during the flight — one or the other is paid. Journeay said operators need to know which tax to apply or they could face other penalties. Additionally, she said if the excise tax is applied retroactively out of the operator’s pocket in an effort to comply, the IRS could levy a $250 fine per violation for not following correct procedure. Air audits IRS officials first approached the Rusts about an audit in the summer of 2011. Suzanne Rust said the auditors respected their request to delay the action until the end of the busy flying season, and they began a review of flight records that fall, she said. The audit required devoting “a couple of employees for three weeks” to compile data requested by the IRS, Todd Rust said. Flight schedules are kept at the Rusts’ businesses for a year, he said. The IRS used those to extrapolate operations out for three years he said, putting their “accuracy in question.” Suzanne Rust wondered about the tactics used by the auditors during their work, as well. She said the attorney the Rusts hired questioned the necessity of some of the documents the auditors requested and was told the audit would simply be pushed out to seven years from the original three. Harris, of Sitka, said the auditor assigned to his case was helpful and understanding. It was in a conference call with the auditor’s supervisor that he was told his audit would also be expanded from three years to seven if he appealed the liability ruling. Todd Rust said he did not get an answer when he asked IRS officials how audited businesses are chosen. Journeay said the association has asked Alaska’s congressional delegation to push for an end to the audits until the application of the tax code is easily understood and for the use of terminology that is consistent with the FAA. In a Jan. 22 letter to the delegation, the Alaska Air Carriers Association also asked for forgiveness of “current punitive audit findings and protection from punitive actions” until the confusion is resolved. “One of the worries that we have is that if this type of auditing for small carriers in the state of Alaska goes unchallenged all of the fishing guides and hunting guides who carries anyone and sells a package to go hunting for $4,000 — the IRS can come in and say $2,000 of that was for the plane that took you out and you should’ve been collecting taxes,” Journeay said to the AACA membership. “We’re just seeing that as a very ripe fruit that could be picked.” Delegation intervention Matthew Shuckerow, a spokesman for Rep. Don Young’s office, wrote in an email to the Journal that the congressman introduced legislation to amend IRS code for “on-demand” flights in July 2012. The bill would have clarified when rural charter flights should receive excise exemptions, Shuckerow wrote. A Sept. 13, 2013, letter addressed to Treasury Secretary Jacob Lew and then-acting IRS Commissioner Daniel Werfel signed by Young and Sens. Lisa Murkowski and Mark Begich says that the some of audited businesses have operated under the assumption they were exempt from excise taxes for decades. The letter also requests a meeting with Werfel to discuss the justification for continuing the allegedly “extraordinarily onerous and punitive” audits without providing clarification to the tax code. The congressional delegation also questioned the conduct of IRS staff. “In at least one instance, our offices were informed that the IRS began an audit in the summer of one year, left, did not return to complete the audit until the next summer and then assessed the taxpayer penalties and interest for the intervening months while the agent was away. These actions are very burdensome on small business,” the letter states. Another letter from the delegation dated Feb. 6, 2014, this time addressed to Lew and current IRS Commissioner John Koskinen, stated a promise made by Werfel for a response on the tax issue by the end of January 2014 was not kept and demands the audits be suspended. “The Internal Revenue Service is dragging its feet on what should be a simple policy clarification and as a result, Alaska air carriers are faced with an uncertain future.  Sen. (Lisa) Murkowski and Rep. Young and I agree—it’s time to change the language and make the tax policy work for these Alaska businesses,” Begich said in a statement from his office. Todd Rust said a year went by between the time the audit was finished and when an administrative appeal was held last September. After flying to San Francisco with their attorney, the Rusts were told they had no grounds for an appeal because IRS attorneys had already reviewed the case, Suzanne Rust said. “The clock kept ticking on the interest that whole time,” she added. Journeay and Suzanne Rust both advised flight service owners to contact legal counsel so operation in “good faith” can be verified and penalties on top of late payments and interest can be avoided in the event of an audit. As to whether or not the Rusts will take their companies’ tax liabilities to court when they arrive in the mail, Suzanne Rust said the decision will have to be made if it is worth investing the $50,000 she said it would take to start in court against the IRS. “I don’t know how many operators have $50,000 just to gamble with,” she said. Elwood Brehmer can be reached at [email protected]

JBER, Eielson make F-35 short list

The Pentagon announced Feb. 25 that Alaska’s Air Force bases are on the short list of candidates to host a squadron of F-35 Joint Strike Fighters, the military’s latest generation of fighter aircraft. “Today is great news for Alaska because it demonstrates the Pentagon recognizes our state’s strategic position in the nation’s defense,” Sen. Mark Begich said in a formal statement following the announcement. “With Alaska’s strategic geographic position, unrivaled training environment and ample air space, there is no better choice for stationing the F-35s in the Pacific.” Joint Base Elmendorf-Richardson near Anchorage and Eielson Air Force Base in the Interior are among the five Pacific bases being considered for the squadron. A release from Begich’s office states that an Air Force survey team will visit Eielson and JBER in the coming weeks to further evaluate their potential as F-35 stations. From there, two or three sites will be selected as “preferred and reasonable alternative bases” and receive more detailed study before a decision is made in 2016, according to the release. In November Eielson was listed as one of eight Pacific bases in the running to host an F-35 squadron. Begich serves on the Senate Appropriations Subcommittee on Military Construction, Veterans Affairs and Related Agencies. “I’ve always said that Alaska sells itself in what it provides our military, and from the beginning our case has been clear,” Rep. Don Young said in a statement from his office. “From our 65,000 square mile Joint Pacific Alaska Range Complex — recognized for its unique environment, size, and terrain-diverse landscape — to our highly strategic location, Alaska would be a great home for these fighters.” The Alaska bases inclusion on the Pentagon’s list comes less than five months after the Air Force scrapped a plan to move a 18th Aggressor Squadron F-16 fighters from Eielson to JBER. The plan was widely criticized by Alaska’s congressional delegation and local officials for the negative economic impact it was projected on the Fairbanks area. “In the Interior, the Eielson and Fairbanks community are ready to go full throttle for the F-35s with their location and range space, while JBER and Anchorage present clear positives as well from a military perspective.  Though issues about the Anchorage area were raised when the Pentagon considered placing F-16s at JBER, I am certain those will be objectively evaluate during this next site visit phase in March,” Sen. Lisa Murkowski said in a release from her office. Anchorage leaders raised concerns over the city’s ability to absorb the roughly 1,500 it was estimated would move to the city with the F-16s. Matthew Felling, a spokesman for Murkowski's office, wrote in an email that the squadron would be 48 planes. Young has said each fighter will likely require 100-plus support personnel. Elwood Brehmer can be reached at [email protected]

CH2M Hill gives detail to role of VECO in port expansion

A CH2M Hill spokesman issued a statement Feb. 18 in an effort to clarify confusion over the role of VECO Inc. in the Port of Anchorage expansion project. CH2M Hill purchased VECO Inc. in September 2007, and the Colorado-based engineering giant with nearly 3,000 employees in Alaska now has a contract pending with the Municipality of Anchorage to manage future construction at the stalled port project. Approval of the contract has twice been delayed by the Anchorage Assembly as members have expressed concern over a possible conflict of interest regarding the municipality’s ongoing lawsuit against CH2M Hill regarding consulting work VECO Inc. performed on the sheet pile design used at the port. The municipality is also suing PND Engineers and former project manager Integrated Concepts and Research Corp. Assembly members have agreed to take up CH2M Hill’s contract bid Feb. 25. The municipal Bidding Review Board met Jan. 23 and unanimously approved the contract proposal and found no conflict of interest in regards to the pending litigation. In a statement provided to the Journal, CH2M Hill spokesman John Corsi wrote: “VECO was one of several sub-consultants engaged by (Open Cell Sheet Pile designer) PND (Engineers) in 2006 to complement their design team. VECO’s scope of work was to provide technical support to project scheduling and estimating, review of soil test data and properties provided by others and to conduct a single seismic stability analysis of an early OCSP concept design. VECO completed their scope of work in March 2007 and had no other participation in the subsequent design changes and completion of final design by PND, the engineer of record. “VECO also had no role in the oversight of the pile driving and other construction.” As part of its consultant work, a report prepared by VECO dated March 15, 2007, determined that the sheet pile design proposed at the time met seismic stability criteria for the project. The initial construction management contract now pending before the Assembly at the port is for five years and up to $30 million, with extensions that could make it up to a nine-year, $54 million deal for CH2M Hill. If it isn’t approved, municipal officials have said the bidding would have to start over, something that could delay the process up to an additional six months. CH2M Hill was also commissioned by U.S. Army Corps of Engineers for the municipality to evaluate the suitability of the sheet pile design employed at the port after construction challenges halted the project in 2010. That work was completed in February 2013, according to Corsi. Further, the company was tasked in October 2012 to produce conceptual design alternatives for the Corps of Engineers and municipality, which were released in February 2013. Attempts made throughout 2013 to contact CH2M Hill Alaska representatives about the company’s layered involvement in the Port of Anchorage project were unsuccessful. CH2M Hill is coming forward now so its involvement, particularly as it relates to VECO’s work, is fully understood by the Assembly, Corsi said. The February 2013 suitability study prepared by CH2M Hill was cited numerous times in the complaint filed by the municipality March 8, 2013, against PND Engineers, former project manager Integrated Concepts and Research Corp. and CH2M Hill. At a special Feb. 7 Assembly meeting held to discuss the management contract, Mark Lasswell a senior vice president for CH2M Hill said the company planned to move Lon Elledge, the program manager for CH2M Hill’s work on a port reconstruction and expansion project at Gulfport, Miss. Lasswell said Elledge is “one of the select few we have, probably in the world, who is actually managing a project identical to (the Port of Anchorage).” He referred to Elledge as “unique” and “qualified” to lead the Anchorage project. The Port of Gulfport was damaged considerably during Hurricane Katrina in 2005. CH2M Hill’s contract for the Gulfport work, signed in 2008 for $3.03 million, has been amended in scope and schedule to total $35 million by 2015. A copy of Elledge’s resume submitted as part of the contract management bid proposal provided to the Journal by CH2M Hill states that he has overseen environmental permitting, design, construction, budget and scheduling among other tasks since he started on the roughly $570 million Gulfport project in 2009. It states that Elledge has 35 years of experience managing marine and general construction projects. A request to interview Elledge was denied until the Anchorage management contract is resolved. Mississippi state officials have raised concerns over some of CH2M Hill’s expenses claimed at Gulfport. Mississippi State Port Authority Commissioner Bobby Knesal said in an interview with the Journal that CH2M Hill is “doing a good job as far as managing and everything,” but that some of their fees have been “excessive.” An invoice from the company to the Port Authority for the four-week period from June 1, 2013, to June 28, 2013, listed travel, lodging, office and apartment rental, telephone, parking, and equipment charges totaling $14,690. After meeting with CH2M Hill officials, Knesal said they agreed to “cut back” on some of their expenses. “We were paying the lease for an apartment they were renting for people who flew in a couple times a month and I just thought that wasn’t appropriate,” he said. “They’ve been here long enough; they should have established their residency.” The average wage for 18 CH2M Hill managers and engineers listed on the invoice was $150.70 per hour. Knesal said the wages were not in line with local companies, as he said they should be. Elwood Brehmer can be reached at [email protected]

Bipartisan bill would eliminate exit exam

Legislation introduced by Gov. Sean Parnell and a bipartisan group of legislators would do away with the state high school exit exam. The High School Graduation Qualifying Exam has been administered to high school seniors in Alaska since 2004. Department of Education and Early Development Deputy Commissioner Les Morse said the exam that tests students’ proficiency in reading, writing, and mathematics at up to the sophomore level has run its course. “It probably fulfilled a purpose when it went into place to make sure we up the scores so that all of our kids are at least getting that level of skill,” Morse said. The statewide graduation rate in 2004, the first year the exam was given, was 62.9 percent, according to an America’s Promise Alliance report. The APA is a nonprofit devoted to increasing graduation rates nationwide. By 2013, the rate had reached 71.8 percent among public school students, an increase from 68 percent in 2011, according to state Education Department data. Students who do not test at a proficient level do not receive a diploma, Morse said, but are allowed to retake the test as adults. Mirror legislation was introduced to the House and Senate, respectively, Jan. 21 and Jan. 22. House Bill 220 is sponsored by a group of five Republicans and Rep. Les Gara, D-Anchorage. Senate Bill 111 is sponsored by Sens. Berta Gardner, D-Anchorage, and Gary Stevens, R-Kodiak. Parnell’s omnibus education legislation, House Bill 278 and Senate Bill 139, also contain language that would repeal the exit exam requirement along with numerous other education related actions. If passed, the test would be repealed for the class of 2015. A statement from the HB 220 sponsors states that the bill would save the state approximately $2.7 million “that can be put to better use for the education of our children.” HB 278 and SB 139 additionally include provisions to pay for students’ first ACT or SAT test, common college qualifying exams. Those tests average about $50 per student, Morse said. That cost added to the $2.7 million savings from not administering the exit exam would equate to an overall state savings of about $913,000. Morse said the cost savings is a bonus but never influenced the push to end the test. The primary driver was to find ways to better prepare students for work or post-secondary education, something the state test doesn’t do, he said. An unintended consequence of the exit exam is that some teachers may teach towards making sure their students pass the test, rather than focusing on maximizing their ability, Morse said. “When you look at where do we want to put our resources and were could we provide families better information to make sure kids are career ready, college ready, there are really some better assessment tools available today,” he said. The state Board of Education and Early Development unanimously passed a resolution Jan. 27 supporting the repeal of the exit exam as a requirement to earn a high school diploma. The resolution states that “the competency examination is not an appropriate means of measuring college and career readiness.” Parnell’s legislation includes a provision to give adults up to a three-year transitional period to retake the exit exam if it is done away with. Morse said the repealing the exam should still meet statutory requirements when combined with the option for retaking it for a time. Elwood Brehmer can be reached at [email protected]

Roads to Resources adds West Susitna, stalls other projects

As the original Roads to Resources projects await more money, a new state study adds new proposals to the mix. The West Susitna Access Reconnaissance Study released by the Department of Transportation and Public Facilities in late January highlights five routes, that if constructed, would provide access to the largely undeveloped side of the Susitna River valley and the resources available there. Collectively, the more than 350 miles of proposed access corridors are more than $1.8 billion of infrastructure, representing another “mega project” for the state. DOT Roads to Resources manager Murray Walsh said the study considering ways to reach significant coal and mineral deposits in the area came out mostly as anticipated. “I haven’t heard anybody express shock and amazement at the results,” Walsh said. “I think most of us expected to find a lot of opportunity on the west side; it’s just seeing it all described in one place creates the sense of opportunity.” The routes that stood out as initially the most practical to begin development with are a 64-mile road to Beluga on the west side of Cook Inlet and one of two possible roads extending up the Skwentna River valley to the edge of Rainy Pass at the base of the Alaska Range. The Beluga road would skirt the Susitna Flats State Game Refuge near the mouth of the river, run past several placer gold claims and end in close proximity to the Chuitna Coal Project. Its cost estimate, with a 1,640-foot bridge across the Susitna River, is $257 million, or about $4 million per mile. A 72-mile road extending south and west from an area south of Trapper Creek near Amber Lake to and along the Skwentna River would require 1,200-foot bridges across the Hayes and Yentna rivers and cost roughly $504 million. Another option to reach the same area would begin at the Little Su River Road — as would the Beluga road — and run 108 miles to Rainy Pass. That option would cost $453 million, according to the report. All of the cost estimates in the study are for 24-foot, two-lane gravel roads. Both of the Skwenta valley routes pass the 13,160-acre Canyon Creek coal lease area, which with total inferred resources of nearly 260 million tons is “so huge you could almost justify a railroad for it,” Walsh said. The Department of Natural Resources issued a decision to hold a competitive lease sale for the Canyon Creek land last July, however a sale has yet to be held. The state estimates the entire region holds more than 11 billion tons of subbitumous coal, primarily used for electrical generation, valued at more than $530 billion at current prices. Additionally, the Beluga road would bisect numerous West Cook Inlet oil and gas lease holdings. Walsh said the biggest challenge to developing any road is funding. Access roads to do not qualify for Federal Highway Administration funds that go to projects that prioritize safety and capacity improvements, he said. One way around that would be to enter a partnership with private entities interested in developing the resources in the area to help pay for the work, Walsh speculated. The Susitna Valley State Forest would benefit from increased access to the west side of the valley as well, Forestry Division Director Chris Maisch said. If passed, mirror legislation House Bill 79 and Senate Bill 28 would form the 762,700-acre forest from 33 parcels in the river valley. The area contains roughly 312,000 acres of viable timberland, with much of that being on the west side of the Susitna River, according to a 2010 state assessment of the land. While much of the available timber is not up to the quality of that found in other areas of the state, the resource may be able to support a value-added processing industry or provide fuel for small-scale biomass energy operations, Maisch said. The road to Tanana northwest of Fairbanks is the furthest along of the four major Roads to Resources projects Gov. Sean Parnell proposed in late 2011.  DOT Northern Region engineer Ryan Anderson said the road that would reach the Yukon River on the opposite bank from the City of Tanana is nearly ready for construction. “We’re all permitted on the Tanana Road,” Anderson said. Planned as a one-lane pioneer road with frequent turnouts, the 26-mile road extending from the end of the Tofty Road off of the Elliott Highway would provide direct winter access to the community via an ice bridge and summer access via ferry, Anderson said. Negotiations with Native corporations about right-of-way access across corporation lands are the last major hurdle for the road and have been “positive” so far, he said. Tanana residents collected timber from state land cleared for the right-of-way for use as firewood and in the wood-fired boilers that heat several public buildings in the city, Anderson said. Parnell proposed $6 million in his fiscal 2015 capital budget to complete the project that received $10 million as a part of the first Roads to Resources appropriations in fiscal 2013. A 220-mile road to the Ambler Mining District would cost between $350 million and $500 million, DOT’s Walsh said. If Parnell’s $8.5 million proposal for the project is approved by the Legislature it will have had $21 million dollars appropriated to it over three years. Walsh said complete design would likely more than double that figure. “The investment the state is spending now is basically taking it to permitting,” he said. Future money appropriated to the Ambler Road project will go to the Alaska Industrial Export and Development Authority so it can investigate financing options for construction if it gets that far, Walsh said. NovaCopper, which has claims in the mining district containing more than 140 million long tons of indicated and inferred copper ore, is a possible financing partner for the industrial road.  The public’s access to the proposed industrial use road could hinge on how much private money, if any, is put forth to fund construction and maintenance. Upgrades to Southeast’s Klondike industrial use highway that connects Skagway with Canada’s road system — appropriated $2.5 million in fiscal 2013 — are on hold, Walsh said. The road is currently rated for 10-axle, 170,000-pound loads. Walsh said the goal is to eventually increase its weight limit to 12-axle, 200,000-pound loads, but before that can happen the Captain William Henry Moore Bridge must be improved, a project that is allocated $13.4 million in Parnell’s budget proposal. When the Roads to Resources initiative was started in 2011 the goal was to finish the Klondike Highway improvements by 2017. “The Yukon mining boom that was predicted in 2011 has not kicked off yet,” Walsh said, meaning increased demand for a stronger highway hasn’t materialized either. Work on a spur road to Umiat off of the Dalton Highway on the North Slope is on hold as well, Anderson said. A draft environmental impact statement has been suspended until results from exploratory drilling work Linc Energy is doing in the area this spring are known, according to Anderson. If the results do not lend to further oil and gas development, demand for the road would fade. The 116-mile road would begin near Galbraith Lake at milepost 278 on the Dalton Highway and run northwest to Umiat. That project began with $10 million in state money nearly three years ago. Elwood Brehmer can be reached at [email protected]

BP's Weiss says tax stability key to LNG project

BP Exploration Alaska President Janet Weiss discussed the company’s North Slope plans over the coming years and the impact that repealing the now in place More Alaska Production Act oil tax structure could have on a large-scale liquefied natural gas export project during a Feb. 10 Anchorage Chamber of Commerce speech. The oil tax reform legislation commonly known as Senate Bill 21 went into effect Jan. 1 and has brought about a more stable investment environment in the industry, Weiss said, as have other oil and gas leaders in the state. BP is moving toward more drilling rigs by 2016, bringing the company’s North Slope total to nine, she said. That activity coincides with about $1 billion in new investment over the next five years, according to Weiss. As far as natural gas, she said that if ballot measure No. 1 passes — which would repeal the 35 percent flat tax on production profit under SB 21 and return to the highly progressive formula known as ACES — the prospect of commercialized North Slope gas could be undermined. “There is a deep connection on that ballot initiative to what’s likely to happen with Alaska LNG and that opportunity,” Weiss told the Anchorage Chamber. “That will speak loudly actually to the viability here on the health of the light oil that would build this opportunity on top of Alaska’s willingness to work to make it a business climate that you can do this huge of a project — $65 billion. You need some stability.” Current cost estimates for a roughly 800-mile, 42-inch natural gas pipeline and the associated Nikiski-area liquefaction plant are between $45 billion and $65 billion. Getting Alaska LNG to world markets is dependent upon high levels of oil activity on the North Slope, according to Weiss. Without oil production and infrastructure development the project can’t stand financially, she said. On Jan. 14, Gov. Sean Parnell announced that members of his administration had signed a “Heads of Agreement” document with ConocoPhillips, BP, ExxonMobil and pipeline manager TransCanada. The tentative agreement lays out each parties’ stake in an LNG export project and awaits vetting in the Legislature. Weiss added that concurrence on the framework of the gas project is vital because all parties must be in play to get North Slope oil or gas production moving, she said. “In Prudhoe Bay, it just takes one of the big three partners to pull something down. What SB 21 enabled was agreement by all three for a more aggressive and progressive development plan,” Weiss said. Adding some detail to the company’s plans she outlined in January at the Meet Alaska conference, Weiss said BP plans to increase its 2014 capital program by 25 percent versus last year, of which 40 percent will go towards “production-adding activity,” in the form of immediate new wells and longer-term major projects, she said. A two-year near shore and onshore seismic survey program will start up this summer on the north end of Prudhoe Bay. Weiss said the 190 square mile-survey area could add 55 million barrels of resource to the company’s reserves and require the drilling of 30 new wells. That activity likely wouldn’t occur for three to four years, however. The northern work announcement supplements the west end work Weiss revealed in January — a $3.2 billion project that would mean a new well pad, expansion of two existing pads, roughly 130 new wells and nearly 200 million barrels of reserves that could equate to 40,000 barrels per day of new production into the Trans-Alaska Pipeline System. “With our partners in Prudhoe Bay we’ve got approval to move into the project appraise phase” on the west end, she said. First production from the work could come sometime in 2018, she said. ConocoPhillips is working as an operator in the western Kuparuk River field. The company has said it will add a second drill rig to the early this year and is planning a new production pad in the area. BP continues to work in the Milne Point unit near Kuparuk with challenges, Weiss said. Over the next several years the company has seven new wells planned there, she said, as part of a seven-year project. Elwood Brehmer can be reached at [email protected]

Postal reform includes Alaska provisions to reduce rural rates

The U.S. Postal Service has agreed to reform its pricing structure and operations in some parts of Alaska, according to Sen. Mark Begich. Rates on packages heavier than 50 pounds increased by up to 50 percent Jan. 26 on some routes in rural Alaska as part of a widespread rate increase, Begich told reporters during a conference a Feb. 6 conference call from his Washington, D.C. office. Begich said Postmaster General Patrick R. Donahoe indicated changes would be made as soon as possible to roll back rate increases in areas where the Postal Service is the only parcel courier. “If they can determine there is competition for postal service then there can be rate issues,” Begich said. “In this case we know, and the Postmaster General absolutely without question said this was an unintended consequence of a national plan they have. They recognize that the rural areas of Alaska don’t have competition.” He added that any future rate increases would go through a formal, public process. The rollbacks will go into effect “as soon as (the Postal Service) can fix the dials and get the notices out,” he said. Begich serves on the Senate Homeland Security and Governmental Affairs Committee that has oversight of the Postal Service. He said the Bypass Mail program, which transports all kinds of goods to rural communities, would remain unchanged in the Postal Reform Act of 2013 that the committee also approved Feb. 6. Additionally, Donahoe agreed to give Southeast Alaska mail processing procedures a makeover, according to Begich. In the future, mail staying in the Ketchikan-Prince of Wales Island area will be sorted out and not be sent to Juneau for processing in an effort to speed up delivery. Parcels mailed from far Southeast going to the Lower 48 or other areas of Alaska will now go to Anchorage and then on to their destinations as well. In the past those parcels going Outside would go to Juneau and Seattle before the final leg of their journey. “It’ll cut out a lot of time and waste and it’ll get the packages you’re sending outside of Alaska, or even in Alaska — outside of Southeast — much faster,” Begich said. The Postal Reform Act also puts a one-year moratorium in place on post office closings and requires a lengthy public process if the service wishes to close an outpost after that year. Language in the bill also prevents a post office from being closed if it is farther than “10 miles of driving distance” from the nearest other post office, Begich said. The Douglas Post Office was added to a protected list because it falls under protection parameters due to it being connected by a bridge to the post office in Juneau, he noted. Prior, roughly 30 post offices across the state were at risk of being closed or having service reduced, he said. The legislation is an attempt to give the struggling Postal Service increased financial flexibility. If passed in its current form, the Postal Reform Act would authorize the service to start general five-day per week delivery to street addresses — likely eliminating Saturday mail service — beginning a year or more after the bill is enacted. On Feb. 7 the Postal Service reported a first quarter 2014 fiscal year net loss of $354 million. It marked the 19th net loss over the last 21 quarters, according to a service release. “The Postal Service is doing its part within the bounds of the law to right-size the organization, and I am very proud of the achievements we have made to reduce costs while significantly growing our package business,” Donahoe said in a formal statement. “We cannot return the organization to long-term financial stability without passage of comprehensive postal reform legislation.” Approximately 22,800 postal employees took advantage of a voluntary early retirement program and enabled the service to cut labor costs in 2013, according to a statement from Joseph Corbett, USPS vice president and chief financial officer. The Postal Reform Act would also reduce the pre-funding requirement for retiree health benefits from 100 percent to 80 percent of the projected liability, according to a Congressional Research Service report. Additionally, it allows for the Postal Service to use up to $6 billion of any possible funding surplus to repay debt obligations. As it stands and if no legislative action is taken, the Postal Service is at risk of defaulting on $5.7 billion in retiree health benefits because of a prefunding payment due on Sept. 30, 2014, the Feb. 7 release states. Elwood Brehmer can be reached at [email protected]

Vigor Industrial close to deal for Seward Ship's Drydock

Vigor Industrial, which operates the Ketchikan shipyard, is poised to acquire Seward Ship’s Drydock operations. It’s unclear when an agreement might be finalized, Vigor spokesman Brian Mannion said Feb. 3, but he said the company excited about expanding in Alaska. “We are looking at making investments in the workforce (in Seward) very similar to what we’re doing in Ketchikan,” Mannion said. Vigor purchased Alaska Ship and Drydock operations in Ketchikan in early 2012 and is currently in the midst of more than $130 million of expansion investments at the facility. The Portland, Ore.-based shipbuilding and repair company operates seven yards in the Pacific Northwest. Aside from the business-to-business transaction, the Seward City Council will have to approve lease and operations and maintenance contracts with Vigor as the city owns the 11-acre parcel that Seward Ship’s and Drydock calls home, city manager Jim Hunt said. “I think I can safely say everybody here in Southcentral is really excited about this opportunity and what it means not only to Seward and the Kenai (Peninsula), but all of Southcentral,” Hunt said. Vigor has plans to hold workforce development courses in the area geared towards the basic aspects of ship work, Mannion said. “Beyond strengthening our business, we look forward to providing even greater family-wage job opportunities for Seward’s current workforce and Alaskans overall,” Vigor President and CEO Frank Foti said in a formal statement.” Primarily a ship repair facility, Seward Ship’s Drydock’s workforce peaks at about 80 workers during the busiest times said Jim Pruitt, company president. “The yard is growing and I think Vigor is the proper one to pass the baton to to take it to the next level,” Pruitt said. The City of Seward submitted a $7.9 million appropriation request to the Legislature this session to fully-fund construction of a roughly $29 million breakwater in the area immediately surrounding the shipyard. Hunt said if the request is approved, construction of the breakwater would begin after the fishing season this fall. It is all a part of a larger Seward Marine Industrial Center plan, he said, that the city has for the land it owns across Resurrection Bay from the population center. Elwood Brehmer  can be reached at [email protected]

Forecasted gov't spending cuts could slow state economy

Alaska’s economic outlook for 2014 is tempered versus recent years, largely due to cuts in government spending according to state economists. Anchorage-based Northern Economics Vice President and Senior Economist Jonathan King told World Trade Center Alaska members in Anchorage Feb. 4 that he expects marginal growth in the state’s economy at around 0.1 percent in the coming year. State spending is no longer masking federal cuts, he said. “Federal spending dropped a while ago and now state spending is slowing,” King said. The $2.2 billion state capital budget for the current 2014 fiscal year was the third-smallest in the last 15 years when adjusted for inflation, according to King. If it passes the Legislature similar to how it has been proposed by Gov. Sean Parnell, the fiscal 2015 capital budget, at nearly $1.7 billion, will be 22 percent smaller yet. While capital budget cuts often aren’t felt at the local level for several years — it often takes that long for money to be fully disbursed into projects — a more immediate hit to the economy could come in the form of predicted job losses. King said that he is forecasting a loss of 2,300 jobs in two sectors — 1,600 financial and professional services positions and 700 government jobs — in the state over the coming year, but an overall increase of 450 jobs from growth in other industries. That would equate to 0.5 percent growth in the job market. Those numbers mainly represent the direct and indirect impact of shrinking government spending, he said. “I think that government (job losses) could actually be worse than our official predication,” King said. Parnell’s proposed budget release in December calls for the state to cut about 150 positions, mainly through attrition, over the coming year. King made his presentation hours before Flint Hills Resources announced it would be closing its North Pole refinery and cutting about 80 jobs before June. Job growth should continue in health care and education, the fastest growing sector in the state’s economy over the past decade, with the addition of 950 positions, King said. Roughly 70 percent of new jobs created in the state in the last five years were in health care, he noted. Still, growth in the industry will almost certainly slow in 2014 base on King’s forecast. If 950 jobs are added, that would equate to 1.2 percent growth versus the about 4.5 percent annual growth seen in recent years. He said that while he is projecting 200 new jobs in natural resources fields, the accuracy of that prediction would depend on Chinese markets. If China’s economy improves, the industry could outpace forecasted growth, and it could lag with a slow Chinese economy, according to King. As the number of cruisers continues to rebound to pre-recession numbers, King said tourism businesses should add about 700 new jobs in 2014. The construction industry should also see about 200 additional jobs, which would take it to a 20-year employment high of more than 21,000 peak-season positions. The University of Alaska Anchorage Institute of Social and Economic Research released a strong construction spending outlook of about $9.2 billion for 2014 on Jan. 28. That would be an 18 percent increase over last year and could be attributed to a 34 percent spike in North Slope oil and gas work, which could be up to $4.3 billion in the coming year. Despite the lukewarm forecast, King said there is still a “sense of optimism” surrounding the economy in the state. The fact that Anchorage, the state’s business hub, averaged sub-5 percent unemployment in 2013 could have something to do with that mood. “I think it’s going to be a solid year here (in Anchorage); I think it’s a wait-and-see year,” he said. The Anchorage Economic Development Corp.’s 2014 economic forecast released Jan. 29 projects steady growth at about 0.8 percent and 1,200 new jobs in the city for the upcoming year. Elwood Brehmer can be reached at [email protected]

Arctic Commission delivers first report to Legislature

Sen. Lesil McGuire said she wants 2014 to be the “year of the Arctic” across Alaska during a meeting with other legislators Feb. 4. McGuire, R-Anchorage, and Rep. Bob Herron, D-Bethel, are co-chairs of the Alaska Arctic Policy Commission, which released its preliminary report to the Legislature Jan. 30 following nearly a year of work. “We are, have been and are going to play a key role in Arctic policy as the Arctic is our future,” Herron said to the joint House Economic Development, Trade and Tourism and Senate World Trade committees. The 26-member commission comprised of 10 legislators, federal officials and industry stakeholders was formed out of the Northern Waters Task Force last March. White House officials also released their “Implementation Plan for the National Strategy for the Arctic Region” Jan. 30. The administration’s report follows the May 2013 release of an Arctic strategy report that Arctic Policy Commission members have criticized for not including more about economic development and potential community benefits in the region. “Every paragraph” of a comparable Canadian report references Arctic residents and their role in the country’s regional goals, McGuire said, while a draft of the May 2013 White House report focused mainly on security concerns and national interests. The guidelines to the latest federal plan call for an Arctic strategy that can “advance United States Security interests, pursue responsible Arctic region stewardship and strengthen international cooperation.” The 130-page preliminary state report contains a vision statement with four points. Those are that “the State of Alaska envisions an Arctic that: values community sustainability and thriving cultures; advances economic development and a healthy environment; ensures public safety and security; (and) incorporates transparency and inclusion into decision making.” It also contains 16 policy recommendations that emphasize striking a balance between resource development and wildlife and fisheries management. Additionally, the commission calls for new ways of dealing with a changing Arctic climate, strengthening relationships with Canada and Russia, and increasing maritime and emergency response infrastructure in the region. Specifically to resource development, the report requests the creation of a revenue-sharing mechanism for communities impacted by resource development — “perpetual trust funds (where lacking) to finance community needs beyond the life of non-renewable resources” are suggested. McGuire said Alaska can “arrive on time” to the Arctic discussion and influence federal policy by making its objectives heard by the federal government. A final report from the Arctic Policy Commission is due Jan. 30 2015, after the Legislature and other leaders across the state review the current draft. The final report will be key as the U.S. takes the chair position for two years at the eight-member international Arctic Council next year, McGuire predicted. To that end, federal officials are going to hold public meetings across the state in the coming year to hear what Alaskans think the country should do as the Arctic Council chair, Herron said. He encouraged legislators to attend the listening sessions in their respective jurisdictions in a further attempt to have the state’s interests heard. In terms of policy, the Arctic Alaska is demarcated as the area north and west of a line roughly following the paths of the Yukon and Kuskokwim rivers across the state and south to include Bristol Bay and the Aleutian Islands, according to the state report. The Bering Sea is included because the Bering Strait is likely to be a major travel corridor for ships traveling the Northern Sea Route if Arctic sea ice recedes as projected in the coming years, Herron said. McGuire and Herron are working on an Arctic legislation package to help prepare the state for investment in the region, the pair said in a Jan. 16 release. Last session Herron introduced House Bill 165 that would establish an Arctic Port Authority and McGuire is drafting a bill to establish a state fund that could serve as a financing mechanism for future infrastructure development. A piece of infrastructure that is already in the works is a deepwater port somewhere on the Seward Peninsula. The design stage of the project is being led by the U.S. Army Corps of Engineers, which has selected Nome and Point Spencer, or a combination, as most suitable to hold a deep-water port. Cape Riley, northwest of Nome, is also being investigated as an option for additional shallow-draft infrastructure, Corps of Engineers project manager Lorraine Cordova told the Joint Transportation Committee Jan. 30. Cordova said the intent was to have the project narrowed down to a single preferred alternative by March. That isn’t likely to happen, she said, as Corps of Engineers leadership has asked for investigation into 23 possible combinations of development involving all three sites. That could push the timeline for a completed plan ready to be taken to Congress for funding back from an original goal of early 2015, Cordova said. A port in the region capable of holding large vessels would serve as a base of operations for vessels supporting Outer Continental Shelf oil and gas exploration and freight vessels traversing the Arctic sea routes. Major infrastructure such as dredging and dock and causeway extensions would be 65 percent funded by the federal government with state and local matches, she said. Local service features would receive no direct federal money. When asked what her best guess was as to when the project would be completed, Cordova said “the stars would really have to align for 2020 to occur,” and 2030 would be a more likely timeline. Elwood Brehmer can be reached at [email protected]

Saving cash, better communication top DOT aviation priorities

In-step with Gov. Sean Parnell’s message of fiscal restraint, Department of Transportation and Public Facilities Deputy Commissioner John Binder said the Statewide Aviation division is returning to its basic responsibilities. “Along the line of the governor’s State of the State address (Jan. 25) is a focus a lot on our core competencies and our core mission — making sure we’re providing that rural access, fix and maintain the things we have and finishing everything we’ve started without a whole lot of emphasis on going out and looking for new projects,” Binder said. After joining DOT in June 2013 as aviation operations manager, Binder took over for former deputy commissioner and head of state aviation Steve Hatter Jan. 7. He will address the Alaska Air Carriers Association Feb. 18 at its annual convention in Anchorage. Winters with several freeze-thaw cycles, such as the one the state is experiencing now, strain localized airport operations budgets by forcing additional resources and money towards sanding, de-icing and surface maintenance, Binder said. The funds not used in winter typically go towards reconstruction and deferred maintenance after breakup and until the new fiscal year that begins each July 1. In his fiscal year 2015 capital budget proposal, Parnell appropriates $209.5 million towards the state Airport Improvement Program. Of that, $170.9 million is project-specific funding from the Federal Aviation Administration. The current 2014 fiscal year budget has $217.8 million for airport projects, of which $206.1 is federal money. While the proposed state contribution increased by $28.6 million year-over-year, the dollars going into state-run general aviation airports could fall by $8.3 million. Ted Stevens Anchorage International Airport and the Fairbanks International Airport — the Alaska International Airport System — have separate budgets. There are several major airport rehabilitation and improvement projects across the state scheduled for the upcoming construction season in the effort to maintain existing infrastructure. Runway 7L-25R in Anchorage will enter a rehab project this spring that will last through 2015. That project is expected to cost $62.1 million, according to the DOT’s 2013 aviation report released last month. Phase two of the taxiway reconstruction at Anchorage will be an additional $9.5 million. At Fairbanks, construction of the $21.9 million Airport Rescue and Firefighting Building — started in September 2013 — will continue into 2015. Stage three of an $11.3 million expansion of the runway safety area at the Kotzebue Airport should be completed this year, the report states. Also in Northwest Alaska, a $15 million rehab and extension project of both runways at the Ambler Airport will commence when the weather allows. Projects that began last year in Western Alaska will continue this year. Work totaling $27 million to expand the runway safety area and resurface the runway in Unalaska will resume; and a $30 million project to relocate the Tununak Airport will continue. One of the things Binder has seen improve in his short time with the department is its exchange with the aviation industry and operators at small airports, he said. “We’ve really worked hard in the last year to reinvigorate our communications with the air carriers, primarily because they’re the ones that are seeing the conditions of our airports on a daily basis,” Binder said. The pilots flying in and out of small airports across the state are often the “first line of defense,” he said, against potential hazards such as uneven runway pavement, washed out gravel and missing lights, that might otherwise go unnoticed. “All the carriers now — and we update it regularly — all have key points of contact for every airport out there with alternates and backups,” to relay safety concerns, Binder said. If the contacts cannot be reached, carriers are encouraged to contact the regional DOT directors, he said. Alaska Airports Association Executive Director Jane Dale said she would still like to see quicker response and issuance of Notices to Airmen, or NOTAMs, at smaller airports, but that the department’s efforts are noticeable. “Communication with Binder as well as (former deputy commissioner) Hatter is greatly improved,” Dale said. DOT is in the midst of an eight-month process to develop an airport needs directory in conjunction with the Alaska Air Carriers Association, according to Binder. The directory will be a record of all the infrastructure maintenance and improvement needs at every airport in the state, he said, and represent billions of dollars worth of work. Binder referred to it as a “wish list” of projects over the next 20 years. Part of improving rural airport maintenance will include continuing operator training with heavy equipment at the Pipeline Training Center in Fairbanks, Binder said. Numerous village airports are run by groups contracted with DOT to maintain the facilities. Last year the department trained contractors from 14 rural airports on lighting system maintenance, equipment operation and maintenance and safety procedures in two courses. The training was funded through a Denali Commission grant. Binder said plans are to have three more courses in 2014. Training the contractors saves significant resources, department officials have said, by eliminating the need to send individuals out to remote locations for issues the contractors can now resolve. Elwood Brehmer can be reached at [email protected]

FAA backs off 2012 rule restricting night approaches

The Federal Aviation Administration has “backed way off” on a rule implemented in October 2012 that could have restricted night operations at more than 100 airports across Alaska, Transportation Department deputy commissioner John Binder said. The change in FAA policy sparked a nationwide review of aeronautical surveys of airports to determine if obstructions penetrate the 20-1 ratio approach minimum standard at a given runway. FAA regulations require a clear approach path extending up to 10,000 feet beyond the end of a runway in some situations. A 20-1 approach ratio refers to the slope of an airplane’s descent as it approaches the runway. Common obstructions include trees, buildings and radio or cell phone towers. Previous to a relaxing of the contested regulation, the FAA could close airports to night and instrument flight rules, or IFR, landings on runways with obstructions, or those without up-to-date aeronautical survey data — potentially impacting more than a third of the state’s 254 airports, according to the Alaska Air Carriers Association. As of mid-December, the FAA has granted affected sites a “pretty significant grace period,” Binder said, allowing for up to a year for some obstructions to be cleared and surveys to be completed. “Now, when FAA identifies an obstruction, rather than saying, ‘no access,’ what they’ve said is, ‘You have 30 days to verify what we think is true is actually true, also to deal with that obstruction in that 30 days if you can,’” Binder said. Obstructions penetrating the 20-1 approach angle by more than 11 feet must be dealt with within 30 days of discovery, according to the revised rule. Alaska Airports Association Executive Director Jane Dale said the change came quickly after a meeting with Alaska Transportation Department and aviation industry officials. “We are very appreciative of the local FAA on this issue with support to resolve the schedule issues,” Dale wrote,” We are also very pleased with (state DOT) taking the lead on developing protocols to become proactive in regards to care of 20-1 approach slope and becoming more aware of the flatter precision approach slopes of 43-1 and 50-1.” DOT is in discussion with the FAA on ways to conduct revised and cheaper airport surveys that would satisfy the new requirement, Binder said. One survey can cost more than $250,000 he said, something the state cannot afford to do for every airport in need. He said the department is trying to get runway ends surveyed for roughly $20,000 to $30,000 and capture the information necessary, rather than surveying the entire area surrounding a given airport. Elwood Brehmer can be reached at [email protected]

Private spending to grow $1.2B in '14

Investments in North Slope oil and gas projects will be the main driver behind statewide construction spending growth in the coming year, according to a report by the University of Alaska Anchorage Institute of Social and Economic Research. The annual forecast projects oil and gas spending on construction work in the state to total $4.3 billion in 2014, up 34 percent from $3.2 billion last year. That sector accounts for 46 percent of all construction spending in the state, estimated to be about $9.2 billion. Last year’s initial projection of $8.4 billion was revised to $7.8 billion after oil and gas spending lagged behind expectations in 2013, setting up an even larger increase in anticipated spending this year. The overall construction spending forecast of $9.2 billion is an 18 percent increase versus 2013. “An 18 percent increase over last year — it’s pretty amazing. I think we can attribute most of that to SB 21,” the oil tax reform legislation signed by Gov. Sean Parnell last spring, Associated General Contractors of Alaska Executive Director John MacKinnon said. The “More Alaska Production Act,” touted by Parnell and Republican legislators as a way to spur investment in the state by oil producers, went into effect Jan. 1. Opponents to the tax structure change got Proposition 1, a referendum to repeal the law, on the August primary ballot after a successful petition campaign. MacKinnon said the “rosy” forecast, as he called it, extends beyond the oil and gas industry. Construction employment peaked last year in August at 21,600 jobs across the state, according to Labor Department figures. It marked the most construction jobs in Alaska since September 2005. Combined private spending in other areas is expected to increase in 2014 as well, by about 5 percent, to about $2 billion. Despite a $1.7 billion cut in the 2014 fiscal year state capital budget — excluding federal appropriations — public construction spending is projected to grow slightly more than 7 percent, from $2.7 billion in 2013 to $2.9 billion this year. That is due in large part to the record state capital spend of $2.8 billion in fiscal 2013, which ended last June 30, when the $453 million construction bond package approved by voters in the timeframe is included. It can often take multiple years for money allocated to public construction projects to be dispersed, as large projects usually are not “shovel ready.” Likewise, it will probably be several years before the impact of the 2015 fiscal year capital budget — proposed by Parnell at a $600 million state spend — will be felt across Alaska, MacKinnon has said. Along that line, activity at the state-funded Port MacKenzie and Tanana River rail projects will continue as expected this year, officials familiar with the projects have stated. The oil and gas spending on the North Slope will come from ConocoPhillips drill work at Kuparuk, its Greater Moose’s Tooth prospect in the National Petroleum Reserve-Alaska, and development of the CD-5 project west of the Colville River, according to the report. Additionally, BP will concentrate on well workovers in its existing fields. The company is expected to increase capital spending “by several billion (dollars) over the next five years,” the report states. ExxonMobil will continue developing its Point Thomson field east of Prudhoe Bay, which ExxonMobil says requires up to 1,200 workers during the peak winter season. Major Cook Inlet player Hilcorp announced in December it planned on spending about $300 million on capital projects in the basin in 2014, similar to its expenditure last year, and drill about 10 new wells. Alaska mines will likely hold back in 2014. The $205 million projection is about $125 million less than the 2013 forecast, largely due to a drop in the price of gold, the report states. It forecasts $110 million being spent to run the six large operating mines in the state and less exploration work being done at the Livengood and Donlin Creek gold prospects, along with Pebble. A combination of public and private dollars, spending by energy utilities should remain fairly flat at about $850 million, ISER predicts. Construction of new power plants by Matanuska Electric Association and Municipal Light and Power, along with infrastructure expansion by Enstar Natural Gas around Homer will drive spending in Southcentral. Golden Valley Electric Association’s acquisition and subsequent emissions retrofit of a coal-fired power plant in Healy will be big in the Interior. Verizon’s push into the Alaska market will be a boost for telecom spending as well, the report projects. Construction activity at the state’s military installations “will take a big jump this year” to $103 million, the report states. Military construction work totaled $33 million last year. The 2014 budget includes seven projects at Fort Wainwright, the largest of which is a $36 million warm-storage hangar. Defense officials have warned that the spike may be short-lived, however, as uncertainty looms over future federal budgets and President Barack Obama’s directive to cut defense spending continues. Spending on health care facilities was down in 2013 as hospitals in Barrow, Nome and Fairbanks opened their doors and it is expected to remain steady at about $230 million this year. The largest project will be construction of state-financed patient housing and an associated parking garage at the Alaska Native Medical Center in Anchorage. The state contribution to ANMC work is $35 million. Smaller projects around the state including hospital expansions in Ketchikan and on the Kenai Peninsula, along with a veterans’ long-term care facility in Haines will collectively make up the bulk of health care construction in the coming year. Residential and commercial building will combine to account for $650 million worth of construction activity. While the Cabela’s and Bass Pro Shops superstore projects in Anchorage will wrap up, work on large office complexes in the city, including the new Cook Inlet Region Inc. headquarters and the 100,000 square-foot JL Properties project in Midtown Anchorage, will pick up the slack. The tight Southcentral housing market did not lead to increased building in 2013, and “market pressure will result in a modest increase in new housing starts this year,” there and in Southeast, the report states. Elwood Brehmer can be reached at [email protected]

Alaska Air Group ends 2013 with another record quarter, year

Alaska Air Group Inc. continued to set profitability records in 2013. The parent to Alaska Airlines and Horizon Air reported a net income of $383 million for 2013 in its Jan. 23 earnings report, up nearly 13 percent from a then-record $339 million for 2012. The company’s fourth quarter alone may be more impressive. Alaska Air Group improved on a record $50 million net income in the last months of 2012 with $77 million in profit for the fourth quarter of 2013, or 54 percent growth. For the year, only the 2013 second quarter didn’t result in a record profit for Alaska Air Group. The latest period extended its run of profitable quarters to 19 in a row. The yearly net income equates to $5.40 per share, up from $4.73 per share in 2012. “Our operational performance continues to lead the industry,” Alaska Air Group President and CEO Brad Tilden told company investors Jan. 23. The company held $1.3 billion in unrestricted cash and securities at the end of 2013. After-tax return on invested capital, or ROIC, was 13.6 percent for the year, up from 13 percent in 2012. Fourth quarter revenue of $78 million was up 7 percent on a 5 percent increase in capacity year-over-year. Full-year operating revenue was up 11 percent at $5.15 billion, according to Alaska Air Group’s financial statement. Unit costs were down slightly in 2013, which Tilden said he expects to grow by about 1 percent in 2014. Investments in IT infrastructure — a transition from Windows XP to Windows 7 operating systems and an outsourcing of the company’s data center — will push operating costs higher in the first quarter, Air Group Vice President Glenn Johnson said. Those costs are expected to flatten later in the year. Increased bag and change fees — announced last summer — are expected to provide additional income in the coming year, Tilden said. The strong returns have allowed the company to contribute to its employee pension plans to the point where they were fully funded by the end of last year, Tilden said. “We believe this is unique in the airline industry and we’re glad our financial success has provided retirement security for our employees,” he said. Additionally, employees earned $105 million in incentive pay in 2013, meaning each employee could expect a check equal to nearly 5 weeks of pay, Alaska Air Group Vice President and Chief Financial Officer Brandon Pedersen said in an interview with the Journal. He said the management team puts an emphasis on paying high wages and expecting quality employee performance in return. “I think this industry has a pretty crummy track record of how we collectively work with labor, how the employees have been treated. That manifests itself in a crummy on-board experience,” for passengers, Pedersen said. To that, Alaska Airlines led all major U.S. airlines in on-time performance in the year ending in November 2013, according to the U.S. Department of Transportation. Alaska Air Group also inked five-year deals with Alaska Airlines pilots and Horizon flight attendants and reached a tentative agreement with Alaska Airlines flight attendants in the last year. The company continued its stock buyback program in 2013, repurchasing nearly 2.5 million shares for $159 million, bringing the buyback total since 2007 to $478 million, the report states. Alaska Air Group stock was trading at $79.75 per share on the New York Stock Exchange as of late Jan. 28. Pedersen said that the company’s management team looks at itself as more than just an airline. “We want not to have the reputation of being a high quality airline with a good balance sheet; we want to be known as a high quality industrial company and have a balance sheet that looks more like a regular company, not like a regular airline,” Pedersen said. That philosophy is born out in Alaska Air Group’s debt-to-capital ratio. In early 2009 its “debt-to-cap” ratio was 81 percent, Pedersen said. By the end of 2013 it was down to 35 percent. The push towards lowering company debt is something unusual in an industry where borrowing money is easy. “People are often eager to loan to airlines because the collateral is mobile. That’s something that differentiates our industry from others,” Pedersen said. “If we default on an airplane, somebody can literally come and fly it away and resell it or re-lease it to another operator.” Lower interest payments on less debt have contributed significantly to recent higher profits, he added. Not coincidentally, Standard and Poor’s upgraded Alaska Air Group’s credit rating to “BB+” in the past year. Pedersen said emphasizing fuel efficiency and flying one aircraft — Boeing 737s at Alaska Airlines and Bombardier Q400s at Horizon — have helped Air Group’s bottom line. “The industry standard measures for cost is unit cost excluding fuel, or the cost to fly one seat one mile excluding fuel,” he said. “We certainly report that, but we also like to talk about cost per available seat-mile including fuel because fuel is a third of our cost structure and to the extent that we can burn less than the other guy it is a competitive advantage.” An International Council on Clean Transportation report released in September found Alaska Airlines to be the most fuel-efficient major airline in the country, based on Bureau of Transportation Statistics data. Alaska Airlines is also in the midst of a delivery program with Boeing for 38 new 737-900ERs through 2017. The 900ER is the latest and most fuel-efficient adaptation of the 737 and will gradually replace the airline’s 737-400s, company officials have said. Flying a single aircraft type is a model used by successful airlines around the world, and was started domestically by Southwest Airlines, Pedersen said. Not only does it eliminate redundancy for mechanic and pilot training, he said the model improves operational efficiency by allowing planes to be swapped on routes when issues arise and gives customers a recognizable look and feel every time they board an Alaska Air Group plane. Elwood Brehmer can be reached at [email protected]

Housing, commercial markets near capacity around state

The largest real estate markets in the state remained strong in 2013, largely due to lean inventory. Brandon Walker with Pacific Tower Properties told members of the Building Owners and Managers Association Anchorage Jan. 10 that the commercial real estate market in Anchorage is “extremely healthy” across its subsets. Class A office space was running at about 4.3 percent vacancy in the city at the end of 2013, and 5.7 percent of Class B offices were empty, according to Walker. Both office class vacancy rates dropped about 0.9 percent over the year, he said, after a fairly flat 2012. “The drop in vacancy seems to be kind of a byproduct of growth in certain industries like oil and gas and legal services,” Walker said. He added that Anchorage office tenants are hesitant to move right now — choosing to stay put and renew their leases unless they’re displaced. “There was a little bit of a pause in new Class A deliveries in 2013 and I think this allowed for some absorption,” of vacant properties, Walker said. When a couple new major office complexes open late this year or early in 2015, Walker predicted the Class A market could see a 2 percent upswing in vacancy. He said that even if his forecast is correct the office market would still be on solid footing. The 100,000 square-foot JL Properties office building under construction at the intersection of C Street and International Airport Road in Midtown Anchorage is about 20 percent pre-leased and available space in the future 110,000 square-foot, eight-story Cook Inlet Region Inc. headquarter complex is about 40 percent early-occupied, according to Walker. CIRI has said corporate operations would take up slightly more than half of the building space at Fireweed Lane and the Seward Highway, leaving the remaining space to be leased out. Overall retail vacancy in the Anchorage Bowl is at 4 percent, Walker said, near half the national average of 7.7 percent. Enclosed, or mall space ended 2013 at 3.9 percent vacancy, down from 4.2 percent at the beginning of last year. Simon Property Group officials at the Fifth Avenue Mall have said their space is almost completely occupied. Available power center space disappeared quickly in 2013, from 4.6 percent at the start of the year to 2.7 percent vacancy now as remaining spaces filled in the Tikahtnu Commons shopping center. Inline, or general retail vacancy increased somewhat to 5.7 percent in 2013 due to “attrition” to power centers, Walker said. Roughly 300,000 square feet of new retail space is on its way to South Anchorage in the next few years. The Gallo Center near C Street and Dimond Boulevard will open late this year with 40,000 square feet of available shop space. Renovations to the Dimond Center Mall and a new traffic pattern inside the mall will add another 40,000 square feet of retail space to the existing structure. “I think the key word at the Dimond Center right now is experience,” Walker said. “They really want to generate a new shopping experience, so look for some new concepts and merchandising strategies.” JL Properties is developing the 220,000 square-foot Outlets of Alaska on 27 acres south of Dimond Boulevard on C Street. That mall is currently about 65 percent pre-leased, Walker said. Industrial vacancy in Anchorage is very low, at 1.7 percent. Walker said industrial space rent stayed in the $1.10 per square-foot range in 2013 and didn’t correspond with the tight market. He suggested there might be some vacant properties not on the market that are skewing those figures. Residential The home market in Southcentral grew slower in 2013, while the length of time single-family homes remained on the market continued to shrink. In Anchorage, the average residential sale price for the year was $346,000, up 2.6 percent from 2012, when sale prices increased 4.7 percent, according to Alaska Multiple Listing Service Inc. data. The average property was on the market a mere 47 days, down from 71 days in 2011, which was the last of five years that saw houses for sale for more than two months, on average. The market time was a return to peak the market years of 2004-06. In the Matanuska-Susitna Valley, average home prices rose 2.6 percent to $238,000 in 2013. In 2012, prices rose 2.9 percent. Mat-Su home prices are up 27 percent since 2004, when the average sale price was $187,000. Listings in the area were on the market for an average of 73 days, down from recent 80-plus day highs from 2008-2011, but not yet back to the 60-day average listings of 2004. Statewide, home sales averaged $304,000 through the second quarter of 2013 — up 2.3 percent year-over-year, according to the most recent Alaska Housing Finance Corp. data available. Year-to-date loan activity in the state for single-family purchases was up 1.2 percent over the first half of 2012. In Fairbanks, loan activity was down 15 percent year-to-date for the first half of the year and the average sale price was $252,000. There was a modest relaxation of rental vacancy rates across much of the state, as rental prices increased slightly. In Anchorage, the tightest rental market in the state, overall vacancies increased from 2.6 percent in 2012 to 3.3 percent last year, according to AHFC. The average rental price per month across all subsets rose 3.9 percent to $1,119 in the city. The Kodiak Island Borough had the highest average monthly rental prices at $1,230 with 4.5 percent vacancy, up from $1,193 per month and 2.3 percent vacancy in 2012. Residential vacancy rates increased from 8.3 in 2012 percent to 9.2 percent last year in the Fairbanks North Star Borough. Prices rose from $1,013 to $1,036 per month. Elwood Brehmer can be reached at [email protected]

Bed tax numbers, 2014 visitor outlook strong

Hotels, lodges, and bed and breakfasts in the state’s major destinations had a healthy year in 2013 based on preliminary bed tax results. When the final numbers are tallied, Anchorage is expected to have generated approximately $23.5 million through its bed tax for the year, up 3.9 percent from 2012. If the prediction made by Jan. 16 by Visit Anchorage President and CEO Julie Saupe at the marketing agency’s annual community report, it would be a growth of more than 22 percent from the $18.3 million the city collected in 2009. The $23.5 million bed tax figure would also be a record for Anchorage. Saupe said she expects the strong numbers to continue in the coming year with “moderate” growth in 2014. “We now have four consecutive years of travel growth and we expect that trend to continue,” she said. Anchorage’s bed tax revenue is split evenly between the municipality’s general fund, paying down bond debt on the Dena’ina and Egan convention centers, and Visit Anchorage’s marketing campaigns. While Alaska’s economy was largely spared from the “Great Recession” as the housing market in the state remained robust and the unemployment rate has been less than the national average for more than five years, visitors from Outside with shrinking disposable incomes stayed home more and spent less when they did travel. As a result, tourism was one of the hardest-hit industries in the state and is just now fully recovering. More than 1 million cruisers visited the state last year for the first time since 2009. Saupe said bookings at the venues are outpacing projections made when the Dena’ina Civic and Convention Center opened roughly five years ago. In addition to the Alaska Federation of Natives Convention, which will return to Anchorage in October, several national and international meetings will be held in the city in the coming year, Saupe said. The National Indian Education Association Convention will dovetail with AFN, she said, and bring with it about 2,000 attendees. Roughly 1,800 people will come to Anchorage for the Council of State Governments meeting in August. Another 1,400 are expected for the International Epidemiological Society meeting the same month and the National Congress of American Indians in June. Holland America Lines’ cruise ship the ms Amsterdam will return to Anchorage and call on the city four times four times from May to August, as well. In Fairbanks, bed tax collections were $2.53 million through November, nearly equaling the full-year total of $2.54 million for 2012, according to data available from the city. The collection total for 2011 was $2.47 million. Last year was the first that the AFN Convention was held in Fairbanks since 2010. Fairbanks Convention and Visitors Bureau President and CEO Deb Hickok said 2014 is off to a good start with Asian charter flights arriving for Aurora viewing tours. The city will have a particularly busy March in 2014. Along with the Open North American Championship mushing race and month-long World Ice Art Championships traditionally held in the city, the Tanana Chief’s Conference annual convention begins March 10 and the city will play host to the 2014 Arctic Winter Games March 16-22. Fairbanks Host Society President Jeff Jacobson said the Games are expected to draw up to 2,000 youth athletes and up to 4,000 people total to Interior for the week. A push to expand Alaska’s presence in the international tourism market — projected to outpace domestic market growth in coming years — sent Visit Anchorage representatives to Australia, New Zealand, Germany, South Africa and India, Saupe said. “While international vacations make up about 10 percent of visitors to Alaska, we know that travelers from overseas tend to stay longer and spend more,” she said. Elwood Brehmer can be reached at [email protected]

LNG export deal would end AGIA in-state transport limit

The agreement Gov. Sean Parnell’s administration signed for a large commercial liquefied natural gas project could have a major impact on the state’s separate push to develop a smaller gas project, Alaska Gasline Development Corp. President Dan Fauske said during a Jan. 24 presentation. Senate Bill 138, which Parnell’s office introduced to the Legislature the same day, not only outlines the state’s share of an LNG export project with the “big three” North Slope producers and TransCanada, but would also terminate the Alaska Gasline Inducement Act license the state has had with TransCanada since 2009. Ending AGIA would lift the 500 million cubic feet per day transport limit on Alaska Stand Alone Pipeline that AGDC is working on, Fauske said. Originally designed as a 24-inch, high-pressure line from the North Slope to Enstar Natural Gas Co.’s Beluga Southcentral distribution facility, the $7.7 billion, in-state pipeline project has morphed to a 36-inch, low-pressure line. “The design that we’re continuing to work on is at 500 million cubic feet per day. The pipeline can certainly haul more gas than that,” Fauske said. Current peak demand in the state is for about 240 million cubic feet, or mmcf, of gas per day. Numerous options remain for surplus gas, even with the 500 mmcf daily cap, Fauske said. Agrium Inc. has begun a long process to restart its fertilizer plant on the Kenai Peninsula, a possible large gas consumer. Additionally, Donlin Gold’s mine plan calls for a 300-mile gas pipeline from Cook Inlet to its Donlin Creek mine site where a natural gas-fired power plant would be built to power the mine. Even if the AGIA transport limit remains in place, Fauske noted that it is for gas produced north of the 68th parallel. Gas produced south of the line delineating the North Slope from the rest of the state could be added to the pipeline to exceed the 500 mmcf limit. Outside of Cook Inlet, Doyon Ltd. is exploring for oil and gas in the Interior near Nenana. Fauske said SB 138 is a “double-edged sword” for AGDC, as Parnell has urged the state corporation to align the small and large projects, adding to the goal of “getting gas to Alaskans.” Under the “Heads of Agreement” statement signed by the commercial gas players Jan. 14, an AGDC subsidiary would finance the state’s share of an LNG facility near Nikiski. TransCanada would finance the state share of the pipeline and the Slope processing plant. In addition to using a larger diameter line, the stand-alone project has changed from an enriched gas to lean gas design, Fauske said. “Lean gas is energy rated for delivery to and consumption by consumers,” he said. The lean gas design means two gas separation facilities — at roughly $250 million apiece — wouldn’t be needed to separate out liquids from the methane that largely comprises natural gas. While the liquids would offer a wider range of commercial possibilities, Fauske said studies by AGDC concluded that LNG offers the most reliable commercial market when compared with natural gas liquids or gas-to-liquid options. The state’s contribution in the stand-alone project would likely be in the $400 million range, about 5 percent of the total cost, Fauske said. The rest would be financed through bonds. He said putting additional state money into the project wouldn’t impact the final price of gas significantly. AGDC calculated that for every additional $1 billion the state spent, the gas tariffs would drop only about 50 cents per thousand cubic feet, or mcf, of gas. According to AGDC estimates, gas would be delivered to Fairbanks consumers in the $9 range per mcf and to Anchorage at around $10 per mcf. The Fairbanks estimate is less than earlier projections because a separation plant at the 30-mile Fairbanks spur takeoff point is no longer needed. “We’ve always had a mantra that if you can’t beat the price of imported LNG it’s a fools errand,” Fauske said. He emphasized that every year the project is delayed the $7.7 billion cost estimate — in 2012 dollars — grows by $210 million. That added cost would be carried into the final gas tariffs. The current design also includes about 1.5 percent propane in the gas mixture, he said, about 4,000 barrels per day. Propane could be used as an easily transportable energy option for rural communities currently relying on fuel oil outside of the natural gas pipeline corridor. To make it all go, a two train, $2.8 billion gas conditioning facility would be built at the head of the 727-mile pipeline at Prudhoe Bay. First gas would reach Fairbanks in 2020 on AGDC’s current project timeline. Fauske said a recourse tariff should be filed with the Regulatory Commission of Alaska in August. Shortly after, AGDC plans to complete its Section 404 wetlands application with the U.S. Army Corps of Engineers, he said. If those steps are reached in the coming year, the corporation will go to an open season in 2015 to solicit bids from prospective partners and gas customers, according to Fauske. Construction would then begin in 2017 on a three-year, winter-summer build cycle. Elwood Brehmer can be reached at [email protected]

AEA recommends 26 projects for seventh round of grants

The Alaska Energy Authority is recommending the Legislature fund 26 heat and power projects through round seven of the state Renewable Energy Fund. If legislators choose to match Gov. Sean Parnell’s fiscal year 2015 proposal for the grant program, the projects would receive a total of $20 million when the money is disbursed in July. The 26 projects were deemed to be highest priority by AEA staff. The authority found that 64 projects — totaling $41.5 million — of the 86 that submitted completed applications by the late September deadline warranted funding recommendations, however there isn’t always enough money to go around, said Sean Skaling, AEA’s deputy director for alternative energy and energy efficiency. “(The Legislature) has generally respected the opinion of AEA, and it’s generally a matter of how far down the list down the list they go before drawing the line,” Skaling said to the AEA board Jan. 14. “That’s the ultimate funding decision.” This year 17 heating and nine electric projects comprise the top 26. Of those, the funding recommended would complete 20, with four in the feasibility phase and two in design, according to AEA. The emphasis on heating is somewhat of a departure from previous years that saw a higher number of electrical generation projects chosen for funding. Skaling said the change is an attempt to help mitigate heating costs in areas of the state where electricity is disproportionately cheaper. Such is the case in much of Southeast Alaska where cheap hydropower is prevalent, but residents primarily use fuel oil for heat. Skaling said his team has seen a “huge” improvement in the quality of applications since the first submittal period, while the number of applications has decreased over the years. “I think (AEA) has become a lot more educated about what works and what doesn’t, and our evaluation is much more sophisticated,” he said. “At the same time the applicants, I believe, have gotten a sense of what works and what doesn’t — what we’re looking for.” Established in 2008, the Alaska Renewable Energy Grant Recommendation Program supports the development of renewable energy projects primarily in rural communities to offset often high energy costs. It was initially meant to provide a total of $250 million in renewable energy development grants over five years, but the Legislature renewed the program in 2012 for an additional 10 years. The state put $25 million towards the program in the current fiscal 2014. To date, $227 million has been appropriated to the Renewable Energy Fund. An October 2012 report evaluating the program done by the Vermont Energy Investment Corp. and the Alaska Center for Energy and Power found that the $96 million invested in operational projects at the time had produced a net benefit of $114 million to participating communities — with a 1.73-to-1 benefit-to-cost ratio. Those projects had also produced more than 23,000 megawatts of power and displaced more than 1.75 million gallons of diesel fuel. After going through technical and economic evaluations by AEA with the help of the Department of Natural Resources and independent economists to ensure their feasibility, the projects are ranked based on weighted criteria, Skaling said. The current cost of energy in the given area is the largest factor, followed by a project’s economic and technical feasibility and the matching funds a community or company can offer. The communities with the top three ranked projects this year — Atka, Chignik and Venetie — all have power costs between 69 cents and 90 cents per kilowatt-hour, according to AEA. Once money is awarded to a project, Skaling said each grantee is required to report to AEA on their progress, monthly during construction and quarterly after a project is completed. Further, he said AEA tracks the energy generation and operation of each project and tabulates those numbers against preconstruction statistics. This allows the authority to measure the net benefit of a project and better calculate its viability, he said. If the Legislature adds to Parnell’s $20 million allocation for the program, two partially funded projects will get full funding, Skaling said, per a Renewable Energy Fund Advisory Committee request. “Their primary recommendation was to take two rather large dollar-figure projects that are in lower cost areas, specifically Stetson Creek and Allison Creek in the Railbelt and Chugach regions, and partially fund those in order to fit in six more projects,” he said. Stetson Creek is a $21.9 million diversion project being done by Chugach Electric Association, which pipes water from Stetson Creek into Cooper Lake on the Kenai Peninsula to increase power production at the site’s hydroelectric facility. AEA recommended a total of more than $3.4 million go to Stetson Creek work. Chugach Electric is expected to complete the project in late 2014. Allison Creek is a run-of-the-river project near Valdez that Copper Valley Electric Association has said it hopes to have in production sometime in 2015. If fully funded, it will receive about $5.9 million from the state in fiscal 2015 and has a total cost estimated of around $22 million. The full list of Round VII Renewable Energy Fund recommendations can be viewed on AEA’s website at akenergyauthority.org/refund7.html. Elwood Brehmer can be reached at [email protected]

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