FISH FACTOR: Awards for crab shell clothes; boards hear advice for cuts

Alaska crab shells are fueling an eco-revolution that will drive new income streams for fabrics to pharmaceuticals to water filters. And for the first time, it is happening in the U.S. and not overseas. The entrepreneurs at Tidal Vision in October made the leap from their labs in Juneau to a pilot plant outside of Seattle to test an earth-friendly method that extracts chitin, the structural element in the exoskeletons of shellfish and insects. Their first big run a few weeks ago was tested on a 60,000 pound batch of crab shells delivered by Trident Seafoods from St. Paul Island. The end product they are going for is chitosan, a fibrous polysaccharide that, among other things, can be woven into fabrics and textiles, and has no end of commercial and biomedical uses. Chitosan can fetch from $10 to $30,000 a pound depending on quality and usages, and up to $150,000 a pound for pharmaceutical grades, said Craig Kasberg, former fisherman and now Tidal Vision’s Captain Executive Officer. Chitosan has been produced commercially in China and India since the late 1950s by using chemicals and waste methods that would never pass the muster of U.S. environmental regulators. That’s all changed with Tidal Vision. “We do not use harsh chemicals and we are able to recycle 89 percent of the chemicals we use. The other 11 percent reacts with everything else in the crab shell — the calcium, protein and lipids — and produces a fertilizer that several agriculture companies are doing trials with,” Kasberg said in a phone call from SafeCo Field, where Tidal Vision was claiming two awards. From the Environmental Protection Agency and the Washington Department of Ecology for Safer Manufacturing and Cleaner Products, he explained. Tidal Vision expects to process 100 million pounds of crab shells during its first year. Shortly after, it projects taking up to 200 million pounds of crab shells from Trident plants, and all shells from the Bering Sea crab fisheries by 2021. “Which is huge considering that with some species they are losing 35 percent in the guts and the shells. So we’re able to cut that in half by processing the shells,” Kasberg said. “I am a strong believer in 100 percent utilization of our resources and working with Tidal Vision has been fantastic,” said Joe Bundrant, Trident Seafoods CEO, in an email. The small company’s long term goal is to build full scale chitin plants next to existing crab processing plants in Alaska, along with mobile plants for areas with smaller catches and shorter seasons. More immediately, Kasberg said Tidal Vision is “vertically integrating into the textile, fiber and commercial filtration markets.” The group’s new clothing line, ChitoSkin, has caught the attention of Grundens, and by next summer, Alaska salmon fishermen may be wearing rain gear that won’t mold or smell. Kasberg said the company also is developing and testing a chitosan filtration system for a coal mining company in British Columbia. “Chitosan reacts very quickly to toxins and bonds really fast. Instead of filling manmade lakes with effluent that is acidic and full of heavy metals, they could instead be pumping out pure drinking water,” Kasberg said. “That’s close to my heart with all the trans-boundary river issues in Southeast, and we really are passionate about accomplishing that.” Board budgets The state Boards of Fisheries and Game got a helpful earful about ways to trim their budget in the face of next year’s fiscal onslaught, and feedback is continuing online. More than a dozen Alaskans shared ideas during a daylong listening session last week in Anchorage focused solely on cutting costs within the Boards’ annual meeting cycles. “Just based on the normal board meeting schedules, we don’t even have enough at status quo in terms of a budget to meet their needs,” said Glenn Haight, Executive Director of Fish and Game Board Support, adding that the combined meeting costs vary each year, but are roughly $500,000. One message was loud and clear at the Anchorage meeting: don’t cut the public out of the rule making process. “We’re not at all interested in helping the department diminish the public’s ability to participate in the regulatory process by supporting any cuts to the board,” said Gary Stevens on behalf of the Alaska Outdoor Council. “We have a hard time understanding why any of the cuts need to come out of the statutorily protected process of regulating fish and game.” Another unpopular idea was extending beyond the current three-year regional meeting cycles, which would save $100,000 for board support tasks. “Don’t move the three-year cycle to five-year cycles,” said Gary Cline of Dillingham. “I do agree that it is too long. Mainly because the decisions made at these meetings have such a huge impact on our Alaskan residents.” Maintaining local board advisory committees also was supported. Haight said that includes travel expenses of $200,000 to $230,000 for members of 60 to 70 active committees. Reducing the number of Fish and Game staff that attends board meetings also was suggested, and there has been much talk about reducing the number of regulatory proposals the boards address — upwards of 400 to 500 each year — or streamlining the process. “I think that individuals should still be able to submit proposals,” Gayla Hoseth of Dillingham told KDLG. “I really believe that one voice is a strong voice. Because one voice could make a difference and I don’t want it to change where we don’t have that voice anymore.” The joint boards plan to meet again in January. Meanwhile, more feedback and ideas are encouraged at an online survey. Cannery call The Alaska Historical Society, or AHS, is seeking sponsors and donors for its Alaska Historic Canneries Initiative. “This all started because people are worried about the state of the old canneries around Alaska, and they are scared that so many are disappearing from the landscape. So we really want to do more to document these places and their stories,” said Anjuli Grantham, a public historian in Kodiak and director for the Initiative. AHS is asking individuals, businesses, and communities to share photos, memories and stories from the canneries, salteries, processors, and herring plants that dotted Alaska’s coasts. “The purpose is to document, preserve, and educate about the history of seafood processing in Alaska,” Grantham said, adding that only two canneries are listed on the national register of historic places in Alaska. The AHS is offering grant money to help with the cause. “It’s a really broad program,” she added. “It could be an oral history project; it could be money to buy lumber if you want to restore a portion of an old cannery building. It could go toward a film or gathering photographs for an archive. If the project has anything to do with the history of the fishing industry in Alaska, you are eligible to apply for funding.” Deadline to apply is Jan. 1. www.alaskahistoricalsociety.org Laine Welch lives in Kodiak. Visit www.alaskafishradio.com or contact [email protected] for information.

A critical year lies ahead for Alaska LNG Project agreements

The coming year is a critical one for the Alaska LNG Project. Continued progress on Alaska LNG is vital to Alaska’s long-term economy, and the state budget. If targets are missed, the state’s future, already cloudy because of short-term state revenue issues, will be challenged. If the project does proceed, the sales of natural gas from the North Slope, as liquefied natural gas, or LNG, will bring new petroleum revenues to the state to replace declining oil income. Also, the construction of a $45 billion to $65 billion project will also be huge stimulus to the state’s economy, reminiscent of the building of the Trans-Alaska Pipeline System in the 1970s. Steve Butt of ExxonMobil, the project manager, will provide an update of a pending labor-needs study for the what’s known as a “giga” project at the Alaska Support Industry Alliance’s annual “Meet Alaska” conference Jan. 8. Alaska LNG involves an 800-mile gas pipeline to be built from the North Slope south through the Interior to Southcentral Alaska. The project involves a large gas treatment plant at Prudhoe Bay mainly to remove carbon dioxide from the gas, the pipeline itself with a thick-wall pipe diameter at 42 inches or 48 inches (both cases are still being studied) and a large natural gas liquefaction plant at Nikiski, the planned terminus of the pipeline on the Kenai Peninsula. Each of the three components are mega-projects in themselves, which led AK LNG to be dubbed a “giga” project by some. Key decisions have to be made in 2016, however. At the forefront are agreements on a set of commercial contracts among the parties involved in the project, which includes the state and the three major North Slope producers: BP, ConocoPhillips and ExxonMobil. Each partner would own about one-fourth of the project, a share that is in line with the parties’ share of North Slope gas reserves, including the state. The concept is that each owner will ship its share of gas through its owned capacity in the project, so that profits are made not only on gas production and sales but also the transportation and processing services. The most important agreements needed include a gas “balancing” contract among the producers that will govern how gas supplies are to be made available if there is a technical problem with production in one of the two fields supplying gas, Prudhoe Bay and Point Thomson. At least one of the partners — ConocoPhillips — says the gas balancing agreement is critical to its participation. This is a complicated issue because the producing companies own differing percentages in the two fields, and arrangements for compensation for emergency gas supply must be worked out in advance. The second most important agreement — and this one is a “must have” for all three of the producers — is a contract on state fiscal terms on gas production, which would assure the companies, and LNG customers, that state taxes on gas won’t change for a period of several years, mostly likely the 20-year or 25-year term of LNG sales contracts. This is a needed because the economic margins in gas production are very thin and the state has a record of frequent changes in taxes on oil production. Without it, buyers are unlikely to sign long-term LNG purchase contracts. A new twist is that an amendment to the state Constitution is needed to allow this, because the constitution now prohibits any Legislature from locking in taxes that a future Legislature can’t change. Alaska voters will have to approve the amendment in the November 2016 general election. That approval is vital if the project is to continue to the next step in mid-2017 of doing final engineering, or front end engineering and design. A critical deadline on this is June 24. That’s when a proposed constitutional amendment, approved by the Legislature, must be transmitted to the Division of Elections for placement on the November general election ballot. If the deadline is missed, the next general election is in November 2018. This would effectively delay Alaska LNG for two years. And, if voters turn down the amendment the companies and the state have no “plan B”, or alternative method of assuring LNG buyers there would be no changes to state tax terms. If the fiscal terms agreement is reached — there’s no guarantee of that — and if the Legislature approves the deal and the constitutional amendment — no guarantee of that, either — the proponents of the amendment will have to convince the public that a “yes” vote is a vote on the Alaska LNG Project itself. Meanwhile, there were some important changes in the project in the latter part of 2015, three of them done at the request of Gov. Bill Walker. One was the governor’s decision for the state to take over TransCanada’s share of the pipeline and gas treatment plant so that the state would own a uniform 25 percent of all three parts of the project: the gas plant on the Slope, the pipeline and the LNG plant. Previously TransCanada owned 25 percent of the gas plant and pipeline with the state owning only 25 percent of the LNG plant. There is potential for misaligned interests when the state ships its one-quarter share of gas through parts of the project it doesn’t own. The new arrangement solves that problem, but it also means the state must finance a full one-quarter share of the project cost, which will be in the range of $13 billion or more. Previously TransCanada would have arranged financing for its share of project costs. The Legislature agreed to fund the TransCanada buyout in a November special session. Another change, or at least potential change, came in early autumn when the governor asked the industry partners to pursue a more detailed assessment of a 48-inch pipe diameter to be considered alongside 42-inch diameter pipe that appears to be optimum, for now at least. The governor argued that building in extra capacity now would allow for more efficient shipping of gas if new gas discoveries are made, which state geologists believe will be the case. Alaska Gasline Development Corp., which owns the state share of the project, will also have to find a new president after Walker obtained former CEO Dan Fauske’s resignation on Nov. 20. The board of directors for AGDC has hired a consulting firm to conduct a worldwide search for a new president.  

North Slope companies to keep up spending

What lies ahead for Alaska’s oil and gas industry in 2016? The overwhelming unknown is the price of crude oil, and whether it will continue to go down, stabilize or creep upward as has been predicted. What is causing the slump is well known. There’s too much oil supply on the market and on the demand side, the economic slowdown in China has taken the wind out the world commodities boom, affecting not just oil but also metal prices. Saudi Arabia continues to produce to keep its market share, ditto for Russia and other producing countries. In the U.S., shale oil drillers have upset expectations that they will cut back by finding cheaper ways to produce. Alaska’s good fortune is that the large companies that produce most of the North Slope’s oil have seen slumps like this before and are capable of riding this one out. How many Alaskans remember $8 per barrel oil prices in 1998? Surprisingly, the large companies’ capital investment estimates for Alaska, for 2016 and 2017, have not yet taken a beating. Forecasts given the state Department of Revenue by the industry, a requirement of the state’s production tax law, estimate that $3.32 billion in capital spending will occur in fiscal year 2017, the state budget year beginning next July 1, and $3.24 billion in 2018. That’s down from $3.61 billion estimated for the current budget year, but considering that crude oil prices are nearly a third of what they were not too long ago, the numbers are a signal of confidence. Identity of companies giving the forecasts to the state cannot be revealed but one company, ConocoPhillips, has released a 2016 Alaska capital budget of $1.3 billion, down 5 percent from 2015 spending but in line with the overall industry estimates given to the Revenue Department. Much of the capital investment will go to major maintenance of facilities in the existing oil and gas fields, which are aging, and for the three major slope producers, ConocoPhillips, BP and ExxonMobil, part of the planned investment will be in expenditures supporting the Alaska LNG Project. There are, however, new projects underway, which is surprising in such an environment. ConocoPhillips is pressing ahead with its planned GMT-1 oil project in the National Petroleum Reserve-Alaska, a project the company had planned to follow the startup of production at CD-5, a few miles east of GMT-1 and on the border of the petroleum reserve and state lands. Caelus Energy is also continuing work on its Nuna oil project also on the Slope and near the company’s Oooguruk oil field, and also plans new exploration drilling on a nearshore Beaufort Sea prospect that the company believes has great potential. Doyon Drilling’s “Arctic Fox” rig was moved to an onshore staging area near the site of the test well last fall, and will be moved into position for drilling as soon as winter weather conditions allow for construction of an offshore ice pad and an ice road. In the big, largely-unexplored Interior basins Ahtna Inc., the Alaska Native regional corporation for the Copper River area, plans to drill in the spring for natural gas in a prospect near Glennallen, in partnership with Texas-based independent Rutter and Wilbank. In the Nenana Basin, west of Fairbanks, Doyon Ltd. is well along on its plan for a third exploration well, to be drilled next summer, near Nenana. In the Cook Inlet basin in Southcentral Alaska, Hilcorp Energy plans new exploration drilling near producing gas fields on the Kenai Peninsula, and BlueCrest Energy plans to begin oil production at the offshore Cosmopolitan oil and gas deposit near Anchor Point. BlueCrest also hopes to begin drilling gas production wells next summer at Cosmopolitan. Some of the 2016 work by smaller companies could be affected by anticipated changes to the state’s oil and gas tax credit development incentives. Gov. Bill Walker has proposed reorganizing the system as a loan program because it has become too expensive for the state in its current form. State officials who are working on the reorganization are sensitive to the needs of companies with projects that are now underway, where investments have already been made. A refashioning of the program will be presented to the Legislature in 2016 but elements of the existing program will be retained, state officials have said. Tim Bradner can be reached at [email protected]

Retail legalization of marijuana will become reality in 2016

Rules governing the recreational cannabis industry were mostly settled at the state level in 2015, but 2016 will be Alaska marijuana’s true birth. Regulators will issue business licenses; cannabis businesspeople will open doors amid both known and yet-to-be-decided restrictions, and the state will punish, forgive, or ignore a fistful of gray market marijuana operations. In November 2014, voters approved a ballot measure to legalize recreational cannabis for adults over 21 and to create business license types for cultivation, manufacturing, testing, and retail. The Alaska Marijuana Control Board finalized regulations in November, and will open the books to business license applications on Feb. 24, 2016. Cannabis entrepreneurs exist in a state with limited capital, and Feb. 24 will bring creative funding opportunities. Banks will not fund marijuana businesses so private loans are vital. State regulations require investors to meet Permanent Fund Dividend residency requirements: a physical presence in Alaska for a calendar year. This effectively bars any above-board Outside investment in the Alaska cannabis industry for the first year. With expensive startup costs, Alaska’s marijuana industry could either begin underfunded or with a dose of unsavory financial practices to skirt investment regulations. Conversely, the business could turn out a surprising number of private investors from the Last Frontier. Cannabis consumers may be excited about store-bought bud in the coming year, but regulations could push back the first marijuana sale until late summer at the earliest. Licenses won’t be issued until May 24 at the soonest. Regulations require each plant to be tracked from seed to sale, meaning a retail store opening on May 24 wouldn’t have access to legally grown, legally tracked, and legally tested product; growers will have to start their process on May 24 as well. With cannabis’ roughly three-month growing cycle, retail outlets are more likely to have legal product in August or September. Though state regulations are complete, local regulations are still coming out. Some towns such as Ketchikan, Soldotna, and Palmer have already banned marijuana cultivation or sale in their localities. The Anchorage Assembly is currently waiting for zoning recommendations from its Planning and Zoning Commission, due Jan. 4. The assembly requires both zoning restrictions and a conditional use permit for marijuana businesses in additional to a state-issued permit, and is expected to have its own regulations completed by the Feb. 24 license application start. So far the proposed ordinances have been roundly condemned by the industry as overly restrictive. Some business may not make the cut into 2016 at all, depending on a string of trials and potential enforcement actions. In January 2016, four marijuana business owners will go to trial for selling or delivering marijuana without a license. Michael Crites, owner and operators of Absolutely Chronic Delivery Company, Charlene Egbe, owner and operator of the Alaska Cannabis Club, and Larry Stamper and Rocky Burns, co-owners and operators of Discreet Deliveries, were all charged with multiple felonies in October 2015. Each has secured legal counsel except Rocky Burns, who after bouncing between several Alaska attorneys has decided to represent himself in court. Marijuana clubs will also present a legal issue to the State of Alaska in 2016. Pot Luck Events in Anchorage and The Higher Calling Club in Fairbanks currently exist in a hazy gray market; they sell no marijuana, but the state claims their clubs amount to public consumption of marijuana, which is forbidden. The state has not taken any action to shut down either club. Soldotna club Green Rush Events closed in December. Owner Josh Bird claimed he halted operations due to increasing fears of law enforcement from local authorities.

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

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

State, local leaders discuss PILT split from AK LNG Project

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

AGDC board taps former VP as interim president

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

What 2016 will do to your checkbook: Rent, food, gas, raises

Wondering how you will fare financially in 2016? Below are what experts think next year will hold for financial matters close to home: Raises, rent, gas, food and health. Will I get a raise next year? Maybe. Wage growth has been perhaps the job market’s biggest weakness since the recession ended. Pay increases have been both slow and uneven, highly dependent on your field of employment. And for many, it has not been enough to keep pace with the cost of living. In November, average hourly earnings climbed 2.3 percent from a year earlier, according to the government’s most recent report. But that is only about two-thirds the roughly 3.5 percent typically seen in a strong economy. Many economists are optimistic Americans’ pay will start growing faster soon because hiring has been good and layoffs have been low. But that’s been the case for a while, and wages haven’t taken off yet. Joseph LaVorgna, chief U.S. economist at Deutsche Bank, is not expecting major gains ahead. He notes that measures that include a broader mix of compensation beyond hourly wages show there’s even less growth in pay than it seems. “I’m not convinced things are going to grow as much as I would like them to,” he said. Will my rent go up? Yes, most likely. It’s been a tough few years for U.S. renters because demand has outpaced supply, causing prices to rise. Rents increased 4.5 percent in October, 5.3 percent in September and 6.2 percent in August, according to real estate data firm Zillow. The median rental payment nationwide was $1,382 in October, roughly 30 percent of the median U.S. family income and high enough for the government to consider it financially burdensome. Over the past decade, that number of renters spending over this threshold on rent has jumped from 14.8 million to 21.3 million, or 49 percent of all renters. There are more rent increases anticipated ahead. “Rents are expected to rise in virtually all major cities in 2016,” said Hessam Nadji, senior executive vice president with commercial real estate services firm Marcus & Millichap. Some small consolation: While rents will still rise, the pace of rent growth will slow modestly from the exceptional levels set in 2015 as new construction creates more housing competition, Nadji says. Will gas prices stay low? Yes, most likely. Oil prices have plummeted over the last year, a result of high global supplies and weaker demand than expected. U.S. drivers are paying less than $2 a gallon on average for the first time since the Great Recession. Seasonal factors and volatile oil prices will push prices up and down throughout the year, but overall prices are expected to remain low compared with recent years. The Energy Department forecasts an average of $2.37 a gallon next year, which would be the lowest annual average since 2009. Tom Kloza, head of energy analysis at the Oil Price Information Service, said drivers should expect lower lows and higher highs at the pump in the year ahead, but he doesn’t expect the price of a gallon of gasoline to go over $3 at any time in 2016. “Nationally we are looking at a year that is very similar to the year we are ending,” Kloza said. What about food? New year, same dish. Food prices should rise at a rate near the historical average, according to the USDA’s forecasts. The United States Department of Agriculture’s Economic Research Service anticipates the price for food will be up 2 to 3 percent for 2016, same as 2015 and in line with the 20-year historical average of 2.6 percent. That includes food people consume at home and out at restaurants. Annemarie Kuhns, an economist at the ERS, said that certain food prices were off this year due to unusual events, such as the avian influenza that led to the death of millions of birds and sent egg prices up roughly 15 percent. Looking ahead, she and fellow economists anticipate these prices may level off in 2016 — assuming cooperation from Mother Nature. Will my health insurance cost more? Probably. People buying their own coverage through the exchanges created by the Affordable Care Act should see premiums go up faster in 2016 than in previous years, said Cynthia Cox, associate director of health reform and private insurance at the Kaiser Family Foundation. According to Kaiser research, if you do not shop around and let your plan passively renew, the premiums for the lowest silver level plan —the most popular on the exchange — will increase 15 percent on average next year. If you are willing to switch, premium increases are expected to be zero to 1 percent. This is because the exchange is set up to encourage shopping around. These increases apply only to people who are receiving subsidies to help pay for the insurance. For those who do not, the increase is expected to be 6 percent. Cox added that shoppers should also update any personal information — such as changes to your family size or income — which can impact what they pay. “It’s very important to go back online and shop every year,” Cox said. “This is still an evolving market — there are new insurers coming in and other insurers leaving. The only way to find (the best price) is to go online or navigate through a broker.” Employer-sponsored plans premiums increased about 4 percent this year. And while Kaiser does not forecast employer-sponsored plan price changes, it does not anticipate any unusual hikes in health care costs that tend to push up insurance prices. However, employees may end up paying more out of pocket for deductibles, copayments and other expenses they are responsible for, depending on their employer’s plan.

Movers & Shakers 12/27/15

Michele Brown, President of United Way of Anchorage, has been invited to serve on the National Professional Council of United Ways, a select group of chief executive officers from across the country that focuses on identifying common challenges and solutions for the community-based member nonprofits. She will join just a handful of local United Way executives who are helping advise United Way Worldwide in setting strategy and direction for nearly 1,200 United Ways across the U.S. As President of United Way of Anchorage, Michele Brown leads efforts to mobilize people and resources to make lasting changes in community conditions. She has helped advance United Way of Anchorage as a community development organization dedicated to building the community activism, aligned services, and policies that achieve measurable change. This has led to improvement in high school graduation rates, family financial stability, and access to health care. Brown will serve a two-year term beginning Jan. 1, 2016, and ending Dec. 31, 2017. Myron Fanning joined NANA Management Services as security manager for NMS Security. The fifth-largest private employer in Alaska, NMS has provided security services for the oil and gas industry on the North Slope for 40 years. Fanning retired in 2015 from the Anchorage Police Department as Deputy Chief of Police after 23 years of service. He oversaw all administrative functions and maintenance of operations readiness for the entire department. His previous supervisory positions with APD include Deputy Chief of Administration and Crime Suppression Division Captain. Before his career in law enforcement, Fanning served almost 10 years as an Infantry Officer in the U.S. Army. Fanning has completed many police and military training programs and holds a bachelor’s degree in criminal justice from University of North Alabama. Laura Rogers joined NANA Management Services as direct hire manager for NMS Staffing. The fifth-largest private employer in Alaska with more than 40 years of experience in the North Slope oil and gas industry, NMS provides a wide variety of support and management services. Rogers will oversee recruitment and placement of qualified professionals to fill positions in the NMS organization throughout Alaska. She has recruited talent in engineering, science, construction, project management, IT, and technical field support for employee placement businesses and corporate sourcing entities. A former investment advisor, Rogers also brings a decade of sales and marketing management experience in the hospitality industry and has coordinated North Slope oil industry projects for BP Exploration Alaska. Born and raised in France, Rogers studied liberal arts at Sorbonne University in Paris and is proficient in specialized software applications used by recruiters. She has received many awards recognizing sales achievements. Syl Fowlis took over as First National Bank Alaska’s Eastchester Branch manager after the board of directors recently announced his promotion. Originally from Gambia, Fowlis has worked in banking for more than a decade with roles as a teller, personal banker, business development officer and branch manager. He spent most of the last two years as Branch Manager of the Federal Branch in downtown Anchorage. The Eastchester Branch is located in Midtown Anchorage, near the bank’s Operations Center.

YEAR IN REVIEW: Budget battles, special sessions, plunging prices

The nosedive in crude oil prices continued through 2015, dipping to less than $40 per barrel. The effects on state revenues, and a ballooning budget deficit, dominated the year’s legislative session — and the special sessions that followed  — as lawmakers wrangled over spending cuts. Lawmakers failed to agree to the point that layoff notices were sent out in case of a state government shutdown were there to be no approved budget by July 1, the start of the fiscal year. As the year ended, the new state revenue estimate and forecasts of even lower oil prices set the stage for a possible repeat of the 2015 session. Two new elements are that Gov. Bill Walker has introduced a plan for a comprehensive overhaul of the state’s fiscal system, with proposals for a variety of new taxes and, most important, a restructuring of the Alaska Permanent Fund so that some of its income can help support state services. The deficit for fiscal year 2016, paid for out of state cash reserves, was about $3.2 billion. The deficit for fiscal year 2017, the budget year beginning next July 1, was previously estimated at $2.7 billion last spring when the Legislature adjourned. Now, with even lower oil prices, the deficit is expected to again exceed $3 billion.  In efforts to narrow the deficit, legislators trimmed the state budget by about $800 million, eliminating about 500 state jobs. However, about $550 million of this was a one-time savings achieved by reducing the state capital budget. The capital budget was brought to a very low level of barely more than $100 million, sufficient mainly to fund the required state match for federal funds and certain critical state capital needs. About $250 million was cut from the state operating budget. A similarly-sized reduction may be difficult to achieve for the fiscal year 2017 budget because there is not much more, if any, that can be squeezed from the capital budget. Similar, or greater, cuts in the operating budget could begin to impair critical state services, but that may happen. One bright spot is that federal funds for Alaska programs, those that are administered by state agencies but paid for by the federal government, appear to be holding steady at about $2.8 billion for this year and next. These include funds for surface transportation projects like roads and airports, rural water and sewer projects and federal support for Medicaid, the state-federal health care program for low-income people. So far the reductions in the state-funded portion of the budget appear not to have had substantial adverse impacts on Alaska’s economy. Employment, a key measure of the economy, is holding steady although some softening was apparent in the later months of 2015. Surprisingly, oil and gas employment continued at record levels through 2015 despite the plunge in oil prices. That was mostly due to companies completing North Slope projects that had started prior to the price drop, however. Two ConocoPhillips projects on the Slope, Drill Site 2S and CD-5, were completed in the latter half of the year. ExxonMobil was wrapping up work on its big Point Thomson gas condensate project as the year closed. Production there will begin soon. — Tim Bradner 2. Alaska LNG Project There were moments of concern, but substantial progress was made on the large Alaska LNG Project in 2015, at least on the technical work. Outside the preliminary engineering, there were major changes as Gov. Walker replaced six of the seven members of the Alaska Gasline Development Corp. board of directors, obtained the resignation of its President and CEO Dan Faukse, and successfully sought an appropriation from the Legislature in a fall special session to buy out the interests of TransCanada Corp. in the project. It’s too early to know the significance of the AGDC changes, however, because the project is being led, and managed, by the three major Slope producers who own the majority of the Alaska LNG Project. The major part of the pre-front end engineering and design, or pre-FEED, was done during the year, although the final work must still be done. Pre-feed will be complete in mid-2016, and it will include a revised cost estimate. The current estimate, of $45 billion to $65 billion, was done in 2012 based on conceptual planning and engineering. Pre-FEED engineering will allow a far more detailed estimate. If the revised cost estimate is in the lower half of the range of the first estimate, the project will stand a good chance of being competitive against, for example, LNG made from cheap shale gas on the Gulf of Mexico. If revised costs are higher, more toward $65 billion, competing with LNG from the Gulf of Mexico or elsewhere may be more difficult. Alaska’s competitive advantage is that the ocean voyage to transport LNG is shorter than from the Gulf of Mexico, the Persian Gulf or Australia, the supply of gas on the North Slope is assured and well known, and that much of the production infrastructure is already in place. The disadvantage is that an 800-mile pipeline must be built from the North Slope to Nikiski, on the Kenai Peninsula, the site of the proposed LNG plant. Another challenge Alaska may face compared with its competitors is that the state’s pool of skilled labor is limited and importing workers in certain fields will add costs. The U.S. Gulf does not face that problem, nor does the Persian Gulf. Australia, however, had had labor supply problems for its projects. However, so far there are no signals there will be unpleasant surprises on costs. Before he resigned, Fauske said, “These people are working continuously on cost estimates and so far we’ve had no indications things are not within the previous range.” After the State of Alaska bought out TransCanada Corp.’s share of the Alaska LNG Project, it now owns a full 25 percent share of the project, potentially putting it on the hook for $13 billion or more in costs. Meanwhile, negotiations on commercial agreements between the producer partners on Alaska LNG Project, with some of the most important of these involving the state, continued through 2015. Hopefully these will be concluded in early 2016 in time for legislative ratification of some of the agreements in a special session that will follow the regular 2016 legislative session. One critical agreement is a “gas balancing” compact among the producers that will set terms for assuring supply from one of two fields supplying gas if there is a production problem in one of them. A second critical agreement is on fixed state fiscal terms, mainly taxes, for gas to be produced. This is needed for buyers of the LNG who will want assurances that taxes won’t change over the life of long-term sales contracts. BP and ExxonMobil sought and received permission from the Alaska Oil and Gas Conservation Commission for a higher offtake amount of gas from Prudhoe Bay in order to supply the Alaska LNG Project if and when major sales begin in the mid-2020s. — Tim Bradner 3. Walker expands Medicaid; Legislature sues him The fight over expanding Medicaid between Gov. Walker and Republican legislators went from the Capitol to the Anchorage Legislative Information Office to a courtroom this year. Walker announced July 16 that he would accept $148.6 million from the federal government for expanding Medicaid to single, low-income Alaskans beginning Sept. 1, the end of a mandatory 45-day waiting period. About 41,000 people became newly eligible for Medicaid, according to state Health Department estimates. How many actually enroll — the Health Department expects more than 20,000 — will ultimately determine whether the program saves or costs Alaska money as Walker claims it will. Accepting and spending money by the State of Alaska typically requires the Legislature’s approval. However, because the Medicaid funding is federal dollars, covers 100 percent of the costs for newly enrolled, and does not involve the general fund, it could be done administratively according to legal opinions from Legislative Services. The Republican-heavy joint Legislative Council voted 10-1 Aug. 18 to sue Walker over his use of executive authority to accept federal funds to expand the state Medicaid program. The legislators claim Walker was overstepping the bounds of his position by adding an optional group to the state’s Medicaid program — an action that would require their approval under state law. The administration contends the new group is mandatory once the money is accepted. A Superior Court judge denied Legislative Council’s request for a preliminary injunction, allowing expansion to proceed, but the case remains in state court. At the same time, the Department of Health and Social Services was working with Xerox Corp. to resolve glitches and claims backlogs in its Medicaid payment system to providers, a fact that numerous legislators have noted in their opposition to expanding the already costly program. The state and Xerox now claim that more than 90 percent of new claims are being processed on time. — Elwood Brehmer 4. Shell quits Arctic; feds cancel lease sales Citing disappointing results on its first — and only — well plus regulatory uncertainty, Shell’s abrupt departure from its Chukchi Sea exploration program in September cast a long shadow over the state’s oil and gas industry. The company’s pullout was followed by a U.S. Department of the Interior announcement cancelling a planned 2016 lease sale in the Chukchi Sea, and a further announcement denying Shell and other companies holding federal offshore leases additional time on their leases. That, in turn, was followed by Statoil’s announcement that it was abandoning its Alaskan Arctic offshore program and would also relinquish its leases back to the federal government, which Shell has not done. Shell’s Chukchi leases expire in 2020; the Beaufort leases expire in 2017. ConocoPhillips, a third company with a big stake in Chukchi Sea leases, has made no announcement on its plans, but its Chukchi Sea leases also expire in 2020. Shell’s departure after a hugely-expensive, multi-year $7 billion effort that included court battles, the grounding of one of its drill rigs during a storm in 2012, confrontations with Greenpeace, and the federal government’s cancellation of the Arctic lease sales has effectively chilled industry interest in the Chukchi Sea. This is similar to the way the failure of “Mukluk,” a very costly offshore Beaufort Sea well drilled in the early 1980s, chilled industry interest in that region. However, there is no doubt that the Chukchi Sea along with the Beaufort Sea are still highly prospective and , oil and gas discoveries have been made in both regions, although they were not commercial. Someday the industry will be back exploring again. At least two offshore discoveries have been made in the Beaufort in the area where Shell was exploring during its last Arctic foray in 2012, the Kuvlum find by ARCO Alaska and “Hammerhead,” an earlier find by Unocal. Though a well was partly drilled in 2012 it was not completed, and Shell chose not to return to the area in 2015 and focused on the Chukchi. The Chukchi Sea, for its part, has multiple attractive targets including a discovery by Shell in the early 1990s at “Burger,” a prospect the company was testing with its 2015 well. Federal geologists say the broad, shallow continental shelf stretching between Alaska and Russia contains sedimentary basins very favorable for oil and gas accumulations. The area is remote but the waters are shallow and, because of climate change, increasingly accessible. Shell’s experience, however, will likely deter other companies for a period. From the 1970s through the 1990s companies safely drilled offshore wells in the federal Arctic waters. However, new rules adopted by the federal government, such as requirements for an additional “standby” rig to be nearby and that an undersea oilspill capping system must be on hand, substantially raised the cost of exploration drilling. In addition, there is a U.S. Fish and Wildlife Service rule that operating offshore rigs be at least 15 miles apart. This prevented Shell from efficiently using the two rigs it brought north in 2015. Only one rig was able to actually drill. These accumulated costs mean that, on a practical basis, a Chukchi Sea well will cost about $1.2 billion. — Tim Bradner 5. AIDEA expands, then refines Interior Energy Project A year ago, the Alaska Industrial Development and Export Authority hit the reset button on the Interior Energy Project when it became apparent the first attempt to truck lower-cost natural gas from the North Slope wouldn’t pencil out. Very quickly, the authority, or AIDEA, made a drastic move when it negotiated to purchase Fairbanks Natural Gas Co. and its sister companies for $54 million — a deal announced in late January that was spurred by direction from Gov. Bill Walker’s administration. Simultaneously, Walker introduced legislation to allow the $332.5 million state financing package for the Interior Energy Project to be used to develop a source of gas from either Cook Inlet or the North Slope, the latter being the source the grants, loans and bonds were originally restricted to. The plan to purchase Fairbanks’ small natural gas utility was met with criticism primarily from Southcentral Republicans in the Legislature, who argued the state should not buy a private business and thus get into a potentially competitive utility market. Walker’s bill to expand the scope of project beyond the North Slope eventually passed as House Bill 105, but was the subject of unexpected and unsuccessful attempts by some Anchorage Republicans in the House to limit AIDEA’s ability to move the Interior Energy Project forward without legislative approval. Bob Shefchik, formerly of the Interior Gas Utility, was chosen to lead the resurgent project. In August, AIDEA announced it received 16 proposals from 13 private business respondents hoping to partner with the state’s effort to get natural gas to Interior residents at about $15 per thousand cubic feet, or mcf, of gas. Those options included nine from Cook Inlet and three from the North Slope in which LNG would be trucked, a small diameter pipeline from Cook Inlet, and other proposals to import LNG and propane. The 16 were quickly narrowed to five: two from the Slope and three from the Inlet. On Dec. 3, Shefchik announced that AIDEA had further narrowed its options to two: Spectrum LNG from the Slope and Salix Inc. from Cook Inlet. A final decision was delayed until late January as AIDEA’s project team further reviews the finalists’ plans Shefchik said were nearly even when evaluated by the authority’s project review committee. Also in early December, the AIDEA board of directors reviewed plans to cut rates to Fairbanks Natural Gas’ residential customers by 13.5 percent, a function of changing from private ownership, with tax liabilities and higher profit margins, to being a public utility. — Elwood Brehmer 6. Cannabis rules move along The Last Frontier has a new industry in recreational marijuana, and 2015 witnessed the grind to set up the ground rules. Personal use and possession of cannabis have been legal for decades thanks to the 1975 Ravin v. Alaska Supreme Court decision, but not cultivation or sale of recreational marijuana. The Ballot 2 Initiative, passed in November 2014, went in effect in February and made Alaska the fourth state in the U.S. to fully legalize the industry of recreational marijuana. The initiative passed 53 percent to 47 percent, and the relatively narrow margin has led several municipalities to outlaw commercial marijuana; Ketchikan, Soldotna, and Palmer have all banned marijuana sales, while the Anchorage Assembly has moved slowly on its own dual licensing provisions. The Legislature created a state Marijuana Control Board alongside the Alcoholic Beverage Control Board to craft cannabis business regulations. After an inaugural meeting in July, the board spent five grueling months drafting the operating requirements for commercial cultivation, sale, testing, and manufacturing. The board’s most controversial final regulation put a limit on Outside investment. Only residents may be listed on a license, and only licensees may invest in an Alaska marijuana business. The board requires the same residency requirements as the Permanent Fund Dividend, including physical residency for a full calendar year. The board also made an “onsite consumption allowance” retail stores can apply for, making Alaska the first state to allow some kind of marijuana café. Currently, marijuana social clubs like Anchorage’s Pot Luck Events exist in a legal purgatory. They allow consumption and sharing on premises in exchange for a membership fee, but sell no marijuana directly. Some including Marijuana Control Board director Cynthia Franklin define clubs as “public places,” in which marijuana consumption was hastily banned during the summer, but law enforcement hasn’t taken any action against Pot Luck Events or a Fairbanks club that opened doors in November. Soldotna club Green Rush Events closed in November, based on fears of law enforcement. Sales aren’t legal until the board issues business licenses by May 24, 2016. Anchorage police charged Rocky Burns, Larry Stamper, Charlene Egbe, and Michael Crites with multiple felonies each for allegedly engaging in the sale and delivery of recreational marijuana prior to license issue. Trials will be held in January. — DJ Summers 7. Obama pushes climate protection in Alaska visit President Barack Obama made good on a promise to visit all 50 states when he landed in Anchorage Aug. 31. During his three-day trip the president spoke at the State Department’s GLACIER Conference in Anchorage; toured Kenai Fjords National Park by way of Seward; became the first president to cross the Arctic Circle on a trip to Kotzebue; and got a taste of Southwest Alaska with a few hours in Dillingham. While Obama saw many parts of Alaska, his trip to the state was clearly made with a singular objective: find and expose climate change. The president, accompanied by Secretary of State John Kerry and Interior Secretary Sally Jewell, painted a grim picture of the future if the world does not take serious action to slow or stop climate change while speaking to an international gathering of Arctic delegations at the GLACIER Conference. Alaska’s congressional delegation concluded his visit to be a failure because Obama did not address the feds’ roll in resource development in the state. Gov. Walker flew with the president from Washington, D.C., to Anchorage with a singular focus of his own — opening the Arctic National Wildlife Refuge coastal plain to drilling for oil, despite Obama’s unequivocal opposition. The president did, however, back spending approximately $1 billion on a new icebreaker for the U.S. Coast Guard while in Seward. Also while in Seward, Obama took the time to film an episode of NBC’s celebrity adventure show Running Wild with Bear Grylls. When in Anchorage, he held a fundraising dinner at the home of Alaska Dispatch News Publisher Alice Rogoff. Alaska media had limited access to the president with no questions allowed; however, he conducted a lengthy interview with Rolling Stone magazine while in Kotzebue. The United States also assumed the chair of the Arctic Council April 24. The Arctic Council is a nine-member, non-binding intergovernmental organization that seeks to address issues common amongst its member states. Former Alaska Lieutenant Gov. Fran Ulmer is a Special Advisor to Secretary Kerry in the State Department, which represents the U.S. on the Arctic Council. — Elwood Brehmer 8. EPA water rule goes final, halted almost immediately by court Congressional Republicans scored a victory Oct. 9 when the 6th Circuit Court of Appeals in Ohio halted nationwide implementation of the Clean Water Rule. Also known as the waters of the U.S., or WOTUS, rule, the Environmental Protection Agency regulation aims to clarify the agency’s jurisdiction under the Clean Water Act passed in 1972, at least according to the Obama administration. Opponents — primarily, but not exclusively Republicans in Congress — contend the rule is a power grab with the goal of expanding federal regulatory jurisdiction on isolated and intermittent water bodies. A Government Accountability Office report released Dec. 14 found the EPA violated anti-lobbying and propaganda laws when it spent money to promote the Clean Water Rule on social media platforms. The three-judge 6th Circuit panel did not issue its opinion based on EPA’s jurisdiction, rather, the panel found enough evidence to suspend the Clean Water Rule based on key parameters in the final rule that are not substantiated by adequate scientific conclusions and that the same parameters may not have been added to the Clean Water Rule in accordance with public comment regulations. The original Clean Water Act often relies up case-by-case analysis of water bodies to determine jurisdiction. Judge David McKeague wrote in the stay order that the clarification the Clean Water Rule tries to achieve “is long overdue,” but how the EPA reached its conclusions needs review. The final rule deviated from draft versions by delineating some waters in and out of federal jurisdiction through “bright line” boundaries.” The demarcations were added to the Clean Water Rule after the public comment period, possibly violating the Administrative Procedure Act, which requires that final rules must related to what is in the proposed rule. Alaska’s congressional delegation welcomed the Circuit Court’s decision. Sens. Dan Sullivan and Lisa Murkowski and Rep. Don Young have characterized the Clean Water Rule as expansion of EPA jurisdiction outside of the boundaries set in law under the Clean Water Act. Alaska holds more than 60 percent of the nation’s wetlands, which makes any changes to the Clean Water Act of particular significance in the state. U.S. Army Corps of Engineers attorneys and senior officials also took umbrage with the changes to the rule in internal memos and legal analyses written this past spring. They argued not only that not only could the EPA be breaching procedural protocol, but also the agency could actually be reducing its jurisdiction with the arbitrary boundaries, putting water bodies that need protection at risk. The Corps acts as an operational arm of the EPA, using the technical expertise of its engineers to review and rule on Clean Water Act Section 404 wetlands permits applied for by development projects. The EPA has contended since proposing the draft rule in April 2014 that it would clarify jurisdictional ambiguity that exists under the Clean Water Act for some wetlands and water bodies. Its economic analysis of implementing the rule, published in May, concluded fewer waters would be under federal authority. The Clean Water Rule took effect Aug. 28 in 37 states. Alaska and 12 other primarily western states challenged the regulation and received a preliminary injunction from a federal District Court in North Dakota, staving off implementation in those states, just one day before the rule took effect. The court order prohibiting implementation was eventually expanded to all 50 states. — Elwood Brehmer 9. Troop cuts proposed at JBER Less than a year after staving off a proposal by the Air Force that would have moved fighter jets from Fairbanks to Anchorage, Alaska’s congressional delegation found itself fighting to keep Army troops in Anchorage in 2015. U.S. Army officials announced in early July a plan to cut 2,600 soldiers from Joint Base Elmendorf-Richardson and another 75 soldiers from Fort Wainwright in Fairbanks likely by sometime in 2017. The JBER reductions — from Fort Richardson’s 4th Airborne Combat Team of the 25th Infantry Division — would be part of an Army-wide contraction of 40,000 troops, a Department of Defense attempt to cut its budget in compliance with the 2011 Budget Control Act known as sequestration. Alaska’s congressional delegation pushed back on the Army’s plan, arguing a troop drawdown in Alaska is exactly the wrong move as Russia and other nations increase their presence, militarily and otherwise, in the Arctic. Sen. Dan Sullivan added an amendment to the National Defense Authorization Act passed by Congress in November that would have required the Army to detail its Operation Plan for the Arctic in hopes of proving the drawdown at JBER is ill-advised. President Barack Obama ultimately vetoed the Defense bill for other reasons. Anchorage officials said the proposed troop reduction, which would cut a little less than half of JBER’s active duty Army personnel, would hurt but not cause major economic damage to the city in the long run. Army officials held well-attended community meetings in Anchorage and Fairbanks in February as part of a nationwide listening tour that covered 30 bases where troop reductions were a possibility. — Elwood Brehmer 10. Alaska banks undergo leadership changes The Alaska banking industry had a changing of the guard in 2015. Former First National Bank Alaska President Daniel Hon Cuddy died May 12 at the age of 94, leaving behind a legacy of steadiness and sober financial principles that fostered one of the longest-standing and most resilient financial institutions in the state. Cuddy’s history is as uniquely Alaskan as his bank, the highest-valued Alaska-owned bank in the state, which finished 2014 with $3.3 billion in assets and $32.6 million in income. He served as president for more than 60 years and most recently served as chairman of the board. Cuddy’s daughter Betsy Lawer serves as president. In October, Northrim BanCorp founder, chairman, and former president Marc Langland announced his retirement at 74 years old, leaving a trail of pluck and forethought in the state’s darker moments that established the second largest Alaska-based bank with $1.5 billion in assets. Northrim BanCorp President and CEO Joe Beedle will take over as chairman of the board for both and Northrim BanCorp and Northrim Bank. Chief Operating Officer and Northrim Bank President Joe Schierhorn will fill Langland’s seat on both the Bancorp and Northrim Bank’s boards and take over as CEO of Northrim Bank. Brian Nerland will retire at year-end from KeyBank, the state’s fourth-largest bank by deposit market share with $924.3 million, and Commercial Banking Executive Lori McCaffrey will succeed him as Alaska market president. With his retirement, Nerland will complete a 30-year career at KeyBank in Alaska and will transfer leadership to McCaffrey, whom he hired 20 years ago to work with him in commercial banking. —DJ Summers  

YEAR IN REVIEW: New production by ConocoPhillips highlights ‘15

ConocoPhilliips had a busy 2015 on the North Slope, completing two new oil projects and planning two others, despite the plunge in crude oil prices. Late in the year the company’s CD-5 project, near the Alpine field on the western Slope, was completed and began production. Earlier in the fall ConocoPhillips completed its Drill Site 2-S in the Kuparuk River field, and it is also now producing. Other projects are in development or are now planned. One being constructed now is an expansion of the West Sak viscous oil project in the Kuparuk field, a project labeled North East West Sak, or NEWS. ConocoPhillips has produced viscous, sometimes called heavy, oil from the West Sak deposit for years, but technical and cost problems have plagued plans to expand the project. On NEWS, the company’s latest plan, new technologies are being employed that will solve some of the earlier problems. A second new project now underway is the $900 million Greater Moose’s Tooth 1 project in the National Petroleum Reserve-Alaska. ConocoPhillips announced this Nov. 18 at the annual Resource Development Council conference in Anchorage, lifting spirits among oil contractors and suppliers in the audience. GMT-1 is a few miles west of CD-5, a drillsite also within NPR-A but near the Colville River boundary with state lands. GMT-1 is expected to peak at 30,000 barrels per day and is to be in production in 2018. Anadarko Petroleum is a minority partner in the project, as it is with CD-5. Mineral rights at GMT-1 are owned jointly by Arctic Slope Regional Corp. and the U.S. Bureau of Land Management, the Interior Department agency that manages the NRA-A. ConocoPhillips and Anadarko are now working on GMT-2, a drill site a few miles furthern into NPR-A. 2. Caelus advances Nuna project Caelus Energy, the Dallas-based independent that now owns and operates the producing offshore Oooguruk field, continued in 2015 with its planning and development of Nuna, a new onshore oil production pad near Oooguruk. A large gravel production pad and access road were constructed for Nuna in early 2015 and engineering work on production facilities continued through the year. Caelus is obligated to have Nuna on production in late 2017 as a condition of an agreement for a temporary reduction of state royalty. The company now plans to construct facilities in the winter of 2016-17 and believes it can meet the deadline for production. Nuna is expected to cost about $1.2 billion to construct and will produce 20,000 to 25,000 barrels per day when operations begin. Caelus also plans additional development work at the Oooguruk field including the treatment of producing wells with large-volume fracturing, a technique aimed at stimulating production in tight rock by injecting fluids and sand at high pressures. Use of large-volume fracturing was very successful on Oooguruk wells last winter, the company has said. In another development for Caelus in 2015 plans were made and equipment was moved, for a strategic offshore exploration well in Smith Bay, northwest of the Colville River delta. The well will be drilled on state-owned submerged lands north of the National Petroleum Reserve-Alaska. The Doyon Drilling “Arctic Fox” rig and other equipment for drilling was moved in the fall to an onshore staging point in NPR-A. As soon as the weather is cold enough construction of an ice island will begin at the well site, which is in shallow water. Two wells are planned to test the prospect. 3. Point Thomson nears production ExxonMobil Corp. continued construction in 2015 on its Point Thomson natural gas condensate project 60 miles east of Prudhoe Bay. The project, with costs at or exceeding $4 billion, is near completion and will begin production of liquid condensates in early 2016. The construction project has been the biggest for the North Slope over the last two years, stimulating employment and business for contractors and suppliers, many of them Alaska based. Although it will initially be a liquids production project, Point Thomson is really intended to produce gas for the large Alaska LNG Project, which is now in the planning and preliminary engineering phase. Production facilities at Point Thomson will initially produce gas with liquid condensates stripped out of the gas, which will then be injected back underground into the producing reservoir. The gas would be “recycled” through the reservoir, being produced and injected repeatedly. As the injected gas, now “lean” after removal of liquids, moves through the underground reservoir rock from injection wells to producing wells, the gas soaks up more liquids, which are stripped off as the gas is produced again. The process will be repeated over and over again. The condensates, at a 10,000 barrels-per-day production rate, will be shipped by pipeline to Prudhoe Bay and Pump Station 1 of the Trans Alaska Pipeline System, where they will be blended with the crude oil being shipped through TAPS. If the Alaska LNG Project is built the production facilities at Point Thompson will be converted to conventional gas production, although facility additions will be needed. Alternatively, if the project does not proceed, the production of liquid condenates can be expanded, possibly to about 30,000 barrels per day. Another option is to convert Point Thomson to gas production and ship the gas to Prudhoe Bay where it can be used to repressure the Prudhoe field and produce more oil. 4. Hilcorp files plan for Liberty offshore Hilcorp Energy filed a development plan for Liberty in late 2015. Liberty is an offshore oil deposit in shallow Beaufort Sea waters northwest of Prudhoe Bay that has long been planned for development by BP but had been shelved for various reasons. If it is developed, Liberty would require construction of an artificial gravel island and a subsea pipeline to shore. Liberty’s oil reserves are estimated at 80 million to 150 million barrels. If developed, the field could produce about 60,000 barrels per day, Hilcorp said in its application. Offshore artificial island construction is a long-established practice for the Beaufort Sea “nearshore,” where waters are very shallow. Three fields are now producing from offshore gravel islands, the Oooguruk field owned by Caelus Energy, the Nikaitchchuk field owned by Eni Oil and Gas, and Northstar, developed by BP and now owned by Hilcorp. Hilcorp purchased a 50 percent interest in Liberty and became the operator of the project when the Texas-based independent acquired four older North Slope fields, including Northstar, from BP in late 2014. Because Liberty is in federally-owned waters five miles offshore, and beyond the state’s three-mile territorial limit, the development plan was filed with the U.S. Bureau of Ocean Energy Management, or BOEM, an agency of the U.S. Interior Department. If it is developed Liberty would be a virtual twin to North Star, an offshore field developed by BP in 2001 and that is now in production. Northstar is northwest of Liberty and roughly north of the Prudhoe Bay field, and six miles offshore. BP considered developing Liberty with a gravel production island some years ago but backed away from the plan after reviewing the company’s experience at Northstar, where there were cost increases and complex issues with regulatory agencies. The company then considered tapping into Liberty’s underground oil reservoir with long-distance, high-angle production wells drilled from shore. Some of the wells would have reached as far as eight miles drilled laterally, and would have been the longest such wells in the world. But this plan was scrapped too. When Hilcorp took over the gravel island plan was resurrected. Although the distances from shore are similar one key difference between Liberty and Northstar is that Liberty is within the belt of barrier islands offshore the North Slope, which will protect the island from the moving Arctic icepack. Northstar, in contrast, faces the open sea and is not protected by barrier islands, so that the island must contend with ice forces causes by the moving pack in winter and summer storms. BP built Northstar strong enough to endure those forces and there have been no problems. Liberty, however, is in a much more benign ice environment, being surrounded in winter by “shore-fast” ice that does not move, in contrast to the polar pack farther offshore. 5. Furie completes first new Inlet platform in 30 years Furie Operating Alaska became the first company to install a new offshore Cook Inlet production platform since the 1980s. Furie began producing gas late in the fall from its Kitchen Lights No. 3 gas well to the production platform and to pipelines to the east side of Cook Inlet. Homer Electric Association, the Kenai Peninsula’s electric utility, is now purchasing gas from Furie. Other production wells will be drilled as its markets expand, Furie says. Development of the Kitchen Lights gas prospect has been a long process for Furie, a Texas-based independent that was formerly Escopta Oil and Gas. Escopeta, under its former president, Danny Davis, identified the gas prospect at Kitchen Lights and worked over several years to bring a jack-up rig to Cook Inlet to drill exploration wells.

YEAR IN REVIEW: Federal agenda dominated by halibut bycatch concerns

Halibut dominated the federal fisheries process in 2015, with each sector fighting over reduced allocations. Directed halibut fishermen in the North Pacific have watched their quotas drop while the trawl industry prosecuting Bering Sea groundfish has had a relatively static bycatch limit for 20 years. The North Pacific Fishery Management Council governs bycatch while the International Pacific Halibut Commission governs directed removals, and the two have not coordinated on the decline in harvestable halibut biomass. To remedy the situation, the six Alaskan members of the North Pacific council made an emergency request to the Department of Commerce December 2014 asking for an reduction of 33 percent of the trawl fleet’s bycatch limit. The Department of Commerce, in turn, requested that the IPHC make an emergency allocation to Central Bering Sea fishermen that exceeded the staff recommendation. The commission agreed, setting the Central Bering Sea harvest limit at 1.285 million pounds of halibut, well above the recommended limit but at the minimum Bering Sea fishermen said they need to survive. At its June meeting, the North Pacific council took a further step and slashed the Bering Sea and Aleutians Islands trawl fleet’s bycatch limits by 25 percent overall. The council discussed further halibut saving measures the rest of the year. In the Gulf of Alaska, the council is still reviewing a plan to address bycatch in Gulf trawl fisheries. Around the Gulf, charter angler guides have received yet another tightening of rules. Halibut anglers in Southcentral Alaska, also known as Area 3A, will have the same amount of fish to catch as in 2015, but be allowed to keep fewer. Anglers can only catch four per year instead of the five they were allowed in 2015, though the council authorized a two-fish daily bag limit with a size limit on one fish. Weekly daylong closures, which the council first added last year, will be held on Wednesdays for the entire Southcentral area. In Southeast Alaska, anglers in 2016 will be allowed only one fish per trip either shorter than 42 inches or longer than 80 inches. Southeast guided angler quota rose to 847,000 pounds, about 80,000 pounds more than last year. These charter rules mirror those of 2015. 2. Lots of salmon, but underweight and late Unknown factors collaborated to bring the second-largest harvest on record for Alaska salmon, but one that arrived late in many areas and with a trend of underweight fish. Statewide, the commercial salmon harvest of all species was 247 million fish, greater than the 2015 harvest projection of 220 million and the 2005-14 average of 179 million fish. This year’s harvest was the second highest since 1994, following only 2013, when the harvest was 273 million fish. Bristol Bay sockeye led in value with an immense but oddly timed run of sub-average-sized fish, while a bumper pink salmon harvest in the Prince William Sound matched exactly an inexplicable lag of Southeast pink salmon runs. Meanwhile, the international salmon market contended with price forces that included the U.S. dollar’s relative strength, Russian import bans, farmed fish and oversupply from the 2014 harvest. In Bristol Bay and in key Southcentral rivers, the run timing for sockeyes was oddly late. By the season’s July 4 midpoint, Bristol Bay biologists saw no sign the harvest would reach close to 37.6 million forecast, only to see a record rally that put the total harvest near 36.7 million, which is second only to 2014 in the last 20 years. While acknowledging wide margin of sampling error, Alaska Department of Fish and Game biologist Steve Moffitt said the average weight for a Cordova sockeye in 2015 was 5.07 pounds. The historical average, he said, is closer to 6 pounds. Kenai area commercial management biologist Pat Shields said he expects this year’s sockeye size to be smaller than average as well. Geoff Spalinger, the Kodiak area commercial fishery biologist, said the average weight for Kodiak sockeye was a half-pound below the historical average at 4.7 pounds. The average Bristol Bay sockeye weight was 5.12 pounds, smaller than the historical average and the 2014 average of 5.92 pounds. 3. Setnet ban in judges’ hands Alaska Supreme Court judges have still not ruled on a ballot initiative that would remove an entire class of fishermen from one of the state’s largest salmon fisheries. The initiative, proposed by the Alaska Fisheries Conservation Alliance led by Bob Penney, would ban setnet gear in urban areas, almost exclusively impacting Cook Inlet East Side setnetters where 735 setnet permits are registered alongside a large guided angler industry. More than 80 percent of the commercial permits are held by Alaska residents. The Alaska Supreme Court heard arguments in August from the Alaska Fisheries Conservation Alliance and the State of Alaska; the state is arguing the measure is unconstitutional as a prohibited allocation of a resource. The judges have yet to issue decision. Lt. Gov. Byron Mallott certified the ballot initiative after the Alaska Fisheries Conservation Alliance submitted 43,000 signatures in support of the measure in August. The issue has been at court since it the initiative was filed in late 2013; then-Lt. Gov. Mead Treadwell rejected it in January 2014 as an allocative measure, which is prohibited by the Alaska Constitution. AFCA appealed and won a reversal in Superior Court that allowed it to begin collecting signatures. The State of Alaska is appealing the lower court decision, calling the initiative an unconstitutional reallocation of salmon from one user group of fishermen to another, though not an explicit one. AFCA argues the constitutional definition of allocation should be applied literally according to a particular legal precedent. 4. A good Board of Fisheries member is hard to find The seven-person Alaska Board of Fisheries had a rough time filling one of its seats early in 2015, and the nominee has yet to be confirmed by the Legislature. Bob Mumford, a former Board of Game member, was appointed to the position on May 20 by Gov. Bill Walker after a merry-go-round of forced retirements, criminal charges, and lobbying efforts juggled three prior appointees in and out of the running. Board chair Karl Johnstone was up for reappointment this year, but Walker told Johnstone his name would not be submitted to the Legislature for reappointment in light of an unsavory Department of Fish and Game commissioner vetting process in January. Johnstone resigned in response, and vice chair Tom Kluberton, a Talkeetna lodge owner, took his place. During a joint board commissioner interview, the Board of Fisheries members voted unanimously, without comment, against forwarding Roland Maw’s name to the governor for consideration, while the Board of Game voted unanimously in favor. When Johnstone resigned, Walker then appointed Maw, a longtime Kenai Peninsula resident, commercial fisherman and former executive director of the United Cook Inlet Drift Association, but without properly vetting his past. Maw withdrew his name from consideration Feb. 20 just one month into the confirmation process during the 2015 Legislative session. He was charged with illegally obtaining resident fishing and hunting permits in Montana shortly thereafter. Walker then appointed Robert Ruffner, who was targeted for defeat by an intense lobbying effort by the Kenai River Sportfishing Association seeking to frame him as sympathetic to commercial fishing interests. Ruffner failed to be confirmed by the joint Legislature by a 30-29 vote, leading to Mumford’s appointment, which is still subject to confirmation. According to former Boards and Commissions Director Karen Gillis, Walker was ready to name Roberta “Bobbi” Quintavell to the seat despite her lack of fisheries experience and Gillis resigned her job in protest before Mumford was named. 5. The Blob A patch of warmer than average water in the Gulf of Alaska raised concerns in 2015 as biologists tied it to several upsetting trends in the region’s fisheries. Warmer and drier climates in the western U.S. combined with natural Pacific Ocean currents to cause a patch of water stretching along the West Coast and into the North Pacific with an average surface temperature of 2 degrees centigrade, or 3.6 degrees Fahrenheit, warmer than the historical mean. Researchers and fishermen haven’t positively connected anything sinister to the warm water, but there was no lack of troubling episodes in the Gulf of Alaska. In the summer of 2015, dead whales cropped up near Kodiak, Chignik, Katmai, Seldovia, and False Pass, along with dead sea lions in Dutch Harbor and Amalik Bay. Dead puffins and other seabirds abound along the Gulf, as well as washes of dead bait fish including sand lances and herring. Biologists suggested the small fish and late runs of sockeye salmon around Alaska could be linked to the warmer water. Warm water is conducive to certain types of algae, that crept into the Gulf of Alaska from farther south.

Banks warn of impacts for breaking Anchorage LIO lease

Editor's note: This story has been modified from the first version posted online to reflect the owner of the Anchorage office as 716 West Fourth Avenue LLC, of which developer Mark Pfeffer is a member, and to include the correct number of appraisals on the building which was four and not three as originally written. The Alaska Legislature’s 10-year lease on its 64,000-square-foot office building in Anchorage has become a political football, possibly a preview of fireworks to come in the 2016 legislative session. Some legislators are pushing for the state to break its lease on the new building, which was signed with 716 West Fourth Avenue LLC, an Anchorage-based company whose members include developer Mark Pfeffer and longtime building owner Bob Acree. The Legislative Information Office, or LIO, is on 4th Avenue in downtown Anchorage, and includes adjacent parking for the building. “We’re leasing a Cadillac at a time when all we can afford is a Chevrolet,” said Sen. Gary Stevens, R-Kodiak, the current chair of the Legislative Council. The Legislative Council, a House-Senate committee that manages the Legislature’s affairs when not in regular session, will meet and possibly decide the issue Dec. 19. One option being considered is purchasing the building outright from 716 West Fourth Avenue LLC. Pfeffer said he is willing to sell the building for less than $38 million, which includes financing costs for issuing bonds to pay off the existing debt, and making the building owners whole on their investment. Pfeffer briefed the Journal on the project Dec. 14. One concern that has surfaced is the effect of a cancellation on the state’s reputation in the financial community, particularly at a time when national credit rating agencies are watching Alaska closely. Pfeffer also said Dec. 14 that he would pursue legal recourse against the state should the Legislature break the lease. The cost of the project was $44.5 million, including $2.89 million spent to purchase an older building formerly home to Anchor Pub adjacent to the legislative building. The cash equity held by Pfeffer in the building is $9 million. The final tab also included the cost of improvements needed by the Legislature. The lease was signed in September 2013. Critics now argue the $3.3 million annual rental cost is too high, given the state’s current financial condition, and that cheaper space is available. The alternative space the critics, including Stevens, point to is the state-owned Atwood Building on 7th Avenue, which is used by state agencies and the governor. Stevens said there is space in the Atwood Building for legislative offices and that state agencies would not be displaced. However, the state’s financial community is worried over the effect a lease cancellation would have on the state’s overall financial credibility, which is already under stress because of the sharp decline in oil revenues. “We alert you that this action will likely impact the state’s credit worthiness and the cost of borrowing in the future,” wrote Steve Lundgren, president of the Alaska Bankers Association, in a sharply worded letter sent April 8 to budget conference co-chairs Sen. Pete Kelly, R-Fairbanks, and Rep. Mark Neuman, R-Big Lake, when the breaking of the lease was first raised. “Doubts about the state’s willingness to service its obligations will reverberate, and cause lenders and investors to begin a focused reassessment of notes and securities where the source of payment is the state.” The state Senate had voted to not make the payment on the lease, in effect breaking it, in its version of the operating budget. The House budget included the rent payment. The bankers association was strongly opposed, enough a meeting was held on Easter Sunday to vote and draft the letter. The payment was ultimately approved in the final state budget. Lundgren expanded on his comments in an interview with the Journal on Dec. 15. “Our association’s comments do not speak to the issue of the building or the lease but mainly to the statewide impact that could occur on all state leases,” or building space, he said. If an Alaska bank helps finance a building that will be occupied or partly occupied by a state agency, “the institution would look to the strength of that lease. If there is an annual ‘out’ clause in the contract it is like not having a long-term lease at all,” he said. Northrim Bank and Wells Fargo NA participated in the construction loan on the Anchorage LIO; EverBank issued the long-term loan on the building in December 2014. Banks may decide not to lend for the building or, more likely, to raise fees for a risk premium, he said. That would trickle through to the lessee in the form of higher rent. The consequence, if the Legislature were to renege on the 4th Avenue building lease and move to the Atwood Building, the cost of rentals for any agencies would climb because building owners will build in a risk factor for a similar lease cancellation by the state. There may also be broader ripple effects, for example if the state moves to borrow money for state capital projects and to finance future state retirement pensions through bonds as Gov. Bill Walker is proposing. All state obligations and contracts have a “contingent on appropriations” clause, but that authority has rarely been used. Stevens said he recalls it having been used with a lease on an office building in Juneau, although the circumstances of the matter were not described, and also was told the state administration has used it two or three times on other state leases. None of those are as high profile as the new Anchorage building, however. Meanwhile there is also a lawsuit filed by Anchorage attorney Jim Gottstein, owner of an older building adjacent to the new LIO that Gottstein claims was damaged during construction, and that the new lease is illegal. Gottstein claims the rental contract violates a state requirement that rates on lease extensions, which is the way the Legislature chose to structure the deal, must be at least 10 percent under prevailing rates in the market for comparable space. The lease rate is above the prevailing rates, Gottstein said. Pfeffer disputes that and cited several appraisals by Northrim, Wells Fargo — who both appraised the building at $44 million in value — and an independent appraiser, Waronzof and Associates, that was hired to do the analysis under the direction of the Alaska Housing Finance Corp., a state agency with experience in commercial building development. Waronzof estimated the cost of the project at $48.5 million with and estimated rental rate, on comparable space at $3.9 million annually. That is to be compared with $3.38 million to be paid annually under the Legislature’s lease with Pfeffer.  Pam Varni, executive director of the Legislative Affairs Agency, which provides administrative and legal services to the Legislature, signed off on the appraisal in a Sept. 19, 2013, letter to the Budget and Audit Committee. “The annual rental payment (to Pfeffer) will be $281,638 per month or $3,379,658 per year, exceeding the 10 percent reduction in market rental value,” required by law, Varni wrote. “Our annual savings will be $528,341,” in contrast with the comparable lease rate determined by the independent appraiser, she wrote. There is a tangled history to the new legislative office building. The old building, constructed in 1972 was first leased by the Legislature in 1992 from longtime owner Bob Acree. Pfeffer became a partner in the building later. There were multiple extensions of the original lease, including five one-year extensions from 2009-13. The building was aging and one-year lease extensions did not allow for major investments in upgrades. Its one elevator was among the slowest in the state. It was not compliant with Americans with Disabilities Act, lacked secure parking, proper meeting spaces and on-site IT equipment. (Note: This writer was once stuck in the elevator with nine people for three hours, with the emergency phone connected to an answering service in Nebraska.) The Legislature began looking at new options in 2007, one being a rebuilding of the old Anchorage Times building also on 4th Avenue that is owned and used by the Alaska Court system and other a rebuilding and conversion of the state parking garage on 7th Avenue, which is across from the state’s Atwood Building. The state Department of Administration said no to the conversion of the 7th Avenue parking garage, however, and the conversion of the Anchorage Times building also did not proceed, although it is not known why. The former Unocal (then Chevron) building on 9th Avenue was also looked at, but the building was purchased and occupied by NANA, the Kotzebue-based Native development corporation. The Legislative Council then began a long process of Requests for Information, or RFIs, and Requests for Proposals, or RFPs, to solicit information on available space or request actual proposals from building owners. There were 12 of these over the years, Pfeffer said, including “government-to-government” solicitations for space from other state agencies. The requirement was for 35,000 square feet of usable space and dedicating parking. There were 28 responses to the various solicitations with proposed locations on Klatt Road, in south Anchorage, and in east Anchorage. “At that time the Legislative Council also took a vote to indicate a preference for staying downtown,” Pfeffer recalled. By 2013 the building “was getting into rough shape,” he said, but one-year lease extensions did not allow for major investments in upgrades by a building owner. Through all of this no one suggested moving the Legislature into the Atwood Building, Pfeffer said. Council makes call In early 2013 the Legislative Council decided a major decision needed to be made. Rep. Mike Hawker, R-Anchorage, then the council’s chair, was authorized to request proposals for major renovation or even reconstruction from Pfeffer, the building owner. Pfeffer said he responded with three options: “One was essentially new carpeting and paint, which wouldn’t have changed the lease rate; a second was a more extensive renovation and included work on the elevator, which would have added to the rent,” he said. A third option was a full modernization, essentially a new building. In May 2013, the Legislative Council agreed the last option, full modernization and reconstruction, was best, but also put out one more RFI to see if any other space was available. Former Rep. Bill Stoltze, R-Chugiak (now a state senator) was a member of the council and asked that the entire Municipality of Anchorage, from Girdwood to Eklutna and included Stoltze’s Chugiak district, be surveyed. There were two responses, one in a building at 64th and A Street, the Carr-Gottstein building in a South Anchorage industrial area, and a second between Northern Lights Boulevard and Fireweed Lane, on streets where there are large buildings occupied by engineering firms. Both options were rejected by the Legislative Council. In June 2013, the council authorized Hawker to ask Pfeffer to develop a proposal for “full modernization.” This required a scoping out of space needs and uses. Two new elevators were needed as well as meeting rooms on the first floor, so members of the public could have easier access. Security was also to be provided for parking because of safety concerns in the old, unprotected underground parking. There was also to be a facility for emergency power. That was not in the old building. Off-street access by trucks was also needed for the twice-yearly loading and unloading of equipment and files to be moved to the state capitol building in Juneau for annual the legislative session. In the old building the trucks blocked off part of 4th Avenue for loading and unloading. Also, in the old building all of the Legislature’s information technology services were in other locations. All of the “IT” was brought into the new building. Pfeffer developed a proposal for the building incorporating all of these needs including a rough estimate of the annual lease rate, about $3 million a year. A period of cost validation followed, conducted by Alaska Housing Finance Corp. The scoping of needs for the new building was done over an 11-week period from June through August 2013, and involved legislative staff, the Legislative Affairs Agency and others, about 60 being engaged at different times. Hawker was authorized to proceed to execute a contract with Pfeffer in August 2014, but the council also asked if the state could purchase instead of lease the building. Pfeffer said he would be agreeable but the legislators decided to stick with the lease option. The contract was signed in August of 2014, but did not include a sale option clause. Four appraisals were completed on the building. Two were done in 2013 by the banks providing construction financing, Northrim Bank and Wells Fargo, and both came in at $44 million, close to the actual cost. A third appraisal was done by EverBank, which took out the long-term debt on the building, in December 2014. That also came in at about $44 million. The fourth was done for Alaska Housing Finance Corp., which came in at $48.5 million. The reconstruction began in late 2013. It was finished on time and legislators moved into their new offices in December 2014. Decision looms Stevens, who is chair of the Legislative Council, said he hopes the council will make a decision Dec. 19 that will end the political wrangling. He would like to see the committee vote, with finality, to either buy the building from Pfeffer, to stick with the existing lease or to terminate it and move to the Atwood Building. “One concern I have is that with state money getting tighter the very expensive lease in Anchorage will drain funds for the Legislative Information Offices in other parts of the state,” Stevens said.

Gov’s budget plan scrutinized by legislators on both sides

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

Revenue Dept. outlines plan to alter tax credit program

By Tim Bradner Alaska Journal of Commerce   State Department of Revenue officials are providing some details on pending changes to an oil and gas tax credit incentive program intended to spur new development. Last summer Gov. Bill Walker vetoed $200 million of a $700 million state appropriation to pay for industry tax credits, arguing the cost of the program was no longer affordable with a deficit of nearly $3 billion. Walker promised that a replacement to the tax credits would be developed, but one that is less expensive. The result is that a draft of a bill to be introduced in the 2016 session of the state Legislature will be made public soon, state Revenue Commissioner Randy Hoffbeck told a group of Commonwealth North members Dec. 11. Hoffbeck said the existing tax credit program for explorers will expire July 1, 2016, as is currently scheduled, except for companies drilling in “Middle Earth,” an informal name for the largely unexplored basins of Interior Alaska. Those tax credit will continue until 2021. Also, a net operating loss credit program, intended mainly to help small producers and developers, will continue. However, there will be an annual cap of about $100 million on state payments to refund these, Hoffbeck said. This is down from $500 million for all tax credit payments in the current state budget year.  The proposed changes will also include more transparency so that citizens can know who the tax credit payments are going to, except that confidential information would be protected as is now, the commissioner said. Under current law there can be no information made public by the Revenue Department on which companies are receiving the tax credits, the commissioner said. In an email, state tax director Ken Alper said a $1.1 billion “transition fund” is proposed to be established to pay for credits that companies have applied for that have not been paid, or for tax credit application that are expected in fiscal year 2017. “These are primarily tied to expenditures made in calendar year 2015 that will be applied for when companies making their tax filings next spring, and approved for repurchase (by the state) between June and August 2016,” Alper wrote in the email. Other changes will include the application of the Senate Bill 21 oil production tax structure to Cook Inlet, which will mainly result in the elimination of a 20 percent capital expenditure credit that was also eliminated on the North Slope with the passage of SB 21, but retained for Cook Inlet, Alper said. A well lease expenditure credit for Cook Inlet would also be repealed. The net effect of this, Alper said, will be to reduce the current “stacking” of credits in Cook Inlet that result in 55 percent to 65 percent of new developments being paid for by the state, and bringing that amount down to about 25 percent, the current level of the net operating loss credit in the Inlet. Exploration companies drilling wells will continue to be helped by the net operating loss credit, which will pay 35 percent of approved costs on the North Slope and 25 percent in the Inlet. Meanwhile, the state is developing a loan program to help small companies develop fields once oil or gas has been discovered. Alper said the eligibility for a state loan will be linked to proven oil and gas reserves, meaning that a discovery must be made. “We don’t believe this is an appropriate mechanism to support exploration (and prior to discovery) as there is a much lower likelihood that there will eventually be production that would repay the loan,” Alper said. Hoffbeck told Commonwealth North that the state development corporation, the Alaska Industrial Development and Export Authority, is being looked at as a possible mechanism to make these loans. AIDEA is already making loans tied to oil development, although mainly in facilities such a drill rigs and surface infrastructure.

Council tightens Southcentral charter halibut rules for ‘16

The ratchet keeps tightening on Southcentral halibut charter operations, among other groups, and relief measures are still stuck in development. The level of legally harvestable halibut in the North Pacific has dropped for a decade, and though biologists think the biomass has stabilized, downsized fishermen continue to fight for as much valuable quota as possible. Charter guides who’ve seen their portion drop want a way to buy quota from commercial operators. The commercial fleet sees the plan as an unfair grab. They already share fish with charter guides under a catch sharing plan and there is a program for charter operators to lease, but not purchase, commercial quota.  “What happened from the mandate from the council to the charter sector that said ‘live within your allocation?’” asked Caroline Nichols, a Sitka commercial fisherwoman, at the December North Pacific Fishery Management Council meeting in Anchorage.  The North Pacific Fishery Management Council sets the operating rules for charter captains in Alaska, and sets the harvest allocation split between charter and commercial fishermen that is derived from the overall quota chosen by the International Pacific Halibut Commission. At its December meeting, the council recommended a merciful amount of halibut, but a further tightening of restrictions. Halibut anglers in Southcentral Alaska, or Area 3A, can still keep two fish per day but can catch fewer per year. The council set a mostly status quo Southcentral guided angler harvest limit at 1.77 million pounds, 10,000 pounds more than last year. Anglers can only catch four per year instead of the five they were allowed in 2015, though the council kept the two-fish daily bag limit with a 28-inch size restriction on one fish. Weekly day closures, which the council first added last year, will be held on Wednesdays for Southcentral. Thursdays were closed in 2015. In Southeast Alaska, where charter captains fish salmon, black cod, and rockfish as well as halibut, restrictions have stabilized. Like last year, anglers in 2016 will be allowed only one fish per trip of either shorter than 42 inches or longer than 80 inches. Southeast guided angler quota rose to 847,000 pounds, over 80,000 pounds more than last year.  In the past, the charter fleet hasn’t been successful at keeping within the limits the commission sets for it. In Southeast alone, the charter sector exceeded its allocation by a combined 3.7 million pounds from 2004 to 2010. In 2014, Southeast exceeded harvest specifications by 110,000 pounds, and Southcentral exceeded by 413,000 pounds. The annual charter rule-setting was adopted as part of the Catch Sharing Plan passed by the council in 2012 that divides the total charter and commercial harvest on a percentage split based on abundance. Recreational quota entities Southeast charter lodge owner Richard Yamada has a plan for keeping the charter fleet within its boundaries, a “market based solution” that matches up willing buyer with willing sellers. Few were satisfied the plan deserved public review, so the council sent the idea back to staff for tweaking. “I strongly support moving this forward as a concept,” said council member Duncan Fields of Kodiak. “I’ve gone from skeptical to being excited about this amendment package.” Under the plan, a recreational quota entity, or RQE, would buy commercial quota to be held in a common pool for charter operators to draw from as needed if they’re in danger of fishing over their harvest limit. Individual Fishing Quota, or IFQ, originally gave a level of halibut quota to commercial permit holders based on their historical harvest levels and involvement in the fishery, and it is bought and sold among fishermen. Prices for quota typically run about five times or more the current ex-vessel value per pound, making purchases particularly expensive. This would differ from the current Guided Angler Fish, or GAF, program, which only allows charter permits to lease commercial quota rather than buy it. “Nothing forced, nothing taken,” said Tom Ohaus, a Sitka charter captain. “I’ve always found that giving people a choice is the best thing.” Commercial fishermen have a laundry list of complaints about the proposal, fearing it could consolidate quota or stunt the commercial fleet. The biggest concern was that an RQE may inflate the market for halibut quota and make entry harder for young fishermen. Twins Ryan and Karina Nichols, Sitka fishing deckhands 28 years old apiece, both implored the council not to make any hasty decisions. “An RQE will increase IFQ cost,” said Karina Nichols. “I see this constant erosion of affordability and accessibility of IFQs. Consider people like me who are trying to get into this industry.” Without a way to buy their quota back from charter captains, commercial fishermen worried the charter industry could hold onto quota too long and grow too big. “I talk to a lot of fishermen about this, and the one thing they do understand is it’s a one-way street,” said Sitka fisherman and council Advisory Panel member Jeff Farvour. “The commercial industry gets smaller and the charter industry gets bigger. They understand that much.” As concessions, the council agreed to allow two-way quota transfers. To prevent overcapitalization, several amendments consider caps on how much quota charter permit holders could buy, and how much money in aggregate can be spent.

AJOC EDITORIAL: Breaking LIO lease will signal state can’t be trusted

Legislators were rightly concerned when Gov. Bill Walker, without warning, vetoed $200 million in appropriations from the current fiscal year budget designated for the oil and gas tax credit program. Walker noted at the time — and his Revenue Commissioner Randall Hoffbeck had to spend a lot of time in the aftermath reiterating to the financial community — that the State of Alaska was not reneging on its obligation to pay the credits. The consequences of not honoring its debts would be terrible for a state trying to protect its top-notch AAA credit rating as it faces multi-billion deficits and now plans to finance its $13 billion share of the Alaska LNG Project. Yet here the Legislature is, through its Legislative Council that handles out-of-session affairs for the body, contemplating breaking a 10-year lease for its downtown Anchorage office building. Like all leases the state government enters, payment is “subject to appropriation,” meaning it can break the lease simply by refusing to pay the rent.  The Senate passed an operating budget last session that withheld the rent payment while the House passed a budget that did. That early April action by the Senate was so concerning that it spurred the Alaska Bankers Association to convene a meeting of its seven member institutions on Easter Sunday to craft a letter to the budget conference co-chairs Sen. Pete Kelly and Rep. Mark Neuman. The language was not ambiguous. ABA President Steve Lundgren of Denali State Bank wrote that, “We alert you that this action will likely impact the State’s credit worthiness and the cost of borrowing in the future.” Lundgren closed with this: “Alaska should not put itself in the position of having to react to a narrative that it will not live up to its commitments. How long creditors would remain accommodating is a great question to which we do not have the answer. What we do know is that some ideas have unintended consequences, and the current funding proposal would be as a good a bellwether as any signaling a risk aversion to the greater credit markets.” Thomas F. Klinker of the law firm Birch Horton Bittner & Cherot, was similarly blunt, citing Moody’s Investor Service guidance that states that “depending on the circumstances involved in a lessee’s decision to not appropriate, this risk could be reflected in that entity’s other debt ratings, including its general obligation and other tax-supported debt.” Klinker noted that while it is true the lease on the Legislative Information Office is not securitized, “a decision to not appropriate rent for the lease without a specific justification, such as the lessor’s failure to perform, could have a similar adverse effect.” He further stated that breaking the lease — which in this case is being contemplated for no reason other than public scrutiny, not because the state lacks the ability to pay — “could be considered material to investors in future state financings, and a required subject of disclosure to prospective investors in such financings under federal securities law, particularly financings based on a lease that is subject to annual appropriation.” Not only is the state considering financing its capital budget for the next two years with general obligation bonds, but Walker has also proposed issuing pension obligation bonds to help cover the 11-figure unfunded liabilities of the public employee and teachers retirement systems. Pension obligation bonds are also “subject to annual appropriation.” Hoffbeck said in a recent interview that while the Legislature has previously approved the issuance of such pension bonds in 2008, a new vote would reassure investors the state would make good on payment if the bonds are sold. “If the Legislature is not willing to voice support of it, we don’t want that kind of noise going into the market when we try to sell bonds,” Hoffbeck said. In other words, if the Legislature won’t pay what it owes on something as small as a $3.3 million annual appropriation, investors aren’t going to lend the state money to finance billions of dollars in bonds or they will do so at much greater interest rates. It is irrelevant at this point whether the decision to renovate and improve the downtown office space was right or not. The fact is the Legislature signed a contract and it should live up to it. If the Legislature can’t make what’s a difficult but necessary decision to pay its debts, how in the world will its members find the intestinal fortitude to do what needs to be done to put the state on a more sustainable fiscal path? A shortsighted action bowing to political pressure or just the optics of the whole thing will signal to private investors that the state can’t be trusted when times get tough, and they sure aren’t getting easier any time soon. Given the circumstances we find ourselves, that should be the last way the Legislature wants to ring in the new year. Andrew Jensen can be reached at [email protected]

FISH FACTOR: Fish 2.0 touts Alaskan fish; Begich condemns GE salmon

Caught by Alaskans for Alaskans is a business concept that bested 170 others in a global fisheries business competition last month at Stanford University in California. The contest, sponsored by Fish 2.0, awards creative approaches that build demand for sustainable seafood, reduce waste and support fishing towns. The Alaska Community Seafood Hub model, presented by Kelly Harrell of Anchorage, won $5,000 in cash and is in the running for more money to be awarded this month. Fish 2.0 builds the knowledge and connections needed to increase investment in the sustainable seafood sector, according to its website. “We noticed that investors were having a hard time finding fisheries deals, and fishery business owners were frustrated that investors had no interest. We created Fish 2.0 to build connections between the groups,” said Monica Jain, Fish 2.0 Founder. “Our goal is to create the business growth needed to drive social and environmental change in the seafood supply chain.” Harrell, who is executive director of the non-profit Alaska Marine Conservation Council, or AMCC, said: “We told the story of the really unique assets we have in Alaska, which include thousands of small boat fishing families. We have a giant seafood economy that provides one of the largest and most sustainable seafood supplies in the world. But the way our seafood supply chain is structured, it is very difficult to get the seafood harvested locally to our communities here in Alaska, because we are set up to export such large volumes.” The Walton Family Foundation, a Fish 2.0 sponsor, wrote: “When Kelly Harrell started crafting the idea of the Alaska Community Seafood Hub, she knew that improving business, people’s lives and the environment go hand in hand. Kelly pitched her business model to a room full of investors, ocean and fishing industry experts and grant makers who shared her vision of a sustainable seafood market. She walked away with $5,000 and countless connections to help build a strong community-based fishery and bring high-quality seafood from Alaskan fishermen to local consumers.” “We often overlook Alaska thinking that people have access to catching their own and a lot do, but in places like Fairbanks and Anchorage, and even in coastal towns, many people don’t. And in the case of species like crab, it’s really not practical to get their own,” Harrell said. The Alaska Seafood Hub concept expanded upon the Catch of the Season program and the Kodiak Jig Seafoods brand for cod and rockfish that AMCC has operated for several years.  “We began by selling Tanner crab and cod to consumers in Alaska and through wholesale buyers in a way that tells the story of the fishermen, the species, the community where it come it comes from,” Harrell said. “It helps build connections between our fishermen and fishing communities and our seafood consumers and buyers, and generates a higher price for the fishermen. It’s a real win/win.” About 20 fishermen are involved in the program so far, and they fetch 60 percent more than the regular dock price. Along with individual buyers, regular customers include the Bear Tooth in Anchorage, Alyeska Resort in Girdwood and Princess Tours Lodges. Harrell said fish offerings are expanding to include Tanner crab from the Bering Sea, king crab from Norton Sound and sockeye salmon.  “This summer we sold salmon from Bristol Bay for the first time in Fairbanks and it was a huge hit,” Harrell said. “People were extremely eager to have seafood caught by Alaskans for Alaskans and we sold thousands of pounds right away to an eager consumer base.” AMCC’s ultimate goal is to spawn umbrella seafood hubs for local brands in other Alaska fishing towns, such as halibut from the Pribilof Islands.  “We want to tell the story of halibut bycatch in the Bering Sea and how that is potentially putting these small communities out of business in terms of their halibut fishery. People in the state really need to hear it through something they can support and put on their dinner plates,” Harrell said. In the four rigorous rounds of the competition, Harrell said the judges were most surprised that many Alaskans don’t have access to local seafood, and that Alaska politics and the economy are not more connected to the state’s fishing industry. Fishing fees Alaska fishermen who hold catch shares of halibut, sablefish and Bering Sea crab pay an annual fee to the federal government to cover management and enforcement costs for those fisheries. The fee, which is capped at 3 percent, is based on dock prices for the fish through September and averaged across the state. Bills went out in late November to 1,983 longliners for a total coverage cost of $5.6 million, said Kristie Balovich, Budget Officer for the National Oceanic and Atmospheric Administration, or NOAA, Alaska Region based in Juneau. The dockside value of the halibut fishery went up this year while the value of sablefish went down.  “The 2015 halibut landings had an increase in overall value to $107 million, compared to $100 million in 2014. Sablefish had a slight decrease going from $76.7 million to $76.6 million,” Balovich said, adding that dock prices, or ex-vessel prices, were higher for both. Halibut was at $6.42 per pound this year, and sablefish was at $3.78 per pound. That compares to an average halibut price of $6.36 per pound and $3.59 per pound for sablefish in 2014. The fee system is different for the Bering Sea crab fisheries.  “NOAA doesn’t track dock prices for crab, only the total value of the fisheries,” Balovich explained. That added up to $229 million for the 2014/2015 season, an increase of about $300,000 from the previous fishery. The crab catches yielded $3.4 million in coverage costs, which are collected and paid by Bering Sea processors (19 last season) by the end of July. The coverage fee for the crab fishery increased to 1.48 percent this year and to 3 percent for halibut and sablefish, due to adding more management and enforcement personnel.  “We were able to hire some people so there were some increases in labor for those fisheries,” Balovich said. Balovich added that Alaska longliners are “great about paying their bills” and that 99.9 percent pay by the Jan. 31 deadline. There’s one change for all bill payers this year: credit cards are no longer accepted over the phone due to security reasons. “Everyone has access to their online landings, and if they go into their eFish account, it switches them over to a site called www.pay.gov. “It is very secure and they can pay with a credit card there,” Balovich said. Begich talks fish fights Former Alaska Sen. Mark Begich is continuing his fight against genetically modified salmon after its approval last month for U.S. sales by the federal government. “I think it is a very bad decision,” he said in a phone conversation. “When I was in the Senate I was able to stop it from being moved forward and being approved. So I decided I am no different than any other concerned Alaskan, and I decided to write a letter to every store chain that serves food in major quantities to ask them not to sell that product.” While many major stores in Alaska, such as Safeway, have pledged to not carry so called Frankenfish, others have remained noncommittal. In his letter to Walmart president Doug McMillon, Begich wrote: “At a minimum, this product must be labeled so Alaskans can make an informed choice about what they are buying and serving to their families. Consumers have a right to know whether they are eating something from the waters of Bristol Bay, Southeast, Cordova or anywhere else in Alaska…or a test tube…I hope you will join me in continuing that effort without compromising the most sustainable fishing industry in the world that exists right here in Alaska.”  “If the people making this fake fish believe it’s such a good product, then label it,” he fumed on the phone. Begich broadened the discussion of fish threats to North Pacific waters, which are getting warmer and more acidic.  “You can’t have sustainable fisheries without sustainable waters,” he stressed. “If we don’t have sustainable ecosystems, everything that lives or thrives on it or uses it will be at risk.” Alaska’s current delegation has voted against every clean air, clean water and climate change measure that has come before Congress, and Begich said it’s time for them “to accept reality.”  “Climate change is real and those who continue to deny it live in a world that doesn’t exist. And the fact that Sen. (Dan) Sullivan, who ran against me, continues to deny it 100 percent is a mistake,” Begich said. “I support the oil and gas industry, but that doesn’t mean you can’t support solid, scientific-based regulations to ensure that our air and waters are protected.” The former senator criticized the “knee jerk reaction to just say no to everything because it makes a good bullet statement in a TV ad or a brochure.” “Always opting for the negative is no way to govern,” he continued. “There is so much we should be focused on in the Alaska resource arena, and just being a no voice is not good enough. It should be a yes voice in trying to figure out how to improve everything from fisheries, oil and gas, all of it for the betterment of Alaskans and this country. What’s happening in Washington is the race to the negative, and not a race to getting things done for the long term benefit of the people we represent.” Laine Welch lives in Kodiak. Visit www.alaskafishradio.com or contact [email protected] for information.

GUEST COMMENTARY: Every Student Succeeds Act fixes No Child Left Behind flaws

Fixing the flawed No Child Left Behind Act, or NCLB, has been years in the making. This past week, we’ve reached a major milestone. On (Dec. 10), the President signed into law the Every Student Succeeds Act, referred to as ESSA. Congress passed NCLB in 2001, the year before I came to the U.S. Senate. It was intended to help states identify and focus on the educational disparities among students and take steps to improve schools that did not serve students well. That was necessary. Despite its obvious flaws, NCLB had good intentions. It delivered both a level of understanding about which children were being left behind and a realization that our schools must be accountable for each and every child. What was wrong with NCLB was that it imposed one-size-fits-all solutions from over 4,000 miles away. NCLB brought us “Adequate Yearly Progress”, or AYP, that gave our schools 31 ways to fail and almost no chance to succeed. It gave us a definition of a “Highly Qualified Teacher” that could not measure whether a teacher effectively engaged our children in learning. It brought the mandate that the first solution to improve a school was to fire the principal. And while Alaska received the Secretary’s “waiver” from NCLB’s requirement that every child reach proficiency by 2014, that “waiver” came with more objectionable conditions and mandates. Essentially, NCLB and waivers brought us a “national school board”. Since coming to the United States Senate in 2002, I have met with school board members, parents, educators, and students from across Alaska who were discouraged and sometimes just plain fed up with NCLB’s mandates, and who shared their ideas for fixing it. Throughout the past year, I have received phenomenal input from so many around the state as I played my part in writing ESSA as a member of the Senate Health, Education, Labor, and Pensions Committee. My focus in this work was for Alaskans to have the ability to make the decisions that impact our schools, educators, students, and parents. So what will ESSA do? First, it will maintain the idea that we must identify which schools are doing a good job of serving our children and which ones need to improve. But it will eliminate unattainable AYP standards and empower Alaskans to decide how to help our struggling schools. As we move away from the “national school board” we also ensure that mandates for national standards like Common Core are prohibited. Under ESSA, states and communities will decide what standards our students and schools are expected to meet, the skills teachers need, and how to evaluate them. In so many ways, ESSA brings control of our schools back to where it belongs — to our communities, school districts, parents, and tribes — so that school accountability starts and ends right here at home. No more federal control, no more “waivers with strings”, no more “one-size-fits-all” education mandates that never fit here in Alaska. ESSA also includes a number of provisions I crafted that are important to Alaska, like the After School for America’s Children Act that I co-sponsored with Sen. Barbara Boxer, so that parents can remain at work after the school day ends, sure that their children are safe and engaged in enriching activities. ESSA also fixes a conflict between the Impact Aid program and the Alaska Native Claims Settlement Act to relieve our rural districts of burdensome paperwork. And I made sure Alaska’s small high schools can calculate their graduation rate appropriately. I was also proud to make sure that Alaska’s Native peoples will have more say in their children’s education and that ESSA will help to revitalize Native languages. This legislation is another example that Congress is working for the American people again. ESSA was crafted over the course of a year by members of the Senate Health, Education, Labor, and Pensions Committee through open negotiations. Senators were given multiple opportunities in committee and on the Senate floor to have their ideas heard and voted on. Finally, it went through conference with the U.S. House of Representatives, where more changes were adopted. Perhaps that is why the final bill passed both the House and Senate with an overwhelming bipartisan majority. The changes enacted by the Every Student Succeeds Act will not happen overnight. The law gives Alaska’s stakeholders time to craft our own plans, discuss them, and come to a consensus. It will be hard work, but it is a responsibility I believe each Alaskan should take seriously. What happens next in Alaska’s schools will be determined by the Alaskans who show up and who share their perspectives. Together, I believe we can do right by Alaska’s children. Murkowski is the senior U.S. senator from Alaska.

Eye on Wall Street: Markets move sideways in November

Last month proved to be quiet compared to the big October rebound in equities. The S&P 500 gained 0.3 percent and is up 3 percent year-to-date, or YTD. Foreign equities lost a bit of ground mainly due to a strong U.S. dollar, which was up 3 percent on FX markets. U.S. interest rates climbed anywhere from 5 to 20 basis points, or bps, across the yield curve. Investors expect the Federal Reserve to hike rates on Dec. 16. The two-year Treasury jumped the most; it was up 20 bps to yield 0.93 percent at month end. The Barclays Aggregate Bond Index lost 0.3 percent. Commodities continued to take it on the chin. Oil fell over 10 percent and finished under $42 a barrel. Gold had its worst month since 2007, declining 6.8 percent to $1,065 an ounce. The Bloomberg Commodity Index lost 7.3 percent and is down 22.3 percent YTD. We’ll have much more about the economic and financial market outlook next month when we review 2015 and peer ahead to 2016. Antiques Road Show My wife and I have been watching this PBS mainstay for years. From time to time you’ll hear us yelling at the TV, “How much? Sell it! Hit the bid! Don’t keep it at that inflated price!” My pet peeve is when someone reports buying something for say $1,000 20 years ago and it’s now worth $2,000. The appraiser often comments, “not a bad return.” Actually, using the Rule of 72 (i.e. divide 72 by the growth rate to estimate how many years before an investment would double) the annual rate of return would be 3.6 percent — not particularly attractive. Really though, how have collectibles faired as investments? A recent comment by an analyst at ISI Evergreen got me thinking. He said: “Coin prices are dropping again and antique furniture prices are some 18 percent below the 2006 peak. Auction prices of classic restored automobiles are down 11 percent from their 2007 peak. Silver set prices are slipping lower as silver prices fall. High-end art prices, however, are starting to rebound from robust overseas demand. But most collectible prices are down from the 2007 peak.” More analytically, a recent article in the Financial Analysts Journal takes a look at collectibles, noting that by some estimates the average high net worth individual has almost 10 percent of their wealth in artworks, antiques, jewelry, fine wines and other luxuries. The authors quote the annual returns from 1900 to 2012 for stocks (9.4 percent) and bonds (5.5 percent) compared to art (6.4 percent), stamps (6.9 percent) and violins (6.5 percent). However, they caution that these numbers exclude transaction costs. Dealer markups and fees for collectibles can be high. For example, auction houses typically charge a “premium” to the buyer and a “commission” to the seller, which together can be 25 percent of the asset’s price! So you better have a long holding period in mind before taking the plunge. Furthermore, collectibles are very illiquid and often require insurance and storage fees. There is the danger of forgery and fraud, not to mention fads and bubbles. The standard indices also underestimate the true volatility of collectible prices. The actual return volatility is probably closer to that of equities. The authors note that diversification within collectibles is important. Yet for a variety of reasons (the difficulty of day-to-day pricing for example) they can find few examples of successful collectible mutual funds. Bottom line? The authors conclude that the, “after-cost, risk adjusted financial returns are low, which can be seen as an indication that the ‘psychic return’ on holding unique and aesthetically pleasing objects must be substantial indeed.” My advice? As an investment, collectibles leave much to be desired. From that perspective it is probably better to get your satisfaction vicariously by tuning into the Antiques Road Show. I’ll bring the popcorn! Jeff Pantages, CFA, is the chief investment officer for Alaska Permanent Capital Management, a $3.5 billion investment management and advisory firm located Anchorage.


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