Halibut quota up 2.3 percent overall, dips for Central Gulf

The International Pacific Halibut Commission raised halibut quota for the second time in as many years, adding a glimmer of hope to a fishery troubled by stock declines and political squabbles. Overall, the commission raised the Pacific halibut catch limits in all except one region: the Central Gulf of Alaska, also known as Area 3A. In particular, it gave a much-welcomed boost to the Central Bering Sea – from where the commission’s newest member hails and holds commercial halibut quota. “We’re very excited about it in St. Paul,” said Simeon Swetzof, mayor of St. Paul in the Pribilof Islands, a Central Bering Sea island whose economy depends in large part on small boat halibut fisheries. “We want to continue to be excited later.” The commission, comprised of U.S. and Canadian commissioners, oversees the quota-setting process for U.S. and Canadian halibut fisheries in the Pacific from Northern California to the Bering Sea. The commission divides the overall halibut fishery into specific areas and allocates quota to each area. In total, the commission set the overall halibut harvest for the 2016 season at 29.89 million pounds, a 2.3 percent increase from 2015. This is also an increase from the catch limits recommended at the commission’s 2015 meeting, called the “blue line” limits. The 2016 limit exceeds the blue line by more than 3 million pounds. The increase looks good for communities represented by Jeff Kauffman, CEO of the Central Bering Sea Fishermen’s Association. Kauffman was recently appointed as one of the commission’s three U.S. commissioners, taking over for Don Lane of Homer. The Central Bering Sea Fishermen’s Association is a Community Development Quota group for St. Paul, a Central Bering Sea island whose economy depends in large part on small boat halibut fisheries. The Central Bering Sea, termed Area 4CDE by the commission, has been the one of the commission’s biggest focal points in 2014 and 2015. Halibut fishermen in the area have been faced with shrinking allocations, leading to several large-scale management decisions from the North Pacific Fishery Management Council. Officials including the Secretary of Commerce implored the commission to set quota at a bare minimum of 1.285 million pounds for the area, which it did in 2015. This year, the area’s quota rose. The Community Development Quota program gives 10 percent of federal fishing quota to 65 Alaska villages within 50 miles of the coast. Kauffman also sits on the Advisory Panel for the North Pacific Fishery Management Council, which sets halibut bycatch limits and management, as well as the split between sportfishing groups and commercial users. Kauffman has been a vocal proponent for cutting halibut bycatch caps for Bering Sea groundfish trawlers in 2015, during which the North Pacific cut bycatch caps for the groundfish fleet by a 25 percent. Swetzof said he recognizes that his area’s quota bump in part comes from a reduction in bycatch from Bering Sea groundfish trawlers, the majority of who are concentrated in the so-called Amendment 80 fleet based in Seattle. “The Amendment 80 guys, they put halibut on the table for us,” said Swetzof. “I really appreciated Amendment 80 doing what they did last year, and this year. They left 900,000 pounds on the table.” Each area either received an increase in quota or an equal amount to the 2015 season, except Area 3A, the Central Gulf of Alaska. The Southcentral Alaska charter halibut fishery has been saddled with steadily tightening restrictions, which charter industry stakeholders make Alaskans lose interest in the fishery. Guided halibut anglers in Area 3A can still keep two fish per day but can catch fewer per 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. Andy Mezirow, captain of Crackerjack Charters in Seward and a member of the North Pacific council, said the Southcentral charter fleet isn’t surprised by the quota reductions for his area given the still-shaky biomass for Pacific halibut. “It looks like the commissioners pretty much followed the science,” said Mezirow. “If there continues to be a downward trend, we’ll have to come up with some innovative solutions to keep it viable.” Mezirow said charter captains have not yet seen a precipitous drop in business. Southcentral restrictions may have a negative impact on Alaska resident charter clients, but overall the fishery is maintained by an increase in Alaska tourism despite quota drops, he said. To Mezirow, this is a mixed blessing. “To me, making up for a loss of access to residents with more tourism isn’t exactly healthy,” said Mezirow. Each area’s 2016 harvest exceeds the blue line harvest limit. Area 2A, Pacific Northwest coast: 1.14 million pounds, 200,000-pound increase from 2015. Area 2B, British Columbia: 7.3 million pounds, a 240,000-pound increase from 2015. Area 2C, Southeast Alaska: 4.95 million pounds, a 300,000-pound increase from 2015. Area 3A, Central Gulf of Alaska: 9.6 million pounds, a 500,000-pound decrease from 2015. Area 3B, Western Gulf of Alaska: 2.71 million pounds, a 60,000-pound increase from 2015. Area 4A, Central Aleutian Islands: 1.39 million pounds, the same as 2015. Area 4B, Western Aleutian Islands: 1.14 million pounds, the same as 2015. Area 4CDE: Central Bering Sea: 1.66 million, a 375,000-pound increase from 2015. Area 4C: 733,600 pounds, up from 559,000 in 2015. Area 4D: 733,600 pounds, up from 559,000 in 2015. Area 4E: 192,800 pounds, up from 92,000 pounds in 2015. DJ Summers can be reached at [email protected]  

BlueCrest: Credits an investment, not a cost

KENAI — BlueCrest Energy President and CEO Benjamin Johnson urged the public to contact the Legislature and ask them not to make any changes to the oil and gas tax credit program until 2017. The company is less than three months away from its first oil production at the Cosmopolitan field off the coast of Anchor Point. Production will be relatively limited at first — neighbors can expect to see one to two trucks a day on the Sterling Highway, taking crude oil north to the Tesoro refinery in Nikiski. As more wells are drilled, that number could be as many as 20 per day, Johnson said. While the oil production is on schedule, the other aspect of the development remains in limbo. A gas pocket that sits above the oil reservoir will be postponed if the state makes significant cuts to the oil and gas tax credit program, Johnson said at the annual Industry Outlook Forum in Kenai’s Old Carr’s Mall on Jan. 28. “It doesn’t work without the tax credits or some type of incentive,” Johnson said. “But we know that we have large amounts of resources. … These resources need to be developed. The tax credits are really critical to make sure that that’s done.” The position of the gas requires offshore drilling, while the oil development will be done with directional drilling from a facility onshore. Placing offshore platforms is significantly more expensive, and if the tax credit program is modified too much, it will postpone the gas development, Johnson said. There is a deadline for the gas development as well. A jack-up rig, the Spartan 151, is currently harbored in Seward and would be used to develop the gas wells if the development moves forward, Johnson said. However, unless the development goes through in 2016, the rig will leave Alaska and, “I’m not sure when we’ll be able to get another rig to drill offshore,” Johnson said. “To know if we’ll drill in 2016, we have to have the funding commitments and everything put together in 2016,” Johnson said. “Everything’s ready to go, we could be drilling April 15 if we knew the tax credits were going to be in place. ” The oil and gas tax credit program is one of the most scrutinized area of Alaska’s state budget as the Legislature looks to plug an approximately $3.5 billion gap in the unrestricted general fund this year. Gov. Bill Walker has called the incentives “unsustainable” and has proposed changes that would significantly cut payments, limiting the annual repurchases to $25 million. While Johnson said he could see the reason for some changes to the program, he said the Legislature should keep the same program for at least the next year. The company has already signed contracts based on the expectation that those tax credits will be carried through, he said. BlueCrest has accrued $45 million in tax credits to date, and the building this year would total about another $100 million in tax credit payments, Johnson said. He asked the attendees at the forum to “let the governor know” the impacts of changing the oil and gas tax credits. “This is the time that … it’s important that the Legislature and the governor understand that the gas development in the Cook Inlet is very important,” Johnson said. “Properly designed tax credits are … a very good investment for Alaskans. It’s an investment, not a cost.” Even if the gas production has to be delayed, the company plans to begin drilling soon, with first oil expected by April from the first well. Two additional wells will be drilled later this year, all of which will be hydraulic fracture wells, Johnson said. All three wills will be directionally drilled from an onshore rig that was designed specially for the BlueCrest project, designed to run on both diesel and natural gas, Johnson said. Johnson said 100 percent of the employees hired to work on the facility are Alaskans, and the company just hired several graduates from Kenai Peninsula College. Jayce Robertson is one of those new employees. A December 2015 Kenai Peninsula College graduate, Robertson obtained his degree in process technology and was immediately offered a job working at BlueCrest, which he said he will start Feb. 1. “I am extremely grateful for the opportunity that BlueCrest has offered me,” Robertson said when he spoke at the forum. “This is also a success story for Kenai Peninsula College and BlueCrest Energy.” Johnson said Robertson was one of a group of students who attended the forum last year who stood up during Johnson’s speech and asked to be hired for the development of Cosmopolitan. “We’re really excited about the folks that we just hired out of Kenai Peninsula College,” Johnson said. “I was thankful when they stood up last year and said, ‘Hey, hire me!’ And we did.” Reach Elizabeth Earl at [email protected]

Hilcorp still ready to buy assets as it looks to cost control

KENAI — As other oil and gas companies seek to trim expenses with layoffs and stalling development, Hilcorp Alaska has no plans to stop acquisitions. The company will continue to buy properties in Alaska, said Chad Helgeson, the Kenai area operations manager, in an update to the public at the annual Industry Outlook Forum in Kenai on Jan. 28. “Hilcorp is a growth company, acquisition-based,” Helgeson said. “That’s been our model.” The company’s workforce has also steadily increased. Of the approximately 520 employees statewide, 240 live on the Kenai Peninsula, Helgeson said. Aggressive purchases have left Hilcorp as the largest producer in Cook Inlet and with holdings on the North Slope. The company has no plans to downsize, either, and will take advantage of properties coming up for sale as other companies hit the rocks, Helgeson said. “Right now, pretty exciting times — a lot of properties are probably going to be available for sale,” Helgeson said. “What are we going to buy next? I have no idea.” At the same time, the company is feeling the impacts of sliding oil prices, though it continues to purchase and spend. Between 2014 and 2015, Hilcorp’s spending in Alaska decreased from $443 million to $281 million, a direct reflection of the decline in oil prices, Helgeson said. This year, the company expects to spend about $220 million, he said. The allocations of investment changed as well. In 2014, most of the money went to capital projects and drilling; in 2015, that changed to be majority maintenance and operations. As oil prices continue to decrease, the company will continue to monitor it and adjust its operations accordingly, Helgeson said. “As the price of oil continues to drop down, our goal is to be responsible and sustainable,” Helgeson said. “Our goal is to be here for the long-term. Our oil and gas contracts are going eight years out … we’ve got to be responsible.” The focus for the Kenai area this year is to control costs, Helgeson said. One of the questions is how the company can look at its Cook Inlet assets and continue to make them profitable, he said. The company applied earlier this year to drill two new wells in its Happy Valley pad southeast of Ninilchik and is in the process of applying to expand the boundaries of its lease in the Deep Creek Unit. The current pool boundaries, defined by the Alaska Oil and Gas Conservation Commission in 2004 when Marathon Oil leased the property, do not adequately include the majority of the gas in the formation, according to the application. This is still in process but is something the Kenai area team will work on this year, Helgeson said. If the commission approves the motion, Hilcorp’s rights under the lease would expand by about 400 acres, according to the application. Helgeson said the company is also exploring a project on the southern Kenai Peninsula and is planning to do seismic work on it later this year. However, the permitting process takes time, so it may be 2017 before any work actually begins, he said. He said there would be public meetings on any exploration the company does but did not give a more exact location of the exploration. “(We’re asking) ‘What can we do to extend the life of our fields?’” Helgeson said. “We’re planning to do some exploration type of activity. … What we’re finding is that it takes somewhere between 12 and 18 months to fully permit a project.” Reach Elizabeth Earl at [email protected]

BP reports 91 percent fall in fourth quarter earnings

LONDON (AP) — BP’s fourth-quarter earnings plunged 91 percent amid sharp declines in oil prices as the British energy company continued to make provision for the Deepwater Horizon disaster in the Gulf of Mexico and streamline operations. The company reported Feb. 2 that underlying replacement cost profit fell to $196 million from $2.2 billion in the same quarter a year earlier. The figure is an oil industry accounting standard that includes fluctuations in the price of oil and excludes one-time items. “It’s going to be a very turbulent year for our industry,” CEO Bob Dudley said as he opened a news conference in London. Oil companies are slashing jobs and delaying investments as crude prices plummet. Brent crude, the benchmark for international oil, fell 34 percent last year and hit a 12-year low of $27.10 a barrel in January. It traded at $34.13 on Feb. 1, having been above $100 a barrel as recently as September 2014. The company also set aside an additional $443 million in the quarter to cover costs related to the Deepwater Horizon oil spill in the Gulf of Mexico in 2010. Charges for the spill now total $55.5 billion. BP stock fell sharply on the news by early afternoon, dropping nearly 9 percent to $29.01. Yet Dudley took the numbers in stride, arguing that the markets had failed to take into account a robust $5.8 billion operating cash flow for the quarter. The overall net loss narrowed to $3.3 billion from $4.4 billion a year earlier. The company also said it was taking steps to streamline redundant systems put in place for legal reasons after the spill. “We have our confidence back now,” he said. The company said it reduced controllable cash costs by $3.4 billion last year, and estimated future cuts at almost $3.6 billion. It forecast asset sales of as much as $5 billion this year. BP also announced 3,000 job cuts globally by the end of 2017. That is in addition to 4,000 cuts planned in exploration and production — including some 600 in North Sea operations. BP’s job cuts will amount to 13 percent of its Alaskan workforce, or about 270 positions. European rival Royal Dutch Shell, which reports earnings later this week, said in January that its planned merger with British gas producer BG Group would result in some 10,000 staff and contractor job losses across both companies. Oil prices have plunged because global supply is high at a time when consumption is growing more slowly than expected, particularly in China. OPEC members, meanwhile, are refusing to cut production for fear of losing market share to non-members like the U.S. and Russia. And Iran is looking to start pumping more after decades of sanctions. BP is supported somewhat during the current price slump by higher margins at its downstream business, which includes refining and selling fuels. But that’s not enough to offset the broader impact of the market drop, said Spencer Welch, an oil expert at IHS. “Without the ongoing costs of Macondo/Gulf of Mexico, then BP would still have made a reasonable profit in 2015, mostly from the Downstream business,” Welch said in an email. Dudley said he expected a tough 2016, particularly in the first half. There are few predictions that oil prices will bounce back quickly, with some analysts forecasting they will drop to near $10 a barrel. And that means lots of uncertainty. “I expect continued layoffs, restructurings, and consolidated among oil and gas companies,” said Gianna Bern, associate teaching professor of finance at the University of Notre Dame. “We are witnessing the perfect storm in this industry.”

ExxonMobil’s 4Q and annual profit drop to 2002 level

DALLAS (AP) — The big plunge in crude prices is taking a toll on Big Oil. Exxon Mobil Corp. said Feb. 2 that fourth-quarter profit fell 58 percent to $2.78 billion. It was the oil giant’s smallest profit since the third quarter of 2002. Exxon’s core exploration and production business lost money in the U.S. and international earnings plummeted by nearly two-thirds. One of the few bright spots, Exxon’s refining operation, was more profitable than a year ago. That helped Exxon avoid the fate of rival Chevron Corp., which lost money in the fourth quarter. Britain’s BP said Feb. 2 that its profit tumbled more than 90 percent. Exxon shares fell $2.12, or 2.8 percent, to $74.17 in afternoon trading. They began the day down 2 percent so far in 2016. The amount of oil on the market remains at extraordinarily high levels and producers, with prices so low, continue to drill just to earn what they can. Exxon’s production rose nearly 5 percent. In 2015, the company pumped oil and natural gas equal to 4.1 million barrels a day. Lower oil prices are causing producers to cut back on new investments. Exxon slashed fourth-quarter capital and exploration spending by 29 percent compared with a year earlier, and it plans to cut that spending by one-fourth, or about $8 billion, in 2016. Still, Exxon expects to start six new projects this year, from Alaska to Australia. The company believes those projects make sense over the long term. Exxon was paid about $34 a barrel for U.S. crude in the fourth quarter, down from $63 a year earlier, and a couple dollars more for oil overseas. The price it got for natural gas fell by about half. Jeff Woodbury, the company’s vice president of investor relations, said that the oversupply of crude — it’s about 1.5 million barrels a day more than demand — will shrink in the second half as seasonal demand grows. But there are still huge stockpiles of oil, and Woodbury declined to predict when crude prices might increase. CEO Rex Tillerson called it a “challenging environment,” but said the company is generating enough cash to continue investing in the business. Exxon’s profit fell from $6.57 billion a year earlier, when oil prices were already beginning to tumble. The Irving, Texas, company was still able to put up per-share earnings of 67 cents, which was 3 cents better than Wall Street had expected, according to a survey by Zacks Investment Research. Revenue fell to $59.81 billion, beating the $50.85 billion according to a poll by the data firm FactSet. Exxon’s profit would have been thinner but for a lower tax bill. The company’s effective rate in the fourth quarter was just 13 percent compared with 34 percent for the full year. A company spokesman said the decline was largely due to reduced earnings and favorable resolution of past tax issues that were booked in the fourth quarter. For all of 2015, Exxon earned $16.15 billion, or about half what it earned in 2014. Tillerson, who has been CEO and chairman since 2006, will reach Exxon’s retirement age of 65 in March 2017. In December, the company named Darren Woods president and gave him a board seat, which made him the heir apparent in the eyes of investors. On a conference call Feb. 2, an analyst asked Woodbury when Tillerson will step down. Woodbury said that is up to the board. Tillerson’s predecessor, Lee Raymond, stayed until age 67.

As the rest of the world dumps Chinese stocks, some wade in

NEW YORK (AP) — While the rest of the world scrambles to get out of the crumbling Chinese stock market, a trickle of investors is heading straight into the wreckage. Managers of Chinese stock mutual funds have seen huge drops many times before, and they even find things to like about them. Instead of taking cover, and preserving cash in their portfolios, this time these managers say they are buying stocks of companies set to take advantage of how the Chinese government is reshaping the economy. This most-recent plummet has been even swifter and sharper than past ones, but managers of Chinese stock funds say it’s also brought down share prices enough that they’ve been buying companies that they thought were too expensive just a few months ago. “With a volatile market like China, buy it when the world hates it and sell when no one’s worried,” says Jim Oberweis, who runs the Oberweis China Opportunities fund. “That’s worked pretty well over the last 20 years in China, and now sure seems to me like a period where everyone hates it.” Only time will tell if he and other Chinese stock fund managers are right. They could have made the same argument after each of the Chinese market’s many sell-offs the last five years, and it wouldn’t have netted them much, if anything. The MSCI China index has had seven declines of at least 10 percent over the last five years, including the 19 percent tumble since late October, which itself followed a 34 percent plunge from April into September by just weeks. After all those ups and downs, the MSCI China index has lost 12 percent over the last five years and is close to its lowest level since the summer of 2009. That’s why fund managers say an investment in Chinese stocks will require lots of patience, maybe even a decade. Oberweis’ fund, for example, has lost 15.9 percent over the last year, even though it’s been one of the top performers in its category. But over the past 10 years, it’s returned an annualized 8.9 percent, better than the S&P 500’s 6.1 percent annual return. What’s causing the panic China’s economy grew last year at its slowest pace in a quarter century, and economists expect it to slow even more this year. Part of that is by design. The Chinese government is steering the economy toward consumer spending and away from exports and investments in infrastructure. It hopes that will yield a more sustainable, though slower, rate of growth. The government is also pushing anti-corruption measures and efforts to make the country’s huge state-owned banks and telecom communications companies more efficient. The goal is to try to slow growth without stopping it. The worry is that the government will lose control of the slowdown, and the economy will fall hard. “It’s painful at the moment, and there could be some more pain to come,” says Jasmine Huang, manager of the Columbia Greater China fund. “Eventually it will be good for the economy.” Huang is avoiding companies from what’s known as “Old China” and owns no raw-material producers and few companies in the industrial and energy sectors. But instead of hiding out in cash, she has been investing in “New China.” She has been focusing on e-commerce companies, where she expects revenue to grow even if the overall economy stumbles because more Chinese shoppers are going online. She also sees big growth for health care companies. They make up only about 2 percent of the MSCI China index, and she says they could grow to become the 10 or 20 percent of the market that health care represents in developed markets. Why this decline is different Andrew Mattock, lead manager at the Matthews China fund, understands if investors are feeling gun-shy about Chinese stocks. “For five years now, if you’ve made money, it’s been hard to get, and you’ve lost it quickly in these sell-offs,” he says. But the most recent drops for Chinese stocks have brought them close to their cheapest level since the financial crisis, relative to their earnings. The MSCI China index was recently trading at about 8.5 times its expected earnings per share over the next 12 months. That’s down from a price-earnings ratio of nearly 10 at the start of the year and approaching the 6.8 ratio of 2008. Mattock, like Huang, has steered his fund toward stocks that he sees profiting from China’s shift toward consumer spending. His top holdings at the start of the year included Tencent, which operates the popular WeChat social media service, and JD.com, one of China’s largest e-commerce sites. “This time, I think, is different because there’s actually change going on now,” Mattock says of the economic reforms underway in China. “There are doubts about whether they can do it, but what they’re trying to do is positive.”

Investors stay steady on retirement savings

Panic is so passé. Investors are keeping their cool — and keeping their hands off of their retirement accounts — despite huge swings in the stock market that sent it careening to its worst start to a year ever. “They are just plugging away through the ups and downs of the stock market,” said Sarah Holden, director of retirement and investor research at the Investment Company Institute, an association of regulated funds. It can be nerve-wracking to see retirement balances plunge with the market, conjuring fears of spending the golden years in a cardboard box. Retirement account administrators say they see a sharp uptick in phone calls when the market stumbles, and this downturn has been no different. But then, sensibly, they don’t do much, says John Sweeney, executive vice president of investing strategies at Fidelity, one the largest administrators of 401(k) accounts. Retirement savers have come to understand that they need to think long term. Many lived through the far more unsettling years of the financial crisis, then saw the market get back to its earlier peak in about 5 years. That sure felt like a long time then, but even those who retire this week can reasonably expect to live another 20 years, long enough for the riskiest parts of any saver’s portfolio to recover. “They aren’t really worried about timing the market but having time in the market,” Holden says. Vanguard, which oversees $3 trillion in assets, says that while the S&P 500 sank 8 percent during the first 11 days of the year there was no perceptible change in participant trading compared with the same period in the past two years. “There are a few that panic and they are harming themselves when they choose to sell equities at a low,” said Jean Young, a senior research analyst with the Vanguard Center for Retirement Research. “But by and large we aren’t seeing a lot of activity.” And this is while retirement savers at nearly every age group are putting more of their next egg into stocks, as advisers recommend. Vanguard says every age group under 60 has increased the portion of their investments allocated to equities between 2007, the pre-crash peak, and 2014. The change was most dramatic for people under 25, who now have 87 percent of their portfolios in stocks, up from 67 percent in 2007. The figures for 2015 are not complete but Vanguard expects the trend to continue. The median allocation for equities across all age groups is 83 percent, up from 80 percent in 2007. So where’s all this cool-headed confidence amid the chaos coming from? As much from automation as from steely nerves or deep wisdom. Funds based on an investor’s expected retirement date and other professionally managed products that allow investors to go on autopilot have become much more popular in recent years. These don’t require the investor to make as many judgment calls, leaving it up to professionals to adjust the risk based on when the investor plans to quit the daily grind and buy a Winnebago. Vanguard said about 48 percent of its plan participants are in a professionally managed product, up from less than 20 percent in 2007. This has helped greatly reduce the number of people with extreme positions, such as holding all equities or no equities at all. Also, employers have increasingly been enrolling employees automatically, and increasing the number of participants. That leaves many investors unaware of exactly how much they hold in stocks, or unconcerned. Some are simply more confident in the concept that equities are long-term investments. And even in a bad stock market, people tend to continue to contribute to their retirement plan. That helps them buy stocks at lower prices, setting them up for bigger gains later. That’s how those with long time horizons weathered the recession without much bruising — and it should help today’s hands-off investors recover too. “People didn’t know what to do, so they didn’t do anything, which worked to their advantage,” Young said.

Movers and Shakers 2/07/16

Prince William Sound Regional Citizens’ Advisory Council Director of Programs Donna Schantz has been promoted to the position of executive director. Schantz replaces Mark Swanson, who retired from the council last November. Since then, Schantz has served as acting executive director. Schantz joined the council staff in 1999 and has served as director of programs since 2001. She is a graduate of Providence College in Rhode Island with a bachelor’s degree in fine arts. Schantz previously served as acting executive director in 2009 after the departure of long time Executive Director John Devens. Notable accomplishments include her recognition by the U.S. Coast Guard in 2015 for her exceptional professionalism, positive demeanor, open communications and contributions in support of the Prince William Sound Subarea Committee, and her work towards the passage of legislation for dual escorts in Prince William Sound under her leadership in 2010. Schantz served as an elected member of the Valdez City Council from 2012-14. Dean Williams was appointed as commissioner of the Department of Corrections. Williams conducted an administrative review of the department, and identified key areas for improvement in policies and procedures. Williams spent more than 30 years working in the state’s justice system. He worked for 12 years as a juvenile justice officer, five years for the Department of Law and 14 years as Division of Juvenile Justice superintendent overseeing various facilities throughout the state. Jenifer Burris was selected as the Alaska National Guard Spouse of the Year. Her bio can be found here: msoy.militaryspouse.com. In 2013, Military Spouse magazine expanded the Armed Forces Insurance Military Spouse of the Year program by introducing an installation echelon. Nominations are now aggregated at the base (Air Force, Army, Marine Corps, Navy), district (Coast Guard), and state level (National Guard). Voters then elected a base level winner at each of these installations. The Base Level Spouses of the Year represent the best of the base, and are a key component in the grass roots level of communication in the military community. On Feb. 1, Thompson & Company Public Relations opened an office in Houston, Texas, creating the third location for the nationally-recognized firm. The firm promoted Liz Baker to vice president, and she will lead the Gulf Coast office in her new role. Baker joined the agency as a senior account manager in 2012 after moving to Anchorage with agency experience from her home state of South Carolina. She brings an expertise in account planning and business development to the Thompson & Co. team. The new office will serve the agency’s current clients who have operations or partners along the Gulf Coast and will also present new business opportunities for Thompson & Co. As the fourth largest city in the country, Houston offers new leads in the health care industry with the largest medical center in the world and is headquarters of many Fortune 500 companies.

FDA bans GE salmon imports

The U.S. Food and Drug Administration forbade all genetically engineered salmon from entering the U.S. marketplace on Jan. 29. The ban applies only to fiscal year 2016. Sen. Lisa Murkowski has been pushing for labeling requirement for genetically engineered salmon, even threatening to withhold the nomination of Dr. Robert Califf as chief until something is done. She said in a release she hopes the FDA’s import ban is a harbinger for action. “This is a huge step in our fight against ‘Frankenfish’. I adamantly oppose the FDA’s misguided decision to allow GE salmon to be placed in our kitchens and on our tables, and I firmly believe that mandatory labeling guidelines must be put in place as soon as possible so consumers know what it is they are purchasing,” said Murkowski. “It seems that the FDA has begun to listen, and I hope this is a sign that the agency plans to develop these necessary guidelines.” "During FY16 the FDA shall not allow the introduction or delivery for introduction into interstate commerce of any food that contains genetically engineered salmon," the mandate reads, "until FDA publishes final labeling guidelines for informing consumers of such content." The mandate promises guidelines only; Alaska's Congressional delegates want a clearly defined requirement to label all genetically engineered salmon. The FDA approved genetically engineered salmon for human consumption, but Alaska politicians doubt the science and fear the economic consequences. Alaska fishermen’s wild caught sockeye will have to compete with genetically altered fish, which splice salmon and ocean pout genes to grow at twice the rate of wild salmon. Last year’s omnibus package included language that orders the FDA to not allow the genetically engineered salmon into the market until the FDA publishes final labeling guidelines. Currently, the FDA allows for voluntary labeling of genetically modified fish, but does not require it.   Murkowski and others say the FDA should require that genetically modified salmon be labeled as such; customers, they say, won’t be able to tell the difference between genetically modified salmon and wild salmon if laid beside each other on a retail rack.  DJ Summers can be reached at [email protected]

Walker bills would shift tax credits to development loans

After more than six months of speculation, Alaska got its first look at Gov. Bill Walker’s solution for what he calls an “unsustainable” oil and gas industry incentive program Jan. 19 when Senate bills 129 and 130 were read for the first time on the Senate floor. Walker jumpstarted the oil and gas tax credit debate last June when he nixed $200 million in credit payments from state operating budget before signing it. What started as a $10 million per year tax credit program in 2003 has grown to a $700 million obligation this year and that payment could eventually hit $1.2 billion if left untouched, the governor contends. SB 130, if enacted, would significantly trim the current credit program and nearly immediately save the state an estimated $500 million at a time when oil prices below $30 per barrel have edged the state’s budget deficit ever closer to $4 billion. The bill would cut spending by eliminating the Qualified Capital Expenditure and Well Lease Expenditure refundable credits applicable to Cook Inlet basin work. When combined with closing a loophole that currently allows some North Slope companies producing “new oil” to claim a 20 percent Gross Value Reduction Credit on top of a net operating loss, repealing the credits would save about $200 million per year. The Qualified Capital Credit reimburses up to 20 percent of all capital development costs and the Well Lease Credit covers up to 40 percent of drilling expenses. Both of the Cook Inlet credits are transferrable. Another $200 million in savings would come by way of adding stipulations companies must meet before the state will directly repurchase tax credits from small producers, according to a fiscal analysis of the bill. Walker’s proposal would cap annual repurchases at $25 million per company and directly tie the refundable percentage of a credit certificate to a company’s — and its contractors’ — Alaska resident hire rate. The remaining credit amount not eligible for a refund based on Alaska hire limits could still be applied to a tax liability. Small producer credits would still be transferrable; however, companies not meeting the stricter guidelines would have to hold the credits until they accrue a tax liability with the state. Credits held for too long would expire after 10 years. Finally, SB 130 would “harden” and raise the minimum gross production tax for oil from North Slope fields not eligible for the Gross Value Reduction Credit. It would prevent several credits, including the Net Operating Loss, or NOL, Credit from being applied to take a production tax obligation below the minimum, often referred to as the tax “floor,” which is currently at 4 percent. That 4 percent minimum production tax would go up to 5 percent in the governor’s bill, a move that would generate about $100 million per year to the state in additional revenue. The increased floor would be applied to all North Slope fields, even new fields eligible for the 20 percent Gross Value Reduction. In its final report, the Senate Oil and Gas Tax Credit Working Group assembled over the summer by Resources chair Sen. Cathy Giessel also recommended hardening the tax floor to prevent large producers from paying no production tax, but the group did not weigh in on raising the minimum tax. Everything the working group proposed was with the future in mind, Giessel said in an interview Jan. 26, and Walker’s bill, as currently constructed, would make the tax floor change retroactive to Jan. 1, 2016. She also called raising the minimum tax to 5 percent a “blatant change” to the More Alaska Production Act, better known as Senate Bill 21, something Walker said he would not do after it was upheld by the voters in an August 2014 referendum. SB 129 Senate Bill 129 would form an Oil and Gas Infrastructure Development Program within the Alaska Industrial Development and Export Authority. A $200 million appropriation would be needed to jumpstart the fund, which would finance oil and gas infrastructure development projects on proven reserves for small and medium-sized companies in lieu of some credits. AIDEA, as the state’s financier, manages revolving loan funds aimed at economic development and holds business interests around the state. The authority typically invests with market returns in mind, but its goals can change with legislative direction. Revenue Commissioner Randy Hoffbeck said during a Jan. 22 press briefing that there is flexibility within the loan program, but AIDEA should be able to recover a competitive rate of return and still offer more attractive financing than private lenders. “What we’re trying to do is build a loan program that steps in where some of these companies are paying venture capital rates or private equity rates that run in the neighborhood of 18 to 20 percent on some of these projects,” Hoffbeck said. “We feel that we can step in and give (companies) a rate that’s a little more reflective of a project that’s a little further down the road because we see a little more certainty in what they’re doing than what they’re finding in the marketplace.” Smaller companies often use the cashable credits as collateral for loans to fully cover exploration costs. AIDEA board member and former Fairbanks-area state senator Gary Wilken said he is excited about the prospect about helping support Alaska’s premier industry and has no qualms about the authority’s ability to meet the challenge. “I think the seven people on the board, including myself, will have the talent to figure out how to execute this if we’re given the responsibility,” Wilken said in an interview. “I think we see the vision; I think we see the benefit and I just have to believe that we’ll reach out and get whatever it takes. If it’s beyond our resources we’ll go get the proper resources to do this right.” While under the auspice of the Commerce Department, AIDEA is a self-funded, for-profit entity that is not bound by the state’s current budget challenges and therefore could expand to manage an additional program. Giessel said the idea of running a loan program through AIDEA would put the state in competition with private lenders, a move that “makes no sense.” The authority on its own has partnered with small producers to finance development projects on the Slope and in Cook Inlet in recent years. It would also mean money already in Alaska would be recycled through the program, while the tax credits, as loan collateral, are bringing in new money from Outside lenders, she said. Impact of changes Walker’s remodel of the oil and gas tax credits is without question a substantial shift from the status quo, something the Oil and Gas Tax Credit working group report urged against — at least right away. His $200 million deferment from the 2016 fiscal year still left the state paying $500 million of what was a $700 million General Fund line item. The remaining $200 million from 2016 is included in a transition fund of nearly $1 billion to pay off credits expected to be earned before the legislation could be enacted. From there, the state’s obligation would shrink to about $200 million per year through 2022, a projection based on the remaining tax credits. Under the current system, the State of Alaska pays upwards of 65 percent of development costs on many projects and up to 85 percent of the cost of exploration because of the ability to “stack” credits, according to the Department of Revenue. A sea change is exactly what representatives from the industry and their supporters in the Legislature have said they don’t want. Walker said in an interview with the Journal that his administration met with each independent exploration and production company that has used the tax credit system to make sure none “fall through the cracks” during a shift away from the current credit structure. “We’re unique with the credit program across the country and (the companies) realize that,” Walker said. His critics on the issue largely agree with the governor that Alaska is unique; they contend the state has a uniquely high cost of doing business, and therefore the credits are essential to spurring development. Alaska Oil and Gas Association President Kara Moriarty said in an interview that she understands the fiscal pickle the state is in, but changing the tax credit system at a time when the companies are also cash-strapped brings about the ever-dreaded political uncertainty. “Policymakers cannot control the price of oil, so you want to have policies that attract investment even when the price of oil is low,” Moriarty said. A member of Giessel’s working group, she also questioned the equity of hardening the production tax floor and not allowing producers to claim a loss against future tax burdens that would take them below the minimum tax threshold. Moriarty said allowing oil and gas producers to claim NOLs, regardless of the minimum tax, is no different than companies in other industries deducting losses on future corporate tax liabilities. On raising the minimum tax, Moriarty was clear: “That will impact production, it just will.” A Revenue Department analysis of SB 130 states that — based on the department’s Fall 2015 Revenue Sources Book — Alaska North Slope crude prices should rebound by 2019 to a point where hardening and raising the production tax floor to 5 percent will no longer factor into tax payments for producers. Revenue is predicting an average ANS price of $68.95 per barrel in fiscal 2019. Now, early in 2016, the state has 12 credits available to explorers and producers across the state. Most are specific to the Slope and Cook Inlet basins, while two are for “Middle Earth” exploration and development credits for work outside of the developed areas, such as Doyon Ltd’s drilling in the Nenana basin near Fairbanks. Four of those credits will sunset by Jan. 1, 2017, if the program continues unchanged. The governor’s proposal to eliminate two of the Cook Inlet capital credits would leave six on the table at the start of next year: three nontransferable and one refundable Slope credit; a refundable Middle Earth exploration credit; and a lone 25 percent Carry Forward Annual Loss Credit for Cook Inlet. Sen. Bill Wielechowski, D-Anchorage, another working group member, has said the state has employed a “scattershot approach” to the credits without thoroughly vetting their benefit. Credit benefits A brief Department of Revenue report examining the fiscal pros and cons of the North Slope credits made public over the summer determined that the credits don’t represent a sound financial investment for the state. Hoffbeck said the seven-page report was incomplete and should not have been released because it limited the benefits to historical production and did not include assumed future production aided by the credits in its analysis. Definitively concluding whether the credits are a good investment for the state is “almost an unanswerable question,” Hoffbeck said in an interview. It’s unknowable whether certain projects would have moved forward or not without the state’s help. The department is more focused on figuring out what’s affordable for the future rather than analyzing historical credits, he said. Those wary of major changes to the credits at a time when North Slope producers are faced with production and transportation costs — in the $48 per barrel range, according to the Revenue Department — far exceeding oil prices that have slid to less than $30 per barrel, say the benefits of the subsidies go well beyond the state’s bottom line. Pat Galvin, chief operating officer for Great Bear Petroleum LLC and a former Alaska Revenue commissioner, recalled during a Jan. 8 discussion panel on the issue a conversation he had with a member of the Walker administration, who said the state will go from paying two-thirds of most exploration costs to about 30 percent under the governor’s plan, with the anticipation the companies themselves will be willing and able to cover the gap. Great Bear Petroleum, founded in 2010, conducted a $50 million exploration drilling last winter on its Slope prospects south of Prudhoe Bay. Galvin said just the exploration credits already set to expire July 1 with the start of the 2017 fiscal year would directly impact activity. “By taking on that exploration risk, the state is allowing for more exploration activity,” Galvin said. “Exploration leads to discoveries; those lead to development, which leads to production. If you don’t get enough projects in the hopper you don’t get enough exploration activity taking place you’re going to get less discovery, less development and less production at the end of the day.” Increasing exploration is the best way for the state to assure future production, he said. He added that if AIDEA is too risk averse and won’t lend to explorers, the loan program won’t accomplish much. Kenai Peninsula Borough oil and gas expert Larry Persily said during the Jan. 8 panel that the credits should be examined not only by their contribution to the state treasury, but what they do for local economies. A study commissioned by the Alaska Oil and Gas Association calculates each direct Alaska exploration and production job supports another nine private sector positions. While Cook Inlet oil carries no production tax and gas from the basin has a minimal tax, the production still contributes royalties, property and corporate income taxes to the state, Persily said. He also noted that incentivizing Cook Inlet gas production helped stave off the natural gas shortages that were feared in Southcentral just three years ago. “There’s no question that tax credits have been good for Cook Inlet, good for utilities, good for customers, good for production — certainly good for the local economy and jobs. Whether they’ve been a net plus, a net gain to the state General Fund is a separate question,” Persily said. Lease expenditures in Cook Inlet have increased fourfold since the state focused in incentivizing activity in the basin in 2010, according to Persily. Giessel concurred with him, saying even small producers not paying production tax bring back three to four times to state coffers what they receive in credits. “This oil tax credit program is a rebate. Folks do not get this money unless they spend money,” Giessel said. “It’s not a giveaway.” The Senate Resources Committee will take up the bills in a couple weeks and get plenty of illumination from the administration on the legislation’s finer points, she said. “I need more clarity as to how it increases production,” Giessel said. She added that she certainly has ideas on how to adjust the tax credit system and a separate bill could be on the way in several weeks as well. Transparency Giessel’s working group also encouraged opening the books, at least a little, so the public can see what the state’s oil and gas tax credit investments are returning. “Though it is not advocated for the names of the operators to be disclosed at this time, the public disclosure of investment amounts can better inform both the public and policymakers, on any other changes to make to the credit system,” the working group report concluded. “Alaskans deserve to know what the other side of the table is spending on a project if their money is investing in its success.” Walker would support more disclosure of the tax credit program, he said, but current statutes tightly restrict what data the state can release and his bills do not address the issue of transparency. He said if the state goes to a broad-based tax on residents while continuing to fund the credits it would definitely be more appropriate for Alaskans to understand what the state is investing in. Moriarty said she believes her member companies are forthright in explaining what the credits have done for them, but contended narrowing disclosures to specific projects “would really allow policymakers and the public to pick winners and losers” amongst the companies, a situation she is not comfortable with. “We’re open to ideas to be more transparent as long as that information is not used against us by other policymakers,” she said. In most years the governor’s 38 pages of oil and gas tax credit and loan program legislation would be enough to dominate the Legislature’s time, as oil industry policy has in the past. This year, however, even bigger budget issues, the Alaska LNG Project and criminal justice and Medicaid reform make oil and gas tax credits just another item on the Legislature’s daunting to-do list. Elwood Brehmer can be reached at [email protected]

Miller, SEC settle for $5M fine; assets overvalued by $400M

KENAI — The U.S. Securities and Exchanges Commission has reached a $5 million settlement with Miller Energy Resources after the company inflated the value of its Alaska assets. The settlement, reached Jan. 12, concluded the SEC’s investigation into the oil and gas company, the parent company of Cook Inlet Energy. The SEC charged the company, two former executives, and one of its former accountants with fraudulently inflating the values of the company’s Alaska oil and gas properties by more than $400 million. The inflated reports began in January 2010, shortly after Miller Energy acquired a series of Alaska properties from another company, according to the settlement document. Between 2010 and the announcement of the charges in August 2015, the company’s stocks skyrocketed — from about 60 cents per share to almost $9 per share. The company’s then-CFO, Paul W. Boyd, double-counted fixed assets, and then-CEO of Alaska operations David M. Hall knowingly understated expenses, according to the SEC’s cease-and-desist order from August 2015. An accountant from now-defunct accounting firm Sherb & Co audited the company’s reports in the year after the acquisition and failed to thoroughly investigate the financial statements, according to the cease-and-desist order. The company bought its Alaska properties for $2.25 million in 2009 and later valued at $480 million. “When computing their estimate of fair value, Miller Energy and the CFO failed to consider the existence of numerous, readily apparent data points strongly indicating that the assets were worth substantially less than the $480 million value Miller Energy recorded,” according to the settlement. Boyd and Hall requested a reserves report with faulty numbers and then presented it as the total fair value of the oil and gas reserves, increasing the total value of the company on paper by $368 million, according to the settlement. They also “refashioned” an insurance study that misrepresented the value of the company’s assets, according to the settlement. “As a result of the foregoing, Miller Energy overvalued the Alaska assets by more than $400 million,” according to the settlement. Miller Energy has agreed to unregister all its stocks and fully cooperate with the SEC to produce documents and provide employees to testify about the violations, according to the settlement. Miller Energy is also in the midst of a Chapter 11 bankruptcy and restructuring itself. The company announced the bankruptcy in October, blaming plummeting oil prices, a drilling plan that did not produce to expectations and the withdrawal of a private lender. The company owes more than $180 million, as reported by the Clarion on Oct. 1, 2015. Should the bankruptcy court accept the company’s plan for restructuring, the $5 million will become a “general unsecured claim,” essentially an IOU. The fine would then be paid “consistently with the payments made to Miller Energy’s other general unsecured creditors,” according to the SEC decision. The federal bankruptcy court has until June 30, 2016 to decide whether to accept the bankruptcy plan, according to the settlement. If the court does not accept the bankruptcy plan, Miller Energy will have to pay the SEC in installments, completing payment by no later than 2019. Reach Elizabeth Earl at [email protected]

S&P finds Alaska with ‘unique exposure’ to oil prices

Standard and Poor’s Rating Services took a look at what makes some oil states’ futures look bleaker than others. The hardest-hit states forecasted oil prices too optimistically, tied too much state income to oil revenues, or didn’t save enough from the good old days when prices were high and state coffers were fat. S&P analyzed eight states: Alaska, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Texas, and Wyoming. Of the eight, S&P rated Alaska, Louisiana, and New Mexico has having negative credit outlooks. Though S&P lowered Alaska’s credit rating from AAA to AA+ earlier this month, S&P analyst and report author Gabriel Petek said the state’s foresight to sock away oil money softens the blow. “To their credit, they recognized that they have this dependence on oil revenue, and that oil production is an important part of their economy,” said Petek. “They were very shrewd to drain the boom, put aside a lot of this revenue that came in, and it’s providing the cushion.” Alaska is singular among oil-producing states in its negative credit outlook from S&P. The other two states with negative outlooks, New Mexico and Louisiana, have to do with more factors than just oil price decline. Petek said New Mexico and Louisiana have a host of other fiscal issues unrelated to oil that make the credit pressure negative. “Alaska is uniquely exposed to this problem, and the pressures and more acute directly because of oil,” said Petek. “It’s telling in a way that Alaska’s credit rating is the first one to already take a hit. They’re the most reliant on oil-related revenue of all the states.” Most states with heavy oil revenue over-forecasted the price per barrel, but some, Alaska in particular, were particularly and damagingly upbeat about the assumption. “In short, the more aggressive a state was with regard to its assumptions and use of oil-related revenues during the oil boom, the more acute its fiscal pressure now, in the oil price bust,” the report reads. The Alaska budgeting process in the early 2010s put too much faith in the sky-high oil prices that sank in 2015. For fiscal year 2016, Alaska had based its budget on a price assumption of $67.49 per barrel, the highest of any major oil-producing state, and has since revised it downward to less than $50 per barrel for the current fiscal year. In fiscal year 2017, the assumption is $56.24, nearly the highest estimate from any oil-dependent state. Only North Dakota, a newcomer in the oil industry with a $45 per barrel price assumption for fiscal year 2017, comes close to what Standard & Poor’s believes realistic. “At this point, all of the states in our survey still have a higher price forecast for 2016 than does Standard & Poor’s ($40 per barrel),” the report reads. Overindulgence in general funds income from oil revenues is another key component to a negative credit outlook, lending credence to Gov. Bill Walker’s plan to funnel oil cash into the Permanent Fund rather than directly into unrestricted general funds. “(Alaska has) a current structural deficit that equals 2/3 the budget,” said Petek. “Most states, they have a 5 percent deficit. You have big reserves and a big deficit.” The Alaska government derived 79 percent of its state spending from oil-related revenues in fiscal year 2016, and 67 percent is estimated for 2017. No oil-producing state had anything approaching this level of oil-related revenues as a percentage of operating revenues; Wyoming drew 35.7 percent of operating revenue from oil, but no other states exceeded 13 percent for fiscal year 2016. In comparison to Alaska’s direct to general fund model, other oil-producing states have stopgaps and checks to cushion commodity price swings, capping the full amount of unrestricted general funds tied to oil. Montana’s general funds “are somewhat insulated” from oil and gas price bounces, as the state’s general fund only derives 3 percent of general funds from oil. North Dakota capped its oil-related general funds income at $300 million every two years, approximately 5 percent of the 2015-2017 general funds. Texas’ oil revenues only contribute 4 percent of the total spending, and natural gas another 2 percent. Alaska’s credit-saving grace comes from savings, the third factor in S&P’s credit considerations. “Some oil producing state have partially mitigated the effect of commodity market volatility on the their budgets by segregating the oil-related revenue, putting most of it in reserves or special funds,” reads the report. Petek said Alaska’s mammoth Permanent Fund has spared the state from a worse credit situation. Alaska used oil-related revenue the most, but also saved the most. The state’s available savings are 312 percent of general fund spending, greater even than North Dakota and Texas, which have each 91 percent of general fund spending available in savings. DJ Summers can be reached at [email protected]

Interior Energy Project decisions moved back again, to Feb.

The Alaska Industrial Development and Export Authority should have its new Interior Energy Project partner in place by the end of February, according to project leaders. A partner recommendation can be expected the second week of February, IEP manager Bob Shefchik said in an interview, with a special AIDEA board meeting to be held later in the month to take formal action on the staff recommendation. The time between the announcement and the board meeting will allow the AIDEA board and the public to scrutinize the IEP team’s recommendation, Shefchik said. AIDEA officials spent much of 2015 evaluating new proposals to get natural gas to Fairbanks-area consumers for the project’s stated goal of $15 per thousand cubic feet, or mcf, of gas. What started as 16 ideas in early August has been whittled to two: Spectrum LNG’s proposal to build a North Slope LNG plant and a plan by Salix Inc. to build a Cook Inlet-sourced LNG facility at Point MacKenzie. Oklahoma-based Spectrum LNG operates a small LNG plant in Arizona and helped develop Fairbanks Natural Gas’ supply chain in the late 1990s to feed the utility with LNG trucked from Southcentral. Salix is a subsidiary of Avista Corp., which owns electric and natural gas utilities in Idaho, Washington and Oregon. Avista also owns Alaska Electric Light and Power Co., the Juneau-area electric utility. Shefchik said that the project team is working to secure natural gas contract terms from both Cook Inlet and North Slope producers before making a final suggestion to the AIDEA board. “We want to make sure we have gas contracts underneath the North Slope and Cook Inlet so that as we’re making recommendations on $50 (million) to $80 million investment we’re not modeling what the gas costs, we know what it costs,” Shefchik said. Golden Valley Electric Association, the Interior’s main electric utility, has a 15-year gas supply agreement for North Slope natural gas with BP that the utility has made available to the Interior Energy Project as well. Shefchik said the group is evaluating all supply options. The omnipresent contrast between lower wholesale gas costs from the Slope against lower construction and transportation costs in Southcentral has made defining a clear-cut winner difficult. The desire to have a complete project for review is what led to pushing an initial, self-imposed early December deadline for a project recommendation back two months, he said. Spectrum’s plan is for an $85 million North Slope LNG plant that would need $30 million in equity and $50 million in low-interest loans from AIDEA. Spectrum would contribute $5 million in equity. Salix is hoping to build a $68 million Southcentral plant also with a $30 million equity investment by AIDEA and a $28 million loan, with Salix offering a $10 million investment. The new oil price reality Alaska’s lawmakers are dealing with is also straining the economics of the Interior Energy Project. “We’re challenged on the differential between the price of oil translating into fuel oil and the target price of gas, so we’re being pretty careful on having lowered our conversion expectations and then deciding how can we continue a project in a low price environment,” Shefchik said. Revised estimates on the demand for natural gas, once it becomes available in the Interior, have lowered the demand forecast by as much as a 30 percent since the project began. Natural gas at $15 per mcf is about half the energy equivalent cost of $4 per gallon fuel oil — roughly the price scenario facing Fairbanks when the Legislature funded the project in 2013. Since then, plummeting oil prices have pulled the price of fuel oil closer to $2 per gallon, which makes it less likely residents will spend potentially thousands of dollars to convert their home heating systems. Consequently, AIDEA is also working to consolidate state and federal energy rebate and loan programs to help offset conversion costs for residents and keep the Interior Energy Project financially viable. Elwood Brehmer can be reached at [email protected]

Legislature gets first update on pros, cons of AK LNG Project

Legislators got their first briefing of the session on the Alaska LNG Project on Jan. 25 direct from the project’s lead manager, ExxonMobil’s Steve Butt. In presentations to the House and Senate Resource committees, Butt implored legislators to view themselves as the board of directors for the state, as a 25 percent owner of the $45 billion to $65 billion prospective development. “We view ourselves as kind of a project organizer evaluating technical and economic viability of the AK LNG Project; does it make sense to the investors?” he said to House Resource members. In a time of a depressed global LNG market — spot prices have fallen by some 50 percent over the last three years — Butt outlined some of the simple but not-to-be understated benefits of Alaska’s project and how it compares to others around the world competing for market share. First, Alaska’s North Slope resource of 32 trillion cubic feet, or tcf, of natural gas is well defined and largely developed. The gas beneath Prudhoe Bay has been captured and re-injected many times to maximize oil production and the wells and other infrastructure needed to retrieve the gas from the reservoir are in place.  ExxonMobil and BP have spent roughly $4 billion developing Point Thomson to the east of Prudhoe Bay to supply about 25 percent of the gas for the AK LNG Project, but that work is also wrapping up as Point Thomson will begin producing about 10,000 barrels of natural gas liquids per day to go into the trans-Alaska Pipeline System this year. Further development will still be needed to equip Point Thomson for gas production and transport to the AK LNG Project, however. Butt said many other LNG projects worldwide have upstream development costs that Alaska does not. Additionally, the Federal Energy Regulatory Commission, as the federal overseer of the project, enjoys the knowledge of known resources and established infrastructure in its decision-making process, he said. Alaska’s relatively close location to Asian markets that will likely be the buyers of from the project is a benefit that has been well documented. Shipping LNG from Alaska to Japan, Korea and China is cheaper and faster than from export projects in the Gulf of Mexico or Australia where competing projects are likely to be. Alaska’s location in the northern hemisphere also allows the project to maximize production efficiency that matches swings in market demand, according to Butt. LNG is produced by chilling natural gas to minus-260 degrees Fahrenheit, which results in a condensed, easily transportable liquid product. Alaska’s cold, dry climate allows liquefaction plants here to produce 10 percent to 15 percent more LNG than comparably sized plants in the Middle East or other warm locales. “Buyers are in the northern hemisphere and they want more LNG in the winter — January and February — when the turbo machinery in Alaska is more efficiently generating LNG,” Butt said. A more efficient process means a more cost-effective project. Those advantages hopefully offset the AK LNG Project’s big but unavoidable disadvantages, he said, which are the North Slope gas treatment plant and the 800-mile pipeline needed to get the gas to an ice-free port. The natural gas coming out of Prudhoe Bay is about 12 percent carbon dioxide; a higher carbon dioxide concentration than the gas source for any currently producing LNG project in the world, he noted. When combined with the 4 percent carbon dioxide gas of Point Thomson, the project will have a blended gas of about 10 percent carbon dioxide makeup. That 10 percent carbon dioxide must be separated from the methane that is the usable natural gas and re-injected into the Prudhoe Bay reservoir. As a result, the project requires an upstream treatment plant pegged at roughly $15 billion. “That’s why there are no projects around the world handling this amount of (carbon dioxide) — it’s very expensive,” Butt said to the Senate Resources Committee. The $15 billion pipeline and associated infrastructure is the other major cost hurdle. LNG projects have been done with pipelines up to about 400 miles, he said, but Alaska’s would be double that. Therefore, minimizing cost by maximizing efficiencies in transportation, design and construction is paramount for a project with tremendous overhead in a highly competitive marketplace, Butt emphasized. Elwood Brehmer can be reached at [email protected]

Administrators favor scrapping new standardized tests

JUNEAU — After almost four years of preparation and planning, plus millions of dollars in implementation, Alaska’s new standardized testing scheme appears bound for the garbage can less than two months before students take it the second time. On Jan. 25, Lisa Skiles Parady, director of the Alaska Superintendents Association, told the Alaska Board of Education and Early Development that a majority of the state’s school district leaders favor abandoning the Alaska Measures of Progress testing scheme. The AMP test was administered to Alaska students for the first time last year under a $5 million per year contract with the Assessment & Achievement Institute of Kansas. Parady presented the results of a superintendent survey that found only five of 42 responding superintendents favored continuing AMP testing. Twenty-three of the 42 said they do not support continuing AMP. The 42 superintendents represent about 80 percent of Alaska’s school districts. Deena Paramo, superintendent of the Mat-Su Borough School District, participated in the meeting by telephone and called AMP testing a “failure” that “does harm” to Alaska’s school system because it does not provide useful feedback to teachers or administrators. In an October memo, the Mat-Su school district declared: “the AMP summative assessment is useful for state compliance purposes only. There is no value to districts from the assessment, and in fact learning opportunities are lost as a result of having to administer the assessment.” Speaking during the meeting, Alaska Education Commissioner Mike Hanley said “there’s nobody more frustrated with AMP than I am.” Hanley, who has been commissioner of education since 2011, oversaw three years of preparation before students took the test for the first time last year. Teachers, administrators and parents helped draft the test, which was prepared for “Alaska’s unique needs” and offered a tougher, more accurate, measurement of students’ knowledge, according to promotional material last year. While testing went well, problems came afterward. “We had glitches in the data, we had glitches in the timing,” Hanley said. Results came back from AAI much later than had been promised, and they didn’t offer the diagnostic information that schools were hoping for. Marianne Perie, AAI’s Alaska project manager, told the Fairbanks Daily News-Miner in November that the company had made mistakes. Perie did not respond to interview requests by this story’s deadline. “One of the most accurate comments was just there was such a loss of confidence in this tool that I don’t know how to get it back,” Hanley said. While Hanley and district superintendents might be frustrated, they have few options at the moment. While Congress has approved and President Obama has signed legislation that replaces the No Child Left Behind Act, the state is still required by state and federal law to conduct standardized assessments. “I just see no other option to meet the letter of the state and federal laws” than to have students take AMP tests this year, said state school board member Barbara Thompson of Douglas. Hanley said that even though it appears the state is locked into AMP testing this spring, he doesn’t plan to wait on replacing it. “I’m not interested in continuing down a path that’s not working,” he said. Rather than immediately seeking alternative proposals from competing testing companies, Hanley said he likely will begin by consulting with school districts to determine what approach works best for them. “Let’s not wait to pursue a new path forward,” he said. The state’s arrangement with AAI is structured as five one-year contracts, Hanley said, and he will gather information to determine the final choice the state takes this summer. In related business, the school board voted unanimously (member Sue Hull absent) to take the first step to cancel a program that would have tied teacher evaluations to students’ test scores.

EDITORIAL: US tax policy keeps sending companies overseas

Here we go again. A major U.S. company merges with a foreign firm in part to avoid America’s punishing corporate tax code, and the politicians who refuse to reform the code denounce the company for trying to stay competitive. The gullible in the media then dutifully play along. Sigh. Let’s try to explain one more time why it makes perfect business — and moral — sense for Johnson Controls to merge with Tyco, as it announced Jan. 25 it would do. Tyco has a U.S. headquarters in New Jersey but is legally domiciled in Cork, Ireland. Johnson Controls will own roughly 56 percent of the combined company and its legal headquarters will move to Cork from Milwaukee, Wisconsin, where it has been based for more than a century. To simplify for Democratic presidential candidates: The U.S. federal corporate income tax rate is 35 percent. The Irish rate is 12.5 percent. Johnson Controls says the tax savings from its move to Cork will be roughly $150 million a year. A CEO obliged to act in the best interests of shareholders cannot ignore this competitive reality. The merger means that Johnson Controls will have more money to invest back in the U.S. because the income it earns overseas would not be subject to the U.S. tax rate. Only if Johnson kept its headquarters in the U.S. would its foreign earnings be double-taxed upon repatriation. If Johnson Controls refuses to do such a deal now, a foreign competitor might end up buying Johnson Controls anyway to achieve the same savings. As with other such tax “inversions,” there are also non-tax strategic reasons for the merger. The new company will have under one roof much of the equipment and services desired by the owners of large commercial buildings, from air conditioning to fire suppression. But none of this business logic impresses Hillary Clinton or Bernie Sanders, who helped to write the U.S. tax code as senators but are now competing as presidential candidates to see who can demagogue more ferociously against American employers. Clinton called the merger “outrageous” and Sanders is calling the executives “corporate deserters.” Neither one wants to reform the tax code to make U.S. tax rates more competitive with the rest of the world. Instead they want to raise the costs of doing business even further. Clinton’s solution is to raise taxes on investors with higher capital-gains taxes, block inversion deals, and apply an “exit tax” to businesses that manage to escape. Sanders would go further and perform an immediate $620 billion cashectomy on U.S. companies. The Vermonter would tax the money U.S. firms have earned overseas, even though that income has already been taxed in foreign jurisdictions and even if the companies aren’t bringing it into the U.S. Sanders’ campaign website says that after the big revenue grab in year one, his change would increase federal revenue by perhaps $90 billion a year thereafter. And he would limit future corporate inversions by taxing many inverting companies as if they never left. His revenue goal is a fantasy, because the practical effect would be to encourage many more companies to flee American shores. Never mind the lost tax revenue, this kind of punishing tax policy is immoral. Multinational corporations with global customers can always relocate to wherever it makes the most business sense. Their American employees aren’t so lucky because their livelihoods depend on thriving and competitive U.S. companies. If the employees can’t move, or their companies can’t compete, they’re the ones who lose their jobs or don’t get raises. Has the Democratic Party moved so far left that it doesn’t understand even this most basic of business realities?

FISH FACTOR: Fisheries battle budget cuts and new taxes in Legislature

A single chinook salmon is worth more than a barrel of oil. The winter kings being caught by Southeast Alaska trollers are averaging 10 pounds each with a dock price of $7.34 a pound, according to state fish tickets. That adds up to $73.40 per fish, compared to $26 per barrel of oil. Those who depend on fishing for their livelihoods want to make sure that budget cuts combined with any new fishery taxes don’t cut core services that result in missed fishing opportunities.  “Not all cuts are equal, and if there are cuts that interfere with the science needed for responsible and sustainable fish harvesting, many times in the absence of information, it will throttle down fisheries and reduce opportunity,” said Mark Vinsel, Executive Administrator for United Fishermen of Alaska. UFA is the nation’s largest commercial fishing trade organization, with 35 member groups.  “When we are able to count fish and make sure enough get up stream, then people can harvest them, get them to market and bring the revenue back to their communities and to the state general fund through taxes. So we have to be careful that we don’t put a tax on something or increase taxes while the overall opportunity goes down. That can be a net decrease,” Vinsel added.  “We are willing to listen to any proposal,” said Jerry McCune, UFA president. “If there is going to be raises in the taxes we would like to see it across the board to be fair for everybody.” Gov. Bill Walker has proposed a 1 percent surtax on both the Fisheries Business Tax and the Fisheries Landing Tax, which would raise an estimated $20 million. A resolution provided to each legislator states: “Budget cuts, though equal in value, are not equal in impact to industry or represent the same overall loss to the State of Alaska in terms of lost revenue and benefit. Emphasis should be given to find efficiencies without reducing economic opportunities for industry.” A second UFA resolution urges that the state “should not further reduce the Alaska Department of Fish and Game’s budget in a manner that negatively impacts the department’s delivery of core/essential services.” The ADFG now has an operating budget of $200 million; the Commercial Fisheries Division gets the largest chunk at $73.3 million. Another UFA resolution supports the existing Division of Investments’ Commercial Fisheries Revolving Loan Funds and continuation of other financing programs that “bring benefits to Alaskans and the economy of the State of Alaska in perpetuity.” UFA also sent a letter to Walker saying it “supports the recommendation of the legislative audit that CFEC remain as an independent agency, separate and distinct from the Alaska Department of Fish and Game.” McCune said UFA is working closely with Rep. Kreiss-Tomkins regarding a bill he plans to introduce that would create permit banks to help reverse the trend of salmon permits migrating out of the state. The bank would buy nonresident permits and lease them to young fishermen who otherwise could not afford them. A permit bank would not cost the state any money, according to Kreiss-Tomkins, because it would fall to local communities to raise the money. “I think it’s a noble idea, but we have some fears,” McCune said. “There are concerns with an entity holding a permit and giving loans and being able to take them back, and there are IRS and constitutional considerations. We will continue to work with the bill sponsor to make sure our concerns are considered and that we are within legal rights of the Limited Entry Act.” Regarding the bill that would allow “fisheries enhancement permits” for groups and individuals (HB 220), McCune said UFA has been assured by ADFG that “safeguards are in place.” “You can’t move one stock to another area, and you must go through all the things that a normal hatchery operator or anyone who wants to do fishery enhancements is required to do,” McCune said. “You can’t just willy-nilly run out and start a hatchery and not have any consideration for wild stocks where it’s going to located and things like that. I don’t think it will move until some things are fleshed out.” Other fish issues and bills will surface as the Alaska legislature gets into full swing. “It’s a bit agonizing for everyone waiting to see what will happen,” McCune said. “But you’ve got to work the process. It’s not going to be up to just UFA, but different groups and individuals are going to have to weigh in on different issues. My message to all the fishermen in the state is pay attention to what’s going on and make sure you have your say.” Bycatch begone! A new fishery management plan will reduce halibut bycatch by 21 percent in Bering Sea and Aleutian Islands trawl and longline groundfish fisheries to 3,515 metric tons (7.73 million pounds). The plan was approved by federal managers prior to the season opener for trawlers on Jan. 20. Managers now are moving towards similar measures for chinook and chum salmon bycatch in the Bering Sea pollock fishery, and they want input from the public. The pollock fishery now has separate programs to account for takes of the two salmon species.  “We want to improve the functioning of these programs so they are integrated,” said Gretchen Harrington, National Environmental Policy Act coordinator for National Oceanic and Atmospheric Administration Alaska Region and leader for the salmon bycatch project. The goal, she said, is to enable the fleets to operate under one incentive agreement.  “The incentive plan agreement is a document created by the pollock fishermen that explains exactly how they are going to provide incentives for each vessel to avoid chinook and chum salmon bycatch through the tools they already are using,” Harrington explained. “There also is a provision in the proposed rule that adjusts the allocation of pollock between the A season (winter) and the B season (summer) to provide five percent more pollock in the A season, so it can be harvested when there is less chance for bycatch. A new key piece of the agreement includes adjusting chinook bycatch limits downwards whenever the state forecasts low abundances for a following year. Currently, a 60,000 bycatch limit is in place for chinook salmon; the bycatch last year was 18,330. For chum, the bycatch take was 237,795 fish. After going through the rule making process, Harrington said the new pollock program should be in place by next year. Public comments on the salmon bycatch reduction plan are accepted through March 8. Fish correction The number of salmon fishing permits held by non-locals or nonresidents at Bristol Bay is 38.3 percent, not 81.1 percent. A total of 61.7 percent of all permits are held by local residents near the fishery. Laine Welch lives in Kodiak. Visit www.alaskafishradio.com or contact [email protected] for information.

EYE ON WALL STREET: 2015 market wrap-up and what to expect in the new year

The big stories in 2015 were the plunge in commodity prices to a 16-year low, turbulence in China, and coming monetary policy “divergence” which contributed to strength in the U.S. dollar. These factors took their toll on various asset classes (global stocks saw their first annual decline since 2011) and market sectors (especially energy). The S&P 500 posted a 1.4 percent total return in 2015. Corporate earnings were flat to down slightly for the year and P/E valuations remained unchanged at elevated levels. Smaller company stocks as measured by the S&P 600 were down 2 percent while REITs, a reasonable proxy for commercial property, gained 2.5 percent. Many foreign stocks did well in their own currencies, but the gains were given back when translated to dollars. The EAFE developed country stock index was up 5.3 percent in local currency but off 0.8 percent in dollars. Emerging market stocks took it on the chin posting a negative 14.9 percent dollar return in 2015. With bond yields very low, coupon income was not much protection against the modest increase in interest rates last year. The yield curve flattened with two-year Treasury yields up 0.38 percent to 1.05 percent, while 10-year yields rose 0.10 percent to close the year at 2.27 percent. Most high quality bond market returns were flattish, while the high-yield “junk” bond market was down 5.5 percent mainly because of worries over energy and market liquidity. Commodities were trounced across the board. Oil lost $30 a barrel ending the year at $35. The broad based Bloomberg Commodity Index fell 24.7 percent and is at levels last seen in the late 1990s. The bottom line was that most diversified portfolios, whether tilted to bonds or stocks provided a return of around +/-2 percent in 2015. This year will likely be better, but challenges remain. Our long-term return expectations remain subdued in the 7 to 9 percent range for stocks and around 2 to 3 percent for bonds. Economic Overview Economic growth in the U.S. remains modest and is running just north of 2 percent. There has been pretty good news on the jobs front with the unemployment rate now at a low 5 percent and decent numbers on the services side of the economy (88 percent of GDP), but frankly poor data from the manufacturing side (12 percent of GDP). We will get a nudge from fiscal stimulus in 2016. The recent federal budget deal turned previous temporary tax benefits permanent and provided for more spending to the tune of 0.6 percent of GDP. It’s positive for growth. The Wall Street Journal reports that the current expansion is longer than 29 of the 33 dating back to 1854. Slow but sure may be frustrating but it means few imbalances have built up. There is no recession in sight. Overseas, both Europe and Japan are rebounding from anemic growth. Economic growth will no doubt lag the U.S., but it is improving and supported by continued monetary easing and low oil prices. China grew at 10 percent from 1980-2010, then downshifted to 8 percent in 2011-2014, and is now coming in just under 7 percent. That’s still strong and on a much bigger base. Still, China and the emerging markets in general are a wild card in the outlook. Inflation is MIA throughout the globe, due mainly to weakness in commodities, sluggish growth and global competition. In the U.S. we may be seeing signs of wages perking up and while headline inflation is just above zero, the core CPI inflation rate is approaching the Feds 2 percent target. Low inflation has allowed central banks to be ultra-easy and keep interest rates at rock bottom levels. In fact, rates in Europe are negative for many government bonds out to five years. At yearend, the Federal Reserve finally began to raise short term rates — the first time in nine years. They have promised to go slow and caution that they are “data dependent.” With many other central banks (Europe and Japan, in particular) keeping rates near zero for several more years and the Fed hiking rates, some believe the dollar will continue to appreciate. We aren’t so sure. Certainly some of this is “in the market” and in fact the dollar is maybe 10-15 percent overvalued on a purchasing power parity basis. What to Expect in 2016 Keeping in mind the late Yogi Berra’s famous admonition that “forecasting is difficult especially when it’s about the future,” here are our thoughts: It’s a slow and low world. Slow economic growth. Low inflation. Low interest rates. Probably low returns on financial assets. Seven years after the Panic of 2008 and Great Recession we are still suffering from the aftereffects of too much debt and challenging demographics. After a seven-year bull market, U.S. stocks are fully valued, so future gains will hinge on earnings growth. Sales and earnings in 2015 were flat to down for S&P 500 companies, but are set to rise 5 to 10 percent according to the consensus. That might be aggressive, as profit margins may narrow owing to nascent wage pressures. Still, we expect modest gains in stocks. We expect developed equity markets outside the U.S., (Europe, for example) to do better. Easy money, more fiscal stimulus, an expanding economy, and weaker currencies should give corporate profits a boost. And valuations are better than in the U.S. While it’s a much tougher call, hope springs eternal with respect to the emerging equity markets. They have been trashed, but perhaps not enough to jump in yet. Valuations are better of course, but there is still considerable uncertainty. The plunge in commodities is worrisome because it is so broad based. It not just oil and gas, which we might chalk up to a supply glut, it’s everything! It is suggestive of weak global demand. We will maintain our underweight to this asset class and not try and catch the proverbial falling knife. It’s hard for us to get excited about foreign government debt boasting negative yields. In general we view bonds as expensive insurance in diversified portfolios. They will probably remain so given a dearth of safe haven assets. Within separately managed bond portfolios we remain underweight corporate bonds but are watching for an entry point as spreads have widened making these bonds more attractive. While non-financial leverage has increased (fueled in part by stock buybacks), the banks have shored up their balance sheets and are quite healthy. We expect the yield curve to flatten as the year progresses although don’t expect much of a sell-off in the intermediate and long end of the market. The Federal Reserve will be cautious and likely hike rates only twice this year keeping the federal funds rate below 1 percent. Jeff Pantages, CFA, is the chief investment officer for Alaska Permanent Capital Management, a $3.5 billion investment management and advisory firm located Anchorage.

INSIDE REAL ESTATE: Some takeaways from the International Builders Show

One-hundred-twenty Alaskans made the trek to the International Builders Show in Las Vegas last week, along with over 100,000 other builders, developers, remodelers, bankers, economists, suppliers, and a potty mouth Jay Leno, who opened the show. Three years ago, the IBS merged with the Kitchen and Bath Show and the Design/Build Week, creating the largest trade show in the U.S. In addition to the Alaskans, there were builders and developers from China, South Korea, and Europe. Whether they were there to gamble, eat a Gordon Ramsey burger, or see a show, you could hear a lot of foreign languages on the escalators. Although much of what was discussed and demonstrated was not applicable to the Far North, there were some definite similarities and take-aways for Alaskans. Alaska has its fair share of millennials and aging baby boomers — the two largest homebuyer groups in the U.S. Unfortunately, within these two home buying groups, there’s a lot of differing demographics, based upon family status, age, and income. The groups include the young single, older single, single parents, young couple, mature couple, older couple, young family, middle family and mature family.  The take-away for Alaska’s builders, virtually all of whom build less than one hundred units a year, is to focus on no more than three of these market segments. However, within our market place, there are some definite design trends that are noteworthy and applicable to Alaska. Like fashion, design trends change with the season, but there are some new ideas that will definitely last more than one season, even here in Alaska. Remember gray walls? They’ve been replaced with a Benjamin Moore off-white that better reflects sunlight. Good news for us who all suffer from light deprivation this time of year. Granite countertops have been replaced with a quiet quartz with little or no movement in the pattern. Selective wood accents have moved from the exterior to the interior with beams, barn doors, kitchen shelving, or a wood slab overlay on the quartz countertop. It’s a good contrast to the white cabinets that 80 percent of all homebuyers are selecting. The kitchen remains the heart of the home and that is not likely to change. However, more and more it looks like any other living area of the home with sleek, under mounted appliances. Can’t afford quartz? Try thick, four to six inch laminate countertops on an island with a waterfall side to the floor. And about that island: it is an island, not a peninsula, and must be six feet long, enough to seat at least four. The bi-level island is absent because it costs more to build and spatially interferes with small living spaces, particularly in the entry level condo market. And remember those plate glass mirrors in bathrooms? They’ve been replaced with a simple painted wood frame made onsite. Or, a Pier One fancy framed crystal mirror, chosen by the buyer. Because, the number one takeaway from the show is that whether it’s an entry level condo or a million dollar custom home, it is all about buyer personalization. Buyers want to make their own selections. The smart Alaskan builder will build a model home to demonstrate the latest in home design/interiors and then let their specs sit after dry wall so buyers can personalize their interiors to their specific tastes and homebuyer group.     Connie Yoshimura is the broker/owner of Dwell Realty. Contact her at 907-646-3670 or [email protected]

IG: Anchorage among airports with too few traffic controllers

WASHINGTON (AP) — There are too few fully qualified controllers at more than a dozen of the nation’s busiest air traffic facilities stretching from Atlanta to Anchorage, according to report released Jan. 26 by a government watchdog. The 13 airport towers, approach control facilities and en route centers have fewer fully trained controllers than the minimum number established by the Federal Aviation Administration specifically for each facility, Transportation Department’s inspector general said. The FAA considers the facilities fully staffed because controllers still in training are used to fill the gaps. But the report says there is great variation among trainee skill levels and readiness to work on their own. It typically takes about three to five years for a trainee to become fully qualified. Many trainees need fully qualified controllers to sit alongside and watch while they direct air traffic, ready to step in if there is a problem. Other trainees have reached a level of proficiency where they’re able to work alone. The report also questions the validity of the minimum staffing levels the FAA has assigned to the facilities, finding fault with the agency’s methodology. The report comes as member of Congress gear up for a fight over whether to spin off air traffic control operations from the FAA and place them under the control of a nonprofit corporation made up of airlines, airports and other aviation stakeholders. Rep. Bill Shuster, R-Pa., chairman of the House Transportation and Infrastructure Committee, is expected to introduce a bill within the next few weeks. The concept has the support of most of the airline industry with the exception of Delta Air Lines. But key House and Senate Democrats, as well as some business and general aviation groups, are opposed. The inspector general’s office recently said in a separate report that spending on air traffic control operations has doubled over two decades, while productivity has declined substantially and efforts to improve performance have been ineffective. Managers at some the 23 key facilities examined in the report cited a higher number of controllers needed to fill all work shifts than the FAA’s designated minimum number of personnel for that facility. “As a result, there is still considerable debate and uncertainty regarding how many controllers FAA actually needs for its most critical facilities,” wrote Matthew Hampton, assistant inspector general for aviation. Some managers agreed that trainees contribute to handling the workload, while others indicated that meeting on-the-job training requirements limited the contribution of trainees, the report said. The 13 facilities where there were less than the designated minimum number of fully trained controllers are the Anchorage tower/approach control, Atlanta approach control, Chicago approach control, Chicago’s O’Hare tower, Denver approach control, Dallas approach control, Houston approach control, New York’s John F. Kennedy tower, New York’s approach control, New York’s high altitude traffic center, Las Vegas’ approach control, Miami’s tower, and Albuquerque’s high altitude traffic center. For example, at the New York approach control facility, where handling air traffic is notoriously demanding, there were 150 fully qualified controllers even though the minimum set by the FAA was 173. There were also 53 trainees. The FAA data on staffing levels is from October 2014. The report doesn’t explain why more current data wasn’t used. Responding to the report, the FAA said in a statement that it is expediting transfers of controllers “from well-staffed facilities to those needing additional personnel.” The agency also said it has recently concluded research on how controllers do their jobs that will help improve overall staffing standards. Further complicating the picture is the large share of fully qualified controllers who are eligible to retire. At the O’Hare airport tower, for example, 24 of the 48 fully qualified controllers were eligible to retire. At the airport tower in Miami, 30 of the 80 fully qualified controllers were eligible to retire. Under FAA rules, any controller who has worked directing air traffic for 25 years is eligible for retirement benefits. Any controller over age 50 who has worked a minimum of 20 years is also eligible for retirement benefits. The FAA has set 56 as the mandatory retirement age for controllers, but most controllers retire before that. The FAA doesn’t consider the retirement situation at specific facilities when estimating how many new controllers it needs to hire, but rather uses a national forecast of retirements, the report said. “FAA does not have the data or an effective model in place to fully and accurately identify how many controllers FAA needs to maintain efficiency without compromising safety,” Hampton wrote.


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