Alaska Journal of Commerce

Utilities update RCA on Railbelt grid upgrades

Leaders of the state’s largest electric utilities submitted a draft plan to state regulators on Dec. 22 outlining how they will address more than $900 million of needed infrastructure upgrades. The early-stage business plan, developed in conjunction with Wisconsin-based American Transmission Co., is an update for the Regulatory Commission of Alaska on the utilities’ efforts to form the Alaska Railbelt Transmission Co. A Railbelt region electric transmission company, commonly referenced as a TRANSCO, would eliminate the disparate management of the region’s aging electric transmission system and bring it under one entity. In theory, operational savings drawn from sole control of the Railbelt’s transmission lines and substations would ultimately benefit ratepayers through lower electric rates. More important, perhaps, would be the ability to spur investment in and improve the reliability of Railbelt transmission infrastructure. The six utilities, from Homer Electric Association to Golden Valley Electric Association in the Interior, signed a nonbinding memorandum of understanding with American Transmission Co. in December 2014 to examine the formation of a Railbelt TRANSCO. Those six utilities provide about 80 percent of Alaskans with power. The RCA released a report at the behest of the Legislature last June that was critical of the utilities’ collective lack of substantive action to form a TRANSCO, which is assumed to be the best path towards addressing the Railbelt’s electric transmission issues. If the utilities did not take meaningful steps to voluntarily form a TRANSCO, the RCA warned it would seek legislative authority to handle the situation itself. The latest progress report to on a Railbelt TRANSCO projects a certificate of public convenience and necessity application, essentially a utility’s business license, could be submitted to the RCA by fall 2016. That could have a TRANSCO up and running by the spring of 2017, based on the utilities’ timeline. The utilities expect to have the potential benefits of a TRANSCO validated and a fair cost-recovery structure for transmission assets settled by next spring. A detailed, formal TRANSCO business model would be developed at the same time. The utilities would then take the agreements to their governing bodies — director boards and local governments — sometime next fall. Which utilities participate in the TRANSCO will largely depend on the benefits that can be identified for their individual ratepayers, the report states. If all six regional electric utilities participate, the TRANSCO would be governed by representatives from each utility, American Transmission Co., five independent directors and its CEO on a large board of directors. Some independent power producers in the state have criticized the Railbelt utilities for allegedly attempting to retain control of the transmission system by limiting access to it, thus squashing competition. Utility leaders collectively claim they will gladly purchase power from the cheapest source, regardless of who provides it. The challenge in the current system is keeping power from nontraditional sources economic as it travels the Railbelt on lines with multiple owners, each with their own transmission tariff needed to pay for the infrastructure. This often leads to what is known as tariff, or rate, pancaking in the industry. American Transmission Co. Business Development Manager Eric Myers said a lot of progress has been made casting an outline for a Railbelt TRANSCO, but noted it’s hard for any utility to commit to the idea at this point. “We’re in the middle of a process of coming up with a workable business model that can serve as a basis for decisions by the companies, and consequently by the regulators, but we’ve got to get all the details down,” Myers said. A 2013 Alaska Energy Authority study estimated $903 million worth of transmission upgrades are needed in the Railbelt to bring the entire system up to single redundancy. AEA is working with a consultant to update that study. Transmission investments in Alaska’s Railbelt would not only improve reliability — some areas are linked with a single transmission line — but could also save consumers money through economic dispatch. AEA has estimated that maximum use of the Railbelt’s cheapest power sources could save ratepayers between $80 million and $240 million per year. Bottlenecks in the system prevent adequate amounts of economic power from being shipped across the lines, forcing power to be purchased from more expensive sources. If AEA’s identified savings are actually realized will likely depend on how infrastructure investments are financed through the inner workings of a Railbelt TRANSCO. Myers said the first priority would probably be de-constraining state-owned Bradley Lake hydropower near Homer. “(Bradley Lake) is really inexpensive power and the more you get that power to market at peak times when demand is high — there’s value in that,” he said. Myers noted that the biggest cost savings along the Railbelt is traditionally avoiding oil-generated power, primarily from Golden Valley Electric Association. Low oil prices, if they last long-term, could challenge the economics of some otherwise obvious line capacity improvements. Ownership of Railbelt transmission lines is divided amongst the utilities and their service areas. The Alaska Energy Authority also manages 173 miles of electric intertie owned by the state between Willow and Healy. Improving transmission is a financial challenge for the individual utilities because expansive service areas and small customer bases can make projects that might benefit consumers elsewhere in the region a large cost burden to bear. Selling or leasing existing transmission infrastructure to the TRANSCO would allow the utilities to pool money for capital projects and allow ATC to invest in transmission, either directly or by attracting third-party investment. Milwaukee-area American Transmission Co. was the first multi-state, transmission-only company when it formed in 2001 to prioritize investment for the owner utilities in its service area of eastern Wisconsin and Michigan’s Upper Peninsula. By 2021, the fourth year full year of operation for a Railbelt TRANSCO under the current proposal, the transmission utility’s gross annual cost is estimated at $11.6 million.  At the same time, it’s projected to save the utilities more than $4.3 million per year, making a TRANSCO’s net cost in 2021 about $7.3 million, a cost that equates to an additional 96 cents per month on an average consumer’s bill. The economic benefits of a TRANSCO would not likely be manifested directly in significant savings on ratepayers’ electric bills. Rather, a TRANSCO would slow or stall significant rate increases by providing the most economic power on a more reliable transmission system. Elwood Brehmer can be reached at [email protected]

For Sullivan, focus on foreign policy, fulfilling promises

It has been a busy first year in Congress for Alaska Sen. Dan Sullivan. Elected in November 2014, the former state Natural Resources Commissioner and Attorney General took office in January in the new Republican-controlled Congress. Sullivan has an increasing role in foreign policy with his military background — he still serves in the U.S. Marine Corps Reserve — and his U.S. State Department experience, where he was Assistant Secretary of State for Economic, Energy, and Business from 2006-09. As a freshman, Sullivan is 100th in Senate seniority, but he did well last spring in his initial committee assignments and landed all four of his priorities: Commerce, an important committee for fisheries (Sullivan is one or two freshmen on the committee); Environment and Public Works, Armed Services, and Veterans’ Affairs. On Armed Services, Sullivan has already formed a close relationship with chairman Sen. John McCain, R-Ariz., and has been tasked with coordinating the committee’s oversight of Pacific region defense issues, to which Sullivan has added an emphasis on the Arctic. In an extended interview with the Journal Dec. 22, Sullivan ticked off accomplishments of the Senate in 2015 under its new Republican leadership. He feels good about his own performance there, too. “My focus is on the themes I campaigned on. This is important because there is a lot of cynicism out there (about government) and people notice,” when an elected official doesn’t follow through on commitments, Sullivan said. “It breeds more cynicism.” “With every vote I make I can point to something I campaigned on.” Return (mostly) to regular order What’s most important, Sullivan said, is that under new leadership the Senate is now functioning as it should, with bills and appropriation measures moving through committees where hearings are held and bill “markups” are done. Legislation then moves on to the Senate floor where amendments can be offered, and sometimes adopted. Sullivan contrasted this to a non-functional Senate under Democratic leadership and its former Majority Leader, Nevada Sen. Harry Reid, where few amendments were allowed on the floor and budget bills did not move through the normal process. “In 2014, under Harry Reid, there were a total of 14 roll call votes on the Senate floor. That’s about one a month. In contrast, in 2015 there have been over 200 roll-call votes,” Sullivan said. “We’re now operating in regular order.” Highlighting two issues, Sullivan said the enactment by Congress of a bipartisan five-year surface transportation bill was a significant accomplishment after years of stalemate and one-year extensions of the former program. He gave credit to Alaska’s senior Sen. Lisa Murkowski, for leadership on the House-Senate conference committee on the transportation bill along with an education bill that took control of school curriculums away from the federal government and send it back to states and local school boards. Among other bills, an amendment by Sullivan to a federal Human Trafficking measure gives states the ability to go after sex offenders if the U.S. Justice Department chooses not to. The senator’s interest in this came from his experience as Alaska’s attorney general where the Justice Department blocked the state in pursuing a high-profile case. “This is about protecting people who are most vulnerable. It was my first accomplishment in the Senate, and it went on to pass the House,” Sullivan said. There is actually more bipartisan action in the Senate than is commonly believed, he said. An example is the Senate’s vote approving the Keystone oil pipeline, a highly-charged energy issue, where one quarter of Democrats in the Senate voted with Republicans to approve the project before President Barack Obama vetoed it. The vote to override the veto failed 62-37, a few votes short of the two-thirds needed to override a veto. However, the old ways are not completely gone from the Senate. Sullivan said he voted against the federal spending bill, passed in late December, because of the less-than-transparent way it was handled, which was in a manner reminiscent of the Harry Reid era. “Harry Reid, (House Minority Leader) Nancy Pelosi, (Senate Majority Leader) Mitch McConnell and the White House made the final agreements behind closed doors on this 2,200-page, $1.8 trillion-dollar Omnibus Appropriations Act. We got this bill on Tuesday and were told we had to vote it on Friday,” Sullivan said. Sullivan voted “no” on the bill, in protest. “I dug my heels in,” he said. “There is a possibility that there are bad things for Alaska tucked into this bill, and we don’t know what there are.” He cited an example of a last-minute, little-scrutinized 2014 bill that contained language making changes to the U.S. Small Business Administration’s minority contracting bill that were very adverse for Alaska Native corporations in that business. Sullivan’s vote split the Alaska delegation on the spending bill. Murkowski and Rep. Don Young voted yes. Before the end-of-year omnibus spending bill he voted against, Sullivan said the Senate’s performance in passing budget appropriation bills in an orderly process showed the process working as it should. “We had 12 budget appropriation bills brought to the Senate floor and those were on a bipartisan basis,” Sullivan said. However, the Senate Democrats filibustered every appropriations bill when brought to the floor, including three times against the National Defense Authorization Act, or NDAA, a bill that Obama eventually vetoed Oct. 22. “I don’t know what they were really after,” in the filibuster, Sullivan said, “other than to force a jam-up of bills at the end of the year.” Congress rebuffed Obama’s veto by passing a virtually identical NDAA in November by veto-proof margins of 91-3 in the Senate and 370-58 in the House. On the spending bill, Sullivan noted that many of his fellow freshman Republican senators voted against it, having campaigned against passing budgets in such a fashion, as well as several committee chairmen who were upset that their appropriations bills had been killed. There were also more partisan bills that passed the Republican-led Senate, such as the repeal of Obamacare and bills dealing with intrusive new federal rules like Environmental Protection Agency’s Waters of the U.S and the new EPA rule on carbon emissions. “The president will likely veto those, but we (the Senate Republicans) felt it was really important to make the case,” he said. Frequent flier It is in foreign and military affairs that Sullivan feels he can contribute the most, taking advantage of his background in the U.S. State Department in the George W. Bush administration and his own military status as an officer in the U.S. Marine Corps Reserve. Being in the reserves allows the senator to interact with troops when on periodic active duty, and this gives him a direct perspective on current issues uniformed military personnel deal with that would be difficult for any other senator. The Senate leadership recognizes this value, leading to the request by McCain and Majority Leader McConnell that Sullivan help oversee the military realignment toward the Pacific. It is highly unusual for responsibilities like this to be given to a freshman senator. It puts Sullivan in key meetings in the Pacific, however, including a one-on-one in Tokyo earlier in 2015 with Japan’s Prime Minister Shinzo Abe. Sullivan used the occasion to pitch the Alaska LNG Project to Abe, and he found the prime minister surprisingly well-briefed on the effort. He also brought up AK LNG at a press conference in Singapore May 28 at the Asia Security Summit as part of a delegation led by McCain and Sen. Jack Reed, D-R.I., noting when he had a chance to speak that he mentioned the project had just that day received a key export permit from the Department of Energy. Sullivan has also been active in jawboning U.S. Army officials to slow, or halt, the transfer of 2,600 troops from the 4th Brigade Combat Team (Airborne) at Joint Base Elmendorf-Richardson, or JBER, downsizing the unit to battalion-size. He succeeded in getting an amendment on the defense spending bill requiring the Defense Department to develop an Arctic Operations Plan and got verbal assurances from the Army that troops would not be withdrawn until the plan was finished. Army brass wasn’t happy about the amendment because operations plans are very detailed, requiring a threat assessment, and they take time, Sullivan said in the interview. Sullivan’s argument for the plan, citing Russia’s Arctic military buildup, got a lot of attention from other senators, however, that rose above common parochial concerns whenever military troops are reduced from an area. “They (Russia) have positioned four brigade-size combat teams and built 11 new airfields in the Arctic, as well as installing a sophisticated new air defense system and commissioning 40 new icebreakers, some of them nuclear. What are we doing? Squat, and at the same time we’re talking about withdrawing the only airborne combat brigade in the Pacific, one of six in the Army, and the only U.S. troops who are Arctic-trained,” Sullivan said. “The good news is that many other members of the Armed Services Committee now recognize this.” The issue is not yet settled. A critical test will come in February when the Army plans to take elements of the 4th BCT from JBER to Louisiana to participate in tests on its ability to operate as a smaller, battalion-sized unit, or essentially what would remain at JBER if the 2,600 troops were to leave. Sullivan plans to attend and observe the tests. The senator agrees the Army needs to cut costs but trimming combat troops is not the way to do it, pointing to the military’s “tooth to tail” ratio. The U.S. military has the longest “tail,” or ratio of support to front-line personnel, of any of the world’s armed forces, and if reductions are made the “tail” should be looked at first, he said. Meanwhile, another foreign policy issue Sullivan is watching closely, although it may now be beyond Congress’ ability to do anything, is the lifting of economic sanctions against Iran that is part of the recently-agreed nuclear accord. Some senators have discussed possible legislation that would prevent at least the U.S. sanctions from lifting until the administration certifies that Iran is no longer a state sponsor of terrorism, in effect taking Iran off the list of nations that sponsor terrorism. Whether the idea will get traction isn’t known, however. Sullivan is not a fan of the nuclear agreement, however, because it has already been shown that Iran has violated it with its tests of long-range missiles. President Obama was too quick to sign off on the deal without ways of ensuring compliance, the senator said. An example he cited is that Iran basically self-inspects its nuclear facilities under the deal. There is no real independent inspection and verification. What rankles Sullivan particularly is that Iran is being freed of sanctions while four U.S. citizens are still being held prisoner, and that Congress has been cut out of the loop on such an important foreign policy decision. “There are a lot of Democrats who opposed this deal. It’s a bad precedent,” Sullivan said. “Through all of our nation’s history, all major foreign policy initiatives have been bipartisan and involving Congress,” through actions like ratification of treaties or formal declarations of war, Sullivan said. The senator feels he has a stake in the matter because as a top State Department official in the Bush administration Sullivan was instrumental in knitting together an international coalition of nations on the economic sanctions that ultimately brought Iran to the bargaining table. Much of what that accomplished is being lost by an agreement that is weak and difficult to enforce, Sullivan said.

Walker plans for better relations with Legislature

What a long, strange trip it’s been — and that was only year one. In his first year in office, Gov. Bill Walker faced unprecedented state budget deficits; an obstinate Legislature, which would eventually sue him; an historic presidential visit; and an oh so precarious state economy, all the while trying to put his mark on an immense natural gas pipeline project led by three of the largest companies that has for years been his overwhelming desire for Alaska. Despite those challenges and countless others, some self-inflicted, Walker still embraces the gubernatorial post. “There’s really no part of I haven’t enjoyed,” Walker told the Journal during a Dec. 22 interview. “It’s been tough — the budget, the financial stuff has been tough —but that’s not deterred me. Sometimes I’ll come home late at night and my wife (Donna) will ask me, ‘Are you still happy to be governor?’ and I say, ‘Yes, I’m still happy to be governor.’” As he noted, today’s Alaska is much different than the one Walker thought he would be leading when he announced his second run at the state’s high office in 2013. Then, the price for Alaska North Slope crude averaged more than $100 per barrel for the entirety of 2013, the only year that has happened. Now, we are all too aware of where that market has gone and what it has done to the state. Then, Walker thought he would be running as an Independent with an Independent running mate. Now, he has a Democratic lieutenant governor in Byron Mallott after the two combined their tickets. Then, the Alaska LNG Project was still a pipe dream. Now, maybe it still is, but the state has committed to spend at least $13 billion for its share if the pieces come together this time. However, the governor said he has the right team in place to match what faces the state’s 13th administration. It was that team that decided to lay out his ambitious state spending reform plan all at once Dec. 9, rather than to parse the tax, Permanent Fund Dividend, and revenue proposals, which would have been the politically expedient thing to do, Walker said. “It was a group decision around the cabinet table, realizing that’s not the politically correct way to do it necessarily,” the governor said. Since, Walker’s New Sustainable Alaska Plan has been picked apart by Republicans who say it doesn’t cut spending enough before resorting to a statewide income tax to help fund state government as the administration has proposed. Democrats have chided the governor’s plan to revamp how state dividend checks are paid to Alaskans, saying the governor’s plan, which would likely cut checks in half, at least in the near term, amounts to an unfair tax on low-income residents without amply taxing the oil industry. This most recent debate with the Legislature is far from his first, however. A series of kerfuffles over the state’s role in the $45 billion-plus Alaska LNG Project kept Walker at odds with the Republican majorities almost all year. In the midst of those, Walker kept a campaign promise and expanded Alaska’s Medicaid system administratively when Majority leadership in the Legislature held up Medicaid legislation. That led to the Republican-led Legislative Council filing suit against the governor in August on grounds that he overstepped his authority. While a last minute injunction to stop Medicaid expansion failed, the lawsuit is ongoing. Even where to hold a special legislative session became a contentious issue. The Majority outright ignored Walker in late April when it pushed to adjourn a special budget session Walker called for Juneau. The Legislature reconvened on its own a few weeks later in Anchorage. A partial, $200 million veto of $700 million in the state operating budget to pay for refundable oil and gas tax credits drew the ire of not only Republicans in the Legislature, but also some in the industry. Walker said he made the unexpected move after the tax credit sum was not addressed in the special budget session, as he predicted. It’s also one he stands behind because it got people talking about a credit program he considers unsustainable. “It started the discussion; it really did,” Walker recalled Dec. 22. “It was a heated discussion, but it started the discussion.” As the start of the next legislative session nears Jan. 19, the governor said he has made plans this year to meet with the leaders of the House and Senate Finance and Resources committees every two weeks, “because just about everything goes through Resources or Finance,” as a way to improve communication between executive and legislative branches, he said. Walker also surmised that the state’s budget deficit, nearing $3.5 billion, might actually improve relations with the Legislature. “I think that this session is going to be easier in some ways, as far as relationship-wise just because we’re all in this together,” he said. “The entire boat’s taking on water. I think we’re going to have a better working relationship.” On President Barack Obama’s three-day, late summer visit, Walker said the president “connected with Alaska” the impact of the visit on the state probably won’t be known until after Obama is out of office. “Some people said when he came back to the White House he was pretty much on fire about Alaska. Now, that could be interpreted two different ways,” Walker quipped. Interpretation one: Alaska is a great national park and must be kept as such. Interpretation two: Alaska needs to develop its resources to promote economic prosperity. Walker said he continues to push the White House for access to the resources on and under federal control his state. “I am not done with my outreach to this administration at all,” he said. He recalled a conversation he had with Obama in which the president was surprised by the fact that only a small portion of the Arctic National Wildlife Refuge would be needed to be opened to exploration in order for the state to access potentially billions of barrels of oil. “The 1002 (Coastal Plain) section is 8 percent of ANWR. We only need half of it; we only need the western half — 4 percent,” Walker said, attempting to put in perspective how a little of the revered wilderness could go a long way towards helping the state’s financial situation, which he said Obama is clearly aware of. Walker also noted that each time he’s raised the issue of ANWR with Obama, the president quickly changes the topic to the AK LNG Project. “Like I continue to tell Washington, we can self-heal if we are allowed access to the resources that we were promised,” the governor reiterated. Elwood Brehmer can be reached at [email protected]

Alyeska pouring efforts into cold-weather ops

It has been a warm winter so far, and operators of the Trans-Alaska Pipeline System operators are thankful. But winter has just begun, and the worry of cold temperatures in Interior Alaska and a midwinter “event” that halts pipeline operations, like what happened in 2011, is never far from mind. Since that suspenseful event when Alyeska Pipeline Service Co. engineers were concerned they couldn’t restart the pipeline, they have been aggressive about putting countermeasures in place. It costs money, but heating the oil flowing through the pipeline has now become standard procedure. Without the heating, oil could cool to 31 degrees Fahrenheit or lower by the time it reaches Valdez, at the pipeline’s southern terminus, a temperature at which ice formation and wax buildup would cause operational problems, Alyeska officials say. The company operates TAPS on behalf of its owners, the large North Slope oil producers. The problem is mainly is caused by the low volumes of oil as North Slope production has continued to decline. TAPS, completed in 1977, now operates at about 25 percent of its 2 million barrels-per-day design capacity, Admiral Thomas Barrett, Alyeska’s CEO, told an Alaska business group in a briefing.  “Our operations in winter are increasingly complex,” Barrett said. At Prudhoe Bay, oil that once entered TAPS at its Pump Station 1 at 140 degrees Fahrenheit now comes in at 108 degrees. When the pipeline operated at full capacity of 2 million barrels per day it took four days for oil to reach Valdez, and with the pipeline full the friction of fluids moving against the pipe walls kept the oil warm. Now it takes 15 days for oil to travel the 800 miles and because half the pipeline is built above ground there’s ample exposure to winter temperature that can reach minus-50 degrees. There isn’t enough oil flowing for the pipe wall-friction mechanism to do what it previously did. “The real danger for us is if there is an unexpected winter shutdown. There could be significant problems,” if the oil were to congeal and ice were to form as water dropped out, Barrett said. Exactly this happened in 2011 when a small oil leak at Pump Station 1 caused TAPS to shut down for several days during cold weather. At several points along the pipeline in Interior Alaska, the crude temperature dropped below freezing. When regulators finally gave the OK, Alyeska was able to restart the pipeline, but with difficulty.  Pipeline operators are now adding heat at four locations by circulating the crude through loops of piping so that the friction adds heat. At Pump Stations 3, 4, 7 and 9, heat is added by running oil through recycle loop, at a rate of up to 25,000 barrels per hour at Pump Station 3. Last January, oil left Pump Station One at a 106 degrees and an ambient sir temperature of minus-17 degrees. When the oil reached Pump Station 3, 100 miles south, its temperature had dropped 51 degrees. Recirculating at Pump Station 3 added 15 degrees back. The same process is repeated at Pump Stations 4 and 9, although at Pump Station 7, which has been shut down, a mainline pump has been kept active to do the recirculation. In 2015, Alyeska added a new heat source, a diesel-fuel heating skid placed 17 miles north of Pump Station 7, at Remote Gate Valve 65, a point along the pipeline where cold winter temperatures are common and the pipeline could be vulnerable to ice formation. Oil is extracted and circulated through a loop with about 2 degrees added by the heat skid. Alyeska is considering the addition of similar heat skids at various points. TAPS also gets a bump in heat by the return of residual oil from a small refinery near Fairbanks owned by Petro Star Inc., an Alaskan refiner. Petro Star takes crude from TAPS and makes jet fuel and diesel, returning unused portions of the crude, at a high temperature, to the pipeline. Michelle Egan, Alyeska’s spokeswoman, said the main strategy is to protect Pump Station 9, near Delta, southeast of Fairbanks, where the oil must be warmed enough to get the rest of the way to Valdez and over Thompson Pass in the Chugach Mountains. “The higher winter production from the North Slope is a big help. On a lot of days now we’re moving 550,000 barrels per day, so the volume helps,” she said. But throughput continues to decline at rates that have averages 5 percent a year and pipeline operators are concerned with wax buildup if rates reach 400,000 or 350,000 barrels per day, she said. Meanwhile, one experiment tried by Alyeska has turned out to be unsuccessful. In a special test facility built at the University of Tulsa, the company experimented with a strategy of removing water from North Slope crude, from its ambient content of 0.2 percent water to 0.02 percent, to see of the crude could be run at temperatures below freezing without ice being formed. Unfortunately, ice still formed even at the lower water content, Barrett said in his briefing. “We learned we can’t flow it colder, so adding heat is now our main strategy,” Egan said. Interestingly, the idea of circulating the crude oil through loops of pipe at pump stations to add heat was born in the crisis atmosphere of the 2011 early winter shutdown, when engineers were seriously worried that after several days the oil had cooled and gelled to the point that the system might not restart. It wasn’t an immediate solution to the problem at hand but in a brainstorming session Alyeska’s engineers suggested it as a preventative measure for the future, and management adopted the plan. The 2011 shutdown also brought some drama between state and federal regulators, and Alyeska’s management, over the restart. The Pump Station 1 leak was still being repaired but Alyeska asked for government permission to temporarily restart the pipeline flow to warm up the oil. The U.S. Environmental Protection Agency, which had taken over control the federal agency management of the problem, refused, according to Dan Sullivan, now a U.S. Senator but who was state Commissioner of Natural Resources at the time. The state and Alyeska forcefully pressed the issue, warning EPA that the system could be down for weeks or even months with serious consequences to U.S. west coast oil supply and state of Alaska finances. Sullivan said he was working back channel to the White House at the time, and EPA eventually backed down, allowing the temporary restart. As Slope production continues its decline the point at which TAPS can no longer operate, as currently configured, is still unknown. Below 300,000 barrels per day, some form of “batch operation” could be implemented where the pipeline is operated periodically, drawing down oil stored at Prudhoe Bay. Meanwhile, the steps Alyeska has to take is adding significant operating costs, a factor in the increasing tariffs for moving North Slope oil to Valdez.  “The real solution for us is finding more oil on the North Slope and adding new production and throughput,” Barrett said. Although it would have been a decade away, new production from the Chukchi Sea from Shell’s exploration was being looked on by many Alaskans as a long-term savior for TAPS. Shell pulled out last fall, however, saying citing regulatory delays and costs amd disappointing results from the one exploration well completed this past summer. Tim Bradner can be reached at [email protected]

Leg. Council seeks help from AIDEA with Anchorage LIO

The Legislative Council is hoping the Alaska Industrial Development and Export Authority can help it out of an untenable situation, while keeping legislators in their Anchorage offices. Council members voted unanimously Dec. 19 to recommend the full Legislature not pay the $3.3 million per year lease it has for the Anchorage Legislative Information Office, or LIO. At the same time, they voted to request help from state agencies in brokering a deal between the Legislature and the building owner that is equal to the cost savings that would come from moving legislative offices into the Atwood Building in Downtown Anchorage, which houses executive branch agencies. The cost of the lease has been heavily criticized by legislators and the public both in and out of Anchorage while the state faces annual deficits nearing $3.5 billion, although when signed a year ago it met state law that requires long-term state lease extensions to be at least 10 percent below market value. That is one of the points of contention in a separate lawsuit filed by Jim Gottstein challenging the lease as illegal as neither an extension nor 10 percent below market value. Sen. Peter Micciche, R-Soldotna, made the advisory motion, noting that it is the Legislature’s duty to operate government as cost-effectively as possible. The state agency to help the council would very likely be the Alaska Industrial Development and Export Authority, or AIDEA. A quasi-government finance entity, AIDEA manages unique business transactions throughout Alaska, some of which are done at the request of government’s political bodies. If a deal isn’t reached after 45 days, the council’s motion would recommend not funding — or breaking — the 10-year lease with building owner 716 West Fourth Avenue LLC, co-owned by Anchorage developer Mark Pfeffer and Bob Acree. The leaseholder company name is the Downtown Anchorage address of the LIO. Pfeffer has indicated he is willing to sell the 64,000 square-foot building for $36 million, which cost $44.5 million in 2014. The Legislative Council decided to rebuild on the old LIO building site in 2013 after numerous attempts to find existing suitable space that meets the unique needs of a public government body in Anchorage failed. The Legislature contributed $7.5 million towards the construction cost, so Pfeffer and his company ultimately funded $37 million, about $28 million of which is long-term debt and $9 million is Pfeffer’s cash equity position in the property. A year of the lease has already been paid for at $3.3 million, which mean Pfeffer’s property company would walk away with $39.9 million over two years at his sale price. The lease is paid through May 31, 2016. The Legislature could terminate the lease seemingly without legal ramification because of a clause in nearly all government contracts stating fulfillment of the agreement is “subject to appropriation,” in this case, by the Legislature. If the Legislature doesn’t fund it, for any reason, the lease or contract falls apart. The “out” clause is virtually never used, though, and ascribing it to the Anchorage LIO lease situation could call the State of Alaska’s credit worthiness into question. While breaking the lease may not directly lead to a credit downgrade for the state, it would not look good after credit rating agencies have warned that the consequence of not addressing the budget deficit will be a downgrade from the state’s AAA credit rating. A consequence of moving out of the LIO to the Atwood Building could be slightly higher bond rates and generally a poorer perception of the state’s trustworthiness. Before a break in the hours-long meeting resulted in Micciche’s motion when the meeting came back to order, Legislative Council members urged against taking action until all options are fully vetted, as the idea of employing AIDEA, nor the consequences of moving had not been fully vetted. Rep. Liz Vasquez, R-Anchorage, a former attorney, vehemently warned against taking a politically expedient way out in testimony to the committee. “It appears to me we have not done our due diligence and we’re going to pay for it in litigation,” Vasquez said. Sen. John Coghill, R-North Pole, characterized the appropriation clause less as an option for the Legislature and more of a “last resort.” If an agreement is not reached that keeps the Legislature in the Anchorage LIO for cost on par with the Atwood Building, the issue is sure to be a big part of a session already ripe with budget conundrums. 716 West Fourth Avenue spokeswoman Amy Slinker said in a formal statement the firm is happy the Legislative Council is gathering more information before making a decision. “We believe there are several options that save the state money without taking the drastic step of breaking the lease and risking what others have said would be serious negative credit implications,” Slinker said. Moving to the Atwood Building, with 30,000 square feet of usable space, would cost $10.1 million over 10 years, which would include a $3.5 million initial refurbishment. The Anchorage LIO is 64,000 square feet; however, it has about 45,000 square feet of usable space, which omits restrooms and other common areas. Pfeffer said he would sue the Legislature for terminating the lease, which could cost the state anywhere from $1 million to $2 million in legal fees, regardless of the outcome, according to an attorney for the Legislative Council. In a Dec. 14 interview with the Journal, Pfeffer also noted that he entered the agreement with the Legislature — the state appropriator in charge of funding the lease it signed — and not a state agency with less control over what is funded. AIDEA’s ability to finance, sometimes at lower than market rates, for special projects, combined with the state’s positive investment returns, could make an authority purchase of the LIO building the best option, AIDEA Chief Investment Officer Mark Davis testified to the council. First, the Legislature would remain in the LIO. Second, AIDEA’s purchase would be preferable over an outright purchase by the Legislature because the authority can borrow money at a rate lower than state savings and investment returns. The Legislature would then lease the building from AIDEA, which would pay a portion of its return on the building back to the state in the form of its annual dividend to state coffers. Elwood Brehmer can be reached at [email protected]

User conflicts over halibut, salmon on horizon for 2016

The year about to end saw the beginnings of some fisheries regulations and legal battles that will either resolve, or present further issues, in 2016. Halibut has dominated the federal fisheries agenda for the North Pacific Fishery Management Council, which oversees the Exclusive Economic Zone from three to 200 miles off the coast. Shrinking halibut stocks and dual management have collided to produce a fishery bitterly divided among bycatch users, directed users, and charter anglers struggling to make ends meet with fewer legally harvestable fish. The council will enact or further review several measures to ease the situation and provide a more collaborative and holistic approach to halibut management. A program for Recreational Quota Entities will be released for public review in 2016. Recreational Quota Entities, or RQEs, would purchase halibut quota from commercial halibut fishermen for the charter fleet to use. Currently charter operators may only lease quota. Commercial concerns about raising the price of commercial quota, among others, prompted the council to tweak the RQE proposal. It will likely release it for public review at its February meeting in Portland or April meeting in Anchorage. The council will also review a broader halibut management framework plan to smooth some of the difficulties it has managing the resource in tandem with the International Pacific Halibut Commission, a joint U.S.-Canadian body which sets quota limits for the directed halibut fishermen. Among the most important points of the framework is a potential for biomass-based halibut bycatch limits. Currently, halibut bycatch limits for the flatfish trawlers in the Bering Sea are capped, and do not move with the abundance of legally harvestable halibut. The council will review methods for abundance based halibut limits in 2016. In state fisheries, all eyes will be on the Supreme Court of Alaska to rule on a ballot initiative proposed by the Alaska Fisheries Conservation Alliance. The initiative would ban setnet gear in urban areas, almost exclusively impacting Cook Inlet East Side setnetters where 735 setnet permits are registered alongside a large guided angler industry. Alaska residents hold more than 80 percent of the commercial permits. The Alaska Supreme Court heard arguments in August from the Alaska Fisheries Conservation Alliance and the State of Alaska; the state is arguing the measure is unconstitutional as a prohibited allocation of a resource while the AFCA argues it is not allocative and simply bans a gear type. If allowed, the initiative could appear on the 2016 ballot and go into effect as early as 2017. State fisheries managers and legislators will wish to avoid the messy Board of Fisheries confirmation fights of 2015. The board will look to the Legislature to confirm the most recent appointee to the seven-member board, Bob Mumford, during the 2016 Legislative session. Mumford was named by Gov. Bill Walker to fill the seat after his first two nominations didn’t make the cut, one withdrawing from the process and the second defeated by the Legislature. Alaska Department of Fish and Game managers will keep a close eye on both the returns of chinook salmon, which have largely been in decline statewide over the past several years, and sockeye salmon, which showed eye-raising behavior in 2015 with late, large runs and below-average size. To catch them in Bristol Bay, the state’s largest sockeye run, fishermen are asking for guarantees they’ll get paid more than in 2015. Bristol Bay fishermen signed a petition late in 2015 to ensure some kind of contract transparency for their dealings with processors. In 2015, Bristol Bay fishermen were only paid 50 cents per pound, half the average rate, due to a confluence of market factors. Though that price is tied to a web of influences, fishermen often suspect processors’ prices.

New year will reveal impacts to economy from budget cuts

There is a strong sense of uncertainty regarding Alaska’s near term economic future in state industry circles, while basic indicators continue to show growth. The state’s unemployment rate was 6.4 percent in November, steady from October and down very slightly from a year ago. A 6.4 percent unemployment rate is significant for Alaska, as it hasn’t been less than 6.3 percent in the nearly 40 years the state Labor Department has tracked the metric. Unemployment is less than 6 percent in the state’s urban hubs. The average number of working Alaskans is up more than 2,700 over 2014, according to the department. Historically strong commercial salmon harvests and a strong-as-ever tourism industry — more than 1.9 million visitors in 2015 spending on average more than $900 apiece — have pushed employers to add positions the last few summers. Low oil prices wreak havoc on the state budget, but they encourage Lower 48’ers spending less on energy to travel and spend that cash in Alaska. Disposable income has been freed up in Alaska as well, particularly for residents who heat their homes with heating oil. Behind those metrics, however, are less optimistic numbers. Alaska’s population growth has flattened, which could distort unemployment figures. The state had a net outmigration of about 7,500 people in fiscal year 2014, most of whom were likely working-age adults, economic experts have said. That was offset by in-state births that kept Alaska’s population nearly perfectly flat at 735,600 from 2013 to 2014, according to the most recent data available from the state Labor Department. A naturally transient population, combined with a healthy Lower 48 economy, can cause out-of-work Alaskans to leave the state rather than file for unemployment. Oil and gas industry employment was down 900 jobs statewide in November from a year prior, based on preliminary Labor numbers. In a state heavily reliant on government spending, a lot rests on what legislators and Gov. Bill Walker do to address the state’s budget deficit, growing towards $3.5 billion as oil falls to less than $35 per barrel for the first time in more than a decade. The governor’s aggressive proposal — and similar ideas floated in the Legislature — to revamp how the state manages its revenue would provide a foundation to fund government long-term and set a clearer economic picture. However, his plan includes industry and income taxes and likely smaller dividends that would certainly impact private spending at least a little. And while minimal capital spending from the state will probably be the norm for at least the next few years, the producer partners and the State of Alaska will continue pumping several hundred million new dollars into the economy each year they design and ponder the Alaska LNG Project. Oil prices have been down from a $110 per barrel peak for more 18 months; at the same time, the 30-year average price for a barrel of Alaska oil is about $50 when adjusted for inflation, which makes current prices low, but not a historical anomaly. Alaska’s economy is slowly diversifying and the next year or two will speak volumes as to whether it has diversified enough to make the state viable without the security blanket of dominating petroleum revenue.  Elwood Brehmer can be reached at [email protected]

A critical year lies ahead for Alaska LNG Project agreements

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

North Slope companies to keep up spending

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

Retail legalization of marijuana will become reality in 2016

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

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

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

State, local leaders discuss PILT split from AK LNG Project

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

AGDC board taps former VP as interim president

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

YEAR IN REVIEW: New production by ConocoPhillips highlights ‘15

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

YEAR IN REVIEW: Federal agenda dominated by halibut bycatch concerns

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

Banks warn of impacts for breaking Anchorage LIO lease

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

Gov’s budget plan scrutinized by legislators on both sides

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

Council tightens Southcentral charter halibut rules for ‘16

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

YEAR IN REVIEW: Five-year transportation bill provides stable funding to Alaska

President Barack Obama signed the $305 billion Fixing America’s Surface Transportation Act Dec. 4, approving the nation’s first long-term transportation funding legislation in more than a decade. Known as the FAST Act, the bill provides five years of funding aimed at improving rail, road and marine infrastructure. It passed both the House and Senate by wide margins the day prior to being signed by the president. All three members of Alaska’s congressional delegation supported the legislation. Alaska is poised to receive more than $2.6 billion over the life of the FAST Act, with yearly allotment increases. The state took $483.9 million from the federal government for surface transportation programs in federal fiscal year 2015, which ended Sept. 30. In 2016, that figure jumps to $508.6 million; by the end of the FAST Act in 2020 it is $555.3 million, according to a release from Sen. Dan Sullivan’s office. The FAST Act also corrects a formula error in the 2012 MAP-21 transportation bill that cost the Alaska Railroad Corp. about $3 million per year in formula funding. The railroad should get $5 million more per year under the new law. Railroads across the country will also have the opportunity to compete for $199 million in federal grants to aid implementation of the federally mandated Positive Train Control safety system, which is expected to cost the Alaska Railroad nearly $160 million by the time it is fully in place in 2018. The previous year-end deadline for railroads to have Positive Train Control in place was pushed back to 2018 in a separate piece of legislation passed earlier this fall. The Tribal Transportation Program — $450 million per year under the MAP-21 extensions — will get an additional $15 million in 2016 and $10 million more in the following four years. A new federal freight program designed to fund freight-related highway improvements will send $80 million Alaska’s way over the duration of the legislation as well. 2. Ferry system cuts, new ships on way It was a year in limbo for the Alaska Marine Highway System. Early in the year, the Transportation Department, which manages the state ferries, increased fares by 4.5 percent on all but the system’s most expensive routes in an attempt to increase revenue and equalize its jumbled fare structure, which had not been changed since 2007. Ferry funding was again a hot topic in the Legislature as proposed budget cuts could have forced the Alaska Marine Highway System, or AMHS, to cancel summer sailings for which thousands of tickets had already been sold. In the end, lower oil prices — the cause of the budget crunch — left $5.5 million of fuel money unspent, which was reallocated to fund summer service. This fall, the AMHS and some legislators began holding meetings in coastal communities to discuss how to prioritize service during future lean budget years. The system is prepping for a 15 percent cut in fiscal year 2017 when compared to 2014 — the last year before its budget started falling. That cut could also deepen depending on what the Legislature allocates in its upcoming session. In fiscal year 2014, the Marine Highway System was appropriated $162.6 million by the Legislature. It will have a budget of about $137 million in the 2017 fiscal year, which begins next July 1, if the administration’s projection holds true. While dealing with funding struggles, the AMHS has been installing a new reservation system, which system leaders say should provide data to better inform future fare and schedule plans. On the positive, construction of the twin, Alaska class “day boat” ferries bound for service in Lynn Canal continued on schedule at Vigor Industrial’s shipyard in Ketchikan. The 280-foot ferries should be ready for water in October 2018. A final design for the M/V Tustumena replacement vessel is expected in January from Glosten, a Seattle-based marine engineering firm. 3. Corps selects Nome, then suspends Arctic port work It was a promising start to the year when the U.S. Army Corps of Engineers released a report in February outlining its idea for a reasonable deepwater port expansion for Nome. The $210 million plan would have dredged Nome’s expanded outer harbor to nearly 30 feet and added a large vessel dock. The plan was based on the perceived long-term need for more marine infrastructure in the region as Shell prepared to resume its offshore Arctic drilling program over the summer. Nome would have been home to smaller safety and support vessels for shipping through the Bering Strait and promising oil development in U.S. Arctic waters. That all came to an end in September when Shell announced the end of its offshore exploration in the Chukchi Sea — a $7 billion expenditure brought down by poor drilling results and onerous federal regulations, the company said. The fallout from Shell’s decision hit Nome in late October when the Corps suspended its work to expand the city’s port — no Shell, no drilling, no need for more infrastructure was the rationale. The Corps had been studying the prospect of a major Arctic port in Western Alaska since late 2011 through a cost-sharing agreement with the State of Alaska. 4. Matson closes Horizon deal, invests in Alaska Pacific shipper Matson Inc. wrapped up a $469 million deal to buy Horizon Lines Alaska business in late May and immediately began investing in its new business. In late July, Matson announced plans to purchase 2,000 new general purpose containers, 430 winter-insulated containers, a 65-ton gantry crane for its Kodiak terminal and two new tractors for container movement at the Port of Anchorage, altogether a $30 million investment. Three containerships operating in Alaska are also getting exhaust scrubber systems to comply with international treaty emission control regulations as part of Matson’s investment. The exhaust systems will eliminate nearly all sulfur dioxide and particulate emissions, according to the company. Kodiak’s new crane arrived Aug. 13. The ship renovations should be done in about a year. Matson provides twice-weekly containership service to Anchorage and Kodiak and weekly service to Dutch Harbor from Tacoma, Wash.

YEAR IN REVIEW: GCI completes wireless acquisition; Arctic fiber advances

Alaska’s two largest telecommunications companies are showing positive growth after shuffling the state’s wireless customers. In 2014, General Communications Inc. agreed to a $300 million deal with to Alaska Communications Systems Group Inc for all the latter company’s wireless subscribers and 33 percent of Alaska Wireless Network, a combination of both companies’ wireless infrastructure. ACS has used the proceeds from the deal to pay down its debt, and now focuses on its broadband business. The deal has yielded results for GCI’s balance sheet. GCI raised third quarter consolidated revenue by 7.4 percent from 2014, from $240.7 million to $258.6 million, and $10 million greater than second quarter 2015. GCI reported $19.9 million in net income in the third quarter of 2015 compared to $9.9 million in the third quarter of 2014. Alaska Communications revenue is down, but net income through nine months is up. Net income through three quarters of the year for Alaska Communications was $12.6 million compared to just $2.6 million for the same nine months of 2014. That is despite total operating revenues declining to $54.7 million from $78.4 million in the third quarter of 2014. 2. Quintillion lays fiber for northern Alaska Alaska’s Northwestern communities are one step closer to joining the worldwide data sphere. Alaska fiber optic provider Quintillion Subsea Holdings LLC signed a turnkey contract with French telecom Alcatel-Lucent for an undersea fiber optic cable network stretching across Nome, Kotzebue, Wainwright, Point Hope, Barrow, and Prudhoe Bay and will provide for future extensions to Asia and Europe. The undersea cable forms the coastal border of a broadband arc that will cover most of the populated Arctic by 2018. Quintillion, based in Anchorage, also plans to run a fiber optic cable from Deadhorse to Fairbanks, scooping most of the northern Alaska population into range of its overland and undersea cables. ASTAC, which provides broadband service and wireless coverage for Deadhorse, Kotzebue, Wainwright, Barrow, and Point Hope, will eventually have to upgrade each town’s broadband infrastructure to make full use of Quintillion’s fiber network. 3. Alaska Communications acquires North Slope fiber Efforts to bring data plans to rural areas and remote workspaces got another boost in 2015 with a ConocoPhillips broadband contract. Quintillion Networks also partnered with Alaska Communication Systems Group Inc., to operate the infield fiber optic cable on ConocoPhillips’ North Slope oilfields and begin a multi-year service provision contract for the oil company. Internet service to ConocoPhillips Slope operations was formerly available, but largely from older, expensive legacy installations of microwave towers and satellite relays. The fiber runs from Kuparuk River and Colville River units to Pump Station 1 of the Trans-Alaska Pipeline System. ConocoPhillips had installed the cable on its own, but decided the management of the cable’s high capacity, which was unfamiliar for the oil company, would better belong in a broadband expert’s hands. Alaska Communications has hired several supervisory positions to oversee the integration of the ConocoPhillips cable into its network, which should be complete by the end of 2015. ACS has also ordered new equipment to add to the cable’s existing capacity.   DJ Summers can be reached at [email protected]


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