Elwood Brehmer

Judge hits both sides in Anchorage LIO suit

A lawsuit challenging the legality of the Anchorage Legislative Information Office lease will continue, but neither side came out of a court ruling unscathed. Anchorage District Superior Court Judge Patrick McKay wrote in a Jan. 7 order denying a defendants’ motion for summary judgment that the filer of the suit, Anchorage attorney James Gottstein, waited an unreasonably long time to file the suit. At the same time, McKay found that the Anchorage LIO owners could in a roundabout way benefit from the building lease being voided. The building is owned by 716 LLC — the Downtown Anchorage LIO address — a real estate partnership in which longtime Anchorage developer Mark Pfeffer is a primary member. Gottstein filed the suit on March 31, 2015, claiming the 10-year, $281,638 per month lease the Legislative Affairs Agency agreed to is illegal because it is not 10 percent below market value, a requirement for state lease extensions that do not go through a competitive bidding process. Legislative Affairs and 716 West Fourth Avenue agreed to expand and renovate the old 23,600 square-foot Anchorage LIO in September 2013 and Gottstein became aware of the agreement a month later; however he did not file suit at that time despite expressing concerns over the legality of the agreement, according to court records. Construction commenced in December 2013 and the new 64,000 square-foot building was finished in January 2015. Gottstein contends on his office’s website that the lease, which he claims equates to $7.15 per square foot, is well beyond the market rate of about $3 per square foot for Downtown Anchorage office space. On a total square-foot basis, the monthly lease works out to about $4.40 per square-foot, while the usable square-foot lease rate is higher. Pfeffer told the Journal in a previous interview that the building was renovated specifically to meet the Legislature’s unique layout and on-site parking requirements and therefore has no equal in the market. The new Anchorage LIO has been appraised multiple times at $44 million by several banks who financed the construction and the long-term debt. Pfeffer, caught in the middle of what has become a political issue, has offered to sell the building to the Legislature for 716’s financial obligation on the building — about $37 million — or millions less than its appraised value. An appraisal of the LIO conducted by the Alaska Housing Finance Corp. estimated the value at $48.5 million. McKay’s order notes that Gottstein, president of the adjacent Alaska Building Inc., collected $25,000 in fees and rent from 716 and the contractor before filing the suit. “The court views Mr. Gottstein’s financial gains as acquiescence and, combined with the 17 months (he) waited to bring the lawsuit, this delay seems ‘unreasonable,’” the judge wrote. If the lease is found “illegal, null and void,” 716 and Legislative Affairs could renegotiate to a rate 10 percent below market value, which could force Pfeffer and his partners to refinance the building over a longer term and thus incur harm, the order reads. Additionally, the building’s unique characteristics may not find anyone to lease the full space on similar terms and incur harm that way. “On the other hand, in the event that the court declares the lease ‘illegal, null and void,’ and the parties are unable to reach a new agreement, 716 will be able to lease the building at a greater rate since it claims the current rate is 10 percent below the market value,” Judge McKay wrote. “Indeed, 716 may even benefit from a finding that the lease is ‘illegal, null and void.’” In its arguments, Legislative Affairs argued it could be harmed because of the $7.5 million the Legislature contributed to the building improvements. McKay wrote that if the lease is found null and void, “the Alaskan taxpayers will be saving potentially much more than the original $7.5 million. It remains a question of fact whether the LAA would ultimately forfeit the original $7.5 million it spent on improvements since the lease makes no specific mention of such a contingency.” Impact of LIO move The messy Anchorage LIO situation has become political, with Anchorage minority Democrats and legislators from outside the city saying the state should break its lease because it cannot afford the building when Alaska is facing a $3.5 billion annual budget deficit. During a Dec. 19 meeting at the Anchorage LIO, the Legislative Council, which directs the Legislative Affairs Agency, voted to move out of the building unless a lease rate equal to what the Legislature would pay in the state’s nearby Atwood Building can be negotiated. Breaking the lease would technically be legal because of a “subject to appropriation” clause that voids the lease if the Legislature votes to not fund it. Pfeffer, some legislators, and state financial experts have warned that walking away from a roughly $26 million remaining obligation would hurt the state’s credit rating at a time when Standard & Poor’s just downgraded Alaska’s debt rating because of its fiscal problems and current lack of a plan to address them. “716 has acknowledged that the State is in a different fiscal environment now than when the lease was legally signed in 2013. Mindful of this reality, 716 West Fourth Avenue, LLC has indicated its willingness to work with the Alaska Legislature to find a pathway to savings,” spokeswoman Amy Slinker said in a formal statement. Gabe Petek, Standard & Poor’s primary credit analyst for Alaska, told the Journal Jan. 8 that the state walking away from a subject-to-appropriation lease likely wouldn’t impact rating agencies’ view of Alaska because the action is a way to reduce spending in the larger budget picture. “In a perverse sort of way it can be a strengthening — (legislators) have the ability when push comes to shove to push things around a little bit. People on the other end of it may not like it, but from the standpoint of the investors and the bondholders it can actually be a protective attribute, I guess,” Petek said. “We’re primarily focused on (the state’s) ability to fund their debt payments in full and on time on their debt that’s out in the public debt markets.” Elwood Brehmer can be reached at [email protected]

BP will cut Alaska workforce by 13 percent

BP is cutting 4,000 jobs worldwide and some of those reductions will be in Alaska. An intra-company email obtained by the Journal sent to BP Alaska employees Jan. 12 states that the company plans to reduce its total in state workforce by 13 percent. All employees should know their status by early spring and the majority of layoffs will be conducted by mid-year, according to the email. BP directly employs about 2,100 people and has another 6,000 contract workers in Alaska, based on the company’s 2015 Alaska Hire report. The 13 percent reduction will come from the company's direct employees, or about 270 people. “Today, the cash we generate from our business is not sufficient, meaning we have to borrow from the BP Group to meet our Alaska investment,” the email reads. “Improving our cost base is critical to maintaining our activity level at Prudhoe Bay and the long-term viability of the region.” In a formal statement BP said it plans to further reduce employee numbers in its upstream division to less than 20,000 — the Gulf of Mexico, Lower 48 onshore and Alaska in the U.S. — to simplify its business, cut cost and improve efficiency. “To reach this level we will need to reduce our current workforce of BP employees and agency contractors by at least 4,000 additional people,” the company said. BP’s restructuring comes as the price for Alaska North Slope oil has fallen to near $31 per barrel. At the same time, North Slope crude production and transportation costs are estimated at $46 per barrel, according to the state’s Fall 2015 Revenue Sources Book. BP cut 475 Alaska positions in late 2014 when it sold North Slope assets to Hilcorp Energy. About 200 of those employees ultimately transitioned to work for Hilcorp, a Houston-based independent. ConocoPhillips announced a 10 percent cut to its 1,200-employee Alaska workforce last September in a cost-cutting move. BP has incurred pre-tax damages upwards of $55 billion related to the massive 2010 explosion and subsequent oil spill from its Deepwater Horizon drilling rig in the Gulf of Mexico, according to the company’s third quarter financial report. Overall oil and gas industry employment was down 900 jobs statewide in November from a year prior, based on preliminary Labor numbers.   Elwood Brehmer can be reached at [email protected]

Credit downgrade timed on bond sales, continued oil decline

Standard & Poor’s Jan. 5 downgrade of Alaska’s credit ratings, which caught many state leaders by surprise, was triggered by upcoming bond sales, according to an analyst from the ratings agency. Gabe Petek, Standard & Poor’s primary Alaska analyst, said in an interview that the agency had a duty to revisit the state’s ratings because of general obligation bond sales scheduled for late January and February. “If you’re selling debt we can’t just sit back and let it go forward without updating our viewpoint,” of the state’s credit, Petek said. In August, Standard & Poor’s revised the State of Alaska’s credit rating outlook from “stable” to “negative,” citing the state’s budget deficit growing towards $3.5 billion annually as the main reason for the change. An associated report acknowledged the state’s significant existing savings — currently a sum of about $15 billion — but also said legislators must act quickly to address the pessimistic trend of the fiscal situation in what Standard & Poor’s at the time called a “contentious” state political climate. The agency officially downgraded Alaska’s formerly sterling “AAA” credit rating to “AA+” for general obligation, or GO, debt Jan. 5. Along with that came single-level downgrades to state appropriation-backed debt and Alaska Energy Authority bonds with a moral obligation pledge from the state to “AA” and “A+,” respectively. A collective negative outlook accompanied the ratings. At a press briefing immediately following the Standard & Poor’s downgrade Gov. Bill Walker said his initial reaction was “give us a chance” to address the state’s long-term budget issues during the regular legislative session that begins Jan. 19. He added at the time it was his understanding a bond sale pushed the issue. Walker put forth an aggressive plan to balance the state budget over several years in early December — a proposal to revamp how the state manages its money through the Permanent Fund, change how resident dividends are paid and increase personal and industry taxes. Whether it is done using the governor’s plan or another method, there is near unanimous consent among legislators that a major fiscal structure change is coming, and soon, for Alaska. Senate Finance Committee co-chair Anna MacKinnon, R-Eagle River, said in a Jan. 5 statement that she was disappointed by the decision to downgrade the state’s credit rating so soon after changing the credit outlook and before the session. The agency’s rationale, as MacKinnon put it, in August was that the Legislature needed to stabilize the budget situation. The specific GO bond sales scheduled for Jan. 20 that Petek said pressed Standard & Poor’s to revisit Alaska’s credit rating are for bond approvals dating back as far as 2005. Those bonds, totaling $38.5 million, are for projects in the Kenai Peninsula and Kodiak Island boroughs and the small Southeast Alaska city of Klawock approved as part of a 2005 bond resolution. Refinancing of a bond for the City of Seward is also included in the package. Fitch Ratings, on Dec. 23, announced a rating of “AA+” with a stable outlook for the GO bonds, which nearly aligns with Standard & Poor’s overall rating downgrade for general state bonds. Alaska Municipal Bond Bank Authority Executive Director Deven Mitchell said another state GO bond sale for statewide transportation projects is scheduled for the end of February. Voters approved those bonds in 2012 as part of a $460 million package. Public infrastructure projects are long-lived, Mitchell said, so the state bond bank regularly asks the Department of Transportation when it needs funds for various projects. Alaska’s credit rating downgrade also comes at a time when the Walker administration is proposing a $500 million multi-year GO bond package to fund essential and capital projects along with pension bonds to stabilize the state’s retirement payment obligation. Mitchell said the downgrade could result in interest rate hikes of about 0.1 percent on future bond sales. Walker equated that to roughly an additional $1,000 per year payment on each $1 million the state borrows. In several years the state could also look to bond for at least part of its share — at least $13 billion — of construction costs on the Alaska LNG Project. However, the state’s credit rating and fiscal situation will have ample time to change for better or worse before then. The state’s financial group made a pitch to Standard & Poor’s analysts in an early August meeting just prior to the negative ratings outlook report for a ratings adjustment after the upcoming legislative session to give Alaska’s leaders a chance to stabilize the state’s fiscal situation, according to Mitchell. “That’s been the state team’s discussion point with the analyst. If you look back 18 months to August of 2014, the price of oil was over $100 per barrel. The state was looking at a balance with a draw on the (Statutory Budget Reserve), but we were going to have growth in the net position of the state because of investment earnings that were going to float a savings in funds like the (Constitutional Budget Reserve), the Earnings Reserve of the Permanent Fund and so we went from that kind of very strong position to a year later trying to deal with a price of oil that had dropped below $50 per barrel and now obviously it’s below $40 per barrel,” Mitchell said. “And it just takes a long time, it’s kind of like you’re in a ship and you want to turn around you can’t just start going the other way; it takes a while to get turned around.” Petek said the timing of the ratings are not tied to the legislative cycles and that Standard & Poor’s does not try to persuade or pressure political leaders into any decisions. Its reports specific to Alaska simply lay out the state’s bind, he said. Since the August ratings outlook adjustment the state’s revenue forecast has declined along with oil prices, further exacerbating Alaska’s fiscal issues, Petek noted. “The problems have gotten larger; that’s one thing, and the state is going to sell debt into the market,” he said. “And we just have a very strong interest in making sure there’s no uncertainty as to what our views are when they’re going to go and sell debt so it kind of forced the issue in a way.” Petek added that Alaska, at “AA+” remains in a “really strong” position — equal to or better than about half of the other states around the country. It is a rating agency’s responsibility to assess based on a state’s immediate situation and not to predict what politicians will do, he said, and currently Alaska’s fiscal house is deteriorating.   Elwood Brehmer can be reached at [email protected]

MEA says economics of single transmission co. overstated

Matanuska Electric Association is questioning the benefits of transferring regional transmission infrastructure to a single utility. In a Dec. 29 letter to the Regulatory Commission of Alaska chair T.W. Patch, MEA General Manager Joe Griffith cited eight reasons why the Southcentral electric utility believes forming a Railbelt electric transmission company could be unnecessary and possibly add costs to participating utility ratepayers. Among the issues raised by MEA is the utility’s belief that a $903 million estimate for needed performance and reliability upgrades to the Railbelt electric system is a “grossly inflated number,” the letter states. The hefty sum is based on reliability standards that don’t return a justifiable value, according to Griffith. He said in an interview that all the Railbelt utilities — there are six — could reap significant benefits from as little as $50 million invested strategically. “The ($903 million) study was done properly for the boundaries and conditions they studied it under,” Griffith said. “It isn’t a bogus study; it’s probably right, but the first question you have to ask is, ‘Do we need it?’” The Alaska Energy Authority commissioned the 2013 study that came to the $903 million conclusion. It was based on a single-loss contingency standard, known in the industry as N-1, meaning the entire Railbelt electric transmission system, from Fairbanks to Homer, would be able to absorb the loss of a single transmission line or substation without consequence. The authority is currently updating that study to include double contingency and status quo costs; that study is expected in March. MEA uses an N-1 standard in its system, Griffith said, and his letter noted that while system-wide planning for a single contingency is prudent, the utilities have consistently determined the cost of reliability improvements is not justified. The 173-mile, state-owned transmission intertie is a single line between Willow and Healy, and a lone connection ties Anchorage to the Kenai Peninsula. Adding redundancy to the interties would allow for the cheapest power to flow freely and continuously, but because each utility has its own generating capacity, improved reliability is not imperative. The utilities are working to finalize a set of system-wide reliability standards that will go a long way towards determining what level of contingency planning will be used where, according to MEA representatives. Griffith concurred with other experts in the field when he said loosening access to Bradley Lake, the 120-megawatt state-owned hydro project near Homer, is the Railbelt’s most pressing need. A lone upgrade of the single-line intertie between Anchorage and the Kenai Peninsula from the decades-old 115-kilovolt line to a 230-kilovolt line would de-constrain Bradley Lake and add needed capacity to the transmission system, not unnecessary reliability, he said. Griffith ballparked a southern intertie upgrade cost at about $50 million. AEA has estimated that full investment to add capacity and reliability to the system could save Railbelt ratepayers between $80 million and $240 million per year simply by accessing the lowest cost power through economic dispatch. MEA contends those cost savings are unsubstantiated. The RCA demanded the Railbelt utilities move to establish a united electric system last June. In a letter to legislative leadership, the commission stated it would seek the authority to mandate the utilities to take action if they failed to heed the warning on their own. In December 2014, American Transmission Co., or ATC, a Milwaukee-area transmission-only utility, inquired about the possibility of developing a Railbelt transmission company to spur investment in the system. The utilities ultimately signed a memorandum of understanding with ATC to investigate the feasibility of a Railbelt transmission company, or TRANSCO. A TRANSCO would centralize management of the transmission system and allow participating utilities to invest in, and thus benefit from, projects across the system, not just those in their service area. ATC has experience with the TRANSCO model and would provide access to capital through its Lower 48 investors. The utilities expect to apply for a license to form a TRANSCO in the third quarter of this year, according to a Dec. 22 update report to the RCA. Griffith also noted that adding another utility with its own workforce and rate of return to the Railbelt could actually increase costs to ratepayers. The progress report to the RCA estimates the net cost of a TRANSCO would be about $7 million per year once it is fully up and running. Beyond operational costs, a for-profit TRANSCO would also require a rate of return — another cost to ratepayers, Griffith said. ATC spokesman Eric Lundberg said the company currently earns a 12.2 percent return on its Midwest business, but added that the Federal Energy Regulatory Commission regulates any return in the Lower 48. Similarly, the RCA would set profit parameters for an Alaska Railbelt TRANSCO, Lundberg noted. ATC operates like most utilities in that it seeks long-term business, understanding its return will ebb and flow with market conditions and regulations, he said. “We don’t look to flip investments; we look to be there,” Lundberg said. The “weak link” of a TRANSCO is the inherent incentive to invest in infrastructure because each investment makes a return, Griffith said. A major selling point of a TRANSCO has been the prospect of a single transmission tariff across the Railbelt — the elimination of “rate pancaking” for power producers needing to cross multiple utility service areas to get power to a buyer. Independent power producers have argued the stacked transmission tariffs are an economic barrier to developing low-cost renewable energy in the state’s most populated region. Griffith said a postage stamp tariff would simplify the cost, but is not likely to lower it for everyone because each utility has a different tariff rate. The transmission tariffs are set by the RCA to allow the utilities to service debt on their transmission infrastructure. “You’ve got to recognize the legacy investment each utility has made. If you don’t do that it’s a dead-bang loser,” he said. Turning over transmission infrastructure to a TRANSCO through a lease or direct change of ownership also provides a disincentive for local reliability investments, according to Griffith’s letter to the RCA. “MEA members could be faced with bearing the burden of both the total cost of their own future transmission improvements while subsidizing the system-wide legacy assets largely serving the retail loads of others,” the letter states. System operator benefits MEA’s concerns about forming a TRANSCO do not mean the utility is averse to changing the structure of the Railbelt electric network. Organizing an independent, or unified, system operator, often referred to as an ISO or USO, along with transmission capacity upgrades, would reap the greatest benefits of economic dispatch without adding unnecessary costs, according to MEA representatives.  “(A system operator) is where all the money is because that lets you maximize the efficiency of the (generating) machines as well as the gas contracts and that’s got to be folded into all this because that’s millions and millions of dollars annually,” Griffith said. Southcentral utilities relying on Cook Inlet natural gas as their generating fuel source sign contracts with producers that have a tiered pricing structure — typically base load, swing load and peak load. When demand peaks a utility can pay a 50 percent to 65 percent premium for natural gas. In theory, a system operator acting as a central power dispatcher would work to distribute as much base load power as possible, regardless of which utility owns the generation. MEA spokeswoman Julie Estey said the new, more efficient power plants coming online in the Railbelt — Municipal Light and Power and Chugach Electric Association’s joint Southcentral Power Plant and MEA’s Eklutna Generating Station — have already started this coordination between the utilities in an informal “loose pool.” For example, the 10 small generators that power the 171-megawatt Eklutna Generating Station can be powered up and down to meet fluctuating demand more efficiently than some of the larger gas turbine generators at other power plants in the region, Griffith said, so the utilities purchase power amongst themselves without a structured agreement. MEA’s vision of a system operator would have each participant represented on a board of directors, with board seats for independent power representatives as well. Alaska’s independent power producers often contend that the utilities control the Railbelt system and have pushed for a system operator to make dispatch decisions separate from the utilities. Estey, of MEA, said other issues the independent power producers raise with the utilities, such as who pays for interconnection fees to independent power sources, would likely be solved with a system operator. “It seems to me there has been more unified support (from the utilities) around a system operator, but ATC has been doing such a good job of driving the utilities around the TRANSCO model that that seems to be making more progress and has more legs, but that’s because more resources have been put into it,” Estey said. Elwood Brehmer can be reached at [email protected]

Feds decide against ESA listing for Alexander Archipelago wolves

A group of Southeast Alaska wolves will not be listed under the Endangered Species Act, according to a Jan. 5 U.S. Fish and Wildlife Service announcement. The Fish and Wildlife Service estimates the population of gray wolves, known as the Alexander Archipelago wolves, at between 850 and 2,700 animals. “Although the Alexander Archipelago wolf faces several stressors throughout its range related to wolf harvest, timber harvest, road development and climate-related events in Southeast Alaska and coastal British Columbia, the best available information indicates that populations of the wolf in most of its range are likely stable,” a Fish and Wildlife Service release states. Conservation groups have petitioned the service to list the wolves as endangered or threatened for more than 20 years. The latest determination comes after a yearlong review of the Alexander Archipelago wolf population in response to a petition filed by the Center for Biological Diversity. In March 2014, the Fish and Wildlife Service began a 90-day petition to list the wolves as threatened based on preliminary information at the time. The petition led to the 12-month finding. Had the wolves been listed, habitat protection measures would likely have further damaged Southeast Alaska’s struggling timber industry. Related efforts by conservationists to get Prince of Wales Island wolves recognized as a distinct population for the purpose of an Endangered Species listing have been unsuccessful as well. Sen. Lisa Murkowski commended the Fish and Wildlife decision, noting that Alaska has the largest population of gray wolves in the nation. “There is agreement that the gray wolf population in Southeast Alaska is healthy and stable in most places and growing in others,” Murkowski said in a release. “At a time when timber harvesting on Prince of Wales Island is barely a tenth of its levels of two decades ago, the attempt by some environmental groups to list the wolf seemed to be an effort solely to end the last of the remaining timber industry in Southeast Alaska. Fortunately, it did not work.” Gathering concrete data on wolf populations and genetics is particularly difficult in the dense Southeast rainforest because of the animals’ elusive nature.

No ESA listing for Alexander Archipelago wolves

A group of Southeast Alaska wolves will not be listed under the Endangered Species Act, according to a Jan. 5 U.S. Fish and Wildlife Service announcement. The Fish and Wildlife Service estimates the population of gray wolves, known as the Alexander Archipelago wolves, at between 850 and 2,700 animals. “Although the Alexander Archipelago wolf faces several stressors throughout its range related to wolf harvest, timber harvest, road development and climate-related events in Southeast Alaska and coastal British Columbia, the best available information indicates that populations of the wolf in most of its range are likely stable,” a Fish and Wildlife Service release states. Conservation groups have petitioned the service to list the wolves as endangered or threatened for more than 20 years. The latest determination comes after a yearlong review of the Alexander Archipelago wolf population in response to a petition filed by the Center for Biological Diversity. In March 2014, the Fish and Wildlife Service began a 90-day petition to list the wolves as threatened based on preliminary information at the time. The petition led to the 12-month finding. Had the wolves been listed, habitat protection measures would likely have further damaged Southeast Alaska’s struggling timber industry. Related efforts by conservationists to get Prince of Wales Island wolves recognized as a distinct population for the purpose of an Endangered Species listing have been unsuccessful as well. Sen. Lisa Murkowski commended the Fish and Wildlife decision, noting that Alaska has the largest population of gray wolves in the nation. “There is agreement that the gray wolf population in Southeast Alaska is healthy and stable in most places and growing in others,” Murkowski said in a release. “At a time when timber harvesting on Prince of Wales Island is barely a tenth of its levels of two decades ago, the attempt by some environmental groups to list the wolf seemed to be an effort solely to end the last of the remaining timber industry in Southeast Alaska. Fortunately, it did not work.” Gathering concrete data on wolf populations and genetics is particularly difficult in the dense Southeast rainforest because of the animals’ elusive nature. Elwood Brehmer can be reached at [email protected]

Walker: ‘We’re TransCanada now’

If 2015 was Alaska’s “year of the budget,” Gov. Bill Walker is looking forward to 2016 being the “year of the gasline.” Walker said he hopes his administration can present the Legislature with a virtually complete Alaska LNG Project fiscal package sometime in the second half of the upcoming legislative session, which begins Jan. 19. The portfolio of Alaska LNG documents the governor wants to take to Juneau includes the project’s fiscal terms, governance agreement and tax policy, and the associated constitutional amendment. The Department of Law has indicated an amendment will be needed to exempt the project from limitations the state Constitution puts on lawmakers preventing them from locking the state into long-term tax policy. The terms of the Alaska LNG Project gas production contracts, essentially gas tax contracts, will likely bind the state for up to 25 years and therefore need to be exempted from constitutional limitations. Walker said he is excited about being able to spend more time on the North Slope natural gas project — a cause the governor has championed in various forms for decades — and he has committed to attending each project sponsor meeting. “Now that we’ve sort of ripped all the Band-Aids off on all the different areas of the budget and all the other stuff now we can get down to the gasline,” he said in a Dec. 22 interview with the Journal. Having the tentative agreements in place as soon as possible should give the Legislature time to critique them during the regular 90-day session before another gasline-dedicated special section later in the spring. The special session is when the fiscal terms of the $45 billion-plus North Slope natural gas export pipeline project the state is in with BP, ConocoPhillips and ExxonMobil would be debated and voted on by the Legislature. Walker said he expects to hold the gasline session immediately following the regular session because legislators will want as much time as possible in late spring and summer to campaign in their districts, as 2016 is an election year. However, when the session is held will depend on what legislators want as well as when the regular session wraps up. Typically 90 days, Alaska’s annual winter-spring session can be extended up to 120 days if pressing issues — the state budgets, taxes and Medicaid expansion and reform this year among others — remain unresolved in late April. The Legislature took just 13 days to adjourn its most recent gasline special session that began Oct. 24; but that was for whether the state should buy out TransCanada Corp.’s share of the Alaska LNG Project. It amounted to an up or down vote. TransCanada, a pipeline company, previously held the state’s 25 percent interest in the North Slope gas treatment plant and the 800-mile gas pipeline. Now, the State of Alaska is a 25 percent partner in the entirety of the project with the three producer partners owning shares equivalent to their in-ground gas holdings devoted to the project. Prior to taking on TransCanada’s role of the project, the State of Alaska held a quarter-share of the LNG plant planned for the Nikiski area on the Kenai Peninsula — a $25 billion operation itself. The special session Walker is anticipating would have multiple, complex financial agreements that, if approved, could have tremendous impacts on the state for decades to come. Regardless of the other moving parts, the constitutional amendment needs to be approved by legislators and shipped off to the Division of Elections by June 24 for inclusion on the November general election ballot. If the late June deadline were missed, the project would likely be delayed two years until the next general election. Walker transformed the leadership of the Alaska Gasline Development Corp., or AGDC, in 2015 by appointing six new members to the seven-member state corporation board. He also asked for, and got, a new AGDC president when financier Dan Fauske resigned the position Nov. 20. The governor said at the time that AGDC needed executive leadership with pipeline expertise to reflect the state’s growing role in the project. He reiterated that sentiment to the Journal. “AGDC does look different now than a year ago,” Walker said Dec. 22. “But a year ago we weren’t in the pipeline business. A year ago we were looking at a portion of an LNG project and we’re looking at a pipeline, at the upstream conditioning. So now, we’re TransCanada; we need to look like TransCanada.” While the State of Alaska will not be expected to match the expertise of TransCanada or ExxonMobil, the project’s pipeline manager, the state will have to provide a “fair representation” of a pipeline company to make its contributions to the Alaska LNG Project, Walker said. Finally, getting gas supply commitments from at least two of the producers, BP and ConocoPhillips, was a significant hurdle cleared, according to the governor. Walker said one of his biggest concerns with Senate Bill 138, the legislation that maps out the project’s structure passed under former Gov. Sean Parnell, was the lack a provision to move forward if a partner withdrew. He noted that, as far as he knows, Alaska LNG is the only project the industry giants are collaborating on — a uniquely challenging aspect given each company has other plans for other investments around the globe. The proof of the challenge lies in the fact that Alaska’s North Slope gas is still in the ground, according to Walker. “The economics have always been in this (AK LNG) project, yet it has not been done to date,” he said. Elwood Brehmer can be reached at [email protected]

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]

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]

Utilities update RCA on Railbelt transmission collaboration

Leaders of the state’s largest electric utilities submitted a draft plan to state regulators on Tuesday 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 hest 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. 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. 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. An Alaska Railbelt Transmission Co. would likely be led by ATC at the guidance of the utilities, which would sell or lease their transmission assets to the TRANSCO. That 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., or ATC, was the first multi-state transmission-only when it formed in 2001 to prioritize investment for the owner utilities in its service are of eastern Wisconsin and Michigan’s Upper Peninsula. Look for an expanded version of this story in an upcoming issue of the Journal. Elwood Brehmer 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]

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]

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.  

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 Saturday afternoon 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]

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.   Elwood Brehmer can be reached at [email protected]

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]

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.

New and bigger taxes, reduced PFD in gov’s plan

(Editor's note: This story has been updated to include remarks from legislators as they become available.)   Ready or not Alaskans, here comes reality: higher taxes, more of them and a smaller dividend. Gov. Bill Walker unveiled his long-range fiscal plan for the state Dec. 9, which includes a personal income tax as well raising nearly every state industry tax in the face of yearly budget deficits approaching $3.5 billion. The Legislature will have its say when it convenes in January, but under the Walker administration’s proposal, the State of Alaska would adopt federal code for its income tax and levy the tax at 6 percent of ones federal liability. That equates to about 1.5 percent of an individual’s annual income. An income tax allows the state to capture revenue from nonresident workers — about 20 percent of Alaska’s workforce, according to the state Labor Department — as well as profits from S-corporations and partnership businesses. The relatively small income tax would generate an estimated $200 million for the state every year. Withholdings would begin in January 2017. Alaska has not had an income tax since 1980, and three attempts to reinstate a tax during the fiscal disaster of the late-1980s all failed. Along with the income tax, Walker formally proposed shifting how the state manages its money towards a “sovereign wealth fund” model, an idea first floated by the administration in late October during a presentation to the Legislature by Attorney General Craig Richards. The concept would stabilize state revenue by filtering it through the Permanent Fund, thus allowing the money to make an investment return, before lawmakers could spend it. More specifically, the Walker administration’s plan would put half of the state’s resource royalty revenue and all of its oil and gas production tax income into the Permanent Fund each year. The earnings, or investment return, made by the fund would then be allotted to the Permanent Fund Earnings Reserve account and spent to run state government. The state could sustainably draw $3.2 billion from the Earnings Reserve each year under the plan. That projection holds up under 97 percent of scenarios and is based on roughly $50 per barrel oil, according to the administration. Permanent Fund Dividend checks, which have historically come from the Earnings Reserve, would then come from the remaining 50 percent of annual resource royalties. Alaskans would no longer get a Permanent Fund Dividend; rather they would get a resource royalty dividend, pegged to be about $1,000 in the coming years. A $3 billion infusion from the Constitutional Budget Reserve, or CBR, account into the Earnings Reserve would be needed to jumpstart the plan, according to the administration. The CBR currently holds about $9.1 billion, while the Earnings Reserve will hold about $6.5 billion at the end of fiscal 2016, according to Alaska Permanent Fund Corp. projections. The Permanent Fund held $51.3 billion in total assets at the end of the third quarter. That money cannot be accessed by the Legislature without a constitutional amendment. The Earnings Reserve can be spent with a simple majority vote. The whole plan is based on continuing status quo unrestricted state spending in the $5 billion range. The fiscal plan “keeps the Permanent Fund permanent,” Walker said while unveiling his proposal. Combining a small, progressive income tax with a smaller dividend, which is an impact to all Alaskans, is an imperfect way to spread the burden of now directly paying for government services across all residents, while minimizing the impact on low-income Alaskans, the administration says. Walker’s proposed taxes and fiscal plan will all be vetted, dissected and reflected upon during the upcoming legislative session. Any action will have to be approved by the Legislature. “This is a work-in-progress; this isn’t an edict or a mandate,” Walker said. “The main message is that we have to fix the problem.” Doing nothing — not really an option — would require the state to draw $33 billion from savings, money the state does not have, over the coming years while dividend checks would disappear in about 2020, the administration says. A large natural gas pipeline, which would generate billions in revenue annually, cannot itself save the state’s finances and is still far from a certainty. How quickly things change. Less than a year-and-a-half ago Alaska North Slope crude was selling for $101 per barrel. On Dec. 7, the price for Alaska oil fell below $40 per barrel for the first time since February 2009. The second half of this year is the first time oil prices have consistently held below $50 per barrel since the end of 2004. Alaska’s state revenue history looks much the same. The Department of Revenue’s annual fall revenue forecast released Dec. 8 projects Alaska will take in just less than $1.6 billion in unrestricted general fund revenue in the current 2016 fiscal year. That would be the lowest income level for unrestricted funds the state has seen since oil was below $20 per barrel in 1999. Just a few years ago in 2013 the state took in nearly $7 billion of discretionary income; a year prior that number was $9.5 billion. The problem this time is declining North Slope oil production will not allow the state to refill its coffers once oil prices rebound, whenever that may be. As a result, the state must wholly shift its financial structure. Further government spending cuts totaling $100 million are proposed in the governor’s operating budget, Office of Management and Budget Director Pat Pitney said at a press briefing Dec. 9. Unrestricted government spending has fallen by nearly $1 billion over the last couple years. Additionally, about 600 state employees have been laid off as a result of those budget cuts. Senate President Sen. Kevin Meyer, R-Anchorage, said he has not had a chance to fully review the administration’s proposal, but his initial reaction is that the spending cuts do not go far enough. “A $100 million reduction (proposed by the governor) is not acceptable to our Senate Majority if we’re asking for $400 million in new taxes on Alaskans,” Meyer said. The majority caucus will be meeting soon to iron out priorities, but Meyer said a likely target for Senate Republicans is a 5 percent to 10 percent reduction. House Speaker Rep. Mike Chenault, R-Nikiski, said he disagrees with the governor over not proposing a state sales tax. There are problems with how it would relate with municipal sales taxes, even in his own Kenai Peninsula Borough, the Speaker said, “but I still think a sales tax is a fair tax across the state, although it won’t be liked in rural Alaska.” Chenault added that he is concerned about the administrative costs associated with implementing new taxes. Walker said a sales tax was considered but not chosen based on the disproportionate impact on rural Alaska, where higher costs of goods would generate a higher sales tax. House and Senate Democrats commended Walker for not ignoring the state's fiscal bind in formal statements, but said the governor's plan pushes the burden of paying for government onto low-income Alaskans. "The oil companies, and the wealthiest Alaskans will be thrilled with this proposal because three-fourths of what the government takes will come from hard-working Alaskans, many of whom rely on their Permanent Fund checks to cover the basics," Anchorage Democrat Sen. Bill Wielechowski said. "The whole plan is skewed to have the least impact on the rich and powerful, while dumping the burden on those who can least afford it. This is a reverse Robin Hood plan that robs from those wo need, and spares the rich." Oil and gas tax credits — brought into the limelight by Walker’s partial deferment of $200 million of the the state’s $700 million refundable credit obligation in the current year’s operating budget — would be transformed into a loan program, with interest rates tied at least partially to what percentage of a project’s workforce is Alaskan. That would be a drastic shift away from the current refundable credit system, which pays, particularly small producers, dollar-for-dollar on many exploration and development capital expenses. Industry representatives have pushed back on major changes to the state’s oil and gas tax credit program, and a report released Dec. 1 by the Senate Majority urged against wholesale changes to the program, fearing a sudden retraction from the industry in the state when low oil prices are already challenging bottom lines. The Alaska Oil and Gas Association panned Walker’s plan to change the tax credit program. “At a time of low oil prices, now is not the time for the state to increase taxes or reduce incentives to the oil and gas industry in Alaska,” said AOGA President Kara Moriarty in a statement. “Unfortunately, Governor Walker is proposing to do both. We support the governor’s goal to put more oil into TAPS. However, increasing taxes and removing important incentives will not lead to more production.” Moriarty noted that prices have now slid to less than $40 per barrel and cited fiscal year 2014 figures of $46.42 per barrel for transportation, operating and capital costs. The administration’s tax plan would also harden the oil production tax floor for legacy oil from large producers to prevent operating losses from eliminating a company’s tax obligation, a recommendation made by the Senate Oil and Gas Tax Credit Working Group report, but also bump the floor up from 4 percent to 5 percent. The oil and gas tax credit changes would not necessarily generate much revenue, but rather would save the state upwards of $500 million per year that it is currently spending. “There’s no one that won’t be impacted in some way by what we’re going to propose,” Walker said. “I guarantee, everybody in Alaska will find something about this plan they don’t care for.” State motor vehicle fuel taxes —the lowest in the nation at 8 cents per gallon— would be doubled to 16 cents; the marine fuel tax would also double to 10 cents per gallon; and the 3.2 cents per gallon aviation fuel tax would go to 10 cents. Those increases would raise $45 million, according to Walker administration projections. Most other major industry taxes would be raised between 1 percent and 2 percent to generate another $12-$20 million annually from the tourism, fishing and mining industries, the administration says. A change to tourism taxes would eliminate a deduction that has allowed cruise companies to deduct local head tax payments from their state obligations, primarily in Juneau and Ketchikan. Additional sin taxes would include a 10 cents per drink alcohol tax to collect $40 million and a $1 per pack increase to tobacco products and e-cigarettes. The regulated marijuana trade — new in fiscal 2017 — should generate about $12 million in its first year, according to the Revenue Department. Elwood Brehmer can be reached at [email protected]

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