Elwood Brehmer

Permanent Fund investment plans generate opportunity, concern

Alaska Permanent Fund Corp. leaders see it as a way to better meet the responsibilities lawmakers have laid out for them while also encouraging economic growth in the state. To many skeptics, it’s the first step towards degrading a $65 billion investment that has become revered worldwide as a sterling model of how governments can turn fleeting riches into continual wealth. In September, the corporation announced it had selected North Carolina-based Barings LLC and McKinley Capital Management of Anchorage to invest up to $200 million in Alaska-based ventures and projects. Barings, a subsidiary of financial and insurance giant MassMutual, will focus on Alaska infrastructure and private credit opportunities; McKinley will manage the fund’s private equity investments in the state, according to APFC officials. A Journal story detailing the Alaska Investment Program drew a significant response from Alaskans fearful the in-state investment initiative would provide special interests access to the state’s giant nest egg. Former state Rep. Ray Metcalfe was one of the concerned individuals that contacted the Journal about that story. Metcalfe said his apprehension to investing Permanent Fund dollars in Alaska stems from his time in the Legislature. He was the Republican chair of the House State Affairs Committee in 1982 when some of the original Permanent Fund investment guidelines were being debated by lawmakers. Metcalfe said he and then-state Sen. Arliss Sturgulewski, who led the Senate State Affairs Committee, drafted very similar bills outlining the APFC’s investment procedures for its namesake fund and worked together to get Sturgulewski’s bill passed near the end of the 1982 legislative session. That legislation purposefully omitted any directive to invest the fund in Alaska-based ventures. “We were being lobbied by the chamber of commerce, (policy nonprofit) Commonwealth North, the banks and the oil companies to take that money and put it into docks, roads and harbors” in the state, Metcalfe said in an interview. “They wanted us to pay for those things out of the Permanent Fund that oil companies effectively would be taxed for additional monies to pay for.” He said he worries similar lobbying of APFC officials — though not necessarily from the same groups — could push the fund into politically friendly but not financially savvy investments. Then a Republican and now a Democrat who has also run for U.S. Senate, Metcalfe said when he started drafting the Permanent Fund investment legislation he was inclined to favor in-state projects but his stance changed after hearing from financial experts who warned against it. “Think of a 50-gallon bathtub and you’ve got 10,000 gallons of water,” Metcalfe recalled a Harvard finance professor consulting to the Legislature telling him. “If you put that 10,000 gallons in that 50-gallon bathtub it’s going to run over the sides and you’re never going to know where that other 9,000 and some-odd gallons went. You’re economy can only hold so much and there’s only so much money available for viable projects. Let the bankers decide what’s viable.” He and Sturgulewski successfully pushed to get the Permanent Fund investment legislation passed then because they did not want their opponents on the issue to have a crack at it in the subsequent election cycle, which proved fortuitous, according to Metcalfe. “Had this been delayed for a year, the Permanent Fund investment strategy would’ve been completely different,” he said. APFC Board of Trustees chair Craig Richards said the concerns held by Metcalfe and others are understandable and are things most folks in the Alaska investment realm are aware of. The resolution the trustees drafted in September 2018 to start the Alaska Investment Program — also called the Emerging Manager Program — attempted to address those issues. “We very thoughtfully and purposefully did not say, ‘Alaska Permanent Fund, let’s invest $200 million in the state of Alaska,’” Richards said in an interview. “Instead, we said, ‘let’s hire an external manager, who the Permanent Fund would oversee and that external managers will have the responsibility for investing the money and that external manager’s role to the corporation is to simply — like all other managers in their asset class — is to beat their benchmark.’ “It creates a level of separation between the corporation and the investment decisions.” Richards, a former state attorney general appointed to the board by former Gov. Bill Walker, stressed that Barings and McKinley will be judged on the returns they generate from the $100 million each will have to invest. Permanent Fund Corp. CEO Angela Rodell similarly said in an interview for the original story that the lone goal for the Alaska investments is to beat the performance benchmark set by the trustees. “These deals are going to be done exactly the same way as all the others and they’re going to be vetted for the same sort of return and risk expectations,” Richards said. He added that the APFC investment statute, which has been modified since Metcalfe’s time in the Legislature, now calls for the corporation to make in-state investments when they are worthy. The trustees’ resolution and the Alaska Investment Program are a way for the state-owned corporation to follow the law. “The law says, all things being equal, we should be investing in Alaska, but I think in practice what was happening was all things being equal the Permanent Fund wasn’t investing in Alaska because there was a concern of investments being politicized,” Richards surmised. Regarding the statutory language directing in-state Permanent Fund investments, Metcalfe said, “Therein lies your chamber of commerce push.” Metcalfe said Alaskan entrepreneurs can find other sources of capital for their ventures that don’t invite cronyism, particularly in the global age of finance. “I just think it’s a bad idea,” he said. “I think it’s a really bad idea and I fully expect them to go out and lose $200 million.” Beating benchmarks McKinley Capital CEO Rob Gillam was traveling and couldn’t be reached for additional comment, but he said in a prior interview that he believes there are ample opportunities for mid-sized — about $2 million to $15 million — private equity investments in the state. McKinley responded to the request for information, or RFI, issued by the APFC early this year for the program and has managed other global equity Permanent Fund investments for 22 years. According to the latest APFC monthly performance report, McKinley managers were responsible for more than $339 million of fund assets as of Aug. 31. Those managers have consistently outperformed the global equity benchmark in recent years. Permanent Fund assets managed by McKinley returned an average of 6.36 percent over the past five years, compared to the global equity benchmark of 5.4 percent for the period, according to APFC records. How McKinley and Barings will be compensated for their work is unclear. While it is a state-owned entity, the APFC’s enabling laws and regulations allow it to keep its business contracts confidential, as is the case with other similar state corporations. Richards also noted that the $200 million allocated to the program, while an immense sum in nearly every other realm, amounts to just barely 0.3 percent of the total $65.3 billion Permanent Fund. “Either as a percentage of the asset class or a percentage of the fund, it’s a toe in the water sort of allocation that was meant to sort of get the system up and going. If it has success in five to six years maybe the allocation increases and if not maybe it gets shut down,” he said. Elwood Brehmer can be reached at [email protected]

Mat-Su Borough officials say errors are skewing AK LNG baseline data

Frustrated over how their proposed site for an LNG plant has been dismissed by leaders of the roughly $40 billion Alaska LNG Project, Matanuska-Susitna Borough officials are pointing to statements from federal regulators they claim prove that parts of the project evaluation are based on flawed basic data. James Wilson, an internal auditor for the Mat-Su Borough, told the Alaska Gasline Development Corp. board of directors during an Oct. 10 meeting that there seems to be a “process issue” that has prevented the errors the borough has flagged regarding its Port MacKenzie in project documents from being corrected. The Federal Energy Regulatory Commission is currently evaluating the Alaska LNG Project — the state’s effort to sell North Slope natural gas via an 800-mile pipeline to a Southcentral LNG plant and export terminal — through the environmental impact statement, or EIS, review process. A favorable record of decision on the EIS would give broad federal approval to start construction and that is expected next June. FERC issued the draft Alaska LNG Project EIS in late June and took public comments on the nearly 4,000-page document until Oct. 3. The borough, which was granted intervenor status in the project docket by FERC, on Sept. 27 asked the agency to put together a supplemental draft EIS to correct what it called “foundational defects” in the current document. As an intervenor, the Mat-Su — along with the Kenai Peninsula Borough and the City of Valdez — has the right to challenge the final EIS and the record of decision in federal court. “Currently, while some of the information is sufficient, there is false and misleading information, at least in my opinion, that gets into the FERC record” for the project, Wilson told the AGDC board. Valdez leaders have also petitioned FERC and AGDC to give more credence to their city as a possible end-point for the Alaska LNG Project, arguing in filings that it was arbitrarily dismissed despite reviews of previous gasline proposals finding it to be the least environmentally damaging option. Mat-Su Borough Manager John Moosey said in an interview shortly after the draft EIS was made public that borough officials were satisfied with the document because based on an initial review it appeared to show Port MacKenzie “in a fair and more accurate light, and that’s really what we wanted.” Prior to that, Mat-Su officials had spent several years attempting to correct sometimes obviously false information that seemingly led project leaders to select Nikiski, on the Kenai Peninsula, as the site for the project’s multibillion-dollar LNG plant. For example, maps supplementing Alaska LNG Resource Report No. 10 that were submitted to FERC to outline the LNG facility location alternatives show Point MacKenzie, where the port is located, as being several miles north of its true location. The location pinpointed on the map has large tidal mud flats, which the port does not, and is on a parcel of private Alaska Native corporation land while the publicly owned port is on borough property. Mat-Su officials have said such errors shouldn’t be dismissed because they distort the baseline information regulators are using to make decisions on the project. Most of the information the borough has issues with is found in the project resource reports — the nearly 60,000 pages of environmental, socioeconomic and engineering data compiled by AGDC and the producer companies to support the project — according to Wilson. Those reports are the basis for the EIS. Nikiski was selected in 2013 when ExxonMobil was leading early work on the project in a consortium with BP, ConocoPhillips and the state. AGDC leadership has, through multiple management changes, stuck with Nikiski as the chosen locale for the massive LNG plant. Nikiski was chosen largely for its flat terrain and the ability to provide natural gas to the state’s four largest population centers along the pipeline route. The draft EIS largely affirms the conclusions of AGDC and the producers. The producer companies solidified their project endpoint by subsequently purchasing nearly 700 acres along tidewater in Nikiski to begin preparing for the LNG plant. Borough officials have changed their tune regarding the Alaska LNG draft EIS since talking with the Journal in early July after taking more time to carefully read through the details of the exhaustive report, according to Wilson. He and Mat-Su Port Commission member Randall Kowalke stressed to the board that they do not want to derail the project, wherever it would end, but they simply want their preferred location to be vetted with accurate information. Specifically, the draft EIS overstates the volume of ocean floor dredging that would likely be needed for a large Port Mackenzie LNG plant and loading terminal by 700,000 cubic yards, or about 55 percent, he highlighted. Those advocating for development at the port regularly point out that the dock is in deep water and strong tidal currents naturally scour the ocean floor in front of the dock. The draft EIS also overestimates the potential impacts to Cook Inlet’s endangered Beluga whales from a Port MacKenzie LNG plant, Wilson said. He referenced the U.S. Army Corps of Engineers’ comments on the document, which ask FERC to correct or remove information about the dredging and whale impacts. Additionally, the EIS greatly overstates the amount of wetlands in the largely undeveloped Port MacKenzie upland area, Wilson contended. It lists Port MacKenzie as having 1,591 acres of wetlands; Wilson said multiple reviews show that as being 430 acres too many. The amount of wetlands and subsequent required mitigation would be a significant consideration in choosing a site for the large development. “I’m not sure the process of one side submitting inaccurate information — some of it’s accurate but a lot of it’s not — and then we just publicly counter; I’m not sure that’s the most effective way,” he said to the AGDC board. “I would think there’s a way we could improve the process so that we don’t just keep going back and forth. It takes a lot of time and energy.” Interim AGDC President Joe Dubler said he and agency staff would take up Wilson on his offer to have a meeting and hash out the issues regarding data inconsistencies. However, Dubler did say the supplemental draft EIS would likely result in a “significant delay” of FERC’s decision on the project, which is now scheduled for June 2020. But he added whether or not a supplemental version is needed is ultimately up to FERC officials. “I’m a resident of the Mat-Su so I’m very interested in making sure that the borough’s happy with what we’re doing or at least not objecting to it,” Dubler said. As for other aspects of the project, AGDC continues to work with BP and ExxonMobil to lower the $43 billion cost estimate for the project, which was most recently calculated in late 2016. He and others at the corporation have said the estimate was made with conservative figures and design and construction methods in the LNG industry are constantly changing and could lower the project’s cost. In March BP and ExxonMobil both committed up to $10 million to help AGDC complete the project EIS. How much money AGDC will need will mostly depend on what additional information and study FERC requires to finish the EIS. AGDC’s commercial focus under Gov. Michael J. Dunleavy’s administration has shifted from seeking investment via LNG buyers to searching for those who want to take over the project once the EIS is done. As such, the corporation cut out much of its marketing work — and correspondingly 60 percent of its staff — in early July. “We’re looking for companies that are willing to invest at this stage of the project once we get the FERC order in June of 2020,” Dubler said. AGDC leaders are hopeful the work with the producers to lower the expected cost will help entice those investors, at which point the state would be a partner in Alaska LNG through the state’s ownership of gas resources. Elwood Brehmer can be reached at [email protected]

Tax initiative certified; legal opinion cites possible problems

The omnipresent issue of oil taxes could be on Alaska ballots next year. Lt. Gov Kevin Meyer certified the “Fair Share Act” Oct. 15. The Department of Law’s 13-page analysis of the citizens’ initiative questions how some portions of the bill would be implemented and whether or not some of it conflicts with existing state law but none of the potential snags warrant rejecting the initiative on constitutional grounds. They are “mainly post-enactment concerns,” wrote Attorney General Kevin Clarkson and Assistant AG Cori Mills, who signed the department’s opinion. The initiative sponsors led by longtime oil and gas attorney Robin Brena, who chairs the “Vote Yes for Alaska’s Fair Share” campaign, and state Sen. Bill Wielechowski, D-Anchorage, aim to raise roughly $1 billion per year in revenue for the state through higher oil production taxes. They contend the Fair Share Act would raise much-needed revenue for the state, which is still facing deficits approaching $1 billion while still keeping the tax regime in Alaska’s foundational industry competitive with other oil provinces. "The numbers show that Alaska will continue to be one of, if not the most profitable place in the world for oil companies to do business," Wielechowski said during an Oct. 16 press conference. Industry representatives contend it would pull money from the industry that would otherwise be invested in new projects to increase North Slope oil production. The initiative aims to raise production taxes on the largest and generally most profitable North Slope oil fields: Prudhoe Bay, Kuparuk River, and Alpine. Collectively, those fields account for nearly 90 percent of North Slope production. The base gross minimum production tax on those fields would increase from the current 4 percent to 10 percent and step with oil prices up to 15 percent at $70 per barrel under the initiative. The per barrel credit, a key provision of the current, contentious oil tax law known as Senate Bill 21 would also be repealed. The Department of Law opinion states that the initiative language is not written according to normal drafting guidelines and it is not clear exactly which sections of statute it attempts to change or repeal. “Because of these issues, the bill may not accomplish what was actually intended by the initiative sponsors,” according to the opinion. “It is also likely to lead to litigation over the meaning of the various provisions and questions of equal protection, due process, and the delegation of authority to Department of Revenue.” In addition to raising the production tax rate, the initiative also attempts to make public more tax information filed by the producers of those fields with the Department of Revenue to allow lawmakers and the public to know how the producers of a public resource are faring economically in the state. "Rather than partial information or misinformation, we need the best information to make decisions about our resources," Brena said regarding the disclosure of producers' tax filings. However, according to the opinion, a general statement in the initiative language that information relating to production tax calculations “shall be a matter of public record” means much in those filings would still be confidential due to exceptions in the Public Records Act for proprietary information or balance of interests. Brena said he was disappointed to see Law officials chose to "speculate" on the implementation of the law if it passes in their written review because that is not the department's role in the initiative process. "In regards to their speculation, it is what it is," he said, adding that the intent of the section aimed at making producer tax records public is clear. "I don't think there's any ambiguity in the (initiative)." The sponsors now have until Jan. 21, the start of the next legislative session to gather 28,501 signatures collectively from 30 of the 40 state House districts to get it on a 2020 statewide ballot, according to a letter to Brena from Meyer. ^ Elwood Brehmer can be reached at [email protected]

USDA announces preference for full Roadless Rule repeal

The U.S. Department of Agriculture is advancing toward a full exemption for the State of Alaska from the hotly contested Roadless Rule while a government watchdog group claims more timber sales in the Tongass National Forest will simply lead to more lost public money. On Oct. 15 the USDA released a summary of the options being examined in the draft environmental impact statement aimed at determining to what level Alaska’s national forests should be exempt from the 2001 Roadless Rule implemented by the Clinton administration. The full EIS has not been published, but the summary document indicates USDA officials have selected a full exemption as their preferred alternative from six options that ostensibly would allow for varying levels of development in the Tongass National Forest. A full exemption would open all 9.2 million acres currently classified as roadless to more development activities, such as mining, logging, and energy development, all of which are made easier with road access. The U.S. Forest Service, which manages the roughly 17 million-acre Tongass, is a sub-agency to the USDA and the Roadless Rule exemption would only apply to the Tongass; the Chugach National Forest in Southcentral Alaska historically has not been used for large-scale timber harvests. Local and national conservation groups said the land-use policy reversal ignores the economic transformation that has occurred in Southeast Alaska over the nearly 20 years since the Roadless Rule was put in place. They contend fishing and tourism — industries boosted by intact wild lands — have largely filled the void left by the region’s dwindling timber industry. “Repealing the Roadless Rule would cast aside years of collaboration and thriving businesses that depend on healthy forests, and usher in a new era of reckless old-growth clear-cut logging that pollutes our streams, hurts our salmon and deer populations, and spoils the forest and scenery,” Trout Unlimited Alaska Legal Director Austin Williams said in a formal statement. “This proposed rule is a complete about-face from the direction we should be headed and reflects the fact that special interests and not common sense are guiding this decision.” Gov. Michael J. Dunleavy and the members of Alaska’s congressional delegation, who have long called for the repeal of the Roadless Rule, said the USDA’s plan would help revitalize the economy in a region that long had a stagnant or declining population. “Today’s announcement on the Roadless Rule is further proof that Alaska’s economic outlook is looking brighter every day,” Dunleavy said in an Oct. 15 statement. “The ill-advised 2001 Roadless Rule shut down the timber industry in Southeast Alaska, wiping out jobs and economic opportunity for thousands of Alaskans. I thank the USDA Forest Service for listening to Alaskans wishes by taking the first step to rebuild an entire industry, putting Alaskans back to work, and diversifying Alaska’s economy.” Dunleavy often notes he first came to Alaska in the 1980s to work in Southeast logging camps. In early 2018, former Gov. Bill Walker requested the USDA and the Forest Service work on exempting the Tongass from the rule, which largely prohibited new road building in undeveloped national forest lands, after numerous attempts through the courts to get the state exempted or the rule repealed entirely failed. Walker’s administration assembled an advisory committee of Tongass stakeholders to issue recommendations on how the exemption should be crafted and their November 2018 report offered a suite of options for how the rule should be scaled back but it stopped short of pushing for a full exemption. Alaska Forest Association Executive Director Owen Graham said in an interview that the USDA’s move is welcome news, but he also noted that it would immediately open up just 165,000 acres of old-growth and 20,000 acres of young-growth stands for harvest without revising the Tongass Land Management Plan finalized in 2016. He characterized it as “a temporary bandage on a burst artery.” In round numbers, the acreage opened for timber harvests by the exemption would provide an additional 50 million board-feet of harvestable timber per year, according to Graham, who estimates more than 240 million board-feet per year need to be harvested from the Tongass to restore timber manufacturing in Southeast Alaska. Without those economies of scale, loggers will continue to ship raw logs out of Alaska — mostly to Asia — without value-added processing. The Forest Service currently offers timber sales authorizing the harvest of between 50 million and 60 million board feet per year from the Tongass. Robert Venables, executive director of the Southeast Conference, a regional development group that has long advocated for scaling back the Roadless Rule, wrote via email that a full exemption without more detailed compromise will likely continue the see-saw battle between development and conservation interests. “What has been missing, and is still missing, is a long-term sustainable plan for managing all of the Tongass resources,” Venables wrote. “Timber plays a small role within the resources needing to be accessed. The vast millions of acres of the Tongass will still never see a road or miss a tree. “My hope is for the rhetoric to wane and the sustainable planning to increase. It will be a long process…unfortunately, it will probably be a loud process with a lot of litigation.” Meanwhile, the Washington, D.C.-based fiscal policy group Taxpayers for Common Sense released a report Oct. 1 that contends the Forest Service has lost nearly $600 million — adjusted for inflation to 2018 dollars — from its Tongass timber sales over the last 20 years. According to the report, the Forest Service recovered on average just 5.4 percent of the costs it incurred to facilitate timber sales and harvests in the Tongass since 1999. Taxpayers for Common Sense totaled the Forest Service’s $632 million in costs for timber sale preparation, reforestation and road building and put that against the $33.8 million collected on a per board-foot basis by the agency from those harvests. Again, those figures are adjusted for inflation to 2018 values. Taxpayers Vice President Autumn Hanna said in an interview that the group is not opposed to logging the Tongass, but she stressed the costs should be scrutinized at a time when the federal administration is pushing to open more of the Tongass to logging. “This is a massive subsidy for the timber industry and we don’t think that this is justified in any way. The mission of our group is to look out for the public interest and make sure that we’re not just providing subsidies for industry,” Hanna said. An Alaska Forest Service spokesman referred questions to headquarters officials in Washington, D.C., who did not respond in time for this story. However, Graham said the report incorrectly characterizes road building, one of the more costly aspects of timber harvests in national forests. According to the group, building roads to access harvest areas cost the Forest Service approximately $200,000 per mile of road. He stressed that oftentimes roads needed to access timber are built too much more expensive multiple-use standards at the behest of other interests instead of being the very basic routes needed for timber trucks and equipment. Graham also contends that changes to environmental requirements for timber sales have also driven up the costs. “Environmental analyses have become extremely costly due to changes imposed by regulations and by the courts, but virtually all of these costly changes have resulted from pressure by environmental groups to reduce the scope of most projects and to require the agency to perform additional analysis,” he wrote in a response to the report. Taxpayers representatives though argue the issue is not new. They cite a 1984 Government Accountability Office report that found 42 percent of Tongass timber sales in 1982 were below-cost. The conclusions of the report should be factored into how the Forest Service implements any changes to the Roadless Rule in the Tongass, Hanna said. “If this program can be reformed and we can look at what is going to generate revenue and where it does make sense to sell timber, that’s what we should be doing first before we continue year after year to blindly follow a program that’s costing us hundreds of millions of dollars.” Elwood Brehmer can be reached at [email protected]

High hurdles remain on efforts to control health care costs

State health officials are promising better communication with their private sector counterparts while national lawmakers struggle to advance seemingly popular health care reforms. Alaska Department of Health and Social Services Commissioner Adam Crum and Sen. Lisa Murkowski recalled recent challenges and discussed their views on the future of health care policy Oct. 2 at the Alaska State of Reform health care conference held each fall in Anchorage. Crum acknowledged that the first 10 months of Gov. Michael J. Dunleavy’s administration was marked by “constant challenges and constant change.” While a sometimes-lengthy adjustment period is common when leadership turns over, the administration’s desire to quickly and drastically cut the state budget seemed to exacerbate the usual transition speed bumps. Crum said the department has asked a lot of those it works with in the health care industry over the past year. “We’re working to implement some significant reforms to address Alaska’s fiscal challenges and it hasn’t gone as smoothly as any of us would’ve liked,” he said. Crum vowed that over the coming year DHSS officials will work to improve health outcomes for Alaskans. The department will also be more responsive and hold monthly meetings with stakeholders on Medicaid initiatives. Alaska holds the dubious distinction of having the highest health care costs in the country, which is generally regarded as having the highest health care costs in the world. Recalling an administration mantra, Crum said, “We do like to say ‘Alaska is open for business,’ but the sad truth is that the high cost of health care is a weight holding back our businesses, our schools and a drain on our government.” At the same time, he noted that the industry was one sector of the state economy that continued to grow through the recent, roughly three-year recession, and state officials need to do their best to protect that growth while trying to cut costs. Across all industries Alaska has lost approximately 8,300 jobs since state’s labor force peaked in 2015. Those losses would be worse if not for the health care sector, which added nearly 4,000 jobs over the past four years and now accounts for more than 10 percent of total employment in the state, according to Alaska Department of Labor statistics. In February the Dunleavy administration proposed cutting upwards of $270 million from the state’s Medicaid budget in one year, which was approximately $680 million at the time. Provider groups said such a quick, steep cut could result in up to 8,000 job losses statewide, as the state’s Medicaid funding is also tied to large sums of federal matching funds. In March, when it became clear that most legislators were opposed to such a drastic reduction, DHSS officials said they could cut $102 million from the Medicaid budget over the coming year. Most of those savings were to come from 5 percent provider reimbursement rate reductions and getting more care for Alaska Natives fully covered by the federal Indian Health Service. The administration also chose to eliminate Medicaid coverage for adult preventative dental procedures against the urging of many lawmakers and providers who said the preventative coverage, which cost the state roughly $8 million per year, ultimately saves money by avoiding more serious and costly procedures down the road. DHSS also on Oct. 2 announced the settlement of a lawsuit brought against the department by the Alaska State Hospital and Nursing Home Association. ASHNHA filed the suit in July, arguing DHSS officials arbitrarily declared an emergency in order to implement the provider rate reductions quicker than can be done through the normal state regulatory process. The settlement calls for the department to pay back the 5 percent reduction to most providers for services rendered between July 1 and Sept. 30. Medicaid mental health providers can file claims for services offered between July 1 and Oct. 30, according to a statement from ASHNHA. Longer term, Crum said the state can save Medicaid dollars by addressing health more holistically, calling Medicaid the “engine” of health care reform in the state. As of August, more than 220,000 Alaskans, or nearly 30 percent of the state, were enrolled in Medicaid, according to DHSS figures. “We cannot cut, grow or change Medicaid without thinking about the other factors that determine our health as well as the impact that Medicaid has on the ecosystem of health care as a whole,” he told conference attendees. On the positive side, Crum highlighted the recent approval by the Center for Medicaid and Medicare Services of the state’s behavioral health Medicaid 1115 demonstration waiver. The waiver, approved Sept. 3, will provide the state more flexibility in what can be done to help Medicaid recipients in need of mental health and substance abuse treatment. The Legislature directed the department to draft the demonstration waiver program in the omnibus Medicaid reform package passed in 2016 as Senate Bill 74. Crum said the benefits of the behavioral health demonstration waiver will reach to Public Safety and other aspects of the state by reducing drug and mental health-related crimes, among other things. He also announced DHSS has contracted with Rich Albertoni of the national policy research firm Public Consulting Group to be a Medicaid advisor and strategist. The department hired Public Consulting Group for $100,000 in June to examine the feasibility of major proposed Medicaid program changes, including shifting some enrolled adults to private insurance plans that would be paid with Medicaid funds. Public Consulting experts found the private-Medicaid concept could work and gain federal approval, but the costs associated with implementing such a major shift are unclear. On the federal side, Murkowski said that while the Affordable Care Act, or Obamacare, focused on getting insurance coverage to as many Americans as possible, it didn’t address costs, and insurance premiums continue to be prohibitively expensive for many, particularly those in the individual market. “We know we have to address the drivers of cost,” Murkowski said. “We have to address the cost of care. We have to recognize that there is no simple fix; there is no silver bullet.” She praised the Lower Health Care Costs Act, sponsored by Health, Education, Labor and Pensions chairman Tennessee Republican Sen. Lamar Alexander and ranking committee Democrat Sen. Patty Murray of Washington as a means by which Congress can start getting to the roots of the problems in the nation’s health care system. Murkowski serves on the Senate HELP Committee. The 444-page bill attempts to address “surprise medical billing” for services rendered by out-of-network providers by limiting what can be charged for out-of-network care to the median price paid for a similar, in-network procedure. The Alexander-Murray bill also works to improve transparency around medical procedure pricing and increase prescription drug competition. Murkowski said it also includes provisions to limit the cost of air ambulances, which are a regular but often extremely expensive facet of life in Alaska. “It’s one of the first steps, I think, we’ve made at least on the Senate side in focusing on real substantive reforms that can be made when we’re talking about overall cost,” she said. Murkowski is a co-sponsor to Wisconsin Democrat Sen. Tammy Baldwin’s Fair Accountability and Innovative Research Drug Pricing Act. In spite of its alphabet soup-like title, the bill is rather simple; it would require prescription drug manufacturer’s to justify wholesale price increases of more 10 percent per year or 25 percent over three years to Food and Drug Administration officials on drugs with a wholesale cost of more than $100 for a month’s supply. The health care cost legislation moved out of the HELP Committee in early July on a bipartisan 20-3 vote, Murkowski noted in a subsequent Oct. 2 meeting with the Journal and Anchorage Daily News. “Lamar says, he says, ‘the only people that voted against it were (Sens.) Bernie Sanders, Elizabeth Warren and Rand Paul, so I figure we’ve got a pretty good product,’” Murkowski recalled from the July HELP vote. The bill is now up for consideration by the full Senate. The prescription drug legislation is still in the HELP Committee. “When it comes to affordability we’re making some headway but we’ve got a lot more work to do,” Murkowski said. She conceded, however, that even if the Senate is able to pass some bipartisan health care reforms in this Congress the impeachment proceedings of President Donald Trump in the House could make passing even popular legislation difficult for the next several months. There is hope that Alexander’s bill could pass towards the end of the session given he is retiring from the Senate and lawmakers often try to “send off” well-liked members of Congress, such as Alexander, by passing a bill of theirs, Murkowski added. ^ Elwood Brehmer can be reached at [email protected]

Alaska Airlines to end miles partnership with American

Finding ways to use your Alaska Airlines miles is about to get a little more difficult. Alaska and American Airlines announced Oct. 2 that they are scaling back their mileage plan partnership early next year. As of March 1, 2020, Alaska Airlines mileage plan members will no longer be able to earn miles on American Airlines international flights and they will no longer be able to use miles for award travel on any American flights. Alaska plan holders will still be able to earn mile-for-mile value on American flights with Alaska flight numbers to places in the Midwest, the East Coast and parts of Canada, according to the airlines. American Airlines was already Alaska’s lone remaining domestic mileage plan partner company, so the degraded mileage plan partnership means Alaska plan members will not have another major carrier on which they can use their Alaska miles. Steve Danishek, president of Seattle-based TMA Travel, said in an interview that he’s not aware of any other major domestic carriers that do not have another airline their loyalty plan members can fly on with earned miles. Alaska Airlines still has partnerships with 15 international carriers as well as in-state airlines Ravn and PenAir, which are under one owner. An Alaska Airlines spokesperson wrote via email that the partnership with American just doesn’t benefit either airline the way it did before Alaska purchased its West Coast rival Virgin America in 2016. “With our acquisition of Virgin America, we’re now the fifth-largest airline in the United States and can now fly more people where they want to go when they want to go,” the statement from Alaska said. Alaska Airlines insists the vast majority of its mileage plan members will not notice the change because it serves about 90 percent of the destinations that Alaska members earned or used miles through American Airlines flights on. When the 20-year partnership began Alaska was serving roughly 18 million passengers; last year it flew 46 million passengers, according to the airline. Alaska Airlines lost its other major domestic partner, Delta Air Lines in 2017, shortly after it purchased Virgin American as Delta began to make Seattle one of its hubs and became a more direct competitor with Alaska on West Coast routes. Alaska travel expert and author of the Alaska Travelgram blog Scott McMurren said American has been trying to divorce itself from Alaska since the Virgin America deal was made. He noted that the Department of Justice forced Alaska to amend some of its partnerships to allow the $4 billion deal to go through. “Ever since that time the partnership agreement (with American) has been degraded until it finally reached a tipping point most recently,” McMurren said. He also noted that American currently serves Anchorage with wide body Boeing 787 aircraft and recently announced nonstop flights between Fairbanks, Dallas and Chicago will start next May for the summer travel season. However, McMurren said given that Alaska Airlines now has upwards of 115 destinations of its own, travelers from its namesake state likely won’t feel the impact of the slow break up with American very often. Danishek said Alaska’s domestic partnership situation is somewhat part of the natural evolution as airlines grow. He pointed to Delta, which has ended many of its marketing arrangements and instead has chosen to purchase minority shares of smaller airlines that its mileage plan members can fly on with Delta miles. “The airlines will do better revenue-wise if they take all the mileage members and put them into their own planes because they don’t pay anything” to the partner airline, Danishek said. “So the fewer choices they give the mileage members — however they do it — the more money they keep. So there’s a revenue side to cutting loose partners.” Danishek said because Delta recently purchased a portion of Chile-based Latam Airlines he expects Alaska’s partnership with Latam will not be renewed when it expires. “Delta kind of declared war and they’re trying to clean Alaska’s clock any time they can,” he said. Danishek added that he suspects the West Coast battle between Alaska and Delta has started to eat into Alaska’s mileage plan membership somewhat, but overall the customers benefit from the competition as fares are kept in check. Elwood Brehmer can be reached at [email protected]

Most fund earnings splits still leave state with deficit

Nearly every option to change the Permanent Fund dividend being considered by lawmakers still leave the state with significant yearly deficits, according to the Legislature’s budget analysts. Legislative Finance Division analyst Alexei Painter told members of the Legislature’s Bicameral Permanent Fund Working Group on Oct. 7 that based on the current budget and revenues, the only way to break the state’s seven-year streak of deficit spending is to make the dividend 25 percent of the total annual draw from the $65.1 billion Permanent Fund. That solution to the State of Alaska’s ongoing deficits, Painter noted, is what the Senate passed in March 2017 in an early version of Senate Bill 26. That bill, championed by former Gov. Bill Walker, ultimately established an annual 5.25 percent of market value, or POMV, draw on the Permanent Fund from which the state could support government services and pay PFDs without violating basic financial management principles for endowment-style funds. However, the SB 26 that passed the Legislature and became law in 2018 did not address the contentious PFD calculation, which was a major political hurdle to establishing the POMV draw that most lawmakers felt needed to happen as the state’s savings accounts dwindled. Legislative leaders formed the eight-member Permanent Fund Working Group in June to analyze how the state should manage its giant nest egg over the long term when Alaska’s traditional oil revenue — and state savings from it — is generally on the decline. Working group co-chair Sen. Click Bishop, R-Fairbanks, said the group will hold another meeting soon to discuss a summary report and present that information to House and Senate leaders. Gov. Michael J. Dunleavy had said he would call a special session to address the PFD this fall — a move that could finally bring the longstanding issue to a head with his stated demand that the Legislature appropriate additional money from the fund to pay an additional $1,300 to satisfy the current statutory formula — but that has been complicated by a drawn out process to fill the seat of late Anchorage Republican Sen. Chris Birch, who died suddenly in early August. A “25-75” split of Permanent Fund POMV revenue between dividend payments and government support would make $773 million available for PFDs in the upcoming 2021 state fiscal year based on the current state budget and financial market forecasts, according to Painter. The remaining $2.3 billion from the nearly $3.1 billion POMV draw would go into the state’s General Fund. The $773 million would equate to dividends of about $1,100 per Alaskan. “It’s roughly a balanced budget if you have a dividend of this size and no other policy changes,” Painter said. The recently paid $1,606 PFDs required an appropriation of just more than $1 billion; that included a $172 million appropriation from the Statutory Budget Reserve Fund that zeroed out that savings account. A dividend calculated with 25 percent of the overall Permanent Fund POMV draw would leave the state with a small surplus of $56 million next fiscal year if the budget grows with inflation and the state’s oil revenue forecast is correct, according to Legislative Finance modeling. Still, a clause in SB 26 that automatically reduces the annual draw to a 5 percent draw — calculated from the Permanent Fund’s average value over the first five of the previous six years — would combine with changes in oil-based revenues to leave the state with deficits in the $100 million to $200 million range through 2026 based on the current budget and inflation projections. If lawmakers were to revert back to the historic dividend calculation, which is approximately half of the five-year average of the Permanent Fund’s annual earnings, the state would have a deficit of nearly $1.2 billion next year, growing to more than $1.7 billion by 2023, Painter said. It’s that large projected deficit that leads many legislators to say the current PFD and POMV statutes are “in conflict.” Backfilling the deficit with additional money beyond the 5.25 percent draw from the fund’s nearly $16 billion Earnings Reserve Account, which is available for the Legislature to spend with a simple majority, would violate endowment fund management principles and could lead to the degradation of the fund’s real value over the long-term. The Alaska Permanent Fund Corp.’s advisor firm Callan and Associates projects the fund will grow by about 7 percent in fiscal 2020. A draw beyond the approved 5.25 percent could then eat into the fund’s ability to grow with inflation. “They’re both equally weighted laws,” said Sitka Republican Sen. Bert Stedman, a co-chair of the Senate Finance Committee. “Both laws are subject to change by the Legislature, but what we can’t change is the Constitution. So we just need to be careful when we talk about following the law.” Dunleavy and legislators in favor of paying PFDs based on the statutory formula have stressed a need for the state to “follow the law” in regards to paying dividends. Dunleavy has proposed paying dividend amounts — and drawing beyond the 5.25 percent from the fund — forgone over the previous three years when the amount was first by Walker with a veto and then Legislature through the appropriations process. Stedman, an investment manager by trade, has been a leading voice in the Legislature against making additional ad-hoc draws on the fund for fears they would damage its long-term value. He and some other lawmakers, including Bishop, have suggested the current POMV draw rate might be too high as well. Palmer Republican Sen. Shelley Hughes for years had been one of the lawmakers advocating for full PFD payments and significant budget cuts to resolve the deficit, but she recently amended that position. A majority of legislators, urged on by significant public opposition to Dunleavy’s plan to cut more than $1 billion out of the state’s roughly $4.5 billion unrestricted General Fund budgets, have said the state cannot absorb cuts of that size and still provide the services most of the public expects. With those same legislators by and large opposed to additional draws on the Permanent Fund and taxes being an ever-politically sensitive topic, recalculating the dividend formula is a focal point of the budget debate. Hughes said during the meeting that a formula leading to somewhat smaller PFDs makes sense but to make it palatable government should not receive more from the fund than the public does. “Let’s make it fair and agreeable and go 50-50,” she said. “I am and expect to get beat up a bit by folks in my district and across the state that are supporting the historic (PFD) formula and have looked for me to carry that flag but I think we have to be realistic and we do have a mathematical problem and we have to realize that the historic draw is eroding the growth of the fund and we do have to make a change.” Stedman and Finance co-chair Sen. Natasha von Imhof, R-Anchorage, proposed legislation last spring to change the PFD formula to be a 50-50 split of the POMV draw, but it did not ever come before the committee for a vote. An even split of the POMV draw would provide more than $1.5 billion for both state services and dividend payments next year. Individual dividends would be in the $2,300 range — instead of about $3,000 under the current formula — and gradually grow to more than $2,500 over several years, according to Legislative Finance figures. However, lawmakers would still have to resolve a roughly $700 million deficit in 2021 and that deficit would likely grow to more than $1 billion by 2024 without additional measures, Painter said. While a 50-50 POMV split would still leave lawmakers with a lot of work to balance the budget, Hughes characterized it as a “grand compromise” that could be a big step towards resolving the issue that has dominated Alaska politics for four years and counting. “We have many important things in the state to work on and we’re getting wrapped around the axle on this one issue and it’s keeping us from addressing other problems,” she said. Bishop said Painter’s modeling indicating that nearly every change to the PFD being discussed still leaves the state with a deficit is a signal that it’s time for Alaska to look for new cash flows. For several years he has proposed the state reinstitute a small employment head tax to help fund school maintenance and construction. “Personally, it’s my opinion that we need to continue to look at new forms of revenue because I believe Alaska has a 20- to 30-year window to diversify our economy and the sooner we get ahead of the curve the better off Alaska’s going to be,” Bishop said. Elwood Brehmer can be reached at [email protected]

Consultants: $1.9B Port of Alaska price could be halved

Consultants tapped to take a comprehensive look at Anchorage’s long-challenged port renovation believe a third or more can be shaved off the project’s current ballpark price of approximately $1.9 billion. A draft report issued to the Anchorage Assembly recommending how city officials should move forward with the Port of Alaska modernization project says between $600 million and $800 million could be saved by limiting new construction to what is truly needed and shifting to a new contracting and design philosophy. The 97-page report was authored by Roe Sturgulewski, a vice president with the project management firm Ascent PGM. Former Anchorage Mayor and Alaska Sen. Mark Begich and Schawna Thoma, both of the consulting company Northern Compass Group, assisted in the port evaluation. Sturgulewski said during a Sept. 19 presentation to the Assembly’s Enterprise and Utility Oversight Committee that the $1.9 billion price tag — a shock to many observers when it was made public early this year — includes upwards of $300 million simply for cost escalation since the design concept was first drafted in 2014. Ascent and Northern Compass were contracted by the Assembly in April to help the city find ways to lower the cost of the project and identify funding options. In July, the Assembly approved a $42 million contract to start construction of a new petroleum and cement dock next year. The work will be the first major development at the port since construction was halted in 2010 when problems installing steel sheet pile led to widespread damage in the structure that was to be the primary dock support. The Municipality of Anchorage has since sued and settled with several contractors that worked on the project and is currently suing the U.S. Maritime Administration, or MARAD, in Federal Claims Court for the agencies role in overseeing the project that saw roughly $300 million of state and municipal money spent with little to show for it. The companies that use the port urged against starting work on the petroleum and cement dock largely out of concern that municipal officials would raise tariffs and fees at the port to cover at least some of the shortfall for the remainder of the petroleum and cement dock. The city had approximately $60 million allocated to the port at the time; the new dock is expected to cost more than $200 million. While the Assembly ultimately approved the contract at the administration’s request, Sturgulewski said at the Sept. 19 meeting that, “There’s a common goal of wanting to solve the port issue, so there’s a good foundation for moving forward.” Design changes and add-ons requested by the port user companies totaled roughly $400 million of the $1.9 billion overall cost based on the administration’s estimates, he also said. Sturgulewski also confirmed that another element adding significantly to the $1.9 billion estimate — a figure no one involved believes is feasible — is that the administration used the basic design criteria from the petroleum and cement terminal and extrapolated them out to other facilities, such as the large cargo terminals, that need to be upgraded. The petroleum and cement dock was designed to have a 75-year life and be extremely seismically resilient; to the point some engineers have said it’s overbuilt. “It was a very conservative approach,” Sturgulewski said. “It was useful to bound the issue but I think it’s definitely overstated what the actual costs are and that could be in the order of hundreds of million of dollars difference.” He suggested some other alternatives to drastically cut costs, such as building just one new cargo terminal instead of replacing both that are currently used. Shippers Matson and TOTE insist their schedules are set out of necessity and a result of many logistical issues, from when grocery stores want their fresh products to longshoremen’s union contracts. Both Matson and TOTE call on the port each Sunday and Tuesday and the two current cargo terminals are largely unused the rest of the week. Some Assembly members have said building one cargo terminal and compelling the shippers to adjust their schedules — with significant lead-time — warrants serious consideration. “You can cut the cost of the program in half, I believe, and that includes where we are at in terms of the PCT,” Sturgulewski said. Begich stressed that city officials need to move towards a maximum price design-build contracting approach. They also need to determine as much as possible what funding is available from the state and federal governments or other sources and build to that funding level. “You need to have a realistic plan of finance; not based on what you think the project is going to cost, but what you can actually get,” Begich said. Municipal Manager Bill Falsey said, as did Assembly members, that he was still reading through the lengthy report, but most of the suggestions were well received. He said he wanted to learn more about how the maximum price contracting concept would work with the inherent uncertainties of a large construction project. Sturgulewski asked for feedback from stakeholders that would be incorporated into the final report by Oct. 4. ^ Elwood Brehmer can be reached at [email protected]

Oil Search pushes up production date for Pikka

The company developing one of the largest oil prospects on the North Slope has applied with state regulators to change its plans and start producing oil a year early. Oil Search Alaska submitted a modification to its July 2019 Plan of Operations for its Nanushuk project in the Pikka Unit on Sept. 26 with the Division of Oil and Gas. The amended plan calls for some changes to the layout and size of the project’s three drill sites near the Colville River delta and moving the tie-in pad that will connect to ConocoPhillips’ Kuparuk River Unit that will link the project’s pipelines to the rest of Slope oil infrastructure at a site that won’t interfere with existing operations. But it also requests changes to the Nanushuk drill site B and associated pipelines that will allow the company to begin producing up to 30,000 barrels per day from the pad in 2022. Alaska leaders for Australia-based Oil Search had previously pegged late 2023 for startup of its Nanushuk oil project, which will require nearly $5 billion of investment and could produce upwards of 120,000 barrels of oil per day at its peak. According to the plan modification document, Oil Search hopes to initially transport liquids produced from drill site B to the Kuparuk Central Processing Facility-2 via pipelines that will pass through the Nanushuk Processing Facility site while it is being constructed. When its own Nanushuk Processing Facility is operational in 2023 or 2024, Oil Search will shift from sending unprocessed liquids to the Kuparuk facilities to sending sales-quality oil through them for shipment down the Trans-Alaska Pipeline System. The project changes will increase its overall gravel footprint by approximately 0.2 acres and add roughly 5,000 cubic yards of fill in total, according to the documents submitted to DOG. An Oil Search Alaska spokeswoman did not respond to questions about the changes in time for this story. This winter the company plans to conduct additional appraisal drilling and begin laying gravel for roads and work pads, Oil Search leaders have said. Oil Search received a favorable environmental impact statement record of decision for the project from the U.S. Army Corps of Engineers last May. The company reached a deal with Armstrong Energy in October 2017 to buy into Pikka and take over as the project operator for $400 million. This year the company exercised an additional $450 million option to completely buy out Armstrong and GMT Exploration Co., a silent working interest owner in Pikka, to take a 51 percent stake in the Unit. Spanish major Repsol holds a 49 percent interest in the Pikka Unit and the Nanushuk project. Most of the oil would come from its namesake shallow, conventional Nanushuk formation. It has been the source for smaller nearby discoveries by ConocoPhillips as well as Conoco’s Willow project in the National Petroleum Reserve-Alaska, which is similar in scale to Pikka but a couple years behind in the development process. The company announced Oct. 1 that current Oil Search Alaska President Keiran Wulff will take over for retiring Managing Director Peter Botten in February. The company’s current chief operating officer for its Alaska unit, Bruce Dingeman, will replace Wulff as its Alaska President. Elwood Brehmer can be reached at [email protected]

Palmer mine exploration permit on hold pending result of Hawaii water case

The tentacles of a legal battle over wastewater discharges in Maui have reached Alaska. Department of Environmental Conservation officials issued letters on Sept. 9 informing stakeholders that a wastewater discharge permit key to future exploration at the Constantine Metals Resources’ Palmer copper and zinc project near Haines mine would be remanded to Division of Water staff for review. Acting Division of Water Director Amber LeBlanc wrote to Southeast Alaska Conservation Council scientist Guy Archibald that the potential impact to Alaska wastewater discharge permits would be evaluated over approximately 90 days pending the outcome of a case now before the U.S. Supreme Court that originated in Hawaii. After that time, the division could uphold, revise or revoke Constantine’s Waste Management Permit for its Palmer exploration plan, according to LeBlanc. The Southeast Alaska Conservation Council, or SEACC, is one of several groups and individuals who requested an informal review of the project. Archibald said in an interview that DEC issued the wrong permit to Constantine altogether. He and Gershon Cohen, a project director for the group Alaska Clean Water Advocacy, argue the state agency should’ve examined the Palmer exploration plan under a more stringent Alaska Pollutant Discharge Elimination System Permit. They claim the Waste Management Permit for groundwater discharges is insufficient because the wastewater will quickly resurface in nearby Glacier Creek, which feeds the salmon-producing Klehini and Chilkat rivers. “The Waste Management Permit they issued basically allowed water degradation for Glacier Creek,” Archibald said, and does not analyze different options for managing wastewater at the site. Over the past year, Vancouver-based Constantine has been pursuing state approvals for its underground exploration plan. The company hopes to excavate a 2,000-meter tunnel that would serve as a space to conduct exploration drilling and collect geotechnical and hydrologic data, according to the plan submitted to the Alaska Mental Heath Trust Land Office. The Palmer project is located on Alaska Mental Health Trust property. Hawaiian connection The link between the State of Alaska wastewater permits and a Ninth Circuit Court of Appeals ruling in the case of Hawai’i Wildlife Fund v. County of Maui comes via the Clean Water Act. In many states, the Environmental Protection Agency administers the National Pollution Discharge Elimination System Program as required by the Clean Water Act. In Alaska, the state took primacy of the program starting in 2008, which allows the Department of Environmental Conservation to oversee the federal pollution discharge elimination system requirements, so long as the state standards are at least as stringent as the EPA’s. In the Maui case, the Hawai’i Wildlife Fund and attorneys for the national environmental law firm Earthjustice contend the County of Maui for decades has been polluting near shore ocean waters by injecting millions of gallons of treated sewage water into the groundwater. The contaminated water — pumped into four injection wells that are about 200 feet deep and roughly a half-mile from the ocean — then resurfaces through the shallow ocean floor near a local beach. The wastewater effluent has damaged coral and other marine life in the area, according to Earthjustice. The groups brought a lawsuit against the County of Maui and in 2014 a federal District Court of Hawaii judge found the wastewater injection well operation violates the Clean Water Act because the wastewater seeping up through the ocean floor can be traced back to the injection wells. The county’s appeal to the Ninth Circuit Court of Appeals was rejected as well. A three-judge panel of the federal appeals court ruled in February 2018 that the water injection wells are indeed “point sources” that discharged polluted water into a federally regulated navigable water. That makes the wells subject to National Pollution Discharge Elimination System Program regulation, the 2018 ruling states. “Agreeing with other circuits, the panel held that the Clean Water Act does not require that the point source itself convey the pollutants directly into the navigable water,” Ninth Circuit Court Judge D.W. Nelson wrote. “The panel held that the County was liable under the Act because it discharged pollutants from a point source, the pollutants were fairly traceable from the point source to a navigable water such that the discharge was the functional equivalent of a discharge into the navigable water, and the pollutant levels reaching navigable water were more than de minimis.” Had the courts ruled that wastewater is a non-point source pollutant, it would be outside the purview of the Clean Water and instead be subject to state regulations. Maui County further appealed the case to the U.S. Supreme Court and oral arguments are scheduled for Nov. 6. Palmer plan Constantine’s water management plan for Palmer states that groundwater expected to seep into the tunnel would be collected and run through a water management facilities and ponds at the floor of the Glacier Creek valley before being discharged back into the ground via diffusers about six feet below the surface. The two settling ponds are designed to handle 500 gallons per minute and hold up to 358,500 gallons each for 12 hours to allow solid materials to settle out of the water before it is sent back underground. The ponds would have surface spillways to release excess water if they are inundated due to melt water, rain runoff or unexpectedly high levels of seepage into the tunnel, according to the water management plan. Alaska Clean Water’s Cohen wrote in a July 25 request for an informal review by DEC that Constantine’s water management plan does not account for treating the water for residue from explosives used in the metal exploration work or hydrocarbons released from vehicles working in the tunnel or drilling compounds, “which will quickly make their way to fish-bearing segments of Glacier Creek and the Klehini River due to the connectivity of the groundwater to nearby surface waters.” Cohen said in an interview that the wastewater will quickly percolate through the loose glacial till soil that makes up the bottom of the valley and end up in the streams still carrying the contaminants. He wrote further in the review request that analysis of the area’s groundwater has been “wholly inadequate.” “We have no confidence that the operator [or the Department] has any credible knowledge of the eventual fate of the discharges, which will affect nearby salmon habitat and possibly the drinking water wells of nearby residents,” Cohen wrote. DEC staff wrote in a July 17 response to comments on the Waste Management Permit that the permit establishes surface water quality triggers at three sites and includes water quality monitoring at four sites “to assure and document the absence of a surface water discharge.” As it stands, Constantine’s Waste Management Permit is good through mid-July 2024. Constantine Vice President of External Affairs Liz Cornejo said in an interview that the permit delay has not impacted the company’s operations, as it was not planning to start work on the tunnel and other facilities until next year. Cornejo also wrote via email that the company agrees with DEC’s decision to not move forward with the permit, and subsequent construction, until the Maui case is resolved. “Construction of the underground ramp [tunnel] will not begin and no water discharge will occur until we have DEC support and approval,” she wrote. Alaska weighs in Alaska Attorney General Kevin Clarkson joined 19 other state attorneys general in supporting Maui County through an amicus brief filed with the Supreme Court. The states argue the Ninth Circuit’s decision drastically expands the Clean Water Act and would place a huge burden on states, such as Alaska, that have taken on pollution discharge elimination programs. “All told, the ‘fairly traceable’ standard threatens to drown state environmental protection agencies under a wave of newfound responsibility, requiring them to process and issue a swell of technologically challenging and complex NPDES permits to sources that have never before been subject to that process. Handling this flood of new permits will leech already scarce resources from other programs better equipped to address groundwater pollution,” the Supreme Court brief supporting Maui states. DEC spokeswoman Laura Achee said department officials aren’t sure about the implications of the Maui case because it’s still unresolved and therefore they aren’t commenting on issues relating to Constantine’s permit. Further complicating matters is a tentative settlement in the case approved by the Maui County Council on Sept. 20. Earthjustice spokeswoman Liz Trotter said the settlement would have county officials find another way to dispose of the wastewater, pay reclamation fees and most importantly, it would mean the Ninth Circuit’s ruling stands. However, Maui County Mayor Michael Victorino has yet to sign off on the agreement, which is required for it to be valid per the county’s procedures. Victorino’s spokesman Brian Perry said the mayor is weighing his options and has not yet decided whether or not to approve the settlement. “He’s doing his due diligence and giving the case the attention it warrants,” Perry said in a brief interview. He said the wastewater injected into the wells is “a step below drinking water” and the half of it not put into the ground is used by area farmers and property owners for irrigation. County officials view the issue as one over home-rule, not a debate over environmental laws with national implications. “Our concern is our own wastewater system, period,” Perry said. He added that the county would like to reuse all of the water as Earthjustice wants, but developing such a system could be prohibitively expensive. “The water has to go somewhere because people aren’t going to stop using the bathroom,” Perry said. Elwood Brehmer can be reached at [email protected]

Permanent Fund Corp. allocates $200M for in-state investments

The Alaska Permanent Fund Corp. is partnering with one of Alaska’s premier investment firms to put some of the capital from its $65 billion namesake fund to work closer to home. Anchorage-based McKinley Capital Management LLC will manage half of the newly formed $200 million Alaska Investment Program, which will seek in-state investments for the Permanent Fund, according to a Sept. 20 APFC statement. The Alaska Investment Program is a means of supporting growing businesses in the state but Permanent Fund Corp. CEO Angela Rodell emphasized that any investments made with the $200 million won’t get preferential treatment just because they’re in Alaska. “From my standpoint, our No. 1 and only goal is really to beat that private equity benchmark, so (the Alaska Investment Program) has to be contributive to the fund value in a positive way,” Rodell said in an interview. As with most investment funds, the APFC has return benchmarks, or standards, that its managers are expected to meet and ideally exceed. Those benchmarks vary for each type of investment and typically correlate to the amount of risk an investment entails. The private equity, or capital, investments that will be made with the $200 million demand a higher rate of return than do real estate purchases, for example, because they require accepting more risk of failure. The APFC uses a private equity benchmark established by the international firm Cambridge and Associates, which set a return goal of 12.7 percent for the just completed 2019 state fiscal year. The Permanent Fund’s roughly $8.7 billion of private equity investments beat that by netting a 19.2 percent return in fiscal 2019, according to the 2019 APFC Annual Report. Rodell said she is waiting to see what sectors of the economy the investment capital will be deployed into as the APFC Board of Trustees put few sideboards on the program beyond the return objectives and Alaska focus. “I think we’re all just really curious to see where this money is going to land and be put to work, but our goal is to make money for the (Permanent) Fund,” she said. The APFC Board of Trustees passed a resolution in September 2018 directing staff to establish the Alaska Investment Program. APFC staff had been working to set up the program in the year since, and Rodell, a former commissioner of the Alaska Department of Revenue, noted that the Alaska program will require a long-term view. She expects it will take upwards of five years just to deploy the $200 million, which says nothing about when those investments will start generating a return. “We will lose money to begin with; that is normal; that is not uncommon,” said Rodell, adding that private equity investments often follow what is called a “J-curve.” “You have to spend a lot of money before you start to see that positive cash flow return and return on investment, so the challenge with this is everybody has to be really patient. It’s not going get deployed in six months and its not going to be making money in eight months and I think that will be a challenge for people because we like our instant gratification.” McKinley Capital CEO Rob Gillam said working with the APFC is nothing new for his company, as McKinley has managed Permanent Fund assets for 22 years. McKinley leaders are excited to invest in the state because they are “bullish on Alaska,” Gillam said. He stressed that the Permanent Fund trustees’ collective decision to devote $200 million to Alaska is an indicator they believe there’s money to be made in the state, as it could’ve been put towards projects literally anywhere else on the planet. The $100 million McKinley will manage will be focused on small to midsized investments in the $2 million to $15 million range with high growth potential, according to Gillam. While no Alaska investments have been made yet, Gillam said he sees them being largely in what he calls “new Alaska,” or sectors such as renewable energy, technology and logistics, to name a few. “Those are the kinds of companies that generally don’t have access to capital and we’re going to fill that role,” he said. “There’s an enormous amount of opportunities out there.” Gillam added that McKinley leaders understand the situation a lot of Alaska entrepreneurs looking for funding face because their company — founded in 1990 by Gillam’s late father and Alaska magnate Bob Gillam — didn’t have access to capital either. “When we founded McKinley Capital 30 years ago we got exactly zero capital support from anyone and fortunately we were able to scrape together a living and build a business. Now we’re a very global business with clients all over the world and investments all over the world from places like Botswana and Nigeria to the New York Stock Exchange,” he said. “It’s wonderful that there is now an opportunity to have capital available to Alaskans that wasn’t available 30 years ago.” McKinley now manages a roughly $5 billion investment portfolio. North Carolina-based Barings LLC, a subsidiary of the financial and insurance giant MassMutual, will manage the other $100 million in the Alaska Investment Program in private credit and infrastructure sectors. In the coming weeks McKinley will put an Alaska Investment Program application portal on its website. When the money is eventually invested and hopefully starts generating strong returns, Gillam said it will create what he sees as a “virtuous cycle.” “Oil and gas come out of the ground, a royalty goes into the (Permanent) Fund, they invest it, they generate a return, the return gets, in-part, paid back to Alaskans and now when this royalty gets invested in place like Alaska — a little bit — and a return is generated and money goes back to Alaskans,” he said. Technology allows McKinley to invest successfully worldwide, but being an Alaska-based firm provides the advantage of knowing what’s going on in the state, and what opportunities arise from that, first. “There’s a little of an ‘it’s raining out there’ kind of attitude (about the Alaska economy) and we would say that there are as many opportunities in Alaska today as there were a decade ago and we just need to start looking for them,” he said. “Look at our business. Nobody would’ve thought you could’ve built a Wall Street firm 30 years ago in Anchorage, Alaska, and here we are with offices in New York and Chicago and Abu Dhabi. What business next door to you or down the street or across town or in Fairbanks or in Juneau is being built today where somebody needs growth capital that could be the next McKinley Capital 30 years from now? There’s a lot of them and hardworking people and it’s our job to find them.” Elwood Brehmer can be reached at [email protected]

Exploration resumes for gold west of Cook Inlet

A new company is restarting exploration at a long-dormant gold prospect on the west side of Cook Inlet. Newly formed HighGold Mining Inc. started drilling at the Johnson Tract prospect in late August. The Vancouver-based mining junior also announced Sept. 23 that it had started trading on the Canadian TSX Venture Exchange. HighGold CEO Darwin Green said in a formal statement that the company is starting with approximately 2,000 meters of total drilling in eight to 10 boreholes. The data derived from that work, combined with historic drilling results, will inform the first official resources estimate of the prospect, according to Green. That document is expected to be completed early next year. The Johnson Tract prospect sits on Cook Inlet Region Inc., or CIRI, in-holdings within the boundaries of Lake Clark National Park and Preserve. Last year CIRI leased 20,900 acres of the property to Vancouver-based Constantine Metal Resources Ltd. for 10 years. Several Southcentral Alaska Native village corporations also own surface rights to land there, while CIRI holds the subsurface mineral rights to those areas. “CIRI prides itself on projects that deliver economic benefits to our shareholders while respecting and preserving the land,” CIRI CEO Sophie Minich said when the Constantine lease agreement was announced in July 2018. “With Constantine’s excellent reputation for responsible mineral exploration and development activities, we know we have chosen an ideal partner.” CIRI spokesman Ethan Tyler wrote via email that the Southcentral region Alaska Native corporation prioritizes striking a balance between developing its resources and protecting land for future generations. He added that the Johnson Tract prospect is one of CIRI's numerous land selections with known mineral potential and it has been the company's intent to develop those prospects when the economics make sense. "HighGold's management team and board of directors are a proven technical team and have a track record as trusted operators with a reputation for safety and quality work," Tyler wrote. "This, combined with CIRI's reputation of excellence and land stewardship, demonstrates CIRI's mindfulness to any public concerns regarding resource development." HighGold's Green has also been part of Constantine's executive leadership, with a focus on exploration. The multi-metal Johnson Tract deposit sits about 10 miles from tidewater near Tuxedni Bay, about 125 miles southwest of Anchorage. HighGold is a spin-out of Constantine, which is also exploring the Palmer copper prospect in the Chilkat River valley north of Haines. HighGold also took over Constantine’s Munro-Croesus gold project in eastern Ontario. According to the mining company, the lease with CIRI calls for annual payments of $75,000 for the first five years, doubling to $150,000 per year for the second half of the term. HighGold is also required to invest $10 million into the Johnson Tract prospect over the 10 years, with $7.5 million of that coming in the first six years. If the decision is made to ultimately build a mine — currently envisioned as an underground operation — CIRI could obtain a 25 percent interest in the project at that time, according to HighGold. The Alaska Native regional corporation would also receive net smelter royalties of 2 percent to 4 percent if a mine is developed. The exploration company acknowledges Johnson is a relatively small prospect, but one that has the potential for very high grades of ore based on the prior drilling work. Anaconda mining company drilled 88 holes at Johnson totaling more than 26,800 meters between 1982 and 1995 and a September HighGold investor presentation calls the area a regional opportunity “with multiple underexplored satellite prospects.” The prior drilling revealed gold resources in excess of 10 grams per metric ton in many areas, as well as high-grade zinc and copper ore, according to HighGold. If developed, the mine would require an access road to a port, both of which would need to be built. The CIRI leases also come with access easement rights and the site has an airstrip built for the earlier exploration work, according to the company. Elwood Brehmer can be reached at [email protected]

Alaska Railroad seeks to overhaul Seward cruise terminal

The Alaska Railroad is looking for a partner to help it update and expand its cruise ship facilities in Seward in order to meet ever-increasing demand in the state’s tourism industry. Railroad officials issued a request for qualifications, or RFQ, on Sept. 16 to start the process of searching for a project developer for what is estimated to be an approximately $60 million to $70 million undertaking. Specifically, the state-owned railroad wants to replace its current passenger vessel, pile-supported dock in Seward, which is 736 feet long and was built in 1966, with a floating dock capable of accommodating two vessels up to 1,080 feet in length. The plan also calls for building a new cruise passenger terminal building with space to accommodate up to 1,500 people. It’s all intended to meet the railroad’s needs for moving cruise passengers from port at the head of Resurrection Bay to other Southcentral destinations for the next 50 years. Railroad officials expect construction to begin in late 2021 and continue into the fall of 2023. However, the current facilities would need to be available for use while construction was ongoing during the May-September cruise season, according to the railroad’s project schedule. Seward is the most popular Southcentral cruise destination; cruise ships called on the small town 95 times in 2019, according to the Alaska chapter of the Cruise Lines International Association. That’s up from 2015 when 11 ships made 64 calls on Seward, according to a railroad passenger report drafted in 2017. More broadly, Alaska’s tourism industry has boomed since visitor numbers bottomed out following the Great Recession roughly a decade ago. Overall railroad passenger ridership — driven largely by visitors arriving or leaving Alaska’s Railbelt by cruise ship — increased 5 percent in 2018, according to the Alaska Railroad’s annual report. The total number of train passengers has grown steadily each year for a 13 percent increase since 2014. Statewide, leaders of the Southeast Conference, a regional economic development organization, reported that more than 1.2 million tourists visited Alaska by cruise ship this year, for 7 percent year-over-year growth. The number of cruise passengers traveling through Seward has grown in recent years as well, from 122,000 in 2013 to nearly 185,000 in 2016, according to the 2017 passenger report. Cruise passengers regularly disembark vessels in Seward, Whittier or Anchorage and board the train to Anchorage or Fairbanks where they take flights back to their home destinations. The railroad frequently contracts to pull passenger cars owned by cruise companies on those routes. What the cruise passenger facility overhaul means for the railroad’s adjacent and idled coal terminal is unclear; railroad officials could not be reached with questions in time for this story, but the need to upgrade passenger infrastructure that sits alongside now unused freight facilities is indicative of a gradual shift in the railroad’s business and Alaska’s economy as a whole. The railroad’s freight business, which is still its primary revenue line, has been on a general downward trajectory while its passenger service continues to grow. Responses to the railroad RFQ are due by Oct. 30. The project is expected to start in May 2020. Elwood Brehmer can be reached at [email protected]

BBNC nets two fishing companies in one deal

The Alaska Native corporation with a “fish first” principle is making its first foray back into the signature Alaska industry in roughly 40 years. Bristol Bay Native Corp. announced an agreement Sep. 17 for it to purchase Blue North Fisheries and Clipper Seafoods, two Seattle-based longline fishing companies that operate in the large Bering Sea Pacific cod fishery. BBNC CEO Jason Metrokin said in an interview that Blue North and Clipper will be merged into a new subsidiary, Bristol Bay Alaska Seafoods, when the deal closes Sept. 30. Metrokin said BBNC focuses on providing economic value and employment opportunities for its shareholders while being good stewards of the region’s land and resources, and acquiring Blue North and Clipper was an opportunity to check all of those boxes. “They’ve got experienced management and executives; they have a quality brand and they’re known for safe fishing and quality products,” he said of the fishing companies. “You add all of those things up at a time when BBNC was looking for an investment in seafood and it made tremendous sense for us to start here.” Bringing ownership of the seafood resource back to Alaska — through the Pacific cod fishing quota held by the companies — was very important to BBNC, Metrokin added. BBNC owned Peter Pan Seafoods in the late 1970s and has been out of the seafood business since, he said. The company has also formed Bristol Bay Seafood Investments LLC, a holding company for Bristol Bay Alaska Seafoods and any other future seafood forays, according to a Sept. 17 company statement. Clipper Seafoods President David Little, who will manage the merged company, said BBNC is simply a “really good fit” for Blue North and Clipper. “I’ve always believed, and I know Mike Burns, the president of Blue North feels the same way, that the Native corporations or the Native economic development corporations were always going to be the rightful owners of these seafood businesses over time and so we’ve been talking to a number of them over the years and we found that Bristol Bay Native Corp., in our opinion, is the leader of all of them and we’re really impressed with the way they run their operation and their business knowledge,” Little said. He added that senior staff at the companies will remain with Bristol Bay Seafoods. By combining the Blue North and Clipper fleets, Bristol Bay Seafoods will have a fleet of 11 large fishing vessels and it will hold 37.4 percent of the freezer longline sector Bering Sea and Aleutian Islands Pacific cod quota, according to Little. He said the freezer-longline sector holds about half of the overall harvest limit of Bering Sea and Aleutian Islands Pacific cod, which is about 175,000 metric tons this year. Set by the North Pacific Fishery Management Council and approved by National Marine Fisheries Service, or NMFS, the annual total allowable catch for the massive Western Alaska Pacific cod fishery has fallen sharply from its near-term high of 261,000 metric tons in 2012. The freezer longline sector is one of nine gear and fishing type sectors that fish for Pacific cod in Western Alaska waters. However, Little noted that cod stocks can rebound quickly and there is optimism among cod fishery managers and participants that current juvenile recruitment can lead to more harvest opportunity soon. Based on Little’s figures, Bristol Bay Seafoods would hold approximately 33,000 metric tons of Pacific cod harvest quota in 2019. According to the latest data available from NMFS, the first wholesale price for Bering Sea Pacific cod caught by freezer longline vessels averaged $1,665 per metric ton in 2017, which would translate to nearly $55 million of wholesale value for the combined Blue North and Clipper 2019 quota. Additionally, freezer longline vessels averaged $6.4 million of revenue in 2017, according to NMFS reports, or $70.4 million total extrapolated to the 11 vessels owned by the two companies. Metrokin declined to disclose a price for the deal, but he did say it “will ultimately be one of BBNC’s largest company acquisitions in our history.” Blue North and Clipper are companies that have recognizable brands, high-quality products and a presence in markets around the world, making them a sound investment despite the current down cycle in Pacific cod stocks, Metrokin said. And while freezer longline vessels cumulatively harvest thousands of tons of cod each year, Little described the freezer longline sector as a “boutique fishery” in that longline vessels can typically harvest only about 10 percent of the volume of fish that a trawl vessel can in a given day. Instead, freezer longline companies focus on quality instead of quantity. “Our fish is primarily destined for white table cloth restaurants around the world whereas a lot of trawl-caught fish is destined for fish and chips,” Little said. The Blue North and Clipper fleets are comprised of relatively new vessels, meaning there are no immediate plans to invest in new vessels or other major infrastructure, according to Little, who also said the companies’ offices are likely to remain Seattle where the fleets are based. The vessels will stay in Seattle when they’re not fishing simply because that’s where the shipyards are and large boats require lots of upkeep. Little noted that the busiest time for a fishing company’s office staff is usually when the vessels are home from the fishing grounds. “It’s important to have an office in Seattle or somewhere close to ship repair and maintenance,” he said. Metrokin said BBNC leadership is enthusiastic about getting back into the fishing industry through a fishery that takes place near the company’s region and aligns with its mission. “Every time we make a business decision we want to know what the benefits or impacts will be to fish and while this investment is outside of the Bristol Bay fishery, it still meets our value, our mantra, of fish first, so it’s very much in alignment with where BBNC is going,” he said. “It may be a stepping stone, a very large stepping stone back into the seafood sector and we’re excited about other opportunities that might present themselves down the road.” Elwood Brehmer can be reached at [email protected]

ConocoPhillips announces busy plans for winter drilling

ConocoPhillips is continuing its series of active North Slope work seasons with seven more exploration wells in the National Petroleum Reserve-Alaska this coming winter. While the drilling will slightly delay one of its prized projects, the Houston-based major is also jumpstarting a recently acquired stalled Slope development. ConocoPhillips Alaska Vice President Scott Jepsen said to during a Sept. 12 presentation to the Alaska Support Industry Alliance trade group that the wells will be focused on the prospective Harpoon area southwest of its existing NPR-A projects and better delineating the large Willow prospect. “We want to get more confidence around the geology and reservoir characteristics of the field, so that’s one of the reasons we pushed back our startup date to around 2025-2026 now for the Willow development,” Jepsen said. The draft environmental impact statement for the project released Aug. 23 cites a late 2024 expected startup. ConocoPhillips announced the Willow discovery in early 2017 and has steadily advanced it since. The company estimates it could produce 130,000 barrels per day at its peak. It will additionally be shooting 3-D seismic data south of Oil Search’s Pikka Unit around the Putu prospect near the village of Nuiqsut. The work will require roughly 165 miles of ice roads, according to Jepsen. “Hopefully the weather will cooperate and we’ll be able to accomplish all this,” he said. ConocoPhillips also announced in June it had purchased the Nuna project from Dallas-based independent Caelus Energy. Caelus held the estimated $1.5 billion oil prospect for years but did not develop it beyond a gravel pad in part because of lower-than-expected tax credit refunds from the state. When Caelus sanctioned Nuna in March 2105 the company indicated in a letter to Department of Natural Resources officials that it had authorized $480 million of expenditures on the project to that point. ConocoPhillips North America and Europe President Michael Hatfield during a July 30 conference call the referred to Nuna as “$100 million for 100 million barrels.” “It’s something we’re very pleased about,” Hatfield said. According to Jepsen, Nuna has been made part of the Kuparuk River Unit and its oil — Caelus estimated up to 20,000 barrels per day — will be processed through Kuparuk facilities, significantly lowering development cost. Drilling will be done from the Nuna pad and a Kuparuk pad to minimize new infrastructure costs, Jepsen said. The company expects 400 laborers over one winter construction season will be able to prep the project for first production, with is expected in 2022. ConocoPhillips is also building the eight-mile gravel road between its completed Greater Mooses Tooth-1 and in-progress Greater Mooses Tooth-2 projects in the NPR-A, Jepsen said. First oil is expected from GMT-2 in late 2021 at a projected peak production of up to 40,000 barrels per day. Finally, the largest mobile drilling rig in North America, which ConocoPhillips contracted with Doyon Drilling for in 2016, the Doyon 26, is on its way through Canada to the North Slope, Jepsen said. “We call it the beast and it’s going to be a beast,” Jepsen said. The extended reach drilling rig will enable the company to develop the Fiord West pool from an Alpine drill site, which could generate up to 20,000 barrels per day, he added. It’s scheduled to start drilling next spring. Elwood Brehmer can be reached at [email protected]

Debate over ‘fair share’ of oil makes a comeback

Alaskans, it’s time to dust off your economics textbooks and dig the calculators out of the back of your junk drawers because the arcane issue of oil taxes is again about to be a hotly contested topic going into the 2020 elections. The sponsors of the Fair Share Act all but assured oil taxes will be a central debate point over the coming year when they filed an initiative petition Aug. 19 with the state Division of Elections to put a major production tax change the ballot next year. The aim of the Fair Share Act is to raise the production tax rate on the three largest and generally most profitable North Slope oil fields of Prudhoe Bay, Kuparuk River and Alpine. Initiative sponsor and longtime Alaska oil and gas attorney Robin Brena, who chairs Vote Yes for Alaska’s Fair Share, said during a Sept. 9 press conference to officially kick off the campaign that under the current oil tax system Alaska is “giving away $1.5 (billion) to $2 billion in tax breaks and getting nothing in return.” That system, best known by its legislative title Senate Bill 21, would return Alaska to being a competitive oil region and spur additional investment and eventually reverse the long trend of declining North Slope oil production industry advocates said at the time. However, a host of lawmakers and interested citizens — including many who were not fans of the former oil tax system called ACES — saw SB 21 as swinging the tax pendulum too far towards industry’s side and launched a referendum to repeal it. The referendum made it to the 2014 primary election ballot but ultimately failed by more than 10,000 votes, or a margin of 52.7 percent to 47.3 percent. That loss hasn’t stopped the debate over the system, though. Brena was blunt in his assessment of the way the state calculates its oil production tax. “Senate Bill 21 is an abject failure for Alaska. It’s giving away massive tax breaks for no particular reason,” Brena said Sept. 9. “As an overall matter there’s no better deal for the oil industry than Alaska. They make more money in Alaska than they do anywhere else in the world that matters with significant oil production.” Alaska Oil and Gas Association CEO Kara Moriarty said total oil revenue still accounted for roughly $2.6 billion in fiscal 2019, which ended June 30. The tax would hit 90 percent of North Slope production activity that helps support almost 100,000 jobs, she said. “You’re targeting three of the largest investors in Alaska. I mean, what kind of message does that send? I think it’s punitive; it just doesn’t make sense to me,” Moriarty said. “Why would we want to double or sometimes even triple production taxes on three of the state’s largest investors? To me, it just doesn’t make any kind of sense for the economic well-being of the state.” While the tax increase may bring in additional short-term revenue, it will discourage the investments that translate to oil production, which also generates royalty revenue for the state’s General and Permanent funds, she said. “We want to continue to have a strong partnership and presence in the state of Alaska, but if voters decide that they want another billion dollars-plus from the industry, companies will make a business decision and will start shifting their investments elsewhere,” Moriarty added. Brena contends that Alaska has historically received about 28 percent of the gross value of produced oil, which includes royalty payments, while in the nearly six years since SB 21 took effect the state has received less than 20 percent of the gross value of oil. The gross value is the market price at the time the oil is produced minus the pipeline and tanker transportation costs required to get the oil to West Coast markets. Both are less than the oil revenue split envisioned by oft-invoked former Gov. Jay Hammond, who suggested the oil companies and state and federal governments should each get approximately one-third of the value of the state’s oil. Hammond was governor during the late 1970s when North Slope oil production was just beginning and, for better or worse, Alaska became inextricably linked to the oil industry. Brena also points to a slide from a January 2018 presentation to the House Resources Committee by ConocoPhillips representatives that shows the company’s share of oil at current prices of roughly $65 per barrel is 48 percent, compared to 39 percent for the state and 13 percent for the feds. The state’s share of oil matches ConocoPhillips’ at prices in the $90 when each takes 44 percent, according to the company’s chart. The change in the split of revenue is a result of a decline in the federal government’s share after the corporate income tax rate was cut from 35 percent to 21 percent in the 2017 federal tax overhaul. The state’s share includes royalty, corporate income tax, production tax and oil and gas property taxes. “It doesn’t matter what metric; by any metric you choose Alaskans are giving away our oil and we cant afford for it to continue to give away our oil at substantially less than fair rates,” he said, stressing that the intent of the initiative is to add equality back to the financial relationship between the state and its big oil producers. Those against raising oil taxes regularly cite the need to remain competitive with Lower 48 shale oil basins that are often significantly less expensive to operate in than Alaska. The North Slope’s remote location, harsh weather and sensitive environment mean permitting a large oil project can take years and cost millions of dollars, even before sometimes billions of dollars are spent for development. Brena counters that argument by noting that North Dakota — which has led the shale boom along with Texas and produces about 1.4 million barrels per day, nearly three times the amount Alaska does — levies a 10 percent gross tax on most of its oil. The tax increases to 11 percent at prices greater than $90 per barrel. North Dakota producers also pay an average royalty of 18 percent, according to a May 2017 North Dakota State University report on the industry’s economic contribution to the state. The report authors surveyed companies to obtain the figures, as royalty payments are made to private landowners and generally remain confidential. At current oil prices the major North Slope producers are near the gross-net crossover point of Alaska’s hybrid production tax, meaning they are paying the 4 percent gross minimum tax or just slightly more if they are profitable enough to move into the net tax. SB 21 calls for the companies to pay the larger of the 4 percent gross tax or the 35 percent net profits tax after application of the currently $8 per barrel production credit. Several years ago the crossover point was in the low to mid-$70 per barrel range, but it has fallen as companies have reduced their operating costs, partly through workforce reductions but also through lower cost contracts with service companies, according to industry representatives. The historical average oil price since 1980, adjusted for inflation to today’s dollars is approximately $55 per barrel, according to the Energy Information Administration. Alaska’s 4 percent gross tax combined with a primarily 12.5 royalty on state leases in the legacy fields adds to a state take — less corporate and property taxes — of 16.5 percent. The comparable rate in North Dakota is 28 percent, Brena notes. He also emphasizes that ConocoPhillips 2018 Alaska net income of more than $1.8 translates to $27 per barrel of oil equivalent when spread over its share of oil and gas produced in the state last year. “There isn’t any place in the world that has substantial reserves of oil where you can make the $27 per barrel ConocoPhillips made from our oil in 2018,” Brena said in an interview. He also cited multiple references to Alaska being the company’s “low cost of supply resource base” in reports and investor presentations. Much of the broader oil tax discussion is centered on ConocoPhillips, Alaska’s largest oil producer, as the company is required to break out results of its Alaska operations in its regular financial reporting to the Securities and Exchange Commission because its activities in the state account for significant segment of its worldwide business. Company officials dispute the claim as being overly simplistic. They point out that North Slope production is dominated by oil, which is more profitable on an equivalent basis than the natural gas that is produced and sold alongside oil in many other basins. Additionally, the net income calculation includes deductions for reservoir depletion, facility depreciation and other items that are not cash costs and therefore do not represent cash flow, which is what economic decisions are usually based on. An April 2018 ConocoPhillips investor report says the company had an operating margin of $27 per barrel at $50 per barrel prices to start the year. Texas oil averaged $64 per barrel last year. “That is our competition,” ConocoPhillips Alaska Vice President Scott Jepsen wrote via email. “We continue to invest in Alaska because we have been able to stay competitive on costs, and that includes the production tax framework. If the proposed tax initiative were to become law, it would jeopardize North Slope investments.” According to Brena, the state’s production tax revenue averaged $12 per barrel in 2009 under ACES when oil prices averaged $68 per barrel and fell to about $2 per barrel at $72 oil in 2015. “The Fair Share Act will add $6 to $7 per barrel so we will be back up to $9 to $10 per barrel,” he said, adding that the average tax would still be less than it was under ACES. The Fair Share Act would increase the gross minimum tax to 10 percent at prices less than $50 per barrel. It would continue to increase 1 percent for every $5 bump in oil price until hitting a 15 percent cap at $70 per barrel. The tax change would also repeal the per barrel credit, a key part of SB 21, which is up to $8 per barrel at current oil prices and steps down to zero at very high prices. The per barrel credit is used as a means to increase the effective net tax along with oil prices. When the monthly production tax value of oil is equal to more than $50, an additional tax that would be the difference between the average production tax value and $50 multiplied by 15 percent. The new taxes would only be levied on fields with average production of more than 40,000 per day and cumulative production of more than 400 million barrels, meaning it would apply to the big three fields — Prudhoe Bay, Kuparuk and Alpine — owned by ConocoPhillips, ExxonMobil and BP (soon to be Hilcorp Energy). Brena stressed it would do nothing to companies developing and producing oil from new fields unless they eventually reach those high production thresholds. Therefore, it should not discourage new entrants to the North Slope, which he hopes the state can attract. According to documents provided by Vote Yes for Alaska’s Fair Share, the act would increase the state’s production tax revenue by approximately $1 billion per year. That money could be used to help resolve some of the state’s biggest challenges, Brena said. “We are talking about changing the entire quality of life in Alaska and we haven’t even touched half of the deficit,” he said. “In addition, we’re getting half of our PFDs, and we haven’t had a meaningful capital budget in years.” The state’s production tax revenue went from $2.6 billion in 2014 to $381 million in 2015, the first full year under SB 21, but also at a time when average oil prices also fell by approximately one-third. SB 21 brought in $125 million in 2017 after prices bottomed out at $26 per barrel before somewhat higher prices helped the state bring in $741 million in fiscal 2018. The producers have also lowered their operating costs significantly since oil prices started collapsed in late 2014, which can improve the state’s net tax take. Brena disputes that the Fair Share Act will discourage investment. He contends that the “vast majority” of investment over the history of North Slope oil has occurred when the state’s tax rates were higher. Supporters of SB 21 often pointed out as it was being debated that exploration activity was almost nonexistent in 2012 with just one well drilled over the winter despite prices greater than $100 per barrel. According to a February report by Department of Revenue economists, capital spending within Prudhoe Bay has declined each year since it totaled $877 million in 2014 to $210 million last year. Overall North Slope capital spending has been on a decline as well. According to the report, after hitting a near-term peak of more than $4 billion in 2015 it has fallen to $1.5 billion in 2017 and $1.7 billion in 2018. Brena and others have been critical of the stagnant levels of North Slope oil production despite numerous claims at the time SB 21 was enacted that it would lead to more production. With minor fluctuations, North Slope production has generally declined slightly since 531,000 barrels per day were produced in 2013 when SB 21 was passed; though the overall trend has slowed greatly versus the steady year-over-year declines of 5 percent to 6 percent since production peaked in 1988. Despite the low prices at the time, production increased year-over-year in 2016 and 2017; the year-over-year increases were the first since 2002 when the Alpine field came online. Production averaged approximately 498,000 barrels per day in fiscal 2019, the first fiscal year it was less than 500,000 barrels since North Slope oil started flowing; however, the 2013 state production forecast estimated 2019 production to be about 426,000 barrels per day. ConocoPhillips’ Jepsen noted during a Sept. 12 presentation during a meeting of the Alaska Support Industry Alliance that simply holding production relatively flat means producing more oil to counteract the natural decline of Alaska’s old, large fields. SB 21 backers insist the large North Slope projects in permitting — ConocoPhillips’ Willow and Oil Search’s Pikka developments, each with the potential to generate more than 100,000 barrels per day — along with several other smaller projects are proof the current tax system is working. The Fair Share Act would also reinstitute the mechanism known as “ring fencing” which requires companies pay their production taxes on a per-field basis. Brena said ring fencing would prevent the large producers from reducing their taxes on the three large fields by applying deductions earned through capital expenditures on other not yet producing projects. As it stands now, ConocoPhillips will be able to deduct 35 percent of the $4 billion to $6 billion the company is expected to spend developing Willow over the next 7 to 8 years. That could reduce its production tax obligation on the profitable legacy fields, all of which ConocoPhillips has a significant stake in, by several hundred million dollars per year, Brena said. Act sponsors note that ring fencing was a part of Alaska’s tax system for years until 2006, when the ongoing back-and-forth over oil taxes really began. Producer officials say it was workable in part because the state had a more simple gross system and incorporating net profit tax elements to a tax system fundamentally requires at least a portion capital investments be deductible across fields in a given region. Finally, it would make “all finings and supporting information provided by each producer to the (Revenue) Department relating to the calculation and payment of (production) taxes,” the initiative states. The act would also require the cost, revenue and profits for each company in the legacy fields be made public. He said regulations would determine what specific information is made public, but he doesn’t believe there is a need to see details that could jeopardize competition among producers and service companies on the Slope. Alaskans, who own the oil and gas resources, should be able to know how their partners in the effort to develop those resources are doing, he said. Moriarty said it’s unclear at this point if the provision to make tax records public documents would violate federal SEC laws or not, but she said the concept of making oil tax records public should be cause for concern for everyone in business in the state. “It pretty much blows away every confidentiality statute on the books,” she said. Legislative reaction Anchorage Democrat Sen. Bill Wielechowski has been at the front of the push in the Legislature to change SB 21 and specifically repeal the per barrel credit. He has said the simple change could generate up to $1.2 billion per year and has submitted legislation to do it. The bills have not been considered in the Republican-held Senate. Wielechowski said he supports the Fair Share Act and it might be a better way to deal with oil taxes because it removes the per barrel credit but also addresses the low minimum tax. “If we’re going to fix the tax system, let’s make it durable,” he said. Senate President Cathy Giessel, R-Anchorage, said she thinks the sponsors paint an inaccurate portrayal of SB 21. She stressed that production and the associated state royalty revenue — significantly less for oil from federal lands — is what truly generates revenue for the state and more taxes will simply discourage it. “It will be another battle to defend the reasonable, competitive tax structure we put in place,” Giessel said in an interview. The Legislature could kick the initiative off the ballot, presuming it makes it, by passing a law that is “substantially similar,” but just defining the term is nearly impossible, she said. Lt. Gov. Kevin Meyer has until Oct. 15 to rule on the initiative petition application, a decision usually made via guidance from the Department of Law. If the application is approved the sponsors can begin gathering signatures. A rejection is appealed through the court system. Senate Minority Leader Tom Begich, D-Anchorage, said over the summer that he was discussing modest oil tax changes with lawmakers of both parties. It seems likely the issue will be more of a debate than it was in 2019, which has been consumed by the budget and PFDs. However, Giessel said its difficult to make tax changes with significant implications in just a single session, especially when there are many new House members likely unfamiliar with the highly complex issue as there are this Legislature. Democrat members of the bipartisan House Majority said they are happy the initiative addresses the minimum tax rate, while some said the progressivity it adds to oil at higher prices is fairly aggressive. The House Majority formed last year to counter Gov. Michael J. Dunleavy’s plans for more than $1 billion in budget cuts with far more modest reductions, but part of the deal was also that the issue of oil taxes would be set aside by the caucus. “It’s like Alaska is burning and our political leadership has decided not to talk about water,” Brena said.

Furie, Homer Electric Assn. agree to amended gas deal

Homer Electric Association members could soon see the benefit from a renegotiated natural gas supply contract that will save the Kenai Peninsula power cooperative more than $2.1 million. HEA filed an amendment on Aug. 28 with the Regulatory Commission of Alaska to the gas sales agreement it signed with Cook Inlet producer Furie Operating Alaska in 2015. The two-year contract ended Dec. 31, 2018, but HEA exercised a one-year option to continue the contract through this year. An option for gas in 2020 was not picked up. The amendment, which has an effective date of May 24, calls for HEA to receive credit totaling $1.7 million for gas purchases through May 2019. The utility would see another $462,000 in gas price reductions for the 2.2 billion cubic feet, or bcf, of gas it expects to purchase from Furie through the end of the year. Furie has had a rough 2019. In January the small Texas-based producer started having methane freeze-up problems in the pipelines on the new Julius R platform it operates in the Inlet, which prevented Furie from delivering gas to its customers, HEA and Enstar Natural Gas, for more than a month to each last winter. By late June Furie had resumed gas production, but not at volumes sufficient to meet its commitments. HEA Manager of Fuel Supply and Renewable Energy Mikel Salzetti said the $2.1 million in savings does not correlate to the premium it had to pay to find interim gas when Furie’s supply failed. The additional cost for the short-term supply was less than and unrelated to the $2.1 million credit, Salzetti said. Furie is HEA’s only firm supplier. Furie officials did not respond to requests for comment. HEA’s decision not to pick up the 2020 option on its contract with Furie was made in mid-2018, before the recent supply issues, according to the RCA filing. Salzetti said the utility just put out an RFP to Cook Inlet producers and found enough other supply options to go back out to the market. On Aug. 9 Furie filed for Chapter 11 bankruptcy in a Delaware federal bankruptcy court. The filings claim the company has about $450 million in debt and its assets are valued at between $10 million and $50 million. The company also cited $105 million in tax credits it is still owed by the State of Alaska. Elwood Brehmer can be reached at [email protected]

Supreme Court hears arguments over bill to pay off credits through bonds

Justices on the Alaska Supreme Court heard oral arguments Thursday morning in the lawsuit over oil and gas tax credit bonds that could have major ramifications for the state’s financial future. Longtime Juneau attorney Joe Geldhof argued on behalf of former University of Alaska Regent Eric Forrer that House Bill 33 — a law passed in May 2018 allowing the state Department of Revenue to sell up to $1 billion in bonds to pay off outstanding oil and gas tax credits — violates the Alaska Constitution’s strict limitations as to what kinds of debt the state can take on and how. If the Supreme Court strikes down HB 331, the Legislature and Gov. Michael J. Dunleavy’s administration would have to find a new way to pay off the remaining refundable oil and gas tax credit obligation, likely through partial appropriations over several years. Revenue officials say the outstanding tax credit certificates the state has not repurchased total roughly $700 million compared to the $1 billion authorized by the bill. That scenario would require the small, oftentimes financially vulnerable companies as well as the investment banks holding the credits to wait substantially longer to be repaid. Several companies have already delayed drilling work, left Alaska or filed for bankruptcy, citing the lack of expected tax credit payments as a reason for their actions. However, Geldhof contended that upholding HB 331 would allow the state to take on debt that is not contemplated in the Alaska Constitution and could have “enormous” fiscal consequences to the state at-large. “If you allow the kind of debt the state seeks to incur here for the state, keep in mind that there’s 162 municipal units that within a week or two of your decision are going to say, ‘Wow, this is a splendid opportunity for us to borrow and spend and we’ll worry about the debt in the future,’” Geldhof said to the panel. The justices subsequently questioned whether he was making a policy debate, which is outside of their purview to consider. Geldhof responded that he wasn’t asking them to second-guess the Legislature’s policy, but stressed that HB 331 is “a clever workaround” to the Constitution that “will allow a proliferation of debt” in Alaska if it stands. Alaska Superior Court Judge Jude Pate dismissed the suit in January on the grounds that Forrer failed to state a claim upon which the court could grant relief on the grounds that HB 331 “passes constitutional muster,” Pate wrote in his decision. Forrer originally filed the suit in May 2018. Hatched by former Gov. Bill Walker’s administration as a way to pay off the large tax credit obligation, HB 331 would allow the companies and banks holding credits to get their money relatively quickly instead of possibly waiting for the state to pay them off over years of appropriations according to current statute. To get paid sooner the credit holders would have to accept a discount of up to 10 percent less than the face value of the certificates. The state Department of Revenue would then use the difference between the credit values and the discounted amount actually paid to cover the borrowing costs. Supporters of the tax credit bonds insist it is a way to restart investment by small producers and explorers in Alaska’s oil and gas fields that has been slowed by three years of credit payment amounts at levels less than what was applied for as the Legislature and the administration debated how to resolve the state’s large budget deficits. At issue is whether or not the law, which passed with bipartisan support and was signed by Walker, runs afoul of Article IX of the Alaska Constitution as Forrer and Geldhof insist. The state Constitution generally limits the Legislature from bonding for debt to general obligation, or GO, bonds for capital projects, veterans’ housing and state emergencies. In most cases the voters must approve the GO bond proposals before the bonds are sold. State corporations can also sell revenue bonds, but those are typically linked to a corresponding income stream and only obligate the corporation to make payments, not the State of Alaska as a whole. HB 331 allows the Revenue Department to set up the Alaska Tax Credit Certificate Bond Corp. specifically for the purpose of issuing the 10-year bonds. But the only revenue the tax credit corporation would have would be direct appropriations from the Legislature, as the bonds would not be sold to support a project that would eventually generate funds to repay the bonds that originally funded it, as is the case in a traditional revenue bond scenario. That’s why Geldhof and other critics of the plan often refer to the state tax credit corporation as a “shell corporation” with the sole purpose of passing money from the Legislature to the bondholders. State officials rebut that language in the bond certificates would notify potential buyers that their repayment would be “subject to appropriation” by the Legislature, which shields the larger State of Alaska from recourse and makes the plan legal. Department of Law attorney Laura Fox argued on the state’s behalf that prospective bond buyers would be aware of the appropriation risk, which is common in state contracts, and that risk would be accounted for through slightly higher interest rates. “Those words tell creditors they can’t legally compel the state to pay,” Fox said of the subject to appropriation clause. She noted the bondholders only recourse would be against the assets of the corporation — which the Legislature appropriated to it. Geldhof questioned whether the state would truly be free from liability if the lawmakers failed to make the bond payments. State attorneys have also pointed to previous court rulings that have allowed the state to take on debt outside the explicit constitutional provisions, but Geldhof asserts those deal with lease-purchase agreements and are not applicable to the bond sale contemplated in HB 331. The intent of the framers of the Alaska Constitution was also contemplated during the arguments. The justices asked Fox if she could discern through Constitutional Convention meeting records whether or not the delegates crafting the Constitution considered the HB 331 plan to be revenue bonds, or if such a plan was even contemplated. Fox responded that revenue bonds in the traditional sense were likely the understanding at the time the Alaska Constitution was granted, but noted that other state corporations occasionally have revenue bond payments supported by legislative appropriations. “Nothing in (Article IX) says where the corporation has to get its revenue from,” she said. She acknowledged the state does not consider the tax credit obligation to be debt, but rather “it is indebtedness,” Fox said, as the Constitution does allow the state to refinance existing debt. “I don’t know whether the semantic debate whether you call it debt or not really matters,” she said. Geldhof said in his closing rebuttal that the state is trying to incur debt to cover operating expenses, which is not what the constitutional framers intended. “We have enough financial problems in Alaska, don’t add to them by green-lighting debt that we can’t sustain,” he said. No timeframe was given as to when the Supreme Court justices will issue their ruling. (Editor's note: This story has been corrected to accurately reflect that Judge Jude Pate serves on the Alaska Superior Court, not District Court.) Elwood Brehmer can be reached at [email protected]

Letters fly in latest scrap over potential Pebble investor

One third of the Alaska Legislature sent a letter to a Canadian mining company on Sept. 9 in an attempt to dissuade a potential investment in the Pebble mine project. The correspondence from the bipartisan and bicameral group of 20 lawmakers is the latest in a series of letters to Vancouver-based Wheaton Precious Metals Corp. CEO Randy Smallwood over the past seven weeks from conservation and Bristol Bay-area Alaska Native organizations opposed to the project and Gov. Michael J. Dunleavy, who sought to counter the negative messaging regarding Pebble with a July 30 letter. The legislators — mostly Democrats, two Republicans and House Speaker Bryce Edgmon of Dillingham, who changed his affiliation from Democrat to independent this past session — specifically responded to Dunleavy’s letter in which the governor stressed his slogan that “Alaska is open for business” and he did not want a potential investor in a major resource development project to be discouraged by those opposed to it. “A fair, efficient and thorough permitting process, without interference and threats from project opponents, is essential to the future economic growth of Alaska,” Dunleavy wrote to Smallwood July 30. “I am committed to making that happen, and once appropriate permits are granted, I am equally committed to removing obstacles that would hinder immediate construction.” The Pebble Partnership is in the midst of the multi-year federal environmental impact statement process to get a key construction authorization from the U.S. Army Corps of Engineers, but the company would still need to obtain numerous other state and federal agency approvals before construction could commence. According to Dunleavy’s letter, the investment Wheaton is purported to be considering would help Pebble get through the expensive permitting process. Pebble leaders have openly acknowledged they need to secure a financially strong partner to move the project from concept to reality, as Pebble’s parent company and junior mining firm Northern Dynasty Ltd. simply doesn’t have the financial wherewithal to raise the several billion dollars that would be needed to construct the large mine and major support infrastructure. The 20 lawmakers responded by retorting that “Alaska is — and always has been — open for business” in their letter to Smallwood, noting that the Alaska Constitution reserves resource ownership in the state to its citizens with a mandate that they be developed for the maximum benefit of all Alaskans. However, they emphasized that “fish are by far the single most important resource” in the Bristol Bay region.” “In his letter, Gov. Dunleavy assures you that the State will actively defend your company’s investment from ‘interference’ and ‘frivolous and scurrilous attacks.’ Opposition to this project is both local and statewide, and is not frivolous, slanderous or interference,” they wrote. “As individual Alaskans our opposition to this project arises from the potentially severe social, economic, and cultural risks that Pebble Mine represents. As elected officials, our opposition to this project aligns with the interests of our constituents.” The lawmakers continued to cite the late Sen. Ted Stevens’ oft-quoted remark that Pebble “is the wrong mine for the wrong place” and highlighted the fact that several large mining firms have already walked away from the project over the years after spending hundreds of millions of dollars to advance it. They also cited figures from a survey commissioned by Bristol Bay Native Corp., which also opposes Pebble, that found approximately 35 percent of Alaskans support Pebble’s development. Pebble Partnership released its unscientific own survey early this year with figures showing the majority of Alaskans support its efforts. The back-and-forth started July 24 when Bristol Bay-area commercial fishing and Native organizations along with several national conservation groups, including the Natural Resources Defense Council, sent a letter to Smallwood to discourage a potential investment in Pebble. Next came Dunleavy’s letter, followed by an Aug. 29 letter from BBNC CEO Jason Metrokin, which had much the same tone as the legislators’ letter, and finally the Sept. 9 letter. A spokeswoman for Wheaton did not return calls or emails regarding the correspondence to the company. BBNC Lands and Resources Vice President Dan Cheyette in a brief interview called it “entirely inappropriate” for the governor, who oversees the agencies that would be regulating Pebble, to send a letter “that is essentially cheerleading a potential investment in a project that has not yet been permitted.” Resource development advocates similarly criticized former Gov. Bill Walker for taking a formal stance against Pebble, alleging state agencies under his watch would not give the project a fair shake. Dunleavy has consistently taken a neutral stance on Pebble, while he has backed most all other resource development efforts in the state. “While some in the Legislature may disagree, Governor Dunleavy and a large number of Alaskans believe projects should be allowed to follow a fair and transparent permitting process; one that is rigorous, merit-based and prescribed by law,” Dunleavy’s spokesman Matt Shuckerow wrote in response to the legislators’ letter. Pebble spokesman Mike Heatwole wrote via email that the company has had conversations with several potential investors but he could not comment on specific prospective partners. “We continue to have productive discussions with a range of companies about the project and when we have something formal to announce we will do so,” he wrote. The lawmakers did not reference a 2014 ballot initiative that requires any large mining project in the Bristol Bay region to be formally approved by a vote of the Legislature. Voters approved the measure with 65 percent support. Pebble leaders have repeatedly said they believe it is unconstitutional and the company will challenge it when it is necessary to do so. Heatwole said the measure illegally gives “one branch of government (the Legislature) two bites at the apple” in regards to approving Pebble, as it is the Legislature that sets the permitting standards carried out by state agencies. He added that even if it stands a legal test, he doesn’t believe legislators would want to “go on the record (with a vote) killing a job-creating, economically stimulating project” that had already met state permitting requirements. ^ Elwood Brehmer can be reached at [email protected]

Sullivan seeks answers on missile defense plans

Sen. Dan Sullivan wants Alaskan contractors to know that the more than $200 million expansion project at Fort Greely is moving ahead “full bore,” despite mixed messages coming out of the Pentagon. The Associated Press reported in late August that Department of Defense officials decided to cancel a contract with Boeing to develop a new “kill vehicle” for intercontinental ballistic missile, or ICBM, interceptors housed at Fort Greely because of problems with the aerospace giant’s current design and related cost issues. The contract was officially canceled Aug. 22. Fort Greely is at the center of the country’s ground-based missile defense system with 40 of the 44 active ICBM interceptors housed in underground silos at the Interior Alaska Army installation. Sullivan said in an Aug. 29 meeting with the Journal that he wanted to quell concerns he heard after the news of the kill vehicle contract broke from those working on a project to expand the number of interceptors at Fort Greely from 40 to 60, as Congress directed in the 2018 National Defense Authorization Act. After making calls to Secretary of Defense Mark T. Esper, Missile Defense Agency Director Vice Adm. Jon Hill and other senior Pentagon officials, Sullivan said he was assured the expansion work at Fort Greely wouldn’t be stopped along with the kill vehicle contract. “We continue and will continue into the future to be the cornerstone of America’s missile defense — no ifs, ands or buts,” Sullivan said of Alaska and Fort Greely. “They got silos, the need to put in what they call sleeves; the need to wire them… That’s continuing. That’s a $200 million project, just that expansion. It’s not done yet but it’s getting close.” In addition to the work at Fort Greely, the Missile Defense Agency is in the midst of spending another $325 million over six years at Clear Air Force Station just south of Fairbanks. Clear is a radar base near Nenana along the Parks Highway. The money there is going towards installing a new power plant and missile detection radar system. Clear Air Force Station is on the electrical grid; however, the upgraded power plant is a backup facility that will be protected against electromagnetic pulse weapons that could be used to render electrical systems useless, according to former MDA Director Vice Admiral James Syring. When the long range discrimination radar being installed at Clear —expected to be done in the early 2020s — is done it will be “the most sophisticated ground-based radar system on planet Earth,” according to Sullivan, and is focused on detecting ballistic missile threats. As for the kill vehicles on the interceptors, he said Pentagon officials want updated kill vehicles to match the ever-evolving threats from adversarial nations and a request for proposals should be let soon to the aerospace companies capable of performing the work. Sullivan added that he was assured the new kill vehicles and associated rocket booster are compatible with the infrastructure at Fort Greely. He planned to get detailed, classified briefings on the status of the ICBM interceptor program when he returned to Washington, D.C., in September after spending most of the August recess in Alaska followed by a week of training at Camp LeJeune in North Carolina as part of his duties as a colonel in the Marine Corps Reserve. Sullivan serves on the Senate Armed Services Committee and chairs the Readiness Subcommittee. To him, the worries over whether or not the work at Fort Greely was going to continue came down to a poorly executed communications strategy on the part of Pentagon officials. The incomplete information that came out initially resulted in the ballistic missile interceptors at Fort Greely and California’s Vandenberg Air Force Base being conflated with work to oppose the newer, hypersonic missiles China and Russia are believed to be developing. The hypersonic weapons fly at a faster speed and on a much lower trajectory than ICBMs and therefore are beyond what the current interceptors can respond to, according to Sullivan. He said the interceptors at Fort Greely are meant to counter threats from “rogue nations” such as North Korea. “I was very mad about the rollout. I was not given a heads up about it but I knew they were looking at it,” he said about the interceptor redesign. He highlighted the significance of a successful test in March when two ICBM interceptors were launched from Vandenberg and destroyed the faux warhead exactly as prescribed. The first defense missile struck the dummy threat, while the second honed in on the largest piece of leftover debris and destroyed it. Sullivan described it as “a bullet hitting a bullet in space, essentially.” There are also plans to increase the frequency of missile tests at the Pacific Spaceport Complex in Kodiak. In July, the Israel Missile Defense Organization and the MDA conducted a successful test of the Israeli Arrow-3 Weapon System at Kodiak, according to a statement from the MDA. “Maybe at the end of the day this was the smart thing to do,” he said of the interceptor changes, “but what I’ve been able to tell people here is that on the construction that’s ongoing, which is kind of all over, and the continued use of Kodiak as a really important place, we’re full bore.” Milcon funding to border wall Secretary of Defense Esper issued a memo to Defense agency leaders Sept. 3 that included a long list of military construction projects that will be deferred as money is pulled from them to fulfill President Donald Trump’s emergency declaration to build a $3.6 billion wall along the southern border with Mexico. Trump issued the declaration in February and projects at Fort Greely Eielson Air Force Base near Fairbanks will have $102 million pulled from them to support wall construction. At Eielson, $74 million to repair two of the base’s central heat and power plan boilers and $19 million to upgrade the combat arms training and maintenance, or CATM, range will be redirected. At Fort Greely, $8 million to support expansion of the installation’s Missile Field No. 1 will also be sent south. However, the contracts for that work was not scheduled to be awarded until early 2020 and early 2021, according to Esper’s memo. Sullivan has been critical of congressional Democrats for blocking attempts to fund additional border security through the normal appropriations process. His spokesman, Mike Anderson, wrote via email that the 2020 National Defense Authorization Act, which passed the Senate in June 27 on an 86-8 vote, authorizes $3.6 billion to restore the repurposed funds. “Going forward, Sen. Sullivan will work with his colleagues on the Appropriations committees to fund this initiative,” Anderson wrote. Elwood Brehmer can be reached at [email protected]


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