potential funding options for the susitnawatana ...faculty.cbpp.uaa.alaska.edu/afgjp/padm628 spring...

PotentialFundingOptionsfortheSusitnaWatana

HydroelectricProjectinSouthcentralAlaska

Crystal Enkvist

Barbara Mongar

N. Nakita Mongar

Amy Wisco

April 16, 2011

PADM 628

Professor Dr. Protasel

Susitna Funding Options 1 | P a g e

TableofContents Executive Summary………..………………………………………………….2 Introduction……………...…………………………………………………….3

Background of Project……………………………………………………...…5

o Project Features………………………………………………...6 o Project Timeline………………………………………………..7 o Key Stakeholders…………………………………………….....8 o Estimated Costs………………………………………………...9

Funding Option 1 – Bradley Lake Funding Model………………………..…10

Funding Option 2 – State-only Funding...………………………………...….12 Funding Option 3 – Utility-only Funding...……………………………...…...13 Funding Option 4 – Private Investor-only Funding……………………...…..14 Funding Option 5 – Federal-only Funding…………………………………....15 Recommendations and Conclusion…………………………………………...17

References……………………………………………………………………..21 Appendix A: Joe Griffith Interview…………………………………………...23 Appendix B: Sara Fisher-Goad Interview…………………………………….25 Appendix C: Mike Pawlowski Interview…………………………………….26 Acknowledgements …………………………………………………………..29


ExecutiveSummary

The Susitna Hydroelectric Project was first studied in the early 1950s by the Bureau of

Reclamation, the project was later studied extensively by the Alaska Power Authority (APA) in

the 1980s, the 25th Alaska State Legislature authorized the Alaska Energy Authority (AEA) to

perform an update of the project in 2008, and approved the project in 2011.1 In 2010, the 26th

Alaska State Legislature passed House Bill 306, which declares a state energy policy. The bill

directs the State to receive 50 percent of its electric power generation from renewable and

alternative energy sources by 2025; the Susitna Hydro Project can help achieve this goal (AEA,

2011).

The Susitna Hydro Project will be located approximately halfway between Anchorage

and Fairbanks. It would create a 700-foot-high dam on the Susitna River at river mile 184 above

the mouth of the Susitna River (AEA Railbelt, 2010). The project could be accessed from the

Denali Highway by a new road and from Gold Creek (existing railroad bridge over the Susitna

River) by a new rail line. The project will take approximately 11 years to be completely built and

costs about $4.5 billion.

Funding for the project can come from multiple channels; this review looks at five

possible funding options: Bradley Lake Hydroelectric Project funding model, State of Alaska-

only funding, utility-only funding, private investor-only funding, and federal-only funding. After

analyzing the funding scenarios, we concluded the following: the utilities themselves cannot

fund this large of a project, the state won’t finance the entire project, federal funding in unlikely

because of the current financial situation, and finding enough private investors to fund a project

of this size is also highly unlikely. The Bradley Lake funding model of a mixture of State of

1 For this class assignment we are assuming that the Susitna Hydro Project has been approved.


Alaska and utility funding is the best area to start with but it will have to be molded to better fit

the Susitna Hydro Project. Our recommendation is for the State to fund 75 percent of the project

and the utilities to fund the remaining 25 percent. That being said, we highly encourage use of

federal funding if available. Federal funding in the form of a grant could provide a cheap form

of capital. Private funding should be considered if the desired cost of power could still be

attained.

Introduction

The Susitna River has its headwaters in the mountains of the Alaska Range about 90

miles south of Fairbanks. It flows southwards for 317 miles before discharging into Cook Inlet

just west of Anchorage. Contained entirely within the southcentral Railbelt region, the Susitna

River is situated between the two largest Alaska population centers of Anchorage and Fairbanks

(HDR, 2009). The Railbelt is served by six regulated public utilities that extend from Fairbanks

to Anchorage and the Kenai Peninsula (AEA, Energy Pathway 2009).

A large-scale hydroelectric project on the Susitna River has been studied for more than

50 years and is now being pursued by the State of Alaska as a long-term source of energy. In the

1980s, the Alaska Power Authority studied the project extensively and a license application was

submitted to the Federal Energy Regulatory Commission (FERC) (HDR, 2009).

Developing a workable financing plan at that time proved difficult for a large

hydroelectric project. When this existing difficulty was combined with the relatively low cost of

gas-fired electricity in the Railbelt, the declining price of oil throughout the 1980s, and its

resulting impacts upon the State budget, the APA terminated the project in March 1986 (HDR,

2009).


In 2008, the 25th Alaska State Legislature authorized the Alaska Energy Authority

(AEA), the state agency that assumed some of the functions of the former Alaska Power

Authority, to perform an update of the project. That authorization also included a Railbelt

Integrated Resource Plan to evaluate the ability of the Susitna Hydroelectric Project and other

sources of energy to meet the long-term energy demand for the Railbelt region of Alaska (HDR,

2009). Hydroelectric power is of particular interest to the Railbelt because of its potential to

provide stable power costs for the region. In 2010, the 26th Alaska State Legislature passed

House Bill 306, which declares a state energy policy. The bill directs the state to receive 50

percent of its electric power generation from renewable and alternative energy sources by 2025

(AEA, 2011).

Hydropower, the lowest cost energy for Alaska consumers, currently provides

approximately 24 percent of the electrical energy used in Alaska. The only way to achieve the

new goal of deriving 50 percent of the state’s electricity from renewable and alternative sources

is for a new, large hydroelectric project to be built in the Railbelt region (AEA, 2011). The 26th

Alaska State Legislature provided funding to the Alaska Energy Authority for the preliminary

planning, design, permitting and field work for the Susitna and Chakachamna Projects, as well as

other hydroelectric projects along the Railbelt.

The State energy authority recommends that the Low Watana site on the Susitna River

should be the primary hydroelectric project for Alaska’s Railbelt. Of the projects examined, the

Susitna Project not only has the best chance of being built, it will provide cost-effective, reliable,

long-term power for the Railbelt, and it will help the state meet its recently established long-

range goal. The Susitna Project would be located approximately halfway between Anchorage

and Fairbanks. It would create a dam on the Susitna River at river mile 184 above the mouth of

the Susitna River (AEA Railbelt, 2010). The project could be accessed from the Denali


Highway by a new road and from Gold Creek (existing railroad bridge over the Susitna River) by

a new rail line.

The 700-foot-high dam would be located within a steep-sided river valley approximately

15 miles upstream of Devil’s Canyon. It would have a 557-foot difference between tail water

and maximum pond elevation,

with a maximum pond level of

2,014 feet. The reservoir would

be 39 miles long and a maximum

of two miles wide (AEA Railbelt,

2010). Installed capacity would

be 600 MW (megawatts) with the

average annual generation

determined to be 2,600 GWhrs

(gigawatt hours). A final decision has not been made on the type of dam or the type of

powerhouse (underground or surface) that would be used (AEA Railbelt, 2010).

BackgroundofProject

The Bureau of Reclamation first studied the Susitna River’s hydroelectric potential in the

early 1950s, with a subsequent review by the Army Corps of Engineers in the 1970s (HDR,

2009). The Army Corps of Engineers developed a two-dam plan for the Susitna River

Hydroelectric Project in the late 1970s for which Acres American, Inc. completed a feasibility

study for the Alaska Power Authority in 1982 and a license application was filed with the

Federal Energy Regulatory Commission. An amended license was prepared in 1985 at an

estimated cost of $5.4 billion and the project was cancelled in early 1986 (AEA Railbelt, 2010).

Source: Alaska Energy Authority


Extensive site work including surveying, deep rock drilling, soil drilling and sampling

was conducted at the Watana site. In addition, environmental studies including fish and wildlife

studies were conducted throughout the basin and included in-stream flow studies in the side

channel sloughs downstream of Portage Creek (AEA Railbelt, 2010).

In the two-dam scheme developed in the 1982 Acres feasibility study, the upper dam was

at Watana and was to be an 885-foot-high earthfill embankment with a 1,040 MW underground

powerhouse. It was to be constructed first. The amended license proposed to develop the project

in three stages instead of two with an expandable 700-foot-high embankment at Watana as the

first phase with an installed capacity of less than 500 MW (AEA Railbelt, 2010).

A number of hydroelectric generation alternatives were studied recently on the Susitna

River, of which the Low Watana Non-Expandable Alternative is the selected Susitna Project

recommended by the Alaska Energy Authority. The Low Watana Non-Expandable Alternative,

a 700-foot-high dam with a 600 MW powerhouse, was chosen because it has the best

combination of winter storage, less environmental impact, and low overall cost. It also has the

most potential of achieving the State of Alaska’s energy policy goal of achieving 50 percent

renewable energy generation by 2025 (AEA, 2010).

Susitna Low Watana (Non-Expandable Alternative) Hydropower Project Features:

• The Susitna Low Watana (Non-Expandable Alternative) Hydropower Project would

generate 2600 GWhrs average annual energy.

• It would be a non-expandable 700-foot-high dam with a gross head of 557 feet.

• The powerhouse would contain four turbine generator units at 150 MW each for a

total installed capacity of 600 MW.

• The reservoir would have a maximum pool elevation at 2,014 feet and 2,704,800

acre-ft. of usable storage.


• The diversion tunnel would be 36-feet in diameter and 3,700-feet long and the tailrace

tunnel would be 1,500-feet long (Hatch, 2010).

Project Timeline

Based on information available at this time, the Susitna Project would take approximately 11

years from the permitting process to construction (AEA Railbelt, 2010). Major Task Susitna-Low Watana Hydropower Project

FERC Pre-filing Process 3.5 years

FERC Processing – DC 2.0 years

FERC Processing - Portland 1.0 year

Construction through Startup 4.5 years

Total 11 years



Key Stakeholders

• Railbelt electric consumers. Sixty-five percent of Alaska’s population lies within

the Railbelt region. In order for the Alaska economy to remain stable, Alaska

business and residents need affordable and reliable electric power. Hydroelectric

power offers a renewable and sustainable source of energy to meet the needs of

southcentral Alaska for decades. The Eklutna and Bradley Lake Hydroelectric

Projects currently provide 20 percent of the electric power in the Railbelt.

• The Railbelt utilities. Six Alaska Railbelt interconnected utilities are: Golden

Valley Electric Association (GVEA), Chugach Electric Association (CEA),

Matanuska Electric Association (MEA), Homer Electric Association (HEA),

Anchorage Municipal Light & Power (ML&P), the City of Seward Electric System

(SES), and Aurora Energy, LLC as an independent power producing utility. These

utilities have aging generation, a transmission system in need of significant

upgrades, and a growing need for additional capacity from new generation sources.

• Alaska State Legislature. State policymakers have a vested interest in providing

their constituents with the most affordable and reliable sources of electric power.

The Alaska State Legislature in 2010 passed House Bill 306, which declares a State

energy policy. The bill directs the state to receive 50 percent of its electric power

generation from renewable and alternative energy sources by 2025 (AEA, 2011).

• Alaska Energy Authority. The only way this goal can be met is with the

construction of a major hydropower facility for the Railbelt or other very large

generation projects. The logical state entity to construct the Susitna Hydroelectric

project is the Alaska Energy Authority. Industry trade associations such as the

Alaska Power Association, which represents the majority of electric utilities in the

state, supports the expansion of statutory powers of the AEA that would, at a


minimum, allow the agency to acquire, construct or own any interest in an electric

project or any right to capacity of an electric project or to perform feasibility studies,

design and engineering with respect to power (APA, 2011).

Estimated costs of the Susitna Low Watana (Non-Expandable Alternative) Hydropower

Project

The estimate in the table below was prepared in November2009 for a Low Watana Non-

Expandable alternative. The estimate for this project in 2008 dollars is $4.5 billion.



Option1–BradleyLakeFundingModel

The Bradley Lake Hydroelectric Project is located in Alaska on the Kenai Peninsula.

Construction of the project was completed in 1991. Project cost in the amount of $357.2 million

(including reserves, capitalized interest, and cost of debt issuance) was funded long-term by: (1)

appropriations from the State of Alaska in the initial aggregate amount of $175 million (later

reduced to $163.6 million), (2) proceeds from the sale of AEA’s bonds issues in the amount of

$165.3 million, and (3) approximately $28.3 million of interest earnings during construction

(SNW, 2010).

Variable Rate Demand Bonds, which earned interest were issued by AEA and paid for

construction. According to Investopedia (2011), a Variable Rate Demand Bond is, “A debt

instrument that represents borrowed funds that are payable on demand and accrue interest based

on a prevailing money market rate, such as the prime rate. The interest rate applicable to the

borrowed funds is specified from the outset of the debt, and is typically equal to the specified

money market rate plus an extra margin.”

The Variable Rate Demand Bonds were general obligations of AEA and were secured by

bank letters of credit and a capital reserve fund under an Indenture of Trust from AEA to the

Bank of New York (SNW, 2010). Upon completion of construction, the Variable Rate Demand

Bonds were redeemed. The project was refunded using State appropriations and the proceeds of

long-term, fixed rate bonds (SNW, 2010).

The Railbelt Energy Fund provided a portion of the state appropriations funding. The

Alaska State Legislature established the Railbelt Energy Fund in the general fund to support

energy projects ranging from Kenai to Fairbanks. The region ranging from Kenai to Fairbanks is

commonly referred to as the Railbelt. The Railbelt Energy Fund is comprised of funds

appropriated by the state legislature and interest earned on money in the fund. The legislature

may appropriate money from the fund for programs, projects, and other expenditures to assist in


meeting Railbelt energy needs (The Alaska State Legislature, 2011). The long-term, fixed rate

bonds were backed by a power sale agreement. The power sale agreement is simply the business

deal between the power generator and the power purchaser and can be used to shift risk from the

generator/developer to the power purchaser (SNW, 2010). The Bradley Lake power sale

agreement also contained language whereby the power purchaser continued to make payments

for 20 years after bonds used to fund their portion of the project were retired. According to the

Alaska House Judiciary Committee, “This structure was designed to repay the State for the

considerable capital that was contributed to the project but also served to extend the time frame

for amortizing the cost of the project” (1988).

Pros: The Bradley Lake Funding Model was an inventive, successful way to secure the

necessary capital to fund the project. It utilized many different resources and also

produced investment earnings from Variable Rate Demand Bonds that covered 9.0% of

project costs (SNW, 2010). One of the major players in the Bradley Lake Funding Model,

the State of Alaska, contributed almost half of the project financing. As mentioned in the

SNW, 2010 report, “State funding, whether in the form of a grant or loan, can be utilized

to defer higher cost conventional revenue bond funding.”

Cons: In today’s market, Variable Rate Demand Bonds would not be a practical consideration as

there would not be significant investment earnings. Even if market conditions were better

making Variable Rate Demand Bonds a more attractive option, the Tax Reform Act of

1986 “eliminated the ability to use tax-exempt bond proceeds to earn interest arbitrage”

(SNW, 2010).

Additionally, two key waivers were obtained for the Bradley Lake project that may or may

not be necessary and obtainable for the Susitna-Watana project. One was a special federal

exemption allowing the project to use tax-exempt financing despite the fact that it would

serve three contiguous counties when normally the facility can only serve no more than


two contiguous counties. The second waiver was that the sale and purchase agreement

was exempt from a review that normally could’ve produced doubt by investors (SNW,

2010).

Option2–StateonlyFunding

House Bill (HB) 306 sets a goal for Alaska to generate 50 percent of its electricity

through renewable resources by 2025, primarily through hydroelectric projects (Office of

Governor Sean Parnell, 2011). State-only funding for construction of the Susitna-Watana project

is a guaranteed way to help meet the goal. The State of Alaska certainly has access to cash and

financing to make the project become a reality. The State could use cash from the general fund

or the Railbelt Energy Fund. State funding through a grant or loan would provide the cheapest

form of capital for the project in turn generating cheaper rates for customers.

In a November 2010 article on adn.com, Governor Sean Parnell and the Alaska Energy

Authority announced they were endorsing the construction of the Susitna project. "The state has

the ability to write a check," said state Sen. Bert Stedman (R-Sitka), who co-chairs the powerful

Senate Finance Committee (Bluemink, 2010). The article also states, “Stedman favors state

spending-and taking on some debt-to finance Susitna.”

Michael “Fish” Pawlowski, Legislative Aide to Senator Lesil McGuire (speaking on

behalf of himself), stated the following when asked about potential State-only funding, “Susitna

could be funded on a phasing basis. Given the scale of our budget and our cash flows for the

state and seeing what kind of excess revenue (according to the Governor’s 10-year plan in

OMB); with modest increases in spending, we end up in 2021 with $37B in liquid assets in the

Constitutional Budget Reserve. It is not out of the realm of possibility.”

Pros: As mentioned, this is a sure-fire way to fund the project. It would also produce the

cheapest form of capital passing along savings to consumers. According to a Black and


Veatch (2010) study commissioned by the Alaska Energy Authority, using a funding

model that provides state assistance would reduce the maximum fixed charge rate on

capital and thereby change the estimated cost of power for the Susitna Hydroelectric

Project from $0.13 per kWh to $0.08 per kWh. All research and interviews conducted

suggest that the State of Alaska must play a major role in the financing of the Susitna-

Watana project either through state credit or a capital commitment.

Cons: It is highly unlikely that the Alaska State Legislature would approve the entire $4.5 billion

in funding for this project via a grant or loan. It is also unlikely that constituents in Alaska

would support this measure. It appears unprecedented for a state to fully fund a

hydroelectric project of this magnitude.

Option3–UtilityonlyFunding

Utility-only funding is another funding scenario to consider. If the six Railbelt utilities

were able to come up with the funding that was needed on their own to build the Susitna-Watana

project, they wouldn’t have to rely on funding from any other sources.

BC Hydro is an example of a utility company that has been able to fund several major

hydropower projects on its own. The BC Hydro and Power Authority (BCHPA), most

commonly known as BC Hydro, is one of the largest Canadian utility companies located in the

province of British Columbia. “BC Hydro operates 30 hydroelectric facilities and three natural

gas-fueled thermal power plants. About 80% of the province's electricity is produced by major

hydroelectric generating stations on the Columbia and Peace rivers. BC Hydro generates

between 43,000 and 54,000 gigawatt hours (GWh) of electricity annually, depending on

prevailing water levels” (BC Hydro, 2011).


Pros: The benefits of a utility-only funding model is that the utilities would not be reliant on the

State of Alaska or the federal government, both having strong political underpinnings and

related uncertainties, for financial support. Moving forward as a utility-only independent

body may possibly allow them to move up the timeline for permitting and constructing the

project.

Cons: It is highly unlikely that the Railbelt utilities would be able to fund a project of this size.

According to Joe Griffith, the President of the Alaska Railbelt Cooperative Transmission

and Energy Company, the Railbelt utilities could only shoulder about 25 percent of the

$4.5 to $5 Billion projected cost of the project (Griffith, 2011). The utilities only have

about one billion dollars of combined debt capacity (which is their ability to borrow

funds) and, because of this, even coming up with the 25 percent for this project could be

stretching their financial limits (Fisher-Goad, 2011).

Option4–PrivateInvestoronlyFunding

Private investor funding is another option to look at with the Susitna-Watana project. For

this to work, enough private investors would have to be obtained to come up with the initial

funding for the project, and once the project is completed a large share of the revenue received

from the project would go back to these private investors for a specified time period. During the

construction period and until their investment is paid off the private investors would own the

project. Once the project is complete and the private investors had been paid in full, ownership of

the project could be sold the public utilities. In this way, “the public sector also gets full

ownership of a relatively new hydro facility at the end of the concession period” (Devernay,

2008).


An example of a large hydro project being partly funded through private investors can be

seen in the Kárahnjúkar Hydropower Project that was built in Iceland. Alcoa, Inc., one of the

world’s largest producers of aluminum, funded this hydroelectric plant. One of the reasons

Alcoa Inc. invested in the project is because it needed a large amount of the energy that it would

produce for its aluminum smelter.

Pros: If private investors are involved in the funding, there will likely be a larger interest in

keeping the project cost down. “There is some concern in today’s world about the checks

and balances. Cost overruns are a huge issue. By including private investment, you can

shift some of the project risk to the developer” (Pawlowski, 2011).

Cons: The likelihood of being able to find enough private investors to fund a project of this size

is not very good. Also, and more importantly, the cost of power per kWh (kilowatt-hour)

would be higher if the funding all came from private investors than it would if the funding

came from the state or federal government because it would have to be repaid in a quicker

time frame and at a higher interest level.

Even though a private investor-only funding scenario may not prove economically

feasible, it should not exclude the potential for some combination of private, utility and

state/federal funding. For example: “If utilities could do the project on their own at the cost of

12 cents a kWh and the state could do the project on its own at the cost of eight cents a kWh; if

we could use private investors and do it at the cost of 10 cents a kWh, this could be a good way

to go” (Fisher-Goad).

Option5–FederalonlyFunding

In President Obama’s State of the Union address in January 2011, he stated: “I challenge

you to join me in setting a new goal: By 2035, 80 percent of America's electricity will come from


clean energy sources” (ABC News, 2011). With this thought in mind, federal-only funding for

the Susitna-Watana hydroelectric project would not only be an excellent way for the federal

government to help move the state of Alaska down the right path, it would also show how

serious the Administration is about meeting its 80 percent clean energy goal.

Federal funding for the project could be done in several ways. Part of it could be funded

through Clean Energy Renewable Bonds (CREBs), a federal loan program for renewable energy

projects. “CREBs are issued, theoretically, with a 0% interest rate. The borrower only pays

back the principal of the bond, and the bondholder receives federal tax credits in lieu of the

traditional bond interest” (Energy.gov, 2011). Even though the Railbelt utilities would have to

pay back this funding, the fact that it is an interest-free loan would make it much easier to repay

over a long period of time.

Another possible way that part of the project could be funded is through grants from the

Department of Energy (DOE) and the Department of the Interior (DOI). These two departments

recently announced $26.6 million in funding available for hydropower projects. U.S. Energy

Secretary Steven Chu stated, “By improving hydropower technology, we can maximize

America’s biggest source of renewable energy in an environmentally responsible way” (United

Press International, 2011). By investing in a project of this size, the knowledge and insight that

would be gained through the advanced hydropower technology used could assist and encourage

other states with their research and decision making process for clean energy sources.

Recently, nine U.S. Senators, including Senator Lisa Murkowski (R-Alaska), co-

sponsored the introduction of the Hydropower Improvement Act of 2011. “The bill seeks to

substantially increase the capacity and generation of our clean, renewable hydropower resources

that will improve environmental quality and support local job creation and economic investment

across the nation” (U.S. Senate Committee on Energy and Natural Resources, 2011). If this bill

is passed, it could open up some additional resources for hydropower research and development.


Pros: As mentioned above, this would be a way for the federal government to promote its new

goal of getting 80 percent of U.S. energy from clean energy by 2035. Since most of the

funding would probably come from zero percent or low interest loans, the federal

government would be paid back most of the funds that it invests in the project.

Another benefit to this would be the fact that the utilities could conceivably pass

the savings that would be gained by using federal financing for the project along to their

customers in the form of lower electric rates. As Sara Fisher-Goad, the Executive

Director of the Alaska Energy Authority states, “Our goal is to help ensure that Alaskans

have the most reasonably priced electric power possible” (Fisher-Goad, 2011).

Cons: It is extremely unlikely that the federal government would agree to fund the entire $4.5

billion that is needed for this project. The state of the U.S. economy and the increasing

national debt makes the possibility of obtaining Federal funds for a hydro project of this

magnitude highly improbable. Also, due to the fact that there is a two-county rule

financing mechanism which states that any project that effects two counties or more can’t

sell tax exempt bonds (Fisher-Goad, 2011), the six Railbelt utilities would not be able to

utilize this method to fund the project unless Alaska can seek federal legislation to allow it

to be exempt from the two-county rule.

RecommendationsandConclusion

As Joe Griffith, President of the Alaska Railbelt Cooperative Transmission and Energy

Company, stated of the Susitna-Watana project, “Number one: the utilities themselves cannot

fund it. Number two: The State won’t finance the entire project. It was somewhere in the

middle that we achieved the Bradley Lake financing model.” It is for this reason articulated by

Griffith that we recommend a scenario with similar characteristics as the Bradley Lake


Hydroelectric Project funding model in that it contains a mix of state support and utility funding.

That being said, we highly encourage use of federal funding if available. Federal funding in the

form of a grant or a zero-interest renewable energy project loan, could provide a an economically

viable form of capital. Private funding should be considered if the desired cost of power could

still be attained.

Our recommendation, which was substantiated by our interview with Joe Griffith and an

extensive literature review, is for the State to fund 75 percent of the project and the utilities to

fund the remaining 25 percent. As mentioned, the Bradley Lake Model was approximately a

50/50 split. However, given the risk factors with Susitna-Watana, a 75/25 option is more

probable.

As pointed out in AEA’s 2010 evaluation, “Government participation is normally

required because of the following risks generally associated with large hydroelectric projects

make project financing unattainable:

• Timeline: Project may take 10-20 years prior to first power sales. Private investors do

not like to spend substantial funds for an extended time when the payoff is a long

time or may now occur.

• Licensing and Permitting Risk: Significant funds can be spent only for the project

to have long delays in licensing and in operation constraints placed on project.

• Construction Risk: Estimating the cost of a project many years out has risk of the

prices changing for materials and labor. In addition, the demand for a product can

change.”

It is our belief that without this level of state funding, the project is unattainable. The

cheapest source of capital for the project would be a State grant. However, it is unlikely the

State will provide a grant. Therefore, a State loan is recommended. An SNW 2010 report points


out that, “State funding in the form of a loan has three significant advantages when compared to

revenue bonds or a loan from a commercial lender:

• Repayment flexibility. State funding can be utilized to extend debt repayment

beyond the terms available in the public or commercial debt capital markets.

Additionally, a State loan can easily be restructured or deferred to achieve system rate

objectives.

• Credit support/risk mitigation. State funding can be used to mitigate project

construction risk to investors. This is particularly relevant for projects with extended

construction timelines, such as the Susitna project. Risk mitigation is also relevant in

situations where permitting is an issue or new technology is being used. As discussed

earlier, investors will not accept the significant construction and permitting risks

inherent with large-scale projects without some form of support from the State.

• Potential interest cost benefit. State funding can provide a lower cost source of

capital. The State’s high investment grade credit rating allows it to borrow for less

than even the most secure utility enterprise, and this lower borrowing cost can be

passed on to the project. Alternatively, the State can use cash reserves to invest in a

large-scale generation project like Susitna. By using a funding model similar to

Bradley Lake’s, this capital investment can be returned to the State over an extended

period of time. Extending the return of capital to a term that more closely matches the

useful life of the asset lowers the rates and charges for utility customers and spreads

the capital cost of the project over a larger customer base.”

One idea on the table is Senator Lesil McGuire’s (R-Anchorage) “ASSETS” (Alaska’s

Sustainable Strategy for Energy Transmission and Supply) funding legislation, which “is based

on the concept of having the State borrowing from itself, thereby keeping investment benefits


and financing costs for Alaska projects in Alaska. Under the ASSETS proposal, the entity

developing the project—the Alaska Energy Authority—would borrow funds from the Alaska

Industrial Development and Export Authority. For example: rather than borrow $2.5B at 6%,

why not borrow $3B at 3%?” (Michael “Fish” Pawlowski, 2011).

If the utilities must find financing through other sources besides the State, they should

(potentially in conjunction with AEA) consider financing their share through the sale of fixed-

price bonds or via a loan from a utility-specific lending institution such as the National Rural

Utilities Cooperative Finance Corporation (CFC) out of Arlington, VA or CoBank out of

Denver, CO. Fixed-price bonds are encouraged given current market conditions. The “moral

obligation of the State,” is a term coined by the Railbelt utilities during the Bradley Lake

financing to provide bankers with confidence that the State of Alaska would stand behind the

utilities, might also have to be leveraged as extra assurance to secure financing.

A purchase power agreement will also have to be negotiated. It is our recommendation

that the purchase power agreement be set up like the Bradley Lake purchase power agreement.

The purchase power agreement should specify that utilities are allowed to repay the State after

they repay their bond.

In conclusion, as Pawlowski stated, “There are lots of opportunities to be creative

funding a project of this size.”


References

ABC News. (2011). “State of the Union 2011: President Obama’s Full Speech”. Retrieved on

March 23, 2011 from http://abcnews.go.com/ad/gmaintroad.html?goback=http://abcnews.go.com/Politics/State_of_the_Union/state-of-the-union-2011-full-transcript/story?id=12759395

Alaska Energy Authority (AEA) (2010). Railbelt Large Hydro Evaluation: Preliminary Decision

Document. November 23, 2010. Alaska Energy Authority (AEA). (2011). Retrieved March 20 from

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AppendixA:JoeGriffithInterview

Interviewee: Joe Griffith, General Manager, Matanuska Electric Association; President of the

Alaska Railbelt Cooperative Transmission and Energy Company; and member of the Bradley

Lake Hydro Project finance committee

Interviewers: Amy Wisco and Crystal Enkvist, UAA MPA students

Date: March 25, 2011, 2:30 pm

Are the Railbelt utilities willing to contribute to funding Susitna? If so, how much? If not, why not? Yes, the Railbelt utilities—10 to 12 years downstream—will strongly consider it if the bus bar power is around 10-12 cents per kilowatt hour. The utilities could carry that if the price of the project is still at $5 billion. The utilities could shoulder 25 percent of that.

Bradley Lake power is currently at 4 cents per kilowatt hour. The State provided a grant and the utilities committed to paying debt service on the project for 20 plus years. After the debt services, the utilities continue to pay so the State can recoup its investment. The Alaska Energy Authority took out debt and the utilities agreed to pay it back over the long term. The state funded approximately half--$165 million—of the project and the utilities continue to pay back the State after the debt service has been paid. The financial deal for the project would not have happened if the State did not put up the grant. When we were putting the Bradley Lake deal together in New York City, the bankers asked us flat out why they should finance the project. It was then that the utilities came up with the term “moral obligation of the State” and we convinced them that the State would stand behind us. It worked, and you will see that term used again in the recent documents on financing Susitna. Do you think coming up with purchase power agreements will be a problem? No, the utilities will take a pledge via precedent agreements. A precedent agreement is a protocol for a future agreement. It contains a set of criteria that must be achieved if the parties are to agree. You see it commonly used with power companies and in the oil and gas industry.

What would be the “best case scenario” funding formula for the Susitna-Watana Project? The Bradley Lake funding model. I think the whole model will work—the State offering a partial grant and the utilities carrying some of the debt with the State standing behind it. Number one: the utilities themselves cannot fund it. Number two: The State won’t finance the entire project. It was somewhere in the middle that we achieved the Bradley Lake financing model. How much, if any, do you think can be obtained from the federal government?


Not much. Some of the Railbelt utilities may be able to tap into USDA Rural Utilities Service (RUS) funding. Most likely, the funding will come from the two lenders who specialize in the electric utilities market—the National Rural Utilities Cooperative Finance Corporation (CFC) out of Arlington, VA or CoBank out of Denver, CO. And, there may be some RUS funding. Most assuredly, CFC and CoBank both want a piece of the action. Are there other things we should consider? Financing costs (interest and depreciation) will be part of the operations.

Also, don’t forget that the transmission aspect is a part of it. In fact, it is approximately $1 billion on top of the $5 million for Susitna-Watana. (He explained that there needs to be a transmission line from the project to the utilities and it needs to include additional lines in order to have a radial system. A radial system is a “looped” system and this ensures greater reliability in electric power deliverability because if one line goes down you have another line with which to transmit power.)

You may recall that the State of Alaska in 1984 built and paid for the large transmission line that runs from Willow to Healy. This is known as the Anchorage – Fairbanks Intertie and the State did this project because it was simply the right thing to do. The State must continue to invest in infrastructure. Do I see that happening this time around? Probably not, but I do believe it’s the right thing to do. How could it (the transmission system) be funded if the State doesn’t do it? If necessary, it could be paid for by the wheeling charges utilities pay each other to run power through the lines. This is commonly done in the Lower 48.


AppendixB:SaraFisherGoadInterview Interviewee: Sara Fisher-Goad, Executive Director, Alaska Energy Authority

Interviewers: Crystal Enkvist, Barbara Mongar, and Nakita Mongar, UAA MPA Students

Date: March 31, 2011, 5:30 pm

What would be the “best case scenario” funding formula for the Susitna-Watana Project? The Bradley Lake Hydro funding model is a good starting point (for financing and project management), where the state puts in half the funds and the utilities put in half the funds and then the utilities would have a 20-year repayment obligation to the state. The problem is that the Susitna-Watana Project is much bigger than the Bradley Lake Hydro Project. If you figure that the project will cost around 4.5 Billion dollars, while the state might still be able to put up half of the funds, utilities only have 1 billion dollars of debt capacity (which is their ability to borrow funds). For this reason, we might not be able to follow the Bradley Lake Hydro Project model with this project. The utilities only have about $1 billion in debt capacity. Your group should look at the IRP which will have the utilities debt capacity in it. Private Investors: We (Alaska Energy Authority) will have to be able to answer the question of: Where would private investments fit into this? We should look at project funding models from the Lower 48 that have used private investors. The BC Hydro Project might be a good one to look at. For example: If utilities could do the project on their own at the cost of 12 cents a KWH and the state could do the project on their own at the cost of 8 cents a KWH; if we could use private investors and do it at the cost of 10 cents a KWH, would this be a good way to go. Our goal is to help ensure that Alaskans have the most reasonably priced electric power possible. Where will the State money come from? General Fund dollars What about transmission? Joe Griffith said that’s a part of the project we ought not to ignore. It may be hard to get private investors and even debt financing for interties. With the Anchorage-Fairbanks Interties, that was all State funded. I am skeptical the State would do that again in this case. It will have to be with the help of the state and federal government and maybe some low-interest loans. Maybe we can sell tax-exempt bonds—ML&P, as a municipal entity, might be able to do that. How much do you think can be obtained from the federal government? We have no assumptions of any federal money. There is a two-county rule financing mechanism which states that any projects that effects two counties or more can’t sell tax exempt bonds so we won’t be able to take advantage of tax exempt bonds like they did in the Bradley Lake model. We could seek legislation to allow us to use tax exempt bonds but with the state of the federal budget and the national debt, it might not be approved. The federal government might be able to help us obtain low cost or low interest loans.


AppendixC:MikePawlowskiInterview Interviewee: Mike Pawlowski2, Legislative Aide, Senator Lesil McGuire

Interviewers: Amy Wisco and Crystal Enkvist, UAA MPA students

Date: April 6, 2011, 2:00 pm

When you are looking at the State’s involvement, you need to consider: What is the potential cash flow to the State? And take a look at the “Energy Pathway” report produced by the Alaska Energy Authority, and ask: What is the appetite for the pie?

If you said that 15-20% of the State’s capital budgets should go to energy projects and then look at regional energy demands, you get a sense of what might be out there for State dollars.

Susitna could be funded on a phasing basis. Given the scale of our budget and our cash flows for the state and seeing what kind of excess revenue (according to the Governor’s 10 year plan in OMB), with modest increases in spending we end up in 2021 with $37B in liquid assets in the Constitutional Budget Reserve. It is not out of the realm of possibility.

With the Bradley Lake Project, 50% was funded by a zero-interest deferred loan. It was the State’s equity share with a deferred return.

Senator McGuire’s ASSETS funding legislation is based on the concept of having the State borrowing from itself, thereby keeping investment benefits and financing costs for Alaska projects in Alaska. Under the ASSETS proposal, the entity developing the project—the Alaska Energy Authority—would borrow funds from the Alaska Industrial Development and Export Authority. For example: rather than borrow $2.5B at 6%, why not borrow $3B at 3%? (This was an example he gave.) If you look at the State’s portfolio and liquid assets, which are invested in stocks and bonds, you do a comparative rate of return.

The real issue is the cost of power. With how you fund the fund the project that size, there are a lot of opportunities to be creative. Instead of 50-50 split, why not a 20-40-40 split? It is worth looking at the P3 model (private investor). The Kárahnjúkar Hydropower Project3 in Iceland is the most recently built large hydro project in an Organization for Economic Co-operation and Development (OECD) member country. Alcoa was taking 70% of the power for this project. In this case, you had the customers keeping an eye on the construction. There is some concern in today’s world about the checks and balances. Cost overruns are a huge issue. By including private investment, you can shift some of the project risk to the developer.

2 Michael Pawlowski graduated from Alaska Pacific University in 2001 with a B.A. in Liberal Arts. He has worked as Chief of Staff and Legislative Aide to Alaska State Representatives. In 2004 he was project manager for the Alaska Natural Gas Development. He was co-sponsor of the Student Initiative for Renewable Energy Now (SIREN), passed by the University of Alaska Fairbanks student body in April of 2009. Currently he is an MA student in the Northern Studies Program at UAF. 3 Kárahnjúkar Hydropower Project is a hydroelectricity plant in eastern Iceland designed to produce 4,600 GWh annually for Alcoa's Fjardaál aluminum smelter.


Acknowledgements We would like to thank the following individuals for contributing their expertise to this project:

Sara Fisher-Goad, Executive Director, Alaska Energy Authority

Joe Griffith, President, Alaska Railbelt Cooperative Transmission and Electric Company, and General Manager of Matanuska Electric Association

Eric Marchegiani, P.E., Field Representative for Alaska, U.S.D.A. Rural Utilities Service Program

Michael “Fish” Pawlowski, Legislative Aide to Senator Lesil McGuire, and a graduate student in the University of Alaska Fairbanks Northern Studies Program

potential funding options for the susitnawatana ...faculty.cbpp.uaa.alaska.edu/afgjp/padm628 spring...

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