“Alaska’s Challenge of Cash & Energy Shortage: Part I”
Additional references and historical background In “Alaska LNG Challenges”
First, there is the Challenge of Cash Shortage.
In the early 1980s, Alaska was feeling its oats.
|Second, there is the Challenge of Energy Shortage, which we shall more fully address tomorrow in Part II, and it involves gas pipelines, distribution systems, state funded project competition and more….
To begin that discussion, below is a letter from one of a number of good, long-time Fairbanks friends, Buzz Otis (NGP Photo), and my initial response. In Part II we will examine a State Energy Shortage issue in more detail and provide what we hope are useful questions for decision makers to answer in their quest for solutions. Read more….
Elected officials were sitting on a cash dowry created by a decade of about a dozen tax increases levied on Alaska’s infant oil industry.
The tax increases were primarily aimed at the unbelievably productive Prudhoe Bay oil field — a 2 million barrel per day elephant field, the largest in North America.
But concerned citizens throughout the state were not unaware of this new phenomenon and where it might end if not properly handled.
State leaders and the citizens had in 1976 created the Alaska Permanent Fund in partial response to the question of, “What if we encountered a rainy day”. Since that time the fund has been largely thought of as a source of annual payments to Alaska citizens of a Permanent Fund Dividend rather than a rainy day fund. The thought of actually using it for the purpose it was created — to fund government operations on a “rainy day” — is an anathema to most citizen beneficiaries and their elected representatives.
In the early 1980s a number of business, social, academic and political leaders from all regions of the state assembled for the most important forum of that day, called “The Challenge of Plenty”. There citizens discussed the possibility of a constitutional amendment to control spending based on a population growth/CPI formula, and other ways of wisely preparing for the future.
Your writer played a role in organizing that conference and it was truly heartwarming to see all political parties and regions of Alaska participate courteously, collegially and in a true spirit of joint problem solving.
Suffice to say that while the highly cooperative leaders agreed upon the problem and potential solutions, they were never able to obtain legislation as the group recommended (i.e. though there was a constitutional spending limit effort in the early 90s which fatally eliminated or diluted the most critical provisions; and another effort by a minority of far-thinking legislators in the late 1990s.)
|While Challenge of Plenty participants were highly concerned about unsustainable state spending, they also focused on the Federal Government’s actions since statehood to steadily remove from the reach of citizens, access to resources on federal lands — best illustrated by passage of the Alaska National Interest Lands Conservation Act.
A series of federal governments also succeeded in using various environmental Acts of Congress (i.e. ESA, CWA, CAA, NEPA, etc.) to restrict reasonable and traditional multiple use — and wealth production — on federal lands as well as reasonable ownership activity on private land.
Readers can thus appreciate how Alaskans have been caught between the charybdis of over spending and scylla of shrinking opportunity for natural resource revenue generation. -dh
Like Joseph of old interpreting the Pharaoh’s dream to compel saving during years of plenty for the coming years of drought and famine, Alaska’s political leaders were not unaware of the challenge. Like Pharaoh, they created a “Joseph”–the Alaska Permanent Fund–so savings during good times could allow for a sustainable economy during the lean years coming.
But the constantly changing demographic profile of voters and elected officials could not enforce management of the savings in modern times as the dictator, Pharaoh did in his era.
The University of Alaska-Anchorage’s 50-year-old Institute of Social and Economic Research (ISER) has studied the importance of a “safe landing” for Alaska’s economy and the discipline required to make that happen. Professor Scott Goldsmith (NGP Photo) has led this effort for over two decades, issuing “Fiscal Policy Paper #1” on August 1, 1989. That first paper states what has now become a long term, perhaps economically fatal challenge: “Alaska faces a problem that will be very tough to solve but is easy to explain: state government is spending more than it collects.”
The challenge of sustainability has worsened over two and a half decades: for, as Prudhoe Bay production declined, spending never sufficiently declined to reach a sustainable equilibrium and, now, oil commodity prices (i.e. at half what they were last summer) are exacerbating the challenge for this highly oil-dependent state.
ISER’s most recent analysis of the situation shows how to obtain a sustainable glide path for the Alaskan economy, but so far elected officials have found it impossible to convert that wise counsel into sustainable reality. (Other Fiscal Policy Papers in archive here)
Alaska now has the greatest debt per capita of any state and the greatest per capita spending along with the greatest dependence on a volatile commodity and the most expensive oil and gas operating area in the country. Some have tried to make these facts the fault of an oil industry whose productivity has provided Alaska with the opportunity to make its own wise or unwise taxing, debt and spending decisions.
But state leaders are now seriously facing the cash shortage issue as a matter of imminent, not theoretical, danger. ISER has clearly demonstrated that the cash flow runs into default in a few years, without dramatic budgetary changes.
Furthermore, from a balance sheet viewpoint, the picture is somewhat more bleak when citizens realize that the unfunded state employee retirement fund is short just under $10 billion, balancing out a similar amount of non-Permanent Fund savings accounts acting as subsidies for annual operating budget deficits.
So, in effect, the day of reckoning is not a few years ‘down the pike’, but is here TODAY.
In Parts II and III (Scroll up), you will be considering whether increased state government debt (even AIDEA revenue bond debt) or use of depleted savings for a Fairbanks gas utility is either rational or necessary.
Email received yesterday, 2-1-15, from Buzz Otis, Fairbanks businessman and community volunteer:
On Feb 1, 2015, at 2:33 PM, Buzz Otis <buzz@xxxxx> wrote:
Morning Dave, I wrote this late last night…. Any suggestions are welcome. With respect, Buzz
Good evening Dave,
|(Answering Buzz’s email, received yesterday. How can anyone with a heart not be drawn to his heartfelt and articulate description of Fairbanks’ Energy Challenge? Tomorrow, we’ll go into much more detail, in Part II.)
You’ve written a thoughtful, compelling piece. Thank you for sharing it with me. I will run your message Monday.
As a former regulator I try to look at all sides of issues like this and believe my best role is to help educate fellow citizens without becoming an advocate or project opponent before all the facts are known.
I also urge you and our very smart mutual and respected friends there to think strategically about the long term, and answer to your satisfaction every possible question–including those both identified and inferred in the News Miner article. I’ll try to help by providing some of my own questions in Part II, tomorrow.
I will make two more observations to you and my Golden Heart friends.
1. I completely understand the gravity of the situation. We agree that where possible the private sector is best equipped to respond to economic supply and demand issues. While Alaska has many examples of failed government projects, it also has a number of public facility projects that are in the public interest. Bradley Lake Hydro, certain roads and bridges come to mind–although a stable energy supply project like hydro is hard to compare to an energy supply governed by commodity pricing and variable costs subject to regulatory ‘cost of service’ reviews.
2. The trick for those requiring (and may I even say, “desperately needing”) a successful Interior energy project not fully appreciated by private investors, is to make sure government applies the same due diligence discipline as you would apply to a new company project before you stake family and company money on it. The questions the News Miner and I and others have raised seem mostly like simple due diligence questions to me. They are the type of questions your banker might ask you about your proposed project. And, they are the type of questions th which the Governor and Legislature will likely wrestle as the initial and continuing due diligence phase begins.
That said, we all agree Fairbanks is in dire need of an efficient energy remedy. Many would also agree that the solution could merit government assistance. In support of these propositions, it might be helpful if:
1. Project advocates approached all questions and concerns as you have: eagerly, positively and non defensively. Successfully doing one’s homework, cheerfully and knowledgeably answering all concerns would avoid conflict and best prepare for statewide consensus. Having the other party’s (Hilcorp’s) concerns quickly addressed are probably also in Fairbanks’ interest due to that company’s significant investment in production that supplies gas (for both heating and power generation) to both South Central and to Interior Alaska consumers in household, business and commercial sectors.
2. As questions are answered, it might be well to encourage public forums — not for the purpose of beating the drums for or against the project–but for the purpose of helpfully answering all reasonable questions and concerns.
I join others who would love to see Fairbanks’ longstanding energy needs responsibly met, quickly. If it is wholly or partly done with public funds, I am sure Fairbanks would agree that those in charge of turning the dream into reality will best encounter public consensus when they’ve done sufficient due diligence to face the public confidently, with well studied answers.
Since the due diligence stage is not complete, it would be to everyone’s advantage if the questions that are answerable at this early date — and future mileposts — are timely addressed.
Sent from my iPhone
I do hope this finds you and your family well. I appreciate your correspondence on a regular basis and yesterday’s article that the state of Alaska, through AIDEA would purchase Pentex Alaska Natural Gas Company, LLC and its assets which include Fairbanks Natural Gas for 52.5 million.
I would like to applaud Governor Walker for taking such bold and quick action to address interior Alaska’s energy needs. Being a private businessman in the interior since 1976, this may come as a surprise to my friends and colleagues, so I will attempt to explain my position in the hopes that you and others can understand the strangle hold we have had on our economic neck with the outrageous costs of energy here in Fairbanks and the surrounding area.
First of all, I am a staunch private enterprise advocate and will continue to fight for the freedom that private enterprise gives to so many Americans until the good Lord decides it is my time to leave here. I have been proactive over the years, encouraging various plans, through my involvement in the Fairbanks Chamber, Fairbanks and North Pole Economic Development Corporations, and the Support Industry Alliance, that promised to lower the cost of energy in Alaska and particularly Fairbanks, to no avail.
When I worked on the Alyeska Pipeline in 1975 we were told the next big project was a gas line that would surely start within a year or two of the oil lines completion.
I remember many gas line projects starting and stopping as you have. I remember when Ray Latchem came to Fairbanks with Fairbanks Natural Gas, I remember touring Point McKenzie with Ray and looking at his small plant there and him telling me how we were going to have lower energy costs in Fairbanks as a result, and we did. However, that only lasted a short while and as the economics of shipping small amounts of gas north by truck, gas contracts renegotiated out of Cook Inlet, and the cost of doing business always having an upward bias, plus wanting to maximize profitability, our natural gas prices came up to par with fuel oil.
In the Fairbanks area, we are heating our homes 7 to 8 months out of the year. Up until recently, we were paying close to $4.00 per gallon for # 2 heating oil. Even today with the price of crude dropping 50 to 60 % our price of heating oil only dropped 25 to 30 %.
As a result, folks here are burning wood, coal, or pellets trying to make it by. Many of our residents are using state of the art wood or coal burning stoves or boilers, with clean dry fuel. Others aren’t doing that. Many oil fired boilers aren’t tuned correctly which when added together, and coupled with our geography, it puts Fairbanks and North Pole air quality out of compliance with EPA on certain days throughout the winter. Not particularly attractive for business or personal health.
I remember Bill Popp, at ADEC, telling me a few years ago that he likes to see a prosperous Fairbanks because it is great for Anchorage’s economy, after all, just about everything that comes to Fairbanks comes through the port of Anchorage! Bill Popp gets it!
* * *
Dave, on top of the high cost of fuel can you believe the cost of electricity for my small commercial buildings is over .21 per kilowatt hour?!
Unfortunately, private enterprise hasn’t delivered low cost energy to Fairbanks! Our energy costs are some of the highest in the nation. It is costing us economic opportunity and causing people to leave our community! We have a US Air Force base that we have had to fight to keep open on two separate occasions, in the past 7 years. Even though we enjoy an extremely strategic location, the military costs are driven by outrageous energy prices. Next month we will be doing our best to keep our Army troops here. I can’t help but believe that if we enjoyed low cost energy like our neighbors to the south we would be in a better position to grow business here.
Our past and present legislative members and past governors, many of which question Governor Walkers intentions, when he put forward the proposal to have AIDEA purchase Fairbanks Natural Gas, are the same individuals that have insisted that every barrel of crude oil is monetized, rather than using some of our royalty oil to ensure economic stability in Alaska. Fairbanks has a crude oil line and until recently had two refineries in North Pole and we pay some of the highest energy prices? Just think what a lower cost of refined product, done through proper negotiations with the refiners, could do for our industry here. Marginal projects become viable. Citizens have disposal income to spend elsewhere! Abundance and positivity would be on every business person’s tongue!
To sum up we need low cost natural gas to fuel our homes, businesses, schools, mines, and military installations while providing a lower cost for electrical generation. PRIVATE ENTERPRISE HAS NOT PROVIDED LOW COST ENERGY! WE CAN’T WAIT ANY LONGER Personally, I have built energy efficient buildings, burn coal at one facility and burn wood in my home and in my shop. These buildings also have oil backup for security. Without energy efficient buildings and burning alternative fuel sources our bottom line would be negligible.
This is no time to divide and conquer. We need your support. Please consider helping Interior Alaska find its way out of these high energy costs and support a more timely solution. I believe the only way forward in a timely manner, if at all, is with state participation. We don’t have such a fiscal crisis that we can’t invest in the future of Alaska. Please find a way to support the governor.