July 5, 2013 | Volume 43, Number 26

Money issues sank Connelly Lake plans

Difficulty securing funding from the state-operated Alaska Energy Authority appears to have been the key factor in Alaska Power and Telephone’s decision to abandon permitting for the Connelly Lake hydro project.

The scale and cost of the project – including a plan to sell excess power to cruise ships – hurt state funding opportunities, according to recent interviews with state and utility officials.

For the past two years, AP&T’s application to the AEA’s Renewable Energy Fund scored too low to qualify for money the utility needed to pursue federal permits for Connelly Lake, said Glen Martin, AP&T’s project manager.

Without funding, the utility couldn’t organize and hold agency and public meetings, provide a draft study plan for review to determine what additional studies are needed, conduct those studies, engineer the project and comply with paperwork, Martin said

“Knowing that we cannot make the kind of progress expected in the near future, there was no reason to hang onto the permit and keep all the agencies, including (the Federal Energy Regulatory Commission), occupied with this project when nothing is really happening,” Martin said.

Failure to provide information and complete tasks associated with previous grant funding – and particularly an economic feasibility report – contributed to the AEA’s low scoring of Connelly Lake the past two years, according to AEA officials.

  Sean Skaling, AEA’s deputy director for alternative energy and energy efficiency, said the feasibility report would have used a model to determine economic viability, including what customers would pay in the long- and short-term.

The company was awarded $468,000 from AEA in 2011, money the utility used partly for environmental studies instead of a required economic feasibility study.  

  “We’re still waiting to hear back about the funding that had been provided, where they got almost a half-million dollars for the technical and economic feasibility studies. But in the subsequent applications (for 2012 and 2013), there was still no response on the economic feasibility,” said Gene Therriault, AEA’s deputy director for statewide energy policy development.

  “That component had not been completed. From AEA’s perspective, that was a critical component,” Therriault said.

Skaling said the AEA is still in communications with AP&T to get a completed economic feasibility study, in case the project is pursued again. “In our minds a feasibility report is still part of the grant and is expected,” Skaling said.

  AP&T recently surrendered its Federal Energy Regulatory Commission (FERC) permit for the Connelly Lake project, citing a lack of existing demand, waning public support and inadequate funding.

  Therriault said the company requested several changes in the grant’s scope after receiving the 2011 funding, some of which were approved. Others were denied, including a request to have money devoted to exploring the economics of the project diverted to environmental studies.

AP&T president Bob Grimm said AEA has refused to reimburse the company for about $90,000 worth of environmental studies it conducted for Connelly Lake.

  The project also ranked low compared to other statewide projects because of AP&T’s intention to use energy generated by the Connelly project to power cruise ships, Therriault said.

“We have all of these needs across the state and saying you’re going to provide this out-of-state industrial group doesn’t get you a lot of points in terms of meeting basic energy needs for Alaska residents,” Therriault said.

  The cost of the project, which AP&T estimated at $50 million, also was prohibitive of additional funding, as the expensive up-front costs are passed on to ratepayers, Therriault said.

Because existing demand for hydropower is not substantially exceeding supply, building a hydro project at Connelly Lake and flooding the region with excess energy would only drive rates up, Therriault said.

  “You might have to turn on the diesel generators from time to time, but if you bring on a new dam, there’s going to be cost associated with that, even if it gets some state grants and state loans... If you’re meeting all your demands with hydro and you make more hydro, you don’t have the customer demand. You have to be careful that you don’t build infrastructure that actually drives peoples’ rates up,” he said.

The project also ranked low – about 9 points out of a possible 35 – in the “cost of energy” category, which awards more points to projects located in areas already paying exorbitant rates. As the cost of power in Haines is relatively low – about 18 cents per kilowatt/hour after power cost equalization (PCE) is factored in – other projects receive priority, Skaling said.

Although AP&T cited a lack of public support as a reason for the project’s temporary abandonment, the company received all five points on the AEA’s scoring chart for “local support.”

Even if the project had ranked poorly in the support category, such a rating wouldn’t have precluded AEA funding, Therriault said. “It doesn’t necessarily make or break a project in terms of how it ranks on the list,” he said.

Skaling also referred to the category as “bonus points,” which don’t amount to much in terms of funding consideration.

AP&T’s Martin said the AEA’s process is flawed because it uses a report, called the Southeast Alaska Integrated Research Study (SEIRP), to evaluate projects. Using the report to evaluate hydro projects “does not provide a fair and balanced evaluation tool, because it is poorly written and should not be utilized in the evaluation process,” Martin said.

Both Therriault and Skaling said Martin is likely overestimating the impact of the research study, which generally pointed to biomass as a more promising avenue for the region than hydropower. Skaling, who evaluated all the projects during this round of AEA funding, said the report “didn’t even enter the picture.”

“That, in my mind, wasn’t anything that was used. Each project was looked at individually (on its own merits),” Skaling said.

Martin said last week the company may seek an investment partner in lieu of grant funding from AEA.

Martin said the company had hoped the Haines Borough would be interested in this solution – as municipalities can sell bonds and access no-interest loans – but the borough has been unenthusiastic.

  FERC requires applicants to show adequate progress on projects by filing reports every six months, to ensure the applicant will be ready to file for licensing at the end of the three-year permit period. The company had complied with the agency’s schedule, said Jennifer Hill, chief of hydropower licensing for FERC’s Northwest division.

  In August 2012, the agency told AP&T it needed to obtain permission to conduct ground-disturbing studies in the Alaska Chilkat Bald Eagle Preserve before FERC would consider moving forward, which it did, Hill said.

  “They did get permission to do studies in the preserve. I don’t remember any hindrances from our end,” Hill said of the company’s recent decision to drop the project.

However, Martin said due to the Alaska Energy Authority’s decision not to fund the project this year, AP&T anticipated it would not be able to keep up in the future.

  Martin maintains that his company is not abandoning the project altogether, but waiting for increased demand or public support before regrouping and reapplying for a FERC permit.