This legal document was submitted to an Alaskan court by Golden Valley Electric Association in support of its case against the Alaska Industrial Development & Export Authority. GVEA filed suit against AIDEA in May of 1998 over problems with the Healy 2 coal plant. By early 2009 litigation between the parties was still pending.
Origins of the HCCP Project
1. The Healy Clean Coal Project (“HCCP”) grew out of the US Department of Energy (“DOE”) Clean Coal Technology Demonstration Program which encouraged development of new technologies to foster secure and reliable energy from coal combustion that met environmental regulations and were economically competitive.
2. In 1989, Usibelli Coal Mine (“UCM”), in an attempt to expand its domestic market for coal produced from its Healy mines, applied to the program for funding for a coal drying facility. UCM’s original coal drying facility concept morphed over time into a full scale coal fired power plant. UCM and the Alaska Industrial Development and Export Authority (“AIDEA”) became
partners with AIDEA taking the lead in UCM’s request for DOE funding.
3. Golden Valley Electric Association (“GVEA”) was at that time operating a 25 megawatt coal fired plant in Healy (“Healy #1) that GVEA had constructed in 1967. It burned coal purchased from Usibelli and produced 33% of the power then used by GVEA’s customers.
4. As part of its DOE grant application, AIDEA assembled a team of engineers and equipment suppliers to design and supply the experimental equipment to the proposed project – Healy Clean Coal Project (“HCCP”). AIDEA approached GVEA to purchase HCCP’s output for transmission over the then existing intertie between Healy and GVEA’s customers in interior Alaska.
5. GVEA declined to purchase the power or be otherwise involved in the project because it had just been ordered by the Regulatory Commission of Alaska (“RCA”) (then known as the Alaska Public Utilities Commission), under the federal law known as “PURPA”, to enter into a contract whereby GVEA would purchase the output of a plant proposed to be built by an independent power producer, if and when the PURPA plant was actually built. GVEA also declined to be involved in the proposed experimental plant because GVEA needed to acquire a base load facility with steady, economical, long term reliable power.
6. AIDEA then shopped its proposal to sell HCCP’s output to the Anchorage based utilities. They were not interested because HCCP’s economics could not match the low cost of the electricity already being generated by the Anchorage area’s natural gas power plants. In fact GVEA was at that time purchasing power from those same gas power plants, and had been since 1984, at a price much lower than HCCP could sell its power.
7. Without a power purchaser and a long term power sales agreement, AIDEA had no viable business plan to operate HCCP and could not effectively issue bonds for the state’s portion of the costs. AIDEA needed to raise money to fund the state’s portion of the cost of HCCP. Even if AIDEA sold “general obligation” bonds, neither bond buyers nor the state legislature would provide funds for a project that didn’t have at least a perceived stream of income from power sales to be a source of repayment.
8. AIDEA therefore approached GVEA again and asked GVEA to purchase HCCP’s output. GVEA told AIDEA in no uncertain terms that, while it was interested in expanding its base load capacity because of GVEA’s future load growth projections, it had absolutely no interest in the experimental “clean coal” technology or in paying any price premium for the power from HCCP.
AIDEA and GVEA enter into a Power Sales Agreement and proceed to get approvals necessary to build HCCP
9. AIDEA worked with GVEA to mitigate GVEA’s concerns over the economics, reliability and safety of the experimental plant by contractually addressing each issue in the terms and conditions of a proposed Power Sales Agreement (“PSA”) between the parties. In the PSA, which was executed on December 6, 1991 and a number of ancillary and related agreements, AIDEA agreed to a price for HCCP’s power that would meet or beat the price of the Anchorage
based gas plants -- GVEA’s other principal options for its projected future base load capacity. In the PSA AIDEA fully assumed all risks of the successful operation of HCCP’s experimental technology.
10. HCCP would be built by AIDEA, who bore the entire risk of any cost overruns in design and construction. The technology demonstrations required by the federal DOE grant would be done by the scientists and engineers either from the DOE or those on AIDEA’s teams. All of the experimentation testing was to be completed during the plant’s “start up” period. After that was all done, HCCP was required to pass a 90 day reliability test. The test specifically agreed to in the PSA was to be rigid and strict, more so than was typically required in the power industry. The plant had to pass that test before GVEA was obligated to take over and run the plant or to purchase electricity from the plant. The PSA said that HCCP had to pass the test before December 31, 1999.
11. The rigid test requirement was insisted on by GVEA, and agreed to by AIDEA, because of HCCP’s remote location, severe working environment, sensitive regulatory restrictions and GVEA’s need that HCCP be a true base load facility and not a source of intermittent back-up power. GVEA insisted, and AIDEA agreed, that in the event the experimental technology caused the plant to fail the 90-day test, AIDEA’s project budget would include the full estimated costs to convert the experimental plant’s equipment to a conventional “low NOx” combustion burner technology. Further, the parties agreed that a “retrofit” to the conventional technology must be an explicit part of the permitting for HCCP that would have to be issued by the Alaska Department of Environmental Conservation (“DEC”) before HCCP could be built.
12. Not only did AIDEA agree to these two specific conditions regarding the retrofit, but AIDEA’s project budgets actually provided a separate line item for the costs of retrofit – right up until AIDEA’s financial management of the project began to spin out of control with huge cost overruns.
13. The inclusion of this specific budget item showed that AIDEA knew the conversion to low NOx burners was difficult and costly. It also shows that AIDEA fully understood and supported a retrofit if HCCP failed to pass its rigid commercial operating test.
14. In a similar fashion, the permitted emission levels for nitrogen oxides (“NOx”)
in the Alaska Department of Environmental Conservation (DEC) air permit were set at a level that would accommodate a retrofit of HCCP to low NOx burner technology.
15. With these agreements in hand and its concerns allayed, GVEA became an active participant, supporter and advocate for the development of the HCCP project.
16. The federal grant was approved in January 1991 and $120 million was committed by DOE to help fund design and construction. The Alaska legislature, looking at the whole project including the retrofit obligation and budget, appropriated $25 million to the project. AIDEA issued $85 million in bonds backed by the good faith of the State of Alaska to fund its obligations to HCCP.
17. The PSA committed GVEA to operate HCCP in a manner consistent with sound utility practices, to purchase coal and all of the other things necessary for operation, and to pay AIDEA $4.3 million per year, which AIDEA planned to use to repay the bonds it issued to fund the state’s portion of the construction.
18. Two sites were considered for HCCP. One was near Usibelli’s coal mine and the other was where the plant is now located -- immediately adjacent to GVEA’s Healy #1 plant. The present site was chosen by AIDEA. AIDEA expressed its conclusions that a true “combined operation” of both plants would almost necessarily result in fewer workers and was the only way that HCCP could be operated to achieve the lower cost power to GVEA that, in the PSA, AIDEA had promised to both GVEA and to the RCA in its
proceedings to secure RCA approval of GVEA entering into the PSA. A single plant manager, a single operations control room, a single coal pile and feeder system, a single water system, coordinated dispatch, all, along with a number of other unities, were anticipated by AIDEA to result in cost savings compared to operating two completely separate plants.
19. The resulting combination of the plants and their physical systems was only a
savings to AIDEA. The combination did not save GVEA anything because Healy #1 already had all of those systems in place. GVEA did not need AIDEA to build any of those systems for Healy #1 if HCCP had never been built.
20. GVEA’s Healy #1 had all necessary environmental permits to operate for the rest of its useful life. Before it could build and operate HCCP, AIDEA needed to secure discharge and emissions permits from DEC and the federal Environmental Protection Agency (EPA). This would typically entail a lengthy EIS process. AIDEA and GVEA determined that the most streamlined permitting strategy was for AIDEA to “piggyback” on GVEA’s permits by seeking to simply expand the limits of GVEA’s permitted discharges and emissions to accommodate the additional waste streams anticipated to be generated by HCCP.
21. The air permit was questioned by the National Park Service and some environmental groups. These challenges were withdrawn when concessions were made. AIDEA agreed to pay for some of these concessions, but all of them affected GVEA and its ability to operate Healy #1, making it more difficult and expensive. To assist AIDEA’s successful application, GVEA was required to install additional controls for the emissions of NOx and SO2. GVEA was also required to change the way Healy #1 was operated on an hour by hour basis. These changes ultimately required GVEA to buy and use TRONA to meet the SO2 standards at a cost of hundreds of thousands of dollars per year.
22. Based upon AIDEA’s assurances that HCCP would operate economically and otherwise in accordance with the provisions of the PSA (which provided GVEA would not be required by AIDEA to purchase power at uneconomical prices) the RCA approved GVEA entering into the PSA. It found that the PSA was in the best interest of interior Alaskan ratepayers. HCCP Construction and experimental technology testing
23. Because the project was being overseen by a governmental body, which had never developed or built a power plant before and because it was being built for any number of different purposes – science experiment, engineering product development and base load electricity plant -- management of the project understandably (but inexcusably) floundered and then almost collapsed.
24. HCCP’s burner and related technology was conceived by engineers who professed to have a developed technology that they simply needed to "scale up" from a laboratory size to a full power plant size. When the project was first started, the engineers planned to build an “intermediate step” in the “scale up” process. As part of another DOE grant, a boiler using the same technology, but significantly smaller than the 8 foot diameter boiler proposed to be installed in HCCP, was to be built in a project in Orange and Rockland, New York for testing purposes. The “intermediate step plant” was planned to be completed well before HCCP and was supposed to help in the development of HCCP’s final full size boiler design. This intermediate step boiler was never actually built. This change in the overall engineering plan and the
“jump” from laboratory size to a full sized boiler added substantially to AIDEA’s risk that HCCP’s technology would fail to operate as planned.
25. In the middle of the development, when the project budget began to climb seemingly out of control, AIDEA approached GVEA and Usibelli seeking “capital” contributions from them to allow HCCP to be completed. Rather than tell AIDEA to simply issue more bonds, GVEA agreed to use $7 million of its own dollars to help the complete the plant. GVEA did insist that all of the dollars it contributed must be used for required elements of the work that related directly to GVEA’s role in the project.
26. GVEA advised AIDEA that a “contribution to the general fund of the project” would have been contrary to the terms of the RCA’s approval of the PSA and beyond GVEA’s authority on behalf of its ratepayers, because it was very uncertain at that time whether HCCP would ever effectively operate as anything other than a science experiment. GVEA used its $7 million contribution to fund work that was required to be done at Healy #1 as part of completing the overall project. AIDEA gladly agreed to those conditions because the monies GVEA was contributing would have to have been paid in by AIDEA in any event to finish the job.
27. AIDEA continued with construction and completed HCCP sufficiently so that the scientists could begin to test the experimental technology beginning in mid 1998. While this testing was going on, AIDEA continued to try to get the construction of the plant finished.
28. During the engineers’ testing of the technology, and as each major system was verified and brought on, it became clear to GVEA that HCCP had no chance of actual commercial operation using the experimental technology within the time frame allowed in the PSA. In addition, the numerous uncontrolled “trips” HCCP suffered during this testing greatly impacted GVEA members both in the number and duration of power outages they were subject to. HCCP tripped off-line 79 times during its first year of operation. GVEA paid the costs of keeping its North Pole facilities in a state of “spinning reserve” to attempt to mitigate some of the effects of these outages. GVEA
was afraid that, contrary to the agreements AIDEA made in inducing GVEA to enter the transaction, AIDEA would use the funds, that had been specifically budgeted for the low NOx retrofit, to cover AIDEA’s costs of basic construction and engineering overruns pursuing the experimental technology.
Disputes arise between GVEA and AIDEA about the operation of HCCP
29. Because of that fear, in 1998 and 1999, GVEA requested AIDEA to declare that the experimental technology was not commercially feasible. GVEA wanted AIDEA to immediately commence planning and implementation of the retrofit to low NOx burners as soon as possible. GVEA made this suggestion so that GVEA could take over HCCP sooner rather than later, and make the economic and dependable power with the proven retrofit technology that the parties had agreed to. Had AIDEA followed GVEA’s advice, operation of HCCP would have begun to generate a significant stream of payments -- millions of dollars per year -- to AIDEA under the PSA in 1999 or 2000.
30. The parties began negotiations in this direction, then AIDEA abruptly left those negotiations and proceeded to hire additional contractors and workers and hurriedly attempted to get HCCP ready for commercial testing in mid 1999. Just as GVEA had feared, AIDEA used the budgeted low NOx retrofit funds to pay for this basic construction completion effort in AIDEA’s “last
gasp” attempt to make the experimental technology work. AIDEA put all of its eggs in one basket – if AIDEA could cause HCCP to make electricity for just 90 days, then it might be able to legally force GVEA to take over the risk of the experimental technology working for the remaining 30 -- 40 years of HCCP’s expected life.
31. AIDEA’s gamble failed. At the end of 1999, AIDEA had spent all of the project funds (including the retrofit budget) and HCCP was still not finished. There was millions of dollars worth of work yet to be completed. The plant had failed to pass the commercial operation test. HCCP was “shuttered” and has been sitting in that condition for 6 years.
GVEA sues AIDEA for breach of the parties’ agreements
32. In the late spring of 1998, when the construction of HCCP had been completed to the point that the experimental tests called for in the federal grants could be run, AIDEA advised GVEA that it did not intend to conduct or evaluate the required 90 day performance testing in such a way as to meet all of the requirements of both the PSA and the parties’ other agreements.
Because of AIDEA’s actions, which GVEA believed breached the parties’ contracts, GVEA filed suit against AIDEA in Fairbanks in May 1998 (“the 1998 suit”).
33. In the 1998 suit, GVEA explained the dispute about AIDEA’s obligations to conduct a complete 90 day test and asked the court to read and interpret the contracts and tell the parties who was right.
34. For more than a year the parties engaged in litigation and discovery. The parties also had discussions where GVEA tried to convince AIDEA to have AIDEA’s test engineers evaluate HCCP with a “complete test” that showed not only that HCCP could “make electricity”, but that it also was properly and completely constructed, that it was safe and reliable and that the testing
engineers knew of no reason why the plant wouldn’t continue to work in that manner for its 30 year useful life. AIDEA resisted having the test engineer make any of these determinations.
35. AIDEA was required by the PSA to successfully complete the 90 day test and get an independent engineer’s report before December 31, 1999. Because HCCP was still incomplete in its construction through the summer of 1999, AIDEA did not even propose to start the 90 day test until September 1999 thereby allowing barely enough time to complete even the “stripped down” test AIDEA was willing to do.
36. On July 31, 1999, GVEA filed a motion for summary judgment asking Judge Green to read the contracts and tell the parties what the “90 day test” engineer should look at, evaluate and report on. AIDEA filed a cross motion for summary judgment seeking to have Judge Green declare that the test engineer was only required to determine essentially “whether the plant made electricity” at particular cumulative levels.
37. On December 6, 1999, the Court granted GVEA’s motion and directed the test engineer to consider the obligations and standards in all of the GVEA/AIDEA contracts, including the PSA and the Construction Agreement, in reaching his conclusion whether HCCP met the standards for the “90 day test”.
38. On December 28, 1999, the test engineer hired by AIDEA, Harris Group, issued its report stating that HCCP had failed the 90 day test. 39. AIDEA’s reaction to the failure, and to its own engineer’s report, was extreme. AIDEA tried to prevent the Court from even considering the Harris Group’s report in connection with then pending motions. AIDEA resisted GVEA’s
attempts to have the court decide the case in a logical sequence. AIDEA sought “an extension” of the contract date and asked the Court for a “second chance” to conduct “another” 90 day test after the contract deadline. AIDEA sought a change of venue to Anchorage, claiming GVEA had tainted the jury pool by making the Harris Group report public. AIDEA’s efforts were rejected
by Judge Green.
40. During January and February 2000 the parties negotiated a settlement of their obligations under the contracts and the claims each had made against the other in the then pending litigation.
41. On March 7, 2000, the parties submitted a joint stipulation for dismissal of the suit telling the court that “they have entered into an agreement fully resolving the disputes which have been the subject of this case”.
42. That “agreement” was the Settlement Agreement dated March 8, 2000 that is attached to the complaint filed by AIDEA in this suit. The claims made by AIDEA in the 1998 lawsuit (which were “fully resolved” in the Settlement Agreement) included numerous additional costs of construction, but also “an amount in excess of $85,000,000 to compensate AIDEA for its investment in HCCP” as well as an amount in excess of $6,000,000 to compensate AIDEA
for its contribution to work that improved or enhanced GVEA’s Healy # 1 plant.
The Settlement Agreement
43. The Settlement Agreement in broad terms accomplished a number of things.
44. It settled and mutually released the pending multi-million dollar claims and
counterclaims asserted in the 1998 suit.
45. It anticipated and specifically provided that the two parties would work together on a solution to get HCCP completed, operated by GVEA and producing electricity safely and dependably as soon as possible, and that whatever solution was chosen would be executed in a timely manner.
46. While it preserved the PSA (at least for time), it terminated the parties’ obligations under a number of prior agreements including the Construction Agreement and the Ground Lease, rendering those agreements null and void.
47. It contained a number of “agreements to agree” in the future on items that were uncertain at the time the Settlement Agreement was entered into. Those items include a joint operation Agreement and an Amended Ground Lease.
48. It contained an agreement for maintenance and upkeep of HCCP.
49. It contained a roadmap and agreed upon procedure to approach getting HCCP to be a plant that operated as originally intended by the parties, either through a “limited retrofit” of the existing experimental technology to make it economic, reliable and safe enough for GVEA’s purposes or through a “full retrofit” to a “proven” technology, such as a low NOx burner, if that was required to assure economic, safe, reliable and long-term dependable operation of HCCP.
50. The Settlement Agreement contained obligations for each party in regard to each of these elements. Not the least of those obligations was the parties’ agreements to seek and cooperate in obtaining regulatory approval of these retrofits in a cost effective and timely manner.
51. The situation that the parties faced at the time of the Settlement Agreement was serious. HCCP did not work the way it was intended. AIDEA had no other buyer for the power, even if it could have operated HCCP to make some electricity. AIDEA needed someone to provide heat to HCCP and to do custodial work on HCCP so that the equipment stayed viable and operable.
GVEA had cooperated in the installation of a number of “cross connected” and integrated systems that either ran through or used portions of the HCCP plant. GVEA needed to run and maintain those systems in AIDEA’s plant so that Healy #1 could continue to operate.
52. GVEA and AIDEA had a complicated, interdependent relationship that required each to regard and cooperate with the other. AIDEA’s primary interest was to salvage some economic value from HCCP. GVEA’s primary interest was to have the operation of HCCP, however it ultimately occurred, have no impact, or at least the most minimal possible impact, on the
economic, safe and reliable operation of Healy #1 and on Golden Valley’s member-owners.
53. The Settlement Agreement called for an initial shutdown period wherein GVEA took over custodial care of HCCP which allowed AIDEA to reduce its site staff to essentially zero. It was anticipated the shutdown period would be no more than 1 year. GVEA continues to act as custodian of HCCP today, almost 6 years after the Settlement Agreement, however since August 8, 2001, those activities have been pursuant to a separate Custodial Agreement.
54. The Settlement Agreement called for the parties to enter into an Amended Ground Lease for the HCCP plant because the prior Ground Lease had terminated. The amended lease was to provide AIDEA site access and have only a nominal rent payable to GVEA prior to the termination of the PSA, if that occurred.
55. During the initial shutdown period, Duke Engineering was to be jointly hired by the parties to evaluate the feasibility of a “full retrofit” to a proven technology, such as low NOx burners. Dr. Bill Steigers, an engineer and formerly part of the engineering team that had designed HCCP’s experimental technology, was to be appointed by AIDEA to provide environmental consulting and from that perspective compare the environmental performance of the technology selected as the most cost effective and reliable with what Steigers thought could be achieved by HCCP operating with its existing experimental burners using waste coal.
56. During the initial shutdown period, GVEA was to pursue (with AIDEA’s full cooperation) regulatory approval of a full retrofit to a proven technology such as low NOx burners. The Settlement Agreement gave GVEA the ability to decide which retrofit scenario (limited or full) to pursue. Various funding formulas and payment schedules would be applied depending on which
scenario was chosen by GVEA. Page 10 302979_2/GRH/052273-1044
57. The Settlement Agreement also gave GVEA the unfettered right to terminate its efforts to seek any retrofit. If GVEA chose that course of action, then the PSA was irrevocably terminated upon GVEA’s notification to AIDEA of that decision. In the event of GVEA’s termination of the PSA, GVEA was to turn over HCCP to AIDEA and AIDEA could then pursue other financial
agreements regarding HCCP.
58. The Settlement Agreement provided that if GVEA terminated the PSA, then AIDEA could decide whether it wanted to attempt to have HCCP operate, dismantle HCCP or otherwise dispose of the plant. If AIDEA decided to try to operate HCCP, and if GVEA said it wanted to be the operator of HCCP, then the parties agreed to negotiate a contract for the joint operation of HCCP and Healy #1 (because of the numerous joint systems). If GVEA and AIDEA were unable to reach acceptable terms, then they were to arbitrate their differences and have an arbitrator decide what the terms of the joint operation agreement should be for an initial 3 year term.
59. The parties agreed to cooperate in entering into future agreements that were necessary and appropriate for AIDEA to realize the economic utility of HCCP while being consistent with GVEA retaining the full economic benefits of operating Healy #1.
Actions taken in seeking a retrofit
60. Following execution of the Settlement Agreement, GVEA and AIDEA jointly executed an agreement with Duke Engineering to have Duke perform an engineering and economic feasibility study of both a “full” and “limited” retrofit of HCCP. The purpose was to determine the consequences and requirements of each of the courses of action.
61. Duke issued its report on February 8, 2001. It recommended that the full retrofit to a proven technology was feasible and was the best option for long term economics, reliability and safety of HCCP. Full retrofit would achieve the goal of reducing to the greatest extent possible the cost, power outage and safety risks to GVEA’s member-owners. The principal requirements to achieve those objectives were regulatory approval, construction, funding,
power sales price and a fuel source contract.
62. The regulatory requirements of a full retrofit principally concerned getting approval from DEC to carry through on the retrofit planned. This involved an administrative modification of DEC’s prior approvals. The terms of GVEA’s air permit stated that the emissions of nitrogen oxides from HCCP were to be controlled using the “TRW Entrained Combustion System”. GVEA proposing changing the language to require HCCP to meet the permitted levels of NOx
emissions using a proven technology. The permit then in effect allowed certain levels of each of a number of substances to be present in the exhaust stream from each of Healy #1 and HCCP, or from the combined plants where the discharge itself was combined. GVEA was not seeking any increase in the overall level of permitted emissions.
63. The Denali National Park supported the proposed changes when GVEA volunteered to reduce the rate of NOx emission from HCCP even below the level that DEC had originally permitted. Despite its agreement as part of the Settlement Agreement to cooperate in the retrofit, AIDEA opposed the administrative changes that GVEA was seeking. AIDEA’s opposition was difficult to understand in light of the fact that the low NOx retrofit technology was expected to function at least as cleanly as the projected performance of the experimental technology GVEA was seeking to replace.
64. In 2000 and 2001, GVEA sought modifications of the permits as “administrative” changes to its already permitted discharges. Seeking an administrative change rather than filing a new permit application should have accelerated the review and approval process.
65. To further support its request, GVEA conducted an analysis of the projected emissions under conditions that simulated a “Best Available Control Technology” (BACT) analysis, even though that was not required by DEC’s regulations. This was done to assure DEC and the citizens of Alaska that the full retrofit technology did not increase emissions at all and that it was the
most economical and technologically advanced alternative.
66. After the Duke report was issued, GVEA took the recommendations and identified the required modifications to the existing HCCP equipment that would be needed to convert to lox NOx burners. GVEA developed rough estimates of the work and established a “worst probable case” cost estimate of $80 million for the full retrofit to an acceptable level of economic, reliable
and safe performance. During this period and up to the spring of 2002, AIDEA and GVEA used that estimate as the projected cost of a full retrofit in seeking appropriation of federal funding to pay for the retrofit.
67. The Duke report also indicated the costs expected in completing a “limited” retrofit by reworking, but not replacing, the experimental technology. Based on the Duke report, GVEA estimated the cost of that work to be approximately $32 million. AIDEA stated that it had estimates as low as $9 million to complete that work.
68. Because of the uncertainty of other issues, such as the permitting, no formal construction drawings or specifications were ever prepared by either GVEA or AIDEA for any retrofit configuration.
69. During this time, GVEA, working through then Senator Frank Murkowski’s office, secured inclusion of an appropriation of $125 million in low interest loan funds for AIDEA to fully retrofit HCCP and to repay some of AIDEA’’s bonds. The appropriation was part of a comprehensive federal Energy Bill. This would have saved AIDEA significant amounts of money by lowering the
interest rate and other borrowing costs AIDEA was incurring for HCCP related bonds, and allowing ADIEA to pay off the existing bonds. AIDEA never supported these efforts despite the savings it would realize.
70. The request for an appropriation for HCCP stayed in the Energy Bill from its introduction in 2001 through its passage in 2005. The original request for $125 million was intact until the spring of 2005. Under pressure to reduce the overall amount of the bill, Senator Lisa Murkowski reduced this line item from $125 million to $80 million. In response to inquiries, AIDEA continuously stated that it would not ask for the loans even if the money for them was
appropriated by Congress. GVEA persisted in seeking inclusion of the retrofit funds in a sufficient amount to actually retrofit the plant to a proven technology as was always intended.
71. GVEA continuously tried to get AIDEA to support the federal funding request reasoning that, even if AIDEA did a limited retrofit to the experimental technology, AIDEA could use that portion of the appropriated funds necessary for the work. In 2005, AIDEA finally agreed to that logic. Inexplicably, two days later, while the 2005 energy bill was in conference committee, AIDEA announced publicly that it only needed $25 million and not the $80 million that was already in the bill. The committee left the entire $80 million in the final bill that became law, but designated the potential borrower not to be AIDEA but rather “the owner of HCCP”.
72. When the Settlement Agreement was signed, GVEA had no agreement with Usibelli to purchase coal to run HCCP after the full retrofit was completed. During the period from March 2000 through the spring of 2002 , GVEA negotiated with Usibelli to arrive at a coal purchase contract. By June 2002, the parties had an agreement in principal that was only awaiting DEC’s
regulatory approval of the permit modifications for finalization and execution.
73. The Settlement Agreement provided that the PSA that had been signed during the initial development of HCCP, would remain in effect unless GVEA decided to stop all efforts to have a retrofit approved and built. In connection with the full retrofit scenario, GVEA sought to modify the PSA to reflect the then current projected operating conditions and the power market. The
modifications would be effective if and when the plant was retrofitted and operating.
74. GVEA and AIDEA worked on this issue for over a year. GVEA developed a draft agreement and sent it to AIDEA, but it was never agreed to by AIDEA.
75. As set forth above, on receipt of the Duke Engineering report, GVEA proceeded on all fronts to get the pieces in place that would allow the completion of HCCP and successful operation and power generation. The least certain and most important piece was always regulatory environmental approval. Until about 2002, AIDEA kept an ancillary role and generally
supported GVEA’s efforts to modify the GVEA permits to include a retrofit forHCCP.
76. In March 2002, the Trustees for Alaska contested GVEA’s permit modification request with DEC. In April 2002 DEC rejected GVEA’s request for an administrative permit modification, finding instead that a full permit process would be required even though the original permits were issued in such a way that would accommodate a retrofit to low NOx burners.
77. Following this denial, GVEA elected to have no further participation in the retrofit of HCCP in accordance with its rights under the Settlement Agreement. GVEA gave notice of that fact and that notice terminated the PSA, again in accordance with the specific terms of the Settlement
Agreement.
78. In late April 2002, a meeting was organized by Senator Stevens about HCCP. GVEA expressed clearly that it was interested in and committed to the long term operation of HCCP as part of its mix of generating assets, but that it could not continue seeking a retrofit under the protocols of the SettlementAgreement.
79. At about this time a number of articles appeared in the press in which AIDEA questioned GVEA’s commitment to successful operation of HCCP.
80. GVEA responded to AIDEA with a time proven set of four industry standards or “must have” characteristics for a successful operation of a generating plant. These included (1) the plant must be safe to operate (alluding to a near fatality caused by an explosion that had occurred during the 90 day test, rapid deterioration of equipment which forced workers to weld and reinforce equipment while it was running during the 90 day test, and other instances);
(2) the plant’s operations must be reliable (alluding to the uncontrolled outages that occurred during the 90 day test and the numerous uncontrolled “trips” during the experimentation period); (3) the plant must be viable over the long term (alluding to the refusal of the test engineer to certify the long term reliability of HCCP following the 90 day test); and (4) the plant must be economical and produce power at a competitive rate (alluding to the fact that
the plant had not been tested during the 90 day period with the “waste coal” it was supposed to burn, and had not been operated with the appropriate staffing levels).
81. GVEA sent these points directly to AIDEA numerous times seeking to start a dialog on how HCCP could be made productive and safe. AIDEA ignored GVEA’s offers. AIDEA proceeded ahead with trying to raise funds for a limited retrofit of HCCP.
82. In October 2002, AIDEA contracted with Capital Energy to study the condition of the plant and to recommend steps to bring it into operation. Without even waiting to receive any report from Capital Energy, AIDEA applied for a grant from DOE for funding of work on HCCP. GVEA was not copied on the grant application so that GVEA could understand AIDEA’s plans and how they might affect Healy #1. When GVEA asked for copies of the grant application and for AIDEA’s contract with Capital Energy, AIDEA refused. When GVEA attempted to secure a copy of the application using the Alaska Open Governmental Records Act, AIDEA denied GVEA access. AIDEA’s grant application was ultimately denied by DOE.
83. During November 2002 AIDEA and GVEA met to discuss what protections or assurances GVEA would need for the operations of Healy #1, in the event that a third party was hired by AIDEA to operate HCCP. AIDEA refused to give any such assurances.
84. After hearing AIDEA several times assert that the experimental technology had not been adequately tested, GVEA said and wrote in a letter to Governor Murkowski in December 2002, that if more testing was desired to start the plant and operate it, then GVEA would fully participate so long as GVEA, its owner-members and the operations of Healy #1 are not impacted by that decision and GVEA was otherwise held harmless by AIDEA. GVEA
explained what had happened to Healy # 1 during the experimental operations of HCCP. GVEA explained the cost and system impacts to its owner-members when HCCP tripped off line 78 times during the first year of operation, causing GVEA to run the North Pole turbine to prevent systemwide blackouts. GVEA offered specific proposals by which GVEA accepted that HCCP would be less reliable than Healy #1. Both in this meeting and in a subsequent meeting between AIDEA and GVEA, AIDEA rejected all of these proposals.
85. Upon Governor Murkowski’s election in November 2002, GVEA contacted the new governor and updated him on the status of HCCP.
86. In February 2003 Ron Miller was appointed to head AIDEA. Almost immediately after his appointment, GVEA contacted him in writing about HCCP and sent him a four page paper about the project and what GVEA’s concerns were. In the paper GVEA reiterated its four points of “must have” elements of proper power plants. GVEA stated its preference for a full retrofit
but also suggested numerous alternatives including just starting the plant up with minimal repairs and modifications and having AIDEA thereafter simply fix whatever breaks. GVEA explained in the paper the difficulty of AIDEA simply providing monetary indemnity to GVEA. That scenario is not a particularly good substitute for keeping the power on reliably to GVEA’s members.
87. Based on review of the available options in the Settlement Agreement and AIDEA’s opposition to the request for administrative changes to the DEC air permit to allow retrofit, in April 2003 GVEA formally terminated the PSA by letter to AIDEA. In the same letter GVEA asked to have the Boards of Directors of both GVEA and AIDEA meet jointly to discuss the situation and to try to find a way to resolve the issues and get HCCP operating again.
88. During the entire time, from 2000 on, GVEA, not AIDEA, had been in contact with Senators Frank and later Lisa Murkowski to seek federal funding to AIDEA for repairs to HCCP to get it operating again. AIDEA never supported those efforts and the funds were finally included in the sum of $80 million in the Energy Bill just passed in 2005, essentially over AIDEA’s objection.
89. On April 28, 2003, GVEA’s President and Board Chairman met with AIDEA where AIDEA stated that AIDEA wanted to get out of the electricity business, that AIDEA won’t spend another nickel on HCCP, that AIDEA didn't want a new Power Sales Agreement with GVEA and all AIDEA wanted to do was sell the plant to GVEA. Shortly thereafter AIDEA sought legislation that would have required the Alaska Energy Agency or another Railbelt utility, or a
consortium of Railbelt utilities, to “acquire” HCCP from AIDEA so that AIDEA could resume its more accustomed role as a lender rather than an owner. The legislation concerning transfer of HCCP didn’t pass but it showed that AIDEA lacked any real commitment to seeking a long term solution of HCCP, preferring to put the problems of HCCP’s ownership onto anyone else it could
find.
90. In the summer of 2003 Governor Murkowski called AIDEA and GVEA representatives together and told them jointly that he wanted the plant to begin operating and that these two entities should get together and make that happen within 6 months. AIDEA took up GVEA’s earlier suggestion. The Boards of AIDEA and GVEA met jointly and toured the site. They tried to set up a format to work out their differences of opinion about the future of HCCP.
91. In the fall of 2003 a second meeting was held with Governor Murkowski where the parties reported on what had happened since the prior meeting. Representatives of Alaska DEC are also present. The governor directed AIDEA to work with DEC and GVEA to get the full retrofit permitted by DEC.
92. As a result of that meeting and after much effort by DEC and GVEA, GVEA submitted a joint air permitting plan to DEC in February 2004. The significance of the timing of the filing of such a plan was that on July 1, 2004, significantly more stringent air quality regulations were to go into effect.
93. GVEA and DEC continued to process these applications throughout 2004 right up to June 29th when AIDEA appeared at a GVEA Board meeting. AIDEA then presented GVEA with 2 letters.
94. One letter was addressed to GVEA and said that if GVEA continued to pursue the air permit applications, AIDEA would oppose them. Despite the letter, GVEA had made a commitment to the governor to work with DEC and AIDEA for a retrofit air permit. GVEA fulfilled that commitment by filing the air permit application on time as agreed.
95. AIDEA’s second June 29th letter was sent directly to DEC asking DEC to suspend the air permit application to allow the full retrofit the governor had directed the parties to pursue.
96. The net result of these actions was that AIDEA lost its “grandfathered rights” status, which allowed it to operate HCCP under the requirements in place when the plant was designed and built. The loss of these rights increased the costs to AIDEA of any retrofit by $15 million because selective catalytic reduction (“SCR”) then became a regulation requirement. This decision by
AIDEA immediately devalued HCCP by the $15 million of otherwise unnecessary costs that would now have to be spent by anyone trying to restart HCCP’s operations. The parties jointly hire an expert to advise them how to solve the problems of HCCP and get it operating again.
97. Prior to the second meeting with the governor in the fall of 2003, and as a result of the joint Boards meeting on almost a monthly basis, AIDEA and GVEA acknowledged that one of the hurdles to agreeing on the future operations of HCCP was that each party disagreed with the set of “facts” that was being used by the other on which that party’s decisions were being
made.
98. In an effort to get both sides to be looking at the future with a common fact set that both parties agreed to, AIDEA and GVEA decided to get an independent third party to identify where AIDEA and GVEA were in disagreement on the basic facts, thereby helping to bring a consensus. Both parties agreed to jointly hire Financial Engineering Company, to, among a number of tasks, do a detailed analysis of the costs of operating HCCP over its projected operating life and to make a recommendation, among a number of possible scenarios. Financial Engineering was jointly requested to tell the parties what to do.
99. In December 2003, after the parties had met for a second time with the governor, Financial Engineering released its report and recommendation. The report found that, while the limited retrofit had a lower initial capital cost, the long term performance risk was much higher. The report recommended the full retrofit option because, despite its higher initial capital cost, the long term performance risk was much lower. AIDEA became upset with the conclusions of the joint expert. AIDEA immediately withdrew its active support for GVEA’s air permitting plan despite its specific agreement with the governor and with GVEA to cooperate and support the plan.
100. Also in reaction to the Financial Engineering report, AIDEA requested all of the rail belt utilities to submit an offer to AIDEA to simply buy HCCP from AIDEA.
101. In response to this request, on March 17, 2004, GVEA submitted an offer to buy HCCP. GVEA’s offer was based upon the assumptions and figures used in the Financial Engineering report.
102. GVEA Board members went to the AIDEA Board meeting 3 days later, on March 20th, to answer any questions AIDEA might have about GVEA’s proposal. During the meeting AIDEA indicated that it would prepare a counter offer.
103. On April 30th the Boards met jointly again and AIDEA announced its rejection of the purchase offer, without any counter offer, or further discussion of any options that would work for AIDEA.
104. Shortly after AIDEA’s unilateral actions in jeopardizing effective permitting for a retrofit, and in another meeting with the governor, this time attended also by legislators from interior Alaska, the governor announced that the state was “taking over the plant” and that GVEA was “no longer in the picture” and that “this relationship is over”.
105. This meeting and the governor’s comments started discussions between AIDEA and GVEA about physical separation of HCCP and Healy #1 into two completely independent plants and the fact that this would cost AIDEA something approaching $20 million before a dime was spent to make the experimental technology work properly. The separation would negate all of the cost and operational advantages that the combined plants were designed to capture.
106. On August 11, and again on August 30, 2004, GVEA told AIDEA that it was withdrawing its offer to buy HCCP made earlier that year. GVEA also expressed formally its intention to be the joint operator of the two plants -– HCCP and Healy #1 – as provided for in the Settlement Agreement.
107. In September 2004 AIDEA announced its intention to start up HCCP using the existing technology. In response, GVEA told AIDEA there were a number of issues that needed to be worked out so that GVEA can operate the two plants. AIDEA responded that GVEA was not the joint operator and that GVEA’s correspondence pointing out the practical and logistical problems in starting up HCCP as a separate plant was sent in bad faith, showed that GVEA lacked faith in the experimental technology and that AIDEA would contract with someone else who had such faith and commitment.
108. Upon the announcement by AIDEA at GVEA’s Board meeting on June 29, 2004 that AIDEA would oppose the air permit application, GVEA immediately complained to the governor’s office about AIDEA reneging on its promises butto no avail. GVEA advised the governor’s office of the severe cost impact of retrofitting HCCP ($20 million of needless additional cost) if the air permit application was not presented before July 1st and the requirement of installing SCRs was later imposed. There was no response from the governor.
109. Regardless of AIDEA’s actions, GVEA still filed the air permit application before July 1st. DEC, despite its commitment to the governor to work with GVEA on its air permit application, apparently stopped all action on the application that GVEA had filed and that was needed for a full retrofit. Ground lease negotiations
110. The Settlement Agreement provided that the parties would, shortly after its execution, enter into an amended ground lease. Few details of that lease were provided for in the Settlement Agreement. Since the Settlement Agreement did not require AIDEA to pay any rent for HCCP until a new Ground Lease had been established (it being anticipated that GVEA would
physically occupy and operate HCCP), AIDEA has paid nothing to GVEA for the acres of GVEA’s property on which HCCP is located.
111. An amended lease was not negotiated or prepared in 2000 (or thereafter) because the parties were busy pursuing a full retrofit of the plant until 2002 (and even until mid 2004 at the direction of the governor). During those periods it was unclear what type of lease was going to be appropriate.
112. Upon announcing that it intended to start the plant with existing technology in
September 2004, AIDEA requested that GVEA immediately agree to an amended ground lease and allow numerous environmental consultants hired by AIDEA to roam around GVEA’s property drilling holes and doing other testing. At the time AIDEA made these requests to GVEA, AIDEA didn’t even know what it intended to do or what it needed to do to “start up the existing technology” or what facilities would be needed to affect a physical separation.
113. AIDEA thereafter convened a technical review session. It invited Railbelt utilities, engineering firms and some private energy companies (but not GVEA) to a technology meeting to educate interested parties about the HCCP technology and what needed to be done to start the plant with the existing technology. This session was held in December 2004. At that time AIDEA was still requesting a lease from GVEA despite the fact that AIDEA had no idea of what physical ground or access was needed to begin operations at HCCP as a separate power plant.
114. In December 2004 AIDEA and GVEA met several times to discuss how HCCP could be operated with a separate operator other than GVEA and what additional property would be needed by AIDEA to allow HCCP to operate in that manner. This “physical unwinding” was required because HCCP had been constructed in such a way that it shared numerous joint systems and joint operation capabilities with Healy #1. If AIDEA was proposing to have a
third party separately operate HCCP, then physical and operational separation of these systems was required.
115. Three months later with no further discussion, in March 2005, AIDEA sent GVEA a “Memorandum of Understanding”. Included with the Memorandum was a draft of ground lease “talking points” prepared by AIDEA. It included a plan showing that AIDEA proposed to occupy more than ½ of the remaining site owned by GVEA. The plan purported to locate new HCCP facilities in areas actively being used by GVEA and also in areas which GVEA had already planned for use for future Healy #1 operations.
116. GVEA responded in writing to the Memorandum and the lease proposal saying that with the then pending Annual, GVEA’s staff was tied up but that GVEA would meet with AIDEA after the GVEA Annual General Membership meeting (held near the end of April) to discuss the Memorandum of Understanding. GVEA sent AIDEA a footprint of the land available on the site
that would not conflict with GVEA’s present and future uses. GVEA also offered to meet later that summer, after the brunt of its busy construction season schedule was over, and to work with AIDEA to reach an acceptable amended ground lease. GVEA offered to set up such a meeting in August and reiterated GVEA’s availability for an August meeting in letters over the
balance of the summer.
117. Shortly after the exchange of letters in the spring of 2004, AIDEA apparently became aware of the significance of the fact that all of the combined plant permits were in GVEA’s name. AIDEA intervened in GVEA’s routine federal water discharge permit renewal process and sought to have the EPA deny GVEA’s permit renewal which could have shut down Healy #1. AIDEA alleged that GVEA’s permit contained 10 errors, all of which were untrue.
118. When that proved unsuccessful, AIDEA requested that it be established as the co-permittee of GVEA’s federal EPA NPDES permit dealing with water discharges. GVEA asked for AIDEA’s operating plan for HCCP and how AIDEA would handle waste water to insure that HCCP’s operations would not impact Healy #1 before GVEA would agree to a co-permittee status for
AIDEA.
119. GVEA reiterated on more than one occasion that it had no objection to AIDEA being a co-permittee, but that GVEA had to know how AIDEA proposed to operate the joint systems so that GVEA would know whether the two operations would be compliant with the terms of the NPDES permit. Rather than work with GVEA or tell GVEA anything about its plans for HCCP, AIDEA sent a letter directly to EPA asking for identification of AIDEA as a copermittee with GVEA. AIDEA’s actions did nothing to further the process and simply caused more time and money to be spent by all the parties and had the potential of adversely impacting GVEA’s excellent relationship with EPA.
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