Dec. 7 Wind Power in AK Forum

Fire Island, Kodiak & More

6-8pm * Anchorage Museum * 625 C Street * FREE Live Podcast: www1.gotomeeting.com/register/287610025  Presenters: Darron Scott, CEO of Kodiak Electric Association Suzanne Gibson, CIRI Sr. Energy Development Director Rich Stromberg, Alaska Energy Authority Wind Program Manager More info: www.REalaska.org, 907.929.7770

Recent News

Election Disappointment
At yesterday's Annual HEA Meeting incumbent Director Tony Garcia was voted out while Board President Debbie Debnam was reelected by a substantial margin. Debnam is the last of the "old guard" Directors who favored business by executive session while promoting involvement in HEALY 2 and other coal projects. HEAMF supported her opponent Ken Hepner who favors open governance and serious efforts to increase inclusion of alternative energy sources to meet HEA load requirements. William Warren defeated Garcia. HEAMF endorsed Garcia largely because he had shown steady growth in supporting our objectives and we lacked knowledge about Warren. Subsequently, Ken Hepner and others who have known him suggest that Warren will make a good Director who will promote open governance and renewable energy. Bill Fry, the only District 3 candidate on the ballot was easily elected in spite of a write-in campaign.

Total Ballots Cast = 5,141 (23.8% of the 21,586 HEA Members)
Total Ballots Voided for Cause = 163
Total Ballots Counted = 4,978
District 1 -- Warren 918, Garcia 702, write-ins 32
District 2 -- Debnam 1,215, Hepner 592, write-ins 46
District 3 -- Fry 1,350, write-ins 93

Manager's Moment
HEA General Manager Brad Janorschke presented a much better overview than the fiasco of 2009. This time he gave a decent summary of the Independent Light project, a brief discussion of the nature of AEEC (Alaska Electric & Energy Cooperative, Inc.), and provide some updated information on the Kenai Winds, Kenai Hydro, and potential large hydroelectric and geothermal projects that might one day supply railbelt energy. Theoretically, his PowerPoint presentation should be posted to the HEA website some time today (http://www.homerelectric.com/). If you want more detailed information check it out. Several things Janorschke said are worth noting here, however:

Independent Light consists of two phases.

Phase I -- HEA/AEEC has already committed to this. It involves upgrade of the Nikiski plant. Contracts have been awarded for design work ($5,017,900), a GE steam turbine ($9,420,000), and related substation upgrades($3,813,697). This phase addresses "baseload," the ongoing 40 to 70 MW consumed by all HEA members.

Phase II --This phase will address "peaking, reserve, and contingency" power sources. Additional power is needed if energy requirements exceed normal baseload capacity, should the Nikiski plant or Bradley Lake fail or be shut down for maintenance, or during unforeseen situations such as a disaster. Three options are being investigated: build new generating capacity ourselves, buy an existing plant from another utility, purchase agreements for buying power from other power producers. No commitment has yet been made to any one or combination of these.

Independent Light and efforts to adopt renewables are now linked. Janorschke said that whatever HEA/AEEC chooses for phase two of Independent Light, the administration doesn't want it to constrain our ability to adopt new or better options as they become available.

HEA Members' Moment
During his explanation of AEEC Janorschke failed to mention that HEA members are not also AEEC members and, consequently, have no rights or authority with AEEC. During the member comment period I pointed this out as something all members should be aware of. It is a significant problem considering that all decisions about Independent Light are being made by AEEC, including plans to take on over $200 million in debt to finance the project. President Debnam ask HEA attorney Rick Baldwin to elaborate on my statement but he declined, saying that no further explanation was warranted.

Another member made a motion from the floor that Board of Director expenses be published in the Kilowatt Courier from now on. I made a friendly amendment that they also be posted on the HEA website. On a vote of the assembled membership the motion and amendment were passed. If memory serves, these floor votes are considered advisory and the Board may choose to accept or reject them. Stay tuned.

Alaska Coal Workshop

Wednesday May 6th, 2009
Homer
Islands and Ocean Visitors Center 7-9 PM

Join Goldman Prize award winner Judy Bonds and acclaimed lawyer Joe Lovett as they share lessons learned from fighting the destructive impacts of coal strip mining and coal power plants in Appalachia and the Southeast United States. Bonds and Lovett will pull back the curtain on the myth of “clean coal.”

Get information and tools needed to protect our lands, waters, fisheries and sustainable jobs.

Invite family and friends along to hear these two remarkable speakers discuss the true costs of coal!

Please write letters to the editor NOW (talking points below)

We need media coverage about permitting problems with Healy Coal Plant No. 2 through letters to the editor and op-eds from citizens who want to assure that Healy’s operations will not harm air quality or pose a danger to public health.

Messages should not focus on wholescale abandonment of the project, but rather that, if Healy 2 ever does start up, it must have proper technology and its operations must be consistent with Clean Air Act requirements in order to protect human health and safety and environmental quality.

Please write letters to the editor NOW (talking points below).

Asking DEC and EPA to make sure the Healy permits are stringent enough to comply with the Clean Air Act and protect public health and the environment.

Demanding that the plant not be allowed to renew and apply its outdated existing permit, which was granted 10 years ago, to a different plant, with different combustion technologies.

Demanding that GVEA and AIDEA apply for new permits that comply with Clean Air Act requirements in the interests of public health and the environment.

Contacts:
Peninsula Clarion
Dori Lynn Anderson, Editor
http://www.peninsulaclarion.com/feedback/directory.shtml

Cinthia Ritchie, Seward Phoenix Log
critchie(emailAT)alaskanewspapers.com

Jenny Neyman, Redoubt Reporter
redoubtreporter(emailAT)alaska.net
phone: 394-6397

Homer News
Lori Evans, Editor
lori.evans(emailAT)homernews.com

Homer Tribune
Editor
spearson(emailAT)homertribune.com


Talking Points

Alaskans have a right to breathe clean air. Healy was designed to burn waste coal under a permit that was granted more than 10 years ago. The only way to ensure that air quality and public health are protected is to subject the plant to a new permitting process that fully analyzes the proposal and ensures current, more-protective standards are met. Coal is dirty. Burning coal releases mercury and carbon dioxide emissions into our air, into our lungs, and into our food supply. GVEA is taking the position that no new permit is required to begin operating Healy Coal Plant No. 2. Without proper permitting, air quality and public health will be compromised.

The Healy Plant has been closed for ten years. The technology is questionable. It’s just common sense to ask to ensure that public health, clean air and clean water are protected from outdated technology.
The Healy plant has been closed for 10 years and its decade-old technology was not designed to mitigate the more recent health concerns of mercury and carbon dioxide emissions. Healy’s technology was not clean 10 years ago – that’s part of the reason the plant never started up full operations –and is not clean today. Under these circumstances, it is logical that new permits are issued before this plant can operate safely.

DEC has an obligation to make sure its permits protect public health and ensure clean air and water .
DEC is obligated to protect public health and the environment through its permitting process for the Healy Coal Plant No. 2. Before the plant is allowed to operate, DEC must carefully review its permits to make sure air quality protections under the Clean Air Act are guaranteed. The Healy plant can pull the switch only when it can be shown that its permits meet Clean Air Act standards and requirement.

Communities and park lands are at risk from air pollution unless we make sure Healy runs clean.
GVEA and AIDEA have a moral obligation to ensure that Healy is properly permitted in a manner that protects public health – particularly pregnant women, the young and the elderly – clean air and clean water from mercury emissions and other toxic pollutants.

GVEA will pass additional costs of start up and environmental compliance onto ratepayers. Ratepayers should know how much their rates will go up and what they will have to pay for permitting the plant to comply with new environmental standards, and other start up costs. Ratepayers have the right to know how their rates will be affected before HEA commits to a power sharing agreement.

Want to Help Reform HEA and Get Paid for It?

HEA Board Candidate Jim Levine Needs a Campaign Manager.

This will be a paid, temporary, part-time position with fluctuating hours.

Good writing, speaking, and computer skills are required. Community organizing experience would be an asset.

Jim is running for the HEA Board District 3 seat -- everything south of Kasilof

Jim advocates finding new and better ways to provide electricity to HEA members as part of a coordinated strategy to bring rates under control. He supports greater openness and transparency in the governance of our coop.

Contact Jim Levine for more information: 299-0323, jlevine(emailAT)jaybrant.com

If you're not interested, please pass this information on to people you know.

KBBI Coffee Table February 25th

Tomorrow's KBBI Coffee Table Program Will Feature HEA Management's Perspective

9:00 AM - 10:00 AM
Wednesday, February 25, 2009

KBBI-AM 890, Homer
KDLL-FM 91.9, Kenai

HEA General Manager Brad Janorschke and Public Relations Coordinator Joe Gallagher will be the only guests.

KBBI News Director Casey Kelly chose not to invite any guests with differing perspectives:

I made that decision because there are so many issues surrounding HEA right now. I felt like the best thing to do was to have Brad come on and answer questions about everything from the rate increase to Healy to the power supply study to board elections and member relations.

But the fact is, no one is being given a soapbox. It's my position that a talk show is a dialogue between host, guests, callers, and listeners. No one element is given greater weight than another.


Nobody will be there to represent your concerns -- it's up to you to call in and express yourself.

Some basic talking points follow.

--------------------------------------------------------------------------------------------------------------------
Talking Points:

Independent Power Source Study:
HEA should stop negotiations with GVEA for a Healy 2 Power Sales Agreement pending the outcome of the recently announced power source study.

Right-to-Know:
HEA is a member-owned cooperative. Members have a right to know about HEA actions that will affect our utility rates. HEA must improve the ways members are informed. Why weren’t recent huge, mid-winter, rate hikes announced farther in advance? How come rate increases weren’t made in small increments over several months? Is HEA considering salary and benefits adjustments for its top management? Why do closed-door power sales agreement negotiations between HEA and GVEA continue? How will we be kept informed of progress and findings of the power source study and other projects?

High Risk:
The Healy Coal Plant faces significant and unknown costs from anticipated greenhouse gas and mercury rules. The Obama Administration is committed to enacting new rules that will limit emissions of greenhouse gasses, and the EPA is re-writing new, tougher rules on mercury emissions. These new rules will add significant Healy 2 startup and operating costs while increasing liabilities from litigation. AIDEA and HEA refuse to consider any of this in estimating costs. Such factors must be quantified before HEA commits us to any contract with GVEA.

Mounting Cost:
The Healy Coal Plant is a black hole for public money. Test runs in 1999 proved the facility could not provide reliable, “clean” power at a competitive cost. Despite this fact, the recent agreement on Healy 2 will retain its faulty technology. After pouring $300 million into this coal experiment how much more state money will a restart really take? The legislature will soon consider a bill to consolidate all railbelt utilities. Does HEA support this approach? What would consolidation mean for the Healy 2 agreement?

Higher Rates:
The Healy Coal Plant is likely to increase your electricity costs. HEA has lamented the 30 year contract with Chugach for natural gas since long before the gas cost spike. We got stuck with that contract because HEA thought gas would always be plentiful and cheap. Why does HEA think that, in the face of rising international demand, coal prices won't increase? Alaskan coal deposits may be vast but coal prices have never been stable. That’s because international markets dictate Alaska coal prices. International coal traders predict a 20% to 30% increase in just the coming six months. Under the current terms, HEA ratepayers will be forced to buy 1⁄2 the power from Healy, regardless of the cost.

Stable Rates:
HEA must look forward to renewable power, not backwards to coal. Alaska boasts enormous renewable energy resources that promise clean, fixed-cost power and sustainable jobs. After construction costs, renewable energy systems produce power on a fixed-cost basis, avoiding the market swings and pricet increases of fossil fuel. The Bradley Lake hydropower facility in Kachemak Bay is an excellent example, producing power at less than half the rate GVEA predicts for Healy 2. And it’s clean, reliable, fixed-cost power indefinitely. What ever happened to the idea of a gas-fired turbine on the Kenai Peninsula to bridge the gap until we can develop our renewable energy sources?

The Regulatory Commission of Alaska (RCA) Has Opened New Net Metering Dockets

Net Metering would allow you to sell excess energy produced by your own solar panels, wind turbine, or other renewable technology back to HEA at the retail rate. Unlike the "SNAP" program, no member contributions are required.

Draft RCA Net Metering proposal:
Size Limit For Individual Renewable Energy System: 25 KW
Overall Renewable Energy Systems Limit Per Utility: 1% of utility’s peak demand
Net Metering Accounting Period: Monthly*
Treatment of Monthly Net Excess Power: Paid at utility’s non-firm avoided cost*
Renewable Energy System Types Allowed: Solar, Wind, Hydro, Biomass, Tidal, Ocean Thermal, Wave, Landfill Gas

The RCA will only establish an Alaskan Net Metering rule if ratepayers demand it.

*Monthly accounting is a bad idea. Excess energy production should be applied over a twelve month period. A solar array will produce most energy in late spring and summer when days are longest. Monthly won't let you use that excess production to offset fall and winter consumption.

*Payment at the utility’s “non-firm avoided cost” is a bad idea too. The utility charges you retail for the power but only credits your excess production at the wholesale price.

“Technical” conferences have been scheduled by the RCA for:
March 4, 2009 (Net Metering Standards, Docket R-09-1) and
March 18, 2009 (Interconnection Standards, Docket R-09-2).
Both will be held at the Commission’s East Hearing Room, suite 300, 701 West Eighth Avenue in Anchorage.

Persons planning to participate in one or both conference must file notice of intent by:
4:00 PM, February 27, 2009 for Net Metering Standards, Docket R-09-1
4:00 PM, March 13, 2009 for Interconnection Standards, Docket R-09-2
Notice must indicate whether you intend to appear in person or telephonically. Contact Joyce McGowan at 1-800-390-2782 or send to rca.mail@alaska.gov at least three days before the technical conference.

For More Information:
Regulatory Commission of Alaska

701 West Eighth Avenue, Suite 300
Anchorage, Alaska 99501-3469
In Anchorage: (907) 276-6222
Toll Free: 1-800-390-2782 (outside Anchorage, within Alaska)

E-mail: rca.mail@alaska.gov

Website: https://rca.alaska.gov/RCAWeb/home.aspx

Congratulations Everyone!

After a rather contentious start, Tuesday’s HEA Board meeting resulted in action to respond to member concerns over the proposed Healy 2 deal with AIDEA and GVEA.
At least 55 members crowded Homer and Kenai HEA offices to express their views. In over two hours of testimony, all but three or four opposed involvement with Healy 2 for a variety of reasons, from environmental to public health and economic questions. Many thanks to all of you who were able to participate and to everyone who sent comments to the Board.

It was a long meeting but, in the end, the HEA Board passed a motion by David Thomas to issue an RFP for a comprehensive, third-party, revised power supply study. It will examine Healy in relationship to all other power options available for meeting HEA’s power needs. Cost/benefit assessment of the various options will be an element of this study. Future fuel costs, regulatory issues, reliability, and potential impact on rates will be among the things considered.

In response to a recommendation by General Manager Brad Janorschke, this process will be conducted by the Generation Committee. Two Board members and three member/ratepayer representatives (1 from each Board district) will work with HEA staff to develop and oversee the RFP and the estimated six month power supply study process.

Unfortunately, the Board did not preclude continuing contract negotiations for a Power Sales Agreement between HEA and GVEA. Still, it would be hard to imagine HEA attempting to sign such a document absent results of the completed study.

Many significant issues remain regarding the way our electrical cooperative does business but HEA Board members deserve words of encouragement for taking a significant step in response to member concerns.

Mike

Feb 11 HEA Press Release - Homer Electric to Study Power Supply Options

HEA
3977 Lake Street, Homer, AK 99603 (907) 235-8167
280 Airport Way, Kenai, AK 99611 (907) 283-5831

PRESS RELEASE - February 11, 2009

Homer Electric to Study Power Supply Options

The Homer Electric Board of Directors will be seeking proposals from power supply consultants to evaluate all possible power generation sources that may be available to the cooperative. The decision was made at the February 10th board meeting, following nearly two hours of comments from Homer Electric members.

The goal of the independent, third-party study will be to provide the HEA board with a complete cost-benefit analysis of different generation sources including natural gas, coal, and various types of renewable energy.

The study will be coordinated by the Homer Electric Board of Directors, with input from three members of the cooperative. The board will select a member from each of the three districts in the cooperative to participate in the design and implementation of the power supply study.

Board President Debbie Debnam said the results of the power supply study will be critical to determining HEA’s future power generation decisions.

"The Homer Electric board is committed to finding a mix of generation sources that will provide our members with reliable, affordable energy. We need to know, as best as possible, what the choices are and what each of them will mean to our rates. This study will give us direction on how to proceed with some very important decisions," said Debnam.

The timeline for completion of the power supply study is approximately six months, although it is possible it could be completed earlier.

There were several comments at Tuesday night’s board meeting regarding the possibility of Homer Electric purchasing power from the Healy Clean Coal Project (HCCP).

Homer Electric recently approved a Term Sheet with the state’s Alaska Industrial Development and Export Authority and Golden Valley Electric Association to purchase half of the power from HCCP, but a binding Power Sales Agreement has not been negotiated.

"The goal of the power supply study is to find out what our best options are. The study will consider all factors involved in power production, including possible future fuel costs, regulatory issues, reliability, and most importantly, the impact it will have on the rates paid by our members," said Debnam.

Debnam said the board hopes to be able to send out a request of proposals for a power supply study by the end of February.

For additional information regarding this press release, please contact Joe Gallagher, HEA public relations coordinator, at 907-283-2324

Your Help Is Needed

HEA Members in Kenai, Soldotna, Nikiski, Sterling and other parts of Board Districts 1 and 2 only:

Good candidates are needed to run against Bruce Passe (HEA District 1) and William Tappan (HEA District 2) in the HEA Board election.

Both these incumbent Board members support the Healy 2 deal.

If you are willing to be a candidate or help to find and support someone else who will, please contact fellow Kenai HEA member Jerry Brookman.

Gerald Brookman brookman (emailAT) alaska.net

Time is short -- candidate applications with at least 15 HEA member signatures (one per household) are due by February 27.

Love or Hate Coal, Healy 2 is a bad deal for HEA members.

AIDEA gets rid of a costly white elephant.
GVEA gets another coal plant.
HEA members get to pay the bills.

Take 3 steps to avoid unnecessary rate hikes:

1. Contact HEA Board members.
Tell them you don't want them to sign a contract with AIDEA and GVEA under terms they approved last month.

Debbie Debnam President (Sterling): 262-9277
Donald Seelinger, Secretary/Treasurer (Seldovia): 399-7573
Bruce Passe, Deputy Secretary (Kenai): 283-4617
William "Bill" Tappan (Kenai): tappassoc (EMAIL@)acsalaska.net; 260-6961
Tim Evans (Kenai): heatde (EMAIL@) gmail.com; 262-3734
Jose (Tony) Garcia (Nikiski): 394-2489
Brad Janorschke, General Manager: bjanorschke (EMAIL@) homerelectric.com; 235-8551


2. Write a letter to the editors.
Tell Peninsula newspapers why you oppose the proposed Healy 2 deal.

Peninsula Clarion, Anderson, Dori Lynn (Editor), dorilynn.anderson(EMAIL@)peninsulaclarion.com
Homer News, Letters to the Editor, letters(EMAIL@)homernews.com
Homer Tribune, Letters to the Editor, letters(EMAIL@)homertribune.com
Seward Phoenix Log, Cinthia Ritchie, critchie(EMAIL@)alaskanewspapers.com
Redoubt Reporter, Jenny Neyman, redoubtreporter(EMAIL@)alaska.net

3. Plan to attend the February 10 HEA Board meeting.
Bring your friends and neighbors. The meeting will be at 280 Airport Way in Kenai (5:30 PM). It will be video conferenced to the Homer office.

HEA General Manager Brad Janorschke claims the plant will produce power at a competitive price but there has been no third party assessment of:

Technical feasibility
Healy 2 relative to other power source options available to HEA
Potential costs and benefits of the proposed agreement

There is nothing to support Janorschke’s assertion.

Narrative Statement of Facts (Healy Coal)

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.

HEA Healy Editorial

AN OPEN LETTER TO HEA MEMBERS REGARDING THE HEALY CLEAN COAL PROJECT (A similar letter was delivered earlier to representatives of Homer Electric Members Forum in response to questions about the Healy Clean Coal Project.)

To Homer Electric Members:

One of the principles of a cooperative is member participation and there is no doubt that Homer Electric is committed to that ideal. Recently, there has been much discussion, sometimes heated, about a decision to restart the Healy Clean Coal Project (HCCP). This discussion comes at the same time that Homer Electric members are feeling the effects of significant rate increases. While we may not have consensus on how to move forward with the Healy Clean Coal Project, there is no doubt in my mind that all involved have the same goal: reliable energy at an affordable price. The following is a synopsis of Homer Electric’s involvement with the Healy Clean Coal Project. As with any large project, there are some unanswered questions, but the following is what we know at this time.

BACKGROUND
Let me begin by telling you that it is HEA’s mission to provide its own independent generation starting in January, 2014. This means that in less than five years, HEA will have to obtain or construct approximately 70-80 MWs of new generation. In achieving this goal, HEA is seeking to diversify its generation portfolio to reduce our dependence on natural gas and the volatility associated with the pricing of this fuel source. To this end, HEA is pursuing renewable energy generation alongside more traditional generation technology, such as coal-fired power production.

Given HEA’s relatively short time to acquire new generation, HCCP has the advantage of being an existing facility. Upon acquiring HCCP from the Alaska Industrial Development and Export Authority (AIDEA), Golden Valley Electric Association (GVEA) expects to bring the facility online in approximately eighteen months to two years. GVEA has given HEA the opportunity to purchase, at cost, up to 50% of the power it generates from the plant. The contract to purchase power from GVEA will satisfy a portion of HEA’s need for new generation and will fulfill the goal of diversifying our generation portfolio. In the larger view, the GVEA transaction would provide approximately 22.5% of the 120-130 MWs of capacity that HEA will require in 2014.

A significant advantage to the GVEA transaction is that it provides HEA with needed capacity but requires no new capital (debt or equity) from HEA. According to HEA’s current power supply study, without the capacity provided by GVEA, HEA would strain its borrowing ability in order to acquire sufficient additional resources. As a result, HEA would not have the capital to use on other energy sources; including developing its own renewable opportunities.

TECHNOLOGY
HCCP was originally designed to burn “waste” coal, essentially a very low BTU content coal that contained a significant amount of impurities that caused undue wear and tear on the system. Complications associated with burning “waste” coal were at the heart of the dispute between GVEA and AIDEA. In spite of burning “waste” coal, the original HCCP did operate successfully for almost two years at full generation capacity. By contrast, when HCCP is restarted it will burn higher quality coal and will no longer try to burn “waste” coal.

As originally designed, HCCP employs an advanced slagging combustor technology that enables burning of the coal in stages to minimize the formation of nitrogen and sulfur oxides. Emissions are further reduced by injection of limestone downstream of the combustion process in conjunction with a Spray Dryer Absorber (SDA). At the time of its conception, it was on the leading edge of technology.

In preparation for restarting HCCP, HEA and AIDEA selected a nationally known engineering firm (Shaw) specializing in coal-fired power plants to perform a comprehensive assessment detailing all work necessary to restart HCCP. Shaw identified systems and tasks that needed modifications and updates prior to restart, but was confident that the plant could be successfully restarted and operated safely and reliably. Through Shaw’s comprehensive assessment of the present status of the plant, we are confident that the plant can be operated successfully.

REGULATIONS
HEA is aware that future regulations will likely affect HCCP; however, these regulations will take several years to develop and implement. In addition, future regulations can and will affect other forms of generation. The Environmental Protection Agency’s (EPA’s) latest attempt at regulating mercury emissions failed in the courts and the EPA is working on a redraft of these regulations. Under the failed regulations, HCCP would likely have qualified as a “low mass emitter” and would not have been required to implement any mercury removal technology. We are fortunate that Usibelli coal is relatively low in mercury content compared with Lower 48 sources of coal. Future regulations would have some impact on coal-fired generation, and perhaps other fossil fuel generation as well, but that impact is a matter of speculation at this time. What is likely to happen is that HCCP will operate, with or without HEA participation, under its existing permits.

Technology and equipment does exist for removing mercury from stack emissions. These technologies are effective and efficient and, if necessary, HEA is confident that mercury removal would not cause an unacceptable increase in the price of power out of HCCP.

On the subject of greenhouse gas emissions, HEA is aware that there may be future regulations. The technology to capture and sequester greenhouse gases is in its early developmental stage and a proven technology has not emerged. How any regulations, if implemented, might affect HCCP in the future is not known and HEA cannot quantify the cost of these regulations at this time. One must also recognize that if HCCP is not used to generate the required energy, that energy would be replaced with the use of gas fired generation. Gas fired generation, although it does not have as large a carbon footprint as coal, still has a significant impact on the total amount of emissions. Diversity of location and diversity of sources can only assist in making the emissions impact as small as possible. In a perfect world there would be a source that we could depend on for the base load energy requirements of our members that would have little or no carbon footprint. Unfortunately, that technology is not available at this time.

COAL PRICES
While coal is a non-renewable resource, Alaska is blessed with an abundance of coal resources. In fact, the source for HCCP’s coal (Usibelli Mine) is located in Healy and is expected to last at least 150 years, which is well beyond the expected life of HCCP. HEA, and our experts, expect less volatility in the price of coal than from other fuels such as gas or oil. While the price of coal will reflect the current economic conditions and trends, coal is insulated from radical price fluctuations because of the terms and long duration of typical coal purchase contracts. While coal may never be as cheap as state or federally subsidized hydroelectric power, it is not likely to exceed the price of natural gas or oil fired generation. Hence, HEA expects that HCCP will, over the long term, provide a stabilizing influence on our price of power. Again, this perfectly matches HEA’s strategy of balancing its generation portfolio to achieve stable long term rates for our members.

Your HEA Board and management are doing their best to bring HEA ratepayers the most cost effective and stable power possible. This challenge involves balancing a complex blend of interests, relationships and technologies. By agreeing to equally share both the cost and power output from HCCP with GVEA, HEA is effectively splitting any future risk for its members.

I appreciate the interest and concerns of all HEA members and hope this information will give you confidence that the HEA Board is making the best possible decision based upon solid engineering recommendations with due consideration given to future risks. While you may not be completely in support of the HCCP project, I hope you will find reason to support the Board’s action in delivering a project that provides diversity and long term stability to our average price for power.

Sincerely,
Brad Janorschke
General Manager
Homer Electric Association, Inc.