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Oil tax cut doesn't stop funding for Alaska's Susitna dam megaproject

Jerzy Shedlock
An illustration of the what the Susitna Dam may look like, if ever built. The proposed project received $95.2 million in Alaska's capital budget, which totaled $2.2 billion, down nearly $1 billion from the previous year.
State of Alaska illustration

Fresh funding will allow a state agency to continue moving forward with plans to build what would be the second-tallest dam in the country, just behind California's 770-foot Oroville dam.

Proponents of the Susitna-Watana Hydro project in Southcentral Alaska pushed hard during the recent legislative sessions to funnel money toward the mega project. They were able to secure further state investment during a session in which lawmakers approved a cut to state oil revenue worth about a billion or more per year. Despite the state's shrinking revenue expectations, the Susitna dam project received $95.2 million in Alaska's most recent capital budget, which totaled $2.2 billion, down nearly $1 billion from the previous year.

The money will be used for an engineering feasibility study and environmental studies, among other work, to prepare for a Federal Energy Regulation Commission (FERC) license application expected to be submitted in September 2015.

“Last year was spent developing our revised study plan, which is our environmental study effort. The next phase of the project is implementing those studies,” said Alaska Energy Authority (AEA) spokeswoman Emily Ford. “We’ll be getting out in the field in 2013, and these funds will support that effort.”

The price tag for completing the licensing, engineering and design of the project is $343.7 million. That work would occur between now and 2017 if the funds supporting it keep coming. The current cost estimate for the project is $5.19 billion. Opponents contend the final cost will wind up closer to between $6 billion and $8 billion.

Susitna's hydro potential

Slated for completion in 2024, the project is currently envisioned as a 735-foot-high dam with a 41-mile long, 2-mile wide (at its widest point) reservoir about 90 miles north of Talkeetna on the Susitna River. Power generated by the dam would be funneled into the Railbelt electric intertie.

AEA projects the dam will produce 50 percent of the electricity needed by the Railbelt, which encompasses portions of the Interior and Southcentral Alaska lying along the Alaska Railroad route from Seward to Fairbanks. Throughout the last decade, Alaska’s interest in renewable energy surged as oil and gas production declined, and in 2010, the Legislature adopted a renewable energy goal that calls for generating 50 percent of the state’s electricity with renewable sources by 2025.

But that’s a goal, not a mandate. Currently, hydroelectric power provides 21 percent of Alaska’s electricity needs, far more than any other form of renewable energy, with 33 sites across the state, according to the Renewable Energy Alaska Project.

But long before traditional energy sources began dwindling, proponents were already calling for a Susitna dam.

The first studies to determine the Susitna River’s hydroelectric potential were conducted in the 1950s by the U.S. Bureau of Reclamation, a federal agency under the U.S. Department of the Interior that oversees water resource management.

Those studies were examined through the late 1970s, and a second study phase began in the 1980s. At that time, the Alaska Power Authority (APA), now AEA, filed for a FERC license -- but the agency pulled the application in 1986. “Crashing oil prices not only impacted the state’s coffers but made other energy sources a lot more viable at the time,” Ford said, referring to heating oil and natural gas.   

While records of the state appropriations during the 1980s aren't readily available, licensing costs totaled about $140 million, according to AEA. That money was spent entirely on the federal application process, but there were likely other costs and funds approved by the Legislature, too.

Big ramp-up in 2010

In 2008, the state authorized AEA to reevaluate Susitna’s hydroelectric potential. Alaska lawmakers again began talking seriously about resurrecting the project. The state was flush with oil money thanks to the Legislature’s decision the previous year to raise taxes on oil companies. Then-House Speaker John Harris, R-Valdez, said he was interested in the project because utility bills were climbing and cheaper energy sources were needed.

The state appropriated $2.5 million to conduct prefeasibility work and to review the studies completed in the 1980s. Basically, AEA looked at the available information and thought about what was still needed to erect the enormous dam.

The real push came in 2010, prompted by Alaska’s renewable energy policy. The Legislature appropriated $10 million after Gov. Sean Parnell announced that November he endorsed the project. During the next legislative session, lawmakers unanimously approved $65 million to continue pursing the project and move toward securing a new FERC license.

AEA submitted its revised study plan to FERC four months ago. The federal commission approved 44 of the plan's component studies in February and the remaining 14 earlier this month. The 58 studies will cover more than 186,000 acres surrounding the proposed dam site. Not all of the studies are funded yet, and AEA estimates it will request $247.5 million over the next three years (including about $124 million next year). 

And the work isn't limited to the proposed site. On April 19 in fact, AEA put out an request for proposals to pay up to $300,000 over two years for a financial advisor for the project, "a multi-year term contract to a firm or team with the expertise to assist ... on financial issues related to financing and constructing a multi-billion dollar hydro-electric project."

A group of opponents, The Coalition for Susitna Dam Alternatives, contends not all costs associated with the project are being considered and estimates the bill could total $8 billion. Coalition president Richard Leo listed several potential costs that he said are common for large dam projects and can account for up to 25 percent of the cost:

• “Inevitable” construction overruns.

• The need to update existing power lines so they can handle the dam’s electrical load.

• Reducing or compensating for impacts on habitat, wildlife and business.

Over the past year, AEA conducted its latest study on the project's cost. The estimate -- $5.2 billion -- was determined with an independent firm, Ford said. She said the coalition was using earlier data that included “larger error bands” -- meaning the cost could’ve ended up 30 percent higher or lower than projected.

The new estimate has smaller error bands. There’s a 90 percent chance the final cost will come within 14 percent of the newest estimate. That means the resulting price tag should fall between $4.5 billion and $5.9 billion, said project economist Nick Szymoniak.

The cost of eventually demolishing or removing the dam at the end of its lifespan is another worry for Leo. “AEA hasn’t raised any considerations to" the cost of removal, he said. “What do you do when the dam’s life is over? How do you get rid of one of the tallest walls of concrete in the country?”

How many jobs will it create?

The coalition disagrees with the project’s official estimates for job creation, too. Ford said the project will provide about 1,000 jobs at the peak of construction. Workers will construct the dam, a road to the dam and related camp facilities.

Those numbers don’t impress the coalition, which argues that jobs balloon during any billion-dollar construction project and then disappear.

In addition to benefits to the blue-collar workforce, researchers are grabbing contracts, too. Northern Land Use Research, an Alaska cultural research firm, nabbed an estimated $1 million dollar contract to conduct archeological work at and around the dam’s site. The firm will identify, survey and inventory numerous archeological sites, seeking prehistoric remains and historic properties, said Burr Neely, the operations manager for Northern Land Use. 

“We’re the folks you see out there with shovels and screens sifting through dirt and looking for signs of human activity,” Neely said.

Having completed more than 400 similar projects across the state -- including work for the proposed Alaska Natural Gas Pipeline, Donlin Creek Mine, Coffman Cove Community Archaeology -- the firm is experienced in such projects. The Railbelt contains signs of prehistoric human occupation, including artifacts and stone tools, Neely said.  

It’s a large project for the firm, particularly in terms of acreage, he said. Northern Land Use typically handles 10 to 20 projects a year. The exact value of the contract and scope of the project hasn’t been determined, he said, but “a handful” of crews will dig throughout the region in summer 2013.

‘Trickle down’ economics

What happens once a dam has been built worries Leo, too. Might the sport fishing industry in the Matanuska-Susitna Borough that generates 1,900 jobs and $163 million in revenue a year be harmed? The coalition argues the effect on Susitna River salmon runs, including the fourth-largest king run in Alaska, could be disastrous.

Among the 58 studies planned by the Alaska Energy Authority are several efforts to better understand Susitna River fish populations, including “Fish Distribution and Abundance in the Upper Susitna,” “Salmon Escapement Study” and “Study of Fish Passage at Watana Dam.” Ford was quick to point out the studies examine the river from the mouth of Cook Inlet to the upper Susitna and, according to AEA, four out of five salmon species found in the river have not been documented within 35 miles of the dam site.

Fish arguments aside, Ford and Szymoniak said the dam will pay off in long-term energy savings by providing a stable cost of power for 50 years or more. “The cost of energy is one of the main drivers and primary concerns for doing business in Alaska,” Ford said. “So, having that stability should ultimately be a positive driver for the economy.”

If the dam follows its construction timeline and begins generating electricity in 2024, the wholesale rates -- the rates utilities would pay to purchase the electricity -- would be about 18 cents per kilowatt hour. That’s in 2024 dollars. It amounts to about 13 cents in today’s dollar value. Single-family homeowners with Municipal Light & Power currently pay an average of 12.2 cents per kilowatt hour; Chugach Electric customers average slightly more. Because most of the project’s costs are capital and fixed costs, the cost of power provided by the dam will remain stable, Szymoniak said. Adjusted for inflation, he said the cost would amount to about 6 cents per kilowatt hour after 50 years.

By comparison, natural gas power costs in 2024, according to AEA, are projected between 10 cents and 15 cents per kilowatt hour. Szymoniak said the energy authority chose natural gas for a “simple comparison” because it’s the primary alternative. He expects prices to equalize after 12 years, with the dam’s power cost reducing every year while natural gas continues to climb, widening the gap.

With a 50-year-project, he added, a 12-year crossover point is “pretty good.”

“I see two main benefits in terms of costs and power,” Szymoniak said. “It will be lower than the cost of natural gas in the long-term, or even the medium term, but the other one is that it stabilizes rates going forward. Industry and businesses looking to invest in the state, build houses, start businesses -- this will provide some incentive.”

AECOM, the consulting firm that established the new cost estimate, said the dam’s timeline is feasible and recommended year-round construction. 

Contact Jerzy Shedlock at jerzy(at)alaskadispatch.com