INTERTIE PARTICIPANTS GROUP MEETING 1/2/03
Southern Intertie 
TESTIMONY OF LEE ANN GERHART

INTRODUCTION:

My name is Lee Ann Gerhart and I am testifying as a volunteer on behalf of Chugach consumers, a grassroots group of fiscally concerned Chugach electric ratepayers, both retail and wholesale ultimate end-users.

My professional background is a CPA (Texas) specializing in business process analysis. I have private sector/corporate expertise in economic & benchmarking analysis and rational decision making. I have worked for Exxon, Alyeska Pipeline, and was a member of the Prudhoe Bay management team for BP. I have been helping Chugach Consumers on electric utility analysis since 1994.

• We are facing a changing state and local economy with lower revenue prospects in the future. Waste is never justified, whether it is boom time or bust, but now more than ever before, we must be more careful about major investments and expenditures.
   
• AEDC Vision Anchorage says all is not well in the Anchorage economy. We have an "economy at risk" that needs to move to a more sustainable, broader basis. To do that we have to be more competitive in the global economy.
   
• One key finding of their analyses of competitor cities is that in Anchorage,
   
  • "Utilities tend to run higher than most of the comparative cities, however natural gas is very competitive."
     
• Enstar Natural Gas has always been a private utility that has to pay investor shareholder profits.
   
• Because the electric utilities are co-ops or municipal-owned, they don't have to do that. They generate off the same low cost natural gas or state-provided cheap hydro yet their rates are higher then the national average. Why?

Electric ratepayers are captive customers of the electric utilities, and taxpayers are captive to the decisions of their government. In both cases, the costs of bad decisions are blithely passed along to the public with no consequence to the decision-makers. In the case of the Southern Intertie, we have both of these entities involved. And there is evidence in both quarters that the true economics of the project have been suppressed and false benefits manufactured.

With so much doubt as to the accuracy of the project benefits publicly presented, it is paramount that an independent review be immediately conducted to assure that this is indeed not another costly boondoggle with Alaskan citizens ultimately left the victims of waste, fraud, abuse, and/or mismanagement.

We first became aware that studies had been suppressed that did not support the popular desire of certain decision makers when a secret study contracted by Chugach electric four years ago was suddenly released last month. The circumstances appear outrageous as will become evident further on.

The cost of the Southern Intertie is $124.1 million [comparison table: http://www.chugachconsumers.org/lib/int/SouthInt.Cost-Benefit.DEIS.htm ]

Chugach management kept this study secret until three weeks ago but during the last four years publicly disseminated the less sophisticated 3/98 DFI study with much higher benefit numbers without the knowledge of the board to whom they only presented the 2/98 DFI study.

A similar history in our state government occurred in 1990: the first DFI study of 1989 showed $125 million benefit. State analyst, Alan Mitchell, now the senior manager of economic analysis for GCI, found only $51 to $63 million. Ramona Barnes, who was making her legacy out of the interties, ended Mr. Mitchell's services by having Gov. Hickel line item veto his contract. The 2/98 secret DFI study would indicate that Mitchell was right with his "politically incorrect" lower benefit numbers.

Regarding the DFI studies:
Why do I call the 2/98 secret study showing only $56.7 million more accurate than the one Chugach made public showing $143.5 million in benefits? I'll let DFI answer that themselves. On page 31 of the 2/98 secret study, DFI says:

"Our operating benefits are significantly less than previous studies, including the 1989 DFI work. The previous work was quite different from ours [i.e. this 2/98 study] in that it built separate small models for each source of operating savings (energy, spinning reserve, hydro use, transfer losses) in isolation for the others. We believe our comprehensive approach [in 2/98 study] is much more accurate."

In other words, they double-counted benefits in their other study.

The release of the secret study was reported in the Anchorage Daily News on December 16, 2002 in an article by Tom Kizzia, with further quotes as follows:

But just last week, Chugach released an internal analysis done in 1998 that found only $57 million in benefits. The same California consultant prepared both studies.

Steve Haas, a consultant involved in the two studies, said last week the more pessimistic internal study was probably the more accurate of the two. It was designed to look at the impacts on Chugach ratepayers and made conservative assumptions, he said. The public study, which updated a decade-old analysis, was more "generous," he said.

"Without the state grant, the line would be difficult, if not impossible, to cost justify," the internal 1998 study said.

So it boils down to this: with DFI publicly stating that their lower estimate of benefits being the more accurate, there is no independent third party that has found the benefits of the Southern Intertie are anywhere near the $125 million cost of this project.

11/2002, Chugach Electric prepared their own economic evaluation of the Southern Intertie that identifies $56 million in benefits for the Chugach system (a subset of the Railbelt consisting of CEA, MEA, HEA, Seward) against $42 million in project costs net of the grant. Adding the $70 million grant results in $112 million in costs. I believe that many of you have seen this presentation. Please note: this is not an independent study and was prepared by the very same staff that suppressed the more accurate 2/98 study from the public EIS process.

In today's Anchorage Chronicle, Chugach spokesperson Phil Steyer claims "the goal is to be able to generate power using the cheapest combination of hydro and natural gas generators, and move it to where there is demand.  Adding the second transmission line would benefit utility customers by improving reliability and reducing costs to produce power."

• "by reducing costs to produce power," but at what transmission cost to achieve those savings?
   
• Reliability is 99.975% at present. How much are you willing to spend for only a part of that remaining 0.025%?

Steyer further says, "we think it is wholly appropriate for the state to invest in vital infrastructure."

• Of the $124.1 million in project costs, only $56.7 million in real benefits go to consumers. The rest just goes to the few who build it. If these lower benefits are true, then we are wasting $67.4 million.
   
• Is this the best & highest use of a $70 million investment of state funds when the costs so far exceed the benefits?

There should be no forward movement on the Southern Intertie until benefit discrepancies have been credibly straightened out.