New report questions viability of Susitna dam project

As the administration of new Alaska Gov. Bill Walker begins to scrub the numbers in the state budget, an analysis released Monday suggests big holes in the economic assumptions justifying the proposed 735-foot-high Susitna-Watana Hydroelectric Project. But the agency leading the charge on the project stood by its price estimate as the "most probable cost."

"The Susitna hydro project does not survive any plausible market test," writes longtime Alaska economist Gregg Erickson in a report commissioned by the Alaska chapter of Trout Unlimited, opponents of the Susitna plan.

The state could draw upon its easily accessible cash savings of more than $15 billion to build the project, but draining state reserves at a time of multibillion-dollar annual deficits would make the future that much more risky, Erickson said.

The ultimate cost of the proposed dam could be far higher than the advertised price of $5.19 billion, the report says, and the dam would compete for a portion of the same energy market as a proposed $7 billion to $8 billion smaller-diameter gas pipeline. That project's future is also uncertain as the Walker administration begins to re-evaluate priorities for the state with oil prices dropping and projected budget deficits growing.

When Gov. Sean Parnell left office last week, he offered a proposed budget that included $20 million to advance studies of the Susitna project. He also included money for a range of other big projects, including the Ambler Road and the Knik Arm Crossing. Money for advancing gas line studies has already been appropriated by the Legislature.

A week ago, the Walker administration began developing its own budget, and one of the many decisions the new governor will face in 2015 is whether to continue with the Susitna dam studies.

Erickson says the state has likely underestimated the cost of building and operating the dam.


It is also downplaying the likelihood that cost overruns would make the project uneconomic and it has not identified how much revenue would have to be paid to Cook Inlet Native corporations for building the project on their lands, he said.

Erickson questions many of the financial assumptions used by the state agency in its public presentations, saying that the project relies on an "exceedingly optimistic" 5 percent interest rate.

Without a state commitment to pay off the debt if the project doesn't pencil out, the agency would most likely have to borrow money at a higher rate, he said.

Regarding construction costs, the state gas pipeline company says the in-state gas pipeline has a margin of error of plus or minus 30 percent. Something similar should apply to the cost estimates on Susitna, Erickson said, as the project is not at a point where a specific cost can be reliably stated.

The project would require about $880 million to upgrade transmission lines to move energy from the dam on the Susitna River to Fairbanks and Anchorage, but that cost is not part of the $5.19 billion estimate, nor is the cost of building and operating the dam on Native lands, Erickson writes.

The Alaska Energy Authority defended its planning work and said that while the cost estimate it has published should be viewed as being accurate to "plus or minus 20 percent to 30 percent," it uses the single $5.19 billion figure to show the "most probable cost."

The agency denied that 5 percent is exceedingly optimistic as a cost of borrowing money and said that "a blend of potential low-interest financing from the Rural Utility Service and 6 percent for AEA bonds with a state moral obligation" will be enough to reach that target.

Regarding the $880 million in intertie upgrades needed to deliver Susitna power to Anchorage and Fairbanks, AEA agreed that the cost is not reflected in the project plan, but "the transmission upgrades and operations is a larger issue that is important to the Railbelt independent of this project."

Proponents of the dam say it would provide low-cost power for 100 years, meeting about half the demand of the Railbelt. The Alaska Gasline Development Corp. says it views the proposed gas pipeline from the North Slope to Southcentral as " complementary to the hydroelectric projects and not an exclusive alternative."

But Erickson writes that the gas pipeline company assumed its gas would have half of the Railbelt demand for electricity, while the Susitna planners say they would capture the other half.

"To finance the Susitna project with borrowed money, as AEA's feasibility calculations assume, it will be necessary for Railbelt utilities to agree to purchase Susitna's entire output," he wrote.

"So far there is no indication that the utilities have the financial strength to make a take-or-pay commitment. And should they make such a promise, it strains credulity to suggest the same utilities could then commit to fulfill half their energy requirements with bullet-line gas," he said.

As far as the dam and the gas pipeline each accounting for half of Railbelt power needs, the agency said that is correct, but they are not in competition.

The AGDC project "assumes serving half of the electric demand, however its project economics are not dependent on serving any portion of the electric demand as all unused natural gas can be exported as LNG, increasing revenues to the state of Alaska."

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.