Port commission tackles tariff schedule with year-end deadline

  • The Anchorage Port Commission is still wrestling with how much to raise tariffs to fund operations as well as repairs and construction to the aging Port of Alaska. The current tariff structure expires at year-end. (Photo/Elwood Brehmer/AJOC)

The traditionally mundane process of updating the fees charged to use the Port of Alaska has turned contentious as city officials search for ways to pay for repairing the ailing docks.

Anchorage Municipal Manager Bill Falsey told the Anchorage Assembly’s Enterprise and Utility Oversight Committee Oct. 17 that port managers had come up with four basic options for updating the tariffs levied on the goods and materials that cross the docks at the port.

“Before the year’s end we have to have something in place. That means big decisions have to be made,” Falsey said to Assembly members, noting the current tariff schedule is set to expire Dec. 31.

The baseline, “keep the lights on” option would follow historical practice and provide port officials the revenue to conduct routine maintenance on facilities — which now includes about $2 million per year to repair dock support piles weakened by corrosion — while keeping 90 days of cash in reserve.

The actual baseline tariff increases would be 3.5 percent for 2020, 3.93 percent in 2021 and 3.01 percent annually through 2027 with flat rates to 2029, according to an Oct. 10 letter Falsey sent to the Port Commission.

Falsey has long stressed that the municipality would not raise tariffs to a point that would unduly burden Alaska consumers or would drive business away from the port and prevent the expected revenue from being raised.

However, the port users contend the proposal reneges on a commitment city officials made when work was approved to rebuild the Petroleum and Cement Terminal, or PCT. They understood city officials to mean port tariffs would not be raised at all to fund PCT construction when the initial contract was awarded, the users claim.

The Port Commission is an advisory group to the Assembly that historically has agreed with the tariffs recommended by officials at the municipal-owned port. Port tariffs have usually been updated on a five-year basis, but the need for long-term funding has pushed city and port officials to look at a 10-year schedule.

The remaining three proposals would raise varying levels of additional funds through greater petroleum and cement tariffs to pay for at least part of the new petroleum and cement terminal, or PCT that will start to be built next year.

In late July the Anchorage Assembly approved a $42 million contract for the first year of PCT construction but an informal consortium of the primary port user companies objected, highlighting the fact that the municipality does not have funding to pay for a second year of PCT work to finish the new dock.

User company representatives at the time said they worried city and port officials would attempt to raise tariffs to cover the cost of finishing the PCT in late 2021.

Overall cost estimates for the PCT have come down from approximately $220 million initially; the city now expects to need $81 million to finish it, according to Falsey’s letter.

The PCT is the restart of major construction work at the Anchorage port — officially renamed the Port of Alaska in 2017 — since 2010 when severe damage to installed sheet pile was discovered and the port expansion project was halted. That project spent roughly $300 million of public money but left little to show for it.

No one disputes that the aging docks at the port need to be overhauled or replaced, but how quickly that should be done while city and port officials try to reduce costs from a $1.9 billion ballpark price published in January is at the heart of the debate.

Many port stakeholders fear large increases on fuel import tariffs could ultimately be felt at Ted Stevens Anchorage International Airport, where international air cargo carriers stop to refuel on flights between Asia and the Lower 48. The business model of carrying more cargo and refueling in Anchorage instead of carrying more fuel and overflying Anchorage could be disrupted by even small changes to fuel prices, they say.

That air cargo traffic has made the Anchorage airport one of the five busiest cargo hubs in the world and has recently spurred several large warehouse development plans there.

According to Falsey, he had said tariffs would not be increased to fund next year’s work. He said during the Oct. 17 committee meeting that he believes there is an “emerging consensus that tariff adjustments of some sort are inevitable.”

“We’re going to need help and back and forth from the user group to figure this all out but we’re committed to figuring something out,” Falsey said.

The increased tariff revenue likely wouldn’t be applied directly to the construction work because much of it would come after the work would hopefully be done. Instead, it would pay the long-term debt service on revenue bonds the port would sell to fund the work up-front and pay back over time.

The city is applying for federal grants to fund portions of the work, but the prospect of that money is still uncertain.

A second option would generate approximately $41 million to finish in-water work on the PCT in 2021 by increasing the petroleum and cement tariffs by 120 percent in 2020 and 1.31 percent per year afterwards through 2029. More specifically, it would raise the current petroleum tariff of 16.4 cents per barrel to 36.2 cents per barrel in 2020 and 40.7 cents per barrel by 2029.

The cement tariff would increase by approximately $2 per ton in 2020 and much smaller increments in subsequent years, according to the letter.

Finishing the in-water work in 2021 would largely alleviate permitting risks for the project, Falsey said, as the port has a two-year permit from the National Marine Fisheries Service to do the work in the habitat of endangered Cook Inlet Beluga whales.

City and port officials have also said a structurally sound but unfinished PCT could be used as an emergency cargo dock if an earthquake or other event took the current cargo docks out of service.

The fuel and cement companies that use the port have declined to specify exactly how significantly the higher tariffs would impact their business, but they have said it would force them to evaluate their options.

Falsey has said the user companies’ somewhat understandable reluctance to disclose sensitive business information makes it difficult to forecast the impact of any tariff changes.

Raising $81 million to finish the PCT in 2021 would require raising the tariffs by 235 percent next year, or by 39 cents per barrel of fuel and $3.93 per ton of cement. Those rates would remain unchanged through 2029, according to municipal figures.

Making the PCT functional for offloading cement shipments would cost approximately $60.5 million and would raise the tariffs by 176 percent next year and 0.61 percent subsequently.

Falsey said year-to-year adjustments could be made to the tariff schedules as long as the revenue goals would be met.

He also suggested the Assembly and commission start considering tariff changes for bulk container cargo that crosses the docks to prepare for replacing the port’s cargo terminals — work that is expected to cost hundreds of millions of dollars.

“We all believe now that the cargo side of the (port modernization) program is kind of back to the drawing board. I think we have in mind ways to skinny the cargo side of the project way down. We don’t yet have a consensus on what that’s going to look like,” Falsey said. “We do know it’s going to cost something and it’s going to be expensive.”

Port Commission members said they are reviewing the tariff documents but have not come to a decision. A commission meeting to discuss the tariffs is scheduled for Oct. 23.

Elwood Brehmer can be reached at [email protected].

10/23/2019 - 9:49am