Parnell needs to call for audit of rail extension

This is a letter to Gov. Sean Parnell urging an audit on the operating costs and revenues at Port MacKenzie.

Dear Governor Parnell:

Cook Inletkeeper is a public interest organization dedicated to protecting the Cook Inlet watershed and the life it sustains. Please accept this letter on behalf of Inletkeeper and its more than 1,200 Alaskan members and supporters throughout the state.

I am writing with serious concerns about the fiscal assumptions underlying the proposed Port MacKenzie rail extension and to request your leadership in pursuing an executive or legislative branch audit to better understand if the project’s projected revenues can pay for the project’s operating costs in the years to come.

To date, the project has received more than $170 million in state grants and bonds, including $25 million you approved this year. The total project cost is estimated at $272.5 million, though that figure may well be underestimated. Nonetheless, the project will require at least another $100 million in capital funding, most likely from state sources.

As a threshold matter, Inletkeeper recognizes the positive economic impacts and jobs the construction phase of this project can generate. We also recognize, however, that this new 32-mile rail extension will bisect wetlands and waterways vital to wild Alaska salmon, and with Mat-Su Valley salmon runs experiencing unprecedented pressures and restrictions, we believe the significant habitat impacts posed by this project have been largely ignored.

The project’s estimated operations revenues, compared to its assumed costs, raise additional concerns. According to a 2008 report by Scott-Balice Strategies for the Mat-Su Borough, “[d]iscussions with representatives of the ARRC provided an updated estimate of $2 million to $3 million annually for maintenance of the Rail Extension.”

Thus, according to the MSB’s consultant, Alaska Railroad Corp. representatives estimate annual operating costs upwards of $3 million per year. Yet, according to a review by Ground Truth Trekking in January 2013, the operating revenues assumed to pay for these costs rest on a “misleading economic analysis” that “relies on vast amounts of theoretical and unlikely future development in the rail corridor.”

For example, studies by ISER (2008 and 2010) and Metz (2007) rely on numerous shipping assumptions that approach the fanciful, including annual shipments of: 2 million tons of mineral ore; 3.5 million tons of Portland cement for export; 1 million tons of export coal; and 3.3 million additional tons of coal for gasification at the Agrium fertilizer plant.

While we believe an audit would provide the more detailed level of analysis needed to better understand these economic assumptions, a few points jump out. For example, the Red Dog Mine — Alaska’s largest mine — ships roughly 1.4 million tons of ore annually. Yet, the Port Mac rail extension expects to ship 2 million tons of ore each year, despite the fact a key mining project in the rail corridor, the Livengood Gold Project, recently announced results showing the project is not economically feasible. As a result, it is highly unlikely new mines will suddenly spring up to produce the annual revenues relied upon by the project to help cover its operations costs.

Additionally, the project’s operating revenues rest heavily on coal shipments. First and foremost, the shipments founded on coal for Agrium’s fertilizer plant are illusory, because Agrium long ago dropped its plans for coal gasification at its Nikiski plant. Furthermore, coal demand in the Pacific Basin is languishing, Usibelli has significantly curtailed its export shipments through Seward over the past year and recent projections by Goldman-Sachs suggest softening markets and low investment in west coast coal potential in the mid- to long-term.

Finally, the project assumptions rely on massive new Portland cement shipments, despite the fact no such industry currently exists in Alaska and none is planned.

These assumptions require a responsible review to ensure this project makes economic sense for Alaskans now and in the future.

Cook Inletkeeper raised similar concerns regarding the Port of Anchorage expansion, but unfortunately, those concerns went unheeded. Now Alaskans have lost hundreds of millions of dollars, and needed upgrades to the state’s most important port lie in limbo. Our intent here is to avoid similar mistakes and to ensure the state of Alaska spends its limited fiscal resources wisely.

We believe if Alaskans are to shoulder impacts to vital salmon habitat in the Mat Su Valley, then the project must pay for itself and stand up to some basic economic scrutiny.

Accordingly, at a time of shrinking state revenues, we request you show the leadership needed to chart a fiscally conservative course in Alaska and initiate an audit to understand whether the assumptions underlying the rail extension’s business plan are realistic, and whether the project’s operating revenues can support this substantial new infrastructure in the future.

Thank you for your attention to this important issue. I look forward to your timely response.

Bob Shavelson is executive director of Cook Inletkeeper.