Alaska Division of Legislative Audit


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June 22, 1995

Members of the Legislative Budget
and Audit Committee:

In accordance with the provisions of Title 24 of the Alaska Statutes, the attached report is submitted for your review.

DEPARTMENT OF COMMERCE AND ECONOMIC DEVELOPMENT
ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY
HEALY CLEAN COAL PROJECT

June 22, 1995

Audit Control Number

08-4522-95

The objectives of the audit were to determine if the procurement procedures, used by the Alaska Industrial Development and Export Authority in the contract award for the Coal Handling and Dust Collection System identified in the audit request and in the award of the general construction services contract, were reasonable and to determine if the dollar amount of the Coal Handling and Dust Collection System contract award was excessive.

The audit was conducted in accordance with generally accepted government auditing standards. Fieldwork procedures utilized in the course of developing the findings presented in this report are outlined in the Objectives, Scope, and Methodology section. Audit results may be found in the Report Conclusions section of the report.


TABLE OF CONTENTS

OBJECTIVES, SCOPE, AND METHODOLOGY

ORGANIZATION AND FUNCTION

PROJECT SUMMARY

REPORT CONCLUSIONS


OBJECTIVES, SCOPE, AND METHODOLOGY

In accordance with Title 24 of the Alaska Statutes and a special request by the Legislative Budget and Audit Committee, we conducted a review of the Alaska Industrial Development and Export Authority's (AIDEA or the authority) Healy Clean Coal Project (HCCP).

Objectives

Our primary objectives were:

Scope

We reviewed AIDEA's clean coal technology demonstration project and two of the contract awards made for the project.

Methodology

During our audit, we examined information from a variety of sources including the following.

In addition, we interviewed AIDEA staff and personnel from the attorney general's office.


ORGANIZATION AND FUNCTION

The Alaska Industrial Development and Export Authority was created by an act of the Alaska State Legislature in 1967. AIDEA is a public corporation of the State, constituting a political subdivision of the Department of Commerce and Economic Development but with a separate and independent legal existence.

AIDEA's purpose is to promote, develop, and advance the general prosperity and economic welfare of the people of Alaska; to relieve problems of unemployment; and to create additional employment. Among other activities, AIDEA is authorized to issue bonds; own and operate development projects; accept grants from federal agencies; and foster the expansion of exports of Alaska goods, services, and natural resources.

The powers of the authority are bestowed on its board. The five board members of the authority consist of the commissioner of revenue, commissioner of commerce and economic development, another commissioner and two public members, all appointed by the governor. The board appoints an executive director to oversee the management and staff of the four functional areas of AIDEA: credit, development, energy, and finance.

The energy division was added to AIDEA to accommodate legislation passed in 1993 that named the board members of the authority also as the directors of the Alaska Energy Authority (AEA) and vested all of the powers of AEA in them. The energy division and the development division share responsibility for the Healy Clean Coal Project.


PROJECT SUMMARY

The Alaska Industrial Development and Export Authority's mission statement reads as follows:

To meet these ends, AIDEA was interested in participating in the federal clean coal technology project identified by Usibelli Coal Mine, Inc.

In 1985, the U.S. Congress authorized the issuance of a general request for proposals for clean coal technology projects. The U.S. Department of Energy (DOE) was directed to fund up to 50 percent of the costs of such projects. In September 1988, Congress made additional funds available for a third procurement of clean coal technology projects. These projects were asked to demonstrate technologies capable of retrofitting or repowering existing facilities. Again, DOE was authorized to provide up to 50 percent of the total project costs.

Forty-eight proposals were submitted to DOE for consideration for the third clean coal technology funding. In addition to developing new technologies for retrofitting or repowering facilities, the projects had to demonstrate innovative energy efficient technologies capable of being commercialized in the 1990s that would minimize environmental impacts of pollution and/or provide for future energy needs in an acceptable manner. Among the proposals was the one submitted by AIDEA for the Healy Clean Coal Project (HCCP).

In December 1989, HCCP was selected as one of thirteen projects qualifying for the DOE clean coal technology demonstration project grants. Among the selection criteria used to evaluate the projects were requirements that the projects be operated in the United States using coal from mines located in the United States, that the proposer agreed to provide a cost share of at least 50 percent of the total allowable project cost, and that the proposed project team members were identified and firmly committed to fulfilling their proposed roles in the project.

Other factors considered in the project evaluation were that the technologies be designed to reduce air pollution and solve the problem of acid rain, that the projects utilize a broad range of U.S. coals and be located in areas that represent diverse regulatory and climatic

conditions, and that the projects provide for future energy needs with the environmentally acceptable use of coal or coal-based fuels.

In 1990, the Alaska legislature authorized issuance of up to $85,000,000 in bonds and appropriated $25,000,000 for the clean coal project. The cooperative agreement between AIDEA and DOE was completed in April 1991.

The project team members defined in the proposal and committed to the project are listed below.

After DOE awarded the grant to the Healy project, the team members' commitments were established through contracts with AIDEA. In their individual contracts, TRW and JOY assumed the repayment obligation agreed to by AIDEA in the cooperative agreement. The agreement stated that DOE would be repaid an amount up to its share of the total project costs. Repayment is based upon gross revenues from TRW's and/or JOY's sale or lease of the equipment developed for the new technology and from gross revenues from royalties and license fees for the use of the demonstration technology.

HCCP is currently estimated to cost $267.0 million. Project costs for the acquisition of equipment and services from team members and the two contracts reviewed for this audit are estimated as follows:

Team Members: Amount Percent
AIDEA $ 7,272,524 2.7
Golden Valley Electric Authority 23,065,842 8.6
Stone and Webster Engineering Corporation 24,599,000 9.2
TRW Space and Technology Division 29,620,000 11.1
Foster Wheeler Energy Company 30,331,000 11.4
JOY Environmental Technologies, Inc. 9,012,510 3.4
Usibelli Coal Mine, Inc. 1,185,565 0.4

Other Contracts:
 
 
General Construction Services Contract 83,246,191 31.2
Coal Handling and Dust Collection System 1,304,055 0.5
Other Equipment and Services 57,363,313 21.5
 
$ 267,000,000 100.0 %

Project funding of $256.2 million is anticipated from the following sources:

Per AIDEA, the $10.8 million deficit will be made up through contributions of funds, goods and services, and potentially through accrual of interest earned on an advance of the DOE grant funds. The deficit is due to higher than envisioned bids on the general construction services contract.

The clean coal project is located in Healy, Alaska. Ground-breaking ceremonies were held on May 30, 1995; construction is scheduled through late 1997. The first year of operation (1998) will be a demonstration period to provide DOE with operational data on the new technology. The technology is intended to be attractive for new power plants, repowering projects, and retrofit applications. Commercial operation is scheduled to begin in 1999. The project is designed to produce 50 megawatts of electricity that will be sold commercially by GVEA.


REPORT CONCLUSIONS

We reviewed the bid request, evaluation, and selection process for two contracts awarded by the Alaska Industrial Development and Export Authority (AIDEA) for the Healy Clean Coal Project (HCCP). The first was for the Coal Handling and Dust Collection System and the second for the General Construction Services Contract. We believe AIDEA acted reasonably in both procurements. Further, given the competitive bid process, we do not believe the contract prices are excessive.

HCCP exempt from the State Procurement Code

Legislation passed in 1990 gave the project an exemption from the State Procurement Code. Alaska Statute 36.30.850(b)(22) states that this chapter (AS 36.30) does not apply to

(A) is attempting to develop a coal-fired electric generation project;

(B) uses technology that is capable of commercialization during the 1990's; and

(C) qualifies for federal financial participation under P.L. 99-190 as amended. . . .

AIDEA established written procurement procedures for HCCP

In 1990, AIDEA, with the assistance of its project team members, developed a written procurement plan to be used for HCCP. The plan, approved by the U.S. Department of Energy (DOE), used AS 36.30 as a guideline with the exception of the requirement to process waiver requests and appeals through the Alaska Department of Transportation and Public Facilities commissioner. Provisions in the plan further specified:

Purchasing procedures issued in January 1992 assigned the responsibility for the preparation of bidders lists to the project engineers, Stone Webster Engineering Corporation. That duty included ensuring

AIDEA complied with the established procedures

We were asked to review the methods used in the contract award, and the amount awarded, for the Coal Handling and Dust Collection System because of concerns expressed that Alaska vendors were excluded and that the amount awarded was excessive due to sole sourcing. We examined the bid request, evaluation, and selection process for two contracts awarded by AIDEA for HCCP. The first was for the Coal Handling and Dust Collection System and the second for the General Construction Services Contract.

Stone and Webster Engineering Corporation (SWEC) developed a list of prequalified bidders for the Coal Handling and Dust Collection System that was sent to AIDEA, Golden Valley Electric Association, and Usibelli for comment, additions, and deletions. The HCCP team members had made the decision to purchase a complete "system" rather than its individual components because they intended to require a "performance guarantee" on it.

In August 1992, SWEC sent Requests for Proposals (RFP) to six prequalified bidders, one of whom had a division licensed in Alaska. In September 1992, three additional companies were sent copies of the RFP. Bids were received from three companies, including the Alaska-licensed one. After comparison and analysis of the bids which included performance guarantees, SWEC recommended award of the contact for $1.2 million to the bidder judged to have the "lowest evaluated bid price for commercially and technically acceptable equipment." The Alaska-licensed bidder did not receive the recommendation.

In the audit request, one of the component parts of the system was specifically identified and questioned as to why it was not bid separately. This component, as requested in the RFP, was for "Magnetic Separators, with support hardware, trolley beam, manual trolley, seals, rectifier, controls and instrumentation." Each of the three bidders identified a different manufacturer (Dings, Stearns, and Eriez) to supply this module at an average cost of $35,000. The winning bidder specified the Stearns model. This system segment represented approximately 2.9 percent of the total amount of the system contract award; as such, we feel that the magnetic separators were immaterial to the total system cost and to the method used to procure it. We believe that AIDEA was reasonable in the methods used for the system procurement.

One of the objectives of the competitive bid process is to allow competition to establish a fair price for specific goods and services. Therefore, given the fact that three responsive bids were received for the design and supply of the coal handling system, we do not feel that the system contract was awarded for an excessive amount.

In August 1994, after all of the project permits were obtained, AIDEA issued an RFP to the public for the project's general construction services contract. In order to qualify as a bidder, each company was required to be licensed in Alaska and had to provide photocopies of a current Alaska contractor's license and an Alaska business license.

The RFP stated that the successful bidder would have to execute an Alaska Resident Hire and EEO/Affirmative Action Affidavit Form in order to be awarded the contract. The contract itself required 90 percent Alaska hire. In addition, the contractor had to agree to use its "best efforts" to incorporate Alaska products and Alaska forest products in the work and to subcontract to Alaska contractors to the "extent that they were competent and qualified."

Seven bids were received on the general construction services contract; the contract was awarded in December 1994 for $83,246,000 to H.C. Price Company, an Alaska firm with 21 years experience in the State. Of the 17 first-tier subcontractors identified by Price to work on the project, 12 are Alaska firms. Subcontracts total $39,821,429; more than 77 percent ($30,833,714) of those dollars is for the Alaska subcontractors with the remainder ($8,987,715) going to the out-of-state companies. Further, as all seven bids were considered to be responsive, we believe there was adequate competition to ensure fair pricing. The contract amount is not considered to be excessive.

In summary, we believe that AIDEA acted reasonably in both procurements and, given the competitive bid process, we do not believe the contract prices were excessive.



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