Northern Economics and the University of Alaska Anchorage’s Institute of Social and Economic Research recently completed a new study on potential national-level benefits of Alaska Arctic OCS development in the Chukchi and Beaufort Seas. This report builds on a previous study of potential state-level benefits using the same methodology and assumptions.

Arctic OCS development:

• Creates significant economic effects


• Will create an estimated 54,700 new jobs


• Will generate an estimated $145 billion payroll


• Will generate $193 billion in federal, state, and local government revenue

Read the reports:

• To see a 2-page brochure on the national effects, click here


• To see the new report on the national effects, click here


• To see the 2009 report on impacts to the state of Alaska, click here

Northern Economics worked on a development plan for Alaska Ship & Drydock in 1999. A recent article in WorkBoat News talks about the development of the facility and the benefits it has brought to Southeast Alaska.

You can read the article here: A Success Story: Alaska Ship & Drydock.

Over the past several weeks, we’ve looked at the process of rate setting with a focus on port and harbor facilities. We’ve talked about the importance of setting appropriate rates as well as the tools used to set them, both economic and political. The intent of this series was to look at some of the specifics of this common need, share a framework for doing a rate study, and perhaps present something new to you.

I will be assembling a white paper on rate setting based on this blog series, with additional material to support your rate setting work such as a life cycle costing example and some examples of rates and rate structures from various facilities in Alaska. The paper will be posted in the downloads section of www.HarborModel.com in approximately two weeks and will be announced via the www.HarborModel.com mailing list.

This week we look at the challenge of gaining acceptance of and agreement with new rates. We’ll look at a few issues, including cost allocation, equity issues, and other community and industry concerns.

Cost allocation is the process of allocating capital and operating costs to different user groups. This can be straightforward with dedicated facilities, but it can become much more complex when dealing with multiple types of users at a common facility. The allocation question ultimately must come from the facility owner’s evaluation of what drives costs. Ideally, this should be based on such factors as: frequency of use, total annual duration of use, total annual tons carried across or gallons carried through the facility, wear and tear based on vessel and equipment sizes, or other quantifiable and measurable factors. Some operating costs, such as staff time, can be more challenging and may be driven by more qualitative factors. The most important part of the process is to use a consistent and transparent process so that it is clear how the results came about and it is easy to evaluate the effect of changing that process.

A common concern when proposing rate changes, especially when long-term maintenance and replacement costs are involved, is that of equity. Users ask why they should have to pay for facilities that are going to serve others. There isn‘t a simple and satisfying answer to this question, though there are two ways to view the issue that may be effective in communicating the need to adjust rates.

First, it is important to recognize that failing to set appropriate rates places a burden on future users that current users didn’t have to face. Heavily subsidized rates are attractive to most users. Few users, however, would choose to group together, build a brand new facility fully funding by their own money, maintain the facility over time with their own money, and, at the end of the facility’s life (30 to 50 years), remove and dispose of all of the improvements (with their own money) and move on. In essence, this is happens without taking a long-term view in rate setting, except that users don’t pay all of these costs; the government entity does.

Second, though current users often face significantly higher rates as a result of adopting a long-term approach than they do under a heavily subsidized situation, the new rates are no higher than they would have been had the long-term approach been followed all along. Current users aren’t being asked to pay for future users’ costs, but for their own, current costs. The issue is about if, and by how much, the government entity is willing to subsidize rates.

A common concern from industry and residents alike is that rate changes have to be considered in the context of the costs of operating in the region. Purchasers of goods brought in to a community ultimately have to pay the cost of bring those goods to their doorstep, which means that these operating costs ultimately come out of their pocket. (If not, then that service may go away, which also means the revenues generated by the activity go away.) For communities off of the road system, there are fewer options for transporting goods than there are in places on the road system. On the road system or with rail access, ports can optimize their user mixes and coordinate with other ports to reduce the overall cost of each type of good in the region. There isn’t a simple answer to this issue, and relative costs fall away when there aren’t any other options. The effect of rates simply must be considered in the overall cost of living and operating in the region.

This week’s post has probably created more questions than it has answered, but it’s important to anticipate these issues ahead of time, rather than after the rate structure has been proposed. Next week we’ll wrap up this series with some closing remarks.

Last week we talked about tools for setting rates. This week we’ll look at what expenses should be included in the calculations. Ideally, port and harbor facilities should pay for themselves with their revenues and perhaps some other sources that are related to, but not directly paid to, the facility. Since this is not always the case, we’ll look at different levels of funding and what they include.

In many Alaskan communities, facility owners have difficulty in charging sufficient rates to cover costs. This is due to a variety of issues, but in many cases it’s either a situation where a comprehensive rate study hasn’t been done (often with rates set by the market) or a situation where the rates were set years, even decades, ago haven’t been updated to reflect actual costs. While we always recommend that rates fully cover all of the facility’s costs, we recognize that it may be a multi-year process to get to that point.

Before we get to the list of different funding levels, let’s revisit last week’s discussion one more time. We talked about life cycle costing as one method for setting rates. To use this approach, we need to consider all of the costs a facility incurs over its life: startup costs, construction costs, operating costs, maintenance (both routine and major) costs, planned upgrades and other capital costs over time (including replacement costs), and decommissioning costs.

Once you’ve gathered all of your cost information, you should organize it into capital and operating costs. Generally, everything in the list is a capital cost, unless it’s an operating cost (such as staffing costs and benefits, materials for running the harbor office, equipment for clearing snow and ice, etc.) or a routine maintenance cost. With your overall capital and operating costs in hand (or the annualized equivalent of them from the life cycle cost analysis), we’re now ready to talk about covering costs.

Generally, we look at funding at three levels: all of it, just operating and routine maintenance costs (O&M), or O&M plus an additional amount. Ideally, rates will cover the facility’s full cost, including both capital and operating costs. That means that the enterprise will be able to keep going indefinitely, at least as long as the rates keep up with changes in the cost structure and use.

At the most basic level, O&M needs to be covered. Perhaps you’ve heard the old saying about losing money on every transaction, but making it up on volume? Though other factors need to be considered (especially if the facility provides the economic lifeblood of the community), if rates don’t cover O&M, there’s a strong argument for either drastic change or a shutdown of the facility. A drastic change is almost always preferable and, with the help of a proper rate study, can be sold much more easily to its users once the rationale behind the rate increases has been discussed.

If rates are sufficient to cover O&M but not the full cost, we recommended that rates cover as much of that gap as possible. When it comes time to replace the facility or expand it, that additional money that has been set aside will provide a local match for the money received from granting agencies or lenders.

No discussion of this nature would be complete without a word about other local funding sources. Port and harbor facilities are undoubtedly economic drivers for many communities. When we talk about revenues to cover facility expenses, these shouldn’t be ignored. In communities where commercial fishing is a big industry, for example, the general fund probably gets shared fish tax revenues from the state. While these are general fund revenues, it’s not much of a logical leap to recognize that without port and harbor facilities, there wouldn’t be much commercial fishing activity. Therefore, it’s perfectly acceptable to make transfers from the general fund to support the maritime facilities since those facilities have generated the revenues. What a community doesn’t want to do is make transfers to subsidize a port or harbor facility without a rational basis for doing so. This simply postpones having to deal with facility revenue shortfalls and raises a red flag to potential funding and financing agencies.

Governmental Accounting Standards Board’s (GASB’s) Statement 34 requires that municipalities account for depreciation expense of their capital assets. This means that port and harbor assets need to be depreciated over time in the community’s or enterprise fund’s financial statements. While depreciation is a non-cash expense, it shouldn’t be ignored. To the extent that you are able, we encourage you to think of that depreciation expense as a target for funding of a facility replacement fund. By seeing that money as off-limits and keeping it available for the next major capital expense, your facility will be much better off, both in terms of the condition of the facility and the attractiveness of the enterprise to potential funding and financing agencies.

There’s a lot to think about in terms of the cost of a port or harbor facility, and this discussion has only begun to scratch the surface. If this is the first time you’ve worked with this kind of information, it’s advisable to talk with your finance director so you can gain an understanding of how these costs are handled.

This week’s and last week’s topics represent the major effort of a rate setting study, but we’re not done yet. Once a rate plan has been prepared, the next step may be the most difficult: getting the rates accepted and in place. That’s the topic for next week.

Last week we looked at reasons for setting sustainable rates. The general idea was that a port or harbor facility should be bringing in enough revenue to cover expenses. Next week we’ll look at what expenses need to be included, but this week we’ll first consider different approaches to setting rates.

There are two general approaches to rate setting that we’ll consider here: market-based and economics-based. Arguably, there could be other categories to consider, but I find these two categories to be broad enough to cover most cases. As I’ll use them here, market-based rates are those driven by what users will pay and economics-based rates are driven more by the costs associated with a facility.

Market-based rate setting usually comes into play when there are two facilities located somewhat close to each other and with comparable offerings. Similarity can be based around many factors. For example, for commercial fishing vessels, similarity can be gauged based on proximity to the fishery resource. For transportation-focused facilities, proximity to major shipping routes and cargo-generating industries is important. For recreational vessels and activities centered on the land-water interface, then similarity may be judged by land access such as highways and railways, and the distances from, the use base to the facility. It’s very tempting to set rates based on one’s neighbors because (a) it’s an easy approach (i.e., fast and inexpensive), (b) it results in rates that users in the area are willing to pay, and© it results in a more acceptable rate from a political standpoint.

There is great danger, however, in using market-based rates without using some kind of economics-based approach to support the decision. Suppose Facility A wants to use rates currently in place at Facility B. Using the approach will work fine if Facility A and Facility B have identical costs, identical uses, and an identical user mix. This is rarely, if ever, the case, however, which means that Facility B’s rates won’t give Facility A the revenues it needs, or Facility B’s per-[gallon, ton, container, etc.] rate won’t be sufficient given the [gallons, tons, containers, etc.] handled at Facility A. In addition to the need for a perfectly-matched facility, using market-based rates also assumes that the owners of Facility B did their homework and set appropriate rates to begin with, not to mention follow an appropriate plan for rate increases over time.

This leads us to economics-based rates. As I’m considering them here, this category includes a broad range of tools and techniques used to create rate structures based on information specific to a facility. This can include the use of facility replacement costs, operating expenses, inflation adjustments, construction cost increases over time, and a facility’s historical usage and experience. Ideally, all of this factors will be considered, but rates based on even a subset of these factors will be more appropriate than purely arbitrary rates.

Since “economics-based rates” is a very broad term and can apply to many types of approaches to rate-setting, here is an example. A technique called Life Cycle Costing (LCC) evaluates the cost of a facility over its entire life. This is often done as part of an alternatives analysis; if everything else remains the same on the revenue side (i.e., the facilities provide the same functional capacity), you can look at the life cycle cost of each alternative that meets your needs and choose the one that has the lowest cost. In essence, this approach is the decision-making portion of value engineering.

When thinking about what costs should be included in a life cycle cost analysis, the answer is just about everything: startup costs, construction costs, operating costs, maintenance (both routine and major) costs, planned upgrades and other capital costs over time, and decommissioning costs. When plotted over time, these expenses show how a facility’s costs are distributed over its life. The timing of costs can vary considerably, which is the idea behind choosing higher quality (and cost) upfront in exchange for lower costs over time, reusability of older materials during decommissioning, and so on.

After considering all of the costs, life cycle costing uses the traditional Net Present Value technique to come up with the present value of future cash flows. The value can then be represented as a series of identical payments over time, similar to a mortgage payment. Converting from annual cash flows to the net present value and then to a series of uniform payments provides a single, smooth, annual amount that can be used to cover all costs over time.

While life cycle costing is just one of many economics-based techniques for rate setting, it serves as a good example of a tool that can be used when a great deal of information is available at the facility. Many other approaches exist under the “economics-based” umbrella and can be applied to different extents based on the amount of information available to make your rate decision.

In the context of life cycle costing, we’ve given a large list of costs that can be covered by rates. Next week, we’ll look at these expenses more closely and decide what needs to be included as part of the rate-setting process.

Why do communities need to set appropriate rates? The issue boils down to sustainability. In a financial sense, port and harbor facilities need enough money coming in through various types of user fees (and other funding sources) to ensure that the facilities are maintained in the long term.

Each group with a stake in port or harbor infrastructure has its own set of needs for the facility with respect to sustainability. The major stakeholder groups are the municipality who owns the facility, the users of the facility, and the lending agencies.

Municipal port and harbor facilities provide a public access point to marine transportation and recreation. In many communities in Alaska, maritime facilities and transportation modes rival other types of transportation in terms of their importance and value. For a municipality, setting appropriate rates means being able to cover costs and ensure long-term operations, routine and major maintenance, and eventual replacement. The municipality has an obligation to maximize the benefit of the public resources and assets it owns, and to do so in a safe and ethical manner. Often, rates are set by balancing the costs of the facility with the community-wide benefits that are created by the port and harbor infrastructure.

Users of port and harbor facilities want to ensure that the facilities are safe and functional. Each type of user, ranging from recreational to subsistence to commercial use, has its own needs, which means that there may be many functions and services provided by the facilities. All users, however, want rate structures to be understandable, rates to be fair and consistent, and allocation of costs to be equitable. The equity issue often comes up when rate increases coincide with major improvements or expansions, with arguments about current users having to pay for facilities that others will use.

Lending agencies have an interest in a facility’s rates because they want to maximize the value of their investments. These agencies want new or expanded facilities to operate without the need for additional investment simply to cover operating shortfalls. In addition to seeing the facilities fully funded and operating long-term, lending agencies also want to see benefits accrue to the community and the region, such as job creation and retention, economic benefits and activity, and benefits to port and harbor users.

Next week we’ll look at some general approaches to setting rates.

A common trend we are seeing is the need to set appropriate rates for community-owned facilities like docks and harbors. Throughout Alaska, communities are facing the need to replace or improve the infrastructure that serves as their economic engine, yet they lack sufficient funds to fund the improvements internally. Rates have been too low, the city or borough has generated insufficient revenues, and there’s no replacement fund in place. When seeking out funding, the lending agencies have a common message: they want to see sustainable facilities. What’s a community to do?

Over the next few weeks, I’ll be posting a series of blogs about the topic of setting rates, including discussions about the need for appropriate rates, general approaches used to set rates, what these rates need to cover, and challenges associated in setting rates. My hope is that along the way you will pick up something useful for setting rates in your community. The culmination of this series of blog posts will be a white paper on rate setting, with a bent toward port and harbor facilities, that will be posted at www.HarborModel.com.

Alaskans’ confidence in their local communities’ economies and their family household finances slipped in the second quarter of 2010; also, more Alaskans now say that local and statewide economic conditions are worsening than say conditions are getting better.
The second quarter of Northern Economics’ Alaska Confidence Review shows confidence in Alaska’s economies declining from the first quarter. Some of the more interesting results include:
·         As in the first quarter of 2010, a majority of Alaskans would not describe the current condition their local community’s economy as good and said that conditions are not improving over time:
o   The portion of respondents who rated their local community’s economy as good or better fell by 3 percentage points to just over 35 percent, while the portion who rated their local economic conditions as poor or worse increased by nearly the same amount to 18 percent.
o   While 60 percent of respondents said they felt the economic conditions in their local communities was staying the same, the portion that felt things were getting worse increased by 8 percentage points to nearly one quarter of the respondents. Less than 15 percent of respondents felt things were getting better in their local community.
·         Alaskans’ rating of the state’s current economic condition stayed steady in the second quarter. A majority of Alaskans would not describe the overall state economy as good or improving. Only 32 percent of respondents rated Alaska’s economy as good or better, while just over 16 percent rated the economy as poor or worse.
·         At the same time, more Alaskans felt that economic conditions in the state are worsening. More than one-quarter of respondents said economic conditions in the state are getting worse. Most of the increase in this category came from respondents who felt that conditions were stable in the first quarter; the portion of respondents who felt things were getting better overall stayed roughly constant in the second quarter.
·         While Alaskans still feel comparatively good about their personal finances, the percentage of respondents who rated their family’s financial situation as secure or very secure fell to 50 percent in the second quarter from 60 percent in the first quarter. Respondents who felt their family’s financial situation is getting better outnumbered those who felt it is getting worse by just five percentage points.
The data supporting Northern Economics’ Alaska Confidence Review are generated via The Alaska Survey, a joint venture between Ivan Moore Research and Northwest Strategies. This quarterly statewide survey of more than 750 Alaskans is the first regularly conducted survey in Alaska to include a substantial sub-sample of respondents who only use cell phones.

In the midst of all the economic doom and gloom these days, it’s nice to hear some good news, this time in the form of a little good press from a long way away! The New York Times Travel section online is running a slideshow highlighting some of the attractions of Anchorage’s downtown. Specifically, the piece features the shops and restaurants of the G Street/4th Avenue area: “Most dream vacations to Alaska revolve around wilderness hikes or cruises past mountains and glaciers. But changes in downtown Anchorage offer visitors a few reasons to linger in the state’s most populous city.”

The story came to our attention through friends whose shop, Suzi’s Woollies, is across the street from one of the merchants featured in the story, Modern Dwellers Chocolate Lounge. Ben and Suzi learned about it when two vacationing New Yorkers stopped in, told them they were on the street because they’d seen the slideshow, and bought three sweaters!

The merchants of G Street have been working for years to promote their blocks between 3rd and 5th Avenues as an arts district, and last year were formally recognized by the Municipality with official street signs to that effect. Over the past couple of years a number of specialty boutiques and artisan food outlets have clustered in the area. Here’s hoping the virtuous cycle continues of merchants with unique offerings drawing more foot traffic, thereby encouraging more creative ventures to open shop, and thus tempting yet more visitors to explore the city and grow our economy—ultimately making the city more appealing for local residents and visitors alike.

And hooray for the little boosts from afar along the way!