Daily Sitka Sentinel

Park Board Backs 2 Bulk Water Deals

By TOM HESSE

Sentinel Staff Writer

Two companies are diving back into Sitka’s bulk water business after gaining early approval on three contracts to export Blue Lake water. 

The Gary Paxton Industrial Park board of directors voted Monday to recommend Assembly approval of contracts to Alaska Bulk Water Inc. and another company with a similar acronym called Arctic Blue Waters, both of which have tried previously to make a business out of selling water from Sitka’s Blue Lake.

Alaska Bulk has held water rights in Sitka since 2006. In 2012, they paid Sitka $1 million for exclusive bulk water rights but lost the contract earlier this year when it didn’t meet a performance requirement and failed make another $1 million payment to renew the contract.

However, Alaska Bulk Water officials told the industrial park board that they have new financing, and wish to sign contracts to buy a small portion of water compared to what they used to have rights to.

The new player in Sitka’s bulk water market, Arctic Blue Waters, is headed by Fred Paley, who made a run at the Sitka bulk water business in the mid ’90s.

He said Alaska Bulk and Arctic Blue will work together under an arrangement that will pay Sitka $1.1 million for rights to the 8.8 billion gallons of water available annually. By contrast, Alaska Bulk’s previous contract was $1 million for the same amount of water.  

The companies submitted separate proposals, but they describe their relationship as “operating at arms length and not as a joint entity.” 

The owners of the two companies have had similar experiences in the past in attempting to market water purchased from Sitka. Under the new arrangement with Sitka, Arctic Blue will be covering a portion of the cost of Alaska Bulk’s contract.

As board member Charles Horan put it at one point during the meeting, “I’m seeing a great opportunity for confusion.” 

The three contracts that will head to the Assembly for approval all have conditions similar to past bulk water agreements negotiated with purchasers. The money paid up front is a non-refundable deposit on future water purchases at the rate of 1 cent per gallon. Other terms include: 

– an elasticity clause that requires performance against the contract. In the first three years, they must ship 50 million gallons of water. Subsequent periods of time have other benchmarks.

 – the contract is good for 20 years assuming contract benchmarks are met. This is twice as long as previous agreements, which were for only 10 years.

– the water is sold as raw and untreated.

Arctic Blue Waters Contract

Paley’s company, Arctic Blue Waters, has committed for the bulk of the water available, and will pay the largest share of the expense. Of the 7.8 billion gallons listed as available in the city’s latest request for proposal, Arctic Blue Waters is seeking 6.8 billion gallons.

The other 1 billion gallons is going to Alaska Bulk Water Inc., the company that held rights to Blue Lake water until this past February. 

The $1 million payment that Arctic Blue will make will cover all 7.8 billion gallons of water that’s available annually, but each company will get its separate allocations. 

ABWI Contract

Alaska Bulk Water Inc., the company run by Terry Trapp and which has spent over $1.3 million for rights to Blue Lake Water over the last decade, will get rights to 2 billion gallons of water through two separate contracts. 

In the contract tied to Arctic Blue Waters, Alaska Bulk will get up to 1 billion gallons under a 20-year contract with Sitka. That is different from the second contract, which is good for only 10  years. 

Speaking over the phone, Trapp said he would have preferred a single contract.

“If you want to do that in two contracts as opposed to one contract, OK. I think one contract would make the most sense,” Trapp said. 

He wasn’t the only one. City Administrator Mark Gorman suggested issuing one contract to Alaska Bulk. In fact, Gorman said, if the companies were going to work in partnership then perhaps they should be asked to submit one proposal for the entire allocation. 

“I see potential conflict and confusion by having two contracts,” he said. 

The reason Alaska Bulk’s proposals were split has to do with a decision made by the industrial park board in April in response to Alaska Bulk’s request to hold back 1 billion gallons of water from sale to any other company, in case Alaska Bulk was able to pay for a new contract. This would recognize the infrastructure investment Alaska Bulk has made at the industrial park and the amount paid for unused purchase credits.

While honoring that request, the board also issued a request for proposals for new water purchases. Alaska Bulk responded to both the board’s offer related to the old contract, and also to the RFP. The variation between the two contracts awarded to ABWI came down to a trade-off on length of the contract and credit for past payments. 

Trapp wanted the city to count the $1.3 million already paid to the city as payment for future water credits. Gorman said that, contractually, there was no reason to do so. 

“As I see it those water credits now belong to the city as that previous contract was terminated,” Gorman said. 

When Alaska Bulk made the payments they were nonrefundable, and contingent on water being shipped within three years. When water didn’t ship, ABWI agreed to pay another $1 million for a contract extension that would have extended those prepaid credits. 

The problem occurred when ABWI failed to make good on that payment. In his latest proposal, Trapp explained: 

“ABWI was funded through one of its wealthy board members up until last fall when this person did not fulfill the obligation of $1 million that ABWI had offered the City and Borough of Sitka for a renewal of its contract. This board member resigned.” 

Gorman granted a one-month contract extension after Alaska Bulk’s payment default, and when the new deadline passed with no payment, the city claimed possession of all previous deposits.

But Horan said he believed that extending those credits would be an act of good faith.

“I also think there’s a fairness issue. I want to build a reputation that the City and Borough of Sitka is fair to businesses,” he said. 

Trapp also made that argument.

“To take back the $1.3 million that we’ve invested in that, I think, is not really fair play. I really do,” Trapp said. 

The board voted 3-1 to extend Alaska Bulk’s water credits. Scott Wagner voting in opposition and Dan Jones voting “reluctantly yes.” In exchange for allowing the previously paid money to count as a water credit, the board opted to keep the contract to 10 years, rather than the 20-year deal that Alaska Bulk and Arctic Blue Waters got in their joint agreement. 

The contract will only run that long if the companies meet shipping requirements. Even if they hit the 50-million gallon mark in the first three years, there are other benchmarks they must meet in order to keep the contract.

The length of a 20-year deal became an issue for Gorman, who was worried about what could happen to the going rate for water if bulk water ever became a viable industry. 

“If we were doing oil today, would you say ‘let’s sell for $44 a barrel for the next 20 years?’ No, you wouldn’t say that,” Gorman told Horan in a spirited exchange. 

Wagner advocated for withholding 1 billion gallons of the total allocation for that reason. 

“There’s no rush to fully allocate all the water right now,” he said. 

The 1 cent per gallon rate is set, barring adjustments from the consumer price index which accounts for inflation. Gorman suggested writing in language to tie it to a commodity index. Such an index doesn’t exist for bulk water now but it could if the industry were ever realized. 

Gorman suggested the city could be undervaluing its water if the value of water skyrocketed and the city was left with no way to adjust the sale price until 2036. 

“If we had to wait a decade shipping greatly undervalued water, our names wouldn’t be on granite blocks,” Gorman said. 

The arrangement to keep 1 billion gallons of Alaska Bulk contract in a 10-year deal was seen as a compromise to those concerns and the concerns over the water credits. 

The board received four responses to the RFP, but two weren’t seen as viable by any of the members of the board. 

I Water Lease

Another water venture yet to be realized took a step back at Monday’s meeting when the industrial park board did not move to extend a lease agreement with that company.

The California-based group I Water has been leasing property in the center of the park the past two years. 

As a part of that contract, I Water was supposed to build a bottling facility, which hasn’t happened yet. 

Industrial Park director Garry White said, “We entered into this agreement two years ago and here we are. Nothing’s happened except for talking to a contractor one month before their contract is up.” 

The board was reluctant to extend the lease because I Water has occupied some of the prime locations in the industrial park. Additionally, confusion over a third party paying for their lease has caused the company to fall behind in payments. 

Assembly member and GPIP board liaison Steven Eisenbeisz said there hasn’t been enough movement for the company to continue encumbering land at the park. 

“I see one I Water sticker around town and they’ve joined SEDA and the Chamber of Commerce, which is not much progress,” he said. 

The board took no action on the lease request but did direct staff to work with I Water to get a more detailed business plan for a possible lease extension.