Legislature(2015 - 2016)BARNES 124
04/06/2015 01:00 PM House RESOURCES
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Confirmation(s): Board of Fisheries | |
| HB105 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | HCR 6 | TELECONFERENCED | |
| + | HB 179 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 105 | TELECONFERENCED | |
HB 105-AIDEA: BONDS;PROGRAMS;LOANS;LNG PROJECT
1:42:15 PM
CO-CHAIR TALERICO announced that the final order of business is
HOUSE BILL NO. 105, "An Act relating to the programs and bonds
of the Alaska Industrial Development and Export Authority;
related to the financing authorization through the Alaska
Industrial Development and Export Authority of a liquefied
natural gas production plant and natural gas energy projects and
distribution systems in the state; amending and repealing bond
authorizations granted to the Alaska Industrial Development and
Export Authority; and providing for an effective date." [Before
the committee was CSHB 105(ENE).]
1:42:25 PM
GENE THERRIAULT, Energy Policy and Outreach Director, Alaska
Energy Authority (AEA), Alaska Industrial Development and Export
Authority (AIDEA), Department of Commerce, Community & Economic
Development (DCCED), turned to slide 2 to begin the PowerPoint
presentation. He explained the first goal of the Interior
Energy Project (IEP) is to supply natural gas to Interior Alaska
at the lowest possible price to as many customers as possible
and as soon as possible. Another goal is that IEP investments
are supposed to complement the eventual delivery of natural gas
across the state via large diameter pipeline. Investment in
infrastructure is trying to be made so there will be a
distribution system and a customer load in Interior Alaska when
a pipeline does allow for delivery. Effort is being made to not
invest in infrastructure that won't have the highest possible
useful life after pipeline delivery. In addition to the
Interior price issue, IEP is trying to address Interior air
quality issues.
MR. THERRIAULT related that in advancing the Interior Energy
Project [slide 3], a supply of natural gas from the North Slope
has been pursued through a concession agreement with [MWH Global
(MWH)]. However, AIDEA and AEA are now evaluating possible
natural gas supply for the Interior from Cook Inlet. This began
after work with MWH through the concession agreement indicated
to the AIDEA/AEA board of directors that [the North Slope] price
may be too high to get the conversion to gas use that is needed.
Currently, AIDEA is still working on the buildout of [natural
gas] distribution in the Interior because, whether the gas comes
from the North Slope or another geographic area, the piping to
deliver it to the consumers is going to be the same.
1:45:25 PM
MR. THERRIAULT discussed the concession agreement with MWH
[slide 4], saying it provided a legal framework for a public-
private partnership to come together. Northleaf, a Canadian
investment firm, was involved as a financial backer and AIDEA
was also going to provide some financing and would own the
liquefied natural gas (LNG) facility. In the negotiations with
that private partner, some federal tax considerations drove the
infrastructure to be set up in a particular way. Both the state
and private partners wanted to structure things that way to
avoid making a payment to the Internal Revenue Service (IRS).
Responding to Co-Chair Nageak, Mr. Therriault said MWH is a
worldwide firm that builds large-scale infrastructure all over
the world. The firm's current chief executive officer grew up
in Alaska and his father still lives in the Anchorage area, so
he had an interest in trying to help with the state's
infrastructure needs. Continuing on slide 4, Mr. Therriault
explained the concession agreement set up conditions for the
financial close. He said AIDEA was to have agreed with the
project costs and the commercial terms, MWH was providing
construction and operating agreements, and MWH was to negotiate
for the secure LNG sales to the utilities, which it spent quite
a bit of time on in 2014. Ultimately, the AIDEA/AEA board
determined the price that was going to be delivered off of that
expected infrastructure was not going to get the conversions and
uptake of the natural gas in the community to satisfy the goals
of the IEP. Thus, the concession agreement was not extended
past its termination date of December 31, 2014.
1:47:50 PM
NICHOLAS SZYMONIAK, Energy Infrastructure Development Officer,
Alaska Industrial Development and Export Authority (AIDEA),
Department of Commerce, Community & Economic Development
(DCCED), explained that slide 5 demonstrates the process in
which AIDEA evaluates these projects and the process in which
the concession agreement was evaluated and eventually
terminated. Going forward, AIDEA will follow this same due
diligence process for any other project under the IEP, including
Cook Inlet or elsewhere. If it is not a good investment, if it
does not meet the goals of the IEP and the legislative intent,
and if it is also not a wise investment for AIDEA, it will not
pass the board's due diligence.
MR. SZYMONIAK said the [Twenty-Eighth Alaska State Legislature]
passed Senate Bill 23 in 2013 and set aside financial tools for
AIDEA to pursue the Interior Energy Project. He said slide 6
lays out what AIDEA has spent to date pursuing the Interior
Energy Project. Of the $57.5 million in capital appropriation
received by AIDEA, $12.4 million has been encumbered. Contracts
were issued and closed out, and AIDEA is currently going through
the process of determining what has been expended and what has
not, so the actual spend will likely be $500,000 to $1 million
less. That leaves $45 million remaining of capital
appropriation. In addition, AIDEA was appropriated $125 million
of sustainable energy transmission and supply development (SETS)
funds with special provisions to advance the IEP. So far, those
SETS funds have been used to finance the buildout of the
distribution system in Interior Alaska, with two convertible
lines of credit that will turn to a term loan once gas arrives.
One line of credit is for $15 million to Fairbanks Natural Gas
(FNG), LLC. The first half of that loan was spent when FNG
built out 34 miles of pipeline in its existing distribution
system in downtown Fairbanks. In 2015 FNG plans to build an
additional 27 miles of pipeline in its service area. The other
line of credit is for $37.8 million to Interior Gas Utility
(IGU) for buildout of phase 1 of its distribution system in
2015, which is approximately 72 miles of pipe in the downtown
North Pole area. The pipe has already been purchased and is on
site and IGU is in the process of selecting three different
construction firms to put the pipe in the ground.
1:50:50 PM
REPRESENTATIVE TARR returned to slide 5 and asked what phase the
[North Slope] project was in when the decision was made to not
go forward.
MR. SZYMONIAK replied [the North Slope] project made it through
probably about the end of phase 3. The deal was put together,
but the final paperwork and final agreements were not done. It
had gone as far as negotiating the construction contract and
negotiating the operating agreement, and the offtake agreements
with the Interior utilities were in the process of being
negotiated. At that point, however, the costs had gotten so
high that the risks and price associated with that did not
permit it to go to phase 4, which is the actual final due
diligence and the closing.
REPRESENTATIVE TARR observed it is written as loans on slide 6,
but understood it is lines of credit that will turn to loans
when the gas is delivered. Regarding when the line of credit
becomes a loan, she surmised the loan will be for the
outstanding balance, not the entire line of credit.
MR. SZYMONIAK responded correct. When gas shows up, this line
of credit - up to $52.78 million for both utilities - will turn
into a term loan with a payback period of, he believed, 40
years.
1:52:17 PM
REPRESENTATIVE HAWKER asked whether the IGU distribution loan of
$37.78 million was the loan approved in February 2015.
MR. SZYMONIAK answered the line of credit was approved in two
stages. A line of credit of $8.9 million, he believed, was
approved in 2014 to do initial design and purchase of pipe. In
January [2015], AIDEA extended the line of credit to the full
$37.78 million.
REPRESENTATIVE HAWKER inquired whether it is fair to say that
the entire [IEP] concept is a market driven project, in that the
project has always been presented as succeeding or failing upon
its ability to meet a specified hurdle rate for delivering gas
to the burner tip for those customers in Fairbanks.
MR. SZYMONIAK agreed that is a fair statement.
REPRESENTATIVE HAWKER noted the state is investing substantial
funds in building out the local distribution infrastructure. He
understood, however, that it is not known for certain as to
whether a project is had which meets that hurdle rate.
MR. SZYMONIAK replied [AIDEA] does not know if it has a project
to supply gas in the near to mid-term. If that gas is supplied,
AIDEA has done the financial analysis to ensure that the utility
can charge rates that pay back the loan AIDEA has made.
REPRESENTATIVE HAWKER said his question was not answered. He
asked whether AIDEA is certain it has a project that can deliver
that gas at that hurdle rate of $15 at the burner tip. He
further asked whether buildout is occurring before it is really
known that there is a project.
MR. SZYMONIAK agreed AIDEA does not yet have a project that is
certain in an absolute term. However, he continued, there are
multiple proposals out of Cook Inlet, including from Hilcorp,
from WestPac, and from Cook Inlet Energy, to provide natural gas
to the Interior. He offered his belief that while the gas isn't
there and the infrastructure isn't built out, there is a fairly
high degree of confidence that natural gas or LNG will be
available for this system.
1:55:30 PM
REPRESENTATIVE HAWKER understood there is a great deal of public
concern with the damage to real property that is being done in
this initial phase of pipeline buildout in North Pole.
MR. THERRIAULT responded he talked to Representative Wilson this
morning about the concern she is hearing from her constituents.
He said he was also in touch last week with IGU personnel in
Fairbanks asking them to get in touch with the governor's office
in Fairbanks to be prepared to respond. He understood IGU has
been encouraged by Representative Wilson to have its contractor
double its efforts when doing advance work, such as going door-
to-door and leaving flyers to let people know that right-of-way
clearing for pipe placement will be happening this summer. Last
fall surveyors were out during the day when people might not be
home and it cannot be told from the flagging what is intended.
He said he thinks what is happening in North Pole is that people
have had their homes for a long time and haven't paid attention
to where their property exactly ends and where the right-of-ways
are located. After providing examples of this happening to
himself and others, he said he thinks Representative Wilson is
asking that the contractors doing the right-of-way clearing be
as sensitive as they can. Contractors actually crossing over a
right-of-way line could be subject to paying damages to the
property owner.
1:58:12 PM
CO-CHAIR NAGEAK inquired whether the issuing of loans means the
distribution system in Fairbanks or North Pole is on the verge
of being built.
MR. THERRIAULT answered the loans are for distribution buildout
in the Fairbanks area where FNG currently has a service
territory and then in the outlying area starting in the city of
North Pole where IGU, a separate utility, has a service
territory granted to it by the Regulatory Commission of Alaska
(RCA). It is wanted for those two systems to eventually be as
fully integrated as possible to get economies of scale, but
starting as two separate distribution systems.
CO-CHAIR NAGEAK asked whether negotiations have started between
AIDEA and possible contractors.
MR. THERRIAULT replied the contractors doing the placement for
the pipe are contractors of IGU and FNG. But, since the state
is providing money for the work to be done, [AIDEA] certainly
tries to keep abreast of the actual work going on in the ground.
1:59:34 PM
CO-CHAIR TALERICO understood North Pole is one of the worst
areas of non-attainment for air quality in the Fairbanks North
Star Borough.
MR. THERRIAULT responded correct, explaining it is colder in
North Pole and during inversions the colder temperatures trap
everything closer to the ground. Additionally, people in that
area are really struggling with the cost of energy. A number of
them have gone to wood heat outdoor boilers and some stoke with
coal, resulting in some bad particulate matter conditions.
2:00:20 PM
REPRESENTATIVE OLSON inquired how the financing is being done.
He offered his belief that when ENSTAR Natural Gas Company
(ENSTAR) expanded in the Anchorage and Kenai Peninsula areas the
expansions were done in all cases by a local improvement
district where the homeowner or business owner shared a portion
of the cost, which was paid through their energy bills over a
number of years.
MR. SZYMONIAK answered that, at this point, each stage of the
buildout might be financed differently. This initial stage for
FNG and IGU is financed through direct loans to the utility, so
the cost of building out to customers in the FNG buildout and
phase 1 of the IGU buildout will be repaid through their rates.
There will be no fee to a homeowner beyond the connection line
to the system, but the pipe going down a homeowner's street will
be paid through the homeowner's cost of gas.
REPRESENTATIVE OLSON said he didn't think the Anchorage or Kenai
Peninsula expansions were price driven like the [Interior Energy
Project] appears to be. He asked what happens if people are not
agreeable to the IEP price.
MR. SZYMONIAK confirmed it is not the same system as the local
improvement districts (LIDs). If the conversions to natural gas
don't happen the utilities will still be mandated to adjust
their prices to recover the rates. If the utilities are unable
to sign up enough customers to pay the rates, AIDEA is at risk
of non-repayment.
REPRESENTATIVE OLSON asked what the response has been from the
communities.
MR. THERRIAULT replied AIDEA has done a number of surveys and
focus groups working in conjunction with IGU to see what the
level of interest is. A professional conversion report was done
and AIDEA ran the numbers on what this enterprise would
ultimately turn out to be based upon about 75 percent of the
individual residents hooking up, given not everyone is likely to
sign up. The indication is that if the gas can be delivered
within AIDEA's range of around $15, customers will sign up.
Also, AIDEA has provided information on how gas delivered at a
certain price will, compared to fuel oil, save customers a
certain amount on a yearly basis. However, there would be an
internal conversion cost for the appliances in a home that could
be anywhere from $2,500 to $11,000. Therefore AIDEA provided
information to show how quickly that cost would be recouped and
how payment could be stretched out over time. Even with that,
the response from the public has been pretty positive.
2:04:01 PM
REPRESENTATIVE SEATON expressed his concern that AIDEA will be
left "holding the bag." In the areas that he is familiar with,
rather than just expressions of interest, people committed to
putting in a system via a vote and then assessments were made
[if the vote approved the project]. He inquired whether AIDEA
considered having local improvement districts that would vote.
MR. THERRIAULT responded the financing tools that were passed
several years ago did not require that. He believed, however,
that for outlying areas where the economics are even more
challenged it is likely that forming local improvement districts
will be a requirement if people want the pipe extended to them.
The initial financing is for the core of the city of Fairbanks,
the North Pole area, and immediately outside the city limits
where there is the greatest density. Under requirements of the
financing that was provided, [FNG and IGU] must get AIDEA's
approval before starting preliminary work on phase 2 so AIDEA
can see what is the price, the conversion, and the number of
customers that are coming forward and signing up. The air
quality issue is something the borough cannot escape and must
deal with, and AIDEA believes that providing this alternative
source of fuel is ultimately the long-term solution.
2:07:04 PM
REPRESENTATIVE OLSON asked what has been contributed thus far by
Fairbanks, North Pole, and the borough.
MR. THERRIAULT answered it has just been in-kind support of the
formation of IGU at this point, and [the IGU] board of directors
is volunteers. The Fairbanks North Star Borough supplied a line
of credit originally to the IGU, which IGU has not used at this
point. Also, AIDEA is working with the local governments on
conversion mechanisms. The borough has indicated it would
finance the stretching of customer payments on the customer's
utility bills for the conversion of individual homes. He said
AIDEA believes there would be a very low default rate on that,
but lenders bringing money to that game might want those loans
to be backstopped and the borough mayor has indicated that that
is likely to be a task of local governments.
REPRESENTATIVE OLSON concluded the only entity having money in
the game at this point is the state through AIDEA.
MR. THERRIAULT answered that that is substantially true.
2:08:29 PM
REPRESENTATIVE HAWKER referred to the risk assessment of IGU's
strengths and weaknesses that was included in the memorandum to
AIDEA's board members for the IGU distribution loan. The first
identified threat was long-term gas supply availability, he
observed, and the second threat was rate-making oversight. He
asked why rate-making oversight is a threat to this project and
something to be considered when making the loan. He said he
unaware of any other public utility in the state, at least in a
major metropolitan area, that isn't subjected to rate-making
oversight.
MR. SZYMONIAK replied the IGU has elected not be rate regulated
through the Regulatory Commission of Alaska (RCA), so the rates
will be set by the IGU board. He believed the rates may be
approved by the borough, but said they will at least be set by
the municipal entity at the Fairbanks North Star Borough board
level or the IGU board level and not overseen or not approved by
the RCA. That was simply to put in there that moving forward,
AIDEA, as the lender on the distribution system, needs to ensure
the mechanisms are in place that rates are set by the IGU at a
level capable of paying back AIDEA under the terms of the loan.
REPRESENTATIVE HAWKER posed a scenario in which there are no
local improvement districts, no community buy-in that assures
the entire community shall become invested in this project, and
on a certain street 40 people were expected to sign up, but only
one does. He inquired whether that one person will be expected
to pay the cost for all 40, given the understanding that IGU
will be charging enough to pay back the state's loans.
MR. SZYMONIAK responded the rates will be set by the entire
service area, not street by street. Under the impending AIDEA
acquisition of FNG and the extent that [IGU and FNG] are
integrated, that cost to a street might be shared by the entire
community. But, yes, it is correct that AIDEA expects the rates
will be set at a level to pay back the AIDEA loan. The AIDEA
loan was made in a way such that the payments are low in the
early years to allow demand to grow before the payments kick in.
In making that loan, AIDEA chose to take the risk based on its
work and analysis of the expected conversion rates. The risk of
not enough conversions was an educated risk that AIDEA made in
order to advance the Interior Energy Project.
2:12:16 PM
REPRESENTATIVE HAWKER said the aforementioned answer has now
caused him greater concern in that an individual person could
end up paying for the entire project, not just the person's own
street, if there are not enough conversions. He said he would
be really uncomfortable if he lived in North Pole right now and
had this coming at him. The whole point of rate regulation is
to protect the consumer from excessive or inappropriate business
decisions made on behalf of a dominant public utility. He asked
whether AIDEA thinks that the consumers would benefit by rate-
making authority.
MR. SZYMONIAK answered he is speculating given AIDEA hasn't seen
the actual financial model moving forward with the conversions,
but he suspects not being rate regulated would be an advantage
in the aforementioned scenario. If the conversions aren't
there, AIDEA is in a position to be flexible when loan repayment
is expected in three to six years. Whereas, the rate-regulator
route would be less flexible and more formulaic, so those rates
would more likely be borne by the customer.
REPRESENTATIVE HAWKER said that would seem to work as long as
the state was willing to provide that subsidy and did not expect
to be repaid in accordance with the terms that are being
presented to the committee as part of AIDEA's transaction.
MR. SZYMONIAK replied such a scenario would be a handful of
years out and based on a handful of things happening by then.
He reiterated his expectation that AIDEA would be flexible with
the repayment of its terms in order to benefit the communities
of North Pole and Fairbanks as is the intent of this
appropriation to begin with.
MR. THERRIAULT added that IGU was advised that having that extra
flexibility would be beneficial to it initially and he thinks
this advice was given by some RCA commissioners. That extra
flexibility is probably needed in those initial years until
overall volume and number of customers gets up high.
2:15:16 PM
REPRESENTATIVE TARR inquired whether opportunities such as the
Alaska Housing Finance Corporation's (AHFC) Home Energy Rebate
Program would be available to help accelerate the rate at which
conversion might take place.
MR. THERRIAULT responded the Local Conversion Working Group - a
combination of local government, individuals from FNG and IGU,
mechanical contractors in Fairbanks, local lenders in Fairbanks,
[and AIDEA] - have looked at the suite of things currently
available or that could be available and the AHFC Home Energy
Rebate Program can assist individuals in converting their homes.
Converting fuel oil appliances to more efficient natural gas
appliances qualifies as an energy efficiency step, so would lend
itself to individual homeowners who convert. Also, there is on-
bill financing, which is an agreement between the customer and
the utility to help finance those conversion costs spread over
time. A separate piece of legislation for business conversions,
the Property Assessed Clean Energy (PACE) financing, would help
businesses perform energy efficiency acts on their structures
and converting to natural gas heat would qualify. The state can
help with some of the mechanisms, and the PACE financing in
particular is asking the legislature to create the mechanism for
local governments to use and is a zero fiscal note for the
state. The AHFC rebate, if that is going to be a portion, is
reliant on the monies that have been appropriated to AHFC.
2:17:53 PM
REPRESENTATIVE HAWKER inquired whether Mr. Therriault had
earlier said the RCA recommended against rate regulation and
asked whether there is a docket on this recommendation.
MR. THERRIAULT answered he had a personal conversation with one
or two of the RCA commissioners about whether it is better for a
municipal entity to be rate regulated or not rate regulated.
The advice he received was that, initially, the utility would
probably need some extra flexibility and then later it could
consider whether to be fully rate regulated and come under the
auspice of the RCA.
REPRESENTATIVE HAWKER asked whether the aforementioned answer is
to be taken as authoritative counsel on behalf of the RCA.
MR. THERRIAULT replied no.
REPRESENTATIVE HAWKER regarding Representative Tarr's question
about what it will take to make this work, noted AIDEA's
response was all about receiving more government largess to make
it work. He asked whether AIDEA has done any financial analysis
to the point that it can credibly state what the natural rate of
conversion will be at varying oil prices, given this whole thing
has been driven by retail heating fuel prices. For example,
what the conversion level would be at any given oil price and
what the additional government subsidy is going to have to be to
incentivize the necessary conversions to get the buildout ratio
needed to make this project work at any given price of oil.
MR. THERRIAULT responded the conversion report he referred to
earlier will answer that question. Consumers were asked
questions about whether they would convert if their savings were
"X" in various scenarios: the difference between the existing
oil price and the natural gas price and as that difference gets
squeezed either because fuel oil comes down or the natural gas
price goes up.
REPRESENTATIVE HAWKER inquired at what price of retail heating
fuel the conversion ratio becomes acceptable to making AIDEA's
project work without additional subsidy for those conversions.
MR. THERRIAULT answered the survey was done when fuel oil was at
$4 [per gallon], which equates to an oil price of $100 [per
barrel]. The survey indicated that within the range of $15-$16
a conversion rate of 75 percent was a realistic number to
expect. Consumers indicated they didn't think today's low price
of oil would be the prevailing price going forward. The survey
showed that at $17-$18 the conversion rate would be negatively
impacted. He said he will provide the committee with a copy of
the sophisticated chart included within the report.
2:22:28 PM
REPRESENTATIVE OLSON recalled that Mr. Therriault served in the
Alaska State Legislature when oil was at about $9 per barrel.
MR. THERRIAULT replied yes, he was co-chair of the House Finance
Committee.
2:22:52 PM
FRED PARADY, Deputy Commissioner, Office of the Commissioner,
Department of Commerce, Community & Economic Development,
resumed the presentation, turning to slide 7. He said the
question before the committee is that AIDEA is exploring the
[LNG] alternatives in Cook Inlet. The premise for this
exploration is simply that Alaska's natural gas and LNG markets
have changed in the last two years and new information is now
available that influences the best course of action going
forward. In 2013 Cook Inlet utilities were actively developing
import plans amidst gas supply fears. The existing proposals
for the North Slope LNG option indicated lower capital costs
than what proved to be true, and AIDEA has not selected a North
Slope developer or project design. In 2015 the concession
agreement work that was done revealed a high cost of the North
Slope LNG project. The Cook Inlet "renaissance," which is
largely a credit to the tax work that has been done by the
legislature, provides an opportunity for lower cost natural gas.
Additionally, the downturn in global LNG markets may reduce the
price for conventional LNG equipment.
MR. PARADY compared the North Slope and Cook Inlet for projects
[slide 8]. In terms of gas supply, Cook Inlet is uncertain, but
the indications are positive. The North Slope has abundant
supply at low cost and existing contracts in place, but the cost
of getting that gas to market is substantial. In terms of LNG
plant costs, constructing and operating an LNG plant is cheaper
"off the shelf" in Southcentral Alaska than in the North Slope
because of the expense to design and construct for North Slope
conditions. In regard to trucking and rail options, there is
lower trucking cost, larger trailer options, and a rail option
coming from the south as opposed to coming down the Dalton
Highway. Storage and distribution is essentially equivalent
between the Cook Inlet and the North Slope, there is no
significant change in design and costs. The conclusion is that,
if affordable natural gas is available, a Cook Inlet project is
favorable.
2:25:20 PM
REPRESENTATIVE HAWKER recalled Mr. Szymoniak earlier stating
that AIDEA is entertaining multiple proposals for natural gas
out of Cook Inlet. He asked how that is possible when AIDEA's
request for proposals (RFP) for gas and supply is not yet on the
street. He further asked whether AIDEA is negotiating with
people and making commitments without having released an RFP.
MR. SZYMONIAK responded AIDEA is not negotiating with people.
Re-stating himself, he said he intended to say that multiple
Cook Inlet providers are proposing to provide LNG to Fairbanks.
Providers can propose to provide LNG to Fairbanks and North Pole
without AIDEA's involvement and they have. They've had meetings
and presentations in the community and, he believed, they've
also had presentations in Juneau. Thus, interest was shown
prior to AIDEA issuing its RFP for liquefaction and gas supply.
REPRESENTATIVE HAWKER maintained he is now getting an entirely
different answer to his previous question in that Mr. Szymoniak
previously assured him that AIDEA was entertaining multiple
proposals out of Cook Inlet. He said he is troubled by this.
2:27:00 PM
REPRESENTATIVE HAWKER addressed the statement on slide 8 about
LNG plant costs being cheaper "off the shelf." He offered his
understanding that the current burner tip cost of gas in Cook
Inlet through ENSTAR is about $10 at the burner tip, about $7.75
for the gas and about another $2 or so in distribution. He
inquired whether that is a fair statement for what it is costing
burner tip in Anchorage at this time.
MR. SZYMONIAK answered yes, AIDEA's calculations show that when
all distribution and variable and fixed costs are included it is
about $10 to the burner tip for a residential customer on the
ENSTAR system outside of Homer.
REPRESENTATIVE HAWKER understood the stipulated hurdle rate in
Fairbanks for consumer delivery of gas is $15 at burner tip.
MR. SZYMONIAK replied correct.
REPRESENTATIVE HAWKER noted [the burner tip cost] being paid in
Anchorage is $10, and $15 is needed in Fairbanks. He asked
whether AIDEA thinks it is economically achievable to meet that
objective in the Fairbanks market place.
MR. SZYMONIAK responded AIDEA believes it is possible, although
not certain, based on AIDEA's analysis and initial discussions
with providers. That cost of gas to ENSTAR's customers is based
on a series of historic prices, he pointed out, not newly
negotiated contracts. Additionally, the gas service required by
ENSTAR will be different than the gas service required by the
Interior Energy Project. So, AIDEA does not know for certain
whether it will get there, but early indications are that an
opportunity is there and it is potentially possible and AIDEA is
exploring that through the RFP process.
REPRESENTATIVE HAWKER inquired what AIDEA thinks will be the
potential consequences when the Hilcorp price cap is removed at
the time the anti-trust agreement expires.
MR. SZYMONIAK answered AIDEA doesn't know what that price will
be and said he doesn't think anyone knows other than the
utilities and the natural gas providers in Cook Inlet that are
currently in the middle of confidential negotiations and
advancing gas supply agreements. He added AIDEA is looking into
that process and trying to achieve the lowest gas price possible
for Interior customers and to determine whether that gas price
is sufficient to meet the goals of the IEP.
2:30:05 PM
REPRESENTATIVE OLSON requested that a copy of AIDEA's analysis
of Cook Inlet gas be forwarded to the committee.
MR. SZYMONIAK replied some upcoming slides will touch on that
and the analysis can be talked about at that point.
REPRESENTATIVE OLSON clarified he is asking for the whole
analysis, not a one-page summary.
MR. SZYMONIAK responded that that's where things are at with the
analysis - AIDEA hasn't written anything up. There have been
extensive conversations, but summary notes from meetings could
be provided to the extent that they aren't confidential.
REPRESENTATIVE OLSON remarked he is now confused because the
analysis was mentioned as if it was a real document. He said
his definition of an analysis is something that is performed for
pay by a person or an organization to provide information to
another group.
MR. SZYMONIAK answered there is not a formal document that AIDEA
has put together; AIDEA has had a series of discussions with the
Department of Natural Resources (DNR) which had formal analysis
of gas reserves left in Cook Inlet. Most of AIDEA's meetings
were done confidentially with Cook Inlet gas providers, and
AIDEA's notes on those meetings constitute an analysis, but
which AIDEA probably cannot share. He allowed there is no
report or formal analysis that AIDEA can provide.
2:31:40 PM
REPRESENTATIVE HAWKER stated he has the same concern as
Representative Olson. He maintained it was very clearly stated
that there was a study, documents and analysis, that were
available and now it is being found out that there isn't. He
offered his understanding that what is being heard is that AIDEA
is stepping into the marketplace and negotiating the procurement
of gas in the Cook Inlet and negotiating gas at a cheaper price
for the IEP on behalf of the utility, a private company, which
is supposed to be operating in Fairbanks. He inquired whether
he is correct in his understanding.
MR. PARADY, noting he is the lead on the gas supply team,
replied that the role of the state team is threefold: assess
the viability of achieving the IEP goals with Cook Inlet natural
gas, initiate the commercial process through a formal and
competitive solicitation, and conduct preliminary negotiations
with Cook Inlet producers on behalf of the Interior utilities.
Through these roles, [the team] hopes to streamline the process
and support the goals of Senate Bill 23, which is the provision
of affordable energy into Fairbanks. Saying today's critical
scrutiny is appreciated, he requested the view be lifted to a
"30,000 foot view" of the original legislation, which is to use
the state's tools to attempt to deliver gas into the Fairbanks
market at an affordable price. He made clear, however, that
neither the State of Alaska, nor AIDEA, will purchase or take
custody of natural gas on behalf of any utility.
MR. THERRIAULT drew attention to the letters of support in the
committee packet from Furie Operating Alaska, LLC, and Cook
Inlet Energy, LLC, two potential suppliers in Cook Inlet
interested in the possibility of supplying the Interior market.
He said they are aware of the price target, what AIDEA believes
the delivered price into the community needs to be, for the
demand to actually present itself. They obviously believe there
is a chance that they could potentially deliver natural gas into
the beginning of that delivery stream that could satisfy that.
2:34:39 PM
REPRESENTATIVE HAWKER addressed Mr. Parady's response, remarking
that Mr. Parady was definitely ready to recite that response.
Calling attention to Administrative Order (AO) 272, dated
January 16, 2015, he noted it directs the commissioner of the
Department of Commerce, Community & Economic Development to take
the lead in facilitating collaboration and coordination among
government and other entities involved in the Interior Energy
Project. He said he doesn't see the commissioner involved much
in the IEP. He further noted the AO also directs the Department
of Natural Resources to work with AIDEA on assessing potential
natural gas supplies for Interior Alaska. Representative Hawker
maintained that [Mr. Parady's] statement did not include an
interest in assessing potential gas supplies, but rather
participating in that procurement. He argued the AO was clear
that it was to assess and identify potential natural gas
supplies for Interior Alaska.
MR. PARADY apologized for any misunderstanding he may have left
on Representative Hawker's part and stated, "Of course
Administrative Order 272 directed the commissioner of commerce
to coordinate at the highest level of the administration to
support both consumer energy statewide and the Interior Energy
Project." Continuing, he said that includes the assessment of
Cook Inlet gas supply, which has a working team comprised of
himself, Mr. Szymoniak, and Paul Decker and Ed King of DNR; the
team has been working with a weekly phone call to continue that
assessment process of natural gas. He confirmed he is prepared
for the committee's questions, saying he would be ill advised
not to be. He noted that the first bullet point he offered to
the committee was to assess the viability of achieving the goals
of IEP with Cook Inlet natural gas and said the foundation of
that analysis rests on an assessment of those resources and that
work is ongoing.
2:36:46 PM
REPRESENTATIVE HAWKER said he is listening between the lines of
Mr. Parady's answer. He asked whether "third floor personnel"
are actively involved in pursuing these gas sources, meaning
people who are not part of AIDEA or the Department of Commerce,
Community & Economic Development.
MR. PARADY replied a representative of the governor's office
participates in the team meetings, but the meetings are led by
himself. The active geological assessment work is being done by
the Department of Natural Resources.
REPRESENTATIVE HAWKER inquired whether anyone in [the governor's
office] is actively procuring LNG facilities or negotiating
leases or the potential ability to identify resource in the
ground that could be utilized for this project.
MR. PARADY responded no and offered his belief that that work
was curtailed a month ago.
REPRESENTATIVE HAWKER respectfully suggested he is receiving
different information.
MR. PARADY thanked Representative Hawker for that information
and said he will continue to pursue it.
2:38:00 PM
MR. SZYMONIAK resumed the presentation, explaining slides 9-12
are visual representations of the North Slope LNG project versus
a Cook Inlet option that AIDEA would be able to pursue with the
passage of HB 105. Addressing the North Slope value chain shown
on slide 9, he said there are two existing contracts for North
Slope natural gas supply, both signed by local Interior
utilities and assigned to the IEP. The liquefaction plant that
was being considered for LNG production was under the concession
agreement with MWH. Trucking off the North Slope was
anticipated to happen by private contractors; AIDEA did explore
potentially financing some trailers, but not the trucking or the
trucking operation itself. In regard to LNG storage and
regasification, AIDEA made loans to FNG and IGU for buildout of
a distribution system. Turning to the value chain depicted on
slide 10 for LNG sourced out of Cook Inlet, he said the big
difference is in gas supply - AIDEA would be working with
utilities to pursue gas supply agreements with Cook Inlet
producers. In the end it would be the utilities themselves that
would be signing those agreements. The LNG production would be
with a third party developer, not AIDEA buying, designing, or
operating a plant. The third party developer would work with
AIDEA to partner on financing or to partner as part of the
larger IEP planning. Presently the base case for transportation
is trucking, but using the Alaska Railroad is an option.
Trucking of the LNG would be done by the private sector and
AIDEA would be open to purchasing or financing the LNG trailers
or the ISO containers if on the railroad. If propane is made
available through legislation or through a proposal, AIDEA could
invest in the propane transportation. If a pipeline is made
available or a pipeline proposal moves forward, AIDEA could
invest in the pipeline transportation, but at this point it is
LNG trucking. Storage and regasification for the Cook Inlet
alternative would remain the same [as for the North Slope].
2:40:38 PM
REPRESENTATIVE OLSON asked whether Golden Valley Electric
Association (GVEA) will have a conflict with its restart of the
Healy coal project.
MR. THERRIAULT answered GVEA is going ahead with restart of the
Healy coal project. However, within its system, GVEA needs the
ability to firm up the Eva Creek wind project, but GVEA cannot
do that with a coal plant because coal cannot be ramped up and
down that quickly. So, GVEA has an LM6000 generator in North
Pole. Part of the reason why the IGU distribution begins at
North Pole is because IGU would partner with GVEA for LNG to be
stored there and made available directly to GVEA for that
LM6000. Conversion of that plant has been factored by GVEA.
When it was initially built the thought was that a pipeline
would be delivering gas into the community, so it was sourced
and built with the idea of converting it over to natural gas.
That particular generator still is a load base, it has a demand
for fuel that can be switched over to LNG.
2:41:52 PM
REPRESENTATIVE HAWKER said he has areas of concern [regarding
the Cook Inlet LNG alternative]. The chart on slide 10 shows a
third party LNG developer in the LNG production part of this
process, yet on February 12, 2015, AIDEA provided an extensive
presentation to the Legislative Budget and Audit Committee
regarding its potential purchase of the Pentex Alaska Natural
Gas Company, LLC (Pentex), which includes an LNG facility that
the state would own and operate. He inquired whether he is
missing something.
MR. SZYMONIAK replied the state would also own an agreement to
sell that asset to Harvest Alaska, LLC, a subsidiary of Hilcorp,
to own and operate the existing LNG plant owned by Pentex.
REPRESENTATIVE HAWKER understood the State of Alaska, through
its attorney general, has opposed that sale. He asked what
AIDEA's intention is to do with that $50 million plant.
MR. PARADY said Mr. Ted Leonard, AIDEA Executive Director
Emeritus, is on line and might be best suited to answer that
question. [Mr. Leonard was unavailable to answer.]
MR. THERRIAULT explained the existing one billion cubic foot
plant is a proposed part of the Pentex purchase, but there is a
contractual obligation to sell that to Hilcorp and AIDEA would
be contractually obligated to follow through on that sale.
2:44:23 PM
REPRESENTATIVE HAWKER presumed that if the attorney general is
overridden and the sale goes through, AIDEA has no intention of
withdrawing that sales commitment. He understood the sale of
that particular LNG plant comes with a 10 year absolute take or
pay commitment on behalf of FNG to purchase gas for its entire
existing requirement today at $15 per thousand cubic feet (MCF)
at city gate, which is not delivery to the burner tip and which
doesn't meet AIDEA's hurdle rate. He inquired how FNG's
customers in Fairbanks can be committed to $15 city gate while
AIDEA is telling the committee today that there is no need for
rate regulation to protect consumers.
MR. PARADY answered the $15 on the first billion cubic feet
(BCF) makes it tough to achieve a lower cost over the ramped-up
volume. He said Representative Hawker is correct in identifying
that as an issue, but added that those issues remain to be
worked out as work continues forward on this deal.
REPRESENTATIVE HAWKER said he is concerned about creating a
situation in Fairbanks of two classes of consumers: those who
are a discriminated class that got into the deal early and those
who benefit later because the state has put a great deal more
money into the project.
2:46:30 PM
REPRESENTATIVE HAWKER addressed slide 10, recalling an earlier
statement that AIDEA would be helping and facilitating
agreements that do not involve AIDEA taking ownership of gas.
He said he has a community that sits on the Cook Inlet and he
has a gas utility that negotiates by itself with the same
providers of gas that AIDEA would be going to and interjecting
the state in a competing role with his utility. He asked
whether it is fair to have the state competing on behalf of the
Fairbanks utilities when his utilities are being disadvantaged
by that activity.
MR. PARADY offered his perspective, saying that the supply of
gas into the Fairbanks market is relatively small compared to
the Anchorage market. Additionally, the increase in gas supply
availability in the Cook Inlet in recent years has created the
potential that there is room for both markets. Finally, there
is the combining of FNG and LNG utilities to create a sufficient
and reasonable economy of scale. From the "30,000 foot view,"
Senate Bill 23 offers a package of $332 million in state
support, of which 20 percent is grants and 80 percent is debt to
be borne by those consumers, albeit in the form of state patient
capital that isn't required to meet a 12.5 percent hurdle rate
for a rate of return. It is trying to deploy those assets in a
way that allows becoming a player in that market without being
destructive to the core market of Anchorage; these are
discussions that he has had personally with ENSTAR's president
and which he believes can be achieved as this process is worked
through. He said Representative Hawker's concern is well taken
and something to be worked on as work continues forward.
REPRESENTATIVE HAWKER agreed this is what negotiations are all
about, but said he would like to have answers that are far more
clear and certain before committing the state's resources on a
long-term basis to a project that is going to be requiring gas
from the Cook Inlet for 30 years when his own utilities cannot
get more than a three-year contract today.
2:49:21 PM
CO-CHAIR NAGEAK recalled testimony several weeks ago from Doyon,
Limited, and Ahtna, Incorporated, that there is the possibility
of finding natural gas closer to Fairbanks, in which case all of
this may be moot because it would be a lot cheaper going from
Nenana to Fairbanks. So much is happening with energy
exploration that AIDEA may come back saying it has found a
cheaper way. He asked whether AIDEA has thought about that.
MR. THERRIAULT responded AIDEA has certainly kept abreast of the
developments of Doyon in the Nenana region. At this point Doyon
has not found a commercial supply of gas, but that could be a
possibility in another decade or so if a big line doesn't
happen. It would still give AIDEA the opportunity, though, to
get the infrastructure for distribution built out and source
initial gas perhaps out of Cook Inlet or off the North Slope.
Something to be kept in mind is that the name Interior Energy
Project denotes a geographic area that is larger than just the
Fairbanks North Star Borough. Although it is the second largest
metropolitan area it is still a relatively small demand, but it
would anchor whatever infrastructure was developed to get that
product flowing for use in Glennallen, Tok, Mentasta, Northway,
and other communities in that larger geographic area; that bulk
demand would bring down that overall per-unit price.
2:52:34 PM
MR. SZYMONIAK continued the presentation, moving to slides 11-12
and comparing a North Slope project map with a Cook Inlet
project map. For the North Slope project (slide 11) the natural
gas supply would be sourced on the North Slope, liquefied on the
North Slope, and trucked to Interior Alaska. For the Cook Inlet
(slide 12) the natural gas supply would be sourced out of Cook
Inlet, liquefied in Southcentral, and trucked or railed to the
Interior. The two are functionally the same project with a
different source of gas, they have the same financing tools by
AIDEA, and they have the same approach by AIDEA to find private
developers to do the operation and advancing of the project with
AIDEA financing and participation.
MR. SZYMONIAK said slide 13 demonstrates why AIDEA is optimistic
about a Cook Inlet gas supply opportunity. It's well documented
that a Cook Inlet gas supply at the volumes and price needed is
not certain, but AIDEA believes there is an opportunity there
and is going through the process of using commercial and market
mechanisms to determine what that price and availability is. If
it is at a price and availability that achieves the goals of the
Interior Energy Project, AIDEA hopes to be able to pursue it
with the passage of HB 105. The chart on the left side of slide
13 was produced by the Department of Natural Resources. The bar
on the left of the chart depicts the remaining 1P and 2P Cook
Inlet gas reserves, so does not include undiscovered resources
or fields in development like those by Furie and the BlueCrest/
WestPac Cosmopolitan Project. The middle bar on the chart shows
the last 10 years of LNG exports and the right bar shows the
next 10 years of Interior gas [demand]. It can be seen from the
bars that while the IEP would be additional use of the Cook
Inlet reserves, the order of magnitude of that use is fairly
small compared to the reserves and non-Southcentral uses.
2:54:45 PM
REPRESENTATIVE HAWKER asked why the situation was so different
two years ago when the importing of LNG into Cook Inlet was
being looked at.
MR. SZYMONIAK answered there are probably multiple reasons, the
primary one being a paradigm shift in Cook Inlet from larger
producers to smaller producers and as those producers moved out
the production from their fields began to drop. Production in
Cook Inlet may also have been dropped because of the impending
end of the existing LNG export license. But, the reserves were
there and the fears of having to import LNG didn't materialize.
REPRESENTATIVE HAWKER argued there are no clear and empirical
answers as to why two short years ago his town was having
brownout drills for the lack of gas. Yet, the entire energy of
Fairbanks will be bet for the next 30 years on something that
hasn't been studied and a determination made as to what changed
over the last two years and whether there could be a change back
just as easily over the next two years.
MR. PARADY replied he would characterize some elements of
Representative Hawker's descriptions somewhat differently.
There is the consequence of tax incentives that have produced
additional gas out of the Cook Inlet; it didn't occur in a magic
24 months, it has occurred over a period of time as those have
come to fruition and projects continue to come on line from the
smaller producers that have been attracted to the inlet. While
Representative Hawker was present in the Senate Bill 23 debate
and he was not, he said his understanding of the IEP is that it
is a bridge to the future when the big pipeline is put in place.
That is why the IEP is a trucking-based project, not a pipeline-
based project, although those questions continue to be evaluated
in the context of Senator Micciche's inquiries. The point of
slide 13 is to say that the demand to meet the Fairbanks piece
of the market over a period of a decade is a relatively small
draw on that trillion cubic feet of reserve.
REPRESENTATIVE HAWKER maintained it is the significant gas
cushion provided by the Cook Inlet Natural Gas Storage Alaska
(CINGSA) facility that is keeping his community lit during the
coldest months of the winter, not necessarily the tax structure.
At least one of the significant tax benefits being referred to
will expire next year, the rest expire in 2021, and there is a
great deal of conversation in this building about not extending
those credits. He inquired whether Mr. Parady can assure him
that those credits will be extended and that the robust
renaissance in the Cook Inlet will be continued.
MR. PARADY responded "of course not and your point is well
taken" and that is why the evaluation of gas supply alternatives
continues to include North Slope based options. A complex set
of interactions must be threaded through to meet the goals of
Senate Bill 23, which were set for AIDEA by this body.
2:58:56 PM
CO-CHAIR NAGEAK noted barges go back and forth in the summer,
especially on the Yukon River and along the coast. He asked
whether any studies have looked at barging LNG on the Yukon
River from Fairbanks.
MR. THERRIAULT answered that language in a piece of pipeline
legislation passed last year charged AEA with looking at the
economics of delivering more cost effective energy statewide.
This indicated planning ahead for how to spread access to
natural gas molecules off of a big trans-Alaska pipeline to a
larger geographic area, including delivery via freshwater system
on barges. Barging LNG is a little more difficult than fuel oil
because LNG is a cryogenic fuel, it is at a temperature of minus
262 degrees Fahrenheit. As instructed, AEA is putting together
a body of work to be delivered to the legislature, he thinks, in
January 2017.
3:01:17 PM
MR. SZYMONIAK resumed the presentation, drawing attention to the
chart on the right side of slide 13. He said the left bar on
the chart depicts the 2014 demand of Cook Inlet gas in billion
cubic feet per year, the middle bar depicts the potential demand
if the Agrium plant is restarted, and the right bar depicts the
Interior demand at full buildout.
MR. PARADY moved to slide 14, explaining HB 105 would give AIDEA
the flexibility to use the Senate Bill 23 financing tools with a
non-North Slope liquefaction location. He said HB 105 does not
increase funding for the IEP, does not increase AIDEA's
investment authority beyond giving AIDEA geographic flexibility,
does not alter AIDEA's policy of supporting the private sector,
and does not change the intent or goals of the IEP.
3:02:06 PM
REPRESENTATIVE HAWKER inquired whether HB 105, as written, will
give AIDEA sufficient resources to conduct itself through the
full buildout of the Interior Energy Project, not just the 20
percent being started with today, or will AIDEA have to come
back to the well for the other 80 percent.
MR. PARADY replied there is no coming back to the well because
there is no well. The plain fact is that AIDEA must use the
tools that were delivered to it for this purpose to achieve this
purpose, and that is what AIDEA is working diligently to find
the answer to.
REPRESENTATIVE HAWKER understood Mr. Parady to be saying that if
HB 105 passes as written, AIDEA will be able to accomplish the
entire buildout of the IEP - not just the 20 percent for FNG,
but the entire 100 percent buildout - without coming back to the
state for additional subsidy.
MR. PARADY deferred to the project manager.
BOB SHEFCHIK, Consultant/Project Manager, Interior Energy
Project, Alaska Industrial Development and Export Authority
(AIDEA), Department of Commerce, Community & Economic
Development (DCCED), replied Senate Bill 23 funds were never
sufficient to do an entire buildout of the complete community
and provide a liquefaction chain that would meet the entire
community's needs. It likely will provide sufficient funding to
build the liquefaction chain, finish the buildout on the core of
town, and build the core out in the North Pole/Badger Road area.
Financing for phases 4, 5, and 6 buildout has been put off until
there is cash flow for the entire system to develop a financing
mechanism for that, which could involve revenue bonds, or local
participation as discussed earlier, or bonding through AIDEA.
Despite Representative Hawker's offer of it when "we" met at
Legislative Budget and Audit Committee, there is not an
expectation the state will be in a position to do more than has
already been done through Senate Bill 23.
3:05:04 PM
REPRESENTATIVE HAWKER recalled that when Senate Bill 23 was
being discussed the representation to the legislature was that
this was all that Fairbanks needed to accomplish the entire
Interior Energy Project goals. He said that seems to have
changed substantially now that a North Slope project isn't being
looked at.
MR. SHEFCHIK responded that the representations were made by the
Parnell Administration. He said his recollection is that it was
described as being a good start and would get the community
kick-started to low cost energy. There was not an expectation
that the loan and appropriation package was sufficient to put
together a North Slope plant, a North Slope supply chain, and a
complete buildout of the distribution system even at the time.
REPRESENTATIVE HAWKER remarked "fascinating" and pointed out
that the now emeritus head of AIDEA is part of the Walker
Administration. He said if the blame is being laid on Mr.
Leonard he would like to hear Mr. Leonard's response.
MR. SHEFCHIK answered it was no blame, it was a description of
there was enough money to make a good start and that is the
effort AIDEA continues to do.
3:06:29 PM
MR. PARADY returned to the presentation. Turning to slide 15 he
said AIDEA board resolution G15-02 approved the expenditures to
evaluate the alternatives to the North Slope Concession
Agreement. Passed by the board on [January 14, 2015,] it
includes $500,000 in SETS funds and $200,000 in AIDEA funds.
The purpose is to assess non-North Slope alternatives to meet
the goals of IEP. Moving to slide 16 he said a total of
$295,000 has been expended to date and was used for plant cost
estimate, the liquefaction RFP, transportation modeling,
distribution and storage design, web site outreach, project
management, and legal expenses.
3:07:28 PM
REPRESENTATIVE HAWKER inquired whether a change occurred in Mr.
Parady's interpretation of what was going to be accomplished
under AIDEA Resolution G15-02.
MR. PARADY replied he senses a deeper question, but said his
first answer is no. He requested Representative Hawker to ask
the next part of the question.
REPRESENTATIVE HAWKER paraphrased from Resolution G15-02: "the
staff of the Authority is proposing that the Authority re-
position the Interior Energy Project by evaluating several
potential sources of natural gas combined with utilization of
methods to finance the infrastructure needed to supply energy to
the Interior. These alternatives may include, but are not
necessarily limited to, obtaining natural gas from the North
Slope, Cook Inlet, or other locations." Representative Hawker
recalled previous testimony in which it was stated that this was
a study. However, he said, an upcoming chart in today's
presentation says it is not a study. He asked what happened
that it ceased being a study. He further believed it was stated
in previous testimony that AIDEA would have answers and would
present them to the legislature this summer. Now, however, it
seems the money is being used to advance a specific Cook Inlet
project rather than to identify different projects for
consideration as to what might be the most efficacious.
MR. PARADY responded it is both things said by Representative
Hawker: to complete the assessment and to move the project
forward.
3:09:22 PM
REPRESENTATIVE HAWKER paraphrased from the next paragraph [in
Resolution G15-02]: "a process-driven evaluation of alternative
means of supplying energy to Interior Alaska." He said he would
have been more comfortable with testimony that had said, "Yes,
we were going to look at alternate means but we've decided we've
... got this other project and we think the money can be better
spent there." He asked what other alternatives are being looked
at other than what is being presented today.
MR. PARADY deferred to Mr. Shefchik.
MR. SHEFCHIK answered that the evaluation will consider North
Slope proposals as well as Southcentral proposals. Two or three
entities have put forward propane solutions. As AIDEA puts out
an RFP the expectation is that it will look to liquefaction
capacity and also entertain other alternatives. The RFP process
will competitively solicit proposals from private entities for
evaluation down to two or three that will get more effort and
scrutiny and negotiation from which one will be picked.
REPRESENTATIVE HAWKER remarked that he likes looking at the
alternatives and studying them so that everyone has information
upon which to make the best decisions possible. But, he said,
today's presentation is all about how great one is and why this
bill needs to be passed to get running with one conception. It
is not about studying alternatives, he argued, given nothing has
been heard in today's presentation about studying an alternative
to anything.
3:11:55 PM
MR. PARADY resumed the presentation. Turning to slide 17 he
said the components of the project include supply, liquefaction,
transportation, storage and regasification, distribution and
conversion. Elaborating on the gas supply and liquefaction
components he moved to slide 18, saying DCCED is leading the
effort to facilitate Cook Inlet natural gas. Solicitation to
all Cook Inlet gas vendors is in process. All current potential
suppliers will be invited to participate in an open competitive
process. The RFP is to be issued for LNG capacity. The focus
is on Cook Inlet, but consideration of the North Slope and
alternates will be made, which speaks to Representative Hawker's
concerns. Proposals will be evaluated that include both
[natural gas] supply and LNG capacity and try to establish
competition between private developers to achieve the lowest
price using the IEP tools.
MR. PARADY moved to slide 19, explaining that for the components
of storage and transportation the use of capital will want to be
optimized to meet IEP goals. The North Slope analysis tools are
applicable to these components as AIDEA moves forward. For
example, is it more economic to invest in LNG plant capacity?
Trucks? Or LNG storage? Storage is one of the critical
components in decision making in this project going forward.
Regarding transportation logistics and cost, there are serious
questions to be answered in terms of levelized versus seasonal
swing and establishing the LNG storage size is driven by the
supply chain, which leads into evaluating trucking versus rail,
the size and capital cost of the selected plant, and the cost of
the seasonal swing versus the cost of storage.
3:13:48 PM
MR. PARADY noted there has already been substantial discussion
today regarding the distribution and conversions components
[slide 20]. He said the conversion study, which is substantial
and detailed, can be found on IEP's web site. Gas trucking
remains a transition to piped gas, which speaks to the duration
of the project. Distribution buildout is required regardless of
the source and the buildout continues this summer. The
distribution adjustments are expected for summer 2016 based on
the LNG capacity and what results from the Pentex outcome as
work continues to blend those two distribution utilities
together. An accomplishment of the project to date is to
rationalize the delivery of gas in Fairbanks by combining those
two entities. The potential acquisition of Pentex/FNG is
ongoing with due diligence. If the acquisition occurs there is
potentially a savings this fall to current customers as well as
long-term efficiencies to benefit all residents. The approach
of AIDEA is to divest the ownership and operation structures
into an integrated FNG and IGU utility.
MR. THERRIAULT addressed the key component of conversion [slide
20], reiterating there is the existing Alaska Housing Finance
Corporation (AHFC) rebate program, the potential of on-bill
financing for residential, and PACE financing should the
legislature allow that mechanism to be in place to help with
businesses. Interest has been expressed at the local level that
there is probably a role for local government to play in helping
to get those conversion mechanisms in place.
3:15:30 PM
MR. PARADY moved to slide 21, saying that the IEP's targets for
June 30, 2015, are to have a gas supply agreement at a term
sheet level, which is not a contract where there is an
understanding of volume, price, duration, and basic delivery
terms.
REPRESENTATIVE HAWKER inquired whether AIDEA intends to be a
signatory to the aforementioned term sheet.
MR. PARADY replied he thinks the answer is no. He deferred to
Mr. Szymoniak.
MR. SZYMONIAK concurred, stating AIDEA would not be a signatory
of that term sheet, AIDEA would be a facilitator and would have
no commitment to buy the gas. It would be the utilities.
REPRESENTATIVE HAWKER asked who AIDEA anticipates will be the
signatories to that term sheet.
MR. SZYMONIAK responded the signatory on the term sheet would be
GVEA, IGU, and FNG. Pending AIDEA acquisition of FNG, AIDEA may
temporarily be a signatory through its role as the FNG owner.
REPRESENTATIVE HAWKER inquired whether AIDEA has a supplier on
this term sheet.
MR. SZYMONIAK answered no, not yet.
MR. PARADY added the solicitation hasn't been published yet.
REPRESENTATIVE HAWKER understood the intention is for this term
sheet to be between whoever is going to supply gas for the
project and the utilities that will be consuming the product.
MR. PARADY replied yes.
REPRESENTATIVE HAWKER asked what term of commitment is expected
on the term sheet.
MR. SZYMONIAK responded the expectation is a long-term contract
of ten years or longer, with a minimum of five years.
3:17:27 PM
REPRESENTATIVE HAWKER inquired how active AIDEA expects to be in
the negotiation of this agreement between two arms-length
commercial parties.
MR. SZYMONIAK answered he expects AIDEA will be as active as
directed by the utilities; AIDEA will be working on their behalf
and to the extent that they sponsor AIDEA's activity work to
aggregate the gas supply agreements between three utilities into
one commercial process.
REPRESENTATIVE HAWKER understood that AIDEA's client will be the
utilities and AIDEA will be working dedicated to the utilities.
He asked how that relates to AIDEA's responsibility to the State
of Alaska as a whole as well as to other utilities in the state
who may be competing for the same resource.
MR. PARADY replied he would refer AIDEA to the original goals of
the IEP as set by Senate Bill 23: AIDEA's role is to support
the delivery of affordable energy into Interior Alaska. He
related there has been discussion in the past that Fairbanks
cannot be handled in a way that is disruptive to ENSTAR or other
utility entities and their 139,000 customers in the Anchorage
area. The question is whether there is enough room for both
operations within that same supply and the potential answer
appears to be yes, but the details remain to be worked through.
REPRESENTATIVE HAWKER understood ENSTAR has expressed interest
in becoming the operator of the potential consolidated utility
in Fairbanks. He asked what AIDEA's role will be in negotiating
a term sheet between the Fairbanks utilities and ENSTAR.
MR. PARADY responded that, pending completion of the Pentex
process, as the owner of the FNG utility AIDEA's role would stem
from that ownership position.
REPRESENTATIVE HAWKER interpreted Mr. Parady's reply to be
"you'll think about it when it happens if it happens."
MR. PARADY answered it's a tremendously interesting idea given
ENSTAR's success as a progressive, stable, long-term utility
owner. However, ENSTAR is not the only potential partner in
that activity and it remains to be seen as it comes forward.
REPRESENTATIVE HAWKER remarked he looks forward to seeing a more
fleshed out proposal for this entire project.
3:20:00 PM
MR. PARADY returned to the presentation. Continuing with slide
21, he said the June 30 targets include: identifying supply
chain partners, [bringing the project] to the AIDEA Board in
terms of development agreements and determining how to deploy
the state's capital; dealing with the Pentex acquisition in
regard to its resolution and integrating Pentex and IGU; and
setting timeline and component pricing.
MR. PARADY concluded the presentation by moving to slide 22 to
summarize. He thanked the committee members for today's robust
discussion, saying that to be successful the project must be
able to withstand critical scrutiny. Noting that this project
was set before [AIDEA] by the legislature in Senate Bill 23, he
said diligent work is continuing to accomplish its goals. He
said HB 105 would increase the project's flexibility and improve
the likelihood of success. He added that AIDEA welcomes the
chance to work with the legislature and the committee on moving
the bill forward.
3:21:05 PM
REPRESENTATIVE HAWKER understood AIDEA has no intention of
owning or controlling the development and distribution of gas
molecules, that AIDEA does not intend to become a gas company.
He inquired whether that statement applies to all other state
entities and agencies or whether it is just AIDEA to which that
restriction is being made. He further inquired whether there is
an intent by the State of Alaska, through another entity, to be
owning or controlling gas that will be used for this project.
MR. PARADY replied not to his knowledge.
MR. THERRIAULT concurred.
MR. SZYMONIAK concurred.
REPRESENTATIVE SEATON, in regard to the aforementioned point,
noted that if there is a large-scale North Slope gas pipeline
the state would own 25 percent of the gas and he would expect
that the state might be supplying gas to that utility. He said
he wants to make sure it isn't being said that [the state] would
never use any of the gas that [the state] has in a large-scale
pipeline to supply Fairbanks. He asked whether that is what Mr.
Parady was stating.
MR. PARADY responded no.
3:22:40 PM
REPRESENTATIVE SEATON noted that the state: is subsidizing a
project for lower cost Interior energy; has subsidized gas for
years through several kinds of credits into the Cook Inlet
Basin; has not had any realistic production tax on gas in Cook
Inlet so as to ensure that gas is the cheapest possible for
Anchorage; and has put in tax credits for CINGSA that must pass
through to consumers. He said he is very concerned that the
state not overly subsidize Fairbanks. He stated he doesn't want
to get into the situation of where the legislature can't do
anything without being criticized for trying to have all parts
of Alaska get reasonably priced energy. One of the
legislature's primary goals - whether on the North Slope, in
Western Alaska, down the river system, or into Anchorage or
Homer - is trying to get lower cost energies available. As the
legislature goes forward, he said he wants to ensure that the
discussion is balanced and that Senate Bill 23 is implemented in
this administration under the same kind of terms the legislature
would have thought reasonable previously. He announced he has a
couple of amendments he plans to bring forward, one for a small
diameter gasline from Cook Inlet northward, as was included in
language on the Senate side, and one for a propane/air mixture
that would go into the pipe distribution systems coming out of
Prince Rupert.
3:25:52 PM
REPRESENTATIVE SEATON opined that the only aspect of the project
that worries him is the FNG purchase and the LNG facilities
being sold to Hilcorp with a 10 year take or pay contract, which
seems to put some of those other alternatives at risk. He
opined that worrying about Anchorage's supply is unusual given
that the committee just passed a tax credit bill to encourage
Agrium to use a large amount of Cook Inlet gas for industrial
product. He encouraged AIDEA to provide members with an
analysis of what a 10 year take or pay contract could mean and
how that could be offset, such as using that liquefied natural
gas to supply coastal towns like Seldovia, Seward, Kodiak, and
Cordova. As he sees it, that could be something that would
actually confound the use and investigation of a pipeline going
north as well as bringing Prince Rupert propane by railroad to
Fairbanks. He said looking at more than one alternative to get
cheaper energy to Fairbanks requires more analysis than just
liquefied natural gas.
3:28:52 PM
CO-CHAIR TALERICO offered his appreciation for today's tough
questions and the answers to them. He said the state's second
biggest municipality definitely needs affordable energy and not
having it will impact everyone between Ketchikan and Barrow.
MR. THERRIAULT noted that AIDEA had engaged in the discussions
on the committee substitute language on the Senate side that was
referred to by Representative Seaton. He offered AIDEA's help
during the committee's forthcoming work.