Legislature(1999 - 2000)
02/21/2000 03:12 PM Senate RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 226-STRANDED GAS PIPELINE CARRIERS
CHAIRMAN HALFORD announced SB 226 to be up for consideration.
MR. MIKE HURLEY, ARCO Alaska ANS Gas Commercialization Group,
said he has been assigned to manage the commercial regulatory
efforts of the Alaska North Slope Sponsor Group, which supports
SB 226. For the last year and a half, the sponsor group,
comprised of ARCO Alaska, BP Amoco, Foothills Pipelines, Ltd.,
Phillips Petroleum, and Marubeni Corporation, has been actively
pursuing the development of a new design for a market viable LNG
export project. It will include a commercial regulatory regime
to provide long term customers with regulatory certainty and, at
the same time, it will meet state and federal regulators' needs
for adequate access and commercial oversight. SB 226 strikes the
balance that provides the Regulatory Commission of Alaska (RCA)
with clear and unambiguous oversight of intrastate gas
transportation.
MR. HURLEY explained the provisions of SB 226 as follows.
Section 1 clarifies that the current Right-of-way Leasing Act
common carriage requirements apply only to the intrastate gas
shipments. Sections 2 and 3 clarify that a stranded gas pipeline
system's intrastate shipments would be regulated under the
Pipeline Act (AS 42.06) rather than under the Utilities Act (AS
42.05).
Section 4 adds a new subsection to the Pipeline Act that creates
a process in RCA's existing certification procedures to determine
the amount of pipeline capacity that should initially be set
aside for intrastate transportation. That process sets out
distinct criteria for capacity for local distribution companies
that must submit their gas purchase contracts to the RCA under
the current regulations. It contains a different set of
procedures for industrial gas users who must provide written
commitments to transport intrastate gas volumes that are
supported by take-or-pay purchase commitments with stranded gas
producers.
Under Section 5, an expansion of the stranded gas pipeline may be
ordered by the RCA, only if such requests for additional
intrastate capacity are supported by firm contractual
commitments.
Section 6 allows the RCA to consider and approve a reservation or
similar charge in the intrastate tariff for firm intrastate
transportation.
Finally, section 7 contains the definitions of terms referred to
in other sections of the bill in an effort to increase clarity
and understanding.
In closing, MR. HURLEY said the companion bill, HB 290, was
recently amended in its first committee of referral in the other
body. He offered to answer questions about the bill or the
amendments.
CHAIRMAN HALFORD asked him to review the amendments.
MR. HURLEY stated the first amendment that the Oil and Gas
Committee took up changed the reference to "stranded gas" to
"North Slope natural gas (NS gas)" throughout the bill. There
was concern about the use of the term "stranded gas" as it
applied to HB 393 (the stranded gas development act, which was
discussed a couple of years ago.
Number 2504
The second amendment that was adopted made a change to Section 4.
It was based on discussions with the RCA about the standards for
building capacity in the initial build of the pipeline system.
The concern was that the standards for small communities along
the line were too high to meet. The amendment changed the
standards so that there are no take-or-pay commitments for
communities, but there would still be a fairly high standard for
large industrial consumers.
CHAIRMAN HALFORD asked if it was a rewrite of the entire section
and it limits take-or-pay to large customers.
MR. HURLEY said that is correct. He explained that the
definition was set at 20 million standard cubic feet per day.
Anything larger than that still has a high bar to it. Only two
facilities in Alaska use more than 20 million cubic feet a day of
gas; the Beluga Power Plant and ML&P's main plant. They were
interested in making sure that any large industrial usage would
have some kind of commitment in place before space for it is
built in the system.
Amendment 2(b) added a new section to the bill at the request of
the chairman. It changes the determinations that need to be made
under the AS 38.05 royalty statutes. It changes the requirements
for the commissioner of the Department of Natural Resources (DNR)
when determining whether to take royalty in kind or in value. It
then provides for legislative approval before the commissioner
can take action with regard to taking royalty in value.
CHAIRMAN HALFORD commented that was a significant rewrite, too.
MR. HURLEY responded it was and it required a change in the
title.
MR. HURLEY stated that Amendment three was written with the RCA.
It addresses section five of the bill. The RCA was concerned
that some language in the bill created a hybrid that was not
under AS 42.06 or AS 42.05. The amendment stripped out some of
the language in 310.(d)1(A) and revised (B), so that it is
clearly under the Pipeline Act.
A fourth amendment was proposed, but did not pass. It referenced
the changes in AS 38.35.
The fifth amendment, which did pass, was the addition of a new
section to the bill that changes the rate structure, such that
tariffs for the North Slope natural gas pipeline would be
calculated as if it was a public utility.
SENATOR LINCOLN referenced Mr. Ross Coen's letter dated February
21, 1000, which asks for the removal of language on line 9, page
8, which excludes marine terminal facilities, including pollution
control equipment. She asked Mr. Hurley to comment on that
request.
MR. HURLEY explained that the intent behind changing the
definition of a pipeline to exclude those facilities was that the
sponsor group recognized that gas will be transported for
intrastate use all along the pipeline system. The actual plant
that makes LNG is expected to be dedicated to the export market.
The existing intrastate usage, under the proposed regulatory
regime, is a regular common carriage system. If the entire
system was kept common carriage, the plant, which is dedicated to
export, would be accessible to people who want to use LNG
instate. That would impinge on the export volumes and they
wouldn't be able to satisfy contracts for export of LNG overseas.
It doesn't prevent anyone from building another LNG plant next
door and barging LNG around the state. The group wanted to keep
the plant and the marine terminal out of a common carriage
situation so they defined the system subject to common carriage
so that it included only the pipeline and the upstream pieces.
The State Pipeline Coordinator's Office (SPCO) has become
concerned that this definition will eliminate the SPCO's
oversight of that plant. The group's intent was never to change
SPCO's regulatory authority one way or the other. They are
working with the Department of Law and the SPCO to find some
other language to take care of that.
Number 2909
MR. MIKE BARNHILL, Department of Law, said he is also testifying
for Roger Marks, Department of Revenue, who is the
Administration's lead on the bill. He circulated Mr. Marks'
written comments.
MR. BARNHILL said the Administration applauds the efforts of the
sponsor group and others to bring the commercialization of North
Slope natural gas closer to reality. The Administration supports
that intent. Nevertheless, the Administration has certain
concerns that he hoped could be resolved.
He read the comments of Roger Marks:
This represents a preliminary analysis by the
Administration, including the Departments of Law, Revenue,
and Natural Resources, and the Regulatory Commission of
Alaska, and the State Pipeline Coordinator's Office.
Instate use of natural gas would be a very valuable benefit
of an Alaska North Slope liquefied natural gas project.
However, if the gas is commercialized, most of the volume
will be for export. The financing of this multi-billion
dollar project will require establishment of long term
contracts with buyers. The set amount of pipeline capacity
will need to be reserved for contractual obligations.
At the same time, the economics of the proposed export
projects appear to be financially marginal. They could not
afford to take the North slope gas to market if they have to
bear the cost of pre-investing to provide substantial excess
capacity if there were a risk the instate excess capacity
would not be used. To do so would affect the economics such
that there would be no project and no one would get gas.
MR. BARNHILL said the desire of the Administration is to maximize
the instate access to natural gas without jeopardizing the export
economics of the project. He thought the goal of this bill
should be to strike that balance. He continued reading Mr.
Marks' comments.
Whereas it is straightforward to arrange for pipeline
capacity and gas supplies for intrastate use before
construction starts, attaining pipeline capacity after
operation begins may be difficult and expensive.
Consequently, the question of how to allocate space and gas
needs to be addressed before the line is built.
TAPE 00-03, SIDE B
MR. BARNHILL continued.
What this bill does is provide a possible way to reduce the
potential gas supply risks perceived by the foreign market,
facilitating the marketing of the gas, while providing a
mechanism for communities to procure gas. The
Administration supports this broad intent.
This said, the bill raises complex issues that could have
significant long-term impacts. Some of these issues
include:
1. Local jurisdictions committing in advance to secure
pipeline capacity without knowing what the cost will be,
especially if the gas purchase contracts are also not in
place. (There may, however, be mechanisms available to
reduce risks to buyers without unduly harming the pipeline
sponsors.)
He said that an attempt was made in the House Oil and Gas
Committee to address the Administration's concerns in amendment
two. Although it was a step in the right direction, there is
more to be done to protect the interests of instate users. He
continued reading Mr. Mark's comments.
2. Allocation of capacity between intrastate and export use
in the event of shortages or excesses of capacity.
3. Exclusion of the pipeline from the Alaska Public
Utilities Regulatory Act and subjection to the Pipeline Act.
The Administration is analyzing the extent to which the
differences between these two statutory regimes may be
material.
4. Finally - exclusion of marine terminal facilities from
the Right-of-Way-Leasing Act. This may affect the ability
of the State Pipeline Coordinator's Office to oversee land
management of marine terminal facilities.
MR. BARNHILL noted the Administration, the pipeline sponsor
group, and Yukon Pacific have been working together over the past
few days to come up with satisfactory language. Making the
marine facilities and LNG common carriers is a principal concern
of the pipeline sponsor group. He continued reading.
In conclusion, the Administration is not yet sufficiently
comfortable with the measures in SB 226 to endorse them at
this time. The multi-agency team will continue to analyze
the bill and provide recommendations to the legislature.
CHAIRMAN HALFORD noted that there wasn't anyone else signed up to
testify on SB 226 and announced that the committee would continue
to work on it.
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