Legislature(2015 - 2016)BARNES 124

02/17/2015 10:15 AM ENERGY

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Audio Topic
10:17:33 AM Start
10:18:08 AM HJR8
10:35:53 AM HB105
11:47:32 AM Overview: Rural Alaska Fuel Service
12:00:31 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Location Change from Room 17 --
+ Program Overview by Del Conrad, Chief Executive TELECONFERENCED
Officer, Rural Alaska Fuel Service
Moved CSHJR 8(ENE) Out of Committee
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
         HB 105-AIDEA: BONDS;PROGRAMS;LOANS;LNG PROJECT                                                                     
10:35:53 AM                                                                                                                   
CO-CHAIR COLVER announced  that the next order  of business would                                                               
be  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."                                                                         
10:37:32 AM                                                                                                                   
FRED  PARADY,   Acting  Commissioner,  Department   of  Commerce,                                                               
Community & Economic Development  (DCCED), informed the committee                                                               
that  Governor Bill  Walker signed  Administrative Order  272 (AO                                                               
272)  on  1/16/15,  which  directed the  highest  levels  of  his                                                               
administration to  work on consumer  energy in Alaska and  on the                                                               
Interior Energy  Project (IEP) [passed  in the 28th  Alaska State                                                               
Legislature].   The order  directs the  commissioner of  DCCED to                                                               
facilitate agencies  involved with  consumer energy and  to focus                                                               
on Interior energy development to  lower energy costs and improve                                                               
air quality.  Further, the  Department of Natural Resources (DNR)                                                               
was directed,  along with the  Alaska Industrial  Development and                                                               
Export Authority (AIDEA), DCCED,  to assess potential natural gas                                                               
supplies  for  the  Interior.    Mr. Parady  said  IEP  work  has                                                               
revealed the  need to assess  a variety of natural  gas supplies,                                                               
including  that  of  Cook  Inlet,  the  North  Slope,  and  other                                                               
locations,  to  achieve  the delivery  of  affordable  energy  to                                                               
Fairbanks.   The AIDEA board  of directors approved  a resolution                                                               
to examine all  sources of supply for IEP, and  the passage of HB                                                               
105  would  provide AIDEA  the  ability  to consider  alternative                                                               
supplies of  natural gas - beyond  that of the North  Slope - for                                                               
IEP. Furthermore,  if AIDEA  determines the  best source  is from                                                               
Cook Inlet,  or elsewhere, the bill  provides AIDEA authorization                                                               
to proceed.                                                                                                                     
10:40:20 AM                                                                                                                   
TED  LEONARD,  Executive  Director,  AIDEA,  DCCED,  speaking  on                                                               
behalf of the administration, presented  a sectional analysis for                                                               
HB 105.   He informed the committee that the  mission of AIDEA is                                                               
to promote, develop, and advance  economic development and growth                                                               
in  Alaska   by  providing  various   means  of   investment  and                                                               
financing,  such  as  access  to low-cost  capital.    This  bill                                                               
addresses  limitations on  AIDEA's ability  to utilize  bonds for                                                               
development  and energy  projects,  and  provides flexibility  to                                                               
advance IEP.   Mr. Leonard  explained HB 105, section  1, changes                                                               
AS 44.88.095(c),  by raising  the limitation  from $6  million to                                                               
$10  million regarding  the  point at  which  AIDEA must  receive                                                               
consent from  an affected community, although  other requirements                                                               
remain in place.   Section 2 changes AS  44.88.095(g), by raising                                                               
the  limitation from  $10 million  to $25  million regarding  the                                                               
point at which  AIDEA must request from  the legislature approval                                                               
to issue a bond  on a project - not to approve  the project - but                                                               
only to  utilize a bond to  finance a project.   Neither of these                                                               
sections  have been  changed  since 1990,  thus  the amounts  are                                                               
being adjusted  for inflation.   Currently, AIDEA bond  rates are                                                               
3-4 percent  which is very  low-cost capital; however,  AIDEA has                                                               
not been  able to  utilize bonding to  provide access  to capital                                                               
for small and  mid-size projects ranging from $10  million to $25                                                               
10:44:48 AM                                                                                                                   
CO-CHAIR COLVER  asked whether the proposed  increases would spur                                                               
economic  development in  the private  sector and  help grow  the                                                               
MR. LEONARD  said yes.   Using bonds  makes access to  lower cost                                                               
capital timely.                                                                                                                 
CO-CHAIR COLVER  referred to energy  projects, and  asked whether                                                               
HB 105 would help projects progress faster.                                                                                     
MR.  LEONARD  said  yes.     The  time  needed  to  complete  the                                                               
legislative approval  process hampers the development  of smaller                                                               
projects.   Larger  projects, such  as transmission  lines, would                                                               
still require  the legislative  process.  Section  3 of  the bill                                                               
changes AS  44.88.155(d)(1) from $20  million to $25  million, to                                                               
adjust for  inflation the limit  regarding AIDEA's purchase  of a                                                               
loan, again to help finance  commercial and energy projects.  Mr.                                                               
Leonard  pointed out  that this  program has  a very  good record                                                               
with a default rate at less than 0.5 percent.                                                                                   
10:48:23 AM                                                                                                                   
GENE  THERRIAULT, Deputy  Director, Energy  Policy and  Outreach,                                                               
Alaska Energy  Authority (AEA), DCCED,  explained that  section 4                                                               
is a change  to the uncodified law [11(a), ch.26,  SA, 2013] that                                                               
relates to IEP.   He said at the time  the legislation was passed                                                               
in  2013,  the  gas  supply  out of  Cook  Inlet  was  uncertain;                                                               
however,  since then  the gas  supply  has "firmed  up" and  AEA,                                                               
AIDEA and DNR are now studying  whether Cook Inlet could become a                                                               
long-term  source of  natural gas  for  the Interior.   Thus,  in                                                               
section 4, on  page 4, line 23, the restrictive  language "on the                                                               
North Slope" was replaced with "in  the state" so that any supply                                                               
of gas  in the state could  be developed to supply  the Interior.                                                               
In addition, other changes have  been suggested by legislators to                                                               
ensure the bill  maintains a focus on Interior  Alaska.  Finally,                                                               
he pointed  out that on  page 4, line  24 was changed  to reflect                                                               
that there are  now two separate utility  distribution systems in                                                               
the Interior.                                                                                                                   
10:52:55 AM                                                                                                                   
CO-CHAIR  COLVER  asked  how  this   business  model  would  help                                                               
communities  that   are  dependent  upon  fuel   oil  and  diesel                                                               
MR. THERRIAULT  explained that  the original  concept of  IEP was                                                               
that  the  demand  from  the Fairbanks  North  Star  Borough  and                                                               
Interior  Alaska was  necessary support  a liquefied  natural gas                                                               
(LNG) project.   Once the  infrastructure was in place  to supply                                                               
the  core  demand,  the  infrastructure  could  possibly  support                                                               
delivery to Tok, Glennallen, Nenana,  or other communities on the                                                               
road system,  and perhaps via the  river system.  He  said demand                                                               
from the Interior remains necessary  to anchor the infrastructure                                                               
that  has the  potential  of serving  a  "much larger  geographic                                                               
CO-CHAIR COLVER inquired as to how  section 4 of the bill relates                                                               
to the purchase of the Pentax  Natural Gas Co., and whether AIDEA                                                               
is acquiring the small LNG plant at Point MacKenzie.                                                                            
MR. THERRIAULT  said the proposal  in the letter of  intent (LOI)                                                               
to purchase  is to buy the  assets owned by Pentax,  which is the                                                               
parent company  that owns  the Titan Alaska  LNG facility  in the                                                               
Matanuska-Susitna  Valley,   the  Fairbanks  Natural   Gas  (FNG)                                                               
distribution  system,  and  some   equipment.    Along  with  the                                                               
purchase, there is an agreement for  Pentax to sell the LNG plant                                                               
to  Hilcorp  Energy  Company  (Hilcorp),   thus  AIDEA  would  be                                                               
purchasing  the asset  and  the obligation  to  sell to  Hilcorp.                                                               
Ultimately,  the state  may own  the distribution  system in  the                                                               
Interior; there  would be  an obligation to  source LNG  from the                                                               
plant  and the  state  may  choose to  partner  with Hilcorp  for                                                               
expansion of the plant.                                                                                                         
10:56:56 AM                                                                                                                   
REPRESENTATIVE  WOOL asked  for  the price  on  which Pentax  and                                                               
Hilcorp have contracted for the liquefaction plant.                                                                             
MR. LEONARD  said there  is a  price that  cannot be  divulged at                                                               
this  time;  in  fact,  AIDEA  has  not  verified  the  price  or                                                               
completed its due diligence.                                                                                                    
REPRESENTATIVE WOOL  surmised AIDEA  would have  another purchase                                                               
agreement and  its terms would  determine the feasibility  of the                                                               
MR. LEONARD said yes.                                                                                                           
CO-CHAIR COLVER asked what the  distribution system would be like                                                               
in one  to two years, assuming  AIDEA acquires the assets  of the                                                               
two existing utilities.                                                                                                         
MR.  THERRIAULT  advised  that  AIDEA  has  approved  a  loan  to                                                               
Interior Gas Utility (IGU), for  the design and initial build-out                                                               
in its  territory out  of North Pole.   A loan  was also  made to                                                               
FGN, which added  30 miles of distribution pipe  last summer, but                                                               
did not  add new customers.   The vision is that  the two systems                                                               
would share LNG  storage, with the greatest degree  of economy of                                                               
scale.   The plan for  the IGU system is  to replace 70  miles of                                                               
distribution pipe this construction season.                                                                                     
CO-CHAIR COLVER surmised AIDEA would  seek to sell the utility to                                                               
a private sector operator.                                                                                                      
MR.  LEONARD  said  correct.   With  this  investment,  AIDEA  is                                                               
looking to integrate  the system and provide a  platform to lower                                                               
the cost of  distribution, but is not in the  business of running                                                               
assets; the  integrated system would either  be purchased through                                                               
the private  sector or through IGU.   As a matter  of fact, AIDEA                                                               
would leave  in place the  company that is operating  the utility                                                               
and act  as a holding company  after the purchase.   In this way,                                                               
there would  be a  15 percent  reduction in  rates, based  on the                                                               
cost of capital that AIDEA can provide.                                                                                         
11:03:32 AM                                                                                                                   
CO-CHAIR COLVER recalled the cost  of natural gas in Anchorage is                                                               
approximately  $10.   He said  the  legislature seeks  affordable                                                               
energy for  all Alaskans, and asked  when the delivery of  gas to                                                               
Fairbanks  can be  expected,  and  what would  be  the source  of                                                               
MR.  THERRIAULT  advised  AEA  and DNR  are  working  on  factors                                                               
affecting a  supply of  natural gas  to areas  of Cook  Inlet and                                                               
Fairbanks.  For  consumers in the Interior, he  said the governor                                                               
indicated that some  savings would be provided for  the winter of                                                               
2015-2016.  If  AIDEA's purchase of FNG proceeds,  there would be                                                               
savings  to  its  customers,  even  if the  gas  comes  from  the                                                               
existing  plant.   More pipe  will be  put into  the distribution                                                               
system  this summer  by both  utilities to  prepare for  a larger                                                               
supply of LNG when it is available.                                                                                             
CO-CHAIR COLVER  assumed that by acquiring  FNG, customers should                                                               
see a price of $20 versus $23 for natural gas.                                                                                  
MR. LEONARD said, "Based on a preliminary review."                                                                              
CO-CHAIR  COLVER  asked for  the  final  estimated price  to  the                                                               
consumer in the greater Fairbanks area.                                                                                         
11:08:21 AM                                                                                                                   
BOB  SHEFCHIK, Project  Leader, IEP,  AIDEA, DCCED,  informed the                                                               
committee  the target  and  likely  outcome are  in  the $15  per                                                               
thousand  cubic  feet  (MCF) price  range  using  a  Southcentral                                                               
supply  chain.   Although IGU  has  a six-year  schedule for  the                                                               
distribution  system  build-out,  the distribution  system  could                                                               
begin in North Pole and University West, which would be faster.                                                                 
REPRESENTATIVE WOOL  asked for the  source of gas for  the 10,000                                                               
new  customers in  the Interior  and Fairbanks,  considering that                                                               
the current liquefaction  plant is operating at  near capacity to                                                               
serve current customers.                                                                                                        
MR. SHEFCHIK  responded that the  key to an Interior  gas project                                                               
is  increased liquefaction  capacity, either  by an  expansion to                                                               
the existing  plant at  Point MacKenzie,  or by  new liquefaction                                                               
capacity  in the  Southcentral area.    Timing and  cost will  be                                                               
evaluated  to determine  the most  likely location.   He  advised                                                               
that the  two factors needed  are a  gas supply contract  for gas                                                               
out  of the  Cook Inlet  current  system to  feed a  liquefaction                                                               
plant, and  increased capacity from  a liquefaction  plant, which                                                               
would  likely occur  in the  third or  fourth quarter  of 2016  -                                                               
depending on the availability of equipment - or in 2017.                                                                        
CO-CHAIR  COLVER  asked  about  the   analysis  on  the  cost  of                                                               
developing a small  diameter methane pipeline from  Cook Inlet to                                                               
MR.  SHEFCHIK  affirmed  that  his  project  expects  to  analyze                                                               
parallel options for gas supply,  such as "the North Slope work,"                                                               
and whether a  Southcentral supply line would work,  based on the                                                               
demands and  the cost of a  plant.  He said  the preferred method                                                               
for a  supply chain is a  pipeline, "... it's more  a question of                                                               
economics and time than logistics."                                                                                             
CO-CHAIR COLVER observed  there are consumers along  the route of                                                               
a possible  pipeline that  could be  served, and  he urged  for a                                                               
focus on the consumers along the way.                                                                                           
11:15:25 AM                                                                                                                   
MR. LEONARD returned  attention to the sectional  analysis for HB                                                               
105.   Sections 5  and 6  repeal legislative  bond authorizations                                                               
from 1994-2004  that were made  under AS 44.88.095(g),  and which                                                               
total approximately  $330 million.  Bond  authorizations now have                                                               
a  five-year  sunset  clause; however,  the  aforementioned  bond                                                               
authorizations are ten years old  and affect AIDEA's bond rating.                                                               
He  assured  the  committee the  proposed  legislation  does  not                                                               
relate  to potential  projects now  under  consideration, but  to                                                               
projects that would have to  be resubmitted to the legislature in                                                               
any case.                                                                                                                       
CO-CHAIR COLVER suggested that he  and Representative Tilton meet                                                               
with AIDEA to  rework authorizations for the  $50 million bonding                                                               
authority  for the  Cook Inlet  commodities cargo  port, and  two                                                               
possible projects at Port MacKenzie.                                                                                            
MR. LEONARD agreed.                                                                                                             
CO-CHAIR COLVER  observed that exploration by  Doyon, Limited, in                                                               
the  Nenana  basin  was  not   discussed,  and  asked  about  the                                                               
opportunities for gas supply from there.                                                                                        
MR.  LEONARD said  he spoke  with Doyon  representatives recently                                                               
regarding the project.                                                                                                          
REPRESENTATIVE WOOL pointed  out that AIDEA seeks  to combine IGU                                                               
and FNG's  distribution system infrastructure  in Fairbanks.   He                                                               
asked  if  the Hilcorp/Pentax  portion  of  the purchase  becomes                                                               
unclear,   whether  AIDEA   would   proceed   to  integrate   the                                                               
distribution system where possible.                                                                                             
MR. THERRIAULT  agreed that the  state seeks  integration between                                                               
the   two  utilities   wherever  possible;   however,  there   is                                                               
discussion about  whether the systems  touch, and how  often, and                                                               
the cost.  The benefits to the community are uncertain.                                                                         
[Public testimony was treated as open on HB 105.]                                                                               
11:21:42 AM                                                                                                                   
The committee took an at ease from 11:21 a.m. to 11:29 a.m.                                                                     
11:29:47 AM                                                                                                                   
LUKE HOPKINS,  Mayor, Fairbanks North  Star Borough  (FNSB), said                                                               
the topic is  very important and all parties must  not lose sight                                                               
of  the focus  on lowering  energy costs  in the  Interior, which                                                               
would be followed  by economic development.   The Interior Energy                                                               
Project is a  bridge project, but is not the  only solution which                                                               
seeks  to  bring  LNG  to  Fairbanks.   He  recalled  that  AIDEA                                                               
performed due  diligence on  the North  Slope proposal  and found                                                               
that the proposal did not provide  what is needed.  He noted that                                                               
FNSB  has  given authorization  for  AIDEA  to provide  financing                                                               
related  to HB  105,  and  expressed his  support  for the  bill.                                                               
Returning attention  to section  4, he  said when  FNSB set  up a                                                               
municipal utility,  it developed  a cost-of-service model,  and a                                                               
municipal utility has  a lot of advantages, in the  same way that                                                               
AIDEA would  if it  acquired Pentax.   He reminded  the committee                                                               
that  the governor  said there  would be  relief this  winter for                                                               
customers  affected  by  HB  105.    Also,  this  legislation  is                                                               
important  in  order to  improve  air  quality because  residents                                                               
continue to  lower the cost  of living  in Fairbanks, and  in the                                                               
Interior, by burning  wood.  Mr. Hopkins urged  for the committee                                                               
to pass  the bill  quickly, and questioned  the need  for several                                                               
referrals.     He  understood  that   AIDEA  needs  to   look  at                                                               
Southcentral for  a source  of gas  since the  North Slope  is no                                                               
longer in  the model.   He pointed  out that customers  would pay                                                               
"almost all  of this back."   He urged the committee  to remember                                                               
what  has already  transpired:   pipe  has been  laid and  eleven                                                               
schools are on natural gas.   Mayor Hopkins acknowledged previous                                                               
discussions about  offtakes from proposed pipelines;  however, at                                                               
this time,  a bridge project is  needed.  He closed,  saying that                                                               
gas  from Cook  Inlet  can be  trucked and  shipped  to parts  of                                                               
Alaska,  and  urged that  the  original  language in  section  4,                                                               
"Interior Alaska" is retained in the bill.                                                                                      
11:37:29 AM                                                                                                                   
REPRESENTATIVE  WOOL  expressed  his   support  for  keeping  the                                                               
original language: to provide natural gas to Interior Alaska.                                                                   
MAYOR  HOPKINS  restated  his  point  that  the  bill  has  seven                                                               
referrals.  He  noted that the private sector is  willing to sell                                                               
to AIDEA.                                                                                                                       
11:39:05 AM                                                                                                                   
JOHN  EBERHART,  Mayor,  City   of  Fairbanks,  stated  that  the                                                               
residents of Fairbanks have been hurt  for years by the high cost                                                               
of energy.  As a natural  gas customer, he noted his January bill                                                               
was  over  $700.   High  energy  costs  have also  hurt  economic                                                               
development  and  jobs: there  has  been  a loss  in  population;                                                               
retail  stores  will  not  come without  gas;  air  pollution  is                                                               
serious and  is hurting the quality  of life; and wood  is burned                                                               
to  save money.   He  expressed concern  that air  pollution will                                                               
also  hurt the  expansion  at  Eielson Air  Force  Base which  is                                                               
expected to  bring $1 billion  into the economy of  the Fairbanks                                                               
area.   If natural gas  becomes available at  a price of  $15 per                                                               
MCF, people will convert to gas  and help the quality of life and                                                               
reduce  the air  pollution  problem.   Mayor  Eberhart urged  for                                                               
quick passage of the bill.                                                                                                      
11:41:52 AM                                                                                                                   
REPRESENTATIVE   TALERICO  relayed   there  are   questions  from                                                               
legislators  about   the  transportation  of  natural   gas  from                                                               
Southcentral to Fairbanks  by rail, truck, or  a future pipeline.                                                               
Although there has not been  opposition to the bill, he suggested                                                               
that  supporters  of  the  bill  contact  legislators  to  answer                                                               
questions.   The Southcentral utilities will  shortly address the                                                               
issue of whether there are  sufficient volumes of gas, which will                                                               
be reassuring.                                                                                                                  
MAYOR HOPKINS  advised that  AIDEA can look  at other  sources of                                                               
gas, but  the focus must  remain on a  gas line that  will "serve                                                               
Alaska and also deal with the revenue issue."                                                                                   
11:45:22 AM                                                                                                                   
RICK SOLIE,  Chair, Energy  Committee, Greater  Fairbanks Chamber                                                               
of Commerce,  disclosed that  he works for  Tower Hill  Mines and                                                               
was  speaking  for the  chamber  of  commerce.   He  thanked  the                                                               
legislature for its past efforts  and encouraged the committee to                                                               
focus on  the top  priority of the  Greater Fairbanks  Chamber of                                                               
Commerce  to reduce  the cost  of energy  in the  Interior.   Mr.                                                               
Solie  stressed  that  HB  105   is  important  for  residential,                                                               
industrial, and large  projects.   Although there  is presently a                                                               
reprieve from energy prices, a solution is needed.                                                                              
11:47:21 AM                                                                                                                   
CO-CHAIR COLVER said public testimony on HB 105 remained open.                                                                  
HB 105 was held over.                                                                                                           

Document Name Date/Time Subjects
HB 105 - Transmittal Letter.PDF HENE 2/17/2015 10:15:00 AM
HB 105
HB 105 Fiscal Note - L0019-DCCED-AIDEA-02-10-15.PDF HENE 2/17/2015 10:15:00 AM
HB 105
HB 105 ver A.PDF HENE 2/17/2015 10:15:00 AM
HB 105
HJR 8 - Draft Proposed Blank CS ver H.pdf HENE 2/17/2015 10:15:00 AM
HJR 8 - Supporting Document - Observations on 111(d) in Alaska.pdf HENE 2/17/2015 10:15:00 AM
HJR 8 - Supporting Document - Rokeberg Letter 111(d).pdf HENE 2/17/2015 10:15:00 AM
2015-02-17 - HENE - Agenda.pdf HENE 2/17/2015 10:15:00 AM
HJR 8 - Summary of Changes Ver. H.pdf HENE 2/17/2015 10:15:00 AM
HJR 8\
HB 105 Fact Sheet-AIDEA-02-17-15.pdf HENE 2/17/2015 10:15:00 AM
HB 105
HB 105 Sectional Analysis AIDEA 2-17-15.pdf HENE 2/17/2015 10:15:00 AM
HB 105
HJR 8 Fiscal Note - HJR 8 HENE FN 1.pdf HENE 2/17/2015 10:15:00 AM