Legislature(2015 - 2016)HOUSE FINANCE 519
04/13/2015 01:30 PM FINANCE
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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." 3:02:03 PM Representative Wilson MOVED to ADOPT the proposed committee substitute for HB 105, Work Draft 29-GH1019\N (Shutts, 4/12/15). There being NO OBJECTION, it was so ordered. JANE PIERSON, STAFF, REPRESENTATIVE STEVE THOMPSON, explained the changes in the Committee Substitute (CS). She read from an explanation of changes: Sec 1: No change Sec 2: Inserts new language into allowing an Interior Alaska utility that is owned and operated by a political subdivision of the state and receives financing from the sustainable energy transmission and supply development fund to exempt the utility from rate regulation, under AS 44.88.660, by resolution. Sec 3: No change Sec 4: No change Sec 5: No change Sec 6: No change Sec 7: Removes subsection (1) regarding the AIDEA acquisition of gas reserves (discussion moved to section 8). Language in subsection (2) is incorporated into (c) and modified. The words "negotiate or" are removed. Language "to provide natural gas to the Interior Alaska as a primary market" are added on page 6, lines 29-30. The words "uses to serve customers in Interior Alaska" are added on page 7, lines 2-3. Sec 8: Inserts new Section 8, amending AS 44.88.690(a), regarding the AIDEA sustainable energy transmission and supply development fund, to require AIDEA to obtain legislative approval before using the fund to purchase or acquire gas reserves or a gas lease or become a working interest owner of a natural gas lease. Sec 9: Version E Section 8 renumbered as Section 9 in Version N. Sec 10: New Section 10 inserted, providing AIDEA bonding authorization up to $50,000,000 to finance the acquisition, design, and construction of a port facility and equipment related to the development and operation of a bulk commodity loading and shipping terminal, to be located at Point MacKenzie. Sec 11: Version E Section 9 renumbered as Section 11 in Version N and "prepares a project plan and receives legislative approval of the plan" is replaced with "approves a project plan" on page 7, line 16. Sec 12: Version E Section 10 renumbered as Section 12 in Version N. Sec 13: Version E Section 11 renumbered as Section 13 in Version N is modified to remove the repeal of "Section 2, ch. 27, SLA 1993, as amended by sec. 19, ch. 111" pertaining to the Point MacKenzie bonding authorization. Sec 14: Inserts a new Section 14 providing legislative authority for AIDEA to issue up to $120,000,000 of bonds to finance the infrastructure and construction costs of Sweetheart Lake hydroelectric project. Sec 15: Inserts a new Section 15 providing legislative authority for the Alaska Energy Authority to loan an amount up to $3,000,000 from the power project fund to the City of King Cove for the Waterfall Creek hydroelectric project. Sec 16: Version E Section 12 renumbered as Section 16 in Version N. Sec 17: Inserts new Section 17 repealing Sections 14 and 15 of this act June 30, 2019. Sec 18: Version E Section 13 renumbered as Section 18 in Version N. FRED PARADY, DEPUTY COMMISSIONER, DEPARTMENT OF COMMERCE, COMMUNITY, AND ECONOMIC DEVELOPMENT, provided a PowerPoint presentation titled "Interior Energy Project" dated April 13, 2015 (copy on file). He addressed slide 2: IEP: GOALS UNDER SB23 Supply natural gas to Interior Alaska: -At the lowest cost possible -As many Alaska customers as possible -As soon as possible IEP investments compliment eventual sources of gas supply from a natural gas pipe line Lower PM2.5 in nonattainment areas of Interior Mr. Parady emphasized that the Interior Energy Project (IEP) lowered the PM2.5 in nonattainment areas of the Interior, which was among the highest level of pollution in the United States. He reviewed slides 3: IEP: OVERVIEW Meet the goals set by the legislature to supply affordable energy to Interior Alaska Project is complex, which is why the legislature took action Now evaluating infrastructure to deliver natural gas from any source, including Cook Inlet AIDEA financing the buildout of natural gas distribution in Fairbanks and North Pole Mr. Parady moved to slide 4: IEP: HB 105 HB 105 gives AIDEA flexibility to use SB 23 financing tools with a non-North Slope liquefaction location -Current version of HB 105 also authorizes financing propane and small diameter pipeline (under 12" diameter) projects to meet the goals of the IEP Mr. Parady highlighted slide 5, "North Slope Project Map" and slide 6, "Cook Inlet Project Map." He explained that the only project authorized under SB 23 (AIDEA: LNG PROJECT; DIVIDENDS; FINANCING) [Adopted May 30, 2013] was the North Slope Natural Gas Supply and Liquefied Natural Gas (LNG) Production plant. The legislation allowed the project to "flip" from north to south and consider a natural gas supply from Cook Inlet instead of the North Slope. He turned to the chart on slide 7, "Cook Inlet, North Slope, And Other Alternatives" that outlined the options for the project. He reviewed that the supply of natural gas from Cook Inlet was currently uncertain but indications for increased supply were 'positive." On the North Slope, where some existing contracts were in place, natural gas was "abundant" and at low cost. Other alternatives that were considered for the project were propane from Canada or a small pipeline from Cook Inlet, which might be preferred over a rail or truck option. He relayed that in consideration of LNG plant costs, a Cook Inlet plant was cheaper to construct and operate as opposed to designing and constructing an LNG plant on the North Slope, which was expensive due to conditions. He added that construction and operation of an LNG plant was not necessary for Canadian Propane or a small pipeline from Cook Inlet. Mr. Parady examined the LNG "transportation logistics of trucking and rail and concluded that Cook Inlet had lower trucking costs, large trailer potential, and rail options as opposed to the North Slope where trucking was feasible, but more expensive. He pointed to the recent closure of the Dalton Highway due to an ice jam as a drawback. He reported that a combination of "marine, rail, and trucking" were possible for propane. He indicated that storage and distribution was inherent to either Cook Inlet, North Slope, or alternative options. NICK SZYMONIAK, FINANCE OFFICER, ENERGY DEVELOPMENT, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY, addressed slide 8, "North Slope LNG Project" and slide 9,"Cook Inlet LNG Alternative" and explained that the graphics on each slide compared the "value chain" for each option and the evaluative approach employed by the IEP team. He discussed slide 8 and delineated that the North Slope project (SB 23) began with two existing gas supply agreements with North Slope producers and interior utilities. The LNG production plant third party developer had not been selected (subsequently a Concession Agreement with MWH Global was chosen) and a plan was in place to contract with a private trucking company for transportation needs. The LNG storage and regasification distribution systems were being negotiated with the Interior Gas Utility (IGU) and Fairbanks Natural Gas (FNG) entities with talks still continuing. He remarked that the LNG costs for a North Slope project under the concession agreement was deemed too high and subsequently terminated. The current legislation authorized the flexibility for consideration of alternative options. Mr. Syzmoniak discussed slide 9 relating to the Cook Inlet alternative. He relayed that the difference in gas supply between both projects was an absence of existing agreements between Interior utility companies and Cook Inlet producers other than an existing .95/bcf agreement between FNG and Hilcorp. An LNG developer had not been chosen. The transportation plan remained the same but the project was also exploring Alaska Railroad options. The current version of HB 105 also allowed for a small diameter pipeline, which eliminated the need for an LNG plant or other transportation needs. A propane option was also under examination. He moved to slide 10: Project Execution Plan Natural Gas supply: Facilitate commercial discussions between producers and utilities Liquefaction: Competitive solicitation to select private partner to develop LNG capacity Transportation: Private trucking, Alaska railroad, small diameter pipeline, propane Storage, Regasification, and Distribution: Buildout of system continues Summer 2015PROJECT Mr. Syzmoniak indicated that the Department of Commerce, Community and Economic Development DCCED) was taking the lead on discussions between producers and utilities. He added that Alaska Industrial Development and Export Authority (AIDEA) would not sign any contracts, buy reserves or retain any interests in a natural gas field in Cook Inlet nor enter into a contractual relationship in the LNG plant. He conveyed that the team was "open to and encouraging" alternatives to Cook Inlet. 3:16:20 PM GENE THERRIAULT, DEPUTY DIRECTOR, STATEWIDE ENERGY POLICY DEVELOPMENT, ALASKA ENERGY AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, spoke to slide 11: IEP SUMMARY The goals remain as established by SB23 HB 105 authorizes the tool kit to best achieve goals of IEP Market driven process -Accomplishing IEP goals requires adaptation to current market and operating realities Representative Gara related that he supported the original plan established in SB 23. He wondered whether the legislation allowed the IEP to revert to a North Slope natural gas supply if the supply became cheaper or more abundant than a Cook Inlet option. Mr. Therriault answered that the language in the bill did not preclude a North Slope producer from submitting a completive bid and might even entice a bid from a North Slope entity. Vice-Chair Saddler asked whether AIDEA would become a gas utility under the IEP. Mr. Therriault replied that currently AIDEA was considering a purchase of Pentex [FNG parent company] assets that included a FNG distribution system. He elaborated that AIDEA intended to contractually operate the distribution system. Ownership by AIDEA facilitated the integration of FNG and the developing IGU distribution systems with the future possibility of morphing into one system. The goal was to ultimately sell the asset to the IGU or a private utility. Vice-Chair Saddler referred to the use of the term "market driven solution" related to the project. He deduced that the AIDEA involvement made the project a less market driven and more government driven solution. Representative Munoz wondered what the fiscal note had been for the original gas trucking proposal [SB 23] and what the remaining balance of the fund was. Mr. Parady answered that the original funding contained approximately $150 million in bonds, $125 million in the Sustainable Energy Transmission and Supply Fund (SETS) loans and $57.5 million in grants. He shared that approximately $55 million from the loan program was committed to the distribution systems. Mr. Therriault interjected that the $150 million bonding authorization and $125 million in SETS funding was designated for loans expected to be "ultimately" repaid. Representative Munoz requested further clarification. Mr. Parady reported that out of the $57.5 million in grants $12.4 million was expended for the North Slope plant construction, design, engineering, and storage study. He added that $52.78 million of the SETS funds were committed to two loans for the distribution system; a $15 million loan to FNG and a $37.78 million loan to IGU. He noted that $72.2 million remained in the SETS fund. Representative Pruitt asked what the project's expected daily volume of gas was. Mr. Parady answered that at peak build out the Interior Alaska demand was expected to be 9.5/bcf per year and on a daily average was 26 million cubic feet (mcf) per day. Representative Pruitt asked what impact the amount would have on the overall reserves in Cook Inlet. Mr. Parady answered that demand was approximately less than 10 percent of Cook Inlet reserves. He shared that ten years of Interior demand amounted to 80/bcf and Cook Inlet reserves were estimated in trillion board feet. Representative Pruitt observed that there was a complex web of ownership throughout Cook Inlet and wondered whether the amount of Cook Inlet reserves were "realistically recoverable." Mr. Szymoniak replied in the affirmative. He assured the committee that the figure represented developed reserves. Representative Pruitt asked for verification that the agency felt comfortable going forward with a Cook Inlet gas supply. He maintained that the Cook Inlet gas supply until recently, was thought to be dwindling. He alluded to other demands on the Cook Inlet supply. He did not want the Southcentral energy crisis to turn into a Fairbanks crisis if Cook Inlet gas supply was not sustainable over the long- term. Mr. Parady believed the question was germane and the amount of available Cook Inlet gas reserves were being assessed further by the Department of Natural Resources (DNR) and the IEP gas supply team. He expounded that the indications were favorable and pointed to "ample reserves." However, more analysis was needed. He engaged in a conversation with Enstar, who reported that its gas supply was firm through the first quarter of 2018. Enstar serviced 134,000 customers in Southcentral, Alaska. He disclosed that current data from DNR reported .4tcf [trillion cubic feet] increase in gas supply in Cook Inlet since 2009. 3:28:06 PM Representative Pruitt queried whether HB 105 maintained the legislature's approval authority over AIDEA's decision on which gas supply to move the project forward with. Mr. Therriault cited the CS, on page 7, lines 18 through 20: (1) identify the source of the natural gas or propane; 2 (2) include the estimated cost of the project; and 3 (3) include the estimated price of natural gas supplied to natural gas utilities… Mr. Therriault communicated that the bill required the AIDEA board to approve a plan that included the required information. He voiced that the AIDEA board had the authority to make the determination like any other project AIDEA undertook. Representative Pruitt asked for verification that approval authority was "out of the legislature's hands." Mr. Therriault replied in the affirmative. Representative Pruitt worried that the legislature would lose control over a "policy decision." Vice-Chair Saddler asked what the Cook Inlet estimated reserve figure was based on. Mr. Parady answered that the figure was based on a DNR evaluation and was "proven plus probable." Vice-Chair Saddler asked how recent the figure was. He requested a copy of the report. Mr. Parady responded that the data was from February 2015. Mr. Therriault noted that the CS contained other hydroelectric projects. He delineated that a hydro project through AIDEA was subjected to the same "due diligence" process as the process the supply of natural gas will be based on. When AIDEA was "empowered" to make the decision it was based on whether the project had a sales agreement that "supported or "underpinned the financing. PATRICE LEE, SELF, FAIRBANKS (via teleconference), spoke in favor of the legislation. She thanked AIDEA for recognizing the severity of the air pollution problem in Fairbanks. She shared two concerns on the CS version of the legislation. She believed that Section 8 restricted the options for a "free market" source of gas. She worried that the price of gas seemed high. She hoped the project would be expedited to serve the 100,000 citizens of the Interior. She felt that the project could be an asset to the Anchorage area if the Cook Inlet option was chosen by increasing the market share and bargaining power. MERRICK PEIRCE, SELF, FAIRBANKS (via teleconference), supported the legislation. He stated concerns over the health risks of the high particulate matter leading to poor air quality of Fairbanks. He referenced a study from the British Medical Journal that concluded exposure to high particulate matter was linked to mortality from strokes. He appreciated the various options being considered and thought a "phased approach" might be a part of the solution. He stated that propane had many advantages over LNG and stored well. He wanted affordable energy for the Interior for residential purposes and to attract new industry and job creation. He was troubled by Section 8 that prohibited AIDEA from directly entering into contracts with Cook Inlet suppliers. PAMELA THROOP, SELF, FAIRBANKS (via teleconference), supported the legislation. She related that she worked as a commercial real estate broker and her biggest concern was the cost of living and doing business in Fairbanks directly related to high utility costs. She discerned that in the event the IEP initially utilized a Cook Inlet Source of gas via pipeline to Fairbanks and subsequently consumed natural gas via pipeline from the North Slope the two pipelines could be connected and natural gas could flow to Anchorage. She urged AIDEA and IEP to consider any kind of energy source for Fairbanks. JIM DODSON, FAIRBANKS ECONOMIC DEVELOPMENT CORPORATION, FAIRBANKS (via teleconference), spoke in support of the legislation. He stressed that clean air was vital to the health of the community's children. He spoke to the need to build a "road map" starting in Fairbanks, to providing affordable energy to the entire state. He urged the legislature to support the legislation. JOMO STEWART, FAIRBANKS ECONOMIC DEVELOPMENT CORPORATION, FAIRBANKS (via teleconference), echoed the testimony from Mr. Dodson. He urged the legislature to act "expeditiously" with passage of the bill to move the project forward. 3:42:01 PM LISA HERBERT, EXECUTIVE DIRECTOR, GREATER FAIRBANKS CHAMBER OF COMMERCE, FAIRBANKS (via teleconference), spoke in favor of the legislation. She represented approximately 700 businesses as executive director and maintained that reducing the high cost of energy was the chambers highest priority. She specifically supported the CS. She supported the goals of the IEP to serve the greatest number of people as possible, as affordable as possible, and as quickly as possible. She encouraged the legislature to remain committed to the goals. DEREK MILLER, FAIRBANKS CHAMBER OF COMMERCE, FAIRBANKS (via teleconference), spoke in support of the legislation. He noted his previous work as a legislative aide and for the University of Alaska, Fairbanks. He stated his support for the original bill, SB 23 and the three major goals previously stated. He was opposed to various restrictive provisions in the House Resources Committee version. He appreciated the concerns raised about the Cook Inlet supply and expressed confidence that the CS accomplished the goals of the IEP. LUKE HOPKINS, MAYOR, FAIRBANKS NORTHSTAR BOROUGH (via teleconference), favored the legislation. He believed the amendments in the CS addressed the three area mayors concerns and advanced the project without restricting AIDEA's decision making authority. He felt that the greatest issues were providing low cost energy for the community and businesses as quickly as possible. Co-Chair Thompson CLOSED public testimony. Representative Wilson reminded the committee that the gas industry in Cook Inlet received generous credits and subsidies from the state and that the gas belonged to everyone. HB 105 was HEARD and HELD in committee for further consideration. Co-Chair Thompson addressed the agenda for the following day.