Legislature(2009 - 2010)BARNES 124
02/08/2010 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB280 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 280 | TELECONFERENCED | |
HB 280-NATURAL GAS
3:22:01 PM
CHAIR OLSON announced that the only order of business would be
HOUSE BILL NO. 280, "An Act relating to natural gas; relating to
a gas storage facility; relating to the Regulatory Commission of
Alaska; relating to the participation by the attorney general in
a matter involving the approval of a rate or a gas supply
contract; relating to an income tax credit for a gas storage
facility; relating to oil and gas production tax credits;
relating to the powers and duties of the Alaska Oil and Gas
Conservation Commission; relating to production tax credits for
certain losses and expenditures, including exploration
expenditures; relating to the powers and duties of the director
of the division of lands and to lease fees for the storage of
gas on state land; and providing for an effective date."
3:22:16 PM
REPRESENTATIVE LYNN moved to adopt the proposed committee
substitute (CS) for HB 280, Version 26-LS1185\S, Bullock,
2/5/10, as the work draft.
REPRESENTATIVE BUCH objected for purpose of discussion.
3:22:51 PM
REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, as a joint
prime sponsor of HB 280, stated that due to declining
productivity and the overall decline of natural gas production,
not enough natural gas will be produced in Cook Inlet to meet
the demand in Southcentral Alaska. This bill would allow for
gas storage, and allow utilities to purchase gas during lower
demand periods for use during peak use times. Secondly, the
bill would address concerns about the tax incentive programs and
may help facilitate oil and gas production. The bill will help
to define specific terms such as facility and types of gas. He
related that HB 280 was pre-filed this legislature but a number
of important, technical changes were incorporated into a
committee substitute. He noted that he has been working with
the stakeholders in developing this bill.
3:25:00 PM
REPRESENTATIVE HAWKER asked members to consider adopting the
proposed committee substitute, which incorporates a number of
important technical changes. As a joint prime sponsor, he would
like to commence the discussion of the bill.
REPRESENTATIVE BUCH asked to remove his objection.
There being no objection, Version S was before the committee.
3:26:16 PM
REPRESENTATIVE HAWKER stated that this bill would address the
regional problem for primary source of heat and light for the
Southcentral Region, which is the natural gas production from
Cook Inlet. This basin was identified 50 years ago and while
the rich fields are being depleted, there arguably remains ample
natural gas. However, gas has become more difficult to extract
from the five major gas domes. The remaining gas will likely
occur in small stratigraphic traps of gas, similar to small
bubbles, instead of the massive reserves extracted in the first
50 years of development. As the community has grown, the level
of consumption has increased at the same time that the
productivity of the basin has declined. The increasing demand
curve crosses the decreasing production curve and the community
is then in a life-safety risk situation. While he offered his
belief that this shortage is not a crisis, the legislature can
facilitate a security plan for the region. He characterized the
process as "getting out of the way of enterprise that has the
capability to address our needs and solve our problems." He
offered that an alternative viewpoint would be that government
needs to step in and take control and try to fix it. He argued
for the legislature to make a policy call and support the
existing infrastructure, industries, and utilities and let the
private sector address the problem.
3:29:42 PM
REPRESENTATIVE HAWKER identified the three areas the bill
focuses on to help facilitate the development of additional
natural gas sources to assure peak deliverability requirements.
He noted the difference between peak deliverability and average
deliverability of gas. Gas wells tend to produce at a fairly
level state, but consumers have a lower demand in the middle of
summer and a higher demand in winter due to lower temperatures.
Thus, gas demand is very high in mid-February, he stated. In
order to meet the peak demand, the producers must meet the peak
deliverability requirement year round. Previously excess
natural gas could be burned off, but that is no longer an
acceptable method of handling excesses. In Alaska, in order to
maximize the value of the resource, in the summer the state has
provided gas to large anchor consumers such as the Agrium plant
in the Kenai Peninsula. In the winter, gas has been diverted
from commercial users to Alaskan consumers, and the demand has
regulated the flow, with excesses used by non-residential non-
community consumers. The state is currently approaching the
point in which the ability to produce from the Cook Inlet will
not meet the peak winter demand. Some energy solutions exist
using a combination of conservation measures and alternative
energy sources. However, he stated that alternative solutions
take time and investment. He predicted that in another two
winters the supply may not meet demand in Southcentral Alaska.
3:32:51 PM
REPRESENTATIVE HAWKER described the central element of this bill
as a universally accepted mechanism by gas utilities, producers,
and local government to increase amount of gas available on peak
demand days through storage. Natural gas storage has been used
in the Lower 48 for a hundred years, but significant gas storage
has not been used in Alaska since it has not been needed until
now. Realistically, to hold volumes of gas to meet peak demand
will require underground gas storage, he stated. The industry
technology has advanced to allow natural gas to be pumped from a
new well into a depleted reservoir for storage. When natural
gas is needed in the winter to meet peak demand, the natural gas
can be pumped from storage, basically doubling the
deliverability capacity. He stated that gas storage is
universally accepted across the stakeholders involved. This
bill provides a tax-credit incentive program for third parties
to build and operate a storage facility to meet these
deliverability requirements.
3:35:50 PM
REPRESENTATIVE HAWKER pointed out that he is providing details
in his testimony primarily to provide a foundation for the new
legislative members.
CHAIR OLSON agreed it was important to provide any new members
with an overview.
REPRESENTATIVE HAWKER explained that this bill creates cost
incentives and cost benefits to those interested in providing
storage. One key point is that providing government support for
the storage is important because the cost of storing natural gas
is part of the supply chain of gas to the consumer. Thus, any
benefit provided must be reflected in the rates ultimately
charged to consumers purchasing gas moved through a storage
facility. Therefore, any savings created for industry will be
passed on as savings to the consumer due to the regulatory
oversight on natural gas and pricing. He recapped that the
state provides an incentive for industry to store gas, but it
results in savings to consumers.
3:37:33 PM
REPRESENTATIVE HAWKER explained the second aspect of the bill
relates to increasing access to existing tax incentives, and
creating tax credit incentives for the development of gas by
producers in Cook Inlet. Thirdly, an issue arose with the
Regulatory Commission of Alaska authority. The original bill
intentionally contained limited language since a docket was open
at the Regulatory Commission of Alaska (RCA) to consider whether
it should regulate a proposed gas storage facility in Cook
Inlet. He surmised that a potential project could be put on
hold if the legislature was going to decide if it should
regulate the business. The RCA recently came to the conclusion
that its authority to regulate gas was unclear. Thus, the RCA
requested the legislature provide guidance on the RCA's
authority over regulating gas storage.
3:39:58 PM
REPRESENTATIVE HAWKER requested the committee consider the RCA's
request for regulatory guidance. He indicated he will provide a
recommendation on the level of guidance, and the specific
language. He offered to discuss this conceptually.
REPRESENTATIVE HAWKER, in response to Chair Olson, suggested an
amendment to HB 280 to address the specific guidance.
3:41:09 PM
REPRESENTATIVE HAWKER recapped that HB 280 provides incentives
for gas storage facilities, additional incentives for
exploration and development, and enlightened guidance from the
legislature to the RCA on regulating these facilities. This is
an urgent issue for Southcentral Alaska since its communities
are at risk of not being served during the coldest winter months
at some time in the next few years. Passing HB 280 will not
solve all the problems but will give the stakeholders in the
Cook Inlet incentives and represents a positive move towards
energy security for consumers in Southcentral Alaska.
3:42:54 PM
CHAIR OLSON remarked that the state is losing its safety value,
which has been its ability to reduce the amount of Liquefied
Natural Gas (LNG) on tankers destined for Japan to provide
additional gas to Southcentral Alaska.
REPRESENTATIVE HAWKER expanded on the LNG, describing the safety
buffer that the state has enjoyed is the export of excess
natural gas from Nikiski when it was not needed. He explained
that what has kept natural gas inexpensive in Southcentral
Alaska has been the export of excess natural gas. In March
2011, the export permit is up for renewal and industry is not
expressing any interest in renewing the permit, nor has he heard
any interest by the administration in promoting the extension.
He characterized the deadline as a "critical deadline."
REPRESENTATIVE NEUMAN asked whether two types of facilities were
under consideration, including above ground storage and
underground storage for gas..
3:45:30 PM
LARRY PERSILY, Staff, Representative Mike Hawker, Alaska State
Legislature, stated that the gas storage could be an underground
storage facility, a nearly depleted reservoir, an above ground
tank, or a pipeline. He explained that a pipeline could be
packed with a small amount of storage and that the bill does not
provide any exclusion. He said the storage facility is defined
as a tank, an above ground tank, a nearly depleted reservoir, or
any other structure in the state.
3:45:59 PM
REPRESENTATIVE NEUMAN recalled losses when natural gas is
injected underground. Thus, if a million cubic feet of natural
gas is injected underground some gas is lost. He asked who
would absorb the losses.
REPRESENTATIVE HAWKER responded that HB 280 addresses the
technical nature of storage with a series of definitions. It is
recognized that when natural gas is placed into an existing
reservoir, some gas has not been developed or been assessed
production taxes. It's a pressure vessel underground so gas is
pumped in, but a base level of pressure is provided by "cushion
gas," which acts as a spring at the bottom of the well. Cushion
gas is comprised of native gas and non-native gas. Native gas
would be comprised of the gas molecules that have never been
produced, and depending on the specific facility, may provide
enough gas to operate the facility. However, if it is necessary
to pump gas into the reservoir to provide adequate
pressurization, non-native gas is used. This bill operates on
the concept that the last molecule pumped into a facility is the
first molecule pumped out. Thus, production taxes are paid on
volumetrics. Production taxes are not paid on native gas until
an equal volume is removed from the facility. Thus, if gas is
seeping out underground, that loss will be counted against the
producer.
3:49:03 PM
REPRESENTATIVE HAWKER explained that storage facilities are big.
In order to qualify for incentives, the facility must be large
and it must be able to deliver gas at a rate sufficient to help
alleviate the peak deliverability problems. Those parameters
are contained in HB 280. Additionally, limits on the aggregate
amount of credit are intended to reduce overspending on capital
expenditures than is necessary. The arbiter will be the Alaska
Oil and Gas Conservation Commission (AOGCC), which he
characterized as the single most respected independent operating
agency in existence in Alaska.
3:50:59 PM
REPRESENTATIVE HAWKER, in response to Representative Neuman,
explained how the proposed tax credit would work. This is an
investment tax credit, so when an owner or investor is building
a storage facility, the company can receive a credit against the
investment as an amount against its future state income tax
obligations using a traditional investment tax credit model.
The credit is not given on the molecules moving through the
facility, but rather is given on the capacity of the facility.
Thus, the goal is to provide an income tax credit of
approximately 10 percent of the cost as a tax credit, which is
based on judgment. One way to consider creating an investment
tax credit is to spend money, send copies of the receipts, and
obtain a ten percent of the qualified investment expenditures.
However, the state has discovered that trying to define
"qualified" has been difficult. The ACES regulations were just
released, and the Governor has been considering asking for
forgiveness regulations since it took so long to promulgate the
regulations. Meanwhile, the industry has been operating for
three years without any rules. The ACES law requires penalties,
but the penalties are due to the state's inability to provide
regulatory guidance, he said.
3:53:26 PM
REPRESENTATIVE HAWKER offered his belief that it is urgent to
provide rules to any potential natural gas storage facility
owners. He said he would hate to see the legislature compromise
moving forward on storage capacity because the government cannot
operate more efficiently. An easier way to calculate the tax
credit exists. By using the volumetric approach, the state
could provide a credit of $1.50 per thousand cubic feet, the
facility could get built, the AOGCC could certify the rate of
the tax credit, which is easy to calculate and would amount to
approximately a 10 percent tax credit. He stated this process
would avoid complications and someone investing more into the
facility than necessary due to the structure of cash on cash
investment tax credit. He restated that the tax credit concept
is volumetric.
3:55:30 PM
REPRESENTATIVE NEUMAN asked whether the source of the injected
gas matters.
REPRESENTATIVE HAWKER answered no.
3:56:03 PM
MR. PERSILY also answered no. He explained that the bill makes
no distinction, so long as the natural gas is produced somewhere
else and is then injected into the storage facility.
REPRESENTATIVE HAWKER added that it must be gas for
deliverability through the utility system.
MR. PERSILY, in response to Representative Neuman, explained
that the tax credit has to do with the size of the "hole in the
ground" or the above ground tank. The AOGCC will certify how
much produced gas from elsewhere can be injected into that
storage facility. Once the AOGCC certifies the capacity, the
tax credit would be based on the capacity of the facility to
hold "working gas," gas that is produced somewhere else, non-
native gas, delivered to the storage and owned by the utility.
When the utility wants its natural gas back to meet the winter
demand the gas would be delivered to the utility. Thus, the
credit is based on the capacity of the "hole in the ground" or
the reservoir storage tank to hold gas.
3:57:48 PM
REPRESENTATIVE LYNN stated that the committee certainly favors
economic development. This seems sensible, but the "devil is
probably in the details." He asked for any concerns.
3:58:33 PM
REPRESENTATIVE HAWKER related that during the development of HB
280, the conscious focus was to address the Southcentral
Alaska's needs for natural gas, while working to provide least
amount of political strife. He sincerely hoped this bill would
have minimal "push back" from any stakeholder. He offered his
belief that this bill will have significant support. He
expressed concern that controversial elements could be added to
the bill. He related that the committee process is the
appropriate process to determine the level of regulatory
oversight for gas storage facilities and ameliorate any
conflicts.
4:00:23 PM
REPRESENTATIVE LYNN applauded the sponsor's presentation.
Besides the stakeholders and the legislature, he asked whether
the general public or other interested parties are opposed to
this bill.
REPRESENTATIVE HAWKER stated that he does not believe so. He
stated that he is unaware of controversy. He stated that
differing views on components may be present, but he is not
aware of horrendous controversy. He recalled that the initial
response by the MOA's Mayor's Energy Task Force was
overwhelmingly positive for the conceptual view of the bill.
4:01:41 PM
MR. PERSILY added that the public will need to understand that
natural gas storage is not free, that a cost will be assessed,
and the utilities will roll those storage costs into the rates.
Thus, the public will absorb the costs of natural gas storage or
risk not having natural gas in the winter to provide heating
fuel. He stated that TransCanada's subsidiary and the ENSTAR
Natural Gas Company [ENSTAR] have been discussing gas storage,
but the rates have not been established yet. The cost may be
assessed as a winter surcharge or rolled into the rates, but
costs will be assessed for guaranteed deliverability, he stated.
4:02:40 PM
REPRESENTATIVE BUCH referred to page 3, line 6, and asked for
clarification between native and non-native gas.
REPRESENTATIVE HAWKER offered to present the sectional analysis
for HB 280.
MR. PERSILY referred to the definitions on pages 2 and 3, and
stated that "native gas" is natural gas that exists but has not
yet been produced. "Cushion gas" is the amount of the natural
gas needed to maintain pressure to allow removal of sufficient
volumes of natural gas. The "non-native gas" is the natural gas
that is produced somewhere else and a utility purchases it,
rents the reservoir, and injects the non-native gas, which is
the working gas. He described a scenario in which an
underground reservoir once held 10 billion cubic feet but has
been produced down to 5 billion cubic feet of gas. The 5
billion cubic feet of native gas still remaining in the
reservoir is injected with 5 billion cubic feet of non-native
gas, which becomes the working gas, or the amount of natural gas
above the level of base gas. He offered to explain the basics
of the royalty gas charges without discussing the detailed
structure. The tax and royalties are paid at the time the
natural gas is produced and even if the gas is subsequently
stored in the reservoir, the gas would not be assessed taxes and
royalties a second time.
4:06:15 PM
MR. PERSILY presented the section-by-section analysis of HB 280.
He stated that Section 2 describes the process in developing a
gas storage facility (GSF), including presenting the engineering
and hydrology to the AOGCC, which would certify it meets the
minimum working storage capacity of 10 million cubic feet per
day to be eligible for the tax credit incentives.
4:07:16 PM
MR. PERSILY stated that Section 3 requires the Director of the
Division of Mining, Land and Water to give priority to and
expedite "when reasonably possible" any applications, permits,
right-of-way's and lease assignments needed for development and
operation of a GSF.
REPRESENTATIVE HAWKER added that Section 3 is an emergency
section.
4:07:39 PM
MR. PERSILY related that Section 4 directs the Department of
Natural Resources (DNR) to waive any state land lease fees or
rents for the first 10 years of a GSF's operation. The waiver
of lease fees or rents would be public record. It requires any
financial benefits of the 10 year exemption flows through to the
utilities for their customers. Finally, Section 4 clarifies
that any gas withdrawn is considered to be non-native gas and is
not subject to royalty until all non-native working gas is
withdrawn, or "last in, first out."
4:08:47 PM
REPRESENTATIVE NEUMAN recalled that Alaska's constitution
provides a 12.5 percent royalty on resources that are developed.
MR. PERSILY explained that this provision does not waive it, but
merely postpones it. He related a scenario in which 5 billion
cubic feet of gas has never been produced, and non-native
working gas - which was produced and taxed somewhere else - is
injected into the GSF, that this provision would provide that
for production tax and royalty purposes, the last molecules are
the native gas molecules. Thus, this provision does not waive
the royalties, but requires the non-native molecules to be
removed prior to assessing taxes and royalties on the native
gas.
4:09:51 PM
MR. PERSILY, in response to Representative Neuman, answered that
once the natural gas has been produced and taxes and royalties
have been assessed, that even though the gas may be stored, no
additional taxes or royalties will be assessed.
REPRESENTATIVE HAWKER characterized this provision as an
inventory management provision.
4:10:20 PM
MR. PERSILY continued. Section 5 would direct the Regulatory
Commission of Alaska (RCA) to consider the impact on consumers
in the event the commission would reject a utility's gas supply
contract, which is similar to the EIS process in that one must
consider all of the alternatives. Before the RCA denies a gas
supply contract, it must consider the effect this will have on
consumers. Secondly, the RCA must also recognize the value of a
utility holding a diversified portfolio of gas supply contracts
with different pricing mechanisms, in order to protect consumers
from inadequate gas supplies and the risk of a single pricing
mechanism. This means that not every contract must be the same.
REPRESENTATIVE HAWKER interjected that this bill was originally
drafted prior to the RCA's request for clarification. The
purpose of this section was to address concerns raised as a
result of the RCA's denial of procurement contracts by utilities
in Southcentral Alaska in recent years. Some people thought the
RCA's denial of contracts was unreasonable and resulted in
compromising the gas deliverability capabilities. However, at
the time, the RCA did not have any legislative guidance, he
stated. This bill was structured to provide a skeletal
framework to give the RCA guidance, without too many strictures,
to evaluate the consequences of any contract denials.
4:12:55 PM
MR. PERSILY explained that Section 6 requires that a utility's
cost of gas storage reflect the financial benefits of any tax
credits or state lease exemptions provided in this bill.
Section 7 specifies that the RCA has jurisdiction over gas
storage services provided for gas that is owned by a regulated
utility. The name of the taxpayers, the amount of the tax
credits issued for storage facilities will be public record.
Section 8 covers the actual credit, which is $1.50 per 1,000
cubic feet of working gas storage capacity, and is only applied
to GSF developed in Alaska during the period 2011 - 2015. He
stated that since an urgency exists, it is important not to
leave the credit "on the books" for 20 years, but to accomplish
this sooner rather than later. The maximum credit is limited to
$30 million per GSF and allows the credit to be transferred or
sold to another taxpayer, similar to how other oil and gas
credits are currently handled.
4:13:55 PM
MR. PERSILY explained Section 9 sunsets a statute on January 1,
2011, which essentially means that the Petroleum Production Tax
(PPT) and Alaska's Clear and Equitable Share (ACES) do not
apply, so the rate that will be used is the Economic Limit
Factor (ELF) rate, which is a maximum of $.17 per thousand cubic
feet for the production tax.
4:14:38 PM
REPRESENTATIVE HOLMES asked whether this section would allow tax
to go below zero.
MR. PERSILY answered no. He explained that currently a producer
might have $2 million in tax credits, but because the tax in
Cook Inlet is set so low, the company could only use $250,000 in
tax credits in Cook Inlet. If the Cook Inlet tax had been set
at full value the producer could have used $ 1 million against
the tax liability. The difference between $250,000 and $1
million would be lost. This section would repeal that provision
and allow the entire $2 million in tax credits to be used
against the company's tax liability in Alaska, but the tax
cannot drop below zero. In further response to Representative
Holmes, he agreed the $2 million in tax credits could be applied
to the company's tax liability outside of Cook Inlet.
REPRESENTATIVE HAWKER affirmed that the provision reevaluates
the PPT and ACES that would apply to a producer who has a GSF in
Cook Inlet. The goal is to put the Cook Inlet on a par with the
rest of the state in terms of exploration incentives.
4:16:48 PM
MR. PERSILY, in response to Representative Neuman, clarified
that this section does not affect the amount of the tax, but
eliminates the limitation on the use of tax credits. The tax
would remain at a very low rate on gas that is produced in Cook
Inlet or produced in Alaska and used in Alaska.
4:17:35 PM
MR. PERSILY explained that Section 10 clarifies the "last in -
first out" accounting principle for determining the production
tax on native gas. Gas withdrawn from a GSF is considered to be
non-native gas until all the non-native gas is withdrawn, at
which point the gas withdrawn is native gas. He explained the
effect of Sections 11 - 13, such that currently the production
tax credit must be spread over two years, but this provision
allows producers to receive their full production tax credit in
the first year. Section 14 provides a 40 percent credit for
exploration expenses in Cook Inlet against production taxes,
rather than the two-tiered 30 percent/40 percent credit in
existing statute depending on how far the new well is from
existing wells. Non-capital well-related lease expenditures in
Cook Inlet also qualify for the credit.
4:18:27 PM
MR. PERSILY highlighted that Sections 15 - 16 allows the
producer the option of selling the tax credit back to the state.
4:18:44 PM
REPRESENTATIVE HOLMES asked whether these credits function the
same way, for use in Cook Inlet or elsewhere in the state.
MR. PERSILY answered yes, and if the producer does not have a
tax liability, it can sell the tax credits to someone else or
back to the state.
REPRESENTATIVE HAWKER recalled that in drafting this section, it
was easier to create a parallel structure that mirrored the
existing statute but was limited to Cook Inlet.
MR. PERSILY continued. Currently if a company has exploration
credits that it wants to sell back to the state, the company
must prove that it has spent an amount equal to that within two
years of the work that obtained the credit. Thus, if a company
has a $10 million credit, the company must demonstrate that it
has spent at least $10 million in Alaska. Section 17 would
eliminate the requirement for Cook Inlet. He related a scenario
in which a company drills but hits a dry hole and decides not to
continue. The goal of this provision is not to penalize
explorers who are unsuccessful. Thus, if a producer spends the
money exploring, but is unsuccessful, the credit could be sold
back to the state.
4:20:49 PM
REPRESENTATIVE HAWKER clarified that the motivation behind the
salability and transferability of the credits is due to the
changing geology in Cook Inlet. He offered his belief that none
of the major producers believe Cook Inlet is currently
attractive nationally or internationally companies that produce
or explore for gas. The large domes that were internationally
competitive are now depleted. No one, including the AOGCC, has
given any indication that Cook Inlet gas is interesting to large
international companies, he restated. He then suggested that
the future of exploration and development in Cook Inlet lies
with the state's ability to attract well capitalized independent
exploration and production companies who "make their business
out of chasing those stratigraphic traps" - the small bubbles of
gas trapped in the Cook Inlet basin. Most of the basin is
underwater, which makes it difficult and expensive to access.
Again, this bill is structured to create an environment to
attract the well capitalized independent producer to the Cook
Inlet basin.
4:23:04 PM
REPRESENTATIVE BUCH asked whether it is a common industry-wide
practice to reward a company even if it fails.
REPRESENTATIVE HAWKER related that is the foundation of the
structure of the PPT and ACES. He mentioned that capex [capital
expenditure] credits do not require successful efforts. The
limitations were put in place to make larger companies take a
greater share of the risk penalty for their exploration
decisions on the North Slope. The state standard also captures
the independent. This bill would not eliminate, but would relax
the standard for producers in the Cook Inlet.
4:24:54 PM
REPRESENTATIVE LYNN remarked that it is not exploring if you
already know where something is located.
REPRESENTATIVE HAWKER agreed.
4:25:20 PM
MR. PERSILY stated that the last section, Section 18, directs
the Office of Public Advocacy (OPA) in the Department of Law,
when considering whether to participate in a utility rate case
regarding a gas supply contract before the RCA, to consider the
impact to consumers if the commission rejects a utility's gas
supply contract, and to recognize the value of a utility holding
a diversified portfolio of gas supply contracts with different
pricing mechanisms in order to protect consumers from inadequate
gas supplies and the risk of a single pricing mechanism.
4:26:12 PM
REPRESENTATIVE HAWKER concluded his remarks. He stated that
numerous analysis and background information was available, but
the bill packet was limited to several outstanding but brief
analyses that resulted in the bill. He pointed out three
articles that provide analysis and background information,
including an article written by Rena Delbridge dated December
27, 2009, which appeared in the Alaska Dispatch, a second
written by Tim Bradner dated June 12, 2009, which appeared in
the Alaska Journal of Commerce, and the third article, which was
prepared by the University of Alaska's Institute of Social and
Economic Research (ISER) 2006, at a Southcentral Energy Forum,
sponsored by the AOGCC. He related that these articles can
provide a foundation on these issues.
4:28:58 PM
ROBERT PICKETT, Commissioner; Chairman, Regulatory Commission of
Alaska (RCA), Department of Commerce, Community, & Economic
Development (DCCED), prefaced his comments. He offered that he
is not speaking for state government outside the Regulatory
Commission of Alaska (RCA), which is an independent quasi-
judicial agency. The RCA does not take an official position on
a specific matter until the commission takes a vote. Thus, he
cannot take an official position, but can discuss the issues.
He related that Representative Hawker's remarks set the context
for the natural gas situation in Cook Inlet. He acknowledged
that while he previously had a general awareness of the issues
he did not know the extent of the problems until he began
working for the RCA.
4:30:34 PM
MR. PICKETT characterized the past five years of the history of
Cook Inlet's natural gas as a dysfunctional one, in part due to
actions by the RCA, the legislature, and the utilities. The
public has not been brought along very well with the realities
of Cook Inlet gas issues. The RCA strongly welcomes legislative
clarity and direction on key issues. He said that HB 280 is a
very good step and while it is not a "silver bullet," the bill
represents a good start. The status quo is not acceptable. The
RCA recognizes the critical nature of deliverability when ENSTAR
experienced a deliverability crunch, that even though the
temperatures were not that cold their systems reached a
threshold. Since then the utilities approached the RCA on four
separate occasions with contingency planning. Mayor Sullivan,
Anchorage, has focused his attention on Anchorage's
preparedness. And although the five largest Cook Inlet fields
are declining, he said he thinks the solution for Cook Inlet gas
problems will be Cook Inlet gas. Currently, gas prices are low;
the contracts signed with the utilities were full deliverability
contracts. These contracts will be unlikely to happen again.
The bill addresses the portfolio of different contracts and
future contracts will probably be a mix of provisions.
Obviously the utilities will need some stable, long-term base-
load contracts. But shorter-term contracts and very short-term
contracts will also be necessary to obtain price signals on the
value of gas to encourage smaller independent producers to
participate in Cook Inlet.
4:33:16 PM
MR. PICKETT related that storage is acknowledged as one of the
key legs by those familiar with Cook Inlet natural gas. ENSTAR,
after working with TransCanada's wholly-owned subsidiary, ANR
Pipeline Company (ANR), requested assistance by petitioning the
RCA on December 21, 2009, to obtain a declaratory judgment to
clear up jurisdictional, regulatory issues. The RCA held
several proceedings and a workshop in mid-December addressing
the storage issue. The petition asked whether the RCA was
regulating the project or would provide a Certificate of Public
Convenience and Necessity (CPCN) in the matter or not. Thus,
ENSTAR and ANR did not want their project to commence and
discover the rules had changed midstream. The ENSTAR asked for
a ruling by January 23rd, which RCA did not meet, noting the
fairly aggressive schedule, including issuing orders on December
24th and December 31st. He related that as the filings were
returned, a clear division ensued. The statutes, under AS
42.05, relating to utilities, or AS 42.06, the pipeline statute
was unclear. He said:
We could not in good conscience make a definitive
judgment saying - yes, this is going to be regulated
or not - knowing full well when it comes to issues of
interpretation of law, it's the courts that will
ultimately decide it. If you have this much
uncertainty and lack of clarity, what you're doing is
getting intervenors down the road that may be opposed
to storage, a gigantic hammer to come in and "muck up
the works." And trust me. Having been through a
couple of gas supply agreements, it's fairly easy to
"muck up the works." And that absolutely is not what
we need at this point.
4:35:17 PM
MR. PICKETT related that the RCA has not taken an "up or down"
vote on whether third party independent storage should be
regulated. The RCA believes that decision is appropriate for
the legislature to make. The general consensus has been that it
will be difficult for the RCA to insure that the public benefits
from tax credits that flow through to the ratepayer if it is
totally unregulated. Just to decide the baseline and how to
apply credits, and what is a reasonable level. Initially, it
was ENSTAR's clear understanding that it would make cost to
service showing and have an open and transparent process.
Independent storage will require long-term contracts, spanning
from 15 to 20 years, with some key anchor utilities. The
utilities will need a baseline commitment, with the assurance
that they can recover their storage costs in their rates. The
public will need to realize there is no "free lunch." In
essence what has been happening is the natural gas services are
being unbundled and storage is one element. In closing, he
offered his belief that it is absolutely critical for the
legislature to weigh in and provide direction on AS 42.05 and AS
42.06, and clarity will be most helpful to the RCA.
4:37:10 PM
CHAIR OLSON stated that during the first 30 years of production
in the Cook Inlet fields, most of the natural gas was produced
by the same company that also purchased the gas, so the price
was somewhat meaningless. He recalled that 80 to 85 percent of
the gas went to the fertilizer plant, Agrium, Incorporated
[Agrium]. He further recalled that most of the gas was sold by
ENSTAR at prices similar to the Agrium prices. Perhaps the
Beluga Hills field set a more accurate price but the rest was
based on the Agrium Inc. urea plant. He did not think the RCA
could be blamed for the pricing, adding that problems started
happening when natural gas services were unbundled and no one
could figure out how to value the gas.
MR. PICKETT agreed.
4:38:18 PM
REPRESENTATIVE BUCH stated that the price for Liquefied Natural
Gas is known.
MR. PICKETT explained that the RCA is not privy to the contracts
between Conoco Phillips Alaska Inc. and Marathon Oil Corporation
with the Tokyo Utilities. He commented that the cost structure
when the five fields were discovered were entirely different
than today's costs. He reaffirmed his belief that the solution
for the Cook Inlet gas problem is Cook Inlet gas. However,
producers also need the assurance of a market for their gas. If
the LNG plant ceases to export gas some people will think that
more gas will be available for ratepayers, but what will likely
happen is that producers have less incentive to explore for gas
without the anchors. He agreed with the values and pricing.
4:39:52 PM
REPRESENTATIVE BUCH understood the value of having the LNG
plant. He related that the RCA showed interest in protecting
ratepayers, in particular, the residential ratepayers and viewed
this bill as a starting point at looking at overall costs.
MR. PICKETT asked whether he was referring to gas storage
facilities or gas prices in general.
REPRESENTATIVE BUCH clarified that his interest is in providing
a reliable natural gas source for the Cook Inlet region. Since
the producers also live in Anchorage, and are Alaska residents
and communities members, they also are interested in reasonable
costs to heat their homes. Additionally, for over 20 years,
Southcentral Alaskans have had the cheapest gas in the country.
He stated that when prices were dramatically adjusted, that
consumers did not understand the increased costs.
MR. PICKETT agreed that the public does not understand because
the RCA and others have not communicated well, that the RCA
routinely receives calls from ratepayers who make all manner of
accusations, as well as hearing complaints from producers.
Thus, openness and transparency is critically important. He
characterized the RCA's relationship with the public as a major
trust issue. Any decisions that are not made in the open, no
matter what the intention, will be subject to criticism. He
prefers some level of regulation over gas storage to give the
public some level of confidence since one component will be
locked into their rates for the next twenty years.
4:42:51 PM
REPRESENTATIVE NEUMAN asked how the RCA would insure that the
tax credit is passed on to consumers and whether any limit
exists for the percentage rate of the utility's profit.
MR. PICKETT stated that the utility's rate is set through a
ratemaking process, which is a well-established methodology.
The rate base is the physical investment and allowable
depreciation schedules and operating expenses. The RCA would
review the capital structure of the company, the breakdown
between the debt and equity ratio, typically the debt is
significantly cheaper than the equity contribution. The return
on equity for pipeline companies routinely ranges between 12 -
14 percent, while the return on equity for utilities would
typically be less than that, depending on the size and type of
the utility, and risk factors. Storage facilities would likely
fall in the range similar to pipelines.
MR. PICKETT related his understanding that the intent of the
proposed tax credit is to make sure the benefit flows through to
the ratepayers. Thus, a baseline rate would need to be
established for the storage services, keeping in mind that the
utilities own the gas. The utility would contract with the
producer for fixed amounts of gas and would store a portion of
the gas in the storage facility. Thus, a rate would be
established per volume per unit of time. The utility would need
to commit to a certain minimal level, since the project's
sponsor needs to have assurance of sufficient business. He said
he hoped that the storage project would allow for common
carriage type of storage for smaller producers. However, with
respect to the regulated ratepayers, if storage was unregulated
it would be quite difficult, and if it is regulated, with some
baseline to draw from the application of the credit itself is a
mathematical calculation. He provided an example. He stated
that he managed the low-income housing tax credit program for
the state during his time at the Alaska Housing Finance
Corporation (AHFC). Over a 15 year period, as credits were
sold, the program initially offered a high discount, but once it
was established, the discounts were reduced, and it received
$.95 to $.96 on the dollar. He offered his belief that amount
has dropped back more recently. Thus, clarity in the regulation
will help define the net credit or provide guidelines on what
should flow through to the ratepayers. It should not be
difficult to figure out, he offered.
4:47:06 PM
REPRESENTATIVE NEUMAN asked in an instance in which a producer
was selling native gas to a utility under these contracts, and
non-native gas was being injected into the storage facility,
whether the RCA would need to calculate the tax credits to the
utility company or to the party that owns the gas storage
facility (GSF).
MR. PICKETT responded that once the facility operates with a
certain amount of native gas, depending on the reservoir, the
project sponsor would need to provide an additional amount of
gas to obtain the cushion gas that stays in place. This becomes
part of the cost structure. The working gas is the gas that is
pumped in and out of the GSF and is gas actually owned by
utility. He related that the volume of the working gas and the
length of time the working gas is "parked" will determine the
storage cost.
REPRESENTATIVE NEUMAN related that he was trying to clarify the
cushion gas since the company would not put in 100 and take out
100. He said he was interested in how the tax credit works.
4:48:49 PM
MR. PICKETT pointed out the necessity to distinguish between the
project itself and what the utilities are "putting in and out."
REPRESENTATIVE T. WILSON remarked that the Interior does not
currently have natural gas. She asked if the Interior obtained
natural gas, whether additional legislation would be required.
MR. PICKETT agreed that this bill is focused on Cook Inlet and
it would depend on companies like Doyon discovering natural gas.
4:49:39 PM
REPRESENTATIVE T. WILSON related that it does look like a GSF
will be built on the North Slope.
MR. PICKETT asked for clarification if she is referring to FNG's
project on the North Slope, explaining that it is a little
different than the Cook Inlet issues.
4:50:11 PM
REPRESENTATIVE HAWKER clarified that the incentives available
for GSF's would apply statewide as the bill was crafted to
facilitate development of storage as appropriate to the
Fairbanks region.
4:51:25 PM
[HB 280, Version S, was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB280 Sectional Analysis.pdf |
HL&C 2/8/2010 3:15:00 PM |
HB 280 |
| HB280 Sponsor Statement.pdf |
HL&C 2/8/2010 3:15:00 PM |
HB 280 |
| HB280 ver E.pdf |
HL&C 2/8/2010 3:15:00 PM |
HB 280 |
| HB280 CS Work Draft ver S.pdf |
HL&C 2/8/2010 3:15:00 PM |
HB 280 |
| HB280 Background.pdf |
HL&C 2/8/2010 3:15:00 PM |
HB 280 |
| HB280 Fact Sheet.pdf |
HL&C 2/8/2010 3:15:00 PM |
HB 280 |
| HB280 Fiscal Note-DOA-AOGCC-02-08-10 (2).pdf |
HL&C 2/8/2010 3:15:00 PM |
HB 280 |