Legislature(1999 - 2000)
01/27/2000 10:17 AM House O&G
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* first hearing in first committee of referral
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HB 290-STRANDED GAS PIPELINE CARRIERS CHAIRMAN WHITAKER announced that the legislation before the committee is HOUSE BILL NO. 290, "An Act relating to stranded gas pipeline carriers and to the intrastate regulation by the Regulatory Commission of Alaska of pipelines and pipeline facilities of stranded gas pipeline carriers." He noted that HB 393, the stranded gas enabling act, overlaps HB 290. Additionally, the committee should have a "staff memo" from Roger Marks, Department of Revenue, who is available on-line. Number 109 LORALI MEIER, Staff to Representative Beverly Masek, Alaska State Legislature, presented HB 290 on behalf of the House Resources Standing Committee, sponsor. She explained that before any stranded gas pipeline project can proceed, certain amendments to existing statute are required. Therefore, HB 290 will amend the Pipeline Act to define a stranded gas pipeline consistent with existing state statute. House Bill 290 will clarify that the Regulatory Commission of Alaska has the authority to regulate only intrastate transportation of stranded gas through a stranded gas pipeline. Export quantities will be regulated by the federal government. She further explained that HB 290 defines a fair, predictable and timely process to identify and dedicate intrastate capacity in a stranded gas pipeline before one is constructed. Furthermore, HB 290 establishes the criteria for needed pipeline system expansions in order to accommodate increased demand for state gas supplies. MS. MEIER also pointed out that HB 290 will amend the Public Utilities Act in order to clarify that stranded gas pipeline systems are exempt from operating as public utilities. The Right-of-Way Leasing Act will also be amended in order to limit the requirement of common carriage for stranded gas pipeline systems to the transportation of intrastate gas volumes only. The bill defines the types of intrastate transportation services that will be available in a stranded gas pipeline system. "Collectively, these changes are intended to provide greater certainty and predictability in the regulation of stranded gas pipeline systems. This increased certainty will increase the marketability of Alaska's North Slope gas and, hopefully, facilitate expedited construction of a pipeline and related facilities necessary to transport Alaska's stranded gas to market." Ms. Meier offered to answer any questions. Number 287 MICHAEL HURLEY, ANS Gas Commercialization Group, ARCO Alaska, Inc., read the following statement into the record: Mr. Chairman, members of the committee, for the record, my name is Michael Hurley. I work for ARCO Alaska, Inc., in the ANS Gas Commercialization Group in Anchorage, and am currently assigned to manage the commercial regulatory efforts for the Alaska North Slope LNG Sponsor Group. I am here today to express the sponsor group's support for HB 290. The sponsor group, as Steve Alleman testified to you several weeks ago, has been actively pursuing the development of an LNG export project; including the development of a commercial regulatory regime which will provide the regulatory certainty our long-term customers require, while at the same time, meeting the needs of state and federal regulators for adequate access and commercial oversight. House Bill 290, we believe, strikes that balance, providing the Regulatory Commission of Alaska, clear and unambiguous oversight of intrastate gas transportation. Section 1 of the bill clarifies the current Right-of- Way Leasing Act common carriage requirement that exists to apply only to intrastate gas shipments. The second and third sections of the bill clarify that a stranded gas pipeline system's intrastate shipments would be regulated under the Pipeline Act (AS 42.06), rather than under the Public Utilities Act (AS 42.05). In Section 4, a new subsection has been added to the Pipeline Act creating procedures, within the RCA's existing pipeline certification process, for determining the amount of pipeline capacity which should initially be set aside for the intrastate transportation. That process sets out distinct criteria for capacity for Local Distribution Companies (LDCs) which must submit their gas purchase contracts to the RCA under the current regulations, and for industrial gas users who must provide written comments to transport intrastate gas volumes, supported by take-or-pay purchase commitments with stranded gas producers. Likewise, in Section 5 of the bill, expansions of stranded gas pipeline may be ordered by the Commission only if such requests for additional intrastate capacity are supported by firm contractual commitments. Section 6 allows the RCA to consider allowing a reservation or similar charge for firm intrastate transportation in the intrastate tariff. And then, finally, Section 7 of the bill adds several definitions with clarifying terms used in other sections of the bill to increase the clarity. Mr. Chairman, thank you for this opportunity to express our support for HB 290, and if you or any members of the committee have any questions, I'd be happy to address those at this time, or at your convenience. Number 511 REPRESENTATIVE GREEN posed a hypothetical situation in which the gas line is built and the only portions considered common carriers are those for intrastate use. Assuming the pipeline is running close to capacity, how would expansion occur if the need arose for a large metropolitan area or a large volume user? Furthermore, how does HB 290 affect [such expansion] from an investor's viewpoint? MR. HURLEY answered that HB 290 handles the ability to expand and the RCA to control expansion of intrastate volumes. The existing RCA statutory authority allows the RCA to order the expansion of systems for identified incremental use. One of the changes encompassed in HB 290 is to add a section that limits those kinds of additions to projects that are actually real and can support actual volume use. He explained that gas systems, because compression can be added, are much more expandable than the traditional oil pipeline systems. He informed the committee that the initial design being reviewed is around 1.3 bcf [billion cubic feet] per day for a 7 million ton market viable project. The expansion capabilities being reviewed are up to 1.8 bcf, which is significant expansion capability that is already built into the system. REPRESENTATIVE GREEN said that satisfied his concern. Number 667 REPRESENTATIVE KEMPLEN inquired as to the amount of gas being modeled for state royalty and/or other in-state demand. MR. HURLEY explained that the royalty piece has not been differentiated. From the perspective of a sponsor group, he expected to be buying gas from gas producers and royalty in-kind gas from the state. He identified that as a royalty issue that they have to deal with the state. He believed that the royalty is the traditional 12.5 percent. From [ARCO Alaska, Inc.'s] perspective, royalty gas would not be treated any differently from other gas. In further response to Representative Kemplen, Mr. Hurley explained that within the 1.3 bcf about 100 million per day is being modeled. That is in-state demand that ARCO Alaska, Inc. knows about. REPRESENTATIVE KEMPLEN asked from where Mr. Hurley foresees that 100 million cubic feet per day coming. MR. HURLEY answered that with regard to the actual usage, he believed there is some demand along the pipeline corridor. Currently, it is a guess. However, HB 290 establishes a procedure for the RCA that reviews the different commitments to gas from various communities. He pointed out that local distribution companies that purchase gas have to have contracts on file with the RCA anyway. He explained that when this was being set up, it attempted to establish an administratively easy path for the RCA. The RCA would receive contracts from the local distribution companies, which the RCA would just add up. He noted that there would also be a process for industrial users, who want space available, to petition the RCA for space. In the end, the RCA would be able to add up everything to arrive at the initial bill for intrastate demand. REPRESENTATIVE KEMPLEN said he understood that the project will need some in-kind contributions such as access across state lands. Therefore, he indicated, there would be quid pro quo such as a specified percentage of the gas moving through the pipeline reserve for public use. He asked: Is that something that has been considered or modeled? Number 891 MR. HURLEY replied no, not at this point. The state's royalty gas is a function of the state's leases with producers. To the best of his knowledge, a right-of-way lease for a pipeline has not been worked in such a fashion. REPRESENTATIVE KEMPLEN pointed out that similar types of arrangements have been worked out with telecommunications firms. He indicated there may be a similar opportunity with this transportation system. He asked if Mr. Hurley knew of any other metro gas pipeline systems in the Lower 48 or elsewhere where the state has reserved a percentage of natural gas for public use in exchange for access across state lands. MR. HURLEY said he was not aware of any such agreements, although the idea is intriguing and could be reviewed. CHAIRMAN WHITAKER noted Representative Ogan's presence. REPRESENTATIVE PORTER presumed that he knew what a take-and-pay purchase commitment is, but he asked Mr. Hurley to define that for the record. MR. HURLEY said a take-and-pay contract is how gas is often moved in the Lower 48. Basically, it is a commitment between a seller and a buyer that a certain amount of gas will be taken over time or that it will be paid for even if the gas is not needed. REPRESENTATIVE GREEN said he understood that this line could have common-carrier sections and sections regulated by the federal government. He asked if Mr. Hurley saw any potential conflicts that would result with the state's regulation of the common carrier portion and the federal government's portions. MR. HURLEY noted that the potential conflict is one of the reasons for HB 290. Traditionally, there has been split jurisdiction on lines such as the Trans-Alaska Pipeline System (TAPS). Such jurisdiction conflicts make long-term purchasers - in Asia for LNG - nervous. Therefore, "we" want to clarify that up-front before going to market. He pointed out that in this case, the Office of Fossil Energy is being looked at instead of the Federal Energy Regulatory Commission (FERC) or the federal jurisdiction in this line. In further response to Representative Green, Mr. Hurley informed the committee that [ARCO Alaska, Inc.] anticipates it will make an application for an export authorization, which is necessary from the federal Department of Energy (DOE) in the future. Number 1177 REPRESENTATIVE HARRIS said he interpreted HB 290 to speak to any project, no matter the location or what it involves with natural gas; is that correct? MR. HURLEY replied yes and explained that the legislation was written in such a way to apply to other LNG projects and objects moving gas to the Lower 48. The legislation was drafted so that it would not be project-specific and could apply to any project to commercialize stranded gas. REPRESENTATIVE HARRIS inquired as to the importance of HB 290 to the development of any gas project in Alaska. MR. HURLEY emphasized that it is very important in the view of ARCO Alaska, Inc. It is important that the reliability of supply be very clear to the customers before the company approaches them. CHAIRMAN WHITAKER requested that Mr. Hurley explain the sense of urgency with this. MR. HURLEY informed the committee that the sponsor group will approach the end of Stage 1 in mid-summer this year. In Stage 2, some marketing actually begins. Therefore, as things progress into Stage 2, [the sponsor group] wants to be able to set the regulatory regime in place before going out to the markets so that there will be the understanding that the gas promised can be guaranteed. If ARCO Alaska, Inc., does not attempt something this year, it will lose a year before the regime can be put in place; therefore, the marketing effort is delayed and the project is slowed. REPRESENTATIVE KEMPLEN referred to page 3, lines 7-9, of HB 290 and asked Mr. Hurley to explain that language. Number 1351 MR. HURLEY informed the committee that the language on page 3, lines 7-9, is the existing Right-of-Way Leasing Act. The only part of the Right-of-Way Leasing Act that was changed is located on page 2, lines 15-19. He explained that as the drafters went through, that section of the existing Right-of-Way Leasing Act was repeated. In response to Representative Kemplen, Mr. Hurley agreed that the language was from the existing Right-of-Way Leasing Act, not HB 393. REPRESENTATIVE KEMPLEN asked if the state would be required to build these new connections and energy facilities. Does the current Act say that? MR. HURLEY said he understood that if the state requires some interconnection or interchange facilities to move its royalty gas, then the state needs to pay for that connection. REPRESENTATIVE KEMPLEN inquired as to how the intrastate consumption referred to in HB 290 is actually defined. MR. HURLEY answered that intrastate consumption is for ultimate consumption, which would include something like an added-value process. He noted that he may have to defer to the Department of Law to define that. However, he understood that when gas is simply being liquefied it is not being consumed, but if the form of the gas is be changed through some industrial process then that is consumption. REPRESENTATIVE KEMPLEN commented that he was not quite sure how the notion of interrupt ability worked; he requested clarification. MR. HURLEY pointed out that traditionally in Lower 48 pipeline service or gas service, there is differentiation between firm and interruptible transportation. Interruptible transportation is normally the first to be dropped if there are shortages. Furthermore, it is normally cheaper, on a tariff basis, to get interruptible transportation versus firm transportation. Firm transportation usually costs more, as a tariff. Basically, [the difference] is a question of which is dropped off first. In further response to Representative Kemplen, Mr. Hurley indicated that it is a standard procedure in the industry. CHAIRMAN WHITAKER said he understood that the intrastate usage calculation does not include Cook Inlet usage at this time. He asked if that was correct. Number 1571 MR. HURLEY clarified that in the numbers he had referred to earlier, which were used for modeling purposes of 100, the Cook Inlet usage was not included. For the legislation, the Cook Inlet usage would be included if either the pipeline is located nearby or a local distribution company wanted to build a connecting spur line. The Cook Inlet usage would be included if it was part of the RCA's. CHAIRMAN WHITAKER said he understood, then, that it would need to be accounted for separately under the procedure outlined by HB 290. MR. HURLEY agreed. CHAIRMAN WHITAKER commented that an in-state user would find it beneficial to be in early and willing to commit to the take-or- pay requirements. Beyond that, what is the procedure that late entrants would face? MR. HURLEY referred to Section 5, which addresses the expansion capability of the system and how the RCA can order the expansion of the system for additional intrastate use when that additional use has been identified and committed to. He noted that such expansion would proceed in a manner similar to that in which the RCA currently orders expansions. CHAIRMAN WHITAKER requested that Mr. Hurley take the committee through the steps required for expansion as well as the numbers of dollars associated with that. How difficult will it be to enter after the initial take-or-pay commitments are made? MR. HURLEY began by differentiating between the two different types of expansions. One type of expansion is the type of expansion which desires to extend the length of pipe significantly. The second type of expansion is that which wants additional capacity, when located near the pipe. Number 1725 CHAIRMAN WHITAKER interjected and posed a situation in which a project was built between Prudhoe Bay and Valdez. After such a line is completed, there is a necessity in Cook Inlet. Under such a situation, he noted the assumption that the cost of that spur line would be borne by the users in Cook Inlet. That is not at question. The question is the expanded capability of the line in order to accommodate that spur situation. MR. HURLEY said: The additional compression that would be required along the system to move that additional volume of gas would, quite likely under the RCA, ... because it would be something that the RCA would decide how to apportion costs. Part of their [RCA] function would be to determine the allocation of costs and how most fairly folks should be bearing those for the intrastate movements. MR. HURLEY said he expected, in a situation in which additional compression is required, that the costs of the entire system would decrease because more volume would be moved. He explained that those wanting an expansion would have to petition the RCA, which would approve the expansion. Then an amended tariff would have to be filed and approved by the RCA in order for any intrastate movement to occur. CHAIRMAN WHITAKER surmised that the intrastate portion would have an effect on the interstate or export portion as well. MR. HURLEY replied yes. An expansion would impact the cost structure of the exports. He agreed with Chairman Whitaker that the impact would, hopefully, be positive. CHAIRMAN WHITAKER emphasized the importance of understanding HB 290 because communities in Alaska will be dramatically affected by this bill. Number 1850 MICHAEL BARNHILL, Assistant Attorney General, Oil, Gas & Mining Section, Civil Division (Juneau), Department of Law, informed the committee that he'd assisted the administration in identifying some of the legal implications encompassed in HB 290. Although he did not find anything that is legally impermissible, he did find many legal implications that everyone should be aware of and consider. He offered to go through those and address Representative Kemplen's question about consumption. REPRESENTATIVE KEMPLEN inquired as to what constitutes consumption in terms of natural gas. MR. BARNHILL asked where in HB 290 it refers to consumption versus transportation. He said he did not recall consumption of the gas being addressed in the bill. CHAIRMAN WHITAKER commented that he believed it would be a fair extrapolation that consumption is related to the ability to transport that is "capacity." MR. BARNHILL agreed with Mr. Hurley's characterization of consumption that actual use of the gas is consumption, as opposed to transforming it into another form for shipment. REPRESENTATIVE KEMPLEN asked if it would preclude someone's coming in and building an added-value processing facility. MR. BARNHILL answered that HB 290 would not preclude someone from building a factory in Valdez and using natural gas in-state. However, to the extent that use was not bid in the initial open season and there was not initial capacity reserved for it, the entity would have to avail itself of the expansion capacity procedures provided by HB 290. He indicated the expansion capacity procedures can be found in Section 5. Number 1980 CHAIRMAN WHITAKER asked at what point ultimate use of the gas is determined. Is gas utilized in a manufacturing process considered ultimate use, or is it simply the burning of the gas as an energy source? MR. BARNHILL said he was not sure to what extent HB 290 addresses or attempts to clarify ultimate use. He believed HB 290 attempts to provide procedures under which folks that want to use gas in- state can approach the RCA and present take-or-pay contracts, and therefore receive a commitment for intrastate capacity. Additionally, HB 290 provides procedures so that those that do not act during the initial open season can seek expansions of intrastate capacity. CHAIRMAN WHITAKER expressed concern in the delineation between intrastate and interstate and the regulatory procedures adherent to each. He referred to page 8, lines 5-7, which is the definition of intrastate. He expressed concern with the language "for ultimate consumption of the stranded gas within the state." He asked if it would apply to a nitrate facility. MR. BARNHILL stated, in his preliminary review, that if the gas is used in a manufacturing context, in an iron ore reduction plant, that would be an ultimate consumption of the gas. The value-added product, the iron, would be different and could be transported out of state. Although it could be transported out of state, it would not transform the intrastate shipment of that gas to an interstate shipment. REPRESENTATIVE GREEN commented that the aforementioned definition is not uncommon in other states. However, he understood that in the past there was a company that had necessary rights-of-way to get the pipeline to tidewater. He asked if Mr. Barnhill saw anything that would lead to problems if those [rights-of-way] are not picked up. He acknowledged that sometimes the right of eminent domain works with a common carrier, but this proposal is not necessarily a common carrier. MR. HURLEY explained that the Alaska Right-of-Way Leasing Act, AS 38.35, provides for the Department of Natural Resources (DNR) to issue rights-of-way over state land for oil and gas pipeline purposes. He noted that the Right-of-Way Leasing Act has been used to issue rights-of-way for gas pipelines in Alaska. Therefore, nothing will change in that respect. With regard to eminent domain, the Public Utilities Act delegates the power of eminent domain to a public utility. One effect of HB 290 is that it exempts a stranded gas pipeline carrier from the Public Utilities Act, and therefore the stranded gas pipeline carrier will not have the right of eminent domain. However, under the Right-of-Way Leasing Act the pipeline builder can petition DNR for a delegation of that power, if necessary. In further response to Representative Green, Mr. Barnhill reiterated that under the Right-of-Way Leasing Act a pipeline builder can seek permission to receive a delegation of the power of eminent domain from DNR. He informed the committee that the only time that has been done, is in the TAPS context in 1974. Number 2215 REPRESENTATIVE PHILLIPS asked if that right comes directly from the department [DNR]. MR. HURLEY replied yes. REPRESENTATIVE PORTER turned to Mr. Marks' memorandum, which he understood to relate a concern regarding having to commit to buying gas without knowing the prices. Why would a municipality commit to an open-ended contract? MR. HURLEY said that he was not sure he could answer that question. He explained that HB 290 contemplates that in the initial open season any municipalities or any other in-state users would come forward with at least a three-year commitment to transport intrastate gas. He believed that the Administration's concern is that, "they may not be ready to make those commitments at the time the pipeline schedules its open season for initial commitments." He also mentioned that they may not be aware of the full extent of the costs and transportation. REPRESENTATIVE PORTER asked, "Isn't it up to the party of the contract, to know what the contract terms are?" MR. HURLEY emphasized that they may not have the contract yet. He explained that the bill provides for a process. When a pipeline company applies for a certificate of public convenience and necessity, then it is left to the in-state users "to get their act together." He did not specifically know the timeline once the application for certificate is filed and when the deadline for the commitments would be; those have not been defined in this bill. He said the intention would be to resolve that through regulation. He indicated the possibility that the regulators may decide that it will be a one-year time line from the date the certificate application is filed and the date the in-state users have to get together their contracts. For some municipalities, that will not be enough time. REPRESENTATIVE GREEN returned to Chairman Whitaker's concern with regard to the increase 1.3 [bcf] an to 1.8 [bcf]. That is about a 40 percent increase, which was indicated may result in a lower overall cost. If there had been long-term contracts at a specified price, is there any benefit to the state? [A new tape was inserted, and therefore Side B of Tape 00-4 is blank.] TAPE 00-5, SIDE A [There are approximately three minutes of blank space at the beginning of Tape 00-5, Side A.] Number 0024 MR. HURLEY noted that pipeline owners have to go back to the RCA and obtain a certificate for their expansion. Therefore, it is not a one-time deal; it occurs whenever the system is expanded. He noted that any party can approach the RCA and request expansion. CHAIRMAN WHITAKER asked whether it is correct that the economic threshold of entry will never be lower than at this initial point. Number 0330 MR. HURLEY replied no, not necessarily. For example, if there is a line from which one wanted to take more gas from an existing cut-off in Fairbanks and the expansion only required additional compression, the incremental cost of that compression is going to be less than the original bill to the system. CHAIRMAN WHITAKER said he understood. He asked if the user making the application would pay the initial cost plus the expansion cost. MR. HURLEY explained that the RCA would have to review the incremental cost and the benefit to the existing shipper in order to ensure that the cost and benefits are fairly apportioned between them. He could envision a case in which it would be less. CHAIRMAN WHITAKER commented that he could envision a case in which it would be more. He noted that generally, the logic is as follows: cost causer, cost payer. Therefore, he found it difficult to entertain circumstance in which [expansion] would not increase the cost of entry. [HB 290 was held over.]
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